-----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, WCubo+sRLKKivO46iGAp+BplgYwlz/3rsfxNnjSURwvo1CHA9qBFTiojbZDdIw/e E4H6hOKE++uN4YbCvemNmg== 0000355115-96-000008.txt : 19960326 0000355115-96-000008.hdr.sgml : 19960326 ACCESSION NUMBER: 0000355115-96-000008 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960325 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALAMCO INC CENTRAL INDEX KEY: 0000355115 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 550615701 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08490 FILM NUMBER: 96538167 BUSINESS ADDRESS: STREET 1: 200 W MAIN ST CITY: CLARKSBURG STATE: WV ZIP: 26301 BUSINESS PHONE: 3046236671 MAIL ADDRESS: STREET 1: P.O. BOX 1740 STREET 2: 200 W. MAINE STREET CITY: CLARKSBURG STATE: WV ZIP: 26301 FORMER COMPANY: FORMER CONFORMED NAME: ALLEGHENY LAND & MINERAL CO DATE OF NAME CHANGE: 19830718 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 -------------------------- FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO --------------- -------------- Commission File Number: 1-8490 ALAMCO, INC. (Exact name of registrant as specified in its charter) Delaware 55-0615701 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 200 West Main Street, Clarksburg, WV 26301 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (304) 623-6671 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ----------------------------- ---------------------- Common Stock - Par Value $.10 per share 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 such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing sale price of such stock on the American Stock Exchange as of March 1, 1996, is set forth below: Aggregate Market Value of the Registrant's Voting Stock Held By Class of Stock Non-Affiliates --------------------------------- --------------------------------- Common Stock, $.10 par value $41,121,302 The number of shares outstanding of the registrant's Common Stock as of March 1, 1996 is 4,713,422 shares. -------------------------------------------------- Page 1 of 61 Index to Exhibits begins on page 57 DOCUMENTS INCORPORATED BY REFERENCE Registrant's definitive Proxy Statement in connection with its 1996 Annual Meeting of Stockholders, which is to be filed not later than 120 days after Registrant's fiscal year-end, is incorporated by reference in Part III of this Report, except those portions of the Proxy Statement specifically not incorporated by reference. The report of the Compensation Committee of the Registrant's Board of Directors and the Registrant's Performance Graph to be included within the definitive Proxy Statement shall not be deemed to be "soliciting material" or to be "filed" with the Securities and Exchange Commission or otherwise incorporated by reference in this Report. PART I Item 1. Business. Alamco, Inc. (the "Company" or "Alamco") is an Appalachian-based independent gas and oil producer actively engaged in the acquisition, exploitation, exploration, development and production of domestic gas and oil. Alamco's activities are conducted in West Virginia, Tennessee and Kentucky, with an emphasis on producing natural gas for ultimate sale to customers in the Northeast gas markets. Independent petroleum engineers estimate that the Company's proved reserves totalled 137.1 equivalent billion cubic feet ("EBCF") as of December 31, 1995, using a conversion of six thousand cubic feet of gas to one barrel of oil. As of December 31, 1995, Alamco had an average ownership interest of 86 percent in 1,156 gross wells and operated 97 percent of the wells in which it had an ownership interest. Alamco, a Delaware corporation, was organized in 1981 as the successor of a privately held entity, Allegheny Land And Mineral Company ("Allegheny"), which had been engaged in the gas and oil business since 1956, and to certain interests in various gas and oil programs sponsored and/or operated by Allegheny. Alamco's executive offices are located at 200 West Main Street, Clarksburg, West Virginia 26301, and its telephone number is (304) 623-6671. The Company and its subsidiaries currently employ approximately 96 persons on a full time basis. The Company's Common Stock is listed on the American Stock Exchange ("AMEX") under the trading symbol "AXO". Certain statements contained in this report under various sections, including but not limited to, "Management's Discussion and Analysis" and "Markets and Customers", are forward-looking statements that involve risks and uncertainties. Such statements are subject to important factors that could cause actual results to differ from those contemplated by such statements. These factors include, without limitation, the results of exploratory and development drilling; the successful acquisition of producing properties; a change in the price received for gas and/or oil; the demand for and supply of gas and oil; the weather; pipeline capacity; general economic conditions; governmental regulation; changes in interest rates; competitors of Alamco having greater resources than those of the Company; or other unanticipated external developments materially impacting the Company's operational and financial performance. BUSINESS STRATEGY Alamco's business strategy is to build stockholder value through the efficient growth of its gas and oil reserves and production in the Appalachian Basin while pursuing complementary business lines. To accomplish this strategy, the Company will continue to focus on increasing its gas and oil reserves through development and exploratory drilling, property acquisitions, and infrastructure development, including the installation of pipelines in areas in Kentucky and Tennessee where successful exploration has occurred. Using this strategy, the Company's reserves have increased in each of the past four years. Estimated reserves of 137.1 EBCF at December 31, 1995, compare favorably to estimated reserves of 128.0 EBCF, 88.0 EBCF and 64.1 EBCF as of December 31, 1994, 1993 and 1992, respectively. The Company intends to continue to focus its activities in the Appalachian Basin, which is geographically one of the largest and oldest gas and oil producing regions in the United States. Alamco and other operators in the Appalachian Basin have historically experienced high drilling success rates in the formations in the Basin, with wells generally producing for more than 25 years, although at low production volumes. The Company has been nationally recognized as a leader in finding reserves at a lower cost than its competitors and will continue to strive to keep its finding costs low in this phase of expansion of its gas and oil reserve base. Alamco may expand its area of operations into other producing basins if management believes such an expansion is beneficial to the Company. The Company develops reserves by drilling wells and recompleting previously drilled wells to prove the existence of gas and oil reservoirs. Drilling activities are currently carried out in West Virginia, Tennessee and Kentucky. Exploration, coupled with development of new discoveries and infrastructure development in Kentucky and Tennessee, will further lay the groundwork for long-term expansion of Alamco's gas and oil reserves. Exploitation programs may add to the Company's reserves because of the upward revision in the estimate of existing producing properties' reserves from the prior year's reserve estimate. Upward revisions in prior years have been due to, among other things, the Company's effort to maximize productive capability through enhanced operating techniques and, thus, an increase in ultimate recoverable reserves by reducing reservoir abandonment pressures and increasing the well drainage area of its existing producing properties. Alamco is focusing more on diversification of business lines by entering into certain oil field-related service businesses. In addition to providing these services for itself, the Company intends to make the services available to others in the gas and oil industry. HAWG HAULING & DISPOSAL, INC. ("HAWG"), a brine hauling and disposal service, is a wholly-owned subsidiary of the Company and Phoenix-Alamco Ventures, a Limited Liability Company ("PAV"), which is owned jointly by the Company and Phoenix Energy Sales Company ("Phoenix"), is engaged in the marketing of Alamco's and other working interest owners' gas. Revenues generated by HAWG and PAV were approximately 1 percent of total revenues in 1995. Alamco installed its first pipeline in 1995 from southern Kentucky into Tennessee to interconnect with a local gas utility's distribution system. In 1996, Alamco plans to install a $1.6 million pipeline in Tennessee to enable the Company to increase its flexibility in marketing gas and to improve gas sales prices. The Company may also transport third-party gas in order to generate additional revenues in the future. Alamco actively pursues the acquisition of producing properties that will enhance the Company's revenue base without proportional increases in overhead costs. The Company focuses its attention on Appalachian Basin properties in which it will have a significant ownership interest and will serve as operator. In addition to the acquisition of properties owned and operated by third parties, Alamco will continue to evaluate the purchase of outside investors' interests in wells operated by the Company. GAS AND OIL EXPLORATION AND DEVELOPMENT ACTIVITIES At December 31, 1995, Alamco's proved reserves totalled 137.1 EBCF, representing a 9.1 EBCF increase from year-end 1994 reserves. Based on these reserve additions, the Company replaced 250 percent of the 5.9 EBCF it sold during 1995. Alamco invested $7,501,000 in gas and oil exploration and development activities during the year, including $1,384,000 in producing property acquisitions. Internally generated cash flows and amounts drawn from the Company's revolving credit facility with Bank One, Texas, N.A. ("Bank One") funded the capital investment program. DRILLING ACTIVITIES Early in 1995, Alamco suspended drilling activities due to decreasing gas prices and the potential risk that gas prices would remain low for an extended period of time. During the summer of 1995, gas prices began to improve and storage injections for the upcoming winter were running lower than the prior year. This increased the probability of substantially higher gas prices in the upcoming winter heating season, especially in the event of a normal or colder than normal winter which did indeed occur. As a result of these factors, the Company restarted its 1995 drilling program in early September. A total of 11.5 EBCF was added to the Company's reserves as a result of the 1995 drilling program. Alamco invested $5,385,000 or 72 percent of its gas and oil exploration and development expenditures in the drilling of 15.5 net wells, of which 14 net wells were successful. Alamco drilled seven, five and four gross wells in West Virginia, Kentucky and Tennessee, respectively. All of the wells drilled in West Virginia were drilled in the South Burns Chapel Field in Monongalia and Preston Counties, including five wells drilled to the deep Oriskany Formation and two wells to the shallower Fourth Sand. Three of the five wells drilled in Kentucky were located in the Company's South Key Rock Prospect. Alamco believes that it made a significant discovery in the Big Lime formation with the first exploratory well drilled on the prospect, which was followed by two development wells. The three wells in aggregate have increased the Company's 1996 equivalent gas production levels over 10 percent from 1995 average levels. The remaining two wells drilled in Kentucky on the Douglas and Hoffman Prospects, both exploratory, resulted in dry holes. The expenditures associated with these two unsuccessful exploratory wells are reflected in Alamco's 1995 statement of income as exploration expense. All four of the wells drilled in Tennessee were drilled on the Company's Carden Prospect. One of these wells produces oil from the Big Lime formation while the remaining three continue to be evaluated for the feasibility of commercial development of the Chattanooga Shale on the prospect. The 14.0 net productive wells drilled in 1995 are a decrease from the 38.0 and 26.0 net wells drilled in 1994 and 1993, respectively. A number of additional prospects have been identified on Company-held acreage in the South Burns Chapel Field in West Virginia, in both the Days Chapel Field and the Carden Prospect in Tennessee, and in the Key Rock Prospect in Kentucky. (See "Future Activities"). DRILLING SUMMARY Gross Wells Net Wells Pro- Dry Total Pro- Dry Total ductive ductive 1995 14 2 16 14.0 1.5 15.5 1994 38 9 47 38.0 8.7 46.7 1993 28 3 31 26.0 3.0 29.0
RECOMPLETION ACTIVITIES Alamco invested $314,000, or 4 percent of its gas and oil exploration and development expenditures, in five recompletion projects during 1995 as compared to $266,000 and $119,000 in 1994 and 1993, respectively. One recompletion attempt was successful. Four of the recompletion attempts were located in Kentucky and one in West Virginia. The Company believes its inventory of wells contains a significant number of recompletion candidates. RECOMPLETION SUMMARY Gross Wells Net Wells Pro- Dry Total Pro- Dry Total ductive ductive 1995 1 4 5 1.0 4.0 5.0 1994 2 3 5 2.0 3.0 5.0 1993 - 2 2 - 2.0 2.0
ACQUISITION ACTIVITIES In 1995, Alamco invested $1,384,000, or 18 percent, of its gas and oil development expenditures, in the acquisition of 77.1 net wells. The acquisition activities added 5.5 EBCF to the Company's reserves. The program involved the acquisition of outside investors' interests in wells operated by Alamco. NET WELLS ACQUIRED Third Party Outside Investors' Interest in Operated Wells Alamco Operated Wells Total 1995 -- 77.1 77.1 1994 71.0 101.6 172.6 1993 -- 24.9 24.9
INFRASTRUCTURE DEVELOPMENT To move the South Key Rock gas to market, the Company installed its first pipeline from Southern Kentucky into Tennessee to interconnect with a local gas utility's distribution system. Alamco invested $190,000, or 3 percent, of its gas and oil development expenditures, to complete this pipeline. GAS AND OIL PRODUCTION AND SALES In 1995, gas sales accounted for 89 percent of Alamco's total gas and oil sales. The average 1995 sales price received by the Company was $1.92 per MMBtu ($2.10 per MCF) for gas and $15.90 per barrel for oil. Gas prices were lower in 1995 than in recent years and financial results were adversely affected by these prices. The following table sets forth the Company's sales volumes and other information for each of the years ended December 31, 1995, 1994 and 1993. PRODUCTION AND SALES STATISTICS Year Ended December 31, 1995 1994 1993 Net Production: Gas (MCF) 5,363,664 4,404,187 3,197,056 Oil (BBL) 87,573 67,749 37,409 Equivalent (MCF)(a) 5,889,102 4,810,681 3,421,510 Average Production Per Day: Gas (MCF) 14,695 12,066 8,759 Oil (BBL) 240 186 102 Equivalent (MCF)(a) 16,135 13,180 9,374 Average Sales Price: Per MCF of Gas $2.10 $2.50 $2.79 Per BBL of Oil $15.90 $14.52 $16.01 Average Cost of Production: Per MCF of Gas $0.62 $0.60 $0.60 Per BBL of Oil $4.31 $3.67 $4.30 Average Cost of Production Per Dollar of Sales: Gas $0.30 $0.24 $0.21 Oil $0.27 $0.25 $0.27 (a) Oil production is converted to gas equivalents at a rate of 6 MCF per barrel.
WELL TENDING SERVICES In the aggregate, as of December 31, 1995, Alamco owns approximately 86 percent of all Company operated wells, with the remaining 14 percent being held by outside investors. The Company charges a monthly fee for well operation services and each outside investor pays a proportional share based on his ownership percentage. For most of 1995, the monthly fees were $337 per well for gas wells and $409 per well for oil wells compared to monthly charges in 1994 of $323 per well for most gas wells and $392 per well for most oil wells. In 1995, about 151 wells were not subject to the monthly operating fee due to temporary abandonments. The well tending income which the Company generates from these fees accounted for approximately 4.7 percent, 9.0 percent, and 18.3 percent of the Company's revenues in 1995, 1994 and 1993, respectively. Well tending income has decreased and is expected to continue to decrease as Alamco purchases the interests of outside investors in Company operated wells. Effective March 1, 1994, Alamco exchanged its interests in approximately 141 gross wells for outside investors' interests in approximately 237 gross wells located in West Virginia. Well tending income was substantially reduced because this like-kind exchange reduced the number of wells that the Company operates for outside investors. Alamco believes, however, that this reduction in well tending income will be offset over time by the effect of higher gas and oil revenues attributable to the Company's greater ownership interest in the wells. BRINE HAULING AND DISPOSAL SERVICES HAWG, a wholly-owned subsidiary, is a commercial brine hauling and disposal service company originally formed to provide service for Company- operated wells. The service entails, for a fee, the transportation of brine to a central processing facility and injection of the brine into disposal wells. The subsidiary now accepts brine, which is produced naturally with gas and oil, from wells operated by the Company as well as from other operators in West Virginia. HAWG currently operates two commercial disposal wells and facilities in West Virginia and has preliminary plans to convert another in 1996. Alamco invested $228,000 in converting one well and enhancing another in 1995. In 1995, HAWG provided 0.5 percent of Alamco's total revenues. GAS MARKETING As a response to the changing gas marketing environment, in October of 1993 the Company formed PAV with Phoenix, a gas marketing company. PAV provides gas marketing services to Alamco and other interest owners in certain Alamco operated wells. PAV has the exclusive right to market approximately 55 percent of Alamco's West Virginia gas supply. PAV seeks diversification for Alamco's gas sales to other marketing entities, local distribution companies and industrial users with a combination of short-term deals (less than a month), mid-term deals (one month to one year) and long-term deals (one year or more). In 1995 and 1994, PAV provided 0.5 and 1.0 percent, respectively, of the Company's total revenues. While Alamco's share of the profits from PAV have not been significant, the prices received for gas sales marketed through PAV have been on average above that which the Company would likely have otherwise received. FUTURE ACTIVITIES In the future, Alamco intends to use internally generated cash flows and amounts available under the Company's $30.0 million revolving bank credit facility to fund the exploration and development of its gas and oil reserves and property acquisitions. As of March 12, 1996, $14.6 million was available for borrowing under this credit facility. Alamco's 1996 capital investment program will ultimately depend upon the market and prices received for natural gas, the success of its exploration and development prospects, and the ability of the Company to capitalize on acquisition opportunities that may arise during the year. Drilling activity will be expanded in 1996 to an estimated 30 wells. Approximately 27 wells will be drilled as development wells at South Burns Chapel in West Virginia and at the Company's recent discoveries at the South Key Rock Prospect in Kentucky and its Carden prospect in Tennessee. Up to three exploratory wells are anticipated at prospects in Kentucky and Tennessee. Alamco plans to install a 17 mile pipeline system that will connect most of its Kentucky and Tennessee wells and transport the gas to a local gas utility, which is expected to result in higher sales prices. Alamco will continue with its aggressive acreage acquisition strategy in order increase its exposure to attractive exploratory and development drilling. Alamco remains committed to the acquisition of producing properties at favorable prices. MARKETS AND CUSTOMERS General. Alamco operates exclusively in the gas and oil industry. Sales through PAV and to Hope Gas, Inc. ("Hope") accounted for a substantial portion of the Company's total 1995 gas and oil sales. Alamco sold 44.2 percent of its gas and oil sales through PAV to various marketers, local distribution companies and commercial users. Additionally, sales to Hope accounted for approximately 28.9 percent of the Company's total 1995 gas and oil sales. West Virginia Production. Alamco's West Virginia production in 1995 was approximately 92 percent of total Company gas and oil sales. PAV. In 1993, Alamco entered into a three year gas marketing agreement with PAV for all gas transported on the CNG Transmission Corporation ("CNG") pipeline system and all gas on the Columbia Gas Transmission Corporation ("Columbia") pipeline system, which will expire on November 1, 1996. Volumes sold in 1995 through PAV on the CNG and the Columbia systems totalled approximately 2.7 BCF. The average price received from sales to PAV was $1.81 per MMBTU ($2.06 per MCF) in 1995. The Company is currently discussing a possible extension of the agreement. Hope. Hope purchases all of the Company's production from the South Burns Chapel Field under two separate gas purchase agreements, with terms continuing through October 31, 1999. Both agreements were renegotiated effective November 1, 1995, and have price reopeners on October 31, 1998. Total volumes sold to Hope in 1995 were approximately 1.7 BCF at an average price of $2.18 per MMBtu ($2.18 per MCF). While the loss of this customer could have a material adverse effect on the Company, management believes alternative customers could be located. Approximately 60 percent of the Company's production at South Burns Chapel is sold at a fixed price, modified from the prior agreement under which prices were based on an Appalachian index price. The remaining 40 percent of the South Burns Chapel Field gas is sold at prices tied to a monthly Appalachian index. Other. Effective March 1, 1995, Alamco permitted CNG to recommence recoupment of gas from its Tallmansville, West Virginia Field as a result of a $3,800,000 prepayment made in 1989 for 1,565,000 MMBTU of gas. This volumetric obligation was fulfilled in December 1995. Since this recoupment was fulfilled, the Company will sell the remaining gas from the Tallmansville Field to PAV. Alamco sells its other West Virginia gas production to various purchasers that are not significant to the Company's revenue base. Tennessee Production. Alamco's Tennessee production in 1995 was approximately 4 percent of total Company gas and oil sales. The Company is currently selling the gas production from its Tennessee operations at the Days Chapel Field to Equitable Resources Marketing Company. This is a month-to-month contract with market-sensitive pricing tied to Gulf Coast prices, less transportation and compression charges. For 1995, the net-back price (reduced for transportation) on volumes of approximately 291,000 MCF averaged $1.18 per MMBTU ($1.40 per MCF). The Company believes that this price can be improved with the installation of a new pipeline in this area. (See "Infrastructure Development"). Kentucky Production. Alamco's Kentucky production in 1995 was approximately 4 percent of total Company gas and oil sales. All of Alamco's production from its Kentucky operations is sold on the spot market or under term contracts providing for fixed or market-sensitive prices. Approximately 29 percent of the Company's Kentucky production is sold to one buyer under a contract which dedicates the gas for the life of the wells, but which still involves market-sensitive pricing. Company sales of Kentucky production totalled 252,000 MCF and averaged $1.55 per MMBTU ($1.77 per MCF) in 1995. Alamco installed a new pipeline in Kentucky in 1995 which is expected to improve gas prices. Principal Transporters. Most of Alamco's gas is transported though the CNG, Hope, Columbia, Texas Eastern and Wiser Oil Company pipeline systems which give Alamco access to major Northeastern markets. With the exception of the Kentucky production, each of the Company's major gas production areas and leases is in close proximity to at least one of those pipelines. A relatively minor amount of the Company's gas is transported on other pipeline systems. Oil Sales. Alamco's oil production is sold to various purchasers under agreements at posted field prices. These sales, which accounted for 11 percent of the Company's total gas and oil sales, averaged $15.90 per BBL in 1995. Marketing Risks. During the last several years, the gas industry has been adversely affected by a surplus, which has tended to depress prices and has created difficulty in estimating future prices. The Company is unable to predict with certainty the future stability or direction of natural gas prices. The availability of a ready market for Alamco's gas and oil depends on numerous factors beyond its control, including, among other factors, the demand for and supply of gas and oil; the weather; the proximity of the Company's natural gas reserves to pipelines; the capacity of such pipelines; the cooperation of pipeline owners; general economic conditions; fluctuations in seasonal demand and the effects of inclement weather and governmental regulation. In addition, under certain gas purchase arrangements the Company is subject to the risk of periodic reduced purchases or access to pipelines. Any significant reduction or curtailment of production for an extended period of time could have a material adverse effect on Alamco's results of operations. COMPETITION Alamco operates in a highly competitive environment. Competition is particularly intense with regard to the acquisition of producing properties and, to a lesser extent, undeveloped acreage. Integrated and independent gas and oil companies, partnerships and drilling programs, each with financial and human resources substantially in excess of those available to the Company, compete with Alamco, actively bidding for desirable gas and oil properties. The ability of the Company to add to its reserves in the future will be dependent on its ability to exploit its current lease holdings and its ability to select and acquire suitable producing properties and prospects for future exploration and development. Similarly, there is intense competition not only from other gas production entities, but also from other marketing firms, which have the capabilities to seek out and serve various customers. Although the Company has historically enjoyed a price premium over Gulf Coast gas production (as do others in the Appalachian Basin) due to the proximity of its production to major Northeast markets, deregulation of the industry and the advent of open access transportation on interstate pipelines have until recently caused an erosion of this premium. Colder than normal weather this winter (1995-1996) has caused the price premium for Appalachian gas to increase substantially. There can be no assurance, however, that this price premium will continue. REGULATION General. The gas and oil industry is extensively regulated by federal, state and local authorities, with legislation affecting the industry under constant review for changes and/or expansion, particularly with regard to environmental issues. Numerous agencies, both federal and state, have issued rules and regulations, some of which carry substantial penalties for failure to comply, binding on the industry and its members. To date, these mandates have had no material effect on the Company's capital expenditures, earnings or competitive position. Inasmuch as new legislation affecting the gas and oil industry is commonplace and existing laws and regulations are frequently amended or reinterpreted, Alamco is unable to predict the future cost or impact of complying with such laws and regulations. Environmental. The Company's operations are subject to various federal and state statutes, rules and regulations regarding the control of discharging materials into, or otherwise protecting, the environment. These requirements relate to drilling and production operations, activities in connection with storage and transportation of gas and oil and facilities used for treating, processing, injecting and handling the wastes therefrom. Additionally, in the case of spills or other impermissible discharges of certain materials into the environment, there are provisions for record keeping, notification and reporting, as well as severe civil and criminal penalties for violations, and potential liability for the costs of cleanup and any resultant damages. Further, the possibility exists that certain gas and oil wastes may be classified as hazardous or semi-hazardous, which could impose substantial obligations on the Company. Alamco does not believe that its compliance with current environmental laws constitutes a material expense. The Company has retained the services of an independent environmental engineering firm to assist with compliance matters on an as-needed basis. (See Part I, Item 3. Legal Proceedings.) Federal Regulation. As a result of the Wellhead Decontrol Act of 1989, all price controls for various classifications of gas were terminated as of January 1, 1993. This has had no impact on Alamco's gas sales since its reserves were either previously deregulated or sold under contracts with alternate pricing. FERC Order 636, issued in 1992, generally required the unbundling or separating of various components of pipelines services, i.e., gathering, transportation, storage and sales. Thus far, it appears to have resulted in increased competition in the marketing of natural gas and could cause increased costs for services the Company uses and decreased costs for services utilized by producers in the Gulf Coast and Southwest regions. Occupational and Safety Regulations. Alamco is subject to the requirements of the Occupational Safety and Health Act ("OSHA"), as well as other state and local labor rules and regulations. The cost of compliance with health and safety requirements has had no material impact on Alamco's aggregate production expenses to date. Nevertheless, the Company is unable to predict the cost of continued compliance. State Regulation. State regulatory authorities have established laws, rules and regulations requiring, among other matters, permits for drilling and recompletion operations, drilling and operating bonds or bank letters of credit, and reports concerning operations. Further, there are statutes and regulations governing the unitization or pooling of oil and gas leases, the spacing of wells and plugging requirements for abandoned wells. To date, these requirements have had no material effect on the Company's operations and the cost of compliance has been minimal. Future regulations could, however, increase the cost of the Company's production operations. Brine Hauling and Disposal Services. In order to comply in an economical manner with regulations governing the disposal of salt water, Alamco began operating its own salt water disposal well in 1992 to dispose of water from its own wells. In 1993, the Company formed a new subsidiary, HAWG, which is responsible for the transportation and disposal of the water. Since then, HAWG has begun operating a second commercial disposal well with permits pending for additional wells in West Virginia. HAWG has been expanding its marketing efforts in order to add customers to dispose of other producers' water. Currently, however, revenues which Alamco receives from HAWG are immaterial. OPERATIONAL HAZARDS AND INSURANCE Alamco's operations are subject to the usual hazards incident to the exploration for and production of gas and oil, such as blowouts, cratering, abnormally pressured formations, explosions, uncontrollable flows of oil, gas or well fluids into the environment, fires, pollution and other environmental hazards and risks. These hazards could result in substantial losses to the Company due to personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage or suspension of operations. Expenditures made in 1995 due to environmental claims which were unreimbursed by insurance carriers were immaterial. While Alamco maintains levels of insurance which it believes to be customary in the industry, the Company's insurance does not cover every potential risk associated with the drilling and production of gas and oil wells. The occurrence of a significant adverse event, the risks of which are not fully covered by insurance, could have a material adverse effect on the Company's financial condition and results of operations. Moreover, no assurance can be given that Alamco will be able to maintain adequate insurance in the future at rates it considers reasonable. Item 2. Properties. Alamco's properties consist essentially of the working and royalty interests owned by the Company in various gas and oil leases which are located in West Virginia, Tennessee and Kentucky. Alamco's proved reserves for the years ended December 31, 1995, 1994 and 1993 are presented below: Year Ended December 31, 1995 1994 1993 Natural Gas (MMCF) Developed 97,169 85,654 56,559 Undeveloped 30,124 33,971 26,059 Total Proved 127,293 119,625 82,618 Crude Oil (MBBL) Developed 1,405 1,164 605 Undeveloped 231 235 292 Total Proved 1,636 1,399 897 These estimates are based primarily on the reports of independent petroleum and geological engineers. Such reports are, by their very nature, inexact and subject to changes and revisions. Proved developed reserves are reserves expected to be recovered from existing wells with existing equipment and operating methods. Proved undeveloped reserves are expected to be recovered from new wells drilled to known reservoirs on undrilled acreage for which the existence and recoverability of such reserves can be estimated with reasonable certainty, or from existing wells where a relatively major expenditure is required to establish production. No estimates of reserves have been included in reports to any federal agency other than the Securities and Exchange Commission and the Department of Energy (Note 14). WELL COUNT Alamco obtained gas and oil sales revenues from 1,005 wells as of December 31, 1995. The Company is the operator of an additional 151 wells that are currently temporarily abandoned. The majority of Alamco's producing wells, located in northern and central West Virginia, are shallow wells drilled to a depth of up to 6,000 feet and are characterized by long producing lives with low volume production from low permeability reservoirs with a thickness ranging from 10 to 40 feet. A typical shallow well will encounter commercial gas production from between 4 and 10 separate and distinct production horizons. Approximately 936 of the Company's wells produce from one or more of these "blanket" formations that cover large areas of northern and central West Virginia. Due to mechanical and technical constraints, it is usually possible to produce only up to three to five of these formations simultaneously, and, consequently, it is necessary either to drill a twin well or recomplete the original well at a later date in order to obtain production from the remaining formations. A significant production horizon below 6,000 feet in Alamco's West Virginia operations is the Oriskany/Huntersville Chert formation. Deeper wells in this formation exhibit higher pressure and productivity than wells in the shallow West Virginia formations and reservoirs have thicknesses of up to 125 feet. Alamco's Tennessee production is from the Big Lime formation, an oil reservoir that also produces casinghead gas. Big Lime wells are typically characterized by low production volumes (5 to 35 barrels of production per day) from low pressure and low permeability reservoirs varying in thickness from 10 to 40 feet. The Tennessee exploratory drilling program found production in the Chattanooga Shale and the Company is still evaluating the long-term commerciality of the shale. In Kentucky, Alamco's production is from numerous zones, including the Big Lime, Coniferous, Maxton and Knox formations. These oil and gas reservoirs, like many other Appalachian formations, are characterized by low productive volumes with long producing lives. WELLS AT DECEMBER 31, 1995 Gross Wells Net Wells Gas Oil Total Gas Oil Total West Virginia 946 59 1,005 806.6 55.1 861.7 Tennessee 8 69 77 6.8 59.1 65.9 Kentucky 51 23 74 47.2 21.8 69.0 Total 1,005 151 1,156 860.6 136.0 996.6
Note: Many of Alamco's wells produce both gas and oil. For purposes of computing the above data, the gas well versus oil well designations were made on the basis of the type of artificial lift installed on the well. PROSPECTS Alamco's producing wells hold approximately 126,000 gross acres under lease which the Company believes includes a substantial number of promising development prospects. The prospects include continued development of the South Key Rock Prospect in Kentucky, the Carden Chattanooga Shale Prospect in Tennessee and the South Burns Chapel Field in West Virginia. Also, at December 31, 1995, Alamco held leases which have not yet been explored for the existence of gas and oil reservoirs. The Company may drill wells on the acreage to determine the existence of productive reservoirs, sell the leases to another gas and oil operator or abandon the acreage upon the expiration of the lease term. LEASE POSITION AT DECEMBER 31, 1995 Developed Acreage Undeveloped Acreage Gross Net Gross Net Acres Acres Acres Acres West Virginia 77,908 65,776 16,748 15,239 Tennessee 6,156 6,156 9,264 9,264 Kentucky 42,059 42,059 35,451 35,451 Total 126,123 113,991 61,463 59,954
TITLE TO PROPERTIES Substantially all of Alamco's property interests are held pursuant to leases from third parties. Title to properties is subject to royalty, overriding royalty, carried, net profits, working and other similar interests and contractual arrangements customary in the gas and oil industry, liens incident to operating agreements, liens relating to amounts owed to the operator, liens for current taxes not yet due and other encumbrances. The Company believes that such burdens neither materially detract from the value of such properties nor from the respective interests therein, or materially interfere with its use in the operation of the business. As is customary in the industry, little investigation of record title is made at the time of lease acquisition (other than a preliminary review of local records) in regard to undeveloped properties. Investigations, including a title opinion of local counsel, are generally made prior to the consummation of an acquisition of larger producing properties and before commencement of drilling operations. OTHER PROPERTY In addition to gas and oil properties, Alamco's property and equipment includes field warehouses, service (workover) rigs and support vehicles. All of the Company's assets collateralize its indebtedness under its revolving bank credit facility. See Note 6 to the Company's Notes to Consolidated Financial Statements. The Company's executive offices, approximately 20,000 square feet, were purchased on January 5, and February 7, 1996 for $561,000 using funds borrowed from the Bank One credit facility. Prior to the purchase, Alamco leased the same executive offices. Item 3. Legal Proceedings. Alamco is not at this date a party to any pending legal proceeding, other than ordinary, routine litigation incidental to the business of the Company and its subsidiaries, none of which is material. See Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 4 for information related to amounts received by the Company from Columbia arising out of the settlement of various gas purchase claims. On May 23, 1994, the United States Environmental Protection Agency (the "EPA") issued an administrative complaint against the Company for alleged violations of the Clean Water Act resulting from an oil discharge at Alamco's Days Chapel Field in Claiborne County, Tennessee. The incident occurred in December 1993 when vandals severed locks securing the valves on the Company's oil storage tanks and discharged approximately 174 barrels of oil into a local creek. The EPA initially proposed that penalties of nearly $124,000 be assessed against the Company. However, the Company contends that the asserted penalties exceed the statutorily authorized limits. Settlement negotiations are ongoing and Alamco believes that, due to meritorious defenses, any final penalties will be substantially less than those proposed although no assurances can be given as to the exact amount of any final penalties. Item 4. Submission of Matters to a Vote of Security Holders. There were no matters submitted to a vote of Alamco's stockholders during the quarter ended December 31, 1995. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows: Name Age Position John L. Schwager 47 President, Chief Executive Officer and Director Executive Vice President, Chief Operating Officer Richard R. Hoffman 45 and Director Bridget D. Furbee 36 Vice President of Administration and Legal Affairs
No family relationship exists among any of the Company's executive officers or directors. John L. Schwager has been President and Chief Executive Officer of Alamco since October 1987. Mr. Schwager was elected a director in 1986. Richard R. Hoffman became Alamco's Executive Vice President and Chief Operating Officer on December 13, 1990. Mr. Hoffman was elected a director in 1988. Bridget D. Furbee has been Vice President, Administration and Legal Affairs of Alamco since May 1994. Ms. Furbee served as Manager, Gas Marketing and Legal Affairs from August 1992 through April 1994, and Gas Marketing/Office Administration Manager from January 1985 through July 1992. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. Alamco's Common Stock is listed on the American Stock Exchange under the trading symbol "AXO". The following table sets forth for the periods indicated the high and low sales price of the Common Stock for each quarter in 1995 and 1994. 1995 1994 Quarter High Low High Low First 6-3/8 5-5/8 7-1/2 6-3/8 Second 8-3/4 6 7-3/4 6-1/8 Third 8-15/16 7-1/2 7-3/8 6-1/4 Fourth 8-1/2 7-5/8 6-3/4 5-1/2
As of March 1, 1996, there were approximately 1,349 holders of the Company's voting Common Stock. Since its incorporation in 1981, Alamco has not declared or paid any dividends with respect to the Company's Common Stock. Alamco presently intends to retain its funds for operations and expansion of its business and does not expect to pay any cash dividends in the foreseeable future. While the Company is not currently prohibited in its credit agreement with Bank One from paying cash dividends, certain financial covenants may, however, restrict such payments in the future. Subject to the terms of the credit agreement, the declaration and payment by Alamco of any dividends on its Common Stock in the future and the amount thereof will, nevertheless, depend upon the Company's operating results, financial condition, cash requirements, future prospects, and other factors deemed relevant by the Company's Board of Directors. Item 6. Selected Financial Data The information below should be read in conjunction with the Consolidated Financial Statements and the related notes in Item 8 and in Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations. Year Ended December 31, ------------------------------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- STATEMENT OF INCOME DATA: Revenues (a) $18,539 $13,671 $11,900 $11,350 $9,653 Income (loss) from operations 2,580 1,625 2,074 1,181 (180) Income before extraordinary items and change in DD&A accounting principle 1,695 1,646 1,552 939 288 Extraordinary items (b) -- -- -- -- 404 Change in DD&A accounting principle (c) -- -- -- 1,058 -- ------- ------- ------- ------- ------ Net income 1,695 1,646 1,552 1,997 692 ------- ------- ------- ------- ------ Cash dividends -- -- -- -- -- BALANCE SHEET DATA: Total assets $59,762 $56,058 $43,261 $40,237 $37,213 Working capital 827 835 1,321 2,475 2,214 Total long-term debt (d) 13,707 12,995 1,003 9,561 10,306 Stockholders' equity (d) 30,343 28,475 26,743 15,222 13,152 Year Ended December 31, ------------------------------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- PER SHARE DATA: Income (loss) from operations: $.55 $.35 $ .60 $ .46 ($.07) Income before extraordinary items and change in DD&A accounting principle .55 .35 .45 .37 .11 Extraordinary items (b) -- -- -- -- .16 Change in DD&A accounting principle (c) -- -- -- .41 -- ----- ----- ----- ----- ----- Net income $.36 $.35 $ .45 $ .78 $ .27 ----- ----- ----- ----- ----- FINANCIAL RATIO DATA: Book value per share (c) and (d) $6.46 $6.12 $5.77 $5.94 $5.18 Total debt to stockholders' equity (d) .4 .5 -- .6 .8 Current ratio 1.1 1.2 1.2 1.5 1.5 SELECTED PRODUCTION DATA: First Second Third Fourth 1995 Quarter Quarter Quarter Quarter ---- ------- ------- ------- ------- Production volumes Gas (MMCF) 1,392 1,354 1,254 1,488 Oil (MBBL) 21 22 17 28 Average Product Price Gas ($/MCF) $2.11 $1.99 $1.92 $2.33 Oil ($/BBL) $16.05 $16.50 $15.20 $15.74 1994 ---- Production volumes Gas (MMCF) 917 1,001 1,230 1,255 Oil (MBBL) 9 17 19 23 Average Product Price Gas ($/MCF) $2.94 $2.60 $2.30 $2.30 Oil ($/BBL) $12.30 $14.68 $16.02 $14.08 Notes to Selected Financial Data: (a) Revenues in 1995 include proceeds from the Columbia settlement in the amount of $4,164,000. During 1994, Alamco acquired a total of 172.6 net producing wells from various third parties. In October 1991, Alamco acquired working and royalty interests in 88 wells from Phillips Petroleum. (b) Alamco recorded an extraordinary gain of $404,000 after considering certain expenses and income tax benefits associated with the extinguishment of debt in 1991. (c) During 1992, Alamco changed its method of computing unit-of-production depreciation from a well-by-well basis to a depositional group basis. (d) In 1993, Alamco consummated a public offering in which 2,071,404 new shares of Common Stock were issued. The Company used the proceeds from the stock offering in 1993 to repay the then outstanding balance on its revolving credit facility with Bank One. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's discussion and analysis of changes in the Company's financial condition, including liquidity and capital resources, and results of operations during the twelve-month periods ended December 31, 1995, 1994 and 1993 are presented below. RESULTS OF OPERATIONS Year Ended December 31, 1995 vs. Year Ended December 31, 1994 - -------------------------------- Alamco reported net income of $1,695,000 for the year ended December 31, 1995, an increase of $49,000, or 3.0 percent as compared to net income of $1,646,000 in 1994. Income from operations for 1995 increased $955,000, or 58.8 percent, to $2,580,000 as compared to $1,625,000 for 1994. Total revenues of $18,539,000 in 1995 were $4,868,000 or 35.6 percent higher than total revenues of $13,671,000 in 1994. Gas and oil sales totalled $12,636,000 in 1995, a $643,000, or 8.1 percent, increase over the same period last year. Higher gas and oil sales volumes, resulting principally from the acquisition of producing properties and the drilling of new wells, contributed $2,398,000 and $288,000, respectively, and higher oil prices contributed $120,000 to the increase but were offset by lower gas prices of $2,164,000. Gas and oil sales volumes totalled 5,889,102 equivalent thousand cubic feet ("EMCF") and 4,810,681 EMCF for the years ending December 31, 1995 and 1994, respectively. Alamco received on average $2.10 per MCF and $15.90 per barrel ("BBL") in 1995, compared to $2.50 per MCF and $14.52 per BBL last year. In July 1995, Hope informed the Company of a two week shut-in of production volumes for system maintenance. In October 1994, Hope requested temporary reductions in production volumes for approximately four weeks due to oversupply of gas. The Company estimates revenues were adversely affected $237,000 and $250,000 in 1995 and 1994, respectively, due to these reductions in volumes. Alamco reported revenues of $4,164,000 in December 1995 from the settlement of claims with Columbia Gas Transmission Corporation ("Columbia"). (Note 4). Well tending income decreased $289,000, or 23.4 percent, due principally to the reduction in the number of wells the Company operates for outside investors. Effective March 1, 1994, Alamco exchanged its interests in approximately 141 gross wells for outside investors' interests in approximately 237 gross wells. In addition, on August 1, 1994, but effective January 1, 1994, Alamco acquired an outside owners' approximately 80 percent interest in 114 gross wells. The Company believes the reduction in well tending income, as a result of these transactions, will be offset over time by the effect of higher gas and oil revenues attributable to Alamco's greater ownership interest in the wells (Note 2). Other operating revenue increased $350,000 due primarily to the recognition of income related to the transaction in which Alamco formed a partnership with an East Coast financial institution (Note 3). The partnership is structured so that the financial institution will be allocated IRC Section 29 tax credits as a result of production from properties contributed by the Company to the partnership. The financial institution initially paid Alamco $1.0 million, less $100,000 for certain expenses incurred by the financial institution. Alamco recognizes income from this transaction as the tax credits are generated. Total expenses in 1995 were $15,959,000, an increase of $3,913,000, or 32.5 percent, from expenses of $12,046,000 in 1994. Operating expenses were higher by $1,252,000, or 22.9 percent, due primarily to the acquisitions made, new wells drilled during 1995, higher production related taxes and the write-off of certain land expenses related primarily to the Company's unsuccessful effort to acquire the oil and gas minerals underlying the Coopers Rock State Forest in Monongalia County, West Virginia. Alamco reported exploration expense of $641,000 in 1995 resulting from the abandonment of the Douglas Prospect and a portion of the Hoffman Prospect in Kentucky after drilling two unsuccessful exploratory wells. Alamco did not drill any exploratory wells in 1994. General and administrative expenses for 1995 were higher by $238,000, or 8.2 percent, as compared to last year due to, among other things, higher employee-related costs. Depreciation, depletion and amortization expense was higher by $748,000 due to, among other things, higher depletion expenses related to the increased gas and oil investments and higher production levels. Higher depreciation expenses associated with fixed assets also contributed to the increase. Interest expense for 1995 was $1,188,000, an increase of $1,034,000 over the same period last year due primarily to the increased utilization of the Company's revolving credit facility. During 1995, interest incurred by the Company totalled $1,360,000, of which $172,000 was capitalized. In 1994 interest incurred was $471,000 of which $317,000 was capitalized. Non-operating income in 1995 totalled $192,000, an increase of $37,000, as compared to $155,000 for 1994, due principally to higher interest income in 1995. Alamco's provision for income tax totalled $1,077,000 in 1995 as compared to an income tax provision of $134,000 last year. The 1995 provision is made up of the provision resulting from the Columbia settlement revenue of $1,627,000 and a tax benefit of $550,000 resulting from the current year loss from operations, excluding Columbia. Year Ended December 31, 1994 vs. Year Ended December 31, 1993 - -------------------------------- Alamco reported net income of $1,646,000 for the year ended December 31, 1994, an increase of $94,000, or 6.1 percent, as compared to net income of $1,552,000 in 1993. Income from operations for 1994 decreased $449,000, or 21.6 percent, to $1,625,000 as compared to $2,074,000 for 1993. Total revenues of $13,671,000 in 1994 were $1,771,000, or 14.9 percent, higher than total revenues of $11,900,000 in 1993. Gas and oil sales totalled $11,993,000 in 1994 which represents a $2,489,000 increase over the same period last year. Higher gas and oil sales volumes, resulting principally from the acquisition of producing properties and the drilling of new wells, contributed $3,362,000 and $486,000, respectively, to the increase and were offset by lower gas prices of $1,258,000 and lower oil prices of $101,000. Gas and oil sales volumes totalled 4,810,681 EMCF and 3,421,510 EMCF for the years ending December 31, 1994 and 1993, respectively. Alamco received on average $2.50 per MCF and $14.52 per BBL in 1994, compared to $2.79 per MCF and $16.01 per BBL last year. In early September 1994, Hope informed the Company and other local suppliers that its gas supply exceeded its sales market requirements, which could create an imbalance with CNG, its pipeline transporter, and requested a temporary reduction of production volumes for an unstated period of time. The Company agreed to temporarily reduce its production by approximately 50 percent beginning September 12, 1994. Beginning October 21, 1994, all of the affected wells produced at unrestricted levels. The Company estimates revenues were adversely affected by $250,000 due to this reduction in volumes. Well tending income decreased $940,000, or 43.3 percent, due principally to the reduction in the number of wells the Company operates for outside investors. Effective March 1, 1994, Alamco exchanged its interests in approximately 141 gross wells for outside investors' interests in approximately 237 gross wells. In addition, on August 1, 1994, but effective January 1, 1994, Alamco acquired an outside owners' approximately 80 percent interest in 114 gross wells. The Company believes the reduction in well tending income, as a result of these transactions, will be offset over time by the effect of higher gas and oil revenues attributable to Alamco's greater ownership interest in the wells (Note 2). Other operating revenue increased $222,000 due primarily to the recognition of income related to the transaction in which Alamco formed a partnership with an East Coast financial institution (Note 3). The partnership is structured so that the financial institution will be allocated IRC Section 29 tax credits as a result of production from properties contributed by the Company to the partnership. The financial institution initially paid Alamco $1.0 million, less $100,000 for certain expenses incurred by the financial institution. Alamco recognizes income from this transaction as the tax credits are generated. Total expenses in 1994 were $12,046,000, an increase of $2,220,000, or 22.6 percent, from expenses of $9,826,000 in 1993. Operating expenses were higher by $1,199,000, or 28.1 percent, due primarily to the significant property acquisitions made and new wells drilled during 1994 and higher employee-related expenses due principally to the expansion of the Company's drilling operations in 1994. Staff levels have increased in those departments that identify and acquire drilling prospects as well as the engineering staff which oversees the drilling of the wells. General and administrative expenses for 1994 were higher by $535,000, or 22.5 percent, as compared to last year due to, among other things, higher business franchise taxes due to the increase in Alamco's equity as a result of the 1993 stock offering. In addition, higher employee-related costs as well as expenses associated with the Company's Stockholders' Rights Plan contributed to the increase. Also, amounts paid under its bank credit facility were higher due to increased commitment fees and other fees which are based upon the unused portion of the Company's credit facility. Depreciation, depletion and amortization expense was higher by $717,000 due to, among other things, higher depletion expenses related to the increased gas and oil investments and higher production levels. Higher depreciation expenses associated with fixed assets also contributed to the increase. Interest expense for 1994 was $154,000, a decrease of $231,000 from the same period last year due primarily to capitalization of interest expense related to drilling activities. During 1994, interest incurred by the Company totalled $471,000 of which $317,000 was capitalized. Non-operating income in 1994 totalled $155,000, a decrease of $166,000, as compared to $321,000 for 1993 due principally to the absence in 1994 of certain asset sales and franchise tax adjustments. Alamco's provision for income tax totalled $134,000 in 1994 as compared to $843,000 last year. The reduction of $709,000 is due to, among other things, a change in the effective state tax rate to reflect new business activities in states with lower tax rates and recently implemented tax planning activities, an increase in the deductions associated with percentage depletion and lower income from operations. LIQUIDITY AND CAPITAL RESOURCES Working Capital. At December 31, 1995, Alamco had working capital of $827,000, as compared to $835,000 at December 31, 1994. Because the Bank One credit facility agreement, as amended, calls for the payment of interest only until July 1, 1998, current liabilities on the Company's December 31, 1995 balance sheet do not include any principal payments relative to the Bank One credit facility. Cash and cash equivalents totalled $3,297,000 at December 31, 1995. Of this amount, approximately $694,000 was available for general corporate purposes and the balance was held for third parties (Note 7). Operating activities provided a net $8,359,000 while investing activities used a net $7,625,000. Financing activities used a net $69,000. Revolving Credit Facility. Currently, Alamco has in place a $30.0 million revolving credit facility with Bank One (Note 6). As of March 12, 1996, $14.6 million was available for borrowing under the credit facility. The Company is required to pay interest only until July 1, 1998, at which time all principal and accrued interest are due and payable. Interest accrues and is paid monthly at a rate of Bank One's prime rate plus one-fourth of one percent. Alamco is not prohibited from paying dividends to its stockholders under the Bank One credit agreement; however, certain other financial covenants, such as debt coverage and equity covenants, may restrict the payment of cash dividends. The Company presently intends to retain its funds for operations and expansion of its business and does not expect to pay any cash dividends in the foreseeable future. Capital Expenditures and Commitments. Alamco's 1995 capital investments totalled $7,931,000, including $6,769,000 for the acquisition of producing properties and drilling of new wells. These activities were funded from internal sources and the Bank One revolving credit facility. In the future, the Company intends to continue to use internally generated cash flows and amounts available under the credit facility to fund the exploration and development of its gas and oil reserves and property acquisitions. (See Part I, Item 1. "Business".) Most of Alamco's capital spending is discretionary and the ultimate level of spending will be dependent, among other things, on the Company's assessment of the gas and oil business environment, the number of gas and oil prospects, and gas and oil business opportunities in general. The level of Alamco's 1996 capital expenditures will to a great extent depend upon the gas prices received by the Company. Based on current gas futures prices, Alamco plans to expand annual drilling activities to an estimated 30 wells. Alamco will continue with its enhancement program on existing wells, particularly the wells acquired in Kentucky and where the Company has established a significant acreage position. The Company plans to continue with its aggressive acreage acquisition strategy and will position itself to increase both exploratory and development drilling. Alamco remains committed to the acquisition of producing properties at favorable prices. Section 29 Tax Credits. Effective August 11, 1994, the Company, through a series of transactions, formed a partnership with a major East Coast financial institution (the "Institution"). The partnership is structured such that the Institution will be allocated IRC Section 29 tax credits as a result of production from properties contributed by Alamco to the partnership (Note 3). The institution initially paid $1.0 million (reduced by $100,000 for certain expenses incurred by the Institution), and will pay additional amounts, up to $4.0 million, in installments prior to December 31, 2002, upon achieving certain production minimums and satisfying other conditions. As part of the Section 29 tax credit transaction, the Company formed Alamco-Delaware, Inc. ("Aladel") as a Delaware Investment Holding Company. In early November 1995, Alamco acquired from an industry partner for $1.35 million in cash, interests in 47 gross (30.7 net) oil and gas wells and the remaining 53 percent of the gas gathering system that it did not own in the Company's Days Chapel Field in Tennessee. This Transaction increased the Company's ownership of the wells in the field from 48.4 percent to 83.0 percent. Alamco used funds available on its credit facility with Bank One to complete the transaction. Alamco also acquired in November 1995 for $1.22 million, four partnerships' share of the Company's claim against Columbia (see Columbia Litigation Claim below). The Company used funds available on its credit facility with Bank One to complete the transaction. Columbia Litigation Claim. In November 1995, Alamco received $7.6 million on its and other interest owners' behalf from Columbia under Columbia's Second Amended Plan of Reorganization, As Further Amended Dated July 17, 1995 (the "Plan"). This amount represents 68.875 percent of the Company's $11 million claim against Columbia arising from the settlement of various gas purchase claims. The Plan provides for a potential additional distribution of up to 3.625 percent of the allowed claim in the future depending upon various contingencies. Alamco's share of the claim was approximately 74 percent. Quarterly Financial Data (Unaudited) - ------------------------------------ The following table sets forth selected historical quarterly financial data (unaudited) with respect to the Company for the quarters indicated in 1995 and 1994. Alamco's results of operations are generally subject to quarterly variations due to, among other factors, weather conditions and other supply and demand factors affecting the natural gas markets. Historically, the demand and price paid for natural gas has increased in the cold winter months and decreased in the warm summer months. Such quarterly data is not necessarily indicative of the Company's future performance. Because of quarterly variations, Alamco believes that its results of operation should be viewed on an annual basis. (in thousands, except per share data) First Second Third Fourth 1995 Quarter Quarter Quarter Quarter ---- ------- ------- ------- ------- Sales and other operating revenues (1) $3,460 $3,530 $3,149 $8,400 Gross profit (1) 883 892 392 4,747 Net income (loss) (1) (102) (75) (352) 2,224 Net income (loss) per share (1) ($0.02) ($0.02) ($0.08) $0.48 First Second Third Fourth 1994 Quarter Quarter Quarter Quarter ---- ------- ------- ------- ------- Sales and other operating revenues $3,370 $3,208 $3,464 $3,629 Gross profit 1,347 1,128 1,161 1,051 Net income (2) 462 321 353 510 Net income per share (2) $0.10 $0.07 $0.08 $0.10 - ---------------------- (1) In the fourth quarter of 1995, Alamco recorded as revenue the proceeds from the Columbia Settlement of $4,164,000. The tax effect of this one- time event of $1,627,000 is included in the fourth quarter 1995 tax provision of $1,364,000. Absent the Columbia Settlement, revenues in the fourth quarter would have been $4,236,000 with a gross profit of $583,000, a net loss of $313,000, and a net loss per share of $.07. (2) In the fourth quarter of 1994, Alamco adjusted its provision for income taxes by $256,000 to reflect a change in the effective state tax rate. In addition, an increase in deductions associated with percentage depletion and lower income from operations also reduced the income tax provision. Item 8. Consolidated Financial Statements. - ------- ---------------------------------- Index to Consolidated Financial Statements ------------------------------------------ Pages ----- Independent Auditor's Report 29 Consolidated Statement of Income, for the Years Ended December 31, 1995, 1994 and 1993 30 Consolidated Balance Sheet, as of December 31, 1995 and 1994 31-32 Consolidated Statement of Changes in Stockholders' Equity, for the Years Ended December 31, 1995, 1994 and 1993 33 Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 34-35 Notes to Consolidated Financial Statements 36-53 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Alamco, Inc. We have audited the accompanying consolidated balance sheet of Alamco, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects the consolidated financial position of Alamco, Inc. and subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. 600 Grant Street Pittsburgh, Pennsylvania February 28, 1996 ALAMCO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME Years Ended December 31, 1995, 1994 and 1993 (In thousands, except share data) =============================================================================== 1995 1994 1993 ---- ---- ---- Revenues: Gas and oil sales $12,636 $11,993 $ 9,504 Agreements with gas purchasers (Note 4) 4,164 -- -- Well tending income 943 1,232 2,172 Other revenue 796 446 224 ------- ------- ------- Total revenues 18,539 13,671 11,900 ------- ------- ------- Expenses: Operating 6,713 5,461 4,262 Exploration 641 -- -- General and administrative 3,146 2,908 2,373 Depreciation, depletion, and amortization 4,271 3,523 2,806 Interest 1,188 154 385 ------- ------- ------- Total expenses 15,959 12,046 9,826 ------- ------- ------- Income from operations 2,580 1,625 2,074 Other nonoperating income 192 155 321 ------- ------- ------- Income before income tax 2,772 1,780 2,395 Provision for income taxes 1,077 134 843 ------- ------- ------- Net income $ 1,695 $ 1,646 $ 1,552 ======= ======= ======= Net income per share $0.36 $0.35 $0.45 ===== ===== ===== Weighted average number of shares outstanding 4,679,703 4,645,154 3,438,594 ========= ========= ========= Accompanying notes are an integral part of the consolidated financial statements. ALAMCO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 1995 and 1994 (In thousands) =============================================================================== ASSETS 1995 1994 ------ ---- ---- Current assets: Cash and cash equivalents $ 3,297 $ 2,632 Accounts receivable, net of allowance of $59-1995; $9-1994; 3,116 2,693 Due from partnerships and programs 72 140 Inventories and other current assets 368 428 ------- ------- Total current assets 6,853 5,893 ------- ------- Property and equipment: Gas and oil producing properties (Successful Efforts Method) 78,076 71,782 Other property and equipment 5,740 5,270 ------- ------- 83,816 77,052 Less accumulated depreciation, depletion and amortization 32,201 28,487 ------- ------- 51,615 48,565 Other assets 1,294 1,600 ------- ------- Total assets $59,762 $56,058 ======= ======= (Continued) Accompanying notes are an integral part of the consolidated financial statements. ALAMCO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 1995 and 1994 (In thousands, except share data) =============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 ------------------------------------ ---- ---- Current liabilities: Current portion of long-term debt and capital lease obligations $ 33 $ 106 Accounts payable 1,026 1,325 Accrued expenses 1,545 1,398 Due working interest and royalty owners 3,309 1,064 Deferred revenue 113 1,165 ------- ------- Total current liabilities 6,026 5,058 ------- ------- Long-term debt and capital lease obligations 13,674 12,889 Due working interest and royalty owners 325 888 Deferred revenue 29 333 Deferred taxes 8,936 8,011 Other long-term liabilities 429 404 ------- ------- Total liabilities 29,419 27,583 ------- ------- Commitments and contingencies Stockholders' equity: Preferred stock, par value $1.00 per share; 1,000,000 shares authorized, none issued -- -- Common stock, par value $0.10 per share; 15,000,000 shares authorized; 4,762,898 and 4,712,713 shares issued and outstanding, respectively 476 471 Additional paid-in capital 31,243 31,039 Accumulated deficit (1,152) (2,847) ------- ------- 30,567 28,663 Less treasury stock, at cost, 62,405 and 63,360 shares of common stock, respectively 224 188 ------- ------- Total stockholders' equity 30,343 28,475 ------- ------- Total liabilities and stockholders' equity $59,762 $56,058 ======== ======= Accompanying notes are an integral part of the consolidated financial statements. ALAMCO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 1995, 1994 and 1993 (In thousands, except share data) =============================================================================== Common Stock Additional Accumu- Treasury Stock ------------- Paid-in lated ----------------- Shares Dollars Capital Deficit Shares Dollars ------ ------- -------- -------- ------ ------- Balance January 1, 1993 1,569,110 $157 $21,164 ($6,045) 38,949 $157 Acquisition of treasury stock -- -- -- -- 50,000 129 Issuance of treasury stock -- -- 10 -- (18,236) (86) Public stock offering 3,105,000 310 9,741 -- -- -- Exercise of stock options 29,567 3 66 -- 2,079 15 Net income -- -- -- 1,552 -- -- --------- ----- ------- ------- -------- ----- Balance December 31, 1993 4,703,677 470 30,981 (4,493) 72,792 215 Issuance of treasury stock -- -- 36 -- (10,370) (34) Issuance of common stock 4,903 -- 32 -- -- -- Acquisition of treasury stock -- -- -- -- 938 7 Exercise of stock options 4,133 1 10 -- -- -- Public stock offering- additional costs -- -- (20) -- -- -- Net income -- -- -- 1,646 -- -- --------- ----- ------ ------ ------- ----- Balance December 31, 1994 4,712,713 471 31,039 (2,847) 63,360 188 Issuance of common stock 4,585 -- 35 -- -- -- Issuance of treasury stock -- -- 36 -- (10,370) (34) Acquisition of treasury stock -- -- -- -- 9,415 70 Exercise of stock options 45,600 5 133 -- -- -- Net income -- -- -- 1,695 -- -- --------- ----- ------- -------- -------- ----- Balance December 31, 1995 4,762,898 $476 $31,243 ($1,152) 62,405 $224 ========= ===== ======= ======== ========= =====
Accompanying notes are an integral part of the consolidated financial statements. ALAMCO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Years Ended December 31, 1995, 1994 and 1993 (In thousands) =============================================================================== 1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Net income $1,695 $1,646 $1,552 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, depletion and amortization 4,271 3,523 2,806 Deferred taxes 925 201 744 Dry hole costs 641 -- -- Gain on asset sales (31) (76) (141) Issuance of stock for employee benefits and compensation expense 105 102 86 Other factors, net 7 12 13 Increase (decrease) in cash from changes in: Accounts receivable (423) 1,282 (275) Due from partnerships and programs 68 18 97 Due working interest and royalty owners 2,245 (1,674) (340) Inventories and other current assets 60 (167) (105) Accounts payable and accrued expenses (152) 897 438 Deferred revenue (1,052) 474 231 ------ ------ ------ Net cash provided by operating activities 8,359 6,238 5,106 ------ ------ ------ Cash flows from investing activities: Proceeds from disposal of fixed assets 156 278 150 Payment for the acquisition of producing properties (1,384) (6,234) -- Capital expenditures, including dry hole costs (6,547) (10,500) (6,685) Investment in limited partnership (5) (290) -- Other assets 155 (464) (161) ------ ------ ------ Net cash used in investing activities (7,625) (17,210) (6,696) ------ ------ ------ (Continued) Accompanying notes are an integral part of the consolidated financial statements. ALAMCO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Years Ended December 31, 1995, 1994 and 1993 (In thousands) =============================================================================== 1995 1994 1993 ---- ---- ---- Cash flows from financing activities: Borrowings under line of credit $ 6,800 $13,300 $ 500 Payment on line of credit (6,000) (1,000) -- Principal payments on long-term debt and capital lease obligations (95) (320) (9,098) Acquisition of treasury stock (70) (7) (144) Net proceeds from public offering of common stock -- -- 9,948 Additional costs of public offering of common stock -- (20) -- Proceeds from exercise of stock options 138 11 69 Other liabilities (842) (825) (1,012) ------ ------ ------ Net cash (used in) provided by financing activities (69) 11,139 263 ------ ------ ------ Net increase (decrease) in cash and cash equivalents 665 167 (1,327) Cash and cash equivalents - beginning of period 2,632 2,465 3,792 ------ ------ ------ Cash and cash equivalents - end of period $3,297 $2,632 $2,465 ====== ====== ====== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $1,353 $216 $373 Income taxes 232 55 180 Supplemental Schedule of Non-Cash Investment and Financing Activities: Fixed assets acquired under capital lease -- -- $27 Like-kind exchange of property -- $3,270 -- Accompanying notes are an integral part of the consolidated financial statements. 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. These consolidated financial statements include the combined accounts of Alamco and its subsidiaries, Alamco-Delaware, Inc. ("Aladel"), HAWG HAULING & DISPOSAL, INC. ("HAWG") and Phoenix-Alamco Ventures, a Limited Liability Company ("PAV"). Aladel and HAWG are wholly owned subsidiaries of the Company. All significant intercompany balances have been eliminated in consolidation. Nature of Operations. Alamco, Inc. is an Appalachian-based independent gas and oil producer actively engaged in the acquisition, exploitation, exploration, development and production of domestic gas and oil. The Company's activities are conducted in West Virginia, Tennessee and Kentucky, with an emphasis on producing natural gas for ultimate sale to customers in the northeast gas markets. Revenue Recognition. Royalties, overrides and working interest revenues are recognized based on production. No material difference would result if revenues were recognized based on sales. Well tending income is recognized as revenue as services are performed. Cash and Cash Equivalents. The Company considers certificates of deposit, U.S. government securities and other short-term securities with maturities of three months or less as cash and cash equivalents. Fair Value of Financial Instruments. The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instruments for which it is practicable to estimate that value. For cash and cash equivalents, receivables and payables, the carrying amounts approximate fair value because of the short maturity of these instru- ments. For long-term debt, including current maturities, the fair value of the Company's long-term debt approximates historically recorded cost since interest rates approximate market. Off-Balance Sheet Risk. In accordance with industry practice, the Company has gas and oil sales contracts with commitments to sell certain quantities of gas and oil, primarily at market prices, for varying periods. Use of Estimates. Preparation of the 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 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. Gas and Oil Producing Properties. The Company uses the successful efforts method of accounting for gas and oil producing properties. Under the successful efforts method, certain expenditures, such as geological and geophysical costs, exploratory dry hole costs, delay rentals, and other costs directly related to exploration are recognized currently as expenses. All direct costs relating to property acquisitions, successful exploratory wells, all development costs, and support equipment and facilities are capitalized and depreciated, depleted or amortized using the units-of-production method. Production overhead and other costs are expensed as incurred. Gas and oil producing properties also include well equipment covered by capital lease obligations. Amortization of the lease assets is included in depreciation, depletion and amortization expense. Interest costs incurred in the drilling of wells are capitalized and amortized using the units-of-production method. The Company capitalized interest costs of $172,000 in 1995, $317,000 in 1994, and none in 1993. Interest incurred in 1995 was $1,360,000 and in 1994 was $471,000. In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). This statement, which is effective for financial statements for years beginning after December 15, 1995, was adopted by the Company in 1995. The Company has evaluated the impact of SFAS 121 by comparing the carrying value of its long- lived assets, consisting of gas and oil producing properties, other property and equipment, and intangibles, to the estimated future cash flow from such assets in order to determine whether the carrying value of such properties should be reduced. No adjustments to carrying values of assets were necessary as of December 31, 1995. Other Property and Equipment. Other property and equipment are stated at cost. Depreciation of other property and equipment is computed using the straight-line method over estimated useful lives of three to forty years, without considering the recoverable value of equipment salvageable from the wells. On an annual basis, the Company estimates the costs of future dismantlement, restoration, reclamation and abandonment of its gas and oil producing properties. Concurrently, the Company evaluates the estimated salvage value of equipment recoverable upon abandonment. At December 31, 1995 the Company's estimate of equipment salvage values is in excess of the costs of future dismantlement, restoration, reclamation and abandonment. Costs of individual gas and oil wells determined to be uneconomical are charged to accumulated depreciation, depletion and amortization, with no gain or loss being recognized until the depositional group in which the well is included is abandoned. When other property and equipment are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any gain or loss is reflected in income for the period. The cost of maintenance and repairs is expensed as incurred; significant renewals and betterments are capitalized. Intangible Assets. Intangible assets, which are reported in other assets on the Company's balance sheet, consist of a non-compete and a consulting agreement arising from the acquisition of 62 wells in Southeastern Kentucky. The values assigned to intangible assets are being amortized on a straight line basis over the life of the agreements which range from four to five years. Covenant not to compete . . . . . . $312,000 Consulting agreement . . . . . . . . 390,000 Less accumulated amortization . . . (234,000) -------- $468,000 ======== Income Taxes. The Company accounts for certain income and expense items differently for financial reporting purposes than for purposes of computing income taxes currently payable. Deferred tax liabilities and assets are determined based on the differences 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. Deferred tax expense is the result of changes in such basis differences and enacted rates. Income Per Share. Income per share amounts are computed by dividing the net income by the weighted average number of shares outstanding in 1995, 1994 and 1993. 2 - PROPERTY ACQUISITIONS AND WELL SWAP In early November 1995, the Company acquired from an industry partner, for $1.35 million in cash, interests in 47 gross (30.7 net) oil and gas wells and the remaining 53 percent of the gas gathering system that it did not own in the Company's Days Chapel Field in Tennessee. This transaction increased the Company's ownership of the wells in the field from 48.4 percent to 83.0 percent. The Company used funds available under its credit facility with Bank One to complete the transaction. On March 31, 1994, the Company exchanged its interests (the "Well Exchange") in 141 gross wells for outside investors' interests in 237 gross wells. The exchange was effective March 1, 1994. The exchange has been treated as a like-kind exchange and no gain or loss has been recognized on this transaction. In a separate transaction, the Company received a note in exchange for the sale of operating rights in a number of wells. Further, the Company sold its wholly-owned subsidiary, Interstate Resources, Inc. ("IRI"), in exchange for a note. The sale of the Company's operating rights and IRI were to the same non- affiliated party and combined into a single interest bearing note in the principal amount of $272,000. The gain resulting from the sale of operating rights and sale of IRI was deferred and is being recognized as principal payments are received. On July 18, 1994, the Company acquired certain gas and oil properties and intangible assets located in Southeastern Kentucky for $2.5 million in cash (Note 1). The Company acquired 62 wells (56.4 net wells) together with 34,000 gross acres (30,000 net acres) and became the operator of the wells. On August 1, 1994, the Company acquired all of the interests held by a number of limited partnerships in 114 West Virginia gas wells (91.2 net wells), of which 102 were already operated by the Company (the "West Virginia Acquisition"). The Company acquired these wells for a net $3.8 million in cash. Also, on August 1, 1994 the Company acquired seven wells and 1,275 acres in Whitley County, Kentucky, for $185,000. The Company became the operator effective as of the purchase date. The Company also acquired 2.5 net wells producing from the Oriskany formation in the South Burns Chapel Field for $500 effective as of July 1, 1994. These transactions have been accounted for under the purchase method and, accordingly, the operating results for the transactions have been included in the Company's consolidated operating results from the dates of the respective acquisitions forward. As the West Virginia Acquisition and the Well Exchange represent a substantial majority of the assets acquired during 1994, the following summary, prepared on a pro forma basis, presents the consolidated results of operations as if the two transactions had been consummated as of January 1, 1994. 1994 (Unaudited and in thousands of dollars, except per share amount) Revenues $14,340 Expenses 12,457 Income from operations 1,883 Net income 1,814 Net income per share $ 0.39 The pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might be achieved from combined operations. 3 - SECTION 29 TAX CREDITS The Company currently produces approximately 800,000 MMBtu per year of natural gas that is eligible for a tax credit of $1.01 per MMBtu under Internal Revenue Code ("IRC") Section 29. The tax credit applies to natural gas produced from "nonconventional" fuel sources, as defined, including gas production from Devonian Shale formations in certain West Virginia counties where the Company has production operations. In addition to producing from certain nonconventional fuel sources, the production must have been from wells drilled between December 31, 1979 and December 31, 1992, and the gas must be sold before December 31, 2002. The tax credit is allowed to reduce a taxpayer's regular tax liability but may not be used to reduce a taxpayer's alternative minimum tax ("AMT") liability. The credits also must be used in the tax year in which they are generated. The Company is currently, and is projected to be in the future, an AMT taxpayer and therefore is unable to fully use the tax credits to reduce its tax liability. In order to receive benefit from these credits which would otherwise expire unused, through a series of transactions, the Company formed a partnership with a large East Coast financial institution (the "Institution"). The partnership is structured such that the Institution will be allocated IRC Section 29 tax credits as a result of production from properties contributed by the Company to the partnership. The Institution initially paid $1.0 million (reduced by $100,000 for certain expenses incurred by the Institution), and will pay additional amounts, up to $4.0 million, in installments prior to December 31, 2002, upon achieving certain production minimums and satisfying other conditions. The Company estimates that this transaction, which was effective August 11, 1994, will allow it to realize $0.65 for each $1.00 in available Section 29 tax credits generated by the producing properties. As of August 11 1994, the effective date of the transaction, the Company recognized $1.0 million in deferred revenues and will recognize income from this transaction as the required gas production levels are achieved. In 1995 and 1994 the Company recognized $645,000 and $249,000, respectively, in income relative to this transaction. Accordingly, as of December 31, 1995, the Company's balance sheet includes $105,000 in deferred revenues, all of which is current. 4 - SETTLEMENT OF COLUMBIA LITIGATION CLAIMS The Company received in November 1995 the proceeds from the settlement of its contract rejection claims from Columbia. The initial distribution was the result of the confirmation by the U.S. Bankruptcy Court of Columbia's Plan of Reorganization on November 15, 1995. The Company received proceeds of $7.6 million, of which its share was $5.6 million. The Company recognized revenue of $4,164,000 in the fourth quarter of 1995, net of claims purchased from other owners, and after tax income of $2,537,000 ($0.54 per share). The Company could receive an additional settlement distribution from Columbia of up to 3.625 percent of its original claim of $11,000,000 with the Company's share being revenue of $295,000 and after tax income of $180,000 ($0.04 per share). The timing and amount of this additional recovery is contingent upon Columbia settling various outstanding claims with other gas producers. 5 - PUBLIC STOCK OFFERING On July 29, 1993, the Company consummated a public offering at a price to the public of $5.50 per share for 2,700,000 shares of Common Stock, of which 2,000,000 shares were sold by the Company and 700,000 shares were sold by PNC. The Company's net proceeds from this sale approximated $10.2 million before considering expenses associated with the stock offering. The Company used approximately $8.6 million of the net proceeds to repay its revolving credit facility loan balance with Bank One. On August 18, 1993, the underwriters exercised their option to purchase at a price to the public of $5.50 per share an additional 405,000 shares, of which the first 333,596 shares were sold by PNC and the remaining 71,404 shares were newly issued shares sold by the Company. The aggregate 1,033,596 shares sold by PNC represented all of the non-voting Class A Common Stock issued to PNC by the Company as part of the 1988 debt restructuring. Upon the sale of the 1,033,596 shares in the stock offering, the shares automatically converted to voting Common Stock on a one-for-one basis. 6 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS The Company has a $30.0 million revolving credit facility with Bank One which calls for the payment of interest only until July 1, 1998 at which time all outstanding principal and interest amounts are due. Interest accrues and is paid monthly at a rate of Bank One's prime rate plus one-fourth of one percent. During 1993, using a portion of the 1993 stock offering, the Company repaid all amounts outstanding under the Bank One credit facility. As of December 31, 1995 the aggregate amount of borrowing under the Bank One revolving credit facility was $13.6 million. Bank One's prime interest rate on December 31, 1995, was 8.5 percent. The credit facility is subject to semiannual borrowing base revisions (in March and September of each year) to be made in accordance with borrowing base recalculations performed by Bank One. Revisions could result in the extension of credit and repayment terms or, in the case of erosion of the borrowing base, the reduction of outstanding principal amounts or the amount of the credit facility. Based on the latest Bank One recalculation, performed in September 1995, the borrowing base is sufficient to allow full utilization of the maximum $30.0 million credit facility. In addition to interest payments, the Company is required to pay a commitment fee equal to the difference between the facility amount and the amount borrowed multiplied by one-half of one percent prorated into quarterly payments. The agreement also contains covenants which, among other things, require that the Company maintain specified levels of cash flow, stockholders' equity and ratio of current assets to current liabilities. The credit facility is collateralized by all of the Company's assets including the Company's gas and oil reserves. The aggregate maturities of long-term debt for each of the next five years and thereafter are as follows (in thousands): 1996 $ 33 1997 37 1998 13,620 1999 17 2000 and thereafter 0 ------- $ 13,707 ======= The Company also leases certain equipment used in the production of gas and oil under three lease programs with McJunkin. These equipment leases are for varying terms with purchase options at the end of the lease term. In addition, as part of a 1988 restructuring with McJunkin, the leases were amended to permit the Company to extend the leases for varying periods with rentals due with respect to the extension periods to be paid from a 2-1/2 percent working interest of the Company on the wells where the leased equipment is situated. The Company has extended the lease periods for all three programs through November 30, 2002. Since rental payments due under such extensions are contingent upon the proceeds of gas and oil production, such payments will be expensed as incurred. There are no future minimum lease payments due. 7 - CASH AND CASH EQUIVALENTS Cash and cash equivalents totalled $3,297,000 at December 31, 1995. Of this amount, approximately $694,000 was available for general corporate purposes and the balance was held for third parties, including $372,000 in gas and oil sales proceeds held for eventual distribution to outside working interests and royalty owners, $1,928,000 representing the outside interests' estimated share of Columbia settlement proceeds, $113,000 representing outside interests' share of cash prepaid by CNG, and $190,000 withheld from outside working interests' proceed distributions to be utilized for future ad valorem tax payments (Note 8). The Company's cash balance at December 31, 1995 includes $2,962,000 invested in commercial paper, U.S. Government and Agency Securities and Bankers' Acceptances, with an annualized 5.5 percent return. 8 - PLUGGING AND AD VALOREM TAX FUNDS The Company retains a portion of outside investors' monthly gas and oil production proceeds to be utilized for future well plugging and abandonment costs and ad valorem tax payments. The funds, totalling $515,000 at December 31, 1995, are invested in securities issued or guaranteed by the United States Treasury in accounts segregated from those of the Company. Interest earned on the funds accrues to the benefit of the working interest owners. Included in other assets is $325,000 for future plugging and abandonments. Corresponding amounts recorded in assets are included in liabilities. 9 - INCOME TAXES The following table details the components of the Company's income tax expense for the year 1993 through 1995. 1995 1994 1993 ---- ---- ---- (In thousands) Federal: Current $137 ($67) $ 99 Deferred 789 397 618 ---- ---- ---- Total Federal 926 330 717 ---- ---- ---- State: Current 15 -- -- Deferred 136 (196) 126 ---- ---- ---- Total State 151 (196) 126 ---- ---- ---- Total $1,077 $134 $843 ===== ==== ==== Reconciliations of the income tax provision computed at the statutory rate and the provision for income taxes as shown on the Statement of Income are summarized below: Year Ended December 31, -------------------------- 1995 1994 1993 ---- ---- ---- (In thousands) Tax provision computed at statutory rate $942 $592 $814 State taxes 139 104 126 Change in effective state tax rate -- (255) -- Sale of partnership interest 249 -- -- Use of percentage depletion (1,029) (321) (103) Valuation allowance 750 -- -- Other 26 14 6 ---- ---- ----- Provision for income taxes $1,077 $134 $843 ===== ==== ===== The 1994 change in effective state tax rate reflects the Company's new business activities in states with lower tax rates and recently implemented tax planning activities. The components of the net deferred tax liability are as follows: December 31, ---------------------------- 1995 1994 1993 ---- ---- ---- (In thousands) Depreciation, depletion and amortization $13,150 $12,293 $10,668 Percentage depletion carryover (750) -- -- Accounts receivable write-off (30) (30) (31) Future litigation payments (39) (72) (126) Sale of partnership interest (212) (293) -- Net operating loss carryforwards (1,553) (1,704) (490) AMT credits (821) (746) (837) ITC carryforwards (1,375) (1,394) (1,371) Other (22) (43) (3) Valuation allowance 750 -- -- ------- ------ ------ Net deferred tax liability $8,936 $8,011 $ 7,810 ======= ====== ====== The Company's investment tax credit carryforwards expire between the years 1996 and 2000. The Company has recorded a valuation allowance applicable to these credits because the ability to use a portion of them is uncertain. Prior to August 1994, the Company owned interests in 504 gas wells which qualified for Devonian Shale tax credits. These credits which approximate $1.01 per MMBtu of qualified gas produced in 1995 can be applied to reduce regular income taxes payable only in the years the gas is produced. Effective August 11, 1994, the Company formed a partnership structured such that a large East Coast financial institution will be allocated substantially all of the Devonian Shale tax credits previously allocated to the Company (see Note 3). No Devonian Shale tax credits were used by the Company in years 1995, 1994 or 1993. Statement 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 differences 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. 10 - STOCKHOLDERS RIGHTS PLAN On November 30, 1994, the Board of Directors of the Company adopted a Preferred Stock Purchase Rights Plan (the "Rights Plan"). Under the Rights Plan, the Board declared a dividend of one preferred share purchase Right for each outstanding share of Alamco Common Stock. In the event that any entity acquires 15% or more of the outstanding shares of Common Stock of the Company, the Rights will become exercisable subject to the terms of the Rights Plan and will entitle each holder of a Right (other than the acquiring person or group) under certain circumstances to purchase that number of shares of Alamco Common Stock having a market value equal to two times the exercise price of the Right. Rights were distributed to stockholders of record at the close of business on December 12, 1994. The Rights will trade with the Company's Common Stock until the Rights become exercisable and no separate certificates will be issued until that time. The rights will expire on December 12, 2004. The Rights Plan is designed to enable the Company and its Board to develop and preserve long- term value for stockholders and to protect stockholders in the event an attempt is made to acquire control of the Company through certain coercive or unfair tactics or without a bona fide offer at fair value to all of the stockholders of the Company. 11 - SALES CONCENTRATION The following table illustrates the Company's gas and oil sales concentration with purchasers greater than 10 percent: Purchasers 1995 1994 1993 PAV 44.2% 53.8% 0.0% Hope 28.9% 28.2% 25.2% CNG 7.1% 5.3% 24.1% Phoenix 0.0% 0.0% 14.4% Enron 0.0% 0.0% 14.2%
Phoenix-Alamco Ventures, a Limited Liability Company ("PAV"), which is owned jointly by the Company and Phoenix Energy Sales Company, is engaged in the marketing of Alamco's and other working interest owners' gas. PAV seeks diversification for Alamco's gas sales to other marketing entities, local distribution companies and industrial users with contracts of various durations. 12 - COMMITMENTS AND CONTINGENCIES CNG Agreement. In November 1989, CNG made a $3,800,000 prepayment for 1,565,000 MMBtu of gas to be produced from the Company's Tallmansville production area. CNG has the right, within certain specified limitations, to take deliveries of this gas up to December 31, 1999. As of December 31, 1995, CNG has taken delivery of all of the Tallmansville gas for which it has prepaid. The Company recognized its proportionate share of this deferred revenue as volumes were recouped in accordance with the CNG Agreement. 13 - STOCK OPTIONS AND BENEFIT PLANS Employee Stock Option Plans. Stock options have been granted to Company employees through two stock option plans, the 1992 Employees' Stock Option Plan (the "1992 Stock Option Plan") and the 1982 Employees' Stock Option Plan (the "1982 Stock Option Plan"). The 1992 Stock Option Plan was established March 20, 1992 and amended on March 24, 1995, to increase the number of shares available for issuance from 100,000 to 250,000. This plan provides for the grant to officers and other key management employees of the Company of stock options covering an aggregate of up to 250,000 shares of the Company's Common Stock. Options may be designated as either non-qualified stock options or incentive stock options, the latter of which must be exercised sequentially in grant date order. The Compensation Committee of the Company's Board of Directors administers the 1992 Stock Option Plan. The exercise price for each option granted must be equal to the fair market value per share of the Company's Common Stock on the date of the granting of the options (except when incentive stock options are granted to any person who owns more than 10% of the total combined voting power of all classes of stock of the Company, the exercise price of each option will be at least 110% of the fair market value of the Common Stock). At December 31, 1995, there were 154,500 shares available for future grants. The 1982 Stock Option Plan provided for the grant of stock options to officers and other employees of the Company for up to 65,000 shares of the Company's Common Stock. As of November 8, 1992, no additional options may be granted from the 1982 Stock Option Plan. Options are designated as either non- qualified stock options or incentive stock options. Information with respect to the options granted under each plan follows: 1982 EMPLOYEES' 1992 EMPLOYEES' STOCK OPTION PLAN STOCK OPTION PLAN ----------------- ----------------- Option Option Number of Price Range Number of Price Range Shares Per Share* Shares Per Share* ------ ---------- ------ ---------- Outstanding at January 1, 1993 50,500 $1.25--3.15 17,500 $4.875 Granted -- 36,000 6.75 Exercised 17,100 1.25--2.50 -- Canceled -- -- ------ ------ Outstanding at December 31, 1993 33,400 1.875-3.15 53,500 4.875-6.75 ------ ------ Granted -- 18,500 6.75 Exercised -- -- Canceled 19,900 1.875-3.15 7,500 4.875 ------ ------ Outstanding at December 31, 1994 13,500 1.875-3.15 64,500 4.875-6.75 ------ ------ Granted -- 35,000 8.00 Exercised 3,500 2.50 2,000 6.75 Canceled -- 4,000 6.75 ------ ------ Outstanding at December 31, 1995 10,000 1.875-3.15 93,500 4.875-8.00 ------ ------ Exercisable at December 31, 1995 10,000 1.875-3.15 36,164 4.875-6.75 ------ ------ - ------------------------ *Reflects the option price range applicable to only those installments included in the total number of shares with respect to which the options are or were exercisable.
Non-Qualified Stock Options. At December 31, 1995, non-qualified stock options granted outside of any stockholder-approved plan totalled 330,000 shares of Common Stock and were held by 7 employees. No options were granted or expired in 1995; 2,000 shares were cancelled in 1995. The stock option exercise prices range from $1.875 to $6.75 per share. Employees exercised 40,100, 4,133 and no shares during 1995, 1994 and 1993, respectively, with option prices ranging from $1.875 to $6.75 in 1995, and an option price of $3.15 in 1994. At December 31, 1995, 263,332 shares were exercisable with the remaining stock options becoming exercisable in November 1996. The 1992 Equity Compensation Plan for Outside Directors. The 1992 Equity Compensation Plan for Outside Directors (the "1992 Outside Directors' Plan") was established March 20, 1992 and provides for a maximum number of 75,000 shares of Common Stock from the Company's authorized and unissued shares of Common Stock and/or treasury shares to be available for issuance, subject to adjustments in certain instances. Outside Directors receive 50 percent of their annual retainer in the form of Common Stock and may elect to receive any or all of the remaining cash balance of their retainer in the form of Common Stock. In 1995, 4,585 shares were issued to directors at a market price of $7.75 per share. The Company adopted the Alamco, Inc. Directors' Deferred Income Plan (the "Plan") effective June 15, 1995, which permits eligible directors of the Company to elect to defer receipt of future compensation that would otherwise be payable in cash currently by the Company and have such deferred amounts credited to individual bookkeeping accounts maintained by the Company in the names of the participants. Outside Directors' Stock Option Plan. The 1982 Outside Directors' Stock Option Plan (the "Outside Directors' Plan") provided for the automatic grant of options of the Company's Common Stock to non-employee Directors of the Company. As of November 9, 1991, stock options may not be granted under the Outside Directors' Plan. At December 31, 1995, 4,400 shares remain outstanding and exercisable with option prices ranging from $2.50 to $3.875. No options were exercised in 1995. Employee Savings and Protection Plan. Effective October 1, 1987, the Company instituted a 401(k) Plan titled the Alamco, Inc. Employee Savings and Protection Plan. In addition to employee contributions, the Company contributed cash and stock of approximately $117,000, $110,000 and $97,000 in 1995, 1994 and 1993, respectively. 14 - SUPPLEMENTAL INFORMATION RELATED TO GAS AND OIL PRODUCING ACTIVITIES (Unaudited) Costs incurred by the Company in gas and oil property acquisition, exploration, and development are presented below: Year Ended December 31, --------------------------- 1995 1994 1993 ---- ---- ---- (In thousands) Costs (capitalized or expensed) for: Property acquisition $1,281 $ 6,740 $ 592 Exploration 641 -- -- Development 5,476 9,578 5,479 ------ ------- ------ $7,398 $16,318 $6,071 ------ ------- ------ Property acquisition costs include costs incurred to purchase, lease, or otherwise acquire a property. Exploration costs include the costs of geological and geophysical activity, dry holes, and drilling and equipping exploratory wells. Development costs include costs incurred to gain access to and prepare development well locations for drilling, to drill and equip development wells and to provide facilities to extract, treat, gather, and store gas and oil, and depreciation of support equipment used in development activities. Aggregate capitalized costs for the Company related to gas and oil exploration and production activities, with applicable accumulated depreciation, depletion and amortization, are presented below: 1995 1994 ---------------------- ----------------------- Accumu- Accumu- lated lated Cost DD&A Net Cost DD&A Net ---- ---- --- ---- ---- --- (In thousands) Proved developed properties $78,076 $28,996 $49,080 $71,782 $25,880 $45,902 Pipelines and processing equipment 1,924 671 1,253 1,734 562 1,172 Vehicles, machinery and equipment consisting principally of assets used in gas and oil producing activities 2,068 1,380 688 1,913 1,024 889 Buildings used in gas and oil producing activities 224 99 125 206 84 122 ------- ------- ------- ------- ------- ------- $82,292 $31,146 $51,146 $75,635 $27,550 $48,085 ------- ------- ------- ------- ------- -------
The results of operations for gas and oil producing activities are presented below: Year Ended December 31, --------------------------- 1995 1994 1993 ---- ---- ---- (In thousands) Gas and oil sales revenues $12,636 $11,993 $9,504 ------ ------ ------ Expenses: Production 4,194 3,287 2,259 Depreciation, depletion and amortization 3,467 2,790 2,734 Exploration 641 -- -- ------ ------ ------ 8,302 6,077 4,993 ------ ------ ------ Results of operations for gas and oil producing activities before provision for income taxes 4,334 5,916 4,511 Provision for income tax 650 887 677 ------ ------ ------ Results of operations for gas and oil producing activities $3,684 $5,029 $3,834 ------ ------ ------ Production expenses include those costs incurred to operate and maintain productive wells and related equipment and include costs such as labor, repairs and maintenance, materials, supplies, fuel consumed and other production taxes. Depreciation, depletion and amortization expense includes those costs associated with capitalized acquisition, exploration, and development costs including the depreciation applicable to support equipment. Exploration expenses would include the cost of exploratory dry holes, the geological and geophysical costs associated with undeveloped properties and write-offs or amortization of lease acquisition and other costs associated with undeveloped properties. The provision for income taxes is computed considering the Company's status as an alternative minimum tax payor. The decrease in the results of operation for gas and oil producing activities between 1995 and 1994 resulted from lower gas prices which was partially offset by increased production from the Company's successful acquisition and drilling programs. The increase in the results of operations for gas and oil producing activities between 1994 and 1993 resulted from higher gas and oil sales revenues due primarily to the Company's successful 1994 acquisition and drilling programs. Estimates of net proved reserves of gas and oil for the Company, all of which are within the United States, are as follows: Year Ended December 31, -------------------------------------------------- 1995 1994 1993 ------------ ----------- ----------- MCF BBL MCF BBL MCF BBL --- --- --- --- --- --- (In thousands) Proved reserves, beginning of year 119,625 1,399 82,617 897 58,830 881 Extensions, discoveries and other additions 11,534 2 13,529 435 23,727 142 Acquisitions 3,242 376 16,888 131 988 5 Revisions of previous estimates (1,744) (53) 10,995 4 2,269 (94) Production (5,364) (88) (4,404) (68) (3,197) (37) ------- ----- ------ ----- ------ --- Proved reserves, end of year 127,293 1,636 119,625 1,399 82,617 897 ------- ----- ------ ----- ------ --- Proved developed reserves 97,169 1,405 85,654 1,164 56,560 605 ------- ----- ------ ----- ------ --- These estimates are based primarily on the reports of independent petroleum and geological engineers. Such reports are, by their very nature, inexact and subject to changes and revisions. Proved reserves are the estimated quantities which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved reserves increased in 1995 and 1994 due to the success of the Company's acquisition and development drilling programs. Reserves were also added due to the inclusion of several additional drilling prospects on existing company acreage and on acreage leased in 1994 and 1995. The estimates include only those amounts considered to be proved reserves and do not include additional amounts that may result from new discoveries in the future. Proved developed reserves are those reserves that are expected to be recovered through existing wells with existing equipment and operating methods. The estimated future net cash flow and the present value of the proved reserves before taxes are presented below. Proved Proved Total Developed Undeveloped Proved --------- ----------- ------ (In thousands) Estimated future net cash flow attributable to production during 1996 11,175 (2,721) 8,454 1997 9,839 (1,076) 8,763 1998 9,332 1,609 10,941 1999 8,871 2,504 11,375 2000 and thereafter 119,254 47,306 166,560 ________ _______ _______ Total 158,471 47,622 206,093 Present value of future cash flow 69,874 13,613 83,487 Estimated future net cash flow represents future cash inflows generated by the sale of the proved reserves less estimated production and future development cost. For production from wells under fixed priced gas purchase contracts, the gas price used is the contractual gas price for the term of the contract. The average gas price used is $2.50 per MCF and the average oil price used is $16.89 per barrel. Production costs are based on those in effect at December 31, 1995. The estimated future net cash flow is based on a large number of estimates and arbitrary assumptions. Reserve quantities cannot be measured with precision and their estimation requires many judgmental determinations and frequent revisions. No assurance of levels of gas and oil prices and costs can be given nor can assurance be given that proved reserves will be developed within the periods indicated. Present value is calculated by discounting estimated future net revenue by 10 percent. Summarized in the following table is information for the Company with respect to the standardized measure of discounted future net cash flows relating to proved oil and gas reserves. Estimated future net cash flow represents future cash inflows generated by the sale of the proved reserves less estimated production and future development cost. Future income tax expenses are computed by applying the statutory rate and tax laws applicable to the future pre-tax net cash flows for each year, less the tax basis of the properties, and giving effect to permanent differences and net operating loss, investment tax credit, and percentage depletion carryforwards which exist as of the end of each year. In addition, 504 of the Company's gas wells qualify for Devonian Shale tax credits under Section 29 of the Internal Revenue Code. These tax credits, which in 1995, 1994 and 1993, are approximately $1.010, $1.000 and $.977, respectively, per MMBtu, of qualified gas produced, must be used in the year in which they originated and cannot be carried forward or back. During 1994, the Company entered into a transaction which allocated substantially all of its Devonian Shale tax credits to a third party (Note 3). Therefore, no Devonian Shale tax credits were included in the 1995 and 1994 tax calculations. For 1993, Devonian Shale tax credits expected to be generated from qualified wells were reflected as reductions of future income tax expense on gas and oil producing activities. Year Ended December 31, -------------------------- 1995 1994 1993 ---- ---- ---- (In thousands) Future cash inflows $344,066 $275,745 $225,423 Future production and development costs (137,973) (108,241) (82,499) Future income tax expense (52,524) (42,915) (33,874) -------- -------- -------- Future net cash flows 153,569 124,589 109,050 10% annual discount for estimated timing of cash flows (90,378) (77,184) (65,395) -------- -------- -------- Standardized measure of discounted future net cash flows $ 63,191 $ 47,405 $ 43,655 -------- -------- -------- Approximately 93 percent of the Company's reserves are natural gas reserves, the price for which has increased since year-end 1995. The following table summarizes the principal sources of change in the standardized measure of discounted future cash flows: Year Ended December 31, -------------------------- 1995 1994 1993 ---- ---- ---- (In thousands) Sales and transfers of gas and oil produced, net of production costs ($8,442) ($8,706) ($7,245) Net changes in prices, production and development costs, and quality estimates 41,458 26,825 48,702 Addition of proved undeveloped reserves 11,049 16,039 17,590 Development costs incurred during the period (5,476) (9,578) (5,479) Accretion of discount 7,718 6,540 3,967 Net change in income taxes (9,609) (9,041) (15,347) Other, including changes in the discount other than due to accretion (20,912) (18,329) (29,689) ------- ------- ------- $15,786 $ 3,750 $12,499 ------- ------- ------- It is necessary to emphasize that the data presented above should not be viewed as necessarily representing the expected cash flow from, or current value of, existing proved reserves since the computations are based on a large number of estimates and arbitrary assumptions. Reserve quantities cannot be measured with precision and their estimation requires many judgmental determinations and frequent revisions. The required projection of production and related expenditures over time requires further estimates with respect to pipeline availability, rates of demand, and governmental control, among other factors. Furthermore, actual prices and costs are likely to be substantially different from the current prices and costs utilized in the computation of reported amounts. In addition, the reported data are applicable only to gas and oil reserves classified as proved; no amounts are included with respect to additional reserves that may become proved in the future. Any analysis or evaluation of the reported amounts should give specific recognition to the computational methods utilized and the limitations inherent therein. Item 9. Changes In and Disagreements With Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure -------------------- None. PART III Item 10. Directors and Executive Officers of the Registrant -------------------------------------------------- Incorporated by reference from the Company's Proxy Statement to be filed not later than 120 days after the Company's 1995 fiscal year end. Item 11. Executive Compensation ---------------------- Incorporated by reference from the Company's Proxy Statement to be filed not later than 120 days after the Company's 1995 fiscal year end. The Report of the Compensation Committee of the Board of Directors is not incorporated by reference herein. Item 12. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- Incorporated by reference from the Company's Proxy Statement to be filed not later than 120 days after the Company's 1995 fiscal year end. Item 13. Certain Relationships and Related Transactions ---------------------------------------------- Incorporated by reference from the Company's Proxy Statement to be filed not later than 120 days after the Company's 1995 fiscal year end. PART IV Item 14. Exhibits and Reports on Form 8-K -------------------------------- (a) 1. and 2. Financial Statements -------------------- Financial Statements included in this report: Alamco, Inc., a Delaware corporation Independent Auditor's Report Consolidated Statement of Income for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Balance Sheet as of December 31, 1995 and 1994 Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements 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 of the undersigned, thereunto duly authorized. ALAMCO, INC. (Registrant) By: /s/ John L. Schwager ---------------------------------- John L. Schwager, President, Chief Executive Officer, Principal Executive Officer and Principal Financial Officer Dated: March 18, 1996 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 Signature and Title ---- ------------------- /s/ John L. Schwager March 18, 1996 -------------------------- John L. Schwager President, Chief Executive Officer, Principal Executive Officer, Principal Financial Officer and Director March 18, 1996 /s/ Robert S. Maust -------------------------- Robert S. Maust Director March 18, 1996 /s/ James B. Gehr ---------------------------- James B. Gehr Director March 18, 1996 /s/ Richard R. Hoffman -------------------------- Richard R. Hoffman Executive Vice President, Chief Operating Officer and Director March 18, 1996 /s/ Stephen L. Barr -------------------------- Stephen L. Barr Director March 18, 1996 /s/ James H. Weber -------------------------- James H. Weber Director /s/ Thomas M. Levine March 18, 1996 -------------------------- Thomas M. Levine Director INDEX TO EXHIBITS The following exhibits to this report are filed herewith or, if marked with an asterisk (*), are incorporated herein by reference: Exhibit Prior Filing or Subsequential No. Description Page No. Herein 3.1 Articles of Incorporation, as amended Filed herewith 3.2 By-laws, as amended Filed herewith 4.1 Form of Rights Agreement dated as of November Exhibit 4.1 to Current Report on Form 8-K 30, 1994 between Alamco, Inc. and Chemical dated November 30, 1994* (1) Bank 4.2 Certificate of Designations, Preferences and Exhibit 4.2 to Current Report on Form 8-K Rights of Series A Preferred Stock of Alamco, dated November 30, 1994* (1) Inc. 10.1 Master Gas Purchase Contract between the Filed herewith Company and Hope Gas, Inc. dated November 1, 1995 10.2 Letter Agreement between the Company and Hope Exhibit 10.3 to Annual Report on Form 10-K, Gas, Inc. dated November 23, 1994 for Year Ended December 31, 1994*(1) 10.3 Memorandum of Agreement dated August 19, 1992, Exhibit 10.28 to Amendment No. 1 to between the Company, Phillips Petroleum Registration Statement on Form S-2 filed on Company and Hope Gas, Inc. July 15, 1993 at Registration No. 33-64234* 10.4 Marketing Agreement between the Company and Exhibit 10.2 to Quarterly Report on Form 10- Phoenix-Alamco Ventures, a West Virginia Q for Quarter ended September 30, 1993* (1) limited liability company dated October 28, 1993 10.5 Letter Agreement between the Company and CNG Exhibit 10.8 to Annual Report on Form 10-K Transmission Corporation dated March 23, 1993 for Year Ended December 31, 1993* (1) 10.6 Stock Option Agreement dated December 13, 1990 Exhibit A to Exhibit 10.4 to Annual Report between the Company and John L. Schwager on Form 10-K, for Year Ended December 31, 1990* (1) (2) 10.7 Amendment No. 1 dated April 15, 1992 to Stock Exhibit 4.5 to Registration Statement on Option Agreement referred to in Exhibit 10.6 Form S-8 filed May 22, 1992 at Registration No. 33-47194* (2) 10.8 Stock Option Agreement dated November 11, 1993 Exhibit 4.3 to Registration Statement on between the Company and John L. Schwager Form S-8 filed February 18, 1994 at Registration No. 33-75500* (2) 10.9 Nonstatutory Stock Option Agreement dated Exhibit 4.3 to Registration Statement on November 1, 1994 between the Company and John Form S-8 filed November 16, 1994 at L. Schwager Registration No. 33-86452* (2) 10.10 Employment Agreement between the Company and Exhibit 10.15 to Annual Report on Form 10-K John L. Schwager dated January 1, 1995 for Year Ended December 31, 1994* (1) (2) 10.11 Stock Option Agreement dated November 11, 1993 Exhibit 4.4 to Registration Statement on between the Company and Richard R. Hoffman Form S-8 filed February 18, 1994 at Registration No. 33-75500* (2) 10.12 Employment Agreement between the Company and Exhibit 10.19 to Annual Report on Form 10-K, Richard R. Hoffman dated January 1, 1995 for Year Ended December 31, 1994* (1) (2) 10.13 Employment Agreement between the Company and Exhibit 10.23 to Annual Report on Form 10-K, Bridget D. Furbee dated January 1, 1995 for Year Ended December 31, 1994* (1) (2) 10.14 Restructuring Agreement with McJunkin Exhibit 28.03 to Report on Form 8-K dated Corporation November 21, ~1988* (1) 10.15 Amended & Restated Credit Agreement among Filed herewith Alamco, Inc., Alamco-Delaware, Inc. and Bank One, Texas, N.A. dated October 1, 1995 10.16 Alamco, Inc. 1982 Employees' Stock Option Plan Exhibit 4.1 to Registration Statement on Form S-8 filed October 9, 1987 at Registration No. 33-17841* (2) 10.17 Alamco, Inc. 1982 Outside Directors' Stock Exhibit 4.2 to Registration Statement on Option Plan Form S-8 filed October 9, 1987 at Registration No. 33-17841* (2) 10.18 Form of Nonstatutory Stock Option Agreement Exhibit 4.3 to Registration Statement on dated March 8, 1991, as amended by Amendment Form S-8 filed May 22, 1992 at Registration No. 1 dated April 15, 1992 (for options No. 33-47192* (2) granted to Richard R. Hoffman) 10.19 Alamco, Inc. 1992 Employees' Stock Option Plan Exhibit 4.3 to Registration Statement on Form S-8 filed May 22, 1992 at Registration No. 33-47193* (2) 10.20 Alamco, Inc. 1992 Equity Compensation Plan for Exhibit 4.3 to Registration Statement on Outside Directors Form S-8 filed May 22, 1992 at Registration No. 33-47195* (2) 10.21 The First National Bank of Morgantown, N.A. Exhibit 10.19 to Annual Report on Form 10-K, 401(k) Trust Agreement for Year Ended December 31, 1992* (1) (2) 10.22 Alamco, Inc. Savings and Protection Plan, Exhibit 10.20 to Annual Report on Form 10-K, effective as of October 1, 1987, as amended for Year Ended December 31, 1992* (1) (2) and restated as of January 1, 1991 10.23 Amendment to the Alamco, Inc. Savings and Exhibit 10.21 to Annual Report on Form 10-K, Protection Plan dated June 23, 1992 for Year Ended December 31, 1992* (1) (2) 10.24 Second Amendment to the Alamco, Inc. Savings Exhibit 10.32 to Annual Report on Form 10-K, and Protection Plan effective January 1, 1993 for Year Ended December 31, 1993* (1) (2) 10.25 Third Amendment to the Alamco, Inc. Savings Exhibit 10.38 to Annual Report on Form 10-K, and Protection Plan effective January 1, 1993 for Year Ended December 31, 1994* (1) (2) 10.26 Form of Indemnification Agreement (for Exhibit 10.25 to Registration Statement on directors/officers to which John L. Schwager, Form S-2 filed on June 10, 1993 at Richard R. Hoffman, Stephen L. Barr, James B. Registration No. 33-64234* Gehr, Robert S. Maust, Thomas M. Levine and James H. Weber are parties) 10.27 Form of Indemnification Agreement (for Exhibit 10.26 to Registration Statement on officers only to which Bridget D. Furbee is a Form S-2 filed on June 10, 1993 at party) Registration No. 33-64234* 10.28 Alamco, Inc. Directors Deferred Income Plan Filed herewith effective June 15, 1995 21.1 Subsidiaries of the Company: HAWG Hauling & Disposal, Inc., a West Virginia corporation Alamco-Delaware, Inc., a Delaware corporation Phoenix-Alamco Ventures, a West Virginia limited liability 23.1 Independent Auditors Consent dated February Filed herewith 28, 1996 23.2 Independent Petroleum Engineers Consent dated Filed herewith February 27, 1996 27 Financial Data Schedule Filed herewith
Note (1): Commission File No. 1-8490 Note (2): Indicates management contracts and compensation plans. EX-2 2 Exhibit 3.1 Alamco, Inc. Restated Copy of the ARTICLES OF INCORPORATION including all amendments as of May 12, 1995 _________________________ ARTICLE I. (As amended June 1, 1983) Name "The name of the corporation (hereinafter referred to as the "Company") is: "Alamco, Inc." ARTICLE II. (As revised July 24, 1984 and effective July 30, 1984) Registered Office The address of its registered office in the State of Delaware is Corpora- tion Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III. Purposes The nature of the business and the object and purposes of the Company are: A. To conduct the business of mining, preparing for market, and otherwise producing and dealing in coal, oil, gas, clay, and all other minerals and the products and by-products thereof of every kind and description and by whatsoever process the same can be or may hereafter be produced, and generally to buy, sell, exchange, lease, hold, acquire, and deal in lands, timber, mines, mineral rights and claims, and to conduct all business relating thereto, including the processing, handling, storage, distribution and transportation of timber, minerals, and all products and by-products of the earth; and B. To engage in any other lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV. (As amended May 8, 1992; amended May 12, 1995) Capital Stock The total number of shares of all classes of capital stock which the Corporation shall have the authority to issue is sixteen million (16,0- 00,000) shares, of which fifteen million (15,000,000) shares shall be Common Stock with a par value of ten cents ($0.10) per share, and of which one million (1,000,000) shares shall be Preferred Stock with a par value of One Dollar ($1.00) per share, and the shares of Common Stock and Preferred Stock are expressly authorized to be issued by the Board of Directors from time to time in one or more classes of stock, voting or non-voting, or in one or more series of stock within any class thereof, and the Board of Directors is expressly authorized to determine, in a resolution providing for the issuance of any class or series of Common Stock or Preferred Stock, the designations, preferences, dividend rate, redemption provisions, sinking fund provisions, rights on liquidation or dissolution, voting power, conversion rights, and other preferences and relative, participating, option or other special rights and qualifications or restrictions, of shares of such class or series not fixed and deter- mined by the Certificate of Incorporation." ARTICLE V. Board of Directors A. Powers of the Board In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized: (1) To make, alter or repeal the By-laws of the Company; (2) To borrow money for any of the objects or purposes of the Company and issue notes, bonds or other evidence of indebtedness therefor and secure payment thereof by deed of trust, mortgage, pledge or other encumbrance on any or all property of the Company; (3) To sell, assign, lease, exchange, or dispose of, in any manner, all or any part of the property and business of the Company at any time, including goodwill, assets, privileges and rights of any kind, for cash, or upon credit, or in consideration of stocks, bonds or other obligations of any person or corporation; (4) To buy, acquire, own, sell, transfer, lease, exchange, mortgage, pledge, encumber, or otherwise dispose of the goodwill, rights, property and assets of all kinds of any person, firm or corporation, domestic or foreign, and pay for the same in cash or upon credit, or in stocks, bonds, debentures, notes or other securities of the Company, or otherwise in any manner permitted by law; and (5) By a majority of the whole board, to designate one or more commit- tees, each committee to consist of one or more of the directors of the Company. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. B. Term and Number of Board Members. (As amended June 1, 1983). The number of members of the Board of Directors will be fixed from time to time by the Board of Directors but (subject to vacancies) in no event may there be less than three directors. The Directors shall be divided into three classes, each consisting of one- third of such directors, as nearly as may be. At the annual stockholders' meeting in 1983, one class of such directors shall be elected for a one-year term, one class for a two-year term and one class for a three-year term. Commencing with the stockholders' meeting in 1984, and at each succeeding annual stockholders' meeting, successors to the class of directors whose term expires at such annual stockholders' meeting shall be elected for a three-year term. If the number of such directors is changed, an increase or decrease in such directors shall be apportioned among the classes so as to maintain the number of directors comprising each class as nearly equal as possible, and any additional directors of any class shall hold office for a term which shall coincide with the remaining term of such class. A director shall hold office until the annual stockholders' meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification, or removal from office. (The following paragraph was amended effective May 11, 1990). Any vacancy in the Board of Directors resulting from death, resignation, removal, increase in number of directors, or other cause may be filled only by a vote of two-thirds of the whole Board of Directors at any regular or special meeting of the Board of Directors called for that purpose. Any director so elected shall serve until the next election of the class for which such director shall have been chosen and until his successor shall be elected and qualified. Any director shall be subject to removal in the manner now or hereafter pre- scribed by the laws of the State of Delaware for a corporation whose board is classified. C. Limitation of Liability of Board Members. (Added by Amendment effective May 27, 1987). A director shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided; however, that a director shall be liable to the corporation or its stockholders (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for paying a dividend or approving a stock repurchase or redemption which is unlawful under Sec. 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. ARTICLE VI. Records The books of the Company may be kept (subject to any requirement of law) 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 By-laws of the Company. Elections of Directors need not be by written ballot unless the By-laws of the Company shall so provide. ARTICLE VII. Stockholder Action Any action upon which a vote of stockholders of the Company is required or permitted may be taken only at a meeting of stockholders, unless provided otherwise in the By-laws of the Company. ARTICLE VIII. (As amended May 11, 1990) Amendments A. General. The Company reserves the right to amend, alter, change or repeal any provisions contained in this Certificate of Incorporation, as amended, in the manner now or hereafter prescribed by the laws of the State of Delaware and all rights herein conferred are granted subject to this reserva- tion, except as otherwise provided in this Article. B. Specific Amendments. The affirmative vote of the holders of at least two-thirds of the outstanding shares of Common Stock and two-thirds of the outstanding shares of each series of Preferred Stock, given in person or by proxy, at a meeting called for the purpose of voting thereon shall be required to amend or repeal Article VII; to amend or repeal Section B of Article V; and to amend or repeal this Section B of Article VIII. ARTICLE IX. Incorporation The incorporator is K. Dale Wissman, whose mailing address is 200 West Main Street, P. O. Box 1740, Clarksburg, West Virginia 26302-1740. Dated: May 12, 1995 EX-3 3 Exhibit 3.2 BY-LAWS OF ALAMCO, INC. EFFECTIVE MARCH 18, 1996 ARTICLE I Offices The Corporation shall maintain a registered office in the State of Delaware as required by law. The Corporation may also have offices at other places within or without the State of Delaware, as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II Stockholders Section 1. Place of Meetings. Meetings of the stockholders shall be held at such place, within or without the State of Delaware, as shall be designated from time to time by the Board of Directors. Section 2. Annual Meetings. The annual meeting of the stockholders for the election of directors and the transaction of such other business as may properly come before the meeting shall be held on the second Friday of each May or at such other date after the close of the Corporation's fiscal year on such date and at such time as shall be designated by the Board of Directors. Section 3. Special Meetings. Special meetings of the stockholders, for any purpose or purposes, shall be called by the president at the request in writing of a majority of the Board of Directors, or at the request in writing of the holders of two-thirds of the issued and outstanding capital stock of the Corporation entitled to vote at such a meeting. Such request shall state the purpose or purposes of the proposed meeting. Section 4. Notice of Meetings. Written notice of each meeting of the stockholders, stating the place, date and hour of the meeting, shall be given to each stockholder entitled to vote at the meeting at least ten, but not more than sixty days prior to the meeting. Notice of any meeting shall state in general terms the purpose or purposes for which the meeting is called. Section 5. Quorum; Adjournments of Meetings.The holders of a majority of the issued and outstanding shares of the capital stock of the Corporation entitled to vote at a meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business at such meeting; but, if there be less than a quorum, the holders of a majority of such shares whose holders are so present or so represented may from time to time adjourn the meeting to another time or place until a quorum shall be present, whereupon the meeting may be held, as adjourned, without further notice, except as required by law, and any business may be transacted there at which might have been transacted at the meeting as originally called. Section 6. Voting. When a quorum is present at any meeting, the vote of the holders of a majority of the shares of the capital stock entitled to vote whose holders are present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of statute or of the Certificate of Incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock entitled to vote held by such stockholder, but no proxy shall be voted on or after three years from its date, unless the proxy specifically provides for a longer period. Section 7. Inspectors of Election. The Board of Directors, or, if the Board shall not have made the appointment, the chairman presiding at any meeting of stockholders, shall have power to appoint one or more persons to act as inspectors of election at the the meeting or any adjournment thereof, to receive, canvass, and report the votes cast by the stockholders at such meeting, but no candidate for the office of director shall be appointed as an inspector at any meeting for the election of directors. Section 8. Chairman of Meetings. The president of the Corporation shall preside at all meetings of the stockholders. In the absence of the president, a majority of the members of the Board of Directors present at such meeting may appoint any other director or officer to act as chairman of the meeting. Section 9. Secretary of the Meetings. The secretary of the Corporation shall act as secretary of all meetings of the stockholders. In the absence of the secretary, the chairman of the meeting shall appoint any other person to act as secretary of the meeting. Section 10. Stockholder Actions. Any action upon which a vote of stockholders of the Corporation is required or permitted may be taken only at a meeting of stockholders, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. Section 11. Nomination of Directors. In addition to the right of the Board of Directors of the Corporation to make nominations for the election of directors, nominations for the election of directors may be made by any stockholder entitled to vote for the election of directors. Advance written notice of such proposed nomination shall be received by the Secretary of the Corporation by certified mail no later than (i) 90 days prior to the anniversary of the previous year's annual meeting of stockholders, or (ii) with respect to an election to be held at a special meeting of stockholders or at an annual meeting that is held more than 70 days prior to the anniversary of the previous year's annual meeting, the close of business on the tenth day following the date on which notice of such meeting is first given to the stockholders. Each such notice shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation of employment of each such nominee, and (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee. In addition, the stockholder making such nomination shall promptly provide any other information reasonably requested by the Corporation. ARTICLE III Board of Directors Section 1. Powers. The business of the Corporation shall be managed by its Board of Directors which shall exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-laws directed or required to be exercised or done by the stockholders. Section 2. Number of Directors. The number of directors which shall constitute the whole Board shall be not less than three nor more than six. The directors shall be elected at the annual meeting of stockholders or at a special meeting of stockholders called for that purpose, and each director elected shall hold office until his/her successor is elected and qualified. Directors need not be stockholders. This Section may be amended to increase or decrease the number of directors constituting the Board of Directors by one (1) within any twelve month period by the affirmative vote of a majority of the whole Board of Directors or by more than one (1) by the affirmative vote of at least two-thirds of the whole Board of Directors. Section 3. Place of Meetings. Any meeting of the Board of Directors may be held either within or without the State of Delaware. Section 4. First Meeting. The first meeting of the Board of Directors after the election of directors, of which no notice shall be necessary, shall be held immediately following the annual meeting of the stockholders or any adjournment thereof at the place where the annual meeting of the stockholders was held at which such directors were elected, or at such other place as a majority of the directors who are then present shall determine, for the election or appointment of officers and the transaction of such other business as may be brought before such meeting. Section 5. Regular Meetings. Regular meetings of the Board of Directors, other than the first meeting, may be held without notice of such times and places as the Board of Directors may from time to time determine. Section 6. Special Meetings. Special meetings of the Board of Directors may be called by the president and shall be called on the written request of any director. Not less than one day's notice of a special meeting shall be given by the secretary to each director in person, by telephone, by mail, or by telegraph. Section 7. Organization. Every meeting of the Board of Directors shall be presided over by the president of the Corporation. In the absence of the president, or if the president is not a director, a presiding officer shall be chosen by a majority of the directors present. The secretary of the Corporation shall act as secretary of the meeting. In his/her absence, the presiding officer shall appoint another person to act as secretary of the meeting. Section 8. Quorum. A majority of the whole Board shall constitute a quorum for the transaction of business, but less than a quorum may from time to time adjourn any meeting to another time or place until a quorum shall be present, whereupon the meeting may be held, as adjourned, without further notice. Section 9. Vote. The act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. Section 10. Action in Lieu of a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of the Board or committee. Section 11. Conference Call Meeting. Members of the Board of Directors or of any committee designated by the Board of Directors may participate in a meeting of the Board of Directors or committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Section 12. Removal of Directors. Any director may be removed by the stockholders only as provided under the Certificate of Incorporation, as amended, and the Delaware Corporation law. Section 13. Indemnification of Officers and Directors. (a) The Corporation shall indemnify each director and officer of the Corporation who was or is a party or a witness or is threatened to be made a party or a witness to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was an officer or director of the Corporation, or is or was serving at the request of the Corporation as a fiduciary, trustee, custodian, administrator or committeeman of an employee benefit plan established and maintained by the Corporation, or is or was serving at the request of the Corporation as an officer, director, employee or agent of another corporation, partnership, joint venture, trust or other enterprise to the fullest extent now or hereafter permitted by law against all expenses (including attorneys' fees and disbursements), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding. (b) The Corporation shall pay expenses, including attorneys' fees and disbursements, incurred by an officer or director in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such officer or director to repay such amount if it shall ultimately be determined that such officer or director is not entitled to be indemnified by the Corporation as authorized by applicable law. (c) The Corporation may, as determined by the Board of Directors, indemnify each employee and agent who was or is a party or a witness or is threatened to be made a party of a witness to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was an employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, fiduciary, employee or agent of another corporation, partnership, joint venture, trust or other enterprise to the fullest extent now or hereafter permitted by law against all expenses (including attorneys' fees and disbursements, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding). The Corporation may, as determined by the Board of Directors, pay expenses incurred by employees and agents by reason of their participation in an action, suit or proceeding referred to in this Section 14 (c) in advance of the final disposition of such action, suit or proceeding without receipt of an undertaking to repay the amount so advanced. (d) Each director and officer shall be deemed to act in such capacity in reliance upon such rights of indemnification and advancement of expenses as are provided in this Article. The indemnification and advancement of expenses provided by this Article shall not be deemed exclusive of any other right to which any person seeking indemnification or advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors, statute or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office or position, and shall continue as to a person who has ceased to be a director, officer, fiduciary, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. (e) Any indemnification under this Article shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee, fiduciary or agent is proper in the circumstances because such person has acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his/her conduct was unlawful. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to such action, suit or proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. The termination of any action, suit or proceeding by judgement, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person's conduct was unlawful. (f) The Corporation may purchase and maintain insurance on behalf of each director and officer against any liability asserted against and incurred by such director or officer in any capacity, or arising out of such director's or officer's status as such, whether or not the Corporation would have the power to indemnify such director or officer against such liability under the provisions of this Article. (g) The Board of Directors, without approval of the stockholders, shall have the power to borrow money on behalf of the Corporation, including the power to pledge the assets of the Corporation, from time to time to discharge the Corporation's obligations with respect to indemnification, the advancement and reimbursement of expenses, and the purchase and maintenance of insurance referred to in this Article III. (h) For purposes of this Article, references to the "Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, fiduciaries, employees or agents, so that any person who is or was a director, officer, fiduciary, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, fiduciary, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. Section 14. Age Limit of Directors. No person shall be eligible to be elected to a term as a Director of the Corporation if at the commencement of the term the person's age at his or her last birthday was 65 years or over. ARTICLE IV Committees Section 1. Committees. The president may, by resolution passed by a majority of the entire board, designate one or more other committees or directors which to the extent provided in the resolution shall have and may exercise powers and authority of the board in the management of the business and affairs of the Corporation. Section 2. Minutes of Meetings. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Article V Officers Section 1. General. The Board of Directors shall elect the officers of the Corporation which may include a president, a chief executive officer, a chief or principal financial officer, such number of vice presidents as the Board may determine, a secretary, an assistant secretary and such other officers as in its option are desirable for the conduct of the business of the Corporation. One person may hold more than one office in the Corporation. Section 2. Powers and Duties. Each of the officers of the Corporation shall, unless otherwise ordered by the Board of Directors, have such powers and duties as generally pertain to his/her respective office as well as such powers and duties as from time to time may be conferred upon him by the Board of Directors. In the absence of the secretary, or in the event of his/her inability or refusal to act, the assistant secretary may exercise, in addition to his/her other duties, the duties of secretary. Section 3. Term of Office; Removal and Vacancy. Each officer shall hold his/her office until his/her successor is elected and qualified or until his/her earlier resignation or removal. Officers shall be subject to removal with cause at any time by the affirmative vote of a majority of the whole Board and shall be subject to removal without cause by the affirmative vote of at least two- thirds of the whole Board. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. Section 4. Power to Vote Stock. Unless otherwise ordered by the Board of Directors, the president of the Corporation shall have the full power and authority on behalf of the Corporation to attend and to vote at any meeting of stockholders of the corporation in which the Corporation may hold stock, and may exercise on behalf of the Corporation any and all of the rights and powers incident to the ownership and authority to execute and deliver proxies, waivers, and consents on behalf of the Corporation in connection with the exercise by the Corporation of the rights and powers incident to the ownership of such stock. The Board of Directors, from time to time, may confer like powers upon any other person or persons. ARTICLE VI Capital Stock Section 1. Certificates of Stock. Certificates for stock of the Corporation shall be in such form and signed by such officers that the Board of Directors may from time to time prescribe. Any of or all of the signatures on a stock certificate, including, without limitation, that or those of any transfer agent or registrar, may be a facsimile or facsimiles. In the event any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if such officer, transfer agent or registrar were the officer, transfer agent or registrar at the date of issue. Section 2. Transfer of Stock. Shares of stock of the Corporation shall be transferable on the books of the Corporation only by the holder of record thereof, in person or by duly authorized attorney, upon surrender and cancellation of certificates for a like number of shares, with an assignment or power of transfer endorsed thereon or delivered therewith, duly executed, and with such proof of the authenticity of the signature and of authority to transfer, and of payment of transfer taxes, as the Corporation or its agents may require. Section 3. Ownership of Stock. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the owner thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law. Section 4. Lost, Stolen or Destroyed Certificates. In case any certificate for stock of the Corporation shall be lost, stolen or destroyed, the Corporation may require such proof of the fact and such indemnity to be given to it and/or to its transfer agent and/or registrar, if any, as shall be deemed necessary or advisable by it. ARTICLE VII Miscellaneous Section 1. Corporate Seal. The seal of the Corporation shall be as determined by the Board of Directors. Section 2. Fiscal Year. The Board of Directors shall have power to fix, and from time to time to change the fiscal year of the Corporation. ARTICLE VIII Notices Section 1. Notice. Whenever, under the provisions of statute or of the Certificate of Incorporation or of these By-laws, notice is required to be given to any director or stockholder, such notice may be given in person, by telephone; by telegraph; by telecopy; or in writing, by mail, addressed to such director or stockholder, at his/her address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Section 2. Waiver. Whenever any notice is required to be given under the provisions of statute or of the Certificate of Incorporation or of these By- laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE IX Amendment Section 1. General. Except as provided in Section 2 below, these By-laws may be amended or repealed, or new By-laws may be adopted by the stockholders, at any meeting of the stockholders or by the Board of Directors at any meeting of the Board or pursuant to Sections 10 and 11 of Article III of these By-laws. Section 2. Amendments to Certain Sections.The affirmative vote of two-thirds of the whole Board shall be required to amend or repeal Article II, Section 3; Article II, Section 10; Article II, Section 11; Article III, Section 2; Article V, Section III; and this Section 2, Article IX, of these By-laws. March 18, 1996 All amendments from 1981 to this date have been incorporated herein. EX-4 4 Exhibit 10.1 MASTER GAS PURCHASE CONTRACT ALAMCO, INC. Contract No. 9131-A THIS MASTER GAS PURCHASE CONTRACT (Agreement) is made and entered into as of the 1st day of November, 1995, by and between ALAMCO, INC., a Delaware corporation, (Seller) with its principal address at 200 West Main Street, Clarksburg, WV 26301, and HOPE GAS, INC., a West Virginia corporation (Buyer), whose address is P. O. Box 2868, Clarksburg, West Virginia 26302-2868. WHEREAS, Seller desires to sell and deliver natural gas to Buyer and Buyer desires to purchase such gas upon and subject to the terms of this Agreement; and, WHEREAS, Seller and Buyer are parties to Master Gas Purchase Contract No. 9131 dated November 1, 1989, as amended ("Master Contract"); and, WHEREAS, Seller and Buyer wish to replace said Master Contract with the terms and conditions set forth herein. NOW, THEREFORE, WITNESSETH, in consideration of the mutual covenants and promises set forth below, and intending to be bound by them, Seller and Buyer covenant and agree: ARTICLE I SALE & PURCHASE OBLIGATIONS 1.01 Seller shall produce and sell to Buyer at the Points of Delivery listed in Article III herein, and Buyer shall take and pay for, volumes of natural gas from the wells and MID numbers set forth in Appendix B (attached), as amended from time to time. Notwithstanding the foregoing, Buyer shall be under no obligation to purchase any of the production offered by Seller in the event that Buyer has insufficient pipeline capacity or market demand to facilitate the sale and/or use of Seller's natural gas. However, Buyer shall use its best efforts to ensure sufficient pipeline capacity and market demand to facilitate the sale and/or use of Seller's natural gas. Further, in the event of a curtailment, Buyer shall not discriminate against the gas described in Appendix B, and any suspensions of deliveries shall be on a nondiscriminatory basis. 1.02 Exclusive right to purchase; additional wells. Unless provided otherwise, Seller shall offer to sell to Buyer all of the natural gas that may be produced from each existing and future well located in Buyer's general operating area of Monongalia and Preston counties. Within ten (10) days after completion of any such well, Seller shall give notice to Buyer of such completion, and Buyer may elect to purchase gas from the well under the terms of this Agreement by giving written notice to Seller within ten (10) days after receipt of Seller's written offer. Wells accepted by Buyer, under the terms of this Agreement, shall be added to Appendix B along with their corresponding MID numbers. ARTICLE II TERM 2.01 This Agreement shall be in full force and effect from November 1, 1995, through October 31, 1999, and thereafter unless terminated by either Buyer or Seller upon sixty (60) days' prior written notification. ARTICLE III DELIVERY POINTS 3.01 The Points of Delivery for natural gas purchased hereunder shall be at existing or future interconnections between the facilities of Buyer and Seller at those MID numbers listed on Appendix B (attached). 3.02 Termination for low volume. In the event that Seller cannot deliver to Buyer an average of five thousand (5,000) cubic feet of natural gas per day at a Point of Delivery, during the period November 1, through April 30, then Buyer may, in its sole discretion, either terminate the contract as it relates to such Point of Delivery by giving Seller notice in writing ten (10) days prior to the effective date of termination or withhold from Seller's proceeds, or invoice Seller, for any costs imposed upon Buyer by upstream transporters as a result of Seller's inability to transport certain minimum quantities. ARTICLE IV METER SITE AND FACILITIES 4.01 Buyer's Facilities; Meter Site. All gas sold by Seller to Buyer shall be measured by a meter owned, installed, maintained, and read by Buyer upon a site satisfactory to Buyer. Rights-of-way and the related surface grants for such site shall be furnished by Seller to Buyer free of all costs and from all claims. In the event Buyer is at any time required to pay for such rights-of-way or such costs or claims, then the amounts paid therefor and other expenses related thereto may be deducted from the payments to be made for gas purchased from Seller and applied to the reimbursement of Buyer for such payments. Seller warrants generally that title to the rights-of-way and the related surface grants conveyed hereunder shall be free and clear of all liens, encumbrances, and claims whatsoever and free of any claim, rightful or otherwise, of any third person by way of infringement. 4.02 Meter maintenance fee. Seller agrees that should the amount of gas passing through any meter installed, maintained, and operated hereunder during any month, be less than a daily average of ten thousand (10,000) cubic feet, it will pay to Buyer a mutually agreed upon reasonable fee for maintaining and operating each such meter for each month. Buyer shall render a bill for such meter operating charge or deduct the amount thereof from the monthly settlements hereunder. ARTICLE V PRICE 5.01 Commodity Rate. For each dekatherm of gas delivered to Seller during the period commencing November 1, 1995, and continuing through October 31, 1998, Buyer shall pay Seller a fixed price equal to two dollars ($2.00). 5.02 Price Renegotiation. Not less than thirty (30) days prior to October 31, 1998, the parties will have negotiated in good faith to agree on the price to be paid for gas sold and purchased hereunder for the succeeding year, or for such other period as may be agreed upon by the parties. If, after good faith negotiations, Buyer and Seller fail to agree upon the price to be paid for gas for the succeeding term, either party may terminate this Agreement upon thirty (30) days written notice. Buyer and Seller expressly agree that the price to be paid for natural gas purchased through October 31, 1998, is non-negotiable and that fluctuations in the market will not serve as grounds for renegotiation. 5.03 Change in Regulation Results in Material Adverse Effect. If the Public Service Commission of West Virginia or any other successor governmental agency, whether state or federal, takes any action or issues any determination that directly or indirectly results in a material adverse change to any provision of this Agreement, then Buyer may either: (a) continue to fulfill its obligations under this Agreement as altered by the change in regulation; or (b) seek to renegotiate the affected terms of this Agreement by giving notice to Seller within thirty (30) days of the material adverse change. If Buyer elects to renegotiate the terms of this Agreement, both Parties shall be obligated to renegotiate in good faith. ARTICLE VI STATEMENTS AND PAYMENT 6.01 Statements. On or before the last day of each calendar month, Buyer shall mail to Seller a statement showing the quantity of natural gas delivered by Seller to Buyer during the billing period ending with the next preceding calendar month, Buyer's check in payment for said natural gas, and the meter charts, if requested. If the meter charts are mailed to Seller, they shall be returned to Buyer within fifteen days. 6.02 Audits. Buyer shall have the right to audit Seller's accounting records and other documents relating to volumes of gas delivered by or on behalf of Seller for Buyer's account for any calendar year within the forty-eight (48) month period following the end of such calendar year. Buyer shall also have the right to audit Seller's records relative to Hope's Business Ethics policy which has been made available to Seller. Seller shall have the right to audit Buyer's accounting records and other documents relating to volumes of gas delivered by or on behalf of Seller for Buyer's account for any calendar year within the forty-eight (48) month period following the end of such calendar year. This provision shall continue in full force and effect for a period of forty-eight (48) months from the termination of this Agreement. 6.03 Withholding. If Seller fails to comply with any of the covenants contained herein, Buyer may immediately withhold all payments due to Seller under the terms of this Agreement until all necessary actions have been taken by Seller and all adjustments have been made by Seller so that in Buyer's opinion Seller is fully complying with all the covenants and terms of this Agreement. 6.04 Error Correction. In the event an error is discovered in the amount billed in any statement rendered to Seller, such error shall be adjusted within thirty (30) days of the determination thereof; provided that claim therefor shall have been made within sixty (60) days from the date of discovery of such error, but in any event within forty-eight (48) months from the date such statement is rendered. ARTICLE VII POSSESSION 7.01 Seller shall be deemed to be in possession and control of the natural gas sold by it hereunder until it shall have been delivered to Buyer at the Delivery Point(s), after which delivery, as between Buyer and Seller, Buyer shall be deemed to be in control and possession thereof. Buyer shall have no responsibility with respect to any natural gas sold to it hereunder until it is delivered at the Delivery Point(s), and no responsibility therefor because of anything which may be done or may occur with respect to said natural gas before delivery to Buyer at the Delivery Point(s). Seller shall have no responsibility unless the gas does not meet the gas quality provision set forth in Appendix A because of anything which may be done or may occur with respect to said natural gas after its delivery to Buyer at such point of delivery. ARTICLE VIII WARRANTY, INDEMNIFICATION, WITHHOLDING 8.01 Title and Indemnification. Seller warrants generally the title to the natural gas sold and delivered hereunder to Buyer and that at the time of delivery the natural gas is or will be free and clear of all liens, encumbrances, and claims whatsoever and free of any claim, rightful or otherwise, of any third person by way of infringement. Seller further warrants that at the time of delivery Seller will have good right and title to sell the natural gas to Buyer, and that Seller will indemnify Buyer and save it totally harmless from all suits, claims, actions, debts, levies, damages, costs, losses, and expenses of any nature arising from or out of adverse claims of any kind or nature asserted by anyone whatsoever to said natural gas, including but not limited to claims, suits, actions, and demands which may arise due to non-payment of landowner royalties, overriding royalties, or rentals thereof or therefrom. 8.02 Withholding. In the event of any adverse claim to or against the proceeds payable under this Agreement is made by any person, Buyer may withhold payment due Seller under this Agreement or any other contract between Buyer and Seller or may refuse to accept delivery of such natural gas until the dispute is settled by contract between Seller and such adverse claimant or by the final decree of a court of competent jurisdiction. If litigation results from any such adverse claim, Buyer may pay any money withheld by it hereunder into court without further liability therefor, or may interplead all claimants, including Seller. Seller will reimburse Buyer for all costs incurred, including reasonable attorney's fees, as a result of litigation. 8.03 Payment Correction. In the event Buyer mistakenly overpays or underpays Seller for natural gas sold and purchased hereunder, which over- or under-payment is the result of a mistake of fact or law, miscalculation, coercion, duress, fraud, governmental or regulatory constraint, ignorance or want of knowledge, then Seller or Buyer, as the case may be, will promptly upon demand by the other party make appropriate refund or adjustment in such over- or under-payments, without liability for payment of interest by either party; provided, however, that the obligation of either party to make restitution hereunder shall be limited to mistaken payments made within the period commencing four (4) years prior to the date on which demand for refund or adjustment shall be made. In the event of Seller's refusal or inability to refund undisputed over-payments, Buyer may withhold payment for the natural gas sold and purchased under this agreement between Seller and Buyer in an amount equivalent to the over-payment, without liability for payment of interest on the amounts so withheld. Nothing in this Agreement shall be construed as a waiver or relinquishment by Seller or Buyer of either of its rights to recover such over-payments. 8.04 Royalties. In no event will Buyer be obligated to make royalty, overriding royalty, or working interest payments to any party or payments to any supplier of Seller for natural gas purchased hereunder. ARTICLE IX COMMUNICATIONS 9.01 Unless otherwise instructed in writing, all communications shall be sent to the parties at the following addresses: Seller: Alamco, Inc. 200 West Main Street P. O. Box 1740 Clarksburg, WV 26301 Attn: Bridget D. Furbee Buyer: Hope Gas, Inc. P. O. Box 2868 Clarksburg, WV 26302-2868 Attn: Manager, Gas Supply ARTICLE X GENERAL PROVISIONS 10.01 Labor. Seller covenants and agrees to comply with all the requirements of the Fair Labor Standards Act of 1938 and the Civil Rights Act of 1964, as amended, with respect to all natural gas produced or sold and delivered under the terms of this Agreement to the extent that said Acts as now or hereafter amended are applicable to Seller and Seller's employees. 10.02 Force Majeure. Neither party to this Agreement shall be liable for any damage or loss that may be due to force majeure as defined herein. In the event either party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this Agreement, other than to demand payment of amounts due hereunder, then the obligations of such party, so far as they are affected by such force majeure, shall be suspended during the continuance of any inability so caused. However, the party claiming the existence of force majeure shall use all reasonable efforts to remedy any situation which may interfere with the performance of its obligations hereunder. The term "force majeure" as used herein, and as applied to either party hereto, shall mean acts of law, acts of God, strikes, lockouts or other labor disturbances, acts of the public enemy, war, blockades, insurrections, riots, epidemics, fires, floods, washouts, arrests and restraints of rules and people, civil disturbances, explosions or any other cause, whether of the kind herein enumerated or otherwise, not reasonably within the control of the party claiming suspension. It is understood that settlement of strikes, lockouts, or labor disturbances shall be entirely within the discretion of the party having the difficulty and that the above requirement that any force majeure shall be remedied with all reasonable dispatch shall not require the settlement of strikes, lockouts, or labor disturbances by acceding to the demands of the opposing party when such course is inadvisable in the discretion or judgment of the party having the difficulty. Among other things, the term "Force Majeure" shall not include: (a) any cause resulting from a Party's negligence or willful misconduct; (b) the freezing of any wells or pipelines; and (c) lack of funds by either party. 10.03 Tax. In the event any tax is now or hereafter imposed on the production, severance, delivery to the point of sale, or sale of natural gas, or upon the business of producing, severing, selling or delivering natural gas to the point of sale, or if such tax is imposed in any other manner so as to constitute directly a charge upon the gas delivered to Buyer hereunder, then the amount of such tax shall be borne by Seller so far as it affects or relates to or is apportionable to the gas delivered to Buyer hereunder. In the event Buyer is required to pay such tax, the amount thereof may be deducted from the payments accruing to Seller under this Agreement. 10.04 Persons Bound. All of the terms, covenants, conditions, and obligations of this Agreement shall extend to and be binding upon the parties hereto and their heirs, successors, and assigns. Any sale or assignment by Seller of its interest in the natural gas delivered hereunder or its interest in this Agreement or its interest in any property, real or personal, required for or dedicated to the performance of this Agreement, shall be made expressly subject to the rights of Buyer hereunder and with provision that the assignee or purchaser shall assume and covenant to perform all of the Seller's obligations hereunder. Seller will give notice in writing to Buyer of any sale or assignment or other disposition of its interest hereunder and will furnish to Buyer copies of any relevant documents evidencing transfer or assignment of Seller's interest. Until notice and relevant documents have been given and furnished to Buyer, Buyer may withhold all payments that may become due hereunder, without interest. 10.05 Terms and Governing Law. The terms and provisions of this Agreement are subject to the limitations of orders of courts and the orders, rules and regulations of all regulatory bodies having jurisdiction. This agreement shall be interpreted in accordance with the laws of the State of West Virginia. 10.06 Captions. The captions of the articles of this Agreement are inserted for the purpose of convenient reference and are not intended to be a part of this Agreement nor considered in any interpretation of the same. 10.07 Severability. If any part, term, or provision of this Agreement is held by any court to be illegal or in conflict with any law of the State of West Virginia, the validity of the remaining portions or provisions shall not be affected, and the rights and obligations of the parties shall be construed and in force as if the Agreement did not contain the particular part, term, or provision held to be invalid. 10.08 Entire Agreement. This Agreement constitutes the entire agreement between Seller and Buyer with respect to the subject matter hereof and supersedes all prior offers, negotiations, and other written or oral agreements, including the Master Contract. This Agreement may only be amended or modified by written instrument signed by duly authorized representatives of Seller and of Buyer. IN WITNESS WHEREOF, Seller and Buyer have duly executed this Agreement as of the day and year first above written. ALAMCO, INC. By: /s/ John L. Schwager Its: President and CEO HOPE GAS, INC. By: /s/ Gary A. Nicholas Its: Vice President and General Manager APPENDIX A MASTER GAS PURCHASE CONTRACT TECHNICAL PROVISIONS All gas purchased under the Master Gas Purchase Contract and all Schedules attached thereto is purchased subject to the provisions of this Appendix A. A1. Well Connections. A1.1 Seller shall notify Buyer's area superintendent immediately upon the completion of each well hereunder and shall, within a reasonable time thereafter, permit Buyer to obtain final open-flow and reservoir shut-in pressures for each such well in order to program the turning of same into Buyer's pipeline under the terms of this Agreement. A1.2 Seller and Buyer shall add each new well to Appendix B within a reasonable time after completion of the well and prior to turn-in into either Buyer's lines or Seller's gathering system. A1.3 At the time of introduction of well gas into the Buyer's pipelines, Buyer's representative shall operate the valves at the meter, and in addition, the Seller shall provide experienced personnel to be located at the well site during this operation. A1.4 The Seller shall provide and install, where needed, pressure regulating equipment. Such regulation shall deliver pressures which are suitable to pressures in the distribution pipeline system. Buyer will recommend the type of regulators to be used and specify orifice size, pressure ranges, and operating settings. A1.5 To prevent entrance of fluids, sand, or other contaminates into the Buyer's pipelines, the Seller shall provide and install facilities such as drips, float valve separators, etc., such equipment to be determined by Buyer and Seller. A1.6 Seller shall provide Buyer with a copy of a Gas Analysis prepared by an acceptable lab verifying the natural gas quality. A1.7 Any gas being delivered into the Buyer's pipelines not meeting the standards set forth in Appendix Section 4.1, 4.2, 5.1, and 5.2 shall be shut in immediately and remain shut in until the operator has taken remedial action to correct the problem. Gas flow may be restored again by providing Buyer with an acceptable Gas Analysis. A2. Delivery Pressure. A2.1 Buyer shall have the right to require regulation and over-pressure protection at the point of delivery hereunder. The cost of such equipment and installation shall be borne by the Seller. A2.2 Seller shall not use any mechanical means or accessory equipment to pump or compress the natural gas in order to aid its delivery into Buyer's pipeline without the written consent of Buyer. Buyer may, at its option, compress and pump the natural gas purchased hereunder. A2.3 Buyer makes no representations concerning the pressure which will be maintained in its pipeline from time to time or concerning other factors which may affect the quantity of gas which Seller may be able to deliver to Buyer. A3. Well Tests, Reports, and Conditions. A3.1 Seller shall equip each well described in Appendix B with a valve suitable for gauging the pressure of natural gas in the well, and Buyer shall have the privilege of gauging such pressure at all reasonable times during the term of this Contract. Such wells shall be and remain continuously connected to Seller's gathering lines for production deliveries, except to the extent that disconnection is required as wells are being repaired. Seller shall operate all wells in a reasonable and prudent manner and keep the same in good condition in order to maximize the production of natural gas. A3.2 If possible, Seller will make all necessary well repairs during the summer period, May 1 to October 31. A3.3 Seller will advise Buyer, as soon as reasonably possible, prior to taking any well out of production when such well will be out of production more than seven (7) days. After repairs have been completed, Seller shall immediately reconnect the well to Buyer's gathering line and resume production, subject to authorization for turn-in by the Buyer's area superintendent. A3.4 Should the Buyer schedule seven-day or other shut-in pressure tests on natural gas wells situated in the same production areas or reservoirs as are covered by this Agreement, then Seller, upon request of Buyer, agrees to make similar tests on Seller's wells covered by this Agreement at the same time as Buyer's scheduled tests and to furnish Buyer with written reports on the results thereof for each such well. A3.5 Buyer shall not be obligated to accept delivery or pay for any natural gas delivered to it from any well subject to this Agreement until Seller has furnished to Buyer complete and accurate copies of the drillers' logs, copies of all state reports, and copies of any and all surveys made for each such well. In the event any such well is to be abandoned, Seller shall notify Buyer in writing fifteen (15) days prior to such abandonment. A4. Gas Quality. A4.1 The gas delivered by Seller to Buyer hereunder at the point(s) of delivery specified shall not contain an amount of water vapor exceeding seven (7) pounds per million cubic feet of gas, or an amount of water vapor exceeding the quantity that is required for saturation of the gas at the flowing temperature and pressure of the gas as described in Appendix Section 5.1, whichever is lesser; provided however, that such gas shall not contain any water in the liquid state. A4.2 Seller shall deliver the natural gas to Buyer free from air, sulphur in any form or compound, nitrogen (no greater than 3 mole %), carbon dioxide (no greater than 3 mole %), total combined inerts (no greater than 5 mole %), and other deleterious substances which may in Buyer's opinion adversely affect its marketability as a fuel or use for other purposes, or be injurious to equipment, transmission lines, and machinery. If, in Buyer's opinion, a sufficient quantity of such natural gas is or can be produced from said wells hereinbefore described to make it economically feasible to purify same and remove substances which would otherwise affect its marketability, Seller has the option to install the necessary purification plant and treat and purify said natural gas so as to make same acceptable to Buyer. A4.3 Seller acknowledges that Buyer intends to resell the natural gas sold and purchased hereunder in the conduct of Buyer's natural gas pipeline and utility business for ultimate residential, commercial, or industrial consumption. Nothing herein is intended or shall be construed to exclude, modify, limit, or negate any warranties, express or implied, as may be provided by law, including without limitation warranties of merchantability and fitness for a particular purpose. A4.4 Seller shall not extract or permit the extraction of any liquid hydrocarbons (ethane, propane, butane, and heavier hydrocarbons) without the prior written consent of Buyer. A4.5 Notwithstanding any other provision of this Agreement, if the gas delivered fails to meet the quality specifications set forth herein, then Buyer may elect to continue to receive such gas or refuse to take all or any portion of such gas until Seller brings the gas into conformity with such specifications. A5. Measurement and Heating Value. A5.1 The volume of natural gas delivered to Buyer shall be determined as follows: (a) The unit of volume for the purpose of measurement shall be one cubic foot of gas at a pressure base of 14.73 pounds per square inch absolute and a temperature base of 60 degree Fahrenheit. (b) In determining the quantity of natural gas delivered to Buyer, factors such as those for pressure, temperature, and deviation from the laws for ideal gases shall be applied. If a displacement or turbine meter is used, these factors shall be applied in accordance with the gas laws as more fully described in the recommendations of the Gas Measurement Committee of the American Gas Association (AGA) in their publication, AGA Gas Measurement Manual; and if an orifice meter is used, the measurement of said gas shall be in accordance with AGA Report No. 3, as amended or superseded from time to time. (c) The average absolute atmospheric pressure shall be assumed to be 14.4 pounds per square inch, irrespective of actual elevation or location of the meter or variations in actual atmospheric pressure. (d) In the absence of a recording thermometer, an assumed flowing temperature of 60 degree Fahrenheit shall be used in computing said quantities of gas; but if the temperature of the natural gas passing through the meter is determined for any day by the use of a recording thermometer, then the arithmetic average of the temperature recorded for such day shall be used. (e) At Seller's request, Buyer will install, at Seller's expense, equipment which will adjust the measurement of gas for the effects of changes in temperature. (f) The specific gravity of the natural gas shall be determined by the use of an Edwards balance or other approved instrument at the commencement of the delivery of natural gas and as often thereafter as deemed necessary. (g) The deviation of the natural gas from the laws for ideal gases shall be determined in accordance with the Manual for Determination for Super-Compressibility Factors for Natural Gas, an American Gas Association publication completed December 1962, as superseded or revised. A5.2 The total heating value per cubic foot of natural gas delivered hereunder shall not be less than 1,000 British thermal units (Btu) per cubic foot calculated on a saturated basis at 14.73 pounds per square inch absolute at 60 degree Fahrenheit. Such heating value per cubic foot of the natural gas delivered hereunder shall be determined at various intervals of time as may be designated by Buyer or Seller, but not required more often than once each year, by tests made by taking samples of such gas at the Delivery Point(s) specified herein and by testing such samples in accordance with accepted chromatographic analysis techniques, or methods specified in AGA Gas Measurement Committee Report No. 5, as amended or superseded from time to time, or by other accepted methods. Seller and Buyer shall have the right to witness any and all such tests. A5.3 Seller may request that Buyer test and verify the accuracy of the meter used for measuring the natural gas delivered to Buyer hereunder. In the event the meter is out of service or is determined by Buyer to be registering inaccurately for any period of time during which times delivery of gas is continued by Seller to Buyer, then the quantity of natural gas delivered during such a period shall be estimated (i) by using the data recorded by any check-measuring equipment, if installed and accurately registering, or if not installed or registering accurately, (ii) by correcting the error if the percentage of error is ascertainable by calibration, test, or mathematical calculation, or if neither such method is feasible, (iii) by estimating the quantity or quality delivered, based upon deliveries under similar conditions during a period when the equipment was registering accurately. If the meter, on a test requested by Seller, shall prove to be accurate within plus or minus two (2) percent, the cost of testing and repairing the same shall be borne by the Seller, but if the meter on test proves to be in error by more than plus or minus two (2) percent, then the cost of testing and repairing same shall be borne by Buyer. 10 EX-5 5 Exhibit 10.15 AMENDED AND RESTATED CREDIT AGREEMENT AMONG ALAMCO, INC., ALAMCO-DELAWARE, INC. AND BANK ONE, TEXAS, NATIONAL ASSOCIATION Effective as of October 1, 1995 REVOLVING LINE OF CREDIT OF UP TO $30,000,000 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND INTERPRETATION . . . . . . . . . . . . . . 1 1.1 Terms Defined Above . . . . . . . . . . . . . . . . . . . . 1 1.2 Additional Defined Terms . . . . . . . . . . . . . . . . . 1 1.3 Undefined Financial Accounting Terms . . . . . . . . . . . 13 1.4 References . . . . . . . . . . . . . . . . . . . . . . . . 13 1.5 Articles and Sections . . . . . . . . . . . . . . . . . . . 13 1.6 Number and Gender . . . . . . . . . . . . . . . . . . . . . 14 1.7 Incorporation of Exhibits . . . . . . . . . . . . . . . . . 14 ARTICLE II AMOUNT AND TERMS OF FACILITY . . . . . . . . . . . . . . . 14 2.1 Revolving Line of Credit . . . . . . . . . . . . . . . . . 14 2.2 Letters of Credit . . . . . . . . . . . . . . . . . . . . . 14 2.3 Use of Proceeds and Letters of Credit. . . . . . . . . . . 15 2.4 Interest . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.5 Repayment of Advances and Interest Thereon . . . . . . . . 15 2.6 Advances and Payments on Note . . . . . . . . . . . . . . . 15 2.7 Borrowing Base Determinations . . . . . . . . . . . . . . 16 2.8 Mandatory Prepayments . . . . . . . . . . . . . . . . . . . 17 2.9 Voluntary Prepayments . . . . . . . . . . . . . . . . . . . 17 2.10 Commitment Fees . . . . . . . . . . . . . . . . . . . . . . 17 2.11 Facility Fees . . . . . . . . . . . . . . . . . . . . . . . 17 2.12 Engineering Fees . . . . . . . . . . . . . . . . . . . . . 18 2.13 Letter of Credit Fees . . . . . . . . . . . . . . . . . . . 18 2.14 Advances to Satisfy Obligations of Borrowers . . . . . . . 18 2.15 Pledge of and Security Interest in Accounts and Right of Offset or Lien . . . . . . . . . . . . . . . . . . . . . . 18 2.16 General Provisions Relating to Interest . . . . . . . . . . 19 2.17 Yield Protection . . . . . . . . . . . . . . . . . . . . . 20 2.18 Power of Attorney . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE III CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . 22 3.1 Receipt of Loan Documents and Other Items; First Advance . 22 3.2 Each Advance and Letter of Credit . . . . . . . . . . . . . 24 ARTICLE IV REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . 25 4.1 Due Authorization and Corporate Existence . . . . . . . . . 25 4.2 Valid and Binding Obligations . . . . . . . . . . . . . . . 25 4.3 Title to Assets . . . . . . . . . . . . . . . . . . . . . . 26 4.4 Scope and Accuracy of Financial Statements . . . . . . . . 26 4.5 Liabilities, Litigation and Restrictions . . . . . . . . . 26 4.6 Authorizations and Consents . . . . . . . . . . . . . . . . 26 4.7 Compliance with Laws . . . . . . . . . . . . . . . . . . . 26 4.8 Proper Filing of Tax Returns and Payment of Taxes Due . . . 26 4.9 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.10 Environmental Laws . . . . . . . . . . . . . . . . . . . . 27 4.11 Compliance with Federal Reserve Regulations . . . . . . . . 28 4.12 Investment Company Act Compliance . . . . . . . . . . . . . 28 4.13 Public Utility Holding Company Act Compliance . . . . . . . 28 4.14 Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.15 Gas Contracts . . . . . . . . . . . . . . . . . . . . . . . 28 4.16 No Material Misstatements . . . . . . . . . . . . . . . . . 29 4.17 Casualties or Taking of Property . . . . . . . . . . . . . 29 4.18 Locations of Business, Offices and Property . . . . . . . . 29 4.19 Security Instruments . . . . . . . . . . . . . . . . . . . 29 4.20 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE V AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . 29 5.1 Maintenance and Access to Records . . . . . . . . . . . . . 29 5.2 Quarterly Financial Statements . . . . . . . . . . . . . . 30 5.3 Annual Financial Statements . . . . . . . . . . . . . . . . 30 5.4 Reserve Reports . . . . . . . . . . . . . . . . . . . . . . 30 5.5 Lockbox Reports . . . . . . . . . . . . . . . . . . . . . . 31 5.6 Stockholder Communications and Securities and Exchange Commission Filings . . . . . . . . . . . . . . . . . . . . 31 5.7 Notices of Certain Events . . . . . . . . . . . . . . . . . 31 5.8 Notification Letters . . . . . . . . . . . . . . . . . . . 32 5.9 Additional Information . . . . . . . . . . . . . . . . . . 33 5.10 Compliance with Laws . . . . . . . . . . . . . . . . . . . 33 5.11 Payment of Assessments and Charges . . . . . . . . . . . . 33 5.12 Indemnification . . . . . . . . . . . . . . . . . . . . . . 33 5.13 Maintenance of Corporate Existence and Good Standing . . . 34 5.14 Further Assurances . . . . . . . . . . . . . . . . . . . . 34 5.15 Initial Fees and Expenses of Lender and/or Legal Counsel to Lender . . . . . . . . . . . . . . . . . . . . . . . . . 35 5.16 Subsequent Fees and Expenses of Lender . . . . . . . . . . 35 5.17 Maintenance and Inspection of Tangible Properties . . . . . 36 5.18 Maintenance of Insurance and Evidence Thereof . . . . . . . 36 5.19 Payment of Note and Performance of Obligations . . . . . . 36 5.20 Operation of Oil and Gas Properties . . . . . . . . . . . . 36 5.21 Current Ratio . . . . . . . . . . . . . . . . . . . . . . . 36 5.22 Shareholders' Equity . . . . . . . . . . . . . . . . . . . 37 5.23 Existing Business . . . . . . . . . . . . . . . . . . . . . 37 5.24 Lockbox Arrangement With Lockbox Account and Working Interest Owners Account . . . . . . . . . . . . . . . . . . 37 5.25 Debt Coverage Ratio . . . . . . . . . . . . . . . . . . . . 37 ARTICLE VI NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . 38 6.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . 38 6.2 Contingent Obligations . . . . . . . . . . . . . . . . . . 38 6.3 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 6.4 Sales of Assets . . . . . . . . . . . . . . . . . . . . . . 39 6.5 Loans or Advances . . . . . . . . . . . . . . . . . . . . . 39 6.6 Payment of Accounts Payable . . . . . . . . . . . . . . . . 39 6.7 Cancellation of Insurance . . . . . . . . . . . . . . . . . 39 6.8 Leases . . . . . . . . . . . . . . . . . . . . . . . . . . 39 6.9 Investments . . . . . . . . . . . . . . . . . . . . . . . . 39 6.10 Changes in Corporate Structure . . . . . . . . . . . . . . 40 6.11 Transactions with Affiliates . . . . . . . . . . . . . . . 40 6.12 Lines of Business . . . . . . . . . . . . . . . . . . . . . 41 6.13 Organization or Acquisition of Subsidiaries, L.L.C.'s, Partnerships and/or Joint Ventures . . . . . . . . . . . . 41 6.14 Clarksburg Gas and Tax Credit Properties . . . . . . . . . 41 ARTICLE VII EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . 41 7.1 Enumeration of Events of Default . . . . . . . . . . . . . 41 7.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 44 ARTICLE VIII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 45 8.1 Transfers and Participations . . . . . . . . . . . . . . . 45 8.2 Survival of Representations, Warranties and Covenants . . . 45 8.3 Notices and Other Communications . . . . . . . . . . . . . 45 8.4 Parties in Interest . . . . . . . . . . . . . . . . . . . . 46 8.5 Rights of Third Parties . . . . . . . . . . . . . . . . . . 46 8.6 Renewals and Extensions . . . . . . . . . . . . . . . . . . 46 8.7 No Waiver; Rights Cumulative . . . . . . . . . . . . . . . 46 8.8 Survival Upon Unenforceability . . . . . . . . . . . . . . 47 8.9 Amendments or Modifications . . . . . . . . . . . . . . . . 47 8.10 Controlling Provision Upon Conflict . . . . . . . . . . . . 47 8.11 Time, Place and Method of Payments . . . . . . . . . . . . 47 8.12 Disposition of Collateral . . . . . . . . . . . . . . . . . 47 8.13 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . 48 8.14 JURISDICTION AND VENUE . . . . . . . . . . . . . . . . . . 48 8.15 WAIVER OF RIGHTS TO JURY TRIAL . . . . . . . . . . . . . . 48 8.16 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . 48 LIST OF EXHIBITS EXHIBIT I - Form of Note EXHIBIT II - Form of Compliance Certificate EXHIBIT III - Disclosures AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDED AND RESTATED CREDIT AGREEMENT, made and entered into effective as of the 1st day of October, 1995, by and among ALAMCO, INC., a Delaware corporation ("Alamco") and ALAMCO-DELAWARE, INC., a Delaware corpo- ration ("Aladel") (Alamco and Aladel each a "Borrower" and collectively, the "Borrowers"), and BANK ONE, TEXAS, NATIONAL ASSOCIATION, a national banking association (the "Lender"), evidences the arrangements concerning certain advances to the Borrowers by the Lender. W I T N E S S E T H: WHEREAS, Alamco, Lender, and Interstate Resources, Inc. entered into that certain Credit Agreement dated March 27, 1991, as amended by that certain First Amendment to Credit Agreement dated effective as of April 22, 1992, the Second Amendment to Credit Agreement dated effective as of December 14, 1992, and the Third Amendment to Credit Agreement dated effective as of July 26, 1993, and Alamco, Lender and Aladel entered into that certain Fourth Amendment to Credit Agreement dated effective as of August 1, 1994 (such Credit Agreement as so amended, the "Prior Agreement"); and WHEREAS, Alamco, Aladel, and Lender desire to amend and restate the Prior Agreement as provided herein; NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrowers and the Lender hereby amend and restate the Prior Agreement to read as follows: ARTICLE I DEFINITIONS AND INTERPRETATION 1.1 Terms Defined Above. As used in this Credit Agreement, the terms "Aladel," "Alamco," "Borrower," "Borrowers," and "Lender" shall have the meaning assigned to such terms hereinabove. 1.2 Additional Defined Terms. As used in this Credit Agreement, each of the following terms shall have the meaning assigned thereto in this Section, unless the context otherwise requires: "Advance" shall mean an advance of funds made by the Lender to the Borrowers under this Agreement and any payment made by the Lender under a Letter of Credit. "Affiliate" shall mean any Person directly or indirectly controlling, or under common control with, either Borrower and includes any Subsidiary and any "affiliate" of either Borrower within the meaning of the regulations promulgated pursuant to the Securities Act of 1933, as amended, with "control," as used in this definition, meaning possession, directly or indirectly, of the power to direct or cause the direction of management, policies or action through ownership of voting securities, contract, voting trust, membership in management or in the group appointing or electing management or otherwise through formal or informal arrangements or business relationships. "Agreement" shall mean this Amended and Restated Credit Agreement and all exhibits and schedules hereto, as the same may be amended, modified, supplemented or restated from time to time according to the terms hereof. "Assignment" shall mean the Assignment and Bill of Sale dated as of August 11, 1994, from Alamco in favor of Clarksburg Gas, and recorded in Book 1255, Page 649 of the assignment records of Harrison County, West Virginia. "Available Commitment" shall mean, at any time, an amount equal to the remainder, if any, of (a) the lesser of the Commitment Amount or the Borrowing Base in effect at such time minus (b) the sum of the Loan Balance at such time plus the L/C Exposure at such time. "Base Rate" shall mean, at any time, an interest rate per annum equal to the interest rate then most recently announced or published by the Lender as its base rate, which may not be the lowest interest rate charged by the Lender, AND which Base Rate shall change upon any change in such announced or published base rate of the Lender, all without notice to the Borrowers. "Borrowing Base" shall mean, at any time, the amount determined by the Lender in accordance with Section 2.7 and then in effect. "Business Day" shall mean a day other than a Saturday, Sunday or legal holiday for commercial banks under the laws of the State of Texas. "Clarksburg Gas" shall mean Clarksburg Gas Limited Partnership, a West Virginia limited partnership. "Closing Date" shall mean the effective date of this Agreement. "Code" shall mean the United States Internal Revenue Code of 1986, as amended from time to time. "Collateral" shall mean the Mortgaged Properties and any other Property of either Borrower, wherever located and whether now owned or existing or hereafter acquired or arising, that is now or at any time used or intended to be subject to the Liens created in the Security Instruments or otherwise as security for the payment or performance of all or any portion of the Obligations, including, without limitation, products and proceeds existing in connection with any of the foregoing. "Commitment" shall mean the obligation of the Lender, subject to applicable provisions of this Agreement, to make Advances to or for the benefit of the Borrowers pursuant to Section 2.1 and to issue Letters of Credit pursuant to Section 2.2. "Commitment Amount" shall mean the amount of $30,000,000. "Commitment Fee" shall mean each fee payable to the Lender by the Borrowers pursuant to Section 2.10. "Commitment Period" shall mean the period from and including the Closing Date to but not including the Drawdown Termination Date. "Commonly Controlled Entity" shall mean any Person which is under common control with either Borrower within the meaning of Section 4001 of ERISA. "Compliance Certificate" shall mean each certificate, substantially in the form attached hereto as Exhibit II, executed by a Responsible Officer of each Borrower and furnished to the Lender from time to time in accordance with this Agreement. "Contingent Obligation" shall mean, as to any Person (the "Guarantor"), any obligation of such Guarantor guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations of any other Person (the "Primary Obligor") (for purposes of this definition, a "primary obligation") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Guarantor, regardless of whether such obligation is contingent, (a) to purchase any primary obligation or any Property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any primary obligation, or (ii) to maintain working capital or equity capital of the Primary Obligor in respect of any primary obligation, or otherwise to maintain the net worth or solvency of any other Person, (c) to purchase Property, securities or services primarily for the purpose of assuring the owner of any primary obligation of the ability of the Person primarily liable for such primary obligation to make payment thereof, or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof, with the amount of any Contingent Obligation being deemed to be equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Guarantor in good faith. "Default" shall mean any event or occurrence which with the lapse of time or the giving of notice or both would become an Event of Default. "Default Rate" shall mean a per annum variable interest rate equal to the Base Rate plus five percent (5%), calculated on the basis of a year of 360 days and actual number of days elapsed (including the first day but excluding the last day), but in no event exceeding the Highest Lawful Rate. "Drawdown Termination Date" shall mean July 1, 1998. "Engineering Fee" shall mean each fee payable to the Lender by the Borrowers pursuant to Section 2.12. "Environmental Complaint" shall mean any written or oral complaint, order, directive, claim, citation, notice of environmental report or investigation or other notice by any Governmental Authority or any other Person with respect to (a) air emissions, (b) spills, releases or discharges to soils or any improvements located thereon, surface water, groundwater or the sewer, septic system or waste treatment, storage or disposal systems servicing any Property of either Borrower, (c) solid or liquid waste disposal, (d) either the use, generation, storage, transportation or disposal of any Hazardous Substance, or (e) other environmental, health or safety matters affecting any Property of either Borrower or the business conducted thereon. "Environmental Laws" shall mean (a) the following federal laws as they may be cited, referenced and amended from time to time: the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Water Pollution Control Act, the Environmental Pesticides Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Endangered Species Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the Hazardous Materials Transportation Act, the Superfund Amendments and Reauthorization Act, and the Toxic Substances Control Act; (b) any and all equivalent environmental statutes of any state in which Property of either Borrower is situated, as they may be cited, referenced and amended from time to time; (c) any so-called federal, state or local "Superfund" or "Superlien" statute, (d) any rules or regulations promulgated under or adopted pursuant to the above federal and state laws; and (e) any other equivalent federal, state or local statute or any requirement, rule, regulation, code, ordinance or order adopted pursuant thereto, including, without limitation, those relating to the generation, transportation, treat- ment, storage, recycling, disposal, handling or release of Hazardous Substances. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations thereunder and interpretations thereof. "Event of Default" shall mean any of the events specified in Section 7.1. "Existing Security Instruments" shall mean the Security Instruments, as such term is defined in the Prior Agreement, as such instruments have been or may be amended, restated, or supplemented from time to time. "Facility Fee" shall mean each fee payable to the Lender by the Borrowers pursuant to Section 2.11. "Financial Statements" shall mean statements of the financial condition of the Borrowers as at the point in time and for the period indicated and consisting of at least a balance sheet and related statements of operations, common stock and other stockholders' equity for the Borrowers and, when required by applicable provisions of this Agreement to be audited, accompanied by the unqualified certification of a nationally-recognized firm of independent certified public accountants or other independent certified public accountants acceptable to the Lender and footnotes to any of the foregoing, all of which shall be prepared in accordance with GAAP and GAAS consistently applied and in comparative form with respect to the corresponding period of the preceding fiscal period. "Floating Rate" shall mean an interest rate per annum equal to the Base Rate from time to time in effect, plus one-fourth of 59 [INVENTORY] 62 [CURRENT-ASSETS] 6,853 [PP&E] 83,816 [DEPRECIATION] 32,201 [TOTAL-ASSETS] 59,762 [CURRENT-LIABILITIES] 6,026 [BONDS] 13,674 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 476 [OTHER-SE] 29,867 [TOTAL-LIABILITY-AND-EQUITY] 59,762 [SALES] 16,800 [TOTAL-REVENUES] 18,539 [CGS] 7,354 [TOTAL-COSTS] 4,271 [OTHER-EXPENSES] 0 [LOSS-PROVISION] 0 [INTEREST-EXPENSE] 1,188 [INCOME-PRETAX] 2,772 [INCOME-TAX] 1,077 [INCOME-CONTINUING] 1,695 [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 1,695 [EPS-PRIMARY] .36 [EPS-DILUTED] 0 [/TABLE] -----END PRIVACY-ENHANCED MESSAGE-----