-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BDWnzLqS1UqKLVNu7OGoQugxGjjsd9A+e+9IwO7TDp56OydJsqmjez4IArqZFKKd VEBoQcR1LRhT5++xwRG3sg== 0000320321-97-000002.txt : 19970329 0000320321-97-000002.hdr.sgml : 19970329 ACCESSION NUMBER: 0000320321-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEAGULL ENERGY CORP CENTRAL INDEX KEY: 0000320321 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 741764876 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08094 FILM NUMBER: 97566131 BUSINESS ADDRESS: STREET 1: 1001 FANNIN STE 1700 STREET 2: 1001 FIRST CITY TOWER CITY: HOUSTON STATE: TX ZIP: 77002-6714 BUSINESS PHONE: 7139514700 MAIL ADDRESS: STREET 1: 1001 FANNIN, SUITE 1700 STREET 2: 1001 FIRST CITY TOWER CITY: HOUSTON STATE: TX ZIP: 77002-6714 FORMER COMPANY: FORMER CONFORMED NAME: SEAGULL PIPELINE CORP DATE OF NAME CHANGE: 19830815 10-K 1 1996 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF 1934 Commission File Number 1-8094 SEAGULL ENERGY CORPORATION (Exact name of registrant as specified in its charter) Texas 74-1764876 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1001 Fannin, Suite 1700 Houston, Texas 77002-6714 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 951-4700 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Stock, par value $.10 per share New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 20, 1997, the aggregate market value of the outstanding shares of Common Stock of the Company held by non-affiliates (based on the closing price of these shares on the New York Stock Exchange) was approximately $1,145,771,074. As of March 20, 1997, 62,931,403 shares of Common Stock, par value $0.10 per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Document Part of Form 10-K (1) Annual Report to Shareholders for PARTS I and II year ended December 31, 1996 (2) Proxy Statement for Annual Meeting PART III of Shareholders to be held on May 13, 1997 PART I Item 1. Business Seagull Energy Corporation (the "Company" or "Seagull") is an international oil and gas company engaged primarily in exploration and development activities in the United States, Canada, Egypt, Cote d'Ivoire, Indonesia and the Russian Republic of Tatarstan. It also transports, distributes and markets natural gas, liquids products and petrochemicals in the U.S. and Canada. The Company was incorporated in Texas in 1973 as a wholly owned subsidiary of Houston Oil & Minerals Corporation ("HO&M"). In March 1981, the Company became an independent entity as a result of the spin-off of its shares to the stockholders of HO&M. The growth in the Company's exploration and development activities has been achieved primarily through acquisitions: HO&M in 1988, Houston Oil Trust in 1989, Wacker Oil Inc. in 1990, certain oil and gas assets from Mesa Limited Partnership in 1991, Arkla Exploration in 1992, Novalta Resources Inc. in 1994, and two Egyptian concessions purchased from units of Exxon Corporation in 1996. On October 3, 1996, the shareholders of Seagull and Global Natural Resources Inc. ("Global") approved a merger of a wholly owned subsidiary of Seagull into Global (the "Global Merger"). Pursuant to the Global Merger, each share of Global common stock was converted into 0.88 shares of Seagull common stock with approximately 26.3 million shares issued to the shareholders of Global. The Global Merger was accounted for as a pooling of interests. Therefore all financial information and statistics have been restated. The "Company" or "Seagull" refers to Seagull and its consolidated subsidiaries, unless otherwise indicated or the context otherwise suggests. For financial information relating to industry segments, see Note 13 of Notes to Consolidated Financial Statements of Seagull Energy Corporation and Subsidiaries. The Consolidated Financial Statements of Seagull Energy Corporation and Subsidiaries and the Notes related thereto (the "Consolidated Financial Statements") are included in the Company's 1996 Annual Report to Shareholders and as part of Exhibit 13 attached hereto. Items 1, 3 and 7 of this document include forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although Seagull believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward looking statements include political developments in foreign countries, federal and state regulatory developments, the timing and extent of changes in commodity prices, the timing and extent of success in discovering, developing and producing or acquiring oil and gas reserves and conditions of the capital and equity markets during the periods covered by the forward looking statements. OIL AND GAS OPERATIONS Seagull's Oil and Gas Operations ("O&G") segment is the Company's primary business segment and is comprised of the following material direct and indirect wholly owned subsidiaries of the Company: Seagull Energy E&P Inc.; Global Natural Resources Inc.; Seagull Midcon Inc.; Seagull Mid- -1- South Inc., Seagull Energy Canada Ltd. ("Seagull Canada"), Seagull East Zeit Petroleum Ltd. and various other subsidiaries. Natural gas is stated herein in billion cubic feet ("Bcf"), million cubic feet ("MMcf") or thousand cubic feet ("Mcf"). Oil, condensate and natural gas liquids ("NGL") are stated in barrels ("Bbl"). MMcfe and Mcfe represent the equivalent of one million and one thousand cubic feet of natural gas, respectively. Oil, condensate and NGL are converted to gas at a ratio of one barrel of liquids per six Mcf of gas, based on relative energy content. MBOE and BOE represent one thousand barrels of oil equivalent and one barrel of oil equivalent, respectively, with six Mcf of gas converted to one barrel of liquid. As used in this Annual Report on Form 10-K, liquids means oil, condensate and natural gas liquids, unless otherwise indicated or the context otherwise suggests. Revenues from the O&G segment accounted for 81%, 76% and 78% of the Company's consolidated revenues for 1996, 1995 and 1994, respectively. Production of gas and liquids for 1996 averaged 391.5 MMcf per day ("MMcf/d") and 13,409 Bbl per day ("Bbl/d"), respectively, compared to 382.6 MMcf/d and 8,753 Bbl/d, respectively, in 1995. Oil production in 1996 increased from the prior year primarily as a result of increased production in Egypt and Cote d'Ivoire. In September 1995, the Company sold substantially all of its gas gathering and processing assets. With the sale of these assets, Seagull's former Exploration and Production segment and the Pipeline and Marketing segment have been reclassified into Oil and Gas Operations. Seagull's principal oil and gas producing properties include the following:
Proved Reserves at December 31, 1996 -------------------------------------------------------------------------------------- Gas (MMcf) Oil (Mbbl) MBOE -------------------------- ------------------------- ------------------------- UNITED STATES: Arkoma Basin.................. 121,896 - 20,316 Arklatex Area................. 297,719 7,687 57,306 Mid-Continent Area............ 203,692 7,958 41,906 Offshore Gulf of Mexico....... 82,095 2,404 16,087 Gulf Coast Onshore............ 27,608 1,166 5,767 Other......................... 82,771 670 14,465 -------------------------- ------------------------- ------------------------- 815,781 19,885 155,847 CANADA.......................... 233,744 3,725 42,682 EGYPT: Qarun......................... 1,447 9,462 9,703 East Zeit..................... - 16,262 16,262 -------------------------- ------------------------- ------------------------- 1,447 25,724 25,965 COTE D'IVOIRE................... 21,644 1,525 5,132 TATARSTAN....................... - 16,338 16,338 INDONESIA....................... 65,217 1,125 11,993 -------------------------- ------------------------- ------------------------- 1,137,833 68,322 257,957 ========================== ========================= =========================
For additional information relating to the Company's oil and gas reserves, based substantially upon reports of DeGolyer and MacNaughton, Netherland, Sewell & Associates, Inc. and Ryder Scott Company, independent petroleum engineers (collectively the "Engineers"), see Note 15 of the Consolidated Financial Statements included in the Company's 1996 Annual Report to Shareholders and as part of Exhibit 13 attached hereto. The Engineers provided the estimates of "proved developed and undeveloped reserves" and "proved developed reserves" at the beginning and end of each of the three years included in Note 15. Under "Standardized Measure of Discounted Future Net Cash Flows" in Note 15, the Engineers provided all information except "discounted income taxes" and "standardized measure of discounted future net cash flows." All information in Note 15 not provided by the Engineers -2- was supplied by the Company. The Company's reserve estimates in Indonesia have been obtained by the Company from a public source which, although not independently verified, the Company believes to be reliable. As required, Seagull also files estimates of oil and gas reserve data with various governmental regulatory authorities and agencies. The basis for reporting reserves to these authorities and agencies, in some cases, may not be comparable. However, the difference in estimates does not exceed 5%. The future results of this segment will be affected by the market prices of natural gas and liquids and the degree of internal exploration and exploitation success. The availability of a ready market for gas and liquids products in the future will depend on numerous factors beyond the control of the Company, including weather, production of other natural gas and liquids products, imports, marketing of competitive fuels, proximity and capacity of gas and liquids pipelines and other transportation facilities, demand for storage refills, any oversupply or undersupply of gas and liquids products, the regulatory environment and other regional, international and political events, none of which can be predicted with certainty. UNITED STATES Most of the Company's proved oil and gas reserves and annual production are contributed by properties in the United States. These properties are generally located in three geographic areas -- the Mid-South region, the Mid-Continent region and the Gulf Coast region. The Company's capital program for 1997 is designed to hold domestic reserves and deliverability to approximately year-end 1996 levels. In addition, Seagull will continue to pursue small acquisitions to increase its domestic reserves and deliverability. Capital expenditures, excluding small acquisitions, for the Company's domestic activities are expected to be approximately $114 million for 1997, including $50 million for exploration, $57 million for development and $7 million for leaseholds. Mid-South Region The Company's Mid-South properties are situated generally in the Arkoma Basin of eastern Oklahoma and western Arkansas and the Arklatex area of east Texas and northwest Louisiana. Combined, these two areas held proved reserves totaling 77,622 MBOE at December 31, 1996, 30% of the Company's total proved reserves. These proved reserves are contained in some 80 fields in which there are approximately 1,300 producing wells. Production from these two areas at December 31, 1996, averaged approximately 28 MBOE per day. The Company's continuing expenditures in the Mid-South region are devoted principally to exploitation activities. Such expenditures in 1996, which totaled $34.0 million, were devoted to 81 development wells. Plans for 1997 call for 69 development wells and capital spending of about $31 million. The Company estimates that it held approximately 313 development drilling locations in the area at the end of 1996. Mid-Continent Region The Company's Mid-Continent properties are situated generally in the Anadarko Basin of the Texas Panhandle and western Oklahoma. This area held proved reserves totaling 41,906 MBOE at December 31, 1996, some 16% of the Company's total proved reserves. These proved reserves are -3- contained in 20 fields in which there are approximately 900 producing wells. Production from this area at December 31, 1996, averaged approximately 16 MBOE per day. The Company's continuing expenditures in the Mid-Continent region are devoted principally to exploitation activities. Such expenditures in 1996, which totaled $19.3 million, were devoted primarily to 39 development wells. Plans for 1997 call for 66 development wells and capital spending of about $21 million. The Company estimates that it held 314 approximately development drilling locations in the area at the end of 1996. Gulf Coast Region The Company's Gulf Coast region properties are located onshore in south Texas and south Louisiana and offshore in the Gulf of Mexico off the coasts of the same two states. As of December 31, 1996, the Company's holdings in the Gulf Coast region totaled 21,854 MBOE of proved reserves, representing 8% of the Company's total such reserves. The Company at December 31, 1996, had 68 undrilled exploratory prospects in its Gulf Coast region, some 60 of which were located offshore. Further, the Company estimates that it held approximately 20 development drilling locations at year-end 1996. Both exploration and exploitation activities are conducted in this region. In 1996 such activity consisted of 28 exploratory and 5 development wells and cumulative capital spending of $86.4 million. The Company's capital budget but also for development drilling and the acquisition of offshore leases for 1997 anticipates spending of $62 million, primarily for 24 exploratory wells but also for development drilling and the acquisition of offshore leases in the Gulf Coast region. CANADA The Company's operations in Canada consist of interests in a small number of fields located in Alberta, Canada. As of December 31, 1996, the Company's holdings in Canada totaled 42,682 MBOE representing 17% of the Company's reserves. Seagull's 1997 capital program includes approximately $15 million in exploratory and development capital expenditures for Canadian operations. EGYPT The Company's Egyptian operations consist of working interests in two producing (Qarun and East Zeit) and three exploratory (East Beni Suef, Darag and South Hurghada) concessions. As discussed below, the East Zeit and South Hurghada concessions were purchased in 1996. The Company's interests in Qarun, East Beni Suef and Darag were owned by Global prior to the Global Merger. Each concession is governed by a concession agreement (collectively, the "Egyptian Concession Agreements") between the working interest partners and the Egyptian national oil company ("EGPC"). Under the Egyptian Concession Agreements, the working interest partners pay 100% of capital and -4- operating costs and production is split between EGPC and the working interest partners. Working interest partners recover costs from a percentage, which varies by concession, of the oil and gas produced and sold from the applicable concession ("cost recovery petroleum"). See the discussions of each concession below for the applicable cost recovery percentage. Cost recovery petroleum forms a single unified pool for the entire concession from which costs of all fields, zones, products and types may be recovered without differentiation, except that operating costs are recovered prior to the recovery of any capital costs. Capital costs (which include exploration, development and other equipment and facilities costs) are amortized for recovery over four to five years while operating expenses are recoverable on a current basis. To the extent that the costs eligible for recovery in any quarter exceed the amount of cost recovery petroleum produced and sold in that quarter, such costs are recoverable from cost recovery petroleum in future quarters with no limit on the ability to carry forward such costs. The remaining oil and gas produced and sold ("remaining oil" or "remaining gas") is divided between EGPC and the working interest partners. See the discussions of each concession below for the applicable remaining oil or gas percentage. From EGPC's share of this remaining oil or gas, all Egyptian government royalties as well as the applicable Egyptian income taxes of the working interest partners are paid. Qarun The Company has a 25% non-operated working interest in the Qarun Concession Agreement ("QCA"). The concession covers approximately 1.9 million gross acres located 45 miles southwest of Cairo, Egypt. Exploratory drilling activities began in mid 1994. Initial oil production, via trucking, began in late 1995 while conventional development facilities were completed in late 1996. These development facilities are expected to be fully operational in early 1997. As required by the QCA, the Qarun Production Company was formed in 1995 to operate the Qarun block and is jointly owned by the QCA partners and EGPC. Under the QCA, cost recovery petroleum may be up to 40% of the oil and gas produced and sold. Any portion of cost recovery petroleum not used to recover costs goes to EGPC. The working interest partners receive 20%-30% of the remaining oil depending upon production levels and 22% of the remaining gas. Up to 16 exploratory wells, as well as ongoing development activities, are scheduled on the Qarun concession during 1997. Plans for 1997 include approximately $30 million in capital expenditures net to the Company's 25% working interest. East Zeit On September 10, 1996, Seagull purchased the East Zeit and South Hurghada concessions from units of Exxon Corporation (the "Esso Suez Acquisition") for a net purchase price of $74 million. The Company, as operator, has a 100% working interest in the East Zeit concession which is located offshore in the Gulf of Suez. Under terms of the concession agreement, cost recovery petroleum may be up to 25% of the oil produced and sold. Any portion of cost recovery petroleum not used to recover costs goes to EGPC. As the working interest partner, the Company receives 15% of remaining oil (11.25% of total oil production). However, the Company receives no allocation of gas production as all such production is taken by EGPC. Plans for 1997 include approximately $30 million in capital expenditures, primarily for development activities and one exploratory well. -5- East Beni Suef Seagull, as the operator, has a 50% working interest in the East Beni Suef Concession Agreement. The concession covers approximately 6.8 million gross acres lying adjacent and to the south of the Qarun concession. The working interest partners have committed to drill one exploratory well in the initial three year exploratory period. The exploration rights may be extended for an additional six years by the assumption of additional drilling obligations. Up to 40% of the oil and gas produced and sold is available as cost recovery petroleum. The working interest partners receive 15%-30% of the remaining oil depending upon production levels and 25% of the remaining gas. Any portion of cost recovery petroleum not used to recover costs is shared among the working interest partners and EGPC in the same manner as remaining petroleum. The Company has budgeted just over $3 million for 1997 capital expenditures in the block, including its share of the first two exploratory wells. Darag The Company has a 50%, non-operated working interest in the Darag block which is located in the northern portion of the Gulf of Suez, and covers 460,000 gross acres. Up to 40% of the oil and gas produced and sold is available as cost recovery petroleum. Any portion of cost recovery petroleum not used to recover costs is shared among the working interest partners and EGPC in the same manner as remaining petroleum. The working interest partners receive 13%-30% of the remaining oil based on the level of production and 25% of the remaining gas. The Company's 1997 capital budget is just over $5 million, including its share of two exploratory wells. South Hurghada As discussed above, the South Hurghada Concession Agreement, covering over 61,000 million acres, was acquired on September 10, 1996. Seagull, as operator, has a 100% working interest in the concession located onshore on the coast of the Gulf of Suez approximately 250 miles south of Cairo. Up to 40% of the oil and gas produced and sold is available as cost recovery petroleum. Any portion of cost recovery petroleum not used to recover costs goes to EGPC. The Company receives 12%-20% of the remaining oil depending upon production levels and 20% of the remaining gas. While there are currently no producing activities at South Hurghada, there are two existing oil discoveries. Projected 1997 capital spending in the block approximates $11 million, primarily for geophysical data acquisition and evaluation, two exploratory wells and installation of production facilities. COTE D'IVOIRE Seagull's operations in Cote d'Ivoire, West Africa consist of working interests in three blocks- CI-11, CI-12 and CI-104. Each block is subject to a Production Sharing Contract ("PSC") with similar terms for each of the blocks. Under the terms of the PSCs, the working interest partners pay 100% of capital and operating costs, and production is split between the Ivorian government and the working interest partners. Working interest partners recover costs from a percentage, which varies by concession, of the oil and gas produced and sold from the applicable contract area ("cost recovery petroleum"). See the discussions of each concession below for the applicable cost recovery percentage. Cost recovery petroleum forms a single unified pool for the entire PSC from which costs of all fields, zones, products and types may be recovered without differentiation, except that operating and financing costs are recovered prior to the recovery of any capital costs. Capital costs include exploration, development and -6- other equipment and facilities costs. To the extent that the costs eligible for recovery in any calendar year exceed the amount of cost recovery petroleum produced and sold in that quarter, such costs are recoverable from cost recovery petroleum in future years with no limit on the ability to carry forward such costs. Any portion of cost recovery petroleum not used to recover costs will be split between the Ivorian government and the working interest partners in the same manner as remaining petroleum. The remaining oil and gas produced and sold is divided between the Ivorian government and the working interest partners. See the discussions of each concession below for the applicable remaining oil and gas percentage. From the Ivorian government's share of remaining petroleum, all Ivorian government royalties as well as the applicable Ivorian income taxes for the working interest partners are paid. CI-11 Pursuant to the CI-11 PSC, the Company has a 13.2% unitized working interest in the area located from onshore to approximately eight miles offshore Cote d'Ivoire. Under this PSC, 40% of the oil and gas produced and sold is available as cost recovery petroleum. The working interest partners receive 10%-50% of the remaining petroleum based on the level of production and the water depth location of the specific wellhead. The Company has budgeted approximately $16 million as its share of 1997 capital spending, primarily for development drilling and facilities. CI-12 In April 1995, the Company signed a PSC for block CI-12 which lies adjacent to the west of block CI-11. The Company acquired a 16.67% working interest in the PSC which covers approximately 525,000 gross acres. The working interest partners have committed to drill one exploratory well in the initial two year period. The exploration rights may be extended for an additional four years by the assumption of additional drilling obligations. The terms and conditions of the CI-12 PSC are similar to those of CI-11, except that 50% of the oil and gas produced is available to recover costs. The Company's capital budget for 1997 includes just over $2 million for CI-12, primarily for its share of two exploratory wells. CI-104 In 1996, the Company received a 100% working interest in block CI-104, which lies adjacent to the west of block CI-12 and covers approximately 250,000 gross acres. The Company has committed to drill one exploratory well in the initial two year period. The exploration rights may be extended for an additional four years by the assumption of additional drilling obligations. While the terms and conditions of the CI-104 PSC are similar to those of CI-11, 75% of the oil and gas produced is available to recover costs. The Company receives 30%-50% of the remaining petroleum depending upon production levels and the water depth location of the specific wellhead. Seismic work is scheduled to begin in 1997 with initial drilling beginning in 1998. -7- TATARSTAN Through its 90% owned subsidiary, Texneft, the Company has a net 45% interest in a joint venture in Tatarstan, a republic in the Russian Federation located west of the Ural Mountains and east of the Volga River. The joint venture is with Tatneft, a Russian open joint stock company. The joint venture, Tatex, operates various oil fields in Tatarstan. Under the terms of the joint venture and various supplemental agreements, the funding for the joint venture is supplied by Texneft and Tatneft through various credit agreements. The joint venture's activities currently include three projects: (i) vapor recovery, (ii) the development and operation of the Onbysk field and (iii) the upcoming development and operation of the Suncheleevsky and Demkinsky fields. Texneft's share of capital spending for 1997 is some $6 million, primarily for development drilling and facilities. INDONESIA Seagull has a 1.714% interest in the Indonesia Joint Venture ("IJV") for the exploration, development and production of oil and gas in East Kalimantan, Indonesia, under a production sharing contract with Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, the state petroleum enterprise of Indonesia ("Pertamina"). The majority of the revenue derived from the IJV results from the sale of liquefied natural gas ("LNG"). Under the terms of the PSC with Pertamina, the IJV is authorized to explore for, develop and produce petroleum reserves in an approximately 1.1 million acre area in East Kalimantan. In accordance with the requirements of the PSC, which expires on August 7, 2018, the IJV must relinquish 10% of the PSC area by August 7, 1998, 10% by December 31, 2000; 15% by each December 31, 2001, 2002 and 2004. However, the IJV is not required to relinquish any of the PSC area in which oil or gas is held for production. Under the PSC, the IJV participants are entitled to recover cumulative operating and certain capital costs out of the oil and gas produced each year, and to receive a share of the remaining oil production and a share of the remaining revenues from the sale of gas on an after Indonesian tax basis. Through August 7, 1998, the share of revenues from the sale of gas after cost recovery will remain at 35% to the IJV and 65% to Pertamina. After August 7, 1998, the split will be (i) 25 % to the IJV and 75% to Pertamina for gas sales under various LNG sales contracts specified in the PSC to the extent that production is committed from the Badak or Nilam fields and (ii) 30% to the IJV and 70% to Pertamina for all LNG revenues from other fields. Based on current and projected oil production, the revenue split from oil sales after cost recovery through August 7, 2018 will remain at 15% to the IJV and 85% to Pertamina. These revenue splits are based on Indonesian income tax rates of 56% through August 7, 1998 and 48% thereafter. OTHER INTERNATIONAL The Company's other international operations consist of activities in the United Kingdom and Malaysia. In the United Kingdom, Seagull has several production licenses awarded to two exploration groups which include Seagull. Although the Company currently has no producing properties in the -8- United Kingdom, a well designed to delineate a 1994 discovery is scheduled for late 1997. While Seagull currently has several minor interests in Malaysia, exploratory efforts in 1993 and 1994 did not find commercial quantities of hydrocarbons. The Company and its joint venture partners do not currently have any additional plans for activities in Malaysia. OIL AND GAS DRILLING ACTIVITIES Seagull's oil and gas exploratory and developmental drilling activities are as follows for the periods indicated. Totals shown in each category include wells completed as productive wells and wells abandoned as dry holes. A well is considered productive for purposes of the following table if it justifies the installation of permanent equipment for the production of oil or gas. A well is deemed to be a dry hole if it is determined to be incapable of commercial production. The term "gross wells" means the total number of wells in which Seagull owns an interest, while the term "net wells" means the sum of the fractional working interests Seagull owns in gross wells. The number of wells drilled refers to the number of wells completed during the fiscal years, regardless of when drilling was initiated. Wells classified as "in progress" at year-end represent wells where drilling activity is ongoing, wells awaiting installation of permanent equipment and wells awaiting the drilling of additional delineation wells.
Year Ended December 31, ------------------------------------------------------------------------------------ 1996 1995 1994 Gross Net Gross Net Gross Net --------- --------- -------- --------- ---------- --------- UNITED STATES: Exploratory Drilling: Productive Wells................. 14 6.2 9 5.7 14 5.9 Dry Holes........................ 15 6.6 14 7.5 19 10.3 Development Drilling: Productive Wells................. 123 54.2 64 29.0 137 71.5 Dry Holes........................ 13 8.2 4 1.1 11 5.1 CANADA: Exploratory Drilling: Productive Wells................. 5 0.8 3 1.0 5 1.7 Dry Holes ....................... 2 2.0 3 3.0 1 0.3 Development Drilling: Productive Wells................. 17 8.6 7 1.9 110 55.0 Dry Holes ....................... 2 1.5 1 0.5 1 0.5 COTE D'IVOIRE: Exploratory Drilling: Productive Wells................. 2 0.3 - - 1 0.1 Dry Holes ....................... 1 0.1 - - - - Development Drilling: Productive Wells................. 1 0.1 4 0.6 1 0.1 EGYPT: Exploratory Drilling: Productive Wells................. 2 0.5 2 0.5 2 0.5 Dry Holes ....................... 5 1.3 1 0.3 - - Development Drilling: Productive Wells................. 14 3.5 4 1.0 - - Dry Holes ....................... - - 1 0.3 - - TATARSTAN: Exploratory Drilling: Dry Holes....................... - - 1 0.5 - - Development Drilling: Productive Wells................ 20 10.0 17 8.5 19 9.5 OTHER INTERNATIONAL: Exploratory Drilling: Dry Holes ....................... - - 2 0.4 2 0.5 TOTALS: Exploratory Drilling: Productive Wells................ 23 7.8 14 7.2 22 8.2 Dry Holes....................... 23 10.0 21 11.7 22 11.1 Development Drilling: Productive Wells................ 175 76.4 96 41.0 267 136.1 Dry Holes....................... 15 9.7 6 1.9 12 5.6
-9- The Company had 15 gross (8.3 net) exploratory wells and 34 gross (21.3 net) development wells in progress at December 31, 1996. The exploratory wells in progress at year-end added 15.7 Bcfe to Seagull's proved reserves at December 31, 1996. The Company's capital expenditures for 1996 included $8.4 million related to these wells. PRODUCTION The following table summarizes the Company's production, average sales prices and direct operating costs for the periods indicated:
Year Ended December 31, ------------------------------------------------------------ 1996 1995 1994 ---------------- ----------------- -------------- UNITED STATES: Net Production: Gas (MMcf).................................................... 116,238 113,482 118,804 Oil, condensate and NGL (MBbl)................................ 1,561 1,403 1,650 Average sales price (1): Gas (per Mcf)................................................. $.2.17 $ 1.62 $ 1.88 Oil, condensate and NGL (per Bbl)............................. $19.03 $15.84 $15.08 Average direct operating costs (per Mcfe) (2)................... $ 0.49 $ 0.44 $ 0.43 CANADA(5): Net Production: Gas (MMcf).................................................... 21,203 22,057 19,755 Oil, condensate and NGL (MBbl)................................ 361 399 427 Average sales price: Gas (per Mcf)................................................. $.1.27 $ 1.02 $ 1.55 Oil, condensate and NGL (per Bbl)............................. $16.77 $13.01 $11.57 Average direct operating costs (per Mcfe)....................... $.0.51 $ 0.45 $ 0.51 EGYPT: Net Production: Oil (MBbl).................................................... 1,305 25 - Average Sales Price: Oil (per Bbl)................................................. $21.56 $17.97 - Average direct operating costs (per Mcfe)....................... $.0.49 $ 0.38 - COTE D'IVOIRE: Net Production: Gas (MMcf).................................................... 1,445 203 - Oil (MBbl).................................................... 511 261 - Average sales price: Gas (per Mcf)................................................. $ 1.77 $ 1.61 - Oil (per Bbl)................................................. $20.04 $15.51 - Average direct operating costs (per Mcfe)....................... $ 0.54 $ 0.57 - TATARSTAN: Net Production: Oil (MBbl)..................................................... 1,117 1,062 842 Average Sales Price: Oil (per Bbl).................................................. $13.98 $15.11 $14.21 Average direct operating costs (per Mcfe)........................ $ 1.18 $ 0.97 $ 1.55 INDONESIA: Net Production: Gas (MMcf)..................................................... 4,429 3,933 4,473 Oil (MBbl)..................................................... 51 45 47 Average sales price: Gas (per Mcf).................................................. $ 3.36 $ 2.96 $ 2.45 Oil (per Bbl).................................................. $19.58 $17.38 $16.58 Average direct operating costs (per Mcfe)........................ - - -
(1) Average sales prices are before deduction of production, severance, and other taxes. (2) Direct operating costs represent costs incurred to operate and maintain wells and related equipment and facilities. These costs include, among other things, repairs and maintenance, workover expenses, labor, materials, supplies, property taxes, insurance, severance taxes and transportation costs. The following table sets forth information regarding the number of productive wells in which the Company held a working interest at December 31, 1996. Productive wells are either producing wells or wells capable of commercial production although currently shut-in. One or more completions in the same borehole are counted as one well. -10-
Gross Wells Net Wells ----------------------------------------------- ---------------------------------------------------- Multiple Multiple Gas Oil Total Completions Gas Oil Total Completions --------- --------- --------- -------------- ---------- -------- ---------- --------------- United States.... 2,385 1,574 3,959 269 957.3 160.9 1,118.2 133.0 Canada........... 748 9 757 515 399.4 1.8 401.2 281.9 Cote d'Ivoire.... 2 9 11 - 0.3 1.2 1.5 - Egypt............ - 31 31 - - 15.3 15.3 - Indonesia........ 317 195 512 388 5.4 3.4 8.8 4.8 Tatarstan........ - 174 174 35 - 87.0 87.0 17.5 --------- --------- --------- -------------- ---------- -------- ---------- --------------- 3,452 1,992 5,444 1,207 1,362.4 269.6 1,632.0 437.2 ========= ========= ========= ============== ========== ======== ========== ===============
For additional information relating to oil and gas producing activities, see Note 15 of the Consolidated Financial Statements included in the Company's 1996 Annual Report to Shareholders and as part of Exhibit 13 attached hereto. DEVELOPED AND UNDEVELOPED OIL AND GAS ACREAGE As of December 31, 1996, the Company owned working interests in the following developed and undeveloped oil and gas acreage:
Developed Undeveloped --------------------------------------- -------------------------------------- Gross Net (*) Gross Net (*) ---------------- --------------- --------------- -------------- UNITED STATES: Onshore: Oklahoma....................... 278,885 132,285 42,948 24,959 Texas.......................... 220,131 97,386 79,277 24,767 Arkansas....................... 214,156 71,971 5,282 2,447 Louisiana...................... 43,581 22,049 4,772 2,937 Montana........................ 1,159 68 174,922 160,937 Other.......................... 26,888 8,977 56,155 26,913 Bays and State Waters............ 8,975 2,810 16,472 10,047 Federal Offshore: Texas.......................... 127,864 65,898 297,483 235,611 Louisiana...................... 66,284 33,352 221,915 115,081 ARCTIC ISLANDS..................... - - 752,293 33,364 CANADA............................. 375,753 196,166 409,548 258,739 COTE D'IVOIRE: CI-11............................ 11,860 1,542 180,329 23,443 CI-12............................ - 525,000 87,517 CI-104........................... - - 250,300 250,300 EGYPT: Qarun............................ 46,447 11,612 1,853,553 463,388 East Zeit........................ 6,672 6,672 - - East Beni Suef................... - - 6,819,960 3,409,980 Darag............................ - - 459,606 229,803 South Hurghada................... - - 61,561 61,561 INDONESIA.......................... 97,000 1,663 1,156,780 19,827 MALAYSIA........................... - - 1,556,100 233,415 TATARSTAN.......................... 12,630 6,315 12,107 6,053 UNITED KINGDOM..................... - - 637,479 126,450 ---------------- --------------- --------------- -------------- 1,538,285 658,766 15,573,842 5,807,539 ================ =============== =============== ==============
(*) When describing acreage on drilling locations, the term "net" refers to the total acres on drilling locations in which the Company has a working interest, multiplied by the percentage working interest owned by the Company. Additionally, as of December 31, 1996, the Company owned mineral and/or royalty interests in 584,430 gross (43,154 net) developed and 2,834,359 gross (105,889 net) undeveloped oil and gas acres, located primarily in the United States. -11- REGULATION The availability of a ready market for oil and natural gas production depends upon numerous regulatory factors beyond the Company's control. These factors include regulation of oil and natural gas production, federal and state regulations governing environmental quality and pollution control and state limits on allowable rates of production by a well or proration unit. State and federal regulations generally are intended to prevent waste of oil and natural gas, protect rights to produce oil and natural gas between owners in a common reservoir, control the amount of oil and natural gas produced by assigning allowable rates of production and control contamination of the environment. Regulation of Oil and Natural Gas Exploration and Production. Exploration and production operations of the Company are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring permits for the drilling of wells, maintaining bonding requirements in order to drill or operate wells, and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilling and the plugging and abandonment of wells. The Company's operations are also subject to various conservation laws and regulations. These include the regulation of the size of drilling and spacing units or proration units and the density of wells which may be drilled and unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In addition, state conservation laws establish maximum rates of production requirements regarding the ratability of production. Natural Gas Marketing and Transportation. Although maximum selling prices of natural gas were formerly regulated, the Natural Gas Wellhead Decontrol Act of 1989 ("Decontrol Act") terminated wellhead price controls on all domestic natural gas on January 1, 1993, and amended the Natural Gas Policy Act of 1978 to remove completely by January 1, 1993 price and nonprice controls for all "first sales" of natural gas, which will include all sales by the Company of its own production. Consequently, sales of the Company's natural gas currently may be made at market prices, subject to applicable contract provisions. The FERC's jurisdiction over natural gas transportation was unaffected by the Decontrol Act. The Federal Energy Regulatory Commission (the "FERC") regulates interstate natural gas transportation rates and service conditions, which affect the marketing of natural gas produced by the Company, as well as the revenues received by the Company for sales of such natural gas. Since the latter part of 1985, the FERC has endeavored to make interstate natural gas transportation more accessible to gas buyers and sellers on an open and nondiscriminatory basis. The FERC's efforts have significantly altered the marketing and pricing of natural gas. Commencing in April 1992, the FERC issued Order Nos. 636, 636-A and 636-B (collectively, "Order No. 636"), which, among other things, require interstate pipelines to "restructure" to provide transportation separate or "unbundled" from the pipelines' sales of gas. Also, Order No. 636 requires pipelines to provide open-access transportation on a basis that is equal for all gas supplies. Additional proposals and proceedings that might affect the natural gas industry are considered from time to time by Congress, the FERC, state regulatory bodies and the courts. The Company cannot predict when or if any such proposals might become effective, or their effect, if any, on the Company's -12- operations. The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue indefinitely into the future. State regulation of gathering facilities generally includes various transportation, safety, environmental, and nondiscriminatory purchase and transport requirements, but does not generally entail rate regulation. Offshore Leasing. Certain operations the Company conducts are on federal oil and gas leases, which the Minerals Management Service ("MMS") administers. The MMS issues such leases through competitive bidding. These leases contain relatively standardized terms and require compliance with detailed MMS regulations and orders pursuant to the Outer Continental Shelf Lands Act ("OCSLA") (which are subject to change by the MMS). For offshore operations, lessees must obtain MMS approval for exploration plans and development and production plans prior to the commencement of such operations. In addition to permits required from other agencies (such as the Coast Guard, the Army Corps of Engineers and the Environmental Protection Agency), lessees must obtain a permit from the MMS prior to the commencement of drilling. The MMS has promulgated regulations requiring offshore production facilities located on the Outer Continental Shelf ("OCS") to meet stringent engineering and construction specifications, and has recently proposed additional safety-related regulations concerning the design and operating procedures for OCS production platforms and pipelines. The MMS also has issued regulations to prohibit the flaring of liquid hydrocarbons and oil without prior authorization. Similarly, the MMS has promulgated other regulations governing the plugging and abandonment of wells located offshore and the removal of all production facilities. To cover the various obligations of lessees on the OCS, the MMS generally requires that lessees post substantial bonds or other acceptable assurances that such obligations will be met. In addition, the MMS is conducting an inquiry into certain contract settlement agreements from which producers on MMS leases have received settlement proceeds that are royalty bearing and the extent to which producers have paid the appropriate royalties on those proceeds. The restructuring of oil and gas markets has resulted in a shifting of markets downstream from the wells. Deregulation has altered the marketplace such that lessors, including the MMS, are challenging the methods of valuation of gas for royalty purposes. The MMS has recently issued a notice of proposed rulemaking in which it proposes to amend its regulations governing the calculation of royalties and the valuation of oil and natural gas produced from federal leases. The principal feature in the amendments, as proposed, would establish an alternative market-index based method to calculate royalties on certain natural gas production sold to affiliates or pursuant to non-arms'-length sales contracts. The MMS has proposed this rulemaking to facilitate royalty valuation in light of changes in the gas marketing environment. The Company cannot predict what action the MMS will take on these matters, nor can it predict at this stage of the rulemaking proceedings how the Company might be affected by amendments to the regulations. In Canada, exploration, production and development activities are governed by federal and provincial laws which subject operators to extensive controls and regulations. Exports of oil and gas across interprovincial borders or on pipelines which connect to United States pipelines are governed by the National Energy Board and each province has its own laws governing the operations of producers and protection of the environment. -13- PIPELINE, MARKETING AND OTHER The Company's O&G segment also includes pipeline and marketing operations involving (i) the transportation and marketing of Seagull's own and third-party gas, oil and natural gas liquids; (ii) gas gathering and processing; and (iii) pipeline engineering design, construction and operation. The Company actively provides marketing services geared toward matching gas supplies available in the major producing areas with attractive markets available in the Midwest, Northeast, Mid-Atlantic, Appalachian and Texas/Louisiana Gulf Coast areas. The matching process includes arranging transportation on a network of open-access pipelines on a firm or interruptible basis. Seagull contracts to provide oil and natural gas to various customers and aggregates supplies from various sources including third-party producers, marketing companies, pipelines, financial institutions and the Company's own production. Marketing profit margins are often small due to competition, and results can vary significantly from month to month. Large amounts of working capital are involved for relatively small net margins, which makes working capital management critical. The Company has policies and procedures in place that are designed to minimize any potential risk of loss from these transactions. These policies and procedures are reviewed and updated periodically by the Company's management. Most of the Company's natural gas is transported through gas gathering systems and gas pipelines which are not owned by the Company. Transportation space on such gathering systems and pipelines is occasionally limited and at times unavailable due to repairs or improvements being made to such facilities or due to such space being utilized by other gas shippers with priority transportation agreements. While the Company has not experienced any inability to market its natural gas, if transportation space is restricted or is unavailable, the Company's cash flow from the affected properties could be adversely affected. In 1995, the Company initiated an active risk management program for both its own E&P production and third party activities, utilizing such derivative financial instruments as futures contracts, options and swaps. The primary objective of the risk management program is as a hedging strategy to manage commodity prices associated with oil and gas production sales and to reduce the impact of price fluctuations. The Company's policy is to leave the majority of its own E&P production either unhedged or protected only from price decreases. The Company accounts for its commodity derivative contracts as hedging activities and, accordingly, income or costs are included in revenues when the commodities are produced. The risk management program is also an important part of the Company's third party marketing efforts, allowing the Company to convert a customer's requested price to a price structure that is consistent with the Company's overall pricing strategy. See Note 2 to the Company's Consolidated Financial Statements and Oil and Gas Operations in Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in the Company's 1996 Annual Report to Shareholders and as part of Exhibit 13 attached hereto. Pipeline Operations and Construction Seagull operates certain pipelines owned by other companies. In some cases the operating agreements provide for reimbursement of expenses incurred in connection with operations plus a profit margin. In other cases the Company receives a negotiated annual fee. The Company also builds pipelines for other companies for which it receives construction fees that are fixed, cost-plus or a -14- combination of both. The Company currently has one ongoing construction project and continues to pursue additional operating and construction opportunities as they arise. COMPETITION The Company's competitors in oil and gas exploration, development, production and marketing include major oil companies, as well as numerous independent oil and gas companies, individuals and drilling programs. Some of these competitors have financial and personnel resources substantially in excess of those available to the Company and, therefore, the Company may be placed at a competitive disadvantage. The Company's success in discovering reserves will depend on its ability to select suitable prospects for future exploration in today's competitive environment. The Company actively competes with numerous other companies for the construction and operation of short and medium length pipelines. The Company's competitors include oil companies, other pipeline companies, natural gas gatherers and petrochemical transporters, many of which have financial resources, staffs and facilities substantially larger than those of the Company. In addition, many of the Company's gas purchasers are also competitors or potential competitors in the sense that they have extensive pipeline-building capabilities and experience and generally operate large pipeline systems of their own. Seagull believes that its ability to compete will depend primarily on its ability to complete pipeline projects quickly and cost effectively, and to operate pipelines efficiently. The Company's gas marketing activities are in competition with numerous other companies offering the same services. Some of these competitors are affiliates of companies with extensive pipeline systems that are used for transportation from producers to end-users. The Company believes its ability to compete depends upon building strong relationships with producers and end-users by consistently purchasing and supplying gas at competitive prices. INTERNATIONAL OPERATIONS Seagull's interests in countries outside the United States are subject to the various risks inherent in foreign operations. These risks may include, among other things, currency restrictions and exchange rate fluctuations, loss of revenue, property and equipment as a result of expropriation, nationalization, war, insurrection and other political risks, risks of increases in taxes and governmental royalties, renegotiation of contracts with governmental entities, changes in laws and policies governing operations of foreign-based companies and other uncertainties arising out of foreign government sovereignty over the Company's international operations. The Company's international operations may also be adversely affected by laws and policies of the United States affecting foreign trade, taxation and investment. In addition, in the event of a dispute arising from foreign operations, the Company may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of the courts of the United States. The Company seeks to manage these risks by maintaining political risk insurance and concentrating its international exploration efforts in areas where the Company believes that the existing government is stable and favorably disposed towards United States exploration and production companies. -15- ALASKA TRANSMISSION AND DISTRIBUTION The Company operates in Alaska through ENSTAR Natural Gas Company ("ENG"), a division of the Company, and Alaska Pipeline Company ("APC"), an Alaska corporation and a wholly owned subsidiary of the Company. ENG and APC are currently operated as a single business unit ("ENSTAR Alaska"), and are regulated as a single operating unit by the Alaska Public Utilities Commission (the "APUC"). APC engages in the intrastate transmission of natural gas in South-Central Alaska. ENG engages in the distribution of natural gas in Anchorage and other nearby communities in Alaska and is APC's only customer. Revenues from the natural gas transmission and distribution segment accounted for 19%, 24% and 22% of the Company's consolidated revenues for 1996, 1995 and 1994, respectively. ENSTAR Alaska's predecessor was formed in 1959 and began serving the Anchorage area with natural gas in 1961. Five years later, in 1966, the predecessor became one of the original entities that formed Alaska Interstate Company, a newly organized public company the shares of which were traded on the New York Stock Exchange. Alaska Interstate Company changed its name to ENSTAR Corporation in 1982. In 1985, the Company purchased ENSTAR Alaska for $55 million in cash plus $10 million in the form of a seven-year unsecured, 10% subordinated note. At the time of the acquisition, APC had outstanding debt of approximately $65 million. The transaction received the final approval of the APUC in June 1985. GAS TRANSMISSION SYSTEM APC owns and operates the only natural gas transmission lines in its service area that are operated for utility purposes. The pipeline transmission system is composed of approximately 277 miles of 12 to 20-inch diameter pipeline and approximately 72 miles of smaller diameter pipeline. The system's present design delivery capacity is approximately 410 MMcf/d. The average throughput of the system in 1996, 1995 and 1994 was 131, 122 and 121 MMcf/d, respectively. In September 1995, APC entered into a 33-year agreement to lease a 60-mile, 8-inch diameter pipeline between Anchorage, Alaska and Whittier, Alaska. Conversion of the pipeline to natural gas was completed in 1996. The new pipeline is expected to account for nearly 1,000 new customers over the next two to three years. GAS DISTRIBUTION SYSTEM ENG distributes natural gas through approximately 2,051 miles of gas mains to approximately 94,100 residential, commercial, industrial and electric power generation customers within the cities and environs of Anchorage, Eagle River, Palmer, Wasilla, Soldotna, Kenai and the Nikiski area of the Kenai Peninsula, Alaska. During the year ended December 31, 1996, ENG added approximately 56 miles of new gas distribution mains, installed 2,500 new service lines and added approximately 2,000 net customers. ENG anticipates relatively modest growth in its residential customer base and will install additional main and service lines to accommodate this growth. -16- ENG distributes gas to its customers under tariffs and contracts which provide for varying delivery priorities. ENG's business is seasonal with approximately 65-70% of its revenues earned in the first and fourth quarters of each year. In 1996, purchase/resale volumes represented 56% of ENG's throughput and 82% of ENG's operating margin. The remaining volumes are transported for power, industrial and large commercial customers for a transportation fee. ENG's five largest customers are the Municipality of Anchorage; ARCO Alaska, Inc.; Aurora Gas, Inc.; the State of Alaska; and Unocal Corporation. Together, they account for about $10 million in annual operating margin and about 18.8 Bcf per year in volumes, which represent approximately 18% and 39%, respectively, of ENG totals. GAS SUPPLY In May 1988, APC entered into a gas purchase contract (the "Marathon Contract") with Marathon Oil Company ("Marathon") providing for the delivery of approximately 450 Bcf of gas in the aggregate. The Marathon Contract is a "requirements" contract with no specified daily deliverability or annual take-or-pay quantities. APC has agreed to purchase and Marathon has agreed to deliver all of APC's gas requirements in excess of those provided for in other presently existing gas supply contracts, subject to certain exceptions, until the commitment has been exhausted and without limit as to time; however, Marathon's delivery obligations are subject to certain specified annual limitations after 2001. The contract has a base price of $1.55 per Mcf plus reimbursements for any severance taxes and other charges. The base price is subject to annual adjustment based on changes in the price of certain traded oil futures contracts. During 1996, the cost of gas purchased under the Marathon Contract averaged $1.64 per Mcf, including reimbursements for severance taxes. The Marathon Contract, as amended in 1991, has been approved by the APUC. APC also has a gas purchase contract with Shell Oil Company and ARCO Alaska, Inc. (the "Shell Contract") which provides for the delivery of up to approximately 220 Bcf of gas through the year 2009. The Shell Contract provides a base price of $1.97 per Mcf plus reimbursements for any severance taxes and an annual adjustment based on changes in the price of certain traded oil futures contracts from the relevant base price. The Shell Contract also provides that certain portions of the gas purchased under the amendments may be priced under a pricing term similar to the Marathon Contract. The 1996 price under the Shell Contract, after application of contractual adjustments, averaged $1.63 per Mcf, including reimbursements for severance taxes. The Shell Contract, as amended, has been approved by the APUC. Combined, the Marathon and Shell Contracts will supply all of ENSTAR Alaska's gas supply requirements through the year 2001. After that time supplies will still be available under the contracts in accordance with their terms, but the annual limitations contained in the Marathon Contract will take effect. As a result, after 2001, at least a portion of ENSTAR Alaska's requirements are expected to be satisfied outside the terms of the contracts, as currently in effect. -17- Based on gas purchases during the twelve months ended December 31, 1996, which are not necessarily indicative of the volume of future purchases, gas reserves committed to APC under the Marathon and Shell Contracts would have a current reserve life index of approximately 14 years. ENSTAR Alaska's average cost of gas sold in 1996, 1995 and 1994 was $1.59, $1.75 and $1.74 per Mcf, respectively. ENSTAR Alaska's average gas sales price in 1996, 1995 and 1994 was $3.29, $3.41 and $3.23 per Mcf, respectively. As stated above, ENSTAR Alaska purchases all of its natural gas under long-term contracts in which the price is indexed to changes in the price of crude oil futures contracts. However, because ENSTAR Alaska's sales prices are adjusted to include the projected cost of its natural gas, there has been and is expected to be little or no impact on margins derived from ENSTAR Alaska's gas sales as a result of fluctuations in oil prices due to worldwide political events and changing market conditions. COMPETITION ENSTAR Alaska competes primarily with municipal and cooperative electric power distributors and with various suppliers of fuel oil and propane for the available energy market. There are also extensive coal reserves proximate to ENSTAR Alaska's operating area; however, such reserves are not presently being produced. During the last eight years, ENSTAR Alaska's natural gas volumes delivered on a purchase/resale basis have declined. Beginning in 1989, several of its major customers began purchasing gas directly from gas producers or gas marketers. However, the APUC has approved tariffs allowing ENSTAR Alaska to transport these volumes for a transportation fee that approximates the margin that would have been earned had the customer remained a sales customer rather than becoming a transportation customer. Consequently, ENSTAR Alaska anticipates no adverse economic impact to result from these transportation arrangements. If any other existing large customer of ENSTAR Alaska chooses to purchase gas directly from producers, ENSTAR Alaska would expect to collect a fee for transporting that gas equivalent to the margin earned on sales volumes for those customers because the large distance of remaining user facilities from producing fields would preclude the by-pass of ENSTAR Alaska's pipelines. ENSTAR Alaska supplies natural gas to its customers at prices that at the present time economically preclude substitution of alternative fuels. Since the Shell Contract and the Marathon Contract include prices that fluctuate based on oil indices, a competitive margin favoring natural gas over oil-based energy sources is expected to continue. However, there is no assurance that the competitive advantage over other alternative fuels will not be reduced or eliminated by the development of new energy technology or by changes in the price of oil or refined products. REGULATION The APUC has jurisdiction as to rates and charges for gas sales, construction of new facilities, extensions and abandonments of service and certain other matters. Rates are generally designed to -18- permit the recovery of the cost of providing service, including purchased gas costs, and a return on investment in plant. APC and ENG are regulated by the APUC on a combined basis as though they were a single entity. Because ENSTAR Alaska's operations are wholly intrastate, ENSTAR Alaska is not subject to or affected by Order 636 or any other economic regulation by the FERC. As a result of a proceeding filed in 1984, which was concluded in May 1986, the APUC granted ENSTAR Alaska an aggregate rate increase of 20.27% and authorized a regulatory rate of return on common equity of 15.65%. ENSTAR Alaska has no significant regulatory issues pending before the APUC. Since its inception in 1961, ENSTAR Alaska has participated in only three formal rate proceedings. CORPORATE REGULATION The Company is a "public utility company" within the meaning of the Public Utility Holding Company Act of 1935, as amended (the "1935 Act"). Accordingly, if any "company" (as defined for purposes of the 1935 Act and therefore including so-called "organized groups") becomes the owner of 10% or more of the Company's outstanding voting stock, that company would be required to register as a "holding company" under the 1935 Act, in the absence of an exemption of the type described below. Section 9(a)(2) also requires a person (including both individuals and "companies") to obtain prior approval from the Securities and Exchange Commission (the "SEC") in connection with the acquisition of 5% or more of the outstanding voting stock of a public utility if that person is also the owner of 5% or more of the outstanding voting stock of another public utility. In March 1991, the Company filed in good faith with the SEC an application pursuant to Section 2(a)(8) of the 1935 Act, seeking a determination that Seagull was not subject to regulation as a "subsidiary company" of FMR Corp. (the "FMR Application"), which was then the owner of 2,805,624 shares (approximately 12.5% at such time) (shares adjusted for a 2-for-1 stock split of all the issued shares of the Company's common stock (the "Common Stock"), effected June 4, 1993) of the outstanding Common Stock. Under the 1935 Act, a company is a "subsidiary company" of a "holding company" if the "holding company" owns 10% or more of the total voting power of the "subsidiary company", unless the SEC determines otherwise. Based upon the most recent information furnished to the Company by FMR Corp., FMR Corp.'s beneficial shares owned has fallen below 5% of the outstanding voting stock of the Company. In December 1993, Seagull filed in good faith with the SEC an additional application pursuant to Section 2(a)(8) of the 1935 Act, seeking a determination that the Company was not subject to regulation as a "subsidiary company" of AXA Assurances I. A. R. D. Mutuelle, AXA Assurances Vie Mutuelle, Alpha Assurances I. A. R. D. Mutuelle, Alpha Assurances Vie Mutuelle, Uni Europe Assurance Mutuelle and AXA (collectively, the "Mutuelles AXA") and The Equitable Companies Incorporated ("Equitable") and their respective affiliates (collectively, the "Equitable Entities"), (the "Equitable Application"). At such time, the Equitable Entities beneficially owned 4,495,600 shares (approximately 12.5%) of Common Stock. Based upon the most recent information furnished to the Company by the -19- Equitable Entities, the Equitable Entities' beneficial shares owned has fallen below 5% of the outstanding voting stock of the Company. On October 3, 1996, the Company filed in good faith with the SEC an application pursuant to Section 2(a)(8) of the 1935 Act, seeking a determination that Seagull was not subject to regulation as a "subsidiary company" of The Prudential Insurance Company of America ("Prudential"), (the "Prudential Application"), which was then the owner of 5,573,061 shares (approximately 8.9% at such time of the outstanding Common Stock. According to information provided by Prudential, in its capacity as investment adviser, is beneficial owner of 6,546,741 shares (10.4%) of the Common Stock which are owned by numerous investment counseling clients, none of which is known to have such interest with respect to more than 5% of the class. Prudential has sole voting and dispositive power as to 5,573,061 shares and shared voting and dispositive power as to 946,680 shares. As a result of the Company's good faith filing of the Prudential Application, it currently would not be subject to any obligation, duty or liability imposed by the 1935 Act, unless and until the SEC enters an order denying or otherwise adversely disposing of the Prudential Application. To date, no such order has been issued. The Company believes that the Prudential Application ultimately should be granted. ENVIRONMENTAL MATTERS Seagull's operations are subject to federal, state and local laws and regulation governing the discharge of materials into the environment or otherwise relating to environmental protection. Numerous governmental departments issue rules and regulations to implement and enforce such laws which are often difficult and costly to comply with and which carry substantial penalties for failure to comply. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas, and impose substantial liabilities for pollution resulting from the Company's operations. In addition, these laws, rules and regulations may restrict the rate of oil and natural gas production below the rate that would otherwise exist. State laws often require some form of remedial action to prevent pollution from former operations, such as pit closure and plugging abandoned wells. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons who are considered to be responsible for the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances. Under CERCLA, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances or other pollutants released into the environment. Stricter standards in environmental legislation may be imposed on the oil and gas industry in the future. For instance, legislation has been proposed in Congress from time to time that would reclassify -20- certain oil and natural gas exploration and production wastes as "hazardous wastes" and make the reclassified wastes subject to more stringent handling, disposal and clean-up requirements. If such legislation were to be enacted, it could have a significant impact on the operating costs of the Company, as well as the oil and gas industry in general. Furthermore, although petroleum, including crude oil and natural gas, is exempt from CERCLA, at least two courts have recently ruled that certain wastes associated with the production of crude oil may be classified as "hazardous substances" under CERCLA and thus such wastes may become subject to liability and regulation under CERCLA, as described above. State initiatives to further regulate the disposal of oil and natural gas wastes are also pending in certain states, and these various initiatives could have a similar impact on the Company. Compliance with environmental requirements generally could have a material adverse effect upon the capital expenditures, earnings or competitive position of the Company. Although the Company has not experienced any material adverse effect from compliance with environmental requirements, there is no assurance that this will continue in the future. The Oil Pollution Act of 1990 ("OPA") and regulations promulgated pursuant thereto impose a variety of requirements on "responsible Parties" related to the prevention of oil spills and liability for damages resulting from such spills. Few defenses exist to the liability imposed by the OPA and such liability could be substantial. A failure to comply with ongoing requirements or inadequate cooperation in a spill event could subject a responsible party to civil or criminal enforcement action. On October 19, 1996, legislative amendments to OPA were enacted. These amendments reduced the requirement of obtaining a certificate of financial responsibility to $35 million in the event of a spill, instead of the $150 million originally called for under OPA. In addition, the Texas Railroad Commission proposed an amendment to its regulations in line with OPA. The proposed amendment requires operators of hazardous liquid pipeline facilities inland of the Gulf coast to prepare facility response plans within 60 days of the effective date of the rule or simultaneously with the filing of the plan with federal authorities. In addition, the OCSLA authorizes regulations relating to safety and environmental protection applicable to lessees and permittees operating in the OCS. Specific design and operation standards may apply to OCS vessels, rigs, platforms, vehicles and structures. Violations of lease conditions or regulations issued pursuant to OCSLA can result in substantial civil and criminal penalties, as well as potential court injunctions curtailing operations and the cancellation of leases. Such enforcement liabilities can result from either governmental or private prosecution. The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and strict controls regarding the discharge of pollutants to state and federal waters. The FWPCA provides for civil, criminal and administrative penalties for any unauthorized discharges of oil and other hazardous substances in reportable quantities and, along with the OPA, imposes substantial potential liability for the costs of removal, remediation and damages. State laws for the control of water pollution also provide varying civil, criminal and administrative penalties and liabilities in the case of a discharge of petroleum or its derivatives into state waters. Within the next few years, both state water discharge regulations and the federal permits are expected to prohibit the discharge of produced water and sand, and some other substances related to the oil and gas industry, to coastal waters. Although the costs to comply with zero discharge mandates under federal or state law may be significant, the entire industry will experience similar costs and the Company believes that these costs will not have a material adverse impact on the Company's financial condition and operations. Some oil and gas exploration and production facilities -21- are required to obtain permits for their storm water discharges. Costs may be associated with treatment of wastewater or developing storm water pollution prevention plans. Further, the Coastal Zone Management Act authorizes state implementation and development of programs of management measures for non-point source pollution to restore and protect coastal waters. Many states in which the Company operates have recently begun to regulate naturally occurring radioactive materials ("NORM") and NORM wastes that are generated in connection with oil and gas exploration and production activities. NORM wastes typically consist of very low-level radioactive substances that become concentrated in pipe scale and in production equipment. State regulations may require the testing of pipes and production equipment for the presence of NORM, the licensing of NORM-contaminated facilities and the careful handling and disposal of NORM wastes. The Company believes that the growing regulation of NORM will have a minimal effect on the Company's operations because the Company generates only a very small quantity of NORM on an annual basis. EMPLOYEES As of March 1, 1997, the Company had 724 full time employees. In addition to the services of its full time employees, the Company employs, as needed, the services of consulting geologists, engineers, regulatory consultants, contract pumpers and certain other temporary employees. ENSTAR Alaska operates under collective bargaining agreements with separate bargaining units for operating and clerical employees. These units represent approximately 80% of ENSTAR Alaska's work force. Contracts have been negotiated that set wages and work relationships for the two units. The operating bargaining unit contract, effective from April 1, 1992 through April 1, 1996, is in the process of being renegotiated. The clerical bargaining unit contract is effective from April 1, 1995 through April 1, 2000. The Company is not a party to any other collective bargaining agreements. The Company has never had a work stoppage. The Company considers its relations with its employees to be satisfactory. -22- EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company, each of whom has been elected to serve until his or her successor is elected and qualified, are as follows:
Name Age Present Position and Prior Business Experience Barry J. Galt......... 63 Chairman of the Board and Chief Executive Officer since December 1983; President of the Company from December 1983 to October 1996 Robert F. Vagt........ 50 President and Chief Operating Officer since October 1996; President and Chief Executive Officer of Global from May 1992 to October 1996; Chairman of the Board of Global since December 1994; Director, President and Chief Operating Officer of Adobe Resources Corporation (Director from May 1986 to May 1992 and President and Chief Operating Officer from November 1990 to May 1992) John W. Elias......... 56 Executive Vice President since April 1993; Chief Operating Officer of the Company from January 1995 through October 1996; For the previous 30 years, he served in a variety of positions for Amoco Production Company and its parent, Amoco Corporation, most recently as Group Vice President of Worldwide Natural Gas for Amoco Production Company Richard F. Barnes..... 53 President of ENSTAR Natural Gas Company (a division of the Company) and Alaska Pipeline Company (a subsidiary of the Company) since September 1987 Gerald R. Colley...... 46 Senior Vice President, International Exploration and Production since November 1996; Senior Vice President - International Exploration of Global from December 1994 to November 1996; Vice President - International Exploration of Global from July 1993 to December 1994; Vice President - International Exploration of Global Natural Resources Corporation of Nevada ("GNRC"), a wholly owned subsidiary of Global, since October 1992; Vice President and Exploration Director of Hadson Europe, Inc. from August 1986 to October 1992 John N. Goodpasture... 48 Senior Vice President, Pipelines and Marketing since May 1993; President of Seagull Pipeline Company since March 1990 John A. Howard........ 50 Senior Vice President, Canadian Exploration and Production since November 1996; President of Seagull Energy Canada Ltd., a wholly owned subsidiary of the Company, since January 1994; President and Chief Executive Officer of Novalta Resources Inc. from 1987 to January 1994 William L. Transier... 42 Senior Vice President and Chief Financial Officer since May 1996; For the previous 20 years, he held a variety of positions at KPMG Peat Marwick LLP and was promoted to partner in July 1986 Janice K. Hartrick.... 44 Chief Counsel and Vice President, Environmental Affairs since December 1992; Chief Counsel of the Company since 1989 Gordon L. McConnell... 50 Vice President and Controller since November 1996; Vice President - Accounting of Global from January 1996 to November 1996; Controller of Global from July 1993 to January 1996; Controller of GNRC since October 1991; Assistant Controller of GNRC from July 1991 to October 1991 H. Alan Payne......... 55 Vice President, Investor Relations since November 1996; Director, Investor Relations from December 1984 to November 1996 Jack M. Robertson..... 53 Vice President, Human Resources since November 1996; Director, Human Resources from November 1990 to November 1996 Stephen A. Thorington. 41 Vice President, Finance and Treasurer since May 1996; Managing Director of Chase Securities Inc. from January 1992 to May 1996; Managing Director for The Chase Manhattan Bank, N.A. from June 1991 through April 1994 Carl E. Volke......... 53 Vice President, Administration since November 1996; Director, Administration from November 1986 to November 1996 Lee Van Winkle........ 44 Vice President, Corporate Planning since November 1996; Vice President - Corporate Planning of Global from July 1993 to November 1996; Vice President - Corporate Planning of GNRC since August 1992; Corporate Manager - Planning and Budget for Adobe Resources Corporation for more than five years prior to August 1992
-23- Item 2. Properties Incorporated herein by reference to Item 1 of this Annual Report on Form 10-K. Item 3. Legal Proceedings Royalty Litigation. Increasingly, royalty owners under oil and gas leases are challenging valuation methodology and post-production deductions used by producers. These cases have arisen because of the manner in which oil and gas producers such as Seagull have begun to provide services that had previously been provided by the interstate gas pipelines prior to the "unbundling" of gas services. For example, in 1996, Seagull has been sued in Anne K. Barnaby, et al. v. Seagull MidSouth, Inc. This case is pending in state court of Latimer County, Oklahoma. In this case, the plaintiffs seek additional royalties based upon the deduction by Seagull of post-production costs, such as those related to gathering, compression, dehydration and treating. In addition, the plaintiffs have questioned the sales price used by Seagull as a basis for calculating royalty to the extent that sales were made to Seagull's gas marketing subsidiary. NorAm Litigation. Seagull Mid-South has been sued in NorAm Gas Transmission Co., et al. v. Seagull Mid-South Inc. The case relates to Seagull's termination of a 1956 gas contract, which provided for the sale of gas by Seagull from certain wells in the Aetna Filed in Arkansas for $0.16 per Mcf. NorAm Gas Transmission ("NorAm) has sought a declaratory judgment that the gas contract remains in effect with respect to these wells. Since the termination by Seagull of the gas contract, Seagull has been selling the gas in question on the spot market. Seagull believes that it has reasonable grounds for terminating the gas contract. The NorAm case is currently scheduled for trial in mid-1997 in District Court in Harris County, Texas. Seagull intends to vigorously defend this case and does not believe that this case will have a material adverse effect on its financial condition or results of operations. NorAm has also sought a declaratory judgment to the effect that certain additional wells in the Aetna Field (including any new wells) would be subject to the $0.16 per Mcf price (the "Additional Well Claim"). If NorAm were successful with the Additional Well Claim, Seagull's operations in the Aetna Field would be materially affected in an adverse manner. However, Seagull believes that there is little basis for this claim by NorAm and believes that it will not be required to pay any amounts in connection with the Additional Well Claim. Gulf Coast Vacuum Site. In 1993, the Environmental Protection Agency ("EPA") notified the Company that a subsidiary was a potentially responsible party ("PRP") at the Gulf Coast Vacuum Services Superfund Site (the "GCV Site") in Vermilion Parish, Louisiana. Based upon the Company's investigation of this claim, the Company believes that the basis for its alleged liability is a series of transactions between the Company's subsidiaries and the operator of the GCV Site that occurred during 1979 and 1980. While the EPA's cleanup cost estimate of the GCV Site is in the range of $17 million, the Company believes that its liability is unlikely to be material to its financial condition, results of operations or cash flows because of the large number of potentially responsible parties at the GCV Site and the relative amount of contamination, if any, that may have been caused at the GCV Site by the disposal of wastes by the Company during 1979 and 1980. Caddo Natural Gas Company Site. The Company was notified by the Louisiana Department of Environmental Quality on March 20, 1996, that one of the Company's wholly owned subsidiaries is a PRP in a state Superfund site known as the Caddo Natural Gas Company Site. This site is reported to be contaminated with low levels of PCB, an additive used in lubricating oils prior to the 1980s. Subsequent to year-end, the Company signed a settlement agreement whereby Seagull would pay a portion of the cleanup costs for the Caddo Natural Gas Company Site. Seagull's share of the cleanup costs is not expected to be material to its financial condition, results of operations or cash flows. Other. The Company is a party to ongoing litigation in the normal course of business or other litigation with respect to which the Company is indemnified pursuant to various purchase agreements or other contractual arrangements. Management regularly analyzes current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, management believes that the effect on its financial condition, results of operations or cash flows, if any, will not be material. Item 4. Submission of Matters to a Vote of Security Holders None. -24- PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters A. The Company's Common Stock (the "Common Stock") is traded on the New York Stock Exchange under the ticker symbol SGO. The high and low sales prices on the New York Stock Exchange Composite Tape for each quarterly period during the last two fiscal years were as follows:
1996 1995 --------------------------------------- -------------------------------------- High Low High Low ----------------- ----------------- ---------------- ---------------- First Quarter 22 7/8 17 1/8 20 15 1/4 Second Quarter 25 1/2 21 19 7/8 16 1/2 Third Quarter 26 17 1/2 22 1/2 16 Fourth Quarter 24 3/8 20 5/8 22 1/4 16 5/8
B. As of March 3, 1997, there were approximately 4,764 holders of record of Common Stock. C. Seagull has not declared any cash dividends on its Common Stock since it became a public entity in 1981. The decision to pay Common Stock dividends in the future will depend upon the Company's earnings and financial condition and such other factors as the Company's Board of Directors deems relevant. The Company's revolving credit agreements (the "Credit Facilities") restrict the Company's declaration or payment of dividends on and repurchases of Common Stock unless each of the following tests have been met: (i) the aggregate amount of outstanding loans under the Credit Agreement, together with all other senior indebtedness of Seagull and its subsidiaries (excluding APC) then outstanding, must not exceed the Borrowing Base, (ii) Tangible Net Worth cannot be less than $465 million plus 50% of the Company's net income, if positive, beginning with the fiscal year ended December 31, 1997, (iii) the Company's Debt/Capitalization Ratio cannot be more than 65% and (iv) no Default or Event of Default shall have occurred and be continuing. The capitalized terms used herein to describe the restrictions contained in the Credit Facilities have the meanings assigned to them in the Credit Facilities. Under the most restrictive of these tests, as of December 31, 1996, approximately $133 million was available for payment of dividends or repurchase of Common Stock. In addition, certain debt instruments of APC restrict the ability of APC to transfer funds to the Company in the form of cash dividends, loans or advances. For a description of such restrictions, reference is made to Note 6 of the Consolidated Financial Statements included in the Company's 1996 Annual Report to Shareholders and as part of Exhibit 13 attached hereto. -25- Item 6. Selected Financial Data Incorporated herein by reference to the Selected Financial Data included in the Company's 1996 Annual Report to Shareholders and as part of Exhibit 13 attached hereto. SELECTED QUARTERLY FINANCIAL DATA Summarized quarterly financial data (stated in thousands except per share amounts) is as follows:
Quarter Ended ----------------------------------------------------------------------------------- March 31 June 30 September 30 December 31 -------------------- -------------------- -------------------- -------------------- 1996: Revenues: Previously Reported................ $110,647 $ 85,788 $ 85,205 NA Global (1)......................... 26,193 26,649 25,581 NA -------------------- -------------------- -------------------- -------------------- As Restated...................... $136,840 $112,437 $110,786 $158,515 ==================== ==================== ==================== ==================== Operating Profit: Previously Reported................ $ 30,609 $ 7,262 $ 12,643 NA Global (1)......................... 7,092 6,564 7,473 NA -------------------- -------------------- -------------------- -------------------- As Restated...................... $ 37,701 $ 13,826 $ 20,116 $ 33,412 ==================== ==================== ==================== ==================== Net Income (Loss): Previously Reported................ $ 14,846 $ (5,907) $ 1,633 NA Global (1)......................... 3,466 2,973 5,825 NA -------------------- -------------------- -------------------- -------------------- As Restated...................... $ 18,312 $ (2,934) $ 7,458 $ 6,125 (6) ==================== ==================== ==================== ==================== Earnings (Loss) per Share (2): Previously Reported................ $ 0.40 $ (0.16) $ 0.04 NA As Restated........................ $ 0.29 $ (0.05) $ 0.12 $ 0.10 ==================== ==================== ==================== ==================== 1995: Revenues: Previously Reported................ $ 94,850 $ 81,487 $ 68,087 $ 91,849 Global (1)......................... 17,577 17,108 17,294 20,174 -------------------- -------------------- -------------------- -------------------- As Restated...................... $112,427 $ 98,595 $ 85,381 $112,023 ==================== ==================== ==================== ==================== Operating Profit (Loss): Previously Reported................ $(44,366) $ (7) $ (2,421) $ 12,677 Global (1)......................... (3,103) (2,107) 946 4,003 -------------------- -------------------- -------------------- -------------------- As Restated...................... $(47,469) (3) $ (2,114) $ (1,475) $ 16,680 ==================== ==================== ==================== ==================== Net Income (Loss): Previously Reported................ $(38,550) $ (7,125) $ 41,550 $ 4,757 Global (1)......................... (4,216) (2,938) 2,142 2,642 -------------------- -------------------- -------------------- -------------------- As Restated...................... $(42,766) (3) $(10,063) (4) $ 43,692 (5) $ 7,399 ==================== ==================== ==================== ==================== Earnings (Loss) per Share (2): Previously Reported................ $ (1.07) $ (0.20) $ 1.13 $ 0.13 As Restated........................ $ (0.69) $ (0.16) $ 0.70 $ 0.12 ==================== ==================== ==================== ====================
(1) Certain adjustments were made to conform the accounting policies and presentation of Seagull and Global. (2) Quarterly earnings (loss) per common share may not total to the full year per share amount, as the weighted average number of shares outstanding for each quarter fluctuated as a result of the assumed exercise of stock options. (3) Includes $48.8 million non-cash charge relating to the impairment of long-lived assets. (4) Includes one-time pre-tax charges of $8 million for expenses involved in the workforce reduction and consolidation. (5) Includes $82 million pre-tax gain on the sale of the Pipeline Assets . (6) Includes $10 million pre-tax merger expenses relating to the Global Merger. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Incorporated herein by reference to Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 1996 Annual Report to Shareholders and as part of Exhibit 13 attached hereto. -26- Item 8. Financial Statements and Supplementary Data Incorporated herein by reference to the Consolidated Financial Statements and Supplementary Data included in the Company's 1996 Annual Report to Shareholders and as part of Exhibit 13 attached hereto. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Incorporated herein by reference to "Election of Directors" included in the Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 13, 1997 (the "Proxy Statement"). See also "Executive Officers of the Company" included in Part I of this Annual Report on Form 10-K, which is incorporated by reference herein. Item 11. Executive Compensation Incorporated herein by reference to "Election of Directors --Executive Compensation--Summary Compensation Table," "--Compensation Arrangements," "--Option Exercises and Fiscal Year-End Values," "--Option Grants," "--Executive Supplemental Retirement Plan," "--ENSTAR Natural Gas Company Supplemental Executive Retirement Plan" and "--ENSTAR Natural Gas Company Retirement Plan"; and "Election of Directors-Compensation of Directors" included in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated herein by reference to "Principal Shareholders" and "Election of Directors--Security Ownership of Directors and Management" included in the Proxy Statement. Item 13. Certain Relationships and Related Transactions Incorporated herein by reference to "Election of Directors--Certain Transactions" included in the Proxy Statement. -27- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements: The following Consolidated Financial Statements and Independent Auditors' Report thereon are included in the Company's 1996 Annual Report to Shareholders and as part of Exhibit 13 attached hereto, and are incorporated herein by reference: Independent Auditors' Report Consolidated Financial Statements Notes to Consolidated Financial Statements 2. Schedules: All schedules have been omitted because the required information is insignificant or not applicable. 3. Exhibits: 3.1 Articles of Incorporation of the Company, as amended, including Articles of Amendment filed May 12, 1988, May 21, 1991, and May 21, 1993 with the Secretary of State of the State of Texas, that certain Statement of Relative Rights and Preferences related to the designation and issuance of the Company's $2.25 Convertible Exchangeable Preferred Stock, Series A, filed August 6, 1986 with the Secretary of State of the State of Texas and that certain Statement of Resolution Establishing Series of Shares of Series B Junior Participating Preferred Stock of Seagull Energy Corporation filed March 21, 1989 with the Secretary of State of the State of Texas (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 3.2 Bylaws of the Company, as amended through March 17, 1995 (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). *4.1 $650 Million Reducing Revolving Credit and Competitive Bid Facility among Seagull Energy Corporation, The Chase Manhattan Bank and The Other Banks Signatory Thereto, dated December 23, 1996. *4.2 U.S. $100 Million Reducing Revolving Credit Facility among Seagull Energy Canada Ltd. and The Chase Manhattan Bank of Canada, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, and The Other Banks Signatory Hereto, dated December 23, 1996. 4.3 Senior Indenture dated as of July 15, 1993 by and between the Company and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K dated August 4, 1993; Specimen of 7 7/8% Senior Note due 2003 and resolutions adopted by the Chairman of the Board of Directors is incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K dated August 4, 1993). 4.4 Senior Subordinated Indenture dated as of July 15, 1993 by and between the Company and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K dated August 4, 1993; Specimen of 8 5/8% Senior Subordinated Note due 2005 and resolutions adopted by the
-28- Chairman of the Board of Directors is incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K dated August 4, 1993). 4.5 Note Agreement dated June 17, 1985 by and among APC and The Travelers Insurance Company, The Travelers Life Insurance Company, and the Equitable Life Assurance Society of the United States (collectively, the "Insurance Companies") (including forms of notes and other exhibits thereto) and Inducement Agreement of even date therewith by and among Seagull and the Insurance Companies (the Note Agreement including exhibits thereto incorporated by reference to Exhibit 4.1 to Annual Report on Form 10-K for the year ended December 31, 1995; the Form of Consent and Agreement dated April 15, 1991 by and among APC and the Insurance Companies (including exhibits thereto) is incorporated by reference to Exhibit 4.2 to Annual Report on Form 10-K for the year ended December 31, 1992). 4.6 Note Agreement dated May 14, 1992 by and among Alaska Pipeline Company and each of the purchasers thereto (including forms of notes and other exhibits thereto) and Inducement Agreement of even date therewith by and among Seagull and Aid Association for Lutherans, The Equitable Life Assurance Society of the United States, Equitable Variable Life Insurance Company, Provident Life & Accident Insurance Company and Teachers Insurance & Annuity Association of America (including exhibits thereto) (incorporated by reference to Exhibit 4.7 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1992). 4.7 Trust Agreement dated as of September 1, 1995 for the Seagull Series 1995 Trust (the Trust Agreement is incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995; the Guaranty by Seagull Energy Corporation in favor of the Seagull Series 1995 Trust is incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 4.8 Rights Agreement dated as of March 17, 1989 between the Company and NCNB Texas National Bank, as Rights Agent, which includes the form of Statement of Resolution setting forth the terms of the Series B Junior Participating Preferred Stock, par value $1.00 per share, as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (the Rights Agreement is incorporated by reference to Exhibit 4.8 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993; the First Amendment dated as of June 18, 1992 is incorporated by reference to Exhibit 3.4 to Registration Statement on Form S-3 (File No. 33-55426)). #10.1 Seagull Energy Corporation 1994 Executive Incentive Plan (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). #10.2 Seagull Energy Corporation 1995 Executive Incentive Plan (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). *#10.3 Seagull Energy Corporation 1996 Executive Incentive Plan. *#10.4 Seagull Energy Corporation 1981 Stock Option Plan (Restated), including forms of agreements, as amended (the amended and restated plan is incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993; Form of Amendement to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; Form of Amendment to Stock Option Agreement(s) is filed herewith). *#10.5 Seagull Energy Corporation 1983 Stock Option Plan (Restated), including forms of agreements, as amended (the amended and restated plan is incorporated by reference to Exhibit 10.7 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993; the amended form of Nonstatutory Stock Option Agreement is incorporated by reference to Exhibit 10.15 to Annual Report on Form 10-K for the year ended December 31, 1993; Form of Amendement to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; Form of Amendment to Stock Option Agreement(s) is filed herewith).
-29- *#10.6 Seagull Energy Corporation 1986 Stock Option Plan (Restated), including forms of agreements, as amended (the amended and restated plan is incorporated by reference to Exhibit 10.8 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993; the amended form of Nonstatutory Stock Option Agreement is incorporated by reference to Exhibit 10.16 to Annual Report on Form 10-K for the year ended December 31, 1993; Form of Amendment to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; Form of Amendment to Stock Option Agreement(s) is filed herewith). *#10.7 Seagull Energy Corporation 1990 Stock Option Plan, including forms of agreements, as amended (incorporated by reference to Exhibit 10.22 to Annual Report on form 10-K for the year ended December 31, 1995; Form of Amendment to Stock Option Agreement(s) is filed herewith). *#10.8 Global Natural Resources Inc. 1989 Key Employees Stock Option Plan (the Plan is incorporated by reference to Exhibit 4.1 to Registration Statement No. 33-31537 of Global Natural Resources Inc.; the Form of Stock Option Agreement is incorporated by reference to Exhibit 4.2 to Registration Statement No. 33-31537 of Global Natural Resources Inc.; Form of Amendment to Stock Option Agreement(s) is filed herewith). *#10.9 Global Natural Resources Inc. 1992 Stock Option Plan (the Plan is incorporated by reference to Exhibit 10.47 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 of Global Natural Resources Inc. (Registration No. 1-8674); the Form of Stock Option Agreement is incorporated by reference to Exhibit 10.48 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 of Global Natural Resources Inc. (Registration No. 1-8674); Form of Amendment to Stock Option Agreement(s) is filed herewith). #10.10 Seagull Energy Corporation 1993 Nonemployee Directors Stock Option Plan, including forms of agreements (the Plan is incorporated by reference to Exhibit 10.37 to Annual Report on Form 10-K for the year ended December 31, 1992; the amended form of Nonstatutory Stock Option Agreement is incorporated by reference to Exhibit 10.29 to Annual Report on Form 10-K for the year ended December 31, 1993; the Amendment to Nonemployee Directors' Stock Option Agreements is incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). *#10.11 Seagull Energy Corporation 1993 Stock Option Plan, including forms of agreements (the Plan is incorporated by reference to Exhibit 10.38 to Annual Report on Form 10-K for the year ended December 31, 1992; the amended form of Nonstatutory Stock Option Agreement is incorporated by reference to Exhibit 10.30 to Annual Report on Form 10-K for the year ended December 31, 1993; Form of Amendment to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; Form of Amendment to Stock Option Agreement(s) is filed herewith). *#10.12 1995 Omnibus Stock Plan (the Plan is incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; Form of Amendment to Stock Option Agreement(s) is filed herewith). *#10.13 Seagull Energy Corporation Management Stability Plan (the Plan is incorporated by reference to Exhibit 10.35 to Annual Report on Form 10-K for the year ended December 31, 1994; the First Amendment is filed herewith). #10.14 Outside Directors Deferred Fee Plan of the Company, as amended and restated (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). *#10.15 Employment Agreement dated December 30, 1983 by and between the Company and Barry J. Galt, Chairman of the Board, President and Chief Executive Officer of the Company (the Employment Agreement is incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993; Amendment to Employment Agreement is filed herewith).
-30- #10.16 Executive Supplemental Retirement Plan Membership Agreement between the Company and Barry J. Galt dated as of February 3, 1986, as amended (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 31, 1996). #10.17 Restricted Stock Agreement made and entered into as of March 17, 1995 between Seagull Energy Corporation and Barry J. Galt (incorporated by reference to Exhibit 10.32 to Annual Report on Form 10-K for the year ended December 31, 1994). #10.18 Severance Agreement between Seagull Energy Corporation and Barry J. Galt (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). #10.19 Seagull Energy Corporation Executive Supplemental Retirement Plan, as amended (incorporated by reference to Exhibit 1.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). #10.20 Seagull Energy Corporation Supplemental Benefit Plan, as amended, including the First Amendment thereto (incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the year ended December 31, 1995). #10.21 Form of Restricted Stock Agreement made and entered into as of March 17, 1995 between Seagull Energy Corporation and, individually, Richard F. Barnes (granted 2,000 shares of restricted Common Stock), John W. Elias (granted 3,000 shares of restricted Common Stock) and Thomas P. McConn (granted 2,000 shares of restricted Common Stock) (incorporated by reference to Exhibit 10.33 to Annual Report on Form 10-K for the year ended December 31, 1994). #10.22 Form of Severance Agreement between Seagull Energy Corporation and Richard F. Barnes, John W. Elias, and Thomas P. McConn (incorporated by reference to Exhibit 10.34 to Annual Report on Form 10-K for the year ended December 31, 1994). 10.23 Joint Venture Agreement dated August 8, 1968, between Huffington, Virginia International Company, Austral Petroleum Gas Corporation, Golden Eagle Indonesia, Limited and Union Texas Far East Corporation, as amended (incorporated by reference to Exhibit 6.6 to Registration Statement No. 2-58834 of Global Natural Resources Inc.). 10.24 Agreement dated as of October 1, 1979 among the parties to the Joint Venture Agreement referred to in Exhibit 10.21 above (incorporated by reference to Exhibit 5.2 to Registration Statement No. 2-66661 of Global Natural Resources Inc.). 10.25 Production Sharing Contract, dated August 8, 1968, between Pertamina, Huffington, and Virginia International Company, as amended (incorporated by reference to Exhibit 6.5 to Registration Statement No. 2-58834 of Global Natural Resources Inc.; Amendment dated as of January 1, 1978 incorporated by reference to Exhibit 5.4 to Registration Statement No. 2-66661 of Global Natural Resources Inc.). 10.26 Royalty Incentive Plan, as amended (incorporated by reference to Exhibit 1.4 to the Annual Report on Form 20-F for the year ended December 31, 1981 of the U.K. Company). 10.27 Acquisition Agreement dated May 17, 1993 between UMIC Cote d'Ivoire Corporation and G.N.R. (Cote d'Ivoire) Ltd. Ivory Coast Production Sharing Contract - Block CI-11 (incorporated by reference to Exhibit 10.40 to the Annual Report on Form 10-K for the year ended December 31, 1994 of Global Natural Resources Inc. (Registration No. 1-8674)). 10.28 Farmout Agreement dated July 25, 1994 between GNR (Egypt) Ltd. and Apache Oil Egypt, Inc. Qarun Concession Egypt (incorporated by reference to Exhibit 10.41 to the Annual Report on Form 10-K for the year ended December 31, 1994 of Global Natural Resources Inc. (Registration No. 1-8674)). 10.29 Purchase and Sale Agreement by and among Seagull Energy Corporation, Amoco Gas Company, Houston Pipe Line Company, Enron Gas Processing Company and Mantaray Pipeline Company, as sellers and Seahawk Gathering & Liquids Company as buyer and Tejas Power Corporation as Guarantor dated July
-31- 28, 1995 (incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). 10.30 Stock Purchase Agreement Between Seagull Energy Corporation and Exxon Corporation relating to all of the Outstanding Capital Stock of Esso Suez Inc., as executed in Houston, Texas on July 22, 1996 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on August 28, 1996). 10.31 Purchase and Sale Agreement Between Esso Egypt Limited and Seagull Energy Corporation dated July 22, 1996 (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed on August 28, 1996). 10.32 Agreement and Plan of Merger dated as of July 22, 1996 by and among Seagull Energy Corporation, GNR Merger Corporation and Global Natural Resources Inc. (incorporated by reference to Exhibit 2.1 to Registration Statement No. 333-09845 on Form S-4 of Seagull Energy Corporation). 10.33 Voting Agreement dated as of July 22, 1996 among Seagull Energy Corporation and The Prudential Life Insurance Company of America (incorporated by reference to Exhibit 2.2 to Registration Statement 333-09845 on Form S-4 of Seagull Energy Corporation). *13 Portions of the Seagull Energy Corporation and Subsidiaries Annual Report to Shareholders for the year ended December 31, 1996 which are incorporated by reference herein to this Annual Report on Form 10-K of Seagull Energy Corporation and Subsidiaries for the year ended December 31, 1996. *21 Subsidiaries of Seagull Energy Corporation. *23.1 Consent of KPMG Peat Marwick LLP. *23.2 Consent of Ryder Scott Company, independent petroleum engineers. *23.3 Consent of DeGolyer and MacNaughton, independent petroleum engineers. *23.4 Consent of Netherland, Sewell and Associates, Inc., independent petroleum engineers. *27.1 Financial Data Schedule.
- -------------------- * Filed herewith. # Identifies management contracts and compensatory plans or arrangements. (b) Reports on Form 8-K On October 18, 1996, the Company filed a current report on Form 8-K dated October 3, 1996 with respect to Seagull's merger with Global. The items reported in such current report were Item 2 (Acquisition and Disposition of Assets) and Item 7 (Financial Statements and Exhibits). The following financial statements were included in that report: (a) Financial statements of businesses acquired. The consolidated financial statements of Global for the years ended December 31, 1995, 1994 and 1993 (incorporated by reference to Global's Annual Report on Form 10-K for the year ended December 31, 1995; Registration No. 1-8674). -32- The unaudited consolidated financial statements of Global for the six months ended June 30, 1996 and 1995 (incorporated by reference to Global's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996; Registration No. 1-8674). (b) Pro forma financial information. The pro forma financial information giving effect to (i) the merger of Seagull and Global using the pooling of interest method of accounting for business combinations and (ii) the Esso Suez Acquisition financed under Seagull's revolving credit facilities and using the purchase method of accounting. On October 18, 1996, the Company filed an amendment to current report on Form 8-K dated September 10, 1996 with respect to Seagull's acquisition of all the outstanding common stock of Esso Suez Inc. and certain assets of Esso Egypt Limited. The item reported in such current report was Item 7 (Financial Statements and Exhibits). The following financial statements were included in that report: The pro forma financial information giving effect to (i) the merger of Seagull and Global using the pooling of interest method of accounting for business combinations and (ii) the Esso Suez Acquisition financed under Seagull's revolving credit facilities and using the purchase method of accounting (incorporated by reference to Exhibit 99.1 of the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 18, 1996). On November 13, 1996, the Company filed an amendment to current report on Form 8-K dated October 3, 1996 with respect to Seagull's merger with Global. The item reported in such current report was Item 7 (Financial Statements and Exhibits). The following financial statements were included in that report: Supplemental consolidated statements of earnings and cash flows of Seagull and Global for each of the quarters in the three quarters ended September 30, 1996 and four quarters ended December 31, 1995 and the supplemental consolidated balance sheets of Seagull and Global as of September 30, June 30, and March 31, 1996 and December 31, 1995. -33- SIGNATURES 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. SEAGULL ENERGY CORPORATION Date: March 27, 1997 By: /s/ Barry J.Galt Barry J. Galt, Chairman of the Board and Chief Executive Officer 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 dates indicated. By: /s/ Barry J. Galt By: /s/ Thomas H. Cruikshank Barry J. Galt, Chairman of the Thomas H. Cruikshank, Director Board and Chief Executive Officer Date: March 27, 1997 and Director (Principal Executive Officer) By: /s/ Peter J. Fluor Date: March 27, 1997 Peter J. Fluor, Director Date: March 27, 1997 By: /s/ Robert F. Vagt Robert F. Vagt, President and By: /s/ William R. Grant Chief Operating Officer and William R. Grant, Director Director Date: March 27, 1997 Date: March 27, 1997 By: /s/ Dean P. Guerin By: /s/ John W. Elias Dean P. Guerin, Director John W. Elias, Executive Vice Date: March 27, 1997 President and Director Date: March 27, 1997 By: /s/ Richard M. Morrow Richard M. Morrow, Director By: /s/ William L. Transier Date: March 27, 1997 William L. Transier, Senior Vice President and Chief Financial By: /s/ Dee S. Osborne Officer (Principal Financial Dee S. Osborne, Director Officer) Date: March 27, 1997 Date: March 27, 1997 By: /s/ Sidney R. Petersen By: /s/ Gordon L. McConnell Sidney R. Petersen, Director Gordon L. McConnell, Vice Date: March 27, 1997 President and Controller (Principal Accounting Officer) By: /s/ Sam F. Segnar Date: March 27, 1997 Sam F. Segnar, Director Date: March 27, 1997 By: /s/ J. Evans Attwell J. Evans Attwell, Director By: /s/ R. A. Walker Date: March 27, 1997 R. A. Walker, Director Date: March 27, 1997 By: /s/ Richard J. Burgess Richard J. Burgess, Director Date: March 27, 1997 By: /s/ Milton Carroll Milton Carroll, Director Date: March 27, 1997 -34- EXHIBIT INDEX EXHIBITS: 3.1 Articles of Incorporation of the Company, as amended, including Articles of Amendment filed May 12, 1988, May 21, 1991, and May 21, 1993 with the Secretary of State of the State of Texas, that certain Statement of Relative Rights and Preferences related to the designation and issuance of the Company's $2.25 Convertible Exchangeable Preferred Stock, Series A, filed August 6, 1986 with the Secretary of State of the State of Texas and that certain Statement of Resolution Establishing Series of Shares of Series B Junior Participating Preferred Stock of Seagull Energy Corporation filed March 21, 1989 with the Secretary of State of the State of Texas (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 3.2 Bylaws of the Company, as amended through March 17, 1995 (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). *4.1 $650 Million Reducing Revolving Credit and Competitive Bid Facility among Seagull Energy Corporation, The Chase Manhattan Bank and The Other Banks Signatory Thereto, dated December 23, 1996. *4.2 U.S. $100 Million Reducing Revolving Credit Facility among Seagull Energy Canada Ltd. and The Chase Manhattan Bank of Canada, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, and The Other Banks Signatory Hereto, dated December 23, 1996. 4.3 Senior Indenture dated as of July 15, 1993 by and between the Company and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K dated August 4, 1993; Specimen of 7 7/8% Senior Note due 2003 and resolutions adopted by the Chairman of the Board of Directors is incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K dated August 4, 1993). 4.4 Senior Subordinated Indenture dated as of July 15, 1993 by and between the Company and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K dated August 4, 1993; Specimen of 8 5/8% Senior Subordinated Note due 2005 and resolutions adopted by the Chairman of the Board of Directors is incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K dated August 4, 1993). 4.5 Note Agreement dated June 17, 1985 by and among APC and The Travelers Insurance Company, The Travelers Life Insurance Company, and the Equitable Life Assurance Society of the United States (collectively, the "Insurance Companies") (including forms of notes and other exhibits thereto) and Inducement Agreement of even date therewith by and among Seagull and the Insurance Companies (the Note Agreement including exhibits thereto incorporated by reference to Exhibit 4.1 to Annual Report on Form 10-K for the year ended December 31, 1995; the Form of Consent and Agreement dated April 15, 1991 by and among APC and the Insurance Companies (including exhibits thereto) is incorporated by reference to Exhibit 4.2 to Annual Report on Form 10-K for the year ended December 31, 1992).
4.6 Note Agreement dated May 14, 1992 by and among Alaska Pipeline Company and each of the purchasers thereto (including forms of notes and other exhibits thereto) and Inducement Agreement of even date therewith by and among Seagull and Aid Association for Lutherans, The Equitable Life Assurance Society of the United States, Equitable Variable Life Insurance Company, Provident Life & Accident Insurance Company and Teachers Insurance & Annuity Association of America (including exhibits thereto) (incorporated by reference to Exhibit 4.7 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1992). 4.7 Trust Agreement dated as of September 1, 1995 for the Seagull Series 1995 Trust (the Trust Agreement is incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995; the Guaranty by Seagull Energy Corporation in favor of the Seagull Series 1995 Trust is incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 4.8 Rights Agreement dated as of March 17, 1989 between the Company and NCNB Texas National Bank, as Rights Agent, which includes the form of Statement of Resolution setting forth the terms of the Series B Junior Participating Preferred Stock, par value $1.00 per share, as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (the Rights Agreement is incorporated by reference to Exhibit 4.8 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993; the First Amendment dated as of June 18, 1992 is incorporated by reference to Exhibit 3.4 to Registration Statement on Form S-3 (File No. 33-55426)). #10.1 Seagull Energy Corporation 1994 Executive Incentive Plan (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). #10.2 Seagull Energy Corporation 1995 Executive Incentive Plan (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). *#10.3 Seagull Energy Corporation 1996 Executive Incentive Plan. *#10.4 Seagull Energy Corporation 1981 Stock Option Plan (Restated), including forms of agreements, as amended (the amended and restated plan is incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993; Form of Amendement to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; Form of Amendment to Stock Option Agreement(s) is filed herewith). *#10.5 Seagull Energy Corporation 1983 Stock Option Plan (Restated), including forms of agreements, as amended (the amended and restated plan is incorporated by reference to Exhibit 10.7 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993; the amended form of Nonstatutory Stock Option Agreement is incorporated by reference to Exhibit 10.15 to Annual Report on Form 10-K for the year ended December 31, 1993; Form of Amendement to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; Form of Amendment to Stock Option Agreement(s) is filed herewith).
quarter ended June 30, 1995; Form of Amendment to Stock Option Agreement(s) is filed herewith). *#10.6 Seagull Energy Corporation 1986 Stock Option Plan (Restated), including forms of agreements, as amended (the amended and restated plan is incorporated by reference to Exhibit 10.8 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993; the amended form of Nonstatutory Stock Option Agreement is incorporated by reference to Exhibit 10.16 to Annual Report on Form 10-K for the year ended December 31, 1993; Form of Amendment to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; Form of Amendment to Stock Option Agreement(s) is filed herewith). *#10.7 Seagull Energy Corporation 1990 Stock Option Plan, including forms of agreements, as amended (incorporated by reference to Exhibit 10.22 to Annual Report on form 10-K for the year ended December 31, 1995; Form of Amendment to Stock Option Agreement(s) is filed herewith). *#10.8 Global Natural Resources Inc. 1989 Key Employees Stock Option Plan (the Plan is incorporated by reference to Exhibit 4.1 to Registration Statement No. 33-31537 of Global Natural Resources Inc.; the Form of Stock Option Agreement is incorporated by reference to Exhibit 4.2 to Registration Statement No. 33-31537 of Global Natural Resources Inc.; Form of Amendment to Stock Option Agreement(s) is filed herewith). *#10.9 Global Natural Resources Inc. 1992 Stock Option Plan (the Plan is incorporated by reference to Exhibit 10.47 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 of Global Natural Resources Inc. (Registration No. 1-8674); the Form of Stock Option Agreement is incorporated by reference to Exhibit 10.48 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 of Global Natural Resources Inc. (Registration No. 1-8674); Form of Amendment to Stock Option Agreement(s) is filed herewith). #10.10 Seagull Energy Corporation 1993 Nonemployee Directors Stock Option Plan, including forms of agreements (the Plan is incorporated by reference to Exhibit 10.37 to Annual Report on Form 10-K for the year ended December 31, 1992; the amended form of Nonstatutory Stock Option Agreement is incorporated by reference to Exhibit 10.29 to Annual Report on Form 10-K for the year ended December 31, 1993; the Amendment to Nonemployee Directors' Stock Option Agreements is incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). *#10.11 Seagull Energy Corporation 1993 Stock Option Plan, including forms of agreements (the Plan is incorporated by reference to Exhibit 10.38 to Annual Report on Form 10-K for the year ended December 31, 1992; the amended form of Nonstatutory Stock Option Agreement is incorporated by reference to Exhibit 10.30 to Annual Report on Form 10-K for the year ended December 31, 1993; Form of Amendment to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; Form of Amendment to Stock Option Agreement(s) is filed herewith). *#10.12 1995 Omnibus Stock Plan (the Plan is incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; Form of Amendment to Stock Option Agreement(s) is filed herewith).
*#10.13 Seagull Energy Corporation Management Stability Plan (the Plan is incorporated by reference to Exhibit 10.35 to Annual Report on Form 10-K for the year ended December 31, 1994; the First Amendment is filed herewith). #10.14 Outside Directors Deferred Fee Plan of the Company, as amended and restated (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). *#10.15 Employment Agreement dated December 30, 1983 by and between the Company and Barry J. Galt, Chairman of the Board, President and Chief Executive Officer of the Company (the Employment Agreement is incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993; Amendment to Employment Agreement is filed herewith). #10.16 Executive Supplemental Retirement Plan Membership Agreement between the Company and Barry J. Galt dated as of February 3, 1986, as amended (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 31, 1996). #10.17 Restricted Stock Agreement made and entered into as of March 17, 1995 between Seagull Energy Corporation and Barry J. Galt (incorporated by reference to Exhibit 10.32 to Annual Report on Form 10-K for the year ended December 31, 1994). #10.18 Severance Agreement between Seagull Energy Corporation and Barry J. Galt (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). #10.19 Seagull Energy Corporation Executive Supplemental Retirement Plan, as amended (incorporated by reference to Exhibit 1.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). #10.20 Seagull Energy Corporation Supplemental Benefit Plan, as amended, including the First Amendment thereto (incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the year ended December 31, 1995). #10.21 Form of Restricted Stock Agreement made and entered into as of March 17, 1995 between Seagull Energy Corporation and, individually, Richard F. Barnes (granted 2,000 shares of restricted Common Stock), John W. Elias (granted 3,000 shares of restricted Common Stock) and Thomas P. McConn (granted 2,000 shares of restricted Common Stock) (incorporated by reference to Exhibit 10.33 to Annual Report on Form 10-K for the year ended December 31, 1994). #10.22 Form of Severance Agreement between Seagull Energy Corporation and Richard F. Barnes, John W. Elias, and Thomas P. McConn (incorporated by reference to Exhibit 10.34 to Annual Report on Form 10-K for the year ended December 31, 1994). 10.23 Joint Venture Agreement dated August 8, 1968, between Huffington, Virginia International Company, Austral Petroleum Gas Corporation, Golden Eagle Indonesia, Limited and Union Texas Far East Corporation, as amended (incorporated by reference to Exhibit 6.6 to Registration Statement No. 2-58834 of Global Natural Resources Inc.). 10.24 Agreement dated as of October 1, 1979 among the parties to the Joint Venture Agreement referred to
in Exhibit 10.21 above (incorporated by reference to Exhibit 5.2 to Registration Statement No. 2-66661 of Global Natural Resources Inc.). 10.25 Production Sharing Contract, dated August 8, 1968, between Pertamina, Huffington, and Virginia International Company, as amended (incorporated by reference to Exhibit 6.5 to Registration Statement No. 2-58834 of Global Natural Resources Inc.; Amendment dated as of January 1, 1978 incorporated by reference to Exhibit 5.4 to Registration Statement No. 2-66661 of Global Natural Resources Inc.). 10.26 Royalty Incentive Plan, as amended (incorporated by reference to Exhibit 1.4 to the Annual Report on Form 20-F for the year ended December 31, 1981 of the U.K. Company). 10.27 Acquisition Agreement dated May 17, 1993 between UMIC Cote d'Ivoire Corporation and G.N.R. (Cote d'Ivoire) Ltd. Ivory Coast Production Sharing Contract - Block CI-11 (incorporated by reference to Exhibit 10.40 to the Annual Report on Form 10-K for the year ended December 31, 1994 of Global Natural Resources Inc. (Registration No. 1-8674)). 10.28 Farmout Agreement dated July 25, 1994 between GNR (Egypt) Ltd. and Apache Oil Egypt, Inc. Qarun Concession Egypt (incorporated by reference to Exhibit 10.41 to the Annual Report on Form 10-K for the year ended December 31, 1994 of Global Natural Resources Inc. (Registration No. 1-8674)). 10.29 Purchase and Sale Agreement by and among Seagull Energy Corporation, Amoco Gas Company, Houston Pipe Line Company, Enron Gas Processing Company and Mantaray Pipeline Company, as sellers and Seahawk Gathering & Liquids Company as buyer and Tejas Power Corporation as Guarantor dated July 28, 1995 (incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). 10.30 Stock Purchase Agreement Between Seagull Energy Corporation and Exxon Corporation relating to all of the Outstanding Capital Stock of Esso Suez Inc., as executed in Houston, Texas on July 22, 1996 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on August 28, 1996). 10.31 Purchase and Sale Agreement Between Esso Egypt Limited and Seagull Energy Corporation dated July 22, 1996 (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed on August 28, 1996). 10.32 Agreement and Plan of Merger dated as of July 22, 1996 by and among Seagull Energy Corporation, GNR Merger Corporation and Global Natural Resources Inc. (incorporated by reference to Exhibit 2.1 to Registration Statement No. 333-09845 on Form S-4 of Seagull Energy Corporation). 10.33 Voting Agreement dated as of July 22, 1996 among Seagull Energy Corporation and The Prudential Life Insurance Company of America (incorporated by reference to Exhibit 2.2 to Registration Statement 333-09845 on Form S-4 of Seagull Energy Corporation). *13 Portions of the Seagull Energy Corporation and Subsidiaries Annual Report to Shareholders for the year ended December 31, 1996 which are incorporated by reference herein to this Annual Report on Form 10-K of Seagull Energy Corporation and Subsidiaries for the year ended December 31, 1996. *21 Subsidiaries of Seagull Energy Corporation.
*23.1 Consent of KPMG Peat Marwick LLP. *23.2 Consent of Ryder Scott Company, independent petroleum engineers. *23.3 Consent of DeGolyer and MacNaughton, independent petroleum engineers. *23.4 Consent of Netherland, Sewell and Associates, Inc., independent petroleum engineers. *27.1 Financial Data Schedule.
- -------------------- * Filed herewith. # Identifies management contracts and compensatory plans or arrangements. EX-4.1 2 CREDIT AGREEMENT CREDIT AGREEMENT $650,000,000 REDUCING REVOLVING CREDIT AND COMPETITIVE BID FACILITY AMONG SEAGULL ENERGY CORPORATION, THE CHASE MANHATTAN BANK, Individually and as Agent, AND THE OTHER BANKS SIGNATORY HERETO December 23, 1996 TABLE OF CONTENTS Section 1. Definitions and Accounting Matters 1.1 Certain Defined Terms......................................1 1.2 Accounting Terms and Determinations.......................24 1.3 Types of Loans............................................24 1.4 Miscellaneous.............................................24 Section 2. Commitments; Borrowing Base Determinations; Competitive Bid Facility..................................25 2.1 Committed Loans...........................................25 2.2 Letters of Credit.........................................25 2.3 Reductions and Changes of Commitments.....................28 2.4 Fees......................................................29 2.5 Affiliates; Lending Offices...............................30 2.6 Several Obligations.......................................30 2.7 Notes.....................................................30 2.8 Use of Proceeds...........................................31 2.9 Borrowing Base Determinations.............................31 2.10 Competitive Bid Procedure.................................31 Section 3. Borrowings, Prepayments and Selection of Interest Rates...33 3.1 Borrowings................................................33 3.2 Prepayments...............................................34 3.3 Selection of Interest Rates...............................35 Section 4. Payments of Principal and Interest........................36 4.1 Repayment of Loans and Reimbursement Obligations..........36 4.2 Interest..................................................36 Section 5. Payments; Pro Rata Treatment; Computations, Etc...........37 5.1 Payments..................................................37 5.2 Pro Rata Treatment........................................37 5.3 Computations..............................................38 5.4 Minimum and Maximum Amounts...............................38 5.5 Certain Actions, Notices, Etc.............................38 5.6 Non-Receipt of Funds by Agent.............................40 5.7 Sharing of Payments, Etc..................................40 Section 6. Yield Protection and Illegality...........................41 6.1 Additional Costs..........................................41
6.2 Limitation on Types of Loans..............................42 6.3 Illegality................................................43 6.4 Substitute Alternate Base Rate Loans......................43 6.5 Compensation..............................................44 6.6 Additional Costs in Respect of Letters of Credit..........44 6.7 Capital Adequacy..........................................45 6.8 Limitation on Additional Charges; Substitute Banks; Non-Discrimination........................................45 Section 7. Conditions Precedent......................................46 7.1 Initial Loans.............................................46 7.2 Initial and Subsequent Loans..............................48 Section 8. Representations and Warranties............................48 8.1 Corporate Existence.......................................49 8.2 Corporate Power and Authorization.........................49 8.3 Binding Obligations.......................................49 8.4 No Legal Bar or Resultant Lien............................49 8.5 No Consent................................................49 8.6 Financial Condition.......................................50 8.7 Investments and Guaranties................................50 8.8 Liabilities and Litigation................................50 8.9 Taxes and Governmental Charges............................50 8.10 Title to Properties.......................................51 8.11 Defaults..................................................51 8.12 Location of Businesses and Offices........................51 8.13 Compliance with Law.......................................51 8.14 Margin Stock..............................................51 8.15 Subsidiaries..............................................52 8.16 ERISA.....................................................52 8.17 Investment Company Act....................................52 8.18 Public Utility Holding Company Act........................52 8.19 Environmental Matters.....................................53 8.20 Claims and Liabilities....................................54 8.21 Solvency..................................................54 Section 9. Affirmative Covenants.....................................54 9.1 Financial Statements and Reports..........................54 9.2 Officers' Certificates....................................56 9.3 Taxes and Other Liens.....................................57 9.4 Maintenance...............................................57 9.5 Further Assurances........................................58
9.6 Performance of Obligations................................58 9.7 Reimbursement of Expenses.................................58 9.8 Insurance.................................................59 9.9 Accounts and Records......................................59 9.10 Rights of Inspection......................................59 9.11 Notice of Certain Events..................................60 9.12 ERISA Information and Compliance..........................61 Section 10. Negative Covenants........................................62 10.1 Debts, Guaranties and Other Obligations...................62 10.2 Liens.....................................................65 10.3 Investments, Loans and Advances...........................68 10.4 Dividend Payment Restrictions.............................70 10.5 Mergers and Sales of Assets...............................70 10.6 Proceeds of Notes.........................................70 10.7 ERISA Compliance..........................................70 10.8 Amendment of Certain Documents............................71 10.9 Tangible Net Worth........................................71 10.10 Company Debt/Capitalization Ratio.........................71 10.11 EBITDAX/Interest Ratio....................................71 10.12 Nature of Business........................................71 10.13 Futures Contracts.........................................72 10.14 Covenants in Other Agreements.............................72 Section 11. Defaults..................................................73 11.1 Events of Default.........................................73 11.2 Collateral Account........................................75 11.3 Preservation of Security for Unmatured Reimbursement Obligations.................................75 11.4 Right of Setoff...........................................76 Section 12. Agent.....................................................76 12.1 Appointment, Powers and Immunities........................76 12.2 Reliance by Agent.........................................77 12.3 Defaults..................................................78 12.4 Rights as a Bank..........................................78 12.5 Indemnification...........................................78 12.6 Non-Reliance on Agent and Other Banks.....................79 12.7 Failure to Act............................................79 12.8 Resignation or Removal of Agent...........................79
Section 13. Miscellaneous.............................................80 13.1 Waiver....................................................80 13.2 Notices...................................................80 13.3 Indemnification...........................................80 13.4 Amendments, Etc...........................................81 13.5 Successors and Assigns....................................82 13.6 Limitation of Interest....................................85 13.7 Survival..................................................86 13.8 Captions..................................................86 13.9 Counterparts..............................................86 13.10 Governing Law.............................................86 13.11 Severability..............................................87 13.12 Chapter 15 Not Applicable.................................87 13.13 Confidential Information..................................87 13.14 Tax Forms.................................................88 13.15 Amendment and Restatement.................................88 13.16 Intercreditor Agreement...................................88 EXHIBITS: Exhibit A Oil and Gas Subsidiaries Exhibit B Form of Borrowing Base Certificate Exhibit C Form of Request for Extension of Credit Exhibit D Existing Competitive Loans Exhibit E Form of Committed Note Exhibit F Subsidiaries (with Addresses) Exhibit G Form of Compliance Certificate Exhibit H Assignment and Acceptance Exhibit I Form of Engineering Report Certificate Exhibit J Parameters Interest Rate Protection and Commodities Futures Programs Exhibit K Form of Competitive Bid Request Exhibit L Form of Notice to Banks of Competitive Bid Request Exhibit M Form of Competitive Bid Exhibit N Form of Competitive Bid Administrative Questionnaire Exhibit O Form of Competitive Note Exhibit P Form of Second Amendment to Intercreditor Agreement
CREDIT AGREEMENT This CREDIT AGREEMENT, dated as of December 23, 1996 (the "Effective Date"), is by and among SEAGULL ENERGY CORPORATION (the "Company"), a corporation duly organized and validly existing under the laws of the State of Texas; each of the banks which is or which may from time to time become a signatory hereto (individually, a "Bank" and, collectively, the "Banks"); THE CHASE MANHATTAN BANK ("Chase"), as agent for the Banks (in such capacity, together with its successors in such capacity, "Agent"). The parties hereto agree as follows: Section 1. Definitions and Accounting Matters. 1.1 Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.1 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa): "Additional Costs" shall have the meaning ascribed to such term in Section 6.1 hereof. "Affiliate" shall mean, as to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person and, if such Person is an individual, any member of the immediate family (including parents, siblings, spouse, children, stepchildren, grandchildren, nephews and nieces) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. As used in this definition, "control" (including, with correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). "Agreement" shall mean this Credit Agreement, as the same may be amended, modified, restated or supplemented from time to time. "Alaskan Gas Component Value" shall mean (A) prior to the initial Borrowing Base Determination, $60,000,000 and (B) thereafter, the amount by which (i) the product of 5-1/2 times an amount equal to (I) the average annual EBITDA of ENSTAR Alaska on a consolidated basis for the three year period ended on the most recent December 31st plus (II) 70% of the average annual management fees paid to the Company by ENSTAR Alaska during such three year period minus (III) average annual Capital Expenditures attributable to ENSTAR Alaska in accordance with GAAP and on a consolidated basis during such three year period exceeds (ii) the Alaskan Gas Debt determined as of (x) the preceding January 1 (in the case of a Scheduled Redetermination) or (y) the last day of the second month prior to the month in which the effective date of the Borrowing Base Determination occurs (in the case of a Requested Redetermination). "Alaskan Gas Debt" shall mean the sum of (i) Funded Indebtedness of ENSTAR Alaska plus (ii) Current Maturities of ENSTAR Alaska plus (iii) Redemption Obligations of ENSTAR Alaska plus (iv) the highest amount of Short Term Borrowings outstanding during the Short Term Borrowings Measuring Period. "Alternate Base Rate" shall mean, for any day, a rate per annum equal to the higher of (a) the Prime Rate in effect on such day or (b) 1/2 of 1% plus the Federal Funds Rate in effect for such day (rounded upwards, if necessary, to the nearest 1/16th of 1%). For purposes hereof, "Federal Funds Rate" shall mean, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Agent from three Federal funds brokers of recognized standing selected by it. For purposes of this Agreement, any change in the Alternate Base Rate due to a change in the Federal Funds Rate shall be effective on the effective date of such change in the Federal Funds Rate. If for any reason Agent shall have determined (which determination shall be conclusive and binding, absent manifest error) that it is unable to ascertain the Federal Funds Rate for any reason, including, without limitation, the inability or failure of Agent to obtain sufficient bids or publications in accordance with the terms hereof, the Alternate Base Rate shall be the Prime Rate until the circumstances giving rise to such inability no longer exist. For the purposes hereof, "Prime Rate" shall mean the prime rate as announced from time to time by Agent, and thereafter entered in the minutes of Agent's Loan and Discount Committee. Without notice to the Company or any other Person, the Prime Rate shall change automatically from time to time as and in the amount by which said prime rate shall fluctuate. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Agent may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. For purposes of this Agreement any change in the Alternate Base Rate due to a change in the Prime Rate shall be effective on the date such change in the Prime Rate is announced. "Alternate Base Rate Loans" shall mean Loans which bear interest at a rate based upon the Alternate Base Rate. "APC" shall mean Alaska Pipeline Company, an Alaska corporation, a Subsidiary of the Company. "APC Long Term Financing Documents" shall mean that certain Inducement Agreement and that certain Note Agreement (together with the Notes, as defined therein), each dated as of May 14, 1992, by and among the Company, Aid Association for Lutherans, The Equitable Life Assurance Society of the United States, Equitable Variable Life Insurance Company, Provident Life and Accident Insurance Company and Teachers Insurance & Annuity Association of America, any documentation executed in connection with any renewal, extension or rearrangement of the Indebtedness that is the subject of the foregoing documents, the Gas Sales Contract, the Intercompany Mortgage, as defined in the above-mentioned Note Agreement, and any documents executed in replacement of any of the foregoing documents, if any, and only if Agent has received notice thereof pursuant to Section 10.8. "Applicable Lending Office" shall mean, for each Bank and for each Type of Loan, such office of such Bank (or of an affiliate of such Bank) as such Bank may from time to time specify to Agent and the Company as the office by which its Loans of such Type are to be made and/or issued and maintained. "Applicable Margin" shall mean, on any day and with respect to any Loan, the applicable per annum percentage set forth at the appropriate intersection in the table shown below, based on the Debt/Capitalization Ratio as of the last day of the most recently ending fiscal quarter of the Company and its Subsidiaries with respect to which Agent shall have received the financial statements and other information (the "Current Information") required to be delivered to Agent pursuant to Section 9.1 hereof (said calculation to be made by Agent as soon as practicable after receipt by Agent of all required Current Information):
Eurodollar Alternate Base Rate Loan Loan Applicable Applicable Debt/Capitalization Ratio Margin Margin - ---------------------------- --------------------- ----------- Greater than or equal to 60% 0.375 1.1875 Greater than or equal to 55% but less than 60% 0.00 0.8125 Greater than or equal to 50% but less than 55% 0.00 0.5625 Less than 50% 0.00 0.4375
Notwithstanding the foregoing, at all times that a Borrowing Base Deficiency shall exist and is continuing for more than 30 days, the Applicable Margins provided for in this definition shall each be increased by adding 1.00%. Each change in the Applicable Margin based on a change in the Current Information shall be effective as of the fifteenth day of the month during which the Current Information used to calculate the new Applicable Margin was delivered to Agent. "Applications" shall mean all applications and agreements for Letters of Credit, or similar instruments or agreements, now or hereafter executed by any Person in connection with any Letter of Credit now or hereafter issued or to be issued. "Bankruptcy Code" shall mean the United States Bankruptcy Code, as amended, and any successor statute. "Beluga Financing Documents" shall mean that certain Inducement Agreement and that certain Note Agreement (together with the Notes, as defined therein), each dated June 17, 1985, and amended as of June 15, 1990, by and among the Company and The Equitable Life Assurance Society of the United States and the Travelers Insurance Company, any documentation executed in connection with any renewal, extension or rearrangement of the Indebtedness that is the subject of the foregoing documents, the Gas Sales Contract, the Intercompany Mortgage, as defined in the above-mentioned Note Agreement, and any documents executed in replacement of any of the foregoing documents, if and only if Agent has received notice thereof pursuant to Section 10.8. "Borrowing Base" shall mean, as at any date, the sum of (i) the Oil and Gas Reserves Component Value plus (ii) the Alaskan Gas Component Value. If the Company fails to provide a current Borrowing Base Certificate as required by Section 9.2(c), two (2) Business Days after notice to the Company the Majority Banks may determine the Alaskan Gas Component Value comprising the Borrowing Base from time to time in their reasonable discretion, taking into account all information reasonably available to them, and the Alaskan Gas Component Value from time to time so determined shall be the Alaskan Gas Component Value for all purposes of this Agreement until a current Borrowing Base Certificate is furnished. "Borrowing Base Certificate" shall mean a certificate with respect to the Alaskan Gas Component Value, duly executed by the chief executive officer, chief financial officer, treasurer or controller of the Company, appropriately completed and in substantially the form of Exhibit B hereto. "Borrowing Base Debt" shall mean, without duplication, the sum of (i) borrowed money Indebtedness (including without limitation contingent obligations in respect of borrowed money Indebtedness under any Guarantee or letter of credit) plus (ii) the "Maximum Outstanding Amount" in effect from time to time under the Canadian Facility plus (iv) Redemption Obligations payable within five (5) years after any applicable determination date, together with obligations (excluding volumetric obligations with respect to pre-sales of Hydrocarbon production which have already been accounted for in the calculation of the Borrowing Base) payable out of Hydrocarbon production (except such obligations payable solely by recourse to properties not included in the Borrowing Base and Indebtedness permitted by Section 10.1(l)) to the extent such obligations have not already been deducted in the calculation of the Borrowing Base; provided, however, that Borrowing Base Debt shall not include the Loans, the Letter of Credit Liabilities or any Subordinated Debt. "Borrowing Base Deficiency" shall mean the amount by which (a) the sum of (i) the aggregate outstanding amount of all Revolving Credit Obligations plus (ii) the aggregate outstanding amount of all Borrowing Base Debt of the Company and its Subsidiaries (other than ENSTAR Alaska) exceeds (b) the then current Borrowing Base. "Borrowing Base Deficiency Notification Date" shall mean the date on which any notice of a Borrowing Base Deficiency is received by the Company. "Borrowing Base Determination" shall mean a Scheduled Redetermination or a Requested Redetermination. "Business Day" shall mean any day other than a day on which commercial banks are authorized or required to close in Houston, Texas or New York, New York, and where such term is used in the definition of "Quarterly Date" in this Section 1.1 or if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, or an Interest Period for, a Eurodollar Loan or a notice by the Company with respect to any such borrowing, payment, prepayment or Interest Period, a day which is also a day on which dealings in Dollar deposits are carried out in the relevant interbank market. "Canadian Facility" shall mean that certain Credit Agreement dated December ____, 1996 executed by and among Seagull Energy Canada Ltd., The Chase Manhattan Bank of Canada, as Arranger and as Agent, The Bank of Nova Scotia, as Paying Agent and as Co-Agent, Canadian Imperial Bank of Commerce, as Co-Agent, and certain banks therein named, as amended by the Intercreditor Agreement, and as the same may be further amended or modified from time to time. "Capital Expenditures" shall mean expenditures in respect of fixed or capital assets (calculated in accordance with GAAP) excluding expenditures for the restoration, repair or replacement of any fixed or capital asset which was destroyed or damaged, in whole or in part, to the extent financed by the proceeds of an insurance policy. Expenditures in respect of replacements and maintenance consistent with the business practices of the Company and its Subsidiaries in respect of plant facilities, machinery, fixtures and other like capital assets utilized in the ordinary course of business are not Capital Expenditures to the extent such expenditures are not capitalized in preparing a balance sheet of the Company in accordance with GAAP. "Capital Lease Obligations" shall mean, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Capitalization" shall mean an amount equal to the sum of (a) Funded Indebtedness of the Company and its Subsidiaries on a consolidated basis plus (b) Current Maturities of the Company and its Subsidiaries on a consolidated basis plus (c) borrowed money Indebtedness of the Company and its Subsidiaries on a consolidated basis that is not Funded Indebtedness plus (d) Indebtedness of the Company and its Subsidiaries on a consolidated basis constituting obligations payable out of Hydrocarbons (except such obligations payable solely by recourse to properties not included in the Borrowing Base) plus (e) Tangible Net Worth of the Company and its Subsidiaries on a consolidated basis. "Change of Control" shall mean a change resulting when any Unrelated Person or any Unrelated Persons acting together which would constitute a Group together with any Affiliates or Related Persons thereof (in each case also constituting Unrelated Persons) shall at any time either (i) Beneficially Own more than 50% of the aggregate voting power of all classes of Voting Stock of the Company or (ii) succeed in having sufficient of its or their nominees elected to the Board of Directors of the Company such that such nominees, when added to any existing director remaining on the Board of Directors of the Company after such election who is an Affiliate or Related Person of such Person or Group, shall constitute a majority of the Board of Directors of the Company. As used herein (a) "Beneficially Own" means "beneficially own" as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended, or any successor provision thereto; provided, however, that, for purposes of this definition, a Person shall not be deemed to Beneficially Own securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates until such tendered securities are accepted for purchase or exchange; (b) "Group" means a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended; (c) "Unrelated Person" means at any time any Person other than the Company or any Subsidiary and other than any trust for any employee benefit plan of the Company or any Subsidiary of the Company; (d) "Related Person" of any Person shall mean any other Person owning (1) 5% or more of the outstanding common stock of such Person or (2) 5% or more of the Voting Stock of such Person; and (e) "Voting Stock" of any Person shall mean capital stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. "Chapter One" shall mean Chapter One of the Texas Credit Code, as in effect on the date the document using such term was executed. "Code" shall mean the Internal Revenue Code of 1986, as amended, or any successor statute, together with all regulations, rulings and interpretations thereof or thereunder by the Internal Revenue Service. "Commitment Percentage" shall mean, as to any Bank, the percentage equivalent of a fraction the numerator of which is the amount of such Bank's Commitment and the denominator of which is the aggregate amount of the Commitments of all Banks. "Commitment" shall mean, as to any Bank, the obligation, if any, of such Bank to make Committed Loans and incur Letter of Credit Liabilities in an aggregate principal amount at any one time outstanding up to but not exceeding the amount, if any, set forth opposite such Bank's name on the signature pages hereof under the caption "Commitment" (as the same may be reduced from time to time pursuant to Section 2.3). "Committed Loans" shall mean the loans provided for in Section 2.1 hereof. "Committed Notes" shall mean the promissory notes of the Company evidencing the Committed Loans, in the form of Exhibit E hereto, together with all renewals, extensions, modifications and replacements thereof and substitutions therefor. "Company Report" shall mean one or more reports, in form satisfactory to Agent and the Majority Banks, prepared by petroleum engineers employed by the Company or its Subsidiaries, which shall evaluate (i) at least 85% of the present value of the Included Reserves and (ii) any other properties as to which the Company has conducted successful exploration activities subsequent to the most recent Engineering Report, in each case effective as of the immediately preceding July 1. Each Company Report shall set forth production, drilling and acquisition information and other information requested by Agent and shall be based upon updated economic assumptions acceptable to Agent and approved by the Majority Banks at the beginning of the applicable year. "Competitive Bid" shall mean an offer by a Bank to make a Competitive Loan pursuant to Section 2.10 hereof. "Competitive Bid Administrative Questionnaire" shall mean a questionnaire substantially in the form of Exhibit N hereto. "Competitive Bid Rate" shall mean, as to any Competitive Bid made by a Bank pursuant to Section 2.10 hereof, the fixed rate of interest, in each case, offered by the Bank making such Competitive Bid. "Competitive Bid Request" shall have the meaning ascribed to such term in Section 2.10 hereof. "Competitive Loans" shall mean the Existing Competitive Loans and loans provided for in Section 2.10 hereof. "Competitive Notes" shall mean the promissory notes of the Company evidencing the Competitive Loans, in the form of Exhibit O hereto, together with all renewals, extensions, modifications and replacements thereof and substitutions therefor. "Cover" for Letter of Credit Liabilities shall be effected by paying to Agent immediately available funds, to be held by Agent in a collateral account maintained by Agent at its Principal Office and collaterally assigned as security for the financial accommodations extended pursuant to this Agreement using documentation satisfactory to Agent, in an amount equal to any required prepayment. Such amount shall be retained by Agent in such collateral account until such time as (x) in the case of Cover being provided pursuant to Section 2.2(a), the applicable Letter of Credit shall have expired and Reimbursement Obligations, if any, with respect thereto shall have been fully satisfied or (y) in the case of Cover being provided pursuant to Section 3.2(b)(1), the outstanding principal amount of all Revolving Credit Obligations is not greater than the aggregate amount of the Commitments. "Current Maturities" shall mean, on any day on which Current Maturities are calculated, the sum of (a) scheduled principal payments on Funded Indebtedness which are payable within one (1) year after such day plus (b) the principal component of payments required to be made with respect to Capital Lease Obligations within one (1) year of said date plus (c), to the extent not included above, all items which in accordance with GAAP would be classified as current maturities of long term debt. "Debt/Capitalization Ratio" shall mean the ratio of (a) the sum of Funded Indebtedness of the Company and its Subsidiaries on a consolidated basis plus Current Maturities of the Company and its Subsidiaries on a consolidated basis plus borrowed money Indebtedness of the Company and its Subsidiaries on a consolidated basis that is not Funded Indebtedness plus Indebtedness of the Company and its Subsidiaries on a consolidated basis constituting obligations payable out of Hydrocarbons (except such obligations payable solely by recourse to properties not included in the Borrowing Base) to (b) Capitalization. "Default" shall mean an Event of Default or an event which with notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Disclosure Statement" shall mean the Disclosure Statement dated December 31, 1992 delivered to Agent by the Company. "Dividend Payment" shall mean, with respect to any Person, dividends (in cash, property or obligations) on, or other payments or distributions on account of, or the redemption of, or the setting apart of money for a sinking or other analogous fund for the purchase, redemption, retirement or other acquisition of, any shares of any class of capital stock of such Person, or the exchange or conversion of any shares of any class of capital stock of such Person for or into any obligations of or shares of any other class of capital stock of such Person or any other property, but excluding dividends to the extent payable in, or exchanges or conversions for or into, shares of common stock of the Company or options or warrants to purchase common stock of the Company. "Dollars" and "$" shall mean lawful money of the United States of America. "EBITDA" shall mean net earnings (excluding gains and losses on sales and retirement of assets, non-cash write downs, charges resulting from accounting convention changes) before deduction for federal and state taxes, interest expense (including capitalized interest), operating lease rentals or depreciation, depletion and amortization expense, all determined in accordance with GAAP. "EBITDAX" shall mean net earnings (excluding gains and losses on sales and retirement of assets, non-cash write downs, charges resulting from accounting convention changes and deductions for dry hole expenses) before deduction for federal and state taxes, interest expense (including capitalized interest), operating lease rentals or depreciation, depletion and amortization expense, all determined in accordance with GAAP. "EBITDAX/Interest Ratio" shall mean the ratio of (a) EBITDAX of the Company and its Subsidiaries on a consolidated basis to (b) operating lease rentals and interest expense (including capitalized interest but excluding non-cash amortization of deferred financing costs) on all Indebtedness of the Company and its Subsidiaries on a consolidated basis for any twelve-month period ending on the last day of every calendar quarter during the period with respect to which the EBITDAX/Interest Ratio is to be calculated. "Engineering Report" shall mean one or more reports, in form satisfactory to Agent and the Majority Banks, prepared by one or more independent consulting firms acceptable to Agent and the Majority Banks in their reasonable business judgment, which shall evaluate at least 85% of the present value of the Included Reserves as of the immediately preceding January 1. Each Engineering Report shall set forth a projection of the future rate of production, Net Proceeds of Production and present value of the Net Proceeds of Production, in each case based upon economic assumptions acceptable to Agent and approved by the Majority Banks. "ENSTAR Alaska" shall collectively mean (i) the gas distribution system in south-central Alaska known as ENSTAR Natural Gas Company, a division of the Company, and (ii) APC. "Environmental Claim" means any third party (including Governmental Authorities and employees) action, lawsuit, claim or proceeding (including claims or proceedings at common law or under the Occupational Safety and Health Act or similar laws relating to safety of employees) which seeks to impose liability for (i) noise; (ii) pollution or contamination of the air, surface water, ground water or land or the clean-up of such pollution or contamination; (iii) solid, gaseous or liquid waste generation, handling, treatment, storage, disposal or transportation; (iv) exposure to Hazardous Substances; (v) the safety or health of employees or (vi) the manufacture, processing, distribution in commerce or use of Hazardous Substances. An "Environmental Claim" includes, but is not limited to, a common law action, as well as a proceeding to issue, modify or terminate an Environmental Permit, or to adopt or amend a regulation to the extent that such a proceeding attempts to redress violations of an applicable permit, license, or regulation as alleged by any Governmental Authority. "Environmental Liabilities" includes all liabilities arising from any Environmental Claim, Environmental Permit or Requirement of Environmental Law under any theory of recovery, at law or in equity, and whether based on negligence, strict liability or otherwise, including but not limited to: remedial, removal, response, abatement, investigative, monitoring, personal injury and damage to property or injuries to persons, and any other related costs, expenses, losses, damages, penalties, fines, liabilities and obligations, and all costs and expenses necessary to cause the issuance, reissuance or renewal of any Environmental Permit including reasonable attorneys' fees and court costs. "Environmental Permit" means any permit, license, approval or other authorization under any applicable Legal Requirement relating to pollution or protection of health or the environment, including laws, regulations or other requirements relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or hazardous substances or toxic materials or wastes into ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants or Hazardous Substances. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and all rules, regulations and interpretations by the Internal Revenue Service or the Department of Labor thereunder. "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) which is a member of a group of which the Company is a member and which is under common control within the meaning of the regulations under Section 414 of the Code. "Eurodollar Base Rate" shall mean, with respect to any Interest Period for any Eurodollar Loan, the lesser of (A) the rate per annum (rounded upwards, if necessary, to the nearest 1/16th of 1%) equal to the average of the offered quotations appearing on Telerate Page 3750 (or if such Telerate Page shall not be available, any successor or similar service as may be selected by Agent and the Company) as of 11:00 a.m., Houston, Texas time (or as soon thereafter as practicable) on the day two Business Days prior to the first day of such Interest Period for Dollar deposits having a term comparable to such Interest Period and in an amount comparable to the principal amount of the Eurodollar Loan to which such Interest Period relates or (B) the Highest Lawful Rate. If none of such Telerate Page 3750 nor any successor or similar service is available, then the "Eurodollar Base Rate" shall mean, with respect to any Interest Period for any applicable Eurodollar Loan, the lesser of (A) the rate per annum (rounded upwards, if necessary, to the nearest 1/16th of 1%) determined by Agent to be the average of the rates quoted by the Reference Banks at approximately 11:00 a.m., Houston, Texas time (or as soon thereafter as practicable) on the day two Business Days prior to the first day of such Interest Period for the offering by such Reference Banks to leading banks in the interbank market of Dollar deposits having a term comparable to such Interest Period and in an amount comparable to the principal amount of the Eurodollar Loan to which such Interest Period relates or (B) the Highest Lawful Rate. If any Reference Bank does not furnish a timely quotation, Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks; if none of such quotations is available on a timely basis, the provisions of Section 6.2 shall apply. Each determination of the Eurodollar Base Rate shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. "Eurodollar Loans" shall mean Loans the interest on which is determined on the basis of rates referred to in the definition of "Eurodollar Base Rate" in this Section 1.1. "Eurodollar Rate" shall mean, for any Interest Period for any Eurodollar Loan, a rate per annum determined by Agent to be equal to the Eurodollar Base Rate for such Loan for such Interest Period. "Event of Default" shall have the meaning assigned to such term in Section 11 hereof. "Existing Competitive Loans" shall mean the Competitive Loans described on Exhibit D hereto. "Facility Fee Percentage" shall mean 0.1875%; provided, however, that at all times that the Company shall have received an investment grade senior debt rating from two nationally known agencies (one of which must be either Standard & Poor's Ratings Group or Moody's Investors Service, Inc.) of BBB-/Baa3 (or the equivalent), the Facility Fee Percentage shall be reduced to 0.125%. "Financial Statements" shall mean the financial statement or statements, together with the notes and schedules thereto, described or referred to in Sections 8.6 and 9.1. "Funded Indebtedness" shall mean all Indebtedness which by its terms matures more than one (1) year from the date as of which any calculation of Funded Indebtedness is made, and any Indebtedness maturing within one (1) year from such date which is renewable at the option of the obligor to a date beyond one (1) year from such date. "GAAP" shall mean as to a particular Person, such accounting practice as, in the opinion of KPMG Peat Marwick or other independent accountants of recognized national standing retained by such Person and acceptable to the Majority Banks, conforms at the time to generally accepted accounting principles, consistently applied. Generally accepted accounting principles means those principles and practices (a) which are recognized as such by the Financial Accounting Standards Board, (b) which are applied for all periods after the date hereof in a manner consistent with the manner in which such principles and practices were applied to the most recent audited financial statements of the relevant Person furnished to the Banks, except only for such changes in principles and practices with which the applicable independent public accountants concur and which are disclosed to the Banks in writing, and (c) which are consistently applied for all periods after the date hereof so as to reflect properly the financial condition and results of operations of such Person. "Gas and Liquids Pipeline Subsidiaries" shall mean each company (which may include the Company) engaged in the Pipeline Operations. "Gas Sale Contract" shall mean that certain Gas Sale Contract dated January 1, 1984, between APC, as Seller, and ENSTAR Natural Gas Company, as Purchaser, as amended on June 17, 1985, and from time to time thereafter, if and only if Agent has received notice thereof pursuant to Section 10.8. "Governmental Authority" shall mean any sovereign governmental authority, the United States of America, any State of the United States and any political subdivision of any of the foregoing, and any central bank, agency, instrumentality, department, commission, board, bureau, authority, court or other tribunal or quasi-governmental authority in each case whether executive, legislative, judicial, regulatory or administrative, having jurisdiction over the Company, any of its Subsidiaries, any of their respective property, Agent or any Bank. "Guarantee" by any Person means any obligation, contingent or otherwise, of any such Person directly or indirectly guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness (whether arising by virtue of partnership arrangements, by agreement to keep- well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise, other than agreements to purchase assets, goods, securities or services at an arm's length price in the ordinary course of business) or (ii) entered into for the purpose of assuring in any other manner the holder of such Indebtedness of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part), provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Substance" shall mean petroleum products, and any hazardous or toxic waste or substance defined or regulated as such from time to time by any law, rule, regulation or order described in the definition of "Requirements of Environmental Law". "Highest Lawful Rate" shall mean, on any day, the maximum nonusurious rate of interest permitted for that day by whichever of applicable federal or Texas law permits the higher interest rate, stated as a rate per annum. On each day, if any, that Chapter One establishes the Highest Lawful Rate, the Highest Lawful Rate shall be the "indicated rate ceiling" (as defined in Chapter One) for that day. "Hydrocarbons" shall mean oil, gas, casinghead gas, drip gasoline, natural gasoline, condensate and all other liquid or gaseous hydrocarbons and related minerals, in each case whether in a natural or a processed state. "Included Reserves" shall mean those producing and non-producing proved oil and gas reserves of the Company and its Oil and Gas Subsidiaries which are to be taken into account in the determination of the Oil and Gas Reserves Component Value from time to time in effect, as designated by the Company. "Indebtedness" shall mean, as to any Person: (i) indebtedness of such Person for borrowed money (whether by loan or the issuance and sale of debt securities) or for the deferred purchase or acquisition price of property or services, including, without limitation, obligations (excluding volumetric obligations with respect to pre-sales of Hydrocarbon production which have already been accounted for in the calculation of the Borrowing Base) payable out of Hydrocarbon production; (ii) obligations, whether fixed or contingent, of such Person in respect of letters of credit, acceptances or similar instruments issued or accepted by banks and other financial institutions for the account of such Person or any other Person; (iii) Capital Lease Obligations of such Person; (iv) Redemption Obligations of such Person and other obligations of such Person to redeem or otherwise retire shares of capital stock of such Person or any other Person, in each case to the extent that the redemption obligations will arise prior to the stated maturity of the Obligations; (v) indebtedness of others of the type described in clause (i), (ii), (iii) or (iv) above secured by a Lien on the property of such Person, whether or not the respective obligation so secured has been assumed by such Person; and (vii) indebtedness of others of the type described in clause (i), (ii), (iii) or (iv) above Guaranteed by such Person. "Intercreditor Agreement" shall mean that certain Intercreditor Agreement dated December 30, 1993 executed by and among the Company, Seagull Energy Canada Ltd., Agent and the "Administrative Agent" under the Canadian Facility, as amended by that certain First Amendment to Intercreditor Agreement dated May 24, 1994 and by that certain Second Amendment to Intercreditor Agreement in the form of Exhibit P hereto dated concurrently herewith, and as the same may be further amended or modified from time to time. "Interest Period" shall mean: (a) With respect to any Eurodollar Loan, the period commencing on (i) the date such Loan is made or converted into or continued as a Eurodollar Loan or (ii) in the case of a roll-over to a successive Interest Period, the last day of the immediately preceding Interest Period and ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, as the Company may select as provided in Section 3.3 hereof, except that each such Interest Period which commences on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month shall end on the last Business Day of the appropriate subsequent calendar month. (b) With respect to any Alternate Base Rate Loan, the period commencing on the date such Loan is made and ending on the next succeeding Quarterly Date. (c) With respect to any Existing Competitive Loan, the applicable interest period specified on Exhibit D hereto, and with respect to any other Competitive Loan, the period commencing on the date such Loan is made and ending on the date specified in the Competitive Bid in which the offer to make the Competitive Loan was extended; provided, however, that each such period shall have a duration of not less than seven calendar days or more than 180 calendar days. Notwithstanding the foregoing: (i) no Interest Period applicable to any Eurodollar Loan or any Competitive Loan may commence before and end after the date of any scheduled reduction in the Commitments if, after giving effect thereto, the aggregate principal amount of the Eurodollar Loans or Competitive Loans which have Interest Periods which end after such reduction date shall be greater than the aggregate principal amount of the Commitments scheduled to be in effect after such reduction date; (ii) each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (or, in the case of an Interest Period for Eurodollar Loans, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); (iii) no Interest Period applicable to any Eurodollar Loan or any Competitive Loan shall extend beyond the end of the scheduled Revolving Credit Availability Period, and (iv) no Interest Period for any Eurodollar Loans shall have a duration of less than one month and, if the Interest Period therefor would otherwise be a shorter period, such Loans shall not be available hereunder. "Investments" shall have the meaning assigned to such term in Section 10.3 hereof. "Investments Tests" shall mean compliance with each of the following restrictions (both before and immediately after giving effect to the applicable Investments): (i) there shall exist no Borrowing Base Deficiency; (ii) no Default or Event of Default shall have occurred and be continuing; and (iii) the applicable Investment, when aggregated with any prior permitted Investments, shall not exceed 10% of Tangible Net Worth of the Company and its Subsidiaries on a consolidated basis. "Issuer" shall mean each Bank issuing a Letter of Credit hereunder. "Legal Requirement" shall mean any law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority, now or hereafter in effect. "Letter of Credit" shall have the meaning assigned to such term in Section 2.2 hereof. "Letter of Credit Fee" shall mean a per annum rate equal to the Applicable Margin for Eurodollar Loans in effect from time to time. "Letter of Credit Liabilities" shall mean, at any time and in respect of any Letter of Credit, the sum of (i) the amount available for drawings under such Letter of Credit plus (ii) the aggregate unpaid amount of all Reimbursement Obligations at the time due and payable in respect of previous drawings made under such Letter of Credit. "Lien" shall mean, with respect to any asset, any mortgage, lien, pledge, charge, collateral assignment, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, a Person shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Liquid Investments" shall mean: (I) in the case of investments of U.S. Dollars (i) securities issued or directly, fully and unconditionally guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than one year from the date of issue; (ii) U.S. Dollar time deposits and certificates of deposit (A) of any Bank having capital and surplus in excess of U.S. $300,000,000, or (B) of any commercial bank incorporated in the United States, of recognized standing, having capital and surplus in excess of U.S. $500,000,000 and which has (or which is a Subsidiary of a holding company which has) publicly traded debt securities rated, at the time of issuance of such time deposits, AA or higher by Standard & Poor's Corporation or Aa-2 or higher by Moody's Investors Service, Inc. with maturities of not more than one year from the date of issue; (iii) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (I)(i) above entered into with any bank meeting the qualifications specified in clause (I)(ii) above, provided that the terms of such agreements comply with the guidelines set forth in the Federal Financial Institution Examination Counsel Supervisory Policy -- Repurchase Agreements of Depository Institutions With Securities Dealers and Others, as adopted by the Comptroller of the Currency on October 31, 1985; (iv) commercial paper or other U.S. Dollar obligations issued by the parent corporation (A) of any Bank having capital and surplus in excess of U.S. $300,000,000, or (B) of any commercial bank (provided that the parent corporation and the bank are both incorporated in the United States) of recognized standing having capital and surplus in excess of U.S. $500,000,000 and commercial paper or other U.S. Dollar obligations issued by any Person incorporated in the United States, which commercial paper is rated at least A-2 or the equivalent thereof by Standard & Poor's Corporation or at least P-2 or the equivalent thereof by Moody's Investors Service, Inc. and in each case maturing not more than six months after the date of issue; (v) obligations of any state or political subdivision thereof rated at least F-1 by Fitch Investors Service, Inc. or AA by Standard & Poor's Corporation with an original maturity of 180 days or less; and (vi) investments in money market funds substantially all the assets of which are comprised of securities of the types described in clauses (I)(i) through (v) above; and (II) in the case of investments of Canadian dollars (i) bonds or other evidences of indebtedness of, or the principal and interest of which is fully guaranteed by, the Government of Canada or any province of Canada, payable in Canadian dollars and (in the case of any provincial obligations and any Government of Canada obligations that are rated) rated AAA or AA (or the then equivalent grade) by Dominion Bond Rating Service Limited, or any other nationally recognized bond rating service, having a maturity not in excess of one year, (ii) certificates of deposit issued or guaranteed by a bank or trust company organized under the laws of Canada or any province thereof, provided such bank or trust company has capital and retained earnings in the aggregate in excess of Canadian $500,000,000 on its most recent balance sheet (whether audited or unaudited), having a maturity not in excess of one year, (iii) bankers' acceptances of any bank or trust company the certificates of deposit of which would constitute Liquid Investments as provided in clause (II)(ii) above, if outstanding unsecured debt of such bank or trust company is rated no less than AA (or the then equivalent grade) by Dominion Bond Rating Service Limited, or any other nationally recognized bond rating service; and (iv) commercial paper rated no less than R-1 (or the then equivalent grade) by Dominion Bond Rating Service Limited or A-1 (or the then equivalent grade) by CBRS Inc., having a maturity not in excess of one year; excluding any bonds or other evidences of indebtedness, certificates of deposit or commercial paper which a Canadian chartered bank may not hold as security under the Bank Act (Canada). "Loan Documents" shall mean this Agreement, the Notes, the Intercreditor Agreement, all Applications, all instruments, certificates and agreements now or hereafter executed or delivered to Agent or any Bank pursuant to any of the foregoing, and all amendments, modifications, renewals, extensions, increases and rearrangements of, and substitutions for, any of the foregoing. "Loans" shall mean Committed Loans and Competitive Loans. "Majority Banks" shall mean (a) prior to the termination of the Commitments, Banks having greater than 66-2/3% of the aggregate amount of the Commitments and (b) after the termination of the Commitments, Banks having greater than 66-2/3% of the aggregate principal amount of the Loans and the Letter of Credit Liabilities. "Material Adverse Effect" shall mean a material adverse effect on the business, condition (financial or otherwise), operations, properties (including proven oil and gas reserves) or prospects of the Company and its Subsidiaries, taken as a whole, or on the ability of the Company to perform its material obligations under any Loan Document to which it is a party. "Maximum Revolving Credit Available Amount" shall mean, at any date, an amount equal to the lesser of (i) the aggregate of the Commitments or (ii) the amount by which (a) the Borrowing Base exceeds (b) the aggregate outstanding amount of all Borrowing Base Debt of the Company and its Subsidiaries (other than ENSTAR Alaska). "Mesa Contract" shall mean that certain Purchase and Sale Agreement dated February 6, 1991 executed by and among Mesa Limited Partnership, a Delaware limited partnership, Mesa Operating Limited Partnership, a Delaware limited partnership, and Mesa Midcontinent Limited Partnership, a Delaware limited partnership, as Sellers, and the Company, as Buyer, as amended by that certain First Amendment to Purchase and Sale Agreement dated February 22, 1991 and as further amended by that certain Second Amendment to Purchase and Sale Agreement dated March 8, 1991. "Net Proceeds of Production" shall mean, with respect to any Person, all revenue received by or credited to the account of such Person from the sale of Hydrocarbons and other minerals in, under or produced from their respective oil, gas and mineral properties after deducting royalties, overriding royalties, volumetric production payments with respect to pre-sales of Hydrocarbon production, production payments pledged to secure non-recourse financing payable solely out of such production payments, net profits interests and other burdens payable out of production, normal and reasonable operating expenses and severance, ad valorem, excise and windfall profit taxes. "Notes" shall mean the Committed Notes and the Competitive Notes. "Obligations" shall mean, as at any date of determination thereof, the sum of the following: (i) the aggregate principal amount of Loans outstanding hereunder plus (ii) the aggregate amount of the Letter of Credit Liabilities hereunder plus (iii) all other liabilities, obligations and indebtedness of the Company or any Subsidiary of the Company under any Loan Document. "Oil and Gas Reserves Component Value" shall mean (A) prior to the initial Borrowing Base Determination, $490,000,000 and (B) thereafter, that amount of Indebtedness that the Super Majority Banks shall agree can be supported by the Included Reserves, after an engineering and economic review of the Included Reserves conducted by the Banks using customary standards for oil and gas lending. "Oil and Gas Subsidiaries" shall mean any Subsidiary of the Company whose assets consist primarily of oil and gas properties. As of the date hereof, the Oil and Gas Subsidiaries are listed as such on Exhibit A hereto. "Organizational Documents" shall mean, with respect to a corporation, the certificate of incorporation, articles of incorporation and bylaws of such corporation; with respect to a partnership, the partnership agreement establishing such partnership; with respect to a joint venture, the joint venture agreement establishing such joint venture, and with respect to a trust, the instrument establishing such trust; in each case including any and all modifications thereof as of the date of the Loan Document referring to such Organizational Document. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" shall mean an individual, a corporation, a company, a bank, a voluntary association, a partnership, a trust, an unincorporated organization, any Governmental Authority or any other entity. "Pipeline Operations" shall mean the natural gas gathering and transmission, gas liquids plant, gas marketing, engineering and construction and liquids pipeline operations of the Company and its Subsidiaries, excluding any portion of such operations attributable to ENSTAR Alaska. "Plan" shall mean an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (a) maintained by the Company or any ERISA Affiliate for employees of the Company or any ERISA Affiliate or (b) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which the Company or any ERISA Affiliate is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Post-Default Rate" shall mean, in respect of any principal of any Loan, any Reimbursement Obligation or any other amount payable by the Company under this Agreement or any other Loan Document which is not paid when due (whether at stated maturity, by acceleration, or otherwise), a rate per annum during the period commencing on the due date until such amount is paid in full equal to the lesser of (a) the sum of (x) with respect to Eurodollar Loans, 2% per annum plus the applicable Eurodollar Rate then in effect plus the Applicable Margin for Eurodollar Loans until the expiration of the applicable Interest Period, (y) with respect to Competitive Loans, 2% per annum plus the applicable fixed rate offered by the applicable Bank and accepted by the Company in accordance with Section 2.10 hereof (or, in the case of the Existing Competitive Loans, the applicable fixed rate specified on Exhibit D hereto), and (z) with respect to Alternate Base Rate Loans and with respect to Eurodollar Loans after the expiration of the applicable Interest Period (and also with respect to indebtedness other than Loans), 2% plus the Alternate Base Rate as in effect from time to time plus the Applicable Margin for Alternate Base Rate Loans or (b) the Highest Lawful Rate. "Principal Office" shall mean the principal office of Agent, presently located at 1 Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention: Agent Services. "Quarterly Dates" shall mean the last day of each March, June, September and December, provided that, if any such date is not a Business Day, then the relevant Quarterly Date shall be the next succeeding Business Day. "Redemption Obligations" shall mean with respect to any Person all mandatory redemption obligations of such Person with respect to preferred stock or other equity securities issued by such Person or put rights in favor of the holder of such preferred stock or other equity securities, to the extent that the redemption obligations will arise prior to the stated maturity of the Obligations. "Reference Banks" shall mean Chase and such other Banks (up to a maximum of two (2) additional Banks) as the Company, with the approval of Agent (which approval shall not be unreasonably withheld), may from time to time designate. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time and any successor or other regulation relating to reserve requirements. "Regulatory Change" shall mean, with respect to any Bank, any change on or after the date of this Agreement in Legal Requirements (including Regulation D) or the adoption or making on or after such date of any interpretation, directive or request applying to a class of banks including such Bank under any Legal Requirements (whether or not having the force of law) by any Governmental Authority. "Reimbursement Obligations" shall mean, as at any date, the obligations of the Company then outstanding in respect of Letters of Credit under this Agreement, to reimburse Agent for the account of the applicable Issuer for the amount paid by the applicable Issuer in respect of any drawing under such Letter of Credit. "Relevant Party" shall mean the Company and each other party to any of the Loan Documents other than (a) the Banks and (b) Agent. "Request for Extension of Credit" shall mean a request for extension of credit duly executed by the chief executive officer, chief financial officer, or treasurer of the Company, appropriately completed and substantially in the form of Exhibit C attached hereto. "Requested Redetermination" shall have the meaning assigned to such term in Section 2.9 hereof. "Requesting Banks" shall mean (a) prior to the termination of the Commitments, Banks having greater than 50% of the aggregate amount of the Commitments and (b) after the termination of the Commitments, Banks having greater than 50% of the aggregate principal amount of the Loans and the Letter of Credit Liabilities. "Requirements of Environmental Law" means all requirements imposed by any law (including for example and without limitation The Resource Conservation and Recovery Act and The Comprehensive Environmental Response, Compensation, and Liability Act), rule, regulation, or order of any federal, state or local executive, legislative, judicial, regulatory or administrative agency, board or authority in effect at the applicable time which relate to (i) noise; (ii) pollution, protection or clean-up of the air, surface water, ground water or land; (iii) solid, gaseous or liquid waste generation, treatment, storage, disposal or transportation; (iv) exposure to Hazardous Substances; (v) the safety or health of employees or (vi) regulation of the manufacture, processing, distribution in commerce, use, discharge or storage of Hazardous Substances. "Reserve Requirement" shall mean, for any Eurodollar Loan for any Interest Period therefor, the stated maximum rate for all reserves (including any marginal, supplemental or emergency reserves) required to be maintained during such Interest Period under Regulation D by any member bank of the Federal Reserve System or any Bank against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect and include any other reserves required to be maintained by such member banks by reason of any Regulatory Change against (i) any category of liabilities which includes deposits by reference to which the Eurodollar Rate is to be determined as provided in the definition of "Eurodollar Base Rate" in this Section 1.1 or (ii) any category of extensions of credit or other assets which include Eurodollar Loans. Any determination by Agent of the Reserve Requirement shall be conclusive and binding, absent manifest error, and may be made using any reasonable averaging and attribution method. "Responsible Officer" shall mean the chairman of the board, the president, any executive vice president, the vice president of finance and administration, the chief executive officer or the chief operating officer or any equivalent officer (regardless of title) and in the case of the Company, any other vice president, and in respect of financial or accounting matters, shall also include the chief financial officer, the treasurer and the controller or any equivalent officer (regardless of title). "Revolving Credit Availability Period" shall mean the period from and including the date hereof to but not including December 31, 2002 or the date the Commitments are terminated pursuant to Section 11.1, whichever is first to occur. "Revolving Credit Obligations" shall mean, as at any date of determination thereof, the sum of the following (determined without duplication): (i) the aggregate principal amount of Loans outstanding hereunder plus (ii) the aggregate amount of the Letter of Credit Liabilities hereunder. "Scheduled Redetermination" shall having the meaning assigned to such term in Section 2.9 hereof. "Senior Debt" shall mean Indebtedness having a weighted average maturity at least seven (7) years from the date of issuance and having no conditions precedent or covenants materially more onerous to the Company than the conditions precedent and covenants contained herein and in the other Loan Documents with respect to the Loans. The documents evidencing any Senior Debt shall contain a provision substantially identical to Section 10.2(y) hereof permitting Liens securing the Notes and the other Obligations on a pari passu basis with such Senior Debt. "Short Term Borrowings" shall mean, as of any date, the aggregate outstanding principal amount of ENSTAR Alaska's borrowed money Indebtedness (other than borrowed money Indebtedness owed by ENSTAR Natural Gas Company to APC or by APC to ENSTAR Natural Gas Company) which is not Funded Indebtedness. "Short Term Borrowings Measuring Period" shall mean that period of ninety (90) consecutive days during the twelve-month period ending on the applicable date that average Short Term Borrowings were lower than any other period of ninety (90) consecutive days during such twelve-month period. "Subordinated Debt" shall mean Indebtedness of the Company having a weighted average maturity at least seven (7) years from the date of issuance and having no conditions precedent or covenants materially more onerous to the Company than the conditions precedent and covenants contained herein and in the other Loan Documents with respect to the Loans and which is expressly made subordinate and junior in right of payment to the Obligations and in respect of any collateral or security by the express terms of the instruments evidencing the Subordinated Debt or the indenture or other similar instrument under which the Subordinated Debt is issued (which indenture or other instrument will be binding on all holders of such Subordinated Debt), by provisions not more favorable to the holders of the Subordinated Debt than the following: (a) in the event a Default exists and is continuing, no payment of principal or interest will be made on account of Subordinated Debt and no remedy for default shall be exercised until (i) such Default will have been cured or waived or until the Obligations will have been paid in full (or provisions made therefor reasonably satisfactory to the Banks) or (ii) 179 days after the occurrence of such Default (as to which the Banks have knowledge as a result of having received notice from the Company pursuant to this Agreement or otherwise) and no action being taken by the Banks with respect to such Default, whichever occurs earlier; (b) upon the occurrence of any of the events or proceedings specified in Subsections 11.1(f) or (g) hereof (or, as to any Subsidiary of the Company, Subsection 11.1(j) to the extent that it refers to Subsections 11.1(f) or (g)), the holders of any Obligations will be entitled to receive payment in full of all principal or interest on all Obligations before the holders of the Subordinated Debt are entitled to receive any payment on account of principal or interest on the Subordinated Debt, and to that end (but subject to the power of a court of competent jurisdiction to make other provision) the holders of the Obligations will be entitled to receive distributions of any kind or character, whether in cash or property or securities (other than equity securities and other securities establishing rights in the holders thereof which are subordinate to the rights of the holders of the Obligations in accordance with this definition of Subordinated Debt), which may be or would otherwise be payable or deliverable in any such proceedings in respect of the Subordinated Debt (provided that, the Subordinated Debt may provide that if the Obligations have been paid in full or provision therefor reasonably satisfactory to the Banks has been made, the holders of the Subordinated Debt will be subrogated to the rights of the holders of the Obligations); (c) in the event that any Subordinated Debt is declared due and payable before its expressed maturity because of the occurrence of an event of default thereunder (under circumstances when the provisions of the foregoing clauses (a) and (b) will not be applicable), the holders of the Obligations at the time such Subordinated Debt becomes due and payable because of such an event of default will be entitled to receive payment in full of all Obligations (or have provision therefor satisfactory to the Banks made) before the holders of the Subordinated Debt are entitled to receive any payment on account of the principal or interest on the Subordinated Debt; and (d) no holder of the Obligations will be prejudiced in its right to enforce subordination of the Subordinated Debt by any act or failure to act on the part of the Company or the part of the holders of the Obligations; provided that, the Subordinated Debt may provide that the foregoing provisions are solely for the purpose of defining the relative rights of the holders of the Obligations on the one hand, and the holders of the Subordinated Debt on the other hand, and that nothing therein will impair, as between the Company and the holders of the Subordinated Debt, the obligation of the Company, which may be unconditional and absolute, to pay to the holders of the Subordinated Debt the principal and interest thereon in accordance with its terms, nor will anything herein prevent the holders of the Subordinated Debt from exercising all remedies otherwise permitted by applicable law or thereunder upon default thereunder, subject to the rights under clauses (a), (b) and (c) above of the holders of the Obligations to receive cash, property or securities otherwise payable or deliverable to the holders of the Subordinated Debt. "Subsidiary" shall mean, with respect to any Person (the "parent"), (a) any corporation of which at least a majority of the outstanding shares of stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by the parent or one or more of the Subsidiaries of the parent or by the parent and one or more of the Subsidiaries of the parent, and (b) any partnership, limited partnership, joint venture or other form of entity, the majority of the legal or beneficial ownership of which is at the time directly or indirectly owned or controlled by the parent or one or more of the Subsidiaries of the parent or by the parent and one or more of the Subsidiaries of the parent. "Super Majority Banks" shall mean (a) prior to the termination of the Commitments, Banks having 75% or more of the aggregate amount of the Commitments and (b) after the termination of the Commitments, Banks having 75% or more of the aggregate principal amount of the Loans and the Letter of Credit Liabilities. "Tangible Net Worth" shall mean the sum of the redemption price of preferred stock, par value of common stock, capital in excess of par value of common stock (additional paid-in capital) and retained earnings, less treasury stock, goodwill, deferred development costs, franchises, licenses, patents, trademarks and copyrights and all other assets which are properly classified as intangible assets in accordance with GAAP less any Redemption Obligations. "Type" shall have the meaning assigned to such term in Section 1.3 hereof. "Unfunded Liabilities" shall mean, with respect to any Plan, at any time, the amount (if any) by which (a) the present value of all benefits under such Plan exceeds (b) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent actuarial valuation report for such Plan, but only to the extent that such excess represents a potential liability of any ERISA Affiliate to the PBGC or a Plan under Title IV of ERISA. 1.2 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be delivered hereunder shall be prepared, in accordance with GAAP. To enable the ready determination of compliance with the provisions hereof, the Company will not change from December 31 in each year the date on which its fiscal year ends, nor from March 31, June 30 and September 30 the dates on which the first three fiscal quarters in each fiscal year end. 1.3 Types of Loans. Loans hereunder are distinguished by "Type". The "Type" of a Loan refers to the determination whether such Loan is a Eurodollar Loan, a Competitive Loan or an Alternate Base Rate Loan. 1.4 Miscellaneous. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Any reference to Sections shall refer to Sections of this Agreement. Section 2. Commitments; Borrowing Base Determinations; Competitive Bid Facility. 2.1 Committed Loans. From time to time on or after the date hereof and during the Revolving Credit Availability Period, each Bank shall make Committed Loans under this Section 2.1 to the Company in an aggregate principal amount at any one time outstanding (including its Commitment Percentage of all Letter of Credit Liabilities at such time) up to but not exceeding such Bank's Commitment Percentage of the amount by which the Maximum Revolving Credit Available Amount exceeds the aggregate unpaid principal balance of all Competitive Loans and Letter of Credit Liabilities from time to time outstanding. Subject to the conditions herein, any such Committed Loan repaid prior to the end of the Revolving Credit Availability Period may be reborrowed pursuant to the terms of this Agreement; provided, that any and all such Committed Loans shall be due and payable in full at the end of the Revolving Credit Availability Period. 2.2 Letters of Credit. (a) Letters of Credit. Subject to the terms and conditions hereof, and on the condition that aggregate Letter of Credit Liabilities shall never exceed $100,000,000, the Company shall have the right, in addition to Committed Loans provided for in Section 2.1 hereof, to utilize the Commitments from time to time from and after the Effective Date through the expiration of the Revolving Credit Availability Period by obtaining the issuance of letters of credit for the account of the Company and on behalf of the Company by the applicable Issuer if the Company shall so request in the notice referred to in Section 2.2(b)(i) (such letters of credit being collectively referred to as the "Letters of Credit"). Upon the date of the issuance of a Letter of Credit, the applicable Issuer shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from the applicable Issuer, a participation, to the extent of such Bank's Commitment Percentage, in such Letter of Credit and the related Letter of Credit Liabilities. Any Letter of Credit having an expiry date after the end of the Revolving Credit Availability Period shall have been fully Covered or shall be backed by a letter of credit in form and substance, and issued by an issuer, acceptable to Agent in its reasonably exercised discretion. Subject to the terms and conditions hereof, upon the request of the Company, if Chase is the designated Issuer, Chase shall issue the applicable Letter of Credit and if any other Bank is the designated Issuer, such Bank may, but shall not be obligated to, issue such Letter of Credit. (b) Additional Provisions. The following additional provisions shall apply to each Letter of Credit: (i) The Company shall give Agent at least three (3) Business Days' prior notice (effective upon receipt) specifying the proposed Issuer and the date such Letter of Credit is to be issued and describing the proposed terms of such Letter of Credit and the nature of the transaction proposed to be supported thereby, and shall furnish such additional information regarding such transaction as Agent or the applicable Issuer may reasonably request. Upon receipt of such notice Agent shall promptly notify each Bank of the contents thereof and of such Bank's Commitment Percentage of the amount of such proposed Letter of Credit. (ii) No Letter of Credit may be issued if after giving effect thereto (A) the aggregate outstanding principal amount of Committed Loans plus the aggregate Letter of Credit Liabilities would exceed (B) the amount by which the Maximum Revolving Credit Available Amount exceeds the aggregate unpaid principal balance of all Competitive Loans and Letter of Credit Liabilities from time to time outstanding. On each day during the period commencing with the issuance of any Letter of Credit and until such Letter of Credit shall have expired or been terminated, the Commitment of each Bank shall be deemed to be utilized for all purposes hereof in an amount equal to such Bank's Commitment Percentage of the amount then available for drawings under such Letter of Credit. (iii) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment thereunder, the applicable Issuer shall promptly notify the Company and each Bank as to the amount to be paid as a result of such demand and the payment date. If at any time the applicable Issuer shall have made a payment to a beneficiary of a Letter of Credit in respect of a drawing under such Letter of Credit, each Bank will pay to the applicable Issuer immediately upon demand by the applicable Issuer at any time during the period commencing after such payment until reimbursement thereof in full by the Company, an amount equal to such Bank's Commitment Percentage of such payment, together with interest on such amount for each day from the date of demand for such payment (or, if such demand is made after 11:00 a.m. Houston, Texas time on such date, from the next succeeding Business Day) to the date of payment by such Bank of such amount at a rate of interest per annum equal to the Federal Funds Rate for such period. (iv) The Company shall be irrevocably and unconditionally obligated forthwith to reimburse the applicable Issuer for any amount paid by the applicable Issuer upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind. Such reimbursement may, subject to satisfaction of any other applicable conditions set forth in this Agreement, including the existence of the Maximum Revolving Credit Available Amount (after adjustment in the same to reflect the elimination of the corresponding Letter of Credit Liability) be made by borrowing of Loans. In the event any such reimbursement is not made by borrowing of Loans, the Company shall make such reimbursement in immediately available funds within five (5) days after demand therefor by the applicable Issuer. The applicable Issuer will pay to each Bank such Bank's Commitment Percentage of all amounts received from the Company for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Letter of Credit, but only to the extent such Bank has made payment to the applicable Issuer in respect of such Letter of Credit pursuant to clause (iii) above. (v) The Company will pay to Agent at the Principal Office for the account of each Bank a fee on such Bank's Commitment Percentage of the daily average amount available for drawings under each Letter of Credit, in each case for the period from and including the date of issuance of such Letter of Credit to and including the date of expiration or termination thereof at a rate per annum equal to the Letter of Credit Fee in effect from time to time, such fee to be paid in arrears on the Quarterly Dates and on the date of the expiration or termination thereof. Agent will pay to each Bank, promptly after receiving any payment in respect of letter of credit fees referred to in the preceding sentence of this clause (v), an amount equal to such Bank's Commitment Percentage of such fees. The Company shall pay to the applicable Issuer an administration and issuance fee in an amount equal to 1/8 of 1% per annum of the daily average amount available for drawings under such Letter of Credit, in each case for the period from and including the date of issuance of such Letter of Credit to and including the date of expiration or termination thereof, such fee to be paid in arrears on the Quarterly Dates and on the date of the expiration or termination thereof. Such administration and issuance fee shall be retained by the applicable Issuer. (vi) The issuance by the applicable Issuer of each Letter of Credit shall, in addition to the conditions precedent set forth in Section 7 hereof, be subject to the conditions precedent that such Letter of Credit shall be in such form and contain such terms as shall be reasonably satisfactory to the applicable Issuer and that the Company shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as the applicable Issuer shall have reasonably requested and are not inconsistent with the terms of this Agreement including an Application therefor. In the event of a conflict between the terms of this Agreement and the terms of any Application, the terms of this Agreement shall control. Without limiting the generality of the foregoing sentence, in the event any such Application shall include requirements for Cover, it is agreed that there shall be no requirements for the Company to provide Cover except as expressly required in this Agreement. (c) Indemnification. The Company hereby indemnifies and holds harmless Agent, the applicable Issuer and each Bank from and against any and all claims and damages, losses, liabilities, costs or expenses which such Bank, the applicable Issuer or Agent may incur (or which may be claimed against such Bank, the applicable Issuer or Agent by any Person whatsoever) in connection with the execution and delivery or transfer of or payment or failure to pay under any Letter of Credit, including, without limitation, any claims, damages, losses, liabilities, costs or expenses which Agent, the applicable Issuer or such Bank, as the case may be, may incur (whether incurred as a result of its own negligence or otherwise) by reason of or in connection with the failure of any other Bank (whether as a result of its own negligence or otherwise) to fulfill or comply with its obligations to Agent, the applicable Issuer or such Bank, as the case may be, hereunder (but nothing herein contained shall affect any rights the Company may have against such defaulting Bank); provided that, the Company shall not be required to indemnify any Bank, the applicable Issuer or Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of the party seeking indemnification, or (ii) by such Bank's, the applicable Issuer's or Agent's, as the case may be, failure to pay under any Letter of Credit after the presentation to it of a request required to be paid under applicable law. Nothing in this Section 2.2(c) is intended to limit the obligations of the Company under any other provision of this Agreement. (d) Co-issuance or Separate Issuance of Letters of Credit. The Company may, at its option, request that any requested Letter of Credit which exceeds $1,000,000 be issued severally, but not jointly, by any two or more of the Banks or issued through separate Letters of Credit issued by any two or more of the Banks, respectively, each in an amount equal to a portion of the amount of the applicable Letter of Credit requested by the Company. In either such event, the Banks issuing such Letters of Credit shall each constitute an "Issuer" and the Letters of Credit so issued shall each constitute a "Letter of Credit" for all purposes hereunder and under the Loan Documents. Notwithstanding the foregoing, no Bank other than Chase shall have any obligation to issue any Letter of Credit, but may do so at its option. 2.3 Reductions and Changes of Commitments. (a) Mandatory. (i) The total Commitment of the Banks shall be reduced as follows:
Reduction Resulting Revolving Reduction Date Amount Credit Commitment March 31, 1999 $40,000,000 $610,000,000 June 30, 1999 $40,000,000 $570,000,000 September 30, 1999 $40,000,000 $530,000,000 December 31, 1999 $40,000,000 $490,000,000 March 31, 2000 $40,000 000 $450,000,000 June 30, 2000 $40,000,000 $410,000,000 September 30, 2000 $40,000,000 $370,000,000 December 31, 2000 $40,000,000 $330,000,000 March 31, 2001 $40,000,000 $290,000,000 June 30, 2001 $40,000,000 $250,000,000 September 30, 2001 $40,000,000 $210,000,000 December 31, 2001 $40,000,000 $170,000,000 March 31, 2002 $40,000,000 $130,000,000 June 30, 2002 $40,000,000 $90,000,000 September 30, 2002 $40,000,000 $50,000,000 December 31, 2002 $50,000,000 $0
(ii) On December 31, 2002, all Commitments shall be terminated in their entirety unless terminated at an earlier date pursuant to Section 11.1. (b) Optional. The Company shall have the right to terminate or reduce the unused portion of the Commitments at any time or from time to time, provided that: (i) the Company shall give notice of each such termination or reduction to Agent as provided in Section 5.5 hereof and (ii) each such partial reduction shall be permanent and in an aggregate amount at least equal to $5,000,000. (c) No Reinstatement. Any reduction in or termination of the Commitments may not be reinstated without the approval of Agent and any Bank whose Commitment (or the applicable part thereof) is to be so reinstated. 2.4 Fees. (a) The Company shall pay to Agent for the account of each Bank a facility fee accruing from the Effective Date, computed for each day at a rate per annum equal to the Facility Fee Percentage times such Bank's pro rata share (based on its respective Commitment) of the Maximum Revolving Credit Available Amount on such day. Such facility fees shall be payable on the Quarterly Dates and on the earlier of the date the Commitments are terminated in their entirety or the last day of the Revolving Credit Availability Period. (b) The Company shall pay to Agent for the account of each Bank a commitment fee with respect to such Bank's Commitment accruing from the Effective Date, computed for each day at a rate per annum equal to 0.05% times the amount of such Bank's pro rata share (based on its respective Commitment) of (i) the aggregate Commitments on such day minus (ii) the sum of the aggregate outstanding Loans on such day plus the aggregate Letter of Credit Liabilities outstanding on such day. Commitment fees accruing pursuant to this clause (b) shall be payable on the Quarterly Dates and on the earlier of the date the Commitments are terminated in their entirety or the last day of the Revolving Credit Availability Period. (c) The Company shall pay to Agent for the account of each Bank an additional facility fee upon any increase in such Bank's available Commitment as a result of an increase in the Borrowing Base or a decrease in Borrowing Base Debt. Such additional facility fee shall be in an amount equal to such Bank's pro rata share (based on its respective Commitment) of the product of (i) one-fourth (1/4th) of the amount (if any) by which the then current Facility Fee Percentage exceeds 0.125% times (ii) the amount of such increase in a Bank's available Commitment as a result of an increase in the Borrowing Base or a decrease in Borrowing Base Debt. Payment of such additional fee resulting from an increase in the Borrowing Base shall be due and payable upon the effective date of such increase in the Borrowing Base. Payment of such additional fee resulting from a decrease in Borrowing Base Debt shall be due and payable upon delivery of a Request for Extension of Credit pursuant to Section 7.2 hereof or a certificate of compliance pursuant to Sections 9.2(a)(i) or 9.2(b) hereof, whichever shall first occur, reflecting such decrease in Borrowing Base Debt. The facility fee provided for in this Section 2.4(c) shall be payable notwithstanding any prior decrease in the available Commitments which may have occurred as a result of a decrease in the Borrowing Base or an increase in Borrowing Base Debt. (d) The Company agrees to pay to Agent fees as provided in the separate letter agreements executed by and between Agent and the Company. 2.5 Affiliates; Lending Offices. (a) Any Bank may, if it so elects, fulfill any obligation to make a Eurodollar Loan or Competitive Loan by causing a branch, foreign or otherwise, or Affiliate of such Bank to make such Loan and may transfer and carry such Loan at, to or for the account of any branch office or Affiliate of such Bank; provided that, in such event for the purposes of this Agreement such Loan shall be deemed to have been made by such Bank and the obligation of the Company to repay such Loan shall nevertheless be to such Bank and shall be deemed to be held by such Bank and, to the extent of such Loan, to have been made for the account of such branch or Affiliate. (b) Notwithstanding any provision of this Agreement to the contrary, each Bank shall be entitled to fund and maintain its funding of all or any part of its Loans hereunder in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if such Bank had actually funded and maintained each Eurodollar Loan during each Interest Period through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the Eurodollar Rate for such Interest Period. 2.6 Several Obligations. The failure of any Bank to make any Loan to be made by it on the date specified therefor shall not relieve any other Bank of its obligation to make its Loan on such date, but neither Agent nor any Bank shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank. 2.7 Notes. The Committed Loans made by each Bank shall be evidenced by a single Committed Note of the Company in substantially the form of Exhibit E hereto payable to the order of such Bank in a principal amount equal to the Commitment of such Bank, and otherwise duly completed. The Competitive Loans made by each Bank shall be evidenced by a single Competitive Note of the Company in substantially the form of Exhibit O hereto payable to the order of such Bank and otherwise duly completed. Each Bank is hereby authorized by the Company to endorse on the schedules (or a continuations thereof) attached to the Notes of such Bank, to the extent applicable, the date, amount and Type of and the Interest Period for each Loan made by such Bank to the Company hereunder, and the amount of each payment or prepayment of principal of such Loan received by such Bank, provided, that any failure by such Bank to make any such endorsement shall not affect the obligations of the Company under such Note or hereunder in respect of such Loan. 2.8 Use of Proceeds. The proceeds of the Loans shall be used for general corporate purposes. 2.9 Borrowing Base Determinations. (a) Within 45 days after receipt of the Engineering Report required to be delivered each year, commencing with the Engineering Report required to be delivered in 1994, Agent shall notify the Company, in writing, of the Oil and Gas Reserves Component Value determined on the basis of such Engineering Report and the Borrowing Base determined on the basis of such Oil and Gas Reserves Component Value, together with the determination of the Alaskan Gas Component Value. Each such determination is herein called a "Scheduled Redetermination". Each Scheduled Redetermination shall be effective when the Company is notified of the amount of the redetermined Borrowing Base by Agent. (b) The Requesting Banks or the Company may, from time to time (but not more frequently than one time during any calendar year by the Requesting Banks and one time during any calendar year by the Company), request a redetermination of the Oil and Gas Reserves Component Value based upon the most recently received Engineering Report or Company Report, as the case may be, and of the Borrowing Base based upon such redetermination of the Oil and Gas Reserves Component Value, together with the determination of the Alaskan Gas Component Value. Each such requested redetermination is herein called a "Requested Redetermination." Each Requested Redetermination shall be effective when the Company is notified, in writing, of the amount of the redetermined Borrowing Base by Agent. 2.10 Competitive Bid Procedure. (a) In order to request Competitive Bids, the Company shall hand deliver, telex or telecopy to Agent a duly completed request substantially in the form of Exhibit K, with the blanks appropriately completed (a "Competitive Bid Request"), to be received by Agent not later than 11:00 a.m., Houston, Texas time, five Business Days before the date specified for a proposed Competitive Loan. No Alternate Base Rate Loan shall be requested in, or, except pursuant to Section 6, made pursuant to, a Competitive Bid Request. A Competitive Bid Request that does not conform substantially to the format of Exhibit K may be rejected at Agent's sole discretion, and Agent shall promptly notify the Company of such rejection by telecopier. Each Competitive Bid Request shall in each case refer to this Agreement and specify (x) the date of such Competitive Loans (which shall be a Business Day) and the aggregate principal amount thereof (which shall not be less than $25,000,000 or greater than the unused portion of the Maximum Revolving Credit Available Amount on such date and shall be an integral multiple of $5,000,000) and (y) the Interest Period with respect thereto (which may not end after the termination of the Revolving Credit Availability Period). Promptly after its receipt of a Competitive Bid Request that is not rejected as aforesaid, Agent shall invite by telecopier (in substantially the form set forth in Exhibit L hereto) the Banks to bid, on the terms and conditions of this Agreement, to make Competitive Loans pursuant to such Competitive Bid Request. Notwithstanding the foregoing, Agent shall have no obligation to invite any Bank to make a Competitive Bid pursuant to this Section 2.10(a) until such Bank has delivered a properly completed Competitive Bid Administrative Questionnaire to Agent. (b) Each Bank may, in its sole discretion, make one or more Competitive Bids to the Company responsive to each Competitive Bid Request. Each Competitive Bid by a Bank must be received by Agent via telecopier, in the form of Exhibit M hereto, not later than 11:00 a.m., Houston, Texas time, four Business Days before the date specified for a proposed Competitive Loan. Competitive Bids that do not conform substantially to the format of Exhibit M may be rejected by Agent after conferring with, and upon the instruction of, the Company, and Agent shall notify the Bank of such rejection as soon as practicable. Each Competitive Bid shall refer to this Agreement and (x) specify the principal amount (which shall be in a minimum principal amount of $10,000,000 and in an integral multiple of $1,000,000 and which may equal the entire aggregate principal amount of the Competitive Loan requested by the Company) of the Competitive Loan that the Bank is willing to make to the Company, (y) specify the Competitive Bid Rate at which the Bank is prepared to make the Competitive Loan and (z) confirm the Interest Period with respect thereto specified by the Company in its Competitive Bid Request. A Competitive Bid submitted by a Bank pursuant to this paragraph (b) shall be irrevocable. (c) Agent shall, by 2:00 p.m. four Business Days before the date specified for a proposed Competitive Loan, notify the Company by telecopier of all the Competitive Bids made, the Competitive Bid Rate and the maximum principal amount of each Competitive Loan in respect of which a Competitive Bid was made and the identity of the Bank that made each bid. Agent shall send a copy of all Competitive Bids to the Company for its records as soon as practicable after completion of the bidding process set forth in this Section 2.10. (d) The Company may in its sole and absolute discretion, subject only to the provisions of this Section 2.10(d), accept or reject any Competitive Bid referred to in Section 2.10(c); provided, however, that the aggregate amount of the Competitive Bids so accepted by the Company may not exceed the principal amount of the Competitive Loan requested by the Company. The Company shall notify Agent by telecopier whether and to what extent it has decided to accept or reject any or all of the bids referred to in Section 2.10(c), not later than 11:00 a.m., Houston, Texas time, three Business Days before the date specified for a proposed Competitive Loan; provided, however, that (w) the failure by the Company to give such notice shall be deemed to be a rejection of all the bids referred to in Section 2.10(c) and (x) no bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of $10,000,000 and an integral multiple of $1,000,000. Notwithstanding the foregoing, if it is necessary for the Company to accept a pro rata allocation of the bids made in response to a Competitive Bid Request (whether pursuant to the events specified in clause (x) above or otherwise) and the available principal amount of Competitive Loans to be allocated among the Banks is not sufficient to enable Competitive Loans to be allocated to each Bank in a minimum principal amount of $10,000,000 and in integral multiples of $1,000,000, then the Company shall select the Banks to be allocated such Competitive Loans and shall round allocations up or down to the next higher or lower multiple of $1,000,000 as it shall deem appropriate. In addition, the Company shall be permitted under the foregoing procedures to accept a bid or bids in a principal amount of less than $10,000,000 (i) in order to enable the Company to accept bids equal to (but not in excess of) the principal amount of the Competitive Loan requested by the Company or (ii) in order to enable the Company to accept all remaining bids, or all remaining bids at a particular Competitive Bid Rate. A notice given by Company pursuant to this paragraph (d) shall be irrevocable. (e) Agent shall promptly notify each bidding Bank whether or not its Competitive Bid has been accepted (and if so, in what amount and at what Competitive Bid Rate) by telex or telecopier sent by Agent, and each successful bidder will thereupon become bound, subject to the other applicable conditions hereof, to make the Competitive Loan in respect of which its bid has been accepted. After completing the notifications referred to in the immediately preceding sentence, Agent shall (i) notify Agent of each Competitive Bid that has been accepted, the amount thereof and the Competitive Bid Rate therefor and (ii) notify each Bank of the aggregate principal amount of all Competitive Bids accepted. (f) No Competitive Loan shall be made within five Business Days of the date of any other Competitive Loan, unless the Company and Agent shall mutually agree otherwise. (g) If Agent shall at any time have a Commitment hereunder and shall elect to submit a Competitive Bid in its capacity as a Bank, it shall submit such bid directly to the Company one quarter of an hour earlier than the latest time at which the other Banks are required to submit their bids to Agent pursuant to paragraph (b) above. (h) All notices required by this Section 2.10 shall be made in accordance with Section 13.2 and the Competitive Bid Administrative Questionnaire most recently placed on file by each Bank with Agent. Section 3. Borrowings, Prepayments and Selection of Interest Rates. 3.1 Borrowings. The Company shall give Agent notice of each borrowing to be made hereunder as provided in Sections 2.10 and 5.5 hereof. Not later than 2:00 p.m. Houston, Texas time on the date specified for each such borrowing hereunder, each Bank shall make available the amount of the Loan, if any, to be made by it on such date to Agent, at its Principal Office, in immediately available funds, for the account of the Company. The amount so received by Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account designated by the Company maintained with Agent at the Principal Office. 3.2 Prepayments. (a) Optional Prepayments. Subject to the provisions of Sections 4, 5 and 6, the Company shall have the right to prepay, on any Business Day, in whole or in part, without the payment of any penalty or fee, Loans at any time or from time to time, provided that, the Company shall give Agent notice of each such prepayment as provided in Section 5.5 hereof. Eurodollar Loans and Competitive Loans may be prepaid on the last day of an Interest Period applicable thereto. Neither Eurodollar Loans nor Competitive Loans may be otherwise prepaid unless prepayment is accompanied by payment of all compensation required by Section 6. (b) Mandatory Prepayments and Cover; Borrowing Base Deficiency. (1) Reduction of Commitments. The Company shall from time to time on demand by Agent prepay the Loans (or provide Cover for Letter of Credit Liabilities) in such amounts as shall be necessary so that at all times the aggregate outstanding principal amount of all Revolving Credit Obligations shall not be in excess of the aggregate amount of the Commitments, as reduced from time to time pursuant to Section 2.3 hereof plus any Cover provided under this Section 3.2(b)(1). (2) Borrowing Base Deficiency. Should a Borrowing Base Deficiency occur, Agent may (and, at the direction of the Majority Banks, shall) notify the Company in writing of such Borrowing Base Deficiency. Within 30 days from and after the Borrowing Base Deficiency Notification Date, the Company shall, at its election, take one of the following actions: (i) execute and deliver to Agent security documents, in form and substance satisfactory to Agent and its counsel, securing the Notes and the other Obligations and covering additional assets, which are not included in the Borrowing Base and which are not then covered by any security documents securing the Notes or the other Obligations, of a type and nature, and having a value (determined by the Majority Banks using customary standards for lending) satisfactory to the Majority Banks; or (ii) make a payment on the Loans or Borrowing Base Debt of the Company or its Subsidiaries, as the Company may elect, in an amount sufficient to eliminate such Borrowing Base Deficiency, and deliver to Agent evidence satisfactory to Agent of any such payment of Borrowing Base Debt of the Company or its Subsidiaries. If the Company shall elect to execute and deliver security documents to Agent pursuant to subsection (i) above, it shall provide Agent and each Bank with descriptions of the assets to be collaterally assigned (together with current valuations, Engineering Reports and title evidence applicable thereto, each of which shall be in form and substance satisfactory to Agent) within 20 days after the Borrowing Base Deficiency Notification Date. If the Company fails to take either of the actions described above within such 30-day period, then without any necessity for notice to the Company or any other person, the Company shall become obligated to pay on the Loans three (3) installments, each in an amount equal to one-third (1/3rd) of the applicable Borrowing Base Deficiency, such installments to be due and payable on or before three (3), six (6) and nine (9) calendar months after the Borrowing Base Deficiency Notification Date, respectively. Payments of principal otherwise required hereunder shall be credited against such installments. (3) Asset Dispositions. If the Company or any Subsidiary sells, transfers or otherwise disposes of assets that have been given value in the most recent determination of the Borrowing Base and having a fair market value in the aggregate for the Company and such Subsidiaries in excess of $50,000,000 during the period from the effective date of any Borrowing Base Determination until the effective date of the next Borrowing Base Determination, the Borrowing Base shall be immediately reduced, until the effective date of the next Borrowing Base Determination, by an amount equal to (i) in the case of sale, transfer or other disposition of all or substantially all of the assets comprising (x) ENSTAR Alaska or (y) the Included Reserves, the value of such assets reflected in the most recent Borrowing Base, or if the value of the applicable asset reflected in the most recent Borrowing Base cannot be readily determined, the net sales proceeds realized from the sale, transfer or other disposition of such assets and (ii) in the case of sale, transfer or other disposition of less than all or substantially all of the assets comprising any of the business segments described in (x) or (y) above, the value of such assets reflected in the most recent Borrowing Base (if such value can be readily determined), or if the value of the applicable asset reflected in the most recent Borrowing Base cannot be readily determined, the net sales proceeds realized from the sale, transfer or other disposition of such assets. If such reduction shall result in a Borrowing Base Deficiency, then in lieu of the provisions of Section 3.2(b)(2) hereof, the Company shall immediately make a payment on the Loans in an amount equal to such Borrowing Base Deficiency. In addition to and cumulative of the foregoing, if a Borrowing Base Deficiency exists prior to such sale, transfer or other disposition of assets, then in lieu of the provisions of Section 3.2(b)(2) hereof, the Company shall immediately make a payment on the Loans in an amount equal to the lesser of the amount of the Borrowing Base Deficiency (after giving effect to the applicable sale, transfer or other disposition) or 100% of the net sales proceeds realized from the applicable sale, transfer or other disposition. 3.3 Selection of Interest Rates. Subject to the terms and provisions of this Agreement, the Company shall have the right either to convert any Loan (in whole or in part) into a Loan of another Type (provided that no such conversion of Eurodollar Loans or Competitive Loans shall be permitted other than on the last day of an Interest Period applicable thereto) or to continue such Loan (in whole or in part) as a Loan of the same Type. In the event the Company fails to so give such notice prior to the end of the applicable Interest Period with respect to any Eurodollar Loan or Competitive Loan, such Loan shall become an Alternate Base Rate Loan on the last day of such Interest Period. Section 4. Payments of Principal and Interest. 4.1 Repayment of Loans and Reimbursement Obligations. The Company will pay to Agent for the account of each Bank (a) the principal of each Loan made by such Bank on the dates provided in the respective Notes and as provided hereunder and (b) the amount of each Reimbursement Obligation promptly upon its occurrence. The amount of any Reimbursement Obligation may, if the applicable conditions precedent specified in Section 7 hereof have been satisfied, be paid with the proceeds of Loans. 4.2 Interest. (a) Subject to Section 13.6 hereof, the Company will pay to Agent for the account of each Bank interest on the unpaid principal amount of each Loan made by such Bank for the period commencing on the date of such Loan to but excluding the date such Loan shall be paid in full, at the lesser of (I) the following rates per annum: (i) if such Loan is an Alternate Base Rate Loan, the Alternate Base Rate plus the Applicable Margin, (ii) if such Loan is a Eurodollar Loan, the applicable Eurodollar Rate plus the Applicable Margin, and (iii) if such Loan is a Competitive Loan, the applicable fixed rate offered by the applicable Bank and accepted by the Company in accordance with Section 2.10 hereof (or, in the case of Existing Competitive Loans, the applicable fixed rate specified on Exhibit D hereto), or (II) the Highest Lawful Rate. (b) Notwithstanding any of the foregoing but subject to Section 13.6 hereof, the Company will pay to Agent for the account of each Bank interest at the applicable Post-Default Rate on any principal of any Loan made by such Bank, on any Reimbursement Obligation and on any other amount payable by the Company hereunder to or for the account of such Bank (but, if such amount is interest, only to the extent legally allowed), which shall not be paid in full when due (whether at stated maturity, by acceleration or otherwise), for the period commencing on the due date thereof until the same is paid in full. (c) Accrued interest on each Loan shall be payable on the last day of each Interest Period for such Loan (and, if such Interest Period exceeds three months' duration, quarterly, commencing on the first quarterly anniversary of the first day of such Interest Period), except that (i) accrued interest payable at the Post-Default Rate shall be due and payable from time to time on demand of Agent or the Majority Banks (through Agent) and (ii) accrued interest on any amount prepaid or converted pursuant to Section 6 hereof shall be paid on the amount so prepaid or converted. Section 5. Payments; Pro Rata Treatment; Computations, Etc. 5.1 Payments. (a) Except to the extent otherwise provided herein, all payments of principal, interest, Reimbursement Obligations and other amounts to be made by the Company hereunder and under the Notes shall be made in Dollars, in immediately available funds, to Agent at the Principal Office (or in the case of a successor Agent, at the principal office of such successor Agent in the United States), not later than 11:00 a.m. Houston, Texas time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). Agent, or any Bank for whose account any such payment is made, may (but shall not be obligated to) debit the amount of any such payment which is not made by such time to any ordinary deposit account of the Company with Agent or such Bank, as the case may be. (b) The Company shall, at the time of making each payment hereunder or under any Note, specify to Agent the Loans or other amounts payable by the Company hereunder or thereunder to which such payment is to be applied. Each payment received by Agent hereunder or under any Note or any other Loan Document for the account of a Bank shall be paid promptly to such Bank, in immediately available funds for the account of such Bank's Applicable Lending Office. (c) If the due date of any payment hereunder or under any Note or any other Loan Document falls on a day which is not a Business Day, the due date for such payment (subject to the definition of Interest Period) shall be extended to the next succeeding Business Day and interest shall be payable for any principal so extended for the period of such extension. 5.2 Pro Rata Treatment. Except to the extent otherwise provided herein: (a) each borrowing from the Banks under Section 2.1 hereof shall be made ratably from the Banks on the basis of their respective Commitments and each payment of commitment or facility fees shall be made for the account of the Banks, and each termination or reduction of the Commitments of the Banks under Section 2.3 hereof shall be applied, pro rata, according to the Banks' respective Commitments; (b) each payment by the Company of principal of or interest on Loans of a particular Type shall be made to Agent for the account of the Banks pro rata in accordance with the respective unpaid principal amounts of such Loans held by the Banks; and (c) the Banks (other than the applicable Issuer) shall purchase from the applicable Issuer participations in the Letters of Credit to the extent of their respective Commitment Percentages. 5.3 Computations. Interest on Competitive Loans and interest based on the Eurodollar Base Rate or the Federal Funds Rate will be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable, unless the effect of so computing shall be to cause the rate of interest to exceed the Highest Lawful Rate, in which case interest shall be calculated on the basis of the actual number of days elapsed in a year composed of 365 or 366 days, as the case may be. All other interest and fees shall be computed on the basis of a year of 365 (or 366) days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. 5.4 Minimum and Maximum Amounts. Except for prepayments made pursuant to Section 3.2(b) hereof, and subject to the provisions of Section 2.10 hereof with respect to Competitive Loans, each borrowing and repayment of principal of Loans, each termination or reduction of Commitments, each optional prepayment and each conversion of Type shall be in an aggregate principal amount at least equal to (a) in the case of Eurodollar Loans and Competitive Loans, $5,000,000, and (b) in the case of Alternate Base Rate Loans, $1,000,000 (borrowings or prepayments of Loans of different Types or, in the case of Eurodollar Loans and Competitive Loans, having different Interest Periods at the same time hereunder to be deemed separate borrowings and prepayments for purposes of the foregoing, one for each Type or Interest Period). Upon any mandatory prepayment that would reduce Eurodollar Loans or Competitive Loans, respectively, having the same Interest Period to less than $5,000,000 such Loans shall automatically be converted into Alternate Base Rate Loans. Notwithstanding anything to the contrary contained in this Agreement, there shall not be, at any one time, more than eight (8) Interest Periods in effect with respect to Eurodollar Loans or Competitive Loans, in the aggregate. 5.5 Certain Actions, Notices, Etc. Notices to Agent of any termination or reduction of Commitments, of borrowings and prepayments, conversions and continuations of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by Agent not later than 11:00 a.m. Houston, Texas time on the number of Business Days prior to the date of the relevant termination, reduction, borrowing and/or repayment, conversion or continuance specified below:
Number of Business Notice Days Prior Termination or Reduction of Commitments 2 Borrowing or prepayment of or conversion into or continuance of Alternate Base Rate Loans same day Borrowing or prepayment of or conversion into or continuance of Eurodollar Loans 3
Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing or prepayment shall specify the amount and Type of the Loans to be borrowed or prepaid (subject to Sections 3.2(a) and 5.4 hereof), the date of borrowing or prepayment (which shall be a Business Day) and, in the case of Eurodollar Loans, the duration of the Interest Period therefor (subject to the definition of "Interest Period"). Each such notice of conversion of a Loan into a Loan of another Type shall identify such Loan (or portion thereof) being converted and specify the Type of Loan into which such Loan is being converted (subject to Section 5.4 hereof) and the date for conversion (which shall be a Business Day) and, unless such Loan is being converted into an Alternate Base Rate Loan, the duration (subject to the definition of "Interest Period") of the Interest Period therefor which is to commence as of the last day of the then current Interest Period therefor (or the date of conversion, if such Loan is being converted from an Alternate Base Rate Loan). Each such notice of continuation of a Loan (or portion thereof) as the same Type of Loan shall identify such Loan (or portion thereof) being continued (subject to Section 5.4 hereof) and, unless such Loan is an Alternate Base Rate Loan, the duration (subject to the definition of "Interest Period") of the Interest Period therefor which is to commence as of the last day of the then current Interest Period therefor. Agent shall promptly notify the affected Banks of the contents of each such notice. Notice of any prepayment having been given, the principal amount specified in such notice, together with interest thereon to the date of prepayment, shall be due and payable on such prepayment date. Section 2.10 hereof shall control the time periods applicable to Competitive Loans. 5.6 Non-Receipt of Funds by Agent. Unless Agent shall have been notified by a Bank or the Company (the "Payor") prior to the date on which such Bank is to make payment to Agent of the proceeds of a Loan to be made by it hereunder (or the payment of any amount by such Bank to reimburse the applicable Issuer for a drawing under any Letter of Credit) or the Company is to make a payment to Agent for the account of one or more of the Banks, as the case may be (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to Agent, Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if the Payor has not in fact made the Required Payment to Agent on or before such date, the recipient of such payment (or, if such recipient is the beneficiary of a Letter of Credit, the Company and, if the Company fails to pay the amount thereof to Agent forthwith upon demand, the Banks ratably in proportion to their respective Commitment Percentages) shall, on demand, pay to Agent the amount made available to it together with interest thereon in respect of the period commencing on the date such amount was so made available by Agent until the date Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such period. 5.7 Sharing of Payments, Etc. If a Bank shall obtain payment of any principal of or interest on any Loan made by it under this Agreement, or on any Reimbursement Obligation or other obligation then due to such Bank hereunder, through the exercise of any right of set-off, banker's lien, counterclaim or similar right, or otherwise, it shall promptly purchase from the other Banks participations in the Loans made, or Reimbursement Obligations or other obligations held, by the other Banks in such amounts, and make such other adjustments from time to time as shall be equitable to the end that all the Banks shall share the benefit of such payment (net of any expenses which may be incurred by such Bank in obtaining or preserving such benefit) pro rata in accordance with the unpaid principal and interest on the Obligations then due to each of them (provided, however, that the foregoing shall not apply to payments of Competitive Loans made prior to the termination of the Commitments following the occurrence of an Event of Default). To such end all the Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. The Company agrees, to the fullest extent it may effectively do so under applicable law, that any Bank so purchasing a participation in the Loans made, or Reimbursement Obligations or other obligations held, by other Banks may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans and Reimbursement Obligations or other obligations in the amount of such participation. Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other Indebtedness or obligation of the Company. Section 6. Yield Protection and Illegality. 6.1 Additional Costs. (a) Subject to Section 13.6, the Company shall pay to Agent, on demand for the account of each Bank from time to time such amounts as such Bank may determine to be necessary to compensate it for any costs incurred by such Bank which such Bank determines are attributable to its making or maintaining of any Eurodollar Loan or any Competitive Loan hereunder or its obligation to make any such Loan hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any of such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), in each case resulting from any Regulatory Change which: (i) subjects such Bank (or makes it apparent that such Bank is subject) to any tax (including without limitation any United States interest equalization tax), levy, impost, duty, charge or fee (collectively, "Taxes"), or any deduction or withholding for any Taxes on or from the payment due under any Eurodollar Loan or any Competitive Loan or other amounts due hereunder, other than income and franchise taxes of the jurisdiction (or any subdivision thereof) in which such Bank has an office or its Applicable Lending Office; or (ii) changes the basis of taxation of any amounts payable to such Bank under this Agreement or its Notes in respect of any of such Loans (other than changes which affect taxes measured by or imposed on the overall net income or franchise taxes of such Bank or of its Applicable Lending Office for any of such Loans by the jurisdiction (or any subdivision thereof) in which such Bank has an office or such Applicable Lending Office); or (iii) imposes or modifies or increases or deems applicable any reserve, special deposit or similar requirements (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Bank or loans made by such Bank, or against any other funds, obligations or other property owned or held by such Bank (including any of such Loans or any deposits referred to in the definition of "Eurodollar Base Rate" in Section 1.1 hereof) and such Bank actually incurs such additional costs. Each Bank (if so requested by the Company through Agent) will designate a different available Applicable Lending Office for the Eurodollar Loans or the Competitive Loans of such Bank or take such other action as the Company may request if such designation or action will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Bank, be disadvantageous to such Bank (provided that such Bank shall have no obligation so to designate an Applicable Lending Office for Eurodollar Loans located in the United States of America). Each Bank will furnish the Company with a statement setting forth the basis and amount of each request by such Bank for compensation under this Section 6.1(a); subject to Section 6.8, such certificate shall be conclusive, absent manifest error, and may be prepared using any reasonable averaging and attribution methods. (b) Without limiting the effect of the foregoing provisions of this Section 6.1, in the event that, by reason of any Regulatory Change, any Bank either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank which includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Bank which includes Eurodollar Loans or Competitive Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, if such Bank so elects by notice to the Company (with a copy to Agent), the obligation of such Bank to make Eurodollar Loans or Competitive Loans, as the case may be, hereunder shall be suspended until the date such Regulatory Change ceases to be in effect (in which case the provisions of Section 6.4 hereof shall be applicable). (c) Good faith determinations and allocations by any Bank for purposes of this Section 6.1 of the effect of any Regulatory Change on its costs of maintaining its obligations to make Loans or of making or maintaining Loans or on amounts receivable by it in respect of Loans, and of the additional amounts required to compensate such Bank in respect of any Additional Costs, shall be conclusive, absent manifest error. (d) The Company's obligation to pay Additional Costs and compensation with regard to each Eurodollar Loan and each Competitive Loan shall survive termination of this Agreement. 6.2 Limitation on Types of Loans. Anything herein to the contrary notwithstanding, if, with respect to any Eurodollar Loans: (a) Agent determines in good faith (which determination shall be conclusive) that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Base Rate" in Section 1.1 hereof are not being provided by the Reference Banks in the relevant amounts or for the relevant maturities for purposes of determining the rate of interest for such Loans for Interest Periods therefor as provided in this Agreement; or (b) the Majority Banks determine (which determination shall be conclusive) and notify Agent that the relevant rates of interest referred to in the definition of "Eurodollar Base Rate" in Section 1.1 hereof upon the basis of which the rates of interest for such Loans are to be determined do not accurately reflect the cost to such Banks of making or maintaining such Loans for Interest Periods therefor; or (c) Agent determines in good faith (which determination shall be conclusive) that by reason of circumstances affecting the interbank Dollar market generally, deposits in United States dollars in the relevant interbank Dollar market are not being offered for the applicable Interest Period and in an amount equal to the amount of the Eurodollar Loan requested by the Company; then Agent shall promptly notify the Company and each Bank thereof, and, so long as such condition remains in effect, the Banks shall be under no obligation to make Eurodollar Loans (but shall maintain until the end of the Interest Period then in effect the Eurodollar Loans then outstanding). 6.3 Illegality. Notwithstanding any other provision of this Agreement to the contrary, if (x) by reason of the adoption of any applicable Legal Requirement or any change in any applicable Legal Requirement or in the interpretation or administration thereof by any Governmental Authority or compliance by any Bank with any request or directive (whether or not having the force of law) of any central bank or other Governmental Authority or (y) circumstances affecting the relevant interbank Dollar market or the position of a Bank therein shall at any time make it unlawful or impracticable in the sole discretion of a Bank exercised in good faith for such Bank or its Applicable Lending Office to (a) honor its obligation to make Eurodollar Loans or Competitive Loans hereunder, or (b) maintain Eurodollar Loans or Competitive Loans hereunder, then such Bank shall promptly notify the Company thereof through Agent and such Bank's obligation to make or maintain Eurodollar Loans or Competitive Loans, as the case may be, hereunder shall be suspended until such time as such Bank may again make and maintain Eurodollar Loans or Competitive Loans, as the case may be (in which case the provisions of Section 6.4 hereof shall be applicable). Before giving such notice pursuant to this Section 6.3, such Bank will designate a different available Applicable Lending Office for the Eurodollar Loans or the Competitive Loans, as the case may be, of such Bank or take such other action as the Company may request if such designation or action will avoid the need to suspend such Bank's obligation to make Eurodollar Loans or Competitive Loans, as the case may be, hereunder and will not, in the sole opinion of such Bank exercised in good faith, be disadvantageous to such Bank (provided, that such Bank shall have no obligation so to designate an Applicable Lending Office for Eurodollar Loans located in the United States of America). 6.4 Substitute Alternate Base Rate Loans. If the obligation of any Bank to make or maintain Eurodollar Loans or Competitive Loans, as the case may be, shall be suspended pursuant to Section 6.1, 6.2 or 6.3 hereof, all Loans which would otherwise be made by such Bank as Eurodollar Loans or Competitive Loans, as the case may be, shall be made instead as Alternate Base Rate Loans (and, if an event referred to in Section 6.1(b) or 6.3 hereof has occurred and such Bank so requests by notice to the Company with a copy to Agent, each Eurodollar Loan or each Competitive Loan, as the case may be, of such Bank then outstanding shall be automatically converted into an Alternate Base Rate Loan on the date specified by such Bank in such notice) and, to the extent that Eurodollar Loans or Competitive Loans, as the case may be, are so made as (or converted into) Alternate Base Rate Loans, all payments of principal which would otherwise be applied to such Eurodollar Loans or such Competitive Loans, as the case may be, shall be applied instead to such Alternate Base Rate Loans. 6.5 Compensation. Subject to Section 13.6 hereof, the Company shall pay to Agent for the account of each Bank, within four (4) Business Days after demand therefor by such Bank through Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost or expense actually incurred by it (exclusive of any lost profits or opportunity costs) as a result of: (a) any payment, prepayment or conversion of a Eurodollar Loan or a Competitive Loan made by such Bank on a date other than the last day of an Interest Period for such Loan; or (b) any failure by the Company to borrow a Eurodollar Loan or a Competitive Loan to be made by such Bank on the date for such borrowing specified in the relevant notice of borrowing under Section 5.5 or Section 2.10 hereof or to convert a Eurodollar Loan or a Competitive Loan into an Alternate Base Rate Loan on such date after giving notice of such conversion; such compensation to include, without limitation, any loss or expense actually incurred (exclusive of any lost profits or opportunity costs) by reason of the liquidation or reemployment of deposits or other funds acquired by the applicable Bank to fund or maintain its share of any Loan. Subject to Section 6.8, each determination of the amount of such compensation by a Bank shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. No costs shall be payable under this Section solely by reason of the conversion of loans designated as "Eurodollar Loans" under that certain Amended and Restated Credit Agreement referred to in Section 13.15 hereof into the Existing Competitive Loans. 6.6 Additional Costs in Respect of Letters of Credit. If as a result of any Regulatory Change there shall be imposed, modified or deemed applicable any tax, reserve, special deposit or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued hereunder or participations in such Letters of Credit, and the result shall be to increase the cost to any Bank of issuing or maintaining any Letter of Credit or any participation therein, or reduce any amount receivable by any Bank hereunder in respect of any Letter of Credit or any participation therein (which increase in cost, or reduction in amount receivable, shall be the result of such Bank's reasonable allocation of the aggregate of such increases or reductions resulting from such event), then such Bank shall notify the Company through Agent, and upon demand therefor by such Bank through Agent, the Company (subject to Section 13.6 hereof) shall pay to such Bank, from time to time as specified by such Bank, such additional amounts as shall be sufficient to compensate such Bank for such increased costs or reductions in amount. Before making such demand pursuant to this Section 6.6, such Bank will designate a different available Applicable Lending Office for the Letter of Credit of such Bank or take such other action as the Company may request, if such designation or action will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Bank exercised in good faith, be disadvantageous to such Bank. A statement as to such increased costs or reductions in amount incurred by such Bank, submitted by such Bank to the Company, shall be conclusive as to the amount thereof, absent manifest error. 6.7 Capital Adequacy. If any Bank shall have determined that the adoption after the date hereof or effectiveness after the date hereof (whether or not previously announced) of any applicable law, rule, regulation or treaty regarding capital adequacy, or any change therein after the date hereof, or any change in the interpretation or administration thereof after the date hereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive after the date hereof regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority has or would have the effect of reducing the rate of return on such Bank's capital as a consequence of such Bank's obligations hereunder, under the Loans made by it, under the Letters of Credit and under the Notes held by it to a level below that which such Bank could have achieved but for such adoption, change or compliance (taking into consideration such Bank's policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, upon satisfaction of the conditions precedent set forth in this Section 6.7, upon demand by such Bank (with a copy to Agent), the Company (subject to Section 13.6 hereof) shall pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction. A certificate as to such amounts, submitted to the Company and Agent by such Bank, setting forth the basis for such Bank's determination of such amounts, shall constitute a demand therefor and shall be conclusive and binding for all purposes, absent manifest error. The Company shall pay the amount shown as due on any such certificate within four (4) Business Days after delivery of such certificate. Subject to Section 6.8, in preparing such certificate, a Bank may employ such assumptions and allocations of costs and expenses as it shall in good faith deem reasonable and may use any reasonable averaging and attribution method. 6.8 Limitation on Additional Charges; Substitute Banks; Non-Discrimination. Anything in this Section 6 notwithstanding: (a) the Company shall not be required to pay to any Bank reimbursement with regard to any costs or expenses, unless such Bank notifies the Company of such costs or expenses within 90 days after the date paid or incurred; (b) none of the Banks shall be permitted to pass through to the Company charges and costs under this Section 6 on a discriminatory basis (i.e., which are not also passed through by such Bank to other customers of such Bank similarly situated where such customer is subject to documents providing for such pass through); and (c) if any Bank elects to pass through to the Company any material charge or cost under this Section 6 or elects to terminate the availability of Eurodollar Loans for any material period of time, the Company may, within 60 days after the date of such event and so long as no Default shall have occurred and be continuing, elect to terminate such Bank as a party to this Agreement; provided that, concurrently with such termination the Company shall (i) if Agent and each of the other Banks shall consent, pay that Bank all principal, interest and fees and other amounts owed to such Bank through such date of termination or (ii) have arranged for another financial institution approved by Agent (such approval not to be unreasonably withheld) as of such date, to become a substitute Bank for all purposes under this Agreement in the manner provided in Section 13.5; provided further that, prior to substitution for any Bank, the Company shall have given written notice to Agent of such intention and the Banks shall have the option, but no obligation, for a period of 60 days after receipt of such notice, to increase their Commitments in order to replace the affected Bank in lieu of such substitution. Section 7. Conditions Precedent. 7.1 Initial Loans. The obligation of each Bank or any applicable Issuer to make its initial Loans after the date hereof or issue or participate in a Letter of Credit after the date hereof (if such Letter of Credit is issued prior to the funding of the initial Loans after the date hereof) hereunder is subject to the following conditions precedent, each of which shall have been fulfilled or waived to the satisfaction of the Majority Banks: (a) Corporate Action and Status. Agent shall have received from the appropriate Governmental Authorities certified copies of the Organizational Documents (other than bylaws) of the Company and each of its Subsidiaries, and evidence satisfactory to Agent of all corporate action taken by the Company or any of its Subsidiaries authorizing the execution, delivery and performance of the Loan Documents and all other documents related to this Agreement to which it is a party (including, without limitation, a certificate of the secretary of each such party setting forth the resolutions of its Board of Directors authorizing the transactions contemplated thereby and attaching a copy of its bylaws), together with such certificates as may be appropriate to demonstrate the qualification and good standing of and payment of taxes by the Company and each of its Subsidiaries in each state in which such qualification is necessary. (b) Incumbency. The Company and each Relevant Party shall have delivered to Agent a certificate in respect of the name and signature of each of the officers (i) who is authorized to sign on its behalf the applicable Loan Documents related to any Loan or the issuance of any Letter of Credit and (ii) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with any Loan or the issuance of any Letter of Credit. Agent and each Bank may conclusively rely on such certificates until they receive notice in writing from the Company or the appropriate Relevant Party to the contrary. (c) Notes. Agent shall have received the appropriate Note of the Company for each Bank, duly completed and executed. (d) Loan Documents. The Company and each other Relevant Party shall have duly executed and delivered the other Loan Documents to which it is a party (in such number of copies as Agent shall have requested) and each such Loan Document shall be in form satisfactory to Agent. Each such Loan Document shall be in substantially the form furnished to the Banks prior to their execution of this Agreement, together with such changes therein as Agent may approve. (e) Fees and Expenses. The Company shall have paid to Agent for the account of each Bank all accrued and unpaid commitment fees and other fees in the amounts previously agreed upon in writing among the Company and Agent; and shall have in addition paid to Agent all amounts payable under the letter agreements referred to Section 2.4(d) hereof and under Section 9.7 hereof on or before the date of this Agreement. (f) Opinions of Counsel. Agent shall have received (1) an opinion of Vinson & Elkins L.L.P., counsel to the Company, in form and substance reasonably satisfactory to Agent and (2) such opinions of counsel to the Company and other Relevant Parties and special local counsel of Agent as Agent shall reasonably request with respect to the Company and the Loan Documents. (g) Execution by Banks. Agent shall have received counterparts of this Agreement executed and delivered by or on behalf of each of the Banks or Agent shall have received evidence satisfactory to it of the execution and delivery by each of the Banks of a counterpart hereof. (h) Consents. Agent shall have received evidence satisfactory to it that, except as disclosed in the Disclosure Statement, all material consents of each Governmental Authority and of each other Person, if any, reasonably required in connection with (a) the Loans and the Letters of Credit and (b) the execution, delivery and performance of this Agreement and the other Loan Documents have been satisfactorily obtained. (i) Amendment to Intercreditor Agreement. Agent shall have received counterparts of the Second Amendment to Intercreditor Agreement referred to in the definition of "Intercreditor Agreement" in Section 1.1 hereof executed and delivered by or on behalf of each of the Company and by the "Administrative Agent" under the Canadian Facility or Agent shall have received evidence satisfactory to it of the execution and delivery by each such Person of a counterpart of such Second Amendment to Intercreditor Agreement. (j) Canadian Facility. Agent shall have received counterparts of the Credit Agreement referred to in the definition of "Canadian Facility" in Section 1.1 hereof executed and delivered by or on behalf of each of Seagull Energy Canada Ltd., The Chase Manhattan Bank of Canada, as Arranger and as Agent, The Bank of Nova Scotia, as Paying Agent and as Co-Agent, Canadian Imperial Bank of Commerce, as Co-Agent, and certain banks parties thereto or Agent shall have received evidence satisfactory to it of the execution and delivery by each such Person of a counterpart of such Credit Agreement. (k) Other Documents. Agent shall have received such other documents consistent with the terms of this Agreement and relating to the transactions contemplated hereby as Agent may reasonably request. All provisions and payments required by this Section 7.1 are subject to the provisions of Section 13.6. 7.2 Initial and Subsequent Loans. The obligation of each Bank or any applicable Issuer to make any Loan (including, without limitation, its initial Loan) to be made by it hereunder or to issue or participate in any Letter of Credit is subject to the additional conditions precedent that (i) Agent shall have received a Request for Extension of Credit and such other certifications as Agent may reasonably require, (ii) in the case of Competitive Loans, the Company shall have complied with the provisions of Section 2.10 hereof and (iii) as of the date of such Loan or such issuance, and after giving effect thereto: (a) no Default shall have occurred and be continuing; (b) except for facts timely disclosed to Agent from time to time in writing, which facts (I) are not materially more adverse to the Company and its Subsidiaries, (II) do not materially decrease the ability of the Banks to collect the Obligations as and when due and payable and (III) do not materially increase the liability of Agent or any of the Banks, in each case compared to those facts existing on the date hereof and the material details of which have been set forth in the Financial Statements delivered to Agent prior to the date hereof or in the Disclosure Statement, and except for the representations set forth in the Loan Documents which, by their terms, are expressly (or by means of similar phrasing) made as of the Effective Date or as of the date hereof, as the case may be, only, the representations and warranties made in each Loan Document shall be true and correct in all material respects on and as of the date of the making of such Loan or such issuance, with the same force and effect as if made on and as of such date; (c) the making of such Loan or the issuance of such Letter of Credit shall not violate any Legal Requirement applicable to any Bank. Each Request for Extension of Credit by the Company hereunder or request for issuance of a Letter of Credit shall include a representation and warranty by the Company to the effect set forth in Subsections 7.2(a) and (b) (both as of the date of such notice and, unless the Company otherwise notifies Agent prior to the date of such borrowing or issuance, as of the date of such borrowing or issuance). Section 8. Representations and Warranties. To induce the Banks to enter into this Agreement and to make the Loans and issue or participate in the Letters of Credit, the Company represents and warrants (such representations and warranties to survive any investigation and the making of the Loans and the issuance of the Letters of Credit) to the Banks and Agent as follows: 8.1 Corporate Existence. The Company and each Subsidiary of the Company are corporations duly incorporated and organized, legally existing and in good standing under the laws of the respective jurisdictions in which they are incorporated, and are duly qualified as foreign corporations in all jurisdictions wherein the property owned or the business transacted by them makes such qualification necessary and the failure to so qualify could reasonably be expected to result in a Material Adverse Effect. 8.2 Corporate Power and Authorization. The Company is duly authorized and empowered to create and issue the Notes; each of the Company and each Subsidiary of the Company is duly authorized and empowered to execute, deliver, and perform this Agreement and the other Loan Documents to which it is a party; and all corporate action on the Company's part requisite for the due creation and issuance of the Notes and on the Company's part and on the part of each Subsidiary of the Company for the due execution, delivery, and performance of this Agreement and the other Loan Documents to which each of the Company and each such Subsidiary is a party has been duly and effectively taken. 8.3 Binding Obligations. This Agreement, the Notes and the other Loan Documents constitute legal, valid and binding obligations of the Company and its Subsidiaries, to the extent each is a party thereto, enforceable against the Company and its Subsidiaries, to the extent each is a party thereto, in accordance with their respective terms, except as may be limited by any bankruptcy, insolvency, moratorium or other similar laws or judicial decisions affecting creditors' rights generally. 8.4 No Legal Bar or Resultant Lien. The Company's and each of its Subsidiaries' creation, issuance, execution, delivery and performance of this Agreement, the Notes and the other Loan Documents, to the extent they are parties thereto, do not and will not violate any provisions of the Organizational Documents of the Company or any Subsidiary of the Company or any Legal Requirement to which the Company or any Subsidiary of the Company is subject or by which its property may be presently bound or encumbered, or result in the creation or imposition of any Lien upon any properties of the Company or any Subsidiary of the Company, other than those permitted by this Agreement. 8.5 No Consent. Except as set forth in the Disclosure Statement, the Company's creation and issuance of the Notes and the Company's and each of its Subsidiaries' execution, delivery, and performance of this Agreement, the Notes and the other Loan Documents to which they are parties do not and will not require the consent or approval of any Person other than such consents and/or approvals obtained by the Company contemporaneously with or prior to the execution of this Agreement, including, without limitation, any Governmental Authorities, other than those consents the failure to obtain which could not be reasonably expected to have a Material Adverse Effect. 8.6 Financial Condition. The audited consolidated and unaudited consolidating annual financial statements of the Company and its Subsidiaries for the year ended December 31, 1995 and the unaudited consolidated interim financial statements of the Company and its Subsidiaries for the quarters and three-month periods ended March 31, 1996 and June 30, 1996, which have been delivered to the Banks, have been prepared in accordance with GAAP, and present fairly the financial condition and results of the operations of the Company and its Subsidiaries for the period or periods stated (subject only to normal year-end audit adjustments with respect to the unaudited interim statements). No material adverse change, either in any case or in the aggregate, has occurred since June 30, 1996 in the assets, liabilities, financial condition, business, operations, affairs or circumstances of the Company and its Subsidiaries taken as a whole, except as disclosed to the Banks in the Disclosure Statement. Each Engineering Report and Company Report fairly presents the values and prospective performances of the property described therein and there are no statements or conclusions therein which were based upon or included materially misleading information or fail to take into account material information. 8.7 Investments and Guaranties. As of the Effective Date, neither the Company nor any Subsidiary of the Company had made Investments in, advances to, or Guarantees of, the obligations of any Person, except as (a) disclosed to the Banks in the Disclosure Statement or (b) not prohibited by applicable provisions of Section 10. 8.8 Liabilities and Litigation. Neither the Company nor any Subsidiary of the Company has any material (individually or in the aggregate) liabilities, direct or contingent, except as (a) disclosed or referred to in the Financial Statements, (b) disclosed to the Banks in the Disclosure Statement, (c) disclosed in a notice to Agent pursuant to Section 9.11 with respect to such as could reasonably be expected to have a Material Adverse Effect or (d) not prohibited by applicable provisions of Section 10. Except as (a) described in the Financial Statements, (b) otherwise disclosed to the Banks in the Disclosure Statement, (c) disclosed in a notice to Agent pursuant to Section 9.11 with respect to such as could reasonably be expected to have a Material Adverse Effect or (d) not prohibited by applicable provisions of Section 10, no litigation, legal, administrative or arbitral proceeding, investigation, or other action of any nature exists or (to the knowledge of the Company) is threatened against or affecting the Company or any Subsidiary of the Company which could reasonably be expected to result in any judgment which could reasonably be expected to have a Material Adverse Effect, or which in any manner challenges or may challenge or draw into question the validity of this Agreement, the Notes or any other Loan Document, or enjoins or threatens to enjoin or otherwise restrain any of the transactions contemplated by any of them. 8.9 Taxes and Governmental Charges. The Company and its Subsidiaries have filed, or obtained extensions with respect to the filing of, all material tax returns and reports required to be filed and have paid all material taxes, assessments, fees and other governmental charges levied upon any of them or upon any of their respective properties or income which are due and payable, including interest and penalties, or have provided adequate reserves for the payment thereof. 8.10 Title to Properties. The Company and its Subsidiaries have good and defensible title to their respective properties included in the Borrowing Base (including, without limitation, all fee and leasehold interests), free and clear of all Liens except (a) those referred to in the Financial Statements, (b) as disclosed to the Banks in the Disclosure Statement or (c) as permitted by Section 10.2. 8.11 Defaults. Neither the Company nor any Subsidiary of the Company is in default, which default could reasonably be expected to have a Material Adverse Effect, under any indenture, mortgage, deed of trust, agreement or other instrument to which the Company or any Subsidiary of the Company is a party or by which the Company or any Subsidiary of the Company or the property of the Company or any Subsidiary of the Company is bound, except as (a) disclosed to the Banks in the Disclosure Statement, (b) disclosed in a notice to Agent pursuant to Section 9.11 with respect to such as could reasonably be expected to have a Material Adverse Effect or (c) specifically permitted by applicable provisions of Section 10. No Default under this Agreement, the Notes or any other Loan Document has occurred and is continuing. 8.12 Location of Businesses and Offices. Except to the extent that Agent has been furnished written notice to the contrary or of additional locations, pursuant to Section 9.11, the Company's principal place of business and chief executive offices are located at the address stated on the signature page hereof and the principal places of business and chief executive offices of each Subsidiary are described on Exhibit F hereto. 8.13 Compliance with Law. Neither the Company nor any Subsidiary of the Company (except as (a) disclosed to the Banks in the Disclosure Statement, (b) disclosed in a notice to Agent pursuant to Section 9.11 with respect to such as could reasonably be expected to have a Material Adverse Effect or (c) not prohibited by applicable provisions of Section 10): (a) is in violation of any Legal Requirement; or (b) has failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of any of their respective properties or the conduct of their respective business; which violation or failure could reasonably be expected to have a Material Adverse Effect. 8.14 Margin Stock. None of the proceeds of the Notes will be used for the purpose of, and neither the Company nor any Subsidiary of the Company is engaged in the business of extending credit for the purpose of (a) purchasing or carrying any "margin stock" as defined in Regulation U of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221) or (b) reducing or retiring any indebtedness which was originally incurred to purchase or carry margin stock, if such purpose under either (a) or (b) above would constitute this transaction a "purpose credit" within the meaning of said Regulation U, or for any other purpose which would constitute this transaction a "purpose credit". Neither the Company nor any Subsidiary of the Company is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stocks. Neither the Company nor any Subsidiary of the Company nor any Person acting on behalf of the Company or any Subsidiary of the Company has taken or will take any action which might cause the Notes or any of the Loan Documents, including this Agreement, to violate Regulation U or any other regulation of the Board of Governors of the Federal Reserve System, or to violate any similar provision of the Securities Exchange Act of 1934 or any rule or regulation under any such provision thereof. 8.15 Subsidiaries. The Company has no Subsidiaries as of the date of this Agreement except those shown in Exhibit F hereto. 8.16 ERISA. With respect to each Plan, the Company and each ERISA Affiliate have fulfilled their obligations, including obligations under the minimum funding standards of ERISA and the Code, and are in compliance in all material respects with the provisions of ERISA and the Code. The Company has no knowledge of any event which could result in a liability of the Company or any ERISA Affiliate to the PBGC or a Plan (other than to make contributions in the ordinary course). Since the effective date of Title IV of ERISA, there have not been any nor are there now existing any events or conditions that would cause the Lien provided under Section 4068 of ERISA to attach to any property of the Company or any ERISA Affiliate. There are no Unfunded Liabilities with respect to any Plan other than those specifically described in the certificate delivered in accordance with Section 7.1(i). No "prohibited transaction" has occurred with respect to any Plan. 8.17 Investment Company Act. Neither the Company nor any of its Subsidiaries is an investment company within the meaning of the Investment Company Act of 1940, as amended, or, directly or indirectly, controlled by or acting on behalf of any Person which is an investment company, within the meaning of said Act. 8.18 Public Utility Holding Company Act. Neither the Company nor any of its Subsidiaries (i) is subject to regulation under the Public Utility Holding Company Act of 1935, as amended (the "PUHC Act"), except as to Section 9(a)(2) thereof (15 U.S.C.A. ss.79(i)(a)(2)), or (ii) is in violation of any of the provisions, rules, regulations or orders of or under the PUHC Act. Further, none of the transactions contemplated under this Agreement, including without limitation, the making of the Loans and the issuance of the Letters of Credit, shall cause or constitute a violation of any of the provisions, rules, regulations or orders of or under the PUHC Act and the PUHC Act does not in any manner impair the legality, validity or enforceability of the Notes. The Company has duly filed with the Securities and Exchange Commission good faith applications (each an "Application") under Section 2(a)(8) of the PUHC Act (15 U.S.C.A. ss.79(b)(a)(8)) for a declaration of non-subsidiary status pursuant to such Section 2(a)(8) with respect to each Person (each a "Specified Shareholder") which owns, controls or holds with power to vote, directly or indirectly, a sufficient quantity of the voting securities of the Company to be construed as a "holding company", as such term is defined in the PUHC Act, in respect of the Company. All of the information contained in such Applications, as amended, was true as of the most recent filing date with respect thereto (provided that the Company may, unless it has actual current knowledge to the contrary, rely solely upon written information furnished by any Specified Shareholder with respect to background information about the Specified Shareholder and the nature of the ownership by such Specified Shareholder or its Affiliates of the voting securities of the Company), and the Company knows of no reason why each such Application, if acted upon by the Securities and Exchange Commission, would not be approved. True and correct copies of each such Application and any amendments thereto, as filed, have been furnished to Agent. The Company has not received any written notice from the Securities and Exchange Commission with respect to any such Application other than as disclosed in writing to Agent. 8.19 Environmental Matters. Except as disclosed in the Disclosure Statement, (i) the Company and it Subsidiaries have obtained and maintained in effect all Environmental Permits (or has initiated the necessary steps to transfer the Environmental Permits into its name), the failure to obtain which could reasonably be expected to have a Material Adverse Effect, (ii) the Company and its Subsidiaries and their properties, assets, business and operations have been and are in compliance with all applicable Requirements of Environmental Law and Environmental Permits failure to comply with which could reasonably be expected to have a Material Adverse Effect, (iii) the Company and its Subsidiaries and their properties, assets, business and operations are not subject to any (A) Environmental Claims or (B) Environmental Liabilities, in either case direct or contingent, and whether known or unknown, arising from or based upon any act, omission, event, condition or circumstance occurring or existing on or prior to the date hereof which could reasonably be expected to have a Material Adverse Effect, and (iv) no Responsible Officer of the Company or any of its Subsidiaries has received any notice of any violation or alleged violation of any Requirements of Environmental Law or Environmental Permit or any Environmental Claim in connection with its assets, properties, business or operations which could reasonably be expected to have a Material Adverse Effect. The liability (including without limitation any Environmental Liability and any other damage to persons or property), if any, of the Company and its Subsidiaries and with respect to their properties, assets, business and operations which is reasonably expected to arise in connection with Requirements of Environmental Laws currently in effect and other environmental matters presently known by a Responsible Officer of the Company will not have a Material Adverse Effect. No Responsible Officer of the Company knows of any event or condition with respect to Environmental Matters with respect to any of its properties or the properties of any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect. For purposes of this Section 8.19, "Environmental Matters" shall mean matters relating to pollution or protection of the environment, including, without limitation, emissions, discharges, releases or threatened releases of Hazardous Substances into the environment (including, without limitation, ambient air, surface water or ground water, or land surface or subsurface), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances. 8.20 Claims and Liabilities. Except as disclosed to the Banks in writing, neither the Company nor any of its Subsidiaries has accrued any liabilities under gas purchase contracts for gas not taken, but for which it is liable to pay if not made up and which, if not paid, would have a Material Adverse Effect. Except as disclosed to the Banks in writing, no claims exist against the Company or its Subsidiaries for gas imbalances which claims if adversely determined would have a Material Adverse Effect. No purchaser of product supplied by the Company or any of its Subsidiaries has any claim against the Company or any of its Subsidiaries for product paid for, but for which delivery was not taken as and when paid for, which claim if adversely determined would have a Material Adverse Effect. 8.21 Solvency. Neither the Company nor the Company and its Subsidiaries, on a consolidated basis, is "insolvent", as such term is used and defined in (i) the Bankruptcy Code and (ii) the Texas Uniform Fraudulent Transfer Act, Tex. Bus. & Com. Code Ann. ss.24.001 et seq. Section 9. Affirmative Covenants. A deviation from the provisions of this Section 9 will not constitute a Default under this Agreement if such deviation is consented to in writing by the Majority Banks. Without the prior written consent of the Majority Banks, the Company agrees with the Banks and Agent that, so long as any of the Commitments is in effect and until payment in full of all Loans hereunder, the termination or expiry of all Letters of Credit and payment in full of Letter of Credit Liabilities, all interest thereon and all other amounts payable by the Company hereunder: 9.1 Financial Statements and Reports. The Company will promptly furnish to any Bank from time to time upon request such information regarding the business and affairs and financial condition of the Company and its Subsidiaries as such Bank may reasonably request, and will furnish to Agent and each of the Banks: (a) Annual Reports - promptly after becoming available and in any event within 100 days after the close of each fiscal year of the Company: (i) the audited consolidated balance sheet of the Company and its Subsidiaries as of the end of such year; (ii) the audited consolidated statement of earnings of the Company and its Subsidiaries for such year; (iii) the audited consolidated statement of cash flows of the Company and its Subsidiaries for such year; (iv) the unaudited consolidating balance sheet and statement of earnings of the Company and its Subsidiaries, each for such year or as of the end of such year, as the case may be; (v) a report prepared by a petroleum engineer, who may be an employee of the Company or its Subsidiaries, setting forth the historical monthly production data for Hydrocarbons produced and sold by the Company and its Subsidiaries for such year; setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, and, in the case of the audited Financial Statements, audited and accompanied by the related opinion of KPMG Peat Marwick or other independent certified public accountants of recognized national standing acceptable to the Majority Banks, which opinion shall state that such audited balance sheets and statements have been prepared in accordance with GAAP consistently followed throughout the period indicated and fairly present the consolidated financial condition and results of operations of the applicable Persons as at the end of, and for, such fiscal year; and (b) Quarterly Reports - as soon as available and in any event within 50 days after the end of each of the first three quarterly periods in each fiscal year of the Company: (i) the unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter; (ii) the unaudited consolidated statement of earnings of the Company and its Subsidiaries for such quarter and for the period from the beginning of the fiscal year to the close of such quarter; (iii) the unaudited consolidated statement of cash flows of the Company and its Subsidiaries for such quarter and for the period from the beginning of the fiscal year to the close of such quarter; (iv) the unaudited consolidating balance sheet and statement of earnings of the Company and its Subsidiaries, each for such quarter and for the period from the beginning of the fiscal year to the close of such quarter; (v) a report prepared by a petroleum engineer, who may be an employee of the Company or its Subsidiaries, setting forth the historical monthly production data for Hydrocarbons produced and sold by the Company and its Subsidiaries for such quarter; all of items (i) through (iv) above prepared on substantially the same accounting basis as the annual reports described in Subsection 9.1(a), subject to normal changes resulting from year-end adjustments; and (c) Company Report - promptly after becoming available and in any event on or before September 1 of each year, a Company Report; and (d) Other Bank Requirements - at such time as the same are required to be furnished to other lenders under other financing arrangements to which the Company or any of its Subsidiaries may be a party or be bound from time to time, a copy of any report, certificate, affidavit or other information required to be furnished to any such lender; and (e) SEC and Other Reports - promptly upon their becoming publicly available, one copy of each financial statement, report, notice or definitive proxy statement sent by the Company or any Subsidiary to shareholders generally, and of each regular or periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by the Company or any of its Subsidiaries with, or received by the Company or any of its Subsidiaries in connection therewith from, any securities exchange or the Securities and Exchange Commission or any successor agency; and (f) Engineering Report and other Component Values - promptly after becoming available and in any event on or before March 15 of each year, commencing with March 15, 1997, an Engineering Report. All of the balance sheets and other financial statements referred to in this Section 9.1 will be in such detail as any Bank may reasonably request and will conform to GAAP applied on a basis consistent with those of the Financial Statements as of December 31, 1995. In addition, if GAAP shall change with respect to any matter relative to determination of compliance with this Agreement, the Company will also provide financial information necessary for the Banks to determine compliance with this Agreement. 9.2 Officers' Certificates. (a) Concurrently with the furnishing of the annual financial statements pursuant to Subsection 9.1(a), commencing with the annual financial statements required to be delivered in 1997, the Company will furnish or cause to be furnished to Agent certificates of compliance, as follows: (i) a certificate signed by the principal financial officer of the Company in the form of ExhiHbit G; and (ii) a certificate from the independent public accountants stating that their audit has not disclosed the existence of any condition which constitutes a Default, or if their audit has disclosed the existence of any such condition, specifying the nature and period of existence. (b) Concurrently with the furnishing of the quarterly financial statements pursuant to Subsection 9.1(b), the Company will furnish to Agent a principal financial officer's certificate in the form of Exhibit G. (c) Not later than concurrently with the furnishing of any annual reports pursuant to Section 9.1(a) or concurrently with any request by the Company for a Requested Redetermination (using then available Financial Statements) and within ten (10) Business Days after any request by the Requesting Banks for a Requested Redetermination (using then available Financial Statements), the Company will furnish to Agent a Borrowing Base Certificate. (d) Concurrently with the furnishing of any Engineering Report or Company Report, the Company will furnish to Agent a certificate signed by an appropriate officer of the Company and the applicable Relevant Party in the form of Exhibit I. 9.3 Taxes and Other Liens. The Company will and will cause each Subsidiary of the Company to pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon the Company or such Subsidiary, or upon the income or any property of the Company or such Subsidiary, as well as all claims of any kind (including claims for labor, materials, supplies, rent and payment of proceeds attributable to Hydrocarbon production) which, if unpaid, might result in or become a Lien upon any or all of the property of the Company or such Subsidiary; provided, however, that neither the Company nor such Subsidiary will be required to pay any such tax, assessment, charge, levy or claims if the amount, applicability or validity thereof will currently be contested in good faith by appropriate proceedings diligently conducted and if the Company or such Subsidiary will have set up reserves therefor adequate under GAAP. 9.4 Maintenance. Except as referred to in Sections 8.1 and 8.13 and except as permitted under Section 10.5 the Company will and will cause each Subsidiary of the Company to: (i) maintain its corporate existence; (ii) maintain its rights and franchises, except for any mergers or consolidations otherwise permitted by this Agreement and except to the extent failure to so maintain the same would not have a Material Adverse Effect; (iii) observe and comply (to the extent that any failure would have a Material Adverse Effect) with all valid Legal Requirements (including without limitation Requirements of Environmental Law); and (iv) maintain (except to the extent failure to so maintain the same would not have a Material Adverse Effect) its properties (and any properties leased by or consigned to it or held under title retention or conditional sales contracts) consistent with the standards of a reasonably prudent operator at all times and make all repairs, replacements, additions, betterments and improvements to its properties consistent with the standards of a reasonably prudent operator. 9.5 Further Assurances. The Company will and will cause each Subsidiary of the Company to cure promptly any defects in the creation and issuance of the Notes and the execution and delivery of the Loan Documents, including this Agreement. The Company at its expense will promptly execute and deliver to Agent upon request all such other and further documents, agreements and instruments (or cause any of its Subsidiaries to take such action) in compliance with or accomplishment of the covenants and agreements of the Company or any of its Subsidiaries in the Loan Documents, including this Agreement, or to correct any omissions in the Loan Documents, or to make any recordings, to file any notices, or obtain any consents, all as may be necessary or appropriate in connection therewith. 9.6 Performance of Obligations. The Company will pay the Notes according to the reading, tenor and effect thereof; and the Company will do and perform every act and discharge all of the obligations provided to be performed and discharged by the Company under this Agreement and the other Loan Documents at the time or times and in the manner specified, and cause each of its Subsidiaries to take such action with respect to their obligations to be performed and discharged under the Loan Documents to which they respectively are parties. 9.7 Reimbursement of Expenses. Whether or not any Loan is ever made or any Letter of Credit is ever issued, the Company agrees to pay or reimburse Agent for paying the reasonable fees and expenses of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., special counsel to Agent, together with the reasonable fees and expenses of local counsel engaged by Agent, in connection with the negotiation of the terms and structure of the Obligations, the preparation, execution and delivery of this Agreement and the other Loan Documents and the making of the Loans and the issuance of Letters of Credit hereunder, as well as any modification, supplement or waiver of any of the terms of this Agreement and the other Loan Documents. The Company will promptly upon request and in any event within 30 days from the date of receipt by the Company of a copy of a bill for such amounts, reimburse any Bank or Agent for all amounts reasonably expended, advanced or incurred by such Bank or Agent to satisfy any obligation of the Company under this Agreement or any other Loan Document, to protect the properties or business of the Company or any Subsidiary of the Company, to collect the Obligations, or to enforce the rights of such Bank or Agent under this Agreement or any other Loan Document, which amounts will include without limitation all court costs, attorneys' fees (but not including allocated costs of in-house counsel), any engineering fees and expenses, fees of auditors, accountants and appraisers, investigation expenses, all transfer, stamp, documentary or similar taxes, assessments or charges levied by any governmental or revenue authority in respect of any of the Loan Documents or any other document referred to therein, all costs, expenses, taxes, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any lien contemplated by any of the Loan Documents or any document referred to therein, fees and expenses incurred in connection with such Bank's participation as a member of a creditors' committee in a case commenced under the Bankruptcy Code or other similar law of the United States or any state thereof, fees and expenses incurred in connection with lifting the automatic stay prescribed in ss.362 Title 11 of the United States Code, and fees and expenses incurred in connection with any action pursuant to ss.1129 Title 11 of the United States Code and all other customary out-of-pocket expenses incurred by such Bank or Agent in connection with such matters, together with interest after the expiration of the 30-day period stated above in this Section if no Event of Default has occurred and is continuing, or from the date of the request to the Company if an Event of Default has occurred and is continuing, at either (i) the Post-Default Rate on each such amount until the date of reimbursement to such Bank or Agent, or (ii) if no Event of Default will have occurred and be continuing, the Alternate Base Rate plus the highest Applicable Margin for Alternate Base Rate Loans (not to exceed the Highest Lawful Rate) on each such amount until the date of the Company's receipt of written demand or request by such Bank or Agent for the reimbursement of same, and thereafter at the applicable Post-Default Rate until the date of reimbursement to such Bank or Agent. The obligations of the Company under this Section are compensatory in nature, shall be deemed liquidated as to amount upon receipt by the Company of a copy of any invoice therefor, and will survive the non-assumption of this Agreement in a case commenced under the Bankruptcy Code or other similar law of the United States or any state thereof, and will remain binding on the Company and any trustee, receiver, or liquidator of the Company appointed in any such case. 9.8 Insurance. The Company and its Subsidiaries will maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and business against such liabilities, casualties, risks and contingencies and in such types and amounts as is customary in the case of corporations engaged in the same or similar businesses and similarly situated. Upon the request of Agent acting at the instruction of the Majority Banks, the Company will furnish or cause to be furnished to Agent from time to time a summary of the insurance coverage of the Company and its Subsidiaries in form and substance satisfactory to the Majority Banks in their reasonable judgment, and if requested will furnish Agent copies of the applicable policies. Subject to the terms of Section 3 hereof, in the case of any fire, accident or other casualty causing loss or damage to any properties of the Company or any of its Subsidiaries, the proceeds of such policies will be used (i) to repair or replace the damaged property or (ii) to prepay the Obligations, at the election of the Company. 9.9 Accounts and Records. The Company will keep and will cause each Subsidiary of the Company to keep books of record and account which fairly reflect all dealings or transactions in relation to their respective businesses and activities, in accordance with GAAP, which books of record and account will be maintained, to the extent necessary to enable compliance with all provisions of this Agreement, separately for each such Subsidiary, the Company and any division of the Company. 9.10 Rights of Inspection. The Company will permit and will cause each of its Subsidiaries to permit any officer, employee, or agent of Agent or any Bank to meet with the consultants who prepared any applicable Engineering Report and to review such Engineering Report with such consultants and to visit and inspect any of the properties of the Company or such Subsidiary, examine the Company's or such Subsidiary's books of record and accounts, take copies and extracts therefrom, and discuss the affairs, finances and accounts of the Bank or such Subsidiary with the Company's or such Subsidiary's officers, accountants and auditors, all at such reasonable times during normal business hours and as often as Agent or such Bank may reasonably desire, and will assist in all such matters. 9.11 Notice of Certain Events. The Company will promptly notify Agent (and Agent will then notify all of the Banks) if a Responsible Officer of the Company learns of the occurrence of, or if the Company causes or intends to cause, as the case may be: (i) any event which constitutes a Default, together with a detailed statement by a responsible officer of the Company of the steps being taken to cure the effect of such Default; or (ii) the receipt of any notice from, or the taking of any other action by, the holder of any promissory note, debenture or other evidence of indebtedness of the Company or any Subsidiary of the Company or of any security (as defined in the Securities Act of 1933, as amended) of the Company or any Subsidiary of the Company with respect to a claimed default, together with a detailed statement by a Responsible Officer of the Company specifying the notice given or other action taken by such holder and the nature of the claimed default and what action the Company or such Subsidiary is taking or proposes to take with respect thereto; or (iii) any legal, judicial or regulatory proceedings affecting the Company or any Subsidiary of the Company or any of the properties of the Company or any Subsidiary of the Company in which the amount involved is materially adverse to the Company and its Subsidiaries taken as a whole, and is not covered by insurance or which, if adversely determined, would have a Material Adverse Effect; or (iv) any dispute between the Company or any Subsidiary of the Company and any Governmental Authority or any other Person which, if adversely determined, could reasonably be expected to have a Material Adverse Effect; or (v) the occurrence of a default or event of default by the Company or any Subsidiary of the Company under any other agreement to which it is a party, which default or event of default could reasonably be expected to have a Material Adverse Effect; or (vi) any change in the accuracy of the representations and warranties of the Company or any Subsidiary contained in this Agreement or any other Loan Document; or (vii) any material violation or alleged material violation of any Requirements of Environmental Law or Environmental Permit or any Environmental Claim or any Environmental Liability; or (viii) any tariff and rate cases and other material reports filed by the Company or any of its Subsidiaries with any Governmental Authority and any notice to the Company or any of its Subsidiaries from any Governmental Authority concerning noncompliance with any applicable Legal Requirement; or (ix) the existence of any Borrowing Base Deficiency; or (x) within 10 days after the date on which a Responsible Officer of the Company has actual knowledge thereof, the receipt of any notice by the Company or any of its Subsidiaries of any claim of nonpayment of, or any attempt to collect or enforce, accounts payable of the Company or any of its Subsidiaries exceeding, in the case of any one account payable at one time outstanding, $1,000,000 and in the case of all accounts payable in the aggregate at any one time outstanding, $3,000,000; or (xi) any requirement for the payment of all or any portion of any Indebtedness of the Company or any of its Subsidiaries prior to the stated maturity thereof (whether by acceleration or otherwise) or as the result of any failure to maintain or the reaching of any threshold amount provided in any promissory note, bond, debenture, or other evidence of Indebtedness or under any credit agreement, loan agreement, indenture or similar agreement executed in connection with any of the foregoing; or (xii) any notice from the Securities and Exchange Commission with respect to any Application (as defined in Section 8.18 hereof). 9.12 ERISA Information and Compliance. The Company will promptly furnish to Agent (i) immediately upon receipt, a copy of any notice of complete or partial withdrawal liability under Title IV of ERISA and any notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, (ii) if requested by Agent, acting on the instruction of the Majority Banks, promptly after the filing thereof with the United States Secretary of Labor or the PBGC or the Internal Revenue Service, copies of each annual and other report with respect to each Plan or any trust created thereunder, (iii) immediately upon becoming aware of the occurrence of any "reportable event", as such term is defined in Section 4043 of ERISA, for which the disclosure requirements of Regulation Section 2615.3 promulgated by the PBGC have not been waived, or of any "prohibited transaction", as such term is defined in Section 4975 of the Code, in connection with any Plan or any trust created thereunder, a written notice signed by the President or the principal financial officer of the Company or the applicable ERISA Affiliate specifying the nature thereof, what action the Company or the applicable ERISA Affiliate is taking or proposes to take with respect thereto, and, when known, any action taken by the PBGC, the Internal Revenue Service or the Department of Labor with respect thereto, (iv) promptly after the filing or receiving thereof by the Company or any ERISA Affiliate of any notice of the institution of any proceedings or other actions which may result in the termination of any Plan, and (v) each request for waiver of the funding standards or extension of the amortization periods required by Sections 303 and 304 of ERISA or Section 412 of the Code promptly after the request is submitted by the Company or any ERISA Affiliate to the Secretary of the Treasury, the Department of Labor or the Internal Revenue Service, as the case may be. To the extent required under applicable statutory funding requirements, the Company will fund, or will cause each ERISA Affiliate to fund, all current service pension liabilities as they are incurred under the provisions of all Plans from time to time in effect, and comply with all applicable provisions of ERISA, except to the extent that any such failure to comply could not reasonably be expected to have a Material Adverse Effect. The Company covenants that it shall and shall cause each ERISA Affiliate to (1) make contributions to each Plan in a timely manner and in an amount sufficient to comply with the contribution obligations under such Plan and the minimum funding standards requirements of ERISA; (2) prepare and file in a timely manner all notices and reports required under the terms of ERISA including but not limited to annual reports; and (3) pay in a timely manner all required PBGC premiums, in each case, to the extent failure to do so would have a Material Adverse Effect. Section 10. Negative Covenants. A deviation from the provisions of this Section 10 will not constitute a Default under this Agreement if such deviation is consented to in writing by the Majority Banks. The Company agrees with the Banks and Agent that, so long as any of the Commitments is in effect and until payment in full of all Loans hereunder, the termination or expiry of all Letters of Credit and payment in full of Letter of Credit Liabilities, all interest thereon and all amounts payable by the Company hereunder: 10.1 Debts, Guaranties and Other Obligations. The Company will not and will not permit any of its Subsidiaries (other than APC) to incur, create, assume or in any manner become or be liable in respect of any Indebtedness (including obligations for the payment of rentals); and the Company will not and will not permit any of its Subsidiaries (other than APC) to Guarantee or otherwise in any way become or be responsible for obligations of any other Person, whether by agreement to purchase the Indebtedness of any other Person or agreement for the furnishing of funds to any other Person through the purchase or lease of goods, supplies or services (or by way of stock purchase, capital contribution, advance or loan) for the purpose of paying or discharging the Indebtedness of any other Person, or otherwise, except that the foregoing restrictions will not apply to: (a) the Notes or other Indebtedness under the Loan Documents; (b) liabilities, direct or contingent, of the Company or any Subsidiary of the Company existing on the date of this Agreement which are reflected in the Financial Statements or the Disclosure Statement and all renewals, extensions, refinancings and rearrangements, but not increases, thereof; (c) endorsements of negotiable or similar instruments for collection or deposit in the ordinary course of business; (d) trade payables, lease acquisition and lease maintenance obligations, extensions of credit from suppliers or contractors, liabilities incurred in exploration, development and operation of the Company's or any Subsidiary's oil and gas properties or similar obligations from time to time incurred in the ordinary course of business, other than for borrowed money, which are paid within 90 days after the invoice date (inclusive of applicable grace periods) or (i) are being contested in good faith, if such reserve as required by GAAP has been made therefor or (ii) trade accounts payable of the Company and its Subsidiaries (with respect to which no legal proceeding to enforce collection has been commenced or, to the knowledge of a Responsible Officer of the Company, threatened) not exceeding, in the aggregate at any time outstanding, $25,000,000; (e) taxes, assessments or other government charges which are not yet due or are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as will be required by GAAP will have been made therefor; (f) Borrowing Base Debt of the Company; provided that the aggregate of all Indebtedness permitted under this Subsection 10.1(f) shall not exceed the amount by which the then current Borrowing Base exceeds the then current Revolving Credit Obligations; (g) to the extent, if any, not covered by Subsection (b) hereinabove, the Indebtedness of the Company to APC evidenced solely by the Intercompany Notes, as defined in the Beluga Financing Documents and the APC Long Term Financing Documents, together with any renewals, extensions, amendments, refinancings, rearrangements, modifications, restatements or supplements, but not increases (other than increases which are permitted under the present terms of the Beluga Financing Documents and the APC Long Term Financing Documents) thereof from time to time; (h) intercompany Indebtedness owed to the Company by any Subsidiary of the Company and intercompany Indebtedness owed to any Subsidiary of the Company by the Company or any other Subsidiary of the Company which is fully subordinated to the Obligations; (i) loans, advances or extensions of credit to the Company for the purpose of financing no more than 75% of the purchase price of any fixed assets which are not included in the property taken into account in determining the Borrowing Base and which are considered in the categories of property, plant or equipment according to GAAP applied on a consistent basis; (j) obligations of the Company under the Gas Sales Contract, together with any renewals, extensions, amendments, refinancings, rearrangements, modifications, restatements or supplements, but not increases, thereof from time to time; (k) the Guarantee by the Company or any Subsidiary of the Company of payment or performance by any Subsidiary of the Company under any agreement so long as the obligation guaranteed does not constitute Indebtedness for borrowed money; (l) obligations of the Company or any of its Subsidiaries under gas purchase contracts for gas not taken, as to which the Company or its respective Subsidiary is liable to pay if not made up; (m) obligations of the Company or any of its Subsidiaries under any contract for sale for future delivery of oil or gas (whether or not the subject oil or gas is to be delivered), hedging contract, forward contract, swap agreement, futures contract or other similar agreement; (n) obligations of the Company or any of its Subsidiaries under any interest rate swap agreement, or any contract implementing any interest rate cap, collar or floor, or any similar interest hedging contract; (o) obligations in connection with gas imbalances arising in the ordinary course of business; (p) Indebtedness not exceeding $1,000,000 in the aggregate borrowed from the Amarillo Economic Development Commission and related Guarantees and related obligations of the Company and its Subsidiaries; (q) liabilities under leases and lease agreements which do not cover oil and gas properties to the extent the incurrence and existence of such liabilities will still enable the Company and each Subsidiary to comply with all other requirements of this Agreement and the other Loan Documents to which they respectively are parties; (r) Subordinated Debt; (s) Funded Indebtedness of any Oil and Gas Subsidiary for borrowed money payable solely by recourse to properties not included in the Borrowing Base and Indebtedness incurred by any Gas and Liquids Pipeline Subsidiary in connection with the construction or acquisition of new assets in connection with the Pipeline Operations which is payable solely by recourse to the assets so constructed or acquired, each to the extent not otherwise expressly permitted by this Section 10.1; (t) the Canadian Facility (and the "Bankers' Acceptances" provided for therein) and the guaranty by the Company of the Canadian Facility; and (u) Indebtedness of Seagull Energy Canada Ltd. having a maturity of 364 days or less from the date of its incurrence in an aggregate principal amount not exceeding Canadian $10,000,000 at any one time outstanding. 10.2 Liens. The Company will not and will not permit any of its Subsidiaries to create, incur, assume or permit to exist any Lien on any of its or their properties (now owned or hereafter acquired), except: (a) Liens securing the Indebtedness described in Subsection 10.1(a); (b) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as will be required by GAAP will have been made therefor; (c) Liens of landlords, vendors, contractors, subcontractors, carriers, warehousemen, mechanics, laborers or materialmen or other like Liens arising by law in the ordinary course of business for sums not yet due or being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as will be required by GAAP will have been made therefor; (d) Liens existing on property owned by the Company or any of its Subsidiaries on the date of this Agreement which have been disclosed to the Banks in the Disclosure Statement, together with any renewals, extensions, amendments, refinancings, rearrangements, modifications, restatements or supplements, but not increases, thereof from time to time; (e) pledges or deposits made in the ordinary course of business in connection with worker's compensation, unemployment insurance, social security and other like laws; (f) inchoate liens arising under ERISA to secure the contingent liability of the Company permitted by Section 9.12; (g) Liens in the ordinary course of business, not to exceed in the aggregate $10,000,000 as to the Company and its Subsidiaries at any time in effect, regarding (i) the performance of bids, tenders, contracts (other than for the repayment of borrowed money or the deferred purchase price of property or services) or leases, (ii) statutory obligations, (iii) surety appeal bonds or (iv) Liens to secure progress or partial payments made to the Company or any of its Subsidiaries and other Liens of like nature; (h) covenants, restrictions, easements, servitudes, permits, conditions, exceptions, reservations, minor rights, minor encumbrances, minor irregularities in title or conventional rights of reassignment prior to abandonment which do not materially interfere with the occupation, use and enjoyment by the Company or any Subsidiary of the Company of its respective assets in the normal course of business as presently conducted, or materially impair the value thereof for the purpose of such business; (i) Liens of operators under joint operating agreements or similar contractual arrangements with respect to the relevant entity's proportionate share of the expense of exploration, development and operation of oil, gas and mineral leasehold or fee interests owned jointly with others, to the extent that same relate to sums not yet due or which are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as will be required by GAAP will have been made therefor; (j) Liens created pursuant to the creation of trusts or other arrangements funded solely with cash, cash equivalents or other marketable investments or securities of the type customarily subject to such arrangements in customary financial practice with respect to long-term or medium-term indebtedness for borrowed money, the sole purpose of which is to make provision for the retirement or defeasance, without prepayment, of Indebtedness permitted under Section 10.1; (k) Liens on the assets or properties of ENSTAR Alaska; (l) the Vendor Financing Arrangements (as defined in the Mesa Contract), to the extent that the same shall have been deducted in calculating the Borrowing Base; (m) purchase money Liens for the acquisition of fixed assets pursuant to Subsection 10.1(i), so long as such Liens exist solely against the relevant fixed asset acquired and secure only the purchase money debt; provided, that the aggregate amount of Indebtedness which is secured by Liens described in this subsection (other than Indebtedness which is payable solely by recourse to the applicable property) shall not exceed $10,000,000 at any one time outstanding; (n) any Lien existing on any real or personal property of any corporation or partnership at the time it becomes a Subsidiary of the Company or of any other Subsidiary of the Company, or existing prior to the time of acquisition upon any real or personal property acquired by the Company or any of its Subsidiaries; provided, that such Liens may at all times be deducted in calculating the Borrowing Base from time to time in effect; (o) legal or equitable encumbrances deemed to exist by reason of the existence of any litigation or other legal proceeding or arising out of a judgment or award with respect to which an appeal is being prosecuted in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as will be required by GAAP will have been made therefor; (p) any Liens securing Indebtedness neither assumed nor guaranteed by the Company or any of its Subsidiaries nor on which it customarily pays interest, existing upon real estate or rights in or relating to real estate acquired by the Company or any of its Subsidiaries for substation, metering station, pump station, storage, gathering line, transmission line, transportation line, distribution line or right-of-way purposes, and any Liens reserved in leases for rent and full compliance with the terms of the leases in the case of leasehold estates, to the extent that any such Lien referred to in this clause arises in the normal course of business as presently conducted and does not materially impair the use of the property covered by such Lien for the purposes for which such property is held by the Company or its applicable Subsidiary; (q) rights reserved to or vested in any municipality or governmental, statutory or public authority by the terms of any right, power, franchise, grant, license or permit, or by any provision of law, to terminate such right, power, franchise, grant, license or permit or to purchase, condemn, expropriate or recapture or to designate a purchaser of any of the property of the Company or any of its Subsidiaries; (r) rights reserved to or vested in any municipality or governmental, statutory or public authority to control or regulate any property of the Company or any of its Subsidiaries, or to use such property in a manner which does not materially impair the use of such property for the purposes for which it is held by the Company or its applicable Subsidiary; (s) any obligations or duties affecting the property of the Company or any of its Subsidiaries to any municipality, governmental, statutory or public authority with respect to any franchise, grant, license or permit; (t) rights of a common owner of any interest in real estate, rights-of-way or easements held by the Company or any of its Subsidiaries and such common owner as tenants in common or through other common ownership; (u) any Liens arising from the matters described in Schedule 3.19 of the Mesa Contract; (v) Liens securing Indebtedness permitted under Section 10.1(s) hereof (to the extent such Liens are permitted under such Section 10.1(s)); (w) as to assets located in Canada, reservations, limitations, provisos and conditions in any original grant from the Crown or freehold lessor of any of the properties of the Company or its Subsidiaries; (x) other Liens securing Indebtedness not exceeding, in the aggregate, $10,000,000 at any one time outstanding; (y) other Liens securing Senior Debt, but only so long as such Liens shall also secure the Obligations on a pari passu basis, in a manner and pursuant to documentation acceptable to the Majority Banks; (z) Liens (i) granted to or existing in favor of third parties on margin accounts of the Company or any of its Subsidiaries relating to exchange traded contracts for the delivery of natural gas pursuant to which the Company or any such Subsidiary intends to take actual delivery of such natural gas within forty (40) days from the then current date in the ordinary course of business and not for speculative purposes, and (ii) on margin accounts of the Company or any of its Subsidiaries relating to exchange traded contracts for the delivery of natural gas, provided, however, the aggregate balance of the margin accounts subject to the Liens permitted by this clause (ii) shall not exceed from time to time $10,000,000. 10.3 Investments, Loans and Advances. The Company will not and will not permit its Subsidiaries to make or permit to remain outstanding any advances, loans or other extensions of credit or capital contributions (other than prepaid expenses in the ordinary course of business) to (by means of transfers of property or assets or otherwise), or purchase or own any stocks, bonds, notes, debentures or other securities of, or incur contingent liability with respect to (except for the endorsement of checks in the ordinary course of business and except for the Indebtedness and Liens permitted under this Agreement) any Person (all such transactions being herein called "Investments"), except that the foregoing restriction will not apply to: (a) Investments (all prior to the date hereof) the material details of which have been set forth in the Financial Statements delivered to Agent prior to the date hereof or the Disclosure Statement; (b) Liquid Investments; (c) advances or extensions of credit in the form of accounts receivable incurred in the ordinary course of business; (d) the acquisition of all of the capital stock of wholly owned Subsidiaries incorporated or acquired subsequent to the date of this Agreement; (e) investments where the consideration paid is capital stock of the Company, plus cash paid in lieu of issuing fractional shares and cash paid in settlement of claims of dissenters, such cash not to exceed 10% of the aggregate purchase price in any such transaction; (f) Investments in any Person which after giving effect thereto will be a Subsidiary of the Company, so long as the Investment in such Person, when consummated, would not result in a breach of the covenants set forth in Section 10.1; (g) intercompany loans, advances or investments by the Company to or in any Subsidiary of the Company (other than a Subsidiary that is obligated to pay Funded Indebtedness for borrowed money payable solely by recourse to properties not included in the Borrowing Base) or, to the extent permitted under Section 10.1(h) hereof, by any Subsidiary of the Company to or in the Company or to or in any other Subsidiary of the Company, provided, however, that APC may not make any intercompany loans, advances or investments in any Subsidiary of the Company pursuant to this clause (g); (h) intercompany loans, advances or investments by the Company, solely from income or cash flow of the Company subject to the Beluga Financing Documents, to APC as required under the Beluga Financing Documents and the APC Long Term Financing Documents; (i) to the extent, if any, not covered by Subsection (a) hereinabove, the Indebtedness of the Company to APC evidenced solely by the Intercompany Notes, as defined in the Beluga Financing Documents and the APC Long Term Financing Documents, together with any renewals, extensions, amendments, refinancings, rearrangements, modifications, restatements or supplements, but not increases (other than increases which are permitted under the present terms of the Beluga Financing Documents and the APC Long Term Financing Documents) thereof from time to time; (j) loans or advances to employees made in the ordinary course of business, up to the aggregate principal amount at any one time outstanding of $5,000,000; (k) Investments in reasonable amounts of securities for purposes of funding employee benefit plans maintained by the Company; (l) advances or extensions of credit made in the ordinary course of business to third parties under applicable contracts and agreements in connection with (i) oil, gas or other mineral exploration, development and production activities or (ii) Hydrocarbon or chemical pipeline gathering or transportation activities; (m) Investments where the consideration paid is assets of the Company or its Subsidiaries other than capital stock, cash or oil and gas reserves; (n) Investments in EBOC Energy Ltd. made in connection with and pursuant to that certain Sale Agreement dated November 19, 1993 executed by and between Novacor Petrochemicals Ltd., as Vendor, and the Company, as Purchaser; (o) any payment, prepayment, purchase or retirement of Indebtedness of the Company (other than payments, prepayments, purchases or retirement of Subordinated Debt prohibited under the definition of "Subordinated Debt"); and (p) any other Investments which in the aggregate do not cause the Company to be in violation of the Investments Tests. 10.4 Dividend Payment Restrictions. The Company will not declare or make any Dividend Payment if any Default or Event of Default has occurred and is continuing or if there exists any Borrowing Base Deficiency. 10.5 Mergers and Sales of Assets. The Company will not (a) merge or consolidate with, or sell, assign, lease or otherwise dispose of, whether in one transaction or in a series of transactions, more than ten percent (10%) in the aggregate of the Company's and its Subsidiaries' consolidated total assets (whether now owned or hereafter acquired) to any Person or Persons during the period since the most recent Borrowing Base Determination, or permit any Subsidiary of the Company to do so (other than to the Company or another Subsidiary of the Company or the issuance by any Subsidiary of the Company of any stock to the Company or another Subsidiary of the Company), or (b) sell, assign, lease or otherwise dispose of, whether in one transaction or in a series of transactions, any other properties if receiving therefor consideration other than cash or other consideration readily convertible to cash or which is less than the fair market value of the relevant properties, or permit any Subsidiary of the Company to do so; provided that the Company or any Subsidiary of the Company may merge or consolidate with any other Person and any Subsidiary of the Company may transfer properties to any other Subsidiary of the Company or to the Company so long as, in each case, (i) immediately thereafter and giving effect thereto, no event will occur and be continuing which constitutes a Default, (ii) in the case of any such merger or consolidation to which the Company is a party, the Company is the surviving Person, (iii) in the case of any such merger or consolidation to which any Subsidiary of the Company is a party (but not the Company), after giving effect to all transactions closing concurrently relating to such merger or consolidation, the surviving Person is a Subsidiary of the Company and (iv) the surviving Person ratifies each applicable Loan Document and provided further that any Subsidiary of the Company may merge or consolidate with any other Subsidiary of the Company so long as, in each case (i) immediately thereafter and giving effect thereto, no event will occur and be continuing which constitutes a Default and (ii) the surviving Person ratifies each applicable Loan Document. 10.6 Proceeds of Notes. The Company will not permit the proceeds of the Notes to be used for any purpose other than those permitted by this Agreement. 10.7 ERISA Compliance. The Company will not at any time permit any Plan maintained by it or any Subsidiary of the Company to: (a) engage in any "prohibited transaction" as such term is defined in Section 4975 of the Code; (b) incur any "accumulated funding deficiency" as such term is defined in Section 302 of ERISA; or (c) terminate or be terminated in a manner which could result in the imposition of a Lien on the property of the Company or any Subsidiary of the Company pursuant to Section 4068 of ERISA, in each case, to the extent that permitting the Plan to do so would have a Material Adverse Effect. 10.8 Amendment of Certain Documents. The Company will not amend, modify or obtain or grant a waiver of (except for waivers only of cross-defaults created by a Default under this Agreement), or allow APC to enter into any amendment or modification or obtain or grant any waiver of (except for waivers only of cross-defaults created by a Default under this Agreement), any provision of those documents relating to or constituting the Beluga Financing Documents or the APC Long Term Financing Documents, without prior written notification to Agent. 10.9 Tangible Net Worth. The Company will not permit the Tangible Net Worth of the Company and its Subsidiaries, on a consolidated basis, at any time to be less than $465,000,000 plus 50% of net income of the Company and its Subsidiaries on a consolidated basis, if positive, beginning with the fiscal year ended December 31, 1997 and calculated annually thereafter based upon positive net income of the Company and its Subsidiaries for each applicable fiscal year taken cumulatively. 10.10 Company Debt/Capitalization Ratio. The Company will not permit the Debt/Capitalization Ratio to be, at any time, more than 65%. 10.11 EBITDAX/Interest Ratio. The Company will not permit the EBITDAX/Interest Ratio to be, at any time, less than (a) 3.00:1.00 for any twelve month period ending on the last day of any calendar quarter for the period from the Effective Date through and including March 31, 1997; and (b) 3.50:1.00 for any twelve month period ending on the last day of any calendar quarter thereafter. 10.12 Nature of Business. The Company will not engage in, and will not permit any Subsidiary of the Company to engage in, businesses other than oil and gas exploration and production, gas processing, transmission, distribution, marketing and storage and gas and liquids pipeline operations and activities related or ancillary thereto; provided, that if the Company acquires one or more Subsidiaries in transactions otherwise permitted by the terms hereof, any such Subsidiary may be engaged in businesses other than those listed in this Section so long as the assets of such Subsidiaries which are used in the conduct of such other businesses do not constitute more than five percent (5%) of the consolidated total assets of the Company (inclusive of the assets of the Subsidiary so acquired). 10.13 Futures Contracts. The Company will not, and will not permit any Subsidiary of the Company to, enter into or be obligated under any contract for sale for future delivery of oil or gas (whether or not the subject oil or gas is to be delivered), hedging contract, forward contract, swap agreement, futures contract or other similar agreement except for (i) such contracts (x) which fall within the parameters set forth on Exhibit J hereto or are otherwise approved in writing by the Majority Banks and (y) which in the aggregate do not cover at any time a volume of oil and/or gas equal to or greater than 50% of the proved producing reserves attributable to the oil and gas properties of the Company and its Subsidiaries, taken as a whole, as evidenced by the most current Engineering and Company Reports and (ii) production sales contracts entered into in the ordinary course of the Company's or the applicable Subsidiary's business. 10.14 Covenants in Other Agreements. The Company will not and will not permit any of its Subsidiaries to become a party to or to agree that it or any of its property is bound by any agreement, indenture, mortgage, deed of trust or any other instrument directly or indirectly (i) restricting any loans, advances or any other Investments to or in the Company by any of its Subsidiaries; (ii) restricting the ability of any Subsidiary of the Company to make tax payments or management fee payments; (iii) restricting the capitalization structure of any Subsidiary of the Company; or (iv) restricting the ability or capacity of any Subsidiary of the Company to make Dividend Payments; provided, however, nothing in this Section 10.14 shall restrict the existence of negative covenants otherwise prohibited by this Section in documentation evidencing or related to Indebtedness permitted by Subsection 10.1(t) and, to the extent that the applicable Subsidiary does not own any property included in the Borrowing Base, Subsections 10.1(m), (n) and (s). Notwithstanding the foregoing, either of ENSTAR Alaska or APC may become a party to, or grant a Lien in any of its property by way of, or agree that it will be bound by, any indenture, mortgage, deed of trust or other instrument containing provisions of the types described above in this Section 10.14 so long as the terms and provisions thereof are not materially more restrictive than the terms or provisions which are legally binding on ENSTAR Alaska or APC on the Effective Date. Section 11. Defaults. 11.1 Events of Default. If one or more of the following events (herein called "Events of Default") shall occur and be continuing: (a) Payments - (i) the Company or any other Relevant Party fails to make any payment or prepayment of any installment of principal on the Loans or any Reimbursement Obligation payable under the Notes, this Agreement or the other Loan Documents when due or (ii) the Company or any other Relevant Party fails to make any payment or prepayment of interest with respect to the Loans, any Reimbursement Obligation or any other fee or amount under the Notes, this Agreement or the other Loan Documents and such failure to pay continues unremedied for a period of five (5) Business Days; or (b) Representations and Warranties - any representation or warranty made by the Company or any other Relevant Party in this Agreement or in any other Loan Document or in any instrument executed in connection herewith or therewith proves to have been incorrect in any material respect as of the date thereof; or any representation, statement (including Financial Statements), certificate or data furnished or made by the Company or any other Relevant Party (or any officer of the Company or any other Relevant Party) under or in connection with this Agreement or any other Loan Document, including without limitation in the Disclosure Statement, proves to have been untrue in any material respect, as of the date as of which the facts therein set forth were stated or certified; or (c) Affirmative Covenants - (i) default shall be made in the due observance or performance of any of the covenants or agreements contained in Sections 9.11 (or in Section 9.6 to the extent such default is considered an Event of Default under the other Subsections of this Section 11.1) or (ii) default is made in the due observance or performance of any of the other covenants or agreements contained in Section 9 of this Agreement or any other affirmative covenant of the Company or any other Relevant Party contained in this Agreement or any other Loan Document and such default continues unremedied for a period of 30 days after (x) notice thereof is given by Agent to the Company or (y) such default otherwise becomes known to the Company, whichever is earlier; or (d) Negative Covenants - (i) default shall be made in the observance or performance of any of the covenants or agreements contained in Section 10.8 and such default continues unremedied for a period of five (5) Business Days after (x) notice thereof is given by Agent to the Company or (y) such default otherwise becomes known to the Company, whichever is earlier, or (ii) default is made in the due observance or performance by the Company of any of the other covenants or agreements contained in Section 10 of this Agreement or of any other negative covenant of the Company or any other Relevant Party contained in this Agreement or any other Loan Document; or (e) Other Obligations - default is made in the due observance or performance by the Company or any of its Subsidiaries (as principal or guarantor or other surety) of any of the covenants or agreements contained in any bond, debenture, note or other evidence of Indebtedness in excess of $25,000,000 (singly or aggregating several such bonds, debentures, notes or other evidence of Indebtedness) which default gives the holder the right to accelerate the maturity of such Indebtedness, other than the Loan Documents, or under any credit agreement, loan agreement, indenture, promissory note or similar agreement or instrument executed in connection with any of the foregoing, to which it (respectively) is a party and such default is unwaived or continues unremedied beyond the expiration of any applicable grace period which may be expressly allowed under such instrument or agreement; or (f) Involuntary Bankruptcy or Receivership Proceedings - a receiver, conservator, liquidator or trustee of the Company or of any of its property is appointed by the order or decree of any court or agency or supervisory authority having jurisdiction, and such decree or order remains in effect for more than 60 days; or the Company is adjudicated bankrupt or insolvent; or any of its property is sequestered by court order and such order remains in effect for more than 60 days; or a petition is filed against the Company under any state or federal bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution, liquidation or receivership law of any jurisdiction, whether now or hereafter in effect, and is not dismissed within 60 days after such filing; or (g) Voluntary Petitions or Consents - the Company commences a voluntary case or other proceeding seeking liquidation, reorganization, arrangement, insolvency, readjustment of debt, dissolution, liquidation or other relief with respect to itself or its debt or other liabilities under any bankruptcy, insolvency or other similar law nor or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or consents to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or fails generally to, or cannot, pay its debts generally as they become due or takes any corporate action to authorize or effect any of the foregoing; or (h) Assignments for Benefit of Creditors or Admissions of Insolvency - the Company makes an assignment for the benefit of its creditors, or admits in writing its inability to pay its debts generally as they become due, or consents to the appointment of a receiver, trustee, or liquidator of the Company or of all or any part of its property; or (i) Undischarged Judgments - judgments (individually or in the aggregate) for the payment of money in excess of $10,000,000 is rendered by any court or other governmental body against the Company or any of its Subsidiaries and the Company or such Subsidiary does not discharge the same or provide for its discharge in accordance with its terms, or procure a stay of execution thereof within 60 days from the date of entry thereof, and within said period of 60 days from the date of entry thereof or such longer period during which execution of such judgment will have been stayed, the Company or such Subsidiary fails to appeal therefrom and cause the execution thereof to be stayed during such appeal while providing such reserves therefor as may be required under GAAP; or (j) Subsidiary Defaults - any Subsidiary of the Company takes, suffers, or permits to exist any of the events or conditions referred to in Subsections 11.1(f), (g) or (h); or (k) Change in Control - there should occur any Change of Control. THEREUPON: Agent may (and, if directed by the Majority Banks, shall) (a) declare the Commitments terminated (whereupon the Commitments shall be terminated) and/or (b) terminate any Letter of Credit providing for such termination by sending a notice of termination as provided therein and/or (c) declare the principal amount then outstanding of and the accrued interest on the Loans and Reimbursement Obligations and all fees and all other amounts payable hereunder and under the Notes to be forthwith due and payable, whereupon such amounts shall be and become immediately due and payable, without notice (including without limitation notice of acceleration and notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company; provided that in the case of the occurrence of an Event of Default with respect to the Company referred to in clause (f) or (g) of this Section 11.1 or in clause (j) of this Section 11.1 to the extent it refers to clauses (f) or (g), the Commitments shall be automatically terminated and the principal amount then outstanding of and the accrued interest on the Loans and Reimbursement Obligations and all fees and all other amounts payable hereunder and under the Notes shall be and become automatically and immediately due and payable, without notice (including but not limited to notice of intent to accelerate and notice of acceleration) and without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company and/or (d) exercise any and all other rights available to it under the Loan Documents, at law or in equity. 11.2 Collateral Account. The Company hereby agrees, in addition to the provisions of Section 11.1 hereof, that upon the occurrence and during the continuance of any Event of Default, it shall, if requested by Agent or the Majority Banks (through Agent), pay to Agent an amount in immediately available funds equal to the then aggregate amount available for drawings under all Letters of Credit issued for the account of the Company, which funds shall be held by Agent as Cover. 11.3 Preservation of Security for Unmatured Reimbursement Obligations. In the event that, following (i) the occurrence of an Event of Default and the exercise of any rights available to Agent under the Loan Documents, and (ii) payment in full of the principal amount then outstanding of and the accrued interest on the Loans and Reimbursement Obligations and fees and all other amounts payable hereunder and under the Notes, any Letters of Credit shall remain outstanding and undrawn upon, Agent shall be entitled to hold (and the Company hereby grants and conveys to Agent a security interest in and to) all cash or other property ("Proceeds of Remedies") realized or arising out of the exercise by Agent of any rights available to it under the Loan Documents, at law or in equity, including, without limitation, the proceeds of any foreclosure, as collateral for the payment of any amounts due or to become due under or in respect of such Letters of Credit. Such Proceeds of Remedies shall be held for the ratable benefit of the applicable Issuers. The rights, titles, benefits, privileges, duties and obligations of Agent with respect thereto shall be governed by the terms and provisions of this Agreement. Agent may, but shall have no obligation to, invest any such Proceeds of Remedies in such manner as Agent, in the exercise of its sole discretion, deems appropriate. Such Proceeds of Remedies shall be applied to Reimbursement Obligations arising in respect of any such Letters of Credit and/or the payment of any Issuer's obligations under any such Letter of Credit when such Letter of Credit is drawn upon. The Company hereby agrees to execute and deliver to Agent and the Banks such security agreements, pledges or other documents as Agent or any of the Banks may, from time to time, require to perfect the pledge, lien and security interest in and to any such Proceeds of Remedies provided for in this Section 11.3. 11.4 Right of Setoff. Upon (i) the occurrence and during the continuance of any Event of Default referred to in clauses (f), (g) or (h) of Section 11.1, or in clause (j) of Section 11.1 to the extent it refers to clauses (f), (g) or (h), or upon (ii) the occurrence and continuance of any other Event of Default and upon the making of the notice specified in Section 11.1 to authorize Agent to declare the Notes due and payable pursuant to the provisions thereof, or if (iii) the Company or any of its Subsidiaries becomes insolvent, however evidenced, the Banks are hereby authorized at any time and from time to time, without notice to the Company or any of its Subsidiaries (any such notice being expressly waived by the Company and its Subsidiaries), to setoff and apply any and all deposits (general or special, time or demand, provisional or final, whether or not such setoff results in any loss of interest or other penalty, and including without limitation all certificates of deposit) at any time held, and any other funds or property at any time held, and other Indebtedness at any time owing by any Bank to or for the credit or the account of the Company against any and all of the Obligations irrespective of whether or not such Bank will have made any demand under this Agreement or the Notes and although such obligations may be unmatured. Should the right of any Bank to realize funds in any manner set forth hereinabove be challenged and any application of such funds be reversed, whether by court order or otherwise, the Banks shall make restitution or refund to the Company pro rata in accordance with their Commitments. The Banks agree promptly to notify the Company and Agent after any such setoff and application, provided that the failure to give such notice will not affect the validity of such setoff and application. The rights of Agent and the Banks under this Section are in addition to other rights and remedies (including without limitation other rights of setoff) which Agent or the Banks may have. Section 12. Agent. 12.1 Appointment, Powers and Immunities. Each Bank hereby irrevocably appoints and authorizes Agent to act as its agent hereunder and under the Letters of Credit and the other Loan Documents with such powers as are specifically delegated to Agent by the terms hereof and thereof, together with such other powers as are reasonably incidental thereto. Agent (which term as used in this Section 12 shall include reference to its affiliates and its own and their affiliates' officers, directors, employees and agents) shall not (a) have any duties or responsibilities except those expressly set forth in this Agreement, the Letters of Credit, and the other Loan Documents, or shall by reason of this Agreement or any other Loan Document be a trustee or fiduciary for any Bank; (b) be responsible to any Bank for any recitals, statements, representations or warranties contained in this Agreement, the Letters of Credit or any other Loan Document, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement, the Letters of Credit or any other Loan Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, the Letters of Credit, or any other Loan Document or any other document referred to or provided for herein or therein or any property covered thereby or for any failure by any Relevant Party or any other Person to perform any of its obligations hereunder or thereunder; (c) be required to initiate or conduct any litigation or collection proceedings hereunder or under the Letters of Credit or any other Loan Document except to the extent Agent is so requested by the Majority Banks, or (d) be responsible for any action taken or omitted to be taken by it hereunder or under the Letters or Credit or any other Loan Document or any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, including, without limitation, pursuant to their own negligence, except for its own gross negligence or willful misconduct. Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Without in any way limiting any of the foregoing, each Bank acknowledges that neither Agent nor any Issuer shall have any greater responsibility in the operation of the Letters of Credit than is specified in the Uniform Customs and Practice for Documentary Credits (1993 Revision, International Chamber of Commerce Publication No. 500). In any foreclosure proceeding concerning any collateral for the Notes, each holder of a Note if bidding for its own account or for its own account and the accounts of other Banks is prohibited from including in the amount of its bid an amount to be applied as a credit against its Note or Notes or the Notes of the other Banks; instead, such holder must bid in cash only; provided that this provision is for the sole benefit of Agent and the Banks and shall not inure to the benefit of the Company or any of its Subsidiaries. However, in any such foreclosure proceeding, Agent may (but shall not be obligated to) submit a bid for all Banks (including itself) in the form of a credit against the Notes of all of the Banks, and Agent or its designee may (but shall not be obligated to) accept title to such collateral for and on behalf of all Banks. 12.2 Reliance by Agent. Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel (which may be counsel for the Company), independent accountants and other experts selected by Agent. As to any matters not expressly provided for by this Agreement, the Letters of Credit, or any other Loan Document, Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and thereunder in accordance with instructions of the Majority Banks (or, where unanimous consent is required by the terms hereof or of the other Loan Documents, all of the Banks), and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. Pursuant to instructions of the Majority Banks (except as otherwise provided in Section 13.4 hereof), Agent shall have the authority to execute releases of security documents on behalf of the Banks without the joinder of any Bank. 12.3 Defaults. Agent shall not be deemed to have knowledge of the occurrence of a Default (other than the non-payment of principal of or interest on Loans or Reimbursement Obligations) unless it has received notice from a Bank or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that Agent receives such a notice of the occurrence of a Default, Agent shall give prompt notice thereof to the Banks (and shall give each Bank prompt notice of each such non-payment). Agent shall (subject to Section 12.7 hereof) take such action with respect to such Default as shall be directed by the Majority Banks and within its rights under the Loan Documents and at law or in equity, provided that, unless and until Agent shall have received such directions, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, permitted hereby with respect to such Default as it shall deem advisable in the best interests of the Banks and within its rights under the Loan Documents, at law or in equity. 12.4 Rights as a Bank. With respect to its Commitments and the Loans made and Letter of Credit Liabilities, Chase in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as Agent and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Chase in its individual capacity. Agent may (without having to account therefor to any Bank) accept deposits from, lend money to and generally engage in any kind of banking, trust, letter of credit, agency or other business with the Company (and any of its Affiliates) as if it were not acting as Agent, and Agent may accept fees and other consideration from the Company and its Affiliates (in addition to the fees heretofore agreed to between the Company and Agent) for services in connection with this Agreement or otherwise without having to account for the same to the Banks. 12.5 Indemnification. The Banks agree to indemnify Agent (to the extent not reimbursed under Section 2.2(c), Section 9.7 or Section 13.3 hereof, but without limiting the obligations of the Company under said Sections 2.2(c), 9.7 and 13.3), ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever (including but not limited to, the consequences of the negligence of Agent) which may be imposed on, incurred by or asserted against Agent in any way relating to or arising out of this Agreement, the Letters of Credit or any other Loan Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses which the Company is obligated to pay under Sections 2.2(c), 9.8 and 13.3 hereof but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of their respective agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents, provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. The obligations of the Banks under this Section 12.5 shall survive the termination of this Agreement and the repayment of the Obligations. 12.6 Non-Reliance on Agent and Other Banks. Each Bank agrees that it has received current financial information with respect to the Company and that it has, independently and without reliance on Agent or any other Bank and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and decision to enter into this Agreement and that it will, independently and without reliance upon Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Loan Documents. Agent shall not be required to keep itself informed as to the performance or observance by any Relevant Party of this Agreement, the Letters of Credit or any of the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the properties or books of the Company or any Relevant Party. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by Agent hereunder, under the Letters of Credit or the other Loan Documents, Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Company or any other Relevant Party (or any of their affiliates) which may come into the possession of Agent. 12.7 Failure to Act. Except for action expressly required of Agent hereunder, under the Letters of Credit and under the other Loan Documents, Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction by the Banks of their indemnification obligations under Section 12.5 hereof against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 12.8 Resignation or Removal of Agent. Subject to the appointment and acceptance of a successor Agent as provided below, Agent may resign at any time by giving notice thereof to the Banks and the Company, and Agent may be removed at any time with or without cause by the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint a successor Agent, provided deposits with a successor Agent shall be insured by the Federal Deposit Insurance Corporation or its successor. If no successor Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or the Majority Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent. Any successor Agent shall be a bank which has an office in the United States and a combined capital and surplus of at least $250,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. A successor Agent shall promptly specify by notice to the Company and the Banks its Principal Office referred to in Sections 3.1 and 5.1. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Section 12 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as an Agent. Section 13. Miscellaneous. 13.1 Waiver. No waiver of any Default shall be a waiver of any other Default. No failure on the part of any Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law or in equity. 13.2 Notices. All notices and other communications provided for herein (including, without limitation, any modifications of, or waivers or consents under, this Agreement) shall be given or made by telex, telegraph, telecopy (confirmed by mail), cable, mail or other writing and telexed, telecopied, telegraphed, cabled, mailed or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party, at such other address as shall be designated by such party in a notice to the Company, Agent given in accordance with this Section 13.2. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly received when transmitted by telex or telecopier during regular business hours, delivered to the telegraph or cable office or personally delivered or, in the case of a mailed notice, three (3) days after deposit in the United States mails, postage prepaid, certified mail with return receipt requested (or upon actual receipt, if earlier), in each case given or addressed as aforesaid. 13.3 Indemnification. The Company shall indemnify Agent, the Banks, and each Affiliate thereof and their respective directors, officers, employees and agents from, and hold each of them harmless against, any and all losses, liabilities, claims or damages to which any of them may become subject (regardless of whether caused in whole or in part by the simple (but not gross) negligence of the Person indemnified), insofar as such losses, liabilities, claims or damages arise out of or result from any (i) actual or proposed use by the Company of the proceeds of any extension of credit (whether a Loan or a Letter of Credit) by any Bank hereunder, (ii) breach by the Company of this Agreement or any other Loan Document, (iii) violation by the Company or any of its Subsidiaries of any Legal Requirement, including but not limited to those relating to Hazardous Substances, (iv) Liens or security interests previously or hereafter granted on any real or personal property, to the extent resulting from any Hazardous Substance located in, on or under any such property, (v) ownership by the Banks or Agent of any real or personal property following foreclosure, to the extent such losses, liabilities, claims or damages arise out of or result from any Hazardous Substance located in, on or under such property, including, without limitation, losses, liabilities, claims or damages which are imposed upon Persons under laws relating to or regulating Hazardous Substances solely by virtue of ownership, (vi) Bank's or Agent's being deemed an operator of any such real or personal property by a court or other regulatory or administrative agency or tribunal in circumstances in which neither Agent nor any of the Banks is generally operating or generally exercising control over such property, to the extent such losses, liabilities, claims or damages arise out of or result from any Hazardous Substance located in, on or under such property, (vii) investigation, litigation or other proceeding (including any threatened investigation or proceeding) relating to any of the foregoing, and the Company shall reimburse Agent, each Bank, and each Affiliate thereof and their respective directors, officers, employees and agents, upon demand, for any expenses (including legal fees) incurred in connection with any such investigation or proceeding or (viii) taxes (excluding income taxes and franchise taxes) payable or ruled payable by any Governmental Authority in respect of the Notes or any other Loan Document, together with interest and penalties, if any; provided, however, that the Company shall not have any obligations pursuant to this Section 13.3 with respect to any losses, liabilities, claims, damages or expenses (a) arising from or relating solely to events, conditions or circumstances which, as to clauses (iv), (v) or (vi) above, first came into existence or which first occurred after the date on which the Company or any of its Subsidiaries conveyed to an unrelated third party all of the Company's or the applicable Subsidiary's rights, titles and interests to the applicable real or personal property (whether by deed, deed-in-lieu, foreclosure or otherwise) other than a conveyance made in violation of any Loan Document or (b) incurred by the Person seeking indemnification by reason of the gross negligence or willful misconduct of such Person. If the Company ever disputes a good faith claim for indemnification under this Section 13.3 on the basis of the proviso set forth in the preceding sentence, the full amount of indemnification provided for shall nonetheless be paid, subject to later adjustment or reimbursement at such time (if any) as a court of competent jurisdiction enters a final judgment as to the applicability of any such exceptions. 13.4 Amendments, Etc. No amendment or waiver of any provision of this Agreement, the Notes or any other Loan Document, nor any consent to any departure by the Company therefrom, shall in any event be effective unless the same shall be agreed or consented to by the Majority Banks and the Company, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, that no amendment, waiver or consent shall, unless in writing and signed by each Bank affected thereby, do any of the following: (a) increase the Commitment of such Bank (it being understood that the waiver of any reduction in the Commitments or any mandatory repayment other than (x) the repayment of all Loans at the end of the Revolving Credit Availability Period and (y) the mandatory reductions of the Commitments provided for in Section 2.3(a) and (z) the mandatory prepayments required by the terms of Section 3.2(b), shall not be deemed to be an increase in any Commitment) or subject the Banks to any additional obligation; (b) reduce the principal of, or interest on, any Loan, Reimbursement Obligation or fee hereunder; (c) postpone any scheduled date fixed for any payment or mandatory prepayment of principal of, or interest on, any Loan, Reimbursement Obligation, fee or other sum to be paid hereunder; (d) change the percentage of any of the Commitments or of the aggregate unpaid principal amount of any of the Loans and Letter of Credit Liabilities, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Agreement; (e) change any provision contained in Sections 2.2(c), 9.7 or 13.3 hereof or this Section 13.4 or Section 6.7 hereof, or (f) release all or substantially all of any security for the obligations of the Company under this Agreement or any Note or all or substantially all of the personal liability of any obligor created under any of the Loan Documents. Anything in this Section 13.4 to the contrary, no amendment, waiver or consent shall be made with respect to Section 12 without the consent of Agent. The consent of the Super Majority Banks shall be required to any amendment of any requirement under this Agreement or the other the Loan Documents that the consent of the Super Majority Banks be obtained. 13.5 Successors and Assigns. (a) This Agreement shall be binding upon and inure to the benefit of the Company, Agent and the Banks and their respective successors and assigns. The Company may not assign or transfer any of its rights or obligations hereunder without the prior written consent of all of the Banks. Each Bank may sell participations to any Person in all or part of any Loan or Letter of Credit, or all or part of its Notes or Commitments, in which event, without limiting the foregoing, the provisions of Section 6 shall inure to the benefit of each purchaser of a participation and the pro rata treatment of payments, as described in Section 5.2, shall be determined as if such Bank had not sold such participation. In the event any Bank shall sell any participation, such Bank shall retain the sole right and responsibility to enforce the obligations of the Company relating to the Loans or Letters of Credit, including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement other than amendments, modifications or waivers with respect to (i) any fees payable hereunder to the Banks and (ii) the amount of principal or the rate of interest payable on, or the dates fixed for the scheduled repayment of principal of, the Loans. (b) Each Bank may assign to one or more Banks or any other Person all or a portion of its interests, rights and obligations under this Agreement, provided, however, that (i) other than in the case of an assignment to another Bank that is, at the time of such assignment, a party hereto or an Affiliate of such Bank, the Company must give its prior written consent, which consent will not be unreasonably withheld, (ii) the aggregate amount of the Commitment and/or Loans or Letters of Credit of the assigning Bank subject to each such assignment (determined as of the date the Assignment and Acceptance (as defined below) with respect to such assignment is delivered to Agent) shall in no event be less than $10,000,000 (or $5,000,000 in the case of an assignment to an Affiliate of a Bank or between Banks), (iii) no assignment shall have the effect of reducing the pro rata share of the Loans or Letters of Credit and the Commitments held by the assignor and its Affiliates below $10,000,000, (iv) notwithstanding any other term or provision of this Agreement, unless the Company shall have otherwise consented in writing (such consent not to be unreasonably withheld), each such assignment shall be pro rata with respect to the Loans, the Letters of Credit and the Commitment of the assignor, and (v) the parties to each such assignment shall execute and deliver to Agent, for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance in the form of Exhibit H hereto (each an "Assignment and Acceptance") with blanks appropriately completed, together with any Note or Notes subject to such assignment and a processing and recordation fee of $2,500 paid by the assignee (for which the Company shall have no liability). Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (B) the Bank thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement. Notwithstanding anything contained in this Agreement to the contrary, any Bank may at any time assign all or any portion of its rights under this Agreement and the Notes issued to it as collateral to a Federal Reserve Bank; provided, that no such assignment shall release the assigning Bank from any of its obligations hereunder. (c) By executing and delivering an Assignment and Acceptance, the Bank assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, such Bank assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or any of the other Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant thereto; (ii) such Bank assignor makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance or observance by the Company of any of its obligations under this Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 8.6 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon any Agent, such Bank assignor or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents; (v) such assignee appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all obligations that by the terms of this Agreement and the other Loan Documents are required to be performed by it as a Bank. (d) Agent shall maintain at its office a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Banks and the Commitments of, and principal amount of the Loans owing to, each Bank from time to time (the "Register"). The entries in the Register shall be conclusive, in the absence of manifest error, and the Company, Agent and the Banks may treat each person the name of which is recorded in the Register as a Bank hereunder for all purposes of this Agreement and the other Loan Documents. The Register shall be available for inspection by the Company or any Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and the assignee thereunder together with any Note or Notes subject to such assignment, the written consent to such assignment executed by the Company and the fee payable in respect thereto, Agent shall, if such Assignment and Acceptance has been completed with blanks appropriately filled, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Company. Within five Business Days after receipt of notice, the Company, at its own expense, shall execute and deliver to Agent in exchange for the surrendered Notes new Notes to the order of such assignee in an amount equal to the Commitments and/or Loans or Letters of Credit assumed by it pursuant to such Assignment and Acceptance and, if the assigning Bank has retained Commitments and/or Loans hereunder, new Notes to the order of the assigning Bank in an amount equal to the Commitment and/or Loans retained by it hereunder. Such new Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the respective Note. Thereafter, such surrendered Notes shall be marked renewed and substituted and the originals delivered to the Company (with copies, certified by the Company as true, correct and complete, to be retained by Agent). (f) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 13.5, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Company furnished to such Bank by or on behalf of the Company; provided, however, that, prior to any such disclosure, the Company shall have consented thereto, which consent shall not be unreasonably withheld, and each such assignee or participant, or proposed assignee or participant, shall execute an agreement whereby such assignee or participant shall agree to preserve the confidentiality of any Confidential Information (defined in Section 13.13) on terms substantially the same as those provided in Section 13.13. (g) The Company will have the right to consent to any material intercreditor arrangements in connection with an assignment by any Bank of any interest, right or obligation under this Agreement which is not pro rata with respect to the Loans, the Letters of Credit and the Commitment of the assignor and the Company may deny its consent to any such arrangements which, in the reasonable judgement of the Company, would adversely affect the Company in a material respect. (h) The provisions of this Section shall not apply to the assignment and pledge of a Bank's rights hereunder or under any Note to any Federal Reserve Bank for collateral purposes pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank; provided that such assignment and pledge shall not relieve such Bank of any of its obligations hereunder. 13.6 Limitation of Interest. The Company and the Banks intend to strictly comply with all applicable laws, including applicable usury laws. Accordingly, the provisions of this Section 13.6 shall govern and control over every other provision of this Agreement or any other Loan Document which conflicts or is inconsistent with this Section, even if such provision declares that it controls. As used in this Section, the term "interest" includes the aggregate of all charges, fees, benefits or other compensation which constitute interest under applicable law, provided that, to the maximum extent permitted by applicable law, (a) any non-principal payment shall be characterized as an expense or as compensation for something other than the use, forbearance or detention of money and not as interest, and (b) all interest at any time contracted for, reserved, charged or received shall be amortized, prorated, allocated and spread, in equal parts during the full term of the Obligations. In no event shall the Company or any other Person be obligated to pay, or any Bank have any right or privilege to reserve, receive or retain, (a) any interest in excess of the maximum amount of nonusurious interest permitted under the laws of the State of Texas or the applicable laws (if any) of the United States or of any other applicable state, or (b) total interest in excess of the amount which such Bank could lawfully have contracted for, reserved, received, retained or charged had the interest been calculated for the full term of the Obligations at the Highest Lawful Rate. On each day, if any, that the interest rate (the "Stated Rate") called for under this Agreement or any other Loan Document exceeds the Highest Lawful Rate, the rate at which interest shall accrue shall automatically be fixed by operation of this sentence at the Highest Lawful Rate for that day, and shall remain fixed at the Highest Lawful Rate for each day thereafter until the total amount of interest accrued equals the total amount of interest which would have accrued if there were no such ceiling rate as is imposed by this sentence. Thereafter, interest shall accrue at the Stated Rate unless and until the Stated Rate again exceeds the Highest Lawful Rate when the provisions of the immediately preceding sentence shall again automatically operate to limit the interest accrual rate. The daily interest rates to be used in calculating interest at the Highest Lawful Rate shall be determined by dividing the applicable Highest Lawful Rate per annum by the number of days in the calendar year for which such calculation is being made. None of the terms and provisions contained in this Agreement or in any other Loan Document which directly or indirectly relate to interest shall ever be construed without reference to this Section 13.6, or be construed to create a contract to pay for the use, forbearance or detention of money at an interest rate in excess of the Highest Lawful Rate. If the term of any Obligation is shortened by reason of acceleration of maturity as a result of any Default or by any other cause, or by reason of any required or permitted prepayment, and if for that (or any other) reason any Bank at any time, including but not limited to, the stated maturity, is owed or receives (and/or has received) interest in excess of interest calculated at the Highest Lawful Rate, then and in any such event all of any such excess interest shall be canceled automatically as of the date of such acceleration, prepayment or other event which produces the excess, and, if such excess interest has been paid to such Bank, it shall be credited pro tanto against the then-outstanding principal balance of the Company's obligations to such Bank, effective as of the date or dates when the event occurs which causes it to be excess interest, until such excess is exhausted or all of such principal has been fully paid and satisfied, whichever occurs first, and any remaining balance of such excess shall be promptly refunded to its payor. 13.7 Survival. The obligations of the Company under Sections 2.2(c), 6, 9.7 and 13.3 hereof and the obligations of the Banks under Section 13.6 hereof shall survive the repayment of the Loans and Reimbursement Obligations and the termination of the Commitments and the Letters of Credit. 13.8 Captions. Captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 13.9 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement and any of the parties hereto may execute this Agreement by signing any such counterpart. 13.10 Governing Law. This Agreement and the Notes and (except as therein provided) the other Loan Documents are performable in Harris County, Texas, which shall be a proper place of venue for suit on or in respect thereof. The Company irrevocably agrees that any legal proceeding in respect of this Agreement or the other Loan Documents shall be brought in the district courts of Harris County, Texas or the United States District Court for the Southern District of Texas, Houston Division (collectively, the "Specified Courts"). The Company hereby irrevocably submits to the nonexclusive jurisdiction of the state and federal courts of the State of Texas. The Company hereby irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to any Loan Document brought in any Specified Court, and hereby further irrevocably waives any claims that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. The Company further (1) agrees to designate and maintain an agent for service of process in the City of Houston in connection with any such suit, action or proceeding and to deliver to Agent evidence thereof and (2) irrevocably consents to the service of process out of any of the aforementioned courts in any such suit, action or proceeding by the mailing of copies thereof by certified mail, return receipt requested, postage prepaid, to the Company at its address as provided in this Agreement or as otherwise provided by Texas law. Nothing herein shall affect the right of any Agent or any Bank to commence legal proceedings or otherwise proceed against the Company in any jurisdiction or to serve process in any manner permitted by applicable law. The Company agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. THIS AGREEMENT AND (EXCEPT AS THEREIN PROVIDED) THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS (OTHER THAN THE CONFLICT OF LAWS RULES) OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA FROM TIME TO TIME IN EFFECT. 13.11 Severability. Whenever possible, each provision of the Loan Documents shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of any Loan Document shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions of such Loan Document shall not be affected or impaired thereby. 13.12 Chapter 15 Not Applicable. Chapter 15, Subtitle 3, Title 79, Revised Civil Statutes of Texas, 1925, as amended, shall not apply to this Agreement or to any Loan or Letter of Credit, nor shall this Agreement or any Loan or Letter of Credit be governed by or be subject to the provisions of such Chapter 15 in any manner whatsoever. 13.13 Confidential Information. Agent and each Bank separately agrees that: (a) As used herein, the term "Confidential Information" means written information about the Company or the transactions contemplated herein furnished by the Company to Agent and/or the Banks which is specifically designated as confidential by the Company; Confidential Information, however, shall not include information which (i) was publicly known or available, or otherwise available on a non-confidential basis to any Bank, at the time of disclosure from a source other than the Company, (ii) subsequently becomes publicly known through no act or omission by such Bank, (iii) otherwise becomes available on a non-confidential basis to any Bank other than through disclosure by the Company or (iv) has been in the possession of any Bank for a period of more than two years from the date on which such information originally was furnished to such Bank by the Company, unless the Company shall have requested Agent and the Banks in writing, at least 30 days prior to the end of such two-year period, to maintain the confidentiality of such information for another two (2) year period (or for successive two (2) year periods); provided that the Company shall not unreasonably withhold its consent to a request made after the initial two (2) year period to eliminate information from "Confidential Information". (b) Agent and each Bank agrees that it will take normal and reasonable precautions to maintain the confidentiality of any Confidential Information furnished to such Person; provided, however, that such Person may disclose Confidential Information (i) upon the Company's consent; (ii) to its auditors; (iii) when required by any Legal Requirement; (iv) as may be required or appropriate in any report, statement or testimony submitted to any Governmental Authority having or claiming to have jurisdiction over it; (v) to such Person's and its Subsidiaries' or Affiliates' officers, directors, employees, agents, representatives and professional consultants in connection with this Agreement or administration of the Loans and Letters of Credit; (vi) as may be required or appropriate, should such Bank elect to assign or grant participations in any of the Obligations in connection with (1) the enforcement of the Obligations to any such Person under any of the Loan Documents or related agreements, or (2) any potential transfer pursuant to this Agreement of any Obligation owned by any Bank (provided any potential transferee has been approved by the Company if required by this Agreement, which approval shall not be unreasonably withheld, and has agreed in writing to be bound by substantially the same provisions regarding Confidential Information contained in this Section); (vii) as may be required or appropriate in response to any summons or subpoena or in connection with any litigation or administrative proceeding; (viii) to any other Bank; (ix) to the extent reasonably required in connection with the exercise of any remedy hereunder or under the other Loan Documents; or (x) to correct any false or misleading information which may become public concerning such Person's relationship to the Company. 13.14 Tax Forms. With respect to each Bank which is organized under the laws of a jurisdiction outside the United States, on the day of the initial borrowing hereunder and from time to time thereafter if requested by the Company or Agent, such Bank shall provide Agent and the Company with the forms prescribed by the Internal Revenue Service of the United States certifying as to such Bank's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to such Bank hereunder or other documents satisfactory to the Bank and Agent indicating that all payments to be made to such Bank hereunder are subject to such tax at a rate reduced by an applicable tax treaty. Unless the Company and Agent shall have received such forms or such documents indicating that payments hereunder are not subject to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Company or Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Bank organized under the laws of a jurisdiction outside the United States. 13.15 Amendment and Restatement. This Agreement amends and restates in its entirety that certain Credit Agreement dated as of May 24, 1994 executed by and among the Company, the Banks and Agent, as amended. 13.16 Intercreditor Agreement. Reference is hereby made to the Intercreditor Agreement, which provides for certain matters relating to both the Loans and the Canadian Facility. To the extent of any conflict between the terms hereof and the terms of the Intercreditor Agreement, the Intercreditor Agreement shall control. The execution and delivery by Agent of the Intercreditor Agreement on behalf of the Banks is hereby ratified and confirmed by each of the Banks. Any Bank that becomes a party to this Agreement after the Effective Date agrees to be bound by the terms and provisions of the Intercreditor Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. SEAGULL ENERGY CORPORATION, a Texas corporation By: /s/ William L. Transier Name: William L. Transier Title: Senior Vice President and Chief Financial Officer Address for Notices: 1001 Fannin, Suite 1700 Houston, Texas 77002 Attention: Steve Thorington THE CHASE MANHATTAN BANK, as Agent By: /s/ Edward L. Nelson, Jr. Name: Edward L. Nelson, Jr. Title: Managing Director Commitment: Address for Notices: $62,000,000 1 Chase Manhattan Plaza, 8th Floor New York, New York 10081 Attention: Agent Services with a copy to: Texas Commerce Bank National Association 712 Main Street Houston, Texas 77002 Attention: Manager, Energy Division MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ John Kowalczuk Commitment: Name: John Kowalczuk Title: Vice President $60,000,000 Address for Notices: 60 Wall Street New York, New York 10260-0060 Attention: Loan Department NATIONSBANK OF TEXAS, N.A. By: /s/ Paul A. Squires Commitment: Name: Paul A. Squires Title: Senior Vice President $60,000,000 Address for Notices: 700 Louisiana, 8th Floor Houston, Texas 77002 Attention: Jo A. Tamalis THE FIRST NATIONAL BANK OF BOSTON By: /s/ George W. Passela Commitment: Name: George W. Passela Title: Managing Director $40,000,000 Address for Notices: 100 Federal Street Energy & Utilities 01-15-04 Boston, Massachusetts 02110 Attention: George W. Passela H1995A/73788 7002/3623 93 ABN AMRO BANK N.V., HOUSTON AGENCY By: ABN AMRO North America, Inc., as agent By: /s/ Cheryl I. Lipshutz Commitment: Name: Cheryl I. Lipshutz Title: Group Vice President and Director $30,000,000 By: /s/ H. Gene Shiels Name: H. Gene Shiels Title: Vice President and Director Address for Notices: Three Riverway, Suite 1700 Houston, Texas 77056 Attention: Ms. Cheryl Lipshultz THE BANK OF NEW YORK By: Commitment: Name: Title: $30,000,000 Address for Notices: One Wall Street, 19th Floor New York, New York 10296 Attention: Ms. Renee Bijlani BANQUE PARIBAS HOUSTON AGENCY By: /s/ Marian Livingston Commitment: Name: Marian Livingston Title: Vice President $25,000,000 By: /s/ Barton D. Schouest Name: Barton D. Schouest Title: Group Vice President Address for Notices: 1200 Smith, Suite 3100 Houston, Texas 77002 Attention: Barton D. Schouest CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Pascal Poupelle Commitment: Name: Pascal Poupelle Title: Senior Vice President $40,000,000 Address for Notices: 1000 Louisiana, Suite #5360 Houston, Texas 77002 Attention: Mr. A. David Dodd THE FUJI BANK, LIMITED HOUSTON AGENCY By: /s/ Yoshiaki Inoue Commitment: Name: Yoshiaki Inoue Title: Vice President and Manager $25,000,000 Address for Notices: One Houston Center Suite 4100 1221 McKinney Street Houston, Texas 77010 Attention: Mr. Roger Frey FIRST NATIONAL BANK OF CHICAGO By: /s/ Dixon P. Schultz Commitment: Name: Dixon P. Schultz Title: Vice President $30,000,000 Address for Notices: 1100 Louisiana, Suite 3200 Houston, Texas 77002 Attention: Mr. Dennis Petito SOCIETE GENERALE, SOUTHWEST AGENCY By: /s/ Richard A. Erbert Commitment: Name: Richard A. Erbert Title: Vice President $35,000,000 Address for Notices: 2001 Ross Avenue, Suite 4800 Dallas, Texas 75201 Attention: Ms. Angela Aldridge with a copy to: 1111 Bagby, Suite 2020 Houston, Texas 77002 Attention: Mr. Richard Erbert THE BANK OF TOKYO-MITSUBISHI, LTD. By: /s/ Michael G. Meiss Commitment: Name: Michael G. Meiss Title: Vice President $16,500,000 Address for Notices: 1100 Louisiana, Suite 2800 Houston, Texas 770002-5216 Attention: Mr. John M. McIntyre BANK OF SCOTLAND By: /s/ Catherine M. Oniffrey Commitment: Name: Catherine M. Oniffrey Title: Vice President Bank of Scotland $25,000,000 Address for Notices: 565 Fifth Avenue New York, New York 10017 Attention: Ms. Catherine Onifrey CAISSE NATIONALE DE CREDIT AGRICOLE By: /s/ David E. Bouhl Commitment: Name: David E. Bouhl Title: First Vice President $16,500,000 Address for Notices: 600 Travis, Suite 2340 Houston, Texas 77002 Attention: Mr. Brian Knezeak CHRISTIANIA BANK OG KREDITKASSE By: /s/ Peter M. Dodge Commitment: Name: Peter M. Dodge Title: First Vice President $30,000,000 By: /s/ Justin F. McCarty, III Name: Justin F. McCarty, III Title: Vice President Address for Notices: 11 West 42nd Street 7th Floor New York, New York 10036 Attention: Mr. Jahn Roising DEN NORSKE BANK AS By: /s/ Byron L. Cooley Commitment: Name: Byron L. Cooley Title: Senior Vice President $21,000,000 By: /s/ William V. Moyer Name: William V. Moyer Title: Vice President Address for Notices: 333 Clay Suite 4890 Houston, Texas 77002 Attention: Mr. Byron L. Cooley WELL FARGO BANK By: /s/Gregory J. Petruska Commitment: Name: Gregory J. Petruska Title: Vice President $21,000,000 Address for Notices: 1000 Louisiana 3rd Floor/MS #156 Houston, Texas 77002 Attention: Mr. John Fields THE BANK OF NOVA SCOTIA By: /s/ F.C.H. Ashby Commitment: Name: F.C.H. Ashby Title: Senior Manager Loan Operations $17,500,000 Address for Notices: Suite 3000, 1100 Louisiana Houston, Texas 77002 Attention: Mr. Mark Ammerman CIBC INC. By: /s/ Aleksandra K. Dymanus Commitment: Name: Aleksandra K. Dymanus Title: Authorized Signatory $17,500,000 Address for Notices: Two Paces West 2727 Paces Ferry Road Suite 1200 Atlanta, Georgia 30339 Attention: Loan Operations with a copy to: Canadian Imperial Bank of Commerce Two Houston Center 909 Fannin Street Houston, Texas 77010 Attention: Mr. Brian Myers MELLON BANK By: /s/ E. Marc Cuenod, Jr. Commitment: Name: E. Marc Cuenod, Jr. Title: First Vice President $16,000,000 Address for Notices: Mellon Bank One Mellon Bank Center Room 151-4425 Pittsburgh, Pennsylvania 15258-0001 Attention: Manager, Energy and Utilities Group with a copy to: Mellon Financial Services 1100 Louisiana, 36th Floor Houston, Texas 77002-5210 Attention: Ms. Melissa Bauman FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: First Union Corporation of North Carolina By: /s/ Michael J. Kolosowsky Commitment: Name: Michael J. Kolosowsky Title: Vice President $21,000,000 Address for Notices: First Union Corporation of North Carolina 1001 Fannin, Suite 2255 Houston, Texas 77002 Attention: Mr. Jay M. Chernosky BANK OF MONTREAL By: /s/ Michael P. Stuckey Commitment: Name: Michael P. Stuckey $11,000,000 Title: Managing Director Address for Notices: 700 Louisiana, Suite 4400 Houston, Texas 77002 Attention: Ms. Christa Hash EX-4.2 3 CANADA CREDIT AGREEMENT CREDIT AGREEMENT U.S. $100,000,000 REDUCING REVOLVING CREDIT FACILITY AMONG SEAGULL ENERGY CANADA LTD. AND THE CHASE MANHATTAN BANK OF CANADA, Individually and as Arranger and Administrative Agent, THE BANK OF NOVA SCOTIA, Individually and as Paying Agent and Co-Agent, CANADIAN IMPERIAL BANK OF COMMERCE, Individually and as Co-Agent, AND THE OTHER BANKS SIGNATORY HERETO December 23, 1996 TABLE OF CONTENTS Section 1. Definitions and Accounting Matters...........................1 1.1 Certain Defined Terms........................................1 1.2 Accounting Terms and Determinations.........................25 1.3 Types of Loans..............................................25 1.4 Miscellaneous...............................................25 Section 2. Commitments; Designation of Maximum Outstanding Amount......25 2.1 Loans and Bankers' Acceptances..............................25 2.2 Letters of Credit...........................................26 2.3 Reductions and Changes of Commitments.......................30 2.4 Fees........................................................31 2.5 Affiliates; Lending Offices.................................32 2.6 Several Obligations.........................................32 2.7 Notes.......................................................32 2.8 Use of Proceeds.............................................33 Section 3. Borrowings, Prepayments and Selection of Interest Rates.....33 3.1 Borrowings..................................................33 3.2 Prepayments.................................................34 3.3 Selection of Interest Rates.................................34 3.4 Conditions Applicable to Bankers' Acceptances...............35 3.5 Paying Agent's Duties Re Bankers' Acceptances...............37 3.6 Certain Provisions Relating to Bankers' Acceptances Forms...38 Section 4. Payments of Principal and Interest..........................38 4.1 Repayment of Loans and Reimbursement Obligations............38 4.2 Interest....................................................39 4.3 Acceptance Fees.............................................39 Section 5. Payments; Pro Rata Treatment; Computations, Etc.............40 5.1 Payments....................................................40 5.2 Pro Rata Treatment..........................................40 5.3 Computations................................................41 5.4 Minimum and Maximum Amounts.................................41 5.5 Certain Actions, Notices, Etc...............................41 5.6 Non-Receipt of Funds by the Paying Agent....................43 5.7 Sharing of Payments, Etc....................................44
Section 6. Yield Protection and Illegality.............................44 6.1 Additional Costs............................................44 6.2 Limitations.................................................46 6.3 Illegality..................................................47 6.4 Substitute Alternate Base Rate Loans or Canadian Prime Rate Loans..........................................48 6.5 Compensation................................................48 6.6 Additional Costs in Respect of Letters of Credit............49 6.7 Capital Adequacy............................................49 6.8 Limitation on Additional Charges; Substitute Banks; Non-Discrimination........................................50 Section 7. Conditions Precedent........................................51 7.1 Initial Loans and Acceptance and Purchase of Bankers' Acceptances......................................51 7.2 Initial and Subsequent Loans................................53 Section 8. Representations and Warranties..............................53 8.1 Corporate Existence.........................................54 8.2 Corporate Power and Authorization...........................54 8.3 Binding Obligations.........................................54 8.4 No Legal Bar or Resultant Lien..............................54 8.5 No Consent..................................................54 8.6 Financial Condition.........................................55 8.7 Investments and Guaranties..................................55 8.8 Liabilities and Litigation..................................55 8.9 Taxes and Governmental Charges..............................56 8.10 Title to Properties.........................................56 8.11 Defaults....................................................56 8.12 Location of Businesses and Offices..........................56 8.13 Compliance with Law.........................................56 8.14 Margin Stock................................................57 8.15 Subsidiaries................................................57 8.16 ERISA.......................................................57 8.17 Investment Company Act......................................57 8.18 Public Utility Holding Company Act..........................58 8.19 Environmental Matters.......................................58 8.20 Claims and Liabilities......................................59 8.21 Solvency....................................................59 Section 9. Affirmative Covenants.......................................59 9.1 Financial Statements and Reports............................59 9.2 Officers' Certificates......................................62
9.3 Taxes and Other Liens.......................................63 9.4 Maintenance.................................................63 9.5 Further Assurances..........................................63 9.6 Performance of Obligations..................................63 9.7 Reimbursement of Expenses...................................64 9.8 Insurance...................................................65 9.9 Accounts and Records........................................65 9.10 Rights of Inspection........................................65 9.11 Notice of Certain Events....................................65 9.12 ERISA Information and Compliance............................67 Section 10. Negative Covenants..........................................68 10.1 Debts, Guarantees and Other Obligations.....................68 10.2 Liens.......................................................71 10.3 Investments, Loans and Advances.............................74 10.4 Dividend Payment Restrictions...............................76 10.5 Mergers, Amalgamations and Sales of Assets..................76 10.6 Use of Proceeds.............................................77 10.7 ERISA Compliance............................................77 10.8 Amendment of Certain Documents..............................77 10.9 Tangible Net Worth..........................................77 10.10 Parent Debt/Capitalization Ratio............................77 10.11 EBITDAX/Interest Ratio......................................77 10.12 Nature of Business..........................................78 10.13 Futures Contracts...........................................78 10.14 Covenants in Other Agreements...............................78 Section 11. Defaults....................................................79 11.1 Events of Default...........................................79 11.2 Collateral Account..........................................82 11.3 Preservation of Security for Unmatured Reimbursement Obligations...............................................82 11.4 Right of Setoff.............................................82 Section 12. The Agents..................................................83 12.1 Appointment, Powers and Immunities..........................83 12.2 Reliance by Agents..........................................84 12.3 Defaults....................................................85 12.4 Rights as a Bank............................................85 12.5 Indemnification.............................................85 12.6 Non-Reliance on Agents and Other Banks......................86
12.7 Failure to Act..............................................86 12.8 Resignation or Removal of Agents............................86 Section 13. Miscellaneous...............................................87 13.1 Waiver......................................................87 13.2 Notices.....................................................87 13.3 Indemnification.............................................87 13.4 Amendments, Etc.............................................89 13.5 Successors and Assigns......................................89 13.6 Limitation of Interest......................................92 13.7 Interest Act (Canada); Interest Generally...................93 13.8 Certain Saskatchewan Legislation............................94 13.9 Survival....................................................94 13.10 Captions....................................................94 13.11 Counterparts................................................94 13.12 Governing Law...............................................94 13.13 Severability................................................95 13.14 Confidential Information....................................95 13.15 Amendment and Restatement...................................96 13.16 Intercreditor Agreement.....................................96 13.17 Judgement Currency..........................................96 13.18 Withholding Tax Remittances.................................97 Exhibit A Oil and Gas Subsidiaries Exhibit B Form of Request for Extension of Credit Exhibit C-1 Form of Revolving Credit Loan Note (U.S. Dollars) Exhibit C-2 Form of Revolving Credit Loan Note (Canadian Dollars) Exhibit D Subsidiaries (with Addresses) Exhibit E Form of Compliance Certificate Exhibit F Assignment and Acceptance Exhibit G Form of Engineering Report Certificate Exhibit H Parameters Interest Rate Protection and Commodities Futures Programs Exhibit I Form of Second Amendment to Intercreditor Agreement Exhibit J Form of Bankers' Acceptance
CREDIT AGREEMENT This CREDIT AGREEMENT, dated as of December 23, 1996, is by and among SEAGULL ENERGY CANADA LTD. (the "Company"), a corporation duly organized and validly existing under the laws of the Province of Alberta, Canada; each of the banks which is or which may from time to time become a signatory hereto (individually, a "Bank" and, collectively, the "Banks"); THE CHASE MANHATTAN BANK OF CANADA ("Chase"), as arranger and administrative agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"); THE BANK OF NOVA SCOTIA ("BNS"), as paying agent and co- agent for the Banks (in such capacity, together with its successors in such capacity, the "Paying Agent"), and CANADIAN IMPERIAL BANK OF COMMERCE ("CIBC"), as co-agent for the Banks (in such capacity, together with its successors in such capacity, the "Co-Agent"). The parties hereto agree as follows: Section 1. Definitions and Accounting Matters 1.1 Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.1 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa): "Additional Costs" shall have the meaning ascribed to such term in Section 6.1 hereof. "Affiliate" shall mean, as to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person and, if such Person is an individual, any member of the immediate family (including parents, siblings, spouse, children, stepchildren, grandchildren, nephews and nieces) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. As used in this definition, "control" (including, with correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). "Agents" shall mean the Administrative Agent, the Paying Agent and the Co-Agent, collectively. "Agreement" shall mean this Credit Agreement, as the same may be amended, modified, restated or supplemented from time to time. "Alternate Base Rate" shall mean, for any day, a rate per annum equal to the higher of (a) the U.S. Prime Rate in effect on such day or (b) 1/2 of 1% plus the Federal Funds Rate in effect for such day (rounded upwards, if necessary, to the nearest 1/16th of 1%). For purposes hereof, "Federal Funds Rate" shall mean, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Paying Agent from three Federal funds brokers of recognized standing selected by it. For purposes of this Agreement, any change in the Alternate Base Rate due to a change in the Federal Funds Rate shall be effective on the effective date of such change in the Federal Funds Rate. If for any reason the Paying Agent shall have determined (which determination shall be conclusive and binding, absent manifest error) that it is unable to ascertain the Federal Funds Rate for any reason, including, without limitation, the inability or failure of the Paying Agent to obtain sufficient bids or publications in accordance with the terms hereof, the Alternate Base Rate shall be the U.S. Prime Rate until the circumstances giving rise to such inability no longer exist. For the purposes hereof, "U.S. Prime Rate" shall mean the annual rate of interest announced from time to time by the Paying Agent in Canada as its U.S. Base Rate for U.S. Dollar loans made by the Paying Agent in Canada. Without notice to the Company or any other Person, the U.S. Prime Rate shall change automatically from time to time as and in the amount by which said annual rate of interest shall fluctuate. The U.S. Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. The Chase Manhattan Bank, any Agent or any Bank may make commercial loans or other loans at rates of interest at, above or below the U.S. Prime Rate. For purposes of this Agreement any change in the Alternate Base Rate due to a change in the U.S. Prime Rate shall be effective on the date such change in the U.S. Prime Rate is announced. "Alternate Base Rate Loans" shall mean Loans which bear interest at a rate based upon the Alternate Base Rate. "APC" shall mean Alaska Pipeline Company, an Alaska corporation, a Subsidiary of the Parent. "APC Long Term Financing Documents" shall mean that certain Inducement Agreement and that certain Note Agreement (together with the Notes, as defined therein), each dated as of May 14, 1992, by and among the Parent, Aid Association for Lutherans, The Equitable Life Assurance Society of the United States, Equitable Variable Life Insurance Company, Provident Life and Accident Insurance Company and Teachers Insurance & Annuity Association of America, any documentation executed in connection with any renewal, extension or rearrangement of the Indebtedness that is the subject of the foregoing documents, the Gas Sales Contract, the Intercompany Mortgage, as defined in the above-mentioned Note Agreement, and any documents executed in replacement of any of the foregoing documents, if any, and only if the Administrative Agent has received notice thereof pursuant to Section 10.8. "Applicable Lending Office" shall mean, for each Bank and for each Type of Loan and for each Bankers' Acceptance, such office of such Bank (or of an affiliate of such Bank) as such Bank may from time to time specify to the Paying Agent and the Company as the office by which its Loans of such Type are to be made and/or issued and maintained and at which Bankers' Acceptances are to be accepted and purchased; provided, however, that each such office shall be located in Canada. "Applicable Margin" shall mean, on any day and with respect to any Loan, the applicable per annum percentage set forth at the appropriate intersection in the table shown below, based on the Debt/Capitalization Ratio as of the last day of the most recently ending fiscal quarter of the Parent and its Subsidiaries with respect to which the Administrative Agent shall have received the financial statements and other information (the "Current Information") required to be delivered to the Administrative Agent pursuant to Section 9.1 hereof (said calculation to be made by the Administrative Agent as soon as practicable after receipt by the Administrative Agent of all required Current Information):
Applicable Margin For Alternate Base Rate Applicable Loans and Canadian Margin for Prime Rate Eurodollar Debt/Capitalization Ratio Loans Loans Greater than or equal to 60% 0.375 1.375 Greater than or equal to 55% but less than 60% 0.00 1.00 Greater than or equal to 50% but less than 55% 0.00 0.75 Less than 50% 0.00 0.625
Notwithstanding the foregoing, at all times that a Borrowing Base Deficiency shall exist and is continuing for more than 30 days, the Applicable Margins provided for in this definition shall each be increased by adding 1.00%. Each change in the Applicable Margin based on a change in the Current Information shall be effective as of the fifteenth day of the month during which the Current Information used to calculate the new Applicable Margin was delivered to the Administrative Agent. "Applications" shall mean all applications and agreements for Letters of Credit, or similar instruments or agreements, now or hereafter executed by any Person in connection with any Letter of Credit now or hereafter issued or to be issued. "Bank Guarantee" shall mean that certain Guarantee dated concurrently herewith executed by the Parent in favour of the Administrative Agent. "Bankers' Acceptances" means bankers' acceptances issued by the Company and denominated in Canadian Dollars, which are accepted and purchased by the Banks at the request of the Company pursuant to Section 2.1. "B.A. Reference Banks" shall mean the Paying Agent and one (1) other Bank selected by the Paying Agent (after consultation with the Company) which is a "Schedule 1" accepting bank. "B/A Stamping Rate" means, with respect to Bankers' Acceptances accepted by a Bank, the Applicable Margin for Eurodollar Loans in effect on the date of acceptance of the Bankers' Acceptance. "Bankruptcy Code" shall mean (i) the United States Bankruptcy Code, as amended, and any successor statute and (ii) the Bankruptcy and Insolvency Act (Canada), as amended, and any successor statute. "Beluga Financing Documents" shall mean that certain Inducement Agreement and that certain Note Agreement (together with the Notes, as defined therein), each dated June 17, 1985, and amended as of June 15, 1990, by and among the Parent and The Equitable Life Assurance Society of the United States and the Travelers Insurance Company, any documentation executed in connection with any renewal, extension or rearrangement of the Indebtedness that is the subject of the foregoing documents, the Gas Sales Contract, the Intercompany Mortgage, as defined in the above-mentioned Note Agreement, and any documents executed in replacement of any of the foregoing documents, if and only if the Administrative Agent has received notice thereof pursuant to Section 10.8. "Borrowing Base" shall have the meaning ascribed to such term in the U.S. Facility (without amendment except as permitted pursuant to the Intercreditor Agreement). "Borrowing Base Debt" shall have the meaning ascribed to such term in the U.S. Facility (without amendment except as permitted pursuant to the Intercreditor Agreement). "Borrowing Base Deficiency" shall have the meaning ascribed to such term in the U.S. Facility (without amendment except as permitted pursuant to the Intercreditor Agreement). "Business Day" shall mean any day other than a day on which commercial banks are authorized or required to close in Houston, Texas, United States, Calgary, Alberta, Canada, or Toronto, Ontario, Canada, and where such term is used in the definition of "Quarterly Date" in this Section 1.1 or if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, or an Interest Period for, a Eurodollar Loan or a notice by the Company with respect to any such borrowing, payment, prepayment or Interest Period, a day which is also a day on which dealings in U.S. Dollar deposits are carried out in the relevant interbank market. "Canadian Bankers' Acceptance Discount Proceeds" means, in respect of any Bankers' Acceptance required to be accepted and purchased by a Bank hereunder, an amount (rounded to the nearest whole cent with one-half of one cent being rounded up) calculated on the date of acceptance of the Bankers' Acceptance by multiplying: (a) the face amount of such Bankers' Acceptance divided by one hundred (100); by (b) the price, where the price is determined by dividing one hundred (100) by the sum of one plus the product of: (i) the Canadian Bankers' Acceptance Discount Rate (expressed as a decimal); and (ii) a fraction, the numerator of which is the term (expressed in days) of such Bankers' Acceptance and the denominator of which is three hundred sixty-five (365); with the price as so determined being rounded up or down to the fifth decimal place and .000005 being rounded up; "Canadian Bankers' Acceptance Discount Rate" shall mean (i) with respect to each Bankers' Acceptance which is required to be accepted and purchased by a Bank hereunder and which has a term of more than 90 days, the percentage discount rate (expressed to two decimal places) determined by the Paying Agent to be the average of the quoted discount rates at which Canadian Dollar Bankers' Acceptances having a comparable issue and maturity date are being bid for discount by the B.A. Reference Banks at approximately 11:00 a.m. Toronto, Ontario time (or as soon thereafter as practicable) on the day of the issuance and acceptance of the Bankers' Acceptances. If either B.A. Reference Bank does not furnish a timely quotation, the Paying Agent shall determine the relevant discount rate on the basis of the quotation or quotations furnished by the remaining B.A. Reference Bank; if neither of such quotations is available on a timely basis, the provisions of Section 6.2 shall apply; and (ii) with respect to each Bankers' Acceptance which is required to be accepted and purchased by a Bank hereunder and which has a term of 90 days or less, the percentage discount rate (expressed to two decimal places) for Canadian Dollar Bankers' Acceptances having a comparable issue and maturity date which is quoted on the Reuter's Canadian Discount Offer Rate Screen for "Schedule 1" accepting banks (or if such screen shall not be available, any successor or similar services may be selected by the Paying Agent and the Company) as of 11:00 a.m. Toronto, Ontario time (or as soon thereafter as practicable) on the day of acceptance of the Bankers' Acceptances. If none of such screen nor any successor or similar services is available then the "Canadian Bankers' Acceptance Discount Rate" shall mean, with respect to each Bankers' Acceptance which is required to be accepted and purchased by a Bank hereunder and which has a term of 90 days or less, the percentage discount rate (expressed to two decimal places) determined by the Paying Agent to be the average of the quoted discount rates at which Canadian Dollar Bankers' Acceptances having a comparable issue and maturity date are being bid for discount by the B.A. Reference Banks at approximately 11:00 a.m. Toronto, Ontario time (or as soon thereafter as practicable) on the day of the issuance and acceptance of the Bankers' Acceptances. If either B.A. Reference Bank does not furnish a timely quotation, the Paying Agent shall determine the relevant discount rate on the basis of the quotation or quotations furnished by the remaining B.A. Reference Bank; if neither of such quotations is available on a timely basis, the provisions of Section 6.2 shall apply. Each determination of the Canadian Bankers' Acceptance Discount Rate shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. "Canadian Dollars" and "Canadian $" shall mean lawful money of Canada. "Canadian Prime Rate" for any day shall mean the variable lending rate of interest (expressed as a rate per annum) established on such day by the Paying Agent from time to time as the reference rate of interest which the Paying Agent employs in order to determine the interest rate it will charge for demand loans denominated in Canadian Dollars to its customers in Canada and which it designates as its prime rate. Without notice to the Company or any other Person, the Canadian Prime Rate shall change automatically from time to time as and in the amount by which said prime rate shall fluctuate. The Canadian Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Any Agent or any Bank may make commercial loans or other loans at rates of interest at, above or below the Canadian Prime Rate. For purposes of this Agreement any change in the Canadian Prime Rate due to a change in the said prime rate shall be effective on the date such change in said prime rate is announced. "Canadian Prime Rate Loans" shall mean Loans which bear interest at a rate based upon the Canadian Prime Rate. "Capital Expenditures" shall mean expenditures in respect of fixed or capital assets (calculated in accordance with GAAP) excluding expenditures for the restoration, repair or replacement of any fixed or capital asset which was destroyed or damaged, in whole or in part, to the extent financed by the proceeds of an insurance policy. Expenditures in respect of replacements and maintenance consistent with the business practices of the Parent and its Subsidiaries in respect of plant facilities, machinery, fixtures and other like capital assets utilized in the ordinary course of business are not Capital Expenditures to the extent such expenditures are not capitalized in preparing a balance sheet of the Parent in accordance with GAAP. "Capital Lease Obligations" shall mean, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Capitalization" shall mean an amount equal to the sum of (a) Funded Indebtedness of the Parent and its Subsidiaries on a consolidated basis plus (b) Current Maturities of the Parent and its Subsidiaries on a consolidated basis plus (c) borrowed money Indebtedness of the Parent and its Subsidiaries on a consolidated basis that is not Funded Indebtedness plus (d) Indebtedness of the Parent and its Subsidiaries on a consolidated basis constituting obligations payable out of Hydrocarbons (except such obligations payable solely by recourse to properties not included in the Borrowing Base) plus (e) Tangible Net Worth of the Parent and its Subsidiaries on a consolidated basis. "Change of Control" shall mean a change resulting when any Unrelated Person or any Unrelated Persons acting together which would constitute a Group together with any Affiliates or Related Persons thereof (in each case also constituting Unrelated Persons) shall at any time either (i) Beneficially Own more than 50% of the aggregate voting power of all classes of Voting Stock of the Parent or (ii) succeed in having sufficient of its or their nominees elected to the Board of Directors of the Parent such that such nominees, when added to any existing director remaining on the Board of Directors of the Parent after such election who is an Affiliate or Related Person of such Person or Group, shall constitute a majority of the Board of Directors of the Parent. As used herein (a) "Beneficially Own" means "beneficially own" as defined in Rule 13d-3 of the United States Securities Exchange Act of 1934, as amended, or any successor provision thereto; provided, however, that, for purposes of this definition, a Person shall not be deemed to Beneficially Own securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates until such tendered securities are accepted for purchase or exchange; (b) "Group" means a "group" for purposes of Section 13(d) of the United States Securities Exchange Act of 1934, as amended; (c) "Unrelated Person" means at any time any Person other than the Parent or any Subsidiary and other than any trust for any employee benefit plan of the Parent or any Subsidiary of the Parent; (d) "Related Person" of any Person shall mean any other Person owning (1) 5% or more of the outstanding common stock of such Person or (2) 5% or more of the Voting Stock of such Person; and (e) "Voting Stock" of any Person shall mean capital stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. "Code" shall mean, as applicable, (i) the Internal Revenue Code of 1986, as amended, or any successor statute, together with all regulations, rulings and interpretations thereof or thereunder by the Internal Revenue Service or (ii) the Income Tax Act (Canada), as amended, or any successor statute, together with all regulations, rulings and interpretations thereof or thereunder. "Commitment Percentage" shall mean, as to any Bank, the percentage equivalent of a fraction the numerator of which is the amount of such Bank's Commitment and the denominator of which is the aggregate amount of the Commitments of all Banks. "Commitment" shall mean, as to any Bank, the obligation, if any, of such Bank to make Loans, accept and purchase Bankers' Acceptances and incur Letter of Credit Liabilities in an aggregate principal amount (including therein the full face amount of all Bankers' Acceptances then outstanding) at any one time outstanding up to but not exceeding the amount, if any, set forth opposite such Bank's name on the signature pages hereof under the caption "Commitment" (as the same may be reduced from time to time pursuant to Section 2.3). "Cover" for Letter of Credit Liabilities shall be effected by paying to the Paying Agent immediately available funds, to be held by the Paying Agent in a collateral account maintained by Paying Agent at its Payment Office and collaterally assigned as security for the financial accommodations extended pursuant to this Agreement using documentation satisfactory to the Administrative Agent, in an amount equal to any required prepayment. Such amount shall be retained by the Paying Agent in such collateral account until such time as (x) in the case of Cover being provided pursuant to Section 2.2(a), the applicable Letter of Credit shall have expired and Reimbursement Obligations, if any, with respect thereto shall have been fully satisfied or (y) in the case of Cover being provided pursuant to Section 3.2(b)(1), the outstanding principal amount of all Revolving Credit Obligations is not greater than the aggregate amount of the Commitments. "Current Maturities" shall mean, on any day on which Current Maturities are calculated, the sum of (a) scheduled principal payments on Funded Indebtedness which are payable within one (1) year after such day plus (b) the principal component of payments required to be made with respect to Capital Lease Obligations within one (1) year of said date plus (c), to the extent not included above, all items which in accordance with GAAP would be classified as current maturities of long term debt. "Debt/Capitalization Ratio" shall mean the ratio of (a) the sum of Funded Indebtedness of the Parent and its Subsidiaries on a consolidated basis plus Current Maturities of the Parent and its Subsidiaries on a consolidated basis plus borrowed money Indebtedness of the Parent and its Subsidiaries on a consolidated basis that is not Funded Indebtedness plus Indebtedness of the Parent and its Subsidiaries on a consolidated basis constituting obligations payable out of Hydrocarbons (except such obligations payable solely by recourse to properties not included in the Borrowing Base) to (b) Capitalization. "Default" shall mean an Event of Default or an event which with notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Disclosure Statement" shall mean the Disclosure Statement dated concurrently herewith delivered to the Administrative Agent by the Company. "Dividend Payment" shall mean, with respect to any Person, dividends (in cash, property or obligations) on, or other payments or distributions on account of, or the redemption of, or the setting apart of money for a sinking or other analogous fund for the purchase, redemption, retirement or other acquisition of, any shares of any class of capital stock of such Person, or the exchange or conversion of any shares of any class of capital stock of such Person for or into any obligations of or shares of any other class of capital stock of such Person or any other property, but excluding dividends to the extent payable in, or exchanges or conversions for or into, shares of common stock of the Parent or options or warrants to purchase common stock of the Parent. "EBITDAX" shall mean net earnings (excluding gains and losses on sales and retirement of assets, non-cash write downs, charges resulting from accounting convention changes and deductions for dry hole expenses) before deduction for federal, provincial, municipal and state taxes, interest expense (including capitalized interest), operating lease rentals or depreciation, depletion and amortization expense, all determined in accordance with GAAP. "EBITDAX/Interest Ratio" shall mean the ratio of (a) EBITDAX of the Parent and its Subsidiaries on a consolidated basis to (b) operating lease rentals and interest expense (including capitalized interest but excluding non-cash amortization of deferred financing costs) on all Indebtedness of the Parent and its Subsidiaries on a consolidated basis for any twelve-month period ending on the last day of every calendar quarter during the period with respect to which the EBITDAX/Interest Ratio is to be calculated. "Engineering Report" shall mean one or more reports, in form satisfactory to the Administrative Agent and the Majority Banks, prepared by one or more independent consulting firms acceptable to the Administrative Agent and the Majority Banks in their reasonable business judgment, which shall evaluate at least 85% of the present value of the Included Reserves (as defined in the U.S. Facility, without amendment except as permitted under the Intercreditor Agreement) as of the immediately preceding January 1. Each Engineering Report shall set forth a projection of the future rate of production, Net Proceeds of Production and present value of the Net Proceeds of Production, in each case based upon economic assumptions acceptable to the Administrative Agent and approved by the Majority Banks. "ENSTAR Alaska" shall collectively mean (i) the gas distribution system in south-central Alaska known as ENSTAR Natural Gas Company, a division of the Parent, and (ii) APC. "Environmental Claim" means any third party (including Governmental Authorities and employees) action, lawsuit, claim or proceeding (including claims or proceedings at common law or under the Occupational Safety and Health Act or similar laws relating to safety of employees) which seeks to impose liability for (i) noise; (ii) pollution or contamination of the air, surface water, ground water or land or the clean-up of such pollution or contamination; (iii) solid, gaseous or liquid waste generation, handling, treatment, storage, disposal or transportation; (iv) exposure to Hazardous Substances; (v) the safety or health of employees or (vi) the manufacture, processing, distribution in commerce or use of Hazardous Substances. An "Environmental Claim" includes, but is not limited to, a common law action, as well as a proceeding to issue, modify or terminate an Environmental Permit, or to adopt or amend a regulation to the extent that such a proceeding attempts to redress violations of an applicable permit, license, or regulation as alleged by any Governmental Authority. "Environmental Liabilities" includes all liabilities arising from any Environmental Claim, Environmental Permit or Requirement of Environmental Law under any theory of recovery, at law or in equity, and whether based on negligence, strict liability or otherwise, including but not limited to: remedial, removal, response, abatement, investigative, monitoring, personal injury and damage to property or injuries to persons, and any other related costs, expenses, losses, damages, penalties, fines, liabilities and obligations, and all costs and expenses necessary to cause the issuance, reissuance or renewal of any Environmental Permit including reasonable attorneys' fees and court costs. "Environmental Permit" means any permit, license, approval or other authorization under any applicable Legal Requirement relating to pollution or protection of health or the environment, including laws, regulations or other requirements relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or hazardous substances or toxic materials or wastes into ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants or Hazardous Substances. "Equivalent U.S. Dollar Amount" shall mean, with respect to any amount of Canadian Dollars, the equivalent amount of U.S. Dollars determined by using the Bank of Canada noon day rate at which it offers to provide U.S. Dollars in exchange for such amount of Canadian Dollars on the date as of which such Equivalent U.S. Dollar Amount is to be determined. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and all rules, regulations and interpretations by the Internal Revenue Service or the Department of Labor thereunder. "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) which is a member of a group of which the Parent is a member and which is under common control within the meaning of the regulations under Section 414 of the Code. "Eurodollar Base Rate" shall mean, with respect to any Interest Period for any Eurodollar Loan, the lesser of (A) the rate per annum (rounded upwards, if necessary, to the nearest 1/16th of 1%) equal to the average of the offered quotations appearing on Telerate Page 3750 (or if such Telerate Page shall not be available, any successor or similar service as may be selected by the Paying Agent and the Company) as of 11:00 a.m., Toronto, Ontario time (or as soon thereafter as practicable) on the day two Business Days prior to the first day of such Interest Period for U.S. Dollar deposits having a term comparable to such Interest Period and in an amount comparable to the principal amount of the Eurodollar Loan to which such Interest Period relates or (B) the Highest Lawful Rate. If none of such Telerate Page 3750 nor any successor or similar service is available, then the "Eurodollar Base Rate" shall mean, with respect to any Interest Period for any applicable Eurodollar Loan, the lesser of (A) the rate per annum (rounded upwards, if necessary, to the nearest 1/16th of 1%) determined by the Paying Agent to be the average of the rates quoted by the Reference Banks at approximately 11:00 a.m., Toronto, Ontario time (or as soon thereafter as practicable) on the day two Business Days prior to the first day of such Interest Period for the offering by such Reference Banks to leading banks in the interbank market of U.S. Dollar deposits having a term comparable to such Interest Period and in an amount comparable to the principal amount of the Eurodollar Loan to which such Interest Period relates or (B) the Highest Lawful Rate. If any Reference Bank does not furnish a timely quotation, the Paying Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks; if none of such quotations is available on a timely basis, the provisions of Section 6.2 shall apply. Each determination of the Eurodollar Base Rate shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. "Eurodollar Loans" shall mean Loans the interest on which is determined on the basis of rates referred to in the definition of "Eurodollar Base Rate" in this Section 1.1. "Eurodollar Rate" shall mean, for any Interest Period for any Eurodollar Loan, a rate per annum determined by the Paying Agent to be equal to the Eurodollar Base Rate for such Loan for such Interest Period. "Event of Default" shall have the meaning assigned to such term in Section 11 hereof. "Financial Statements" shall mean the financial statement or statements, together with the notes and schedules thereto, described or referred to in Sections 8.6 and 9.1. "Funded Indebtedness" shall mean all Indebtedness which by its terms matures more than one (1) year from the date as of which any calculation of Funded Indebtedness is made, and any Indebtedness maturing within one (1) year from such date which is renewable at the option of the obligor to a date beyond one (1) year from such date. "GAAP" shall mean as to a particular Person, such accounting practice as, in the opinion of KPMG Peat Marwick or other independent accountants of recognized national standing retained by such Person and acceptable to the Majority Banks, conforms at the time to generally accepted accounting principles, consistently applied. Generally accepted accounting principles means those principles and practices (a) which are recognized as such by the Financial Accounting Standards Board, (b) which are applied for all periods after the date hereof in a manner consistent with the manner in which such principles and practices were applied to the most recent audited financial statements of the relevant Person furnished to the Banks, except only for such changes in principles and practices with which the applicable independent public accountants concur and which are disclosed to the Banks in writing, and (c) which are consistently applied for all periods after the date hereof so as to reflect properly the financial condition and results of operations of such Person. "Gas and Liquids Pipeline Subsidiaries" shall mean each company (which may include the Parent) engaged in the Pipeline Operations (as defined in the U.S. Facility, without amendment except as permitted under the Intercreditor Agreement). "Gas Sale Contract" shall mean that certain Gas Sale Contract dated January 1, 1984, between APC, as Seller, and ENSTAR Natural Gas Company, as Purchaser, as amended on June 17, 1985, and from time to time thereafter, if and only if the Administrative Agent has received notice thereof pursuant to Section 10.8. "Governmental Authority" shall mean any sovereign governmental authority, Canada, the United States of America, any Province of Canada, any State of the United States and any political subdivision of any of the foregoing, and any central bank, agency, instrumentality, department, commission, board, bureau, authority, court or other tribunal or quasi-governmental authority in each case whether executive, legislative, judicial, regulatory or administrative, having jurisdiction over the Parent, any of its Subsidiaries, any of their respective property, any Agent or any Bank. "Guarantee" by any Person means any obligation, contingent or otherwise, of any such Person directly or indirectly guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness (whether arising by virtue of partnership arrangements, by agreement to keep- well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise, other than agreements to purchase assets, goods, securities or services at an arm's length price in the ordinary course of business) or (ii) entered into for the purpose of assuring in any other manner the holder of such Indebtedness of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part), provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Substance" shall mean petroleum products, and any hazardous or toxic waste or substance defined or regulated as such from time to time by any law, rule, regulation or order described in the definition of "Requirements of Environmental Law". "Highest Lawful Rate" shall mean, on any day, the maximum nonusurious rate of interest permitted for that day by whichever of applicable Canadian or provincial law permits the higher interest rate, stated as a rate per annum. "Hydrocarbons" shall mean oil, gas, casinghead gas, drip gasoline, natural gasoline, condensate and all other liquid or gaseous hydrocarbons and related minerals, in each case whether in a natural or a processed state. "Indebtedness" shall mean, as to any Person: (i) indebtedness of such Person for borrowed money (whether by loan or the issuance and sale of debt securities) or for the deferred purchase or acquisition price of property or services, including, without limitation, obligations (excluding volumetric obligations with respect to pre-sales of Hydrocarbon production which have already been accounted for in the calculation of the Borrowing Base) payable out of Hydrocarbon production; (ii) obligations, whether fixed or contingent, of such Person in respect of letters of credit, acceptances or similar instruments issued or accepted by banks and other financial institutions for the account of such Person or any other Person; (iii) Capital Lease Obligations of such Person; (iv) Redemption Obligations of such Person and other obligations of such Person to redeem or otherwise retire shares of capital stock of such Person or any other Person, in each case to the extent that the redemption obligations will arise prior to the stated maturity of the Obligations; (v) indebtedness of others of the type described in clause (i), (ii), (iii) or (iv) above secured by a Lien on the property of such Person, whether or not the respective obligation so secured has been assumed by such Person; and (vii) indebtedness of others of the type described in clause (i), (ii), (iii) o r (iv) above Guaranteed by such Person. "Intercreditor Agreement" shall mean that certain Intercreditor Agreement dated December 30, 1993 executed by and among the Company, the Parent, the Administrative Agent and the "Administrative Agent" (now known as "Agent") under the U.S. Facility, as amended by that certain First Amendment to Intercreditor Agreement dated May 24, 1994 and by that certain Second Amendment to Intercreditor Agreement in the form of Exhibit I hereto dated concurrently herewith, and as the same may be further amended or modified from time to time. "Interest Period" shall mean: (a) With respect to any Eurodollar Loan, the period commencing on (i) the date such Loan is made or converted into or continued as a Eurodollar Loan or (ii) in the case of a roll-over to a successive Interest Period, the last day of the immediately preceding Interest Period and ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, as the Company may select as provided in Section 3.3 hereof, except that each such Interest Period which commences on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month shall end on the last Business Day of the appropriate subsequent calendar month. (b) With respect to any Alternate Base Rate Loan or any Canadian Prime Rate Loan, the period commencing on the date such Loan is made and ending on the next succeeding Quarterly Date. Notwithstanding the foregoing: (i) no Interest Period with respect to a Eurodollar Loan may commence before and end after the date of any scheduled reduction in the Commitments if, after giving effect thereto, the aggregate principal amount of the Eurodollar Loans having Interest Periods which end after such reduction date shall be greater than the aggregate principal amount of the Commitments scheduled to be in effect after such reduction date; (ii) each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (or, in the case of an Interest Period for Eurodollar Loans, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); (iii) no Interest Period with respect to a Eurodollar Loan shall extend beyond the end of the scheduled Revolving Credit Availability Period; and (iv) no Interest Period for any Eurodollar Loans shall have a duration of less than one month and, if the Interest Period therefore would otherwise be a shorter period, such Loans shall not be available hereunder. "Investments" shall have the meaning assigned to such term in Section 10.3 hereof. "Investments Tests" shall mean compliance with each of the following restrictions (both before and immediately after giving effect to the applicable Investments): (i) there shall exist no Borrowing Base Deficiency; (ii) no Default or Event of Default shall have occurred and be continuing; and (iii) the applicable Investment, when aggregated with any prior permitted Investments, shall not exceed 10% of Tangible Net Worth of the Parent and its Subsidiaries on a consolidated basis. "Issuer" shall mean each Bank issuing a Letter of Credit hereunder. "Legal Requirement" shall mean any law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority, now or hereafter in effect. "Letter of Credit" shall have the meaning assigned to such term in Section 2.2 hereof. "Letter of Credit Fee" shall mean a per annum rate equal to the Applicable Margin for Eurodollar Loans in effect from time to time. "Letter of Credit Liabilities" shall mean, at any time and in respect of any Letter of Credit, the sum of (i) the amount available for drawings under such Letter of Credit plus (ii) the aggregate unpaid amount of all Reimbursement Obligations at the time due and payable in respect of previous drawings made under such Letter of Credit. "Lien" shall mean, with respect to any asset, any mortgage, lien, pledge, charge, collateral assignment, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, a Person shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Liquid Investments" shall mean: (I) in the case of investments of U.S. Dollars (i) securities issued or directly, fully and unconditionally guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than one year from the date of issue; (ii) U.S. Dollar time deposits and certificates of deposit (A) of any Bank having capital and surplus in excess of U.S. $300,000,000, or (B) of any commercial bank incorporated in the United States, of recognized standing, having capital and surplus in excess of U.S. $500,000,000 and which has (or which is a Subsidiary of a holding company which has) publicly traded debt securities rated, at the time of issuance of such time deposits, AA or higher by Standard & Poor's Corporation or Aa-2 or higher by Moody's Investors Service, Inc. with maturities of not more than one year from the date of issue; (iii) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (I)(i) above entered into with any bank meeting the qualifications specified in clause (I)(ii) above, provided that the terms of such agreements comply with the guidelines set forth in the Federal Financial Institution Examination Counsel Supervisory Policy--Repurchase Agreements of Depository Institutions With Securities Dealers and Others, as adopted by the Comptroller of the Currency on October 31, 1985; (iv) commercial paper or other U.S. Dollar obligations issued by the parent corporation (A) of any Bank having capital and surplus in excess of U.S. $300,000,000, or (B) of any commercial bank (provided that the parent corporation and the bank are both incorporated in the United States) of recognized standing having capital and surplus in excess of U.S. $500,000,000 and commercial paper or other U.S. Dollar obligations issued by any Person incorporated in the United States, which commercial paper is rated at least A-2 or the equivalent thereof by Standard & Poor's Corporation or at least P-2 or the equivalent thereof by Moody's Investors Service, Inc. and in each case maturing not more than six months after the date of issue; (v) obligations of any state or political subdivision thereof rated at least F-1 by Fitch Investors Service, Inc. or AA by Standard & Poor's Corporation with an original maturity of 180 days or less; and (vi) investments in money market funds substantially all the assets of which are comprised of securities of the types described in clauses (I)(i) through (v) above; and (II) in the case of investments of Canadian dollars (i) bonds or other evidences of indebtedness of, or the principal and interest of which is fully guaranteed by, the Government of Canada or any province of Canada, payable in Canadian dollars and (in the case of any provincial obligations and any Government of Canada obligations that are rated) rated AAA or AA (or the then equivalent grade) by Dominion Bond Rating Service Limited, or any other nationally recognized bond rating service, having a maturity not in excess of one year, (ii) certificates of deposit issued or guaranteed by a bank or trust company organized under the laws of Canada or any province thereof, provided such bank or trust company has capital and retained earnings in the aggregate in excess of Canadian $500,000,000 on its most recent balance sheet (whether audited or unaudited), having a maturity not in excess of one year, (iii) bankers' acceptances of any bank or trust company the certificates of deposit of which would constitute Liquid Investments as provided in clause (II)(ii) above, if outstanding unsecured debt of such bank or trust company is rated no less than AA (or the then equivalent grade) by Dominion Bond Rating Service Limited, or any other nationally recognized bond rating service; and (iv) commercial paper rated no less than R-1 (or the then equivalent grade) by Dominion Bond Rating Service Limited or A-1 (or the then equivalent grade) by CBRS Inc., having a maturity not in excess of one year; excluding any bonds or other evidences of indebtedness, certificates of deposit or commercial paper which a Canadian chartered bank may not hold as security under the Bank Act (Canada). "Loan Documents" shall mean this Agreement, the Notes, the Bank Guarantee, the Intercreditor Agreement, the Bankers' Acceptances, all Applications, all instruments, certificates and agreements now or hereafter executed or delivered to any Agent or any Bank pursuant to any of the foregoing, and all amendments, modifications, renewals, extensions, increases and rearrangements of, and substitutions for, any of the foregoing. "Loans" shall mean the loans provided for by Section 2.1 hereof. "Majority Banks" shall mean Banks having greater than 66-2/3% of the aggregate amount of Commitments. "Material Adverse Effect" shall mean a material adverse effect on the business, condition (financial or otherwise), operations, properties (including proven oil and gas reserves) or prospects of the Parent and its Subsidiaries, taken as a whole, or on the ability of any Relevant Party to perform its material obligations under any Loan Document to which it is a party. "Maximum Outstanding Amount" shall have the meaning ascribed to such term in Section 2.9 hereof. "Maximum Revolving Credit Available Amount" shall mean, at any date, an amount equal to the lesser of (i) the aggregate of the Commitments or (ii) the Maximum Outstanding Amount designated from time to time by the Company in accordance with the terms hereof. "Mesa Contract" shall mean that certain Purchase and Sale Agreement dated February 6, 1991 executed by and among Mesa Limited Partnership, a Delaware limited partnership, Mesa Operating Limited Partnership, a Delaware limited partnership, and Mesa Midcontinent Limited Partnership, a Delaware limited partnership, as Sellers, and the Parent, as Buyer, as amended by that certain First Amendment to Purchase and Sale Agreement dated February 22, 1991 and as further amended by that certain Second Amendment to Purchase and Sale Agreement dated March 8, 1991. "Net Proceeds of Production" shall mean, with respect to any Person, all revenue received by or credited to the account of such Person from the sale of Hydrocarbons and other minerals in, under or produced from their respective oil, gas and mineral properties after deducting royalties, overriding royalties, volumetric production payments with respect to pre-sales of Hydrocarbon production, production payments pledged to secure non-recourse financing payable solely out of such production payments, net profits interests and other burdens payable out of production, normal and reasonable operating expenses and severance, ad valorem, excise, freehold mineral and windfall profit taxes. "Notes" shall mean the promissory notes of the Company evidencing the Loans, in the form of Exhibit C hereto, together with all renewals, extensions, modifications and replacements thereof and substitutions therefore. "Novalta" shall mean Novalta Resources Inc., a corporation incorporated under the laws of the Province of Alberta. "Novalta Contract" shall mean that certain Sale Agreement dated November 19, 1993 executed by and between Novacor Petrochemicals Ltd., as Vendor, and the Parent, as Purchaser. "Obligations" shall mean, as at any date of determination thereof, the sum of the following: (i) the aggregate principal amount of Loans outstanding hereunder plus (ii) the aggregate face amount of all outstanding Bankers' Acceptances plus (iii) the aggregate amount of the Letter of Credit Liabilities hereunder plus (iv) all other liabilities, obligations and indebtedness of the Parent or any Subsidiary of the Parent under any Loan Document. "Oil and Gas Subsidiaries" shall mean any Subsidiary of the Parent whose assets consist primarily of oil and gas properties. As of the date hereof, the Oil and Gas Subsidiaries are listed as such on Exhibit A hereto. "Organizational Documents" shall mean, with respect to a corporation, the certificate of incorporation, articles of incorporation and bylaws of such corporation; with respect to a partnership, the partnership agreement establishing such partnership; with respect to a joint venture, the joint venture agreement establishing such joint venture, and with respect to a trust, the instrument establishing such trust; in each case including any and all modifications thereof as of the date of the Loan Document referring to such Organizational Document. "Parent" shall mean Seagull Energy Corporation, a Texas corporation. "Parent Report" shall mean one or more reports, in form satisfactory to the Administrative Agent and the Majority Banks, prepared by petroleum engineers employed by the Parent or its Subsidiaries, which shall evaluate (i) at least 85% of the present value of the Included Reserves (as defined in the U.S. Facility, without amendment except as permitted under the Intercreditor Agreement) and (ii) any other properties as to which the Parent has conducted successful exploration activities subsequent to the most recent Engineering Report, in each case effective as of the immediately preceding July 1. Each Parent Report shall set forth production, drilling and acquisition information and other information requested by the Administrative Agent and shall be based upon updated economic assumptions acceptable to the Administrative Agent and approved by the Majority Banks at the beginning of the applicable year. "Payment Office" shall mean the Toronto, Ontario office of the Paying Agent, presently located at The Bank of Nova Scotia, International Banking Division-Loan Accounting, 14th Floor, 44 King Street West, Toronto, Ontario, Canada M5H 1H1. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" shall mean an individual, a corporation, a company, a bank, a voluntary association, a partnership, a trust, an unincorporated organization, any Governmental Authority or any other entity. "Plan" shall mean an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (a) maintained by the Parent or any ERISA Affiliate for employees of the Parent or any ERISA Affiliate or (b) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which the Parent or any ERISA Affiliate is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Post-Default Rate" shall mean, in respect of any principal of any Loan, any Reimbursement Obligation or any other amount payable by the Company under this Agreement or any other Loan Document which is not paid when due (whether at stated maturity, by acceleration, or otherwise), a rate per annum during the period commencing on the due date until such amount is paid in full equal to the lesser of (a) the sum of (w) with respect to Eurodollar Loans, 2% per annum plus the applicable Eurodollar Rate then in effect plus the Applicable Margin for Eurodollar Loans until the expiration of the applicable Interest Period, (x) with respect to Canadian Prime Rate Loans, 2% per annum plus the applicable Canadian Prime Rate as in effect from time to time plus the Applicable Margin for Canadian Prime Rate Loans, and (y) with respect to Alternate Base Rate Loans and with respect to Eurodollar Loans after the expiration of the applicable Interest Period (and also with respect to indebtedness other than Loans), 2% plus the Alternate Base Rate as in effect from time to time plus the Applicable Margin for Alternate Base Rate Loans or (b) the Highest Lawful Rate. "Quarterly Dates" shall mean the last day of each March, June, September and December, provided that, if any such date is not a Business Day, then the relevant Quarterly Date shall be the next succeeding Business Day. "Quarterly Equivalent" shall mean, as of any date, the Bank of Canada noon day rate at which it offers to provide U.S. Dollars in exchange for Canadian Dollars on the later of (i) the last Business Day immediately preceding the then current calendar quarter or (ii) the last Business Day immediately preceding the most recent revision of the Maximum Outstanding Amount pursuant to Section 2.9. "Redemption Obligations" shall mean with respect to any Person all mandatory redemption obligations of such Person with respect to preferred stock or other equity securities issued by such Person or put rights in favour of the holder of such preferred stock or other equity securities, to the extent that the redemption obligations will arise prior to the stated maturity of the Obligations. "Reference Banks" shall mean The Bank of Nova Scotia and The Chase Manhattan Bank of Canada and such other Banks (up to a maximum of two (2) additional Banks) as the Company, with the approval of the Paying Agent (which approval shall not be unreasonably withheld), may from time to time designate. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time and any successor or other regulation relating to reserve requirements. "Regulatory Change" shall mean, with respect to any Bank, any change on or after the date of this Agreement in Legal Requirements (including Regulation D) or the adoption or making on or after such date of any interpretation, directive or request applying to a class of banks including such Bank under any Legal Requirements (whether or not having the force of law) by any Governmental Authority. "Reimbursement Obligations" shall mean, as at any date, the obligations of the Company then outstanding in respect of Letters of Credit under this Agreement, to reimburse the Paying Agent for the account of the applicable Issuer for the amount paid by the applicable Issuer in respect of any drawing under such Letter of Credit. "Relevant Party" shall mean the Company, the Parent and each other party to any of the Loan Documents other than (a) the Banks and (b) the Agents. "Request for Extension of Credit" shall mean a request for extension of credit duly executed by the chief executive officer, chief financial officer, or treasurer of the Company, appropriately completed and substantially in the form of Exhibit B attached hereto. "Requirements of Environmental Law" means all requirements imposed by any law (including for example and without limitation The Resource Conservation and Recovery Act (U.S.) and The Comprehensive Environmental Response, Compensation, and Liability Act (U.S.), the Environmental Protection and Enhancement Act (Alberta) and the Canadian Environmental Protection Act), rule, regulation, or order of any federal, state, provincial or local executive, legislative, judicial, regulatory or administrative agency, board or authority in effect at the applicable time which relate to (i) noise; (ii) pollution, protection or clean-up of the air, surface water, ground water or land; (iii) solid, gaseous or liquid waste generation, treatment, storage, disposal or transportation; (iv) exposure to Hazardous Substances; (v) the safety or health of employees or (vi) regulation of the manufacture, processing, distribution in commerce, use, discharge or storage of Hazardous Substances. "Reserve Requirement" shall mean, for any Eurodollar Loan for any Interest Period therefor, the stated maximum rate for all reserves (including any marginal, supplemental or emergency reserves) required to be maintained during such Interest Period under applicable Legal Requirements by any Bank against eurocurrency liabilities. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect and include any other reserves required to be maintained by any Bank by reason of any Regulatory Change against (i) any category of liabilities which includes deposits by reference to which the Eurodollar Rate is to be determined as provided in the definition of "Eurodollar Base Rate" in this Section 1.1 or (ii) any category of extensions of credit or other assets which include Eurodollar Loans. Any determination by the Paying Agent of the Reserve Requirement shall be conclusive and binding, absent manifest error, and may be made using any reasonable averaging and attribution method. "Responsible Officer" shall mean the chairman of the board, the president, any executive vice president, the vice president of finance and administration, the chief executive officer or the chief operating officer or any equivalent officer (regardless of title) and in the case of the Company, any other vice president, and in respect of financial or accounting matters, shall also include the chief financial officer, the treasurer and the controller or any equivalent officer (regardless of title). "Revolving Credit Availability Period" shall mean the period from and including the date hereof to but not including December 31, 2002 or the date the Commitments are terminated pursuant to Section 11.1, whichever is first to occur. "Revolving Credit Commitment Fee Percentage" shall mean 0.225% per annum. "Revolving Credit Obligations" shall mean, as at any date of determination thereof, the sum of the following (determined without duplication): (i) the aggregate principal amount of Loans outstanding hereunder plus (ii) the aggregate of the face amounts of all outstanding Bankers' Acceptances plus (iii) the aggregate amount of the Letter of Credit Liabilities hereunder. "Senior Debt" shall mean Indebtedness having a weighted average maturity at least seven (7) years from the date of issuance and having no conditions precedent or covenants materially more onerous to the Parent than the conditions precedent and covenants contained herein and in the other Loan Documents with respect to the Loans. The documents evidencing any Senior Debt shall contain a provision substantially identical to Section 10.2(y) hereof permitting Liens securing the Notes and the other Obligations on a pari passu basis with such Senior Debt. "Subordinated Debt" shall mean Indebtedness of the Parent having a weighted average maturity at least seven (7) years from the date of issuance and having no conditions precedent or covenants materially more onerous to the Parent than the conditions precedent and covenants contained in the U.S. Facility, in this Agreement and in the other Loan Documents with respect to the Loans and which is expressly made subordinate and junior in right of payment to the Obligations and in respect of any collateral or security by the express terms of the instruments evidencing the Subordinated Debt or the indenture or other similar instrument under which the Subordinated Debt is issued (which indenture or other instrument will be binding on all holders of such Subordinated Debt), by provisions not more favourable to the holders of the Subordinated Debt than the following: (a) in the event a Default exists and is continuing, no payment of principal or interest will be made on account of Subordinated Debt and no remedy for default shall be exercised until (i) such Default will have been cured or waived or until the Obligations will have been paid in full (or provisions made therefor reasonably satisfactory to the Banks) or (ii) 179 days after the occurrence of such Default (as to which the Banks have knowledge as a result of having received notice from the Company pursuant to this Agreement or otherwise) and no action being taken by the Banks with respect to such Default, whichever occurs earlier; (b) upon the occurrence of any of the events or proceedings specified in Subsections 11.1(f) or (g) hereof (or, as to any Subsidiary of the Parent, Subsection 11.1(j) to the extent that it refers to Subsections 11.1(f) or (g)), the holders of any Obligations will be entitled to receive payment in full of all principal or interest on all Obligations before the holders of the Subordinated Debt are entitled to receive any payment on account of principal or interest on the Subordinated Debt, and to that end (but subject to the power of a court of competent jurisdiction to make other provision) the holders of the Obligations will be entitled to receive distributions of any kind or character, whether in cash or property or securities (other than equity securities and other securities establishing rights in the holders thereof which are subordinate to the rights of the holders of the Obligations in accordance with this definition of Subordinated Debt), which may be or would otherwise be payable or deliverable in any such proceedings in respect of the Subordinated Debt (provided that, the Subordinated Debt may provide that if the Obligations have been paid in full or provision therefor reasonably satisfactory to the Banks has been made, the holders of the Subordinated Debt will be subrogated to the rights of the holders of the Obligations); (c) in the event that any Subordinated Debt is declared due and payable before its expressed maturity because of the occurrence of an event of default thereunder (under circumstances when the provisions of the foregoing clauses (a) and (b) will not be applicable), the holders of the Obligations at the time such Subordinated Debt becomes due and payable because of such an event of default will be entitled to receive payment in full of all Obligations (or have provision therefor satisfactory to the Banks made) before the holders of the Subordinated Debt are entitled to receive any payment on account of the principal or interest on the Subordinated Debt; and (e) no holder of the Obligations will be prejudiced in its right to enforce subordination of the Subordinated Debt by any act or failure to act on the part of the Parent or the part of the holders of the Obligations; provided that, the Subordinated Debt may provide that the foregoing provisions are solely for the purpose of defining the relative rights of the holders of the Obligations on the one hand, and the holders of the Subordinated Debt on the other hand, and that nothing therein will impair, as between the Parent and the holders of the Subordinated Debt, the obligation of the Parent, which may be unconditional and absolute, to pay to the holders of the Subordinated Debt the principal and interest thereon in accordance with its terms, nor will anything herein prevent the holders of the Subordinated Debt from exercising all remedies otherwise permitted by applicable law or thereunder upon default thereunder, subject to the rights under clauses (a), (b) and (c) above of the holders of the Obligations to receive cash, property or securities otherwise payable or deliverable to the holders of the Subordinated Debt. "Subsidiary" shall mean, with respect to any Person (the "parent"), (a) any corporation of which at least a majority of the outstanding shares of stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by the parent or one or more of the Subsidiaries of the parent or by the parent and one or more of the Subsidiaries of the parent, and (b) any partnership, limited partnership, joint venture or other form of entity, the majority of the legal or beneficial ownership of which is at the time directly or indirectly owned or controlled by the parent or one or more of the Subsidiaries of the parent or by the parent and one or more of the Subsidiaries of the parent. "Tangible Net Worth" shall mean the sum of the redemption price of preferred stock, par value of common stock, capital in excess of par value of common stock (additional paid-in capital) and retained earnings, less treasury stock, goodwill, deferred development costs, franchises, licenses, patents, trademarks and copyrights and all other assets which are properly classified as intangible assets in accordance with GAAP less any Redemption Obligations. "Type" shall have the meaning assigned to such term in Section 1.3 hereof. "Unfunded Liabilities" shall mean, with respect to any Plan, at any time, the amount (if any) by which (a) the present value of all benefits under such Plan exceeds (b) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent actuarial valuation report for such Plan, but only to the extent that such excess represents a potential liability of any ERISA Affiliate to the PBGC or a Plan under Title IV of ERISA. "U.S. Dollars" and "U.S. $" shall mean lawful money of the United States of America. "U.S. Facility" shall mean that certain Credit Agreement dated concurrently herewith executed by and among the Parent, The Chase Manhattan Bank, as Agent, and certain banks therein named, as amended by the Intercreditor Agreement and as the same may be further amended or modified from time to time. 1.2 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be delivered hereunder shall be prepared, in accordance with GAAP. To enable the ready determination of compliance with the provisions hereof, the Parent will not change from December 31 in each year the date on which its fiscal year ends, nor from March 31, June 30 and September 30 the dates on which the first three fiscal quarters in each fiscal year end. 1.3 Types of Loans. Loans hereunder are distinguished by "Type". The "Type" of a Loan refers to the determination whether such Loan is a Eurodollar Loan, an Alternate Base Rate Loan or a Canadian Prime Rate Loan. 1.4 Miscellaneous. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Any reference to Sections shall refer to Sections of this Agreement. Whenever it is necessary to convert an amount denominated in Canadian Dollars to U.S. Dollars, such as calculating the aggregate outstanding principal amount of the Revolving Credit Obligations, such conversion shall be effected using the Equivalent U.S. Dollar Amount or, where applicable, the Quarterly Equivalent. Unless payments are otherwise required by the terms of this Agreement or by any other applicable Loan Document to be made in U.S. Dollars or Canadian Dollars, such payment shall be made in U.S. Dollars or in Canadian Dollars converted by using the Equivalent U.S. Dollar Amount as of the date of such payment calculated, where applicable, using the Quarterly Equivalent. Section 2. Commitments; Designation of Maximum Outstanding Amount. 2.1 Loans and Bankers' Acceptances. From time to time on or after the date hereof and during the Revolving Credit Availability Period, each Bank shall: (a) make Loans under this Section 2.1, in Canadian Dollars or U.S. Dollars, to the Company; and (b) accept and purchase Bankers' Acceptances and deliver the Canadian Bankers' Acceptance Discount Proceeds (less the applicable acceptance fees payable by the Company to such Bank pursuant to Sections 4.3) in respect thereof for the account of the Company through the Paying Agent at the Payment Office, in an aggregate principal amount (including therein the aggregate face amount of any outstanding Bankers' Acceptances) at any one time outstanding (including its Commitment Percentage of all Letter of Credit Liabilities at such time) up to but not exceeding such Bank's Commitment Percentage of the Maximum Revolving Credit Available Amount. Subject to the conditions herein, any such Loan or Bankers' Acceptance repaid prior to the end of the Revolving Credit Availability Period may be reborrowed or reissued, as the case may be, pursuant to the terms of this Agreement; provided, that any and all such Loans and the full face amount of all outstanding Bankers' Acceptances shall be due and payable in full at the end of the Revolving Credit Availability Period. For purposes of determining the amount available for borrowing hereunder (or the maximum availability for the issuance of Bankers' Acceptances or Letters of Credit), the Equivalent U.S. Dollar Amount as of the Business Day preceding the Loan request, Bankers' Acceptance Request or Letter of Credit request shall be used to determine availability hereunder, rather than the Quarterly Equivalent. 2.2 Letters of Credit. (a) Letters of Credit. Subject to the terms and conditions hereof, and on the condition that aggregate Letter of Credit Liabilities shall never exceed U.S. $10,000,000, the Company shall have the right, in addition to Loans provided for in Section 2.1 hereof, to utilize the Commitments from time to time from and after the date hereof through the expiration of the Revolving Credit Availability Period by obtaining the issuance of letters of credit for the account of the Company and on behalf of the Company by the applicable Issuer if the Company shall so request in the notice referred to in Section 2.2(b)(i) (such letters of credit being collectively referred to as the "Letters of Credit"). Letters of Credit may, upon written request of the Company, be denominated in Canadian Dollars and if so all payments and fees with respect thereto shall be paid in Canadian Dollars. Upon the date of the issuance of a Letter of Credit, the applicable Issuer shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from the applicable Issuer, a participation, to the extent of such Bank's Commitment Percentage, in such Letter of Credit and the related Letter of Credit Liabilities. Any Letter of Credit having an expiry date after the end of the Revolving Credit Availability Period shall have been fully Covered or shall be backed by a letter of credit in form and substance, and issued by an issuer, acceptable to the Administrative Agent in its reasonably exercised discretion. Subject to the terms and conditions hereof, upon the request of the Company, if BNS is the designated Issuer, BNS shall issue the applicable Letter of Credit and if any other Bank is the designated Issuer, such Bank may, but shall not be obligated to, issue such Letter of Credit. (b) Additional Provisions. The following additional provisions shall apply to each Letter of Credit: (i) The Company shall give the Administrative Agent and the Paying Agent at least three (3) Business Days' prior notice (effective upon receipt) specifying the proposed Issuer and the date such Letter of Credit is to be issued and describing the proposed terms of such Letter of Credit and the nature of the transaction proposed to be supported thereby, and shall furnish such additional information regarding such transaction as the Administrative Agent, the Paying Agent or the applicable Issuer may reasonably request. Upon receipt of such notice the Paying Agent shall promptly notify each Bank of the contents thereof and of such Bank's Commitment Percentage of the amount of such proposed Letter of Credit. (ii) No Letter of Credit may be issued if after giving effect thereto the sum of (A) the aggregate outstanding principal amount of Loans plus (B) the aggregate Letter of Credit Liabilities would exceed the Maximum Revolving Credit Available Amount. On each day during the period commencing with the issuance of any Letter of Credit and until such Letter of Credit shall have expired or been terminated, the Commitment of each Bank shall be deemed to be utilized for all purposes hereof in an amount equal to such Bank's Commitment Percentage of the amount then available for drawings under such Letter of Credit. (iii) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment thereunder, the applicable Issuer shall promptly notify the Company and each Bank as to the amount to be paid as a result of such demand and the payment date. If at any time the applicable Issuer shall have made a payment to a beneficiary of a Letter of Credit in respect of a drawing under such Letter of Credit, each Bank will pay to the applicable Issuer immediately upon demand by the applicable Issuer at any time during the period commencing after such payment until reimbursement thereof in full by the Company, an amount equal to such Bank's Commitment Percentage of such payment, together with interest on such amount for each day from the date of demand for such payment (or, if such demand is made after 11:00 a.m. Toronto, Ontario time on such date, from the next succeeding Business Day) to the date of payment by such Bank of such amount at a per annum rate of interest determined by the Issuer (such rate to be conclusive and binding on the Banks) in accordance with the Issuer's usual banking practice for similar advances to financial institutions of like standing to the applicable Bank. (iv) The Company shall be irrevocably and unconditionally obligated forthwith to reimburse the applicable Issuer for any amount paid by the applicable Issuer upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind. Such reimbursement may, subject to satisfaction of the conditions in Sections 7.1 and 7.2 hereof and to the existence of the Maximum Revolving Credit Available Amount (after adjustment in the same to reflect the elimination of the corresponding Letter of Credit Liability) be made by borrowing of Loans. In the event any such reimbursement is not made by borrowing of Loans, the Company shall make such reimbursement in immediately available funds within five (5) days after demand therefor by the applicable Issuer. The applicable Issuer will pay to each Bank such Bank's Commitment Percentage of all amounts received from the Company for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Letter of Credit, but only to the extent such Bank has made payment to the applicable Issuer in respect of such Letter of Credit pursuant to clause (iii) above. (v) The Company will pay to the Paying Agent at the Payment Office for the account of each Bank a fee on such Bank's Commitment Percentage of the daily average amount available for drawings under each Letter of Credit, in each case for the period from and including the date of issuance of such Letter of Credit to and including the date of expiration or termination thereof at a rate per annum equal to the Letter of Credit Fee in effect from time to time, such fee to be paid in arrears on the Quarterly Dates and on the date of the expiration or termination thereof. The Paying Agent will pay to each Bank, promptly after receiving any payment in respect of letter of credit fees referred to in the preceding sentence of this clause (v), an amount equal to such Bank's Commitment Percentage of such fees. The Company shall pay to the applicable Issuer an administration and issuance fee in an amount equal to 1/8 of 1% per annum of the daily average amount available for drawings under such Letter of Credit, in each case for the period from and including the date of issuance of such Letter of Credit to and including the date of expiration or termination thereof, such fee to be paid in arrears on the Quarterly Dates and on the date of the expiration or termination thereof. Such administration and issuance fee shall be retained by the applicable Issuer. (vi) The issuance by the applicable Issuer of each Letter of Credit shall, in addition to the conditions precedent set forth in Section 7 hereof, be subject to the conditions precedent that such Letter of Credit shall be in such form and contain such terms as shall be reasonably satisfactory to the applicable Issuer and that the Company shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as the applicable Issuer shall have reasonably requested and are not inconsistent with the terms of this Agreement including an Application therefor. In the event of a conflict between the terms of this Agreement and the terms of any Application, the terms of this Agreement shall control. Without limiting the generality of the foregoing sentence, in the event any such Application shall include requirements for Cover, it is agreed that there shall be no requirements for the Company to provide Cover except as expressly required in this Agreement. (c) Indemnification. The Company hereby indemnifies and holds harmless each Agent, the applicable Issuer and each Bank from and against any and all claims and damages, losses, liabilities, costs or expenses which such Bank, the applicable Issuer or such Agent may incur (or which may be claimed against such Bank, the applicable Issuer or such Agent by any Person whatsoever) in connection with the execution and delivery or transfer of or payment or failure to pay under any Letter of Credit, including, without limitation, any claims, damages, losses, liabilities, costs or expenses which such Agent, the applicable Issuer or such Bank, as the case may be, may incur (whether incurred as a result of its own negligence or otherwise) by reason of or in connection with the failure of any other Bank (whether as a result of its own negligence or otherwise) to fulfill or comply with its obligations to such Agent, the applicable Issuer or such Bank, as the case may be, hereunder (but nothing herein contained shall affect any rights the Company may have against such defaulting Bank); provided that, the Company shall not be required to indemnify any Bank, the applicable Issuer or any Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of the party seeking indemnification, or (ii) by such Bank's, the applicable Issuer's or such Agent's, as the case may be, failure to pay under any Letter of Credit after the presentation to it of a request required to be paid under applicable law. Nothing in this Section 2.2(c) is intended to limit the obligations of the Company under any other provision of this Agreement. (d) Co-issuance or Separate Issuance of Letters of Credit. The Company may, at its option, request that any requested Letter of Credit which exceeds U.S. $1,000,000 be issued severally, but not jointly, by any two or more of the Banks or issued through separate Letters of Credit issued by any two or more of the Banks, respectively, each in an amount equal to a portion of the amount of the applicable Letter of Credit requested by the Company. In either such event, the Banks issuing such Letters of Credit shall each constitute an "Issuer" and the Letters of Credit so issued shall each constitute a "Letter of Credit" for all purposes hereunder and under the Loan Documents. Notwithstanding the foregoing, no Bank other than BNS shall have any obligation to issue any Letter of Credit, but may do so at its option. 2.3 Reductions and Changes of Commitments. (a) Mandatory. (i) The total Commitment of the Banks shall be reduced as follows:
Reduction Resulting Revolving Reduction Date Amount Credit Commitment March 31, 1999 U.S. $6,250,000 U.S. $93,750,000 June 30, 1999 U.S. $6,250,000 U.S. $87,500,000 September 30, 1999 U.S. $6,250,000 U.S. $81,250,000 December 31, 1999 U.S. $6,250,000 U.S. $75,000,000 March 31, 2000 U.S. $6,250,000 U.S. $68,750,000 June 30, 2000 U.S. $6,250,000 U.S. $62,500,000 September 30, 2000 U.S. $6,250,000 U.S. $56,250,000 December 31, 2000 U.S. $6,250,000 U.S. $50,000,000 March 31, 2001 U.S. $6,250,000 U.S. $43,750,000 June 30, 2001 U.S. $6,250,000 U.S. $37,500,000 September 30, 2001 U.S. $6,250,000 U.S. $31,250,000 December 31, 2001 U.S. $6,250,000 U.S. $25,000,000 March 31, 2002 U.S. $6,250,000 U.S. $18,750,000 June 30, 2002 U.S. $6,250,000 U.S. $12,500,000 September 30, 2002 U.S. $6,250,000 U.S. $6,250,000 December 31, 2002 U.S. $6,250,000 U.S. $0
(ii) On December 31, 1999, all Commitments shall be terminated in their entirety unless terminated at an earlier date pursuant to Section 11.1. (b) Optional. The Company shall have the right to terminate or reduce the unused portion of the Commitments a t any time or from time to time, provided that: (i) the Company shall give notice of each such termination or reduction to the Administrative Agent and the Paying Agent as provided in Section 5.5 hereof and (ii) each such partial reduction shall be permanent and in an aggregate amount at least equal to U.S. $5,000,000. (c) No Reinstatement. Any reduction in or termination of the Commitments may not be reinstated without the approval of the Administrative Agent and each of the Banks. 2.4 Fees. (a) The Company shall pay to the Paying Agent for the account of each Bank a commitment fee with respect to such Bank's Commitment accruing from the date hereof, computed for each day at a rate per annum equal to the Revolving Credit Commitment Fee Percentage with respect to the Commitments of the respective Banks and based on the amount, if any, by which such Bank's pro rata share of the lesser of the aggregate Commitments or the Maximum Outstanding Amount on such day exceeds the sum of (i) the unpaid principal balance of such Bank's Note outstanding on such day plus (ii) the full face amount of all outstanding Bankers' Acceptances accepted by such Bank plus (iii) such Bank's allocated share of the aggregate Letter of Credit Liabilities outstanding on such day. Commitment fees accruing pursuant to this clause (a) shall be payable on the Quarterly Dates and on the earlier of the date the Commitments are terminated or the last day of the Revolving Credit Availability Period. Such fees shall be calculated in U.S. Dollars, but paid in Canadian Dollars converted by using the Equivalent U.S. Dollar Amount as of the date of payment. (b) The Company shall pay to the Paying Agent for the account of each Bank an additional commitment fee with respect to such Bank's Commitment accruing from the date hereof, computed for each day at a rate per annum equal to one-half (1/2) of the Revolving Credit Commitment Fee Percentage with respect to the Commitments of the respective Banks and based on the amount, if any, by which the amount set forth opposite such Bank's name on the signature pages hereto under the heading "Commitment" (but only to the extent that such amount has not been permanently and irrevocably terminated and reduced by written notice from the Company to the Administrative Agent, with a copy to the Paying Agent; provided, however that any such termination or reduction must be allocated among the Banks pro rata in accordance with their respective Commitment Percentages) exceeds such Bank's pro rata share of the Maximum Outstanding Amount on such day. Commitment fees accruing pursuant to this clause (b) shall be payable on the Quarterly Dates and on the earlier of the date the Commitments are terminated or the last day of the Revolving Credit Availability Period. Such fees shall be calculated in U.S. Dollars, but paid in Canadian Dollars converted by using the Equivalent U.S. Dollar Amount as of the date of payment. (c) The Company shall pay to the Paying Agent for the account of each Bank an additional commitment fee effective upon any increase in borrowing availability hereunder. Such additional commitment fee shall be in an amount equal to the amount by which the commitment fee which such Bank would have received under Sections 2.4(a) and (b) if such increased borrowing availability had been effective six (6) calendar months earlier exceeds the commitment fee actually received by such Bank under Sections 2.4(a) and (b) during such six (6) calendar month period. Payment of such additional commitment fee shall be due and payable upon the effective date of such increase in the Maximum Outstanding Amount. The commitment fee provided for in this Section 2.4(c) shall be payable notwithstanding any prior decrease in the available Commitments which may have occurred. Such fees shall be calculated in U.S. Dollars, but paid in Canadian Dollars converted by using the Equivalent U.S. Dollar Amount as of the date of payment. (d) For purposes of determining the amount of any payment required to be made under this Section 2.4, the Quarterly Equivalent shall be used as the conversion rate with respect to Canadian Dollars. 2.5 Affiliates; Lending Offices. (a) Any Bank may, if it so elects, fulfill its Commitment as to any Eurodollar Loan by causing a branch, foreign or otherwise, or Affiliate of such Bank to make such Loan and may transfer and carry such Loan at, to or for the account of any branch office or Affiliate of such Bank which is a resident of Canada under the Income Tax Act (Canada); provided that, in such event for the purposes of this Agreement such Loan shall be deemed to have been made by such Bank and the obligation of the Company to repay such Loan shall nevertheless be to such Bank and shall be deemed to be held by such Bank and, to the extent of such Loan, to have been made for the account of such branch or Affiliate. (b) Notwithstanding any provision of this Agreement to the contrary, each Bank shall be entitled to fund and maintain its funding of all or any part of its Loans hereunder in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if such Bank had actually funded and maintained each Eurodollar Loan during each Interest Period through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the Eurodollar Rate, as the case may be, for such Interest Period for such Interest Period. 2.6 Several Obligations. The failure of any Bank to make any Loan to be made by it or accept and purchase Bankers' Acceptances to be purchased by it on the date specified therefor shall not relieve any other Bank of its obligation to make its Loan or accept and purchase such Bankers' Acceptances on such date, but neither any Agent nor any Bank shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank or to accept and purchase any Bankers' Acceptances to be accepted and purchased by such other Bank. 2.7 Notes. The Loans made by each Bank shall be evidenced by a single Canadian Dollar denominated Note of the Company in the case of Loans denominated in Canadian Dollars and by a single U.S. Dollar denominated Note of the Company in the case of Loans denominated in U.S. Dollars, such notes to be in substantially the forms of Exhibit C-1 and C-2, respectively, hereto payable to the order of such Bank in a principal amount equal to the Commitment of such Bank, and otherwise duly completed. Each Bank is hereby authorized by the Company to endorse on the schedule (or a continuation thereof) attached to the Note of such Bank, to the extent applicable, the date, amount and Type of and the Interest Period for each Loan made by such Bank to the Company hereunder, and the amount of each payment or prepayment of principal of such Loan received by such Bank, provided, that any failure by such Bank to make any such endorsement shall not affect the obligations of the Company under such Note or hereunder in respect of such Loan. 2.8 Use of Proceeds. The proceeds of the Loans and the Canadian Bankers' Acceptance Discount Proceeds, as the case may be, shall be used for general corporate purposes. 2.9 Designation of Maximum Outstanding Amount. The Company shall from time to time designate a maximum principal amount, denominated in U.S. Dollars, permitted to be outstanding hereunder for the period during which such designation is effective (such amount being herein called the "Maximum Outstanding Amount"). The initial Maximum Outstanding Amount, effective from the date hereof, is U.S. $95,000,000. The Company may, at any time, by written notice delivered to the Administrative Agent and the Paying Agent no later than two (2) Business Days prior to the effective date thereof, revise the Maximum Outstanding Amount upwards or downwards; provided, however, that (i) the Maximum Outstanding Amount may not at any time exceed the aggregate amount of the Commitments, as reduced from time to time pursuant to Section 2.3 hereof and (ii) the Maximum Outstanding Amount may not at any time exceed the amount by which the Borrowing Base from time to time in effect exceeds the sum of the aggregate amount of all "Revolving Credit Obligations" from time to time outstanding under the U.S. Facility plus the aggregate amount of all other Borrowing Base Debt of the Parent and its Subsidiaries from time to time outstanding. Section 3. Borrowings, Prepayments and Selection of Interest Rates. 3.1 Borrowings. The Company shall give the Administrative Agent and the Paying Agent notice of each borrowing or the issuance of each Bankers' Acceptance to be made hereunder as provided in Section 5.5 hereof. Not later than 2:00 p.m. Toronto, Ontario time on the date specified for each such borrowing or the issuance of each such Bankers' Acceptance hereunder, each Bank shall make available the amount of the Loan, if any, to be made by it on such date or make available Canadian Bankers' Acceptance Discount Proceeds in respect of Bankers' Acceptances to be accepted and purchased by it on such date (less the applicable acceptance fees payable by the Company in respect of such Bankers' Acceptances), in each case to the Paying Agent, at the Payment Office, in immediately available funds, for the account of the Company. The amount so received by the Paying Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account designated by the Company maintained with the Paying Agent at the Payment Office. 3.2 Prepayments. (a) Optional Prepayments. Subject to the provisions of Sections 4, 5 and 6, the Company shall have the right to prepay, on any Business Day, in whole or in part, without the payment of any penalty or fee, Loans at any time or from time to time, provided that, the Company shall give the Administrative Agent and the Paying Agent notice of each such prepayment as provided in Section 5.5 hereof. Eurodollar Loans may be prepaid on the last day of an Interest Period applicable thereto and Bankers' Acceptances may be prepaid on their stated maturity date. Eurodollar Loans and Bankers' Acceptances may not be otherwise prepaid unless prepayment is accompanied by payment of all compensation required by Section 6. (b) Mandatory Prepayments and Cover. (1) Reduction of Commitments. The Company shall from time to time on demand by the Administrative Agent prepay the Loans (or provide Cover for Letter of Credit Liabilities and the face amount of Bankers' Acceptances) in such amounts as shall be necessary so that at all times the aggregate outstanding principal amount (including therein the face amount of all outstanding Bankers' Acceptances) of all Revolving Credit Obligations shall not be in excess of the Maximum Outstanding Amount plus any Cover provided under this Section 3.2(b)(1). (2) Borrowing Base Deficiency. Any payments required to cure any Borrowing Base Deficiency shall be made by Parent to the lenders under the U.S. Facility and by the Company to the Banks (with the Maximum Outstanding Amount to be reduced by the amount of such payments by the Company) in the manner provided in the Intercreditor Agreement. (3) Use of Quarterly Equivalent. For purposes of determining whether any payment is required to be made under this Section 3.2, and the amount thereof, when such determination requires a conversion of U.S. Dollars into Canadian Dollars and vice versa, the Quarterly Equivalent shall be used as the conversion rate. 3.3 Selection of Interest Rates. Subject to Section 5.1 and Section 6 hereof, the Company shall have the right, by giving written notice to the Administrative Agent and the Paying Agent as provided in Section 5.5 hereof, either to convert any Bankers' Acceptance (in whole or in part) into a Loan, to convert any Loan (in whole or in part) into a Bankers' Acceptance, to convert any Loan (in whole or in part) into a Loan of another Type (provided that no such conversion of Eurodollar Loans shall be permitted other than on the last day of an Interest Period applicable thereto and no conversion of Bankers' Acceptances shall be permitted other than on the maturity date thereof), to continue any Bankers' Acceptance (in whole or in part) or to continue any Loan (in whole or in part) as a Loan of the same Type. Any such notice of conversion of a Bankers' Acceptance into a Loan or of conversion of a Loan into, or continuation of a Loan as, a Eurodollar Loan or a Bankers' Acceptance shall specify the new Interest Period or maturity date, as applicable. In the event the Company fails to so give such notice prior to the end of any Interest Period for any Eurodollar Loan, such Loan shall become an Alternate Base Rate Loan on the last day of such Interest Period. 3.4 Conditions Applicable to Bankers' Acceptances. (a) Acceptance and Purchase of Bankers' Acceptances. Subject to the terms and conditions of this Agreement, each Bank agrees to accept its Commitment Percentage of Bankers' Acceptances issued by the Company and to purchase same at the applicable Canadian Bankers' Acceptance Discount Rate and to provide to the Paying Agent for the account of the Company the Canadian Bankers' Acceptance Discount Proceeds in respect thereof less the applicable acceptance fees payable by the Company to such Bank pursuant to Section 4.3. Each such Bank may at any time and from time to time hold, sell, rediscount or otherwise dispose of any or all Bankers' Acceptances purchased by it. (b) Waiver of Presentment and Other Conditions. The Company waives presentment for payment and any other defence to payment of any amounts due to a Bank in respect of a Bankers' Acceptance accepted and purchased by it pursuant to this Agreement which might exist solely by reason of such Bankers' Acceptance being held, at the maturity thereof, by such Bank in its own right and the Company agrees not to claim any days of grace if such Bank as holder sues the Company on the Bankers' Acceptance for payment of the amount payable by the Company thereunder. On the specified maturity date of a Bankers' Acceptance, or such earlier date as may be required or permitted pursuant to the provisions of this Agreement, the Company shall pay the Bank that has accepted and purchased such Bankers' Acceptance the full face amount of such Bankers' Acceptance. (c) Terms of Each Bankers' Acceptance: Each Bankers' Acceptance shall: (1) have a maturity date which shall be on a Business Day; (2) have a term of not less than thirty (30) days and not more than one hundred and eighty (180) days (excluding days of grace); (3) be in the form of Exhibit J attached hereto or in such other form as the Company may agree to in writing; (4) be issued in face amounts of Canadian $100,000 or whole multiples thereof (each of the Banks agrees that it will use its best efforts to minimize the number of separate Bankers' Acceptances required to be executed); and (5) not have a maturity date which extends beyond the end of the scheduled Revolving Credit Availability Period. (d) Delivery of Blank Bankers' Acceptances. As a condition precedent to each Banks' obligation to accept and purchase Bankers' Acceptances hereunder, the Company shall have delivered to such Bank through the Paying Agent at the Payment Office sufficient bankers' acceptances endorsed in blank in sufficient time for such Bank to forward to and hold the same for issuance in accordance with a request from the Company. Each Bank is hereby authorized to issue such bankers' acceptances endorsed in blank in such face amounts as may be determined by such Bank; provided that the aggregate amount thereof is equal to the aggregate amount of Bankers' Acceptances required to be accepted and purchased by such Bank hereunder. No Bank shall be liable for any damage, loss or other claim arising by reason of any loss or improper use of any bankers' acceptance endorsed in blank except any loss arising by reason of the negligence or wilful misconduct of such Bank or its officers, employees, agents or representatives. The Paying Agent shall maintain a record with respect to bankers' acceptances endorsed in blank that are received from the Company and that are delivered to a Bank hereunder. Each Bank shall maintain a record with respect to bankers' acceptances endorsed in blank that are: (1) received by such Bank from the Paying Agent hereunder; (2) voided by such Bank for any reason; (3) accepted and purchased by such Bank hereunder; and (4) cancelled by such Bank at the maturity thereof. Each Bank agrees to provide such record to the Paying Agent upon request therefor by the Paying Agent as well as concurrently with any request by such Bank to the Paying Agent for any additional bankers' acceptances endorsed in blank required from the Company. The Paying Agent shall provide a report of such records received by the Paying Agent to the Company upon request from the Company. (e) Failure to Give Notice of Repayment. If the Company fails to give notice to the Paying Agent at the Payment Office of the method of repayment of a Bankers' Acceptance prior to the date of maturity of such Bankers' Acceptance in accordance with the same period of notice required for the original acceptance of such Bankers' Acceptance as set forth herein, the face amount of such Bankers' Acceptance shall, on its maturity, automatically be converted to a Canadian Prime Rate Loan. (f) Execution of Bankers' Acceptances. Bankers' acceptances of the Company which are endorsed in blank and are to be accepted as Bankers' Acceptances hereunder shall be signed by a duly authorized signatory or duly authorized signatories of the Company, and may, at the option of the Company, be signed by way of affixing a reproduction of the signature or signatures of such duly authorized signatory or signatories. Notwithstanding that any person whose signature appears on any Bankers' Acceptance as a signatory may no longer be an authorized signatory of the Company at the date of issuance of a Bankers' Acceptance, and notwithstanding that the signature affixed may be a reproduction only, such signature shall nevertheless be valid and sufficient for all purposes as if such authority had remained in force at the time of such issuance and as if such signature had been manually applied, and any such Bankers' Acceptance so signed shall be binding on the Company. 3.5 Paying Agent's Duties Re Bankers' Acceptances. (a) Advice to the Lenders. The Paying Agent, promptly following receipt of a Request for Extension of Credit by way of Bankers' Acceptance, shall so advise the Banks and shall advise each Bank of the amount of each issue of Bankers' Acceptances to be accepted and purchased by it and the term thereof, which term shall be identical for all Banks. (b) Agent's Confirmation of Bankers' Acceptance Issuance. At or prior to 11:00 a.m. (Toronto, Ontario time) on the date on which the Bankers' Acceptances are to be accepted and purchased hereunder, the Paying Agent shall provide telephone advice to the Company and each Bank confirming the particulars with respect to the issuance, acceptance and purchase of such Bankers' Acceptances. Such advice shall be confirmed in writing at or prior to 4:30 p.m. (Toronto, Ontario time) on such date by delivery to the Company and each Bank of a written confirmation of such telephone advice with respect to the issuance, acceptance and purchase of such Bankers' Acceptances. Each Bank will forthwith advise the Paying Agent of the particulars of the Bankers' Acceptances accepted and purchased by it. (c) Completion of Bankers' Acceptance. Upon receipt of the telephone advice referred to in Section 3.5(a), each Bank is thereupon authorized to complete bankers' acceptances held by it in blank in accordance with the particulars so advised by the Paying Agent. (d) Paying Agent's Discretion on Allocation. In the event it is not practicable to allocate Bankers' Acceptances to each Lender in accordance with Section 5.2 such that the aggregate amount of Bankers' Acceptances required to be accepted and purchased by such Bank hereunder is in a whole multiple of Canadian $100,000, the Paying Agent is authorized by the Company and each Bank to make such allocation as the Paying Agent determines in its sole and unfettered discretion may be equitable in the circumstances. 3.6 Certain Provisions Relating to Bankers' Acceptances Forms. (a) The Company shall hold and use prudently the bankers' acceptance forms delivered to it in blank from time to time and shall return them from time to time to the Paying Agent for onward conveyance to the respective Banks, properly pre-signed and pre-endorsed and in sufficient quantities to be dealt with by each Bank in conformity with this Agreement. The Paying Agent shall provide to the Company written acknowledgment of the receipt of such pre-signed and pre-endorsed bankers' acceptance forms. (b) The Paying Agent and each Bank shall deal prudently with any bankers' acceptance forms pre-signed and pre-endorsed by the Company and delivered from time to time by the Company and shall use them only in accordance with the instructions of the Company given to the Paying Agent, in conformity with this Agreement. (c) In accordance with the instructions given from time to time by the Company, each Bank is hereby authorized to complete the aforementioned bankers' acceptance forms, to provide its acceptance thereon and, at such Bank's option, to put them into circulation, the whole as provided in and subject to this Agreement. (d) Neither the Paying Agent nor any Bank shall be responsible or liable for any failure to make credit available by way of Bankers' Acceptances under the terms of the Credit Agreement if such failure is due to the failure of the Company to return duly pre-signed and pre-endorsed bankers' acceptance forms to the Paying Agent on a timely basis. (e) On request by the Paying Agent on behalf of the Banks, the Company shall return to the Paying Agent all bankers' acceptance forms then held by the Company, provided that all such bankers' acceptance forms which have been pre-signed or pre-endorsed by the Company may be cancelled prior to their return and on request by the Company made to the Paying Agent, a Bank shall cancel all pre-signed or pre-endorsed bankers' acceptance forms held by such Bank and not yet issued in accordance with the Company's instructions and shall confirm such cancellation to the Paying Agent who shall in turn inform the Company. Section 4. Payments of Principal and Interest. 4.1 Repayment of Loans and Reimbursement Obligations. The Company will pay to the Paying Agent for the account of each Bank (a) the principal of each Loan made by such Bank on the dates provided in the respective Notes and as provided hereunder, (b) the face amount of each Bankers' Acceptance on its maturity date and (c) the amount of each Reimbursement Obligation promptly upon its occurrence. The face amount of any Bankers' Acceptance or the amount of any Reimbursement Obligation may, if the applicable conditions precedent specified in Section 7 hereof have been satisfied, be paid with the proceeds of Loans. Repayments of Loans or Reimbursement Obligations denominated in Canadian Dollars and repayments of Bankers' Acceptances shall be made in Canadian Dollars and repayments of Loans or Reimbursement Obligations denominated in U.S. Dollars shall be made in U.S. Dollars. 4.2 Interest. (a) Subject to Section 13.6 hereof, the Company will pay to the Paying Agent for the account of each Bank interest on the unpaid principal amount of each Loan made by such Bank for the period commencing on the date of such Loan to but excluding the date such Loan shall be paid in full, in the currency in which the Loan is denominated, at the lesser of (I) the following rates per annum: (i) if such Loan is an Alternate Base Rate Loan, the Alternate Base Rate plus the Applicable Margin, and (ii) if such Loan is a Canadian Prime Rate Loan, the Canadian Prime Rate plus the Applicable Margin, and (iii) if such Loan is a Eurodollar Loan, the applicable Eurodollar Rate plus the Applicable Margin, or (II) the Highest Lawful Rate. (b) Notwithstanding any of the foregoing but subject to Section 13.6 hereof, the Company will pay to the Paying Agent for the account of each Bank interest in the applicable currency at the applicable Post-Default Rate on any principal of any Loan made by such Bank, on any Reimbursement Obligation and on any other amount payable by the Company hereunder to or for the account of such Bank (but, if such amount is interest, only to the extent legally allowed), which shall not be paid in full when due (whether at stated maturity, by acceleration or otherwise), for the period commencing on the due date thereof until the same is paid in full. (c) Accrued interest on each Loan shall be payable on the last day of each Interest Period for such Loan (and, if such Interest Period exceeds three months' duration, quarterly, commencing on the first quarterly anniversary of the first day of such Interest Period), except that (i) accrued interest payable at the Post-Default Rate shall be due and payable from time to time on demand of the Administrative Agent or the Majority Banks (through the Administrative Agent) and (ii) accrued interest on any amount prepaid or converted pursuant to Section 6 hereof shall be paid on the amount so prepaid or converted. 4.3 Acceptance Fees. The Company shall pay to each Bank acceptance fees in Canadian Dollars forthwith upon the acceptance by such Bank of each Bankers' Acceptance issued by the Company at a rate per annum equal to the B/A Stamping Rate in effect at the time of the acceptance of such Bankers' Acceptance, calculated on the face amount of such Bankers' Acceptance and on the basis of the number of days in the term of such Bankers' Acceptance divided by three hundred sixty-five (365). Acceptance fees payable to the Banks pursuant to this Section 4.3 shall be paid in the manner specified in Section 3.4(a). Section 5. Payments; Pro Rata Treatment; Computations, Etc. 5.1 Payments. (a) Except to the extent otherwise provided herein, all payments of principal, interest, the full face amount of Bankers' Acceptances, Reimbursement Obligations and other amounts to be made by the Company hereunder and under the Notes and the other Loan Documents shall be made in U.S. Dollars or Canadian Dollars, as the case may be, in immediately available funds, to the Paying Agent at the Payment Office (or in the case of a successor Paying Agent, at the payment office designated by such successor Paying Agent in Canada), not later than 11:00 a.m. Toronto, Ontario time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). The Paying Agent, or any Bank for whose account any such payment is made, may (but shall not be obligated to) debit the amount of any such payment which is not made by such time to any ordinary deposit account of the Company with the Paying Agent or such Bank, as the case may be. (b) The Company shall, at the time of making each payment hereunder or under any Note or any other Loan Document, specify to the Paying Agent the Loans, the Bankers' Acceptances or other amounts payable by the Company hereunder or thereunder to which such payment is to be applied. Each payment received by the Paying Agent hereunder or under any Note, Bankers' Acceptance or any other Loan Document for the account of a Bank shall be paid promptly to such Bank, in immediately available funds for the account of such Bank's Applicable Lending Office. (c) If the due date of any payment hereunder or under any Note or any other Loan Document falls on a day which is not a Business Day, the due date for such payment (subject to the definition of Interest Period) shall be extended to the next succeeding Business Day and interest shall be payable for any principal so extended for the period of such extension. 5.2 Pro Rata Treatment. Except to the extent otherwise provided herein: (a) each borrowing from the Banks under Section 2.1 hereof shall be made ratably from the Banks on the basis of their respective Commitments and each payment of commitment fees shall be made for the account of the Banks, and each termination or reduction of the Commitments of the Banks under Section 2.3 hereof shall be applied, pro rata, according to the Banks' respective Commitments; (b) each payment by the Company of the full face amount of Bankers' Acceptances and principal of or interest on Loans of a particular Type shall be made to the Paying Agent for the account of the Banks pro rata in accordance with the respective full face amount of such Bankers' Acceptances or the unpaid principal amounts of such Loans held by the Banks; and (c) the Banks (other than the applicable Issuer) shall purchase from the applicable Issuer participations in the Letters of Credit to the extent of their respective Commitment Percentages. 5.3 Computations. Subject to Section 13.7, interest based on the Eurodollar Base Rate or the Federal Funds Rate will be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable, unless the effect of so computing shall be to cause the rate of interest to exceed the Highest Lawful Rate, in which case interest shall be calculated on the basis of the actual number of days elapsed in a year composed of 365 or 366 days, as the case may be. All other interest and fees shall be computed on the basis of a year of 365 (or 366) days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. 5.4 Minimum and Maximum Amounts. Except for prepayments made pursuant to Section 3.2(b) hereof, each borrowing and repayment of principal of Loans, each acceptance, purchase and repayment of Bankers' Acceptances and each termination or reduction of Commitments, each optional prepayment and each conversion of Type shall be in an aggregate principal amount at least equal to (a) in the case of Eurodollar Loans, U.S. $5,000,000,(b) in the case of Bankers' Acceptances, Canadian $5,000,000, (c) in the case of Canadian Prime Rate Loans, Canadian $1,000,000, and (d) in the case of Alternate Base Rate Loans, U.S. $1,000,000 (borrowings or prepayments of Loans of different Types or, in the case of Eurodollar Loans, having different Interest Periods at the same time hereunder to be deemed separate borrowings and prepayments for purposes of the foregoing, one for each Type or Interest Period). Upon any mandatory prepayment that would reduce Eurodollar Loans having the same Interest Period to less than U.S. $5,000,000 such Loans shall automatically be converted into Alternate Base Rate Loans. Notwithstanding anything to the contrary contained in this Agreement, there shall not be, at any one time, more than eight (8) Interest Periods in effect with respect to Eurodollar Loans. 5.5 Certain Actions, Notices, Etc. Notices to the Administrative Agent and the Paying Agent of any termination or reduction of Commitments, of borrowings and prepayments, of issuance, acceptance and purchase of Bankers' Acceptances, of conversions and continuations of Loans and Bankers' Acceptances, of the term of Bankers' Acceptances and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Administrative Agent and the Paying Agent not later than 11:00 a.m. Toronto, Ontario time on the number of Business Days prior to the date of the relevant termination, reduction, borrowing and/or repayment, conversion or continuance specified below:
Number of Business Notice Days Prior ------ ---------- Termination or Reduction of Commitments 2 Borrowing or prepayment of or conversion into or continuance of Alternate Base Rate Loans or Canadian same day Prime Rate Loans which are equal to or less than (in the aggregate with respect to all Loans requested on a given day) U.S. $20,000,000 Borrowing or prepayment of or conversion into or continuance of Alternate Base Rate 1 Loans or Canadian Prime Rate Loans which exceed (in the aggregate with respect to all Loans requested on a given day) U.S. $20,000,000 Issuance of Bankers' Acceptances 2 Borrowing or prepayment of or conversion into or continuance of 3 Eurodollar Loans
Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing or prepayment shall specify the amount of Bankers' Acceptances to be accepted and purchased or prepaid and the Type of the Loans to be borrowed or prepaid (subject to Sections 3.2(a) and 5.4 hereof), the date of borrowing, acceptance and purchase or prepayment (which shall be a Business Day) and, in the case of Eurodollar Loans, the duration of the Interest Period therefor (subject to the definition of "Interest Period") and, in the case of Bankers' Acceptances, the term and maturity date therefor (subject to Section 3.4(c)). Each such notice of conversion of a Bankers' Acceptance into a Loan or conversion of a Loan into a Loan of another Type or a Bankers' Acceptance shall identify such Bankers' Acceptance or Loan (or portion thereof) being converted and specify the Type of Loan into which such Bankers' Acceptance or Loan is being converted (subject to Section 5.4 hereof) and the date for conversion (which shall be a Business Day) and, unless such Bankers' Acceptance or Loan is being converted into an Alternate Base Rate Loan or a Canadian Prime Rate Loan, the duration (subject to the definition of "Interest Period") of the Interest Period therefor which is to commence as of the last day of the then current Interest Period therefor (or the date of conversion, if such Loan is being converted from an Alternate Base Rate Loan or a Canadian Prime Rate Loan). In the case of any such notice for a Bankers' Acceptance, the term and maturity date of such Bankers' Acceptance shall also be specified. Each such notice of continuation of a Loan (or portion thereof) as the same Type of Loan shall identify such Loan (or portion thereof) being continued (subject to Section 5.4 hereof) and, unless such Loan is an Alternate Base Rate Loan or a Canadian Prime Rate Loan, the duration (subject to the definition of "Interest Period") of the Interest Period therefor which is to commence as of the last day of the then current Interest Period therefor. The Paying Agent shall promptly notify the affected Banks of the contents of each such notice. Notice of any prepayment having been given, the principal amount specified in such notice, together with interest thereon to the date of prepayment, shall be due and payable on such prepayment date. 5.6 Non-Receipt of Funds by the Paying Agent. Unless the Paying Agent shall have been notified by a Bank or the Company (the "Payor") prior to the date on which such Bank is to make payment to the Paying Agent of the Canadian Bankers' Acceptance Discount Proceeds in respect of a Bankers' Acceptance to be purchased by it or the proceeds of a Loan to be made by it hereunder (or the payment of any amount by such Bank to reimburse the applicable Issuer for a drawing under any Letter of Credit) or the Company is to make a payment to the Paying Agent for the account of one or more of the Banks, as the case may be (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Paying Agent, the Paying Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if the Payor has not in fact made the Required Payment to the Paying Agent on or before such date, the recipient of such payment (or, if such recipient is the beneficiary of a Letter of Credit, the Company and, if the Company fails to pay the amount thereof to the Paying Agent forthwith upon demand, the Banks ratably in proportion to their respective Commitment Percentages) shall, on demand, pay to the Paying Agent the amount made available to it together with interest thereon in respect of the period commencing on the date such amount was so made available by the Paying Agent until the date the Paying Agent recovers such amount at a per annum rate of interest determined by the Paying Agent (such rate to be conclusive and binding on the Banks) in accordance with the Paying Agent's usual banking practice for similar advances to financial institutions of like standing to the applicable Bank. 5.7 Sharing of Payments, Etc. If a Bank shall obtain payment of the full face amount of an outstanding Bankers' Acceptance accepted and purchased by it under this Agreement or of any principal of or interest on any Loan made by it under this Agreement, or on any Reimbursement Obligation or other obligation then due to such Bank hereunder, through the exercise of any right of set-off, banker's lien, counterclaim or similar right, or otherwise, it shall promptly purchase from the other Banks participations in the Loans made, the outstanding Bankers' Acceptances or Reimbursement Obligations or other obligations held, by the other Banks in such amounts, and make such other adjustments from time to time as shall be equitable to the end that all the Banks shall share the benefit of such payment (net of any expenses which may be incurred by such Bank in obtaining or preserving such benefit) pro rata in accordance with the unpaid principal and interest on the Obligations then due to each of them. To such end all the Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. The Company agrees, to the fullest extent it may effectively do so under applicable law, that any Bank so purchasing a participation in the Loans made, the outstanding Bankers' Acceptances or Reimbursement Obligations or other obligations held, by other Banks may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans, Bankers' Acceptances and Reimbursement Obligations or other obligations in the amount of such participation. Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other Indebtedness or obligation of the Company. Section 6. Yield Protection and Illegality. 6.1 Additional Costs. (a) Subject to Section 13.6, the Company shall pay to the Paying Agent, on demand for the account of each Bank from time to time such amounts as such Bank may determine to be necessary to compensate it for any costs incurred by such Bank which such Bank determines are attributable to its making or maintaining of any Eurodollar Loan or any Bankers' Acceptance hereunder or its obligation to make any such Loan hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any of such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), in each case resulting from any Regulatory Change which: (i) subjects such Bank (or makes it apparent that such Bank is subject) to any tax, levy, impost, duty, charge or fee (collectively, "Taxes"), or any deduction or withholding for any Taxes on or from the payment due in respect of any Bankers' Acceptance or under any Eurodollar Loan or other amounts due hereunder, other than income and franchise taxes of the jurisdiction (or any subdivision thereof) in which such Bank has an office or its Applicable Lending Office; or (ii) changes the basis of taxation of any amounts payable to such Bank under this Agreement or its Notes in respect of any of such Loans or in respect of Bankers' Acceptances (other than changes which affect taxes measured by or imposed on the overall net income or franchise taxes of such Bank or of its Applicable Lending Office for any of such Loans by the jurisdiction (or any subdivision thereof) in which such Bank has an office or such Applicable Lending Office); or (iii) imposes or modifies or increases or deems applicable any reserve, special deposit or similar requirements (including, without limitation, any such requirement imposed by the Office of the Superintendent of Financial Institutions Canada) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Bank or loans made by such Bank, or Bankers' Acceptances accepted by such Bank or against any other funds, obligations or other property owned or held by such Bank (including any of such Loans or, where applicable, any deposits referred to in the definition of "Eurodollar Base Rate" in Section 1.1 hereof or any Bankers' Acceptances) and such Bank actually incurs such additional costs. Each Bank (if so requested by the Company through the Administrative Agent) will designate a different available Applicable Lending Office for the Eurodollar Loans or the Bankers' Acceptances of such Bank or take such other action as the Company may request if such designation or action will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Bank, be disadvantageous to such Bank (provided that such Bank shall have no obligation so to designate an Applicable Lending Office for Eurodollar Loans located in the United States of America or to designate an Applicable Lending Office for Bankers' Acceptances located in any jurisdiction that is not located in Canada). Each Bank will furnish the Company with a statement setting forth the basis and amount of each request by such Bank for compensation under this Section 6.1(a); subject to Section 6.8, such certificate shall be conclusive, absent manifest error, and may be prepared using any reasonable averaging and attribution methods. (b) Without limiting the effect of the foregoing provisions of this Section 6.1, in the event that, by reason of any Regulatory Change, any Bank either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank which includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Bank which includes Eurodollar Loans or Bankers' Acceptances or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, if such Bank so elects by notice to the Company (with a copy to the Administrative Agent and the Paying Agent), the obligation of such Bank to make Eurodollar Loans or accept and purchase Bankers' Acceptances, as applicable, hereunder shall be suspended until the date such Regulatory Change ceases to be in effect (in which case the provisions of Section 6.4 hereof shall be applicable). (c) Good faith determinations and allocations by any Bank for purposes of this Section 6.1 of the effect of any Regulatory Change on its costs of maintaining its obligations to make Loans or accept and purchase Bankers' Acceptances or of making or maintaining Loans or accepting and purchasing Bankers' Acceptances on amounts receivable by it in respect of Loans or Bankers' Acceptances, and of the additional amounts required to compensate such Bank in respect of any Additional Costs, shall be conclusive, absent manifest error. (d) The Company's obligation to pay Additional Costs and compensation with regard to each Eurodollar Loan and each Bankers' Acceptance shall survive termination of this Agreement. 6.2 Limitations. Anything herein to the contrary notwithstanding, if, with respect to any Eurodollar Loans or Bankers' Acceptance: (a) the Paying Agent determines in good faith (which determination shall be conclusive) that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Base Rate" in Section 1.1 hereof are not being provided by the Reference Banks in the relevant amounts or for the relevant maturities for purposes of determining the rate of interest for such Loans for Interest Periods therefor as provided in this Agreement; or (b) the Paying Agent determines in good faith (which determination shall be conclusive) that quotations of discount rates for the purchase of Canadian Dollar bankers' acceptances referred to in the definition of "Canadian Bankers' Acceptance Discount Rate" in Section 1.1 hereof are not available in the relevant amounts or for the relevant maturities for purposes of determining the Canadian Bankers' Acceptance Discount Rate thereforE as provided in this Agreement; or (c) the Majority Banks determine (which determination shall be conclusive) and notify the Paying Agent (with a copy to the Administrative Agent) that the relevant rates of interest referred to in the definition of "Eurodollar Base Rate" in Section 1.1 hereof upon the basis of which the rates of interest for such Loans (where applicable) are to be determined do not accurately reflect the cost to such Banks of making or maintaining such Loans for Interest Periods therefore; or (d) the Paying Agent determines in good faith (which determination shall be conclusive) that by reason of circumstances affecting the interbank U.S. Dollar market generally, deposits in United States dollars in the relevant interbank U.S. Dollar market are not being offered for the applicable Interest Period and in an amount equal to the amount of the Eurodollar Loan requested by the Company; then the Paying Agent shall promptly notify the Company and each Bank thereof, and, so long as such condition remains in effect, the Banks shall be under no obligation to make Eurodollar Loans or accept and purchase Bankers' Acceptances, as the case may be (but shall maintain until the end of the Interest Period then in effect the Eurodollar Loans and until the specified maturity date of the Bankers' Acceptances, as the case may be, then outstanding). 6.3 Illegality. Notwithstanding any other provision of this Agreement to the contrary, if (x) by reason of the adoption of any applicable Legal Requirement or any change in any applicable Legal Requirement or in the interpretation or administration thereof by any Governmental Authority or compliance by any Bank with any request or directive (whether or not having the force of law) of any central bank or other Governmental Authority or (y) with respect to Eurodollar Loans, circumstances affecting the relevant interbank U.S. Dollar market or the position of a Bank therein or (z) with respect to Bankers' Acceptances, circumstances affecting the market for Canadian Dollar bankers' acceptance or the position of a Bank therein shall at any time make it unlawful or impracticable in the sole discretion of a Bank exercised in good faith for such Bank or its Applicable Lending Office to (a) honour its obligation to make Eurodollar Loans or accept and purchase Bankers' Acceptances, as the case may be, hereunder, or (b) maintain Eurodollar Loans or Bankers' Acceptances, as the case may be, hereunder, then such Bank shall promptly notify the Company thereof through the Paying Agent and such Bank's obligation to make or maintain Eurodollar Loans or accept and purchase Bankers' Acceptances, as the case may be, hereunder shall be suspended until such time as such Bank may again make and maintain Eurodollar Loans or accept and purchase Bankers' Acceptances, as the case may be (in which case the provisions of Section 6.4 hereof shall be applicable). Before giving such notice pursuant to this Section 6.3 with respect to Eurodollar Loans only, such Bank will designate a different available Applicable Lending Office for the Eurodollar Loans of such Bank or take such other action as the Company may request if such designation or action will avoid the need to suspend such Bank's obligation to make Eurodollar Loans hereunder and will not, in the sole opinion of such Bank exercised in good faith, be disadvantageous to such Bank (provided, that such Bank may not designate an Applicable Lending Office that is not located in Canada). 6.4 Substitute Alternate Base Rate Loans or Canadian Prime Rate Loans. If the obligation of any Bank to make or maintain Eurodollar Loans shall be suspended pursuant to Section 6.1, 6.2 or 6.3 hereof, all Loans which would otherwise be made by such Bank as Eurodollar Loans shall be made instead as Alternate Base Rate Loans (and, if an event referred to in Section 6.1(b) or 6.3 hereof has occurred and such Bank so requests by notice to the Company with a copy to the Paying Agent, each Eurodollar Loan of such Bank then outstanding shall be automatically converted into an Alternate Base Rate Loan on the date specified by such Bank in such notice) and, to the extent that Eurodollar Loans are so made as (or converted into) Alternate Base Rate Loans, all payments of principal which would otherwise be applied to such Eurodollar Loans shall be applied instead to such Alternate Base Rate Loans. If the obligation of any Bank to accept and purchase Bankers' Acceptances shall be suspended pursuant to Section 6.1, 6.2 or 6.3 hereof, all advances which would otherwise be made by such Bank by way of acceptance and purchase of Bankers' Acceptances shall be made instead as Canadian Prime Rate Loans (and, if an event referred to in Section 6.1(b) or 6.3 hereof has occurred and such Bank so requests by notice to the Company with a copy to the Paying Agent, the face amount of each Bankers' Acceptance of such Bank then outstanding shall be automatically converted into a Canadian Prime Rate Loan on the date specified by such Bank in such notice). 6.5 Compensation. Subject to Section 13.6 hereof, the Company shall pay to the Paying Agent for the account of each Bank, within four (4) Business Days after demand therefor by such Bank through the Administrative Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost or expense actually incurred by it (exclusive of any lost profits or opportunity costs) as a result of: (a) any payment, prepayment or conversion of a Eurodollar Loan made by such Bank or a Bankers' Acceptance accepted by such Bank on a date other than the last day of an Interest Period for such Eurodollar Loan or the specified maturity date for such Bankers' Acceptance, as the case may be; or (b) any failure by the Company to borrow a Eurodollar Loan to be made by such Bank or to issue a Bankers' Acceptance to be accepted and purchased by such Bank on the date for such borrowing or such issuance specified in the relevant notice under Section 5.5 hereof or to convert a Eurodollar Loan into a Bankers' Acceptance or a Loan of another Type or to convert a Bankers' Acceptance into a Loan on such date after giving notice of such conversion; such compensation to include, without limitation, any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the applicable Bank to fund or maintain its share of any Loan or to fund the acceptance and purchase of any Bankers' Acceptance. Compensation due pursuant to this Section with respect to Bankers' Acceptances shall be calculated using the Canadian Bankers' Acceptance Discount Rate for bankers' acceptances maturing on (or as close as reasonably possible) to the maturity date of the Bankers' Acceptances with respect to which such compensation arises (versus the actual Canadian Bankers' Acceptance Discount Rate for such Bankers' Acceptances). Subject to Section 6.8, each determination of the amount of such compensation by a Bank shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. 6.6 Additional Costs in Respect of Letters of Credit. If as a result of any Regulatory Change there shall be imposed, modified or deemed applicable any tax, reserve, special deposit or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued hereunder or participations in such Letters of Credit, and the result shall be to increase the cost to any Bank of issuing or maintaining any Letter of Credit or any participation therein, or reduce any amount receivable by any Bank hereunder in respect of any Letter of Credit or any participation therein (which increase in cost, or reduction in amount receivable, shall be the result of such Bank's reasonable allocation of the aggregate of such increases or reductions resulting from such event), then such Bank shall notify the Company through the Administrative Agent, and upon demand therefor by such Bank through the Administrative Agent, the Company (subject to Section 13.6 hereof) shall pay to such Bank, from time to time as specified by such Bank, such additional amounts as shall be sufficient to compensate such Bank for such increased costs or reductions in amount. Before making such demand pursuant to this Section 6.6, such Bank will designate a different available Applicable Lending Office for the Letter of Credit of such Bank or take such other action as the Company may request, if such designation or action will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Bank exercised in good faith, be disadvantageous to such Bank. A statement as to such increased costs or reductions in amount incurred by such Bank, submitted by such Bank to the Company, shall be conclusive as to the amount thereof, absent manifest error. 6.7 Capital Adequacy. If any Bank shall have determined that the adoption after the date hereof or effectiveness after the date hereof (whether or not previously announced) of any applicable law, rule, regulation or treaty regarding capital adequacy, or any change therein after the date hereof, or any change in the interpretation or administration thereof after the date hereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive after the date hereof regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority has or would have the effect of reducing the rate of return on such Bank's capital as a consequence of such Bank's obligations hereunder, under the Loans made by it, under the Bankers' Acceptances accepted and purchased by it, under the Letters of Credit and under the Notes held by it to a level below that which such Bank could have achieved but for such adoption, change or compliance (taking into consideration such Bank's policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, upon satisfaction of the conditions precedent set forth in this Section 6.7, upon demand by such Bank (with a copy to the Administrative Agent and the Paying Agent), the Company (subject to Section 13.6 hereof) shall pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction. A certificate as to such amounts, submitted to the Company and the Administrative Agent and the Paying Agent by such Bank, setting forth the basis for such Bank's determination of such amounts, shall constitute a demand therefor and shall be conclusive and binding for all purposes, absent manifest error. The Company shall pay the amount shown as due on any such certificate within four (4) Business Days after delivery of such certificate. Subject to Section 6.8, in preparing such certificate, a Bank may employ such assumptions and allocations of costs and expenses as it shall in good faith deem reasonable and may use any reasonable averaging and attribution method. 6.8 Limitation on Additional Charges; Substitute Banks; Non-Discrimination. Anything in this Section 6 notwithstanding: (a) the Company shall not be required to pay to any Bank reimbursement with regard to any costs or expenses, unless such Bank notifies the Company of such costs or expenses within 90 days after the date paid or incurred; (b) none of the Banks shall be permitted to pass through to the Company charges and costs under this Section 6 on a discriminatory basis (i.e., which are not also passed through by such Bank to other customers of such Bank similarly situated where such customer is subject to documents providing for such pass through); and (c) if any Bank elects to pass through to the Company any material charge or cost under this Section 6 or elects to terminate the availability of Eurodollar Loans or Bankers' Acceptances for any material period of time, the Company may, within 60 days after the date of such event and so long as no Default shall have occurred and be continuing, elect to terminate such Bank as a party to this Agreement; provided that, concurrently with such termination the Company shall (i) if the Administrative Agent and each of the other Banks shall consent, pay that Bank all principal, interest and fees and other amounts owed to such Bank through such date of termination or (ii) have arranged for another financial institution approved by the Administrative Agent (such approval not to be unreasonably withheld) as of such date, to become a substitute Bank for all purposes under this Agreement in the manner provided in Section 13.5; provided further that, prior to substitution for any Bank, the Company shall have given written notice to the Administrative Agent and the Paying Agent of such intention and the Banks shall have the option, but no obligation, for a period of 60 days after receipt of such notice, to increase their Commitments in order to replace the affected Bank in lieu of such substitution. Section 7. Conditions Precedent. 7.1 Initial Loans and Acceptance and Purchase of Bankers' Acceptances. The obligation of each Bank or any applicable Issuer to make its initial Loans after the date hereof or to accept and purchase the initial Bankers' Acceptance after the date hereof or issue or participate in a Letter of Credit after the date hereof (whichever shall first occur) hereunder is subject to the following conditions precedent, each of which shall have been fulfilled or waived to the satisfaction of the Majority Banks: (a) Corporate Action and Status. The Administrative Agent shall have received from the appropriate Governmental Authorities certified copies of the Organizational Documents (other than bylaws) of the Parent and each of its Subsidiaries, and evidence satisfactory to the Administrative Agent of all corporate action taken by the Parent or any of its Subsidiaries authorizing the execution, delivery and performance of the Loan Documents and all other documents related to this Agreement to which it is a party (including, without limitation, a certificate of the secretary of each such party setting forth the resolutions of its Board of Directors authorizing the transactions contemplated thereby and attaching a copy of its bylaws), together with such certificates as may be appropriate to demonstrate the qualification and good standing of and payment of taxes by the Parent and each of its Subsidiaries in each state or province in which such qualification is necessary. (b) Incumbency. The Parent and each Relevant Party shall have delivered to the Administrative Agent a certificate in respect of the name and signature of each of the officers (i) who is authorized to sign on its behalf the applicable Loan Documents related to any Loan or the issuance of any Letter of Credit and (ii) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with any Loan or the issuance of any Letter of Credit. The Agents and each Bank may conclusively rely on such certificates until they receive notice in writing from the Parent or the appropriate Relevant Party to the contrary. (c) Notes. The Administrative Agent shall have received the appropriate Notes of the Company for each Bank, duly completed and executed. (d) Loan Documents. The Company and each other Relevant Party shall have duly executed and delivered the other Loan Documents to which it is a party (in such number of copies as the Administrative Agent shall have requested) and each such Loan Document shall be in form satisfactory to Administrative Agent. Each such Loan Document shall be in substantially the form furnished to the Banks prior to their execution of this Agreement, together with such changes therein as the Administrative Agent may approve. (e) Fees and Expenses. The Company shall have paid to the Paying Agent for the account of each Bank all accrued and unpaid commitment fees and other fees in the amounts previously agreed upon in writing among the Company and the respective Agents; and shall have in addition paid to the Paying Agent all amounts payable under Section 9.7 hereof, on or before the date of this Agreement. (f) Opinions of Counsel. The Administrative Agent shall have received (1) an opinion of Vinson & Elkins L.L.P., counsel to the Parent and its Subsidiaries, in form and substance reasonably satisfactory to the Administrative Agent and (2) an opinion of Bennett Jones Verchere, Canadian counsel to the Parent and its Subsidiaries, in form and substance reasonably satisfactory to the Administrative Agent. (g) Execution by Banks. The Administrative Agent shall have received counterparts of this Agreement executed and delivered by or on behalf of each of the Banks or the Administrative Agent shall have received evidence satisfactory to it of the execution and delivery by each of the Banks of a counterpart hereof. (h) Consents. The Administrative Agent shall have received evidence satisfactory to it that, except as disclosed in the Disclosure Statement, all material consents of each Governmental Authority and of each other Person, if any, reasonably required in connection with (a) the Loans, the Bankers' Acceptances and the Letters of Credit and (b) the execution, delivery and performance of this Agreement and the other Loan Documents have been satisfactorily obtained. (i) Amendment to Intercreditor Agreement. The Administrative Agent shall have received counterparts of the Second Amendment to Intercreditor Agreement referred to in the definition of "Intercreditor Agreement" in Section 1.1 hereof executed and delivered by or on behalf of each of the Company and by the "Agent" under the U.S. Facility or the Administrative Agent shall have received evidence satisfactory to it of the execution and delivery by each such Person of a counterpart of such Second Amendment to Intercreditor Agreement. (j) U.S. Facility. The Administrative Agent shall have received counterparts of the Credit Agreement referred to in the definition of "U.S. Facility" in Section 1.1 hereof executed and delivered by or on behalf of each of Parent, The Chase Manhattan Bank, as Agent, and certain banks parties thereto or Administrative Agent shall have received evidence satisfactory to it of the execution and delivery by each such Person of a counterpart of such Credit Agreement. (k) Other Documents. The Administrative Agent shall have received such other documents consistent with the terms of this Agreement and relating to the transactions contemplated hereby as the Administrative Agent may reasonably request. All provisions and payments required by this Section 7.1 are subject to the provisions of Section 13.6. 7.2 Initial and Subsequent Loans. The obligation of each Bank or any applicable Issuer to make any Loan (including, without limitation, its initial Loan) to be made by it hereunder or to accept and purchase Bankers' Acceptances or to issue or participate in any Letter of Credit is subject to the additional conditions precedent that (i) the Administrative Agent and the Paying Agent shall have received a Request for Extension of Credit and such other certifications as the Administrative Agent may reasonably require and (ii) as of the date of such Loan or such acceptance and purchase or such issuance, and after giving effect thereto: (a) no Default shall have occurred and be continuing; (b) except for facts timely disclosed to the Administrative Agent from time to time in writing, which facts (I) are not materially more adverse to the Parent and its Subsidiaries, (II) do not materially decrease the ability of the Banks to collect the Obligations as and when due and payable and (III) do not materially increase the liability of any of the Agent or any of the Banks, in each case compared to those facts existing on the date hereof and the material details of which have been set forth in the Financial Statements delivered to the Administrative Agent prior to the date hereof or in the Disclosure Statement, and except for the representations set forth in the Loan Documents which, by their terms, are expressly (or by means of similar phrasing) made as of the date hereof only, the representations and warranties made in each Loan Document shall be true and correct in all material respects on and as of the date of the making of such Loan or such acceptance and purchase or such issuance, with the same force and effect as if made on and as of such date; (c) the making of such Loan or the acceptance and purchase of such Bankers' Acceptance or the issuance of such Letter of Credit shall not violate any Legal Requirement applicable to any Bank. Each Request for Extension of Credit by the Company hereunder or request for issuance of a Letter of Credit shall include a representation and warranty by the Company to the effect set forth in Subsections 7.2(a) and (b) (both as of the date of such notice and, unless the Company otherwise notifies the Administrative Agent prior to the date of such borrowing or issuance, as of the date of such borrowing or issuance). Section 8. Representations and Warranties. To induce the Banks to enter into this Agreement and to make the Loans, accept and purchase Bankers' Acceptances and issue or participate in the Letters of Credit, the Company (or, where applicable, the Parent) represents and warrants (such representations and warranties to survive any investigation and the making of the Loans, the acceptance and purchase Bankers' Acceptances and the issuance of the Letters of Credit) to the Banks and the Agents as follows: 8.1 Corporate Existence. The Parent and each Subsidiary of the Parent are corporations duly incorporated and organized, legally existing and in good standing under the laws of the respective jurisdictions in which they are incorporated, and are duly qualified as foreign corporations in all jurisdictions wherein the property owned or the business transacted by them makes such qualification necessary and the failure to so qualify could reasonably be expected to result in a Material Adverse Effect. 8.2 Corporate Power and Authorization. Each of the Company and the other Relevant Parties is duly authorized and empowered to execute, deliver, and perform the Loan Documents to which it is a party; and all corporate action on the part of the Company and the other Relevant Parties requisite for the due creation and issuance of the Notes and for the due execution, delivery, and performance of this Agreement and the other Loan Documents to which each of the Company and the other Relevant Parties is a party has been duly and effectively taken. 8.3 Binding Obligations. This Agreement, the Notes and the other Loan Documents constitute legal, valid and binding obligations of the Company and the other Relevant Parties, to the extent each is a party thereto, enforceable against the Company and the other Relevant Parties, to the extent each is a party thereto, in accordance with their respective terms, except as may be limited by (i) any applicable bankruptcy, insolvency, fraudulent transfer, winding up, arrangement, liquidation, reorganization, moratorium or other similar laws affecting creditors' rights generally, (ii) equitable limitations on the availability of remedies, (iii) the statutory power of a court to grant relief from forfeiture, (iv) applicable laws regarding limitations of actions, (v) general principles of equity which may apply to any proceeding in equity or at law, and (vi) the powers of a court to stay proceedings before it and to stay the execution of judgments. 8.4 No Legal Bar or Resultant Lien. The Company's and each of the other Relevant Parties' creation, issuance, execution, delivery and performance of this Agreement, the Notes and the other Loan Documents, to the extent they are parties thereto, do not and will not violate any provisions of the Organizational Documents of the Company or any other Relevant Party or any Subsidiary of the Parent, or any Legal Requirement to which the Company or any other Relevant Party or any Subsidiary of the Parent is subject or by which its property may be presently bound or encumbered, or result in the creation or imposition of any Lien upon any properties of the Company or any other Relevant Party or any Subsidiary of the Parent, other than those permitted by this Agreement. 8.5 No Consent. Except as set forth in the Disclosure Statement, the Company's creation and issuance of the Notes and the Company's and each of the other Relevant Parties' execution, delivery, and performance of this Agreement, the Notes and the other Loan Documents to which they are parties do not and will not require the consent or approval of any Person other than such consents and/or approvals obtained contemporaneously with or prior to the execution of this Agreement, including, without limitation, any Governmental Authorities, other than those consents the failure to obtain which could not be reasonably expected to have a Material Adverse Effect. 8.6 Financial Condition. The audited consolidated and unaudited consolidating annual financial statements of the Parent and its Subsidiaries for the year ended December 31, 1995 and the unaudited consolidated interim financial statements of the Parent and its Subsidiaries for the quarters and three-month periods ended March 31, 1996 and June 30, 1996, which have been delivered to the Banks, have been prepared in accordance with GAAP, and present fairly the financial condition and results of the operations of the Parent and its Subsidiaries for the period or periods stated (subject only to normal year-end audit adjustments with respect to the unaudited interim statements). No material adverse change, either in any case or in the aggregate, has occurred since June 30, 1996 in the assets, liabilities, financial condition, business, operations, affairs or circumstances of the Parent and its Subsidiaries taken as a whole, except as disclosed to the Banks in the Disclosure Statement. Each Engineering Report and Parent Report fairly presents the values and prospective performances of the property described therein and there are no statements or conclusions therein which were based upon or included materially misleading information or fail to take into account material information. 8.7 Investments and Guaranties. As of the date hereof, neither the Parent nor any Subsidiary of the Parent had made Investments in, advances to, or Guarantees of, the obligations of any Person, except as (a) disclosed to the Banks in the Disclosure Statement or (b) not prohibited by applicable provisions of Section 10. 8.8 Liabilities and Litigation. Neither the Parent nor any Subsidiary of the Parent has any material (individually or in the aggregate) liabilities, direct or contingent, except as (a) disclosed or referred to in the Financial Statements, (b) disclosed to the Banks in the Disclosure Statement, (c) disclosed in a notice to the Administrative Agent pursuant to Section 9.11 with respect to such as could reasonably be expected to have a Material Adverse Effect or (d) not prohibited by applicable provisions of Section 10. Except as (a) described in the Financial Statements, (b) otherwise disclosed to the Banks in the Disclosure Statement, (c) disclosed in a notice to the Administrative Agent pursuant to Section 9.11 with respect to such as could reasonably be expected to have a Material Adverse Effect or (d) not prohibited by applicable provisions of Section 10, no litigation, legal, administrative or arbitral proceeding, investigation, or other action of any nature exists or (to the knowledge of the Parent or the Company) is threatened against or affecting the Parent or any Subsidiary of the Parent which could reasonably be expected to result in any judgment which could reasonably be expected to have a Material Adverse Effect, or which in any manner challenges or may challenge or draw into question the validity of this Agreement, the Notes or any other Loan Document, or enjoins or threatens to enjoin or otherwise restrain any of the transactions contemplated by any of them. 8.9 Taxes and Governmental Charges. The Parent and its Subsidiaries have filed, or obtained extensions with respect to the filing of, all material tax returns and reports required to be filed and have paid all material taxes, assessments, fees and other governmental charges levied upon any of them or upon any of their respective properties or income which are due and payable, including interest and penalties, or have provided adequate reserves for the payment thereof. 8.10 Title to Properties. The Parent and its Subsidiaries have good and defensible title to their respective properties included in the Borrowing Base (including, without limitation, all fee and leasehold interests), free and clear of all Liens except (a) those referred to in the Financial Statements, (b) as disclosed to the Banks in the Disclosure Statement or (c) as permitted by Section 10.2. 8.11 Defaults. Neither the Parent nor any Subsidiary of the Parent is in default, which default could reasonably be expected to have a Material Adverse Effect, under any indenture, mortgage, deed of trust, agreement or other instrument to which the Parent or any Subsidiary of the Parent is a party or by which the Parent or any Subsidiary of the Parent or the property of the Parent or any Subsidiary of the Parent is bound, except as (a) disclosed to the Banks in the Disclosure Statement, (b) disclosed in a notice to the Administrative Agent pursuant to Section 9.11 with respect to such as could reasonably be expected to have a Material Adverse Effect or (c) specifically permitted by applicable provisions of Section 10. No Default under this Agreement, the Notes or any other Loan Document has occurred and is continuing. 8.12 Location of Businesses and Offices. Except to the extent that the Administrative Agent has been furnished written notice to the contrary or of additional locations, pursuant to Section 9.11, the Company's principal place of business and chief executive offices are located at the address stated on the signature page hereof and the principal places of business and chief executive offices of each Subsidiary of the Parent are described on Exhibit D hereto. The Parent's principal place of business and chief executive office is at 1001 Fannin, Suite 1700, Houston, Texas 77002. 8.13 Compliance with Law. Neither the Parent nor any Subsidiary of the Parent (except as (a) disclosed to the Banks in the Disclosure Statement, (b) disclosed in a notice to the Administrative Agent pursuant to Section 9.11 with respect to such as could reasonably be expected to have a Material Adverse Effect or (c) not prohibited by applicable provisions of Section 10): (a) is in violation of any Legal Requirement; or (b) has failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of any of their respective properties or the conduct of their respective business; which violation or failure could reasonably be expected to have a Material Adverse Effect. 8.14 Margin Stock. None of the proceeds of the Loans will be used for the purpose of, and neither the Parent nor any Subsidiary of the Parent is engaged in the business of extending credit for the purpose of (a) purchasing or carrying any "margin stock" as defined in Regulation U of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221) or (b) reducing or retiring any indebtedness which was originally incurred to purchase or carry margin stock, if such purpose under either (a) or (b) above would constitute this transaction a "purpose credit" within the meaning of said Regulation U, or for any other purpose which would constitute this transaction a "purpose credit". Neither the Parent nor any Subsidiary of the Parent is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stocks. Neither the Parent nor any Subsidiary of the Parent nor any Person acting on behalf of the Parent or any Subsidiary of the Parent has taken or will take any action which might cause the Notes or any of the Loan Documents, including this Agreement, to violate Regulation U or any other regulation of the Board of Governors of the Federal Reserve System, or to violate any similar provision of the Securities Exchange Act of 1934 or any rule or regulation under any such provision thereof. 8.15 Subsidiaries. The Parent has no Subsidiaries as of the date of this Agreement except those shown in Exhibit D hereto. 8.16 ERISA. With respect to each Plan, the Parent and each ERISA Affiliate have fulfilled their obligations, including obligations under the minimum funding standards of ERISA and the Code, and are in compliance in all material respects with the provisions of ERISA and the Code. The Parent has no knowledge of any event which could result in a liability of the Parent or any ERISA Affiliate to the PBGC or a Plan (other than to make contributions in the ordinary course). Since the effective date of Title IV of ERISA, there have not been any nor are there now existing any events or conditions that would cause the Lien provided under Section 4068 of ERISA to attach to any property of the Parent or any ERISA Affiliate. There are no Unfunded Liabilities with respect to any Plan other than those specifically described in the certificate delivered in accordance with Section 7.1(i). No "prohibited transaction" has occurred with respect to any Plan. 8.17 Investment Company Act. Neither the Parent nor any of its Subsidiaries is an investment company within the meaning of the Investment Company Act of 1940, as amended, or, directly or indirectly, controlled by or acting on behalf of any Person which is an investment company, within the meaning of said Act. 8.18 Public Utility Holding Company Act. Neither the Parent nor any of its Subsidiaries (i) is subject to regulation under the Public Utility Holding Company Act of 1935, as amended (the "PUHC Act"), except as to Section 9(a)(2) thereof (15 U.S.C.A. ss.79(i)(a)(2)), or (ii) is in violation of any of the provisions, rules, regulations or orders of or under the PUHC Act. Further, none of the transactions contemplated under this Agreement, including without limitation, the making of the Loans, the issuance of the Letters of Credit and the creation of any Liens pursuant to the Loan Documents, shall cause or constitute a violation of any of the provisions, rules, regulations or orders of or under the PUHC Act and the PUHC Act does not in any manner impair the legality, validity or enforceability of the Notes or any Liens created pursuant to the Loan Documents. The Parent has duly filed with the Securities and Exchange Commission good faith applications (each an "Application") under Section 2(a)(8) of the PUHC Act (15 U.S.C.A. ss.79(b)(a)(8)) for a declaration of non-subsidiary status pursuant to such Section 2(a)(8) with respect to each Person (each a "Specified Shareholder") which owns, controls or holds with power to vote, directly or indirectly, a sufficient quantity of the voting securities of the Parent to be construed as a "holding company", as such term is defined in the PUHC Act, in respect of the Parent. All of the information contained in such Applications, as amended, was true as of the most recent filing date with respect thereto (provided that the Parent may, unless it has actual current knowledge to the contrary, rely solely upon written information furnished by any Specified Shareholder with respect to background information about the Specified Shareholder and the nature of the ownership by such Specified Shareholder or its Affiliates of the voting securities of the Parent), and the Parent knows of no reason why each such Application, if acted upon by the Securities and Exchange Commission, would not be approved. True and correct copies of each such Application and any amendments thereto, as filed, have been furnished to the Administrative Agent. The Parent has not received any written notice from the Securities and Exchange Commission with respect to any such Application other than as disclosed in writing to the Administrative Agent. 8.19 Environmental Matters. Except as disclosed in the Disclosure Statement, (i) the Parent and it Subsidiaries have obtained and maintained in effect all Environmental Permits (or has initiated the necessary steps to transfer the Environmental Permits into its name), the failure to obtain which could reasonably be expected to have a Material Adverse Effect, (ii) the Parent and its Subsidiaries and their properties, assets, business and operations have been and are in compliance with all applicable Requirements of Environmental Law and Environmental Permits failure to comply with which could reasonably be expected to have a Material Adverse Effect, (iii) the Parent and its Subsidiaries and their properties, assets, business and operations are not subject to any (A) Environmental Claims or (B) Environmental Liabilities, in either case direct or contingent, and whether known or unknown, arising from or based upon any act, omission, event, condition or circumstance occurring or existing on or prior to the date hereof which could reasonably be expected to have a Material Adverse Effect, and (iv) no Responsible Officer of the Parent or any of its Subsidiaries has received any notice of any violation or alleged violation of any Requirements of Environmental Law or Environmental Permit or any Environmental Claim in connection with its assets, properties, business or operations which could reasonably be expected to have a Material Adverse Effect. The liability (including without limitation any Environmental Liability and any other damage to persons or property), if any, of the Parent and its Subsidiaries and with respect to their properties, assets, business and operations which is reasonably expected to arise in connection with Requirements of Environmental Laws currently in effect and other environmental matters presently known by a Responsible Officer of the Parent will not have a Material Adverse Effect. No Responsible Officer of the Parent knows of any event or condition with respect to Environmental Matters with respect to any of its properties or the properties of any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect. For purposes of this Section 8.19, "Environmental Matters" shall mean matters relating to pollution or protection of the environment, including, without limitation, emissions, discharges, releases or threatened releases of Hazardous Substances into the environment (including, without limitation, ambient air, surface water or ground water, or land surface or sub surface), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances. 8.20 Claims and Liabilities. Except as disclosed to the Banks in writing, neither the Parent nor any of its Subsidiaries has accrued any liabilities under gas purchase contracts for gas not taken, but for which it is liable to pay if not made up and which, if not paid, would have a Material Adverse Effect. Except as disclosed to the Banks in writing, no claims exist against the Parent or its Subsidiaries for gas imbalances which claims if adversely determined would have a Material Adverse Effect. No purchaser of product supplied by the Parent or any of its Subsidiaries has any claim against the Parent or any of its Subsidiaries for product paid for, but for which delivery was not taken as and when paid for, which claim if adversely determined would have a Material Adverse Effect. 8.21 Solvency. Neither the Parent nor the Parent and its Subsidiaries, on a consolidated basis, is "insolvent", as such term is used (and, where applicable, defined) in (i) the Bankruptcy Code and (ii) the Companies' Creditors Arrangement Act (Canada). Section 9. Affirmative Covenants. A deviation from the provisions of this Section 9 will not constitute a Default under this Agreement if such deviation is consented to in writing by the Majority Banks. Without the prior written consent of the Majority Banks, the Company (or, where applicable, the Parent) agrees with the Banks and the Agents that, so long as any of the Commitments is in effect and until payment in full of all Loans hereunder, the repayment in full of the full face amount of all outstanding Bankers' Acceptances, the termination or expiry of all Letters of Credit and payment in full of Letter of Credit Liabilities, all interest thereon and all other amounts payable by the Company hereunder: 9.1 Financial Statements and Reports. The Parent will promptly furnish to any Bank from time to time upon request such information regarding the business and affairs and financial condition of the Parent and its Subsidiaries as such Bank may reasonably request, and will furnish to the Administrative Agent and each of the Banks: (a) Annual Reports - promptly after becoming available and in any event within 100 days after the close of each fiscal year of the Parent: (i) the audited consolidated balance sheet of the Parent and its Subsidiaries as of the end of such year; (ii) the audited consolidated statement of earnings of the Parent and its Subsidiaries for such year; (iii) the audited consolidated statement of cash flows of the Parent and its Subsidiaries for such year; (iv) the unaudited consolidating balance sheet and statement of earnings of the Parent and its Subsidiaries, each for such year or as of the end of such year, as the case may be; (v) the unaudited consolidated balance sheet, statement of earnings and statement of cash flows and unaudited consolidating balance sheet and statement of earnings of the Company and its Subsidiaries, each for such year or as of the end of such year, as the case may be; (vi) a report prepared by a petroleum engineer, who may be an employee of the Parent or its Subsidiaries, setting forth the historical monthly production data for Hydrocarbons produced and sold by the Parent and its Subsidiaries for such year; setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, and, in the case of the audited Financial Statements, audited and accompanied by the related opinion of KPMG Peat Marwick or other independent certified public accountants of recognized national standing acceptable to the Majority Banks, which opinion shall state that such audited balance sheets and statements have been prepared in accordance with GAAP consistently followed throughout the period indicated and fairly present the consolidated financial condition and results of operations of the applicable Persons as at the end of, and for, such fiscal year; and (b) Quarterly Reports - as soon as available and in any event within 50 days after the end of each of the first three quarterly periods in each fiscal year of the Parent: (i) the unaudited consolidated balance sheet of the Parent and its Subsidiaries as of the end of such quarter; (ii) the unaudited consolidated statement of earnings of the Parent and its Subsidiaries for such quarter and for the period from the beginning of the fiscal year to the close of such quarter; (iii) the unaudited consolidated statement of cash flows of the Parent and its Subsidiaries for such quarter and for the period from the beginning of the fiscal year to the close of such quarter; (iv) the unaudited consolidating balance sheet and statement of earnings of the Parent and its Subsidiaries, each for such quarter and for the period from the beginning of the fiscal year to the close of such quarter; (v) the unaudited consolidated balance sheet, statement of earnings and statement of cash flows and unaudited consolidating balance sheet and statement of earnings of the Company and its Subsidiaries, each for such quarter and for the period from the beginning of the fiscal year to the close of such quarter; (vi) a report prepared by a petroleum engineer, who may be an employee of the Parent or its Subsidiaries, setting forth the historical monthly production data for Hydrocarbons produced and sold by the Parent and its Subsidiaries for such quarter; all of items (i) through (iv) above prepared on substantially the same accounting basis as the annual reports described in Subsection 9.1(a), subject to normal changes resulting from year-end adjustments; and (c) Parent Report - promptly after becoming available and in any event on or before September 1 of each year, a Parent Report; and (d) Other Bank Requirements - at such time as the same are required to be furnished to other lenders under other financing arrangements to which the Parent or any of its Subsidiaries may be a party or be bound from time to time, a copy of any report, certificate, affidavit or other information required to be furnished to any such lender; and (e) SEC and Other Reports - promptly upon their becoming publicly available, one copy of each financial statement, report, notice or definitive proxy statement sent by the Parent or any of its Subsidiaries to shareholders generally, and of each regular or periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by the Parent or any of its Subsidiaries with, or received by the Parent or any of its Subsidiaries in connection therewith from, any securities exchange or the Securities and Exchange Commission or any successor agency; and (f) Engineering Report - promptly after becoming available and in any event on or before March 15 of each year, commencing with March 15, 1997, an Engineering Report. All of the balance sheets and other financial statements referred to in this Section 9.1 will be in such detail as any Bank may reasonably request and will conform to GAAP applied on a basis consistent with those of the Financial Statements as of December 31, 1995. In addition, if GAAP shall change with respect to any matter relative to determination of compliance with this Agreement, the Parent will also provide financial information necessary for the Banks to determine compliance with this Agreement. 9.2 Officers' Certificates. (a) Concurrently with the furnishing of the annual financial statements pursuant to Subsection 9.1(a), commencing with the annual financial statements required to be delivered in 1997, the Parent will furnish or cause to be furnished to the Administrative Agent certificates of compliance, as follows: (i) a certificate signed by the principal financial officer of the Parent and the principal financial officer of the Company in the form of Exhibit E; and (ii) a certificate from the independent public accountants stating that their audit has not disclosed the existence of any condition which constitutes a Default, or if their audit has disclosed the existence of any such condition, specifying the nature and period of existence. (b) Concurrently with the furnishing of the quarterly financial statements pursuant to Subsection 9.1(b), the Parent will furnish to the Administrative Agent a certificate signed by the principal financial officer of the Parent and the principal financial officer of the Company in the form of Exhibit E. (c) Concurrently with the delivery of any Borrowing Base Certificate under the U.S. Facility, the Parent will furnish to the Administrative Agent and the Paying Agent a true, correct and complete copy thereof. (d) Concurrently with the furnishing of any Engineering Report or Parent Report, the Company will furnish to the Administrative Agent a certificate signed by an appropriate officer of the Parent and any other applicable Relevant Party in the form of Exhibit G. 9.3 Taxes and Other Liens. The Parent will and will cause each Subsidiary of the Parent to pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon the Parent or such Subsidiary, or upon the income or any property of the Parent or such Subsidiary, as well as all claims of any kind (including claims for labor, materials, supplies, rent and payment of proceeds attributable to Hydrocarbon production) which, if unpaid, might result in or become a Lien upon any or all of the property of the Parent or such Subsidiary; provided, however, that neither the Parent nor such Subsidiary will be required to pay any such tax, assessment, charge, levy or claims if the amount, applicability or validity thereof will currently be contested in good faith by appropriate proceedings diligently conducted and if the Parent or such Subsidiary will have set up reserves therefor adequate under GAAP. 9.4 Maintenance. Except as referred to in Sections 8.1 and 8.13 and except as permitted under Section 10.5, the Parent will and will cause each Subsidiary of the Parent to: (i) maintain its corporate existence; (ii) maintain its rights and franchises, except for any mergers or consolidations otherwise permitted by this Agreement and except to the extent failure to so maintain the same would not have a Material Adverse Effect; (iii) observe and comply (to the extent that any failure would have a Material Adverse Effect) with all valid Legal Requirements (including without limitation Requirements of Environmental Law); and (iv) maintain (except to the extent failure to so maintain the same would not have a Material Adverse Effect) its properties (and any properties leased by or consigned to it or held under title retention or conditional sales contracts) consistent with the standards of a reasonably prudent operator at all times and make all repairs, replacements, additions, betterments and improvements to its properties consistent with the standards of a reasonably prudent operator. 9.5 Further Assurances. The Parent will and will cause each Subsidiary of the Parent to cure promptly any defects in the creation and issuance of the Notes and the execution and delivery of the Loan Documents, including this Agreement. The Parent at its expense will promptly execute and deliver to the Administrative Agent upon request all such other and further documents, agreements and instruments (or cause any of its Subsidiaries to take such action) in compliance with or accomplishment of the covenants and agreements of the Parent or any of its Subsidiaries in the Loan Documents, including this Agreement, or to correct any omissions in the Loan Documents, or to make any recordings, to file any notices, or obtain any consents, all as may be necessary or appropriate in connection therewith. 9.6 Performance of Obligations. The Company will pay the Notes according to the reading, tenor and effect thereof; and the Company will do and perform every act and discharge all of the obligations provided to be performed and discharged by the Company under this Agreement and the other Loan Documents at the time or times and in the manner specified, and cause each of its Subsidiaries to take such action with respect to their obligations to be performed and discharged under the Loan Documents to which they respectively are parties. 9.7 Reimbursement of Expenses. Whether or not any Loan is ever made or any Letter of Credit is ever issued, the Company agrees to pay or reimburse the Administrative Agent for paying the reasonable fees and expenses of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., special counsel to the Administrative Agent, together with the reasonable fees and expenses of local counsel engaged by the Administrative Agent, in connection with the negotiation of the terms and structure of the Obligations, the preparation, execution and delivery of this Agreement and the other Loan Documents and the making of the Loans and the issuance of Letters of Credit hereunder, as well as any modification, supplement or waiver of any of the terms of this Agreement and the other Loan Documents. The Company will promptly upon request and in any event within 30 days from the date of receipt by the Company of a copy of a bill for such amounts, reimburse any Bank or any Agent for all amounts reasonably expended, advanced or incurred by such Bank or such Agent to satisfy any obligation of the Company or any other Relevant Party under this Agreement or any other Loan Document, to protect the properties or business of the Parent or any Subsidiary of the Parent, to collect the Obligations, or to enforce the rights of such Bank or such Agent under this Agreement or any other Loan Document, which amounts will include without limitation all court costs, attorneys' fees (but not including allocated costs of in-house counsel), any engineering fees and expenses, fees of auditors, accountants and appraisers, investigation expenses, all transfer, stamp, documentary or similar taxes, assessments or charges levied by any governmental or revenue authority in respect of any of the Loan Documents or any other document referred to therein, all costs, expenses, taxes, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any Lien contemplated by any of the Loan Documents or any document referred to therein, fees and expenses incurred in connection with such Bank's participation as a member of a creditors' committee in a case commenced under the Bankruptcy Code or other similar law of the United States or any state thereof or of Canada or any province thereof, fees and expenses incurred in connection with lifting the automatic stay prescribed in ss.362 Title 11 of the United States Code or in connection with any similar proceeding under the laws of Canada or any province thereof, and fees and expenses incurred in connection with any action pursuant to ss.1129 Title 11 of the United States Code or in connection with any similar proceeding under the laws of Canada or any province thereof, and all other customary out-of-pocket expenses incurred by such Bank or such Agent in connection with such matters, together with interest after the expiration of the 30-day period stated above in this Section if no Event of Default has occurred and is continuing, or from the date of the request to the Company if an Event of Default has occurred and is continuing, at either (i) the Post-Default Rate on each such amount until the date of reimbursement to such Bank or such Agent, or (ii) if no Event of Default will have occurred and be continuing, the Alternate Base Rate plus the highest Applicable Margin for Alternate Base Rate Loans (not to exceed the Highest Lawful Rate) on each such amount until the date of the Company's receipt of written demand or request by such Bank or such Agent for the reimbursement of same, and thereafter at the applicable Post-Default Rate until the date of reimbursement to such Bank or such Agent. The obligations of the Company under this Section are compensatory in nature, shall be deemed liquidated as to amount upon receipt by the Company of a copy of any invoice therefor, and will survive the non-assumption of this Agreement in a case commenced under the Bankruptcy Code or other similar law of the United States or any state thereof or of Canada or any province thereof, and will remain binding on the Company and any trustee, receiver, or liquidator of the Company appointed in any such case. 9.8 Insurance. The Parent and its Subsidiaries will maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and business against such liabilities, casualties, risks and contingencies and in such types and amounts as is customary in the case of corporations engaged in the same or similar businesses and similarly situated. Upon the request of the Administrative Agent acting at the instruction of the Majority Banks, the Parent will furnish or cause to be furnished to the Administrative Agent from time to time a summary of the insurance coverage of the Parent and its Subsidiaries in form and substance satisfactory to the Majority Banks in their reasonable judgment, and if requested will furnish the Administrative Agent copies of the applicable policies. Subject to the terms of Section 3 hereof, in the case of any fire, accident or other casualty causing loss or damage to any properties of the Parent or any of its Subsidiaries, the proceeds of such policies will be used (i) to repair or replace the damaged property or (ii) to prepay the Obligations, at the election of the Company. 9.9 Accounts and Records. The Parent will keep and will cause each Subsidiary of the Parent to keep books of record and account which fairly reflect all dealings or transactions in relation to their respective businesses and activities, in accordance with GAAP, which books of record and account will be maintained, to the extent necessary to enable compliance with all provisions of this Agreement, separately for each such Subsidiary, the Parent and any division of the Parent. 9.10 Rights of Inspection. The Parent will permit and will cause each of its Subsidiaries to permit any officer, employee, or agent of any Agent or any Bank to meet with the consultants who prepared any applicable Engineering Report and to review such Engineering Report with such consultants and to visit and inspect any of the properties of the Parent or such Subsidiary, examine the Parent's or such Subsidiary's books of record and accounts, take copies and extracts therefrom, and discuss the affairs, finances and accounts of the Bank or such Subsidiary with the Parent's or such Subsidiary's officers, accountants and auditors, all at such reasonable times during normal business hours and as often as such Agent or such Bank may reasonably desire, and will assist in all such matters. 9.11 Notice of Certain Events. The Parent will promptly notify the Administrative Agent (and the Administrative Agent will then notify all of the Banks) if a Responsible Officer of the Parent learns of the occurrence of, or if the Parent causes or intends to cause, as the case may be: (i) any event which constitutes a Default, together with a detailed statement by a responsible officer of the Parent of the steps being taken to cure the effect of such Default; or (ii) the receipt of any notice from, or the taking of any other action by, the holder of any promissory note, debenture or other evidence of indebtedness of the Parent or any Subsidiary of the Parent or of any security (as defined in the Securities Act of 1933, as amended) of the Parent or any Subsidiary of the Parent with respect to a claimed default, together with a detailed statement by a Responsible Officer of the Parent specifying the notice given or other action taken by such holder and the nature of the claimed default and what action the Parent or such Subsidiary is taking or proposes to take with respect thereto; or (iii) any legal, judicial or regulatory proceedings affecting the Parent or any Subsidiary of the Parent or any of the properties of the Parent or any Subsidiary of the Parent in which the amount involved is materially adverse to the Parent and its Subsidiaries taken as a whole, and is not covered by insurance or which, if adversely determined, would have a Material Adverse Effect; or (iv) any dispute between the Parent or any Subsidiary of the Parent and any Governmental Authority or any other Person which, if adversely determined, could reasonably be expected to have a Material Adverse Effect; or (v) the occurrence of a default or event of default by the Parent or any Subsidiary of the Parent under any other agreement to which it is a party, which default or event of default could reasonably be expected to have a Material Adverse Effect; or (vi) any change in the accuracy of the representations and warranties of the Parent or any Subsidiary contained in this Agreement or any other Loan Document; or (vii) any material violation or alleged material violation of any Requirements of Environmental Law or Environmental Permit or any Environmental Claim or any Environmental Liability; or (viii) any tariff and rate cases and other material reports filed by the Parent or any of its Subsidiaries with any Governmental Authority and any notice to the Parent or any of its Subsidiaries from any Governmental Authority concerning noncompliance with any applicable Legal Requirement; or (ix) the existence of any Borrowing Base Deficiency; or (x) within 10 days after the date on which a Responsible Officer of the Parent has actual knowledge thereof, the receipt of any notice by the Parent or any of its Subsidiaries of any claim of nonpayment of, or any attempt to collect or enforce, accounts payable of the Parent or any of its Subsidiaries exceeding, in the case of any one account payable at one time outstanding, U.S. $1,000,000 and in the case of all accounts payable in the aggregate at any one time outstanding, U.S. $3,000,000; or (xi) any requirement for the payment of all or any portion of any Indebtedness of the Parent or any of its Subsidiaries prior to the stated maturity thereof (whether by acceleration or otherwise) or as the result of any failure to maintain or the reaching of any threshold amount provided in any promissory note, bond, debenture, or other evidence of Indebtedness or under any credit agreement, loan agreement, indenture or similar agreement executed in connection with any of the foregoing; or (xii) any notice from the Securities and Exchange Commission with respect to any Application (as defined in Section 8.18 hereof). 9.12 ERISA Information and Compliance. The Parent will promptly furnish to the Administrative Agent (i) immediately upon receipt, a copy of any notice of complete or partial withdrawal liability under Title IV of ERISA and any notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, (ii) if requested by the Administrative Agent, acting on the instruction of the Majority Banks, promptly after the filing thereof with the United States Secretary of Labor or the PBGC or the Internal Revenue Service, copies of each annual and other report with respect to each Plan or any trust created thereunder, (iii) immediately upon becoming aware of the occurrence of any "reportable event", as such term is defined in Section 4043 of ERISA, for which the disclosure requirements of Regulation Section 2615.3 promulgated by the PBGC have not been waived, or of any "prohibited transaction", as such term is defined in Section 4975 of the Code, in connection with any Plan or any trust created thereunder, a written notice signed by the President or the principal financial officer of the Parent or the applicable ERISA Affiliate specifying the nature thereof, what action the Parent or the applicable ERISA Affiliate is taking or proposes to take with respect thereto, and, when known, any action taken by the PBGC, the Internal Revenue Service or the Department of Labor with respect thereto, (iv) promptly after the filing or receiving thereof by the Parent or any ERISA Affiliate of any notice of the institution of any proceedings or other actions which may result in the termination of any Plan, and (v) each request for waiver of the funding standards or extension of the amortization periods required by Sections 303 and 304 of ERISA or Section 412 of the Code promptly after the request is submitted by the Parent or any ERISA Affiliate to the Secretary of the Treasury, the Department of Labor or the Internal Revenue Service, as the case may be. To the extent required under applicable statutory funding requirements, the Parent will fund, or will cause each ERISA Affiliate to fund, all current service pension liabilities as they are incurred under the provisions of all Plans from time to time in effect, and comply with all applicable provisions of ERISA, except to the extent that any such failure to comply could not reasonably be expected to have a Material Adverse Effect. The Parent covenants that it shall and shall cause each ERISA Affiliate to (1) make contributions to each Plan in a timely manner and in an amount sufficient to comply with the contribution obligations under such Plan and the minimum funding standards requirements of ERISA; (2) prepare and file in a timely manner all notices and reports required under the terms of ERISA including but not limited to annual reports; and (3) pay in a timely manner all required PBGC premiums, in each case, to the extent failure to do so would have a Material Adverse Effect. Section 10. Negative Covenants. A deviation from the provisions of this Section 10 will not constitute a Default under this Agreement if such deviation is consented to in writing by the Majority Banks. The Company (or, where applicable, the Parent) agrees with the Banks and the Agents that, so long as any of the Commitments is in effect and until payment in full of all Loans hereunder, the payment in full of the full face amount of all outstanding Bankers' Acceptances, the termination or expiry of all Letters of Credit and payment in full of Letter of Credit Liabilities, all interest thereon and all amounts payable by the Company hereunder: 10.1 Debts, Guarantees and Other Obligations. The Parent will not and will not permit any of its Subsidiaries (other than APC) to incur, create, assume or in any manner become or be liable in respect of any Indebtedness (including obligations for the payment of rentals); and the Parent will not and will not permit any of its Subsidiaries (other than APC) to Guarantee or otherwise in any way become or be responsible for obligations of any other Person, whether by agreement to purchase the Indebtedness of any other Person or agreement for the furnishing of funds to any other Person through the purchase or lease of goods, supplies or services (or by way of stock purchase, capital contribution, advance or loan) for the purpose of paying or discharging the Indebtedness of any other Person, or otherwise, except that the foregoing restrictions will not apply to: (a) the Notes, the Bankers' Acceptances or other Indebtedness under the Loan Documents; (b) liabilities, direct or contingent, of the Parent or any Subsidiary of the Parent existing on the date of this Agreement which are reflected in the Financial Statements or the Disclosure Statement and all renewals, extensions, refinancings and rearrangements, but not increases, thereof; (c) endorsements of negotiable or similar instruments for collection or deposit in the ordinary course of business; (d) trade payables, lease acquisition and lease maintenance obligations, extensions of credit from suppliers or contractors, liabilities incurred in exploration, development and operation of the Parent's or any of its Subsidiaries' oil and gas properties or similar obligations from time to time incurred in the ordinary course of business, other than for borrowed money, which are paid within 90 days after the invoice date (inclusive of applicable grace periods) or (i) are being contested in good faith, if such reserve as required by GAAP has been made therefor or (ii) trade accounts payable of the Parent and its Subsidiaries (with respect to which no legal proceeding to enforce collection has been commenced or, to the knowledge of a Responsible Officer of the Parent, threatened) not exceeding, in the aggregate at any time outstanding, U.S. $25,000,000; (e) taxes, assessments or other government charges which are not yet due or are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as will be required by GAAP will have been made therefor; (f) Borrowing Base Debt of the Parent; provided that the aggregate of all Indebtedness permitted under this Subsection 10.1(f) shall not exceed the amount by which the then current Borrowing Base exceeds the then current "Revolving Credit Obligations" under the U.S. Facility; (g) to the extent, if any, not covered by Subsection (b) hereinabove, the Indebtedness of the Parent to APC evidenced solely by the Intercompany Notes, as defined in the Beluga Financing Documents and the APC Long Term Financing Documents, together with any renewals, extensions, amendments, refinancings, rearrangements, modifications, restatements or supplements, but not increases (other than increases which are permitted under the present terms of the Beluga Financing Documents and the APC Long Term Financing Documents) thereof from time to time; (h) intercompany Indebtedness owed to the Parent by any Subsidiary of the Parent and intercompany Indebtedness owed to any Subsidiary of the Parent by the Parent or any other Subsidiary of the Parent which is fully subordinated to the Obligations; (i) loans, advances or extensions of credit to the Parent for the purpose of financing no more than 75% of the purchase price of any fixed assets which are not included in the property taken into account in determining the Borrowing Base and which are considered in the categories of property, plant or equipment according to GAAP applied on a consistent basis; (j) obligations of the Parent under the Gas Sales Contract, together with any renewals, extensions, amendments, refinancings, rearrangements, modifications, restatements or supplements, but not increases, thereof from time to time; (k) the Guarantee by the Parent or any Subsidiary of the Parent of payment or performance by any Subsidiary of the Parent under any agreement so long as the obligation guaranteed does not constitute Indebtedness for borrowed money; (l) obligations of the Parent and Wacker Oil Inc. pursuant to that certain Agreement Regarding Contingent Payments For Well No. 3 and Well No. 9 dated as of June 18, 1990, by and among Costain Holdings Inc., Wacker Oil Inc. and the Parent; (m) obligations of the Parent or any of its Subsidiaries under gas purchase contracts for gas not taken, as to which the Parent or its respective Subsidiary is liable to pay if not made up; (n) obligations of the Parent or any of its Subsidiaries under any contract for sale for future delivery of oil or gas (whether or not the subject oil or gas is to be delivered), hedging contract, forward contract, swap agreement, futures contract or other similar agreement; (o) obligations of the Parent or any of its Subsidiaries under any interest rate swap agreement, or any contract implementing any interest rate cap, collar or floor, or any similar interest hedging contract; (p) obligations in connection with gas imbalances arising in the ordinary course of business; (q) Indebtedness not exceeding U.S. $1,000,000 in the aggregate borrowed from the Amarillo Economic Development Commission and related Guarantees and related obligations of the Parent and its Subsidiaries; (r) liabilities under leases and lease agreements which do not cover oil and gas properties to the extent the incurrence and existence of such liabilities will still enable the Parent and each Subsidiary to comply with all other requirements of this Agreement and the other Loan Documents to which they respectively are parties; (s) Subordinated Debt; (t) Funded Indebtedness of any Oil and Gas Subsidiary for borrowed money payable solely by recourse to properties not included in the Borrowing Base and Indebtedness incurred by any Gas and Liquids Pipeline Subsidiary in connection with the construction or acquisition of new assets in connection with the Pipeline Operations (as defined in the U.S. Facility, without amendment except as permitted under the Intercreditor Agreement) which is payable solely by recourse to the assets so constructed or acquired, each to the extent not otherwise expressly permitted by this Section 10.1; (u) the note payable which is to be assumed by the Company in connection with the consummation of the Novalta Contract and is to be fully paid and satisfied out of the initial proceeds available under this Agreement from the making of Loans or the acceptance and purchase of Bankers' Acceptances; and (v) the U.S. Facility; (w) Indebtedness of the Company having a maturity of 364 days or less from the date of its incurrence in an aggregate principal amount not exceeding Canadian $10,000,000 at any one time outstanding. 10.2 Liens. The Parent will not and will not permit any of its Subsidiaries to create, incur, assume or permit to exist any Lien on any of its or their properties (now owned or hereafter acquired), except: (a) Liens securing the Indebtedness described in Subsection 10.1(a) or 10.1(v); (b) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as will be required by GAAP will have been made therefor; (c) Liens of landlords, vendors, contractors, subcontractors, carriers, warehousemen, mechanics, laborers or materialmen or other like Liens arising by law in the ordinary course of business for sums not yet due or being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as will be required by GAAP will have been made therefor; (d) Liens existing on property owned by the Parent or any of its Subsidiaries on the date of this Agreement which have been disclosed to the Banks in the Disclosure Statement, together with any renewals, extensions, amendments, refinancings, rearrangements, modifications, restatements or supplements, but not increases, thereof from time to time; (e) pledges or deposits made in the ordinary course of business in connection with worker's compensation, unemployment insurance, social security and other like laws; (f) inchoate liens arising under ERISA to secure the contingent liability of the Parent permitted by Section 9.12; (g) Liens in the ordinary course of business, not to exceed in the aggregate U.S. $10,000,000 as to the Parent and its Subsidiaries at any time in effect, regarding (i) the performance of bids, tenders, contracts (other than for the repayment of borrowed money or the deferred purchase price of property or services) or leases, (ii) statutory obligations, (iii) surety appeal bonds or (iv) Liens to secure progress or partial payments made to the Parent or any of its Subsidiaries and other Liens of like nature; (h) covenants, restrictions, easements, servitudes, permits, conditions, exceptions, reservations, minor rights, minor encumbrances, minor irregularities in title or conventional rights of reassignment prior to abandonment which do not materially interfere with the occupation, use and enjoyment by the Parent or any Subsidiary of the Parent of its respective assets in the normal course of business as presently conducted, or materially impair the value thereof for the purpose of such business; (i) Liens of operators under joint operating agreements or similar contractual arrangements with respect to the relevant entity's proportionate share of the expense of exploration, development and operation of oil, gas and mineral leasehold or fee interests owned jointly with others, to the extent that same relate to sums not yet due or which are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as will be required by GAAP will have been made therefor; (j) Liens created pursuant to the creation of trusts or other arrangements funded solely with cash, cash equivalents or other marketable investments or securities of the type customarily subject to such arrangements in customary financial practice with respect to long-term or medium-term indebtedness for borrowed money, the sole purpose of which is to make provision for the retirement or defeasance, without prepayment, of Indebtedness permitted under Section 10.1; (k) Liens on the assets or properties of ENSTAR Alaska; (l) the Vendor Financing Arrangements (as defined in the Mesa Contract), to the extent that the same shall have been deducted in calculating the Borrowing Base; (m) purchase money Liens for the acquisition of fixed assets pursuant to Subsection 10.1(i), so long as such Liens exist solely against the relevant fixed asset acquired and secure only the purchase money debt; provided, that the aggregate amount of Indebtedness which is secured by Liens described in this subsection (other than Indebtedness which is payable solely by recourse to the applicable property) shall not exceed U.S. $10,000,000 at any one time outstanding; (n) any Lien existing on any real or personal property of any corporation or partnership at the time it becomes a Subsidiary of the Parent or of any other Subsidiary of the Parent, or existing prior to the time of acquisition upon any real or personal property acquired by the Parent or any of its Subsidiaries; provided, that such Liens may at all times be deducted in calculating the Borrowing Base from time to time in effect; (o) legal or equitable encumbrances deemed to exist by reason of the existence of any litigation or other legal proceeding or arising out of a judgment or award with respect to which an appeal is being prosecuted in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as will be required by GAAP will have been made therefor; (p) any Liens securing Indebtedness neither assumed nor guaranteed by the Parent or any of its Subsidiaries nor on which it customarily pays interest, existing upon real estate or rights in or relating to real estate acquired by the Parent or any of its Subsidiaries for substation, metering station, pump station, storage, gathering line, transmission line, transportation line, distribution line or right-of-way purposes, and any Liens reserved in leases for rent and full compliance with the terms of the leases in the case of leasehold estates, to the extent that any such Lien referred to in this clause arises in the normal course of business as presently conducted and does not materially impair the use of the property covered by such Lien for the purposes for which such property is held by the Parent or its applicable Subsidiary; (q) rights reserved to or vested in any municipality or governmental, statutory or public authority by the terms of any right, power, franchise, grant, license or permit, or by any provision of law, to terminate such right, power, franchise, grant, license or permit or to purchase, condemn, expropriate or recapture or to designate a purchaser of any of the property of the Parent or any of its Subsidiaries; (r) rights reserved to or vested in any municipality or governmental, statutory or public authority to control or regulate any property of the Parent or any of its Subsidiaries, or to use such property in a manner which does not materially impair the use of such property for the purposes for which it is held by the Parent or its applicable Subsidiary; (s) any obligations or duties affecting the property of the Parent or any of its Subsidiaries to any municipality, governmental, statutory or public authority with respect to any franchise, grant, license or permit; (t) rights of a common owner of any interest in real estate, rights-of-way or easements held by the Parent or any of its Subsidiaries and such common owner as tenants in common or through other common ownership; (u) any Liens arising from the matters described in Schedule 3.19 of the Mesa Contract; (v) Liens securing Indebtedness permitted under Section 10.1(t) hereof (to the extent such Liens are permitted under such Section 10.1(t)); (w) reservations, limitations, provisos and conditions in any original grant from the Crown or freehold lessor of any of the properties of the Company or its Subsidiaries; (x) other Liens securing Indebtedness not exceeding, in the aggregate, U.S. $3,000,000 at any one time outstanding; (y) other Liens securing Senior Debt, but only so long as such Liens shall also secure the Obligations on a pari passu basis, in a manner and pursuant to documentation acceptable to the Majority Banks; (z) Liens (i) granted to or existing in favor of third parties on margin accounts of the Parent or any of its Subsidiaries relating to exchange traded contracts for the delivery of natural gas pursuant to which the Parent or any such Subsidiary intends to take actual delivery of such natural gas within forty (40) days from the then current date in the ordinary course of business and not for speculative purposes, and (ii) on margin accounts of the Parent or any of its Subsidiaries relating to exchange traded contracts for the delivery of natural gas, provided, however, the aggregate balance of the margin accounts subject to the Liens permitted by this clause (ii) shall not exceed from time to time $10,000,000. 10.3 Investments, Loans and Advances. The Parent will not and will not permit its Subsidiaries to make or permit to remain outstanding any advances, loans or other extensions of credit or capital contributions (other than prepaid expenses in the ordinary course of business) to (by means of transfers of property or assets or otherwise), or purchase or own any stocks, bonds, notes, debentures or other securities of, or incur contingent liability with respect to (except for the endorsement of checks in the ordinary course of business and except for the Indebtedness and Liens permitted under this Agreement) any Person (all such transactions being herein called "Investments"), except that the foregoing restriction will not apply to: (a) Investments (all prior to the date hereof) the material details of which have been set forth in the Financial Statements delivered to the Administrative Agent prior to the date hereof or the Disclosure Statement; (b) Liquid Investments; (c) advances or extensions of credit in the form of accounts receivable incurred in the ordinary course of business; (d) the acquisition of all of the capital stock of wholly owned Subsidiaries incorporated or acquired subsequent to the date of this Agreement; (e) investments where the consideration paid is capital stock of the Parent, plus cash paid in lieu of issuing fractional shares and cash paid in settlement of claims of dissenters, such cash not to exceed 10% of the aggregate purchase price in any such transaction; (f) Investments in any Person which after giving effect thereto will be a Subsidiary of the Parent, so long as the Investment in such Person, when consummated, would not result in a breach of the covenants set forth in Section 10.1; (g) intercompany loans, advances or investments by the Parent to or in any Subsidiary of the Parent (other than a Subsidiary that is obligated to pay Funded Indebtedness for borrowed money payable solely by recourse to properties not included in the Borrowing Base) or, to the extent permitted under Section 10.1(h) hereof, by any Subsidiary of the Parent to or in the Parent or to or in any other Subsidiary of the Parent, provided, however, that APC may not make any intercompany loans, advances or investments in any Subsidiary of the Parent pursuant to this clause (g); (h) intercompany loans, advances or investments by the Parent, solely from income or cash flow of the Parent subject to the Beluga Financing Documents, to APC as required under the Beluga Financing Documents and the APC Long Term Financing Documents; (i) to the extent, if any, not covered by Subsection (a) hereinabove, the Indebtedness of the Parent to APC evidenced solely by the Intercompany Notes, as defined in the Beluga Financing Documents and the APC Long Term Financing Documents, together with any renewals, extensions, amendments, refinancings, rearrangements, modifications, restatements or supplements, but not increases (other than increases which are permitted under the present terms of the Beluga Financing Documents and the APC Long Term Financing Documents) thereof from time to time; (j) loans or advances to employees made in the ordinary course of business, up to the aggregate principal amount at any one time outstanding of U.S. $5,000,000; (k) Investments in reasonable amounts of securities for purposes of funding employee benefit plans maintained by the Parent; (l) advances or extensions of credit made in the ordinary course of business to third parties under applicable contracts and agreements in connection with (i) oil, gas or other mineral exploration, development and production activities or (ii) Hydrocarbon or chemical pipeline gathering or transportation activities; (m) Investments where the consideration paid is assets of the Parent or its Subsidiaries other than capital stock, cash or oil and gas reserves; (n) Investments in EBOC Energy Ltd. made in connection with and pursuant to the Novalta Contract; (o) any payment, prepayment, purchase or retirement of Indebtedness of the Parent (other than payments, prepayments, purchases or retirement of Subordinated Debt prohibited under the definition of "Subordinated Debt"); and (p) any other Investments which in the aggregate do not cause the Parent to be in violation of the Investments Tests. 10.4 Dividend Payment Restrictions. The Parent will not declare or make any Dividend Payment if any Default or Event of Default has occurred and is continuing or if there exists any Borrowing Base Deficiency. 10.5 Mergers, Amalgamations and Sales of Assets. The Parent will not (a) merge, amalgamate or consolidate with, or sell, assign, lease or otherwise dispose of, whether in one transaction or in a series of transactions, more than ten percent (10%) in the aggregate of the Parent's and its Subsidiaries' consolidated total assets (whether now owned or hereafter acquired) to any Person or Persons during the period since the most recent "Borrowing Base Determination" (as defined in the U.S. Facility, without amendment except as permitted under the Intercreditor Agreement), or permit any Subsidiary of the Parent to do so (other than to the Parent or another Subsidiary of the Parent or the issuance by any Subsidiary of the Parent of any stock to the Parent or another Subsidiary of the Parent), or (b) sell, assign, lease or otherwise dispose of, whether in one transaction or in a series of transactions, any other properties if receiving therefor consideration other than cash or other consideration readily convertible to cash or which is less than the fair market value of the relevant properties, or permit any Subsidiary of the Parent to do so; provided that the Parent or any Subsidiary of the Parent may merge, amalgamate or consolidate with any other Person and any Subsidiary of the Parent may transfer properties to any other Subsidiary of the Parent or to the Parent so long as, in each case, (i) immediately thereafter and giving effect thereto, no event will occur and be continuing which constitutes a Default, (ii) in the case of any such merger, amalgamation or consolidation to which the Parent is a party, the Parent is the surviving Person, (iii) in the case of any such merger, amalgamation or consolidation to which any Subsidiary of the Parent is a party (but not the Parent), after giving effect to all transactions closing concurrently relating to such merger or consolidation, the surviving Person is a Subsidiary of the Parent and (iv) the surviving Person ratifies each applicable Loan Document and provided further that any Subsidiary of the Parent may merge or consolidate with any other Subsidiary of the Parent so long as, in each case (i) immediately thereafter and giving effect thereto, no event will occur and be continuing which constitutes a Default and (ii) the surviving Person ratifies each applicable Loan Document. 10.6 Use of Proceeds. The Company will not permit the proceeds of the Loans or the Canadian Bankers' Acceptance Discount Proceeds to be used for any purpose other than those permitted by this Agreement. 10.7 ERISA Compliance. The Parent will not at any time permit any Plan maintained by it or any Subsidiary of the Parent to: (a) engage in any "prohibited transaction" as such term is defined in Section 4975 of the Code; (b) incur any "accumulated funding deficiency" as such term is defined in Section 302 of ERISA; or (c) terminate or be terminated in a manner which could result in the imposition of a Lien on the property of the Parent or any Subsidiary of the Parent pursuant to Section 4068 of ERISA, in each case, to the extent that permitting the Plan to do so would have a Material Adverse Effect. 10.8 Amendment of Certain Documents. The Parent will not amend, modify or obtain or grant a waiver of (except for waivers only of cross-defaults created by a Default under this Agreement), or allow APC to enter into any amendment or modification or obtain or grant any waiver of (except for waivers only of cross-defaults created by a Default under this Agreement), any provision of those documents relating to or constituting the Beluga Financing Documents or the APC Long Term Financing Documents, without prior written notification to the Administrative Agent. 10.9 Tangible Net Worth. The Parent will not permit the Tangible Net Worth of the Parent and its Subsidiaries, on a consolidated basis, at any time to be less than U.S. $465,000,000 plus 50% of net income of the Parent and its Subsidiaries on a consolidated basis, if positive, beginning with the fiscal year ended December 31, 1997 and calculated annually thereafter based upon positive net income of the Parent and its Subsidiaries for each applicable fiscal year taken cumulatively. 10.10 Parent Debt/Capitalization Ratio. The Parent will not permit the Debt/Capitalization Ratio to be, at any time, more than 65%. 10.11 EBITDAX/Interest Ratio. The Parent will not permit the EBITDAX/Interest Ratio to be, at any time, less than (a) 3.00:1.00 for any twelve month period ending on the last day of any calendar quarter for the period from the date hereof through and including March 31, 1997; and (c) 3.50:1.00 for any twelve month period ending on the last day of any calendar quarter thereafter. 10.12 Nature of Business. The Parent will not engage in, and will not permit any Subsidiary of the Parent to engage in, businesses other than oil and gas exploration and production, gas processing, transmission, distribution, marketing and storage and gas and liquids pipeline operations and activities related or ancillary thereto; provided, that if the Parent acquires one or more Subsidiaries in transactions otherwise permitted by the terms hereof, any such Subsidiary may be engaged in businesses other than those listed in this Section so long as the assets of such Subsidiaries which are used in the conduct of such other businesses do not constitute more than five percent (5%) of the consolidated total assets of the Parent (inclusive of the assets of the Subsidiary so acquired). 10.13 Futures Contracts. The Parent will not, and will not permit any Subsidiary of the Parent to, enter into or be obligated under any contract for sale for future delivery of oil or gas (whether or not the subject oil or gas is to be delivered), hedging contract, forward contract, swap agreement, futures contract or other similar agreement except for (i) such contracts (x) which fall within the parameters set forth on Exhibit H hereto or are otherwise approved in writing by the Majority Banks and (y) which in the aggregate do not cover at any time a volume of oil and/or gas equal to or greater than 50% of the proved producing reserves attributable to the oil and gas properties of the Parent and its Subsidiaries, taken as a whole, as evidenced by the most current Engineering and Parent Reports and (ii) production sales contracts entered into in the ordinary course of the Parent's or the applicable Subsidiary's business. 10.14 Covenants in Other Agreements. The Parent will not and will not permit any of its Subsidiaries to become a party to or to agree that it or any of its property is bound by any agreement, indenture, mortgage, deed of trust or any other instrument directly or indirectly (i) restricting any loans, advances or any other Investments to or in the Parent by any of its Subsidiaries; (ii) restricting the ability of any Subsidiary of the Parent to make tax payments or management fee payments; (iii) restricting the capitalization structure of any Subsidiary of the Parent; or (iv) restricting the ability or capacity of any Subsidiary of the Parent to make Dividend Payments; provided, however, nothing in this Section 10.14 shall restrict the existence of negative covenants otherwise prohibited by this Section in documentation evidencing or related to Indebtedness permitted by Subsection 10.1(v) and, to the extent that the applicable Subsidiary does not own any property included in the Borrowing Base, Subsections 10.1(n), (o) and (p). Notwithstanding the foregoing, either of ENSTAR Alaska or APC may become a party to, or grant a Lien in any of its property by way of, or agree that it will be bound by, any indenture, mortgage, deed of trust or other instrument containing provisions of the types described above in this Section 10.14 so long as the terms and provisions thereof are not materially more restrictive than the terms or provisions which were legally binding on ENSTAR Alaska or APC on the date hereof. Section 11. Defaults. 11.1 Events of Default. If one or more of the following events (herein called "Events of Default") shall occur and be continuing: (a) Payments - (i) the Company or any other Relevant Party fails to make any payment or prepayment of any installment of principal on the Loans or any Reimbursement Obligation payable under the Notes, this Agreement or the other Loan Documents or the full face amount of any outstanding Bankers' Acceptances when due or (ii) the Company or any other Relevant Party fails to make any payment or prepayment of interest with respect to the Loans, any Reimbursement Obligation or any other fee or amount under the Notes, the Bankers' Acceptances, this Agreement or the other Loan Documents and such failure to pay continues unremedied for a period of five (5) Business Days; or (b) Representations and Warranties - any representation or warranty made by the Company or any other Relevant Party in this Agreement or in any other Loan Document or in any instrument executed in connection herewith or therewith proves to have been incorrect in any material respect as of the date thereof; or any representation, statement (including Financial Statements), certificate or data furnished or made by the Company or any other Relevant Party (or any officer of the Company or any other Relevant Party) under or in connection with this Agreement or any other Loan Document, including without limitation in the Disclosure Statement, proves to have been untrue in any material respect, as of the date as of which the facts therein set forth were stated or certified; or (c) Affirmative Covenants - (i) default shall be made in the due observance or performance of any of the covenants or agreements contained in Sections 9.11 (or in Section 9.6 to the extent such default is considered an Event of Default under the other Subsections of this Section 11.1) or (ii) default is made in the due observance or performance of any of the other covenants or agreements contained in Section 9 of this Agreement or any other affirmative covenant of the Company or any other Relevant Party contained in this Agreement or any other Loan Document and such default continues unremedied for a period of 30 days after (x) notice thereof is given by the Administrative Agent to the Company or (y) such default otherwise becomes known to the Company, whichever is earlier; or (d) Negative Covenants - (i) default shall be made in the observance or performance of any of the covenants or agreements contained in Section 10.8 and such default continues unremedied for a period of five (5) Business Days after (x) notice thereof is given by the Administrative Agent to the Company or (y) such default otherwise becomes known to the Parent, whichever is earlier, or (ii) default is made in the due observance or performance by the Company or the Parent, as the case may be, of any of the other covenants or agreements contained in Section 10 of this Agreement or of any other negative covenant of the Company or any other Relevant Party contained in this Agreement or any other Loan Document; or (e) Other Obligations - default is made in the due observance or performance by the Parent or any of its Subsidiaries (as principal or guarantor or other surety) of any of the covenants or agreements contained in any bond, debenture, note or other evidence of Indebtedness in excess of U.S. $25,000,000 (singly or aggregating several such bonds, debentures, notes or other evidence of Indebtedness) which default gives the holder the right to accelerate the maturity of such Indebtedness, other than the Loan Documents, or under any credit agreement, loan agreement, indenture, promissory note or similar agreement or instrument executed in connection with any of the foregoing, to which it (respectively) is a party and such default is unwaived or continues unremedied beyond the expiration of any applicable grace period which may be expressly allowed under such instrument or agreement; or (f) Involuntary Bankruptcy or Receivership Proceedings - a receiver, conservator, liquidator or trustee of the Parent or of any of its property is appointed by the order or decree of any court or agency or supervisory authority having jurisdiction, and such decree or order remains in effect for more than 60 days; or the Parent is adjudicated bankrupt or insolvent; or any of its property is sequestered by court order and such order remains in effect for more than 60 days; or a petition is filed against the Parent under any provincial, state or federal bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution, liquidation or receivership law of any jurisdiction, whether now or hereafter in effect, and is not dismissed within 60 days after such filing; or (g) Voluntary Petitions or Consents - the Parent commences a voluntary case or other proceeding seeking liquidation, reorganization, arrangement, insolvency, readjustment of debt, dissolution, liquidation or other relief with respect to itself or its debt or other liabilities under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or consents to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or fails generally to, or cannot, pay its debts generally as they become due or takes any corporate action to authorize or effect any of the foregoing, or files a notice of intention to make a proposal under the Bankruptcy Code; or (h) Assignments for Benefit of Creditors or Admissions of Insolvency - the Parent makes an assignment for the benefit of its creditors, or admits in writing its inability to pay its debts generally as they become due, or consents to the appointment of a receiver, trustee, or liquidator of the Parent or of all or any part of its property; or (i) Undischarged Judgments - judgments (individually or in the aggregate) for the payment of money in excess of U.S. $10,000,000 is rendered by any court or other governmental body against the Parent or any of its Subsidiaries and the Parent or such Subsidiary does not discharge the same or provide for its discharge in accordance with its terms, or procure a stay of execution thereof within 60 days from the date of entry thereof, and within said period of 60 days from the date of entry thereof or such longer period during which execution of such judgment will have been stayed, the Parent or such Subsidiary fails to appeal therefrom and cause the execution thereof to be stayed during such appeal while providing such reserves therefor as may be required under GAAP; or (j) Subsidiary Defaults - any Subsidiary of the Parent takes, suffers, or permits to exist any of the events or conditions referred to in Subsections 11.1(f), (g) or (h); or (k) Change in Control - there should occur any Change of Control. THEREUPON: the Administrative Agent may (and, if directed by the Majority Banks, shall) (a) declare the Commitments terminated (whereupon the Commitments shall be terminated) and/or (b) terminate any Letter of Credit providing for such termination by sending a notice of termination as provided therein and/or (c) declare the principal amount then outstanding of and the accrued interest on the Loans and Reimbursement Obligations and all fees and all other amounts payable hereunder and under the Notes to be forthwith due and payable and/or (d) declare the full face amount of all outstanding Bankers' Acceptances to be forthwith due and payable, whereupon such amounts shall be and become immediately due and payable, without notice (including without limitation notice of acceleration and notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company; provided that in the case of the occurrence of an Event of Default with respect to the Parent referred to in clause (f) or (g) of this Section 11.1 or in clause (j) of this Section 11.1 to the extent it refers to clauses (f) or (g), the Commitments shall be automatically terminated and the principal amount then outstanding of and the accrued interest on the Loans and Reimbursement Obligations and all fees and all other amounts payable hereunder and under the Notes and the full face amount of all outstanding Bankers' Acceptances shall be and become automatically and immediately due and payable, without notice (including but not limited to notice of intent to accelerate and notice of acceleration) and without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company and/or (d) exercise any and all other rights available to it under the Loan Documents, at law or in equity. 11.2 Collateral Account. The Company hereby agrees, in addition to the provisions of Section 11.1 hereof, that upon the occurrence and during the continuance of any Event of Default, it shall, if requested by the Administrative Agent or the Majority Banks (through the Administrative Agent), pay to the Paying Agent an amount in immediately available funds equal to the then aggregate amount available for drawings under all Letters of Credit issued for the account of the Company, which funds shall be held by the Paying Agent as Cover. 11.3 Preservation of Security for Unmatured Reimbursement Obligations. In the event that, following (i) the occurrence of an Event of Default and the exercise of any rights available to any Agent under the Loan Documents, and (ii) payment in full of the principal amount then outstanding of and the accrued interest on the Loans and Reimbursement Obligations and fees and all other amounts payable hereunder and under the Notes and under the other Loan Documents, and (iii) payment in full of the full face amount of all outstanding Bankers' Acceptances, any Letters of Credit shall remain outstanding and undrawn upon, the each Agent shall be entitled to hold (and the Company hereby grants and conveys to each Agent a security interest in and to) all cash or other property ("Proceeds of Remedies") realized or arising out of the exercise by such Agent of any rights available to it under the Loan Documents, at law or in equity, including, without limitation, the proceeds of any foreclosure, as collateral for the payment of any amounts due or to become due under or in respect of such Letters of Credit. Such Proceeds of Remedies shall be held for the ratable benefit of the applicable Issuers. The rights, titles, benefits, privileges, duties and obligations of each applicable Agent with respect thereto shall be governed by the terms and provisions of this Agreement. The applicable Agent may, but shall have no obligation to, invest any such Proceeds of Remedies in such manner as such Agent, in the exercise of its sole discretion, deems appropriate. Such Proceeds of Remedies shall be applied to Reimbursement Obligations arising in respect of any such Letters of Credit and/or the payment of any Issuer's obligations under any such Letter of Credit when such Letter of Credit is drawn upon. The Company hereby agrees to execute and deliver to the Administrative Agent and the Banks such security agreements, pledges or other documents as the Administrative Agent or any of the Banks may, from time to time, require to perfect the pledge, lien and security interest in and to any such Proceeds of Remedies provided for in this Section 11.3. 11.4 Right of Setoff. Upon (i) the occurrence and during the continuance of any Event of Default referred to in clauses (f), (g) or (h) of Section 11.1, or in clause (j) of Section 11.1 to the extent it refers to clauses (f), (g) or (h), or upon (ii) the occurrence and continuance of any other Event of Default and upon the making of the notice specified in Section 11.1 to authorize the Administrative Agent to declare the Notes and the full face amount of all Bankers' Acceptances outstanding due and payable pursuant to the provisions thereof, or if (iii) the Parent or any of its Subsidiaries becomes insolvent, however evidenced, the Banks are hereby authorized at any time and from time to time, without notice to the Parent or any of its Subsidiaries (any such notice being expressly waived by the Parent and its Subsidiaries), to setoff and apply any and all deposits (general or special, time or demand, provisional or final, whether or not such setoff results in any loss of interest or other penalty, and including without limitation all certificates of deposit) at any time held, and any other funds or property at any time held, and other Indebtedness at any time owing by any Bank to or for the credit or the account of the Company against any and all of the Obligations irrespective of whether or not such Bank will have made any demand under this Agreement, any Bankers' Acceptances or the Notes and although such obligations may be unmatured. Should the right of any Bank to realize funds in any manner set forth hereinabove be challenged and any application of such funds be reversed, whether by court order or otherwise, the Banks shall make restitution or refund to the Company pro rata in accordance with their Commitments. The Banks agree promptly to notify the Company and the Administrative Agent and the Paying Agent after any such setoff and application, provided that the failure to give such notice will not affect the validity of such setoff and application. The rights of the Agents and the Banks under this Section are in addition to other rights and remedies (including without limitation other rights of setoff) which the Agents or the Banks may have. Section 12. The Agents. 12.1 Appointment, Powers and Immunities. Each Bank hereby irrevocably appoints and authorizes the Administrative Agent to act as arranger and administrative agent hereunder and under the Letters of Credit and the other Loan Documents with such powers as are specifically delegated to the Administrative Agent by the terms hereof and thereof, together with such other powers as are reasonably incidental thereto. Each Bank hereby irrevocably appoints and authorizes the Paying Agent to act as co-agent and paying agent hereunder and under the Bankers' Acceptances, the Letters of Credit and the other Loan Documents with such powers as are specifically delegated to the Paying Agent by the terms hereof and thereof, together with such other powers as are reasonably incidental thereto. Each Bank hereby irrevocably appoints and authorizes the Co-Agent to act as co-agent hereunder and under the Letters of Credit and the other Loan Documents with such powers as are specifically delegated to the Co-Agent by the terms hereof and thereof, together with such other powers as are reasonably incidental thereto. None of the Agents (which term as used in this Section 12 shall include reference to their affiliates and their own and their affiliates' officers, directors, employees and agents) (a) shall have any duties or responsibilities except those expressly set forth in this Agreement, the Bankers' Acceptances, the Letters of Credit, and the other Loan Documents, or shall by reason of this Agreement or any other Loan Document be a trustee or fiduciary for any Bank; (b) shall be responsible to any Bank for any recitals, statements, representations or warranties contained in this Agreement, the Bankers' Acceptances, the Letters of Credit or any other Loan Document, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement, the Bankers' Acceptances, the Letters of Credit or any other Loan Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, the Bankers' Acceptances, the Letters of Credit, or any other Loan Document or any other document referred to or provided for herein or therein or any property covered thereby or for any failure by any Relevant Party or any other Person to perform any of its obligations hereunder or thereunder; (c) shall be required to initiate or conduct any litigation or collection proceedings hereunder or under the Bankers' Acceptances, the Letters of Credit or any other Loan Document except to the extent requested by the Majority Banks, and (d) shall be responsible for any action taken or omitted to be taken by them hereunder or under the Bankers' Acceptances, the Letters of Credit or any other Loan Document or any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, including, without limitation, pursuant to their own negligence, except for their own gross negligence or wilful misconduct. The Agents may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by them with reasonable care. Without in any way limiting any of the foregoing, each Bank acknowledges that neither any Agent nor any Issuer shall have any greater responsibility in the operation of the Letters of Credit than is specified in the Uniform Customs and Practice for Documentary Credits (1993 Revision, International Chamber of Commerce Publication No. 500). In any foreclosure proceeding concerning any collateral for the Obligations, each holder of an Obligation if bidding for its own account or for its own account and the accounts of other Banks is prohibited from including in the amount of its bid an amount to be applied as a credit against its Obligation or Obligations or the Obligations of the other Banks; instead, such holder must bid in cash only; provided that this provision is for the sole benefit of the Agents and the Banks and shall not inure to the benefit of the Parent or any of its Subsidiaries. However, in any such foreclosure proceeding, the Administrative Agent may (but shall not be obligated to) submit a bid for all Banks (including itself) in the form of a credit against the Notes of all of the Banks, and the Administrative Agent or its designee may (but shall not be obligated to) accept title to such collateral for and on behalf of all Banks. 12.2 Reliance by Agents. Each of the Agents shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telegram or cable) believed by them to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel (which may be counsel for the Company and/or the Parent and/or any Subsidiary of the Parent), independent accountants and other experts selected by any Agent. As to any matters not expressly provided for by this Agreement, the Bankers' Acceptances, the Letters of Credit, or any other Loan Document, the Agents shall in all cases be fully protected in acting, or in refraining from acting, hereunder and thereunder in accordance with instructions of the Majority Banks (or, where unanimous consent is required by the terms hereof or of the other Loan Documents, all of the Banks), and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. Pursuant to instructions of the Majority Banks (except as otherwise provided in Section 13.4 hereof), the Administrative Agent shall have the authority to execute releases of any Liens created by the Loan Documents on behalf of the Banks without the joinder of any Bank. 12.3 Defaults. The Agents shall not be deemed to have knowledge of the occurrence of a Default unless they have received notice from a Bank or the Company specifying such Default and stating that such notice is a "Notice of Default"; provided, however, that the Paying Agent shall be deemed to have knowledge of the non-payment of principal of or interest on Loans or the full face amount of outstanding Bankers' Acceptances or Reimbursement Obligations at the time of such non-payment. In the event that the Administrative Agent receives such a notice of the occurrence of a Default, the Administrative Agent shall give prompt notice thereof to the Banks. The Paying Agent shall give each Bank prompt notice to the Banks of each non-payment of principal of or interest on Loans, the full face amount of outstanding Bankers' Acceptances or Reimbursement Obligations. The Administrative Agent shall (subject to Section 12.7 hereof) take such action with respect to such Default as shall be directed by the Majority Banks and within its rights under the Loan Documents and at law or in equity, provided that, unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, permitted hereby with respect to such Default as it shall deem advisable in the best interests of the Banks and within its rights under the Loan Documents, at law or in equity. 12.4 Rights as a Bank. With respect to their Commitments and the Loans made, Bankers' Acceptances accepted and purchased and Letter of Credit Liabilities, the Agents in their capacities as Banks hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though they were not acting as Agents, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Agents in their individual capacities. The Agents may (without having to account therefor to any Bank) accept deposits from, lend money to and generally engage in any kind of banking, trust, letter of credit, agency or other business with the Parent or its Subsidiaries (and any of their Affiliates) as if they were not acting as Agents, and the Agents may accept fees and other consideration from the Parent or its Subsidiaries (and any of their Affiliates), in addition to the fees heretofore agreed to between the Company and the Agents, for services in connection with this Agreement or otherwise without having to account for the same to the Banks. 12.5 Indemnification. The Banks agree to indemnify the Agents (to the extent not reimbursed under Section 2.2(c), Section 9.7 or Section 13.3 hereof, but without limiting the obligations of the Company under said Sections 2.2(c), 9.7 and 13.3), ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever (including but not limited to, the consequences of the negligence of the Agents) which may be imposed on, incurred by or asserted against the Agents in any way relating to or arising out of this Agreement, the Bankers' Acceptances, the Letters of Credit or any other Loan Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses which the Company is obligated to pay under Sections 2.2(c), 9.8 and 13.3 hereof but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of their agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents, including but not limited to the negligence of the Agents, provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or wilful misconduct of the party to be indemnified. The obligations of the Banks under this Section 12.5 shall survive the termination of this Agreement and the repayment of the Obligations. 12.6 Non-Reliance on Agents and Other Banks. Each Bank agrees that it has received current financial information with respect to the Parent and its Subsidiaries and that it has, independently and without reliance on the Agents or any other Bank and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Parent and its Subsidiaries and decision to enter into this Agreement and that it will, independently and without reliance upon the Agents or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Loan Documents. The Agents shall not be required to keep themselves informed as to the performance or observance by any Relevant Party of this Agreement, the Bankers' Acceptances, the Letters of Credit or any of the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the properties or books of the Parent or its Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agents hereunder, under the Bankers' Acceptances, under the Letters of Credit or the other Loan Documents, the Agents shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Parent or its Subsidiaries (or any of their Affiliates) which may come into the possession of the Agents. 12.7 Failure to Act. Except for action expressly required of the Agents hereunder, under the Bankers' Acceptances, under the Letters of Credit and under the other Loan Documents, the Agents shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless they shall receive further assurances to their satisfaction by the Banks of their indemnification obligations under Section 12.5 hereof against any and all liability and expense which may be incurred by them by reason of taking or continuing to take any such action. 12.8 Resignation or Removal of Agents. Subject to the appointment and acceptance of a successor Agent as provided below, any Agent may resign at any time by giving notice thereof to the Banks and the Company, and any Agent may be removed at any time with or without cause by the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint a successor Agent, provided deposits with such successor Agent shall be insured by the Canada Deposit Insurance Corporation or its successor. If no successor Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or the Majority Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent. Any successor Agent shall be a bank which has an office in Canada and a combined capital and surplus of at least U.S. $250,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. Any successor Paying Agent shall promptly specify by notice to the Company its Payment Office referred to in Sections 3.1 and 5.1. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Section 12 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. Section 13. Miscellaneous. 13.1 Waiver. No waiver of any Default shall be a waiver of any other Default. No failure on the part of any Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law or in equity. 13.2 Notices. All notices and other communications provided for herein (including, without limitation, any modifications of, or waivers or consents under, this Agreement) shall be given or made by telex, telegraph, telecopy (confirmed by mail), cable, mail or other writing and telexed, telecopied, telegraphed, cabled, mailed or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party, at such other address as shall be designated by such party in a notice to the Company and the Administrative Agent given in accordance with this Section 13.2. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly received when transmitted by telex or telecopier during regular business hours, delivered to the telegraph or cable office or personally delivered or, in the case of a mailed notice, three (3) days after deposit in the Canadian mails, postage prepaid, registered mail with return receipt requested (or upon actual receipt, if earlier), in each case given or addressed as aforesaid. 13.3 Indemnification. The Company shall indemnify the Agents, the Banks, and each Affiliate thereof and their respective directors, officers, employees and agents from, and hold each of them harmless against, any and all losses, liabilities, claims or damages to which any of them may become subject (except as provided in clause (c) of this Section 13.3, regardless of whether caused in whole or in part by the simple (but not gross) negligence of the Person indemnified), insofar as such losses, liabilities, claims or damages arise out of or result from any (i) actual or proposed use by the Company of the proceeds of any extension of credit (whether a Loan, Bankers' Acceptance or a Letter of Credit) by any Bank hereunder, (ii) breach by the Company or any other Relevant Party of this Agreement or any other Loan Document, (iii) violation by the Parent or any of its Subsidiaries of any Legal Requirement, including but not limited to those relating to Hazardous Substances, (iv) Liens or security interests previously or hereafter granted on any real or personal property, to the extent resulting from any Hazardous Substance located in, on or under any such property, (v) ownership by the Banks or the Agents of any real or personal property following foreclosure, to the extent such losses, liabilities, claims or damages arise out of or result from any Hazardous Substance located in, on or under such property, including, without limitation, losses, liabilities, claims or damages which are imposed upon Persons under laws relating to or regulating Hazardous Substances solely by virtue of ownership, (vi) Banks' or Agents' being deemed an operator of any such real or personal property by a court or other regulatory or administrative agency or tribunal in circumstances in which neither any of the Agents nor any of the Banks is generally operating or generally exercising control over such property, to the extent such losses, liabilities, claims or damages arise out of or result from any Hazardous Substance located in, on or under such property, (vii) investigation, litigation or other proceeding (including any threatened investigation or proceeding) relating to any of the foregoing, and the Company shall reimburse each Agent, each Bank, and each Affiliate thereof and their respective directors, officers, employees and agents, upon demand, for any expenses (including legal fees) incurred in connection with any such investigation or proceeding or (viii) taxes (excluding income taxes and franchise taxes) payable or ruled payable by any Governmental Authority in respect of the principal and interest of the Loans, the Bankers' Acceptances or any other Loan Document, together with interest and penalties, if any; provided, however, that the Company shall not have any obligations pursuant to this Section 13.3 with respect to any losses, liabilities, claims, damages or expenses (a) arising from or relating solely to events, conditions or circumstances which, as to clauses (iv), (v) or (vi) above, first came into existence or which first occurred after the date on which the Parent or any of its Subsidiaries conveyed to an unrelated third party all of the Parent's or the applicable Subsidiary's rights, titles and interests to the applicable real or personal property (whether by deed, deed-in-lieu, foreclosure or otherwise) other than a conveyance made in violation of any Loan Document, (b) incurred by the Person seeking indemnification by reason of the gross negligence or wilful misconduct of such Person, (c) in the case of liability arising with respect to Bankers' Acceptances, incurred by the Person seeking indemnification by reason of the negligence or wilful misconduct of such Person or (d) resulting from withholding tax liability incurred in connection with payments made by the Company to any Agent, any Bank or any Affiliate thereof. If the Company ever disputes a good faith claim for indemnification under this Section 13.3 on the basis of the proviso set forth in the preceding sentence, the full amount of indemnification provided for shall nonetheless be paid, subject to later adjustment or reimbursement at such time (if any) as a court of competent jurisdiction enters a final judgment as to the applicability of any such exceptions. 13.4 Amendments, Etc. No amendment or waiver of any provision of this Agreement, the Notes or any other Loan Document, nor any consent to any departure by the Company or any other Relevant Party therefrom, shall in any event be effective unless the same shall be agreed or consented to by the Majority Banks and the Company, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, that no amendment, waiver or consent shall, unless in writing and signed by each Bank affected thereby, do any of the following: (a) increase the Commitment of such Bank (it being understood that the waiver of any reduction in the Commitments or any mandatory repayment other than (x) the repayment of all Loans at the end of the Revolving Credit Availability Period and (y) the mandatory reductions of the Commitments provided for in Section 2.3(a) and (z) the mandatory prepayments required by the terms of Section 3.2(b), shall not be deemed to be an increase in any Commitment) or subject the Banks to any additional obligation; (b) reduce the principal of, or interest on, any Loan, Reimbursement Obligation or fee hereunder or the face amount of any outstanding Bankers' Acceptances; (c) postpone any scheduled date fixed for any payment or mandatory prepayment of principal of, or interest on, any Loan, Reimbursement Obligation, fee or the face amount of any outstanding Bankers' Acceptances or other sum to be paid hereunder; (d) change the percentage of any of the Commitments or of the aggregate unpaid principal amount of any of the Loans or the face amount of any outstanding Bankers' Acceptances and Letter of Credit Liabilities, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Agreement; (e) change any provision contained in Sections 2.2(c), 9.7 or 13.3 hereof or this Section 13.4 or Section 6.7 hereof, or (f) release all or substantially all of any security for the obligations of the Company under this Agreement or any Note or all or substantially all of the personal liability of any obligor created under any of the Loan Documents. Anything in this Section 13.4 to the contrary, no amendment, waiver or consent shall be made with respect to Section 12 without the consent of the applicable Agent or Agents affected thereby. 13.5 Successors and Assigns. (a) This Agreement shall be binding upon and inure to the benefit of the Company, the Agents and the Banks and their respective successors and assigns. The Company may not assign or transfer any of its rights or obligations hereunder without the prior written consent of all of the Banks. Each Bank may sell participations to any Person which is a resident of Canada under the Income Tax Act (Canada) in all or part of any Loan, Bankers' Acceptance or Letter of Credit, or all or part of its Notes or Commitments, in which event, without limiting the foregoing, the provisions of Section 6 shall inure to the benefit of each purchaser of a participation and the pro rata treatment of payments, as described in Section 5.2, shall be determined as if such Bank had not sold such participation. In the event any Bank shall sell any participation, such Bank shall retain the sole right and responsibility to enforce the obligations of the Company or any other Relevant Party relating to the Loans, Bankers' Acceptances or Letters of Credit, including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement other than amendments, modifications or waivers with respect to (i) any fees payable hereunder to the Banks and (ii) the amount of principal or the rate of interest payable on, or the dates fixed for the scheduled repayment of principal of, the Loans. (b) Each Bank may assign to one or more Banks or any other Person, in each case which is a resident of Canada under the Income Tax Act (Canada), all or a portion of its interests, rights and obligations under this Agreement, provided, however, that (i) other than in the case of an assignment to another Bank that is, at the time of such assignment, a party hereto or an Affiliate of such Bank which is a resident of Canada under the Income Tax Act (Canada), the Company must give its prior written consent, which consent will not be unreasonably withheld, (ii) the aggregate amount of the Commitment and/or Loans, the face amount of all outstanding Bankers' Acceptances or Letters of Credit of the assigning Bank subject to each such assignment (determined as of the date the Assignment and Acceptance (as defined below) with respect to such assignment is delivered to the Administrative Agent) shall in no event be less than U.S. $10,000,000 (or U.S. $5,000,000 in the case of an assignment to an Affiliate of a Bank or between Banks), (iii) no assignment shall have the effect of reducing the pro rata share of the Loans, the face amount of all outstanding Bankers' Acceptances or Letters of Credit and the Commitments held by the assignor and its Affiliates below U.S. $10,000,000, (iv) notwithstanding any other term or provision of this Agreement, unless the Company shall have otherwise consented in writing (such consent not to be unreasonably withheld), each such assignment shall be pro rata with respect to the Loans, the Bankers' Acceptances, the Letters of Credit and the Commitment of the assignor, and (v) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance in the form of Exhibit F hereto (each an "Assignment and Acceptance") with blanks appropriately completed, together with any Note or Notes subject to such assignment and a processing and recordation fee of U.S. $2,500 paid by the assignee (for which the Company shall have no liability). Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (B) the Bank thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement. (c) By executing and delivering an Assignment and Acceptance, the Bank assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, such Bank assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or any of the other Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant thereto; (ii) such Bank assignor makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Parent or any of its Subsidiaries or the performance or observance by the Company or any other Relevant Party of any of its obligations under this Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 8.6 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon any Agent, such Bank assignor or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents; (v) such assignee appoints and authorizes the Agents to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Agents by the terms hereof, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all obligations that by the terms of this Agreement and the other Loan Documents are required to be performed by it as a Bank. (d) The Administrative Agent shall maintain at its office a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Banks and the Commitments of, and principal amount of the Loans owing to, and the face amount of all Bankers' Acceptances accepted and purchased by, each Bank from time to time (the "Register"). The entries in the Register shall be conclusive, in the absence of manifest error, and the Company, the Agents and the Banks may treat each person the name of which is recorded in the Register as a Bank hereunder for all purposes of this Agreement and the other Loan Documents. The Register shall be available for inspection by the Company or any Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and the assignee thereunder together with any Note or Notes subject to such assignment, the written consent to such assignment executed by the Company and the fee payable in respect thereto, the Administrative Agent shall, if such Assignment and Acceptance has been completed with blanks appropriately filled, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Company. Within five Business Days after receipt of notice, the Company, at its own expense, shall execute and deliver to the Administrative Agent in exchange for the surrendered Notes new Notes to the order of such assignee in an amount equal to the Commitments and/or Loans or the face amount of outstanding Bankers' Acceptances or Letters of Credit assumed by it pursuant to such Assignment and Acceptance and, if the assigning Bank has retained Commitments and/or Loans hereunder, new Notes to the order of the assigning Bank in an Amount equal to the Commitment and/or Loans retained by it hereunder. Such new Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the respective Note. Thereafter, such surrendered Notes shall be marked renewed and substituted and the originals delivered to the Company (with copies, certified by the Company as true, correct and complete, to be retained by the Administrative Agent). (f) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 13.5, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Parent or its Subsidiaries furnished to such Bank by or on behalf of the Parent or its Subsidiaries; provided, however, that, prior to any such disclosure, the Parent shall have consented thereto, which consent shall not be unreasonably withheld, and each such assignee or participant, or proposed assignee or participant, shall execute an agreement whereby such assignee or participant shall agree to preserve the confidentiality of any Confidential Information (defined in Section 13.12) on terms substantially the same as those provided in Section 13.12. (g) The Company will have the right to consent to any material intercreditor arrangements in connection with an assignment by any Bank of any interest, right or obligation under this Agreement which is not pro rata with respect to the Loans, or the face amount of outstanding Bankers' Acceptances, the Letters of Credit and the Commitment of the assignor and the Company may deny its consent to any such arrangements which, in the reasonable judgement of the Company, would adversely affect the Company in a material respect. 13.6 Limitation of Interest. The Company and the Banks intend to strictly comply with all applicable laws, including applicable usury laws. Accordingly, the provisions of this Section 13.6 shall govern and control over every other provision of this Agreement or any other Loan Document which conflicts or is inconsistent with this Section, even if such provision declares that it controls. As used in this Section, the term "interest" includes the aggregate of all charges, fees, benefits or other compensation which constitute interest under applicable law, provided that, to the maximum extent permitted by applicable law, (a) any non-principal payment shall be characterized as an expense or as compensation for something other than the use, forbearance or detention of money and not as interest, and (b) all interest at any time contracted for, reserved, charged or received shall be amortized, prorated, allocated and spread, in equal parts during the full term of the Obligations. In no event shall the Company or any other Person be obligated to pay, or any Bank have any right or privilege to reserve, receive or retain, (a) any interest in excess of the maximum amount of nonusurious interest permitted under the laws of the Province of Alberta or the applicable laws (if any) of Canada or of any other applicable jurisdiction, or (b) total interest in excess of the amount which such Bank could lawfully have contracted for, reserved, received, retained or charged had the interest been calculated for the full term of the Obligations at the Highest Lawful Rate. On each day, if any, that the interest rate (the "Stated Rate") called for under this Agreement or any other Loan Document exceeds the Highest Lawful Rate, the rate at which interest shall accrue shall automatically be fixed by operation of this sentence at the Highest Lawful Rate for that day, and shall remain fixed at the Highest Lawful Rate for each day thereafter until the total amount of interest accrued equals the total amount of interest which would have accrued if there were no such ceiling rate as is imposed by this sentence. Thereafter, interest shall accrue at the Stated Rate unless and until the Stated Rate again exceeds the Highest Lawful Rate when the provisions of the immediately preceding sentence shall again automatically operate to limit the interest accrual rate. The daily interest rates to be used in calculating interest at the Highest Lawful Rate shall be determined by dividing the applicable Highest Lawful Rate per annum by the number of days in the calendar year for which such calculation is being made. None of the terms and provisions contained in this Agreement or in any other Loan Document which directly or indirectly relate to interest shall ever be construed without reference to this Section 13.6, or be construed to create a contract to pay for the use, forbearance or detention of money at an interest rate in excess of the Highest Lawful Rate. If the term of any Obligation is shortened by reason of acceleration of maturity as a result of any Default or by any other cause, or by reason of any required or permitted prepayment, and if for that (or any other) reason any Bank at any time, including but not limited to, the stated maturity, is owed or receives (and/or has received) interest in excess of interest calculated at the Highest Lawful Rate, then and in any such event all of any such excess interest shall be canceled automatically as of the date of such acceleration, prepayment or other event which produces the excess, and, if such excess interest has been paid to such Bank, it shall be credited pro tanto against the then-outstanding principal balance of the Company's obligations to such Bank, effective as of the date or dates when the event occurs which causes it to be excess interest, until such excess is exhausted or all of such principal has been fully paid and satisfied, whichever occurs first, and any remaining balance of such excess shall be promptly refunded to its payor. 13.7 Interest Act (Canada); Interest Generally. For the purposes of this Agreement, the Notes and the other Loan Documents, whenever interest or fees to be paid hereunder are to be calculated on the basis of a year of 365 or 360 days, the yearly rate of interest to which the rate determined pursuant to such calculation is equivalent is the rate so determined multiplied by the actual number of days in the 12 month period commencing on the first day of the period for which such calculation is made and divided by 365 or 360, as applicable. The theory of deemed reinvestment shall not apply to the calculation of interest or payment of fees or other amounts hereunder or under the Notes or under the other Loan Documents, notwithstanding anything contained in this Agreement or in the Notes or in the other Loan Documents, or in any other instrument referred to herein or in the Notes or in the other Loan Documents, and all interest and fees payable by the Borrower to the Lender shall accrue from day to day and be computed as described herein or in the Notes or in the other Loan Documents in accordance with the "nominal rate" method of interest calculation. To the extent permitted by law, any provision of the Judgment Interest Act (Alberta) and the Interest Act (Canada) which restricts the rate of interest on any judgment debt shall be inapplicable to this Agreement and is hereby waived by the Borrower. 13.8 Certain Saskatchewan Legislation. The Land Contracts (Actions) Act of the Province of Saskatchewan shall have no application to any action, as defined in the said Land Contracts (Actions) Act, with respect to this Agreement; and the Limitation of Civil Rights Act in the Province of Saskatchewan shall have no application to this Agreement. The Company agrees that the provisions of both the Land Contracts (Actions) Act and the Limitation of Civil Rights Act are hereby waived. 13.9 Survival. The obligations of the Company under Sections 2.2(c), 6, 9.7 and 13.3 hereof and the obligations of the Banks under Section 13.6 hereof shall survive the repayment of the Loans and Reimbursement Obligations and the termination of the Commitments and the Letters of Credit. 13.10 Captions. Captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 13.11 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement and any of the parties hereto may execute this Agreement by signing any such counterpart. 13.12 Governing Law. This Agreement and the Notes and the Bankers' Acceptances and (except as therein provided) the other Loan Documents are performable in Calgary, Alberta, Canada, which shall be a proper place of venue for suit on or in respect thereof. The Company irrevocably agrees that any legal proceeding in respect of this Agreement or the other Loan Documents shall be brought in the courts of the Province of Alberta and the courts of appeal therefrom (collectively, the "Specified Courts"). The Company hereby irrevocably submits to the nonexclusive jurisdiction of such courts. The Company hereby irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to any Loan Document brought in any Specified Court, and hereby further irrevocably waives any claims that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. The Company further (1) agrees to designate and maintain an agent for service of process in Calgary, Alberta, Canada in connection with any such suit, action or proceeding and to deliver to the Administrative Agent evidence thereof and (2) irrevocably consents to the service of process out of any of the aforementioned courts in any such suit, action or proceeding by the mailing of copies thereof by registered mail, return receipt requested, postage prepaid, to the Company at its address as provided in this Agreement or as otherwise provided by governing law. Nothing herein shall affect the right of any Agent or any Bank to commence legal proceedings or otherwise proceed against the Company in any jurisdiction or to serve process in any manner permitted by applicable law. The Company agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. THIS AGREEMENT AND (EXCEPT AS THEREIN PROVIDED) THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS (OTHER THAN THE CONFLICT OF LAWS RULES) OF THE PROVINCE OF ALBERTA AND OF CANADA FROM TIME TO TIME IN EFFECT. 13.13 Severability. Whenever possible, each provision of the Loan Documents shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of any Loan Document shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions of such Loan Document shall not be affected or impaired thereby. 13.14 Confidential Information. Each Agent and each Bank separately agrees that: (a) As used herein, the term "Confidential Information" means written information about the Parent or its Subsidiaries or the transactions contemplated herein furnished by the Parent or its Subsidiaries to the Agents and/or the Banks which is specifically designated as confidential by the Parent; Confidential Information, however, shall not include information which (i) was publicly known or available, or otherwise available on a non-confidential basis to any Bank, at the time of disclosure from a source other than the Parent or its Subsidiaries, (ii) subsequently becomes publicly known through no act or omission by such Bank, (iii) otherwise becomes available on a non-confidential basis to any Bank other than through disclosure by the Parent or its Subsidiaries or (iv) has been in the possession of any Bank for a period of more than two years from the date on which such information originally was furnished to such Bank by the Parent or its Subsidiaries, unless the Parent shall have requested the Agents and the Banks in writing, at least 30 days prior to the end of such two-year period, to maintain the confidentiality of such information for another two (2) year period (or for successive two (2) year periods); provided that the Parent shall not unreasonably withhold its consent to a request made after the initial two (2) year period to eliminate information from "Confidential Information". (b) Each Agent and each Bank agrees that it will take normal and reasonable precautions to maintain the confidentiality of any Confidential Information furnished to such Person; provided, however, that such Person may disclose Confidential Information (i) upon the Parent's consent; (ii) to its auditors; (iii) when required by any Legal Requirement; (iv) as may be required or appropriate in any report, statement or testimony submitted to any Governmental Authority having or claiming to have jurisdiction over it; (v) to such Person's and its Subsidiaries' or Affiliates' officers, directors, employees, agents, representatives and professional consultants in connection with this Agreement or administration of the Loans and Letters of Credit; (vi) as may be required or appropriate, should such Bank elect to assign or grant participations in any of the Obligations in connection with (1) the enforcement of the Obligations to any such Person under any of the Loan Documents or related agreements, or (2) any potential transfer pursuant to this Agreement of any Obligation owned by any Bank (provided any potential transferee has been approved by the Company if required by this Agreement, which approval shall not be unreasonably withheld, and has agreed in writing to be bound by substantially the same provisions regarding Confidential Information contained in this Section); (vii) as may be required or appropriate in response to any summons or subpoena or in connection with any litigation or administrative proceeding; (viii) to any other Bank; (ix) to the extent reasonably required in connection with the exercise of any remedy hereunder or under the other Loan Documents; or (x) to correct any false or misleading information which may become public concerning such Person's relationship to the Parent or its Subsidiaries. 13.15 Amendment and Restatement. This Agreement amends and restates in its entirety that certain Credit Agreement dated as of December 30, 1993 executed by and among the Company, the Banks and the Agents, as amended. 13.16 Intercreditor Agreement. Reference is hereby made to the Intercreditor Agreement, which provides for certain matters relating to both the Obligations and the U.S. Facility. To the extent of any conflict between the terms hereof and the terms of the Intercreditor Agreement, the Intercreditor Agreement shall control. The execution and delivery by the Administrative Agent of the Intercreditor Agreement on behalf of the Banks is hereby ratified and confirmed by each of the Banks. Any Bank that becomes a party to this Agreement after the date hereof agrees to be bound by the terms and provisions of the Intercreditor Agreement. 13.17 Judgement Currency. Notwithstanding that this Agreement is governed by the laws of the Province of Alberta, Canada, monies outstanding in connection herewith may be stipulated in terms of lawful money of the United States of America (which stipulation or expression is of the essence) and payments to be made in regard thereto pursuant to this Agreement, or otherwise, are and are intended to be payable in lawful money of the United States of America; and to the extent permitted by law any judgment in respect of any such monies outstanding as aforesaid or any obligation pertaining thereto arising under this Agreement may be obtained or enforced either in lawful money of the United States of America or the equivalent in lawful money of Canada, as the Administrative Agent may elect, and the Administrative Agent shall to the extent permitted by law be entitled to such election and the benefit (if any) from the consequent conversion of currency at the date of payment or enforcement of the judgment. Any such payment obligation stipulated or expressed in lawful money of the United States of America shall not be discharged by an amount paid in lawful money of Canada, whether pursuant to a judgment or otherwise, to the extent that the amount so paid on prompt conversion into lawful money of the United States of America does not, after deduction of any and all premiums and/or costs of exchange paid or payable by the Administrative Agent in connection with such conversion, yield the required amount of payment expressed in terms of lawful money of the United States of America. In the event that any payment in lawful money of Canada in respect of a payment in lawful money of Canada in respect of a payment obligation stipulated or expressed in terms of lawful money of the United States of America as aforesaid, whether pursuant to a judgment or otherwise, upon conversion as aforesaid does not, after deduction of any and all premiums and/or costs of exchange paid or payable by any Agent or any Bank in connection with such conversion, yield the required amount expressed in terms of lawful money of the United States of America, the Administrative Agent shall, on behalf of and for the benefit of the affected Person, have a separate cause of action for the additional amount required to yield the required amount expressed in terms of lawful money of the United States of America. 13.18 Withholding Tax Remittances. If any withholding for, or on account of, any present or future tax, duty or charge of whatsoever nature is imposed or levied by or on behalf of any taxing jurisdiction or authority (together with any interest and penalties thereon and additions thereto) in respect of any payments to be made pursuant to this Agreement or the Notes, the Company shall be entitled to withhold and remit such payment to the applicable taxing authority whereupon such payment, for the purposes of this Agreement and the Notes, shall be deemed to have been made as required hereunder or under the Notes, notwithstanding anything contained elsewhere in this Agreement or in the Notes. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. SEAGULL ENERGY CANADA LTD. By: /s/William L. Transier Name: William L. Transier Title: Senior Vice President and Chief Financial Officer Address for Notices: 1001 Fannin, Suite 1700 Houston, Texas 77002 Attention: Steve Thorington with a copy to: 2900 Western Canadian Place 707 8th Avenue S.W. Calgary, Alberta T2P 2M7 Attention: Mr. Lorne Martin THE CHASE MANHATTAN BANK OF CANADA, as Arranger, as Administrative Agent and as a Bank By: /s/ DG McGorman Name:DG McGorman Commitment: Title: Vice President U.S. $20,000,000 By: /s/ Owen G. Roberts Name: Owen G. Roberts Title: Vice President Address for Notices: First Canadian Place 100 King Street West, Suite 6900 Toronto, Ontario M5X 1A4 Attention: Mr. David McGorman with copies to: The Chase Manhattan Bank 1 Chase Manhattan Plaza, 8th Floor New York, New York 10081 Attention: Agent Services and Texas Commerce Bank National Association 712 Main Street Houston, Texas 77002 Attention: Manager, Energy Division THE BANK OF NOVA SCOTIA, as Paying Agent, as Co-Agent and as a Bank By: /s/ J.G. McNeil Commitment: Name: J.G. McNeil Title: Unit Head U.S. $22,500,000 By: /s/ R.D. Lee Name: R.D. Lee Title: Senior Manager Address for Notices: International Banking Division-Loan Accounting 14th Floor 44 King Street West Toronto, Ontario CANADA M5H 1H1 Attention: Assistant Manager with a copies to: The Bank of Nova Scotia Corporate Banking Calgary Suite #3820, 700-2nd Street S.W. Calgary, Alberta CANADA T2P 2N7 Attention: Vice President and to: The Bank of Nova Scotia Suite 3000, 1100 Louisiana Houston, Texas 77002 Attention: Mr. Mark A. Ammerman CANADIAN IMPERIAL BANK OF COMMERCE, as Co-Agent and as a Bank By: /s/ David J. Swain Commitment: Name: David J. Swain Title: Managing Director U.S. $22,500,000 Address for Notices: Oil and Gas Group 10th Floor, 855 2nd Street, S.W. Calgary, Alberta CANADA T2P 2P2 Attention: Director with a copy to: Canadian Imperial Bank of Commerce Two Houston Center, Suite 1200 909 Fannin Street Houston, Texas 77010 Attention: Brian Myers ABN AMRO BANK CANADA By: /s/ Jane Taylor Commitment: Name: Jane Taylor Title: Assistant Vice President U.S. $10,000,000 By: /s/ P.K. Chan Name: P.K. Chan Title:Vice President, Credit Address for Notices: 2500-650 West Georgia Street Vancouver, British Columbia CANADA V6B 4N8 Attention: Jane Taylor with a copy to: ABN AMRO Bank N.V., Houston Agency Three Riverway, Suite 1700 Houston, Texas 77056 Attention: Ms. Cheryl Lipshutz FIRST CHICAGO NBD BANK, CANADA By: /s/ Jeremiah A. Hynes Commitment: Name: Jeremiah A. Hynes Title: First Vice President U.S. $5,000,000 Address for Notices: BCE Place 161 Bay Street P.O. Box 613 Toronto, Ontario CANADA M5J 2S1 Attention: Ms. Janet Beadle with a copy to: First National Bank of Chicago 1100 Louisiana, Suite 3200 Houston, Texas 77002 Attention: Mr. Dennis Petito SOCIETE GENERALE (CANADA) By: Commitment: Name: Title: U.S. $5,000,000 Address for Notices: Scotia Plaza 100 Yonge Street, Suite 1002 Toronto, Ontario CANADA M5C 2W1 Attention: Mr. Michael Klopchic with a copy to: Societe Generale, Southwest Agency 1111 Bagby, Suite 2020 Houston, Texas 77002 Attention: Mr. Richard Erbert BANK OF MONTREAL By: /s/ Randall Johnson Commitment: Name: Randall Johnson Title: Managing Director U.S. $10,000,000 Address for Notices: 360-7th Avenue S.W. 24th Floor Calgary, Alberta CANADA T29 3N9 Attention: Ms. Marge Wassenaar MELLON BANK By: /s/ Joseph Cavanaugh Commitment: Name: Joseph Cavanaugh Title: Vice President U.S. $5,000,000 Address for Notices: Suite 3200 Royal Trust Tower T-D Centre Toronto, Ontario CANADA M5K 1K2 Attention: Mr. Joseph Cavanaugh EX-10.3 4 1996 EXECUTIVE INCENTIVE PLAN SEAGULL ENERGY CORPORATION 1996 EXECUTIVE INCENTIVE PLAN (As revised and approved May 13, 1996) Background The 1996 Executive Incentive Plan (the "Incentive Plan") for Seagull Energy Corporation is designed to motivate key employees of the Company to achieve tough, but realistic, performance goals and to reward those employees who perform at or above the expected level. The Incentive Plan defines participants, award opportunities and performance goals for the 1996 performance year. It is, of course, based upon the 1996 Operating Plan (the "Operating Plan") and is designed to maximize performance incentives while allowing for the recognition of individual efforts through a significant discretionary component. Participation Approximately 125 key employees are or may become participants in the Incentive Plan. They are officers or individuals whose positions have been valued in the salary structure in and above Grade 12. These are the persons responsible for the annual and longer-term success of the company. Timing of Payments Seventy-five percent of any Incentive Plan award is paid to the recipient early in the year following the performance year, and the remaining 25% in the next year. In this case, the performance year is 1996. The award will be determined and the first 75% increment paid in early 1997, and the remaining installment in early 1998. The recipient must be an employee on the payment dates in order to receive any of the respective payments. Award Opportunities Annual incentive targets are expressed as a percentage of total salary earned during a given year and can increase to double the targeted amounts or decrease to zero, relative to the achievement of predetermined performance goals and subject to senior management and Board of Director discretion at year-end. The Compensation Committee of the Board reserves the right to modify the performance measures and award levels specified in the objective components of the Incentive Plan if presently unforeseen circumstances should occur during the year which invalidate any of the material assumptions that underlie the Operating Plan, or if, in the opinion of the Compensation Committee, such modifications are required to avoid a result that is inequitable to either the company or the Incentive Plan participants. Performance Measures The performance measures for the Incentive Plan are summarized on pages 3-5. Four performance criteria are included with the following weightings: Pre-tax cash flow from operations 25% weight Pre-tax cash flow from operations to revenue ratio to E&P peers 25% weight Discretionary individual performance assessment 25% weight Company stock performance assessment 25% weight The first component, pre-tax cash flow from operations ("PCFO"), is defined as earnings before income taxes, plus operating and non-operating depreciation, depletion and amortization, plus pre-tax incentive compensation expense, and is based on actual corporate performance for the year as compared to the Company's Operating Plan projection of PCFO. The second component compares the ratio of PCFO from E&P to E&P revenue with the same measures for our E&P peers. The definition of PCFO is the same as described above, except incentive compensation expenditures are not added back to the results, and the data is for E&P only. The PCFO and revenue figures will be for the sum of the last four quarters ending September 30 of the performance year. The third component, discretionary individual performance assessment, will be determined individually and subjectively based on the respective participant's individual job performance. The fourth component, Company stock performance assessment, will be determined by subjectively comparing the Company's stock price performance to the average stock price performance by a selected group of "peer companies" over three separate time periods. The time periods are: year-end 1995 to year-end 1996; rolling three-year average from year-end 1993 to year-end 1996; and rolling five-year average from year-end 1991 to year-end 1996. Each performance component will be measured at year-end independently of the other. At that time, the Chief Executive Officer will recommend specific awards, subject to final approval of each element of the total awards by the Compensation Committee and ultimately the Board of Directors. Performance Weightings: 25% on pre-tax cash flow from operations 25% on pre-tax cash flow from operations to revenue ratio to E&P peers 25% on subjective individual performance assessment 25% on subjective Company stock performance assessment I. Objective Performance Assessment - 50%: Pre-Tax Cash Flow from Operations ("PCFO") - 25% The performance award will be calculated as follows:
Column 1 Column 2 Column 3 Column 4 -------- -------- -------- -------- Pre-Tax Cash Percentage of Percentage of PCFO Percentage of Total Flow From Operating Plan Target Award Target Award Operations (1) Projection (2) Earned (3) Earned (3) -------------- -------------- ---------- ---------- 97,988 85 0 0.00 103,752 90 25 6.25 109,516 95 50 12.50 115,280 100 100 25.00 121,044 105 110 27.50 126,808 110 120 30.00 132,572 115 130 32.50 138,336 120 140 35.00 144,100 125 150 37.50 149,864 130 160 40.00 155,628 135 170 42.50 161,392 140 180 45.00 167,156 145 190 47.50 172,920 150 200
(1) Earnings before income taxes plus operating and non-operating depreciation, depletion and amortization and also plus pre-tax incentive compensation expense (dollars in thousands). (2) If subsequent events over the course of the performance year invalidate any of the basic assumptions in the Operating Plan, then the original Operating Plan projections will be revised to conform the Operating Plan assumptions to reality. The initial PCFO performance criteria for the Incentive Plan shown in Column 1 will then be adjusted by applying the percentages shown in Column 2 to the revised Operating Plan projection of PCFO. (3) If, after the actual PCFO for the performance for the year is determined, it falls within the ranges shown in Column 1, the exact incentive award percentages from Columns 3 and 4 will be calculated by interpolation. Pre-Tax Cash Flow from Operations ("PCFO") to revenue ratio to E&P peers - 25% Pre-tax cash flow will be defined in the same way as in the other objective measures of the plan (i.e., pre-tax income plus amortization, depreciation and depletion). In order to allow the appropriate performance comparisons to industry peers, only pre-tax cash flow from the E&P segment is considered in the calculation. Further, pre-tax cash flow levels will be expressed as a percent of E&P revenues (which are defined as gross sales less write-offs). The PCFO pre-tax cash flow and revenue figures will be for the sum of the last four quarters ending September 30 of the performance year. Performance on the pre-tax cash flow to revenue ratio will be assessed relative to the industry peer group used in the Company's Total Shareholder Return Graph in the proxy statement. As a result, the Company will be measured against other companies that face volatility in the price of energy. The performance award will be calculated as follows:
Percentage of PCFO Percentage of Total PCFO Relative Against Peers Target Target Award to Peers (1) Award Earned Earned Less than 25th percentile 0 0 40th percentile 40 10 50th percentile 80 20 55th percentile 100 25 60th percentile 120 30 70th percentile 160 40 80th percentile 200 50 (1) Awards for performance between stated levels will be calculated using straight-line interpolation.
II. Discretionary Performance Assessment - 50% Both the discretionary individual performance assessment and the Company stock performance assessment will be determined informally and subjectively. 25% on the respective participant's individual job performance, based primarily on the extent to which individual and collective goals and objectives established at the beginning of the year are achieved. 25% on the Company's stock price performance based on rolling five-year and three-year averages and year-end 1995 to year-end 1996 comparisons with the average stock price performance by a selected group of "peer companies" over the same three periods. The five-year and three-year comparative calculations will be done on a "total return" basis, weighted for variances in beginning market capitalization and in all respects consistent with the SEC proxy disclosure rules. Gatekeeper Performance Level For this component, regardless of performance against the peer group, if the five-year stock price performance has not resulted in a positive return, no award will be made. At year-end, the Chief Executive Officer will counsel with his direct reports in completing discretionary performance assessments for each participant and recommend specific awards, which will be subject to final approval by the Compensation Committee and ultimately the Board of Directors. Total Plan Payout Potential Maximum potential is 200% (1) Target goal is 100% (1) Minimum potential is 0% (1) (1) Expressed as a percentage of the executive's targeted incentive opportunity as defined in the Incentive Plan. SEAGULL ENERGY CORPORATION PERFORMANCE MEASURES FOR THE 1996 EXECUTIVE INCENTIVE PLAN EX-10.4 5 AMENDMENT TO STOCK OPTION AGREEMENTS (SEAGULL) AMENDMENT TO STOCK OPTION AGREEMENT(S) WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has previously adopted the SEAGULL ENERGY CORPORATION 1981 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1981 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1990 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1993 STOCK OPTION PLAN and the SEAGULL ENERGY CORPORATION 1995 OMNIBUS STOCK PLAN (collectively, the "Option Plans"); and WHEREAS, certain nonstatutory stock options and incentive stock options (collectively, "Options") have heretofore been granted to the optionee, a full-time active employee of the Company (the "Employee"), that are currently outstanding under the Option Plans, each of such Options being listed on the schedule attached hereto and evidenced by a Nonstatutory Stock Option Agreement or an Incentive Stock Option Agreement (collectively, the "Agreements"); and WHEREAS, the Employee's employment with the Company has been terminated in connection with the consummation of the merger contemplated by the Agreement and Plan of Merger by and among Seagull Energy Corporation, GNR Merger Corporation and Global Natural Resources Inc. dated as of July 22, 1996, and the Company desires to amend the Agreements in certain respects; NOW, THEREFORE, the Agreements shall be amended as follows, effective as of _______________ (Employee's employment termination date): 1. The vesting schedule contained in the Agreements shall be waived and all Options outstanding under such Agreements shall be exercisable in full. 2. Notwithstanding any provision in the Agreements to the contrary, all Options shall continue to be exercisable by the Employee, his estate or the person who acquires such Options by will or the laws of descent and distribution, at any time on or before the first anniversary of Employee's employment termination date. 3. As amended hereby, the Agreements are specifically ratified and reaffirmed. IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed by one of its officers thereunto duly authorized, and the Employee has executed this amendment, effective as of ________________ (Employee's employment termination date). SEAGULL ENERGY CORPORATION By _______________________ -------------------------- Employee EX-10.5 6 AMENDMENT TO STOCK OPTION AGREEMENTS (SEAGULL) AMENDMENT TO STOCK OPTION AGREEMENT(S) WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has previously adopted the SEAGULL ENERGY CORPORATION 1981 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1981 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1990 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1993 STOCK OPTION PLAN and the SEAGULL ENERGY CORPORATION 1995 OMNIBUS STOCK PLAN (collectively, the "Option Plans"); and WHEREAS, certain nonstatutory stock options and incentive stock options (collectively, "Options") have heretofore been granted to the optionee, a full-time active employee of the Company (the "Employee"), that are currently outstanding under the Option Plans, each of such Options being listed on the schedule attached hereto and evidenced by a Nonstatutory Stock Option Agreement or an Incentive Stock Option Agreement (collectively, the "Agreements"); and WHEREAS, the Employee's employment with the Company has been terminated in connection with the consummation of the merger contemplated by the Agreement and Plan of Merger by and among Seagull Energy Corporation, GNR Merger Corporation and Global Natural Resources Inc. dated as of July 22, 1996, and the Company desires to amend the Agreements in certain respects; NOW, THEREFORE, the Agreements shall be amended as follows, effective as of _______________ (Employee's employment termination date): 1. The vesting schedule contained in the Agreements shall be waived and all Options outstanding under such Agreements shall be exercisable in full. 2. Notwithstanding any provision in the Agreements to the contrary, all Options shall continue to be exercisable by the Employee, his estate or the person who acquires such Options by will or the laws of descent and distribution, at any time on or before the first anniversary of Employee's employment termination date. 3. As amended hereby, the Agreements are specifically ratified and reaffirmed. IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed by one of its officers thereunto duly authorized, and the Employee has executed this amendment, effective as of ________________ (Employee's employment termination date). SEAGULL ENERGY CORPORATION By _______________________ -------------------------- Employee EX-10.6 7 AMENDMENT TO STOCK OPTION AGREEMENTS (SEAGULL) AMENDMENT TO STOCK OPTION AGREEMENT(S) WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has previously adopted the SEAGULL ENERGY CORPORATION 1981 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1981 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1990 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1993 STOCK OPTION PLAN and the SEAGULL ENERGY CORPORATION 1995 OMNIBUS STOCK PLAN (collectively, the "Option Plans"); and WHEREAS, certain nonstatutory stock options and incentive stock options (collectively, "Options") have heretofore been granted to the optionee, a full-time active employee of the Company (the "Employee"), that are currently outstanding under the Option Plans, each of such Options being listed on the schedule attached hereto and evidenced by a Nonstatutory Stock Option Agreement or an Incentive Stock Option Agreement (collectively, the "Agreements"); and WHEREAS, the Employee's employment with the Company has been terminated in connection with the consummation of the merger contemplated by the Agreement and Plan of Merger by and among Seagull Energy Corporation, GNR Merger Corporation and Global Natural Resources Inc. dated as of July 22, 1996, and the Company desires to amend the Agreements in certain respects; NOW, THEREFORE, the Agreements shall be amended as follows, effective as of _______________ (Employee's employment termination date): 1. The vesting schedule contained in the Agreements shall be waived and all Options outstanding under such Agreements shall be exercisable in full. 2. Notwithstanding any provision in the Agreements to the contrary, all Options shall continue to be exercisable by the Employee, his estate or the person who acquires such Options by will or the laws of descent and distribution, at any time on or before the first anniversary of Employee's employment termination date. 3. As amended hereby, the Agreements are specifically ratified and reaffirmed. IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed by one of its officers thereunto duly authorized, and the Employee has executed this amendment, effective as of ________________ (Employee's employment termination date). SEAGULL ENERGY CORPORATION By _______________________ -------------------------- Employee EX-10.7 8 AMENDMENT TO STOCK OPTION AGREEMENTS (SEAGULL) AMENDMENT TO STOCK OPTION AGREEMENT(S) WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has previously adopted the SEAGULL ENERGY CORPORATION 1981 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1981 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1990 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1993 STOCK OPTION PLAN and the SEAGULL ENERGY CORPORATION 1995 OMNIBUS STOCK PLAN (collectively, the "Option Plans"); and WHEREAS, certain nonstatutory stock options and incentive stock options (collectively, "Options") have heretofore been granted to the optionee, a full-time active employee of the Company (the "Employee"), that are currently outstanding under the Option Plans, each of such Options being listed on the schedule attached hereto and evidenced by a Nonstatutory Stock Option Agreement or an Incentive Stock Option Agreement (collectively, the "Agreements"); and WHEREAS, the Employee's employment with the Company has been terminated in connection with the consummation of the merger contemplated by the Agreement and Plan of Merger by and among Seagull Energy Corporation, GNR Merger Corporation and Global Natural Resources Inc. dated as of July 22, 1996, and the Company desires to amend the Agreements in certain respects; NOW, THEREFORE, the Agreements shall be amended as follows, effective as of _______________ (Employee's employment termination date): 1. The vesting schedule contained in the Agreements shall be waived and all Options outstanding under such Agreements shall be exercisable in full. 2. Notwithstanding any provision in the Agreements to the contrary, all Options shall continue to be exercisable by the Employee, his estate or the person who acquires such Options by will or the laws of descent and distribution, at any time on or before the first anniversary of Employee's employment termination date. 3. As amended hereby, the Agreements are specifically ratified and reaffirmed. IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed by one of its officers thereunto duly authorized, and the Employee has executed this amendment, effective as of ________________ (Employee's employment termination date). SEAGULL ENERGY CORPORATION By _______________________ -------------------------- Employee EX-10.8 9 FORM OF AMENDMENT TO STOCK OPTION AGREEMENTS (GNR) AMENDMENT TO STOCK OPTION AGREEMENT(S) WHEREAS, GLOBAL NATURAL RESOURCES INC. ("Global") has previously adopted the GLOBAL NATURAL RESOURCES INC. KEY EMPLOYEE STOCK OPTION PLAN (1989) and the GLOBAL NATURAL RESOURCES INC. 1992 STOCK OPTION PLAN (collectively, the "Global Option Plans"); and WHEREAS, Section 3.3 of the Agreement and Plan of Merger (the "Merger") by and among Seagull Energy Corporation ("Seagull"), GNR Merger Corporation and Global Natural Resources Inc. dated as of July 22, 1996 (the "Merger Agreement") provides that options outstanding under the Global Option Plans (the "Global Options") shall be assumed by Seagull and become options to purchase Seagull common stock in accordance with the provisions thereof; and WHEREAS, in conjunction with the Merger, Seagull agreed to adopt a policy (the "Policy") of vesting and extending the exercise period of Global Options granted to Retained Employees (as such term is defined in the Merger Agreement) who terminate employment with Global or Seagull on or before the second anniversary of the Effective Time (as such term is defined in the Merger Agreement); and WHEREAS, certain nonstatutory stock options (the "Options") have heretofore been granted to the undersigned employee of Global, who is subject to the Policy (the "Employee"), that are currently outstanding under the Global Option Plans, each of such Options being listed on the schedule attached hereto and evidenced by a Nonstatutory Stock Option Agreement (the "Agreements"); and WHEREAS, the Employee's employment with the Company has been terminated and Seagull desires to amend the Agreements in certain respects; NOW, THEREFORE, the Agreements shall be amended as follows, effective as of _______________ (Employee's employment termination date): 1. The vesting schedule contained in the Agreements shall be waived and all Options outstanding under such Agreements shall be exercisable in full. 2. Notwithstanding any provision in the Agreements to the contrary, all Options shall continue to be exercisable by the Employee, his estate or the person who acquires such Options by will or the laws of descent and distribution, at any time on or before the first anniversary of Employee's employment termination date. 3. As amended hereby, the Agreements are specifically ratified and reaffirmed. IN WITNESS WHEREOF, Seagull has caused this amendment to be duly executed by one of its officers thereunto duly authorized, and the Employee has executed this amendment, effective as of ________________ (Employee's employment termination date). SEAGULL ENERGY CORPORATION By _______________________ -------------------------- Employee EX-10.9 10 FORM OF AMENDMENT TO STOCK OPTION AGREEMENTS (GNR) AMENDMENT TO STOCK OPTION AGREEMENT(S) WHEREAS, GLOBAL NATURAL RESOURCES INC. ("Global") has previously adopted the GLOBAL NATURAL RESOURCES INC. KEY EMPLOYEE STOCK OPTION PLAN (1989) and the GLOBAL NATURAL RESOURCES INC. 1992 STOCK OPTION PLAN (collectively, the "Global Option Plans"); and WHEREAS, Section 3.3 of the Agreement and Plan of Merger (the "Merger") by and among Seagull Energy Corporation ("Seagull"), GNR Merger Corporation and Global Natural Resources Inc. dated as of July 22, 1996 (the "Merger Agreement") provides that options outstanding under the Global Option Plans (the "Global Options") shall be assumed by Seagull and become options to purchase Seagull common stock in accordance with the provisions thereof; and WHEREAS, in conjunction with the Merger, Seagull agreed to adopt a policy (the "Policy") of vesting and extending the exercise period of Global Options granted to Retained Employees (as such term is defined in the Merger Agreement) who terminate employment with Global or Seagull on or before the second anniversary of the Effective Time (as such term is defined in the Merger Agreement); and WHEREAS, certain nonstatutory stock options (the "Options") have heretofore been granted to the undersigned employee of Global, who is subject to the Policy (the "Employee"), that are currently outstanding under the Global Option Plans, each of such Options being listed on the schedule attached hereto and evidenced by a Nonstatutory Stock Option Agreement (the "Agreements"); and WHEREAS, the Employee's employment with the Company has been terminated and Seagull desires to amend the Agreements in certain respects; NOW, THEREFORE, the Agreements shall be amended as follows, effective as of _______________ (Employee's employment termination date): 1. The vesting schedule contained in the Agreements shall be waived and all Options outstanding under such Agreements shall be exercisable in full. 2. Notwithstanding any provision in the Agreements to the contrary, all Options shall continue to be exercisable by the Employee, his estate or the person who acquires such Options by will or the laws of descent and distribution, at any time on or before the first anniversary of Employee's employment termination date. 3. As amended hereby, the Agreements are specifically ratified and reaffirmed. IN WITNESS WHEREOF, Seagull has caused this amendment to be duly executed by one of its officers thereunto duly authorized, and the Employee has executed this amendment, effective as of ________________ (Employee's employment termination date). SEAGULL ENERGY CORPORATION By _______________________ -------------------------- Employee EX-10.11 11 AMENDMENT TO STOCK OPTION AGREEMENTS (SEAGULL) AMENDMENT TO STOCK OPTION AGREEMENT(S) WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has previously adopted the SEAGULL ENERGY CORPORATION 1981 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1981 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1990 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1993 STOCK OPTION PLAN and the SEAGULL ENERGY CORPORATION 1995 OMNIBUS STOCK PLAN (collectively, the "Option Plans"); and WHEREAS, certain nonstatutory stock options and incentive stock options (collectively, "Options") have heretofore been granted to the optionee, a full-time active employee of the Company (the "Employee"), that are currently outstanding under the Option Plans, each of such Options being listed on the schedule attached hereto and evidenced by a Nonstatutory Stock Option Agreement or an Incentive Stock Option Agreement (collectively, the "Agreements"); and WHEREAS, the Employee's employment with the Company has been terminated in connection with the consummation of the merger contemplated by the Agreement and Plan of Merger by and among Seagull Energy Corporation, GNR Merger Corporation and Global Natural Resources Inc. dated as of July 22, 1996, and the Company desires to amend the Agreements in certain respects; NOW, THEREFORE, the Agreements shall be amended as follows, effective as of _______________ (Employee's employment termination date): 1. The vesting schedule contained in the Agreements shall be waived and all Options outstanding under such Agreements shall be exercisable in full. 2. Notwithstanding any provision in the Agreements to the contrary, all Options shall continue to be exercisable by the Employee, his estate or the person who acquires such Options by will or the laws of descent and distribution, at any time on or before the first anniversary of Employee's employment termination date. 3. As amended hereby, the Agreements are specifically ratified and reaffirmed. IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed by one of its officers thereunto duly authorized, and the Employee has executed this amendment, effective as of ________________ (Employee's employment termination date). SEAGULL ENERGY CORPORATION By _______________________ -------------------------- Employee EX-10.12 12 AMENDMENT TO STOCK OPTION AGREEMENTS (SEAGULL) AMENDMENT TO STOCK OPTION AGREEMENT(S) WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has previously adopted the SEAGULL ENERGY CORPORATION 1981 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1981 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1990 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1993 STOCK OPTION PLAN and the SEAGULL ENERGY CORPORATION 1995 OMNIBUS STOCK PLAN (collectively, the "Option Plans"); and WHEREAS, certain nonstatutory stock options and incentive stock options (collectively, "Options") have heretofore been granted to the optionee, a full-time active employee of the Company (the "Employee"), that are currently outstanding under the Option Plans, each of such Options being listed on the schedule attached hereto and evidenced by a Nonstatutory Stock Option Agreement or an Incentive Stock Option Agreement (collectively, the "Agreements"); and WHEREAS, the Employee's employment with the Company has been terminated in connection with the consummation of the merger contemplated by the Agreement and Plan of Merger by and among Seagull Energy Corporation, GNR Merger Corporation and Global Natural Resources Inc. dated as of July 22, 1996, and the Company desires to amend the Agreements in certain respects; NOW, THEREFORE, the Agreements shall be amended as follows, effective as of _______________ (Employee's employment termination date): 1. The vesting schedule contained in the Agreements shall be waived and all Options outstanding under such Agreements shall be exercisable in full. 2. Notwithstanding any provision in the Agreements to the contrary, all Options shall continue to be exercisable by the Employee, his estate or the person who acquires such Options by will or the laws of descent and distribution, at any time on or before the first anniversary of Employee's employment termination date. 3. As amended hereby, the Agreements are specifically ratified and reaffirmed. IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed by one of its officers thereunto duly authorized, and the Employee has executed this amendment, effective as of ________________ (Employee's employment termination date). SEAGULL ENERGY CORPORATION By _______________________ -------------------------- Employee EX-10.13 13 FIRST AMENDMENT TO MANAGEMENT STABILITY PLAN FIRST AMENDMENT TO SEAGULL ENERGY CORPORATION MANAGEMENT STABILITY PLAN WHEREAS, Seagull Energy Corporation (the "Company") has heretofore adopted and currently maintains the Seagull Energy Corporation Management Stability Plan (the "Plan"); and WHEREAS, pursuant to Section 7.11 of the Agreement and Plan of Merger by and among Seagull Energy Corporation, GNR Merger Corporation and Global Natural Resources Inc. dated as of July 22, 1996 (the "Merger Agreement"), the Company has agreed to provide benefits under the Plan to employees of Global Natural Resources Inc. ("Global") that are employed by Global as of Effective Time (as such term is defined in the Merger Agreement) (the "Effective Time"); and WHEREAS, the Company desires to amend the Plan to accomplish such purpose; NOW, THEREFORE, the Plan is hereby amended, effective as of the Effective Time: 1. The following sentence shall be added to Section 1.1(c) of the Plan: "Further, with respect to a Covered Employee who was employed by Global Natural Resources Inc. ('Global') as of the Effective Time (as such term is defined in the Agreement and Plan of Merger by and among Seagull Energy Corporation, GNR Merger Corporation and Global Natural Resources Inc. dated as of July 22, 1996 (the 'Merger Agreement')) (the 'Effective Time'), 'Change of Control' shall mean the consummation of the merger contemplated by the Merger Agreement." 2. Section 1.1(j) of the Plan shall be deleted and the following shall be substituted therefor: "'EIP' shall mean the Seagull Energy Corporation Executive Incentive Plan or any successor thereto. Further, with respect to a Covered Employee who was employed by Global as of the Effective Time, 'EIP' shall mean the Global incentive bonus program or, as applicable, the Seagull Energy Corporation Executive Incentive Plan or any successor thereto." 3. Section 1.1(k) of the Plan shall be deleted and the following shall be substituted therefor: "'Employer' shall mean the Company, Global and each eligible organization designated as an Employer in accordance with the provisions of Section 4.4 of the Plan." 4. The following sentence shall be added to Section 1.1(m) of the Plan: "Further, for purposes of this provision, the 'Grade' of a Covered Employee who was employed by Global as of the Effective Time shall be determined in accordance with the procedures of the Company." 5. Section 1.1(o) of the Plan shall be deleted. 6. Section 2.1(b) of the Plan shall be deleted and the following shall be substituted therefor: "(b) A lump sum cash payment in an amount equal to the remaining portion of any award to the Covered Employee under any prior years' EIP. Further, if a Covered Employee's Involuntary Termination occurs on or after the date an award has been earned under the EIP, but prior to the date such award is paid, the Covered Employee shall receive an additional lump sum cash payment in an amount equal to his Targeted EIP Award." 7. As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED this 9th day of November, 1996. SEAGULL ENERGY CORPORATION By: /s/Jack M. Robertson Name: Jack M. Robertson Title: Vice President, Human Resources GLOBAL NATURAL RESOURCES INC. By: /s/ William L. Transier Name: William L. Transier Title: Senior Vice President, Chief Financial Officer and Assistant Secretary EX-10.15 14 AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT TO EMPLOYMENT AGREEMENT WHEREAS, Seagull Energy Corporation (the "Company") and Barry J. Galt ("Galt") have heretofore entered into an Employment Agreement (the "Agreement"), effective as of December 30, 1983; and WHEREAS, Section 3.4 of the Agreement obligates the Company to provide certain term life insurance coverage to Galt during the term of the Agreement; and WHEREAS, the Company and Galt have heretofore entered into an agreement regarding the provision of insurance coverage for Galt, effective as of January 1, 1987, and in satisfaction of the Company's obligations under Section 3.4 of the Agreement; and WHEREAS, the Company and Galt desire to amend such prior agreement regarding the provision of life insurance coverage for Galt, effective as of January 1, 1997, to provide Galt with additional flexibility with respect to such insurance coverage; NOW, THEREFORE, the parties hereto agree as follows: 1. Effective as of January 1, 1997 and continuing for each year that the Agreement is in force and effect, on the date and in the manner designated by Galt, which date shall be within ninety days of the due date specified on Schedule A attached hereto and made a part hereof, the Company shall tender annual premiums in the amounts established pursuant to Schedule A by check payable to the insurance company designated by Galt to be applied by such company to the insurance policy designated by Galt. 2. Galt agrees that payment of the premiums by the Company as specified in Item 1 above will constitute full and complete performance by the Company of its obligations under Section 3.4 of the Agreement. Executed this 23rd day of January, 1997. SEAGULL ENERGY CORPORATION By: /s/ William L. Transier Name: William L. Transier Title: Sr. Vice President and CFO /s/ Barry J. Galt BARRY J. GALT SCHEDULE A Annual Premium Payments by Seagull Energy Corporation
Due Date Amount Age of Mr. Galt - -------------------------------------------------------------------------------- 2-9-97 $ 4,770 63 2-9-98 5,490 64 2-9-99 6,355 65 2-9-00 7,225 66 2-9-01 8,100 67 2-9-02 8,990 68 2-9-03 9,885 69 2-9-04 11,000 70 2-9-05 12,520 71 2-9-06 14,520 72 2-9-07 17,055 73 2-9-08 20,235 74 2-9-09 24,060 75 2-9-10 28,510 76 2-9-11 33,570 77 2-9-12 36,730 78 2-9-13 40,080 79 2-9-14 43,565 80
EX-13 15 1996 ANNUAL REPORT EXHIBIT 13 CONSOLIDATED FINANCIAL STATEMENTS CONTENTS
PAGE Selected Financial Data ................................................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................. 22 Report of Management to Shareholders ...................................... 32 Independent Auditors' Report .............................................. 33 Consolidated Statements of Operations ..................................... 34 Consolidated Balance Sheets ............................................... 35 Consolidated Statements of Cash Flows ..................................... 36 Consolidated Statements of Shareholders' Equity ........................... 37 Notes to Consolidated Financial Statements ................................ 38
SELECTED FINANCIAL DATA (Amounts in Thousands Except Per Share Data)
Year Ended December 31, 1996 1995 1994 1993 1992 ========================================================================================================================== Restated Restated Restated Restated Revenues ......................................... $ 518,578 $ 408,426 $ 470,486 $ 452,232 $ 296,335 Net income (loss)(3)(4) .......................... 28,961 (1,738) (4,405) 34,095 3,842 Earnings (loss) per share(3)(4) .................. 0.45 (0.03) (0.07) 0.56 0.08 Net cash provided by operating activities before changes in operating assets and liabilities .............. 220,543 124,822 182,413 174,697 92,928 Net cash provided by operating activities .......................... 256,419 118,034 209,114 139,292 78,900 Total assets ..................................... 1,515,063 1,359,125 1,454,050 1,286,391 1,233,828 Long-term portion of debt ........................ 573,455 557,107 622,080 459,787 608,066 Redeemable bearer shares(5) ...................... 16,059 16,591 17,467 18,375 -- Shareholders' equity ............................. 597,730 562,621 557,646 567,943 358,326 Capital expenditures ............................. 213,462 144,101 202,553 137,894 51,524 Acquisitions, net of cash acquired ............... 104,420 -- 193,859 29,470 401,888 Standardized measure of discounted future net cash flows before taxes .................................. 2,137,870 1,103,962 865,047 1,022,140 955,960
(1)Reference is made to the Consolidated Financial Statements of Seagull Energy Corporation and Subsidiaries and Notes thereto, appearing on pages 33 through 64 of this Annual Report. As discussed in Note 1 to the Consolidated Financial Statements, all periods have been restated to reflect Seagull's merger with Global Natural Resources Inc. on October 3, 1996, which was accounted for as a pooling of interests. (2)Includes Seagull Mid-South Inc. since December 31, 1992, Seagull Energy Canada Ltd. since January 4, 1994 and two Egyptian concessions since September 10, 1996. (3)1992 includes the cumulative effect of two changes in accounting principles related to income taxes and postretirement benefits representing an increase in earnings of approximately $2.3 million, or $0.09 per share. (4)1995 includes a pre-tax, non-cash charge for the impairment of long-lived assets of $48.8 million. (5)See Note 9 to the Consolidated Financial Statements for discussion of redeemable bearer shares. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL On October 3, 1996, the shareholders of Seagull Energy Corporation ("Seagull" or the "Company") and Global Natural Resources Inc. ("Global") approved a merger of a wholly owned subsidiary of Seagull into Global (the "Global Merger"). Pursuant to the Global Merger, each share of Global common stock was converted into 0.88 shares of Seagull common stock. The Global Merger was accounted for as a pooling of interests. Accordingly, the financial information for all periods have been restated to combine the results of Seagull and Global. Certain adjustments were made to the results of Seagull and Global to conform the accounting policies and presentation used by Seagull and Global. Information presented herein includes forward looking statements within the meaning of Section 27A of the Securities Act of 1993 and Section 21E of the Securities Exchange Act of 1934. Although Seagull believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward looking statements include political developments in foreign countries, federal and state regulatory developments, the timing and extent of changes in commodity prices, the timing and extent of success in discovering, developing and producing or acquiring oil and gas reserves, and conditions of the capital and equity markets during the periods covered by the forward looking statements. RESULTS OF OPERATIONS CONSOLIDATED HIGHLIGHTS (Amounts in Thousands Except Per Share Data)
1996 1995 1994 ------------- ------------- ------------ Revenues: Restated Restated Oil and gas operations(*) ................................................... $ 420,962 $ 310,656 $ 364,888 Alaska transmission and distribution ........................................ 97,616 97,770 105,598 ------------- ------------- ------------ $ 518,578 $ 408,426 $ 470,486 ============= ============= ============ Operating profit (loss): Oil and gas operations(*) ................................................... $ 100,529 $ (33,721) $ 41,374 Alaska transmission and distribution ........................................ 26,026 23,141 21,865 General and administrative expenses ......................................... (21,500) (23,798) (14,603) ------------- ------------- ------------ $ 105,055 $ (34,378) $ 48,636 ============= ============= ============ Net income (loss) ............................................................. $ 28,961 $ (1,738) $ (4,405) Earnings (loss) per share ..................................................... $ 0.45 $ (0.03) $ (0.07) Weighted average number of common shares outstanding .......................... 64,073 62,674 63,006 Net cash provided by operating activities before changes in operating assets and liabilities ............................................................. $ 220,543 $ 124,822 $ 182,413 Net cash provided by operating activities ..................................... $ 256,419 $ 118,034 $ 209,114
(*)The Company reclassified its results of operations for 1995 and 1994 to combine the former Exploration and Production segment and Pipeline and Marketing segment into Oil and Gas Operations. Substantially all of the Company's gas processing and gas gathering assets were sold in September 1995. The assets sold contributed $17.6 million and $26.4 million in revenues and $6.2 million and $6.7 million in operating profit for 1995 and 1994, respectively. 22 Seagull's $31 million and $138 million improvement in net income and cash flow provided by operating activities, respectively, for 1996 is principally due to two factors that substantially impacted the Oil and Gas Operations segment -- higher domestic gas prices and increasing levels of international oil production. Conversely, the Company's results of operations for 1995 were greatly influenced by lower domestic gas prices and three unusual items discussed below. See the "Oil and Gas Operations," section below for a further discussion of that segment's operating profit. The Company's results of operations were impacted by the following unusual items in the last two years: Merger expenses of $10.0 million ($9.0 million after taxes) were recorded in the fourth quarter of 1996 representing investment banking fees, legal, accounting and other expenses related to the Global Merger. On September 25, 1995, Seagull and three other sellers completed the sale of their disparate interests in 19 natural gas gathering systems and a gas processing plant (the "Pipeline Assets"). The Company recorded a pre-tax gain on the sale of $82 million ($54 million after taxes). The Pipeline Assets contributed $17.6 million and $26.4 million in revenues and $6.2 million and $6.7 million in operating profit for 1995 and 1994, respectively. With the sale of the Pipeline Assets, Seagull's former Exploration and Production segment and the Pipeline and Marketing segment have been reclassified into Oil and Gas Operations. Effective March 31, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As a result of the adoption of this standard, the Company recognized a pre-tax, non-cash charge against earnings during 1995 of $48.8 million ($32 million after taxes) (the "Long-Lived Asset Impairment"). Seagull recorded one-time pre-tax charges of $8 million in general and administrative expenses resulting from the Company's workforce reduction and consolidation implemented during the second quarter of 1995. The savings from the workforce reduction and consolidation are primarily reflected in lower operating expenses. Natural gas is stated herein in billion cubic feet ("Bcf"), million cubic feet ("MMcf") or thousand cubic feet ("Mcf"). Oil, condensate and natural gas liquids ("NGL") are stated in thousand barrels ("MBbl") or barrels ("Bbl"). MMcfe and Mcfe represent the equivalent of one million and one thousand cubic feet of natural gas, respectively. Oil, condensate and NGL are converted to gas at a ratio of one barrel of liquids per six Mcf of gas, based on relative energy content. MBOE and BOE represent one thousand barrels of oil equivalent and one barrel of oil equivalent, respectively, with six Mcf of gas converted to one barrel of liquid. 23 OIL AND GAS OPERATIONS (Amounts in Thousands)
1996 1995 1994 ---------- ---------- ---------- Revenues: Restated Restated Natural gas .................................. $ 297,149 $ 218,039 $ 264,764 Oil and NGL .................................. 90,779 48,725 42,557 Other E&P .................................... (971) 991 156 Pipeline and marketing ....................... 34,005 42,901 57,411 ---------- ---------- ---------- Total revenues .............................. 420,962 310,656 364,888 ---------- ---------- ---------- Costs of Operations: E&P direct operating expense ................. 87,255 71,632 75,192 E&P general operating expense ................ 14,419 13,393 15,378 Pipeline and marketing expenses .............. 23,578 30,674 39,949 Exploration charges .......................... 50,227 40,223 43,813 Depreciation, depletion and amortization ..... 144,954 139,613 149,182 Impairment of long-lived assets .............. -- 48,842 -- ---------- ---------- ---------- Total operating costs ....................... 320,433 344,377 323,514 ---------- ---------- ---------- Operating profit (loss) ........................ $ 100,529 $ (33,721) $ 41,374 ========== ========== ==========
The $110 million increase in revenues for 1996 as compared to 1995 was primarily the net result of two factors - (i) increases in the Company's average realized price of natural gas for its domestic E&P activities and (ii) increases in oil production and oil and gas price internationally. The domestic natural gas prices increase from $1.62 per Mcf for 1995 to $2.17 per Mcf for 1996 accounted for approximately $63 million of the overall increase in revenues. International production increased over 1995 as production in Egypt began in November 1995 and the Company purchased interests in two additional Egyptian concessions on September 10, 1996 (the "Esso Suez Acquisition"). Also, production increased steadily during 1996 from Cote d'Ivoire where production began in April 1995. The increases in production in Cote d'Ivoire and Egypt contributed approximately $35 million of the overall increase in revenues. Domestic gas production also increased slightly, providing approximately $6 million of the overall increase in revenues. Revenues decreased $54 million from 1994 to 1995 primarily as the result of substantial declines in the domestic and Canadian average natural gas prices and a 5% decline in domestic natural gas production. The domestic and Canadian natural gas price per Mcf decline from $1.88 to $1.62 and from $1.55 to $1.02, respectively, was responsible for approximately $41 million of the decrease in revenues and the 5% decline in domestic natural gas production was responsible for an additional $9 million. The decrease in domestic production was primarily due to voluntary curtailments coupled with lower sustainable deliverability resulting from natural production declines and a substantially lower level of development expenditures in late 1994 and all of 1995. Both the lower level of development expenditures and voluntary curtailments were directly related to the low natural gas price. The Company has had no voluntary curtailments in the U.S. since October 1995. In late 1995, Seagull initiated an active risk management program for a portion of its own E&P production and third-party activities, utilizing such derivative financial instruments as futures contracts, options and swaps. The primary objective of the risk management program is to help ensure more stable cash flow. The risk management program is also an important part of Seagull's third-party marketing efforts, allowing the Company to convert a customer's 24 requested price to a price structure that is consistent with the Company's overall pricing strategy. Seagull accounts for its commodity derivative contracts as hedging activities and, accordingly, the effect is included in revenues when the commodities are produced. The Company recorded costs related to commodity hedging activities of $9.0 million, $0.5 million and none for 1996, 1995 and 1994, respectively. These costs had the effect of reducing average gas prices by $0.06 mcfe for 1996 and $0.004 mcfe for 1995. In mid 1996, Seagull put price "collars" in place with respect to about a third of its domestic gas deliverability for the first quarter of 1997 only. These "collars" assured a minimum realization above $2.00 per Mcf in exchange for a $2.50 per Mcf ceiling on that component of Seagull's production. Additionally, the Company has commodity hedges in place for approximately 12 MMcf per day through December 1998 on properties associated with the Monetary Production Payment (see Note 6 to the Consolidated Financial Statements). These hedge positions will reduce first quarter 1997 E&P revenues. At December 31, 1996, there was $8.2 million of realized cost on commodity hedging activities which was deferred and will reduce revenues in the month that the hedged production occurred (January 1997). On the other hand, because of the drop in commodity prices after January 1997, the Company expects actual net realizations of above "collars" for February and March, 1997 to be slightly positive. Also at December 31, 1996, there are $2.0 million of net unrealized and unrecognized hedging cost related to the commodity hedges associated with the Monetary Production Payment based on the difference between the strike price and the futures price for the respective trading months at year end. Again as a result of the intervening drop in commodity prices, the net unrealized and unrecognized hedging cost would be substantially lower if current strike and futures prices were used. Essentially all other hedging activities were realized prior to year-end. The Company has no commodity hedges in place for equity production after March 1997 other than those associated with the Monetary Production Payment. EXPLORATION AND PRODUCTION REVENUE BY AREA (Amounts in Thousands)
1996 1995 1994 ---------- ---------- ---------- Restated Restated Gas Revenues: Domestic ........................ $ 252,806 $ 183,478 $ 223,110 Canada .......................... 26,869 22,591 30,695 Cote d'Ivoire ................... 2,563 328 -- Indonesia ....................... 14,911 11,642 10,959 ---------- ---------- ---------- $ 297,149 $ 218,039 $ 264,764 ========== ========== ========== Oil and NGL Revenues: Domestic ........................ $ 29,706 $ 22,228 $ 24,879 Canada .......................... 6,048 5,186 4,940 Cote d'Ivoire ................... 10,235 4,050 -- Egypt ........................... 28,126 442 -- Russia .......................... 15,626 16,037 11,956 Indonesia ....................... 1,038 782 782 ---------- ---------- ---------- $ 90,779 $ 48,725 $ 42,557 ========== ========== ==========
25 EXPLORATION AND PRODUCTION OPERATING DATA
Net Daily Production Unit Price 1996 1995 1994 1996 1995 1994 --------- --------- --------- --------- --------- --------- Restated Restated Restated Restated Gas Sales(1): Domestic ........................... 317.6 310.7 325.5 $ 2.17 $ 1.62 $ 1.88 Canada ............................. 57.9 60.5 54.1 1.27 1.02 1.55 Cote d'Ivoire ...................... 3.9 0.6 -- 1.77 1.61 -- Indonesia .......................... 12.1 10.8 12.3 3.36 2.96 2.45 --------- --------- --------- --------- --------- --------- Total .............................. 391.5 382.6 391.9 $ 2.07 $ 1.56 $ 1.85 ========= ========= ========= ========= ========= ========= Oil and NGL Sales(2): Domestic ........................... 4,264 3,845 4,520 $ 19.03 $ 15.84 $ 15.08 Canada ............................. 985 1,092 1,170 16.77 13.01 11.57 Cote d'Ivoire ...................... 1,395 715 -- 20.04 15.51 -- Egypt .............................. 3,565 67 -- 21.56 17.97 -- Indonesia .......................... 147 125 129 19.58 17.18 16.58 Russia ............................. 3,053 2,909 2,307 13.98 15.11 14.21 --------- --------- --------- --------- --------- --------- Total .............................. 13,409 8,753 8,126 $ 18.50 $ 15.53 $ 14.35 ========= ========= ========= ========= ========= =========
(1) Volume in MMcf per day; Price in $ per Mcf. (2) Volume in Bbl per day; Price in $ per Bbl. The increase in E&P direct operating expenses of $15.6 million from 1995 to 1996 is principally a result of the increased production in the United States and Egypt. However, direct operating expense per equivalent unit of production for the Company's E&P activities increased from $0.45 per Mcfe in 1995 to $0.51 per Mcfe in 1996 primarily due to increased domestic transportation expense. Direct operating costs per equivalent unit of production are expected to increase slightly during 1997 as the Company's international operations and oil production (with higher associated direct operating costs) become increasingly significant to the Company's total E&P operations. Direct operating expense for the Company's E&P activities declined from 1994 to 1995 primarily due to the decline in domestic production and decreased export taxes in Russia attributable to a one-year exemption from export tax in the Company's Russian operations in 1995. Direct operating expenses per equivalent unit of production declined from $0.47 per Mcfe in 1994 to $0.45 per Mcfe in 1995. Oil and Gas Operations depreciation, depletion and amortization ("DD&A") expense increased from $139.6 million in 1995 to $145.0 million in 1996 primarily due to increased production discussed above, partially offset by a decrease in the average DD&A rate per equivalent unit of production from $0.86 per Mcfe in 1995 to $0.83 per Mcfe in 1996. DD&A expense for Oil and Gas Operations decreased $6.6 million from 1994 to 1995 principally as a result of the decline in domestic production coupled with a decrease in the average DD&A rate. Due to the Long-Lived Asset Impairment discussed previously and a change in the mix of properties being produced, the Company's average DD&A rate decreased from $0.89 per Mcfe in 1994 to $0.86 per Mcfe in 1995. OUTLOOK At year-end 1996, the Company was producing about 375 MMcf per day of 26 natural gas and 18,500 Bbl per day of crude oil, condensate and NGL worldwide. In the United States, Seagull expects to maintain its level of domestic gas production of about 300 MMcf per day throughout 1997. U.S. liquids production will increase when initial shipments begin from a recent discovery in the first half of 1997. In Canada, Seagull expects 1997 production to compare closely with year-end 1996 levels of between 50 and 55 MMcf per day of gas and 1,000 Bbl per day of oil, condensate and NGL. Internationally, production increases are anticipated in Egypt, where the Company expects oil output for 1997 to average approximately 10,000 Bbl per day. Elsewhere, Seagull expects production levels to grow more modestly in Cote d'Ivoire and to be essentially unchanged in Indonesia and Russia. The future results of the Oil and Gas Operations segment will be affected by the market prices of oil and natural gas and the Company's degree of exploration success. The availability of a ready market for oil, natural gas and liquid products in the future will depend on numerous factors beyond the control of the Company, including weather, production of other crude oil, natural gas and liquid products, imports, marketing of competitive fuels, proximity and capacity of oil and gas pipelines and other transportation facilities, any oversupply or undersupply of oil, gas and liquid products, the regulatory environment, and other international, regional and political events, none of which can be predicted with certainty. ALASKA TRANSMISSION AND DISTRIBUTION (Dollars in Thousands Except Per Unit Data)
1996 1995 1994 ---------- ---------- ---------- Revenues ..................................... $ 97,616 $ 97,770 $ 105,598 Cost of gas sold ............................. 42,600 46,328 54,465 ---------- ---------- ---------- Gross margin............................... 55,016 51,442 51,133 Operations and maintenance expense ........... 21,045 20,504 21,516 Depreciation, depletion and amortization ..... 7,945 7,797 7,752 ---------- ---------- ---------- Operating profit........................... $ 26,026 $ 23,141 $ 21,865 ========== ========== ========== OPERATING DATA: Degree days(*) ............................... 10,975 9,997 10,291 Volumes (Bcf): Gas sold ................................... 26.8 26.4 31.3 Gas transported ............................ 21.0 17.9 12.8 Combined ................................... 47.8 44.3 44.1 Margins (per Mcf): Gas sold ................................... $ 1.70 $ 1.66 $ 1.49 Gas transported ............................ $ 0.46 $ 0.43 $ 0.35 Combined ................................... $ 1.15 $ 1.16 $ 1.16 Year-end customers ........................... 94,100 92,100 90,100
(*)A measure of weather severity calculated by subtracting the mean temperature for each day from 65(degree)F. More degree days equate to colder weather. 27 Operating profit of the Alaska transmission and distribution segment (ENSTAR Natural Gas Company, a division of the Company, and Alaska Pipeline Company, a wholly owned subsidiary, (collectively referred to herein as "ENSTAR Alaska") is primarily a function of the weather in the Anchorage, Alaska area during the winter heating season. Cold weather equates to higher gas volumes delivered, resulting in increased profits. This proved to be the case in 1996 as degree days for the ENSTAR Alaska service area increased 10% to 10,975 compared with 1995, resulting in a 12% increase in operating profit. Although degree days were down slightly in 1995, operating profit of ENSTAR Alaska improved from 1994 primarily as a result of lower operations and maintenance expense due to lower permit fees paid. In the first quarter of 1995, two large military power plants that previously purchased gas from ENSTAR Alaska began purchasing gas directly from gas producers. However, ENSTAR Alaska has been approved by the Alaska Public Utilities Commission to transport the customers' gas supplies for a fee that is essentially comparable to the margin (revenues net of the associated cost of gas sold) it previously earned. Accordingly, overall operating profit for the Alaska transmission and distribution segment was basically unaffected by this change. OUTLOOK ENSTAR Alaska will continue to play a significant role in Seagull's future. Even though it may not fit precisely into the Company's other E&P-oriented activities, management expects it to be maintained as a major part of the Company. Future operating profit for this segment will be affected by weather, regulatory action and customer growth in ENSTAR Alaska's service area. The Company expects customer growth to continue to be relatively modest. During the 1996 summer construction season, approximately 56 miles of new distribution pipeline were installed to connect some 2,000 new customers. In September 1995, ENSTAR Alaska entered into a 33-year agreement to lease a 60-mile, 8-inch diameter pipeline between Anchorage, Alaska and Whittier, Alaska. The new pipeline is expected to add close to 1,500 new customers over the next few years. ENSTAR Alaska purchases all of its natural gas under long-term contracts in which the price is indexed to changes in the price of crude oil futures contracts. However, because ENSTAR Alaska's sales prices are adjusted to include the projected cost of its natural gas, there has been and is expected to be little or no impact on margins derived from ENSTAR Alaska's gas sales as a result of fluctuation in oil prices due to worldwide political events and changing market conditions. OTHER General and administrative expenses, excluding the $8 million charge for workforce reduction and consolidation discussed previously, increased approximately $5.7 million to $21.5 million in 1996 as a result of an increase in incentive compensation expenses and the Company's expanding international operations. Interest expense declined from $53.0 million in 1995 to $44.8 million for 1996 through utilization of the proceeds from the sale of the Pipeline Assets in late 1995 to repay amounts outstanding under the Company's existing credit facilities. 28 LIQUIDITY AND CAPITAL RESOURCES CAPITAL EXPENDITURES (Amounts in Thousands)
1996 1995 1994 ---------- ---------- ---------- Restated Restated Exploration and production: Leasehold ................................ $ 12,986 $ 18,000 $ 18,573 Exploration .............................. 77,774 46,575 67,135 Development .............................. 108,763 69,260 100,763 ---------- ---------- ---------- 199,523 133,835 186,471 Pipeline and marketing ...................... 228 441 2,503 ---------- ---------- ---------- Oil and gas operations ...................... 199,751 134,276 188,974 Alaska transmission and distribution ........ 9,287 7,611 7,626 Corporate ................................... 4,424 2,214 5,953 ---------- ---------- ---------- $ 213,462 $ 144,101 $ 202,553 ========== ========== ==========
E&P CAPITAL EXPENDITURES BY GEOGRAPHIC REGION (AMOUNTS IN MILLIONS)
Data for 1996 Actuals Chart Domestic ............... $139.7 Canada ................. $ 15.2 Egypt .................. $ 33.0 Cote d'Ivoire .......... $ 6.9 Other .................. $ 4.7 Data for 1997 Plan Chart Domestic .............. $114.2 Canada ................. $ 15.4 Egypt .................. $ 79.0 Cote d'Ivoire .......... $ 18.1 Other .................. $ 8.3
E&P is the Company's primary growth area. Historically, that growth has been achieved primarily through acquisitions of proved oil and gas properties. However, acquisitions are expected to play a much smaller role in Seagull's near-term future growth. In 1997, the Company's capital program is designed to hold domestic reserves and deliverability to approximately year-end 1996 levels, while greater focus is placed on Seagull's international drilling efforts. E&P capital expenditures in 1996 totaled $199.5 million, up substantially from $133.8 million in 1995. Spending outside the U.S. totaled $59.8 million, of which $13.2 million was for exploration and $43.5 million for exploitation. Seagull participated in the drilling of 46 exploratory wells during 1996, of which 23 were successful. Another 15 wells were in progress at year-end. Of the successes, 14 were in the U.S., 2 in Egypt, 2 in Cote d'Ivoire and 5 in Canada. In addition, domestic exploitation activities picked up considerably after being severely curtailed in 1995 due to the depressed U.S. gas prices. On September 10, 1996, Seagull consummated the Esso Suez Acquisition for a net purchase price of approximately $74 million in cash financed through additional borrowings under Seagull's revolving credit (the "Revolving Credit Facilities"). The assets purchased in the Esso Suez Acquisition include a 100% interest in the East Zeit oil producing concession in the offshore Gulf of Suez and the entire working interest in the South Hurghada concession located onshore on the coast of the Gulf of Suez approximately 250 miles south of Cairo. 29 On September 10, 1996, the East Zeit concession area contained approximately 17 million net barrels of proved oil reserves. The 63,000-acre South Hurghada concession contained several currently drillable exploratory prospects, plus two existing oil discoveries. In addition, Seagull's new program of relatively small domestic producing property acquisitions initiated in 1996 resulted in the addition of 37.3 Bcfe for a cost of $29.1 million. Seagull's proved oil and gas reserves at December 31, 1996 totaled 257,957 MBOE compared with 243,152 MBOE at year-end 1995. Through drilling and proved property acquisitions, the Company replaced 159% of its production during 1996 at a finding and development ("F&D") cost of $6.36 per BOE and 177% of its production over the three year period 1994 through 1996 at a F&D cost of $5.76 per BOE. The higher reserve volumes and the improved price environment that existed at year-end 1996 combined to substantially increase the present value of future net cash flows from the Company's proved reserves. Specifically, the standardized measure of discounted future net cash flows before taxes from Seagull's proved oil and gas reserves, calculated based on Securities and Exchange Commission criteria, increased to $2.1 billion at December 31, 1996 compared with $1.1 billion at the end of 1995. Year-end 1996 calculations were made using prices of $3.27 per Mcf for gas and $20.99 per Bbl for oil, condensate and NGL. The Company's average realized price for the year ended December 31, 1996 were $2.07 per Mcf for gas and $18.50 per Bbl for oil, condensate and NGL. Because the disclosure requirements are standardized, significant changes can occur in these estimates based upon oil and gas prices in effect at year-end. The above estimates should not be viewed as an estimate of fair market value. See Note 15 of Notes to Consolidated Financial Statements beginning on page 38 of this Annual Report for additional information. Plans for 1997 call for capital expenditures of approximately $250 million, including about $235 million in E&P. Seagull anticipates spending approximately $140 million for development, $10 million for leasehold and $85 million will be devoted to exploration. Of this total, about $105 million is expected to be spent outside North America. The 1997 capital program anticipates 35 to 40 exploratory wells in the U.S. and Canada and over 25 exploratory wells outside of North America. LIQUIDITY The growth in the Oil and Gas Operations segment over the past eight years has been accomplished primarily through acquisitions financed initially by bank borrowings; however, since August 1990, the Company has utilized $520 million in net proceeds from three separate Common Stock offerings and the July 1993 sale of Senior and Senior Subordinated Notes, all in underwritten public offerings, to reduce borrowings under its existing bank facilities. In addition, Seagull reduced its borrowings under existing bank facilities in 1995 by $143 million with the proceeds from the sale of the Pipeline Assets and the Internal Revenue Code Section 29 Tax Credit-bearing gas properties. In 1993, the Company entered into the Revolving Credit Facilities with a group of major U. S. and international banks (the "Banks"). During 1996, the terms of the Revolving Credit Facilities were amended and currently provide a maximum commitment of $650 million. Under the terms of the Revolving Credit Facilities, the commitments thereunder begin to decline in equal quarterly amounts of $40 million commencing on March 31, 1999, with a final reduction of $50 million on December 31, 2002. The amount of senior indebtedness available to the Company under the provisions of the Revolving Credit Facilities is subject to a borrowing base (the "Borrowing Base"), based upon certain of the Company's proved oil and gas reserves and the financial performance of ENSTAR Alaska. The Borrowing Base is generally determined annually but may be redetermined one additional time each year, at the option of either Seagull or the Banks, and upon the sale of certain assets included in the Borrowing 30 Base. With the Esso Suez Acquisition, Seagull requested and received a $50 million increase to the Borrowing Base to $550 million on October 1, 1996. See Notes 4 and 6 of Notes to Consolidated Financial Statements beginning on page 38 of this Annual Report for additional information relating to acquisitions and debt. As of December 31, 1996, borrowings outstanding under the Revolving Credit Facilities were $237 million, leaving immediately available unused commitments of approximately $176 million, net of outstanding letters of credit of $20 million, $100 million of borrowings outstanding under the Senior Notes, and $17 million in borrowings outstanding under the Company's money market facilities. The money market facilities are with two U.S. banks and have a combined maximum commitment of $70 million. These lines of credit bear interest at rates made available by the banks at their option and may be canceled at either Seagull's or the banks' option. Management believes that the Company's internally generated funds and bank borrowing capabilities will be sufficient to finance current and forecasted operations. ENVIRONMENTAL To date, compliance with applicable environmental and safety regulations by the Company has not required any significant capital expenditures or materially affected its business or earnings. The Company believes it is in substantial compliance with environmental and safety regulations and foresees no material expenditures in the future; however, the Company is unable to predict the impact that compliance with future regulations may have on capital expenditures, earnings and competitive position. SELECTED QUARTERLY FINANCIAL DATA Summarized quarterly financial data (stated in thousands except per share amounts) is as follows:
Quarter Ended(1) ----------------------------------------------------------- March 31 June 30 September 30 December 31 ---------- ---------- ------------ ----------- 1996: Revenues ............................. $ 136,840 $ 112,437 $ 110,786 $ 158,515 Operating Profit ..................... $ 37,701 $ 13,826 $ 20,116 $ 33,412 Net Income (Loss) .................... $ 18,312 $ (2,934) $ 7,458 $ 6,125(6) Earnings (Loss) per Share(2) ......... $ 0.29 $ (0.05) $ 0.12 $ 0.10 1995: Revenues ............................. $ 112,427 $ 98,595 $ 85,381 $ 112,023 Operating Profit (Loss) .............. $ (47,469)(3) $ (2,114)(4) $ (1,475) $ 16,680 Net Income (Loss) .................... $ (42,766)(3) $ (10,063)(4) $ 43,692(5) $ 7,399 Earnings (Loss) per Share(2) ......... $ (0.69) $ (0.16) $ 0.70 $ 0.12
(1)As discussed in Note 1 to the Consolidated Financial Statements, all periods have been restated to reflect the Global Merger on October 3, 1996. (2)Quarterly earnings (loss) per common share may not total to the full year per share amount, as the weighted average number of shares outstanding for each quarter fluctuated as a result of the assumed exercise of stock options. (3)Includes $48.8 million pre-tax non-cash charge relating to the impairment of long-lived assets. (4)Includes one-time pre-tax charges of $8 million for expenses involved in the workforce reduction and consolidation. (5)Includes $82 million pre-tax gain on the sale of the Pipeline Assets. (6)Includes $10 million pre-tax merger expenses relating to the Global Merger. 31 REPORT OF MANAGEMENT TO SHAREHOLDERS The management of Seagull Energy Corporation is responsible for the preparation and integrity of financial statements and related data in this Annual Report, whether audited or unaudited. The financial statements were prepared in conformity with generally accepted accounting principles and are not misstated due to material fraud or error. The financial statements include certain estimates and judgments which management believes are reasonable under the circumstances. The other information in the Annual Report is consistent with that in the financial statements. Management is responsible for and maintains a system of internal accounting controls that is sufficient to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that financial records are reliable for preparing financial statements, as well as to prevent and detect fraudulent financial reporting. The internal control system is supported by written policies and procedures and the employment of trained, qualified personnel. The Company has an internal auditing staff which reviews the adequacy of the internal accounting controls and compliance with them. Management has considered the recommendations of the internal auditing staff and KPMG Peat Marwick LLP concerning the Company's system of internal controls and has responded appropriately to those recommendations. The accompanying consolidated financial statements of Seagull Energy Corporation and Subsidiaries as of December 31, 1996 have been audited by KPMG Peat Marwick LLP, independent certified public accountants. Their audits were made in accordance with generally accepted auditing standards and included a review of the system of internal controls to the extent considered necessary to determine the audit procedures required to support their opinion on the consolidated financial statements. The Auditors' Report appears on page 33. The Board of Directors, through its Audit Committee composed exclusively of outside directors, meets periodically with representatives of management, the internal auditing staff and the independent auditors to ensure the existence of effective internal accounting controls and to ensure that financial information is reported accurately and timely with all appropriate disclosures included. The independent auditors and the internal auditing staff have full and free access to, and meet with, the Audit Committee, with and without management present. /s/ BARRY J. GALT Barry J. Galt Chairman and Chief Executive Officer /s/ WILLIAM L. TRANSIER William L. Transier Senior Vice President and Chief Financial Officer /s/ GORDON L. MCCONNELL Gordon L. McConnell Vice President and Controller January 27, 1997 32 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Seagull Energy Corporation: We have audited the accompanying consolidated balance sheets of Seagull Energy Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Seagull Energy Corporation and Subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 2 in 1995, the Company changed its method of accounting for the impairment of long-lived assets and for long-lived assets to be disposed of to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." /s/ KPMG Peat Marwick LLP Houston, Texas January 27, 1997 33 CONSOLIDATED STATEMENTS OF OPERATIONS (Amount in Thousands Except Per Share Data)
Year Ended December 31, -------------------------------------- 1996 1995 1994 ---------- ---------- ---------- Restated Restated Revenues: Oil and gas operations ................................... $ 420,962 $ 310,656 $ 364,888 Alaska transmission and distribution ..................... 97,616 97,770 105,598 ---------- ---------- ---------- 518,578 408,426 470,486 Costs of Operations: Operations and maintenance ............................... 146,297 136,203 152,035 Alaska transmission and distribution cost of gas sold .... 42,600 46,328 54,465 Exploration charges ...................................... 50,227 40,223 43,813 Depreciation, depletion and amortization ................. 152,899 147,410 156,934 Impairment of long-lived assets .......................... -- 48,842 -- General and administrative ............................... 21,500 23,798 14,603 ---------- ---------- ---------- 413,523 442,804 421,850 ---------- ---------- ---------- Operating Profit (Loss) .................................... 105,055 (34,378) 48,636 Other (Income) Expense: Merger expense ........................................... 9,982 -- -- Interest expense ......................................... 44,842 52,978 51,674 Gain on sales of property, plant and equipment, net ...... (1,088) (83,388) (405) Interest income and other ................................ (3,537) (5,012) (1,968) ---------- ---------- ---------- 50,199 (35,422) 49,301 ---------- ---------- ---------- Income (Loss) Before Income Taxes .......................... 54,856 1,044 (665) Income Tax Expense ......................................... 25,895 2,782 3,740 ---------- ---------- ---------- Net Income (Loss) .......................................... $ 28,961 $ (1,738) $ (4,405) ========== ========== ========== Earnings (Loss) Per Share .................................. $ 0.45 $ (0.03) $ (0.07) ========== ========== ========== Weighted Average Number of Common Shares Outstanding ....................................... 64,073 62,674 63,006 ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. 34 CONSOLIDATED BALANCE SHEETS (Amount in Thousands Except Share and Per Share Data)
December 31, -------------------------- 1996 1995 ----------- ----------- Restated ASSETS Current Assets: Cash and cash equivalents ....................................................... $ 15,284 $ 21,477 Short-term investments .......................................................... -- 5,004 Accounts receivable, net ........................................................ 193,659 133,190 Inventories ..................................................................... 12,285 5,488 Prepaid expenses and other ...................................................... 6,389 16,272 ----------- ----------- Total Current Assets .......................................................... 227,617 181,431 Property, Plant and Equipment: Oil and gas properties (successful efforts method) .............................. 1,750,784 1,494,773 Utility plant ................................................................... 238,091 229,883 Other ........................................................................... 60,481 58,507 ----------- ----------- 2,049,356 1,783,163 Accumulated Depreciation, Depletion and Amortization ............................. 804,715 652,985 ----------- ----------- 1,244,641 1,130,178 Other Assets ..................................................................... 42,805 47,516 ----------- ----------- Total Assets ..................................................................... $ 1,515,063 $ 1,359,125 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts and note payable ....................................................... $ 166,775 $ 94,318 Accrued expenses ................................................................ 57,368 50,224 Current maturities of long-term debt ............................................ 7,227 1,650 ----------- ----------- Total Current Liabilities ..................................................... 231,370 146,192 Long-Term Debt ................................................................... 573,455 557,107 Other Noncurrent Liabilities ..................................................... 65,428 53,237 Deferred Income Taxes ............................................................ 31,021 23,377 Redeemable Bearer Shares ......................................................... 16,059 16,591 Commitments and Contingencies .................................................... -- -- Shareholders' Equity: Common Stock, $.10 par value; authorized 100,000,000 shares; issued 63,073,287 in 1996 and 65,983,199 in 1995 .............................. 6,307 6,598 Additional paid-in capital ...................................................... 483,118 496,377 Retained earnings ............................................................... 115,805 86,844 Foreign currency translation adjustment ......................................... 51 389 Less: note receivable from employee stock ownership plan ....................... (4,284) (4,922) Less: treasury stock, at cost; 361,314 shares in 1996 and 3,729,823 in 1995 .... (3,267) (22,665) ----------- ----------- Total Shareholders' Equity .................................................... 597,730 562,621 ----------- ----------- Total Liabilities and Shareholders' Equity ...................................... $ 1,515,063 $ 1,359,125 =========== ===========
See accompanying Notes to Consolidated Financial Statements. 35 CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands)
Year Ended December 31, ----------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Operating Activities: Restated Restated Net income (loss) ................................................................ $ 28,961 $ (1,738) $ (4,405) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization ...................................... 156,319 151,761 159,950 Impairment of long-lived assets ............................................... -- 48,842 -- Amortization of deferred financing costs ...................................... 2,969 3,429 3,841 Deferred income taxes ......................................................... 8,701 (16,292) (6,291) Dry hole expense .............................................................. 23,671 22,153 27,166 Gains on sales of property, plant and equipment, net .......................... (1,088) (83,388) (405) Other ......................................................................... 1,010 55 2,557 ----------- ----------- ----------- 220,543 124,822 182,413 Changes in operating assets and liabilities, net of acquisitions: Decrease in short-term investments ......................................... 5,014 28,538 16,210 Decrease (increase) in accounts receivable ................................. (53,531) (21,721) 12,408 Decrease in inventories, prepaid expenses and other ........................ 9,731 1,793 3,046 Increase (decrease) in accounts payable .................................... 53,281 (15,551) 3,093 Increase (decrease) in accrued expenses and other .......................... 21,381 153 (8,056) ----------- ----------- ----------- Net Cash Provided By Operating Activities ................................. 256,419 118,034 209,114 Investing Activities: Capital expenditures ............................................................. (213,462) (144,101) (202,553) Acquisitions of oil and gas properties ........................................... (90,867) -- (222,780) Acquisitions of other assets and liabilities, net of cash acquired ............... (13,553) -- 28,921 Proceeds from sales of property, plant and equipment ............................. 10,557 107,960 7,605 Other ............................................................................ 2,020 (307) (1,775) ----------- ----------- ----------- Net Cash Used In Investing Activities ...................................... (305,305) (36,448) (390,582) Financing Activities: Proceeds from debt ............................................................... 407,738 668,815 754,413 Principal payments on debt ....................................................... (368,754) (737,473) (582,827) Proceeds from sale of common stock ............................................... 4,401 2,241 1,291 Acquisitions of treasury stock ................................................... -- -- (5,289) Other ............................................................................ (1,051) (3,957) 624 ----------- ----------- ----------- Net Cash Provided by (Used In) Financing Activities ........................ 42,334 (70,374) 168,212 Effect of exchange rate changes on cash ............................................ 359 (48) 1,641 ----------- ----------- ----------- Increase (Decrease) In Cash And Cash Equivalents .......................... (6,193) 11,164 (11,615) Cash And Cash Equivalents At Beginning Of Period ................................... 21,477 10,313 21,928 ----------- ----------- ----------- Cash And Cash Equivalents At End Of Period ......................................... $ 15,284 $ 21,477 $ 10,313 =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements. 36 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Amounts in Thousands)
Foreign Note Additional Currency Receivable Treasury Common Paid-in Retained Translation from Stock, Stock Capital Earnings Adjustment ESOP at Cost Total --------- --------- --------- --------- --------- --------- --------- January 1, 1994 - Restated .............. $ 6,559 $ 492,110 $ 92,987 $ -- $ (6,029) $ (17,683) $ 567,944 Net loss for the period .............. -- -- (4,405) -- -- -- (4,405) Acquisition of treasury stock ........ -- -- -- -- -- (5,289) (5,289) Exercise of employee stock options ...................... 18 1,273 -- -- -- -- 1,291 Foreign currency translation adjustment ............. -- -- -- (2,684) -- -- (2,684) Repayment of note receivable by ESOP ................. -- -- -- -- 527 -- 527 Other ................................ -- 195 -- -- -- 70 265 --------- --------- --------- --------- --------- --------- --------- December 31, 1994 - Restated ............ 6,577 493,578 88,582 (2,684) (5,502) (22,902) 557,649 Net loss for the period .............. -- -- (1,738) -- -- -- (1,738) Exercise of employee stock options ... 21 2,220 -- -- -- -- 2,241 Treasury stock issued as executive incentive compensation ............. -- 164 -- -- -- 171 335 Foreign currency translation adjustment ............. -- -- -- 3,073 -- -- 3,073 Repayment of note receivable by ESOP ................. -- -- -- -- 580 -- 580 Other ................................ -- 415 -- -- -- 66 481 --------- --------- --------- --------- --------- --------- --------- December 31, 1995 - Restated ............ 6,598 496,377 86,844 389 (4,922) (22,665) 562,621 Net income for the period ............ -- -- 28,961 -- -- -- 28,961 Retirement of treasury stock pursuant to the Global Merger ...... (335) (19,021) -- -- -- 19,356 -- Exercise of employee stock options ... 44 4,357 -- -- -- -- 4,401 Foreign currency translation adjustment ............. -- -- -- (338) -- -- (338) Repayment of note receivable by ESOP ................. -- -- -- -- 638 -- 638 Other ................................ -- 1,405 -- -- -- 42 1,447 --------- --------- --------- --------- --------- --------- --------- December 31, 1996 ....................... $ 6,307 $ 483,118 $ 115,805 $ 51 $ (4,284) $ (3,267) $ 597,730 ========= ========= ========= ========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. 37 NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX PAGE 1. Organization...................................................... 38 2. Summary of Significant Accounting Policies........................ 39 3. Supplemental Disclosures of Cash Flow Information................. 43 4. Acquisition and Disposition of Assets............................. 43 5. Other Noncurrent Assets........................................... 44 6. Debt.............................................................. 45 7. Other Noncurrent Liabilities...................................... 48 8. Fair Value of Financial Instruments............................... 48 9. Redeemable Bearer Shares.......................................... 49 10. Shareholders' Equity.............................................. 50 11. Benefit Plans..................................................... 51 12. Income Taxes...................................................... 55 13. Business Segments................................................. 57 14. Commitments and Contingencies..................................... 58 15. Supplemental Oil and Gas Information (Unaudited).................. 59
1. ORGANIZATION Seagull is an international oil and gas company engaged in exploration and development activities in the United States, Egypt, Cote d'Ivoire, Canada, Indonesia and the Russian Republic of Tatarstan. It also transports, distributes and markets natural gas, liquids products and petrochemicals in the U.S. and Canada. MERGER WITH GLOBAL NATURAL RESOURCES INC. - On October 3, 1996, the shareholders of Seagull Energy Corporation (the "Company" or "Seagull") and Global Natural Resources Inc. ("Global") approved a merger of a wholly owned subsidiary of Seagull into Global (the "Global Merger"). Pursuant to the Global Merger, each share of Global common stock was converted into 0.88 shares of Seagull common stock with approximately 26.3 million shares issued to the shareholders of Global. The Global Merger was accounted for as a pooling of interests. Accordingly, the financial statements for periods prior to the Global Merger have been restated to combine the results of Seagull and Global. Net income for the year ended December 31, 1996 includes the effect of transaction costs of the Global Merger of approximately $10 million ($9 million after tax). The results of operations previously reported by the separate companies and the combined amounts presented in the accompanying consolidated financial statements are summarized below. Certain adjustments were made to the results of Seagull and Global to conform 38 the accounting policies and presentation used by Seagull and Global. The increase (decrease) in net income of these adjustments was $(1.4) million, $3.9 million and $0.6 million for the nine months ended September 30, 1996 and the years ended December 31, 1995 and 1994, respectively. These adjustments were primarily to reflect the change in the valuation allowance related to the deferred tax assets associated with book to tax basis differences on domestic property, plant and equipment generated during the applicable periods. These deferred tax assets were not utilized by Global, but more likely than not will be utilized by the combined company. ================================================================================ (Amounts In Thousands)
Nine Months Ended Year Ended December 31, September 30, 1996 1995 1994 ------------------ ---------- ---------- (Unaudited) Revenues: Seagull .............................. $ 281,640 $ 336,273 $ 408,104 Global ............................... 82,525 78,457 62,943 Conforming adjustments ............... (4,102) (6,304) (561) ------------------ ---------- ---------- Combined ............................. $ 360,063 $ 408,426 $ 470,486 ================== ========== ========== Net income (loss): Seagull .............................. $ 10,572 $ 632 $ 3,246 Global ............................... 13,645 (6,307) (8,253) Conforming adjustments ............... (1,381) 3,937 602 ------------------ ---------- ---------- Combined ............................. $ 22,836 $ (1,738) $ (4,405) ================== ========== ==========
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL - The accompanying consolidated financial statements of Seagull have been prepared according to generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission. These accounting principles require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made in the 1995 and 1994 financial statements to conform to the presentation used in 1996. CONSOLIDATION - The accompanying consolidated financial statements include the accounts of Seagull Energy Corporation and its majority-owned entities. All significant intercompany transactions have been eliminated. REGULATION - The Company operates in Alaska through a division of the Company and a wholly owned subsidiary (collectively referred to herein as "ENSTAR Alaska"). ENSTAR Alaska is subject to regulation by the Alaska Public Utilities Commission ("APUC"), which has jurisdiction over, among other things, rates, accounting procedures and standards of service. CASH EQUIVALENTS - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. SHORT-TERM INVESTMENTS - Short-term investments include highly liquid investments having a maturity at the date of purchase of more than three months. As of December 31, 1995, short-term investments consisted entirely of U.S. government securities. 39 INVENTORIES - Materials and supplies are valued at the lower of average cost or market value (net realizable value). OIL AND GAS PROPERTIES - The Company uses the successful efforts method of accounting for its oil and gas operations whereby acquisition costs and exploratory drilling costs related to properties with proved reserves and all development costs including development dry holes are capitalized. The acquisition costs of unproved leaseholds are capitalized pending the results of exploration efforts. Unproved leaseholds with significant acquisition costs are assessed periodically, on a property-by-property basis, and a loss is recognized to the extent, if any, that the cost of the property has been impaired. Unproved leaseholds whose acquisition costs are not individually significant are aggregated, and the portion of such costs estimated to ultimately prove nonproductive, based on experience, is amortized over an average holding period. As unproved leaseholds are determined to be productive, the related costs are transferred to proved leaseholds. Exploratory dry holes and geological and geophysical charges are expensed as incurred. Capitalized costs are depleted using the unit-of-production method based upon estimates of proved oil and gas reserves on a depletable unit basis. Estimated costs (net of salvage value) of dismantling and abandoning oil and gas production facilities are computed by the Company's engineers and included when calculating depreciation and depletion using the unit-of-production method. The total estimated future dismantlement and abandonment cost being amortized as of December 31, 1996 was approximately $26.6 million. The Company performs a review for impairment of proved oil and gas properties on a depletable unit basis when circumstances suggest the need for such a review. For each depletable unit determined to be impaired, an impairment loss equal to the difference between the carrying value and the fair value of the depletable unit will be recognized. Fair value, on a depletable unit basis, is estimated to be the present value of expected future net cash flows computed by applying estimated future oil and gas prices, as determined by management, to estimated future production of oil and gas reserves over the economic lives of the reserves. As a result of the adoption of Statement of Financial Accounting Standards ("SFAS") No. 121, effective March 31, 1995, the Company recognized a non-cash pre-tax charge against income of $46.1 million related to oil and gas properties. Prior to March 31, 1995, the Company determined the impairment of proved oil and gas properties on a world-wide basis. Using the world-wide basis, if the net capitalized costs exceeded the estimated future undiscounted after-tax net cash flows from proved oil and gas reserves using period-end pricing, such excess costs would be charged to expense. Interest cost capitalized as property, plant and equipment amounted to approximately $2.6 million, $1.2 million and $0.7 million in 1996, 1995 and 1994, respectively. OTHER PROPERTY, PLANT AND EQUIPMENT - Depreciation of the utility plant, gas gathering pipeline facilities, gas processing plants and other property is computed principally using the straight-line method over their estimated useful lives, which vary from 3 to 33 years. Utility plant facilities are subject to APUC regulation. When utility properties are disposed of or otherwise retired, the original cost of the property, plus cost of retirement, less salvage value, is charged to accumulated depreciation. The Company groups and evaluates other property, plant and equipment for impairment based on the ability to identify separate cash flows generated therefrom. As a result of the adoption of SFAS No. 121, effective March 31, 1995, the Company recognized a pre-tax non-cash charge against income of $2.7 million for impairment of other property, plant and equipment. Maintenance, repairs and renewals are charged to operations and maintenance expense except that renewals which extend the life of the property are capitalized. TREASURY STOCK - The Company follows the average cost method of accounting for treasury stock transactions. 40 REVENUE RECOGNITION - The Company records oil and natural gas revenue following the entitlement method of accounting for production imbalances, in which any excess amount received above the Company's share is treated as a liability. If less than the Company's entitlement is received, the underproduction is recorded as an asset. ENSTAR Alaska's operating revenues are based on rates authorized by the APUC which are applied to customers' consumption of natural gas. ENSTAR Alaska records unbilled revenue, including amounts to be billed under a purchased gas adjustment clause, at the end of each accounting period. DERIVATIVE FINANCIAL INSTRUMENTS - The Company enters into a variety of commodity derivative contracts for non-trading purposes as a hedging strategy to manage commodity prices associated with oil and gas sales and to reduce the impact of price fluctuations. The Company primarily uses futures contracts, price swaps and options when it determines it is appropriate to hedge its commodity prices. While derivative financial instruments are intended to reduce the Company's exposure to declines in the market price of oil and natural gas, the derivative financial instruments may limit the Company's gain from increases in the market price of oil and natural gas. Income and costs related to these hedging activities are recognized in oil and gas revenues when the commodities are produced. Any realized income and costs that are deferred at the balance sheet date and any margin accounts for futures contracts are included as net current assets. For the years ended December 31, 1996, 1995 and 1994, the Company recorded $9.0 million, $0.5 million and none, respectively, in costs from commodity hedging activities. At December 31, 1996, there was $8.2 million of realized costs on commodity hedging activities which were deferred and will be applied as a reduction in revenues in the month of physical sale of production. Of this amount, $1.0 million is related to the commodity hedges required in the sale of the Section 29 properties. In addition, there was $2.5 million of unrealized and unrecognized costs associated with open contracts at December 31, 1996. The Company recorded costs related to commodity hedging activities of $9.0 million, $0.5 million and none for 1996, 1995 and 1994, respectively. These costs had the effect of reducing average gas prices by $0.06 mcfe for 1996 and $0.004 mcfe for 1995. In mid 1996, Seagull put price "collars" in place with respect to about a third of its domestic gas deliverability for the first quarter of 1997 only. These "collars" assured a minimum realization above $2.00 per Mcf in exchange for a $2.50 per Mcf ceiling on that component of Seagull's production. Additionally, the Company has commodity hedges in place for approximately 12 MMcf per day through December 1998 on properties associated with the Monetary Production Payment (see Note 6). These hedge positions will reduce first quarter 1997 E&P revenues. At December 31, 1996, there was $8.2 million of realized cost on commodity hedging activities which was deferred and will reduce revenues in the month that the hedged production occurred (January 1997). On the other hand, because of the drop in commodity prices after January 1997, the Company expects actual net realizations of above "collars" for February and March, 1997 to be slightly positive. Also at December 31, 1996, there are $2.0 million of net unrealized and unrecognized hedging cost related to the commodity hedges associated with the Monetary Production Payment based on the difference between the strike price and the futures price for the respective trading months at year end. Again as a result of the intervening drop in commodity prices, the net unrealized and unrecognized hedging cost would be substantially lower if current strike and futures prices were used. Essentially all other hedging activities were realized prior to year-end. The Company has no commodity hedges in place for equity production after March 1997 other than those associated with the Monetary Production Payment. The Company has entered into interest rate swap agreements to manage the impact of changes in interest rates. The differential interest to be paid or received is accrued as interest rates change and is recognized over the life of the agreements as a component of interest expense. GENERAL AND ADMINISTRATIVE EXPENSE - General and administrative expenses represent various overhead costs of corporate departments. All overhead expenses directly related to the operations of the Company's business segments are included in operations and maintenance expenses and exploration charges. INCOME TAXES - The Company uses the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as part of the provision for income taxes in the period that includes the enactment date. FOREIGN CURRENCY TRANSLATION - The functional currency for the Company's Canadian operations is the applicable local currency. Translation from Canadian dollars to U. S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using primarily a weighted average exchange rate during the period. Adjustments resulting from such translation are included as a separate component of shareholders' equity. Deferred income taxes have not been provided on translation adjustments because any unremitted income from Seagull's foreign operations is considered to be permanently invested. The U.S. dollar is the functional currency for the Company's operations in Russia. Monetary assets and liabilities denominated in rubles are translated into U.S. dollars using the market rate, as set by the Central Bank of the Russian Federation. Non-monetary assets and liabilities denominated in rubles are translated at historical rates. Exchange gains 41 or losses arising from the translation of ruble denominated assets and liabilities into U.S. dollars are included in net income. The ruble is not a convertible currency outside the territory of Russia. In addition, the economy in Russia has experienced hyperinflation, which has resulted in a significant devaluation of the ruble. If hyperinflation continues, additional devaluation of the ruble may occur. As of December 31, 1996, the Company's consolidated financial statements include ruble denominated net monetary liabilities of approximately 4.6 billion rubles, which have been translated into approximately $0.8 million. The U.S. dollar is the functional currency for all other foreign operations, as predominantly all transactions in those operations are denominated in U.S. dollars. STOCK-BASED COMPENSATION - Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." This SFAS allows a Company to adopt a fair value based method of accounting for a stock-based employee compensation plan or to continue to use the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has chosen to continue to account for stock-based compensation under the intrinsic value method. Under this method, the Company records no compensation expense for stock options granted when the exercise price of options granted is equal to the fair market value of Seagull's common stock on the day of grant. EARNINGS PER SHARE - The weighted average number of common shares outstanding for the computation of earnings per share for the years ended December 31, 1996, 1995 and 1994 gives effect to the assumed exercise of stock options as of the beginning of the year. CONCENTRATIONS OF RISK - The future results of the oil and gas operations segment will be affected by the market prices of oil and natural gas. The availability of a ready market for natural gas, oil and liquid products in the future will depend on numerous factors beyond the control of the Company, including weather, production of other natural gas, crude oil and liquid products, imports, marketing of competitive fuels, proximity and capacity of oil and gas pipelines and other transportation facilities, any oversupply or undersupply of gas, oil and liquid products, the regulatory environment, and other regional and political events, none of which can be predicted with certainty. The Company operates in various phases of the oil and natural gas industries with sales to resellers such as pipeline companies and local distribution companies as well as to end-users such as commercial businesses, industrial concerns and residential consumers. The Company's receivables include amounts due from purchasers of oil and gas production and amounts due from joint venture partners for their respective portions of operating expense and exploration and development costs. The Company believes that no single customer or joint venture partner exposes the Company to significant credit risk. While certain of these customers and joint venture partners are affected by periodic downturns in the economy in general or in their specific segment of the natural gas or oil industry, the Company believes that its level of credit-related losses due to such economic fluctuations has been immaterial and will continue to be immaterial to the Company's results of operations in the long term. Trade receivables are generally not collateralized; however, the Company analyzes customers' and joint venture partners' historical credit positions prior to extending credit. The Company has a significant portion of its operations in various geographic areas of the world. The Company's activities in these areas are subject to the usual risks associated with foreign operations, including political and economic uncertainties, risks of cancellation or unilateral modification of agreements, operating restrictions, currency repatriation restrictions, expropriation, export restrictions, the imposition of new taxes and the increase of existing taxes, inflation, foreign exchange fluctuations and other risks arising out of foreign government sovereignty over areas in which the operations are conducted. The Company has endeavored to protect 42 itself against political and commercial risks inherent in these operations. There is no certainty that the steps taken by the Company will provide adequate protection. Derivative financial instruments that hedge the price of oil and natural gas and interest rates are generally executed with major financial or commodities trading institutions which expose the Company to acceptable levels of market and credit risks and may at times be concentrated with certain counterparties or groups of counterparties. Although notional amounts are used to express the volume of these contracts, the amounts potentially subject to credit risk, in the event of non-performance by the counterparties, are substantially smaller. The creditworthiness of counterparties is subject to continuing review and full performance is anticipated. 3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Supplemental disclosures of cash flow information (stated in thousands) are as follows: ================================================================================
Year Ended December 31, 1996 1995 1994 --------- --------- -------- Cash paid during the year for: Interest, net of amount capitalized ........ $ 44,033 $ 46,804 $ 44,946 Income taxes ............................... $ 12,046 $ 14,074 $ 8,198
4. ACQUISITION AND DISPOSITION OF ASSETS On September 10, 1996, Seagull purchased the stock of Esso Suez Inc. ("ESI") and certain assets of Esso Egypt Limited (the "EEL Assets") for a net purchase price of approximately $74 million in cash (the "Esso Suez Acquisition") financed through additional borrowings under Seagull's revolving credit facilities. The transaction was accounted for as a purchase. ESI holds a 100% interest in the East Zeit oil producing concession in the offshore Gulf of Suez, and the EEL Assets consist of the entire working interest in the South Hurghada concession located onshore on the coast of the Gulf of Suez approximately 250 miles southeast of Cairo. As of September 10, 1996, the ESI concession area contained approximately 17 million net barrels of proved oil reserves. The 63,000-acre South Hurghada concession contains several currently drillable exploratory prospects, plus two existing oil discoveries. ===============================================================================
(Unaudited) Year Ended December 31, 1996 1995 --------- --------- Revenues ............................... $ 552,892 $ 466,639 Net income ............................. $ 37,030 $ 11,074 Earnings per share ..................... $ 0.58 $ 0.18
The table on page 43 (stated in thousands except per share data) presents the unaudited pro forma results of the combined operations of Seagull, ESI and the EEL Assets as though the Esso Suez Acquisition had occurred on January 1, 1995. The unaudited pro forma information does not purport to be indicative of actual results if the Esso Suez Acquisition had been in effect for the periods indicated. 43 On September 25, 1995, the Company and three other sellers completed the sale of their disparate interests in 19 natural gas gathering systems and a gas processing plant (the "Pipeline Assets"). From its share of the proceeds, Seagull realized a one-time, pre-tax gain of approximately $82 million recorded in the third quarter of 1995. For the years ended December 31, 1995 and 1994, the Pipeline Assets contributed $17.6 million and $26.4 million, respectively, to the revenues and $6.2 million and $6.7 million, respectively, to the operating profit (loss) of the oil and gas operations segment. In September 1995, the Company sold certain Internal Revenue Code Section 29 Tax Credit-bearing gas properties (the "Section 29 Properties") to an investment group which includes a Seagull subsidiary and two financial investors. For accounting purposes, the Company has treated the sale as a non-recourse monetary production payment reflected in long-term debt on the balance sheet (see Note 6). 5. OTHER NONCURRENT ASSETS Other noncurrent assets include the following (stated in thousands): ===============================================================================
December 31, 1996 1995 --------- --------- Oil and gas imbalances ................. $ 24,673 $ 24,382 Deferred financing costs ............... 10,255 12,979 Other .................................. 7,877 10,155 --------- --------- $ 42,805 $ 47,516 ========= =========
OIL AND GAS IMBALANCES - As discussed in Note 2, the Company records oil and gas revenues following the entitlement method of accounting for production imbalances. The Company records revenue from gas marketing sales net of the cost of gas and third-party delivery fees, with any resulting transportation imbalances recorded as a current receivable or payable. The Company's oil, gas and transportation imbalance assets and liabilities were as follows: ===============================================================================
December 31, 1996 1995 --------------------- --------------------- AMOUNT VOLUME Amount Volume (THOUSANDS) (BCFE) (Thousands) (Bcfe) ------------ ------ ------------ ------ ASSETS: Current ......................... $ 17,650 9.8 $ 12,693 8.2 Noncurrent ...................... 24,673 15.9 24,382 16.1 ------------ ------ ------------ ------ $ 42,323 25.7 $ 37,075 24.3 ============ ====== ============ ====== LIABILITIES: Current ......................... $ 12,060 6.5 $ 11,219 7.6 Noncurrent ...................... 20,047 13.4 20,439 13.8 ------------ ------ ------------ ------ $ 32,107 19.9 $ 31,658 21.4 ============ ====== ============ ======
44 DEFERRED FINANCING COSTS - Deferred financing costs represent financing costs incurred in connection with the execution of various facilities entered into or securities issued by the Company. These costs are capitalized and amortized to interest expense over the life of the related debt. As discussed in Note 6, the Company has a $650 million revolving credit line which matures in 2002. Financing costs initially incurred in 1992 of approximately $16.7 million were capitalized in connection with this facility and will be amortized over periods ending December 31, 2002. Approximately $5.0 million in financing costs incurred in connection with the Company's July 1993 issuance of $250 million in senior and senior subordinated notes was capitalized and will be amortized over periods ending August 1, 2005 (see Note 6). 6. DEBT MONEY MARKET FACILITIES - Seagull has money market facilities with two U.S. banks with a combined maximum commitment of $70 million. These lines of credit bear interest at rates made available by the banks at their discretion (7.5% and 6.6% at December 31, 1996 and 1995, respectively) and may be canceled at either Seagull's or the banks' discretion. At December 31, 1996, the total amounts outstanding under the money market facilities of $17 million were classified as a current liability and included in accounts and note payable since it is Seagull's intent to repay these amounts in 1997. At December 31, 1995, all amounts outstanding under the money market facilities of approximately $27.5 million were classified as long-term debt since it was Seagull's intent to refinance these amounts on a long-term basis with proceeds from its revolving credit facilities. Long-term debt for 1996 and 1995 (stated in thousands) was as follows: ===============================================================================
December 31, 1996 1995 -------- -------- Revolving credit ............................... $236,620 $164,396 Senior notes ................................... 100,000 100,000 Senior subordinated notes ...................... 150,000 150,000 Monetary production payment .................... 34,378 43,856 Money market facilities ........................ -- 27,527 International Finance Corporation loan ......... -- 12,200 ENSTAR Alaska: Unsecured industrial development bonds ....... 10,230 11,140 Other unsecured notes ........................ 50,450 50,750 Other debt ................................... 10 14 -------- -------- 581,688 559,883 Less: Current maturities ...................... 7,227 1,650 Unamortized debt discount ............... 1,006 1,126 -------- -------- $573,455 $557,107 ======== ========
45 REVOLVING CREDIT - During 1996, the terms of the Company's unsecured revolving credit agreements (the "Revolving Credit Facilities") were amended and currently provide a maximum commitment of $650 million. Under the terms of the Revolving Credit Facilities, the commitments thereunder begin to decline on March 31, 1999 in equal quarterly reductions of approximately $40 million and a final reduction of $50 million on December 31, 2002. The Revolving Credit Facilities bear interest, at Seagull's option, at various market-sensitive rates plus an applicable margin or competitive bid rate. These rates varied from 3.7% to 6.3% and 6.2% to 6.9% at December 31, 1996 and 1995, respectively. The Revolving Credit Facilities contain certain covenants and restrictive provisions among which are limitations on the incurrence of additional debt or liens, the declaration or payment of dividends and the repurchase or redemption of capital stock and the maintenance of certain financial ratios. Under the most restrictive of these provisions, approximately $133 million was available for payment of cash dividends on Common Stock or to repurchase Common Stock as of December 31, 1996. Under provisions included in the Revolving Credit Facilities, the amount of senior indebtedness available to the Company is subject to a borrowing base (the "Borrowing Base") based upon certain of the Company's proved oil and gas reserves and the financial performance of the Alaska transmission and distribution segment. The Borrowing Base is generally determined annually, but may be redetermined, at the option of either Seagull or the banks, one additional time each year, and will be redetermined upon the sale of certain assets included in the Borrowing Base. With the Esso Suez Acquisition, Seagull requested and received a $50 million increase to the Borrowing Base to $550 million on October 1, 1996. If the Borrowing Base is redetermined in such a manner that the amount outstanding under the Revolving Credit Facilities (together with any other permitted senior debt facility) exceeds the new Borrowing Base, then the Company must repay the Revolving Credit Facilities or such other indebtedness in an amount necessary to cure the deficiency. If such deficiency has not been cured within 30 days, such deficiency must be cured in three equal quarterly installments. During 1995, Global executed a $35 million credit agreement (the "Global Credit Agreement") with a bank. At December 31, 1995, under this agreement, there were no loans outstanding and approximately $18 million in letters of credit had been issued. These letters of credit are primarily associated with the Redeemable Bearer Shares (see Note 9). During 1995, Global also executed a $17.5 million financing agreement with the International Finance Corporation, a subsidiary of the World Bank, (the "IFC Loan"). As of December 31, 1995, the weighted average interest rate was 8.4% for the IFC Loan. Subsequent to the Merger, the IFC Loan was repaid with proceeds from the Revolving Credit Facilities and both the Global Credit Agreement and the IFC Loan were canceled. The letters of credit associated with the Redeemable Bearer Shares were reissued under the Revolving Credit Facilities. As of December 31, 1996, borrowings outstanding under the Revolving Credit Facilities were approximately $237 million, leaving immediately available unused commitments of approximately $176 million, net of outstanding letters of credit of $20 million, $100 million of borrowings outstanding under the Senior Notes (defined below), and $17 million in borrowings outstanding under the money market facilities. SENIOR AND SENIOR SUBORDINATED NOTES - In July 1993, Seagull sold $100 million of senior notes (the "Senior Notes") and $150 million of senior subordinated notes (the "Senior Subordinated Notes") (collectively the "Notes") in an underwritten public offering. The Senior Notes bear interest at 7 7/8% per annum, are not redeemable prior to maturity or subject to any sinking fund and mature on August 1, 2003. The Senior Subordinated Notes bear interest at 8 5/8% per annum, are not 46 subject to any sinking fund and mature on August 1, 2005. On or after August 1, 2000, the Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, at redemption prices declining from 102.59% in 2000 to 100.00% in 2003 and thereafter (expressed as a percentage of principal amount), plus accrued interest to the redemption date. The Notes were issued at par and interest is paid semiannually. The Notes represent unsecured obligations of the Company. The Senior Notes rank pari passu with senior indebtedness of the Company while the Senior Subordinated Notes are subordinate in right of payment to all existing and future senior indebtedness of the Company. The Notes contain conditions and restrictive provisions including, among other things, restrictions on additional indebtedness by the Company and by its subsidiaries, the right of each note holder to have the notes repurchased by the Company at 101% of the principal amount upon a change in control, as well as restrictions on the incurrence of secured debt and entering into sale and leaseback transactions. MONETARY PRODUCTION PAYMENT - On September 1, 1995, the Company sold the Section 29 Properties for $46.3 million in net proceeds. The transaction was recorded as a monetary production payment for accounting purposes. The investors receive the operating cash flow from the properties, less funds required for working capital purposes, and are expected to recoup their investment plus their required after-tax rate of return by 2002. Seagull's pre-tax effective interest rate is currently estimated to be approximately 4%. ENSTAR ALASKA - All long-term debt of ENSTAR Alaska is issued by a wholly owned subsidiary of Seagull in the form of senior unsecured notes. These unsecured notes bear interest at various fixed rates ranging from 7.75% to 12.8% with principal repayments due 1997 through 2009. These senior unsecured notes of the subsidiary provide for restrictions on dividends, additional borrowings and purchases, redemptions or retirements of shares of capital stock, other than in stock of the subsidiary. Under the most restrictive provisions of these financing arrangements, ENSTAR Alaska had approximately $16.1 million available for the making of restricted investments, restricted stock payments and restricted subordinated debt payments as of December 31, 1996. INTEREST RATE SWAP AGREEMENTS - The Company enters into interest rate swap agreements to manage the impact of changes in interest rates. At December 31, 1996, the Company had outstanding interest rate swaps with a notional amount of $100 million whereby the Company pays a floating interest rate and receives a fixed interest rate ranging from 5.43% to 5.635%. These interest rate swaps will expire on January 31, 1997 and are not expected to have a material impact on the Company's results of operations or cash flow for 1997. While notional amounts are used to express the volume of the interest rate swap transactions discussed above, the amount potentially subject to credit risk, in the event of nonperformance by Seagull's counterparties, is significantly smaller. For the years ended December31, 1996, 1995 and 1994, interest expense included approximately $1.7 million, $0.6 million and $2.3 million, respectively, relating to these agreements. ANNUAL MATURITIES - At December 31, 1996, the Company's aggregate annual maturities of long-term debt are $7.2 million, $7.1 million, $7.1 million, $27.8 million and $34.2 million for the years 1997, 1998, 1999, 2000 and 2001, respectively. 47 7. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities (stated in thousands) include the following: ===============================================================================
December 31, 1996 1995 --------- --------- Oil and gas imbalances (see Note 5) .............. $ 20,047 $ 20,439 Refundable customer advances for construction .... 11,567 11,037 Other ............................................ 33,814 21,761 --------- --------- $ 65,428 $ 53,237 ========= =========
Refundable customer advances for construction represent customer deposits received by ENSTAR Alaska for construction of main extensions refundable either wholly or in part over a period not to exceed 10 years. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments (stated in thousands) are summarized as follows: ===============================================================================
December 31, ------------------------------------------------- 1996 1995 ---------------------- ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value --------- ---------- --------- ---------- Assets: Cash and cash equivalents .................... $ 15,284 $ 15,284 $ 21,477 $ 21,477 Short-term investments ....................... -- -- 5,004 5,004 Liabilities: Refundable customer advances and deposits .... (14,075) (11,405) (14,866) (11,986) Long-term debt ............................... (580,682) (589,815) (558,757) (558,197) Redeemable bearer shares ....................... (16,059) NA (16,591) NA Derivative transactions: Interest rate swap agreements: In a receivable position .................. -- -- -- 440 In a payable position ..................... -- (107) -- (1,604) Commodity hedging instruments: In a receivable position .................. (42) 247 -- 981 In a payable position ..................... (291) (10,798) (105) (3,688)
CASH AND CASH EQUIVALENTS - The carrying amount approximates fair value because of the short maturity of these instruments. SHORT-TERM INVESTMENTS - The carrying amount approximates fair value which is estimated based upon quoted market prices. REFUNDABLE CUSTOMER ADVANCES AND DEPOSITS - The fair value is based on discounted cash flow analyses utilizing a discount rate of 8.25% and 8.75% at December 31, 1996 and 1995, respectively, with monthly payments ratably over the estimated period of deposit or advance refunding. LONG-TERM DEBT - The fair value of the Senior Notes, Senior Subordinated Notes and ENSTAR Alaska debt is estimated based on quoted market prices for the same or similar issues. The fair value of the monetary production payment is estimated using discounted cash flow analyses utilizing a discount rate of 48 approximately 3.8% at December 31, 1996 and 1995. The carrying amount of all other debt approximates fair value because these instruments bear interest at rates tied to current market rates. REDEEMABLE BEARER SHARES - The fair value is not determinable because reductions in the outstanding balance are on demand only to the extent necessary to redeem bearer shares presented for exchange until July 2008 with any remaining balance reverting to the Company. The Company is not able to determine when the bearer shares will be presented and how many will not be redeemed. INTEREST RATE SWAP AGREEMENTS - The fair values are obtained from the financial institutions that are counterparties to the transactions. These values represent the estimated amount the Company would pay or receive to terminate the agreements, taking into consideration current interest rates and the current creditworthiness of the counterparties. Seagull's interest rate swap agreements are off balance sheet transactions and, accordingly, no respective carrying amounts for these transactions are included in the accompanying consolidated balance sheets as of December 31, 1996 and 1995. COMMODITY RELATED TRANSACTIONS -- The fair value of the Company's commodity hedging instruments is the estimated amount the Company would receive or pay to settle the applicable commodity hedging instrument at the reporting date, taking into account the difference between New York Mercantile Exchange ("NYMEX") prices or index prices at year-end and the contract price of the commodity hedging instrument. The estimated fair value amounts have been determined by the Company using available market information and valuation methodologies described above. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. 9. REDEEMABLE BEARER SHARES The Company through its merger with Global became the successor issuer to Global Natural Resources PLC, a United Kingdom company ("U.K. Company"). On July 26, 1983 pursuant to the terms of a Scheme of Arrangement (the "Arrangement") under Section 206 of the English Companies Act, the domicile of the parent company was moved to the United States from the United Kingdom. Under the terms of the Arrangement, 24,270,876 registered common shares of Global were registered in the name of Hambros Trust ("Trust Shares"). The Trust Shares were held for the owners of bearer share warrants issued by the U.K. Company. Holders of bearer shares were entitled to receive at their election either cash or Global shares on a share-for-share basis until July 1993. After July 1993, holders of bearer shares are entitled to receive only cash. The Arrangement provided that Trust Shares not claimed by July 26, 1988 could be sold by the Trust and the proceeds from such sale together with earned interest be used to satisfy future claims by the holders of share warrants to bearer. In August 1993, Global received $19.2 million, the remaining cash held by the Trust, in the form of an interest-free loan. The loan is repayable on demand only to the extent necessary to redeem bearer share warrants presented for exchange until July 2008. Each bearer share warrant presented during this period will be redeemed for $6.66. As of December 31, 1996 and 1995, there were 2,463,008 and 2,575,947 outstanding bearer share warrants, respectively. The loan is secured by a letter of credit which is issued under the Revolving Credit Facilities. During 1996 and 1995 there were no drawings under the letter of credit. In July 2008, the obligation of the Company to holders of bearer share warrants will cease, the 49 interest-free loan will terminate, and any remaining cash will revert to the Company and will be accounted for as an increase in additional paid-in capital. 10. SHAREHOLDERS' EQUITY The following table reflects the activity in shares of the Company's Common Stock and Treasury Stock during the three years ended December 31, 1996. ===============================================================================
1996 1995 1994 ----------- ----------- ----------- Common Stock Issued Shares at beginning of year ....................................... 65,983,199 65,767,743 65,586,112 Exercise of employee stock options ................................ 449,256 215,104 181,631 Executive compensation ............................................ 3,000 -- -- Retirement of treasury stock pursuant to the Global Merger ........ (3,361,185) -- -- Other ............................................................. (983) 352 -- ----------- ----------- ----------- Shares at end of year ............................................. 63,073,287 65,983,199 65,767,743 =========== =========== =========== Treasury Stock Shares at beginning of year ....................................... 3,729,823 3,759,425 3,130,782 Acquisition of treasury stock ..................................... -- -- 641,134 Issuance of treasury stock to 401(k) plan ......................... (7,324) (11,602) (12,491) Executive incentive compensation .................................. -- (18,000) -- Retirement of treasury stock pursuant to the Global Merger ........ (3,361,185) -- -- ----------- ----------- ----------- Shares at end of year ............................................. 361,314 3,729,823 3,759,425 =========== =========== ===========
TREASURY STOCK - Pursuant to the terms of the Global Merger, 3,819,525 shares of Global Common Stock (equivalent to 3,361,185 shares of Seagull Common Stock on an as-converted basis) were retired. PREFERRED STOCK - The Company is authorized to issue 5,000,000 shares of preferred stock, par value $1.00 per share, in one or more series. There were no shares issued or outstanding as of December 31, 1996 and 1995. PREFERRED SHARE PURCHASE RIGHTS - In 1989, Seagull adopted a Share Purchase Rights Plan to protect the Company's shareholders from coercive or unfair takeover tactics. Under the Plan, each outstanding share and each share of Common Stock subsequently issued has attached to it one Right, exercisable at $32.75, subject to certain adjustments. Generally, in the event a person or group acquires 20% or more of the outstanding Common Stock other than pursuant to a cash tender offer for all shares of such Common Stock (provided that the tender offer increases the acquiring person's or group's ownership to at least 85% of the outstanding Common Stock), or in the event the Company is acquired in a merger or other business combination or 50% or more of the Company's consolidated assets or earning power is sold, each Right entitles the holder to purchase shares of Common Stock of the Company or of the acquiring company, having a value of twice the exercise price. The Rights, under certain circumstances, are redeemable at the option of Seagull's Board of Directors at a price of $0.01 per Right, within 10 days (subject to extension) following the day on which the acquiring person or group exceeds the 20% threshold. The Rights expire on March 22, 1999. 50 11. BENEFIT PLANS STOCK OPTION PLANS - The Company currently has various stock option plans. The stock options become exercisable over a three to six year period and all options expire 10 years after the date of grant. The majority of Seagull's options may be granted at the fair market value of Seagull's Common Stock on the New York Stock Exchange on the date of grant. The remaining stock options may have an exercise price not less than 50% of the fair market value of Seagull's Common Stock on the date of grant. All outstanding options, other than 44,000 granted by Global in 1993, were issued at the fair market value of Seagull's Common Stock. Accordingly as discussed in Note 2, no compensation expense relating to these options is recognized in the Company's results of operations. At December 31, 1996, approximately 1.5 million shares of Common stock were available for grant. Information relating to stock options is summarized as follows: ===============================================================================
1996 1995 1994 ------------------------------ ------------------------------ ------------------------------ EXERCISE PRICE Exercise Price Exercise Price SHARES PER SHARE Shares Per Share Shares Per Share ----------- --------------- ------------ --------------- ------------ --------------- Balance outstanding - Beginning of year.............. 4,501,920 $ 5.89 - 26.38 4,065,084 $ 5.89 - 26.38 3,627,600 $ 5.89 - 26.38 Granted....................... 844,000 $ 10.69 - 24.50 766,640 $ 8.81 - 18.88 665,900 $ 8.17 - 25.50 Exercised..................... (449,256) $ 6.31 - 14.88 (215,104) $ 5.89 - 17.38 (183,164) $ 5.89 - 14.88 Canceled...................... (149,872) (114,700) (45,252) ----------- --------------- ------------ --------------- ------------ --------------- Balance outstanding - End of year.................... 4,746,792 $ 5.89 - 26.38 4,501,920 $ 5.89 - 26.38 4,065,084 $ 5.89 - 26.38 =========== =============== ============ =============== ============ =============== Options exercisable - End of year.................... 2,417,492 2,265,809 2,009,062 =========== ============ ============
The weighted average fair value of stock options granted during 1996, 1995 and 1994 was $10.77, $8.36 and $12.95 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model. The model assumed expected volatility of 43%, 41% and 38%, weighted average risk-free interest rates of 6.5%, 6.1% and 7.0%, for grants in 1996, 1995 and 1994, respectively, and an expected life of three years after the vesting term. As Seagull has not declared dividends since it became a public entity, no dividend yield was used. Actual value realized, if any, is dependent on the future performance of Seagull Common Stock and overall stock market conditions. There is no assurance the value realized by an optionee will be at or near the value estimated by the Black-Scholes model. 51 Information relating to stock options outstanding at December 31, 1996 is summarized as follows: ===============================================================================
Options Outstanding Options Exercisable -------------------------------------------------------- ------------------------------------- Number Weighted Average Weighted Number Exercisable Weighted Range of Outstanding at Remaining Average at December 31, Average Exercise Prices December 31, 1996 Contractual Life Exercise Price 1996 Exercise Price -------------- ------------------ ----------------- ------------ ------------------ ------------- $ 5.89 -- $ 8.44 966,540 3 years $ 7.13 934,068 $ 7.12 $ 8.45 -- $ 12.00 1,071,988 6 years $ 10.34 893,540 $ 10.23 $ 12.01 -- $ 19.00 992,264 7 years $ 16.05 370,884 $ 14.87 $ 19.01 -- $ 26.00 1,214,000 9 years $ 24.32 26,200 $ 25.27 $ 26.01 -- $ 26.38 502,000 6 years $ 26.38 192,800 $ 26.38 ---------- ------- --------- --------- --------- $ 5.89 -- $ 26.38 4,746,792 6 years $ 16.15 2,417,492 $ 11.19 ========== ======= ========= ========= =========
As discussed above, no compensation expense has been recorded in 1996, 1995 or 1994 for the Company's stock options. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards made after December 31, 1994 under those plans, the Company's net income (loss) (stated in thousands) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below: ===============================================================================
Year Ended December 31, 1996 1995 ---------- ---------- Net income (loss) As reported................................... $ 28,961 $ (1,738) Pro forma..................................... $ 26,429 $ (2,443) Earnings (loss) per share As reported................................... $ 0.45 $ (0.03) Pro forma..................................... $ 0.41 $ (0.04)
Under the provisions of SFAS No. 123, the pro forma disclosures above include only the effects of stock options granted by Seagull subsequent to December 31, 1994. During this initial phase-in period, the pro forma disclosures as required by SFAS No. 123 are not representative of the effects on reported net income for future years as options vest over several years and additional awards are generally made each year. PROFIT SHARING PLANS - ENSTAR Alaska has trusteed profit sharing plans for salaried employees and union employees. Annual contributions for each plan are determined by the Company's Board of Directors pursuant to formulae which contain minimum contribution requirements. Profit sharing expense was approximately $0.4 million for 1996 and $0.3 million for both 1995 and 1994, and is included in operations and maintenance expenses. THRIFT PLANS - The Company has various thrift plans which are qualified employee savings plans in accordance with the provisions of Section 401(k) of the Internal Revenue Code of 1986, as amended, or the provisions of the Income Tax Act of Canada, as applicable. Company contributions to these plans (collectively, the "Thrift Plans") were approximately $1.8 million for each of the years 1996, 1995 and 1994. The Thrift Plans' costs are included in operations and maintenance expenses and general and administrative expenses. One of the Thrift Plans, the Employees 401(k) Savings Plan ("ESP"), was a defined contribution plan which covered substantially all of Global's U.S. employees. Employees' contributions were matched by the Company with treasury shares of common stock. The Company recorded expense of approximately $0.1 million in each of the years 1996, 1995 and 1994 relating to its contributions of 7,324, 11,602, and 12,491 shares, respectively, of Seagull Common Stock to the ESP. Subsequent to December 31, 1996, contributions to 52 the ESP will be suspended and those employees eligible to contribute to the ESP prior to the Merger will be eligible to contribute to the Seagull Thrift Plan. DEFINED BENEFIT PLANS - The Company has an unfunded retirement plan which provides for supplemental benefits to certain officers and key employees. As of December 31, 1996, only one person was designated to participate in such plan. Total expenses of the plan were approximately $0.2 million for both 1996 and 1995 and $0.3 million for 1994. The retirement plan's costs are included in general and administrative expenses. ENSTAR Alaska has two defined benefit retirement plans which cover salaried employees and operating employees. Determination of benefits for the salaried employees is based upon a combination of years of service and final monthly compensation. Benefits for operating employees are based solely on years of service. ENSTAR Alaska's policy is to fund the minimum contributions required by applicable regulations. The net pension costs are included in operations and maintenance expenses. Global sponsored a defined benefit pension plan which covered substantially all of Global's U.S. employees. The plan provides benefits based on the employee's years of service and compensation during the years immediately preceding retirement. Global made annual contributions to the plan to comply with the minimum funding provisions of the Employee Retirement Income Security Act. The plan investments consist primarily of common equities and fixed income securities. The Company has terminated this defined benefit pension plan and intends to pay participants the present value of their accrued benefits. Settlement of this plan is not expected to have a material effect on Seagull's financial position or results of operations. The following table (stated in thousands) details the components of pension income and expense, the funded status of the Company's plans, amounts recognized in the Company's consolidated balance sheets and major assumptions used to determine these projected benefit obligations. Certain assumptions are based on factors, such as interest rates and long-term rates of return on investments, which are subject to change due to forces beyond the Company's control. Changes in the various assumptions utilized could have a significant effect on the amounts reported. 53 ===============================================================================
1996 1995 --------- --------- Actuarial present value of benefit obligations: Vested benefit obligation ....................................................... $ (16,242) $ (14,678) ========= ========= Accumulated benefit obligation .................................................. $ (16,278) $ (15,053) ========= ========= Projected benefit obligation for services rendered to date ........................ $ (17,740) $ (18,043) Plan assets at fair value, primarily listed stocks and corporate and U. S. bonds .. 15,520 13,376 --------- --------- Plan assets at fair value less than projected benefit obligation .................. (2,220) (4,667) Unrecognized prior service cost ................................................... 91 274 Unrecognized net loss ............................................................. 753 2,843 Unrecognized net obligation arising out of the initial application of SFAS No. 87, amortized over 15 years to 18 years ................................ 394 533 Additional minimum liability ...................................................... -- (1,321) --------- --------- Accrued pension cost .............................................................. $ (982) $ (2,338) ========= ========= Net pension cost includes the following components: Service cost - benefits earned during the period ................................ $ 1,025 $ 812 Interest cost on projected benefit obligation ................................... 1,212 1,054 Actual return on plan assets .................................................... (2,605) (3,094) Net amortization and deferral ................................................... 1,835 2,464 --------- --------- Net periodic pension cost ......................................................... $ 1,467 $ 1,236 ========= ========= Assumptions: Discount rate ................................................................... 7% 7% Rate of increase in future compensation ......................................... 2% 4% Expected long-term rate of return on plan assets ................................ 8% 8%
EMPLOYEE STOCK OWNERSHIP PLAN - On November 15, 1989, the Company formed the Seagull Employee Stock Ownership Plan (the "ESOP") for the benefit of the non-Alaskan employees of the Company. The ESOP borrowed from the Company $7.7 million at an interest rate of 10 percent per annum to be repaid in twelve equal annual installments of principal and interest. The ESOP used the borrowed funds and the 1989 contributions from the Company to purchase 948,150 shares of Common Stock at $8.438 per share from Seagull's treasury. The purchase price was based upon the closing price of the Common Stock on the New York Stock Exchange on the date the ESOP was formed. The promissory note has been and will be funded entirely by contributions from Seagull. Company contributions of approximately $0.6 million in both 1996 and 1995 and $0.5 million in 1994 are included in operations and maintenance expenses and general and administrative expenses. POSTRETIREMENT MEDICAL PLAN - ENSTAR Alaska has a postretirement medical plan which covers all of its salaried employees. Determination of benefits is based upon the combined age of the retiree and years of service at retirement. The Company accrues for such benefits during the years the plan participants render service. Expenses related to the postretirement medical plan of $0.3 in 1996 and $0.2 million in both 1995 and 1994 are included in operations and maintenance expenses. 54 12. INCOME TAXES The income (loss) before income taxes and the components of income tax expense (stated in thousands) for each of the years ended December 31, 1996, 1995 and 1994 were as follows: ===============================================================================
1996 1995 1994 --------- --------- --------- Income (loss) before income taxes: Domestic ............................................... $ 38,200 $ 6,841 $ 2,886 Foreign ................................................ 16,656 (5,797) (3,551) --------- --------- --------- $ 54,856 $ 1,044 $ (665) ========= ========= ========= Current income tax expense: Federal ................................................ $ (643) $ 6,236 $ 1,675 Foreign ................................................ 17,737 9,376 7,031 State .................................................. 100 3,462 1,325 --------- --------- --------- Total current ......................................... 17,194 19,074 10,031 --------- --------- --------- Deferred income tax expense (benefit): Federal ................................................ 7,605 (13,570) (7,257) Foreign ................................................ 815 (1,935) 1,256 State .................................................. 281 (787) (290) --------- --------- --------- Total deferred ........................................ 8,701 (16,292) (6,291) --------- --------- --------- Income tax expense ....................................... 25,895 2,782 3,740 Additional paid-in capital for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes ........................... (1,244) (374) (160) --------- --------- --------- $ 24,651 $ 2,408 $ 3,580 ========= ========= =========
The provision for income taxes for each of the years ended December 31, 1996, 1995 and 1994 was different than the amount computed using the federal statutory rate (35%) for the following reasons (stated in thousands): ===============================================================================
1996 1995 1994 --------- --------- --------- Amount computed using the statutory rate ................................ $ 19,200 $ 365 $ (233) Increase (Reduction) in taxes resulting from: Utilization of Internal Revenue Code Section 29 (Tight Sands) credits ..................................... (171) (3,096) (5,534) State income taxes, net of federal income tax benefits ................ 248 1,739 673 Taxation of foreign operations, net of federal income tax benefits .... 13,613 8,494 7,272 Decrease in deferred tax asset valuation allowance .................... (8,430) (6,194) (982) Adjustments to beginning-of-the-year tax bases per the 1994 tax returns and effects of IRS exam ..................... -- (1,385) -- Other ................................................................. 1,435 2,859 2,544 --------- --------- --------- Income tax expense ...................................................... $ 25,895 $ 2,782 $ 3,740 ========= ========= =========
55 The net decrease in the valuation allowance for the year ended December 31, 1996 of approximately $8.4 million included $6.2 million related to the utilization in 1996 of net operating losses. The remaining change for 1996 and the changes for 1995 and 1994 are related to management's belief that, due to events occurring in the year of change, it is more likely than not that such deferred tax assets, for which a valuation allowance had previously been established, will be realized. The significant components of deferred income tax expense (benefit) attributable to income from continuing operations for the years ended December 31, 1996, 1995 and 1994 (stated in thousands) were as follows: ===============================================================================
1996 1995 1994 --------- --------- --------- Deferred tax expense (benefit) (exclusive of the effects of other components listed below) ........................ $ 17,131 $ (10,098) $ (5,309) Decrease in deferred tax asset valuation allowance ......... (8,430) (6,194) (982) --------- --------- --------- $ 8,701 $ (16,292) $ (6,291) ========= ========= =========
The tax effects of temporary differences that gave rise to significant portions of the deferred tax liabilities and deferred tax assets as of December 31, 1996, 1995 and 1994 (stated in thousands) were as follows: ===============================================================================
1996 1995 1994 --------- --------- --------- Deferred tax liabilities: Property, plant and equipment, due to differences in depreciation, depletion and amortization ....... $ 66,242 $ 50,783 $ 60,723 Other .......................................................... 583 197 1,077 --------- --------- --------- Deferred tax liabilities ......................................... 66,825 50,980 61,800 --------- --------- --------- Deferred tax assets: Minimum tax credit carryforwards ............................... (15,972) (18,950) (15,301) Investment tax credit carryforwards ............................ (1,851) (1,682) (3,466) Net operating loss carryforwards ............................... (1,727) (7,129) (10,267) Foreign tax credit carryforwards ............................... -- -- (1,545) Deferred compensation/retirement related items accrued for financial reporting purposes ................ (5,464) (4,349) (3,965) Contingent consideration related to acquisitions/dispositions .. (5,018) (651) (1,052) Notes receivable ............................................... (6,209) (5,333) (5,248) Other .......................................................... (3,636) (3,178) (1,774) --------- --------- --------- Deferred tax assets .............................................. (39,877) (41,272) (42,618) Less - valuation allowance ....................................... -- 8,430 14,624 --------- --------- --------- Net deferred tax assets .......................................... (39,877) (32,842) (27,994) Less - reclassification to current deferred tax assets ........... 4,073 5,239 4,118 --------- --------- --------- Non-current deferred tax assets .................................. (35,804) (27,603) (23,876) --------- --------- --------- Net non-current deferred tax liabilities ......................... $ 31,021 $ 23,377 $ 37,924 ========= ========= =========
For federal income tax purposes, as of December 31, 1996, the Company has unused investment tax credits of approximately $1.9 million which will expire in the years 1999 and 2000, unused operating loss carryforwards of approximately $4.9 million which will expire in the years 1997 through 1999 and unused minimum tax credits of approximately $16.0 million which are available over an indefinite period. 56 13. BUSINESS SEGMENTS Information on the Company's operations by business segment (stated in thousands) is summarized as follows for the years ended December 31: ===============================================================================
1996 1995 1994 ----------- ----------- ----------- REVENUES: Oil and gas operations ......................... $ 420,962 $ 310,656 $ 364,888 Alaska transmission and distribution ........... 97,616 97,770 105,598 ----------- ----------- ----------- $ 518,578 $ 408,426 $ 470,486 =========== =========== =========== OPERATING PROFIT (LOSS): Oil and gas operations(1) ...................... $ 100,529 $ (33,721) $ 41,374 Alaska transmission and distribution ........... 26,026 23,141 21,865 General and administrative expense ............. (21,500) (23,798) (14,603) ----------- ----------- ----------- $ 105,055 $ (34,378) $ 48,636 =========== =========== =========== DEPRECIATION, DEPLETION AND AMORTIZATION: Oil and gas operations(1) ...................... $ 144,954 $ 188,455 $ 149,182 Alaska transmission and distribution ........... 7,945 7,797 7,752 Corporate ...................................... 3,420 4,351 3,016 ----------- ----------- ----------- $ 156,319 $ 200,603 $ 159,950 =========== =========== =========== IDENTIFIABLE ASSETS: Oil and gas operations ......................... $ 1,267,481 $ 1,118,216 $ 1,188,341 Alaska transmission and distribution ........... 189,867 189,081 190,087 Corporate ...................................... 57,715 51,828 75,622 ----------- ----------- ----------- $ 1,515,063 $ 1,359,125 $ 1,454,050 =========== =========== =========== CAPITAL EXPENDITURES: Exploration and production: Leasehold ..................................... $ 12,986 $ 18,000 $ 18,573 Exploration ................................... 77,774 46,575 67,135 Development ................................... 108,763 69,260 100,763 ----------- ----------- ----------- 199,523 133,835 186,471 Pipeline and marketing ......................... 228 441 2,503 ----------- ----------- ----------- Oil and gas operations ......................... 199,751 134,276 188,974 Alaska transmission and distribution ........... 9,287 7,611 7,626 Corporate ...................................... 4,424 2,214 5,953 ----------- ----------- ----------- $ 213,462 $ 144,101 $ 202,553 =========== =========== =========== ACQUISITIONS, NET OF CASH ACQUIRED: Acquisitions of oil and gas properties ........... $ 90,867 $ -- $ 222,780 Acquisitions of other assets and liabilities ..... 13,553 -- (28,921) ----------- ----------- ----------- $ 104,420 $ -- $ 193,859 =========== =========== ===========
(1) Includes $48.8 million relating to the impairment of long-lived assets for the year ended December 31, 1995. Identifiable assets by geographic area is stated in thousands and summarized as follows:
1996 1995 1994 ---------- ---------- ---------- United States ..................... $1,138,619 $1,074,787 $1,185,890 Canada ............................ 200,352 211,040 224,656 Cote d'Ivoire ..................... 28,854 33,167 10,949 Egypt ............................. 119,680 11,003 2,772 Indonesia ......................... 3,487 4,237 4,535 Russia ............................ 21,152 21,120 19,228 Other(2) .......................... 2,919 3,771 6,020 ---------- ---------- ---------- $1,515,063 $1,359,125 $1,454,050 ========== ========== ==========
(2)Other includes Malaysia, the United Kingdom and Vietnam. 57 14. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS - The Company leases certain office space and equipment under operating lease arrangements which contain renewal options and escalation clauses. Future minimum rental payments under these leases range between $2.1 million and $2.9 million in each of the years 1997-2001, and total $10.4 million for all subsequent years. Total rental expense under operating leases for each of the years 1996, 1995 and 1994 was approximately $3.2 million. LITIGATION - The Company is a party to ongoing litigation in the normal course of business or other litigation with respect to which the Company is indemnified pursuant to various purchase agreements or other contractual arrangements. Management regularly analyzes current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, management believes that any adverse effect on the Company's financial condition, results of operations or cash flows will not be material. 58 15. SUPPLEMENTAL OIL AND GAS INFORMATION (Unaudited) CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES (AMOUNTS IN THOUSANDS) ===============================================================================
United Cote States Canada d'Ivoire Egypt Indonesia Russia Other Total ---------- ---------- -------- ---------- --------- ---------- -------- --------- At December 31, 1996: Proved ........................ $1,312,448 $ 239,323 $ 32,648 $ 98,407 $ 3,962 $ 17,056 $ -- $1,703,844 Unproved ...................... 33,959 2,525 664 5,584 -- -- 4,208 46,940 ---------- ---------- -------- ---------- -------- ---------- -------- ---------- 1,346,407 241,848 33,312 103,991 3,962 17,056 4,208 1,750,784 Accumulated depreciation, depletion and amortization ... 620,602 49,561 6,245 7,442 2,911 4,979 1,441 693,181 ---------- ---------- -------- ---------- -------- ---------- -------- ---------- $ 725,805 $ 192,287 $ 27,067 $ 96,549 $ 1,051 $ 12,077 $ 2,767 $1,057,603 ========== ========== ======== ========== ======== ========== ======== ========== At December 31, 1995: Proved ........................ $1,168,219 $ 234,437 $ 27,146 $ 9,331 $ 3,962 $ 13,103 $ 134 $1,456,332 Unproved ...................... 30,278 2,722 118 897 -- -- 4,426 38,441 ---------- ---------- -------- ---------- -------- ---------- -------- ---------- 1,198,497 237,159 27,264 10,228 3,962 13,103 4,560 1,494,773 Accumulated depreciation, depletion and amortization ... 511,174 34,015 2,100 134 2,779 2,635 815 553,652 ---------- ---------- -------- ---------- -------- ---------- -------- ---------- $ 687,323 $ 203,144 $ 25,164 $ 10,094 $ 1,183 $ 10,468 $ 3,745 $ 941,121 ========== ========== ======== ========== ======== ========== ======== ==========
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES (AMOUNTS IN THOUSANDS) ===============================================================================
United Cote States Canada d'Ivoire Egypt Indonesia Russia Other Total --------- --------- --------- --------- --------- --------- --------- --------- Year Ended December 31, 1996: Acquisition costs: Proved ........................ $ 29,102 $ 1,000 $ -- $ 56,051 $ -- $ -- $ -- $ 86,153 Unproved ...................... 10,371 862 782 5,584 -- -- 101 17,700 Exploration costs ............... 64,066 3,332 2,823 6,934 -- -- 619 77,774 Development costs ............... 65,309 10,992 3,255 25,176 -- 4,031 -- 108,763 --------- --------- --------- --------- --------- --------- --------- --------- $ 168,848 $ 16,186 $ 6,860 $ 93,745 $ -- $ 4,031 $ 720 $ 290,390 ========= ========= ========= ========= ========= ========= ========= ========= Year Ended December 31, 1995: Acquisition costs: Proved ........................ $ 3,193 $ 553 $ -- $ -- $ -- $ -- $ -- $ 3,746 Unproved ...................... 13,036 873 126 13 -- -- 206 14,254 Exploration costs ............... 38,762 764 (29) 3,412 -- 312 3,354 46,575 Development costs ............... 39,669 2,507 18,359 4,792 -- 3,933 -- 69,260 --------- --------- --------- --------- --------- --------- --------- --------- $ 94,660 $ 4,697 $ 18,456 $ 8,217 $ -- $ 4,245 $ 3,560 $ 133,835 ========= ========= ========= ========= ========= ========= ========= ========= Year Ended December 31, 1994: Acquisition costs: Proved ........................ $ 7,934 $ 218,871 $ -- $ -- $ -- $ -- $ -- $ 226,805 Unproved ...................... 8,021 3,216 -- 885 -- -- 2,426 14,548 Exploration costs ............... 54,604 801 3,032 2,022 -- 496 6,180 67,135 Development costs ............... 73,782 18,830 2,624 -- -- 5,527 -- 100,763 --------- --------- --------- --------- --------- --------- --------- --------- $ 144,341 $ 241,718 $ 5,656 $ 2,907 $ -- $ 6,023 $ 8,606 $ 409,251 ========= ========= ========= ========= ========= ========= ========= =========
59 RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (AMOUNTS IN THOUSANDS) ===============================================================================
United Cote States Canada d'Ivoire Egypt ---------- ---------- ---------- ---------- Year Ended December 31, 1996: Revenues ............................. $ 280,540 $ 33,911 $ 12,798 $ 28,126 Direct operating expense(1) .......... 61,206 11,849 2,454 3,851 General operating expense(1).......... 6,610 2,169 215 1,945 Exploration charges .................. 35,629 4,295 5,401 2,725 DD&A(2) .............................. 110,691 16,985 4,151 7,416 Income tax expense(3) ................ 23,047 1,375 2,158 5,579 ---------- ---------- ---------- ---------- Results of activities ................ $ 43,357 $ (2,762) $ (1,581) $ 6,610 ========== ========== ========== ========== Year Ended December 31, 1995: Revenues ............................. $ 205,596 $ 28,837 $ 4,377 $ 442 Direct operating expense(1) .......... 53,298 11,078 1,010 56 General operating expense(1).......... 8,486 1,856 390 -- Exploration charges .................. 26,156 2,866 471 2,086 DD&A(2) .............................. 113,430 18,046 2,106 136 Impairment of oil and gas properties . 46,122 -- -- -- Income tax expense (benefit)(3) ...... (20,776) (2,233) 832 -- ---------- ---------- ---------- ---------- Results of activities ................ $ (21,120) $ (2,776) $ (432) $ (1,836) ========== ========== ========== ========== Year Ended December 31, 1994: Revenues ............................. $ 246,491 $ 37,068 $ -- $ -- Direct operating expense(1) .......... 55,918 11,440 -- -- General operating expense(1).......... 11,356 1,574 -- -- Exploration charges .................. 34,926 2,308 -- -- DD&A(2) .............................. 124,179 16,558 -- -- Income tax expense (benefit)(3) ...... (2,405) 2,300 -- -- ---------- ---------- ---------- ---------- Results of activities ................ $ 22,517 $ 2,888 $ -- $ -- ========== ========== ========== ==========
Indonesia Russia Other Total ---------- ---------- ---------- ---------- Year Ended December 31, 1996: Revenues ............................. $ 15,892 $ 15,633 $ 57 $ 386,957 Direct operating expense(1) .......... -- 7,895 -- 87,255 General operating expense(1).......... -- 3,467 13 14,419 Exploration charges .................. -- (133) 2,310 50,227 DD&A(2) .............................. 131 2,830 877 143,081 Income tax expense(3) ................ 8,899 541 -- 41,599 ---------- ---------- ---------- ---------- Results of activities ................ $ 6,862 $ 1,033 $ (3,143) $ 50,376 ========== ========== ========== ========== Year Ended December 31, 1995: Revenues ............................. $ 12,418 $ 16,078 $ 7 $ 267,755 Direct operating expense(1) .......... -- 6,190 -- 71,632 General operating expense(1).......... -- 2,682 (21) 13,393 Exploration charges .................. -- 367 8,277 40,223 DD&A(2) .............................. 131 2,111 536 136,496 Impairment of oil and gas properties . -- -- -- 46,122 Income tax expense (benefit)(3) ...... 6,953 1,066 -- (14,158) ---------- ---------- ---------- ---------- Results of activities ................ $ 5,334 $ 3,662 $ (8,785) $ (25,953) ========== ========== ========== ========== Year Ended December 31, 1994: Revenues ............................. $ 11,738 $ 12,170 $ 10 $ 307,477 Direct operating expense(1) .......... -- 7,834 -- 75,192 General operating expense(1).......... -- 2,335 113 15,378 Exploration charges .................. -- 498 6,081 43,813 DD&A(2) .............................. 131 1,555 630 143,053 Income tax expense (benefit)(3) ...... 6,577 55 -- 6,527 ---------- ---------- ---------- ---------- Results of activities ................ $ 5,030 $ (107) $ (6,814) $ 23,514 ========== ========== ========== ==========
(1)Direct operating expense represents costs incurred to operate and maintain wells and related equipment and facilities. These costs include, among other things, repairs and maintenance, labor, materials, supplies, property taxes, insurance, severance taxes and transportation costs. General operating expense represents all overhead expenses directly related to oil and gas producing activities. (2)"DD&A" represents depreciation, depletion and amortization. (3)Income tax expense (benefit) is calculated by applying the applicable tax rate to operating profit for that country and, in the U.S., also providing the benefit of any Internal Revenue Code Section 29 Tax Credits. 60 RESERVE QUANTITY INFORMATION - THOUSAND EQUIVALENT BARRELS OF OIL (MBOE) ===============================================================================
United Cote States Canada d'Ivoire Egypt Indonesia Russia Total --------- --------- --------- --------- --------- --------- --------- Proved reserves: January 1, 1996 ................... 153,794 45,816 6,521 8,151 13,300 15,570 243,152 Revisions of previous estimates ... 4,021 (2,713) (900) 386 (518) 651 927 Extensions and discoveries ........ 12,769 5,261 263 1,798 -- 1,234 21,325 Purchases of reserves in place .... 6,217 288 -- 16,935 -- -- 23,440 Sales of reserves in place ........ (20) (2,075) -- -- -- -- (2,095) Production ........................ (20,934) (3,895) (752) (1,305) (789) (1,117) (28,792) --------- --------- --------- --------- --------- --------- --------- December 31, 1996(1) .............. 155,847 42,682 5,132 25,965 11,993 16,338 257,957 ========= ========= ========= ========= ========= ========= ========= January 1, 1995 ................... 158,848 48,714 5,282 3,520 14,397 13,157 243,918 Revisions of previous estimates ... 3,515 363 118 4,656 (396) 1,497 9,753 Extensions and discoveries ........ 11,242 1,054 1,416 -- -- 1,978 15,690 Purchases of reserves in place .... 1,254 323 -- -- -- -- 1,577 Sales of reserves in place ........ (748) (563) -- -- -- -- (1,311) Production ........................ (20,317) (4,075) (295) (25) (701) (1,062) (26,475) --------- --------- --------- --------- --------- --------- --------- December 31, 1995(1) .............. 153,794 45,816 6,521 8,151 13,300 15,570 243,152 ========= ========= ========= ========= ========= ========= ========= January 1, 1994 ................... 179,437 -- -- -- 14,289 7,297 201,023 Revisions of previous estimates ... (10,225) 760 -- -- 901 2,109 (6,455) Extensions and discoveries ........ 11,198 5,580 5,282 3,520 -- 4,593 30,173 Purchases of reserves in place .... 1,623 46,554 -- -- -- -- 48,177 Sales of reserves in place ........ (1,734) (460) -- -- -- -- (2,194) Production ........................ (21,451) (3,720) -- -- (793) (842) (26,806) --------- --------- --------- --------- --------- --------- --------- December 31, 1994 ................. 158,848 48,714 5,282 3,520 14,397 13,157 243,918 ========= ========= ========= ========= ========= ========= ========= Proved developed reserves: December 31, 1996 ................. 127,871 37,150 3,092 14,502 9,528 10,806 202,949 December 31, 1995 ................. 122,918 40,787 3,623 265 10,652 9,176 187,421 December 31, 1994 ................. 125,520 44,094 -- -- 11,707 8,866 190,187
(1)At December 31, 1996 and 1995, includes approximately 14,072 MBOE and 14,733 MBOE, respectively, of oil equivalents dedicated to the monetary production payment (see Note 4). The reserve volumes presented are estimates only and should not be construed as being exact quantities. These reserves may or may not be recovered and may increase or decrease as a result of future operations of the Company and changes in economic conditions. 61 RESERVE QUANTITY INFORMATION - OIL (MBBL) ===============================================================================
United Cote States Canada d'Ivoire Egypt Indonesia Russia Total --------- --------- --------- --------- --------- --------- --------- Proved reserves: January 1, 1996 ................... 20,163 3,667 3,010 7,918 1,153 15,570 51,481 Revisions of previous estimates ... (800) (47) (1,038) 384 23 651 (827) Extensions and discoveries ........ 1,656 916 64 1,792 -- 1,234 5,662 Purchases of reserves in place .... 429 21 -- 16,935 -- -- 17,385 Sales of reserves in place ........ (2) (471) -- -- -- -- (473) Production ........................ (1,561) (361) (511) (1,305) (51) (1,117) (4,906) --------- --------- --------- --------- --------- --------- --------- December 31, 1996(1) .............. 19,885 3,725 1,525 25,724 1,125 16,338 68,322 ========= ========= ========= ========= ========= ========= ========= January 1, 1995 ................... 15,481 4,051 2,210 3,520 1,066 13,157 39,485 Revisions of previous estimates ... 4,000 (164) 72 4,423 132 1,497 9,960 Extensions and discoveries ........ 1,382 258 989 -- -- 1,978 4,607 Purchases of reserves in place .... 781 74 -- -- -- -- 855 Sales of reserves in place ........ (78) (153) -- -- -- -- (231) Production ........................ (1,403) (399) (261) (25) (45) (1,062) (3,195) --------- --------- --------- --------- --------- --------- --------- December 31, 1995(1) .............. 20,163 3,667 3,010 7,918 1,153 15,570 51,481 ========= ========= ========= ========= ========= ========= ========= January 1, 1994 ................... 16,249 -- -- -- 1,005 7,297 24,551 Revisions of previous estimates ... (210) 685 -- -- 108 2,109 2,692 Extensions and discoveries ........ 1,123 878 2,210 3,520 -- 4,593 12,324 Purchases of reserves in place .... 82 2,923 -- -- -- -- 3,005 Sales of reserves in place ........ (113) (8) -- -- -- -- (121) Production ........................ (1,650) (427) -- -- (47) (842) (2,966) --------- --------- --------- --------- --------- --------- --------- December 31, 1994 ................. 15,481 4,051 2,210 3,520 1,066 13,157 39,485 ========= ========= ========= ========= ========= ========= ========= Proved developed reserves: December 31, 1996 ................. 12,855 2,913 1,035 14,336 936 10,806 42,881 December 31, 1995 ................. 11,205 3,196 1,720 265 1,022 9,176 26,584 December 31, 1994 ................. 8,967 3,587 -- -- 870 8,866 22,290
(1) At December 31, 1996 and 1995, includes approximately 2,248 Mbbl and 2,281 Mbbl, respectively, of oil dedicated to the monetary production payment (see Note 4). 62 RESERVE QUANTITY INFORMATION - GAS (MMCF) ===============================================================================
United Cote States Canada d'Ivoire Egypt Indonesia Total ---------- ---------- ---------- ---------- ---------- ---------- Proved reserves: January 1, 1996 ................... 801,797 252,892 21,066 1,399 72,892 1,150,046 Revisions of previous estimates ... 28,925 (15,994) 828 13 (3,246) 10,526 Extensions and discoveries ........ 66,678 26,071 1,195 35 -- 93,979 Purchases of reserves in place .... 34,729 1,603 -- -- -- 36,332 Sales of reserves in place ........ (110) (9,625) -- -- -- (9,735) Production ........................ (116,238) (21,203) (1,445) -- (4,429) (143,315) ---------- ---------- ---------- ---------- ---------- ---------- December 31, 1996(1) .............. 815,781 233,744 21,644 1,447 65,217 1,137,833 ========== ========== ========== ========== ========== ========== January 1, 1995 ................... 860,209 267,980 18,432 -- 79,990 1,226,611 Revisions of previous estimates ... (2,908) 3,159 278 1,399 (3,165) (1,237) Extensions and discoveries ........ 59,157 4,773 -- -- -- 63,930 Purchases of reserves in place .... 2,840 1,494 2,559 -- -- 6,893 Sales of reserves in place ........ (4,019) (2,457) -- -- -- (6,476) Production ........................ (113,482) (22,057) (203) -- (3,933) (139,675) ---------- ---------- ---------- ---------- ---------- ---------- December 31, 1995(1) .............. 801,797 252,892 21,066 1,399 72,892 1,150,046 ========== ========== ========== ========== ========== ========== January 1, 1994 ................... 979,128 -- -- -- 79,706 1,058,834 Revisions of previous estimates ... (60,087) 449 -- -- 4,757 (54,881) Extensions and discoveries ........ 60,451 28,212 18,432 -- -- 107,095 Purchases of reserves in place .... 9,247 261,785 -- -- -- 271,032 Sales of reserves in place ........ (9,726) (2,711) -- -- -- (12,437) Production ........................ (118,804) (19,755) -- -- (4,473) (143,032) ---------- ---------- ---------- ---------- ---------- ---------- December 31, 1994 ................. 860,209 267,980 18,432 -- 79,990 1,226,611 ========== ========== ========== ========== ========== ========== Proved developed reserves: December 31, 1996 ................. 690,095 205,422 12,344 993 51,554 960,408 December 31, 1995 ................. 670,277 225,544 11,415 -- 57,777 965,013 December 31, 1994 ................. 699,317 243,042 -- -- 65,021 1,007,380
(1)At December 31, 1996 and 1995, includes approximately 70,914 MMcf and 74,713 MMcf, respectively, of gas dedicated to the monetary production payment (see Note 4). The Company's standardized measure of discounted future net cash flows as of December 31, 1996 and 1995 and changes therein for each of the years 1996, 1995 and 1994 are provided based on the present value of future net revenues from proved oil and gas reserves estimated by independent petroleum engineers in accordance with guidelines established by the Securities and Exchange Commission. These estimates were computed by applying appropriate year-end prices for oil and gas to estimated future production of proved oil and gas reserves over the economic lives of the reserves and assuming continuation of existing economic conditions. Year-end 1996 calculations were made using prices of $3.27 per Mcf and $20.99 per Bbl for gas and oil, respectively. The Company's average realized prices for the year ended December 31, 1996 were $2.07 per Mcf and $18.50 per Bbl for gas and oil, respectively. Because the disclosure requirements are standardized, significant changes can occur in these estimates based upon oil and gas prices in effect at year-end. The following estimates should not be viewed as an estimate of fair market value. Income taxes are computed by applying the statutory income tax rate in the jurisdiction to the net cash inflows relating to proved oil and gas reserves less the tax bases of the properties involved and giving effect to appropriate net operating loss carryforwards, tax credits and allowances relating to such properties. 63 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (AMOUNTS IN THOUSANDS) ===============================================================================
United Cote States Canada d'Ivoire Egypt ----------- ----------- ----------- ----------- December 31, 1996: Future cash inflows ......................... $ 3,489,097 $ 481,159 $ 80,526 $ 604,613 Future development costs .................... (169,240) (20,487) (15,529) (115,639) Future production costs ..................... (712,881) (129,313) (17,700) (122,697) ----------- ----------- ----------- ----------- Future net cash flows before income taxes ... 2,606,976 331,359 47,297 366,277 10% annual discount ......................... (1,086,947) (153,161) (11,121) (114,772) ----------- ----------- ----------- ----------- Discounted future net cash flows before income taxes ....................... 1,520,029 178,198 36,176 251,505 Discounted income taxes ..................... (383,032) (63,079) (5,072) (75,306) ----------- ----------- ----------- ----------- Standardized measure of discounted future net cash flows ........................... $ 1,136,997 $ 115,119 $ 31,104 $ 176,199 =========== =========== =========== =========== December 31, 1995: Future cash inflows ......................... $ 1,985,934 $ 345,380 $ 103,820 $ 144,528 Future development costs .................... (180,175) (20,297) (16,971) (43,459) Future production costs ..................... (515,802) (113,917) (18,993) (34,972) ----------- ----------- ----------- ----------- Future net cash flows before income taxes ... 1,289,957 211,166 67,856 66,097 10% annual discount ......................... (522,907) (98,399) (18,973) (21,867) ----------- ----------- ----------- ----------- Discounted future net cash flows before income taxes ....................... 767,050 112,767 48,883 44,230 Discounted income taxes ..................... (123,479) (33,286) (11,851) (19,181) ----------- ----------- ----------- ----------- Standardized measure of discounted future net cash flows ........................... $ 643,571 $ 79,481 $ 37,032 $ 25,049 =========== =========== =========== ===========
Indonesia Russia Total ----------- ----------- ----------- December 31, 1996: Future cash inflows ......................... $ 229,497 $ 266,304 $ 5,151,196 Future development costs .................... -- (30,896) (351,791) Future production costs ..................... (41,640) (121,137) (1,145,368) ----------- ----------- ----------- Future net cash flows before income taxes ... 187,857 114,271 3,654,037 10% annual discount ......................... (95,995) (54,171) (1,516,167) ----------- ----------- ----------- Discounted future net cash flows before income taxes ....................... 91,862 60,100 2,137,870 Discounted income taxes ..................... (48,623) (18,236) (593,348) ----------- ----------- ----------- Standardized measure of discounted future net cash flows ........................... $ 43,239 $ 41,864 $ 1,544,522 =========== =========== =========== December 31, 1995: Future cash inflows ......................... $ 179,534 $ 261,880 $ 3,021,076 Future development costs .................... -- (29,422) (290,324) Future production costs ..................... (36,305) (118,768) (838,757) ----------- ----------- ----------- Future net cash flows before income taxes ... 143,229 113,690 1,891,995 10% annual discount ......................... (71,042) (54,846) (788,034) ----------- ----------- ----------- Discounted future net cash flows before income taxes ....................... 72,187 58,844 1,103,961 Discounted income taxes ..................... (35,479) (19,334) (242,610) ----------- ----------- ----------- Standardized measure of discounted future net cash flows ........................... $ 36,708 $ 39,510 $ 861,351 =========== =========== ===========
PRINCIPAL SOURCES OF CHANGE IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (AMOUNTS IN THOUSANDS) ===============================================================================
Year Ended December 31, 1996 1995 1994 ----------- ----------- ----------- Beginning of year ................................................ $ 861,351 $ 728,303 $ 836,850 Revisions of previous quantity estimates less related costs ... 3,825 54,287 (36,088) Extensions and discoveries less related costs ................. 209,860 163,131 99,909 Purchases of reserves in place ................................ 219,510 11,967 197,301 Sales of reserves in place .................................... (6,593) (5,238) (12,047) Net changes in prices and production costs .................... 785,928 166,325 (366,431) Change in development costs during the period ................. 108,763 69,260 100,763 Sales of oil and gas produced, net of lifting costs ........... (299,702) (196,123) (232,285) Accretion of discount ......................................... 110,396 86,151 103,740 Net change in income taxes .................................... (350,738) (105,655) 66,378 Changes in production, timing and other ....................... (98,078) (111,057) (29,787) ----------- ----------- ----------- 683,171 133,048 (108,547) ----------- ----------- ----------- End of year ...................................................... $ 1,544,522 $ 861,351 $ 728,303 =========== =========== ===========
64 EX-21 16 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES The Company was incorporated in Texas in 1973. The following is a listing of significant subsidiaries of the Company as of March 18, 1997:
% Voting Securities Jurisdiction of or Beneficial Incorporation Interest Owned Name of Subsidiary or Organization by the Company - ------------------------------------------------ --------------------- ---------------- Alaska Pipeline Company Alaska 100% Global Natural Resources Inc. New Jersey 100% Global Natural Resources Corporation of Nevada Nevada 100% Seagull East Zeit Petroleum Ltd. Cayman Islands 100% Seagull Energy Canada Holding Company Wyoming 100% Seagull Energy Canada Ltd. Alberta, Canada 100% Seagull Energy E&P Inc. Delaware 100% Seagull Pipeline & Marketing Company Delaware 100% Seagull Marketing Services, Inc. Texas 100% Seagull Midcon Inc. Delaware 100% Seagull Mid-South Inc. Delaware 100%
EX-23.1 17 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Seagull Energy Corporation: We consent to the incorporation by reference in the following Registration Statements of Seagull Energy Corporation of our report dated January 27, 1997, relating to the consolidated balance sheets of Seagull Energy Corporation and Subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears or is incorporated by reference in the December 31, 1996 Annual Report on Form 10-K of Seagull Energy Corporation. Such report on the consolidated financial statements refers to a change in the Company's method of accounting for the impairment of long-lived assets and for long-lived assets to be disposed of. a. Form S-8, Seagull Thrift Plan (2-72014). b. Form S-8, Seagull Energy Corporation 1981 Non-Qualified and Incentive Stock Option Plan (2-80834). c. Form S-8, ENSTAR Natural Gas Company Thrift Plan (33-14463). d. Forms S-8 and S-3, Seagull Energy Corporation 1983 Stock Option Plan (2-93087). e. Forms S-8 and S-3, Seagull Energy Corporation 1986 Stock Option Plan (33-22475). f. Form S-8, Seagull Energy Corporation 1990 Stock Option Plan (33-43483). g. Form S-8, Seagull Energy Corporation 1993 Stock Option Plan (33-50643). h. Form S-8, Seagull Energy Corporation 1993 Nonemployee Directors' Stock Option Plan (33-50645). i. Form S-3, $350,000,000 Debt Securities of Seagull Energy Corporation (33-65118). j. Form S-3, ENSTAR Alaska Group of Common Stock of Seagull Energy Corporation (33-53729). k. Form S-8, Seagull Energy Corporation 1995 Omnibus Stock Plan (33-64041). l. Form S-3, $300,000,000 Debt Securities, Preferred Stock, Depositary Shares, Common Stock or Securities Warrants of Seagull Energy Corporation (33-64051). m. Form S-8, Global Natural Resources InC. 1989 Key Employees Stock Option Plan and 1992 Stock Option Plan (333-13393). Houston, Texas March 27, 1997 EX-23.2 18 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS EXHIBIT 23.2 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS We hereby consent to the use of our name in the Annual Report on Form 10-K of Seagull Energy Corporation and Subsidiaries (the "Company") for the year ended December 31, 1996, and the incorporation by reference thereof into the Company's registration statements on Form S-8 (Nos. 2-72014, 2-80834, 33-14463, 33-43483, 33-50643, 33-50645, 33-64041 and 333-13393), Forms S-8 and S-3 (Nos. 2-93087 and 33-22475) and Form S-3 (Nos. 33-53729, 33-65118 and 33-64051). /s/ RYDER SCOTT COMPANY PETROLEUM ENGINEERS RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas March 24, 1997 EX-23.3 19 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS EXHIBIT 23.3 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS We hereby consent to the use of our name under the heading "Exploration and Production" of Item 1 in the Annual Report on Form 10-K (the Form 10-K) for the year ended December 31, 1996, of Seagull Energy Corporation and Subsidiaries and the incorporation by reference of the Form 10-K into the Company's registration statements on Form S-8 (Nos. 2-72014, 2-80834, 33-14463, 33-43483, 33-50643, 33-50645, 33-64041 and 333-13393), Forms S-8 and S-3 (Nos. 2-93087 and 33-22475) and Form S-3 (Nos. 33-53729, 33-65118 and 33-64051). /s/ DeGOLYER AND MacNAUGHTON DeGOLYER AND MacNAUGHTON Dallas, Texas March 24, 1997 EX-23.4 20 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS EXHIBIT 23.4 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS We hereby consent to the use of our name in the Annual Report on Form 10-K of Seagull Energy Corporation and Subsidiaries (the "Company") for the year ended December 31, 1996, and the incorporation by reference thereof into the Company's registration statements on Form S-8 (Nos. 2-72014, 2-80834, 33-14463, 33-43483, 33-50643, 33-50645, 33-64041 and 333-13393), Forms S-8 and S-3 (Nos. 2-93087 and 33-22475) and Form S-3 (Nos. 33-53729, 33-65118 and 33-64051). NETHERLAND, SEWELL & ASSOCIATES, INC. By: /s/ FREDERICK D. SEWELL Frederick D. Sewell President Houston, Texas March 21, 1997 EX-27 21 FDS
5 1,000 Year Dec-31-1996 Dec-31-1996 15,284 0 193,659 0 12,285 227,617 2,049,356 804,715 1,515,063 231,370 573,455 0 0 6,307 591,423 1,515,063 518,578 518,578 42,600 370,923 5,357 0 44,842 54,856 25,895 28,961 0 0 0 28,961 0.45 0.45
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