-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, ASLTFpWQrW2j5tWnOqgp4YxqzVU6Cz9Al6tRQxyBw7ZuuxuCa56aE8yRJSc+KtWk 0HZDnNoK/xHtZlM75FJ3lg== 0000950129-94-000233.txt : 19940330 0000950129-94-000233.hdr.sgml : 19940330 ACCESSION NUMBER: 0000950129-94-000233 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEAGULL ENERGY CORP CENTRAL INDEX KEY: 0000320321 STANDARD INDUSTRIAL CLASSIFICATION: 4923 IRS NUMBER: 741764876 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-08094 FILM NUMBER: 94518735 BUSINESS ADDRESS: STREET 1: 1001 FANNIN STE 1700 CITY: HOUSTON STATE: TX ZIP: 77002-6714 BUSINESS PHONE: 7139514700 MAIL ADDRESS: STREET 1: 1001 FANNIN, SUITE 1700 CITY: HOUSTON STATE: TX ZIP: 77002-6714 FORMER COMPANY: FORMER CONFORMED NAME: SEAGULL PIPELINE CORP DATE OF NAME CHANGE: 19830815 10-K 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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 INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.) 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 TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------------------------------ ------------------------------------------ Common Stock, par value $.10 per share 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 11, 1994, 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 $876,067,940. Indicate the number of shares outstanding of each of the registrant's classes of Common Stock, as of the latest practicable date.
OUTSTANDING AT MARCH CLASS 11, 1994 ----------------------------------------------------------------- --------- Common Stock, par value $.10 per share 36,064,649
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT PART OF FORM 10-K - ------------------------------------------------------------------ ----------------- (1) Annual Report to Shareholders for year ended PARTS I and II December 31, 1993 (2) Proxy Statement for Annual Meeting of PART III Shareholders to be held on June 1, 1994
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS Seagull Energy Corporation (the "Company" or "Seagull") is an independent energy company primarily engaged in natural gas exploration, development and production. The Company's operations are focused offshore Texas and Louisiana in the Gulf of Mexico and onshore in three principal geographic regions: (i) in the Mid-Continent Region located in western Oklahoma and the Texas Panhandle; (ii) in the Mid-South Region, primarily in the Arklatex area in eastern Texas and northern Louisiana and the Arkoma Basin in eastern Oklahoma and western Arkansas; and (iii) in western Canada. Seagull's two other business segments are also natural gas related: (i) pipeline and marketing, which include natural gas supply, marketing and transportation, principally in the southwestern United States; pipeline transportation of hydrocarbon products and petrochemicals in Texas and Louisiana; pipeline engineering, design, construction and operation; and natural gas processing in Texas; and (ii) natural gas transmission and distribution in Alaska. 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 "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 15 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 1993 Annual Report to Shareholders and as part of Exhibit 99.1 attached hereto. During 1993, the Company derived no revenues and had no material assets outside the United States. See discussions below regarding the Seagull Canada Acquisition and interests in production licenses acquired in United Kingdom waters. EXPLORATION AND PRODUCTION Seagull's exploration and production ("E&P") segment is the Company's primary growth area and is comprised of the following material direct and indirect wholly owned subsidiaries of the Company: Seagull Energy E&P Inc.; HO&M; Wacker Oil Inc; Seagull Midcon Inc.; Seagull Mid-South Inc., formerly Arkla Exploration Company; and Seagull Energy Canada Ltd., formerly Novalta Resources Inc. On January 4, 1994, an indirect wholly owned subsidiary of Seagull acquired all of the outstanding shares of stock of Novalta Resources Inc. ("Novalta") from Novacor Petrochemicals Ltd. (the "Seagull Canada Acquisition"). Effective as of the January 4, 1994 Closing Date, Novalta was amalgamated with Seagull Energy Canada Ltd., the indirect subsidiary of Seagull that acquired Novalta. The resulting amalgamated company was named Seagull Energy Canada Ltd. ("Seagull Canada"). Seagull Canada's assets (the "Seagull Canada Properties") consist primarily of natural gas and oil reserves and developed and undeveloped lease acreage concentrated principally in a small number of fields located in 3 Alberta, Canada. According to reserve estimates prepared as of December 31, 1993 by the independent petroleum engineering firm, DeGolyer and MacNaughton, the Seagull Canada Properties had proved reserves totaling 257.4 billion cubic feet ("Bcf") of natural gas and 2.8 million barrels ("Bbl") of oil, condensate and natural gas liquids. Approximately 80% of these reserves and 75% of Seagull Canada's total producing wells are concentrated in 16 of 95 total fields. In 1993, a four-company exploration group including Seagull was awarded four production licenses in United Kingdom waters. The awards gave Seagull a 10% interest in three licenses in the Irish Sea totaling 398,319 acres and a 20% interest in a fourth license in the North Sea which totals 60,785 acres. Seismic studies and other evaluation activities on the licensed blocks have been ongoing since mid-1993. The first two of eight planned exploratory wells are scheduled during the latter part of 1994. During the first quarter of 1994, Seagull increased its interests in these licenses to 20% and 30%, respectively. Seagull anticipates that its share of exploration-related costs will approximate $13 million over the next five years as the program is currently structured. Seagull also has an active ongoing exploration program that has resulted in numerous natural gas discoveries since 1988 in the Gulf of Mexico, primarily in shallow waters off the central Texas Gulf Coast. The Company has in the past financed its gas and oil exploration and development activities through internally generated funds, bank borrowings and participation by industry partners on a prospect-by-prospect basis. The Company believes that its gas and oil exploration and development activities in the foreseeable future will be financed by internally generated funds. In 1994, the Company expects E&P capital expenditures to total approximately $160 million. Of this amount, about $50 million will be devoted to exploration, primarily in the Seagull Trend and elsewhere in the Gulf of Mexico, $100 million to development and $10 million to leasehold acquisition. Of the expected development capital expenditures, about $34 million is targeted for the Mid-South Region, $31 million for the Gulf of Mexico, $20 million for the Mid-Continent Region and $15 million for Western Canada. By comparison, 1993 capital expenditures for E&P activities totaled $98 million. Revenues from the sale of gas and liquids accounted for 60%, 38% and 32% of the Company's consolidated revenues for 1993, 1992 and 1991, respectively. 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. Gas production in 1993 increased primarily as a result of contributions attributable to properties in the Mid-South Region acquired in December 1992. Production of gas and liquids for 1993 averaged 279.5 million cubic feet ("MMcf") per day ("MMcf/d") and 4,641 Bbl per day ("Bbl/d"), respectively, compared to 104.2 MMcf/d and 3,494 Bbl/d, respectively, in 1992. 2 4 Seagull's principal gas and oil properties include the following:
Average Net Daily Production for the Year Ended At December 31, 1993 December 31, 1993 --------------------------- ------------------------------ Proved Number of Reserves Natural Gas Liquids Field/Province State Gross Wells (Bcfe) (1) (MMcf) (Bbl) -------------- ----- ----------- ---------- ----------- ------- UNITED STATES Mid-South Region: Arklatex Area: Carthage . . . . . . . . . Texas 242 194 27.4 631 Waskom . . . . . . . . . . Texas 77 66 17.6 129 Ruston . . . . . . . . . . Louisiana 48 47 10.0 109 Sligo . . . . . . . . . . . Louisiana 73 16 4.4 32 Arkoma Basin: Cecil . . . . . . . . . . . Arkansas 223 73 26.6 - Aetna . . . . . . . . . . . Arkansas 151 35 12.4 - Wilburton . . . . . . . . . Oklahoma 69 25 11.4 - Other . . . . . . . . . . . . . . . . . . . 332 145 49.0 962 Mid-Continent Region: Panhandle West . . . . . . . Texas 61 59 12.7 2 Panhandle Gray . . . . . . . Texas 119 31 0.3 677 Watonga-Chickasha . . . . . . Oklahoma 221 40 11.4 73 Strong City . . . . . . . . . Oklahoma 96 35 11.4 99 Other . . . . . . . . . . . . . . . . . . . 340 78 17.5 325 Offshore Texas . . . . . . . . . . . . . . . 46 92 55.9 197 Offshore Louisiana . . . . . . . . . . . . . 13 49 6.2 367 Gulf Coast Onshore . . . . . . . . . . . . . 29 19 5.3 1,038 ----- ----- ----- ----- 2,140 1,004 279.5 4,641 ===== ===== ===== ===== CANADA (2) Alberta . . . . . . . . . . . . . . . . . . . 648 272 49.9 797 Saskatchewan . . . . . . . . . . . . . . . . 10 2 - 334 ----- ----- ----- ----- 658 274 49.9 1,131 ===== ===== ===== =====
(1) The equivalent of one billion cubic feet ("Bcfe") of natural gas. Liquids are converted to gas at a ratio of one barrel of liquids per six Mcf ("Mcf" represents one thousand cubic feet) of gas, based on relative energy content. (2) The Seagull Canada Properties were acquired on January 4, 1994 in connection with the Seagull Canada Acquisition. Average net daily production amounts assume the Seagull Canada Acquisition occurred on December 31, 1992. For additional information relating to the Company's gas and oil reserves, based substantially upon reports of Netherland, Sewell & Associates, Inc. (for the years ended December 31, 1993 and 1992), DeGolyer and MacNaughton (for the years ended December 31, 1993, 1992 and 1991), Ryder Scott Company (for the years ended December 31, 1993, 1992 and 1991), and K&A Energy Consultants, Inc. and R. A. Lenser & Associates, Inc. (for the year ended December 31, 1991), independent petroleum engineers (collectively the "Engineers"), see Note 4 of the Consolidated Financial Statements included in the Company's 1993 Annual Report to Shareholders and as part of Exhibit 99.1 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 4. Under "Standardized Measure of Discounted Future Net Cash Flows" in Note 4, the Engineers provided all information except "discounted income taxes" and "standardized 3 5 measure of discounted future net cash flows". All information in Note 4 not provided by the Engineers was supplied by the Company. As required, Seagull also files estimates of gas and oil 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 five %. The future results of this segment will be affected by the market prices of natural gas and liquids. 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 domestic natural gas and liquids products, imports, marketing of competitive fuels, proximity and capacity of gas and liquids pipelines and other transportation facilities, any oversupply of gas and liquids products, the regulatory environment and other domestic and political events, none of which can be predicted with certainty. As in the past, the Company would expect to curtail gas production during times of inferior prices. However, due to the sustained improvements in natural gas prices and demand throughout 1993 and various field operating considerations, Seagull does not anticipate curtailing gas sales in the coming year to the significant extent of curtailments in years prior to 1993. GAS AND OIL DRILLING ACTIVITIES Seagull's gas and oil 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 gas or oil. 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.
Year Ended December 31, ------------------------------------------------------------------------------ 1993 1992 1991 Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Exploratory Drilling: Productive Wells . . . . 8 5.19 3 1.28 8 2.86 Dry Holes . . . . . . . . 19 9.20 12 5.51 10 6.38 Development Drilling: Productive Wells . . . . 100 54.62 24 16.11 24 16.23 Dry Holes . . . . . . . . 22 13.71 2 0.73 6 3.87
From January 1, 1994 to February 28, 1994, the Company has drilled 1 gross (0.66 net) successful exploratory well and 1 gross (1.0 net) dry exploratory well. In addition, the Company has drilled 12 gross (7.70 net) successful development wells. The Company is currently drilling 1 gross (0.50 net) exploratory well and 21 gross (15.46 net) development wells. As of the beginning of 1994, the Company had an inventory of approximately 90 exploratory prospects, including at least 20 in Canada. 4 6 PRODUCTION The following table summarizes the Company's production, average sales prices and lifting costs for the periods indicated:
Year Ended December 31, ------------------------------------- 1993 1992 1991 ---- ---- ---- Net Production: Gas (MMcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,025 38,137 32,906 Oil and condensate (Mbbl)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,412 1,014 1,111 Natural gas liquids (Mbbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282 265 225 Combined (MMcfe) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,188 45,809 40,922 Average sales price (2): Gas (per Mcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.99 $ 1.85 $ 1.69 Oil and condensate (per Bbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . $16.72 $18.60 $20.30 Natural gas liquids (per Bbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.10 $10.20 $11.17 Combined (per Mcfe) (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.03 $ 2.01 $ 1.97 Average lifting costs of gas and liquids (per Mcfe) (4) . . . . . . . . . . . . . . . $ 0.47 $ 0.57 $ 0.59
(1) Thousands of Bbl ("Mbbl"). (2) Before deduction of production, severance, and other taxes. (3) The equivalent of one thousand cubic feet ("Mcfe") of natural gas. (4) Lifting 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, 1993. 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.
Gross (2) Net (2) --------- ------- Gas (1) 1,840 896.31 Oil 305 159.52 ----- -------- Total 2,145 1,055.83 ===== ========
(1) Includes 314 gross (152.36 net) gas wells with multiple completions. (2) Excludes 643 gross (346.10 net) gas wells and 15 gross (10.40 net) oil wells acquired January 4, 1994 in connection with the Seagull Canada Acquisition. For additional information relating to gas and oil producing activities, see Note 4 of the Consolidated Financial Statements included in the Company's 1993 Annual Report to Shareholders and as part of Exhibit 99.1 attached hereto. 5 7 PRODUCTIVE AND UNDEVELOPED GAS AND OIL ACREAGE As of December 31, 1993, the Company owned working interests in the following developed and undeveloped gas and oil acreage in the United States:
Developed (1) Undeveloped (1) ------------------------------ ------------------------------ Gross Net (2) Gross Net (2) ----- ------- ----- ------- Onshore: Oklahoma . . . . . . . . . . . . . . . 393,005 127,711 119,645 49,169 Arkansas . . . . . . . . . . . . . . . 348,363 96,946 86,011 57,793 Texas . . . . . . . . . . . . . . . . . 183,988 82,981 36,008 13,724 Louisiana . . . . . . . . . . . . . . . 53,717 25,672 9,986 8,364 Mississippi . . . . . . . . . . . . . . 24,355 11,139 28,582 13,518 Other . . . . . . . . . . . . . . . . . 8,779 6,450 9,837 7,477 Bays and State Waters . . . . . . . . . . 1,045 792 8,398 6,970 Federal Offshore: Texas . . . . . . . . . . . . . . . . . 133,624 57,624 119,685 73,956 Louisiana . . . . . . . . . . . . . . . 39,658 15,758 84,259 54,821 --------- ------- ------- ------- Total . . . . . . . . . . . . . . . . . . 1,186,534 425,073 502,411 285,792 ========= ======= ======= =======
(1) Excludes 396,800 gross (195,985 net) developed acres and 451,510 gross (244,010 net) undeveloped acres acquired January 4, 1994 in connection with the Seagull Canada Acquisition. (2) 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, 1993, the Company owned mineral and/or royalty interests in 375,488 gross (45,547 net) developed and 158,447 gross (28,040 net) undeveloped gas and oil acreage. The Company also currently owns interests in production licenses covering 459,104 gross (97,899 net) undeveloped acres in United Kingdom waters (see discussion above regarding interests in production licenses acquired in United Kingdom waters). COMPETITION The Company's competitors in gas and oil 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. MARKETS The Company believes there currently exists a very delicate balance between supply and demand in the marketplace. Extreme fluctuations in weather conditions may cause a real or perceived imbalance at any given time, 6 8 in any given area of the United States or Canada. Although markets project their usage well in advance of actual purchases based on historical data and weather forecasting, the projections may be adjusted for unexpected weather conditions, creating a temporary increase or decrease in demand. These unexpected demand fluctuations, combined with conservation and competition from alternative fuels, continue to cause radical swings in gas prices. Monthly pricing indices often do not follow the trends of prior years and, with each passing month, average price projections continue to be adjusted and revised. REGULATION UNITED STATES Aspects of the production, sale and transportation of natural gas and crude oil in federal Outer Continental Shelf waters are regulated pursuant to various federal statutes, including the Outer Continental Shelf Lands Act ("OCSLA"). The interstate transportation of natural gas is regulated under the Natural Gas Act ("NGA") or the Natural Gas Policy Act of 1978 ("NGPA"). Until January 1, 1993, certain first sales (generally, wellhead or producing field sales) of natural gas remained price regulated under the NGPA. Effective January 1, 1993, all price-regulation of first sales of natural gas was eliminated by the Natural Gas Wellhead Decontrol Act of 1989. Operations conducted by the Company on federal gas and oil leases must comply with numerous statutory and regulatory restrictions. Additionally, certain operations must be conducted pursuant to appropriate permits issued by government agencies, such as the Bureau of Land Management and the Minerals Management Service of the Department of Interior and, in regard to certain federal leases, prior approval of drill site locations must be obtained from the Environmental Protection Agency. In all states in which the Company engages in gas and oil exploration and production, its activities are subject to regulation. These regulations generally require permits for the drilling and spacing of wells, the prevention of waste of gas and oil reserves, the prevention and cleanup of pollution and other matters. Government agencies in various states regulate, among other things, the amount and rate of gas and oil production. The states of Texas and Oklahoma have recently revised their regulations regarding proration of production. These kinds of regulations by state agencies may affect determinations of deliverability under certain of the Company's gas purchase contracts and thereby affect the purchasers' volumetric purchase obligations. In addition to the proration changes, Oklahoma has promulgated regulations pursuant to Senate Bill 168, which governs sharing of gas markets among working interest owners and disbursement of royalty proceeds. Over the past several years, the Federal Energy Regulatory Commission (the "FERC") has issued certain orders that have brought sweeping changes to the fundamental regulatory structure governing interstate sales and transportation of natural gas. Collectively, these orders have changed the gas pricing structure and altered the traditional relationship among producers, pipelines and end-use markets. Most pipelines are in the process of transforming themselves from their strictly-merchant role to a combination of merchant and open-access transporter. Producers frequently contract directly with end-users or other gas buyers and, if the transporting pipeline 7 9 is open-access, transportation services can be arranged by either the buyer, the seller or a broker on a first-come, first-serve basis. These FERC orders therefore provide the Company with greater marketing options. CANADA Seagull Canada has exploration and development operations in Alberta and Saskatchewan. The oil and natural gas industry is subject to extensive controls and regulations imposed by various levels of government in Canada. Natural Gas Pricing Prior to deregulation of natural gas markets, prices in Canada were legislated by the government having jurisdiction. In the current deregulated environment, the price of natural gas is determined by negotiation between buyers and sellers. Exports of natural gas require approvals similar to those required for exports of oil, as described below. Crude Oil Pricing Since June 1, 1985, producers of oil have been entitled to negotiate sales contracts directly with oil purchasers. Oil exporters are entitled to export oil pursuant to contracts, the terms of which do not exceed one year in the case of light crude and two years in the case of heavy crude, provided that an order approving the export has been obtained from the Natural Energy Board ("NEB"). Any export to be made pursuant to a contract of a longer duration requires the exporter to obtain a license from the NEB, and the issuance of such a license requires the approval of the Governor General in Council. Provincial Royalties and Incentives The royalty regime is a significant factor in the profitability of oil and gas production. Royalties payable on production from lands other than Crown lands are determined by negotiations between the mineral owner and the lessee. Crown royalties are determined by government regulation and are generally calculated as a percentage of the value of the gross production; the rate of royalties payable depends in part on well productivity and field discovery date. From time to time the governments of Canada, Alberta and Saskatchewan have established incentive programs which have included royalty rate reductions, royalty holidays and tax credits for the purpose of encouraging oil and gas exploration. In November 1991, the Government of Alberta announced temporary royalty incentives for oil exploration and development. The relief program provides for: (i) a two year royalty holiday for oil exploration wells drilled between November 1, 1991 and March 31, 1992 and a one year royalty holiday for exploratory wells drilled between April 1, 1992 and March 31, 1993 and an extra one year royalty holiday for exploratory wells drilled in the foothills and northern regions of the Province, with a cap of $1 million per well; (ii) a one year royalty holiday on development oil wells drilled between November 1, 1991 and March 31, 1993 with a cap of $400,000 per well; (iii) a five year royalty holiday for reactivated oil wells which obtained a well license prior to July 30, 1993 and which have been continuously inactive since August 31, 1990, with a 25,000 barrel cap which was raised to 8 10 50,000 barrels pursuant to the October 13, 1992 announcement; and (iv) new oil royalty rates for reactivated wells. On October 13, 1992, the Government of Alberta announced major changes to its royalty structure and permanent incentives for exploring and developing oil and gas reserves. The regulations incorporating these changes were adopted on January 20, 1993. The significant changes announced include the following: (i) new oil discovered after September 30, 1992 will have a permanent one year oil royalty holiday, subject to a maximum of $1 million and a reduced royalty rate thereafter; (ii) reduction of royalties on existing production of oil and gas; (iii) incentives by way of royalty holidays and reduced royalties on reactivated and horizontal wells; (iv) introduction of separate par pricing for light, medium and heavy oil; and (v) modification of the royalty formula structure to provide for sensitivity to price fluctuations. The Government of Alberta recently announced a plan to simplify the natural gas royalty scheme. The regulations are not yet available and it is anticipated the new scheme will take effect some time in 1994. A price and productivity sensitive royalty structure for crude oil and natural gas in the Province of Saskatchewan has been in effect since 1987. The royalty structure provides for royalty holidays for certain categories of wells drilled in the Province of Saskatchewan and royalties which vary with the price of a particular commodity. For a description of regulation of environmental matters affecting Seagull Canada, see Environmental Matters below. PIPELINE AND MARKETING Seagull is involved in the pipeline transportation of natural gas, hydrocarbon products and petrochemicals in Texas, Louisiana and Mississippi. In addition, the Company is engaged in pipeline engineering, design, construction and operation, natural gas processing, third-party natural gas marketing and the marketing of Seagull's natural gas and liquids production. Revenue from the pipeline and marketing segment accounted for 11%, 16% and 15% of the Company's consolidated revenues for 1993, 1992 and 1991, respectively. GAS PIPELINES The Company owns and operates short and medium length gathering pipelines that carry gas from producing fields to other pipelines which are owned by utility companies, large gas transmission companies, or others, and to industrial customers (referred to herein collectively as "Gas Purchasers"). The Company owns and operates 22 onshore and offshore natural gas gathering systems having an aggregate length of approximately 431 miles. Seagull's gas pipelines, which do not form an interconnected system, are principally located in Texas, Louisiana and offshore along the Texas coast. In addition, the Company owns partial interests in and operates two other offshore gas pipelines. 9 11 Seagull transports gas under arrangements where customers are charged a fee for gas carried through Seagull's pipelines. Seagull also delivers gas through its pipelines pursuant to contracts whereby it purchases and resells gas. In the case of purchase and sales contracts, the margin between Seagull's cost of gas and its resale revenues constitutes, in effect, a transportation fee. Natural gas producers prefer flexibility in commitment of gas reserves both as to term and pricing. Some of the wells connected to the Company's pipelines are not dedicated to those pipelines. It is probable that most gas wells currently connected to the Seagull gas gathering systems will remain connected from year to year with deliverability of reserves declining until depleted. It is no longer practical for a major pipeline company to consider gas reserves to be firmly committed to its facilities. Several systems are located in good prospective gas development areas where some new gas wells have been drilled, and more development may occur. In areas of active drilling, it is likely that new wells and additional gas volumes can be added to the systems. The following table shows the volumes of gas transported for the periods shown:
Year Ended December 31, --------------------------------------------------- 1993 1992 1991 ---- ---- ---- Volume (MMcf): Sales Contracts . . . . . . . . . . . . . . . . . . . . . . . . 1,419 2,290 3,734 Transportation Fee Arrangements . . . . . . . . . . . . . . . . 112,081 69,660 66,602 ------- ------ ------ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,500 71,950 70,336 ======= ====== ======
HYDROCARBON PRODUCTS AND PETROCHEMICAL PIPELINES The Company owns and/or operates pipelines for the transportation of liquid hydrocarbon products and petrochemicals. Seagull operates seven such pipelines, four of which it owns and all of which are located in Texas and Louisiana. GAS MARKETING 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. 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. 10 12 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 operation 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 combination of both. The Company recognized operating profit in 1993 on an 8.7 mile, 16-inch gas pipeline that Seagull constructed for an international exploration company from a platform to a gathering pipeline offshore Louisiana. The project was completed in early 1994. Historically, the Company has not been engaged in pipeline construction projects on a regularly recurring basis. Seagull had no other new construction projects in 1993 and none are currently pending; however, Seagull is currently conducting marketing efforts in order to generate new projects. GAS PROCESSING The Company owns interests in a number of gas processing plants. The largest of the plants is located in Matagorda County, Texas (the "Matagorda Plant"), and has been in operation since March 1981. Seagull owns a 65% undivided interest in and operates the Matagorda Plant, and the other 35% interest is owned by a subsidiary of Enron Corp. The Matagorda Plant processes natural gas, producing a full-range demethanized raw mix products stream. The actual throughput at the Matagorda Plant varies depending upon gas sales demand and production-related mechanical factors. For the year ended December 31, 1993, throughput averaged approximately 244 MMcf/d, which is close to the maximum design capacity of 250 MMcf/d but is slightly lower than the prior year. Throughput volumes are expected to remain at the same level for the foreseeable future. Profitability will depend largely on the relative prices of products and natural gas. COMPETITION 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 11 13 to compete depends upon building strong relationships with producers and end-users by consistently purchasing and supplying gas at competitive prices. REGULATION Government regulation has a significant effect on various segments of the Company's pipeline operations. Its pipeline systems are regulated by state regulatory commissions with respect to safety, location and other matters. The FERC has jurisdiction over, among other things, the construction and operation of pipelines and related facilities used in the transportation, storage and sale of natural gas in interstate commerce. The FERC also has jurisdiction over the rates and charges levied by companies subject to the NGA for the transportation of natural gas in interstate commerce and for the sale of natural gas for resale in interstate commerce. At the Company's request, FERC has decertified the Company's former interstate facility and it is no longer subject to NGA jurisdiction. Sales of natural gas by the Company's marketing subsidiary were generally not regulated by the FERC prior to January 1, 1993, and will not be subject to any FERC regulation on or after that date. Transportation and sales for resale of gas in interstate commerce by the Company's intrastate pipelines are regulated by the FERC pursuant to Section 311 of the NGPA. Section 311 permits intrastate pipelines to engage in certain transactions with interstate pipelines and their customers without being regulated as interstate pipelines under the NGA, thus allowing more flexibility in operations between intrastate and interstate gas pipeline companies. The FERC has revised its Section 311 regulations to allow intrastate pipelines to transport gas destined for interstate commerce under new self-implementing blanket certificates. The Company currently offers these services on several of its intrastate pipelines. In April 1992, the FERC issued its Order No. 636 (and related orders), which basically requires interstate pipelines to "unbundle" or separate their transportation services from their merchant sales of gas. This permits end-users of gas to contract directly with producers to purchase gas and to contract separately with pipelines for transportation services. As the interstate pipelines began operating under Order No. 636 during 1993, new opportunities were created throughout the industry. While it remains difficult to predict the ultimate impact Order No. 636 will have on the Company, new opportunities to market and transport natural gas are being explored by the Company. The extensive regulatory proceedings required under this order have not directly affected the Company's pipelines significantly to date. With regard to pipeline design, construction, operation and maintenance, state regulatory commissions generally have the authority to take all steps necessary to ensure compliance by intrastate pipeline and gathering companies with applicable safety regulations. The FERC also regulates certain aspects of intrastate pipeline construction related to Section 311 transportation or storage services. The Company is also subject to safety regulations imposed by the Office of Pipeline Safety of the Department of Transportation (the "DOT"), promulgated pursuant to the Natural Gas Pipeline Safety Act of 1968 and enforced by the Railroad Commission. 12 14 Pursuant to regulations regarding drug abuse enacted by the DOT and adopted by the Railroad Commission, the Company has implemented a drug abuse program that strives for a safe and drug-free workplace for its employees. ALASKA TRANSMISSION AND DISTRIBUTION The Company operates in Alaska through its ENSTAR Natural Gas Company division ("ENG") and Alaska Pipeline Company ("APC"), an Alaska corporation and a wholly owned subsidiary. APC and ENG are regulated by the Alaska Public Utilities Commission (the "APUC") as a single operating unit, ENSTAR Alaska ("ENSTAR Alaska"). 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 29%, 46% and 52% of the Company's consolidated revenues for 1993, 1992 and 1991, respectively. ENSTAR Alaska's predecessor was formed 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 71 miles of smaller diameter pipeline. The system's present design delivery capacity is approximately 410 MMcf/d. GAS DISTRIBUTION SYSTEM ENG distributes natural gas through approximately 1,916 miles of gas mains to approximately 88,200 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, 1993, ENG added approximately 55 miles of new gas distribution mains, installed 1,791 new service lines and added approximately 1,800 net customers. ENG anticipates relatively modest growth in its residential customer base and will install additional main and service lines to accommodate this growth. ENG distributes gas to its customers under tariffs which provide for varying delivery priorities. ENG's business is seasonal with approximately 65% of its sales made in the first and fourth quarters of each year. 13 15 In 1993, purchase/resale volumes represented 72% of ENG's throughput. The remaining volumes are transported for power and industrial customers for a transportation fee. Purchase/resale volumes accounted for 91% of ENG's operating margin in 1993. ENG's five largest customers are Municipal Light and Power ("ML&P"), an electric utility; the U. S. Air Force; the U. S. Army; the Anchorage School District; and Unocal Corporation. Together, they account for about $6.8 million in annual operating margin and about 14 Bcf per year in volumes, which represent about 14% and 35%, respectively, of ENG totals. GAS SUPPLY In May 1988, the Company entered into a contract (the "Marathon Contract") with Marathon Oil Company ("Marathon") providing for the delivery of approximately 450 Bcf of gas. 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 1993, the cost of gas purchased under the Marathon Contract averaged $2.00 per Mcf, including reimbursements for severance taxes. The Marathon Contract, as amended, has been approved by the APUC. Effective January 1, 1992, APC amended a gas purchase contract with Shell Oil Company and ARCO Alaska, Inc. (the "Shell Contract") to extend the term of the contract through the year 2009, modify the price, delivery and the deliverability provisions and provide procedures for reducing take-or-pay volumes for the effect of APC sales volumes that are displaced by gas sales made by others. The Shell Contract provides for the delivery of up to approximately 220 Bcf of gas. The amendments revised the price to a base price of $1.971 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. Certain portions of the gas purchased under the amendments may be priced under a pricing term similar to the Marathon Contract. The 1993 price under the Shell Contract, after application of contractual adjustments, was approximately $2.03 per Mcf, including reimbursements for severance taxes. The amendments provide for varying deliverability, before displaced gas sales adjustments, up to a maximum of 110 MMcf/d through 1995, and take-or-pay quantities, before displaced gas sales adjustments, up to a maximum of 15.4 Bcf per year through 1994. 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 which time the annual limitations contained in the Marathon Contract begin to take effect. Based on gas purchases during the twelve months ended December 31, 1993, which are not necessarily indicative of the volume of future purchases, APC's 14 16 gas reserves committed 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 1993, 1992 and 1991 was $2.07, $1.94 and $2.32 per Mcf, respectively. The average price of gas sold by ENSTAR Alaska in 1993, 1992 and 1991 was $3.56, $3.41 and $3.64 per Mcf, respectively. As stated above, ENSTAR Alaska purchases all of its natural gas under contracts in which the price is indexed to crude oil futures contracts. However, because ENSTAR Alaska's sales prices are adjusted to include the projected cost of its 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 fuel oil prices due to world-wide political events and changing market conditions. ENSTAR Alaska has no material take-or-pay obligations and does not anticipate any such obligations in the foreseeable future. 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. A 90-megawatt hydroelectric facility at Bradley Lake, completed in September 1991, reduced ENSTAR Alaska's lower-margin power volumes by approximately 1.0 to 1.5 Bcf per year. ENSTAR Alaska's margin on gas sales was reduced by approximately $500,000 to $750,000 per year as a result of this facility. During the last five years, ENSTAR Alaska's natural gas volumes delivered on a purchase/resale basis have declined primarily due to two of its major customers electing to purchase gas directly from gas producers. During the fourth quarter of 1991, ML&P the larger of the two customers, began purchasing gas directly from three gas producers, which displaced gas sales of approximately 8.0 Bcf per year. However, the APUC has approved a tariff allowing ENSTAR Alaska to transport these volumes from ML&P's purchase points to the ML&P electric generation facilities for a transportation fee that approximates the margin that would have been earned had ML&P remained a sales customer rather than becoming a transportation customer. Deliveries of gas to ML&P during 1993, 1992 and 1991 amounted to approximately 18%, 19% and 19%, respectively, of the total deliveries of gas by ENSTAR Alaska. During 1988, Chugach Electric Association, the smaller of the two customers, entered into a contract to purchase gas directly from a producer. The contract became effective on April 1, 1989, displacing gas sales of approximately 1.3 Bcf per year. However, ENSTAR Alaska continues to transport these volumes, although at a lower fee than the margin earned on sales volumes. The net result of this loss of business was approximately $800,000 in operating margin per year. If any other existing large customer of ENSTAR Alaska chooses to purchase gas directly from producers, ENSTAR Alaska would expect to collect 15 17 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 pipeline by-pass. 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 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. The rates, services and operations of ENSTAR Alaska are subject to regulation by the APUC. In May 1986, the APUC granted ENSTAR Alaska a rate increase of 3.26% and authorized a 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. The Company is a "public utility company" within the meaning of the Public Utility Holding Company Act of 1935, as amended (the "1935 Act"). In March 1991, the Company filed in good faith with the Securities and Exchange Commission (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. was the beneficial owner (albeit within the meaning of Section 13(d) of the Securities Exchange Act of 1934) of 2,891,574 shares, which is approximately 8% of the Common Stock as of February 28, 1994. However, although FMR Corp.'s ownership and control, within the meaning of the 1935 Act, has fallen below 10% of the outstanding voting stock of the Company, the Company does not currently intend to withdraw the FMR Application. 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 16 18 recent information furnished to the Company by the Equitable Entities, the Equitable Entities were the beneficial owners (albeit within the meaning of Section 13(d) of the Securities Exchange Act of 1934) of 3,399,600 shares, which represents approximately 9.4% of the Common Stock as of February 28, 1994. However, although the Equitable Entities' ownership and control has fallen below 10% of the outstanding voting stock of the Company, the Company does not currently intend to withdraw the Equitable Application. Even if FMR Corp. or the Equitable Entities held greater than 10% of the outstanding voting stock of the Company, as a result of its good faith filing of the two applications, the Company 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 applications. To date, no such order has been issued. The Company believes that the FMR Application and the Equitable Application ultimately should be granted. ENVIRONMENTAL MATTERS Seagull, as an owner and operator of oil and gas properties, is subject to various federal, state, local and foreign country laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations, subject the lessee to liability for pollution damages, require suspension or cessation of operations in affected areas and impose restrictions on the injection of liquids into subsurface aquifers that may contaminate groundwater. For a discussion of the Gulf Coast Vacuum Site matter, see Legal Proceedings below. Seagull Canada's oil and gas operations are largely regulated by the Energy Resources Conservation Board ("ERCB") for the province of Alberta and the Energy and Mines Board for the province of Saskatchewan ("SEM"). These bodies enforce legislation which regulates all aspects of exploration, development and production, including the licensing of wells, pipelines and facilities. Environmental legislation provides for restrictions and prohibitions on releases or emissions of various substances produced in association with certain oil and gas industry operations. In addition, legislation requires that well and facility sites must be abandoned and reclaimed to the satisfaction of provincial authorities, typically to pre-disturbance quality. A breach of such legislation may result in the imposition of fines and penalties. Environmental legislation in Alberta has recently undergone a major revision to update and consolidate the various acts applicable into the Environmental Protection and Enhancement Act, which was proclaimed on April 21, 1993 and took effect on September 1, 1993. The Act imposes stricter environmental standards requiring more stringent compliance and significantly increased penalties. Seagull has made and will continue to make expenditures in its efforts to comply with these requirements, which it believes are necessary business costs in the oil and gas industry. Although environmental requirements do have a substantial impact upon the energy industry, generally these 17 19 requirements do not appear to affect Seagull any differently or to any greater or lesser extent than other companies in the industry. Seagull maintains insurance coverages which it believes are customary in the industry, although it is not fully insured against all environmental risks. The Company is not aware of any environmental claims existing as of December 31, 1993, which would have a material impact upon the Company's financial position or results of operations. Seagull does not believe that compliance with federal, state, local or foreign country provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have a material adverse effect upon the capital expenditures, earnings or competitive position of the Company or its subsidiaries, but there is no assurance that changes in or additions to laws or regulations regarding the protection of the environment will not have such an impact. Seagull has established policies that provide for continuing compliance with environmental laws and regulations, as well as operational procedures designed to limit the environmental impact on its field facilities. EMPLOYEES As of February 28, 1994, the Company had 742 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 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 70% of ENSTAR Alaska's work force. Contracts effective April 1, 1992 were negotiated that set wages and work relationships extending to April 1, 1995 for the clerical bargaining unit and until April 1, 1996 for the operating bargaining unit. 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. 18 20 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:
Years Served Years in As Executive Current Name Age Officer Position Positions ---- --- ------------ -------- --------- Barry J. Galt 60 10 10 Chairman of the Board, President and Chief Executive Officer John W. Elias 53 1 1 Executive Vice President Robert W. Shower 56 2 - Executive Vice President and Chief Financial Officer Richard F. Barnes 50 6 6 President of ENSTAR Natural Gas Company (a division of the Company) and Alaska Pipeline Company (a subsidiary of the Company) John N. Goodpasture 45 12 1 President, Seagull Pipeline Company (a division of the Company) and Senior Vice President, Pipelines T. P. McConn 60 5 1 President, Seagull Energy E&P Inc. (a subsidiary of the Company) and Senior Vice President, Exploration and Production Rodney W. Bridges 44 4 1 Vice President and Controller Janice K. Hartrick 41 1 1 Chief Counsel and Vice President, Environmental Affairs Robert M. King 33 4 1 Vice President, Corporate Development and Treasurer
The business experience of each of the executive officers named above who has held the position(s) set forth opposite his or her name for less than five years, is as follows: Mr. Elias joined the Company in his present position in April 1993. 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. Mr. Shower joined the Company as Senior Vice President and Chief Financial Officer in March 1992 and was named Executive Vice President of the Company in December 1993. He served as Senior Vice President, Corporate Development for Albert Fisher, Inc. from 1991 to February 1992. From 1990 to 1991, he was Vice President and Chief Financial Officer with AmeriServ Food Company. From 1986 to 1990, he served as a Managing Director, Corporate Finance, for Lehman Brothers Inc., formerly Shearson Lehman Hutton Inc. 19 21 Mr. Goodpasture joined the Company in May 1980 as General Manager of Products and Petrochemicals. He has been an executive officer of the Company since 1981, most recently, he was named President of Seagull Pipeline Company in March 1990, and Senior Vice President, Pipelines, in December 1992. Mr. McConn joined Seagull in 1988 as Vice President - Production Operations of Seagull Energy E&P Inc., one of the Company's exploration and production subsidiaries. He was named Vice President, Exploration and Production of the Company in January 1990 and President of Seagull Energy E&P Inc. in March 1991. In December 1992, he was named Senior Vice President, Exploration and Production. Mr. Bridges joined the Company as Corporate Controller in August 1990, and was named Vice President and Controller in December 1992. From 1988 to 1990, he was Corporate Controller for TransAmerican Natural Gas Corporation and, for the previous six years, he was with Damson Oil Corporation, most recently as Chief Accounting Officer. Ms. Hartrick joined Seagull as Staff Counsel in 1987 and became Chief Counsel in 1989. She was named Chief Counsel and Vice President, Environmental Affairs in December 1992. Mr. King joined the Company as Treasurer in August 1990, and was named Vice President, Corporate Development and Treasurer in December 1992. From 1986 to 1990, he was with Mellon Bank, where he served as Vice President in the Energy Division. ITEM 2. PROPERTIES Incorporated herein by reference to Item 1 of this Annual Report on Form 10-K. ITEM 3. LEGAL PROCEEDINGS Gulf Coast Vacuum Site. On March 19, 1993, Franks Petroleum, Inc. ("Franks") submitted a claim to Seagull Mid-South Inc., a subsidiary of the Company ("Seagull Mid-South"), for a portion of Franks' costs incurred in connection with the Gulf Coast Vacuum Services Superfund Site (the "GCV Site") in Vermillion Parish, Louisiana. The United States Environmental Protection Agency Region 6 (the "EPA") currently is seeking the cleanup of the GCV Site under the authority of the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). Franks previously has been identified as a potentially responsible party at the GCV Site as a result of Franks' arrangements with the former operator of the GCV Site to transport wastes from various oil and gas leases owned or operated by Franks in trucks owned by the GCV Site operator. Franks' claim against Seagull Mid-South asserts that some of the wastes hauled by the GCV Site operator on behalf of Franks came from a gas well owned by Seagull Mid-South. On February 9, 1993, the EPA also sent a notice to Houston Oil & Minerals Corporation, a subsidiary of the Company ("HO&M"), indicating that HO&M may be a potentially responsible party at the GCV Site. Based upon the Company's investigation of this claim, the Company believes that the basis 20 22 for HO&M's alleged liability is a series of transactions between HO&M and the operator of the GCV Site that occurred during 1979 and 1980, long before Seagull acquired HO&M. The EPA's cleanup cost estimate of the GCV Site is in the range of $17 million, although other unofficial estimates indicate the cost may be higher. Under certain circumstances, liability under CERCLA is joint and several, although parties whose liability is joint and several have contribution rights against each other under CERCLA. Nevertheless, if Seagull Mid-South and/or HO&M is found to be a responsible party at the GCV Site, the Company believes that its liability is unlikely to be material to its financial condition or its results of operations 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 arising from the wells identified in the claims. 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 or results of operations, if any, will not be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 21 23 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 for each quarterly period during the last two fiscal years were as follows:
High (*) Low (*) -------- ------- 1992 First Quarter 12 3/4 10 7/8 Second Quarter 14 1/4 11 3/8 Third Quarter 16 11 7/8 Fourth Quarter 16 7/8 14 5/8
High Low ----- ----- 1993 First Quarter 24 1/2 14 7/8 Second Quarter 30 22 7/8 Third Quarter 32 7/8 24 Fourth Quarter 31 1/4 21
(*) Prices have been adjusted to reflect a two-for-one split of the Common Stock effected June 4, 1993. B. As of March 10, 1994, there were approximately 2,910 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 credit agreement (the "Credit Agreement") restricts the Company's declaration or payment of dividends on and repurchases of Common Stock unless each of the following tests have been met and after making such dividend payment such tests continue to be met: (i) the Tangible Net Worth is not less than $350 million, (ii) the ratio of the Company's earnings before interest expense, taxes, depreciation and amortization to the Company's interest expense (including operating lease rentals and capitalized interest) is not less than 3.5:1.0, (iii) the Debt to Capitalization Ratio is less than 60%, (iv) the aggregate amount of outstanding loans under the Credit Agreement, together with all other senior indebtedness of Seagull and its subsidiaries (excluding Alaska Pipeline Company ("APC")) then outstanding, must not exceed the Borrowing Base and (v) no Event of Default or unmatured Event of Default shall have occurred and be continuing; provided that in any event the aggregate dividend payments may not exceed 33 1/3% of the 22 24 consolidated cumulative net income of Seagull and its subsidiaries on a cumulative annual basis from January 1, 1993. The foregoing restrictions do not apply to dividends payable solely in the form of additional shares of Common Stock or to dividends payable on up to $100 million of preferred stock. The capitalized terms used herein to describe the restrictions contained in the Credit Agreement have the meanings assigned to them in the Credit Agreement. Under the most restrictive of these tests, as of December 31, 1993, approximately $9.1 million was available for payment of dividends on (other than the stock dividends described above) or repurchase of Common Stock. However, as of January 4, 1994, immediately following the Company's acquisition of Novalta Resources Inc., the Company's consolidated Debt to Capitalization Ratio increased to 60.2%. In the event the Company's consolidated Debt to Capitalization Ratio is in excess of 60% as of March 31, 1994, the Company would not be able to pay any cash dividends on or repurchase any Common Stock under these currently existing provisions. 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 1993 Annual Report to Shareholders and as part of Exhibit 99.1 attached hereto. ITEM 6. SELECTED FINANCIAL DATA(1)(2)
(Thousands of Dollars Except Per Share Amounts) Year Ended December 31, 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- Revenues . . . . . . . . . . . . . . . . . . . . . . . 377,165 238,829 248,537 219,908 178,401 Earnings applicable to common stock (3) . . . . . . . . 27,198 6,688 5,107 20,564 7,691 Earnings per share (3)(4) . . . . . . . . . . . . . . . 0.76 0.26 0.23 1.10 1.07 Net cash provided by operating activities before changes in operating assets and liabilities . . . . . . . . . . . . . . . . . . . 160,762 81,368 66,654 64,822 39,167 Net cash provided by operating activities . . . . . . . 119,761 72,187 69,773 87,321 53,264 Total assets . . . . . . . . . . . . . . . . . . . . . 1,118,251 1,102,964 618,552 389,619 332,152 Long-term portion of debt . . . . . . . . . . . . . . . 459,787 608,011 219,154 49,239 113,829 Shareholders' equity (5) . . . . . . . . . . . . . . . 439,379 243,673 235,797 192,516 101,025 Capital expenditures . . . . . . . . . . . . . . . . . 112,042 43,651 71,709 50,293 33,920 Acquisitions, net of cash acquired . . . . . . . . . . 29,470 401,888 201,767 54,320 6,988
(1) Reference is made to the Consolidated Financial Statements included in the Company's 1993 Annual Report to Shareholders and as part of Exhibit 99.1 attached hereto. (2) Includes Houston Oil Trust since December 31, 1989, Wacker Oil Inc. since June 28, 1990, the Mid-Continent Assets since March 8, 1991, and Seagull Mid-South Inc. since December 31, 1992. (3) 1992 includes the cumulative effect of two changes in accounting principles representing an increase in earnings of approximately $2.3 million, or $0.09 per share. (4) Per share data have been restated to reflect a two-for-one split of the Common Stock effected June 4, 1993. (5) The Company has not declared any cash dividends on the Common Stock since it became a public entity in 1981. 23 25 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 1993 Annual Report to Shareholders and as part of Exhibit 99.1 attached hereto. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated herein by reference to the Consolidated Financial Statements and Supplementary Data included in the Company's 1993 Annual Report to Shareholders and as part of Exhibit 99.1 attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 24 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference to "Proposal 1 - Election of Directors" included in the Proxy Statement for the Company's Annual Meeting of Shareholders to be held on June 1, 1994 (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 "Proposal 1 - Election of Directors --Executive Compensation--Summary Compensation Table", "--Compensation Arrangements," "--Option Exercises and Fiscal Year-End Values," "--Option Grants," "--Executive Supplemental 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 "Proposal 1 - 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 "Proposal 1 - Election of Directors--Certain Transactions and Other Matters" included in the Proxy Statement. 25 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 1993 Annual Report to Shareholders and as part of Exhibit 99.1 attached hereto, and are incorporated herein by reference: Consolidated Financial Statements Notes to Consolidated Financial Statements Independent Auditors' Report 2. SCHEDULES: PAGE ---- Independent Auditors' Report........................ 35 Schedule II - Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties........ 36 Schedule V - Property, Plant and Equipment.......... 37 Schedule VI - Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment......................... 38 Schedule X - Supplementary Income Statement Information................................. 39 All other 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). 26 28 3.2 Bylaws of the Company, as amended through January 30, 1990 (incorporated by reference to Exhibit 3.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 4.1 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 (including exhibits thereto) (incorporated by reference to Exhibit 4.1 to Annual Report on Form 10-K for the year ended December 31, 1990). 4.2 Form of Consent and Agreement dated April 15, 1991 by and among APC and the Insurance Companies (including exhibits thereto) (incorporated by reference to Exhibit 4.2 to Annual Report on Form 10-K for the year ended December 31, 1992). 4.3 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 (incorporated by reference to Exhibit 4.8 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 4.4 First Amendment to Rights Agreement by and between the Company and NationsBank of Texas, N. A. (formerly NCNB Texas National Bank) dated as of June 18, 1992 (incorporated by reference to Exhibit 3.4 to Registration Statement on Form S-3 (File No. 33-55426)). 4.5 Amended and Restated Credit Agreement dated June 25, 1993 by and among Seagull, each of the banks signatory thereto and Texas Commerce Bank National Association, as agent (without exhibits and schedules) (incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 4.6 Form of Revolving Credit Loan Note executed in connection with the Amended and Restated Credit Agreement included as Exhibit 4.5 hereto (incorporated by reference to Exhibit 4.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 4.7 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). 4.8 Senior Subordinated Indenture dated as of July 15, 1993 by and between the Company and The Bank of New York, as Trustee 27 29 (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K dated August 4, 1993). 4.9 Specimen of 7 7/8% Senior Note due 2003 and resolutions adopted by the Chairman of the Board of Directors (incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K dated August 4, 1993). 4.10 Specimen of 8 5/8% Senior Subordinated Note due 2005 and resolutions adopted by the Chairman of the Board of Directors (incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K dated August 4, 1993). 4.11 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). 4.12 First Amendment to Amended and Restated Credit Agreement by and among Seagull, each of the banks signatory thereto, and Texas Commerce Bank National Association, as agent, dated December 30, 1993 (without exhibits and schedules) (incorporated by reference to Exhibit 2.3 to Current Report on Form 8- K filed January 19, 1994). 4.13 Credit Agreement, U. S. $175 Million Reducing Revolving Credit Facility, dated December 30, 1993 by and among Seagull Energy Canada Ltd., each of the banks signatory thereto, and Chemical Bank of Canada, The Bank of Nova Scotia and Canadian Imperial Bank of Commerce, as co-agents (without exhibits) (incorporated by reference to Exhibit 2.4 to Current Report on Form 8-K filed January 19, 1994). 4.14 Form of Revolving Credit Loan Note (U. S. Dollars) executed in connection with the Credit Agreement included as Exhibit 4.13 hereto (incorporated by reference to Exhibit 2.5 to Current Report on Form 8-K filed January 19, 1994). 4.15 Form of Revolving Credit Loan Note (Canadian Dollars) executed in connection with the Credit Agreement included as Exhibit 4.13 hereto (incorporated by reference to Exhibit 2.6 to Current Report on Form 8-K filed January 19, 1994). 4.16 Intercreditor Agreement executed in connection with the Credit Agreement included as Exhibit 4.13 hereto (incorporated by reference to Exhibit 2.7 to Current Report on Form 8-K filed January 19, 1994). 28 30 4.17 Form of Bankers' Acceptance executed in connection with the Credit Agreement included as Exhibit 4.13 hereto (incorporated by reference to Exhibit 2.8 to Current Report on Form 8-K filed January 19, 1994). 4.18 Guarantee executed in connection with the Credit Agreement included as Exhibit 4.13 hereto (incorporated by reference to Exhibit 2.9 to Current Report on Form 8-K filed January 19, 1994). # 10.1 Seagull Thrift Plan, as amended and restated (the amended and restated plan is incorporated by reference to Exhibit 10.46 to the Annual Report on Form 10-K for the year ended December 31, 1990; the First and Second Amendments thereto are incorporated by reference to Exhibit 10.1 to Annual Report on Form 10-K for the year ended December 31, 1991; the Third Amendment thereto is incorporated by reference to Exhibit 10.1 to Annual Report on Form 10-K for the year ended December 31, 1992). # 10.2 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 (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). # 10.3 Outside Directors Deferred Fee Plan of the Company, as amended and restated (incorporated by reference to Exhibit 10.3 to Annual Report on Form 10-K for the year ended December 31, 1991). # 10.4 Seagull Energy Corporation Executive Supplemental Retirement Plan, as amended (incorporated by reference to Exhibit 10.4 to Annual Report on Form 10-K for the year ended December 31, 1991). # 10.5 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 10.5 to Annual Report on Form 10-K for the year ended December 31, 1991). #*10.6 ENSTAR Natural Gas Company Thrift Investment Plan, as amended and restated (the amended and restated plan is incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the year ended December 31, 1992; the First and Second Amendments thereto are filed herewith). # 10.7 ENSTAR Natural Gas Company Retirement Plan for Salaried Employees, as renamed, amended and restated (incorporated by reference to Exhibit 10.7 to Annual Report on Form 10-K for the year ended December 31, 1992). # 10.8 ENSTAR Natural Gas Company Retirement Plan for Operating Unit Employees, as amended and restated (incorporated by 29 31 reference to Exhibit 10.8 to Annual Report on Form 10-K for the year ended December 31, 1992). #*10.9 ENSTAR Natural Gas Company Profit by Service Plan for Salaried Employees, as amended and restated (the amended and restated plan is incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 1992; the First Amendment thereto is filed herewith). #*10.10 ENSTAR Natural Gas Company Profit by Service Plan for Classified Employees, as amended and restated (the amended and restated plan is incorporated by reference to Exhibit 10.10 to Annual Report on Form 10-K for the year ended December 31, 1992; the First and Second Amendments thereto are filed herewith). # 10.11 Seagull Energy Corporation Supplemental Benefit Plan, as amended (the original plan is incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the year ended December 31, 1990; the First Amendment thereto is incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 1991). 10.12 Gas Purchase Agreement among Alaska Pipeline Company and Marathon Oil Company dated as of May 1, 1988, as amended (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.13 Agreement to terminate Gas Purchase Contract among Alaska Pipeline Company and Union Oil Company of California (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). # 10.14 Seagull Energy Corporation 1981 Stock Option Plan (Restated), including forms of agreements, as amended (incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). #*10.15 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 filed herewith). #*10.16 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 filed herewith). # 10.17 Seagull Employee Stock Ownership Plan (the "Plan") as amended, including the First through Fourth Amendments thereto (incorporated by reference to Exhibit 10.9 to 30 32 Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.18 Non-Recourse Promissory Note from the Plan to the Company, dated November 15, 1989 (incorporated by reference to Exhibit 10.10 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.19 Security (Pledge) Agreement dated November 15, 1989 by and between the Plan and the Company (incorporated by reference to Exhibit 10.11 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.20 Sale Agreement made and entered into as of November 19, 1993 between Novacor Petrochemicals Ltd. and Seagull Energy Corporation (including Appendix J, "Tax Provisions") (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed January 19, 1994). 10.21 Guarantee executed in connection with Sale Agreement included as Exhibit 10.20 hereto (incorporated by reference to Exhibit 2.2 to Current Report on Form 8-K filed January 19, 1994). 10.22 Purchase and Sale Agreement made and entered into February 6, 1991 among Mesa Limited Partnership, Mesa Operating Limited Partnership, Mesa Midcontinent Limited Partnership and Seagull (without exhibits and schedules), as amended (incorporated by reference to Exhibits 2.3 and 2.4 to Amendment No. 1 dated March 5, 1991 to Current Report on Form 8-K dated December 7, 1990 and to Exhibits 2.3 and 2.4 to Current Report on Form 8-K dated March 8, 1991). #*10.23 Seagull Energy Corporation 1990 Stock Option Plan, including forms of agreements (the Plan is incorporated by reference to Exhibit 10.42 to Annual Report on Form 10-K for the year ended December 31, 1990; the amended form of Nonstatutory Stock Option Agreement is filed herewith). 10.24 Gas Purchase Contract among Alaska Pipeline Company and Shell Oil Company dated as of December 20, 1982, as amended (incorporated by reference to Exhibit 10.29 to Annual Report on Form 10-K for the year ended December 31, 1991). # 10.25 Seagull Energy Corporation 1991 Executive Incentive Plan (incorporated by reference to Exhibit 10.31 to Annual Report on Form 10-K for the year ended December 31, 1991). # 10.26 Seagull Energy Corporation 1992 Executive Incentive Plan (incorporated by reference to Exhibit 10.32 to Annual Report on Form 10-K for the year ended December 31, 1991). # 10.27 Seagull Energy Corporation 1993 Executive Incentive Plan (incorporated by reference to Exhibit 10.35 to Annual Report on Form 10-K for the year ended December 31, 1992). 31 33 10.28 Stock Purchase Agreement made and entered into as of November 16, 1992 between Arkla, Inc. and Seagull (not including disclosure schedules) (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K dated December 4, 1992, as amended). #*10.29 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 filed herewith). #*10.30 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 filed herewith). *21. Subsidiaries of Seagull Energy Corporation. *23.1 Consent of KPMG Peat Marwick. *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. *23.5 Consent of K&A Energy Consultants, Inc., independent petroleum engineers. 23.6 Consent of R. A. Lenser & Associates, Inc., independent petroleum engineers (incorporated by reference to Exhibit 24.6 to Annual Report on Form 10-K for the year ended December 31, 1992). *99.1 Portions of the Seagull Energy Corporation and Subsidiaries Annual Report to Shareholders for the year ended December 31, 1993 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, 1993. ____________________________ * Filed herewith. # Identifies management contracts and compensatory plans or arrangements. 32 34 (B) REPORTS ON FORM 8-K There were no Reports on Form 8-K filed during the three months ended December 31, 1993. The Company filed a current report on Form 8-K dated January 4, 1994, as amended, with respect to Seagull's acquisition of all the outstanding shares of stock of Novalta Resources Inc. The items reported in such current report were Item 2 (Acquisition or Disposition of Assets) and Item 7 (Financial Statements and Exhibits). The following financial statements were included in this report: ( i) Financial statements of business acquired. The financial statements of Novalta Resources Inc. and Subsidiaries - Years ended December 1993 and 1992 (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated January 4, 1994, as amended). (ii) Pro forma financial information. The pro forma financial information giving effect to the Seagull Canada Acquisition (incorporated by reference to the "Unaudited Pro Forma Condensed Financial Statements" contained in Item 7(b) of the Company's Current Report on Form 8-K dated January 4, 1994, as amended). 33 35 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 18, 1994 By: /s/ Barry J. Galt ------------------------------ Barry J. Galt, Chairman of the Board, President 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/ J. Evans Attwell ----------------------------------------------- ---------------------------- Barry J. Galt, Chairman of the Board, President J. Evans Attwell, Director and Chief Executive Officer and Director Date: March 18, 1994 (Principal Executive Officer) Date: March 18, 1994 By: ---------------------------- John B. Brock, Director By: /s/ Robert W. Shower Date: March 18, 1994 ----------------------------------------------- Robert W. Shower, Executive Vice President and Chief Financial Officer and Director (Principal By: /s/ John W. Elias Financial Officer) ---------------------------- Date: March 18, 1994 John W. Elias, Director Date: March 18, 1994 By: /s/ Rodney W. Bridges By: /s/ Peter J. Fluor ----------------------------------------------- ---------------------------- Rodney W. Bridges, Vice President and Peter J. Fluor, Director Controller (Principal Accounting Officer) Date: March 18, 1994 Date: March 18, 1994 By: /s/ William R. Grant ---------------------------- William R. Grant, Director Date: March 18, 1994 By: /s/ Dean P. Guerin ---------------------------- Dean P. Guerin, Director Date: March 18, 1994 By: /s/ Richard M. Morrow ---------------------------- Richard M. Morrow, Director Date: March 18, 1994 By: /s/ Dee S. Osborne ---------------------------- Dee S. Osborne, Director Date: March 18, 1994 By: /s/ Sam F. Segnar ---------------------------- Sam F. Segnar, Director Date: March 18, 1994 By: /s/ George M. Sullivan ---------------------------- George M. Sullivan, Director Date: March 18, 1994
34 36 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Seagull Energy Corporation: Under date of January 31, 1994, except the last three paragraphs of Note 17, Subsequent Events, which are as of March 11, 1994, we reported on the consolidated balance sheets of Seagull Energy Corporation and Subsidiaries as of December 31, 1993 and 1992, 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, 1993, as contained in the 1993 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK Houston, Texas January 31, 1994 35 37 SCHEDULE II SEAGULL ENERGY CORPORATION AND SUBSIDIARIES AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES (*)
Balance at Balance Name of Beginning at End of Debtor of Period Additions Deductions Period ---------------------- ---------- --------- ----------------------------- ---------------------- Amounts Amounts Not Collected Written Off Current Current --------- ----------- ------- ------- (Dollars in Thousands) Year ended December 31, 1991: Barry J. Galt $250 $ - $ 25 $ - $ 25 $200 Year ended December 31, 1992: Barry J. Galt $225 $ - $ 25 $ - $ 25 $175 Year ended December 31, 1993: Barry J. Galt $200 $ - $200 $ - $ - $ -
(*) Principal payments were made in equal annual installments beginning April 2, 1991 . Annual interest payments at the rate of 6% per annum were provided for throughout the term of the promissory notes. The remaining principal balance of the notes and accrued interest for the period were repaid in full in August 1993. 36 38 SCHEDULE V SEAGULL ENERGY CORPORATION AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT (1)
Other Balance at Changes Balance Beginning Additions Add at End Descriptions of Period at Cost (2) Retirements (Deduct) of Period ------------ --------- ----------- ----------- -------- --------- (Dollars in Thousands) Year ended December 31, 1991: Gas and oil properties $ 172,140 $ 260,012 $ 17,971 $ (4,195) (3) $ 409,986 Pipeline facilities 66,710 473 121 - 67,062 Gas processing plant 10,963 161 - - 11,124 Utility plant 191,058 10,492 1,519 904 (4) 200,935 Equipment and other 5,027 2,557 194 - 7,390 ---------- --------- -------- ----------- ---------- $ 445,898 $ 273,695 $ 19,805 $ (3,291) $ 696,497 ========== ========= ======== =========== ========== Year ended December 31, 1992: Gas and oil properties $ 409,986 $ 485,767 $ 2,343 $ (5,232) (3) $ 888,178 Pipeline facilities 67,062 10,802 5,451 - 72,413 Gas processing plant 11,124 1,177 - - 12,301 Utility plant 200,935 9,024 804 (736) (5) 208,419 Equipment and other 7,390 3,172 298 - 10,264 ---------- --------- -------- ----------- ---------- $ 696,497 $ 509,942 $ 8,896 $ (5,968) $1,191,575 ========== ========= ======== =========== ========== Year ended December 31, 1993: Gas and oil properties $ 888,178 $ 120,740 $ 24,635 $ (10,534) (3) $ 972,460 (1,289) (6) Pipeline facilities 72,413 468 9,862 - 63,019 Gas processing plants 12,301 1,647 - 1,860 (6) 15,808 Utility plant 208,419 10,094 1,630 - 216,883 Equipment and other 10,264 2,015 1,177 (571) (6) 10,531 ---------- --------- --------- ----------- ---------- $1,191,575 $ 134,964 $ 37,304 $ (10,534) $1,278,701 ========== ========= ========= =========== ==========
(1) See Note 1 ("Gas and Oil Properties" and "Other Property, Plant and Equipment") of the Consolidated Financial Statements included in the Company's 1993 Annual Report to Shareholders and as part of Exhibit 99.1 attached hereto for information regarding depreciation methods. (2) The additions to property, plant and equipment for the acquisitions of Wacker, the Mid-Continent Assets and Seagull Mid-South are included under "Additions at Cost" (see Note 2 of the Consolidated Financial Statements included in the Company's 1993 Annual Report to Shareholders and as part of Exhibit 99.1 attached hereto). (3) Dry hole expense. (4) Adjustment to investment tax credit related to ENSTAR Alaska. (5) Adjustment for prior purchase business combination resulting from the Company's adoption of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, effective January 1, 1992 (see Notes 1 ("Income Taxes") and 13 of the Consolidated Financial Statements included in the Company's 1993 Annual Report to Shareholders and as part of Exhibit 99.1 attached hereto). (6) Intercompany transfers. 37 39 SCHEDULE VI SEAGULL ENERGY CORPORATION AND SUBSIDIARIES ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
Additions Other Balance at Charged to Changes Balance Beginning Costs and Add at End Descriptions of Period Expenses Retirements (Deduct) of Period ------------ --------- -------- ----------- -------- --------- (Dollars in Thousands) Year ended December 31, 1991: Gas and oil properties $ 60,252 $ 42,646 $16,759 $ - $ 86,139 Pipeline facilities 56,610 2,382 103 - 58,889 Gas processing plant 6,443 897 - - 7,340 Utility plant 34,359 7,868 1,428 - 40,799 Equipment and other 2,224 1,018 167 - 3,075 -------- -------- ------- -------- -------- $159,888 $ 54,811 $18,457 $ - $196,242 ======== ======== ======= ======== ======== Year ended December 31, 1992: Gas and oil properties $ 86,139 $ 52,855 $ 1,793 $ - $137,201 Pipeline facilities 58,889 2,290 5,048 - 56,131 Gas processing plant 7,340 902 - - 8,242 Utility plant 40,799 7,920 659 - 48,060 Equipment and other 3,075 1,271 207 - 4,139 -------- -------- ------- -------- -------- $196,242 $ 65,238 $ 7,707 $ - $253,773 ======== ======== ======= ======== ======== Year ended December 31, 1993: Gas and oil properties $137,201 $103,552 $15,611 $(691)(*) $224,451 Pipeline facilities 56,131 4,255 9,591 - 50,795 Gas processing plants 8,242 1,238 - 691 (*) 10,171 Utility plant 48,060 8,587 1,768 - 54,879 Equipment and other 4,139 1,912 835 - 5,216 -------- -------- ------- -------- -------- $253,773 $119,544 $27,805 $ - $345,512 ======== ======== ======= ======== ========
(*) Intercompany transfers. 38 40 SCHEDULE X SEAGULL ENERGY CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION
Item Charged to Costs and Expenses ---- ---------------------------------------------------------- Year Ended December 31, ---------------------------------------------------------- 1993 1992 1991 ---- ---- ---- (Dollars in Thousands) Maintenance and Repairs $5,576 $3,844 $4,156 Taxes, other than payroll and income taxes: Ad Valorem $6,080 $4,400 $4,137 Production $9,134 $4,045 $3,531 Other $1,817 $1,301 $1,533
39 41 EXHIBIT INDEX EXHIBITS: Page ---- 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 January 30, 1990 (incorporated by reference to Exhibit 3.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 4.1 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 (including exhibits thereto) (incorporated by reference to Exhibit 4.1 to Annual Report on Form 10-K for the year ended December 31, 1990). 4.2 Form of Consent and Agreement dated April 15, 1991 by and among APC and the Insurance Companies (including exhibits thereto) (incorporated by reference to Exhibit 4.2 to Annual Report on Form 10-K for the year ended December 31, 1992). 4.3 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 40 42 Purchase Preferred Shares as Exhibit C (incorporated by reference to Exhibit 4.8 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 4.4 First Amendment to Rights Agreement by and between the Company and NationsBank of Texas, N. A. (formerly NCNB Texas National Bank) dated as of June 18, 1992 (incorporated by reference to Exhibit 3.4 to Registration Statement on Form S-3 (File No. 33-55426)). 4.5 Amended and Restated Credit Agreement dated June 25, 1993 by and among Seagull, each of the banks signatory thereto and Texas Commerce Bank National Association, as agent (without exhibits and schedules) (incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 4.6 Form of Revolving Credit Loan Note executed in connection with the Amended and Restated Credit Agreement included as Exhibit 4.5 hereto (incorporated by reference to Exhibit 4.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 4.7 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). 4.8 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). 4.9 Specimen of 7 7/8% Senior Note due 2003 and resolutions adopted by the Chairman of the Board of Directors (incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K dated August 4, 1993). 4.10 Specimen of 8 5/8% Senior Subordinated Note due 2005 and resolutions adopted by the Chairman of the Board of Directors (incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K dated August 4, 1993). 4.11 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 41 43 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). 4.12 First Amendment to Amended and Restated Credit Agreement by and among Seagull, each of the banks signatory thereto, and Texas Commerce Bank National Association, as agent, dated December 30, 1993 (without exhibits and schedules) (incorporated by reference to Exhibit 2.3 to Current Report on Form 8-K filed January 19, 1994). 4.13 Credit Agreement, U. S. $175 Million Reducing Revolving Credit Facility, dated December 30, 1993 by and among Seagull Energy Canada Ltd., each of the banks signatory thereto, and Chemical Bank of Canada, The Bank of Nova Scotia and Canadian Imperial Bank of Commerce, as co-agents (without exhibits) (incorporated by reference to Exhibit 2.4 to Current Report on Form 8-K filed January 19, 1994). 4.14 Form of Revolving Credit Loan Note (U. S. Dollars) executed in connection with the Credit Agreement included as Exhibit 4.13 hereto (incorporated by reference to Exhibit 2.5 to Current Report on Form 8-K filed January 19, 1994). 4.15 Form of Revolving Credit Loan Note (Canadian Dollars) executed in connection with the Credit Agreement included as Exhibit 4.13 hereto (incorporated by reference to Exhibit 2.6 to Current Report on Form 8-K filed January 19, 1994). 4.16 Intercreditor Agreement executed in connection with the Credit Agreement included as Exhibit 4.13 hereto (incorporated by reference to Exhibit 2.7 to Current Report on Form 8-K filed January 19, 1994). 4.17 Form of Bankers' Acceptance executed in connection with the Credit Agreement included as Exhibit 4.13 hereto (incorporated by reference to Exhibit 2.8 to Current Report on Form 8-K filed January 19, 1994). 4.18 Guarantee executed in connection with the Credit Agreement included as Exhibit 4.13 42 44 hereto (incorporated by reference to Exhibit 2.9 to Current Report on Form 8-K filed January 19, 1994). # 10.1 Seagull Thrift Plan, as amended and restated (the amended and restated plan is incorporated by reference to Exhibit 10.46 to the Annual Report on Form 10-K for the year ended December 31, 1990; the First and Second Amendments thereto are incorporated by reference to Exhibit 10.1 to Annual Report on Form 10-K for the year ended December 31, 1991; the Third Amendment thereto is incorporated by reference to Exhibit 10.1 to Annual Report on Form 10-K for the year ended December 31, 1992). # 10.2 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 (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). # 10.3 Outside Directors Deferred Fee Plan of the Company, as amended and restated (incorporated by reference to Exhibit 10.3 to Annual Report on Form 10-K for the year ended December 31, 1991). # 10.4 Seagull Energy Corporation Executive Supplemental Retirement Plan, as amended (incorporated by reference to Exhibit 10.4 to Annual Report on Form 10-K for the year ended December 31, 1991). # 10.5 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 10.5 to Annual Report on Form 10-K for the year ended December 31, 1991). #*10.6 ENSTAR Natural Gas Company Thrift Investment Plan, as amended and restated (the amended and restated plan is incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the year ended December 31, 1992; the First and Second Amendments thereto are filed herewith). # 10.7 ENSTAR Natural Gas Company Retirement Plan for Salaried Employees, as renamed, amended and restated (incorporated by reference to Exhibit 10.7 to Annual Report on Form 10-K for the year ended December 31, 1992). 43 45 # 10.8 ENSTAR Natural Gas Company Retirement Plan for Operating Unit Employees, as amended and restated (incorporated by reference to Exhibit 10.8 to Annual Report on Form 10-K for the year ended December 31, 1992). #*10.9 ENSTAR Natural Gas Company Profit by Service Plan for Salaried Employees, as amended and restated (the amended and restated plan is incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 1992; the First Amendment thereto is filed herewith). #*10.10 ENSTAR Natural Gas Company Profit by Service Plan for Classified Employees, as amended and restated (the amended and restated plan is incorporated by reference to Exhibit 10.10 to Annual Report on Form 10-K for the year ended December 31, 1992; the First and Second Amendments thereto are filed herewith). # 10.11 Seagull Energy Corporation Supplemental Benefit Plan, as amended (the original plan is incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the year ended December 31, 1990; the First Amendment thereto is incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 1991). 10.12 Gas Purchase Agreement among Alaska Pipeline Company and Marathon Oil Company dated as of May 1, 1988, as amended (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.13 Agreement to terminate Gas Purchase Contract among Alaska Pipeline Company and Union Oil Company of California (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). # 10.14 Seagull Energy Corporation 1981 Stock Option Plan (Restated), including forms of agreements, as amended (incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). #*10.15 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 44 46 amended form of Nonstatutory Stock Option Agreement is filed herewith). #*10.16 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 filed herewith). # 10.17 Seagull Employee Stock Ownership Plan (the "Plan") as amended, including the First through Fourth Amendments thereto (incorporated by reference to Exhibit 10.9 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.18 Non-Recourse Promissory Note from the Plan to the Company, dated November 15, 1989 (incorporated by reference to Exhibit 10.10 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.19 Security (Pledge) Agreement dated November 15, 1989 by and between the Plan and the Company (incorporated by reference to Exhibit 10.11 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.20 Sale Agreement made and entered into as of November 19, 1993 between Novacor Petrochemicals Ltd. and Seagull Energy Corporation (including Appendix J, "Tax Provisions") (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed January 19, 1994). 10.21 Guarantee executed in connection with Sale Agreement included as Exhibit 10.20 hereto (incorporated by reference to Exhibit 2.2 to Current Report on Form 8-K filed January 19, 1994). 10.22 Purchase and Sale Agreement made and entered into February 6, 1991 among Mesa Limited Partnership, Mesa Operating Limited Partnership, Mesa Midcontinent Limited Partnership and Seagull (without exhibits and schedules), as amended (incorporated by reference to Exhibits 2.3 and 2.4 to Amendment No. 1 dated March 5, 1991 to Current Report on Form 8-K dated December 7, 1990 and to Exhibits 2.3 and 2.4 to Current Report on Form 8-K dated March 8, 1991). 45 47 #*10.23 Seagull Energy Corporation 1990 Stock Option Plan, including forms of agreements (the Plan is incorporated by reference to Exhibit 10.42 to Annual Report on Form 10-K for the year ended December 31, 1990; the amended form of Nonstatutory Stock Option Agreement is filed herewith). 10.24 Gas Purchase Contract among Alaska Pipeline Company and Shell Oil Company dated as of December 20, 1982, as amended (incorporated by reference to Exhibit 10.29 to Annual Report on Form 10-K for the year ended December 31, 1991). # 10.25 Seagull Energy Corporation 1991 Executive Incentive Plan (incorporated by reference to Exhibit 10.31 to Annual Report on Form 10-K for the year ended December 31, 1991). # 10.26 Seagull Energy Corporation 1992 Executive Incentive Plan (incorporated by reference to Exhibit 10.32 to Annual Report on Form 10-K for the year ended December 31, 1991). # 10.27 Seagull Energy Corporation 1993 Executive Incentive Plan (incorporated by reference to Exhibit 10.35 to Annual Report on Form 10-K for the year ended December 31, 1992). 10.28 Stock Purchase Agreement made and entered into as of November 16, 1992 between Arkla, Inc. and Seagull (not including disclosure schedules) (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K dated December 4, 1992, as amended). #*10.29 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 filed herewith). #*10.30 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 filed herewith). *21. Subsidiaries of Seagull Energy Corporation. *23.1 Consent of KPMG Peat Marwick. 46 48 *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. *23.5 Consent of K&A Energy Consultants, Inc., independent petroleum engineers. 23.6 Consent of R. A. Lenser & Associates, Inc., independent petroleum engineers (incorporated by reference to Exhibit 24.6 to Annual Report on Form 10-K for the year ended December 31,1992). *99.1 Portions of the Seagull Energy Corporation and Subsidiaries Annual Report to Shareholders for the year ended December 31, 1993 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, 1993. ____________________ * Filed herewith. # Identifies management contracts and compensatory plans or arrangements. 47 EX-10.6 2 1ST AND 2ND AMENDMENT TO ENSTAR THRIFT PLAN 1 Exhibit 10.6 FIRST AMENDMENT TO ENSTAR NATURAL GAS COMPANY THRIFT INVESTMENT PLAN WHEREAS, SEAGULL ENERGY CORPORATION, (the "Company") has heretofore adopted the ENSTAR NATURAL GAS COMPANY THRIFT INVESTMENT PLAN (the "Plan"), and WHEREAS, Section 13.1 of the Plan provides that the Administrative Committee appointed by the Chief Executive Officer of the Company to administer the Plan (the "Committee") shall have the authority to make any administrative modifications necessary or advisable by the Committee to facilitate the efficient administration of the Plan; and WHEREAS, the Committee desires to amend the Plan provision that governs when a Class III Withdrawal can be made. Presently, a member may not make a Class III Withdrawal unless he has had Basic Contributions allocated to his account for at least five years. This amendment allows a member to make a Class III Withdrawal as long as he has been a Member of the Plan for five or more years. NOW THEREFORE, the Plan is hereby amended, effective as of January 1, 1989, by deleting Section 8.2 of the Plan and substituting the following therefor: "8.2 CLASS III WITHDRAWALS: A Member may, as of any Valuation Date, withdraw an amount equal to all amounts withdrawable pursuant to Section 8.1, plus all amounts withdrawable pursuant to Section 8.3, plus an amount not exceeding the then value of such Member's Company Contribution Account, and for withdrawals in Plan Years beginning before January 1, 1993, less any Company Matching Contributions made to such Account in the twenty-four months immediately preceding such withdrawal. A Member who makes such a withdrawal may not participate in the Plan for a period of twelve months following such withdrawal. A Member may not make a withdrawal pursuant to this Section 8.2 unless he has been a Member of the Plan for at least five years." As amended hereby, the Plan is specifically ratified and reaffirmed. Executed this 9th day of June, 1993. ADMINISTRATIVE COMMITTEE ENSTAR NATURAL GAS COMPANY THRIFT INVESTMENT PLAN BY____________________________ RICHARD F. BARNES, CHAIRMAN 2 SECOND AMENDMENT TO THE ENSTAR NATURAL GAS COMPANY THRIFT INVESTMENT PLAN WHEREAS, Seagull Energy Corporation (the "Company") has heretofore adopted the ENSTAR Natural Gas Company Thrift Investment Plan (the "Plan"); and WHEREAS, Section 13.1 of the Plan provides that the administrative committee appointed by the Chief Executive Officer of the Company to administer the Plan (the "Committee") may make certain amendments to the Plan; and WHEREAS, the Committee desires to make such an amendment to the Plan; NOW, THEREFORE, the Plan is hereby amended, effective as of January 1, 1989, by deleting Section 7.4(a) of the Plan and substituting the following therefor: "(a) Each Member, OR A MEMBER'S SURVIVING SPOUSE WHO HAS ELECTED TO DEFER DISTRIBUTION UNDER THE TERMS OF THIS PLAN, shall have the right to designate the beneficiary or beneficiaries to receive payment of his benefit in the event of his death. Each such designation shall be made by executing the beneficiary designation form prescribed by the Committee and filing same with the Committee. Any such designation may be changed at any time by execution of a new designation in accordance with this Section. Notwithstanding the foregoing, if a Member who is married on the date of his death designates other than his surviving spouse as his beneficiary, such designation shall not be effective unless (1) such spouse has consented thereto in writing, and such consent (A) acknowledges the effect of such specific designation, (B) either consents to the specific designated beneficiary (which designation may not subsequently be changed by the Member without spousal consent) or expressly permits such designation by the Member without the requirements of further consent by the spouse and (C) is witnessed by a Plan representative (other than the Member) or a notary public or (2) such consent may not be obtained because such spouse cannot be located or because of other circumstances described by applicable Treasury Regulations. Any such consent by such surviving spouse shall be irrevocable." As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED this 20th day of December, 1993. ADMINISTRATIVE COMMITTEE ENSTAR NATURAL GAS COMPANY THRIFT INVESTMENT PLAN BY: _________________________________ RICHARD F. BARNES, CHAIRMAN EX-10.9 3 1ST AMEND. ENSTAR PROFIT SERVICE PLAN 1 Exhibit 10.9 FIRST AMENDMENT TO THE ENSTAR NATURAL GAS COMPANY PROFIT BY SERVICE PLAN FOR SALARIED EMPLOYEES WHEREAS, Seagull Energy Corporation (the "Company") has heretofore adopted the ENSTAR Natural Gas Company Profit by Service Plan for Salaried Employees (the "Plan"); and WHEREAS, Section 15.1 of the Plan provides that the administrative committee appointed by the Chief Executive Officer of the Company to administer the Plan (the "Committee") may make certain amendments to the Plan; and WHEREAS, the Committee desires to make such an amendment to the Plan; NOW, THEREFORE, the Plan is hereby amended, effective as of January 1, 1989, by deleting Section 8.2(a) of the Plan and substituting the following therefor: "(a) Each Member, OR A MEMBER'S SURVIVING SPOUSE WHO HAS ELECTED TO DEFER DISTRIBUTION UNDER THE TERMS OF THIS PLAN, shall have the right to designate the beneficiary or beneficiaries to receive payment of his Article IX benefit in the event of his death. Each such designation shall be made by executing the beneficiary designation form prescribed by the Committee and filing same with the Committee. Any such designation may be changed at any time by execution of a new designation in accordance with this Section. Notwithstanding the foregoing, if a Member who is married on the date of his death designates other than his surviving spouse as his beneficiary, such designation shall not be effective unless (1) such spouse has consented thereto in writing, and such consent (A) acknowledges the effect of such specific designation, (B) either consents to the specific designated beneficiary (which designation may not subsequently be changed by the Member without spousal consent) or expressly permits such designation by the Member without the requirements of further consent by the spouse and (C) is witnessed by a Plan representative (other than the Member) or a notary public or (2) such consent may not be obtained because such spouse cannot be located or because of other circumstances described by applicable Treasury Regulations. Any such consent by such surviving spouse shall be irrevocable." As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED this 20th day of December, 1993 ADMINISTRATIVE COMMITTEE ENSTAR NATURAL GAS COMPANY PROFIT BY SERVICE PLAN FOR SALARIED EMPLOYEES BY: ________________________________________ RICHARD F. BARNES, CHAIRMAN EX-10.10 4 1ST AMEND. TO ENSTAR PROFIT SERVICE PLAN CLASSIFIE 1 Exhibit 10.10 FIRST AMENDMENT TO THE ENSTAR NATURAL GAS COMPANY PROFIT BY SERVICE PLAN FOR CLASSIFIED EMPLOYEES WHEREAS, Seagull Energy Corporation (the "Company") has heretofore adopted the ENSTAR Natural Gas Company Profit By Service Plan for Classified Employees (the "PLAN"); and WHEREAS, Section 15.1 of the Plan provides that the administrative committee appointed by the Chief Executive Officer of the Company to administer the Plan (the "COMMITTEE") may make certain amendments to the Plan; and WHEREAS, the Committee desires to make such an amendment, NOW, THEREFORE, the Plan is hereby amended, effective as of January 1, 1989, by deleting Section 7.4(b) of the Plan and substituting the following therefor: "(b) In the event that an amount credited to a terminated Member's Profit Sharing Account becomes a forfeiture pursuant to Paragraph (a) above, the terminated Member shall, upon subsequent reemployment with the Company prior to incurring five consecutive One-Year Breaks-in-Service, have the forfeited amount restored to such Member's Profit Sharing Account, unadjusted by any subsequent gains or losses of the Trust Fund, if such Member repays in cash an amount equal to the amount so distributed to him from such Profit Sharing Account within five years from the date the Member is reemployed. Any such restoration shall be made as of the Valuation Date coincident with or next succeeding the date of repayment. Notwithstanding anything to the contrary in the Plan, forfeited amounts to be restored by the Company pursuant to this Paragraph shall be charged against and deducted from forfeitures otherwise available for allocation to other Members in accordance with Section 4.2(a) in the Plan Year in which such amounts are restored. If such forfeitures otherwise available are not sufficient to provide such restoration, the portion of such restoration not provided by forfeitures shall be charged against and deducted from Company contributions otherwise available for allocation to other Members in accordance with Section 4.2, and such excess amount shall be a minimum required Company contribution (without regard to net profits)." As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED this 15th day of September, 1993. ADMINISTRATIVE COMMITTEE ENSTAR NATURAL GAS COMPANY PROFIT BY SERVICE PLAN FOR CLASSIFIED EMPLOYEES BY: __________________________________________ RICHARD F. BARNES, CHAIRMAN 2 SECOND AMENDMENT TO THE ENSTAR NATURAL GAS COMPANY PROFIT BY SERVICE PLAN FOR CLASSIFIED EMPLOYEES WHEREAS, Seagull Energy Corporation (the "Company") has heretofore adopted the ENSTAR Natural Gas Company Profit by Service Plan for Classified Employees (the "Plan"); and WHEREAS, Section 15.1 of the Plan provides that the administrative committee appointed by the Chief Executive Officer of the Company to administer the Plan (the "Committee") may make certain amendments to the Plan; and WHEREAS, the Committee desires to make such an amendment to the Plan; NOW, THEREFORE, the Plan is hereby amended, effective as of January 1, 1989, by deleting Section 8.2(a) of the Plan and substituting the following therefor: "(a) Each Member, OR A MEMBER'S SURVIVING SPOUSE WHO HAS ELECTED TO DEFER DISTRIBUTION UNDER THE TERMS OF THIS PLAN, shall have the right to designate the beneficiary or beneficiaries to receive payment of his Article IX benefit in the event of his death. Each such designation shall be made by executing the beneficiary designation form prescribed by the Committee and filing same with the Committee. Any such designation may be changed at any time by execution of a new designation in accordance with this Section. Notwithstanding the foregoing, if a Member who is married on the date of his death designates other than his surviving spouse as his beneficiary, such designation shall not be effective unless (1) such spouse has consented thereto in writing, and such consent (A) acknowledges the effect of such specific designation, (B) either consents to the specific designated beneficiary (which designation may not subsequently be changed by the Member without spousal consent) or expressly permits such designation by the Member without the requirement of further consent by the spouse and (C) is witnessed by a Plan representative (other than the Member) or a notary public or (2) such consent may not be obtained because such spouse cannot be located or because of other circumstances described by applicable Treasury Regulations. Any such consent by such surviving spouse shall be irrevocable." As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED this 20th day of December, 1993 ADMINISTRATIVE COMMITTEE ENSTAR NATURAL GAS COMPANY PROFIT BY SERVICE PLAN FOR CLASSIFIED EMPLOYEES BY: __________________________________________ RICHARD F. BARNES, CHAIRMAN EX-10.15 5 NONSTATUTORY STOCK OPTION AGREEMENT 1 EXHIBIT 10.15 NONSTATUTORY STOCK OPTION AGREEMENT AGREEMENT made as of the ______ day of ________, 19__, between SEAGULL ENERGY CORPORATION, a Texas corporation (the "COMPANY") and __________ ("EMPLOYEE"). To carry out the purposes of the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN (the "PLAN"), by affording Employee the opportunity to purchase shares of common stock of the Company ("STOCK"), and in consideration of the mutual agreements and other matters set forth herein and in the Plan, the Company and Employee hereby agree as follows: 1. GRANT OF OPTION. The Company hereby irrevocably grants to Employee the right and option ("OPTION") to purchase all or any part of an aggregate of ________ shares of Stock, on the terms and conditions set forth herein and in the Plan, which Plan is incorporated herein by reference as a part of this Agreement. This Option shall not be treated as an incentive stock option within the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the "CODE"). 2. PURCHASE PRICE. The purchase price of Stock purchased pursuant to the exercise of this Option shall be __________ per share. For all purposes of this Agreement, fair market value of Stock shall be determined in accordance with the provisions of the Plan. 3. EXERCISE OF OPTION. Subject to the earlier expiration of this Option as herein provided, this Option may be exercised, by written notice to the Company at its principal executive office addressed to the attention of its Corporate Secretary, at any time and from time to time after the date of grant hereof, but, except as otherwise provided below, this Option shall not be exercisable for more than a percentage of the aggregate number of shares offered by this Option determined by the number of full years from the date of grant hereof to the date of such exercise, in accordance with the following schedule:
PERCENTAGE OF SHARES NUMBER OF FULL YEARS THAT MAY BE PURCHASED -------------------- --------------------- Less than 3 years 0% 3 years 40% 4 years 60% 5 years 80% 6 years or more 100%
Notwithstanding anything in this agreement to the contrary, the Committee appointed by the Board of Directors to the Company to administer the Plan (the "COMMITTEE") in its sole discretion may waive the foregoing schedule of vesting and permit Employee to exercise the Option in such amount or amounts and at such time or times as the Committee shall determine. This Option is not transferable by Employee otherwise than by will or the laws of descent and distribution, and may be exercised only by Employee during Employee's lifetime and while Employee remains an employee of the Company, except that: 2 Page 2 (a) If Employee's employment with the Company terminates for cause or voluntarily by Employee (other than by reason of normal retirement at or after age sixty-five) without the written consent of the Committee, this Option shall immediately terminate and shall no longer be exercisable. For purposes of this Agreement, "cause" shall mean Employee's gross negligence or willful misconduct in performance of the duties of Employee's employment, or Employee's final conviction of a felony or of a misdemeanor involving moral turpitude. (b) If Employee's employment with the Company terminates for any reason other than death or as described in (a) above, this Option may be exercised by Employee at any time during the period of three months following such termination, or by Employee's estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee) during a period of one year following Employee's death if Employee dies during such three-month period, but in each case only as to the number of shares Employee was entitled to purchase hereunder as of the date Employee's employment so terminates unless such termination was by reason of normal retirement at or after age sixty-five or total and permanent disability in either which case this Option shall be exercisable in full. (c) If Employee dies while in the employ of the Company, Employee's estate, or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee, may exercise this Option in full at any time during the period of one year following the date of Employee's death. This Option shall not be exercisable in any event after the expiration of ten years from the date of grant hereof. The purchase price of shares as to which this Option is exercised shall be paid in full at the time of exercise (a) in cash (including check, bank draft or money order payable to the order of the Company), (b) by delivering to the Company shares of Stock having a fair market value equal to the purchase price, or (c) any combination of cash or Stock. No fraction of a share of Stock shall be issued by the Company upon exercise of an Option or accepted by the Company in payment of the purchase price thereof; rather, Employee shall provide a cash payment for such amount as is necessary to effect the issuance and acceptance of only whole shares of Stock. Unless and until a certificate or certificates representing such shares shall have been issued by the Company to Employee, Employee (or the person permitted to exercise this Option in the event of Employee's death) shall not be or have any of the rights or privileges of a shareholder of the Company with respect to shares acquirable upon an exercise of this Option. 4. WITHHOLDING OF TAX. To the extent that the exercise of this Option or the disposition of shares of Stock acquired by exercise of this Option results in compensation income to Employee for federal or state income tax purposes, Employee shall deliver to the Company at the time of such exercise or disposition such amount of money or shares of Stock as the Company may require to meet its obligation under applicable tax laws or regulations. Employee may elect with respect to this 3 Page 3 Option to surrender or authorize the Company to withhold shares of Stock (valued at their fair market value on the date of surrender or withholding of such shares) in satisfaction of any such withholding obligation (a "Stock Surrender Withholding Election"); provided, however, that: (a) Any Stock Surrender Withholding Election shall be made by written notice to the Company and thereafter shall be irrevocable by Employee; (b) Any Stock Surrender Withholding Election shall be subject to disapproval by the Committee at any time; (c) Any Stock Surrender Withholding Election shall be made prior to the date Employee recognizes income with respect to the exercise of this Option (the "Tax Date"); and (d) If Employee is an "officer" of the Company or other person subject to section 16(b) of the Securities Exchange Act of 1934, as amended, or any successor law and wishes to make a Stock Surrender Withholding Election, such person shall make any Stock Surrender Withholding Election: (i) more than six months after the date of grant of this Option, except that this limitation shall not apply in the event of death or disability of Employee prior to the expiration of the six-month period; and (ii) either at least six months prior to the Tax Date or during the period beginning on the third business day following the date of release for publication of the Company's summary statement of sales and earnings for a quarter or fiscal year and ending on the twelfth business day following such date. (e) When the Tax Date falls after the exercise of this Option and Employee makes a Stock Surrender Withholding Election, the full number of shares of Stock for which this Option is being exercised shall be issued, but Employee shall be unconditionally obligated to deliver to the Company on the Tax Date a number of shares of Stock having a value equal to any tax required to be withheld. If Employee fails to deliver such money or make a Stock Surrender Withholding Election pursuant to this Paragraph, the Company is authorized to withhold from any cash or Stock remuneration then or thereafter payable to Employee any tax required to be withheld. 5. STATUS OF STOCK. The Company intends to register for issuance under the Securities Act of 1933, as amended (the "ACT") the shares of Stock acquirable upon exercise of this Option, and to keep such registration effective throughout the period this Option is exercisable. In the absence of such effective registration or an available exemption from registration under the Act, issuance of shares of Stock acquirable upon exercise of this Option will be delayed until registration of such shares is effective or an exemption from registration under the Act is available. The Company intends to use its best efforts to ensure that no such delay will occur. In the event exemption from registration under the Act is available upon an exercise of this Option, Employee (or the person permitted to exercise this Option in the event of Employee's death or incapacity), if 4 Page 4 requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws. Employee agrees that the shares of Stock which Employee may acquire by exercising this Option will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable securities laws, whether federal or state. Employee also agrees (i) that the certificates representing the shares of Stock purchased under this Option may bear such legend or legends as the Committee deems appropriate in order to assure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the shares of Stock purchased under this Option on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities law and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the shares of Stock purchased under this Option. 6. EMPLOYMENT RELATIONSHIP. For purposes of this Agreement, Employee shall be considered to be in the employment of the Company as long as Employee remains an employee of either the Company, a parent or subsidiary corporation (as defined in section 424 of the Code) of the Company, or a corporation or a parent or subsidiary of such corporation assuming or substituting a new option for this Option. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee, and its determination shall be final. 7. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Employee. 8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officer thereunto duly authorized, and Employee has executed this Agreement, all as of the day and year first above written. SEAGULL ENERGY CORPORATION BY: ____________________________________ CHAIRMAN OF THE BOARD EMPLOYEE: ______________________________ EX-10.16 6 NONSTATUTORY STOCK OPTION AGREEMENT 1 EXHIBIT 10.16 NONSTATUTORY STOCK OPTION AGREEMENT AGREEMENT made as of the _____ day of ____, 199__, between SEAGULL ENERGY CORPORATION, a Texas corporation (the "COMPANY") and ____________________ ("EMPLOYEE"). To carry out the purposes of the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN (the "PLAN"), by affording Employee the opportunity to purchase shares of common stock of the Company ("STOCK"), and in consideration of the mutual agreements and other matters set forth herein and in the Plan, the Company and Employee hereby agree as follows: 1. GRANT OF OPTION. The Company hereby irrevocably grants to Employee the right and option ("OPTION") to purchase all or any part of an aggregate of ________ shares of Stock, on the terms and conditions set forth herein and in the Plan, which Plan is incorporated herein by reference as a part of this Agreement. This Option shall not be treated as an incentive stock option within the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the "CODE"). 2. PURCHASE PRICE. The purchase price of Stock purchased pursuant to the exercise of this Option shall be $_______ per share. For all purposes of this Agreement, fair market value of Stock shall be determined in accordance with the provisions of the Plan. 3. EXERCISE OF OPTION. Subject to the earlier expiration of this Option as herein provided, this Option may be exercised, by written notice to the Company at its principal executive office addressed to the attention of its Corporate Secretary, at any time and from time to time after the date of grant hereof, but, except as otherwise provided below, this Option shall not be exercisable for more than a percentage of the aggregate number of shares offered by this Option determined by the number of full years from the date of grant hereof to the date of such exercise, in accordance with the following schedule:
PERCENTAGE OF SHARES NUMBER OF FULL YEARS THAT MAY BE PURCHASED -------------------- --------------------- Less than 3 years 0% 3 years 40% 4 years 60% 5 years 80% 6 years or more 100%
Notwithstanding anything in this agreement to the contrary, the Committee appointed by the Board of Directors to the Company to administer the Plan (the "COMMITTEE") in its sole discretion may waive the foregoing schedule of vesting and permit Employee to exercise the Option in such amount or amounts and at such time or times as the Committee shall determine. This Option is not transferable by Employee otherwise than by will or the laws of descent and distribution, and may be exercised only by Employee during Employee's lifetime and while Employee remains an employee of the Company, except that: 2 Page 2 (a) If Employee's employment with the Company terminates for cause or voluntarily by Employee (other than by reason of normal retirement at or after age sixty-five) without the written consent of the Committee, this Option shall immediately terminate and shall no longer be exercisable. For purposes of this Agreement, "cause" shall mean Employee's gross negligence or willful misconduct in performance of the duties of Employee's employment, or Employee's final conviction of a felony or of a misdemeanor involving moral turpitude. (b) If Employee's employment with the Company terminates for any reason other than death or as described in (a) above, this Option may be exercised by Employee at any time during the period of three months following such termination, or by Employee's estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee) during a period of one year following Employee's death if Employee dies during such three-month period, but in each case only as to the number of shares Employee was entitled to purchase hereunder as of the date Employee's employment so terminates unless such termination was by reason of normal retirement at or after age sixty-five or total and permanent disability in either which case this Option shall be exercisable in full. (c) If Employee dies while in the employ of the Company, Employee's estate, or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee, may exercise this Option in full at any time during the period of one year following the date of Employee's death. This Option shall not be exercisable in any event after the expiration of ten years from the date of grant hereof. The purchase price of shares as to which this Option is exercised shall be paid in full at the time of exercise (a) in cash (including check, bank draft or money order payable to the order of the Company), (b) by delivering to the Company shares of Stock having a fair market value equal to the purchase price, or (c) any combination of cash or Stock. No fraction of a share of Stock shall be issued by the Company upon exercise of an Option or accepted by the Company in payment of the purchase price thereof; rather, Employee shall provide a cash payment for such amount as is necessary to effect the issuance and acceptance of only whole shares of Stock. Unless and until a certificate or certificates representing such shares shall have been issued by the Company to Employee, Employee (or the person permitted to exercise this Option in the event of Employee's death) shall not be or have any of the rights or privileges of a shareholder of the Company with respect to shares acquirable upon an exercise of this Option. 4. WITHHOLDING OF TAX. To the extent that the exercise of this Option or the disposition of shares of Stock acquired by exercise of this Option results in compensation income to Employee for federal or state income tax purposes, Employee shall deliver to the Company at the time of such exercise or disposition such amount of money or shares of Stock as the Company may require to meet its obligation under applicable tax laws or regulations. Employee may elect with respect to this 3 Page 3 Option to surrender or authorize the Company to withhold shares of Stock (valued at their fair market value on the date of surrender or withholding of such shares) in satisfaction of any such withholding obligation (a "Stock Surrender Withholding Election"); provided, however, that: (a) Any Stock Surrender Withholding Election shall be made by written notice to the Company and thereafter shall be irrevocable by Employee; (b) Any Stock Surrender Withholding Election shall be subject to disapproval by the Committee at any time; (c) Any Stock Surrender Withholding Election shall be made prior to the date Employee recognizes income with respect to the exercise of this Option (the "Tax Date"); and (d) If Employee is an "officer" of the Company or other person subject to section 16(b) of the Securities Exchange Act of 1934, as amended, or any successor law and wishes to make a Stock Surrender Withholding Election, such person shall make any Stock Surrender Withholding Election: (i) more than six months after the date of grant of this Option, except that this limitation shall not apply in the event of death or disability of Employee prior to the expiration of the six-month period; and (ii) either at least six months prior to the Tax Date or during the period beginning on the third business day following the date of release for publication of the Company's summary statement of sales and earnings for a quarter or fiscal year and ending on the twelfth business day following such date. (e) When the Tax Date falls after the exercise of this Option and Employee makes a Stock Surrender Withholding Election, the full number of shares of Stock for which this Option is being exercised shall be issued, but Employee shall be unconditionally obligated to deliver to the Company on the Tax Date a number of shares of Stock having a value equal to any tax required to be withheld. If Employee fails to deliver such money or make a Stock Surrender Withholding Election pursuant to this Paragraph, the Company is authorized to withhold from any cash or Stock remuneration then or thereafter payable to Employee any tax required to be withheld. 5. STATUS OF STOCK. The Company intends to register for issuance under the Securities Act of 1933, as amended (the "ACT") the shares of Stock acquirable upon exercise of this Option, and to keep such registration effective throughout the period this Option is exercisable. In the absence of such effective registration or an available exemption from registration under the Act, issuance of shares of Stock acquirable upon exercise of this Option will be delayed until registration of such shares is effective or an exemption from registration under the Act is available. The Company intends to use its best efforts to ensure that no such delay will occur. In the event exemption from registration under the Act is available upon an exercise of this Option, Employee (or the person permitted to exercise this Option in the event of Employee's death or incapacity), if 4 Page 4 requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws. Employee agrees that the shares of Stock which Employee may acquire by exercising this Option will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable securities laws, whether federal or state. Employee also agrees (i) that the certificates representing the shares of Stock purchased under this Option may bear such legend or legends as the Committee deems appropriate in order to assure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the shares of Stock purchased under this Option on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities law and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the shares of Stock purchased under this Option. 6. EMPLOYMENT RELATIONSHIP. For purposes of this Agreement, Employee shall be considered to be in the employment of the Company as long as Employee remains an employee of either the Company, a parent or subsidiary corporation (as defined in section 424 of the Code) of the Company, or a corporation or a parent or subsidiary of such corporation assuming or substituting a new option for this Option. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee, and its determination shall be final. 7. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Employee. 8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officer thereunto duly authorized, and Employee has executed this Agreement, all as of the day and year first above written. SEAGULL ENERGY CORPORATION BY: ____________________________________ CHAIRMAN OF THE BOARD EMPLOYEE: ______________________________ EX-10.23 7 NONSTATUTORY STOCK OPTION AGREEMENT 1 EXHIBIT 10.23 NONSTATUTORY STOCK OPTION AGREEMENT AGREEMENT made as of the _____ day of ____, 199__, between SEAGULL ENERGY CORPORATION, a Texas corporation (the "COMPANY") and __________________ ("EMPLOYEE"). To carry out the purposes of the SEAGULL ENERGY CORPORATION 1990 STOCK OPTION PLAN (the "PLAN"), by affording Employee the opportunity to purchase shares of common stock of the Company ("STOCK"), and in consideration of the mutual agreements and other matters set forth herein and in the Plan, the Company and Employee hereby agree as follows: 1. GRANT OF OPTION. The Company hereby irrevocably grants to Employee the right and option ("OPTION") to purchase all or any part of an aggregate of ________ shares of Stock, on the terms and conditions set forth herein and in the Plan, which Plan is incorporated herein by reference as a part of this Agreement. This Option shall not be treated as an incentive stock option within the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the "CODE"). 2. PURCHASE PRICE. The purchase price of Stock purchased pursuant to the exercise of this Option shall be $_______ per share. For all purposes of this Agreement, fair market value of Stock shall be determined in accordance with the provisions of the Plan. 3. EXERCISE OF OPTION. Subject to the earlier expiration of this Option as herein provided, this Option may be exercised, by written notice to the Company at its principal executive office addressed to the attention of its Corporate Secretary, at any time and from time to time after the date of grant hereof, but, except as otherwise provided below, this Option shall not be exercisable for more than a percentage of the aggregate number of shares offered by this Option determined by the number of full years from the date of grant hereof to the date of such exercise, in accordance with the following schedule:
PERCENTAGE OF SHARES NUMBER OF FULL YEARS THAT MAY BE PURCHASED -------------------- --------------------- Less than 3 years 0% 3 year 40% 4 years 60% 5 years 80% 6 years 100%
Notwithstanding anything in this agreement to the contrary, the Committee appointed by the Board of Directors to the Company to administer the Plan (the "COMMITTEE") in its sole discretion 2 may waive the foregoing schedule of vesting and permit Employee to exercise the Option in such amount or amounts and at such time or times as the Committee shall determine. This Option is not transferable by Employee otherwise than by will or the laws of descent and distribution, and may be exercised only by Employee during Employee's lifetime and while Employee remains an employee of the Company, except that: (a) If Employee's employment with the Company terminates for cause or voluntarily by Employee (other than by reason of normal retirement at or after age sixty-five) without the written consent of the Committee, this Option shall immediately terminate and shall no longer be exercisable. For purposes of this Agreement, "cause" shall mean Employee's gross negligence or willful misconduct in performance of the duties of Employee's employment, or Employee's final conviction of a felony or of a misdemeanor involving moral turpitude. (b) If Employee's employment with the Company terminates for any reason other than death or as described in (a) above, this Option may be exercised by Employee at any time during the period of three months following such termination, or by Employee's estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee) during a period of one year following Employee's death if Employee dies during such three-month period, but in each case only as to the number of shares Employee was entitled to purchase hereunder as of the date Employee's employment so terminates unless such termination was by reason of normal retirement at or after age sixty-five or total and permanent disability in either which case this Option shall be exercisable in full. (c) If Employee dies while in the employ of the Company, Employee's estate, or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee, may exercise this Option in full at any time during the period of one year following the date of Employee's death. This Option shall not be exercisable in any event after the expiration of ten years from the date of grant hereof. The purchase price of shares as to which this Option is exercised shall be paid in full at the time of exercise (a) in cash (including check, bank draft or money order payable to the order of the Company), (b) by delivering to the Company shares of Stock having a fair market value equal to the purchase price, or (c) any combination of cash or Stock. No fraction of a share of Stock shall be issued by the Company upon exercise of an Option or accepted by the Company in payment of the purchase price thereof; rather, Employee shall provide a cash payment for such amount as is necessary to effect the issuance and acceptance of only whole shares of Stock. Unless and until a certificate or certificates representing such shares shall have been issued by the Company to Employee, Employee (or the person permitted to exercise this Option in the event of Employee's -2- 3 death) shall not be or have any of the rights or privileges of a shareholder of the Company with respect to shares acquirable upon an exercise of this Option. 4. WITHHOLDING OF TAX. To the extent that the exercise of this Option or the disposition of shares of Stock acquired by exercise of this Option results in compensation income to Employee for federal or state income tax purposes, Employee shall deliver to the Company at the time of such exercise or disposition such amount of money or shares of Stock as the Company may require to meet its obligation under applicable tax laws or regulations. Employee may elect with respect to this Option to surrender or authorize the Company to withhold shares of Stock (valued at their fair market value on the date of surrender or withholding of such shares) in satisfaction of any such withholding obligation (a "Stock Surrender Withholding Election"); provided, however, that: (a) Any Stock Surrender Withholding Election shall be made by written notice to the Company and thereafter shall be irrevocable by Employee; (b) Any Stock Surrender Withholding Election shall be subject to disapproval by the Committee at any time; (c) Any Stock Surrender Withholding Election shall be made prior to the date Employee recognizes income with respect to the exercise of this Option (the "Tax Date"); and (d) If Employee is an "officer" of the Company or other person subject to section 16(b) of the Securities Exchange Act of 1934, as amended, or any successor law and wishes to make a Stock Surrender Withholding Election, such person shall make any Stock Surrender Withholding Election: (i) more than six months after the date of grant of this Option, except that this limitation shall not apply in the event of death or disability of Employee prior to the expiration of the six-month period; and (ii) either at least six months prior to the Tax Date or during the period beginning on the third business day following the date of release for publication of the Company's summary statement of sales and earnings for a quarter or fiscal year and ending on the twelfth business day following such date. (e) When the Tax Date falls after the exercise of this Option and Employee makes a Stock Surrender Withholding Election, the full number of shares of Stock for which this Option is being exercised shall be issued, but Employee shall be unconditionally obligated to deliver to the Company on the Tax Date a number of shares of Stock having a value equal to any tax required to be withheld. If Employee fails to deliver such money or make a Stock Surrender Withholding Election pursuant to this Paragraph, the Company is authorized to withhold from any cash or Stock remuneration then or thereafter payable to Employee any tax required to be withheld. -3- 4 5. STATUS OF STOCK. The Company intends to register for issuance under the Securities Act of 1933, as amended (the "ACT") the shares of Stock acquirable upon exercise of this Option, and to keep such registration effective throughout the period this Option is exercisable. In the absence of such effective registration or an available exemption from registration under the Act, issuance of shares of Stock acquirable upon exercise of this Option will be delayed until registration of such shares is effective or an exemption from registration under the Act is available. The Company intends to use its best efforts to ensure that no such delay will occur. In the event exemption from registration under the Act is available upon an exercise of this Option, Employee (or the person permitted to exercise this Option in the event of Employee's death or incapacity), if requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws. Employee agrees that the shares of Stock which Employee may acquire by exercising this Option will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable securities laws, whether federal or state. Employee also agrees (i) that the certificates representing the shares of Stock purchased under this Option may bear such legend or legends as the Committee deems appropriate in order to assure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the shares of Stock purchased under this Option on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities law and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the shares of Stock purchased under this Option. 6. EMPLOYMENT RELATIONSHIP. For purposes of this Agreement, Employee shall be considered to be in the employment of the Company as long as Employee remains an employee of either the Company, a parent or subsidiary corporation (as defined in section 424 of the Code) of the Company, or a corporation or a parent or subsidiary of such corporation assuming or substituting a new option for this Option. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee, and its determination shall be final. 7. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Employee. 8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. -4- 5 IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officer thereunto duly authorized, and Employee has executed this Agreement, all as of the day and year first above written. SEAGULL ENERGY CORPORATION BY: _____________________________________ CHAIRMAN OF THE BOARD EMPLOYEE: _______________________________ -5- EX-10.29 8 NONEMPLOYEE DIRECTOR'S STOCK OPTION AGREEMENT 1 EXHIBIT 10.29 NONEMPLOYEE DIRECTOR'S STOCK OPTION AGREEMENT AGREEMENT made as of the ______ day of ________________, 19___, between SEAGULL ENERGY CORPORATION, a Texas corporation (the "COMPANY") and ________________________________ ("DIRECTOR"). To carry out the purposes of the SEAGULL ENERGY CORPORATION 1993 NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN (the "PLAN"), a copy of which is attached hereto as Exhibit A, by affording Director the opportunity to purchase shares of common stock of the Company ("STOCK"), and in consideration of the mutual agreements and other matters set forth herein and in the Plan, the Company and Director hereby agree as follows: 1. GRANT OF OPTION. The Company hereby irrevocably grants to Director the right and option ("OPTION") to purchase all or any part of an aggregate of ______ shares of Stock, on the terms and conditions set forth herein and in the Plan, which Plan is incorporated herein by reference as a part of this Agreement. This Option shall not be treated as an incentive stock option within the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended. 2. PURCHASE PRICE. The purchase price of Stock purchased pursuant to the exercise of this Option shall be $_______ per share, which has been determined to be not less than the fair market value of the Stock at the date of grant of this Option. For all purposes of this Agreement, fair market value of Stock shall be determined in accordance with the provisions of the Plan. 3. EXERCISE OF OPTION. Subject to the earlier expiration of this Option as herein provided, this Option may be exercised, by written notice to the Company at its principal executive office addressed to the attention of its Chairman, President and Chief Executive Officer, at any time and from time to time after the date of grant hereof, but, except as otherwise provided below, this Option shall not be exercisable for more than a percentage of the aggregate number of shares offered by this Option determined by the number of full years from the date of grant hereof to the date of such exercise, in accordance with the following schedule:
PERCENTAGE OF SHARES NUMBER OF FULL YEARS THAT MAY BE PURCHASED -------------------- --------------------- Less than 1 year 0% 1 year 20% 2 years 40% 3 years 60% 4 years 80% 5 years or more 100%
This Option is not transferable by Director otherwise than by will or the laws of descent and distribution, and may be exercised only by Director (or Director's guardian or legal representative) during Director's lifetime. If a Director's membership on the Board of Directors of the Company (the "BOARD") terminates, this Option may be exercised as follows: 2 (a) If Director's membership on the Board terminates for cause or voluntarily by Director (other than by reason of mandatory retirement pursuant to the policy of the Board) not at the request of the Board, this Option may be exercised by Director at any time during the period of three months following such termination, or by Director's estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Director) during a period of one year following Director's death if Director dies during such three-month period, but in each case only as to the number of shares Director was entitled to purchase hereunder upon exercise of this Option as of the date Director's membership on the Board so terminates. For purposes of this Agreement, "cause" shall mean Director's gross negligence or willful misconduct in performance of his duties as a director, or Director's final conviction of a felony or of a misdemeanor involving moral turpitude. (b) If Director's membership on the Board terminates by reason of disability, this Option may be exercised in full by Director (or Director's guardian or legal representative or Director's estate or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Director) at any time during the period of one year following such termination. (c) If Director dies while a member of the Board, Director's estate, or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Director, may exercise this Option in full at any time during the period of one year following the date of Director's death. (d) If Director's membership on the Board terminates for any reason other than as described in (a), (b) or (c) above, this Option may be exercised in full by Director at any time during the period of three months following such termination, or by Director's estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Director) during a period of one year following Director's death if Director dies during such three-month period. This Option shall not be exercisable in any event after the expiration of ten years from the date of grant hereof. The purchase price of shares as to which this Option is exercised shall be paid in full at the time of exercise (A) in cash (including check, bank draft or money order payable to the order of the Company), (B) by delivering to the Company shares of Stock having a fair market value equal to the purchase price, or (C) any combination of cash or Stock. No fraction of a share of Stock shall be issued by the Company upon exercise of an Option or accepted by the Company in payment of the purchase price thereof; rather, Director shall provide a cash payment for such amount as is necessary to effect the issuance and acceptance of only whole shares of Stock. Unless and until a certificate or certificates representing such shares shall have been issued by the Company to Director, Director (or the person permitted to exercise this Option in the event of Director's death) shall not be or have any of the rights or privileges of a shareholder of the Company with respect to shares acquirable upon an exercise of this Option. -2- 3 4. WITHHOLDING OF TAX. To the extent that the exercise of this Option or the disposition of shares of Stock acquired by exercise of this Option results in compensation income to Director for federal or state income tax purposes, Director shall deliver to the Company at the time of such exercise or disposition such amount of money or shares of Stock as the Company may require to meet its obligation under applicable tax laws or regulations, and, if Director fails to do so, the Company is authorized to withhold from any cash or Stock remuneration then or thereafter payable to Director any tax required to be withheld by reason of such resulting compensation income. Upon an exercise of this Option, the Company is further authorized in its discretion to satisfy any such withholding requirement out of any cash or shares of Stock distributable to Director upon such exercise. 5. STATUS OF STOCK. The Company intends to register for issuance under the Securities Act of 1933, as amended (the "ACT"), the shares of Stock acquirable upon exercise of this Option, and to keep such registration effective throughout the period this Option is exercisable. In the absence of such effective registration or an available exemption from registration under the Act, issuance of shares of Stock acquirable upon exercise of this Option will be delayed until registration of such shares is effective or an exemption from registration under the Act is available. The Company intends to use all reasonable efforts to ensure that no such delay will occur. In the event exemption from registration under the Act is available upon an exercise of this Option, Director (or the person permitted to exercise this Option in the event of Director's death or incapacity), if requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws. Director agrees that the shares of Stock which Director may acquire by exercising this Option will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable federal or state securities laws. Director also agrees (i) that the certificates representing the shares of Stock purchased under this Option may bear such legend or legends as the Company deems appropriate in order to assure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the shares of Stock purchased under this Option on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities law and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the shares of Stock purchased under this Option. 6. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Director. 7. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. -3- 4 IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officer thereunto duly authorized, and Director has executed this Agreement, all as of the day and year first above written. SEAGULL ENERGY CORPORATION By: _______________________________________________ Chairman, President and Chief Executive Officer _______________________________________________ Director -4- EX-10.30 9 NONSTATUTORY STOCK OPTION AGREEMENT 1 EXHIBIT 10.30 NONSTATUTORY STOCK OPTION AGREEMENT AGREEMENT made as of the ______ day of ________, 19__, between SEAGULL ENERGY CORPORATION, a Texas corporation (the "COMPANY") and __________ ("EMPLOYEE"). To carry out the purposes of the SEAGULL ENERGY CORPORATION 1993 STOCK OPTION PLAN (the "PLAN"), by affording Employee the opportunity to purchase shares of common stock of the Company ("STOCK"), and in consideration of the mutual agreements and other matters set forth herein and in the Plan, the Company and Employee hereby agree as follows: 1. GRANT OF OPTION. The Company hereby irrevocably grants to Employee the right and option ("OPTION") to purchase all or any part of an aggregate of ________ shares of Stock, on the terms and conditions set forth herein and in the Plan, which Plan is incorporated herein by reference as a part of this Agreement. This Option shall not be treated as an incentive stock option within the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the "CODE"). 2. PURCHASE PRICE. The purchase price of Stock purchased pursuant to the exercise of this Option shall be __________ per share. For all purposes of this Agreement, fair market value of Stock shall be determined in accordance with the provisions of the Plan. 3. EXERCISE OF OPTION. Subject to the earlier expiration of this Option as herein provided, this Option may be exercised, by written notice to the Company at its principal executive office addressed to the attention of its Corporate Secretary, at any time and from time to time after the date of grant hereof, but, except as otherwise provided below, this Option shall not be exercisable for more than a percentage of the aggregate number of shares offered by this Option determined by the number of full years from the date of grant hereof to the date of such exercise, in accordance with the following schedule:
PERCENTAGE OF SHARES NUMBER OF FULL YEARS THAT MAY BE PURCHASED -------------------- --------------------- Less than 3 years 0% 3 years 40% 4 years 60% 5 years 80% 6 years or more 100%
Notwithstanding anything in this agreement to the contrary, the Committee appointed by the Board of Directors to the Company to administer the Plan (the "COMMITTEE") in its sole discretion may waive the foregoing schedule of vesting and permit Employee to exercise the Option in such amount or amounts and at such time or times as the Committee shall determine. This Option is not transferable by Employee otherwise than by will or the laws of descent and distribution, and may be exercised only by Employee during Employee's lifetime and while Employee remains an employee of the Company, except that: 2 Page 2 (a) If Employee's employment with the Company terminates for cause or voluntarily by Employee (other than by reason of normal retirement at or after age sixty-five) without the written consent of the Committee, this Option shall immediately terminate and shall no longer be exercisable. For purposes of this Agreement, "cause" shall mean Employee's gross negligence or willful misconduct in performance of the duties of Employee's employment, or Employee's final conviction of a felony or of a misdemeanor involving moral turpitude. (b) If Employee's employment with the Company terminates for any reason other than death or as described in (a) above, this Option may be exercised by Employee at any time during the period of three months following such termination, or by Employee's estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee) during a period of one year following Employee's death if Employee dies during such three-month period, but in each case only as to the number of shares Employee was entitled to purchase hereunder as of the date Employee's employment so terminates unless such termination was by reason of normal retirement at or after age sixty-five or total and permanent disability in either which case this Option shall be exercisable in full. (c) If Employee dies while in the employ of the Company, Employee's estate, or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee, may exercise this Option in full at any time during the period of one year following the date of Employee's death. This Option shall not be exercisable in any event after the expiration of ten years from the date of grant hereof. The purchase price of shares as to which this Option is exercised shall be paid in full at the time of exercise (a) in cash (including check, bank draft or money order payable to the order of the Company), (b) by delivering to the Company shares of Stock having a fair market value equal to the purchase price, or (c) any combination of cash or Stock. No fraction of a share of Stock shall be issued by the Company upon exercise of an Option or accepted by the Company in payment of the purchase price thereof; rather, Employee shall provide a cash payment for such amount as is necessary to effect the issuance and acceptance of only whole shares of Stock. Unless and until a certificate or certificates representing such shares shall have been issued by the Company to Employee, Employee (or the person permitted to exercise this Option in the event of Employee's death) shall not be or have any of the rights or privileges of a shareholder of the Company with respect to shares acquirable upon an exercise of this Option. 4. WITHHOLDING OF TAX. To the extent that the exercise of this Option or the disposition of shares of Stock acquired by exercise of this Option results in compensation income to Employee for federal or state income tax purposes, Employee shall deliver to the Company at the time of such exercise or disposition such amount of money or shares of Stock as the Company may require to meet its obligation under applicable tax laws or regulations. Employee may elect with respect to this 3 Page 3 Option to surrender or authorize the Company to withhold shares of Stock (valued at their fair market value on the date of surrender or withholding of such shares) in satisfaction of any such withholding obligation (a "Stock Surrender Withholding Election"); provided, however, that: (a) Any Stock Surrender Withholding Election shall be made by written notice to the Company and thereafter shall be irrevocable by Employee; (b) Any Stock Surrender Withholding Election shall be subject to disapproval by the Committee at any time; (c) Any Stock Surrender Withholding Election shall be made prior to the date Employee recognizes income with respect to the exercise of this Option (the "Tax Date"); and (d) If Employee is an "officer" of the Company or other person subject to section 16(b) of the Securities Exchange Act of 1934, as amended, or any successor law and wishes to make a Stock Surrender Withholding Election, such person shall make any Stock Surrender Withholding Election: (i) more than six months after the date of grant of this Option, except that this limitation shall not apply in the event of death or disability of Employee prior to the expiration of the six-month period; and (ii) either at least six months prior to the Tax Date or during the period beginning on the third business day following the date of release for publication of the Company's summary statement of sales and earnings for a quarter or fiscal year and ending on the twelfth business day following such date. (e) When the Tax Date falls after the exercise of this Option and Employee makes a Stock Surrender Withholding Election, the full number of shares of Stock for which this Option is being exercised shall be issued, but Employee shall be unconditionally obligated to deliver to the Company on the Tax Date a number of shares of Stock having a value equal to any tax required to be withheld. If Employee fails to deliver such money or make a Stock Surrender Withholding Election pursuant to this Paragraph, the Company is authorized to withhold from any cash or Stock remuneration then or thereafter payable to Employee any tax required to be withheld. 5. STATUS OF STOCK. The Company intends to register for issuance under the Securities Act of 1933, as amended (the "ACT") the shares of Stock acquirable upon exercise of this Option, and to keep such registration effective throughout the period this Option is exercisable. In the absence of such effective registration or an available exemption from registration under the Act, issuance of shares of Stock acquirable upon exercise of this Option will be delayed until registration of such shares is effective or an exemption from registration under the Act is available. The Company intends to use its best efforts to ensure that no such delay will occur. In the event exemption from registration under the Act is available upon an exercise of this Option, Employee (or the person permitted to exercise this Option in the event of Employee's death or incapacity), if 4 Page 4 requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws. Employee agrees that the shares of Stock which Employee may acquire by exercising this Option will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable securities laws, whether federal or state. Employee also agrees (i) that the certificates representing the shares of Stock purchased under this Option may bear such legend or legends as the Committee deems appropriate in order to assure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the shares of Stock purchased under this Option on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities law and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the shares of Stock purchased under this Option. 6. EMPLOYMENT RELATIONSHIP. For purposes of this Agreement, Employee shall be considered to be in the employment of the Company as long as Employee remains an employee of either the Company, a parent or subsidiary corporation (as defined in section 424 of the Code) of the Company, or a corporation or a parent or subsidiary of such corporation assuming or substituting a new option for this Option. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee, and its determination shall be final. 7. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Employee. 8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officer thereunto duly authorized, and Employee has executed this Agreement, all as of the day and year first above written. SEAGULL ENERGY CORPORATION BY: ____________________________________ CHAIRMAN OF THE BOARD EMPLOYEE: ______________________________ EX-21 10 SUSIDIARIES 1 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 11, 1994:
% Voting Securities Jurisdiction of or Beneficial Incorporation Interest Owned Name of Subsidiary or Organization by the Company ------------------ --------------- --------------- Alaska Pipeline Company Alaska 100% Cavallo Pipeline Company Texas 50% (partnership) Houston Oil & Minerals Corporation Nevada 100% Seagull Energy Canada Holding Company Wyoming 100% Seagull Energy Canada Ltd. Alberta, Canada 100% Seagull Energy E&P Inc. Texas 100% Seagull Industrial Pipeline Company Texas 100% Seagull Marketing Services, Inc. Texas 100% Seagull Midcon Inc. Delaware 100% Seagull Mid-South Inc. Delaware 100% Seagull Natural Gas Company Texas 100% Seagull Processing Company Delaware 100% Seagull Shoreline System Texas 19% (partnership) Seagull Transmission Company Texas 100% Wacker Oil Inc. Delaware 100%
EX-23.1 11 CONSENT OF AUDITORS PEAT MARWICK 1 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 reports dated January 31, 1994, except the last three paragraphs of Note 17, Subsequent Events, which are as of March 11, 1994, relating to the consolidated balance sheets of Seagull Energy Corporation and Subsidiaries as of December 31, 1993 and 1992 and the related consolidated statements of earnings, shareholders' equity and cash flows and related schedules for each of the years in the three-year period ended December 31, 1993 which reports appear or are incorporated by reference in the December 31, 1993 Annual Report on Form 10-K of Seagull Energy Corporation: 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). KPMG PEAT MARWICK Houston, Texas March 28, 1994 EX-23.2 12 CONSENT OF RYDER SCOTT 1 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, 1993, 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 and 33-50645) and on Forms S-8 and S-3 (Nos. 2-93087 and 33-22475). RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas March 21, 1994 EX-23.3 13 CONSENT OF DEGOLYER AND MACNAUGHTON 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS We hereby consent to the use of our name in the Annual Report to Shareholders of Seagull Energy Corporation and Subsidiaries (the "Company") for the year ended December 31, 1993 (the "Annual Report") in Note 4, Supplemental Gas and Oil Producing Activities, of Notes to Consolidated Financial Statements; provided, however, since the Annual Report contains only aggregate reserve information that combines the reserve and discounted present worth estimates prepared by DeGolyer and MacNaughton with the reserve and discounted present worth estimates of other petroleum consultants, in providing our consent we have necessarily relied on a letter dated March 9, 1994, from the Company with respect to the estimates of such other petroleum consultants to verify that the Annual Report correctly reflects our estimates. The Company's Annual Report on Form 10-K for the year ended December 31, 1993 (the "Form 10-K") incorporates by reference the Annual Report. We further consent to the use of our name under the heading "Exploration and Production" of Item 1 in the Form 10-K 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 and 33-50645) and on Forms S-8 and S-3 (Nos. 2-93087 and 33-22475). DeGOLYER AND MacNAUGHTON PETROLEUM ENGINEERS Dallas, Texas March 16, 1994 EX-23.4 14 CONSENT OF NETHERLAND, SEWELL 1 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, 1993, 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 and 33-50645) and on Forms S-8 and S-3 (Nos. 2-93087 and 33-22475). NETHERLAND, SEWELL & ASSOCIATES,INC. PETROLEUM ENGINEERS Houston, Texas March 28, 1994 EX-23.5 15 CONSENT OF K & A ENERGY CONSULTANTS 1 EXHIBIT 23.5 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, 1993, 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 and 33-50645) and on Forms S-8 and S-3 (Nos. 2-93087 and 33-22475). K&A ENERGY CONSULTANTS, INC. PETROLEUM ENGINEERS Houston, Texas March 28, 1994 EX-99.1 16 ANNUAL REPORT 1 EXHIBIT 99.1 PORTIONS OF THE 1993 SEAGULL ENERGY CORPORATION ANNUAL REPORT TO SHAREHOLDERS INCORPORATED BY REFERENCE INTO THE 1993 SEAGULL ENERGY CORPORATION ANNUAL REPORT ON FORM 10-K INDEX
PAGE --- Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited): Results of Operations................................................................. 2 Liquidity and Capital Resources....................................................... 9 Consolidated Financial Statements: Consolidated Statements of Earnings................................................... 12 Consolidated Balance Sheets........................................................... 13 Consolidated Statements of Cash Flows................................................. 14 Consolidated Statements of Shareholders' Equity....................................... 15 Notes to Consolidated Financial Statements............................................ 16 Independent Auditors' Report.......................................................... 41
1 2 SEAGULL ENERGY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) RESULTS OF OPERATIONS CONSOLIDATED HIGHLIGHTS
PERCENT CHANGE -------------------- 1993 1992 1991 1992-'93 1991-'92 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Revenues: Exploration and production................ $227,437 $ 91,991 $ 81,099 + 147 + 13 Pipeline and marketing.................... 42,484 37,240 37,823 + 14 - 2 Alaska transmission and distribution...... 107,244 109,598 129,615 - 2 - 15 -------- -------- -------- ------ ------ $377,165 $238,829 $248,537 + 58 - 4 -------- -------- -------- ------ ------ -------- -------- -------- ------ ------ Operating profit (loss): Exploration and production................ $ 42,969 $ (1,613) $ 1,275 +2,764 - 227 Pipeline and marketing.................... 14,065 9,057 7,884 + 55 + 15 Alaska transmission and distribution...... 18,955 22,439 21,024 - 16 + 7 -------- -------- -------- ------ ------ $ 75,989 $ 29,883 $ 30,183 + 154 - 1 -------- -------- -------- ------ ------ -------- -------- -------- ------ ------ Earnings before cumulative effect of changes in accounting principles.................. $ 27,198 $ 4,415 $ 5,107 + 516 - 14 Net earnings................................ $ 27,198 $ 6,688 $ 5,107 + 307 + 31 Net cash provided by operating activities before changes in operating assets and liabilities............................... $160,762 $ 81,368 $ 66,654 + 98 + 22 Net cash provided by operating activities... $119,761 $ 72,187 $ 69,773 + 66 + 3 Earnings per share: Earnings before cumulative effect of changes in accounting principles............... $ 0.76 $ 0.17 $ 0.23 + 347 - 26 Cumulative effect of changes in accounting principles............................. -- 0.09 -- - 100 N/A -------- -------- -------- ------ ------ Net earnings.............................. $ 0.76 $ 0.26 $ 0.23 + 192 + 13 -------- -------- -------- ------ ------ -------- -------- -------- ------ ------ Weighted average number of common shares outstanding (in thousands)................ 35,790 25,583 22,692 + 40 + 13 -------- -------- -------- ------ ----- -------- -------- -------- ------ -----
Revenues and Operating Profit are discussed in the respective segment sections. 1993 Results Compared to 1992 Seagull Energy Corporation and Subsidiaries (the "Company") recorded a significant increase in net earnings for the year ended December 31, 1993 versus the prior year due to increases in operating profit, partially offset by increases in interest and general and administrative expenses. Net earnings for 1993 includes a pre-tax gain of approximately $3.8 million relating to the sales of nonstrategic producing properties. The Company's 1993 net earnings also benefitted from a reduction in the Company's income tax provision due to utilization of approximately $4.8 million in Internal Revenue Code Section 29 tax credits, which more than offset a 1% increase in the federal corporate tax rate from 34% to 35%. In addition, net earnings for the prior year included a $4.6 million pre-tax settlement of litigation (the "Seismic Litigation Settlement") and the cumulative effect of two changes in accounting principles described below. See "Other (Income) Expense" and "Income Taxes" sections below. Effective January 1, 1992, the Company adopted two Statements of Financial Accounting Standards ("SFAS"), SFAS No. 109, Accounting for Income Taxes, and SFAS No. 106, Employers' Accounting for 2 3 Postretirement Benefits Other Than Pensions. The cumulative effect of these accounting changes as of January 1, 1992 resulted in a net increase in net earnings of approximately $2.3 million, or $0.09 per share, as reflected in the Company's consolidated statement of earnings for the year ended December 31, 1992. Net cash provided by operating activities before and after changes in operating assets and liabilities for 1993 increased substantially in comparison to 1992 primarily as a result of significant increases in the Company's natural gas production primarily due to the Company's acquisition of Arkla Exploration Company (the "Mid-South Acquisition") in December 1992. On June 4, 1993, the Company effected, in the form of a 100 percent stock dividend, a two-for-one stock split (the "Stock Split") of all the issued shares of Seagull Common Stock. The weighted average number of common shares outstanding and per share amounts for all periods have been restated to reflect the Stock Split. All share amounts included in the consolidated balance sheets and consolidated statements of shareholders' equity as of dates prior to June 4, 1993 were not adjusted to reflect the Stock Split. The increase in the weighted average number of common shares outstanding in 1993 over 1992 was due to the February 1993 sale of 5,060,000 shares (10,120,000 shares after the Stock Split) of Seagull Common Stock pursuant to an underwritten public offering. 1992 Results Compared to 1991 The Company's net earnings for 1992 increased from 1991 primarily due to the Seismic Litigation Settlement and the cumulative effect of two changes in accounting principles described above, partially offset by higher general and administrative expenses and a higher effective income tax rate. See "Other (Income) Expense" and "Income Taxes" sections below. Net cash provided by operating activities before changes in operating assets and liabilities, increased 22% in 1992 versus 1991 primarily due to increases in cash flows generated by the Company's Exploration and Production ("E&P") segment and the Seismic Litigation Settlement. Net cash provided by operating activities was not materially different from the 1991 amount. The weighted average number of common shares outstanding in 1992 reflects the full year effect of the December 1991 sale of 1.5 million shares (3.0 million shares after the Stock Split) of Seagull Common Stock pursuant to an underwritten public offering. 3 4 EXPLORATION AND PRODUCTION
PERCENT CHANGE -------------------- 1993 1992 1991 1992-'93 1991-'92 -------- ------- ------- -------- -------- (DOLLARS IN THOUSANDS EXCEPT PER UNIT AMOUNTS) Revenues: Natural gas................................. $203,137 $70,689 $55,691 + 187 + 27 Oil and condensate.......................... 23,597 18,849 22,546 + 25 - 16 Natural gas liquids......................... 3,132 2,706 2,518 + 16 + 7 Other....................................... (2,429) (253) 344 - 860 - 174 -------- ------- ------- ------ ----- 227,437 91,991 81,099 + 147 + 13 Lifting costs................................. 53,243 26,230 24,018 + 103 + 9 General operating expense..................... 10,408 4,614 3,933 + 126 + 17 Exploration charges........................... 17,265 9,905 9,227 + 74 + 7 Depreciation, depletion and amortization...... 103,552 52,855 42,646 + 96 + 24 -------- ------- ------- ------ ----- Operating profit (loss)....................... $ 42,969 $(1,613) $ 1,275 +2,764 - 227 -------- ------- ------- ------ ----- -------- ------- ------- ------ ----- OPERATING DATA: Net daily production(1): Natural gas (MMcf).......................... 279.5 104.2 90.2 + 168 + 16 Oil and condensate (Bbl).................... 3,868 2,769 3,043 + 40 - 9 Natural gas liquids (Bbl)................... 773 725 618 + 7 + 17 Combined (MMcfe)(2)......................... 307.4 125.2 112.1 + 146 + 12 Average sales prices: Natural gas ($ per Mcf)..................... 1.99 1.85 1.69 + 8 + 9 Oil and condensate ($ per Bbl).............. 16.72 18.60 20.30 - 10 - 8 Natural gas liquids ($ per Bbl)............. 11.10 10.20 11.17 + 9 - 9 Combined ($ per Mcfe)(2).................... 2.03 2.01 1.97 + 1 + 2 Lifting costs ($ per Mcfe)(2): Lease operating............................. 0.25 0.33 0.37 - 24 - 11 Workovers................................... 0.04 0.05 0.05 - 20 -- Production taxes............................ 0.08 0.09 0.09 - 11 -- Transportation.............................. 0.07 0.06 0.04 + 17 + 50 Ad valorem taxes............................ 0.03 0.04 0.04 - 25 -- Total....................................... 0.47 0.57 0.59 - 18 - 3 DD&A rate ($ per Mcfe)(2)..................... 0.92 1.15 1.04 - 20 + 11
- --------------- (1) Natural gas stated in million cubic feet ("MMcf") or thousand cubic feet ("Mcf"); oil and condensate and natural gas liquids stated in barrels ("Bbl"). (2) Mcfe and MMcfe represent the equivalent of one thousand cubic feet and one million cubic feet of natural gas, respectively. Oil and condensate and natural gas liquids are converted to gas at a ratio of one barrel of liquids per six Mcf of gas, based on relative energy content. The increase in operating profit of the E&P segment for the year ended December 31, 1993 as compared to 1992 was due to a significant increase in revenues as a result of increased natural gas production and higher natural gas prices, which more than offset increases in depreciation, depletion and amortization ("DD&A") expense, exploration charges and lifting costs. DD&A expense and lifting costs increased as a result of the significant increase in production. However, both DD&A expense and lifting costs per equivalent unit of production declined in 1993. Exploration charges also increased in 1993 due to higher dry hole costs as a result of increased exploratory activity. In 1993, the Company was successful on eight gross exploratory wells in 27 attempts, compared with three successes out of 15 wells drilled during 1992. 4 5 The increase in natural gas production was primarily due to contributions from properties acquired in connection with the Mid-South Acquisition. On December 31, 1992, the Company acquired the outstanding capital stock of Arkla Exploration Company from Arkla, Inc. ("Arkla"), which more than doubled the Company's proved natural gas reserves as of such date. In addition, because of the improvement in natural gas prices, the Company had substantially no price-related curtailments of gas production in 1993 compared with significant curtailments in prior years. In response to the sustained growth in demand for and shrinking industry deliverability of natural gas, particularly from the offshore Gulf Coast, the Company continues to boost its deliverability through accelerated exploration and exploitative activities. The Company's deliverability increased significantly in the fourth quarter of 1993 primarily due to production flowing for the first time from three newly installed Company operated production facilities offshore Texas and Louisiana. Although revenues for the E&P segment were much higher for the year ended December 31, 1992 compared with 1991 due to an increase in production and higher natural gas prices, these increases were more than offset by increased DD&A expense, exploration charges and lifting costs. The higher DD&A charge was due both to the increase in natural gas production and a higher DD&A rate per unit of production. Exploration charges increased primarily due to higher dry hole costs. Total lifting costs increased due to the increase in production; however, lifting costs per unit of production declined slightly. The increase in natural gas production in 1992 was primarily due to the full period effect of production from certain gas and oil assets (the "Mid-Continent Assets"), purchased from Mesa Limited Partnership, a predecessor of Mesa, Inc., in March 1991, and to production flowing for the first time from certain of the Company's discoveries. In addition, the improvement in prices and growing demand for natural gas prompted the Company to increase production to near maximum deliverability in late 1992 and for the 1992-93 winter season. The Company's development activities were also accelerated in the fourth quarter of 1992 to boost deliverability further for 1993. The E&P segment is the Company's primary growth area. That growth has been achieved over the past six years primarily through acquisitions: Houston Oil & Minerals Corporation ("HO&M") in 1988; the assets of Houston Oil Trust in 1989; Wacker Oil Inc. ("Wacker") in 1990; the Mid-Continent Assets in 1991 and Seagull Mid-South Inc., formerly Arkla Exploration Company, in 1992. In addition, on January 4, 1994, the Company acquired all of the outstanding shares of stock of Novalta Resources Inc. ("Novalta") and an intercompany note (the "Seagull Canada Acquisition"), which added 257.4 billion cubic feet ("Bcf") of natural gas and 2.8 million barrels ("MMbbl") of oil, condensate and natural gas liquids to the Company's net proved reserves as of such date. See Notes 2 and 17 of Notes to Consolidated Financial Statements beginning on page 16 of this Exhibit. In 1993, a four-company exploration group including the Company was awarded four production licenses in United Kingdom waters. The awards gave the Company a 10% interest in three licenses in the Irish Sea totaling 398,319 acres and a 20% interest in a fourth license in the North Sea which totals 60,785 acres. Seismic studies and other evaluation activities on the licensed blocks have been ongoing since mid-1993. The first two of eight planned exploratory wells are scheduled during the latter part of 1994. During the first quarter of 1994, the Company increased its interests in these licenses to 20% and 30%, respectively. The Company anticipates that its share of exploration-related costs will approximate $13 million over the next five years as the program is currently structured. Finally, the future results of this segment will be affected by the market prices of natural gas and oil. The availability of a ready market for oil, gas and liquid products in the future will depend on numerous factors beyond the control of the Company, including weather, production of other domestic 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 of oil, gas and liquid products, the regulatory environment, and other domestic and political events, none of which can be predicted with certainty. As in the past, the Company would expect to curtail gas production during times of inferior prices. However, due to the sustained improvements in natural gas prices and demand throughout 1993 and various field operating considerations, the Company does not anticipate curtailing gas sales in the coming year to the significant extent of curtailments in years prior to 1993. 5 6 PIPELINE AND MARKETING
PERCENT CHANGE --------------------- 1993 1992 1991 1992-'93 1991-'92 ------- ------ ------ -------- -------- (DOLLARS IN THOUSANDS) OPERATING PROFIT: Pipelines................................... $ 8,561 $5,671 $3,331 + 51 + 70 Gas marketing............................... 2,862 784 9 +265 N/A Gas processing.............................. 518 2,157 3,093 - 76 - 30 Operating and construction services......... 2,124 445 1,451 +377 - 69 ------- ------ ------ ---- ---- $14,065 $9,057 $7,884 + 55 + 15 ------- ------ ------ ---- ---- ------- ------ ------ ---- ---- OPERATING DATA: Average daily volumes (MMcf): Gas gathering............................. 311 196 193 + 59 + 2 Partnership systems (net)................. 117 102 91 + 15 + 12 Gas marketing............................. 446 290 250 + 54 + 16 Gas processing(*): Average daily inlet volumes (MMcf)........ 273 243 247 + 12 - 2 Average daily net production (Bbl)........ 3,305 3,198 3,453 + 3 - 7
- --------------- (*) 1993 data includes contributions from two small onshore Texas plants for the first time. In the pipeline and marketing segment, operating profit increased in 1993 over 1992 due primarily to improvements in the pipelines and gas marketing areas and as a result of profits recognized from a pipeline construction project. These contributions more than offset a decline in operating profit in the gas processing area. Operating profit in the pipelines area, which includes the Company's interests in two partnership systems, improved due primarily to increased volumes transported through four new gas gathering systems, two acquired in June 1992 and two acquired as part of the Mid-South Acquisition in December 1992. An increase in volumes delivered by the Company's partnership systems also contributed to the improvement. In the gas marketing area, operating profit improved in 1993 due to a 54% increase in sales volumes primarily as a result of increases in the E&P segment's natural gas production discussed earlier and a 13% increase in margins. The Company recognized operating profit in 1993 on a pipeline construction project; an 8.7 mile, 16-inch gas pipeline that the Company constructed for an international exploration company from a platform to a gathering pipeline offshore Louisiana. The project was completed in early 1994. Operating profit in the gas processing area declined in 1993 primarily due to increases in natural gas costs and significant declines in prices received for extracted products. Operating profit in the pipeline and marketing segment increased in 1992 as compared to 1991 due to improvements in the pipelines and gas marketing areas which more than offset declines in the construction and gas processing areas. Operating profit in the pipelines area improved primarily due to increased volumes delivered by the Company's partnership systems. Volumes transported through the two gas gathering systems acquired in June 1992 also contributed to the improvement. In the gas marketing area, operating profit improved due to increased sales volumes and higher margins. Operating profit from gas processing declined 30% during 1992 as a result of lower average natural gas liquids prices coupled with higher average natural gas prices. In addition, net natural gas liquids production decreased because one significant producer elected to recover ethane in 1992. The absence of construction profits comparable to those recognized in 1991 also had a negative impact on 1992 operating profit. 6 7 Historically, the Company has not been engaged in pipeline construction projects on a regularly recurring basis. The Company currently has no construction projects pending; however, several projects are actively being pursued. ALASKA TRANSMISSION AND DISTRIBUTION
PERCENT CHANGE -------------------- 1993 1992 1991 1992-'93 1991-'92 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS EXCEPT PER UNIT AMOUNTS) Revenues.................................... $107,244 $109,598 $129,615 - 2 - 15 Cost of gas sold............................ 59,898 59,999 81,935 -- - 27 Operations and maintenance expense.......... 20,880 19,976 19,678 + 5 + 2 Depreciation, depletion and amortization.... 7,511 7,184 6,978 + 5 + 3 -------- -------- -------- ------ ------ Operating profit............................ $ 18,955 $ 22,439 $ 21,024 -16 + 7 -------- -------- -------- ------ ------ -------- -------- -------- ------ ------ OPERATING DATA: Degree days (*)............................. 9,382 10,653 10,178 -12 + 5 Volumes (Bcf): Gas Sold.................................. 28.9 30.9 35.3 - 6 - 12 Gas Transported........................... 11.3 10.2 4.3 +11 +137 Combined.................................. 40.2 41.1 39.6 - 2 + 4 Margins ($ per Mcf): Gas Sold.................................. 1.49 1.47 1.32 + 1 + 11 Gas Transported........................... 0.36 0.40 0.27 -10 + 48 Combined.................................. 1.17 1.20 1.20 - 2 -- Year-end customers.......................... 88,200 86,400 84,800 + 2 + 2
- --------------- (*) A measure of weather severity calculated by subtracting the mean temperature for each day from 65 degrees Fahrenheit. More degree days equate to colder weather. 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")) for the year ended December 31, 1993 declined from 1992 primarily due to unusually warm weather in the utility's market area. ENSTAR Alaska's gas sales revenues and the associated cost of gas sold both declined for the year ended December 31, 1992 from the 1991 period. In the fourth quarter of 1991, one large utility customer began purchasing gas directly from gas producers. However, ENSTAR Alaska currently transports the utility's gas supplies for a transportation fee that approximates the price at which ENSTAR Alaska sold gas to the utility previously, less the cost of that gas. Accordingly, operating profit for the Alaska transmission and distribution segment was not materially affected by these factors in 1992. However, operating profit for 1992 improved over 1991 as a result of higher non-power customer demand due to an increase in customers and colder temperatures. 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 1993 summer construction season, approximately 55 miles of new distribution pipeline were installed to connect some 1,800 new customers. 7 8 OTHER (INCOME) EXPENSE
PERCENT CHANGE ------------------- 1993 1992 1991 1992-'93 1991-'92 ------- ------- ------- -------- -------- (DOLLARS IN THOUSANDS) General and administrative....................... $11,666 $10,099 $ 8,427 + 16 + 20 Interest expense................................. 36,753 17,574 17,875 +109 - 2 Interest income and other........................ (5,708) (4,705) (1,426) + 21 +230 ------- ------- ------- -------- -------- $42,711 $22,968 $24,876 + 86 - 8 ------- ------- ------- -------- -------- ------- ------- ------- -------- --------
General and administrative expenses increased for the year ended December 31, 1993 in comparison to 1992 due to costs associated with three compensation plans, one for outside directors, one for key managers, and the other for all Company employees, that are tied directly to the price of the Seagull Common Stock. The closing price of Seagull Common Stock increased from $15.563 (adjusted for Stock Split) at December 31, 1992 to $25.375 at December 31, 1993. Also, increases in other payroll related expenses contributed to the increase in general and administrative expenses in 1993. These increases were partially offset by a decline in costs related to potential acquisitions which were not consummated. On December 31, 1992, the Company incurred additional debt to finance the Mid-South Acquisition. In addition, a large portion of the Company's outstanding floating rate debt was refinanced in July 1993 with longer term debt bearing interest at fixed rates which were somewhat higher than the floating rates in effect for the debt being replaced. As a result of these transactions, the Company's interest expense and overall average interest rate increased for 1993. Interest income and other for 1993 includes a pre-tax gain of approximately $3.8 million relating to sales of nonstrategic oil and gas producing properties. Net proceeds from the sales totaled approximately $13.0 million, resulting in an after-tax gain of approximately $2.8 million, or $0.08 per share. The parcels sold had proven reserves estimated at approximately 19 Bcf of natural gas equivalents. General and administrative expenses increased for the year ended December 31, 1992 in comparison to 1991 as a result of increases in payroll related expenses and a charge of approximately $1.2 million for costs related to a potential acquisition which was not consummated. During the first quarter of 1992, the Company incurred approximately $400,000 in severance expenses (included in general and administrative expenses and operations and maintenance costs) when the Company reduced its non-Alaskan workforce by more than 10 percent. The workforce reduction was primarily a result of the depressed state of natural gas demand and prices in early 1992, coupled with a decrease in planned capital spending for 1992. The Company's workforce temporarily increased by approximately 240 employees as a result of the Mid-South Acquisition on December 31, 1992. The Company has retained a sizeable group of these employees. All severance expenses incurred in connection with any workforce reductions in the Mid-South area during 1993 were paid by Arkla. No additional workforce reductions are currently planned. Interest expense declined approximately 15% for the year ended December 31, 1992 in comparison to 1991 as a result of a decrease in the level of debt outstanding during the year as well as a decline in the overall average interest rate. This decline, however, was substantially offset by a fourth quarter 1992 charge to interest expense resulting from the expensing of $2.3 million in unamortized debt acquisition costs relating to the repayment of the Company's then existing revolving credit line in connection with the Mid-South Acquisition. Interest income and other for the year ended December 31, 1992 includes $4.6 million relating to the Seismic Litigation Settlement resulting from a claim made by the Company that certain of the seismic data acquired by it in connection with its acquisition of HO&M was actually delivered to other purchasers. In accordance with the settlement agreement, the Company received a cash payment in July 1992 of $2.6 million and will receive up to $5 million in pipeline business accommodations through December 31, 1995. If less than $3 million of business accommodations are realized, the Company will receive a cash payment in early 1996 equal to the difference between $3 million and the sum of the business accommodations realized. The 8 9 $4.6 million in 1992 income includes the $2.6 million cash payment plus the present value of the $3 million guaranteed minimum payment for business accommodations less certain expenses. INCOME TAXES The Company's effective tax rate of 18.3% for the year ended December 31, 1993 was substantially lower than the statutory federal tax rate of 35% primarily because the Company utilized approximately $4.8 million in credits allowed under Section 29 of the Internal Revenue Code of 1986, as amended, to reduce its 1993 regular income tax liability. The Section 29 (Tight Sands) credits are allowed for production of fuels derived from nonconventional sources that are sold to nonrelated parties. The effect of utilizing the Section 29 credits discussed above more than offset the effect of an increase in the federal corporate tax rate from 34% to 35% called for in recently enacted tax legislation. The effect of this rate change was an increase in the Company's 1993 provision for federal income taxes of approximately $1.3 million. The provision for income taxes for 1993 and 1992 is not comparable to 1991 due to the Company's adoption of SFAS No. 109 effective January 1, 1992. This SFAS requires the use of the "liability method," which bases the amount of current and future taxes payable on events recognized in the consolidated financial statements and under existing tax laws. The Company recognized the cumulative effect of this change in accounting principle in the line item entitled "Cumulative Effect of Changes in Accounting Principles" in the accompanying consolidated statement of earnings for the year ended December 31, 1992. Accordingly, periods prior to January 1, 1992 were not restated to reflect this change. LIQUIDITY AND CAPITAL RESOURCES Capital expenditures for 1993 were substantially higher than those for 1992 due to significant increases in the Company's exploitative activities, primarily resulting from the large number of prospects acquired in connection with the Mid-South Acquisition, and the Company's exploratory activities in response to improvements in prices received and demand for natural gas. The Company's E&P activities and related capital expenditures had been dramatically reduced in 1992 as a result of unacceptable natural gas prices early in the year. Capital expenditures for 1993, 1992 and 1991 were as follows:
PERCENT CHANGE --------------------- 1993 1992 1991 1992-'93 1991-'92 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) CAPITAL EXPENDITURES: Exploration and production: Lease acquisitions................ $ 7,396 $ 5,396 $ 4,446 + 37 + 21 Exploration....................... 26,824 8,378 15,053 +220 - 44 Development....................... 63,598 18,341 38,960 +247 - 53 -------- -------- -------- -------- -------- 97,818 32,115 58,459 +205 - 45 Pipeline and marketing............... 2,115 1,622 634 + 30 +156 Alaska transmission and distribution...................... 10,094 9,024 10,492 + 12 - 14 Corporate............................ 2,015 890 2,124 +126 - 58 -------- -------- -------- -------- -------- $112,042 $ 43,651 $ 71,709 +157 - 39 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ACQUISITIONS, NET OF CASH ACQUIRED: Exploration and production........... $ 29,470 $391,531 $201,767 - 92 + 94 Pipeline and marketing............... -- 10,357 -- N/A N/A -------- -------- -------- -------- -------- $ 29,470 $401,888 $201,767 - 93 + 99 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
9 10 In October 1993, the Company purchased an interest in a producing natural gas field in East Texas for approximately $26.6 million, effective September 1, 1993. The interest purchased contained proved reserves estimated at approximately 28.3 Bcf of natural gas and approximately 143,000 Bbl of condensate, or the equivalent of 29.2 Bcf of natural gas as of the October 1993 closing date. Plans for 1994 call for capital expenditures of approximately $173 million, including about $160 million in exploration and production. The Company anticipates spending approximately $100 million for development, $10 million for lease acquisitions and $50 million will be devoted to exploration. The growth in the E&P segment over the past six years has been accomplished primarily through acquisitions financed initially by bank borrowings; however, since August 1990, the Company has reduced borrowings under existing bank facilities by $520 million with net proceeds received from three separate Seagull Common Stock offerings and the July 1993 sale of Senior and Senior Subordinated Notes discussed below, all in underwritten public offerings. See Notes 6 and 9 of Notes to Consolidated Financial Statements beginning on page 16 of this Exhibit. In connection with the Mid-South Acquisition, the Company entered into a credit agreement (the "Credit Agreement") with a group of major U.S. and international banks (the "Banks"). The Credit Agreement provided for a $150 million term loan, which was repaid in full in February 1993 with the net proceeds of approximately $164 million from the sale of 5,060,000 shares (10,120,000 shares after the Stock Split) of Seagull Common Stock, and a $475 million revolving credit line. See Notes 2, 6 and 9 of Notes to Consolidated Financial Statements beginning on page 16 of this Exhibit. In June 1993, the Company amended and restated the Credit Agreement converting the facility into a single revolving credit facility (the "Revolver") with a total commitment of $475 million and a final maturity of December 31, 1999. Under the terms of the Revolver, the commitments thereunder begin to decline on March 31, 1996 in equal quarterly reductions of $27.5 million and a final reduction of $62.5 million on December 31, 1999. The amount of senior indebtedness available to the Company under the provisions of the Revolver is subject to a borrowing base (the "Borrowing Base") based upon the proved reserves of the Company's exploration and production segment and the financial performance of the Company's other business segments. The Borrowing Base is generally determined annually, but may be redetermined, at the option of either the Company or the Banks, one additional time each year, and will be redetermined upon the sale of certain assets included in the Borrowing Base. As of January 4, 1994, immediately following the Seagull Canada Acquisition, the available commitment under the Revolver is subject to a $610 million Borrowing Base and is determined after consideration of outstanding borrowings under the Company's other senior debt facilities. As of February 28, 1994, borrowings outstanding under the Revolver were $188.5 million, leaving immediately available unused commitments of approximately $141.1 million, net of outstanding letters of credit of $2.2 million, $100 million of borrowings outstanding under the Senior Notes discussed below, the nominated maximum borrowing availability of $160 million under the Canadian Credit Agreement discussed below, and $18.2 million in borrowings outstanding under the Company's money market facilities. In connection with the Seagull Canada Acquisition, Seagull Energy Canada Ltd. ("Seagull Canada"), the indirect wholly owned subsidiary of the Company which acquired Novalta, entered into a new $175 million reducing revolving credit facility (the "Canadian Credit Agreement") with a group of 10 Canadian affiliates of major U.S. and international banks. The Canadian Credit Agreement provides for dual currency borrowings in U.S. and Canadian dollars with a nominated maximum borrowing availability of $160 million, which may be increased or decreased by the Company at any time pursuant to provisions of the Canadian Credit Agreement, up to a maximum commitment of $175 million. The Canadian Credit Agreement matures on December 31, 1999 and commitments thereunder begin to decline on March 31, 1996 in equal quarterly reductions of $10,937,500. As of January 4, 1994, immediately following the Seagull Canada Acquisition, approximately $152 million in borrowings were outstanding under this facility. 10 11 In July 1993, the Company sold $100 million of senior notes (the "Senior Notes") and $150 million of senior subordinated notes (the "Senior Subordinated Notes") (collectively the "Notes"). 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 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. The Notes were issued at par and interest is paid semi-annually. Net proceeds from the offering, totaling approximately $245.0 million, were used to repay borrowings outstanding under the Revolver. In addition to the facilities discussed above, the Company has money market facilities with two major 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 and may be canceled at either the Company's or the banks' discretion. The lines are subject to annual renewal. Management believes that the Company's capital resources will be sufficient to finance current and forecasted operations. However, the Company continues to actively pursue potential acquisitions and, depending upon the size and terms of any such acquisition, additional financing may be required. 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. 11 12 SEAGULL ENERGY CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, ---------------------------------- 1993 1992 1991 -------- -------- -------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Revenues: Exploration and production............................... $227,437 $ 91,991 $ 81,099 Pipeline and marketing................................... 42,484 37,240 37,823 Alaska transmission and distribution..................... 107,244 109,598 129,615 -------- -------- -------- 377,165 238,829 248,537 -------- -------- -------- Costs of Operations: Alaska transmission and distribution cost of gas sold.... 59,898 59,999 81,935 Cost of other gas sold................................... 2,660 3,888 5,913 Operations and maintenance............................... 104,797 71,923 68,377 Exploration charges...................................... 17,265 9,905 9,227 Depreciation, depletion and amortization................. 116,556 63,231 52,902 -------- -------- -------- 301,176 208,946 218,354 -------- -------- -------- Operating Profit........................................... 75,989 29,883 30,183 Other (Income) Expense: General and administrative............................... 11,666 10,099 8,427 Interest expense......................................... 36,753 17,574 17,875 Interest income and other................................ (5,708) (4,705) (1,426) -------- -------- -------- 42,711 22,968 24,876 -------- -------- -------- Earnings Before Income Taxes and Cumulative Effect of Changes in Accounting Principles......................... 33,278 6,915 5,307 Income Taxes............................................... 6,080 2,500 200 -------- -------- -------- Earnings Before Cumulative Effect of Changes in Accounting Principles............................................... 27,198 4,415 5,107 Cumulative Effect of Changes in Accounting Principles...... -- 2,273 -- -------- -------- -------- Net Earnings............................................... $ 27,198 $ 6,688 $ 5,107 -------- -------- -------- -------- -------- -------- Earnings Per Share: Earnings before cumulative effect of changes in accounting principles................................. $ 0.76 $ 0.17 $ 0.23 Cumulative effect of changes in accounting principles.... -- 0.09 -- -------- -------- -------- Net Earnings............................................. $ 0.76 $ 0.26 $ 0.23 -------- -------- -------- -------- -------- -------- Weighted Average Number of Common Shares Outstanding (in thousands)............................................... 35,790 25,583 22,692 -------- -------- -------- -------- -------- --------
See Accompanying Notes to Consolidated Financial Statements. 12 13 SEAGULL ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ------------------------- 1993 1992 ---------- ---------- (DOLLARS IN THOUSANDS) Current Assets: Cash and cash equivalents......................................... $ 5,572 $ 3,882 Accounts receivable, net.......................................... 98,734 89,823 Inventories....................................................... 4,382 4,153 Prepaid expenses and other........................................ 6,520 926 ---------- ---------- Total Current Assets......................................... 115,208 98,784 Property, Plant and Equipment -- at cost (successful efforts method for gas and oil properties)....................................... 1,278,701 1,191,575 Accumulated Depreciation, Depletion and Amortization................ 345,512 253,773 ---------- ---------- 933,189 937,802 Other Assets........................................................ 69,854 66,378 ---------- ---------- Total Assets........................................................ $1,118,251 $1,102,964 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable.................................................. $ 84,904 $ 99,520 Accrued expenses.................................................. 30,134 12,713 Prepaid gas and oil sales......................................... 7,590 27,933 Current maturities of long-term debt.............................. 1,538 3,743 ---------- ---------- Total Current Liabilities.................................... 124,166 143,909 Long-Term Debt...................................................... 459,787 608,011 Other Noncurrent Liabilities........................................ 66,785 80,928 Deferred Income Taxes............................................... 28,134 26,443 Shareholders' Equity: Common Stock, $.10 par value; authorized 100,000,000 shares (1993) and 40,000,000 shares (1992); issued 36,378,659 shares (1993) and 12,977,257 shares (1992)................................... 3,638 1,298 Additional paid-in capital........................................ 324,192 158,503 Retained earnings................................................. 120,713 93,515 Less -- note receivable from employee stock ownership plan........ (6,029) (6,508) Less -- 326,812 shares (1993) and 163,406 shares (1992) of Common Stock held in Treasury, at cost................................ (3,135) (3,135) ---------- ---------- Total Shareholders' Equity................................... 439,379 243,673 Commitments and Contingencies....................................... ---------- ---------- Total Liabilities and Shareholders' Equity.......................... $1,118,251 $1,102,964 ---------- ---------- ---------- ----------
See Accompanying Notes to Consolidated Financial Statements. 13 14 SEAGULL ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------- 1993 1992 1991 --------- --------- --------- (DOLLARS IN THOUSANDS) Operating Activities: Net earnings.......................................... $ 27,198 $ 6,688 $ 5,107 Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of changes in accounting principles....................................... -- (2,273) -- Depreciation, depletion and amortization........... 119,544 65,238 54,811 Amortization of loan acquisition costs............. 4,261 2,927 745 Deferred income taxes.............................. 1,050 2,305 438 Dry hole expense................................... 10,534 5,232 4,195 Gain on sales of property, plant and equipment..... (3,929) (177) (46) Distributions in excess of earnings from partnerships..................................... 1,506 872 888 Other.............................................. 598 556 516 --------- --------- --------- 160,762 81,368 66,654 Changes in operating assets and liabilities, net of acquisitions: Decrease (Increase) in accounts receivable, net.... (7,029) 5,039 (1,764) Decrease (Increase) in inventories, prepaid expenses and other............................... 757 (457) (1,089) Increase (Decrease) in accounts payable............ (16,292) (11,334) 7,781 Decrease in prepaid gas and oil sales.............. (27,933) -- -- Increase (Decrease) in accrued expenses and other............................................ 9,496 (2,429) (1,809) --------- --------- --------- Net Cash Provided By Operating Activities........ 119,761 72,187 69,773 Investing Activities: Capital expenditures.................................. (112,042) (43,651) (71,709) Acquisitions, net of cash acquired.................... (29,470) (401,888) (201,767) Proceeds from sales of property, plant and equipment.......................................... 13,428 1,347 1,394 --------- --------- --------- Net Cash Used In Investing Activities............ (128,084) (444,192) (272,082) Financing Activities: Proceeds from revolving lines of credit and other borrowings......................................... 599,490 756,500 365,900 Principal payments on revolving lines of credit and other borrowings................................... (750,039) (369,877) (198,205) Fees paid to acquire financing........................ (6,535) (18,282) (3,201) Proceeds from sales of common stock................... 166,140 794 37,571 Purchase of treasury stock............................ -- (210) -- Other................................................. 957 765 1,272 --------- --------- --------- Net Cash Provided By Financing Activities........ 10,013 369,690 203,337 --------- --------- --------- Increase (Decrease) In Cash And Cash Equivalents................................... 1,690 (2,315) 1,028 Cash And Cash Equivalents At Beginning Of Year.......... 3,882 6,197 5,169 --------- --------- --------- Cash And Cash Equivalents At End Of Year................ $ 5,572 $ 3,882 $ 6,197 --------- --------- --------- --------- --------- ---------
See Accompanying Notes to Consolidated Financial Statements. 14 15 SEAGULL ENERGY CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL NOTE COMMON PAID-IN RETAINED RECEIVABLE TREASURY STOCK CAPITAL EARNINGS FROM ESOP STOCK TOTAL ------ ---------- -------- --------- -------- -------- (DOLLARS IN THOUSANDS) January 1, 1991.................... $1,137 $ 119,924 $ 81,720 $(7,340) $ (2,925) $192,516 Net earnings..................... -- -- 5,107 -- -- 5,107 Issuance of common stock, 1,500,000 shares.............. 150 36,586 -- -- -- 36,736 Exercise of employee stock options, 60,304 shares........ 6 829 -- -- -- 835 Repayment of Note Receivable by ESOP.......................... -- -- -- 396 -- 396 Other............................ -- 207 -- -- -- 207 ------ ---------- -------- --------- -------- -------- December 31, 1991.................. 1,293 157,546 86,827 (6,944) (2,925) 235,797 Net earnings..................... -- -- 6,688 -- -- 6,688 Purchase of treasury stock, 9,438 shares........................ -- -- -- -- (210) (210) Exercise of employee stock options, 50,235 shares........ 5 789 -- -- -- 794 Repayment of Note Receivable by ESOP.......................... -- -- -- 436 -- 436 Other............................ -- 168 -- -- -- 168 ------ ---------- -------- --------- -------- -------- December 31, 1992.................. 1,298 158,503 93,515 (6,508) (3,135) 243,673 Net earnings..................... -- -- 27,198 -- -- 27,198 Issuance of common stock, 5,060,000 shares.............. 506 163,131 -- -- -- 163,637 Two-for-one stock split.......... 1,807 (1,807) -- -- -- -- Exercise of employee stock options, 271,645 shares....... 27 2,476 -- -- -- 2,503 Repayment of Note Receivable by ESOP.......................... -- -- -- 479 -- 479 Other............................ -- 1,889 -- -- -- 1,889 ------ ---------- -------- --------- -------- -------- December 31, 1993.................. $3,638 $ 324,192 $120,713 $(6,029) $ (3,135) $439,379 ------ ---------- -------- --------- -------- -------- ------ ---------- -------- --------- -------- --------
See Accompanying Notes to Consolidated Financial Statements. 15 16 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX PAGE - ----- ---- 1. Summary of Significant Accounting Policies..................................... 16 2. Acquisitions................................................................... 18 3. Property, Plant and Equipment.................................................. 19 4. Supplemental Gas and Oil Producing Activities (Unaudited)...................... 19 5. Other Noncurrent Assets........................................................ 23 6. Long-Term Debt................................................................. 25 7. Other Noncurrent Liabilities................................................... 28 8. Fair Value of Financial Instruments............................................ 29 9. Shareholders' Equity........................................................... 30 10. Stock Option Plans............................................................. 30 11. Employee Benefit Plans......................................................... 31 12. Interest Income and Other...................................................... 33 13. Income Taxes................................................................... 34 14. Business Segments.............................................................. 37 15. Selected Quarterly Financial Data (Unaudited).................................. 38 16. Commitments and Contingencies.................................................. 38 17. Subsequent Events.............................................................. 39
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation. The accompanying consolidated financial statements include the accounts of Seagull Energy Corporation and Subsidiaries (the "Company"), all of which are wholly owned. All significant intercompany transactions have been eliminated. The results of operations of Seagull Mid-South Inc. ("Seagull Mid-South"), formerly Arkla Exploration Company ("Arkla Exploration") have been included with those of the Company since December 31, 1992, and the results of operations of certain gas and oil assets (the "Mid-Continent Assets") purchased from Mesa Limited Partnership, a predecessor of Mesa, Inc., ("Mesa") have been included with those of the Company since March 8, 1991, the respective acquisition dates (See Note 2). Partnerships in which the Company holds a 50% interest or less are accounted for using the equity method. Regulation. The Company operates in Alaska through ENSTAR Natural Gas Company ("ENG"), a division of the Company, and Alaska Pipeline Company ("APC"), 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. Supplemental Disclosures of Cash Flow Information.
YEAR ENDED DECEMBER 31, -------------------------------- 1993 1992 1991 -------- -------- -------- (DOLLARS IN THOUSANDS) Cash paid during the year for: Interest, net of amount capitalized......................... $ 26,753 $ 19,079 $ 16,114 Income taxes................................................ $ 7,140 $ 878 $ 3,748
16 17 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Inventories. Materials and supplies are valued at the lower of average cost or market value (net realizable value). Inventories of hydrocarbon products are valued on a first-in, first-out (FIFO) basis at the lower of cost or market value. Gas And Oil Properties. The Company uses the successful efforts method of accounting for its gas and oil operations. The 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. Depletion of proved leaseholds and amortization and depreciation of the costs of all development and successful exploratory drilling are provided by the unit-of-production method based upon estimates of proved gas and oil reserves on a field-by-field basis. Estimated costs (net of salvage value) of dismantling and abandoning gas and oil production facilities are computed and included in depreciation and depletion using the unit-of-production method. The total estimated future dismantlement and abandonment cost being amortized as of December 31, 1993 was approximately $23.2 million. On a world-wide basis, should the net capitalized costs exceed the estimated future undiscounted after tax net cash flows from proved gas and oil reserves, such excess costs would be charged to expense. Other Property, Plant And Equipment. Depreciation of gas gathering pipeline facilities is computed principally using the unit-of-production method based on the estimated proved reserves to be transported through the pipeline facility. Depreciation of the utility plant, gas processing plants and other property is computed using the straight-line method over their estimated useful lives, which vary from 3 to 33 years. Gain or loss on sale or disposition of non-utility property is credited or charged to interest income and other. 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. 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 cost method of accounting for treasury stock transactions. Revenue Recognition. The Company records revenue following the entitlement method of accounting for production gas imbalances. The Company constructs pipeline systems for third parties and recognizes profits on construction under the percentage-of-completion method. 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. 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 costs and exploration charges. Interest Rate Swap Agreements. 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. 17 18 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income Taxes. Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. This SFAS requires the use of the liability method 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. Prior to January 1, 1992, the Company used the deferral method of accounting for income taxes, under which deferred taxes were provided for all material timing differences arising from the recognition of certain items of income and expense in different accounting periods for tax and financial accounting purposes using the tax rate applicable for the year of the calculation. Under the deferral method, deferred taxes were not adjusted for subsequent changes in tax rates. Earnings per Share. The weighted average number of common shares outstanding for the computation of earnings per share for the year ended December 31, 1993 gives effect to the assumed exercise of dilutive stock options as of the beginning of the year. The effect of dilutive stock options is insignificant on the earnings per share computations for the years ended December 31, 1992 and 1991. On June 4, 1993, the Company effected, in the form of a 100 percent stock dividend, a two-for-one stock split (the "Stock Split") of all the issued shares of the Company's common stock ("Seagull Common Stock"). The weighted average number of common shares outstanding and per share amounts for all periods have been restated to reflect the Stock Split. All share amounts included in the consolidated balance sheets and consolidated statements of shareholders' equity as of dates prior to June 4, 1993 were not adjusted to reflect the Stock Split. Changes in Financial Presentation. Certain reclassifications have been made in the 1992 and 1991 financial statements to conform to the presentation used in 1993. 2. ACQUISITIONS Seagull Mid-South Inc. On December 31, 1992, the Company purchased all of the outstanding capital stock of Arkla Exploration from Arkla, Inc. ("Arkla") for approximately $397 million in cash, subject to certain customary post-closing adjustments (the "Mid-South Acquisition"). The purchase price was adjusted for, among other things, certain title defects and an adjustment relating to the net aggregate gas imbalances attributable to Arkla Exploration's interest in the properties it owned. The final adjusted purchase price was approximately $393 million. The acquisition was accounted for as a purchase. Seagull Mid-South's assets (the "Mid-South Properties") consist almost exclusively of natural gas and oil reserves and developed and undeveloped lease acreage concentrated principally in a small number of fields located in Arkansas, Louisiana, Mississippi, Oklahoma and Texas. Arkla Exploration entered into prepaid gas and oil sales contracts prior to its acquisition by the Company. As of December 31, 1992, Seagull Mid-South was obligated to deliver for no future consideration approximately 13 billion cubic feet ("Bcf") of gas and approximately one million barrels ("MMbbl") of oil and condensate pursuant to these contracts over periods expiring January 31, 1994 and June 30, 1995, respectively. As of December 31, 1993, approximately 620 million cubic feet ("MMcf") of gas and 529,000 barrels of oil and condensate remain to be delivered under these contracts. Mid-Continent Assets. On March 8, 1991, the Company purchased the Mid-Continent Assets from Mesa for approximately $199 million in cash after certain adjustments. In addition, the Company and Mesa entered into a contingent gas price payment agreement at the closing pursuant to which the Company would generally pay an additional $450,000 (up to a maximum of $25 million) for each $.01 that the weighted average 18 19 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) wellhead price, as defined, of natural gas sold from the Mid-Continent Assets exceeds $1.80 per thousand cubic feet ("Mcf") for the three year period ending December 31, 1993. The estimated weighted average wellhead price, as defined, of natural gas sold for the three year period ended December 31, 1993 was $1.76 per Mcf. Based upon this estimated price, the Company does not anticipate that any payment will be required under the contingent gas price payment agreement. The Mid-Continent Assets include gas and oil interests generally located in Western Oklahoma and the Texas Panhandle and certain related assets. The acquisition was accounted for as a purchase. See Note 17 for information concerning the Company's acquisition of Novalta Resources Inc. ("Novalta") (the "Seagull Canada Acquisition") in January 1994. 3. PROPERTY, PLANT AND EQUIPMENT The major classes of the Company's property, plant and equipment are shown below:
DECEMBER 31, -------------------------- 1993 1992 ---------- ---------- (DOLLARS IN THOUSANDS) Gas and oil properties.............................................. $ 972,460 $ 888,178 Pipeline facilities................................................. 63,019 72,413 Gas processing plants............................................... 15,808 12,301 Utility plant....................................................... 216,883 208,419 Equipment and other................................................. 10,531 10,264 ---------- --------- $1,278,701 $1,191,575 ---------- --------- ---------- ---------
Interest cost capitalized as property, plant and equipment amounted to approximately $0.9 million in 1993 and 1992 and $1.7 million in 1991. Total depreciation, depletion and amortization related to property, plant and equipment amounted to approximately $119.5 million, $65.2 million and $54.8 million in 1993, 1992 and 1991, respectively. 4. SUPPLEMENTAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED) CAPITALIZED COSTS RELATING TO GAS AND OIL PRODUCING ACTIVITIES
DECEMBER 31, ----------------------- 1993 1992 -------- -------- (DOLLARS IN THOUSANDS) Proved properties...................................................... $956,604 $876,419 Unproved properties.................................................... 15,856 11,759 -------- -------- 972,460 888,178 Accumulated depreciation, depletion and amortization................... 224,451 137,201 -------- -------- $748,009 $750,977 -------- -------- -------- --------
19 20 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COSTS INCURRED IN GAS AND OIL PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES
YEAR ENDED DECEMBER 31, ---------------------------------- 1993 1992 1991 -------- -------- -------- (DOLLARS IN THOUSANDS) Acquisition of properties: Proved................................................... $ 22,568 $455,970 $199,499 Unproved................................................. 7,750 3,078 6,500 Exploration costs.......................................... 26,824 8,378 15,053 Development costs.......................................... 63,598 18,341 38,960 -------- -------- -------- $120,740 $485,767 $260,012 -------- -------- -------- -------- -------- --------
RESULTS OF OPERATIONS FOR GAS AND OIL PRODUCING ACTIVITIES
YEAR ENDED DECEMBER 31, -------------------------------- 1993 1992 1991 -------- ------- ------- (DOLLARS IN THOUSANDS) Revenues..................................................... $227,437 $91,991 $81,099 Lifting costs: Lease operating expense.................................... 28,806 15,334 14,946 Workover expense........................................... 4,249 2,449 2,058 Production taxes........................................... 9,133 4,045 3,531 Transportation expenses.................................... 7,764 2,757 1,827 Ad valorem taxes........................................... 3,291 1,645 1,656 -------- ------- ------- 53,243 26,230 24,018 General operating expense.................................... 10,408 4,614 3,933 Exploration charges.......................................... 17,265 9,905 9,227 Depreciation, depletion and amortization..................... 103,552 52,855 42,646 -------- ------- ------- Operating profit (loss)...................................... 42,969 (1,613) 1,275 Income tax expense (benefit)(*).............................. 7,851 (584) 48 -------- ------- ------- Results of operations from producing activities.............. $ 35,118 $(1,029) $ 1,227 -------- ------- ------- -------- ------- -------
- --------------- (*) Income tax expense is calculated by applying the current effective tax rate to operating profit. 20 21 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RESERVE QUANTITY INFORMATION
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1993 1992 1991 --------------------- -------------------- -------------------- GAS OIL GAS OIL GAS OIL (MMCF) (MBBL)(1) (MMCF) (MBBL)(1) (MMCF) (MBBL)(1) -------- --------- ------- --------- ------- --------- Proved developed and undeveloped reserves: Beginning of year............ 884,327 18,149 335,121 11,014 127,709 5,791 Purchases of reserves in place..................... 34,350 198 573,526 6,691 167,098 4,639 Sales of reserves in place... (9,587) (1,554) (181) (24) (506) (52) Revisions of previous estimates................. 24,924 (1,281) (5,503) 1,548 7,675 982 Extensions and discoveries... 83,158 972 19,501 199 66,051 990 Production................... (102,025) (1,694) (38,137) (1,279) (32,906) (1,336) -------- --------- ------- --------- ------- --------- End of year(2)............... 915,147 14,790 884,327 18,149 335,121 11,014 -------- --------- ------- --------- ------- --------- -------- --------- ------- --------- ------- --------- Proved developed reserves: Beginning of year............ 675,861 11,552 265,987 7,213 106,369 3,901 -------- --------- ------- --------- ------- --------- -------- --------- ------- --------- ------- --------- End of year.................. 693,610 9,362 675,861 11,552 265,987 7,213 -------- --------- ------- --------- ------- --------- -------- --------- ------- --------- ------- ---------
- --------------- (1) "Mbbl" represents one thousand barrels of oil. (2) At December 31, 1993 and 1992, includes approximately 620 MMcf and 13 Bcf of gas, respectively, and 529 Mbbl and one MMbbl of oil, respectively, related to prepaid gas and oil sales. Proved reserves attributable to the properties obtained on January 4, 1994 in connection with the Seagull Canada Acquisition (see Note 17) were as follows:
DECEMBER 31, 1993 ------------------ GAS OIL (MMCF) (MBBL) ------- ------ Proved developed and undeveloped reserves................................. 257,382 2,783 ------- ------ ------- ------ Proved developed reserves................................................. 236,945 2,529 ------- ------ ------- ------
The Company's standardized measure of discounted future net cash flows and changes therein as of December 31, 1993, 1992 and 1991 are provided based on the present value of future net revenues from proved gas and oil reserves (all located in the United States prior to 1994) estimated by independent petroleum engineers in accordance with guidelines established by the Securities and Exchange Commission. These estimates were computed by applying appropriate current prices for gas and oil to estimated future production of proved gas and oil reserves over the economic lives of the reserves and assuming continuation of existing economic conditions. Year end 1993 calculations were made utilizing average prices for natural gas and oil, condensate and natural gas liquids that existed at December 31, 1993 of $2.33 per Mcf and $12.13 per barrel ("Bbl"), respectively. Income taxes are computed by applying the statutory federal income tax rate to the net cash inflows relating to proved gas and oil reserves less the tax bases of the properties involved and giving effect to any net operating loss carryforwards, tax credits and allowances relating to such properties. The reserve volumes provided by the independent petroleum engineers 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 market conditions. 21 22 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
DECEMBER 31, ------------------------ 1993 1992 --------- --------- (DOLLARS IN THOUSANDS) Future cash inflows(*).............................................. $2,318,243 $2,168,259 Future development costs............................................ (234,494) (206,574) Future production costs............................................. (564,915) (522,686) ---------- ---------- Future net cash flows before income taxes........................... 1,518,834 1,438,999 10% annual discount................................................. (625,504) (604,461) ---------- ---------- Discounted future net cash flows before income taxes................ 893,330 834,538 Discounted income taxes............................................. (165,682) (140,090) ---------- ---------- Standardized measure of discounted future net cash flows(*)......... $ 727,648 $ 694,448 ---------- ---------- ---------- ----------
- --------------- (*) At December 31, 1993 and 1992, future cash inflows include approximately $10.3 million and $38.3 million, respectively, for prepaid gas and oil sales made by Arkla Exploration prior to its acquisition by the Company. In addition, the standardized measure of discounted future net cash flows includes approximately $6.2 million and $23.7 million, respectively, relating to these prepaid sales. As discussed in Note 2, Seagull Mid-South was obligated, as of December 31, 1992, under prepaid gas and oil sales contracts to deliver for no future consideration approximately 13 Bcf of gas and approximately one MMbbl of oil and condensate over periods expiring January 31, 1994 and June 30, 1995, respectively. As of December 31, 1993, 620 MMcf of gas and 529 Mbbl of oil and condensate remain to be delivered under these contracts. The standardized measure of discounted future net cash flows relating to the properties obtained on January 4, 1994 in connection with the Seagull Canada Acquisition (see Note 17) is as follows: STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
DECEMBER 31, 1993 ----------------- (DOLLARS IN THOUSANDS) Future cash inflows.......................................................... $ 493,067 Future development costs..................................................... (22,113) Future production costs...................................................... (121,425) --------- Future net cash flows before income taxes.................................... 349,529 10% annual discount.......................................................... (160,085) --------- Discounted future net cash flows before income taxes......................... 189,444 Discounted income taxes...................................................... (62,149) --------- Standardized measure of discounted future net cash flows..................... $ 127,295 --------- ---------
22 23 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PRINCIPAL SOURCES OF CHANGE IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------- 1993 1992 1991 --------- -------- -------- (DOLLARS IN THOUSANDS) Standardized measure of discounted future net cash flows, beginning of year....................................... $ 694,448 $289,881 $158,757 Purchases of reserves in place.......................... 28,871 486,048 166,477 Sales of reserves in place.............................. (13,679) (259) (776) Revisions of previous quantity estimates less related costs................................................ 16,660 (4,155) 11,457 Extensions and discoveries less related costs........... 87,345 13,760 56,308 Net changes in prices and production costs.............. 28,393 15,790 (48,457) Development costs incurred during period and changes in estimated future development costs................... 22,248 8,595 13,245 Sales of gas and oil produced during period, net of lifting costs........................................ (174,194) (65,761) (57,081) Accretion of discount................................... 83,454 35,407 20,181 Net change in income taxes.............................. (25,591) (75,900) (21,137) Other................................................... (20,307) (8,958) (9,093) --------- -------- -------- 33,200 404,567 131,124 --------- -------- -------- Standardized measure of discounted future net cash flows, end of year............................................. $ 727,648 $694,448 $289,881 --------- -------- -------- --------- -------- --------
5. OTHER NONCURRENT ASSETS Other assets include the following:
DECEMBER 31, ------------------- 1993 1992 ------- ------- (DOLLARS IN THOUSANDS) Natural gas imbalances................................................... $31,271 $35,418 Debt acquisition costs................................................... 19,007 17,305 Investments in partnerships.............................................. 7,377 8,883 Acquisition costs -- Seagull Canada Acquisition.......................... 7,745 -- Other.................................................................... 4,454 4,772 ------- ------- $69,854 $66,378 ------- ------- ------- -------
Natural Gas Imbalances. The Company records 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. 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. 23 24 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's natural gas imbalance assets and liabilities were as follows:
DECEMBER 31, ------------------------------------------------- 1993 1992 --------------------- --------------------- AMOUNT VOLUMES AMOUNT VOLUMES ------- ------- ------- ------- (DOLLARS IN THOUSANDS AND VOLUMES IN BCF) ASSETS: Current.............................. $ 5,808 3.6 $ 2,686 1.8 Noncurrent........................... 31,271 20.9 35,418 23.8 ------- ------- ------- ------- $37,079 24.5 $38,104 25.6 ------- ------- ------- ------- ------- ------- ------- ------- LIABILITIES: Current.............................. $ 7,546 4.5 $ 5,552 3.7 Noncurrent........................... 31,693 20.7 39,011 25.7 ------- ------- ------- ------- $39,239 25.2 $44,563 29.4 ------- ------- ------- ------- ------- ------- ------- -------
Debt Acquisition Costs. Debt acquisition 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 $475 million revolving credit line which matures in 1999. Financing costs initially incurred in 1992 of approximately $16.7 million were capitalized in connection with this facility and will be amortized to interest expense over periods ending December 31, 1999. Approximately $5.0 million in financing costs incurred were capitalized in connection with the Company's July 1993 issuance of $250 million in senior and senior subordinated notes, and will be amortized to interest expense over periods ending August 1, 2005 (see Note 6). Investments in Partnerships. Seagull Shoreline System. The Company, through one of its wholly owned subsidiaries, serves as operator and at December 31, 1993 held approximately a 19% interest in the Seagull Shoreline System ("SSS"), a partnership that owns an offshore gas pipeline. At December 31, 1993, the Company's investment in SSS amounted to $2.3 million. Cavallo Pipeline Company. A wholly owned subsidiary of the Company owns a 50% interest in, and operates, Cavallo Pipeline Company ("Cavallo"). The Cavallo system consists of an offshore pipeline system. At December 31, 1993, the Company's investment in Cavallo amounted to approximately $5.1 million. Acquisition Costs -- Seagull Canada Acquisition. Acquisition costs represent costs incurred in connection with the Seagull Canada Acquisition, including a deposit of approximately $7.5 million paid in November 1993 which was applied as part of the cash purchase price paid in January 1994 (see Note 17). 24 25 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. LONG-TERM DEBT Long-term debt for 1993 and 1992 was as follows:
DECEMBER 31, -------------------- 1993 1992 -------- -------- (DOLLARS IN THOUSANDS) Seagull Energy Corporation: Money market facilities, variable rates (3.875%-4.75% at December 31, 1993) due in 1994.................................................. $ 70,000 $ -- Term Loan, variable rates (8% at December 31, 1992) due in 1993-1995.......................................................... -- 150,000 Revolving credit, variable rates (6% and 8% at December 31, 1993 and 1992) due in 1996-1999............................................. 77,000 391,000 Senior notes, 7.875%, due August 1, 2003.............................. 100,000 -- Senior subordinated notes, 8.625%, due August 1, 2005................. 150,000 -- Alaska Pipeline Company: Unsecured industrial development bonds: 7.75%-8.00% due in 1993-2008....................................... 12,915 13,100 Other unsecured indebtedness: 9.95%-12.80% notes, due in 1993-2000............................... 2,750 9,107 8.15%-8.81% notes, due in 1997-2009................................ 50,000 50,000 Other debt............................................................ 26 33 -------- -------- 462,691 613,240 Less: Current maturities................................................ 1,538 3,743 Unamortized debt discount......................................... 1,366 1,486 -------- -------- Total long-term debt.................................................... $459,787 $608,011 -------- -------- -------- --------
Money Market Facilities. The Company has money market facilities with two major 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 and may be canceled at either the Company's or the banks' discretion. The lines are subject to annual renewal. In connection with the Seagull Canada Acquisition (see Note 17), borrowings outstanding under the Company's money market facilities were reduced to $10 million in January 1994 and the remaining $60 million was refinanced with borrowings under the Revolver (defined below). Seagull Energy Corporation Revolving Credit. During 1993, the Company amended and restated its credit agreement with a group of major U.S. and international banks (the "Banks") converting the facility into a single revolving credit facility (the "Revolver") with a total commitment of $475 million and a final maturity of December 31, 1999. The facility was also amended to, among other things, release as security all of the following: (i) a pledge of the stock of all direct or indirect subsidiaries of the Company whose shares had been pledged; (ii) a mortgage on all gas and oil properties of the Company and its subsidiaries; and (iii) guaranties from each of the Company's subsidiaries pledging stock or mortgaging properties as described above. Under the terms of the Revolver, the commitments thereunder begin to decline on March 31, 1996 in equal quarterly reductions of $27.5 million and a final reduction of $62.5 million on December 31, 1999. The Revolver is an unsecured credit facility that contains restrictive provisions regarding the incurrence of additional debt, the making of investments outside existing lines of business, the maintenance of certain financial ratios (based upon the Company's consolidated financial condition and results of operations), the incurrence of additional liens, the declaration or payment of dividends (other than dividends payable on up to $100 million of preferred stock or dividends payable solely in the form of additional shares of the Company's common stock) and the repurchase or redemption of capital stock. Under the most restrictive of these provisions, approximately $9.1 million was available for payment of cash dividends on Seagull Common Stock 25 26 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) or to repurchase Seagull Common Stock as of December 31, 1993. As of January 4, 1994, immediately following the Seagull Canada Acquisition, the Company's consolidated Debt to Capitalization Ratio, as defined under the Revolver, increased to 60.2%. In the event the Company's consolidated Debt to Capitalization Ratio is in excess of 60% as of March 31, 1994, the Company would not be able to pay any cash dividends on or repurchase any Seagull Common Stock under these provisions. No cash dividends have been paid on Seagull Common Stock since the Company became an independent entity in 1981. However, in connection with the consummation of the ENSTAR Alaska Stock Offering (see Note 17), the Revolver will be required to be amended to allow for the payment of cash dividends on the ENSTAR Alaska Stock. The Revolver bears interest, at the Company's option, at a rate equal to (i) either one, two, three or six month Adjusted LIBOR, plus a margin (the "LIBOR Margin") or (ii) the Reference Rate, plus a margin (the "Prime Margin"). The "Reference Rate" is the greater of (i) 0.5% per annum above the daily federal funds rate or (ii) the prime rate of the agent bank. The LIBOR Margin ranges from 0.625% to 2.5% per annum, depending upon the Company's credit rating and consolidated Debt to Capitalization Ratio (as defined under the Revolver), and the Prime Margin ranges from 0% to 1.5% per annum, depending upon the same factors. Under provisions included in the Revolver, the amount of senior indebtedness available to the Company is subject to a borrowing base (the "Borrowing Base"), based upon the proved reserves of the Company's exploration and production segment and the financial performance of the Company's other business segments. The Borrowing Base is generally determined annually, but may be redetermined, at the option of either the Company or the Banks, one additional time each year, and will be redetermined upon the sale of certain assets included in the Borrowing Base. If the Borrowing Base is redetermined in such a manner that the amount outstanding under the Revolver (or any other permitted senior debt facility) exceeds the new Borrowing Base, then the Company must repay the Revolver 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. As of January 4, 1994, immediately following the Seagull Canada Acquisition, the available commitment under the Revolver is subject to a $610 million Borrowing Base and is determined after consideration of outstanding borrowings under the Company's other senior debt facilities. On that date, borrowings outstanding under the Revolver were $188.5 million, leaving immediately available unused commitments of approximately $149.3 million, net of outstanding letters of credit of $2.2 million, $100 million of borrowings outstanding under the Senior Notes (defined below), the nominated maximum borrowing availability of $160 million under the Canadian Credit Agreement (defined below), and $10 million in borrowings outstanding under the Company's money market facilities. Canadian Credit Agreement. In connection with the Seagull Canada Acquisition (see Note 17), Seagull Energy Canada Ltd. ("Seagull Canada"), the indirect wholly owned subsidiary of the Company which acquired Novalta, entered into a new $175 million reducing revolving credit facility (the "Canadian Credit Agreement") with a group of 10 Canadian affiliates of major U.S. and international banks. The Canadian Credit Agreement provides for dual currency borrowings in U.S. and Canadian dollars with a nominated maximum borrowing availability of $160 million, which may be increased or decreased by the Company at any time pursuant to provisions of the Canadian Credit Agreement, up to a maximum commitment of $175 million. The Canadian Credit Agreement matures on December 31, 1999 and commitments thereunder begin to decline on March 31, 1996 in equal quarterly reductions of $10,937,500. As of January 4, 1994, immediately following the Seagull Canada Acquisition, approximately $152 million in borrowings were outstanding under this facility, which are currently denominated in Canadian dollars. Borrowings outstanding in Canadian dollars bear interest, at Seagull Canada's option, at a rate equal to (i) either one, two, three or six month Bankers' Acceptance Rate plus the LIBOR Margin or (ii) the Paying Agent's prime rate plus the Prime Margin. Borrowings outstanding under the Canadian Credit Agreement 26 27 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) funded in U.S. dollars bear interest, at Seagull Canada's option, in a manner similar to borrowings outstanding under the Revolver as described above. The Canadian Credit Agreement is an unsecured credit facility guaranteed by the Company and contains restrictive provisions similar to those included in the Revolver. 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 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, as well as restrictions on the incurrence of secured debt and entering into sale and leaseback transactions. Net proceeds from the offering, totaling approximately $245.0 million, were used to repay borrowings outstanding under the Revolver. Interest Rate Swap Agreements. The Company enters into interest rate swap agreements to manage the impact of changes in interest rates. During 1993, the following interest rate swap agreements were in effect:
INTEREST RATE NOTIONAL EFFECTIVE MATURITY ---------------------- AMOUNT DATE DATE RECEIVED PAID - --------- -------- -------- --------- --------- (DOLLARS IN THOUSANDS) $15,000 9/11/92 9/11/93 Floating 5.52% 40,000 9/11/92 9/11/95 Floating 6.76% 20,000 9/16/92 9/16/94 Floating 6.265% 25,000 9/11/92 9/11/94 Floating 6.265% 50,000 8/2/93 7/31/98 5.635% Floating 50,000 8/2/93 7/31/97 5.43% Floating 50,000 8/2/93 7/31/96 5.199% Floating
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 the Company's counterparties, is significantly smaller. For the year ended December 31, 1993, interest expense included approximately $1.8 million net expense relating to these agreements. Alaska Pipeline Company. All long-term debt of ENSTAR Alaska is issued by APC. The majority of the capital requirements of ENG are met by loans from APC pursuant to intercompany notes secured by a mortgage on the properties, rights and franchises (other than certain excepted properties) of ENG. The senior unsecured notes of APC provide for restrictions on dividends, additional borrowings and purchases, redemptions or retirements of shares of capital stock, other than in stock of APC. Under the most restrictive provisions of these financing arrangements, approximately $14.2 million was available for the making of restricted investments, restricted stock payments and restricted subordinated debt payments as of December 31, 1993. 27 28 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In July 1992, APC issued three new series of APC senior unsecured notes totaling $50 million to a group of institutional investors. The notes have interest rates ranging from 8.15% to 8.81% and have final maturities ranging from 2001 to 2009. The proceeds were used to retire APC's then existing $40 million unsecured credit agreement, to meet sinking fund requirements on other APC debt and for working capital purposes. The Company has not guaranteed payment of the new senior unsecured notes of APC. APC has a $5 million revolving line of credit, none of which was utilized during 1993. This is a one year line of credit which has historically been renewed annually and is used for seasonal working capital requirements. Annual Maturities. At December 31, 1993, the Company's aggregate annual maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31, (DOLLARS IN THOUSANDS) ------------------------ 1994...................................................... $ 1,538 1995...................................................... $ 1,550 1996...................................................... $ 1,564 1997...................................................... $ 7,577 1998...................................................... $ 9,097 Thereafter................................................ $441,365
For purposes of the above table, the required payments related to the money market facilities are considered to be funded with amounts available under the Revolver. 7. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities include the following:
DECEMBER 31, -------------------- 1993 1992 ------- ------- (DOLLARS IN THOUSANDS) Natural gas imbalances................................................... $31,693 $39,011 Refundable customer advances for construction............................ 11,623 10,379 Prepaid gas and oil sales................................................ 2,732 10,322 Contingent consideration -- Wacker....................................... -- 3,104 Other.................................................................... 20,737 18,112 ------- ------- $66,785 $80,928 ------- ------- ------- -------
Natural Gas Imbalances. Revenues for natural gas production received and sold by the Company in excess of the Company's ownership percentage of total gas production (See Note 5). Refundable Customer Advances For Construction. 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. Prepaid Gas and Oil Sales. Prepayments received pursuant to prepaid gas and oil sales contracts Arkla Exploration entered into prior to its acquisition by the Company (See Notes 2 and 4). Contingent Consideration -- Wacker. A portion of the adjusted purchase price of Wacker Oil Inc. ("Wacker") withheld pending resolution of issues that developed with respect to two of its producing gas wells prior to the closing of the acquisition of Wacker by the Company in 1990. The disposition of the contingent consideration was settled through arbitration on December 2, 1993 pursuant to provisions of the agreements executed in connection with the acquisition. The arbitration resulted in a payment to the seller of $1 million of 28 29 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the funds withheld at closing. This amount was paid in December 1993, and the remaining unpaid contingent consideration was accounted for as a reduction to the purchase price. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are summarized as follows:
DECEMBER 31, -------------------------------------------------- 1993 1992 ----------------------- ----------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE --------- ---------- --------- ---------- (DOLLARS IN THOUSANDS) Assets: Cash and cash equivalents..................... $ 5,572 $ 5,572 $ 3,882 $ 3,882 Liabilities: Customer deposits............................. (1,672) (1,571) (1,809) (1,701) Refundable customer advances for construction............................... (11,983) (9,858) (10,812) (8,314) Long-term debt: Seagull Energy Corporation: Term Loan................................ -- -- (150,000) (150,000) Revolver and money market facilities..... (147,000) (147,000) (391,000) (391,000) Senior Notes............................. (100,000) (99,500) -- -- Senior Subordinated Notes................ (150,000) (149,250) -- -- Alaska Pipeline Company, including current maturities............................... (64,325) (75,800) (70,754) (75,667) Interest rate swap agreements: In a receivable position...................... -- 1,986 -- -- In a payable position......................... -- (2,709) -- (3,161)
Cash and Cash Equivalents. The carrying amount approximates fair value because of the short maturity of these instruments. Customer Deposits And Refundable Customer Advances For Construction. The fair value is based on discounted cash flow analyses utilizing a discount rate of 6% with monthly payments ratably over the estimated period of deposit or advance refunding. Long-Term Debt. Seagull Energy Corporation. The carrying amount of borrowings outstanding under the Company's Term Loan, Revolver and money market facilities approximates fair value because these instruments bear interest at rates tied to current market rates. The fair value of the Company's Senior and Senior Subordinated Notes is estimated based on quoted market prices for the same issues. Alaska Pipeline Company. The fair value of APC's long-term debt is estimated based on quoted market prices for the same or similar issues. 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. The Company's interest rate swap agreements are off balance sheet 29 30 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) transactions and, accordingly, there are no respective carrying amounts for these transactions included in the accompanying consolidated balance sheets as of December 31, 1993 and 1992. 9. SHAREHOLDERS' EQUITY Seagull Common Stock. In February 1993, the Company sold 5,060,000 shares (10,120,000 shares after the Stock Split) of Seagull Common Stock in an underwritten public offering. Net proceeds from the offering, totaling approximately $163.6 million, were used to repay the Company's then existing term loan in full, with the remaining $13.6 million being used to repay borrowings outstanding under the Revolver. In December 1991, the Company sold 1.5 million shares (3.0 million shares after the Stock Split) of Seagull Common Stock in an underwritten public offering. Net proceeds from the offering, totaling approximately $37 million, were used to repay borrowings outstanding under the Company's then existing revolving credit line. See Note 6 for information concerning restrictions imposed by the Revolver on the Company's future purchases of Common Stock. 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, 1993, 1992 and 1991. Preferred Share Purchase Rights. In 1989, the Company 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 Seagull Common Stock subsequently issued has attached to it one Right, exercisable at $32.75 (adjusted for Stock Split), subject to certain adjustments. Generally, in the event a person or group acquires 20% or more of the outstanding Seagull Common Stock other than pursuant to a cash tender offer for all shares of such Seagull Common Stock (provided that the tender offer increases the acquiring person's or group's ownership to at least 85% of the outstanding Seagull 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 Seagull 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 the Company'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. 10. STOCK OPTION PLANS The Company currently has six stock option plans: the 1981 Stock Option Plan; the 1983 Stock Option Plan; the 1986 Stock Option Plan; the 1990 Stock Option Plan; the 1993 Stock Option Plan and the 1993 Nonemployee Directors' Stock Option Plan. Twenty percent of (i) all options granted through December 31, 1992, (ii) 100,000 options granted in May 1993, and (iii) all options granted under the 1993 Nonemployee Directors' Stock Option Plan become exercisable on a cumulative basis in each of the first five years and expire 10 years after the date of grant. Beginning in 1993, 40% of all other options granted become exercisable after three years and 20% become exercisable on a cumulative basis in each of the next three years, and the options expire 10 years after the date of grant. The options are granted at the quoted market value of Seagull Common Stock on the date of grant. Accordingly, no compensation expense is recognized in the Company's results of operations relating to these options. 30 31 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information relating to stock options is summarized as follows (adjusted for Stock Split):
1993 1992 1991 -------------------- -------------------- ------------------- OPTION OPTION OPTION PRICE PRICE PRICE PER PER PER SHARES SHARE SHARES SHARE SHARES SHARE --------- ------ -------- ------ -------- ------ Balance outstanding -- Beginning of year........... 1,862,872 1,366,736 1,513,344 Granted.................. 615,000 $26.38 711,000 $11.94 -- -- Exercised................ (304,952) $ 6.31- (100,664) $ 3.25- (120,608) $ 5.56- $14.88 $14.88 $10.81 Cancelled................ (13,028) (114,200) (26,000) --------- --------- --------- Balance outstanding -- End of year................. 2,159,892 $ 6.31- 1,862,872 $ 6.31- 1,366,736 $ 3.25- $26.38 $14.88 $14.88 --------- --------- --------- Options exercisable -- End of year................. 763,892 764,736 726,168 --------- --------- --------- --------- --------- --------- Options available for grant -- End of year................. 1,430,060 242,104 858,904 --------- --------- --------- --------- --------- ---------
11. EMPLOYEE BENEFIT PLANS Retirement Plans. Effective January 1, 1986, the Company adopted an unfunded retirement plan which provides for supplemental benefits to certain officers and key employees. As of December 31, 1993, only one person was designated to participate in such plan. Total expenses of the plan were approximately $0.2 million for 1993 and 1992 and $0.3 million for 1991. The retirement plan's costs are included in general and administrative expenses. ENSTAR Alaska has two defined benefit retirement plans which cover salaried employees (the "Salaried Retirement Plan") and operating employees (the "Operating Unit Plan"). Clerical unit personnel, which constitute approximately 25% of total ENSTAR Alaska personnel, are not covered under a retirement plan. 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 costs. 31 32 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the ENSTAR Alaska plans' funded status and the amounts recognized in the consolidated financial statements at December 31, 1993 and 1992:
1993 1992 ---------------------- ---------------------- SALARIED OPERATING SALARIED OPERATING EMPLOYEES EMPLOYEES EMPLOYEES EMPLOYEES --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Actuarial present value of benefit obligations: Vested benefit obligation......................... $(4,756) $(2,753) $(4,196) $(2,449) -------- -------- -------- -------- -------- -------- -------- -------- Accumulated benefit obligation.................... $(4,866) $(2,773) $(4,285) $(2,465) -------- -------- -------- -------- -------- -------- -------- -------- Projected benefit obligation for services rendered to date........................................... $(5,921) $(2,773) $(5,778) $(2,465) Plan assets at fair value, primarily listed stocks and corporate and U.S. bonds...................... 4,094 2,790 3,721 2,467 -------- -------- -------- -------- Plan assets in excess of (less than) projected benefit obligation................................ (1,827) 17 (2,057) 2 Unrecognized prior service cost..................... 90 19 245 21 Unrecognized net loss............................... 417 632 618 585 Unrecognized net obligation (asset) arising out of the initial application of SFAS No. 87, amortized over 15 years (salaried) and 18 years (operating)....................................... 748 (101) 842 (111) Additional minimum liability........................ (200) -- (212) -- -------- -------- -------- -------- Prepaid (accrued) pension cost...................... $ (772) $ 567 $ (564) $ 497 -------- -------- -------- -------- -------- -------- -------- -------- Net pension cost includes the following components: Service cost -- benefits earned during the period......................................... $ 232 $ 110 $ 195 $ 84 Interest cost on projected benefit obligation..... 413 190 386 162 Actual return on plan assets...................... (333) (224) (185) (197) Net amortization and deferral....................... 147 40 22 18 -------- -------- -------- -------- Net periodic pension cost........................... $ 459 $ 116 $ 418 $ 67 -------- -------- -------- -------- -------- -------- -------- --------
The assumed weighted average discount rate for both ENSTAR Alaska plans was 7.25% for 1993 and 1992, and the rate of increase in future compensation for the Salaried Retirement Plan used in determining the projected benefit obligation was 5% and 5.5% for 1993 and 1992, respectively. The expected long-term rate of return on plan assets for both ENSTAR Alaska plans was 8%. Profit Sharing Plans. ENSTAR Alaska has 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 $0.3 million for each of the years 1993, 1992 and 1991, and is included in operations and maintenance costs. Thrift Plans. The Seagull Thrift Plan and the ENSTAR Natural Gas Company Thrift Plan (collectively, the "Thrift Plans") are qualified employee savings plans in accordance with the provisions of Section 401(k) of the Internal Revenue Code of 1986. Company contributions to the Thrift Plans were approximately $1.3 million, $0.9 million and $0.8 million for the years 1993, 1992 and 1991, respectively. The Thrift Plans' costs are included in operations and maintenance costs and general and administrative expenses. 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% per annum to be repaid in 12 equal annual installments of principal and interest. The ESOP used the borrowed funds and the 1989 contributions 32 33 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) from the Company to purchase 948,150 shares (adjusted for Stock Split) of Seagull Common Stock at $8.438 per share (adjusted for Stock Split) from the Company's treasury. The purchase price was based upon the closing price of the Seagull 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 the Company. Company contributions of approximately $0.5 million in 1993 and $0.4 million in 1992 and 1991 are included in operations and maintenance costs and general and administrative expenses. Postretirement Benefits Other Than Pensions. 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. Prior to January 1, 1992, ENSTAR Alaska accounted for these obligations on a "pay-as-you-go" basis. Effective January 1, 1992, the Company adopted SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This SFAS changes the accounting treatment for such benefits from a pay-as-you-go basis to a method where the expected costs for these benefits are accrued during the years the plan participants render service. The Company recognized the cumulative effect of this change in accounting principle in the line item entitled "Cumulative Effect of Changes in Accounting Principles" in the accompanying consolidated statement of earnings for the year ended December 31, 1992. Accordingly, periods prior to January 1, 1992 were not restated to reflect this change. The cumulative effect of this accounting change as of January 1, 1992, resulted in a reduction in earnings of $0.7 million, (after income taxes of $0.4 million), or $0.03 per share. The effect of this change on earnings before the cumulative effect for the year ended December 31, 1992, and the pro forma effect of retroactive application of this accounting change on earnings for the year ended December 31, 1991 were not material. 12. INTEREST INCOME AND OTHER Interest income and other includes the following:
YEAR ENDED DECEMBER 31, ---------------------------- 1993 1992 1991 ------ ------ ------ (DOLLARS IN THOUSANDS) Interest income.................................................. $ 454 $ 413 $ 493 Seismic Litigation Settlement.................................... -- 4,606 -- Gain on sales of property, plant and equipment................... 4,175 177 46 Other............................................................ 1,079 (491) 887 ------ ------ ------ $5,708 $4,705 $1,426 ------ ------ ------ ------ ------ ------
Seismic Litigation Settlement. Interest income and other for the year ended December 31, 1992 includes $4.6 million relating to the Seismic Litigation Settlement resulting from a claim made by the Company that certain of the seismic data acquired by it in connection with its 1988 acquisition of Houston Oil & Minerals Corporation ("HO&M") was actually delivered to other purchasers. In accordance with the settlement agreement, the Company received a cash payment in July 1992 of $2.6 million and will receive up to $5 million in pipeline business accommodations through December 31, 1995. If less than $3 million of business accommodations are realized, the Company will receive a cash payment in early 1996 equal to the difference between $3 million and the sum of the business accommodations realized. The $4.6 million in 1992 income includes the $2.6 million cash payment plus the present value of the $3 million guaranteed minimum payment for business accommodations less certain expenses. Gain on Sales of Property, Plant and Equipment. Interest income and other for the year ended December 31, 1993 includes a pre-tax gain of approximately $3.8 million relating to sales of non-strategic oil 33 34 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and gas producing properties. Net proceeds from the sales totaled approximately $13.0 million, resulting in an after-tax gain of $2.8 million, or $0.08 per share. The parcels sold had proven reserves estimated at approximately 19 billion cubic feet of natural gas equivalents. 13. INCOME TAXES Total income tax expense for the years ended December 31, 1993 and 1992 was allocated as follows:
1993 1992 ------ ------- (DOLLARS IN THOUSANDS) Income tax provision before cumulative effect of changes in accounting principles.......................................................... $6,080 $ 2,500 Adjustments for certain changes in accounting principles.............. -- (3,473) Additional paid-in capital for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes.... (1,966) (214) ------ ------- $4,114 $(1,187) ------ ------- ------ -------
The provision for income taxes for each of the years ended December 31, 1993, 1992 and 1991 was as follows:
1993 1992 1991 ------ ------ ----- (DOLLARS IN THOUSANDS) Current: Federal......................................................... $3,667 $ 131 $ 285 State........................................................... 1,363 64 (523) ------ ------ ----- Total current.............................................. 5,030 195 (238) ------ ------ ----- Deferred: Federal......................................................... 1,128 (212) (485) State........................................................... (78) 2,517 923 ------ ------ ----- Total deferred............................................. 1,050 2,305 438 ------ ------ ----- Income tax provision before cumulative effect of changes in accounting principles........................................... $6,080 $2,500 $ 200 ------ ------ ----- ------ ------ -----
The provision for income taxes before cumulative effect of changes in accounting principles for the years ended December 31, 1993 and 1992 is not comparable to 1991 due to the Company's adoption of SFAS No. 109, Accounting for Income Taxes, effective January 1, 1992. The Company recognized the cumulative effect of this change in accounting principle in the line item entitled "Cumulative Effect of Changes in Accounting Principles" in the accompanying consolidated statement of earnings for the year ended December 31, 1992. Accordingly, periods prior to January 1, 1992 were not restated to reflect this change. The cumulative effect of this accounting change as of January 1, 1992 resulted in an increase in earnings of approximately $3.0 million, or $0.12 per share. The effect of this change on earnings before income taxes for the year ended December 31, 1992 was not material. 34 35 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision for income taxes before cumulative effect of changes in accounting principles for each of the years ended December 31, 1993, 1992 and 1991 was different than the amount computed using the federal statutory rate (35% for 1993, 34% for 1992 and 1991) for the following reasons:
1993 1992 1991 ------- ------- ------- (DOLLARS IN THOUSANDS) Amount computed using the statutory rate...................... $11,647 $ 2,351 $ 1,804 Increase (Reduction) in taxes resulting from: Utilization of Internal Revenue Code Section 29 (Tight Sands) credits........................................... (4,773) -- -- Excess of tax basis over book basis of acquired assets...... -- -- (2,093) State income taxes, net..................................... 835 1,703 264 Increase (Decrease) in deferred tax asset valuation allowance................................................ (859) 1,119 -- Adjustments to beginning-of-the-year tax bases per the 1992 and 1991 tax returns..................................... (657) (1,828) -- Increase in the beginning-of-the-year balance of the deferred tax liabilities due to the increase in the corporate federal income tax rate........................ 960 -- -- Other....................................................... (1,073) (845) 225 ------- ------- ------- Income tax provision before cumulative effect of changes in accounting principles....................................... $ 6,080 $ 2,500 $ 200 ------- ------- ------- ------- ------- -------
The significant components of deferred income tax expense attributable to income from continuing operations for the years ended December 31, 1993 and 1992 are as follows:
1993 1992 ------ ------ (DOLLARS IN THOUSANDS) Deferred tax expense (exclusive of the effects of other components listed below)........................................................ $ 949 $1,186 Increase (Decrease) in deferred tax asset valuation allowance.......... (859) 1,119 Increase in the beginning-of-the-year balance of the deferred tax liabilities due to the increase in the corporate federal income tax rate................................................................. 960 -- ------ ------ $1,050 $2,305 ------ ------ ------ ------
As discussed in Note 1, under SFAS No. 109 deferred income taxes have been provided for all temporary differences between the carrying amounts of assets and liabilities for financial accounting and tax purposes. In 1991, prior to the adoption of SFAS No. 109, deferred income taxes were provided based on timing differences in certain items of income and expense recognized for income tax purposes in periods different from the periods for financial accounting purposes. 35 36 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 1993 and 1992 were as follows:
1993 1992 -------- -------- (DOLLARS IN THOUSANDS) Deferred tax liabilities: Property, plant and equipment, due to differences in depreciation, depletion and amortization........................................ $ 45,296 $ 38,619 Investments in partnership, due to difference in depreciation........ 606 1,307 Other................................................................ 509 546 -------- -------- Deferred tax liabilities............................................... 46,411 40,472 -------- -------- Deferred tax assets: Minimum tax credit carryforwards..................................... (12,221) (9,065) Investment tax credit carryforwards.................................. (2,771) (3,334) Deferred compensation/retirement related items accrued for financial reporting purposes...................................... (3,269) (2,263) Contingent consideration related to acquisitions/dispositions........ (604) (1,975) Other................................................................ (3,134) (1,332) -------- -------- Deferred tax assets.................................................... (21,999) (17,969) Less -- valuation allowance............................................ 1,943 2,802 -------- -------- Net deferred tax assets................................................ (20,056) (15,167) -------- -------- Net deferred tax liabilities........................................... $ 26,355 $ 25,305 -------- -------- -------- --------
For federal income tax purposes, as of December 31, 1993, the Company has unused investment tax credits of approximately $2.8 million which will expire in the years 1998 through 2000, and unused minimum tax credits of approximately $12.2 million which are available over an indefinite period. During 1991, the tax effects of timing differences were as follows:
YEAR ENDED DECEMBER 31, 1991 ------------ (DOLLARS IN THOUSANDS) Net operating loss offsetting deferred taxes for financial accounting purposes...................................................................... $(7,778) Depreciation, depletion and partnership earnings................................ (1,890) Gas and oil property costs capitalized for financial accounting purposes........ 12,180 Minimum tax credit carryforward for tax purposes................................ (1,462) Other........................................................................... (612) ------- Total deferred tax provision.................................................... $ 438 ------- -------
36 37 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. BUSINESS SEGMENTS Information on the Company's operations by business segment is as follows for the year ended December 31:
1993 1992 1991 ---------- ---------- -------- (DOLLARS IN THOUSANDS) REVENUES(*): Exploration and production.............................. $ 227,437 $ 91,991 $ 81,099 Pipeline and marketing.................................. 42,484 37,240 37,823 Alaska transmission and distribution.................... 107,244 109,598 129,615 ---------- ---------- -------- $ 377,165 $ 238,829 $248,537 ---------- ---------- -------- ---------- ---------- -------- OPERATING PROFIT: Exploration and production.............................. $ 42,969 $ (1,613) $ 1,275 Pipeline and marketing.................................. 14,065 9,057 7,884 Alaska transmission and distribution.................... 18,955 22,439 21,024 ---------- ---------- -------- 75,989 29,883 30,183 ---------- ---------- -------- General and administrative expense...................... (11,666) (10,099) (8,427) Interest expense........................................ (36,753) (17,574) (17,875) Interest income and other............................... 5,708 4,705 1,426 ---------- ---------- -------- Earnings before income taxes.............................. $ 33,278 $ 6,915 $ 5,307 ---------- ---------- -------- ---------- ---------- -------- OPERATIONS AND MAINTENANCE EXPENSE: Exploration and production.............................. $ 63,651 $ 30,844 $ 27,951 Pipeline and marketing.................................. 20,266 21,103 20,748 Alaska transmission and distribution.................... 20,880 19,976 19,678 ---------- ---------- -------- $ 104,797 $ 71,923 $ 68,377 ---------- ---------- -------- ---------- ---------- -------- DEPRECIATION, DEPLETION AND AMORTIZATION: Exploration and production.............................. $ 103,552 $ 52,855 $ 42,646 Pipeline and marketing.................................. 5,493 3,192 3,278 Alaska transmission and distribution.................... 7,511 7,184 6,978 ---------- ---------- -------- $ 116,556 $ 63,231 $ 52,902 ---------- ---------- -------- ---------- ---------- -------- IDENTIFIABLE ASSETS: Exploration and production.............................. $ 816,812 $ 831,222 $371,208 Pipeline and marketing.................................. 70,675 65,378 49,611 Alaska transmission and distribution.................... 185,701 186,519 189,059 Corporate............................................... 45,063 19,845 8,674 ---------- ---------- -------- $1,118,251 $1,102,964 $618,552 ---------- ---------- -------- ---------- ---------- -------- CAPITAL EXPENDITURES: Exploration and production.............................. $ 97,818 $ 32,115 $ 58,459 Pipeline and marketing.................................. 2,115 1,622 634 Alaska transmission and distribution.................... 10,094 9,024 10,492 Corporate............................................... 2,015 890 2,124 ---------- ---------- -------- $ 112,042 $ 43,651 $ 71,709 ---------- ---------- -------- ---------- ---------- -------- ACQUISITIONS, NET OF CASH ACQUIRED: Exploration and production.............................. $ 29,470 $ 391,531 $201,767 Pipeline and marketing.................................. -- 10,357 -- ---------- ---------- -------- $ 29,470 $ 401,888 $201,767 ---------- ---------- -------- ---------- ---------- --------
- --------------- (*) Intersegment revenues are recorded at market prices. 37 38 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data is as follows:
EARNINGS (LOSS) REVENUES OPERATING PROFIT NET EARNINGS (LOSS) PER SHARE(1) --------------------- ------------------- -------------------- ----------------- 1993 1992 1993 1992 1993 1992 1993 1992 -------- -------- ------- ------- ------- ------ ----- ----- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) March 31,................ $103,192 $ 67,533 $19,421 $ 6,854 $ 3,853 $2,942(2) $0.12 $0.12(2) June 30,................. 86,973 49,216 15,201 4,902 3,624 2,603(3) 0.10 0.10(3) September 30,............ 81,790 48,898 17,077 2,547 7,273(5) (2,310) 0.20(5) (0.09) December 31,............. 105,210 73,182 24,290 15,580 12,448 3,453(4) 0.34 0.13(4) -------- -------- ------- ------- ------- ------ ----- ----- Total.................... $377,165 $238,829 $75,989 $29,883 $27,198 $6,688 $0.76 $0.26 -------- -------- ------- ------- ------- ------ ----- ----- -------- -------- ------- ------- ------- ------ ----- -----
- --------------- (1) Adjusted for the two-for-one stock split of the Seagull Common Stock effected June 4, 1993. (See Notes 1 and 9). (2) Includes the cumulative effect of two changes in accounting principles in the first quarter of 1992 representing an increase in earnings of approximately $2.3 million, or $0.09 per share. (See Notes 1, 11 and 13). (3) Includes an after-tax gain in the second quarter of 1992 of approximately $2.9 million, or $0.12 per share, relating to the Seismic Litigation Settlement. (See Note 12). (4) Includes two charges in the fourth quarter of 1992 resulting from the expensing of $2.3 million in unamortized loan acquisition costs relating to the repayment of the Company's then existing revolving credit line and $1.2 million in costs related to a potential acquisition which was not consummated. The effect of these charges on net earnings was a reduction of approximately $1.5 million and $0.8 million, respectively, or $0.06 and $0.03 per share, respectively. (5) Includes an after-tax gain in the third quarter of 1993 of approximately $2.7 million, or $0.08 per share, relating to sales of non-strategic oil and gas producing properties. (See Note 12). 16. 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 are $2.8 million and $2.4 million in 1994 and 1995, respectively, range between $1.6 million and $2.4 million in each of the years 1996-1998, and total $10.4 million for all subsequent years. Total rental expense under operating leases for 1993, 1992 and 1991 was approximately $1.7 million, $1.8 million and $1.7 million, respectively. Concentrations of Credit Risk. The Company operates in all phases of the natural gas industry 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. While certain of these customers are affected by periodic downturns in the economy in general or in their specific segment of the natural gas 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. 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 the effect on its financial condition and results of operations, if any, will not be material. 38 39 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. SUBSEQUENT EVENTS Seagull Canada Acquisition. In January 1994, an indirect wholly owned subsidiary of the Company acquired all of the outstanding shares of stock of Novalta and an intercompany note (the "Note") from Novalta to its parent, Novacor Petrochemicals Ltd. ("Novacor Petrochemicals") for a purchase price of approximately $203 million in cash, subject to customary postclosing adjustments described below (the "Seagull Canada Acquisition"). The economic effective date of the Seagull Canada Acquisition was December 31, 1993 (the "Effective Date"). The purchase price was adjusted for, among other things, working capital and capital expenditures for 1993 in excess of a specified threshold pursuant to the provisions of the Sale Agreement, dated November 19, 1993, between Seagull and Novacor Petrochemicals. Effective as of the January 1994 Closing Date, Novalta was amalgamated with Seagull Canada, the indirect subsidiary of the Company that acquired Novalta. As a result of the amalgamation, the Note was extinguished. The acquisition was accounted for as a purchase. Seagull Canada's assets (the "Seagull Canada Properties") consist primarily of natural gas and oil reserves and developed and undeveloped lease acreage concentrated principally in a small number of fields located in Alberta, Canada. According to reserve estimates prepared as of December 31, 1993 by an independent petroleum engineering firm, the Seagull Canada Properties had proved reserves totaling 257.4 Bcf of natural gas and 2.8 MMbbl of oil, condensate and natural gas liquids. Approximately 80 percent of these reserves and 75 percent of Seagull Canada's total producing wells are concentrated in 16 of 95 total fields. As of December 31, 1993, the Seagull Canada Properties consisted of lease acreage holdings including approximately 200,000 net developed acres and approximately 250,000 net undeveloped acres. In connection with the Seagull Canada Acquisition, the Company entered into the Canadian Credit Agreement (see Note 6). The following table presents the unaudited pro forma results of the combined operations of the Company and Novalta for the year ended December 31, 1993 as though the acquisition of Novalta had occurred on January 1, 1993, financed primarily with borrowings under the Canadian Credit Agreement as well as borrowings under the Revolver (see Note 6). The results presented give effect to depreciation, depletion and amortization of assets recognized in recording the purchase, interest on debt incurred to effect the purchase and the related income tax effects of these items. The unaudited pro forma information presented does not purport to be indicative of actual results if the combination had been in effect on the date or for the period indicated, or of future results.
YEAR ENDED DECEMBER 31, 1993 ------------------------ PRO FORMA ACTUAL (UNAUDITED) -------- ----------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Revenues............................................................. $377,165 $409,523 Net earnings......................................................... $ 27,198 $ 22,162 Earnings per share................................................... $ 0.76 $ 0.62
39 40 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the pro forma consolidated total assets and pro forma capitalization of the Company as of December 31, 1993 as though the acquisition of Novalta had occurred on December 31, 1993, financed primarily with borrowings under the Canadian Credit Agreement as well as borrowings under the Revolver (see Note 6).
DECEMBER 31, 1993 ------------------------- PRO FORMA ACTUAL (UNAUDITED) ---------- --------- (DOLLARS IN THOUSANDS) Total assets.................................................... $1,118,251 $1,342,654 ---------- ---------- ---------- ---------- Long-term portion of debt....................................... $ 459,787 $ 653,093 Shareholders' equity............................................ 439,379 439,379 ---------- ---------- Total capitalization............................................ $ 899,166 $1,092,472 ---------- ---------- ---------- ---------- Long-term portion of debt to total capitalization............... 51.1% 59.8% ---------- ---------- ---------- ----------
ENSTAR Alaska Stock Proposal. In March 1994, the Board of Directors approved, subject to shareholder approval, a plan (the "ENSTAR Alaska Stock Proposal") to create and issue a new class of common stock of the Company intended to reflect separately the performance of ENSTAR Alaska (the "ENSTAR Alaska Stock"). As part of the ENSTAR Alaska Stock Proposal, and following the issuance of the ENSTAR Alaska Stock, currently outstanding Seagull Common Stock will reflect separately the performance of the Company's exploration and production and pipeline and marketing segments. In addition, certain terms of the Seagull Common Stock will be amended to allow for the creation and issuance of the ENSTAR Alaska Stock. The Company currently expects that, shortly after shareholder approval of the ENSTAR Alaska Stock Proposal and subject to prevailing market and other conditions, it will make a public offering (the "ENSTAR Alaska Stock Offering") for cash of shares of ENSTAR Alaska Stock. Net proceeds from the ENSTAR Alaska Stock Offering would be used to repay amounts borrowed under the Revolver, none of which is attributable to ENSTAR Alaska. The ENSTAR Alaska Stock Proposal will be submitted to shareholders at the Company's Annual Meeting of Shareholders in June 1994. 40 41 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, 1993 and 1992, 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, 1993. 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, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles. As discussed in Notes 11 and 13 to the consolidated financial statements, respectively, the Company adopted the provisions of the Financial Accounting Standards Board Statements of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and No. 109, Accounting for Income Taxes, in 1992. KPMG PEAT MARWICK Houston, Texas January 31, 1994, except as to the last three paragraphs of Note 17, Subsequent Events, which are as of March 11, 1994. 41 -----END PRIVACY-ENHANCED MESSAGE-----