-----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, MdPMtcNV/iv6ix1yz6vCYwbxcbF/D3zdD991TAoEvZaZHc6gLt+ET4SfEzEhaIKV GojXyzTY16RfqlPXbUU6eQ== 0000950129-05-010772.txt : 20051109 0000950129-05-010772.hdr.sgml : 20051109 20051109093300 ACCESSION NUMBER: 0000950129-05-010772 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051109 DATE AS OF CHANGE: 20051109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APACHE CORP CENTRAL INDEX KEY: 0000006769 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 410747868 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04300 FILM NUMBER: 051188052 BUSINESS ADDRESS: STREET 1: 2000 POST OAK BLVD STREET 2: ONE POST OAK CENTER STE 100 CITY: HOUSTON STATE: TX ZIP: 77056-4400 BUSINESS PHONE: 7132966000 MAIL ADDRESS: STREET 1: 2000 POST OAK BLVD STREET 2: STE 100 CITY: HOUSTON STATE: TX ZIP: 77056-4400 FORMER COMPANY: FORMER CONFORMED NAME: APACHE OIL CORP DATE OF NAME CHANGE: 19660830 10-Q 1 h29394e10vq.txt APACHE CORPORATION - DATED 9/30/2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ___________________ to _____________________ Commission File Number 1-4300 APACHE CORPORATION (Exact Name of Registrant as Specified in Its Charter) Delaware 41-0747868 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number)
Suite 100, One Post Oak Central 2000 Post Oak Boulevard, Houston, TX 77056-4400 (Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 296-6000 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO ----- ----- Number of shares of Registrant's common stock, outstanding as of September 30, 2005............. 329,293,598
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS APACHE CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED OPERATIONS (UNAUDITED)
FOR THE QUARTER FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ----------------------- ----------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- (In thousands, except per common share data) REVENUES AND OTHER: Oil and gas production revenues ............ $2,051,744 $1,414,128 $5,452,928 $3,814,294 Other ...................................... 9,308 (7,126) 29,643 (16,620) ---------- ---------- ---------- ---------- 2,061,052 1,407,002 5,482,571 3,797,674 ---------- ---------- ---------- ---------- OPERATING EXPENSES: Depreciation, depletion and amortization ... 357,159 313,520 1,055,583 895,485 Asset retirement obligation accretion ...... 13,527 11,071 40,016 32,723 Lease operating costs ...................... 279,995 208,372 768,596 616,387 Gathering and transportation costs ......... 23,571 20,902 73,529 60,698 Severance and other taxes .................. 150,394 47,148 309,173 77,691 General and administrative ................. 50,047 38,583 152,460 123,821 China litigation ........................... -- -- -- 71,216 Financing costs: Interest expense ........................ 43,517 41,753 133,590 122,495 Amortization of deferred loan costs ..... 521 652 3,226 1,814 Capitalized interest .................... (14,990) (12,593) (42,653) (38,951) Interest income ......................... (2,201) (962) (4,003) (1,795) ---------- ---------- ---------- ---------- 901,540 668,446 2,489,517 1,961,584 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES .................... 1,159,512 738,556 2,993,054 1,836,090 Provision for income taxes ................. 472,517 308,081 1,157,546 675,764 ---------- ---------- ---------- ---------- NET INCOME .................................... 686,995 430,475 1,835,508 1,160,326 Preferred stock dividends .................. 1,420 1,420 4,260 4,260 ---------- ---------- ---------- ---------- INCOME ATTRIBUTABLE TO COMMON STOCK ........... $ 685,575 $ 429,055 $1,831,248 $1,156,066 ========== ========== ========== ========== NET INCOME PER COMMON SHARE: Basic ...................................... $ 2.08 $ 1.31 $ 5.57 $ 3.55 ========== ========== ========== ========== Diluted .................................... $ 2.05 $ 1.30 $ 5.49 $ 3.51 ========== ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of this statement. 1 APACHE CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2005 2004 ----------- ----------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................................. $ 1,835,508 $ 1,160,326 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization ............................. 1,055,583 895,485 Asset retirement obligation accretion ................................ 40,016 32,723 Provision for deferred income taxes .................................. 412,652 218,085 Other ................................................................ 48,518 33,981 Changes in operating assets and liabilities: (Increase) decrease in receivables ................................... (317,394) (143,155) (Increase) decrease in drilling advances and other ................... (96,259) (13,514) (Increase) decrease in inventories ................................... 10,822 5,123 (Increase) decrease in deferred charges and other .................... (30,226) (44,880) Increase (decrease) in accounts payable .............................. 121,003 114,512 Increase (decrease) in accrued expenses .............................. 137,501 80,698 Increase (decrease) in advances from gas purchasers .................. (15,935) (13,116) Increase (decrease) in deferred credits and noncurrent liabilities ... (41,693) (5,730) ----------- ----------- Net cash provided by operating activities ......................... 3,160,096 2,320,538 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment ........................................ (2,736,266) (1,682,037) Acquisition of Anadarko properties ......................................... -- (92,699) Acquisition of ExxonMobil properties ....................................... -- (347,352) Restricted cash for acquisition settlement ................................. -- (444,734) Other, net ................................................................. 5,236 (55,422) ----------- ----------- Net cash used in investing activities ............................. (2,731,030) (2,622,244) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings ....................................................... 112,398 543,366 Payments on long-term debt ................................................. (508,729) (135,300) Dividends paid ............................................................. (83,046) (62,825) Common stock activity ...................................................... 18,646 19,324 Treasury stock activity, net ............................................... 5,802 11,412 Cost of debt and equity transactions ....................................... (838) (2,250) Tax benefits of stock-based compensation and other ......................... 12,292 -- ----------- ----------- Net cash provided by (used in) financing activities ............... (443,475) 373,727 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................... (14,409) 72,021 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................ 111,093 33,503 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................... $ 96,684 $ 105,524 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of this statement. 2 APACHE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents .................................... $ 96,684 $ 111,093 Receivables, net of allowance ................................ 1,258,387 939,736 Inventories .................................................. 198,436 157,293 Drilling advances ............................................ 101,232 82,889 Prepaid assets and other ..................................... 131,866 57,771 ----------- ----------- 1,786,605 1,348,782 ----------- ----------- PROPERTY AND EQUIPMENT: Oil and gas, on the basis of full cost accounting: Proved properties ......................................... 22,507,140 19,933,041 Unproved properties and properties under development, not being amortized ....................... 808,380 777,690 Gas gathering, transmission and processing facilities ........ 1,285,848 966,605 Other ........................................................ 297,832 284,069 ----------- ----------- 24,899,200 21,961,405 Less: Accumulated depreciation, depletion and amortization ... (9,153,715) (8,101,046) ----------- ----------- 15,745,485 13,860,359 ----------- ----------- OTHER ASSETS: Goodwill, net ................................................ 189,252 189,252 Deferred charges and other ................................... 131,755 104,087 ----------- ----------- $17,853,097 $15,502,480 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of this statement. 3 APACHE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ (In thousands) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................................... $ 726,646 $ 542,074 Accrued operating expense ...................................... 77,976 80,741 Accrued exploration and development ............................ 524,774 341,063 Accrued compensation and benefits .............................. 122,018 83,636 Accrued interest ............................................... 45,672 32,575 Accrued income taxes ........................................... 73,390 78,042 Current debt ................................................... 274 -- Derivative instruments ......................................... 320,734 21,273 Other .......................................................... 251,780 103,487 ----------- ----------- 2,143,264 1,282,891 ----------- ----------- LONG-TERM DEBT .................................................... 2,191,785 2,588,390 ----------- ----------- DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes ................................................... 2,347,583 2,146,637 Advances from gas purchasers ................................... 74,941 90,876 Asset retirement obligation .................................... 984,353 932,004 Derivative instruments ......................................... 213,574 31,417 Other .......................................................... 184,746 225,844 ----------- ----------- 3,805,197 3,426,778 ----------- ----------- SHAREHOLDERS' EQUITY: Preferred stock, no par value, 5,000,000 shares authorized - Series B, 5.68% Cumulative Preferred Stock, 100,000 shares issued and outstanding .................... 98,387 98,387 Common stock, $0.625 par, 430,000,000 shares authorized, 336,185,275 and 334,912,505 shares issued, respectively ..... 210,116 209,320 Paid-in capital ................................................ 4,170,164 4,106,182 Retained earnings .............................................. 5,763,081 4,017,339 Treasury stock, at cost, 6,891,677 and 7,455,002 shares, respectively ................................................ (89,971) (97,325) Accumulated other comprehensive loss ........................... (438,926) (129,482) ----------- ----------- 9,712,851 8,204,421 ----------- ----------- $17,853,097 $15,502,480 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of this statement. 4 APACHE CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (UNAUDITED)
SERIES B COMPREHENSIVE PREFERRED COMMON PAID-IN (In thousands, except per share) INCOME STOCK STOCK CAPITAL - -------------------------------- ------------- --------- -------- ---------- BALANCE AT DECEMBER 31, 2003 ................ $98,387 $207,818 $4,038,007 Comprehensive income (loss): Net income ............................ $1,160,326 -- -- -- Commodity hedges, net of income tax benefit of $16,280 ................. (27,454) -- -- -- ---------- Comprehensive income ..................... $1,132,872 ========== Dividends: Preferred ............................. -- -- -- Common ($.20 per share) ............... -- -- -- Common shares issued ..................... -- 923 59,807 Treasury shares issued, net .............. -- -- 7,579 Other .................................... -- -- 4,418 ------- -------- ---------- BALANCE AT SEPTEMBER 30, 2004 ............... $98,387 $208,741 $4,109,811 ======= ======== ========== BALANCE AT DECEMBER 31, 2004 ................ $98,387 $209,320 $4,106,182 Comprehensive income (loss): Net income ............................ $1,835,508 -- -- -- Commodity hedges, net of income tax benefit of $185,766 ................ (309,444) -- -- -- ---------- Comprehensive income ..................... $1,526,064 ========== Dividends: Preferred ............................. -- -- -- Common ($.26 per share) ............... -- -- -- Common shares issued ..................... -- 796 56,795 Treasury shares issued, net .............. -- -- 7,064 Other .................................... -- -- 123 ------- -------- ---------- BALANCE AT SEPTEMBER 30, 2005 ............... $98,387 $210,116 $4,170,164 ======= ======== ========== ACCUMULATED OTHER TOTAL RETAINED TREASURY COMPREHENSIVE SHAREHOLDERS' (In thousands, except per share) EARNINGS STOCK INCOME (LOSS) EQUITY - -------------------------------- ---------- --------- ------------- ------------- BALANCE AT DECEMBER 31, 2003 ................ $2,445,698 $(105,169) $(151,943) $6,532,798 Comprehensive income (loss): Net income ............................ 1,160,326 -- -- 1,160,326 Commodity hedges, net of income tax benefit of $16,280 ................. -- -- (27,454) (27,454) Comprehensive income ..................... Dividends: Preferred ............................. (4,260) -- -- (4,260) Common ($.20 per share) ............... (65,211) -- -- (65,211) Common shares issued ..................... -- -- -- 60,730 Treasury shares issued, net .............. -- 7,060 -- 14,639 Other .................................... -- -- -- 4,418 ---------- --------- --------- ---------- BALANCE AT SEPTEMBER 30, 2004 ............... $3,536,553 $ (98,109) $(179,397) $7,675,986 ========== ========= ========= ========== BALANCE AT DECEMBER 31, 2004 ................ $4,017,339 $ (97,325) $(129,482) $8,204,421 Comprehensive income (loss): Net income ............................ 1,835,508 -- -- 1,835,508 Commodity hedges, net of income tax benefit of $185,766 ................ -- -- (309,444) (309,444) Comprehensive income ..................... Dividends: Preferred ............................. (4,260) -- -- (4,260) Common ($.26 per share) ............... (85,506) -- -- (85,506) Common shares issued ..................... -- -- -- 57,591 Treasury shares issued, net .............. -- 7,354 -- 14,418 Other .................................... -- -- -- 123 ---------- --------- --------- ---------- BALANCE AT SEPTEMBER 30, 2005 ............... $5,763,081 $ (89,971) $(438,926) $9,712,851 ========== ========= ========= ==========
The accompanying notes to consolidated financial statements are an integral part of this statement. 5 APACHE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) These financial statements have been prepared by Apache Corporation (Apache or the Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the summary of significant accounting policies and notes included in the Company's most recent annual report on Form 10-K. Reclassifications and Restatements The financial statement amounts applicable to the three-month and nine-month periods ending September 30, 2004 presented in this Form 10-Q will not agree to the amounts originally reported in the Company's Form 10-Q filed November 9, 2004, because they have been restated to reflect early adoption of Statement of Financial Accounting Standards No. 123 (revised 2004) "Share-Based Payment" (SFAS No. 123-R) (see Note 4, Capital Stock - Stock-Based Compensation). This restatement did not materially impact our results of operations. Certain other prior-period amounts have also been reclassified to conform with current year presentations. 1. ACQUISITIONS 2005 ACQUISITIONS No material acquisitions were completed during the three-month or nine-month periods ending September 30, 2005. 2004 ACQUISITIONS ANADARKO In August 2004, Apache signed a definitive agreement to acquire all of Anadarko Petroleum Corporation's (Anadarko) Gulf of Mexico Outer Continental Shelf properties (excluding certain deepwater properties) for $537 million, subject to normal post-closing adjustments, including preferential rights. The transaction was effective as of October 1, 2004, and included interests in 74 fields covering 232 offshore blocks (approximately 664,000 acres) and 104 platforms. Eighty-nine of the blocks were undeveloped at the time of the acquisition. At the time of acquisition, Apache operated 49 of the fields comprising approximately 70 percent of the production. Prior to Apache's purchase from Anadarko, Morgan Stanley Capital Group, Inc. paid Anadarko $646 million to acquire an overriding royalty interest in these properties. For a complete discussion of this transaction, please refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Results of Operations, Acquisitions and Divestitures" and Note 2, Acquisitions and Divestitures, of Item 15 in the Company's 2004 Form 10-K. EXXONMOBIL During the third quarter of 2004, Apache entered into separate arrangements with Exxon Mobil Corporation and its affiliates (ExxonMobil) that provided for property transfers and joint operating and exploration activity across a broad range of prospective and mature properties in (1) Western Canada, (2) West Texas and New Mexico, and (3) onshore Louisiana and the Gulf of Mexico-Outer Continental Shelf. Apache's participation included cash payments of approximately $347 million, subject to normal post-closing adjustments. For a complete discussion of these transactions, please refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Results of Operations, Acquisitions and Divestitures" and Note 2, Acquisitions and Divestitures, of Item 15 in the Company's 2004 Form 10-K. 6 2. HEDGING AND DERIVATIVE INSTRUMENTS Apache uses a variety of strategies to manage its exposure to fluctuations in crude oil and natural gas commodity prices. As established by the Company's hedging policy, Apache occasionally enters into cash flow hedges in connection with selected acquisitions to protect against commodity price volatility. The success of these acquisitions is significantly influenced by Apache's ability to achieve targeted production at forecasted prices over the long-term. These hedges effectively reduce price risk on a portion of the production from the acquisitions. Apache entered into, and designated as cash flow hedges, various fixed-price swaps, option collars and puts in conjunction with the ExxonMobil and Anadarko property acquisitions completed in 2004. These positions were entered into in accordance with the Company's hedging policy and involved counterparties which are rated A+ or better. As of September 30, 2005, the outstanding positions of our natural gas and crude oil cash flow hedges were as follows:
PRODUCTION TOTAL VOLUMES WEIGHTED AVERAGE FAIR VALUE ASSET/ PERIOD INSTRUMENT TYPE (MMBTU/BBL) FLOOR/CEILING (LIABILITY) - ---------------- -------------------- ------------- ---------------- ----------------- (In thousands) 4th Quarter 2005 Gas Collars 6,440,000 $ 6.00 / 6.78 $ (46,930) Gas Fixed-Price Swap 1,534,000 6.24 (11,992) Oil Collars 901,600 33.51 / 41.72 (22,098) Oil Fixed-Price Swap 86,000 40.95 (2,173) Oil Put Option 386,400 28.00 -- 2006 Gas Collars 32,850,000 5.50 / 6.66 (162,896) Gas Fixed-Price Swap 4,404,000 5.87 (25,713) Oil Collars 4,307,000 32.07 / 40.66 (110,579) Oil Fixed-Price Swap 224,000 38.50 (6,140) Oil Put Option 1,533,000 28.00 63 2007 Gas Collars 24,570,000 5.25 / 6.20 (88,596) Gas Fixed-Price Swap 1,761,000 5.57 (7,363) Oil Collars 1,911,000 33.00 / 39.25 (47,140) Oil Fixed-Price Swap 78,000 36.89 (2,039)
The natural gas and crude oil prices shown in the above table are based on the NYMEX index and have been valued using actively quoted prices and quotes obtained from reputable third-party financial institutions. The above prices represent a weighted average of several contracts entered into and are on a per million British thermal units (MMBtu) or per barrel (Bbl) basis for gas and oil derivatives, respectively. In November 2004, Apache hedged a portion of its 2005 foreign currency exchange risk associated with its forecasted Canadian, Australian and North Sea lease operating expenditures by entering into forward purchase contracts. The Company purchased a total of 144 million Canadian dollars at an average exchange rate of .840, 22 million Australian dollars at an average exchange rate of .763 and 42 million British pounds at an average exchange rate of 1.853. The remaining forward contracts mature through December 2005. The fair market value of these contracts as of September 30, 2005 was a gain of $183,000 ($141,000 after tax). Future changes in market value are recorded in other comprehensive income (loss) and the fair values of the foreign exchange contracts are based on quotes from either third-party financial institutions or published indices. A reconciliation of the components of accumulated other comprehensive income (loss) in the statement of consolidated shareholders' equity related to Apache's commodity and foreign currency derivative activities is presented in the table below:
GROSS AFTER TAX --------- --------- (In thousands) Unrealized gain (loss) on derivatives at December 31, 2004.... $ (33,113) $ (20,732) Net losses realized into earnings............................. 62,116 38,837 Net change in derivative fair value........................... (557,326) (348,281) --------- --------- Unrealized gain (loss) on derivatives at September 30, 2005... $(528,323) $(330,176) ========= =========
7 Based on current market prices as of September 30, 2005, the Company has an unrealized loss in other comprehensive income (loss) of $528 million ($330 million after tax), primarily representing commodity derivative hedges. Gains and losses on the commodity hedges will be realized in future earnings contemporaneously with the related sales of natural gas and crude oil production applicable to specific hedges. Gains and losses on the foreign exchange contracts will be realized in future earnings as the forecasted lease operating expenditures are incurred. Of the $528 million unrealized loss on commodity derivatives as of September 30, 2005, approximately $316 million ($198 million after tax) applies to the next 12 months; however, these amounts are likely to vary materially as a result of changes in market conditions. These contracts, designated as hedges, qualified and continue to qualify for hedge accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, as amended. 3. DEBT On May 12, 2005, the Company entered into a new $450 million revolving bank credit facility for the U.S., a $150 million revolving bank credit facility for Australia and a $150 million revolving bank credit facility for Canada. These new facilities replaced the Company's existing credit facilities in the same amounts which were scheduled to mature in June 2007. These new facilities are scheduled to mature on May 12, 2010. There were no changes to the Company's $750 million U.S. credit facility which matures in May 2009. The financial covenants of the Company's revolving bank credit facilities require the Company to maintain a debt-to-capitalization ratio of not greater than 60 percent at the end of any fiscal quarter. The negative covenants include restrictions on the Company's ability to create liens and security interests on our assets, with exceptions for liens typically arising in the oil and gas industry, purchase money liens and liens arising as a matter of law, such as tax and mechanics' liens. The Company may incur liens on assets located in the U.S., Canada and Australia of up to five percent of the Company's consolidated assets, which would approximate $893 million as of September 30, 2005. There are no restrictions on incurring liens in countries other than the U.S., Canada and Australia. There are also restrictions on Apache's ability to merge with another entity, unless the Company is the surviving entity, and a restriction on our ability to guarantee debt of entities not within our consolidated group. There are no clauses in the facilities that permit the lenders to accelerate payments or refuse to lend based on unspecified material adverse changes (MAC clauses). The credit facility agreements do not have drawdown restrictions or prepayment obligations in the event of a decline in credit ratings. However, the agreements allow the lenders to accelerate payments and terminate lending commitments if Apache Corporation, or any of its U.S., Canadian or Australian subsidiaries, defaults on any direct payment obligation in excess of $100 million or has any unpaid, non-appealable judgment against it in excess of $100 million. The Company was in compliance with the terms of the credit facilities as of September 30, 2005. The Company's debt-to-capitalization ratio as of September 30, 2005 was 18.4 percent. At the Company's option, the interest rate for the facilities is based on (i) the greater of (a) The JP Morgan Chase Bank prime rate or (b) the federal funds rate plus one-half of one percent or (ii) the London Interbank Offered Rate (LIBOR) plus a margin determined by the Company's senior long-term debt rating. The $750 million and the $450 million credit facilities (U.S. credit facilities) also allow the Company to borrow under competitive auctions. At September 30, 2005, the margin over LIBOR for committed loans under the new facilities was .23 percent. If the total amount of the loans borrowed under all three facilities equals or exceeds 50 percent of the total facility commitments, then an additional .10 percent will be added to the margins over LIBOR. The Company also pays quarterly facility fees of .07 percent on the total amount of the three facilities. The facility fees vary based upon the Company's senior long-term debt rating. 8 4. CAPITAL STOCK NET INCOME PER COMMON SHARE A reconciliation of the components of basic and diluted net income per common share is presented in the table below:
FOR THE QUARTER ENDED SEPTEMBER 30, --------------------------------------------------------------- 2005 2004 ------------------------------ ------------------------------ INCOME SHARES PER SHARE INCOME SHARES PER SHARE -------- ------- --------- -------- ------- --------- (In thousands, except per share amounts) BASIC: Income attributable to common stock .... $685,575 329,219 $2.08 $429,055 326,294 $1.31 ===== ===== EFFECT OF DILUTIVE SECURITIES: Stock options and other ................ -- 4,945 -- 3,899 -------- ------- -------- ------- DILUTED: Income attributable to common stock, including assumed conversions ....... $685,575 334,164 $2.05 $429,055 330,193 $1.30 ======== ======= ===== ======== ======= =====
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------------- 2005 2004 -------------------------------- -------------------------------- INCOME SHARES PER SHARE INCOME SHARES PER SHARE ---------- ------- --------- ---------- ------- --------- (In thousands, except per share amounts) BASIC: Income attributable to common stock .... $1,831,248 328,615 $5.57 $1,156,066 325,657 $3.55 ===== ===== EFFECT OF DILUTIVE SECURITIES: Stock options and other ................ -- 4,987 -- 3,801 ---------- ------- ---------- ------- DILUTED: Income attributable to common stock, including assumed conversions ....... $1,831,248 333,602 $5.49 $1,156,066 329,458 $3.51 ========== ======= ===== ========== ======= =====
STOCK-BASED COMPENSATION In the fourth quarter 2004, Apache elected to early adopt Financial Accounting Standards Board (FASB) SFAS No. 123-R under the "Modified Retrospective Approach", effective January 1, 2004. Under this approach, the Company is required to expense all options and other stock-based compensation that vest during the year based on the fair value determined at the date of grant. Total stock-based compensation cost (net of amounts capitalized) is presented in the table below. The related stock-based compensation cost capitalized as part of oil and gas properties was $11 million and $29 million for the three-month and nine-month periods ended September 30, 2005, respectively, and $5 million and $14 million for the three-month and nine-month periods ended September 30, 2004, respectively.
2005 2004 ----------------- ----------------- GROSS AFTER TAX GROSS AFTER TAX ----- --------- ----- --------- (In millions) Stock-based compensation expense: For the quarter ended September 30....... $21 $13 $12 $ 8 For the nine months ended September 30... 59 37 31 19
STOCK OPTION PLAN On May 5, 2005, the Company's stockholders approved a new stock option plan and 1.7 million options were subsequently awarded to substantially all employees. The estimated fair value per share determined on the date of grant was $20.25. The terms and underlying valuation assumptions of the grant are consistent with prior-year awards and are expensed on a straight-line basis over the four-year vesting term. 9 SHARE APPRECIATION PLAN Also in May 2005, the Company's stockholders approved a new targeted stock plan that provides incentives for employees to double Apache's share price to $108 by the end of 2008, with an interim goal of $81 to be achieved by the end of 2007. To achieve the trigger price, the Company's stock price must close at or above the stated threshold for 10 days out of any 30 consecutive trading days by the end of the stated period. Under the plan, if the first threshold is achieved, approximately 1.3 million shares would be awarded for an intrinsic cost of $106 million. Achieving the second threshold would result in approximately 2.0 million shares awarded for an intrinsic cost of $213 million. Shares ultimately issued would be reduced for any minimum tax withholding requirements. Under the terms of the new targeted stock plan, awards are payable in four equal installments, beginning with the date the trigger stock price is met and on each succeeding anniversary date. Current accounting practices dictate that, regardless of whether these thresholds are ultimately achieved, the Company must recognize the fair value cost at the grant date based on numerous assumptions, including an estimate of the likelihood that Apache's stock price will achieve these thresholds and the expected forfeiture rate. As a result, the Company will recognize expense and capitalized costs of approximately $68 million over the expected service life of the plan. The weighted average fair value at the date of grant, based on the Monte Carlo Simulation Model, was $23.67 per share. CASH DIVIDEND PAYMENTS During the third quarters of 2005 and 2004, Apache paid dividends on its Common Stock of $26 million and $20 million, respectively. On September 16, 2004, the Company announced that its Board of Directors voted to increase the quarterly cash dividend on its common stock to eight cents per share from six cents, effective with the November 2004 payment. On September 15, 2005, the Company announced that its Board of Directors voted to increase the quarterly cash dividend on its common stock to ten cents per share, effective with the November 2005 payment. During the second quarter 2005, Apache paid a total of $1.4 million in dividends in both periods on its Series B Preferred Stock issued in August 1998. 5. SUPPLEMENTAL CASH FLOW INFORMATION The following table provides supplemental disclosure of cash flow information:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2005 2004 -------- -------- (In thousands) Cash paid during the period for: Interest (net of amounts capitalized) .. $ 69,173 $ 63,333 Income taxes (net of refunds) .......... 816,221 352,585
6. PENSION AND POSTRETIREMENT BENEFITS Apache has a non-contributory defined benefit pension plan that provides retirement benefits for certain North Sea employees meeting established age and service requirements. The pension plan is closed to new employees. Apache also has a postretirement benefit plan which provides benefits for substantially all of its U.S. employees. The postretirement benefit plan provides medical benefits up until the age of 65 and is contributory. 10 NET PERIODIC COST The following table presents the plans' net periodic benefit cost for the three and nine month periods ended September 30, 2005 and 2004.
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS ------------------------------------- ---------------------------------- QUARTER ENDED NINE MONTHS ENDED QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ----------------- ----------------- -------------- ----------------- 2005 2004 2005 2004 2005 2004 2005 2004 -------- ------ ------- ------- ---- ---- ------ ------ (In thousands) Components of net periodic benefit cost: Service cost ........................... $ 1,540 $1,364 $ 4,778 $ 4,091 $350 $243 $1,049 $ 727 Interest cost .......................... 1,093 905 3,392 2,718 204 157 610 471 Expected return on plan assets ......... (1,181) (896) (3,664) (2,689) -- -- -- -- Amortization of transition obligation .. -- -- -- -- 11 11 33 33 Amortization of actuarial (gain)/loss .. -- -- -- -- 82 62 248 187 ------- ------ ------- ------- ---- ---- ------ ------ Net periodic benefit cost ........... $ 1,452 $1,373 $ 4,506 $ 4,120 $647 $473 $1,940 $1,418 ======= ====== ======= ======= ==== ==== ====== ======
EMPLOYER CONTRIBUTIONS As previously disclosed in our financial statements for the year ended December 31, 2004, we expect to contribute $5 million to the pension plan and $318,000 to the postretirement benefit plan in 2005. As of September 30, 2005, approximately $3.8 million of contributions have been made to the plans for the year. 11 7. BUSINESS SEGMENT INFORMATION Apache has interests in seven countries: the United States, Canada, Egypt, Australia, the United Kingdom, China and Argentina. Our reportable segments are the United States, Canada, Egypt, Australia, North Sea, and Other International. The Company evaluates segment performance based on oil and gas sales and lease-level expenses. Apache's reportable segments are managed separately because of their geographic locations. Financial information by reportable segment is presented below:
UNITED OTHER STATES CANADA EGYPT AUSTRALIA NORTH SEA INTERNATIONAL TOTAL ---------- ---------- ---------- ---------- ---------- ------------- ----------- (IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30, 2005 Oil and Gas Production Revenues ...... $ 761,167 $ 375,310 $ 378,194 $ 122,423 $ 378,977 $ 35,673 $ 2,051,744 ========== ========== ========== ========== ========== ======== =========== Operating Income (1) ................. $ 439,330 $ 230,741 $ 293,410 $ 62,216 $ 182,520 $ 18,881 $ 1,227,098 ========== ========== ========== ========== ========== ======== Other Income (Expense): Other ............................. 9,308 General and administrative ........ (50,047) Financing costs, net .............. (26,847) ----------- Income Before Income Taxes ........... $ 1,159,512 =========== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 Oil and Gas Production Revenues ...... $2,154,921 $ 962,188 $ 984,452 $ 300,008 $ 932,901 $118,458 $ 5,452,928 ========== ========== ========== ========== ========== ======== =========== Operating Income (1) ................. $1,222,036 $ 562,314 $ 738,838 $ 152,786 $ 470,090 $ 59,967 $ 3,206,031 ========== ========== ========== ========== ========== ======== Other Income (Expense): Other ............................. 29,643 General and administrative ........ (152,460) Financing costs, net .............. (90,160) ----------- Income Before Income Taxes ........... $ 2,993,054 =========== Total Assets ......................... $7,852,092 $4,567,754 $2,425,911 $1,212,946 $1,628,267 $166,127 $17,853,097 ========== ========== ========== ========== ========== ======== =========== FOR THE QUARTER ENDED SEPTEMBER 30, 2004 Oil and Gas Production Revenues ...... $ 582,846 $ 253,329 $ 258,684 $ 155,951 $ 135,224 $ 28,094 $ 1,414,128 ========== ========== ========== ========== ========== ======== =========== Operating Income (1) ................. $ 324,453 $ 140,122 $ 195,352 $ 79,337 $ 59,963 $ 13,888 813,115 ========== ========== ========== ========== ========== ======== Other Income (Expense): Other ............................. (7,126) General and administrative ........ (38,583) China litigation provision ........ -- Financing costs, net .............. (28,850) ----------- Income Before Income Taxes ........... $ 738,556 =========== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 Oil and Gas Production Revenues ...... $1,683,181 $ 723,266 $ 671,346 $ 345,600 $ 321,353 $ 69,548 $ 3,814,294 ========== ========== ========== ========== ========== ======== =========== Operating Income (1) ................. $ 924,746 $ 399,549 $ 473,147 $ 169,114 $ 134,677 $ 30,077 $ 2,131,310 ========== ========== ========== ========== ========== ======== Other Income (Expense): Other ............................. (16,620) General and administrative ........ (123,821) China litigation provision ........ (71,216) Financing costs, net .............. (83,563) ----------- Income Before Income Taxes ........... $ 1,836,090 =========== Total Assets ......................... $6,949,034 $3,364,170 $1,960,751 $1,036,576 $1,121,214 $190,970 $14,622,715 ========== ========== ========== ========== ========== ======== ===========
(1) Operating Income consists of oil and gas production revenues less depreciation, depletion and amortization, asset retirement obligation accretion, lease operating costs, gathering and transportation costs, and severance and other taxes. 12 8. ASSET RETIREMENT OBLIGATIONS The following table describes changes to the Company's asset retirement obligation (ARO) liability for the nine months ended September 30, 2005 (in thousands): Asset retirement obligation as of December 31, 2004 .... $932,004 Liabilities incurred ................................... 76,709 Liabilities settled .................................... (64,376) Accretion expense ...................................... 40,016 -------- Asset retirement obligation as of September 30, 2005 ... $984,353 ========
Liabilities incurred primarily relate to abandonment obligations assumed in connection with current drilling activity and various small acquisitions closed during the period. Liabilities settled during the period primarily relate to individually immaterial properties plugged and abandoned or sold during the period. During the third quarter, nine of the Company's offshore platforms in the Gulf of Mexico were lost, two platforms were severely damaged and approximately 12 non-operated structures were destroyed as a result of Hurricane Katrina and Hurricane Rita (refer to Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Impact of Hurricanes" in this Form 10-Q). These platforms have abandonment obligations associated with them that will be incurred in the near future and will likely require significantly more cost because of underwater recovery efforts. The Company is continuing to assess the expected timing and ultimate costs anticipated to abandon these platforms. Any revisions to future cash outflow or changes in timing resulting from the hurricanes will be reflected in oil and gas properties when those estimates become reasonably determinable. Any new facilities built to recover reserves previously serviced by the destroyed platforms will have separate abandonment liabilities associated with them. Future cash payments made to abandon properties impacted by the hurricanes and to build new facilities will be offset to some degree by insurance proceeds. These proceeds will be reflected as a separate receivable and not netted with the abandonment liability. 9. LITIGATION TEXACO CHINA B.V. Apache recorded a reserve in the second quarter of 2004 to fully reflect a pre-tax $71 million international arbitration award to Texaco China B.V. (Texaco China). The arbitration award was subject to interest at nine percent until May 6, 2005, the date following the federal district court ruling discussed below. On May 6, 2005, the interest rate dropped to 3.33 percent. Apache accrued $3.2 million of interest expense in 2004 and an additional $3.2 million of interest expense in the first nine months of 2005. In September 2001, Texaco China initiated an arbitration proceeding against Apache China Corporation LDC (Apache China), later adding Apache Bohai Corporation LDC (Apache Bohai) to the arbitration. In the arbitration Texaco China claimed damages, plus interest, arising from Apache Bohai's alleged failure to drill three wells, prior to re-assignment of the interest to Texaco China. Apache believes that the finding of the arbitrator is unsupported by the facts and the law, and Apache filed an application to vacate the award in federal court. Texaco China filed an application to confirm the award in the same court. On May 5, 2005, the federal district court ruled in favor of Texaco China. The Company has appealed that decision to the circuit court of appeals. In January 2005, while awaiting the decision of the U.S. federal courts, Texaco China also filed a proceeding against Apache China and Apache Bohai in the People's Republic of China to recognize the award, apparently seeking the same relief as sought in U.S. federal court. The parties subsequently agreed to stay enforcement of the arbitration award in China and elsewhere pending the final, determinative outcome of all possible appeals in the U.S. federal courts. PREDATOR In December 2000, certain subsidiaries of the Company and Murphy Oil Corporation (Murphy) filed a lawsuit in Canada charging The Predator Corporation Ltd. (Predator) and others with misappropriation and misuse of confidential well data to obtain acreage offsetting a significant natural gas discovery in the Ladyfern area of northeast British Columbia made by Apache Canada Ltd. (Apache Canada) and Murphy during 2000. In February 2001, Predator filed a counterclaim seeking more than C$6 billion and later reduced this amount to approximately C$3.6 billion. In September 2004, the Canadian court granted Apache Canada's motion for summary judgment on 13 the counterclaim, dismissing more than C$3 billion of Predator's claims against the Company and Murphy, and dismissing all claims against both Murphy's president and Apache Canada's president. Predator has appealed the dismissal. The trial court also granted Apache Canada's request for costs and disbursements in the approximate amount of C$700,000, which Predator has paid. The Canadian court has also granted Predator's request to add some new mismanagement of operations claims to its counterclaim. At this time, Predator's counterclaims against Murphy and Apache Canada for mismanaging operations still survive in the trial court. Those combined claims total approximately C$365 million, plus interest and attorneys' fees. While management believes Predator's counterclaim against Apache Canada is without merit, an adverse judgment is possible. Exposure related to this lawsuit is not currently determinable. Apache and Murphy's claims against Predator, filed in December 2000, are still pending. GRYNBERG In 1997, Jack J. Grynberg began filing lawsuits against other natural gas producers, gatherers, and pipelines claiming that the defendants have under paid royalty to the federal government and Indian tribes by mis-measurement of the volume and heating content of natural gas and are responsible for acts of others who mis-measured natural gas. In 2004, Grynberg filed suit against Apache making the same claims he had made previously against others in the industry. With the addition of Apache, there are more than 300 defendants to these actions. Other plaintiffs have made or may be expected to make similar claims. The Grynberg lawsuits have, for the most part, been consolidated through a federal Multi-District Litigation (MDL) action located in Wyoming federal court for discovery and pre-trial purposes. The defendants in the MDL, jointly and/or separately, filed motions to dismiss based upon certain statutory requirements Grynberg is required to prove to proceed with these qui tam lawsuits. These motions were referred to a magistrate for recommendation for decision. The magistrate has recommended some defendants be dismissed. Subsequent motions are pending before the federal district court by both sides on these recommendations for confirmation and/or denial of the recommendation. It is unclear from the Magistrate's recommendation if there was a ruling on Apache's filing for dismissal; however, at this time, Apache has not been dismissed. Apache has filed additional pleadings to obtain rulings on its separate request for dismissal. Although Grynberg purports to be acting on behalf of the government, the federal government has declined to join in the cases. While an adverse judgment against Apache is possible, Apache does not believe the plaintiff's claims have merit and plans to vigorously pursue its defenses against these claims. Exposure related to this lawsuit is not currently determinable. EGYPT TAX AUTHORITY As of the end of 2004, the Egyptian Tax Authority (ETA) had issued claims for back taxes against various Apache subsidiaries in Egypt totaling approximately $106 million (at current exchange rates) relating to periods as far back as 1994. In July 2005, the ETA made a new claim for approximately $85 million of additional taxes for the 1994-99 tax years. While an adverse judgment against Apache is possible, Egyptian concession agreements clearly provide that the Egyptian General Petroleum Corporation is responsible for the payment of all taxes related to the operation of the concessions. Apache believes that the claims of the ETA are unsupported by either the facts or the language of the concession agreements, which have the force of law in Egypt. Apache's subsidiaries have, therefore, contested liability with respect to the original claims by filing actions in Egyptian civil court, and will pursue all appropriate appeals and actions to challenge the new tax claims as well. Apache plans to vigorously pursue its remedies with respect to these claims. A civil court ruling with respect to the initial tax claims is expected sometime in 2006. LOUISIANA RESTORATION Numerous surface owners have filed claims or sent demand letters to various oil and gas companies, including Apache, claiming that, under either expressed or implied lease terms or Louisiana law, they are liable for damage measured by the cost of restoration of leased premises to their original condition. Many of these lawsuits claim small amounts, while others assert claims in excess of a million dollars. Also, some lawsuits or claims are being settled or resolved, while others are still being filed. Any exposure, therefore, related to these lawsuits and claims is not currently determinable. While an adverse judgment against Apache is possible, Apache intends to actively defend the cases. HURRICANE RELATED LITIGATION A class action lawsuit has been filed styled Barasich, et al., individually and as representatives of all those similarly situated vs. Columbia Gulf Transmission Co., et al, No. 05-4161, United States District Court, Eastern 14 District of Louisiana, against all oil and gas and pipeline companies that drilled or dredged in the marshes of South Louisiana. The lawsuit claims defendants were negligent by constructing canals and conducting oil and gas operations, which plaintiffs contend is the sole and/or almost the sole cause of the alleged destruction of the marshes in South Louisiana, which plaintiffs blame for all and/or substantially all loss of life and destruction of property which was incurred from Hurricane Katrina. Apache was not named, but if a defendant class is certified, would fall within the definition alleged. Apache believes such claims are without merit, and if joined will undertake an active defense to such claims. 10. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2005, the FASB ratified the consensus in Emerging Issue Task Force (EITF) Issue Number 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights" (Issue 04-5). EITF Issue Number 04-5 states that the general partner in a limited partnership is presumed to control the partnership and must consolidate the entity on its financial statements. The presumption of control and consolidation requirement may be overcome if the limited partners have substantive participating rights or have the ability to effectively liquidate the partnership. The Company's only limited partnership covered by the EITF is the Apache Offshore Investment Partnership. Management is currently determining the ultimate impact of applying this statement, but does not believe application of Issue Number 04-5 will have a material impact on the Company's consolidated financial statements. The effective date for applying the guidance in Issue Number 04-5 to existing limited partnerships is for the first reporting period in fiscal years beginning after December 15, 2005. In September 2005, the EITF reached a consensus on Issue No. 04-13, "Accounting for Purchases and Sales of Inventory with the Same Counterparty," concluding that purchases and sales of inventory with the same party in the same line of business should be accounted for as a single non-monetary exchange, if entered into in contemplation of one another. Apache presents such purchase and sale activities related to its marketing activities on a net basis in its Statement of Consolidated Operations. The conclusion reached on EITF Issue No. 04-13 was that it did not have any impact on the Company's consolidated financial statements. 11. SUBSEQUENT EVENT On October 13, 2005, the Company announced that it had agreed to sell its 55 percent interest in the deepwater section of Egypt's West Mediterranean Concession to Amerada Hess Corporation for $413 million. Apache also has agreed to purchase Amerada Hess' interests in eight fields located in the Permian Basin of West Texas and New Mexico, six of which are operated, for $404 million. The Permian Basin transaction is subject to exercise of preferential rights to purchase by third parties as well as to standard closing requirements. 12. SUPPLEMENTAL GUARANTOR INFORMATION Apache Finance Pty Ltd. (Apache Finance Australia) and Apache Finance Canada Corporation (Apache Finance Canada) are subsidiaries of Apache that have issuances of publicly traded securities and require the following condensed consolidating financial statements be provided as an alternative to filing separate financial statements. Each of the companies presented in the condensed consolidating financial statements have been fully consolidated in Apache's consolidated financial statements. As such, the condensed consolidating financial statements should be read in conjunction with the financial statements of Apache Corporation and Subsidiaries and notes. 15 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2005
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- --------- -------------- (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues ............. $ 757,281 $ -- $ -- $ -- Equity in net income (loss) of affiliates ... 410,091 10,979 13,952 62,111 Other ....................................... 4,413 -- -- -- ---------- ------- ------- ------- 1,171,785 10,979 13,952 62,111 ---------- ------- ------- ------- OPERATING EXPENSES: Depreciation, depletion and amortization .... 139,719 -- -- -- Asset retirement obligation accretion ....... 7,967 -- -- -- Lease operating costs ....................... 136,530 -- -- -- Gathering and transportation costs .......... 7,090 -- -- -- Severance and other taxes ................... 28,496 -- -- -- General and administrative .................. 42,658 -- -- -- Financing costs, net ........................ 17,912 -- 4,512 14,110 ---------- ------- ------- ------- 380,372 -- 4,512 14,110 ---------- ------- ------- ------- INCOME (LOSS) BEFORE INCOME TAXES .............. 791,413 10,979 9,440 48,001 Provision (benefit) for income taxes ........ 104,418 -- (1,539) (4,738) ---------- ------- ------- ------- NET INCOME ..................................... 686,995 10,979 10,979 52,739 Preferred stock dividends ................... 1,420 -- -- -- ---------- ------- ------- ------- INCOME ATTRIBUTABLE TO COMMON STOCK ............ $ 685,575 $10,979 $10,979 $52,739 ========== ======= ======= ======= ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues ............. $1,397,113 $(102,650) $2,051,744 Equity in net income (loss) of affiliates ... (12,345) (484,788) -- Other ....................................... 4,895 -- 9,308 ---------- --------- ---------- 1,389,663 (587,438) 2,061,052 ---------- --------- ---------- OPERATING EXPENSES: Depreciation, depletion and amortization .... 217,440 -- 357,159 Asset retirement obligation accretion ....... 5,560 -- 13,527 Lease operating costs ....................... 246,115 (102,650) 279,995 Gathering and transportation costs .......... 16,481 -- 23,571 Severance and other taxes ................... 121,898 -- 150,394 General and administrative .................. 7,389 -- 50,047 Financing costs, net ........................ (9,687) -- 26,847 ---------- --------- ---------- 605,196 (102,650) 901,540 ---------- --------- ---------- INCOME (LOSS) BEFORE INCOME TAXES .............. 784,467 (484,788) 1,159,512 Provision (benefit) for income taxes ........ 374,376 -- 472,517 ---------- --------- ---------- NET INCOME ..................................... 410,091 (484,788) 686,995 Preferred stock dividends ................... -- -- 1,420 ---------- --------- ---------- INCOME ATTRIBUTABLE TO COMMON STOCK ............ $ 410,091 $(484,788) $ 685,575 ========== ========= ==========
16 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2004
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- --------- ------- (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues ............. $581,632 $ -- $ -- $ -- Equity in net income (loss) of affiliates ... 239,066 11,286 14,242 25,869 Other ....................................... (2,547) -- -- -- -------- ------- ------- ------- 818,151 11,286 14,242 25,869 -------- ------- ------- ------- OPERATING EXPENSES: Depreciation, depletion and amortization .... 136,169 -- -- -- Asset retirement obligation accretion ....... 5,897 -- -- -- Lease operating costs ....................... 90,391 -- -- -- Gathering and transportation costs .......... 7,154 -- -- -- Severance and other taxes ................... 17,527 -- -- -- General and administrative .................. 30,659 -- -- -- Financing costs, net ........................ 19,572 -- 4,512 9,936 -------- ------- ------- ------- 307,369 -- 4,512 9,936 -------- ------- ------- ------- INCOME (LOSS) BEFORE INCOME TAXES .............. 510,782 11,286 9,730 15,933 Provision (benefit) for income taxes ........ 80,307 -- (1,556) 1,470 -------- ------- ------- ------- NET INCOME ..................................... 430,475 11,286 11,286 14,463 Preferred stock dividends ................... 1,420 -- -- -- -------- ------- ------- ------- INCOME ATTRIBUTABLE TO COMMON STOCK ............ $429,055 $11,286 $11,286 $14,463 ======== ======= ======= ======= ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues ............. $909,350 $ (76,854) $1,414,128 Equity in net income (loss) of affiliates ... (14,362) (276,101) -- Other ....................................... (4,579) -- (7,126) -------- --------- ---------- 890,409 (352,955) 1,407,002 -------- --------- ---------- OPERATING EXPENSES: Depreciation, depletion and amortization .... 177,351 -- 313,520 Asset retirement obligation accretion ....... 5,174 -- 11,071 Lease operating costs ....................... 194,835 (76,854) 208,372 Gathering and transportation costs .......... 13,748 -- 20,902 Severance and other taxes ................... 29,621 -- 47,148 General and administrative .................. 7,924 -- 38,583 Financing costs, net ........................ (5,170) -- 28,850 -------- --------- ---------- 423,483 (76,854) 668,446 -------- --------- ---------- INCOME (LOSS) BEFORE INCOME TAXES .............. 466,926 (276,101) 738,556 Provision (benefit) for income taxes ........ 227,860 -- 308,081 -------- --------- ---------- NET INCOME ..................................... 239,066 (276,101) 430,475 Preferred stock dividends ................... -- -- 1,420 -------- --------- ---------- INCOME ATTRIBUTABLE TO COMMON STOCK ............ $239,066 $(276,101) $ 429,055 ======== ========= ==========
17 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- --------- -------- (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues ............. $2,128,566 $ -- $ -- $ -- Equity in net income (loss) of affiliates ... 1,120,922 23,103 32,056 171,971 Other ....................................... 40,859 -- -- -- ---------- ------- ------- -------- 3,290,347 23,103 32,056 171,971 ---------- ------- ------- -------- OPERATING EXPENSES: Depreciation, depletion and amortization .... 447,770 -- -- -- Asset retirement obligation accretion ....... 23,674 -- -- -- Lease operating costs ....................... 360,626 -- -- -- Gathering and transportation costs .......... 22,656 -- -- -- Severance and other taxes ................... 72,112 -- -- 1 General and administrative .................. 127,950 -- -- -- Financing costs, net ........................ 58,140 -- 13,537 42,330 ---------- ------- ------- -------- 1,112,928 -- 13,537 42,331 ---------- ------- ------- -------- INCOME (LOSS) BEFORE INCOME TAXES .............. 2,177,419 23,103 18,519 129,640 Provision (benefit) for income taxes ........ 341,911 -- (4,584) (14,223) ---------- ------- ------- -------- NET INCOME ..................................... 1,835,508 23,103 23,103 143,863 Preferred stock dividends ................... 4,260 -- -- -- ---------- ------- ------- -------- INCOME ATTRIBUTABLE TO COMMON STOCK ............ $1,831,248 $23,103 $23,103 $143,863 ========== ======= ======= ======== ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues ............. $3,582,523 $ (258,161) $5,452,928 Equity in net income (loss) of affiliates ... (37,061) (1,310,991) -- Other ....................................... (11,216) -- 29,643 ---------- ----------- ---------- 3,534,246 (1,569,152) 5,482,571 ---------- ----------- ---------- OPERATING EXPENSES: Depreciation, depletion and amortization .... 607,813 -- 1,055,583 Asset retirement obligation accretion ....... 16,342 -- 40,016 Lease operating costs ....................... 666,131 (258,161) 768,596 Gathering and transportation costs .......... 50,873 -- 73,529 Severance and other taxes ................... 237,060 -- 309,173 General and administrative .................. 24,510 -- 152,460 Financing costs, net ........................ (23,847) -- 90,160 ---------- ----------- ---------- 1,578,882 (258,161) 2,489,517 ---------- ----------- ---------- INCOME (LOSS) BEFORE INCOME TAXES .............. 1,955,364 (1,310,991) 2,993,054 Provision (benefit) for income taxes ........ 834,442 -- 1,157,546 ---------- ----------- ---------- NET INCOME ..................................... 1,120,922 (1,310,991) 1,835,508 Preferred stock dividends ................... -- -- 4,260 ---------- ----------- ---------- INCOME ATTRIBUTABLE TO COMMON STOCK ............ $1,120,922 $(1,310,991) $1,831,248 ========== =========== ==========
18 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- --------- -------------- (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues ............. $1,679,091 $ -- $ -- $ -- Equity in net income (loss) of affiliates ... 657,923 29,968 38,958 117,268 Other ....................................... (4,458) -- -- -- ---------- ------- -------- -------- 2,332,556 29,968 38,958 117,268 ---------- ------- -------- -------- OPERATING EXPENSES: Depreciation, depletion and amortization .... 405,223 -- -- -- Asset retirement obligation accretion ....... 17,497 -- -- -- Lease operating costs ....................... 263,078 -- -- -- Gathering and transportation costs .......... 22,377 -- -- -- Severance and other taxes ................... 46,323 -- -- 18 General and administrative .................. 98,487 -- -- -- China litigation provision .................. -- -- -- -- Financing costs, net ........................ 61,588 -- 13,534 29,979 ---------- ------- -------- -------- 914,573 -- 13,534 29,997 ---------- ------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES .............. 1,417,983 29,968 25,424 87,271 Provision (benefit) for income taxes ........ 257,657 -- (4,544) (5,315) ---------- ------- -------- -------- NET INCOME ..................................... 1,160,326 29,968 29,968 92,586 Preferred stock dividends ................... 4,260 -- -- -- ---------- ------- -------- -------- INCOME ATTRIBUTABLE TO COMMON STOCK ............ $1,156,066 $29,968 $ 29,968 $ 92,586 ========== ======= ======== ======== ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues ............. $2,367,271 $ (232,068) $3,814,294 Equity in net income (loss) of affiliates ... (33,672) (810,445) -- Other ....................................... (12,162) -- (16,620) ---------- ----------- ---------- 2,321,437 (1,042,513) 3,797,674 ---------- ----------- ---------- OPERATING EXPENSES: Depreciation, depletion and amortization .... 490,262 -- 895,485 Asset retirement obligation accretion ....... 15,226 -- 32,723 Lease operating costs ....................... 585,377 (232,068) 616,387 Gathering and transportation costs .......... 38,321 -- 60,698 Severance and other taxes ................... 31,350 -- 77,691 General and administrative .................. 25,334 -- 123,821 China litigation provision .................. 71,216 -- 71,216 Financing costs, net ........................ (21,538) -- 83,563 ---------- ----------- ---------- 1,235,548 (232,068) 1,961,584 ---------- ----------- ---------- INCOME (LOSS) BEFORE INCOME TAXES .............. 1,085,889 (810,445) 1,836,090 Provision (benefit) for income taxes ........ 427,966 -- 675,764 ---------- ----------- ---------- NET INCOME ..................................... 657,923 (810,445) 1,160,326 Preferred stock dividends ................... -- -- 4,260 ---------- ----------- ---------- INCOME ATTRIBUTABLE TO COMMON STOCK ............ $ 657,923 $ (810,445) $1,156,066 ========== =========== ==========
19 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- --------- -------------- (IN THOUSANDS) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ............................... $1,220,137 $ -- $(13,725) $(19,785) ---------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment ...... (767,872) -- -- -- Investment in subsidiaries, net .......... (50,210) (12,525) -- -- Other, net ............................... 58,137 -- -- -- ---------- -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES ....... (759,945) (12,525) -- -- ---------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings ..................... 112,189 -- 1,200 502 Payments on long-term debt ............... (507,900) -- -- -- Dividends paid ........................... (83,046) -- -- -- Common stock activity .................... 18,646 12,525 12,525 19,281 Treasury stock activity, net ............. 5,802 -- -- -- Cost of debt and equity transactions ..... (838) -- -- -- Other .................................... 12,292 -- -- -- ---------- -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES ... (442,855) 12,525 13,725 19,783 ---------- -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... 17,337 -- -- (2) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........................ 597 -- 2 3 ---------- -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................ $ 17,934 $ -- $ 2 $ 1 ========== ======== ======== ======== ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ............................... $ 1,973,469 $ -- $ 3,160,096 ----------- -------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment ...... (1,968,394) -- (2,736,266) Investment in subsidiaries, net .......... (33,312) 96,047 -- Other, net ............................... (52,901) -- 5,236 ----------- -------- ----------- NET CASH USED IN INVESTING ACTIVITIES ....... (2,054,607) 96,047 (2,731,030) ----------- -------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings ..................... 36,124 (37,617) 112,398 Payments on long-term debt ............... (829) -- (508,729) Dividends paid ........................... -- -- (83,046) Common stock activity .................... 14,099 (58,430) 18,646 Treasury stock activity, net ............. -- -- 5,802 Cost of debt and equity transactions ..... -- -- (838) Other .................................... -- -- 12,292 ----------- -------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES ... 49,394 (96,047) (443,475) ----------- -------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... (31,744) -- (14,409) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........................ 110,491 -- 111,093 ----------- -------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................ $ 78,747 $ -- $ 96,684 =========== ======== ===========
20 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- --------- -------- (IN THOUSANDS) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ................................... $ 1,162,884 $ -- $(11,831) $(19,435) ----------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment .......... (577,697) -- -- -- Acquisition of Anadarko properties ........... (92,699) -- -- -- Acquisition of ExxonMobil properties ......... (347,352) -- -- -- Restricted cash for acquisition settlement ... (444,734) -- -- -- Investment in subsidiaries, net .............. (45,720) (12,525) -- -- Other, net ................................... (17,430) -- -- -- ----------- -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES ........... (1,525,632) (12,525) -- -- ----------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings ......................... 543,170 -- (694) 156 Payments on long-term debt ................... (135,300) -- -- -- Dividends paid ............................... (62,825) -- -- -- Common stock activity ........................ 19,324 12,525 12,525 19,281 Treasury stock activity, net ................. 11,412 -- -- -- Cost of debt and equity transactions ......... (2,250) -- -- -- ----------- -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES ....... 373,531 12,525 11,831 19,437 ----------- -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. 10,783 -- -- 2 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................ -- -- 2 1 ----------- -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 10,783 $ -- $ 2 $ 3 =========== ======== ======== ======== ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ................................... $ 1,188,920 $ -- $ 2,320,538 ----------- -------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment .......... (1,104,340) -- (1,682,037) Acquisition of Anadarko properties ........... -- -- (92,699) Acquisition of ExxonMobil properties ......... -- -- (347,352) Restricted cash for acquisition settlement ... -- -- (444,734) Investment in subsidiaries, net .............. (30,748) 88,993 -- Other, net ................................... (37,992) -- (55,422) ----------- -------- ----------- NET CASH USED IN INVESTING ACTIVITIES ........... (1,173,080) 88,993 (2,622,244) ----------- -------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings ......................... 19,507 (18,773) 543,366 Payments on long-term debt ................... -- -- (135,300) Dividends paid ............................... -- -- (62,825) Common stock activity ........................ 25,889 (70,220) 19,324 Treasury stock activity, net ................. -- -- 11,412 Cost of debt and equity transactions ......... -- -- (2,250) ----------- -------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES ....... 45,396 (88,993) 373,727 ----------- -------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. 61,236 -- 72,021 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................ 33,500 -- 33,503 ----------- -------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 94,736 $ -- $ 105,524 =========== ======== ===========
21 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 2005
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- --------- ---------- (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents .................... $ 17,934 $ -- $ 2 $ 1 Receivables, net of allowance ................ 376,307 -- -- -- Inventories .................................. 28,131 -- -- -- Drilling advances and other .................. 132,941 -- -- -- ----------- -------- -------- ---------- 555,313 -- 2 1 ----------- -------- -------- ---------- PROPERTY AND EQUIPMENT, NET ..................... 7,062,999 -- -- -- ----------- -------- -------- ---------- OTHER ASSETS: Intercompany receivable, net ................. 1,143,410 -- (2,242) (254,180) Goodwill, net ................................ -- -- -- -- Equity in affiliates ......................... 5,308,510 295,877 540,839 1,506,387 Deferred charges and other ................... 44,934 -- -- 4,380 ----------- -------- -------- ---------- 14,115,166 295,877 538,599 1,256,588 =========== ======== ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................. 382,632 -- -- -- Other accrued expenses ....................... 701,765 -- (731) 53,086 Current debt ................................. -- -- -- -- ----------- -------- -------- ---------- 1,084,397 -- (731) 53,086 ----------- -------- -------- ---------- LONG-TERM DEBT .................................. 1,271,334 -- 269,355 646,844 ----------- -------- -------- ---------- DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes .............................. 1,004,087 -- (25,902) 4,766 Advances from gas purchasers .............. 74,941 -- -- -- Asset retirement obligation ............... 594,084 -- -- -- Oil and gas derivative instruments ........ 213,574 -- -- -- Other ..................................... 159,898 -- -- -- ----------- -------- -------- ---------- 2,046,584 -- (25,902) 4,766 ----------- -------- -------- ---------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY ............................ 9,712,851 295,877 295,877 551,892 ----------- -------- -------- ---------- $14,115,166 $295,877 $538,599 $1,256,588 =========== ======== ======== ========== ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents .................... $ 78,747 $ -- $ 96,684 Receivables, net of allowance ................ 882,080 -- 1,258,387 Inventories .................................. 170,305 -- 198,436 Drilling advances and other .................. 100,157 -- 233,098 ----------- ----------- ----------- 1,231,289 -- 1,786,605 ----------- ----------- ----------- PROPERTY AND EQUIPMENT, NET ..................... 8,682,486 -- 15,745,485 ----------- ----------- ----------- OTHER ASSETS: Intercompany receivable, net ................. (886,988) -- -- Goodwill, net ................................ 189,252 -- 189,252 Equity in affiliates ......................... (1,199,457) (6,452,156) -- Deferred charges and other ................... 82,441 -- 131,755 ----------- ----------- ----------- 8,099,023 (6,452,156) 17,853,097 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................. 344,014 -- 726,646 Other accrued expenses ....................... 662,224 -- 1,416,344 Current debt ................................. 274 -- 274 ----------- ----------- ----------- 1,006,512 -- 2,143,264 ----------- ----------- ----------- LONG-TERM DEBT .................................. 4,252 -- 2,191,785 ----------- ----------- ----------- DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes .............................. 1,364,632 -- 2,347,583 Advances from gas purchasers .............. -- -- 74,941 Asset retirement obligation ............... 390,269 -- 984,353 Oil and gas derivative instruments ........ -- -- 213,574 Other ..................................... 24,848 -- 184,746 ----------- ----------- ----------- 1,779,749 -- 3,805,197 ----------- ----------- ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY ............................ 5,308,510 (6,452,156) 9,712,851 ----------- ----------- ----------- $ 8,099,023 $(6,452,156) $17,853,097 =========== =========== ===========
22 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2004
APACHE APACHE APACHE FINANCE APACHE CORPORATION NORTH AMERICA AUSTRALIA FINANCE CANADA ----------- ------------- --------- -------------- (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents ........... $ 597 $ -- $ 2 $ 3 Receivables, net of allowance ....... 367,359 -- -- -- Inventories ......................... 28,000 -- -- -- Drilling advances and other ......... 82,837 -- -- -- ----------- -------- -------- ---------- 478,793 -- 2 3 ----------- -------- -------- ---------- PROPERTY AND EQUIPMENT, NET ............ 6,683,499 -- -- -- ----------- -------- -------- ---------- OTHER ASSETS: Intercompany receivable, net ........ 1,107,286 -- (1,205) (253,724) Goodwill, net ....................... -- -- -- -- Equity in affiliates ................ 4,173,788 258,437 506,806 1,250,590 Deferred charges and other .......... 43,460 -- -- 4,617 ----------- -------- -------- ---------- $12,486,826 $258,437 $505,603 $1,001,486 =========== ======== ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .................... $ 280,754 $ -- $ -- $ -- Other accrued expenses .............. 306,511 -- 3,335 29,946 ----------- -------- -------- ---------- 587,265 -- 3,335 29,946 ----------- -------- -------- ---------- LONG-TERM DEBT ......................... 1,667,044 -- 269,192 646,798 ----------- -------- -------- ---------- DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes ........................ 1,132,618 -- (25,361) 4,233 Advances from gas purchasers ........ 90,876 -- -- -- Asset retirement obligation ......... 568,862 -- -- -- Oil and gas derivative instruments .. 31,417 -- -- -- Other ............................... 204,323 -- -- -- ----------- -------- -------- ---------- 2,028,096 -- (25,361) 4,233 ----------- -------- -------- ---------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY ................... 8,204,421 258,437 258,437 320,509 ----------- -------- -------- ---------- $12,486,826 $258,437 $505,603 $1,001,486 =========== ======== ======== ========== ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents ........... $ 110,491 $ -- $ 111,093 Receivables, net of allowance ....... 572,377 -- 939,736 Inventories ......................... 129,293 -- 157,293 Drilling advances and other ......... 57,823 -- 140,660 ----------- ----------- ----------- 869,984 -- 1,348,782 ----------- ----------- ----------- PROPERTY AND EQUIPMENT, NET ............ 7,176,860 -- 13,860,359 ----------- ----------- ----------- OTHER ASSETS: Intercompany receivable, net ........ (852,357) -- -- Goodwill, net ....................... 189,252 -- 189,252 Equity in affiliates ................ (1,178,450) (5,011,171) -- Deferred charges and other .......... 56,010 -- 104,087 ----------- ----------- ----------- $ 6,261,299 $(5,011,171) $15,502,480 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .................... $ 261,320 $ -- $ 542,074 Other accrued expenses .............. 401,025 -- 740,817 ----------- ----------- ----------- 662,345 -- 1,282,891 ----------- ----------- ----------- LONG-TERM DEBT ......................... 5,356 -- 2,588,390 ----------- ----------- ----------- DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes ........................ 1,035,147 -- 2,146,637 Advances from gas purchasers ........ -- -- 90,876 Asset retirement obligation ......... 363,142 -- 932,004 Oil and gas derivative instruments .. -- -- 31,417 Other ............................... 21,521 -- 225,844 ----------- ----------- ----------- 1,419,810 -- 3,426,778 ----------- ----------- ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY ................... 4,173,788 (5,011,171) 8,204,421 ----------- ----------- ----------- $ 6,261,299 $(5,011,171) $15,502,480 =========== =========== ===========
23 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Apache reported third-quarter 2005 earnings of $686 million, up 60 percent from the $429 million reported in the third quarter of 2004. The higher earnings were driven by higher crude oil and natural gas prices which more than offset higher costs and the financial impact of Gulf of Mexico production shut in during the third-quarter 2005 because of hurricane activity. Oil realizations averaged $58.66 per barrel, up 54 percent from the prior-year quarter, and gas realizations averaged $6.54 per thousand cubic feet (Mcf), up 37 percent from the prior-year quarter. The Company was well positioned to benefit from higher commodity prices with less than 10 percent of its production hedged in the third-quarter 2005. Production averaged 453,845 barrels of oil equivalent per day (boe/d) down 4,567 boe/d (one percent) from third quarter 2004 levels, reflecting the impact of production shut in for hurricanes, the most significant being Hurricanes Katrina and Rita. Shut-in production resulting from the hurricanes was an estimated 26,700 boe/d. (See the Impact of Hurricanes section below for additional discussion.) Year-to-date earnings of $1.8 billion and net cash provided by operating activities of $3.2 billion increased 58 percent and 36 percent, respectively, from the same period of 2004. These increases were driven by significantly higher commodity prices and a four percent increase in daily equivalent production, which was up 17,687 boe/d despite the impact of the hurricanes mentioned above. Average oil realizations increased 50 percent, to $51.05 per barrel, while average gas realizations were up 22 percent, at $5.86 per Mcf, when compared to average realized prices for first nine months of 2004. Third-quarter and year-to-date operating results include: - Record quarterly and year-to-date oil and natural gas production revenues of $2.1 billion and $5.5 billion, respectively. - Third-quarter natural gas production increased 31 million cubic feet per day (MMcf/d) to 1,265 MMcf/d compared to the third quarter of 2004, despite the impact of the hurricanes. - Third-quarter crude oil production was 233,692 barrels of oil per day (b/d), three percent lower than the prior-year quarter, reflecting the effect of the hurricanes. - Hurricane related production shut in averaged an estimated 88 MMcf/d of gas and 12,000 b/d of oil resulting in lost revenue of approximately $148 million. - Australia's third-quarter daily oil production decreased 49 percent, or 15,700 b/d from the third quarter of 2004 on natural decline, particularly at the Legendre and Monet fields and loss of natural gas liquids from East Spar which ceased production earlier in 2005. - The North Sea's third-quarter daily production increased 9,682 b/d, or 17 percent, compared to the third quarter of 2004 driven by drilling activity and reduced downtime. - Daily gas production increased 15 percent in Canada when compared to the third quarter of 2004, driven by new wells drilled at Nevis, Zama and on the ExxonMobil farm-in acreage and the completion of four gas plants. The Company expects additional production as seven new gas plants enabling over 200 wells waiting on these facilities to come on-line in the first half of 2006. - Initial production from the Qasr field in Egypt's Khalda Concession drove a 15 percent increase in third-quarter gas production compared to the same quarter in 2004. - The Company's Central region increased third quarter oil production 34 percent and gas production 14 percent when compared to the third quarter of last year. Increases were driven by the ExxonMobil acquisition in the third quarter of last year and an active drilling and recompletion program. Capital expenditures totaled $2.9 billion for the first nine months of 2005, 70 percent, or $1.2 billion higher than the comparable period last year. Expenditures for exploration and production activity accounted for 89 percent, or $2.5 billion, of the capital spending, a $915 million increase over last year's first nine months. The remaining balance of capital spending was primarily for gathering, marketing and processing facilities which totaled $319 million, up $260 million from the first nine months of last year. This increase was driven by construction of 11 new gas processing plants in Canada (four of which were completed during the third quarter of 2005) and development of the Qasr facilities in Egypt. Refer to Oil and Gas Capital Expenditures discussion in the Capital Resources and Liquidity section of this Management Discussion and Analysis. 24 Noteworthy operational developments include: - On July 5, 2005, the Company announced that the Tanzanite-2 well on Egypt's West Mediterranean Onshore Concession tested 2,846 b/d and 640 thousand cubic feet per day (Mcf/d) of gas from the Cretaceous-age Alamein Dolomite formation in the Tanzanite Field. - On July 5, 2005, Apache also announced a new field oil discovery, the El Diyur-2X, on the Apache-operated El Diyur Concession in Egypt's Western Desert. A test of the lower Bahariya formation flowed at a rate of 1,177 b/d. - On July 28, 2005, Apache announced that it initiated production from the Mohave-1H discovery in the Carnarvon Basin offshore Western Australia. The initial gross production rate was 10,690 b/d from the Flag Sandstone zone, a prolific but traditionally often smaller reservoir. Apache owns a 68.5 percent interest in the field. - On August 24, 2005, the Company announced it signed a new 15-year term contract to supply gas to a major power station to be built in Kwinana, Western Australia. The terms call for delivery of approximately 215 billion cubic feet (bcf) gross (118 bcf net to Apache) at a daily gross rate of 39 MMcf. The Company expects to source the gas for the contract from its John Brookes field beginning in late 2008. The term can be extended an additional 10 years by mutual agreement. - On October 13, 2005, the Company announced it had agreed to sell its 55 percent interest in the deepwater section of Egypt's West Mediterranean Concession to Amerada Hess Corporation for $413 million. Apache has not previously recorded any oil and gas reserves for these properties. The Company also announced that it agreed to purchase Amerada Hess's interest in eight fields located in the Permian Basin of West Texas and New Mexico for $404 million. The Permian Basin properties are subject to exercise of preferential rights to purchase by third parties, as well as standard closing requirements. Both transactions are expected to close before January 3, 2006. Impact of Hurricanes During the third-quarter of 2005, four hurricanes struck the Gulf of Mexico, impacting the Company's U.S. gulf coast operations, both onshore and offshore Louisiana and Texas. During each of these hurricanes, personnel were evacuated and production was shut-in. Two of these storms, Hurricanes Dennis and Emily, required only temporary curtailment of production and caused minor damage to the Company's production platforms. The other storms, Hurricanes Katrina and Rita, caused extensive damage to both onshore and offshore production and transportation facilities. In addition to Apache's property damage, third-party pipelines and processing facilities, which the Company relies upon to transport and process the crude oil and natural gas it produces, were damaged. Restoration of full production is dependent on numerous factors, many of which are beyond the Company's control. The impact on operations and results follows: Production - Production shut-in during the third quarter of 2005 because of the hurricanes averaged approximately 88 MMcf/d of natural gas and 12,000 b/d of crude oil. The bulk of the shut-in production was associated with Hurricanes Katrina and Rita, which struck in late August and late September 2005, respectively. As of early November 2005, approximately 161 MMcf/d of net natural gas production and 27,000 b/d of net crude oil production remained shut-in. A portion of the production may remain shut-in up to a year. We expect to see a decline in 2005 fourth-quarter production compared to 2005 third-quarter levels. The shut-in production also resulted in volumes that could not be delivered to the owners of volumetric production payments ("VPP") burdening some of the Company's Gulf of Mexico properties. As discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Company's 2004 Form 10-K, Apache assumed obligations for pre-existing VPPs in the 2004 acquisition of properties from Anadarko and the 2003 acquisition of properties from Shell. VPP owners own the first production from those same properties and if their scheduled volumes are not delivered in a given month, they are supplied from the burdened properties as production is restored. As a consequence, the make-up VPP volumes of approximately 437 thousand barrels of oil equivalent (Mboe) as of September 30, 2005, are expected to be delivered during the fourth quarter from the burdened properties and will reduce Apache's net volumes during the period. Financial Results -- The impact on the Company's third-quarter 2005 financial results included $148 million of lower crude oil and natural gas revenues and approximately $18 million of additional lease operating expenses, including an insurance deductible, additional premiums assessed by Oil Insurance Limited (OIL) and an accrual for an insurance contingency assessed by OIL should Apache withdraw from the insurance pool. 25 Assessment of Damage - The Company is continuing its assessment of damage caused by the hurricanes, but is unable to estimate the ultimate costs of abandonment and repair at this time. Nine operated production platforms were lost and two were severely damaged during the storms. Production platforms lost or severely damaged during Hurricane Katrina were: Main Pass 312-JA; South Timbalier 161-A; 161-B; 161-D; South Pass (SP) 62-A; SP 62-B; West Delta (WD) 103-A; WD 103-B; WD104-C; and WD133-B. The production platform lost during Hurricane Rita was Ship Shoal 193-B. Prior to the hurricanes, aggregate production from the lost and damaged platforms was approximately 10,000 b/d of oil and 21 MMcf/d of gas. Initial inspections also indicate some damage to other operated offshore production platforms and onshore facilities. Additionally, twelve non-operated structures have been reported as destroyed or severely damaged: 10 located at Grand Isle 43; 1 platform at South Marsh Island 108; and 1 platform at Eugene Island 330. Insurance Coverage - The Company carries casualty insurance to cover property damage and business interruption insurance to cover deferred and lost oil and gas production revenues. In the aggregate, these policies provide the Company with potential coverage for Hurricane Katrina and Hurricane Rita totaling $750 million. The Company carries property damage insurance of $250 million subject to a $7.5 million deductible, per event, and another $100 million in aggregate for the policy year. The $250 million in coverage is provided through OIL and will be prorated down if total claims received by the insurer for a single event exceed $1 billion. The Company's business interruption insurance begins 60 days after occurrence of an event and has an aggregate limit of $150 million with a daily limit of $750,000 per event. Coverage is based on current market prices and begins on October 28, 2005, for shut-in production caused by Hurricane Katrina and November 22, 2005, for Hurricane Rita. The Company estimates that it will accrue claims in the fourth quarter of 2005 totaling approximately $79 million, with the remainder of the aggregate $150 million limit available for 2006. 26 RESULTS OF OPERATIONS REVENUES The table below presents oil and gas production revenues, production and average prices received from sales of oil, natural gas and natural gas liquids.
FOR THE QUARTER ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ --------------------------------------- INCREASE INCREASE 2005 2004 (DECREASE) 2005 2004 (DECREASE) ---------- ---------- ---------- ---------- ---------- ---------- Revenues (in thousands): Oil ................................ $1,261,192 $ 843,572 50% $3,328,102 $2,121,861 57% Natural gas ........................ 761,399 541,489 41% 2,035,941 1,618,852 26% Natural gas liquids ................ 29,153 29,067 -- 88,885 73,581 21% ---------- ---------- ---------- ---------- Total ........................ $2,051,744 $1,414,128 45% $5,452,928 $3,814,294 43% ========== ========== ========== ========== Oil Volume - Barrels per day: United States ...................... 64,906 65,017 -- 71,860 67,110 7% Canada ............................. 21,974 24,743 (11%) 22,226 25,409 (13%) Egypt .............................. 54,728 52,602 4% 54,110 51,706 5% Australia .......................... 16,499 32,199 (49%) 15,323 26,041 (41%) North Sea .......................... 67,713 58,031 17% 64,966 49,866 30% China .............................. 6,533 7,948 (18%) 9,224 7,121 30% Argentina .......................... 1,339 532 152% 1,074 542 98% ---------- ---------- ---------- ---------- Total ........................ 233,692 241,072 (3%) 238,783 227,795 5% ========== ========== ========== ========== Average Oil price - Per barrel: United States ...................... $ 53.85 $ 41.45 30% $ 47.72 $ 36.90 29% Canada ............................. 60.66 41.34 47% 52.12 36.72 42% Egypt .............................. 60.38 41.51 45% 53.29 35.81 49% Australia .......................... 66.52 46.72 42% 58.06 40.96 42% North Sea .......................... 60.46 25.18 140% 52.33 23.36 124% China .............................. 50.76 35.99 41% 42.35 32.77 29% Argentina .......................... 39.18 31.28 25% 36.96 33.28 11% Total ........................ 58.66 38.04 54% 51.05 34.00 50% Natural Gas Volume - Mcf per day: United States ...................... 586,111 640,467 (8%) 625,716 649,997 (4%) Canada ............................. 373,079 325,535 15% 366,892 322,390 14% Egypt .............................. 162,386 141,072 15% 154,839 135,709 14% Australia .......................... 138,267 121,088 14% 120,759 118,587 2% North Sea .......................... 2,384 2,043 17% 2,287 1,769 29% Argentina .......................... 2,715 3,467 (22%) 3,142 3,985 (21%) ---------- ---------- ---------- ---------- Total ........................ 1,264,942 1,233,672 3% 1,273,635 1,232,437 3% ========== ========== ========== ========== Average Natural Gas price - Per Mcf: United States ...................... $ 7.73 $ 5.30 46% $ 6.71 $ 5.32 26% Canada ............................. 7.17 5.10 41% 6.28 5.10 23% Egypt .............................. 4.97 4.45 12% 4.67 4.41 6% Australia .......................... 1.69 1.58 7% 1.73 1.64 5% North Sea .......................... 10.57 4.36 142% 7.63 4.57 67% Argentina .......................... 1.35 .78 73% 1.14 .62 84% Total ........................ 6.54 4.77 37% 5.86 4.79 22% Natural Gas Liquids (NGL) Volume - Barrels per day: United States ................... 7,097 8,934 (21%) 8,529 8,218 4% Canada .......................... 2,232 2,794 (20%) 2,187 2,665 (18%) ---------- ---------- ---------- ---------- Total ........................ 9,329 11,728 (20%) 10,716 10,883 (2%) ========== ========== ========== ========== Average NGL Price - Per barrel: United States ................... $ 34.54 $ 27.56 25% $ 31.10 $ 25.25 23% Canada .......................... 32.13 24.94 29% 27.59 22.90 20% Total ........................ 33.97 26.94 26% 30.38 24.67 23%
27 The following table presents each reportable segment's oil revenues and gas revenues as a percentage of total oil revenues and gas revenues, respectively.
FOR THE QUARTER ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ --------------------------------------- OIL REVENUES GAS REVENUES OIL REVENUES GAS REVENUES ------------ ------------ ------------ ------------ 2005 2004 2005 2004 2005 2004 2005 2004 ---- ---- ---- ---- ---- ---- ---- ---- United States ......... 25% 30% 55% 58% 28% 32% 56% 58% Canada ................ 10 11 32 28 10 12 31 28 Egypt ................. 24 24 10 11 24 24 10 10 Australia ............. 8 16 3 3 7 14 3 4 North Sea ............. 30 16 -- -- 28 15 -- -- Other International ... 3 3 -- -- 3 3 -- -- --- --- --- --- --- --- --- --- Total .............. 100% 100% 100% 100% 100% 100% 100% 100% === === === === === === === ===
Crude Oil Contribution Total oil revenues rose 50 percent in the third quarter of 2005 relative to 2004. Revenue contributions from outside the U.S., which comprise 75 percent ($940 million) of our total crude revenue for the 2005 three-month period, rose five percent. U.S. oil revenues increased $74 million quarter-over-quarter on higher price realizations as production was flat, reflecting the impact of the hurricanes discussed previously. The North Sea's oil contribution increased to 30 percent on production growth and significantly higher price realizations, leading all segments in crude oil contributions. The comparable 2004 quarter for the North Sea was impacted by a lower fixed-price physical contract (discussed below) that expired December 31, 2004. Australia's contribution to third-quarter consolidated oil revenues fell to eight percent from 16 percent on a 49 percent decrease in production compared to the third quarter of 2004. Contributions to third-quarter 2005 consolidated oil revenues from Egypt and our Other International segment remained flat, while Canada's contribution was down one percent. Nine-month 2005 revenues rose 57 percent relative to the 2004 period. Each segment's contribution to consolidated oil revenues for the 2005 nine-month period was similar to those discussed above. Crude Oil Revenues Third-quarter crude oil revenues increased $418 million from the comparable 2004 quarter on a $20.62 per barrel increase in average realized oil price, which more than offset a three percent decline in daily production. All segments reported a significant increase in realized crude oil price, with the North Sea and Egypt also benefiting from production growth compared to third-quarter 2004. For the nine-month period, crude oil revenues increased $1.2 billion from the comparable 2004 period reflecting a $17.05 per barrel increase in average realized oil price and a five percent increase in daily production. The North Sea's third-quarter 2005 crude oil revenues were $242 million higher than the comparable quarter of 2004, reflecting significantly higher price realizations and a 17 percent increase in production. The higher price realizations generated additional revenues of $188 million when compared to the same quarter in 2004, while the higher production added $54 million. Third-quarter 2004 revenues were impacted by a lower fixed-price physical contract entered into in conjunction with our 2003 property acquisition from BP p.l.c. (BP). The production growth reflects the benefits of the North Sea's drilling, workover and repair programs, particularly on the Alpha and Echo platforms. Similarly, the North Sea's crude oil revenues for the 2005 nine-month period were $609 million higher than the 2004 period on a $28.97 improvement in price realizations and a 30 percent increase in daily production. U.S. third-quarter 2005 crude oil revenues increased $74 million compared to the same quarter of 2004. This increase was the result of a 30 percent increase in crude oil price, as quarter-over-quarter production was flat. The third-quarter 2005 average realized price includes an unfavorable $3.55 per barrel hedge loss. (See Note 2, Hedging and Derivative Instruments, of this Form 10-Q.) The ExxonMobil and Anadarko property acquisitions in 2004 and successful drilling and re-completion efforts partially offset production declines and approximately 12,000 b/d downtime resulting from hurricanes experienced during the third quarter of 2005. Revenues for the nine-month period increased $258 million on a seven percent increase in daily production and a 29 percent increase in crude oil price realization. The 2005 year-to-date average realized price includes an unfavorable $2.01 per barrel hedge loss. The seven percent increase in daily production for the 2005 nine-month period, relative to 2004, was for the reasons previously discussed. Egypt contributed additional revenues of $103 million to the third quarter of 2005 compared to the same quarter in 2004. This increase in revenue was primarily attributable to a 45 percent increase in crude oil price, with a 2,126 28 b/d increase in production generating $12 million of the increase in revenues. The production increase was related to drilling and recompletion activity on Egypt's Western Mediterranean Concession, particularly completion of the Tanzanite-2 well and re-completion of the Tanzanite-1 well. Egypt's 2005 nine-month revenues were up $280 million on a 49 percent increase in price over the same period in 2004 and a five percent rise in daily production. Canada's third-quarter 2005 revenues increased $29 million over third-quarter 2004 on a 47 percent increase in price, which more than offset an 11 percent, or 2,769 b/d, decrease in oil production. Canada production was impacted by natural decline in the Zama, Midale, Virginia Hills and Consort operated areas, as well as natural decline on non-operated Karr Simonette and Nevis areas. Canadian oil revenues for the 2005 nine-month period increased $61 million on a 42 percent increase in price, which more than offset the impact of a 13 percent decline in daily production. Production for the 2005 nine-month period was down for the reasons discussed above. China's third-quarter 2005 revenues were $4 million higher than the third quarter of 2004 with $11 million of additional revenues related to a 41 percent increase in crude oil price, partially offset by an 18 percent decrease in net volumes. Apache's net volumes were down despite flat gross production because the higher crude prices have enabled Apache to fully recover partner advances, thereby reducing Apache's net volumes. Revenues for the 2005 nine-month period were $43 million higher than the comparable 2004 period on a 30 percent increase in daily production and a 29 percent increase in price. The production increase is commensurate with a 37 percent increase in year-to-date gross production from new wells. Australia's third-quarter 2005 crude oil revenues decreased $37 million compared to the third-quarter 2004. This decrease reflects a 49 percent decline in production partially offset by a 42 percent increase in price. The decrease in daily oil production resulted from natural decline, particularly in the Legendre and Monet fields and loss of liquids from East Spar, which ceased production earlier in 2005. Crude oil revenues for the nine-month period were down $49 million for the same reasons. The impact on Australia's 2005 year-to-date oil revenues from a 41 percent decline in daily production was partially offset by a 42 percent increase in price realization, when compared to the 2004 period. Approximately six percent of our worldwide crude oil production was subject to financial derivative hedging for the third quarter of 2005 compared to three percent in 2004. For the first nine-months of 2005, approximately six percent of our worldwide crude oil production was subject to financial derivative hedging compared to four percent in the 2004 period. (See Note 2, Hedging and Derivative Instruments, of this Form 10-Q for a summary of the current derivative positions and terms.) These financial derivative instruments reduced our third-quarter 2005 and 2004 realized price $.99 and $.07 per barrel, respectively. For the first nine-month periods of 2005 and 2004, these hedges reduced our average realized prices $.61 and $.21 per barrel, respectively. Natural Gas Contribution Total gas revenues rose 41 percent in the third quarter of 2005 relative to the comparative quarter in 2004. Our North America operations contributed 87 percent of third-quarter 2005 consolidated natural gas revenues. The U.S. contributed $105 million of additional revenues to the 2005 third quarter compared to the comparable quarter in 2004 on a 46 percent increase in price, partially offset by an eight percent decrease in production. Canada's gas contribution increased to 32 percent resulting from $93 million more revenues in the third-quarter of 2005 than the comparable quarter of 2004. Driving the Canadian revenues was a 41 percent increase in the realized natural gas price and a 15 percent increase in production. While Egypt's gas production increased 15 percent, its contribution to the third-quarter 2005 gas revenues decreased slightly to 10 percent as the additional revenues generated from a 12 percent increase in Egypt's natural gas price realizations were less than the increase in North America. Australia's contribution to our total gas revenues was unchanged at three percent. Contributions for the 2005 nine-month period were similar to the 2005 third quarter. Natural Gas Revenues Our third-quarter 2005 natural gas revenues increased $220 million from the prior-year quarter as a 37 percent increase in our realized natural gas price generated an additional $201 million in gas revenues for the quarter. A three percent increase in natural gas production added $19 million to third-quarter 2005 revenues, relative to the comparable prior-year quarter. While all of our reportable segments realized an increase in natural gas price, the increase in the U.S. and Canada had the most significant impact on third-quarter revenues. Canada, Egypt and Australia also contributed increased gas revenues from higher production, while the additional price-driven revenues generated in the U.S. were partially offset by an eight percent decline in production. 29 U.S. third-quarter 2005 natural gas revenues were $105 million higher than the same quarter of 2004. U.S. third-quarter natural gas prices, which were up 46 percent, contributed $143 million of additional revenues, while an eight percent production decline, lowered revenues $38 million, when compared to the comparable prior-year quarter. While U.S. production was down quarter-over-quarter because of the hurricanes, production gains in other areas, including a 13 percent gain in the Central region, offset some of the hurricane impact. The Central region was up on active drilling and recompletion programs and acquisitions. For the 2005 nine-month period, the U.S. contributed an additional $199 million of gas revenues when compared to 2004. This increase reflects a 26 percent upswing in natural gas prices, partially offset by a four percent decrease in daily production year-over-year. Canada's third-quarter 2005 natural gas revenues increased $93 million over the comparable quarter of 2004. Two-thirds of the increase related to a 41 percent increase in price, with the balance generated by a 15 percent increase in production. Production increased 47,544 Mcf/d, as a result of successful drilling efforts at the Nevis, Zama, Hatton and Consort areas and the ExxonMobil lands, which more than offset natural declines in the Ladyfern and other Northeast British Columbia areas. For the 2005 nine-month period, Canada's gas revenues increased $179 million compared to 2004 resulting from a 23 percent increase in natural gas price and a 14 percent increase in daily production, as discussed above. Egypt contributed an additional $16 million to third-quarter 2005 consolidated natural gas revenues compared to the same quarter of 2004. This increase is attributable to a favorable 12 percent price movement and a 15 percent increase in production. Egypt's production growth was associated with initial production from the Khalda Concession's Qasr field. On a year-to-date basis, Egypt contributed an additional $33 million of revenues on a six percent increase in gas price and a 14 percent rise in daily production. The year-over-year production growth came from development of the Khalda Concession Imhoptep and Atoun wells, development of the Qasr field, and first sales from the Northeast Abu Gharadig concession, which commenced in January 2005. Australia 2005 third-quarter and nine-month natural gas revenues were both $4 million higher than the respective prior-year periods. While Australia's 2005 third-quarter natural gas production and price were up 14 percent and seven percent, respectively, over the 2004 quarter, the impact on revenues was minimal, given the relatively low natural gas price. For the year-to-date, Australia's natural gas price was up five percent, while daily production increased two percent. Production increases in both periods reflect higher takes by contractual customers. Although a majority of our worldwide gas sales contracts are indexed to prevailing market prices, approximately nine percent and eight percent of our third-quarter 2005 and 2004 U.S. natural gas production, respectively, was subject to long-term, fixed-price physical contracts. For the nine months of 2005 and 2004, approximately nine percent of our U.S. natural gas production was subject to long-term, fixed-price physical contracts. These fixed-price contracts reduced third-quarter 2005 and 2004 worldwide realized prices $.16 and $.09 per Mcf, respectively and 2005 and 2004 nine-month worldwide realized prices $.13 and $.09 per Mcf, respectively. Additionally, nearly all of our Australian natural gas production is subject to long-term, fixed-price supply contracts that are periodically adjusted for changes in Australia's consumer price index. Since these contracts are denominated in Australian dollars, the resulting revenues are impacted by changes in the value of the Australian dollar relative to the U.S. dollar. Approximately seven percent and 10 percent of our worldwide natural gas production was subject to financial derivative hedges for the third-quarter and nine-month periods of 2005, respectively, while approximately 15 percent of our worldwide natural gas production was subject to hedges in the comparable 2004 periods. Currently, all of our natural gas derivative positions have been designated against Gulf of Mexico production. These derivative financial instruments reduced our third-quarter and nine-month 2005 consolidated realized prices $.12 and $.06 Mcf, respectively. The third-quarter and nine-month periods of 2004 realized prices were both reduced $.18 and $.15 per Mcf, respectively, as a result of the financial derivative instruments. (See Note 2, Hedging and Derivative Instruments, of this Form 10-Q for a summary of our current derivative positions and terms.) Also during the 2004 quarter, we amortized specific unrealized gains and losses related to derivative positions closed in October and November 2001. This amortization, which terminated in July 2004, had a negligible impact on third-quarter 2004 average realized prices. 30 COSTS The table below presents a comparison of our expenses on an absolute dollar basis and an equivalent unit of production (boe) basis. Our discussion may reference either expenses on a boe basis or expenses on an absolute dollar basis, or both, depending on their relevance. Third-quarter and year-to-date 2005 costs reflect the impact of our ExxonMobil and Anadarko property acquisitions closed in the latter half of 2004.
FOR THE QUARTER ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- --------------------------------------- 2005 2004 2005 2004 2005 2004 2005 2004 ---- ---- ------ ------ ------ ------ ------ ------ (In millions) (Per boe) (In millions) (Per boe) Depreciation, depletion and amortization (DD&A): Oil and gas property and equipment ..... $333 $295 $ 7.97 $ 7.00 $ 991 $ 841 $ 7.86 $ 6.91 Other assets ........................... 24 18 .58 .43 65 54 .51 .44 Asset retirement obligation accretion ..... 14 11 .32 .26 40 33 .32 .27 Lease operating costs (LOE) ............... 280 208 6.71 4.94 769 616 6.10 5.07 Gathering and transportation costs ........ 24 21 .56 .51 74 61 .58 .50 Severance and other taxes ................. 150 47 3.60 1.12 309 78 2.45 .64 General and administrative expense (G&A) .. 50 39 1.20 .91 152 124 1.21 1.02 China litigation .......................... -- -- -- -- -- 71 -- .59 Financing costs, net ...................... 27 29 .65 .68 90 84 .72 .68 ---- ---- ------ ------ ------ ------ ------ ------ Total ............................... $902 $668 $21.59 $15.85 $2,490 $1,962 $19.75 $16.12 ==== ==== ====== ====== ====== ====== ====== ======
Depreciation, Depletion and Amortization Third quarter 2005 full-cost DD&A expense of $333 million was $38 million higher than the comparative 2004 period. The increase in absolute costs was concentrated in the North Sea, Canada and Egypt, all of which saw increases in production and rates. The Company's third-quarter 2005 full-cost DD&A rate of $7.97 per boe was $.97 per boe higher than the comparable 2004 quarter. Year-to-date 2005, full-cost DD&A expense increased $150 million, spread among the North Sea, the U.S., Canada and Egypt. Approximately $31 million (20 percent) of the nine-month period increase was attributable to volume growth and the remainder to rising costs. The 2005 nine-month period full-cost DD&A was $.95 per boe more than the comparable 2004 period. The Company's DD&A expense per boe increased from the third quarter and first nine months of 2004 driven by increasing rates in the U.S., Canada and the North Sea. The increases in U.S. and Canada reflect rising industry-wide drilling and acquisition costs. The higher commodity prices experienced over the past year led to increased demand for drilling services and thus higher drilling costs and higher estimated future development costs. In addition, the cost of properties acquired from ExxonMobil and Anadarko were higher than our historical cost. Rising commodity prices have increased the value and costs of properties available for acquisition. The increase in North Sea's rates per boe reflect the continuation of facility upgrades to increase the overall efficiency of the platforms. Lease Operating Costs Third-quarter 2005 LOE increased $72 million, 34 percent, over the third-quarter of 2004. Absolute costs were up in all core areas when compared to the prior-year quarter, while the overall rate was up in all core areas except the North Sea. On a unit of production basis, third-quarter 2005 costs were up $1.77 from 2004 to $6.71 per boe. Production shut-ins ($.38 per boe) and the additional insurance costs ($.42 per boe) from the hurricanes added $.80 to the third-quarter 2005 rate. The remaining increase of $.97 per boe reflects higher service costs associated with rising commodity prices and the associated increase in demand for services, the hurricane related costs, costs associated with properties acquired in 2004 from ExxonMobil and Anadarko, and higher stock-based compensation costs. For the first nine months of 2005 LOE totaled $769 million, $152 million higher than 2004. On a boe basis, 2005 nine-month LOE averaged $6.10 per boe, $1.03 per boe higher than 2004, with $.14 of the rate increase coming from the impact of the hurricanes. The remaining increase was for the reasons itemized in the quarter discussion above. 31 Regionally, 2005 costs were up as follows: U.S. - Third-quarter 2005 costs were $46 million higher than the equivalent 2004 quarter, with approximately $12 million directly related to the hurricanes. On a unit of production basis, the U.S. added $1.26 per boe to the third-quarter 2005 consolidated rate. Over half ($.65 per boe) of the impact the U.S. had on the consolidated rate was attributable to the additional insurance costs and production shut-ins caused by the hurricanes. Higher stock-based compensation costs, contract labor costs, workover activity and various other commodity-price driven service costs accounted for the remaining $.61 per boe impact. The Company expects operating expenses in the Gulf Coast region will continue at a higher level because of storm related factors. For the year, the U.S. added $97 million of costs and $.79 per boe to the consolidated rate, with all of the increase in the rate attributable to higher costs, as discussed above. Australia - Australia added $.28 per boe to the third-quarter 2005 consolidated rate on $4 million of additional costs and a 25 percent drop in equivalent production. Approximately 53 percent of the additional costs were related to the additional insurance costs. The balance of the increase in costs was from higher service costs, higher stock-based compensation costs and the impact of a stronger Australian dollar (relative to the U.S. dollar) had on costs. The additional costs added $.09 per boe to the third-quarter 2005 consolidated rate, while the lower production added $.19 per boe. Australia's nine-month 2005 costs were up $5 million compared to 2004, while production was down 23 percent on an equivalent barrel basis. The combination of higher costs and lower production added $.19 per boe to the 2005 nine-month consolidated rate, relative to the 2004 period. Canada - Third-quarter 2005 costs were up $12 million from the same 2004 quarter, with nearly half related to the impact the strengthening Canadian dollar had on cost. The balance related to various other costs associated with an increase in activity, higher service costs, higher stock-based compensation costs and additional insurance costs. Canada added $.22 per boe to the third-quarter 2005 consolidated rate increase, with costs adding $.29 and volumes reducing the rate $.07 per boe. Egypt - Egypt's third-quarter 2005 costs were $7 million higher than the comparable 2004 quarter on increased workover activity, higher diesel fuel and supply costs, higher service costs, and the stock-based compensation and insurance costs previously mentioned. The diesel fuel costs were previously subsidized by the Egyptian government. Egypt added $.08 per boe to the consolidated rate increase, with higher costs adding $.17 and volumes lowering the rate $.09 per boe. For the year, Egypt added $.07 to the consolidated rate. As with the quarter, the impact of higher production partially offset the impact of higher costs, which were up $18 million year-over-year. North Sea - Third-quarter 2005 costs were up four percent from the year-ago quarter, as the impact of additional repair and maintenance costs, higher stock-based compensation and insurance costs were mostly offset by lower operating costs resulting from operating efficiency improvements. The impact of North Sea's 17 percent increase in third-quarter 2005 production, when combined with the impact of the slightly higher costs, reduced the consolidated rate $.11 per boe. On a year-to-date basis, the combination of a 30 percent increase in North Sea production and slightly lower costs reduced the 2005 consolidated rate $.21 per boe. Gathering and Transportation Costs Gathering and transportation costs for the third quarter and first nine months of 2005 increased 13 percent and 21 percent, respectively, compared to the same periods in 2004. The following table presents gathering and transportation costs paid directly by Apache to third-party carriers for each of the periods presented.
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- ------------------------- 2005 2004 2005 2004 ---- ---- ---- ---- (In millions) U.S. ................................ $ 7 $ 7 $23 $22 Canada .............................. 8 8 24 22 North Sea ........................... 8 6 21 16 Egypt ............................... 1 -- 5 -- China ............................... -- -- 1 1 --- --- --- --- Total Gathering and Transportation .. $24 $21 $74 $61 === === === ===
These costs are primarily related to the transportation of natural gas in our North American operations, North Sea crude oil sales and Egyptian exports. The increase in costs for both the third-quarter and year-to-date 2005 periods were driven by production growth in the North Sea, strengthening of the Canadian dollar relative to the U.S. 32 dollar and additional exports of Egyptian crude in 2005. Apache began exporting Egyptian crude in the second half of 2004 and first incurred third-party transportation charges in early 2005. Severance and Other Taxes Third-quarter 2005 severance and other taxes totaled $150 million, $103 million greater than the prior-year quarter. For the nine-month period, severance and other taxes totaled $309 million compared to $78 million in the year-earlier period. A detail of these taxes follows:
FOR THE QUARTER ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- --------------------------------------- 2005 2004 2005 2004 ---- ---- ---- ---- (In millions) Severance taxes: U.S ........................... $ 27 $17 $ 70 $ 44 Australia ..................... 16 30 33 48 U.K. PRT ......................... 99 (5) 188 (35) Canadian taxes ................... 6 5 15 15 Other ............................ 2 -- 3 6 ---- --- ---- ---- Total Severance and Other Taxes .. $150 $47 $309 $ 78 ==== === ==== ====
For the third quarter and first nine months of 2005 severance taxes in the U.S. increased $10 million and $26 million, respectively, driven by higher prices and increased production from our Central Region. Australia decreased $14 million and $15 million for the same comparative periods, primarily reflecting lower excise tax on production from Legendre, a result of declining production. North Sea Petroleum Revenue Tax (PRT) is assessed on net receipts from subject fields in the United Kingdom (U.K.) North Sea. North Sea PRT increased $104 million quarter-over-quarter and $223 million on a year-to-date comparative basis on higher production and significantly higher oil price realizations. Also, as previously discussed, the North Sea's 2004 third-quarter and nine-month period revenues were impacted by a lower fixed-price physical contract resulting in lower net receipts and comparative PRT expenses. The 2004 PRT credit reflected qualifying capital spending and lifting costs that exceeded associated revenues. General and Administrative Expense Third-quarter and year-to-date G&A costs increased $11 million and $29 million, respectively, compared to the same periods in 2004. Over half of the increase in 2005 third-quarter costs, and nearly three-fourths of the increase in year-to-date costs, were related to the impact of stock-based compensation programs. Stock-based compensation costs increased, relative to the prior-year periods, because of new grants issued in 2005, the targeted stock plan approved by stockholders in May 2005, and the impact Apache's rising common stock price had on stock-based compensation programs. The balance of the G&A increase for both 2005 periods was primarily attributed to the increased cost of insurance, higher employee benefit costs, especially health care costs, and higher audit fees driven by Sarbanes-Oxley compliance. Provision for Income Taxes Third-quarter 2005 income tax expense was $164 million higher than in the third quarter of 2004. For the nine-month period, 2005 income tax expense was $482 million above 2004. The additional income tax expense in both periods was driven by higher taxable income related to the increased revenues. The effective tax rates for both the 2005 and 2004 three-month and nine-month periods were comparable. Additional deferred tax expenses related to foreign currency exchange rate movements added three percentage points to both the third-quarter 2005 and third-quarter 2004 effective rates. The year-to-date effective tax rates were largely unaffected by foreign exchange movements. 33 CAPITAL RESOURCES AND LIQUIDITY FINANCIAL INDICATORS
SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ Current ratio ............................ .83 1.05 Total debt (in millions) ................. $2,192 $2,588 Shareholders' equity (in millions) ....... $9,713 $8,204 Percent of total debt to capitalization .. 18.4% 24.0% Floating-rate debt/total debt ............ -- 15%
Apache's primary uses of cash are for exploration, development and acquisition of oil and gas properties, costs and expenses necessary to maintain continued operations, repayment of principal and interest on outstanding debt, and payment of dividends. With all commercial paper paid off at the end of the third quarter of 2005, Apache's cash balances are expected to rise. Unlike some companies in the oil and gas industry, Apache has not repurchased shares or paid special dividends, choosing instead to maintain its strategy of pursuing growth and possible acquisitions, despite a comparatively high-priced market. The Company's ratio of current assets to current liabilities was .83 on September 30, 2005, compared to 1.05 on December 31, 2004. The decrease in the ratio is the result of an increase in current liabilities of $860 million as of September 30, 2005 as compared to December 31, 2004, which exceeded an increase in current assets of $438 million for the same period. The increase in current liabilities was primarily attributable to higher accrued exploration and development costs from increased drilling activity, an increase in the accrued liability for derivative instruments from higher commodity prices and higher accrued PRT in the North Sea. The increase in current assets was driven by an increase in oil and gas revenue receivables, resulting from higher commodity prices and higher joint owner receivables. NET CASH PROVIDED BY OPERATING ACTIVITIES Apache's net cash provided by operating activities for the first nine months of 2005 totaled $3.2 billion, up from $2.3 billion for the same period in 2004. The increase in 2005 cash flow is attributed primarily to the significant increase in commodity prices, which generated additional oil and gas revenues. The Company's average realized crude oil price increased 50 percent, a reflection of higher worldwide prices. The Company also saw a 22 percent increase in natural gas prices. Additional revenues generated from a five percent increase in daily crude oil production and a three percent increase in daily gas production also contributed to the increased cash flows. These increases were partially offset by higher LOE, severance taxes, U.K. PRT and higher income taxes, all of which are generally up because of higher production and higher commodity prices. The Company reviews oil and gas sales and production costs and expenses for each reportable segment on a monthly basis. For a more detailed discussion of commodity prices, production, costs and expenses, refer to the "Results of Operations" in this Management's Discussion and Analysis of Financial Condition and Results of Operations. DEBT During the first nine months of 2005, we continued to strengthen our financial flexibility and build on our solid financial position. Our debt-to-capitalization ratio on September 30, 2005, declined to 18.4 percent from 24.0 percent on December 31, 2004, as a result of lower debt and additional equity from earnings. On September 30, 2005, the Company had outstanding debt of $2.2 billion, $396 million less than December 31, 2004. The Company's outstanding debt consisted of notes and debentures maturing in the years 2006 through 2096. The Company has available a $1.2 billion commercial paper program which enables Apache to borrow funds for up to 270 days at competitive interest rates. If the Company is unable to issue commercial paper following a significant credit downgrade or dislocation in the market, the Company's U.S. credit facilities are available as a 100 percent backstop. There was no commercial paper outstanding as of September 30, 2005. The weighted-average interest rate for commercial paper was 3.46 percent and 1.70 percent for the third quarter of 2005 and 2004, respectively. As of September 30, 2005, available borrowing capacity under our credit facilities was $1.5 billion. We had $97 million in cash and cash equivalents on hand on September 30, 2005, down $14 million from the $111 million 34 available at the end of 2004. The Company was in compliance with the terms of its credit facilities as of September 30, 2005. On May 12, 2005, the Company entered into a new $450 million revolving bank credit facility for the U.S., a $150 million revolving bank credit facility for Australia and a $150 million revolving bank credit facility for Canada. These new facilities replaced the Company's existing credit facilities in the same amounts which were scheduled to mature in June 2007. These new facilities are scheduled to mature on May 12, 2010. There were no changes to the Company's $750 million U.S. credit facility which matures in May 2009. The financial covenants of the Company's revolving bank credit facilities require the Company to maintain a debt-to-capitalization ratio of not greater than 60 percent at the end of any fiscal quarter. The Company's debt-to-capitalization ratio as of September 30, 2005 was 18.4 percent. The negative covenants include restrictions on the Company's ability to create liens and security interests on our assets, with exceptions for liens typically arising in the oil and gas industry, purchase money liens and liens arising as a matter of law, such as tax and mechanics' liens. The Company may incur liens on assets located in the U.S., Canada and Australia of up to five percent of the Company's consolidated assets, which approximated $893 million as of September 30, 2005. There are no restrictions on incurring liens in countries other than the U.S., Canada and Australia. There are also restrictions on Apache's ability to merge with another entity, unless the Company is the surviving entity, and a restriction on our ability to guarantee debt of entities not within our consolidated group. There are no clauses in the facilities that permit the lenders to accelerate payments or refuse to lend based on unspecified material adverse changes (MAC clauses). The credit facility agreements do not have drawdown restrictions or prepayment obligations in the event of a decline in credit ratings. However, the agreements allow the lenders to accelerate payments and terminate lending commitments if Apache Corporation, or any of its U.S., Canadian or Australian subsidiaries, defaults on any direct payment obligation in excess of $100 million or has any unpaid, non-appealable judgment against it in excess of $100 million. At the Company's option, the interest rate for the facilities is based on (i) the greater of (a) The JP Morgan Chase Bank prime rate or (b) the federal funds rate plus one-half of one percent or (ii) the London Interbank Offered Rate (LIBOR) plus a margin determined by the Company's senior long-term debt rating. The $750 million and the $450 million credit facilities (U.S. credit facilities) also allow the Company to borrow under competitive auctions. At September 30, 2005, the margin over LIBOR for committed loans under the new facilities was .23 percent. If the total amount of the loans borrowed under all three facilities equals or exceeds 50 percent of the total facility commitments, then an additional .10 percent will be added to the margins over LIBOR. The Company also pays quarterly facility fees of .07 percent on the total amount of the three facilities. The facility fees vary based upon the Company's senior long-term debt rating. OIL AND GAS CAPITAL EXPENDITURES The Company funded its year-to-date 2005 oil and gas exploration and production capital expenditures with internally generated net cash provided by operating activities of $3.2 billion and its lines of credit and commercial paper program. Capital expenditures totaled $2.9 billion for the first nine months of 2005, 70 percent, or $1.2 billion higher than the comparable period last year. Expenditures for exploration and production activity accounted for 89 percent, or $2.5 billion, of the capital spending; a $915 million increase over last year's first nine months. The remaining balance of capital spending was primarily for gathering, marketing and processing facilities which totaled $319 million, up $260 million from the first nine months of last year. This increase was driven by construction of 11 new gas processing plants in Canada (four of which were completed during the third quarter of 2005) and development of the Qasr facilities in Egypt. 35 The following table presents a summary of the Company's capital expenditures for each reportable segment for the nine months ended September 30, 2005 and 2004.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2005 2004 ---------- ---------- (In thousands) Exploration and development: United States ..................................... $ 803,297 $ 573,871 Canada ............................................ 854,032 491,001 Egypt ............................................. 262,315 219,333 Australia ......................................... 174,809 97,445 North Sea ......................................... 399,836 220,644 Other International ............................... 37,205 13,872 ---------- ---------- $2,531,494 $1,616,166 ========== ========== Capitalized Interest ................................. $ 42,653 $ 38,951 ========== ========== Gas gathering, transmission and processing facilities: Canada ............................................ $ 134,306 $ 13,564 Egypt ............................................. 156,081 29,137 Australia ......................................... 28,856 16,862 ---------- ---------- $ 319,243 $ 59,563 ========== ========== Acquisitions: Oil and gas properties ............................ $ 35,826 $ 490,832 ========== ==========
CASH DIVIDEND PAYMENTS The Company has paid cash dividends on its common stock for 40 consecutive years through 2004. Future dividend payments will depend on the Company's level of earnings, financial requirements and other relevant factors. Common dividends paid during the third quarter of 2005 rose to $26 million from $20 million in the same period of 2004, reflecting the increase in common shares outstanding and the higher common stock dividend rate. The Company increased its quarterly cash dividend to eight cents per share from six cents, effective with the November 2004 dividend payment. On September 15, 2005, the Company announced that its Board of Directors voted to increase the quarterly cash dividend on its common stock to ten cents per share, effective with the November 2005 payment. During the third quarter of 2005, Apache paid a total of $1.4 million in dividends on its Series B Preferred Stock issued in August 1998. CONTRACTUAL OBLIGATIONS We are subject to various financial obligations and commitments in the normal course of operations. These contractual obligations represent known future cash payments that we are required to make and relate primarily to long-term debt, operating leases, pipeline transportation commitments and international commitments. The Company expects to fund these contractual obligations with cash generated from operating activities. Apache is also subject to various contingent obligations that become payable only if certain events or rulings were to occur. The inherent uncertainty surrounding the timing of and monetary impact associated with these events or rulings prevents any meaningful accurate measurement, which is necessary to assess any impact on future liquidity. Such obligations include environmental contingencies and potential settlements resulting from litigation. Apache's management believes that it has adequately reserved for its contingent obligations. The Company has approximately $11 million reserved for environmental remediation and approximately $11 million reserved for various legal liabilities. In addition, the Company has an accrued reserve of $71 million, plus accrued interest of $6.4 million for the Texaco China B.V. litigation. The Company's future liquidity could be impacted by a significant downgrade of its credit ratings by Moody's, Standard and Poor's, and Fitch; however, we do not believe that such a sharp downgrade is reasonably likely. The Company's credit facilities do not require the Company to maintain a minimum credit rating. In addition, generally under our commodity hedge agreements, Apache may be required to post margin or terminate outstanding positions if the Company's credit ratings decline significantly. The negative covenants associated with our debt are outlined 36 in greater detail in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Capital Resources and Liquidity, Debt", in the Company's 2004 Form 10-K. OFF-BALANCE SHEET ARRANGEMENTS Apache does not currently utilize any off-balance sheet arrangements with unconsolidated entities to enhance liquidity and capital resource positions. Please refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Off-Balance Sheet Arrangements", in the Company's 2004 Form 10-K. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK COMMODITY RISK The major market risk exposure is in the pricing applicable to our oil and gas production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to our U.S. and Canadian natural gas production. Prices received for oil and gas production have been and remain volatile and unpredictable. Average monthly oil price realizations, including the impact of fixed-price contracts and hedges, ranged from a low of $42.63 per barrel to a high of $61.31 per barrel during the first nine-months of 2005. Average monthly gas price realizations, including the impact of fixed-price contracts and hedges, ranged from a monthly low of $5.16 per Mcf to a monthly high of $7.40 per Mcf during the same period. Based on the Company's worldwide oil production levels, a $1.00 per barrel change in the weighted-average realized price of oil would increase or decrease revenues by approximately $65 million. Based on the Company's worldwide gas production levels, a $.10 per Mcf change in the weighted-average realized price of gas would increase or decrease revenues by approximately $35 million. We periodically enter into hedges in conjunction with selected acquisitions to protect against commodity price volatility. These hedges effectively reduce price risk on a portion of our projected oil and natural gas production from acquisitions. On September 30, 2005, the Company had open natural gas derivative positions with a fair value of $(343) million. A 10 percent increase in natural gas prices would reduce the fair value by approximately $88 million, while a 10 percent decrease in prices would increase the fair value by approximately $86 million. The Company also had open oil derivative positions with a fair value of $(190) million on September 30, 2005. A 10 percent increase in crude oil prices would reduce the fair value by approximately $47 million, while a 10 percent decrease in prices would increase the fair value by approximately $46 million. See Note 2, Hedging and Derivative Instruments, of this Form 10-Q, for notional volumes associated with the Company's derivative contracts. INTEREST RATE RISK As of September 30, 2005, the Company had no interest rate risk exposure since the Company did not have any floating-rate debt. FOREIGN CURRENCY RISK The Company's cash flow stream relating to certain international operations is based on the U.S. dollar equivalent of cash flows measured in foreign currencies. In Australia, oil production is sold under U.S. dollar contracts and natural gas production is sold under fixed-price Australian dollar contracts. Over half the costs incurred for Australian operations are paid in Australian dollars. In Canada, the majority of oil and natural gas production is sold under Canadian dollar contracts. The majority of the costs incurred are paid in Canadian dollars. The North Sea oil production is sold under U.S. dollar contracts and the majority of costs incurred are paid in British pounds. In contrast, all oil and natural gas production in Egypt is sold for U.S. dollars and the majority of the costs incurred are denominated in U.S. dollars. Revenue and disbursement transactions denominated in Australian dollars, Canadian dollars and British pounds are converted to U.S. dollar equivalents based on the exchange rate as of the transaction date. The Company hedged a portion of its foreign exchange risk associated with lease operating expenditures for 2005. For information on open derivative contracts, please see Note 2, Hedging and Derivative Instruments, of this Form 10-Q. 37 A 10 percent strengthening of the Australian and Canadian dollars and the British pound as of September 30, 2005, would have a negative $121 million impact on expenses. This is primarily driven from foreign currency effects on the Company's deferred tax liability positions in its international operations. The information set forth under "Commodity Risk," "Interest Rate Risk" and "Foreign Currency Risk" in Item 7A of our annual report on Form 10-K for the year ended December 31, 2004, is incorporated herein by reference. Information about market risks for the quarter and nine months ended September 30, 2005, does not differ materially from the disclosure in our 2004 Form 10-K, except as noted above. DOMESTIC GOVERNMENTAL RISK Apache's U.S. operations have been, and at times in the future may be, affected by political developments and by federal, state and local laws and regulations impacting production levels, taxes, environmental requirements and other assessments including a potential Windfall Profits Tax. FORWARD-LOOKING STATEMENTS AND RISK Certain statements in this report, including statements of the future plans, objectives, and expected performance of the Company, are forward-looking statements that are dependent upon certain events, risks and uncertainties that may be outside the Company's control, and which could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to, the market prices of oil and gas, economic and competitive conditions, inflation rates, legislative and regulatory changes, financial market conditions, political and economic uncertainties of foreign governments, future business decisions, and other uncertainties, all of which are difficult to predict. There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and in projecting future rates of production and the timing of development expenditures. The total amount or timing of actual future production may vary significantly from reserves and production estimates. The drilling of exploratory wells can involve significant risks, including those related to timing, success rates and cost overruns. Lease and rig availability, complex geology and other factors can affect these risks. Although Apache may make use of futures contracts, swaps, options and fixed-price physical contracts to mitigate risk, fluctuations in oil and natural gas prices or a prolonged continuation of low prices, may adversely affect the Company's financial position, results of operations and cash flows. ITEM 4 - CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES G. Steven Farris, the Company's President, Chief Executive Officer and Chief Operating Officer, and Roger B. Plank, the Company's Executive Vice President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2005, the end of the period covered by this report. Based on that evaluation and as of the date of that evaluation, these officers concluded that the Company's disclosure controls were effective, providing effective means to insure that information we are required to disclose under applicable laws and regulations is recorded, processed, summarized and reported in a timely manner. We also made no significant changes in internal controls over financial reporting during the quarter ending September 30, 2005, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. We periodically review the design and effectiveness of our disclosure controls, including compliance with various laws and regulations that apply to our operations both inside and outside the United States. We make modifications to improve the design and effectiveness of our disclosure controls, and may take other corrective action, if our reviews identify deficiencies or weaknesses in our controls. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management report called for by Item 308(a) of Regulation S-K is incorporated herein by reference to Report of Management on Internal Control Over Financial Reporting, included on Page F-1 in Item 15 of the Company's 2004 Form 10-K. 38 The independent auditors attestation report called for by Item 308(b) of Regulation S-K is incorporated by reference to Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting, included on Page F-3 in Item 15 of the Company's 2004 Form 10-K. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There was no change in our internal controls over financial reporting during the period covered by this quarterly Report on Form 10-Q that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. 39 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information set forth in Note 10 to the Consolidated Financial Statements contained in the Company's annual report on Form 10-K for the year ended December 31, 2004 (filed with the SEC on March 16, 2005) is incorporated herein by reference. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None 40 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 - Apache Corporation 1995 Stock Option Plan, as amended and restated September 15, 2005, effective as of January 1, 2005. 10.2 - Apache Corporation 1998 Stock Option Plan, as amended and restated September 15, 2005, effective as of January 1, 2005. 10.3 - Apache Corporation 2000 Stock Option Plan, as amended and restated September 15, 2005, effective as of January 1, 2005. 10.4 - Apache Corporation 2000 Share Appreciation Plan, as amended and restated September 15, 2005, effective as of January 1, 2005. 10.5 - Apache Corporation Deferred Delivery Plan, as amended and restated September 15, 2005, effective as of January 1, 2005. 10.6 - Amended and Restated Conditional Grant Agreement, dated September 15, 2005, effective as of January 1, 2005, between Registrant and G. Steven Farris. 10.7 - Apache Corporation Non-Employee Directors' Compensation Plan, as amended and restated September 15, 2005, effective as of January 1, 2005. 10.8 - Apache Corporation Outside Directors' Retirement Plan, as amended and restated September 15, 2005, effective as of January 1, 2005. 12.1 - Statement of computation of ratio of earnings to fixed charges and combined fixed charges and preferred stock dividends. 31.1 - Certification of Chief Executive Officer. 31.2 - Certification of Chief Financial Officer. 32.1 - Certification of Chief Executive Officer and Chief Financial Officer. (b) Reports filed on Form 8-K The following current reports on Form 8-K were filed by Apache during the fiscal quarter ended September 30, 2005: Item 8.01 - Other Events - dated and filed September 15, 2005 On September 15, 2005, Apache issued an update on its recovery efforts after Hurricane Katrina. Also on September 15, 2005, Apache announced an increase in the quarterly cash dividend on its common stock to ten cents per share from eight cents per share. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. APACHE CORPORATION Dated: November 9, 2005 /s/ ROGER B. PLANK --------------------------------------- Roger B. Plank Executive Vice President and Chief Financial Officer Dated: November 9, 2005 /s/ THOMAS L. MITCHELL --------------------------------------- Thomas L. Mitchell Vice President and Controller (Chief Accounting Officer) INDEX TO EXHIBITS
Exhibit Number Description of Exhibit - ------- ---------------------- 10.1 Apache Corporation 1995 Stock Option Plan, as amended and restated September 15, 2005, effective as of January 1, 2005. 10.2 Apache Corporation 1998 Stock Option Plan, as amended and restated September 15, 2005, effective as of January 1, 2005. 10.3 Apache Corporation 2000 Stock Option Plan, as amended and restated September 15, 2005, effective as of January 1, 2005. 10.4 Apache Corporation 2000 Share Appreciation Plan, as amended and restated September 15, 2005, effective as of January 1, 2005. 10.5 Apache Corporation Deferred Delivery Plan, as amended and restated September 15, 2005, effective as of January 1, 2005. 10.6 Amended and Restated Conditional Grant Agreement, dated September 15, 2005, effective as of January 1, 2005, between Registrant and G. Steven Farris. 10.7 Apache Corporation Non-Employee Directors' Compensation Plan, as amended and restated September 15, 2005, effective as of January 1, 2005. 10.8 Apache Corporation Outside Directors' Retirement Plan, as amended and restated September 15, 2005, effective as of January 1, 2005. 12.1 Statement of computation of ratio of earnings to fixed charges and combined fixed charges and preferred stock dividends. 31.1 Certification of Chief Executive Officer. 31.2 Certification of Chief Financial Officer. 32.1 Certification of Chief Executive Officer and Chief Financial Officer.
EX-10.1 2 h29394exv10w1.txt 1995 STOCK OPTION PLAN AS AMENDED Exhibit 10.1 APACHE CORPORATION 1995 STOCK OPTION PLAN (AS AMENDED AND RESTATED SEPTEMBER 15, 2005, EFFECTIVE AS OF JANUARY 1, 2005) SECTION 1 INTRODUCTION 1.1 Establishment. Apache Corporation, a Delaware corporation (hereinafter referred to, together with its Affiliated Corporations (as defined in Section 2.1 hereof) as the "Company" except where the context otherwise requires), hereby establishes the Apache Corporation 1995 Stock Option Plan (the "Plan") for certain key employees of the Company. The Plan permits the grant of stock options to certain key employees of the Company. 1.2 Purposes. The purposes of the Plan are to provide the key management employees selected for participation in the Plan with added incentives to continue in the long-term service of the Company and to create in such employees a more direct interest in the future success of the operations of the Company by relating incentive compensation to increases in stockholder value, so that the income of the key management employees is more closely aligned with the interests of the Company's stockholders. The Plan is also designed to attract key employees and to retain and motivate participating employees by providing an opportunity for investment in the Company. 1.3 Effective Date. The Effective Date of the Plan (the "Effective Date") is May 4, 1995. This Plan and each option granted hereunder is conditioned on and shall be of no force or effect until approval of the Plan by the holders of the shares of voting stock of the Company unless the Company, on the advice of counsel, determines that stockholder approval is not necessary. The Committee (as defined in Section 2.1 hereof) may grant options the exercise of which shall be expressly subject to the condition that the Plan shall have been approved by the stockholders of the Company. 1 SECTION 2 DEFINITIONS 2.1 Definitions. The following terms shall have the meanings set forth below: (a) "Administrative Agent" means any designee or agent that may be appointed by the Committee pursuant to Section 3.1(b) hereof. (b) "Affiliated Corporation" means any corporation or other entity (including but not limited to a partnership) which is affiliated with Apache Corporation through stock ownership or otherwise and is treated as a common employer under the provisions of Sections 414(b) and (c) or any successor section(s) of the Internal Revenue Code. (c) "Board" means the Board of Directors of the Company. (d) "Committee" means the Stock Option Plan Committee of the Board, which is empowered hereunder to take actions in the administration of the Plan. The Committee shall be constituted at all times as to permit the Plan to comply with: (i) Rule 16b-3 or any successor rule(s) promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and (ii) Section 162(m) or any successor section(s) of the Internal Revenue Code and the regulations promulgated thereunder. (e) "Deferred Delivery Plan" means the Company's Deferred Delivery Plan, effective as of February 10, 2000 and as it may be amended from time to time, or any successor plan. (f) "Depositary Shares" means the depositary shares representing the Company's preferred stock convertible into Stock. (g) "Eligible Employees" means those full-time key employees (including, without limitation, officers and directors who are also employees) of the Company or any division thereof, upon whose judgment, initiative and efforts the Company is, or will become, largely dependent for the successful conduct of its business. (h) "Fair Market Value" means the per share closing price of the Stock or Depositary Shares, as applicable, as reported on the New York Stock Exchange, Inc. Composite Transactions Reporting System for a particular date. If on such date there are no transactions in the Stock or Depositary Shares, as applicable, the Fair Market Value shall be determined as of the immediately preceding date on which there were transactions in the Stock or Depositary Shares, as applicable. (i) "Internal Revenue Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. 2 (j) "Option" means a right to purchase shares of Stock at a stated price for a specified period of time. All Options granted under the Plan shall be Options which are not "incentive stock options" as described in Section 422 or any successor section(s) of the Internal Revenue Code. (k) "Option Price" means the price at which shares of Stock subject to an Option may be purchased, determined in accordance with subsection 7.2(b) hereof. (l) "Participant" means an Eligible Employee designated by the Committee from time to time during the term of the Plan to receive one or more Options under the Plan. (m) "Stock" means the $0.625 par value Common Stock of the Company. (n) "Stock Units" means investment units under the Deferred Delivery Plan, each of which is deemed to be equivalent to one share of Stock. 2.2 Headings; Gender and Number. The headings contained in the Plan are for reference purposes only and shall not affect in any way the meaning or interpretation of the Plan. Except when otherwise indicated by the context, the masculine gender shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural. SECTION 3 PLAN ADMINISTRATION 3.1 Administration by the Committee. (a) The Plan shall be administered by the Committee. In accordance with the provisions of the Plan, the Committee shall, in its sole discretion, select the Participants from among the Eligible Employees, determine the Options to be granted pursuant to the Plan, the number of shares of Stock to be issued thereunder, the time at which such Options are to be granted, fix the Option Price, and establish such other terms and requirements as the Committee may deem necessary, or desirable and consistent with the terms of the Plan. The Committee shall determine the form or forms of the agreements with Participants which shall evidence the particular provisions, terms, conditions, rights and duties of the Company and the Participants with respect to Options granted pursuant to the Plan, which provisions need not be identical except as may be provided herein. (b) The Committee may from time to time adopt such rules and regulations for carrying out the purposes of the Plan as it may deem proper and 3 in the best interests of the Company. The Committee may appoint an Administrative Agent, who need not be a member of the Committee or an employee of the Company, to assist the Committee in administration of the Plan and to whom it may delegate such powers as the Committee deems appropriate, except that the Committee shall determine any dispute. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan, or in any agreement entered into hereunder, in the manner and to the extent it shall deem expedient and it shall be the sole and final judge of such expediency. No member of the Committee shall be liable for any action or determination made in good faith. The determination, interpretations and other actions of the Committee pursuant to the provisions of the Plan shall be binding and conclusive for all purposes and on all persons. 3.2 Compliance with Section 162(m). The Plan is intended to comply with the requirements of Section 162 or any successor section(s) of the Internal Revenue Code ("Section 162") as to any "covered employee" as defined in Section 162, and shall be administered, interpreted and construed consistently therewith. In accordance with this intent, the amount of income a Participant may receive from Options granted under the Plan shall be based solely on an increase in the value of the Stock after the date of the grant of the Option, or such other bases as may be permitted by applicable law. The Committee is authorized to take such additional action, if any, that may be required to ensure that the Plan satisfies the requirements of Section 162 and the regulations promulgated or revenue rulings published thereunder. SECTION 4 STOCK SUBJECT TO THE PLAN 4.1 Number of Shares. Subject to Section 7.1 and to adjustment pursuant to Section 4.3 hereof, 2,500,000 shares of Stock (adjusted to 5,775,000 shares of Stock for (i) the Company's ten-percent stock dividend, record date December 31, 2001, paid January 21, 2002, (ii) the Company's five-percent stock dividend, record date March 12, 2003, paid April 2, 2003, and (iii) the Company's two-for-one stock split, record date December 31, 2003, distributed January 14, 2004) are authorized for issuance under the Plan in accordance with the provisions of the Plan and subject to such restrictions or other provisions as the Committee may from time to time deem necessary. This authorization may be increased from time to time by approval of the Board and the stockholders of the Company if, on the advice of counsel for the Company, such stockholder approval is required. Shares of Stock which may be issued upon exercise of Options shall be applied to reduce the maximum number of shares of Stock remaining available for use under the Plan. The Company shall at all times during the term of the Plan and while any Options are outstanding retain as authorized and unissued 4 Stock, or as Stock in the Company's treasury, at least the number of shares from time to time required under the provisions of the Plan, or otherwise assure itself of its ability to perform its obligations hereunder. 4.2 Other Shares of Stock. Any shares of Stock that are subject to an Option which expires, is forfeited, is cancelled, or for any reason is terminated unexercised, and any shares of Stock that for any other reason are not issued to a Participant or are forfeited shall automatically become available for use under the Plan. 4.3 Adjustments for Stock Split, Stock Dividend, etc. If the Company shall at any time increase or decrease the number of its outstanding shares of Stock or change in any way the rights and privileges of such shares by means of the payment of a Stock dividend or any other distribution upon such shares payable in Stock, or through a Stock split, subdivision, consolidation, combination, reclassification or recapitalization involving the Stock then in relation to the Stock that is affected by one or more of the above events, the numbers, rights and privileges of the following shall be, in each case, equitably and proportionally adjusted to take into account the occurrence of any of the above events, (i) the shares of Stock as to which Options may be granted under the Plan; (ii) the shares of Stock then included in each outstanding Option granted hereunder; and (iii) the Option Price for each outstanding Option granted hereunder. 4.4 Dividend Payable in Stock of Another Corporation, Etc. If the Company shall at any time pay or make any dividend or other distribution upon the Stock payable in securities or other property (except money or Stock), a proportionate part of such securities or other property shall be set aside and delivered to any Participant then holding an Option for the particular type of Stock for which the dividend or other distribution was made, upon exercise thereof. Prior to the time that any such securities or other property are delivered to a Participant in accordance with the foregoing, the Company shall be the owner of such securities or other property and shall have the right to vote the securities, receive any dividends payable on such securities, and in all other respects shall be treated as the owner. If securities or other property which have been set aside by the Company in accordance with this Section are not delivered to a Participant because an Option is not exercised, then such securities or other property shall remain the property of the Company and shall be dealt with by the Company as it shall determine in its sole discretion. 4.5 Other Changes in Stock. In the event there shall be any change, other than as specified in Sections 4.3 and 4.4 hereof, in the number or kind of outstanding shares of Stock or of any stock or other securities into which the Stock shall be changed or for which it shall have been exchanged, and if the Committee shall in its discretion determine that such change equitably requires an adjustment in the number or kind of shares subject to outstanding Options or 5 which have been reserved for issuance pursuant to the Plan but are not then subject to an Option, then such adjustments shall be made by the Committee and shall be effective for all purposes of the Plan and on each outstanding Option that involves the particular type of stock for which a change was effected. 4.6 Rights to Subscribe. If the Company shall at any time grant to the holders of its Stock rights to subscribe pro rata for additional shares thereof or for any other securities of the Company or of any other corporation, there shall be reserved with respect to the shares then under Option to any Participant of the particular class of Stock involved the Stock or other securities which the Participant would have been entitled to subscribe for if immediately prior to such grant the Participant had exercised his entire Option. If, upon exercise of any such Option, the Participant subscribes for the additional shares or other securities, the aggregate Option Price shall be increased by the amount of the price that is payable by the Participant for such additional shares or other securities. 4.7 General Adjustment Rules. No adjustment or substitution provided for in this Section 4 shall require the Company to sell a fractional share of Stock under any Option, or otherwise issue a fractional share of Stock, and the total substitution or adjustment with respect to each Option shall be limited by deleting any fractional share. In the case of any such substitution or adjustment, the aggregate Option Price for the shares of Stock then subject to the Option shall remain unchanged but the Option Price per share under each such Option shall be equitably adjusted by the Committee to reflect the greater or lesser number of shares of Stock or other securities into which the Stock subject to the Option may have been changed. 4.8 Determination by the Committee, Etc. Adjustments under this Section 4 shall be made by the Committee, whose determinations with regard thereto shall be final and binding upon all parties. SECTION 5 REORGANIZATION OR LIQUIDATION In the event that the Company is merged or consolidated with another corporation and the Company is not the surviving corporation, or if all or substantially all of the assets or more than 20 percent of the outstanding voting stock of the Company is acquired by any other corporation, business entity or person, or in case of a reorganization (other than a reorganization under the United States Bankruptcy Code) or liquidation of the Company, and if the provisions of Section 8 hereof do not apply, the Committee, or the board of directors of any corporation assuming the obligations of the Company, shall, as to the Plan and outstanding Options either (i) make appropriate provision for the adoption and continuation of 6 the Plan by the acquiring or successor corporation and for the protection of any such outstanding Options by the substitution on an equitable basis of appropriate stock of the Company or of the merged, consolidated or otherwise reorganized corporation which will be issuable with respect to the Stock, provided that no additional benefits shall be conferred upon the Participants holding such Options as a result of such substitution, and the excess of the aggregate Fair Market Value of the shares subject to the Options immediately after such substitution over the aggregate Option Price thereof is not more than the excess of the aggregate Fair Market Value of the shares subject to such Options immediately before such substitution over the aggregate Option Price thereof, or (ii) upon written notice to the Participants, provide that all unexercised Options shall be exercised within a specified number of days of the date of such notice or such Options will be terminated. In the latter event, the Committee shall accelerate the vesting dates of outstanding Options so that all Options become fully vested and exercisable prior to any such event. SECTION 6 PARTICIPATION Participants in the Plan shall be those Eligible Employees who, in the judgment of the Committee, are performing, or during the term of their incentive arrangement will perform, vital services in the management, operation and development of the Company or an Affiliated Corporation, and significantly contribute, or are expected to significantly contribute, to the achievement of the Company's long-term corporate economic objectives. Participants may be granted from time to time one or more Options; provided, however, that the grant of each such Option shall be separately approved by the Committee, and receipt of one such Option shall not result in automatic receipt of any other Option. Upon determination by the Committee that an Option is to be granted to a Participant, written notice shall be given to such person, specifying the terms, conditions, rights and duties related thereto. Each Participant shall, if required by the Committee, enter into an agreement with the Company, in such form as the Committee shall determine and which is consistent with the provisions of the Plan, specifying such terms, conditions, rights and duties. Options shall be deemed to be granted as of the date specified in the grant resolution of the Committee, which date shall be the date of any related agreement with the Participant. In the event of any inconsistency between the provisions of the Plan and any such agreement entered into hereunder, the provisions of the Plan shall govern. 7 SECTION 7 STOCK OPTIONS 7.1 Grant of Stock Options. Coincident with or following designation for participation in the Plan, an Eligible Employee may be granted one or more Options. Grants of Options under the Plan shall be made by the Committee. In no event shall the exercise of one Option affect the right to exercise any other Option or affect the number of shares of Stock for which any other Option may be exercised, except as provided in subsection 7.2(j) hereof. During the life of the Plan, no Eligible Employee may be granted Options which in the aggregate pertain to in excess of 25 percent of the total shares of Stock authorized under the Plan. 7.2 Stock Option Agreements. Each Option granted under the Plan shall be evidenced by a written stock option agreement which shall be entered into by the Company and the Participant to whom the Option is granted (the "Stock Option Agreement"), and which shall contain the following terms and conditions, as well as such other terms and conditions, not inconsistent therewith, as the Committee may consider appropriate in each case. (a) Number of Shares. Each Stock Option Agreement shall state that it covers a specified number of shares of Stock, as determined by the Committee. (b) Price. The price at which each share of Stock covered by an Option may be purchased shall be determined in each case by the Committee and set forth in the Stock Option Agreement, but in no event shall the price be less than the Fair Market Value of the Stock on the date the Option is granted. (c) Duration of Options; Employment Required For Exercise. Each Stock Option Agreement shall state the period of time, determined by the Committee, within which the Option may be exercised by the Participant (the "Option Period"). The Option Period must end, in all cases, not more than ten years from the date an Option is granted. Except as otherwise provided in Sections 5 and 8 and subsection 7.2(d)(iv) hereof, each Option granted under the Plan shall become exercisable in increments such that 25 percent of the Option will become exercisable on each of the four subsequent one-year anniversaries of the date the Option is granted, but each such additional 25-percent increment shall become exercisable only if the Participant has been continuously employed by the Company from the date the Option is granted through the date on which each such additional 25-percent increment becomes exercisable. (d) Termination of Employment, Death, Disability, Etc. Each Stock Option Agreement shall provide as follows with respect to the exercise of the Option upon termination of the employment or the death of the Participant: 8 (i) If the employment of the Participant by the Company is terminated within the Option Period for cause, as determined by the Company, the Option shall thereafter be void for all purposes. As used in this subsection 7.2(d), "cause" shall mean a gross violation, as determined by the Company, of the Company's established policies and procedures, provided that the effect of this subsection 7.2(d) shall be limited to determining the consequences of a termination and that nothing in this subsection 7.2(d) shall restrict or otherwise interfere with the Company's discretion with respect to the termination of any employee. (ii) If the Participant retires from employment by the Company on or after attaining age 60, the Option may be exercised by the Participant within 36 months following his or her retirement (provided that such exercise must occur within the Option Period), but not thereafter. In the event of the Participant's death during such 36-month period, each Option may be exercised by those entitled to do so in the manner referred to in (iv) below. In any such case, the Option may be exercised only as to the shares as to which the Option had become exercisable on or before the date of the Participant's retirement. (iii) If the Participant becomes disabled (as determined pursuant to the Company's Long-Term Disability Plan or any successor plan), during the Option Period while still employed, or within the three-month period referred to in (v) below, or within the 36-month period referred to in (ii) above, the Option may be exercised by the Participant or by his or her guardian or legal representative, within twelve months following the Participant's disability, or within the 36-month period referred to in (ii) if applicable and if longer (provided that such exercise must occur within the Option Period), but not thereafter. In the event of the Participant's death during such twelve-month period, each Option may be exercised by those entitled to do so in the manner referred to in (iv) below. In any such case, the Option may be exercised only as to the shares of Stock as to which the Option had become exercisable on or before the date of the Participant's disability. (iv) In the event of the Participant's death while still employed by the Company, each Option of the deceased Participant may be exercised by those entitled to do so under the Participant's will or under the laws of descent and distribution within twelve months following the Participant's death (provided that in any event such exercise must occur within the Option Period), but not thereafter, as to all shares of Stock which are subject to such Option, including each 25-percent increment of the Option, if any, which has not yet become exercisable at the time of the Participant's death. In the event of the Participant's death within the 36-month period referred to in (ii) above or within the twelve-month period referred to in (iii) above, each Option of the deceased Participant that is exercisable at the time of death may be exercised by those entitled to do so 9 under the Participant's will or under the laws of descent and distribution within twelve months following the Participant's death or within the 36-month period referred to in (ii), if applicable and if longer (provided that in any event such exercise must occur within the Option Period). The provisions of this paragraph (iv) of subsection 7.2(d) shall be applicable to each Stock Option Agreement as if set forth therein word for word. Each Stock Option Agreement executed by the Company prior to the adoption of this provision shall be deemed amended to include the provisions of this paragraph and all Options granted pursuant to such Stock Option Agreements shall be exercisable as provided herein. (v) If the employment of the Participant by the Company is terminated (which for this purpose means that the Participant is no longer employed by the Company or by an Affiliated Corporation) within the Option Period for any reason other than cause, the Participant's retirement on or after attaining age 60, the Participant's disability or death, the Option may be exercised by the Participant within three months following the date of such termination (provided that such exercise must occur within the Option Period), but not thereafter. In any such case, the Option may be exercised only as to the shares as to which the Option had become exercisable on or before the date of termination of the Participant's employment. (e) Transferability. Each Stock Option Agreement shall provide that the Option granted therein is not transferable by the Participant except by will or pursuant to the laws of descent and distribution, and that such Option is exercisable during the Participant's lifetime only by him or her, or in the event of the Participant's disability or incapacity, by his or her guardian or legal representative. (f) Agreement to Continue in Employment. Each Stock Option Agreement shall contain the Participant's agreement to remain in the employment of the Company, at the pleasure of the Company, for a continuous period of at least one year after the date of such Stock Option Agreement, at the salary rate in effect on the date of such agreement or at such changed rate as may be fixed, from time to time, by the Company. (g) Exercise, Payments, Etc. (i) Each Stock Option Agreement shall provide that the method for exercising the Option granted therein shall be by delivery to the Office of the Secretary of the Company or to the Administrative Agent of written notice specifying the number of shares of Stock with respect to which such Option is exercised and payment to the Company of the aggregate Option Price. Such notice shall be in a form satisfactory to the Committee and shall specify the particular Options (or portions thereof) which are being exercised and the number of shares of Stock with respect to which the Options are being exercised. The 10 exercise of the Option shall be deemed effective on the date such notice is received by the Office of the Secretary or by the Administrative Agent and payment is made to the Company of the aggregate Option Price (the "Exercise Date"); however, if payment of the aggregate Option Price is made pursuant to a sale of shares of Stock as contemplated by subsection 7.2(g)(iii)(F) below, the Exercise Date shall be deemed to be the date of such sale. If requested by the Company, such notice shall contain the Participant's representation that he or she is purchasing the Stock for investment purposes only and his or her agreement not to sell any Stock so purchased in any manner that is in violation of the Securities Act of 1933, as amended, or any applicable state law, and such restriction, or notice thereof, shall be placed on the certificates representing the Stock so purchased. The purchase of such Stock shall take place upon delivery of such notice to the Office of the Secretary of the Company or to the Administrative Agent, at which time the aggregate Option Price shall be paid in full to the Company by any of the methods or any combination of the methods set forth in 7.2(g)(iii) below. (ii) Except as referenced below in connection with the Deferred Delivery Plan, the shares of Stock to which the Participant is entitled as a result of the exercise of the Option shall be issued by the Company and (A) delivered by electronic means to an account designated by the Participant, or (B) delivered to the Participant in the form of a properly executed certificate or certificates representing such shares of Stock. If shares of Stock and/or Depositary Shares are used to pay all or part of the aggregate Option Price, the Company shall issue and deliver to the Participant the additional shares of Stock, in excess of the aggregate Option Price or portion thereof paid using shares of Stock or Depositary Shares, to which the Participant is entitled as a result of the Option exercise. If the Participant exercising an Option (x) is eligible for participation in the Deferred Delivery Plan, (y) pays the aggregate Option Price pursuant to 7.2(g)(iii)(A), (B), (C), (D) or (E) below, and (z) has made an irrevocable election at least six months prior to the Exercise Date as required under the Deferred Delivery Plan, the income resulting from the Option exercise shall be deferred into the Participant's Deferred Delivery Plan account and no additional shares of Stock shall be delivered to the Participant. The income resulting from the Option exercise may not be deferred into the Participant's Deferred Delivery Plan account except to the extent that the Option was vested by December 31, 2004, the deferral election was made by December 31, 2004, and the deferral into the Deferred Delivery Plan occurs before January 1, 2006. (iii) the aggregate Option Price shall be paid by any of the following methods or any combination of the following methods: (A) in cash, including the wire transfer of funds in U.S. dollars to one of the Company's bank accounts located in the United States, with such bank account to be designated from time to time by the Company; 11 (B) by personal, certified or cashier's check payable in U.S. dollars to the order of the Company; (C) by delivery to the Company or the Administrative Agent of certificates representing a number of shares of Stock then owned by the Participant, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the aggregate Option Price of the Option being exercised, properly endorsed for transfer to the Company; provided that the shares of Stock used for this purpose must have been owned by the Participant for a period of at least six months; (D) by certification or attestation to the Company or the Administrative Agent of the Participant's ownership as of the Exercise Date of the number of shares of Stock and/or Depositary Shares, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the aggregate Option Price of the Option being exercised, provided that the shares of Stock and/or Depositary Shares used for this purpose have been owned by the Participant for a period of at least six months; (E) if the income resulting from the Option exercise is to be deferred into the Participant's Deferred Delivery Plan account, by certification or attestation to the Company or the Administrative Agent of the Participant's ownership (as of the Exercise Date) of a number of vested Stock Units held in the Participant's Deferred Delivery Plan account, the equivalent aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the aggregate Option Price of the Option being exercised, provided that the Stock Units used for this purpose were vested as of the Exercise Date; or (F) by delivery to the Company or the Administrative Agent of a properly executed notice of exercise together with irrevocable instructions to a broker to promptly deliver to the Company, by wire transfer or check as noted in (A) and (B) above, the amount of the proceeds of the sale of all or a portion of the Stock or of a loan from the broker to the Participant necessary to pay the aggregate Option Price. (iv) For purposes of the Plan, the income resulting from an Option exercise shall be based on the Fair Market Value of the Stock for the Exercise Date; however, if payment of the aggregate Option Price is made pursuant to a sale of shares of Stock as contemplated by subsection 7.2(g)(iii)(F) hereof, the Fair Market Value shall be deemed to be the per share sale price and the Exercise Date shall be deemed to be the date of such sale. (h) Date of Grant. An Option shall be considered as having been granted on the date specified in the grant resolution of the Committee. 12 (i) Tax Withholding. Each Stock Option Agreement shall provide that, upon exercise of the Option, the Participant shall make appropriate arrangements with the Company to provide for the amount of tax withholding required by Sections 3102 and 3402 or any successor section(s) of the Internal Revenue Code and applicable state and local income tax laws, including payment of such taxes in cash, by check or as provided in Section 13.2 hereof. (j) Adjustment of Options. Subject to the provisions of Sections 4, 5, 7, 8 and 12 hereof, the Committee may make any adjustment in the number of shares of Stock covered by, or the terms of an outstanding Option and a subsequent granting of an Option, by amendment or by substitution for an outstanding Option; however, except as provided in Sections 4, 5, 8 and 12 hereof, the Committee may not adjust the Option Price of any outstanding Option. Such amendment or substitution may result in terms and conditions (including the number of shares of Stock covered, vesting schedule or Option Period) that differ from the terms and conditions of the original Option. The Committee may not, however, adversely affect the rights of any Participant to previously granted Options without the consent of such Participant. If such action is effected by amendment, the effective date of such amendment will be the date of grant of the original Option. 7.3 Stockholder Privileges. No Participant shall have any rights as a stockholder with respect to any shares of Stock covered by an Option until the Participant becomes the holder of record of such Stock. Except as provided in Section 4 hereof, no adjustments shall be made for dividends or other distributions or other rights as to which there is a record date preceding the date on which such Participant becomes the holder of record of such Stock. SECTION 8 CHANGE OF CONTROL 8.1 In General. In the event of the occurrence of a change of control of the Company, as defined in Section 8.3 hereof, all outstanding Options shall become automatically vested, without further action by the Committee or the Board, so as to make all such Options fully vested and exercisable as of the date of such change of control. 8.2 Limitation on Payments. If the provisions of this Section 8 would result in the receipt by any Participant of a payment within the meaning of Section 280G or any successor section(s) of the Internal Revenue Code, and the regulations promulgated thereunder, and if the receipt of such payment by any Participant would, in the opinion of independent tax counsel of recognized standing selected by the Company, result in the payment by such Participant of any excise tax 13 provided for in Sections 280G and 4999 or any successor section(s) of the Internal Revenue Code, then the amount of such payment shall be reduced to the extent required, in the opinion of independent tax counsel, to prevent the imposition of such excise tax; provided, however, that the Committee, in its sole discretion, may authorize the payment of all or any portion of the amount of such reduction to the Participant. 8.3 Definition. For purposes of the Plan, a "change of control" shall mean any of the events specified in the Company's Income Continuance Plan or any successor plan which constitute a change of control within the meaning of such plan. SECTION 9 RIGHTS OF EMPLOYEES, PARTICIPANTS 9.1 Employment. Nothing contained in the Plan or in any Option granted under the Plan shall confer upon any Participant any right with respect to the continuation of his or her employment by the Company or any Affiliated Corporation, or interfere in any way with the right of the Company or any Affiliated Corporation, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the level of the Participant's compensation from the level in existence at the time of the grant of an Option. Whether an authorized leave of absence, or absence in military or government service, shall constitute a termination of employment shall be determined by the Committee at the time. 9.2 Nontransferability. No right or interest of any Participant in an Option granted pursuant to the Plan shall be assignable or transferable during the lifetime of the Participant, either voluntarily or involuntarily, or subjected to any lien, directly or indirectly, by operation of law, or otherwise, including execution, levy, garnishment, attachment, pledge or bankruptcy. In the event of a Participant's death, a Participant's rights and interests in Options shall, to the extent provided in Section 7 hereof, be transferable by testamentary will or the laws of descent and distribution, and payment of any amounts due under the Plan shall be made to, and exercise of any Options may be made by, the Participant's legal representatives, heirs or legatees. If in the opinion of the Committee, a person entitled to payments or to exercise rights with respect to the Plan is disabled from caring for his or her affairs because of mental condition, physical condition or age, payment due such person may be made to, and such rights shall be exercised by, such person's guardian, conservator or other legal personal representative upon furnishing the Committee with evidence of such status satisfactory to the Committee. 14 SECTION 10 GENERAL RESTRICTIONS 10.1 Investment Representations. The Company may require a Participant, as a condition of exercising an Option, to give written assurances in substance and form satisfactory to the Company and its counsel to the effect that such person is acquiring the Stock subject to the Option for his own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws. 10.2 Compliance with Securities Laws. Each Option shall be subject to the requirement that, if at any time counsel to the Company shall determine that the listing, registration or qualification of the shares of Stock subject to such Option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, is necessary as a condition of, or in connection with, the issuance or purchase of shares of Stock thereunder, such Option may not be accepted or exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained on conditions acceptable to the Committee. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration, qualification, consent or approval. SECTION 11 OTHER EMPLOYEE BENEFITS The amount of any income deemed to be received by a Participant as a result of an Option exercise shall not constitute "earnings" or "compensation" with respect to which any other employee benefits of such Participant are determined including, without limitation benefits under any pension, profit sharing, life insurance or salary continuation plan. SECTION 12 PLAN AMENDMENT, MODIFICATION AND TERMINATION The Board may at any time terminate, and from time to time may amend or modify the Plan provided, however, that no amendment or modification may become effective without approval of the amendment or modification by the Company's stockholders if stockholder approval is required to enable the Plan to satisfy any applicable statutory or regulatory requirements unless the Company, on the advice of counsel, determines that stockholder approval is otherwise necessary or desirable. 15 No amendment, modification or termination of the Plan shall in any manner adversely affect any Option theretofore granted under the Plan, without the consent of the Participant holding such Option. The Committee shall have the authority to adopt such modifications, procedures and subplans as may be necessary or desirable to comply with the provisions of the laws (including, but not limited to, tax laws and regulations) of countries other than the United States in which the Company may operate, so as to assure the viability of the benefits of the Plan to Participants employed in such countries. SECTION 13 WITHHOLDING 13.1 Withholding Requirement. The Company's obligations to deliver shares of Stock upon the exercise of an Option, or to defer income resulting from an Option exercise into the Deferred Delivery Plan, shall be subject to the Participant's satisfaction of all applicable federal, state and local income and other tax withholding requirements. 13.2 Satisfaction of Required Withholding. At the time the Committee grants an Option, it may, in its sole discretion, grant the Participant an election to pay all such amounts of required tax withholding, or any part thereof: (a) by the delivery to the Company or the Administrative Agent of a number of shares of Stock then owned by the Participant, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the amount required to be withheld, provided that such shares have been held by the Participant for a period of at least six months; (b) by certification or attestation to the Company or the Administrative Agent of the Participant's ownership (as of the Exercise Date) of a number of shares of Stock and/or Depositary Shares, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the amount required to be withheld, provided that such shares of Stock and/or Depositary Shares have been owned by the Participant for a period of at least six months; (c) if the income resulting from the Option exercise is to be deferred into the Participant's Deferred Delivery Plan account, by certification or attestation to the Company or the Administrative Agent of the Participant's ownership (as of the Exercise Date) of a number of vested Stock Units held in the Participant's Deferred Delivery Plan account, the equivalent aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the amount required to be withheld, provided that such Stock Units were vested as of the Exercise Date; or 16 (d) by the Company or the Administrative Agent withholding from the shares of Stock otherwise issuable to the Participant upon exercise of the Option, a number of shares of Stock, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the amount required to be withheld. Any such elections by Participants to have shares of Stock withheld for this purpose will be subject to the following restrictions: (i) all elections shall be made on or prior to the Exercise Date; and (ii) all elections shall be irrevocable. 13.3 Excess Withholding. At the time the Committee grants an Option, it may, in its sole discretion, grant the Participant an election to pay additional or excess amounts of tax withholding, beyond the required amounts and up to the Participant's marginal tax rate: (a) by delivery to the Company or the Administrative Agent of a number of Shares of Stock then owned by the Participant, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than such excess withholding amount, provided that such shares of Stock have been owned by the Participant for a period of at least six months; or (b) by certification or attestation to the Company or the Administrative Agent of the Participant's ownership (as of the Exercise Date) of a number of shares of Stock and/or Depositary Shares, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than such excess withholding amount, provided that such shares of Stock and/or Depositary Shares have been owned by the Participant for a period of at least six months. 13.4 Section 16 Requirements. If the Participant is an officer or director of the Company within the meaning of Section 16 or any successor section(s) of the 1934 Act ("Section 16"), the Participant must satisfy the requirements of such Section 16 and any applicable rules and regulations thereunder with respect to the use of shares of Stock, Depositary Shares and/or Stock Units to satisfy such tax withholding obligation. SECTION 14 REQUIREMENTS OF LAW 14.1 Requirements of Law. The issuance of Stock and the payment of cash pursuant to the Plan shall be subject to all applicable laws, rules and regulations. 17 14.2 Federal Securities Laws Requirements. If a Participant is an officer or director of the Company within the meaning of Section 16, Options granted hereunder shall be subject to all conditions required under Rule 16b-3, or any successor rule(s) promulgated under the 1934 Act, to qualify the Option for any exception from the provisions of Section 16 available under such Rule. Such conditions are hereby incorporated herein by reference and shall be set forth in the Stock Option Agreement with the Participant which describes the Option. 14.3 Governing Law. The Plan and all Stock Option Agreements hereunder shall be construed in accordance with and governed by the laws of the State of Texas. SECTION 15 DURATION OF THE PLAN The Plan shall terminate at such time as may be determined by the Board, and no Option shall be granted after such termination. If not sooner terminated under the preceding sentence, the Plan shall fully cease and expire at midnight on May 4, 2000. Options outstanding at the time of the Plan termination shall continue to be exercisable in accordance with the Stock Option Agreement pertaining to each such Option, as such Stock Option Agreement may be modified pursuant to Section 12. Dated: September 15, 2005. APACHE CORPORATION ATTEST: /s/ Cheri L. Peper By: /s/ Jeffrey M. Bender - ------------------------------------- ------------------------------------ Cheri L. Peper Jeffrey M. Bender Corporate Secretary Vice President, Human Resources 18 EX-10.2 3 h29394exv10w2.txt 1998 STOCK OPTION PLAN AS AMENDED Exhibit 10.2 APACHE CORPORATION 1998 STOCK OPTION PLAN (AS AMENDED AND RESTATED SEPTEMBER 15, 2005, EFFECTIVE AS OF JANUARY 1, 2005) SECTION 1 INTRODUCTION 1.1 Establishment. Apache Corporation, a Delaware corporation (hereinafter referred to, together with its Affiliated Corporations (as defined in Section 2.1 hereof) as the "Company" except where the context otherwise requires), hereby establishes the Apache Corporation 1998 Stock Option Plan (the "Plan") for Eligible Employees (as defined in Section 2.1 hereof). The Plan permits the grant of stock options to Eligible Employees selected by the Committee (as defined in Section 2.1 hereof). 1.2 Purposes. The purposes of the Plan are to provide the Eligible Employees designated by the Committee for participation in the Plan with added incentives to continue in the long-term service of the Company and to create in such employees a more direct interest in the future success of the operations of the Company by relating incentive compensation to increases in stockholder value, so that the income of those employees is more closely aligned with the interests of the Company's stockholders. The Plan is also designed to attract outstanding individuals and to retain and motivate Eligible Employees by providing an opportunity for investment in the Company. 1.3 Effective Date. The Effective Date of the Plan (the "Effective Date") is February 6, 1998. This Plan and each option granted hereunder is conditioned on and shall be of no force or effect until approval of the Plan by the holders of the shares of voting stock of the Company unless the Company, on the advice of counsel, determines that stockholder approval is not necessary. The Committee may grant options the exercise of which shall be expressly subject to the condition that the Plan shall have been approved by the stockholders of the Company. SECTION 2 DEFINITIONS 2.1 Definitions. The following terms shall have the meanings set forth below: 1 (a) "Administrative Agent" means any designee or agent that may be appointed by the Committee pursuant to Section 3.1(b) hereof. (b) "Affiliated Corporation" means any corporation or other entity (including but not limited to a partnership) which is affiliated with Apache Corporation through stock ownership or otherwise and is treated as a common employer under the provisions of Sections 414(b) and (c) or any successor section(s) of the Internal Revenue Code. (c) "Board" means the Board of Directors of the Company. (d) "Committee" means the Stock Option Plan Committee of the Board, which is empowered hereunder to take actions in the administration of the Plan. The Committee shall be constituted at all times as to permit the Plan to comply with: (i) Rule 16b-3 or any successor rule(s) promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and (ii) Section 162(m) or any successor sections(s) of the Internal Revenue Code and the regulations promulgated thereunder. (e) "Deferred Delivery Plan" means the Company's Deferred Delivery Plan, effective as of February 10, 2000 and as it may be amended from time to time, or any successor plan. (f) "Depositary Shares" means the Depositary shares representing the Company's preferred stock convertible into Stock. (g) "Eligible Employees" means full-time employees (including, without limitation, officers and directors who are also employees), and certain part-time employees, of the Company or any division thereof. (h) "Fair Market Value" means the per share closing price of the Stock or Depositary Shares, as applicable, as reported on the New York Stock Exchange, Inc. Composite Transactions Reporting System for a particular date. If on such date there are no transactions in the Stock or Depositary Shares, as applicable, the Fair Market Value shall be determined as of the immediately preceding date on which there were transactions in the Stock or Depositary Shares, as applicable. (i) "Internal Revenue Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. (j) "Option" means a right to purchase shares of Stock at a stated price for a specified period of time. All Options granted under the Plan shall be Options which are not "incentive stock options" as described in Section 422 or any successor section(s) of the Internal Revenue Code. (k) "Option Price" means the price at which shares of Stock subject to an Option may be purchased, determined in accordance with subsection 7.2(b) hereof. (l) "Participant" means an Eligible Employee designated by the Committee from time to time during the term of the Plan to receive one or more Options under the Plan. (m) "Stock" means the $0.625 par value Common Stock of the Company. (n) "Stock Units" means investment units under the Deferred Delivery Plan, each of which is deemed to be equivalent to one share of Stock. 2.2 Headings; Gender and Number. The headings contained in the Plan are for reference purposes only and shall not affect in any way the meaning or interpretation of the Plan. Except when otherwise indicated by the context, the masculine gender shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural. SECTION 3 PLAN ADMINISTRATION 3.1 Administration by the Committee. (a) The Plan shall be administered by the Committee. In accordance with the provisions of the Plan, the Committee shall, in its sole discretion, select the Participants from among the Eligible Employees, determine the Options to be granted pursuant to the Plan, the number of shares of Stock to be issued thereunder, the time at which such Options are to be granted, fix the Option Price, and establish such other terms and requirements as the Committee may deem necessary or desirable and consistent with the terms of the Plan. The Committee shall determine the form or forms of the agreements with Participants which shall evidence the particular provisions, terms, conditions, rights and duties of the Company and the Participants with respect to Options granted pursuant to the Plan, which provisions need not be identical except as may be provided herein. (b) The Committee may from time to time adopt such rules and regulations for carrying out the purposes of the Plan as it may deem proper and in the best interests of the Company. The Committee may appoint an Administrative Agent, who need not be a member of the Committee or an employee of the Company, to assist the Committee in administration of the Plan and to whom it may delegate such powers as the Committee deems appropriate, except that the Committee shall determine any dispute. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan, or in any agreement entered into hereunder, in the manner and to the extent it shall deem expedient and it shall be the sole and final judge of such expediency. No member of the Committee shall be liable for any action or determination made in good faith. The determination, interpretations and other actions of the Committee pursuant to the provisions of the Plan shall be binding and conclusive for all purposes and on all persons. 3.2 Compliance with Section 162(m). The Plan is intended to comply with the requirements of Section 162(m) or any successor section(s) of the Internal Revenue Code ("Section 162(m)") as to any "covered employee" as defined in Section 162(m), and shall be administered, interpreted and construed consistently therewith. In accordance with this intent, the amount of income a Participant may receive from Options granted under the Plan shall be based solely on an increase in the value of the Stock after the date of the grant of the Option, or such other bases as may be permitted by applicable law. The Committee is authorized to take such additional action, if any, that may be required to ensure that the Plan satisfies the requirements of Section 162(m) and the regulations promulgated or revenue rulings published thereunder. SECTION 4 STOCK SUBJECT TO THE PLAN 4.1 Number of Shares. Subject to Section 7.1 and to adjustment pursuant to Section 4.3 hereof, 2,500,000 shares of Stock (adjusted to 5,775,000 shares of Stock for (i) the Company's ten-percent stock dividend, record date December 31, 2001, paid January 21, 2002, (ii) the Company's five-percent stock dividend, record date March 12, 2003, paid April 2, 2003, and (iii) the Company's two-for-one stock split, record date December 31, 2003, distributed January 14, 2004) are authorized for issuance under the Plan in accordance with the provisions of the Plan and subject to such restrictions or other provisions as the Committee may from time to time deem necessary. This authorization may be increased from time to time by approval of the Board and the stockholders of the Company if, on the advice of counsel for the Company, such stockholder approval is required. Shares of Stock which may be issued upon exercise of Options shall be applied to reduce the maximum number of shares of Stock remaining available for use under the Plan. The Company shall at all times during the term of the Plan and while any Options are outstanding retain as authorized and unissued Stock, or as Stock in the Company's treasury, at least the number of shares from time to time required under the provisions of the Plan, or otherwise assure itself of its ability to perform its obligations hereunder. 4.2 Other Shares of Stock. Any shares of Stock that are subject to an Option which expires, is forfeited, is cancelled, or for any reason is terminated unexercised, and any shares of Stock that for any other reason are not issued to a Participant or are forfeited shall automatically become available for use under the Plan. 4.3 Adjustments for Stock Split, Stock Dividend, etc. If the Company shall at any time increase or decrease the number of its outstanding shares of Stock or change in any way the rights and privileges of such shares by means of the payment of a Stock dividend or any other distribution upon such shares payable in Stock, or through a Stock split, subdivision, consolidation, combination, reclassification or recapitalization involving the Stock then in relation to the Stock that is affected by one or more of the above events, the numbers, rights and privileges of the following shall be, in each case, equitably and proportionally adjusted to take into account the occurrence of any of the above events, (i) the shares of Stock as to which Options may be granted under the Plan; (ii) the shares of Stock then included in each outstanding Option granted hereunder; and (iii) the Option Price for each outstanding Option granted hereunder. 4.4 Dividend Payable in Stock of Another Corporation, Etc. If the Company shall at any time pay or make any dividend or other distribution upon the Stock payable in securities or other property (except money or Stock), a proportionate part of such securities or other property shall be set aside and delivered to any Participant then holding an Option for the particular type of Stock for which the dividend or other distribution was made, upon exercise thereof. Prior to the time that any such securities or other property are delivered to a Participant in accordance with the foregoing, the Company shall be the owner of such securities or other property and shall have the right to vote the securities, receive any dividends payable on such securities, and in all other respects shall be treated as the owner. If securities or other property which have been set aside by the Company in accordance with this Section are not delivered to a Participant because an Option is not exercised, then such securities or other property shall remain the property of the Company and shall be dealt with by the Company as it shall determine in its sole discretion. 4.5 Other Changes in Stock. In the event there shall be any change, other than as specified in Sections 4.3 and 4.4 hereof, in the number or kind of outstanding shares of Stock or of any stock or other securities into which the Stock shall be changed or for which it shall have been exchanged, and if the Committee shall in its discretion determine that such change equitably requires an adjustment in the number or kind of shares subject to outstanding Options or which have been reserved for issuance pursuant to the Plan but are not then subject to an Option, then such adjustments shall be made by the Committee and shall be effective for all purposes of the Plan and on each outstanding Option that involves the particular type of stock for which a change was effected. 4.6 Rights to Subscribe. If the Company shall at any time grant to the holders of its Stock rights to subscribe pro rata for additional shares thereof or for any other securities of the Company or of any other corporation, there shall be reserved with respect to the shares then under Option to any Participant of the particular class of Stock involved the Stock or other securities which the Participant would have been entitled to subscribe for if immediately prior to such grant the Participant had exercised his entire Option. If, upon exercise of any such Option, the Participant subscribes for the additional shares or other securities, the aggregate Option Price shall be increased by the amount of the price that is payable by the Participant for such additional shares or other securities. 4.7 General Adjustment Rules. No adjustment or substitution provided for in this Section 4 shall require the Company to sell a fractional share of Stock under any Option, or otherwise issue a fractional share of Stock, and the total substitution or adjustment with respect to each Option shall be limited by deleting any fractional share. In the case of any such substitution or adjustment, the aggregate Option Price for the shares of Stock then subject to the Option shall remain unchanged but the Option Price per share under each such Option shall be equitably adjusted by the Committee to reflect the greater or lesser number of shares of Stock or other securities into which the Stock subject to the Option may have been changed. 4.8 Determination by the Committee, Etc. Adjustments under this Section 4 shall be made by the Committee, whose determinations with regard thereto shall be final and binding upon all parties. SECTION 5 REORGANIZATION OR LIQUIDATION In the event that the Company is merged or consolidated with another corporation and the Company is not the surviving corporation, or if all or substantially all of the assets or more than 20 percent of the outstanding voting stock of the Company is acquired by any other corporation, business entity or person, or in case of a reorganization (other than a reorganization under the United States Bankruptcy Code) or liquidation of the Company, and if the provisions of Section 8 hereof do not apply, the Committee, or the board of directors of any corporation assuming the obligations of the Company, shall, as to the Plan and outstanding Options either (i) make appropriate provision for the adoption and continuation of the Plan by the acquiring or successor corporation and for the protection of any such outstanding Options by the substitution on an equitable basis of appropriate stock of the Company or of the merged, consolidated or otherwise reorganized corporation which will be issuable with respect to the Stock, provided that no additional benefits shall be conferred upon the Participants holding such Options as a result of such substitution, and the excess of the aggregate Fair Market Value of the shares subject to the Options immediately after such substitution over the aggregate Option Price thereof is not more than the excess of the aggregate Fair Market Value of the shares subject to such Options immediately before such substitution over the aggregate Option Price thereof, or (ii) upon written notice to the Participants, provide that all unexercised Options shall be exercised within a specified number of days of the date of such notice or such Options will be terminated. In the latter event, the Committee shall accelerate the vesting dates of outstanding Options so that all Options become fully vested and exercisable prior to any such event. SECTION 6 PARTICIPATION Participants in the Plan shall be those Eligible Employees who, in the judgment of the Committee, are performing, or during the term of their incentive arrangement will perform, vital services in the management, operation and development of the Company or an Affiliated Corporation, and significantly contribute, or are expected to significantly contribute, to the achievement of the Company's long-term corporate economic objectives. Participants may be granted from time to time one or more Options; provided, however, that the grant of each such Option shall be separately approved by the Committee, and receipt of one such Option shall not result in automatic receipt of any other Option. Upon determination by the Committee that an Option is to be granted to a Participant, written notice shall be given to such person, specifying the terms, conditions, rights and duties related thereto. Each Participant shall, if required by the Committee, enter into an agreement with the Company, in such form as the Committee shall determine and which is consistent with the provisions of the Plan, specifying such terms, conditions, rights and duties. Options shall be deemed to be granted as of the date specified in the grant resolution of the Committee, which date shall be the date of any related agreement with the Participant. In the event of any inconsistency between the provisions of the Plan and any such agreement entered into hereunder, the provisions of the Plan shall govern. SECTION 7 STOCK OPTIONS 7.1 Grant of Stock Options. Coincident with or following designation for participation in the Plan, an Eligible Employee may be granted one or more Options. Grants of Options under the Plan shall be made by the Committee. In no event shall the exercise of one Option affect the right to exercise any other Option or affect the number of shares of Stock for which any other Option may be exercised, except as provided in subsection 7.2(j) hereof. During the life of the Plan, no Eligible Employee may be granted Options which in the aggregate pertain to in excess of 25 percent of the total shares of Stock authorized under the Plan. 7.2 Stock Option Agreements. Each Option granted under the Plan shall be evidenced by a written stock option agreement which shall be entered into by the Company and the Participant to whom the Option is granted (the "Stock Option Agreement"), and which shall contain the following terms and conditions, as well as such other terms and conditions, not inconsistent therewith, as the Committee may consider appropriate in each case. (a) Number of Shares. Each Stock Option Agreement shall state that it covers a specified number of shares of Stock, as determined by the Committee. (b) Price. The price at which each share of Stock covered by an Option may be purchased shall be determined in each case by the Committee and set forth in the Stock Option Agreement, but in no event shall the price be less than the Fair Market Value of the Stock on the date the Option is granted. (c) Duration of Options; Employment Required For Exercise. Each Stock Option Agreement shall state the period of time, determined by the Committee, within which the Option may be exercised by the Participant (the "Option Period"). The Option Period must end, in all cases, not more than ten years from the date an Option is granted. Except as otherwise provided in Sections 5 and 8 and subsection 7.2(d)(iv) hereof, each Option granted under the Plan shall become exercisable in increments such that 25 percent of the Option will become exercisable on each of the four subsequent one-year anniversaries of the date the Option is granted, but each such additional 25-percent increment shall become exercisable only if the Participant has been continuously employed by the Company from the date the Option is granted through the date on which each such additional 25-percent increment becomes exercisable. (d) Termination of Employment, Death, Disability, Etc. Each Stock Option Agreement shall provide as follows with respect to the exercise of the Option upon termination of the employment or the death of the Participant: (i) If the employment of the Participant by the Company is terminated within the Option Period for cause, as determined by the Company, the Option shall thereafter be void for all purposes. As used in this subsection 7.2(d), "cause" shall mean a gross violation, as determined by the Company, of the Company's established policies and procedures, provided that the effect of this subsection 7.2(d) shall be limited to determining the consequences of a termination and that nothing in this subsection 7.2(d) shall restrict or otherwise interfere with the Company's discretion with respect to the termination of any employee. (ii) If the Participant retires from employment by the Company on or after attaining age 60, the Option may be exercised by the Participant within 36 months following his or her retirement (provided that such exercise must occur within the Option Period), but not thereafter. In the event of the Participant's death during such 36-month period, each Option may be exercised by those entitled to do so in the manner referred to in (iv) below. In any such case, the Option may be exercised only as to the shares as to which the Option had become exercisable on or before the date of the Participant's retirement. (iii) If the Participant becomes disabled (as determined pursuant to the Company's Long-Term Disability Plan or any successor plan), during the Option Period while still employed, or within the three-month period referred to in (v) below, or within the 36-month period referred to in (ii) above, the Option may be exercised by the Participant or by his or her guardian or legal representative, within twelve months following the Participant's disability, or within the 36-month period referred to in (ii) above if applicable and if longer (provided that such exercise must occur within the Option Period), but not thereafter. In the event of the Participant's death during such twelve-month period, each Option may be exercised by those entitled to do so in the manner referred to in (iv) below. In any such case, the Option may be exercised only as to the shares of Stock as to which the Option had become exercisable on or before the date of the Participant's disability. (iv) In the event of the Participant's death while still employed by the Company, each Option of the deceased Participant may be exercised by those entitled to do so under the Participant's will or under the laws of descent and distribution within twelve months following the Participant's death (provided that in any event such exercise must occur within the Option Period), but not thereafter, as to all shares of Stock which are subject to such Option, including each 25-percent increment of the Option, if any, which has not yet become exercisable at the time of the Participant's death. In the event of the Participant's death within the 36-month period referred to in (ii) above or within the twelve-month period referred to in (iii) above, each Option of the deceased Participant that is exercisable at the time of death may be exercised by those entitled to do so under the Participant's will or under the laws of descent and distribution within twelve months following the Participant's death or within the 36-month period referred to in (ii) above, if applicable and if longer (provided that in any event such exercise must occur within the Option Period). The provisions of this paragraph (iv) of subsection 7.2(d) shall be applicable to each Stock Option Agreement as if set forth therein word for word. Each Stock Option Agreement executed by the Company prior to the adoption of this provision shall be deemed amended to include the provisions of this paragraph and all Options granted pursuant to such Stock Option Agreements shall be exercisable as provided herein. (v) If the employment of the Participant by the Company is terminated (which for this purpose means that the Participant is no longer employed by the Company or by an Affiliated Corporation) within the Option Period for any reason other than cause, the Participant's retirement on or after attaining age 60, or the Participant's disability or death, the Option may be exercised by the Participant within three months following the date of such termination (provided that such exercise must occur within the Option Period), but not thereafter. In any such case, the Option may be exercised only as to the shares as to which the Option had become exercisable on or before the date of termination of the Participant's employment. (e) Transferability. Each Stock Option Agreement shall provide that the Option granted therein is not transferable by the Participant except by will or pursuant to the laws of descent and distribution, and that such Option is exercisable during the Participant's lifetime only by him or her, or in the event of the Participant's disability or incapacity, by his or her guardian or legal representative. (f) Agreement to Continue in Employment. Each Stock Option Agreement shall contain the Participant's agreement to remain in the employment of the Company, at the pleasure of the Company, for a continuous period of at least one year after the date of such Stock Option Agreement, at the salary rate in effect on the date of such agreement or at such changed rate as may be fixed, from time to time, by the Company. (g) Exercise, Payments, Etc. (i) Each Stock Option Agreement shall provide that the method for exercising the Option granted therein shall be by delivery to the Office of the Secretary of the Company or to the Administrative Agent of written notice specifying the number of shares of Stock with respect to which such Option is exercised and payment to the Company of the aggregate Option Price. Such notice shall be in a form satisfactory to the Committee and shall specify the particular Options (or portions thereof) which are being exercised and the number of shares of Stock with respect to which the Options are being exercised. The exercise of the Option shall be deemed effective on the date such notice is received by the Office of the Secretary or by the Administrative Agent and payment is made to the Company of the aggregate Option Price (the "Exercise Date"); however, if payment of the aggregate Option Price is made pursuant to a sale of shares of Stock as contemplated by subsection 7.2(g)(iii)(F) below, the Exercise Date shall be deemed to be the date of such sale. If requested by the Company, such notice shall contain the Participant's representation that he or she is purchasing the Stock for investment purposes only and his or her agreement not to sell any Stock so purchased in any manner that is in violation of the Securities Act of 1933, as amended, or any applicable state law, and such restriction, or notice thereof, shall be placed on the certificates representing the Stock so purchased. The purchase of such Stock shall take place upon delivery of such notice to the Office of the Secretary or to the Administrative Agent, at which time the aggregate Option Price shall be paid in full to the Company by any of the methods or any combination of the methods set forth in 7.2(g)(iii) below. (ii) Except as referenced below in connection with the Deferred Delivery Plan, the shares of Stock to which the Participant is entitled as a result of the exercise of the Option shall be issued by the Company and (A) delivered by electronic means to an account designated by the Participant, or (B) delivered to the Participant in the form of a properly executed certificate or certificates representing such shares of Stock. If shares of Stock and/or Depositary Shares are used to pay all or part of the aggregate Option Price, the Company shall issue and deliver to the Participant the additional shares of Stock, in excess of the aggregate Option Price or portion thereof paid using shares of Stock or Depositary Shares, to which the Participant is entitled as a result of the Option exercise. If the Participant exercising an Option (x) is eligible for participation in the Deferred Delivery Plan, (y) pays the aggregate Option Price pursuant to 7.2(g)(iii)(A), (B), (C), (D) or (E) below, and (z) has made an irrevocable election at least six months prior to the Exercise Date as required under the Deferred Delivery Plan, the income resulting from the Option exercise shall be deferred into the Participant's Deferred Delivery Plan account and no additional shares of Stock shall be delivered to the Participant. The income resulting from the Option exercise may not be deferred into the Participant's Deferred Delivery Plan account except to the extent that the Option was vested by December 31, 2004, the deferral election was made by December 31, 2004, and the deferral into the Deferred Delivery Plan occurs before January 1, 2006. (iii) the aggregate Option Price shall be paid by any of the following methods or any combination of the following methods: (A) in cash, including the wire transfer of funds in U.S. dollars to one of the Company's bank accounts located in the United States, with such bank account to be designated from time to time by the Company; (B) by personal, certified or cashier's check payable in U.S. dollars to the order of the Company; (C) by delivery to the Company or the Administrative Agent of certificates representing a number of shares of Stock then owned by the Participant, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the aggregate Option Price of the Option being exercised, properly endorsed for transfer to the Company; provided that the shares of Stock used for this purpose must have been owned by the Participant for a period of at least six months; (D) by certification or attestation to the Company or the Administrative Agent of the Participant's ownership (as of the Exercise Date) of a number of shares of Stock and/or Depositary Shares, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the aggregate Option Price of the Option being exercised, provided that the shares of Stock and/or Depositary Shares used for this purpose have been owned by the Participant for a period of at least six months; (E) if the income resulting from the Option Exercise is to be deferred into the Participant's Deferred Delivery Plan account, by certification or attestation to the Company or the Administrative Agent of the Participant's ownership (as of the Exercise Date) of a number of vested Stock Units held in the Participant's Deferred Delivery Plan account, the equivalent aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the aggregate Option Price of the Option being exercised, provided that the Stock Units used for this purpose were vested as of the Exercise Date; or (F) by delivery to the Company or the Administrative Agent of a properly executed notice of exercise together with irrevocable instructions to a broker to promptly deliver to the Company, by wire transfer or check as noted in (A) and (B) above, the amount of the proceeds of the sale of all or a portion of the Stock or of a loan from the broker to the Participant necessary to pay the aggregate Option Price. (iv) For purposes of the Plan, the income resulting from an Option exercise shall be based on the Fair Market Value of the Stock for the Exercise Date; however, if payment of the aggregate Option Price is made pursuant to a sale of shares of Stock as contemplated by subsection 7.2(g)(iii)(F) hereof, the Fair Market Value shall be deemed to be the per share sale price and the Exercise Date shall be deemed to be the date of such sale. (h) Date of Grant. An Option shall be considered as having been granted on the date specified in the grant resolution of the Committee. (i) Tax Withholding. Each Stock Option Agreement shall provide that, upon exercise of the Option, the Participant shall make appropriate arrangements with the Company to provide for the amount of tax withholding required by Sections 3102 and 3402 or any successor section(s) of the Internal Revenue Code and applicable state and local income tax laws, including payment of such taxes in cash, by check, or as provided in Section 13.2 hereof. (j) Adjustment of Options. Subject to the provisions of Sections 4, 5, 7, 8 and 12 hereof, the Committee may make any adjustment in the number of shares of Stock covered by, or the terms of an outstanding Option and a subsequent granting of an Option, by amendment or by substitution for an outstanding Option; however, except as provided in Sections 4, 5, 8 and 12 hereof, the Committee may not adjust the Option Price of any outstanding Option. Such amendment or substitution may result in terms and conditions (including the number of shares of Stock covered, vesting schedule or Option Period) that differ from the terms and conditions of the original Option. The Committee may not, however, adversely affect the rights of any Participant to previously granted Options without the consent of such Participant. If such action is effected by amendment, the effective date of such amendment will be the date of grant of the original Option. 7.3 Stockholder Privileges. No Participant shall have any rights as a stockholder with respect to any shares of Stock covered by an Option until the Participant becomes the holder of record of such Stock. Except as provided in Section 4 hereof, no adjustments shall be made for dividends or other distributions or other rights as to which there is a record date preceding the date on which such Participant becomes the holder of record of such Stock. SECTION 8 CHANGE OF CONTROL 8.1 In General. In the event of the occurrence of a change of control of the Company as defined in Section 8.3 hereof, all outstanding Options shall become automatically vested, without further action by the Committee or the Board, so as to make all such Options fully vested and exercisable as of the date of such change of control. 8.2 Limitation on Payments. If the provisions of this Section 8 would result in the receipt by any Participant of a payment within the meaning of Section 280G or any successor section(s) of the Internal Revenue Code, and the regulations promulgated thereunder, and if the receipt of such payment by any Participant would, in the opinion of independent tax counsel of recognized standing selected by the Company, result in the payment by such Participant of any excise tax provided for in Sections 280G and 4999 or any successor section(s) of the Internal Revenue Code, then the amount of such payment shall be reduced to the extent required, in the opinion of independent tax counsel, to prevent the imposition of such excise tax; provided, however, that the Committee, in its sole discretion, may authorize the payment of all or any portion of the amount of such reduction to the Participant. 8.3 Definition. For purposes of the Plan, a "change of control" shall mean any of the events specified in the Company's Income Continuance Plan or any successor plan which constitute a change of control within the meaning of such plan. SECTION 9 RIGHTS OF EMPLOYEES, PARTICIPANTS 9.1 Employment. Nothing contained in the Plan or in any Option granted under the Plan shall confer upon any Participant any right with respect to the continuation of his or her employment by the Company or any Affiliated Corporation, or interfere in any way with the right of the Company or any Affiliated Corporation, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the level of the Participant's compensation from the level in existence at the time of the grant of an Option. Whether an authorized leave of absence, or absence in military or government service, shall constitute a termination of employment shall be determined by the Committee at the time. 9.2 Nontransferability. No right or interest of any Participant in an Option granted pursuant to the Plan shall be assignable or transferable during the lifetime of the Participant, either voluntarily or involuntarily, or subjected to any lien, directly or indirectly, by operation of law, or otherwise, including execution, levy, garnishment, attachment, pledge or bankruptcy. In the event of a Participant's death, a Participant's rights and interests in Options shall, to the extent provided in Section 7 hereof, be transferable by testamentary will or the laws of descent and distribution, and payment of any amounts due under the Plan shall be made to, and exercise of any Options may be made by, the Participant's legal representatives, heirs or legatees. If, in the opinion of the Committee, a person entitled to payments or to exercise rights with respect to the Plan is disabled from caring for his or her affairs because of mental condition, physical condition or age, payment due such person may be made to, and such rights shall be exercised by, such person's guardian, conservator or other legal personal representative upon furnishing the Committee with evidence of such status satisfactory to the Committee. SECTION 10 GENERAL RESTRICTIONS 10.1 Investment Representations. The Company may require a Participant, as a condition of exercising an Option, to give written assurances in substance and form satisfactory to the Company and its counsel to the effect that such person is acquiring the Stock subject to the Option for his own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws. 10.2 Compliance with Securities Laws. Each Option shall be subject to the requirement that, if at any time counsel to the Company shall determine that the listing, registration or qualification of the shares of Stock subject to such Option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, is necessary as a condition of, or in connection with, the issuance or purchase of shares of Stock thereunder, such Option may not be accepted or exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained on conditions acceptable to the Committee. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration, qualification, consent or approval. SECTION 11 OTHER EMPLOYEE BENEFITS The amount of any income deemed to be received by a Participant as a result of an Option exercise shall not constitute "earnings" or "compensation" with respect to which any other employee benefits of such Participant are determined including, without limitation benefits under any pension, profit sharing, life insurance or salary continuation plan. SECTION 12 PLAN AMENDMENT, MODIFICATION AND TERMINATION The Board may at any time terminate, and from time to time may amend or modify the Plan provided, however, that no amendment or modification may become effective without approval of the amendment or modification by the Company's stockholders if stockholder approval is required to enable the Plan to satisfy any applicable statutory or regulatory requirements unless the Company, on the advice of counsel, determines that stockholder approval is otherwise necessary or desirable. No amendment, modification or termination of the Plan shall in any manner adversely affect any Option theretofore granted under the Plan, without the consent of the Participant holding such Option. The Committee shall have the authority to adopt such modifications, procedures and subplans as may be necessary or desirable to comply with the provisions of the laws (including, but not limited to, tax laws and regulations) of countries other than the United States in which the Company may operate, so as to assure the viability of the benefits of the Plan to Participants employed in such countries. SECTION 13 WITHHOLDING 13.1 Withholding Requirement. The Company's obligations to deliver shares of Stock upon the exercise of an Option, or to defer income resulting from an Option exercise into the Deferred Delivery Plan, shall be subject to the Participant's satisfaction of all applicable federal, state and local income and other tax withholding requirements. 13.2 Satisfaction of Required Withholding. At the time the Committee grants an Option, it may, in its sole discretion, grant the Participant an election to pay all such amounts of required tax withholding, or any part thereof: (a) by the delivery to the Company or the Administrative Agent of a number of shares of Stock then owned by the Participant, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the amount required to be withheld, provided that such shares have been held by the Participant for a period of at least six months; (b) by certification or attestation to the Company or the Administrative Agent of the Participant's ownership (as of the Exercise Date) of a number of shares of Stock and/or Depositary Shares, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the amount required to be withheld, provided that such shares of Stock and/or Depositary Shares have been owned by the Participant for a period of at least six months; (c) if the income resulting from the Option exercise is to be deferred into the Participant's Deferred Delivery Plan account, by certification or attestation to the Company or the Administrative Agent of the Participant's ownership (as of the Exercise Date) of a number of vested Stock Units held in the Participant's Deferred Delivery Plan account, the equivalent aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the amount required to be withheld, provided that such Stock Units were vested as of the Exercise Date; or (d) by the Company or the Administrative Agent withholding from the shares of Stock otherwise issuable to the Participant upon exercise of the Option, a number of shares of Stock, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the amount required to be withheld. Any such elections by Participants to have shares of Stock withheld for this purpose will be subject to the following restrictions: (i) all elections shall be made on or prior to the Exercise Date; and (ii) all elections shall be irrevocable. 13.3 Excess Withholding. At the time the Committee grants an Option, it may, in its sole discretion, grant the Participant an election to pay additional or excess amounts of tax withholding, beyond the required amounts and up to the Participant's marginal tax rate: (a) by delivery to the Company or the Administrative Agent of a number of Shares of Stock then owned by the Participant, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than such excess withholding amount, provided that such shares of Stock have been owned by the Participant for a period of at least six months; or (b) by certification or attestation to the Company or the Administrative Agent of the Participant's ownership (as of the Exercise Date) of a number of shares of Stock and/or Depositary Shares, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than such excess withholding amount, provided that such shares of Stock and/or Depositary Shares have been owned by the Participant for a period of at least six months. 13.4 Section 16 Requirements. If the Participant is an officer or director of the Company within the meaning of Section 16 or any successor section(s) of the 1934 Act ("Section 16"), the Participant must satisfy the requirements of such Section 16 and any applicable rules and regulations thereunder with respect to the use of shares of Stock, Depositary Shares and/or Stock Units to satisfy such tax withholding obligation. SECTION 14 REQUIREMENTS OF LAW 14.1 Requirements of Law. The issuance of Stock and the payment of cash pursuant to the Plan shall be subject to all applicable laws, rules and regulations. 14.2 Federal Securities Laws Requirements. If a Participant is an officer or director of the Company within the meaning of Section 16, Options granted hereunder shall be subject to all conditions required under Rule 16b-3, or any successor rule(s) promulgated under the 1934 Act, to qualify the Option for any exception from the provisions of Section 16 available under such Rule. Such conditions are hereby incorporated herein by reference and shall be set forth in the Stock Option Agreement with the Participant which describes the Option. 14.3 Governing Law. The Plan and all Stock Option Agreements hereunder shall be construed in accordance with and governed by the laws of the State of Texas. SECTION 15 DURATION OF THE PLAN The Plan shall terminate at such time as may be determined by the Board, and no Option shall be granted after such termination. If not sooner terminated under the preceding sentence, the Plan shall fully cease and expire at midnight on February 6, 2003. Options outstanding at the time of the Plan termination shall continue to be exercisable in accordance with the Stock Option Agreement pertaining to each such Option, as such Stock Option Agreement may be modified pursuant to Section 12. Dated: September 15, 2005 ATTEST: APACHE CORPORATION /s/ Cheri L. Peper By: /s/ Jeffrey M. Bender - ------------------------------------- ------------------------------------ Cheri L. Peper Jeffrey M. Bender Corporate Secretary Vice President, Human Resources EX-10.3 4 h29394exv10w3.txt 2000 STOCK OPTION PLAN AS AMENDED Exhibit 10.3 APACHE CORPORATION 2000 STOCK OPTION PLAN (AS AMENDED AND RESTATED SEPTEMBER 15, 2005, EFFECTIVE AS OF JANUARY 1, 2005) SECTION 1 INTRODUCTION 1.1 Establishment. Apache Corporation, a Delaware corporation (hereinafter referred to, together with its Affiliated Corporations (as defined in Section 2.1 hereof) as the "Company" except where the context otherwise requires), hereby establishes the Apache Corporation 2000 Stock Option Plan (the "Plan") for Eligible Employees (as defined in Section 2.1 hereof). The Plan permits the grant of stock options to Eligible Employees selected by the Committee (as defined in Section 2.1 hereof). 1.2 Purposes. The purposes of the Plan are to provide the Eligible Employees designated by the Committee for participation in the Plan with added incentives to continue in the long-term service of the Company and to create in such employees a more direct interest in the future success of the operations of the Company by relating incentive compensation to increases in stockholder value, so that the income of those employees is more closely aligned with the interests of the Company's stockholders. The Plan is also designed to attract outstanding individuals and to retain and motivate Eligible Employees by providing an opportunity for investment in the Company. 1.3 Effective Date. The Effective Date of the Plan (the "Effective Date") is February 10, 2000. SECTION 2 DEFINITIONS 2.1 Definitions. The following terms shall have the meanings set forth below: (a) "Administrative Agent" means any designee or agent that may be appointed by the Committee pursuant to Section 3.1(b) hereof. 1 (b) "Affiliated Corporation" means any corporation or other entity (including but not limited to a partnership) which is affiliated with Apache Corporation through stock ownership or otherwise and is treated as a common employer under the provisions of Sections 414(b) and (c) or any successor section(s) of the Internal Revenue Code. (c) "Board" means the Board of Directors of the Company. (d) "Committee" means the Stock Option Plan Committee of the Board, which is empowered hereunder to take actions in the administration of the Plan. The Committee shall be constituted at all times as to permit the Plan to comply with Rule 16b-3 or any successor rule(s) promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"). (e) "Deferred Delivery Plan" means the Company's Deferred Delivery Plan, effective as of February 10, 2000, as it may be amended from time to time, or any successor plan. (f) "Depositary Shares" means the Depositary shares representing the Company's preferred stock convertible into Stock. (g) "Eligible Employees" means full-time employees (including, without limitation, officers and directors who are also employees), and certain part-time employees, of the Company or any division thereof. (h) "Expiration Date" means the date on which the Option Period (as defined in subsection 7.2(c) hereof) ends. (i) "Fair Market Value" means the per share closing price of the Stock or Depositary Shares, as applicable, as reported on the New York Stock Exchange, Inc. Composite Transactions Reporting System for a particular date. If on such date there are no transactions in the Stock or Depositary Shares, as applicable, the Fair Market Value shall be determined as of the immediately preceding date on which there were transactions in the Stock or Depositary Shares, as applicable. (j) "Internal Revenue Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. (k) "Option" means a right to purchase shares of Stock at a stated price for a specified period of time. All Options granted under the Plan shall be Options which are not "incentive stock options" as described in Section 422 or any successor section(s) of the Internal Revenue Code. (l) "Option Price" means the price at which shares of Stock subject to an Option may be purchased, determined in accordance with subsection 7.2(b) hereof. (m) "Participant" means an Eligible Employee designated by the Committee from time to time during the term of the Plan to receive one or more Options under the Plan. (n) "Reload Option" has the meaning set forth in subsection 7.4 hereof. (o) "Stock" means the U.S. $0.625 par value Common Stock of the Company. (p) "Stock Units" means investment units under the Deferred Delivery Plan, each of which is deemed to be equivalent to one share of Stock. 2.2 Headings; Gender and Number. The headings contained in the Plan are for reference purposes only and shall not affect in any way the meaning or interpretation of the Plan. Except when otherwise indicated by the context, the masculine gender shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural. SECTION 3 PLAN ADMINISTRATION 3.1 Administration by the Committee. (a) The Plan shall be administered by the Committee. In accordance with the provisions of the Plan, the Committee shall, in its sole discretion, select the Participants from among the Eligible Employees, determine the Options to be granted pursuant to the Plan, the number of shares of Stock to be issued thereunder, the time at which such Options are to be granted, fix the Option Price, and establish such other terms and requirements as the Committee may deem necessary or desirable and consistent with the terms of the Plan. The Committee shall determine the form or forms of the agreements with Participants which shall evidence the particular provisions, terms, conditions, rights and duties of the Company and the Participants with respect to Options granted pursuant to the Plan, which provisions need not be identical except as may be provided herein. (b) The Committee may from time to time adopt such rules and regulations for carrying out the purposes of the Plan as it may deem proper and in the best interests of the Company. The Committee may appoint an Administrative Agent, who need not be a member of the Committee or an employee of the Company, to assist the Committee in administration of the Plan and to whom it may delegate such powers as the Committee deems appropriate, except that the Committee shall determine any dispute. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan, or in any agreement entered into hereunder, in the manner and to the extent it shall deem expedient and it shall be the sole and final judge of such expediency. No member of the Committee shall be liable for any action or determination made in good faith. The determination, interpretations and other actions of the Committee pursuant to the provisions of the Plan shall be binding and conclusive for all purposes and on all persons. SECTION 4 STOCK SUBJECT TO THE PLAN 4.1 Number of Shares. Subject to Sections 7.1 and 7.4 hereof and to adjustment pursuant to Section 4.3 hereof, 3,000,000 shares of Stock (adjusted to 6,300,000 shares of Stock for (i) the Company's ten-percent stock dividend, record date December 31, 2001, paid January 21, 2002, (ii) the Company's five-percent stock dividend, record date March 12, 2003, paid April 2, 2003, and (iii) the Company's two-for-one stock split, record date December 31, 2003, distributed January 14, 2004) are authorized for issuance under the Plan in accordance with the provisions of the Plan and subject to such restrictions or other provisions as the Committee may from time to time deem necessary. This authorization may be increased from time to time by approval of the Board and the stockholders of the Company if, on the advice of counsel for the Company, such stockholder approval is required. Shares of Stock which may be issued upon exercise of Options shall be applied to reduce the maximum number of shares of Stock remaining available for use under the Plan. The Company shall at all times during the term of the Plan and while any Options are outstanding retain as authorized and unissued Stock, or as Stock in the Company's treasury, at least the number of shares from time to time required under the provisions of the Plan, or otherwise assure itself of its ability to perform its obligations hereunder. 4.2 Other Shares of Stock. Any shares of Stock that are subject to an Option which expires, is forfeited, is cancelled, or for any reason is terminated unexercised, and any shares of Stock that for any other reason are not issued to a Participant or are forfeited shall automatically become available for use under the Plan. 4.3 Adjustments for Stock Split, Stock Dividend, etc. If the Company shall at any time increase or decrease the number of its outstanding shares of Stock or change in any way the rights and privileges of such shares by means of the payment of a Stock dividend or any other distribution upon such shares payable in Stock, or through a Stock split, subdivision, consolidation, combination, reclassification or recapitalization involving the Stock then in relation to the Stock that is affected by one or more of the above events, the numbers, rights and privileges of the following shall be, in each case, equitably and proportionally adjusted to take into account the occurrence of any of the above events, (i) the shares of Stock as to which Options may be granted under the Plan; (ii) the shares of Stock then included in each outstanding Option granted hereunder; and (iii) the Option Price for each outstanding Option granted hereunder. 4.4 Dividend Payable in Stock of Another Corporation, Etc. If the Company shall at any time pay or make any dividend or other distribution upon the Stock payable in securities or other property (except money or Stock), a proportionate part of such securities or other property shall be set aside and delivered to any Participant then holding an Option for the particular type of Stock for which the dividend or other distribution was made, upon exercise thereof. Prior to the time that any such securities or other property are delivered to a Participant in accordance with the foregoing, the Company shall be the owner of such securities or other property and shall have the right to vote the securities, receive any dividends payable on such securities, and in all other respects shall be treated as the owner. If securities or other property which have been set aside by the Company in accordance with this Section are not delivered to a Participant because an Option is not exercised, then such securities or other property shall remain the property of the Company and shall be dealt with by the Company as it shall determine in its sole discretion. 4.5 Other Changes in Stock. In the event there shall be any change, other than as specified in Sections 4.3 and 4.4 hereof, in the number or kind of outstanding shares of Stock or of any stock or other securities into which the Stock shall be changed or for which it shall have been exchanged, and if the Committee shall in its discretion determine that such change equitably requires an adjustment in the number or kind of shares subject to outstanding Options or which have been reserved for issuance pursuant to the Plan but are not then subject to an Option, then such adjustments shall be made by the Committee and shall be effective for all purposes of the Plan and on each outstanding Option that involves the particular type of stock for which a change was effected. 4.6 Rights to Subscribe. If the Company shall at any time grant to the holders of its Stock rights to subscribe pro rata for additional shares thereof or for any other securities of the Company or of any other corporation, there shall be reserved with respect to the shares then under Option to any Participant of the particular class of Stock involved the Stock or other securities which the Participant would have been entitled to subscribe for if immediately prior to such grant the Participant had exercised his entire Option. If, upon exercise of any such Option, the Participant subscribes for the additional shares or other securities, the aggregate Option Price shall be increased by the amount of the price that is payable by the Participant for such additional shares or other securities. 4.7 General Adjustment Rules. No adjustment or substitution provided for in this Section 4 shall require the Company to sell a fractional share of Stock under any Option, or otherwise issue a fractional share of Stock, and the total substitution or adjustment with respect to each Option shall be limited by deleting any fractional share. In the case of any such substitution or adjustment, the aggregate Option Price for the shares of Stock then subject to the Option shall remain unchanged but the Option Price per share under each such Option shall be equitably adjusted by the Committee to reflect the greater or lesser number of shares of Stock or other securities into which the Stock subject to the Option may have been changed. 4.8 Determination by the Committee, Etc. Adjustments under this Section 4 shall be made by the Committee, whose determinations with regard thereto shall be final and binding upon all parties. SECTION 5 REORGANIZATION OR LIQUIDATION In the event that the Company is merged or consolidated with another corporation and the Company is not the surviving corporation, or if all or substantially all of the assets or more than 20 percent of the outstanding voting stock of the Company is acquired by any other corporation, business entity or person, or in case of a reorganization (other than a reorganization under the United States Bankruptcy Code) or liquidation of the Company, and if the provisions of Section 8 hereof do not apply, the Committee, or the board of directors of any corporation assuming the obligations of the Company, shall, as to the Plan and outstanding Options either (i) make appropriate provision for the adoption and continuation of the Plan by the acquiring or successor corporation and for the protection of any such outstanding Options by the substitution on an equitable basis of appropriate stock of the Company or of the merged, consolidated or otherwise reorganized corporation which will be issuable with respect to the Stock, provided that no additional benefits shall be conferred upon the Participants holding such Options as a result of such substitution, and the excess of the aggregate Fair Market Value of the shares subject to the Options immediately after such substitution over the aggregate Option Price thereof is not more than the excess of the aggregate Fair Market Value of the shares subject to such Options immediately before such substitution over the aggregate Option Price thereof, or (ii) upon written notice to the Participants, provide that all unexercised Options shall be exercised within a specified number of days of the date of such notice or such Options will be terminated. In the latter event, the Committee shall accelerate the vesting dates of outstanding Options so that all Options become fully vested and exercisable prior to any such event. SECTION 6 PARTICIPATION Participants in the Plan shall be those Eligible Employees who, in the judgment of the Committee, are performing, or during the term of their incentive arrangement will perform, vital services in the management, operation and development of the Company or an Affiliated Corporation, and significantly contribute, or are expected to significantly contribute, to the achievement of the Company's long-term corporate economic objectives. Participants may be granted from time to time one or more Options; provided, however, that the grant of each such Option shall be separately approved by the Committee, and receipt of one such Option shall not result in automatic receipt of any other Option. Upon determination by the Committee that an Option is to be granted to a Participant, written notice shall be given to such person, specifying the terms, conditions, rights and duties related thereto. Each Participant shall, if required by the Committee, enter into an agreement with the Company, in such form as the Committee shall determine and which is consistent with the provisions of the Plan, specifying such terms, conditions, rights and duties. Options shall be deemed to be granted as of the date specified in the grant resolution of the Committee, which date shall be the date of any related agreement with the Participant. In the event of any inconsistency between the provisions of the Plan and any such agreement entered into hereunder, the provisions of the Plan shall govern. SECTION 7 STOCK OPTIONS 7.1 Grant of Stock Options. Coincident with or following designation for participation in the Plan, an Eligible Employee may be granted one or more Options. Grants of Options under the Plan shall be made by the Committee. In no event shall the exercise of one Option affect the right to exercise any other Option or affect the number of shares of Stock for which any other Option may be exercised, except as provided in subsection 7.2(j) hereof. During the duration of the Plan, no Eligible Employee may be granted Options which in the aggregate cover in excess of 25 percent of the total shares of Stock authorized under the Plan. 7.2 Stock Option Agreements. Each Option granted under the Plan shall be evidenced by a written stock option agreement which shall be entered into by the Company and the Participant to whom the Option is granted (the "Stock Option Agreement"), and which shall contain the following terms and conditions, as well as such other terms and conditions, not inconsistent therewith, as the Committee may consider appropriate in each case: (a) Number of Shares. Each Stock Option Agreement shall state that it covers a specified number of shares of Stock, as determined by the Committee. (b) Price. The price at which each share of Stock covered by an Option may be purchased shall be determined in each case by the Committee and set forth in the Stock Option Agreement, but in no event shall the price be less than the Fair Market Value of the Stock on the date the Option is granted. (c) Duration of Options; Employment Required For Exercise. Each Stock Option Agreement shall state the period of time, determined by the Committee, within which the Option may be exercised by the Participant (the "Option Period"). The Option Period must end, in all cases, not more than ten years from the date an Option is granted. Except as otherwise provided in Sections 5 and 8 and subsections 7.2(d)(iv) and 7.4(a) hereof, each Option granted under the Plan shall become exercisable in increments such that 25 percent of the Option becomes exercisable on each of the four subsequent one-year anniversaries of the date the Option is granted, provided that each such additional 25-percent increment shall become exercisable only if the Participant has been continuously employed by the Company from the date the Option is granted through the date on which each such additional 25-percent increment becomes exercisable. (d) Termination of Employment, Death, Disability, Etc. Each Stock Option Agreement shall provide as follows with respect to the exercise of the Option upon termination of the employment or the death of the Participant: (i) If the employment of the Participant by the Company is terminated within the Option Period for cause, as determined by the Company, the Option shall thereafter be void for all purposes. As used in this subsection 7.2(d), "cause" shall mean a gross violation, as determined by the Company, of the Company's established policies and procedures, provided that the effect of this subsection 7.2(d) shall be limited to determining the consequences of a termination and that nothing in this subsection 7.2(d) shall restrict or otherwise interfere with the Company's discretion with respect to the termination of any employee. (ii) If the Participant retires from employment by the Company on or after attaining age 60, the Option may be exercised by the Participant within 36 months following his or her retirement (provided that such exercise must occur within the Option Period), but not thereafter. In the event of the Participant's death during such 36-month period, each Option may be exercised by those entitled to do so in the manner referred to in (iv) below. In any such case, the Option may be exercised only as to the shares as to which the Option had become exercisable on or before the date of the Participant's retirement. (iii) If the Participant becomes disabled (as determined pursuant to the Company's Long-Term Disability Plan or any successor plan), during the Option Period while still employed, or within the three-month period referred to in subsection 7.2(d)(v) below, or within the 36-month period referred to in subsection 7.2(d)(ii) above, the Option may be exercised by the Participant or by his or her guardian or legal representative, within twelve months following the Participant's disability, or within the 36-month period referred to in subsection 7.2(d)(ii) above if applicable and if longer (provided that such exercise must occur within the Option Period), but not thereafter. In the event of the Participant's death during such twelve-month period, each Option may be exercised by those entitled to do so in the manner referred to in subsection 7.2(d)(iv) below. In any such case, the Option may be exercised only as to the shares of Stock as to which the Option had become exercisable on or before the date of the Participant's disability. (iv) In the event of the Participant's death while still employed by the Company, each Option of the deceased Participant may be exercised by those entitled to do so under the Participant's will or under the laws of descent and distribution within twelve months following the Participant's death (provided that in any event such exercise must occur within the Option Period), but not thereafter, as to all shares of Stock which are subject to such Option, including each 25- percent increment of the Option, if any, which has not yet become exercisable at the time of the Participant's death. In the event of the Participant's death within the 36-month period referred to in subsection 7.2(d)(ii) above or within the twelve-month period referred to in subsection 7.2(d)(iii) above, each Option of the deceased Participant that is exercisable at the time of death may be exercised by those entitled to do so under the Participant's will or under the laws of descent and distribution within twelve months following the Participant's death or within the 36-month period referred to in subsection 7.2(d)(ii) above, if applicable and if longer (provided that in any event such exercise must occur within the Option Period). The provisions of this paragraph (iv) of subsection 7.2(d) shall be applicable to each Stock Option Agreement as if set forth therein word for word. Each Stock Option Agreement executed by the Company prior to the adoption of this provision shall be deemed amended to include the provisions of this paragraph and all Options granted pursuant to such Stock Option Agreements shall be exercisable as provided herein. (v) If the employment of the Participant by the Company is terminated (which for this purpose means that the Participant is no longer employed by the Company or by an Affiliated Corporation) within the Option Period for any reason other than cause, the Participant's retirement on or after attaining age 60, or the Participant's disability or death, the Option may be exercised by the Participant within three months following the date of such termination (provided that such exercise must occur within the Option Period), but not thereafter. In any such case, the Option may be exercised only as to the shares as to which the Option had become exercisable on or before the date of termination of the Participant's employment. (e) Transferability. Each Stock Option Agreement shall provide that the Option granted therein is not transferable by the Participant except by will or pursuant to the laws of descent and distribution, and that such Option is exercisable during the Participant's lifetime only by him or her, or in the event of the Participant's disability or incapacity, by his or her guardian or legal representative. (f) Agreement to Continue in Employment. Each Stock Option Agreement shall contain the Participant's agreement to remain in the employment of the Company, at the pleasure of the Company, for a continuous period of at least one year after the date of such Stock Option Agreement, at the salary rate in effect on the date of such agreement or at such changed rate as may be fixed, from time to time, by the Company. (g) Exercise, Payments, Etc. (i) Each Stock Option Agreement shall provide that the method for exercising the Option granted therein shall be by delivery to the Office of the Secretary of the Company or to the Administrative Agent of written notice specifying the number of shares of Stock with respect to which such Option is exercised and payment to the Company of the aggregate Option Price. Such notice shall be in a form satisfactory to the Committee and shall specify the particular Options (or portions thereof) which are being exercised and the number of shares of Stock with respect to which the Options are being exercised. The exercise of the Option shall be deemed effective on the date such notice is received by the Office of the Secretary or by the Administrative Agent and payment is made to the Company of the aggregate Option Price (the "Exercise Date"); however, if payment of the aggregate Option Price is made pursuant to a sale of shares of Stock as contemplated by subsection 7.2(g)(iii)(F) below, the Exercise Date shall be deemed to be the date of such sale. If requested by the Company, such notice shall contain the Participant's representation that he or she is purchasing the Stock for investment purposes only and his or her agreement not to sell any Stock so purchased in any manner that is in violation of the Securities Act of 1933, as amended, or any applicable state law, and such restriction, or notice thereof, shall be placed on the certificates representing the Stock so purchased. The purchase of such Stock shall take place upon delivery of such notice to the Office of the Secretary of the Company or to the Administrative Agent, at which time the aggregate Option Price shall be paid in full to the Company by any of the methods or any combination of the methods set forth in subsection 7.2(g)(iii) below. (ii) Except as referenced below in connection with the Deferred Delivery Plan, the shares of Stock to which the Participant is entitled as a result of the exercise of the Option shall be issued by the Company and (A) delivered by electronic means to an account designated by the Participant, or (B) delivered to the Participant in the form of a properly executed certificate or certificates representing such shares of Stock. If shares of Stock and/or Depositary Shares are used to pay all or part of the aggregate Option Price, the Company shall issue and deliver to the Participant the additional shares of Stock, in excess of the aggregate Option Price or portion thereof paid using shares of Stock or Depositary Shares, to which the Participant is entitled as a result of the Option exercise. If the Participant exercising an Option (x) is eligible for participation in the Deferred Delivery Plan, (y) pays the aggregate Option Price pursuant to subsection 7.2(g)(iii)(A), (B), (C), (D) or (E) below, and (z) has made an irrevocable election at least six months prior to the Exercise Date as required under the Deferred Delivery Plan, the income resulting from the Option exercise shall be deferred into the Participant's Deferred Delivery Plan account and no additional shares of Stock shall be delivered to the Participant. The income resulting from the Option exercise may not be deferred into the Participant's Deferred Delivery Plan account except to the extent that the Option was vested by December 31, 2004, the deferral election was made by December 31, 2004, and the deferral into the Deferred Delivery Plan occurs before January 1, 2006. (iii) the aggregate Option Price shall be paid by any of the following methods or any combination of the following methods: (A) in cash, including the wire transfer of funds in U.S. dollars to one of the Company's bank accounts located in the United States, with such bank account to be designated from time to time by the Company; (B) by personal, certified or cashier's check payable in U.S. dollars to the order of the Company; (C) by delivery to the Company or the Administrative Agent of certificates representing a number of shares of Stock then owned by the Participant, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the aggregate Option Price of the Option being exercised, properly endorsed for transfer to the Company, provided that the shares of Stock used for this purpose must have been owned by the Participant for a period of at least six months; (D) by certification or attestation to the Company or the Administrative Agent of the Participant's ownership (as of the Exercise Date) of a number of shares of Stock and/or Depositary Shares, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the aggregate Option Price of the Option being exercised, provided that the shares of Stock and/or Depositary Shares used for this purpose have been owned by the Participant for a period of at least six months; (E) if the income resulting from the Option exercise is to be deferred into the Participant's Deferred Delivery Plan account, by certification or attestation to the Company or the Administrative Agent of the Participant's ownership (as of the Exercise Date) of a number of vested Stock Units held in the Participant's Deferred Delivery Plan account, the equivalent aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the aggregate Option Price of the Option being exercised, provided that the Stock Units used for this purpose were vested as of the Exercise Date; or (F) by delivery to the Company or the Administrative Agent of a properly executed notice of exercise together with irrevocable instructions to a broker to promptly deliver to the Company, by wire transfer or check as noted in subsection 7.2(g)(iii)(A) and (B) above, the amount of the proceeds of the sale of all or a portion of the Stock or of a loan from the broker to the Participant necessary to pay the aggregate Option Price. (iv) For purposes of the Plan, the income resulting from an Option exercise shall be based on the Fair Market Value of the Stock for the Exercise Date; however, if payment of the aggregate Option Price is made pursuant to a sale of shares of Stock as contemplated by subsection 7.2(g)(iii)(F) hereof, the Fair Market Value shall be deemed to be the per share sale price and the Exercise Date shall be deemed to be the date of such sale. (h) Date of Grant. An Option shall be considered as having been granted on the date specified in the grant resolution of the Committee. (i) Tax Withholding. Each Stock Option Agreement shall provide that, upon exercise of the Option, the Participant shall make appropriate arrangements with the Company to provide for the amount of tax withholding required by Sections 3102 and 3402 or any successor section(s) of the Internal Revenue Code and applicable state and local income and other tax laws, including payment of such taxes in cash, by check, or as provided in Section 13.2 hereof. (j) Adjustment of Options. Subject to the provisions of Sections 4, 5, 7, 8 and 12 hereof, the Committee may make any adjustment in the number of shares of Stock covered by, or the terms of an outstanding Option and a subsequent granting of an Option, by amendment or by substitution for an outstanding Option; however, except as provided in Sections 4, 5, 8 and 12 hereof, the Committee may not adjust the Option Price of any outstanding Option. Such amendment or substitution may result in terms and conditions (including the number of shares of Stock covered, vesting schedule or Option Period) that differ from the terms and conditions of the original Option. The Committee may not, however, adversely affect the rights of any Participant to previously granted Options without the consent of such Participant. If such action is effected by amendment, the effective date of such amendment will be the date of grant of the original Option. 7.3 Stockholder Privileges. No Participant shall have any rights as a stockholder with respect to any shares of Stock covered by an Option until the Participant becomes the holder of record of such Stock. Except as provided in Section 4 hereof, no adjustments shall be made for dividends or other distributions or other rights as to which there is a record date preceding the date on which such Participant becomes the holder of record of such Stock. 7.4 Reload Provisions. (a) The Committee shall have the authority, but not an obligation, to include as a part of any Stock Option Agreement provisions under which the Participant shall be granted a further option (a "Reload Option") when the Participant exercises all or part of the Option represented by such Stock Option Agreement on or before February 10, 2005, and pays all or part of the aggregate Option Price and/or required or excess tax withholding pursuant to subsections 7.2(g)(iii)(C) (D) or (E), and/or subsections 13.2(a), (b) or (c), and/or subsections 13.3(a) or (b) hereof. Any Option including such reload provisions shall become exercisable in increments such that 25 percent of the Option becomes exercisable on the dates six months, 12 months, 18 months and 24 months following the date the Option is granted, provided that each such additional 25-percent increment shall become exercisable only if the Participant has been continuously employed by the Company from the date the Option is granted through the date on which such additional 25-percent increment becomes exercisable. (b) Any shares of Stock issued to a Participant as a result of an Option exercise which resulted in the grant of a Reload Option, may not be sold or otherwise disposed of until the term of the original Option has expired or the Participant is no longer employed by the Company or by an Affiliated Corporation. Any Stock Units acquired by a Participant as a result of the deferral of income (pursuant to subsection 7.2(g)(ii) hereof) in connection with an Option exercise which resulted in the grant of a Reload Option, may not be sold or otherwise disposed of until the shares of Stock relating to such Stock Units are distributed under the terms of the Deferred Delivery Plan. (c) A Reload Option shall be granted, without further action of the Committee or the Participant, if one or more of the payment provisions referenced in subsection 7.4(a) above are used and if all of the following are satisfied as of the date of exercise of the underlying Option: (i) the Participant has not previously been granted a Reload Option or there has been a period of more than six months since the Participant was last granted a Reload Option; (ii) no shares of Stock have been sold or otherwise disposed of in breach of the provisions of subsection 7.4(b) above; (iii) the Fair Market Value of the shares of Stock covered by the original Option being exercised is at least ten percent greater than the Option Price for such shares; (iv) the underlying Option is exercised on or before February 10, 2005; and (v) there is a period of more than six months remaining in the term of the original Option. (d) Each Reload Option: (i) shall cover that certain number of shares of Stock equal to the shares or equivalent shares of Stock actually or constructively delivered to the Company as referenced in subsection 7.4(a) above; (ii) shall be deemed to be granted as of the date on which the original Option is exercised and shall have an Option Price of 100 percent of Fair Market Value on such date; (iii) shall become exercisable six months after the date of grant and shall have the same Expiration Date as the original Option; and (iv) except as set forth in subsections 7.4(d)(i), (ii) and (iii) above, and 7.4(e) below, shall have the same terms and conditions as those of the original Option. (e) The Participant may not defer the income from the exercise of a Reload Option into the Participant's Deferred Delivery Plan account except to the extent that (i) the Reload Option was vested by December 31, 2004; (ii) the deferral election was made by December 31, 2004; and (iii) the deferral into the Deferred Delivery Plan occurs before January 1, 2006. SECTION 8 CHANGE OF CONTROL 8.1 In General. In the event of the occurrence of a change of control of the Company, as defined in Section 8.3 hereof, all outstanding Options shall become automatically vested, without further action by the Committee or the Board, so as to make all such Options fully vested and exercisable as of the date of such change of control. 8.2 Limitation on Payments. If the provisions of this Section 8 would result in the receipt by any Participant of a payment within the meaning of Section 280G or any successor section(s) of the Internal Revenue Code, and the regulations promulgated thereunder, and if the receipt of such payment by any Participant would, in the opinion of independent tax counsel of recognized standing selected by the Company, result in the payment by such Participant of any excise tax provided for in Sections 280G and 4999 or any successor section(s) of the Internal Revenue Code, then the amount of such payment shall be reduced to the extent required, in the opinion of independent tax counsel, to prevent the imposition of such excise tax; provided, however, that the Committee, in its sole discretion, may authorize the payment of all or any portion of the amount of such reduction to the Participant. 8.3 Definition. For purposes of the Plan, a "change of control" shall mean any of the events specified in the Company's Income Continuance Plan or any successor plan which constitute a change of control within the meaning of such plan. SECTION 9 RIGHTS OF EMPLOYEES, PARTICIPANTS 9.1 Employment. Nothing contained in the Plan or in any Option granted under the Plan shall confer upon any Participant any right with respect to the continuation of his or her employment by the Company or any Affiliated Corporation, or interfere in any way with the right of the Company or any Affiliated Corporation, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the level of the Participant's compensation from the level in existence at the time of the grant of an Option. Whether an authorized leave of absence, or absence in military or government service, shall constitute a termination of employment shall be determined by the Committee at the time. 9.2 Nontransferability. No right or interest of any Participant in an Option granted pursuant to the Plan shall be assignable or transferable during the lifetime of the Participant, either voluntarily or involuntarily, or subjected to any lien, directly or indirectly, by operation of law, or otherwise, including execution, levy, garnishment, attachment, pledge or bankruptcy. In the event of a Participant's death, a Participant's rights and interests in Options shall, to the extent provided in Section 7 hereof, be transferable by testamentary will or the laws of descent and distribution, and payment of any amounts due under the Plan shall be made to, and exercise of any Options may be made by, the Participant's legal representatives, heirs or legatees. If, in the opinion of the Committee, a person entitled to payments or to exercise rights with respect to the Plan is disabled from caring for his or her affairs because of mental condition, physical condition or age, payment due such person may be made to, and such rights shall be exercised by, such person's guardian, conservator or other legal personal representative upon furnishing the Committee with evidence of such status satisfactory to the Committee. SECTION 10 GENERAL RESTRICTIONS 10.1 Investment Representations. The Company may require a Participant, as a condition of exercising an Option, to give written assurances in substance and form satisfactory to the Company and its counsel to the effect that such person is acquiring the Stock subject to the Option for his own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws. 10.2 Compliance with Securities Laws. Each Option shall be subject to the requirement that, if at any time counsel to the Company shall determine that the listing, registration or qualification of the shares of Stock subject to such Option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, is necessary as a condition of, or in connection with, the issuance or purchase of shares of Stock thereunder, such Option may not be accepted or exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained on conditions acceptable to the Committee. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration, qualification, consent or approval. SECTION 11 OTHER EMPLOYEE BENEFITS The amount of any income deemed to be received by a Participant as a result of an Option exercise shall not constitute "earnings" or "compensation" with respect to which any other employee benefits of such Participant are determined including, without limitation, benefits under any pension, profit sharing, life insurance or salary continuation plan. SECTION 12 PLAN AMENDMENT, MODIFICATION AND TERMINATION The Board may at any time terminate, and from time to time may amend or modify the Plan provided, however, that no amendment or modification may become effective without approval of the amendment or modification by the Company's stockholders if stockholder approval is required to enable the Plan to satisfy any applicable statutory or regulatory requirements unless the Company, on the advice of counsel, determines that stockholder approval is otherwise necessary or desirable. No amendment, modification or termination of the Plan shall in any manner adversely affect any Option theretofore granted under the Plan, without the consent of the Participant holding such Option. The Committee shall have the authority to adopt such modifications, procedures and subplans as may be necessary or desirable to comply with the provisions of the laws (including, but not limited to, tax laws and regulations) of countries other than the United States in which the Company may operate, so as to assure the viability of the benefits of the Plan to Participants employed in such countries. SECTION 13 WITHHOLDING 13.1 Withholding Requirement. The Company's obligations to deliver shares of Stock upon the exercise of an Option, or to defer income resulting from an Option exercise into the Deferred Delivery Plan, shall be subject to the Participant's satisfaction of all applicable federal, state and local income and other tax withholding requirements. 13.2 Satisfaction of Required Withholding. At the time the Committee grants an Option, it may, in its sole discretion, grant the Participant an election to pay all such amounts of required tax withholding, or any part thereof: (a) by the delivery to the Company or the Administrative Agent of a number of shares of Stock then owned by the Participant, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the amount required to be withheld, provided that such shares have been held by the Participant for a period of at least six months; (b) by certification or attestation to the Company or the Administrative Agent of the Participant's ownership (as of the Exercise Date) of a number of shares of Stock and/or Depositary Shares, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the amount required to be withheld, provided that such shares of Stock and/or Depositary Shares have been owned by the Participant for a period of at least six months; (c) if the income resulting from the Option exercise is to be deferred into the Participant's Deferred Delivery Plan account, by certification or attestation to the Company or the Administrative Agent of the Participant's ownership (as of the Exercise Date) of a number of vested Stock Units held in the Participant's Deferred Delivery Plan account, the equivalent aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the amount required to be withheld, provided that such Stock Units were vested as of the Exercise Date; or (d) by the Company or the Administrative Agent withholding from the shares of Stock otherwise issuable to the Participant upon exercise of the Option, a number of shares of Stock, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than the amount required to be withheld. Any such elections by Participants to have shares of Stock withheld for this purpose will be subject to the following restrictions: (i) all elections shall be made on or prior to the Exercise Date; and (ii) all elections shall be irrevocable. 13.3 Excess Withholding. At the time the Committee grants an Option, it may, in its sole discretion, grant the Participant an election to pay additional or excess amounts of tax withholding, beyond the required amounts and up to the Participant's marginal tax rate: (a) by delivery to the Company or the Administrative Agent of a number of Shares of Stock then owned by the Participant, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than such excess withholding amount, provided that such shares of Stock have been owned by the Participant for a period of at least six months; or (b) by certification or attestation to the Company or the Administrative Agent of the Participant's ownership (as of the Exercise Date) of a number of shares of Stock and/or Depositary Shares, the aggregate Fair Market Value of which (as of the Exercise Date) is not greater than such excess withholding amount, provided that such shares of Stock and/or Depositary Shares have been owned by the Participant for a period of at least six months. 13.4 Section 16 Requirements. If the Participant is an officer or director of the Company within the meaning of Section 16 or any successor section(s) of the 1934 Act ("Section 16"), the Participant must satisfy the requirements of such Section 16 and any applicable rules and regulations thereunder with respect to the use of shares of Stock, Depositary Shares and/or Stock Units to satisfy such tax withholding obligation. SECTION 14 REQUIREMENTS OF LAW 14.1 Requirements of Law. The issuance of Stock and the payment of cash pursuant to the Plan shall be subject to all applicable laws, rules and regulations. 14.2 Federal Securities Laws Requirements. If a Participant is an officer or director of the Company within the meaning of Section 16, Options granted hereunder shall be subject to all conditions required under Rule 16b-3, or any successor rule(s) promulgated under the 1934 Act, to qualify the Option for any exception from the provisions of Section 16 available under such Rule. Such conditions are hereby incorporated herein by reference and shall be set forth in the Stock Option Agreement with the Participant which describes the Option. 14.3 Governing Law. The Plan and all Stock Option Agreements hereunder shall be construed in accordance with and governed by the laws of the State of Texas. SECTION 15 DURATION OF THE PLAN The Plan shall terminate at such time as may be determined by the Board, and no Option shall be granted after such termination. If not sooner terminated under the preceding sentence, the Plan shall fully cease and expire at midnight on February 10, 2005. Any Options outstanding at the time of the Plan termination shall continue to be exercisable in accordance with the Stock Option Agreement pertaining to each such Option, as such Stock Option Agreement may be modified pursuant to Section 12. Dated: September 15, 2005 ATTEST: APACHE CORPORATION /s/ Cheri L. Peper By: /s/ Jeffrey M. Bender - ------------------------------------- ------------------------------------ Cheri L. Peper Jeffrey M. Bender Corporate Secretary Vice President, Human Resources EX-10.4 5 h29394exv10w4.txt 2000 SHARE APPRECIATION PLAN AS AMENDED Exhibit 10.4 APACHE CORPORATION 2000 SHARE APPRECIATION PLAN (AS AMENDED AND RESTATED SEPTEMBER 15, 2005, EFFECTIVE AS OF JANUARY 1, 2005) SECTION 1 INTRODUCTION 1.1 Establishment. Apache Corporation, a Delaware corporation (hereinafter referred to, together with its Affiliated Corporations (as defined below) as the "Company" except where the context otherwise requires), hereby established the Apache Corporation 2000 Share Appreciation Plan (the "Plan"), effective as of October 12, 2000. 1.2 Purposes. The primary purpose of this Plan is to focus the energies of the Company's employees on significantly increasing shareholder wealth through stock price appreciation to share prices of $100, $120 and $180 (adjusted to $43.29, $51.95 and $77.92, respectively, for (i) the Company's ten-percent stock dividend, record date December 31, 2001, paid January 21, 2002, (ii) the Company's five-percent stock dividend, record date March 12, 2003, paid April 2, 2003, and (iii) the Company's two-for-one stock split, record date December 31, 2003, distributed January 14, 2004) and a doubling of the Company's oil and gas production per share for calendar year 2000 (also adjusted for the stock dividends and stock split). The share price goals of this Plan seek to increase shareholder wealth by approximately $5.2 to $7.8 billion dollars with the Company's employees sharing in approximately three percent of the additional shareholder value created. The production goal is designed to inspire the Company's employees to significantly improve the one factor that is most within the control of the Company, production, and that is involved in determining the Company's earnings per share and cash flow per share. Additional purposes of this Plan include the retention of existing key employees and as an additional inducement in the recruitment of talented personnel in a competitive environment. SECTION 2 DEFINITIONS 2.1 Definitions. The following terms shall have the meanings set forth below: "Affiliated Corporation" means any corporation or other entity (including but not limited to a partnership) which is affiliated with Apache Corporation through stock ownership or otherwise and is treated as a common employer under the provisions of Sections 414(b) and (c) or any successor section(s) of the Internal Revenue Code. "Base Salary" means, with regard to any Participant, such Participant's base compensation as an employee of the Company at the date of award of a Plan Unit (except for the calculation of the Independent Production Goal Amount, in which case 1 the date shall be the Independent Production Goal Date), without regard to any bonus, pension, profit sharing, stock option, life insurance or salary continuation plan which the Participant either receives or is otherwise entitled to have paid on his behalf. "Board" means the Board of Directors of the Company. "Category" means one of the three groupings of Participants in the Plan whose Plan Units represent the right to receive the same multiple of their base salary for each Payout Amount. "Committee" means the Stock Option Plan Committee of the Board or such other Committee of the Board that is empowered hereunder to administer the Plan. The Committee shall be constituted at all times so as to permit the Plan to be administered by "non-employee directors" (as defined in Rule 16b-3 of the Securities Exchange Act of 1934, as amended). "Deferred Delivery Plan" means the Company's Deferred Delivery Plan, effective as of February 10, 2000, as it may be amended from time to time, or any successor plan. "Eligible Employees" means those full-time employees (including, without limitation, the Company's executive officers), and certain part-time employees, of the Company. "Fair Market Value" means the closing price of the Stock as reported on The New York Stock Exchange, Inc. Composite Transactions Reporting System ("Composite Tape") for a particular date. If there are no Stock transactions on such date, the Fair Market Value shall be determined as of the immediately preceding date on which there were Stock transactions. "Final Amount" means with regard to any: (a) Category I Participant, such number of shares of Stock (rounded down to the nearest full share) which equals two (2) times such Participant's Base Salary divided by $180 (adjusted to $77.92 for the stock dividends and stock split); (b) Category II Participant, such number of shares of Stock (rounded down to the nearest full share) which equals one (1) times such Participant's Base Salary divided by $180 (adjusted to $77.92 for the stock dividends and stock split); and (c) Category III Participant, such number of shares of Stock (rounded down to the nearest full share) which equals 50 percent (.50) times such Participant's Base Salary divided by $180 (adjusted to $77.92 for the stock dividends and stock split); which amount, in each case, shall be fixed and not subject to adjustment due to market fluctuation. 2 "Final Price Threshold Date" means the last of any 10 trading days (which need not be consecutive) during any period of 30 consecutive trading days occurring prior to January 1, 2005, but not thereafter, on each of which 10 days the closing price of the Stock as reported on the Composite Tape equaled or exceeded $180 per share (adjusted to $77.92 per share for the stock dividends and stock split). If the above trading criteria are met more than once, the first occurrence shall be deemed to be the Final Price Threshold Date. "Final Plan Unit" means an investment unit convertible into the applicable Final Amount for a Participant upon occurrence of the Final Price Threshold Date. "Grant" has the meaning set forth in Section 6 hereof. "Grant Agreement" has the meaning set forth in Section 6 hereof. "Independent Production Goal Amount" means with regard to any: (a) Category I Participant, such number of shares of Stock (rounded down to the nearest full share) which equals one and one half (1.5) times such Participant's Base Salary divided by the Independent Production Goal Price; (b) Category II Participant, such number of shares of Stock (rounded down to the nearest full share) which equals 75 percent (.75) times such Participant's Base Salary divided by the Independent Production Goal Price; and (c) Category III Participant, such number of shares of Stock (rounded down to the nearest full share) which equals 37.5 percent (.375) times such Participant's Base Salary divided by the Independent Production Goal Price; which amount, in each case, shall be fixed and not subject to adjustment due to market fluctuation. "Independent Production Goal Date" means the last day of any fiscal quarter ending on or before December 31, 2004 during which fiscal quarter the Company's average daily production (calculated on an annualized basis) equals or exceeds 1.54 barrels of oil equivalent per outstanding share of Stock (calculated on a fully diluted basis and adjusted to 0.67 barrels per share for the stock dividends and stock split), as confirmed by the Company's independent auditors. If the above production criterion is met more than once, the first occurrence shall be deemed to be the Independent Production Goal Date. "Independent Production Goal Price" means the average daily closing price of the Stock as reported on the Composite Tape for the quarter ending on the Independent Production Goal Date. "Independent Production Goal Plan Unit" means an investment unit convertible into the applicable Independent Production Goal Amount for a Participant upon occurrence of the Independent Production Goal Date. 3 "Initial Amount" means with regard to any: (a) Category I Participant, such number of shares of Stock (rounded down to the nearest full share) which equals one (1) times such Participant's Base Salary divided by $100 (adjusted to $43.29 for the stock dividends and stock split); (b) Category II Participant, such number of shares of Stock (rounded down to the nearest full share) which equals 50 percent (.50) times such Participant's Base Salary divided by $100 (adjusted to $43.29 for the stock dividends and stock split); and (c) Category III Participant, such number of shares of Stock (rounded down to the nearest full share) which equals 25 percent (.25) times such Participant's Base Salary divided by $100 (adjusted to $43.29 for the stock dividends and stock split); which amount, in each case, shall be fixed and not subject to adjustment due to market fluctuation. "Initial Price Threshold Date" means the last of any 10 trading days (which need not be consecutive) during any period of 30 consecutive trading days occurring prior to January 1, 2005, but not thereafter, on each of which 10 days the closing price of the Stock as reported on the Composite Tape equaled or exceeded $100 per share (adjusted to $43.29 per share for the stock dividends and stock split). If the above trading criteria are met more than once, the first occurrence shall be deemed to be the Initial Price Threshold Date. "Initial Plan Unit" means an investment unit convertible into the applicable Initial Amount for a Participant upon occurrence of the Initial Price Threshold Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. "Participant" means an Eligible Employee designated by the Committee from time to time during the term of the Plan to receive one or more grants of Plan Units under the Plan. "Payout Amounts" means the Initial Amount, the Secondary Amount, the Final Amount and/or the Independent Production Goal Amount. "Plan Units" means each of the Initial Plan Units, Secondary Plan Units, Final Plan Units and/or Independent Production Goal Plan Units. "Price Threshold Date" means the Initial Price Threshold Date, the Secondary Price Threshold Date, the Final Price Threshold Date and/or the Independent Production Goal Date, as the context may require. 4 "Secondary Amount" means with regard to any: (a) Category I Participant, such number of shares of Stock (rounded down to the nearest full share) which equals three (3) times such Participant's Base Salary divided by $120 (adjusted to $51.95 for the stock dividends and stock split); (b) Category II Participant, such number of shares of Stock (rounded down to the nearest full share) which equals one and one half (1.5) times such Participant's Base Salary divided by $120 (adjusted to $51.95 for the stock dividends and stock split); and (c) Category III Participant, such number of shares of Stock (rounded down to the nearest full share) which equals 75 percent (.75) times such Participant's Base Salary divided by $120 (adjusted to $51.95 for the stock dividends and stock split); which amount, in each case, shall be fixed and not subject to adjustment due to market fluctuation. "Secondary Price Threshold Date" means the last of any 10 trading days (which need not be consecutive) during any period of 30 consecutive trading days occurring prior to January 1, 2005, but not thereafter, on each of which 10 days the closing price of the Stock as reported on the Composite Tape equaled or exceeded $120 per share (adjusted to $51.95 per share for the stock dividends and stock split). If the above trading criteria are met more than once, the first occurrence shall be deemed to be the Secondary Price Threshold Date. "Secondary Plan Unit" means an investment unit convertible into the applicable Secondary Amount for a Participant upon occurrence of the Secondary Price Threshold Date. "Stock" means the $0.625 par value Common Stock of the Company. "Stock Units" means investment units under the Deferred Delivery Plan, each of which is deemed to be equivalent to one share of Stock. 2.2 Headings; Gender and Number. The headings contained in the Plan are for reference purposes only and shall not affect in any way the meaning or interpretation of the Plan. Except when otherwise indicated by the context, the masculine gender shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural. 5 SECTION 3 PLAN ADMINISTRATION The Plan shall be administered by the Committee. In accordance with the provisions of the Plan, the Committee shall, in its sole discretion, adopt rules and regulations for carrying out the purposes of the Plan, including, without limitation, selecting the Participants from among the Eligible Employees and the Category of participation for each Participant, appointing designees or agents (who need not be members of the Committee or employees of the Company) to assist the Committee with the administration of the Plan, and establish such other terms and requirements as the Committee may deem necessary or desirable and consistent with the terms of the Plan. No member of the Committee shall be liable for any action or determination made in good faith. The determinations, interpretations and other actions of the Committee pursuant to the provisions of the Plan shall be binding and conclusive for all purposes and on all persons. SECTION 4 STOCK SUBJECT TO THE PLAN 4.1 Number of Shares. Subject to Sections 4.3 and Section 6.1 hereof, up to 3,500,000 shares of Stock (adjusted to 8,085,000 shares for the stock dividends and stock split) are authorized for issuance under the Plan upon conversion of any Plan Units in accordance with the Plan's terms and subject to such restrictions or other provisions as the Committee may from time to time deem necessary. Shares of Stock which may be issued pursuant to the conversion of any Plan Units awarded hereunder shall be applied to reduce the maximum number of shares of Stock remaining available for use under the Plan. The Company shall at all times during the term of the Plan and while any Plan Units are outstanding retain as authorized and unissued Stock and/or Stock in the Company's treasury, at least the number of shares from time to time required under the provisions of the Plan, or otherwise assure itself of its ability to perform its obligations hereunder. 4.2 Other Shares of Stock. Any shares of Stock that are subject to issuance upon conversion of a Plan Unit which expires, is forfeited, is cancelled, or for any reason is terminated, and any shares of Stock that for any other reason are not issued to a Participant or are forfeited shall automatically become available for use under the Plan. 4.3 Certain Adjustments. If the Company shall at any time increase or decrease the number of its outstanding shares of Stock (other than by way of issuing Stock in a public or private offering for cash or property) or change in any way the rights and privileges of such shares by means of a Stock dividend or any other distribution upon such shares payable in Stock, or through a Stock split, subdivision, consolidation, combination, reclassification or recapitalization involving the Stock or a subscription for shares of Stock that has the effect of diluting the Company's capital (hereinafter a "capital restructuring"), then for purposes of determining the entitlement to payments under Section 6, (i) the number of shares authorized for issuance under this Section 4, and (ii) 6 the per share amounts referenced in Section 1 and contained in the definitions set forth in Section 2 hereof and the amount of production required to attain the Independent Production Goal shall be, in each case, equitably and proportionally adjusted to take into account any capital restructuring. Any adjustment under this Section shall be made by the Committee, whose determination with regard thereto, including whether any adjustment is needed, shall be final and binding upon all parties. SECTION 5 REORGANIZATION OR LIQUIDATION In the event that the Company is merged or consolidated with another corporation and the Company is not the surviving corporation, or if all or substantially all of the assets or more than 20 percent of the outstanding voting stock of the Company is acquired by any other corporation, business entity or person, or in case of a reorganization (other than a reorganization under the United States Bankruptcy Code) or liquidation of the Company, and if the provisions of Section 7 hereof do not apply, the Committee, or the board of directors of any corporation assuming the obligations of the Company, shall, as to the Plan and outstanding Plan Units either (i) make appropriate provision for the adoption and continuation of the Plan by the acquiring or successor corporation and for the protection of any holders of such outstanding Plan Units by the substitution on an equitable basis of appropriate stock of the Company or of the merged, consolidated or otherwise reorganized corporation which will be issuable with respect to the Stock, provided that no additional benefits shall be conferred upon the Participants holding such Plan Units as a result of such substitution, or (ii) provided that a Price Threshold Date has occurred, upon written notice to the Participants, the Committee may accelerate the vesting and payment dates of the entitlement to receive cash and Stock under outstanding Plan Units so that all such existing entitlements are paid prior to any such event. In the latter event, such acceleration shall only apply to entitlements to cash and Stock payable as the result of the occurrence of the most recent Price Threshold Date and shall not by such acceleration, deem the occurrence of a Price Threshold Date that has not occurred by the date of the notice. SECTION 6 GRANT OF PLAN UNITS 6.1 Grants. Each Participant may be awarded an initial grant (a "Grant") of Plan Units under this Plan by the Committee, which Grant shall be composed of one Initial Plan Unit, Secondary Plan Unit, Final Plan Unit and Independent Production Goal Unit. The Committee, in its sole discretion, may award additional Grants to any Participant in connection with such Participant's receiving a significant increase in salary and/or a promotion within the Company. Each Grant awarded by the Committee shall be evidenced by a written agreement entered into by the Company and the Participant to whom the Grant is awarded (the "Grant Agreement"), which shall contain the terms and conditions set out in this Section 6, as well as such other terms and conditions as the Committee may consider appropriate. 7 6.2 Grant Agreements. Each Grant Agreement entered into by the Company and each Participant shall specify which Category applies for such Participant and contain at least the following terms and conditions. In the event of any inconsistency between the provisions of the Plan and any Grant Agreement, the provisions of the Plan shall govern. 6.2.1 Grant Terms. Each Grant Agreement shall evidence the Grant of Plan Units and entitle the Participant to receive the indicated Plan Units which shall convert into the right to receive a conditional payment of cash and issuance of Stock upon the occurrence of one or more of the Price Threshold Dates, all as set forth below. (a) If at any time prior to January 1, 2005, the Initial Price Threshold Date occurs, the Participant may become entitled to receive a portion or all of the Initial Amount payable to Participants in such Category, as specified in the applicable Grant Agreement, in accordance with the payment schedule and as otherwise set out in Section 6.2.2. (b) If at any time prior to January 1, 2005, the Secondary Price Threshold Date occurs, the Participant may become entitled to receive a portion or all of the Secondary Amount payable to Participants in such Category, as specified in the applicable Grant Agreement, in accordance with the payment schedule and as otherwise set out in Section 6.2.2. (c) If at any time prior to January 1, 2005, the Final Price Threshold Date occurs, the Participant may become entitled to receive a portion or all of the Final Amount payable to Participants in such Category, as specified in the applicable Grant Agreement, in accordance with the payment schedule and as otherwise set out in Section 6.2.2. (d) If at any time prior to January 1, 2005, the Independent Production Goal Date occurs, the Participant may become entitled to receive a portion or all of the Independent Production Goal Amount payable to Participants in the same Category, as specified in the applicable Grant Agreement, in accordance with the payment schedule and as otherwise set out in Section 6.2.2. 6.2.2 Payment of Payout Amounts. Subject to the provisions of Section 6.3, the Payout Amounts shall be payable in increments strictly in accordance with the following schedule: (a) The entitlement to receive the first one-third (1/3) of any Payout Amount shall vest on the applicable Price Threshold Date and shall be paid by the Company to the Participant within thirty (30) days of the applicable Price Threshold Date in the manner set out in Section 6.4 below. (b) The entitlement to receive the remainder of any Payout Amount shall vest and become payable in equal parts on the dates occurring, respectively, 12 months and 24 months after the applicable Price Threshold Date, in the same proportions and amounts as set forth in Section 6.4 below, and shall be paid by the Company to the 8 Participant within thirty (30) days of such date. If any of the above dates is not a business day during which the Company is open for business, such date of vesting or payment shall be the first business date occurring immediately thereafter. (c) No Payout Amount or portion thereof shall be payable under this Section 6.2.2 if the applicable Price Threshold Date has not occurred prior to January 1, 2005. 6.3 Termination of Employment, Death, Disability, etc. Except as set forth below, each Grant Agreement shall state that each Grant, the Plan Units received thereunder and the right to receive any payment thereunder upon conversion of the Plan Units shall be subject to the condition that the Participant has remained an Eligible Employee from the initial award of a Grant until the applicable vesting date as follows: (a) If the Participant voluntarily leaves the employment of the Company, or if the employment of the Participant is terminated by the Company for cause or otherwise, any Plan Units not previously converted and the right to receive any Payout Amounts not yet paid in accordance with Section 6.2.2 shall thereafter be void and forfeited for all purposes. (b) A Participant shall become vested in all Payout Amounts on the date the Participant retires from employment with the Company on or after attaining age 60, on the date the Participant dies while employed by the Company, or on the date the Participant becomes disabled (as determined pursuant to the Company's Long-Term Disability Plan or any successor plan) while employed by the Company. Such Participant shall not become entitled to any payment which may arise due to the occurrence of a Price Threshold Date after the Participant dies, becomes disabled, or retires. Payment shall occur as soon as administratively convenient following the date the Participant retires, dies, or becomes disabled; in no event shall the payment occur later than the later of December 31, 2005, or March 15 in the calendar year immediately following the calendar year in which the Participant retires, dies, or becomes disabled. Any payment made pursuant to this subsection 6.3(b) during 2005 shall not occur until the amended and restated plan document has been executed. If the Participant dies before receiving payment, the payment shall be made to those entitled under the Participant's will or, if there is no will, by the laws of descent and distribution. 6.4 Payment and Tax Withholding. Each Grant Agreement shall provide that, upon payment of any entitlement upon conversion of any Plan Units, the Participant shall make appropriate arrangements with the Company to provide for the amount of minimum tax withholding required by Sections 3102 and 3402 or any successor section(s) of the Internal Revenue Code and applicable state and local income and other tax laws, as follows: (a) If upon the achievement of a Threshold Date the credit rating of the Company's long term, unsecured debt is at or above investment grade, then each payment of the related Payout Amount shall be made in a proportion of cash and shares of Stock, determined by the Committee, such that the cash portion shall be sufficient to cover the withholding amount required by this Section. The cash portion of any payment of a Payout Amount shall be based on the Fair Market Value of the shares 9 of Stock on the business day immediately preceding the payment date. Such cash portion shall be withheld by the Company to satisfy applicable tax withholding requirements. (b) If upon the achievement of a Threshold Date the Company's long term, unsecured debt has a credit rating below investment grade, the Committee, in its sole discretion, may either (i) provide for the payment of the withholding amount required by this Section as set forth in Subsection (a) above or (ii) specify that each payment of the related Payout Amount to a Participant be made only after the Participant has made funds available to the Company sufficient to cover the withholding amount required by this Section. The funds required by this Subsection (b) may be obtained by the Participant by means of a loan from a securities broker or dealer, in which case the Participant may satisfy the requirements hereof by delivering to the Company an irrevocable instruction to such broker or dealer to promptly deliver to the Company, by wire transfer or certified or cashier's check, the funds necessary to meet the Participant's obligations hereunder and such delivery instructions for the shares issuable to the Participant as the broker or dealer may require. The calculation of the funds to be provided by the Participant under this paragraph shall be based on the Fair Market Value of the shares of Stock to be issued to the Participant, on the business day immediately preceding the payment date. (c) Upon a request made to the Committee by a Participant, the proportion of cash and Stock as set forth in Subsection (a) above may be, but need not be, changed by the Committee, in its sole discretion, to provide for, among other things, special or additional tax burdens on a Participant but, in no event, shall the cash portion of any payment exceed fifty percent (50%). 6.5 Subsequent Grant Agreements. Following the award of Grants in 2000, additional Participants may be designated by the Committee for grants of Plan Units thereafter subject to the same terms and conditions set forth above for initial grants except that the Committee, in its sole discretion, may reduce the value of the Initial Amount, Secondary Amount, Final Amount or Independent Production Goal Amount to which subsequent Participants may become entitled and the applicable Grant Agreement shall be modified to reflect such reduction. 6.6 Stockholder Privileges. No Participant shall have any rights as a stockholder with respect to any shares of Stock into which a Plan Unit is convertible until the Participant becomes the holder of record of such Stock. 6.7 Limitations on Stock Issuable to Officers and Directors. Any provision of the Plan notwithstanding, the total number of shares of Stock issuable to Participants who are directors or officers of the Company (as defined for the purposes of Section 16 of the Securities Exchange Act of 1934, as amended) shall not exceed 49 percent of the total shares issuable under the Plan (the "D&O Limitation"). If the total number of shares of Stock issuable to all of the Company's directors and officers who are Participants in the Plan shall exceed the D&O Limitation, then the total number of shares of Stock issuable to such Participants shall be reduced to a number equal to the D&O Limitation and the 10 number of shares of Stock issuable to each such Participant upon conversion of any Plan Unit shall be reduced pro rata. 6.8 Deferral of Income. This Section 6.8 shall only apply to amounts paid from this Plan before January 1, 2005. Payments made on or after January 1, 2005 pursuant to this Plan cannot be deferred into the Deferred Delivery Plan. For Participants eligible for participation in the Deferred Delivery Plan, all or a portion of the income resulting from the conversion of Plan Units into Payout Amounts is subject to deferral into the Participant's Deferred Delivery Plan account, if the Participant has made an irrevocable election to make such a deferral, as follows: (a) with respect to the first payment to be made upon the occurrence of a Price Threshold Date, no more than 30 days after the Participant executes the applicable Grant Agreement and/or (b) with respect to any other payment to be made after the occurrence of a Price Threshold Date, at least six months prior to the date such payment is to be made by the Company. If the Participant has complied with the above requirements, all or a portion of the income resulting from any payment upon the conversion of Plan Units into Payout Amounts shall be deferred into the Participant's Deferred Delivery Plan account and no additional cash or shares of Stock shall be delivered to the Participant. SECTION 7 CHANGE OF CONTROL 7.1 In General. In the event of the occurrence of a change of control of the Company as defined in Section 7.3 hereof, and assuming the occurrence of a Price Threshold Date, the entitlement to receive cash and Stock upon conversion of any Plan Units shall vest automatically, without further action by the Committee or the Board, and shall become payable as follows: (a) If such change of control occurs subsequent to the occurrence of a Price Threshold Date, (i) the first one-third (1/3) of the applicable Payout Amount shall vest and be paid pursuant to Section 6.2.2(a) hereof, and (ii) the remainder of such Payout Amount shall vest as of the date of such change of control and shall be paid by the Company to the Participant within thirty (30) days of the date of such change of control in the manner set out in Section 6.4 hereof. (b) If the occurrence of a Price Threshold Date occurs subsequent to the date of a change of control, the applicable Payout Amount shall vest in full as of such Price Threshold Date and shall be paid by the Company to the Participant within thirty (30) days of such Price Threshold Date in the manner set out in Section 6.4 hereof. 7.2 Limitation on Payments. If the provisions of this Section 7 would result in the receipt by any Participant of a payment within the meaning of Section 280G or any successor section(s) of the Internal Revenue Code, and the regulations promulgated thereunder, and if the receipt of such payment by any Participant would, in the opinion of independent tax counsel of recognized standing selected by the Company, result in the payment by such Participant of any excise tax provided for in Sections 280G and 4999 or any successor section(s) of the Internal Revenue Code, then the amount of 11 such payment shall be reduced to the extent required, in the opinion of independent tax counsel, to prevent the imposition of such excise tax; provided, however, that the Committee, in its sole discretion, may authorize the payment of all or any portion of the amount of such reduction to the Participant. 7.3 Definition. For purposes of the Plan, a "change of control" shall mean any of the events specified in the Company's Income Continuance Plan or any successor plan which constitute a change of control within the meaning of such plan. SECTION 8 RIGHTS OF EMPLOYEES, PARTICIPANTS 8.1 Employment. Neither anything contained in the Plan or any Grant Agreement nor the granting of any Plan Units under the Plan shall confer upon any Participant any right with respect to the continuation of his or her employment by the Company or any Affiliated Corporation, or interfere in any way with the right of the Company or any Affiliated Corporation, at any time to terminate such employment or to increase or decrease the level of the Participant's compensation from the level in existence at the time of the award of Plan Units. 8.2 Non-transferability. No right or interest of any Participant in a Plan Unit granted pursuant to the Plan shall be assignable or transferable during the lifetime of the Participant, either voluntarily or involuntarily, or subjected to any lien, directly or indirectly, by operation of law, or otherwise, including execution, levy, garnishment, attachment, pledge or bankruptcy. In the event of a Participant's death, a Participant's rights and interests in any Plan Unit shall, to the extent provided in Section 6.3 hereof, be transferable by testamentary will or the laws of descent and distribution, and payment of any entitlements due under the Plan shall be made to the Participant's legal representatives, heirs or legatees. If in the opinion of the Committee a person entitled to payments or to exercise rights with respect to the Plan is disabled from caring for his or her affairs because of mental condition, physical condition or age, payment due such person may be made to, and such rights shall be exercised by, such person's guardian, conservator or other legal personal representative upon furnishing the Committee with evidence satisfactory to the Committee of such status. SECTION 9 OTHER EMPLOYEE BENEFITS The amount of any income deemed to be received by a Participant as a result of the payment upon conversion of a Plan Unit shall not constitute "earnings" or "compensation" with respect to which any other employee benefits of such Participant are determined, including without limitation benefits under any pension, profit sharing, life insurance or salary continuation plan. 12 SECTION 10 PLAN AMENDMENT, MODIFICATION AND TERMINATION The Committee or the Board may at any time terminate, and from time to time may amend or modify the Plan. No amendment, modification or termination of the Plan shall in any manner adversely affect any Plan Unit theretofore awarded under the Plan, without the consent of the Participant holding such Plan Unit. The Committee shall have the authority to adopt such modifications, procedures and subplans as may be necessary or desirable to comply with the provisions of the laws (including, but not limited to, tax laws and regulations) of countries other than the United States in which the Company may operate, so as to assure the viability of the benefits of the Plan to Participants employed in such countries. SECTION 11 REQUIREMENTS OF LAW 11.1 Requirements of Law. The issuance of Stock and the payment of cash pursuant to the Plan shall be subject to all applicable laws, rules and regulations, including applicable federal and state securities laws. The Company may require a Participant, as a condition of receiving payment upon conversion of a Plan Unit, to give written assurances in substance and form satisfactory to the Company and its counsel to such effect as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws. 11.2 Section 16 Requirements. If a Participant is an officer or director of the Company within the meaning of Section 16, Grants awarded hereunder shall be subject to all conditions required under Rule 16b-3, or any successor rule(s) promulgated under the Securities Exchange Act of 1934, as amended, to qualify the Plan Units for any exemption from the provisions of Section 16 available under such Rule. Such conditions are hereby incorporated herein by reference and shall be set forth in the agreement with the Participant, which describes the Grant. 11.3 Governing Law. The Plan and all Grant Agreements hereunder shall be construed in accordance with and governed by the laws of the State of Texas. SECTION 12 DURATION OF THE PLAN The Plan shall terminate at such time as may be determined by the Committee, and no Plan Units shall be awarded after such termination. If not sooner terminated under the preceding sentence, the Plan shall fully cease and expire at midnight on December 31, 2004. Payout Amounts for which one or more of the Price Threshold Dates has occurred and which remain outstanding at the time of the Plan termination shall continue in accordance with the Grant Agreement pertaining to such Plan Units. 13 Dated: September 15, 2005 APACHE CORPORATION ATTEST: /s/ Cheri L. Peper By: /s/ Jeffrey M. Bender - ------------------------------------- ------------------------------------ Cheri L. Peper Jeffrey M. Bender Corporate Secretary Vice President 14 EX-10.5 6 h29394exv10w5.txt DEFERRED DELIVERY PLAN AS AMENDED Exhibit 10.5 APACHE CORPORATION DEFERRED DELIVERY PLAN (as amended and restated September 15, 2005; effective as of January 1, 2005) Apache Corporation ("Apache"), a Delaware corporation (hereinafter referred to, together with its Affiliated Entities, as the "Company" except where the context otherwise requires), established the Apache Corporation Deferred Delivery Plan, effective as of February 10, 2000. The Plan provides Participants with an opportunity to defer income and permits the grant of Stock Bonus Awards to Participants selected by the Committee, in consideration of the valuable past services provided by Participants to the Company. The Plan is intended to provide Participants with added incentives and to induce them to remain in the employ of the Company. The Company intends that the Plan shall not be treated as a "funded" plan for purposes of either the Code or the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ARTICLE I DEFINITIONS 1.01 Definitions Defined terms used in this Plan shall have the meanings set forth below: (a) "Account" means the memorandum account maintained for each Participant to which shall be credited all Deferred Amounts (including any Stock Bonus Award), all Company Match made on behalf of a Participant, all Deferred Restricted Units, and all adjustments thereto. (b) "Affiliated Entity" means any corporation or other legal entity (including but not limited to a partnership) which is affiliated with Apache through stock ownership or otherwise and is treated as a common employer under the provisions of Sections 414(b) and (c) or any successor sections of the Code. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means the Stock Option Plan Committee of Apache's Board of Directors. The Committee shall be constituted at all times so as to permit the Plan to be administered by "non-employee directors" (as 1 defined in Rule 16b-3 of the Securities Exchange Act of 1934, as amended). (e) "Company Match" means the allocations to a Participant's Account made pursuant to Section 3.02. (f) "Compensation" shall mean the one-time 1999 discretionary award and income from (a) any Stock Bonus Award, (b) exercises of non-qualified employee stock options granted to the Participants pursuant to Apache's 1990 Stock Incentive Plan, 1995 Stock Option Plan, 1998 Stock Option Plan, 2000 Stock Option Plan or any future plan under which employee stock options may be granted (but only for stock options that vested before January 1, 2005 and for which a deferral election was made before January 1, 2005), and (c) any Other Approved Plan. The Committee and/or the Board of Directors may from time to time designate other forms of remuneration that are available for deferral into the Plan. (g) "Deferred Amounts" means the amounts of a Participant's Compensation, which are deferred and credited to the Participant's Account pursuant to Section 3.01. (h) "Deferred Restricted Units" means those units deferred into the Plan from the Restricted Stock Plan and any related units from dividend amounts. Each Deferred Restricted Stock Unit is deemed to be equivalent to one share of Stock. (i) "Election Agreement" means an application for participation in the Plan, execution of which by an eligible employee is required under Article II for the Participant to elect or acknowledge Deferred Amounts. (j) "Fair Market Value" means the per share closing price of the Stock as reported on The New York Stock Exchange, Inc. Composite Transactions Reporting System for a particular date. If there are no Stock transactions on such date, the Fair Market Value shall be determined as of the immediately preceding date on which there were Stock transactions. (k) "Other Approved Plan" means the 2000 Share Appreciation Plan (but only until December 31, 2004) and any other compensation or benefit plan which may from time to time be designated by the Committee and/or the Board of Directors. (l) "Participant" means any eligible employee selected to participate in the Plan pursuant to Section 2.01. 2 (m) "Plan" means the Apache Corporation Deferred Delivery Plan (including Annex A), as it has been amended from time to time, or any successor plan. (n) "Plan Year" means the period during which the Plan records are kept. The Plan Year shall be the calendar year. (o) "Restricted Stock Plan" means the Apache Corporation Executive Restricted Stock Plan as it may be amended from time to time, or any successor plan. (p) "Separate from Service" or "Separation from Service" has the meaning specified in section 409A(a)(2)(A)(i) of the Code. (q) "Spouse" means the individual of the opposite sex to whom a Participant is lawfully married according to the laws of the state of the Participant's domicile. (r) "Stock" means the $0.625 par value common stock of Apache. (s) "Stock Bonus Award" means any grant of Stock Units made pursuant to Annex A. (t) "Stock Units" means investment units and any related units from dividend amounts. Each Stock Unit is deemed to be equivalent to one share of Stock. (u) "Trust" means the trust or trusts, if any, created by the Company to provide funding for the distribution of benefits in accordance with the provisions of the Plan. The assets of any such Trust shall remain subject to the claims of the Company's general creditors in the event of the Company's insolvency. (v) "Trust Agreement" means the written instrument pursuant to which each separate Trust is created. (w) "Trustee" means one or more banks, trust companies or insurance companies designated by the Company to hold the Trust fund and to pay benefits and expenses as authorized by the Committee in accordance with the terms and provisions of the Trust Agreement. 1.02 Headings; Gender and Number The headings contained in the Plan are for reference purposes only and shall not affect in any way the meaning or interpretation of the Plan. Except when otherwise indicated by the context, the masculine gender shall also include the 3 feminine gender, and the definition of any term herein in the singular shall also include the plural. ARTICLE II ELIGIBILITY AND PARTICIPATION 2.01 Eligibility and Participation The Committee shall from time to time in its sole discretion select those employees of the Company who are eligible to participate in the Plan from among a select group of key employees; however, any Participant in the Restricted Stock Plan shall be a Participant in the Plan without further action by the Committee. 2.02 Election Participants shall complete the election procedure specified by the Committee. The election procedure may include form(s) for the Participant to (a) designate a beneficiary (pursuant to Article V), (b) elect or acknowledge Deferred Amounts by entering into an Election Agreement with the Company (pursuant to Section 3.01), (c) select a payment option for the eventual distribution of his Account (pursuant to Article V), and (d) provide such other information as the Committee may reasonably require. 2.03 Failure of Eligibility The Committee shall have the authority to determine that a Participant is no longer eligible to participate in the Plan. No Company Match or Stock Bonus Award shall be made, no Deferred Amounts withheld from a Participant's Compensation, no Deferred Restricted Units deferred into the Plan from the Restricted Stock Plan, and no dividend amounts credited to a Participant's Account after he ceases to be eligible to participate in the Plan. The determination of the Committee with respect to the termination of participation in the Plan shall be final and binding on all parties affected thereby. Any benefits vested hereunder at the time the Participant becomes ineligible to continue participation shall be distributed in accordance with the provisions of Article V. ARTICLE III CONTRIBUTION DEFERRALS 3.01 Participant Deferrals (a) General. A Participant may elect to defer a portion of his Compensation and/or acknowledge the deferral of income from the grant of a Stock Bonus Award by filing the appropriate Election Agreement with the Committee's designee. Deferred Amounts related to the one-time 1999 4 discretionary award, and to such other remuneration as may be designated from time to time, shall be deducted through payroll withholding from the Participant's cash Compensation payable by the Company, and shall be credited to the Participant's Account on or about the date the amounts are deducted. Deferred Amounts from the deferral of income from the exercise of non-qualified stock option grants, from the grant of a Stock Bonus Award or from any Other Approved Plan shall be credited to the Participant's Account on or about the date of the stock option exercise, the grant date of the Stock Bonus Award or the date the income would have been otherwise paid or distributed from such Other Approved Plan, respectively. (b) Initial Enrollment. When an employee first is selected to participate in the Plan, pursuant to Section 2.01, the Committee's designee shall provide him with an election form, which, when properly completed and timely returned to the Committee's designee shall constitute an Election Agreement. To be effective, the Election Agreement must be completed and returned to the Committee's designee by the deadline established by the Committee. The employee may elect to defer (i) up to 100 percent of the one-time 1999 discretionary award, and (ii) such percentage up to 100 percent of income from stock options exercised in the Plan Year indicated or from any Other Approved Plan, divisible into such increments as may be designated by the Committee; however, 100 percent of income from the grant of any Stock Bonus Award shall be deferred. The Election Agreement shall be effective immediately upon receipt by the Committee's designee; however, (i) Election Agreements related to the deferral of income from stock option exercises must be completed and returned not less than six months in advance of the Participant's intended exercise date on which income is to be deferred, and (ii) Election Agreements related to the deferral of income from any Other Approved Plan must be completed and returned pursuant to the provisions of both this Plan and the Other Approved Plan. Each Election Agreement shall be irrevocable for the deferral of the one-time 1999 discretionary award, or the deferral of income (i) from stock options exercised in the Plan Year indicated, (ii) from the grant of any Stock Bonus Award, or (iii) from any Other Approved Plan. (c) Continuing Election. A Participant shall enter into a separate Election Agreement for (i) the deferral of income from stock options exercises in the Plan Year indicated, (ii) the deferral of income from the grant of any Stock Bonus Award (iii) the deferral of income from any Other Approved Plan, or (iv) any other deferral opportunity offered by the Committee. To be effective, the Election Agreement must be completed and returned to the Committee's designee by the deadline established by the Committee; however, (i) Election Agreements related to the deferral of income from stock option exercises must be completed and returned not less than six 5 months in advance of the Participant's intended exercise date on which income is to be deferred, and (ii) Election Agreements related to the deferral of income from any Other Approved Plan must be completed and returned pursuant to the provisions of such Other Approved Plan. Each Election Agreement shall be irrevocable. (d) Participant Becomes Ineligible. A Participant's Election Agreement(s) shall be canceled immediately if and when the Participant becomes ineligible to participate in the Plan. (e) Deferrals from Stock Options Cease. A Participant may elect to defer income from the receipt of any stock option only if the stock option vested before January 1, 2005, the deferral election was made before January 1, 2005, and the deferral occurs on or before December 31, 2005. (f) Compliance with Code Section 409A. The following rules regarding the timing of an Election Agreement apply in addition to the requirements specified above in this Section. An Election Agreement must be completed and returned in the calendar year before the services giving rise to the Compensation are performed, unless one of the following two exceptions applies. Within 30 days of becoming eligible to participate in the Plan, the new Participant may complete and return an Election Agreement with respect to Compensation paid for services performed after the election. If the Election Agreement relates to "performance-based compensation based on services performed over a period of at least 12 months" (within the meaning of section 409A(a)(4)(B)(iii) of the Code), the Election Agreement must be completed and returned at least six months before the end of the service period. 3.02 Company Match The Company shall credit to a Participant's Account matching contributions equal to the Participant's Deferred Amount related to the 1999 one-time discretionary award. The Committee may from time to time in its sole discretion designate such other forms of remuneration that are available for deferral into the Plan, as well as such other matching contributions as the Committee deems appropriate. The Company Match shall be invested as specified in Article IV. 3.03 Deferral of Deferred Restricted Units Pursuant to the terms of the Restricted Stock Plan, Deferred Restricted Units (a) may be deferred into the Plan if so elected by the Participant and (b) shall be credited to the Participant's Account as set forth in Subsection 4.01(b) hereof. 6 ARTICLE IV INVESTMENT OF DEFERRALS AND ACCOUNTING; VOTING 4.01 Investments (a) Except as provided in Subsection 4.01(b), all amounts credited to a Participant's Account shall be invested in Stock Units, with the number of Stock Units determined using the Fair Market Value of the Stock for the date as of which the amount is credited to the Participant's Account. Amounts equal to any cash dividends declared on the Stock shall be credited to the Participant's Account as of the payment date for such dividend in proportion to the number of Stock Units in the Participant's Account as of the record date for such dividend. Such dividend amounts shall be invested in Stock Units, with the number of Stock Units determined using the Fair Market Value of the Stock on the dividend payment date, and such Stock Units shall vest pursuant to Section 5.01. (b) All Deferred Restricted Units deferred into the Plan shall be credited to the Participant's Account as of the date of vesting under the Restricted Stock Plan. Amounts equal to any cash dividends declared on the Stock shall be credited to the Participant's Account for such dividend in proportion to the number of Deferred Restricted Units in the Participant's Account as of the record date for such dividend. Such dividend amounts shall be invested in Deferred Restricted Units with the number of Deferred Restricted Units determined using the Fair Market Value of the Stock on the dividend payment date, and such Deferred Restricted Units shall be fully vested. (c) Nothing contained in this Section shall be construed to give any Participant any power or control to make investment decisions or otherwise influence in any manner the investment and reinvestment of assets contained within any investment alternative, such control being at all times retained in the full discretion of the Committee. Nothing contained in this Section shall be construed to require the Company or the Committee to fund any Participant's Account. 4.02 Voting Participants shall have no right to vote any Stock Units or Deferred Restricted Units prior to the date on which such Stock Units or Deferred Restricted Units are subject to distribution and shares of Stock are issued therefor. 7 ARTICLE V DISTRIBUTIONS 5.01 Vesting (a) The portion of a Participant's Account attributable to Deferred Amounts from the one-time 1999 discretionary award, related to the deferral of income from stock option exercises and/or related to Deferred Restricted Units shall be fully vested; however, the portion of a Participant's Account (i) attributable to Deferred Amounts related to the grant of any Stock Bonus Award or to such other remuneration as may be designated from time to time and/or (ii) related to the deferral of income from any Other Approved Plan, shall vest on such terms as may be determined by the Committee. (b) A Participant shall vest in the portion of his Account that is attributable to the Company Match for the 1999 one-time discretionary award as follows: 50 percent on the date six months following the date of deferral and the remaining 50 percent on the date twelve months following the date of deferral. (c) If a Participant retires or becomes disabled (as defined by the Company's Long Term Disability Plan) while still employed by the Company, no further vesting shall occur subsequent to the date of retirement or disability and all unvested portions of the Participant's Account shall be forfeited immediately. (d) If a Participant dies while still employed by the Company, any unvested portion of the Participant's Account shall be immediately vested. (e) If a Participant's employment is terminated other than for cause (as defined below), no further vesting of unvested portions of the Participant's Account shall occur and all unvested portions thereof shall be forfeited immediately. (f) If the employment of the Participant is terminated for cause as determined by the Company, the Participant's entire Account balance (including any Deferred Amounts and/or Deferred Restricted Units) shall be forfeited immediately. As used in this subsection, "cause" shall mean a gross violation, as determined by the Company, of the Company's established policies and procedures. The effect of this subsection shall be limited to determining the consequences of a termination and nothing in this subsection shall restrict or otherwise interfere with Company's discretion with respect to termination of any employee. 8 (g) Stock Units attributable to dividend amounts credited to a Participant's Account pursuant to Section 4.01 shall vest as the corresponding Stock Units vest. As used in this subsection, "corresponding Stock Units" shall mean those Stock Units on which the dividend amounts are calculated. (h) If a change of control (within the meaning of Apache's Income Continuance Plan or any successor plan) of Apache occurs, all unvested Stock Units credited to Participants' Accounts shall become automatically vested, without further action by the Committee or the Board. 5.02 Distribution During Employment (a) In-Service Election. On each Election Agreement, the Participant may elect to have the vested Plan benefits accrued under that Election Agreement paid to him in one of the following manners. (i) The benefits will be paid in a lump sum five years after the deferral occurs, or as near to that date as is administratively convenient. If the Participant Separates from Service before receiving this lump sum, the benefits shall be paid as specified in Section 5.03. If there is a change of control or the Participant dies before receiving the lump sum, the benefits shall be paid as specified in Section 5.04 or 5.05. (ii) The benefits will be paid in five annual installments, with the first installment paid five years after the deferral occurs (or as near to that date as is administratively convenient) and subsequent installments paid on the anniversary of the first installment or as near to that date as is administratively convenient. The amount of each installment shall be equal to the number of remaining vested Stock Units and Deferred Restricted Units associated the Election Agreement, divided by the number of remaining installments, rounded down to the nearest whole share, except that the last installment shall be equal to the number of remaining vested Stock Units and Deferred Restricted Units. If the Participant Separates from Service before receiving all installments, the remaining vested benefits shall be paid as specified in Section 5.03. If there is a change of control or the Participant dies before receiving all installments, the remaining vested benefits shall be paid as specified in Section 5.04 or 5.05. (iii) The benefits will be paid after the Participant Separates from Service, as described in Section 5.03. (b) Form of Distribution. A lump sum shall be paid in whole shares of Stock, with any fractional shares paid in cash. Each installment shall be paid in 9 whole shares of Stock, and the last installment shall be paid in whole shares of Stock with any fractional shares paid in cash. (c) Existing Elections. Any election in place before September 15, 2005 shall be followed only with respect to the date(s) of any in-service distribution. Any election for payment to occur upon termination of employment shall be interpreted as an election for payment to occur after Separation from Service, and section 5.03 shall apply to such election. 5.03 Distributions After Employment This Section applies once a Participant Separates from Service. (a) Installments or Lump Sum. When a Participant Separates from Service, all of his vested undistributed benefits shall be aggregated into a single Account which shall be distributed in a lump sum unless the Participant elects to receive five annual installments. The Participant's lump-sum-or-installment election shall be made by the later of December 31, 2005 or 30 days after the employee becomes a Participant. (b) Small Accounts. A Participant who elected installments shall nevertheless be paid a lump sum if, as of the date the Participant Separates from Service, the value of his entire vested Account is $100,000 or less. (c) Time of Payment(s). A lump sum or the first installment shall be made as soon as administratively convenient after six months after the Participant's Separation from Service, unless Section 5.04 or 5.05 provides for a different payment date. Subsequent installments shall be paid on the anniversary of the first installment, or as near to that date as is administratively convenient, unless Section 5.04 or 5.05 provides for a different payment date. Payments under this section during 2005 may be delayed until after September 15, 2005. (d) Form of Distribution. A lump sum shall be paid in whole shares of Stock, with any fractional shares paid in cash. Each installment shall be paid in whole shares of Stock, and the last installment shall be paid in whole shares of Stock with any fractional shares paid in cash. (e) Reemployment. If a Participant is reemployed by the Company before his entire vested Account balance is paid, the benefits he accrued during his first episode of employment shall be paid as scheduled, and shall be unaffected by his reemployment. Any benefits accrued during his second episode of employment shall be paid according to the elections he makes after being reemployed. 10 5.04 Distributions After Participant's Death This section applies once a Participant dies. (a) Immediate Payment. When a Participant dies, his remaining vested Account balance shall be paid to his Beneficiary in one lump sum as soon as administratively convenient after his death, after giving the Beneficiary an opportunity to disclaim and after the Committee's designee has been furnished with proof of death and such other information as it may reasonably require. Such distribution shall be paid in whole shares of Stock, with any fractional shares paid in cash. (b) Designating Beneficiaries. Each Participant shall designate one or more persons, trusts or other entities as his beneficiary (the "Beneficiary") by furnishing the Committee with a Beneficiary designation form. In the absence of an effective Beneficiary designation as to part or all of a Participant's interest in the Plan, such amount shall be distributed to the Participant's surviving Spouse, if any, otherwise to the Participant's estate. Unless the Participant's Beneficiary designation form specifies otherwise, if a Beneficiary dies after the Participant but before being paid by the Plan, the Plan shall pay the Beneficiary's estate. (c) Changing Beneficiaries. A Beneficiary designation may be changed by the Participant at any time and without the consent of any previously designated Beneficiary. However, if the Participant is married, his Spouse shall be his Beneficiary unless such Spouse has consented to the designation of a different Beneficiary. To be effective, the Spouse's consent must be in writing, witnessed by a notary public, and filed with the Committee's designee. If a Participant has designated his Spouse as a Beneficiary or as a contingent Beneficiary, and the Participant and that Spouse subsequently divorce, then the former Spouse will be treated as having pre-deceased the Participant for purposes of interpreting a beneficiary designation form completed prior to the divorce; this sentence shall apply only if the Committee's designee is informed of the divorce before payment to the former Spouse is authorized. (d) Disclaimers. Any individual or legal entity who is a Beneficiary may disclaim all or any portion of his interest in the Plan, provided that the disclaimer satisfies the requirements of applicable state law and section 2518(b) of the Code. The legal guardian of a minor or legally incompetent person may disclaim for such person. The personal representative (or the individual or legal entity acting in the capacity of the personal representative according to applicable state law) may disclaim on behalf of a Beneficiary who has died. The amount disclaimed shall be distributed as if the disclaimant had predeceased the Participant. 11 5.05 Change of Control This section applies if there is a change of control of Apache that is described in section 409A(a)(2)(A)(v) of the Code. Each Account shall be paid to the appropriate Participant (or Beneficiary of a deceased Participant) in a lump sum paid on the date of the change of control or as soon thereafter as is administratively practicable. 5.06 Withholding At the time of vesting and distribution, as applicable, the Plan shall withhold from such distribution any taxes or other amounts that are required to be withheld pursuant to any applicable law or such greater amount as requested by the Participant. The Committee may direct the Company to withhold additional amounts from any payment to repay the Participant's debt or obligation to the Company or at the request of the Participant. ARTICLE VI ADMINISTRATION 6.01 Committee to Administer and Interpret Plan The Plan shall be administered by the Committee. The Committee shall have all discretion and powers necessary for administering the Plan, including, but not by way of limitation, full discretion and power to interpret the Plan, to determine the eligibility, status and rights of all persons under the Plan and, in general, to decide any dispute. The Committee shall direct the Company, the Trustee, or both, as the case may be, concerning distributions in accordance with the provisions of the Plan. The Committee's designee shall maintain all Plan records except records of any Trust. The Committee may delegate any of its administrative duties to a designee. 6.02 Organization of Committee The Committee shall adopt such rules as it deems desirable for the conduct of its affairs and for the administration of the Plan. The Committee may appoint a designee and/or agent (who need not be a member of the Committee or an employee of the Company) to assist the Committee in administration of the Plan and to whom it may delegate such powers as the Committee deems appropriate, except that the Committee shall determine any dispute. The Committee may make its determinations with or without meetings. The Committee may authorize one or more of its members, designees or agents to sign instructions, notices and determinations on its behalf. The action of a majority of the Committee's members shall constitute the action of the Committee. 12 6.03 Agent for Process Apache's General Counsel and Apache's Corporate Secretary shall each be an agent of the Plan for service of all process. 6.04 Determination of Committee Final The decisions made by the Committee shall be final and conclusive on all persons. ARTICLE VII TRUST 7.01 Trust Agreement The Company may, but shall not be required to, adopt a separate Trust Agreement for the holding and administration of the funds contributed to Accounts under the Plan. The Trustee shall maintain and allocate assets to a separate account for each Participant under the Plan. The assets of any such Trust shall remain subject to the claims of the Company's general creditors in the event of the Company's insolvency. 7.02 Expenses of Trust The parties expect that any Trust created pursuant to Section 7.01 will be treated as a "grantor" trust for federal and state income tax purposes and that, as a consequence, such Trust will not be subject to income tax with respect to its income. However, if the Trust should be taxable, the Trustee shall pay all such taxes out of the Trust. All expenses of administering any such Trust shall be a charge against and shall be paid from the assets of such Trust. ARTICLE VIII AMENDMENT AND TERMINATION 8.01 Amendment (a) The Plan may be amended at any time and from time to time, retroactively or otherwise; however, no amendment shall reduce any vested benefit that has accrued on the effective date of such amendment. Each Plan amendment shall be in writing and shall be approved by the Committee and/or Apache's Board of Directors. An officer of Apache to whom the Committee and/or Apache's Board of Directors has delegated the authority to execute Plan amendments shall execute each such amendment or the Plan document restated to include all such Plan amendment(s). 13 (b) The Committee shall have the authority to adopt such modifications, procedures and subplans as may be necessary or desirable to comply with the provisions of the laws (including, but not limited to, tax laws and regulations) of countries other than the United States in which the Company may operate, so as to assure the viability of the benefits of the Plan to Participants employed in such countries. 8.02 Successors and Assigns; Termination of Plan The Plan is binding upon Apache and its successors and assigns. The Plan shall continue in effect from year to year unless and until terminated by Apache's Board of Directors. Any such termination shall operate only prospectively and shall not reduce any vested benefit that has accrued on the effective date of such termination. ARTICLE IX STOCK SUBJECT TO THE PLAN 9.01 Number of Shares Subject to Section 4.01 and Annex A, and to adjustment pursuant to Section 9.03 hereof, 350,000 shares of Stock (adjusted to 735,000 shares for (i) the Company's five-percent stock dividend, record date March 12, 2003, paid April 2, 2003, and (ii) the Company's two-for-one stock split, record date December 31, 2003, distributed January 14, 2004) are authorized for issuance under the Plan in accordance with the provisions of the Plan and subject to such restrictions or other provisions as the Committee may from time to time deem necessary. This authorization may be increased from time to time by approval of the Board and the stockholders of Apache if, in the opinion of counsel for the Company, such stockholder approval is required. Shares of Stock distributed under the terms of the Plan and shares of Stock equal to the number of Stock Units and Deferred Restricted Units credited to Participants' Accounts maintained under the Plan shall be applied to reduce the maximum number of shares of Stock remaining available for use under the Plan. However, shares of Stock represented (a) by any Stock Units related to the deferral of income (i) from the exercise of stock options and/or (ii) from any Other Approved Plan or (b) by any Deferred Restricted Units deferred from the Restricted Stock Plan shall retain their authorization under the applicable stock option plan, under such Other Approved Plan, or under the Restricted Stock Plan, and shall not be applied to reduce the number of shares of Stock remaining available for use under the Plan. Apache, at all times during the existence of the Plan and while any Stock Units and/or Deferred Restricted Units are credited to Participants' Accounts maintained under the Plan, shall retain as Stock in Apache's treasury at least the number of shares from time to time required under the provisions of the Plan, or otherwise assure itself of its ability to perform its obligations hereunder. 14 9.02 Other Shares of Stock The shares of Stock represented by any Stock Units or any Deferred Restricted Units from dividend amounts that are forfeited, and any shares of Stock that for any other reason are not issued to a Participant or are forfeited, shall again become available for use under the Plan. 9.03 Adjustments for Stock Split, Stock Dividend, Etc. If Apache shall at any time increase or decrease the number of its outstanding shares of Stock or change in any way the rights and privileges of such shares by means of the payment of a Stock dividend or any other distribution upon such shares payable in Stock, or through a Stock split, subdivision, consolidation, combination, reclassification or recapitalization involving the Stock, then in relation to the Stock that is affected by one or more of the above events, the numbers, rights and privileges of the following shall be increased, decreased or changed in like manner as if they had been issued and outstanding, fully paid and nonassessable at the time of such occurrence: (i) the shares of Stock remaining available for use under the Plan; and (ii) the shares of Stock then represented by Stock Units and Deferred Restricted Units credited to Participants' Accounts maintained under the Plan. 9.04 Dividend Payable in Stock of Another Corporation, Etc. If Apache shall at any time pay or make any dividend or other distribution upon the Stock payable in securities or other property (except cash or Stock), a proportionate part of such securities or other property shall be set aside for Stock Units and Deferred Restricted Units credited to Participants' Accounts maintained under the Plan and delivered to any Participant upon distribution pursuant to the terms of the Plan. Prior to the time that any such securities or other property are delivered to a Participant in accordance with the foregoing, Apache shall be the owner of such securities or other property and shall have the right to vote the securities, receive any dividends payable on such securities, and in all other respects shall be treated as the owner. If securities or other property which have been set aside by Apache in accordance with this Section are not delivered to a Participant because all or part of his Stock Units and/or Deferred Restricted Units are forfeited pursuant to the terms of the Plan, then the applicable portion of such securities or other property shall remain the property of Apache and shall be dealt with by Apache as it shall determine in its sole discretion. 9.05 Other Changes in Stock In the event there shall be any change, other than as specified in Sections 9.03 and 9.04 hereof, in the number or kind of outstanding shares of Stock or of any stock or other securities into which the Stock shall be changed or for which it 15 shall have been exchanged, and if the Committee shall in its discretion determine that such change equitably requires an adjustment in the number or kind of shares (i) remaining available for use under the Plan and/or (ii) represented by Stock Units and Deferred Restricted Units credited to Participants' Accounts maintained under the Plan, then such adjustments shall be made by the Committee and shall be effective for all purposes of the Plan. 9.06 Rights to Subscribe If Apache shall at any time grant to the holders of its Stock rights to subscribe pro rata for additional shares thereof or for any other securities of Apache or of any other corporation, there shall be reserved with respect to the Stock Units and Deferred Restricted Units credited to Participants' Accounts maintained under the Plan the Stock or other securities which the Participant would have been entitled to subscribe for if immediately prior to such grant the shares of Stock represented by such Stock Units and Deferred Restricted Units had been issued and outstanding. If, at the time of distribution under the terms of the Plan, the Participant subscribes for the additional shares or other securities, the price that is payable by the Participant for such additional shares or other securities shall be withheld from such distribution pursuant to Section 5.06 hereof. 9.07 General Adjustment Rules No adjustment or substitution provided for in this Article IX shall require Apache to sell or otherwise issue a fractional share of Stock. All benefits payable under the Plan shall be distributed in whole shares of Stock, with any fractional shares paid in cash. 9.08 Determination by the Committee, Etc. Adjustments under this Article IX shall be made by the Committee, whose determinations with regard thereto shall be final and binding upon all parties thereto. ARTICLE X REORGANIZATION OR LIQUIDATION In the event that Apache is merged or consolidated with another corporation and Apache is not the surviving corporation, or if all or substantially all of the assets or more than 20 percent of the outstanding voting stock of Apache is acquired by any other corporation, business entity or person, or in case of a reorganization (other than a reorganization under the United States Bankruptcy Code) or liquidation of the Company, and if the provisions of Section 9.07 hereof do not apply, the Committee, or the board of directors of any corporation assuming the obligations of the Company, shall, as to the Plan and any Stock Units and Deferred Restricted Units credited to Participants' Accounts maintained under the Plan, either (i) make appropriate provision 16 for the adoption and continuation of the Plan by the acquiring or successor corporation and for the protection of any Stock Units and Deferred Restricted Units credited to Participants' Accounts maintained under the Plan by the substitution on a equitable basis of appropriate stock of Apache or of the merged, consolidated or otherwise reorganized corporation which will be issuable with respect to the Stock, provided that no additional benefits shall be conferred upon the Participants with respect to such Stock Units and Deferred Restricted Units as a result of such substitution or (ii) upon written notice to the Participants, provide that all distributions from the Plan shall be made within a specified number of days of the date of such notice. In the latter event, the Committee shall accelerate the vesting of all unvested Stock Units credited to Participants' Accounts so that (a) all such Stock Units become fully vested and (b) all Stock Units and Deferred Restricted Units are payable prior to any such event. ARTICLE XI MISCELLANEOUS 11.01 Funding of Benefits -- No Fiduciary Relationship Benefits shall be paid either out of the Trust or, if no Trust is in existence or if the assets in the Trust are insufficient to provide fully for such benefits, then such benefits shall be distributed by the Company out of its general assets. Nothing contained in the Plan shall be deemed to create any fiduciary relationship between the Company and the Participants. Notwithstanding anything herein to the contrary, to the extent that any person acquires a right to receive benefits under the Plan, such right shall be no greater than the right of any unsecured general creditor of the Company, except to the extent provided in the Trust Agreement, if any. 11.02 Right to Terminate Employment The Company may terminate the employment of any Participant as freely and with the same effect as if the Plan were not in existence. 11.03 Inalienability of Benefits No Participant shall have the right to assign, transfer, hypothecate, encumber or anticipate his interest in any benefits under the Plan, nor shall the benefits under the Plan be subject to any legal process to levy upon or attach the benefits for payment for any claim against the Participant or his Spouse. If, notwithstanding the foregoing provision, any Participant's benefits are garnished or attached by the order of any court, the Company may bring an action for declaratory judgment in a court of competent jurisdiction to determine the proper recipient of the benefits to be distributed pursuant to the Plan. During the pendency of the action, any benefits that become distributable shall be paid into the court, as they become distributable, to be distributed by the court to the recipient it deems proper at the conclusion of the action. 17 11.04 Claims Procedure (a) General. Each claim for benefits shall be processed in accordance with the procedures that may established by the Committee. The procedures shall comply with the guidelines specified in this section. The Committee may delegate its duties under this section. (b) Representatives. A claimant may appoint a representative to act on his behalf. The Plan shall only recognize a representative if the Plan has received a written authorization signed by the claimant and on a form prescribed by the Committee, with the following exceptions. The Plan shall recognize a claimant's legal representative, once the Plan is provided with documentation of such representation. If the claimant is a minor child, the Plan shall recognize the claimant's parent or guardian as the claimant's representative. Once an authorized representative is appointed, the Plan shall direct all information and notification regarding the claim to the authorized representative and the claimant shall be copied on all notifications regarding decisions, unless the claimant provides specific written direction otherwise. (c) Extension of Deadlines. The claimant may agree to an extension of any deadline that is mentioned in this section that applies to the Plan. The Committee or the relevant decision-maker may agree to an extension of any deadline that is mentioned in this section that applies to the claimant. (d) Fees. The Plan may not charge any fees to a claimant for utilizing the claims process described in this section. (e) Filing a Claim. A claim is made when the claimant files a claim in accordance with the procedures specified by the Committee. Any communication regarding benefits that is not made in accordance with the Plan's procedures will not be treated as a claim. (f) Initial Claims Decision. The Plan shall decide a claim within a reasonable time up to 90 days after receiving the claim. The Plan shall have a 90-day extension, but only if the Plan is unable to decide within 90 days for reasons beyond its control, the Plan notifies the claimant of the special circumstances requiring the need for the extension by the 90th day after receiving the claim, and the Plan notifies the claimant of the date by which the Plan expects to make a decision. (g) Notification of Initial Decision. The Plan shall provide the claimant with written notification of the Plan's full or partial denial of a claim, reduction of a previously approved benefit, or termination of a benefit. The notification shall include a statement of the reason(s) for the decision; references to the Plan provision(s) on which the decision was based; a description of 18 any additional material or information necessary to perfect the claim and why such information is needed; a description of the procedures and deadlines for appeal; a description of the right to obtain information about the appeal procedures; and a statement of the claimant's right to sue. (h) Appeal. The claimant may appeal any adverse or partially adverse decision. To appeal, the claimant must follow the procedures specified by the Committee. The appeal must be filed within 60 days of the date the claimant received notice of the initial decision. If the appeal is not timely and properly filed, the initial decision shall be the final decision of the Plan. The claimant may submit documents, written comments, and other information in support of the appeal. The claimant shall be given reasonable access at no charge to, and copies of, all documents, records, and other relevant information. (i) Appellate Decision. The Plan shall decide the appeal of a claim within a reasonable time of no more than 60 days from the date the Plan receives the claimant's appeal. The 60-day deadline shall be extended by an additional 60 days, but only if the Committee determines that special circumstances require an extension, the Plan notifies the claimant of the special circumstances requiring the need for the extension by the 60th day after receiving the appeal, and the Plan notifies the claimant of the date by which the Plan expects to make a decision. If an appeal is missing any information from the claimant that is needed to decide the appeal, the Plan shall notify the claimant of the missing information and grant the claimant a reasonable period to provide the missing information. If the missing information is not timely provided, the Plan shall deny the claim. If the missing information is timely provided, the 60-day deadline (or 120-day deadline with the extension) for the Plan to make its decision shall be increased by the length of time between the date the Plan requested the missing information and the date the Plan received it. (j) Notification of Decision. The Plan shall provide the claimant with written notification of the Plan's appellate decision (positive or adverse). The notification of any adverse or partially adverse decision shall include a statement of the reason(s) for the decision; reference to the plan provision(s) on which the decision was based; a description of the procedures and deadlines for a second appeal, if any; a description of the right to obtain information about the second-appeal procedures; a statement of the claimant's right to sue; and a statement that the claimant is entitled to receive, free of charge and upon request, reasonable access to and copies of all documents, records, and other information relevant to the claim. 19 11.05 Disposition of Unclaimed Distributions Each Participant must file with the Company from time to time in writing his post office address and each change of post office address. Any communication, statement or notice addressed to a Participant at his last post office address on file with the Company, or if no address is filed with the Company, then at his last post office address as shown on the Company's records, will be binding on the Participant and his Spouse for all purposes of the Plan. The Company shall not be required to search for or locate a Participant or his Spouse. 11.06 Distributions Due Infants or Incompetents If any person entitled to a distribution under the Plan is an infant, or if the Committee determines that any such person is incompetent by reason of physical or mental disability, whether or not legally adjudicated an incompetent, the Committee shall have the power to cause the distributions becoming due to such person to be made to another for his benefit, without responsibility of the Committee to see to the application of such distributions. Distributions made pursuant to such power shall operate as a complete discharge of the Company, the Trustee, if any, and the Committee. 11.07 Addresses Any notice, form, or election required or permitted to be given under the Plan shall be in writing and shall be given by first class mail, by Federal Express, UPS, or other carrier, by fax or other electronic means, or by personal delivery to the appropriate party, addressed: (a) If to the Company, to Apache Corporation at its principal place of business at 2000 Post Oak Boulevard, Suite 100, Houston, Texas 77056-4400 (Attention: Corporate Secretary) or at such other address as may have been furnished in writing by the Company to a Participant; or (b) If to a Participant, at the address the Participant has furnished to the Company in writing. 11.08 Statutory References Any reference to a specific section of the Code or other statute shall be deemed to refer to the cited section or to the appropriate successor section. 20 11.09 Governing Law The Plan and all Election Agreements shall be construed in accordance with the Code and, to the extent applicable, the laws of the State of Texas excluding any conflicts-of-law provisions. Dated: September 15, 2005, effective as of January 1, 2005 ATTEST: APACHE CORPORATION /s/ Cheri L. Peper /s/ Jeffrey M. Bender - ------------------------------------- ---------------------------------------- Cheri L. Peper Jeffrey M. Bender Corporate Secretary Vice President, Human Resources 21 ANNEX A APACHE CORPORATION DEFERRED DELIVERY PLAN STOCK BONUS AWARD PROVISIONS From time to time, grants of stock bonus awards for specified numbers of Stock Units (each a "Stock Bonus Award") may be made to Participants under the terms of the Plan. Capitalized terms used in this Annex A shall have the meaning set forth in the Plan or herein, as the case may be. Grants of Stock Bonus Awards shall be made by the Committee or by the Company's Board of Directors or its delegate. The Stock Units covered by each Stock Bonus Award shall be credited to the Participant's Account maintained under the Plan. In accordance with the provisions of the Plan, the Committee shall, in its sole discretion, select the Participants to receive Stock Bonus Awards. For each stock Bonus Award, the Committee shall: - specify the date of grant and number of Stock Units granted; - designate the vesting provisions; and - establish such other terms and requirements as deemed necessary or desirable and consistent with the Plan. Each Stock Bonus Award shall be evidenced by a written agreement containing the particular provisions of such award and in such form as the Committee shall determine. Upon the grant and/or vesting of each Stock Bonus Award, the Participant shall make appropriate arrangements with the Company to provide for the amount of all applicable federal, state and local income and other tax withholding requirements. As used in the Plan, the phrase "income from the grant of a Stock Bonus Award" shall mean the amount calculated by multiplying (a) the number of Stock Units covered by the Stock Bonus Award, times (b) the Fair Market Value of the Stock for the date of grant. Except as set forth in this Annex A and/or in the applicable written agreement, each Stock Bonus Award and the Stock Units related thereto shall be subject to all other terms and conditions set forth in the Plan. A-1 EX-10.6 7 h29394exv10w6.txt AMENDED AND RESTATED CONDITIONAL GRANT AGREEMENT Exhibit 10.6 APACHE CORPORATION AMENDED AND RESTATED CONDITIONAL STOCK GRANT AGREEMENT THIS AGREEMENT is made effective as of January 1, 2005 between APACHE CORPORATION, a Delaware corporation (the "Company"), and G. Steven Farris ("Grantee") as an amendment and restatement of the agreement initially entered into by the parties on December 17, 1998 and subsequently amended June 6, 2001. 1. GRANT. Subject to the terms of this Agreement and effective as of December 17, 1998, the Company hereby granted to Grantee a conditional stock award (the "Award") of up to 100,000 shares (230,992 shares after adjustment*) of the Company's common stock, par value $0.625 per share (the "Common Stock"). 2. RESTRICTIONS. The Award granted hereunder is subject to the following terms, conditions, restrictions and risks of forfeiture: (a) Shares of Common Stock to be issued pursuant to this Award may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of by Grantee until vested and paid in accordance with paragraph 2(b) and not otherwise forfeited in accordance with the terms hereof. (b) Subject to the other provisions of this Agreement, the Award shall be payable to Grantee in periodic installments (each an "Installment"), on the fifth anniversary of each commencement date (each a "Commencement Date") as set out below for each applicable Installment (each a "Vesting Date"):
INSTALLMENT COMMENCEMENT DATE VESTING DATE ----------- ----------------- ------------ (in shares of Common Stock) 6,667 January 1, 1999 January 1, 2004 (15,398 after adjustment*) 13,333 January 1, 2000 January 1, 2005 (30,798 after adjustment*) 20,000 January 1, 2001 January 1, 2006 (46,200 after adjustment*) 26,667 January 1, 2002 January 1, 2007 (61,598 after adjustment*) 33,333 January 1, 2003 January 1, 2008 (76,998 after adjustment*)
* adjusted for the Company's (i) ten-percent stock dividend, record date December 31, 2001, paid January 21, 2002, (ii) five-percent stock dividend, record date March 12, 2003, paid April 2, 2003, and (iii) two-for-one stock split, record date December 31, 2003, distributed January 14, 2004. Each Installment shall be paid to Grantee within five (5) business days of the applicable Vesting Date for such Installment as follows: 60% of the value of the Installment shall be in the form of shares of Common Stock and 40% of the value of the Installment (inclusive of withholding of any required income tax withholding) shall be in the form of cash. The value of each applicable Installment shall be the product of (i) the number of shares for such Installment as set out in the above table, and (ii) the closing price of the shares of Common Stock on The New York Stock Exchange, Inc. Composite Transactions Reporting System ("NYSE") on the Vesting Date or, if the Vesting Date is not a day on which the NYSE is open for trading, the last business day preceding the Vesting Date when the NYSE is open for trading. Except as otherwise provided in subparagraph (d) through (e) below, Grantee shall not be entitled to any payment with respect to any Installment unless Grantee is employed by the Company on the applicable Vesting Date. (c) If, prior to any Vesting Date, Grantee elects to discontinue his employment with the Company, or his employment with the Company is terminated for cause, as defined in that certain Employment Agreement between Grantee and the Company dated June 6, 1988, then Grantee shall forfeit all Installments of the Award for which a Vesting Date has not occurred as of the date of termination as provided above. (d) If, prior to any Vesting Date, the Company elects to terminate Grantee's employment with the Company other than for cause as defined in subparagraph (c) above, or Grantee dies or becomes totally disabled, then Grantee (or his beneficiary, as stated below in the case of death) shall be entitled to receive payment, as provided in this subparagraph (d), for the value of all Installments for which a Commencement Date has occurred on or prior to the date of termination, death or total disability, as applicable. The payment for the value of such Installment(s) shall be made to Grantee within thirty (30) days of the date of termination, death or disability, as applicable, shall be solely in cash, with the value of such Installment(s) being the product of (i) the number of shares for such Installment or Installments as set out in the above table, and (ii) the closing price of the shares of Common Stock on the NYSE on the date of termination, death or disability, as applicable, or, if such date is not a day on which the NYSE is open for trading, the last business day preceding such date when the NYSE is open for trading. Grantee may name a beneficiary or beneficiaries to receive any payment which he would otherwise be entitled to hereunder in the event of his death while in the employ of the Company. Such designation shall be made on a form to be provided by and filed with the Corporate Secretary of the Company. If Grantee fails to designate a beneficiary or no designated beneficiary survives Grantee, such payment shall be made to the legal representative of Grantee's estate. Grantee shall not be entitled to receive payment under this subparagraph (d) for any Installment for which a Commencement Date has not occurred as of the date of termination, death or disability, as applicable. (e) If, prior to any Vesting Date, an individual other than Grantee or the current Chief Executive Officer of the Company, becomes the Chief Executive Officer of the Company (which, for purposes of this subparagraph, shall include any entity which comes to control the Company), then Grantee, upon written request to the 2 Company, is entitled to receive payment, as provided in this subparagraph (e), for the value of all Installments for which a Commencement Date has occurred on or prior to the date of the written request The payment for such Installment(s) shall be made to Grantee within thirty (30) days of receipt of Grantee's notice, shall be solely in cash, with the value of such Installment(s) being the product of (i) the number of shares for such Installment or Installments as set out in the above table, and (ii) the closing price of the shares of Common Stock on the NYSE on the date of such written request or if such date is not a day on which the NYSE is open for trading, the last business day preceding such date when the NYSE is open for trading. (f) The shares of Common Stock issuable in accordance with this Agreement have not be registered under the Securities Act of 1933, as amended (the "Act"), and are subject to the restrictions contained in paragraph 8 of this Agreement. 3. ENFORCEMENT OF RESTRICTIONS. (a) Each stock certificate issued in the name of Grantee pursuant to this Agreement shall bear the following restrictive legend: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE RESTRICTIONS CONTAINED IN A CONDITIONAL STOCK GRANT AGREEMENT DATED AS OF DECEMBER 17, 1998, BY AND BETWEEN APACHE CORPORATION AND G. STEVEN FARRIS, A COPY OF WHICH IS ON FILE AT THE OFFICE OF THE CORPORATE SECTETARY OF THE COMPANY. (b) Grantee shall not be entitled to delivery of the stock certificate for the share portion of any Installment of the Award until such Installment has vested in Grantee and been paid by the Company in accordance with paragraph 2(a). Prior to the Vesting Date for any Installment, all stock certificates shall be held by the Corporate Secretary and Grantee hereby agrees to execute a blank stock power with respect to the stock certificate representing the share portion of any Installment. 4. PRIVILEGES OF A STOCKHOLDER. Upon the occurrence of a Commencement Date and subject to the restrictions of paragraph 2, Grantee shall have all voting, dividend and liquidation rights of a stockholder of the Company with respect to the shares of Common Stock subject to the applicable Installment, notwithstanding that such Installment is unvested. 5. ADMINISTRATION. This Agreement shall be administered by the Board of Directors of Apache Corporation (the "Board of Directors") or any committee thereof as may be empowered by the Board of Directors. Any action taken or decision made by the Company, the Board of Directors, or its delegates arising out of or in connection with the construction, interpretation or effect of this Agreement shall lie within its sole and 3 absolute discretion, and shall be final, conclusive and binding on Grantee and all persons claiming under or through Grantee. By accepting this Agreement, Grantee and all persons claiming under or through Grantee shall be conclusively deemed to have indicated acceptance and ratification of, and consent to, any action taken under this Agreement by the Company, the Board of Directors, or its delegates. 6. ADJUSTMENTS. (a) If the Company shall at any time increase or decrease the number of its outstanding shares of Common Stock or change in any way the rights and privileges of such shares by means of a stock dividend or any other distribution upon such shares payable in shares of Common Stock, or through a stock split, subdivision, consolidation, combination, reclassification or recapitalization involving the outstanding shares of Common Stock (hereinafter a "capital restructuring"), then upon the occurrence of a capital restructuring, the number of shares of Common Stock of each unvested Installment shall be appropriately increased, decreased or changed in like manner as if the number of shares of Common Stock of each unvested Installment had been issued, outstanding, fully paid and non-assessable at the record date for the capital restructuring. (b) In the event that the Company is merged or consolidated with another corporation and the Company is not the surviving corporation, or if all or substantially all of the assets or more than 50 percent of the outstanding shares of Common Stock of the Company is acquired by any other corporation, business entity or person, or in case of a reorganization (other than a reorganization under the United States Bankruptcy Code) or liquidation of the Company, and if the provisions of subparagraph (c) hereof do not apply, the Board of Directors, or the board of directors of any corporation assuming the obligations of the Company, shall either (i) make appropriate provision for the adoption and continuation of this Agreement by the acquiring or successor corporation and for the protection of Grantee by the substitution on an equitable basis of appropriate stock of the Company or of the merged, consolidated or otherwise reorganized corporation which will be issuable with respect to any outstanding Installment, provided that no additional benefits shall be conferred upon Grantee as a result of such substitution, or (ii) upon written notice to Grantee, the Board of Directors, in its sole discretion, if it so elects, may accelerate the vesting of any unvested Installment so that all unvested Installments become fully vested (and become immediately payable upon vesting) at the time of, or prior to, any such event. (c) In the event of a change of control of the Company, as defined below, all unvested Installments shall automatically vest, without further action by the Board of Directors, as of the date of such change of control. Payment shall occur on or before the fifth business day following the change of control. (d) For purposes of this Agreement, a "change of control" shall mean any of the events specified in the Company's Income Continuance Plan, as amended, or any successor plan which constitute a change in control within the meaning of such plan. 4 (e) Any adjustments under this paragraph shall be made by the Board of Directors whose determination with regard thereto shall be final and binding on all parties. 7. WITHHOLDING OF TAX. The Grantee hereby agrees that the Company is entitled to make any required income tax withholding from any payments made under paragraph 2. 8. INVESTMENT REPRESENTATION. Grantee hereby acknowledges that any shares of Common Stock issued pursuant to this Agreement are acquired for investment without a view to distribution, within the meaning of the Act, and shall not be sold, transferred, assigned, pledged or hypothecated in the absence of an effective registration statement under the Act or an applicable exemption from the registration requirements of the Act and any applicable state securities laws and the following legend shall be imprinted on any stock certificate. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE FEDERAL SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OFFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER APPLICABLE SECURITIES LAWS OR AN OPINION FROM COUNSEL ACCEPTABLE TO THE COMPANY STATING THAT SUCH REGISTRATION IS NOT REQUIRED. 9. LISTING AND REGISTRATION OF COMMON STOCK. This Agreement shall be subject to the requirement that, if at any time counsel to the Company shall determine that the listing, registration or qualification of the shares of Common Stock issued pursuant to this Agreement upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, is necessary as a condition of, or in connection with, the issuance of the shares hereunder, this Agreement may not be accepted in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained on conditions acceptable to the Board of Directors. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration or qualification. 5 10. NO RIGHT TO CONTINUE AS DIRECTOR OR EMPLOYEE. Nothing contained in this Agreement shall interfere with or limit in any way the right of the stockholders of the Company to remove Grantee from the Board of Directors pursuant to the Bylaws or the Restated Certificate of Incorporation of the Company, nor confer upon Grantee any right to continue in the employment of the Company. 11. NOTICES. Any notice hereunder to the Company shall be addressed to: Apache Corporation, One Post Oak Central, 2000 Post Oak Boulevard, Suite 100, Houston, Texas 77056-4400, Attention: Corporate Secretary, and any notice to Grantee shall be addressed to Grantee at Grantee's last address on the records of the Company, subject to the right of either party to designate at any time hereafter in writing some other address. Any notice shall be deemed to have been duly given when delivered personally or enclosed in a properly sealed envelope, addressed as set forth above, and deposited (with first class postage prepaid) with the United States Postal Service. 12. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under or through Grantee. 13. GOVERNING LAW. The validity, construction, interpretation, administration and effect of this Agreement, shall be governed by the substantive laws, but not the choice of law rules, of the State of Texas. IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement on September 15, 2005. The Agreement is effective as of January 1, 2005. ATTEST: APACHE CORPORATION /s/ Cheri L. Peper /s/ Jeffrey M. Bender - ------------------------------------- ---------------------------------------- Cheri L. Peper By: Jeffrey M. Bender Corporate Secretary Its: Vice President GRANTEE /s/ G. Steven Farris ---------------------------------------- G. Steven Farris Printed Name 6 EX-10.7 8 h29394exv10w7.txt NON-EMPLOYEE DIRECTORS' COMPENSATION PLAN AS AMENDED Exhibit 10.7 APACHE CORPORATION NON-EMPLOYEE DIRECTORS' COMPENSATION PLAN As Amended and Restated September 15, 2005; Effective as of January 1, 2005 PURPOSE The purpose of the Non-Employee Directors' Compensation Plan (the "PLAN") is to set forth certain of the compensation arrangements for members of the board of directors (the "BOARD") of Apache Corporation ("APACHE") who are not also employees of Apache ("NON-EMPLOYEE DIRECTORS"). The Plan supersedes the Directors' Deferred Compensation Plan. The Plan does not supersede or amend in any way any other arrangements relating to Non-Employee Directors including specifically, without limitation, the Equity Compensation Plan for Non-Employee Directors, the Outside Directors' Retirement Plan, indemnification provisions of Apache's charter or bylaws, or policies with respect to reimbursement of expenses. PLAN PROVISIONS 1. BOARD RETAINER. Each Non-Employee Director shall be paid, as soon as practicable following accrual, the Board retainer fees set forth below: (a) $10,000.00 shall be paid to each Non-Employee Director at the end of each calendar quarter during which such Non-Employee Director served as a member of Apache's Board ("CASH RETAINER FEE"); (b) $2,500.00 in value of Apache common stock, par value $0.625 per share ("STOCK"), shall be paid from Apache's treasury shares to each Non-Employee Director at the end of each calendar quarter during which such Non-Employee Director served as a member of Apache's Board ("STOCK RETAINER FEE"). The number of shares of Stock shall be determined by dividing $2,500.00 by the per share closing price of the Stock as reported on The New York Stock Exchange, Inc. Composite Transactions Reporting System (the "COMPOSITE TAPE") as of the trading day prior to the last trading day of the relevant calendar quarter, with any fractional shares to be paid to the director in cash; and (c) In the event that a Non-Employee Director serves as a member of Apache's Board for less than an entire calendar quarter, the fees payable pursuant to sections 1(a) and 1(b) shall be prorated on the basis of the number of weeks served during such calendar quarter. 2. COMMITTEE RETAINERS. Each Non-Employee Director serving on any committee of Apache's Board shall be paid, as soon as practicable, the committee retainer fee ("COMMITTEE RETAINER FEE") set forth below: (a) $500.00 shall be paid to each Non-Employee Director at the end of each calendar quarter in respect of each committee on which such Non-Employee Director served during such quarter; 1 (b) $1,000.00 shall be paid to each Non-Employee Director at the end of each calendar quarter in respect of each committee on which such Non-Employee Director served as chairperson during such quarter; and (c) In the event that a Non-Employee Director serves on any committee of Apache's Board and/or as chairperson of any committee of Apache's board for less than an entire calendar quarter, the fees payable pursuant to sections 2(a) and 2(b) shall be prorated on the basis of the number of weeks served during such calendar quarter. 3. ATTENDANCE FEES. Each Non-Employee Director shall receive the attendance fee ("ATTENDANCE FEE") set forth below, such fee to be paid at each such meeting or as soon thereafter a practicable: (a) $1,500.00 shall be paid for each meeting of the Board or of any committee thereof attended in person; and (b) $1,000.00 shall be paid for each meeting of the Board or of any committee thereof attended by teleconference, video conference, or other similar means. 4. OPTIONAL DEFERRAL OF FEES. (a) DEFERRABLE FEES. A Non-Employee Director may defer all or any portion of any unpaid Cash Retainer Fee, Stock Retainer Fee, Committee Retainer Fee, and Attendance Fee, all of which are paid to Non-Employee Directors with respect to their services performed as a director on the Board ("DEFERRABLE FEES"). No other payments to Non-Employee Directors may be deferred including, without limitation, any expense reimbursement, any award under Apache's Equity Compensation Plan for Non-Employee Directors, and benefits payable under the Outside Directors' Retirement Plan. (b) ELECTION TO DEFER. A Non-Employee Director's election to defer all or any portion of Deferrable Fees ("DEFERRAL ELECTION") shall be effected by the completion of a Deferral Election form. A Deferral Election form must be executed by the deferring Non-Employee Director and received by Apache on or before December 31 of the year prior to the year for which deferral is elected, except that a new Non-Employee Director may enter into a Deferral Election within 30 days of becoming a Non-Employee Director. A Deferral Election shall apply only to Deferrable Fees paid for services rendered after the date of the Deferral Election. Each December 31, a Deferral Election made for the following year shall become irrevocable. A new Deferral Election must be made each year for the upcoming year. (c) MEMORANDUM ACCOUNT. Apache shall maintain a separate account ("MEMORANDUM ACCOUNT") for each deferring Non-Employee Director. Each Memorandum Account shall be subdivided into a "CASH ACCOUNT" and a "STOCK ACCOUNT." The Memorandum Accounts are merely for recordkeeping purposes, and do not represent any actual property that has been set aside for Non-Employee Directors. Nothing contained in this Plan shall be construed to require Apache to fund any Memorandum Account. Neither the deferring Non-Employee Director nor 2 his or her Beneficiary shall have any property interest whatsoever in any specific assets of Apache. (d) CREDITING OF ACCOUNTS. Any deferred Cash Retainer Fees and deferred Committee Retainer Fees shall be credited to the Cash Account or the Stock Account, as the Non-Employee Director may elect. Any deferred Stock Retainer Fees shall be credited to the Stock Account. Any deferred Attendance Fees shall be credited to the Cash Account. Only whole shares of Stock will be credited to a Stock Account; the value of any fractional share shall instead be credited to the Cash Account. Apache shall at all times have reserved from its treasury shares for issuance under this Plan a number of shares at least equal to the number of shares of Stock in the Stock Accounts. (e) NUMBER OF SHARES. The number of shares of Stock that are credited to a Stock Account shall be determined by dividing the amount deferred by the per share closing price of the Stock as reported on the Composite Tape as of the trading day prior to the last trading day of the calendar quarter in which the deferral occurs. (f) INVESTMENT. All amounts credited to a Stock Account shall be treated as if such amounts were invested in Stock; any dividends paid on Stock shall be credited to the Cash Account. All amounts credited to a Cash Account shall be credited with investment earnings at the rate of interest earned by Apache's short-term marketable securities portfolio or an equivalent index or market rate for similar investments in short-term marketable securities. Each year, a Non-Employee Director may elect to transfer all or a portion of his or her Cash Account to his or her Stock Account (but only in whole-share increments) by completing an election form that must be received by Apache on or before December 31. Any such transfer shall be made as of the first trading day of the following year, and shall be based on the per share closing price of the Stock as reported on the Composite Tape for the first trading day of the year. Transfers are not permitted from a Stock Account to a Cash Account. A Non-Employee Director shall have no ownership rights with respect to any balance in his or her Memorandum Account, and thus shall have no right to vote any Stock in his or her Stock Account. (g) PAYOUT ELECTIONS. If a Non-Employee Director's directorship terminated before January 1, 2005, his or her benefit payments shall be determined under the terms of the Plan on December 31, 2004 and the payout elections in effect at the time his or her directorship terminated. The remainder of this section 4(g) shall only apply to individuals who continue as Non-Employee Directors after December 31, 2004, or who became Non-Employee Directors after December 31, 2004. (i) Election. A Non-Employee Director shall make one payout election for his or her Memorandum Account. The payout election shall specify both the timing and form of distribution. The payout election must be made by the later of December 31, 2005 or 30 days after the individual became a Non-Employee Director; if no payout election is made by that time, the Non-Employee Director shall be deemed to have elected to be paid a single lump-sum payment in January after separating from service (except that, if he or she is a specified employee, his or her payment shall be delayed, if necessary, until six months after he or she separated from service). The 3 payout election will not apply if there is a change of control (see section 4(h)) or the Non-Employee Director dies (see section 4(i)). (ii) Form of Payout. A Non-Employee Director may elect to be paid out in a single lump-sum payment or in two to ten annual installments. Each installment from a Stock Account shall be equal to the number of shares in the Stock Account on the second business day of that year, divided by the number of remaining installments, rounded down to the nearest whole share. For example, the first installment from a Stock Account payable in seven installments beginning in 2008 shall be one-seventh of the shares in the account on the second trading day of 2008; the second installment shall be one-sixth of the shares in the account on the second trading date of 2009; etc. Each installment from a Cash Account shall be equal to the balance of the Cash Account on the second trading day of the year, divided by the number of remaining installments, except that the last installment shall equal the balance of the Cash Account at the time the distribution is processed. Distributions from the Stock Account shall be paid in whole shares of Stock. Distributions from the Cash Account shall be paid in cash. (iii) Timing of Payment(s). A Non-Employee Director may select a specific year in which the single lump-sum payment is made or the installment payments begin ("IN-SERVICE DISTRIBUTION"), in which case the payment will be made as soon as administratively practicable in January of the earlier of the selected year or the year after the Non-Employee Director separates from service (but, if the Non-Employee Director is a specified employee, not earlier than six months after he or she separated from service). Alternatively, a Non-Employee Director may elect for his or her single lump-sum payment or first installment to be paid as soon as administratively practicable in the January after the Non-Employee Director separated from service (but, if the Non-Employee Director is a specified employee, not earlier than six months after separating from service). Subsequent installment payments shall be made in January of each year, beginning with the year after the first installment was paid. (iv) Special Rules Where Payments Begin While Still a Director. This section 4(g)(iv) applies to a Non-Employee Director who elected an In-Service Distribution. A second Memorandum Account shall be established for the Non-Employee Director for any amounts deferred into the Plan during or after the year in which the In-Service Distribution is scheduled to begin. Distributions from the second Memorandum Account shall be subject to the rules specified in this section 4(g), except that a Non-Employee Director must complete a payout election for the second Memorandum Account by the December 31 that immediately precedes the year in which amounts are first deferred into the second Memorandum Account. (v) Definitions. As used in this section 4, the term "specified employee" has the meaning described in section 409A(a)(2)(B)(i) of the Internal Revenue Code of 1986, as amended ("CODE"), and the term "separate from service" or "separation from service" has the meaning described in section 409A(a)(2)(A)(i) of the Code. 4 (h) CHANGE OF CONTROL. If there is a change of control of Apache that is described in section 409A(a)(2)(A)(v) of the Code, each Memorandum Account shall be paid to the appropriate Non-Employee Director (or to the Beneficiary of a deceased Non-Employee Director) in a single lump-sum payment made on the date of the change of control or as soon thereafter as is administratively practicable. (i) BENEFICIARIES. If a Non-Employee Director dies while there is still a balance in his or her Memorandum Account, that amount shall be paid to his or her Beneficiary in a single lump-sum payment that is made as soon as administratively convenient after the Non-Employee Director's death, after giving the Beneficiary an opportunity to disclaim and after Apache has been furnished with proof of death and such other information as it may reasonably require. (i) Designation. Each Non-Employee Director shall designate one or more persons, trusts, or other entities as his or her beneficiary ("BENEFICIARY"). In the absence of an effective Beneficiary designation as to part or all of a Memorandum Account, such amount shall be distributed to the Non-Employee Director's surviving Spouse, if any, otherwise to the Non-Employee Director's estate. Unless the Non-Employee Director's Beneficiary designation form specifies otherwise, if a Beneficiary dies after the Non-Employee Director but before being paid by the Plan, the Plan shall pay the Beneficiary's estate. (ii) Changing Beneficiaries. A Beneficiary designation may be changed by the Non-Employee Director at any time and without the consent of any previously designated Beneficiary. However, if the Non-Employee Director is married, the Non-Employee Director's Spouse shall be the Beneficiary unless the Spouse has consented to the designation of a different Beneficiary. To be effective, the Spouse's consent must have been made before January 1, 2005 or, if made on or after January 1, 2005, the Spouse's consent must be in writing, witnessed by a notary public, and filed with Apache. If the Non-Employee Director has designated his or her Spouse as a primary or contingent Beneficiary, and the Non-Employee Director and Spouse later divorce (or their marriage is annulled), then the former Spouse will be treated as having pre-deceased the Non-Employee Director for purposes of interpreting a Beneficiary designation form completed prior to the divorce or annulment; this provision will apply only if Apache is notified of the divorce or annulment before payment to the former Spouse is made. (iii) "SPOUSE" shall mean the individual to whom a Non-Employee Director is lawfully married according to the laws of the state of the Non-Employee Director's domicile. (iv) Disclaimers. Any individual or legal entity who is a Beneficiary may disclaim all or any portion of his or her interest in the Plan, provided that the disclaimer satisfies the requirements of section 2518(b) of the Code and applicable state law. The legal guardian of a minor or legally incompetent person may disclaim for such person. The personal representative (or the individual or legal entity acting in the capacity of the personal representative according to applicable state law) may disclaim on behalf of a Beneficiary who 5 has died. The amount disclaimed shall be distributed as if the disclaimant had predeceased the individual whose death caused the disclaimant to become a Beneficiary. (j) ADJUSTMENTS IN STOCK. In the event of any merger, consolidation, liquidation, dissolution, recapitalization, or reorganization of Apache, split, subdivision, or consolidation of shares of Stock, the payment of a stock dividend, or any other material change in Apache's capital structure, the number of shares of Stock shown in each deferring Non-Employee Director's Stock Account shall be adjusted to reflect that number of shares of Stock or such cash, securities, or other property to which such Non-Employee Director would have been entitled if, immediately prior thereto, such Non-Employee Director had been the holder of record of the number of shares of Stock shown in the Stock Account. Notwithstanding the foregoing, the issuance by Apache of Stock, rights, options, or warrants to acquire Stock, or securities convertible or exchangeable into Stock in consideration of cash, property, labor, or services, whether or not for fair value, shall not result in an adjustment pursuant to this section 4(j). 5. ASSIGNMENT AND TRANSFER. The right of the Non-Employee Director or any other person to receive payments under the Plan shall not be assigned, transferred, pledged, or encumbered. 6. AMENDMENT OF PLAN. The Plan may be amended from time to time or terminated by vote of the Board. Upon such amendment or termination, Non-Employee Directors shall not be entitled to receive pursuant to the Plan any compensation or other rights or benefits not accrued hereunder prior to the time of amendment or termination hereof; provided, however, that no such Plan amendment or termination shall impair any rights of Non-Employee Directors to amounts previously accrued pursuant to the Plan or accumulated in such Non-Employee Director's Memorandum Account. A Plan termination shall not affect the timing of any benefit payments from a Memorandum Account; payment may occur substantially after the Plan is terminated. A Plan amendment may delay the timing of a benefit payment. A Plan amendment may accelerate the timing of a benefit payment, but only if the acceleration would not cause the Plan to violate section 409A(a)(3) of the Code. 7. SUCCESSORS AND ASSIGNS. The Plan is binding upon Apache and its successors and assigns. The Plan shall continue in effect until terminated by the Board. Any such termination shall operate only prospectively and shall not affect the rights and obligations under elections previously made. 8. NOTICES. Any notice, form, or election required or permitted to be given under the Plan shall be in writing and shall be given by first class mail, by Federal Express, UPS, or other carrier, by fax or other electronic means, or by personal delivery to the appropriate party, addressed: (a) If to Apache, to Apache Corporation at its principal place of business at 2000 Post Oak Boulevard, Suite 100, Houston, Texas 77056-4400 (Attention: Corporate Secretary) or at such other address as may have been furnished in writing by Apache to a Non-Employee Director; or 6 (b) If to a Non-Employee Director or Spouse, at the address the Non-Employee Director has furnished to Apache in writing. (c) If to a Beneficiary, at the address the Non-Employee Director has furnished to Apache in writing for such Beneficiary. Any such notice to a Non-Employee Director, Spouse, or Beneficiary shall be deemed to have been given as of the third day after deposit in the United States Postal Service, postage prepaid, properly addressed as set forth above, in the case of a mailed notice, or as of the date delivered in the case of any other method of delivery. 9. GENDER. Any term used herein in the singular shall also include the plural, and the masculine gender shall also include the feminine gender, and vice versa. 10. STATUTORY REFERENCES. Any reference to a specific section of the Code shall be deemed to refer to that section or to the appropriate successor section. 11. GOVERNING LAW. The Plan and all elections hereunder shall be construed in accordance with and governed by the laws of the State of Texas. Dated: September 15, 2005; Effective as of January 1, 2005 ATTEST: APACHE CORPORATION /s/ Cheri L. Peper /s/ Jeffrey M. Bender - ------------------------------------- ---------------------------------------- Cheri L. Peper Jeffrey M. Bender Corporate Secretary Vice President, Human Resources 7 EX-10.8 9 h29394exv10w8.txt OUTSIDE DIRECTORS' RETIREMENT PLAN AS AMENDED Exhibit 10.8 APACHE CORPORATION OUTSIDE DIRECTORS' RETIREMENT PLAN (As Amended and Restated September 15, 2005, Effective as of January 1, 2005) APACHE CORPORATION (the "Company") established the Apache Corporation Outside Directors' Retirement Plan (the "Plan"), effective as of December 15, 1992, to provide non-employee Directors of the Company ("Outside Directors") with certain retirement and death payments. The purpose of the Plan is to advance the interests of the Company, its subsidiaries, and its stockholders by continuing to attract and retain outstanding individuals as Outside Directors and to stimulate the efforts of such individuals by giving suitable recognition to services which will contribute materially to the success of the Company. ARTICLE I ELIGIBILITY, PARTICIPATION AND CONTRIBUTIONS 1.1 Eligibility and Participation. Each Outside Director begins to participate in the Plan as of the date his or her Service begins. 1.2 Contributions. All amounts payable under the Plan shall be paid from the general assets of the Company. Nothing contained in the Plan shall be deemed to create any fiduciary relationship between the Company and the participating Outside Director ("Participant"). Any rights of the Participant under the Plan shall be no greater than the right of any unsecured general creditor of the Company. ARTICLE II RETIREMENT PAYMENTS 2.1 Retirement Payments. (a) Eligibility for Benefits. A Participant who Retires with four or more Quarters of Service is entitled to receive benefits under the Plan. (b) Amount of Benefits. The amount of benefits under the Plan is equal to the value of a series of quarterly payments, with each payment equal in amount to one-sixth of the Participant's Annual Director's Retainer, and with the number of quarterly payments equal to the number of the Participant's Quarters of Service. As a consequence, each Participant will generally receive an annual benefit of 662/3 percent of his or her Annual Director's Retainer. 1 (c) "Annual Director's Retainer" shall mean the aggregate annual amount of an Outside Director's board retainer fee payable pursuant to section 1 of the Company's Non-Employee Directors' Compensation Plan (or comparable section of any successor plan), whether or not all or a portion of such amount is deferred or delayed. Such amount shall be determined as of the earlier of the date a Participant Retires or the date the Participant dies. (d) "Quarter of Service" shall mean the aggregate total full months of Service as an Outside Director divided by three and rounded up to the next whole number but in no event shall any Participant's Quarters of Service exceed 40. (e) "Retirement, Retired or Retires" shall mean a Participant's ceasing to hold office as an Outside Director, for any reason other than death, on or after the attainment of age 60. (f) "Service" shall mean the aggregate total, not to exceed 120, of (i) the number of full months beginning on or after July 1, 1992 (whether or not consecutive) that a Participant held office as an Outside Director, whether or not a Participant at the time, and (ii) 1/2 the number of full months prior to July 1, 1992 (whether or not consecutive) that a Participant held office as an Outside Director; provided, however, that a Participant who, as of December 15, 1992, has held office as an Outside Director for an aggregate total of 15 years shall automatically be credited with 120 full months of Service. If a Participant begins to receive a benefit under the Plan and then becomes an Outside Director again, (1) the Participant's benefits from his or her initial episode of participation shall continue to be paid as scheduled and shall not be affected by any subsequent Service, and (2) the Participant's benefits from his or her later episode of participation shall be calculated by ignoring his or her Service from earlier episodes of participation. 2.2 Retirement Payments Following Change of Control. In the event of a "change of control" of the Company, as defined in the Company's Income Continuance Plan (as amended or the corresponding provisions of any successor plan), each current Outside Director shall be eligible for the benefits described in section 2.1(b). If the change of control is a transaction described in Section 409A(a)(2)(A)(v) of the Internal Revenue Code of 1986, as amended ("Code"), each Participant shall be paid a single lump-sum payment equal to the net present value of the benefit to which the Participant is entitled, calculated in the manner described in section 2.4, as of the date of the change of control. If the change of control is not a transaction described in Code Section 409A(a)(2)(A)(v), each Participant shall be paid at the time(s) specified in section 2.3 or 2.4, whichever is applicable. 2 2.3 Quarterly Payments. A Participant may elect to be paid quarterly installments that are paid on the last day of each calendar quarter (or as near to that date as administratively practicable). The first quarterly payment shall be made as of the last day of the calendar quarter after the date the Participant separates from service (within the meaning of Code Section 409A(a)(2)(A)(i)), unless the Participant is a specified employee within the meaning of Code Section 409A(a)(2)(B)(i), in which case the first two quarterly payments shall be delayed until, and paid with, the third regularly scheduled quarterly payment. 2.4 Lump-Sum Payments. A Participant shall receive a single lump-sum payment unless the Participant elects quarterly installments. The Participant's election must be made by the later of December 31, 2005 or 30 days after the individual initially becomes a Participant. The lump sum shall be paid as soon as administratively practicable after the Participant separates from service within the meaning of Code Section 409A(a)(2)(A)(i), unless the Participant is a specified employee within the meaning of Code Section 409A(a)(2)(B)(i), in which case the lump sum shall be paid as soon as administratively practicable after 6 months after the Participant's separation from service. The amount of the lump sum shall be calculated by the Committee as of the date of the Participant's Retirement. The amount of the lump sum shall be equal to the net present value of the quarterly payments to which the Participant would otherwise be entitled, determined using an annual interest rate equal to the rate on ten-year treasury bonds/notes as reported in The Wall Street Journal published on or most recently prior to the effective date of the Participant's Retirement. 2.5 Retirement before 2005. A Participant who Retired on or before December 31, 2004 shall receive his or her benefit in accordance with the terms of the Plan in effect on December 31, 2004. ARTICLE III DEATH PAYMENTS 3.1 Death Benefits. (a) Eligibility for Death Benefits. A Participant's Beneficiary shall receive a death benefit only if (i) a change of control occurs while the Participant is an Outside Director, (ii) the Participant attains age 60 as an Outside Director, or (iii) the Participant dies while an Outside Director after having obtained at least 40 Quarters of Service. (b) Installments Selected. If a Participant elected quarterly payments, the Participant's Beneficiary shall be paid a lump sum equal to the net present value of any remaining payments, calculated as of the date of the Participant's death, and calculated in the manner specified in section 2.4. 3 (c) Scheduled to Receive a Lump Sum. If a Participant is scheduled to receive a single lump-sum payment, but dies before doing so, the Participant's Beneficiary shall be paid the lump sum. (d) Timing. Payment to the Beneficiary shall be made as soon as administratively convenient after the Participant's death, after giving the Beneficiary an opportunity to disclaim and after the Company has been furnished with proof of death and such other information as it may reasonably require. (e) Beneficiary in Pay Status. The Beneficiary of a Participant who died on or before December 31, 2004 shall receive his or her death benefits in accordance with the terms of the Plan in effect on December 31, 2004. 3.2 Beneficiaries. (a) Designation. Each Participant shall designate one or more persons, trusts, or other entities as his or her beneficiary (the "Beneficiary") to receive any death benefits provided under section 3.1. In the absence of an effective Beneficiary designation as to part or all of a Participant's death benefits, such benefits shall be distributed to the Participant's surviving Spouse, if any, otherwise to the Participant's estate. Unless the Participant's Beneficiary designation form specifies otherwise, if a Beneficiary dies after the Participant but before being paid by the Plan, the Plan shall pay the Beneficiary's estate. (b) Changing Beneficiaries. A Beneficiary designation may be changed by the Participant at any time and without the consent of any previously designated Beneficiary. However, if the Participant is married, the Participant's Spouse shall be the Participant's Beneficiary unless the Spouse has consented to the designation of a different Beneficiary. To be effective, the Spouse's consent must have been made before January 1, 2005 or, if made on or after January 1, 2005, the Spouse's consent must be in writing, witnessed by a notary public, and filed with the Company. If the Participant has designated his or her Spouse as a primary or contingent Beneficiary, and the Participant and Spouse later divorce (or their marriage is annulled), then the former Spouse will be treated as having pre-deceased the Participant for purposes of interpreting a Beneficiary designation form completed prior to the divorce or annulment; this provision will apply only if the Company is notified of the divorce or annulment before payment to the former Spouse is made. (c) "Spouse" shall mean the individual to whom a Participant is lawfully married according to the laws of the state of the Participant's domicile. (d) Disclaimers. Any individual or legal entity who is a Beneficiary may disclaim all or any portion of his or her interest in the Plan, provided that the disclaimer satisfies the requirements of Code Section 2518(b) and applicable state law. The legal guardian of a minor or legally incompetent person may disclaim for such person. The 4 personal representative (or the individual or legal entity acting in the capacity of the personal representative according to applicable state law) may disclaim on behalf of a Beneficiary who has died. The amount disclaimed shall be distributed as if the disclaimant had predeceased the individual whose death caused the disclaimant to become a Beneficiary. ARTICLE IV ADMINISTRATION, AMENDMENT AND TERMINATION 4.1 The Management Development and Compensation Committee. The Plan shall be administered by the Management Development and Compensation Committee (the "Committee") of the Company's Board of Directors. All administrative duties, including but not limited to, the power to interpret the Plan and to decide any dispute, shall be carried out by the Committee, which shall have full discretion and authority hereunder. All claims under the Plan shall be filed with the Company and shall be decided by the Committee. The decisions made by the Committee shall be final and binding on all persons having or claiming to have rights under the Plan. 4.2 Termination or Amendment of Plan. The Plan may be terminated or amended at any time through action of the Company's Board of Directors. No termination or amendment, however, shall reduce the payments (a) to a Participant or Beneficiary where a Participant has already died or reached Retirement, (b) to which a Participant is or may become entitled, based on such Participant's Service and Annual Director's Retainer as determined on the effective date of such termination or amendment, or (c) to which a Participant is or may become entitled pursuant to section 2.2 as a result of a change of control. The termination of the Plan shall not affect the timing of any benefit payments; payments after the Plan has terminated will be made at the time(s) specified in Articles II and III. ARTICLE V MISCELLANEOUS 5.1 Inalienability of Payments. No Participant shall have the right to assign, transfer, hypothecate, encumber or anticipate his or her interest in any payments under the Plan, nor shall the payments under the Plan be subject to any legal process to levy upon or attach such payments for any claim against the Participant, Spouse, or Beneficiary. 5.2 Notices. Any notice, form, or election required or permitted to be given under the Plan shall be in writing and shall be given by first class mail, by Federal Express, UPS, or 5 other carrier, by fax or other electronic means, or by personal delivery to the appropriate party, addressed: (a) If to the Company, to Apache Corporation at its principal place of business at 2000 Post Oak Boulevard, Suite 100, Houston, Texas 77056-4400 (Attention: Corporate Secretary) or at such other address as may have been furnished in writing by the Company to a Participant; or (b) If to a Participant or Spouse, at the address the Participant has furnished to the Company in writing. (c) If to a Beneficiary, at the address the Participant has furnished to the Company in writing for such Beneficiary. Any such notice to a Participant, Spouse, or Beneficiary shall be deemed to have been given as of the third day after deposit in the United States Postal Service, postage prepaid, properly addressed as set forth above, in the case of a mailed notice, or as of the date delivered in the case of any other method of delivery. 5.3 Disposition of Unclaimed Payments. Any communication, statement or notice addressed to a Participant at his or her last post office address, as provided to the Company under section 5.2, will be binding on the Participant, Spouse, or Beneficiary for all purposes of the Plan. If the Company cannot ascertain the whereabouts of any person to whom a payment is due under the Plan within three years from the date such payment is due, such payment shall be cancelled on the records of the Plan and the amount thereof forfeited to the Company. 5.4 Gender. Any term herein used in the singular shall also include the plural, and the masculine gender shall also include the feminine gender, and vice versa. 5.5 Statutory References. Any reference to a specific section of the Code shall be deemed to refer to that section or to the appropriate successor section. 5.6 Governing Law. The Plan shall be governed by the laws of the State of Texas. Dated: September 15, 2005, Effective as of January 1, 2005 ATTEST: APACHE CORPORATION By: /s/ Cheri L. Peper By: /s/ Jeffrey M. Bender --------------------------------- ------------------------------------ Cheri L. Peper Jeffrey M. Bender Corporate Secretary Vice President, Human Resources 6 EX-12.1 10 h29394exv12w1.txt STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 APACHE CORPORATION STATEMENT OF COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2005 2004 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- ---------- ---------- EARNINGS Pretax income from continuing operations before preferred interests of subsidiaries .......................... $2,993,054 $1,836,090 $2,663,083 $1,930,925 $ 915,194 $1,206,863 $1,203,681 Add: Fixed charges excluding capitalized interest and preferred interest requirements of consolidated subsidiaries .......................... 106,035 96,510 134,797 132,820 128,730 134,484 116,190 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Adjusted Earnings ........................ $3,099,089 1,932,600 $2,797,880 $2,063,745 $1,043,924 $1,341,347 $1,319,871 ========== ========== ========== ========== ========== ========== ========== FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Interest expense including capitalized interest (1) .......................... $ 133,590 $ 122,495 $ 168,090 $ 173,045 $ 155,667 $ 178,915 $ 168,121 Amortization of debt expense ............. 3,226 1,814 2,471 2,163 1,859 2,460 2,726 Interest component of lease rental expenditures (2) ...................... 11,872 11,152 14,984 14,458 11,895 9,858 7,343 Preferred interest requirements of consolidated subsidiaries (3) ......... -- -- -- 11,805 19,581 8,608 -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges ............................ 148,688 135,461 185,545 201,471 189,002 199,841 178,190 Preferred stock dividend requirements (4) ................................... 6,946 6,741 9,058 9,968 17,540 32,495 33,386 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Combined Fixed Charges and Preferred Stock Dividends ....................... $ 155,634 $ 142,202 $ 194,603 $ 211,439 $ 206,542 $ 232,336 $ 211,576 ========== ========== ========== ========== ========== ========== ========== Ratio of Earnings to Fixed Charges .......... 20.84 14.27 15.08 10.24 5.52 6.71 7.41 ========== ========== ========== ========== ========== ========== ========== Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends ............ 19.91 13.59 14.38 9.76 5.05 5.77 6.24 ========== ========== ========== ========== ========== ========== ==========
- ---------- (1) The Company did not receive a tax benefit for $5 million of transaction costs written off to interest expense when the Company retired its preferred interests of subsidiaries in September 2003. Given the non-deductibility of the charge, $9 million of pre-tax income was required to cover the $5 million write-off. Accordingly, interest expense for the 2003 period was grossed up by $4 million. (2) Represents the portion of rental expense assumed to be attributable to interest factors of related rental obligations determined at interest rates appropriate for the period during which the rental obligations were incurred. Approximately 32 to 34 percent applies to rental payments for all periods presented. (3) The Company did not receive a tax benefit for a portion of its preferred interests of consolidated subsidiaries. This amount represents the pre-tax earnings that would be required to cover preferred interests requirements of consolidated subsidiaries. In September 2003, the Company retired its preferred interests of subsidiaries. (4) The Company does not receive a tax benefit for its preferred stock dividends. This amount represents the pre-tax earnings that would be required to cover its preferred stock dividends. EX-31.1 11 h29394exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATIONS I, G. Steven Farris, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Apache Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ G. Steven Farris - -------------------------------------- G. Steven Farris President, Chief Executive Officer and Chief Operating Officer Date: November 9, 2005 EX-31.2 12 h29394exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATIONS I, Roger B. Plank, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Apache Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Roger B. Plank - -------------------------------------- Roger B. Plank Executive Vice President and Chief Financial Officer Date: November 9, 2005 EX-32.1 13 h29394exv32w1.txt CERTIFICATION OF CEO AND CFO EXHIBIT 32.1 APACHE CORPORATION CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER I, G. Steven Farris, certify that the Quarterly Report of Apache Corporation on Form 10-Q for the quarterly period ending September 30, 2005, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m or Section 78o (d)) and that information contained in such report fairly represents, in all material respects, the financial condition and results of operations of Apache Corporation. /s/ G. Steven Farris - -------------------------------------- By: G. Steven Farris Title: President, Chief Executive Officer and Chief Operating Officer I, Roger B. Plank, certify that the Quarterly Report of Apache Corporation on Form 10-Q for the quarterly period ending September 30, 2005, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m or Section 78o (d)) and that information contained in such report fairly represents, in all material respects, the financial condition and results of operations of Apache Corporation. /s/ Roger B. Plank - -------------------------------------- By: Roger B. Plank Title: Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----