-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NSzexcec1xxniZsOJ18yCVP+s7m61+CkZ0/paCyKuAIRD2/iX4lHldcVHWYkXO4m NxdtLk1f0UMd0N72fyQ9Fw== 0000950129-96-000520.txt : 19960402 0000950129-96-000520.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950129-96-000520 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEAGULL ENERGY CORP CENTRAL INDEX KEY: 0000320321 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 741764876 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08094 FILM NUMBER: 96542296 BUSINESS ADDRESS: STREET 1: 1001 FANNIN STE 1700 STREET 2: 1001 FIRST CITY TOWER CITY: HOUSTON STATE: TX ZIP: 77002-6714 BUSINESS PHONE: 7139514700 MAIL ADDRESS: STREET 1: 1001 FANNIN, SUITE 1700 STREET 2: 1001 FIRST CITY TOWER CITY: HOUSTON STATE: TX ZIP: 77002-6714 FORMER COMPANY: FORMER CONFORMED NAME: SEAGULL PIPELINE CORP DATE OF NAME CHANGE: 19830815 10-K405 1 SEAGULL ENERGY CORPORATION - FORM 10-K - 12/31/95 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, 1995 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 77002-6714 HOUSTON, TEXAS (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: (713) 951-4700 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------- Common Stock, par value $.10 per share New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ As of March 20, 1996, 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 $714,592,713. Indicate the number of shares outstanding of each of the registrant's classes of Common Stock, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 20, 1996 ----- ----------------------------- Common Stock, par value $.10 per share 36,354,466
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT PART OF FORM 10-K -------- ----------------- (1) Annual Report to Shareholders for PARTS I and II year ended December 31, 1995 (2) Proxy Statement for Annual Meeting PART III of Shareholders to be held on May 14, 1996
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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) western Oklahoma and the Texas Panhandle; (ii) the Arklatex area in eastern Texas and northern Louisiana and the Arkoma Basin in eastern Oklahoma and western Arkansas; and (iii) western Canada. Seagull's two other business segments are also natural gas related: (i) pipeline and marketing which includes natural gas gathering, gas processing, gas marketing and pipeline engineering, design, construction and operation; and (ii) natural gas transmission and distribution in Alaska. In September 1995, the Company disposed of substantially all of its gas gathering and processing assets. 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 1995 Annual Report to Shareholders and as part of Exhibit 13 attached hereto. Prior to 1994, the Company derived no revenues and had no material assets outside the United States. See discussions below regarding the Company's interests in Canada and in production licenses acquired in United Kingdom waters. Items 1, 3 and 7 of this document include "forward looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in such forward looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Important factors that could cause actual results to differ materially from the Company's expectations are disclosed in conjunction with the forward looking statements included herein ("Cautionary Disclosures"). Subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Disclosures. 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. and Seagull Energy Canada Ltd. ("Seagull Canada"). The Company's other exploration activities outside North America consist of several production licenses, awarded to two exploration groups which include Seagull, in United Kingdom waters. While the Company currently has no producing properties in the United Kingdom waters, two exploratory wells are scheduled to be drilled in 1996. Seagull's ongoing North American exploration program has been concentrated 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 1 3 oil exploration and development activities through internally generated funds 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 1996, the Company expects E&P capital expenditures to total approximately $122 million. Of this amount, about $47 million will be devoted to exploration, primarily in the Gulf of Mexico, $66 million to development and $9 million to leasehold acquisition. By comparison, 1995 capital expenditures for E&P activities totaled $76 million. Management believes that the Company's capital resources will be sufficient to finance current and forecasted operations. Revenues from the sale of gas and liquids production accounted for 62%, 64% and 60% of the Company's consolidated revenues for 1995, 1994 and 1993, 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 1995 decreased from the prior year primarily as a result of voluntary curtailments by Seagull and natural production declines of the reserves. Production of gas and liquids for 1995 averaged 333.8 million cubic feet ("MMcf") per day ("MMcf/d") and 4,268 barrels ("Bbl") per day ("Bbl/d"), respectively, compared to 355.2 MMcf/d and 5,063 Bbl/d, respectively, in 1994. 2 4 Seagull's principal gas and oil producing properties include the following:
Average Net Daily Production for the Year Ended At December 31, 1995 December 31, 1995 --------------------------- ---------------------------- Proved Number of Reserves Natural Gas Liquids Field State Gross Wells (Bcfe) (*) (MMcf) (Bbl) ----- ----- ----------- ---------- ----------- ------- UNITED STATES: Mid-South Region: Arklatex Area: Carthage ................ Texas 239 197 21.1 559 Oak Hill ................ Texas 50 22 4.6 17 Waskom .................. Texas 78 59 18.9 181 Ruston .................. Louisiana 41 43 16.0 147 Sligo ................... Louisiana 49 11 4.1 37 Arkoma Basin: Cecil ................... Arkansas 206 67 19.2 - Aetna ................... Arkansas 107 30 11.2 - Wilburton ............... Oklahoma 60 22 11.7 - Other .................................. 406 86 43.0 363 Mid-Continent Region: Panhandle West ............ Texas 119 49 13.2 8 Panhandle Gray ............ Texas 122 28 0.2 557 Watonga-Chickasha ......... Oklahoma 152 33 13.2 80 Strong City ............... Oklahoma 117 29 12.2 52 Other .................................. 262 62 22.0 336 Offshore Texas ........................... 38 59 32.7 103 Offshore Louisiana ....................... 9 29 25.9 285 Gulf Coast Onshore ....................... 17 12 4.2 451 ---------------------------------------------------------------- 2,072 838 273.4 3,176 CANADA .................................... 769 275 60.4 1,092 ----------------------------------------------------------------- 2,841 1,113 333.8 4,268 =================================================================
(*) 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. For additional information relating to the Company's gas and oil reserves, based substantially upon reports of DeGolyer and MacNaughton (for the years ended December 31, 1995, 1994 and 1993), Netherland, Sewell & Associates, Inc. (for the years ended December 31, 1994 and 1993) and Ryder Scott Company (for the years ended December 31, 1994 and 1993), independent petroleum engineers (collectively the "Engineers"), see Note 7 of the Consolidated Financial Statements included in the Company's 1995 Annual Report to Shareholders and as part of Exhibit 13 attached hereto. The Engineers provided the estimates of "proved developed and undeveloped reserves" and "proved developed reserves" at the beginning and end of each of the three years included in Note 7. Under "Standardized Measure of Discounted Future Net Cash Flows" in Note 7, the Engineers provided all information except "discounted income taxes" and "standardized measure of discounted future net cash flows". All information in Note 7 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 5%. 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 natural gas and liquids products, imports, 3 5 marketing of competitive fuels, proximity and capacity of gas and liquids pipelines and other transportation facilities, demand for storage refills, any oversupply or undersupply of gas and liquids products, the regulatory environment and other regional and political events, none of which can be predicted with certainty. As in the past, the Company expects to continue curtailing a portion of its gas production whenever prices are deemed to be below acceptable levels. 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, ----------------------------------------------------------------------------- 1995 1994 1993 Gross Net Gross Net Gross Net ----------------------------------------------------------------------------- UNITED STATES: Exploratory Drilling: Productive Wells ............ 7 5.17 5 3.23 8 5.19 Dry Holes ................... 9 6.12 10 6.48 19 9.20 Development Drilling: Productive Wells ............ 57 28.47 119 69.34 100 54.62 Dry Holes ................... 4 1.07 11 5.11 22 13.71 CANADA: Exploratory Drilling: Productive Wells ............ 3 1.00 5 1.67 - - Dry Holes ................... 3 3.00 1 0.33 - - Development Drilling: Productive Wells ............ 7 1.90 110 54.95 - - Dry Holes ................... 1 0.50 1 0.50 - - OTHER INTERNATIONAL: Exploratory Drilling: Dry Holes ................... 2 0.40 2 0.53 - -
From January 1, 1996 through March 25, 1996, the Company drilled 14 gross (5.97 net) successful development wells in 15 attempts (6.97 net). As of late March, the Company had seven gross (3.26 net) exploratory wells and 18 gross (9.79 net) development wells in progress or being evaluated. As of the beginning of 1996, the Company had an inventory of approximately 100 exploratory prospects. 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 --------------------------------- 1995 1994 1993 --------------------------------- UNITED STATES: Net Production: Gas (MMcf) ................................................................... 99,772 109,900 102,025 Oil and condensate (Mbbl)(1) ................................................. 908 1,204 1,412 Natural gas liquids (Mbbl) ................................................... 251 217 282 Combined (MMcfe)(2) .......................................................... 106,727 118,427 112,188 Average sales price (3): Gas (per Mcf) ................................................................ $ 1.64 $ 1.88 $ 1.99 Oil and condensate (per Bbl) ................................................. $17.07 $15.98 $16.72 Natural gas liquids (per Bbl) ................................................ $ 9.48 $ 9.45 $11.10 Combined (per Mcfe) (2) ...................................................... $ 1.69 $ 1.90 $ 2.03 Average lifting costs of gas and liquids (per Mcfe) (4) ....................... $ 0.45 $ 0.44 $ 0.47 CANADA(5): Net Production: Gas (MMcf) .................................................................. 22,057 19,755 - Oil and condensate (Mbbl) ................................................... 290 324 - Natural gas liquids (Mbbl) .................................................. 109 103 - Combined (MMcfe) ............................................................ 24,449 22,317 - Average sales price : Gas (per Mcf) ............................................................... $ 1.02 $ 1.55 - Oil and condensate (per Bbl) ................................................ $14.79 $12.67 - Natural gas liquids (per Bbl) ............................................... $ 8.29 $ 8.12 - Combined (per Mcfe) ......................................................... $ 1.18 $ 1.66 - Average lifting costs of gas and liquids (per Mcfe) ........................... $ 0.45 $ 0.51 -
(1) Thousands of barrels ("Mbbl"). (2) The equivalent of one thousand cubic feet ("Mcfe") and one million cubic feet ("MMcfe") of natural gas. (3) Average sales prices are before deduction of production, severance, and other taxes. (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. (5) The Canadian properties were acquired on January 4, 1994 in connection with the purchase of Seagull Canada. 5 7 The following table sets forth information regarding the number of productive wells in which the Company held a working interest at December 31, 1995. 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 Net ------------------------ --------------------------- United United States Canada States Canada -------- -------- ----------- --------- Gas (*) 1,864 760 927.17 402.32 Oil 208 9 151.70 3.38 -------- -------- ----------- --------- Total 2,072 769 1,078.87 405.70 ======== ======== =========== =========
(*) Includes 333 gross (131.19 net) and 441 gross (282.20 net) gas wells with multiple completions for the United States and Canada, respectively. For additional information relating to gas and oil producing activities, see Note 7 of the Consolidated Financial Statements included in the Company's 1995 Annual Report to Shareholders and as part of Exhibit 13 attached hereto. DEVELOPED AND UNDEVELOPED GAS AND OIL ACREAGE As of December 31, 1995, the Company owned working interests in the following developed and undeveloped gas and oil acreage:
Developed Undeveloped ----------------------------- ---------------------------- Gross Net (*) Gross Net (*) ----------- -------------- ----------- ------------ UNITED STATES: Onshore: Oklahoma .......................... 270,965 129,751 58,236 34,522 Arkansas .......................... 214,401 71,997 10,874 5,662 Texas ............................. 161,562 87,552 16,745 6,080 Louisiana ......................... 46,232 22,884 6,121 1,850 Other ............................. 980 533 24,728 16,396 Bays and State Waters ............... 1,054 795 2,151 1,788 Federal Offshore: Texas ............................. 127,865 63,424 227,239 192,852 Louisiana ......................... 45,600 23,180 118,844 85,989 CANADA ................................ 392,596 202,988 437,361 271,833 UNITED KINGDOM ........................ - - 589,813 116,917 ----------- -------------- ----------- ------------ 1,261,255 603,104 1,492,112 733,889 ============ ============== =========== ===========
(*) 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, 1995, the Company owned mineral and/or royalty interests in 225,347 gross (32,129 net) developed and 327,302 gross (67,361 net) undeveloped gas and oil acres. 6 8 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 utilizes a variety of commodity derivative contracts to achieve more predictable cash flows and to reduce its exposure to fluctuations in gas and oil prices for portions of its gas and oil production . As of March 26, 1996, the Company had entered into commodity derivative contracts for as much as 150,000 Mcf of natural gas per day. The Company's natural gas production is equal to approximately 360,000 Mcf per day. On a Mcfe basis, the Company's production as of March 26, 1996 was approximately 40% hedged. The terms of the Company's derivative contracts range from one to seven months. Of the total volume of production that has been hedged, over 80% has been hedged in a manner which only limits the Company's exposure to price decreases while allowing it to benefit from expected price increases. Seagull expects to continue to leave the majority of its own E&P production either unhedged or protected only from price decreases so that it can benefit from expected gas price strengthening. The Company accounts for its commodity derivative contracts as hedging activities and, accordingly, gains or losses are included in revenues when the commodities are produced. See Note 11 to the Company's Consolidated Financial Statements. The Company's production is sold in the spot market, as well as to local distribution companies, other marketing firms and end users under longer term contracts, typically with six-month to one-year terms. Most of the Company's natural gas is transported through gas gathering systems and gas pipelines which are not owned by the Company. Transportation space on such gathering systems and pipelines is occasionally limited and at times unavailable due to repairs or improvements being made to such facilities or due to such space being utilized by other gas shippers with priority transportation agreements. While the Company has not experienced any inability to market its natural gas, if transportation space is restricted or is unavailable, the Company's cash flow from the affected properties could be adversely affected. REGULATION The availability of a ready market for natural gas and oil production depends upon numerous regulatory factors beyond the Company's control. These factors include regulation of natural gas and oil production, federal and state regulations governing environmental quality and pollution control and state limits on allowable rates of production by a well or proration unit. State and federal regulations generally are intended to prevent waste of natural gas and oil, protect rights to produce natural gas and oil between owners in a common reservoir, control the amount of natural gas and oil produced by assigning allowable rates of production and control contamination of the environment. Regulation of Natural Gas and Oil Exploration and Production. Exploration and production operations of the Company are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring permits for the drilling of wells, maintaining bonding requirements in order to drill or operate 7 9 wells, and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilling and the plugging and abandonment of wells. The Company's operations are also subject to various conservation laws and regulations. These include the regulation of the size of drilling and spacing units or proration units and the density of wells which may be drilled and unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In addition, state conservation laws establish maximum rates of production requirements regarding the ratability of production. With respect to the establishment of maximum production rates from natural gas wells, certain producing states, in an attempt to limit production to market demand, have recently adopted (Texas and Oklahoma) or are considering adopting (Louisiana) measures that alter the methods previously used to prorate gas production from wells located in these states. For example, the new Texas rules provide for reliance on information filed monthly by well operators, in addition to historical production data for the well during comparable past periods, to arrive at an allowable. This is in contrast to historic reliance on forecasts of upcoming takes filed monthly by purchasers of natural gas in formulating allowables, a procedure which resulted in substantial excess allowables over volumes actually produced. The Company cannot predict whether other states will adopt similar or other procedures for prorating gas production. The effect of these regulations is to limit the amounts of natural gas and oil the Company's operator or the Company can produce from its wells, and to limit the number of wells or the locations at which the Company can drill. Legislation affecting the oil and gas industry also is under constant review for amendment or expansion. Generally, state-established allowables have been influenced by overall natural gas market supply and demand in the United States, as well as the specific "nominations" for natural gas from the parties who produce or purchase gas from the field and other factors deemed relevant by the agency. The Company cannot predict whether further changes will be made in how these states set allowables or what impact, if any, such further changes might have. Natural Gas Marketing and Transportation. Federal legislation and regulatory controls in the United States have historically affected the price of the natural gas produced by the Company and the manner in which such production is marketed. The transportation and sale for resale of natural gas in interstate commerce are regulated pursuant to the Natural Gas Act of 1938 (the "NGA"), the Natural Gas Policy Act of 1978 (the "NGPA") and the Federal Energy Regulatory Commission (the "FERC"). Although maximum selling prices of natural gas were formerly regulated, on July 26, 1989, the Natural Gas Wellhead Decontrol Act of 1989 ("Decontrol Act") was enacted, which terminated wellhead price controls on all domestic natural gas on January 1, 1993, amended the NGPA to remove completely by January 1, 1993 price and nonprice controls for all "first sales" of natural gas, which will include all sales by the Company of its own production; consequently, sales of the Company's natural gas currently may be made at market prices, subject to applicable contract provisions. The FERC's jurisdiction over natural gas transportation was unaffected by the Decontrol Act. The FERC regulates interstate natural gas transportation rates and service conditions, which affect the marketing of natural gas produced by the Company, as well as the revenues received by the Company for sales of such natural gas. Since the latter part of 1985, the FERC has endeavored to make interstate natural gas transportation more accessible to gas buyers and sellers on an open and nondiscriminatory basis. The FERC's efforts have significantly altered the marketing and pricing of natural gas. Commencing in April 1992, the FERC issued Order Nos. 636, 636-A and 636-B (collectively, "Order No. 636"), which, among other things, require interstate pipelines to "restructure" to provide transportation separate or "unbundled" from the pipelines' sales of gas. Also, Order No. 636 requires pipelines to provide open-access transportation on a basis that is equal for all gas supplies. Order No. 636 has been implemented through negotiated settlements in individual pipeline service restructuring proceedings. In many instances, the result of the Order No. 636 and related initiatives has been to substantially reduce or bring to an end the interstate pipelines' traditional role as wholesalers of natural gas in favor of providing only storage and transportation services. The FERC has issued final orders in virtually all 8 10 pipeline restructuring proceedings, and commenced a series of reviews to determine whether refinements are required regarding individual pipeline implementations of Order No. 636. Although Order No. 636 does not regulate natural gas producers such as the Company, the FERC has stated that Order No. 636 is intended to foster increased competition within all phases of the natural gas industry. It is unclear what impact, if any, increased competition within the natural gas industry under Order No. 636 will have on the Company and its natural gas marketing efforts. In addition, numerous petitions seeking judicial review of Order No. 636 are pending. Numerous parties have also sought review of FERC orders implementing Order No. 636 on individual pipeline systems. Order No. 636 could be reversed in whole or in part as a result. Although Order No. 636, assuming it is upheld in its entirety in its current form, would provide the Company with additional market access and more fairly applied transportation service rates, terms and conditions, it could also subject the Company to more restrictive pipeline imbalance tolerances and greater penalties for violation of those tolerances. The Company does not believe, however, that it will be affected by any action taken with respect to Order No. 636 materially different than other natural gas producers and marketers with which it competes. Additional proposals and proceedings that might affect the natural gas industry are considered from time to time by Congress, the FERC, state regulatory bodies and the courts. The Company cannot predict when or if any such proposals might become effective, or their effect, if any, on the Company's operations. The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue indefinitely into the future. State regulation of gathering facilities generally includes various safety, environmental, and in some circumstances, nondiscriminatory take requirements, but does not generally entail rate regulation. Natural gas gathering has received greater regulatory scrutiny at both the state and federal levels as the pipeline restructuring under Order No. 636 continues. For example, Oklahoma enacted a prohibition against discriminatory gathering rates, and certain Texas regulatory officials have expressed interest in evaluating similar rules in Texas. Offshore Leasing. Certain operations the Company conducts are on federal oil and gas leases, which the Minerals Management Service ("MMS") administers. The MMS issues such leases through competitive bidding. These leases contain relative standardized terms and require compliance with detailed MMS regulations and orders pursuant to the Outer Continental Shelf Lands Act ("OCSLA") (which are subject to change by the MMS). For offshore operations, lessees must obtain MMS approval for exploration plans and development and production plans prior to the commencement of such operations. In addition to permits required from other agencies (such as the Coast Guard, the Army Corps of Engineers and the Environmental Protection Agency), lessees must obtain a permit from the MMS prior to the commencement of drilling. The MMS has promulgated regulations requiring offshore production facilities located on the Outer Continental Shelf ("OCS") to meet stringent engineering and construction specifications, and has recently proposed additional safety-related regulations concerning the design and operating procedures for OCS production platforms and pipelines. The MMS also has issued regulations to prohibit the flaring of liquid hydrocarbons and oil without prior authorization. Similarly, the MMS has promulgated other regulations governing the plugging and abandonment of wells located offshore and the removal of all production facilities. To cover the various obligations of lessees on the OCS, the MMS generally requires that lessees post substantial bonds or other acceptable assurances that such obligations will be met. In addition, the MMS is conducting an inquiry into certain contract settlement agreements from which producers on MMS leases have received settlement proceeds that are royalty bearing and the extent to which producers have paid the appropriate royalties on those proceeds. The restructuring of oil and gas markets has resulted in a shifting of markets downstream from the wells. Deregulation has so altered the marketplace that lessors, including the MMS, are reevaluating the methods of valuation of gas for royalty purposes. 9 11 In Canada, exploration, production and development activities are governed by federal and provincial laws which subject operators to extensive controls and regulations. Exports of gas and oil across interprovincial borders or on pipelines which connect to United States pipelines are governed by the National Energy Board and each province has its own laws governing the operations of producers and protection of the environment. PIPELINE AND MARKETING Pipeline and marketing operations include the marketing of Seagull's own and third-party gas, oil and natural gas liquids, as well as gas gathering and gas processing. Seagull is also involved in pipeline engineering, design, construction and operation. Revenue from the pipeline and marketing segment accounted for 9%, 10% and 11% of the Company's consolidated revenues for 1995, 1994 and 1993, respectively. On September 25, 1995, the Company and three other sellers completed the sale of their disparate interests in 19 natural gas gathering systems and a gas processing plant. Together with the sale of another of Seagull's gas processing plants, the assets sold represent substantially all of the Company's gas gathering and gas processing assets. 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. Seagull contracts to provide natural gas and oil to various customers and aggregates supplies from various sources including third-party producers, marketing companies, pipelines, financial institutions and the Company's own production. In 1995, the Company initiated an active risk management program for both its own E&P production and third party activities, utilizing such derivative financial instruments as futures contracts, options and swaps. The primary objective of the risk management program is to help ensure more stable cash flow. However, Seagull expects to leave the majority of its own E&P production either unhedged or protected only from price decreases so that it can benefit from expected gas price strengthening. The risk management program is also an important part of the Company's third party marketing efforts, allowing the Company to convert a customer's requested price to a price structure that is consistent with the Company's overall pricing stragegy. 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. PIPELINE OPERATIONS AND CONSTRUCTION Seagull operates certain pipelines owned by other companies. In some cases the operating agreements provide for reimbursement of expenses incurred in connection with operations plus a profit margin. In other cases the Company receives a negotiated annual fee. The Company also builds pipelines for other companies for which it receives construction fees that are fixed, cost-plus or a combination of both. In June 1995, Seagull was engaged to build an approximately 114-mile onshore pipeline. The project began in late 1995 and Seagull will operate the new pipeline upon 10 12 completion. The Company recognized operating profit in 1994 and 1993 on another gas pipeline construction project, which was completed in the first quarter of 1994. 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 to compete depends upon building strong relationships with producers and end-users by consistently purchasing and supplying gas at competitive prices. ALASKA TRANSMISSION AND DISTRIBUTION The Company operates in Alaska through ENSTAR Natural Gas Company ("ENG"), a division of the Company, and Alaska Pipeline Company ("APC"), an Alaska corporation and a wholly owned subsidiary of the Company. ENG and APC are currently operated as a single business unit, ENSTAR Alaska ("ENSTAR Alaska"), and are regulated as a single operating unit by the Alaska Public Utilities Commission (the "APUC"). APC engages in the intrastate transmission of natural gas in South-Central Alaska. ENG engages in the distribution of natural gas in Anchorage and other nearby communities in Alaska and is APC's only customer. Revenues from the natural gas transmission and distribution segment accounted for 29%, 26% and 29% of the Company's consolidated revenues for 1995, 1994 and 1993, respectively. ENSTAR Alaska's predecessor was formed in 1959 and began serving the Anchorage area with natural gas in 1961. Five years later, in 1966, the predecessor became one of the original entities that formed Alaska Interstate Company, a newly organized public company the shares of which were traded on the New York Stock Exchange. Alaska Interstate Company changed its name to ENSTAR Corporation in 1982. In 1985, the Company purchased ENSTAR Alaska for $55 million in cash plus $10 million in the form of a seven-year unsecured, 10% subordinated note. At the time of the acquisition, APC had outstanding debt of approximately $65 million. The transaction received the final approval of the APUC in June 1985. GAS TRANSMISSION SYSTEM APC owns and operates the only natural gas transmission lines in its service area that are operated for utility purposes. The pipeline transmission system is composed of approximately 277 miles of 12- to 20-inch diameter pipeline and approximately 71 miles of smaller diameter pipeline. The system's present design delivery capacity is approximately 410 MMcf/d. The average throughput of the system in 1995, 1994 and 1993 was 122, 121 and 110 MMcf/d, respectively. 11 13 In September 1995, APC entered into a 33-year agreement to lease a 60-mile, 8-inch diameter pipeline between Anchorage, Alaska and Whittier, Alaska. Conversion of the pipeline to natural gas is expected to be completed in 1996. The new pipeline is expected to account for nearly 1,000 new customers over the next two to three years. GAS DISTRIBUTION SYSTEM ENG distributes natural gas through approximately 1,995 miles of gas mains to approximately 92,100 residential, commercial, industrial and electric power generation customers within the cities and environs of Anchorage, Eagle River, Palmer, Wasilla, Soldotna, Kenai and the Nikiski area of the Kenai Peninsula, Alaska. During the year ended December 31, 1995, ENG added approximately 33 miles of new gas distribution mains, installed 1,800 new service lines and added approximately 2,000 net customers. ENG anticipates relatively modest growth in its residential customer base and will install additional main and service lines to accommodate this growth. ENG distributes gas to its customers under tariffs and contracts which provide for varying delivery priorities. ENG's business is seasonal with approximately 67% of its revenues earned in the first and fourth quarters of each year. In 1995, purchase/resale volumes represented 60% of ENG's throughput and 85% of ENG's operating margin. The remaining volumes are transported for power, industrial and large commercial customers for a transportation fee. ENG's five largest customers are the Municipality of Anchorage; ARCO Alaska, Inc.; Aurora Gas, Inc.; the State of Alaska; and Unocal Corporation. Together, they account for about $8.6 million in annual operating margin and about 17.6 Bcf per year in volumes, which represent approximately 17% and 40%, respectively, of ENG totals. GAS SUPPLY In May 1988, APC entered into a gas purchase contract (the "Marathon Contract") with Marathon Oil Company ("Marathon") providing for the delivery of approximately 450 Bcf of gas in the aggregate. The Marathon Contract is a "requirements" contract with no specified daily deliverability or annual take-or-pay quantities. APC has agreed to purchase and Marathon has agreed to deliver all of APC's gas requirements in excess of those provided for in other presently existing gas supply contracts, subject to certain exceptions, until the commitment has been exhausted and without limit as to time; however, Marathon's delivery obligations are subject to certain specified annual limitations after 2001. The contract has a base price of $1.55 per Mcf plus reimbursements for any severance taxes and other charges. The base price is subject to annual adjustment based on changes in the price of certain traded oil futures contracts. During 1995, the cost of gas purchased under the Marathon Contract averaged $1.74 per Mcf, including reimbursements for severance taxes. The Marathon Contract, as amended in 1991, 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 $1.97 per Mcf plus reimbursements for any severance taxes and an annual adjustment based on changes in the price of certain traded oil futures contracts from the relevant base price. Certain portions of the gas purchased 12 14 under the amendments may be priced under a pricing term similar to the Marathon Contract. The 1995 price under the Shell Contract, after application of contractual adjustments, averaged $1.71 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 Bcf per year. The Shell Contract, as amended, has been approved by the APUC. Combined, the Marathon and Shell Contracts will supply all of ENSTAR Alaska's gas supply requirements through the year 2001. After that time supplies will still be available under the contracts in accordance with their terms, but the annual limitations contained in the Marathon Contract will take effect. As a result, after 2001, at least a portion of ENSTAR Alaska's requirements are expected to be satisfied outside the terms of the contracts, as currently in effect. Based on gas purchases during the twelve months ended December 31, 1995, which are not necessarily indicative of the volume of future purchases, gas reserves committed to APC under the Marathon and Shell Contracts would have a current reserve life index of approximately 15 years. ENSTAR Alaska's average cost of gas sold in 1995, 1994 and 1993 was $1.75, $1.74 and $2.07 per Mcf, respectively. ENSTAR Alaska's average gas sales price in 1995, 1994 and 1993 was $3.41, $3.23 and $3.56 per Mcf, respectively. As stated above, ENSTAR Alaska purchases all of its natural gas under long-term contracts in which the price is indexed to changes in the price of crude oil futures contracts. However, because ENSTAR Alaska's sales prices are adjusted to include the projected cost of its natural gas, there has been and is expected to be little or no impact on margins derived from ENSTAR Alaska's gas sales as a result of fluctuations in oil prices due to worldwide political events and changing market conditions. 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. During the last seven years, ENSTAR Alaska's natural gas volumes delivered on a purchase/resale basis have declined. Beginning in 1989, several of its major customers began purchasing gas directly from gas producers or gas marketers. However, the APUC has approved tariffs allowing ENSTAR Alaska to transport these volumes for a transportation fee that approximates the margin that would have been earned had the customer remained a sales customer rather than becoming a transportation customer. Consequently, ENSTAR Alaska anticipates no adverse economic impact to result from these transportation arrangements. If any other existing large customer of ENSTAR Alaska chooses to purchase gas directly from producers, ENSTAR Alaska would expect to collect a fee for transporting that gas equivalent to the margin earned on sales volumes for those customers because the large distance of remaining user facilities from producing fields would preclude the by-pass of ENSTAR Alaska's pipelines. 13 15 ENSTAR Alaska supplies natural gas to its customers at prices that at the present time economically preclude substitution of alternative fuels. Since the Shell Contract and the Marathon Contract include prices that fluctuate based on oil indices, a competitive margin favoring natural gas over oil-based energy sources is expected to continue. However, there is no assurance that the competitive advantage over other alternative fuels will not be reduced or eliminated by the development of new energy technology or by changes in the price of oil or refined products. REGULATION The APUC has jurisdiction as to rates and charges for gas sales, construction of new facilities, extensions and abandonments of service and certain other matters. Rates are generally designed to permit the recovery of the cost of providing service, including purchased gas costs, and a return on investment in plant. APC and ENG are regulated by the APUC on a combined basis as though they were a single entity. Because ENSTAR Alaska's operations are wholly intrastate, ENSTAR Alaska is not subject to or affected by Order 636 or any other economic regulation by the FERC. As a result of a proceeding filed in 1984, which was concluded in May 1986, the APUC granted ENSTAR Alaska an aggregate rate increase of 20.27% and authorized a regulatory rate of return on common equity of 15.65%. ENSTAR Alaska has no significant regulatory issues pending before the APUC. Since its inception in 1961, ENSTAR Alaska has participated in only three formal rate proceedings. CORPORATE REGULATION The Company is a "public utility company" within the meaning of the Public Utility Holding Company Act of 1935, as amended (the "1935 Act"). Accordingly, if any "company" (as defined for purposes of the 1935 Act and therefore including so-called "organized groups") becomes the owner of 10% or more of the Company's outstanding voting stock, that company would be required to register as a "holding company" under the 1935 Act, in the absence of an exemption of the type described below. Section 9(a)(2) also requires a person (including both individuals and "companies") to obtain prior approval from the Securities and Exchange Commission (the "SEC") in connection with the acquisition of 5% or more of the outstanding voting stock of a public utility if that person is also the owner of 5% or more of the outstanding voting stock of another public utility. In March 1991, the Company filed in good faith with the SEC an application pursuant to Section 2(a)(8) of the 1935 Act, seeking a determination that Seagull was not subject to regulation as a "subsidiary company" of FMR Corp. (the "FMR Application"), which was then the owner of 2,805,624 shares (approximately 12.5% at such time) (shares adjusted for a 2-for-1 stock split of all the issued shares of the Company's common stock (the "Common Stock"), effected June 4, 1993) of the outstanding Common Stock. Under the 1935 Act, a company is a "subsidiary company" of a "holding company" if the "holding company" owns 10% or more of the total voting power of the "subsidiary company", unless the SEC determines otherwise. Based upon the most recent information furnished to the Company by FMR Corp., FMR Corp. was the beneficial owner (albeit within the meaning of Section 13(d) of the Securities Exchange Act of 1934) of 568,800 shares, which is less than 2% of the Common Stock as of December 31, 1995. 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. 14 16 In December 1993, Seagull filed in good faith with the SEC an additional application pursuant to Section 2(a)(8) of the 1935 Act, seeking a determination that the Company was not subject to regulation as a "subsidiary company" of AXA Assurances I. A. R. D. Mutuelle, AXA Assurances Vie Mutuelle, Alpha Assurances I. A. R. D. Mutuelle, Alpha Assurances Vie Mutuelle, Uni Europe Assurance Mutuelle and AXA (collectively, the "Mutuelles AXA") and The Equitable Companies Incorporated ("Equitable") and their respective affiliates (collectively, the "Equitable Entities"), (the "Equitable Application"). At such time, the Equitable Entities beneficially owned 4,495,600 shares (approximately 12.5%) of Common Stock. Based upon the most recent information furnished to the Company by the 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 1,403,000 shares, which represents approximately 4% of the Common Stock as of December 31, 1995. 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. According to information provided by Wellington Management Company ("WMC"), WMC, in its capacity as investment adviser, may be deemed the beneficial owner of 3,712,200 shares (approximately 10%) of the Common Stock that are owned by numerous investment counseling clients, none of which is known to have such interest with respect to more than 5% of the class. WMC has shared voting power as to 2,405,000 shares and shared dispositive power as to 3,712,200 shares. Because WMC has shared voting power with respect to only 2,405,000 shares, and no voting power with respect to the remaining shares beneficially owned by WMC, it is deemed to own or control only these 2,405,000 shares (approximately 6.5%) for purposes of the 1935 Act. Even if FMR Corp. or the Equitable Entities held 10% or more 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's operations are subject to federal, state and local laws and regulation governing the discharge of materials into the environment or otherwise relating to environmental protection. Numerous governmental departments issue rules and regulations to implement and enforce such laws which are often difficult and costly to comply with and which carry substantial penalties for failure to comply. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas, and impose substantial liabilities for pollution resulting from the Company's operations. In addition, these laws, rules and regulations may restrict the rate of oil and natural gas production below the rate that would otherwise exist. State laws often require some form of remedial action to prevent pollution from former operations, such as pit closure and plugging abandoned wells. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons who are considered to be responsible for the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances. Under CERCLA, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous 15 17 substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances or other pollutants released into the environment. Stricter standards in environmental legislation may be imposed on the oil and gas industry in the future. For instance, legislation has been proposed in Congress from time to time that would reclassify certain oil and natural gas exploration and production wastes as "hazardous wastes" and make the reclassified wastes subject to more stringent handling, disposal and clean-up requirements. If such legislation were to be enacted, it could have a significant impact on the operating costs of the Company, as well as the oil and gas industry in general. Furthermore, although petroleum, including crude oil and natural gas, is exempt from CERCLA, at least two courts have recently ruled that certain wastes associated with the production of crude oil may be classified as "hazardous substances" under CERCLA and thus such wastes may become subject to liability and regulation under CERCLA, as described above. State initiatives to further regulate the disposal of oil and natural gas wastes are also pending in certain states, and these various initiatives could have a similar impact on the Company. Compliance with environmental requirements generally could have a material adverse effect upon the capital expenditures, earnings or competitive position of the Company. Although the Company has not experienced any material adverse effect from compliance with environmental requirements, there is no assurance that this will continue in the future. The Oil Pollution Act (the "OPA") requires persons responsible for "offshore facilities" to establish proof of financial responsibility to cover environmental cleanup and restoration costs likely to be incurred in connection with an oil spill. On August 25, 1993, the MMS published an advance notice of its intention to adopt a rule under the OPA that would define "offshore facilities" to include all oil and gas facilities that have the potential to affect "waters of the United States." The term "waters of the United States" has been broadly defined to include not only the waters of the Gulf of Mexico but also inland waterbodies, including wetlands, playa lakes and intermittent streams. Since the Company has many oil and gas facilities that could affect "waters of the United States," the Company would become subject to the financial responsibility rule if it is adopted as proposed. Under the proposed rule, financial responsibility could be established through insurance, guaranty, indemnity, surety bond, letter of credit, qualification as a self-insurer or a combination thereof. There is substantial opposition to the proposed rule throughout the oil and gas industry, and the MMS has informally indicated that it will not move forward with the adoption of the rule until Congress has had an opportunity to reconsider the financial responsibility requirements imposed under OPA. Absent Congressional action, the Company cannot predict the final form of any financial responsibility rule that may be adopted by the MMS under the OPA, but if the proposed rule were adopted no assurance can be given as to the Company's ability to comply with such rule or the costs of such compliance. On May 9, 1995, the U.S. House of Representatives passed a bill that would lower the financial responsibility requirements applicable to offshore facilities to $35 million (the current requirement under OCSLA). The bill allows the limit to be increased to $150 million if a formal risk assessment indicates the increase is warranted. It would also define "offshore facility" to include only OCS oil production, transportation and storage facilities, thus excluding inland or coastal oil and gas properties. A Senate bill that would provide the Coast Guard flexibility to establish liability limits that correspond to the facility's potential oil spill liability has been referred to the Senate Environmental and Public Works Committee. The Senate bill would reduce the scope of "offshore facilities" subject to this financial assurance requirement to those facilities seaward of the U.S. coastline that engaged in drilling for, producing or processing oil or that have the capacity to transport, store, transfer or handle more that 1,000 barrels of oil at a time. The Clinton Administration has indicated support for changes to the OPA financial responsibility requirements. Whether these legislative efforts will reduce the OPA financial responsibility requirements applicable to the Company cannot be determined at this time. In any event, the impact of any rule is not expected to be any more burdensome to the Company than it will be to other similarly situated companies involved in oil and gas exploration and production. 16 18 OPA imposes a variety of additional requirements on "responsible parties" for oil and gas facilities or vessels related to the prevention of oil spills and liability for damages resulting from such spills in waters of the United States. The "responsible party" includes the owner or operator of an onshore facility or vessel or the lessee or permittee of the area in which an offshore facility is located. OPA assigns liability to each responsible party for oil spill removal costs and a variety of public and private damages from oil spills. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill is caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulation. If a party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. OPA establishes a liability limit for offshore facilities of all removal costs plus $75 million. Few defenses exist to the liability for oil spills imposed by OPA. OPA also imposes other requirements on facility operators, such as the preparation of an oil spill contingency plan. Failure to comply with ongoing requirements or inadequate cooperation in a spill event may subject a responsible party to civil or criminal enforcement actions. In addition, the OCSLA authorizes regulations relating to safety and environmental protection applicable to lessees and permittees operating in the OCS. Specific design and operation standards may apply to OCS vessels, rigs, platforms, vehicles and structures. Violations of lease conditions or regulations issued pursuant to OCSLA can result in substantial civil and criminal penalties, as well as potential court injunctions curtailing operations and the cancellation of leases. Such enforcement liabilities can result from either governmental or private prosecution. The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and strict controls regarding the discharge of pollutants to state and federal waters. The FWPCA provides for civil, criminal and administrative penalties for any unauthorized discharges of oil and other hazardous substances in reportable quantities and, along with the OPA, imposes substantial potential liability for the costs of removal, remediation and damages. State laws for the control of water pollution also provide varying civil, criminal and administrative penalties and liabilities in the case of a discharge of petroleum or its derivatives into state waters. Within the next few years, both state water discharge regulations and the federal permits are expected to prohibit the discharge of produced water and sand, and some other substances related to the oil and gas industry, to coastal waters. Although the costs to comply with zero discharge mandates under federal or state law may be significant, the entire industry will experience similar costs and the Company believes that these costs will not have a material adverse impact on the Company's financial conditions and operations. Some oil and gas exploration and production facilities are required to obtain permits for their storm water discharges. Costs may be associated with treatment of wastewater or developing storm water pollution prevention plans. Further, the Coastal Zone Management Act authorizes state implementation and development of programs of management measures for non-point source pollution to restore and protect coastal waters. Many states in which the Company operates have recently begun to regulate naturally occurring radioactive materials ("NORM") and NORM wastes that are generated in connection with oil and gas exploration and production activities. NORM wastes typically consist of very low-level radioactive substances that become concentrated in pipe scale and in production equipment. State regulations may require the testing of pipes and production equipment for the presence of NORM, the licensing of NORM-contaminated facilities and the careful handling and disposal of NORM wastes. The Company believes that the growing regulation of NORM will have a minimal effect on the Company's operations because the Company generates only a very small quantity of NORM on an annual basis. 17 19 EMPLOYEES As of March 1, 1996, the Company had 637 full time employees. In addition to the services of its full time employees, the Company employs, as needed, the services of consulting geologists, engineers, regulatory consultants, contract pumpers and certain other temporary employees. ENSTAR Alaska operates under collective bargaining agreements with separate bargaining units for operating and clerical employees. These units represent approximately 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. ENSTAR Alaska is in the process of renegotiating a collective bargaining agreement with the clerical 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 62 12 12 Chairman of the Board, President and Chief Executive Officer John W. Elias 55 3 1 Executive Vice President and Chief Operating Officer Robert W. Shower 58 4 2 Executive Vice President and Chief Financial Officer Richard F. Barnes 52 8 8 President of ENSTAR Natural Gas Company (a division of the Company) and Alaska Pipeline Company (a subsidiary of the Company) John N. Goodpasture 47 14 3 President, Seagull Pipeline & Marketing Company (a subsidiary of the Company) and Senior Vice President, Pipelines and Marketing T. P. McConn 62 7 3 President, Seagull Energy E&P Inc. (a subsidiary of the Company) and Senior Vice President, Exploration and Production Rodney W. Bridges 46 6 3 Vice President and Controller Janice K. Hartrick 43 3 3 Chief Counsel and Vice President, Environmental Affairs
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 as Executive Vice President in April 1993 and was named Executive Vice President and Chief Operating Officer in January 1995. 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. Mr. Shower will retire as an executive officer and employee of the Company prior to the Annual Meeting of Shareholders on May 14, 1996. 19 21 Mr. Goodpasture joined the Company and has been an executive officer since 1981 and was named President of Seagull Pipeline Company in March 1990, and Senior Vice President, Pipelines and Marketing, in December 1992. Mr. McConn 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. 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. 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 Vermilion 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 ("PRP") 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 HO&M, a subsidiary of the Company, indicating that HO&M may be a PRP at the GCV Site. Based upon the Company's investigation of this claim, the Company believes that the basis 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. 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, results of operations or cash flows because of the large number of potentially responsible parties at the GCV Site and the relative amount of contamination, if any, that may have been caused at the GCV Site by the disposal of wastes arising from the wells identified in the claims. 20 22 Marco of Iota Superfund Site. In June 1995, the EPA advised HO&M that it had been identified as a PRP at the Marco of Iota Superfund Site ("Iota Site") located in Iota, Louisiana. The EPA is currently seeking the cleanup to the Iota Site under the authority of CERCLA. The EPA's cleanup cost estimate of the Iota Site is in the range of $5 million. Based on the information provided by the EPA, the basis for HO&M's alleged liability is a series of transactions between HO&M and the operator of the Iota Site that occurred during the early 1970s through the 1980's, long before Seagull acquired HO&M from Tenneco, Inc. In January 1996, the Company entered into a deminimus settlement agreement with the EPA, which established a settlement payment of approximately $15,000. Pursuant to the provisions of the Stock Purchase Agreement dated as of October 24, 1988 between the Company and Tenneco, Inc., Tenneco has assumed the monetary liability for this matter. Other. The Company is a party to ongoing litigation in the normal course of business or other litigation with respect to which the Company is indemnified pursuant to various purchase agreements or other contractual arrangements. Management regularly analyzes current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, management believes that the effect on its financial condition, results of operations or cash flows, if any, will not be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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 on the New York Stock Exchange Composite Tape for each quarterly period during the last two fiscal years were as follows:
- ---------------------------------------------------------------------------- High Low - ---------------------------------------------------------------------------- 1994 First Quarter 28 5/8 23 5/8 Second Quarter 29 3/4 23 Third Quarter 28 5/8 22 3/4 Fourth Quarter 26 17 5/8 - ---------------------------------------------------------------------------- High Low - ---------------------------------------------------------------------------- 1995 First Quarter 20 15 1/4 Second Quarter 19 7/8 16 1/2 Third Quarter 22 1/2 16 Fourth Quarter 22 1/4 16 5/8 - ----------------------------------------------------------------------------
B. As of March 20, 1996, there were approximately 2,659 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) aggregate dividend payments attributable to ENSTAR Alaska Stock must not exceed $20 million plus 100% of the net income of ENSTAR Alaska on a cumulative basis from January 1, 1994, (ii) aggregate dividend payments, other than those permitted under (i) above or on up to $150 million in preferred stock, must not exceed $20 million plus 33 1/3% of the net income of the Company (excluding net income of ENSTAR Alaska) on a cumulative basis from January 1, 1994 plus 100% of the net income of ENSTAR Alaska on a cumulative basis for such period less any dividend payments allowed under (i) above, (iii) the aggregate amount of outstanding loans under the Credit Agreement, together with all other senior indebtedness of Seagull and its subsidiaries (excluding APC) then outstanding, must not exceed the Borrowing Base and (iv) no Default or Event of Default shall have occurred and be continuing. 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 $150 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, 1995, approximately $34.6 million was available for 22 24 payment of dividends (other than the stock dividends described above) or repurchase of Common Stock. In addition, certain debt instruments of APC restrict the ability of APC to transfer funds to the Company in the form of cash dividends, loans or advances. For a description of such restrictions, reference is made to Note 9 of the Consolidated Financial Statements included in the Company's 1995 Annual Report to Shareholders and as part of Exhibit 13 attached hereto. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference to the Selected Financial Data included in the Company's 1995 Annual Report to Shareholders and as part of Exhibit 13 attached hereto. 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 1995 Annual Report to Shareholders and as part of Exhibit 13 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 1995 Annual Report to Shareholders and as part of Exhibit 13 attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference to "Election of Directors" included in the Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 14, 1996 (the "Proxy Statement"). See also "Executive Officers of the Company" included in Part I of this Annual Report on Form 10-K, which is incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference to "Election of Directors --Executive Compensation--Summary Compensation Table," "--Compensation Arrangements," "--Option Exercises and Fiscal Year-End Values," "--Option Grants," "--Executive Supplemental Retirement Plan," "--ENSTAR Natural Gas Company Supplemental Executive Retirement Plan" and "--ENSTAR Natural Gas Company Retirement Plan"; and "Election of Directors-Compensation of Directors" included in the Proxy Statement. 23 25 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to "Principal Shareholders" and "Election of Directors--Security Ownership of Directors and Management" included in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference to "Election of Directors--Certain Transactions" included in the Proxy Statement. 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 1995 Annual Report to Shareholders and as part of Exhibit 13 attached hereto, and are incorporated herein by reference: Consolidated Financial Statements Notes to Consolidated Financial Statements Independent Auditors' Report 2. SCHEDULES: All schedules have been omitted because the required information is insignificant or not applicable.
3. EXHIBITS: 3.1 Articles of Incorporation of the Company, as amended, including Articles of Amendment filed May 12, 1988, May 21, 1991, and May 21, 1993 with the Secretary of State of the State of Texas, that certain Statement of Relative Rights and Preferences related to the designation and issuance of the Company's $2.25 Convertible Exchangeable Preferred Stock, Series A, filed August 6, 1986 with the Secretary of State of the State of Texas and that certain Statement of Resolution Establishing Series of Shares of Series B Junior Participating Preferred Stock of Seagull Energy Corporation filed March 21, 1989 with the Secretary of State of the State of Texas (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 3.2 Bylaws of the Company, as amended through March 17, 1995 (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1995).
24 26 * 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). 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 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). 4.6 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). 4.7 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). 4.8 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). 4.9 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).
25 27 * 4.10 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; the First Amendment dated May 24, 1994 (without exhibits) is incorporated by reference to Exhibit 4.5 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994; the Second Amendment dated June 30, 1994 is incorporated by reference to Exhibit 4.16 to Annual Report on Form 10-K for the year ended December 31, 1994; the Third Amendment dated March 10, 1995 is incorporated by reference to Exhibit 4.17 to Annual Report on Form 10-K for the year ended December 31, 1994; the Fourth Amendment dated January 12, 1996 is filed herewith). 4.11 Intercreditor Agreement executed in connection with the Credit Agreement included as Exhibit 4.10 hereto (incorporated by reference to Exhibit 2.7 to Current Report on Form 8-K filed January 19, 1994). 4.12 First Amendment to Intercreditor Agreement executed in connection with the First Amendment to Credit Agreement included as Exhibit 4.10 hereto (incorporated by reference to Exhibit 4.8 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). 4.13 Form of Bankers' Acceptance executed in connection with the Credit Agreement included as Exhibit 4.10 hereto (incorporated by reference to Exhibit 2.8 to Current Report on Form 8-K filed January 19, 1994). 4.14 Guarantee executed in connection with the Credit Agreement included as Exhibit 4.10 hereto (incorporated by reference to Exhibit 2.9 to Current Report on Form 8-K filed January 19, 1994). 4.15 Form of Note (U. S. Dollars) executed in connection with the First Amendment to Credit Agreement included as Exhibit 4.10 hereto (incorporated by reference to Exhibit 4.6 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). 4.16 Form of Note (Canadian Dollars) executed in connection with the First Amendment to Credit Agreement included as Exhibit 4.10 hereto (incorporated by reference to Exhibit 4.7 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). * 4.17 Credit Agreement, $725 million Reducing Revolving Credit and Competitive Bid Facility, dated May 24, 1994 by and among Seagull, each of the banks signatory thereto and Texas Commerce Bank National Association and Chemical Bank, as co-agents (without exhibits and schedules) (incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994; the First Amendment dated June 30, 1994 is incorporated by reference to Exhibit 4.21 to Annual Report on Form 10-K for the year ended December 31, 1994; the Second Amendment dated March 10, 1995 is incorporated by reference to Exhibit 4.22 to Annual Report on Form 10-K for the year ended December 31, 1994; the Third Amendment dated January 12, 1996 is filed herewith).
26 28 4.18 Form of Committed Note executed in connection with the Credit Agreement included as Exhibit 4.17 hereto (incorporated by reference to Exhibit 4.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). 4.19 Form of Competitive Note executed in connection with the Credit Agreement included as Exhibit 4.17 hereto (incorporated by reference to Exhibit 4.3 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). 4.20 Form of Assignment and Acceptance executed in connection with the Credit Agreement included as Exhibit 4.17 hereto (incorporated by reference to Exhibit 4.4 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). 4.21 $5,000,000 Revolving Credit Agreement between Alaska Pipeline Company and The First National Bank of Anchorage dated March 15, 1995 (incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). 4.22 Trust Agreement dated as of September 1, 1995 for the Seagull Series 1995 Trust (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 4.23 Guaranty by Seagull Energy Corporation in favor of the Seagull Series 1995 Trust (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). #*10.1 Seagull Thrift Plan, as amended and restated, including the First through Sixth Amendments thereto. # 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 are incorporated by reference to Exhibit 10.6 to the Annual Report on
27 29 Form 10-K for the year ended December 31, 1993; the Third Amendment is incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the year ended December 31, 1994). # 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; the First Amendment is incorporated by reference to Exhibit 10.7 to Annual Report on Form 10-K for the year ended December 31, 1994). # 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; the First Amendment is incorporated by reference to Exhibit 10.8 to Annual Report on Form 10-K for the year ended December 31, 1994). # 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 incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 1993; the Second Amendment is incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 1994). # 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 incorporated by reference to Exhibit 10.10 to Annual Report on Form 10-K for the year ended December 31, 1993; the Third Amendment is incorporated by reference to Exhibit 10.10 to Annual Report on Form 10-K for the year ended December 31, 1994). #*10.11 Seagull Energy Corporation Supplemental Benefit Plan, as amended, including the First Amendment thereto. 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; Form of Amendment to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995).
28 30 # 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 incorporated by reference to Exhibit 10.15 to Annual Report on Form 10-K for the year ended December 31, 1993; Form of Amendment to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). # 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 incorporated by reference to Exhibit 10.16 to Annual Report on Form 10-K for the year ended December 31, 1993; Form of Amendment to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). # 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; the Fifth and Sixth Amendments are incorporated by reference to Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 and the Seventh Amendment is incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995). 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 Seagull Energy Corporation 1990 Stock Option Plan, including forms of agreements, as amended. 10.23 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).
29 31 # 10.24 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). # 10.25 Seagull Energy Corporation 1994 Executive Incentive Plan (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.26 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). # 10.27 Seagull Energy Corporation 1993 Nonemployee Directors' Stock Option Plan, including forms of agreements (the Plan is incorporated by reference to Exhibit 10.37 to Annual Report on Form 10-K for the year ended December 31, 1992; the amended form of Nonstatutory Stock Option Agreement is incorporated by reference to Exhibit 10.29 to Annual Report on Form 10-K for the year ended December 31, 1993). # 10.28 Seagull Energy Corporation 1993 Stock Option Plan, including forms of agreements (the Plan is incorporated by reference to Exhibit 10.38 to Annual Report on Form 10-K for the year ended December 31, 1992; the amended form of Nonstatutory Stock Option Agreement is incorporated by reference to Exhibit 10.30 to Annual Report on Form 10-K for the year ended December 31, 1993; Form of Amendment to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). # 10.29 Seagull Energy Canada Ltd. Retirement Plan (incorporated by reference to Exhibit 10.30 to Annual Report on Form 10-K for the year ended December 31, 1994). # 10.30 Seagull Energy Canada Ltd. Capital Accumulation Plan (incorporated by reference to Exhibit 10.31 to Annual Report on Form 10-K for the year ended December 31, 1994). # 10.31 Restricted Stock Agreement made and entered into as of March 17, 1995 between Seagull Energy Corporation and Barry J. Galt (incorporated by reference to Exhibit 10.32 to Annual Report on Form 10-K for the year ended December 31, 1994). # 10.32 Form of Restricted Stock Agreement made and entered into as of March 17, 1995 between Seagull Energy Corporation and, individually, Richard F. Barnes (granted 2,000 shares of restricted Common Stock), John W. Elias (granted 3,000 shares of restricted Common Stock), Thomas P. McConn (granted 2,000 shares of restricted Common Stock) and Robert W. Shower (granted 3,000 shares of restricted Common Stock) (incorporated by reference to Exhibit 10.33 to Annual Report on Form 10-K for the year ended December 31, 1994). # 10.33 Form of Severance Agreement between Seagull Energy Corporation and Richard F. Barnes, John W. Elias, Thomas P. McConn and Robert W. Shower (incorporated by reference to Exhibit 10.34 to Annual Report on Form 10-K for the year ended December 31, 1994).
30 32 # 10.34 Seagull Energy Corporation Management Stability Plan (incorporated by reference to Exhibit 10.35 to Annual Report on Form 10-K for the year ended December 31, 1994). #10.35 Severance Agreement between Seagull Energy Corporation and Barry J. Galt (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). #10.36 Seagull Energy Corporation 1995 Executive Incentive Plan (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). #10.37 1995 Omnibus Stock Plan (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). 10.38 Purchase and Sale Agreement by and among Seagull Energy Corporation, Amoco Gas Company, Houston Pipe Line Company, Enron Gas Processing Company and Mantaray Pipeline Company, as sellers and Seahawk Gathering & Liquids Company as buyer and Tejas Power Corporation as Guarantor dated July 28, 1995 (incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended June 30 1995). *13 Portions of the Seagull Energy Corporation and Subsidiaries Annual Report to Shareholders for the year ended December 31, 1995 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, 1995. *21 Subsidiaries of Seagull Energy Corporation. *23.1 Consent of KPMG Peat Marwick LLP. *23.2 Consent of Ryder Scott Company, independent petroleum engineers. *23.3 Consent of DeGolyer and MacNaughton, independent petroleum engineers. *23.4 Consent of Netherland, Sewell and Associates, Inc., independent petroleum engineers. *27 Financial Data Schedule.
____________________________ * Filed herewith. # Identifies management contracts and compensatory plans or arrangements. (B) REPORTS ON FORM 8-K There were no Reports on Form 8-K filed during the three months ended December 31, 1995. 31 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SEAGULL ENERGY CORPORATION Date: March 18, 1996 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/ Peter J. Fluor ----------------------------------------------------- ---------------------------------------------- Barry J. Galt, Chairman of the Board, President and Peter J. Fluor, Director Chief Executive Officer and Director (Principal Date: March 18, 1996 Executive Officer) --------------------------------------------- Date: March 18, 1996 By: /s/ William R. Grant ----------------------------------------------------- ---------------------------------------------- William R. Grant, Director By: /s/ John W. Elias Date: March 18, 1996 ----------------------------------------------------- ---------------------------------------------- John W. Elias, Executive Vice President, Chief Operating Officer and Director By: /s/ Dean P. Guerin Date: March 18, 1996 ---------------------------------------------- ----------------------------------------------------- Dean P. Guerin, Director Date: March 18, 1996 By: /s/ Robert W. Shower ---------------------------------------------- ----------------------------------------------------- Robert W. Shower, Executive Vice President By: /s/ Richard M. Morrow and Chief Financial Officer and Director ---------------------------------------------- (Principal Financial Officer) Richard M. Morrow, Director Date: March 18, 1996 Date: March 18, 1996 ----------------------------------------------------- ---------------------------------------------- By: /s/ Rodney W. Bridges By: /s/ Dee S. Osborne ----------------------------------------------------- ---------------------------------------------- Rodney W. Bridges, Vice President and Controller Dee S. Osborne, Director (Principal Accounting Officer) Date: March 18, 1996 Date: March 18, 1996 ----------------------------------------------------- By: /s/ Sam F. Segnar ---------------------------------------------- By: /s/ J. Evans Attwell Sam F. Segnar, Director ----------------------------------------------------- Date: March 18, 1996 J. Evans Attwell, Director ---------------------------------------------- Date: March 18, 1996 ----------------------------------------------------- /s/ George M. Sullivan By: ---------------------------------------------- By: /s/ Thomas H. Cruikshank George M. Sullivan, Director ----------------------------------------------------- Thomas H. Cruikshank, Director Date: March 18, 1996 ---------------------------------------------- Date: March 18, 1996 -----------------------------------------------------
34 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 March 17, 1995 (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). * 4.1 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). 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).
35 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 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). 4.6 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). 4.7 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). 4.8 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). 4.9 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). * 4.10 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; the First Amendment dated May 24, 1994 (without exhibits) is incorporated by reference to Exhibit 4.5 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994; the Second Amendment dated June 30, 1994 is incorporated by reference to Exhibit 4.16 to Annual Report on Form 10-K for the year ended December 31, 1994; the Third Amendment dated March 10, 1995 is incorporated by reference to Exhibit 4.17 to
36 Annual Report on Form 10-K for the year ended December 31, 1994; the Fourth Amendment dated January 12, 1996 is filed herewith). 4.11 Intercreditor Agreement executed in connection with the Credit Agreement included as Exhibit 4.10 hereto (incorporated by reference to Exhibit 2.7 to Current Report on Form 8-K filed January 19, 1994). 4.12 First Amendment to Intercreditor Agreement executed in connection with the First Amendment to Credit Agreement included as Exhibit 4.10 hereto (incorporated by reference to Exhibit 4.8 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). 4.13 Form of Bankers' Acceptance executed in connection with the Credit Agreement included as Exhibit 4.10 hereto (incorporated by reference to Exhibit 2.8 to Current Report on Form 8-K filed January 19, 1994). 4.14 Guarantee executed in connection with the Credit Agreement included as Exhibit 4.10 hereto (incorporated by reference to Exhibit 2.9 to Current Report on Form 8-K filed January 19, 1994). 4.15 Form of Note (U.S. Dollars) executed in connection with the First Amendment to Credit Agreement included as Exhibit 4.10 hereto (incorporated by reference to Exhibit 4.6 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). 4.16 Form of Note (Canadian Dollars) executed in connection with the First Amendment to Credit Agreement included as Exhibit 4.10 hereto (incorporated by reference to Exhibit 4.7 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). * 4.17 Credit Agreement, $725 million Reducing Revolving Credit and Competitive Bid Facility, dated May 24, 1994 by and among Seagull, each of the banks signatory thereto and Texas Commerce Bank National Association and Chemical Bank, as co-agents (without exhibits and schedules) (incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994; the First Amendment dated June 30, 1994 is incorporated by reference to Exhibit 4.21 to Annual Report on Form 10-K for the year ended December 31, 1994; the Second Amendment dated March 10, 1995 is incorporated by reference to Exhibit 4.22 to Annual Report on Form 10-K for the year ended December 31, 1994; the Third Amendment dated January 12, 1996 is filed herewith). 4.18 Form of Committed Note executed in connection with the Credit Agreement included as Exhibit 4.17 hereto (incorporated by reference to Exhibit 4.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). 4.19 Form of Competitive Note executed in connection with the Credit Agreement included as Exhibit 4.17 hereto (incorporated by
37 reference to Exhibit 4.3 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). 4.20 Form of Assignment and Acceptance executed in connection with the Credit Agreement included as Exhibit 4.17 hereto (incorporated by reference to Exhibit 4.4 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). 4.21 $5,000,000 Revolving Credit Agreement between Alaska Pipeline Company and The First National Bank of Anchorage dated March 15, 1995 (incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). 4.22 Trust Agreement dated as of September 1, 1995 for the Seagull Series 1995 Trust (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 4.23 Guaranty by Seagull Energy Corporation in favor of the Seagull Series 1995 Trust (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). #*10.1 Seagull Thrift Plan, as amended and restated, including the First through the Sixth Amendments thereto. # 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
38 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 are incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-K for the year ended December 31, 1993; the Third Amendment is incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the year ended December 31, 1994). # 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; the First Amendment is incorporated by reference to Exhibit 10.7 to Annual Report on Form 10-K for the year ended December 31, 1994). # 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; the First Amendment is incorporated by reference to Exhibit 10.8 to Annual Report on Form 10-K for the year ended December 31, 1994). # 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 incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 1993; the Second Amendment is incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 1994). # 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 incorporated by reference to Exhibit 10.10 to Annual Report on Form 10-K for the year ended December 31, 1993; the Third Amendment is incorporated by reference to Exhibit 10.10 to Annual Report on Form 10-K for the year ended December 31, 1994). #*10.11 Seagull Energy Corporation Supplemental Benefit Plan, as amended, including the First Amendment thereto.
39 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; Form of Amendment to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). # 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 incorporated by reference to Exhibit 10.15 to Annual Report on Form 10-K for the year ended December 31, 1993; Form of Amendment to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). # 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 incorporated by reference to Exhibit 10.16 to Annual Report on Form 10-K for the year ended December 31, 1993; Form of Amendment to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). # 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; the Fifth and Sixth Amendments are incorporated by reference to Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 and the Seventh Amendment is incorporated by reference to Exhibit 10.4
40 to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995). 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 Seagull Energy Corporation 1990 Stock Option Plan, including forms of agreements, as amended. 10.23 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). # 10.24 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). # 10.25 Seagull Energy Corporation 1994 Executive Incentive Plan (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.26 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). # 10.27 Seagull Energy Corporation 1993 Nonemployee Directors' Stock Option Plan, including forms of agreements (the Plan is incorporated by reference to Exhibit 10.37 to Annual Report on Form 10-K for the year ended December 31, 1992; the amended form of Nonstatutory Stock Option Agreement is incorporated
41 by reference to Exhibit 10.29 to Annual Report on Form 10-K for the year ended December 31, 1993). # 10.28 Seagull Energy Corporation 1993 Stock Option Plan, including forms of agreements (the Plan is incorporated by reference to Exhibit 10.38 to Annual Report on Form 10-K for the year ended December 31, 1992; the amended form of Nonstatutory Stock Option Agreement is incorporated by reference to Exhibit 10.30 to Annual Report on Form 10-K for the year ended December 31, 1993; Form of Amendment to Stock Option Agreement(s) for the Seagull Energy Corporation is incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). # 10.29 Seagull Energy Canada Ltd. Retirement Plan (incorporated by reference to Exhibit 10.30 to Annual Report on Form 10-K for the year ended December 31, 1994). # 10.30 Seagull Energy Canada Ltd. Capital Accumulation Plan (incorporated by reference to Exhibit 10.31 to Annual Report on Form 10-K for the year ended December 31, 1994). # 10.31 Restricted Stock Agreement made and entered into as of March 17, 1995 between Seagull Energy Corporation and Barry J. Galt (incorporated by reference to Exhibit 10.32 to Annual Report on Form 10-K for the year ended December 31, 1994). # 10.32 Form of Restricted Stock Agreement made and entered into as of March 17, 1995 between Seagull Energy Corporation and, individually, Richard F. Barnes (granted 2,000 shares of restricted Common Stock), John W. Elias (granted 3,000 shares of restricted Common Stock), Thomas P. McConn (granted 2,000 shares of restricted Common Stock) and Robert W. Shower (granted 3,000 shares of restricted Common Stock) (incorporated by reference to Exhibit 10.33 to Annual Report on Form 10-K for the year ended December 31, 1994). # 10.33 Form of Severance Agreement between Seagull Energy Corporation and Richard F. Barnes, John W. Elias, Thomas P. McConn and Robert W. Shower (incorporated by reference to Exhibit 10.34 to Annual Report on Form 10-K for the year ended December 31, 1994). # 10.34 Seagull Energy Corporation Management Stability Plan (incorporated by reference to Exhibit 10.35 to Annual Report on Form 10-K for the year ended December 31, 1994). #10.35 Severance Agreement between Seagull Energy Corporation and Barry J. Galt (incorporated by reference to Exhibit 10.3 to
42 Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). #10.36 Seagull Energy Corporation 1995 Executive Incentive Plan (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). #10.37 1995 Omnibus Stock Plan (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). 10.38 Purchase and Sale Agreement by and among Seagull Energy Corporation, Amoco Gas Company, Houston Pipe Line Company, Enron Gas Processing Company and Mantaray Pipeline Company, as sellers and Seahawk Gathering & Liquids Company as buyer and Tejas Power Corporation as Guarantor dated July 28, 1995 (incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended June 30 1995). *13 Portions of the Seagull Energy Corporation and Subsidiaries Annual Report to Shareholders for the year ended December 31, 1995 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, 1995. *21 Subsidiaries of Seagull Energy Corporation. *23.1 Consent of KPMG Peat Marwick LLP. *23.2 Consent of Ryder Scott Company, independent petroleum engineers. *23.3 Consent of DeGolyer and MacNaughton, independent petroleum engineers. *23.4 Consent of Netherland, Sewell and Associates, Inc., independent petroleum engineers. *27 Financial Data Schedule.
____________________ * Filed herewith. # Identifies management contracts and compensatory plans or arrangements. EX-4.1 2 NOTE AGREEMENT DATED 6/17/85 1 - -------------------------------------------------------------------------------- ALASKA PIPELINE COMPANY -------------------------- NOTE AGREEMENT -------------------------- Dated as of: June 17, 1985 $10,000,000 12.125% Series E Notes Due July 1, 1990 $14,500,000 12.70% Series F Notes due by July 1, 1995 $ 3,000,000 12.80% Series G Notes due July 1, 2000 $17,500,000 12.75% Series H Notes due July 1, 2000 - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- 1 Sale and Purchase of Notes ........................ 1 2 Closing ........................................... 1 3 Conditions to Closing ............................. 2 3.1 Sale of Common Stock of the Company and Assets of the Division ..... ................................ 2 3.3 Assumption of Intercompany Mortgage and Delivery of Intercompany Notes ................................ 2 3.4 Inducement Agreement .............................. 2 3.5 Amendment to Gas Sale Contract .................... 2 3.6 Prepayment of the Bonds and Repayment of Bank Indebtedness ...................................... 3 3.7 Sale of Other Notes ............................... 3 3.8 Representations and Warranties Correct ............ 3 3.9 Alaska Public Utilities Commission Approval ....... 3 3.10 Performance No Default ............................ 3 3.11 Compliance Certificate ............................ 3 3.12 Opinions of Counsel ............................... 3 3.13 Legal Investment .................................. 3 3.14 Proceedings and Documents ......................... 4
-i- 3 3.15 Tax Sharing Agreement ............................. 4 4 Use of Proceeds ................................... 4 5 Representations and Warranties .................... 4 5.1 Organization, Standing etc ........................ 4 5.2 Subsidiaries ...................................... 4 5.3 Qualification ..................................... 4 5.4 Financial Statements .............................. 5 5.5 Changes, etc ...................................... 5 5.6 Tax Returns and Liabilities ....................... 6 5.7 Indebtedness for Money Borrowed ................... 6 5.8 Title to Properties; Liens ........................ 6 5.9 Litigation ........................................ 7 5.10 Compliance with Other Instruments ................. 7 5.11 Patents, Trademarks, etc., Franchises ............. 7 5.12 Governmental Consent, etc ......................... 8 5.13 Holding Company Act ............................... 8 5.14 Gas Contracts ..................................... 8 5.15 Coverage of Fixed Charges ......................... 8 5.16 Disclosure ........................................ 8 5.17 Issue of Notes is Legal and Authorize ............. 9 5.18 ERISA ............................................. 9 5.19 No Defaults ....................................... 10
-ii- 4 5.20 Private Offering .................................. 10 5.21 Certain Documents ................................. 10 6 Financial Statements and Information .............. 10 7 Inspection of Properties and Books ................ 13 8 Prepayment of Notes ............................... 13 8.1 Fixed Prepayments ................................. 13 8.2 Optional Prepayment without Premium ............... 14 8.3 Optional Prepayments with Premium ................. 14 8.4 Prepayment in Full at Option of Noteholders under Certain Circumstances ...... ...................... 15 8.5 Allocation of Partial Prepayments ................. 15 8.6 Notice of Optional Prepayments .................... 15 8.7 Maturity; Exchange or Notation, Surrender, etc .... 15 8.8 Purchase of Notes ................................. 16 9 General Covenants ................................. 16 9.1 Accounting and Reserves ........................... 16 9.2 Payment of Taxes and Claims; Tax Sharing Agreement 16 9.3 Corporate Existence, etc .......................... 16 9.4 Maintenance of Properties, Conduct of Business; Company Certificate ............................... 16 9.5 Insurance ......................................... 17 9.6 Delivery of Supplemental Opinion of Counsel ....... 17 10 Particular Covenants .............................. 17
-iii- 5 10.1 Limitation on Indebtedness ........................ 17 10.2 Restrictions on Investments, Loans, etc ........... 18 10.3 Restricted Investments, Restricted Stock Payments and Restricted Subordinated Debt Payments ......... 20 10.4 Restrictions on Lease-Backs, Rental Obligations, etc ............................................... 21 10.5 Restrictions on Liens, etc ........................ 22 10.6 Issuance and Sale, etc., of Subsidiary Stock Disposition of Subsidiary Stock and Indebtedness .. 25 10.7 Consolidation or Merger of Subsidiaries; Disposition of Subsidiary Property as an Entirety ............. 25 10.8 Consolidation or Merger of Company; Disposition of Company Disposition of Company Property as an Entirety .......................................... 25 10.9 Disposition of Company and Subsidiaries Property .. 26 10.10 Gas Contracts ..................................... 27 10.11 Intercompany Notes, etc ........................... 27 10.12 Compliance with ERISA ............................. 28 11 Remedies .......................................... 28 11.1 Events of Default; Acceleration ................... 28 11.2 Notice of Default ................................. 31 11.3 Suits for Enforcement, etc ........................ 32 11.4 Remedies Cumulative ............................... 32 11.5 Remedies Not Waived ............................... 32 12 Registration Books, Transfer and Exchange of Notes 32
-iv- 6 13. Replacement of Notes .............................. 32 14. Definitions ....................................... 33 15. Expenses, etc ..................................... 45 16. Amendment of Existing Note Agreements ............. 45 17. Survival of Agreements, etc. ...................... 46 18. Amendments and Waivers ............................ 46 19. Purchase for Investment ........................... 47 20. Payments on Notes; Notice of Sale, etc ............ 47 21. Notices, etc ...................................... 47 22. Nonenforcement for Others ......................... 47 23. Miscellaneous ..................................... 47 Schedule A - Information Relating to Purchasers Exhibit A-1 - Form of Series E Note Exhibit A-2 - Form of Series F Note Exhibit A-3 - Form of Series G Notes Exhibit A-4 - Form of Series H Notes Exhibit B - Form of Intercompany Mortgage Exhibit C - Form of Inducement Agreement Exhibit D - Form of Gas Contract Amendment Exhibit E-1 - Form of Opinion of Andrews & Kurth Exhibit E-2 - Form of Opinion of Vinson & Elkins Exhibit E-3 - Form of Opinion of Hughes Thorsness Gantz Powell & Brundin
-v- 7 Exhibit E-4 - Form of Opinion of Debevoise & Ploimpton Exhibit F - Form of Tax Sharing Agreement Exhibit G - Statement of Exceptions Exhibit H - List of Agreements Relating to Short-Term Borrowing and Funded Debt -vi- 8 ALASKA PIPELINE COMPANY 3000 Spenard Road Anchorage, Alaska 99502 TO EACH OF THE PURCHASERS LISTED IN THE ATTACHED SCHEDULE A Dated as of: June 17, 1985 Dear Sirs: ALASKA PIPELINE COMPANY (the "Company"), an Alaska corporation, agrees with you as follows: 1. Sale and Purchase of Notes. The Company will duly authorize the issue and sale of (a) $10,000,000 aggregate principal amount of the Company's 12.125% Series E Notes due April 1, 1990 (the "Series E Notes"), (b) $14,500,000 aggregate principal amount of the Company's 12.70% Series F Notes due April 1, 1995 (the "Series F Notes"), (c) $3,000,000 aggregate principal amount of the Company's 12.80% Series G Notes due April 1, 2000 (the "Series G Notes"), and (d) $17,500,000 aggregate principal amount of the Company's 12.75% Series H Notes due April 1, 2000 (the "Series H Notes"), substantially in the forms of Exhibits A-1 through A-4, respectively, attached hereto (such Notes, together with all Notes issued in exchange therefor or in replacement thereof pursuant to sections 12 and 13, being herein called the "Notes"). The Company will issue and sell to you and, subject to the terms and conditions of this Agreement, you will purchase from the Company, at the Closing provided for in section 2, Notes in the principal amounts specified opposite your name in Schedule A attached hereto at the purchase price of 100% of the principal amount thereof. Contemporaneously with entering into this Agreement, the Company is entering into separate Note Agreements (the "Other Agreements") identical with this Agreement with each of the Other Purchasers named in Schedule A (the "Other Purchasers"), providing for the sale to each Other Purchaser, at such Closing, of Notes in the principal amount specified opposite its name in Schedule A. As used herein, the term "Note" shall mean one of the Notes; certain other capitalized terms used herein are defined in section 14. 2. Closing. The closing of the sale and purchase of the Notes hereunder (the "Closing") shall take place at the office of Messrs. Vinson & Elkins, 3300 First City Tower, Houston, Texas, at 11:00 A.M., Houston time, on June 17, 1985 (or such business day prior to July 2, 1985 as the Company and you and the Other Purchasers may agree upon). At the Closing the Company will deliver to you the Notes to be purchased by you in the form of a single Note (or such greater number of Notes as you may request) for each Series of Notes being purchased by you, dated the date of the Closing, payable to you or your registered assigns, against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor. If at the Closing the Company shall fail to tender such Notes as provided herein, or if at the Closing any of the conditions specified in section 3 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of 9 all further obligations under this Agreement, without thereby waiving any other rights you may have by reason of such failure or such non-fulfillment. 3. Conditions to Closing. Your obligation to accept delivery of and pay for the Notes to be purchased by you hereunder is subject to the fulfillment to your satisfaction, prior to or at the Closing, of the following conditions: 3.1. Sale of Common Stock of the Company and Assets of the Division. All of the issued and outstanding Common Stock of the Company and all or substantially all of the assets of the Division shall have been sold to Seagull, and all of the conditions to the obligations of any party to the Acquisition Agreement shall have been satisfied and shall not have been waived without your prior written consent. 3.2. No Indebtedness to ENSTAR. Neither the Company nor the Division shall have any Indebtedness or any other liability or obligation (whether fixed, absolute, matured, unmatured, contingent or otherwise) to ENSTAR or any of its Affiliates except for (i) the Indebtedness of the Company to an Affiliate of ENSTAR which the Company will prepay on the date of the Closing with a portion of the proceeds from the sale of the Notes, (ii) income tax obligations of the Company and the Division payable pursuant to section 8.2(b) of the Acquisition Agreement and income tax obligations, if any, of the Company not in excess of $3,250,000 payable after the Closing under the Tax Agreement to be entered into pursuant to the Acquisition Agreement, and (iii) other obligations with a total present value (discounted at current market rates), taken as a whole, not exceeding $100,000. 3.3. Assumption of Intercompany Mortgage and Delivery of Intercompany Notes. Seagull shall have assumed all obligations of ENSTAR under the Original Intercompany Mortgage. The Original Intercompany Mortgage shall have been amended and restated to read substantially as set forth in Exhibit B hereto and, as so amended and restated, shall be in full force and effect without default by Seagull thereunder. Seagull shall have issued and delivered to the Company its notes (the "Intercompany Notes") in an amount equal to, and otherwise containing terms and conditions comparable to, all liabilities of ENSTAR to the Company evidenced by notes of ENSTAR and such notes of ENSTAR shall have been cancelled and discharged. 3.4. Inducement Agreement. Seagull shall have executed and delivered to you an Inducement Agreement substantially in the form of Exhibit C attached hereto (the "Inducement Agreement"), whereby, in order to induce you to purchase the Notes, Seagull shall make certain representations and warranties and agreements with respect to Seagull and the Division; and such Inducement Agreement shall be in full force and effect with no default by Seagull thereunder. 3.5. Amendment to Gas Sale Contract. The Company and Seagull shall have entered into an amendment to the Gas Sale Contract substantially in the form of Exhibit D attached hereto. -2- 10 3.6. Prepayment of the Bonds and Repayment of Bank Indebtedness. The Company shall have duly taken all actions necessary to prepay in full the Bonds and the Bank Indebtedness at the Closing with the proceeds of the Notes, and, upon such prepayment of the Bonds, to defease the Bond Indenture. 3.7. Sale of Other Notes. Contemporaneously with the Closing the Company shall sell to each of the Other Purchasers the Notes to be purchased by it at the Closing as specified in Schedule A. 3.8. Representations and Warranties Correct. The representations and warranties contained in section 5 thereof, in section 1 of the Inducement Agreement and otherwise made in writing by or on behalf of the Company or Seagull in connection with the transactions contemplated hereby shall be correct at and as of the time of the Closing, except as sections 5.1, 5.5 and 5.13 are affected by the sale of all of the assets of the Division and all of the common stock of the Company to Seagull and except as affected by the sale of the Notes and the amendment of the Existing Note Agreements. 3.9. Alaska Public Utilities Commission Approval. The Alaska Public Utilities Commission ("PUC") shall have given all consents, entered all orders and taken all such other actions as may be necessary under applicable law to approve the transactions contemplated by the Acquisition Agreement and this Agreement subject to no terms and conditions which, in your sole judgment, impose an undue burden on the Company or the Division, and all such consents, orders and other actions shall be final and not subject to any further administrative or judicial review. For purposes hereof, the Approval Order shall not be deemed to contain any terms or conditions which impose an undue burden on the Company or the Division. 3.10. Performance; No Default. All agreements and conditions contained herein required to be performed or complied with prior to or at the Closing shall have been duly performed or complied with and at the time of the Closing no condition or event shall exist which constitutes an Event of Default or which, after notice or lapse of time or both, would constitute an Event of Default. 3.11. Compliance Certificate. You shall have received an Officer's Certificate, dated the date of the Closing, certifying that the conditions specified in sections 3.1, 3.2, 3.5, 3.6, 3.8, 3.9 and 3.10 have been fulfilled. 3.12. Opinions of Counsel. You shall have received favorable opinions, dated the date of the Closing and satisfactory in substance and form to you, (a) from Andrews & Kurth, counsel for the Company, substantially in the form of Exhibit E-1 attached hereto, (b) from Vinson & Elkins, counsel for Seagull, substantially in the form of Exhibit E-2 attached hereto, (c) from Hughes Thorsness Gantz Powell & Brundin, Alaska counsel for the Company, substantially in the form of Exhibit E-3 attached hereto, and (d) from Debevoise & Plimpton, your special counsel, substantially in the form of Exhibit E-4 attached hereto. 3.13. Legal Investment. At the time of the Closing your purchase of Notes hereunder shall be permitted by the laws of each jurisdiction to which you may be subject, without -3- 11 recourse to provisions such as Section 1404(a)(2) of the New York Insurance Law permitting limited investments by life insurance companies without restriction as to the character of the particular investment. 3.14. Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated hereby and all documents and instruments incident to such transactions shall be satisfactory in substance and form to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. 3.15. Tax Sharing Agreement. The Company and Seagull shall have entered into the Tax Sharing Agreement, substantially in the form of Exhibit F attached hereto. 4. Use of Proceeds. The Company will apply the proceeds of the sale of the Notes to (a) repay all amounts outstanding under the Company's unsecured subordinated note payable to an Affiliate of ENSTAR in the original principal amount of $13,400,000, (b) repay Bank Indebtedness and (c) prepay the Bonds. The Company will not directly or indirectly (x) use any of the proceeds of the Notes for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System (12 C.F.R. 207, as amended), or otherwise take or permit any action which would involve a violation of such Regulation G, Regulation X (12 C.F.R. 224) or any other regulation of the Board of Governors of the Federal Reserve System, or (y) use any part of such proceeds for the purpose of engaging in any transaction prohibited by the Foreign Assets Control Regulations, the Transactions Control Regulations, the Cuban Assets Control Regulations, the Foreign Funds Control Regulations or the Iranian Assets Control Regulations of the United States Treasury Department (31 C.F.R., Subtitle B, Chapter V, as amended). No Indebtedness being reduced or retired out of the proceeds of the Notes was incurred for the purpose of purchasing or carrying any "margin stock" within the meaning of such Regulation G. The Company does not own or have any present intention of acquiring any such margin stock. 5. Representations and Warranties. The Company represents an warrants that: 5.1. Organization, Standing etc. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Alaska and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted, to enter into this Agreement, to make the borrowings hereunder, to execute and deliver the Notes and to carry out the terms hereof and thereof. All of the issued and outstanding Common Stock of the Company is validly issued, fully paid and nonassessable and is owned by ENSTAR, free and clear of any security interest, mortgage, pledge, lien, charge or encumbrance or conditional sale or other title retention agreement, except as arising under the Acquisition Agreement and the Divestiture Agreement. 5.2. Subsidiaries. The Company has no Subsidiaries. 5.3. Qualification. The Company is duly qualified or licensed and in good standing as a foreign corporation duly authorized to do business in each jurisdiction wherein the -4- 12 character of the properties owned or the nature of the activities conducted by it makes such qualification or licensing necessary, except for such failures to be so qualified or licensed and in good standing, if any, which when taken together would not in the aggregate have a material adverse effect on the condition, business or property of the Company. 5.4. Financial Statements. The Company has delivered to you financial statements of the Company for the years ended December 31, 1980 to 1984, inclusive, and of the Division for the years ended December 31, 1980 to 1984, inclusive, including balance sheets of the Company (and consolidated and consolidating balance sheets or combined and combining balance sheets of the Company and the Division) as at such dates and statements of income and of surplus of the Company (and consolidated and consolidating or combined and combining statements of income and of surplus of the Company and the Division) for the years then ended, all as certified by Peat, Marwick, Mitchell & Co., independent certified public accountants. The Company has also delivered to you its unaudited balance sheet as at March 31, 1985 and its unaudited statement of operations for the three-month period then ended. Such financial statements fairly present the financial condition of the Company and the Division as at the respective dates thereof and the results of the operations of the Company and the Division for the respective periods covered thereby, were prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout such periods and reflect all known liabilities, contingent or otherwise, as at such dates which are required by generally accepted accounting principles to be reflected therein. The Company had no Subsidiaries for the period covered by such financial statements. 5.5. Changes, etc. Except as set forth in Exhibit G attached hereto, or in the Company's unaudited balance sheet as at March 31, 1985 and its unaudited statement of operations for the three-month period then ended, since December 31, 1984, there has been no material adverse change in the condition of the Company or the Division and no material adverse occurrence or development with respect to the business, prospects or condition (financial or otherwise) of the Company or the Division or any of their respective properties or assets (individually or in the aggregate material). Except as set forth in the Company's unaudited balance sheet as at March 31, 1985 and its unaudited statement of operations for the three-month period then ended, since December 31, 1984, there has been no change in the condition of the Company or of the Division from that reflected in the combining balance sheets of the Company as at such date referred to in section 5.4, other than changes in the ordinary course of business which have not been, either in any case or in the aggregate, materially adverse, and, except as set forth in Exhibit G attached hereto, or in the Company's unaudited balance sheet as at March 31, 1985 and its unaudited statement of operations for the three-month period then ended, since December 31, 1984, there has been no occurrence or development which has had or in the opinion of the Company (a) will have a materially adverse effect on the business or prospects of the Company or the Division or on any of their respective properties or assets (individually or in the aggregate material) or (b) constitutes or would result in a material adverse change in the nature or the extent of the business of the Company or the Division. Except as disclosed in the Company's unaudited balance sheet as at March 31, 1985 and its unaudited statement of operations for the three-month period then ended, since December 31, 1984, the Company has not directly or indirectly made any Restricted Investment or Restricted Stock Payment and has not made Restricted Subordinated -5- 13 Debt Payments except payments on the note referred to in section 4(a) and other such payments not in excess of $100,000. 5.6. Tax Returns and Liabilities. The Company has filed (or obtained extensions with respect to the filing of) all tax returns and reports required to be filed by it and has paid all taxes, assessments and other governmental charges imposed upon it or any of its properties, assets, income or franchises, other than those currently payable without penalty or interest and those, not substantial in amount, being contested as permitted by section 9.2. Until July 26, 1983, the Company was a member of the affiliated group, within the meaning of Section 1504 of the Code, of which ENSTAR was the common parent and, as such, joined in the filing of the consolidated Federal income tax returns of such affiliated group for the periods ending on or before such date. The consolidated Federal income tax returns of the ENSTAR affiliated group have been audited by the Internal Revenue Service for all fiscal periods through December 31, 1981 and the results of such audits are duly reflected in the financial statements referred to in section 5.4. The charges, accruals and reserves on the books of the Company in respect of Federal, state and other income taxes for all fiscal periods are adequate in the opinion of the Company, and the Company does not know of any actual or proposed assessment for additional Federal, state or other income taxes for any fiscal period. 5.7. Indebtedness for Money Borrowed. Exhibit H correctly describes all secured and unsecured Short-Term Borrowing and Funded Debt of the Company outstanding, or for which the Company has commitments, on the date of this Agreement. The Company is not in default in respect of any such Short-Term Borrowing or Funded Debt or in respect of any instrument or agreement relating thereto and no instrument or agreement applicable to or binding on the Company contains any restrictions on the incurrence of additional Funded Debt by the Company, except the agreements relating to Short-Term Borrowing or Funded Debt referred to in items 2, 4 and 5 of Exhibit H, complete and correct copies of which have been delivered to your special counsel. 5.8. Title to Properties; Liens. The Company has good and marketable title in fee simple absolute to all its real property on which compressor stations are located and good and marketable title to all of its other real property and to all of its personal property (except for property consisting of rights-of-way, licenses, permits and franchises, as to which the Company has satisfactory title for the purpose of constructing, operating and maintaining all property located or proposed to be located on the real property covered thereby), in each case subject to no mortgage, pledge, lien, security interest, lease, charge or encumbrance other than those of the character permitted by section 10.5. None of the properties or assets the value of which is reflected in the combining balance sheets of the Company and the Division as at March 31, 1985, referred to in section 5.4, is held by the Company or the Division as lessee under or subject to any lease (except as disclosed in such balance sheets or the notes thereto) or as conditional vendee under any conditional sale or other title retention agreement. The Company enjoys peaceful and undisturbed possession under all leases under which it operates, and all such leases are valid and subsisting, with no material default on the part of the Company existing thereunder. No financing statement under the Uniform Commercial Code which names the Company as debtor has been filed in any state or other jurisdiction and the Company has not signed any such financing statement or any security agreement authorizing any secured -6- 14 party thereunder to file any such financing statement except financing statements relating to the liens, security interests and other encumbrances permitted by section 10.5. 5.9. Litigation. There is no litigation, proceeding or investigation pending or, to the best of the Company's knowledge, threatened against or affecting the Company or any Affiliate of the Company which questions the validity of any of this Agreement or the Notes or any action taken or to be taken pursuant hereto. Except as set forth in the notes to the financial statements of the Company and the Division for the quarterly period ended March 31, 1985, referred to in section 5.4, and except as set forth in Exhibit G attached hereto, there is no litigation, proceeding or investigation pending or, to the best of the Company's knowledge, threatened against or affecting the Company which involves the condemnation, purchase or other acquisition by any governmental authority of any property (individually or in the aggregate material) of the Company or which might result in any materially adverse change in the condition, business or prospects of the Company or in any of its properties or assets (individually or in the aggregate material). The Company is not subject to or a party to any order of any court or governmental body arising out of any action, suit or proceeding under any statute or other law with respect to antitrust, monopoly, restraint of trade, unfair competition or similar matters. 5.10. Compliance with Other Instruments. The Company is not in violation of any term of its charter or by-laws, and neither the Company nor the Division is in violation of any material term of any agreement, instrument, judgment, decree, order, statute, rule, governmental regulation, franchise, certificate, permit or the like applicable to it, and the execution, delivery and performance of this Agreement and the Notes will not result in any such violation or be in conflict with or constitute a default under any such term, or result in the creation of any mortgage, lien, charge or encumbrance upon any of the properties or assets of the Company pursuant to any such term. Except as set forth in the notes to the financial statements of the Company and the Division for the quarterly period ended March 31, 1985, referred to in section 5.4, and except as set forth in the Approval Order, there is no such term which materially adversely affects the business, operations, affairs or condition of the Company or any of its properties or assets (individually or in the aggregate material). 5.11. Patents, Trademarks, etc., Franchises. Subject to certain pending disputes and claims relating to the ownership and/or use of the name "ENSTAR" or any variant thereof, the Company owns or possesses all the permits, patents, trademarks, service marks, trade names, copyrights and licenses, and rights with respect to the foregoing, necessary for the conduct of its business as now conducted and proposed to be conducted, without any known conflict with the rights of others. The Company has received a Certificate of Public Convenience and Necessity from the PUC (the "Company Certificate"), the Division has received a Certificate of Public Convenience and Necessity from the PUC (the "Division Certificate"), and each of the Company and the Division has received all material permits, licenses, franchises and other authorizations from governmental or public bodies or authorities which are necessary for the conduct of their business as now conducted and proposed to be conducted other than those which are expected to be obtained without difficulty in due course. Such Certificates of Public Convenience and Necessity have been duly and effectively granted, are valid and enforceable in accordance with their terms and are in full force and effect, and the Company and the -7- 15 Division have performed and complied with in all material respects all terms thereof and of all orders of the PUC relating thereto required to be performed and complied with by them and neither the Company nor the Division is in default in any material respect under any such term. 5.12. Governmental Consent, etc. The Company is not required to obtain any consent, approval or authorization of, or to make any registration, declaration or filing with, any governmental or public body or authority as a condition precedent to the valid execution, delivery and performance of this Agreement or the Notes. 5.13. Holding Company Act. The Company is a subsidiary of ENSTAR which is a subsidiary of Unimar Company ("Unimar"), a Texas general partnership whose partners are subsidiaries of Allied Corporation ("Allied") and Ultramar PLC ("Ultramar"). On June 26, 1984, Unimar, Allied and Ultramar, acting in good faith, filed with the Securities and Exchange Commission (the "SEC"), pursuant to Section 3(a)(4) of the Public Utility Holding Company Act of 1935, as amended (the "Holding Company Act"), an application (the "Exemption Application") for an order to the effect that, upon and after Unimar's acquisition of the stock of ENSTAR, the applicants and each of their subsidiaries will be exempt from all the provisions of the Holding Company Act other than Section 11(b)(1) insofar as it relates to the commitment of the applicants to divest ENSTAR's utility operations under the Divestiture Agreement. As a result of such filing, Unimar, Allied and Ultramar and all of their subsidiaries are exempt from the provisions of the Holding Company Act other than Section 9(a)(2) and Section 11(b)(1) insofar as it relates to the commitment of the applicants to divest ENSTAR's utility operations under the Divestiture Agreement. Pursuant to Section 3(c) of the Holding Company Act, such exemption shall continue until the SEC, after notice and opportunity for hearing, shall enter an order denying or otherwise disposing of the Exemption Application. As of the date hereof, the SEC has not given any such notice nor has it otherwise acted upon the Exemption Application in any respect. 5.14. Gas Contracts. The Company has delivered to you and your special counsel complete and correct copies of the Gas Purchase Contracts, the Gas Sale Contract and any Other Agreements relating to the purchase and sale of natural gas to which the Company is a party. The Gas Purchase Contract, the Gas Sale Contract and any other such agreement are each valid and enforceable in accordance with their respective terms and are in full force and effect, and no material default on the part of any party thereto exists thereunder. 5.15. Coverage of Fixed Charges. The Company's net earnings available for fixed charges for the period of its last five fiscal years have averaged per year not less than one and one-half times its average annual fixed charges applicable to such period, and during at least one of its last two fiscal years the Company's net earnings available for fixed charges have been not less than one and one-half times its fixed charges for such fiscal year, in each case on an unconsolidated basis. As used in this section 5.15, the terms "net earnings available for fixed charges" and "fixed charges" have the respective meanings specified in Section 1404 of the New York Insurance Law. 5.16. Disclosure. Neither this Agreement nor any other document, certificate or statement furnished to you by or on behalf of the Company in connection with the transactions -8- 16 contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact known to the Company which materially adversely affects or in the future may (so far as the Company can now foresee) materially adversely affect the business, operations, affairs or condition of the Company, the Division or any of their respective properties or assets (individually or in the aggregate material) which has not been set forth in this Agreement or in the other documents, certificates or statements furnished to you by or on behalf of the Company prior to the date hereof in connection with the transactions contemplated hereby. 5.17. Issue of Notes is Legal and Authorized. The Company has full power and legal right to execute, deliver and perform this Agreement and the Notes and has taken all corporate action necessary thereto. This Agreement constitutes, and the Notes, when executed and delivered by the Company, will constitute, legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms. 5.18. ERISA. (a) The Company has not engaged in any transaction in connection with which the Company could be subjected to either a civil penalty assessed pursuant to section 502(i) of ERISA or a tax imposed by section 4975 of the Code which, in either case, would be materially adverse to the Company. (b) No Plan subject to Title IV of ERISA or any trust created under any such Plan has been terminated within the past 10 years. No liability to the Pension Benefit Guaranty Corporation has been or is expected by the Company to be incurred with respect to any Plan by the Company or any Related Person which is or would be materially adverse to the Company. There has been no reportable event (within the meaning of section 4043(b) of ERISA) or any other event or condition with respect to any Plan which presents a risk of termination of any such Plan by the Pension Benefit Guaranty Corporation under circumstances which in any case could result in liability which would be materially adverse to the Company. (c) Except with respect to contributions on behalf of certain excluded employees (restoration of which is not expected to exceed $150,000.00), full payment has been made of all amounts which the Company is required under the terms of each Plan to have paid as contributions to such Plan as of the last day of the most recent fiscal year of such Plan ended prior to the date hereof, and no accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan. (d) The current value of all vested accrued benefits under all Plans did not, as of the end of the Company's most recently ended fiscal year, exceed the current value of the assets of such Plans allocable to such vested accrued benefits by more than $500,000. The terms "current value" and "accrued benefits" have the meanings specified in section 4062(b)(1)(A) and section 3 of ERISA, respectively. (e) The Company is not presently obligated, nor has it at any time within the last six years been obligated, to contribute to any Multiemployer Plan. -9- 17 5.19. No Defaults. No event has occurred and no condition exists which constitutes a Default or Event of Default under this Agreement. No event has occurred and no condition exists which constitutes, or which with the passage of time or the giving of notice or both would constitute, an event of default under any agreement relating to any indebtedness of the Company for money borrowed, or a material default in the performance of any covenant or condition under any other mortgage, indenture, contract or other instrument or under any order of any court, governmental authority, arbitration board or tribunal, applicable to the Company or any of its property. 5.20. Private Offering. Neither the Company nor any Person authorized or employed by the Company as agent, broker, dealer or otherwise has offered any of the Notes or any similar security of the Company for sale to, or solicited offers to buy any thereof from, or otherwise approached or negotiated with respect thereto with anyone other than you and the Other Purchasers. The Company agrees that neither the Company nor anyone acting on its behalf will offer the Notes or any part thereof or any similar securities for issue or sale to, or solicit any offer to acquire any of the same from, anyone so as to bring the issuance and sale of the Notes within the provisions of Section 5 of the Securities Act of 1933, as amended. 5.21. Certain Documents. The Company has delivered to you and your special counsel complete and correct copies of the Acquisition Agreement, the Approval Order, the Divestiture Agreement and the Exemption Application, each of which is in full force on the date hereof. 6. Financial Statements and Information. The Company will deliver (in duplicate) to you, so long as you are committed to purchase Notes hereunder or shall hold any Notes, and to each other holder of 10% or more in principal amount of the Notes at the time outstanding: (a) as soon as available and in any event within 60 days after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, combined and combining balance sheets of the Company, its Subsidiaries and the Division as at the end of such period and the related combined and combining statements of income and surplus and of changes in financial position of the Company, its Subsidiaries and the Division for such period, for the periods from the beginning of the current fiscal year to the end of such quarterly period, and for the 12-month period ended with such quarterly period, setting forth in each case, in comparative form the figures for the corresponding periods of the previous fiscal year, all in reasonable detail and certified, subject to changes resulting from year-end audit adjustments, by a principal financial officer of the Company; (b) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, combined and combining balance sheets of the Company, its Subsidiaries and the Division (and, in case the Company shall have any Subsidiaries which are not Wholly-Owned Domestic Subsidiaries, a combined balance sheet of the Company, its Wholly-Owned Domestic Subsidiaries and the Division) as at the end of such fiscal year and the related combined and combining statements of income and surplus and of changes in financial position of the Company, its Subsidiaries and the Division (and, in case the Company shall have any Subsidiaries which are not -10- 18 Wholly-Owned Domestic Subsidiaries, combined statements of income and surplus and of changes in financial position of the Company, its Wholly-Owned Domestic Subsidiaries and the Division) for such fiscal year, setting forth in each case, in comparative form the figures for the previous fiscal year, all in reasonable detail and accompanied by the report and opinion thereon of independent public accountants of recognized national standing selected by the Company and reasonably satisfactory to you, if you shall then be committed to purchase Notes hereunder or shall hold any Notes; (c) together with each delivery of financial statements pursuant to subdivisions (a) and (b) above, (i) an Officer's Certificate of the Company (x) stating that the signer has reviewed the relevant terms of this Agreement and of the Notes and have made, or caused to be made under their supervision, a review of the transactions and condition of the Company and its Subsidiaries during the period in question, and that such review has not disclosed the existence during such period and that the signer does not have knowledge of the existence as of the date of such Officer's Certificate of the Company of any condition or event which constitutes a Default or an Event of Default or, if any such Default or Event of Default existed or exists, specifying the nature and period of existence thereof and what action the Company has taken or is taking or proposes to take with respect thereto, and (y) specifying the amount of all Restricted Investments, Restricted Stock Payments and Restricted Subordinated Debt Payments made during such period and the amount available as at the end of such period for Restricted Investments, Restricted Stock Payments and Restricted Subordinated Debt Payments in compliance with section 10.3 and showing in reasonable detail the calculations thereof, and (ii) an Officer's Certificate of Seagull stating that the signer has reviewed the relevant terms of the Seagull Documents and have made, or caused to be made under their supervision, a review of the transactions and condition of the Division during the period in question, and that such review has not disclosed the existence during such period, and that the signer does not have knowledge of the existence as of the date of such Officer's Certificate of any condition or event which constitutes a Default or an Event of Default or, if any such Default or Event of Default existed or exists, specifying the nature and period of existence thereof and what action Seagull has taken or is taking or proposes to take with respect thereto; (d) together with each delivery of financial statements pursuant to subdivision (b) above, a separate report by the independent public accountants reporting thereon (i) stating that their examination has included a review of the relevant terms of this Agreement, the Inducement Agreement and the Notes as they relate to accounting matters, (ii) stating whether or not their examination has disclosed the existence or occurrence, during or as at the end of the fiscal year covered by such financial statements, of any condition or event which constitutes a Default or an Event of Default, and, if their examination has disclosed such a Default or Event of Default specifying the nature and period of existence thereof, and (iii) specifying the amount of all Restricted Investments, Restricted Stock Payments and Restricted Subordinated Debt Payments made during such fiscal year and the amount available as at the end of such fiscal year for Restricted investments, Restricted Stock Payments and Restricted -11- 19 Subordinated Debt Payments in compliance with section 10.3 and showing in reasonable detail the calculations thereof; (e) within 30 days after the end of each quarterly fiscal period in each fiscal year of the Company, an Officer's Certificate of each of Seagull and the Company, with respect to the period beginning on the later of the date hereof and the date of the last such certificate and ending on the date of such certificate (i) specifying the nature of any amendment, modification or supplement to the Gas Sale Contract (and attaching a copy thereof) made during such period and stating whether such amendment, modification or supplement is permitted by the terms of section 10.10, (ii) specifying the amounts and dates of all payments made during such period by Seagull to the Company pursuant to the Gas Sale Contract, demonstrating in reasonable detail the calculation thereof, and (iii) stating that the signer has reviewed the relevant terms of the Gas Sale Contract and that such review has not disclosed the existence during such period of any default by Seagull of its obligations under the Gas Sale Contract, and that the signer does not have knowledge of the existence as at the date of such Officer's Certificate of any such default by Seagull or, if any such default existed or exists, specifying the nature and period of existence thereof and what action Seagull has taken or is taking or proposes to take with respect thereto; (f) prior to becoming liable with respect to any Funded Debt, an Officer's Certificate of the Company stating that the signer has reviewed the relevant terms of this Agreement and that the Funded Debt with respect to which the Company proposes to become liable is permitted by section 10.1 and showing in reasonable detail the calculations thereof, with the confirmation thereof endorsed thereon by independent public accountants of recognized national standing selected by the Company and satisfactory to you, if you shall then be committed to purchase Notes hereunder, or shall hold any Notes, except that such confirmation shall not be required if the officer signing such Officer's Certificate of the Company is engaged in accounting work or business, whether or not a certified, licensed or public accountant; (g) promptly upon receipt thereof, copies of all audit reports submitted to the Company or Seagull by independent public accountants in connection with each annual, interim or special audit of the accounts of the Company or any of its Subsidiaries or the Division made by such accountants; (h) promptly upon transmission thereof, copies of each report on Federal Energy Regulatory Commission Form 2 (or similar report) filed by the Company with the PUC or any governmental authority succeeding to any of its functions (and, to the extent requested by you or such holder, copies of all regular and periodic reports filed by the Company or any of its Subsidiaries with the PUC or any governmental authority succeeding to any of its functions) and copies of all regular and periodic reports filed by the Company or any of its Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental authority succeeding to any of its functions; -12- 20 (i) forthwith upon any principal officer of the Company obtaining knowledge of any condition or event which constitutes a Default or an Event of Default, an Officer's Certificate of the Company specifying the nature and period of existence thereof and what action the Company has taken or is taking or proposes to take with respect thereto; and (j) with reasonable promptness, such other information and data with respect to the Company or any of its Subsidiaries or the Division or the performance by the Company of this Agreement or by Seagull of the Seagull Documents as from time to time may be reasonably requested. 7. Inspection of Properties and Books. The Company will permit you or your authorized representative designated by you, so long as you shall be committed to purchase Notes hereunder, or shall hold any Notes, to visit and inspect, at your expense, any of the properties of the Company, its Subsidiaries or the Division, to examine its and their books of account (and to make copies thereof and take extracts therefrom) and to discuss its and their affairs, finances and accounts (including transactions, agreements and other relations with any stockholders) with, and to be advised as to the same by, its and their officers and independent public accountants, all at such reasonable times and intervals as you may desire. 8. Prepayment of Notes. 8.1. Fixed Prepayments. (a) Prepayment of the Series E Notes. On July 1, 1989, the Company will prepay without premium $5,000,000 principal amount of the Series E Notes, leaving $5,000,000 principal amount of the Series E Notes for payment at their stated maturity on July 1, 1990. (b) Prepayment of the Series F Notes. On July 1, 1991, and on each July 1 thereafter until the Series F Notes are paid in full, the Company will prepay without premium $2,900,000 principal amount of the Series F Notes or such lesser principal amount thereof as then remains unpaid, leaving $2,900,000 principal amount, or such other principal amount thereof as then remains unpaid, of the Series F Notes for payment at their stated maturity on July 1, 1995. (c) Prepayment of the Series G Notes. On July 1, 1991, and on each July 1 thereafter until the Series G Notes are paid in full, the Company will prepay without premium $300,000 principal amount of the Series G Notes or such lesser principal amount thereof as then remains unpaid, leaving $300,000 principal amount, or such other principal amount thereof as then remains unpaid, of the Series G Notes for payment at their stated maturity on July 1, 2000. (d) Prepayment of the Series H Notes. On July 1, 1991, and on each July 1 thereafter to and including July 1, 1995, the Company will prepay without premium $2,300,000 principal amount of the Series H Notes or such lesser principal amount thereof as then remains unpaid. On July 1, 1996, and on each July 1 thereafter until the Series H Notes are paid in full, the Company will prepay without premium $1,200,000 principal amount of the Series E Notes or such lesser principal amount thereof as then remains unpaid, leaving $1,200,000 -13- 21 principal amount, or such other principal amount thereof as then remains unpaid, of the Series H Notes for payment at their stated maturity on July 1, 2000. (e) No Relief From Required Prepayments. No partial prepayment of the Notes pursuant to section 8.2 or 8.3 shall relieve the Company from its obligation to make the required prepayments provided for in this section 8.1. 8.2. Optional Prepayment without Premium. On the date of any required prepayment of the Series F, G or H Notes pursuant to section 8.1, the Company may upon notice as provided in section 8.6 prepay an additional principal amount of each Series of Notes then subject to required prepayment (in an integral multiple of $1,000) not exceeding, in the case of each Series, the amount of the required prepayment for such Series at the principal amount of the Notes so prepaid, without premium, provided that no prepayment with respect to any such Series shall be made pursuant to this section 8.2 unless (a) immediately after giving effect to such prepayment, the total principal amount of such Series of Notes prepaid pursuant to this section 8.2 would not exceed 25% of the original principal amount of such Series and (b) the ratio of (i) the principal amount of the Notes of each Series being prepaid pursuant to this Section 8.2 at such time to (ii) the maximum principal amount of the Notes of such Series which could then be prepaid pursuant to this Section 8.2 shall be equal for each such Series. The right to make optional prepayments pursuant to this section 8.2 shall be noncumulative and shall lapse as to any particular optional prepayment if and to the extent not exercised on the date when such optional prepayment may be made. 8.3. Optional Prepayments with Premium. At any time or from time to time after July 1, 1993, in the case of the Series F Notes, and after January 1, 1996, in the case of the Series G and H Notes, the Company may, at its option, upon notice as provided in section 8.6, prepay all or any part of any such Series (in an integral multiple of $1,000 and a minimum of $50,000), upon payment of a premium (a percentage of the principal amount so prepaid) applicable in accordance with the following table, depending upon the 12-month period in which the date fixed for such prepayment occurred and the Series of Notes involved:
12-Month Period Series F Series G Series H Commencing Notes Notes Notes - ------------------------ -------- -------- -------- July 1, 1993 ........... 1.41% -- -- July 1, 1994 ........... 0 -- -- January 1, 1996 ........ -- 3.20% 3.19% July 1, 1996 ........... -- 2.74 2.73 July 1, 1997 ........... -- 1.83 1.82 July 1, 1998 ........... -- 0.91 0.91 July 1, 1999 ........... -- 0 0
-14- 22 provided that no such prepayment shall be made with respect to either of the Series G or H Notes unless the ratio of (i) the principal amount of the Notes of each of Series G and H being prepaid pursuant to this section 8.3 at such time to (ii) the then outstanding principal amount of the Notes of such Series shall be equal for each such Series. 8.4. Prepayment in Full at Option of Noteholders under Certain Circumstances. In the event that (a) at any time Seagull shall for any reason cease (whether voluntarily or involuntarily) to own, beneficially and of record, more than 50% of each class of Voting Stock of the Company, or (b) substantially all of the assets of the Company or the Division shall be subject to Total Taking or a Total Destruction, or (c) the Division Certificate is terminated, cancelled or changed in a manner materially adverse to the Division, the Company shall forthwith deliver to each holder of any Note an Officer's Certificate of the Company certifying as to the occurrence of such event and a notice fixing a date (which shall be not less than 60 or more than 90 days after the delivery of such notice) on which the Company will make prepayment of the Notes if requested to do so as provided in this section 8.4, and at the written request of the holders of at least 66 2/3% in principal amount of the Notes at the time outstanding, received by the Company at any time within 30 days after delivery of such Officers's Certificate of the Company and such notice, the Company will prepay, on the date specified therefor in such notice, all, but not less than all, of the Notes at the time outstanding, such prepayment to be made without premium. 8.5. Allocation of Partial Prepayments. In the case of each prepayment of less than all of a given Series of Notes, the principal amount of each Series of Notes to be prepaid shall be allocated (in integral multiples of $1,000) among all of the Notes of such Series at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment, with adjustments, to the extent practicable, to compensate for any prior prepayments not made exactly in such proportion. 8.6. Notice of Optional Prepayments. In the case of each prepayment of Notes under section 8.2 or 8.3, the Company will give written notice thereof to each holder of any of the Notes not less than 30 nor more than 60 days prior to the date fixed for such prepayment, in each case specifying such date, the aggregate principal amount of each Series of Notes to be prepaid on such date, the principal amount of each Note, if any, held by such holder to be prepaid on such date, the amount of interest on such principal amount accrued to such date and the premium, if any, applicable to such prepayment. 8.7. Maturity; Exchange or Notation, Surrender, etc. In the case of each prepayment of Notes, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable premium, if any. Except as otherwise provided in section 20, the Company may, as a condition to prepaying any Note in part only, require the holder thereof to make such Note available to the Company at the place of payment specified therein or pursuant thereto for notation thereon of the portion of the principal amount thereof -15- 23 then being prepaid. Any Note prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. 8.8. Purchase of Notes. The Company will not, and will not permit any Subsidiary or Affiliate of the Company to, purchase or otherwise acquire any Note except pursuant to the provisions for prepayment provided for in this section 8. 9. General Covenants. 9.1. Accounting and Reserves. The Company will, and will cause each Subsidiary to, (a) maintain a standard and uniform system of accounting and keep proper books of record and account in which full, true and correct entries will be made of its transactions, all in accordance with Required Accounting Practice, and (b) set aside on its books for each fiscal year all such proper reserves for depreciation, depletion, obsolescence, amortization, bad debts and other purposes in connection with its business as shall be required by Required Accounting Practices. 9.2. Payment of Taxes and Claims; Tax Sharing Agreement. (a) The Company will, and will cause each Subsidiary to, pay all taxes, assessments, rates, excises, levies, fees and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its franchises, business, income or profits before any penalty or interest accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or might become a lien or charge upon any of its properties or assets, provided that no such charge or claim need be paid if the amount, applicability or validity thereof is currently being contested in good faith by appropriate action promptly initiated and diligently conducted and if such reserve or other appropriate provision, if any, as shall be required by Required Accounting Practice shall have been made therefor. (b) The Company will not enter into any amendment of the Tax Sharing Agreement which would materially adversely affect the Company's obligation to make or right to receive payments thereunder. 9.3. Corporate Existence, etc. The Company will preserve and keep in full force and effect its corporate existence, rights and franchises and those of each of its Subsidiaries, except as otherwise permitted by sections 10.7 and 10.8 and except where any such failure to maintain such existence, rights and franchises could not be expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole. 9.4. Maintenance of Properties, Conduct of Business; Company Certificate. (a) The Company will maintain or cause to be maintained in good repair, working order and condition all properties used or useful in the business of the Company and its Subsidiaries, and from time to time will make or cause to be made all appropriate repairs, renewals and replacements -16- 24 thereof, so that the business carried on in connection therewith may be properly and advantageously conducted at all times. (b) The Company will carry on its business and will cause the business of its Subsidiaries to be carried on in an efficient manner and will not, and will not permit any Subsidiary to, engage in any business other than the transmission or distribution of natural gas and in businesses directly related thereto, provided that neither the Company nor any Subsidiary will engage in the business of exploring for or developing natural gas or other hydrocarbon reserves. (c) The Company will at all times perform and observe all of the covenants, agreements, terms, conditions and limitations contained in the Company Certificate and do all things necessary to keep unimpaired all of the Company's rights thereunder and to prevent any default by the Company thereunder or any forfeiture or impairment thereof. The Company will not cancel or terminate, or permit the cancellation or termination of, or default under, or make or agree to any amendment, modification or alteration which would result in a material adverse change in the rights of the Company under the Company Certificate. 9.5. Insurance. The Company will keep or cause to be kept all of its and its Subsidiaries' property and business of a character usually insured by companies of established reputation similarly situated insured by reputable insurance companies or associations of high standing against loss or damage by fire and such other hazards and risks (including, without limitation, public liability, workmen's compensation, war risk and earthquake risk if and to the extent war risk and earthquake risk insurance are at the time generally available) as are customarily insured against by companies of established reputations similarly situated, in such amounts as such properties and business are usually insured by such companies. The Company will comply, and will cause each Subsidiary to comply, with all the terms and conditions of all insurance policies with respect to its property and business or any part thereof and with all requirements of Boards of Underwriters or similar bodies applicable thereto. 9.6. Delivery of Supplemental Opinion of Counsel. The Company will deliver to you and your special counsel, within 30 days of the date of the Closing, supplemental opinions of counsel, satisfactory in scope and form to you and your special counsel, to the effect that all filings, recordings, registrations or other actions which are required or advisable to effect the complete and absolute release of the liens of the Division Mortgage, the Bond Indenture, the Note Indenture, the Division Collateral Assignment and the Company Collateral Assignment have been made or taken. 10. Particular Covenants. 10.1. Limitation on Indebtedness. (a) General Restrictions on Company Funded Debt. The Company will not directly or indirectly create, incur, issue, assume, guarantee, agree to purchase or repurchase or provide funds in respect of or otherwise become liable with respect to any Funded Debt, unless immediately after giving effect thereto and to the application of the proceeds thereof, -17- 25 (i) the aggregate principal amount of all Consolidated Funded Debt of the Company and its Wholly-Owned Domestic Subsidiaries at the time outstanding would not exceed 65% of the then Consolidated Total Capitalization of the Company and its Wholly-Owned Domestic Subsidiaries; and (ii) Consolidated Net Income as Defined of the Company and its Wholly-Owned Domestic Subsidiaries for the preceding fiscal year of the Company plus income taxes and interest on Indebtedness of the Company and its Wholly-Owned Domestic Subsidiaries deducted in determining such Consolidated Net Income as Defined plus the amount of Division Income Taxes for such preceding fiscal year would be at least 200% of the annual interest charges on all such Indebtedness then outstanding. (b) Restriction on Consolidated Total Debt. The Company will not, and will not permit any Wholly-Owned Domestic Subsidiary, directly or indirectly, to create, incur, issue, assume, guarantee, agree to purchase or repurchase or provide funds in respect of or otherwise become liable with respect to any Indebtedness which would constitute Consolidated Total Debt unless immediately after giving effect thereto and the application of the proceeds thereof the aggregate principal amount of Consolidated Total Debt at the time outstanding would not exceed 75% of the then Consolidated Adjusted Total Capitalization of the Company and its Wholly-Owned Domestic Subsidiaries. (c) Restrictions on Subsidiary Funded Debt and Short-Term Borrowing. The Company will not permit any Subsidiary, directly or indirectly, to create, incur, issue, assume, guarantee, agree to purchase or repurchase or provide funds in respect of or otherwise become liable with respect to any Funded Debt or Short-Term Borrowing other than secured or unsecured Funded Debt of a Wholly-Owned Domestic Subsidiary owing to the Company and secured or unsecured Short-Term Borrowing of a Wholly-Owned Domestic Subsidiary owing to the Company. (d) Prohibition of Incurrence of Funded Debt and Short-Term Borrowing During Gas Sale Contract Payment Default. Notwithstanding the foregoing provisions of this section 10.1, neither the Company nor any Subsidiary will directly or indirectly, create, incur, issue, assume, guaranty, agree to purchase or repurchase or provide funds in respect of or otherwise become liable with respect to any Funded Debt or Short-Term Borrowing at a time when a default has occurred and is continuing by Seagull in the due and punctual payment of the price for natural gas under the Gas Sale Contract and such default shall be continuing. 10.2 Restrictions on Investments, Loans, etc. The Company will not, and will not permit any Subsidiary to, directly or indirectly purchase or otherwise acquire or own any Securities of any other Person, or make any capital contribution, loan or advance to any other Person, or be obligated to provide funds to guarantee any obligation of any other Person, or otherwise invest in any other Person, including, in any such case, a transfer of property to such -18- 26 person for an aggregate consideration of less than the amount determined by the Company in good faith to be the aggregate fair value of such property (collectively "Investments"), except that: (a) the Company and any Subsidiary may purchase and own marketable direct obligations of the United States of America maturing within one year from the date of acquisition thereof; (b) the Company and any Wholly-Owned Domestic Subsidiary may purchase and own (i) certificates of deposit of any member bank of the Federal Reserve System which either has a combined capital and surplus of not less than $250,000,000 or which has a Standard & Poor's corporation credit rating on its outstanding securities of not less than AA, and (ii) certificates of deposit of National Bank of Alaska and of First National Bank of Anchorage, in each case not exceeding $1,000,000 in the aggregate at any time, and of First Interstate Bank of Alaska and of Alaska National Bank of the North, in each case not exceeding $100,000 in the aggregate at any time; (c) subject to section 10.3, the Company may purchase and own Securities of, or make capital contributions to, or make any loan or advance to, or be obligated to provide funds to, any Wholly-Owned Domestic Subsidiary or any corporation which simultaneously therewith becomes a Wholly-Owned Domestic Subsidiary; (d) so long as no Default or Event of Default shall have occurred and be continuing, the Company may make any loan or advance to Seagull evidenced by Intercompany Notes, which Intercompany Notes are secured by the Intercompany Mortgage and bear interest at the rate required by section 2.02 of the Intercompany Mortgage, but only if either (i) the proceeds of any such loan or advance made after December 31, 1984 are applied solely to finance, or to replace funds used in financing, the construction, acquisition or improvement after January 1, 1985 of property which is used or useful or intended for use in the Division's business and which is subjected to the lien of the Intercompany Mortgage, or (ii) after giving effect to such loan or advance, the Company would be permitted to make at least $1.00 in Restricted Stock Payments pursuant to section 10.3; and (e) the Company may purchase and own commercial paper maturing not more than 270 days from the date of creation thereof which has the highest credit rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and which is not issued by an Affiliate of the Company. For the purpose of clause (d) above, any extension or renewal of Intercompany Notes shall constitute a new loan or advance to the Division unless the requirements with respect to fixing the interest rate applicable to Intercompany Notes set forth in section 2.02 of the Intercompany Mortgage are complied with as of the time of such extension and renewal. -19- 27 10.3. Restricted Investments, Restricted Stock Payments and Restricted Subordinated Debt Payments. The Company will not, directly or indirectly, (a) other than as contemplated by section 4 make any Restricted Investment, Restricted Stock Payment or Restricted Subordinated Debt Payment so long as any Default or Event of Default shall have occurred and be continuing; or (b) make any Restricted Investment, Restricted Stock Payment or Restricted Subordinated Debt Payment from and after December 31, 1984, unless, after giving effect to the proposed action, the aggregate amount of such Restricted Investment, such Restricted Stock Payment or such Restricted Subordinated Debt Payment plus all other Restricted Investments, Restricted Stock Payments and Restricted Subordinated Debt Payments made from and after December 31, 1984 plus the aggregate unpaid principal amount of all loans and advances made by the Company to Seagull pursuant to clause (d)(ii) of section 10.2 would not exceed the sum of the following: (i) $10,000,000; plus (ii) Consolidated Adjusted Net Earnings of the Company and its Wholly-Owned Domestic Subsidiaries accrued during the period from December 31, 1984 to the end of the next preceding quarterly fiscal period (the "Computation Period"); plus (iii) the aggregate amount of net cash proceeds to the Company from sales during the Computation Period of shares of any class of its stock; provided that the restrictions in this paragraph (b) shall not prevent Restricted Investments not exceeding $500,000 in the aggregate, but the aggregate amount of each such Restricted Investment shall nevertheless be included in all subsequent calculations of the aggregate amount of Restricted Investments pursuant to this paragraph (b). The Company will not, directly or indirectly, declare any dividend (except a dividend payable solely in Common Stock of the Company) for payment, or order any distribution to be made to any holders of any stock of the Company, on a date more than 60 days after the declaration of such dividend or the ordering of such distribution, as the case may be. The Company will not permit any Subsidiary to purchase or otherwise acquire or own any shares of stock of the Company of any class or any Subordinated Indebtedness or any warrant, option or right to purchase, subscribe for or otherwise acquire any such stock or securities. The foregoing shall not restrict or prohibit the Company from declaring and paying accrued dividends or making mandatory redemption payments on its 12% Cumulative Preferred Stock outstanding on the date hereof to the extent the same are paid or made pursuant to the terms of such 12% Cumulative Preferred Stock on the date hereof. -20- 28 10.4. Restrictions on Lease-Backs, Rental Obligations, etc. (a) The Company will not, and will not permit any Subsidiary to, become or be or remain liable as lessee, directly or indirectly, upon or with respect to any lease of any property, real or personal, (i) previously owned by the Company or a Subsidiary and sold or transferred by the Company or such Subsidiary after December 31, 1984 with a view to the leasing of the same back to the Company or a Subsidiary, or (ii) on terms involving or contemplating the substantial equivalent of a purchase thereof or an eventual rental thereof at a rent materially below the fair rental value thereof at the time the lease is entered into, or (iii) involving any option to the lessee to purchase the leased property for an amount materially below the fair market value thereof at the time the lease is entered into. (b) The Company will not permit the aggregate amount (determined on a consolidated basis) of the net rental obligations of the Company and its Subsidiaries for any current or future 12-month period under all leases of real and/or personal property to be at any time in excess of $100,000, exclusive of rental obligations under (i) leases of office and warehouse space, (ii) leases of office furniture and equipment, automobiles, airplanes, mobile transportation equipment, stores equipment, shop equipment, laboratory equipment, tools and work equipment and mobile communications equipment, (iii) leases having a term (including terms of renewal at the option of the lessor or the lessee, whether or not the lease has theretofore been renewed) expiring less than 3 years after the time of determination, and (iv) leases of and leasehold interests in oil and gas properties and the land covered thereby having net rental obligations of the Company and its Subsidiaries for any current or future 12-month period not exceeding an aggregate of $75,000. For purposes of this paragraph (b), the net rental obligations of the Company or any Subsidiary for any current or future 12-month period under any such lease shall be the sum of the rental and other amounts required to be paid in such 12-month period by the Company or such Subsidiary, as the case may be, thereunder and with respect thereto, not including, however (whether or not designated in such lease as rental or additional rental payable thereunder), (x) amounts not exceeding $75,000 in the aggregate during any such 12-month period, paid as "bonuses" or similar charges with respect to the entering into of such leases of oil and gas -21- 29 properties and lands, and (y) any amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water rights and similar charges. 10.5. Restrictions on Liens, etc. The Company will not, and will not permit any Subsidiary to, directly or indirectly, create, assume or suffer to exist any mortgage, lien, pledge, charge or encumbrance on or conditional sale or other title retention arrangement with respect to or security in any property or asset of the Company or any Subsidiary, whether now owned or hereafter acquired, or upon any income or profits therefrom, or give its consent to any subordination of any right or claim of the Company or such Subsidiary to any right or claim of any other Person, other than (a) liens on property of a Wholly-Owned Domestic Subsidiary securing Funded Debt of such Wholly-Owned Domestic Subsidiary owing to the Company; (b) liens of taxes, assessments and governmental charges not yet payable, or payable without penalty so long as so payable, or deposits created in the ordinary course of business as security for compliance with laws imposing taxes, assessments or governmental charges; (c) liens of taxes, assessments and governmental charges the validity of which are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve or other appropriate provision, if any, as shall be required by Required Accounting Practice shall have been made therefor; (d) carriers', warehousemen's, materialmen's, mechanics', repairmen's, employees' or other similar liens for services arising in the ordinary course of business not yet due or being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve or other appropriate provision, if any, as shall be required by Required Accounting Practice shall have been made therefor; (e) liens incurred or deposits made in the ordinary course of business in connection with workmen's compensation, unemployment insurance and other social security, or to secure the performance of leases (provided that all such liens incurred and deposits made in connection with such leases do not at any time exceed $250,000), tenders, statutory obligations, surety and appeal bonds, performance and return-of-money bonds and other similar obligations (exclusive of obligations incurred in connection with the borrowing of money or the obtaining of advances or credit), (f) any judgment lien, unless the judgment it secures shall not, within 30 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within 30 days after the expiration of any such stay; -22- 30 (g) leases granted in the ordinary course of business or leases to which any property acquired in the ordinary course of business is subject, provided that such leases are permitted by this Agreement; (h) encumbrances (other than to secure the payment of money), easements, rights-of-way, servitudes, permits, reservations, leases and other rights in respect of gravels, minerals, oil, gases or water or in respect of grazing, logging, mining, canals, ditches, reservoirs or the like, conditions, covenants, party wall agreements or other restrictions, or easements for streets, alleys, highways, pipe lines, telephone lines, power lines, railways and other rights-of-way, on, over or in respect of property (other than property used or to be used primarily for compressor stations) owned by the Company or a Subsidiary or over which the Company or Subsidiary owns rights-of-way, easements, permits or licenses, provided that such encumbrances, easements, rights-of-way, servitudes, permits, reservations, leases, rights, conditions, covenants, party wall agreements or other restrictions are such that they will not either individually or in the aggregate, if exercised or availed of, interfere materially with the proper use or operation of the property affected thereby for the purpose for which such property is or is to be used, and provided, further, that, in the case of such of the same as relate only to property on, over or in respect of which the Company or a Subsidiary owns rights-of-way or easements exclusively for pipe line purposes or locations for regulator stations or other pipe line facilities (other than compressor stations), the Company or such Subsidiary has power under eminent domain or similar statutes to remove the same; (i) rights reserved to or vested in any municipality or public authority to control or regulate any property of the Company or a Subsidiary or to use such property in any manner which does not materially impair the use of such property for the purposes for which it is held by the Company or such Subsidiary; (j) obligations or duties, affecting the property of the Company or a Subsidiary, to any municipality or public authority with respect to any certificate of public convenience and necessity, franchise, grant, license or permit which do not materially impair the use of such property for the purposes for which it is held by the Company or such Subsidiary; (k) zoning laws and ordinances; (l) irregularities in or deficiencies of title to any rights-of-way, licenses or permits for pipe lines, telephone lines, power lines, water lines and/or appurtenances thereto or other improvements thereon, and to any real estate used or to be used primarily for right-of-way purposes or for regulator stations or other pipe line facilities (other than compressor stations), provided that the Company or a Subsidiary shall have obtained from the apparent owner of the land or estate covered by any such -23- 31 right-of-way, license or permit a sufficient right, by the terms of the instrument granting such right-of-way, license or permit to the use thereof for the construction, operation or maintenance of the lines, appurtenances or improvements for which the same is used or is to be used, and provided, further, that the Company or such Subsidiary has power under eminent domain or similar statutes to remove such irregularities or deficiencies; (m) reservations and other matters relating to titles to leases and leasehold interests in oil and gas properties and the lands covered thereby, if such reservations and other matters do not, in the aggregate, materially affect the marketability of the title thereto, and do not materially impair the use of such leases or leasehold interests for the purposes for which they are held or the value of the interest therein; (n) liens and other encumbrances incurred in connection with Indebtedness of the Company not in excess of $10,000,000 at any time outstanding, issued by a municipality or development corporation to finance the construction of premises to be used by the Company or a Subsidiary thereof, the interest on which is exempt from federal income tax under section 103(b) of the Code, provided that the incurrence of such Indebtedness secured thereby is permitted by section 10.1; (o) purchase money mortgages, liens or security interests in respect of property either acquired by the Company or upon which the Company is constructing improvements after the date of this Agreement, or mortgage, liens or security interests existing in respect of such property at the time of acquisition thereof, securing Indebtedness of the Company, provided that (i) no such mortgage, lien or security interest shall extend to or cover any other property, or secure any other Indebtedness of the Company or any Subsidiary, (ii) the incurrence of such Indebtedness secured thereby is permitted by section 10.1, (iii) the aggregate principal amount of all Indebtedness of the Company secured by all such mortgages, liens and security interests shall not exceed $2,500,000 at any time outstanding, and (iv) the aggregate principal amount of all Indebtedness secured by all such mortgages, liens or other security interests in respect of any such property shall not exceed 90% of the cost or fair market value (as determined by the Company in good faith), whichever shall be lower, of such property at the time of the acquisition thereof by the Company; (p) for the period prior to the Closing, the liens, pledges, charges and other encumbrances created by or pursuant to the Bond Indenture, the Note Indenture and the Company Collateral Assignment; and (q) liens and other encumbrances resulting from the placement in trust of United States government securities for the benefit of holders of any Indebtedness of the Company or such Subsidiary under circumstances where such Indebtedness is deemed to be extinguished under generally accepted accounting principles but for which the Company or such Subsidiary remains legally liable, provided that the current market -24- 32 value as of the date of such placement in trust of such securities shall not exceed the unpaid balance of such Indebtedness. The Company will not, and will not permit any Subsidiary to, sign or file in any state or other jurisdiction a financing statement under the Uniform Commercial Code which names the Company or such Subsidiary as debtor or sign any security agreement authorizing any secured party thereunder to file any such financing statement, except, in any such case, a financing statement filed or to be filed to perfect or protect a security interest which the Company or such Subsidiary is entitled to create, assume or incur, or permit to exist, under this section 10.5. 10.6. Issuance and Sale, etc., of Subsidiary Stock Disposition of Subsidiary Stock and Indebtedness. The Company will not permit any Subsidiary to issue, sell or otherwise dispose of any shares of stock of any class, or any security convertible into or exchangeable for or carrying rights to subscribe for shares of stock of any class, of such Subsidiary to any Person other than the Company or a Wholly-Owned Domestic Subsidiary, except to qualify directors if required by law. The Company will not permit any Subsidiary to have outstanding any shares of Preferred Stock, except shares of Preferred Stock owned or held by the Company or a Wholly-Owned Domestic Subsidiary of the Company. The Company will not sell or otherwise dispose of any shares of stock or any Indebtedness of any Subsidiary or permit any Subsidiary to sell, transfer or otherwise dispose of any shares of stock or any Indebtedness of any Subsidiary except (a) to qualify directors if required by law or (b) to the Company or a Wholly-Owned Domestic Subsidiary of the Company. 10.7. Consolidation or Merger of Subsidiaries; Disposition of Subsidiary Property as an Entirety. The Company will not permit any Subsidiary to consolidate with or merge into any Person other than the Company or a Wholly-Owned Domestic Subsidiary of the Company. The Company will not permit any Subsidiary to sell, lease or otherwise dispose of its properties and assets as an entirety or substantially as an entirety except to the Company or a Wholly-Owned Domestic Subsidiary of the Company. 10.8. Consolidation or Merger of Company; Disposition of Company Disposition of Company Property as an Entirety. The Company will not consolidate with, merge into, or sell, lease or otherwise dispose of its properties and assets as an entirety or substantially as an entirety to, any Person, unless (a) the successor formed by or resulting from such consolidation or merger or to which such disposition shall have been made shall be a solvent corporation organized under the laws of the United States of America or a state thereof or the District of Columbia; (b) simultaneously with such consolidation, merger or disposition, such successor corporation shall execute and deliver to each holder of any of the Notes at the time outstanding an instrument, satisfactory in substance and form to each such -25- 33 recipient, expressly assuming the due and punctual payment of the principal of and the premium, if any, and interest on all of the Notes at the time outstanding, according to their tenor, and the due and punctual performance and observance of all of the terms, covenants, agreements and conditions of such Notes and this Agreement to be performed or observed by the Company, to the same extent as if such successor corporation had originally executed this Agreement in place of the Company and had been the original maker of such Notes; (c) at the time of such consolidation, merger or sale, such successor corporation shall not be liable with respect to any Indebtedness or lease (other than Indebtedness or leases of the Company outstanding immediately prior thereto) which it could not become liable with respect to or make hereunder immediately after giving effect to such consolidation, merger or sale; and (d) immediately after giving effect to such consolidation, merger or sale (and the execution and delivery of the instrument of assumption required under clause (b) of this section 10.8), no condition or event shall exist which constitutes a Default or an Event of Default. No sale, lease, transfer or other disposition of assets permitted by this section 10.8 shall have the effect of releasing Alaska Pipeline Company (or any other corporation which shall at any time have assumed the liabilities or obligations of the Company hereunder or with respect to any of the Notes) from any liability or obligation hereunder or with respect to any of the Notes. 10.9. Disposition of Company and Subsidiaries Property. The Company will not, and will not permit any Wholly-Owned Domestic Subsidiary to, directly or indirectly sell or otherwise dispose of any of its properties and assets (other than in a transaction permitted by section 10.7 or 10.8) unless, immediately after giving effect to any such disposition, (a) the Aggregate Value of all such properties and assets so sold or disposed of during the period of 12 consecutive calendar months ending with the calendar month of the date of such disposition would not exceed 10% of Consolidated Net Tangible Assets of the Company and its Wholly-Owned Domestic Subsidiaries as at the December 31 next preceding the date of such disposition; or (b) the Company could become liable (in compliance with clause (a) of section 10.1) with respect to $1 of additional Funded Debt. If the aggregate net cash proceeds of all such sales and other dispositions of properties and assets of the Company and its Wholly-Owned Domestic Subsidiaries during any fiscal year of the Company, commencing with the fiscal year ending on December 31, 1985, shall exceed the aggregate amount expended by the Company and its Wholly Owned Domestic Subsidiaries -26- 34 offset against such net cash proceeds as hereinafter provided, then and in each such case the Company will, not later than November 15 of the next succeeding fiscal year, apply such excess to the prepayment of its Funded Debt (other than tax-exempt Funded Debt) at the time outstanding. For purposes of the foregoing, there may be offset against the net cash proceeds of sales and other dispositions of properties and assets during any fiscal year all or any portion of the aggregate amount expended by the Company and its Wholly-Owned Domestic Subsidiaries for property, plant and equipment during the period of such fiscal year and the next following 10-month period thereafter, provided that no portion of the amount so expended which has been so offset against the proceeds of sales and dispositions shall again be offset, directly or indirectly, against the proceeds of any other sales or dispositions. 10.10. Gas Contracts. The Company will at all times perform and observe all the covenants, agreements, terms, conditions and limitations applicable to it contained in the Gas Contracts, and will do all things necessary to keep unimpaired all its rights thereunder and to prevent any default thereunder or any forfeiture or impairment thereof. In case the Company shall at any time receive any notice, demand or other communication from any other party to any of the Gas Contracts relating to any alleged, potential or actual material default thereunder or material breach of any of the covenants, agreements, terms, conditions or limitations thereof, or purporting to terminate or in any other way materially adversely affect the rights of the Company thereunder, the Company will immediately deliver to the holders of all Notes a copy of such notice, demand or other communication. The Company will not amend, modify, supplement, surrender, cancel, terminate or in any way waive any covenant, agreement, term, condition or limitation of any of the Gas Contracts, except that the Company may amend, modify or supplement any of the Gas Contracts if such amendment, modification or supplement does not contravene the provisions of Article IV or Article V of the Gas Sale Contract as amended by the amendment attached as Exhibit D hereto, and if, in the good faith judgment of the Company, such amendment, modification or supplement is desirable in, or will not have a material adverse effect on, the business of the Company and will not be in any way prejudicial to the holders of the Notes. Prior to or at the Closing the Company will cause the Gas Sale Contract to be amended to be substantially in the form of the amendment set forth in Exhibit D attached hereto. 10.11. Intercompany Notes, etc. The Company will not transfer, assign or encumber any of the Intercompany Notes or its rights and privileges under the Intercompany Mortgage, nor will the Company amend, modify, supplement, surrender, cancel, terminate or in any way waive any covenant, agreement, term, condition or limitation of the Intercompany Mortgage or any Intercompany Note, unless, in the good faith judgment of the Company, such action is desirable in, or will not have a material adverse effect on, the business of the Company and will not be in any way prejudicial to the holders of the Notes. The Company will promptly notify the holders of the Notes in the event it becomes aware of any default under, or material breach of any of the covenants, agreements, terms, conditions or limitations contained in, the Intercompany Mortgage or any of the Intercompany Notes. The Company will cause the Intercompany Mortgage and all supplements thereto at all times to be recorded, registered and -27- 35 filed and to be kept, recorded, registered and filed in such manner and in such places, and will pay or cause to be paid all such mortgage registration, recording, filing and other taxes and fees, and will comply or cause Seagull to comply with all such statutes and regulations, all as may be required by law in order fully to create, preserve, maintain and protect the lien of the Intercompany Mortgage on the property subject thereto. 10.12. Compliance with ERISA. The Company will not, and will not permit any Subsidiary to, (a) engage in any transaction in connection with which the Company or any Subsidiary could be subject to either a civil penalty assessed pursuant to section 502(i) of ERISA or a tax imposed by section 4975 of the Code, terminate any Plan (other than a Multiemployer Plan) in a manner, or take any other action with respect to any such Plan, which could result in any liability of the Company or any Subsidiary to the Pension Benefit Guaranty Corporation, fail to make full payment when due of all amounts which, under the provisions of any Plan, the Company or any Subsidiary is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency, whether or not waived, with respect to any Plan (other than a Multiemployer Plan), if, in any such case, such penalty or tax or such liability, or the failure to make such payment, or the existence of such deficiency, as the case may be, could have a material adverse effect on the Company or any of its Subsidiaries; (b) permit the present value of all vested accrued benefits under all Plans maintained at such time by the Company and any Subsidiary (other than Multiemployer Plans) guaranteed under Title IV of ERISA to exceed the current value of the assets of such Plans allocable to such vested accrued benefits by more than $750,000; or (c) permit the aggregate complete or partial withdrawal liability under Title IV of ERISA with respect to Multiemployer Plans incurred by the Company and its Subsidiaries to exceed $1,000,000. As used in this section 10.12, the term "accumulated funding deficiency" has the meaning specified in section 302 of ERISA and section 412 of the Code, the term "accrued benefit" has the meaning specified in section 3 of ERISA and the term "current value" has the meaning specified in section 4062(b)(1)(A) of ERISA. 11. Remedies. 11.1. Events of Default; Acceleration. If any one or more of the following events ("Events of Default") shall occur and be continuing: (a) if default shall be made by the Company in the due and punctual payment of any principal or premium, if any, on any Note when and as the same shall become due and payable, whether at maturity or a date fixed for prepayment or by declaration or otherwise; -28- 36 (b) if default shall be made in the due and punctual payment of any interest on any Note when and as such interest shall become due and payable, and such default shall have continued for a period of 5 days; (c) if default shall be made by Seagull in the due and punctual payment of any principal or premium, if any, on any Intercompany Note when and as the same shall become due and payable, whether at maturity or a date fixed for prepayment or by declaration or otherwise; (d) if default shall be made by Seagull in the due and punctual payment of any interest on any Intercompany Note when and as such interest shall become due and payable, and such default shall have continued for a period of 5 days; (e) if default shall be made by the Company in the performance or observance of any term contained in section 9.2, 9.3, 9.4(b), 9.4(c) or 10 or by Seagull in the performance or observance of any term contained in section 6 of the Inducement Agreement; (f) if default shall be made in the performance or observance of any term contained in this Agreement, other than those referred to above in this section 11.1, and such default shall have continued for a period of 30 days after written notice thereof to the Company by the holder of any Note; (g) if default shall be made by Seagull in the due and punctual payment of the price for natural gas under the Gas Sale Contract and such default shall have continued for a period of 90 days after the end of the quarterly fiscal period in which such default occurred; (h) if any representation made by or on behalf of the Company or Seagull in this Agreement or the Inducement Agreement or in any certificate, report or other instrument delivered under or pursuant to any term hereof or thereof shall prove to have been false or incorrect in any material respect on the date as of which made; (i) if Seagull shall fail to perform or comply with any term of the Seagull Documents other than those referred to above in this section 11.1 and such default shall have continued for a period of 30 days after written notice thereof to the Company by the holder of any Note; (j) if the Company or any Subsidiary or Seagull shall (i) be generally not paying its debts as they become due, (ii) file, or consent by answer or otherwise to the filing against it of, or fail to deny the material allegations of or to contest, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy or insolvency law or other act for -29- 37 the relief or aid of debtors of any jurisdiction, (iii) make an assignment for the benefit of its creditors, (iv) consent to or acquiesce in the appointment of a custodian, receiver, liquidator, fiscal agent, trustee or other officer with similar powers of itself or themselves or of the whole or any substantial part of its properties and assets, (v) be adjudicated insolvent or a bankrupt, or (vi) take corporate action for the purpose of any of the foregoing; (k) if a court or governmental authority of competent jurisdiction shall enter an order, judgment or decree appointing, without the consent or the acquiescence of the Company or a Subsidiary or Seagull, as the case may be, a custodian, receiver, liquidator, fiscal agent, trustee or other officer with similar powers of the Company or such Subsidiary or Seagull or of the whole or any substantial part of its properties and assets, or if an order for relief shall be entered in any case or proceeding for liquidation or reorganization or otherwise to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the reorganization, arrangement, composition, readjustment, dissolution, winding-up, liquidation or similar relief of the Company or such Subsidiary or Seagull, or if any petition for any such relief shall be filed against the Company or such Subsidiary or Seagull and such petition, order, judgment or decree shall not be dismissed or discharged within 60 days; (l) if, under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the Company or any Subsidiary or Seagull or of the whole or any substantial part of its properties and assets and such custody or control shall remain unterminated or unstayed for an aggregate of 60 days (whether or not consecutive) from the date of assumption of such custody or control; (m) if final judgment for the payment of money in excess of $50,000 shall be rendered by a court of record against the Company or any Subsidiary or Seagull and the Company or such Subsidiary or Seagull shall not (i) within 60 days from the date of entry thereof, discharge the same or provide for its discharge in accordance with its terms or procure a stay of execution thereof, and (ii) if execution of such judgment shall be stayed, within such period of 60 days or such longer period during which execution of such judgment shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal, or, after the expiration of any such stay or the denial of such appeal, forthwith discharge the same or provide for its discharge; or (n) if the Company or any Subsidiary or Seagull shall default (as principal or as guarantor or other surety) in the payment of any principal of or premium, if any, or interest on any Indebtedness for borrowed money (other than the Notes), or if any event shall occur or condition shall exist in respect of any such Indebtedness or under any evidence of any such Indebtedness, or of any mortgage, indenture or Other Agreements relating thereto which would permit or shall have caused the acceleration -30- 38 of the payment of such Indebtedness, and such default, event or condition shall continue for more than the period of grace, if any, specified therein and shall not have been waived pursuant thereto; then and in any such event any holder or holders of 25% or more in principal amount of the Notes at the time outstanding may at any time (unless all defaults shall theretofore have been remedied) at its or their option, by written notice or notices to the Company, declare all the Notes to be due and payable, whereupon the same shall forthwith mature and become due and payable together with interest accrued thereon and, with respect to each Series of Notes, to the extent permitted by applicable law, a premium in the amount of the lesser of the stated interest rate payable in respect of such Series of Notes multiplied by the unpaid principal amount of such Notes or the amount which would be payable if the Company then had elected to prepay the Notes of such Series at a premium pursuant to section 8.3, without presentment, demand, protest or notice, all of which are hereby waived, provided that during the existence of an Event of Default described in subdivision (a) of this section 11, then, irrespective of whether the holder or holders of 25% or more in principal amount of Notes then outstanding shall have declared all the Notes to be due and payable pursuant to this section 11, any holder of the Notes at the time outstanding (excluding any Notes directly or indirectly owned by the Company or any of its Subsidiaries or Affiliates) may, at its option, by notice in writing to the Company, declare the Notes then held by such holder to be due and payable, whereupon the Notes then held by such holder shall forthwith mature and become due and payable, together with interest accrued thereon and with respect to each Series of Notes, to the extent permitted by applicable law, a premium in the amount of the lesser of the stated interest rate payable in respect of such Series of Notes multiplied by the unpaid principal amount of such Notes or the amount which would be payable if the Company then had elected to prepay the Notes of such Series at a premium pursuant to section 8.3, without presentment, demand, protest or notice, all of which are hereby waived. If a declaration is made pursuant to this section 11.1 by the holder or holders of at least 25% in principal amount of the Notes, then and in each such case, the holders of at least 75% in aggregate principal amount of the Notes at the time outstanding may, by written notice or notices to the Company, rescind and annul such declaration and the consequences thereof, provided that at the time such declaration is annulled and rescinded, (i) no judgment or decree has been entered for the payment of any moneys due pursuant to the Notes or this Agreement, (ii) all arrears of interest upon all the Notes and all other sums payable under the Notes and under this Agreement (except any principal or interest on the Notes which has become due and payable solely by reason of such declaration under this section 11.1) shall have been duly paid, and (iii) each and every other default and Event of Default shall have been remedied, and provided, further, that no such rescission and annulment shall extend to or affect any subsequent default or Event of Default or impair any right consequent thereon. 11.2. Notice of Default. If any holder of any Note shall serve any notice or take any other action in respect of a claimed default, the Company will forthwith give written notice -31- 39 thereof to all other holders of the Notes at the time outstanding describing such notice or action and the nature of the claimed default. 11.3. Suits for Enforcement, etc. In case any one or more Events of Default shall have occurred and be continuing, the holder of any Note may proceed to protect and enforce its rights by suit in equity or action at law, whether for the specific performance of any term contained in this Agreement or for an injunction against any breach of any such term or in aid of the exercise of any power granted in this Agreement, or may proceed to enforce the payment of such Note or to enforce any other legal or equitable right of the holder of such Note, or may take any one or more of such actions. In case of a default in the payment of any principal of or premium, if any, or interest on any Note, the Company will pay to the holder thereof on demand such further amounts as shall be sufficient to pay the costs and expenses of collection, including, without limitation, reasonable attorneys' fees, expenses and disbursements. 11.4. Remedies Cumulative. No right, power or remedy conferred upon you or the holder of any Note shall be exclusive, and each such right, power or remedy shall be cumulative and in addition to every other right, power or remedy, whether conferred hereby or by any Note or now or hereafter available at law or in equity or by statute or otherwise. 11.5. Remedies Not Waived. No course of dealing between the Company and you or the holder of any Note, and no delay in exercising any right, power or remedy conferred hereby or by any Note or now or hereafter existing at law or in equity or by statute or otherwise, shall operate as a waiver of or otherwise prejudice any such right, power or remedy. 12. Registration Books, Transfer and Exchange of Notes. The Company will keep or cause to be kept, at its principal office (or the office of its agent for such purpose) in Anchorage, Alaska, proper books in which the names and addresses of the holders of all Notes issued by the Company shall be registered and in which transfers of Notes may be registered. Upon due presentment of any Note for registration of transfer at such office, or upon surrender of any Note for exchange at such office, the Company at its expense will issue in exchange therefor a new Note or Notes, in such denomination or denominations as may be requested ($1,000 and integral multiples thereof) which aggregate the unpaid principal amount of the presented or surrendered Note, registered as such holder or transferee may request, dated the date to which interest has been paid on the presented or surrendered Note and otherwise of like tenor. Prior to the due presentment of any Note for registration of transfer, the Company may treat the registered holder thereof as the absolute owner thereof for the purpose of receiving all payments of principal, premium, if any, and interest thereon and for all other purposes thereof and hereof. 13. Replacement of Notes. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Note and, in the case of any such loss, theft or destruction of any Note held by a Person other than you, upon delivery of indemnity reasonably satisfactory to the Company in form and amount, or, in the case of any -32- 40 such mutilation, upon the surrender of such Note for cancellation at the office of the Company maintained pursuant to section 12, the Company at its expense will execute and deliver, in lieu thereof, a new Note of like tenor, dated the date to which interest has been paid on such lost, stolen, destroyed or mutilated Note. 14. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: "Acquisition Agreement" shall mean the Purchase and Sale Agreement, dated October 30, 1984, between ENSTAR and Seagull as supplemented by a Supplemental Agreement, dated as of May 3, 1985. "Affiliate" of any Person shall mean any Person which directly or indirectly controls or is controlled by or is under common control with such Person. For the purposes of this definition, "control" (including, with correlative meaning, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting Securities or by contract or otherwise. "Aggregate Value" shall mean, with reference to any disposition of properties and assets, the greater of (a) the net book value of all properties and assets disposed of, as shown on the books of the Company and its Wholly-Owned Domestic Subsidiaries as at the date of such disposition, and (b) the fair market value of such properties and assets, as determined in good faith by the Board of Directors of the Company. "Approval Order" shall mean Order No. 4 of the PUC issued April 3, 1985 in Docket U-84-67. "Bank Indebtedness" shall mean the indebtedness of the Company incurred pursuant to the Credit Agreement, dated as of May 21, 1985, as amended, between the Company and Chemical Bank. "Board of Directors" of any corporation shall mean the Board of Directors of such corporation or, to the extent permitted by applicable law and the articles of incorporation and by-laws of such corporation, the Executive Committee of such Board of Directors. "Bond Indenture" shall mean the Indenture of Mortgage and Deed of Trust, dated as of August 1, 1960, from the Company to MBank Houston, N.A. (formerly named Bank of the Southwest, National Association, Houston), as trustee, as amended and supplemented by a First Supplemental Indenture, dated as of May 1, 1961, a Second Supplemental Indenture, dated as of December 15, 1969, a Third Supplemental Indenture, dated as of February 18, 1972, a Fourth Supplemental Indenture, dated as of November 15, 1975, a Fifth Supplemental -33- 41 Indenture, dated as of December 30, 1977, and a Sixth Supplemental Indenture, dated as of January 1, 1984. "Bonds" shall mean the Company's First Mortgage and Collateral Trust Bonds, 7 3/4% Series due January 1, 1990, issued under the Bond Indenture. "Closing" shall have the meaning specified in section 2. "Code" shall mean the Internal Revenue Code of 1954, as amended from time to time. "Common Stock" shall mean stock or shares of any class or classes (however designated) of a corporation, association or business trust, the holders of which are ordinarily and generally, in the absence of contingencies, entitled to vote for the election of a majority of the directors (or persons performing similar functions) of such corporation, association or business trust, even though the right so to vote has been suspended by the happening of a contingency. "Company" shall mean Alaska Pipeline Company, an Alaska corporation. "Company Certificate" shall have the meaning specified in section 5.11. "Company Collateral Assignment" shall mean the Collateral Assignment Agreement, dated as of December 30, 1977, between the Company and MBank Houston, N.A. (formerly named Bank of the Southwest, National Association, Houston), as trustee, as thereafter supplemented and amended from time to time. "Consolidated Adjusted Net Earnings" shall mean, as applied to the Company and its Wholly-Owned Domestic Subsidiaries, the aggregate of the Consolidated Net Income as Reported of the Company and its Wholly-Owned Domestic Subsidiaries for each fiscal year or portion thereof during the period in question, provided that (a) there shall be deducted an amount equal to the excess, if any, of (i) the aggregate amount applied by the Company during such period to the payment, redemption, retirement and purchase of Funded Debt of the Company and to the repayment of advances to the Company by Seagull, over (ii) the sum of the aggregate amount of depreciation and amortization deducted during such period in determining Consolidated Net Income as Reported and the sinking fund payments made by Seagull to the Company during such period in accordance with indebtedness of the Division to the Company evidenced by the Intercompany Notes; (b) such reserves as shall be required by Required Accounting Practice for deferred income tax resulting from accelerated depreci- ation or amortization shall be deducted; and -34- 42 (c) if net gains from the sale, abandonment or other disposition of capital assets and from the purchase, sale, conversion or other disposition of Securities shall exceed $25,000, such excess shall be excluded and taxes in respect of such excess shall not be deducted. Capital assets as used in this definition shall include all fixed assets, both tangible (such as land, buildings, machinery and equipment) and intangible (such as patents, copyrights, trademarks, franchises and good will), and Securities. "Consolidated Adjusted Total Capitalization" shall mean, as applied to the Company and its Wholly-Owned Domestic Subsidiaries at any date, the aggregate Consolidated Total Capitalization of the Company and its Wholly-Owned Domestic Subsidiaries as at such date, plus the aggregate principal amount of Consolidated Short-Term Borrowing outstanding on such date. "Consolidated Funded Debt" shall mean, as applied to the Company and its Wholly-Owned Domestic Subsidiaries, the aggregate of the Funded Debt of the Company and its Wholly-Owned Domestic Subsidiaries outstanding on such date, determined on a consolidated basis and in accordance with Required Accounting Practice. "Consolidated Net Cash Flow" shall mean, as applied to the Company and its Wholly-Owned Domestic Subsidiaries, Consolidated Net Income as Defined of the Company and its Wholly-Owned Domestic Subsidiaries during the period in question, less all amounts included in the determination of Consolidated Net Income as Defined in respect of undistributed earnings of all Subsidiaries, plus all amounts deducted in the determination of Consolidated Net Income as Defined in respect of depreciation and amortization, Division Depreciation and deferred income taxes. "Consolidated Net Income as Defined" shall mean, as applied to the Company and its Wholly-Owned Domestic Subsidiaries, the Consolidated Net Income as Reported for the period in question plus or minus, as the case may be, the net income or net loss of the Division for such period as stated in the statement of, income of the Division for such period furnished to the Noteholders pursuant to section 4 of the Inducement Agreement. "Consolidated Net Income as Reported" shall mean, as applied to the Company and its Wholly-Owned Domestic Subsidiaries, the consolidated net income (or deficit) of the Company and its Wholly-Owned Domestic Subsidiaries for the period in question, as stated in the combined statement of income of the Company and its Wholly-Owned Domestic Subsidiaries for such period furnished to the Noteholders pursuant to section 6. "Consolidated Net Tangible Assets" shall mean, as applied to the Company and its Wholly-Owned Domestic Subsidiaries at any date, the gross book value of all assets (exclusive of franchises, licenses, permits, patents, patent applications, copyrights, -35- 43 trademarks, trade names, good will, experimental and organizational expense and other like intangibles, treasury shares and unamortized debt discount) properly appearing on a consolidated balance sheet of the Company and its Wholly-Owned Domestic Subsidiaries as at such date prepared in accordance with Required Accounting Practice on a consolidated basis after eliminating all intercompany items, less the sum (without duplication) of: (a) the amount included in such assets of any write-up subsequent to December 31, 1984 in the book value of any asset owned by the Company or any Wholly-Owned Domestic Subsidiary on such date resulting from the revaluation thereof subsequent to such date, or any write-up in excess of cost of any asset acquired subsequent to such date except as permitted by clause (d). (b) all reserves for depreciation, depletion, obsolescence and amortization of properties (other than those excluded as hereinabove provided) as shown in such balance sheet and all other proper reserves (other than general contingency reserves and reserves representing mere appropriations of surplus) which in accordance with Required Accounting Practice should be set aside in connection with the business conducted; (c) all liabilities (including tax and other proper accruals) which would, in accordance with Required Accounting Practice, be classified as current liabilities of the Company and its Wholly-Owned Domestic Subsidiaries (including current maturities of Funded Debt); and (d) the amount included in such assets of the excess, if any, of (i) the cost of any assets acquired by the Company or any Wholly-Owned Domestic Subsidiary subsequent to December 31, 1984 upon the consolidation or merger of any other corporation with or into the Company or such Wholly-Owned Domestic Subsidiary or upon the acquisition by the Company or any Wholly-Owned Domestic Subsidiary of all or substantially all of the assets or any other corporation, over (ii) the book value of such assets on the books of such other corporation at the time of such consolidation, merger or acquisition (other than a write-up of the book value of an asset made in accordance with generally accepted accounting principles in connection with the acquisition of such assets). "Consolidated Short-Term Borrowing" shall mean, as applied to the Company and its Wholly-Owned Domestic Subsidiaries at any date, the aggregate of the Short-Term Borrowing of the Company and its Wholly-Owned Domestic Subsidiaries as at such date, determined on a consolidated basis and in accordance with Required Accounting Practice. "Consolidated Total Capitalization" shall mean, as applied to the Company and its Wholly-Owned Domestic Subsidiaries at any date, the aggregate of the Total Capitalization -36- 44 of the Company and its Wholly-Owned Domestic Subsidiaries as at such date, determined on a consolidated basis and in accordance with Required Accounting Practice. "Consolidated Total Debt" shall mean, as applied to the Company and its Wholly-Owned Domestic Subsidiaries at any date, the aggregate of the Funded Debt and the Short Term Borrowing of the Company and its Wholly-Owned Domestic Subsidiaries as at such date, determined on a consolidated basis and in accordance with Required Accounting Practice. "corporation" shall include, except for the purposes of section 10.8, an association, joint stock company, business trust or other similar organization, and shall not include, without limitation, partnerships. "Default" shall mean an event or condition which, with the lapse of time or the giving of notice or both, would become an Event of Default. "Divestiture Agreement" shall mean the continuation of Operations, voting and Divestiture Agreement, dated June 20, 1984, between ENSTAR and Unimar. "Division" shall mean all of ENSTAR's current gas distribution and sales systems business located in the State of Alaska, which are presently operating under the name "ENSTAR Natural Gas Company, Division of ENSTAR Corporation", which business will be sold to Seagull on or before the date of the Closing, and as such business is conducted after the date hereof by Seagull. Such business comprises and shall comprise the distribution and sale of natural, manufactured and mixed gas in Alaska for residential, commercial, industrial and electrical power plant use, the sale of gas ranges, water heaters, gas burners and other appliances and equipment related to the use of such gas, all similar activities in Alaska and all assets, whether or not located in the State of Alaska, directly relating thereto or used or intended for use therein. "Division Certificate" shall have the meaning specified in section 5.11. "Division Collateral Assignment" shall mean the Collateral Assignment Agreement, dated as of December 30, 1977, between Alaska Interstate Company and MBank Houston, N.A. (formerly named Bank of the Southwest, National Association, Houston), as trustee, as thereafter supplemented and amended from time to time. "Division Depreciation" shall mean, for the period in question, all amounts of depreciation deducted in determining the net income or net loss of the Division as stated in the statement of income of the Division for such period furnished to the Noteholders pursuant to section 6. -37- 45 "Division Income Taxes" shall mean, for the period in question, all amounts of income taxes deducted in determining the net income or net loss of the Division for such period as stated in the statement of income of the Division for such period furnished to the Noteholders pursuant to section 6. "Division Mortgage" shall mean the Mortgage and Deed of Trust dated February 12, 1972 between Alaska Interstate Company and MBank Houston, N.A. (formerly named Bank of the Southwest, National Association, Houston), as trustee, as thereafter supplemented and amended from time to time. "Domestic Subsidiary" shall mean a Subsidiary incorporated under the laws of the United States of America or a State thereof or the District of Columbia and owning substantially all its property and conducting substantially all its business in the State of Alaska. "ENSTAR" shall mean ENSTAR Corporation, a Delaware corporation. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "Event of Default" shall have the meaning specified in section 11.1. "Existing Note Agreements" shall mean (a) the Series A and B Note Agreement, (b) the Series C Note Agreement, and (c) the Series D Note Agreement. "Existing Notes" shall mean (a) the Series A Notes, (b) the Series B Notes, (c) the Series C Notes and (d) the Series D Notes. "Funded Debt" shall mean, as applied to any Person at any date, all Indebtedness of such Person which would, in accordance with Required Accounting Practice, be classified as funded debt, including, without limitation, all Indebtedness for borrowed money (whether secured or unsecured) and Indebtedness of the character referred to in subdivisions (b) and (c) of the definition of Indebtedness, in each case maturing more than one year after the date of the creation thereof, or directly or indirectly renewable or extendible, by its terms or otherwise, at the option of such Person, beyond such year, and all Indebtedness (whether secured or unsecured) incurred under a revolving credit or similar agreement extending for more than one year after the date of the creation thereof. Any Indebtedness which is extended or renewed (other than pursuant to an option of the debtor) shall be deemed to have been created at the date of the extension or renewal. "Gas Contracts" shall mean the Gas Purchase Contracts, the Gas Sale Contract and all other contracts and agreements for the purchase or other acquisition, sale or other disposition, exchange or transportation of natural, manufactured or mixed gas to which the -38- 46 Company is now or hereafter may become a party, and all renewals, extensions, additions, amendments and modifications thereof entered into as permitted hereby. "Gas Purchase Contracts" shall mean (i) the Gas Purchase Contract, dated May 13, 1960, as amended to the date hereof, between the Company and Union Oil Company of California and Marathon Oil Company (formerly named The Ohio Oil Company), (ii) the Gas Purchase and Sale Contract, dated as of May 1, 1984, among the Company, Cities-Pacific Lewis River Partnership and Pacific Alaska LNG Associates, (iii) the Agreement, dated November 26, 1984, between the Company and Phillips Petroleum Company, (iv) the Gas Purchase Contract, dated December 16, 1982, between the Company and Marathon Oil Company, (v) the Gas Purchase Contract, dated December 20, 1982 between the Company and Shell Oil Company, and (vi) all renewals, extensions, additions, amendments and modifications thereof entered into as permitted hereby. "Gas Sale Contract" shall mean the Gas Sale Contract, dated as of January 1, 1984, between the Company and the Division, and all renewals, extensions, additions, amendments and modifications thereof entered into as permitted hereby. "Indebtedness" shall mean, as applied to any Person at any date, (a) all items which in accordance with Required Accounting Practice would be included on the liability side of the balance sheet of such Person at such date, except (i) items of capital stock and of surplus, (ii) reserves for deferred income tax resulting from accelerated depreciation or amortization, (iii) contributions in aid of construction, (iv) unallocated contingency reserves, and (v) reserves properly deductible from assets in accordance with Required Accounting Practice; (b) all indebtedness, obligations and liabilities secured by any mortgage, pledge, lien, charge, conditional sale agreement or other title retention agreement existing on all property held by such Person at such date subject to such mortgage, pledge, lien, charge or agreement; all of such indebtedness, obligations and liabilities shall be treated as Indebtedness of such Person, whether or not such Person is in fact liable therefor; (c) all indebtedness, obligations and liabilities of other Persons, of the character referred to in the foregoing subdivisions (a) and (b), which such Person has directly or indirectly guaranteed or upon or with respect to which such Person is directly or indirectly liable (by discount, endorsement--other than for deposit for collection--sale with recourse, repurchase agreement or otherwise) or in respect of which such Person is obligated to advance or supply funds; and -39- 47 (d) adequate reserves in respect of disputed or contingent indebtedness, obligations and liabilities of the character referred to in the foregoing subdivisions (a), (b) and (c), to the extent not included pursuant to such subdivisions. Notwithstanding the foregoing, in determining the Indebtedness of any Person there shall be included all indebtedness of such Person of the character referred to in subdivisions (a), (b) and (c) deemed to be extinguished under generally accepted accounting principles but for which such Person remains legally liable. "Inducement Agreement" shall have the meaning specified in section 3.4. "Intercompany Mortgage" shall mean the Eighth Supplemental Mortgage and Deed of Trust, substantially in the form of Exhibit B attached hereto, to be dated June 17, 1985. "Intercompany Notes" shall mean the Notes as defined in the Intercompany Mortgage. "Investment" shall have the meaning given in section 10.2. "Multiemployer Plan" shall mean a Plan which is a "multiemployer plan" as such term is defined in section 4001(a)(3) of ERISA. "Note" and "Notes" shall have the meanings specified in section 1. "Note Indenture" shall mean the Second Indenture of Mortgage and Deed of Trust, dated as of December 30, 1977, between the Company and MBank Houston, N.A. (formerly named Bank of the Southwest, National Association, Houston), as trustee, as thereafter supplemented and amended from time to time. "Officer's Certificate" shall mean a certificate executed on behalf of any corporation by such corporation's President, vice President - Finance or Chief Financial Officer. "Original Intercompany Mortgage" shall mean the First Mortgage and Deed of Trust, dated as of August 1, 1960, between the Company and Alaska Natural Gas Corporation, as amended and supplemented prior to the Closing. "Person" shall mean an individual, a corporation, a partnership, a joint venture, a trust, an unincorporated organization or a government or any agency or political subdivision thereof. "Plan" shall mean any "employee pension benefit plan" as such term is defined in Section 3 of ERISA, which is or has been established or maintained, or to which -40- 48 contributions are or have been made, by the Company or, for purposes of section 5.18(b) hereof, any Related Person. "Preferred Stock", as applied to the capital stock of any corporation, shall mean capital stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of capital stock of any other class of such corporation. "PUC" shall have the meaning specified in section 3.10. "Related Person" shall mean any trade or business, whether or not incorporated, which, together with the Company, is under common control, as described in section 414(b) or (c) of the Code. "Required Accounting Practice" shall mean, as to any corporation or division thereof, the accounting rules or regulations, if any, at the time prescribed by the regulatory body or bodies under the jurisdiction of which such corporation or division, as the case may be, is at the time operating, and, to the extent that a matter is not covered by such rules or regulations, the accounting rules or regulations at the time prescribed by the Federal Energy Regulatory Commission for companies of established reputation engaged in a business similar to that of such corporation or division, as the case may be, which are at the time operating under the jurisdiction of the Federal Energy Regulatory Commission. "Restricted Investment" shall mean an Investment in a Wholly-Owned Domestic Subsidiary of the kind referred to in section 10.2(c). The amount of Investments which constitute Restricted Investments shall, for all purposes of this Agreement, be the aggregate cost to the Company of all such Investments determined in accordance with generally accepted accounting principles, but without regard to unrealized increases or decreases in value or write-ups, write-downs or write-offs, of such Investments (except to the extent that Consolidated Adjusted Net Earnings has been increased or reduced as the result thereof) and without regard to the existence of any undistributed earnings or accrued interest with respect thereto accrued after the respective dates on which such Investments were made, less any net return of capital realized during such period upon the sale, repayment or other liquidation of such Investments (determined in accordance with generally accepted accounting principles, but without regard to any amounts received during such period as earnings (in the form of dividends, interest or otherwise) on such Investments or as loans from any Persons in whom such Investments have been made). "Restricted Stock Payment" shall mean any of the following: (a) any direct or indirect declaration ordering, setting aside of funds for, payment or making of any dividend or other distribution on or with respect to any -41- 49 stock of the Company of any class now or hereafter outstanding, other than a dividend payable solely in Common Stock of the Company; or (b) any direct or indirect purchase, redemption, retirement or other acquisition of any stock of the Company of any class now or hereafter outstanding or of any securities convertible into shares of its stock of any class (other than payments of Indebtedness evidenced thereby) or of any warrant, option or right to purchase, subscribe for or otherwise acquire any such stock or securities, other than one effected for a consideration consisting solely of Common Stock of the Company. The amount of any Restricted Stock Payment in property of the Company shall be deemed to be the greater of the fair value of such property (as determined by the Board of Directors of the Company) or the net book value of such property on the Company's books (in accordance with Required Accounting Practice). "Restricted Subordinated Debt Payment" shall mean any direct or indirect payment or other distribution on account of the principal of or the premium, if any, or interest on, or any purchase, redemption, retirement or other acquisition of, any Subordinated Indebtedness of the Company now or hereafter outstanding, provided that for the purposes of paragraph (b) of section 10.3, Restricted Subordinated Debt Payments shall not include payments, not exceeding $300,000 during any twelve-month period, on account of Subordinated Indebtedness consisting of management fees incurred in the ordinary course of business. "Seagull" shall mean Seagull Energy Corporation, a Texas corporation, and any successor to such corporation. "Seagull Documents" shall mean the Inducement Agreement, the Intercomp- any Mortgage, the Intercompany Notes and the Gas Sale Contract. "Securities" shall mean any stocks, any bonds, debentures, notes or other evidences of Indebtedness, and any other instruments generally known as securities; any certificates of interest or participation in, temporary or interim certificates for, receipts for, guaranties of, or warrants or rights to subscribe to or purchase any of the foregoing and any agreements, indentures, mortgages or other instruments providing for or securing any of the foregoing. "Series A Notes" shall mean the Company's 8 3/8% Series A Notes due January 1, 1993, issued pursuant to the Series A and B Note Agreement. "Series B Notes" shall mean the Company's 10 1/4% Series B Notes due January 1, 1995, issued pursuant to the Series A and B Note Agreement. -42- 50 "Series C Notes" shall mean the Company's 11 1/2% Series C Notes due January 1, 1991, issued pursuant to the Series C Note Agreement. "Series D Notes" shall mean the Company's 9.95% Series D Notes due April 1, 1997, issued pursuant to the Series D Note Agreement. "Series E Notes" shall have the meaning specified in section 1. "Series F Notes" shall have the meaning specified in section 1. "Series G Notes" shall have the meaning specified in section 1. "Series H Notes" shall have the meaning specified in section 1. "Series A and B Note Agreement" shall mean the Note Agreement, dated as of August 15, 1972, between the Company and The Equitable Life Assurance Society of the United States, as amended and modified by a letter agreement dated May 28, 1974, by the Second Supplemental Note Agreement, dated as of October 1, 1974, and by the Third Supplemental Note Agreement, dated as of November 15, 1975, and as the same may be further modified, supplemented or amended in accordance with the terms thereof. "Series C Note Agreement" shall mean the Note Agreement, dated as of November 15, 1975, between the Company and The Equitable Life Assurance Society of the United States, as the same may be modified, supplemented or amended in accordance with the terms thereof. "Series D Note Agreement" shall mean the Note Agreement, dated as of March 15, 1977, between the Company and The Travelers Insurance Company, as the same may be modified, supplemented or amended in accordance with the terms thereof. "Short Term Borrowing" shall mean, as applied to any Person at any date, all Indebtedness for borrowed money of such Person maturing on demand or within one year or less from the date of the creation thereof and not directly or indirectly renewable or extendible, by its terms or otherwise, at the option of the debtor, beyond such year, and not incurred under a revolving credit or similar agreement extending for more than one year. "Subordinated Indebtedness" shall mean all Indebtedness of the Company to Seagull, now existing or hereafter incurred, including, without limitation, all Indebtedness in respect of advances, open accounts, accounts payable obligations, loans, notes, bonds, debentures or other evidences of debt whether for principal, premium, if any, or interest, and all instruments constituting or evidencing any of the foregoing, whether or not held -43- 51 by Seagull; all of such Indebtedness being subordinated to the prior pay- ment in full of the Notes. "Subsidiary" shall mean as to any entity a corporation, association or business trust a majority (by number of votes) of either the Voting Stock or the Common Stock of which is at the time owned or controlled, directly or indirectly, by such entity. "Tax Sharing Agreement" shall mean the Tax Sharing Agreement, to be dated the date of the Closing, between the Company and Seagull, substantially in the form of Exhibit F attached hereto. "Total Capitalization" shall mean, as applied to a corporation, the sum of the following, all determined in accordance with Required Accounting Practice and as shown on the books of account of such corporation: (a) the principal amount of all Funded Debt of such cor- poration at the time outstanding, plus (b) the amount of the capital stock liability of such corporation and any premium thereon, plus (c) the amount of any earned surplus, capital surplus and other surplus of such corporation, less (d) the amount of any deficit of such corporation. "Total Destruction" shall mean, with respect to any assets, any damage to or destruction of such a substantial part of such assets so that, in the good faith judgment of the owner of such assets, the restoration, replacement or rebuilding of such assets or any portion thereof as nearly as possible to their value and condition immediately prior to such damage or destruction is not economically feasible. "Total Taking" shall mean, with respect to any assets, the acquisition (other than for temporary use) of such a substantial part of such assets by any one or more governments or municipal corporations or other governmental subdivisions or governmental authorities or any nominee or designee thereof by the exercise of the power of condemnation or eminent domain, by the exercise of a right reserved to purchase the same or by a sale or conveyance by the owner of such assets in lieu of and in reasonable anticipation of the impending exercise of such a power or of such a right, so that, in the good faith judgment of the owner of such assets, the restoration, replacement or rebuilding of such assets or any portion thereof as nearly as possible to their value and condition immediately prior to such taking is not economically feasible. -44- 52 "Unimar" shall have the meaning specified in section 5.13. "Voting Stock" shall mean stock or shares of any class or classes (however designated) of a corporation, association or business trust, the holders of which are at the time entitled to vote for the election of a majority of the directors (or persons performing similar functions) of such corporation, association or business trust, whether or not the right to vote exists by reason of the happening of a contingency, provided that the Company's 12% Cumulative Preferred Stock outstanding on the date hereof shall not be considered Voting Stock for purposes of Section 8.4 unless the holders of such Preferred Stock shall have had the right to vote for the election of a majority of the directors of the Company for a continuous period of at least three years. "Wholly-Owned Domestic Subsidiary" shall mean a Domestic Subsidiary all of the outstanding stock of which, of whatever class and having whatever rights (other than directors' qualifying shares, if required, options to acquire which for a nominal consideration shall have been obtained, together with the certificates therefor, duly endorsed in blank or accompanied by stock powers duly executed in blank), is at the time owned by the Company. 15. Expenses, etc. Whether or not the transactions contemplated hereby shall be consummated, the Company will pay (a) the cost and expenses of preparing and reproducing this Agreement and the Notes, of furnishing all opinions by counsel for the Company (including any opinions requested by your counsel as to the legal matter arising hereunder) and all certificates on behalf of the Company, and of the Company's performance of and compliance with all agreements and conditions contained herein on its part to be performed or complied with (b) the cost of delivering to your home office, insured to your satisfaction, the Notes acquired by you hereunder and any Notes delivered to you upon any exchange or surrender pursuant hereto and of your delivering any Notes, insured to your satisfaction, for any such exchange or surrender, (c) the reasonable fees, expenses and disbursements of your special counsel in connection with the transactions contemplated hereby, any matters arising hereunder and any amendments, waivers and consents under or in respect hereof, and (d) the reasonable out-of-pocket expenses incurred by you in connection with the transactions contemplated hereby and any matters arising hereunder. The Company will also pay and save you and each holder of any Notes harmless against all liabilities, if any, with respect to all taxes, other than income taxes (including interest and penalties) which may be payable in connection with the execution and delivery of this Agreement and the Inducement Agreement, the offer, issue, sale and delivery of the Notes, and any amendment, waiver or consent under or in respect of any such instrument. The obligations of the Company under this section 15 shall survive any disposition or payment of the Notes. 16. Amendment of Existing Note Agreements. Upon the issue and sale of the Notes, each of the Existing Note Agreements shall automatically be amended to restate -45- 53 sections 6, 9, 10 and 11 thereof in their entirety as set forth in sections 6, 9, 10 and 11 respectively, hereof whereupon, for all purposes of the Existing Note Agreements, capitalized terms used in such restated sections 6, 9, 10 and 11 shall have the definitions set forth in section 14 hereof. In addition, so long as you or your nominee shall be the holder of any existing Note, and notwithstanding anything to the contrary contained in section 19 of any Existing Note Agreement, the Company will pay all sums becoming due on the Existing Notes for principal, premium, if any, and interest by the method and at the address specified for such purpose in the Schedule of Purchasers attached hereto, or by such other method or at such address as you shall have from time to time specified to the Company in writing for such purpose without the presentation or surrender of such Note or the making of any notation thereon, except that any Note paid or prepaid in full shall be surrendered to the Company at its principal office for cancellation. 17. Survival of Agreements, etc. All agreements, representations and warranties contained herein or made in writing by or on behalf of the Company in connection with the transactions contemplated hereby shall survive the execution and delivery of this Agreement, any investigation at any time made by you or on your behalf, and the issue, sale and delivery of the Notes and any disposition or payment of the Notes. All statements contained in any certificate or other instrument delivered by or on the behalf of the Company pursuant hereto or in connection with the transactions contemplated hereby shall be deemed representations and warranties by the Company hereunder. 18. Amendments and Waivers. Any term of this Agreement or of the Notes may, with the consent of the Company, be amended and the observance of any term of this Agreement or of the Notes may be waived (either generally or in a particular instance and either retroactively or prospectively) only by an instrument or instruments in writing signed by you, so long as you are committed to purchase Notes hereunder, and by the holders of at least 66 2/3% in principal amount of the Notes at the time outstanding (excluding any Notes directly or indirectly owned by the Company or any of its Subsidiaries or Affiliates) provided that no such amendment or waiver shall, without the prior written consent of the holders of all the Notes at the time outstanding, (a) change the stated maturity or principal amount of any Note, (b) reduce the rate or change the time of payment of interest on any Note, (c) change the amount or the time of payment of any principal or premium, if any, payable on any prepayment of any Note, (d) change any of the provisions of section 11, (e) reduce the aforesaid percentage of the principal amount of Notes the holders of which are required to consent to any such amendment or waiver, or (f) change the percentage of principal amount of the Notes the holders of which are entitled to accelerate the maturity of the Notes, or reduce the percentage of the principal amount of the Notes the holders of which are entitled to rescind and annul any such declaration, as provided in section 11.1. Any amendment or waiver effected in accordance with this section 18 shall be binding upon each holder of any Note at the time outstanding, each future holder of any Note and the Company. -46- 54 19. Purchase for Investment. You represent that you are purchasing the Notes hereunder for your own account for investment and with no present intention of distributing or reselling any thereof, provided that the disposition of your property shall at all times be within your control. 20. Payments on Notes; Notice of Sale, etc. So long as you or your nominee shall be the holder of any Note, and notwithstanding anything contained herein or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, premium, if any, and interest by the method and at the address specified for such purpose in the Schedule of Purchasers, or by such other commercially reasonable method or at such other address as you shall have from time to time specified to the Company in writing for such purpose without the presentation or surrender of such Note or the making of any notation thereon, except that any Note paid or prepaid in full shall be surrendered to the Company at its principal office for cancellation. Prior to any sale or other disposition of any Note held by you or your nominee, you will, at your election, either endorse thereon (or on a paper annexed thereto) the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to section 12. You will promptly notify the Company of any sale or other disposition of any Note held by you, specifying the name and address of the transferee, if known to you. The Company will afford the benefits of this section 20 to any institutional investor which is the direct or indirect transferee of any Note purchased by you under this Agreement and which has made the same agreement relating to such note as you have made in this section 20. 21. Notices, etc. All notices and other communications hereunder (other than referred to in section 20) shall be in writing and shall be deemed to have been given when delivered or when mailed by first class mail, postage prepaid, addressed (a) if to you, at your address specified on the attached Schedule A, or at such other address as you shall have furnished to the Company in writing, or (b) if to any other holder of any Note, at the most recent address of such holder as it appears on the registration books maintained by or on the behalf of the Company pursuant to section 12, or (c) if to the Company, at its address as set forth in the beginning of this Agreement, or at such other address as the Company shall have furnished to you and each holder of any Note in writing with a copy to Seagull at its address set forth in the Inducement Agreement or such other address as Seagull shall have furnished to you and each holder of any Note in writing. 22. Nonenforcement for Others. Neither this Agreement nor any disposition of any of the Notes shall be deemed to create any liability or obligation of any holder of any Note (including you) to enforce any provision hereof or of any of the Notes for the benefit or on the behalf of any other Person who may be the holder of any Note. 23. Miscellaneous. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of New York. This Agreement -47- 55 shall be binding upon and shall inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, including, except as expressly limited herein, any holder or holders at the time of the Notes or any part thereof, provided that you shall not be obligated to purchase Notes of any Person other than the present Alaska Pipeline Company. Except as stated in section 17, this Agreement embodies the entire agreement and understanding between you and the Company and supersedes all prior agreements and understandings relating to the subject matter hereof. The headings in this Agreement are for the purpose of reference only and shall not limit or otherwise affect the meaning hereof. Any reference herein to a section refers to a section of this Agreement unless otherwise specifically stated herein. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterparts of this letter, whereupon this letter shall become a binding agreement between you and the Company. Please then return one of such signed counterparts to the Company. Very truly yours, ALASKA PIPELINE COMPANY By /s/ Bill B. Hickman Title: Executive Vice President -48- 56 The foregoing Agreement is hereby agreed to as of the date thereof. THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES By /s/ John D. Miller Title: Vice President THE TRAVELERS INSURANCE COMPANY By /s/ Teresa M. Torrey Title: Investment Officer THE TRAVELERS LIFE INSURANCE COMPANY By /s/ Teresa M. Torrey Title: Investment Officer -49- 57 EXHIBIT A-1 ALASKA PIPELINE COMPANY 12.125% SERIES E NOTES DUE JULY 1, 1990 $________________ NEW YORK, NEW YORK ------------ ALASKA PIPELINE COMPANY (the "Company"), an Alaska corporation, for value received, hereby promises to pay to _______________________________, or registered assigns, the principal amount of $_________ on July 1, 1990, with interest (computed on the basis of a 360- day year, 30-day month) on the unpaid balance of such principal amount from the date hereof, payable on January 1, 1986, and thereafter semi-annually on each July 1 and January 1, at the rate of 12.125% per annum until the same shall become due and payable (whether at maturity or at a date fixed for prepayment or by declaration or otherwise), and with interest on any overdue principal (including any overdue prepayment of principal) and premium, if any, and (to the extent permitted under applicable law) on any overdue installment of interest, at the rate of 14.125% per annum until paid, payable semi-annually as aforesaid or, at the option of the holder hereof, on demand. Payments of principal, premium, if any, and interest shall be made in lawful money of the United States of America at the principal office of Chemical Bank in the Borough of Manhattan, City and State of New York. The Series E Notes. This Note is one of the Company's 12.125% Series E Notes due July 1, 1990 (the "Series E Notes", such term to include any Series E Notes issued in exchange therefor or in replacement thereof), issued in the original aggregate principal amount of $10,000,000 pursuant to a Note Agreement (the "Note Agreement"), dated as of June 17, 1985, between the Company and certain institutional investors. The holder hereof is entitled to the benefits, and is subject to the provisions, of the Note Agreement and may enforce the agreements of the Company contained therein and exercise the remedies provided for thereby or otherwise available in respect thereof. Prepayment of Notes. As provided in the Note Agreement, the Company will prepay on July 1, 1989, $5,000,000 principal amount of the Series E Notes, without premium but together with interest on the principal amount so prepaid accrued to the date fixed for such prepayment. Registration of Transfers, etc. Transfers of this Series E Note shall be registered upon registration books maintained for such purpose by or on behalf of the Company as provided in the Note Agreement. Prior to presentment of this Series E Note for registration of transfer, the Company may treat the registered holder hereof as the absolute owner of this Series E Note for the purpose of receiving all payments of principal, premium, if any, and interest hereon and for all other purposes hereof and of the Note Agreement. 58 Event of Default. In case an Event of Default, as defined in the Note Agreement, shall occur, the unpaid balance of the principal amount of this Series E Note may be declared and become due and payable in the manner of and with the effect provided in the Note Agreement. Governing Law. This Series E Note shall be construed and enforced in accordance with and governed by the laws of the State of New York. ALASKA PIPELINE COMPANY By: ----------------------- President By: ----------------------- Treasurer -2- 59 EXHIBIT A-2 ALASKA PIPELINE COMPANY 12.70% SERIES F NOTES DUE JULY 1, 1995 $________________ NEW YORK, NEW YORK ------------ ALASKA PIPELINE COMPANY (the "Company"), an Alaska corporation, for value received, hereby promises to pay to _______________________________, or registered assigns, the principal amount of $_________ on July 1, 1995, with interest (computed on the basis of a 360- day year, 30-day month) on the unpaid balance of such principal amount from the date hereof, payable on January 1, 1986, and thereafter semi-annually on each July 1 and January 1, at the rate of 12.70% per annum until the same shall become due and payable (whether at maturity or at a date fixed for prepayment or by declaration or otherwise), and with interest on any overdue principal (including any overdue prepayment of principal) and premium, if any, and (to the extent permitted under applicable law) on any overdue installment of interest, at the rate of 14.70% per annum until paid, payable semi-annually as aforesaid or, at the option of the holder hereof, on demand. Payments of principal, premium, if any, and interest shall be made in lawful money of the United States of America at the principal office of Chemical Bank in the Borough of Manhattan, City and State of New York. The Series F Notes. This Note is one of the Company's 12.70% Series F Notes due July 1, 1995 (the "Series F Notes", such term to include any Series F Notes issued in exchange therefor or in replacement thereof), issued in the original aggregate principal amount of $14,500,000 pursuant to a Note Agreement (the "Note Agreement"), dated as of June 17, 1985, between the Company and certain institutional investors. The holder hereof is entitled to the benefits, and is subject to the provisions, of the Note Agreement and may enforce the agreements of the Company contained therein and exercise the remedies provided for thereby or otherwise available in respect thereof. Prepayment of Notes. As provided in the Note Agreement, the Company will prepay on July 1, 1991 and on each July 1 thereafter so long as any Series F Notes shall be outstanding, a principal amount of the Series F Notes specified in the Note Agreement, in each case without premium but together with interest on the principal amount so prepaid accrued to the date fixed for such prepayment. In addition, the Series F Notes are subject to prepayment in whole or in part, in certain cases with a premium and in other cases without a premium, all as specified in the Note Agreement. Registration of Transfers, etc. Transfers of this Series F Note shall be registered upon registration books maintained for such purpose by or on behalf of the Company as provided in the Note Agreement. Prior to presentment of this Series F Note for registration of transfer, the Company 60 may treat the registered holder hereof as the absolute owner of this Series F Note for the purpose of receiving all payments of principal, premium, if any, and interest hereon and for all other purposes hereof and of the Note Agreement. Event of Default. In case an Event of Default, as defined in the Note Agreement, shall occur, the unpaid balance of the principal amount of this Series F Note may be declared and become due and payable in the manner of and with the effect provided in the Note Agreement. Governing Law. This Series F Note shall be construed and enforced in accordance with and governed by the laws of the State of New York. ALASKA PIPELINE COMPANY By: ---------------------- President By: ---------------------- Treasurer -2- 61 EXHIBIT A-3 ALASKA PIPELINE COMPANY 12.80% SERIES G NOTES DUE JULY 1, 2000 $________________ NEW YORK, NEW YORK ------------ ALASKA PIPELINE COMPANY (the "Company"), an Alaska corporation, for value received, hereby promises to pay to _______________________________, or registered assigns, the principal amount of $_________ on July 1, 2000, with interest (computed on the basis of a 360-day year, 30-day month) on the unpaid balance of such principal amount from the date hereof, payable on January 1, 1986, and thereafter semi-annually on each July 1 and January 1, at the rate of 12.80% per annum until the same shall become due and payable (whether at maturity or at a date fixed for prepayment or by declaration or otherwise), and with interest on any overdue principal (including any overdue prepayment of principal) and premium, if any, and (to the extent permitted under applicable law) on any overdue installment of interest, at the rate of 14.80% per annum until paid, payable semi-annually as aforesaid or, at the option of the holder hereof, on demand. Payments of principal, premium, if any, and interest shall be made in lawful money of the United States of America at the principal office of Chemical Bank in the Borough of Manhattan, City and State of New York. 1. The Series G Notes. This Note is one of the Company's 12.80% Series G Notes due July 1, 2000 (the "Series G Notes", such term to include any Series G Notes issued in exchange therefor or in replacement thereof), issued in the original aggregate principal amount of $3,000,000 pursuant to a Note Agreement (the "Note Agreement"), dated as of June 17, 1985, between the Company and certain institutional investors. The holder hereof is entitled to the benefits, and is subject to the provisions, of the Note Agreement and may enforce the agreements of the Company contained therein and exercise the remedies provided for thereby or otherwise available in respect thereof. 2. Prepayment of Notes. As provided in the Note Agreement, the Company will prepay on July 1, 1991 and on each July 1 thereafter so long as any Series G Notes shall be outstanding, a principal amount of Series G Notes specified in the Note Agreement, in each case without premium but together with interest on the principal amount so prepaid accrued to the date fixed for such prepayment. In addition, the Series G Notes are subject to prepayment in whole or in part, in certain cases with a premium and in other cases without a premium, all as specified in the Note Agreement. 62 3. Registration of Transfers, etc. Transfers of this Series G Note shall be registered upon registration books maintained for such purpose by or on behalf of the Company as provided in the Note Agreement. Prior to presentment of this Series G Note for registration of transfer, the Company may treat the registered holder hereof as the absolute owner of this Series G Note for the purpose of receiving all payments of principal, premium, if any, and interest hereon and for all other purposes hereof and of the Note Agreement. 4. Event of Default. In case an Event of Default, as defined in the Note Agreement, shall occur, the unpaid balance of the principal amount of this Series G Note may be declared and become due and payable in the manner of and with the effect provided in the Note Agreement. 5. Governing Law. This Series G Note shall be construed and enforced in accordance with and governed by the laws of the State of New York. ALASKA PIPELINE COMPANY By: ----------------------- President By: ----------------------- Treasurer -2- 63 EXHIBIT A-4 ALASKA PIPELINE COMPANY 12.75% SERIES H NOTES DUE JULY 1, 2000 $________________ NEW YORK, NEW YORK ------------ ALASKA PIPELINE COMPANY (the "Company"), an Alaska corporation, for value received, hereby promises to pay to _______________________________, or registered assigns, the principal amount of $_________ on July 1, 2000, with interest (computed on the basis of a 360-day year, 30-day month) on the unpaid balance of such principal amount from the date hereof, payable on January 1, 1986, and thereafter semi-annually on each July 1 and January 1, at the rate of 12.75% per annum until the same shall become due and payable (whether at maturity or at a date fixed for prepayment or by declaration or otherwise), and with interest on any overdue principal (including any overdue prepayment of principal) and premium, if any, and (to the extent permitted under applicable law) on any overdue installment of interest, at the rate of 14.75% per annum until paid, payable semi-annually as aforesaid or, at the option of the holder hereof, on demand. Payments of principal, premium, if any, and interest shall be made in lawful money of the United States of America at the principal office of Chemical Bank in the Borough of Manhattan, City and State of New York. 1. The Series H Notes. This Note is one of the Company's 12.75% Series H Notes due July 1, 2000 (the "Series H Notes", such term to include any Series H Notes issued in exchange therefor or in replacement thereof), issued in the original aggregate principal amount of $17,500,000 pursuant to a Note Agreement (the "Note Agreement"), dated as of June 17, 1985, between the Company and certain institutional investors. The holder hereof is entitled to the benefits, and is subject to the provisions, of the Note Agreement and may enforce the agreements of the Company contained therein and exercise the remedies provided for thereby or otherwise available in respect thereof. 2. Prepayment of Notes. As provided in the Note Agreement, the Company will prepay on July 1, 1991 and on each July 1 thereafter so long as any Series H Notes shall be outstanding, a principal amount of Series H Notes specified in the Note Agreement, in each case without premium but together with interest on the principal amount so prepaid accrued to the date fixed for such prepayment. In addition, the Series H Notes are subject to prepayment in whole or in part, in certain cases with a premium and in other cases without a premium, all as specified in the Note Agreement. 64 3. Registration of Transfers, etc. Transfers of this Series H Note shall be registered upon registration books maintained for such purpose by or on behalf of the Company as provided in the Note Agreement. Prior to presentment of this Series H Note for registration of transfer, the Company may treat the registered holder hereof as the absolute owner of this Series H Note for the purpose of receiving all payments of principal, premium, if any, and interest hereon and for all other purposes hereof and of the Note Agreement. 4. Event of Default. In case an Event of Default, as defined in the Note Agreement, shall occur, the unpaid balance of the principal amount of this Series H Note may be declared and become due and payable in the manner of and with the effect provided in the Note Agreement. 5. Governing Law. This Series H Note shall be construed and enforced in accordance with and governed by the laws of the State of New York. ALASKA PIPELINE COMPANY By: ----------------------- President By: ----------------------- Treasurer -2- 65 EXHIBIT B [Conformed Copy] SEAGULL ENERGY CORPORATION As Mortgagor TO ALASKA PIPELINE COMPANY As Mortgagee --------------- EIGHTH SUPPLEMENTAL MORTGAGE Dated as of June 17, 1985 --------------- Further Supplementing, Amending and Restating the First Mortgage and Deed of Trust, dated as of August 1, 1960, as amended, as restated by a Fourth Supplemental Mortgage, dated as of February 18, 1972, supplemented and amended by a Fifth Supplemental Mortgage, dated as of November 15, 1975, a Sixth Supplemental Mortgage, dated as of December 30, 1977, and a Seventh Supplemental Mortgage, dated as of January 1, 1984. 66 TABLE OF CONTENTS
Page RECITALS ......................................................... 1 GRANTING CLAUSE I................................................. 5 General Property......................................... 5 GRANTING CLAUSE II................................................ 5 Real Property............................................ 5 GRANTING CLAUSE III............................................... 5 Gas Systems, Buildings, Equipment, Etc................... 5 GRANTING CLAUSE IV................................................ 6 Franchises and Other Rights.............................. 6 GRANTING CLAUSE V................................................. 6 Pledged Contracts........................................ 6 GRANTING CLAUSE VI................................................ 6 Further Property Conveyed to Mortgagee................... 6 GRANTING CLAUSE VII............................................... 7 Other and After-Acquired Property........................ 7 GRANTING CLAUSE VIII.............................................. 7 Appurtenances, Income, Etc............................... 7 EXCEPTED PROPERTY CLAUSE.......................................... 7 HABENDUM CLAUSE................................................... 8 SUBJECT CLAUSE.................................................... 8 DEFEASANCE CLAUSE................................................. 8 I. CERTAIN REPRESENTATIONS AND COVENANTS OF THE COMPANY.......... 8 II. AMENDMENT AND RESTATEMENT OF SUPPLEMENTED ORIGINAL MORTGAGE................................................. 9 GRANTING CLAUSE I................................................. 9 General Property......................................... 9
(i) 67 Page GRANTING CLAUSE II................................................ 9 Real Property............................................ 9 GRANTING CLAUSE III............................................... 9 Gas Systems, Buildings, Equipment, Etc................... 9 GRANTING CLAUSE IV................................................ 10 Franchises and Other Rights.............................. 10 GRANTING CLAUSE V................................................. 10 Pledged Contracts........................................ 10 GRANTING CLAUSE VI................................................ 10 Further Property Conveyed to Mortgagee................... 10 GRANTING CLAUSE VII............................................... 11 Other and After-Acquired Property........................ 11 GRANTING CLAUSE VIII.............................................. 11 Appurtenances, Income, Etc............................... 11 EXCEPTED PROPERTY CLAUSE.......................................... 11 HABENDUM CLAUSE................................................... 12 SUBJECT CLAUSE.................................................... 12 DEFEASANCE CLAUSE................................................. 13 GENERAL COVENANT.................................................. 13 ARTICLE 1. - Definitions.......................................... 13 Section 1.01. Definitions............................ 13 "Affiliate":.................................... 13 "Alaska":....................................... 13 "Alaska Note Agreements":....................... 13 "Alaska Notes".................................. 13 "Article," "Section", etc.:..................... 14 "Board of Directors"; "Board":.................. 14 "Common Stock":................................. 14 "Company":...................................... 14 "Construction Liens":........................... 14 "Default":...................................... 14 "Division":..................................... 14
(ii) 68 Page "Division Certificate":......................... 15 "Event of Default":............................. 15 "ENSTAR":....................................... 15 "Excepted Property":............................ 15 "Executive Committee":.......................... 15 "Gas Sale Contract":............................ 15 "Herein"; "hereof"; "hereby"; "hereunder":...... 15 "Indebtedness":................................. 15 "Lien of this Mortgage"; "lien of the Mortgage"; "lien hereof":.................................. 16 "Mortgage":..................................... 16 "Mortgaged Property":........................... 17 "Mortgagee":.................................... 17 "Notes": ....................................... 17 "Permitted Encumbrances":....................... 17 "Person":....................................... 19 "Pledged Contracts":............................ 19 "Replacement Notes":............................ 19 "Required Accounting Practice":................. 19 "Securities":................................... 20 "Subsidiary":................................... 20 "Supplemental Mortgage"; "mortgage supplemental hereto":....................................... 20 "Voting Stock":................................. 20 ARTICLE 2. - Description of Indebtedness Secured; Form of Notes... 20 Section 2.01. Indebtedness Secured................... 20 Section 2.02. Covenant to Issue Notes; Form of Notes. 20 ARTICLE 3. - Particular Warranties and Covenants of the Company... 22 Section 3.01. Title to Mortgaged Property; Lien...... 22 Section 3.02. Payment of Principal, Premium and Interest; Obligation Absolute.................... 22 Section 3.03. Payment of Taxes, etc.; Observance of Legal Requirments Liens; Contests; Preferential Transfers Prohibited...... 23 Section 3.04. Insurance; Application of Insurance Proceeds; Notices to Mortgagee......... 23 Section 3.05. Maintenance of Corporate Existence, Franchises, etc., Restriction on Business .............................. 24 Section 3.06. Maintenance and Improvement of Property 24 Section 3.07. Restrictions on Liens, etc............. 24 Section 3.08. Restrictions on Indebtedness........... 25 Section 3.09. Sale, Merger and Consolidation......... 25 Section 3.10. Subjecting of Property to the Mortgage; Further Assurances..................... 25 Section 3.11. Recordation of Mortgage and Supplemental Mortgages.............................. 26 Section 3.12. Payment of Stamp Taxes, etc............ 26
(iii) 69 Page Section 3.13. Performance and Advances by Mortgagee, etc.................................... 26 ARTICLE 4. - Pledged Contracts.................................... 27 Section 4.01. Pledge of Contracts; Other Hypothecation Prohibited............................. 27 Section 4.02. Consents to Assignment of Pledged Contracts, etc......................... 27 Section 4.03. Performance of Pledged Contracts; No Assumption by Mortgagee; Notice of Claimed Defaults....................... 27 Section 4.04. Rights as to Pledged Contracts......... 28 Section 4.05. Amendment, etc., of Pledged Contracts.. 29 Section 4.06. Third Parties Protected................ 29 ARTICLE 5. - Possession, Use and Release of Property.............. 30 Section 5.01. Possession of and Dealing With Property until Default; Leases, etc............. 30 Section 5.02. Disposal of Worn-Out Property, Franchises, etc., Without Mortgagee's Consent...... 30 Section 5.03. Release by Mortgagee of Property Sold by Company............................. 32 Section 5.04. Disposal of Property of Value Without Mortgagee's Consent.................... 32 Section 5.05. New Property Subject to Lien of Mortgage............................... 32 Section 5.06. Release on Condemnation, etc., of Mortgaged Property..................... 32 Section 5.07. Purchaser of Released Property Not Required to Investigate......................... 33 Section 5.08. Confirmatory Releases, etc............. 33 Section 5.09. Exercise of Company Powers After Event of Default............................. 33 ARTICLE 6. - Remedies Upon Default................................ 34 Section 6.01. Definition of Event of Default......... 34 Section 6.02. Acceleration of Maturity............... 34 Section 6.03. Mortgagee's Right to Enter and Take Possession, Operate and Apply Income... 34 Section 6.04. Mortgagee's Power of Sale.............. 36 Section 6.05. Mortgagee's Power of Enforcement....... 36 Section 6.06. Adjournment of Sale.................... 37 Section 6.07. Mortgagee Authorized to Execute Deeds, Conveyances, Deliver Possession, etc... 37 Section 6.08. Principal and Interest Become Due on Sale................................... 37 Section 6.09. Purchase by Mortgagee.................. 37 Section 6.10. Application of Notes Toward Purchase Price.................................. 37 Section 6.11. Receipt Sufficient Discharge to Purchaser.............................. 38 Section 6.12. Sale a Bar Against Company............. 38 Section 6.13. Application of Proceeds of Sale........ 38 Section 6.14. Waiver of Appraisement, Valuation, Stay, Extension and Redemption Laws.......... 39 Section 6.15. Mortgagee Entitled to Appointment of Receiver............................... 39 Section 6.16. Suits to Protect the Mortgaged Property 39
(iv) 70 Page Section 6.17. Mortgagee May File Proofs of Claim in Receivership, etc...................... 39 Section 6.18. Company to Pay All Notes on Any Default in Payment; Application of Moneys by Mortgagee.............................. 40 Section 6.19. Delay or Omission No Waiver............ 41 Section 6.20. No Waiver of One Default to Affect Another................................ 41 Section 6.21. Discontinuance of Proceedings--Position of Parties Restored.................... 41 Section 6.22. Remedies Cumulative.................... 41 ARTICLE 7. - Immunity of Incorporators, Stockholders, Officers and Directors............................................. 41 Section 7.01. Immunity of Incorporators, Stockholders, Officers and Directors.................. 41 ARTICLE 8. - Defeasance............................................ 42 Section 8.01. Defeasance.............................. 42 ARTICLE 9. - Miscellaneous Provisions.............................. 42 Section 9.01. Successors and Assigns Included in Parties................................. 42 Section 9.02. Addresses for Notices, etc.............. 42 Section 9.03. Table of Contents, Headings, etc........ 43 Section 9.04. Invalid Provisions to Affect No Others.. 43 Section 9.05. Changes, etc............................ 43 Section 9.06. Counterparts of Mortgage................ 43 III. MISCELLANEOUS PROVISIONS RELATING TO EIGHTH SUPPLEMENTAL MORTGAGE.................................................. 43 ARTICLE 10. - Miscellaneous Provisions............................. 43 Section 10.01. Titles, Headings, etc................... 43 Section 10.02. Counterparts............................ 43 ARTICLE 11. - Real Property Specifically Described................. 43 Section 11.01. Real Property Specifically Described.... 43
(v) 71 EIGHTH SUPPLEMENTAL MORTGAGE, dated as of June 17, 1985, between SEAGULL ENERGY CORPORATION (the "Company"), a Texas corporation, party of the first part, and ALASKA PIPELINE COMPANY ("Alaska"), an Alaska corporation, party of the second part. RECITALS WHEREAS, pursuant to a Loan Agreement dated as of August 1, 1960, as amended by a Supplemental Agreement dated September 9, 1960, and as ratified and confirmed by a Loan Agreement Confirmation dated as of December 15, 1969, between Alaska and Alaska Public Service Corporation (formerly named Anchorage Natural Gas Corporation and herein called "Service"), Alaska heretofore made loans to Service evidenced by two series of notes of Service designated respectively as its Secured Notes, 5-3/4% Series due February 1, 1981 (the "Notes of the 1981 Series"), and its Secured Notes, 7-3/4% Series due January 1, 1990 (the "Notes of the 1990 Series", the Notes of the 1981 Series and the Notes of the 1990 Series being herein collectively called the "Secured Notes"); WHEREAS, the Notes of the 1981 Series have heretofore matured, and the indebtedness evidenced thereby has been repaid in full to the holders thereof; WHEREAS, in order to secure the Secured Notes, Service executed and delivered to Alaska, as Mortgagee, a First Mortgage and Deed of Trust dated as of August 1, 1960 (the "Original Mortgage"), and three mortgages supplemental thereto consisting of a Supplemental Mortgage dated as of September 9, 1960 (the "First Supplemental Mortgage"), a Second Supplemental Mortgage dated as of May 1, 1961 (the "Second Supplemental Mortgage") and a Third Supplemental Mortgage dated as of December 15, 1969 (the "Third Supplemental Mortgage"); WHEREAS, effective February 18, 1972, Alaska Interstate Company, an Alaska corporation ("Interstate"), acquired all of the assets and business as a going concern of Service and in connection therewith entered into a Fourth Supplemental Mortgage dated as of February 18, 1972 (the "Fourth Supplemental Mortgage") which, among other things (a) provided for the assumption by Interstate of all the obligations, warranties and agreements of Service under the Secured Notes and the Original Mortgage as supplemented and amended thereby and by the First Supplemental Mortgage, the Second Supplemental Mortgage and the Third Supplemental Mortgage, and (b) restated the terms and provisions of the Original Mortgage, as supplemented and amended thereby and by the First Supplemental Mortgage, the Second Supplemental Mortgage and the Third Supplemental Mortgage; WHEREAS, the Original Mortgage, as supplemented, amended and restated by the First Supplemental Mortgage, the Second Supplemental Mortgage, the Third Supplemental Mortgage and the Fourth Supplemental Mortgage, has been further supplemented and amended by a Fifth Supplemental Mortgage, dated as of November 15, 1975, a Sixth Supplemental Mortgage, dated as of December 30, 1977 and a Seventh Supplemental Mortgage, dated as of January 1, 1984 (the Original Mortgage, as so supplemented, amended and restated by such seven supplemental mortgages, being herein called the "Supplemented Original Mortgage"); 72 WHEREAS, effective June 4, 1982, Interstate was merged into ENSTAR Corporation ("ENSTAR"), and ENSTAR, as the surviving corporation, succeeded to all of Interstate's right, title and interest to the assets and business of Service as a going concern, and assumed all of Interstate's obligations under the Secured Notes and the Original Mortgage as supplemented, amended and restated to the date thereof; WHEREAS, following such merger, the name of Service was changed to ENSTAR Natural Gas Company and has continued to operate as a division (the "Division") of ENSTAR; WHEREAS, Alaska has outstanding on the date hereof its First Mortgage and Collateral Trust Bonds, 7 3/4% Series due January 1, 1990 (such bonds being herein collectively referred to as the "Bonds"), which Bonds were issued under, and are secured by, an Indenture of Mortgage and Deed of Trust, dated as of August 1, 1960, as amended, supplemented and restated by six indentures supplemented thereto (such Indenture of Mortgage and Deed of Trust, as so amended, supplemented and restated, being herein referred to as the "Bond Indenture") between Alaska and MBank Houston, N.A. (formerly, Bank of the Southwest National Association, Houston, and herein referred to as "MBank" or the "Trustee"), a national banking association, as successor trustee under the Indenture to Texas Commerce Bank National Association; WHEREAS, Alaska has outstanding on the date hereof four series of notes, consisting of its 8-3/8% Series A Notes due January 1, 1993 (the "Series A Notes"), its 10-1/4% Series B Notes due January 1, 1995 (the "Series B Notes"), its 11-1/2% Series C Notes due January 1, 1991 (the "Series C Notes") and its 9.95% Series D Notes, due April 1, 1997 (the "Series D Notes") (the Series A Notes, the Series B Notes, the Series C Notes and the Series D Notes being sometimes collectively referred to herein as the "Existing Alaska Notes"); WHEREAS, the Series A Notes and the Series B Notes were originally issued pursuant to a Note Agreement, dated as of August 15, 1972 (the "Series A and B Note Agreement"), the Series C Notes were originally issued pursuant to a Note Agreement, dated as of November 15, 1975 (the "Series C Note Agreement") and the Series D Notes were originally issued pursuant to a Note Agreement, dated as of March 15, 1977 (the "Series D Note Agreement"), each such agreement being severally between Alaska and the institutional investor named therein (the Series A and B Note Agreement, the Series C Note Agreement and the Series D Note Agreement, as amended, being sometimes collectively referred to herein as the "Existing Alaska Note Agreements"); WHEREAS, for the purpose of providing security for the Bonds, Alaska has heretofore assigned certain rights, titles and interests under the Supplemented Original Mortgage and endorsed the Secured Notes outstanding thereunder to the Trustee under the Bond Indenture; WHEREAS, for the purpose of providing security for the Existing Alaska Notes, Alaska has heretofore assigned certain rights, titles and interests under the Supplemented Original Mortgage and endorsed the Secured Notes outstanding thereunder to MBank as trustee under a Second Indenture of Mortgage and Deed of Trust, dated as of December 30, 1977, as supplemented and amended by a First Supplemental Indenture, dated as of January 1, 1984 -2- 73 (such Second Indenture of Mortgage and Deed of Trust, as so supplemented and amended, being herein called the "Note Indenture"); WHEREAS, concurrently herewith Alaska is issuing to certain institutional investors $45,000,000 aggregate principal amount of its unsecured promissory notes, consisting of $10,000,000 aggregate principal amount of 12.125% Series E Notes due July 1, 1990 (the "Series E Notes"), $14,500,000 aggregate principal amount of 12.70% Series F Notes due July 1, 1995 (the "Series F Notes"), $3,000,000 aggregate principal amount of 12.80% Series G Notes due July 1, 2000 (the "Series G Notes") and $17,500,000 aggregate principal amount of 12.75% Series H Notes due July 1, 2000 (the "Series H Notes") (the Series E Notes, the Series F Notes, the Series G Notes and the Series H Notes being sometimes collectively referred to herein as the "New Alaska Notes", and the Existing Alaska Notes and New Alaska Notes being sometimes collectively referred to herein as the "Alaska Notes"); WHEREAS, the proceeds of the sale of New Alaska Notes will be applied in part to the prepayment of the Bonds, whereupon the Bond Indenture will be terminated and the lien on the Supplemented Original Mortgage and the Secured Notes created by the Bond Indenture will be released and terminated; WHEREAS, concurrently herewith, the Company is purchasing from ENSTAR all of the outstanding common stock of Alaska and all of the assets and business as a going concern of the Division pursuant to an Agreement of Purchase and Sale dated as of October 30, 1984, as amended by a Supplemental Agreement dated May 3, 1985, which, among other things, provides for (a) the assumption by the Company of all indebtedness of ENSTAR to Alaska and all the obligations, warranties and agreements of ENSTAR and the Division under the Supplemented Original Mortgage, and (b) the unconditional release and discharge of ENSTAR of and from all such indebtedness and all the obligations, warranties and agreements under the Supplemented Original Mortgage; WHEREAS, at the date of execution and delivery of this Eighth Supplemental Mortgage, the aggregate outstanding principal amount of indebtedness of ENSTAR to Alaska is $40,623,512, which indebtedness is evidenced by promissory notes of ENSTAR issued to Alaska, some of which are Secured Notes (collectively, the "ENSTAR Notes"); WHEREAS, in order to evidence the assumption of the indebtedness evidenced by the ENSTAR Notes, concurrently herewith the Company is executing and delivering to Alaska, in exchange for and replacement of the ENSTAR Notes, promissory notes of the Company (the "Replacement Notes") in an aggregate principal amount equal to, and, except as provided herein, containing substantially identical terms and conditions as, the ENSTAR Notes, and the ENSTAR Notes are being cancelled and discharged; WHEREAS, the Replacement Notes are being issued in renewal, extension and refunding of the ENSTAR Notes and the lien created by the Supplemented Original Mortgage is by this Eighth Supplemental Mortgage being carried forward and continued in force and effect for the purpose of securing, among other indebtedness, the indebtedness evidenced by the Replacement Notes; -3- 74 WHEREAS, in connection with the above transactions, the Company and Alaska desire to terminate the Note Indenture such that the Existing Alaska Notes will become unsecured obligations of Alaska, pari passu with the New Alaska Notes; WHEREAS, (i) the holders of the Existing Alaska Notes were willing to consent to the acquisition by the Company of Alaska and the Division, and the termination of the Note Indenture, and (ii) the purchasers of the New Alaska Notes were willing to purchase the New Alaska Notes, only on the condition that the Company execute and deliver this Eighth Supplemental Mortgage in order to assume ENSTAR's obligations, warranties and agreements under the Supplemented Original Mortgage and to secure the Replacement Notes and certain future indebtedness of the Company to Alaska; WHEREAS, in furtherance of the above, the Company and Alaska desire to amend, modify, alter, supplement and restate certain terms and conditions contained in the Supplemented Original Mortgage, and the Company desires to convey and mortgage, and confirm the conveyancing and mortgaging under the Supplemented Original Mortgage and hereunder, of certain properties heretofore acquired by the Company with respect to the operations of the Division and not specifically described in the Supplemented Original Mortgage, and, to that end, the Company desires to make, execute and deliver to Alaska an Eighth Supplemental Mortgage, supplemental to the Supplemented Original Mortgage, in the form hereof and for the purposes herein provided, which will secure all the Notes (as defined in Section 1.01 of the Mortgage); WHEREAS, all conditions and requirements necessary to authorize the execution, acknowledgment and delivery of this Eighth Supplemental Mortgage and duly and legally to effect the supplements to and modifications of the Supplemented Original Mortgage provided for in this Eighth Supplemental Mortgage and to make the Supplemented Original Mortgage, as supplemented, modified and restated hereby, a valid, binding and legal instrument for the security of the Notes (as defined in Section 1.01 of the Mortgage), have been complied with or have been done and performed; NOW, THEREFORE, THIS EIGHTH SUPPLEMENTAL MORTGAGE WITNESSETH THAT: the Company, in consideration of the premises and of $10 to it duly paid by Alaska, the receipt of which is hereby acknowledged, and in order further to secure (and the Company hereby acknowledges and agrees that the lien of the Supplemented Original Mortgage is hereby carried forward and continued in force and effect for the purpose of securing) the payment of the principal of and the premium, if any, and interest on all Notes at any time issued and outstanding under the Supplemented Original Mortgage, as supplemented, amended and restated by this Eighth Supplemental Mortgage (the Supplemented Original Mortgage, as supplemented, amended and restated by this Eighth Supplemental Mortgage, being herein referred to as the "Mortgage"), in accordance with their terms, and the performance and observance by the Company of all of the obligations and agreements of the Company herein and therein contained and the payment of all amounts payable and to become payable by the Company under the Gas Sale Contract (as defined in Section 1.01 of the Mortgage), has executed and delivered this Eighth Supplemental Mortgage and does hereby ratify and confirm its mortgage and pledge to Alaska of its property (other than Excepted Property, as defined in -4- 75 the Excepted Property Clause of the Supplemented Original Mortgage, and any property heretofore released from the lien of the Supplemented Original Mortgage pursuant thereto and other than easements, rights-of-way, permits, leaseholds, contracts and agreements which have either expired or been completed in accordance with their terms) described in the Supplemented Original Mortgage as being subjected to the lien of the Supplemented Original Mortgage and has granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over and confirmed, and hereby does grant, bargain, sell, release, convey, assign, transfer, mortgage, pledge, set over and confirm unto Alaska, as Mortgagee under the Mortgage, and to its successors and assigns forever: GRANTING CLAUSE I. General Property. All premises, property, rights and franchises directly relating to or used or intended for use in the business of the Division which have been constructed or acquired by the Company since the execution and delivery of the Original Mortgage, have not heretofore been specifically subjected to the lien thereof and are owned by the Company on the date of the execution hereof or which may be hereafter owned, constructed or acquired by the Company, of every character whatever and wherever situated, except as hereinafter expressly excepted in the Excepted Property Clause of this Eighth Supplemental Mortgage, including, among other things, and without limitation, those referred to in the following Granting Clauses (reference to or enumeration of any particular kind, class or item of property shall not be deemed to exclude from the operation and effect of the Mortgage and this Eighth Supplemental Mortgage any kind, class or item not so referred to or enumerated). GRANTING CLAUSE II. Real Property. All real property and interests therein specifically described in Schedule I attached hereto and made a part hereof for all purposes, except as expressly excepted therein. GRANTING CLAUSE III. Gas Systems, Buildings, Equipment, Etc. All systems for the gathering, transmission, distribution and storage of natural, manufactured or mixed gas; all plants, buildings, structures, erections and works, together with their fixtures and appurtenances; all pumps, pumping stations, compressors, compressor stations, reservoirs, boilers, boiler houses, tanks, gates, mains, pipe lines (main, branch, lateral, extension, loop, tap, plant and all other types), service laterals, pipes, tunnels, sewerage lines, field lines, power lines, poles, wires, conduits, fittings, casings, valves, reducers, gauges, regulators, protection units, bypasses, scrubbers, service and other connections, meters, meter installations, meter stations, regulatory stations, measuring stations and all other stations; all measuring, regulating and control equipment, and all other equipment, machinery, facilities, -5- 76 materials, supplies and tools; and all other property, of every character and wherever situated; in each case directly relating to or used or intended for use in the business of the Division and which have been constructed or acquired by the Company since the execution and delivery of the Original Mortgage and not heretofore subjected to the lien thereof and are owned by the Company on the date of the execution hereof or which may hereafter be so owned, constructed or acquired by the Company; but, as to all such property, except as hereinafter expressly excepted in the Excepted Property Clause of this Eighth Supplemental Mortgage. GRANTING CLAUSE IV. Franchises and Other Rights. The Division Certificate (as defined in Section 1.01 of the Mortgage) and all other franchises (corporate and other) of every character whatever, and all certificates of convenience or necessity, immunities, privileges, permits, licenses, easements, consents, grants, ordinances, leaseholds, rights-of-way and other rights, of every character whatever, and all renewals, extensions, additions, amendments, modifications and replacements of any of the foregoing; in each case (a) directly relating to or used or intended for use in the business of the Division and (b) which have been acquired by the Company since the execution and delivery of the Original Mortgage, have not heretofore been specifically subjected to the lien thereof and are owned, held or enjoyed by the Company on the date of the execution hereof or which may hereafter be acquired, owned, held or enjoyed by the Company; but, as to all such property, only to the extent permitted by law and except as hereinafter expressly excepted in the Excepted Property Clause of this Eighth Supplemental Mortgage. GRANTING CLAUSE V. Pledged Contracts. All right, title and interest of the Company in, to and under the Gas Sale Contract (as defined in Section 1.01 of the Mortgage) and all other contracts and agreements for the purchase or other acquisition, sale or other disposition, exchange or transportation of natural, manufactured or mixed gas which are used or intended for use in or directly relating to the business of the Division, and in, to and under all renewals, extensions, additions, amendments and modifications of any of the foregoing; in each case which have been acquired, assumed or entered into by the Company since the execution and delivery of the Original Mortgage and have not heretofore been specifically subjected to the lien thereof or which may hereafter be acquired, assumed or entered into by the Company, other than contracts and agreements not involving the receipt by the Company of more than $100,000 in any calendar year. GRANTING CLAUSE VI. Further Property Conveyed to Mortgagee. All property, of every character whatever, which from time to time after the date of the Original Mortgage may have been, or hereafter may be, delivered or, by writing of any kind, -6- 77 conveyed, mortgaged, pledged, assigned, or transferred to the Mortgagee (as defined in Section 1.01 of the Mortgage) by the Company or by any other Person (as so defined) to be held as a part of the Mortgaged Property (as so defined), except as hereinafter expressly excepted in the Excepted Property Clause of this Eighth Supplemental Mortgage. GRANTING CLAUSE VII. Other and After-Acquired Property. All other property, of every character whatever, which the Company now owns and which it may hereafter acquire and which, in each case, directly relates to or is used or intended for use in the business of the Division, except as hereinafter expressly excepted in the Excepted Property Clause of this Eighth Supplemental Mortgage. GRANTING CLAUSE VIII. Appurtenances, Income, Etc. All the tenements, hereditaments and appurtenances belonging or in any way pertaining to the above-mentioned premises, property, franchises, rights, contracts and agreements, or any part thereof, with all reversions and remainders thereof, and, to the extent permitted by law and subject to the applicable terms of the Mortgage, all tolls, rents, revenues, issues, income, products and profits thereof, and all the estate, right, title, interest and claim whatever at law and in equity which the Company now has or may hereafter acquire in and to the same. EXCEPTED PROPERTY CLAUSE. EXCEPTING, HOWEVER, from the lien, operation and effect of this Eighth Supplemental Mortgage and the Mortgage all Excepted Property (as defined in the Excepted Property Clause of the Mortgage) other than any of such property which hereby is or at any time hereafter may be specifically transferred or assigned to or pledged or deposited with Alaska, as Mortgagee under the Mortgage, or required by the terms of the Mortgage or hereby so to be; provided that if, upon the occurrence of an Event of Default (as defined in section 1.01 of the Mortgage), Alaska, or any receiver or trustee appointed under the Mortgage or upon the application of Alaska, shall enter upon and take possession of all or substantially all of the Mortgaged Property, Alaska or such receiver or trustee may, to the full extent permitted by law, at the same time likewise take possession of any or all of the Excepted Property then on hand which is directly related to or used or intended for use in connection with the business of the Division, and use and administer the same, to the full extent permitted by law, to the same extent as if such Excepted Property were part of the Mortgaged Property, unless and until such Event of Default shall be remedied or waived in the manner provided in the Mortgage and possession of the Mortgaged Property restored to the Company or its successors and assigns. -7- 78 HABENDUM CLAUSE. TO HAVE AND TO HOLD all such premises, properties, franchises, rights, contracts and agreements so granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed by the Company as aforesaid or intended so to be, unto Alaska, as Mortgagee, and to its successors and assigns forever, for the equal and proportionate benefit and security of Alaska, in its capacity as a creditor under the Gas Sale Contract, and the holders of the Notes issued or to be issued under the Mortgage, as hereby and hereafter supplemented, amended and restated, without preference of any such Notes over any other by reason of priority in the time of the issuance or negotiation thereof or by reason of the date of maturity thereof or for any other reason whatever. SUBJECT CLAUSE. SUBJECT, HOWEVER, to the exceptions, reservations and matters herein recited, to Permitted Encumbrances (as defined in Section 1.01 of the Mortgage) and, to the extent permitted by the Mortgage, to Construction Liens (as so defined). DEFEASANCE CLAUSE. PROVIDED, HOWEVER, that if the Company, or its successors or assigns shall pay or cause to be paid, or shall make provision in the manner provided in Article 8 of the Mortgage for the payment of the principal, interest and premium, if any, to become due in respect of all of the Notes at the time and in the manner stipulated therein and in the Mortgage, and shall perform and comply with all the covenants, agreements and conditions contained in the Notes and in the Mortgage and shall perform and comply with all the covenants, agreements and conditions contained in the Gas Sale Contract, then the estate and rights hereby and thereby granted shall cease, determine and be void, otherwise to remain in full force and effect. I. CERTAIN REPRESENTATIONS AND COVENANTS OF THE COMPANY. (a) The Company hereby assumes and agrees to fully and timely pay, satisfy, discharge and perform all debts, liabilities, duties and obligations of ENSTAR (absolute, accrued, contingent or otherwise) under, resulting from or in any way relating to the Supplemented Original Mortgage and agrees that it shall be legally bound by the Supplemented Original Mortgage the same as if it were the original mortgagor named therein. The Company hereby confirms and ratifies in all respects the Supplemented Original Mortgage and the lien created thereby. (b) The Company hereby represents and warrants that it is duly authorized under the laws of the State of Texas, and all other applicable laws, to assume the Supplemented Original Mortgage, to create and issue the Replacement Notes and to execute and deliver this Eighth Supplemental Mortgage, and all corporate action on its part required for the lawful execution and delivery of the Replacement Notes and this Eighth Supplemental Mortgage have been duly and effectively taken; and the Replacement Notes and all other Notes issued or to be issued -8- 79 are and will be valid and enforceable obligations of the Company in accordance with their terms and are and will be entitled to the security, lien and benefits of the Mortgage. II. AMENDMENT AND RESTATEMENT OF SUPPLEMENTED ORIGINAL MORTGAGE. The Company and Alaska, in consideration of the premises and other good and valuable consideration, hereby agree that the Granting Clauses, Excepted Property Clause, Habendum Clause, Subject Clause, Defeasance Clause, General Covenant and Articles 1 through 10, inclusive, of the Original Mortgage, as amended by the First Supplemented Mortgage, the Second Supplemental Mortgage, the Third Supplemental Mortgage, the Fourth Supplemental Mortgage, the Fifth Supplemental Mortgage, the Sixth Supplemental Mortgage and the Seventh Supplemental Mortgage (said Supplemental Mortgages, together with this Eighth Supplemental Mortgage, being hereinafter collectively called the "Supplemental Mortgages"), are hereby amended, supplemented and restated to read as follows: GRANTING CLAUSE I. General Property. All premises, property, rights and franchises of the Company, whether now owned or hereafter constructed or acquired, directly relating to or used or intended for use in the business of the Division, of every character whatever and wherever situated, except as hereinafter expressly excepted in the Excepted Property Clause, including, among other things and without limitation, those referred to in the following Granting Clauses (reference to or enumeration of any particular kind, class or item of property shall not be deemed to exclude from the operation and effect of this Mortgage any kind, class or item not so referred to or enumerated). GRANTING CLAUSE II. Real Property. All real property and interests therein now owned or hereafter acquired by the Company directly relating to or used or intended for use in the business of the Division, except as hereinafter expressly excepted in the Excepted Property Clause, including, without limitation, those specifically described in the Original Mortgage and the Supplemental Mortgages, except as expressly excepted therein. GRANTING CLAUSE III. Gas Systems, Buildings, Equipment, Etc. All systems for the gathering, transmission, distribution and storage of natural, manufactured or mixed gas; all plants, buildings, structures, erections and works, together with their fixtures and appurtenances; all pumps, pumping stations, compressors, compressor stations, reservoirs, boilers, boiler houses, tanks, gates, mains, pipe lines (main, branch, lateral, -9- 80 extension, loop, tap, plant and all other types), service laterals, pipes, tunnels, sewerage lines, field lines, power lines, poles, wires, conduits, fittings, casings, valves, reducers, gauges, regulators, protection units, bypasses, scrubbers, service and other connections, meeters, meter installations, meter stations, regulatory stations, measuring stations and all other stations; all measuring, regulating and control equipment, and all other equipment, machinery, facilities, materials, supplies and tools; and all other property, of every character and wherever situated; in each case which is now owned or hereafter acquired by the Company and which directly relates to or is used or intended for use in the business of the Division; but, as to all such property, except as hereinafter expressly excepted in the Excepted Property Clause. GRANTING CLAUSE IV. Franchises and Other Rights. The Division Certificate (as defined in section 1.01) and all other franchises (corporate and other) of every character whatever, and all certificates of convenience or necessity, immunities, privileges, permits, licenses, easements, consents, grants, ordinances, leaseholds, rights-of-way and other rights, of every character whatever, and all renewals, extensions, additions, amendments, modifications and replacements of any of the foregoing; in each case which is now or hereafter owned, held or enjoyed by the Company and which directly relates to or is used or intended for use in the business of the Division; but, as to all such property, only to the extent permitted by law and except as hereinafter expressly excepted in the Excepted Property Clause. GRANTING CLAUSE V. Pledged Contracts. All right, title and interest of the Company in, to and under the Gas Sale Contract, and all other contracts and agreements for the purchase or other acquisition, sale or other disposition, exchange or transportation of natural, manufactured or mixed gas to which the Company hereafter may become a party, and which are used or intended for use in or directly related to the business of the Division, and in, to and under all renewals, extensions, additions, amendments and modifications of any of the foregoing, other than contracts and agreements not involving the payment or receipt by the Company or the Division of more than $100,000 in any calendar year. GRANTING CLAUSE VI. Further Property Conveyed to Mortgagee. All property, of every character whatever, which from time to time after the date of this Mortgage may be delivered, or may by writing of any kind be conveyed, mortgaged, pledged, assigned or transferred to the Mortgagee by the Company or the Division or by any other person to be held as part of the Mortgaged Property (as defined in section 1.01), except as hereinafter expressly excepted in the Excepted Property Clause. -10- 81 GRANTING CLAUSE VII. Other and After-Acquired Property. All other property, of every character whatever, which the Company now owns and which it may hereafter acquire and which, in each case, directly relates to or is used or intended for use in the business of the Division, except as hereinafter expressly excepted in the Excepted Property Clause. GRANTING CLAUSE VIII. Appurtenances, Income, Etc. All the tenements, hereditaments, and appurtenances belonging or in any way pertaining to the above-mentioned premises, property, franchises, rights, contracts and agreements or any part thereof, with all reversions and remainders thereof, and, to the extent permitted by law and subject to the applicable terms of this Mortgage, all tolls, rents, revenues, issues, income, products and profits thereof, and all the estate, right, title, interest and claim whatever at law and in equity which the Company or the Division now has or may hereafter acquire in and to the same. EXCEPTED PROPERTY CLAUSE. EXCEPTING, HOWEVER, from the lien, operation and effect of the Mortgage, all of the following property ("Excepted Property"), whether now owned or hereafter acquired: (a) all cash on hand and in banks, and all bills, notes and accounts receivable; (b) all contracts and choses in action, obligations, mortgages, and other Securities; (c) all office furniture and equipment, automobiles, airplanes, mobile transportation equipment, stores equipment, shop equipment, laboratory equipment, tools and work equipment, and mobile communications equipment; (d) all materials, merchandise, appliances and supplies acquired for the purpose of resale or for leasing to customers or for promotional or educational use in the ordinary course of business of the Division, and all gas, oil, coal, fuel, materials, stores and supplies consumable (otherwise than by ordinary wear and tear) in their use in the ordinary operation of the business of the Division; (e) all gas, oil, coal and other hydrocarbons in pipe lines or in processing or testing plants, and all gas (other than cushion gas) in storage in underground reservoirs or other facilities used for the storage of gas in gaseous or in liquefied state; and all leases, other mineral interests, gas and oil rights, wells, equipment and other properties, -11- 82 whether producing or nonproducing, used or useful primarily and principally for the production of natural gas up to a point of connection with any gathering system or for the production, processing or treatment of oil or condensate; (f) not more than five one-family houses owned and operated by or on behalf of the Division exclusively for the purpose of providing housing and related facilities for employees of the Division; (g) the last day of each lease to the Company which is subject to the lien of this Mortgage; and (h) all property, real and personal, tangible and intangible, which is not directly related to or used or intended for use in the business of the Division; other than any of the foregoing which hereby are or at any time hereafter may be specifically transferred or assigned to or pledged or deposited with the Mortgagee hereunder or required by the terms of this Mortgage so to be; provided that if, upon the occurrence of an Event of Default, the Mortgagee or any receiver or trustee appointed hereunder or upon the application of the Mortgagee shall enter upon and take possession of all or substantially all of the Mortgaged Property, the Mortgagee or such receiver or trustee may, to the full extent permitted by law, at the same time likewise take possession of any or all of the Excepted Property then on hand, which is used or useful in connection with the business of the Division, and use and administer the same, to the full extent permitted by law, to the same extent as if such Excepted Property were part of the Mortgaged Property, unless and until such Event of Default shall be remedied and possession of the Mortgaged Property restored to the Company or its successors or assigns. HABENDUM CLAUSE. TO HAVE AND TO HOLD all such premises, property, franchises, rights, contracts and agreements so granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed by the Company as aforesaid or intended so to be, unto the Mortgagee and its successors and assigns forever, for the equal and proportionate benefit and security of Alaska, in its capacity as a creditor under the Gas Sale Contract, and the holders of the Notes issued and to be issued hereunder, without preference of any of such Notes over any others by reason of priority in the time of the issue or negotiation thereof or by reason of the date of maturity thereof or for any other reason whatever. SUBJECT CLAUSE. SUBJECT, HOWEVER, to Permitted Encumbrances (as defined in section 1.01) and to Construction Liens (as so defined) existing on property owned by the Company on the date of the execution and delivery hereof and, to the extent permitted hereby, on property hereafter acquired by the Company. -12- 83 DEFEASANCE CLAUSE. PROVIDED, HOWEVER, that if the Company, or its successors or assigns, shall pay or cause to be paid, or shall make provision in the manner provided in Article 8 for payment of, the principal, interest and premium, if any, to become due in respect of all the Notes at the times and in the manner stipulated therein and herein, and shall perform and comply with all covenants, agreements and conditions contained in the Notes and in this Mortgage and shall perform and comply with all of its covenants, agreements and conditions contained in the Gas Sale Contract, then this Mortgage and the estate and rights hereby granted shall cease, determine and be void, otherwise to remain in full force and effect. GENERAL COVENANT. IT IS HEREBY COVENANTED, DECLARED AND AGREED, by and between the parties hereto, that all the Notes are to be issued and delivered, and that the Mortgaged Property is to be held and applied, subject to the further covenants, agreements, conditions and uses hereinafter set forth; and the Company, for itself and its successors, does hereby covenant and agree to and with the Mortgagee, and to and with its successors and assigns, as follows: 1. Definitions. 1.1. Definitions. Unless the context otherwise requires, the terms defined in this section 1.01 shall for all purposes of this Mortgage have the respective meanings set forth below, the following definitions to be equally applicable to both the singular and the plural forms of any of the terms defined: "Affiliate": When used with reference to any Person, any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with the Person referred to; for the purposes of this definition, "control" shall mean the power to direct or cause the direction of the management and policies of a Person, directly or through one or more intermediaries, whether through the ownership of voting Securities, by contract or otherwise, and "controlling" and "controlled" shall have meanings correlative to the foregoing. "Alaska": Alaska Pipeline Company, an Alaska corporation and a Subsidiary of the Company. "Alaska Note Agreements": The note agreements, as amended, providing for the issuance of the Alaska Notes. "Alaska Notes": (a) Alaska's 8-38% Series A Notes due January 1, 1993 issued in the original aggregate principal amount of $5,000,000, (b) Alaska's 10-1/4% Series B Notes due January 1, 1995 issued in the original aggregate principal amount of $5,000,000, (c) Alaska's 11-1/2% -13- 84 Series C Notes due January 1, 1991 issued in the original aggregate principal amount of $5,000,000, (d) Alaska's 9.95% Series D Notes due April 1, 1997 issued in the original aggregate principal amount of $7,000,000, (e) Alaska's 12.125% Series E Notes due July 1, 1990 issued in the original aggregate principal amount of $10,000,000, (f) Alaska's 12.70% Series F Notes due July 1, 1995 issued in the original aggregate principal amount of $14,500,000, (g) Alaska's 12.80% Series G Notes due July 1, 2000 issued in the original aggregate principal amount of $3,000,000, (h) Alaska's 12.75% Series H Notes due July 1, 2000 issued in the original aggregate principal amount of $17,500,000 and (i) any further series promissory notes of Alaska which are originally issued with the prior written consent of the holders of at least at a majority in principal amount of each series of Alaska Notes outstanding immediately prior to such issuance. "Article," "Section", etc.: All references herein to any Article, section, paragraph or other subdivision are to the corresponding Article, section, paragraph or subdivision of this Mortgage. "Board of Directors"; "Board": The Board of Directors of the Company. "Common Stock": Stock or shares of any class or classes (however designated) of a corporation, association or business trust, the holders of which are ordinarily and generally, in the absence of contingencies, entitled to vote for the election of a majority of the directors (or persons performing similar functions) of such corporation, association or business trust, even though the right so to vote has been suspended by the happening of a contingency. "Company": Seagull Energy Corporation, a Texas corporation, and, subject to section 3.09, its successors and assigns. "Construction Liens": Carriers', warehousemen's, materialmen's, mechanics', repairmen's, employees' or other similar liens (not including any indeterminate or inchoate lien or charge incidental to current construction) arising out of the construction or improvement of the Mortgaged Property or the furnishing of materials or supplied therefor, and existing at the time in question upon any of the Mortgaged Property which are prior to the lien of this Mortgage. "Default": A failure on the part of the Company to perform or comply with any of the terms of this Mortgage required to be performed or complied with by the Company, whether or not such failure shall constitute an Event of Default. "Division": All of the Company' current and future gas distribution and sales systems located in the State of Alaska, which are presently operating under the name "ENSTAR Natural Gas Company, Division of Seagull Energy Corporation", formerly named "ENSTAR Natural Gas -14- 85 Company, Division of ENSTAR Corporation", and prior thereto named "Alaska Gas and Service Company, Division of Alaska Interstate Company" and which, prior to February 18, 1972, were owned and operated by Alaska Public Service Corporation. Such business comprises and shall comprise the distribution and sale of natural, manufactured and mixed gas in Alaska for residential, commercial, industrial and electrical power plant use, the sale of gas ranges, water heaters, gas burners and other appliances and equipment related to the use of such gas, all similar activities in Alaska and all assets, whether or not located in the State of Alaska, directly relating thereto or used or intended for use therein. "Division Certificate": The Certificate of Public Convenience and Necessity No.4 granted by the Alaska Public Utilities Commission to Alaska Public Service Corporation and transferred to the Company pursuant to an Order of the Alaska Public Utilities Commission, dated April 3, 1985, and any renewals, extensions, additions, amendments, modifications or replacements thereof. "Event of Default": As specified in section 7.01. "ENSTAR": ENSTAR Corporation, a Delaware corporation, and, with respect to the Division, predecessor in interest to the Company. "Excepted Property": As specified in the Excepted Property Clause hereof. "Executive Committee": The Executive Committee of the Company, appointed by the Board in accordance with the By-Laws of the Company. "Gas Sale Contract": The Gas Sale Contract between Alaska and the Company, dated as of January 1, 1984, as amended by an Amendment to Gas Sale Contract dated the date hereof, and all renewals, extensions, additions, amendments and modifications thereof entered into pursuant thereto. "Herein"; "hereof"; "hereby"; "hereunder": Such terms and other terms of similar import refer to this Mortgage as a whole and not to any particular Article, section, paragraph, subdivision or other portion hereof. "Indebtedness": As applied to any Person at any date, (a) all items which in accordance with Required Accounting Practice would be included on the liability side of the balance sheet of such Person at such date, except (i) items of capital stock and of surplus, (ii) reserves for deferred income tax resulting from accelerated depreciation or amortization, (iii) contributions in aid of construction, -15- 86 (iv) unallocated contingency reserves, and (v) reserves properly deductible from assets in accordance with Required Accounting Practice; (b) all indebtedness, obligations and liabilities secured by any mortgage, pledge, lien, charge, conditional sale agreement or other title retention agreement existing on all property held by such Person at such date subject to such mortgage, pledge, lien, charge or agreement; all of such indebtedness, obligations and liabilities shall be treated as Indebtedness of such Person, whether or not such Person is in fact liable therefor; (c) all indebtedness, obligations and liabilities of other Persons, of the character referred to in the foregoing subdivisions (a) and (b), which such Person has directly or indirectly guaranteed or upon or with respect to which such Person is directly or indirectly liable (by discount, endorsement -- other than for deposit for collection -- sale with recourse, repurchase agreement or otherwise) or in respect of which such Person is obligated to advance or supply funds; and (d) adequate reserves in respect of disputed or contingent indebtedness, obligations and liabilities of the character referred to in the foregoing subdivisions (a), (b) and (c), to the extent not included pursuant to such subdivisions; provided that "Indebtedness" of any Person shall not include indebtedness for money borrowed, in case, prior to or at the maturity thereof , there shall have been deposited with the proper depositary, in trust, the funds (of evidence of such indebtedness, if permitted by the instrument creating such indebtedness) necessary for the redemption, payment or satisfaction of all such indebtedness so to be redeemed, paid or satisfied, and in case all other steps prerequisite to such redemption, payment or satisfaction shall have been duly taken or duly provided for; in such case the funds and evidences of indebtedness so deposited shall not be included in any computation of the assets of such Person. "Lien of this Mortgage"; "lien of the Mortgage"; "lien hereof": The lien created by this Mortgage (including the after-acquired property clauses hereof), or created by any subsequent conveyance hereunder to the Mortgagee (whether made by the Company or any other Person), or otherwise created, effectively constituting any property a part of the security held by the Mortgagee for the benefit of the Notes. "Mortgage": The First Mortgage and Deed of Trust dated as of August 1, 1960, as supplemented and amended by the Supplemental Mortgage, dated September 9, 1960, a Second Supplemental Mortgage, dated as of May 1, 1961, a Third Supplemental Mortgage, dated as of December 15, 1969, a Fourth Supplemental Mortgage, dated as of February 18, 1972, a Fifth Supplemental Mortgage, dated as of November 15, 1975, a Sixth Supplemental Mortgage, dated as of December 30, 1977, a Seventh Supplemental Mortgage, dated as of January 1, 1984, and an Eighth Supplemental Mortgage dated as of June 17, 1985, or if further supplemented or amended by any one or more supplemental mortgages, then as so supplemented or amended. -16- 87 "Mortgaged Property": As of any particular time, all property then subject or intended to be subject to the lien of this Mortgage. "Mortgagee": Alaska. "Notes": All of the Replacement Notes and all promissory notes of the Company issued after the date hereof to Alaska evidencing loans or advances by Alaska to the Company. The term "Notes" shall also mean and include all promissory notes of the Company issued in exchange for or in replacement of any note referred to in the preceding sentence. "Permitted Encumbrances": As applied to the Company: (a) the lien of this Mortgage; (b) liens of taxes, assessments and governmental charges not yet payable, or payable without penalty so long as so payable, or deposits created in the ordinary course of the business of the Division as security for compliance with laws imposing taxes, assessments or governmental charges; (c) liens of taxes, assessments and governmental charges the validity of which are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve or other appropriate provision, if any, as shall be required by Required Accounting practice shall have been made therefor; (d) carriers', warehousemen's, materialmen's, mechanics', repairmen's, employees' or other similar liens for services arising in the ordinary course of the business of the Division not yet due or being contested in good faith by appropriate action promptly initiated and diligently conducted if such reserve or other appropriate provision, if any, as shall be required by Required Accounting Practice shall have been made therefor; (e) liens incurred or deposits made in the ordinary course of the business of the Division in connection with workmen's compensation, unemployment insurance and other social security, or to secure the performance of leases (provided that all such liens incurred and deposits made in connection with such leases do not any any time exceed $250,000), tenders, statutory obligations, surety and appeal bonds, performance and return-of-money bonds and other similar obligations (exclusive of obligations incurred in connection with the borrowing of money or the obtaining of advances or credit); (f) any judgment lien, unless the judgment it secures shall not, within 30 days after the entry thereof, have been discharged or execution thereof stayed -17- 88 pending appeal, or shall not have been discharged within 30 days after the expiration of any such stay; (g) leases granted in the ordinary course of business of the Division or leases to which any property acquired in the ordinary course of such business is subject; (h) encumbrances (other than to secure the payment of money), easements, rights-of-way, servitudes, permits, reservations, leases and other rights in respect of gravels, minerals, oil, gases or water or in respect of grazing, logging, mining, canals, ditches, reservoirs or the like, conditions, covenants, party wall agreements or other restrictions, or easements for streets, alleys, highways, pipe lines, telephone lines, power lines, railways and other rights-of-way, on, over or in respect of property (other than property used or to be used primarily for compressor stations) owned by the Company or over which the Company owns rights-of-way, easements, permits or licenses, provided that such encumbrances, easements, rights-of-way, servitudes, permits, reservations, leases, rights, conditions, covenants, party wall agreements or other restrictions are such that they will not either individually or in the aggregate, if exercised or availed of, interfere materially with the proper use or operation of the property affected thereby for the purpose for which such property is or is to be used, and provided, further, that, in the case of such of the same as relate only to property on, over or in respect of which the Company owns rights-of-way or easements exclusively for pipe line purposes or locations for regulator stations or other pipe line facilities (other than compressor stations), the Company has power under eminent domain or similar statutes to remove the same; (i) rights reserved to or vested in any municipality or public authority to control or regulate any property of the Company or to use such property in any manner which does not materially impair the use of such property for the purposes for which it is held; (j) obligations or duties, affecting the property of the Company, to any municipality or public authority with respect to any certificate of public convenience and necessity, franchise, grant, license or permit which do not materially impair the use of such property for the purposes for which it is held; (k) zoning laws and ordinances; (l) irregularities in or deficiencies of title to any rights-of-way, licenses or permits for pie lines, telephone lines, power lines, water lines and/or appurtenances thereto or other improvements thereon, and to any real estate used or to be used primarily for right-of-way purposes or for regulator stations or other pipe line facilities (other than compressor stations), provided that the Company shall have obtained from the apparent owner of the land or estate covered by any such right-of-way, license or permit, and shall hold as an asset of the Division, a sufficient right, by the terms of the instrument granting such right-of-way, license or permit to the use thereof for the construction, operation or maintenance of the lines, appurtenances or improvements for -18- 89 which the same is used or is to be used, and provided, further, that the Company has power under eminent domain or similar statutes to remove such irregularities or deficiencies; (m) reservations and other matters relating to titles to leases and leasehold interests in oil and gas properties and the lands covered thereby, if such reservations and other matters do not, in the aggregate, materially affect the marketability of the title thereto, and do not materially impair the use of such leases or leasehold interests for the purposes for which they are held or the value of the interest therein; (n) liens and other encumbrances incurred in connection with Indebtedness of the Company not in excess of $10,000,000 at any time outstanding issued by a municipality or development corporation to finance the acquisition and construction of the property subject to such lien and other encumbrances, the interest on which is exempt from Federal income tax under Section 103(b) of the Internal Revenue Code of 1954, as amended; and (o) purchase money mortgages, liens or security interests in respect of property either acquired by the Company or upon which the Company is constructing improvements after the date of the Eighth Supplemented Mortgage, or mortgages, liens or security interests existing in respect of such property at the time of acquisition thereof securing Indebtedness of the Company, provided that (i) no such mortgage, lien or security interest shall extend to or cover any other property or secure any other Indebtedness of the Company, (ii) the aggregate principal amount of all Indebtedness of the Company secured by all such mortgages, liens and security interests shall not exceed $2,500,000 at any time outstanding, and (iii) the aggregate principal amount of all Indebtedness secured by all such mortgages, liens or other security interests in respect of any such property shall not exceed 90% of the cost or fair market value (as determined by the Company in good faith), whichever shall be lower, of such property at the time of the acquisition thereof by the Company. "Person": An individual, a corporation (including the Company), a partnership, a trust, an unincorporated organization or a government or any agency or political subdivision thereof. "Pledged Contracts": All contracts and agreements to which the Company now is or hereafter may become a party and all contracts and agreements to which the Company now is or hereafter may become a party, in each case relating to or used or intended for use in the business of the Division (including all renewals, extensions, additions, amendments and modifications thereof), and now or hereafter subjected to the lien of this Mortgage or required so to be. "Replacement Notes": The sixteen promissory notes of the Company payable to the order of Alaska in the aggregate principal sum of $40,623,512, each of which promissory notes is dated the date hereof and was issued to Alaska in renewal, extension and refunding of certain promissory -19- 90 notes of ENSTAR held by Alaska prior to the acquisition by the Company of the Division from ENSTAR. "Required Accounting Practice": With respect to the Company, generally accepted accounting principles; with respect to the Division, the accounting rules or regulations, if any, at the time prescribed by the regulatory body or bodies under the jurisdiction of which the Division is at the time operating, and, to the extent that a matter is not covered by such rules or regulations, the accounting rules or regulations at the time prescribed by the Federal Energy Regulatory Commission for companies of established reputation engaged in a business similar to that of the Division which are at the time operating under the jurisdiction of the Federal Energy Regulatory Commission. "Securities": Any stocks, any bonds, debentures, notes or other evidences of Indebtedness, and any other instruments generally known as securities; any certificates of interest or participation in, temporary or interim certificates for, receipts for, guaranties of, or warrants or rights to subscribe to or purchase, any of the foregoing; and any agreements, indentures, mortgages or other instruments providing for or securing any of the foregoing. "Subsidiary": A corporation, association or business trust a majority (by number of votes) of either the Voting Stock or the Common Stock of which is at the time owned or controlled, directly or indirectly, by the Company. "Supplemental Mortgage"; "mortgage supplemental hereto": Any mortgage hereafter duly entered into between the Company and the Mortgagee. "Voting Stock": Stock or shares of any class or classes (however designated) of a corporation, association or business trust, the holders of which are at the time entitled to vote for the election of a majority of the directors (or persons performing similar functions) of such corporation, association or business trust, whether or not the right so to vote exists by reason of the happening of a contingency. 2. Description of Indebtedness Secured; Form of Notes. 2.1. Indebtedness Secured. This Mortgage is intended to and shall secure all indebtedness evidenced by the Notes (principal, premium and interest), the Gas Sale Contract and all obligations, duties and liabilities of the Company under this Mortgage. 2.2. Covenant to Issue Notes; Form of Notes. The company shall not accept any loan or advance from Alaska unless, promptly upon receipt thereof, the Company shall duly execute and deliver to the order of Alaska a promissory note of the Company, dated the date of such loan or advance, in an aggregate principal amount equal to the amount of such loan or advance. -20- 91 Each such promissory note (and any promissory note issued in exchange therefor or in replacement thereof) shall (i) be in substantially the form set forth below (appropriately completed) and (ii) provide for interest at a rate not less than the rate of interest applicable to the Indebtedness for borrowed money, if any, incurred by Alaska for the purpose of making such loan or advance or, in the absence of any such borrowing by Alaska, at a rate not less than the rate of interest determined by Alaska in good faith to be its then effective borrowing rate, provided that, in the case of any extension or renewal of any Replacement Note, the interest rate applicable to such extension or renewal need not exceed the average interest rate then applicable to the Alaska Notes referred to in clauses (e) through (h) of the definition of "Alaska Notes" in Section 1.01. [Form of Note] $ SEAGULL ENERGY CORPORATION ("Seagull"), a Texas corporation, for value received, hereby promises to pay to ALASKA PIPELINE COMPANY ("Pipeline"), an Alaska corporation, or order, the principal sum of $ [insert terms specifying amortization of principal]. Seagull promises to pay interest on the unpaid principal hereof [insert terms specifying interest rate and manner of payment]. Payment of principal and interest shall be made in lawful money of the United States of America at the principal office of Pipeline in Anchorage, Alaska. This Note is subject to prepayment, in whole or in part, without premium or penalty. This Note is issued under and secured by a First Mortgage and Deed of Trust, dated as of August 1, 1960 (the "Original Mortgage"), as supplemented and amended by a Supplemental Mortgage, dated September 9, 1960, a Second Supplemental Mortgage, dated as of May 1, 1961, a Third Supplemental Mortgage, dated as of December 15, 1969, as supplemented, amended and restated by a Fourth Supplemental Mortgage, dated as of February 18, 1972, as further supplemented and amended by a Fifth Supplemental Mortgage, dated as of November 15, 1975, a Sixth Supplemental Mortgage, dated as of December 30, 1977, a Seventh Supplemental Mortgage, dated as of January 1, 1984, as further supplemented, amended and restated by an Eighth Supplemental Mortgage, dated as of June 17, 1985 [describe other supplements, if any], and as may hereafter be further supplemented, amended or restated, between Seagull, as Mortgagor, and Pipeline, as Mortgagee (the Original Mortgage, as so supplemented, amended and restated, being hereinafter called the "Mortgage'). The holder of this Note is entitled to the benefits and security of the Mortgage, and, subject to the terms thereof, may enforce the agreements of Seagull contained therein and exercise the remedies provided thereby. All capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Mortgage. -21- 92 In case an Event of Default shall occur, the unpaid balance of the principal amount of this Note may be declared due and payable in the manner and with the effect provided in the Mortgage. This Note shall become immediately due and payable in the event of an acceleration of the maturity of any of the Alaska Notes following the occurrence of an Event of Default (as defined in therein) under the related Alaska Note Agreements. If Seagull shall default in the payment of the principal of or interest on this Note when due, Seagull agrees to pay, in addition to any amounts due hereunder, any costs or expenses of collection (including reasonable attorneys' fees) incurred by the holder hereof. No delay on the part of the holder hereof in exercising any of its options, powers or rights, or partial or single exercise thereof shall constitute a waiver of any such options, powers or rights. The ability of Pipeline to transfer, assign or encumber this Note is restricted by the provisions of the Alaska Note Agreements. [If Note is being issued in exchange for and replacement of an outstanding Note, insert appropriate statement to such effect.] This note shall be governed by and construed in accordance with the laws of the State of Alaska. SEAGULL ENERGY CORPORATION By: Title: 3. Particular Warranties and Covenants of the Company. 3.1. Title to Mortgaged Property; Lien. The Company hereby represents and warrants that it will, as of the date of any Supplemental Mortgage, be the absolute owner of the legal and beneficial title to all property therein described or referred to as then mortgaged thereby and that all such property shall be subject to no mortgage, pledge, lien, encumbrance, claim or charge prior to or on a party with the lien of this Mortgage except for Permitted Encumbrances and Construction Liens. The Company at its expense will warrant and defend its title to all such property and the lien of this Mortgage therein against all claims of others, and will maintain and preserve the lien of this Mortgage so long as any Notes are outstanding. 3.2. Payment of Principal, Premium and Interest; Obligation Absolute. The Company will duly and punctually pay or cause to be paid the principal of and the premium, if any, and interest on all the Notes (whether Replacement Notes or otherwise) issued hereunder according -22- 93 to the terms hereof and thereof. If the Company shall default in any payment of principal, premium, if any, or interest in respect of any such Note, it will also pay interest on all overdue principal thereof and premium, if any, thereon, and, if and to the extent permitted by law, on all overdue installments of interest thereon, in each case at a rate per annum equal to the rate of interest specified in such Note plus 2%. No reference in this Mortgage to the Notes or to any Supplemental Mortgage and no term hereof or of any Supplemental Mortgage or contained in any Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and the premium, if any, and interest on all the Notes. 3.3. Payment of Taxes, etc.; Observance of Legal Requirements; Liens; Contests; Preferential Transfers Prohibited. (a) The Company will duly pay and discharge or cause to be paid and discharged, as the same shall become due and payable, all taxes, assessments, rates, excises, levies, fees and other charges levied and imposed upon or with respect to the Mortgaged Property or any part thereof or any other property of the Company, or upon or with respect to the interest of the Mortgagee in the Mortgaged Property or any part thereof or any income or profits therefrom, or upon or measured by the income, profits or business of the Company. (b) The Company will not claim or demand or be entitled to receive any credit against the interest payable on the Notes or against any other payment secured hereby for any portion of any tax, assessment, rate, excise, levy, fee or charge assessed against the Mortgaged Property or any part thereof or any other property, and the Company hereby waives the provisions of any present or future law, statute or constitutional provision permitting or entitling the Company to receive any such credit. (c) The Company will at all times protect its title to the Mortgaged Property and every part thereof against loss by reason of any foreclosure or other proceeding to enforce any lien thereon prior to the lien of this Mortgage. The Company will promptly discharge or cause to be discharged any Construction Lien now existing or hereafter created on the Mortgaged Property or any part thereof. (d) The Company will duly observe and comply with all valid laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, certificates, franchises, permits, licenses, authorizations, directions and requirements of all federal, state, county, municipal and other governments, departments, commissions, boards, courts, authorities, officials and officers, domestic or foreign, which now or at any time hereafter may be applicable to the Mortgaged Property or any part thereof, or any use, manner of use or condition of the Mortgaged Property or any part thereof, and will duly observe and comply with all terms upon or under which any of the Mortgaged Property is held. (e) Nothing contained in this section 3.03 shall be deemed to require the Company to pay or discharge or cause to be paid or discharged any such tax, assessment, rate, excise, levy, fee or charge, or any such lien, or to observe or comply with or to cause to be observed or complied with any such legal requirement, so long as the Company in good faith by -23- 94 appropriate action (prior written notice of which, in the case of any proceeding involving a material item of property, shall have been given to the Mortgagee by the Company), promptly initiated and diligently conducted, shall contest or cause to be contested the validity thereof, unless, in the opinion of the Mortgagee, the security conferred by this Mortgage might be materially impaired or endangered by such contest. (f) The Contest will not directly or indirectly transfer any Mortgaged Property for the purpose of subjecting the same to the payment of any Indebtedness in priority to the payment of the Notes. 3.4. Insurance; Application of Insurance Proceeds; Notice to Mortgagee. (a) The Company will keep or cause to be kept all properties of, or directly relating to or used or intended for use in the business of, the Division and the Division's business of a character usually insured by companies of established reputation similarly situated insured by reputable insurance companies or associations of high standing against loss or damage by fire and such other hazards and risks (including, without limitation, public liability, workmen's compensation and war risks, if and to the extent war risk insurance is at the time generally available) as are customarily insured against by companies of established reputation similarly situated in such amount as such property and business is usually insured by such companies. The Company will comply with all the terms and conditions of all insurance policies with respect to its property and business or any part thereof and with all requirements of Boards of Underwriters or similar bodies applicable thereto. (b) All insurance policies with respect to the Mortgaged Property or any part thereof shall be payable to the Mortgagee as its interest may appear under standard mortgagee clauses acceptable to the Mortgagee, except that the loss payable clause in any such insurance policy may provide that any one loss not in excess of $50,000 (whether payable by one or more insurers) shall be paid to the Company, provided that the aggregate amount payable to the Company under all such policies for all losses in any one calendar year shall not exceed $100,000. Any moneys received by the Mortgagee pursuant to this Section 3.04 shall be applied by the Mortgagee on the date of receipt of such moneys to the prepayment of an equal principal amount of Notes at the time outstanding. (c) The Company will promptly apply the proceeds of any insurance received by it to the repair, restoration or replacement of the property destroyed or damaged. 3.5. Maintenance of Corporate Existence, Franchises, etc.; Restriction on Business. (a) The Company will at all times maintain and keep and cause to be maintained and kept in full force and effect its corporate existence, good standing, franchises, rights and privileges as a corporation under the laws of the State of Texas and its qualification and good standing as a foreign corporation in each jurisdiction wherein the character of the properties owned or the nature of the activities conducted makes such qualification or licensing necessary. (b) The Division will not, and the Company will not permit the Division to, engage in any business other than the construction, ownership, operation and maintenance of systems -24- 95 for the distribution of natural, manufactured or mixed gas, and activities incidental to the foregoing. 3.6. Maintenance and Improvement of Property. Except as to property released pursuant to Article 5, the Company will at all times maintain, preserve and keep all of its property used or useful or intended for use in the business of the Division and all of the Division's property in proper repair, working order and condition, and make all necessary or appropriate repairs, renewals, replacements, additions, betterments and improvements to such property, so that the efficiency of all such property shall at all times be properly preserved and maintained. 3.7. Restrictions on Liens, etc. The Company will not directly or indirectly create, assume or suffer to exist, any mortgage, lien, pledge, charge or encumbrance or conditional sale or other title restriction arrangement with respect to any property or asset of, or used or useful in or relating to the business of, the Division, whether owned on the date of delivery hereof or subsequently acquired, or upon any income or profits therefrom, other than (a) Permitted Encumbrances; (b) Construction Liens incurred in the ordinary course of business for sums which are not yet due but will become due within 60 days after completion, provided that adequate provision for payments thereof shall have been made, or such sums are being contested in good faith by appropriate action promptly initiated and diligently conducted and if such reserve or other appropriate provision, if any, as shall be required by Required Accounting Practice shall have been made therefor, and (c) liens on one-family houses referred to in subclause (f) of the Excepted Property Clause hereof. The Company will not sign or file in any state or other jurisdiction a financing statement under the Uniform Commercial Code with respect to any such property or asset or sign any security agreement with respect to any such property or asset authorizing any secured party thereunder to file any such financing statement, except, in any such case, a financing statement filed or to be filed to perfect or protect a security interest which the Company is entitled to create, assume or incur, or permit to exist under this Section 3.07. 3.8. Restrictions on Indebtedness. So long as any Notes are outstanding, the Company will not directly or indirectly create, incur, issue, assume or otherwise become or remain liable with respect to any Indebtedness secured by the lien of this Mortgage other than the Notes. 3.9. Sale, Merger and Consolidation. (a) The Company will not directly or indirectly sell, transfer or otherwise dispose of all or substantially all of its properties and assets, or merge into or consolidate with any other corporation or permit any other corporation to consolidate with or merge into it, unless (i) the acquiring or surviving person shall be a corporation incorporated under the laws of the United States of America or any state thereof -25- 96 and (if other than the Company) shall expressly assume in writing all obligations of the Company hereunder, and (ii) immediately after giving effect to such action (and, if applicable, such assumption) no default shall exist hereunder, provided that no such sale, transfer or other disposition of all or substantially all of the properties and assets of the Company shall release the Company from any of its obligations hereunder unless the Mortgagee shall have consented to such release by an instrument in writing. (b) The Company will not sell, lease, transfer or otherwise dispose of any part of the Mortgaged Property without obtaining a release thereof from the lien of this Mortgage in accordance with the provisions of Article 5, except to the extent of sales or dispositions (without a release) permitted by sections 5.02 and 5.04. 3.10. Subjecting of Property to the Mortgage; Further Assurances. (a) All property which the Company agrees by any of the terms of this Mortgage to convey, pledge or assign, or cause to be conveyed, pledged or assigned, to the Mortgagee, and all property at any time acquired by the Company or the Division and provided by this Mortgage to become subject hereto, shall, immediately upon the acquisition thereof by the Company or the Division and without further conveyance or acquisition thereof by the Company or the Division and without further conveyance or assignment, become and be subject to the lien of this Mortgage as fully and completely as though now owned by the Company or the Division and specifically described in the Granting Clauses hereof or in Article 11, but at any and all times the Company will make and deliver, or cause to be made and delivered, such further assurances or conveyances or assignments thereof as the Mortgagee from time to time may reasonably require for the purpose of expressly and specifically subjecting the same to the lien of this Mortgage. (b) The Company will also do, execute, acknowledge and deliver and cause to be done, executed, acknowledged and delivered all and every such further acts, deeds, conveyances, mortgages, pledges, assignments, transfers and instruments for the better assuring, conveying, mortgaging, pledging, assigning and confirming unto the Mortgagee all and singular the premises, estates, rights and properties hereby conveyed, mortgaged, pledged, assigned or transferred or intended so to be, or which the Company may be or become bound to convey, pledge or assign to the Mortgagee, as the Mortgagee from time to time may reasonably require. 3.11. Recordation of Mortgage and Supplemental Mortgages. The Company will cause this Mortgage and all mortgages supplemental hereto at all times to be recorded, registered and filed and to be kept recorded, registered and filed in such manner and in such places, and will pay or cause to be paid all such mortgage registration recording, filing or other taxes and fees, and will comply with all such statutes and regulations, all as may be required by law in order fully to create, preserve, maintain and protect the lien of this Mortgage on the Mortgaged Property (including, without limitation, property acquired after the date of execution hereof) and the security of the Notes and the rights of the Mortgagee hereunder. 3.12. Payment of Stamp Taxes, etc. The Company will pay and discharge or cause to be paid and discharged, when and as due, any and all stamp and other taxes, imposts and charges in connection with the execution, delivery and recordation of this Mortgage and any -26- 97 mortgage supplemental thereto, any other instrument executed pursuant hereto, and the issue of any Notes hereunder. 3.13. Performance and Advances by Mortgagee, etc. (a) If the Company shall fail to perform or cause to be performed any of the covenants or agreements contained in this Mortgage, the Mortgagee (or any receiver, trustee or custodian appointed in any action or proceeding for the foreclosure hereof or for the enforcement of any of the rights of the Mortgagee hereunder or under the Notes) may, directly or through any agent or representative, perform the same on behalf of the Company, and may make advances for the purpose. (b) The Company will repay on demand all sums so advanced on its behalf, with interest from the date of demand at a rate per annum equal to average per annum rate on the Notes then outstanding, and all sums so advanced (with interest as aforesaid) shall be secured hereby and by the lien hereof in priority to the lien of the Notes. (c) No such performance or advance by the Mortgagee shall impair or prejudice any of the rights, powers or remedies of the Mortgagee under this Mortgage by reason of any such failure on the part of the Company, or shall relieve the Company from any Default hereunder. 4. Pledged Contracts. 4.01. Pledge of Contracts; Other Hypothecation Prohibited. (a) Promptly after entering into any gas purchase, sale, exchange or transportation contract or agreement which is required to be assigned to and pledged and mortgaged with the Mortgagee hereunder, the Company will (i) deliver to the Mortgagee an executed counterpart of such contract or agreement, or a complete and correct copy thereof certified as such by the Secretary or an Assistant Secretary of the Company, (ii) at its expense, execute and deliver to the Mortgagee all such instruments of assignment or transfer as shall be necessary in the opinion of the Mortgagee effectually to assign to and pledge and mortgage hereunder with the Mortgagee, as further security for the Notes, all the right, title and interest of the Company in, to and under such contract or agreement (subject to any restrictions as to the assignability thereof), (iii) give written notice of such assignment, pledge and mortgage to all other parties to such contract or agreement, (iv) duly file or record notice of such assignment, pledge and mortgage in all places required by law to perfect and maintain the lien of this Mortgage on such contract or agreement, and -27- 98 (v) keep its records and books of account in such manner as to give adequate notice that such contract or agreement has been assigned, pledged and mortgaged hereunder. (b) The Company will not assign, pledge, mortgage or otherwise hypothecate, or permit the assignment, pledge, mortgage or hypothecation of, any of its right, title or interest in, to or under any gas purchase, sale, exchange or transportation contract or agreement required to be assigned, pledged or mortgaged hereunder, whether existing on the date of delivery hereof or subsequently entered into, or any amendment or supplement thereto, except to or with the Mortgagee hereunder. 4.02. Consents to Assignment of Pledged Contracts, etc. The Company will use its best efforts to obtain appropriate consents of other contracting parties under any contract or agreement assigned, pledged or mortgaged or required to be assigned, pledged or mortgaged hereunder, to the extent that any such consent is required for the effectiveness of such assignment, pledge or mortgage. The Company will not enter into any such contract or agreement which by its terms is not assignable to the Mortgagee or which requires any consent for the assignment thereof to the Mortgagee. 4.03. Performance of Pledged Contracts; No Assumption by Mortgagee; Notice of Claimed Defaults. (a) The Company will at all times perform and observe all the covenants, agreements, terms, conditions and limitations applicable to it contained in any contract or agreement assigned, pledged or mortgaged or required to be assigned, pledged or mortgaged hereunder and will do all things necessary to keep unimpaired all its rights under all such contracts or agreements and to prevent any default thereunder or any forfeiture or impairment thereof; and, without limitation, the Company, subject to delays resulting from disputes in good faith and to adverse claims of independent third parties, will promptly pay suppliers for all gas purchased in accordance with the terms contained in the respective gas purchase contracts assigned, pledged, mortgaged or required to be assigned, pledged or mortgaged hereunder. (b) No assignment, pledge or mortgage hereunder of any contract or agreement by or on behalf of the Company shall (i) relieve the Company of its obligations and liabilities under such contract or agreement, all of which shall continue to be the obligations and liabilities of the Company, or (ii) impose any obligations or liabilities upon the Mortgagee with respect to the performance or nonperformance of any such contract or agreement, all of which obligations and liabilities shall continue to be those of the Company. (c) In case the Company shall at any time receive any notice, demand or other communication from any other party to any contract or agreement assigned, pledged or mortgaged or required to be assigned, pledged or mortgaged hereunder, relating to any alleged, potential or actual material default thereunder or material breach of any of the covenants, agreements, terms, conditions or limitations thereof, or purporting to terminate or in any other -28- 99 way adversely affect the rights of the Company thereunder, the Company will immediately deliver or cause to be delivered to the Mortgagee a copy of such notice, demand or other communication. 4.04. Rights as to Pledged Contracts. (a) Unless and until an Event of Default shall have occurred and be continuing, the Company shall be entitled, to the extent permitted by law, to collect and retain all sums due under, and to receive and dispose of all gas deliverable under, all contracts and agreements subject to the lien hereof and to require and enforce the performance of any and all such contracts and agreements, without further consent of or action by the Mortgagee; but the Mortgagee shall, if the Company shall so request, deliver to the Company suitable orders in favor of the Company or its nominee or nominees for the payment of all sums, delivery of all gas and the performance of all acts and things under such contracts and agreements. Such orders shall be expressed to be revocable by the Mortgagee whenever an Event of Default shall have occurred and be continuing. (b) Promptly upon the occurrence of an Event of Default, (i) the Mortgagee shall give written notice of the occurrence of such Event of Default hereunder, describing the effect of clause (ii) of this paragraph (b), to all parties (other than the Company) to all contracts and agreements at the time subject to the lien hereof; and (ii) the Mortgagee or any receiver or trustee in bankruptcy or other Person who shall rightfully be in possession of the Mortgaged Property shall collect and retain, as part of the Mortgaged Property, all sums due under, receive and dispose of all gas deliverable under, and require and enforce the performance of, any and all such contracts and agreements, all for the benefit and further security of the Notes; provided that, if such Event of Default shall be made good or waived and shall be no longer continuing, the Mortgagee, or any receiver or trustee in bankruptcy or other Person who shall rightfully be in possession of the Mortgaged Property, shall so notify all parties who received notice pursuant to the provisions of clause (i) of this paragraph (b) and shall discontinue the collection of any sums due under such contracts and agreements and the receipt and disposal of any gas deliverable thereunder; all sums theretofore collected pursuant to clause (ii) of this paragraph (b) shall be applied, first, to the items referred to in subdivisions (aa) to (gg), inclusive, of paragraph (d) of section 6.03, and any remainder shall be paid to or upon the order of the Company. 4.05. Amendment, etc., of Pledged Contracts. (a) Unless and until an Event of Default shall have occurred and be continuing, the Company shall have the right to amend, modify, supplement, surrender, cancel, terminate, or replace any contract or agreement at the time subject to the lien hereof, provided that, in connection with any such amendment, modification, supplement, surrender, cancellation, termination or replacement, the Company shall comply with the terms of paragraph (a) of section 4.01. -29- 100 (b) Whenever an Event of Default shall have occurred and be continuing, the Company may, so long as the Company shall be in possession of the Mortgaged Property, perform the acts specified in paragraph (a) of this section 4.05, upon the conditions stated in such paragraph, except that the prior written approval and consent of the Mortgagee shall be required in every case. (c) Whenever the Company shall no longer be in possession of the Mortgaged Property, the rights of the Company under paragraph (a) of this section 4.05 may, upon the conditions therein stated, be exercised by the Mortgagee or (with the prior written approval and consent of the Mortgagee) by a receiver or trustee in bankruptcy or other Person rightfully in possession of the Mortgaged Property. 4.06. Third Parties Protected. Any party to any contract or agreement subject to the lien hereof may, until such party shall have received written notice to the contrary, conclusively assume that no Event of Default has occurred and is continuing and that the Company is in possession of the Mortgaged Property, is entitled to perform and accept performance of any such contract or agreement, including the receipt of any gas deliverable thereunder and the receipt of all sums due thereunder, and is entitled to amend, modify, supplement, surrender, cancel, terminate or replace any such contract or agreement on the conditions set forth in paragraph (a) of section 4.05. 5. Possession, Use and Release of Property. 5.01. Possession of and Dealing With Property until Default; Leases, etc. Unless and until an Event of Default shall have occurred and be continuing, and subject to Article 4 (relating to Pledged Contracts), the Company shall be permitted to possess, use and enjoy all the Mortgaged Property, and to receive and use the tolls, rents, revenues, issues, income, product and profits thereof, with power in the ordinary course of business freely and without hindrance on the part of the Mortgagee, (a) to use, consume, sell or dispose of materials, supplies and products, (b) except as herein otherwise expressly provided to the contrary, to deal with closes in action, leases, leasehold interests and contracts, and to exercise the rights and powers conferred upon it thereby, (c) to repair and alter buildings and structures (including leasehold improvements), (d) to change the position of pipes, mains, conduits, transmission or distribution systems or other property, provided that such change shall not impair the lien of this Mortgage thereon, (e) to replace and renew any equipment, machinery or other property, and -30- 101 (f) to make any lease as lessor, or grant or convey any right-of-way, easement or license, provided that (i) no such lease, grant or conveyance shall be made unless, in the opinion of the Board or Executive Committee, the same would not be prejudicial to the security of the Notes; and (ii) any property so leased and any property over, through, under or with respect to which any such right-of-way, easement or license shall be so granted or conveyed shall remain subject to the lien of this Mortgage to the same extent and in the same man- ner as it was prior to such lease, grant or conveyance. 5.02. Disposal of Worn-Out Property, Franchises, etc., Without Mortgagee's Consent. Unless and until an Event of Default shall occur and be continuing, the Company may, at any time and from time to time, without any release or consent by the Mortgagee: (a) Replacement of Worn-Out Property. Sell or otherwise dispose of, free from the lien of this Mortgage, any apparatus, tools, implements, machinery, equipment, pipe lines and related facilities, pipe or other similar property comprising part of the Mortgaged Property, which has become work out, obsolete, unserviceable or unnecessary for use in the conduct of the business of the division, upon replacing the same with or substituting for the same other property which is of a fair value at the time of replacement or substitution at least equal to the fair value at the time of disposition of the property so sold or disposed of and which, upon such replacement or substitution, shall become subject to the lien of this Mortgage, free and clear of all liens prior to, or on a parity with, the lien hereof other than Permitted Encumbrances. (b) Abandonment of Worn-Out Property. In the ordinary course of business demolish, dismantle, tear down, use as scrap, abandon or surrender and, having done so, sell or otherwise dispose of any Mortgaged Property if it has become worn out, unserviceable or unnecessary for use in the conduct of the business of the Division, and the best interests of the Division and the Mortgagee require such treatment thereof and do not require any replacement thereof or substitution therefor, provided that the Company shall forthwith pay to the Mortgagee any net cash proceeds thereof, to the extent such net cash proceeds exceed $250,000. Such net cash proceeds shall be applied by the Mortgagee on the date of receipt of such proceeds to the prepayment of an equal principal amount of Notes at the time outstanding. (c) Modification or Surrender of Franchises, etc. Assent to the modification, or surrender in whole or in part, of any franchise, license, permit, authority, easement, right-of-way or lease which it may hold or under which it may be operating, provided that (i) the Company will have the right, -31- 102 (x) under the modified franchise, license, permit, authority, easement, right-of-way or lease, or (y) under a new franchise, license, permit, authority, easement, right-of-way or lease received in exchange in the event of such a surrender, or (z) under some other franchise, license, permit, authority, ease- ment, right-of-way or lease, to conduct the same or an extended business in the same or an extended territory during the same or an extended or unlimited or indefinite period of time, or (ii) it is no longer necessary or desirable in the profitable conduct of the business of the Division or in the best interests of the Division or the Mortgagee to comply with the terms of such franchise, license, permit, authority, easement, right-of-way or lease or to operate the properties covered thereby, and that the value and utility generally of all the Company's properties as an entirety and the security for the Notes will not be impaired by the surrender of such franchise, license,permit, authority, easement, right-of-way or lease; For the purposes of this paragraph (c), any right of any municipality or other governmental body to terminate a franchise, license, permit or authority by purchase shall not be deemed to abridge or affect its duration. 5.03. Release by Mortgagee of Property Sold by Company. The Company may sell, exchange or otherwise dispose of any (but less than all or substantially all) of the Mortgaged Property (in addition to the dispositions referred to in sections 5.01 and 5.02), and the Mortgagee shall release the same from the lien hereof, upon receipt by the Mortgagee of (a) any money received as consideration for any property so to be released to which the Company is entitled and (b) if any property other than cash is included in such consideration, such instruments of conveyance, assignment and transfer, if any, as may be necessary to subject to the lien of this Mortgage all the right, title and interest of the Company in and to such property. All moneys received by the Mortgagee pursuant to clause (a) of this section 5.03 shall be applied by the Mortgagee on the date of receipt of such moneys to the prepayment of an equal principal amount of Notes at the time outstanding. 5.04. Disposal of Property of Value Without Mortgagee's Consent. Unless and until an Event of Default shall have occurred and be continuing, the Company may sell, exchange or otherwise dispose of any of its tangible property (in addition to the dispositions referred to in sections 5.01, 5.02 and 5.02) at any time subject to the lien hereof having an aggregate fair value not exceeding $500,000 without notice to or any release or consent by the Mortgagee; provided that promptly after the end of each calendar year, and at any time during any calendar year when the aggregate fair value of the property so sold, exchanged or otherwise disposed of and not theretofore covered by the payment of cash to the Mortgagee as hereinafter in this -32- 103 section 5.04 provided shall equal or exceed $500,000 the Company shall forthwith pay to the Mortgagee a sum in cash at least equal to the aggregate fair value of the property so sold, exchanged or otherwise disposed of (but not less than the consideration received by the Company for such property). Such cash paid to the Mortgagee shall be applied by the Mortgagee on the date of receipt of such cash to the prepayment of an equal principal amount of Notes at the time outstanding. 5.05. New Property Subject to Lien of Mortgage. Any new property acquired by the Company (by exchange, purchase, construction or otherwise) to take the place of any property released hereunder shall forthwith and without further conveyance become subject to the lien of and be covered by this Mortgage. 5.06. Release on Condemnation, etc., of Mortgaged Property. In the event that any one or more governments or municipal corporations or other governmental subdivisions or governmental authorities or any nominee or designee thereof shall at any time acquire all or any part of the Mortgaged Property, (a) by the exercise of the power of condemnation or eminent domain, (b) by the exercise of a right reserved to purchase the same, or (c) by a sale or conveyance by the Company in lieu of and in reasonable anticipation of the impending exercise of such a power or of such a right, the award or consideration therefor shall be paid to the Mortgagee and applied by the Mortgagee on the date of receipt thereof to the prepayment of an equal principal amount of Notes at the time outstanding. 5.07. Purchaser of Released Property Not Required to Investigate. In no event shall any purchaser in good faith of any property which the Mortgagee has purported to release hereunder be bound to ascertain the authority of the Mortgagee to execute the release, or to inquire as to any facts required by the terms hereof for the exercise of such authority, or to see to the application of the purchase money; nor shall any purchaser of property sold pursuant to section 5.02, 5.03 or 5.04 be under obligation to ascertain or inquire into the occurrence of the event on which any such sale is hereby authorized. 5.08. Confirmatory Releases, etc. The Mortgagee shall, upon request by the Company, execute and deliver any confirmatory release or other instrument necessary or appropriate to confirm that any property released from the lien of this Mortgage is permitted by this Article 5; provided that, in the case of any sale, exchange or other disposition of property by the Company pursuant to section 5.02 or 5.04, the execution of such release or other instrument shall not be a condition precedent to the right of the Company to make such sale, exchange or other disposition free from the lien of this Mortgage. 5.09. Exercise of Company Powers After Event of Default. (a) Notwithstanding that an Event of Default shall have occurred and be continuing, in case the Mortgaged Property -33- 104 or any part thereof shall be in the possession of a receiver, trustee or other custodian, lawfully appointed, or of an assignee for the benefit of creditors, the powers conferred upon the Company by this Article 5 may, with the consent of the Mortgagee, be exercised by such receiver, trustee, custodian or assignee with respect to such part of the Mortgaged Property as may then be in his or its possession. (b) If the Mortgagee shall be in possession of the Mortgaged Property or any part thereof under any of the terms of this Mortgage or otherwise, all the powers conferred upon the Company by this Article 5 may be exercised by the Mortgagee, in its discretion, with respect to such part of the Mortgaged Property as may then be in its possession. (c) Notwithstanding that an Event of Default shall have occurred and be continuing, the Company, so long as it shall be in possession of the Mortgaged Property, may, with the prior written approval and consent of the Mortgagee, exercise any of the powers conferred upon it by this Article 5. 6. Remedies Upon Default. 6.01. Definition of Event of Default. The term "Event of Default", wherever used in this Mortgage, shall mean any one or more of the following events, whether or not the occurrence of such event shall, on the part of the Company, Alaska, or any Subsidiary of Alaska, be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of a court of competent jurisdiction or any order, rule or regulation of any administrative or governmental body or otherwise: (a) failure by the Company for 10 days to pay any principal of or premium on any Note when and as the same shall become due and payable, whether at a maturity, on a date fixed for prepayment, by declaration or otherwise; or (b) failure by the Company for 10 days to pay any interest on any Note, when and as the same shall become due and payable; or (c) failure by the Company for 30 days to perform and comply with any term of paragraph (b) of section 3.05 (relating to restrictions on the business of the Division), section 3.07 (relating to restrictions on liens, etc.), section 3.08 (relating to restrictions on indebtedness) or section 3.09 (relating to consolidations, mergers, etc.); or (d) failure by the Company to perform and comply with any term of this Mortgage (other than those referred to in clause (c) of this section 6.01 or in any supplemental mortgage for 30 days after written notice specifying such failure shall have been given to the Company; or -34- 105 (e) an "Event of Default", under any of the Alaska Notes or Alaska Note Agreements shall occur and shall be continuing. 6.02. Acceleration of Maturity. If an Event of Default shall have occurred and be continuing, the Mortgagee may declare the principal of all the Notes then outstanding (if not then due and payable) to be due and payable, and upon any such declaration the same shall become and be immediately due and payable, anything in this Mortgage or in the Notes contained to the contrary notwithstanding. 6.03. Mortgagee's Right to Enter and Take Possession, Operate and Apply Income. (a) if an Event of Default shall have occurred and be continuing, the Company, upon demand of the Mortgagee, shall forthwith surrender to the Mortgagee the actual possession, and, if and to the extent permitted by law, the Mortgagee itself, or by such officers or agents as it may appoint, may enter and take possession of all the Mortgaged Property together with all other property which the Mortgagee is permitted to take possession of, use and administer, and may exclude the Company and its agents and employees wholly therefrom, and may have joint access with the Company to the books, papers and accounts of the Division. (b) If the Company shall for any reason fail to surrender or deliver any such Mortgaged Property or part thereof after such demand by the Mortgagee, the Mortgagee may (i) obtain a judgment conferring on the Mortgagee the right to immediate possession or requiring the Company to deliver immediate possession of all or part of such Mortgaged Property to the Mortgagee, to the entry of which judgment the Company hereby specifically consents, and (ii) pursue all or part of such Mortgaged Property wherever it may be found and enter any of the premises of the Company wherever such Mortgaged Property may be or be supposed to be and search for such Mortgaged Property and take possession of and remove such Mortgaged Property. (c) The Company will pay to the Mortgagee, upon demand, all expenses of obtaining such judgment or of pursuing, searching for and taking such property, and reasonable compensation to the Mortgagee, its attorneys and agents; and all such expenses and compensation shall, until paid, be secured by the lien of this Mortgage. (d) Upon every such entering upon or taking of possession, the Mortgagee may hold, store, use, operate, manage and control the Mortgaged Property and conduct the business thereof, and, from time to time (i) make all necessary and proper maintenance, repairs, renewals, replacements, additions, betterments and improvements thereto and thereon and purchase or otherwise acquire additional equipment, machinery, tools and other property, (ii) insure or keep insured such of the same as is usually insured by companies of established reputation engaged in a similar business and in the same manner and to the same extent, -35- 106 (iii) manage the same and exercise all the rights and powers of the Company, in its name or otherwise, with respect to the same, and (iv) enter into any and all agreements with respect to the exercise by others of any of the powers herein granted the Mortgagee, all as the Mortgagee from time to time may determine to be to its best advan- tage; and the Mortgagee may collect and receive all the income, revenues, tolls, rents, issues and profits of the same, and, after deducting (aa) all expenses of taking, holding and operating the Mortgaged Property and of operating and conducting the business thereof (including compensation for the services of all persons employed for such purposes), (bb) the cost of all such maintenance, repairs, renewals, replacements, additions, betterments, improvements and purchases and acquisitions, (cc) the cost of such insurance, (dd) such taxes, assessments and other charges prior to the lien of this Mortgage as the Mortgagee may determine to pay, (ee) any sums advanced by the Mortgagee under the provisions of section 3.19, (ff) other proper charges upon the Mortgaged Property or any part thereof, and (gg) the reasonable compensation, expenses and disbursements of the attorneys and agents of the Mortgagee (including engineers and accountants employed to examine, inspect and make reports upon the properties and books and records of the Company), shall apply the remainder of the moneys so received by the Mortgagee, first, to the payment of the interest in default, in the order of the maturity of the installments of such interest, with interest (if and to the extent permitted by law) on all overdue installments of interest at a rate per annum equal, in the case of each Note, to the rate of interest specified in such Note plus 2%; second, in case the principal of any of the Notes then outstanding shall have become due, by declaration or otherwise, to the payment of the principal of all Notes then due, with interest on any overdue principal at a rate per annum equal, in the case of each Note, to the rate of interest specified in such Note plus 2%; and third, to the payment of any premium which may be due and payable upon Notes theretofore called for prepayment, with interest on any overdue premium at a rate per annum equal, in the case of each Note, to the rate of interest specified in such Note plus 2%; such payments, respectively, to be made ratably, without preference or priority of any one over any other. -36- 107 (e) Whenever all that is due upon such interest installments and upon the principal of and premium on such Notes, and under any of the terms of this Mortgage, shall have been paid and all Defaults made good, the Mortgagee shall surrender possession of the Mortgaged Property, and any other property of the Company in its possession, to the Company, its successors or assigns. The same right of taking possession, however, shall exist if any subsequent Event of Default shall occur and be continuing. 6.04. Mortgagee's Power of Sale. If an Event of Default shall have occurred and be continuing, the Mortgagee may, if and to the extent and in the manner permitted by law, itself, or by such agents and attorneys as it may appoint, with or without entry or taking possession, sell the Mortgaged Property as an entirety or in such separate lots or parcels as the Mortgagee may determine, at public or private sale and, except as otherwise required by law, at such place or places (whether or not the Mortgaged Property be present), at such time or times, upon such terms (including credit, secured or unsecured) and upon such notice (by publication or otherwise), if any, as the Mortgagee in its discretion may determine. 6.05. Mortgagee's Power of Enforcement. If an Event of Default shall have occurred and be continuing, the Mortgagee may, either with or without entry or taking possession as hereinabove provided or otherwise, proceed by suit or suits at law or in equity or by any other appropriate proceeding or remedy (a) to enforce payment of the Notes or the performance of any term hereof or any other right, (b) to foreclose this Mortgage and to sell, as an entirety or in separate lots or parcels, the Mortgaged Property, under the judgment or decree of a court or courts of competent jurisdiction and to attach, levy or execute upon any other property of the Company and (c) to pursue any other remedy available to it, all as the Mortgagee, with the advice of counsel, shall deem most effectual for such purposes. The Mortgagee shall take action either by such proceedings or by the exercise of its powers with respect to entry or taking possession or sale, as the Mortgagee may determine. 6.06. Adjournment of Sale. From time to time the Mortgagee may, to the extent permitted by law, adjourn any sale to be made under the terms of this Mortgage or otherwise, by announcement at the time and place appointed for such sale, or for such adjourned sale or sales; and without further notice, the Mortgagee may make such sale at the time and place to which the same shall be so adjourned. 6.07. Mortgagee Authorized to Execute Deeds, Conveyances, Deliver Possession, etc. The Mortgagee is irrevocably appointed the agent and attorney-in-fact of the Company, in its name and stead and on its behalf, for the purpose of effectuating any sale for the enforcement of this Mortgage, whether under the power of sale hereby given or pursuant to judicial proceedings or otherwise, to execute and deliver all such deeds, conveyances, bills of sale, assignments, transfers and other instruments as the Mortgagee may consider necessary or appropriate, and to substitute one or more Persons with like power, the Company hereby ratifying and confirming all that the Mortgagee, or such substitute or substitutes, shall lawfully do by virtue hereof. Nevertheless, if so requested by the Mortgagee, or by any purchaser, the Company shall ratify and confirm any such sale by executing and delivering to the Mortgagee or to such -37- 108 purchaser or purchasers all such proper deeds, conveyances, assignments, instruments of transfer and releases as may be designated in any such request. Upon any such sale being made, the Company shall deliver the Mortgaged Property so sold in accordance with the instructions of the Mortgagee. If the Company shall fail for any reason to deliver such Mortgaged Property or part thereof after receiving instructions from the Mortgagee, the Mortgagee shall have all of the rights granted to the Mortgagee upon failure of the Company to deliver Mortgaged Property as specified in section 6.03. 6.08. Principal and Interest Become Due on Sale. Upon any sale being made, either under the power of sale hereby given or pursuant to judicial proceedings or otherwise, for the enforcement of this Mortgage, the principal of all Notes then outstanding, if not previously due, and the interest accrued thereon, shall at once become and be immediately due and payable. 6.09. Purchase by Mortgagee. Upon any such sale, whether under the power of sale hereby given or pursuant to judicial proceedings or otherwise, the Mortgagee may bid for and purchase the Mortgaged Property and, upon compliance with the terms of sale, may hold, retain and possess and dispose of such property in its own absolute right without further accountability. 6.10. Application of Notes Toward Purchase Price. Upon any such sale, whether under the power of sale hereby given or pursuant to judicial proceedings or otherwise, any purchaser may, if permitted by law, after allowing for the proportion of the total purchase price required to be paid in cash for the costs and expenses of the sale, compensation and other charges, in paying the purchase price, apply to the purchase price Notes then outstanding, in lieu of cash, to the amount which shall, upon distribution of the net proceeds of such sale, be payable thereon. 6.11. Receipt Sufficient Discharge to Purchaser. Upon any such sale, whether under the power of sale hereby given or pursuant to judicial proceedings or otherwise, the receipt of the Mortgagee or of the officer making a sale under judicial proceedings shall be a sufficient discharge to the purchaser or purchasers for the purchase money, and such purchasers, and their assigns or personal representatives, shall not, after paying such purchase money and receiving such receipt therefor, be obliged to see to the application of such purchase money, or be in any wise answerable for any loss, misapplication or nonapplication thereof. 6.12. Sale a Bar Against Company. Any such sale, whether under the power of sale hereby given or pursuant to judicial proceedings or otherwise, shall operate to divest all right, title, interest, claim and demand whatsoever, at law or in equity or by statute or otherwise, of the Company in and to the property sold, and, so far as permitted by law, shall be a perpetual bar at law and in equity and otherwise against the Company and its successors and assigns and all Persons now or hereafter claiming such property or any part thereof from, through or under the Company or its successors or assigns. 6.13. Application of Proceeds of Sale. The proceeds of any such sale, whether under the power of sale hereby given or pursuant to judicial proceedings or otherwise, together with -38- 109 any other moneys then held by the Mortgagee under this Mortgage as part of the Mortgaged Property or the proceeds thereof, shall be applied as follows: First: to the payment of all lawful taxes, assessments or liens prior to the lien of this Mortgage, except those subject to which such sale shall have been made, and of all costs and expenses of such sale, including the reasonable compensation, expenses and disbursements of the Mortgagee and its agents and attorneys, and of all other sums payable to the Mortgagee hereunder by reason of any liabilities incurred or advances made by it in connection with the management or administration of the Mortgaged Property; Second: to the payment of the whole amount then due and unpaid upon the Notes then outstanding for principal, premium, if any, and interest, with interest on the overdue principal, premium, if any, and (if and to the extent permitted by law) interest at a rate per annum equal, in the case of each Note, to the rate of interest specified therein plus 2%; and, in case such proceeds shall be insufficient to pay in full the whole amount so due and unpaid, then to the payment of such principal, premium, if any, and interest ratably, without preference or priority of any one over any other, or of any installment of interest over any other installment of interest; and Third: any surplus then remaining, to the Company or its successors or assigns, or to whomsoever may be lawfully entitled to receive the same. In the event of any sale of the Mortgaged Property, or any part thereof, under this Article on terms of credit, the Mortgagee shall receive and hold as property subject to the lien of this Mortgage all agreements and instruments evidencing the indebtedness of the purchaser or purchasers, shall administer and enforce the same, shall collect all moneys becoming due thereunder and apply such moneys as provided in this section 6.13. The Mortgagee is hereby authorized, in its discretion, to sell and dispose of the indebtedness evidenced by such agreements or instruments and to collect the proceeds thereof, which shall thereupon be applied as provided in this section 6.13. 6.14. Waiver of Appraisement, Valuation, Stay, Extension and Redemption Laws. The Company agrees, to the full extent that it may lawfully so agree, that in case of a Default on its part hereunder, neither the Company nor anyone claiming through or under it shall or will set up, claim or seek to take advantage of any appraisement, valuation, stay, extension or redemption laws now or hereafter in force in any locality where any property subject to the lien hereof may be situated, in order to prevent or hinder the enforcement or foreclosure of this Mortgage, or in the absolute sale of the property hereby conveyed, or the final and absolute putting into possession thereof, immediately after such sale, of the purchasers thereat, and the Company, for itself and all who may at any time claim through or under it, hereby waives to the full extent that it may lawfully so do, the benefit of all such laws, and any and all right to have the assets comprised in the security intended to be created hereby marshaled upon any foreclosure of the lien hereof and agrees that the Mortgagee or any court having jurisdiction to foreclose such lien may sell the Mortgaged Property as an entirety. -39- 110 6.15. Mortgagee Entitled to Appointment of Receiver. If an Event of Default shall occur and be continuing, then upon the filing of a bill in equity or other commencement of judicial proceedings to enforce the rights of the Mortgagee, the Mortgagee, to the extent permitted by law, shall be entitled as a matter of right to the appointment of a receiver or receivers of the Mortgaged Property, and of the tolls, rents, revenues, issues, income, product and profits thereof, pending such proceedings, with such powers as the court making such appointment shall confer, but, notwithstanding the appointment of any receiver, trustee or other custodian, the Mortgagee shall be entitled as pledgee to the possession and control of any cash, or other instruments at the time held by, or payable or deliverable under the terms of this Mortgage to, the Mortgagee. 6.16. Suits to Protect the Mortgaged Property. The Mortgagee shall have power (a) to institute and maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Mortgaged Property by any acts which may be unlawful or any violation of the Mortgage, (b) to preserve or protect its interests in the Mortgaged Property and in the income, revenues, tolls, rents and profits arising therefrom, and (c) to restrain the enforcement of or compliance with any legislation or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid, if the enforcement of, or compliance with, such enactment, rule or order would impair the security hereunder or be prejudicial to the interests of the Mortgagee. 6.17. Mortgagee May File Proofs of Claim in Receivership, etc. In the case of any receivership, insolvency, bankruptcy, reorganization, arrangement, adjustment, composition, or other judicial proceedings affecting the Company, its creditors or its property, the Mortgagee shall, to the extent permitted by law, be entitled to file such proofs of claim and other documents as may be necessary or advisable in order to have the claims of the Mortgagee allowed in such proceedings for the entire amount due and payable by the Company under this Mortgage at the date of the institution of such proceedings and for any additional amount which may become due and payable by the Company hereunder after such date. 6.18. Company to Pay All Notes on Any Default in Payment; Application of Moneys by Mortgagee. If Default shall be made in the payment of any principal of, or premium, if any, or interest on any of the Notes, when and as due and payable, then, upon demand of the Mortgagee, the Company will pay to the Mortgagee, the whole amount due and payable on all Notes at the time outstanding for principal, premium, if any, and interest, with interest on the overdue principal, premium, if any, and (if and to the extent permitted by law) interest at a rate per annum equal, in the case of each Note, to the rate of interest specified therein plus 2%; and in case the Company shall fail to pay the same forthwith upon such demand, the Mortgagee shall be entitled to sue for and to recover judgment for the whole amount so due and unpaid together with costs, which shall include the reasonable compensation, expenses and disbursements of the Mortgagee's agents and attorneys. The Mortgagee shall be entitled to sue and recover judgment as aforesaid either before, after or during the pendency of any proceedings for the enforcement of this Mortgage, and the right of the Mortgagee to recover such judgment shall not be affected by any taking, possession -40- 111 or sale hereunder, or by the exercise of any other right, power or remedy for the enforcement of the terms of this Mortgage, or the foreclosure of the lien hereof. In case of a sale of any of the Mortgaged Property and of the application of the proceeds of sale to the payment of the debt hereby secured, the Mortgagee shall be entitled to enforce payment of and to receive all amounts then remaining due and unpaid upon any and all of the Notes then outstanding, and the Mortgagee shall be entitled to recover judgment for any portion of the debt remaining unpaid, with interest. The Company agrees, to the full extent that it may lawfully so agree, the no recovery of any such judgment by the Mortgagee and no attachment or levy of any execution upon any such judgment upon any of the Mortgaged Property or upon any other property shall in any manner or to any extent affect the lien of this Mortgage upon the Mortgaged Property or any part thereof or any lien, rights, powers or remedies of the Mortgagee hereunder, but such lien, rights, powers and remedies shall continue unimpaired as before. Any moneys thus collected by the Mortgagee or received by the Mortgagee under this section 6.18 shall be applied as follows: First, to the payment of the reasonable compensation, expenses and disbursements of the agents and attorneys of the Mortgagee; and Second, toward payment of the amounts then due and unpaid upon the Notes in respect of which such moneys shall have been collected, ratably and without any preference or priority of any kind, according to the amounts due and payable upon such Notes. 6.19. Delay or Omission No Waiver. No delay or omission of the Mortgagee or of any holder of Notes outstanding hereunder to exercise any right, power or remedy accruing upon any Default shall exhaust or impair any such right, power or remedy or shall be construed to be a waiver of any such Default, or acquiescence therein; and every right, power and remedy given by this Mortgage to the Mortgagee may be exercised from time to time and as often as may be deemed expedient by the Mortgagee. 6.20. No Waiver of One Default to Affect Another. No waiver of any Default hereunder shall extend to or shall affect any subsequent or any other then existing Default or shall impair any rights, powers or remedies consequent thereon. 6.21. Discontinuance of Proceedings--Position of Parties Restored. In case the Mortgagee shall have proceeded to enforce any right or remedy under this Mortgage by foreclosure, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely to the Mortgagee, then and in every such case the Company and the Mortgagee shall be restored to their former positions and rights hereunder, and all rights, powers and remedies of the Mortgagee shall continue as if no such proceeding had been taken. -41- 112 6.22. Remedies Cumulative. No right, power or remedy conferred upon or reserved to the Mortgagee by this Mortgage is intended to be exclusive of any other right, power or remedy, but each and every such right, power and remedy shall be cumulative and concurrent and shall be in addition to any other right, power and remedy given hereunder or now or hereafter existing at law or in equity or by statute. 7. Immunity of Incorporators, Stockholders, Officers and Directors. 7.01. Immunity of Incorporators, Stockholders, Officers and Directors. No recourse under or upon any obligation, covenant or agreement contained in this Mortgage or in any mortgage supplemental hereto, or in any Note (other than by endorsement thereof), or because of any Indebtedness hereby secured, shall be had against any incorporator, or against any past, present or future stockholder, officer or director, as such, of the Company or of any successor corporation, either directly or through the Company or any successor corporation under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceedings or otherwise; it being agreed and understood that this Mortgage, any mortgage supplemental hereto and the obligations hereby secured, are solely corporate obligations, and that no personal liability whatever shall attach to, or be incurred by, such incorporators, stockholders, officers or directors, as such, of the Company or of any successor corporation, or any of them, because of the incurring of the indebtedness hereby authorized, or under or by reason of any of the obligations, covenants or agreements contained in this Mortgage or in any mortgage supplemental hereto or in any of the Notes, or implied therefrom. 8. Defeasance. 8.01. Defeasance. If the Company shall pay and discharge or provide for the payment and discharge of the entire Indebtedness on all Notes at the time outstanding by paying or causing to be paid the principal of, and the premium, if any, and interest on the Notes, at the time and in the manner therein and herein expressed, and if the Company shall also pay and discharge all amounts and obligations under the Gas Sale Contract, and if the Company shall also (a) pay or cause to be paid all other sums payable hereunder by the Company or make provision satisfactory to the Mortgagee for the payment thereof, and (b) duly perform and comply with all covenants, agreements, terms and conditions on the part of the Company contained in this Mortgage according to the true intent and meaning thereof, -42- 113 then and in that case all property, rights and interests hereby conveyed or assigned or pledged shall revert to the Company, and the estate, right, title and interest of the Mortgagee therein shall thereupon cease, terminate and become void; and the Mortgagee in such case, on demand of the Company and at its cost and expense, shall execute and deliver to the Company a proper instrument or instruments acknowledging the satisfaction and termination of this Mortgage and all mortgages supplemental hereto, and shall convey, assign and transfer, or cause to be conveyed, assigned or transferred, and shall deliver or cause to be delivered, to the Company all property, including money, then held by the Mortgagee, other than moneys paid to the Mortgagee for the payment of the principal of and premium, if any, or interest on any Notes. 9. Miscellaneous Provisions. 9.01. Successors and Assigns Included in Parties. Whenever in this Mortgage one of the parties hereto is named or referred to, the successors and assigns of such party shall be included, and all covenants and agreements contained in this Mortgage by or on behalf of the Company or by or on behalf of Alaska shall bind and inure to the benefit of their respective successors and assigns, whether so expressed or not. 9.02. Addresses for Notices, etc. Any notice, demand or other instrument authorized by this Mortgage to be served on or given to the Company may be served on or given to the Company at First City Tower, 1001 Fannin, Suite 1700, Houston, Texas 77002, or at such other address as may have been furnished in writing to the Mortgagee by the Company. Any notice, demand or other instrument to be served on or given to Alaska may be served on or given to Alaska at 3000 Spenard Road, Anchorage, Alaska 99502, or at such other address as may have been furnished in writing to the Company by Alaska. 9.03. Table of Contents, Headings, etc. The table of contents, the headings of the Articles, sections, paragraphs and subdivisions of this Mortgage are for convenience of reference only, are not to be considered a part hereof, and shall not limit or otherwise affect any of the terms hereof. 9.04. Invalid Provisions to Affect No Others. In case any one or more of the covenants, agreements, terms or provisions contained in this Mortgage or any mortgage supplemental hereto or in the Notes shall be invalid, illegal or unenforceable in any respect, the validity of the remaining covenants, agreements, terms or provisions contained herein and in the Notes shall be in no way affected, prejudiced or disturbed thereby. 9.05. Changes, etc. Neither this Mortgage nor any term hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. -43- 114 9.06. Counterparts of Mortgage. The Mortgage may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. III. MISCELLANEOUS PROVISIONS RELATING TO EIGHTH SUPPLEMENTAL MORTGAGE. 10. Miscellaneous Provisions. 10.01. Titles, Headings, etc. The titles and headings of the articles, sections and subdivisions of this Eighth Supplemental Mortgage have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. 10.02. Counterparts. This Eighth Supplemental Mortgage may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 11. Real Property Specifically Described. 11.01. Real Property Specifically Described. The real property and interests referred to in the Granting Clauses of this Eighth Supplemental Mortgage are set forth in Schedule I attached hereto and made a part hereof for all purposes. IN WITNESS WHEREOF, the parties have caused this Eighth Supplemental Mortgage to be executed by their respective officers thereunto duly authorized, all as of the day and year first above written. SEAGULL ENERGY CORPORATION By: /s/ Barry J. Galt, Chairman and Chief Executive Officer [Corporate Seal] Attest: By: /s/ Joe T. Rye, Secretary -44- 115 ALASKA PIPELINE COMPANY By: /s/ Bill B. Hickman, Executive Vice President [Corporate Seal] Attest: By: /s/ Eugene S. Clark, Secretary -45- 116 STATE OF TEXAS ss. ss. COUNTY OF HARRIS ss. Before me, the undersigned authority, on this day personally appeared Barry J. Galt, known to me to be the person whose name is subscribed to the foregoing instrument, and known to me to be the Chairman and Chief Executive Officer of Seagull Energy Corporation, a Texas corporation, and acknowledged to me that he executed said instrument for the purposes and consideration therein expressed, and in the capacity therein stated, as the free and voluntary act and deed of the said corporation for the uses and purposes therein mentioned. Given under my hand and seal of office this 17th day of June, 1985. /s/ DeBra D. Edwards Notary Public in and for the State of Texas My Commission Expires April 17, 1989 [Notarial Seal] STATE OF TEXAS ss. ss. COUNTY OF HARRIS ss. Before me, the undersigned authority, on this day personally appeared Bill B. Hickman, known to me to be the person whose name is subscribed to the foregoing instrument, and known to me to be an Executive Vice President of Alaska Pipeline Company, an Alaska corporation, and acknowledged to me that he executed said instrument for the purposes and consideration therein expressed, and in the capacity therein stated, as the free and voluntary act and deed of the said corporation for the uses and purposes therein mentioned. Given under my hand and seal of office this 17th day of June, 1985. /s/ DeBra D. Edwards Notary Public in and for t State of Texas My Commission Expires April 17, 1989 [Notarial Seal] -46- 117 EXHIBIT C SEAGULL ENERGY CORPORATION TO THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES THE TRAVELERS INSURANCE COMPANY AND THE TRAVELERS LIFE INSURANCE COMPANY ---------------------- INDUCEMENT AGREEMENT ---------------------- Dated as of: June 17, 1985 118 TABLE OF CONTENTS
Page 1. Representations by Seagull ...................................... 1 1.1. Incorporation, Standing, etc .................................... 1 1.2. Qualification ................................................... 2 1.3. Authority Binding Effect ........................................ 2 1.4. Financial Statements ............................................ 2 1.5. Changes, etc .................................................... 2 1.6. Litigation, etc ................................................. 3 1.7. Compliance with Other Instruments, etc .......................... 3 1.8. Governmental Consent, etc ....................................... 3 1.9. Title to Properties; Liens ...................................... 3 1.10. Holding Company Act ............................................. 4 1.11. Disclosure ...................................................... 4 2. [Intentionally Omitted.] ........................................ 4 3. Subordination ................................................... 4 4. Financial Statements and Other Information ...................... 7 5. Inspection ...................................................... 8 6. Covenants of Seagull ............................................ 9 6.1. Accounting and Reserves ......................................... 9 6.2. Consolidated Net Tangible Assets ................................ 9 6.3. Insurance ....................................................... 10 6.4. Maintenance of Corporate Existence, Franchises, etc ............. 10 6.5. Maintenance and Improvement of Division Property ................ 10 6.6. Restrictions on Liens, etc ...................................... 11 6.7. Recordation of Intercompany Mortgage ............................ 13 6.8. Performance of Franchises; Extension, Amendment, etc. of Division Certificate ..................................................... 14 6.9. Gas Sale Contract ............................................... 14 6.10. Sale, Merger and Consolidation .................................. 14 7. Costs and Expenses .............................................. 15 8. Notices etc ..................................................... 15 9. Miscellaneous ................................................... 15 EXHIBIT A - Litigation
-i- 119 SEAGULL ENERGY CORPORATION 1001 Fannin, Suite 1700 Houston, Texas 77002 Dated as of: June 17, 1985 The Equitable Life Assurance Society of the United States 1285 Avenue of the Americas New York, New York 10019 Attention: Corporate Finance Department The Travelers Insurance Company The Travelers Life Insurance Company One Tower Square Hartford, Connecticut 06115 Attention: Securities Department Private Placement Division Dear Sirs: You expect to purchase, collectively, $10,000,000 aggregate principal amount of the 12.125% Series E Notes due July 1, 1990 (the "Series E Notes"), $14,500,000 aggregate principal amount of the 12.70% Series F Notes due July 1, 1995 (the "Series F Notes"), $3,000,000 aggregate principal amount of the 12.80% Series G Notes due July 1, 2000 (the "Series G Notes") and $17,500,000 aggregate principal amount of the 12.75% Series H Notes due July 1, 2000 (the "Series H Notes" and, together with the Series E, F and G Notes, the "New Notes") of Alaska Pipeline Company (the "Company"). Such purchases by each of you will be made pursuant to identical Note Agreements, dated the date hereof, between the Company and each of you (collectively, the "New Note Agreements"). You previously purchased the Existing Notes pursuant to one or more of the Existing Note Agreements (as these and other capitalized terms used herein without definition are defined in the New Note Agreements). Hereinafter, the New Notes and the Existing Notes will be collectively referred to as the "Notes" and the New Note Agreements and the Existing Note Agreements will be collectively referred to as the "Note Agreements". Seagull Energy Corporation, a Texas corporation ("Seagull"), has agreed to acquire all of the issued and outstanding common stock of the Company and the assets and liabilities of the Division pursuant to a Purchase and Sale Agreement, dated October 10, 1984, between ENSTAR Corporation ("ENSTAR") and Seagull, as supplemented by a Supplemental Agreement dated as of May 3, 1985 (the "Acquisition Agreement"). In order to induce you to enter into the New Note Agreements and to purchase the New Notes pursuant thereto, and to release certain collateral securing the Existing Notes, Seagull agrees with each of you as follows: 1. Representations by Seagull. Seagull represents and warrants to you at: 1.1. Incorporation, Standing, etc. Seagull is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Texas and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now 120 conducted and as now proposed to be conducted, and to enter into and perform the Acquisition Agreement and the Seagull Documents. 1.2. Qualification. Seagull is duly qualified or licensed and in good standing as a foreign corporation duly authorized to do business in the State of Alaska and in each jurisdiction wherein the character of the properties owned or the nature of the activities conducted by Seagull makes necessary such qualification or licensing as a foreign corporation, except for such failures to be so qualified or licensed and in good standing, if any, which when taken together would not in the aggregate have a material adverse effect on the condition, business or property of Seagull. 1.3. Authority Binding Effect. The execution, delivery and performance by Seagull of the Acquisition Agreement and the Seagull Documents have been duly authorized by all necessary action on the part of Seagull. This Agreement and the Acquisition Agreement have been duly executed and delivered by the duly authorized officers of Seagull and, assuming due authorization, execution and delivery by the other parties thereto, constitute legal, valid and binding obligations of Seagull enforceable against Seagull in accordance with their respective terms. When executed and delivered by Seagull each of the other Seagull Documents shall have been duly executed and delivered by the duly authorized officers of Seagull and, assuming due authorization, execution and delivery by the other parties thereto, shall constitute legal, valid and binding obligations of Seagull enforceable against Seagull in accordance with their respective terms. 1.4. Financial Statements. Seagull has delivered to you financial statements of Seagull for the years ended December 31, 1983 to 1984, inclusive, and for the quarterly period ended March 31, 1985, containing consolidated balance sheets of Seagull and its consolidated subsidiaries as at such dates and the related consolidated statements of income and surplus for such years and for such quarterly period, all (except such financial statements for such quarterly period) as certified by Peat, Marwick, Mitchell & Co. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved and fairly present the financial condition and the results of operations of Seagull and its consolidated subsidiaries as at such dates and for such years and quarterly period. Seagull has also delivered to you copies of (i) Seagull's Annual Report on Form 10-K for the year ended December 31, 1984 (the "1984 10-K"), (ii) Seagull's Quarterly Report on Form 10-Q for the quarter ended March 31, 1985 (the "10Q"), (iii) the Prospectus dated January 15, 1985 relating to the underwritten public offering by Seagull of 850,000 shares of its common stock (the "Prospectus"), (iv) the Acquisition Agreement and (v) Seller's Disclosure Schedule (as defined in the Acquisition Agreement). The 1984 10-K, the 10Q, the Prospectus, the Acquisition Agreement, Seller's Disclosure Schedule and the financial statements referred to in this section 1.4 are hereinafter collectively called the "Disclosure Documents". 1.5. Changes, etc. Since March 31, 1985, there has been no material adverse change in the financial condition of Seagull and its consolidated subsidiaries, taken as a whole, from that reflected in the consolidated balance sheet as at such date referred to in section 1.4, and there has been no occurrence or development which has had or in the opinion of Seagull will have a materially adverse effect on the financial condition of Seagull and its consolidated -2- 121 subsidiaries, the Company or the Division, or the ability of Seagull to perform its obligations under the Seagull Documents. 1.6. Litigation, etc. There is no litigation, proceeding or investigation pending or, to the best of Seagull's knowledge, threatened against Seagull which questions the validity of the Acquisition Agreement or the Seagull Documents or any action taken or to be taken pursuant to any thereof. Except as disclosed on Exhibit A attached hereto, there is no litigation, proceeding or investigation pending or, to the best of Seagull's knowledge, threatened against Seagull which involves the condemnation, purchase or other acquisition by any governmental authority of any property (individually or in the aggregate material) of Seagull, the Company or the Division or which might result in any materially adverse change in the condition, business or prospects of Seagull, the Company or the Division or in any of their respective properties or assets (individually or in the aggregate material), except as described in the Disclosure Documents. 1.7. Compliance with Other Instruments, etc. The execution, delivery and performance by the Company of the New Note Agreements or the Gas Contracts, or by Seagull of the Acquisition Agreement and the Seagull Documents, and the issuance and sale of the New Notes, will not result in any violation of any term or condition of (i) the charter or by-laws of Seagull, or (ii) any material contract, agreement, instrument, judgment, decree, order, franchise, certificate, permit and the like or, to the actual knowledge of the executive officers of Seagull, any statute, rule, regulation or ordinance of any court or governmental authority applicable to Seagull or by which it is bound or to which any of its properties or assets is subject. 1.8. Governmental Consent, etc. Except for (i) the approval of the PUC to the transfer of the Division Certificate from ENSTAR to Seagull, (ii) routine filings and the like required in the ordinary course of business of Seagull, the Company or the Division, (iii) the approvals, consents, filings and the like referred to in Part VI of Seller's Disclosure Schedule, (iv) the filing by Seagull of a report on Form 8-K relating to the closing under the Acquisition Agreement, and (v) any filings required pursuant to section 6.7 hereof or referred to in section 9.6 of the Note Agreement, no consent, approval or authorization of, or registration, declaration or filing with, any governmental or public body or authority is required in connection with the valid execution, delivery and performance by Seagull of the Acquisition Agreement and the Seagull Documents, or the carrying out of any of the transactions contemplated by any thereof. 1.9. Title to Properties; Liens. Seagull will have, upon the consummation of the transactions contemplated by the Acquisition Agreement, good and marketable title to (i) substantially all of the Division's real and personal property (except for property consisting of rights-of-way, licenses, permits and franchises, as to which Seagull will have satisfactory title for the purposes of constructing, operating and maintaining all property located or proposed to be located on the real property covered thereby), and (ii) all of the issued and outstanding Common Stock of the Company, in each case subject to no mortgage, pledge, lien, security interest, lease, charge or encumbrance or conditional sale or other title retention agreement other than, with respect only to the Division's real and personal property, those permitted by section 6.6 and other than, with respect only to such Common Stock, the security interest and -3- 122 pledge, if any, securing the indebtedness of Seagull referred to in Section 5.2.3 of the Acquisition Agreement. 1.10. Holding Company Act. Seagull is not, and upon the consummation of the transactions contemplated by the Acquisition Agreement shall not be, a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended (the "PUHCA" ore than 10% of the common stock of Seagull is beneficially owned by Finial Investment Corporation, a Texas corporation ("Finial"), and the Division constitutes a "public utility company" within the meaning of the PUHCA. On May 23, 1985, Seagull, acting in good faith, filed with the Securities and Exchange Commission ("SEC") pursuant to Section 2(a)(8) of the PUHCA, an application (the "Application") for an order to the effect that Seagull is not a "subsidiary" of Finial within the meaning of the PUHCA. As a result of such filing, Seagull is not a "subsidiary" of a "holding company" or an "affiliate" of a "holding company" or of a "subsidiary" of a "holding company", all within the meaning of the PUHCA. Pursuant to Section 3(c) of the PUHCA, the non-subsidiary status of Seagull shall continue until the SEC, after notice and opportunity for hearing, shall enter an order denying or otherwise disposing of the Application. As of the date hereof, the SEC has not given any such notice nor has it otherwise acted upon the Application in any respect. 1.11. Disclosure. Neither this Agreement nor any certificate, statement or other document furnished by or on behalf of Seagull in connection with the transactions referred to in this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact known to Seagull which materially adversely affects or in the future may (so far as Seagull can now reasonably foresee) materially adversely affect the business operations, affairs or condition of Seagull, the Company or the Division or any of its properties or assets (individually or in the aggregate material) which has not been set forth in this Agreement, or in the other documents, certificates or statements furnished to you by or on behalf of Seagull prior to the date hereof pursuant hereto in connection with such transactions. 2. [Intentionally Omitted.] 3. Subordination. All Indebtedness of the Company to Seagull, now existing or hereafter incurred, including, without limitation, all Indebtedness in respect of advances, open accounts, accounts payable obligations, loans, notes, bonds, debentures or other evidences of debt whether for principal, premium, if any, or interest, and all instruments constituting or evidencing any of the foregoing, whether or not held by Seagull (the "Subordinated Indebtedness") shall be subordinate, subject and junior in right of payment to the prior payment in full of all the Notes in the manner and with the effect provided below in this section 3: (a) Upon the happening of an event which would constitute an Event of Default under any of the Note Agreements (an "Event of Default") unless and until such Event of Default shall have been remedied or waived or shall have ceased to exist, no direct or indirect payment (in cash, property or securities or by set-off or otherwise) shall be made or agreed to be made on account of the principal of, or premium, if any, or interest on any Subordinated Indebtedness, or as a sinking fund for the Subordinated -4- 123 Indebtedness, or in respect of any redemption, retirement, purchase or other acquisition of any of the Subordinated Indebtedness. (b) In the event of (i) any insolvency, bankruptcy, receivership, liquidation, reorganization, readjustment, composition or other similar proceeding relative to the Company, its creditors, as such, or its property, (ii) any proceeding for the liquidation, dissolution or other winding-up of the Company, voluntary or involuntary, whether or not involving insolvency or bankruptcy proceedings, (iii) any assignment by the Company for the benefit of creditors, or (iv) any other marshalling of the assets of the Company, then and in any such event: (1) the holders of Subordinated Indebtedness shall not be entitled to receive any payment or distribution of any character, whether in cash, securities or other property, in respect of any Subordinated Indebtedness unless and until all the Notes (including any interest thereon accruing at the legal rate after the commencement of any such proceedings and any additional interest thereon that would have accrued thereon but for the commencement of such proceedings) shall have been paid in full; (2) all Subordinated Indebtedness shall forthwith become due and payable (notwithstanding the terms thereof) and any payment or distribution of any character, whether in cash, securities or other property, which would otherwise (but for the terms of this section 3) be payable or deliverable in respect of any Subordinated Indebtedness shall be paid or delivered directly to the holders of the Notes, to be applied, pro rata, to the reduction of the then outstanding principal balance of the Notes until all the Notes shall have been paid in full; (3) the holders of Subordinated Indebtedness irrevocably authorize and empower you to demand, sue for, collect and receive all such payments and distributions and to receipt therefor, and to file and prove all such claims and take all such other action in the name of the holders of Subordinated Indebtedness, or otherwise, as you may determine to be necessary or appropriate for the enforcement of this section 3; and (4) the holders of Subordinated Indebtedness will execute and deliver to you all such further instruments confirming the above authorization, and all such powers of attorney, proofs of claim, assignments of claim and other instruments, and will take all such other action as may be reasonably requested by you in order to enable you to enforce all claims upon such payment or distribution in respect of Subordinated Indebtedness. (c) In the event that any Subordinated Indebtedness is declared due and payable as a result of the occurrence of one or more defaults in respect thereof under circumstances when the terms of subdivision (b) are not applicable, no payment shall be made in respect of any Subordinated Indebtedness unless and until all the Notes outstanding at the time such Subordinated Indebtedness is so declared due and payable -5- 124 shall have been paid in full or such declaration and its consequences shall have been rescinded and all such defaults shall have been remedied or waived or shall have ceased to exist. (d) If any payment or distribution of any character, whether in cash, securities or other property in respect of any Subordinated Indebtedness (other than payments not prohibited pursuant to this section 3) shall, despite the foregoing terms, be received by any holders of Subordinated Indebtedness before all the Notes shall have been paid in full, such payment or distribution shall be received in trust for the benefit of the holders of the Notes. Such trust and all claims of the holders of the Notes with respect to any such payment or distribution received by any holders of Subordinated Indebtedness shall terminate 365 days following the receipt of such payment or distribution by such holders of Subordinated Indebtedness unless, (x) prior to the expiration of such 365-day period, such holders of Subordinated Indebtedness shall have actual knowledge or should have had actual knowledge that an Event of Default had occurred and was continuing under any of the Note Agreements at the time of such payment or distribution or (y) such Event of Default shall relate to any act or omission of Seagull or any condition with respect to Seagull. Unless such trust and such claims shall terminate in accordance with the prior sentence, each such payment and distribution so received shall be paid over or delivered and transferred to the holders of the Notes, and applied, pro rata, to the reduction of the then outstanding principal balance of the Notes to the extent necessary to pay all the Notes in full. In the event of the failure of the holder of any Subordinated Indebtedness to endorse or assign any such payment, distribution or security, each holder of the Notes is hereby irrevocably authorized to endorse or assign the same. (e) No present or future holder of the Notes shall be prejudiced in the right to enforce subordination of Subordinated Indebtedness by any act or failure to act on the part of the Company. (f) The Company will not execute and deliver, issue or give, and neither Seagull nor any other holder of Subordinated Indebtedness will demand, accept or receive, any instrument or other evidence of any Subordinated Indebtedness. (g) Unless and until all the Notes shall have been paid in full, neither Seagull nor any other holder of Subordinated Indebtedness will assign or otherwise transfer any Subordinated Indebtedness without, in each case, your prior written consent, except that all Subordinated Indebtedness held by Seagull may be transferred to any corporation assuming the obligations of Seagull hereunder in accordance with a transaction permitted by section 6. (h) Seagull and the Company will each mark its books of account in such manner as shall be effective to give proper notice of the subordination effected by this Agreement. (i) This Agreement shall continue to be effective, or be reinstated, as the case may be, if at any time payment, in whole or in part, of any of the sums due any holder of the Notes for principal, interest or premium, if any, is rescinded or must otherwise -6- 125 be restored or returned by such holder upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Company, or upon or as a result of the appointment of a custodian, receiver, liquidator, fiscal agent, trustee or other officer with similar powers with respect to the Company or any substantial part of its property, or otherwise, all as though such payments had not been made. For the purposes of this Agreement, no Note shall be deemed to have been paid in full unless the holder thereof shall have received (free and clear of any lien, charge or encumbrance created by or through the Company), cash equal to the principal amount of such Note at the time remaining unpaid, together with interest, and premium, if any, then due thereon, and none of such cash shall be required to be restored or returned by such holder for a reason set forth above or for any other reason. (j) Upon the payment in full of all the Notes, the holders of Subordinated Indebtedness shall be subrogated to all rights of any holders of the Notes to receive any further payments or distributions applicable to the Notes until the Subordinated Indebtedness shall have been paid in full, and for the purposes of such subrogation, no payment or distribution received by the holders of the Notes of cash, securities or other property to which the holders of the Subordinated Indebtedness would have been entitled except for these subordination provisions shall, as between the Company and its creditors other than the holders of the Notes, on the one hand, and the holders of Subordinated Indebtedness, on the other, be deemed to be a payment or distribution by the Company to or on account of the Notes. 4. Financial Statements and Other Information. Seagull will deliver (in duplicate) to you, so long as you shall hold any Notes, and to each other holder of at least 10% in principal amount of any Series of the Notes at the time outstanding: (a) as soon as available and in any event within 60 days after the end of the first, second and third quarterly accounting periods in each fiscal year of Seagull, a balance sheet of the Division and a consolidated balance sheet of Seagull and its consolidated subsidiaries as at the end of such period and the related statements of income and surplus and changes in financial position of the Division and consolidated statements of income and surplus and changes in financial position of Seagull and its consolidated subsidiaries for the period from the beginning of the current fiscal year to the end of such quarterly period, setting forth in each case in comparative form the figures for the corresponding periods of the previous year, all in reasonable detail and certified, subject to changes resulting from year-end audit adjustments, by a principal financial officer of Seagull; (b) as soon as available and in any event within 90 days after the end of each fiscal year of Seagull, a balance sheet of the Division and a consolidated balance sheet of Seagull and its consolidated subsidiaries as at the end of such fiscal year and the related statements of income and surplus and changes in financial position of the Division and consolidated statements of income and surplus and changes in financial position of Seagull and its consolidated subsidiaries for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable -7- 126 detail and accompanied by the report and opinion thereon of independent public accountants of recognized national standing selected by Seagull; (c) together with each delivery of financial statements pursuant to subdivisions (a) and (b) above, an Officer's Certificate (i) stating that the signer has reviewed the relevant terms of the Seagull Documents, and has made, or caused to be made under his supervision, a review of the transactions and conditions of the Division and of Seagull and its consolidated subsidiaries during the period in question, and that such review has not disclosed the existence during such period, and that the signer did not have knowledge of the existence as at the date of such Officer's Certificate, of any default by Seagull under any Seagull Documents or, if any such default existed or exists, specifying the nature and period of existence thereof and what action Seagull has taken or is taking or proposes to take with respect thereto, and (ii) specifying the amount of Consolidated Net TangibIe Assets as at the end of such period, showing in reasonable detail the calculation thereof; (d) together with each delivery of financial statements pursuant to subdivision (b) above, a separate report by the independent public accountants reporting thereon (i) stating that their examination has included a review of the relevant terms of the Seagull Documents, as they relate to accounting matters, and (ii) stating whether or not their examination has disclosed the existence, during or as as the end of the fiscal year covered by such financial statements, of any default under any Seagull Document and, if their examination has disclosed such a default, specifying the nature and period of existence thereof; (e) promptly upon transmission thereof, copies of each report on Federal Energy Regulatory Commission Form 2 (or similar report) filed by Seagull with the PUC or any governmental authority succeeding to any of its functions (and, to the extent requested by you or such holder, copies of all regular and periodic reports filed by Seagull with the PUC or any governmental authority succeeding to any of its functions) and copies of all regular and periodic reports filed by Seagull with any securities exchange or with the Securities and Exchange Commission or any governmental authority succeeding to any of its functions; and (f) with reasonable promptness, such other financial data and information as from time to time may be reasonably requested. 5. Inspection. At any and all reasonable times, Seagull will permit any registered holder of at least 10% of the aggregate principal amount of any series of the Notes then outstanding, or any agents or representatives designated by it, to examine all the books of account, records, reports and other papers of Seagull and of the Division (and to make copies and extracts therefrom), to inspect any property of Seagull and of the Division and to discuss the business and affairs of Seagull and of the Division with its and their officers and independent public accountants; provided, however, that Seagull shall have no obligation to provide access to (i) trade secrets, (ii) proprietary information of Seagull or any of its subsidiaries (other than the Division), (iii) any information covered by a confidentiality restriction or covenant entered into in good faith and applicable to Seagull or any of its -8- 127 Subsidiaries (other than the Division) or (iv) any information (including, without limitation, Seagull's shareholder lists) not relating to the Division and not reasonably related to the performance by Seagull of its obligations under the Seagull Documents. 6. Covenants of Seagull. 6.1. Accounting and Reserves. Seagull will (a) maintain a standard and uniform system of accounting and keep proper books of record and account in which full, true and correct entries will be made of its transactions and, separately, transactions of the Division, all in accordance with generally accepted accounting principles or, in the case of the Division, Required Accounting Practice, and (b) set aside on its books and on the books of the Division for each fiscal year all such proper reserves for depreciation, depletion, obsolescence, amortization, bad debts and other purposes in connection with its business and the business of the Division as shall be required by Required Accounting Practice. 6.2. Consolidated Net Tangible Assets. Seagull shall at all times maintain Consolidated Net Tangible Assets in an amount at least equal to $55,000,000. For purposes of this Agreement, Consolidated Net Tangible Assets shall mean, as applied to Seagull and its consolidated subsidiaries at any date, the gross book value of all assets (exclusive of franchises, licenses, permits, patents, patent applications, copyrights, trademarks, trade names, good will, experimental and organizational expense and other like intangibles, treasury shares and unamortized debt discount) properly appearing on a consolidated balance sheet of Seagull and its consolidated subsidiaries as at such date prepared in accordance with generally accepted accounting principles on a consolidated basis after eliminating all intercompany items, less the sum (without duplication) of: (a) the amount included in such assets of any write-up subsequent to December 31, 1984 in the book value of any asset owned by Seagull or any consolidated subsidiary on such date resulting from the revaluation thereof subsequent to such date, or any write-up in excess of cost of any asset acquired subsequent to such date; (b) all reserves for depreciation, depletion, obsolescence and amortization of properties (other than those excluded as hereinabove provided) as shown in such balance sheet and all other proper reserves (other than general contingency reserves and reserves representing mere appropriations of surplus) which in accordance with generally accepted accounting principles should be set aside in connection with the business conducted; (c) all liabilities (including tax and other proper accruals) which would, in accordance with generally accepted accounting principles, be classified as current liabilities of Seagull and its consolidated subsidiaries (including current maturities of Funded Debt); and (d) the amount included in such assets of the excess, if any, of (i) the cost of any assets acquired by Seagull or any of its consolidated subsidiaries subsequent to December 31, 1984 upon the consolidation or merger of any other corporation with or into Seagull or any of its consolidated subsidiaries or upon the acquisition by Seagull or -9- 128 any of its consolidated subsidiaries of all or substantially all of the assets of any other corporation, over (ii) the book value of such assets on the books of such other corporation at the time of such consolidation, merger or acquisition (other than the write-up of the book value of an asset made in accordance with generally accepted accounting principles in connection with the acquisition of such asset). 6.3. Insurance. Seagull will keep or cause to be kept all of its and its Subsidiaries' property, directly relating to or used or useful or intended for use in the business of the Division and of a character usually insured by companies of established reputation similarly situated insured by reputable insurance companies or associations of high standing against loss or damage by fire and such other hazards and risks (including, without limitation, public liability, workmen's compensation and war risks and earthquake risks, if and to the extent war risk and earthquake risk insurance is at the time generally available) as are customarily insured against by companies of established reputation similarly situated, in such amount as such property and business is usually insured by such companies. Seagull will comply with all the terms and conditions of all insurance policies with respect to such property and business or any part thereof and with all requirements of Boards of Underwriters or similar bodies applicable thereto. 6.4. Maintenance of Corporate Existence, Franchises, etc. Restrictions on Business. (a) Seagull will at all times maintain and keep and cause to be maintained and kept in full force and effect its corporate existence, good standing, franchises, rights and privileges as a foreign corporation under the laws of the State of Alaska and its qualification and good standing as a foreign corporation in each jurisdiction wherein the character of the properties owned or the nature of the activities conducted makes such qualification or licensing necessary, except where any such failure to maintain franchises, rights and privileges in such jurisdictions could not be reasonably expected (in the judgment of Seagull's executive officers) to have a material adverse effect on Seagull, the Division or the Company; provided, however, that nothing in this paragraph shall prohibit Seagull from merging or consolidating with any entity (whether as the surviving or resulting corporation or not) to the extent permitted by section 6.10. (b) The Division will not engage in any business other than the construction, ownership, operation and maintenance of systems for the distribution of natural, manufactured or mixed gas, and activities incidental to the foregoing. 6.5. Maintenance and Improvement of Division Property. Seagull will at all times maintain, preserve and keep all of its property used or useful or intended for use in the Division's business and all of the Division's property in proper repair, working order and condition, and make all necessary or appropriate repairs, renewals, replacements, additions, betterments and improvements to such property, so that the efficiency of all such property shall at all times be properly preserved and maintained, provided that Seagull need not make such repair, renewal, replacement, addition, betterment or improvement if Seagull shall in good faith determine that such repair, renewal, replacement, addition, betterment or improvement is not necessary or desirable for the continued efficient and profitable operation of the Division's properties and business. -10- 129 6.6. Restrictions on Liens, etc. Seagull will not directly or indirectly create, assume or suffer to exist any mortgage, lien, pledge, charge or encumbrance on or conditional sale or other title retention arrangement with respect to any property or asset of the Division, whether owned on the date of delivery hereof or subsequently acquired, or upon any income or profits therefrom, other than: (a) the lien of the Intercompany Mortgage; (b) liens of taxes, assessments and governmental charges not yet payable, or payable without penalty so long as so payable, or deposits created in the ordinary course of business of the Division as security for compliance with laws imposing taxes, assessments or governmental charges; (c) liens of taxes, assessments and governmental charges the validity of which are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve or other appropriate provision, if any, as shall be required by Required Accounting Practice shall have been made therefor; (d) carriers', warehousemen's, materialmen's, mechanics', repairmen's, employees' or other similar liens for services arising in the ordinary course of the business of the Division not yet due or being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve or other appropriate provision, if any, as shall be required by Required Accounting Practice shall have been made therefor; (e) liens incurred or deposits made in the ordinary course of the business of the Division in connection with workmen's compensation, unemployment insurance and other social security, or to secure the performance of leases (provided that all such liens incurred and deposits made in connection with such leases do not at any time exceed $250,000), tenders, statutory obligations, surety and appeal bonds, performance and return-of-money bonds and other similar obligations (exclusive of obligations incurred in connection with the borrowing of money or the obtaining of advances or credit); (f) any judgment lien, unless the judgment it secures shall not, within 30 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within 30 days after the expiration of any such stay; (g) leases granted in the ordinary course of the business of the Division or leases to which any property acquired in the ordinary course of the business of the Division is subject; (h) encumbrances (other than to secure the payment of money), easements, rights-of-way, servitudes, permits, reservations, leases and other rights in respect of gravels, minerals, oil, gases or water or in respect of grazing, logging, mining, canals, ditches, reservoirs or the like, conditions, covenants, party wall agreements or other restrictions, or easements for streets, alleys, highways, pipe lines, telephone lines, power -11- 130 lines, railways and other rights-of-way, on, over or in respect of property (other than property used or to be used primarily for compressor stations) owned by Seagull or over which Seagull owns rights-of-way, easements, permits or licenses, provided that such encumbrances, easements, rights-of-way, servitudes, permits, reservations, leases, rights, conditions, covenants, party wall agreements or other restrictions are such that they will not either individually or in the aggregate, if exercised or availed of, interfere materially with the proper use or operation of the property affected thereby for the purpose for which such property is or is to be used, and provided, further, that, in the case of such of the same as relate only to property on, over or in respect of which Seagull owns rights-of-way or easements exclusively for pipe line purposes or locations for regulator stations or other pipe line facilities (other than compressor stations), Seagull has power under eminent domain or similar statutes to remove the same; (i) rights reserved to or vested in any municipality or public authority to control or regulate any property of Seagull or to use such property in any manner which does not materially impair the use of such property for the purposes for which it is held; (j) obligations or duties, affecting the property of Seagull, to any municipality or public authority with respect to any certificate of public convenience or necessity, franchise, grant, license or permit which do not materially impair the use of such property for the purposes for which it is held; (k) zoning laws and ordinances; (l) irregularities in or deficiencies of title to any rights-of-way, licenses or permits for pipe lines, telephone lines, power lines, water lines and/or appurtenances thereto or other improvements thereon, and to any real estate used or to be used primarily for right-of-way purposes or for regulator stations or other pipe line facilities (other than compressor stations), provided that Seagull shall have obtained from the apparent owner of the land or estate covered by any such right-of-way, license or permit, and shall hold as an asset of the Division a sufficient right, by the terms of the instrument granting such right-of-way, license or permit to the use thereof for the construction, operation or maintenance of the lines, appurtenances or improvements for which the same is used or is to be used, and provided, further, that Seagull has power under eminent domain or similar statutes to remove such irregularities or deficiencies; (m) reservations and other matters relating to titles to leases and leasehold interests in oil and gas properties and the lands covered thereby, if such reservations and other matters do not, in the aggregate, materially affect the marketability of the title thereto, and do not materially impair the use of such leases or leasehold interests for the purposes for which they are held or the value of the interest therein; (n) liens and other encumbrances incurred in connection with Indebtedness of Seagull not in excess of $10,000,000 at any time outstanding issued by a municipality or development corporation to finance the acquisition and construction of the property subject to such lien to be used by the Company or a Subsidiary thereof, the interest on which is exempt from federal income tax under section 103(b) of the Code; and -12- 131 (o) purchase money mortgages, liens or security interests in respect of property held as an asset of the Division either acquired by Seagull or upon which Seagull is constructing improvements after the date of this Agreement, or mortgages, liens or security interests existing in respect of such property at the time of acquisition thereof, securing Indebtedness of Seagull, provided that (i) no such mortgage, lien or security interest shall extend to or cover any other property, or secure any other Indebtedness of Seagull, (ii) the aggregate principal amount of all Indebtedness of Seagull secured by all such mortgages, liens and security interest shall not exceed $2,500,000 at any time outstanding, and (iii) the aggregate principal amount of all Indebtedness secured by all such mortgages, liens or other security interests in respect of any such property shall not exceed 90% of the cost or fair market value (as determined by Seagull in good faith), whichever shall be lower, of such property at the time of the acquisition thereof by Seagull. Seagull will not sign or file in any state or other jurisdiction a financing statement under the Uniform Commercial Code with respect to any such property or asset or sign any security agreement with respect to any such property or asset authorizing any secured party thereunder to file any such financing statement, except, in any such case, a financing statement filed or to be filed to perfect or protect a security interest which Seagull is entitled to create, assume or incur, or permit to exist, under this section 6.6. 6.7. Recordation of Intercompany Mortgage. Seagull, at its expense, will at all times cause the Intercompany Mortgage and any instruments amendatory thereof or supplemental thereto and any instruments of assignment thereof (and any appropriate financing statements or other instruments and continuations thereof with respect to any thereof) to be recorded, registered and filed and to be kept recorded, registered and filed in such manner and in such places, and will pay all such recording, registration, filing fees and other charges, and will comply with all such statutes and regulations as may be required by law in order to establish, preserve, perfect and protect the lien of the Intercompany Mortgage as a valid, direct first mortgage lien on and first priority perfected security interest in the property subject thereto, subject only to any encumbrances permitted thereby. Seagull will pay or cause to be paid all taxes (including interest and penalties) at any time payable in connection with the filing and recording of the Intercompany Mortgage and any and all supplements and amendments thereto. Seagull, at its expense, will execute and deliver to the Company (and will record) an instrument supplemental to the Intercompany Mortgage, whenever such an instrument is necessary or desirable under applicable law to subject to the lien of the Intercompany Mortgage all right, title and interest of the Division in and to all property required by the Intercompany Mortgage to be subject to the lien thereof and acquired by the Division since the date of the Intercompany Mortgage or the date of the most recent supplemental instrument so subjecting property to the lien thereof, whichever is later. Seagull, at its expense, will furnish to the holders of the Notes upon request from any holder of at least 10% of the aggregate principal amount of any Series of Notes then outstanding, an opinion of counsel reasonably satisfactory to you specifying the action taken by Seagull to comply with this section 6.7 since the date of the most recent opinion furnished pursuant to this section 6.7 (or, if no opinion has been so furnished, since the date hereof), stating that in the opinion of such counsel such action has been duly taken and stating that no other action is at the time required to be taken pursuant to this section 6.7 or if any such action is then required, specifying the same; provided, however, -13- 132 that in no event shall Seagull be required to furnish more than one such opinion of counsel during any 12-month period. 6.8. Performance of Franchises; Extension, Amendment, etc. of Division Certificate. (a) Seagull will at all times perform and observe all of the material covenants, agreements, terms, conditions and limitations contained in the Division Certificate and all other franchises for the distribution of gas at the time held by the Division or held by Seagull and directly relating to or used or useful or intended for use in the operations of the Division, and do all things necessary to keep unimpaired all of Seagull's rights thereunder and to prevent any default by Seagull thereunder or any forfeiture or impairment thereof. (b) Seagull will not cancel or terminate, or permit the cancellation or termination of, or default under, or make or agree to any amendment, modification or alteration which would result in a material adverse change in the rights of Seagull under the Division Certificate. 6.9. Gas Sale Contract. Seagull will not assign, pledge, mortgage or otherwise hypothecate, or permit the assignment, pledge, mortgage or hypothecation of, any of its right, title or interest in, to or under the Gas Sale Contract. Seagull will at all times perform and observe all the covenants, agreements, terms, conditions and limitations applicable to it contained in the Gas Sale Contract and will do all things necessary to keep unimpaired all its rights under the Gas Sale Contract and to prevent any default thereunder or any forfeiture or impairment thereof; and, without limitation, Seagull, subject to delays resulting from disputes in good faith and to adverse claims of independent third parties, will promptly make the payments to the Company specified in the Gas Sale Contract. Seagull will not amend, modify, supplement, surrender, cancel, terminate or replace or in any way waive any covenant, agreement, term, condition or limitation of the Gas Sale Contract, except that Seagull may amend, modify or supplement the Gas Sale Contract if such amendment, modification or supplement does not contravene the provisions of Article IV or Article V (as amended on the date hereof pursuant to section 3.5 of the New Note Agreements) and if, in the good faith judgment of Seagull, such amendment, modification or supplement is desirable in, or will not have a material adverse effect on, the business of the Division and will not be in any way prejudicial to the holders of the Notes. 6.10. Sale, Merger and Consolidation. Seagull will not directly or indirectly sell, transfer or otherwise dispose of all or substantially all of its properties and assets, or merge into or consolidate with any other corporation, or permit any other corporation to consolidate with or merge into it, unless (a) such sale of properties and assets, or such merger, as the case may be, effects the transfer of the properties and assets of the Division and all of the then issued and outstanding Common Stock of the Company as a unit to the acquiring or surviving Person or results in the retention of the same, as a unit, by Seagull, (b) if such properties and assets are so transferred, the acquiring or surviving Person shall be a corporation incorporated under the laws of the United States of America or any state thereof and (if other than Seagull) shall expressly assume in writing all obligations of Seagull under the Seagull Documents and (c) immediately after giving effect to such action (and, if applicable, such assumption) no default shall exist under any Seagull Document, provided that no such sale, transfer or other disposition of all or substantially all of the properties and assets of Seagull shall release Seagull from any -14- 133 of its obligations hereunder or under the Intercompany Notes or the Intercompany Mortgage. Except as provided in the prior sentence, Seagull will not directly or indirectly sell, transfer or otherwise dispose of all or substantially all of the properties and assets of the Division. 7. Costs and Expenses. Seagull will pay (or provide reimbursement for) all costs and expenses (including, without limitation, attorneys' fees and expenses) reasonably incurred by or on behalf of any holder of the Notes in enforcing the obligation of Seagull under this Agreement or in connection with any amendment, modification or waiver of this Agreement. 8. Notices etc. Any notice or other communication hereunder shall be in writing and shall be deemed to have been properly given when a single copy thereof shall have been delivered or mailed by first class registered or certified mail, postage prepaid, addressed (a) if to the holder of any Note at the last address of such holder appearing on the registration books of the Company maintained pursuant to the Note Agreements, or at such other address as such holder shall have furnished to the Company and Seagull in writing, or (b) if to the Company, at 3000 Spenard Road, Anchorage, Alaska, or at such other address as the Company shall have furnished to Seagull and each holder of a Note in writing, with a copy to Seagull, or (c) if to Seagull, at 1001 Fannin, Suite 1700, Houston, Texas 77002, or at such other address as Seagull shall furnish to the Company and each holder of a Note in writing. 9. Miscellaneous. This Agreement may be changed, waived, discharged or terminated only by an instrument in writing signed by the Company, Seagull and, so long as any of the Notes remain unpaid, by the holders of 66 2/3% in principal amount of the Notes at the time outstanding. Any change, waiver, discharge or termination pursuant to the preceding sentence shall apply equally to all holders of the Notes and shall be binding upon them, upon each future holder of any Note and upon Seagull and the Company. This Agreement shall be binding upon the respective successors and assigns of the Company and Seagull and shall inure to the benefit of you and each other holder of Notes and shall be enforceable by each of you, so long as you shall hold any Notes, and by each other holder of at least 10% in principal amount of any Series of the Notes at the time outstanding. This Agreement shall be construed in accordance with and governed by the laws of the State of New York. This Agreement embodies the entire agreement and understanding between you and Seagull and supersedes all prior agreements and understandings relating to the subject matter hereof. The headings in this Agreement are for the purpose of reference only and shall not limit or otherwise affect the meaning hereof. Nothing contained herein shall be construed to constitute a guarantee by Seagull of the Notes or of the payment by the Company of any principal, premium or interest due or to become due thereon. This Agreement may be executed in any number of counterparts, each of which is an original, but all of which shall constitute one instrument. -15- 134 If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterparts of this letter, whereupon this letter shall become a binding agreement between you and Seagull. Please then return one of such signed counterparts to Seagull. Very truly yours, SEAGULL ENERGY CORPORATION By /s/ Barry J. Galt Title: Chairman and Chief Executive Officer The Company hereby acknowledges receipt of this Inducement Agreement and agrees to perform and observe all the provisions therein relating to the Company. ALASKA PIPELINE COMPANY By /s/ Bill B. Hickman Executive Vice President The foregoing Agreement is hereby agreed to as of the date hereof. THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES By /s/ John D. Miller Title: Vice President THE TRAVELERS INSURANCE COMPANY By /s/ Teresa M. Torrey Title: Investment Officer THE TRAVELERS LIFE INSURANCE COMPANY By /s/ Teresa M. Torrey Title: Investment Officer -16- EX-4.10 3 CREDIT AGREEMENT, U.S. $175 MIL. CREDIT FACILITY 1 EXHIBIT 4.10 FOURTH AMENDMENT TO CREDIT AGREEMENT THIS FOURTH AMENDMENT TO CREDIT AGREEMENT ("Fourth Amendment") effective as of January 12, 1996 (the "Fourth Amendment Effective Date") is made and entered into by and among SEAGULL ENERGY CANADA LTD. (the "Borrower"), a corporation duly organized and validly existing under the laws of the Province of Alberta, Canada, the banking institutions from time to time a party to the Credit Agreement (as hereinafter defined) as amended by this Fourth Amendment (each, together with its successors and assigns, a "Bank" and collectively, the "Banks"), CHEMICAL BANK OF CANADA, as arranger and as administrative agent for the Banks (in such capacity, the "Administrative Agent"), THE BANK OF NOVA SCOTIA, as paying agent and co-agent for the Banks (in such capacity, the "Paying Agent"), and CANADIAN IMPERIAL BANK OF COMMERCE (in such capacity, the "Co-Agent"), as co-agent for the Banks. RECITALS WHEREAS, the Borrower, the Administrative Agent, the Paying Agent, the Co-Agent and the Banks are parties to a Credit Agreement dated as of December 30, 1993, as amended by the First Amendment to Credit Agreement dated as of May 24, 1994, the Second Amendment to Credit Agreement dated as of June 30, 1994 and the Third Amendment to Credit Agreement dated as of March 10, 1995 (collectively, the "Credit Agreement"); and WHEREAS, the Borrower, the Administrative Agent, the Paying Agent, the Co-Agent and the Banks have agreed, on the terms and conditions herein set forth, that the Credit Agreement be amended in certain respects; NOW, THEREFORE, IT IS AGREED: Section 1. Definitions. Terms used herein which are defined in the Credit Agreement shall have the same meanings when used herein unless otherwise provided herein. Section 2. Waiver of Default. The Administrative Agent, the Paying Agent, the Co-Agent and the Banks hereby waive any default occurring before the effectiveness of this Fourth Amendment and resulting from a breach of Section 10.2 of the Credit Agreement with respect to liens held by third parties relating to any margin account balances of the Parent or any of its Subsidiaries with respect to exchange traded contracts for the delivery of natural gas, where such margin account balances exceed in the aggregate, and together with debt secured by liens not otherwise permitted under Section 10.2 of the Credit Agreement, U.S. $3,000,000. Section 3. Amendments to the Credit Agreement. On and after the Fourth Amendment Effective Date, the Credit Agreement shall be amended as follows: Section 10.2 of the Credit Agreement is hereby amended by deleting the word "and" following the semi-colon at the end of clause (x), changing the period (.) at the end of clause (y) to a semi-colon (;) and inserting the word "and" after such semi-colon and by adding a new clause (z), such clause (z) to read in its entirety as follows: 2 (z) Liens (i) granted to or existing in favor of third parties on margin accounts of the Parent or any of its Subsidiaries relating to exchange traded contracts for the delivery of natural gas pursuant to which the Parent or any such Subsidiary intends to take actual delivery of such natural gas within forty (40) days from the then current date in the ordinary course of business and not for speculative purposes, and (ii) on margin accounts of the Parent or any of its Subsidiaries relating to exchange traded contracts for the delivery of natural gas, provided, however, the aggregate balance of the margin accounts subject to the Liens permitted by this clause (ii) shall not exceed from time to time U.S. $10,000,000. Section 4. Limitations. The amendments set forth herein are limited precisely as written and shall not be deemed to (a) be a consent to, or waiver or modification of, any other term or condition of the Credit Agreement or any of the other Loan Documents (except as specifically set forth in Section 2 of this Fourth Amendment), or (b) except as expressly set forth herein, prejudice any right or rights which the Banks may now have or may have in the future under or in connection with the Credit Agreement, the Loan Documents or any of the other documents referred to therein. Except as expressly modified hereby or by express written amendments thereof, the terms and provisions of the Credit Agreement, the Notes, and any other Loan Documents or any other documents or instruments executed in connection with any of the foregoing are and shall remain in full force and effect. In the event of a conflict between this Fourth Amendment and any of the foregoing documents, the terms of this Fourth Amendment shall be controlling. Section 5. Payment of Expenses. The Borrower agrees, whether or not the transactions hereby contemplated shall be consummated, to reimburse and save the Agents harmless from and against liability for the payment of all reasonable substantiated out-of-pocket costs and expenses arising in connection with the preparation, execution, delivery, amendment, modification, waiver and enforcement of, or the preservation of any rights under this Fourth Amendment, including, without limitation, the reasonable fees and expenses of any local or other counsel for the Administrative Agent, and all stamp taxes (including interest and penalties, if any), recording taxes and fees, filing taxes and fees, and other charges which may be payable in respect of, or in respect of any modification of, the Credit Agreement and the other Loan Documents. The provisions of this Section shall survive the termination of the Credit Agreement and the repayment of the Loans. Section 6. Governing Law. THIS FOURTH AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS (OTHER THAN THE CONFLICT OF LAWS RULES) OF THE PROVINCE OF ALBERTA AND OF CANADA FROM TIME TO TIME IN EFFECT. Section 7. Descriptive Headings, etc. The descriptive headings of the several Sections of this Fourth Amendment are inserted for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. Section 8. Entire Agreement. This Fourth Amendment and the documents referred to herein represent the entire understanding of the parties hereto regarding the subject matter hereof and supersede all prior and contemporaneous oral and written agreements of the parties hereto with respect to the subject matter hereof, including, without limitation, any commitment letters regarding the transactions contemplated by this Fourth Amendment. 2 3 Section 9. Counterparts. This Fourth Amendment may be executed in any number of counterparts and by different parties on separate counterparts and all of such counterparts shall together constitute one and the same instrument. Section 10. Amended Definitions. As used in the Credit agreement (including all Exhibits thereto) and all other instruments and documents executed in connection therewith, on and subsequent to the Fourth Amendment Effective Date the term "Agreement" shall mean the Credit Agreement as amended by this Fourth Amendment. IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to be duly executed and delivered by their respective duly authorized offices and effective as of the date first above written. SEAGULL ENERGY CANADA LTD., a Texas corporation By: /s/ ROBERT W. SHOWER ---------------------------- Robert W. Shower Vice Chairman and Chief Financial Officer 3 4 CHEMICAL BANK OF CANADA individually and as Arranger and as Administrative Agent By: /s/ DAVID MCGORMAN --------------------------------- Name: David McGorman Title: Vice President By: /s/ DALE G. BLUE --------------------------------- Name: Dale G. Blue Title: THE BANK OF NOVA SCOTIA, as Paying Agent, as Co-Agent and as a Bank By: --------------------------------- Name: Title: By: --------------------------------- Name: Title: CANADIAN IMPERIAL BANK OF COMMERCE, as Co-Agent and as a Bank By: /s/ CAROL D. ROGERS --------------------------------- Name: Carol D. Rogers Title: Director 4 5 ABN AMRO BANK CANADA By: /s/ ROBERT DUFFIELD --------------------------------- Name: Robert Duffield Title: Vice President By: /s/ P.K. CHAN --------------------------------- Name: P.K. Chan Title: Vice President, Credit PARIBAS BANK OF CANADA By: /s/ JOHN PLANT --------------------------------- Name: John Plant Title: Vice President By: --------------------------------- Name: Title: MELLON BANK CANADA By: /s/ J.L. CAVANAUGH --------------------------------- Name: J.L. Cavanaugh Title: Vice President 5 6 NBD BANK, CANADA By: /s/ J.S. BEADLE ----------------------------------- Name: J.A. Beadle Title: Assistant Vice President By: /s/ J.A. HYNES ----------------------------------- Name: J.A. Hynes III Title: Vice President SOCIETE GENERALE (CANADA) By ----------------------------------- Name: Title: THE BANK OF TOKYO CANADA By: ----------------------------------- Name: Title: CREDIT LYONNAIS CANADA By: ----------------------------------- Name: Title: 6 7 BANK OF MONTREAL By: /s/ ROBERT J. ROBERTS ----------------------------------- Name: Robert J. Roberts Title: Director, U.S. Corporate Banking 8 The undersigned hereby joins in the execution of this Fourth Amendment to evidence its consent hereto and its acknowledgment that the Guarantee shall continue to apply to the Credit Agreement, as amended hereby. SEAGULL ENERGY CORPORATION By: /s/ ROBERT W. SHOWER --------------------------------- Robert W. Shower Executive Vice President and Chief Financial Officer 7 EX-4.17 4 CREDIT AGRMNT., $725 MIL. COMPETITIVE BID FACILITY 1 EXHIBIT 4.17 THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT TO CREDIT AGREEMENT ("Third Amendment") effective as of January 12, 1996 (the "Third Amendment Effective Date") is made and entered into by and among SEAGULL ENERGY CORPORATION (the "Borrower"), a Texas corporation, the banking institutions from time to time a party to the Credit Agreement (as hereinafter defined) as amended by this Third Amendment (each, together with its successors and assigns, a "Bank" and collectively, the "Banks"), TEXAS COMMERCE BANK NATIONAL ASSOCIATION, individually and as administrative agent for the Banks (in such capacity, the "Administrative Agent") and CHEMICAL BANK, as auction agent. RECITALS WHEREAS, the Borrower, the Administrative Agent and the Banks are parties to a Credit Agreement dated as of May 24, 1994, as amended pursuant to a First Amendment to Credit Agreement dated as of June 30, 1994 and a Second Amendment to Credit Agreement dated as of March 10, 1995 (collectively, the "Credit Agreement"); and WHEREAS, the Borrower, the Administrative Agent and the Banks have agreed, on the terms and conditions herein set forth, that the Credit Agreement be amended in certain respects; NOW, THEREFORE, IT IS AGREED: Section 1. Definitions. Terms used herein which are defined in the Credit Agreement shall have the same meanings when used herein unless otherwise provided herein. Section 2. Waiver of Default. The Administrative Agent and the Banks hereby waive any default occurring before the effectiveness of this Third Amendment and resulting from a breach of Section 10.2 of the Credit Agreement by the Borrower with respect to liens held by third parties relating to any margin account balances of the Borrower or any of its Subsidiaries with respect to exchange traded contracts for the delivery of natural gas, where such margin account balances exceed in the aggregate, and together with debt secured by liens not otherwise permitted under Section 10.2 of the Credit Agreement, $3,000,000. Section 3. Amendments to the Credit Agreement. On and after the Third Amendment Effective Date, the Credit Agreement shall be amended as follows: Section 10.2 of the Credit Agreement is hereby amended by deleting the word "and" following the semi-colon at the end of clause (y), changing the period (.) at the end of clause (z) to a semi-colon (;) and inserting the word "and" after such semi-colon and by adding a new clause (aa), such clause (aa) to read in its entirety as follows: (aa) Liens (i) granted to or existing in favor of third parties on margin accounts of the Company or any of its Subsidiaries relating to exchange traded contracts for the delivery of natural gas pursuant to which the Company or any such Subsidiary intends to take actual delivery of such natural gas within forty (40) days from the then current date in the ordinary course of business and not for speculative 2 purposes, and (ii) on margin accounts of the Company or any of its Subsidiaries relating to exchange traded contracts for the delivery of natural gas, provided, however, the aggregate balance of the margin accounts subject to the Liens permitted by this clause (ii) shall not exceed from time to time $10,000,000. Section 4. Limitations. The amendments set forth herein are limited precisely as written and shall not be deemed to (a) be a consent to, or waiver or modification of, any other term or condition of the Credit Agreement or any of the other Loan Documents (other than as specifically set forth in Section 2 of this Third Amendment), or (b) except as expressly set forth herein, prejudice any right or rights which the Banks may now have or may have in the future under or in connection with the Credit Agreement, the Loan Documents or any of the other documents referred to therein. Except as expressly modified hereby or by express written amendments thereof, the terms and provisions of the Credit Agreement, the Notes, and any other Loan Documents or any other documents or instruments executed in connection with any of the foregoing are and shall remain in full force and effect. In the event of a conflict between this Third Amendment and any of the foregoing documents, the terms of this Third Amendment shall be controlling. Section 5. Payment of Expenses. The Borrower agrees, whether or not the transactions hereby contemplated shall be consummated, to reimburse and save the Administrative Agent harmless from and against liability for the payment of all reasonable substantiated out-of-pocket costs and expenses arising in connection with the preparation, execution, delivery, amendment, modification, waiver and enforcement of, or the preservation of any rights under this Third Amendment, including, without limitation, the reasonable fees and expenses of any local or other counsel for the Administrative Agent, and all stamp taxes (including interest and penalties, if any), recording taxes and fees, filing taxes and fees, and other charges which may be payable in respect of, or in respect of any modification of, the Credit Agreement and the other Loan Documents. The provisions of this Section shall survive the termination of the Credit Agreement and the repayment of the Loans. Section 6. Governing Law. This Third Amendment and the rights and obligations of the parties hereunder and under the Credit Agreement shall be construed in accordance with and be governed by the laws of the State of Texas and the United States of America. Section 7. Descriptive Headings, etc. The descriptive headings of the several Sections of this Third Amendment are inserted for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. Section 8. Entire Agreement. This Third Amendment and the documents referred to herein represent the entire understanding of the parties hereto regarding the subject matter hereof and supersede all prior and contemporaneous oral and written agreements of the parties hereto with respect to the subject matter hereof, including, without limitation, any commitment letters regarding the transactions contemplated by this Third Amendment. Section 9. Counterparts. This Third Amendment may be executed in any number of counterparts and by different parties on separate counterparts and all of such counterparts shall together constitute one and the same instrument. 2 3 Section 10. Amended Definitions. As used in the Credit agreement (including all Exhibits thereto) and all other instruments and documents executed in connection therewith, on and subsequent to the Third Amendment Effective Date the term "Agreement" shall mean the Credit Agreement as amended by this Third Amendment. IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be duly executed and delivered by their respective duly authorized offices effective as of the date first above written. NOTICE PURSUANT TO TEX. BUS. & COMM. CODE SS.26.02 THIS THIRD AMENDMENT AND OTHER LOAN DOCUMENTS EXECUTED BY ANY OF THE PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT AND REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENT BETWEEN THE PARTIES. SEAGULL ENERGY CORPORATION, a Texas corporation By: /s/ ROBERT W. SHOWER -------------------------------- Robert W. Shower Executive Vice President and Chief Financial Officer 3 4 CHEMICAL BANK, as Auction Agent By: /s/ RONALD POTTER ---------------------------------- Name: Ronald Potter Title: Managing Director Address for Notices: 140 East 45th 29th Floor New York, New York 10017 Attention: Ms. Terri Reilly 4 5 TEXAS COMMERCE BANK NATIONAL ASSOCIATION as Administrative Agent and as a Bank By: /s/ SCOTT RICHARDSON ----------------------------------- Name: Scott Richardson Title: Vice President Address for Notices: 712 Main Street Houston, Texas 77002 Attention: Manager, Energy Division 5 6 THE CHASE MANHATTAN BANK, N.A. By: /s/ BETTYLOU J. ROBERT ---------------------------------- Name: Bettylou J. Robert Title: Vice President Address for Notices: 1221 McKinney, Suite 3000 Houston, Texas 77010 Attention: Scott Porter Vice President 6 7 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ PHILIP W. MCNEAL ----------------------------------- Name: Philip W. McNeal Title: Vice President Address for Notices: 60 Wall Street New York, New York, 10260-0060 Attention: Loan Department 7 8 NATIONSBANK OF TEXAS, N.A. By: /s/ JO A. TAMALIS ---------------------------------- Name: Jo A. Tamalis Title: Senior Vice President Address for Notices: 700 Louisiana Street Houston, Texas 77002 Attention: Jo A. Tamalis Senior Vice President 8 9 THE FIRST NATIONAL BANK OF BOSTON By: /s/ GEORGE W. PASSELA ---------------------------------- Name: George W. Passela Title: Managing Director Address for Notices: 100 Federal Street Energy & Utilities 01-15-04 Boston, Massachusetts 02110 Attention: George W. Passela Managing Director 9 10 ABN AMRO BANK N.V., HOUSTON AGENCY ABN AMBRO NORTH AMERICA, INC. as Agent By: /s/ CHERYL I. LIPSHUTZ ----------------------------------- Name: Cheryl I. Lipshutz Title: Vice President and Director By: /s/ JONATHAN C. HOMEYER ----------------------------------- Name: Jonathan C. Homeyer Title: Officer Address for Notices: Three Riverway, Suite 1600 Houston, Texas 70056 Attention: Ms. Cheryl I. Lipshutz 10 11 THE BANK OF NEW YORK By: /s/ RENEE BIJLANI ---------------------------------- Name: Renee Bijlani Title: Vice President Address for Notices: One Wall Street New York, New York 10296 Attention: Mr. Andrew G. Mathews Vice President 11 12 BANQUE PARIBAS HOUSTON AGENCY By: /s/ MARIAN LIVINGSTON ----------------------------------- Name: Marion Livingston Title: Vice President By: /s/ BRIAN MALONE ----------------------------------- Name: Brian Malone Title: Vice President Address for Notices: 1200 Smith Street, Suite 3100 Houston, Texas 77002 Attention: Barton D. Shouest Group Vice President 12 13 CREDIT LYONNAIS NEW YORK BRANCH By: /s/ PASCAL POUPELLE ----------------------------------- Name: Pascal Poupelle Title: Senior Vice President Address for Notices: c/o Credit Lyonnais Representative Office 1000 Louisiana, Suite 5360 Houston, Texas 77002 Atention: Mr. A. David Dodd 13 14 THE FUJI BANK, LIMITED HOUSTON AGENCY By: /s/ SOICHI YOSHIDA ---------------------------------- Name: Soichi Yoshida Title: Vice President And Senior Manager Address for Notices: 909 Fannin, Suite 2800 Houston, Texas 77010 Attention: Mr. Jacques Azagury Assistant Vice President 14 15 NBD BANK, N.A. By: /s/ GEORGE R. SCHANZ ---------------------------------- Name: George R. Schanz Title: Vice President Address for Notices: 611 Woodward Avenue Detroit, Michigan 48226 Attention: Mr. George R. Shanz Vice President 15 16 SOCIETE GENERALE, SOUTHWEST AGENCY By: /s/ RICHARD A. ERBERT ----------------------------------- Name: Richard A. Erbert Title: Vice President Address for Notices: 4800 Trammell Crow Center 2001 Ross Avenue Dallas, Texas 75201 Attention: Mr. Ralph Saheb Vice President With a copy to: 1111 Bagby, Suite 2020 Houston, Texas 77002 Attention: Mr. Richard Erbert Vice President 16 17 THE BANK OF TOKYO, LTD., DALLAS AGENCY By: /s/ JOHN MCINTYRE --------------------------------- Name: J. Mcintyre Title: Vice President Address for Notices: 909 Fannin, Suite 1104 Two Houston Center Houston, Texas 77010 Attention: Mr. John M. McIntyre Vice President 17 18 BANK OF SCOTLAND By: /s/ CATHERINE M. ONIFFEREY ---------------------------------- Name: Catherine M. Onifferey Title: Vice President Address for Notices: 380 Madison Avenue New York, New York 10017 Attention: Mr. Joseph Fratus 18 19 CAISSE NATIONALE DE CREDIT AGRICOLE By: /s/ DAVID BOUHL ---------------------------------- Name: David Bouhl, F.v.p. Title: Head Of Corporate Banking Chicago Address for Notices: 600 Travis, Suite 2340 Houston, Texas 77002 Attention: Brian Knezeak Vice President 19 20 CHRISTIANIA BANK OG KREDITKASSE By: /s/ JAHN O. ROISING ---------------------------------- Name: Jahn O. Roising Title: First Vice President By: /s/ CARL-PETER SVENDSEN ---------------------------------- Name: Carl-Peter Svendsen Title: First Vice President Address for Notices: 11 West 42nd Street, 7th Floor New York, New York 10036 Attention: Mr. Jahn Roising First Vice President 20 21 DEN NORSKE BANK AS By: /s/ BYRON L. COOLEY ---------------------------------- Name: Byron L. Cooley Title: First Vice President By: /s/ NILS FYKSE ---------------------------------- Name: Nils Fykse Title: Vice President Address for Notices: 333 Clay Street Suite 4890 Houston, Texas 77002 Attention: Mr. Byron L. Cooley First Vice President 21 22 MIDLAND BANK PLC, NEW YORK BRANCH By: /s/ DOUGLAS R. LIFTMAN ----------------------------------- Name: Douglas R. Liftman Title: Director Address for Notices: 140 Broadway New York, New York 1000 Attention: Mr. Doug Liftman Director 22 23 FIRST INTERSTATE BANK OF TEXAS, N.A. By: /s/ COLLIE C. MICHAELS ---------------------------------- Name: Collie C. Michaels Title: Vice President Address for Notices: 1000 Louisiana 3rd Floor/MS #156 Houston, Texas 77002 Attention: Ms. Collie Michaels Vice President 23 24 THE BANK OF NOVA SCOTIA By: /s/ F. C. H. ASHBY ---------------------------------- Name: F.C.H. Ashby Title: Senior Manager Loan Operations Address for Notices: Suite 3000, 1100 Louisiana Houston, Texas 77002 Attention: Mr. Mark Ammerman With copies to: 600 Peachtree Street, N.E. Suite 2700 Atlanta, Georgia 30308 Attention: Ms. Lauren Bianchi 24 25 CIBC INC. By: /s/ GARY C. GASKILL ---------------------------------- Name: Gary C. Gaskill Title: Vice President Address for Notices: Two Pac s West 2727 Paces Ferry Road Suite 1200 Atlanta, Georgia 30339 Attention: Loan Operations With a copy to: Canadian Imperial Bank of Commerce Two Houston Center 909 Fannin Street Houston, Texas 77010 Attention: Mr. Brian Swinford Vice President 25 26 CITIBANK, N.A. By: /s/ AREZOO JAFARI ---------------------------------- Name: Arezoo Jafari Title: Assistant Vice President Address for Notices: 1200 Smith Street 20th Floor Houston, Texas 77002 Attention: Ms. Lydia Junek 26 27 MELLON BANK By: /s/ E. MARC CUENOD, JR. ---------------------------------- Name: E. Marc Cuenod, Jr. Title: First Vice President Address for Notices: Mellon Bank One Mellon Bank Center Room 151-4425 Pittsburgh, Pennsylvania 15258-0001 Attention: Mr. A. Gary Chace Senior Vice President Energy & Utilities Group With a copy to: Mellon Financial Services 1100 Louisiana, 36th Floor Houston, Texas 77002-5210 Attention: Mr. Richard Gould 27 28 FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: /s/ MICHAEL J. KOLOSOWSKY ---------------------------------- Name: Michael J. Kolosowsky Title: Vice President Address for Notices: First Union Corporation of North Carolina 1001 Fannin, Suite 2255 Houston, Texas 77002 Attention: Mr. Jay M. Chernosky Vice President 28 29 BANK OF MONTREAL By: /S/ J.B. WHITMORE ---------------------------------- Name: J.S. Whitmore Title: Director Address for Notices: 700 Louisiana, Suite 4400 Houston, Texas 77002 Attention: Mr. Robert L. Roberts Director, U.S. Corporate Banking 29 EX-10.1 5 THRIFT PLAN, AS AMENDED & RESTATED AMEND. #1-6 1 EXHIBIT 10.1 SEAGULL THRIFT PLAN Effective Date: January 1, 1989 2 TABLE OF CONTENTS
ARTICLE PAGE - ------- ---- I - DEFINITIONS AND CONSTRUCTION ............................... I-1 II - PARTICIPATION .............................................. II-1 III - CONTRIBUTIONS .............................................. III-1 IV - ALLOCATIONS ................................................ IV-1 V - INVESTMENT OF FUNDS ........................................ V-1 VI - RETIREMENT BENEFITS ........................................ VI-1 VII - DISABILITY BENEFITS ........................................ VII-1 VIII - SEVERANCE BENEFITS ......................................... VIII-1 IX - DEATH BENEFITS ............................................. IX-1 X - TIME AND MANNER OF PAYMENT OF BENEFITS ..................... X-1 XI - WITHDRAWALS AND LOANS ...................................... XI-1 XII - ADMINISTRATION OF PLAN ..................................... XII-1 XIII - ADMINISTRATION OF FUNDS .................................... XIII-1 XIV - TRUSTEE'S POWERS AND DUTIES ................................ XIV-1 XV - FIDUCIARY PROVISIONS ....................................... XV-1 XVI - AMENDMENTS ................................................. XVI-1 XVII - DISCONTINUANCE OF CONTRIBUTIONS, TERMINATION AND MERGER OR CONSOLIDATION ................. XVII-1 XVIII - OTHER EMPLOYING COMPANIES .................................. XVIII-1 XIX - MISCELLANEOUS .............................................. XIX-1 XX - TOP-HEAVY STATUS ........................................... XX-1 XXI - SECURITIES REGULATIONS ..................................... XXI-1
(i) 3 SEAGULL THRIFT PLAN THIS AGREEMENT AND DECLARATION OF TRUST is by and between SEAGULL ENERGY CORPORATION, a Texas corporation, hereinafter referred to as the "Company," and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, Houston, Texas, a national banking association, hereinafter referred to as "Trustee." W I T N E S S E T H : WHEREAS, Company has heretofore adopted the SEAGULL THRIFT PLAN, hereinafter referred to as the "Plan," for the benefit of its employees; and WHEREAS, the Company has heretofore entered into a trust agreement with the Trustee establishing a trust to hold and invest contributions made under the Plan and from which benefits have been distributed under the Plan; WHEREAS, the Company desires to restate the Plan and to amend the Plan in several respects, intending thereby to provide an uninterrupted and continuing program of benefits and to incorporate the trust agreement into the Plan document; NOW THEREFORE, the Plan and the trust agreement are hereby restated in their entirety as follows with no interruption in time, effective as of January 1, 1989, except as otherwise indicated herein: (ii) 4 I. DEFINITIONS AND CONSTRUCTION 1.01 DEFINITIONS. Where the following words and phrases appear in the Plan, they shall have the respective meanings set forth below, unless their context clearly indicates to the contrary. (1) ACCOUNTS: The total of the amounts allocated to a Member's Cash or Deferred Account, Company Contribution Account and Member Contribution Account. (2) ACT: The "Employee Retirement Income Security Act of 1974, as amended." (3) BENEFIT COMMENCEMENT DATE: With respect to each Member or beneficiary, the date such Member's or beneficiary's benefit is paid to him from the Trust Fund. (4) CASH OR DEFERRED ACCOUNT: An individual account for each Member to which is credited the Cash or Deferred Contributions made by the Company on such Member's behalf and the Company Discretionary Contributions, if any, made on such Member's behalf pursuant to Section 3.03(b) and which is credited (or debited) for such account's allocation of net income (or net loss) of the Trust Fund. (5) CASH OR DEFERRED CONTRIBUTIONS: Contributions made to the Plan by the Company on a Member's behalf in accordance with the Member's elections to defer Compensation under the Plan's qualified cash or deferred arrangement as described in Section 3.01. (6) CODE: The Internal Revenue Code of 1986, as amended. (7) COMMENCEMENT DATE: The date on which an Employee first performs an Hour of Service. (8) COMMITTEE: The administrative committee appointed by the Directors to administer the Plan. (9) COMPANY: Seagull Energy Corporation. (10) COMPANY CONTRIBUTION ACCOUNT: An individual account for each Member to which is credited the sum of (A) the Company Matching Contributions made on such Member's behalf and (B) the Company Discretionary Contributions made on such Member's behalf pursuant to Section 3.03(a) plus such Member's allocation of forfeitures and which is credited (or debited) for such account's allocation of net income (or net loss) of the Trust Fund. I-1 5 (11) COMPANY CONTRIBUTIONS: The total of Company Discretionary Contributions and Company Matching Contributions. (12) COMPANY DISCRETIONARY CONTRIBUTIONS: Contributions made to the Plan by the Company pursuant to Section 3.03. (13) COMPANY MATCHING CONTRIBUTIONS: Contributions made to the Plan by the Company pursuant to Section 3.02. (14) COMPANY STOCK: The common stock of Seagull Energy Corporation. (15) COMPENSATION: The total of all wages, salaries, fees for professional service and other amounts received in cash or in kind by a Member for services actually rendered or labor performed for the Company while a Member to the extent such amounts are includable in gross income, excluding, however, bonuses, incentive or other supplemental pay, reimbursements or other expense allowances, cash and noncash fringe benefits, moving expenses, Company contributions to or payments from this or any other deferred compensation program whether such program is qualified under section 401(a) of the Code or nonqualified, welfare benefits, amounts realized from the exercise of a stock option which is not an incentive stock option within the meaning of section 422A of the Code or when property described in section 83 of the Code is no longer subject to a substantial risk of forfeiture, any amount realized as a result of a disqualifying disposition within the meaning of section 421(a) of the Code and any other amounts which receive special tax benefits under the Code but are not hereinafter included; provided that, for the purposes of this definition, the following shall also be included: (A) elective contributions made on a Member's behalf by the Company that are not includable in income under section 125, section 402(A)(8), section 402(h) or section 403(b) of the Code, (B) compensation deferred under an eligible deferred compensation plan within the meaning of section 457(b) of the Code and (C) employee contributions described in section 414(h) of the Code that are picked up by the employing unit and are treated as employer contributions. The above notwithstanding, the Compensation of any Member taken into account for purposes of the Plan shall be limited to $200,000 for any Plan Year (with such amount to be (i) adjusted automatically to reflect any cost-of-living increases authorized by section 401(a)(17) of the Code and (ii) prorated for a Plan Year of less than twelve months and to the extent otherwise required by applicable law). (16) CONTROLLED ENTITY: Each corporation that is a member of a controlled group of corporations, within the meaning of section 1563(a) (determined without regard to sections 1563(a)(4) and 1563(e)(3)(C)) of the Code, of which the Company is a member, each trade or business (whether or not incorporated) with which the Company is under common control and each member of an affiliated service group, I-2 6 within the meaning of section 414(m) of the Code, of which the Company is a member. (17) DIRECTORS: The Board of Directors of the Company. (18) EFFECTIVE DATE: January 1, 1989, as to this restatement of the Plan, except (A) as otherwise indicated in specific provisions of the Plan and (B) that provisions of the Plan required to have an earlier effective date by provision of the Tax Reform Act of 1986, the Technical and Miscellaneous Revenue Act of 1988, technical corrections to the Retirement Equity Act of 1984 and the Deficit Reduction Act of 1984 and by regulations issued pursuant to such Acts shall be effective as of the required effective date in such Acts and regulations. (19) ELIGIBLE EMPLOYEE: Any Employee other than (A) an Employee whose terms and conditions of employment are governed by a collective bargaining agreement unless such agreement provides for his coverage under the Plan, (B) any non-resident alien who has no United States source income, (C) any Employee who is a Leased Employee, (D) any Employee who is employed at the ENSTAR Natural Gas Company division of the Company and (E) any Employee who is employed by the Alaska Pipeline Company. (20) EMPLOYEE: Any individual employed by the Company and any Leased Employee. (21) FUND: A portion of the Trust Fund which is invested in a specified manner. (22) HIGHLY COMPENSATED EMPLOYEE: Any Employee who performs services during the Plan Year for which the determination of who is highly compensated is being made (the "Determination Year") and who (A) is a five-percent owner of the Company (within the meaning of section 416(i)(1)(A)(iii) of the Code) at any time during the Determination Year or the twelve-month period immediately preceding the Determination Year (the "Look-Back Year"), (B) receives compensation (within the meaning of section 415(c)(3) of the Code, including elective or salary reduction contributions to a cafeteria plan, cash or deferred arrangement or tax-sheltered annuity; "compensation" for purposes of this Paragraph) in excess of $75,000 (with such amount to be adjusted automatically to reflect any cost-of-living adjustments authorized by section 414(q)(1) of the Code) during the Look-Back Year, (C) receives compensation in excess of $50,000 (with such amount to be adjusted automatically to reflect any cost-of-living adjustments authorized by section 414(q)(1) of the Code) during the Look-Back Year and is a member of the top 20% of Employees for the Look-Back Year (other than Employees described in section 414(q)(8) of the Code) ranked on the basis of compensation received during the year, (D) is an officer (within the meaning of section 416(i) of the Code) during the Look-Back Year and receives compensation in the Look-Back Year greater than 50% of the amount in effect under section 415(b)(1)(A) of the Code for the I-3 7 calendar year in which the Look-Back Year begins or (E) is described in clauses (B), (C) or (D) above (after modifying such clauses to substitute the Determination Year for the Look-Back Year) and is one of the 100 Employees who receives the most compensation from the Company during the Determination Year. For purposes of the preceding sentence, (i) no more than 50 Employees (or, if lesser, the greater of three Employees or 10% of the Employees) shall be treated as officers, (ii) if no officer has compensation in excess of 50% of the amount in effect under section 415(b)(1)(A) of the Code, then the highest-paid officer shall be deemed to be a Highly Compensated Employee, (iii) all employers aggregated with the Company under section 414(b), (c), (m) or (o) of the Code shall be treated as a single employer and (iv) a former Employee who had a separation year (generally, the Determination Year such Employee separates from service) prior to the Determination Year and who was an active Highly Compensated Employee for either such separation year or any Determination Year ending on or after such Employee's fifty-fifth birthday shall be deemed to be a Highly Compensated Employee. Further, if any individual is a member of the family of a five-percent owner or of a Highly Compensated Employee in the group consisting of the ten Highly Compensated Employees paid the greatest compensation during the year, then such individual shall not be considered a separate employee and any compensation paid to such individual (and any applicable contribution or benefit on behalf of such individual) shall be treated as if it were paid to (or on behalf of) the five-percent owner or Highly Compensated Employee. For purposes of the preceding sentence, the term "family" means, with respect to any active or former Employee, such Employee's spouse and lineal ascendants and descendants and the spouses of such lineal ascendants and descendants. To the extent that the provisions of this Paragraph are inconsistent or conflict with the definition of a "highly compensated employee" set forth in section 414(q) of the Code and the Treasury Regulations thereunder, the relevant terms and provisions of section 414(q) of the Code and the Treasury Regulations thereunder shall govern and control. (23) HOUR OF SERVICE: An Hour of Service is each hour for which an Employee is directly or indirectly paid, or entitled to payment, by the Company or a Controlled Entity for the performance of duties or for reasons other than the performance of duties; provided, however, that no more than 501 Hours of Service shall be credited to an Employee on account of any continuous period during which he performs no duties. Such Hours of Service shall be credited to the Employee for the computation period in which such duties were performed or in which occurred the period during which no duties were performed. An Hour of Service also includes each hour, not credited above, for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to by the Company or a Controlled Entity. These Hours of Service shall be credited to the Employee for the computation period to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made. Solely for purposes of determining whether a One-Year Break-in-Service has occurred, an I-4 8 Hour of Service is also each normal work hour, not otherwise credited above, during which an Employee is absent from work by reason of the Employee's pregnancy, the birth of a child of the Employee or the placement of a child with the Employee in connection with the adoption of such child by the Employee or for purposes of caring for such child for the period immediately following such birth or placement. The Committee may require, as a condition to the crediting of Hours of Service under this provision, that the Employee furnish appropriate and timely information to the Committee establishing the reason for any such absence. These Hours of Service shall be credited to the Employee for the computation period in which the absence from work begins if such crediting is necessary to prevent the occurrence of a One-Year Break-in-Service in such computation period, otherwise these Hours of Service shall be credited to the Employee in the next following computation period. The number of Hours of Service to be credited to an Employee for any computation period shall be governed by section 2530.200b-2(b) and (c) of the Labor Department Regulations relating to the Act. The above notwithstanding, Hours of Service with Wacker Oil Inc. prior to the date it became a Controlled Entity shall be taken into account for all purposes under the Plan except that in determining whether a Member has one Year of Service for purposes of Section 3.02 (a) and 4.02(c) of the Plan, a Member shall not be considered to have one Year of Service before January 1, 1991 based upon Hours of Service with Wacker Oil Inc. (24) LEASED EMPLOYEE: Any person who is not an employee of the Company or a Controlled Entity but who performs services for the Company or a Controlled Entity pursuant to an agreement (oral or written) between the Company or a Controlled Entity and any leasing organization, provided that such person has performed such services for the Company or a Controlled Entity or for related persons (within the meaning of section 144(a)(3) of the Code) on a substantially full-time basis for a period of at least one year and such services are of a type historically performed by the Company's or Controlled Entity's employees in the Company's or Controlled Entity's field of business. (25) MEMBER: Any individual who has met the eligibility requirements for participation in the Plan. (26) MEMBER CONTRIBUTION ACCOUNT: An individual account for each Member to which is credited his Member contributions made prior to January 1, 1987 and which is credited (or debited) for such account's allocation of net income (or net loss) of the Trust Fund. (27) NORMAL RETIREMENT DATE: The date a Member attains the age of sixty-five. I-5 9 (28) ONE-YEAR BREAK-IN-SERVICE: Any Plan Year during which an Employee has no more than 500 Hours of Service. (29) PLAN: The Seagull Thrift Plan, as amended from time to time. (30) PLAN YEAR: The twelve-consecutive month period commencing January 1 of each year. (31) TRUST: The trust established herein to hold and invest contributions made under the Plan, and income thereon, and from which the benefits will be distributed. (32) TRUST FUND: The funds and properties held pursuant to the provisions hereof for the use and benefit of the Members, together with all income, profits and increments thereto. (33) TRUSTEE: The trustee or trustees qualified and acting hereunder at any time. (34) VALUATION DATES: The last day of each calendar quarter and any other interim Valuation Date determined by the Committee on a nondiscrimi- natory basis. (35) VESTED INTEREST: The portion of a Member's Accounts which, pursuant to the Plan, is nonforfeitable. (36) VESTING SERVICE: The measure of service used in determining a Member's Vested Interest as determined pursuant to Section 8.03. (37) Voting Fiduciary: The independent fiduciary, if any, appointed by the Committee pursuant to the provisions of Section 12.07(1) to receive voting directions from the Members and vote Company Stock in accordance with the provisions of Section 5.03(a). 1.02 NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall be considered to include the plural and the plural to include the singular. The masculine gender, where appearing in this Plan, shall be deemed to include the feminine gender. 1.03 HEADINGS. The headings of Articles and Sections herein are included solely for convenience and if there is any conflict between such headings and the text of the Plan, the text shall control. I-6 10 II. PARTICIPATION 2.01 ELIGIBILITY. Any Eligible Employee shall become a Member upon the first day of the month coincident with or next following the date on which he completes an Hour of Service. Notwithstanding the foregoing: (a) an Eligible Employee who was a Member of the Plan on the day prior to the Effective Date shall remain a Member of this restatement thereof as of the Effective Date; (b) an Eligible Employee who was a Member of the Plan, or who was eligible to become a Member of the Plan, prior to a termination of employment shall become a Member immediately upon his reemployment as an Eligible Employee; and (c) an Employee who has completed an Hour of Service but who has not become a Member of the Plan because he was not an Eligible Employee shall become a Member of the Plan immediately upon becoming an Eligible Employee as a result of a change in his employment status; and (d) an Eligible Employee who completed an Hour of Service but who terminated employment prior to the date upon which he would have become a Member shall become a Member immediately upon his reemployment. II-1 11 III. CONTRIBUTIONS 3.01 CASH OR DEFERRED CONTRIBUTIONS. (a) A Member may elect to defer an integral percentage of from 1% to 14% of his Compensation for a Plan Year by having the Company contribute the amount so deferred to the Plan. Compensation for a Plan Year not so deferred by such election shall be received by such Member in cash. A Member's election to defer an amount of his Compensation pursuant to this Section shall be made on the date he first becomes a Member or upon the first day of any subsequent month by executing a Compensation reduction agreement pursuant to which the Member authorizes the Company to reduce his Compensation in the elected amount and the Company, in consideration thereof, agrees to contribute an equal amount to the Plan. The reduction in a Member's Compensation for a Plan Year pursuant to his election under a Compensation reduction agreement shall be effected by Compensation reductions as of each payroll period within such Plan Year following the effective date of such agreement. The amount of Compensation elected to be deferred by a Member for a Plan Year pursuant to this Section shall become a part of the Company's Cash or Deferred Contributions for such Plan Year. (b) A Member's Compensation reduction agreement shall remain in force and effect for all periods following the date of its execution until modified or terminated or until such Member terminates his employment. A Member who has elected to defer a portion of his Compensation may change his deferral election percentage (within the percentage limits set forth in Paragraph (a) above), effective as of the first day of any month by executing and delivering to the Committee a new Compensation reduction agreement within the time period prescribed by the Committee. Only one such change may be made in any calendar quarter. (c) A Member may cancel his Compensation reduction agreement, effective as of the first day of any month by executing and delivering to the Committee a Compensation reduction cancellation agreement in the form prescribed by the Committee within the time period prescribed by the Committee. A Member who so cancels his Compensation reduction agreement may resume Compensation deferrals, effective as of the first day of any month that is at least six months after such cancellation, by executing and delivering to the Committee a new Compensation reduction agreement within the time period prescribed by the Committee. (d) In restriction of the Members' elections provided in Paragraphs (a), (b) and (c) above, the Cash or Deferred Contributions on behalf of any Member for any calendar year shall not exceed $7,000 (with such amount to be adjusted automatically to reflect any cost-of-living adjustments authorized by section 402(g)(5) of the Code), reduced by any "excess deferrals" from other plans allocated to the Plan by March 1 of the next III-1 12 following calendar year within the meaning of, and pursuant to the provisions of, section 402(g)(2) of the Code. (e) In further restriction of the Members' elections provided in Paragraphs (a), (b) and (c) above, it is specifically provided that one of the "actual deferral percentage" tests set forth in section 401(k)(3) of the Code and the Treasury Regulations thereunder must be met in each Plan Year. (f) If the restrictions set forth in Paragraph (e) above would not otherwise be met for any Plan Year, the Compensation deferral elections made pursuant to Paragraphs (a), (b) and (c) above of all Members who are Highly-Compensated Employees shall automatically be revised by the Committee on a temporary basis to the extent necessary to meet such restrictions. Any reduction of amounts to be deferred by Members who are Highly-Compensated Employees shall be applied by first reducing on an equal basis Compensation deferral elections of 14%, then reducing on an equal basis Compensation deferral elections of 13% or more and continuing in such manner until the restrictions set forth in Paragraph (e) are met. A Member whose Compensation deferral election percentage has been reduced pursuant to this Paragraph shall be notified of such reduction in writing by the Committee. The intent of the foregoing provision is to effect a prospective reduction in a Member's deferral election percentage. If the Committee temporarily reduces Members' deferral elections pursuant to this Paragraph and subsequently determines at any time that, on a projected basis for such Plan Year, such Members' deferral elections, as originally made, may be wholly or partially restored, the Committee shall increase the deferral elections of such Members in the same manner as such deferral elections were reduced to the extent consistent with meeting the restrictions referred to in the first sentence of this Paragraph as of the last day of such Plan Year. (g) As of the last day of each month, the Company shall contribute, as Cash or Deferred Contributions with respect to each Member, an amount equal to the amount of Compensation elected to be deferred, pursuant to Paragraphs (a) and (b) above (as adjusted pursuant to Paragraph (f) above), by such Member during such month. Such contributions, as well as the contributions pursuant to Sections 3.02 and 3.03, shall be made without regard to current or accumulated profits of the Company. Notwithstanding the foregoing, the Plan is intended to qualify as a profit sharing plan for purposes of sections 401(a), 402, 412 and 417 of the Code. 3.02 COMPANY MATCHING CONTRIBUTIONS. (a) For each calendar month, the Company shall contribute, out of its current or accumulated earnings and profits, as Company Matching Contributions on behalf of each Member who has completed one Year of Service, as defined below, as of the first day of such month, an amount which equals 100% of the Cash or Deferred Contributions which were made pursuant to Section 3.01 on behalf of such Member during III-2 13 such month and which were not in excess of 6% of such Member's Compensation for such month. For purposes of this Paragraph (a), an Employee shall be credited with one Year of Service upon the completion of any twelve month period commencing with his Commencement Date or any anniversary thereof during which twelve month period such Employee is credited with 1,000 Hours of Service. An Employee who completed one Year of Service prior to a termination of his employment (regardless of whether such Employee had elected to defer compensation pursuant to Section 3.01) shall continue to be credited with one Year of Service upon his reemployment with the Company. (b) If current or accumulated earnings and profits on any contribution date are not sufficient to permit the Company to make such contributions, the Company may make such contributions at a subsequent time when current or accumulated earnings and profits are sufficient. 3.03 COMPANY DISCRETIONARY CONTRIBUTIONS. (a) For each Plan Year, the Company may contribute, out of its current or accumulated earnings and profits, as a Company Discretionary Contribution, an additional amount as determined in the discretion of the Directors. (b) In addition to the Company Matching Contributions made pursuant to Section 3.02 and the Company Discretionary Contribution made pursuant to Section 3.03(a), and as authorized by the Directors, for each Plan Year, the Company may contribute as a "safe harbor contribution" for such Plan Year out of its current or accumulated earnings and profits, on behalf of Members who are not Highly Compensated Employees, the amount necessary to cause the Plan to satisfy the restrictions set forth in Section 3.01(e) and Section 3.04. Any amounts contributed pursuant to this Paragraph to cause the Plan to satisfy the restrictions set forth in Section 3.01(e) shall be allocated to the Cash or Deferred Accounts of the Members who are not Highly Compensated Employees and any amounts contributed pursuant to this Paragraph to cause the Plan to satisfy the restrictions of Section 3.04 shall be allocated to the Company Contribution Accounts of the Members who are not Highly Compensated Employees. 3.04 RESTRICTIONS ON COMPANY CONTRIBUTIONS. In restriction of the Company Contributions hereunder, it is specifically provided that one of the "actual contribution percentage" tests set forth in section 401(m) of the Code and the Treasury Regulations thereunder must be met in each Plan Year. The Committee may elect, in accordance with applicable Treasury Regulations, to treat Cash or Deferred Contributions to the Plan as Company Matching Contributions for purposes of meeting this requirement. 3.05 PAYMENTS TO TRUSTEE. Contributions under the Plan shall be paid by the Company directly to the Trustee as soon as practicable. On or about the date of any such payment, the Committee shall be informed as to the amount of such payment. III-3 14 3.06 RETURN OF CONTRIBUTIONS. Anything to the contrary herein notwithstanding, the Company's contributions to the Plan are contingent upon the deductibility of such contributions under section 404 of the Code. To the extent that a deduction for contributions is disallowed, such contributions shall, upon the written demand of the Company, be returned to the Company by the Trustee within one year after the date of disallowance, reduced by any net losses of the Trust Fund attributable thereto but not increased by any net earnings of the Trust Fund attributable thereto. Moreover, if Company contributions are made under a mistake of fact, such contributions shall, upon the written demand of the Company, be returned to the Company by the Trustee within one year after the payment thereof, reduced by any net losses of the Trust Fund attributable thereto but not increased by any net earnings of the Trust Fund attributable thereto. 3.07 DISTRIBUTION OF EXCESS CONTRIBUTIONS. (a) Anything to the contrary herein notwithstanding, any Cash or Deferred Contributions to the Plan for a calendar year on behalf of a Member in excess of the limitations set forth in Section 3.01(d) shall be distributed to such Member not later than April 15 of the next following calendar year. (b) Anything to the contrary herein notwithstanding, if, for any Plan Year, the aggregate Cash or Deferred Contributions made by the Company on behalf of Highly Compensated Employees exceeds the maximum amount of Cash or Deferred Contributions permitted on behalf of such Highly Compensated Employees pursuant to Section 3.01(e) (determined by reducing Cash or Deferred Contributions on behalf of Highly Compensated Employees in order of the "actual deferral percentages" (as that term is defined in section 401(k)(3)(B) of the Code and the Treasury Regulations thereunder) beginning with the highest of such percentages), such excess shall be distributed to the Highly Compensated Employees on whose behalf such excess was contributed before the end of the next following Plan Year. For purposes of this Paragraph, the determination and correction of excess Cash or Deferred Contributions of a Member whose actual deferral percentage is determined under the family aggregation rules of sections 401(k) and 414(q) of the Code shall be made in accordance with the provisions of such sections and the Treasury Regulations thereunder. (c) Anything to the contrary herein notwithstanding, if, for any Plan Year, the aggregate Company Contributions allocated to the Accounts of Highly Compensated Employees exceeds the maximum amount of such Company Contributions permitted on behalf of such Highly Compensated Employees pursuant to Section 3.04 (determined by reducing Company Contributions made on behalf of Highly Compensated Employees in order of the "contribution percentages" (as that term is defined in section 401(m)(3) of the Code and Treasury Regulations thereunder) beginning with the highest of such percentages), such excess shall be distributed to the Highly Compensated Employees on whose behalf such excess contributions were made (or, if such excess contributions are forfeitable, they shall be forfeited) before the end of the next following Plan Year. For III-4 15 purposes of this Paragraph, the determination and correction of excess Company Contributions allocated to the Account of a Member whose contribution percentage is determined under the family aggregation rules of sections 401(m) and 414(q) of the Code shall be made in accordance with the provisions of such sections and the Treasury Regulations thereunder. Any excess contribution which is forfeitable shall be considered forfeited on March 15 of the next following Plan Year. (d) In coordinating distributions of excess contributions pursuant to this Section, such excess contributions shall be distributed in the following order: (1) first, excess deferrals described in Paragraph (a) above shall be distributed; (2) second, excess Cash or Deferred Contributions described in Paragraph (b) above shall be distributed; and (3) third, excess Company Contributions described in Paragraph (c) above shall be distributed (or, if forfeitable, forfeited). (e) Any distribution of excess contributions pursuant to this Section shall be adjusted for income or loss allocated thereto in a manner consistent with applicable Treasury Regulations, rulings and notices. III-5 16 IV. ALLOCATIONS 4.01 SUSPENSE ACCOUNT. All contributions, forfeitures and the net income (or net loss) of the Trust Fund shall be held in a suspense account until allocated to the Accounts of the Members as provided herein. 4.02 ALLOCATION OF CONTRIBUTIONS AND FORFEITURES. (a) Cash or Deferred Contributions made by the Company on a Member's behalf pursuant to Section 3.01 shall be allocated to such Member's Cash or Deferred Account as of the last day of the month for which they were made. (b) The 100% Company Matching Contributions for each month pursuant to Section 3.02 on behalf of a Member shall be allocated as of the end of such month to the Company Contribution Account of such Member. (c) As of the last day of each Plan Year, the sum of (1) the Company Discretionary Contribution, if any, made pursuant to Section 3.03(a) for such Plan Year plus (2) any amounts which are forfeited under any provisions hereof during such Plan Year shall be allocated as of the last day of such Plan Year to the Company Contribution Account of each Member (regardless of whether such Member elected to have Cash or Deferred Contributions made to the Plan on his behalf during such Plan Year) who had completed one Year of Service as of the last day of such Plan Year and who (A) was an Eligible Employee on the last day of such Plan Year or (B) terminated his employment during such Plan Year on or after his Normal Retirement Date or by reason of total and permanent disability or death. The allocation to each such eligible Member's Company Contribution Account shall be that portion of such Company Discretionary Contribution and forfeitures which is in the same proportion that such Member's Compensation for such Plan Year bears to the total of all such Members' Compensation for such Plan Year. (d) As of the last day of each Plan Year, the Company Discretionary Contribution, if any, made pursuant to Section 3.03(b) for such Plan Year in order to satisfy the restrictions set forth in Section 3.01(e) shall be allocated to the Cash or Deferred Accounts of Members who are not Highly Compensated Employees on the basis of such Members' Cash or Deferred Contributions for such Plan Year and each such Member's Cash or Deferred Account shall be allocated that portion of such contribution which such Member's Cash or Deferred Contributions for such Plan Year is of all such Members' Cash or Deferred Contributions for such Plan Year. (e) As of the last day of each Plan Year, the Company Discretionary Contribution, if any, made pursuant to Section 3.03(b) for such Plan Year in order to satisfy the restrictions set forth in Section 3.04 shall be allocated to the Cash or Deferred Accounts of Members who are not Highly Compensated Employees on the basis of such IV-1 17 Members' share of Company Matching Contributions for such Plan Year and each such Member's Cash or Deferred Account shall be allocated that portion of such contribution which such Member's share of Company Matching Contributions for such Plan Year is of all such Members' share of Company Matching Contributions for such Plan Year. 4.03 ALLOCATION OF NET INCOME OR LOSS. (a) As of each Valuation Date, the Trustee shall determine the fair market value of the Trust Fund assets and the net income (or net loss) of the Trust Fund. The net income (or net loss) of each Fund within the Trust Fund since the next preceding Valuation Date shall be ascertained by the Trustee and shall be determined on the accrual basis of accounting; provided, however, that such net income (or net loss) shall include any net increase or net decrease in the value of the assets of each such Fund since the next preceding Valuation Date to the extent not otherwise accrued. As soon as is practicable after each Valuation Date, the Trustee shall deliver to the Committee a written statement of such determination. (b) For purposes of allocations of net income (or net loss) of the Trust Fund, each Member's Accounts (or subaccounts) shall be divided into subaccounts to reflect such Member's investment designation in a particular Fund or Funds pursuant to Article V. As of each Valuation Date, the Committee shall adjust the Accounts of each Member as follows: (1) The net income (or net loss) of each Fund, separately and respectively, shall be allocated among the corresponding subaccounts of the Members who had such corresponding subaccounts on the next preceding Valuation Date and each such corresponding subaccount shall be credited (or debited) with that portion of such net income (or net loss) which the value of each such corresponding subaccount on such next preceding Valuation Date was of the value of all such corresponding subaccounts on such date; provided, however, that the value of such subaccounts as of the next preceding Valuation Date shall be reduced by the amount of any withdrawals or distributions made therefrom since the next preceding Valuation Date. (2) With respect to each Member whose employment is terminated for any reason, so long as there is any balance in any of his Accounts, such Account or Accounts shall continue to receive allocations pursuant to this Section; provided, however, that the value of such Accounts as of the next preceding Valuation Date shall be reduced by the amount of any payments made therefrom since the next preceding Valuation Date. (c) Plan provisions to the contrary notwithstanding, the provisions of this Paragraph shall be applicable with respect to allocations and accounting for Company Stock held by the Plan. All amounts which are allocated to a Member's Accounts under the Plan and are to be invested in Company Stock shall be used to purchase shares of IV-2 18 Company Stock as soon as practicable after such allocation. Shares of Company Stock so purchased for a Member's Accounts shall be earmarked for the benefit of such Member. Any cash dividends received by the Trustee with respect to Company Stock earmarked for Members' Accounts shall be invested in additional shares of Company Stock which shall be earmarked for the benefit of such Member. Any such additional Company Stock, plus any other Company Stock received as a result of a stock split or stock dividend, shall be allocated pro rata to the Members' Accounts in proportion to the respective balances of Company Stock credited to such Accounts as of the appropriate record date and following an allocation of such shares to a Member's Accounts such shares shall be earmarked for the benefit of such Member. 4.04 LIMITATIONS. (a) For purposes of this Section, the following terms and phrases shall have these respective meanings: (1) "ANNUAL ADDITIONS" of a Member for any Limitation Year shall mean the total of (A) the Company Contributions, Cash or Deferred Contributions and forfeitures allocated to such Member's Accounts for such year, (B) Member's contributions, if any, (excluding any rollover contributions) for such year and (C) amounts referred to in sections 415(l)(1) and 419A(d)(2) of the Code. (2) "LIMITATION YEAR" shall mean the Plan Year. (3) "MAXIMUM ANNUAL ADDITIONS" of a Member for any Limitation Year shall mean the lesser of (A) $30,000 (or, if greater, one-fourth of the dollar limitation in effect under section 415(b)(1)(A) of the Code for such Limitation Year) or (B) 25% of such Member's compensation, within the meaning of section 415(c)(3) of the Code as limited by section 401(a)(17) of the Code for Limitation Years beginning after December 31, 1988, during such year except that the limitation in this Clause (B) shall not apply to any contribution for medical benefits (within the meaning of section 419A(f)(2) of the Code) after separation from service with the Company or a Controlled Entity which is otherwise treated as an Annual Addition or to any amount otherwise treated as an Annual Addition under section 415(l)(1) of the Code. (b) Contrary Plan provisions notwithstanding, in no event shall the Annual Additions credited to a Member's Accounts for any Limitation Year exceed the Maximum Annual Additions for such Member for such year. If as a result of allocation of forfeitures, a reasonable error in estimating a Member's Compensation or because of other limited facts and circumstances, the Annual Additions which would be credited to a Member's Accounts for a Limitation Year would nonetheless exceed the Maximum Annual Additions for such Member for such year, the excess Annual Additions which, but for this Section, would have been allocated to such Member's Accounts shall be disposed of as follows: IV-3 19 (1) first, any such excess Annual Additions in the form of Company Discretionary Contributions shall, to the extent such amounts would otherwise have been allocated to such Member's Company Contribution Account, be allocated to a suspense account and shall be held therein until allocated to Members' Company Contribution Accounts in the same manner as a forfeiture; (2) next, any such excess Annual Additions in the form of Company Matching Contributions shall, to the extent such amounts would have otherwise been allocated to such Member's Company Contribution Account, be allocated instead to a suspense account and shall be held therein until allocated to Members' Company Contribution Accounts in the same manner as a forfeiture; (3) finally, any such excess Annual Additions in the form of Cash or Deferred Contributions shall be allocated instead to a suspense account and shall be held therein until allocated to such Member's Cash or Deferred Account in future Limitation Years before any Cash or Deferred Contributions are made to the Plan on behalf of such Member. (c) If a suspense account is in existence at any time during a Limitation Year pursuant to this Section, it will not participate in allocations of the net income (or net loss) of the Trust Fund. (d) For purposes of determining whether the Annual Additions under this Plan exceed the limitations herein provided, all defined contribution plans of the Company are to be treated as one defined contribution plan. In addition, all defined contribution plans of Controlled Entities shall be aggregated for this purpose. For purposes of this Section only, a "Controlled Entity" (other than an affiliated service group member within the meaning of section 414(m) of the Code) shall be determined by application of a more than 50% control standard in lieu of an 80% control standard. Effective from and after January 1, 1989 and through December 31, 1990, if the Annual Additions credited to a Member's Accounts for any Limitation Year under this Plan plus the additions credited on his behalf under other defined contribution plans required to be aggregated pursuant to this Paragraph would exceed the Maximum Annual Additions for such Member for such Limitation Year, the additions under such other plans shall be reduced to the extent possible prior to any reduction of the Annual Additions under this Plan. Effective from and after January 1, 1991, if the Annual Additions credited to a Member's Accounts for any Limitation Year under this Plan plus the additions credited on his behalf under other defined contribution plans required to be aggregated pursuant to this Paragraph would exceed the Maximum Annual Additions for such Member for such Limitation Year, the Annual Additions under this Plan shall be reduced to the extent possible prior to any reductions of additions under such other plan or plans. (e) In the case of a Member who also participated in a defined benefit plan of the Company or a Controlled Entity (as defined in Paragraph (d) above), the Company IV-4 20 shall reduce the Annual Additions credited to the Accounts of such Member under this Plan pursuant to the provisions of Paragraph (b) to the extent necessary to prevent the limitation set forth in section 415(e) of the Code from being exceeded. Notwithstanding the foregoing, the provisions of this Paragraph shall only apply if such defined benefit plan does not provide for a reduction of benefits thereunder to ensure that the limitation set forth in section 415(e) of the Code is not exceeded. (f) If the limitations set forth in this Section would not otherwise be met for any Limitation Year, the Compensation deferral elections pursuant to Section 3.01 of affected Members shall be revised prospectively by the Committee on a temporary basis to the extent necessary to meet such limitations in the manner described in Section 3.01(f). IV-5 21 V. INVESTMENT OF FUNDS 5.01 INVESTMENT OPTIONS FOR MEMBERS' CONTRIBUTIONS. On the form prescribed by the Committee, each Member shall designate the manner in which the amounts allocated to his Accounts shall be invested from among the following options: OPTION 1 In Company Stock. Amounts invested under this Option 1 shall be invested as one Fund referred to as Fund A. OPTION 2 In such general equity investments (other than Company Stock or other securities of the Company) as the Trustee may determine. Amounts invested under this Option 2 shall be invested as one Fund referred to as Fund B. OPTION 3 In such general money market investments (other than Company Stock or other securities of the Company) as the Trustee may determine. Amounts invested under this Option 3 shall be invested as one Fund referred to as Fund C. OPTION 4 In a combination of general equity investments (other than Company Stock or other securities of the Company) and general fixed income investments (other than Company Stock or other securities of the Company) as the Trustee may determine. Amounts invested under this Option 4 shall be invested as one Fund referred to as Fund D. It is specifically provided that the Trustee may invest the assets of Fund B, Fund C or Fund D in one or more mutual funds or group annuity contracts provided that the underlying investments of such mutual funds or group annuity contracts are consistent with the investment objectives of such funds as described above. A Member may designate one of such options for all of the contributions to his Accounts or he may split the investment of the contributions to his Accounts between such options. If a Member fails to make a designation, his Accounts shall be invested in Option 3. 5.02 INVESTMENT OPTION CHANGES. (a) A Member may change his designated investment option for future contributions as of the first day of any month in the manner and on the form prescribed by the Committee; provided, however, that the designation may not be changed more frequently than once every calendar quarter. V-1 22 (b) A Member may elect, in the manner and on the form prescribed by the Committee, to convert up to 100% of the amounts in his Accounts from one investment Fund to another of the Funds permitted by Section 5.01, as of the last day of any calendar quarter. No more than one such election may be made during any calendar quarter. 5.03 VOTING AND OTHER RIGHTS. (a) Each Member whose Accounts are invested in Fund A shall be entitled to direct the Committee or the Voting Fiduciary if one has been appointed as to the manner in which his Accounts' pro rata interest in Company Stock held in Fund A shall be voted. In the absence of voting instructions by a Member, Company Stock held in Fund A shall be voted by the Committee or the Voting Fiduciary if one has been appointed to the extent possible to reflect the voting directions the Committee or the Voting Fiduciary if one has been appointed has received from Members with respect to Company Stock held in Fund A. (b) If a "cash tender offer" or "exchange offer" for shares of Company Stock is made, a Member's pro rata interest in Company Stock held in Fund A shall be tendered or exchanged by the Trustee pursuant to such "cash tender offer" or "exchange offer" only in accordance with the written instructions and directions of such Member to the Trustee to so tender or exchange. If written instructions or directions are not timely received from a Member whose Accounts are invested in Fund A, such Member's pro rata interest in the shares of Company Stock held in Fund A shall not be tendered or exchanged pursuant to such "cash tender offer" or "exchange offer." For purposes of this Paragraph, the term "cash tender offer" shall include a tender offer for, or request or invitation for tenders of, shares of Company Stock in exchange for cash, as made to the Plan or to holders of shares of Company Stock generally; the term "exchange offer" shall include a tender offer for, or request or invitation for tenders of, any shares of Company Stock in exchange for any consideration other than for all cash, as made to the Plan or to holders of shares of Company Stock generally. If a "cash tender offer" or "exchange offer" for shares of Company Stock is made, the Trustee shall use its best efforts to take those steps reasonably necessary to furnish information to, and allow decision by, each Member whose Accounts are invested in Fund A with respect to such "cash tender offer" or "exchange offer" in substantially the same manner as would be available to holders of Company Stock generally, and, in that connection, the Trustee shall: (1) inform each such Member as to the existence of such "cash tender offer" or "exchange offer;" (2) transmit to each such Member as soon as practicable such written information, explanation and other materials relative to such "cash tender offer" or "exchange offer" as are made available by the Company or by the persons or entities making such "cash tender offer" or "exchange offer" to the holders of shares of Company Stock generally; V-2 23 (3) request detailed written instructions and directions from each such Member as to whether to tender or exchange each such Member's pro rata interest in the shares of Company Stock held in Fund A and, if so instructed and directed, as to the time and manner of such tender or exchange, and such instructions and directions of the individual Members shall be given to the election judge or the Trustee and shall be kept confidential from the Company; and (4) use its best efforts to effect on a confidential and nondiscriminatory basis the tender or exchange of Company Stock held under the Plan with respect to such "cash tender offer" or "exchange offer" solely in accordance with written instructions and directions received from such Members. V-3 24 VI. RETIREMENT BENEFITS A Member who terminates his employment on or after his Normal Retirement Date shall be entitled to an Article X benefit equal in value to the sum of: (a) the amount in his Accounts as of the Valuation Date next preceding his Benefit Commencement Date plus any Cash or Deferred Contributions and Company Matching Contributions allocated to his Accounts after such Valuation Date; and (b) if such Member's Benefit Commencement Date occurs prior to the close of the Plan Year during which his termination of employment occurred, the amount of such Member's allocation of Company Discretionary Contributions and forfeitures for such Plan Year. VI-1 25 VII. DISABILITY BENEFITS 7.01 TOTAL AND PERMANENT DISABILITY DETERMINED. The Committee shall determine whether a Member has become totally and permanently disabled and shall so notify such Member within sixty days thereafter. A Member shall be considered totally and permanently disabled if such disability is so certified by the Committee and, unless waived by the Committee as unnecessary, supported by a written medical opinion that such Member will be permanently incapable of performing his job for physical or mental reasons. 7.02 DISABILITY BENEFITS. In the event a Member's employment is terminated due to total and permanent disability as of the Committee's certification thereof, such Member shall be entitled to an Article X benefit equal in value to the sum of: (a) the amount in his Accounts as of the Valuation Date next preceding his Benefit Commencement Date plus any Cash or Deferred Contributions and Company Matching Contributions allocated to his Accounts after such Valuation Date; and (b) if such Member's Benefit Commencement Date occurs prior to the close of the Plan Year during which such disability was determined, the amount of such Member's allocation of Company Discretionary Contributions and forfeitures for such Plan Year. VII-1 26 VIII. SEVERANCE BENEFITS 8.01 NO BENEFITS UNLESS HEREIN SET FORTH. Except as set forth in this Article, upon termination of employment of a Member for any reason other than total and permanent disability, retirement or death, such Member shall acquire no right to any benefit from the Plan or the Trust Fund. 8.02 SEVERANCE BENEFIT. (a) Each Member whose employment is terminated prior to his Normal Retirement Date for any reason other than total and permanent disability or death shall be entitled to an Article X benefit equal in value to his Vested Interest in the amount in his Accounts as of the Valuation Date next preceding his Benefit Commencement Date plus any Cash or Deferred Contributions and Company Matching Contributions allocated to his Accounts after such Valuation Date. (b) For purposes of this Section, a Member's Vested Interest in his Company Contribution Account shall be determined by such Member's years of Vesting Service in accordance with the following schedule:
YEARS OF VESTING SERVICE VESTED INTEREST ------------------------ --------------- Less than 2 years 0% 2 years 25% 3 years 40% 4 years 55% 5 years 70% 6 years 85% 7 years or more 100%
(c) Paragraph (b) above notwithstanding, a Member shall have a 100% Vested Interest in his Company Contribution Account upon attainment of his Normal Retirement Date. (d) A Member shall have a 100% Vested Interest in his Cash or Deferred Account and his Member Contribution Account at all times. 8.03 VESTING SERVICE. (a) For the period preceding the Effective Date, an Employee shall be credited with Vesting Service in an amount equal to all service credited to him for vesting purposes under the Plan as it existed on the day prior to the Effective Date. VIII-1 27 (b) For the Plan Year beginning with the Effective Date and all Plan Years thereafter, subject to the provisions of Paragraphs (c) and (d) below, 1,000 or more Hours of Service during any Plan Year shall constitute one year of Vesting Service. (c) In the case of an Employee who terminates employment at a time when he does not have any Vested Interest in his Company Contribution Account and who then incurs a number of consecutive One-Year Breaks-in-Service which equals or exceeds the greater of (1) five years or (2) his years of Vesting Service prior to such One-Year Breaks-in-Service, such Employee's years of Vesting Service completed before such One-Year Breaks-in-Service shall be disregarded in determining his years of Vesting Service. (d) In the case of a Member who incurs five consecutive One-Year Breaks-in-Service, such Member's years of Vesting Service completed after such One-Year Breaks-in-Service shall be disregarded in determining such Member's Vested Interest in any Plan benefits derived from Company contributions on his behalf prior to such One-Year Breaks-in-Service. 8.04 FORFEITURES. (a) With respect to a Member (1) who terminates employment with the Company with a Vested Interest in his Company Contribution Account which is less than 100% and (2) who either (A) is not entitled to a distribution from the Plan or (B) if he is entitled to a distribution, he receives such distribution no later than the close of the second Plan Year following the Plan Year in which his employment is terminated, the forfeitable amount credited to the terminated Member's Company Contribution Account as of the Valuation Date next preceding his Benefit Commencement Date shall become a forfeiture as of his Benefit Commencement Date (or as of his date of termination of employment if no amount is payable from the Trust Fund on behalf of such Member with such Member being considered to have received a distribution of zero dollars on his date of termination of employment). (b) In the event that an amount credited to a terminated Member's Company Contribution 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 Company Contribution Account, unadjusted by any subsequent gains or losses of the Trust Fund; provided, however, that such restoration shall be made only if such Member repays in cash an amount equal to the amount so distributed to him pursuant to Paragraph (a) above within five years from the date the Member is reemployed; provided, further, that such Member's repayment of amounts distributed to him from his Cash or Deferred Account shall be limited to the portion thereof which was attributable to contributions with respect to which the Company made Company Matching Contributions. A reemployed Member who was not entitled to a distribution from VIII-2 28 the Plan on his date of termination of employment shall be considered to have repaid a distribution of zero dollars on the date of his reemployment. 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 4.02(c) 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 4.02(c) and such excess amount shall be a minimum required Company contribution (without regard to current or accumulated earnings and profits). (c) With respect to a Member whose Vested Interest in his Company Contribution Account is less than 100% and who receives a termination distribution from his Company Contribution Account after the close of the second Plan Year following the Plan Year in which his employment is terminated, any amount remaining in his Company Contribution Account shall continue to be maintained as a separate account. At any relevant time, such Member's nonforfeitable portion of his separate account shall be determined in accordance with the following formula: X = P(AB + (R X D)) - (R X D) For purposes of applying the formula: X is the nonforfeitable portion of such separate account at the relevant time; P is the Member's Vested Interest in his Company Contribution Account at the relevant time; AB is the balance of such separate account at the relevant time; R is the ratio of the balance of such separate account at the relevant time to the balance of such separate account after the distribution; and D is the amount of the distribution. For all other purposes of the Plan, a Member's separate account shall be treated as a Company Contribution Account. Upon his incurring five consecutive One-Year Breaks-in-Service, the forfeitable portion of a terminated Member's separate account and Company Contribution Account shall be forfeited as of the end of the Plan Year during which the terminated Member incurred his fifth such consecutive One-Year Break-in-Service. (d) With respect to a Member who terminates employment with the Company with a Vested Interest in his Company Contribution Account greater than 0% but less than 100% and who is not otherwise subject to the forfeiture provisions of Paragraph (a) or Paragraph (c) above, the forfeitable portion of his Company Contribution Account shall be forfeited as of the end of the Plan Year during which the terminated Member incurs his fifth consecutive One-Year Break-in-Service. (e) Any forfeitures occurring pursuant to Paragraphs (a), (c) or (d) above shall be held in a suspense account and shall be available for allocation to the Accounts VIII-3 29 of the eligible Members pursuant to Section 4.02(c), as of the end of the Plan Year in which such forfeitures occurred. For all Valuation Dates prior to such allocation, forfeited amounts held in the suspense account shall receive allocations of net income (or net loss) pursuant to Section 4.03. (f) Distributions of benefits described in this Section shall be subject to the time of payment requirements of Section 10.01. VIII-4 30 IX. DEATH BENEFITS 9.01 DEATH BENEFITS. Upon the death of a Member while an Employee, the Member's designated beneficiary shall be entitled to an Article X benefit equal in value to the sum of: (a) the amount in his Accounts as of the Valuation Date next preceding his Benefit Commencement Date plus any Cash or Deferred Contributions and Company Matching Contributions allocated to his Accounts after such Valuation Date; and (b) if such Member's Benefit Commencement Date occurs prior to the close of the Plan Year during which his death occurred, the amount of such Member's allocation of Company Discretionary Contributions and forfeitures for such Plan Year. 9.02 DESIGNATION OF BENEFICIARIES. (a) Each Member shall have the right to designate the beneficiary or beneficiaries to receive payment of his Article X 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. (b) If no such designation is on file with the Committee at the time of the death of the Member or such designation is not effective for any reason as determined by the Committee, the designated beneficiary or beneficiaries to receive such Article X benefit shall be as follows: (1) If a Member leaves a surviving spouse, his Article X benefit shall be paid to such surviving spouse; IX-1 31 (2) If a Member leaves no surviving spouse, his Article X benefit shall be paid to such Member's executor or administrator or to his heirs at law if there is no administration of such Member's estate. IX-2 32 X. TIME AND MANNER OF PAYMENT OF BENEFITS 10.01 TIME AND MANNER OF PAYMENT. (a) Subject to the provisions of the remaining Paragraphs of this Section, payment of a Member's benefit hereunder shall be made as soon as administratively feasible after the Valuation Date coincident with or next succeeding the date the Member or his beneficiary becomes entitled to a benefit pursuant to Article VI, VII, VIII or IX. (b) Unless (1) the Member has attained age sixty-five or died, (2) the Member consents to a distribution pursuant to Paragraph (a) within the ninety-day period ending on the date payment of his benefit hereunder is to commence pursuant to Paragraph (a) or (3) the Member's Vested Interest in his Accounts is not in excess of $3,500, the Member's Benefit Commencement Date shall be deferred to the date which is as soon as administratively feasible after the Valuation Date coincident with or next succeeding the earlier of the date the Member attains age sixty-five or the Member's date of death, or such earlier Valuation Date as the Member may elect by written notice to the Committee prior to such Valuation Date. The Committee shall inform the Member of his right to defer his Benefit Commencement Date. (c) A Member's Benefit Commencement Date shall in no event be later than the sixtieth day following the close of the Plan Year during which such Member attains, or would have attained, age sixty-five or, if later, terminates his employment with the Company or a Controlled Entity. (d) A Member's Benefit Commencement Date shall be in compliance with the provisions of section 401(a)(9) of the Code and applicable Treasury Regulations thereunder and shall in no event be later than: (1) In the case of a Member who attains the age of seventy and one-half prior to January 1, 1988 and is not a "five-percent owner" (within the meaning of section 416(i) of the Code) at any time during the five Plan Year period ending in the calendar year in which such Member attains the age of seventy and one-half, April 1st following the later of (i) the calendar year in which such Member attains the age of seventy and one-half, or (ii) the calendar year in which such Member terminates his employment with the Company, or if such Member becomes a "five-percent owner" following the end of such five Plan Year period, April 1st of the calendar year following the calendar year in which such Member becomes a "five-percent owner;" and (2) In the case of a Member who does not attain the age of seventy and one-half prior to January 1, 1988 or is a "five-percent owner" (within the X-1 33 meaning of section 416(i) of the Code) at any time during the five Plan Year period ending in the calendar year in which such Member attains the age of seventy and one-half, April 1st of the calendar year following the calendar year in which such Member attains the age of seventy and one-half. (3) In the case of a benefit payable pursuant to Article IX, the last day of the five-year period following the death of such Member. For purposes of subparagraph (d)(2) above, a Member who attains the age seventy and one-half in 1988, is not a "five-percent owner" (within the meaning of section 416(i) of the Code) at any time during the five Plan Year period ending in 1988 and does not terminate employment with the Company prior to January 1, 1989, shall be considered to attain the age of seventy and one-half in 1989. Further, the preceding provisions of this Section notwithstanding, a Member may not elect to defer the receipt of his benefit hereunder to the extent that such deferral creates a death benefit that is more than incidental within the meaning of section 401(a) (9) (G) of the Code and applicable Treasury Regulations thereunder. (e) Subject to the provisions of Paragraphs (c) and (d) above, a Member's Benefit Commencement Date shall not occur before the expiration of the latest to end of the following periods: (1) a period during which the Member is employed by the Company or any Controlled Entity; or (2) a period during which the Member is employed by a purchaser of assets from the Company or a Controlled Entity if such Member transfers to employment with such purchaser in connection with such purchase. (f) A Member's benefit shall be provided from the Member's Account balance(s) under the Plan and shall be paid in one lump sum on the Member's Benefit Commencement Date. The Member's benefit shall be paid to the Member unless the Member has died prior to his Benefit Commencement Date, in which case the Member's benefit shall be paid to his beneficiary designated in accordance with the provisions of Section 9.02. (g) Benefits shall be paid in cash except that a Member (or his designated beneficiary or legal representative in the case of a deceased Member) may elect to have the portion of his Accounts invested in Fund A distributed in full shares of Company Stock to the extent of the Member's pro-rata portion of the shares of Company Stock held in Fund A with any balance of the Member's interest in Fund A (including fractional shares) to be paid in cash. X-2 34 10.02 UNCLAIMED BENEFITS. In the case of a benefit payable on behalf of a Member, if the Committee is unable to locate the Member or beneficiary to whom such benefit is payable, upon the Committee's determination thereof, such benefit shall be forfeited, held in a suspense account and available for allocation to the Accounts of the eligible Members pursuant to Section 4.02 as of the end of the Plan Year in which the forfeiture occurred. For all Valuation Dates prior to such allocation, forfeited amounts held in the suspense account shall not participate in allocations of the net income (or net loss) of the Trust Fund. Notwithstanding the foregoing, if subsequent to any such forfeiture the Member or beneficiary to whom such benefit is payable makes a valid claim for such benefit, such forfeited benefit shall be restored to the Plan in the manner provided in Section 8.04(b). 10.03 CLAIMS REVIEW. In any case in which a claim for Plan benefits of a Member or beneficiary is denied or modified, the Committee shall: (a) state the specific reason or reasons for the denial or modification; (b) provide specific reference to pertinent Plan provisions on which the denial or modification is based; (c) provide a description of any additional material or information necessary for the Member, his beneficiary or representative to perfect the claim and an explanation of why such material or information is necessary; and (d) explain the Plan's claim review procedure as contained herein. In the event the request is denied or modified, if the Member, his beneficiary or representative desires to have such denial or modification reviewed, he must, within sixty days following receipt of the notice of such denial or modification, submit a written request for review by the Committee of its initial decision. Within sixty days following such request for review the Committee shall, after providing a full and fair hearing, render its final decision in writing to the Member, his beneficiary or representative stating specific reasons for such decision. If special circumstances require an extension of such sixty-day period, the Committee's decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. If an extension of time for review is required, written notice of the extension shall be furnished to the Member, beneficiary or representative prior to the commencement of the extension period. X-3 35 XI. WITHDRAWALS AND LOANS 11.01 WITHDRAWALS. (a) A Member may withdraw an amount that is not less than 25% nor more than 100% of the then value of his Member Contribution Account. Only one such withdrawal may be made in any twenty-four month period. (b) A Member who has attained age fifty-nine and one-half may withdraw from his Cash or Deferred Account an amount not less than 25% nor more than 100% of the then value of such Account. Only one such withdrawal may be made in any twenty-four month period. (c) A Member who has a financial hardship, as determined by the Committee, and who has made all available withdrawals pursuant to the Paragraphs above and pursuant to the provisions of any other plans of the Company and any Controlled Entities of which he is a member and who has obtained all available loans pursuant to Section 11.02 and pursuant to the provisions of any other plans of the Company and any Controlled Entities of which he is a member may withdraw from his Cash or Deferred Account amounts not to exceed the lesser of (1) the then value of such Account or (2) the amount determined by the Committee as being available for withdrawal pursuant to this Paragraph. For purposes of this Paragraph, financial hardship means the immediate and heavy financial needs of the Member. A withdrawal based upon financial hardship pursuant to this Paragraph shall not exceed the amount required to meet the immediate financial need created by the hardship and not reasonably available from other resources of the Member. The determination of the existence of a Member's financial hardship and the amount required to be distributed to meet the need created by the hardship shall be made by the Committee. A withdrawal shall be deemed to be made on account of an immediate and heavy financial need of a Member if the withdrawal is on account of: (1) medical expenses described in section 213(d) of the Code incurred by the Member, the Member's spouse or any dependents of the Member (as defined in section 152 of the Code) and not reimbursed by insurance; (2) purchase (excluding mortgage payments) of a principal residence of the Member; (3) payment of tuition for the next semester or quarter of post-secondary education of the Member, or the Member's spouse, children or dependents (as defined in section 152 of the Code); XI-1 36 (4) the need to prevent the eviction of the Member from his principal residence or foreclosure on the mortgage of the Member's principal residence; or (5) such other financial needs which the Commissioner of Internal Revenue may deem to be immediate and heavy financial needs through the publication of revenue rulings, notices and other documents of general applicability. The decision of the Committee shall be final and binding, provided that all Members similarly situated shall be treated in a uniform and nondiscriminatory manner. The above notwithstanding, (1) withdrawals under this Paragraph from a Member's Cash or Deferred Account shall be limited to the sum of the Member's Cash or Deferred Contributions to the Plan, plus income allocable thereto and credited to the Member's Cash or Deferred Account as of December 31, 1988, less any previous withdrawals of such amounts, and (2) amounts allocated to a Member's Cash or Deferred Account pursuant to the provisions of Section 4.02(d) or (e) and Company Matching Contributions used to satisfy the restrictions set forth in Section 3.01(e) shall not be subject to withdrawal. A Member who makes a withdrawal under this Paragraph may not again make elective contributions or employee contributions to the Plan or any other qualified or nonqualified plan of the Company or any Controlled Entity for a period of twelve months following such withdrawal. Further, such Member may not make elective contributions under the Plan or any other plan maintained by the Company or any Controlled Entity for such Member's taxable year immediately following the taxable year of the withdrawal in excess of the applicable limit set forth in Section 3.01(d) for such next taxable year less the amount of such Member's elective contributions for the taxable year of the withdrawal. (d) All withdrawals pursuant to this Section shall be made only as of the first day of any month by executing and filing with the Committee the form prescribed by the Committee at least ten days prior to the proposed date of withdrawal. Notwithstanding the provisions of this Section, no withdrawal shall be made from an Account to the extent such Account has been pledged to secure a loan under Section 11.02. If a Member's Account from which a withdrawal is made is invested in more than one Fund, the Member shall designate which Fund, or combination of Funds, from which the withdrawal shall be made. In the absence of such designation, the withdrawal shall be made pro rata from each Fund in which such Account is invested. (e) This Section shall not be applicable to a Member following termination of employment and the amounts in such Member's Accounts shall be distributable in accordance with the provisions of Article X. XI-2 37 11.02 LOANS. (a) Upon application by (1) any Member who is an Employee or (2) any Member no longer employed by the Company, a beneficiary of a deceased Member or an alternate payee under a qualified domestic relations order who retains an Account balance under the Plan and who is a party-in-interest, as that term is defined in section 3(14) of the Act, as to the Plan (an individual who is eligible to apply for a loan under this Section being hereinafter referred to as a "Member" for purposes of this Section), the Committee may in its discretion direct the Trustee to make a loan or loans to such Member, not to exceed 50% of the then value of the Member's Vested Interest in his Accounts. Such loans shall be made pursuant to the provisions of the Committee's written loan procedure, which procedure is hereby incorporated by reference as a part of the Plan. (b) Paragraph (a) above to the contrary notwithstanding, the amount of a loan made to a Member under this Section shall not exceed an amount equal to the difference between: (1) the lesser of $50,000 (reduced by the excess, if any, of (A) the highest outstanding balance of loans from the Plan during the one-year period ending on the day before the date on which the loan is made, over (B) the outstanding balance of loans from the Plan on the date on which the loan is made) or one-half of the present value of the Member's total nonforfeitable accrued benefit under all qualified plans of the Company or a Controlled Entity (but not less than $10,000); minus (2) the total outstanding loan balance of the Member under all other loans from all qualified plans of the Company or a Controlled Entity. XI-3 38 XII. ADMINISTRATION OF THE PLAN 12.01 APPOINTMENT OF COMMITTEE. The general administration of the Plan shall be vested in the Committee which shall be appointed by the Directors and shall consist of one or more persons. Any individual, whether or not an Employee, is eligible to become a member of the Committee. Each member of the Committee shall, before entering upon the performance of his duties, qualify by signing a consent to serve as a member of the Committee under and pursuant to the Plan and by filing such consent with the records of the Committee. For purposes of the Act, the Committee shall be the Plan "administrator" and shall be the "named fiduciary" with respect to the general administration of the Plan (except as to the investment of the assets of the Trust Fund). 12.02 TERM, VACANCIES, RESIGNATION AND REMOVAL. Each member of the Committee shall serve until he resigns, dies or is removed by the Directors. At any time during his term of office, a member of the Committee may resign by giving written notice to the Directors and the Committee, such resignation to become effective upon the appointment of a substitute member or, if earlier, the lapse of thirty days after such notice is given as herein provided. At any time during his term of office, and for any reason, a member of the Committee may be removed by the Directors. Any member of the Committee who is an Employee shall automatically cease to be a member of the Committee as of the date he ceases to be employed by the Company or a Controlled Entity. 12.03 OFFICERS, RECORDS AND PROCEDURES. The Committee may select officers and may appoint a secretary who need not be a member of the Committee. The Committee shall keep appropriate records of its proceedings and the administration of the Plan and shall make available for examination during business hours to any Member or beneficiary such records as pertain to that individual's interest in the Plan. The Committee shall designate the person or persons who shall be authorized to sign for the Committee and, upon such designation, the signature of such person or persons shall bind the Committee. 12.04 MEETINGS. The Committee shall hold meetings upon such notice and at such time and places as it may from time to time determine. Notice to a member shall not be required if waived in writing by that member. A majority of the members of the Committee duly appointed shall constitute a quorum for the transaction of business. All resolutions or other actions taken by the Committee at any meeting where a quorum is present shall be by vote of a majority of those present at such meeting and entitled to vote. Resolutions may be adopted or other action taken without a meeting upon written consent signed by all of the members of the Committee. 12.05 SELF-INTEREST OF MEMBERS. No member of the Committee shall have any right to vote or decide upon any matter relating solely to himself under the Plan or to vote in XII-1 39 any case in which his individual right to claim any benefit under the Plan is particularly involved. In any case in which a Committee member is so disqualified to act and the remaining members cannot agree, the Directors shall appoint a temporary substitute member to exercise all the powers of the disqualified member concerning the matter in which he is disqualified. 12.06 COMPENSATION AND BONDING. The members of the Committee shall not receive compensation with respect to their services for the Committee. To the extent required by the Act or other applicable law, or required by the Company, members of the Committee shall furnish bond or security for the performance of their duties hereunder. 12.07 COMMITTEE POWERS AND DUTIES. The Committee shall supervise the administration and enforcement of the Plan according to the terms and provisions hereof and shall have all powers necessary to accomplish these purposes, including, but not by way of limitation, the right, power, authority and duty: (a) to make rules, regulations and bylaws for the administration of the Plan which are not inconsistent with the terms and provisions hereof, provided such rules, regulations and bylaws are evidenced in writing and copies thereof are delivered to the Trustee and to the Company; (b) to construe all terms, provisions, conditions and limitations of the Plan. In all cases, the construction necessary for the Plan to qualify under the applicable provisions of the Code shall control; (c) to correct any defect or supply any omission or reconcile any inconsistency that may appear in the Plan, in such manner and to such extent as it shall deem expedient to effectuate the purposes of the Plan; (d) to employ and compensate such accountants, attorneys, investment advisors and other agents and employees as the Committee may deem necessary or advisable in the proper and efficient administration of the Plan; (e) to determine all questions relating to eligibility; (f) to prescribe procedures to be followed by distributees in obtaining benefits hereunder; (g) to prepare, file and distribute, in such manner as the Committee determines to be appropriate, such information and material as is required by the reporting and disclosure requirements of the Act; (h) to make a determination as to the right of any person to a benefit under the Plan; XII-2 40 (i) to receive and review reports from the Trustee as to the financial condition of the Trust Fund, including its receipts and disbursements; (j) to instruct the Trustee as to the loans to Members pursuant to the provisions of Section 11.02. (k) to instruct the Trustee as to the investment and reinvestment of the Trust Fund in mutual funds and group annuity contracts consistent with the Fund investment objectives set forth in Article V; and (l) to vote any shares of Company Stock or mutual funds held in the Trust Fund, provided, however, that the Committee shall follow the directions of the Members pursuant to Section 5.03(a) in voting Company Stock, and further provided, that the Committee may appoint a Voting Fiduciary to vote Company Stock in accordance with the directions from the Members. 12.08 COMPANY TO SUPPLY INFORMATION. The Company shall supply full and timely information to the Committee relating to the Compensation of all Members, their ages, their retirement, death or other cause for termination of employment and such other pertinent facts as the Committee may require. The Company shall advise the Trustee of such of the foregoing facts as are deemed necessary for the Trustee to carry out the Trustee's duties under the Plan. When making a determination in connection with the Plan, the Committee shall be entitled to rely upon the aforesaid information furnished by the Company. 12.09 INDEMNIFICATION. The Company shall indemnify and hold harmless each member of the Committee against any and all expenses and liabilities arising out of his or her administrative functions or fiduciary responsibilities, excepting only expenses and liabilities arising out of the individual's own gross negligence or willful misconduct. Expenses against which such person shall be indemnified hereunder include, without limitation, the amounts of any settlement or judgment, costs, counsel fees and related charges reasonably incurred in connection with a claim asserted or a proceeding brought or settlement thereof. XII-3 41 XIII. ADMINISTRATION OF FUNDS 13.01 PAYMENT OF EXPENSES. All expenses incident to the administration of the Plan and Trust, including but not limited to, legal, accounting, Trustee fees, expenses of the Committee and the cost of furnishing any bond or security required of the Committee, may be paid by the Company and, if not paid by the Company, shall be paid by the Trustee from the Trust Fund and, until paid, shall constitute a claim against the Trust Fund which is paramount to the claims of Members and beneficiaries; provided, however, that in the event the Trustee's compensation is to be paid, pursuant to this Section, from the Trust Fund, any individual serving as Trustee who already receives full-time pay from an employer or an association of employers whose employees are participants in the Plan, or from an employee organization whose members are participants in the Plan, shall not receive any additional compensation for serving as Trustee. 13.02 TRUST FUND PROPERTY. All income, profits, recoveries, contributions, forfeitures and any and all moneys, securities and properties of any kind at any time received or held by the Trustee hereunder shall be held for investment purposes as a commingled Trust Fund. The Committee shall maintain Accounts in the name of each Member, but the maintenance of an Account designated as the Account of a Member shall not mean that such Member shall have a greater or lesser interest than that due him by operation of the Plan and shall not be considered as segregating any funds or property from any other funds or property contained in the commingled fund. No Member shall have any title to any specific asset in the Trust Fund. 13.03 DISTRIBUTIONS FROM MEMBERS' ACCOUNTS. Distributions from a Member's Accounts shall be made by the Trustee only if, when, and in the amount and manner directed in writing by the Committee. Any distribution made to a Member or for his benefit shall be debited to such Member's Account or Accounts. All distributions hereunder shall be made in cash except as otherwise specifically provided herein. XIII-1 42 XIV. TRUSTEE'S POWERS AND DUTIES 14.01 ACCEPTANCE OF FUND. The Trustee accepts the Trust Fund hereunder and agrees to accept and retain, manage, administer and hold the Trust Fund in accordance with the terms and provisions of this Plan. The Trustee shall receive any securities or other properties that are tendered to the Trustee pursuant to the Plan that are acceptable to the Trustee. For purposes of the Act, the Trustee shall be the "named fiduciary" with respect to the investment of the assets of the Trust Fund. 14.02 COMMITTEE DISCHARGING DUTY. The Trustee may assume that the Committee is discharging its duties under the Plan until and unless the Trustee is notified to the contrary in writing by any person known to be a Member or by the Company. Upon receipt of such notice, the Trustee may, if the Trustee so desires, apply to a court of competent jurisdiction for guidance with respect to the disposition of the Trust Fund. 14.03 TAXES. If, pursuant to the provisions of any law now or hereafter enacted, any tax shall be imposed upon the Trustee with respect to the assets or income of the Trust Fund, the Trustee (without the necessity of any direction or approval by the Committee) may pay such tax from the Trust Fund, provided such payment is not otherwise prohibited by law. The Trustee, however, shall not be obligated to pay any such tax as long as the validity thereof is contested in good faith. In determining whether or not to pay any such tax, the Trustee may obtain the advice of counsel (including, but not limited to, counsel for the Company or the Committee). 14.04 POWERS OF THE TRUSTEE. Subject to any limitations stated elsewhere herein, in addition to the authority, rights, privileges, powers and duties elsewhere herein vested in the Trustee and those now or hereafter conferred by law, the Trustee shall also have the following authority, rights, privileges, powers and duties: (a) To hold, manage, control, collect and use the Trust Fund in accordance with the terms of this instrument. (b) To sell (for cash or on credit, or both), exchange or otherwise dispose of, the whole or any part of the Trust Fund, at public or private sale; to lease (including, but not limited to, oil, gas or mineral leases), rent, mortgage (including purchase money mortgages), pledge or otherwise encumber, the whole or any part of the Trust Fund; and to loan or borrow money in any manner, including by joint and several obligations, all upon such terms, regardless of the duration of the Trust, as the Trustee may deem advisable (provided that neither the Company nor any Member may borrow from the Trust Fund except as otherwise permitted herein). XIV-1 43 (c) To invest or reinvest the Trust Fund in property of any description whatsoever (including, but not limited to, oil, gas or mineral interests; common or preferred stock; shares of investment trusts or companies; group annuity contracts; bills, notes and other evidences of indebtedness; non-income producing property; and property outside of Texas). (d) To make or hold investments of any part of the Trust Fund in common or undivided interest with other persons or entities, including an undivided interest in any property in which any Trustee, individually or otherwise, may hold an undivided interest; to buy from, or sell to, any person or entity to the extent not otherwise prohibited herein. (e) To make commingled, collective or common investments; and to invest and reinvest all or any portion of the Trust Fund collectively with funds of other pension and profit sharing trusts exempt from tax under section 501(a) of the Code by reason of qualifying under section 401(a) of said Code, including, without limitation, power to invest collectively with such other funds through the medium of one or more of the common, collective or commingled trust funds which has been or may hereafter be established and maintained by the Trustee. To the extent of the interest of the Trust Fund in any such collective trust, the agreement or declaration of trust establishing such collective trust shall be deemed to be adopted and made a part of the Plan and Trust as if set forth in full herein. (f) To deposit or invest all or a part of the Trust Fund in savings accounts, certificates of deposit or other deposits which bear a reasonable rate of interest in a bank or similar financial institution, including the commercial department of the Trustee, if such bank or other institution is supervised by any agency of a state or the federal government. (g) To employ and compensate such attorneys, counsel, brokers, banks, investment advisors or other agents or employees and to delegate to them such of the duties, rights and powers of the Trustee as may be deemed advisable in handling and administering the Plan. (h) To partition any property or interest held as a part of the Trust Fund and, in any and all such partitions, to pay or receive such money or property as may be necessary or advisable to equalize differences; and to evaluate any property belonging to the Trust Fund. (i) To institute, join in, maintain, defend, compromise, submit to arbitration or settle any litigation, claim, obligation or controversy with respect to any matter affecting the Trust Fund, regardless of the manner in which such matter may have arisen, all in the name of the Trustee and without the joinder of any Member. XIV-2 44 (j) To hold uninvested for a reasonable period of time any moneys received by it until the same shall be invested or disbursed pursuant to the provisions of the Plan. The Trustee is also authorized to exercise all the rights, powers, options and privileges now or hereafter granted to, provided for, or vested in, trustees under the Texas Trust Code, except such as conflict with the terms of this instrument or applicable law. As far as possible, no subsequent legislation or regulation shall be in limitation of the rights, powers or privileges granted the Trustee hereunder or in the Texas Trust Code as it exists at the time of the execution hereof. Generally, the Trustee shall have, hold, manage, control, use, invest and reinvest, disburse and dispose of, the Trust Fund under all circumstances to the same extent as if the Trustee were the owner thereof in fee simple, subject only to such limitations as are contained herein and such applicable laws as cannot be waived. This instrument shall always be construed in favor of the validity of any act or omission by or of the Trustee. Notwithstanding the foregoing, the Trustee may not invest the Trust Fund assets in any Company security which is not a "qualifying Company security" or in any Company real property which is not "qualifying Company real property." The Trustee may, however, acquire or hold "qualifying Company securities" or "qualifying Company real property" as an investment provided that any such acquisition or investment will not result in the Trust Fund's holding more than 50% of the then fair market value of the assets of the Trust Fund in "qualifying Company securities" and "qualifying Company real property." The term "qualifying Company securities" means stock or marketable obligations of the Company or an affiliate. The term "qualifying Company real property" means parcels of real property leased to the Company or an affiliate if a substantial number of the parcels are dispersed geographically and if each parcel is suitable for, or adaptable to, more than one use. 14.05 COMPENSATION, EXPENSES AND BOND OF TRUSTEE. Unless prohibited by Section 13.01, the Trustee shall receive such compensation for services as Trustee hereunder as may be agreed upon from time to time by the Company and the Trustee. The Trustee shall be reimbursed for all reasonable expenses incurred while acting as Trustee as provided in Section 13.01. No bond or other security shall be required of the Trustee unless otherwise required by law or by the Company. 14.06 RELIANCE. The Trustee shall be fully protected in relying upon a resolution of the Directors as to the membership of the Committee as it then exists and in continuing to rely upon such resolution until a subsequent resolution is filed with the Trustee by the Directors. The Trustee may accept as true all papers, certificates, statements and representations of fact that are presented to the Trustee by the Committee without investigation, questioning or verification if the Trustee believes same to be true and authentic and may rely solely on the written advice of the Committee on any question of fact. XIV-3 45 14.07 ACCOUNTING. As soon as possible after the end of each Plan Year, the Trustee shall render a written accounting of the administration of the Trust Fund showing all receipts and disbursements during the year and the then value of the assets of the Trust Fund. This accounting shall be transmitted to the Committee and to the Company. 14.08 JUDICIAL PROTECTION. The Trustee may seek judicial protection by any action or proceeding deemed necessary to settle the accounts of the Trustee or may obtain a judicial determination or a declaratory judgment as to a question of construction of the Plan. The Trustee need join as parties defendant in any such action only the Committee and the Company, although the Trustee may join other parties if the Trustee deems it advisable to do so. 14.09 RESIGNATION AND REMOVAL. Any Trustee may resign at any time by giving at least thirty days written notice of such resignation to the Directors. Any Trustee may be removed, with or without cause, by the Directors on written notice of such removal to such Trustee. The Directors may appoint a successor Trustee by instrument in writing, copies of which shall be delivered to the Committee and the former Trustee. If there would be no other Trustee acting hereunder, the actual appointment and qualification of a successor Trustee to whom the Trust Fund may be transferred are conditions which must be fulfilled before the resignation or removal of a Trustee shall become effective. The Directors may by resolution increase or decrease the number of Trustees at any time acting hereunder. XIV-4 46 XV. FIDUCIARY PROVISIONS 15.01 ARTICLE CONTROLS. This Article shall control over any contrary, inconsistent or ambiguous provisions contained in the Plan. 15.02 GENERAL ALLOCATION OF DUTIES. Each fiduciary with respect to the Plan shall have only those specific powers, duties, responsibilities and obligations as are specifically given him under the Plan. The Directors shall have the sole authority to appoint and remove the Trustee or members of the Committee. Except as otherwise specifically provided, the Committee shall have the sole responsibility for the administration of the Plan, which responsibility is specifically described herein. Except as otherwise specifically provided, the Trustee shall have the sole responsibility for the administration, investment and management of the assets held under the Plan. However, if the Committee, as a co-fiduciary, shall exercise its power given hereunder at any time, and from time to time, by written notice to the Trustee, to direct the Trustee in the management, investment and reinvestment of the Trust Fund, then in that event the Trustee shall be subject to all proper directions of the Committee which are made in accordance with the terms of the Plan and the Act. It is intended under the Plan that each fiduciary shall be responsible for the proper exercise of his own powers, duties, responsibilities and obligations hereunder and shall not be responsible for any act or failure to act of another fiduciary except to the extent provided by law or as specifically provided herein. 15.03 FIDUCIARY DUTY. Each fiduciary under the Plan, including but not limited to the Committee and the Trustee as "named fiduciaries," shall discharge his duties and responsibilities with respect to the Plan: (a) solely in the interest of the Members, for the exclusive purpose of providing benefits to Members, and their beneficiaries, and defraying reasonable expenses of administering the Plan; (b) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; (c) by diversifying the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances it is prudent not to do so; and (d) in accordance with the documents and instruments governing the Plan insofar as such documents and instruments are consistent with applicable law. XV-1 47 No fiduciary shall cause the Plan or Trust Fund to enter into a "prohibited transaction" as provided in section 4975 of the Code. 15.04 DELEGATION AND ALLOCATION. The Committee may appoint subcommittees, individuals or any other agents as it deems advisable and may delegate to any of such appointees any or all of the powers and duties of the Committee. Such appointment and delegation must be in writing, specifying the powers or duties being delegated, and must be accepted in writing by the delegatee. Upon such appointment, delegation and acceptance, the delegating Committee members shall have no liability for the acts or omissions of any such delegatee, as long as the delegating Committee members do not violate their fiduciary responsibility in making or continuing such delegation. 15.05 INVESTMENT MANAGER. The Committee may, in its sole discretion, appoint an "investment manager," with power to manage, acquire or dispose of any asset of the Plan and to direct the Trustee in this regard, so long as: (a) the investment manager is (1) registered as an investment adviser under the Investment Advisers Act of 1940, (2) a bank, as defined in the Investment Advisers Act of 1940, or (3) an insurance company qualified to do business under the laws of more than one state; and (b) such investment manager acknowledges in writing that he is a fiduciary with respect to the Plan. Upon such appointment, the Committee shall not be liable for the acts of the investment manager, as long as the Committee members do not violate their fiduciary responsibility in making or continuing such appointment. The Trustee shall follow the directions of such investment manager and shall not be liable for the acts or omissions of such investment manager. The investment manager may be removed by the Committee at any time and within its sole discretion. XV-2 48 XVI. AMENDMENTS No amendment of the Plan may be made which would vest in the Company, directly or indirectly, any interest in or control of the Trust Fund. No amendment may be made which would vary the Plan's exclusive purpose of providing benefits to Members, and their beneficiaries, and defraying reasonable expenses of administering the Plan or which would permit the diversion of any part of the Trust Fund from that exclusive purpose. No amendment shall be made which would reduce any then nonforfeitable interest of a Member. No amendment shall increase the duties or responsibilities of the Trustee unless the Trustee consents thereto in writing. Subject to these limitations and any other limitations contained in the Act or the Code, the Company may from time to time amend, in whole or in part, any or all of the provisions of the Plan on behalf of the Company and other Employing Companies. Specifically, but not by way of limitation, the Company may make any amendment necessary to acquire and maintain a qualified status for the Plan under the Code, whether or not retroactive. XVI-1 49 XVII. DISCONTINUANCE OF CONTRIBUTIONS TERMINATION AND MERGER OR CONSOLIDATION 17.01 DECLARATION OF INTENT. The Company has established the Plan with the bona fide intention and expectation that from year to year it will be able to, and will deem it advisable to, make its contributions as herein provided. However, the Company realizes that circumstances not now foreseen, or circumstances beyond its control, may make it either impossible or inadvisable to continue to make its contributions to the Trustee. Therefore, the Company shall have the power to discontinue contributions to the Plan, terminate the Plan or partially terminate the Plan at any time hereafter. Each member of the Committee and the Trustee shall be notified of such discontinuance, termination or partial termination. 17.02 ADMINISTRATION OF PLAN IN CASE OF DISCONTINUANCE OF CONTRIBUTIONS OR TERMINATION. (a) If the Plan is amended so as to permanently discontinue Company contributions, or if Company contributions are in fact permanently discontinued, the Vested Interest of each affected Member shall be 100%, effective as of the date of discontinuance. In case of discontinuance, the Committee shall remain in existence and all other provisions of the Plan which are necessary, in the opinion of the Committee, for equitable operation of the Plan shall remain in force. (b) If the Plan is terminated or partially terminated, the Vested Interest of each affected Member shall be 100%, effective as of the termination date. Unless the Plan is otherwise amended prior to dissolution of the Company, the Plan shall terminate as of the date of dissolution of the Company. (c) Upon discontinuance or termination, any previously unallocated contributions, forfeitures and net income (or net loss) shall be allocated among the Accounts of the Members on such date of discontinuance or termination according to the provisions of Article IV, as if such date of discontinuance or termination were a Valuation Date. Thereafter, the net income (or net loss) shall continue to be allocated to the Accounts of the Members until the balances are distributed. In the event of termination, the date of the final distribution shall be treated as a Valuation Date. (d) In the case of a total or partial termination of the Plan, and in the absence of a Plan amendment to the contrary, the Trustee shall pay the balance of the Accounts of a Member for whom the Plan is terminated to such Member, subject to the time of payment, manner of payment and consent provisions of Article X. XVII-1 50 17.03 MERGER, CONSOLIDATION OR TRANSFER. This Plan and Trust Fund may not merge or consolidate with, or transfer its assets or liabilities to, any other plan, unless immediately thereafter each Member would, in the event such other plan terminated, be entitled to a benefit which is equal to or greater than the benefit to which he would have been entitled if the Plan were terminated immediately before the merger, consolidation or transfer. Prior to any such merger, consolidation or transfer, the Committee shall make a determination regarding compliance with this Section and shall also comply with the provisions of section 6058(b) of the Code. XVII-2 51 XVIII. OTHER EMPLOYING COMPANIES 18.01 ADOPTION BY OTHER EMPLOYING COMPANIES. It is contemplated that other corporations, associations, partnerships or proprietorships may adopt this Plan and thereby become an "Employing Company" hereunder. Any such entity, whether or not presently existing, may become, upon approval of the Directors, a party hereto by appropriate action of its Board of Directors or noncorporate counterpart. The provisions of the Plan shall apply separately and equally to each Employing Company and its employees in the same manner as is expressly provided for the Company and its Employees, except that the power to appoint or otherwise affect the Committee or the Trustee shall be exercised by the Directors alone and the power to amend or terminate the Plan and Trust Agreement shall be exercised by the Company alone and, in the case of Employing Companies which are Controlled Entities, forfeitures to be allocated pursuant to Section 4.02 shall be allocated on an aggregate basis among the Members employed by all Employing Companies. Nevertheless, any Employing Company may, with the consent of the Directors, incorporate in its adoption agreement or in an amendment document specific provisions relating to the operation of the Plan, and such provisions shall become a part of the Plan as to such Employing Company only. Transfer from the employment of the Company or an Employing Company to the employment of the Company or any other Employing Company shall not be considered a termination of employment hereunder, and an Hour of Service with one shall be considered as an Hour of Service with all others. Any Employing Company may, by appropriate action of its Board of Directors or noncorporate counterpart, terminate its participation in the Plan. Moreover, the Directors may, in their discretion, terminate an Employing Company's Plan participation at any time. 18.02 SINGLE PLAN. For purposes of the Code and the Act, the Plan as adopted by the Employing Companies shall constitute a single plan rather than a separate plan of each Employing Company. All assets in the Trust Fund shall be available to pay benefits to all Members and their beneficiaries. XVIII-1 52 XIX. MISCELLANEOUS 19.01 NOT CONTRACT OF EMPLOYMENT. The adoption and maintenance of this Plan shall not be deemed to be a contract between the Company and any person or to be consideration for the employment of any person. Nothing herein contained shall be deemed to give any person the right to be retained in the employ of the Company or to restrict the right of the Company to discharge any person at any time nor shall the Plan be deemed to give the Company the right to require any person to remain in the employ of the Company or to restrict any person's right to terminate his employment at any time. 19.02 PAYMENTS SOLELY FROM TRUST FUND. All benefits payable under the Plan shall be paid or provided for solely from the Trust Fund and neither the Company nor the Trustee assumes any liability or responsibility for the adequacy thereof. The Committee or the Trustee may require execution and delivery of such instruments as are deemed necessary to assure proper payment of any benefits. 19.03 ALIENATION OF INTEREST FORBIDDEN. Except as otherwise provided with respect to "qualified domestic relations orders" pursuant to section 206(d) of the Act and sections 401(a)(13) and 414(p) of the Code and except as otherwise provided under other applicable law, no right or interest of any kind in any benefit shall be transferable or assignable by any Member or any beneficiary or be subject to anticipation, adjustment, alienation, encumbrance, garnishment, attachment, execution or levy of any kind. Plan provisions to the contrary notwithstanding, the Committee shall comply with the terms and provisions of any "qualified domestic relations orders," including orders which require distributions to an alternate payee prior to a Member's "earliest retirement age" as such term is defined in section 206(d)(3)(E)(ii) of the Act and section 414(p)(4)(B) of the Code, and shall establish appropriate procedures to effect the same. 19.04 NO BENEFITS TO THE COMPANY. No part of the corpus or income of the Trust Fund shall be used for any purpose other than the exclusive purpose of providing benefits for the Members and their beneficiaries and defraying reasonable expenses of administering the Plan. Anything to the contrary herein notwithstanding, the Plan shall never be construed to vest any rights in the Company other than those specifically given hereunder. 19.05 SEVERABILITY. If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions hereof; instead, each provision shall be fully severable and the Plan shall be construed and enforced as if said illegal or invalid provision had never been included herein. 19.06 JURISDICTION. The situs of the Plan and the Trust hereby created is Texas. All provisions of the Plan shall be construed in accordance with the laws of Texas except to the extent preempted by federal law. XIX-1 53 XX. TOP-HEAVY STATUS 20.01 ARTICLE CONTROLS. Any Plan provisions to the contrary notwithstanding, the provisions of this Article shall control to the extent required to cause the Plan to comply with the requirements imposed under section 416 of the Code. 20.02 DEFINITIONS. For purposes of this Article, the following terms and phrases shall have these respective meanings: (a) ACCOUNT BALANCE: As of any Valuation Date, the aggregate amount credited to an individual's account or accounts under a qualified defined contribution plan maintained by the Company or a Controlled Entity (excluding employee contributions which were deductible within the meaning of section 219 of the Code and rollover or transfer contributions made after December 31, 1983 by or on behalf of such individual to such plan from another qualified plan sponsored by an entity other than the Company or a Controlled Entity), increased by (1) the aggregate distributions made to such individual from such plan during a five-year period ending on the Determination Date and (2) the amount of any contributions due as of the Determination Date immediately following such Valuation Date. (b) ACCRUED BENEFIT: As of any Valuation Date, the present value (computed on the basis of the Assumptions) of the cumulative accrued benefit (excluding the portion thereof which is attributable to employee contributions which were deductible pursuant to section 219 of the Code, to rollover or transfer contributions made after December 31, 1983 by or on behalf of such individual to such plan from another qualified plan sponsored by an entity other than the Company or a Controlled Entity, to proportional subsidies or to ancillary benefits) of an individual under a qualified defined benefit plan maintained by the Company or a Controlled Entity increased by (1) the aggregate distributions made to such individual from such plan during a five-year period ending on the Determination Date and (2) the estimated benefit accrued by such individual between such Valuation Date and the Determination Date immediately following such Valuation Date. Solely for the purpose of determining top-heavy status, the Accrued Benefit of an individual shall be determined under (1) the method, if any, that uniformly applies for accrual purposes under all qualified defined benefit plans maintained by the Company and the Controlled Entities or (2) if there is no such method, as if such benefit accrued not more rapidly than under the slowest accrual rate permitted under section 411(b)(1)(C) of the Code. (c) AGGREGATION GROUP: The group of qualified plans maintained by the Company and each Controlled Entity consisting of (1) each plan in which a Key Employee participates and each other plan which enables a plan in which a Key XX-1 54 Employee participates to meet the requirements of sections 401(a)(4) or 410 of the Code or (2) each plan in which a Key Employee participates, each other plan which enables a plan in which a Key Employee participates to meet the requirements of sections 401(a)(4) or 410 of the Code and any other plan which the Company elects to include as a part of such group; provided, however, that the Company may elect to include a plan in such group only if the group will continue to meet the requirements of sections 401(a)(4) and 410 of the Code with such plan being taken into account. (d) ASSUMPTIONS: The interest rate and mortality assumptions specified for top-heavy status determination purposes in any defined benefit plan included in the Aggregation Group including the Plan. (e) DETERMINATION DATE: For the first Plan Year of any plan, the last day of such Plan Year and for each subsequent Plan Year of such plan, the last day of the preceding Plan Year. (f) KEY EMPLOYEE: A "key employee" as defined in section 416(i) of the Code and the Treasury Regulations thereunder. (g) PLAN YEAR: With respect to any plan, the annual accounting period used by such plan for annual reporting purposes. (h) REMUNERATION: Compensation within the meaning of section 415(c)(3) of the Code, as limited by section 401(a)(17) of the Code. (i) VALUATION DATE: With respect to any Plan Year of any defined contribution plan, the most recent date within the twelve-month period ending on a Determination Date as of which the trust fund established under such plan was valued and the net income (or loss) thereof allocated to participants' accounts. With respect to any Plan Year of any defined benefit plan, the most recent date within a twelve-month period ending on a Determination Date as of which the plan assets were valued for purposes of computing plan costs for purposes of the requirements imposed under section 412 of the Code. 20.03 TOP-HEAVY STATUS. (a) The Plan shall be deemed to be top-heavy for a Plan Year, if, as of the Determination Date for such Plan Year, (1) the sum of Account Balances of Members who are Key Employees exceeds 60% of the sum of Account Balances of all Members unless an Aggregation Group including the Plan is not top-heavy or (2) an Aggregation Group including the Plan is top-heavy. An Aggregation Group shall be deemed to be top-heavy as of a Determination Date if the sum (computed in accordance with section 416(g)(2)(B) of the Code and the Treasury Regulations promulgated thereunder) of (1) XX-2 55 the Account Balances of Key Employees under all defined contribution plans included in the Aggregation Group and (2) the Accrued Benefits of Key Employees under all defined benefit plans included in the Aggregation Group exceeds 60% of the sum of the Account Balances and the Accrued Benefits of all individuals under such plans. Notwithstanding the foregoing, the Account Balances and Accrued Benefits of individuals who are not Key Employees in any Plan Year but who were Key Employees in any prior Plan Year shall not be considered in determining the top-heavy status of the Plan for such Plan Year. Further, notwithstanding the foregoing, the Account Balances and Accrued Benefits of individuals who have not performed services for the Company or any Controlled Entity at any time during the five-year period ending on the applicable Determination Date shall not be considered. (b) If the Plan is determined to be top-heavy for a Plan Year, the Vested Interest in his Company Contribution Account of each Member who is credited with an Hour of Service during such Plan Year shall be determined in accordance with the following schedule:
YEARS OF VESTING SERVICE VESTED INTEREST ------------------------ --------------- Less than 2 years 0% 2 years 25% 3 years 40% 4 years 60% 5 years 80% 6 years or more 100%
(c) If the Plan is determined to be top-heavy for a Plan Year, the Company shall contribute to the Plan for such Plan Year on behalf of each Member who is not a Key Employee and who has not terminated his employment as of the last day of such Plan Year an amount equal to: (1) the lesser of (A) 3% of such Member's Remuneration for such Plan Year or (B) a percent of such Member's Remuneration for such Plan Year equal to the greatest percent determined by dividing for each Key Employee the amounts allocated to such Key Employee's Cash or Deferred Account and Company Contribution Account (other than Rollover Contributions) for such Plan Year by such Key Employee's Remuneration; reduced by (2) the amounts allocated to such Member's Cash or Deferred Account and Company Contribution Account for such Plan Year. The minimum contribution required to be made for a Plan Year pursuant to this Paragraph for a Member employed on the last day of such Plan Year shall be made regardless of whether such Member is otherwise ineligible to receive an allocation of the XX-3 56 Company's contributions for such Plan Year. The minimum contribution required to be made pursuant to this Paragraph shall also be made for an Eligible Employee who is not a Key Employee and who is excluded from participation in the Plan for failing to make Cash or Deferred Contributions. Notwithstanding the foregoing, if the Plan is deemed to be top-heavy for a Plan Year, the Company's contribution for such Plan Year pursuant to this Paragraph shall be increased by substituting "4%" in lieu of "3%" in Clause (1) hereof to the extent that the Directors determine to so increase such contribution to comply with the provisions of section 416(h)(2) of the Code. Notwithstanding the foregoing, no contribution shall be made pursuant to this Paragraph for a Plan Year with respect to a Member who is a participant in another defined contribution plan sponsored by the Company or a Controlled Entity if such Member receives under such other defined contribution plan (for the Plan Year of such plan ending with or within the Plan Year of this Plan) a contribution which is equal to or greater than the minimum contribution required by section 416(c)(2) of the Code. Notwithstanding the foregoing, no contribution shall be made pursuant to this Paragraph for a Plan Year with respect to a Member who is a participant in a defined benefit plan sponsored by the Company or a Controlled Entity if such Member accrues under such defined benefit plan (for the Plan Year of such plan ending with or within the Plan Year of this Plan) a benefit which is at least equal to the benefit described in section 416(c)(1) of the Code. If the preceding sentence is not applicable, the requirements of this Paragraph shall be met by providing a minimum benefit under such defined benefit plan which, when considered with the benefit provided under the Plan as an offset, is at least equal to the benefit described in section 416(c)(1) of the Code. 20.04 TERMINATION OF TOP-HEAVY STATUS. If the Plan has been deemed to be top-heavy for one or more Plan Years and thereafter ceases to be top-heavy, the provisions of this Article shall cease to apply to the Plan effective as of the Determination Date on which it is determined to no longer be top-heavy. Notwithstanding the foregoing, the Vested Interest of each Member as of such Determination Date shall not be reduced and, with respect to each Member who has five or more years of Vesting Service on such Determination Date (three or more years of Vesting Service for Determination Dates occurring in Plan Years beginning after December 31, 1988), the Vested Interest of each such Member shall continue to be determined in accordance with the schedule set forth in Section 20.03(b). 20.05 EFFECT OF ARTICLE. Notwithstanding anything contained herein to the contrary, the provisions of this Article shall automatically become inoperative and of no effect to the extent not required by the Code or the Act. XX-4 57 XXI. SECURITIES REGULATIONS Notwithstanding any other provision hereof, it is specifically provided that the Trustee shall not purchase Company Stock or other Company securities during any period in which such purchase is, in the opinion of counsel for the Company or the Committee, restricted by any law or regulation applicable thereto. During such period, amounts that would otherwise be invested in Company Stock or other Company securities shall be invested in such other assets as the Trustee may in its discretion determine or the Trustee may hold such amounts uninvested for a reasonable period pending the designated investment. XXI-1 58 EXECUTED this 10th day of December, 1990. SEAGULL ENERGY CORPORATION By: /s/ JOE T. RYE --------------------------------- TEXAS COMMERCE BANK NATIONAL ASSOCIATION, TRUSTEE By: /s/ LUKE PROVENZANO --------------------------------- (iii) 59 FIRST AMENDMENT TO SEAGULL THRIFT PLAN WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has heretofore adopted the SEAGULL THRIFT PLAN (the "Plan"); and WHEREAS, the Company has amended and restated the Plan, effective as of January 1, 1989 except as otherwise indicated therein; and WHEREAS, the Company desires to further amend the Plan; NOW, THEREFORE, the Plan is hereby amended, effective as of January 1, 1991, by adding the following sentence to the third paragraph of Section 1.01(23) of the Plan: "Further, Hours of Service with Mesa Limited Partnership, and any entity which would be a Controlled Entity if Mesa Limited Partnership were the Company (Mesa Limited Partnership and such entities being hereinafter referred to as the "Mesa Controlled Group"), shall be taken into account for all purposes under the Plan with respect to employees of the Mesa Controlled Group who become Employees in connection with the acquisition of assets from the Mesa Controlled Group by the Company." As amended hereby, the Plan is specifically ratified and reaffirmed. Executed this 22 day of May, 1991. SEAGULL ENERGY CORPORATION By /s/ JOE T. RYE ------------------------------------ Joe, T. Rye, Senior Vice President and Chief Financial Officer 60 SECOND AMENDMENT TO SEAGULL THRIFT PLAN WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has heretofore adopted the SEAGULL THRIFT PLAN (the "Plan"); and WHEREAS, the Company has amended and restated the Plan, effective as of January 1, 1989, except as otherwise indicated therein; and WHEREAS, the Company desires to further amend the Plan; NOW, THEREFORE, the Plan is hereby amended as follows, effective as of January 1, 1991: 1. Sections 3.07(c), (d) and (e) of the Plan shall be deleted and the following shall be substituted therefor: "(c) Anything to the contrary herein notwithstanding, if, for any Plan Year, the aggregate Company Contributions allocated to the Accounts of Highly Compensated Employees exceeds the maximum amount of such Company Contributions permitted on behalf of such Highly Compensated Employees pursuant to Section 3.04 (determined by reducing Company Contributions made on behalf of Highly Compensated Employees in order of the `CONTRIBUTION PERCENTAGES' (as that term is defined in section 401(m)(3) of the Code and Treasury Regulations thereunder) beginning with the highest of such percentages), such excess shall be distributed to the Highly Compensated Employees on whose behalf such excess contributions were made (or, if such excess contributions are forfeitable, they shall be forfeited) before the end of the next following Plan Year. For purposes of this Paragraph, the determination and correction of excess Company Contributions allocated to the Account of a Member whose contribution percentage is determined under the family aggregation rules of sections 401(m) and 414(q) of the Code shall be made in accordance with the provisions of such sections and the Treasury Regulations thereunder. Any excess contribution which is forfeitable shall be considered forfeited on the date which is 2-1/2 months after the end of the Plan Year. Company Contributions shall be forfeited pursuant to this Paragraph only if distribution of all vested Company Contributions is insufficient to meet the requirements of this Paragraph. (d) In coordinating excess contributions pursuant to this Section, such excess contributions shall be treated in the following order: 61 (1) first, excess deferrals described in Paragraph (a) above shall be distributed; (2) second, excess Cash or Deferred Contributions described in Paragraph (b) above shall be distributed; and (3) third, excess Company Contributions described in Paragraph (c) above shall be distributed (or, if forfeitable, forfeited). (e) If, after all distributions and forfeitures required by Paragraphs (a), (b), (c) and (d) above have been completed for a Plan Year, Cash or Deferred Contributions, which were considered in determining the amount of Company Contributions allocated to a Member pursuant to Section 4.02 for such Plan Year, have been distributed, but the Company Contributions which were allocated to such Member based upon such distributed Cash or Deferred Contributions have not been either distributed or forfeited, such remaining Company Contributions with respect to such distributed Cash or Deferred Contributions shall be forfeited, without regard to whether they were otherwise forfeitable under the Plan. Such forfeiture shall be considered to have occurred on the date which is 2-1/2 months after the end of the Plan Year. (f) Any distribution or forfeiture of excess contributions pursuant to this Section shall be adjusted for income or loss allocated thereto in accordance with the provisions of Section 4.03 through the Valuation Date next preceding the date of the distribution or forfeiture." 2. Section 4.04(b) of the Plan shall be deleted and the following shall be substituted therefor: "(b) Contrary Plan provisions notwithstanding, in no event shall the Annual Additions credited to a Member's Accounts for any Limitation Year exceed the Maximum Annual Additions for such Member for such year. If as a result of allocation of forfeitures, a reasonable error in estimating a Member's Compensation or because of other limited facts and circumstances, the Annual Additions which would be credited to a Member's Accounts for a Limitation Year would nonetheless exceed the Maximum Annual Additions for such Member for such year, the excess Annual Additions which, but for this Section, would have been allocated to such Member's Accounts shall be disposed of as follows: (1) first, any such excess Annual Additions in the form of Company Discretionary Contributions and forfeitures shall, to the extent such amounts -2- 62 would otherwise have been allocated to such Member's Company Contribution Account, be allocated to a suspense account and shall be held therein until allocated to Members' Company Contribution Accounts in the same manner as a forfeiture; (2) next, any such excess Annual Additions in the form of Cash or Deferred Contributions on behalf of such Member which would not have been considered in determining the amount of Company Contributions allocated to such Member pursuant to Section 4.02 shall be distributed to such Member, adjusted for income or loss allocated thereto; and (3) finally, any such excess Annual Additions in the form of Cash or Deferred Contributions on behalf of such Member which would have been considered in determining the amount of Company Contributions allocated to such Member pursuant to Section 4.02 shall be distributed to such Member, adjusted for income or loss allocated thereto, and the Company Contributions based upon such distributed Cash or Deferred Contributions shall, to the extent such amounts would have otherwise been allocated to such Member's Company Contribution Account, be allocated instead to a suspense account and shall be held therein until allocated to Members' Company Contribution Accounts in the same manner as a forfeiture." 3. Section 11.01(c) of the Plan shall be deleted and the following shall be substituted therefor: "(c) A Member who has a financial hardship, as determined by the Committee, and who has made all available withdrawals pursuant to the Paragraphs above and pursuant to the provisions of any other plans of the Company and any Controlled Entities of which he is a member and who has obtained all available loans pursuant to Section 11.02 and pursuant to the provisions of any other plans of the Company and any Controlled Entities of which he is a member may withdraw from his Cash or Deferred Account amounts not to exceed the lesser of (1) the then value of such Account or (2) the amount determined by the Committee as being available for withdrawal pursuant to this Paragraph. For purposes of this Paragraph, financial hardship means the immediate and heavy financial needs of the Member. A withdrawal based upon financial hardship pursuant to this Paragraph shall not exceed the amount required to meet the immediate financial need created by the hardship and not reasonably available from other resources of the Member. The amount required to meet the immediate financial need may include any amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution. The determina- -3- 63 tion of the existence of a Member's financial hardship and the amount required to be distributed to meet the need created by the hardship shall be made by the Committee. A withdrawal shall be deemed to be made on account of an immediate and heavy financial need of a Member if the withdrawal is for: (1) expenses for medical care described in section 213(d) of the Code previously incurred by the Member, the Member's spouse or any dependents of the Member (as defined in section 152 of the Code) or necessary for these persons to obtain medical care described in section 213(d) of the Code and which are not reimbursed or reimbursable by insurance; (2) costs directly related to the purchase of a principal residence for the Member (excluding mortgage payments); (3) payment of tuition and related educational fees for the next twelve months of post-secondary education for the Member, the Member's spouse, children or dependents (as defined in section 152 of the Code); (4) payments necessary to prevent the eviction of the Member from his principal residence or foreclosure on the mortgage of the Member's principal residence; or (5) such other financial needs which the Commissioner of Internal Revenue may deem to be immediate and heavy financial needs through the publication of revenue rulings, notices and other documents of general applicability. The decision of the Committee shall be final and binding, provided that all Members similarly situated shall be treated in a uniform and nondiscriminatory manner. The above notwithstanding, (1) withdrawals under this Paragraph from a Member's Cash or Deferred Account shall be limited to the sum of the Member's Cash or Deferred Contributions to the Plan, plus income allocable thereto and credited to the Member's Cash or Deferred Account as of December 31, 1988, less any previous withdrawals of such amounts, and (2) amounts allocated to a Member's Cash or Deferred Account pursuant to the provisions of Section 4.02(d) or (e) shall not be subject to withdrawal. A Member who makes a withdrawal under this Paragraph may not again make elective contributions or employee contributions to the Plan or any other qualified or nonqualified plan of the Company or any Controlled Entity for a period of twelve months following such withdrawal. Further, such Member may not make elective contributions under the Plan or any other plan maintained by the Company or any Controlled Entity for -4- 64 such Member's taxable year immediately following the taxable year of the withdrawal in excess of the applicable limit set forth in Section 3.01(d) for such next taxable year less the amount of such Member's elective contributions for the taxable year of the withdrawal." 4. As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED this 15th day of November, 1991. SEAGULL ENERGY CORPORATION By /s/ JOE T. RYE ----------------------------------- Joe T. Rye, Senior Vice President and Chief Financial Officer -5- 65 THIRD AMENDMENT TO SEAGULL THRIFT PLAN WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has heretofore adopted the SEAGULL THRIFT PLAN (the "Plan"); and WHEREAS, pursuant to Section 7.1.2(a) of the Stock Purchase Agreement dated November 16, 1992 between Arkla, Inc. and the Company and any amendments thereto, the Company agreed to cover employees of Arkla Exploration Company ("AEC") under the Plan effective as of January 1, 1993 and to give such employees credit thereunder for their period of employment with AEC, Arkla, Inc. or any affiliate thereof; and WHEREAS, the Company desires to amend the Plan to accomplish such purpose; NOW, THEREFORE, the Plan is hereby amended, effective as of January 1, 1993, by adding the following sentence to the third paragraph of Section 1.01(23) of the Plan: "Further, Hours of Service with Arkla Exploration Company ("AEC"), and any entity which would be a Controlled Entity if AEC were the Company, shall be taken into account for all purposes under the Plan with respect to Employees who were employees of AEC on the closing date of the Company's acquisition of the stock of AEC from Arkla, Inc." As amended hereby, the Plan is specifically ratified and reaffirmed. Executed this 22 day of December, 1992. SEAGULL ENERGY CORPORATION By /s/ ROBERT M. KING ---------------------------------- 66 FOURTH AMENDMENT TO SEAGULL THRIFT PLAN WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has heretofore adopted and maintains the SEAGULL THRIFT PLAN (the "Plan") for the benefit of its eligible employees; and WHEREAS, the Company desires to amend the Plan; NOW, THEREFORE, the Plan is hereby amended as follows: I. Effective January 1, 1993: 1. The following new Paragraphs (16A), (17A), (19A) and (19B) shall be added to Section 1.01 of the Plan: "(16A) DIRECT ROLLOVER: A payment by the Plan to an Eligible Retirement Plan designated by a Distributee. (17A) DISTRIBUTEE: Each (A) Member entitled to an Eligible Rollover Distribution, (B) Member's surviving spouse with respect to the interest of such surviving spouse in an Eligible Rollover Distribution, and (C) former spouse of a Member who is an alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, with regard to the interest of such former spouse in an Eligible Rollover Distribution. (19A) ELIGIBLE RETIREMENT PLAN: (A) With respect to a Distributee other than a surviving spouse, an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified plan described in section 401(a) of the Code, which under its provisions accepts such Distributee's Eligible Roll-over Distribution and (B) with respect to a Distributee who is a surviving spouse, an individual retirement account described in section 408(a) of the Code or an individual retirement annuity described in section 408(b) of the Code. (19B) ELIGIBLE ROLLOVER DISTRIBUTION: Any distribution of all or any portion of the Accounts of a Distributee other than (A) a distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for 67 the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated beneficiary or for a specified period of ten years or more, (B) a distribution to the extent such distribution is required under section 401(a)(9) of the Code, (C) the portion of a distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities), (D) a loan treated as a distribution under section 72(p) of the Code and not excepted by section 72(p)(2), (E) a loan in default that is a deemed distribution, (F) any corrective distributions provided in Sections 3.07 and 4.04(b), and (G) any other distribution so designated by the Internal Revenue Service in revenue rulings, notices, and other guidance of general applicability." 2. The last sentence of Section 10.01(b) of the Plan shall be deleted and the following shall be substituted therefor: "No less than thirty days and no more than ninety days before his Benefit Commencement Date, the Committee shall inform the Member of his right to defer his Benefit Commencement Date and shall describe the Member's Direct Rollover election pursuant to Section 10.04 below." 3. Section 10.01(g) of the Plan shall be deleted and the following shall be substituted therefor: "Benefits shall be paid (or transferred pursuant to Section 10.04) in cash except that a Member (or his designated beneficiary or legal representative in the case of a deceased Member) may elect to have the portion of his Accounts invested in Fund A distributed (or transferred pursuant to Section 10.04) in full shares of Company Stock to the extent of the Member's pro rata portion of the shares of Company Stock held in Fund A with any balance of the Member's interest in Fund A (including fractional shares) to be paid or transferred in cash." 4. The following new Section 10.04 shall be added to Article X of the Plan: "10.04 DIRECT ROLLOVER ELECTION. (a) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this Section, a Distributee may elect, at the time and in the manner prescribed by the Committee, to have all or any portion of an Eligible Rollover Distribution (other than any portion attributable to the offset of an outstanding loan balance of such Member pursuant to the Plan's loan procedure) paid directly to an Eligible -2- 68 Retirement Plan specified by the Distributee in a Direct Rollover. The preceding sentence notwithstanding, a Distributee may elect a Direct Rollover pursuant to this Section only if such Distributee's Distributions during the Plan Year are reasonably expected to total $200 or more. Furthermore, if less than 100% of the Member's Eligible Rollover Distribution is to be a Direct Rollover, the amount of the Direct Rollover must be $500 or more. Prior to any Direct Rollover pursuant to this Section, the Distributee shall furnish the Committee with a statement from the plan, account, or annuity to which the benefit is to be transferred verifying that such plan, account, or annuity is, or is intended to be, an Eligible Retirement Plan. (b) No less than thirty days and no more than ninety days before his Benefit Commencement Date, the Committee shall inform the Distributee of his Direct Rollover right pursuant to this Section. A distribution or Direct Rollover of the Distributee's benefit may commence less than thirty days after such notice is given, provided that (1) the Committee clearly informs the Distributee that the Distributee has a right to a period of at least thirty days after receiving the notice to consider the decision of whether or not to elect a Direct Rollover and (2) the Distributee, after receiving the notice, affirmatively elects either a distribution or a Direct Rollover or a combination thereof." 5. The following sentence shall be added to the end Section 11.01(d) of the Plan: "Any withdrawal pursuant to this Article XI shall be subject to the Direct Rollover election described in Section 10.04." II. Effective August 5, 1993, the following shall be added to the end of Section 1.01(23) of the Plan: "Hours of Service shall also include any hours required to be credited by federal law other than the Act or the Code, but only under the conditions and to the extent so required by such federal law." III. Effective January 1, 1994, Section 1.01(15) of the Plan shall be deleted and the following shall be substituted therefor: "(15) COMPENSATION: The total of all wages, salaries, fees for professional service and other amounts received in cash or in kind by a Member for services actually rendered or labor performed for the Company while a Member to the extent such amounts are includable in gross income, excluding, however, bonuses, incentive or other supplemental pay, reimbursements and other expense allowances, cash and noncash fringe benefits, moving expenses, Company contributions to or payments from this or any other deferred compensation program, whether such program is qualified under section 401(a) of the Code or -3- 69 nonqualified, welfare benefits, amounts realized from the receipt or exercise of a stock option that is not an incentive stock option within the meaning of section 422 of the Code, amounts realized at the time property described in section 83 of the Code is freely transferable or no longer subject to a substantial risk of forfeiture, amounts realized as a result of an election described in section 83(b) of the Code, any amount realized as result of a disqualifying disposition within the meaning of section 421(a) of the Code and any other amounts that receive special tax benefits under the Code but are not hereinafter included; provided that, for the purposes of this definition, the following shall also be included: (A) elective contributions made on a Member's behalf by the Company that are not includable in income under section 125, section 402(e)(3), section 402(h) or section 403(b) of the Code, (B) compensation deferred under an eligible deferred compensation plan within the meaning of section 457(b) of the Code and (C) employee contributions described in section 414(h) of the Code that are picked up by the employing unit and are treated as employer contributions. The above notwithstanding, the Compensation of any Member taken into account for purposes of the Plan shall be limited to $150,000 for any Plan Year with such amount to be (i) adjusted automatically to reflect any amendments to section 401(a)(17) of the Code and any cost-of-living increases authorized by section 401(a)(17) of the Code, (ii) prorated for a Plan Year of less than twelve months and to the extent otherwise required by applicable law, and (iii) in the case of a Member who is either a five-percent owner of the Company (within the meaning of section 416(i)(1)(A)(iii) of the Code) or is one of the ten most Highly Compensated Employees for the Plan Year and who has a spouse and/or lineal descendants who are under the age of nineteen as of the end of a Plan Year who receive Compensation during such Plan Year, prorated and allocated among such Member, his spouse, and/or lineal descendants under the age of nineteen based on the Compensation for such Plan Year of each such individual." IV. As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED this 1st day of September, 1994. SEAGULL ENERGY CORPORATION By /s/ ROBERT M. KING ----------------------------------- -4- 70 FIFTH AMENDMENT TO SEAGULL THRIFT PLAN WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has heretofore adopted and maintains the SEAGULL THRIFT PLAN (the "Plan") for the benefit of its eligible employees; and WHEREAS, the Company desires to amend the Plan; NOW, THEREFORE, the Plan is hereby amended as follows, effective as of January 1, 1989, except as otherwise provided herein: 1. Sections 3.02 and 3.03 of the Plan shall be deleted and the following shall be substituted therefor: "3.02 COMPANY MATCHING CONTRIBUTIONS. For each calendar month, the Company shall contribute, as Company Matching Contributions on behalf of each Member who has completed one Year of Service, as defined below, as of the first day of such month, an amount which equals 100% of the Cash or Deferred Contributions which were made pursuant to Section 3.01 on behalf of such Member during such month and which were not in excess of 6% of such Member's Compensation for such month. For purposes of this Section, an Employee shall be credited with one Year of Service upon the completion of any twelve month period commencing with his Commencement Date or any anniversary thereof during which twelve month period such Employee is credited with 1,000 Hours of Service. An Employee who completed one Year of Service prior to a termination of his employment (regardless of whether such Employee had elected to defer compensation pursuant to Section 3.01) shall continue to be credited with one Year of Service upon his reemployment with the Company. 3.03 COMPANY DISCRETIONARY CONTRIBUTIONS. (a) For each Plan Year, the Company may contribute, as a Company Discretionary Contribution, an additional amount as determined in the discretion of the Directors. (b) In addition to the Company Matching Contributions made pursuant to Section 3.02 and the Company Discretionary Contribution made pursuant to Section 3.03(a), and as authorized by the Directors, for each Plan Year, the Company may contribute as a "safe harbor contribution" for such Plan Year, on behalf of Members who are not Highly Compensated Employees, the amount necessary to cause the Plan to satisfy the restrictions 71 set forth in Section 3.01(e) and Section 3.04. Any amounts contributed pursuant to this Paragraph to cause the Plan to satisfy the restrictions set forth in Section 3.01(e) shall be allocated to the Cash or Deferred Accounts of the Members who are not Highly Compensated Employees and any amounts contributed pursuant to this Paragraph to cause the Plan to satisfy the restrictions of Section 3.04 shall be allocated to the Cash or Deferred Accounts of the Members who are not Highly Compensated Employees." 2. The following shall be added to Section 3.04 of the Plan: "If multiple use of the alternative limitation (within the meaning of section 401(m)(9) of the Code and Treasury Regulation ss. 1.401(m)-2(b)) occurs during a Plan Year, such multiple use shall be corrected in accordance with the provisions of Treasury Regulation ss. 1.401(m)-2(c); provided, however, that if such multiple use is not eliminated by making "safe harbor contributions" pursuant to Section 3.03(b), then the "actual contribution percentages" of all Highly Compensated Employees participating in the Plan shall be reduced, and the excess contributions distributed, in accordance with the provisions of Section 3.07(c) and applicable Treasury Regulations, so that there is no such multiple use." 3. The following language shall be added to Section 3.07(c) of the Plan, effective as of January 1, 1991: "If vested Company Contributions are distributed to a Member and nonvested Company Contributions remain credited to such Member's Accounts, such nonvested Company Contributions shall vest at the same rate as if such distribution had not been made." 4. Section 20.02(h) of the Plan shall be deleted and the following shall be substituted therefor: "(h) REMUNERATION: The total of all amounts paid by the Company to or for the benefit of a Member for services rendered or labor performed for the Company, which are required to be reported on the Member's federal income tax withholding statement or statements (Form W-2 or its subsequent equivalent) for the calendar year ending with the Plan Year, limited to $200,000 ($150,000 for Plan Years beginning after December 31, 1993) for any Plan Year with such limitation to be (1) adjusted automatically to reflect any amendments to section 401(a)(17) of the Code and any cost-of-living increases authorized by section 401(a)(17) of the Code, (2) prorated for a Plan Year of less than twelve months and to the extent otherwise required by applicable law and (3) in the case of a Member who is either a five-percent owner of the Company (within the meaning of section 416(i)(1)(A)(iii) of the Code) or is one of the ten most Highly Compensated Employees for the Plan Year and who has a spouse and/or lineal descendants who are under the age -2- 72 of nineteen as of the end of a Plan Year who receive Remuneration during such Plan Year, prorated and allocated among such Member, his spouse, and/or lineal descendants under the age of nineteen based on the Remuneration for such Plan Year of each such individual." 5. As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED this 26 day of May, 1995. SEAGULL ENERGY CORPORATION By /s/ ILLEGIBLE ---------------------------------- -3- 73 SIXTH AMENDMENT TO SEAGULL THRIFT PLAN WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has heretofore adopted and maintains the SEAGULL THRIFT PLAN (the "Plan") for the benefit of its eligible employees; and WHEREAS, the Company desires to amend the Plan; NOW, THEREFORE, the Plan is hereby amended as follows, effective as of January 1, 1995, except as otherwise provided herein: 1. The phrase "plus such Member's allocation of forfeitures" shall be deleted from Section 1.01(10)(B) of the Plan. 2. Section 4.02(c) of the Plan shall be deleted and the following shall be substituted therefor: "(c) As of the last day of each Plan Year, the Company Discretionary Contribution, if any, made pursuant to Section 3.03(a) for such Plan Year shall be allocated as of the last day of such Plan Year to the Company Contribution Account of each Member (regardless of whether such Member elected to have Cash or Deferred Contributions made to the Plan on his behalf during such Plan Year) who had completed one Year of Service as of the last day of such Plan Year and who (A) was an Eligible Employee on the last day of such Plan Year or (B) terminated his employment during such Plan Year on or after his Normal Retirement Date or by reason of total and permanent disability or death. The allocation to each such eligible Member's Company Contribution Account shall be that portion of such Company Discretionary Contribution which is in the same proportion that such Member's Compensation for such Plan Year bears to the total of all such Members' Compensation for such Plan Year." 3. The following new Section 4.02(f) shall be added to Article IV of the Plan: "(f) Any amounts that are forfeited under any provision hereof during a Plan Year shall be applied to reduce Company Matching Contributions next coming due." 4. Section 4.04(b) of the Plan shall be deleted and the following shall be substituted therefor: 74 "(b) Contrary Plan provisions notwithstanding, in no event shall the Annual Additions credited to a Member's Accounts for any Limitation Year exceed the Maximum Annual Additions for such Member for such year. If as a result of a reasonable error in estimating a Member's Compensation, a reasonable error in determining the amount of elective deferrals (within the meaning of section 402(g)(3) of the Code) that may be made with respect to any individual under the limits of section 415 of the Code, or because of other limited facts and circumstances, the Annual Additions which would be credited to a Member's Accounts for a Limitation Year would nonetheless exceed the Maximum Annual Additions for such Member for such year, the excess Annual Additions which, but for this Section, would have been allocated to such Member's Accounts shall be disposed of as follows: (1) first, any such excess Annual Additions in the form of Company Discretionary Contributions shall, to the extent such amounts would otherwise have been allocated to such Member's Company Contribution Account, be allocated to a suspense account and shall be held therein until used to reduce future Company Matching Contributions in the same manner as a forfeiture; (2) next, any such excess Annual Additions in the form of Cash or Deferred Contributions which are not considered in determining the amount of Company Matching Contributions pursuant to Section 3.02(a) shall be distributed to such Member, adjusted for income or loss allocated thereto; and (3) finally, any such excess Annual Additions in the form of Cash or Deferred Contributions which are considered in determining the amount of Company Matching Contributions pursuant to Section 3.02(a) shall be distributed to such Member, adjusted for income or loss allocated thereto, and the Company Matching Contributions based upon such distributed Cash or Deferred Contributions shall, to the extent such amounts would have otherwise been allocated to such Member's Company Contribution Account, be allocated instead to a suspense account and shall be held therein until used to reduce future Company Matching Contributions in the same manner as a forfeiture." 5. The phrase "and forfeitures" shall be deleted from Article VI(b), Section 7.02(b) and Section 9.01(b) of the Plan. 6. Effective April 4, 1995, the following new Section 8.02(e) shall be added to Article VIII the Plan: "(e) Paragraph (b) above notwithstanding, if a Member shall cease to be employed by reason of a reduction in force, as hereinafter described, such Member shall then have a 100% Vested Interest in his -2- 75 Company Contribution Account. The employment of a Member shall be considered as having been terminated because of a `reduction in force' if such Member's employment is terminated as the result of a workforce reduction, geographic consolidation or segment disposition." 7. The last two sentences of Section 8.04(b) of the Plan shall be deleted and the following shall be substituted therefor: "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 for the Plan Year in which such amounts are restored that would otherwise be available to reduce Company Matching Contributions. 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 4.02(c), and any additional amount needed to restore such forfeited amounts shall be a minimum required Company Contribution (without regard to current or accumulated earnings and profits)." 8. Section 8.04(e) of the Plan shall be deleted and the following shall be substituted therefor: "(e) Any forfeitures occurring pursuant to Paragraphs (a), (c), or (d) above shall be held in a suspense account and shall be applied to reduce Company Matching Contributions next coming due. For all Valuation Dates prior to such application, forfeited amounts held in the suspense account shall not receive allocations of net income (or net loss) pursuant to Section 4.03." 9. Effective April 4, 1995, the following sentence shall be added to Section 10.01(e) of the Plan: "Notwithstanding the foregoing, in the event of a segment disposition by the Company, the limitation of this Paragraph (e)(2) shall not apply to a Member who transfers to the employment of the purchaser of such segment if such segment disposition satisfies the requirements of section 401(k)(10) of the Code." 10. Section 10.02 of the Plan shall be deleted and the following shall be substituted therefor: "10.02 UNCLAIMED BENEFITS. In the case of a benefit payable on behalf of a Member, if the Committee is unable to locate the Member or beneficiary to whom such benefit is payable, upon the Committee's determination thereof, such benefit shall be forfeited, held in a suspense account, and applied to reduce Company Matching Contributions next coming due. For -3- 76 all Valuation Dates prior to such application, forfeited amounts held in the suspense account shall not participate in allocations of the net income (or net loss) of the Trust Fund. Notwithstanding the foregoing, if subsequent to any such forfeiture the Member or beneficiary to whom such benefit is payable makes a valid claim for such benefit, such forfeited benefit shall be restored to the Plan in the manner provided in Section 8.04(b)." 11. The third sentence of Section 18.01 of the Plan shall be deleted and the following shall be substituted therefor: "The provisions of the Plan shall apply separately and equally to each Employing Company and its employees in the same manner as is expressly provided for the Company and its Employees, except that the power to appoint or otherwise affect the Committee or the Trustee shall be exercised by the Directors alone and the power to amend or terminate the Plan and Trust Agreement shall be exercised by the Company alone." 12. As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED this 7th day of July, 1995. SEAGULL ENERGY CORPORATION By /s/ ROBERT W. SHOWER --------------------------------- -4- EX-10.11 6 SUPPLEMENTAL BENEFIT PLAN AS AMENDED INCL. AMEND 1 1 EXHIBIT 10.11 SEAGULL ENERGY CORPORATION SUPPLEMENTAL BENEFIT PLAN Effective: January 1, 1991 2 SEAGULL ENERGY CORPORATION SUPPLEMENTAL BENEFIT PLAN WITNESSETH: WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has heretofore adopted the SEAGULL ENERGY CORPORATION SUPPLEMENTAL THRIFT PLAN (the "Plan") for the benefit of certain of its eligible employees; and WHEREAS, the Company desires to restate the Plan and amend the Plan in several respects, intending thereby to provide an uninterrupted and continuing program of benefits; and WHEREAS, the Company, in restating and amending the Plan, desires to change the name of the Plan to the "SEAGULL ENERGY CORPORATION SUPPLEMENTAL BENEFIT PLAN;" NOW, THEREFORE, the Plan is hereby restated in its entirety as follows with no interruption in time, effective as of January 1, 1991: (i) 3 ARTICLE I DEFINITIONS AND CONSTRUCTION 1.1 DEFINITIONS. Where the following words and phrases appear in the Plan, they shall have the respective meanings set forth below, unless their context clearly indicates otherwise: (1) ACCOUNT: A memorandum bookkeeping account established on the records of the Company for a Participant which is credited with amounts determined pursuant to Sections 3.1, 3.2, 3.3 and 3.4 of the Plan. Each Participant shall have three Accounts, a Deferred Compensation Account, an ESOP Account and a Match Account. As of any determination date, a Participant's benefit under this Plan shall be equal to the amount credited to his Accounts as of such date. (2) BONUS: With respect to any Participant for a Plan Year, amounts considered as annual or incentive bonuses. (3) CODE: The Internal Revenue Code of 1986, as amended. (4) COMMITTEE: The Compensation Committee of the Board of Directors of the Company. (5) COMPANY: Seagull Energy Corporation. (6) COMPANY CONTRIBUTIONS: Contributions made to the ESOP by the Company with respect to a Participant pursuant to Section 5.02 of the ESOP. (7) COMPANY MATCHING CONTRIBUTIONS: Contributions made to the Thrift Plan by the Company on a Participant's behalf pursuant to Section 3.03 of such Thrift Plan. (8) COMPENSATION: With respect to any Participant for a Plan Year, amounts considered as compensation pursuant to Section 1.01(15) of the Thrift Plan, determined without regard to the limitations imposed by section 401(a)(17) of the Code. (9) DEFERRED COMPENSATION ACCOUNT: An Account credited with amounts deter- mined pursuant to Sections 3.1 and 3.4 of the Plan. (10) EFFECTIVE DATE: January 1, 1991 as to this restatement of the Plan. (11) ERISA: The Employee Retirement Income Security Act of 1974, as amended. (12) ESOP: The Seagull Employee Stock Ownership Plan. I-1 4 (13) ESOP ACCOUNT: An account credited with amounts determined pursuant to Sections 3.3 and 3.4 of the Plan. (14) LIMITATIONS: Benefit limitations imposed on the ESOP and the Thrift Plan by ERISA and by sections 401(a)(17), 401(k)(3), 401(m)(2), 402(g) and 415 of the Code. (15) MATCH ACCOUNT: An account credited with amounts determined pursuant to Sections 3.2 and 3.4 of the Plan. (16) PARTICIPANT: Any employee of the Company who has been designated by the Committee as a Participant in the Plan until such employee ceases to be a Participant in accordance with Section 2.1 of the Plan. (17) PLAN: The Seagull Energy Corporation Supplemental Benefit Plan. (18) PLAN YEAR: The twelve-consecutive month period commencing January 1 of each year. (19) THRIFT PLAN: The Seagull Thrift Plan. 1.2 CONSTRUCTION. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender; the singular shall include the plural, and vice versa; unless the context clearly indicates to the contrary. The headings of Articles and Sections herein are indicated solely for convenience and if there is any conflict between such headings and the text of the Plan, the text shall control. I-2 5 ARTICLE II PARTICIPATION 2.1 ELIGIBILITY. Any employee of the Company shall become a Participant upon designation by the Committee. Once an employee has been designated as a Participant, he shall automatically continue to be a Participant until he ceases to be an employee of the Company or is removed as a Participant by the Committee. 2.2 COMPENSATION DEFERRAL ELECTION. Any Participant may elect to defer receipt of an integral percentage of from 1% to 14% of his Compensation for any calendar year under this Plan. A Participant's election to defer receipt of Compensation for any subsequent calendar year under this Plan shall be made prior to the January 1 of such calendar year and shall be irrevocable for such calendar year. The reduction in a Participant's Compensation pursuant to his election shall be effected by Compensation reductions as of each payroll period within the election period. 2.3 BONUS DEFERRAL ELECTION. Any Participant may elect to defer receipt of an integral percentage of from 1% to 14% of his Bonus for any calendar year under this Plan. A Participant's election to defer receipt of a percentage of his Bonus under this Plan shall be made prior to January 1 of the calendar year during which such Bonus is earned and shall be irrevocable for such calendar year. The reduction of a Participant's Bonus pursuant to this election shall be effected at the time such Bonus is paid. II-1 6 ARTICLE III BENEFITS 3.1 AMOUNT OF DEFERRED COMPENSATION BENEFIT. As of the last day of each month of each Plan Year, a Participant's Deferred Compensation Account shall be credited with an amount equal to the Compensation or Bonus deferred under this Plan pursuant to an election by the Participant described in Article II for such month. 3.2 AMOUNT OF SUPPLEMENTAL THRIFT BENEFIT. As of the last day of each month of each Plan Year, the Match Account of any Participant who makes the maximum allowable contribution under the Thrift Plan but, as a result of the Limitations, such contribution is less than the percentage of Compensation such Participant actually elected under such Plan shall be credited with an amount equal to the excess, if any, of (a) over (b) where: (a) equals the Company Matching Contributions to which such Participant would have been entitled under the Thrift Plan based upon the percentage of Compensation such Participant actually elected to defer under such Plan for such month assuming none of the Limitations were imposed; and (b) equals the Company Matching Contributions which were made on behalf of such Participant under the Thrift Plan for such month. 3.3 AMOUNT OF SUPPLEMENTAL ESOP BENEFIT. As of the last day of each Plan Year, a Participant's ESOP Account shall be credited with an amount equal to the excess, if any, of (a) over (b) where: (a) is the amount of Company Contributions which would have been allocated to such Participant's Stock and Investment Accounts under the ESOP assuming none of the Limitations were imposed; and (b) is the amount of Company Contributions actually allocated to such Participant's Stock and Investment Accounts under the ESOP. 3.4 CREDITING OF INCOME. (a) INTEREST EQUIVALENTS. As of the last day of each calendar quarter, each of a Participant's Accounts shall be credited with a dollar amount equal to interest on the amounts credited to such Account (excluding any amounts being credited to such Account as of such date) computed at the sum of: (1) the prime rate published in the Wall Street Journal on the last business day of such calendar quarter, plus III-1 7 (2) a rate based upon the number of complete Plan Years which have elapsed since the date the Participant commenced participation in the Plan in accordance with the following schedule:
NUMBER OF PLAN YEARS ADDITIONAL RATE OF INTEREST -------------------- --------------------------- Less than 5 0% 5 but less than 10 1% 10 or more 2%
(b) ALTERNATIVE INVESTMENT IN STOCK UNITS. In lieu of having his Accounts credited with interest equivalents pursuant to Paragraph (a) above, a Participant may elect in accordance with the provisions of Paragraph (c) below to have the value of his Accounts determined as if they had been credited with a number of shares of stock (the "Phantom Stock") equal to the number of shares of common stock of the Company which could have been purchased with such Accounts on the date of such election and, for amounts which are subsequently credited to the Participant's Account, on the date such amounts are so credited, based upon the average of the closing prices of common stock of the Company on the twenty trading days preceding such date. As of the last day of each calendar quarter and as of any other date which the Committee shall determine, the Committee shall redetermine the value of each Participant's Accounts credited with Phantom Stock based upon the increase or decrease in the value of the common stock of the Company during such quarter plus credit for dividends paid during such quarter; for the purpose of such redetermination, one share of Phantom Stock shall be deemed to be the equivalent of one share of the common stock of the Company. (c) CREDITING ELECTION. Prior to the first day of any calendar quarter, a Participant may elect to have his Accounts credited with Phantom Stock pursuant to Paragraph (b) above for such quarter. Any such election shall be effective until revoked by the Participant. If a Participant revokes an election made pursuant to this Paragraph as of the first day of any calendar quarter, such Participant's Accounts shall be credited with the value of the number of shares of Phantom Stock credited to his Accounts as of the last day of the prior calendar quarter, based upon the average of the closing prices of common stock of the Company on the twenty trading days preceding such date. If a Participant fails to make any election under this Paragraph, his Accounts shall be credited with interest equivalents pursuant to Paragraph (a) above. III-2 8 ARTICLE IV FORFEITURES If any portion of a Participant's Company Matching Account under the Thrift Plan or such Participant's Stock Account or Investment Account under the ESOP is forfeited for any reason, amounts equal to the percentages of his Match or ESOP Accounts under this Plan which correspond to the percentages of his Accounts under the Thrift Plan or the ESOP which were forfeited shall be debited from his Accounts. Notwithstanding the preceding sentence, in the event of a change of control that is not approved, recommended and supported by at least two-thirds of the Directors that were also Directors prior to the occurrence of any such change of control in actions taken prior to, and with respect to, such change of control, amounts credited to a Participant's Accounts shall be nonforfeitable as of the date of such change of control. Further, in the event of a change of control other than as described in the preceding sentence, amounts credited to a Participant's Accounts shall be nonforfeitable upon involuntary termination of employment within the twelve-month period following the date of such change of control. For purposes of the Plan, a "change of control" shall be deemed to have occurred if (i) any person (other than Employee or the Company) including a "group" as determined in accordance with Section 13(d)(3) of the Securities Exchange Act of 1934, becomes the beneficial owner of shares of the Company having 40% or more of the total number of votes that may be cast for the election of Directors; or (ii) as a result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the persons who were Directors before the Transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor thereto. The determinations of whether a change of control has occurred and whether such change of control was not approved, recommended or supported by the Directors in actions taken prior to, and with respect to, such change of control shall be made by the Committee as existing at least six months prior to the occurrence of such change of control and its determination shall be final. IV-1 9 ARTICLE V FORM AND TIMING OF BENEFITS Upon a Participant's termination of employment, his benefit under this Plan shall be paid to him (or his beneficiary) in a lump sum in cash as soon as practicable following such termination of employment. Notwithstanding the preceding sentence, in the event of a change of control that is not approved, recommended and supported by at least two-thirds of the Directors that were also Directors prior to the occurrence of any such change of control in actions taken prior to, and with respect to, such change of control, each Participant's benefit under this Plan shall be paid to him (or his beneficiary) in a lump sum in cash as soon as practicable, but no later than thirty days following the date on which such change of control occurs. If a Participant has elected to have his Accounts credited with Phantom Stock pursuant to Section 3.4(c), the Participant shall be paid an amount equal to the value of his Accounts as of the last day of the calendar month preceding his termination of employment or the change of control as described in the preceding sentence, based upon the average of the closing prices of common stock of the Company on the twenty trading days preceding such date. If a Participant's employment is terminated by reason of death, his benefit under this Plan shall be paid to the same recipient or recipients as are paid his benefits under the Thrift Plan. V-1 10 ARTICLE VI MISCELLANEOUS 6.1 ADMINISTRATION. This Plan shall be administered by the Committee as an unfunded plan which is not intended to meet the qualification requirements of section 401 of the Code. The Committee shall have full power and authority to interpret, construe and administer this Plan and the Committee's interpretations and construction hereof, and actions hereunder, including the timing, form, amount or recipient of any payment to be made hereunder, shall be binding and conclusive on all persons for all purposes. In the event that an individual's claim for a benefit is denied or modified, the Committee shall provide such individual with a written statement setting forth the specific reasons for such denial or modification in a manner calculated to be understood by the individual. Any such written statement shall reference the pertinent provisions of the Plan upon which the denial or modification is based and shall explain the Plan's claim review procedure. Such individual may, within sixty days of receipt of such written statement, make written request to the Committee for review of its initial decision. Within sixty days following such request for review, the Committee shall, after affording such individual a reasonable opportunity for a full and fair hearing, render its final decision in writing to such individual. No member of the Committee shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Plan unless attributable to his own willful misconduct or lack of good faith. Members of the Committee shall not participate in any action or determination regarding their own benefits hereunder. 6.2 INDEMNIFICATION. The Company shall indemnify and hold harmless each member of the Committee and any other person acting on its behalf, against any and all expenses and liabilities arising out of his or her administrative functions or fiduciary responsibilities, excepting only expenses and liabilities arising out of the individual's own willful misconduct. Expenses against which such person shall be indemnified hereunder include, without limitation, the amounts of any settlement or judgment, costs, counsel fees and related charges reasonably incurred in connection with a claim asserted or a proceeding brought or settlement thereof. 6.3 AMENDMENT OR TERMINATION. The Company may, in its sole discretion, terminate, suspend, or amend this Plan at any time or from time to time, in whole or in part, by means of 30 days written notice given to each Participant. If the Company should amend or suspend this Plan, no such amendment or suspension shall reduce any amounts credited to a Participant's Accounts which are nonforfeitable as of the date of such amendment or suspension. Notwithstanding any provision to the contrary, if the Company terminates this Plan, all amounts credited to the Participants' Account shall become nonforfeitable as of the date of such termination and the Committee, in its sole discretion, may elect to pay all such amounts as soon as practicable following such date. VI-1 11 6.4 PARACHUTE PAYMENT LIMITATIONS. To the extent that any amounts payable pursuant to this Plan would result in the receipt by Participant of a "parachute payment," as such term is defined in section 280G(b)(2)(A) of the Code, Participant shall be entitled to receive only that amount which would result in Participant's receiving an aggregate present value of all payments in the nature of compensation received by or for the benefit of Participant from the Company and its affiliates that are contingent on a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company, whether pursuant to the Plan or other arrangements, which is equal to 2.999 times Participant's "base amount," as such term is defined in section 280G(b)(3)(A) of the Code. The foregoing limitation is intended to provide the Company with the discretion to reduce payments in the nature of compensation to or for the benefit of Participant that are contingent on a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company, whether pursuant to the Plan or other arrangements,in whatever manner is most suitable under the circumstances so as to avoid imposition of the sanctions imposed under sections 280G and 4999 of the Code with respect to "excess parachute payments," as such term is defined in section 280G(b)(1) of the Code; provided, however, that the Company shall have the obligation to exercise such discretion in a manner that results in the minimization of federal income tax incidence to Participant. 6.5 NONGUARANTEE OF EMPLOYMENT. Nothing contained in this Plan shall be construed as a contract of employment between the Company and any Participant, or as a right to have benefits which are provided by the Company maintained, or as a right of any Participant to be continued in the employment of the Company, or as a limitation of the right of the Company to discharge any of its Participants, with or without cause. 6.6 RIGHTS TO COMPANY'S ASSETS. No Participant shall have any right to, or interest in, any assets of the Company upon termination of employment or otherwise, except as provided from time to time under this Plan, and then only to the extent of the benefits payable under the Plan to such Participant. This Plan is unfunded, and all payments of benefits as provided for in this Plan shall be made solely out of the general assets of the Company on a current disbursements basis. 6.7 NONALIENATION OF BENEFITS. Subject to income tax withholding, benefits payable under this Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, including any such liability which is for alimony or other payments for the support of a spouse or former spouse, or for any other relative of the Participant, prior to actually being received; and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any right to benefits payable hereunder, shall be void. The Company shall not in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements or torts of any person entitled to benefits hereunder. VI-2 12 6.8 WITHHOLDING TAXES. The Company shall have the right to deduct from all payments made under this Plan, any federal, state or local taxes required by law to be withheld with respect to such payments. 6.9 SEVERABILITY. If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions hereof; instead, each provision shall be fully severable and the Plan shall be construed and enforced as if said illegal or invalid provision had never been included herein. 6.10 OTHER EMPLOYING COMPANIES. Any subsidiary or affiliate of the Company which has adopted the Thrift Plan may adopt this Plan for the benefit of its employees. The provisions of this Plan shall be applicable with respect to each employer separately, and amounts payable hereunder shall be paid by the employer which employs the particular employee. If any employee shall be entitled to benefits under the Thrift Plan on account of service with more than one employer, the obligations under this Plan shall be apportioned among such employers on the basis of time of service with each. 6.11 JURISDICTION. The situs of the Plan hereby created is Texas. All provisions of the Plan shall be construed in accordance with the laws of Texas except to the extent preempted by federal law. VI-3 13 IN WITNESS WHEREOF, the parties hereto have caused these presents to be executed this 6th day of February, 1991. SEAGULL ENERGY CORPORATION By /s/ JOE T. RYE ----------------------------------- Joe T. Rye Senior Vice President and Chief Financial Officer (ii) 14 FIRST AMENDMENT TO SEAGULL ENERGY CORPORATION SUPPLEMENTAL BENEFIT PLAN WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has heretofore adopted the SEAGULL ENERGY CORPORATION SUPPLEMENTAL BENEFIT PLAN (the "Plan"); and WHEREAS, the Company desires to amend the Plan; NOW, THEREFORE, the Plan shall be amended as follows, effective as of January 1, 1992: 1. Section 2.2 of the Plan shall be deleted and the following shall be substituted therefor: "2.2 COMPENSATION DEFERRAL ELECTION. Any Participant may elect to defer receipt of an integral percentage of from 1% to 14% of his Compensation for any calendar year under this Plan. A Participant's election to defer receipt of Compensation for any calendar year under this Plan shall be made prior to the January 1 of such calendar year and shall be irrevocable for such calendar year. Notwithstanding the preceding sentence, in the case of an employee who first becomes a Participant after the beginning of a calendar year, such Participant may elect prospectively to defer receipt of an integral percentage of from 1% to 14% of his Compensation for the remaining portion of such calendar year under this Plan; provided, however, that such election must be made within thirty days after the date he becomes a Participant. The reduction in a Participant's Compensation pursuant to his election shall be effected by Compensation reductions as of each payroll period within the election period." 2. Section 3.2 of the Plan shall be deleted and the following shall be substituted therefor: "3.2 AMOUNT OF SUPPLEMENTAL THRIFT BENEFIT. (a) As of the last day of each month of each Plan Year, and at the discretion of the Committee, the Match Account of any Participant who is not eligible to receive Company Matching Contributions under the Thrift Plan because he has not completed the required period of service with the Company shall be credited with an amount equal to 6% of such Participant's Compensation for such month. 15 (b) As of the last day of each month of each Plan Year, the Match Account of any Participant who makes the maximum allowable contribution under the Thrift Plan but, as a result of the Limitations, such contribution is less than the percentage of Compensation such Participant actually elected under such Plan shall be credited with an amount equal to the excess, if any, of (1) over (2) where: (1) equals the Company Matching Contributions to which such Participant would have been entitled under the Thrift Plan based upon the percentage of Compensation such Participant actually elected to defer under such Plan for such month assuming none of the Limitations were imposed; and (2) equals the Company Matching Contributions which were made on behalf of such Participant under the Thrift Plan for such month." 3. As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED this 2nd day of March, 1992. SEAGULL ENERGY CORPORATION By /s/ ILLEGIBLE ---------------------------------- -2- EX-10.22 7 1990 STOCK OPTION PLAN INCL. FORMS OF AGREEMENTS 1 EXHIBIT 10.22 SEAGULL ENERGY CORPORATION 1990 STOCK OPTION PLAN I. PURPOSE OF THE PLAN The SEAGULL ENERGY CORPORATION 1990 STOCK OPTION PLAN (the "Plan") is intended to provide a means whereby certain employees of SEAGULL ENERGY CORPORATION, a Texas corporation (the "Company"), and its subsidiaries may develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to remain with and devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its shareholders. Accordingly, the Company may grant to certain employees the option ("Option") to purchase shares of the common stock of the Company ("Stock"), as hereinafter set forth. Options granted under the Plan may be either incentive stock options, within the meaning of section 422A(b) of the Internal Revenue Code of 1986, as amended (the "Code"), ("Incentive Stock Options") or options which do not constitute Incentive Stock Options. II. ADMINISTRATION The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"). Members of the Committee shall be persons that are "disinterested persons" within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"). The Committee shall have sole authority to select the individuals who are to be granted Options from among those eligible hereunder and to establish the number of shares which may be issued under each Option. The Committee is authorized to interpret the Plan and may from time to time adopt such rules and regulations, consistent with the provisions of the Plan, as it may deem advisable to carry out the Plan. All decisions made by the Committee in selecting the individuals to whom Options shall be granted, in establishing the number of shares which may be issued under each Option and in construing the provisions of the Plan shall be final. III. OPTION AGREEMENTS Each Option shall be evidenced by an Option Agreement and shall contain such terms and conditions, and may be exercisable for such periods, as may be approved by the Committee. The terms and conditions of the respective Option Agreements need not be identical. Specifically, an Option Agreement may provide for the surrender of the right to purchase shares under the Option in return for a payment in cash or shares of Stock or a combination of cash and shares of Stock equal in value to the excess of the fair market value of the shares with respect to which the right to purchase is surrendered over the option price therefor ("Stock Appreciation Rights"), on such terms and conditions as the Committee in its sole discretion may prescribe; provided, that with 2 respect to Stock Appreciation Rights granted to employees who are subject to Section 16 of the 1934 Act, except as provided in Subparagraph VIII(c) hereof, the Committee shall retain final authority (i) to determine whether an optionee shall be permitted, or (ii) to approve an election by an optionee, to receive cash in full or partial settlement of Stock Appreciation Rights. Moreover, an Option Agreement may provide for the payment of the option price, in whole or in part, by the delivery of a number of shares of Stock (plus cash if necessary) having a fair market value equal to such option price. Finally, in the case of an option which does not constitute an Incentive Stock Option, an Option Agreement may provide for payment of the amount of federal or state income tax withholding required with respect to the exercise of such Option by permitting an Optionee to surrender shares of Stock or authorize the Company to withhold from shares of Stock acquired upon exercise of such Option shares of Stock equal in value to such withholding. For all purposes under the Plan, the fair market value of a share of Stock on a particular date shall be equal to the closing price of the Stock on the New York Stock Exchange Composite Tape on that date, or if no prices are reported on that date, on the last preceding date on which such prices of the Stock are so reported. Each Option and all rights granted thereunder shall not be transferable other than by will or the laws of descent and distribution, and shall be exercisable during the optionee's lifetime only by the optionee or the optionee's guardian or legal representative. IV. ELIGIBILITY OF OPTIONEE Options may be granted only to individuals who are key employees (including officers and directors who are also key employees) of the Company or any parent or subsidiary corporation (as defined in section 425 of the Code) of the Company at the time the Option is granted. Options may be granted to the same individual on more than one occasion. No Incentive Stock Option shall be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporation, within the meaning of section 422A(b)(6) of the Code, unless (i) at the time such Option is granted the option price is at least 110% of the fair market value of the Stock subject to the Option and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant. To the extent that the aggregate fair market value (determined at the time the respective Incentive Stock Option is granted) of stock with respect to which Incentive Stock Options granted after 1986 are exercisable for the first time by an individual during any calendar year under all incentive stock option plans of the Company and its parent and subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be treated as options which do not constitute Incentive Stock Options. The Committee shall determine, in accordance with applicable provisions of the Code, Treasury Regulations and other administrative pronouncements, which of an optionee's Incentive Stock Options will not constitute Incentive Stock Options because of such -2- 3 limitation and shall notify the optionee of such determination as soon as practicable after such determination. V. SHARES SUBJECT TO THE PLAN The aggregate number of shares which may be issued under Options granted under the Plan shall not exceed 500,000 shares of Stock. Such shares may consist of authorized but unissued shares of Stock or previously issued shares of Stock reacquired by the Company. Any of such shares which remain unissued and which are not subject to outstanding Options at the termination of the Plan shall cease to be subject to the Plan, but, until termination of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. Should any Option hereunder expire or terminate prior to its exercise in full, the shares theretofore subject to such Option may again be subject to an Option granted under the Plan. The aggregate number of shares which may be issued under the Plan shall be subject to adjustment in the same manner as provided in Paragraph VIII hereof with respect to shares of Stock subject to Options then outstanding. Exercise of an Option in any manner, including an exercise involving a Stock Appreciation Right, shall result in a decrease in the number of shares of Stock which may thereafter be available, both for purposes of the Plan and for sale to any one individual, by the number of shares as to which the Option is exercised. Separate stock certificates shall be issued by the Company for those shares acquired pursuant to the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of any Option which does not constitute an Incentive Stock Option. VI. OPTION PRICE The purchase price of Stock issued under each Option shall be determined by the Committee, but in the case of an Incentive Stock Option, such purchase price shall not be less than the fair market value of Stock subject to the Option on the date the Option is granted. VII. TERM OF PLAN The Plan shall be effective upon the date of its adoption by the Board, provided the Plan is approved by the shareholders of the Company within twelve months thereafter. Except with respect to Options then outstanding, if not sooner terminated under the provisions of Paragraph IX, the Plan shall terminate upon and no further Options shall be granted after the expiration of ten years from the date of its adoption by the Board. VIII. RECAPITALIZATION OR REORGANIZATION (a) The existence of the Plan and the Options granted hereunder shall not affect in any way the right or power of the Board or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities ahead of or affecting Stock or the rights thereof, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. -3- 4 (b) The shares with respect to which Options may be granted are shares of Stock as presently constituted, but if, and whenever, prior to the expiration of an Option theretofore granted, the Company shall effect a subdivision or consolidation of shares of Stock or the payment of a stock dividend on Stock without receipt of consideration by the Company, the number of shares of Stock with respect to which such Option may thereafter be exercised (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the purchase price per share shall be proportionately increased. (c) If the Company recapitalizes or otherwise changes its capital structure, thereafter upon any exercise of an Option theretofore granted the optionee shall be entitled to purchase under such Option, in lieu of the number of shares of Stock as to which such Option shall then be exercisable, the number and class of shares of stock and securities to which the optionee would have been entitled pursuant to the terms of the recapitalization if, immediately prior to such recapitalization, the optionee had been the holder of record of the number of shares of Stock as to which such Option is then exercisable. If (i) the Company shall not be the surviving entity in any merger or consolidation (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company), (ii) the Company sells, leases or exchanges or agrees to sell, lease or exchange all or substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary of the Company), (iii) the Company is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control (including, without limitation, power to vote) of more than 40% of the outstanding shares of Stock, or (v) as a result of or in connection with a contested election of directors, the persons who were directors of the Company before such election shall cease to constitute a majority of the Board (each such event is referred to herein as a "Corporate Change"), then effective as of a date (selected by the Committee) within (a) ten days after the approval by the shareholders of the Company of such merger, consolidation, sale, lease or exchange of assets or dissolution or such election of directors or (b) thirty days of such change of control, the Committee, acting in its sole discretion without the consent or approval of any optionee, shall effect one or more of the following alternatives, which may vary among individual optionees: (1) accelerate the time at which Options then outstanding may be exercised so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Committee, after which specified date all unexercised Options and all rights of optionees thereunder shall terminate, (2) require the mandatory surrender to the Company by selected optionees of some or all of the outstanding Options held by such optionees (irrespective of whether such Options are then -4- 5 exercisable under the provisions of the Plan) as of a date, before or after such Corporate Change, specified by the Committee, in which event the Committee shall thereupon cancel such Options and pay to each optionee an amount of cash per share equal to the excess of the amount calculated in Subparagraph (d) below (the "Change of Control Value") of the shares subject to such Option over the exercise price(s) under such Options for such shares, (3) make such adjustments to Options then outstanding as the Committee deems appropriate to reflect such Corporate Change (provided, however, that the Committee may determine in its sole discretion that no adjustment is necessary to Options then outstanding) or (4) provide that thereafter upon any exercise of an Option theretofore granted the optionee shall be entitled to purchase under such Option, in lieu of the number of shares of Stock as to which such Option shall then be exercisable, the number and class of shares of stock or other securities or property to which the optionee would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets and dissolution if, immediately prior to such merger, consolidation or sale of assets and dissolution the optionee had been the holder of record of the number of shares of Stock as to which such Option is then exercisable. (d) For the purposes of clause (2) in Subparagraph (c) above, the "Change of Control Value" shall equal the amount determined in clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per share price offered to shareholders of the Company in any such merger, consolidation, sale of assets or dissolution transaction, (ii) the price per share offered to shareholders of the Company in any tender offer or exchange offer whereby a Corporate Change takes place, or (iii) if such Corporate Change occurs other than pursuant to a tender or exchange offer, the fair market value per share of the shares into which such Options being surrendered are exercisable, as determined by the Committee as of the date determined by the Committee to be the date of cancellation and surrender of such Options. In the event that the consideration offered to shareholders of the Company in any transaction described in this Subparagraph (d) or Subparagraph (c) above consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash. (e) Any adjustment provided for in Subparagraphs (b) or (c) above shall be subject to any required shareholder action. (f) Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Options theretofore granted or the purchase price per share. IX. AMENDMENT OR TERMINATION OF THE PLAN The Board in its discretion may terminate the Plan at any time with respect to any shares for which Options have not theretofore been granted. The Board shall have the right to alter or amend the Plan or any part thereof from time to time; provided, that no change in any Option theretofore granted may be made which would impair the rights of the optionee without the consent of such optionee; and provided, further, that the Board may not make any alteration or amendment which would materially increase the benefits accruing to participants under the Plan, increase the aggregate number of shares which may be issued pursuant to the provisions of the Plan, change the class of individuals eligible to receive Options under the Plan or extend the term of the Plan, without the approval of the shareholders of the Company. -5- 6 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 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 422A(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 THAT NUMBER OF FULL YEARS 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%
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. 7 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 Company, 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 ex- ercised 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 retirement (including normal retirement at or after age sixty-five or early retirement with the prior written consent of the Company) 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 -2- 8 income to Employee for federal or state income tax purposes, except as hereinafter provided, Employee shall deliver to the Company at the time of such exercise or disposition such amount of money 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. 5. STATUS OF STOCK. The Company intends to register for issue under 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 -3- 9 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 425 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 -4- 10 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: -------------------------------- ----------------------------------- Employee -5- 11 AMENDMENT TO STOCK OPTION AGREEMENT(S) WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has previously adopted the SEAGULL ENERGY CORPORATION 1981 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1981 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1983 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN, the SEAGULL ENERGY CORPORATION 1986 STOCK OPTION PLAN (RESTATED), the SEAGULL ENERGY CORPORATION 1990 STOCK OPTION PLAN and the SEAGULL ENERGY CORPORATION 1993 STOCK OPTION PLAN (collectively, the "Option Plans"); and WHEREAS, certain nonstatutory stock options ("NSOs") and incentive stock options (collectively, "Options") have heretofore been granted to the optionee, an employee of the Company other than an individual subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Employee"), that are currently outstanding under the Option Plans, each of such Options being listed on the schedule attached hereto and evidenced by a Nonstatutory Stock Option Agreement or an Incentive Stock Option Agreement (collectively, the "Agreements"); and WHEREAS, the Employee's employment with the Company will be terminated as the result of the Company's workforce reduction, geographic consolidation and segment disposition announced April 4, 1995, and the Company desires to amend the Agreements in certain respects; NOW, THEREFORE, the Agreements shall be amended as follows, effective as of _______________ (Employee's employment termination date): 1. The vesting schedule contained in the Agreements shall be waived and all Options outstanding under such Agreements shall be exercisable in full. 2. Notwithstanding any provision in the Agreements to the contrary, with respect to any NSOs (or portions thereof) that were exercisable under the Agreements as of _______________ (day before Employee's employment termination date)("Vested NSOs"), such Vested NSOs shall continue to be exercisable by the Employee, his estate or the person who acquires such Vested NSOs by will or the laws of descent and distribution, at any time on or before December 31, 1996. 3. As amended hereby, the Agreements are specifically ratified and reaffirmed. 12 IN WITNESS WHEREOF, the Company has caused this amendment to be duly executed by one of its officers thereunto duly authorized, and the Employee has executed this amendment, effective as of ________________ (Employee's employment termination date). SEAGULL ENERGY CORPORATION By: -------------------------------- ----------------------------------- Employee EX-13 8 PORTIONS OF SEAGULL'S & SUBSIDIARIES ANNUAL REPORT 1 ================================================================================ CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTENTS - --------------------------------------------------------------------------------
PAGE Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) . . . . . . . . . . . . . . . . . . . . 20 Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . 32 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . 33 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . 34 Consolidated Statements of Shareholders'Equity . . . . . . . . . . . . . . . 35 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 36 Report of Management to Shareholders . . . . . . . . . . . . . . . . . . . . 64 Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . 65
- -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA(1)(2) (Dollars in Thousands Except Per Share Amounts) - --------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------- Revenues . . . . . . . . . . $ 336,273 $ 408,104 $ 377,165 $ 238,829 $ 248,537 Earnings applicable to common stock(3) . . . . . 632 3,246 27,198 6,688 5,107 Earnings per share(3)(4) . . 0.02 0.09 0.76 0.26 0.23 Net cash provided by operating activities before changes in operating assets and liabilities . . 97,384 166,765 160,762 81,368 66,654 Net cash provided by operating activities . . . 63,283 170,925 119,761 72,187 69,773 Total assets . . . . . . . . 1,198,796 1,299,550 1,118,251 1,102,964 618,552 Long-term portion of debt . . 545,343 620,805 459,787 608,011 219,154 Shareholders' equity(5) . . . 447,668 441,101 439,379 243,673 235,797 Capital expenditures . . . . 85,347 150,252 112,042 43,651 71,709 Acquisitions, net of cash acquired . . . -- 193,859 29,470 401,888 201,767
(1) Reference is made to the Consolidated Financial Statements of Seagull Energy Corporation and Subsidiaries and Notes thereto, appearing on pages 32 through 63 of this Annual Report. (2) Includes (i) certain gas and oil assets purchased from Mesa Limited Partnership since March 8, 1991, (ii) Seagull Mid-South Inc. since December 31, 1992, and (iii) Seagull Energy Canada Ltd. since January 4, 1994. (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 Company's common shares effected June 4, 1993. (5) The Company has not declared any cash dividends on its common stock since it became a public entity in 1981. ------------------------------- Seagull Energy Corporation 19 2 ================================================================================ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- CONSOLIDATED HIGHLIGHTS (Dollars in Thousands Except Per Share Amounts) - --------------------------------------------------------------------------------
Percent Change 1995 1994 1993 1994-'95 1993-'94 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues: Exploration and production . . . . . . . . . . . . . . $ 209,328 $ 262,543 $ 227,437 - 20 + 15 Pipeline and marketing . . . . . . . . . . . . . . . . 29,175 39,963 42,484 - 27 - 6 Alaska transmission and distribution . . . . . . . . . 97,770 105,598 107,244 - 7 - 2 - ------------------------------------------------------------------------------------------------------------------------------------ $ 336,273 $ 408,104 $ 377,165 - 18 + 8 ==================================================================================================================================== Operating profit (loss): Exploration and production . . . . . . . . . . . . . . $ (46,756) $ 28,266 $ 42,969 - 265 - 34 Pipeline and marketing . . . . . . . . . . . . . . . . 9,165 11,936 14,065 - 23 - 15 Alaska transmission and distribution . . . . . . . . . 23,141 21,865 18,955 + 6 + 15 - ------------------------------------------------------------------------------------------------------------------------------------ $ (14,450) $ 62,067 $ 75,989 - 123 - 18 ==================================================================================================================================== Net earnings . . . . . . . . . . . . . . . . . . . . . . $ 632 $ 3,246 $ 27,198 - 81 - 88 Net cash provided by operating activities before changes in operating assets and liabilities . . . . . . 97,384 166,765 160,762 - 42 + 4 Net cash provided by operating activities . . . . . . . . 63,283 170,925 119,761 - 63 + 43 Earnings per share . . . . . . . . . . . . . . . . . . . 0.02 0.09 0.76 - 78 - 88 ==================================================================================================================================== Weighted average number of common shares outstanding (in thousands) . . . . . . . . . . . . . . 36,717 36,904 35,790 - 1 + 3 ====================================================================================================================================
Revenues and operating profit (loss) are discussed in the respective segment sections. - -------------------------------------------------------------------------------- 1995 RESULTS COMPARED TO 1994 - -------------------------------------------------------------------------------- Seagull Energy Corporation and Subsidiaries ("Seagull" or the "Company") recorded a decrease in net earnings for the year ended December 31, 1995 as compared to 1994 primarily due to a decrease in operating profit and an increase in general and administrative ("G&A") expense, which were substantially offset by the pre-tax gain on the sale of certain pipeline assets in September 1995 of $82 million. The decrease in operating profit is primarily due to declines in the exploration and production ("E&P") segment resulting from the 16% reduction in the Company's average realized natural gas prices and a $44.4 million non-cash charge for the impairment of gas and oil properties. The increase in G&A expense is primarily due to one-time pre-tax charges of $8 million for expenses involved in the workforce reduction and consolidation implemented by the Company during the second quarter of 1995. See the "Exploration and Production," "Pipeline and Marketing" and "Other (Income) Expense" sections below for further discussion. Net cash provided by operating activities before and after changes in operating assets and liabilities decreased for the year ended December 31, 1995 versus 1994 primarily due to decreases in E&P revenues, which are a result of lower natural gas prices and lower natural gas production, and one-time pre-tax charges of $8 million for expenses involved in the workforce reduction and consolidation. Net cash provided by operating activities after changes in operating assets and liabilities was further - ------------------------------- 20 Seagull Energy Corporation 3 ================================================================================ reduced by an increase in accounts receivable due to increased natural gas prices and marketing volumes in late 1995 as compared to the 1994 period and a decrease in accounts payable as a result of lower accrued capital expenditures. - -------------------------------------------------------------------------------- 1994 RESULTS COMPARED TO 1993 - -------------------------------------------------------------------------------- Net earnings decreased for the year ended December 31, 1994 as compared to 1993 due to a decrease in operating profit and an increase in interest expense, partially offset by a decrease in income taxes. Operating profit decreased primarily due to a 34% decrease in the operating profit of the E&P segment. The 40% increase in interest expense was a result of a higher level of debt outstanding due to debt incurred to finance the acquisition of Novalta Resources Inc. (the "Seagull Canada Acquisition") and an increase in interest rates. Net earnings in 1994 include a pre-tax expense of approximately $2 million relating to costs incurred in obtaining shareholder approval to create a new class of common stock of the Company intended to reflect separately the performance of the Company's Alaska transmission and distribution segment (the "ENSTAR Alaska Stock"). There were no shares of the ENSTAR Alaska Stock issued or outstanding as of December 31, 1995 and 1994. The 1993 results included a pre-tax gain of approximately $3.8 million relating to sales of non-strategic producing properties. Net cash provided by operating activities before changes in operating assets and liabilities for 1994 increased in comparison to 1993 primarily due to the Seagull Canada Acquisition and to production beginning in late 1993 and early 1994 from certain of the Company's discoveries, partially offset by lower natural gas prices and higher interest expense. Net cash provided by operating activities after changes in operating assets and liabilities for 1994 increased substantially in comparison to 1993 primarily due to significant decreases during 1993 in both accounts payable and prepaid gas and oil sales. Accounts payable recorded in connection with the purchase of Seagull Mid-South Inc., formerly Arkla Exploration Company, at December 31, 1992 decreased substantially during the first year of operations by the Company. ------------------------------- Seagull Energy Corporation 21 4 ================================================================================ EXPLORATION AND PRODUCTION - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
Percent Change 1995 1994 1993 1994-'95 1993-'94 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues: Natural gas . . . . . . . . . . . . . . . . . . . . . . $ 186,055 $ 237,269 $ 203,137 - 22 + 17 Oil and condensate . . . . . . . . . . . . . . . . . . 19,788 23,346 23,597 - 15 - 1 Natural gas liquids . . . . . . . . . . . . . . . . . . 3,283 2,889 3,132 + 14 - 8 Other . . . . . . . . . . . . . . . . . . . . . . . . . 202 (961) (2,429) + 121 + 60 - ------------------------------------------------------------------------------------------------------------------------------------ 209,328 262,543 227,437 - 20 + 15 Lifting costs . . . . . . . . . . . . . . . . . . . . . . 58,633 63,989 53,243 - 8 + 20 General operating expense . . . . . . . . . . . . . . . . 8,410 11,353 10,408 - 26 + 9 Exploration charges . . . . . . . . . . . . . . . . . . . 29,555 26,888 17,265 + 10 + 56 Depreciation, depletion and amortization . . . . . . . . 115,110 132,047 103,552 - 13 + 28 Impairment of gas and oil properties . . . . . . . . . . 44,376 -- -- NA -- - ------------------------------------------------------------------------------------------------------------------------------------ Operating profit (loss) . . . . . . . . . . . . . . . . . $ (46,756) $ 28,266 $ 42,969 - 265 - 34 ==================================================================================================================================== OPERATING DATA: Net daily production(1): Natural gas (MMcf) . . . . . . . . . . . . . . . . . . 333.8 355.2 279.5 - 6 + 27 Oil and condensate (Bbl) . . . . . . . . . . . . . . . 3,282 4,186 3,868 - 22 + 8 Natural gas liquids (Bbl) . . . . . . . . . . . . . . . 986 877 773 + 12 + 13 Combined (MMcfe)(2) . . . . . . . . . . . . . . . . . . 359.4 385.6 307.4 - 7 + 25 Average sales prices: Natural gas ($ per Mcf) . . . . . . . . . . . . . . . . 1.53 1.83 1.99 - 16 - 8 Oil and condensate ($ per Bbl) . . . . . . . . . . . . 16.52 15.28 16.72 + 8 - 9 Natural gas liquids ($ per Bbl) . . . . . . . . . . . . 9.12 9.03 11.10 + 1 - 19 Combined ($ per Mcfe)(2) . . . . . . . . . . . . . . . 1.60 1.87 2.03 - 14 - 8 Lifting costs ($ per Mcfe): Lease operating expense . . . . . . . . . . . . . . . . 0.27 0.26 0.25 + 4 + 4 Workover expense . . . . . . . . . . . . . . . . . . . 0.02 0.02 0.04 -- - 50 Production taxes . . . . . . . . . . . . . . . . . . . 0.05 0.06 0.08 - 17 - 25 Transportation expense . . . . . . . . . . . . . . . . 0.08 0.08 0.07 -- + 14 Ad valorem taxes . . . . . . . . . . . . . . . . . . . 0.03 0.03 0.03 -- -- Total . . . . . . . . . . . . . . . . . . . . . . . . . 0.45 0.45 0.47 -- - 4 DD&A rate ($ per Mcfe) . . . . . . . . . . . . . . . . . 0.88 0.94 0.92 - 6 + 2 ====================================================================================================================================
(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, 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. - -------------------------------------------------------------------------------- 1995 RESULTS COMPARED TO 1994 - -------------------------------------------------------------------------------- The decrease in operating profit of the E&P segment for the year ended December 31, 1995 as compared to the 1994 period was primarily due to a 20% decrease in revenues and a $44.4 million non-cash charge for impairment of gas and oil properties, partially offset by decreased depreciation, depletion and amortization ("DD&A") expense, lower lifting costs and reduced general operating expenses. The decrease in revenues was primarily the result of a 16% year-to-year decrease in the average realized natural gas price and a 6% decline in gas production. The price decline was due to several factors beyond the control of - ------------------------------- 22 Seagull Energy Corporation 5 ================================================================================ the Company, including warm weather, new gas supply, utilization of competitive fuels and low demand for storage refills. The Company's average realized gas prices remained depressed throughout much of the year, averaging as low as $1.40 per Mcf in the U.S. during February and $0.90 per Mcf in Canada during August. Average prices for the full year were $1.64 per Mcf domestically and $1.02 per Mcf in Canada. The decrease in production was due to lower sustainable deliverability, a consequence of normal declines in production from developed properties and the combined impact of substantially lower levels of development expenditures in late 1994 and all of 1995 and voluntary production curtailments over that same period, both of which were a result of the low natural gas price environment. The Company's long-standing policy is to curtail production as well as reduce the level of development expenditures when prices are not at acceptable levels. Lifting costs decreased as a result of the lower production. While the overall amount of lifting costs decreased, lifting costs per equivalent unit of production were unchanged. General operating expense was lower year-to-year as a result of the workforce reduction and consolidation implemented by the Company during the second quarter of 1995. Estimated annual savings from the Company's workforce reduction and consolidation are expected to total approximately $8 million and will be reflected in lower general operating and G&A expenses. Exploration charges, which include seismic costs, dry hole costs and delay rentals, increased due to a significant increase in seismic costs during 1995. The increase in seismic costs is due to increased use of 3-D seismic surveys on offshore exploratory blocks. While dry hole costs were essentially unchanged from the prior year, Seagull was successful on 12 gross exploratory wells in 26 attempts (including two wells being completed at year-end) compared with 10 successes out of 23 wells drilled in 1994. Those results include three successful gross exploratory wells in six attempts in Canada during 1995 compared with five successful gross exploratory wells in six attempts during 1994. Effective March 31, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As a result of the adoption of this standard, the Company recognized a non-cash pre-tax charge against earnings during the first quarter of $44.4 million. As a result of the impairment and a change in the mix of properties being produced, the Company's average DD&A rate per equivalent unit of production decreased from $0.94 per Mcfe for 1994 to $0.88 per Mcfe for 1995. DD&A expense for 1995 decreased from the 1994 period due to this lower average DD&A rate per equivalent unit of production as well as the 7% decrease in total production. - -------------------------------------------------------------------------------- 1994 RESULTS COMPARED TO 1993 - -------------------------------------------------------------------------------- Operating profit for the E&P segment in 1994 as compared to 1993 decreased, despite higher natural gas production, due to lower natural gas prices and increased DD&A expense, lifting costs and exploration charges. The 27% increase in natural gas production was primarily due to production contributed from properties acquired in connection with the Seagull Canada Acquisition on January 4, 1994, which averaged 54.1 MMcf per day in 1994, and to production beginning in late 1993 and early 1994 from certain of the Company's discoveries. The increases in production would have been higher but for voluntary curtailments for approximately one-third of the year during 1994 when natural gas prices were below acceptable levels. The increases in DD&A expense and lifting costs resulted from the significant increases in production. DD&A expense per equivalent unit of production also increased from 1993 to 1994 primarily as a result of the change in the mix of the properties being produced. While ------------------------------- Seagull Energy Corporation 23 6 ================================================================================ total lifting costs increased from 1993 to 1994, lifting costs per equivalent unit of production declined 4% due primarily to a decrease in workover expenses and production taxes. Exploration charges increased primarily due to higher dry hole costs and the increased use of 3-D seismic surveys on offshore exploratory blocks. During 1994 Seagull was successful on 10 gross exploratory wells in 23 attempts, compared with eight successes out of 27 wells drilled in 1993. The increased dry hole expense per well is primarily due to Seagull retaining larger working interests in 1994 in the wells drilled offshore Texas and Louisiana and costs associated with deepening successful exploratory wells to deeper zones that ultimately proved to be dry. - -------------------------------------------------------------------------------- OUTLOOK - -------------------------------------------------------------------------------- The E&P segment is the Company's primary growth area. That growth has been achieved over the past eight years primarily through acquisitions: Houston Oil & Minerals Corporation in 1988; the assets of Houston Oil Trust in 1989; Wacker Oil Inc. in 1990; certain gas and oil assets from Mesa Limited Partnership in 1991; Seagull Mid-South Inc. in 1992 and Seagull Energy Canada Ltd. ("Seagull Canada"), formerly Novalta Resources Inc. ("Novalta") in 1994. See Note 5 of Notes to Consolidated Financial Statements beginning on page 40 of this Annual Report. The future results of the E&P segment will be affected by the market prices of natural gas and oil. The availability of a ready market for oil, natural gas and liquid products in the future will depend on numerous factors beyond the control of the Company, including weather, production of other crude oil, natural gas and liquid products, imports, marketing of competitive fuels, proximity and capacity of oil and gas pipelines and other transportation facilities, any oversupply or undersupply of oil, gas and liquid products, the regulatory environment, and other regional and political events, none of which can be predicted with certainty. While sustained cold weather has helped increase natural gas prices during late 1995 and the first weeks of 1996, short-term natural gas prices remain volatile. As in the past, the Company expects to continue curtailing a portion of its gas production whenever prices are deemed to be below acceptable levels. PIPELINE AND MARKETING - -------------------------------------------------------------------------------- (Dollars in Thousands)
Percent Change 1995 1994 1993 1994-'95 1993-'94 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING PROFIT (*): Pipelines . . . . . . . . . . . . . . . . . . . . . . . . $ 5,554 $ 6,334 $ 8,561 - 12 - 26 Marketing and supply . . . . . . . . . . . . . . . . . . 1,634 3,772 2,862 - 57 + 32 Gas processing . . . . . . . . . . . . . . . . . . . . . 1,144 784 518 + 46 + 51 Operating and construction services . . . . . . . . . . . 833 1,046 2,124 - 20 - 51 - ------------------------------------------------------------------------------------------------------------------------------------ $ 9,165 $ 11,936 $ 14,065 - 23 - 15 ==================================================================================================================================== OPERATING DATA (*): Average daily volumes (MMcf): Gas gathering . . . . . . . . . . . . . . . . . . . . . 214 277 311 - 23 - 11 Partnership systems (net) . . . . . . . . . . . . . . . 106 112 117 - 5 - 4 Marketing and supply . . . . . . . . . . . . . . . . . 560 552 446 + 1 + 24 Gas processing: Average daily inlet volumes (MMcf) . . . . . . . . . . 238 278 273 - 14 + 2 Average daily net production (Bbl) . . . . . . . . . . 3,926 4,140 3,305 - 5 + 25 ====================================================================================================================================
(*) On September 25, 1995, the Company sold substantially all of its pipelines and gas processing assets. Average daily volumes for pipelines and gas processing assets are based on the number of days those assets were owned by the Company. - ------------------------------- 24 Seagull Energy Corporation 7 ================================================================================ - -------------------------------------------------------------------------------- 1995 RESULTS COMPARED TO 1994 - -------------------------------------------------------------------------------- On September 25, 1995, the Company and three other sellers completed the sale of their disparate interests in 19 natural gas gathering systems and a gas processing plant. The purchaser paid Seagull and the other sellers $154.8 million in cash for the assets. The Company's share of gross proceeds was approximately $100 million. Net proceeds after payment of approximately $3 million in transaction costs were used to lower the Company's borrowings under its U.S. revolving credit facility (the "U.S. Credit Agreement"). From its share of the proceeds, Seagull realized a one-time, pre-tax gain of approximately $82 million recorded in the third quarter. For the nine months ended September 30, 1995, the pipeline assets the Company disposed of (the "Pipeline Assets") contributed $6.2 million and for the years ended December 31, 1994 and 1993, the Pipeline Assets contributed $6.7 million and $8.4 million, respectively, to the operating profit of the pipeline and marketing segment. In accordance with SFAS No. 121, the Company ceased depreciating the Pipeline Assets in April 1995 at the time of the announcement of the Company's intention to sell those assets. Operating profit for the pipeline and marketing segment declined $2.8 million in 1995 from 1994 primarily for three reasons -- lower margins received on third party marketing sales, lower marketing fees received from the sale of the E&P segment's domestic gas production (which were due to lower gas prices and production), and the sale of the Pipeline Assets in the third quarter of 1995 (such assets contributed approximately $1.6 million operating profit in the fourth quarter of 1994). - -------------------------------------------------------------------------------- 1994 RESULTS COMPARED TO 1993 - -------------------------------------------------------------------------------- In the pipeline and marketing segment, operating profit decreased in 1994 as compared to 1993 primarily due to declines in the pipelines and operating and construction services areas, partially offset by an increase in marketing and supply. Operating profit in the pipelines area, which included the Company's gas gathering and product pipeline systems as well as the Company's interests in two partnership systems, decreased primarily as a result of reduced volumes delivered as a result of the natural depletion of the reserves serviced by the systems. In the marketing and supply area, operating profit improved in 1994 over 1993 due to a 24% increase in sales volumes due primarily to increases in the E&P segment's domestic natural gas production. Operating profit for the operating and construction services area declined in 1994 because of the first quarter completion of a gas pipeline construction project the Company began in mid-1993. - -------------------------------------------------------------------------------- OUTLOOK - -------------------------------------------------------------------------------- Operating profit for the pipelines and gas processing areas is expected to be significantly reduced in 1996 due to the sale of the Pipeline Assets. The Company is however expanding its marketing activities by adding staff, upgrading support facilities and expanding the marketing activities it conducts for third parties. Seagull also expects to continue to market the E&P segment's production and to continue its efforts in the operations and construction services area. Furthermore in 1995, the Company initiated an active risk management program for both its own E&P production and third party activities, utilizing such derivative financial instruments as futures contracts, options and swaps. The primary objective of the risk management program is to help ensure more stable cash flow. However, Seagull expects to leave the majority of its own E&P production either unhedged or protected only from price decreases so that it can benefit from expected gas price strengthening. The risk management program is also an important part of the Company's third party marketing efforts, allowing the Company to convert a customer's requested price to a price structure that is consistent with the Company's overall pricing strategy. The operations and construction services area was engaged in 1995 to build an approximately 114-mile onshore pipeline. The project began in late 1995 and Seagull will operate the new pipeline upon completion. ------------------------------- Seagull Energy Corporation 25 8 ================================================================================ ALASKA TRANSMISSION AND DISTRIBUTION - -------------------------------------------------------------------------------- (Dollars in Thousands Except Per Unit Amounts)
Percent Change 1995 1994 1993 1994-'95 1993-'94 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 97,770 $ 105,598 $ 107,244 - 7 - 2 Cost of gas sold . . . . . . . . . . . . . . . . . . . . 46,328 54,465 59,898 - 15 - 9 Operations and maintenance expense . . . . . . . . . . . 20,504 21,516 20,880 - 5 + 3 Depreciation, depletion and amortization . . . . . . . . 7,797 7,752 7,511 + 1 + 3 - ------------------------------------------------------------------------------------------------------------------------------------ Operating profit . . . . . . . . . . . . . . . . . . . . $ 23,141 $ 21,865 $ 18,955 + 6 + 15 ==================================================================================================================================== OPERATING DATA: Degree days(1) . . . . . . . . . . . . . . . . . . . . . 9,997 10,291 9,382 - 3 + 10 Volumes (Bcf)(2): Gas Sold . . . . . . . . . . . . . . . . . . . . . . . 26.4 31.3 28.9 - 16 + 8 Gas Transported . . . . . . . . . . . . . . . . . . . . 17.9 12.8 11.3 + 40 + 13 Combined . . . . . . . . . . . . . . . . . . . . . . . 44.3 44.1 40.2 -- + 10 Margins ($ per Mcf): Gas Sold . . . . . . . . . . . . . . . . . . . . . . . 1.66 1.49 1.49 + 11 -- Gas Transported . . . . . . . . . . . . . . . . . . . . 0.43 0.35 0.36 + 23 - 3 Combined . . . . . . . . . . . . . . . . . . . . . . . 1.16 1.16 1.17 -- - 1 Year-end customers . . . . . . . . . . . . . . . . . . . 92,100 90,100 88,200 + 2 + 2 ====================================================================================================================================
(1) 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. (2) Natural gas stated in billion cubic feet ("Bcf"). - -------------------------------------------------------------------------------- 1995 RESULTS COMPARED TO 1994 - -------------------------------------------------------------------------------- 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, 1995 improved from the 1994 period primarily as a result of lower operations and maintenance expense due to lower permit fees paid. In the first quarter of 1995, two large military power plants that previously purchased gas from ENSTAR Alaska began purchasing gas directly from gas producers. However, ENSTAR Alaska has been authorized by the Alaska Public Utilities Commission to transport the customers' gas supplies for a fee that is essentially comparable to the margin (revenues net of the associated cost of gas sold) it previously earned. Accordingly, overall operating profit for the Alaska transmission and distribution segment was basically unaffected by this change. - -------------------------------------------------------------------------------- 1994 RESULTS COMPARED TO 1993 - -------------------------------------------------------------------------------- Operating profit from ENSTAR Alaska for the year ended December 31, 1994 increased from 1993 primarily due to higher non-power customer demand due to an increase in customers and colder weather. - -------------------------------------------------------------------------------- OUTLOOK - -------------------------------------------------------------------------------- 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 1995 summer construction season, approximately 33 miles of new distribution pipeline were installed to connect some 2,000 new customers. In September 1995, ENSTAR Alaska entered into a - ------------------------------- 26 Seagull Energy Corporation 9 ================================================================================ 33-year agreement to lease a 60 mile, 8-inch diameter pipeline between Anchorage, Alaska and Whittier, Alaska. Conversion of the pipeline to natural gas is expected to be completed in 1996. The new pipeline is expected to account for nearly 1,000 new customers over the next two to three years. OTHER (INCOME) EXPENSE
- ------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Percent Change 1995 1994 1993 1994-'95 1993-'94 - ------------------------------------------------------------------------------------------------------------------------ General and administrative . . . . . . . . . . . . . . . $ 19,167 $ 10,252 $ 11,666 + 87 - 12 Interest expense . . . . . . . . . . . . . . . . . . . . 52,814 51,550 36,753 + 2 + 40 Gain on sales of property, plant and equipment, net . . . (83,591) (413) (3,929) + 20,140 - 89 Interest income and other . . . . . . . . . . . . . . . . (1,160) (254) (1,779) + 357 - 86 - ------------------------------------------------------------------------------------------------------------------------ $ (12,770) $ 61,135 $ 42,711 - 121 + 43 ========================================================================================================================
- -------------------------------------------------------------------------------- 1995 RESULTS COMPARED TO 1994 - -------------------------------------------------------------------------------- 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. G&A expenses increased in 1995 primarily due to one-time pre-tax charges of $8 million for expenses involved in the Company's workforce reduction and consolidation and an increase in costs associated with three compensation plans, one for outside directors, one for key managers, and the other for all Seagull employees, that are tied directly to the price of the Company's common stock ("Common Stock"). The closing price of Seagull Common Stock increased 16% from $19.125 at December 31, 1994 to $22.25 on December 31, 1995, compared to a 25% decrease in the 1994 period. Lower operations and maintenance expenses and G&A expenses resulting from the Company's workforce reduction and consolidation are expected to total approximately $8 million annually. In October 1995, the Financial Accounting Standards Board approved the issuance of SFAS No. 123, "Accounting for Stock-Based Compensation." This SFAS establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 allows a company to adopt a fair value based method of accounting for an employee stock-based compensation plan or to continue to use the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," Seagull's current accounting method. Under the intrinsic value method, the Company records no compensation expense for stock options granted, as the exercise price of all options granted is equal to the closing price of Seagull's common stock on the day of grant. However, under the fair value method, the Company would record compensation expense for similar grants based on an option-pricing model that takes into account the exercise price and expected life of the option, the current price of the stock and its expected volatility and the risk-free interest rate for the expected term of the option. Seagull has undertaken a preliminary study of SFAS No. 123 and has determined that the Company will continue to follow the intrinsic value method. The disclosures required by SFAS No. 123 will be included in the Company's consolidated financial statements for the year ended December 31, 1996. The increase in interest expense for the year ended December 31, 1995 over 1994 was a result of an increase in the overall level of interest rates since the 1994 period. The average interest rates on the Company's U.S. Credit Agreement were 6.8% and 5.2% for the years ended December 31, 1995 and 1994, respectively. ----------------------------- Seagull Energy Corporation 27 10 ================================================================================ After giving effect to the Company's interest rate swaps, between 55% and 65% of the Company's long-term debt bears interest at various fixed rates through the end of 1996. The remainder of the outstanding debt bears interest at various market sensitive interest rates. During 1995, the Company repaid a portion of the debt balance outstanding under the Company's Canadian revolving credit facility (the "Canadian Credit Agreement"). While the payment of the Canadian Credit Agreement was funded through additional borrowings under the U.S. Credit Agreement, the average interest rate for the U.S. Credit Agreement was significantly lower than the average interest rate for the Canadian Credit Agreement. In addition, since proceeds from the sales of the Pipeline Assets and substantially all of the Company's Internal Revenue Code Section 29 Tax Credit- bearing gas properties (the "Section 29 Properties") were used to pay down the Company's borrowings under the U.S. Credit Agreement, the Company expects its interest costs to decrease substantially for the year ended December 31, 1996. The increase in the gain on sales of property, plant and equipment for the year ended December 31, 1995 as compared to 1994 is primarily due to the $82 million pre-tax gain on the sale of the Pipeline Assets. Interest income and other for 1994 includes approximately $2 million relating to costs incurred in gaining shareholder approval to create the ENSTAR Alaska Stock. - -------------------------------------------------------------------------------- 1994 RESULTS COMPARED TO 1993 - -------------------------------------------------------------------------------- General and administrative expenses decreased 12% from 1993 to 1994 primarily as a result of costs associated with the three compensation plans discussed above, partially offset by increases in costs related to potential acquisitions which were not consummated. The closing price of the Common Stock decreased 25% from $25.375 at December 31, 1993 to $19.125 at December 31, 1994, compared to a 63% increase in the 1993 period. Interest expense increased in 1994 compared to 1993 as a result of an increase in the level of debt outstanding due primarily to new debt incurred in early 1994 to finance the Seagull Canada Acquisition and secondarily to the steady increase in short-term interest rates during the year. Gain on sales of property, plant and equipment for 1993 includes a pre-tax gain of approximately $3.8 million relating to sales of non-strategic oil and gas producing properties. Net proceeds from the sales totaled approximately $13 million. As discussed above, interest income and other for 1994 includes approximately $2 million relating to the ENSTAR Alaska Stock. INCOME TAXES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1995 RESULTS COMPARED TO 1994 - -------------------------------------------------------------------------------- Seagull's income tax benefit was essentially unchanged from 1994 to 1995. Seagull recognized an income tax benefit of $2.3 million for 1995 versus the income tax benefit of $0.6 million that would have resulted in 1995 using the statutory federal tax rate of 35%. This difference is primarily attributable to the utilization of approximately $3.1 million in Internal Revenue Code Section 29 Tax Credits ("Section 29 Credits") to reduce its 1995 regular income tax liability. The Section 29 Credits are allowed for production of fuels derived from nonconventional sources that are sold to nonrelated parties. The Section 29 Credits decreased from the prior year due to a decrease in production and the sale of the Section 29 Properties during the third quarter of 1995. - -------------------------------------------------------------------------------- 1994 RESULTS COMPARED TO 1993 - -------------------------------------------------------------------------------- The decrease in income taxes for the year ended December 31, 1994 versus the prior year was primarily the result of lower earnings before income taxes. Seagull - ----------------------------- 28 Seagull Energy Corporation 11 ================================================================================ incurred an income tax benefit of $2.3 million for 1994 versus the income tax expense of $0.3 million that would have resulted using the statutory federal tax rate of 35% primarily due to the utilization of approximately $5.5 million in Section 29 Credits to reduce its 1994 regular income tax liability. LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CAPITAL EXPENDITURES - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Percent Change 1995 1994 1993 1994-'95 1993-'94 - ------------------------------------------------------------------------------------------------------------------------ CAPITAL EXPENDITURES: Exploration and production: Lease acquisitions . . . . . . . . . . . . . . . . $ 12,003 $ 17,144 $ 7,396 - 30 +132 Exploration . . . . . . . . . . . . . . . . . . . 32,124 35,107 26,824 - 8 + 31 Development . . . . . . . . . . . . . . . . . . . 32,075 83,839 63,598 - 62 + 32 - ------------------------------------------------------------------------------------------------------------------------ 76,202 136,090 97,818 - 44 + 39 Pipeline and marketing . . . . . . . . . . . . . . 137 2,026 2,115 - 93 - 4 Alaska transmission and distribution . . . . . . . 7,611 7,626 10,094 -- - 24 Corporate . . . . . . . . . . . . . . . . . . . . . 1,397 4,510 2,015 - 69 +124 - ------------------------------------------------------------------------------------------------------------------------ $ 85,347 $150,252 $112,042 - 43 + 34 ======================================================================================================================== ACQUISITIONS, NET OF CASH ACQUIRED . . . . . . . . . . . $ -- $193,859 $ 29,470 - 100 +558 ========================================================================================================================
The goals of Seagull's E&P capital expenditure program are twofold - expand production via the drill bit and/or acquisition of producing properties, and maintain sustainable deliverability. However, it is also the Company's long- standing policy that total capital expenditures will not be allowed to exceed net cash flow from operating activities before changes in operating assets and liabilities, and therefore, E&P capital spending may be reduced when natural gas prices are below acceptable levels. The Company was successful in 1994 and 1993 in replacing 223% and 126%, respectively, of production. The 1993 success was primarily due to drilling results while 1994 was primarily due to the Seagull Canada Acquisition. The reserve replacement ratio for 1995 was 60%. Seagull maintained sustainable deliverability in both 1994 and 1993 but fell short of this goal in 1995. The success in 1994 and 1993 was due to sufficient levels of development spending in both years and to the Seagull Canada Acquisition in 1994. Sustainable deliverability dropped in 1995 due to reductions in development spending because natural gas prices remained below acceptable levels for much of the year. Plans for 1996 call for capital expenditures of approximately $132 million, including about $122 million in E&P. Seagull anticipates spending approximately $66 million for development, $9 million for lease acquisitions and $47 million for exploration. - -------------------------------------------------------------------------------- CAPITAL RESOURCES - -------------------------------------------------------------------------------- The growth in the E&P segment over the past eight 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 Common Stock offerings and the July 1993 sale of Senior and Senior Subordinated Notes, all in underwritten public offerings. In addition, Seagull reduced its borrowings under existing bank facilities in 1995 by $143 million with the proceeds from the sale of the Pipeline Assets and the Section 29 Properties, see below. See Notes 3, 9 and 12 of Notes to Consolidated Financial Statements beginning on page 36 of this Annual Report. ----------------------------- Seagull Energy Corporation 29 12 ================================================================================ In 1993, the Company entered into the U.S. Credit Agreement with a group of major U. S. and international banks (the "Banks"). Under provisions in the U.S. Credit Agreement the Company, at its option, may request a reduction in the maximum commitment. In June 1995, the Company requested the maximum commitment under the U.S. Credit Agreement be reduced from $725 million to $650 million. The maximum commitment under the U.S. Credit Agreement reduces in equal quarterly amounts of $45 million commencing on March 31, 1997, with a final reduction of $20 million on September 30, 2000. The amount of senior indebtedness available to the Company under the provisions of the U.S. Credit Agreement 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 one additional time each year, at the option of either Seagull or the banks, and upon the sale of certain assets included in the Borrowing Base. The sale of the Pipeline Assets and Section 29 Properties reduced the available Borrowing Base under the U.S. Credit Agreement from $575 million to $500 million. See Notes 3 and 9 of Notes to Consolidated Financial Statements beginning on page 36 of this Annual Report. As of February 27, 1996, borrowings outstanding under the U.S. Credit Agreement were $99 million, leaving approximately $185 million of unused borrowing base immediately available, net of outstanding letters of credit of $3 million, $100 million of borrowings under the Senior Notes discussed below, the nominated maximum borrowing availability of $95 million under the Canadian Credit Agreement discussed below, and $18 million in borrowings outstanding under Seagull's money market facilities discussed below. In September 1995, the Company sold its Section 29 Properties to an investment group which includes a Seagull subsidiary and two financial investors. For accounting purposes, the Company has treated the sale as a non-recourse monetary production payment reflected in long-term debt on the balance sheet. Net of transaction costs, the proceeds from the sale were approximately $46.3 million in cash. Payments of the production payment liability are funded from the operating cash flow of the properties, less funds required for working capital purposes. The investors are expected to recoup their investment plus their required after-tax rate of return by 2002. Seagull's pre-tax effective interest rate is currently estimated to be 4%. In connection with the Seagull Canada Acquisition, Seagull Canada, the indirect wholly owned subsidiary of Seagull which acquired Novalta, entered into the Canadian Credit Agreement with a group of the Banks or their Canadian affiliates. The Canadian Credit Agreement provides for dual currency borrowings in U.S. and Canadian dollars and has a flexible nominated maximum borrowing availability which may be increased or decreased by Seagull Canada at its discretion. During 1995, the Company elected to reduce the nominated maximum borrowing available under the Canadian Credit Agreement from $160 million to $95 million. The Canadian Credit Agreement matures on December 31, 2000 and commitments thereunder begin to decline on March 31, 1997 in equal quarterly reductions of approximately $10.9 million. At December 31, 1995, the Company was not in compliance with a certain covenant contained in the U.S. Credit Agreement and a similar covenant in the Canadian Credit Agreement (neither of which was a payment default). The Banks have consented to and waived the event of noncompliance under both the U.S. and Canadian Credit Agreements. Subsequent to December 31, 1995, the Company obtained amendments to the U.S. and Canadian Credit Agreements from the Banks which modify the covenants discussed above. - ----------------------------- 30 Seagull Energy Corporation 13 ================================================================================ Under both the U.S. and Canadian Credit Agreements, maximum commitments begin to decline in 1997 and any amounts in excess of the maximum commitment must be repaid. As a result of the voluntary reductions in the maximum commitment of each agreement discussed above, approximately $19 million (based on the balances outstanding at December 31, 1995) would be payable during 1997 to remain below the declining maximum commitment levels. The Company intends to revise both the U.S. and Canadian Credit Agreements during 1996 to extend the maturity date of both agreements and delay the reductions in the maximum commitments. 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"). 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 million, were used to repay borrowings outstanding under the U.S. Credit Agreement. In addition to the facilities discussed above, Seagull has money market facilities with three major U. S. banks with a combined maximum commitment of $75 million. These lines of credit bear interest at rates made available by the banks at their discretion and may be canceled at either Seagull'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. - -------------------------------------------------------------------------------- ENVIRONMENTAL - -------------------------------------------------------------------------------- To date, compliance with applicable environmental and safety regulations by the Company has not required any significant capital expenditures or materially affected its business or earnings. The Company believes it is in substantial compliance with environmental and safety regulations and foresees no material expenditures in the future; however, the Company is unable to predict the impact that compliance with future regulations may have on capital expenditures, earnings and competitive position. ----------------------------- Seagull Energy Corporation 31 14 ================================================================================ - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF EARNINGS (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------------------------------- Revenues: Exploration and production . . . . . . . . . . . . . $ 209,328 $ 262,543 $ 227,437 Pipeline and marketing . . . . . . . . . . . . . . . 29,175 39,963 42,484 Alaska transmission and distribution . . . . . . . . 97,770 105,598 107,244 - -------------------------------------------------------------------------------------------------------- 336,273 408,104 377,165 - -------------------------------------------------------------------------------------------------------- Costs of Operations: Alaska transmission and distribution cost of gas sold 46,328 54,465 59,898 Operations and maintenance . . . . . . . . . . . . . 105,674 119,987 107,457 Exploration charges . . . . . . . . . . . . . . . . 29,555 26,888 17,265 Depreciation, depletion and amortization . . . . . . 124,790 144,697 116,556 Impairment of gas and oil properties . . . . . . . . 44,376 -- -- - -------------------------------------------------------------------------------------------------------- 350,723 346,037 301,176 - -------------------------------------------------------------------------------------------------------- Operating Profit (Loss) . . . . . . . . . . . . . . . . . (14,450) 62,067 75,989 Other (Income) Expense: General and administrative . . . . . . . . . . . . . 19,167 10,252 11,666 Interest expense . . . . . . . . . . . . . . . . . . 52,814 51,550 36,753 Gain on sales of property, plant and equipment, net (83,591) (413) (3,929) Interest income and other . . . . . . . . . . . . . (1,160) (254) (1,779) - -------------------------------------------------------------------------------------------------------- (12,770) 61,135 42,711 - -------------------------------------------------------------------------------------------------------- Earnings (Loss) Before Income Taxes . . . . . . . . . . . (1,680) 932 33,278 Income Tax Expense (Benefit) . . . . . . . . . . . . . . (2,312) (2,314) 6,080 - -------------------------------------------------------------------------------------------------------- Net Earnings . . . . . . . . . . . . . . . . . . . . . . $ 632 $ 3,246 $ 27,198 ======================================================================================================== Earnings Per Share . . . . . . . . . . . . . . . . . . . $ 0.02 $ 0.09 $ 0.76 ======================================================================================================== Weighted Average Number of Common Shares Outstanding (in thousands) . . . . . . . . . . . . 36,717 36,904 35,790 ========================================================================================================
See Accompanying Notes to Consolidated Financial Statements. - ----------------------------- 32 Seagull Energy Corporation 15 ================================================================================ - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
December 31, 1995 1994 - -------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 11,205 $ 6,432 Accounts receivable, net . . . . . . . . . . . . . . . . . . . 119,898 101,346 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 4,947 4,530 Prepaid expenses and other . . . . . . . . . . . . . . . . . . 11,331 7,055 - -------------------------------------------------------------------------------------------------------- Total Current Assets . . . . . . . . . . . . . . . . . . . 147,381 119,363 Property, Plant and Equipment - at cost (successful efforts method for gas and oil properties) . . . . . . . . . . . . . . 1,581,002 1,592,152 Accumulated Depreciation, Depletion and Amortization . . . . . . . 569,587 467,845 - -------------------------------------------------------------------------------------------------------- 1,011,415 1,124,307 Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 55,880 - -------------------------------------------------------------------------------------------------------- Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,198,796 $ 1,299,550 ======================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 83,111 $ 97,315 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 33,080 31,598 Prepaid gas and oil sales . . . . . . . . . . . . . . . . . . -- 2,732 Current maturities of long-term debt . . . . . . . . . . . . . 1,214 1,549 - -------------------------------------------------------------------------------------------------------- Total Current Liabilities . . . . . . . . . . . . . . . . 117,405 133,194 Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 545,343 620,805 Other Noncurrent Liabilities . . . . . . . . . . . . . . . . . . . 52,276 57,737 Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . 36,104 46,713 Shareholders' Equity: Common Stock, $.10 par value; authorized 100,000,000 shares; issued 36,561,290 (1995) and 36,432,514 shares (1994) . . 3,656 3,643 Additional paid-in capital . . . . . . . . . . . . . . . . . . 326,918 324,820 Retained earnings . . . . . . . . . . . . . . . . . . . . . . 124,591 123,959 Foreign currency translation adjustment . . . . . . . . . . . 389 (2,684) Less - note receivable from employee stock ownership plan . . (4,922) (5,502) Less - 308,812 shares (1995) and 326,812 shares (1994) of Common Stock held in Treasury, at cost . . . . . . . . . . (2,964) (3,135) - -------------------------------------------------------------------------------------------------------- Total Shareholders' Equity . . . . . . . . . . . . . . . . 447,668 441,101 Commitments and Contingencies - -------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity . . . . . . . . . . . . $ 1,198,796 $ 1,299,550 ========================================================================================================
See Accompanying Notes to Consolidated Financial Statements. ----------------------------- Seagull Energy Corporation 33 16 ================================================================================ - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- Operating Activities Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 632 $ 3,246 $ 27,198 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, depletion and amortization . . . . . . . . . . . 129,141 147,713 119,544 Impairment of gas and oil properties . . . . . . . . . . . . . 44,376 -- -- Amortization of deferred financing costs . . . . . . . . . . . 3,429 3,841 4,261 Deferred income taxes . . . . . . . . . . . . . . . . . . . . (12,355) (5,689) 1,050 Dry hole expense . . . . . . . . . . . . . . . . . . . . . . . 16,147 15,931 10,534 Gain on sales of property, plant and equipment, net . . . . . (83,591) (413) (3,929) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (395) 2,136 2,104 - ------------------------------------------------------------------------------------------------------------------- 97,384 166,765 160,762 Changes in operating assets and liabilities, net of acquisitions: Decrease (Increase) in accounts receivable . . . . . . . . (19,094) 8,204 (7,029) Decrease in inventories, prepaid expenses and other . . . 2,104 5,217 757 Increase (Decrease) in accounts payable . . . . . . . . . (13,399) 5,360 (16,292) Decrease in prepaid gas and oil sales . . . . . . . . . . (2,732) (7,591) (27,933) Increase (Decrease) in accrued expenses and other . . . . (980) (7,030) 9,496 - ------------------------------------------------------------------------------------------------------------------- Net Cash Provided By Operating Activities . . . . . . . 63,283 170,925 119,761 Investing Activities Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (85,347) (150,252) (112,042) Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . -- (193,859) (29,470) Proceeds from sales of property, plant and equipment . . . . . . . 107,514 762 13,428 - ------------------------------------------------------------------------------------------------------------------- Net Cash Provided By (Used In) Investing Activities . . 22,167 (343,349) (128,084) Financing Activities Proceeds from revolving lines of credit and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . 610,373 753,138 599,490 Principal payments on revolving lines of credit and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . (733,812) (582,827) (750,039) Proceeds from monetary production payment liability . . . . . . . . 46,242 -- -- Principal payments of monetary production payment liability . . . . (2,386) -- -- Fees paid to acquire financing . . . . . . . . . . . . . . . . . . (273) (52) (6,535) Proceeds from sales of common stock . . . . . . . . . . . . . . . . 1,583 473 166,140 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,356) 911 957 - ------------------------------------------------------------------------------------------------------------------- Net Cash Provided By (Used In) Financing Activities . . (80,629) 171,643 10,013 Effect of Exchange Rate Changes on Cash . . . . . . . . . . . . . . . (48) 1,641 -- - ------------------------------------------------------------------------------------------------------------------- Increase in Cash and Cash Equivalents . . . . . . . . . 4,773 860 1,690 Cash and Cash Equivalents at Beginning of Period . . . . . . . . . . 6,432 5,572 3,882 - ------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period . . . . . . . . . . . . . $ 11,205 $ 6,432 $ 5,572 ===================================================================================================================
See Accompanying Notes to Consolidated Financial Statements. - ----------------------------- 34 Seagull Energy Corporation 17 ================================================================================ - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
Foreign Additional Currency Note Common Paid-in Retained Translation Receivable Treasury Stock Capital Earnings Adjustment From ESOP Stock Total - ---------------------------------------------------------------------------------------------------------------------------- January 1, 1993 . . . . . . . . . . . . $ 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 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 Net earnings . . . . . . . . . . . . -- -- 3,246 -- -- -- 3,246 Exercise of stock options, 53,855 shares . . . . . . 5 468 -- -- -- -- 473 Foreign currency translation adjustment . . . . . . -- -- -- (2,684) -- -- (2,684) Repayment of note receivable by ESOP . . . . . . . . -- -- -- -- 527 -- 527 Other . . . . . . . . . . . . -- 160 -- -- -- -- 160 - ---------------------------------------------------------------------------------------------------------------------------- December 31, 1994 . . . . . . . . . . . 3,643 324,820 123,959 (2,684) (5,502) (3,135) 441,101 Net earnings . . . . . . . . . . . . -- -- 632 -- -- -- 632 Exercise of stock options, 128,776 shares . . . . . 13 1,570 -- -- -- -- 1,583 Treasury stock issued as executive incentive compensation, 18,000 shares . . . . . . . . . . -- 164 -- -- -- 171 335 Foreign currency translation adjustment . . . . . . -- -- -- 3,073 -- -- 3,073 Repayment of note receivable by ESOP . . . . . . . . -- -- -- -- 580 -- 580 Other . . . . . . . . . . . . -- 364 -- -- -- -- 364 - ---------------------------------------------------------------------------------------------------------------------------- December 31, 1995 . . . . . . . . . . . $ 3,656 $ 326,918 $ 124,591 $ 389 $ (4,922) $ (2,964) $ 447,668 ============================================================================================================================
See Accompanying Notes to Consolidated Financial Statements. ----------------------------- Seagull Energy Corporation 35 18 ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INDEX
PAGE 1. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2. Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . 36 3. Disposition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 4. Workforce Reduction and Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 5. Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 6. Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 7. Supplemental Gas and Oil Producing Activities (Unaudited) . . . . . . . . . . . . . . . . . 42 8. Other Noncurrent Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 9. Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 10. Other Noncurrent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 11. Fair Value of Financial Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 12. Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 13. Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 14. Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 15. Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 16. Selected Quarterly Financial Data (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . 62 17. Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
- -------------------------------------------------------------------------------- 1. ORGANIZATION Seagull Energy Corporation and Subsidiaries (the "Company" or "Seagull") is an independent energy company primarily focused on natural gas through three segments. The Company's exploration and production operations are focused offshore Texas and Louisiana in the Gulf of Mexico and onshore in three principal geographic regions: (i) western Oklahoma and the Texas Panhandle; (ii) the Arklatex area in eastern Texas and northern Louisiana and the Arkoma Basin in eastern Oklahoma and western Arkansas; and (iii) western Canada. Seagull's two other business segments are also natural gas related: (i) pipeline and marketing which includes gas gathering, gas processing, gas marketing, and pipeline engineering, design, construction and operation; and (ii) natural gas transmission and distribution in Alaska. In September 1995, the Company disposed of substantially all of its gas gathering and processing assets (see Note 3). - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The accompanying consolidated financial statements include the accounts of Seagull Energy Corporation and Subsidiaries, all of which are wholly owned at December 31, 1995. All significant intercompany transactions have been eliminated. - ------------------------------- 36 Seagull Energy Corporation 19 ================================================================================ The results of operations of Seagull Energy Canada Ltd. ("Seagull Canada"), formerly Novalta Resources Inc. ("Novalta"), have been included with those of the Company since January 4, 1994 (see Note 5). Partnerships in which Seagull held a 50% interest or less were 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 are shown below:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Year Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Cash paid during the year for: Interest, net of amount capitalized . . . . . . . . . . . . . . . . . . . $ 46,663 $ 44,914 $ 26,753 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,393 1,621 7,140 ====================================================================================================================================
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, are 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 depletable unit 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, 1995 was approximately $26.6 million. Effective March 31, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This SFAS requires that an impairment loss be recognized whenever the carrying amount of an asset exceeds the ------------------------------- Seagull Energy Corporation 37 20 ================================================================================ sum of the estimated future cash flows (undiscounted) of the asset. Under SFAS No. 121, the Company performed its impairment review of proved gas and oil properties on a depletable unit basis. For each depletable unit determined to be impaired, an impairment loss equal to the difference between the carrying value and the fair value of the depletable unit was recognized. Fair value, on a depletable unit basis, was estimated to be the present value of expected future cash flows computed by applying estimated future gas and oil prices, as determined by management, to estimated future production of gas and oil reserves over the economic lives of the reserves. As a result of the adoption of SFAS No. 121, the Company recognized a non-cash pre-tax charge against earnings of $44.4 million. Prior to March 31, 1995, the Company determined the impairment of proved gas and oil properties on a world-wide basis. Using the world-wide basis, if the net capitalized costs exceeded the estimated future undiscounted after-tax net cash flows from proved gas and oil reserves using period-end pricing, 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 plant and other property is computed using the straight-line method over their estimated useful lives, which vary from 3 to 33 years. Under SFAS No. 121, long-lived assets held for sale are not depreciated while they are held for disposal. Accordingly, the Company ceased depreciating the pipeline assets disposed of at the time of the announcement in April 1995 of the Company's intention to sell those assets (see Note 3). 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 average cost method of accounting for treasury stock transactions. REVENUE RECOGNITION The Company records revenue following the entitlement method of accounting for production gas imbalances (see Note 8). Seagull 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. DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into a variety of commodity derivative contracts for non-trading purposes as a hedging strategy to manage commodity prices associated with gas and oil sales and to reduce the impact of price fluctuations. The Company primarily uses futures contracts, price swaps and options to hedge its commodity prices. Gains or losses on these hedging activities are recognized in exploration and production or marketing revenues when the commodities are produced. Any realized gains or losses that are deferred at the balance sheet date are included in net current assets. Margin accounts for futures contracts are included on the balance sheet in net current assets. 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 - ------------------------------- 38 Seagull Energy Corporation 21 ================================================================================ interest rates change and is recognized over the life of the agreements as a component of interest expense. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense represents 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 expense and exploration charges. INCOME TAXES The Company uses the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as part of the provision for income taxes in the period that includes the enactment date. FOREIGN CURRENCY TRANSLATION The functional currency for the Company's foreign operations is the applicable local currency. Translation from applicable foreign currencies to U. S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using primarily a weighted average exchange rate during the period. Adjustments resulting from such translation are included as a separate component of shareholders' equity. Deferred income taxes have not been provided on translation adjustments because unremitted earnings from Seagull's foreign operations are considered to be permanently invested. EARNINGS PER SHARE The weighted average number of common shares outstanding for the computation of earnings per share for the years ended December 31, 1995, 1994 and 1993 gives effect to the assumed exercise of dilutive stock options as of the beginning of the year. On June 4, 1993, Seagull 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 ("Common Stock"). The weighted average number of common shares outstanding and per share amounts for the year ended December 31, 1993 have been restated to reflect the Stock Split. None of the share amounts included in the consolidated statements of shareholders' equity as of dates prior to June 4, 1993 were adjusted to reflect the Stock Split. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. CHANGES IN FINANCIAL PRESENTATION Certain reclassifications have been made in the 1994 and 1993 financial statements to conform to the presentation used in 1995. ------------------------------- Seagull Energy Corporation 39 22 ================================================================================ - -------------------------------------------------------------------------------- 3. DISPOSITION OF ASSETS On September 25, 1995, the Company and three other sellers completed the sale of their disparate interests in 19 natural gas gathering systems and a gas processing plant. The purchaser paid Seagull and the other sellers $154.8 million in cash for the assets. The Company's share of gross proceeds was approximately $100 million. Net proceeds after payment of approximately $3 million in transaction costs were used to reduce the Company's borrowings under its U.S. revolving credit facility (the "U.S. Credit Agreement"). From its share of the proceeds, Seagull realized a one-time, pre-tax gain of approximately $82 million recorded in the third quarter. For the nine months ended September 30, 1995, the pipeline assets the Company disposed of (the "Pipeline Assets") contributed $6.2 million and for the years ended December 31, 1994 and 1993, the Pipeline Assets contributed $6.7 million and $8.4 million, respectively, to the operating profit of the pipeline and marketing segment. In September 1995, the Company sold certain Internal Revenue Code Section 29 Tax Credit-bearing gas properties (the "Section 29 Properties") to an investment group which includes a Seagull subsidiary and two financial investors. For accounting purposes, the Company has treated the sale as a non-recourse monetary production payment reflected in long-term debt on the balance sheet (see Note 9). Net of transaction costs, the proceeds from the sale of approximately $46.3 million in cash were used to pay down the Company's borrowings under the U.S. Credit Agreement. During the year ended December 31, 1993, the Company recorded a pre-tax gain of approximately $3.8 million relating to sales of non-strategic gas and oil producing properties. Net proceeds from the sales totaled approximately $13 million. The parcels sold had proven reserves estimated at approximately 19 billion cubic feet ("Bcf") of natural gas equivalents. - -------------------------------------------------------------------------------- 4. WORKFORCE REDUCTION AND CONSOLIDATION In April 1995, the Company announced plans to reduce its workforce and consolidate operations into a smaller number of locations. Company-wide, approximately 90 of about 770 positions were eliminated in the combined workforce reduction and consolidation. The eliminated positions primarily represent technical and administrative positions in two regional offices. In the second quarter of 1995, the Company recorded one-time pre-tax charges, included in general and administrative expense, of $8 million to account for the expenses involved in the workforce reduction and consolidation. Furthermore, the sale of the Pipeline Assets resulted in the elimination of approximately 35 additional jobs, primarily field positions. - -------------------------------------------------------------------------------- 5. ACQUISITIONS On January 4, 1994, an indirect wholly owned subsidiary of Seagull acquired all of the outstanding shares of stock of Novalta and an intercompany note from Novalta to its parent, Novacor Petrochemicals Ltd., for a purchase price of approximately $202 million in cash (the "Seagull Canada Acquisition"). Effective as of the January 4, 1994 closing date, Novalta was amalgamated with Seagull Canada, the indirect subsidiary of Seagull that acquired Novalta. As a result of the amalgamation, the intercompany note was extinguished. The acquisition was accounted for as a purchase. Seagull Canada's assets 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. - ------------------------------- 40 Seagull Energy Corporation 23 ================================================================================ - -------------------------------------------------------------------------------- 6. PROPERTY, PLANT AND EQUIPMENT The major classes of the Company's property, plant and equipment are shown below:
- -------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) December 31, 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- Gas and oil properties . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,325,183 $ 1,289,541 Pipeline facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,255 48,264 Gas processing plants . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,535 16,128 Utility plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,883 223,335 Equipment and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,146 14,884 - -------------------------------------------------------------------------------------------------------------------------- $ 1,581,002 $ 1,592,152 ==========================================================================================================================
Interest cost capitalized as property, plant and equipment amounted to approximately $0.9 million, $0.6 million and $0.9 million in 1995, 1994 and 1993, respectively. Total depreciation, depletion and amortization related to property, plant and equipment amounted to approximately $173.5 million, $147.7 million and $119.5 million in 1995, 1994 and 1993, respectively. As discussed in Note 2, the Company recognized a non-cash pre-tax charge against earnings of $44.4 million related to the adoption of SFAS No. 121. This charge is included in the accumulated depreciation, depletion and amortization related to property, plant and equipment at December 31, 1995. As discussed in Note 3, the Company sold the Pipeline Assets during the year ended December 31, 1995. ------------------------------- Seagull Energy Corporation 41 24 ================================================================================ - -------------------------------------------------------------------------------- 7. SUPPLEMENTAL GAS AND OIL PRODUCING ACTIVITIES (Unaudited) CAPITALIZED COSTS RELATING TO GAS AND OIL PRODUCING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) United Other States Canada International Total - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1995: Proved properties . . . . . . . . . . . . . . . . . $ 1,058,415 $ 234,437 $ -- $ 1,292,852 Unproved properties . . . . . . . . . . . . . . . . 25,428 2,722 4,181 32,331 - ------------------------------------------------------------------------------------------------------------------------------------ 1,083,843 237,159 4,181 1,325,183 Accumulated depreciation, depletion and amortization 448,279 34,015 815 483,109 - ------------------------------------------------------------------------------------------------------------------------------------ $ 635,564 $ 203,144 $ 3,366 $ 842,074 ==================================================================================================================================== December 31, 1994: Proved properties . . . . . . . . . . . . . . . . . $ 1,036,494 $ 225,365 $ -- $ 1,261,859 Unproved properties . . . . . . . . . . . . . . . . 19,376 3,216 5,090 27,682 - ------------------------------------------------------------------------------------------------------------------------------------ 1,055,870 228,581 5,090 1,289,541 Accumulated depreciation, depletion and amortization 332,108 16,098 497 348,703 - ------------------------------------------------------------------------------------------------------------------------------------ $ 723,762 $ 212,483 $ 4,593 $ 940,838 ====================================================================================================================================
COSTS INCURRED IN GAS AND OIL PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) United Other States Canada(*) International Total - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1995: Acquisition of properties: Proved . . . . . . . . . . . . . . . . . . . . . . $ 11 $ 553 $ -- $ 564 Unproved . . . . . . . . . . . . . . . . . . . . . 10,360 873 206 11,439 Exploration costs . . . . . . . . . . . . . . . . . 28,480 764 2,880 32,124 Development costs . . . . . . . . . . . . . . . . . 29,568 2,507 -- 32,075 - ------------------------------------------------------------------------------------------------------------------------------------ $ 68,419 $ 4,697 $ 3,086 $ 76,202 ==================================================================================================================================== Year Ended December 31, 1994: Acquisition of properties: Proved . . . . . . . . . . . . . . . . . . . . . . $ 4,144 $ 218,871 $ -- $ 223,015 Unproved . . . . . . . . . . . . . . . . . . . . . 5,581 3,216 2,426 11,223 Exploration costs . . . . . . . . . . . . . . . . . 28,728 801 5,578 35,107 Development costs . . . . . . . . . . . . . . . . . 65,009 18,830 -- 83,839 - ------------------------------------------------------------------------------------------------------------------------------------ $ 103,462 $ 241,718 $ 8,004 $ 353,184 ==================================================================================================================================== Year Ended December 31, 1993: Acquisition of properties: Proved . . . . . . . . . . . . . . . . . . . . . . $ 22,568 $ -- $ -- $ 22,568 Unproved . . . . . . . . . . . . . . . . . . . . . 7,657 -- 93 7,750 Exploration costs . . . . . . . . . . . . . . . . . 26,824 -- -- 26,824 Development costs . . . . . . . . . . . . . . . . . 63,598 -- -- 63,598 - ------------------------------------------------------------------------------------------------------------------------------------ $ 120,647 $ -- $ 93 $ 120,740 ====================================================================================================================================
(*) Includes Seagull Canada since January 4, 1994. - ------------------------------- 42 Seagull Energy Corporation 25 ================================================================================ RESULTS OF OPERATIONS FOR GAS AND OIL PRODUCING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) United Other States Canada(1) International Total - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1995: Revenues . . . . . . . . . . . . . . . . . . . . . $ 180,491 $ 28,837 $ -- $ 209,328 Lifting costs: Lease operating expense . . . . . . . . . . . . . 27,856 8,482 -- 36,338 Workover expense . . . . . . . . . . . . . . . . . 1,566 647 -- 2,213 Production taxes . . . . . . . . . . . . . . . . . 6,390 -- -- 6,390 Transportation expense . . . . . . . . . . . . . . 8,189 1,949 -- 10,138 Ad valorem taxes . . . . . . . . . . . . . . . . . 3,554 -- -- 3,554 - ------------------------------------------------------------------------------------------------------------------------------------ 47,555 11,078 -- 58,633 General operating expense . . . . . . . . . . . . . 6,554 1,856 -- 8,410 Exploration charges . . . . . . . . . . . . . . . . 19,996 2,866 6,693 29,555 Depreciation, depletion and amortization . . . . . 96,544 18,046 520 115,110 Impairment of gas and oil properties . . . . . . . 44,376 -- -- 44,376 - ------------------------------------------------------------------------------------------------------------------------------------ Operating loss . . . . . . . . . . . . . . . . . . (34,534) (5,009) (7,213) (46,756) Income tax benefit(2) . . . . . . . . . . . . . . . (14,983) (2,233) (318) (17,534) - ------------------------------------------------------------------------------------------------------------------------------------ Results of operations from producing activities . . $ (19,551) $ (2,776) $ (6,895) $ (29,222) ==================================================================================================================================== Year Ended December 31, 1994: Revenues . . . . . . . . . . . . . . . . . . . . . $ 225,475 $ 37,068 $ -- $ 262,543 Lifting costs: Lease operating expense . . . . . . . . . . . . . 27,948 9,003 -- 36,951 Workover expense . . . . . . . . . . . . . . . . . 2,593 725 -- 3,318 Production taxes . . . . . . . . . . . . . . . . . 8,712 -- -- 8,712 Transportation expense . . . . . . . . . . . . . . 9,967 1,712 -- 11,679 Ad valorem taxes . . . . . . . . . . . . . . . . . 3,329 -- -- 3,329 - ------------------------------------------------------------------------------------------------------------------------------------ 52,549 11,440 -- 63,989 General operating expense . . . . . . . . . . . . . 9,779 1,574 -- 11,353 Exploration charges . . . . . . . . . . . . . . . . 19,617 2,308 4,963 26,888 Depreciation, depletion and amortization . . . . . 114,738 16,558 751 132,047 - ------------------------------------------------------------------------------------------------------------------------------------ Operating profit (loss) . . . . . . . . . . . . . . 28,792 5,188 (5,714) 28,266 Income tax expense(2) . . . . . . . . . . . . . . . 2,761 2,300 -- 5,061 - ------------------------------------------------------------------------------------------------------------------------------------ Results of operations from producing activities . . $ 26,031 $ 2,888 $ (5,714) $ 23,205 ==================================================================================================================================== Year Ended December 31, 1993: Revenues . . . . . . . . . . . . . . . . . . . . . $ 227,437 $ -- $ -- $ 227,437 Lifting costs: Lease operating expense . . . . . . . . . . . . . 28,806 -- -- 28,806 Workover expense . . . . . . . . . . . . . . . . . 4,249 -- -- 4,249 Production taxes . . . . . . . . . . . . . . . . . 9,133 -- -- 9,133 Transportation expense . . . . . . . . . . . . . . 7,764 -- -- 7,764 Ad valorem taxes . . . . . . . . . . . . . . . . . 3,291 -- -- 3,291 - ------------------------------------------------------------------------------------------------------------------------------------ 53,243 -- -- 53,243 General operating expense . . . . . . . . . . . . . 10,408 -- -- 10,408 Exploration charges . . . . . . . . . . . . . . . . 16,579 -- 686 17,265 Depreciation, depletion and amortization . . . . . 103,537 -- 15 103,552 - ------------------------------------------------------------------------------------------------------------------------------------ Operating profit (loss) . . . . . . . . . . . . . . 43,670 -- (701) 42,969 Income tax expense(2) . . . . . . . . . . . . . . . 9,241 -- -- 9,241 - ------------------------------------------------------------------------------------------------------------------------------------ Results of operations from producing activities . . $ 34,429 $ -- $ (701) $ 33,728 ====================================================================================================================================
(1) Includes Seagull Canada since January 4, 1994. (2) Income tax expense (benefit) for United States operations and U.S. subsidiaries conducting international operations is calculated by applying the current U.S. effective income tax rate, before the Internal Revenue Code Section 29 Tax Credits, to operating profit and reducing (increasing) the resulting income tax expense (benefit) by the Section 29 Tax Credits. Income tax expense for Canada is calculated by applying the current statutory rate to operating profit. No income tax expense (benefit) was applied to Other International operations in 1994 and 1993 as these operations had no impact on the Company's consolidated tax return. ------------------------------- Seagull Energy Corporation 43 26 ================================================================================ RESERVE QUANTITY INFORMATION (1)
- ------------------------------------------------------------------------------------------------------------------------------------ United States Canada(2) Total Gas Oil Gas Oil Gas Oil (MMcf) (Mbbl) (MMcf) (Mbbl) (MMcf) (Mbbl) - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1993: Proved developed and undeveloped reserves: Beginning of year . . . . . . . . . . . . 884,327 18,149 -- -- 884,327 18,149 Purchases of reserves in place . . . . . . 34,350 198 -- -- 34,350 198 Sales of reserves in place . . . . . . . . (9,587) (1,554) -- -- (9,587) (1,554) Revisions of previous estimates . . . . . 24,924 (1,281) -- -- 24,924 (1,281) Extensions and discoveries . . . . . . . . 83,158 972 -- -- 83,158 972 Production . . . . . . . . . . . . . . . . (102,025) (1,694) -- -- (102,025) (1,694) - ------------------------------------------------------------------------------------------------------------------------------------ End of year(3) . . . . . . . . . . . . . . 915,147 14,790 -- -- 915,147 14,790 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1994: Proved developed and undeveloped reserves: Beginning of year . . . . . . . . . . . . 915,147 14,790 -- -- 915,147 14,790 Purchases of reserves in place . . . . . . 7,168 67 261,785 2,923 268,953 2,990 Sales of reserves in place . . . . . . . . (923) (17) (2,711) (8) (3,634) (25) Revisions of previous estimates . . . . . (61,357) (442) 449 685 (60,908) 243 Extensions and discoveries . . . . . . . . 50,576 331 28,212 878 78,788 1,209 Production . . . . . . . . . . . . . . . . (109,900) (1,421) (19,755) (427) (129,655) (1,848) - ------------------------------------------------------------------------------------------------------------------------------------ End of year(3) . . . . . . . . . . . . . . 800,711 13,308 267,980 4,051 1,068,691 17,359 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1995: Proved developed and undeveloped reserves: Beginning of year . . . . . . . . . . . . 800,711 13,308 267,980 4,051 1,068,691 17,359 Purchases of reserves in place . . . . . . -- -- 1,494 74 1,494 74 Sales of reserves in place . . . . . . . . (4,019) (78) (2,457) (153) (6,476) (231) Revisions of previous estimates . . . . . (11,379) 4,000 3,159 (164) (8,220) 3,836 Extensions and discoveries . . . . . . . . 47,633 1,371 4,773 258 52,406 1,629 Production . . . . . . . . . . . . . . . . (99,772) (1,159) (22,057) (399) (121,829) (1,558) - ------------------------------------------------------------------------------------------------------------------------------------ End of year(4) . . . . . . . . . . . . . . 733,174 17,442 252,892 3,667 986,066 21,109 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ Proved developed reserves: December 31, 1992 . . . . . . . . . . . . 675,861 11,552 -- -- 675,861 11,552 December 31, 1993 . . . . . . . . . . . . 693,610 9,362 -- -- 693,610 9,362 December 31, 1994 . . . . . . . . . . . . 650,371 7,882 243,042 3,587 893,413 11,469 December 31, 1995 . . . . . . . . . . . . 610,651 9,344 225,544 3,196 836,195 12,540 ====================================================================================================================================
(1) Gas stated in million cubic feet ("MMcf"); oil stated in thousands of barrels ("Mbbl"). (2) Includes Seagull Canada since January 4, 1994. (3) At December 31, 1994, includes approximately 154 Mbbl of oil related to prepaid oil sales. At December 31, 1993, includes approximately 620 MMcf of gas and 529 Mbbl of oil related to prepaid gas and oil sales. (4) At December 31, 1995, includes approximately 74,713 MMcf of gas and 2,281 Mbbl of oil dedicated to the monetary production payment (see Note 3). - ------------------------------- 44 Seagull Energy Corporation 27 ================================================================================ The reserve volumes 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. The Company's standardized measure of discounted future net cash flows and changes therein as of December 31, 1995, 1994 and 1993 are based substantially on the present value of future net revenues from proved gas and oil reserves estimated by independent petroleum engineers in accordance with guidelines established by the Securities and Exchange Commission. These estimates were computed by applying appropriate year-end prices for 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 1995 calculations were made utilizing average prices for natural gas and oil, condensate and natural gas liquids that existed at December 31, 1995 of $2.09 per thousand cubic feet ("Mcf") and $14.51 per barrel ("Bbl"), respectively, for the United States and $1.13 per Mcf and $14.26 per Bbl, respectively, for Canada. 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. Standardized Measure of Discounted Future Net Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) United States Canada Total - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1995: Future cash inflows . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,788,343 $ 345,380 $ 2,133,723 Future development costs . . . . . . . . . . . . . . . . . . . . . . (161,332) (20,297) (181,629) Future production costs . . . . . . . . . . . . . . . . . . . . . . . (483,879) (113,917) (597,796) - ------------------------------------------------------------------------------------------------------------------------------------ Future net cash flows before income taxes . . . . . . . . . . . . . . 1,143,132 211,166 1,354,298 10% annual discount . . . . . . . . . . . . . . . . . . . . . . . . . (486,558) (98,399) (584,957) - ------------------------------------------------------------------------------------------------------------------------------------ Discounted future net cash flows before income taxes . . . . . . . . 656,574 112,767 769,341 Discounted income taxes . . . . . . . . . . . . . . . . . . . . . . . (103,749) (33,286) (137,035) - ------------------------------------------------------------------------------------------------------------------------------------ Standardized measure of discounted future net cash flows . . . . . . $ 552,825 $ 79,481 $ 632,306 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1994: Future cash inflows . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,537,172 $ 386,249 $ 1,923,421 Future development costs . . . . . . . . . . . . . . . . . . . . . . (175,394) (20,863) (196,257) Future production costs . . . . . . . . . . . . . . . . . . . . . . . (474,545) (114,831) (589,376) - ------------------------------------------------------------------------------------------------------------------------------------ Future net cash flows before income taxes . . . . . . . . . . . . . . 887,233 250,555 1,137,788 10% annual discount . . . . . . . . . . . . . . . . . . . . . . . . . (354,360) (119,168) (473,528) - ------------------------------------------------------------------------------------------------------------------------------------ Discounted future net cash flows before income taxes . . . . . . . . 532,873 131,387 664,260 Discounted income taxes . . . . . . . . . . . . . . . . . . . . . . . (37,348) (41,224) (78,572) - ------------------------------------------------------------------------------------------------------------------------------------ Standardized measure of discounted future net cash flows . . . . . . $ 495,525 $ 90,163 $ 585,688 ====================================================================================================================================
------------------------------- Seagull Energy Corporation 45 28 ================================================================================ Principal Sources of Change in the Standardized Measure of Discounted Future Net Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Year Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Standardized measure of discounted future net cash flows, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 585,688 $ 727,648 $ 694,448 Purchases of reserves in place . . . . . . . . . . . . . . . . . . . 930 197,301 28,871 Sales of reserves in place . . . . . . . . . . . . . . . . . . . . . (5,238) (2,932) (13,679) Revisions of previous quantity estimates less related costs . . . . 1,666 (51,622) 16,660 Extensions and discoveries less related costs . . . . . . . . . . . 68,265 50,062 87,345 Net changes in prices and production costs . . . . . . . . . . . . . 146,709 (348,609) 28,393 Development costs incurred during period and changes in estimated future development costs . . . . . . . . . . 27,867 66,991 22,248 Sales of gas and oil produced during period, net of lifting costs . (150,695) (198,554) (174,194) Accretion of discount . . . . . . . . . . . . . . . . . . . . . . . 66,426 89,333 83,454 Net change in income taxes . . . . . . . . . . . . . . . . . . . . . (58,464) 87,109 (25,591) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,848) (31,039) (20,307) - ------------------------------------------------------------------------------------------------------------------------------------ 46,618 (141,960) 33,200 - ------------------------------------------------------------------------------------------------------------------------------------ Standardized measure of discounted future net cash flows, end of year . $ 632,306 $ 585,688 $ 727,648 ====================================================================================================================================
- -------------------------------------------------------------------------------- 8. OTHER NONCURRENT ASSETS Other noncurrent assets include the following:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) December 31, 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Natural gas imbalances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,336 $ 26,350 Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,979 16,066 Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 8,837 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,685 4,627 - ------------------------------------------------------------------------------------------------------------------------------------ $ 40,000 $ 55,880 ====================================================================================================================================
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. - ------------------------------- 46 Seagull Energy Corporation 29 ================================================================================ The Company's natural gas and transportation imbalance assets and liabilities were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands and Volumes in Bcf) December 31, 1995 1994 Amount Volume Amount Volume - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,213 7.4 $ 8,970 5.7 Noncurrent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,336 16.1 26,350 17.5 - ------------------------------------------------------------------------------------------------------------------------------------ $ 35,549 23.5 $ 35,320 23.2 ==================================================================================================================================== LIABILITIES: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,219 7.6 $ 10,130 6.0 Noncurrent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,235 13.5 25,607 16.4 - ------------------------------------------------------------------------------------------------------------------------------------ $ 31,454 21.1 $ 35,737 22.4 ====================================================================================================================================
DEFERRED FINANCING COSTS Deferred financing costs represent financing costs incurred in connection with the execution of various facilities entered into or securities issued by the Company. These costs are capitalized and amortized to interest expense over the life of the related debt. As discussed in Note 9, the Company has a $650 million revolving credit line which matures in 2000. 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, 2000. Approximately $5.0 million in financing costs incurred in connection with the Company's July 1993 issuance of $250 million in senior and senior subordinated notes was capitalized and will be amortized to interest expense over periods ending August 1, 2005 (see Note 9). EQUITY INVESTMENTS All of the Company's equity investments in two partnerships and one corporation were sold during the year ended December 31, 1995 (See Note 3 regarding the sale of the Pipeline Assets which included the Company's equity investments in two partnerships). ------------------------------- Seagull Energy Corporation 47 30 ================================================================================ - -------------------------------------------------------------------------------- 9. LONG-TERM DEBT Long-term debt for 1995 and 1994 was as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) December 31, 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Seagull Energy Corporation: Money market facilities, variable rates (6.6% and 7% at December 31, 1995 and 1994, respectively) due in 1996 . . . . . . . . . . . . . . $ 27,527 $ 6,173 Revolving credit, variable rates (6.20%-6.475% and 6.09%-7.4% at December 31, 1995 and 1994, respectively) due in 1997-2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 89,000 155,000 Senior notes, 7.875%, due August 1, 2003 . . . . . . . . . . . . . . . . . . . . . 100,000 100,000 Senior subordinated notes, 8.625%, due August 1, 2005 . . . . . . . . . . . . . . . 150,000 150,000 Monetary production payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,856 -- Seagull Energy Canada Ltd.: Revolving credit, variable rates (6.94% and 6.94%-8.25% at December 31, 1995 and 1994, respectively) due in 1997-2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 75,396 148,275 Alaska Pipeline Company: Unsecured industrial development bonds: 7.75%-8.00% due in 1995-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,140 12,035 Other unsecured indebtedness: 9.95%-12.80% notes, due in 1995-2000 . . . . . . . . . . . . . . . . . . . . . . . 750 2,100 8.15%-8.81% notes, due in 1997-2009 . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000 Other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 18 - ------------------------------------------------------------------------------------------------------------------------------------ 547,683 623,601 Less: Current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,214 1,549 Unamortized debt discount . . . . . . . . . . . . . . . . . . . . . . . . . . 1,126 1,247 - ------------------------------------------------------------------------------------------------------------------------------------ $ 545,343 $ 620,805 ====================================================================================================================================
SEAGULL ENERGY CORPORATION MONEY MARKET FACILITIES Seagull 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 Seagull's or the banks' discretion. The lines are subject to annual renewal. SEAGULL ENERGY CORPORATION REVOLVING CREDIT During 1995, the Company requested the maximum commitment under the U.S. Credit Agreement be reduced from $725 million to $650 million. Under the terms of the U.S. Credit Agreement, the commitments thereunder begin to decline on March 31, 1997 in equal quarterly reductions of $45 million and a final reduction of $20 million on September 30, 2000. The U.S. Credit Agreement is an unsecured credit facility that contains restrictive provisions regarding the incurrence of additional debt, the making of investments - ------------------------------- 48 Seagull Energy Corporation 31 ================================================================================ outside existing lines of business, the maintenance of certain financial ratios (based upon Seagull'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 $150 million of preferred stock or dividends payable solely in the form of additional shares of Common Stock) and the repurchase or redemption of capital stock. Under the most restrictive of these provisions, approximately $34.6 million was available for payment of cash dividends on Common Stock or to repurchase Common Stock as of December 31, 1995. The U.S. Credit Agreement also includes restrictive provisions whereby a change in control of the Company would constitute an Event of Default, thereby accelerating all amounts due under the U.S. Credit Agreement. The U.S. Credit Agreement bears interest, at Seagull's option, at a rate equal to (i) either one, two, three or six month Adjusted LIBOR, plus a margin (the "LIBOR Margin"), (ii) the Reference Rate, plus a margin (the "Prime Margin") or (iii) a competitive bid rate. 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 1.5% per annum, depending upon Seagull's consolidated Debt to Capitalization Ratio (as defined under the U.S. Credit Agreement), and the Prime Margin ranges from 0% to 0.5% per annum, depending upon the same factor. Under provisions included in the U.S. Credit Agreement, 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 Seagull or the banks, one additional time each year, and will be redetermined upon the sale of certain assets included in the Borrowing Base. As a result of the sale of the Pipeline Assets and Section 29 Properties, the available Borrowing Base decreased by approximately $75 million to $500 million. If the Borrowing Base is redetermined in such a manner that the amount outstanding under the U.S. Credit Agreement (together with any other permitted senior debt facility) exceeds the new Borrowing Base, then the Company must repay the U.S. Credit Agreement 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 December 31, 1995, the available commitment under the U.S. Credit Agreement is subject to a $500 million Borrowing Base and is determined after consideration of outstanding borrowings under Seagull's other senior debt facilities. On that date, borrowings outstanding under the U.S. Credit Agreement were $89 million, leaving immediately available unused commitments of approximately $185.6 million, net of outstanding letters of credit of $2.9 million, $100 million of borrowings outstanding under the Senior Notes (defined below), the nominated maximum borrowing availability of $95 million under the $175 million reducing revolving credit facility (the "Canadian Credit Agreement"), and $27.5 million in borrowings outstanding under Seagull's money market facilities. At December 31, 1995, the Company was not in compliance with a certain covenant contained in the U.S. Credit Agreement and a similar covenant in the Canadian Credit Agreement (neither of which was a payment default). The banks have consented to and waived this event of noncompliance for both the U.S. and Canadian Credit Agreements. Subsequent to December 31, 1995, the Company obtained amendments to the U.S. and Canadian Credit Agreements from the banks which modify the covenants discussed above. ------------------------------- Seagull Energy Corporation 49 32 ================================================================================ 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, the right of each note holder to have the notes repurchased by the Company at 101% of the principal amount upon a change in control, as well as restrictions on the incurrence of secured debt and entering into sale and leaseback transactions. Net proceeds from the offering, totaling approximately $245 million, were used to repay borrowings outstanding under the U.S. Credit Agreement. INTEREST RATE SWAP AGREEMENTS The Company enters into interest rate swap agreements to manage the impact of changes in interest rates. During 1995, the following interest rate swap agreements were in effect:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Interest Rate Notional Amount Effective Date Maturity Date Receive Pay - ------------------------------------------------------------------------------------------------------------------------------------ $ 40,000 09/11/92 09/11/95 Floating 6.76% 50,000 08/02/93 01/31/97 5.635% Floating 50,000 08/02/93 01/31/97 5.43% Floating 50,000 08/02/93 07/31/96 5.199% Floating 65,000 05/02/95 12/29/95 Floating 6.35% 35,000 05/02/95 12/29/95 Floating 6.355% 65,000 01/02/96 12/30/96 Floating 6.83% 35,000 01/02/96 12/30/96 Floating 6.837% - ------------------------------------------------------------------------------------------------------------------------------------
While notional amounts are used to express the volume of the interest rate swap transactions discussed above, the amount potentially subject to credit risk, in the event of nonperformance by Seagull's counterparties, is significantly smaller. MONETARY PRODUCTION PAYMENT On September 1, 1995, the Company sold the Section 29 Properties for $46.3 million in net proceeds. The transaction was recorded as a monetary production payment for accounting purposes. The investors receive the operating cash flow from the properties, less funds required for working capital purposes, and are expected to recoup their investment plus their required after-tax rate of return by - ------------------------------- 50 Seagull Energy Corporation 33 ================================================================================ 2002. Seagull's pre-tax effective interest rate is currently estimated to be approximately 4%. SEAGULL ENERGY CANADA LTD. In connection with the Seagull Canada Acquisition (see Note 5), Seagull Canada entered into the Canadian Credit Agreement with a group of major U. S. and international banks or their Canadian affiliates. In June 1995, the Company requested the maximum commitment under the Canadian Credit Agreement be reduced from $175 million to $100 million. The Canadian Credit Agreement provides for dual currency borrowings in U. S. and Canadian dollars with a nominated maximum borrowing availability of $95 million, which may be increased or decreased by the Company at any time pursuant to provisions of the Canadian Credit Agreement. The Canadian Credit Agreement matures on December 31, 2000 and commitments thereunder begin to decline on March 31, 1997 in equal quarterly reductions of approximately $10.9 million. 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 funded in U. S. dollars bear interest, at Seagull Canada's option, in a manner similar to borrowings outstanding under the U.S. Credit Agreement as described above. The Canadian Credit Agreement is an unsecured credit facility guaranteed by Seagull and contains restrictive provisions similar to those included in the U.S. Credit Agreement. ALASKA PIPELINE COMPANY All long-term debt of ENSTAR Alaska is issued by APC. The majority of the capital requirements of ENG is 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 $12.0 million was available for the making of restricted investments, restricted stock payments and restricted subordinated debt payments as of December 31, 1995. ENSTAR Alaska also has a money market facility with a maximum commitment of $5 million that is subject to annual renewal. There were no balances outstanding under this facility during 1995 or 1994. ANNUAL MATURITIES At December 31, 1995, the Company's aggregate annual maturities of long-term debt are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Year Ending December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,214 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,373 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,847 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,174 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,187 Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323,888 ====================================================================================================================================
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 U.S. Credit Agreement. ------------------------------- Seagull Energy Corporation 51 34 ================================================================================ - -------------------------------------------------------------------------------- 10. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities include the following:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) December 31, 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Natural gas imbalances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,235 $ 25,607 Refundable customer advances for construction . . . . . . . . . . . . . . . . . . . . . . 11,037 12,668 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,004 19,462 - ------------------------------------------------------------------------------------------------------------------------------------ $ 52,276 $ 57,737 ====================================================================================================================================
NATURAL GAS IMBALANCES This represents 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 8). REFUNDABLE CUSTOMER ADVANCES FOR CONSTRUCTION This represents 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. - ------------------------------- 52 Seagull Energy Corporation 35 ================================================================================ 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) December 31, 1995 1994 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ Assets: Cash and cash equivalents . . . . . . . . . . . . . . $ 11,205 $ 11,205 $ 6,432 $ 6,432 Liabilities: Customer deposits . . . . . . . . . . . . . . . . . . (1,698) (1,552) (1,639) (1,513) Refundable customer advances for construction . . . . (13,168) (10,434) (12,927) (10,144) Long-term debt: U.S. Credit Agreement and money market facilities . (116,527) (116,527) (161,173) (161,173) Senior Notes . . . . . . . . . . . . . . . . . . . . (100,000) (98,600) (100,000) (89,000) Senior Subordinated Notes . . . . . . . . . . . . . (150,000) (143,580) (150,000) (130,500) Seagull Energy Canada Ltd. Credit Agreement . . . . (75,396) (75,396) (148,275) (148,275) Monetary production payment . . . . . . . . . . . . (43,856) (43,294) -- -- Alaska Pipeline Company, including current maturities . . . . . . . . . . . . . . . . (60,778) (68,600) (62,906) (65,100) Derivative transactions: Interest rate swap agreements: In a receivable position . . . . . . . . . . . . . . -- 440 -- 138 In a payable position . . . . . . . . . . . . . . . -- (1,604) -- (11,541) Commodity price swaps: In a receivable position . . . . . . . . . . . . . . -- 981 -- -- In a payable position . . . . . . . . . . . . . . . -- (1,897) -- -- Commodity futures: In a payable position . . . . . . . . . . . . . . . -- (1,465) -- -- Commodity options: In a payable position . . . . . . . . . . . . . . . (105) (326) -- -- ====================================================================================================================================
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 8.75% and 7.75% at December 31, 1995 and 1994, respectively, 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 U.S. Credit Agreement and money market facilities approximates fair value because these instruments bear interest at rates tied to current market rates. The fair value of Seagull's Senior and Senior Subordinated Notes is estimated based on quoted market prices for the same issues. The fair value of the monetary production payment is estimated using discounted cash flow analyses utilizing a discount rate of 3.83% at December 31, 1995. ------------------------------- Seagull Energy Corporation 53 36 ================================================================================ SEAGULL ENERGY CANADA LTD.: The carrying amount of borrowings outstanding under the Canadian Credit Agreement approximates fair value because this instrument bears interest at rates tied to current market rates. 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. DERIVATIVE TRANSACTIONS INTEREST RATE SWAP AGREEMENTS: The fair values are obtained from the financial institutions that are counterparties to the transactions. These values represent the estimated amount the Company would pay or receive to terminate the agreements, taking into consideration current interest rates and the current creditworthiness of the counterparties. Seagull's interest rate swap agreements are off balance sheet transactions and, accordingly, no respective carrying amounts for these transactions are included in the accompanying consolidated balance sheets as of December 31, 1995 and 1994. COMMODITY RELATED TRANSACTIONS: The Company uses derivative financial instruments for non-trading purposes as a hedging strategy to reduce the impact of market volatility and to ensure cash flows or to convert a customer's requested price structure to a price structure that is consistent with the Company's overall pricing strategy. Gains and losses on these hedging transactions are recorded when the related gas or oil production has been produced or delivered. If a derivative financial instrument no longer qualifies for hedge accounting, changes in the market value of that instrument will be recorded in income in the period in which the changes occur. Gains and losses are generally offset by similar changes in the price of natural gas and oil. While derivative financial instruments are intended to reduce the Company's exposure to declines in the market price of natural gas and oil, the derivative financial instruments may limit the Company's gain from increases in the market price of natural gas and oil. At December 31, 1995, the Company had deferred realized losses of $2.3 million and unrealized losses of $1.5 million, included in net current assets, related to commodity hedging activities. COMMODITY PRICE SWAPS The fair value is the estimated amount the Company would receive or pay to terminate the swap agreements at the reporting date, taking into account the difference between New York Mercantile Exchange ("NYMEX") prices or index prices at year-end and the fixed swap price. At December 31, 1995, the Company had open swap agreements for the Company's production of 23,051,000 million British thermal units ("MMbtu") of natural gas for February 1996 through December 1998. Seagull had no open oil price swaps at year-end. COMMODITY FUTURES The fair value is the estimated amount the Company would receive or pay to close the futures contracts at the reporting date, taking into account the difference between the NYMEX gas prices at year-end and the fixed futures price. At December 31, 1995, the Company had outstanding futures contracts covering notional volumes of 6,180,000 MMbtu for February 1996 through June 1996. COMMODITY OPTIONS The fair value is the estimated amount the Company would receive or pay to close the option contracts at the reporting date, taking into account the difference between NYMEX or index prices at year-end and the option "strike" prices. At December 31, 1995, the Company had open option contracts on 2,430,000 MMbtu for February 1996 through June 1996. Fair value estimates are dependent upon subjective assumptions and involve significant uncertainties resulting in variability in estimates with changes in assumptions. Also, potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed. - ------------------------------- 54 Seagull Energy Corporation 37 ================================================================================ - -------------------------------------------------------------------------------- 12. SHAREHOLDERS' EQUITY COMMON STOCK In February 1993, Seagull sold 5,060,000 shares (10,120,000 shares after the Stock Split) of Common Stock in an underwritten public offering. Net proceeds from the offering, totaling approximately $163.6 million, were used to retire debt. See Note 9 for information concerning restrictions imposed by the U.S. Credit Agreement 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, 1995 and 1994. PREFERRED SHARE PURCHASE RIGHTS In 1989, Seagull adopted a Share Purchase Rights Plan to protect the Company's shareholders from coercive or unfair takeover tactics. Under the Plan, each outstanding share and each share of Common Stock subsequently issued has attached to it one Right, exercisable at $32.75 (adjusted for Stock Split), subject to certain adjustments. Generally, in the event a person or group acquires 20% or more of the outstanding Common Stock other than pursuant to a cash tender offer for all shares of such Common Stock (provided that the tender offer increases the acquiring person's or group's ownership to at least 85% of the outstanding Common Stock), or in the event the Company is acquired in a merger or other business combination or 50% or more of the Company's consolidated assets or earning power is sold, each Right entitles the holder to purchase shares of Common Stock of the Company or of the acquiring company, having a value of twice the exercise price. The Rights, under certain circumstances, are redeemable at the option of Seagull's Board of Directors at a price of $0.01 per Right, within 10 days (subject to extension) following the day on which the acquiring person or group exceeds the 20% threshold. The Rights expire on March 22, 1999. ENSTAR ALASKA STOCK In June 1994, shareholders approved an amendment to the Company's articles of incorporation to create and issue a new class of common stock of the Company intended to reflect separately the performance of ENSTAR Alaska. There were no shares issued or outstanding as of December 31, 1995 and 1994. - -------------------------------------------------------------------------------- 13. BENEFIT PLANS STOCK OPTION PLANS The Company currently has seven 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; the 1993 Nonemployee Directors' Stock Option Plan and the 1995 Omnibus Stock 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. Forty percent of all other options granted after 1992 become exercisable after three years and twenty percent 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 closing market price of Seagull's Common Stock on the New York Stock Exchange on the date of grant. Accordingly, no compensation expense is recognized in the Company's results of operations relating to these options. ------------------------------- Seagull Energy Corporation 55 38 ================================================================================ Information relating to stock options is summarized as follows (adjusted for Stock Split):
- ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 Shares Option Price Shares Option Price Shares Option Price Per Share Per Share Per Share - ------------------------------------------------------------------------------------------------------------------------------------ Balance outstanding - Beginning of year . . . . . . . . . . . 2,692,504 2,159,892 1,862,872 Granted . . . . . . . . . . . . . . . 610,000 $ 17.25- 628,500 $ 25.50 615,000 $ 26.38 $ 18.88 Exercised . . . . . . . . . . . . . . (128,776) $ 6.31- (55,388) $ 6.31 - (304,952) $ 6.31 - $ 17.38 $ 14.88 $ 14.88 Canceled . . . . . . . . . . . . . . . (114,700) (40,500) (13,028) - ------------------------------------------------------------------------------------------------------------------------------------ Balance outstanding - End of year . . . . 3,059,028 $ 6.31- 2,692,504 $ 6.31 - 2,159,892 $ 6.31 - $ 26.38 $ 26.38 $ 26.38 ==================================================================================================================================== Options exercisable - End of year . . . . 1,110,061 1,003,970 763,892 ==================================================================================================================================== Options available for grant - End of year 1,546,360 842,060 1,430,060 ====================================================================================================================================
In October 1995, the Financial Accounting Standards Board approved the issuance of SFAS No. 123, "Accounting for Stock-Based Compensation." This SFAS establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 allows a company to adopt a fair value based method of accounting for an employee stock-based compensation plan or to continue to use the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," Seagull's current accounting method. Under the intrinsic value method, the Company records no compensation expense for stock options granted, as the exercise price of all options granted is equal to the closing price of Seagull's common stock on the day of grant. However, under the fair value method, the Company would record compensation expense for similar grants based on an option-pricing model that takes into account the exercise price and expected life of the option, the current price of the stock and its expected volatility and the risk-free interest rate for the expected term of the option. Seagull has undertaken a preliminary study of SFAS No. 123 and has determined that the Company will continue to follow the intrinsic value method. The disclosures required by SFAS No. 123 will be included in the Company's consolidated financial statements for the year ended December 31, 1996. DEFINED BENEFIT PLANS The Company has an unfunded retirement plan which provides for supplemental benefits to certain officers and key employees. As of December 31, 1995, only one person was designated to participate in such plan. Total expenses of the plan were approximately $0.2 million, $0.3 million and $0.2 million for 1995, 1994 and 1993, respectively. 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 - ------------------------------- 56 Seagull Energy Corporation 39 ================================================================================ applicable regulations. The net pension costs are included in operations and maintenance expenses. The following table sets forth the ENSTAR Alaska plans' funded status and the amounts recognized in the consolidated financial statements at December 31, 1995 and 1994:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) 1995 1994 Salaried Operating Salaried Operating Employees Employees Employees Employees - ------------------------------------------------------------------------------------------------------------------------------------ Actuarial present value of benefit obligations: Vested benefit obligation . . . . . . . . . . . . . . . . $ (6,529) $ (3,701) $ (4,517) $ (2,405) ==================================================================================================================================== Accumulated benefit obligation . . . . . . . . . . . . . . $ (6,578) $ (3,708) $ (4,582) $ (2,416) ==================================================================================================================================== Projected benefit obligation for services rendered to date . $ (7,984) $ (3,708) $ (5,415) $ (2,416) Plan assets at fair value, primarily listed stocks and corporate and U. S. bonds . . . . . . . . . . . . . . 5,377 3,412 3,818 2,513 - ------------------------------------------------------------------------------------------------------------------------------------ Plan assets at fair value in excess of (less than) projected benefit obligation . . . . . . . . . . . . . . . (2,607) (296) (1,597) 97 Unrecognized prior service cost . . . . . . . . . . . . . . . 87 16 96 17 Unrecognized net loss . . . . . . . . . . . . . . . . . . . . 1,300 847 121 432 Unrecognized net obligation (asset) arising out of the initial application of SFAS No. 87, amortized over 15 years (salaried) and 18 years (operating) . . . . . . . . . . . 561 (83) 655 (92) Additional minimum liability . . . . . . . . . . . . . . . . (542) (779) (38) -- - ------------------------------------------------------------------------------------------------------------------------------------ Prepaid (accrued) pension cost . . . . . . . . . . . . . . . $ (1,201) $ (295) $ (763) $ 454 ==================================================================================================================================== Net pension cost includes the following components: Service cost - benefits earned during the period . . . . . $ 172 $ 94 $ 226 $ 111 Interest cost on projected benefit obligation . . . . . . 469 210 440 206 Actual loss (gain) on plan assets . . . . . . . . . . . . (1,337) (840) 331 198 Net amortization and deferral . . . . . . . . . . . . . . 1,126 642 (559) (402) - ------------------------------------------------------------------------------------------------------------------------------------ Net periodic pension cost . . . . . . . . . . . . . . . . . . $ 430 $ 106 $ 438 $ 113 ====================================================================================================================================
The assumed weighted average discount rate for both ENSTAR Alaska plans was 7% and 8.5% for 1995 and 1994, respectively, and the rate of increase in future compensation for the Salaried Retirement Plan used in determining the projected benefit obligation was 5% for both 1995 and 1994. The expected long-term rate of return on plan assets for both ENSTAR Alaska plans was 8% for both 1995 and 1994. PROFIT SHARING PLANS ENSTAR Alaska has trusteed profit sharing plans for salaried employees and union employees. Annual contributions for each plan are determined by the Company's Board of Directors pursuant to formulae which contain minimum contribution requirements. Profit sharing expense was approximately $0.3 million for each of the ------------------------------- Seagull Energy Corporation 57 40 ================================================================================ years 1995, 1994 and 1993, and is included in operations and maintenance expenses. THRIFT PLANS The Seagull Thrift Plan and the ENSTAR Natural Gas Company Thrift Plan are qualified employee savings plans in accordance with the provisions of Section 401(k) of the Internal Revenue Code of 1986, as amended. Seagull Canada's Retirement Plan and Capital Accumulation Plan are qualified employee savings plans in accordance with the provisions of the Income Tax Act of Canada. Company contributions to these four plans (collectively, the "Thrift Plans") were approximately $1.8 million, $1.8 million and $1.3 million for the years 1995, 1994 and 1993, respectively. The Thrift Plans' costs are included in operations and maintenance expenses 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 percent per annum to be repaid in twelve equal annual installments of principal and interest. The ESOP used the borrowed funds and the 1989 contributions from the Company to purchase 948,150 shares (adjusted for Stock Split) of Common Stock at $8.438 per share (adjusted for Stock Split) from Seagull's treasury. The purchase price was based upon the closing price of the Common Stock on the New York Stock Exchange on the date the ESOP was formed. The promissory note has been and will be funded entirely by contributions from Seagull. Company contributions of approximately $0.6 million in 1995 and $0.5 million in both 1994 and 1993 are included in operations and maintenance expenses and general and administrative expenses. POSTRETIREMENT MEDICAL PLAN ENSTAR Alaska has a postretirement medical plan which covers all of its salaried employees. Determination of benefits is based upon the combined age of the retiree and years of service at retirement. The Company accrues for such benefits during the years the plan participants render service. Expenses related to the postretirement medical plan of $0.2 million in each of the years 1995, 1994 and 1993 are included in operations and maintenance expenses. - -------------------------------------------------------------------------------- 14. INCOME TAXES Total income tax expense (benefit) for the years ended December 31, 1995, 1994 and 1993 was allocated as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . $ (2,312) $ (2,314) $ 6,080 Additional paid-in capital for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes . . . . (374) (160) (1,966) - ------------------------------------------------------------------------------------------------------------------------------------ $ (2,686) $ (2,474) $ 4,114 ====================================================================================================================================
- ------------------------------- 58 Seagull Energy Corporation 41 ================================================================================ The income tax expense (benefit) for each of the years ended December 31, 1995, 1994 and 1993 was as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,115 $ 1,651 $ 3,667 Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466 399 -- State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,462 1,325 1,363 - ------------------------------------------------------------------------------------------------------------------------------------ Total current . . . . . . . . . . . . . . . . . . . . . . . . . . 10,043 3,375 5,030 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,633) (6,655) 1,128 Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,935) 1,256 -- State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (787) (290) (78) - ------------------------------------------------------------------------------------------------------------------------------------ Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . (12,355) (5,689) 1,050 - ------------------------------------------------------------------------------------------------------------------------------------ Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . $ (2,312) $ (2,314) $ 6,080 ====================================================================================================================================
The provision for income taxes for each of the years ended December 31, 1995, 1994 and 1993 was different than the amount computed using the federal statutory rate (35%) for the following reasons:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Amount computed using the statutory rate . . . . . . . . . . . . . . . . . $ (588) $ 326 $ 11,647 Increase (Reduction) in taxes resulting from: Utilization of Internal Revenue Code Section 29 (Tight Sands) credits . . (3,096) (5,534) (4,773) State income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . 1,739 673 835 Deferred tax asset valuation allowance . . . . . . . . . . . . . . . . . (981) (380) (859) Foreign Tax Effect - Canada . . . . . . . . . . . . . . . . . . . . . . . 2,391 2,961 -- Adjustments to beginning-of-the-year tax bases per the 1994 and 1992 tax returns and effects of IRS exam . . . . . . . . . . . (1,385) -- (657) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (392) (360) (1,073) - ------------------------------------------------------------------------------------------------------------------------------------ Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . $ (2,312) $ (2,314) $ 6,080 ====================================================================================================================================
------------------------------- Seagull Energy Corporation 59 42 ================================================================================ The significant components of deferred income tax expense (benefit) attributable to income from continuing operations for the years ended December 31, 1995, 1994 and 1993 are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred tax expense (benefit) (exclusive of the effects of other components listed below) . . . . . . . $ (11,374) $ (5,309) $ 949 Decrease in deferred tax asset valuation allowance . . . . . . . . . . . . (981) (380) (859) 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 - ------------------------------------------------------------------------------------------------------------------------------------ $ (12,355) $ (5,689) $ 1,050 ====================================================================================================================================
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, 1995, 1994 and 1993 were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred tax liabilities: Property, plant and equipment, due to differences in depreciation, depletion and amortization . . . . . . . . . . . . . . . . . . . . $ 57,301 $ 63,303 $ 45,296 Investments in partnership, due to difference in depreciation . . . -- 564 606 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 513 509 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . 57,498 64,380 46,411 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred tax assets: Minimum tax credit carryforwards . . . . . . . . . . . . . . . . . (18,102) (14,367) (12,221) Investment tax credit carryforwards . . . . . . . . . . . . . . . . (1,165) (2,274) (2,771) Deferred compensation/retirement related items accrued for financial reporting purposes . . . . . . . . . . . . . . . . . . . (4,349) (3,965) (3,269) Contingent consideration related to acquisitions/dispositions . . . (651) (1,052) (604) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,948) (1,690) (3,134) - ------------------------------------------------------------------------------------------------------------------------------------ Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . (27,215) (23,348) (21,999) Less - valuation allowance . . . . . . . . . . . . . . . . . . . . . 582 1,563 1,943 - ------------------------------------------------------------------------------------------------------------------------------------ Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . (26,633) (21,785) (20,056) - ------------------------------------------------------------------------------------------------------------------------------------ Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . $ 30,865 $ 42,595 $ 26,355 ====================================================================================================================================
For federal income tax purposes, as of December 31, 1995, the Company has unused investment tax credits of approximately $1.2 million which will expire in the years 1999 and 2000, and unused minimum tax credits of approximately $18.1 million which are available over an indefinite period. - ------------------------------- 60 Seagull Energy Corporation 43 ================================================================================ - -------------------------------------------------------------------------------- 15. BUSINESS SEGMENTS Information on the Company's operations by business segment is as follows for the year ended December 31:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ REVENUES: Exploration and production . . . . . . . . . . . . . . . . . . . . $ 209,328 $ 262,543 $ 227,437 Pipeline and marketing . . . . . . . . . . . . . . . . . . . . . . 29,175 39,963 42,484 Alaska transmission and distribution . . . . . . . . . . . . . . . 97,770 105,598 107,244 - ------------------------------------------------------------------------------------------------------------------------------------ $ 336,273 $ 408,104 $ 377,165 ==================================================================================================================================== OPERATING PROFIT (LOSS): Exploration and production(1) . . . . . . . . . . . . . . . . . . . $ (46,756) $ 28,266 $ 42,969 Pipeline and marketing . . . . . . . . . . . . . . . . . . . . . . 9,165 11,936 14,065 Alaska transmission and distribution . . . . . . . . . . . . . . . 23,141 21,865 18,955 - ------------------------------------------------------------------------------------------------------------------------------------ (14,450) 62,067 75,989 ==================================================================================================================================== General and administrative expense . . . . . . . . . . . . . . . . (19,167) (10,252) (11,666) Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . (52,814) (51,550) (36,753) Gain on sales of property plant and equipment, net . . . . . . . . 83,591 413 3,929 Interest income and other . . . . . . . . . . . . . . . . . . . . . 1,160 254 1,779 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings (loss) before income taxes . . . . . . . . . . . . . . . . . $ (1,680) $ 932 $ 33,278 ==================================================================================================================================== OPERATIONS AND MAINTENANCE EXPENSE: Exploration and production . . . . . . . . . . . . . . . . . . . . $ 67,043 $ 75,342 $ 63,651 Pipeline and marketing . . . . . . . . . . . . . . . . . . . . . . 18,127 23,129 22,926 Alaska transmission and distribution . . . . . . . . . . . . . . . 20,504 21,516 20,880 - ------------------------------------------------------------------------------------------------------------------------------------ $ 105,674 $ 119,987 $ 107,457 ==================================================================================================================================== DEPRECIATION, DEPLETION AND AMORTIZATION: Exploration and production(1) . . . . . . . . . . . . . . . . . . . $ 159,486 $ 132,047 $ 103,552 Pipeline and marketing . . . . . . . . . . . . . . . . . . . . . . 1,883 4,898 5,493 Alaska transmission and distribution . . . . . . . . . . . . . . . 7,797 7,752 7,511 - ------------------------------------------------------------------------------------------------------------------------------------ $ 169,166 $ 144,697 $ 116,556 ==================================================================================================================================== IDENTIFIABLE ASSETS: Exploration and production(2) . . . . . . . . . . . . . . . . . . . $ 897,233 $ 1,001,263 $ 816,812 Pipeline and marketing . . . . . . . . . . . . . . . . . . . . . . 75,954 72,377 70,675 Alaska transmission and distribution . . . . . . . . . . . . . . . 189,081 190,087 185,701 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,528 35,823 45,063 - ------------------------------------------------------------------------------------------------------------------------------------ $ 1,198,796 $ 1,299,550 $ 1,118,251 ==================================================================================================================================== CAPITAL EXPENDITURES: Exploration and production . . . . . . . . . . . . . . . . . . . . $ 76,202 $ 136,090 $ 97,818 Pipeline and marketing . . . . . . . . . . . . . . . . . . . . . . 137 2,026 2,115 Alaska transmission and distribution . . . . . . . . . . . . . . . 7,611 7,626 10,094 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,397 4,510 2,015 - ------------------------------------------------------------------------------------------------------------------------------------ $ 85,347 $ 150,252 $ 112,042 ==================================================================================================================================== ACQUISITIONS, NET OF CASH ACQUIRED . . . . . . . . . . . . . . . . . $ -- $ 193,859 $ 29,470 ====================================================================================================================================
(1) Includes $44.4 million relating to the impairment of gas and oil properties for the year ended December 31, 1995. (2) Includes identifiable assets related to Canadian operations, acquired on January 4, 1994, of $221.0 million and $224.7 million at December 31, 1995 and 1994, respectively. Net assets related to Canadian operations were $110.4 million and $44.2 million at December 31, 1995 and 1994, respectively. ------------------------------- Seagull Energy Corporation 61 44 ================================================================================ - -------------------------------------------------------------------------------- 16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands Except Per Share Amounts) Earnings (Loss) Revenues Operating Profit (Loss) Net Earnings (Loss) Per Share(1) 1995 1994 1995 1994 1995 1994 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ March 31, . . . . $ 94,850 $ 127,063 $ (41,712)(2) $ 34,829 $(38,550)(2) $ 12,915 $ (1.07)(2) $ 0.35 June 30, . . . . 81,487 99,559 9,840 17,246 (7,125)(3) 2,581 (0.20)(3) 0.07 September 30, . . 68,087 81,044 455 3,418 41,550(4) (6,291) 1.13(4) (0.17) December 31, . . 91,849 100,438 16,967 6,574 4,757 (5,959) 0.13 (0.16) - ------------------------------------------------------------------------------------------------------------------------------------ Total . . . . . . $336,273 $ 408,104 $ (14,450) $ 62,067 $ 632 $ 3,246 $ 0.02 $ 0.09 ====================================================================================================================================
(1) Quarterly earnings (loss) per common share do not total to the full year per share amount for 1995, as the weighted average number of shares outstanding for each quarter fluctuated as a result of the assumed exercise of stock options (see Note 2). (2) Includes $44.4 million non-cash charge relating to the impairment of gas and oil properties (see Note 2). (3) Includes one-time pre-tax charges of $8 million for expenses involved in the workforce reduction and consolidation (see Note 4). (4) Includes $82 million pre-tax gain on the sale of the Pipeline Assets (see Note 3). - -------------------------------------------------------------------------------- 17. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases certain office space and equipment under operating lease arrangements which contain renewal options and escalation clauses. Future minimum rental payments under these leases range between $1.9 million and $2.9 million in each of the years 1996-2000, and total $10.1 million for all subsequent years. Total rental expense under operating leases for 1995, 1994 and 1993 was approximately $2.8 million, $2.8 million and $2.5 million, respectively. CONCENTRATIONS OF RISK The future results of the exploration and production segment will be affected by the market prices of natural gas and oil. The availability of a ready market for natural gas, oil and liquid products in the future will depend on numerous factors beyond the control of the Company, including weather, production of other natural gas, crude oil and liquid products, imports, marketing of competitive fuels, proximity and capacity of gas and oil pipelines and other transportation facilities, any oversupply or undersupply of gas, oil and liquid products, the regulatory environment, and other regional and political events, none of which can be predicted with certainty. The Company operates in various phases of the 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. Derivative financial instruments that hedge the price of natural gas and oil and interest rates are generally executed with major financial or commodities trading institutions which expose the Company to acceptable levels of market and credit risks and may at times be concentrated with certain counterparties or groups of counterparties. Although notional amounts are used to express the volume of these contracts, the amounts potentially subject to credit risk, in the event of non-performance by the counterparties, are substantially smaller. The credit worthiness of counterparties is subject to continuing review and full performance is anticipated. - ------------------------------- 62 Seagull Energy Corporation 45 ================================================================================ 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 or results of operations, if any, will not be material. ------------------------------- Seagull Energy Corporation 63 46 ================================================================================ - -------------------------------------------------------------------------------- REPORT OF MANAGEMENT TO SHAREHOLDERS - -------------------------------------------------------------------------------- The management of Seagull Energy Corporation is responsible for the preparation and integrity of financial statements and related data in this Annual Report, whether audited or unaudited. The financial statements were prepared in conformity with generally accepted accounting principles and are not misstated due to material fraud or error. The financial statements include certain estimates and judgments which management believes are reasonable under the circumstances. The other information in the Annual Report is consistent with that in the financial statements. Management is responsible for and maintains a system of internal accounting controls that is functioning as intended as of the end of the fiscal year. Management believes the system of internal controls is sufficient to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that financial records are reliable for preparing financial statements, as well as to prevent and detect fraudulent financial reporting. The internal control system is supported by written policies and procedures and the employment of trained, qualified personnel. The Company has an internal auditing staff which reviews the adequacy of the internal accounting controls and compliance with them. Management has considered the recommendations of the internal auditing staff and KPMG Peat Marwick LLP concerning the Company's system of internal controls and has responded appropriately to those recommendations. The accompanying consolidated financial statements of Seagull Energy Corporation and Subsidiaries as of December 31, 1995 have been audited by KPMG Peat Marwick LLP, independent certified public accountants. Their audits were made in accordance with generally accepted auditing standards and included a review of the system of internal controls to the extent considered necessary to determine the audit procedures required to support their opinion on the consolidated financial statements. The Auditors' Report appears on page 65. The Board of Directors, through its Audit Committee composed exclusively of outside directors, meets periodically with representatives of management, the internal auditing staff and the independent auditors to ensure the existence of effective internal accounting controls and to ensure that financial information is reported accurately and timely with all appropriate disclosures included. The independent auditors and the internal auditing staff have full and free access to, and meet with, the Audit Committee, with and without management present. s/Barry J. Galt Chairman, President and Chief Executive Officer s/Robert W. Shower Executive Vice President and Chief Financial Officer s/Rodney W. Bridges Vice President and Controller - ------------------------------- 64 Seagull Energy Corporation 47 ================================================================================ - -------------------------------------------------------------------------------- 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 2, in 1995, the Company changed its method of accounting for the impairment of long-lived assets and for long-lived assets to be disposed of to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." /s/ KPMG PEAT MARWICK LLP Houston, Texas January 23, 1996 ------------------------------- Seagull Energy Corporation 65 EX-21 9 SUBSIDIARIES OF SEAGULL ENERGY CORPORATION 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 25, 1996:
% Voting Securities Jurisdiction of or Beneficial Incorporation Interest Owned Name of Subsidiary or Organization by the Company - ------------------------------------------------------------------------------------------------------------------- Alaska Pipeline Company Alaska 100% 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. Delaware 100% Seagull Products Pipeline Corporation Delaware 100% Seagull Marketing Services, Inc. Texas 100% Seagull Midcon Inc. Delaware 100% Seagull Mid-South Inc. Delaware 100% Wacker Oil Inc. Delaware 100% ===================================================================================================================
EX-23.1 10 CONSENT OF KPMG PEAT MARWICK LLP 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 report dated January 23, 1996, relating to the consolidated balance sheets of Seagull Energy Corporation and Subsidiaries as of December 31, 1995 and 1994 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, 1995, which report appears or is incorporated by reference in the December 31, 1995 Annual Report on Form 10-K of Seagull Energy Corporation. Such report on the consolidated financial statements refers to a change in the Company's method of accounting for the impairment of long-lived assets and for long-lived assets to be disposed of. a. Form S-8, Seagull Thrift Plan (2-72014). b. Form S-8, Seagull Energy Corporation 1981 Non-Qualified and Incentive Stock Option Plan (2-80834). c. Form S-8, ENSTAR Natural Gas Company Thrift Plan (33-14463). d. Forms S-8 and S-3, Seagull Energy Corporation 1983 Stock Option Plan (2-93087). e. Forms S-8 and S-3, Seagull Energy Corporation 1986 Stock Option Plan (33-22475). f. Form S-8, Seagull Energy Corporation 1990 Stock Option Plan (33-43483). g. Form S-8, Seagull Energy Corporation 1993 Stock Option Plan (33-50643). h. Form S-8, Seagull Energy Corporation 1993 Nonemployee Directors' Stock Option Plan (33-50645). i. Form S-3, $350,000,000 Debt Securities of Seagull Energy Corporation (33-65118). j. Form S-3, ENSTAR Alaska Group of Common Stock of Seagull Energy Corporation (33-53729). k. Form S-8, Seagull Energy Corporation 1995 Omnibus Stock Plan (33-64041). l. Form S-3, $300,000,000 Debt Securities, Preferred Stock, Depositary Shares, Common Stock or Securities Warrants of Seagull Energy Corporation (33-64051). /s/ KPMG Peat Marwick LLP Houston, Texas March 28, 1996 EX-23.2 11 CONSENT OF RYDER SCOTT COMPANY 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, 1995, and the incorporation by reference thereof into the Company's registration statements on Form S-8 (Nos. 2-72014, 2-80834, 33-14463, 33-43483, 33-50643, 33-50645 and 33-64041), Forms S-8 and S-3 (Nos. 2-93087 and 33-22475) and Form S-3 (Nos. 33-53729, 33-65118 and 33-64051). /s/ RYDER SCOTT COMPANY PETROLEUM ENGINEERS RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas March 18, 1996 EX-23.3 12 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, 1995 (the "Annual Report") in Note 7, Supplemental Gas and Oil Producing Activities, of Notes to Consolidated Financial Statements. The Company's Annual Report on Form 10-K for the year ended December 31, 1995 (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, 33-50645 and 33-64041), Forms S-8 and S-3 (Nos. 2-93087 and 33-22475) and Form S-3 (Nos. 33-53729, 33-65118 and 33-64051). /s/ DeGOLYER AND MacNAUGHTON DeGOLYER AND MacNAUGHTON Dallas, Texas March 19, 1996 EX-23.4 13 CONSENT OF NETHERLAND, SEWELL AND ASSOCIATES, INC. 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, 1995, and the incorporation by reference thereof into the Company's registration statements on Form S-8 (Nos. 2-72014, 2-80834, 33-14463, 33-43483, 33-50643, 33-50645 and 33-64041), Forms S-8 and S-3 (Nos. 2-93087 and 33-22475) and Form S-3 (Nos. 33-53729, 33-65118 and 33-64051). NETHERLAND, SEWELL & ASSOCIATES, INC. By: /s/ FREDERICK D. SEWELL Frederick D. Sewell President Houston, Texas March 20, 1996 EX-27 14 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1995 DEC-31-1995 11,205 0 119,898 0 4,947 147,381 1,581,002 569,587 1,011,415 117,405 0 3,656 0 0 444,012 1,198,796 336,273 336,273 46,328 350,723 (65,584) 0 52,814 (1,680) (2,312) 632 0 0 0 632 .02 .02
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