-----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, CHu+L9UtUwP/czz/xoBKI3vucBPsf0C4njq8UYgXgP26BNV6JIswIgnAjlNHZjbH FxXItq7WFn2lpBi0avbroA== 0000899243-96-000151.txt : 19960305 0000899243-96-000151.hdr.sgml : 19960305 ACCESSION NUMBER: 0000899243-96-000151 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960304 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLAINS RESOURCES INC CENTRAL INDEX KEY: 0000350426 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PETROLEUM & PETROLEUM PRODUCTS (NO BULK STATIONS) [5172] IRS NUMBER: 132898764 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10454 FILM NUMBER: 96530869 BUSINESS ADDRESS: STREET 1: 1600 SMITH ST STE 1500 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7136541414 MAIL ADDRESS: STREET 1: 1600 SMITH STREET STREET 2: SUITE 1500 CITY: HOUSTON STATE: TX ZIP: 77002 10-K405 1 FORM 10-K405 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _____________ COMMISSION FILE NUMBER: 0-9808 PLAINS RESOURCES INC. (Exact name of registrant as specified in its charter) Delaware 13-2898764 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1600 Smith Street Houston, Texas 77002 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 654-1414 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered: Common Stock, par value $.10 per share American Stock Exchange 12% Senior Subordinated Notes due 1999 American 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 the filing requirements for the past 90 days. Yes [x] No ------- ------- The aggregate value of the Common Stock held by non-affiliates of the registrant (treating all executive officers and directors of the registrant, for this purpose, as if they may be affiliates of the registrant) was approximately $137,025,000 on February 26, 1996 (based on $8 3/4 per share, the last sale price of the Common Stock as reported on the American Stock Exchange Composite Tape on such date). 16,182,420 shares of the registrant's Common Stock were outstanding as of February 26, 1996. DOCUMENTS INCORPORATED BY REFERENCE. The information required in Part III of this Annual Report on Form 10-K is incorporated by reference to the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A for the Registrant's Annual Meeting of Stockholders. 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] ================================================================================ PART I ITEM 1. BUSINESS Plains Resources Inc. (the "Company") is an independent energy company engaged in the acquisition, exploitation, development, exploration and production of oil and natural gas and the marketing, transportation, terminalling and storage of crude oil. The Company's upstream oil and natural gas activities are focused in the Los Angeles Basin of California (the "LA Basin"), the Sunniland Trend of South Florida (the "Sunniland Trend"), the Illinois Basin and the Gulf Coast area of Louisiana. The Company's downstream marketing activities are concentrated in Oklahoma, where it owns a two million barrel, above ground crude oil terminalling and storage facility, Texas and the Gulf Coast area of Louisiana. The Company's upstream operations contributed approximately 90% of the Company's 1995 EBITDA proforma for the Illinois Basin Acquisition, while the Company's downstream activities accounted for the remainder. References to the Company in this Annual Report on Form 10-K (the "Report") include Plains Resources Inc. and its subsidiaries, except as the context may otherwise require./1/ The Company's business strategy is to increase its proved reserves and cash flow by exploiting and producing oil and natural gas from its existing properties, acquiring additional underdeveloped oil properties and exploring for significant new sources of reserves. The Company concentrates its exploitation efforts on mature but underdeveloped crude oil producing properties in areas that meet the Company's targeted criteria. Generally, such properties were previously owned by major integrated oil and gas companies or large independent oil and gas companies. Management believes that it has developed a proven record in acquiring and exploiting underdeveloped crude oil properties where it believes substantial reserve additions and cash flow increases can be made through improved production practices and recovery techniques and relatively low risk development drilling. An integral component of the Company's exploitation efforts is to increase unit operating margins, and therefore cash flow, by reducing unit production expenses and increasing wellhead price realizations. The Company also seeks to capitalize on downstream opportunities that complement its oil producing activities. The Company's marketing of its crude oil production takes advantage of the marketing expertise and economies of scale attributable to its downstream activities. As part of its business strategy, the Company periodically evaluates, and from time to time has elected to sell, certain of its fully developed producing properties. Such sales enable the Company to maintain financial flexibility, control overhead and redeploy the sales proceeds to activities that have potentially higher financial returns. During the five-year period ended December 31, 1995, the Company incurred aggregate acquisition, exploration, development and exploitation costs of approximately $287 million, resulting in proved oil and natural gas reserve additions (including revisions of estimates but excluding production) of approximately 112.8 million BOE, or $2.55 per BOE, through implementation of its business strategy. See Item 2, "Properties--Oil and Natural Gas Reserves". Approximately 82% of these expenditures were directed toward the acquisition, exploitation and development of proved reserves while approximately 18% were incurred on exploration activities. On December 22, 1995, the Company acquired all of Marathon Oil Company's ("Marathon") upstream oil and gas assets in the Illinois Basin (the "Illinois Basin Properties"). The acquisition of the Illinois Basin Properties (the "Illinois Basin Acquisition") was effective as of November 1, 1995. As a result of such acquisition, - ---------------------- /(1)/ As used in this Report, "Mcf" means thousand cubic feet, "Bcf" means billion cubic feet, "Bbl" means barrel, "MBbls" means thousand barrels, "MMBbls" means million barrels, "Btus" means British Thermal Units, "MBtus" means thousand Btus, "MMBtus" means million Btus, "BOE" means barrels of oil equivalent, and "MMBOE" means million BOE. Natural gas is converted to BOE using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. A "gross acre" is an acre in which a working interest is owned. The number of "net acres" is the sum of fractional working interests owned in gross acres. "Net" oil and gas wells are obtained by multiplying "gross" oil and gas wells by the Company's working interest in the applicable properties. "Present Value of Proved Reserves" means the present value (discounted at 10%) of estimated future net cash flows (before income taxes) of proved oil and natural gas reserves based on product prices in effect on the date of determination. "EBITDA" means earnings before interest, taxes, depreciation, depletion and amortization. 1 the Company added approximately 17.3 million barrels of oil to its proved reserve base at an aggregate cost of approximately $51.5 million, or an average of $2.98 per BOE ($0.50 per MCFE). The Company intends to aggressively exploit these properties to evaluate additional reserve potential identified during its acquisition analysis. In addition, the Company's exploitation plan for the Illinois Basin Properties targets improving the unit gross margin by decreasing unit production expenses and increasing price realizations as well as increasing production volumes by conducting production enhancement activities similar to those employed in its LA Basin Properties and Sunniland Trend Properties. In order to manage its exposure to commodity price risk, the Company has routinely hedged a portion of its crude oil production. For 1996, the Company has committed an average of approximately 8,500 Bbls of oil per day to fixed price arrangements that expire at various times throughout 1996. Such arrangements represent approximately 55% of the Company's average daily oil production for 1995 pro forma for the Illinois Basin Acquisition and partially mitigate the adverse impact of potential oil price declines on the Company's operating results. The following table sets forth certain information with respect to the Company's reserves over the last five years. Such reserve volumes and values were determined under the method prescribed by the Securities and Exchange Commission (the " Commission"), which requires the application of year-end oil and natural gas prices for each year, held constant throughout the projected reserve life. See Item 2, "Properties--Oil and Natural Gas Reserves" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
AS OF OR FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1991 1992 1993(1) 1994 1995 ------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT RATIOS AND PER UNIT AMOUNTS) Present Value of Proved Reserves....... $71,718 $155,360 $134,539 $229,371 $366,780 Proved Reserves Crude oil and natural gas liquids (Bbls)....................... 6,576 33,390 38,810 61,459 94,408 Natural gas (Mcf)..................... 42,898 39,861 49,397 51,009 43,110 Oil equivalent (BOE).................. 13,726 40,034 47,043 69,960 101,593 Reserve Replacement Ratio(2)........... 530% 1,100% 270% 620% 647%(3) Reserve Replacement Cost per BOE(4).... $ 5.86 $ 2.35 $ 5.39 $ 1.49 $ 2.14 Total upstream capital costs incurred.. $32,256 $ 68,209 $ 61,769 $ 40,849 $84,012 Percentage of total upstream capital costs attributable to: Acquisition........................... 30% 56% 40% 48% 71% Development........................... 23% 17% 43% 38% 27% Exploration........................... 47% 27% 17% 14% 2% West Texas Intermediate ("WTI") crude oil posted price at December 31,....... $ 17.75 $ 18.00 $ 12.50 $ 16.00 $ 18.00
- -------------------- (1) A large portion of the Company's reserve base is comprised of long-life oil properties that are sensitive to low crude oil prices. During the fourth quarter of 1993, crude oil prices declined significantly, with the posted price for WTI crude oil ending the year at $12.50 per Bbl, the lowest year- end oil price in the 13 years since U. S. crude oil prices were deregulated. Such low prices had an adverse affect on the proved reserves and Present Value of Proved Reserves at December 31, 1993, and led to a noncash charge of $20 million related to a writedown of the capitalized costs of the Company's proved oil and natural gas properties. 2 (2) The Reserve Replacement Ratio is calculated by dividing (a) the sum of reserves added during each respective year through purchases of reserves in place, extensions, discoveries and other additions and the effects of revisions, if any, ("Reserve Additions") by (b) each respective year's production. Reserve information at each year end is based on reports prepared by independent petroleum engineers. (3) Pro forma as if the Illinois Basin Acquisition occurred on January 1, 1995. (4) Reserve Replacement Cost per BOE for a year is calculated by dividing capital expenditures for such year by such year's Reserve Additions. ACQUISITION AND EXPLOITATION Acquisition and Exploitation Strategy The Company is continually engaged in the exploitation and development of its existing property base and the evaluation and pursuit of additional underdeveloped properties for acquisition. The Company focuses on mature but underdeveloped producing crude oil properties in areas where the Company believes substantial reserve additions and cash flow increases can be made through relatively low-risk drilling, improved production practices and recovery techniques and improved operating margins. Generally, the Company seeks to increase production rates and improve a property's operating margin by reducing unit production costs and enhancing the marketing arrangements of the oil production. Once the Company identifies a prospective property for acquisition, it conducts a technical review of existing production and operating practices in an effort to identify any previously unrecognized value. If the initial studies indicate undeveloped potential, the various producing and potentially productive formations in the area are mapped in detail. Historical production data is evaluated to determine if additional wells or other capital expenditures appear necessary to optimize the recovery of reserves from the property. Geologic and engineering information and operating practices utilized by operators on offsetting leases are analyzed to identify potential additional exploitation and development opportunities. A market study is also performed analyzing product markets, available pipeline connections, access to trading locations and existing contractual arrangements with the goal of maximizing sales and profit margins from the area. See "--Product Markets and Major Customers". A comprehensive plan of exploitation is then prepared and used as a basis for the Company's offer to purchase. The Company typically seeks to acquire a majority interest in the properties it has identified and to act as operator of those properties. The Company has in the past and may in the future hedge a significant portion of the acquired production, thereby partially mitigating product price volatility which could have an adverse impact on exploitation opportunities. If the Company is successful in purchasing such properties, it then implements its exploitation plan by modifying production practices, realigning existing waterflood patterns, drilling wells and performing workovers, recompletions and other production enhancements. After the initial acquisition, the Company also seeks to increase its interest in the properties through acquisitions of offsetting acreage, farmout drilling arrangements and the purchase of minority interests in the properties. By modifying production practices, realigning existing waterflood patterns, drilling wells and performing workovers, recompletions and other production enhancements, the Company seeks to offset normal production declines, replace its annual production volumes and expand its reserve base. The results of such activities are reflected in additions and revisions to proved reserves. During the four year period ending December 31, 1995, net additions and revisions to proved reserves totaled 48.6 million BOE or approximately 300% of cumulative net production for such period. Such reserves were added at an aggregate average cost of $2.33 per BOE. This activity excludes reserves added as a result of the Company's acquisition activities. Reserve additions related solely to the Company's acquisition activities totaled 58.6 million BOE and were added at an aggregate average cost of $2.41 per BOE. The Company's properties in its three core areas represent approximately 96% of total reserves at December 31, 1995. Such properties were previously owned and operated by major integrated oil and gas companies and are comprised of underdeveloped crude oil properties believed by the Company to have significant 3 upside potential that can be evaluated through development and exploitation activities. During 1996, the Company estimates it will spend approximately $40 million on the development and exploitation of its LA Basin, Sunniland Trend and Illinois Basin Properties. Set forth below is a discussion of such properties: Current Exploitation Projects Los Angeles Basin Properties. Prior to its acquisition by the Company in ----------------------------- May 1992, Stocker Resources, Inc. ("Stocker") was a sole purpose company formed in 1990 to acquire substantially all of Chevron U.S.A.'s ("Chevron") producing oil properties in the LA Basin. The aggregate purchase price paid by the Company for Stocker was approximately $23 million and consisted of (i) $14 million cash; (ii) 400,000 shares of its common stock ("Common Stock") valued at $6.8 million; (iii) warrants to purchase an aggregate 150,000 shares of Common Stock valued at $.5 million; and (iv) associated transaction costs. Following the initial acquisition, the Company expanded its holdings in this area by acquiring additional interests within the existing fields. In late 1993, the Company acquired all of Texaco Exploration and Production, Inc.'s ("Texaco") interest in the Vickers Lease for approximately $5 million. The Vickers Lease is located immediately adjacent to one of the Company's existing properties and was consolidated into Stocker's existing operations. All of the Company's oil properties in the LA Basin are collectively referred to in this Report as the "LA Basin Properties". The LA Basin Properties consist of long-life reserves discovered at various times between 1924 and 1966, and through December 31, 1995, the LA Basin Properties have produced over 400 million barrels of oil and 350 Bcf of natural gas. Since mid-1992, the Company has performed various exploitation activities, including drilling additional wells, returning previously marginal wells to economic production, optimizing waterflood operations, improving artificial lift and facility equipment, reducing unit production expenses and improving marketing margins. Through these acquisition and exploitation activities, average daily production from this area, net to the Company's interest, has increased from approximately 6,650 BOE per day in May 1992 to an average of 8,400 BOE per day during 1995. The Company has expended approximately $64.4 million in direct acquisition, development and exploitation capital on the LA Basin Properties. From the effective dates of acquisition through December 31, 1995, net production from such properties totaled 11.1 million BOE, generating cumulative net margin (oil and gas revenue less production expenses) and proceeds from minor property sales of approximately $78.9 million. Total estimated proved reserves attributable to the LA Basin Properties have increased from 17.7 million BOE at initial acquisition to approximately 60.6 million BOE at December 31, 1995. Estimated future net revenues and the Present Value of Proved Reserves at December 31, 1995, were estimated at $483.9 million and $220.8 million, respectively. As a result, the Company's aggregate reserve addition cost to date for the LA Basin Properties is approximately $.90 per BOE. During 1995, the unit gross margin for this area averaged $7.74 per BOE. During 1996, the Company estimates it will spend approximately $16 million on the further development and exploitation of the LA Basin Properties. South Florida Sunniland Trend Properties. During the first quarter of ---------------------------------------- 1993, the Company acquired all of the capital stock of Calumet Florida, Inc. ("CFI") for approximately $5 million. CFI was organized in February 1993 to purchase and operate a 50% working interest in six producing fields located in the Sunniland Trend previously owned and operated by Exxon Corporation ("Exxon"). During 1994, CFI acquired the remaining 50% working interest in the Sunniland Trend Properties, increasing its working interest to approximately 100% and adding approximately five million barrels of oil to its proved reserve base at the acquisition date. The Company's aggregate interest in such properties is referred to in this Report as the "Sunniland Trend Properties". The aggregate purchase price for the additional 50% interest was approximately $13.6 million, including the issuance of a five year warrant valued at $2 million to purchase 750,000 shares of Common Stock at an exercise price of $6.00 per share. The Sunniland Trend was discovered by Exxon in 1943 and the properties have produced approximately 88 million barrels of oil through December 31, 1995. At the time of acquisition, production from the properties was about 900 barrels of oil per day net to the Company. As a result of exploitation activities designed primarily to repair failed wells and to increase the fluid lift capacity of certain wells and the acquisition 4 of the remaining 50% working interest, the Company's net production averaged 3,400 barrels of oil per day during 1995. The Company has expended approximately $33.1 million in direct acquisition, development and exploitation capital on the Sunniland Trend Properties. From the effective dates of acquisition through December 31, 1995, net production from such properties totaled 2.7 million BOE, generating cumulative net margin of approximately $17 million. Total estimated proved reserves attributable to the Sunniland Trend Properties have increased from approximately 5 million BOE at initial acquisition to approximately 20 million BOE at December 31, 1995. At December 31, 1995, estimated future net revenues and the Present Value of Proved Reserves were estimated at $89 million and $72 million, respectively. As a result, the Company's aggregate reserve addition cost to date for the Sunniland Trend Properties is approximately $1.46 per BOE. During 1995, the unit gross margin for this area averaged $5.88 per BOE. During 1996, the Company estimates it will spend approximately $18 million on the further development and exploitation of the Sunniland Trend Properties. See "-- Exploration -- Current Exploration Projects -- South Florida Sunniland Trend". Illinois Basin Properties. In December 1995, the Company acquired all of ------------------------- Marathon's producing and nonproducing upstream oil and gas assets in the Illinois Basin. This acquisition was effective as of November 1, 1995. As a result of such acquisition, the Company added approximately 17.3 million barrels of oil to its proved reserve base at an aggregate average cost of $2.98 per BOE. The aggregate purchase price, including associated closing costs, was $51.5 million, comprised of 798,143 shares of the Company's common stock valued at $6.5 million and $45.0 million cash. The majority of the cash portion was funded with the proceeds of a $42 million bank facility (the "Illinois Basin Acquisition Indebtedness"). The Illinois Basin Properties consist of long-life oil reserves. The largest of the three fields was discovered in 1905 and has produced over 400 million barrels of oil through December 31, 1995. The Company intends to aggressively exploit these properties to evaluate additional reserve potential identified during its acquisition analysis. The Company's exploitation plan for the Illinois Basin Properties involves improving the unit gross margin by decreasing unit production expenses and increasing price realizations as well as increasing production volumes by conducting production enhancement activities similar to those employed in its LA Basin Properties and Sunniland Trend Properties. At December 31, 1995, estimated proved reserve volumes totaled approximately 17.1 million BOE and estimated future net revenues and the Present Value of Proved Reserves were estimated at $122 million and $66 million, respectively. Production for the two month period included in the Company's 1995 results totaled approximately 224,000 BOE. Under Marathon's operations during 1995, the unit gross margin for this property averaged $6.75 per BOE. During 1996, the Company estimates it will spend approximately $6 million implementing its exploitation plan on the Illinois Basin Properties. The Company believes that its properties in its three core areas hold potential for additional increases in production, reserves and cash flow. However, there can be no assurance that such increases will be achieved. The Company believes that attractive acquisition opportunities will continue to be available as a result of sales of domestic oil properties by both major and independent oil companies. While the Company is continuously evaluating acquisition opportunities, there can be no assurance that any of these efforts will be successful. Although the Company has historically acquired producing properties located only in the continental United States, it from time to time evaluates, and may in the future seek to acquire, properties located outside the continental United States. 5 EXPLORATION Exploration Strategy The Company seeks to complement its strategy of acquiring and exploiting mature but underdeveloped oil properties by dedicating a substantially smaller portion of its annual capital expenditures to higher risk but potentially higher reward exploration opportunities. The Company focuses on exploration opportunities that, if successful, could have a substantial positive impact on production, cash flow and ultimately proved reserves. However, there can be no assurance that any of its exploration projects will be successful. In February 1996, the Company and 3DX Technologies, Inc. ("3DX") formed a joint venture to pursue the Company's existing exploration projects and a five year strategic alliance to jointly pursue new exploration opportunities that are candidates for the application of 3-D seismic technology. The joint venture covers exploration activities in the Sunniland Trend, the Illinois Basin and the LA Basin as well as the Company's current 3-D seismic project at the Four Isle Dome Field in Terrebonne Parish, Louisiana. 3DX will be responsible for the geological and geophysical oversight and project technical management of such projects. In connection with the joint venture, 3DX acquired 15% to 20% of the Company's working interests in certain projects, excluding designated productive areas within each field. 3DX will have the right to participate for up to 20% in the Company's new exploration and exploitation projects. Current Exploration Projects South Florida Sunniland Trend. During 1995, the Company completed a multi- ------------------------------ year study of the exploration potential of the Sunniland Trend. Using recent advancements in seismic technology, the Company has identified several prospects that are analogous to the existing producing fields in this trend. The Company also formed a long-term, 50/50 joint venture with Meridian Oil Company to conduct exploration activities in the Sunniland Trend. As a result of the 3DX joint venture, the Company's net share of this project may be reduced to 42% if certain events occur. The Company is the operator of this joint venture and intends to drill one exploratory well in this area during 1996. See "-- Acquisition and Exploitation--Current Exploitation Projects--South Florida Sunniland Trend Properties". Four Isle Dome. The Company, Phillips Petroleum Company ("Phillips") and --------------- Nuevo Energy Company ("Nuevo") entered into an agreement to explore approximately 20,000 acres in Terrebonne Parish, Louisiana currently held under seismic option. During 1995, the joint venture conducted a 3-D seismic survey covering approximately 52 square miles. The area, known as Four Isle Dome, was discovered in 1934 and has produced to date over 540 Bcf of natural gas and 20 million Bbls of oil. The Company, Phillips and Nuevo each hold a 33.3% interest in the project which is subject to a proportionate 25% reduction if the mineral owner, Louisiana Land and Exploration ("LL&E"), elects to participate in a given prospect. In such instance, the Company, Nuevo, Phillips and LL&E would each hold a 25% working interest. As a result of the 3DX joint venture, the Company's net share of this project was reduced to 27% (20% if LL&E participates). The Company is the operator of the joint venture and intends to drill up to two wells in this project during 1996. 1995 Domestic and International Exploration Activities. The Company's 1995 ------------------------------------------------------- exploration efforts were concentrated on the drilling of a well in its Miami Fee prospect in Cameron Parish, Louisiana and the geophysical and geological work necessary to prepare for drilling evaluations on the two projects discussed above. The Company's drilling efforts in the Miami Fee prospect validated the geophysical concept of the Miami Fee prospect, but did not result in a discovery. Because of the disproportionate cost sharing arrangements entered into with its partners, the Company did not incur any net cost in 1995 in the drilling of this prospect. The Company's ownership in the Miami Fee prospect is subject to the 3DX joint venture; however, no capital expenditures are planned for this prospect in 1996. 6 Since late 1991, the Company has focused its international efforts on generating high-potential exploration opportunities that can be sold to larger companies, retaining a small but meaningful carried interest in such high potential opportunities. The Company has successfully implemented this strategy, causing two high potential wells to be drilled in Peru; however, such activities did not result in a discovery. The Company currently has interests in two exploratory permits in Australia covering approximately 404,000 gross (304,000 net) acres, one exploration license in New Caledonia covering 143,000 gross (10,725 net) acres and an exclusive exploration reconnaissance permit in Pakistan covering 7.7 million net acres. In connection with its joint venture and strategic alliance with 3DX, the Company has decided not to generate new international exploration opportunities. In addition, during 1996 the Company intends to wind up its current international exploration opportunities by selling off a majority of its interest in these projects and retaining a carried interest in any subsequent drilling activity or selling the international subsidiary. During 1996, the Company estimates it will spend approximately $5 million, net of partner reimbursements, on exploration activities, primarily in Four Isle Dome and the Sunniland Trend. While all drilling activities are subject to numerous risks, the risks associated with exploration activities are significantly greater than those associated with exploitation and development activities. There can be no assurance that any of the Company's current exploration projects will result in proved reserves or commercially viable oil or natural gas production being obtained. The Company has historically conducted a portion of its exploration activities with outside partners. When deemed appropriate, the Company will continue to solicit industry and financial partners to participate in exploration projects on negotiated terms. The level of the Company's capital expenditures for these projects, and its working and revenue interests, will vary depending on the amount and terms of such outside participation. DISPOSITION OF PROPERTIES The Company periodically evaluates, and from time to time has elected to sell, certain of its mature producing properties that it considers to be nonstrategic or fully valued. Such sales enable the Company to maintain financial flexibility, reduce overhead and redeploy the proceeds therefrom to activities that the Company believes potentially have a higher financial return. During 1995, the Company sold non-strategic oil and natural gas properties located primarily in the Gulf Coast area of Texas and Louisiana for aggregate proceeds of $7.4 million. As a result, approximately 96% of the Company's 1995 year-end proved reserve volumes and proved reserve value were associated with its properties in the LA Basin, Sunniland Trend and Illinois Basin. DOWNSTREAM ACTIVITIES The Company's marketing effort entails purchasing crude oil from producers and marketing it to the refining sector. The Company aggregates these volumes at major crude oil interchanges and trading locations and is therefore able to obtain higher prices for its own production while realizing profits on the production purchased from others. The Company owns and operates a two million barrel, above ground crude oil storage and terminalling facility in Cushing, Oklahoma (the "Cushing Terminal"), the United States' largest inland crude oil interchange and trading location. This facility enhances the competitive marketing ability of the Company by enabling it to take crude oil from different sources and make physical delivery of crude oil in Cushing, the NYMEX designated delivery location. This facility also enables the Company to aggregate crude oil volumes and to segregate, store, terminal and provide contract services for its customers. The Company's downstream activities have expanded significantly over the last four years, with gross margin increasing from $1.2 million in 1991 to $6.4 million in 1995. Based on additional capacity available at the Cushing Terminal, the Company believes it can increase its downstream gross margin without expending substantial additional capital. Crude oil is purchased at the wellhead and transported by Company-owned trucks or third-party transporters to a trading location where the Company sells the crude oil to a refiner or other purchaser. The Company also purchases crude oil in the spot market at trading locations. The Company's policy is to only purchase crude oil for 7 which it has a market to sell and to negotiate its sales contracts so that crude oil price fluctuations do not affect the gross margin which it receives. The crude oil marketing business is characterized by a large volume of transactions with low margins. The Company has maintained a gross margin of approximately 2% in its marketing activities for each of the years 1992 through 1995. The Company also routinely analyzes opportunities for possible purchase or construction of gathering and pipeline systems, processing and storage facilities and various other related capital investment projects to enhance its profitability in the markets in which it operates. The Cushing Terminal was completed in December 1993. The facility consists of two million barrels of above ground shell storage capacity. The Cushing Terminal was built at a total cost of approximately $30.9 million which includes the cost of land acquisition, engineering and environmental studies, construction-phase interest, pipeline interconnects and an oversized manifold and pumping system that was designed and constructed to accommodate expansion up to an aggregate ten million barrels of storage capacity. The Company estimates that its storage tanks have a useful life in excess of 60 years. The facility is connected to major pipelines into and out of the Cushing interchange and can operate at a daily throughput rate of approximately 800,000 Bbls. Cushing is the largest wet barrel trading hub in the United States and the delivery point for crude oil futures contracts traded on the NYMEX. The Cushing Terminal has been designated by the NYMEX as an approved delivery location for crude oil delivered under the NYMEX "light" sweet crude oil futures contract. The Company's Cushing storage facility was constructed to capitalize on the crude oil supply and demand imbalance in the Midwest caused by the continued decline of traditional regional supplies, increasing imports and an inadequate pipeline and terminal infrastructure. Based upon the Company's analysis of existing storage facilities at Cushing and the anticipated increase in crude oil volumes to be transported through Cushing, the Company believes that there will be an increasing demand for additional storage capacity at Cushing. Because of its initial investment in land, engineering and environmental studies, pipeline interconnects and the manifold and pumping system, the cost to construct incremental storage capacity is estimated at $7.50 to $8.00 per Bbl of shell capacity. The Company generates revenue from the Cushing Terminal through a combination of storage, reservation and throughput fees from customers such as (i) refiners and gatherers seeking to segregate or custom blend crudes for refining feedstocks, (ii) pipelines requiring segregated tankage for foreign cargoes, (iii) traders who make or take delivery under the NYMEX contract, (iv) producers seeking to increase their marketing alternatives and (v) contango market crude oil trading activities. The Company's upstream and downstream business segments focus on crude oil as the primary product. As a result of inefficiencies inherent in the crude oil market and the U.S. pipeline and transportation infrastructure, management believes its competitive abilities are enhanced by the alternatives afforded it by its proprietary access to the Cushing Terminal. Such alternatives include the ability to take and make physical delivery of crude oil in Cushing, the NYMEX designated delivery location. The Company's crude oil marketing expertise further provides it with a competitive advantage in obtaining higher prices for the Company's existing production and identifying potential crude oil price enhancements for properties targeted for acquisition. 8 OPERATING ACTIVITIES The following table presents certain information with respect to the Company's oil and natural gas producing, marketing, transportation and storage activities during the three years ended December 31, 1993, 1994 and 1995:
YEAR ENDED DECEMBER 31, --------------------------- 1993 1994 1995 -------- -------- ------- (IN THOUSANDS) Sales to unaffiliated customers: Oil and natural gas........................ $ 57,507 $ 57,234 $ 64,080 Marketing, transportation and storage...... 128,186 199,239 339,826 Operating profits: Oil and natural gas (1).................... $ 29,519 $ 30,122 $ 34,029 Marketing, transportation and storage (2).. 3,834 6,305 6,480 Identifiable assets: Oil and natural gas........................ $180,209 $204,778 $271,248 Marketing, transportation and storage...... 56,458 62,126 80,798
- ------------- (1) Consists of primarily oil and natural gas sales less production expenses. (2) Consists of primarily marketing, transportation and storage sales less purchases and transportation and storage expenses. Includes approximately $337,000, $1.5 million and $121,000 during 1993, 1994 and 1995, respectively, of operating profit attributed to contango market transactions. Operating profits as a percentage of sales are significantly lower for the Company's marketing, transportation and storage activities than for its oil and natural gas producing activities because the cost of oil and natural gas purchased for resale is higher, as a percentage of sales price, than the Company's cost of oil and natural gas produced. See "--Downstream Activities". GENERAL The Company was incorporated under the laws of the State of Delaware in 1976. The Company's executive offices are located at 1600 Smith Street, Suite 1500, Houston, Texas 77002, and its telephone number is (713) 654-1414. PRODUCT MARKETS AND MAJOR CUSTOMERS The revenues generated by the Company's operations are highly dependent upon the prices of, and demand for, oil and natural gas. Historically, the markets for oil and natural gas have been volatile and are likely to continue to be volatile in the future. The price received by the Company for its oil and natural gas production and the level of such production are subject to wide fluctuations and depend on numerous factors beyond the Company's control, including seasonality, the condition of the United States economy (particularly the manufacturing sector), foreign imports, political conditions in other oil-producing and natural gas-producing countries, the actions of the Organization of Petroleum Exporting Countries and domestic government regulation, legislation and policies. Decreases in the prices of oil and natural gas have had, and could have in the future, an adverse effect on the carrying value of the Company's proved reserves and the Company's revenues, profitability and cash flow. In order to partially mitigate the adverse affects of crude oil price volatility, the Company routinely commits a significant portion of its crude oil production, its principal product, to fixed price contracts or other hedging arrangements. To ensure a fixed price for future production, the Company may sell a futures contract and 9 thereafter either (i) make physical delivery of its product to comply with such contract or (ii) buy a matching futures contract to unwind its futures position and sell its production to a customer. These same techniques are also utilized to manage price risk for certain production purchased from customers of Plains Marketing & Transportation Inc. ("Plains Marketing"). Such contracts may expose the Company to the risk of financial loss in certain circumstances, including instances where production is less than expected, the Company's customers fail to purchase or deliver the contracted quantities of oil or natural gas, or a sudden, unexpected event materially impacts oil or natural gas prices. At December 31, 1995, the Company's financial hedge arrangements provided for a benchmark NYMEX WTI indexed average price for: (i) 11,000 barrels per day through March 31, 1996, at $18.07 per barrel; (ii) 10,000 barrels per day from April 1, 1996, through May 31, 1996, at $18.03 per barrel; (iii) 9,500 barrels per day from June 1, 1996, through June 30, 1996, at $18.01 per barrel; (iv) 3,500 barrels per day from July 1, 1996, through December 31, 1996, at $17.48 per barrel; and (v) 1,500 barrels per day from January 1, 1997, through June 30, 1997, at $17.23 per barrel. The Company has entered into additional swap agreements which provide for a NYMEX WTI indexed ceiling price of $17.63 per barrel and a floor price of $16.50 per barrel for 3,000 barrels per day from July 1, 1996 through December 31, 1996. The above prices do not reflect quality and location differentials attributable to the unique characteristics of each core area's oil production. The Company's current crude oil hedges do not expose the Company to various basis risk differentials that exist in the crude oil market. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". Substantially all of the Company's LA Basin crude oil production and all of the Company's Sunniland Trend crude oil production is transported by two pipelines owned by third parties. The inability of either one of these pipelines to provide transportation services to the Company in the future could result in involuntary curtailment of a significant portion of the Company's crude oil production. Certain of the Company's natural gas production has been in the past, and may be in the future, curtailed from time to time depending on the quality of the natural gas produced and transportation alternatives. In addition, market, economic and regulatory factors, including issues regarding the quality of certain of the Company's natural gas, may in the future adversely affect the Company's ability to sell its natural gas production. Before 1985, substantially all of the Company's natural gas production was sold directly to pipeline companies which were responsible for resale and transportation of the natural gas to end-users. Since that time, however, with the adoption of various orders by the Federal Energy Regulatory Commission ("FERC") (see "--Regulation--Transportation and Sale of Natural Gas") and the deregulation of natural gas pursuant to the Natural Gas Policy Act of 1978 ("NGPA") and the Natural Gas Wellhead Decontrol Act of 1989 (the "Decontrol Act"), the FERC has actively promoted competition in the nationwide market for natural gas and has encouraged pipelines to significantly reduce their role as merchants of natural gas and to make transportation services available on an "open-access", nondiscriminatory basis. Since these regulatory initiatives were begun, natural gas producers such as the Company have been able to sell their natural gas supplies directly to utilities and other end-users. In addition to the regulatory changes discussed above, deregulation of natural gas prices under the NGPA and the Decontrol Act has increased competition and volatility of natural gas prices. Since demand for natural gas is generally highest during winter months, prices received for the Company's natural gas are subject to seasonal variations and other fluctuations. All of the Company's natural gas production is currently sold under various arrangements at spot indexed prices. In certain instances, the Company enters into financial arrangements to hedge its exposure to spot price fluctuations. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". Phibro Division of Salomon Inc. ("Phibro") and Phibro Energy USA, Inc., accounted for 16% and 12%, respectively, of the Company's total revenue (exclusive of interest and other income) during 1995. Customers accounting for more than 10% of total revenue for 1994 and 1993 were as follows: 1994 -- Phibro -- 19% and 10 Chevron -- 16%; 1993 -- Chevron -- 23%, Marathon -- 22% and Phibro --15%. No other single purchaser of the Company's products accounted for as much as 10% of total sales during 1995, 1994 or 1993. During 1995, 1994 and 1993, Chevron accounted for 39%, 71% and 76% of the Company's oil and natural gas sales, respectively. Additionally during 1995, Unocal and Scurlock Permian accounted for approximately 28% and 19%, respectively, of the Company's oil and gas sales. During 1995, Unocal was the purchaser of the Company's LA Basin oil production, while Scurlock Permian was purchaser of oil production attributable to the Sunniland Trend Properties. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". COMPETITION Oil and Natural Gas Producing Activities The Company's competitors include major integrated oil and natural gas companies and numerous independent oil and natural gas companies, individuals and drilling and income programs. Many of the Company's larger competitors possess and employ financial and personnel resources substantially greater than those available to the Company. Such companies are able to pay more for productive oil and natural gas properties and exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and prospects than the Company's financial or human resources permit. The Company's ability to acquire additional properties and to discover reserves in the future will be dependent upon its ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. In addition, there is substantial competition for capital available for investment in the oil and natural gas industry. Downstream Activities The Company faces intense competition in purchasing and marketing crude oil and in the crude oil storage business. Its competitors include the major integrated oil companies, their marketing affiliates and independent gatherers, brokers and marketers of widely varying sizes, financial resources and experience. Some of these competitors have capital resources many times greater than the Company's and control substantially greater supplies of crude oil. Although the Company believes that the environmental safeguards and operating capabilities of the Cushing Terminal are superior to other existing facilities in Cushing, the Company competes with larger companies that possess superior financial resources and have an established business presence. Such advantages could inhibit the development of the Company's business for the Cushing Terminal. REGULATION The Company's operations are subject to extensive and continually changing regulation, as legislation affecting the oil and natural gas industry is under constant review for amendment and expansion. Many departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations binding on the oil and natural gas industry and its individual participants. The failure to comply with such rules and regulations can result in substantial penalties. The regulatory burden on the oil and natural gas industry increases the Company's cost of doing business and, consequently, affects its profitability. However, the Company does not believe that it is affected in a significantly different manner by these regulations than are its competitors in the oil and natural gas industry. Due to the myriad and complex federal and state statutes and regulations which may affect the Company, directly or indirectly, the following discussion of certain statutes and regulations should not be relied upon as an exhaustive review of all matters affecting the Company's operations. Transportation and Sale of Natural Gas Prior to January 1, 1993, various aspects of the Company's natural gas operations were subject to regulations by the FERC under the Natural Gas Act of 1938 (the "NGA") and the NGPA with respect to "first sales" of natural gas, including price controls and certificate and abandonment authority regulations. However, as 11 a result of the enactment of the Decontrol Act, the remaining "first sales" restrictions imposed by the NGA and the NGPA terminated on January 1, 1993. The FERC regulates interstate natural gas pipeline transportation rates and service conditions, which affect the marketing of 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 adopted policies intended to make natural gas transportation more accessible to gas buyers and sellers on an open and non-discriminatory basis. The FERC's most recent action in this area, Order No. 636, reflected the FERC's finding that, under the then- existing regulatory structure, interstate pipelines and other gas merchants, including producers, did not compete on a "level playing field" in selling gas. Order No. 636 instituted individual pipeline service restructuring proceedings, designed specifically to "unbundle" those services (e.g., transportation, sales and storage) provided by many interstate pipelines so that buyers of natural gas may secure gas supplies and delivery services from the most economical source, whether interstate pipelines or other parties. The FERC has issued final orders in almost all restructuring proceedings, and has now commenced a series of reviews of individual pipeline restructuring orders to determine whether refinements are required regarding individual pipeline implementations of Order No. 636. In addition the FERC has announced its intention to reexamine certain of its transportation related policies, including the appropriate manner in which interstate pipelines release transportation capacity under Order No. 636, and has issued a new policy regarding the use of non-traditional methods of setting rates for interstate gas pipelines in certain circumstances as alternatives to cost of service based rates. Although the FERC's actions, such as Order No. 636, do not regulate gas producers such as the Company, these actions are intended to foster increased competition within all phases of the natural gas industry. To date, the FERC's pro-competition policies have not materially affected the Company's business or operations. On a prospective basis, however, such orders may substantially increase the burden on the producers and transporters to nominate and deliver on a daily basis a specified volume of natural gas. Producers and transporters which deliver deficient volumes or volumes in excess of such daily nominations could be subject to additional charges by the pipeline carriers. Numerous petitions seeking judicial review of Order No. 636 and the individual pipeline restructuring orders are pending. It is not possible to predict what, if any, effect the final restructuring rule will have on the Company. The Company does not believe, however, that it will be affected any differently than other 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 has historically been very heavily regulated; thus there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue indefinitely into the future. Transportation and Sale of Crude Oil Sales of crude oil and condensate can be made by the Company at market prices not subject at this time to price controls. The price that the Company receives from the sale of these products is affected by the cost of transporting the products to market. Commencing in October 1993, the FERC issued a series of orders (Order Nos. 561 and 561-A) in which it revised its regulations governing the rates that may be charged by oil pipelines. The new rules, which became effective January 1, 1995, provide a simplified, generally applicable method for regulating such rates by use of an index for setting rate ceilings. In certain circumstances, the new rules permit oil pipelines to establish rates using traditional cost of service and other methods of ratemaking. On October 28, 1994, the FERC issued two separate Orders (Nos. 571 and 572), which adopt additional regulations governing rates that an oil pipeline may be authorized to charge. Order No. 571 authorizes a pipeline to implement cost-of-service based rates, provided it can demonstrate that there is a substantial divergence between the actual costs experienced by the 12 carrier and the indexed rate that the pipeline is directed to charge under Order No. 561. In Order No. 572, the FERC adopted regulations that authorize a pipeline to charge market-based rates, provided it can demonstrate that it lacks significant market power in the market(s) in which it proposes to charge such rates. Challenges to these various rules are the subject of pending court appeals. The effect that these new rules may have on moving the Company's liquid products to market cannot yet be determined. Regulation of Production The production of oil and natural gas is subject to regulation under a wide range of federal and state statutes, rules, orders and regulations. State and federal statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. Most states in which the Company owns and operates properties have regulations governing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from oil and natural gas wells and the regulation of the spacing, plugging and abandonment of wells. Many states also restrict production to the market demand for oil and natural gas and several states have indicated interest in revising applicable regulations. The effect of these regulations is to limit the amount of oil and natural gas the Company can produce from its wells and to limit the number of wells or the locations at which the Company can drill. Moreover, each state generally imposes an ad valorem, production or severance tax with respect to production and sale of crude oil, natural gas and gas liquids within its jurisdiction. Environmental Regulation General. Various federal, state and local laws and regulations governing the discharge of materials into the environment, or otherwise relating to the protection of the environment, affect the Company's operations and costs. In particular, the Company's exploration, exploitation and production operations, its activities in connection with storage and transportation of crude oil and other liquid hydrocarbons and its use of facilities for treating, processing or otherwise handling hydrocarbons and wastes therefrom are subject to stringent environmental regulation. As with the industry generally, compliance with existing and anticipated regulations increases the Company's overall cost of business. Such areas affected include unit production expenses primarily related to the control and limitation of air emissions and the disposal of produced water, capital costs to drill exploration and development wells due to solids control and capital costs to construct, maintain and upgrade equipment and facilities. While these regulations affect the Company's capital expenditures and earnings, the Company believes that such regulations do not affect its competitive position in that the operations of its competitors that comply with such regulations are similarly affected. Environmental regulations have historically been subject to frequent change by regulatory authorities, and the Company is unable to predict the ongoing cost to it of complying with these laws and regulations or the future impact of such regulations on its operation. A discharge of hydrocarbons or hazardous substances into the environment could, to the extent such event is not insured, subject the Company to substantial expense, including both the cost to comply with applicable regulations and claims by neighboring landowners and other third parties for personal injury and property damage. A significant portion of the Miami Fee acreage is within the Sabine National Wildlife Refuge (the "Refuge"), and operations therein are subject to the National Wildlife Refuge Administration Act and the regulations promulgated thereunder (the "Wildlife Refuge Act"). The Wildlife Refuge Act states that no person may use, occupy, conduct any activity on or remove property from any area located within a wildlife refuge unless a permit has been granted for such use, occupation, conduct, activity or removal of property. Persons holding mineral rights in wildlife refuge lands may obtain a Special Use Permit granted by the Regional Director of the Fish and Wildlife Service for exploration, development and production operations in compliance with regulations intended to protect fish and wildlife in the refuge. The Regional Director is given broad discretion and authority in granting Special Use Permits and may specify additional requirements to ensure that the proposed activities are compatible with the Wildlife Refuge Act. 13 Although the Company obtained environmental studies on its properties in the LA Basin, Sunniland Trend and Illinois Basin, and the Company believes that such properties have been operated in accordance with standard oil field practices, certain of the fields have been in operation for approximately 90 years, and current or future local, state and federal environmental laws and regulations may require substantial expenditures to comply with such rules and regulations. In December 1995, the Company negotiated an agreement with Chevron, a prior owner of the LA Basin Properties, to remediate sections of the properties impacted by prior drilling and production operations. Under this agreement, Chevron agreed to investigate and potentially remediate specific areas contaminated with volatile organic substances and heavy metals, and the Company agreed to excavate and remediate crude oil contaminated soils. The Company is obligated to construct and operate (for the next 15 years) two five- acre bioremediation cells for crude oil contaminated soils designated for excavation and treatment by Chevron. While the Company believes that it does not have any material obligations for operations conducted prior to Stocker's acquisition of the properties from Chevron, other than its obligation to plug existing wells and those normally associated with customary oil field operations of similarly situated properties (such as the Chevron agreement described above), there can be no assurance that current or future local, state or federal rules and regulations will not require it to spend material amounts to comply with such rules and regulations or that any portion of such amounts will be recoverable from Chevron, either under the December 1995 agreement or the limited indemnity from Chevron contained in the original purchase agreement. A portion of the Sunniland Trend Properties is located within the Big Cypress National Preserve and the Company's operations therein are subject to regulations administered by the National Park Service ("NPS"). Under such regulations, a Master Plan of Operations has been approved by the Regional Director of the NPS. The Master Plan of Operations is a comprehensive plan of practices and procedures for the Company's drilling and production operations designed to minimize the effect of such operations on the environment. The Master Plan of Operations must be modified and permits must be secured from the NPS for new wells which require the use of additional land for drilling operations. The Master Plan of Operations also requires that the Company restore the surface property affected by its drilling and production operations upon cessation of these activities. The Company does not anticipate that expenditures required to comply with such regulations will have a material adverse effect on its current operations. Water. The Oil Pollution Act ("OPA") was enacted in 1990 and amends provisions of the Federal Water Pollution Control Act of 1972 ("FWPCA") and other statutes as they pertain to prevention and response to oil spills. The OPA subjects owners of facilities to strict, joint and potentially unlimited liability for removal costs and certain other consequences of an oil spill, where such spill is into navigable waters, along shorelines or in the exclusive economic zone. In the event of an oil spill into such waters, substantial liabilities could be imposed upon the Company. States in which the Company operates have also enacted similar laws. Regulations are currently being developed under OPA and state laws that may also impose additional regulatory burdens on the Company. The FWPCA imposes restrictions and strict controls regarding the discharge of produced waters and other oil and gas wastes into navigable waters. Permits must be obtained to discharge 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. The EPA has promulgated regulations that require many oil and gas production operations to obtain permits to discharge storm water runoff. At some facilities, such as the Sunniland Trend Properties, the Company eliminated this permit requirement by collecting all potentially contaminated storm water and disposing of it through the Company's underground injection control ("UIC") disposal wells. At other facilities, the Company has applied for and obtained any necessary storm water discharge permits, and is currently in substantial compliance with applicable permit conditions. The Company believes that compliance with existing permits and compliance with foreseeable new permit requirements will not have a material adverse effect on the Company's financial condition or results of operations. 14 Air Emissions. The operations of the Company are subject to the Federal Clean Air Act and comparable state and local statutes. The Company believes that its operations are in substantial compliance with such statutes in all states in which they operate. Amendments to the Federal Clean Air Act enacted in late 1990 require or will require most industrial operations in the United States to incur capital expenditures in order to meet air emission control standards developed by the EPA and state environmental agencies. In particular, the Company's LA Basin properties are located in an "extreme" non-attainment area for ozone. This classification will force the local air quality regulatory authority, the South Coast Air Quality Management District, to adopt stringent controls on all emissions of nitrogen oxide and volatile organic compounds. As a result of these future regulations, the Company may incur future capital expenditures to reduce air emissions from the LA Basin production facilities. In addition, the 1990 Federal Clean Air Act Amendments include a new operating permit for major sources ("Title V permits"), and several of the Company's facilities may require permits under this new program. Although no assurances can be given, the Company believes implementation of the 1990 Federal Clean Air Act Amendments will not have a material adverse effect on the Company's financial condition or results of operations. Solid Waste. The Company generates non-hazardous solid wastes that are subject to the requirements of the Federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The EPA is considering the adoption of stricter disposal standards for non-hazardous wastes. RCRA also governs the disposal of hazardous wastes. At present, the Company is not required to comply with a substantial portion of the RCRA requirements because the Company's operations generate minimal quantities of hazardous wastes. However, it is anticipated that additional wastes, which could include wastes currently generated during operations, will in the future be designated as "hazardous wastes". Hazardous wastes are subject to more rigorous and costly disposal requirements than are non-hazardous wastes. Such changes in the regulations may result in additional capital expenditures or operating expenses by the Company. Superfund. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as "Superfund", imposes liability, without regard to fault or the legality of the original act, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the site and companies that disposed or arranged for the disposal of the hazardous substances found at the site. CERCLA also authorizes the EPA and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of its ordinary operations, the Company may generate waste that may fall within CERCLA's definition of a "hazardous substance". The Company may be jointly and severally liable under CERCLA for all or part of the costs required to clean up sites at which such wastes have been disposed. The Company currently owns or leases, and has in the past owned or leased, numerous properties that for many years have been used for the exploration and production of oil and gas. Although the Company has utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by the Company or on or under other locations where such wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes was not under the Company's control. These properties and wastes disposed thereon may be subject to CERCLA, RCRA and analogous state laws. Under such laws, the Company could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including contaminated groundwater) or to perform remedial plugging operations to prevent future contamination. FEDERAL TAXATION At December 31, 1995, the Company and its subsidiaries, which together file a consolidated federal income tax return, had federal income tax net operating loss ("NOL") carryforwards of approximately $164 million. Of 15 that amount, approximately $23 million is subject to separate return limitation year restrictions and may only be utilized to the extent certain subsidiaries which generated the NOLs have taxable income. At December 31, 1995, the Company had approximately $149 million of alternative minimum tax ("AMT") net operating loss carryforwards available as a deduction against future AMT income. In addition, the Company had approximately $.8 million of investment tax credit carryforwards and $7 million of percentage depletion carryforwards at December 31, 1995. The NOL carryforwards expire from 1996 through 2010. The value of these carryforwards depends on the ability of the Company to generate federal taxable income. In addition, for AMT purposes, only 90% of AMT income in any given year may be offset by AMT NOLs. The ability of the Company to utilize NOL and investment tax credit carryforwards to reduce future federal taxable income and federal income tax of the Company is subject to various limitations under the Internal Revenue Code of 1986, as amended (the "Code"). The utilization of such carryforwards may be limited upon the occurrence of certain ownership changes, including the issuance or exercise of rights to acquire stock, the purchase or sale of stock by 5% stockholders, as defined in Temporary Treasury Regulations, and the offering of stock by the Company during any three-year period resulting in an aggregate change of more than 50% ("Ownership Change") in the beneficial ownership of the Company. In the event of an Ownership Change, Section 382 of the Code imposes an annual limitation on the amount of a corporation's taxable income that can be offset by these carryforwards. The limitation is generally equal to the product of (i) the fair market value of the equity of the Company multiplied by (ii) a percentage approximately equivalent to the yield on long-term tax exempt bonds during the month in which an Ownership Change occurs. In addition, the limitation is increased if there are recognized built-in gains during any post- change year, but only to the extent of any net unrealized built-in gains (as defined in the Code) inherent in the assets sold. Under Final Treasury Regulations issued by the Internal Revenue Service, the Company does not believe that an Ownership Change has occurred as of December 31, 1995. The Company does not expect to report any regular taxable income in the near future because it expects to utilize its carryforwards and other tax deductions and credits. However, there is no assurance that the Internal Revenue Service will not challenge these carryforwards or their utilization. OTHER BUSINESS MATTERS The Company must continually acquire, explore for, develop or exploit new oil and natural gas reserves to replace those produced or sold. Without successful drilling, acquisition or exploitation operations, the Company's oil and natural gas reserves and revenues will decline. Drilling activities are subject to numerous risks, including the risk that no commercially viable oil or natural gas production will be obtained. The decision to purchase, explore, exploit or develop an interest or property will depend in part on the evaluation of data obtained through geophysical and geological analyses and engineering studies, the results of which are often inconclusive or subject to varying interpretations. See Item 2, "Properties--Oil and Natural Gas Reserves". The cost of drilling, completing and operating wells is often uncertain. Drilling may be curtailed, delayed or canceled as a result of many factors, including title problems, weather conditions, compliance with government permitting requirements, shortages of or delays in obtaining equipment, reductions in product prices or limitations in the market for products. The availability of a ready market for the Company's oil and natural gas production also depends on a number of factors, including the demand for and supply of oil and natural gas and the proximity of natural gas reserves to pipelines or trucking and terminal facilities. Natural gas wells may be shut in for lack of a market or due to inadequacy or unavailability of natural gas pipeline or gathering system capacity. The Company's operations are subject to all of the risks normally incident to the exploration for and the production of oil and natural gas, including blowouts, cratering, oil spills and fires, each of which could result in damage to or destruction of oil and natural gas wells, production facilities or other property, or injury to persons. The Company's current and planned drilling operations in the Sunniland Trend and Four Isle Dome involve increased drilling risks of high pressures and mechanical difficulties, including stuck pipe, collapsed casing and 16 separated cable. The Company's operations in the LA Basin, including transportation of crude oil by pipelines within the city of Los Angeles, are especially susceptible to damage from earthquakes and involve increased risks of personal injury, property damage and marketing interruptions because of the population density of the area. Although the Company maintains insurance coverage considered to be customary in the industry, it is not fully insured against certain of these risks, including, in certain situations, earthquake risk in the LA Basin, either because such insurance is not available or because of high premium costs. The occurrence of a significant event that is not fully insured against could have a material adverse effect on the Company's financial position. In order to manage its exposure to price risks in the marketing of its oil and natural gas, the Company from time to time enters into fixed price delivery contracts, financial swaps and oil and natural gas futures contracts as hedging devices. To ensure a fixed price for future production, the Company may sell a futures contract and thereafter either (i) make physical delivery of its product to comply with such contract or (ii) buy a matching futures contract to unwind its futures position and sell its production to a customer. These same techniques are also utilized to manage price risk for certain production purchased from customers of the Company's marketing subsidiary, Plains Marketing & Transportation Inc. Such contracts may expose the Company to the risk of financial loss in certain circumstances, including instances where production is less than expected, the Company's customers fail to purchase or deliver the contracted quantities of oil or natural gas, or a sudden, unexpected event materially impacts oil or natural gas prices. Such contracts may also restrict the ability of the Company to benefit from unexpected increases in oil and natural gas prices. TITLE TO PROPERTIES The Company's properties are subject to customary royalty interests, liens incident to operating agreements, liens for current taxes and other burdens, including other mineral encumbrances and restrictions. The Company does not believe that any of these burdens materially interferes with the use of such properties in the operation of its business. The Company believes that it has generally satisfactory title to or rights in all of its producing properties. As is customary in the oil and natural gas industry, minimal investigation of title is made at the time of acquisition of undeveloped properties. Title investigation is made and title opinions of local counsel are generally obtained only before commencement of drilling operations. EMPLOYEES As of February 22, 1996, the Company had 202 full-time employees, none of whom is represented by any labor union. Approximately 98 of such full-time employees are field personnel involved in oil and natural gas producing activities, trucking and transport activities and crude oil terminalling and storage activities. ITEM 2. PROPERTIES The Company is an independent energy company engaged in the acquisition, exploitation, development, exploration and production of oil and natural gas and the marketing, transportation, terminalling and storage of crude oil. The Company's upstream oil and natural gas activities are focused in the LA Basin of California, the Sunniland Trend of South Florida, the Illinois Basin and the Gulf Coast area of Louisiana. Its downstream marketing activities are concentrated in Oklahoma, where it owns a two million barrel, above ground crude oil terminalling and storage facility, Texas and the Gulf Coast area of Louisiana. The Company's upstream operations contributed approximately 90% of the Company's 1995 EBITDA proforma for the Illinois Basin Acquisition while the Company's downstream activities accounted for the remainder. See Item 1, "Business" for a discussion of the Company's exploration, acquisition, development and exploitation activities and downstream businesses. 17 OIL AND NATURAL GAS RESERVES The following tables set forth certain information with respect to the Company's reserves based upon reserve reports prepared by the independent petroleum consulting firms of H.J. Gruy and Associates, Inc. with respect to the LA Basin Properties, Netherland, Sewell & Associates, Inc. with respect to the Sunniland Trend and other minor properties, and Ryder Scott Company with respect to the Illinois Basin Properties. Such reserve volumes and values were determined under the method prescribed by the Commission which requires the application of year-end prices for each year, held constant throughout the projected reserve life. The following table sets forth the estimated quantities of proved and proved developed reserves of crude oil (including condensate and natural gas liquids) and natural gas owned by the Company as of December 31, 1993, 1994 and 1995 and the principal components of the changes in the quantities of reserves for each of the years then ended.
AS OF OR FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1993 1994 1995 ------------------ ----------------- ------------------ OIL GAS OIL GAS OIL GAS (BBL) (MCF) (BBL) (MCF) (BBL) (MCF) -------- -------- -------- -------- -------- -------- (IN THOUSANDS) PROVED RESERVES Beginning balance 33,390 39,861 38,810 49,397 61,459 51,009 Revisions of previous estimates (6,478) (7,753) 16,834 4,365 5,423 2,792 Extensions, discoveries, improved recovery and other additions 3,712 6,250 4,362 1,182 15,489 1,730 Sale of reserves (92) (622) (16) (446) (1,227) (9,773) Purchase of reserves in place 11,834 15,837 5,304 80 17,640 130 Production (3,556) (4,176) (3,835) (3,569) (4,376) (2,778) ------- ------- ------ ------- ------- ------ Ending balance 38,810 49,397 61,459 51,009 94,408 43,110 ======= ======= ====== ======= ======= ====== PROVED DEVELOPED RESERVES Beginning balance 24,296 20,555 30,646 28,436 48,978 30,869 ======= ======= ====== ======= ======= ====== Ending balance 30,646 28,436 48,978 30,869 67,266 29,397 ======= ======= ====== ======= ======= ======
The following table sets forth the Present Value of Proved Reserves as of December 31, 1993, 1994 and 1995. 1993 1994 1995 -------- -------- -------- (IN THOUSANDS) Proved developed $106,212 $191,578 $272,634 Proved undeveloped 28,327 37,793 94,146 -------- -------- -------- Total proved $134,539 $229,371 $366,780 ======== ======== ========
There are numerous uncertainties inherent in estimating quantities and values of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the Company. Reserve engineering is a subjective process of estimating the recovery from underground accumulations of oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Because all reserve estimates are to some degree speculative, the quantities of oil and natural gas that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures and future oil and natural gas sales prices may all differ from those assumed in these estimates. In addition, different reserve engineers may make different estimates of reserve quantities and cash flows based upon the same available data. Therefore, the Present Value of Proved Reserves shown above represents estimates only and should not be construed as the current market value of the estimated oil and natural gas reserves attributable to the Company's properties. In this regard, the information set forth in the preceding tables includes revisions of reserve estimates attributable 18 to proved properties included in the preceding year's estimates. Such revisions reflect additional information from subsequent exploitation and development activities, production history of the properties involved and any adjustments in the projected economic life of such properties resulting from changes in product prices. In accordance with the Commission's guidelines, the engineers' estimates of future net revenues from the Company's properties and the present value thereof are made using oil and natural gas sales prices in effect as of the dates of such estimates and are held constant throughout the life of the properties, except where such guidelines permit alternate treatment, including the use of fixed and determinable contractual price escalations. The crude oil price in effect at December 31, 1995, is based on NYMEX spot price for WTI crude oil of $19.55 per Bbl ($18.00 per Bbl WTI posted price) with variations therefrom based on location and grade of crude oil. The Company has entered into crude oil financial swap arrangements to fix the NYMEX WTI index price for a significant portion of its crude oil production. These prices are included in the reserve reports through the term of the arrangements. On December 31, 1995, these arrangements provided for a NYMEX WTI indexed average price for: (i) 11,000 barrels per day through March 31, 1996, at $18.07 per barrel; (ii) 10,000 barrels per day from April 1, 1996, through May 31, 1996, at $18.03 per barrel; (iii) 9,500 barrels per day from June 1, 1996, through June 30, 1996, at $18.01 per barrel; (iv) 3,500 barrels per day from July 1, 1996, through December 31, 1996, at $17.48 per barrel; and (v) 1,500 barrels per day from January 1, 1997, through June 30, 1997, at $17.23 per barrel. The Company has entered into additional swap arrangements which provide for a NYMEX WTI indexed ceiling price of $17.63 per barrel and a floor price of $16.50 per barrel for 3,000 barrels per day from July 1, 1996, through December 31, 1996. Location and quality differentials attributable to the Company's properties are not included in the foregoing prices. The crude oil swap agreements provide for monthly settlement based on the differential between the contract price and the actual NYMEX WTI crude oil price. The Company's current crude oil hedges do not expose the Company to various basis risk differentials that exist in the crude oil market. The overall average prices as of December 31, 1995, were $15.55 per Bbl of crude oil, condensate and natural gas liquids and $1.05 per Mcf of natural gas. See Item 1, "Business--Product Markets and Major Customers". Prices for natural gas and, to a lesser extent, oil are subject to substantial seasonal fluctuations and prices for each are subject to substantial fluctuations as a result of numerous other factors. Since December 31, 1994, the Company has not filed any estimates of total proved net oil or natural gas reserves with any federal authority or agency other than the Commission. See Note 15 to the Company's Consolidated Financial Statements appearing elsewhere in this Report for certain additional information concerning the proved reserves of the Company. PRODUCTIVE WELLS AND ACREAGE As of December 31, 1995, the Company had working interests in 1,529 gross (1,529 net) active oil wells and 48 gross (22 net) active natural gas wells. These totals do not include the Company's royalty and overriding royalty interests in approximately 135 gross (4 net) producing oil and natural gas wells. 19 The following table sets forth certain information with respect to the developed and undeveloped acreage of the Company as of December 31, 1995.
DECEMBER 31, 1995 ---------------------------------------------- DEVELOPED ACRES(1) UNDEVELOPED ACRES(2)(3) ------------------ -------------------------- GROSS NET GROSS NET(4) ------- ------ ----------- ------------- California.................. 3,707 3,634 10 10 Florida(5).................. 12,502 12,502 86,935 77,385 Illinois.................... 15,887 13,885 33,653 15,416 Indiana..................... 1,155 854 2,562 1,216 Kansas...................... -- -- 50,193 39,421 Kentucky.................... -- -- 1,321 521 Louisiana(6)................ -- -- 19,511 10,653 Oklahoma.................... 640 88 -- -- Texas....................... -- -- 659 186 Utah........................ 14,551 7,276 -- -- ------ ------ ------- ------- Total..................... 48,442 38,239 194,844 144,808 ====== ====== ======= =======
- ----------------- (1) Developed acres are acres spaced or assigned to productive wells. (2) Undeveloped acres are acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves. (3) Does not include: (i) approximately 84,000 gross (39,500 net) acres located within Exploration Permit WA-246-P in the Northwest Territory of Australia; (ii) approximately 320,000 gross (264,000 net) acres located within Block AC/P14 in the Vulcan Sub-basin (Timor Sea) on the Northwest shelf of Australia in which the Company holds exploration rights; (iii) approximately 143,000 gross (10,725 net) acres located within an exploration license located in New Caledonia; or (iv) approximately 8 million gross (7.7 million net) acres in Pakistan to which the Company holds exploration rights. See Item 1, "Business--Exploration--Current Exploration Projects--1995 Domestic and International Exploration Activities". (4) Less than 5% of total net undeveloped acres are covered by leases that expire in 1996 and 1997. (5) Does not include approximately 8,500 gross (4,250 net) acres under seismic option. (6) Does not include approximately 20,000 gross (6,700 net) acres under seismic option. 20 DRILLING ACTIVITIES Certain information with regard to the Company's drilling activities during the years ended December 31, 1993, 1994 and 1995 is set forth below:
YEAR ENDED DECEMBER 31, -------------------------------------- 1993 1994 1995 ------------ ----------- ----------- GROSS NET GROSS NET GROSS NET ----- ----- ----- ---- ----- ---- Exploratory Wells: Oil.................... 0.00 0.00 0.00 0.00 0.00 0.00 Natural gas............ 0.00 0.00 0.00 0.00 0.00 0.00 Dry.................... 5.00 1.90 6.00 4.39 1.00 0.40 ----- ----- ---- ---- ---- ---- Total.............. 5.00 1.90 6.00 4.39 1.00 0.40 ===== ===== ==== ==== ==== ==== Development Wells: Oil.................... 13.00 13.00 1.00 1.00 0.00 0.00 Natural gas............ 0.00 0.00 0.00 0.00 0.00 0.00 Dry.................... 2.00 1.80 0.00 0.00 1.00 0.50 ----- ----- ---- ---- ---- ---- Total.............. 15.00 14.80 1.00 1.00 1.00 0.50 ===== ===== ==== ==== ==== ==== Total Wells: Producing.............. 13.00 13.00 1.00 1.00 0.00 0.00 Dry.................... 7.00 3.70 6.00 4.39 2.00 0.90 ----- ----- ---- ---- ---- ---- Total.............. 20.00 16.70 7.00 5.39 2.00 0.90 ===== ===== ==== ==== ==== ====
At December 31, 1995, the Company was in the process of drilling 1 gross (1 net) developmental well. See Item 1, "Business--Acquisition and Exploitation" and "--Productive Wells and Acreage" for additional information regarding exploitation activities, including waterflood patterns, workovers and recompletions. PRODUCTION AND SALES The following table presents certain information with respect to oil and natural gas production attributable to the Company's properties, the revenue derived from the sale of such production, average sales price received and average production costs during the three years ended December 31, 1993, 1994 and 1995.
YEAR ENDED DECEMBER 31, --------------------------- 1993 1994 1995 ------ ------- ------- (IN THOUSANDS, EXCEPT UNIT PRICES) Production: Crude oil and natural gas liquids (Bbls).. 3,556 3,835 4,376 Natural gas (Mcf)......................... 4,176 3,569 2,788 BOE....................................... 4,252 4,430 4,839 Revenue: Crude oil and natural gas liquids......... $50,986 $52,331 $61,241 Natural gas............................... 6,521 4,903 2,839 ------- ------- ------- Total.................................... $57,507 $57,234 $64,080 ======= ======= ======= Average sales price: Crude oil and natural gas liquids (Bbl)... $ 14.34 $ 13.65 $ 13.99 Natural gas (Mcf)......................... $ 1.56 $ 1.37 $ 1.02 Per BOE................................... $ 13.52 $ 12.92 $ 13.24 Production costs per BOE................... $ 6.65 $ 6.15 $ 6.25
21 CRUDE OIL STORAGE AND TERMINALLING FACILITY In December 1993, the Company completed construction on the first phase of the Cushing Terminal in Cushing, Oklahoma. The first phase of the facility consists of two million barrels of shell storage capacity comprised of fourteen 100,000 barrel capacity tanks and four 150,000 barrel capacity tanks. See Item 1, "Business -- Downstream Activities". OTHER FACILITIES The Company currently leases offices containing approximately 46,000 square feet in Houston, Texas. ITEM 3. LEGAL PROCEEDINGS On April 27, 1992, the Company and certain of its officers and directors and a former director and officer were named as defendants in a lawsuit filed in the United States District Court for the Southern District of Texas captioned Judith Rubinstein and Howard Greenwald v. Collins, et al., C.A. No. H-92-1297. The complaint brings a class action (the class period of which is October 23, 1991, through April 13, 1992) for, among other things, alleged violations of Sections 10(b) and 20(a) of the Exchange Act and for state law fraud and negligent misrepresentation, arising out of certain alleged misrepresentations and omissions in the Company's disclosures regarding its onshore natural gas exploration activities. The plaintiffs, who purport to have purchased their Common Stock in open market transactions (300 and 375 shares, respectively), contend the class is entitled to approximately $30 million for compensatory damages and punitive damages in an unspecified amount. The Company filed a motion to dismiss in July 1992. On August 24, 1992, the Court entered an Order of Dismissal and a Final Judgment dismissing the plaintiffs' complaint for failure to state a claim under the federal securities laws and/or under the common law of the State of Texas. On September 10, 1992, the plaintiffs filed a Notice of Appeal of the District Court's judgment with the United States Court of Appeals for the Fifth Circuit (No. 92-2736). On May 5, 1994, the Fifth Circuit Court ruled, among other things, that the plaintiffs had sufficiently pleaded claims under the federal securities laws and under Texas common law and reversed the trial court's dismissal and remanded the case to the trial court for further proceedings. On July 27, 1993, a second case similar to the Rubinstein case described in the preceding paragraph was filed in the United States District Court for the Southern District of Texas captioned Gloria Moroson v. Collins, et al., C.A. No. H-93-2305, naming the Company and certain of its officers and directors and a former director and officer as defendants. The complaint brings a class action (the class period of which is May 11, 1992, through August 14, 1992) for, among other things, alleged violations of Sections 10(b) and 20(a) of the Exchange Act and for state law fraud and negligent misrepresentation, arising out of certain alleged misrepresentations and omissions in the Company's disclosures regarding its onshore natural gas exploration activities. The plaintiff, who purports to have purchased 50 shares of Common Stock in an open market transaction, contends the class is entitled to approximately $60 million for compensatory damages and punitive damages in an unspecified amount. These amounts are alleged to be in addition to the damages claimed in the Rubinstein case. In June 1994, the trial court granted the Company's motion to consolidate the Rubinstein and Moroson cases. On February 20, 1996, the Court denied the Company's motion for summary judgment in these two cases and set a trial date for May 8, 1996. The Company expects the cases to go to trial before a jury on or about such date. Although the Company believes these complaints to be without merit and intends to vigorously defend these lawsuits, if the plaintiffs were awarded, and the Company were ultimately required to pay, a substantial portion of the $90 million in compensatory damages sought by the plaintiffs, it would have a material adverse effect on the Company. On July 9, 1987, Exxon filed an interpleader action in the United States District Court for the Middle District of Florida, Exxon Corporation v. E. W. Adams, et al., Case Number 87-976-CIV-T-23-B. This action was 22 filed by Exxon to interplead royalty funds as a result of a title controversy between certain mineral owners in a field in Florida. One group of mineral owners, John W. Hughes, et al. (the "Hughes Group"), filed a counterclaim against Exxon alleging fraud, conspiracy, conversion of funds, declaratory relief, federal and Florida RICO, breach of contract and accounting, as well as challenging the validity of certain oil and natural gas leases owned by Exxon, and seeking exemplary and treble damages. In March 1993, but effective November 1, 1992, Calumet, a wholly-owned subsidiary of the Company, acquired all of Exxon's leases in the field affected by this lawsuit. In order to address those counterclaims challenging the validity of certain oil and natural gas leases, which constitute approximately 10% of the lands underlying this unitized field, Calumet filed a motion to join Exxon as plaintiff in the subject lawsuit, which was granted July 29, 1994. In August 1994, the Hughes Group amended its counterclaim to add Calumet as a counter-defendant. No trial date has been set in this case. Exxon and Calumet have filed a motion to dismiss the counterclaims. The Court has not yet ruled on such motion. Calumet believes the counterclaim challenging the validity of certain oil and natural gas leases owned by Calumet to be without merit and intends to vigorously defend against such claim. The Company, in the ordinary course of business, is a claimant and/or a defendant in various other legal proceedings in which its exposure, individually and in the aggregate, is not considered material to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders, through solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this Report. EXECUTIVE OFFICERS OF THE COMPANY Information regarding the executive officers of the Company is presented below. All executive officers hold office until their successors are elected and qualified. Greg L. Armstrong, President and Chief Executive Officer Officer Since 1981 Mr. Armstrong, age 37, has been President, Chief Executive Officer and a director of the Company since 1992. He was President and Chief Operating Officer from October to December 1992, and Executive Vice President and Chief Financial Officer from June to October 1992. He was Senior Vice President and Chief Financial Officer from 1991 to June 1992, Vice President and Chief Financial Officer from 1984 to 1991, Corporate Secretary from 1981 to 1988, and Treasurer from 1984 to 1987. William C. Egg, Jr., Senior Vice President Officer Since 1984 Mr. Egg, age 44, has been Senior Vice President of the Company since 1991. He was Vice President-Corporate Development of the Company from 1984 to 1991 and Special Assistant-Corporate Planning from 1982 to 1984. Cynthia A. Feeback, Controller and Principal Accounting Officer Officer Since 1993 Ms. Feeback, age 38, has been Controller and Principal Accounting Officer of the Company since 1993. She was Controller of the Company from 1990 to 1993 and Accounting Manager from 1988 to 1990. Phillip D. Kramer, Vice President, Chief Financial Officer and Treasurer Officer Since 1987 Mr. Kramer, age 40, has been Vice President and Chief Financial Officer of the Company since 1992. He was Vice President and Treasurer from 1988 to 1992, Treasurer from 1987 to 1988, and Controller from 1983 to 1987. 23 G. M. McCarroll, Vice President-Exploration and Land Officer Since 1989 Mr. McCarroll, age 38, became Vice President-Exploration and Land in February 1996. He had been Vice President-Land of the Company since 1989, except for the period of May through July 1991 when he was Vice President of a land development company in Lafayette, Louisiana. From 1988 to 1989 he was a consultant to the Company for acquisitions and land functions. Michael R. Patterson, Vice President and General Counsel Officer Since 1985 Mr. Patterson, age 48, has been Vice President and General Counsel of the Company since 1985 and Corporate Secretary since 1988. Harry N. Pefanis, Senior Vice President Officer Since 1988 Mr. Pefanis, age 38, became Senior Vice President in February 1996. He had been Vice President-Products Marketing of the Company since 1988. From 1987 to 1988 he was Manager of Products Marketing. From 1983 to 1987 he was Special Assistant for Corporate Planning for the Company. Mr. Pefanis is also President of Plains Marketing & Transportation Inc., a wholly-owned subsidiary of the Company. Mary O. Peters, Vice President - Administration and Human Resources Officer Since 1991 Ms. Peters, age 47, has been Vice President-Administration and Human Resources since 1991. She was Manager of Office Administration of the Company from 1984 to 1991. 24 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's $.10 par value common stock ("Common Stock") is listed and traded on the American Stock Exchange under the symbol "PLX." The number of stockholders of record of the Common Stock as of February 26, 1996, was 1,622. For the periods indicated below, the following table sets forth the range of high and low closing sales prices for the Common Stock as reported on the American Stock Exchange Composite Tape. HIGH LOW ------ ------- 1995: 1st Quarter................................ $ 7 5/8 $5 1/2 2nd Quarter................................ 9 3/4 7 5/8 3rd Quarter................................ 10 3/4 7 5/8 4th Quarter................................ 9 6 13/16 1994: 1st Quarter................................ $ 7 $5 3/8 2nd Quarter................................ 6 1/2 5 5/8 3rd Quarter................................ 7 7/8 5 3/4 4th Quarter................................ 6 3/4 5 3/8 The Company has not paid cash dividends on shares of the Common Stock since the Company's inception and does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. In addition, the Company is prohibited by provisions of the indenture governing the issue of $100 million 12% Senior Subordinated Notes Due 1999 (the "12% Notes") and the Revolving Credit Facility from paying dividends on the Common Stock. 25 ITEM 6. SELECTED FINANCIAL DATA The following selected historical financial information was derived from, and is qualified by reference to, the Consolidated Financial Statements of the Company, including the Notes thereto, appearing elsewhere in this Report. The selected financial data should be read in conjunction with the Consolidated Financial Statements, including the Notes thereto, and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) STATEMENT OF OPERATIONS DATA: Revenues: Oil and natural gas sales $ 14,872 $ 38,400 $ 57,507 $ 57,234 $ 64,080 Marketing, transportation and storage 64,434 93,838 128,186 199,239 339,826 Other 189 413 335 223 319 -------- -------- -------- --------- -------- Total revenue 79,495 132,651 186,028 256,696 404,225 -------- -------- -------- --------- -------- Costs and expenses: Production expenses 3,466 19,329 28,285 27,220 30,256 Purchases, transportation and storage 63,200 92,107 124,390 193,049 333,460 General and administrative 3,825 8,592 7,724 6,966 7,215 Depreciation, depletion and amortization......... 18,581(1) 12,155 36,980 (2) 16,305 17,036 Interest expense 3,251 3,776 8,847 12,585 13,606 Provision for income taxes 45 -- -- -- -- -------- -------- -------- --------- -------- Total expenses 92,368 135,959 206,226 256,125 401,573 -------- -------- -------- --------- -------- Net income (loss) $(12,873)(1) $ (3,308) $(20,198)(2) $ 571 $ 2,652 ======== ======== ======== ========= ======== Net income (loss) per common and common equivalent share.......... $ (1.59) $ (.32) $ (1.77) $ .04 $ .16 Weighted average number of common and common equivalent shares 8,142 10,536 11,438 11,625 15,981 OTHER FINANCIAL DATA: Net cash provided by operating activities..... $ 6,145 $ 11,435 $ 10,397 $ 18,369 $ 16,984 Cash flow from operations (earnings before depreciation, depletion and amortization) $ 5,708 $ 8,847 $ 16,782 $ 16,876 $ 19,688 EBITDA(3) $ 9,004 $ 12,623 $ 25,629 $ 29,461 $ 33,294 AS OF DECEMBER 31 ------------------------------------------------------------ 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Cash and cash equivalents $ 3,388 $ 25,149 $ 4,862 (4) $ 2,791(4) $ 6,129 Working capital (deficit) (3,441) 13,065 (13,986) (4,465) (4,749) Property and equipment, net 78,176 144,692 191,985 217,602 280,538 Total assets 96,754 199,093 236,667 266,904 352,046 Long-term debt 42,173 100,000 141,600 149,600 205,089 Other long-term liabilities 324 2,506 967 3,754 1,547 Redeemable preferred stock -- -- -- 20,937 -- Total stockholders' equity, including non-redeemable preferred stock 34,135 63,333 44,997 46,462 77,029
- --------------- (1) Includes a noncash charge of approximately $11 million related to a writedown of the capitalized costs of the Company's proved oil and natural gas properties as a result of unusually low seasonal gas prices at June 30, 1991. (2) A large portion of the Company's reserve base is comprised of long-life oil properties that are sensitive to low crude oil prices. During the fourth quarter of 1993, crude oil prices declined significantly, with the posted price for WTI crude oil ending the year at $12.50 per Bbl, the lowest year- end oil price in the 13 years since U.S. crude oil prices were deregulated. Such low prices had an adverse affect on the quantities and Present Value of Proved Reserves at December 31, 1993, and led to a noncash charge of $20 million related to a writedown of the capitalized costs of the Company's proved oil and natural gas properties. 26 (3) EBITDA means earnings before interest, taxes, depreciation, depletion and amortization. EBITDA is commonly used by debt holders and financial statement users as a measurement to determine the ability of an entity to meet its interest obligations. EBITDA is not a measurement presented in accordance with generally accepted accounting principles ("GAAP") and is not intended to be used in lieu of GAAP presentations of results of operations and cash provided by operating activities. (4) Includes restricted cash of $1.1 million and $1.5 million as of December 31, 1993 and 1994, respectively, attributable to compensating balance requirements. 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL For the three years ended December 31, 1995, the Company reported significant increases in proved reserves, production and cash flow from oil and natural gas producing activities. Such increases are primarily the result of the acquisition and subsequent exploitation of its LA Basin and Sunniland Trend Properties and the recent acquisition of the Illinois Basin Properties. These three core areas are comprised primarily of crude oil properties and together account for approximately 96% of the Company's year-end 1995 proved reserves. See Item 1, "Business--Acquisition and Exploitation--Current Exploitation Projects". See Note 9 to the accompanying Consolidated Financial Statements for pro forma information giving effect to the acquisition of the Illinois Basin Properties as if such transaction occurred on January 1, 1995. RESULTS OF OPERATIONS Three years ended December 31, 1995 During 1995 and 1994, the Company reported increases in total production, upstream gross margin and downstream gross margin while decreasing per unit general and administrative ("G&A") expenses. The Company reported net income of $2.7 million on total revenue of $404.2 million for the year ended December 31, 1995. This compares with net income of $571,000 in 1994 and a net loss of $20.2 million in 1993. Total revenue for 1994 and 1993 was $256.7 million and $186.0 million, respectively. The 1993 loss included a $20 million noncash charge related to the writedown of the net capitalized costs of the Company's proved oil and gas properties due to unusually low oil prices. The Company follows the full cost method of accounting which limits the net capitalized costs of proved oil and gas properties to the present value (discounted at 10%) of estimated future net cash flows after income taxes (the "Standardized Measure"). Due to the low oil price at December 31, 1993, such costs exceeded the Standardized Measure by approximately $20 million. At year-end 1995 and 1994, the Standardized Measure of the Company's proved reserves exceeded the book carrying cost by approximately $107.0 million and $54.0 million, respectively. However, the Commission's full cost accounting rules do not allow the Company to reinstate the $20.0 million book value written off in 1993. EBITDA increased 13% in 1995 to $33.3 million from the $29.5 million reported in 1994 and nearly 30% more than the $25.6 million reported in 1993. Cash flow from operations (earnings before depreciation, depletion and amortization) increased to $19.7 million in 1995, 17% above the $16.9 million and $16.8 million reported for 1994 and 1993, respectively. Net cash provided by operating activities was $17.0 million for the year ended December 31, 1995 as compared to $18.4 million for 1994 and $10.4 million in 1993. A large portion of the increase in 1994 over 1993 was attributable to proceeds received during 1994 from the sale of crude oil inventory that was purchased during 1993. 28 The following table sets forth certain operating information of the Company for the periods presented:
YEAR ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ---- ---- ---- (IN THOUSANDS, EXCEPT PER UNIT DATA) (UNAUDITED) AVERAGE DAILY PRODUCTION VOLUMES Barrels of oil: LA Basin........................ 7.6 7.3 7.2 Sunniland Trend................. 3.4 2.7 1.3 Illinois Basin.................. 0.6 -- -- Other........................... 0.4 0.5 1.2 ---- ---- ---- Total.......................... 12.0 10.5 9.7 ==== ==== ==== Mcf of natural gas: LA Basin........................ 4.5 4.5 5.0 Other........................... 3.1 5.3 6.4 ---- ---- ---- Total.......................... 7.6 9.8 11.4 ==== ==== ==== Barrels of oil equivalent: LA Basin........................ 8.4 8.1 8.0 Sunniland Trend................. 3.4 2.7 1.3 Illinois Basin.................. 0.6 -- -- Other........................... 0.9 1.3 2.3 ---- ---- ---- Total.......................... 13.3 12.1 11.6 ==== ==== ==== AVERAGE SALES PRICE Per barrel of oil................ $13.99 $13.65 $14.34 ====== ====== ====== Per Mcf of natural gas........... $1.02 $1.37 $1.56 ===== ===== ===== UNIT ECONOMICS Average sales price per BOE...... $13.24 $12.92 $13.52 Production expenses per BOE...... 6.25 6.15 6.65 ------ ------ ------ Gross margin per BOE............. 6.99 6.77 6.87 Upstream G&A expenses per BOE.... .99 1.04 1.34 ------ ------ ------ Gross profit per BOE............. $ 6.00 $ 5.73 $ 5.53 ====== ====== ======
Oil and natural gas production volumes totaled 4.8 million BOE in 1995, a 9% increase over 1994's level of 4.4 million BOE and a 21% increase over the 1993 base level of 4.0 million BOE. The base level production for 1993 excludes approximately 263,000 BOE associated with a marginal property disposed of in late 1993 and not previously included in the Company's proved reserves. Oil production increased by 14% to 4.4 million Bbls from 1994's level of 3.8 million Bbls and 33% over the 1993 base level of 3.3 million Bbls. In 1992, the Company increased its focus on mature but underdeveloped crude oil producing properties. As a result of this increased focus on crude oil properties and normal production declines in the Company's Gulf Coast properties, natural gas production declined by 22% to 2.8 Bcf in 1995 as compared to 3.6 Bcf in 1994. Natural gas production was 4.2 Bcf in 1993. Primarily as a result of increased production volumes from the Company's acquisition and exploitation activities, oil and natural gas revenues increased to $64.1 million in 1995 as compared to $57.2 million in 1994 and $57.5 million in 1993. The Company routinely seeks to manage its exposure to commodity prices through the prudent use of hedges, primarily through long-term fixed price arrangements or financial swaps. During the three years ended December 31, 1995, the majority of the Company's crude oil production was sold under such arrangements. The average oil price received for the year ended December 31, 1995, which is an average of prices received under fixed and floating price sales arrangements, was $13.99 per Bbl, approximately 3% more than the $13.65 per Bbl received in 1994 and 2% less than the $14.34 received in 1993. The Company's average natural 29 gas price received was $1.02 per Mcf during 1995, down 26% from the $1.37 per Mcf received in 1994 and 35% below the $1.56 per Mcf received in 1993. The Company's oil and natural gas production yields lower product prices than benchmark NYMEX prices due to location and quality differentials. Financial swap arrangements and futures transactions entered into by the Company to hedge production are included in the foregoing prices. Such transactions had the effect of decreasing the overall average price per BOE by $.19 in 1995 and increasing the average price by $.16 and $.18 for 1994 and 1993, respectively. During 1995, the Company's unit gross margin (gross margin per BOE) and unit gross profit averaged $6.99 per BOE ($1.17 per MCFE) and $6.00 per BOE ($1.00 per MCFE), respectively. Marketing, transportation, storage and terminalling activities generated gross margin (total revenues less purchases, transportation and storage and terminalling costs) of $6.4 million on total revenues of $339.8 million as compared to 1994's gross margin of $6.2 million on total revenues of $199.2 million. Gross margin totaled $3.8 million on total revenues of $128.2 million for 1993. The trend of increased revenues and associated gross margin is reflective of increases in the quantity of crude oil marketed on behalf of other producers and premium resale markets made available by the Cushing Terminal. Gross margin for 1994 included approximately $1.5 million of income resulting from the occurrence of a contango crude oil futures market generated principally during the first half of the year when third party storage and terminalling operations, the Company's fundamental downstream business activity, were commencing. A contango crude oil futures market exists when the futures price of a subsequent month exceeds the price of a prior month. Such market allows the Company to simultaneously purchase and sell crude oil and lock-in a profit. The Cushing Terminal provides the mechanism to capitalize on a contango market due to the ability to receive, store and redeliver crude oil. The Company expects its downstream activities to continue to increase. During 1995, the Company continued its trend of reducing unit production and unit G&A expenses on properties held throughout the year. Excluding the fourth quarter impact of the Illinois Basin Acquisition, unit production expenses decreased 3% to $5.97 per BOE as compared to $6.15 per BOE in 1994 and were 10% below 1993's unit production expenses of $6.65 per BOE. These decreases are attributable to improved operating and cost control practices implemented by the Company and increased production volumes as well as to the disposition of certain properties. Including the impact of the Illinois Basin Properties, unit production expenses were $6.25 per BOE during 1995. For the two months of operations included in 1995's results, unit production expenses for the Illinois Basin Properties averaged $12.00 per BOE. The Illinois Basin Properties were operated by Marathon during such period. An integral component of the Company's plan of exploitation for this property is a significant reduction in unit production expenses. The Company assumed operations from Marathon on January 1, 1996. Total production expenses increased 11% to $30.3 million in 1995 as compared to $27.2 million in 1994. Total production expenses were $28.3 million in 1993. In the Company's upstream segment, unit G&A expenses decreased for the third consecutive year totaling $.99 per BOE for 1995, down 5% as compared to $1.04 per BOE in 1994 and 26% below the level in 1993 of $1.34 per BOE. These reductions are directly attributable to the Company's ongoing cost reduction and cost control efforts and increased production levels. Downstream G&A expenses for 1995 and 1994 were relatively constant at $2.4 million for each period while downstream G&A expenses for 1993 totaled approximately $2.0 million. The increase in G&A expenses over the 1993 level was attributable to the continued expansion of the Company's marketing and terminalling activities. Combined G&A expenses for both the upstream and downstream activities totaled $7.2 million, $7.0 million and $7.7 million in 1995, 1994 and 1993, respectively. DD&A per BOE was approximately $3.02 in 1995 as compared to $3.17 in 1994 and $3.57 in 1993 (excluding the $20 million noncash writedown in 1993 in the carrying costs of the Company's oil and natural gas properties). Primarily as a result of increased production levels, total DD&A for the year ended December 31, 1995 was $17.0 million, up 4% as compared to $16.3 million in 1994 and relatively constant with 1993's level of $17.0 million (excluding the noncash writedown). 30 Interest expense, net of capitalized interest, for 1995 increased to $13.6 million as compared to $12.6 million in 1994 and $8.8 million in 1993, primarily due to higher borrowing levels related to the Company's acquisition, exploitation, development and exploration activities. In addition, interest capitalization decreased in 1994 following the completion of the Cushing Terminal, resulting in a corresponding increase in interest expense for 1994. During 1993, 1994 and 1995, the Company capitalized $4.3 million, $2.7 million and $3.1 million of interest, respectively. The Company has a deferred tax asset of approximately $18.3 million at December 31, 1995. The realization of the tax asset is dependent on the Company's ability to generate taxable earnings in future periods. A valuation allowance for such amount has been recorded to reflect the estimated amount of the deferred tax asset which may not be realized due to the expiration of a portion of the Company's tax net operating loss ("NOL") and tax credit carryforwards. Future realization of the tax asset will be affected by recent additions to the Company's oil and gas reserves and the resulting increases in anticipated future income. Management is currently reassessing the ability to realize a portion of such asset based on these reserve additions. Although the Company recorded net income for 1995 and 1994, no provision for income taxes was reflected but rather the valuation allowance discussed above was adjusted. CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION The Company has historically relied on working capital generated by cash flow from operating activities, various types of debt financing and proceeds from the sale of preferred and common stock to finance its capital expenditures. The Company believes that it has the available capital resources to fund its obligations and planned capital expenditures. The Company currently estimates that its 1996 capital expenditures excluding acquisitions will aggregate approximately $48 million, approximately $40 million of which will be spent on exploitation and development activities, $5 million of which will be spent on exploration activities and the remaining $3 million of which will be spent on other capital projects, primarily to expand downstream activities. A substantial portion of these planned capital expenditures are discretionary and actual expenditures may vary based on crude oil and natural gas prices, results from geological and geophysical studies and drilling operations. In addition, the Company intends to continue to pursue the acquisition of underdeveloped producing properties. The Company has a $75 million revolving credit facility (the "Revolving Credit Facility") with a group of five banks (the "Lenders"). In December 1995, the Revolving Credit Facility and borrowing base thereunder was increased to $75 million from $65 million. The Revolving Credit Facility is secured by the oil and natural gas properties of the Company and is guaranteed by all of the Company's subsidiaries other than PMCT, Inc. ("PMCT"), which guarantees are secured by all of the oil and natural gas properties of the Company and its subsidiaries (except Plains Illinois Inc. ("Plains Illinois"), the subsidiary which holds the Illinois Basin Properties) and the stock of all guaranteeing subsidiaries. The Cushing Terminal is not pledged as security for any of the Company's debt. The Revolving Credit Facility is subject to borrowing base availability as determined from time to time by the Lenders in good faith, in the exercise of the Lenders' sole discretion, and in accordance with customary practices and standards in effect from time to time for oil and natural gas loans to borrowers similar to the Company. Such borrowing base may be affected from time to time by the performance of the Company's oil and natural gas properties and changes in oil and natural gas prices. The Company incurs a commitment fee of 1/2% per annum on the unused portion of the borrowing base. The Revolving Credit Facility converts to a term loan on October 1, 1997, with a final maturity of April 1, 1998. Indebtedness of up to $65 million under the Revolving Credit Facility bears interest at the option of the Company at (i) LIBOR plus 2% or (ii) the higher of the Base Rate plus 5/8% and the federal funds rate plus 1-1/8%. Indebtedness in excess of $65 million under the Revolving Credit Facility bears interest at an additional 1/2% through December 31, 1996, and an additional 1% thereafter. At December 31, 1995, outstanding borrowings under the Revolving Credit Facility were $56 million. An additional $1 million was reserved against the issuance of a standby letter of credit. 31 Plains Illinois established the Illinois Basin Acquisition Indebtedness to fund the acquisition of the Illinois Basin Properties. The Illinois Basin Acquisition Indebtedness has a final maturity of December 22, 1999, with monthly payments of interest and principal required from 85% of Field Level Net Revenues. Field Level Net Revenues are defined as revenues derived from the sale of production from the Illinois Basin Properties less a predefined amount of production expenses equal to the Company's original projections of such expenses or actual production expenses, whichever are less, on a monthly basis. The Illinois Basin Acquisition Indebtedness bears interest at LIBOR plus 2% through September 30, 1996, and LIBOR plus 3%, thereafter. The Company has entered into a one year interest rate swap agreement with INCC, one of the lending banks, to fix the LIBOR portion of the interest rate at 5.35%. The Illinois Basin Acquisition Indebtedness is secured by a first lien on the Illinois Basin Properties and is guaranteed by the Company. The Illinois Basin Acquisition Indebtedness contains covenants which, among other things prohibit (i) Plains Illinois from making certain loans and investments and (ii) the incurrence of additional indebtedness by Plains Illinois. The Company intends to sell privately $150 million in principal amount of senior subordinated notes due 2006 (the "Notes"). The Company anticipates that such sale (the "Offering"), if consummated, would be completed in March 1996. The net proceeds to the Company from the sale of the Notes are estimated to be $145.8 million after deducting expenses of the transaction. An aggregate $106 million of such net proceeds will be used to redeem all of the 12% Notes at 106% of the $100 million principal amount outstanding. The remaining $39.8 million together with an additional $2.2 million to be borrowed under the Company's Revolving Credit Facility will be used to retire the Illinois Basin Acquisition Indebtedness. As of February 26, 1996, the Company had $58 million outstanding under the Revolving Credit Facility and approximately $42 million outstanding under the Illinois Basin Acquisition Indebtedness. Subsequent to the Offering and in order to fully retire the Illinois Basin Acquisition Indebtedness, the Company will increase the amount outstanding under the Revolving Credit Facility by $2.2 million. After the Offering, and in accordance with a commitment letter from INCC, the Company intends to increase the Revolving Credit Facility to $125 million, to secure the Revolving Credit Facility with all of the Company's oil and natural gas properties and to cause all of the Company's principal subsidiaries to guarantee the Revolving Credit Facility. As so modified, the Revolving Credit Facility will bear interest at LIBOR plus 1.75% per annum, will convert to a term loan two years after the date of modification and will be repayable in equal quarterly installments for five years following the conversion to a term loan. Final maturity of the Revolving Credit Facility will be seven years after the date of modification. During 1995, the Company's marketing subsidiary established an $80 million uncommitted secured demand transactional line of credit (the "Transactional Facility") with three banks. The purpose of the Transactional Facility is to provide standby letters of credit to support the purchase of crude oil for resale and borrowings to finance crude oil inventory which has been hedged against future price risk. The Transactional Facility is secured by all of the assets of the marketing subsidiary and is guaranteed by the Company. The Company's guarantee is secured by a $1 million standby letter of credit issued on behalf of the Company. At December 31, 1995, approximately $49.1 million in letters of credit were outstanding under the Transactional Facility. PMCT has established a $20 million sublimit (the "Sublimit") within the Transactional Facility for standby letters of credit and borrowings to finance crude oil purchased in connection with operations at the Company's crude oil terminal and storage facility in Cushing, Oklahoma. Under the terms of the Sublimit, all purchases of crude oil inventory financed are required to be hedged against future price risk on terms acceptable to the lenders. Standby letters of credit and borrowings under the Sublimit are secured by all of the assets of PMCT and are recourse only to the subsidiary. At December 31, 1995, no letters of credit or borrowings were outstanding under the Sublimit. Letters of credit under the Transactional Facility are issued for up to seventy day periods and bear fees of 1.5% per annum. Borrowings incur interest at the option of the borrower at (i) the Base Rate plus 5/8% or (ii) LIBOR plus 2%. All financings under the Transactional Facility, which expires in August 1996, are at the discretion of the lenders. Aggregate cash borrowings by both subsidiaries are limited to $20 million. On May 25, 1995, all outstanding shares of the Company's Series C Cumulative Convertible Preferred Stock (the "Series C Preferred Stock"), including accrued dividends, were converted into approximately 3.6 million 32 shares of Common Stock. The Series C Preferred Stock was sold in a private placement for net proceeds of approximately $20 million in 1994. Proceeds of the placement were used to retire an $11.5 million bridge loan, incurred to acquire an approximate 50% working interest in the Sunniland Trend Properties in 1994, to fund exploitation of such properties and to reduce the amount outstanding on the Revolving Credit Facility. At December 31, 1995, the Company had a working capital deficit of approximately $4.7 million compared to a deficit of $4.5 million at December 31, 1994. The Company has historically operated with a working capital deficit due primarily to ongoing capital expenditures that have been financed through cash flow and the Revolving Credit Facility. Changing Oil and Natural Gas Prices The Company is heavily dependent on crude oil prices which have historically been volatile. Although the Company has routinely hedged a substantial portion of its crude oil production and intends to continue this practice, future crude oil price declines would have a negative impact on the Company's overall results, and therefore its liquidity. Furthermore, low crude oil prices could affect the Company's ability to raise capital on terms favorable to the Company. For 1996, the Company has committed an average of approximately 8,500 Bbls of oil per day to fixed price arrangements that expire at various times throughout 1996. Such arrangements represent approximately 55% of the Company's average daily oil production for 1995 pro forma for the Illinois Basin Acquisition and partially mitigate the adverse impact of potential oil price declines on the Company's operating results. The Company enters into hedging arrangements which provide for settlement based on index prices that correlate directly to that being received for its physical delivery of its crude oil production. Accordingly, the Company's current crude oil hedges do not expose the Company to various basis risk differentials that exist in the crude oil market. Management intends to continue to maintain hedging arrangements for a significant portion of its production. Such contracts may expose the Company to the risk of financial loss in certain circumstances. See Item 1, "Business--Product Markets and Major Customers". Investing Activities Net cash flows used in investing activities were $64.4 million, $40.2 million and $76.5 million for the years ended December 31, 1995, 1994 and 1993, respectively. Included in such amounts are payments, net of cash received from property sales and reimbursements from partners, for acquisition, exploration and development costs of $63.9 million, $39.6 million and $52.8 million for the same periods, respectively. Such payments for 1995 include $45.0 million related to the cash portion of the acquisition of the Illinois Basin Properties and for 1994 include approximately $12.4 million related to the cash portion of the acquisition of the Sunniland Trend Properties. The Company expended $1.1 million, $2.1 million and $23.6 million in 1995, 1994 and 1993, respectively, for other property additions, primarily attributable to the Cushing Terminal which was completed in December 1993. The total cost of the Cushing Terminal, including land acquisition, engineering and environmental studies, construction- phase interest, pipeline interconnects and an oversized manifold and pumping system that was designed and constructed to accommodate ten million barrels of storage, was approximately $30.9 million. Financing Activities Net cash provided by financing activities amounted to $52.3 million, $19.3 million and $44.7 million for 1995, 1994, and 1993, respectively. Aggregate proceeds from long-term borrowings for these same years were $83.6 million, $70.0 million and $72.2 million, respectively, while payments of long-term debt were $30.7 million, $60.5 million and $36.6 million for the respective periods. The Illinois Basin Acquisition Indebtedness of $42 million is included in aggregate proceeds for 1995. Remaining long-term debt activity is primarily related to advances received and payments made on the Revolving Credit Facility. Financing activities during 1994 and 1993 include net payments and receipts from short-term borrowings of $9.6 million related to the Transactional Facility. Such amounts were borrowed to finance the purchase of crude oil inventory in 1993 which was sold in 1994. Financing activities include proceeds from the sale of capital stock of $869,000, $20.6 million and $803,000 in 33 1995, 1994 and 1993, respectively. The 1994 proceeds were primarily from the issuance of the Series C Preferred Stock. Commitments Under the amended terms of the asset purchase agreement between Stocker and Chevron, commencing with the year beginning January 1, 2000, and each year thereafter, Stocker is required to plug and abandon 20% of the then remaining inactive wells, which currently aggregate approximately 270. To the extent the Company elects not to plug and abandon the number of required wells, the Company is required to escrow an amount equal to the greater of $25,000 per well or the actual average plugging cost per well in order to provide for the future plugging and abandonment of such wells. In addition, Stocker is required to expend a minimum of $600,000 per year in each of the ten years beginning January 1, 1996, and $300,000 per year in each of the succeeding five years to remediate oil contaminated soil from existing well sites, provided there are remaining sites to be remediated. In the event Stocker does not expend the required amounts during a calendar year, Stocker is required to contribute an amount equal to 125% of the actual shortfall to an escrow account. Stocker may withdraw amounts from such escrow account to the extent it expends excess amounts in a future year. Although the Company obtained environmental studies on its properties in the LA Basin, Sunniland Trend and Illinois Basin and the Company believes that such properties have been operated in accordance with standard oil field practices, certain of the fields have been in operation for approximately 90 years, and current or future local, state and federal environmental laws and regulations may require substantial expenditures to comply with such rules and regulations. In connection with the purchase of the LA Basin Properties, Stocker received a limited indemnity from Chevron for certain conditions if they violate applicable local, state and federal environmental laws and regulation in effect on the date of such agreement. While the Company believes that it does not have any material obligations for operations conducted prior to Stocker's acquisition of the properties from Chevron, other than its obligation to plug existing wells and those normally associated with customary oil field operations of similarly situated properties, there can be no assurance that current or future local, state or federal rules and regulations will not require it to spend material amounts to comply with such rules and regulations or that any portion of such amounts will be recoverable under the Chevron indemnity. Consistent with normal industry practices, substantially all of the Company's oil and natural gas leases require that, upon termination of economic production, the working interest owners plug and abandon non-producing wellbores, remove tanks, production equipment and flow lines and restore the wellsite. The Company has estimated that the costs to perform these tasks is approximately $14 million, net of salvage value and other considerations. Such estimated costs are amortized to expense through the unit-of-production method as a component of accumulated depreciation, depletion and amortization. Results from operations for 1995, 1994 and 1993 include $1.0 million, $1.1 million and $1.8 million, respectively, of expense associated with these estimated future costs. For valuation and realization purposes of the affected oil and natural gas properties, these estimated future costs are also deducted from estimated future gross revenues to arrive at the estimated future net revenues and the Standardized Measure disclosed in the accompanying Consolidated Financial Statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required to be provided in this item is included in the Consolidated Financial Statements of the Company, including the Notes thereto, attached hereto as pages F-1 to F-22 and such information is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements on accounting and financial disclosure with the Company's independent accountants. 34 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the directors of the Company will be included in the proxy statement for the 1996 Annual Meeting of Stockholders (the "Proxy Statement") to be filed within 120 days after December 31, 1995, and is incorporated herein by reference. Information with respect to the Company's executive officers is presented in Part I, Item 4 of this Report. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation will be included in the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information, if any, regarding beneficial ownership of the Common Stock will be included in the Proxy Statement and is incorporated herein by reference. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding Certain Relationships and Related Transactions will be included in the Proxy Statement and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS The financial statements filed as part of this report are listed in the "Index to Consolidated Financial Statements" on Page F-1 hereof. (2) EXHIBITS 2(a) - Purchase and Sale Agreement dated October 31, 1995, between Marathon and Crete, as amended by that certain Amendment dated December 4, 1995, among Marathon, Plains Resources Inc. and Plains Illinois Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K dated January 4, 1996.) 2(b) - Credit Agreement dated December 22, 1995, between Plains Illinois Inc. and Internationale Nederlanden (U.S.) Capital Corporation (incorporated by reference to Exhibit 2.2 to Form 8-K dated January 4, 1996.) 35 3(a) - Second Restated Certificate of Incorporation of the Company. 3(b) - Bylaws of the Company, as amended to date (incorporated by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4(a) - Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company's Form S-1 Registration Statement (Reg. No. 33-33986)). 4(b) - Form of Indenture dated as of October 1, 1992, between the Company and Ameritrust Texas National Association, as the Trustee (incorporated by reference to Exhibit 4 to Amendment No. 3 to Form S-3 Registration statement (Reg. No. 33-50572)). 4(c) - Purchase Agreement for Stock Warrant dated May 16, 1994, between Plains Resources Inc. and Legacy Resources, Co., L.P. (incorporated by reference to Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1994). 10(a) - Second Amended and Restated Credit Agreement dated as of February 11, 1994, between Internationale Nederlanden (U.S.) Capital Corporation (incorporated by reference to Exhibit (10a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993) (the "Second Restated Credit Agreement"). 10(b)* - Employment Agreement dated as of March 1, 1993, between the Company and Greg L. Armstrong (incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10(c)* - The Company's 1991 Management Options (incorporated by reference to Exhibit 4.1 to the Company's S-8 Registration Statement (Reg. No. 33-43788)). 10(d)* - The Company's 1992 Stock Incentive Plan (incorporated by reference to Exhibit 4.3 to the Company's S-8 Registration Statement (Reg. No. 33-48610)). 10(e)* - The Company's 401(K) Plan (incorporated by reference to Exhibit 10(i) to the Company's Form S-1 Registration Statement (Reg. No. 33-43859)). 10(f) - Restructure Agreement dated February 25, 1991, among The Aetna Casualty and Surety Company, Aetna Life Insurance Company and the Company (incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 10(g) - Amended and Restated Agreement of Limited Partnership of Plains Gulf Coast Limited Partnership dated February 25, 1991, (incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 10(h) - First Amendment to Second Restated Credit Agreement dated as of September 15, 1994. 36 (incorporated by reference to Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994). 10(i) - Second Amendment to Second Amended and Restated Credit Agreement dated as of January 25, 1995, (incorporated by reference to Exhibit 10(k) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10(j) - Third Amendment to Second Restated Credit Agreement dated as of June 12, 1995, (incorporated by reference to Exhibit 10(l) to the Company's Quarterly Report on Form 10-Q for the calendar quarter ended June 30, 1995). 10(k) - Fourth Amendment to Second Restated Credit Agreement dated as of August 22, 1995, (incorporated by reference to Exhibit 10(m) to the Company's Quarterly Report on Form 10- Q for the calendar quarter ended September 30, 1995). 10(l) - Fifth Amendment to the Second Restated Credit Agreement dated as of December 20, 1995. 10(m) - Uncommitted Secured Transactional Line of Credit Facility letter agreement dated as of August 23, 1995, between Plains Marketing & Transportation Inc. and Internationale Nederlanden (U.S.) Capital Corporation. 10(n) - Uncommitted Secured Transactional Line of Credit Facility letter agreement dated as of August 23, 1995 between PMCT Inc. and Internationale Nederlanden (U.S.) Capital Corporation. 11(a) - Statement regarding computation of per share earnings for the year ended December 31, 1995. 11(b) - Statement regarding computation of per share earnings for the year ended December 31, 1994. 11(c) - Statement regarding computation of per share earnings for the year ended December 31, 1993. 21 - Subsidiaries of the Company. 23 - Consent of Price Waterhouse LLP. 27 - Financial Data Schedule. *A management contract or compensation plan. ______________ (b) REPORTS ON FORM 8-K The Company filed a Current Report on Form 8-K dated December 22, 1995, as amended by Amendment No. 1 thereto on Form 8-K/A reporting under Item 2 thereof the acquisition of the Illinois Basin Properties. Such Current Report included the following financial statements: AUDITED FINANCIAL STATEMENTS Report of Independent Accountants Statement of Revenues and Direct Operating Expenses for the years ended December 31, 1992, 1993, and 1994, and the nine month periods ended September 30, 1994 and 1995 Notes to Statement of Revenues and Direct Operating Expenses 37 PRO FORMA FINANCIAL INFORMATION (UNAUDITED) Pro Forma Financial Information Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1995 Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1994 Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1995 Notes to Pro Forma Condensed Consolidated Financial Statements 38 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. PLAINS RESOURCES INC. Date: March 4, 1996 By: /s/ Phillip D. Kramer -------------------------------------------- Phillip D. Kramer, Vice President and Chief Financial Officer (Principal Financial 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. Date: March 4, 1996 By: /s/ Greg L. Armstrong -------------------------------------------- Greg L. Armstrong, President, Chief Executive Officer and Director (Principal Executive Officer) Date: March 4, 1996 By: /s/ Robert A. Bezuch -------------------------------------------- Robert A. Bezuch, Director Date: March 4, 1996 By: /s/ Tom H. Delimitros -------------------------------------------- Tom H. Delimitros, Director Date: March 4, 1996 By: /s/ Cynthia A. Feeback -------------------------------------------- Cynthia A. Feeback, Controller and Principal Accounting Officer (Principal Accounting Officer) Date: March 4, 1996 By: /s/ William M. Hitchcock -------------------------------------------- William M. Hitchcock, Director 39 Date: March 4, 1996 By: /s/ Phillip D. Kramer -------------------------------------------- Phillip D. Kramer, Vice President and Chief Financial Officer (Principal Financial Officer) Date: March 4, 1996 By: /s/ Dan M. Krausse -------------------------------------------- Dan M. Krausse, Chairman of the Board and Director Date: March 4, 1996 By: /s/ John H. Lollar -------------------------------------------- John H. Lollar, Director Date: March 4, 1996 By: /s/ D. Irving Obrow -------------------------------------------- D. Irving Obrow, Director Date: March 4, 1996 By: /s/ Robert V. Sinnott -------------------------------------------- Robert V. Sinnott, Director Date: March 4, 1996 By: /s/ J. Taft Symonds -------------------------------------------- J. Taft Symonds, Director The Annual Report to Stockholders of the Company for the year ended December 31, 1995, and the proxy statement relating to the annual meeting of stockholders will be furnished to stockholders subsequent to the filing of this Annual Report on Form 10-K. Such documents have not been mailed to stockholders as of the date of this report.
PAGE ---- PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Accountants F-2 Consolidated Balance Sheets as of December 31, 1995 and 1994 F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 F-6 Notes to Consolidated Financial Statements F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Plains Resources Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Plains Resources Inc. and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Houston, Texas February 22, 1996 F-2 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31, --------------------- 1995 1994 --------- --------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 6,129 $ 1,291 Restricted cash -- 1,500 Accounts receivable 51,632 32,306 Inventory 5,120 5,525 Prepaids and other 751 1,064 --------- --------- Total current assets 63,632 41,686 --------- --------- PROPERTY AND EQUIPMENT Oil and natural gas properties - full cost method: Subject to amortization 328,712 265,123 Not subject to amortization 48,795 35,779 Downstream assets, primarily crude oil terminal and storage facility 32,788 32,266 Other property and equipment 7,789 6,090 --------- --------- 418,084 339,258 Less allowance for depreciation, depletion and amortization (137,546) (121,656) --------- --------- 280,538 217,602 --------- --------- OTHER ASSETS 7,876 7,616 --------- --------- $ 352,046 $ 266,904 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other current liabilities $ 56,573 $ 36,282 Interest payable 3,977 3,617 Royalties payable and drilling advances 6,364 4,702 Notes payable and other current obligations 1,467 1,550 --------- --------- Total current liabilities 68,381 46,151 BANK DEBT 98,000 45,100 SUBORDINATED DEBT 100,000 100,000 OTHER LONG-TERM DEBT 7,089 4,500 OTHER LONG-TERM LIABILITIES 1,547 3,754 --------- --------- 275,017 199,505 --------- --------- SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK, STATED AT LIQUIDATION PREFERENCE -- 20,937 --------- --------- COMMITMENTS AND CONTINGENCIES (NOTE 10) NON-REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY Preferred stock, stated at liquidation preference -- 481 Common stock, $.10 par value, 50,000,000 shares authorized; issued and outstanding 16,178,670 shares at December 31, 1995, and 11,593,457 shares at December 31, 1994 1,618 1,159 Additional paid-in capital 118,090 89,274 Accumulated deficit (42,679) (44,452) --------- --------- 77,029 46,462 --------- --------- $ 352,046 $ 266,904 ========= =========
See notes to consolidated financial statements. F-3 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
YEAR ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 -------- -------- ---------- REVENUE Oil and natural gas sales $ 64,080 $ 57,234 $ 57,507 Marketing, transportation and storage 339,826 199,239 128,186 Interest and other income 319 223 335 -------- -------- -------- 404,225 256,696 186,028 -------- -------- -------- EXPENSES Production expenses 30,256 27,220 28,285 Purchases, transportation and storage 333,460 193,049 124,390 General and administrative 7,215 6,966 7,724 Depreciation, depletion and amortization 17,036 16,305 16,980 Reduction of carrying cost of oil and natural gas properties -- -- 20,000 Interest expense 13,606 12,585 8,847 -------- -------- -------- 401,573 256,125 206,226 -------- -------- -------- NET INCOME (LOSS) $ 2,652 $ 571 $(20,198) ======== ======== ======== Net income (loss) per common and common equivalent share $.16 $.04 $(1.77) ======== ======== ======== Weighted average number of common and common equivalent shares 15,981 11,625 11,438 ======== ======== ========
See notes to consolidated financial statements. F-4 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 --------- --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 2,652 $ 571 $(20,198) Items not affecting cash flows from operating activities: Depreciation, depletion and amortization 17,036 16,305 16,980 Reduction of carrying cost of oil and natural gas properties -- -- 20,000 Change in assets and liabilities resulting from operating activities: Accounts receivable (18,598) (17,578) 2,010 Inventory 405 8,050 (12,486) Prepaids and other 106 (115) 389 Accounts payable and other current liabilities 14,133 11,119 1,231 Interest payable 347 503 357 Royalties payable 903 (486) 2,114 -------- -------- -------- Net cash provided by operating activities 16,984 18,369 10,397 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Cash received for the sale of oil and gas properties 7,355 314 -- Payment for acquisition, exploration and development costs (71,250) (39,885) (52,826) Payment for additions to other property and assets (1,120) (2,130) (23,625) Proceeds from escrow account 617 1,543 -- -------- -------- -------- Net cash used in investing activities (64,398) (40,158) (76,451) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 83,550 70,000 72,166 Proceeds from short-term debt -- 10,576 12,682 Proceeds from sale of capital stock, options and warrants 869 20,641 803 Principal payments of long-term debt (30,650) (60,500) (36,566) Principal payments of short-term debt -- (20,214) (3,044) Payment of other long-term liabilities (2,080) (136) (83) Other 563 (1,070) (1,270) -------- -------- -------- Net cash provided by financing activities 52,252 19,297 44,688 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 4,838 (2,492) (21,366) Cash and cash equivalents, beginning of year 1,291 3,783 25,149 -------- -------- -------- Cash and cash equivalents, end of year $ 6,129 $ 1,291 $ 3,783 ======== ======== ========
See notes to consolidated financial statements. F-5 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands, except share data)
$1.30 CUMULATIVE ADDITIONAL CONVERTIBLE PAID-IN ACCUMULATED PREFERRED STOCK COMMON STOCK CAPITAL DEFICIT -------------------------------------------- ----------- ----------- SHARES AMOUNT SHARES AMOUNT --------- ------- ---------- ------------ BALANCE AT DECEMBER 31, 1992 48,770 $ 488 11,211,513 $1,121 $ 85,189 $(23,465) Conversion of $1.30 Cumulative Convertible Preferred Stock (700) (7) 620 2 6 -- Capital stock issued in connection with an acquisition -- -- 215,137 21 1,111 -- Capital stock issued upon exercise of options and other -- -- 139,743 13 905 -- Dividends on $1.30 Cumulative Convertible Preferred Stock -- -- -- -- -- (189) Net loss for the year -- -- -- -- -- (20,198) -------- ------ ---------- ------ -------- -------- BALANCE AT DECEMBER 31, 1993 48,070 481 11,567,013 1,157 87,211 (43,852) Warrant issued in connection with an acquisition -- -- -- -- 2,000 -- Preferred stock dividends -- -- -- -- -- (1,171) Capital stock issued upon exercise of options and other -- -- 26,444 2 63 -- Net income for the year -- -- -- -- -- 571 -------- ------ ---------- ------ -------- -------- BALANCE AT DECEMBER 31, 1994 48,070 481 11,593,457 1,159 89,274 (44,452) Preferred stock dividends -- -- -- -- -- (879) Redemption of $1.30 Cumulative Convertible Preferred Stock (48,070) (481) -- -- -- -- Conversion of Preferred Stock -- -- 3,628,125 363 21,406 -- Issuance of common stock in connection with an acquisition -- -- 798,143 80 6,447 -- Capital stock issued upon exercise of options and other -- -- 158,945 16 963 -- Net income for the year -- -- -- -- -- 2,652 -------- ------ ---------- ------ -------- -------- BALANCE AT DECEMBER 31, 1995 -- $ -- 16,178,670 $1,618 $118,090 $(42,679) ======== ====== ========== ====== ======== ========
See notes to consolidated financial statements. F-6 PLAINS RESOURCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- ACCOUNTING POLICIES - ----------------------------- PRINCIPLES OF CONSOLIDATION AND PRESENTATION The consolidated financial statements include the accounts of Plains Resources Inc. (the "Company"), and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to the prior year statements to conform with the current year presentation. The Company is an independent energy company engaged in the acquisition, exploitation, development, exploration and production of oil and natural gas and the marketing, transportation,terminalling and storage of crude oil. The Company's upstream oil and natural gas activities are focused in the Los Angeles Basin of California (the "LA Basin"), the Sunniland Trend of South Florida (the "Sunniland Trend"), the Illinois Basin and the Gulf Coast area of Louisiana. Its downstream marketing activities are concentrated in Oklahoma, where it owns a two million barrel, above ground crude oil terminalling and storage facility (the "Cushing Terminal"), Texas and the Gulf Coast area of Louisiana. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of all demand deposits and funds invested in highly liquid instruments. INVENTORY Crude oil inventory is carried at the lower of cost, as adjusted for deferred hedging gains and losses, or market value using an average cost method. Materials and supplies inventory is stated at the lower of cost or market with cost determined on a first-in, first-out method. OIL AND NATURAL GAS PROPERTIES The Company follows the full cost method of accounting whereby all costs associated with property acquisition, exploration and development activities are capitalized. Such costs include internal general and administrative costs such as payroll and related benefits and costs directly attributable to employees engaged in acquisition, exploration and development activities. General and administrative costs associated with production, operations, marketing and general corporate activities are expensed as incurred. These capitalized costs along with the Company's estimate of future development and abandonment costs, net of salvage values and other considerations, are amortized to expense by the unit-of-production method using engineers' estimates of unrecovered proved oil and natural gas reserves. The costs of unproved properties are excluded from amortization until the properties are evaluated. Interest is capitalized on oil and natural gas properties not subject to amortization and in the process of development. Proceeds from the sale of properties are accounted for as reductions to capitalized costs unless such sales involve a significant change in the relationship between costs and the estimated value of proved reserves, in which case a gain or loss is recognized. Unamortized costs of proved properties are subject to a ceiling which limits such costs to the estimated present value of oil and natural gas reserves reduced by future operating expenses, development expenditures and abandonment costs (net of salvage values), and income taxes (the "Standardized Measure") (see Note 15). F-7 OTHER PROPERTY AND EQUIPMENT Other property and equipment is recorded at cost. Acquisitions, renewals, and betterments are capitalized; maintenance and repairs are expensed. Depreciation on the Cushing Terminal is provided using the straight-line method over an estimated useful life of forty years; other property and equipment is also depreciated using the straight-line method over estimated useful lives of three to seven years. Approximately $1.6 million of interest was capitalized during 1993 in connection with the construction of the Cushing Terminal. DEBT ISSUE COSTS Costs incurred in connection with the issuance of long-term debt are capitalized and amortized using the straight-line method over the term of the related debt. Debt issue costs, net of accumulated amortization, as of December 31, 1995 and 1994, in the amount of $3.4 million and $4.2 million, respectively, are included in "Other Assets" in the accompanying Consolidated Balance Sheets. FEDERAL AND STATE INCOME TAXES Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. MARKETING AND TRANSPORTATION The Company's marketing activities are conducted through its wholly-owned subsidiary, Plains Marketing & Transportation Inc. ("Plains Marketing"). Plains Marketing markets principally crude oil of third party producers as well as crude oil and natural gas produced by the Company. Marketing and transportation revenue is accrued at the time title to the product sold transfers to the purchaser and purchases are accrued at the time title to the product purchased transfers to Plains Marketing. The Company's policy is to only purchase crude oil for which it has a market to sell and to negotiate its sales contracts so that fluctuations in prices do not affect the gross margin which it receives. HEDGING The Company periodically uses certain instruments to hedge its exposure to price fluctuations on oil and natural gas transactions. Recognized gains and losses on hedge contracts are reported as a component of the related transaction. Results for hedging transactions are reflected in oil and natural gas sales to the extent related to the Company's oil and natural gas production and in marketing, transportation and storage revenues to the extent related to such activities. The Company has entered into an interest rate swap to manage the interest rate exposure on certain of its long-term debt. The amount to be paid or received from the interest rate swap is charged or credited to interest expense over the term of the swap. STOCK OPTIONS In October 1995, the Financial Accounting Standards Board issued Statement No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation". As permitted by SFAS 123, the Company plans to continue to retain its current method of accounting for stock compensation and adopt the disclosure of this Statement in 1996. F-8 NOTE 2 -- INVENTORY - ------------------- Inventory consists of the following: DECEMBER 31, ---------------- 1995 1994 ------ ------ (in thousands) Crude oil $2,884 $3,901 Materials and supplies 2,236 1,624 ------ ------ $5,120 $5,525 ====== ====== Substantially all of the crude oil inventory at December 31, 1995 and 1994, except for minor amounts of working inventory, was hedged with New York Mercantile Exchange ("NYMEX") futures contracts or short-term physical delivery contracts. Deferred gains or losses from inventory hedges are included as part of the inventory cost and recognized when the related inventory is sold. NOTE 3 -- LONG-TERM DEBT - ------------------------ Long-term debt consists of the following: DECEMBER 31, -------------------- 1995 1994 -------- -------- (in thousands) Revolving Credit Facility, bearing interest at weighted average interest rates of 8.2% and 7.9%, at December 31, 1995 and 1994, respectively $ 56,000 $ 45,100 Illinois Basin Acquisition Indebtedness, bearing interest at 7.35% at December 31, 1995 42,000 -- 12% Senior Subordinated Notes due 1999 100,000 100,000 Other long-term debt 8,533 6,000 -------- -------- Total long-term debt $206,533 $151,100 Less current maturities (1,444) (1,500) -------- -------- $205,089 $149,600 ======== ======== REVOLVING CREDIT FACILITY The Company maintains a revolving credit facility (the "Revolving Credit Facility") with a group of five banks (collectively the "Lenders"). In December 1995, the total credit commitment and borrowing base under the Revolving Credit Facility was increased to $75 million from $65 million. The Revolving Credit Facility is guaranteed by all of the Company's subsidiaries other than PMCT, Inc. ("PMCT") and such guarantees are secured by all of the Company's oil and natural gas properties (except Plains Illinois Inc. ("Plains Illinois")) and the stock of such subsidiaries. The Cushing Terminal is not pledged as security for any of the Company's debt. The Revolving Credit Facility is subject to borrowing base availability as determined from time to time by the Lenders in good faith, in the exercise of the Lenders' sole discretion, and in accordance with customary practices and standards in effect from time to time for oil and natural gas loans to borrowers similar to the Company. Such borrowing base may be affected from time to time by the performance of the Company's oil and natural gas properties and changes in oil and natural gas prices. The Company incurs a commitment fee of 1/2% per annum on the unused portion of the borrowing base. The Revolving Credit Facility, as amended, consists of a $75 million revolving credit loan which matures on October 1, 1997, at which time the credit commitment reduces by an amount equal to one-third of the then outstanding principal amount of the revolving credit loan. The remaining outstanding balance converts to a term loan which is repayable in equal installments due on January 1, 1998, and April 1, 1998. The Revolving Credit Facility bears interest at the option of the Company at (i) LIBOR plus 2% or (ii) the higher of the Base Rate (as defined in the Revolving Credit Facility) plus 5/8% or the federal funds rate plus 1 1/8%. Borrowings in excess of $65 million bear interest at an additional 1/2% through December 31, 1996, and an additional 1% thereafter. The Revolving Credit Facility contains covenants which, among other things, restrict the payment of cash dividends, limit the amount of consolidated debt, limit the Company's ability to make certain loans and investments, and provide that the Company must maintain a specified relationship between current assets and current liabilities. F-9 ILLINOIS BASIN ACQUISITION INDEBTEDNESS On December 22, 1995, Plains Illinois, a wholly owned subsidiary of the Company, acquired, effective November 1, 1995, all of the upstream oil and gas assets of Marathon Oil Company ("Marathon") in the Illinois Basin (the "Illinois Basin Properties"). The aggregate purchase price was approximately $51.5 million including associated transaction costs, of which approximately $6.5 million was paid for by the issuance of 798,143 shares of the Company's common stock (the "Common Stock") and the remaining $45 million was paid in cash. The cash portion of the purchase price was financed through a combination of advances under the Revolving Credit Facility and a four year $42 million credit facility (the "Illinois Basin Acquisition Indebtedness") under a credit agreement between Plains Illinois and three banks. The Illinois Basin Acquisition Indebtedness consists of a $42 million four- year term loan with a final maturity on December 22, 1999. Monthly payments of interest and principal are required from 85% of Field Level Net Revenues, as defined in the Illinois Basin Acquisition Indebtedness. Field Level Net Revenues are defined as revenues derived from the sale of production from the Illinois Basin Properties less a predefined amount of production expense equal to the Company's original projections of such expenses, or actual production expense, whichever is less, on a monthly basis. The Illinois Basin Acquisition Indebtedness bears interest at LIBOR plus 2% through September 30, 1996, and LIBOR plus 3%, thereafter. The Company has entered into a one year interest rate swap agreement with one of the lending banks to fix the LIBOR portion of the interest rate at 5.35%. The Illinois Basin Acquisition Indebtedness is secured by a first lien on the Illinois Basin Properties and contains covenants which, among other things prohibit (i) Plains Illinois from making certain loans and investments, and (ii) additional indebtedness by Plains Illinois. 12% SENIOR SUBORDINATED NOTES DUE 1999 On October 2, 1992, the Company sold at par $100 million of 12% Senior Subordinated Notes (the "12% Notes") due October 1, 1999. The 12% Notes are redeemable, at the option of the Company, at 106% of the principal amount through October 1, 1996, and thereafter at prices declining annually to 100% of principal at October 1, 1998, plus accrued and unpaid interest to the date of redemption. A sinking fund payment of $50 million calculated to retire 50% of the issue is due October 1, 1998. The indenture under which the 12% Notes were issued (the "Indenture") contains, among other things, limitations on additional borrowings in excess of certain amounts and limitations on Restricted Payments, as defined in the Indenture, including cash dividends on the Common Stock. In the event of a change of control, as defined in the Indenture, the Company will be required to make an offer to repurchase the 12% Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase. The 12% Notes are unsecured general obligations of the Company and are subordinated in right of payment to all existing and future senior indebtedness of the Company. The 12% Notes are guaranteed by all of the Company's principal subsidiaries, with the exception of PMCT, a wholly-owned, sole purpose subsidiary of the Company (see Note 4), and PLX Crude Lines Inc. ("PLX Crude"). Such guarantees may be released under certain circumstances. OTHER LONG-TERM DEBT Included in other long-term debt at December 31, 1995 is (i) $4.6 million related to the 1995 acquisition of a production payment burdening certain of the Company's LA Basin properties and (ii) $3.9 million related to the 1991 purchase of a portion of the limited partners' interest in a partnership in which the Company is the general partner. Such amounts have maturities of approximately $1.4 million in 1996, $2 million in 1997 and 1998, and approximately $500,000 per year in each of the years 1999 through 2004. The aggregate amount of maturities of all long-term indebtedness for the next five years is: 1996 - $1.4 million, 1997 - $2 million, 1998 - $108 million, 1999 - $92.5 million and 2000 - $.5 million. NOTE 4 -- UNCOMMITTED SECURED TRANSACTIONAL GUIDANCE FACILITY - ------------------------------------------------------------- During 1995, Plains Marketing established an $80 million Uncommitted Secured Demand Transactional Line of Credit (the "Transactional Facility") with three banks. The purpose of the Transactional Facility is to provide standby letters of credit to support the purchase of crude oil for resale and borrowings to finance crude oil inventory which has been hedged against future price risk. The Transactional Facility is secured by all of the assets of Plains F-10 Marketing and is guaranteed by the Company. The Company's guarantee is secured by a $1 million standby letter of credit issued on behalf of the Company under the Revolving Credit Facility. At December 31, 1995, approximately $49.1 million in letters of credit were outstanding under the Transactional Facility. PMCT, a wholly owned subsidiary of the Company, has established a $20 million sublimit (the "Sublimit") within the Transactional Facility for standby letters of credit and borrowings to finance crude oil purchased in connection with operations at the Cushing Terminal. Under the terms of the Sublimit, all purchases of crude oil inventory financed are required to be hedged against future price risk on terms acceptable to the lenders. Standby letters of credit and borrowings under the Sublimit are secured by all of the assets of PMCT and are recourse only to PMCT. At December 31, 1995, no letters of credit or borrowings were outstanding under the Sublimit. Letters of credit under the Transactional Facility are generally issued for up to seventy day periods and bear fees of 1.5% per annum. Borrowings incur interest at the option of the borrower at (i) the Base Rate, as defined, plus 5/8% or (ii) LIBOR plus 2%. All financings under the Transactional Facility, which expires in August 1996, are at the discretion of the lenders. Aggregate cash borrowings by both subsidiaries are limited to $20 million. NOTE 5 -- CAPITAL STOCK - ----------------------- The Company has authorized capital stock consisting of 50,000,000 shares of Common Stock, $.10 par value, and 2,000,000 shares of preferred stock, $1.00 par value. At December 31, 1995, there were 16,178,670 shares of Common Stock issued and outstanding and no shares of preferred stock outstanding. STOCK WARRANTS At December 31, 1995, the Company had warrants outstanding which entitle the holders thereof to purchase an aggregate 950,000 shares of Common Stock. Per share exercise prices for the warrants are as follows: 100,000 shares at $9.25; 100,000 shares at $7.50 and 750,000 shares at $6.00. These warrants expire at various times from 1997 to 2000. $1.30 PREFERRED STOCK On October 31, 1995, all outstanding shares of the Company's $1.30 Cumulative Convertible Preferred Stock (the "$1.30 Preferred Stock") were redeemed for $10 per share plus unpaid and accrued dividends of $.0325 per share. The Company paid a total of $496,000, including unpaid dividends, to redeem the $1.30 Preferred Stock. REDEEMABLE PREFERRED STOCK In July 1994, the Company sold in a private placement 200,000 shares of its Series C Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") for net proceeds of approximately $20 million. On January 2, 1995, the Company paid a dividend on the Series C Preferred Stock for the period of July 14, 1994, through December 31, 1994. The dividend amount of approximately $937,000 was paid by issuing 9,370 additional shares of the Series C Preferred Stock. On May 25, 1995, all 209,370 outstanding shares of the Series C Preferred Stock, including accrued dividends, were converted into approximately 3.6 million shares of Common Stock. As a result of this conversion and the redemption of the $1.30 Preferred Stock, all outstanding preferred stock has been eliminated. Proceeds from the Series C Preferred Stock were used to repay the $11.5 million bridge loan incurred to finance the acquisition of a 50% working interest in six producing oil fields in the Sunniland Trend of South Florida (the "Sunniland Trend Properties") (see Note 9), to fund the exploitation of such properties and to reduce the amount outstanding on the Revolving Credit Facility. F-11 STOCK OPTIONS Stock option transactions for 1995 and 1994 are summarized below:
1995 1994 -------------------------- -------------------------- SHARES OPTION PRICE SHARES OPTION PRICE --------- -------------- --------- -------------- Outstanding at beginning of year 1,518,991 $5.00 to $15.63 1,641,971 $5.00 to $15.63 Granted 365,250 $6.25 -- Exercised (146,945) $5.00 to $6.75 (19,188) $5.00 Canceled or expired (9,493) $5.25 to $6.75 (103,792) $5.00 to $10.50 --------- --------- Outstanding at end of year 1,727,803 $5.00 to $15.63 1,518,991 $5.00 to $15.63 ========= ========= Exercisable at end of year 1,233,216 $5.00 to $15.63 1,201,767 $5.00 to $15.63 ========= =========
The Company has options outstanding under its 1992 Stock Incentive Plan, under which a maximum of 1.1 million shares of Common Stock were reserved for issuance, and options outstanding outside of the plan which were granted in 1991 to certain officers and employees and a director. Generally, terms of the options provide for an exercise price of not less than market at date of grant, a pro rata vesting period of two to four years and an exercise period of six to ten years. NOTE 6 -- EARNINGS PER SHARE - ---------------------------- Primary earnings per share is based on the weighted average number of common and common equivalent shares of Common Stock outstanding. Common equivalent shares include employee stock options and warrants when dilutive. Fully diluted earnings per share is based on the weighted average number of common and common equivalent shares in addition to all other convertible securities, when dilutive. The assumed conversion of these securities was not dilutive for all periods presented and, accordingly, is not reflected herein. For purposes of the earnings per share calculation, Common Stock issued upon the conversion of the Series C Preferred Stock is included in the weighted average number of shares outstanding effective January 1, 1995. Additionally, 1994 earnings per share includes the dilutive effect of additional shares of Series C Preferred Stock issued in 1995 as payment of 1994 accrued dividends (See Note 5). NOTE 7 -- INCOME TAXES - ---------------------- The Company's deferred income tax assets (liabilities) at December 31, 1995 and 1994 consist of the tax effect of income tax carryforwards and differences related to the timing of recognition of certain acquisition, exploration, and development costs for financial and tax reporting as follows:
DECEMBER 31, ------------------- 1995 1994 -------- -------- (in thousands) Deferred tax assets: Tax credit carryforwards $ 988 $ 1,035 Percentage depletion carryforward 2,380 2,380 Net operating loss ("NOL") carryforwards 55,798 46,120 -------- -------- 59,166 49,535 Deferred tax liabilities: Acquisition, exploration and development costs (40,871) (28,975) -------- -------- Net deferred tax asset 18,295 20,560 Valuation allowance (18,295) (20,560) -------- -------- $ -- $ -- ======== ========
The realization of the deferred tax asset is dependent on the Company's ability to generate taxable earnings in future periods. A valuation allowance for $18.3 million has been recorded at December 31, 1995, to reflect the estimated amount of the deferred tax asset which may not be realized due to the expiration of a portion of the NOL's and tax credit carryforwards. The net change in the current year deferred tax asset and related valuation allowance was a decrease of $2.3 million. The decrease was primarily attributable to the expiration of certain NOL carryforwards. F-12 Future realization of the tax asset will be affected by recent additions to the Company's oil and natural gas reserves and the resulting increases in anticipated future income. Management is currently reassessing the ability to realize a portion of such asset based on these reserve additions. At December 31, 1995, the Company had carryforwards of approximately $164.1 million of regular tax NOL's, $7.0 million of statutory depletion, $.8 million of investment tax credit ("ITC") and $.2 million of alternative minimum tax ("AMT") credit. Of these amounts, utilization of approximately $22.9 million of the NOL carryforwards and $.5 million of the ITC carryforward is limited to certain companies within the consolidated group. At December 31, 1995, the Company had approximately $149.4 million of AMT NOL carryforwards available as a deduction against future AMT income. The NOL carryforwards expire from 1996 through 2010. Set forth below is a reconciliation between the income tax provision computed at the United States statutory rate on income before income taxes and the income tax provision per the accompanying Consolidated Statements of Operations:
DECEMBER 31, --------------- 1995 1994 ------- ------ (in thousands) U.S. federal income tax provision at statutory rate $ 902 $ 194 Utilization of tax attributes previously included (902) (194) in allowance and other ----- ----- $ -- $ -- ====== =====
Although the Company recorded net income for the year 1995 and 1994, no provision for income taxes was reflected but rather the valuation allowance discussed above was adjusted. In accordance with certain provisions of the Tax Reform Act of 1986, a change of greater than 50% of the beneficial ownership of the Company within a three-year period (an "Ownership Change") will place an annual limitation on the Company's ability to utilize its existing tax carryforwards. Under Final Treasury Regulations issued by the Internal Revenue Service, the Company does not believe that an Ownership Change has occurred as of December 31, 1995. NOTE 8 -- RELATED PARTY TRANSACTIONS - ------------------------------------ In April 1993, the Company purchased certain oil and natural gas properties and associated participation rights from an officer and two directors, one of which is also an officer, for approximately $1.4 million. The purchase price consisted of 215,137 restricted shares of Common Stock, valued at approximately $1.1 million, and the assumption of approximately $255,000 of net liabilities. NOTE 9 -- ACQUISITIONS AND DISPOSITIONS - --------------------------------------- As further discussed in Note 3, effective November 1, 1995, the Company purchased the Illinois Basin Properties for approximately $51.5 millon. The Illinois Basin Properties include three Marathon operated oil fields, various nonoperated producing properties and all of Marathon's oil and natural gas mineral interests, surface fee and undeveloped leasehold within the Illinois Basin as well as Marathon's geological, geophysical and engineering database for the entire region. At the acquisition date, the Illinois Basin Properties added approximately 17.3 million barrels to the Company's proved oil reserves. The following unaudited information reflects pro forma results of operations as if the acquisition occurred on January 1, 1995:
YEAR ENDED DECEMBER 31, 1995 --------------------- HISTORICAL PRO FORMA ---------- --------- Revenue (in thousands) $404,225 $426,294 Net income (in thousands) $ 2,652 $ 9,589 Net income per common and common equivalent share $ 0.16 $ 0.57
F-13 In December 1995, Stocker Resources Inc. ("Stocker"), a wholly-owned subsidiary of the Company, acquired from Chevron U.S.A. ("Chevron") a production payment burdening certain of Stocker's LA Basin properties. The production payment had a face amount of approximately $30 million and was accounted for in prior periods as an overriding royalty interest. Stocker also acquired a fifteen year term mineral interest in certain of its LA Basin properties and approximately ten acres of surface fee lands in Los Angeles County. These assets were acquired in connection with a settlement agreement resolving certain outstanding issues between Chevron and Stocker. In return for the conveyance of the foregoing assets, Stocker agreed to forgive certain amounts due it, dismiss existing lawsuits related to such claims and issue to Chevron a ten year note for $4.6 million. The settlement also provides for a modification of Stocker's existing contractual obligations to Chevron to plug inactive wells, provided that Stocker continue its present activities to remediate oil contaminated soil from existing wellsites on an accelerated basis, and for the Company to guarantee the performance of such obligations. During 1995, the Company sold certain non-strategic oil and natural gas properties located primarily in the Gulf Coast area of Texas and Louisiana for net proceeds of approximately $7.4 million. During the first quarter of 1993, the Company acquired all of the outstanding capital stock of Calumet Florida, Inc. ("CFI") for approximately $5 million, including transaction costs. CFI, organized in February 1993, owned and operated a 50% working interest in the Sunniland Trend Properties which it acquired from Exxon just prior to its acquisition by the Company. The Company funded the acquisition primarily through the Revolving Credit Facility. During 1994, CFI acquired the remaining 50% working interest in the Sunniland Trend Properties, increasing its working interest to approximately 100% and adding approximately five million barrels of oil to its proved reserve base at the acquisition date. Operating results from the additional 50% interest in the Sunniland Trend Properties are included in the accompanying financial statements effective May 1, 1994. The aggregate purchase price, including acquisition costs, was approximately $13.6 million including the issuance of a five year warrant to purchase 750,000 shares of Common Stock at an exercise price of $6.00 per share. The acquisition was initially financed by an $11.5 million bridge loan which was repaid in July 1994 with proceeds from the sale of the Series C Preferred Stock (see Note 5). In October 1993, the Company purchased an average 46% nonoperated working interest in certain natural gas properties for approximately $2.7 million. The acquisition consisted of 47 producing wells and surrounding acreage located in the San Arroyo Field in northeastern Utah. At the acquisition date, these properties added approximately 14 billion cubic feet of natural gas to the Company's proved reserves. The Company funded the acquisition primarily through the Revolving Credit Facility. In late 1993, the Company acquired all of Texaco Exploration and Production Inc.'s interest in the Vickers lease, which is located immediately adjacent to one of the Company's existing LA Basin fields, for approximately $5 million. In connection with Stocker's acquisition of certain of the LA Basin properties from Chevron in 1990 (the "Stocker Properties"), numerous disputes arose regarding each party's obligations under the purchase and sale agreement governing such transaction. These disputes included, among other things, the financial responsibility for a 2.8% nonoperating working interest in a high volume but marginal property. In December 1993, the parties entered into a partial settlement under which Chevron agreed to terminate an agreement with respect to such property and to assume financial responsibility therefor. Set forth below is a summary of the pro forma impact of this termination on selected items for the year ended December 31, 1993.
YEAR ENDED DECEMBER 31, --------------------------------- 1993 --------------------------------- HISTORICAL PRO FORMA ------------ ----------- (IN THOUSANDS, EXCEPT UNIT PRICES) Production volumes, BOE 4,252 3,989 Production expense per BOE $ 6.65 $ 6.24 Net loss $(20,198) $(20,198)
F-14 NOTE 10 -- COMMITMENTS AND CONTINGENCIES - ---------------------------------------- Minimum commitments in connection with office space and computer and trucking equipment leased by the Company are: 1996 - $1 million; 1997 through 1999 - $.9 million annually; thereafter - $.8 million. Rental payments made under the terms of similar arrangements totaled approximately $1.2 million in each of the three years ended December 31, 1995, 1994 and 1993. In connection with its crude oil marketing, Plains Marketing provides certain purchasers and transporters with irrevocable standby letters of credit to secure the Company's obligation for the purchase of crude oil (See Note 4). Generally, these letters of credit are issued for up to seventy day periods and are terminated upon completion of each transaction. At December 31, 1995, Plains Marketing had outstanding letters of credit of approximately $49.1 million. Such letters of credit are secured by the crude oil inventory and accounts receivable of Plains Marketing and are guaranteed by the Company. To date, no amounts have been drawn on such letters of credit issued by the Company. Under the amended terms of the asset purchase agreement between Stocker and Chevron, commencing with the year beginning January 1, 2000, and each year thereafter, Stocker is required to plug and abandon 20% of the then remaining inactive wells, which currently aggregate approximately 270. To the extent the Company elects not to plug and abandon the number of required wells, the Company is required to escrow an amount equal to the greater of $25,000 per well or the actual average plugging cost per well in order to provide for the future plugging and abandonment of such wells. In addition, Stocker is required to expend a minimum of $600,000 per year in each of the ten years beginning January 1, 1996, and $300,000 per year in each of the succeeding five years to remediate oil contaminated soil from existing well sites, provided there are remaining sites to be remediated. In the event Stocker does not expend the required amounts during a calendar year, Stocker is required to contribute an amount equal to 125% of the actual shortfall to an escrow account. Stocker may withdraw amounts from such escrow account to the extent it expends excess amounts in a future year. Although the Company obtained environmental studies on its properties in the LA Basin, Sunniland Trend and Illinois Basin and the Company believes that such properties have been operated in accordance with standard oil field practices, certain of the fields have been in operation for more than 90 years, and current or future local, state and federal environmental laws and regulations may require substantial expenditures to comply with such rules and regulations. In connection with the purchase of the Stocker Properties, Stocker received a limited indemnity from Chevron for certain conditions if they violate applicable local, state and federal environmental laws and regulations in effect on the date of such agreement. While the Company believes that it does not have any material obligations for operations conducted prior to Stocker's acquisition of the properties from Chevron, other than its obligation to plug existing wells and those normally associated with customary oil field operations of similarly situated properties, there can be no assurance that current or future local, state or federal rules and regulations will not require it to spend material amounts to comply with such rules and regulations or that any portion of such amounts will be recoverable under the Chevron indemnity. Consistent with normal industry practices, substantially all of the Company's oil and natural gas leases require that, upon termination of economic production, the working interest owners plug and abandon non-producing wellbores, remove tanks, production equipment and flow lines and restore the wellsite. The Company has estimated that the costs to perform these tasks is approximately $14 million, net of salvage value and other considerations. Such estimated costs are amortized to expense through the unit-of-production method as a component of accumulated depreciation, depletion and amortization ("DD&A"). Results from operations for 1995, 1994 and 1993 include $1 million, $1.1 million and $1.8 million, respectively, of expense associated with these estimated future costs. For valuation and realization purposes of the affected oil and natural gas properties, these estimated future costs are also deducted from estimated future gross revenues to arrive at the estimated future net revenues and the Standardized Measure disclosed in Note 15. As is common within the industry, the Company has entered into various commitments and operating agreements related to exploration and the development of and production from certain proved oil and natural gas properties. It is management's belief that such commitments will be met without a material adverse effect on the Company's financial position. F-15 The Company and certain of its subsidiaries are the general partners of various limited partnerships. Accordingly, the Company and its subsidiaries as general partner have unlimited liability with respect to the operations of the partnerships. NOTE 11 -- LITIGATION - --------------------- On April 27, 1992, the Company and certain of its officers and directors and a former director and officer were named as defendants in a lawsuit filed in the United States District Court for the Southern District of Texas captioned Judith Rubinstein and Howard Greenwald v. Collins, et al., C.A. No. H-92-1297. The complaint brings a class action (the class period of which is October 23, 1991, through April 13, 1992) for, among other things, alleged violations of Sections 10(b) and 20(a) of the Exchange Act and for state law fraud and negligent misrepresentation, arising out of certain alleged misrepresentations and omissions in the Company's disclosures regarding its onshore natural gas exploration activities. The plaintiffs, who purport to have purchased their Common Stock in open market transactions (300 and 375 shares, respectively), contend the class is entitled to approximately $30 million for compensatory damages and punitive damages in an unspecified amount. The Company filed a motion to dismiss in July 1992. On August 24, 1992, the Court entered an Order of Dismissal and a Final Judgment dismissing the plaintiffs' complaint for failure to state a claim under the federal securities laws and/or under the common law of the State of Texas. On September 10, 1992, the plaintiffs filed a Notice of Appeal of the District Court's judgment with the United States Court of Appeals for the Fifth Circuit (No. 92-2736). On May 5, 1994, the Fifth Circuit Court ruled, among other things, that the plaintiffs had sufficiently pleaded claims under the federal securities laws and under Texas common law and reversed the trial court's dismissal and remanded the case to the trial court for further proceedings. On July 27, 1993, a second case similar to the Rubinstein case described in the preceding paragraph was filed in the United States District Court for the Southern District of Texas captioned Gloria Moroson v. Collins, et al., C.A. No. H-93-2305, naming the Company and certain of its officers and directors and a former director and officer as defendants. The complaint brings a class action (the class period of which is May 11, 1992, through August 14, 1992) for, among other things, alleged violations of Sections 10(b) and 20(a) of the Exchange Act and for state law fraud and negligent misrepresentation, arising out of certain alleged misrepresentations and omissions in the Company's disclosures regarding its onshore natural gas exploration activities. The plaintiff, who purports to have purchased 50 shares of Common Stock in an open market transaction, contends the class is entitled to approximately $60 million for compensatory damages and punitive damages in an unspecified amount. These amounts are alleged to be in addition to the damages claimed in the Rubinstein case. In June 1994, the trial court granted the Company's motion to consolidate the Rubinstein and Moroson cases. On February 20, 1996, the Court denied the Company's motion for summary judgment in these two cases and set a trial date for May 8, 1996. The Company expects the cases to go to trial before a jury on or or about such date. Although the Company believes these complaints to be without merit and intends to vigorously defend these lawsuits, if the plaintiffs were awarded, and the Company were ultimately required to pay, a substantial portion of the $90 million in compensatory damages sought by the plaintiffs, it would have a material adverse effect on the Company. On July 9, 1987, Exxon filed an interpleader action in the United States District Court for the Middle District of Florida, Exxon Corporation v. E. W. Adams, et al., Case Number 87-976-CIV-T-23-B. This action was filed by Exxon to interplead royalty funds as a result of a title controversy between certain mineral owners in a field in Florida. One group of mineral owners, John W. Hughes, et al. (the "Hughes Group"), filed a counterclaim against Exxon alleging fraud, conspiracy, conversion of funds, declaratory relief, federal and Florida RICO, breach of contract and accounting, as well as challenging the validity of certain oil and natural gas leases owned by Exxon, and seeking exemplary and treble damages. In March 1993, but effective November 1, 1992, CFI, a wholly- owned subsidiary of the Company, acquired all of Exxon's leases in the field affected by this lawsuit. In order to address those counterclaims challenging the validity of certain oil and natural gas leases, which constitute approximately 10% of the lands underlying this unitized field, CFI filed a motion to join Exxon as plaintiff in the subject lawsuit, which was granted July 29, 1994. In August 1994, the Hughes Group amended its counterclaim to add CFI as a counter-defendant. No trial date has been set in this case. Exxon and CFI have filed a motion to dismiss the counterclaims. The Court has not yet ruled on such motion. CFI believes the counterclaim challenging the validity of certain oil and natural gas leases owned by CFI to be without merit and intends to vigorously defend against such claim. F-16 The Company, in the ordinary course of business, is a claimant and/or a defendant in various other legal proceedings in which its exposure, individually and in the aggregate, is not considered material to the consolidated financial statements. NOTE 12 -- MAJOR CUSTOMERS - -------------------------- Phibro Division of Salomon Inc. ("Phibro") and Phibro Energy USA, Inc., accounted for 16% and 12%, respectively, of the Company's total revenue (exclusive of interest and other income) during 1995. Customers accounting for more than 10% of total revenue for 1994 and 1993 were as follows: 1994 -- Phibro -- 19% and Chevron -- 16%; 1993 -- Chevron -- 23%, Marathon -- 22% and Phibro --15%. No other single purchaser of the Company's products accounted for as much as 10% of total sales during 1995, 1994 and 1993. During 1995, 1994 and 1993, Chevron accounted for 39%, 71% and 76% of the Company's oil and natural gas sales, respectively. Additionally during 1995, Unocal and Scurlock Permian Corporation accounted for approximately 28% and 19%, respectively, of the Company's oil and natural gas sales. During 1995, Unocal was the purchaser of the Company's LA Basin oil production, while Scurlock Permian Corporation was purchaser of oil production attributable to the Sunniland Trend Properties. NOTE 13 -- FINANCIAL INSTRUMENTS - -------------------------------- DERIVATIVES The Company has only limited involvement with derivative financial instruments, as defined in SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" and does not use them for trading purposes. The Company's principle objective is to hedge exposure to price volatility on crude oil and natural gas. These arrangements expose the Company to credit risk (as to counterparties) and to risk of adverse price movements in certain cases where the Company's production is less than expected. The Company has entered into crude oil financial swap arrangements to fix the NYMEX WTI index price for a significant portion of its crude oil production. On December 31, 1995, these arrangements provided for a NYMEX WTI indexed average price for: (i) 11,000 barrels per day through March 31, 1996, at $18.07 per barrel; (ii) 10,000 barrels per day from April 1, 1996, through May 31, 1996, at $18.03 per barrel; (iii) 9,500 barrels per day from June 1, 1996, through June 30, 1996, at $18.01 per barrel; (iv) 3,500 barrels per day from July 1, 1996, through December 31, 1996, at $17.48 per barrel; and (v) 1,500 barrels per day from January 1, 1997, through June 30, 1997, at $17.23 per barrel. The Company has entered into additional swap arrangements which provide for a NYMEX WTI indexed ceiling price of $17.63 per barrel and a floor price of $16.50 per barrel for 3,000 barrels per day from July 1, 1996, through December 31, 1996. Location and quality differentials attributable to the Company's properties are not included in the foregoing prices. The crude oil swap agreements provide for monthly settlement based on the differential between the contract price and the actual NYMEX WTI crude oil price. The arrangements do not expose the Company to any basis risk. Gains or losses on the crude oil swaps are recognized in the month of related production and are included in oil and natural gas sales. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables. The Company's accounts receivable are primarily from purchasers of oil and natural gas products and exploration and production companies which own interests in properties operated by the Company. This industry concentration has the potential to impact the Company's overall exposure to credit risk, either positively or negatively, in that the customers may be similarly affected by changes in economic, industry or other conditions. The Company generally requires letters of credit for receivables from customers which are not considered investment grade, unless the credit risk can otherwise be mitigated. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments". The estimated fair value amounts have been determined by the Company using available market information and valuation methodologies F-17 described below. Considerable judgement is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. The carrying values of items comprising current assets and current liabilities approximate fair values due to the short-term maturities of these instruments. Crude oil futures contracts permit settlement by delivery of the crude oil and, therefore, are not financial instruments, as defined. The carrying amounts and fair values of the Company's other financial instruments are as follows:
DECEMBER 31, ---------------------------------------- 1995 1994 ------------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- --------- -------- --------- (IN THOUSANDS) LIABILITIES: Bank debt $ 98,000 $ 98,000 $ 45,100 $45,100 Subordinated debt 100,000 105,250 100,000 99,000 Other long-term debt (see Note 3) 8,533 8,624 4,500 3,873 SERIES C PREFERRED STOCK -- -- 20,937 20,937 OFF BALANCE SHEET FINANCIAL INFORMATION: Unrealized loss on crude oil swap agreements -- (5,438) -- (1,204)
The carrying value of bank debt approximates its fair value as interest rates are variable, based on prevailing market rates. The fair value of subordinated debt was based on quoted market prices. Other long-term debt was valued by discounting the future payments using the Company's incremental borrowing rate. The fair value of the Series C Preferred Stock is estimated to be its liquidation value at December 31, 1994. The fair value of the crude oil swap agreements is the estimated amount that the Company would pay or receive as if the agreements had terminated at December 31, 1995 and 1994, based on the closing prices for NYMEX futures contracts on such dates. NOTE 14 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - ------------------------------------------------------------- Selected cash payments and noncash activities were as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 --------- --------- -------- (IN THOUSANDS) Cash paid for interest (net of amount capitalized) $13,259 $12,082 $ 8,489 ======= ======= ======= Noncash investing and financing activities: Series C Preferred Stock Dividends $ -- $ 937 $ -- ======= ======= ======= Conversion of Series C Preferred $21,769 $ -- $ -- ======= ======= ======= Detail of properties acquired for other than cash: Fair value of acquired assets $56,100 $13,600 $ 7,387 Debt issued and liabilities assumed (4,600) -- (6,255) Capital stock and warrants issued (6,527) (1,250) (1,132) ------- ------- ------- Cash paid $44,973 $12,350 $ -- ======= ======= =======
F-18 NOTE 15 -- OIL AND NATURAL GAS ACTIVITIES - ----------------------------------------- COSTS INCURRED The Company's oil and natural gas acquisition, exploration and development activities are primarily conducted in the United States. The following table summarizes the costs incurred in connection therewith during the last three years.
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Property acquisition costs: Unproved properties $18,136 $ 6,150 $ 4,800 Proved properties 41,194 13,222 19,659 Exploration costs 2,001 5,907 10,524 Development costs 22,681 15,570 26,786 ------- ------- ------- $84,012 $40,849 $61,769 ======= ======= =======
CAPITALIZED COSTS The following table presents the aggregate capitalized costs subject to amortization relating to the Company's oil and natural gas acquisition, exploration and development activities, and the aggregate related DD&A.
DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- (IN THOUSANDS) Proved properties $ 328,712 $ 265,123 Accumulated DD&A (131,063) (116,430) --------- --------- $ 197,649 $ 148,693 ========= =========
Under full cost accounting rules, to the extent that the Standardized Measure of the proved reserves (as described below) is less than the amount of net capitalized costs of proved properties, a write-down is required. The capitalized costs of the Company's proved oil and natural gas properties exceeded the Standardized Measure by approximately $20 million at year-end 1993 due to low crude oil prices and accordingly, the capitalized costs were written down by such amount. The DD&A rate per equivalent unit of production excluding the write-down was $3.02, $3.17 and $3.57 for the three years ended December 31, 1995, 1994 and 1993, respectively. The DD&A rate per equivalent unit of production for 1993 including the noncash writedown of the recorded cost of the Company's oil and natural gas properties was $8.27. COSTS NOT SUBJECT TO AMORTIZATION The following table summarizes the categories of costs which comprise the amount of unproved properties not subject to amortization.
DECEMBER 31, ------------------ 1995 1994 -------- -------- (IN THOUSANDS) Acquisition costs $35,550 $23,830 Exploration costs 5,075 5,470 Capitalized interest 8,170 6,479 ------- ------- $48,795 $35,779 ======= =======
Unproved properties not subject to amortization at December 31, 1995, consist mainly of lease costs and seismic data related to unproved areas. The Company will continue to evaluate these properties over the lease terms; however, the timing of the ultimate evaluation and disposition of a significant portion of the properties has not been determined. Costs associated with seismic data and all other costs will become subject to amortization as the prospects to which they relate are evaluated. Approximately 37%, 16% and 24% of the balance in unproved properties at December 31, 1995, related to additions made in 1995, 1994, and 1993, respectively. F-19 During 1995, 1994 and 1993, the Company capitalized $3.1 million, $2.7 million and $2.7 million, respectively, of interest related to costs of unproved property in the process of development. SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) The following information summarizes the Company's net proved reserves of oil (including condensate and natural gas liquids) and natural gas and the present values thereof for the three years ended December 31, 1995. The following reserve information is based upon reports of the independent petroleum consulting firms of H.J. Gruy and Company with respect to the LA Basin properties, Netherland, Sewell & Associates, Inc. with respect to the Sunniland Trend Properties and other minor properties and Ryder Scott Company with respect to the Illinois Basin Properties. The estimates are in accordance with regulations prescribed by the Securities and Exchange Commission (the "SEC"). In management's opinion, the reserve estimates presented herein, in accordance with generally accepted engineering and evaluation principles consistently applied, are believed to be reasonable. However, there are numerous uncertainties inherent in estimating quantities and values of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the Company. Reserve engineering is a subjective process of estimating the recovery from underground accumulations of oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Because all reserve estimates are to some degree speculative, the quantities of oil and natural gas that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures and future oil and natural gas sales prices may all differ from those assumed in these estimates. In addition, different reserve engineers may make different estimates of reserve quantities and cash flows based upon the same available data. Therefore, the Standardized Measure shown below represents estimates only and should not be construed as the current market value of the estimated oil and natural gas reserves attributable to the Company's properties. In this regard, the information set forth in the following tables includes revisions of reserve estimates attributable to proved properties included in the preceding year's estimates. Such revisions reflect additional information from subsequent exploitation and development activities, production history of the properties involved and any adjustments in the projected economic life of such properties resulting from changes in product prices. ESTIMATED QUANTITIES OF OIL AND NATURAL GAS RESERVES (UNAUDITED) The following table sets forth certain data pertaining to the Company's proved and proved developed reserves for the three years ended December 31, 1995.
AS OF OR FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------- 1995 1994 1993 --------------- --------------- --------------- OIL GAS OIL GAS OIL GAS (BBL) (MCF) (BBL) (MCF) (BBL) (MCF) ------ ------ ------ ------ ------ ------ (IN THOUSANDS) PROVED RESERVES Beginning balance 61,459 51,009 38,810 49,397 33,390 39,861 Revisions of previous estimates 5,423 2,792 16,834 4,365 (6,478) (7,753) Extensions, discoveries, improved recovery and other additions 15,489 1,730 4,362 1,182 3,712 6,250 Sale of reserves in-place (1,227) (9,773) (16) (446) (92) (622) Purchase of reserves in place 17,640 130 5,304 80 11,834 15,837 Production (4,376) (2,778) (3,835) (3,569) (3,556) (4,176) ------ ------ ------ ------ ------ ------ Ending balance 94,408 43,110 61,459 51,009 38,810 49,397 ====== ====== ====== ====== ====== ====== PROVED DEVELOPED RESERVES Beginning balance 48,978 30,869 30,646 28,436 24,296 20,555 ====== ====== ====== ====== ====== ====== Ending balance 67,266 29,397 48,978 30,869 30,646 28,436 ====== ====== ====== ====== ====== ======
F-20 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED) The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves is presented below:
DECEMBER 31, ------------------------------------ 1995 1994 1993 ------------ ---------- ---------- (in thousands) Future cash inflows $1,513,145 $ 894,434 $ 497,942 Future development costs (107,995) (62,695) (44,644) Future production expense (692,009) (414,741) (221,814) ---------- --------- --------- Future net cash flows (before income taxes) 713,141 416,998 231,484 Discounted at 10% per year (346,361) (187,627) (96,945) ---------- --------- --------- Standardized measure of discounted future net cash 366,780 229,371 134,539 flows (before income taxes) Discounted future income (61,939) (26,427) (4,050) tax expense ---------- --------- --------- Standardized measure of $ 304,841 $ 202,944 $ 130,489 discounted future net cash flows ========== ========= =========
The standardized measure of discounted future net cash flows (discounted at 10%) from production of proved reserves was developed as follows: 1. An estimate was made of the quantity of proved reserves and the future periods in which they are expected to be produced based on year-end economic conditions. 2. In accordance with SEC guidelines, the engineers' estimates of future net revenues from the Company's properties and the present value thereof are made using oil and natural gas sales prices in effect as of the dates of such estimates and are held constant throughout the life of the properties, except where such guidelines permit alternate treatment, including the use of fixed and determinable contractual price escalations. The crude oil price in effect at December 31, 1995, is based on the price for NYMEX WTI crude oil of $19.55 per barrel ($18 per barrel WTI posted price) with variations therefrom based on location and grade of crude oil. The Company has entered into financial swap arrangements to fix the price on a significant portion of its crude oil production. These prices are included in the reserve reports through the term of the arrangements (See Note 13). The overall average prices as of December 31, 1995, were $15.55 per barrel of crude oil, condensate and natural gas liquids and $1.05 per Mcf of natural gas. 3. The future gross revenue streams were reduced by estimated future operating costs (including production and ad valorem taxes) and future development and abandonment costs, all of which were based on current costs. 4. SFAS No. 69 requires the Company further to reduce these estimates by an amount equal to the present value of estimated income taxes which might be payable by the Company in future years to arrive at the Standardized Measure. Future income taxes were calculated by applying the statutory federal income tax rate to pretax future net cash flows, net of the tax basis of the properties involved and utilization of available tax carryforwards. F-21 The principal sources of changes in the standardized measure of future net cash flows for the three years ended December 31, 1995, are as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------- 1995 1994 1993 ---------- ---------------- --------------- (in thousands) Balance, beginning of year $202,944 $130,489 $141,171 Sales, net of production expenses (33,824) (30,014) (29,222) Net change in sales and transfer prices, net of production expenses 26,968 29,840 (74,123) Changes in estimated future development costs (3,228) (9,477) (3,188) Extensions, discoveries and improved recovery, net of costs 59,050 14,928 14,305 Previously estimated development costs incurred during the year 3,136 2,995 23,935 Purchase of reserves in-place 64,214 16,919 40,569 Sales of reserves in-place (11,381) (426) (1,139) Revision of quantity estimates 24,533 71,188 (20,636) Accretion of discount 22,937 13,454 15,536 Net change in income taxes (35,512) (22,377) 10,139 Changes in estimated timing of production and other (14,996) (14,575) 13,142 -------- -------- -------- Balance, end of year $304,841 $202,944 $130,489 ======== ======== ========
NOTE 16 -- QUARTERLY FINANCIAL DATA (UNAUDITED) - ------------------------------------------------- Selected quarterly financial data:
QUARTER ENDED ---------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1995 1995 1995 1995 --------- -------- ------------- ------------ (in thousands, except per share data) Revenues $93,647 $ 95,256 $103,607 $111,715 Operating profits $ 9,500 $ 10,312 $ 9,744 $ 10,953 Net income $ 319 $ 914 $ 483 $ 936 Net income per share Primary $ .03(1) $ .06 $ .03 $ .06 Assuming full dilution $ .02 $ .06 $ .03 $ .06
QUARTER ENDED --------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1994 1994 1994 1994 --------- -------- ------------- ------------ (in thousands, except per share data) Revenues $50,584 $ 67,198 $ 66,224 $ 72,690 Operating profits $ 7,741 $ 9,947 $ 9,066 $ 9,673 Net income (loss) $(1,178) $ 750 $ 209 $ 790 Net income (loss) per share Primary $ (.10) $ .06 $ .02(2) $ .07(2) Assuming full dilution $ (.10) $ .06 $ .01(2) $ .05(2)
- ------------------------- (1) Earnings per share for the quarter ended March 31,1995, has been restated to reflect the satisfaction of accrued dividends on the Series C Preferred Stock through the conversion of such series into Common Stock on May 25, 1995 (see Note 6). (2) Earnings per share for the quarters ended September 30, 1994, and December 31, 1994, have been restated to eliminate accrued dividends on the Series C Preferred Stock of $433,000 and $504,000 for the respective quarters. Such dividends were paid in additional shares of such stock on January 2, 1995 (See Note 5). F-22 EX-3.A 2 SECOND RESTATED CERT. OF INCORP. EXHIBIT 3.A SECOND RESTATED CERTIFICATE OF INCORPORATION OF PLAINS RESOURCES INC. --------------------- The undersigned, being the President and Secretary of Plains Resources Inc. (the "Corporation") a corporation organized and existing under the laws of the State of Delaware, do hereby state and certify that: (i) the name of the Corporation is Plains Resources Inc.; (ii) the Corporation was originally incorporated under the name of Alifin Resources Inc. under the original Certificate of Incorporation filed with the Secretary of State of Delaware on September 10, 1976; (iii) on November 9, 1995, the Board of Directors of the Corporation duly adopted this Second Restated Certificate of Incorporation without a vote of stockholders in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware; (iv) this Second Restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the Corporation's Certificate of Incorporation as heretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of this Second Restated Certificate of Incorporation; and (v) the text of the Certificate of Incorporation of the Corporation as heretofore amended or supplemented is hereby restated to read in full, as follows: "SECOND RESTATED CERTIFICATE OF INCORPORATION OF PLAINS RESOURCES INC. --------------------- FIRST: The name of the Corporation is PLAINS RESOURCES INC. - ----- SECOND: The address of its registered office in the State of Delaware is 1013 - ------ Centre Road, Wilmington, Delaware 19805, County of Newcastle. The name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. THIRD: The nature of the business or purposes to be conducted or promoted is: - ----- To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The total number of shares of stock which the Corporation shall have - ------ authority to issue is 52,000,000 shares, of which 50,000,000 shall be shares of common stock of a par value of $.10 per share and 2,000,000 shall be shares of preferred stock of a par value of $1.00 per share. The Board of Directors is expressly authorized at any time, and from time to time, to provide for the issuance of shares of preferred stock in one or more series, with such voting powers, full or limited or without voting powers, and with such designations, preferences and relative, participating, option or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors, and as are not stated and expressed in this Certificate of Incorporation, or any amendment thereto, including (but without limiting the generality of the foregoing) the following: (i) the designation of and number of shares constituting such series; (ii)the dividend rate of such series, the conditions and dates upon which such dividends shall be payable, the preference or relation which such dividends shall bear to the dividends payable on any other class or classes or on any other series of any other class or classes of capital stock, and whether such dividends shall be cumulative or noncumulative; (iii)whether the shares of such series shall be subject to redemption by the Corporation, and, if made subject to such redemption, the times, prices and other terms and conditions of such redemption; (iv)the terms and amounts of any sinking fund provided for the purchase or redemption of the shares of such series; (v)the extent, if any, to which the shares of such series shall be convertible into or exchangeable for shares of any other class or classes or of any other series of any class or classes of capital stock of the Corporation, and, if provision be made for conversion or exchange, the time, prices, rates, adjustments, and other terms and conditions of such conversion or exchange; (vi)the extent, if any, to which the holders of the shares of such series shall be entitled to vote as a class or otherwise with respect to the election of directors or otherwise; (vii) the restrictions, if any, on the issue or reissue of any additional preferred stock; and (viii)the rights of the holders of the shares of such series upon the dissolution of, or upon the distribution of assets of, the Corporation. FIFTH: The Corporation is to have perpetual existence. - ----- SIXTH: In furtherance and not in limitation of the powers conferred by statute, - ----- the Board of Directors is expressly authorized: To make, alter or repeal the Bylaws of the Corporation; To authorize and cause to be executed mortgages and liens upon the real and personal property of the Corporation; To set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created. 2 By resolution passed by a majority of the whole Board, to designate one or more committees, each committee to consist of two or more of the directors of the Corporation, which, to the extent provided in the resolution or in the Bylaws of the Corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. When and as authorized by the affirmative vote of the holders of a majority of the stock issued and outstanding having voting power given at a stockholders' meeting duly called for that purpose, or when authorized by the written consent of the holders of a majority of the voting stock issued and outstanding, to sell, lease or exchange all of the property and assets of the Corporation, including its good will and its corporate franchises, upon such terms and conditions and for such consideration, which may be in whole or in part shares of stock in, and/or other securities of, any other corporation or corporations, as its Board of Directors shall deem expedient and for the best interests of the Corporation. SEVENTH: Whenever a compromise or arrangement is proposed between this - ------- Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stock holders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. EIGHTH: Meetings of stockholders may be held within or without the State of - ------ Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provisions contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. 3 NINTH: The Corporation reserves the right to amend, alter, change or repeal any - ----- provisions contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. TENTH: No director shall be personally liable to the Corporation or its - ----- stockholders for monetary damages for any breach of fiduciary duty by such director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (a) for breach of the director's duty of loyalty to the Corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) pursuant to Section 174 of the Delaware General Corporation Law, or (d) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article TENTH shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. The Corporation shall indemnify to the full extent authorized or permitted by law any person made, or threatened to be made, a party to any action, suit or proceeding (whether civil, criminal or otherwise) by reason of fact that he, his testator or intestate, is or was a director or officer of the Corporation or by reason of the fact that such director or officer, at the request of the Corporation, is or was serving any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, in any capacity. Nothing contained herein shall affect any rights to indemnification to which employees other than directors and officers may be entitled by law. The rights to indemnification set forth in this Article TENTH shall not be exclusive of any other rights to which any person may be entitled under any statute, provision of the Certificate of Incorporation, Bylaw, agreement, contract, vote of stockholders or disinterested directors or otherwise. ELEVENTH: Notwithstanding any other provisions of this Certificate of - -------- Incorporation or the Bylaws of the Corporation to the contrary, no action required to be taken or which may be taken at any annual or special meeting of stockholders of the Corporation may be taken by written consent without a meeting of such stockholders, except (a) any action which may be taken solely upon the vote or consent of holders of preferred stock, or any series thereof, or (b) any action taken upon the signing of a consent in writing, setting forth the action so taken, by all the stockholders of the Corporation entitled to vote thereon. Notwithstanding any other provisions of this Certificate of Incorporation or the Bylaws of the Corporation to the contrary (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or the Bylaws of the Corporation), the affirmative vote of the holders of eighty percent (80%) or more of the outstanding shares of Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with this Article ELEVENTH. The term "Voting Stock" shall mean all capital stock which by its terms may be voted on all matters submitted to the stockholders of the Corporation, generally. 4 TWELFTH: Subject to the rights which any class or series of stock having a - ------- preference over the common stock as to dividends or upon liquidation may have with respect to directors elected by such class or series, a director may be removed from office, without cause, only by the affirmative vote of the holders of eighty percent (80%) or more of the outstanding shares of Voting Stock entitled to vote for the election of such director. The term "Voting Stock" shall mean all capital stock which by its terms may be voted on all matters submitted to stockholders of the Corporation, generally. Notwithstanding any other provisions of this Certificate of Incorporation or the Bylaws of the Corporation to the contrary (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or the Bylaws of the Corporation), the affirmative vote of the holders of eighty percent (80%) or more of the outstanding shares of Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with this Article TWELFTH." IN WITNESS WHEREOF, we the undersigned have signed this certificate this 24th day of January, 1996. /s/ Greg L. Armstrong ----------------------------------- Greg L. Armstrong President ATTEST: By: /s/ Michael R. Patterson ---------------------------------- Michael R. Patterson Secretary 5 EX-10.L 3 FIFTH AMEND. CREDIT AGR. EXHIBIT 10.L FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") dated as of the 20th day of December, 1995, by and among PLAINS --------- RESOURCES INC., a Delaware corporation (the "Company"), INTERNATIONALE ------- NEDERLANDEN (U.S.) CAPITAL CORPORATION, as Agent ("Agent"), and the Lenders ----- under the Original Agreement (as defined herein). W I T N E S S E T H: WHEREAS, the Company, Agent and Lenders entered into that certain Second Amended and Restated Credit Agreement dated as of February 11, 1994, as amended by that certain First Amendment to Second Amended and Restated Credit Agreement dated as of September 15, 1994, that certain Second Amendment to Second Amended and Restated Credit Agreement dated as of January 25, 1995, that certain Third Amendment to Second Amended and Restated Credit Agreement dated as of June 12, 1995 and that certain Fourth Amendment to Second Amended and Restated Credit Agreement dated as of August 22, 1995 (as amended, including any schedules thereto, the "Original Agreement") for the purposes and consideration therein ------------------ expressed, pursuant to which Lenders became obligated to make loans to the Company as therein provided; and WHEREAS, the Company, Agent and Lenders desire to amend the Original Agreement for the purposes described herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and in the Original Agreement, in consideration of the loans which may hereafter be made by Lenders to the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I. -- Definitions and References -------------------------- (S) 1.1. Terms Defined in the Original Agreement. Unless the context --------------------------------------- otherwise requires or unless otherwise expressly defined herein, the terms defined in the Original Agreement shall have the same meanings whenever used in this Amendment. (S) 1.2. Other Defined Terms. Unless the context otherwise requires, the ------------------- following terms when used in this Amendment shall have the meanings assigned to them in this (S) 1.2. "Amendment" means this Fifth Amendment to Second Amended and Restated --------- Credit Agreement. "Amendment Documents" means this Amendment, the Renewal Notes, and the ------------------- Mortgage Amendments. "Credit Agreement" means the Original Agreement as amended hereby. ---------------- -1- "Mortgage Amendments" has the meaning set forth in Section 3.1(iv)(A). ------------------- "Original Mortgage" means that certain Deed of Trust, Mortgage, Assignment, ----------------- Security Agreement and Fixture Filing dated February 11, 1994 by Calumet Florida, Inc., Stocker Resources, L.P., the Company and Plains Resources Utah Inc. in favor of Agent for the benefit of Lenders, as amended by that certain First Amendment to Deed of Trust, Mortgage, Assignment, Security Agreement and Fixture Filing dated November 1, 1994, that certain Second Amendment to Deed of Trust, Mortgage, Assignment, Security Agreement and Fixture Filing dated February 6, 1995 and that certain Third Amendment to Deed of Trust, Mortgage, Assignment, Security Agreement and Fixture Filing dated June 12, 1995. "Original Notes" means the "Notes" referred to and defined as such in the -------------- Original Agreement. "Renewal Notes" has the meaning given it in Section 3.1(iii). ------------- ARTICLE II. -- Amendments ---------- (s) 2.1 Definitions. The definitions of "Applicable Margin", ----------- "Commitment", "Revolving Credit Termination Date" and "Subsidiary" set forth in Section 1.01 of the Original Agreement are hereby amended in their entirety to read as follows: "Applicable Margin" shall mean (i) with respect to Base Rate Loans five- ----------------- eighths percent (0.625%) per annum and (ii) with respect to Eurodollar Loans, two percent (2%) per annum; provided, at any time that the aggregate -------- principal amount of the Loans exceeds $65,000,000, the "Applicable Margin" ----------------- on that portion of the Loans constituting such excess shall be increased by (a) one-half percent (0.5%) per annum through and including December 31, 1996 and (b) one percent (1%) per annum thereafter. "Commitment" shall mean the obligation of Lenders to make Loans in an ---------- aggregate amount at any one time outstanding up to but not exceeding $75,000,000, as the same may be reduced at any time or from time to time pursuant to Sections 2.03(a), (b) or (c). "Revolving Credit Termination Date" shall mean the earlier of (a) October --------------------------------- 1, 1997 and (b) the date on which the Commitment is reduced to zero or terminated pursuant to Section 2.03 hereof. "Subsidiary" shall mean, for any Person, any corporation or other entity of ---------- which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or -2- indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person; provided that the term "Subsidiary" shall not include any of the -------- ---------- Partnerships other than any Partnership of which all of the partnership interests are owned, directly or indirectly, by the Company and/or any of its Subsidiaries; provided further, that the term "Subsidiary" shall not, ---------------- ---------- for the Company, include Plains Illinois for purposes of (i) the representations and warranties set forth in Sections 8.12 and 8.18, and (ii) the covenants set forth in Sections 9.04, 9.05, 9.07 through 9.10, 9.20, 9.25, 9.26 and 9.32. "Wholly-Owned Subsidiary" shall mean any such ----------------------- corporation or other entity of which all of such securities or other ownership interests (other than, in the case of a corporation, directors' qualifying shares) are so owned or controlled. Section 1.01 of the Original Agreement is hereby amended by adding the following definitions of "Adjusted Borrowing Base", "Plains Illinois", "Plains Illinois Bridge Facility" and "Support Letter of Credit": "Adjusted Borrowing Base" shall mean, at any time, an amount equal to (i) ----------------------- the Borrowing Base in effect at such time minus (ii) the aggregate amount ----- at such time that Lenders might be called upon to advance under the Support Letter of Credit. "Plains Illinois" shall mean Plains Illinois Inc., a Delaware corporation --------------- and a Wholly-Owned Subsidiary of the Company. "Plains Illinois Bridge Facility" shall mean the secured line of credit ------------------------------- facility, in an aggregate amount not to exceed $42,000,000, dated on or about December 22, 1995, among Plains Illinois, INCC, individually and as agent, and the lenders named therein, together with the security documents and other documents and agreements executed in connection therewith. "Support Letter of Credit" shall mean that certain Letter of Credit No. ------------------------ 672917 dated August 23, 1995, issued by INCC for the benefit of The First National Bank of Boston, as agent, for the account of the Company, in the face amount of $1,000,000, expiring June 30, 1996, as from time to time extended, which secures a guaranty by the Company of the Indebtedness of Plains Marketing and its Wholly-Owned Subsidiaries under the Bank of Boston/ING Capital Facility. (S) 2.2 Adjusted Borrowing Base. The references to "Borrowing Base" in ----------------------- Sections 2.01, 2.04, 2.07(b) and 7.02(iii), the last such reference in Section 9.15(b)(iv), and the last such reference in Section 9.26(d), are hereby amended to refer instead to "Adjusted Borrowing Base". (S) 2.3 Changes of Commitment. The first sentence of Section 2.03(a) of --------------------- the Original Agreement is hereby amended in its entirety to read as follows: 2.03 Changes of Commitment. (a) The Commitment shall be reduced on --------------------- October 1, 1997 by an amount equal to one-third of the outstanding principal amount of the Revolving Credit Loans as of such date. -3- (S) 2.4 Repayment of Term Loans. Section 3.01(b) of the Original ----------------------- Agreement is hereby amended in its entirety to read as follows: (b) The Company will repay the principal of the Term Loans in two installments payable on each Quarterly Date beginning January 1, 1998, with the final installment being due and payable on or before April 1, 1998. Each such installment shall be equal to one-half of the original principal amount of the Term Loans as of the Revolving Credit Termination Date. In any event all unpaid principal and interest shall be due and payable in full on the final maturity of April 1, 1998. As set forth in Section 2.07(c), all optional and mandatory prepayments made on the Term Loans shall be applied to the scheduled installments in inverse order of their maturity. (S) 2.5 Transactions with Plains Illinois. Section 9 of the Original --------------------------------- Agreement is hereby amended by adding the following Section 9.37: 9.37 Transactions with Plains Illinois . Notwithstanding the limitations ---------------------------------- set forth in Section 9.10, the Company may make investments in, and loans, advances and other extensions of credit to Plains Illinois as follows: (x) overhead which may be allocable by the Company to Plains Illinois for which Plains Illinois has no obligation of reimbursement, (y) without limitation, common stock of the Company and amounts not to exceed the net proceeds of any issuance or sale of such common stock of the Company, and (z) up to an aggregate amount of $7,850,000 in cash or other Property of the Company (excluding any investments described in clause (x) above), or any combination thereof (valued at the fair market value thereof as determined by the Board of Directors of the Company), other than Oil and Gas Properties subject to the Security Documents. Except as otherwise permitted in this Section 9.37, the Company shall not, and shall not permit any of its Subsidiaries to (i) Guarantee any Indebtedness or other obligations of Plains Illinois (including, without limitation the Plains Illinois Bridge Facility), (ii) enter into any transaction with Plains Illinois except for services and other transactions provided by the Company or its Subsidiaries in the ordinary course of their respective businesses on an arms length basis on terms not less favorable to the Company and its Subsidiaries than similar transactions with unaffiliated third parties, (iii) grant or permit any Lien on any of its Property to secure any Indebtedness or other obligations of Plains Illinois (including, without limitation the Plains Illinois Bridge Facility), (iv) transfer any Property to Plains Illinois, except as pursuant to an arms length transaction permitted under clause (ii), or (v) make any Investment in Plains Illinois. Plains Illinois shall not (A) engage in any line of business other than the exploration for, and development, acquisition, production, processing, marketing, storage and transportation of Hydrocarbons and other related energy and natural resources business, and such other businesses as are reasonably necessary or desirable to facilitate the conduct and operations of the foregoing businesses, or (B) declare and make any Dividend Payment, but excluding (1) dividends payable solely in its shares of capital stock and (2) to the extent permitted under the Plains Illinois Bridge Facility, dividends to the Company. Plains Illinois shall at all times be a Wholly- Owned Subsidiary. -4- (S) 2.6 Events of Default. Section 10 of the Original Agreement is hereby ----------------- amended by adding the following subsection (l): (l) (i) Plains Illinois shall default in the payment when due of any principal of or interest on any of its Indebtedness in excess of $100,000 in the aggregate, or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Indebtedness shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, such Indebtedness to become due, or to be prepaid in full (whether by redemption, purchase, offer to purchase or otherwise), prior to its stated maturity, and (ii) Majority Lenders shall have notified the Company in writing that in the judgment of Majority Lenders, such default could reasonably be expected to have a Material Adverse Effect. (s) 2.7 Support Letter of Credit. (a) The Company and Lenders hereby ------------------------ acknowledge and agree that (i) INCC, in its capacity as Agent, issued the Support Letter of Credit for the account of the Company pursuant to the Credit Agreement, (ii) the reimbursement obligations of the Company relating to the Support Letter of Credit constitute Obligations under the Credit Agreement, (iii) such Obligations are secured by the Security Documents, including without limitation the Subsidiary Guarantees, and (iv) the Support Letter of Credit and any related applications and agreements executed in connection therewith are Basic Documents under the Credit Agreement. (b) Upon the honoring by Agent of any draft or demand under the Support Letter of Credit, such payment shall constitute a loan by Agent to the Company. The Company hereby promises to pay to Agent, or to Agent's order, immediately on demand, the full amount of such Obligation, together with interest thereon at the Post-Default Rate. The Company may request Lenders to make Revolving Credit Loans to the Company in the amount of such draft or demand, which Revolving Credit Loans may be made concurrently with Agent's payment of such draft or demand and shall be immediately used by Agent to repay the amount of the resulting Obligation. Such request by the Company shall comply in all respects with the provisions of the Credit Agreement. (c) Agent irrevocably agrees to grant and hereby grants to each Lender, and each Lender irrevocably agrees to accept and purchase and hereby accepts and purchases from Agent, on the terms and conditions hereinafter stated and for such Lender's own account and risk an undivided interest equal to such Lender's Percentage Share of Agent's obligations and rights under the Support Letter of Credit and the amount of each draft or demand paid by Agent thereunder. Each Lender unconditionally and irrevocably agrees with Agent that, if any such draft or demand is paid for which Agent is not reimbursed in full by the Company in accordance with the terms hereof and the other Basic Documents, such Lender shall (in all circumstances and without set-off or counterclaim) pay to Agent on demand, in immediately available funds at Agent's address for notices hereunder, such Lender's Percentage Share of such draft or demand (or any portion thereof which has not been reimbursed by the Company). Each Lender's obligation to make such payment to Agent is irrevocable and unconditional. If any amount required to be paid by any Lender to Agent hereunder is paid -5- within three Business Days after the due date, Agent shall in addition to such amount be entitled to recover from such Lender, on demand, interest thereon calculated from such due date at the Base Rate. If any amount required to be paid by any Lender to Agent hereunder is not paid within three Business Days after the due date, Agent shall in addition to such amount be entitled to recover from such Lender, on demand, interest thereon calculated from such due date at the Post-Default Rate. Whenever Agent receives payment of any Lender's Percentage Share of any such draft of demand, if Agent thereafter receives any payment thereof or any payment of interest thereon (whether directly from the Company or otherwise, and excluding only interest for any period prior to Agent's demand that such Lender make such payment of its Percentage Share), Agent will distribute to such Lender its Percentage Share of the amounts so received by Agent; provided, however, that if any such payment must thereafter -------- ------- be returned by Agent, such Lender shall return to Agent the portion thereof previously distributed to such Lender. A written advice setting forth in reasonable detail the amounts owing hereunder, submitted by Agent to Borrower or any Lender from time to time, shall be conclusive, absent manifest error, as to the amounts thereof. (d) In consideration of each Lender's acceptance and purchase from Agent of an undivided interest equal to such Lender's Percentage Share of Agent's obligations and rights under the Support Letter of Credit as set forth above, Agent hereby agrees to pay to each Lender for such Lender's account such Lender's Percentage Share of the quarterly letter of credit fee paid by Borrower to Agent in connection with the Support Letter of Credit. (S) 2.8 Borrowing Base. Lenders hereby designate the Borrowing Base as -------------- $75,000,000, effective for the period beginning on the date hereof, and continuing until but not including the next date as of which the Borrowing Base is redetermined. (S) 2.9 Waiver and Consent. The Company proposes to purchase a production ------------------ payment override owned by Chevron USA, Inc. and in connection therewith incur Indebtedness of up to $4,600,000. The incurrence of such Indebtedness is prohibited under Section 9.09 of the Credit Agreement. Subject to the conditions and limitations set forth hereinbelow, Lenders hereby consent to, and waive any Default or Event of Default occurring as a result of, the incurrence of up to $4,600,000 of Indebtedness in connection with such purchase of such production payment override. ARTICLE III. -- Conditions of Effectiveness --------------------------- (S) 3.1. Effective Date. This Amendment shall become effective as of the -------------- date first above written when and only when (i) Agent shall have received, at Agent's office, a counterpart of this Amendment executed and delivered by the Company and each Lender, (ii) the Company shall have paid to Agent for the account of each Lender according to its Percentage Share a facility increase fee in the aggregate amount of $50,000, (iii) the Company shall have issued and delivered to each Lender a promissory note with appropriate insertions in the form attached hereto as Exhibit A payable to the order of such Lender on or before April 1, 1998 (collectively, the "Renewal Notes"), duly executed on ------------- behalf of the Company, dated the date hereof, and expressly renewing, extending and increasing, but not novating or extinguishing, such Lender's Original Note, and (iv) Agent shall have additionally received all of the following documents, each document (unless otherwise -6- indicated) being dated the date of receipt thereof by Agent, duly authorized, executed and delivered, and in form and substance satisfactory to Agent: (A) Mortgage Amendments. A Fourth Amendment to Deed of Trust, Mortgage, ------------------- Assignment, Security Agreement and Fixture Filing among Calumet Florida, Inc., Stocker Resources, L.P., the Company and Agent, for the benefit of Lenders, amending the Original Mortgage, and a First Amendment to Mortgage, Assignment, Security Agreement and Fixture Filing between the Company and Agent, for the benefit of Lenders, amending that certain Mortgage, Assignment, Security Agreement and Fixture Filing dated March 20, 1995 by the Company in favor of Agent, for the benefit of Lenders (collectively, the "Mortgage Amendments"). ------------------- (B) Opinions of Counsel for the Company. A written opinion of (I) Michael ----------------------------------- Patterson, Esq., counsel for the Company, dated as of the date of this Amendment, addressed to Agent and Lenders, to the effect that the Amendment Documents have been duly authorized, executed and delivered by the Company and the Subsidiary Guarantors, and (II) Fulbright & Jaworski, L.L.P., counsel for the Company, dated as of the date of this Amendment, addressed to Agent and Lenders, to the effect that the Credit Agreement and the Notes constitute the legal, valid and binding obligations of the Company, enforceable in accordance with their terms (subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency and similar laws and to general principles of equity) and that the New York choice of law provisions contained therein are enforceable under Texas law. (C) Officer's Certificate. A certificate of a duly authorized officer of --------------------- the Company to the effect that all of the representations and warranties set forth in Article IV hereof are true and correct at and as of the date thereof. (D) Supporting Documents. (I) A certificate of the Secretary of the -------------------- Company dated the date of this Amendment certifying that attached thereto is a true and complete copy of resolutions adopted by the Board of Directors of the Company authorizing the execution, delivery and performance of the Amendment Documents and certifying the names and true signatures of the officers of the Company authorized to sign the Amendment Documents and (II) such supporting documents as Agent may reasonably request. ARTICLE IV. -- Representations and Warranties ------------------------------ (S) 4.1. Representations and Warranties of the Company. In order to --------------------------------------------- induce Agent and Lenders to enter into this Amendment, the Company represents and warrants to Agent and Lenders that: (a) The representations and warranties contained in Section 8 of the Original Agreement, are true and correct at and as of the time of the effectiveness hereof, subject to the amendment of certain of the Schedules to the Credit Agreement as attached hereto. -7- (b) The Company and the Subsidiaries are duly authorized to execute and deliver this Amendment and the other Amendment Documents to the extent a party thereto, and the Company is and will continue to be duly authorized to borrow and perform its obligations under the Credit Agreement. The Company and the Subsidiaries have duly taken all corporate action necessary to authorize the execution and delivery of this Amendment and the other Amendment Documents, to the extent a party thereto, and to authorize the performance of their respective obligations thereunder. (c) The execution and delivery by the Company and the Subsidiaries of this Amendment and the other Amendment Documents, to the extent a party thereto, the performance by the Company and the Subsidiaries of their respective obligations hereunder and thereunder, and the consummation of the transactions contemplated hereby and thereby, do not and will not conflict with any provision of law, statute, rule or regulation or of the certificate or articles of incorporation and bylaws of the Company or any Subsidiary, or of any material agreement, judgment, license, order or permit applicable to or binding upon the Company or any Subsidiary, or result in the creation of any lien, charge or encumbrance upon any assets or properties of the Company or any Subsidiary, except in favor of Agent for the benefit of Lenders. Except for those which have been duly obtained, no consent, approval, authorization or order of any court or governmental authority or third party is required in connection with the execution and delivery by the Company or any Subsidiary of this Amendment or any other Amendment Document, to the extent a party thereto, or to consummate the transactions contemplated hereby and thereby. (d) When this Amendment and the other Amendment Documents have been duly executed and delivered, each of the Basic Documents, as amended by this Amendment and the other Amendment Documents, will be a legal and binding instrument and agreement of the Company and the Subsidiaries, to the extent a party thereto, enforceable in accordance with its terms, (subject, as to enforcement of remedies, to applicable bankruptcy, insolvency and similar laws applicable to creditors' rights generally and to general principles of equity). ARTICLE V. -- Miscellaneous ------------- (S) 5.1. Ratification of Agreements. The Original Agreement, as hereby -------------------------- amended, is hereby ratified and confirmed in all respects. The Basic Documents, as they may be amended or affected by this Amendment and/or the other Amendment Documents, are hereby ratified and confirmed in all respects. Any reference to the Credit Agreement in any Basic Document shall be deemed to refer to this Amendment also. The execution, delivery and effectiveness of this Amendment and the other Amendment Documents shall not, except as expressly provided herein or therein, operate as a waiver of any right, power or remedy of Agent or any Lender under the Credit Agreement or any other Basic Document nor constitute a waiver of any provision of the Credit Agreement or any other Basic Document. (S) 5.2. Ratification of Security Documents. The Company, Agent and ---------------------------------- Lenders each acknowledge and agree that any and all indebtedness, liabilities or obligations arising under -8- or in connection with the Notes are Obligations and is secured indebtedness under, and is secured by, each and every Security Document to which the Company is a party. The Company hereby re-pledges, re-grants and re-assigns a security interest in and lien on every asset of the Company described as collateral in any Security Document. (S) 5.3. Survival of Agreements. All representations, warranties, ---------------------- covenants and agreements of the Company herein and in the other Amendment Documents shall survive the execution and delivery of this Amendment and the other Amendment Documents and the performance hereof and thereof, including without limitation the making or granting of each Loan, and shall further survive until all of the Obligations are paid in full. All statements and agreements contained in any certificate or instrument delivered by the Company or any Subsidiary hereunder, under the other Amendment Documents or under the Credit Agreement to Agent or any Lender shall be deemed to constitute representations and warranties by, or agreements and covenants of, the Company under this Amendment and under the Credit Agreement. (S) 5.4. Basic Documents. This Amendment and each of the other Amendment --------------- Documents is a Basic Document, and all provisions in the Credit Agreement pertaining to Basic Documents apply hereto and thereto. (S) 5.5. GOVERNING LAW. THIS AMENDMENT AND THE OTHER AMENDMENT DOCUMENTS -------- ---------------------------------------------------------------- SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF - ------------------------------------------------------------------------------ NEW YORK AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA IN ALL - ----------------------------------------------------------------------- RESPECTS, INCLUDING CONSTRUCTION, VALIDITY AND PERFORMANCE. - ----------------------------------------------------------- (S) 5.6. Counterparts. This Amendment and each of the other Amendment ------------ Documents may be separately executed in counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment or Amendment Document, as the case may be. IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. PLAINS RESOURCES INC. By:/s/ Phillip D. Kramer Phillip D. Kramer Vice President and Chief Financial Officer -9- INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION, individually as a Lender and as Agent By:/s/ Robi Artman-Hodge Robi Artman-Hodge, Managing Director THE FIRST NATIONAL BANK OF BOSTON, Lender By:/s/ George W. Passela George W. Passela, Managing Director DEN NORSKE BANK AS, Lender By: Name: /s/ Charles E. Hall Title: First Vice President By: Name: /s/ Nils Fykse Title: Vice President FIRST INTERSTATE BANK OF TEXAS, N.A., Lender By:/s/ John A. Fields John A. Fields, Vice President TEXAS COMMERCE BANK NATIONAL ASSOCIATION, Lender By:/s/ Gary K. Wright Gary K. Wright, Executive Vice President -10- CONSENT AND AGREEMENT --------------------- Each of the undersigned Subsidiary Guarantors hereby consents to the provisions of this Amendment and the transactions contemplated herein and hereby (i) acknowledge and agree that any and all indebtedness, liabilities or obligations arising under or in connection with the Notes and the Renewal Notes are Obligations and are secured indebtedness under, and is secured by, each and every Security Document to which it is a party, (ii) re-pledges, re-grants and re-assigns a security interest in and lien on all of its assets described as collateral in any Security Document and (iii) ratifies and confirms its Amended and Restated Guaranty dated February 11, 1994 made by it for the benefit of Agent and Lenders, expressly acknowledges and agrees that such Subsidiary Guarantor guarantees all indebtedness, liabilities and obligations arising under or in connection with the Notes and the Renewal Notes pursuant to the terms of such Amended and Restated Guaranty, and agrees that its obligations and covenants thereunder are unimpaired hereby and shall remain in full force and effect. CALUMET FLORIDA, INC. a Delaware corporation By:/s/ Phillip D. Kramer Phillip D. Kramer, Vice President PLAINS LIQUIDS TRANSPORT INC., a Delaware corporation By:/s/ Phillip D. Kramer Phillip D. Kramer, Vice President PLAINS MARKETING & TRANSPORTATION INC., a Delaware corporation By:/s/ Phillip D. Kramer Phillip D. Kramer, Vice President PLAINS RESOURCES INTERNATIONAL INC., a Delaware corporation By:/s/ Phillip D. Kramer Phillip D. Kramer, Vice President -11- PLAINS TERMINAL & TRANSFER CORPORATION, a Delaware corporation By:/s/Phillip D. Kramer Phillip D. Kramer, Vice President PRI PRODUCING INC., a Delaware corporation By:/s/ Phllip D. Kramer Phillip D. Kramer, Vice President PLX CRUDE LINES INC., a Delaware corporation By:/s/ Phillip D. Kramer Phillip D. Kramer, Vice President STOCKER RESOURCES, INC., a California corporation By:/s/ Phillip D. Kramer Phillip D. Kramer, Vice President STOCKER RESOURCES, L.P., a California limited partnership By: Stocker Resources, Inc., its General Partner By:/s/ Phillip D. Kramer Phillip D. Kramer, Vice President -12- EX-10.M 4 PLAINS UNCOMMITTED CREDIT FACILITY EXHIBIT 10.M August 23, 1995 Plains Marketing & Transportation Inc. 1600 Smith Street Houston, TX 77002 Re: Uncommitted Secured Demand Transactional Line of Credit Facility ---------------------------------------------------------------- Gentlemen: The purpose of the following is to outline the parameters of the uncommitted secured demand transactional line of credit facility (the "MARKETING FACILITY") ------------------ which The First National Bank of Boston ("FNBB"), Internationale Nederlanden ---- (U.S.) Capital Corporation ("ING") and such other banks as may from time to time --- become parties hereto by signing below or by executing an Instrument of Accession in the form of Exhibit A attached hereto (collectively, the "LENDERS") --------- ------- and FNBB, as agent for the Lenders (in such capacity, the "AGENT"), are prepared ----- to provide to Plains Marketing & Transportation Inc. ("BORROWER") for the -------- issuance of standby letters of credit and demand loans (each an "ACCOMMODATION" ------------- and collectively, the "ACCOMMODATIONS"). An "uncommitted secured demand -------------- transactional line of credit facility" means that the Lenders shall have no obligation, under any circumstances, to issue, grant or make any Accommodation. Each request made by Borrower for an Accommodation shall be reviewed by the Lenders on a case by case basis and the decision to grant any Accommodation shall be made by the Lenders in their absolute and sole discretion in light of considerations which the Lenders in their sole discretion deem pertinent and irrespective of whether or not the Borrower is in compliance with any of the guidelines set forth in Schedule 4 hereto. The Lenders also reserve the right ---------- to summarily refuse any request for an Accommodation without any review as contemplated by the preceding sentence. Accordingly, the Lenders have no commitment to make any Accommodation available. FURTHERMORE, THE LENDERS MAY DEMAND REPAYMENT OF ANY AMOUNTS OUTSTANDING HEREUNDER OR WITH RESPECT TO ANY ACCOMMODATION AND, AS HEREINAFTER PROVIDED, PREPAYMENT OF ANY AND ALL UNDRAWN AMOUNTS AVAILABLE FOR DRAWING UNDER ANY ISSUED AND OUTSTANDING L/C (AS HEREINAFTER DEFINED) OR OF ANY OBLIGATIONS SECURED BY SUCH L/C AT ANY TIME IN THE LENDERS' SOLE DISCRETION. 1. THE FACILITY. The parameters of the uncommitted secured demand ------------ transactional line of credit facility shall be as follows until further notice by the Agent and the Lenders: (a) BORROWER: Plains Marketing & Transportation Inc., a Delaware -------- corporation. -2- (b) MARKETING FACILITY AMOUNT: The aggregate amount of the ------------------------- Accommodations which may be made available by the Lenders and which will be allowed to be outstanding at any one time under the Marketing Facility shall be restricted to the excess of (i) an amount which shall be $70,000,000 during periods when the NYMEX price for West Texas Intermediate crude oil ("WTI") is --- equal to or less than $20.00 per barrel and which shall increase by $2,500,000 for each $1.00 per barrel increase in the NYMEX price of WTI above $20.00 per barrel up to a maximum amount of $80,000,000, such increase in the amount of the Marketing Facility to be determined at the time of the issuance or advance of any Accommodation over (ii) the then aggregate amount of the outstanding Accommodations made by the Lenders to or for the account of PMCT Inc., a Delaware corporation ("PMCT"), under that certain letter agreement of even date ---- herewith, as amended and in effect (the "PMCT AGREEMENT"), among the Lenders, -------------- the Agent and PMCT (such difference in amount, as in effect from time to time under the Marketing Facility, hereinafter referred to as the "MARKETING FACILITY ------------------ AMOUNT"). PLEASE NOTE THAT THE LENDERS MAY MODIFY THE MARKETING FACILITY AMOUNT - ------ AT ANY TIME IN THEIR SOLE DISCRETION. In the event such modification results in a decrease in the Marketing Facility Amount below the then aggregate amount of outstanding Accommodations, the Borrower will, within one (1) Business Day (as defined below), or as hereinafter provided, repay the amount of outstanding Accommodations in excess of the modified Marketing Facility Amount or repay the undrawn amounts available for drawing under L/Cs in excess of the modified Marketing Facility Amount, unless notified otherwise by the Agent. As used herein, "BUSINESS DAY" shall mean any day on which commercial lenders are not ------------ authorized or required to close in Boston, Massachusetts and New York, New York. (c) LENDERS' SHARES: Each Lender shall be offered the opportunity to --------------- fund or participate in that percentage of every requested Accommodation as set forth opposite such Lender's name on Schedule 1 hereto (its "SCHEDULE 1 ---------- PERCENTAGE"). If any Lender shall decline to so fund or participate in such - ---------- requested Accommodation, any combination of one or more of the other Lenders may additionally fund or purchase a participation in the requested Accommodation in the entire or a pro rata portion of such declining Lender's Schedule 1 -------- Percentage of such Accommodation, provided that in no event shall any Lender's -------- interest in any Accommodation exceed a sum representing such Lender's Schedule 1 Percentage multiplied by the Marketing Facility Amount. (d) TYPES OF ACCOMMODATIONS; SUBLIMITS: The types of and limits on ---------------------------------- Accommodations which may be made available under the Marketing Facility shall be the following: (i) Standby Letters of Credit: Standby letters of credit having an ------------------------- expiration date no later than 70 days after the date of issuance, extension or -3- renewal thereof issued for the account of Borrower to support the purchase and exchange by Borrower of crude oil from producers and other third parties (the "L/CS"); ---- (ii) Demand Loans: Demand loans which may be made by the Lenders to ------------ Borrower in an aggregate principal amount at any time outstanding not to exceed $20,000,000 less the amount of Demand Loans then outstanding under the PMCT Agreement (the "DEMAND LOANS"), the proceeds of which ------------ are to be used for any of the following purposes: (x) to finance the purchase and physical storage of crude oil which is fully hedged on the NYMEX and located in the terminalling and storage facilities owned by Plains Terminal & Transfer Corporation in Cushing, Oklahoma (the "CUSHING TERMINAL") or in transit in specified pipelines approved by ----------------- the Lenders and listed on Schedule 5 hereto (the "CASH AND CARRY ---------- -------------- PIPELINES") or (y) to finance up to ninety (90%) of the value, --------- calculated on a marked-to-market basis, of inventory designated by the requesting Borrower as so-called "working inventory" at the Cushing Terminal or as linefill in Cash and Carry Pipelines. (e) EXPIRATION: (i) No request for any Accommodation may be made after ---------- the first anniversary of the date hereof unless the Lenders, in their sole discretion and without any obligation to do so, extend such date in writing. (ii) All Accommodations are payable ON DEMAND. Any Lender may, at any time and in its sole discretion, demand payment of all amounts owing to the Lenders under the Marketing Facility; provided that any -------- Lender not then making such demand for payment with respect to Accommodations made by it may waive such demand with respect only to the Accommodations made by it. In addition, those Lenders having a pro rata share of the Accommodations at least equal to sixty-seven -------- percent of the Accommodations (the "REQUIRED LENDERS") may at any time ---------------- in their sole discretion demand that the Borrower prepay in cash all or any part or fraction of the undrawn amount available for drawing under any issued and outstanding L/C or the obligations secured by such L/C by delivery to the Agent. Each Lender demanding payment of any outstanding amounts owing to the Lenders under the Marketing Facility or prepayment of any undrawn amounts available for drawing under any issued and outstanding L/C or of any obligations secured by such L/C shall promptly notify the Borrower of the reason for such demand. "CASH EQUIVALENTS" means repurchase agreements and short term ---------------- obligations issued or guaranteed as to principal -4- and interest by the United States of America and having a maturity of not more than 12 months from the date of acquisition; short-term certificates of deposit issued by any bank organized under the laws of the United States of America or any state thereof if such bank has a short-term debt rating of not less than P-1 or A-1 or their equivalent by Moody's Investor Service or Standard & Poor's Corporation, respectively; short-term certificates of deposit issued by, and so- called Eurodollar "call deposits" at, any Lender or any foreign subsidiary or affiliates of such Lender, if any investments issued by such Lender or foreign subsidiary or affiliate, as applicable, has a rating of not less than A or its equivalent, or P-1 or A-1 or their equivalent, as applicable, by Moody's Investor Service or Standard & Poor's Corporation, respectively; or commercial paper or finance company paper that is rated not less than P-1 or A-1 or their equivalents by Moody's Investor Service or Standard & Poor's Corporation, respectively. (iii) Upon the occurrence of a Bankruptcy Event, all obligations and liabilities of Borrower to the Lenders with respect to the Accommodations, including, without limitation, the obligation to prepay any and all amounts available for drawing under any issued and outstanding L/C and all other obligations and liabilities of Borrower to the Lenders arising under this letter agreement (the "MARKETING --------- LETTER AGREEMENT") or any agreements, instruments or documents ---------------- executed in connection herewith (collectively with the Marketing Letter Agreement, the "MARKETING FACILITY DOCUMENTS") shall become ---------------------------- immediately due and payable. "BANKRUPTCY EVENT" means any event ---------------- pursuant to which Borrower makes an assignment for the benefit of creditors, or admits in writing its inability to pay or generally fails to pay its debts as they mature or become due, or petitions or applies for the appointment of a trustee or other custodian, liquidator or receiver of Borrower or of any substantial part of its assets or commences any case or other proceeding relating to Borrower under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or takes any action to authorize, or in furtherance of, any of the foregoing, or if any such petition or application shall be filed or any such case or other proceeding shall be commenced against Borrower and Borrower shall indicate its approval thereof, consent thereto or acquiescence therein, or a decree or order is entered appointing any such trustee, custodian, liquidator or receiver or adjudicating Borrower bankrupt or insolvent, or approving a petition in any such case or other proceeding, or a decree or order for relief -5- is entered in respect of Borrower in an involuntary case under federal bankruptcy laws as now or hereafter constituted. (f) PRICING: The following will apply until further notice by the Agent: ------- (i) Demand Loans: Subject to paragraph 1(f)(v) hereof, the annual ------ ----- rate of interest on the unpaid principal balance of Demand Loans from time to time outstanding shall be equal to either (i) the Base Rate plus five-eighths of one percent (5/8%) per annum or (ii) the ---- Eurodollar Rate for the applicable interest period plus two percent ---- (2%) per annum, as such rates are selected by Borrower pursuant to Section 1(g) hereof, in each case computed on the basis of a 360-day year. Interest calculated by reference to the Base Rate shall be payable quarterly in arrears. Interest calculated by reference to the Eurodollar Rate shall be payable at the end of any applicable interest period selected by Borrower for such Demand Loan pursuant to Section 1(g) hereof. "BASE RATE" means the higher of (a) the annual rate of --------- interest announced from time to time by FNBB as its "base rate" at its head office in Boston, Massachusetts or (b) 1/2% above the overnight federal funds rate from time to time in effect; provided, that such -------- rate may not be the lowest rate at which funds are made available to customers of FNBB at such time. "EURODOLLAR RATE" means for any --------------- interest period of one, two or three months (as selected by Borrower pursuant to Section 1(g) hereof), the annual rate of interest (rounded upwards, if necessary, to the nearest 1/16th of 1%) determined by the Agent at or about 10:30 a.m., Boston time, two Business Days on which Lenders are able to conduct eurodollar transactions preceding the first day of such interest period, as being (a) the average of the per annum rates at which deposits of United States dollars are offered to the Agent by prime banks in any lawful recognized market selected by the Agent, in its sole discretion acting in good faith and in accordance with its usual practice, in which United States dollars are offered by banking institutions to each other for delivery on the first day of such interest period for the number of days comprised therein and in an amount equal (as nearly as may be) to the amount of the Demand Loan to be subject to such Eurodollar Rate divided by (b) ------- one minus the Reserve Rate. The "RESERVE RATE" for any date is the ------------ maximum percentage (expressed as a decimal) in effect on such date at which the Agent is required to maintain reserves under Regulation D of the Board of Governors of the Federal Reserve System against "EUROCURRENCY LIABILITIES". The Reserve Rate shall be adjusted ------------------------- automatically on and as of the effective date of any change therein. -6- (ii) Letters of Credit. ----------------- (x) For the issuance of an L/C, Borrower shall pay to any Lender issuing such L/C (in such capacity, an "ISSUING LENDER"), for -------------- the pro rata accounts of the Lenders participating in such L/C, a --- ---- fee equal to the greater of (A) 1-1/2% per annum of the maximum drawing amount of such L/C on the date of issuance calculated for the period during which such L/C is outstanding or (B) 1/4% flat of the maximum drawing amount of such L/C on the date of issuance, such fee to be estimated and payable upon the issuance of such L/C and any unpaid balance of such fee to be payable upon any drawing under, and upon the expiration or termination of, such L/C. (y) In addition to the fees set forth in clause (x) above, Borrower shall pay to the Issuing Lender for its own account an additional issuance fee of $100 per L/C, payable on the date of issuance thereof, and such other fees and charges customarily charged by the Issuing Lender in respect of L/Cs. (iii) Overdue Amounts. All overdue amounts payable with respect to --------------- the Demand Loans, including without limitation interest, principal and fees, and reimbursement obligations in respect to drawn L/Cs shall bear interest payable on demand at a rate per annum equal to four percent above the Base Rate from the date of such nonpayment until paid in full and whether before or after the entry of judgment thereon. (iv) Charges to the Borrower's Accounts. Borrower authorizes the ---------------------------------- Agent and the Lenders to charge Borrower's account at any of the Lenders for any interest and fees stated herein and due and payable by Borrower; provided that in the absence of a demand for payment of the -------- Accommodations or in the case of undrawn amounts available for drawing under any L/C or the obligations secured by such L/C, prepayment of such amounts, the Agent or the Lender charging such account shall give Borrower prior notice of its intention to do so. (v) Limitation on Interest. It is the intention of the parties ---------------------- hereto that the Agent and each Lender shall conform strictly to usury laws applicable to it. Accordingly, if the transactions contemplated hereby would be usurious as to the Agent or any Lender under applicable laws then, in that event, notwithstanding anything to the contrary in this Marketing Letter Agreement or any other Marketing Facility Document, it is agreed that the -7- aggregate of all consideration which constitutes interest under any law applicable to the Agent or any Lender that is contracted for, taken, reserved, charged or received by such Lender under this Marketing Letter Agreement or under any other Marketing Facility Document shall under no circumstances exceed the maximum amount allowed by such applicable law, and any excess shall be credited by the Agent or such Lender to the principal amount of the Demand Loans or, if the principal amount of the Demand Loans shall have been or would thereby be paid in full, refunded by the Agent or such Lender to Borrower. (vi) No pricing applicable to any particular outstanding Accommodation shall be changed after the making or issuance of such Accommodation without Borrower's written consent. Notwithstanding the above, nothing herein shall affect the Lenders' right to demand payment, as set forth herein, in their sole discretion, of such Accommodation and to charge the rate of interest applicable to overdue amounts thereon as set forth in Section 1(f)(iii) if such demand is not met. (g) PROCEDURES FOR REQUESTING ACCOMMODATIONS: The following procedures ---------------------------------------- will assist the Lenders in considering Borrower's requests for Accommodations: (i) To Request a Demand Loan: To request a Demand Loan, the -- ------- - ------ ---- Borrower shall, in a notice to the Agent in the form of Exhibit B --------- hereto (a "DEMAND LOAN NOTICE"), delivered no later than 11:00 a.m. ------------------ Boston, Massachusetts time (x) on the Business Day on which the Demand Loan is requested to be made if it is to bear interest calculated by reference to the Base Rate and (y) three Business Days prior to the day on which the Demand Loan is requested to be made if it is to bear interest calculated by reference to the Eurodollar Rate, specify the amount of such Demand Loan, whether such Demand Loan is to bear interest calculated by reference to the Base Rate or to the Eurodollar Rate and, if such Demand Loan is to bear interest calculated by reference to the Eurodollar Rate, the interest period to be applicable thereto which may be one, two or three months and shall also specify the Business Day on which the Demand Loan then requested is to be made; (ii) To Request a Letter of Credit: To request an L/C, Borrower -- ------- - ---------------- shall submit to the Agent a completed letter of credit application in substantially the form of Exhibit C hereto or, if the Agent shall ------- - designate, upon prior notice to the Borrower, a Lender other than FNBB to be the -8- Issuing Lender with respect to such requested L/C, in the form of letter of credit application requested by such Lender. In the event that any provision of the letter of credit application shall be inconsistent with any provision of this Marketing Letter Agreement, then the provisions of this Marketing Letter Agreement shall, to the extent of any such inconsistency, govern; and (iii) Representations, etc. Any request for an Accommodation --------------- --- shall automatically constitute a certification that the representations and warranties contained in Schedule 2 hereof are true -------- - and correct on the date of such request and that all the guidelines set forth in Schedule 4 attached to this Marketing Letter Agreement on ---------- the date of such request have been and are met, unless otherwise set forth in a writing submitted by Borrower in connection with the request for the corresponding Accommodation. Disclosure that Borrower has not met or does not meet such guidelines shall in no way affect the Lenders' right to demand payment or prepayment of any Accommodation or any obligation secured by any L/C, as set forth herein, in their sole discretion or to refuse to make or issue an Accommodation in their sole discretion. (h) PAYMENTS: All payments due with respect to the Accommodations, -------- including, without limitation, prepayments of any undrawn amounts available for drawing under any L/C or of the obligations secured by such L/C, shall be made to the Agent or, with respect to an L/C, the Issuing Lender, for the respective accounts of the Lenders and the Agent, and shall be paid to the Agent or such Issuing Lender at the address set forth on the signature page of this Marketing Letter Agreement for notices to the Agent or such Issuing Lender or at such other address as the Agent or Issuing Lender may from time to time designate, in each case in immediately available funds. (i) ACCOMMODATIONS: All Accommodations or transactions related thereto -------------- must meet the following criteria in addition to any other requirements that may be imposed by the Lenders in their sole discretion from time to time: (i) Copies of all applicable written purchase and sale contracts for the purchase and sale of crude oil in form acceptable to the Agent and other relevant third party documentation must be provided to the Agent and the Lenders prior to the issuance or advance of any Accommodation securing Borrower's obligation in connection with such transaction; (ii) The obligations of the third party purchaser in any matched purchase and sale transaction for which an L/C is to be issued shall be -9- secured in an amount at least equal to 100% of the maximum drawing amount of such L/C by any combination of cash, Cash Equivalents, accounts receivable approved by the Agent, or accounts receivable secured by letters of credit from acceptable financial institutions advised through the Agent; (iii) Notification of the assignment to the Issuing Lender, as agent for the Lenders of the proceeds of a sale contract relating to a purchase and sale transaction for which an Accommodation is to be issued or made has been or will be, prior to the making or issuance of the Accommodation, accomplished by the following means: (A) Borrower has notified or will, promptly, and in any event prior to the making or issuance of the related Accommodation, notify the account debtor on such sale contract in writing, either by separate correspondence and/or in Borrower's sales contract, of the assignment to the Issuing Lender, as agent for the Lenders, of proceeds of such sale contract and has given or will, prior to the making or issuance of the related Accommodation, give irrevocable instructions to such account debtor to make payment on such sale contract, without offset or counterclaim unless the Lenders, through the Agent, have given their specific prior approval for the Borrower to give effect to any net-out or offset agreements, to Borrower's account at the Issuing Lender, as agent for the Lenders, by wire transfer; and (B) Agent shall notify such account debtor of the assignment of such sale contract and the proceeds relating thereto to the Agent or the Issuing Lender as agent for the Lenders, and of Borrower's instruction to pay such proceeds, without offset or counterclaim, unless the Lenders, through the Agent, have given their specific prior approval for the Borrower to give effect to any net-out or offset agreements, to Borrower's account at the Issuing Lender, as agent for the Lenders, by wire transfer. (iv) Borrower shall endeavor, and Agent shall be satisfied that Borrower has endeavored, to include the notification and instructions referred to in clause (i)(iii)(A) above in such Borrower's sales contracts; -10- (v) Notification of the assignment to the Issuing Lender, as agent for the Lenders, of the proceeds of each letter of credit securing a sale contract relating to a purchase and sale transaction for which an Accommodation is to be issued or made has been or will, prior to the making or issuance of the related Accommodation, be accomplished by the following means: (A) Borrower has notified the issuer of such letter of credit in writing of the assignment of such proceeds to the Issuing Lender, as agent for the Lenders, and has given irrevocable instructions to such issuing bank to pay such proceeds, without offset or counterclaim unless the Lenders, through the Agent, have given their specific prior approval for the Borrower to give effect to any net-out or offset agreements, to such Borrower's account at the Issuing Lender, as agent for the Lenders; and (B) Borrower or such issuer has delivered the original of such letter of credit to the Issuing Lender, as agent for the Lenders. (vi) Funds from any account debtor with respect to a sale contract in a purchase and sale transaction for which an L/C was issued which are received in advance of payment under such L/C shall be maintained as cash collateral with the Issuing Lender, as agent for the Lenders, for such L/C and shall be paid over and delivered to Borrower upon expiration (without drawdown) of such L/C unless the Lenders have demanded payment of any Accommodations, or prepayment of any undrawn amounts available for drawing under any other L/C or of the obligations secured thereby, as permitted herein, and such demand has not been met; (vii) Payments made to suppliers under outstanding L/C will be made through the Issuing Lender, as agent for the Lenders, by wire transfer with reference to the corresponding L/C to facilitate the reduction or cancellation of such L/C; and (viii) Marine cargo, transportation, and other insurance as appropriate, shall name the Agent or Issuing Lender, as agent for the Lenders, as loss payee or co-loss payee to the extent of its interest in any purchase and sale transaction for which an Accommodation has been made or issued. -11- (j) REPORTING AND INSPECTION REQUIREMENTS: For so long as any ------------------------------------- Accommodation is outstanding under this Marketing Letter Agreement or Borrower wishes to request any Accommodations under this Marketing Letter Agreement and to enable the Lenders to carry out an ongoing financial review of Borrower, Borrower shall furnish each of the Lenders with the following: (i) within 45 days following the end of each month, a monthly unaudited balance sheet and income statement, prepared in accordance with generally accepted accounting principles ("GAAP"), subject to ---- year-end adjustments, together with a certificate regarding the financial and other guidelines set forth in Schedule 4 to this ---------- Marketing Letter Agreement (the "FINANCIAL AND OTHER GUIDELINES") in ------------------------------ the form attached as Exhibit D hereto (and showing calculations for --------- the financial performance guidelines set forth in paragraphs (i), (ii) and (iii) of Schedule 4 hereto) demonstrating that the Borrower has ---------- met, or has not met, as applicable, such operating guidelines, signed by the Borrower's chief financial officer or principal accounting officer; (ii) within 120 days following Borrower's fiscal year end, audited balance sheets and statements of income and retained earnings from Price Waterhouse L.L.P. or, in lieu of Price Waterhouse L.L.P., an independent public accounting firm selected by Borrower and acceptable to the Agent, prepared in accordance with GAAP; (iii) on a daily basis, MERC position reports of Borrower as of the end of the immediately preceding Business Day and, at such other intervals as the Agent may request, reports of inventory held by Borrower; (iv) as soon as possible and, in any event prior to the date requested for the issuance of L/C hereunder on a monthly basis, a monthly scheduling forecast report listing purchases, sales and exchange volumes, counterparties, pricing indices and other information relating to crude oil purchases and exchanges for the next month, together with copies of purchase and sales contracts and an estimate of the gross profit margin and operating income for such month; (v) immediate notice of any material adverse change in the business of Borrower, including without limitation, any threatened or pending -12- material litigation against Borrower or any event which may give rise to any material litigation or claim under any environmental law; (vi) immediate notice of any material default by Plains Resources, Inc., a Delaware corporation ("RESOURCES") with respect to any --------- indebtedness of Resources in excess of $50,000, including defaults under that certain Second Amended and Restated Credit Agreement dated as of February 11, 1994, as amended, among Resources, ING, as agent, and the Lenders named therein (the "RESOURCES CREDIT AGREEMENT"); -------------------------- (vii) on a monthly basis, a report of the value, calculated on a marked-to-market basis, of inventory designated by the Borrower as so- called "working inventory" at the Cushing Terminal or as linefill in Cash and Carry Pipelines, provided that Borrower will deliver an additional -------- report within two days of any downward fluctuation in the value of such inventory stated in the most recent monthly report by an amount equal to or greater than $500,000; (viii) if requested by any of the Lenders, Borrower will furnish to the requesting Lender in connection with any Accommodation hereunder a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in said Regulation U; and (ix) such other financial or other information about Borrower as any Lender may request. In addition, at least twice per year, and more frequently if requested by the Required Lenders, the Lenders or any of their agents or representatives shall have the right to conduct a commercial finance examination, including the right to examine and make copies and abstracts from the records and books of account of, and visit the properties of, Borrower and to discuss the affairs, finances and accounts of Borrower with any of Borrower's officers, directors and, upon prior written notice to Borrower, independent accountants. All expenses relating to not more than two such commercial finance examinations per year shall be for the account of Borrower, provided Borrower will be responsible -------- for more than two such commercial finance examinations per year if agreed to by the Borrower or if any demand has been made by any Lender for the payment by Borrower of outstanding Accommodations owing to such Lenders, or by the Required Lenders for the prepayment of any undrawn amounts available for drawing under any L/C or of any obligations secured by such L/C, and such demand has not been met or withdrawn. -13- (k) FINANCIAL AND OTHER GUIDELINES. In determining whether to issue or ------------------------------ extend, as applicable, any Accommodation, and in no way limiting the imposition, from time to time, of other reasonable requirements by the Lenders or the discretionary nature of this Marketing Facility, the Lenders will rely on Borrower's representations and warranties given pursuant to Section 1(g)(iii) that as of the date of each request by Borrower for an Accommodation, each of the Financial and Other Guidelines are met and, up to the date of such request, have been met by Borrower, unless the Lenders have otherwise been notified by Borrower. In order to induce the Lenders to issue or make Accommodations, Borrower hereby agrees to make such representations and warranties pursuant to Section 1(g) hereof and hereby covenants that it will immediately notify the Agent and the Lenders if, at any time, such Financial and Other Guidelines are not then met by the Borrower. Whether or not the Financial and Other Guidelines are, at any time, met shall in no way affect the Lenders' ability to demand repayment of any Demand Loans outstanding hereunder or to demand prepayment of any undrawn amounts available for drawing under any L/C or of the obligations secured by such L/C or the Lenders' right to refuse to advance any Accommodations. The Agent, Lenders and Borrower acknowledge that the Financial and Other Guidelines are meant to provide parameters for Borrower's operations and serve only as a basis for Borrower to keep the Agent and Lenders apprised of the status of its operations. 2. GENERAL DOCUMENTATION. (a) Prior to Borrower's initial request for an ---------------------- Accommodation under the Marketing Facility, Borrower shall execute and/or deliver, or cause to be executed and/or delivered, to the Agent and the Lenders (i) a security agreement, in form and substance of Exhibit E hereto and in any ------- - event sufficient to grant to the Agent a continuing, perfected, first priority lien on all of the assets of Borrower to secure Borrower's obligations with respect to or in connection with the Accommodations, (ii) pledges, in form and substance of Exhibit F hereto, of all of the Borrower's deposit and margin ------- - accounts and acknowledgments of and consents to such pledges from the financial institutions with which such accounts are maintained, (iii) a guaranty, in form and substance of Exhibit G hereto, by Resources of all of Marketing's payment ------- - obligations with respect to or in connection with the Accommodations, together with a letter of credit in form and substance of Exhibit H hereto issued by a ------- - bank acceptable to the Lenders in the face amount of $1,000,000 to secure Resources' obligations under such guaranty (items (i) through (iii), collectively, the "SECURITY DOCUMENTS"), (iv) promissory notes evidencing the ------------------ Borrower's obligations to repay the Demand Loans and any drawings under the L/Cs (the "NOTES") in form and substance of Exhibit I hereto and (v) such other ----- ------- - documents and instruments requested by the Agent and the Lenders, including, without limitation those documents and instruments listed on that certain Closing Agenda prepared in connection with the execution of this Marketing Letter Agreement. -14- (b) Notwithstanding, the foregoing, any Accommodation which the Lenders, in their sole discretion, may make or issue shall be on such terms and conditions as the Lenders may require and shall be evidenced by documentation in form and substance satisfactory to the Lenders and shall be subject thereto. If, however, the Lenders shall make or issue any Accommodation and the Lenders shall not specify other terms, conditions or documentation applicable thereto, then such Accommodation shall be subject to the terms and conditions set forth in this Marketing Letter Agreement. 3. INDEMNIFICATION. Borrower shall indemnify and hold harmless the Agent --------------- and each of the Lenders and each of their respective directors, officers, employees and agents from and against (a) any and all damages, losses, liabilities, reasonable costs, and expenses, including, without limitation, reasonable legal, and/or outside accounting, investment banking and other professional fees paid or incurred by the Agent or any of the Lenders, which shall arise out of, result from or in any way relate to any investigation, litigation or proceeding (actual or threatened) relating to the extension of Accommodations under this Marketing Letter Agreement, the Marketing Facility Documents, the Marketing Facility, any Accommodation issued or made hereunder, the violation or alleged violation of any environmental law or involving or respecting any inventory or product sold to or by any Borrower and (b) all related reasonable costs and expenses, including, without limitation, legal, and/or outside accounting, investment banking and other professional fees paid or incurred by the Agent or any of the Lenders in connection with any effort to mitigate or defend against such damages, losses and liabilities, actual or potential, and to otherwise protect the Agent's or any of the Lenders' interests in connection with any matter which may give rise to such damages, losses and liabilities (but excluding any such damages, losses, liabilities, costs and expenses, and related costs and expenses, incurred by reason of the gross negligence or willful misconduct by the person or entity seeking to be indemnified hereunder). Without prejudice to any of the foregoing provisions of this Agreement, Borrower will on demand by any Lender indemnify such Lender against any losses, costs and expenses which such Lender may at any time or from time to time sustain or incur with respect to any Demand Loan which bears interest calculated by reference to the Eurodollar Rate as a consequence of Borrower's failure to borrow such Demand Loan on the date designated for Borrower therefor or to repay such Demand Loan on the last day of the Interest Period relating thereto or if any principal payment thereof is made, whether before or after demand, on any day other than the last day of the interest period relating thereto, including interest or fees payable by such Lender to lenders of funds obtained by it in order to maintain such Demand Loan for such interest period. Such losses, costs and expenses shall be determined by such Lender in good faith on a commercially reasonable basis. 4. EXPENSES. Whether or not any Accommodations shall be made hereunder, -------- Borrower agrees to pay: -15- (i) the reasonable cost of (x) reproducing this Marketing Letter Agreement and the other Marketing Facility Documents and (y) any taxes (including any interest and penalties in respect thereto) or filing fees payable by the Agent or the Lenders (other than taxes based upon the Agent's or any Lender's net income) on or with respect to the transactions contemplated by this Agreement (the Borrowers hereby agreeing to indemnify the Agent and the Lenders with respect thereto); (ii) the reasonable fees, expenses and disbursements of the Agent, the Agent's legal counsel and any experts or consultants (which experts or consultants may be employees of the Agent or any Lender) retained by the Agent incurred in connection with the preparation, negotiation or interpretation of this Marketing Letter Agreement and the other Marketing Facility Documents, each Accommodation issued or made hereunder, and each amendment, modification, approval, consent or waiver hereto or hereunder; and (iii) all reasonable out-of-pocket expenses (including reasonable attorneys' fees and costs (which attorneys may be employees of the Agent or such Lender)) incurred by the Agent or the Lenders in connection with (x) the enforcement of this Marketing Letter Agreement, the Marketing Facility or any of the Marketing Facility Documents against the Borrower or the administration thereof, (y) any so-called "work-out" of the Borrowers' obligations with respect to the Marketing Facility, or (z) any litigation, proceeding or dispute whether arising hereunder or otherwise, in any way related to the Agent's or the Lenders' relationship with Borrower or any of its subsidiaries under the Marketing Facility Documents if with respect to any litigation, proceeding or dispute where the Borrowers and the Lenders are adverse parties, the Agent and the Lenders are the prevailing parties. The provisions of this section shall survive payment or satisfaction of payment of amounts owing under or with respect to the Marketing Facility Documents. 5. CONSENTS, AMENDMENTS, WAIVERS, ETC. Except as otherwise expressly -------- ---------- ------- --- provided in this Marketing Letter Agreement, any consent or approval required or permitted by this Marketing Letter Agreement to be given by the Agent and the Lenders may be given, and any term of this Marketing Letter Agreement or the Marketing Facility Documents may be amended, and the performance or observance by the Borrower of any terms of this Marketing Letter Agreement or the other Marketing Facility Documents may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Borrower, the Agent and the -16- Required Lenders. Neither (a) the provisions of Section 1(e) requiring that the Required Lenders are necessary to make a demand for prepayment of any undrawn amounts available for drawing under any L/C or of any obligations secured by such L/C nor (b) modification to the defined term "Required Lenders" shall be made without the written consent of the Borrower, the Agent and all of the Lenders. 6. ASSIGNMENT. Any Lender may, with the prior written consent of the ---------- Borrowers, the Agent and ING, such consent not to be unreasonably withheld, make an assignment of any portion of its share of the Marketing Facility, provided that the assignee with respect thereto and Borrower shall execute an Instrument of Accession in the form of Exhibit A attached hereto. --------- 7. NOTICES, ETC. Except as otherwise expressly provided herein or in the ------- --- other Marketing Facility Documents, all notices and other communications made or required to be given pursuant to this Marketing Letter Agreement or the other Marketing Facility Documents to any party hereto shall be in writing and shall be delivered in hand, mailed by United States registered or certified first class mail, postage prepaid, sent by overnight courier, or sent by telecopy, facsimile or telex and confirmed by delivery via courier or postal service at the address set forth for such party on the signature pages hereto or at such other address for notice as such party shall have last furnished in writing to the person giving the notice. Any such notice or demand shall be deemed to have been duly given or made and to have become effective upon receipt thereof. 8. DEFINITIONS. Any capitalized term defined herein shall have such meaning ----------- in each place it appears herein, including in any schedules and exhibits hereto. 9. MISCELLANEOUS. ------------- With respect to the Borrower, this Marketing Letter Agreement is for Borrower's information only and the Borrower is not to show this Marketing Letter Agreement to, and it is not to be relied upon by, third parties (except that the Borrower may file a copy of, or show, or both, as applicable, this Marketing Letter Agreement to the Securities Exchange Commission ("SEC"), as --- required by the SEC) and this Marketing Letter Agreement creates no rights in any such third party. The Agent and the Lenders shall not disclose the terms of this Marketing Letter Agreement except in accordance with standard and customary banking practices or as required by law or legal practice or to assignees or potential assignees. This Marketing Letter Agreement constitutes the entire understanding among Borrower, the Lenders and the Agent on this subject and supersedes all prior discussions. -17- No failure on the part of the Agent or the Lenders to exercise and no delay in exercising, and no course of dealing with respect to any right, power, or privilege under this Marketing Letter Agreement or any of the other Marketing Facility Documents shall operate as a waiver thereof. Any waiver of any provision hereof shall be effective only in the specific instance granted and shall not operate as a continuing waiver of such provision. THIS LETTER AGREEMENT AND THE FACILITY DOCUMENTS AND INSTRUMENTS EXECUTED IN CONNECTION HEREWITH SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (WITHOUT REFERENCE TO CHOICE OF LAW PROVISIONS). THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS LETTER AGREEMENT OR ANY RELATED DOCUMENT OR INSTRUMENT MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURT AND IRREVOCABLY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. BORROWER CONSENTS TO SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON BORROWER BY CERTIFIED OR REGISTERED MAIL, POSTAGE PREPAID AND RETURN RECEIPT REQUESTED, WITH COPY THEREOF TO RESOURCES ALSO BY SUCH CERTIFIED OR REGISTERED MAIL, AT THE ADDRESS, WITH RESPECT TO BORROWER, FOR BORROWER SPECIFIED IN SECTION 7 HEREOF, AND AT THE ADDRESS, WITH RESPECT TO RESOURCES FOR RESOURCES, SPECIFIED AT SECTION 13 OF THAT CERTAIN GUARANTY OF EVEN DATE HEREWITH BY RESOURCES GUARANTYING MARKETING'S OBLIGATIONS WITH RESPECT TO THE ACCOMMODATIONS. SERVICE OF PROCESS SERVED IN THE MANNER SET FORTH IN THE PRECEDING SENTENCE SHALL BE EFFECTIVE FIVE BUSINESS DAYS AFTER THE DATE ON WHICH SUCH SERVICE OF PROCESS IS SENT AS PROVIDED ABOVE; PROVIDED THAT SUCH FIVE BUSINESS DAY PERIOD SHALL NOT -------- APPLY IF THE AGENT OR ANY LENDER TAKES ANY ACTION OR FILES ANY MOTION, AND SHALL NOT PREVENT THE AGENT OR ANY LENDER FROM TAKING ANY ACTION, OR FILING ANY MOTION, SEEKING AN INJUNCTION OR OTHER EMERGENCY ORDER OR RELIEF WITHOUT REGARD TO THE FIVE BUSINESS DAY PERIOD PROVIDED FOR IN THIS SENTENCE AND SUCH ACTION OR MOTION WILL NOT BE CONSIDERED TO BE EX PARTE EXCEPT AS OTHERWISE PROVIDED BY -------- APPLICABLE LAW. -18- EACH OF THE AGENT, THE LENDERS AND THE BORROWER HEREBY WAIVES ITS RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS LETTER AGREEMENT OR ANY OTHER FACILITY DOCUMENT OR ANY RIGHT OR OBLIGATION HEREUNDER OR THEREUNDER. Except as prohibited by law, each of the Agent, the Lenders and the Borrower hereby waives any right which it may have to claim or recover in any litigation referred to in the preceding sentence any special, exemplary, punitive consequential damages or any damages other than, or in addition to, actual damages. Each of the Agent, the Lenders and the Borrower (i) certifies that no party hereto nor any representative, agent or attorney for any party hereto has represented, expressly or otherwise, that such party would not, in the event of litigation, seek to enforce the foregoing waivers, and (ii) acknowledges that, in entering into the Marketing Letter Agreement and the other Marketing Facility Documents such parties are relying upon, among other things, the waivers and certifications contained in this (S)9. Agent and each Lender agrees (on behalf of itself and each of its affiliates, directors, officers, employees, agents and representatives) to use reasonable precautions to keep confidential, in accordance with its customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, any non-public information supplied to it by Borrower or Resources as being confidential at the time the same is delivered to Agent or such Lender, provided that nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel for Agent or any Lender, (iii) to bank examiners, auditors or accountants, (iv) in connection with any litigation to which Agent or any Lender is a party or (v) to any assignee or participant (or prospective assignee participant) so long as such assignee or participant (or prospective assignee or participant) first enters into a confidentiality agreement with Agent or such Lender; and provided further that in no event shall Agent or any Lender be required to return any materials furnished by Borrower or Resources. This Marketing Letter Agreement may be executed in several counterparts, each of which shall be an original, and all of which shall constitute one agreement. In proving this Marketing Letter Agreement, it shall not be necessary to produce more than one such counterpart executed by the party to be charged. The provisions of this Marketing Letter Agreement are severable and if any one provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, such invalidity or unenforceability shall affect only such provision in such jurisdiction. -19- Please acknowledge your understanding of the above by signing and returning the enclosed copy of this letter. Sincerely, THE FIRST NATIONAL BANK OF BOSTON, Individually and as Agent By: /s/ Christopher H. Holmgren --------------------------------------- Name: Christopher H. Holmgren --------------------------------------- Title: Vice President --------------------------------------- Address: 100 Federal Street, 01-08-02 Boston, Massachusetts 02110 Attention: Christopher H. Holmgren, Vice President Fax: (617) 434-4067 INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION By: /s/ Robi Artman-Hodge --------------------------------------- Name: Robi Artman-Hodge --------------------------------------- Title: Managing Director --------------------------------------- Address: 135 East 57 Street New York, New York 10022 Attention: Ms. Robi Artman-Hodge Managing Director Fax: (212) 593-3362 -20- Accepted and Agreed to: PLAINS MARKETING & TRANSPORTATION INC. By: /s/ Phil Kramer ------------------------------------ Name: Phil Kramer ------------------------------------ Title: Vice President ------------------------------------ Address: 1600 Smith Street Houston, Texas 77002 Attention: Mr. Phillip D. Kramer Fax: (713) 654-1523 EX-10.N 5 PMCT UNCOMMITTED CREDIT FACILITY EXHIBIT 10.N August 23, 1995 PMCT Inc. 1600 Smith Street Houston, TX 77002 Re: Uncommitted Secured Demand Transactional Line of Credit Facility ---------------------------------------------------------------- Gentlemen: The purpose of the following is to outline the parameters of the uncommitted secured demand transactional line of credit facility (the "PMCT ----- FACILITY") which The First National Bank of Boston ("FNBB"), Internationale - -------- ---- Nederlanden (U.S.) Capital Corporation ("ING") and such other banks as may from --- time to time become parties hereto by signing below or by executing an Instrument of Accession in the form of Exhibit A attached hereto (collectively, the "LENDERS") and FNBB, as agent for the Lenders (in such capacity, the ------- "AGENT"), are prepared to provide to PMCT Inc. ("BORROWER") for the issuance of ----- -------- standby letters of credit and demand loans (each an "ACCOMMODATION" and ------------- collectively, the "ACCOMMODATIONS"). An "uncommitted secured demand -------------- transactional line of credit facility" means that the Lenders shall have no obligation, under any circumstances, to issue, grant or make any Accommodation. Each request made by Borrower for an Accommodation shall be reviewed by the Lenders on a case by case basis and the decision to grant any Accommodation shall be made by the Lenders in their absolute and sole discretion in light of considerations which the Lenders in their sole discretion deem pertinent and irrespective of whether or not the Borrower is in compliance with any of the guidelines set forth in Schedule 4 hereto. The Lenders also reserve the right to summarily refuse any request for an Accommodation without any review as contemplated by the preceding sentence. Accordingly, the Lenders have no commitment to make any Accommodation available. FURTHERMORE, THE LENDERS MAY DEMAND REPAYMENT OF ANY AMOUNTS OUTSTANDING HEREUNDER OR WITH RESPECT TO ANY ACCOMMODATION AND, AS HEREINAFTER PROVIDED, PREPAYMENT OF ANY AND ALL UNDRAWN AMOUNTS AVAILABLE FOR DRAWING UNDER ANY ISSUED AND OUTSTANDING L/C (AS HEREINAFTER DEFINED) OR OF ANY OBLIGATIONS SECURED BY SUCH L/C AT ANY TIME IN THE LENDERS' SOLE DISCRETION. 1. THE FACILITY. The parameters of the uncommitted secured demand ------------ transactional line of credit facility shall be as follows until further notice by the Agent and the Lenders: -2- (a) BORROWER: PMCT Inc., a Delaware corporation. -------- (b) PMCT FACILITY AMOUNT: The aggregate amount of the Accommodations -------------------- which may be made available by the Lenders and which will be allowed to be outstanding at any one time under the PMCT Facility shall be restricted to the lesser of (i) the PMCT Sublimit (as hereinafter defined) or (ii) the excess of (x) an amount which shall be $70,000,000 during periods when the NYMEX price for West Texas Intermediate crude oil ("WTI") is equal to or less than $20.00 per --- barrel and which shall increase by $2,500,000 for each $1.00 per barrel increase in the NYMEX price of WTI above $20.00 per barrel up to a maximum amount of $80,000,000, such increase in the amount of the PMCT Facility to be determined at the time of the issuance or advance of any Accommodation over (y) the then aggregate amount of the outstanding Accommodations made by the Lenders to or for the account of Plains Marketing & Transportation Inc., a Delaware corporation ("MARKETING") under that certain letter agreement of even date herewith, as - ----------- amended and in effect (the "MARKETING AGREEMENT"), among the Lenders, the Agent ------------------- and Marketing (such lesser amount, as in effect from time to time under the PMCT Facility, hereinafter referred to as the "PMCT FACILITY AMOUNT"). PLEASE NOTE -------------------- THAT THE LENDERS MAY MODIFY THE AMOUNT OF THE PMCT FACILITY AMOUNT AT ANY TIME IN THEIR SOLE DISCRETION. In the event such modification results in a decrease in the PMCT Facility Amount below the then aggregate amount of outstanding Accommodations, the Borrower will within one (1) Business Day (as defined below, or as hereinafter provided, repay the amount of outstanding Accommodations in excess of the modified PMCT Facility Amount or prepay the undrawn amounts available for drawing under L/Cs in excess of the modified PMCT Facility Amount, unless notified otherwise by the Agent. As used herein, "BUSINESS DAY" shall ------------ mean any day on which commercial lenders are not authorized or required to close in Boston, Massachusetts or New York,, New York. (c) LENDERS' SHARES: Each Lender shall be offered the opportunity to --------------- fund or participate in that percentage of every requested Accommodation as set forth opposite such Lender's name on Schedule 1 hereto (its "SCHEDULE 1 ---------- PERCENTAGE"). If any Lender shall decline to so fund or participate in such - ---------- requested Accommodation, any combination of one or more of the other Lenders may additionally fund or purchase a participation in the requested Accommodation in the entire or a pro rata portion of such declining Lender's Schedule 1 -------- Percentage of such Accommodation, provided that in no event shall any Lender's -------- interest in any Accommodation exceed a sum representing such Lender's Schedule 1 Percentage multiplied by the PMCT Facility Amount. -3- (d) TYPES OF ACCOMMODATIONS; SUBLIMITS: The types of and limits on ---------------------------------- Accommodations which may be made available under the PMCT Facility shall be the following: (i) Standby Letters of Credit: Standby letters of credit having ------------------------- an expiration date no later than 70 days after the date of issuance, extension or renewal thereof issued for the account of Borrower to support the purchase and exchange by Borrower of crude oil from producers and other third parties (the "L/CS"); ---- (ii) Demand Loans: Demand loans which may be made by the Lenders ------ to Borrower in an aggregate amount at any time outstanding not to exceed $20,000,000 less the amount of Demand Loans then outstanding under the Marketing Agreement (the "DEMAND LOANS"), the proceeds of ------------ which are to be used for any of the following purposes: (x) to finance the purchase and physical storage of crude oil which is fully hedged on the NYMEX and located in the terminalling and storage facilities owned by Plains Terminal & Transfer Corporation in Cushing, Oklahoma (the "CUSHING TERMINAL") or in transit in specified pipelines approved ---------------- by the Lenders and listed on Schedule 5 hereto (the "CASH AND CARRY ---------- -------------- PIPELINES") or (y) to finance up to ninety (90%) of the value, --------- calculated on a marked-to-market basis, of inventory designated by the requesting Borrower as so-called "working inventory" at the Cushing Terminal or as linefill in Cash and Carry Pipelines. (iii) PMCT Sublimit: For purposes hereof, "PMCT SUBLIMIT" ------------- ------------- shall mean an amount equal to the lesser of (a) five (5) times Tangible Liquid Net Worth of PMCT or (b) $20,000,000. For purposes hereof, "TANGIBLE LIQUID NET WORTH" shall mean the excess of the total ------------------------- assets of PMCT as determined in accordance with generally accepted accounting principles ("GAAP"), over the total liabilities of PMCT as ---- determined in accordance with GAAP, less the total book value of all assets of PMCT properly classified as intangible assets under GAAP; provided that the Tangible Liquid Net Worth of PMCT shall be deemed to --------- be zero unless at least $2,000,000 of cash, Cash Equivalents or fully hedged crude oil inventory valued on a marked to market basis, or any combination of the foregoing, is included therein; and provided, --------- further, that intercompany notes payable to PMCT by Plains Resources, ------- Inc. ("RESOURCES") shall be included in the calculation of the --------- Tangible Liquid Net Worth of PMCT (1) -4- only if such promissory notes are payable on demand or within one year from the date on which such calculation is made and (2) only to the extent that the principal amount thereof does not at the time of such calculation exceed the unused borrowing base available to support additional revolving credit loans under that certain Second Amended and Restated Credit Agreement dated as of February 11, 1994, as amended, among Resources, ING, as agent, and the lenders named therein (the "RESOURCES CREDIT AGREEMENT"). "CASH EQUIVALENTS" means -------------------------- ---------------- repurchase agreements and short term obligations issued or guaranteed as to principal and interest by the United States of America and having a maturity of not more than 12 months from the date of acquisition; short-term certificates of deposit issued by any bank organized under the laws of the United States of America or any state thereof if such bank has a short-term debt rating of not less than P-1 or A-1 or their equivalent by Moody's Investor Service or Standard & Poor's Corporation, respectively; short-term certificates of deposit issued by, and so-called Eurodollar "call deposits" at, any Lender or any foreign subsidiary or affiliates of such Lender, if any investments issued by such Lender or foreign subsidiary or affiliate, as applicable, has a rating of not less than A or its equivalent, or P-1 or A-1 or their equivalent, as applicable, by Moody's Investor Service or Standard & Poor's Corporation, respectively; or (d) commercial paper or finance company paper that is rated not less than P-1 or A-1 or their equivalents by Moody's Investor Service or Standard & Poor's Corporation, respectively. (e) EXPIRATION: (i) No request for any Accommodation may be made after the ---------- first anniversary of the date hereof unless the Lenders, in their sole discretion and without any obligation to do so, extend such date in writing. (ii) All Accommodations are payable ON DEMAND. Any Lender may, at any time and in its sole discretion, demand payment of all amounts owing to the Lenders under the PMCT Facility, provided that -------- any Lender not then making such demand for payment with respect to Accommodations made by it may waive such demand with respect only to the Accommodations made by it. In addition, those Lenders having a pro --- rata share of the Accommodations at least equal to sixty-seven percent ---- of the Accommodations (the "REQUIRED LENDERS") may at any time in ---------------- their sole discretion demand that the Borrower prepay in cash all or any part or fraction of the undrawn amount available for drawing under any issued and outstanding L/C or the obligations secured by such L/C by delivery to the -5- Agent. Each Lender demanding payment of any outstanding amounts owing to the Lenders under the PMCT Facility or prepayment of any undrawn amounts available for drawing under any issued and outstanding L/C or of any obligations secured by such L/C shall promptly notify the Borrower of the reason for such demand. (iii) Upon the occurrence of a Bankruptcy Event, all obligations and liabilities of Borrower to the Lenders with respect to the Accommodations, including, without limitation, the obligation to prepay any and all amounts available for drawing under any issued and outstanding L/C and all other obligations and liabilities of Borrower to the Lenders arising under this letter agreement (the "PMCT LETTER ----------- AGREEMENT") or any agreements, instruments or documents executed in --------- connection herewith (collectively with the PMCT Letter Agreement, the "PMCT FACILITY DOCUMENTS") shall become immediately due and payable. ----------------------- "BANKRUPTCY EVENT" means any event pursuant to which Borrower makes an ---------------- assignment for the benefit of creditors, or admits in writing its inability to pay or generally fails to pay its debts as they mature or become due, or petitions or applies for the appointment of a trustee or other custodian, liquidator or receiver of Borrower or of any substantial part of its assets or commences any case or other proceeding relating to Borrower under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or takes any action to authorize, or in furtherance of, any of the foregoing, or if any such petition or application shall be filed or any such case or other proceeding shall be commenced against Borrower and Borrower shall indicate its approval thereof, consent thereto or acquiescence therein, or a decree or order is entered appointing any such trustee, custodian, liquidator or receiver or adjudicating Borrower bankrupt or insolvent, or approving a petition in any such case or other proceeding, or a decree or order for relief is entered in respect of Borrower in an involuntary case under federal bankruptcy laws as now or hereafter constituted. (f) PRICING: The following will apply until further notice by the Agent: (i) Demand Loans: Subject to paragraph 1(f)(v) hereof, the annual ------------ rate of interest on the unpaid principal balance of Demand Loans from time to time outstanding shall be equal to either (i) the Base Rate plus five-eighths of one percent (5/8%) per annum or (ii) the ---- Eurodollar Rate for -6- the applicable interest period plus two percent (2%) per annum, as ---- such rates are selected by Borrower pursuant to Section 1(g) hereof, in each case computed on the basis of a 360-day year. Interest calculated by reference to the Base Rate shall be payable quarterly in arrears. Interest calculated by reference to the Eurodollar Rate shall be payable at the end of any applicable interest period selected by Borrower for such Demand Loan pursuant to Section 1(g) hereof. "BASE RATE" means the higher of (a) the annual rate of interest --------- announced from time to time by FNBB as its "base rate" at its head office in Boston, Massachusetts or (b) 1/2% above the overnight federal funds rate from time to time in effect; provided, that such -------- rate may not be the lowest rate at which funds are made available to customers of FNBB at such time. "EURODOLLAR RATE" means for any --------------- interest period of one, two or three months (as selected by Borrower pursuant to Section 1(g) hereof), the annual rate of interest (rounded upwards, if necessary, to the nearest 1/16th of 1%) determined by the Agent at or about 10:30 a.m., Boston time, two Business Days on which Lenders are able to conduct eurodollar transactions preceding the first day of such interest period, as being (a) the average of the per annum rates at which deposits of United States dollars are offered to the Agent by prime banks in any lawful recognized market selected by the Agent, in its sole discretion acting in good faith and in accordance with its usual practice, in which United States dollars are offered by banking institutions to each other for delivery on the first day of such interest period for the number of days comprised therein and in an amount equal (as nearly as may be) to the amount of the Demand Loan to be subject to such Eurodollar Rate divided by (b) ------- one minus the Reserve Rate. The "RESERVE RATE" for any date is the ------------ maximum percentage (expressed as a decimal) in effect on such date at which the Agent is required to maintain reserves under Regulation D of the Board of Governors of the Federal Reserve System against "EUROCURRENCY LIABILITIES". The Reserve Rate shall be adjusted ------------------------ automatically on and as of the effective date of any change therein. (ii) Letters of Credit. ----------------- (x) For the issuance of an L/C, Borrower shall pay to any Lender issuing such L/C (in such capacity, the "ISSUING LENDER"), for -------------- the pro rata accounts of the Lenders participating in such L/C, a fee -------- equal to the greater of (A) 1-1/2% per annum of the maximum drawing amount of such L/C calculated for the period during which such L/C is outstanding or (B) -7- 1/4% flat of the maximum drawing amount of such L/C, such fee to be estimated and payable upon the issuance of such L/C and any unpaid balance of such fee to be payable upon any drawing under, and upon the expiration or termination of, such L/C. (y) In addition to the fees set forth in clause (x) above, Borrower shall pay to the Issuing Lender for its own account an additional issuance fee of $100 per L/C, payable on the date of issuance thereof, and such other fees and charges customarily charged by the Agent in respect of L/Cs. (iii) Overdue Amounts. All overdue amounts payable with respect --------------- to the Demand Loans and reimbursement obligations in respect to drawn L/Cs shall bear interest payable on demand at a rate per annum equal to four percent above the Base Rate from the date of such nonpayment until paid in full and whether before or after the entry of judgment thereon. (iv) Charges to the Borrower's Accounts. Borrower authorizes the ---------------------------------- Agent and the Lenders to charge Borrower's account at any of the Lenders for any interest and fees stated herein and due and payable by Borrower; provided that in the absence of a demand for payment of the -------- Accommodations or in the case of undrawn amounts available for drawing under any L/C or the obligations secured by such L/C, prepayment, of such amounts, the Agent or the Lender charging such account shall give Borrower prior notice of its intention to do so. (v) Limitation on Interest. It is the intention of the parties ---------------------- hereto that the Agent and each Lender shall conform strictly to usury laws applicable to it. Accordingly, if the transactions contemplated hereby would be usurious as to the Agent or any Lender under applicable laws then, in that event, notwithstanding anything to the contrary in this PMCT Letter Agreement or any other PMCT Facility Document, it is agreed that the aggregate of all consideration which constitutes interest under any law applicable to the Agent or any Lender that is contracted for, taken, reserved, charged or received by such Lender under this PMCT Letter Agreement or under any other PMCT Facility Document shall under no circumstances exceed the maximum amount allowed by such applicable law, and any excess shall be credited by the Agent or such Lender to the principal amount of the Demand Loans or, if the principal amount of the Demand -8- Loans shall have been or would thereby be paid in full, refunded by the Agent or such Lender to Borrower. (vi) No pricing applicable to any particular outstanding Accommodation shall be changed after the making or issuance of such Accommodation without Borrower's written consent. Notwithstanding the above, nothing herein shall affect the Lenders' right to demand payment, as set forth herein, in their sole discretion, of such Accommodation and to charge the rate of interest applicable to overdue amounts thereon as set forth in Section 1(f)(iii) if such demand is not met. (g) PROCEDURES FOR REQUESTING ACCOMMODATIONS: The following ---------------------------------------- procedures will assist the Lenders in considering Borrower's requests for Accommodations: (i) To Request a Demand Loan: To request a Demand Loan, the ------------------------ Borrower shall, in a notice to the Agent in the form of Exhibit B --------- hereto (a "DEMAND LOAN NOTICE"), delivered no later than 11:00 a.m. ------------------ Boston, Massachusetts time (x) on the Business Day on which the Demand Loan is requested to be made if it is to bear interest calculated by reference to the Base Rate and (y) three Business Days prior to the day on which the Demand Loan is requested to be made if it is to bear interest calculated by reference to the Eurodollar Rate, specify the amount of such Demand Loan, whether such Demand Loan is to bear interest calculated by reference to the Base Rate or to the Eurodollar Rate and, if such Demand Loan is to bear interest calculated by reference to the Eurodollar Rate, the interest period to be applicable thereto which may be one, two or three months and shall also specify the Business Day on which the Demand Loan then requested is to be made; (ii) To Request a Letter of Credit: To request an L/C, Borrower ----------------------------- shall submit to the Agent a completed letter of credit application in substantially the form of Exhibit C hereto or, if the Agent shall --------- designate, upon prior notice to the Borrower, any Lender other than FNBB to be the Issuing Lender with respect to such requested L/C, in the form of letter of credit application requested by such Lender. In the event that any provision of the letter of credit application shall be inconsistent with any provision of this PMCT Letter Agreement, then the provisions of this PMCT Letter Agreement shall, to the extent of any such inconsistency, govern; and -9- (iii) Representations, etc. Any request for an Accommodation -------------------- shall automatically constitute a certification that the representations and warranties contained in Schedule 2 hereof are ---------- true and correct on the date of such request and that all guidelines set forth in Schedule 4 attached to this PMCT Letter Agreement on the ---------- date of such request have been and are met, unless otherwise set forth in a writing submitted by Borrower in connection with the request for the corresponding Accommodation. Disclosure that Borrower has not met or does not meet such guidelines shall in no way affect the Lenders' right to demand payment or prepayment of any Accommodation or any obligation secured by any L/C, as set forth herein, in their sole discretion or to refuse to make or issue an Accommodation in their sole discretion. (h) PAYMENTS: All payments due with respect to the Accommodations, -------- including, without limitation, prepayments of any undrawn amounts available for drawing under any L/C or of the obligations secured by such L/C, shall be made to the Agent or, with respect to an L/C, the Issuing Lender, for the respective accounts of the Lenders and the Agent, and shall be paid to the Agent or such Issuing Lender at the address set forth on the signature page of this PMCT Letter Agreement for notices to the Agent and such Issuing Lender or at such other address as the Agent or Issuing Lender may from time to time designate, in each case in immediately available funds. (i) ACCOMMODATIONS: All Accommodations or transactions related thereto -------------- must meet the following criteria in addition to any other requirements that may be imposed by the Lenders in their sole discretion from time to time: (i) Copies of all applicable written purchase and sale contracts for the purchase and sale of crude oil in form acceptable to the Agent and other relevant third party documentation must be provided to the Agent and the Lenders prior to the issuance or advance of any Accommodation securing Borrower's obligation in connection with such transaction; (ii) The obligations of the third party purchaser in any matched purchase and sale transaction for which an L/C is to be issued shall be secured in an amount at least equal to 100% of the maximum drawing amount of such L/C by any combination of cash, Cash Equivalents, accounts receivable approved by the Agent, or accounts receivable secured by letters of credit from acceptable financial institutions advised through the Agent; -10- (iii) Notification of the assignment to the Issuing Lender, as agent for the Lenders, of the proceeds of a sale contract relating to a purchase and sale transaction for which an Accommodation is to be issued or made has been or will be, prior to the making or issuance of the Accommodation, accomplished by the following means: (A) Borrower has notified or will, promptly, and in any event prior to the making or issuance of the related Accommodation, notify the account debtor on such sale contract in writing, either by separate correspondence and/or in Borrower's sales contract, of the assignment to the Issuing Lender, as agent for the Lenders, of proceeds of such sale contract and has given or will, prior to the making or issuance of the Accommodation, give irrevocable instructions to such account debtor to make payment on such sale contract, without offset or counterclaim unless the Lenders, through the Agent, have given their specific prior approval for the Borrower to give effect to any net-out or offset agreements, to Borrower's account at the Issuing Lender, as agent for the Lenders, by wire transfer; and (B) Agent shall notify such account debtor of the assignment of such sale contract and the proceeds relating thereto to the Issuing Lender, as agent for the Lenders, and of Borrower's instruction to pay such proceeds, without offset or counterclaim, unless the Lenders, through the Agent, have given their specific prior approval for the Borrower to give effect to any net-out or offset agreements, to Borrower's account at the Issuing Lender, as agent for the Lenders, by wire transfer. (iv) Borrower shall endeavor, and Agent shall be satisfied that Borrower has endeavored, to include the notification and instructions referred to in clause (i)(iii)(A) above in such Borrower's sales contracts; (v) Notification of the assignment to the Issuing Lender, as agent for the Lenders, of the proceeds of each letter of credit securing a sale contract relating to a purchase and sale transaction for which an -11- Accommodation is to be issued or made has been or will, prior to the making or issuance of the Accommodation, be accomplished by the following means: (A) Borrower has notified the issuer of such letter of credit in writing of the assignment of such proceeds to the Issuing Lender, as agent for the Lenders, and has given irrevocable instructions to such issuing bank to pay such proceeds, without offset or counterclaim unless the Lenders, through the Agent, have given their specific prior approval for the Borrower to give effect to any net-out or offset agreements, to such Borrower's account at the Issuing Lender, as agent for the Lenders; and (B) Borrower or such issuer has delivered the original of such letter of credit to the Issuing Lender, as agent for the Lenders. (vi) Funds from any account debtor with respect to a sale contract in a purchase and sale transaction for which an L/C was issued which are received in advance of payment under such L/C shall be maintained as cash collateral with the Issuing Lender, as agent for the Lenders, for such L/C and shall be paid over and delivered to Borrower upon expiration (without drawdown) of such L/C unless the Lenders have demanded payment of any Accommodations, or prepayment of any undrawn amounts available for drawing under any other L/C or of the obligations secured thereby, as permitted herein, and such demand has not been met; (vii) Payments made to suppliers under outstanding L/Cs will be made through the Issuing Lender, as agent for the Lenders, by wire transfer with reference to the corresponding L/C to facilitate the reduction or cancellation of such L/C; and (viii) Marine cargo, transportation, and other insurance as appropriate, shall name the Agent or Issuing Lender as loss payee or co-loss payee to the extent of its interest in any purchase and sale transaction for which an Accommodation has been made or issued. -12- (j) REPORTING AND INSPECTION REQUIREMENTS: For so long as any ------------------------------------- to request any Accommodations under this PMCT Letter Agreement and to enable the Lenders to carry out an ongoing financial review of Borrower, Borrower shall furnish each of the Lenders with the following: (i) within 45 days following the end of each month, a monthly unaudited balance sheet and income statement, prepared in accordance with GAAP, subject to year-end adjustments, together with a certificate regarding the financial and other guidelines set forth in Schedule 4 to this Marketing Letter Agreement (the "FINANCIAL AND ---------- ------------- OTHER GUIDELINES") in the form attached as Exhibit D hereto (and ---------------- --------- showing calculations for the financial performance guidelines set forth in paragraphs (i), (ii) and (iii) of Schedule 4 hereto) ---------- demonstrating that the Borrower has met, or has not met, as applicable, such operating guidelines, signed by the Borrower's chief financial officer or principal accounting officer; (ii) within 120 days following Borrower's fiscal year end, audited balance sheets and statements of income and retained earnings from Price Waterhouse L.L.P. or, in lieu of Price Waterhouse L.L.P., an independent public accounting firm selected by Borrower and acceptable to the Agent, prepared in accordance with GAAP; (iii) on a daily basis, MERC position reports of Borrower as of the end of the immediately preceding Business Day and, at such other intervals as the Agent may request, reports of inventory held by Borrower; (iv) as soon as possible and in any event prior to the date requested for the issuance of L/Cs hereunder on a monthly basis, a monthly scheduling forecast report listing purchases, sales and exchange volumes, counterparties, pricing indices and other information relating to crude oil purchases and exchanges for the next month, together with copies of purchase and sales contracts and an estimate of the gross profit margin and operating income for such month; (v) immediate notice of any material adverse change in the business of Borrower, including without limitation, any threatened or pending material litigation against Borrower or any event which may give rise to any material litigation or claim under any environmental law; -13- (vi) immediate notice of any material default by Resources with respect to any indebtedness of Resources in excess of $50,000, including defaults under the Resources Credit Agreement; (vii) on a monthly basis, a report of the value, calculated on a marked-to-market basis, of inventory designated by the Borrower as so-called "working inventory" at the Cushing Terminal or as linefill in Cash and Carry Pipelines, provided that Borrower will deliver an -------- additional report within two days of any downward fluctuation in the value of such inventory stated in the most recent monthly report by an amount equal to or greater than $500,000; (viii) if requested by any of the Lenders, Borrower will furnish to the requesting Lender in connection with any Accommodation hereunder a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in said Regulation U; and (ix) such other financial or other information about Borrower as any Lender may request. In addition, at least twice per year, and more frequently if requested by the Required Lenders, the Lenders or any of their agents or representatives shall have the right to conduct a commercial finance examination, including the right to examine and make copies and abstracts from the records and books of account of, and visit the properties of, Borrower and to discuss the affairs, finances and accounts of Borrower with any of Borrower's officers, directors and, upon prior written notice to Borrower, independent accountants. All expenses relating to not more than two such commercial finance examinations per year shall be for the account of Borrower, provided Borrower will be responsible for more than two such commercial finance examinations per year if agreed to by the Borrower or if any demand has been made by any Lender for the payment by Borrower of outstanding Accommodations owing to such Lenders, or by the Required Lenders for the prepayment of any undrawn amounts available for drawing under any L/C or of any obligations secured by such L/C, and such demand has not been met or withdrawn. (k) FINANCIAL AND OTHER GUIDELINES: In determining whether to issue or ------------------------------ extend, as applicable, any Accommodation, and in no way limiting the imposition, from time to time, of other reasonable requirements by the Lenders or the discretionary nature -14- of this PMCT Facility, the Lenders will rely on Borrower's representations and warranties given pursuant to Section 1(g)(iii) that as of the date of each request by Borrower for an Accommodation, each of the Financial and Other Guidelines are met and, up to the date of such request, have been met by Borrower, unless the Lenders have otherwise been notified by Borrower. In order to induce the Lenders to issue or make Accommodations, Borrower hereby agrees to make such representations and warranties pursuant to Section 1(g) hereof and hereby covenants that it will immediately notify the Agent and the Lenders if, at any time, such Financial and Other Guidelines are not then met by Borrower. Whether or not the Financial and Other Guidelines are, at any time, met shall in no way affect the Lenders' ability to demand repayment of any Demand Loans outstanding hereunder or to demand prepayment of any undrawn amounts available for drawing under any L/C or of the obligations secured by such L/C or the Lenders' right to refuse to advance any Accommodations. The Agent, the Lenders and Borrower hereby acknowledge that the Financial and Other Guidelines are meant to provide parameters for Borrower's operations and serve only as a basis for Borrower to keep the Agent and Lenders apprised of the status of its operations. 2. GENERAL DOCUMENTATION. (a) Prior to Borrower's initial request for an --------------------- Accommodation under this PMCT Facility, Borrower shall execute and/or deliver, or cause to be executed and/or delivered, to the Agent and the Lenders (i) a security agreement, in form and substance of Exhibit E hereto and in any event --------- sufficient to grant to the Agent a continuing, perfected, first priority lien on all of the assets of Borrower to secure Borrower's obligations with respect to or in connection with the Accommodations, (ii) pledges, in form and substance of Exhibit F hereto, of all of the Borrower's deposit and margin accounts and - --------- acknowledgments of and consents to such pledges from the financial institutions with which such accounts are maintained, (iii) a guaranty by Resources of all of Marketing's payment obligations with respect to or in connection with the Marketing Facility (as defined in the Marketing Agreement), together with a letter of credit issued by a bank acceptable to the Lenders in the face amount of $1,000,000 to secure Resources' obligations under such guaranty, (items (i) through (iii), collectively, the "SECURITY DOCUMENTS"), (iv) promissory notes ------------------ evidencing Borrower's obligations to repay the Demand Loans and any drawings under the L/Cs (the "NOTES") in form and substance of Exhibit G hereto and (v) ----- --------- such other documents and instruments requested by the Agent and the Lenders, including, without limitation those documents and instruments listed on that certain Closing Agenda prepared in connection with the execution of this PMCT Letter Agreement. (b) Notwithstanding, the foregoing, any Accommodation which the Lenders, in their sole discretion, may make or issue shall be on such terms and conditions as the -15- Lenders may require and shall be evidenced by documentation in form and substance satisfactory to the Lenders and shall be subject thereto. If, however, the Lenders shall make or issue any Accommodation and the Lenders shall not specify other terms, conditions or documentation applicable thereto, then such Accommodation shall be subject to the terms and conditions set forth in this PMCT Letter Agreement. 3. INDEMNIFICATION. Borrower shall indemnify and hold harmless the Agent --------------- and each of the Lenders and each of their respective directors, officers, employees and agents from and against (a) any and all damages, losses, liabilities, reasonable costs, and expenses, including, without limitation, reasonable legal, and/or outside accounting, investment banking and other professional fees paid or incurred by the Agent or any of the Lenders, which shall arise out of, result from or in any way relate to any investigation, litigation or proceeding (actual or threatened) relating to the extension of Accommodations under this PMCT Letter Agreement, the PMCT Facility Documents, the PMCT Facility, any Accommodation issued or made hereunder, the violation or alleged violation of any environmental law or involving or respecting any inventory or product sold to or by any Borrower and (b) all related reasonable costs and expenses, including, without limitation, legal, and/or outside accounting, investment banking and other professional fees paid or incurred by the Agent or any of the Lenders in connection with any effort to mitigate or defend against such damages, losses and liabilities, actual or potential, and to otherwise protect the Agent's or any of the Lenders' interests in connection with any matter which may give rise to such damages, losses and liabilities (but excluding any such damages, losses, liabilities, costs and expenses, and related costs and expenses, incurred by reason of the gross negligence or willful misconduct by the person or entity seeking to be indemnified hereunder). Without prejudice to any of the foregoing provisions of this Agreement, Borrower will on demand by any Lender indemnify such Lender against any losses, costs and expenses which such Lender may at any time or from time to time sustain or incur with respect to any Demand Loan which bears interest calculated by reference to the Eurodollar Rate as a consequence of Borrower's failure to borrow such Demand Loan on the date designated for Borrower therefor or to repay such Demand Loan on the last day of the Interest Period relating thereto or if any principal payment thereof is made, whether before or after demand, on any day other than the last day of the interest period relating thereto, including interest or fees payable by such Lender to Lenders of funds obtained by it in order to maintain such Demand Loan for such interest period. Such losses, costs and expenses shall be determined by such Lender in good faith on a commercially reasonable basis. 4. EXPENSES. Whether or not any Accommodations shall be made hereunder, -------- Borrower agrees to pay: -16- (i) the reasonable cost of (x) reproducing this PMCT Letter Agreement and the other PMCT Facility Documents and (y) any taxes (including any interest and penalties in respect thereto) or filing fees payable by the Agent or the Lenders (other than taxes based upon the Agent's or any Lender's net income) on or with respect to the transactions contemplated by this PMCT Letter Agreement (the Borrower hereby agreeing to indemnify the Agent and the Lenders with respect thereto); (ii) the reasonable fees, expenses and disbursements of the Agent, the Agent's legal counsel and any experts or consultants (which experts or consultants may be employees of the Agent or any Lender) retained by the Agent incurred in connection with the preparation, negotiation or interpretation of this PMCT Letter Agreement and the other PMCT Facility Documents, each Accommodation issued or made hereunder, and each amendment, modification, approval, consent or waiver hereto or hereunder; and (iii) all reasonable out-of-pocket expenses (including reasonable attorneys' fees and costs (which attorneys may be employees of the Agent or such Lender)) incurred by the Agent or the Lenders in connection with (x) the enforcement of this PMCT Letter Agreement, the PMCT Facility or any of the PMCT Facility Documents against the Borrower or the administration thereof, (y) any so-called "work-out" of the Borrowers' obligations with respect to the PMCT Facility, or (z) any litigation, proceeding or dispute whether arising hereunder or otherwise, in any way related to the Agent's or the Lenders' relationship with the Borrower or any of its subsidiaries under the PMCT Facility Documents if with respect to any litigation, proceeding or dispute where the Borrowers and the Lenders are adverse parties, the Agent and the Lenders are the prevailing parties. The provisions of this section shall survive payment or satisfaction of payment of amounts owing under or with respect to the PMCT Facility Documents. 5. CONSENTS, AMENDMENTS, WAIVERS, ETC. Except as otherwise expressly ----------------------------------- provided in this PMCT Letter Agreement, any consent or approval required or permitted by this PMCT Letter Agreement to be given by the Agent and the Lenders may be given, and any term of this PMCT Letter Agreement or the PMCT Facility Documents may be amended, and the performance or observance by the Borrower of any terms of this PMCT Letter Agreement or the other PMCT Facility Documents may be waived (either -17- generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Borrower, the Agent and the Required Lenders. Neither (a) the provisions of Section 1(e), requiring that the Required Lenders are necessary to make a demand for prepayment of any undrawn amounts available for drawing under any L/C or of any obligations secured by such L/C nor (b) any modification to the defined term "Required Lenders" shall be made without the written consent of the Borrower, the Agent and all of the Lenders. 6. ASSIGNMENT. Any Lender may, with the prior written consent of the ---------- Borrowers, the Agent and ING, such consent not to be unreasonably withheld, make an assignment of any portion of its share of the PMCT Facility, provided that the assignee with respect thereto and Borrower shall execute an Instrument of Accession in the form of Exhibit A attached hereto. --------- 7. NOTICES, ETC. Except as otherwise expressly provided herein or in the ------------ other PMCT Facility Documents, all notices and other communications made or required to be given pursuant to this PMCT Letter Agreement or the other PMCT Facility Documents to any party hereto shall be in writing and shall be delivered in hand, mailed by United States registered or certified first class mail, postage prepaid, sent by overnight courier, or sent by telecopy, facsimile or telex and confirmed by delivery via courier or postal service at the address set forth for such party on the signature pages hereto or at such other address for notice as such party shall have last furnished in writing to the person giving the notice. Any such notice or demand shall be deemed to have been duly given or made and to have become effective upon receipt thereof. 8. DEFINITIONS. Any capitalized term defined herein shall have such ----------- meaning in each place it appears herein, including in any schedules and exhibits hereto. 9. MISCELLANEOUS. ------------- With respect to Borrower, this PMCT Letter Agreement is for Borrower's information only and Borrower is not to show this PMCT Letter Agreement to, and it is not to be relied upon by, third parties (except that Borrower may file a copy of, or show, or both, as applicable, this PMCT Letter Agreement to the Securities Exchange Commission ("SEC") as required by the SEC) and this PMCT ---- Letter Agreement creates no rights in any such third party. The Agent and the Lenders shall not disclose the terms of this PMCT Letter Agreement except in accordance with standard and customary banking practices or as required by law or legal practice or to assignees or potential -18- assignees. This PMCT Letter Agreement constitutes the entire understanding among Borrower, the Lenders and the Agent on this subject and supersedes all prior discussions. No failure on the part of the Agent or the Lenders to exercise and no delay in exercising, and no course of dealing with respect to any right, power, or privilege under this PMCT Letter Agreement or any of the other PMCT Facility Documents shall operate as a waiver thereof. Any waiver of any provision hereof shall be effective only in the specific instance granted and shall not operate as a continuing waiver of such provision. THIS LETTER AGREEMENT AND THE PMCT FACILITY DOCUMENTS AND INSTRUMENTS EXECUTED IN CONNECTION HEREWITH SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (WITHOUT REFERENCE TO CHOICE OF LAW PROVISIONS). THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS PMCT LETTER AGREEMENT OR ANY RELATED DOCUMENT OR INSTRUMENT MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NON- EXCLUSIVE JURISDICTION OF SUCH COURT AND IRREVOCABLY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. BORROWER CONSENTS TO SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON BORROWER BY CERTIFIED OR REGISTERED MAIL, POSTAGE PREPAID AND RETURN RECEIPT REQUESTED, AT THE ADDRESS FOR BORROWER SPECIFIED IN SECTION 7 HEREOF. SERVICE OF PROCESS SERVED IN THE MANNER SET FORTH IN THE PRECEDING SENTENCE SHALL BE EFFECTIVE FIVE BUSINESS DAYS AFTER THE DATE ON WHICH SUCH SERVICE OF PROCESS IS SENT AS PROVIDED ABOVE; PROVIDED THAT SUCH FIVE BUSINESS -------- DAY PERIOD SHALL NOT APPLY IF THE AGENT OR ANY LENDER TAKES ANY ACTION OR FILES ANY MOTION, AND SHALL NOT PREVENT THE AGENT OR ANY LENDER FROM TAKING ANY ACTION, OR FILING ANY MOTION, SEEKING AN INJUNCTION OR OTHER EMERGENCY ORDER OR RELIEF WITHOUT REGARD TO THE FIVE BUSINESS DAY PERIOD PROVIDED FOR IN THIS SENTENCE AND SUCH ACTION OR MOTION WILL NOT BE CONSIDERED TO BE EX PARTE EXCEPT -------- AS OTHERWISE PROVIDED BY APPLICABLE LAW. -19- EACH OF THE AGENT, THE LENDERS AND THE BORROWER HEREBY WAIVES ITS RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS LETTER AGREEMENT OR ANY OTHER PMCT FACILITY DOCUMENT OR ANY RIGHT OR OBLIGATION HEREUNDER OR THEREUNDER. Except as prohibited by law, each of the Agent, the Lenders and the Borrower hereby waives any right which it may have to claim or recover in any litigation referred to in the preceding sentence any special, exemplary, punitive consequential damages or any damages other than, or in addition to, actual damages. Each of the Agent, the Lenders and the Borrower (i) certifies that no party hereto nor any representative, agent or attorney for any party hereto has represented, expressly or otherwise, that such party would not, in the event of litigation, seek to enforce the foregoing waivers, and (ii) acknowledges that, in entering into the PMCT Letter Agreement and the other PMCT Facility Documents such parties are relying upon, among other things, the waivers and certifications contained in this (S)9. Agent and each Lender agrees (on behalf of itself and each of its affiliates, directors, officers, employees, agents and representatives) to use reasonable precautions to keep confidential, in accordance with its customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, any non-public information supplied to it by Borrower or Resources as being confidential at the time the same is delivered to Agent or such Lender, provided that nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel for Agent or any Lender, (iii) to bank examiners, auditors or accountants, (iv) in connection with any litigation to which Agent or any Lender is a party or (v) to any assignee or participant (or prospective assignee participant) so long as such assignee or participant (or prospective assignee or participant) first enters into a confidentiality agreement with Agent or such Lender; and provided further that in no event shall Agent or any Lender be required to return any materials furnished by Borrower or Resources. This PMCT Letter Agreement may be executed in several counterparts, each of which shall be an original, and all of which shall constitute one agreement. In proving this PMCT Letter Agreement, it shall not be necessary to produce more than one such counterpart executed by the party to be charged. The provisions of this PMCT Letter Agreement are severable and if any one provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, such invalidity or unenforceability shall affect only such provision in such jurisdiction. -20- Please acknowledge your understanding of the above by signing and returning the enclosed copy of this letter. Sincerely, THE FIRST NATIONAL BANK OF BOSTON, Individually and as Agent By: /s/ Christopher H. Holmgren -------------------------------- Name: /s/ Christopher H. Holmgren -------------------------------- Title: Vice President -------------------------------- Address: 100 Federal Street, 01-08-02 Boston, Massachusetts 02110 Attention: Christopher H. Holmgren, Vice President Fax: (617) 434-4067 INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION By: /s/ Robi Artman-Hodge -------------------------------- Name: Robi Artman-Hodge -------------------------------- Title: Managing Director -------------------------------- Address: 135 East 57 Street New York, New York 10022 Attention: Ms. Robi Artman-Hodge Managing Director Fax: (212) 593-3362 with a copy to: -21- Accepted and Agreed to: PMCT INC. By: /s/ Phil Kramer --------------------- Name: Phil Kramer --------------------- Title: Vice President --------------------- Address: 1600 Smith Street Houston, Texas 77002 Attention: Mr. Phillip D. Kramer Fax: (713) 654-1523 EX-11.A 6 COMPUTATION OF EARNINGS PER SHARE '95 Exhibit 11 (A) EXHIBIT Computation of Earnings Per Share Year Ended December 31, 1995
Assuming Primary Full Dilution ------------ -------------- Weighted average common shares outstanding 13,859,121 13,859,121 Other dilutive securities 2,122,370 2,313,128 ----------- ----------- Total shares outstanding for calculation 15,981,491 16,172,249 =========== =========== Net income - as reported $ 2,652,000 $ 2,652,000 Deduct: Dividends on Cumulative Convertible Preferred Stock (42,000) (42,000) ----------- ----------- Net income for calculation $ 2,610,000 $ 2,610,000 =========== =========== Net income per share $.16 $.16 =========== ===========
EX-11.B 7 COMPUTATION OF EARNINGS PER SHARE '94 Exhibit 11 (B) EXHIBIT Computation of Earnings Per Share Year Ended December 31, 1994
Assuming Primary Full Dilution ------------ -------------- Weighted average common shares outstanding 11,576,126 11,576,126 Other dilutive securities 48,780 1,694,095 ----------- ----------- Total shares outstanding for calculation 11,624,906 13,270,221 =========== =========== Net loss - as reported $ 571,000 $ 571,000 Deduct: Dividends on Cumulative Convertible Preferred Stock (62,000) (62,000) ----------- ----------- Net income for calculation $ 509,000 $ 509,000 =========== =========== Net income per share $.04 $.04 =========== ===========
EX-11.C 8 COMPUTATION OF EARNINGS PER SHARE '93 Exhibit 11 (C) EXHIBIT Computation of Earnings Per Share Year Ended December 31, 1993
Assuming Primary Full Dilution -------------- -------------- Weighted average common shares outstanding 11,438,451 11,438,451 Other dilutive securities -- 66,430 ------------ ------------ Total shares outstanding for calculation 11,438,451 11,504,881 ============ ============ Net loss - as reported $(20,198,000) $(20,198,000) Deduct: Dividends on Cumulative Convertible Preferred Stock (63,000) (62,000) ------------ ------------ Net loss for calculation $(20,261,000) $(20,260,000) ============ ============ Net loss per share $ (1.77) $ (1.76) ============ ============
EX-21 9 SUBSIDIARIES AND PARTNERSHIPS Exhibit 21 SUBSIDIARIES AND PARTNERSHIPS OF PLAINS RESOURCES INC. Subsidiaries - ------------ . PMCT INC. . Plains Terminal & Transfer Corporation . Plains Marketing & Transportation Inc. . Plains Liquids Transport Inc. . Plains Resources International Inc. . PLX Crude Lines Inc. . PRI Producing Inc. . Stocker Resources Inc. . Calumet Florida, Inc. . Plains Illinois Inc. . PLX Ingleside Inc. Partnerships - ------------ . Plains Gulf Coast Limited Partnership . Stocker Resources, L.P. EX-23 10 CONSENT OF ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in each Prospectus constituting part of the Registration Statements on Form S-8 (Nos. 33-32565, 33- 43788, 33-48610 and 33-53802 of Plains Resources Inc. of our report dated February 22, 1996, appearing on page F2 of this Form 10-K. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Houston, Texas February 29, 1996 EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995, AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 6,129 0 51,632 0 5,120 63,632 418,084 137,546 352,046 68,381 206,636 0 0 1,618 75,411 352,046 403,906 404,225 363,716 401,573 7,215 0 13,606 2,652 0 2,652 0 0 0 2,652 .16 .16
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