-----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, OJP5WdFaC26JMNWzJodcmjRBJu/J1lSJOhjbaT4/KWBNE4/cfqOIPbHGStNAyRZD uuGWcYangsLxuuUab0mO9A== 0000890566-97-000402.txt : 19970313 0000890566-97-000402.hdr.sgml : 19970313 ACCESSION NUMBER: 0000890566-97-000402 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970312 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SANTA FE ENERGY RESOURCES INC CENTRAL INDEX KEY: 0000086772 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 362722169 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07667 FILM NUMBER: 97555402 BUSINESS ADDRESS: STREET 1: 1616 S VOSS RD STE 1000 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7137832401 MAIL ADDRESS: STREET 1: 1616 S VOSS ROAD STE 1000 CITY: HOUSTON STATE: TX ZIP: 77057 FORMER COMPANY: FORMER CONFORMED NAME: SANTA FE NATURAL RESOURCES INC DATE OF NAME CHANGE: 19900111 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-7667 ------------------------ SANTA FE ENERGY RESOURCES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 36-2722169 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1616 SOUTH VOSS, SUITE 1000 HOUSTON, TEXAS 77057 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 507-5000 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED Common Stock, $.01 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 3, 1997 was approximately $1,357,000,000. Shares of Common Stock outstanding at February 3, 1997 -- 91,068,871. DOCUMENTS INCORPORATED BY REFERENCE: NONE ================================================================================ TABLE OF CONTENTS PAGE PART I Items 1 and 2. Business and Properties .................................... 1 General ................................................................... 1 Santa Fe Excluding Monterey ............................................... 2 Reserves .................................................................. 3 Production and Development Activities ..................................... 3 Exploration Activities .................................................... 7 Drilling Activities ....................................................... 10 Producing Wells ........................................................... 10 Domestic Acreage .......................................................... 11 Foreign Acreage ........................................................... 11 Selected Financial and Operating Data ..................................... 12 Santa Fe Energy Trust ..................................................... 14 Monterey Resources, Inc. .................................................. 14 Reserves .................................................................. 15 Development Activities .................................................... 16 Selected Financial and Operating Data ..................................... 18 Santa Fe Consolidated ..................................................... 19 Reserves .................................................................. 20 Drilling Activities ....................................................... 21 Producing Wells ........................................................... 21 Domestic Acreage .......................................................... 22 Foreign Acreage ........................................................... 22 Current Markets for Oil and Gas ........................................... 22 Other Business Matters .................................................... 23 Item 3. Legal Proceedings ................................................. 28 Item 4. Submission of Matters to Vote of Security Holders ................. 28 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ....................................................... 29 Item 6. Selected Financial Data ........................................... 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results Of Operations ....................................... 32 Item 8. Financial Statements and Supplementary Data ....................... 42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................... 42 PART III Item 10. Directors and Executive Officers of the Registrant ............... 42 Item 11. Executive Compensation ........................................... 42 Item 12. Security Ownership of Certain Beneficial Owners and Management ............................................................ 42 Item 13. Certain Relationships and Related Transactions ................... 42 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ....................................................... 62 Signatures ................................................................ 99 i PART I CERTAIN DEFINITIONS As used herein, the following terms have the specific meanings set out: "Bbl" means barrel. "MBbl" means thousand barrels. "MMBbl" means million barrels. "Mcf" means thousand cubic feet. "MMcf" means million cubic feet. "Bcf" means billion cubic feet. "BOE" means barrel of oil equivalent. "MBOE" means thousand barrels of oil equivalent and "MMBOE" means million barrels of oil equivalent. Natural gas volumes are converted to barrels of oil equivalent using the ratio of 6.0 Mcf of natural gas to 1.0 barrel of crude oil. Unless otherwise indicated, natural gas volumes are stated at the official temperature and pressure basis of the area in which the reserves are located. "Replacement cost" refers to a fraction, of which the numerator is equal to the costs incurred by the Company for property acquisition, exploration and development and of which the denominator is equal to proved reserve additions from extensions, discoveries, improved recovery, acquisitions and revisions of previous estimates. "Improved recovery," "enhanced oil recovery" and "EOR" include all methods of supplementing natural reservoir forces and energy, or otherwise increasing ultimate recovery from a reservoir, such as waterfloods, cyclic steam, steam drive and CO2 (carbon dioxide) injection and fireflood projects. "Heavy oil" is low gravity, high viscosity crude oil. ITEMS 1 AND 2. BUSINESS AND PROPERTIES GENERAL Santa Fe Energy Resources, Inc. ("Santa Fe") is engaged in the exploration, development and production of crude oil and natural gas in the continental and offshore United States and in certain international areas. In September 1996, Santa Fe announced its intention to separate its heavy oil operations in California (the "Western Division") from its other domestic and international operations located in the central United States, the Gulf of Mexico and abroad. The initial phase of the separation was completed by the end of November 1996 and involved: (i) the contribution of substantially all of the assets and operations of the Western Division, which include Santa Fe's interests in the Midway-Sunset, South Belridge, Coalinga and Kern River oil fields, to Monterey Resources, Inc. ("Monterey"), a newly-formed subsidiary, and the assumption by Monterey of all the liabilities and obligations associated with the Western Division, including $245 million of senior indebtedness; and (ii) the initial public offering of approximately 17% of the common stock of Monterey. At December 31, 1996, Santa Fe owned approximately 83% of the Monterey's outstanding common stock. As the final phase of the separation, Santa Fe intends to distribute pro rata to its common shareholders all of these shares of Monterey's common stock by means of a tax-free distribution (the "Proposed Spin Off"). Santa Fe's final determination to proceed will require approval of the Proposed Spin Off by Santa Fe's Board of Directors. Such declaration is not expected to be made until certain conditions, many of which are beyond the control of Santa Fe, are satisfied, including: (i) receipt by Santa Fe of a ruling from the Internal Revenue Service as to the tax-free nature of the Proposed Spin Off; (ii) approval of the Proposed Spin Off by Santa Fe's shareholders; and (iii) the absence of any future change in market or economic conditions (including developments in the capital markets) or Santa Fe's or Monterey's business and financial condition that causes Santa Fe's Board of Directors to conclude that the Proposed Spin Off is not in the best interests of Santa Fe's shareholders. It is not anticipated that the Proposed Spin Off will occur prior to July 1997. Following the Proposed Spin Off, Santa Fe's domestic activities will be focused in the Permian Basin in Texas and New Mexico and in the Gulf of Mexico, and its international operations will be focused primarily in Southeast Asia, South America and West Africa. Monterey's operations are focused in the San Joaquin Valley of California. Following is a description of the business and properties of (i) Santa Fe excluding Monterey; (ii) Monterey; and (iii) Santa Fe consolidated with Monterey. 1 SANTA FE EXCLUDING MONTEREY After the Proposed Spin Off Santa Fe will have a balanced base of reserves with significant development potential, an active exploration program in the Gulf of Mexico and internationally and a capital structure with low leverage. The company's production will be approximately one-half light oil and one-half natural gas. Domestically, the Central Division will focus on long-lived enhanced recovery properties in the Permian Basin of west Texas and light oil and natural gas properties in southeastern New Mexico. The Gulf Division is continuing its exploration and development program in the shallow waters of the Continental Shelf and is expanding into the deeper water "flex trend" where the company acquired 89,000 net undeveloped acres in 1996. Internationally, development activities will focus on bringing discoveries in Indonesia and Gabon on production in 1997 and 1998 as well as continuing development of its producing fields in Indonesia and Argentina. Exploration activities will focus on the company's inventory of prospects in Southeast Asia, West Africa and South America. At December 31, 1996 worldwide proved oil and gas reserves totalled 124.3 MMBOE (83.1 MMBbls of crude oil and liquids and 247.2 Bcf of natural gas) of which approximately 77% were domestic and 23% were foreign. Production in 1996 averaged 27.5 MBbls of crude oil and liquids and 163.4 MMcf of natural gas per day, a 13% increase from 1995, reflecting a 3.0 MBbl per day increase in crude oil and liquids production and an 18.7 MMcf per day increase in natural gas production. Capital expenditures for exploration and development projects totalled approximately $181 million in 1996 and are expected to be approximately $214 million in 1997. In 1996 approximately 75% of such expenditures were domestic. In 1997 International Division expenditures will increase to approximately 35% of the total primarily due to increased development expenditures in Indonesia. In 1996 the company participated in the drilling of 75 development wells (48 domestic and 27 international) and 33 exploratory wells (24 domestic and 9 international) of which, 19 exploratory wells and 66 development wells were successfully completed. In 1997 the company expects to participate in 145 development wells (94 domestic and 51 international) and 47 exploratory wells (37 domestic and 10 international). 2 RESERVES The following tables set forth information regarding changes in the company's estimates of proved net reserves from January 1, 1994 to December 31, 1996 and the balance of the company's estimated proved developed reserves at December 31 of each of the years 1993 through 1996.
INCREASES (DECREASES) ------------------------------------------------------------- BALANCE NET AT REVISIONS EXTENSIONS, PURCHASES BALANCE BEGINNING OF DISCOVERIES (SALES) OF AT END OF PREVIOUS IMPROVED AND MINERALS OF PERIOD ESTIMATES RECOVERY ADDITIONS IN PLACE PRODUCTION PERIOD --------- --------- -------- ------------ ---------- ---------- -------- 1994: Oil and condensate (MMBbls)...... 64.6 5.3 1.3 5.5 (0.7) (8.9) 67.1 Natural Gas (Bcf)................ 251.2 (5.6) 0.9 36.2 (5.2) (48.5) 229.0 Oil Equivalent (MMBOE)........... 106.4 4.3 1.5 11.5 (1.5) (17.0) 105.2 1995: Oil and condensate (MMBbls)...... 67.1 8.5 2.4 4.4 6.2 (8.9) 79.7 Natural Gas (Bcf)................ 229.0 1.4 0.2 36.9 18.0 (52.8) 232.7 Oil Equivalent (MMBOE)........... 105.2 8.7 2.5 10.7 9.2 (17.8) 118.5 1996: Oil and condensate (MMBbls)...... 79.7 5.7 -- 2.2 5.6 (10.1) 83.1 Natural Gas (Bcf)................ 232.7 22.2 -- 41.9 10.2 (59.8) 247.2 Oil Equivalent (MMBOE)........... 118.5 9.4 -- 9.2 7.3 (20.1) 124.3(a)
DECEMBER 31, ---------------------------------------- 1996 1995 1994 1993 ------- ------ ------ ------ PROVED DEVELOPED RESERVES (MMBOE).... 103.2 95.0 82.7 83.2 - ------------ (a) At December 31, 1996, 4.3 MMBOE were subject to a 90% net profits interest held by Santa Fe Energy Trust. See "-- Santa Fe Energy Trust." Historically, the company has utilized active development and exploration programs as well as selected acquisitions to replace its reserves depleted by production. The company has increased its proved reserves (net of production and sales) by approximately 76% over the five years ended December 31, 1996. Ryder Scott Company ("Ryder Scott"), a firm of independent petroleum engineers, prepared the above estimates of the company's total proved reserves as of December 31, 1993 through 1996. PRODUCTION AND DEVELOPMENT ACTIVITIES CENTRAL DIVISION The Central Division's producing properties consist primarily of long-lived enhanced recovery properties in the Permian Basin of west Texas and light oil and natural gas properties in southeastern New Mexico. Central Division production averaged 15.9 MBbls of crude oil and liquids and 44.1 MMcf of natural gas per day in 1996, a 13% increase from 1995. During 1996 the Division spent $49.7 million on development projects and acquisitions. The Division participated in 41 gross (19.9 net) development wells, 34 (17.1 net) of which were successful. The acquisition of three enhanced oil recovery properties in west Texas for $20 million added production of approximately 1.0 MBOE per day. The company is engaged in development activities primarily through the use of secondary waterfloods and tertiary CO2 floods on its properties in mature fields in the Permian Basin of west Texas and the development of producing properties discovered or acquired by the company. The company has extensive experience in the use of waterfloods, which involves the injection of water into a reservoir to drive hydrocarbons into producing wellbores. Following the waterflood phase, certain fields may continue to produce in response to tertiary EOR projects, such as the injection of CO2 which 3 mixes with the oil and improves the efficiency of the water flood. The Wasson and Reeves fields are the most significant of the company's enhanced oil recovery properties. The company has been active in the Wasson field in the Permian Basin of west Texas since 1939. The company's interests in this field consist principally of royalty and working interests in four units, operated by affiliates of Amoco Corporation, Atlantic Richfield Company and Shell Oil Company, which are presently under CO2 flood. Most of the expenditures for plant, facilities, wells and equipment necessary for such tertiary recovery projects have been made. In addition, while expenditures relating to the purchase of CO2 for the Wasson field are expected to continue, CO2 can be recycled and, therefore, such expenditures should decline in the future. During 1996 the Wasson field accounted for approximately 21% of the company's crude oil and liquids production. Since initiation of CO2 flooding operations in 1984, the field's previous production decline has been reversed. Reservoir engineering studies prepared on behalf of the company indicate significant additions to proved reserves can be made through additional EOR and development projects. The company is the operator and owns a 72% average net revenue interest in the Reeves field, which is located seven miles east of the Wasson field in west Texas. The field has been under waterflood since 1965. During 1996, 21 wells were drilled and 15 wells were worked over as part of a program to infill drill the unit from 40-acre to 20-acre spacing and enhance current waterflood operations.After three years, the program has more than doubled the production rates at the beginning of the project. Based on its success to date, the company plans to continue the infill drilling and workover program in this field in 1997. During 1996 the Reeves field accounted for approximately 7% of the company's crude oil and liquids production. The company continued its development activities in Lea and Eddy Counties in southeastern New Mexico with a total of 22 gross (8.6 net) development wells being completed in 1996. At year-end 1996, production from this area averaged 9.7 MBOE per day, a 10% increase from year-end 1995. The Cisco-Canyon project in Eddy County continues to be the company's most significant project in the area. At year-end net production from the project was averaging approximately 4.4 MBOE per day from eleven wells. Development drilling in the East Indian Basin area of the Cisco-Canyon project added approximately 1.7 MBOE per day to 1996 production. Development drilling will continue in the area in 1997. Central Division development and acquisition capital expenditures are expected to total approximately $66 million in 1997. Such expenditures include the first quarter acquisitions of working interests in certain properties in the Levelland field in the Permian Basin of west Texas for approximately $31.4 million. Such properties currently produce approximately 1,100 BOE per day, net to the company. GULF DIVISION Gulf Division production in 1996 increased to 98.1 MMcf of natural gas per day and 3.6 MBbls of crude oil and liquids per day, a 10% increase from 1995. The increase in production, which reversed a two-year decline, was due primarily to the Company's successful exploration program in 1995 and 1996, during which 14 of 19 exploratory wells were successful. Gulf Division properties accounted for 60% of the company's 1996 natural gas production and 50% of the company's proved natural gas reserves at year-end 1996. The company's activities in the Gulf of Mexico have historically been concentrated in the shallow water area (less than 400 feet of water) where the company has considerable experience in drilling and field operations. The Gulf Division participates in 51 producing fields on 90 blocks, 11 of which are company-operated. The company expects seven new fields to commence production in 1997, six of which are company-operated. 4 During 1996 the Division spent $41.8 million on development, including $6.8 million on acquisitions. The company participated in the drilling of seven gross (1.6 net) development wells, six of which were successfully completed. Three of these wells were producing at year end 1996, including a horizontal completion that is part of the Main Pass 225 Unit. The Main Pass 225 Unit is currently producing approximately 10 MMcf of natural gas per day net to the company. The remaining three wells are scheduled to commence production in 1997 and 1998. In mid-1996 the company completed platform and pipeline construction and commenced production from its 100% owned Galveston A-34 project. At year end three wells were producing approximately 15 MMcf of natural gas and 300 barrels of condensate per day. Gulf Division development expenditures are expected to total approximately $45 million in 1997. The division expects to participate in the drilling of six development wells in 1997. INTERNATIONAL DIVISION International Division production and development operations are currently focused in Indonesia, Argentina and Gabon. In 1996 the International Division accounted for 29% of the company's crude oil and liquids and 13% of the company's natural gas production. The Division's 1996 production comes from the Salawati Basin and Salawati Island fields in Indonesia and the El Tordillo and Sierra Chata fields in Argentina. New production will commence from the Mudi and North Geragai fields in Indonesia in 1997 and from the Makmur field in Indonesia and the Tchatamba discovery in Gabon in 1998. International Division proved reserves at year-end 1996 accounted for 29% of the company's crude oil and liquids reserves and 11% of the company's natural gas reserves. Such reserves do not include volumes attributable to the Indonesian and Gabon fields which are expected to begin production in 1997 and 1998. International Division production averaged 8.0 MBBls of crude oil and liquids and 21.2 MMcf of natural gas per day in 1996, a 17% increase from 1995. During 1996 the Division spent $36.5 million on development projects and acquisitions. In Argentina, the Division spent $12.1 million on ongoing field enhancements at the El Tordillo and Sierra Chata fields and expansion of the gas plant at the Sierra Chata field. In addition, the Division paid $7.4 million for an additional 4% working interest in the El Tordillo field. Indonesian operations accounted for $12.9 million of development expenditures and in Gabon development expenditures totalled $3.1 million. During 1996 the Division participated in 27 gross (5.8 net) development wells, 26 gross (5.6 net) of which were successful. INDONESIA. The company is the operator of a joint venture (the "Salawati Basin Joint Venture") formed in 1970 to explore for and develop hydrocarbon reserves in the Salawati Basin area of Irian Jaya. At December 31, 1996, the company held a 33 1/3% participation interest in the Salawati Basin Joint Venture. The Salawati Basin Joint Venture operates under a production sharing contract (a "PSC") with the Indonesia state oil agency ("Pertamina"), which expires in the year 2020. As of December 31, 1996 the contract covered an area of approximately 235,000 acres. Production occurs from seven oil and three gas condensate fields. The entitlement of the Salawati Basin Joint Venture under the PSC averaged approximately 6.5 MBbls per day (approximately 2.2 MBbls per day net to the company) for the year ended December 31, 1996. The company is also a participant in a joint venture with Pertamina to explore the Salawati Island Block of Irian Jaya. The effective date of this joint venture was April 23, 1990 with a term of 30 years. At December 31, 1996 the company held a 16 2/3% participation interest in the block which covers approximately 1.1 million acres. The company and Pertamina (with its 50% interest) jointly operate the contract area under the terms of a Joint Operating Body (a "JOB"). Sales from the Matoa field began in January of 1993 and in December 1996 the field produced approximately 6.9 MBbls of oil per day (approximately 2.0 MBbls per day net to the company) from 25 wells. In December 1995 on the Tuban block on the island of Java, the company tested the Mudi No. 5, the fifth successful test of the Tuban Limestone formation on the Mudi prospect. Pertamina has given preliminary approval of a plan of development and the company and its partners have begun 5 procurement of facilities and construction services. Commercial oil sales are expected to begin in the third quarter of 1997. The company has conducted a seismic program to delineate the extent of the field and to further define similar anomolies in the area. A sixth well was completed in February 1997 and a seventh well is in progress. Three additional development wells are planned for 1997. The company holds a 12.5% interest and operates the Mudi project under the terms of a JOB comprised of Pertamina and the company. The Jabung Block covers nearly two million acres in central Sumatra. The company holds a 33 1/3% interest and is the operator of the Jabung Block under the terms of a PSC with Pertamina. In the first quarter of 1995 the company completed the North Geragai No. 1 discovery well on the Jabung Block in central Sumatra and to date six additional productive wells have been drilled. In September 1996 Pertamina approved the plan of development for the North Geragai field and procurement of facilities and initial construction commenced in October. Three additional development wells are planned for 1997. Commercial oil sales from the field are expected to commence in mid-1997. In August 1995 the Northeast Batara No. 1 exploratory well, located approximately 25 miles northeast of the North Geragai No. 1, tested 420 barrels of condensate and 22 MMcf of gas (approximately 55% carbon dioxide) per day from three intervals. A second well tested 204 barrels of condensate and 12 MMcf of gas per day. A seismic program is planned to delineate the extent of the field. In December 1996 the company tested the Makmur No. 1, the third new field discovery on the Jabung Block, at combined flow rates of 3,915 barrels of oil and 6.8 MMcf of gas per day from three geologic intervals. Additional seismic and delineation drilling will be required to determine the extent of the Makmur reservoir. The contracts under which the company operates the Salawati Basin Joint Venture and the Tuban Block entitle the participants to recover all expenditures related to the operation (the "cost recovery amount") by allocating to the participants a portion of the crude oil production ("cost oil") sufficient, at the Indonesia government official crude oil price ("ICP"), to offset the cost recovery amount. All unrecovered costs in any calendar year are carried forward to future years. The balance of production after deducting the cost recovery amount is allocated to Pertamina and the participants (66% is allocated to Pertamina with respect to the Salawati Basin Joint Venture and 71% is allocated to Pertamina with respect to the Tuban Block). However, after the first five years of production 25% of such production allocated to the participants must be sold into the Indonesian domestic market for $0.20 per barrel. Under the terms of the contracts under which the company operates the Salawati Island Block and the Jabung Block, the joint venture participants are allowed to recover the cost recovery amount, after an initial 20% portion (approximately 8% to the joint venture participants and 12% to Pertamina) has been deducted, by allocating to the joint venture participants cost oil sufficient to offset the cost recovery amount. All unrecovered costs in any calendar year are carried forward to future years. The balance of production after allocation of cost oil is allocated approximately 62% to Pertamina and 38% to the joint venture participants. However, after the first five years of production 25% of such production allocated to the joint venture participants must be sold into the Indonesian domestic market for 10% to 15% of ICP. ARGENTINA. The company acquired an interest in the El Tordillo field in Chubut Province, Argentina in 1991. At that time, the field was producing approximately 10,500 gross barrels of oil per day. As of December 31, 1996 the company and its partners have completed 282 workovers and drilled 30 new wells, expanded the existing waterflood programs and initiated two new waterflood pilots, increasing production to approximately 20,800 gross barrels of oil per day. The company expects to drill 22 development wells and continue the workover program in 1997 and anticipates the expansion of the existing waterflood projects. 6 The joint venture group is allowed to sell crude oil produced from this field into the open market. There is a 12% royalty on gross production and the joint venture is taxed at a 33% rate after deductions for capitalized costs and expenses. The company holds a 22% working interest in the El Tordillo field. In April 1993 the company completed the Sierra Chata X-1 as a successful natural gas and condensate exploratory test in Chihuidos Block, Neuquen Province, Argentina. Fourteen additional successful wells have been drilled and the combined deliverability of the fifteen wells is approximately 180 MMcf of natural gas per day with a carbon dioxide content of approximately 8%. The company expects to drill two additional development wells in 1997. The company and its partners have built a gas processing facility and a 40-mile gathering pipeline which transports production from the field and interconnects with two main transmission lines owned by a third party that transport gas to Buenos Aires and other major markets. Sales of production from the Sierra Chata field commenced in April 1995 under a gas contract with certain "take-or-pay" and "delivery-or-pay" obligations with MetroGas S.A., a Buenos Aires gas distribution company. Natural gas produced in excess of the contract requirements is sold on the spot market. The company has committed to supply gas to the Chilean market via the GasAndes Pipeline beginning in 1998. To fulfill its commitment under the new contract, deliveries to Metro Gas will be reduced within the contract terms. Sales from the field averaged 20.4 MMcf per day net to the company during 1996. There is a 12% royalty and a 1% provincial tax on gross production and the joint venture is taxed at a 33% rate after deductions for capitalized costs and expenses. The company has a 19.9% working interest in the Block and is the operator. During 1997 the Division expects to spend $54.5 million on development projects. Indonesian operations account for $27.5 million of such expenditures, primarily on Jabung Block and the Mudi field where production will begin in 1997. In Argentina, the Division expects to spend $13.1 million on the El Tordillo and Sierra Chata fields. In Gabon, where production is expected to commence in 1998, development expenditures are expected to total $6.9 million. During 1997 the Division expects to participate in 51 gross (10 net) development wells. EXPLORATION ACTIVITIES The company drilled 33 gross exploratory wells (13.8 net wells) in 1996 of which 19 (8.9 net) were successful, and the company plans to participate in the drilling of 47 gross exploratory wells at a net cost to the company of approximately $33 million during 1997. The company typically develops its own prospects, in many cases utilizing 3-D seismic data. A large portion of the company's undeveloped acreage position has been acquired through federal lease sales and through entering into concessions with foreign governments. Prior to drilling more expensive wells, the company generally brings in partner(s) to share the cost while retaining operatorship. In certain instances, the company is able to get its partners to pay the company's share of the cost to drill a well. The company's exploration program is most active in the Gulf of Mexico, where it recently entered the "flex trend", and certain foreign locations. The company plans to drill five exploratory wells in the flex trend, the first of which is scheduled for the second quarter of 1997, and ten exploratory wells in foreign locations. DOMESTIC At year-end 1996, the company held an interest in 245,100 gross undeveloped acres (124,100 net acres) in the shallow water Continental Shelf area of the Gulf of Mexico. The company participated in 7 gross (2.9 net) exploratory wells in the Gulf of Mexico in 1996, including 5 gross (2.4 net) discovery wells, for an 83% net success rate. The company's offshore program has been expanded to include prospects in the flex trend in water depths of 400 to 2,500 feet. This area of the Gulf of Mexico has only recently had sufficient infrastructure and technology to warrant the company's entry into the play. The "'flex" area of the Gulf is underexplored and contains larger prospects and field sizes than are being drilled in the 7 shallower water "shelf" area. The company acquired 89,000 net acres on 14 prospects on 22 blocks in the flex trend in 1996 and intends to participate in the two lease sales in 1997. Five of the flex trend prospects will be explored under the terms of an agreement with Reading & Bates Development Co. A drilling rig is under contract and drilling is expected to commence in the second quarter of 1997. An affiliate of Reading & Bates will carry out the design, construction and installation of facilities associated with commercial discoveries on the five prospects. In southeastern New Mexico, the company has continued a modest exploratory program concentrating on multiple Permian and Pennsylvanian aged oil and gas reservoirs ranging in depth from 1,500 to 16,000 feet. The focus in 1996 was to drill for deeper, gas bearing objectives which also provide exposure to shallower Delaware and Bone Springs oil reserves. The company has entered into a joint venture 3-D seismic exploration program in western Michigan. The focus of the play is shallow oil and gas reserves in Silurian reefs, a prolific producer in the state. The company acquired an option covering more than 50,000 acres in 1996 and will begin the seismic and drilling phases of the program in 1997. INTERNATIONAL INDONESIA. In 1995 the company signed a new contract for the 956,000 acre Bangko Block in south Sumatra. During 1996 the company drilled and abandoned two exploratory wells, the majority of the company's costs of which were paid by its partners. Additional exploration efforts on the block are being evaluated. The company is the operator and holds a 35% interest in the Bangko Block. In December 1996 the company signed a PSC with Pertamina giving the company the right to explore the Pagatan Block, an area of approximately 2.1 million acres along the southern coast of the island of Kalimantan. During the three-year primary term of the contract, the company is obligated to drill at least one well. The company is the operator and holds a 100 percent interest in the block. The company is negotiating with potential partners for approximately 50% of its working interest. COLOMBIA. In June 1996 the company signed a contract granting it the exploration rights on approximately 425,000 acres in southern Colombia. The Caprio Block covers an area in the Putumayo Basin, the northern extension of Ecuador's Oriente Basin. The company is obligated to reprocess 1,500 kilometers of seismic data within one year and has the option to drill an exploratory well during the second year of the contract. The company holds a 75% working interest in the block and is the operator. ECUADOR. In January 1995 the company signed a contract covering exploration rights on Oriente Block 11 which is located in the north central portion of the Oriente Basin in northeast Ecuador. The contract includes an initial exploration period of four years with optional extensions. Seismic operations were completed in the first quarter of 1996 and the company drilled two exploratory wells in the fourth quarter of 1996. One well was plugged and abandoned and the other well has been temporarily abandoned after testing 500 barrels of oil per day. The company is obligated to drill two additional wells on the block and plans to drill on other prospects to determine the ultimate commerciality of the block. The company is the operator and holds a 35% working interest in the block. GABON. During 1995 the company participated in the drilling of the Tchatamba Marine No. 1 on the Kowe permit, offshore Gabon. The well tested 4,545 barrels per day of 46 degree API gravity oil from a 74-foot interval in the Upper Madiela formation between 6,306 to 6,380 feet. During 1996 additional seismic surveys were conducted to delineate the Tchatamba structure and further define other prospects and two successful delineation wells were drilled. An exploitation permit has been approved by the government and construction of production facilities is expected to begin in late 1997. During 1997 one development well and three exploratory wells are expected to be drilled on the block. The Company holds a 25% working interest in the 614,200-acre permit area. In August 1996 the company signed a contract to explore the Mondah Bay Block in Gabon's Atlantic Salt Basin. The contract provides for an initial exploration period of two years with a three-year optional extension and a twenty-year production period. The company has committed to drill one well in mid-1997 and it is expected that all of the company's share of the cost will be paid by its 8 partner. The block is located in the northern, unexplored portion of the Atlantic Salt Basin and covers a combined onshore and offshore area of approximately 600 square miles. Initial activity will focus on the offshore portions of the block where water depths are less than 100 feet and prospects are targeted at drilling depths of less than 5,000 feet. The company holds a 50% working interest in the block and is the operator. COTE D'IVOIRE. In October 1996 the company signed an exploration contract to explore Block CI-24 in the offshore portion of Cote d'Ivoire's Abidjan margin. The block covers 649,000 acres in predominantly shallow water. Early exploration activity will focus on the interpretation of a 3-D seismic survey acquired by Petroci, the national oil company of Cote d'Ivoire. Petroci holds a 10% carried interest in the block and the company holds a 90% of the remaining working interest and is the operator. CHINA. In November 1996 the company signed a PSC with the Chinese National Offshore Oil Company ("CNOOC") with respect to offshore Block 27/11 in the Pearl River Mouth Basin approximately 100 miles south of Hong Kong. The block consists of approximately 765,000 acres, with water depths generally less than 300 feet. The work program commitment on the block includes the acquisition of approximately 600 miles of seismic data and a well to be drilled to at least 11,500 feet. Santa Fe holds a 40% working interest in the block which is operated by Kerr-McGee. In January 1997 the company signed two PSCs with CNOOC, giving the company the right to explore two additional areas of the South China Sea. Block 15/34 covers approximately 800,000 acres in the Pearl River Mouth Basin, approximately 50 miles south of Hong Kong, adjacent to Block 27/11. Several prospect areas have been identified from existing seismic and additional data acquisition will focus on the confirmation and selection of drillsites as well as the identification of additional drillable prospects. Block 23/28 is located north of the large island of Haina and covers approximately 500,000 acres in the southern portion of the Beibu Gulf Basin. Several prospect areas have been identified from existing data which will be supplemented with 2-D and 3-D seismic programs. The company is obligated to acquire 2-D and 3-D seismic and drill a well to at least 10,500 feet on each of the blocks. The company holds 100% of the working interest in both contract areas. 9 DRILLING ACTIVITIES The table below sets forth, for the periods indicated, the number of wells drilled in which the company had an economic interest. As of December 31, 1996 wells in the process of drilling or completing included 4 gross (1.3 net) domestic exploratory wells, 15 gross (6.7 net) domestic development wells, and 5 gross (1.2 net) foreign development wells.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1996 1995 1994 ------------------ ------------------ ------------------ GROSS NET GROSS NET GROSS NET Development Wells ------ --------- ------ --------- ------ --------- Domestic Completed as natural gas wells......................... 12 3.8 13 6.3 17 4.4 Completed as oil wells.......... 28 14.7 47 25.3 58 31.2 Dry holes....................... 8 3.0 4 1.5 3 1.5 Foreign Completed as natural gas wells........................... 5 1.1 3 0.9 2 0.4 Completed as oil wells.......... 21 4.5 17 3.2 14 4.3 Dry holes....................... 1 0.2 5 1.1 2 0.6 ------ --------- ------ --------- ------ --------- 75 27.3 89 38.3 96 42.4 ------ --------- ------ --------- ------ --------- Exploratory Wells Domestic Completed as natural gas wells......................... 10 5.1 13 6.3 3 1.5 Completed as oil wells.......... 6 2.9 9 3.3 9 3.5 Dry holes....................... 8 3.0 5 2.1 23 8.6 Foreign Completed as natural gas wells........................... 1 0.2 2 0.8 1 0.5 Completed as oil wells.......... 2 0.7 3 0.9 1 0.3 Dry holes....................... 6 1.9 3 0.8 6 2.1 ------ --------- ------ --------- ------ --------- 33 13.8 35 14.2 43 16.5 ------ --------- ------ --------- ------ --------- 108 41.1 124 52.5 139 58.9 ====== ========= ====== ========= ====== =========
PRODUCING WELLS The following table sets forth the company's ownership in producing wells at December 31, 1996:
U.S.(A) ARGENTINA(B) INDONESIA(C) TOTAL ------------------ -------------- -------------- --------------- GROSS NET GROSS NET GROSS NET GROSS NET ------ --------- ------ ---- ------ ---- ------ ----- Oil.................................. 8,539 931 386 84 368 117 9,293 1,132 Natural gas.......................... 567 164 16 3 7 2 590 169 ------ --------- ------ ---- ------ ---- ------ ----- 9,106 1,095 402 87 375 119 9,883 1,301 ====== ========= ====== ==== ====== ==== ====== =====
- ------------ (a) Includes 61 gross wells with multiple completions. (b) At December 31, 1996 one gross gas well was shut-in. (c) Includes one gross well with multiple completions and 69 gross wells which were shut-in at December 31, 1996. 10 DOMESTIC ACREAGE The following table summarizes developed and undeveloped fee and leasehold acreage in the United States at December 31, 1996. Excluded from such information is acreage in which ownership interest is limited to royalty, overriding royalty and other similar interests. UNDEVELOPED DEVELOPED -------------------- -------------------- STATE GROSS NET GROSS NET --------- --------- --------- --------- (IN ACRES) Alabama -- Offshore................ -- -- 23,040 12,480 Alabama -- Onshore................. -- -- 824 112 Arkansas........................... 329 60 818 182 Colorado........................... 872 728 5,931 5,249 Kansas............................. 93 63 3,833 874 Louisiana -- Offshore.............. 232,523 109,651 229,185 88,302 Louisiana -- Onshore............... 1,856 609 8,998 2,093 Mississippi........................ 300 84 2,991 523 Montana............................ 3,450 428 670 43 New Mexico......................... 169,270 117,497 52,701 28,342 New York........................... -- -- 189 47 North Dakota....................... 2,963 986 4,570 1,025 Oklahoma........................... 6,631 5,417 21,569 8,091 Pennsylvania....................... 20 20 25 3 Texas -- Offshore.................. 133,003 103,478 58,381 18,087 Texas -- Onshore................... 137,942 107,137 188,270 133,865 Utah............................... 1,363 531 3,325 1,527 Wyoming............................ 16,384 9,260 22,844 10,753 --------- --------- --------- --------- 706,999 455,949 628,164 311,598 ========= ========= ========= ========= FOREIGN ACREAGE The following table summarizes foreign acreage at December 31, 1996: UNDEVELOPED DEVELOPED -------------------- -------------------- GROSS NET GROSS NET --------- --------- --------- --------- (THOUSANDS OF ACRES) Argentina.......................... 2,169 539 93 19 China.............................. 765 306 -- -- Colombia........................... 423 318 -- -- Cote d'Ivoire...................... 197 197 -- -- Ecuador............................ 474 166 -- -- Gabon.............................. 1,001 345 -- -- Indonesia.......................... 6,427 3,297 43 13 --------- --------- --------- --------- 11,456 5,168 136 32 ========= ========= ========= ========= 11 SELECTED FINANCIAL AND OPERATING DATA The following table sets forth selected financial and operating data with respect to the company, excluding Monterey:
YEAR ENDED DECEMBER 31,(a) ----------------------------------------------------- 1996 1995 1994 1993(g) 1992(h) --------- --------- --------- --------- --------- (IN MILLIONS OF DOLLARS, EXCEPT AS NOTED) (UNAUDITED) FINANCIAL DATA INCOME STATEMENT DATA Revenues........................ 290.4 230.7 212.3 250.0 212.4 --------- --------- --------- --------- --------- Costs and Expenses Production and operating............... 80.6 69.7 63.7 63.6 48.5 Oil and gas systems and pipelines............... -- -- -- 4.2 3.2 Exploration, including dry hole costs.............. 32.8 21.0 19.0 29.3 22.8 Depletion, depreciation and amortization............ 110.8 100.8 89.3 111.5 102.3 Impairment of oil and gas properties.............. 57.4 30.2 -- 50.2 -- General and administrative.......... 21.2 19.6 19.5 23.1 22.1 Taxes (other than income)................. 17.1 11.3 17.1 18.9 15.4 Restructuring charges(b).............. -- -- 5.9 26.7 -- Loss (gain) on disposition of assets............... (12.1) 0.3 (8.3) 0.6 (13.9) --------- --------- --------- --------- --------- 307.8 252.9 206.2 328.1 200.4 --------- --------- --------- --------- --------- Income (Loss) from Operations... (17.4) (22.2) 6.1 (78.1) 12.0 ========= ========= ========= ========= ========= COSTS AND EXPENSES PER BOE Production and operating(c)..... 4.03 3.92 3.76 3.43 3.28 Exploration, including dry hole costs........................ 1.64 1.19 1.12 1.58 1.55 Depletion, depreciation and amortization(d).............. 5.39 5.61 5.26 6.03 6.91 General and administrative(e)... 0.88 1.10 1.15 1.25 1.49 Taxes other than income(f)...... 0.86 0.63 1.01 1.03 1.04 (TABLE CONTINUED ON FOLLOWING PAGE) 12 YEAR ENDED DECEMBER 31,(a) ----------------------------------------------------- 1996 1995 1994 1993(g) 1992(h) --------- --------- --------- --------- --------- (IN MILLIONS OF DOLLARS, EXCEPT AS NOTED) OPERATING DATA DAILY AVERAGE PRODUCTION Crude oil and liquids (MBbls/day) Domestic.................. 19.5 16.7 16.3 17.7 16.3 Argentina................. 3.7 2.6 2.4 2.4 2.4 Indonesia................. 4.3 5.2 5.7 4.1 1.8 --------- --------- --------- --------- --------- 27.5 24.5 24.4 24.2 20.5 ========= ========= ========= ========= ========= Natural gas (MMcf/day).......... 163.4 144.7 132.8 159.0 119.2 Total production (MBOE/day)..... 54.7 48.6 46.6 50.7 40.4 AVERAGE SALES PRICES Crude oil and liquids ($/Bbl) Unhedged Domestic............. 19.96 16.34 14.92 16.20 18.38 Argentina............ 19.06 14.72 13.23 14.07 15.99 Indonesia............ 18.92 16.10 15.09 15.50 17.51 Total................ 19.68 16.12 14.79 15.87 18.02 Hedged.................... 18.66 16.40 14.79 15.87 18.17 Natural Gas ($/Mcf) Unhedged.................. 2.18 1.46 1.77 2.04 1.72 Hedged.................... 1.83 1.45 1.75 1.90 1.71 PROVED RESERVES AT YEAR END Crude oil, condensate and natural gas liquids (MMBbls)............. 83.1 79.7 67.1 64.6 64.8 Natural gas (Bcf)............... 247.2 232.7 229.0 251.2 258.7 Proved reserves (MMBOE)......... 124.3 118.5 105.2 106.4 108.1 Proved developed reserves (MMBOE)...................... 103.2 95.0 82.7 83.2 90.8 PRESENT VALUE OF PROVED RESERVES AT YEAR-END Before income taxes............. 1,047.7 602.8 417.0 400.7 532.0
- ------------ (a) Certain prior period amounts have been restated to conform to 1996 presentation. (b) 1993 amount includes losses on property dispositions of $16.5 million, long-term debt repayment penalties of $8.6 million and accruals of certain personnel benefits and related costs of $1.6 million. 1994 amount represents severance, benefits and relocation expenses. (c) Excluding related production, severance and ad valorem taxes. (d) Excludes effect of unproved property writedowns of $0.13 per BOE in 1996 and $0.06 per BOE in 1995. (e) Excludes effect of $1.6 million charge related to the abandonment of an office lease and $2.0 million in costs and expenses related to the IPO ($0.18 per BOE) in 1996. (f) Includes production, severance and ad valorem taxes. (g) Includes production attributable to properties sold during 1993 of 4.1 MBbls of oil and 21.7 MMcf of natural gas per day (7.7 MBOE per day) and gives effect to the sale in 1993 of approximately 8.0 MMBOE of proved reserves. (h) On May 19, 1992 Adobe Resources Corporation was merged with and into the company. 13 SANTA FE ENERGY TRUST In November 1992 5,725,000 Depositary Units ("Depositary Units"), each consisting of beneficial ownership of one unit of undivided interest in the Trust and a $20 face amount beneficial ownership interest in a $1,000 face amount zero coupon United States Treasury obligation maturing on February 15, 2008, were sold in a public offering. The assets of the Trust consist of certain oil and gas properties conveyed by the company. A total of $114.5 million was received from public investors, of which $38.7 million was used to purchase the Treasury obligations and $5.7 million was used to pay underwriting commissions and discounts. The company received the remaining $70.1 million and retained 575,000 Depositary Units. A portion of the proceeds received by the company was used to retire $30.0 million of debt and the remainder was used for general corporate purposes. In the first quarter of 1994 the company sold the remaining 575,000 Depositary Units it held for $11.3 million. The properties conveyed to the Trust consisted of two term royalty interests in two production units in the Wasson field in west Texas and a net profits royalty interest in certain royalty and working interests in a diversified portfolio of properties located in twelve states. At December 31, 1996, 4.3 MMBOE of the company's estimated proved reserves were subject to such net profits interest. The reserve estimates included herein reflect the conveyance of the Wasson term royalties to the Trust. For any calendar quarter ending on or prior to December 31, 2002, the Trust will receive additional royalty payments to the extent that such payments are required to provide distributions of $0.40 per Depositary Unit per quarter. Such additional royalty payments, if needed, will come from the company's remaining royalty interest in one of the production units in the Wasson field described above, and are non-recourse to the company. If such additional payments are made, certain proceeds otherwise payable to the Trust in subsequent quarters may be reduced to recoup the amount of such additional payments. The aggregate amount of the additional royalty payments (net of any amounts recouped) is limited to $20.0 million on a revolving basis. As of December 31, 1996 the company had made additional royalty payments (net of recoupments) totalling $1.2 million and will recoup $1.0 million from the proceeds payable to the Trust in the first quarter of 1997. Dependent on various factors, such as sales volumes and prices and the level of operating costs and capital expenditures incurred, proceeds payable to the Trust with respect to operations in subsequent quarters may not be sufficient to make distributions of $0.40 per quarter. In such instances the company would be required to make additional royalty payments. MONTEREY RESOURCES, INC. In 1996 Santa Fe formed Monterey to assume the operations of Santa Fe's Western Division (the "Western Division") which conducted Santa Fe's oil and gas operations in the State of California. In November 1996, prior to the initial public offering (the "IPO") discussed below, pursuant to a contribution and conveyance agreement (the "Contribution Agreement"), among other things: (i) Santa Fe contributed to Monterey substantially all of the assets and properties of the Western Division, subject to the retention by Santa Fe of a production payment, as defined below, and certain other assets; (ii) Santa Fe retained a $30.0 million production payment (the "Production Payment") with respect to certain properties in the Midway-Sunset field; (iii) Monterey assumed all obligations and liabilities of Santa Fe associated with or allocated to the assets and properties of the Western Division, including $245.0 million of indebtedness in respect of Santa Fe's 10.23% Series E Notes due 1997, 10.27% Series F Notes due 1998 and 10.61% Series G Notes due 2005 (the "Series E Notes", "Series F Notes" and "Series G Notes", respectively) and (iv) Monterey agreed to purchase from Santa Fe an $8.3 million promissory note receivable related to the sale to a third party of certain surface acreage located in Orange County, California. Also prior to the IPO, Monterey and Santa Fe entered into a $75.0 million revolving credit facility with a group of banks (the "Monterey Credit Facility") and borrowed $16.0 million which was retained by Santa Fe. In November 1996 Monterey sold 9,335,000 shares of its common stock for total consideration of $123.6 million (after deducting underwriting discounts of $9.1 million and other related costs of $2.6 14 million). The proceeds from the IPO were used in part to (i) repay the Series E Notes and Series F Notes ($70.0 million) and pay a prepayment penalty thereon of $2.5 million; (ii) retire the Production Payment ($30.0 million); (iii) repay the $16.0 million outstanding under the New Credit Facility; and (iv) pay a $2.0 million fee with respect to a supplement to the indenture relating to Santa Fe's 11% Senior Subordinated Debentures due 2004. Subsequent to the IPO, Monterey issued $175.0 million in aggregate principal amount of 10.61% Senior Notes due 2005 (the "Monterey Senior Notes") to holders of the Series G Notes in exchange for the cancellation of such notes and paid a $1.3 million consent fee in connection therewith. In December 1996 Santa Fe sold the surface rights to approximately 116 surface acres in Orange County, California for total consideration of $24.2 million and recognized a $12.3 million gain. Santa Fe received $15.9 million in cash and an $8.3 million note, which note was then purchased by Monterey for cash. At December 31, 1996, Santa Fe owned 82.8% of Monterey's outstanding common stock. Santa Fe has announced that it intends to distribute pro rata to its common shareholders all of the shares of Monterey's common stock that it owns by means of a tax-free distribution. See -- "GENERAL." The discussions included herein with respect to the years ended December 31, 1995 and prior relate to the operations of the Western Division. The discussions with respect to the year ended December 31, 1996 relate to the operations of the Western Division for January through October and the operations of Monterey for November and December. RESERVES The following table sets forth information regarding changes in Monterey's estimates of proved net reserves from January 1, 1994 to December 31, 1996 and the balance of Monterey's estimated proved developed reserves at December 31, of each of the years 1993 through 1996, as prepared by Ryder Scott:
INCREASES (DECREASES) ------------------------------------------------------------- BALANCE NET AT REVISION EXTENSIONS, PURCHASES BALANCE BEGINNING OF DISCOVERIES (SALES) OF AT END OF PREVIOUS IMPROVED AND MINERALS OF PERIOD ESTIMATES RECOVERY ADDITIONS IN PLACE PRODUCTION PERIOD --------- --------- -------- ------------ ---------- ---------- -------- 1994: Oil and Condensate (MMBbls)...... 183.6 9.9 12.6 -- 0.2 (15.1) 191.2 Gas (Bcf)........................ 11.8 2.9 -- -- 0.1 (1.4) 13.4 Oil Equivalent (MMBOE)........... 185.6 10.4 12.6 -- 0.2 (15.3) 193.5 1995: Oil and Condensate (MMBbls)...... 191.2 9.7 13.7 -- 0.1 (15.2) 199.5 Gas (Bcf)........................ 13.4 0.9 -- -- -- (1.9) 12.4 Oil Equivalent (MMBOE)........... 193.5 9.8 13.7 -- 0.1 (15.5) 201.6 1996: Oil and Condensate (MMBbls)...... 199.5 12.0 14.4 -- 7.6 (17.1) 216.4 Gas (Bcf)........................ 12.4 1.1 -- -- -- (1.3) 12.2 Oil Equivalent (MMBOE)........... 201.6 12.1 14.4 -- 7.6 (17.3) 218.4
DECEMBER 31, ------------------------------------------ 1996 1995 1994 1993 --------- --------- --------- --------- PROVED DEVELOPED RESERVES (MMBOE)... 172.6 158.6 141.8 142.3 During the five years ended December 31, 1996, Monterey spent a total of $172.9 million on development activities on its properties. Cumulative production from the properties during the same five-year period exceeded 79.8 MMBOE while additions to proved reserves exceeded 111.4 MMBOE (yielding 31.6 MMBOE net additions after production.) Based on reservoir engineering studies prepared by Ryder Scott, Monterey believes that it can continue to make significant additions to proved reserves on its properties through additional EOR and development projects. Monterey anticipates 15 spending approximately $70.9 million during 1997 on additional development projects on its properties. Because the actual amounts expended in the future and the results therefrom will be influenced by numerous factors, including many beyond its control, and due to the inherent uncertainty of reservoir engineering studies, no assurances can be given as to the amounts that will be expended or, if expended, that the results therefrom will be consistent with the Monterey's prior experience or expectations. DEVELOPMENT ACTIVITIES Monterey is engaged in development activities primarily through the application of thermal EOR techniques on its heavy oil properties in the San Joaquin Valley. Thermal EOR operations involve the injection of steam into a reservoir to raise the temperature and reduce the viscosity of heavy oil, facilitating the flow of the oil into producing wellbores. In addition, Monterey has begun to utilize horizontal drilling in conjunction with the steam projects already deployed. Based on results to date it is believed that horizontal wells can provide production rates up to 10 times greater than the typical vertical well while providing drainage for portions of the reservoir that cannot be effectively drained by vertical wells. In addition to these thermal techniques, Monterey has extensive experience in the use of waterfloods, which involves the injection of water into a reservoir to drive hydrocarbons into producing wellbores. In 1996 Monterey spent $48.7 million on development work including the drilling of vertical infill and step-out wells and seven horizontal wells, the addition of 39 steamflood patterns and the expansion of key facilities to serve increased production and steam volumes. The majority of the 1996 development activity was focused at Midway-Sunset and Kern River and resulted in a combined net oil production increase from December 31, 1995 to December 31, 1996 of 4.3 MBbls per day. During 1996 Monterey drilled 227 gross (218 net) development wells. Monterey's production and reserves are concentrated in four fields in California's San Joaquin Valley. These fields, Midway-Sunset, Kern River, South Belridge and Coalinga account for 95% of Monterey's 1996 net production and 93% of Monterey's December 31, 1996 proved reserves. Monterey's properties in these fields are generally highly concentrated and equipped with efficient centralized infrastructure. MIDWAY-SUNSET. Monterey owns and operates a 100% working interest (96% average net revenue interest) in over 13,000 gross acres and 2,300 producing wells in the Midway-Sunset field. The Company is currently the largest producer in the field and has operated there continuously since 1905. Substantially all of the oil produced from the Midway-Sunset field is heavy crude oil located in the Pleistocene and Miocene reservoirs at depths of less than 2,000 feet. During 1996, Monterey's properties at Midway-Sunset produced at record levels averaging 35.1 MBbls per day for the year, an increase of 2.5 MBbls per day over the average for 1995, and accounted for 74% of Monterey's 1996 crude production. Total December 31, 1996 proved reserves for Monterey's Midway-Sunset properties represented approximately 75% of Monterey's total proved reserves. Based on reservoir engineering studies prepared by Ryder Scott, Monterey believes that it can continue to make significant additions to its proved reserves in this field through additional EOR and development projects. Monterey has identified in excess of 1,300 well operations that could be undertaken in the field and anticipates completing 300 of these operations (including 40 horizontal wells) in 1997 at an estimated capital cost of $51.0 million. KERN RIVER. Monterey owns and operates a 100% working interest (91% average net revenue interest) in four properties in the Kern River field, located near Bakersfield, California. Monterey acquired its interest in the Kern River field in 1905. With field-wide production rates of approximately 135 MBbls per day, the Kern River field is the second largest producing oil field in the lower 48 states and has produced in excess of 1.5 billion barrels of oil. Most of the oil produced from the Kern River field is heavy crude oil produced from Plio-Pleistocene reservoirs at depths of less than 1,000 feet. During 1996, the Kern River field accounted for approximately 11% of Monterey's total crude 16 production. As of December 31, 1996, Monterey's total proved reserves in the Kern River field were approximately 9% of its total proved reserves. As with the Midway-Sunset field, based on engineering studies prepared by Ryder Scott, Monterey believes that it can continue to make significant additions to its proved reserves in the Kern River field through additional thermal development projects. SOUTH BELRIDGE. Monterey has a 46% average working interest (40% average net revenue interest) in its properties in the South Belridge field, which is located 15 miles north of the Midway-Sunset field. Monterey acquired interests in the South Belridge field in 1987 and expanded its holdings in 1991. The oil in the South Belridge field is heavy and light crude that is produced from depths of generally less than 2,000 feet. During 1996, the South Belridge field accounted for approximately 5% of Monterey's total crude production. As of December 31, 1996, Monterey's total proved reserves in the South Belridge field were approximately 6% of its total proved reserves. COALINGA. Monterey has a 100% average working interest (84% average net revenue interest) in its properties in the Coalinga field which is located 55 miles southwest of Fresno, California. During 1996, the Coalinga field accounted for approximately 5% of Monterey's crude production. As of December 31, 1996, Monterey's total proved reserves in the Coalinga field were approximately 3% of its total proved reserves. 17 SELECTED FINANCIAL AND OPERATING DATA The following table sets forth selected financial and operating data with respect to Monterey:
YEAR ENDED DECEMBER 31, (a) ----------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (IN MILLIONS OF DOLLARS, EXCEPT AS NOTED) FINANCIAL DATA INCOME STATEMENT DATA Revenues........................... 292.9 218.7 191.9 199.5 226.4 --------- --------- --------- --------- --------- Costs and Expenses Production and operating..... 107.8 86.1 87.4 101.7 106.3 Cost of crude oil purchased.................. 20.8 6.5 11.7 11.1 9.9 Exploration, including dry hole costs................. 1.7 2.4 1.4 1.7 2.7 Depletion, depreciation and amortization............... 37.4 32.4 32.0 41.2 44.0 Impairment of oil and gas properties................. -- -- -- 49.1 -- General and administrative... 8.9 7.3 7.8 9.2 8.8 Taxes (other than income).... 9.4 7.9 8.7 8.4 8.9 Restructuring charges........ -- -- 1.1 11.9 -- Loss (gain) on disposition of oil and gas properties..... -- -- (0.3) 0.1 0.3 --------- --------- --------- --------- --------- 186.0 142.6 149.8 234.4 180.9 --------- --------- --------- --------- --------- Income (Loss) from Operations...... 106.9 76.1 42.1 (34.9) 45.5 ========= ========= ========= ========= ========= COSTS AND EXPENSES PER BOE: Production and Operating Expenses:....................... Steam generation............. 2.51(b) 1.98 2.16 2.26 2.41 Lease operating.............. 3.53 3.56 3.55 4.05 4.24 Total................... 6.04(b) 5.54 5.71 6.31 6.65 Exploration, including dry holes... 0.10 0.15 0.09 0.11 0.17 Depletion, depreciation and amortization.................... 2.16 2.08 2.09 2.59 2.79 General and administrative......... 0.44 0.47 0.51 0.58 0.56 Taxes (other than income).......... 0.54 0.51 0.56 0.53 0.56 (TABLE CONTINUED ON FOLLOWING PAGE) 18 YEAR ENDED DECEMBER 31, (a) ----------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (IN MILLIONS OF DOLLARS, EXCEPT AS NOTED) OPERATING DATA DAILY AVERAGE PRODUCTION Crude oil and liquids (MBbls/day)..................... 46.8 41.8 41.3 42.5 42.0 Natural gas (MMcf/day)............. 3.5 5.3 3.8 6.4 7.1 Total production (MBOE/day)........ 47.4 42.7 41.9 43.6 43.2 AVERAGE SALES PRICES Crude oil and liquids ($/Bbl) Unhedged..................... 16.00 13.79 11.77 11.77 13.22 Hedged....................... 15.82 13.79 11.77 11.77 13.78 Natural gas ($/Mcf realized)....... 1.03 0.98 1.14 1.59 1.57 PROVED RESERVES AT YEAR-END Crude oil, condensate and natural gas liquids (MMBbls)........................ 216.4 199.5 191.2 183.6 190.3 Natural gas (Bcf).................. 12.2 12.4 13.4 11.8 18.8 Proved reserves (MMBOE)............ 218.5 201.6 193.5 185.6 193.4 Proved developed reserves (MMBOE)......................... 172.6 158.6 141.8 142.3 157.6 PRESENT VALUE OF PROVED RESERVES AT YEAR-END Before income taxes................ 1,047.8 654.4 553.8 167.1 383.2 PRODUCTION COSTS PER BOE (including related production, severance and ad valorem taxes) (in dollars)..... 6.64 5.98 6.19 6.85 7.23
- ------------ (a) Reflects the operations of the Western Division for the years 1992 through 1995. The year 1996 reflects the operations of the Western Division for January through October and Monterey for November and December. (b) Excludes $0.18 per BOE loss on hedging. The hedging transactions which generated these losses expired on June 30, 1996. Including such hedging losses, historical steam generation costs would have been $2.69 per BOE and historical total production costs would have been $6.22 per BOE. SANTA FE CONSOLIDATED Unless otherwise indicated, discussions and amounts throughout the remainder of this Form 10-K relate to Santa Fe Energy Resources, Inc. consolidated with its 83% subsidiary Monterey. Therefore all references hereafter to "Santa Fe" or the "Company" relate to Santa Fe, including Monterey. At December 31, 1996 the Company had worldwide proved reserves totaling 342.7 MMBOE (consisting of approximately 299.5 MMBbls of oil and approximately 259.4 Bcf of natural gas), of which approximately 92% were domestic reserves and approximately 8% were foreign reserves. During 1996 the Company's worldwide production aggregated approximately 37.4 MMBOE, of which approximately 73% was crude oil and approximately 27% was natural gas. Santa Fe was incorporated in Delaware in 1971 as Santa Fe Natural Resources, Inc., a wholly owned subsidiary of a predecessor of Santa Fe Pacific Corporation ("SFP"). On January 8, 1990 Santa Fe Energy Company, which previously conducted a substantial portion of Santa Fe's domestic exploration and development operations, merged into Santa Fe. Santa Fe thereafter changed its name to Santa Fe Energy Resources, Inc. On March 8, 1990 Santa Fe sold 11,700,000 previously unissued shares of common stock in initial public offering. On December 4, 1990 SFP distributed all of the shares of Santa Fe's common stock it held to its shareholders. In May 1992 Adobe Resources Corporation ("Adobe") was merged with and into the Company (the "Adobe Merger"). 19 RESERVES The following tables set forth information regarding changes in the Company's estimates of proved net reserves from January 1, 1994 to December 31, 1996 and the balance of the Company's estimated proved developed reserves at December 31 of each of the years 1993 through 1996, as prepared by Ryder Scott:
INCREASES (DECREASES) ------------------------------------------------------------- BALANCE NET AT REVISION EXTENSIONS, PURCHASES BALANCE BEGINNING OF DISCOVERIES (SALES) OF AT END OF PREVIOUS IMPROVED AND MINERALS OF PERIOD ESTIMATES RECOVERY ADDITIONS IN PLACE PRODUCTION PERIOD --------- --------- -------- ------------ ---------- ---------- -------- 1994: Crude Oil and Liquids (MMBbls)... 248.2 15.2 13.9 5.5 (0.5) (24.0) 258.3 Gas (Bcf)........................ 263.0 (2.7) 0.9 36.2 (5.1) (49.9) 242.4 Oil Equivalent (MMBOE)........... 292.0 14.7 14.1 11.5 (1.3) (32.3) 298.7 1995: Crude Oil and Liquids (MMBbls)... 258.3 18.2 16.1 4.4 6.3 (24.1) 279.2 Gas (Bcf)........................ 242.4 2.3 0.2 36.9 18.0 (54.7) 245.1 Oil Equivalent (MMBOE)........... 298.7 18.5 16.2 10.7 9.3 (33.3) 320.1 1996(A) : Crude Oil and Liquids (MMBbls)... 279.2 17.7 14.4 2.2 13.2 (27.2) 299.5 Gas (Bcf)........................ 245.1 23.3 -- 41.9 10.2 (61.1) 259.4 Oil Equivalent (MMBOE)........... 320.1 21.5 14.4 9.2 14.9 (37.4) 342.7(b)
DECEMBER 31, ------------------------------------------ 1996 1995 1994 1993 --------- --------- --------- --------- PROVED DEVELOPED RESERVES (MMBOE).. 275.8 253.6 224.5 225.5 - ------------ (a) At December 31, 1996 Monterey had proved reserves totalling 216.4 MMBbls of oil and liquids and 12.2 Bcf of natural gas. (b) At December 31, 1996, 4.3 MMBOE were subject to a 90% net profits interest held by Santa Fe Energy Trust. See "-- Santa Fe Energy Trust." Historically, the Company has utilized active development and exploration programs as well as selected acquisitions to replace its reserves depleted by production. The Company has increased its proved reserves (net of production and sales) by approximately 33% over the five years ended December 31, 1996. Most of such increases are attributable to proved reserve additions from the Company's producing oil properties in the San Joaquin Valley of California and the Permian Basin in west Texas, proved reserves acquired in the Adobe Merger and other purchases of oil and gas reserves. During 1996 the Company filed Energy Information Administration Form 23 which reported natural gas and oil reserves for the year 1995. On an equivalent barrel basis, the reserve estimates for the year 1995 contained in such report and those reported herein for the year 1995 do not differ by more than five percent. 20 DRILLING ACTIVITIES The table below sets forth, for the periods indicated, the number of wells drilled in which Santa Fe had an economic interest. As of December 31, 1996 Santa Fe was in the process of drilling or completing 4 gross (1.3 net) domestic exploratory wells, 15 gross (6.7 net) domestic development wells, and 5 gross (1.2 net) foreign development wells.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1996 1995 1994 ------------------ ------------------ ------------------ GROSS NET GROSS NET GROSS NET ------ --------- ------ --------- ------ --------- Development Wells Domestic Completed as natural gas wells........................ 12 3.8 13 6.3 17 4.4 Completed as oil wells.......... 252 229.9 271 234.5 136 101.4 Dry holes....................... 11 6.0 4 1.5 4 2.5 Foreign Completed as natural gas wells........................... 5 1.1 3 0.9 2 0.4 Completed as oil wells.......... 21 4.5 17 3.2 14 4.3 Dry holes....................... 1 0.2 5 1.1 2 0.6 ------ --------- ------ --------- ------ --------- 302 245.5 313 247.5 175 113.6 ------ --------- ------ --------- ------ --------- Exploratory Wells Domestic Completed as natural gas wells........................ 10 5.1 13 6.3 3 1.5 Completed as oil wells.......... 6 2.9 9 3.3 9 3.5 Dry holes....................... 9 3.4 8 5.1 23 8.6 Foreign Completed as natural gas wells........................... 1 0.2 2 0.8 1 0.5 Completed as oil wells.......... 2 0.7 3 0.9 1 0.3 Dry holes....................... 6 1.9 3 0.8 6 2.1 ------ --------- ------ --------- ------ --------- 34 14.2 38 17.2 43 16.5 ------ --------- ------ --------- ------ --------- 336 259.7 351 264.7 218 130.1 ====== ========= ====== ========= ====== =========
PRODUCING WELLS The following table sets forth Santa Fe's ownership in producing wells at December 31, 1996:
U.S.(a) ARGENTINA(b) INDONESIA(c) TOTAL --------------------- -------------- ----------------- --------------- GROSS NET GROSS NET GROSS NET GROSS NET --------- --------- ------ ---- --------- ---- ------ ----- Oil.................................. 14,178 6,034 386 84 368 117 14,932 6,235 Natural gas.......................... 569 164 16 3 7 2 592 169 --------- --------- ------ ---- --------- ---- ------ ----- 14,747 6,198 402 87 375 119 15,524 6,404 ========= ========= ====== ==== ========= ==== ====== =====
- ------------ (a) Includes 61 gross wells with multiple completions. (b) At December 31, 1996 one gross gas well was shut-in. (c) Includes one gross well with multiple completions and 69 gross wells which were shut-in at December 31, 1996. 21 DOMESTIC ACREAGE The following table summarizes Santa Fe's developed and undeveloped fee and leasehold acreage in the United States at December 31, 1996. Excluded from such information is acreage in which Santa Fe's interest is limited to royalty, overriding royalty and other similar interests. UNDEVELOPED DEVELOPED -------------------- -------------------- STATE GROSS NET GROSS NET (IN ACRES) Alabama -- Offshore............... -- -- 23,040 12,480 Alabama -- Onshore................ -- -- 824 112 Arkansas.......................... 329 60 818 182 California -- Offshore............ -- -- 17,280 2,074 California -- Onshore............. 6,602 6,602 19,716 19,496 Colorado.......................... 872 728 5,931 5,249 Kansas............................ 93 63 3,833 874 Louisiana -- Offshore............. 232,523 109,651 229,185 88,302 Louisiana -- Onshore.............. 1,856 609 8,998 2,093 Mississippi....................... 300 84 2,991 523 Montana........................... 3,450 428 670 43 New Mexico........................ 169,270 117,497 52,701 28,342 New York.......................... -- -- 189 47 North Dakota...................... 2,963 986 4,570 1,025 Oklahoma.......................... 6,631 5,417 21,569 8,091 Pennsylvania...................... 20 20 25 3 Texas -- Offshore................. 133,003 103,478 58,381 18,087 Texas -- Onshore.................. 137,942 107,137 188,270 133,865 Utah.............................. 1,363 531 3,325 1,527 Wyoming........................... 16,384 9,260 22,844 10,753 --------- --------- --------- --------- 713,601 462,551 665,160 333,168 ========= ========= ========= ========= At December 31, 1996 the Company held oil and gas rights to 372,062 net undeveloped leasehold acres. The primary lease terms with respect to 9% of such acreage expires in 1997, 8% in 1998, 10% in 1999, 8% in 2000 and the remainder thereafter. In addition, the Company holds 90,489 acres of undeveloped fee acreage, located primarily in Texas. FOREIGN ACREAGE See "SANTA FE EXCLUDING MONTEREY -- Foreign Acreage." CURRENT MARKETS FOR OIL AND GAS Substantially all of the Company's oil and gas production is sold at market responsive prices. The domestic crude oil marketing activities of the Company are conducted through its Santa Fe Energy Products Division ("Energy Products"), which is also engaged in crude oil trading. A substantial portion of the Company's domestic natural gas production is currently marketed under the terms of a sales contract with LG&E Natural Marketing Inc. ("LG&E"), formerly Hadson Corporation ("Hadson"). The revenues generated by the Company's operations are highly dependent upon the prices of, and demand for, oil and gas. The price received by the Company for its crude oil and natural gas depends upon numerous factors, the majority of which are beyond the Company's control, including economic conditions in the United States and elsewhere, the world political situation as it affects OPEC, the Middle East and other producing countries, the actions of OPEC and governmental 22 regulation. The fluctuation in world oil prices continues to reflect market uncertainty regarding OPEC's ability to control member country production and underlying concern about the balance of world demand for and supply of oil and gas. Decreases in the prices of oil and gas have had, and could have in the future, an adverse effect on the Company's development and exploration programs, proved reserves, revenues, profitability and cash flow. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." Monterey's market for heavy crude oil produced in California differs substantially from the remainder of the domestic crude oil market, due principally to the transportation and refining requirements associated with heavy crude. The profit margin realized from the sale of heavy crude oil is generally lower than that realized from the sale of light crude oil because the costs of producing heavy oil are generally higher, and the sales price realized for heavy crude oil is generally lower than the comparable costs and prices paid for light crude oils. From time to time the Company has hedged a portion of its oil and natural gas production to manage its exposure to volatility in prices of oil and natural gas. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General" for a discussion of the Company's hedging activities. During 1996 affiliates of Shell Oil Company, Celeron Corporation and Coastal States Trading, Inc. accounted for approximately 24%, 15% and 12%, respectively, of Energy Products' crude oil sales (which with respect to certain properties includes royalty and working interest owners' share of production). No other individual customer accounted for more than 10% of the Company's crude oil and liquids revenues during 1996. Availability of a ready market for the Company's oil production depends on numerous factors, including the level of consumer demand, the extent of worldwide oil production, the cost and availability of alternative fuels, the availability of refining capacity, the cost of and proximity of pipelines and other transportation facilities, regulation by state and federal authorities and the cost of complying with applicable environmental regulations. In December 1993 the Company signed a seven-year gas sales contract with LG&E pursuant to the terms of which LG&E markets a substantial portion of the Company's domestic natural gas production. Pursuant to such gas contract, LG&E is required to pay the Company for all production delivered at a price for such gas equal to stipulated published monthly index prices. LG&E is obligated to use its best efforts to receive gas from the Company at delivery points so as to maximize the net price received by the Company for such production. Payment for purchases by LG&E are made in immediately available funds no later than the last working day of the month following the month of production. OTHER BUSINESS MATTERS COMPETITION The Company faces competition in all aspects of its business, including, but not limited to, acquiring reserves, leases, licenses and concessions; obtaining goods, services and labor needed to conduct its operations and manage the Company; and marketing its oil and gas. The Company's competitors include multinational energy companies, government-owned oil and gas companies, other independent producers and individual producers and operators. The Company believes that its competitive position is affected by its technical and operational capabilities. Many competitors have greater financial and other resources than the Company. The Company believes that the well-defined nature of the reservoirs in its long-lived oil fields, its expertise in EOR methods in these fields, its active development and exploration program, its financial flexibility and its experienced management may give it a competitive advantage over some other producers. REGULATION OF CRUDE OIL AND NATURAL GAS The petroleum industry is subject to various types of regulation throughout the world, including regulation in the United States by state and federal agencies. Domestic legislation affecting the oil and 23 gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations binding on the oil and gas industry and its individual members, compliance with which is often difficult and costly and which may carry substantial penalties for non-compliance. Although the regulatory burden on the oil and gas industry increases the cost of doing business and, consequently, affects profitability, generally these burdens do not appear to affect the Company any differently or to any greater or lesser extent than other companies in the industry with similar types and quantities of production. While the Company is a party to several regulatory proceedings before governmental agencies arising in the ordinary course of business, the Company does not believe that the outcome of such proceedings will have a material adverse affect on its operations or financial condition. Set forth below is a general description of certain state and federal regulations which have an effect on the Company's operations. STATE REGULATION. State statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. Most states in which the Company operates also have statutes and regulations governing the conservation of oil and gas and the prevention of waste, including the unitization or pooling of oil and gas properties and rates of production from oil and gas wells. Rates of production may be regulated through the establishment of maximum daily production allowables on a market demand or conservation basis or both. FEDERAL REGULATION. A portion of the Company's oil and gas leases are granted by the federal government and administered by the Bureau of Land Management ("BLM") and the Minerals Management Service ("MMS"), both of which are federal agencies. Such leases are issued through competitive bidding, contain relatively standardized terms and require compliance with detailed BLM and MMS regulations and orders (which are subject to change by the BLM and the MMS). For offshore operations, lessees must obtain MMS approval for exploration plans and development and production plans prior to the commencement of such operations. In addition to permits required from other agencies (such as the Coast Guard, Army Corps of Engineers and Environmental Protection Agency), lessees must obtain a permit from the BLM or the MMS prior to the commencement of drilling. The interstate transportation of natural gas is regulated by the Federal Energy Regulatory Commission ("FERC") under the Natural Gas Act of 1938 and, to a lesser extent, the Natural Gas Policy Act of 1978 (collectively, the "Acts"). Since 1991, FERC's regulatory efforts have centered largely around its generic rulemaking proceedings, Order No. 636. Through Order No. 636 and successor orders, FERC has undertaken to restructure the interstate pipeline industry with the goal of providing enhanced access to, and competition among, alternative gas suppliers. By requiring interstate pipelines to "unbundle" their sales services and to provide their customers with direct access to any upstream pipeline capacity held by pipelines, Order No. 636 has enabled pipeline customers to choose the levels of transportation and storage service they require, as well as to purchase gas directly from third-party merchants other than the pipelines. Even though the implementation of Order No. 636 on individual interstate pipelines is largely complete, many of the issues related to this Order are still pending final resolution by the FERC (in remand proceedings) and by the courts. Thus, while Order No. 636 has generally facilitated the transportation of gas and the direct access to end-user markets, the ultimate impact of these regulations on marketing production cannot be predicted at this time. With the completion of the Order No. 636 implementation process on the FERC level, FERC's natural gas regulatory efforts have turned towards a number of other important policies, all of which could significantly affect the marketing of gas. Some of the more notable of these regulatory initiatives include (i) a series of orders in individual pipeline proceedings articulating a policy (which has been approved by the courts) of generally approving the divestiture of pipeline-owned gathering facilities to pipeline affiliates, (ii) FERC's efforts to implement uniform standards for pipeline electronic bulletin boards, electronic data exchange, and basic business and operational practices of the pipelines, 24 (iii) efforts to refine FERC's regulations controlling the operation of the secondary market for released pipeline capacity, (iv) a policy statement regarding market and other non-cost-based rates for interstate pipeline transmission and storage capacity and (v) an inquiry into the appropriate nature and extent of continuing FERC regulation of offshore pipelines. The on-going and evolving nature of these regulatory initiatives make it impossible at this time to predict their ultimate impact upon marketing natural gas. Finally, numerous states are in the process of implementing regulatory initiatives requiring local distribution companies ("LDCs") to develop (to various degrees) unbundled transportation and related service options and rates. Typically, these programs are designed to allow the LDCs' commercial, industrial, and, in more and more cases, residential, customers to have access to transportation service on the LDC, coupled with an ability to select third-party city-gate gas suppliers. These developments have already led a number of industry participants to redirect significant marketing resources to these emerging downstream markets. ENVIRONMENTAL REGULATION Various federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect the Company's operations and costs. In particular, the Company's oil and gas exploration, development, production and EOR operations, its activities in connection with storage and transportation of liquid hydrocarbons and its use of facilities for treating, processing, recovering or otherwise handling hydrocarbons and wastes therefrom are subject to stringent environmental regulation by governmental authorities. Such regulation has increased the cost of planning, designing, drilling, installing, operating and abandoning the Company's oil and gas wells and other facilities. The Company has expended significant resources, both financial and managerial, to comply with environmental regulations and permitting requirements and anticipates that it will continue to do so in the future in order to comply with stricter industry and regulatory safety standards such as those described below. Although the Company believes that its operations and facilities are in general compliance with applicable environmental regulations, risks of substantial costs and liabilities are inherent in oil and gas operations and there can be no assurance that significant costs and liabilities will not be incurred in the future. Moreover, it is possible that other developments, such as increasingly strict environmental laws, regulations and enforcement policies thereunder, and claims for damages to property, employees, other persons and the environment resulting from the Company's operations, could result in substantial costs and liabilities in the future. Although the resulting costs cannot be accurately estimated at this time, these requirements and risks typically apply to companies with types, quantities and locations of production similar to those of the Company and to the oil and gas industry in general. OFFSHORE PRODUCTION. Offshore oil and gas operations are subject to regulations of the United States Department of the Interior, the Department of Transportation, the United States Environmental Protection Agency ("EPA") and certain state agencies. In particular, the Federal Water Pollution Control Act of 1972, as amended ("FWPCA"), imposes strict controls on the discharge of oil and its derivatives into navigable waters. The FWPCA provides for civil and criminal penalties for any discharges of petroleum in reportable quantities and, along with the Oil Pollution Act of 1990 and similar state laws, imposes substantial liability for the costs of oil removal, remediation and damages. SOLID AND HAZARDOUS WASTE. The Company currently owns or leases, and has in the past owned or leased, numerous properties that have been used for production of oil and gas for many years. Although the Company has utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other solid wastes may have been disposed or released on or under the properties owned or leased by the Company. State and federal laws applicable to oil and gas wastes and properties have gradually become more strict. Under these new laws, the Company has been, and in the future could be, required to remove or remediate previously disposed wastes or property contamination (including groundwater contamination) or to perform remedial plugging operations to prevent future contamination. 25 The Company generates hazardous and nonhazardous wastes that are subject to the federal Resource Conservation and Recovery Act and comparable state statutes. The EPA has limited the disposal options for certain hazardous wastes and is considering the adoption of stricter disposal standards for nonhazardous wastes. Furthermore, it is anticipated that additional wastes (which could include certain wastes generated by the Company's oil and gas operations) will in the future be designated as "hazardous wastes," which are subject to more rigorous and costly disposal requirements. In response to the changing regulatory environment, the Company has made certain changes in its operations and disposal practices. For example, the Company has commenced remediation of sites or replacement of facilities where its wastes have previously been disposed. SUPERFUND. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of a site and companies that disposed or arranged for the disposal of the hazardous substance found at a site. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of its operations, the Company has generated and will generate wastes that may fall within CERCLA's definition of "hazardous substances". The Company may be responsible under CERCLA for all or part of the costs to clean up sites at which such wastes have been disposed. Certain properties owned or used by the Company or its predecessors have been investigated under state and Federal Superfund statutes, and the Company has been and could be named a potentially responsible party ("PRP") for the cleanup of some of these sites. Pursuant to the Contribution Agreement, Monterey agreed to indemnify and hold harmless Santa Fe from and against any costs incurred in the future relating to environmental liabilities of the Western Division assets (other than those retained by Santa Fe), including any costs or expenses incurred at any of the OII Site, the Santa Fe Springs Site and the Eastside Site (as defined herein), and any costs or liabilities that may arise in the future are attributable to laws, rules or regulations in respect to any property or interest therein located in California and formerly owned or operated by the Western Division or its predecessors. The Company has been identified as one of over 250 PRPs at a Superfund site in Los Angeles County, California (the "OII Site"). The OII Site was operated by a third party as a waste disposal facility from 1948 until 1983. The EPA is requiring the PRPs to undertake remediation of the site in several phases, which include site monitoring and leachate control, gas control and final remediation. In November 1988 the EPA and a group of PRPs that includes the Company entered into a consent decree covering the site monitoring and leachate control phases of remediation. The Company was a member of the group Coalition Undertaking Remediation Efforts ("CURE") which was responsible for constructing and operating the leachate treatment plant. This phase is now complete and the Company's share of costs with respect to this phase was $0.9 million. Another consent decree provides for the predesign, design and construction of a gas plant to harness and market methane gas emissions. The Company is a member of the New CURE group which is responsible for the gas plant construction and operation and landfill cover. Currently, New CURE is in the design stage of the gas plant. The Company's share of costs of this phase is expected to be $1.9 million and such costs have been provided for in the financial statements. Pursuant to consent decrees settling lawsuits against the municipalities and transporters involved with the OII site but not named by the EPA as PRPs, such parties are required to pay approximately $84 million, of which approximately $76 million will be credited against future remediation expenses. The EPA and the PRPs are currently negotiating the final closure requirements. After taking into consideration the credits from the municipalities and transporters, the Company estimates its share of final costs of closure will be approximately $0.8 million, which amount has been provided for by the Company in its financial statements. The Company has entered into a Joint Defense Agreement with the other PRPs to defend against a lawsuit filed in September 1994 by 95 homeowners alleging, among other things, nuisance, trespass, strict liability and 26 infliction of emotional distress. A second lawsuit has been filed by 33 additional homeowners and the Company and the other PRPs have entered into a Joint Defense Agreement. At this stage of the lawsuit the Company is not able to estimate costs or potential liability. In 1994 the Company received a request from the EPA for information pursuant to Section 104(e) of CERCLA and a letter ordering the Company and other PRPs to negotiate with the EPA regarding implementation of a remedial plan for a site located in Santa Fe Springs, California (the "Santa Fe Springs Site"). The Company owned the property on which the Santa Fe Springs Site is located from 1921 to 1932. During that time the property was leased to another company and in 1932 the property was sold to that company. During the time the other company leased or owned the property and for a period thereafter, hazardous wastes were allegedly disposed at the Santa Fe Springs Site. The EPA estimates total past and future costs for remediation to be approximately $8.0 million. The Company filed its response to the Section 104(e) order setting forth its position and defenses based on the fact that the other company was the lessee and operator of the site during the time the Company was the owner of the property. However, the Company has also given its Notice of Intent to comply with the EPA's order to prepare a remediation design plan. The PRPs estimate total costs to final remediation to be $3.0 million and the Company has provided $250,000 for such costs in the financial statements. In 1995 the Company and twelve other companies received notice that they have been identified as PRPs by the California Department of Toxic Substances Control (the "DTSC") as having generated and/or transported hazardous waste to the Environmental Protection Corporation ("EPC") Eastside Landfill (the "Eastside Site") during its fourteen-year operation from 1971 to 1985. EPC has since liquidated all assets and placed the proceeds in trust (the "EPC Trust") for closure and post-closure activities. However, these monies may not be sufficient to close the site. The PRPs have entered into an enforceable agreement with the DTSC to characterize the contamination at the site and prepare a focused remedial investigation and feasibility study. The DTSC has agreed to implement reasonable measures to bring new PRPs into the agreement. The DTSC will address subsequent phases of the cleanup, including remedial design and implementation in a separate order agreement. The cost of the remedial investigation and feasibility study is estimated to be $0.8 million, the cost of which will be shared by the PRPs and the EPC Trust. The ultimate costs of subsequent phases will not be known until the remedial investigation and feasibility study is completed and a remediation plan is accepted by the DTSC. The Company currently estimates final remediation could cost $2 million to $6 million and believes the monies in the EPC Trust will be sufficient to fund the lower end of this range of costs. The Company has provided $80,000 in its financial statements for its share of costs related to this site. AIR EMISSIONS. The operations of the Company, including most of its operations in the San Joaquin Valley, are subject to local, state and federal regulations for the control of emissions from sources of air pollution. Legal and regulatory requirements in this area are increasing, and there can be no assurance that significant costs and liabilities will not be incurred in the future as a result of new regulatory developments. In particular, the 1990 Clean Air Act Amendments will impose additional requirements that may affect the Company's operations, including permitting of existing sources and control of hazardous air pollutants. However, it is impossible to predict accurately the effects, if any, of the Clean Air Act Amendments on the Company at this time. The Company has been and may in the future be subject to administrative enforcement actions for failure to comply strictly with air regulations or permits. These administrative actions are generally resolved by payment of a monetary penalty and correction of any identified deficiencies. Alternatively, regulatory agencies may require the Company to forego construction or operation of certain air emission sources. OTHER. The Company is subject to the requirements of the federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and similar state statutes (such as California Proposition 65) require the Company to organize information about hazardous materials used or produced in its operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens. 27 The Company's facilities in California are also subject to California Proposition 65, which was adopted in 1986 to address discharges and releases of, or exposures to, toxic chemicals in the environment. Proposition 65 makes it illegal to knowingly discharge a listed chemical if the chemical will pass (or probably will pass) into any source of drinking water. It also prohibits companies from knowingly and intentionally exposing any individual to such chemicals through ingestion, inhalation or other exposure pathways without first giving a clear and reasonable warning. Although generally less stringent, the Company's foreign operations are subject to similar foreign laws respecting environmental and worker safety matters. INSURANCE COVERAGE MAINTAINED WITH RESPECT TO OPERATIONS The Company maintains insurance policies covering its operations in amounts and areas of coverage normal for a company of its size in the oil and gas exploration and production industry. These coverages include, but are not limited to, workers' compensation, employers' liability, automotive liability and general liability. In addition, an umbrella liability and operator's extra expense policies are maintained. All such insurance is subject to normal deductible levels. The Company does not insure against all risks associated with its business either because insurance is not available or because it has elected not to insure due to prohibitive premium costs. EMPLOYEES As of December 31, 1996, the Company had approximately 651 employees, 177 of whom were covered by a collective bargaining agreement which expires on January 31, 1999. Of such employees, 307 are employed by Monterey, including all employees who are covered by the collective bargaining agreement. The Company believes that its relations with its employees are satisfactory. ITEM 3. LEGAL PROCEEDINGS The Company, its subsidiaries and other related companies are named defendants in several lawsuits and named parties in certain governmental proceedings arising in the ordinary course of business. For a description of certain proceedings in which the Company is involved, see Items 1 and 2 "Business and Properties -- SANTA FE CONSOLIDATED -- Other Business Matters -- Environmental Regulation" and Note 14 to the Consolidated Financial Statements. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, the Company does not expect these matters to have a material adverse effect on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 28 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Santa Fe's common stock is listed on the New York Stock Exchange and trades under the symbol SFR. The following table sets forth information as to the last sales price per share of Santa Fe's common stock as quoted on the Consolidated Tape System for each calendar quarter in 1995 and 1996. LOW HIGH ---- ---- 1995 1st Quarter..................... 8 9 3/4 2nd Quarter..................... 9 1/8 10 1/2 3rd Quarter..................... 9 10 5/8 4th Quarter..................... 8 1/2 9 7/8 1996 1st Quarter..................... 8 3/8 10 1/2 2nd Quarter..................... 10 1/4 12 3/8 3rd Quarter..................... 11 1/4 14 1/4 4th Quarter..................... 13 15 1/8 The Company has not paid dividends on its common stock since the third quarter of 1993. The determination of the amount of future cash dividends, if any, to be declared and paid is in the sole discretion of Santa Fe's Board of Directors and will depend on dividend requirements with respect to the Company's convertible preferred stock, the Company's financial condition, earnings and funds from operations, the level of its capital and exploration expenditures, dividend restrictions in its financing agreements, its future business prospects and other matters as the Company's Board of Directors deems relevant. For a discussion of certain restrictions on Santa Fe's ability to pay dividends, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financing Activities." At December 31, 1996 the Company had approximately 38,500 shareholders of record. 29 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1996 1995 1994 1993 1992(d) --------- --------- --------- ------- --------- (IN MILLIONS OF DOLLARS, EXCEPT AS NOTED) SELECTED FINANCIAL DATA(A) INCOME STATEMENT DATA Revenues........................ 583.3 449.4 404.2 449.5 438.8 --------- --------- --------- ------- --------- Costs and Expenses Production and operating... 188.4 155.8 151.1 165.3 154.8 Cost of crude oil purchased................ 20.8 6.5 11.7 11.1 9.9 Oil and gas systems and pipelines................ -- -- -- 4.2 3.2 Exploration, including dry hole costs............... 34.5 23.4 20.4 31.0 25.5 Depletion, depreciation and amortization............. 148.2 133.2 121.3 152.7 146.3 Impairment of oil and gas properties............... 57.4 30.2 -- 99.3 -- General and administrative........... 30.1 26.9 27.3 32.3 30.9 Taxes (other than income).................. 26.5 19.2 25.8 27.3 24.3 Restructuring charges(b)... -- -- 7.0 38.6 -- Loss (gain) on disposition of assets................ (12.1) 0.3 (8.6) 0.7 (13.6) --------- --------- --------- ------- --------- 493.8 395.5 356.0 562.5 381.3 --------- --------- --------- ------- --------- Income (Loss) from Operations... 89.5 53.9 48.2 (113.0) 57.5 Interest income............ 1.9 10.7 2.8 9.1 2.3 Interest expense........... (37.6) (32.5) (27.5) (45.8) (55.6) Interest capitalized....... 5.2 5.8 3.6 4.3 4.9 Other income (expense)..... (1.0) (1.6) (4.0) (4.8) (10.0) --------- --------- --------- ------- --------- Income (Loss) Before Income Taxes, Minority Interest and Extraordinary Items........... 58.0 36.3 23.1 (150.2) (0.9) Income taxes............... (14.3) (9.7) (6.0) 73.1 (0.5) --------- --------- --------- ------- --------- Income (Loss) Before Minority Interest and Extraordinary Items......................... 43.7 26.6 17.1 (77.1) (1.4) Minority Interest in Monterey Resources, Inc...................... (1.3) -- -- -- -- --------- --------- --------- ------- --------- Income (Loss) Before Extraordinary Items........... 42.4 26.6 17.1 (77.1) (1.4) Extraordinary Item -- Debt Extinguishment Costs...................... (6.0) -- -- -- -- --------- --------- --------- ------- --------- Net Income (Loss)............... 36.4 26.6 17.1 (77.1) (1.4) Preferred Dividend Requirement.............. (13.5) (14.8) (11.7) (7.0) (4.3) Convertible Preferred Repurchase Premium....... (33.7) -- -- -- -- --------- --------- --------- ------- --------- Earnings (Loss) Attributable to Common Stock.................. (10.8) 11.8 5.4 (84.1) (5.7) ========= ========= ========= ======= ========= Per share data (in dollars) Earnings (loss) before extraordinary items...... (0.05) 0.13 0.06 (0.94) (0.07) Extraordinary items........ (0.07) -- -- -- -- Earnings (loss) to common shares................... (0.12) 0.13 0.06 (0.94) (0.07) Weighted average number of common shares outstanding (in millions)..................... 90.6 90.2 89.9 89.7 79.0 STATEMENT OF CASH FLOWS DATA Net cash provided by operating activities.................... 227.6 174.5 124.5 160.2 141.5 Net cash used in investing activities.................... 206.8 160.8 57.7 121.4 15.9 BALANCE SHEET DATA (AT PERIOD END) Properties and equipment, net... 909.8 889.5 843.0 832.7 1,101.8 Total assets.................... 1,120.0 1,064.8 1,071.4 1,076.9 1,337.2 Long-term debt.................. 278.5 344.4 350.4 405.4 492.8 Convertible preferred stock..... 19.7 80.0 80.0 80.0 80.0 Shareholders' equity............ 526.8 437.7 423.3 323.6 416.6 (TABLE CONTINUED ON FOLLOWING PAGE) 30 YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 1993(c) 1992(d) --------- --------- --------- --------- --------- (IN MILLIONS OF DOLLARS, EXCEPT AS NOTED) SELECTED OPERATING DATA(A) DAILY AVERAGE PRODUCTION Crude oil and liquids (MBbls/day) Domestic.................. 66.3 58.5 57.6 60.2 58.3 Argentina................. 3.7 2.6 2.4 2.4 2.4 Indonesia................. 4.3 5.2 5.7 4.1 1.8 --------- --------- --------- --------- --------- 74.3 66.3 65.7 66.7 62.5 ========= ========= ========= ========= ========= Natural gas (MMcf/day).......... 166.9 150.0 136.6 165.4 126.3 Total production (MBOE/day)..... 102.1 91.3 88.5 94.3 83.6 AVERAGE SALES PRICES Crude oil and liquids ($/Bbl) Unhedged Domestic............. 17.17 14.52 12.66 13.07 14.66 Argentina............ 19.06 14.72 13.23 14.07 15.99 Indonesia............ 18.92 16.10 15.09 15.50 17.51 Total................ 17.36 14.65 12.89 13.26 14.80 Hedged.................... 16.87 14.75 12.89 13.26 15.22 Natural Gas ($/Mcf) Unhedged.................. 2.16 1.44 1.75 2.03 1.71 Hedged.................... 1.81 1.43 1.73 1.89 1.70 PROVED RESERVES AT YEAR END Crude oil, condensate and natural gas liquids (MMBbls)............. 299.5 279.2 258.3 248.2 255.1 Natural gas (Bcf)............... 259.4 245.1 242.4 263.0 277.5 Proved reserves (MMBOE)......... 342.7 320.1 298.7 292.0 301.5 Proved developed reserves (MMBOE)...................... 275.8 253.6 224.5 225.5 248.4 PRESENT VALUE OF PROVED RESERVES AT YEAR-END Before income taxes............. 2,095.5 1,257.2 970.8 567.8 915.2 After income taxes.............. 1,477.1 930.2 739.9 502.4 733.5 PRODUCTION COSTS PER BOE (including related production, severance and ad valorem taxes) (in dollars).................... 5.64 5.18 5.34 5.43 5.71
- ------------ (a) Certain prior period amounts have been restated to conform to 1996 presentation. (b) 1993 amount includes losses on property dispositions of $27.8 million, long-term debt repayment penalties of $8.6 million and accruals of certain personnel benefits and related costs of $2.2 million. 1994 amount represents severance, benefits and relocation expenses. (c) Includes production attributable to properties sold during 1993 of 4.1 MBbls of oil and 21.7 MMcf of natural gas per day (7.7 MBOE per day) and gives effect to the sale in 1993 of approximately 8.0 MMBOE of proved reserves. (d) On May 19, 1992 Adobe was merged with and into the Company. 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company reported a loss to common shares for the fourth quarter of 1996 of $46.2 million, or $0.51 per share, compared to earnings to common shares of $4.7 million, or $0.05 per share, in the fourth quarter of 1995. Earnings for the fourth quarter of 1996 included pretax charges of $47.0 million for impairment of oil and gas properties and $9.2 million in debt extinguishment costs associated with the IPO and, in addition, a $33.7 million premium paid with respect to the purchase of 3.8 million shares of the Company's Convertible Preferred Stock, 7% Series. Earnings for the fourth quarter also included a $12.3 million gain on the sales of certain surface lands in California. Crude oil and liquids sales of 76.5 MBbls per day represents the highest quarterly average in the Company's history. The Company's average hedged sales price for crude oil and liquids of $18.80 per barrel was $4.74 per barrel higher than the fourth quarter of 1995. Similarly, the Company's average hedged sales price for natural gas increased $0.40 per Mcf from the fourth quarter of 1995 to $2.04 per Mcf. The Company reported a loss to common shares for the full year 1996 of $10.8 million, or $0.12 per share, compared to earnings to common shares of $11.8 million, or $0.13 per share, in 1995. Crude oil and liquids sales averaged 74.3 MBbls per day, the highest annual average in the Company's history. The Company's average hedged sales price for crude oil and liquids of $16.87 per barrel was $2.12 per barrel higher than 1995. Average natural gas sales of 166.9 MMcf per day were also the highest in the Company's history. The Company's average hedged sales price for natural gas increased $0.38 per Mcf from the 1995 average to $1.81 per Mcf in 1996. GENERAL As an independent oil and gas producer, the Company's results of operations are dependent upon the difference between the prices received for oil and gas and the costs of finding and producing such resources. A material portion of the Company's crude oil production is from long-lived fields in the San Joaquin Valley of California where EOR methods are being utilized. The market price of the heavy (i.e., low gravity, high viscosity) and sour (i.e., high sulfur content) crude oils produced in these fields is lower than sweeter, light (i.e., low sulfur and low viscosity) crude oils, reflecting higher transportation and refining costs. In addition, the lifting costs of heavy crude oils are generally higher than the lifting costs of light crude oils. The lower price received for the Company's domestic heavy and sour crude oil is reflected in the average sales price of the Company's domestic crude oil and liquids (excluding the effect of hedging transactions) for 1996 of $17.17 per barrel, compared to $20.44 per barrel for West Texas Intermediate ("WTI") crude oil (an industry posted price generally indicative of prices for sweeter light crude oil). In 1996 the Company's average sales price for California heavy crude oil was $15.77 per barrel, approximately 77% of the annual average posted price for WTI. Crude oil prices are subject to significant changes in response to fluctuations in the domestic and world supply and demand and other market conditions as well as the world political situation as it affects OPEC, the Middle East and other producing countries. During 1995 and 1996 the actual average sales price (unhedged) received by the Company ranged from a high of $18.80 per barrel in the fourth quarter of 1996 to a low of $14.16 per barrel for the fourth quarter of 1995. Based on operating results for the year 1996, the Company estimates that a $1.00 per barrel increase or decrease in its average domestic crude oil sales prices would result in a corresponding $14.6 million change in net income and a $18.0 million change in cash flow from operating activities. The foregoing estimates do not give effect to changes in any other factors, such as the effect of the Company's hedging program or its debt levels and related interest expense, that might result from a change in oil prices. The price of natural gas fluctuates due to weather conditions, the level of natural gas in storage, the relative balance between supply and demand and other economic factors. The actual average sales price (unhedged) received by the Company in 1996 and 1995 for its natural gas ranged from a high of $2.45 per Mcf in the fourth quarter of 1996 to a low of $1.31 per Mcf in the first quarter of 1995. 32 Based on operating results for the year 1996, the Company estimates that a $0.10 per Mcf increase or decrease in its average domestic natural gas sales price would result in a corresponding $2.1 million change in net income (net of $1.0 million in costs associated with natural gas purchased for use in steam generation) and a $2.6 million change in cash flow from operating activities (net of $1.3 million in costs associated with natural gas purchased for steam generation). The foregoing estimates do not give effect to changes in any other factors, such as the effect of the Company's hedging program or its debt levels and related interest expense, that might result from a change in natural gas prices. From time to time the Company hedges a portion of its oil and gas sales to provide a certain minimum level of cash flow from its sales of oil and gas. While the hedges are generally intended to reduce the Company's exposure to declines in market price, the Company's gain from increases in market price may be limited. The Company uses various financial instruments whereby monthly settlements are based on differences between the prices specified in the instruments and the settlement prices of certain futures contracts quoted on the New York Mercantile Exchange ("NYMEX") or certain other indices. Generally, in instances where the applicable settlement price is less than the price specified in the contract, the Company receives a settlement based on the difference; in instances where the applicable settlement price is higher than the specified price, the Company pays an amount based on the difference. The instruments utilized by the Company differ from futures contracts in that there is no contractual obligation which requires or allows for the future delivery of the product. Gains or losses on hedging activities are recognized in oil and gas revenues in the period in which the hedged production is sold. The Company has open crude hedges on an average of approximately 7,700 barrels per day for the period January to July 1997. The instruments used have floors ranging from $21 to $23 per barrel and ceilings ranging from $24 to $27 per barrel. Under the terms of the instruments, if the aggregate average of the applicable daily settlement prices is below the floor, the Company will receive a settlement based on the difference, and if the aggregate average of the applicable daily settlement prices is above the ceiling, the Company will be required to pay an amount based on the difference. The following table reflects estimated amounts due to or from the Company assuming the stated settlement prices are in effect for the entire period the aforementioned hedges are in effect. SETTLEMENT PRICE DUE TO (FROM) COMPANY (DOLLARS PER BARREL) (MILLIONS OF DOLLARS) -------------------- --------------------- 27.00 (1.6) 26.00 (0.2) 25.00 (0.1) 23.00 - 24.00 -- 22.00 0.3 21.00 1.1 20.00 2.7 Crude oil hedges resulted in a $13.4 million decrease in revenues in 1996 and a $2.4 million increase in revenues in 1995. The Company has no open natural gas hedges. In 1996 and 1995 natural gas hedges resulted in decreases in revenues of $21.4 million and $0.3 million, respectively. In addition to its oil and gas sales hedges, for the first six months of 1996 the Company hedged 20.0 MMcf per day of the natural gas it purchases for use in its steam generation operations in the San Joaquin Valley of California. Such hedges resulted in a $3.2 million increase in 1996 production and operating costs. In February 1996 the Bureau of Land Management ("BLM") of the United States Department of the Interior (which operates the Company's leases of Federal lands) agreed, effective as of June 1, 1996, to reduce the royalties payable on any Federal lease that produces heavy oil. As a result of this 33 program, the Company's royalty rate on its Federal leases which produce heavy oil (all of which are operated by Monterey) has been reduced from 12.5% to an average of 4.8%, resulting in a net increase in the production attributable to the Company's net revenue interests in such leases of approximately 1,600 barrels per day. The royalty reduction will be terminated upon the first to occur of (i) the determination by the BLM that the WTI average oil price (as adjusted for inflation) has remained above $24 per barrel for six consecutive months and (ii) such time after September 10, 1999, as the Secretary of the Interior determines that the heavy oil royalty rate reduction has not produced the intended results (i.e., to reduce the loss of otherwise recoverable reserves). 34 RESULTS OF OPERATIONS REVENUES The following table reflects the components of the Company's crude oil and liquids and natural gas revenues: YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- CRUDE OIL AND LIQUIDS PRODUCED REVENUES ($ MILLIONS) Sales Domestic California Heavy........... 251.4 193.9 161.8 Other...................... 165.3 115.9 104.3 --------- --------- --------- 416.7 309.8 266.1 Argentina..................... 25.8 13.8 11.6 Indonesia..................... 29.5 30.8 31.3 Hedging......................... (13.4) 2.4 -- Net Profits Payments............ (3.2) (4.4) (3.8) --------- --------- --------- 455.4 352.4 305.2 ========= ========= ========= VOLUMES (MBBLS/DAY) Domestic California Heavy.............. 43.5 38.9 38.3 Other......................... 22.8 19.6 19.3 --------- --------- --------- 66.3 58.5 57.6 Argentina....................... 3.7 2.6 2.4 Indonesia....................... 4.3 5.2 5.7 --------- --------- --------- 74.3 66.3 65.7 ========= ========= ========= SALES PRICES ($/BBL) Domestic California Heavy.............. 15.77 13.65 11.57 Other......................... 19.84 16.24 14.83 Total......................... 17.17 14.52 12.66 Argentina....................... 19.06 14.72 13.23 Indonesia....................... 18.92 16.10 15.09 Total........................... 17.36 14.65 12.89 Total Hedged.................... 16.87 14.75 12.89 NATURAL GAS PRODUCED REVENUES ($ MILLIONS) Sales Domestic...................... 122.2 73.3 87.2 Foreign....................... 9.8 5.5 0.1 --------- --------- --------- 132.0 78.8 87.3 Hedging......................... (21.4) (0.3) (1.0) Net Profits Payments............ (4.8) (1.4) (2.9) --------- --------- --------- 105.8 77.1 83.4 ========= ========= ========= VOLUMES (MMCF/DAY) Domestic........................ 145.7 137.7 136.3 Foreign......................... 21.2 12.3 0.3 --------- --------- --------- 166.9 150.0 136.6 ========= ========= ========= SALES PRICES ($/MCF) Unhedged Domestic...................... 2.29 1.46 1.75 Foreign....................... 1.27 1.22 0.99 Total......................... 2.16 1.44 1.75 Hedged.......................... 1.81 1.43 1.73 35 Total revenues increased 30% from $449.4 million in 1995 to $583.3 million in 1996. Revenues from the sales of crude oil and liquids produced increased $103.0 million, primarily reflecting increased sales prices ($65.6 million) and increased volumes ($52.1 million). Such increases were partially offset by a $13.4 million hedging loss in 1996 compared to a $2.4 million hedging gain in 1995. Crude oil and liquids sales volumes increased 8.0 MBbls per day primarily due to capital spending on the Company's heavy oil properties (3.5 MBbls per day), reduced royalties on Federal heavy oil leases (1.0 MBbls per day) and new domestic production and acquired interests in certain producing properties (3.4 MBbls per day). Revenues from the sales of natural gas produced increased $28.7 million, primarily reflecting increased sales prices ($39.5 million) and increased volumes ($13.7 million). Such increases were partially offset by a $21.4 million hedging loss in 1996 compared to a loss of $0.3 million in 1995. Domestic natural gas sales volumes increased 8.0 MMcf per day primarily reflecting new production partially offset by declines in production from more mature fields. The increase in international sales volumes primarily reflects a full year's production from the Company's Sierra Chata field in Argentina, which commenced production in April 1995, and increased demand for the Argentine natural gas. Revenues from the sales of crude oil purchased relate to the sale of crude oil purchased and blended with certain of the Company's heavy oil production to facilitate pipeline transportation. The cost to purchase such crude oil is included in Costs and Expenses. The increase in 1996 reflects an increase in blending to transport heavy oil to more attractive markets outside southern California. Total revenues increased 11% from $404.2 million in 1994 to $449.4 million in 1995. Crude oil and liquids revenues increased $47.2 million, primarily reflecting the effect of increased sales prices ($44.3 million) and increased volumes ($4.3 million). Natural gas revenues declined $6.3 million primarily due to the effect of lower sales prices ($14.6 million) which was partially offset by the effect of higher sales volumes ($8.6 million). The increase in natural gas sales volumes is principally due to sales from the Company's Sierra Chata field in Argentina, which commenced production in April 1995. Other revenues for 1995 includes $10.2 million related to the favorable settlement of a disputed natural gas sales contract. Total revenues declined 10% from $449.5 million in 1993 to $404.2 million in 1994. Crude oil and liquids revenues declined $10.2 million. The sale of certain domestic properties in the fourth quarter of 1993 and the second quarter of 1994 resulted in a decrease in oil revenues of approximately $20.4 million. The effect of increased volumes of California heavy and Indonesian crude, approximately $14.5 million, and lower net profits payments were partially offset by the effect of lower sales prices. Daily average oil production in 1994 decreased 1,000 barrels per day from 1993. The 3,800 barrel per day decrease in oil production resulting from the sale of properties was partially offset by a 1,300 barrel per day increase in California heavy crude and a 1,600 barrel per day increase in Indonesian production. Natural gas revenues declined from $107.8 million in 1993 to $83.4 million in 1994. The sales of properties resulted in a decrease in natural gas revenues of approximately $13.1 million and lower sales prices resulted in a reduction in revenues of approximately $7.6 million. In addition, revenues for 1993 included a positive adjustment of $3.2 million related to production in prior periods from certain nonoperated properties. Net profits payments in 1994 were $3.3 million lower than in 1993. Natural gas sales volumes decreased from 165.4 MMcf per day in 1993 to 136.6 MMcf per day in 1994 with the property sales accounting for approximately 18.6 MMcf per day of the decrease. The Company's curtailment program due to low prices resulted in a reduction in 1994 volumes of approximately 5.1 MMcf per day and a prior period adjustment included in 1993 represented volumes of approximately 4.0 MMcf per day. 36 COSTS AND EXPENSES The following table sets forth, on a per barrel of oil equivalent produced basis, certain of the Company's costs and expenses (in dollars): 1996 1995 1994 --------- --------- --------- Production and operating (a)......... 5.02(f) 4.65 4.65 Exploration, including dry hole costs.............................. 0.92 0.70 0.63 Depletion, depreciation and amortization (b)................... 3.89 3.96 3.76 General and administrative........... 0.67(g) 0.81 0.85 Taxes other than income (c).......... 0.71 0.58 0.80 Interest, net (d)(e)................. 0.82 0.93 1.08 - ------------ (a) Excluding related production, severance and ad valorem taxes. (b) Excludes effect of unproved property writedowns of $0.07 per BOE in 1996 and $0.03 per BOE in 1995. (c) Includes production, severance and ad valorem taxes. (d) Reflects interest expense less amounts capitalized and interest income. (e) Excludes effects of (i) benefit of federal income tax audit refund of $0.25 per BOE in 1995; (ii) benefit of an adjustment to certain financing costs recorded in a prior period of $0.05 per BOE in 1995; (iii) benefit of adjustments to provisions for potential state income tax obligations of $0.15 per BOE in 1995 and $0.36 per BOE in 1994; (iv) benefit of adjustment to provisions made in prior periods with respect to interest on certain federal income tax audit adjustments of $0.07 per BOE in 1994; and (v) benefit of Federal income tax audit refund and revised tax sharing agreement with the Company's former parent of $0.36 per BOE in 1993. (f) Excludes effect of $0.9 million charge for environmental clean-up costs ($0.02 per BOE). (g) Excludes effect of $1.6 million charge related to the abandonment of an office lease and $3.3 million in costs and expenses related to the IPO ($0.14 per BOE). Costs and expenses totalled $493.8 million in 1996 compared to $395.5 million in 1995. Production and operating costs increased $32.6 million, primarily reflecting higher production volumes, $3.2 million in expenses related to hedges of natural gas purchased in connection with steam generation operations in California (see -- General) and higher volumes and prices for natural gas purchased in connection with such steam generation operations. The cost of crude oil purchased increased primarily due to increased blending activity (see -- REVENUES). The $11.1 million increase in exploration costs primarily reflects higher geological and geophysical expenditures ($6.4 million) and higher dry hole costs ($5.7 million). The increase in depletion, depreciation and amortization ("DD&A") primarily reflects higher production volumes. The impairments of oil and gas properties of $57.4 million in 1996 and $30.2 million in 1995 represent writedowns taken in accordance with the Company's accounting policy discussed in Note 1 to the Consolidated Financial Statements. The increase in general and administrative expense primarily reflects $3.3 million in expenses related to the IPO. The increase in taxes other than income primarily reflects higher production and severance taxes due to higher prices and volumes ($2.7 million) and higher ad valorem taxes. Taxes other than income in 1995 included a $0.7 million benefit related to the settlement of certain disputed sales and use taxes. The gain on disposition of properties in 1996 includes a $12.3 million gain on the fourth quarter sale of certain surface properties in Orange County, California. Costs and expenses totalled $395.5 million in 1995 compared to $356.0 million in 1994. DD&A increased $11.9 million primarily reflecting such expense associated with new production from the Company's Sierra Chata field in Argentina and increased expense associated with certain of the Company's Gulf Coast and Permian Basin properties principally due to the high level of capital expenditures in 1995. In 1995 the Company recognized $30.2 million in impairment of oil and gas properties associated with the adoption of a new accounting standard with respect to the impairment of certain assets. Taxes other than income are $6.6 million lower in 1995, primarily reflecting lower 37 ad valorem taxes and a $0.7 million benefit reflecting adjustments to amounts accrued in prior periods due to the favorable settlement of a dispute with respect to certain sales and use taxes. Costs and expenses for 1994 totalled $356.0 million compared to $562.5 million for 1993. Costs and expenses for 1993 included impairments of oil and gas properties of $99.3 million and restructuring charges of $38.6 million. Costs and expenses for 1994 included restructuring charges of $7.0 million (see -- Liquidity and Capital Resources). Property sales in the fourth quarter of 1993 and the second quarter of 1994 resulted in reductions in production and operating costs and DD&A of $12.4 million and $11.5 million, respectively. The remainder of the decrease in DD&A is primarily attributable to the effect of the property impairments taken in the fourth quarter of 1993. Exploration expenses were down $10.6 million primarily reflecting lower geological and geophysical costs with respect to foreign operations and lower overhead. General and administrative expenses were $5.0 million lower, primarily reflecting the effect of the corporate restructuring program. Interest income for 1995 includes $7.4 million related to a $12.0 million refund with respect to the audit of the Company's federal income tax returns for 1981 through 1985 and $0.8 million related to a $1.3 million refund with respect to the audit of Adobe's federal income tax returns for 1984 and 1985. Interest expense for 1995 includes a $5.0 million benefit reflecting adjustments to provisions made in prior periods for potential state income tax obligations. Interest expense for 1994 includes a benefit of $2.4 million reflecting adjustments to provisions made in prior periods with respect to interest on certain potential federal income tax audit adjustments and a benefit of $11.5 million reflecting adjustments to provisions made in prior periods for potential state income tax obligations. Other income (expense) for 1995 includes a $2.5 million gain on the sale of Cherokee Resources Incorporated, a privately-held oil and gas company, and a $1.8 million loss on the sale of the Company's investment in Hadson. Other income (expense) for 1994 includes (i) a $2.4 million gain on the sale of the Company's interest in a company which was acquired in the Adobe merger in 1992; (ii) a net $1.6 million charge with respect to the Company's investment in Hadson; and (iii) a $5.0 million charge with respect to certain litigation. Income taxes for 1996 include a $8.3 million deferred tax benefit related to certain foreign expenditures incurred in prior periods. Income taxes for 1995 include a $5.0 million benefit related to the previously discussed federal tax audit refunds and a $1.3 million benefit related to adjustments to provisions in prior periods for potential state income tax obligations. Income taxes for 1994 include a $3.0 million credit reflecting the benefit of adjustments to provisions made in prior periods with respect to certain potential federal income tax audit adjustments and a $2.6 million credit reflecting the benefit of adjustments to provisions made in prior periods for potential state income tax obligations. The extraordinary item reported in 1996 represents costs and expenses associated with the retirement of certain of the Company's debt in association with the IPO. See Note 2 to the Consolidated Financial Statements. The Company's preferred dividend requirement for 1996 includes a $33.7 million premium related to the purchase of 3.8 million shares of the Company's Convertible Preferred Stock, 7% Series. The increase in the Company's preferred dividend requirement in 1994 reflects the issuance of 10.7 million shares of $0.732 Series A Convertible Preferred Stock in the second quarter of 1994. In October 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"), which established financial accounting and reporting standards for stock-based employee compensation plans. FAS 123 encourages companies to adopt a fair value based method of accounting for such plans but continues to allow the use of the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("Opinion 25"). Companies electing to continue accounting in accordance with Opinion 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method defined in FAS 123 had been applied. The Company has elected to continue to account for stock-based compensation in accordance with 38 Opinion 25 and the pro forma disclosures in accordance with the provisions of FAS 123 are included in Note 12 to the Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flow from operating activities is a function of the volumes of oil and gas produced from the Company's properties and the sales prices received therefor. Since crude oil and natural gas are depleting assets, unless the Company replaces the oil and gas produced from its properties, the Company's assets will be depleted over time and its ability to incur debt at constant or declining prices will be reduced. The Company increased its proved reserves (net of production and sales) by approximately 33% over the five years ended December 31, 1996; however, no assurances can be given that such increase will occur in the future. Historically, the Company has generally funded development and exploration expenditures and working capital requirements from cash provided by operating activities. Depending upon the future levels of operating cash flows, which are significantly affected by oil and gas prices, the restrictions on additional borrowings included in certain of the Company's debt agreements, together with debt service requirements and dividends, may limit the cash available for future exploration, development and acquisition activities. Net cash provided by operating activities and net proceeds from sales of properties totalled $244.3 million in 1996; net cash used for capital expenditures and producing property acquisitions in such period totalled $223.5 million. The increase in accounts receivable in 1996 primarily reflects the effect of higher sales prices and an increase in crude oil blending activity, partially offset by the collection of the income tax refund discussed below. The increase in other current assets primarily reflects an increase in advances to the operators of joint interest oil and gas properties due to higher capital spending and the note receivable associated with the sale of certain surface property. Other assets at December 31, 1996 includes $24.2 million in escrowed funds related to a producing property acquisition the Company completed in January 1997. The increase in accounts payable at year end 1996 primarily reflects an increase in capital projects in progress and increased crude oil blending activity. The increase in income taxes payable in 1996 primarily reflects current taxes associated with the contribution of assets to Monterey and the Proposed Spin Off. The increase in other current liabilities reflects higher advances received from joint interest partners. The increase in accounts receivable from $76.2 million at December 31, 1994 to $89.0 million at December 31, 1995 primarily reflects a $12.0 million receivable at December 31, 1995 related to a refund with respect to the audit of the Company's federal income tax returns for 1981 through 1985. The decrease in accounts payable from $84.1 million at December 31, 1994 to $73.1 million at December 31, 1995 primarily reflects lower amounts payable with respect to capital projects in progress. Monterey intends to pay its shareholders a quarterly dividend of $0.15 per share. The first dividend has been declared and will be paid in April 1997 consisting of a prorated dividend of $0.22 per share in respect of Monterey's first partial quarter which ended December 31, 1996 and its first full quarter ending March 31, 1997. Santa Fe will receive a total of approximately $10.0 million with respect to the 45.4 million shares that it currently holds. To the extent Monterey continues to pay such dividends, Santa Fe will receive dividends of approximately $6.8 million per quarter (assuming a quarterly dividend of $0.15 per share) until the Proposed Spin Off is consummated. Such amounts would be available to fund the Company's operations, other than those conducted by Monterey. Effective November 13, 1996 Santa Fe entered into a revolving credit agreement (the "Santa Fe Credit Agreement") which matures November 13, 2001. The Santa Fe Credit Agreement permits the Company to obtain revolving credit loans and issue letters of credit up to an aggregate amount of up to $150.0 million, with the aggregate amount of letters of credit outstanding at any time limited to $30.0 million. Borrowings under the Santa Fe Credit Agreement are unsecured and interest rates are tied to 39 the bank's prime rate or eurodollar offering rate, at the option of the Company. At December 31, 1996, no loans or letters of credit were outstanding under the terms of the Santa Fe Credit Agreement. Effective November 13, 1996 Monterey entered into the Monterey Credit Agreement which matures November 13, 2000. The Monterey Credit Agreement permits Monterey to obtain revolving credit loans and issue letters of credit up to an aggregate amount of up to $75.0 million, with the aggregate amount of letters of credit outstanding at any time limited to $15.0 million. Borrowings under the Monterey Credit Agreement are unsecured and interest rates are tied to the bank's prime rate or eurodollar offering rate, at the option of Monterey. At December 31, 1996 no loans or letters of credit were outstanding under the terms of the Monterey Credit Agreement. In November 1996 Monterey issued the Monterey Senior Notes which were exchanged for $175.0 million of senior notes previously issued by Santa Fe. The Monterey Senior Notes bear interest at 10.61% per annum and are payable in full in 2005. Monterey is required to repay, without premium, $25.0 million of the principal amount each year from 1999 through 2005. Certain of the credit agreements and the indenture for the Debentures include covenants that restrict Santa Fe and Monterey's ability to take certain actions, including the ability to incur additional indebtedness and to pay dividends on capital stock. Under the most restrictive of these covenants, at December 31, 1996 Santa Fe could incur up to $417.7 million of additional indebtedness and pay dividends of up to $36.8 million on its aggregate capital stock (including its common stock, 7% Convertible Preferred Stock and Series A Preferred). At December 31, 1996, under the most restrictive of these covenants, Monterey could incur up to $253.4 million of additional indebtedness and pay dividends of $61.7 million on its common stock. Monterey is prohibited from paying more than $31.0 million in dividends to Santa Fe in any fiscal year prior to the consummation of the Proposed Spin Off. The Company has three short-term uncommitted lines of credit totalling $60.0 million which are used to meet short-term cash needs. Interest rates on borrowings under these lines of credit are typically lower than rates paid under the Bank Facility. At December 31, 1996 $4.0 million was outstanding under these lines of credit. At December 31, 1996 the Company had outstanding letters of credit totalling $6.0 million, $2.3 million of which related to the operations of Monterey. INITIAL PUBLIC OFFERING AND PROPOSED SPINOFF In the third quarter of 1996 the Company announced its intention to separate its operations in the State of California from the rest of its domestic and international operations. In November such operations were assumed by Monterey which subsequently issued 9.3 million shares of its common stock in an initial public offering. The proceeds from the offering were primarily used to retire certain of the Company's then outstanding long-term debt. See Items 1 and 2. Business and Properties -- MONTEREY RESOURCES, INC. The Company has announced that it intends to distribute pro rata to its common shareholders all of its remaining ownership interest in Monterey by means of a tax-free distribution. The Proposed Spin Off is subject to certain conditions including, the receipt of a ruling from the Internal Revenue Service that such a distribution would be tax-free, the approval of such distribution by the Company's common shareholders, the absence of any future change in the market or economic conditions (including developments in the capital markets) or the Company's or Monterey's business or financial condition that causes the Company's Board of Directors to conclude that the Proposed Spin Off is not in its shareholders' best interests and the final declaration of the Proposed Spin Off by the Company's Board of Directors. The Proposed Spin Off is not expected to occur prior to July 1997. The Company is taking these actions because of its belief that its oil and gas operations have developed over time into separate businesses that operate independently and have diverging capital requirements and risk profiles. In addition, the Board of Directors believes that dividing the Company's operations into two independent companies will allow each to more efficiently develop its 40 distinct resource base and pursue separate business opportunities while providing each with improved access to capital markets. The Board of Directors also believes that the IPO and the Proposed Spin Off will allow investors to better evaluate each business, enhancing the likelihood that each would achieve appropriate market recognition for its performance. If the Proposed Spin Off occurs, the market price of the Company's common stock will decline to reflect the distribution of the Monterey common stock and the increased shares available in the market may have an adverse effect on the market price of Monterey's common stock. Also in November, the Company completed the purchase of 3.8 million of the 5.0 million outstanding shares of its Convertible Preferred Stock, 7% Series, for $24.50 per share, net to the seller in cash. The Company made the offer because it believes that the goals of the Proposed Spin Off can be better achieved by reducing the number of preferred shares outstanding and simplifying the Company's capital structure. ENVIRONMENTAL MATTERS Almost all phases of the Company's oil and gas operations are subject to stringent environmental regulation by governmental authorities. Such regulation has increased the costs of planning, designing, drilling, installing, operating and abandoning oil and gas wells and other facilities. The Company has expended significant financial and managerial resources to comply with such regulations. Although the Company believes its operations and facilities are in general compliance with applicable environmental regulations, risks of substantial costs and liabilities are inherent in oil and gas operations. It is possible that other developments, such as increasingly strict environmental laws, regulations and enforcement policies or claims for damages to property, employees, other persons and the environment resulting from the Company's operations, could result in significant costs and liabilities in the future. As it has done in the past, the Company intends to fund its cost of environmental compliance from operating cash flows. See Items 1 and 2. "Business and Properties -- SANTA FE CONSOLIDATED -- Other Business Matters -- Environmental Regulation" and Note 14 to the Consolidated Financial Statements. DIVIDENDS Dividends on the Company's 7% Convertible Preferred Stock and Series A Preferred Stock are cumulative at an annual rate of $1.40 per share and $0.732 per share, respectively. No dividends may be declared or paid with respect to the Company's common stock if any dividends with respect to the 7% Convertible Preferred Stock or Series A Preferred Stock are in arrears. None of the dividends with respect to the Company's 7% Convertible Preferred Stock and Series A Preferred Stock are in arrears. The determination of the amount of future cash dividends, if any, to be declared and paid on the Company's common stock is in the sole discretion of the Company's Board of Directors and will depend on dividend requirements with respect to the preferred stock, the Company's financial condition, earnings and funds from operations, the level of capital and exploration expenditures, dividend restrictions in financing agreements, future business prospects and other matters the Board of Directors deems relevant. FORWARD LOOKING STATEMENTS In its discussion and analysis of financial condition and results of operations, the Company has included certain statements (other than statements of historical fact) that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used herein, the words "budget," "budgeted," "anticipate," "expects," "believes," "seeks," "goals," "intends" or "projects" and similar expressions are intended to identify forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected by such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable and such forward-looking statements are based upon the best data available at the time this report is 41 filed with the Securities and Exchange Commission, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements include, but are not limited to, the following: production variances from expectations, volatility of oil and gas prices, the need to develop and replace its reserves, the substantial capital expenditures required to fund its operations, exploration risks, environmental risks, uncertainties about estimates of reserves, competition, government regulation and political risks, and the ability of the Company to implement its business strategy. All such forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE ---- Audited Financial Statements Report of Independent Accountants ............................................................... 63 Consolidated Statement of Operations for the years ended December 31, 1996, 1995 and 1994 ............................................................. 64 Consolidated Balance Sheet - -- December 31, 1996 and 1995 ...................................................................... 65 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 ............................................................. 66 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 ................................................... 67 Notes to Consolidated Financial Statements ...................................................... 68 Unaudited Financial Information Supplemental Information to Consolidated Financial Statements ................................................................ 91 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS, EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. EXECUTIVE OFFICERS OF SANTA FE Listed below are the names, ages (as of February 1, 1997) and positions of all executive officers of Santa Fe (excluding executive officers who are also directors of Santa Fe) and their business experience during the past five years. Unless otherwise stated, all offices were held with Santa Fe Energy Company prior to its merger with Santa Fe. Each executive officer holds office until his or her successor is elected or appointed or until his or her earlier death, resignation or removal. HUGH L. BOYT, 51 Senior Vice President -- Production since March 1, 1990. From 1989 until March 1990, Mr. Boyt served as Corporate Production Manager. JERRY L. BRIDWELL, 53 Senior Vice President -- Exploration and Land since 1986. JANET F. CLARK, 42 Vice President and Chief Financial Officer since January 1997. Ms. Clark was with Southcoast Capital Corporation from January 1994 until she joined Santa Fe. While with Southcoast Capital Ms. Clark served as Vice President from January 1994 to June 1996 and as Director, Corporate Finance, from June 1996 to December 1996. From December 1992 to January 1994 Ms. Clark served as Senior Vice President with Williams MacKay Jordan & Company. Prior to December 1992 Ms. Clark was an independent financial consultant. 42 E. EVERETT DESCHNER, 56 Vice President -- Engineering and Evaluation since April 1990. KATHY E. HAGER, 45 Vice President -- Public Affairs since January 1997. From January 1994 to January 1997 Ms. Hager served as Director, Investor Relations and from September 1990 to January 1994 as Manager, Investor Relations. CHARLES G. HAIN, JR., 50 Vice President -- Human and Data Resources since 1994. Vice President -- Employee Relations from 1988 until 1994. DAVID L. HICKS, 47 Vice President -- Law and General Counsel since March 1991. DIRECTORS CURRENT DIRECTORS. Listed below are the names and ages (as of February 1, 1997) of, and certain other information about, all the current directors of the Company. The indicated periods of service as a director of the Company include service during the time the Company was a wholly owned subsidiary of Santa Fe Pacific Corporation. FIRST ELECTED NAME, AGE AND BUSINESS EXPERIENCE A DIRECTOR - ------------------------------------- ------------- DIRECTORS CONTINUING IN OFFICE UNTIL 1997 Marc J. Shapiro, 49 ............................................. 1990 Chairman and Chief Executive Officer of Texas Commerce Bank National Association ("Texas Commerce Bank") (banking) since 1987, and a member of the Policy Council of Chase Manhattan Corporation, (successor to the Management Committee of Chemical Banking Corporation) since December 1991. Mr. Shapiro is also a director of Browning-Ferris Industries, Burlington Northern Santa Fe Corporation and a trustee of Weingarten Realty Investors William E. Greehey, 60 .......................................... 1991 Chairman of the Board, Chief Executive Officer and director of Valero Energy Corporation (refining and marketing, gas transmission and processing) since 1983. Mr. Greehey is also a director of Weatherford-Enterra DIRECTORS CONTINUING IN OFFICE UNTIL 1998 Melvyn N. Klein, 55 ............................................. 1993 Attorney and Counselor at Law; private investor; the sole stockholder of a general partner in GKH Partners, L.P. Mr. Klein is also a principal of Questor Management Company, and director of Anixter International and Bayou Steel Corporation (specialty steel manufacturer) James L. Payne, 59 .............................................. 1986 Chairman of the Board, President and Chief Executive Officer of the Company since June 1990. Mr. Payne was President of Santa Fe Energy Company, a predecessor in interest of the Company from January 1986 to January 1990 when he became President of the Company. From 1982 to January 1986 Mr. Payne was Senior Vice President--Exploration and Land of Santa Fe Energy Company. Mr. Payne is also a director of Pool Energy Services Co. (oilfield services), and Monterey Resources, Inc. DIRECTORS CONTINUING IN OFFICE UNTIL 1999 Allan V. Martini, 69 ............................................ 1990 Retired Vice President Exploration/Production and director of Chevron Corporation (petroleum operations) since August 1988. Mr. Martini served in that position from July 1986 until his retirement (TABLE CONTINUED ON FOLLOWING PAGE) 43 FIRST ELECTED NAME, AGE AND BUSINESS EXPERIENCE A DIRECTOR - ------------------------------------- ------------- Reuben F. Richards, 67........................................... 1992 Chairman of the Board, Terra Industries Inc. (argibusiness) from December 1982 until retirement in March 1996. Chief Executive Officer thereof from December 1982 to May 1991 and President thereof from July 1983 to May 1991; Chairman of the Board, Engelhard Corporation (specialty chemicals, engineered materials and precious metals management services) from May 1985 to December 1994 and director thereof since prior to 1990; Chairman of the Board, Minorco (U.S.A.) Inc. ("Minorco (USA)"), from May 1990 to March 1996 and Chief Executive Officer and President from February 1994 to March 1996. Mr. Richards is also a director of Ecolab, Inc. (cleaning and sanitizing products), Engelhard Corporation, Potlatch Corporation (forest products), and Minorco. Kathryn D. Wriston, 57........................................... 1990 For the past five years, director of various corporations and organizations, including Northwestern Mutual Life Insurance Company and the Stanley Works and a Trustee of the Financial Accounting Foundation. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Since July 1, 1990, the Company has entered into agreements with Texas Commerce Bank or affiliates thereof providing for cash management, lending, depository and other banking services in the normal course of business. Texas Commerce Bank also issued standby letters of credit with various expiration dates for security and environmental requirements totaling $4,206,854 as of December 31, 1996. Texas Commerce Bank is also the Trustee of the Company's Retirement Income Plan. Finally, effective November 19, 1992, the Company in return for cash contributed certain oil and gas interests to the Santa Fe Energy Trust which in turn issued Secure Principal Energy Receipts evidencing an interest in the Trust and a United States Treasury Obligation. Texas Commerce Bank is the Trustee of the Trust and acts as registrar and transfer agent of the Secure Principal Energy Receipts. During 1996 the Company paid Texas Commerce Bank interest in the amount of $76,144 for loans to the Corporation and fees for various services in the amount of $320,798 (which does not include $34,274 paid from the Retirement Income Plan Trust). In addition, Mr. Shapiro, a director of the Company, is Chairman and Chief Executive Officer of Texas Commerce Bank. Mr. Shapiro has no direct or personal interest in these banking arrangements. His interest arises only because of his positions as an officer of Texas Commerce Bank and a director of the Company. Mr. Shapiro has abstained from voting on any issues involving the relationships between the Company and Texas Commerce Bank. In the opinion of the Company, the fees paid to Texas Commerce Bank for the services performed are normal and customary. Mr. Shapiro is also a director of Burlington Northern Santa Fe Corporation which, as a result of a business combination in September 1995, became the successor in interest to SFP. In connection with the distribution of shares of the Company's common stock by SFP (and the initial distribution in December 1989 to SFP by one of SFP's wholly owned subsidiaries of such shares) (collectively the "SFP Spin Off"), the Company and SFP entered into an agreement to protect SFP from federal and state income taxes, penalties and interest that would be incurred by SFP if the SFP Spin Off was determined to be a taxable event resulting primarily from actions taken by the Company during a one year period that ended on December 4, 1991. If the Company were required to make payments pursuant to the agreement, such payments could have a material adverse effect on its financial condition; however, the Company does not believe that it took any actions during such one-year period that would have such an effect on the SFP Spin Off. For periods prior to the date of the SFP Spin Off, the Company was included in the consolidated federal income tax return filed by SFP as the common parent for itself and its subsidiaries. Pursuant to the Agreement for the Allocation of the Consolidated Federal Income Tax Liability Among the Members of the SFP Affiliated Group and various state agreements for the allocation of tax liability among the SFP Group (the "Tax Agreements") between SFP and its subsidiaries, the Company paid 44 to SFP an amount approximating the federal income tax liability and for years 1989 and 1990 the state income tax liability it would have paid if it and its subsidiaries were members of separate consolidated groups. These amounts were payable regardless of whether the SFP consolidated group, as a whole, had any current federal or state income tax liability. Pursuant to the Agreement Concerning Taxes between SFP and the Company, after the SFP Spin Off additional payments to or refunds from SFP may be made if there is an audit, carryover or similar adjustment subsequently made that impacts the computation of amounts paid SFP as described above. Mr. Shapiro has no direct or personal interest in the above described transaction. His interest arose only because of his position as a director of Burlington Northern Santa Fe Corporation and as a director of the Company. Mr. Payne is also a director of Pool Energy Services Co. ("Pool") which provides various oilfield services. During 1996 the Company and Monterey paid Pool subsidiaries $7,094,573 for services performed on properties operated by the Company or Monterey. Mr. Payne has no direct or personal interest in these services. His interest arises only because of his position as an officer of the Company and a director of Pool. In the opinion of the Company, the amounts paid for services performed by Pool were competitive and were normal and customary in the industry. The Company entered into an Agreement Regarding Shelf Registration dated March 24, 1995, with HC Associates ("HC") which owns more than 5% of the Company's common stock whereby the Company agreed that upon written demand (which demand may be submitted to the Company once, provided such registration is effected and the registration statement is declared effective) from HC, GKH Partners, L.P. ("GKH"), GKH Investments, L.P., Ernest H. Cockrell Texas Testamentary Trust or Carol Cockrell Jennings Texas Testamentary (collectively, the "Selling Stockholders") at any time prior to March 27, 2000 to file with the Securities and Exchange Commission a registration statement to register the offer and sale, from time to time, by the Selling Stockholders of up to 5,203,091 shares of the Company's common stock beneficially owned by them as of March 24, 1995, subject to certain specified restrictions. The Company is obligated to pay all expenses incidental to such registration, excluding underwriting discounts, commissions, fees or disbursements of legal counsel for the Selling Stockholders. See also Report of the Compensation and Benefits Committee -- Compensation Committee Interlocks and Insider Participation at page 53 and Security Ownership of Certain Beneficial Owners at page 47. With respect to certain fees which will be payable to affiliates of Texas Commerce Bank and to GKH upon consummation of the Proposed Spin Off, see Note 2 to the Consolidated Financial Statements. OTHER INFORMATION CONCERNING DIRECTORS. In 1996, the Board met eight times, and each member of the Board as it was composed at the time attended at least 75% of the total number of meetings of the Board and the total number of meetings held by all committees of the Board on which he or she served. DIRECTORS COMPENSATION. Directors who are not employees of the Company or its subsidiaries receive an annual cash retainer fee of $10,000, a fee of $1,000 for each meeting of the Board attended, and a fee of $1,000 (an additional $2,000 annual retainer for the committee Chairman) for each committee meeting attended plus expenses for each Board or committee meeting attended. In addition, on May 8, 1996, the shareholders of the Company approved an amendment to the 1990 Incentive Stock Compensation Plan, as amended (the "Stock Plan") whereby a portion of the annual retainer is paid in shares of the Company's common stock as well as a grant of Non-Qualified Stock Options ("NQSOs). Pursuant to this amendment non-employee directors receive as a portion of their retainer 1,000 shares of common stock with a six-month restriction period during which it may not be transferred and 5,000 NQSOs issued at Fair Market Value (as defined in the Stock Plan) as of the date of the Annual Meeting of Shareholders. Further, all newly elected directors receive a one-time grant of 10,000 NQSOs with a 45 strike price of the Fair Market Value on the date the director is first elected. Current directors received a similar one-time grant effective February 1, 1996, the date the amendment to the Stock Plan was approved by the Board. Additional terms and conditions relating to the NQSOs are described on page 52. BOARD COMMITTEES. In 1996, the Board maintained Audit, Compensation and Benefits, Executive, Nominating and Pension Committees. Following are the members of each committee and brief descriptions of their functions. All chairman of the committees are non-employee directors. The members of the Audit Committee are Kathryn D. Wriston (Chairman), Marc J. Shapiro and Melvyn N. Klein. The principal functions of the Audit Committee, which met three times in 1996, include overseeing the performance and reviewing the scope of the audit function of independent accountants. The Audit Committee also reviews, among other things, audit plans and procedures, the Company's policies with respect to conflicts of interest and the prohibition on the use of corporate funds or assets for improper purposes, changes in accounting policies, and the use of independent accountants for non-audit services. The members of the Compensation and Benefits Committee are William E. Greehey (Chairman), Kathryn D. Wriston and Reuben F. Richards. The principal function of the Compensation and Benefits Committee, which met five times in 1996, is to administer all executive compensation and benefit plans of the Company. Members of the Compensation and Benefits Committee are not eligible to participate in any benefit plans of the Company that they administer except the Stock Plan pursuant to which grants may be made only as described above. In December 1996 the Pension Committee was abolished and its duties described below were assumed by the Compensation and Benefits Committee. The members of the Nominating Committee are Allan V. Martini (Chairman), Kathryn D. Wriston and James L. Payne. The Nominating Committee, which met twice in 1996, receives recommendations for review and evaluates the qualifications of and selects and recommends to the Board of Directors, nominees for election as Directors. The Nominating Committee will consider nominees recommended by stockholders. Any such recommendation, together with the nominee's qualifications and consent to be considered as a nominee, should be sent in writing to the Secretary of the Company not less than 30 days nor more than 60 days prior to the annual meeting. The members of the Executive Committee are Melvyn N. Klein (Chairman), William E. Greehey, James L. Payne, Allan V. Martini and Reuben F. Richards. The Committee, which met twice in 1996, may exercise during periods between meetings of the Board of Directors, all powers of the Board in the management and business of the Company subject to limitations imposed by the Bylaws, Certificate of Incorporation or applicable law. The members of the Pension Committee were a former director as Chairman, James L. Payne and Allan V. Martini. The duties of the Pension Committee which met once in 1996, included reviewing the actions of the Pension Administration and Pension Investment Committees which are composed of Company employees, making recommendations to the Board of Directors concerning future memberships of such committees and such other recommendations as may be necessary or appropriate, and recommending to the Board of Directors substantial amendments to the Company's retirement plan which do not change benefit levels. The duties of the Pension Committee were assumed by the Compensation and Benefits Committee in December 1996. 46 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS To the best of the Company's knowledge, the following persons are the only persons who are beneficial owners of more than five percent of the Company's common stock, Convertible Preferred Stock, 7% Series, or $.732 Series A Convertible Preferred Stock based upon the number of shares outstanding on December 31, 1996:
NUMBER OF NUMBER OF SHARES OF SHARES OF $.732 NUMBER OF CONVERTIBLE SERIES A SHARES OF PERCENT PREFERRED PERCENT CONVERTIBLE PERCENT COMMON OF STOCK, OF PREFERRED OF NAME AND ADDRESS STOCK(A) CLASS 7% SERIES CLASS STOCK CLASS - ------------------------------------- ------------- ------- ------------ ------- --------- ------- HC Associates(b)..................... 5,203,091 5.7% -- -- % -- -- % 200 West Madison Street 27th Floor Chicago, Illinois 60606 Neuberger & Berman, LLC(c)........... 4,535,168 5.0% -- -- % -- -- % 605 Third Ave. New York, New York 10158 Merrill Lynch & Co., Inc.(d)......... 10,126,285 11.1% 64,393 5.0% 500,000 4.7% World Financial Center, North Tower 250 Vesey Street New York, NY 10281 OppenheimerFunds, Inc.(e)............ -- -- % -- -- % 825,000 7.7% Two World Trade Center Suite 3400 New York, New York 10048 FMR Corp.(f)......................... 9,388,321 10.3% -- -- % 2,498,800 23.4% 82 Devonshire Street Boston, Massachusetts 02109
The holders of Convertible Preferred Stock, 7% Series, of which there are 1,229,890 shares outstanding, may, at their option, convert any or all such shares into 1.3913 shares of the Corporation's common stock. Each share of $.732 Series A Convertible Preferred Stock, of which there are 10,700,000 shares outstanding, is convertible at the option of the holder into 0.8474 shares of the Corporation's common stock at any time prior to May 15, 1998. - ------------ (a) Each holder has claimed sole voting and investment power concerning these shares except as noted below. The number of shares of common stock does not include shares issuable upon conversion of preferred stock. (b) As reported at May 31, 1995, HC Associates, a Delaware general partnership ("HC") is the owner of 5,203,091 shares (approximately 5.7 percent) of the common stock of the Corporation. HC was organized in December 1992 for the purpose of, among other things, acquiring, holding, selling, exchanging and otherwise dealing with shares of the Corporation's common stock. The partners of HC (and their respective percentage interests in HC) are GKH Investments, L.P. (the "Fund") (92.743659 percent), GKH Partners, L.P., as nominee for GKH Private Limited (3.506491 percent), Ernest H. Cockrell Texas Testamentary Trust (1.874963 percent) and Carol Cockrell Jennings Texas Testamentary Trust (1.874965 percent). The sole general partner of the Fund, a Delaware limited partnership is GKH Partners, L.P. ("GKH"), a Delaware limited partnership. Pursuant to a management agreement, GKH manages assets on behalf of GKH Private Limited ("GKHPL"). The number of shares described above do not include 39,100 shares of common stock acquired in September 1994 by GKH on behalf of GKHLP and the Fund. The general partners of GKH are JAKK Holding Corp., a Nevada corporation ("JAKK"), DWL Lumber Corporation, a Delaware corporation ("DWL"); and HGM Associates Limited Partnership, an Illinois limited partnership ("HGMLP"). The sole general partner of HGMLP is HGM Corporation, a Nevada corporation ("HGM"). Melvyn N. Klein is the sole director and stockholder of JAKK and serves as its president, treasurer and secretary. Mr. Klein disclaims beneficial ownership of the shares of common stock owned by HC, GKH, GKHLP and the Fund. Dan W. Lufkin is (FOOTNOTES CONTINUED ON FOLLOWING PAGE) 47 president, director and sole stockholder, Craigh Leonard is secretary and a director and Douglas J. McBride is assistant secretary and a director of DWL. Jay A. Pritzker is a director and Chairman of the Board, Thomas J. Pritzker is president and a director, Glen Miller is vice president and treasurer and Harold S. Handelsman is vice president and secretary of HGM. (c) As reported at February 13, 1997, Neuberger & Berman LLC is deemed to be a beneficial owner of these shares for the purpose of Rule 13(d) since it has shared power to make decisions whether to retain or dispose of the securities of many unrelated clients. Neuberger & Berman, LLC does not however have any economic interest in the securities of these clients. The clients are the actual owners of the securities and have the sole right to receive and the power to direct the receipt of dividends from or proceeds from the sale of such securities. Principals of Neuberger & Berman, LLC own 438,700 shares of the Company's common stock. The principals own these shares in their own personal securities accounts, Neuberger & Berman, LLC disclaims beneficial ownership of these shares since they were purchased with each principals' personal funds and each principal has exclusive dispositive and voting power over the shares held in their respective accounts. Neuberger & Berman Profit Sharing Retirement Plan owns 290,100 shares. Such shares are held in a securities account in the name of the Plan with Neuberger & Berman, LLC and are held in street name. The Plan's sole beneficial owners are current and former Neuberger & Berman, LLC employees and Principals who are Plan participants. Neuberger & Berman Trust Company (a wholly owned affiliate of Neuberger & Berman, LLC) is trustee of the Plan. One Principal of Neuberger & Berman, LLC makes day to day investment decisions for the Plan. Neuberger & Berman, LLC disclaims beneficial ownership of these shares. (d) As reported at February 11, 1997, Merrill Lynch & Co., Inc., a Delaware corporation ("ML & Co."), Merrill Lynch Group, Inc., a Delaware corporation ("ML Group"), whose address is World Financial Center, North Tower, 250 Vesey Street, New York, N.Y. 10281, and Princeton Services, Inc., a Delaware corporation ("PSI"), whose address is 800 Scudders Mill Road, Plainsboro, N.J. 08536, are parent holding companies pursuant to Section 240, 13d-1 (b)(1)(ii)(G) of the Securities Exchange Act of 1934 (the "Exchange Act"). The relevant subsidiaries of ML & Co. are Merrill Lynch Pierce, Fenner & Smith Incorporated, a Delaware corporation with its principal place of business at 250 Vesey Street, New York, N.Y. ("MLPF&S"), ML Group and PSI, which is the general partner of Merrill Lynch Asset Management, L. P. (d/b/a) Merrill Lynch Asset Management ("MLAM"). The relevant subsidiaries of Merrill Lynch Group are PSI and certain Merrill Lynch trust companies. ML & Co. may be deemed to be the beneficial owner of the reported securities of the Company as set forth by virtue of its control of its wholly-owned subsidiaries, ML Group and MLPF&S. MLPF&S, a wholly owned direct subsidiary of ML & Co. and a broker-dealer registered pursuant to the Exchange Act holds certain of the reported securities in proprietary trading accounts and may be deemed to be the beneficial owner of securities held in customer accounts over which MLPF&S has discretionary power and in unit investment trusts for which MLPF&S is the sponsor. ML Group, a wholly owned direct subsidiary of ML & Co., may be deemed to be the beneficial owner of the reported securities of the Corporation as set forth by virtue of its control of (i) its wholly-owned subsidiary, PSI, and (ii) certain Merrill Lynch trust companies, each of which is a wholly-owned subsidiary of ML Group and a bank as defined in Section 3(a)(6) of the Exchange Act. One or more Merrill Lynch trust companies or institutions, each of which is a bank as defined in Section 3(a)(6) of the Exchange Act, may be deemed the beneficial owner of certain of the reported securities of the Company held by customers in accounts over which such trust companies or institutions have discretionary authority. PSI, a wholly owned direct subsidiary of ML Group, may be deemed to be the beneficial owner of certain of the reported securities of the Company as set forth by virtue of its being the general partner of MLAM. MLAM, a Delaware limited partnership with its principal place of business at 800 Scudders Mill Road, Plainsboro, New Jersey, is an investment advisor registered under Section 203 of the Investment Advisors Act of 1940. MLAM may be deemed to be the beneficial owner of certain of the reported securities of the Company as set forth by virtue of its acting as investment advisor to one or more investment companies registered under Section 8 of the Investment Company Act of 1940, and/or to one or more private accounts. 48 A registered investment company advised by MLAM, Merrill Lynch Growth Fund for Investment for Retirement is the beneficial owner of 9,000,000 shares of the Company's common stock as reported and is a reporting person hereunder. Pursuant to Section 240.13d-4 of the Exchange Act, ML&Co., ML Group and PSI disclaim beneficial ownership of the securities of the Corporation reported, and the filing of a Schedule 13G shall not be construed as an admission that such entity is, for purposes of Section 13(d) or 13(g) of the Exchange Act, the beneficial owner of any of the securities of the Company. (e) As reported at February 10, 1997, the Board of Directors or Trustees of the registered investment companies managed by Oppenheimer Funds, Inc. ("OFI") and owning the shares of the Corporation's $.732 Series A Convertible Preferred Stock shown can direct the disposition of dividends received by OEIF and can dispose of such securities. Additionally, OFI shares the power to dispose of such securities with the Board of Directors or Trustees of such funds; however, the Board of Trustees of such funds have delegated these responsibilities to OFI as the fund's investment advisor under its investment advisory agreement. OFI has an interest relating to 7.5% of the securities noted by virtue of the interest of 7.5% of such securities owned by OEIF. OFI disclaims ownership of such securities except as expressly stated above. (f) As reported at February 14, 1997, as of December 31, 1996, Fidelity Management & Research Company ("Fidelity"), 82 Devonshire Street, Boston, Massachusetts 02109, a wholly-owned subsidiary of FMR Corp. and an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, is the beneficial owner of 8,980,198 or 9.9% of the common stock and 1,879,600 shares or 17.6% of the $.732 Series A Convertible Preferred Stock of the Company as a result of acting as an investment advisor to various investment companies registered under Section 8 of the Investment Company Act of 1940. Edward C. Johnson 3d, FMR Corp., through its control of Fidelity, and the funds each has sole power to dispose of the 8,980,198 shares of common stock and 1,879,600 shares of Preferred Stock owned by the funds. Neither FMR Corp. nor Edward C. Johnson 3d, Chairman of FMR Corp., has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds' Board of Trustees. Fidelity carries out the voting of the shares under written guidelines established by the Funds' Boards of Trustees. Fidelity Management Trust Company, 82 Devonshire Street, Boston, Massachusetts 02109, a wholly-owned subsidiary of FMR Corp., and a bank as defined in Section 3(a)(6) of the Securities Exchange Act of 1934, is the beneficial owner of 408,123 shares or less than 1% of the common stock and 619,200 shares or 5.8% of the $.732 Series A Convertible Preferred Stock of the Company as a result of its serving as an investment manager of the institutional accounts. Edward C. Johnson 3d and FMR Corp., through its control of Fidelity Management Trust Company, each has sole dispositive power over these shares, the sole power to vote or direct the vote over a portion of the shares and no power to vote or direct the voting of the balance of such shares. Members of the Edward C. Johnson 3d family and trusts for their benefit are the predominant owners of Class B shares of common stock of FMR corp., representing approximately 49% of the voting power of FMR Corp. Mr. Johnson 3d owns 12.0% and Abigail Johnson owns 24.5% of the aggregate outstanding voting stock of FMR Corp. Mr. Johnson 3d is Chairman of FMR Corp. and Abigail P. Johnson is a Director of FMR Corp. The Johnson family group and all other Class B shareholders have entered into a shareholders' voting agreement under which all Class B shares will be voted in accordance with the majority vote of Class B shares. Accordingly, through their ownership of voting common stock and the execution of the shareholders' voting agreement, members of the Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR Corp. 49 STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the amount of common stock beneficially owned as of February 1, 1997 by each of the directors, by each of the executive officers, and by all directors and executive officers as a group. Unless otherwise noted, each of the named persons and members of the group has sole voting and investment power with respect to the shares shown. No individual listed below, except Mr. Payne, beneficially owns one percent or more of the Company's outstanding common stock. In addition, no individual listed below beneficially owns any shares of Convertible Preferred Stock, 7% Series. With the exception of Mr. Payne, no individual listed below owns any $.732 Series A Convertible Preferred Stock. SHARES NAME OF DIRECTOR, OWNED PERCENT EXECUTIVE OFFICER OR GROUP BENEFICIALLY OF CLASS - ------------------------------------- ------------ -------- William E. Greehey................... 49,726 -- Melvyn N. Klein(a)................... 5,063,203 5.6% Allan V. Martini..................... 22,907 -- Reuben F. Richards................... 21,387 -- Marc J. Shapiro...................... 26,707 -- Kathryn D. Wriston................... 21,629 -- James L. Payne(b).................... 946,277 1.0% Jerry L. Bridwell(c)................. 366,985 -- Hugh L. Boyt(d)...................... 280,314 -- R. Graham Whaling(e)................. 20,627 -- Directors and Executive Officers as a Group(f)........................... 7,269,102 7.8% - ------------ (a) Includes 5,048,083 shares of common stock which may be deemed to be owned by GKH primarily through its participation in HC Associates. See "Security Ownership of Certain Beneficial Owners" for a description of ownership of the Corporation's common stock by HC Associates. Mr. Klein is the sole stockholder of one of the general partners in GKH Partners, L. P., the general partner of GKH Investments, L. P. and the nominee for GKH Private Limited and disclaims beneficial ownership of the shares held by HC Associates. Also includes 15,000 shares which could be received upon the exercise of options within 60 days. The weighted average exercise price of such options is $10.2292. (b) Mr. Payne's common stock ownership includes 47,906 shares arising from participation in the Corporation's Savings Investment Plan and 722,890 shares which could be received upon the exercise of options within 60 days. The weighted average exercise price of such options is $12.7344. In addition, Mr. Payne owns 3,000 shares of $.732 Series A Convertible Preferred Stock. (c) Mr. Bridwell's common stock ownership includes 36,676 shares arising from participation in the Corporation's Savings Investment Plan and 273,839 shares which could be received upon the exercise of options within 60 days. The weighted average exercise price of such options is $13.5447. (d) Mr. Boyt's common stock ownership includes 6,455 shares arising from participation in the Company's Savings Investment Plan and 225,245 shares which could be received upon the exercise of options within 60 days. The weighted average exercise price of such options is $11.5275. (e) Mr. Whaling's common stock ownership includes 1,459 shares arising from participation in the Corporation's Savings Investment Plan. (f) The common stock ownership described includes 115,977 shares arising from participation in the Company's Savings Investment Plan as of February 1, 1997 and 1,649,805 shares which could be received upon the exercise of options within 60 days. 50 REPORT OF THE COMPENSATION AND BENEFITS COMMITTEE The Compensation and Benefits Committee (the "Committee") has been chartered by the Board to review salaries and other compensation of officers, including Mr. Payne, the Company's Chief Executive Officer, and key employees on an annual basis. Following review, the Committee submits recommendations to the Board regarding such salaries and compensation. In addition, the Committee selects officers and key employees for participation in incentive compensation plans, establishes performance goals for those officers and key employees who participate in such plans and reviews and monitors benefits under all employee plans of the Company. Although Mrs. Wriston appears below as a member of the Committee, she was appointed as such in December 1996 and did not participate as a member in any meetings held during 1996. COMPENSATION POLICIES FOR EXECUTIVE OFFICERS As a result of an extensive review undertaken in 1995 with the assistance of Hay Management Consultants, a performance-based executive compensation program was developed. The Committee believes the program is competitive, reinforces the Company's business strategy and supports objectives for enhanced shareholder value. It is designed to attract, retain and motivate key employees by providing total compensation opportunities consistent with those maintained by the Company's peer group. The group used for this purpose includes companies from the peer graph on page 58 which the Committee believes approximate the Company's size and asset mix. The program allows compensation to vary significantly based on performance results, balance objectives for short-term operating performance with longer term performance, and encourage stock ownership among key employees. Base salaries for the executive group are maintained near the median competitive position for comparable positions among the peer group. Annual incentive opportunities are targeted to provide compensation between a median and upper quartile of the Company's peer group described above. Long-Term incentive opportunities are provided through grants of stock options and Phantom Units made pursuant to the Stock Plan and are targeted between median and upper quartile award levels with upside opportunities based on sustained performance and creation of shareholder value. As a result of the review of the peer group undertaken in 1996 and in light of the proposed Spin-Off to Monterey Resources it was determined that no salary increases be given to the executive officers in 1996. Mr. Whaling's salary was increased in November 1996 by action of the Monterey Resources board in recognition of his assumption of the duties of the Chairman of the Board and Chief Executive Officer of that company. Annual incentives are provided through the Incentive Compensation Plan (the "ICP Plan"). Goals are established which, if met at the target objective, will result in the executive officer being paid 50 percent of the maximum amount for which the individual is eligible. All executive officers participate in the ICP Plan with maximum payout percentages in 1996 (before the possible adjustments discussed below) of base salary ranging from 100 percent for Mr. Payne through 50 percent for all other executive officers. The Committee may increase or decrease the ultimate award by 25 percent at its discretion. In addition, by electing to forgo all or a portion of the cash segment of the award a participant may elect to receive an amount of Restricted Stock under the Stock Plan equal to an additional $1 in value for each $2 of cash given up. The goals established for 1996 were based upon discretionary cash flow per share, production, reserve replacement, the performance of the Company's common stock as compared to the peer group shown in the table on page 58, general and administrative expense and a discretionary award. The awards were subject to reduction by 50 percent in the event the Company failed to achieve net income to common shareholders. Discretionary cash flow per share is defined as net cash provided by operating activities before changes in operating assets and liabilities minus exploration dry hole costs plus total exploration expense minus capitalized interest minus preferred dividends by the average number of common shares outstanding. Each goal was weighted equally with the exception of general 51 and administrative expense and the discretionary award and with the exception of the stock performance goal and discretionary award were compared against profit plan projections. The discretionary cash flow, reserve replacement, production and stock price performance goals were met in full. After deducting expenses relating to the reconfiguration program undertaken in 1996 the general and administrative expense goal was met in full and the entire amount of the discretionary award was granted. Although the Company did not achieve net income to common shareholders the Committee decided not to reduce the ultimate payout since a positive net income would have resulted but for non-recurring expenses relating to the reconfiguration program. The payout of the awards under the ICP Plan were initially set to be made 75 percent in cash and 25 percent in Bonus Stock granted pursuant to the Stock Plan. Participants were allowed to elect prior to the beginning of the 1996 Plan year to forgo all or a portion of the cash payment in return for the receipt of Restricted Stock on the basis of an additional $1 in value for each $2 of cash given up. These shares are subject to forfeiture in certain events and will vest one-third per year over a three-year period. The number of shares of Restricted Stock granted to Mr. Payne and other executive officers listed in the Summary Compensation Table on page 54 are described in a footnote to that table. In addition to the above described cash and stock payments, the executive officers and key employees are eligible to participate in other grants made under the Stock Plan. In order to further the identity of interest of employees with that of its stockholders, all forms of compensation under the Stock Plan relate to the Company's common stock. Prior to the Initial Public Offering of Monterey the Committee took action to cause the acceleration of vesting of certain outstanding Non-Qualified Stock Options ("NQSO's") and the payout of Phantom Units. NQSO's granted to executive officers and key employees under the 1990 Incentive Stock Compensation Plan prior to the July 1996 grant described below vested in full in September 1996. In addition, the Performance Units granted in 1996 paid out in shares of the Company's common stock at the target level in November 1996. As a result of this acceleration Mr. Payne received early vesting on 300,000 NQSO's with a strike price of $9.5625. The other executive officers received early vesting on NQSO's ranging in amounts from 62,500 with a strike price of $8.00 in the case of Mr. Whaling, 100,000 each with a strike price of $9.5625 to several other executive officers to 12,666 each with a strike price of $7.875 to several other executive officers. The early payout of the Phantom Units resulted in the receipt by Mr. Payne of 34,355 shares of the Company's common stock with the other individuals listed in the Summary Compensation Table on page 54 receiving 9,375 shares of stock and the remaining individuals participating in the grant receiving amounts ranging from 9,375 to 5,833. In July 1996, as part of the strategy discussed above the Committee granted Mr. Payne, the executive officers and other key employees NQSO's as noted in the table located on page 56. In December 1996 the Company granted additional NQSO's to Mr. Payne, selected executive officers and key employees in the amounts noted in the table. All grants were made at fair market value and vest as to one-third of the grant per year over a three-year period. The Committee did not accelerate the vesting of these grants and the Proposed Spin Off of Monterey will not do so. Finally, also as part of the strategy discussed above in December 1996 the Committee granted a total of 81,787 Performance Units to seventeen individuals including Mr. Payne and the executive officers. Mr. Payne received 23,679 Phantom Units, the executive officers listed in the Summary Compensation Table on page 54 (other than Messrs. Whaling and Rosinski) received 6,610 and the remaining individuals participating in the grant received Units in amounts ranging from 6,610 to 2,414. The Units are earned over a three-year period commencing January 1, 1997 with ultimate payout if any to be made in an equivalent number of shares of the Company's common stock. The Committee established four equally weighted goals which must be attained over this three-year period. Full payout will result if discretionary cash flow (as described above) and production volumes equal the three-year projected levels established by the 1997 profit plan, the Company's common stock price performance (after deletion at the outset of the implied value of Monterey) equals the S&P 500 Index over the three- 52 year period and the Company's common stock price at the end of the three years equals an established target. If the above goals are substantially exceeded possible payouts may increase by 100 percent. Failure to meet a threshold goal level will result in the reduction or total elimination of a payout. CHIEF EXECUTIVE COMPENSATION The review of executive compensation discussed above included a review of Mr. Payne's compensation. As in the case of the executive officers as a result of the review of the peer group and in light of the Proposed Spin Off of Monterey it was determined that Mr. Payne's salary not be increased in 1996. Mr. Payne did receive a grant of 100,000 NQSOs with a strike price of $11.625 in July and another grant of 125,000 NQSOs with a strike price of $13.75 in December. Further as a result of the Committee action described above, the vesting on 300,000 NQSOs with a strike price of $9.5625 was accelerated in September and 34,355 Performance Units paid out early in the amount of an equal number of shares of the Company's common stock. SECTION 162 (M) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED The Committee continues to review implications of the $1 million pay cap rules set forth in Section 162 (m) of the Internal Revenue Code of 1986, as amended, and takes this into account when establishing and reviewing compensation policies. COMPENSATION AND BENEFITS COMMITTEE William E. Greehey, Chairman Reuben F. Richards Kathryn D. Wriston COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of the Compensation and Benefits Committee was an officer or employee of the Company in 1994, 1995 or 1996. Mr. Greehey is Chairman of the Board and Chief Executive Officer of Valero Energy Corporation. During 1996, an affiliate of Valero paid the Company $635,841 for compression of natural gas. These fees were determined on an arm's length basis. Mr. Greehey did not have a direct or personal interest in the above transactions and his interest in the above transactions and his interest arises only because of his position as an officer and director of Valero and as a director of the Company. Mr. Richards is the retired Chairman of the Board, Chief Executive Officer and President of Minorco (USA) and is a director of its parent Minorco. On March 8, 1996, Minorco (USA) disposed of 8,712,327 shares of the Company's common stock which it held. Pursuant to the terms of a registration rights agreement dated December 10, 1991, and effective as of May 19, 1992, the Company paid substantially all expenses incidental to the registration of these shares, excluding underwriting discounts and commissions. Mr. Richards did not have a direct or personal interest in this transaction and his interest arises only because of his former position as an officer and director of Minorco (USA) and a director of Minorco and the Company. 53 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------- AWARDS PAYOUTS SECURITIES --------- ANNUAL COMPENSATION UNDERLYING LTIP ALL OTHER NAME AND --------------------------------- OPTIONS/SARS PAYOUTS COMPENSATION PRINCIPAL POSITION YEAR SALARY $ BONUS $(A) # $(B) $(C) - ------------------------------------- --------- --------- ---------- ------------- --------- ------------ James L. Payne....................... 1996 515,000 708,125 225,000 515,025 30,900 Chairman of the Board, Chief 1995 433,250 284,922 -- -- 24,150 Executive Officer and 1994 406,000 300,000 -- -- 18,983 President R. Graham Whaling.................... 1996(d) 236,538 243,930 35,000 140,625 19,993 Senior Vice President and 1995 225,000 109,766 250,000 -- 6,000 Chief Financial Officer 1994 -- -- -- -- -- Hugh L. Boyt......................... 1996 230,000 215,625 70,000 140,625 13,800 Senior Vice President -- 1995 210,731 103,938 -- -- 9,432 Production 1994 204,308 102,971 -- -- 10,489 Jerry L. Bridwell.................... 1996 230,000 172,500 70,000 140,625 12,420 Senior Vice President -- 1995 207,080 107,000 -- -- 11,246 Exploration and Land 1994 199,440 100,518 -- -- 10,295 Michael J. Rosinski.................. 1996 200,000 206,250 17,500 140,625 455,750 Senior Vice President -- 1995 194,675 91,200 -- -- 11,026 Marketing and Environmental 1994 192,900 97,222 -- -- 9,912
- ------------ (a) The bonus amounts shown, while determined on a cash basis, were actually paid partially in shares of the Company's common stock pursuant to the Stock Plan. For 1994 Messrs. Payne, Boyt, Bridwell and Rosinski received 17,911; 6,148; 6,002 and 5,805 shares, respectively. For 1995, Messrs. Payne, Whaling, Boyt, Bridwell and Rosinski received 14,898; 1,818; 5,435; 5,595 and 4,769 shares, respectively. For 1996, participants in the ICP Plan, pursuant to which these bonuses were paid, received 25 percent of the bonus earned in Bonus Stock under the Stock Plan and had the right to receive the balance in cash. Alternatively participants could elect to forgo all or a portion of the cash payment in return for the receipt of Restricted Stock on the basis of an additional $1 in value for each $2 of cash given up. These shares are subject to forfeiture in certain events and will vest one-third per year over a three year period. The bonus amounts for 1996 reflect that additional value received as a result of such elections. Messrs. Payne, Whaling, Bridwell and Boyt received 6,460, 1,836, 3,067, and 2,084 shares of Bonus Stock and 41,200, 14,192, 0, and 9,200 shares of Restricted Stock, respectively. Mr. Rosinski, whose employment with the Company terminated on December 31, 1996, received all cash. (b) The amounts shown reflect the value the Company's common stock received as a result of the accelerated payout of Performance Units granted as of January 1, 1996. See the Report of the Compensation and Benefits Committee. (c) Amounts shown reflect matches made by the Company for employee contributions to the Santa Fe Energy Resources, Inc. Savings Investment Plan as well as the performance match. (See "Benefit Plans -- Savings Plan" for a description of the Savings Investment Plan as well as the performance match.) The performance match is contributed in the year following the performance and therefore total amounts shown for 1994, 1995 and 1996 include the match made for 1993, 1994 and 1995 results, respectively. The Company made a performance match in February 1997 for 1996 results for Messrs. Payne, Whaling, Boyt, Bridwell and Rosinski in the amount of $3,000 for each individual. In addition, amounts shown for 1996 also include the match made by the Corporation relating to deferrals under the Deferred Compensation Plan. (See "Benefit Plans -- Savings Plan" for a description of the Deferred Compensation Plan.) These amounts are also subject to the performance match outlined in the Savings Investment Plan. In February 1997 the Company allocated to accounts maintained by Messrs. Payne, Whaling, Boyt, Bridwell and Rosinski $7,300, $1,750, $1,600, $1,140 and $1,000, respectively as a performance match. Amounts shown for 1996 for Mr. Whaling also include grossed up tax payments made to him relating to his relocation from Houston, Texas to Bakersfield, California. (FOOTNOTES CONTINUED ON FOLLOWING PAGE) 54 Finally, the amounts shown in 1996 for Mr. Rosinski also include $443,750 which he will receive pursuant to the terms of a severance arrangement. (d) Mr. Whaling served as Senior Vice President and Chief Financial Officer until November 1996 when he resigned to assume the position of Chairman of the Board and Chief Executive Officer of Monterey Resources. AGGREGATED OPTION/SAR EXERCISES IN 1996 AND 1996 YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY SHARES OPTIONS/SARS AT OPTIONS/SARS AT ACQUIRED YEAR-END 1996 YEAR-END 1996 ON EXERCISES VALUE EXERCISABLE/ EXERCISABLE/ NAME DURING 1996 REALIZED UNEXERCISABLE UNEXERCISABLE(A) - ------------------------------------- ------------ --------- ---------------- ------------------ (#) $ (#) $ James L. Payne....................... -0- 722,890/225,000 1,832,812/240,625 R. Graham Whaling (b)................ -0- 250,000/35,000 1,468,750/78,750 Hugh L. Boyt......................... -0- 225,245/70,000 625,312/83,125 Jerry L. Bridwell.................... -0- 273,839/70,000 625,312/83,125 Michael J. Rosinski (c).............. 20,000 111,250 120,000/17,500 517,500/39,375
- ------------ (a) The closing price of the Company's common stock on December 31, 1996 was $13.875. (b) See footnote (1) under OPTION/SAR GRANTS IN LAST FISCAL YEAR for information concerning the cancellation of these options by the Company in return for the grant of options to Mr. Whaling by Monterey Resources. (c) Mr. Rosinski's employment with the Company terminated on December 31, 1996. Pursuant to the terms of a severance arrangement Mr. Rosinski received $43,750 (the difference between the average of the high and low sales prices of the Company's common stock on December 31, 1996 and the strike price of $11.625 per share multiplied by his unexercisable options) in return for the cancellation of his unexercised options. 55 OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ----------------------------- POTENTIAL REALIZABLE NUMBER OF PERCENT OF VALUE AT ASSUMED SECURITIES TOTAL RATES OF STOCK PRICE UNDERLYING OPTIONS/SARS EXERCISE APPRECIATED FOR OPTIONS/SARS GRANTED TO OR BASE OPTION TERM GRANTED EMPLOYEES IN PRICE EXPIRATION ------------------------ (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($) ------------ ------------- -------- ---------- ----------- ----------- James L. Payne....................... 100,000 8% 11.625 07-02-06 731,090 1,852,720 125,000 10% 13.75 12-11-06 1,080,925 2,739,250 R. Graham Whaling(a)................. 35,000 3% 11.625 07-02-06 255,881 648,452 Hugh L. Boyt......................... 35,000 3% 11.625 07-02-06 255,881 648,452 35,000 3% 13.75 12-11-06 302,659 766,990 Jerry L. Bridwell.................... 35,000 3% 11.625 07-02-06 255,881 648,452 35,000 3% 13.75 12-11-06 302,659 766,990 Michael J. Roskinski(b).............. 17,500 3% 11.625 07-02-06 127,940 324,226
All options described above are NQSOs granted pursuant to the 1990 Incentive Stock Compensation Plan, as amended (the "Stock Plan"). The NQSOs were granted at market on the date of grant and vest one-third per year over a three year period. These options were not accelerated by the IPO. - ------------ (a) Mr. Whaling resigned his position as Senior Vice President and Chief Financial Officer in November 1996 and assumed the position of Chairman of the Board and Chief Executive Officer of Monterey. Upon the closing of the IPO Mr. Whaling received 112,500 NQSOs pursuant to the Monterey Resources 1996 Incentive Stock Compensation Plan (the "Monterey Stock Plan") with a strike price of $14.50. These options vest one-fifth per year over a five year period but may not be exercised until one year following the consummation of the Proposed Spin Off. In addition, in December 1996 Monterey offered to replace NQSOs granted pursuant to the Company's Stock Plans with NQSOs granted pursuant to the Monterey Stock Plans. Mr. Whaling accepted the offer and effective January 17, 1997, the options described above were cancelled in return for a grant of 31,496 Monterey NQSO's with a strike price of $12.9185. In addition, 250,000 NQSOs granted in January 1995 with a strike price of $8.00 were cancelled in return for a grant of 224,969 NQSOs issued pursuant to the Monterey Stock Plan with a strike price of $8.8901. The newly granted NQSOs contain the same vesting schedule as the Company NQSOs they replaced but may not be exercised until one year following the consummation of the Proposed Spin Off even if fully or partial vested prior to that time. (b) Mr. Rosinski's employment with the Company terminated on December 31, 1996. Pursuant to the terms of a severance arrangement these options were cancelled. See -- Aggregated Option/SAR Exercises in 1996 and 1996 Year-End Option/SAR Values. 56 LONG-TERM INCENTIVE PLANS AWARDS IN 1996
ESTIMATED FUTURE PAYOUTS NUMBER OF UNDER NON-STOCK SHARES, UNITS PERFORMANCE PRICE-BASED PLANS OR OTHER OR OTHER PERIOD ------------------------------ RIGHTS UNTIL MATURATION OR THRESHOLD TARGET MAXIMUM NAME (#) PAYOUT (#) (#) (#) - ------------------------------------- ------------- ------------------- --------- ------ ------- James L. Payne....................... 23,679 1/1/97-12/31/99 7,104 23,679 47,358 R. Graham Whaling.................... -0- -- -- -- -- Hugh L. Boyt......................... 6,610 1/1/97-12/31/99 1,983 6,610 13,220 Jerry L. Bridwell.................... 6,610 1/1/97-12/31/99 1,983 6,610 13,220 Michael J. Rosinski.................. -0- -- -- -- --
In December 1996, the individuals described above (as well as 14 other executive officers and key employees) received grants of Phantom Units pursuant to the Stock Plan in the amounts indicated. The grant was effective January 1, 1997 with the Units being earned over a three-year period. Ultimate payout, if any, is to be made in an equivalent number of shares of the Company's common stock. Four equally weighted goals have been established which must be attained over the three year performance period. Full payout at the target level will result if discretionary cash flow (as described on page 51) and production volumes equal the three year projected levels established by the 1997 profit plan, the Company's common stock price performance equals the S&P 500 Index over the three year period and the Company's common stock price at the end of the three years equals an established target. If the above goals are substantially exceeded possible payouts may increase to the maximum shown. Failure to meet a threshold level, shown above as the combined threshold level of all four goals, will result in a reduction or total elimination of a payout. Mr. Whaling did not receive a grant of Phantom Units but did receive 37,500 shares of Monterey Resources, Inc. Restricted Stock pursuant to the Monterey Resources Stock Plan. These shares vest as to one-fifth of the grant per year over a five year period. The grant is not contingent upon the attainment of goals but is subject to forfeiture in the event of termination of employment under certain circumstances. 57 PERFORMANCE GRAPH The following performance graph compares the performance of the Corporation's common stock to the S&P 500 Index and to an index composed of 21 Independent Oil and Gas Companies selected by Goldman, Sachs & Co. from time to time.(a) Although Goldman, Sachs & Co. does not represent that these companies comprise a "peer group," the Corporation believes that its asset base and operations are best compared to this group and that they are its peers. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG SANTA FE ENERGY RESOURCES INC., THE S & P 500 INDEX AND A PEER GROUP [LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW] 12/91 12/92 12/93 12/94 12/95 12/96 ----- ----- ----- ----- ----- ----- SANTA FE ENERGY RESOURCES INC. 100 98 106 92 110 159 PEER GROUP 100 117 141 127 152 202 THE S & P 500 100 108 118 120 165 203 * $100 invested on 12/31/91 in stock or index -- including reinvestment of dividends. Fiscal year ending December 31. (a) This group of companies, which includes the Corporation, also currently includes Anadarko Petroleum Corp., Apache Corp., Barrett Resources Corp., Burlington Resources, Cabot Oil & Gas, Cross Timbers Oil Co., Devon Energy, Enron Oil & Gas, Louisiana Land & Exploration, Mitchell Energy & Development, Noble Affiliates, Inc., Oryx Energy Co., Parker & Parsley Petroleum, Pennzoil Co., Pogo Producing Company, Seagull Energy Corp., Union Texas Petroleum Holdings, Inc., Vastar Resources, Inc., Vintage Petroleum and United Meridian Corp. Due to activities such as reorganizations and mergers, additions and deletions were made to the group from time to time. Goldman Sachs & Co. has discontinued its past practice of selecting this group. 58 BENEFIT PLANS The Company maintains a 401(k) savings plan and a retirement income plan. In addition, the Company has entered into employment agreements with certain officers and key employees and maintains a severance program for all full-time salaried employees. These plans and agreements are briefly described below. SAVINGS PLAN. The Company has adopted the Santa Fe Energy Resources Retirement and Savings Plan, which became operative and was restated and renamed the Santa Fe Energy Resources Savings Investment Plan, effective November 1, 1990 (the "Savings Investment Plan"). The Savings Investment Plan offers eligible employees an opportunity to make long-term investments on a regular basis through salary contributions, which are supplemented by matching employer contributions. Substantially all salaried employees are eligible to participate on the first day of the month after their date of hire. The Company will match up to 4% of an employee's compensation and the employee's contribution could not exceed $9,500 in 1996. The limit amount is indexed each year to reflect cost-of- living increases. In addition to the employer match described above, at the end of each fiscal year, the Company's performance is evaluated using the same performance measures used in the ICP Plan. If the performance meets or exceeds the goals for that year, participants will receive up to another fifty cents on each regular matching dollar contributed by the Company. The regular employer matching contributions as well as the performance match are made in the Company's common stock. The goals were 100 percent met in 1996 and a performance match was made in March 1997. The Savings Investment Plan is intended to qualify as a Section 401(k) cash or deferred compensation arrangement whereby an employee's contributions and the employer's matching contributions are not subject to federal income taxes at the time of the contribution to the Savings Investment Plan, and the Savings Investment Plan is subject to the restrictions imposed by the Code. Investment alternatives to which contributions may be allocated by the participants include a fixed income fund, an equities fund, a balanced fund, a growth equity fund and a fund which is invested in the Company's common stock. The Company also maintains a supplemental deferred compensation arrangement whereby employees earning in excess of $95,000 per year are allowed to defer all or a portion of their salary until any future year or retirement. These amounts are not matched by the Company. Employees earning in excess of $160,000 per year may also defer up to 4 percent of such excess and the amount will be matched by the Company. The amount contributed is also subject to the performance match described above in the Savings Investment Plan. All amounts are contributed in cash and earn interest at the rate paid on the fixed income fund of the Savings Investment Plan. RETIREMENT PLANS. The Company has adopted the Santa Fe Energy Resources Retirement Income Plan, a qualified defined benefit plan for substantially all salaried employees (the "Retirement Plan"), and the Santa Fe Energy Resources Supplemental Retirement Plan (the "Nonqualified Plan"). The Nonqualified Plan will pay benefits to Retirement Plan participants where the Retirement Plan formula produces a benefit to members in excess of limits imposed by ERISA and applicable government regulations. It also includes amounts deferred under the Santa Fe Energy Resources, Inc. Deferred Compensation Plan as pensionable compensation. Benefits which have accrued to the Corporation's participants under the Santa Fe Pacific Retirement Plan ("SFP Retirement Plan") are protected under the Retirement Plan. Total approximate benefits under both the Retirement Plan and supplemental plan are shown below for selected compensation levels and years of service. As of December 31, 1996, Payne, Whaling, Bridwell, Boyt, and Rosinski were credited with 14.8, 2.0, 22.8, 13.2 and 4.3 years of service under the plans, respectively. 59 PENSION PLAN TABLE AVERAGE YEARS OF SERVICE YEARLY --------------------------------------------------------------- COMPENSATION 15 20 25 30 35 - ------------ ----------- ----------- ----------- ----------- ----------- $125,000 $ 22,000 $ 29,000 $ 36,000 $ 54,000 $ 63,000 $150,000 $ 26,000 $ 35,000 $ 44,000 $ 66,000 $ 77,000 $175,000 $ 31,000 $ 41,000 $ 52,000 $ 77,000 $ 90,000 $200,000 $ 36,000 $ 48,000 $ 59,000 $ 89,000 $ 104,000 $225,000 $ 40,000 $ 54,000 $ 67,000 $ 101,000 $ 118,000 $250,000 $ 45,000 $ 60,000 $ 75,000 $ 112,000 $ 131,000 $300,000 $ 54,000 $ 72,000 $ 90,000 $ 136,000 $ 158,000 $400,000 $ 73,000 $ 97,000 $ 121,000 $ 182,000 $ 212,000 $450,000 $ 82,000 $ 110,000 $ 137,000 $ 205,000 $ 240,000 $500,000 $ 91,000 $ 122,000 $ 152,000 $ 229,000 $ 267,000 $600,000 $ 110,000 $ 147,000 $ 183,000 $ 275,000 $ 321,000 $650,000 $ 119,000 $ 159,000 $ 199,000 $ 298,000 $ 348,000 Benefit figures shown are amounts payable based on a straight life annuity assuming retirement by the participant at age 62 in 1996 without a joint survivorship provision. The benefits listed in the above table are not subject to any deduction for social security or other offset amounts. Benefits under the plans are computed based on a participant's total compensation during this period of covered employment, for the 60 consecutive months during the ten-year period immediately prior to the termination of his covered employment for which his total compensation is the highest, divided by 60. If a participant has not received compensation for 60 consecutive months during such ten-year period, his compensation shall equal the total of his compensation for the longest period of consecutive months during such ten-year period divided by the total number of months of compensation so considered. Compensation recognized under the plans is the total basic compensation, including any elective salary deferral amounts excluded from income pursuant to Section 125 or 402 of the code, plus overtime, shift differentials and bonuses (whether cash or stock) paid pursuant to recurring bonus programs, including compensation deferred under the Santa Fe Energy Resources, Inc. Deferred Compensation Plan, but excluding any special or extraordinary bonuses and any other items of compensation. A participant's basic compensation is the regular rate of pay specified for his position and does not include automobile allowances, imputed income under any group term life insurance program, moving expense or other reimbursements, fringe benefits, or similar items. The pension compensation therefore differs from the compensation listed in the Summary Compensation Table in several respects. Pension compensation is based on average compensation as explained above. It does not include restricted stock awards, stock options, and other compensation in the "All Other Compensation" column (i.e., employer matching contributions to the Savings Investment Plan and the performance match). It also does not include special or extraordinary bonuses. The pension compensation of officers whose pension compensation differs from the compensation contained in the Summary Compensation Table is listed below: PENSION COMPENSATION NAME (FINAL AVERAGE PAY) - --------------------------------------------------------- James L. Payne....................... $662,206 R. Graham Whaling.................... $302,058 Jerry L. Bridwell.................... $313,165 Hugh L. Boyt......................... $293,705 Michael J. Rosinski.................. $305,591 60 EMPLOYMENT AGREEMENTS. The Company has entered into employment agreements ("Employment Agreements") covering 11 employees of the Company (including each of the individuals named in the Cash Compensation Table except Messrs. Whaling and Rosinski. Mr. Whaling has entered into an employment agreement with Monterey Resources similar to Mr. Payne's Employment Agreement. Mr. Rosinski's employment with the Company terminated on December 31, 1996.) The Employment Agreements, which replaced similar agreements with several of these employees originally entered into in 1990, are intended to encourage such employees to remain in the employ of the Company. The initial term of each Employment Agreement, with the exception of Messrs. Payne's and Whaling's expires on December 31, 1998; however, beginning January 1, 1998 and on each January thereafter the term of the Employment Agreements will automatically be extended for additional one-year periods, unless by September 30 of the preceding year the Company gives notice that the Employment Agreements will not be so extended. The term of each Employment Agreement, with the exception of Messrs. Payne's and Whaling's is automatically extended for a period of two years following a Change in Control (as defined herein). Messrs. Payne's and Whaling's Employment Agreement have an initial term which expires on December 31, 1999, are automatically extended for one-year periods beginning January 1, 1999 and are automatically extended for a three-year period following a Change in Control. In the event following a Change in Control employment is terminated by the employee for "Good Reason" or the employee is involuntarily terminated by the Company other than for "Cause" (as those terms are defined in the Employment Agreements), or if during the six months preceding a Change in Control, the employee's employment is terminated by the employee for Good Reason or by the Company other than for Cause, and such termination is demonstrated to be connected with the Change in Control, the Employment Agreements provide for payment of certain amounts to the employee based on the employee's salary and bonus under the Company's Incentive Compensation Plan; payout of non-vested restricted stock, phantom units, stock options, if any, and continuation of certain insurance benefits on a tax neutral basis for the Company employees for a period of up to 24 months (36 months in the case of Messrs. Payne and Whaling). The payments and benefits are payable pursuant to the Employment Agreements only to the extent they are not paid out under the terms of any other plan of the Company. The payments and benefits provided by the Employment Agreements for all individuals except Messrs. Payne and Whaling may be further limited by the Parachute Payment Limit described in the discussion of the Company's Stock Plan below. In the event Messrs. Payne's or Whaling's payments would exceed the Parachute Payment Limit, they will be made "whole" on a net after-tax basis for any excise tax incurred. Without giving effect to such limitation, the estimated value of the payments and benefits that Messrs. Payne, Whaling, Boyt and Bridwell and all executive officers as a group would be entitled to receive if any qualifying termination occurred on February 1, 1997 would be $2,694,711, $1,300,000, $743,326, $734,492 and $6,319,817, respectively. SEVERANCE PROGRAM. The Company has adopted a Severance Program for all full-time, salaried employees who are terminated by the Company or terminated or constructively terminated by an acquiring company, other than for Cause (as defined in the Severance Program). However, following a Change in Control (defined substantially the same as in the Stock Compensation Plan), an executive officer or key employee who has entered into an Employment Agreement is not eligible to receive duplicate benefits under the Employment Agreement and the Severance Program. As noted above, the merger of Adobe with the Company constituted a Change of Control. A participant in the Severance Program is generally entitled to an amount of up to one year's pay based upon a participant's age, length of service and highest rate of base salary in effect during the 24-month period preceding his termination, provided that the aggregate of such payment does not exceed two times the participant's actual salary for the 12-month period preceding the date of termination. In addition, a participant is entitled to continuation of health and life insurance benefits for up to a period of two years. 61 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this report: PAGE 1. Financial Statements: Report of Independent Accountants ..................................... 63 Consolidated Statement of Operations for the years ended December 31, 1996, 1995 and 1994 ............................................... 64 Consolidated Balance Sheet -- December 31, 1996 and 1995 ......................................................... 65 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 ......................................................... 66 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 ................................................... 67 Notes to Consolidated Financial Statements ............................ 68 2. Financial Statement Schedules: Schedule VIII -- Valuation and Qualifying Accounts .............................................................. 100 All other schedules have been omitted because they are not applicable or the required information is presented in the financial statements or the notes to financial statements. 3. Exhibits: See Index of Exhibits on page 101 for a description of the exhibits filed as a part of this report. (b) Reports on Form 8-K DATE ITEM ----------------- ---- February 28, 1997 5 62 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Santa Fe Energy Resources, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 62 present fairly, in all material respects, the financial position of Santa Fe Energy Resources, Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Houston, Texas February 21, 1997 63 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Revenues Sales of crude oil and liquids produced...................... $ 455.4 $ 352.4 $ 305.2 Sales of natural gas produced... 105.8 77.1 83.4 Sales of crude oil purchased.... 21.1 6.7 11.9 Other........................... 1.0 13.2 3.7 --------- --------- --------- 583.3 449.4 404.2 --------- --------- --------- Costs and Expenses Production and operating........ 188.4 155.8 151.1 Cost of crude oil purchased..... 20.8 6.5 11.7 Exploration, including dry hole costs......................... 34.5 23.4 20.4 Depletion, depreciation and amortization.................. 148.2 133.2 121.3 Impairment of oil and gas properties.................... 57.4 30.2 -- General and administrative...... 30.1 26.9 27.3 Taxes (other than income)....... 26.5 19.2 25.8 Restructuring charges........... -- -- 7.0 Loss (gain) on disposition of assets........................ (12.1) 0.3 (8.6) --------- --------- --------- 493.8 395.5 356.0 --------- --------- --------- Income from Operations............... 89.5 53.9 48.2 Interest income................. 1.9 10.7 2.8 Interest expense................ (37.6) (32.5) (27.5) Interest capitalized............ 5.2 5.8 3.6 Other income (expense).......... (1.0) (1.6) (4.0) --------- --------- --------- Income Before Income Taxes, Minority Interest and Extraordinary Items... 58.0 36.3 23.1 Income taxes.................... (14.3) (9.7) (6.0) --------- --------- --------- Income Before Minority Interest and Extraordinary Items................ 43.7 26.6 17.1 Minority Interest in Monterey Resources, Inc................ (1.3) -- -- --------- --------- --------- Income Before Extraordinary Items.... 42.4 26.6 17.1 Extraordinary item -- debt extinguishment costs............ (6.0) -- -- --------- --------- --------- Net Income........................... 36.4 26.6 17.1 Preferred dividend requirement................... (13.5) (14.8) (11.7) Convertible preferred repurchase premium....................... (33.7) -- -- --------- --------- --------- Earnings (Loss) Attributable to Common Shares...................... $ (10.8) $ 11.8 $ 5.4 ========= ========= ========= Earnings (Loss) Attributable to Common Shares Per Share Earnings (loss) before extraordinary items........... $ (0.05) $ 0.13 $ 0.06 Extraordinary items -- debt extinguishment costs.......... (0.07) -- -- --------- --------- --------- Earnings (loss) to common shares........................ $ (0.12) $ 0.13 $ 0.06 ========= ========= ========= Weighted Average Number of Common Shares Outstanding (in millions)...................... 90.6 90.2 89.9 ========= ========= ========= The accompanying notes are an integral part of these financial statements. 64 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED BALANCE SHEET (IN MILLIONS OF DOLLARS) DECEMBER 31, ------------------------ 1996 1995 ----------- ----------- ASSETS Current Assets Cash and cash equivalents....... $ 14.6 $ 42.6 Accounts receivable............. 109.1 89.0 Inventories..................... 13.6 10.5 Other current assets............ 35.2 17.2 ----------- ----------- 172.5 159.3 ----------- ----------- Properties and Equipment, at cost Oil and gas (on the basis of successful efforts accounting)................... 2,539.8 2,336.3 Other........................... 34.4 35.6 ----------- ----------- 2,574.2 2,371.9 Accumulated depletion, depreciation, amortization and impairment.................... (1,664.4) (1,482.4) ----------- ----------- 909.8 889.5 ----------- ----------- Other Assets Receivable under gas balancing arrangements.................. 4.5 5.8 Other........................... 33.2 10.2 ----------- ----------- 37.7 16.0 ----------- ----------- $ 1,120.0 $ 1,064.8 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable................ $ 115.4 $ 73.1 Income taxes payable............ 21.4 3.0 Interest payable................ 6.0 7.9 Other current liabilities....... 36.6 25.6 ----------- ----------- 179.4 109.6 ----------- ----------- Long-Term Debt....................... 278.5 344.4 ----------- ----------- Deferred Revenues.................... 4.0 4.9 ----------- ----------- Other Long-Term Obligations.......... 27.5 24.2 ----------- ----------- Deferred Income Taxes................ 53.8 64.0 ----------- ----------- Minority Interest in Monterey Resources, Inc..................... 30.3 -- ----------- ----------- Commitments and Contingencies (Note 14)................................ -- -- ----------- ----------- Convertible Preferred Stock, 7% Series, $0.01 par value, 5.0 million shares authorized and issued; 1.2 million and 5.0 million outstanding at December 31, 1996 and 1995, respectively....................... 19.7 80.0 ----------- ----------- Shareholders' Equity Preferred stock, $0.01 par value, 38.1 million shares authorized, none issued....... -- -- $.732 Series A preferred stock, $0.01 par value, 10.7 million shares authorized, issued and outstanding................... 91.4 91.4 Common stock, $0.01 par value, 200.0 million shares authorized.................... 0.9 0.9 Paid-in capital................. 601.3 501.4 Accumulated deficit............. (166.5) (155.7) Foreign currency translation adjustment.................... (0.3) (0.3) ----------- ----------- 526.8 437.7 ----------- ----------- $ 1,120.0 $ 1,064.8 =========== =========== The accompanying notes are an integral part of these financial statements. 65 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS OF DOLLARS) YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Operating Activities: Net income...................... $ 36.4 $ 26.6 $ 17.1 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation and amortization............. 148.2 133.2 121.3 Impairment of oil and gas properties............... 57.4 30.2 -- Restructuring charges...... -- -- 1.0 Deferred income taxes...... (11.2) 7.7 11.3 Loss (gain) on disposition of assets................ (12.1) 0.3 (8.6) Exploratory dry hole costs.................... 11.2 5.5 6.5 Minority interest in Monterey Resources, Inc...................... 1.3 -- -- Equity in losses and adjustment to valuation of investment in Hadson Corporation.............. -- -- 6.1 Hadson Corporation preferred dividends received in-kind......... -- -- (4.5) Other...................... 6.7 2.4 3.0 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable...... (20.1) (12.8) 1.3 Decrease (increase) in inventories.............. (3.1) (1.3) (0.5) Increase (decrease) in accounts payable......... 20.0 (4.5) (8.6) Increase (decrease) in interest payable......... (1.9) (0.6) (1.7) Increase (decrease) in income taxes payable..... 18.4 1.5 0.2 Net change in other assets and liabilities.......... (23.6) (13.7) (19.4) --------- --------- --------- Net Cash Provided by Operating Activities......................... 227.6 174.5 124.5 --------- --------- --------- Investing Activities: Capital expenditures, including exploratory dry hole costs.... (185.7) (189.4) (136.6) Acquisitions of producing properties, net of related debt.......................... (37.8) (33.8) (2.2) Proceeds from sale of investment in Hadson Corporation......... -- 55.2 -- Net proceeds from sales of properties.................... 16.7 7.2 81.1 --------- --------- --------- Net Cash Used in Investing Activities......................... (206.8) (160.8) (57.7) --------- --------- --------- Financing Activities: Issuance of Monterey Resources, Inc. common stock............. 123.6 -- -- Issuance of Santa Fe Energy Resources, Inc. common stock......................... 2.4 -- -- Purchase of 7% Series convertible preferred stock... (94.0) -- -- Principal payments on long-term borrowings.................... (70.0) (10.0) (144.7) Net change in revolving credit agreement..................... 4.0 -- (50.0) Issuance of 11% senior subordinated debentures....... -- -- 96.1 Issuance of $.732 Series A convertible preferred stock... -- -- 91.4 Cash dividends paid............. (14.8) (14.8) (10.7) --------- --------- --------- Net Cash Used in Financing Activities......................... (48.8) (24.8) (17.9) --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents................... (28.0) (11.1) 48.9 Cash and Cash Equivalents at Beginning of Year.................. 42.6 53.7 4.8 --------- --------- --------- Cash and Cash Equivalents at End of Year............................... $ 14.6 $ 42.6 $ 53.7 ========= ========= ========= The accompanying notes are an integral part of these financial statements. 66 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (SHARES AND DOLLARS IN MILLIONS)
$.732 SERIES A CONVERTIBLE UNAMORTIZED FOREIGN PREFERRED STOCK COMMON STOCK RESTRICTED CURRENCY --------------- --------------- PAID-IN STOCK ACCUMULATED TRANSLATION SHARES AMOUNT SHARES AMOUNT CAPITAL AWARDS DEFICIT ADJUSTMENT ------ ------ ------ ------ ------- ----------- ----------- ---------- Balance at December 31, 1993......... -- $-- 89.8 $0.9 $ 496.9 $(0.1) $(173.8) $ (0.3) Issuance of common stock Employee stock compensation and savings plans.................. -- -- 0.2 -- 2.0 -- -- -- Issuance of preferred stock........ 10.7 91.4 -- -- -- -- -- -- Amortization of restricted stock awards........................... -- -- -- -- -- 0.1 -- -- Pension liability adjustment....... -- -- -- -- -- -- 0.9 -- Foreign currency translation adjustments...................... -- -- -- -- -- -- -- (0.1) Net income......................... -- -- -- -- -- -- 17.1 -- Dividends declared................. -- -- -- -- -- -- (11.7) -- ------ ------ ------ ------ ------- ----------- ----------- ---------- Balance at December 31, 1994......... 10.7 91.4 90.0 0.9 498.9 -- (167.5) (0.4) Issuance of common stock Employee stock compensation and savings plans.................. -- -- 0.3 -- 2.5 -- -- -- Foreign currency translation adjustments...................... -- -- -- -- -- -- -- 0.1 Net income......................... -- -- -- -- -- -- 26.6 -- Dividends declared................. -- -- -- -- -- -- (14.8) -- ------ ------ ------ ------ ------- ----------- ----------- ---------- Balance at December 31, 1995......... 10.7 91.4 90.3 0.9 501.4 -- (155.7) (0.3) Issuance of common stock Employee stock compensation and savings plans.................. -- -- 0.7 -- 6.4 -- -- -- Issuance of Monterey Resources, Inc. common stock................ -- -- -- -- 93.5 -- -- -- Purchase of 7% Series convertible preferred stock.................. -- -- -- -- -- -- (33.7) -- Net income......................... -- -- -- -- -- -- 36.4 -- Dividends declared................. -- -- -- -- -- -- (13.5) -- ------ ------ ------ ------ ------- ----------- ----------- ---------- Balance at December 31, 1996......... 10.7 $91.4 91.0 $0.9 $ 601.3 $-- $(166.5) $ 0.3 ====== ====== ====== ====== ======= =========== =========== ==========
TOTAL SHAREHOLDERS' EQUITY -------------- Balance at December 31, 1993......... $323.6 Issuance of common stock Employee stock compensation and savings plans.................. 2.0 Issuance of preferred stock........ 91.4 Amortization of restricted stock awards........................... 0.1 Pension liability adjustment....... 0.9 Foreign currency transaction adjustments...................... (0.1) Net income......................... 17.1 Dividends declared................. (11.7) -------------- Balance at December 31, 1994......... 423.3 Issuance of common stock Employee stock compensation and savings plans.................. 2.5 Foreign currency translation adjustments...................... 0.1 Net income......................... 26.6 Dividends declared................. (14.8) -------------- Balance at December 31, 1995......... 437.7 Issuance of common stock Employee stock compensation and savings plans.................. 6.4 Issuance of Monterey Resources, Inc. common stock................ 93.5 Purchase of 7% Series convertible preferred stock.................. (33.7) Net income......................... 36.4 Dividends declared................. (13.5) -------------- Balance at December 31, 1996......... $526.8 ============== The accompanying notes are an integral part of these financial statements. 67 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of Santa Fe Energy Resources, Inc. ("Santa Fe" or the "Company") and its subsidiaries include the accounts of all wholly owned subsidiaries and Monterey Resources, Inc. ("Monterey"). Prior to its initial public offering in November 1996, the Company owned 100% of the outstanding common stock of Monterey. At December 31, 1996, the Company owned 82.8% of the outstanding common stock of Monterey (See Note 2). References herein to the "Company" or "Santa Fe" relate to Santa Fe Energy Resources, Inc., individually or together with its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to current presentation. OIL AND GAS OPERATIONS The Company follows the successful efforts method of accounting for its oil and gas exploration and production activities. Costs (both tangible and intangible) of productive wells and development dry holes, as well as the cost of prospective acreage, are capitalized. The costs of drilling and equipping exploratory wells which do not find proved reserves are expensed upon determination that the well does not justify commercial development. Other exploratory costs, including geological and geophysical costs and delay rentals, are charged to expense as incurred. Depletion and depreciation of proved properties are computed on an individual field basis using the unit-of-production method based upon proved oil and gas reserves attributable to the field. Certain other oil and gas properties are depreciated or amortized on a straight-line basis. In the fourth quarter of 1995 the Company changed its impairment policy to conform to the provisions of Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"). In accordance with the provisions of FAS 121, proved properties are reviewed to determine if the carrying value of the property exceeds the expected undiscounted future net cash flows from the operation of the property. Based on this review and the continuing evaluation of development plans, production data, economics and other factors, as appropriate, the Company records impairment (additional depletion and depreciation) to the extent that the carrying value of the property exceeds the fair value of the property based on discounted future net cash flows. In accordance with its policy, the Company recorded impairments of $57.4 million in 1996 and $30.2 million in 1995. With respect to the impairments recorded in 1995, approximately $22.1 million was due to the adoption of FAS 121. The Company provides for future abandonment and site restoration costs with respect to certain of its oil and gas properties. The Company estimates that with respect to these properties such future costs total approximately $39.0 million and such amount is being accrued over the expected life of the properties. At December 31, 1996 and 1995 Accumulated Depletion, Depreciation, Amortization and Impairment includes $16.6 million and $15.5 million, respectively, with respect to such costs. 68 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The value of undeveloped acreage is aggregated and the portion of such costs estimated to be nonproductive, based on historical experience, is amortized to expense over the average holding period. Additional amortization may be recognized based upon periodic assessment of prospect evaluation results. The cost of properties determined to be productive is transferred to proved properties; the cost of properties determined to be nonproductive is charged to accumulated amortization. Maintenance and repairs are expensed as incurred; major renewals and improvements are capitalized. Gains and losses arising from sales of properties are included in income currently. REVENUE RECOGNITION Revenues from the sale of crude oil and liquids produced are generally recognized upon the passage of title, net of royalties and net profits interests. Revenues from natural gas production are generally recorded using the entitlement method, net of royalties and net profits interests. Sales proceeds in excess of the Company's entitlement are included in Deferred Revenues and the Company's share of sales taken by others is included in Other Assets. At December 31, 1996 the Company's deferred revenues for sales proceeds received in excess of the Company's entitlement was $3.2 million with respect to 2.5 MMcf and the asset related to the Company's share of sales taken by others was $4.5 million with respect to 3.2 MMcf. The Company hedges a portion of its oil and gas sales. See Note 14 -- Commitments and Contingencies -- Oil and Gas Hedging. Revenues from sales of crude oil purchased relate to the sales of low viscosity crude oil purchased and blended with certain of the Company's high viscosity, low gravity crude oil production, either to facilitate pipeline transportation or to realize higher margins. The cost to purchase such crude oil is reflected as an expense. EARNINGS PER SHARE Earnings per share are based on the weighted average number of common and common equivalent shares outstanding during the year. ACCOUNTS RECEIVABLE Accounts Receivable relates primarily to sales of oil and gas and amounts due from joint interest partners for expenditures made by the Company on behalf of such partners. The Company reviews the financial condition of potential purchasers and partners prior to signing sales or joint interest agreements. At December 31, 1996 and 1995 the Company's allowance for doubtful accounts receivable, which is reflected in the consolidated balance sheet as a reduction in accounts receivable, totalled $2.5 million and $2.0 million, respectively. Accounts receivable totalling $1.1 million and $3.8 million were written off as uncollectible in 1995 and 1994, respectively. INVENTORIES Inventories are valued at the lower of cost (average price or first-in, first-out) or market. Crude oil inventories at December 31, 1996 and 1995 were $4.5 million and $2.7 million, respectively, and materials and supplies inventories at such dates were $9.1 million and $7.8 million, respectively. ENVIRONMENTAL EXPENDITURES Environmental expenditures relating to current operations are expensed or capitalized, as appropriate, depending on whether such expenditures provide future economic benefits. Liabilities are recognized when the expenditures are considered probable and can be reasonably estimated. Measurement of liabilities is based on currently enacted laws and regulations, existing technology and 69 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) undiscounted site-specific costs. Generally, such recognition coincides with the Company's commitment to a formal plan of action. INCOME TAXES The Company follows the asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities are determined using the tax rate for the period in which those amounts are expected to be received or paid, based on a scheduling of temporary differences between the tax bases of assets and liabilities and their reported amounts. Under this method of accounting for income taxes, any future changes in income tax rates will affect deferred income tax balances and financial results. USE OF ESTIMATES The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires the Company to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and the periods in which certain items of revenue and expense are included. Actual results may differ from such estimates. (2) MONTEREY RESOURCES, INC. In 1996 Santa Fe formed Monterey to assume the operations of the Company's Western Division (the "Western Division") which conducted the Company's oil and gas operations in the State of California. In November 1996, prior to the initial public offering (the "IPO") discussed below, pursuant to a contribution and conveyance agreement (the "Contribution Agreement"), among other things: (i) Santa Fe contributed to Monterey substantially all of the assets and properties of the Western Division, subject to the retention by Santa Fe of a production payment, as defined below, and certain other assets; (ii) Santa Fe retained a $30.0 million production payment (the "Production Payment") with respect to certain properties in the Midway-Sunset field; (iii) Monterey assumed all obligations and liabilities of Santa Fe associated with or allocated to the assets and properties of the Western Division, including $245.0 million of indebtedness in respect of Santa Fe's 10.23% Series E Notes due 1997, 10.27% Series F Notes due 1998 and 10.61% Series G Notes due 2005 (the "Series E Notes", "Series F Notes" and "Series G Notes", respectively) and (iv) Monterey agreed to purchase from Santa Fe an $8.3 million promissory note receivable related to the sale to a third party of certain surface acreage located in Orange County, California. Also prior to the IPO, Monterey and Santa Fe entered into a $75.0 million revolving credit facility with a group of banks (the "Monterey Credit Facility") and borrowed $16.0 million which was retained by Santa Fe. In November 1996 Monterey sold 9,335,000 shares of its common stock for total consideration of $123.6 million (after deducting underwriting discounts of $9.1 million and other related costs of $2.6 million). The proceeds from the IPO were used in part to (i) repay the Series E Notes and Series F Notes ($70.0 million) and pay a prepayment penalty thereon of $2.5 million; (ii) retire the Production Payment ($30.0 million); (iii) repay the $16.0 million outstanding under the Monterey Credit Facility; and (iv) pay a $2.0 million fee with respect to a supplement to the indenture relating to Santa Fe's 11% Senior Subordinated Debentures due 2004. Subsequent to the IPO, Monterey issued $175.0 million in aggregate principal amount of 10.61% Senior Notes due 2005 (the "Monterey Senior Notes") to holders of the Series G Notes in exchange for the cancellation of such notes and paid a $1.3 million consent fee in connection therewith. The costs and expenses related to the retirement of Santa Fe's outstanding debt, as discussed above, and approximately $3.4 million of deferred debt issue costs and related transaction costs are reflected in the Statement of Operations as an extraordinary item, net of $3.2 million in income taxes. 70 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1996, Santa Fe owned 82.8% of the Monterey's outstanding common stock. Santa Fe has announced that it intends to distribute pro rata to its common shareholders all of the shares of Monterey's common stock that it owns by means of a tax-free distribution (the "Proposed Spin Off"). Santa Fe's final determination to proceed will require a declaration of the Proposed Spin Off by Santa Fe's Board of Directors. Such declaration is not expected to be made until certain conditions, many of which are beyond the control of Santa Fe, are satisfied, including: (i) receipt by Santa Fe of a ruling from the Internal Revenue Service as to the tax-free nature of the Proposed Spin Off; (ii) approval of the Proposed Spin Off by Santa Fe's shareholders; and (iii) the absence of any future change in market or economic conditions (including developments in the capital markets) or Santa Fe's or Monterey's business and financial condition that causes Santa Fe's Board to conclude that the Proposed Spin Off is not in the best interests of Santa Fe's shareholders. The Company does not expect the Proposed Spin Off to occur prior to July 1997. Pursuant to the terms of a letter agreement dated as of June 13, 1996, a fee will be payable by Monterey to Chase Securities Inc. and Petrie Parkman & Co., Inc. upon consummation of the Proposed Spin Off. The total amount of such fee is equal to the product of (a) the sum of the market value of the shares of Monterey distributed in the Proposed Spin Off (based upon the average closing price of Monterey's common stock during the ten trading days after the Proposed Spin Off) PLUS the aggregate principal amount of long-term indebtedness assumed by Monterey in connection with the Proposed Spin Off (which totalled $175.0 million) TIMES (b) 0.5%, LESS $1.0 million. If the market value of the Monterey common stock distributed is $16.00 per share, the Company estimates the total fee payable would be approximately $3.5 million, of which $1.75 million would be payable to each of Chase Securities and Petrie Parkman. In addition, a fee of $400,000 will be payable to GKH Partners, L.P., of which $200,000 will be payable by each the Company and Monterey. Certain of the Company's directors are associated with Chase Securities and GKH Partners. Monterey has agreed to indemnify the Company if at any time during the one-year period after the consummation of the Proposed Spin Off (or if certain tax legislation is enacted and is applicable, such longer period as is required for the Proposed Spin Off to be tax free to Santa Fe) Monterey takes certain actions the effects of which result in the Proposed Spin Off being taxable to Santa Fe. Santa Fe provides various administrative and financial services to Monterey, including administration of certain employee benefits plans, access to telecommunications, corporate legal assistance and certain other corporate staff and support services. Santa Fe and Monterey have entered into a Services Agreement, terminable by either party on thirty day's notice, under which Monterey pays a fee of $120,000 per month for such services until such time as Monterey assumes full responsibility during 1997 for each of the services covered by the agreement. During 1996 Santa Fe charged Monterey $240,000 under the terms of the Services Agreement. Certain Monterey employees are participants in Santa Fe's employee benefit and pension plans. Subsequent to the IPO Santa Fe charged Monterey $0.2 million in connection with Monterey employees' participation in such plans. (3) CORPORATE RESTRUCTURING PROGRAM In 1993 the Company adopted a corporate restructuring program which included, among other things, a cost reduction program which consisted of a reduction in the Company's salaried work force, an improvement in the efficiency of information systems and a reduction in other general and administration and production and operating costs. The Company's income from operations for 1994 includes restructuring charges of $7.0 million, comprised of severance, benefits and relocation expenses associated with the cost reduction program. 71 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) INVESTMENT IN HADSON CORPORATION In December 1993 the Company completed a transaction with Hadson Corporation ("Hadson") under the terms of which the Company sold the common stock of Adobe Gas Pipeline Company ("AGPC"), a wholly-owned subsidiary which held the Company's natural gas gathering and processing assets, to Hadson in exchange for Hadson 11.25% preferred stock with a face value of $52.0 million and 40% of Hadson's common stock. The Company accounted for the sale as a non-monetary transaction and the investment in Hadson was valued at $56.2 million, the carrying value of the Company's investment in AGPC. The Company's investment in Hadson was accounted for on the equity basis. Also in December 1993 the Company signed a seven-year gas sales contract with Hadson under the terms of which Hadson markets a substantial portion of the Company's domestic natural gas production at market prices as defined by published monthly indices for relevant production locations. In November 1994 the Company and Hadson settled a lawsuit related to certain of the assets sold to Hadson by the Company in December 1993. The settlement totalled $5.7 million and the Company's share, approximately $3.3 million, is included in Other Income (Expense) in the income statement. The Company paid the full amount of the settlement and Hadson gave the Company a $2.4 million ten-year note for its share. The note bore interest at 9%, payable annually, with the principal amount due at maturity. The note was retired as part of the sales transaction discussed below. In 1995 the Company sold its holdings in Hadson for $55.2 million. Other Income (Expense) for 1995 includes a $1.8 million charge with respect to the Company's loss on the sale. Subsequent to the sale Hadson's name was changed to LG&E Natural Marketing Inc. ("LG&E"). (5) SANTA FE ENERGY TRUST In November 1992 5,725,000 Depository Units ("Trust Units"), each consisting of beneficial ownership of one unit of undivided beneficial interest in the Santa Fe Energy Trust (the "Trust") and a $20 face amount beneficial ownership interest in a $1,000 face amount zero coupon United States Treasury obligation maturing on or about February 15, 2008, were sold in a public offering. The Trust consists of certain oil and gas properties conveyed by Santa Fe. In the first quarter of 1994, the Company sold 575,000 Trust Units which it held for $11.3 million. The gain on the sale of $0.8 million is included in Other Income (Expense). For any calendar quarter ending on or prior to December 31, 2002, the Trust will receive additional royalty payments to the extent that it needs such payments to distribute $0.40 per Depository Unit per quarter. The source of such additional royalty payments, if needed, will be limited to the Company's remaining royalty interest in certain of the properties conveyed to the Trust. If such additional payments are made, certain proceeds otherwise payable to the Trust in subsequent quarters may be reduced to recoup the amount of such additional payments. The aggregate amount of the additional royalty payments (net of any amounts recouped) will be limited to $20.0 million on a revolving basis. Through December 31, 1996 the Company had made additional royalty payments, net of recoupments, totalling $1.2 million. At December 31, 1996 and 1995, Accounts Payable included $3.1 million and $2.6 million, respectively, due to the Trust. 72 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) CASH FLOWS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. In December 1996 the Company sold the surface rights to approximately 116 surface acres in Orange County, California for total consideration of $24.2 million and recognized a $12.3 million gain. The Company received $15.9 million in cash and an $8.3 million note which was purchased by Monterey for cash. In November 1993 the Company completed the sale of certain southern California and Gulf Coast producing properties for net proceeds totalling $42.0 million in cash, $10.5 million of which was collected in 1994. In April 1994 the Company completed the sale of certain Mid-Continent and Rocky Mountain producing and nonproducing oil and gas properties for net proceeds totalling $46.7 million. The Company's income from operations for 1994 includes $2.2 million attributable to the assets sold. In the first quarter of 1994 the Company sold its interest in certain oil and gas properties, in which it had no remaining basis, for $8.3 million. The Company made interest payments of $38.6 million, $37.6 million and $47.9 million in 1996, 1995 and 1994, respectively. In 1996, 1995 and 1994, the Company made tax payments of $2.0 million, $1.6 million and $1.8 million, respectively, and in 1996 and 1995 received tax refunds of $11.2 million and $1.3 million, respectively, primarily related to the audit of prior years' returns. (7) INCOME TAXES In December 1990 SFP distributed all of the shares of the Company it held to its shareholders (the "SFP Spin Off"). Through the date of the SFP Spin Off the taxable income or loss of the Company was included in the consolidated federal income tax return filed by SFP. The consolidated federal income tax returns of SFP have been examined through 1990 and all years prior to 1986 are closed. Issues relating to the open years are being contested through various stages of administrative appeal. The Company, in conjunction with the SFP Spin Off, agreed to indemnify SFP should the transaction be determined to be taxable to SFP because of the Company's actions. The Company does not believe it has taken any action that would have such an effect. Accounts Receivable at December 31, 1995 included $12.0 million with respect to a refund related to the audit of the years 1981 through 1985 which was collected in 1996. The Company has filed separate consolidated federal income tax returns for periods subsequent to the SFP Spin Off. The consolidated returns of the Company through 1991 have been audited and are closed. During 1989, the Company received a notice of deficiency for certain state franchise tax returns filed for the years 1978 through 1983 as part of the consolidated tax returns of SFP. The matter was contested by the Company and favorably resolved in 1994. The years 1984 through 1986 have been audited and no significant Company issues were raised. The years 1987 through 1992 are currently being audited. With the Merger of Adobe the Company succeeded to a net operating loss carryforward that is subject to Internal Revenue Code Section 382 limitations which annually limit taxable income that can be offset by such losses. Certain changes in the Company's shareholders in 1995 resulted in a second Section 382 limitation, the imposition of which is not expected to result in a limitation of the Company's ability to use its net operating losses. Losses carrying forward of $71.4 million will expire beginning in 2004. 73 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total pretax income for the years ended December 31, 1996, 1995 and 1994 was taxed under the following jurisdictions (in millions of dollars): 1996 1995 1994 --------- --------- --------- Domestic............................. 46.4 40.5 22.0 Foreign.............................. 2.4 (4.2) 1.1 --------- --------- --------- 48.8 36.3 23.1 ========= ========= ========= The Company's total income tax expense (benefit) for the years ended December 31, 1996, 1995 and 1994 consisted of (in millions of dollars): 1996 1995 1994 --------- --------- --------- Current U.S. federal.................... 13.6 1.5 (3.5) State........................... 5.1 (2.1) (3.2) Foreign......................... 3.6 2.6 1.4 --------- --------- --------- 22.3(a) 2.0 (5.3) --------- --------- --------- Deferred U.S. federal.................... 4.7 13.3 8.6 State........................... 1.3 (0.6) 2.4 Foreign......................... (17.2)(b) (5.0) 0.3 --------- --------- --------- (11.2) 7.7 11.3 --------- --------- --------- 11.1(a) 9.7 6.0 ========= ========= ========= - ------------ (a) Includes $3.2 million income tax benefit which is reflected in extraordinary item - debt extinguishment costs (see Note 2). (b) Includes benefit of $8.3 million related to certain prior period foreign expenditures. The Company's deferred income tax liabilities (assets) at December 31, 1996 and 1995 are composed of the following differences between financial and tax reporting (in millions of dollars): 1996 1995 --------- --------- Capitalized costs and write-offs..... 99.9 138.5 State deferred liability............. 10.5 7.6 Foreign deferred liability........... (8.1) 9.1 --------- --------- Gross deferred liabilities........... 102.3 155.2 --------- --------- Accruals not currently deductible for tax purposes....................... (0.7) (16.7) Alternative minimum tax carryforwards...................... (13.6) (12.7) Net operating loss carryforwards..... (25.0) (54.7) Other................................ (9.2) (7.1) --------- --------- Gross deferred assets................ (48.5) (91.2) --------- --------- Deferred tax liability............... 53.8 64.0 ========= ========= 74 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the Company's total U.S. income tax expense computed by applying the statutory U.S. federal income tax rate to the Company's total income (loss) before income taxes for the years ended December 31, 1996, 1995 and 1994 is presented in the following table (in millions of dollars): 1996 1995 1994 --------- --------- --------- U.S. federal income taxes at statutory rate..................... 17.1 12.7 8.1 Increase (reduction) resulting from: State income taxes, net of federal effect.......................... 4.3 0.6 0.9 Foreign income taxes in excess of (less than) U.S. rate........... (14.4) (0.9) 1.4 U.S. tax on foreign reinvested earnings........................ 2.8 0.8 1.2 Benefit of tax losses.............. (1.8) (0.3) (4.3) Prior period adjustments........... 1.7 (2.7) (1.6) Other.............................. 1.4 (0.5) 0.3 --------- --------- --------- 11.1 9.7 6.0 ========= ========= ========= (8) FINANCING AND DEBT Long-term debt at December 31, 1996 and 1995 consisted of (in millions of dollars): DECEMBER 31, -------------------------------------------- 1996 1995 -------------------- -------------------- CURRENT LONG-TERM CURRENT LONG-TERM ------- --------- ------- --------- Santa Fe Senior Notes................. -- -- -- 245.0 11% Senior Subordinated Debentures................ -- 99.5 -- 99.4 Short-term lines of credit... -- 4.0 -- -- ------- --------- ------- --------- -- 103.5 -- 344.4 Monterey Senior Notes................. -- 175.0 -- -- ------- --------- ------- --------- -- 278.5 -- 344.4 ======= ========= ======= ========= Aggregate total maturities of long-term debt during the next five years are as follows: 1997 -- none; 1998 -- none; 1999 -- $25.0 million; 2000 -- $25.0 million; and 2001 -- $29.0 million. Effective November 13, 1996 Santa Fe entered into a revolving credit agreement (the "Santa Fe Credit Agreement") which matures November 13, 2001. The Santa Fe Credit Agreement permits the Company to obtain revolving credit loans and issue letters of credit up to an aggregate amount of $150.0 million, with the aggregate amount of letters of credit outstanding at any time limited to $30.0 million. Borrowings under the Santa Fe Credit Agreement are unsecured and interest rates are tied to the bank's prime rate or eurodollar offering rate, at the option of the Company. At December 31, 1996, no loans or letters of credit were outstanding under the terms of the Santa Fe Credit Agreement. Effective November 13, 1996 Monterey entered into the Monterey Credit Agreement which matures November 13, 2000. The Monterey Credit Agreement permits Monterey to obtain revolving credit loans and issue letters of credit up to an aggregate amount of up to $75.0 million, with the aggregate amount of letters of credit outstanding at any time limited to $15.0 million. Borrowings under the Monterey Credit Agreement are unsecured and interest rates are tied to the bank's prime rate 75 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) or eurodollar offering rate, at the option of Monterey. At December 31, 1996, no loans or letters of credit were outstanding under the terms of the Monterey Credit Agreement. In November 1996 Monterey issued the Monterey Senior Notes which were exchanged for $175.0 million of senior notes previously issued by Santa Fe. The Monterey Senior Notes bear interest at 10.61% per annum and mature in 2005. Monterey is required to repay $25.0 million of the principal amount each year from 1999 through 2005. In a public offering in May 1994 the Company issued $100.0 million of 11% Senior Subordinated Debentures due 2004 (the "Debentures"). The Debentures were issued for 99.266% of face value and the Company received proceeds of $96.1 million, after deducting related costs and expenses of $3.2 million. The Debentures, which mature May 15, 2004, are not redeemable prior to May 15, 1999 and may be redeemed after such date at the option of the Company at prices set forth in the indenture for the Debentures. Under certain circumstances, the Company may be required to redeem the Debentures for 101% of the principal amount. The Debentures are general unsecured subordinated obligations of the Company. The Company used the proceeds from the issuance of the Debentures, together with a portion of the proceeds from the issuance of the Series A Preferred (see Note 11), to retire $132.3 million of its then outstanding long-term debt. In the first quarter of 1995 the Company retired the $10.0 million balance of a loan from an Argentine bank. The loan, which related to the Company's purchase of an interest in a producing oil field in Argentina in 1991, bore interest at 13% at the time it was retired. Santa Fe has three short-term uncommitted lines of credit totalling $60.0 million which are used to meet short-term cash needs. Interest rates on borrowings under these lines of credit are typically lower than rates paid under the Santa Fe Credit Agreement. At December 31, 1996 $4.0 million was outstanding under these lines of credit. The amount outstanding at December 31, 1996 is classified as long-term since the Santa Fe Credit Agreement is available to refinance such amount on a long-term basis. At December 31, 1996 the Company had outstanding letters of credit totalling $6.0 million, $2.3 million of which relate to the operations of Monterey. Certain of the credit agreements and the indenture for the Debentures include covenants that restrict Santa Fe and Monterey's ability to take certain actions, including the ability to incur additional indebtedness and to pay dividends on capital stock. Under the most restrictive of these covenants, at December 31, 1996 Santa Fe could incur up to $417.7 million of additional indebtedness and pay dividends of up to $36.8 million on its aggregate capital stock (including its common stock, 7% Convertible Preferred Stock and Series A Preferred). At December 31, 1996, under the most restrictive of these covenants, Monterey could incur up to $253.4 million of additional indebtedness and pay dividends of $61.7 million on its common stock. Monterey is prohibited from paying more than $31.0 million in dividends to Santa Fe in any fiscal year prior to the consummation of the Proposed Spin Off. 76 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (9) SEGMENT INFORMATION The principal business of the Company consists of the acquisition, exploration and development of oil and gas properties and the production and sale of crude oil and liquids and natural gas. Pertinent information with respect to the Company's oil and gas business is presented in the following table (in millions of dollars):
OIL AND GAS ------------------------------------------ OTHER GENERAL U.S. ARGENTINA INDONESIA FOREIGN CORPORATE TOTAL --------- --------- --------- ------- --------- --------- 1996 Revenues........................... 517.9 35.8 29.6 -- -- 583.3 Income (Loss) from Operations...... 126.0 17.6 (11.3) (17.4) (25.4) 89.5 Depletion, Depreciation, Amortization and Impairment..... 164.9 7.9 24.6 5.0 3.2 205.6 Additions to Property and Equipment....................... 190.0 20.2 15.3 9.4 10.8 245.7 Identifiable Assets at December 31.............................. 854.7 87.3 72.6 6.2 99.2 1,120.0 1995 Revenues........................... 398.6 19.2 31.6 -- -- 449.4 Income (Loss) from Operations...... 87.9 3.6 0.8 (6.5) (31.9) 53.9 Depletion, Depreciation, Amortization and Impairment..... 143.3 7.0 10.0 0.5 2.6 163.4 Additions to Property and Equipment....................... 175.4 14.4 16.7 3.8 6.5 216.8 Identifiable Assets at December 31.............................. 806.7 73.0 84.8 9.5 90.8 1,064.8 1994 Revenues........................... 359.5 12.9 31.8 -- -- 404.2 Income (Loss) from Operations...... 88.9 3.1 6.1 (10.3) (39.6) 48.2 Depletion, Depreciation, Amortization and Impairment..... 99.9 3.8 9.7 6.3 1.6 121.3 Additions to Property and Equipment....................... 98.2 13.6 16.3 4.4 5.4 137.9 Identifiable Assets at December 31.............................. 817.6 57.8 103.1 6.5 86.4 1,071.4
Crude oil and liquids and natural gas accounted for more than 93% of revenues in 1996, 1995 and 1994. The following table (which with respect to certain properties includes royalty and working interest owners' share of production) reflects sales to crude oil purchasers who accounted for more than 10% of the Company's crude oil and liquids revenues (in millions of dollars): YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 1994 ----- ----- ---- Celeron Corporation.................. 66.7 62.1 58.7 Coastal States Trading, Inc.......... 56.4 (a) (a) Shell Oil Company.................... 105.7 100.4 94.5 - ------------ (a) Sales represented less than 10% of crude oil and liquids revenues. In 1996, 1995 and 1994 the only purchaser of the Company's natural gas to account for more than 10% of natural gas revenues was LG&E (see Note 4 with respect to the Company's gas sales contract with LG&E). 77 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) CONVERTIBLE PREFERRED STOCK, 7% SERIES The Company's Convertible Preferred Stock, 7% Series, which was issued in connection with the Company's merger with Adobe Resources Corporation ("Adobe") in 1992, is non-voting and entitled to receive cumulative cash dividends at an annual rate equivalent to $1.40 per share. The holders of the convertible preferred shares may, at their option, convert any or all such shares into 1.3913 shares of the Company's common stock. The Company may, at any time after the fifth anniversary of the effective date of the Merger and upon the occurrence of a "Special Conversion Event", convert all outstanding shares of convertible preferred stock into common stock at the initial conversion rate of 1.3913 shares of common stock, subject to certain adjustments, plus additional shares in respect to accrued and unpaid dividends. A Special Conversion Event is deemed to have occurred when the average daily closing price for a share of the Company's common stock for 20 of 30 consecutive trading days equals or exceeds 125% of the quotient of $20.00 divided by the then applicable conversion rate (approximately $18.00 per share at a conversion rate of 1.3913). Upon the occurrence an ownership change, as defined, of Santa Fe, each holder of shares of convertible preferred stock shall have the right, at the holder's option, to elect to have all of such holder's shares redeemed for $20.00 per share plus accrued and unpaid interest and dividends. The First Ownership Change shall be deemed to have occurred when any person or group, together with any affiliates or associates, becomes the beneficial owner of 50% or more of the outstanding common stock of Santa Fe. In November 1996 the Company purchased 3,770,110 of the outstanding shares for $24.50 per share. The excess of the cost of the acquired shares ($94.0 million, including related costs of $1.7 million) over the book value of such shares, $33.7 million, is reflected in the Statement of Operations as a preferred dividend. At December 31, 1996, 1,229,890 shares were outstanding. (11) SHAREHOLDERS' EQUITY $.732 SERIES A CONVERTIBLE PREFERRED STOCK In a public offering in May 1994 the Company issued 10,700,000 shares of $.732 Series A Convertible Preferred Stock. The Series A Preferred was issued at $8.875 per share and the Company received total proceeds of $91.4 million after deducting related costs and expenses of $3.6 million. Each share of Series A Preferred mandatorily converts into one share of common stock on May 15, 1998 and the Company has the option to redeem the shares, in whole or in part, on or after May 15, 1997 and prior to May 15, 1998 at prices set forth in the certificate of designation for the Series A Preferred which decline from $9.058 per share on May 15, 1997 to $8.875 per share on May 14, 1998, payable in common stock. Each share of Series A Preferred is convertible at the option of the holder into 0.8474 shares of common stock at any time prior to May 15, 1998. The Series A Preferred ranks prior to common stock both as to payment of dividends and distribution of assets upon liquidation. The holders of Series A Preferred are entitled to receive cumulative preferential dividends, accruing at the rate per share of $0.732 per annum ($0.183 per quarter) payable quarterly in arrears. PREFERRED STOCK The Board of Directors of the Company is empowered, without approval of the shareholders, to cause shares of preferred stock to be issued in one or more series, and to determine the number of shares in each series and the rights, preferences and limitations of each series. Among the specific matters which may be determined by the Board of Directors are: the annual rate of dividends; the redemption price, if any; the terms of a sinking or purchase fund, if any; the amount payable in the 78 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) event of any voluntary liquidation, dissolution or winding up of the affairs of the Company; conversion rights, if any; and voting powers, if any. SHAREHOLDER RIGHTS PLAN The Company has adopted a shareholder rights plan (the "Rights Plan") whereby preferred stock purchase rights (the "Rights") will be distributed to holders of the Company's common stock. The Rights will expire two years after the Proposed Spin Off or on March 3, 2000, whichever occurs first. The Rights will be exercisable only if a person acquires beneficial ownership of 15 percent or more of the Company's common stock (an "Acquiring Person"), or commences a tender offer which would result in ownership of 15 percent or more of such stock. Under the Rights Plan, one Right to purchase one one-hundredth of a share of a new series of junior preferred stock of the Company at an exercise price of $42.00 per one one-hundredth of a share (subject to adjustment) will be issued for each outstanding share of the Company's common stock held at the close of business on March 3, 1997. If any person becomes an Acquiring Person, each Right will entitle the holder to purchase, at the Right's then current exercise price, shares of the Company's common stock having a value of twice the Right's exercise price. In addition, if, after a person becomes an Acquiring Person, the Company is involved in a merger or other business combination transaction with another person in which the Company is not the surviving corporation, or under certain other circumstances, each Right will entitle its holder to purchase, at the Right's then current exercise price, shares of common stock of the other person having a value of twice the Right's exercise price. The Company will generally be entitled to redeem the Rights in whole, but not in part, at $0.01 per Right payable in cash or common stock, subject to adjustment, at any time until 10 business days (subject to extension) after the first public announcement that an Acquiring Person has become such. The terms of the Rights may be amended by the Company without the approval of the holders of the Rights at any time the Rights are redeemable. At any time the Rights are no longer redeemable the terms may be amended only to (i) cure any ambiguity; (ii) correct or supplement any provision which may be defective or inconsistent with other provisions; (iii) shorten or lengthen any time period; or (iv) change or supplement the provisions in any manner which the Company deems necessary or desirable, so long as such change does not adversely affects the interests of the holders of the Rights. (12) STOCK OPTION PLANS Under the terms of the Santa Fe Energy Resources 1990 Incentive Stock Compensation Plan (the "1990 Plan") the Company may grant options and awards with respect to no more than 7,500,000 shares of common stock to officers, directors and key employees. Under the terms of the Santa Fe Energy Resources 1995 Incentive Stock Compensation Plan (the "1995 Plan") the Company may grant options and awards with respect to not more than 1,000,000 shares of common stock per year to employees other than executive officers and directors. Awards made under the terms of the 1990 Plan and the 1995 Plan (collectively the "Plans") may be made in the form of Restricted Stock, Bonus Stock, Phantom Units and Stock Appreciation Rights, as such terms are defined in the Plans. 79 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Options under the terms of the Plans are granted at the average market price on the date of grant and have a ten-year term with vesting periods ranging from six months to three years. The following table summarizes the activity with respect to options outstanding under the Plans during 1996 and 1995:
1996 1995 -------------------------------- -------------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE (THOUSANDS) ($/SHARE) (THOUSANDS) ($/SHARE) ------------ ---------------- ------------ ---------------- Outstanding at beginning of year..... 4,441.7 11.85 4,039.7 12.23 Grants............................... 1,240.5 12.07 472.7 8.75 Cancellations........................ (27.9) 11.31 (61.3) 13.47 Exercises............................ (280.3) 8.73 (9.4) 9.41 ------------ ------------ Outstanding at end of year........... 5,374.0 12.07 4,441.7 11.85 ============ ============ Exercisable at end of year........... 4,265.6 4,218.6 Weighted average fair value of options granted during year ($/share).......................... 6.67 4.80
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (i) expected dividend yield -- 0.0%; (ii) expected stock price volatility -- 22 to 27%; (iii) risk-free interest rate -- 5 to 7%; and (iv) expected life of options -- 10 years. The following table summarizes certain information with respect to options outstanding under the Plans at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------------------------------- --------------------------------- RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICES SHARES REMAINING LIFE EXERCISE PRICE SHARES EXERCISE PRICE ($/SHARE) (THOUSANDS) (YEARS) ($/SHARE) (THOUSANDS) ($/SHARE) --------------- ----------- ----------------- ---------------- ----------- ----------------- 7-10 2,714.6 7 9.06 2,685.2 9.05 11-15 2,186.7 7 13.31 1,107.7 14.29 23-25 472.7 4 23.62 472.7 23.62 ----------- 5,374.0 4,265.6 ===========
In December 1995 the Company granted 0.1 million Phantom Units to certain executive officers which were to be earned over a three-year period commencing January 1, 1996. The Phantom Units vested as a result of the IPO. The Company recognized $1.6 million in expense in 1996 with respect to such Phantom Units. 80 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In December 1996 the Company granted 0.2 million Phantom Units to certain executive officers and key personnel which are to be earned over a three-year period commencing January 1, 1997. During 1996 and 1995 the Company granted 0.1 million and 0.2 million, respectively, shares of restricted stock to certain executive officers and other employees. At December 31, 1996 1.4 million shares were available for options or awards under the 1990 Plan and 1.0 million shares were available under the 1995 Plan. Under the terms of the Monterey Resources, Inc. 1996 Incentive Stock Compensation Plan (the "Monterey Plan"), Monterey may grant options and awards with respect to up to 3.0 million shares of common stock to officers, directors and key employees, including up to 0.5 million shares of restricted stock. During 1996 Monterey granted options on 0.2 million shares at an average exercise price of $14.59 per share, with each option granted having an average fair value of $7.77 per share. The grants were made at the market price at the date of grant, have a ten year term and vest one year from the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (i) expected dividend yield -- 0.0%; (ii) expected stock price volatility -- 24%; (iii) risk-free interest rate -- 6.4%; and (iv) expected life of options -- 10 years. During 1996 Monterey also issued 0.1 million restricted shares which vest over a five-year period from the date of grant. In October 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"), which established financial accounting and reporting standards for stock-based employee compensation plans. FAS 123 encourages companies to adopt a fair value based method of accounting for such plans but continues to allow the use of the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). The Company has elected to continue to account for stock-based compensation costs based on the fair value of options granted as prescribed by FAS 123. Earnings (loss) attributable to common shares and the related per share amounts would have been reduced as is reflected by the proforma amounts in the following table (in millions of dollars, except per share data): YEAR ENDED DECEMBER 31, -------------------- 1996 1995 --------- --------- As Reported: Earnings (loss) attributable to common shares................. (10.8) 11.8 Earnings (loss) attributable to common shares per share....... (0.12) 0.13 Proforma: Earnings (loss) attributable to common shares................. (12.6) 10.9 Earnings (loss) attributable to common shares per share....... (0.14) 0.12 During the initial phase-in period, the effects of applying FAS 123 for recognizing compensation cost on a proforma basis may not be representative of the effects on reported earnings for future periods since the options granted vest over several periods and additional awards will be made in future periods. 81 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) PENSION AND OTHER EMPLOYEE BENEFIT PLANS PENSION PLANS The Company has a defined benefit retirement plan (the "SFER Plan") covering substantially all salaried employees not covered by collective bargaining agreements and a nonqualified supplemental retirement plan (the "Supplemental Plan"). The Supplemental Plan will pay benefits to participants in the SFER Plan in those instances where the SFER Plan formula produces a benefit in excess of limits established by ERISA and the Tax Reform Act of 1986. Benefits payable under the SFER Plan are based on years of service and compensation during the five highest paid years of service during the ten years immediately preceding retirement. The Company's funding policy is to contribute annually not less than the minimum required by ERISA and not more than the maximum amount deductible for income tax purposes. The following table sets forth the funded status of the SFER Plan and the Supplemental Plan at December 31, 1996 and 1995 (in millions of dollars):
SFER PLAN SUPPLEMENTAL PLAN -------------------- -------------------- 1996 1995 1996 1995 --------- --------- --------- --------- Plan assets at fair value, primarily invested in common stocks and U.S. and corporate bonds................ 36.1 32.5 -- -- Actuarial present value of projected benefit obligations: Accumulated benefit obligations Vested.................... (30.8) (30.4) (1.6) (0.7) Nonvested................. (1.7) (1.3) (0.2) -- Effect of projected future salary increases.................... (8.3) (7.3) (1.4) (1.3) --------- --------- --------- --------- Excess of projected benefit obligations over plan assets....... (4.7) (6.5) (3.2) (2.0) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions........................ 1.2 3.0 (1.1) (2.1) Unrecognized prior service cost...... (1.9) (2.0) 1.9 2.0 Unrecognized net (asset) obligation being recognized over plan's average remaining service life....................... (0.8 (0.9) 0.2 0.2 --------- --------- --------- --------- Accrued pension liability............ (6.2) (6.4) (2.2) (1.9) ========= ========= ========= ========= Major assumptions at year-end Discount rate................... 7.50% 7.50% 7.50% 7.50% Long-term asset yield........... 9.50% 9.50% -- -- Rate of increase in future compensation................. 5.25% 5.25% 5.25% 5.25%
82 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the components of pension expense for the SFER Plan and Supplemental Plan for 1996, 1995 and 1994 (in millions of dollars):
SFER PLAN SUPPLEMENTAL PLAN ---------------------- ---------------------- 1996 1995 1994 1996 1995 1994 ---- ---- ---- ---- ---- ---- Service cost......................... 1.6 1.3 1.7 0.1 0.4 -- Interest cost........................ 2.9 2.7 2.8 0.2 0.4 0.1 Return on plan assets................ (4.1) (5.5) 0.5 -- -- -- Net amortization and deferral........ 0.8 2.5 (3.3) -- 0.3 -- ---- ---- ---- ---- ---- ---- 1.2 1.0 1.7 0.3 1.1 0.1 ==== ==== ==== ==== ==== ====
The Company sponsors a pension plan covering certain hourly-rated employees in California (the "Hourly Plan"). The Hourly Plan provides benefits that are based on a stated amount for each year of service. The Company annually contributes amounts which are actuarially determined to provide the Hourly Plan with sufficient assets to meet future benefit payment requirements. The following table sets forth the funded status of the Hourly Plan at December 31, 1996 and 1995 (in millions of dollars): 1996 1995 --------- --------- Plan assets at fair value, primarily invested in fixed-rate securities.... 9.5 8.7 Actuarial present value of projected benefit obligations Accumulated benefit obligations Vested.................... (10.9) (10.4) Nonvested................. (0.4) (0.4) --------- --------- Excess of projected benefit obligation over plan assets........ (1.8) (2.1) Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions........................ (0.4) (0.3) Unrecognized prior service cost...... 0.4 0.4 Unrecognized net obligation.......... 1.0 1.2 Additional minimum liability......... (1.1) (1.3) --------- --------- Accrued pension liability....... (1.9) (2.1) ========= ========= Major assumptions at year-end Discount rate................... 7.50% 7.50% Expected long-term rate of return on plan assets......... 8.50% 8.50% The following table sets forth the components of pension expense for the Hourly Plan for 1996, 1995 and 1994 (in millions of dollars): YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Service cost.................... 0.2 0.2 0.2 Interest cost................... 0.8 0.8 0.8 Return on plan assets........... (0.9) (1.4) (0.4) Net amortization and deferral... 0.4 0.9 -- --------- --------- --------- 0.5 0.5 0.6 ========= ========= ========= 83 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company sponsors a pension plan for certain persons employed in foreign locations (the "Foreign Plan"). The following table sets forth the funded status of the Foreign Plan at December 31, 1996 and 1995 (in millions of dollars): 1996 1995 --------- --------- Plan assets.......................... -- -- Actuarial present value of projected benefit obligations: Accumulated benefit obligations.................. Vested.......................... (0.1) -- Nonvested....................... (0.2) (0.2) Effect of projected future salary increases............. (0.1) -- --------- --------- Excess of projected benefit obligations over plan assets....... (0.4) (0.2) Unrecognized prior service costs..... 0.1 0.1 --------- --------- Accrued pension liability............ (0.3) (0.1) ========= ========= Major assumptions at year-end: Discount rate................... 7.50% 7.50% Rate of increase in future compensation................. 5.00% 5.00% The following table sets forth the components of pension expense for the Foreign Plan for 1996, 1995 and 1994 (in millions of dollars): YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Service cost......................... 0.1 0.1 -- Interest cost........................ -- -- -- Net amortization and deferral........ -- -- -- --------- --------- --------- 0.1 0.1 -- ========= ========= ========= 84 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides health care and life insurance benefits for substantially all employees who retire under the provisions of a Company-sponsored retirement plan and their dependents. Participation in the plans is voluntary and requires a monthly contribution by the retiree. The following table sets forth the plan's funded status at December 31, 1996 and 1995 (in millions of dollars): DECEMBER 31, -------------------- 1996 1995 --------- --------- Plan assets, at fair value........... -- -- Accumulated postretirement benefit obligation Retirees........................... (4.2) (4.6) Eligible active participants....... (1.0) (1.4) Other active participants.......... (2.1) (1.2) --------- --------- Accumulated postretirement benefit obligation in excess of plan assets............................. (7.3) (7.2) Unrecognized transition obligation... 3.7 3.8 Unrecognized net loss (gain) from past experience different from that assumed and from changes in assumptions........................ (0.2) 0.3 --------- --------- Accrued postretirement benefit cost............................... (3.8) (3.1) ========= ========= Assumed discount rate................ 7.50% 7.75% Assumed rate of compensation increase........................... 5.25% 5.25% The Company's net periodic postretirement benefit cost for 1996, 1995 and 1994 includes the following components (in millions of dollars): YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 1994 ---- ---- ---- Service costs........................ 0.5 0.3 0.4 Interest costs....................... 0.5 0.5 0.5 Amortization of unrecognized transition obligation.............. 0.3 0.3 0.3 ---- ---- ---- 1.3 1.1 1.2 ==== ==== ==== Estimated costs and liabilities have been developed assuming trend rates for growth in future health care costs beginning with 8.0% for 1996 graded to 6.0% (5.5% for post age 65) by the year 2000 and remaining constant thereafter. Increasing the assumed health care cost trend rate by one percent each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $0.4 million and the aggregate of the service cost and interest cost components of the net periodic postretirement benefit cost for 1997 by $0.1 million. SAVINGS PLAN The Company has a savings plan available to substantially all salaried employees and intended to qualify as a deferred compensation plan under Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). The Company will match employee contributions for an amount up to 4% of each employee's base salary. In addition, if at the end of each fiscal year the Company's performance for such year has exceeded certain predetermined criteria, each participant will receive an additional matching contribution equal to 50% of the regular matching contribution. The Company's contributions to the 401(k) Plan, which are made in the form of the Company's common stock and charged to expense, totalled $1.2 million in 1996, $1.3 million in 1995 and $1.2 million in 1994. 85 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company also has a savings plan with respect to certain personnel employed in foreign locations. The plan is an unsecured creditor of the Company and at December 31, 1996 and 1995 the Company's liability with respect to the plan totalled $0.3 million and $0.1 million, respectively. (14) COMMITMENTS AND CONTINGENCIES OIL AND GAS HEDGING From time to time the Company hedges a portion of its oil and gas sales to provide a certain minimum level of cash flow from its sales of oil and gas. While the hedges are generally intended to reduce the Company's exposure to declines in market price, the Company's gain from increases in market price may be limited. The Company uses various financial instruments whereby monthly settlements are based on differences between the prices specified in the instruments and the settlement prices of certain futures contracts quoted on the New York Mercantile Exchange ("NYMEX") or certain other indices. Generally, in instances where the applicable settlement price is less than the price specified in the contract, the Company receives a settlement based on the difference; in instances where the applicable settlement price is higher than the specified price, the Company pays an amount based on the difference. The instruments utilized by the Company differ from futures contracts in that there is no contractual obligation which requires or allows for the future delivery of the product. Gains or losses on hedging activities are recognized in oil and gas revenues in the period in which the hedged production is sold. Crude oil sales hedges resulted in a $13.4 million decrease in revenues in 1996 and a $2.4 million increase in revenues in 1995. At December 31, 1996 the Company had open crude oil sales hedges on an average of 2,000 barrels per day for the period January to June 1997. Under the terms of the instruments, if the average of the applicable daily settlement prices is below $21.00 per barrel, the Company will receive a settlement based on the difference, and if the average of the applicable daily settlement prices is above $26.10, the Company will be required to pay an amount based on the difference. Subsequent to year end, the Company entered into additional agreements which increased the number of barrels hedged to an average of approximately 7,700 barrels per day for the period January to July 1997. The instruments used have floors ranging from $21.00 to $23.00 per barrel and ceilings ranging from $24.00 to $27.00 per barrel. Under the terms of the instruments, if the aggregate average of the applicable daily settlement prices is below the floor, the Company will receive a settlement based on the difference, and if the aggregate average of the applicable daily settlement prices is above the ceiling, the Company will be required to pay an amount based on the difference. At December 31, 1996 the Company had no open natural gas sales hedges. Natural gas sales hedges resulted in a decrease in revenues of $21.4 million in 1996, $0.3 million in 1995 and $1.0 million in 1994. In addition to its oil and gas sales hedges, for the first six months of 1996 the Company hedged 20 MMcf per day of the natural gas it purchases for use in its steam generation operations in the San Joaquin Valley of California. Such hedges resulted in a $3.2 million increase in production and operating costs. ENVIRONMENTAL REGULATION Federal, state and local laws and regulations relating to environmental quality control affect the Company in all of its oil and gas operations. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the owner or 86 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) operator of a site and companies that disposed or arranged for the disposal of the hazardous substance found at a site. CERCLA also authorizes the Environmental Protection Agency (the "EPA") and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of its operations, the Company has generated and will generate wastes that may fall within CERCLA's definition of "hazardous substances". The Company may be responsible under CERCLA for all or part of the costs to clean up sites at which such wastes have been disposed. Certain properties owned or used by the Company or its predecessors have been investigated under state and Federal Superfund statutes, and the Company has been and could be named a potentially responsible party ("PRP") for the cleanup of some of these sites. The Company has been identified as one of over 250 PRPs at a Superfund site in Los Angeles County, California (the "OII Site"). The OII Site was operated by a third party as a waste disposal facility from 1948 until 1983. The EPA is requiring the PRPs to undertake remediation of the site in several phases, which include site monitoring and leachate control, gas control and final remediation. In November 1988 the EPA and a group of PRPs that includes the Company entered into a consent decree covering the site monitoring and leachate control phases of remediation. The Company was a member of the group Coalition Undertaking Remediation Efforts ("CURE") which was responsible for constructing and operating the leachate treatment plant. This phase is now complete and the Company's share of costs with respect to this phase was $0.9 million. Another consent decree provides for the predesign, design and construction of a gas plant to harness and market methane gas emissions. The Company is a member of the New CURE group which is responsible for the gas plant construction and operation and landfill cover. Currently, New CURE is in the design stage of the gas plant. The Company's share of costs of this phase is expected to be $1.9 million and such costs have been provided for in the financial statements. Pursuant to consent decrees settling lawsuits against the municipalities and transporters involved with the OII site but not named by the EPA as PRPs, such parties are required to pay approximately $84 million, of which approximately $76 million will be credited against future remediation expenses. The EPA and the PRPs are currently negotiating the final closure requirements. After taking into consideration the credits from the municipalities and transporters, the Company estimates its share of final costs of closure will be approximately $0.8 million, which amount has been provided for by the Company in its financial statements. The Company has entered into a Joint Defense Agreement with the other PRPs to defend against a lawsuit filed in September 1994 by 95 homeowners alleging, among other things, nuisance, trespass, strict liability and infliction of emotional distress. A second lawsuit has been filed by 33 additional homeowners and the Company and the other PRPs have entered into a Joint Defense Agreement. At this stage of the lawsuit the Company is not able to estimate costs or potential liability. In 1994 the Company received a request from the EPA for information pursuant to Section 104(e) of CERCLA and a letter ordering the Company and other PRPs to negotiate with the EPA regarding implementation of a remedial plan for a site located in Santa Fe Springs, California (the "Santa Fe Springs Site"). The Company owned the property on which the Santa Fe Springs Site is located from 1921 to 1932. During that time the property was leased to another company and in 1932 the property was sold to that company. During the time the other company leased or owned the property and for a period thereafter, hazardous wastes were allegedly disposed at the Santa Fe Springs Site. The EPA estimates total past and future costs for remediation to be approximately $8.0 million. The Company filed its response to the Section 104(e) order setting forth its position and defenses based on the fact that the other company was the lessee and operator of the site during the time the Company was the owner of the property. However, the Company has also given its Notice of Intent to comply with the EPA's order to prepare a remediation design plan. The PRPs estimate total costs to final remediation to be $3.0 million and the Company has provided $250,000 for such costs in the financial statements. 87 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 1995 the Company and twelve other companies received notice that they have been identified as PRPs by the California Department of Toxic Substances Control (the "DTSC") as having generated and/or transported hazardous waste to the Environmental Protection Corporation ("EPC") Eastside Landfill (the "Eastside Site") during its fourteen-year operation from 1971 to 1985. EPC has since liquidated all assets and placed the proceeds in trust (the "EPC Trust") for closure and post-closure activities. However, these monies may not be sufficient to close the site. The PRPs have entered into an enforceable agreement with the DTSC to characterize the contamination at the site and prepare a focused remedial investigation and feasibility study. The DTSC has agreed to implement reasonable measures to bring new PRPs into the agreement. The DTSC will address subsequent phases of the cleanup, including remedial design and implementation in a separate order agreement. The cost of the remedial investigation and feasibility study is estimated to be $0.8 million, the cost of which will be shared by the PRPs and the EPC Trust. The ultimate costs of subsequent phases will not be known until the remedial investigation and feasibility study is completed and a remediation plan is accepted by the DTSC. The Company currently estimates final remediation could cost $2 million to $6 million and believes the monies in the EPC Trust will be sufficient to fund the lower end of this range of costs. The Company has provided $80,000 in its financial statements for its share of costs related to this site. Pursuant to the Contribution Agreement, Monterey agreed to indemnify and hold harmless Santa Fe from and against any costs incurred in the future relating to environmental liabilities of the Western Division assets (other than those retained by Santa Fe), including any costs or expenses incurred at any of the OII Site, the Santa Fe Springs Site and the Eastside Site, and any costs or liabilities that may arise in the future that are attributable to laws, rules or regulations in respect to any property or interest therein located in California and formerly owned or operated by the Western Division or its precedessors. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with eleven employees. The initial term of ten of the agreements expire on December 31, 1998; however, beginning January 1, 1998 and on each January 1 thereafter, the term is automatically extended for one-year periods, unless by September 30 of the preceding year the Company gives notice that the agreement will not be extended. The term of the agreements is automatically extended for a period of two years following a change of control. The initial term of the other agreement expires December 31, 1999 and beginning January 1, 1999, is automatically extended for one-year periods and is automatically extended for a three-year period following a change of control. In the event following a change in control employment is terminated by the employee for "good reason" or the employee is involuntarily terminated by the Company other than for "cause" (as those terms are defined in the employment agreements), or if during the six months preceding a change in control, the employee's employment is terminated by the employee for good reason or by the Company other than for cause, and such termination is demonstrated to be connected with the change in control, the employment agreements provide for payment of certain amounts to the employee based on the employee's salary and bonus under the Company's incentive compensation plan; payout of non-vested restricted stock, phantom units, stock options, if any, and continuation of certain insurance benefits on a tax neutral basis for a period of up to 36 months. The payments and benefits are payable pursuant to the employment agreements only to the extent they are not paid out under the terms of any other plan of the Company. The payments and benefits provided by the employment agreements may be limited, with the exception of those made to Mr. Payne, by certain provisions of the Internal Revenue Code. 88 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OPERATING LEASES The Company has noncancellable agreements with terms ranging from one to ten years to lease office space and equipment. Minimum rental payments due under the terms of these agreements are: 1997 -- $6.2 million,1998 -- $5.7 million, 1999 -- $3.7 million,2000 -- $1.9 million, 2001 -- $1.5 million and $6.1 million thereafter. Rental expense under the terms of noncancellable agreements totalled $5.9 million in 1996, $6.1 million in 1995 and $6.2 million in 1994. OTHER MATTERS The Company has certain long-term contracts ranging up to twelve years for the supply and transportation of approximately 20 million cubic feet per day of natural gas to the Company's operations in Kern County, California. In the aggregate, these contracts involve a minimum commitment on the part of the Company of approximately $18.6 million per year (based on prices and transportation charges in effect for December 1996). In connection with the development of a gas field in Argentina in which the Company has a 19.9% working interest, a gas contract with "take-or-pay" and "delivery-or-pay" obligations was executed in 1994 with a gas distribution company. There are other claims and actions, including certain other environmental matters, pending against the Company. In the opinion of management, the amounts, if any, which may be awarded in connection with any of these claims and actions could be significant to the results of operations of any period but would not be material to the Company's consolidated financial position. (15) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107 "Disclosure About Fair Value of Financial Instruments" requires the disclosure, to the extent practicable, of the fair value of financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences, if any, of realization or settlement. The following table reflects the financial instruments for which the fair value differs from the carrying amount of such financial instrument in the Company's December 31, 1996 and 1995 balance sheets (in millions of dollars):
1996 1995 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ----- -------- ----- Liabilities Long-Term Debt.................. 278.5 315.4 344.4 378.5 Convertible Preferred Stock, 7% Series....................... 19.7 28.4 80.0 95.6 Shareholders' Equity $.732 Series A Convertible Preferred Stock.............. 91.4 131.1 91.4 105.7
The fair value of the Company's 11% Senior Subordinated Debentures, Convertible Preferred Stock, 7% Series and $.732 Series A Convertible Preferred Stock is based on market prices. The fair value of the Company's fixed-rate long-term debt is based on current borrowing rates available for financings with similar terms and maturities. With respect to the Company's floating-rate debt the carrying amount approximates fair value. At December 31, 1996 the Company had open oil sales hedging contracts (see Note 14). Based on the year-end 1996 settlement prices of the applicable NYMEX futures contracts, the Company would recognize no gain or loss with respect to such hedges in 1997. The actual gains or losses realized by the Company from these hedges may vary significantly due to the volatility of the futures markets and other indices. 89 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (16) SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
1 QTR 2 QTR 3 QTR 4 QTR YEAR ------ ------ ------ ------ ----- (IN MILLIONS OF DOLLARS EXCEPT PER SHARE DATA) 1996(A) Revenues........................ 123.7 137.5 149.4 172.7 583.3 Gross profit (b)................ 35.5 33.9 40.3 9.9 119.6 Impairment of oil and gas properties.................... -- 10.4 -- 47.0 57.4 Loss (gain) on sale of assets... 0.2 0.3 -- (12.6) (12.1) Income (loss) from operations... 29.5 26.0 33.9 0.1 89.5 Income (loss) before extraordinary items........... 12.6 17.4 16.5 (4.1) 42.4 Extraordinary item -- debt extinguishment costs.......... -- -- -- 6.0 6.0 Net income (loss)............... 12.6 12.4 16.5 (10.1) 36.4 Earnings (loss) attributable to common shares................. 8.9 13.7 12.8 (46.2) (10.8) Earnings (loss) attributable to common shares per share Earnings (loss) before extraordinary items...... 0.10 0.15 0.14 (0.44) (0.05) Extraordinary items........ -- -- -- (0.07) (0.07) Earnings (loss) to common shares................... 0.10 0.15 0.14 (0.51) (0.12) Average shares outstanding (millions).................... 90.4 90.6 90.6 90.9 90.6 1995 Revenues........................ 100.3 111.4 113.4 124.3 449.4 Gross profit (b)................ 18.4 29.4 26.9 6.1 80.8 Income (loss) from operations... 12.5 22.5 19.8 (0.9) 53.9 Net income (loss)............... 3.6 7.6 7.0 8.4 26.6 Earnings (loss) attributable to common shares................. (0.1) 3.9 3.3 4.7 11.8 Earnings (loss) attributable to common shares per share....... -- 0.04 0.04 0.05 0.13 Average shares outstanding (millions).................... 90.1 90.3 90.3 90.3 90.2
- ------------ (a) The fourth quarter of 1996 includes impairments of oil and gas properties of $47.0 million (see Note 1), a $12.3 million gain on the sale of certain surface lands (see Note 6), a $6.0 million extraordinary item with respect to debt extinguishment costs (see Note 2) and a $33.7 million convertible preferred redemption premium (see Note 10). (b) Revenues less operating expenses other than general and administrative. 90 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OIL AND GAS RESERVES AND RELATED FINANCIAL DATA Information with respect to the Company's oil and gas producing activities is presented in the following tables. Reserve quantities as well as certain information regarding future production and discounted cash flows were determined by independent petroleum consultants, Ryder Scott Company. OIL AND GAS RESERVES The following table sets forth the Company's net proved oil and gas reserves at December 31, 1993, 1994, 1995 and 1996 and the changes in net proved oil and gas reserves for the years ended December 31, 1994, 1995 and 1996.
CRUDE OIL AND LIQUIDS (MMBBLS) NATURAL GAS (BCF) ---------------------------------------- --------------------------------------------- U.S. ARGENTINA INDONESIA TOTAL U.S. ARGENTINA INDONESIA TOTAL --------- --------- --------- ----- --------- --------- ---------- --------- Proved reserves at December 31, 1993................... 230.9 8.8 8.5 248.2 235.9 26.4 0.7 263.0 Revisions of previous estimates.... 13.3 0.6 1.3 15.2 (2.7) -- -- (2.7) Improved recovery techniques....... 13.9 -- -- 13.9 0.9 -- -- 0.9 Extensions, discoveries and other additions........................ 3.6 0.8 1.1 5.5 22.5 13.7 -- 36.2 Purchases of minerals-in-place..... 0.2 -- -- 0.2 0.5 -- -- 0.5 Sales of minerals-in-place......... (0.7) -- -- (0.7) (2.5) (3.1) -- (5.6) Production......................... (21.0) (0.9) (2.1) (24.0) (49.8) -- (0.1) (49.9) --------- --------- --------- ----- --------- --------- ---------- --------- Proved reserves at December 31, 1994................... 240.2 9.3 8.8 258.3 204.8 37.0 0.6 242.4 Revisions of previous estimates.... 16.4 1.4 0.4 18.2 1.0 1.3 -- 2.3 Improved recovery techniques....... 15.3 0.8 -- 16.1 -- 0.2 -- 0.2 Extensions, discoveries and other additions........................ 1.7 2.2 0.5 4.4 36.4 0.5 -- 36.9 Purchases of minerals-in-place..... 6.3 -- -- 6.3 18.0 -- -- 18.0 Production......................... (21.3) (0.9) (1.9) (24.1) (50.3) (4.3) (0.1) (54.7) --------- --------- --------- ----- --------- --------- ---------- --------- Proved reserves at December 31, 1995................... 258.6 12.8 7.8 279.2 209.9 34.7 0.5 245.1 Revisions to previous estimates.... 15.6 (0.2) 2.3 17.7 25.9 (2.4) (0.2) 23.3 Improved recovery techniques....... 14.4 -- -- 14.4 -- -- -- -- Extensions, discoveries and other additions........................ 0.6 1.3 0.3 2.2 40.8 1.1 -- 41.9 Purchases of minerals-in-place..... 10.7 2.8 -- 13.5 11.7 0.6 -- 12.3 Sales of minerals-in-place......... (0.3) -- -- (0.3) (2.1) -- -- (2.1) Production......................... (24.3) (1.4) (1.5) (27.2) (53.4) (7.6) (0.1) (61.1) --------- --------- --------- ----- --------- --------- ---------- --------- Proved reserves at December 31, 1996................................ 275.3 15.3 8.9 299.5 232.8 26.4 0.2 259.4 ========= ========= ========= ===== ========= ========= ========== =========
(TABLE CONTINUED ON FOLLOWING PAGE) 91 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CRUDE OIL AND LIQUIDS (MMBBLS) NATURAL GAS (BCF) ----------------------------------------- --------------------------------------------- U.S. ARGENTINA INDONESIA TOTAL U.S. ARGENTINA INDONESIA TOTAL --------- --------- ---------- ----- --------- --------- ---------- --------- Proved developed reserves at December 31 1993............................ 178.8 5.5 6.7 191.0 206.0 -- 0.7 206.7 1994............................ 181.3 6.1 7.1 194.5 178.2 1.3 0.6 180.1 1995............................ 206.5 7.1 6.0 219.6 170.2 33.3 0.5 204.0 1996............................ 224.1 8.5 6.5 239.1 193.6 25.9 0.2 219.7
Proved reserves are estimated quantities of crude oil and natural gas which geological and engineering data indicate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Indonesian reserves represent an entitlement to gross reserves in accordance with a production sharing contract. These reserves include estimated quantities allocable to the Company for recovery of operating costs as well as quantities related to the Company's net equity share after recovery of costs. Accordingly, these quantities are subject to fluctuations with an inverse relationship to the price of oil. If oil prices increase, the reserve quantities attributable to the recovery of operating costs decline. Although this reduction would be offset partially by an increase in the net equity share, the overall effect would be a reduction of reserves attributable to the Company. At December 31, 1996, the quantities include 0.6 million barrels which the Company is contractually obligated to sell for $.20 per barrel. The Company has certain commitments with respect to the delivery of natural gas (see Note 14) which the Company believes it can fulfill from its proved reserves and supply contracts with other companies. At December 31, 1996 U.S. proved reserves included 216.4 MMBbls of crude oil and liquids (171.0 MMBbls of which were proved developed) and 12.2 Bcf of natural gas (9.5 Bcf of which were proved developed) attributable to Monterey. At December 31, 1996, 2.0 million barrels of crude oil reserves and 14.1 billion cubic feet of natural gas reserves were subject to a 90% net profits interest held by Santa Fe Energy Trust. 92 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) ESTIMATED PRESENT VALUE OF FUTURE NET CASH FLOWS Estimated future net cash flows from the Company's proved oil and gas reserves at December 31, 1996, 1995 and 1994 are presented in the following table (in millions of dollars, except as noted):
U.S. ARGENTINA INDONESIA TOTAL ---------- --------- --------- ---------- 1996 Future cash inflows............. 6,393.6 377.7 191.8 6,963.1 Future production costs......... (2,792.7) (138.8) (135.2) (3,066.7) Future development costs........ (286.7) (53.0) (22.5) (362.2) Future income tax expenses...... (999.2) (33.4) (11.9) (1,044.5) ---------- --------- --------- ---------- Net future cash flows..... 2,315.0 152.5 22.2 2,489.7 Discount at 10% for timing of cash flows................... (951.2) (54.3) (7.1) (1,012.6) ---------- --------- --------- ---------- Present value of future net cash flows from proved reserves.............. 1,363.8 98.2 15.1 1,477.1 ========== ========= ========= ========== Present value of pretax future net cash flows from proved reserves..................... 1,952.3 119.6 23.6 2,095.5 ========== ========= ========= ========== Average sales prices Oil ($/Barrel)............ 20.35 22.62 21.67 20.51 Natural gas ($/Mcf)....... 3.47 1.20 1.05 3.24 1995 Future cash inflows............. 4,191.2 244.7 137.4 4,573.3 Future production costs......... (1,852.8) (103.0) (63.0) (2,018.8) Future development costs........ (282.8) (36.1) (6.1) (325.0) Future income tax expenses...... (541.7) (11.8) (25.1) (578.6) ---------- --------- --------- ---------- Net future cash flows..... 1,513.9 93.8 43.2 1,650.9 Discount at 10% for timing of cash flows................... (672.0) (35.7) (13.0) (720.7) ---------- --------- --------- ---------- Present value of future net cash flows from proved reserves.............. 841.9 58.1 30.2 930.2 ========== ========= ========= ========== Present value of pretax future net cash flows from proved reserves..................... 1,143.1 65.4 48.7 1,257.2 ========== ========= ========= ========== Average sales prices Oil ($/Barrel)............ 14.75 15.66 17.51 14.87 Natural gas ($/Mcf)....... 1.88 1.27 1.03 1.79 1994 Future cash inflows............. 3,488.8 176.9 134.9 3,800.6 Future production costs......... (1,614.6) (89.6) (69.4) (1,773.6) Future development costs........ (263.7) (32.3) (6.2) (302.2) Future income tax expenses...... (385.2) (3.7) (20.0) (408.9) ---------- --------- --------- ---------- Net future cash flows..... 1,225.3 51.3 39.3 1,315.9 Discount at 10% for timing of cash flows................... (544.9) (20.1) (11.0) (576.0) ---------- --------- --------- ---------- Present value of future net cash flows from proved reserves.............. 680.4 31.2 28.3 739.9 ========== ========= ========= ========== Present value of pretax future net cash flows from proved reserves..................... 894.3 33.5 43.0 970.8 ========== ========= ========= ========== Average sales prices Oil ($/Barrel)............ 13.18 14.06 15.21 13.28 Natural gas ($/Mcf)....... 1.63 1.25 0.97 1.57
93 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) The following tables sets forth the changes in the present value of estimated future net cash flows from proved reserves during 1996, 1995 and 1994 (in millions of dollars):
U.S. ARGENTINA INDONESIA TOTAL ------ --------- --------- --------- 1996 Balance at beginning of year....... 841.9 58.1 30.2 930.2 ------ --------- --------- --------- Increase (decrease) due to: Sales of oil and gas, net of production costs of $210.8 million...................... (311.7) (25.6) (13.9) (351.1) Net changes in prices and production costs............. 552.1 35.0 (8.3) 578.8 Extensions, discoveries and improved recovery............ 169.1 16.4 0.8 186.3 Purchases of minerals-in-place............ 92.5 19.2 -- 111.7 Sales of minerals-in-place...... (3.3) -- -- (3.3) Development costs incurred...... 145.4 19.5 12.9 177.8 Changes in estimated volumes.... 152.3 6.6 3.1 162.0 Changes in estimated development costs........................ (100.8) (23.4) (22.8) (147.0) Interest factor -- accretion of discount..................... 113.7 6.6 3.0 123.2 Income taxes.................... (287.4) (14.2) 10.1 (291.5) ------ --------- --------- --------- 521.9 40.1 (15.1) 546.9 ------ --------- --------- --------- 1,363.8 98.2 15.1 1,477.1 ====== ========= ========= ========= 1995 Balance at beginning of year....... 680.4 31.2 28.3 739.9 ------ --------- --------- --------- Increase (decrease) due to: Sales of oil and gas, net of production costs of $172.6 million...................... (244.7) (11.8) (13.2) (269.7) Net changes in prices and production costs............. 178.2 13.9 9.1 201.2 Extensions, discoveries and improved recovery............ 110.3 4.6 4.2 119.1 Purchases of minerals-in-place............ 56.6 -- -- 56.6 Development costs incurred...... 145.4 13.7 11.3 170.4 Changes in estimated volumes.... 19.9 9.6 0.3 29.8 Changes in estimated development costs........................ (105.6) (2.4) (10.2) (118.2) Interest factor -- accretion of discount..................... 88.7 4.4 4.2 97.3 Income taxes.................... (87.3) (5.1) (3.8) (96.2) ------ --------- --------- --------- 161.5 26.9 1.9 190.3 ------ --------- --------- --------- 841.9 58.1 30.2 930.2 ====== ========= ========= =========
94 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
U.S. ARGENTINA INDONESIA TOTAL ------ --------- --------- --------- 1994 Balance at beginning of year....... 482.0 7.5 12.9 502.4 ------ --------- --------- --------- Increase (decrease) due to: Sales of oil and gas, net of production costs of $172.2 million...................... (196.0) (7.3) (17.2) (220.5) Net changes in prices and production costs............. 389.0 21.1 19.6 429.7 Extensions, discoveries and improved recovery............ 78.8 7.4 10.4 96.6 Purchases of minerals-in-place............ 1.2 -- -- 1.2 Sales of minerals-in-place...... (8.9) (0.4) -- (9.3) Development costs incurred...... 81.7 13.0 9.3 104.0 Changes in estimated volumes.... 18.5 (2.6) 8.3 24.2 Changes in estimated development costs........................ (66.6) (7.3) (6.5) (80.4) Interest factor -- accretion of discount..................... 53.3 2.0 2.0 57.3 Income taxes.................... (152.6) (2.2) (10.5) (165.3) ------ --------- --------- --------- 198.4 23.7 15.4 237.5 ------ --------- --------- --------- 680.4 31.2 28.3 739.9 ====== ========= ========= =========
Estimated future cash flows represent an estimate of future net cash flows from the production of proved reserves using estimated sales prices and estimates of the production costs, ad valorem and production taxes, and future development costs necessary to produce such reserves. No deduction has been made for depletion, depreciation or any indirect costs such as general corporate overhead or interest expense. The sales prices used in the calculation of estimated future net cash flows are based on the prices in effect at year end. Such prices have been held constant except for known and determinable escalations. Operating costs and ad valorem and production taxes are estimated based on current costs with respect to producing oil and gas properties. Future development costs are based on the best estimate of such costs assuming current economic and operating conditions. Income tax expense is computed based on applying the appropriate statutory tax rate to the excess of future cash inflows less future production and development costs over the current tax basis of the properties involved. While applicable investment tax credits and other permanent differences are considered in computing taxes, no recognition is given to tax benefits applicable to future exploration costs or the activities of the Company that are unrelated to oil and gas producing activities. The information presented with respect to estimated future net revenues and cash flows and the present value thereof is not intended to represent the fair value of oil and gas reserves. Actual future sales prices and production and development costs may vary significantly from those in effect at year-end and actual future production may not occur in the periods or amounts projected. This information is presented to allow a reasonable comparison of reserve values prepared using standardized measurement criteria and should be used only for that purpose. At December 31, 1996 approximately $126.0 million of the Company's estimated present value of future net cash flows were attributable to the minority interest in Monterey. 95 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES The following table includes all costs incurred, whether capitalized or charged to expense at the time incurred (in millions of dollars):
OTHER U.S. ARGENTINA INDONESIA FOREIGN TOTAL --------- --------- --------- -------- ------ 1996 Property acquisition costs Unproved........................ 31.6 -- -- 1.8 33.4 Proved.......................... 30.2 7.4 -- 0.2 37.8 Exploration costs.................. 29.5 0.1 2.4 11.4 43.4 Development costs.................. 115.2 12.1 12.9 3.9 144.1 --------- --------- --------- -------- ------ 206.5 19.6 15.3 17.3 258.7 ========= ========= ========= ======== ====== 1995 Property acquisition costs Unproved........................ 13.0 -- 0.7 0.1 13.8 Proved.......................... 33.8 -- -- -- 33.8 Exploration costs.................. 27.7 1.2 7.7 7.2 43.8 Development costs.................. 111.5 13.7 11.3 0.5 137.0 --------- --------- --------- -------- ------ 186.0 14.9 19.7 7.8 228.4 ========= ========= ========= ======== ====== 1994 Property acquisition costs Unproved........................ 4.5 0.1 0.6 0.2 5.4 Proved.......................... 1.9 0.3 -- -- 2.2 Exploration costs.................. 19.3 1.2 7.5 6.8 34.8 Development costs.................. 81.6 13.0 9.3 0.1 104.0 --------- --------- --------- -------- ------ 107.3 14.6 17.4 7.1 146.4 ========= ========= ========= ======== ======
96 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES The following table sets forth information concerning capitalized costs at December 31, 1996 and 1995 related to the Company's oil and gas operations (in millions of dollars):
1996 1995 ---------------------------------------------------------- -------------------- OTHER U.S. ARGENTINA INDONESIA FOREIGN TOTAL U.S. ARGENTINA --------- ---------- --------- ------- --------- ------- --------- Oil and gas properties Unproved......................... 63.8 4.5 11.8 1.9 82.0 41.7 4.5 Proved........................... 2,236.8 90.3 113.9 5.3 2,446.3 2,090.6 70.8 Other............................ 11.5 -- -- -- 11.5 12.8 -- Accumulated amortization of unproved properties......................... (18.9) (2.4) (4.4) (1.4) (27.1) (12.8) (2.4) Accumulated depletion, depreciation and impairment of proved properties......................... (1,523.9) (23.4) (63.8) (3.5) (1,614.6) (1,385.9) (15.9) Accumulated depreciation of other oil and gas properties................. (4.4) -- -- -- (4.4) (5.3) -- --------- ---------- --------- ------- --------- ------- --------- 764.9 69.0 57.5 2.3 893.7 741.1 57.0 ========= ========== ========= ======= ========= ======= =========
OTHER INDONESIA FOREIGN TOTAL --------- ------- --------- Oil and gas properties Unproved......................... 12.0 3.0 61.2 Proved........................... 99.1 1.8 2,262.3 Other............................ -- -- 12.8 Accumulated amortization of unproved properties......................... (3.8) (1.8) (20.8) Accumulated depletion, depreciation and impairment of proved properties......................... (39.7) -- (1,441.5) Accumulated depreciation of other oil and gas properties................. -- -- (5.3) --------- ------- --------- 67.6 3.0 868.7 ========= ======= ========= 97 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES The following table sets forth the Company's results of operations from oil and gas producing activities for the years ended December 31, 1996, 1995 and 1994 (in millions of dollars):
OTHER U.S. ARGENTINA INDONESIA FOREIGN TOTAL ------ --------- --------- ------- --------- 1996 Revenues........................... 517.9 35.8 29.6 -- 583.3 Production costs Production and operating costs........................ (162.4) (10.0) (15.7) (0.3) (188.4) Taxes (other than income)....... (22.2) (0.2) -- -- (22.4) Cost of crude oil purchased........ (20.8) -- -- -- (20.8) Exploration, including dry hole costs........................... (21.9) (0.1) (0.6) (11.9) (34.5) Depletion, depreciation, amortization and impairments.... (164.9) (7.9) (24.6) (5.0) (202.4) Gain (loss) on disposition of properties...................... 0.3 -- -- (0.2) 0.1 ------ --------- --------- ------- --------- 126.0 17.6 (11.3) (17.4) 114.9 Income taxes....................... (49.6) (5.3) 2.9 3.5 (48.5) ------ --------- --------- ------- --------- 76.4 12.3 (8.4) (13.9) 66.4 ====== ========= ========= ======= ========= 1995 Revenues........................... 398.6 19.2 31.6 -- 449.4 Production costs Production and operating costs........................ (130.6) (7.1) (17.7) (0.4) (155.8) Taxes (other than income)....... (16.5) (0.3) -- -- (16.8) Cost of crude oil purchased........ (6.5) -- -- -- (6.5) Exploration, including dry hole costs........................... (13.6) (1.2) (3.1) (5.5) (23.4) Depletion, depreciation, amortization and impairments.... (143.3) (7.0) (10.0) (0.5) (160.8) Gain (loss) on disposition of properties...................... (0.2) -- -- (0.1) (0.3) ------ --------- --------- ------- --------- 87.9 3.6 0.8 (6.5) 85.8 Income taxes....................... (34.8) (1.1) (1.2) -- (37.1) ------ --------- --------- ------- --------- 53.1 2.5 (0.4) (6.5) 48.7 ====== ========= ========= ======= ========= 1994 Revenues........................... 359.5 12.9 31.8 -- 404.2 Production costs Production and operating costs........................ (130.8) (5.5) (14.6) (0.2) (151.1) Taxes (other than income)....... (21.0) (0.1) -- -- (21.1) Cost of crude oil purchased........ (11.7) -- -- -- (11.7) Exploration, including dry hole costs........................... (14.0) (1.2) (1.4) (3.8) (20.4) Depletion, depreciation, amortization and impairments.... (99.9) (3.8) (9.7) (6.3) (119.7) Gain (loss) on disposition of properties...................... 6.8 0.8 -- -- 7.6 ------ --------- --------- ------- --------- 88.9 3.1 6.1 (10.3) 87.8 Income taxes....................... (31.0) (0.9) (2.6) -- (34.5) ------ --------- --------- ------- --------- 57.9 2.2 3.5 (10.3) 53.3 ====== ========= ========= ======= =========
Income taxes are computed by applying the appropriate statutory rate to the results of operations before income taxes. Applicable tax credits and allowances related to oil and gas producing activities have been taken into account in computing income tax expenses. No deduction has been made for indirect cost such as corporate overhead or interest expense. 98 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. SANTA FE ENERGY RESOURCES, INC. By /s/ JANET F. CLARK JANET F. CLARK VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) Dated: March 11, 1997 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED. SIGNATURE AND TITLE ------------------------ JAMES L. PAYNE, Chairman of the Board, President and Chief Executive Officer and Director (PRINCIPAL EXECUTIVE OFFICER) JANET F. CLARK, Vice President and Chief Financial Officer (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) DIRECTORS ----------- William E. Greehey By: /s/ JANET F. CLARK Melvyn N. Klein JANET F. CLARK Allan V. Martini VICE PRESIDENT AND Marc J. Shapiro CHIEF FINANCIAL OFFICER Kathryn D. Wriston ATTORNEY IN FACT Dated: March 11, 1997 99 SANTA FE ENERGY RESOURCES, INC. SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1996 (IN MILLIONS OF DOLLARS) =================================================================== 1996 1995 1994 - ------------------------------------------------------------------- Accounts receivable Balance at the beginning of period........................ 2.0 3.1 6.3 Charge (credit) to income.................. 0.5 -- 0.6 Net amounts written off... -- (1.1) (3.8) ----- ----- ----- Balance at the end of period.... 2.5 2.0 3.1 ===== ===== ===== 100 INDEX OF EXHIBITS A. EXHIBITS EXHIBIT NUMBER DESCRIPTION 3(a) -- Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Form S-2 Registration Statement of Santa Fe Energy Resources, Inc. ("SFER, Inc.") Commission File No. 33-32831). 3(b) -- Bylaws, as amended (incorporated by reference to Exhibit 3(b) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992). 4(a) -- Form of Certificate of Designation, Preferences and Rights of the 7% Convertible Preferred Stock of SFER, Inc. (incorporated by reference to Exhibit 3(b) of the Form S-4 Registration Statement of SFER, Inc., Commission File No. 33-45043). 4(b) -- Rights Agreement dated as of March 3, 1997, between SFER, Inc. and First Chicago Trust Company of New York, as Rights Agent (incorporated by reference to Exhibit 1 to SFER, Inc.'s Form 8-A filed February 28, 1997.) 4(c) -- Form of Amended Certificate of Designations of Series A Junior Participating Preferred Stock of SFER, Inc. (incorporated by reference to Exhibit 1 to SFER, Inc.'s Form 8-A filed February 28, 1997). 4(d) -- Note Agreement dated as of November 19, 1996 by and among Monterey Resources, Inc. and various institutional investors relating to the issuance of $175,000,000 of Senior Notes maturing in 2005 (incorporated by reference to Exhibit 10.15 to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996). 4(e) -- Form of Certificate of Designation of the Dividend Enhanced Convertible Stock, $.732 Series A Convertible Preferred Stock of SFER, Inc. (incorporated by reference to Exhibit 4.3 of the Form S-3 Registration Statement of SFER, Inc., Commission File No. 33-52849). 4(f) -- Form of Indenture dated as of May 25, 1994 and Form of Debenture relating to SFER, Inc.'s 11% Senior Subordinated Debentures Due 2004 (incorporated by reference to Exhibit 4.1 of the Form S-3 Registration Statement of SFER, Inc. Commission File No. 33-52849). 4(g) -- First Supplemental Indenture, dated as of October 21, 1996, between SFER, Inc. and State Street Bank and Trust Company, as Trustee, relating to SFER Inc.'s 11% Senior Subordinated Debentures due 2004 (incorporated by reference to Exhibit 10.1 to SFER Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10(a) -- Agreement for the Allocation of the Consolidated Federal Income Tax Liability Among the Members of the Santa Fe Pacific Corporation Affiliated Group, as amended, dated December 23, 1983 (incorporated by reference to Exhibit 10.8 of the Form S-2 Registration Statement of SFER, Inc. Commission File No. 33-32831). 10(b) -- SFER, Inc. Incentive Compensation Plan, as amended (incorporated by reference to Exhibit 10(b) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995). 10(c) -- SFER, Inc. 1990 Incentive Stock Compensation Plan, Third Amendment and Restatement (incorporated by reference to Exhibit 10(a) to SFER Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). *10(d) -- Examples of Employment Agreements entered into with executive officers of SFER, Inc. *10(e) -- Example of Indemnification Agreements with SFER Inc.'s directors and officers. *10(f) -- Spin-Off Tax Indemnification Agreement between SFER, Inc. and Santa Fe Pacific Corporation. *10(g) -- Agreement Concerning Taxes among SFER, Inc., certain subsidiaries of SFER, Inc. and Santa Fe Pacific Corporation. 101 INDEX OF EXHIBITS -- (CONTINUED) EXHIBIT NUMBER DESCRIPTION *10(h) -- Santa Fe Energy Resources Supplemental Retirement Plan effective as of December 4, 1990. 10(i) -- SFER, Inc. Deferred Compensation Plan, effective as of January 1, 1991 as amended and restated, effective February 1, 1994 (incorporated by reference to Exhibit 10(p) to SFER Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993). 10(j) -- Gas Marketing Agreement, dated as of December 14, 1993, between SFER, Inc., Santa Fe Energy Operating Partners, L.P. and Adobe Gas Pipeline Company (incorporated by reference to Exhibit 10(t) to SFER Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993). *10(k) -- Credit Agreement dated as of November 13, 1996 among SFER, Inc., the banks signatory thereto, and The Chase Manhattan Bank, as Administrative Agent and ABN AMRO Bank, N.V., as Co-Agent. 10(l) -- Credit Agreement dated as of November 13, 1996 among Monterey Resources, Inc., the Banks signatory thereto and The Chase Manhattan Bank, as Administrative Agent (incorporated by reference to Exhibit 10.16 to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996). 10(m) -- Agreement for the Allocation of Consolidated Federal Income Tax Liability and State and Local Taxes among the members of the SFER, Inc. affiliated Group dated November 19, 1996 (incorporated by reference to Exhibit 10.2 to Monterey Resources Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996). 10(n) -- Agreement Concerning Taxes and Tax Indemnifications upon Spin-Off, dated November 19, 1996, between Monterey Resources, Inc. and SFER, Inc. (incorporated by reference to Exhibit 10.3 to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996). 10(o) -- Registration Rights and Indemnification Agreement dated November 19, , 1996, between Monterey Resources, Inc. and SFER, Inc. (incorporated by reference to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996). 10(p) -- Agreement Regarding Shelf Registration Statement dated March 24, 1995 between SFER, Inc. and HC Associates, GKH Partners, L.P., GKH Investments, L.P., Ernest H. Cockrell Texas Testamentary Trust and Carol Cockrell Jennings Texas Testamentary Trust (incorporated by reference to Exhibit 10(o) to SFER Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995). 10(q) -- Conveyance and Contribution Agreement dated as of November 1, 1996, between Monterey Resources, Inc. and SFER, Inc. (incorporated by reference to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996). *21 -- Subsidiaries of the registrant. *23(a) -- Consent of Independent Accountants with respect to Registration Statements on Form S-8 (Nos. 33-37175, 33-44541, 33-44542, 33-58613, 33-59253, 33-59255 and 333-07949). *23(b) -- Consent of Ryder Scott Company with respect to Registration Statements on Form S-8 (Nos. 33-37175, 33-44541, 33-4452, 33-58613, 33-59253, 33-59255 and 333-07949). *24 -- Powers of Attorney. - ------------ * Included in this report B. REPORTS ON FORM 8-K. DATE ITEM ------------------ ----- February 28, 1997 5 102
EX-10.D 2 EXHIBIT 10(d) Attached are three (3) examples of Employment Agreements entered into between Santa Fe Energy Resources Inc. and certain executive officers and other key employees of the Company. The agreements vary in the potential amount of payments to be made to the individuals but are otherwise substantially similar. The individuals are listed below with the number of the form of agreement next to their name. NAME OF EMPLOYEE AGREEMENT NO. ---------------- ------------- James L. Payne ................................... 1 Hugh L. Boyt ..................................... 2 Jerry L. Bridwell ................................ 2 Dyabe C, Radtke .................................. 2 David L. Hicks ................................... 3 Charles G. Hain, Jr .............................. 3 E. Everett Deschner .............................. 3 John R. Womack ................................... 3 Janet F. Clark ................................... 3 Kathy E. Hager ................................... 3 Mark A. Older .................................... 3 EMPLOYMENT AGREEMENT NO. 1 This Employment Agreement ("Agreement") is entered into effective as of December 31, 1996 by and between Santa Fe Energy Resources, Inc., a Delaware corporation ("Company"), and James L. Payne ("Employee"). WHEREAS, the Company employs Employee and desires to continue such employment relationship and Employee desires to continue such employment; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties, and agreements contained herein, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby accepts employment by the Company, on the terms and conditions set forth in this Agreement. 2. TERM OF EMPLOYMENT. Subject to the provisions for earlier termination provided in the Agreement, the term of this Agreement (the "Term") shall commence on the effective date of this Agreement as stated above and shall terminate on December 31, 1999; PROVIDED, HOWEVER, commencing on January 1, 1998 and on each January 1 thereafter, the term of this Agreement shall automatically be extended one additional year unless, not later than September 30 of the preceding year, the Board of Directors of the Company (the "Board") shall give written notice to Employee that the Term of the Agreement shall cease to be so extended; PROVIDED, FURTHER, that if a Change in Control, as defined in Section 6, shall have occurred during the original or extended Term of this Agreement, the Term shall continue in effect for a period of not less than three years from the date of such Change in Control. In no event, however, shall the Term of this Agreement extend beyond the end of the calendar month in which Employee's 65th birthday occurs. Notwithstanding any provision of this Agreement to the contrary, termination of this Agreement shall not alter or impair any rights of Employee (or Employee's estate or beneficiaries) that have arisen under this Agreement prior to such termination. 3. EMPLOYEE'S DUTIES. During the Term of this Agreement, Employee shall serve as the Chairman of the Board, Chief Executive Officer and President of the Company, with such customary duties and responsibilities as may from time to time be assigned to him by the Board, provided that such duties are at all times consistent with the duties of such position. Employee agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the duties and responsibilities assigned to Employee hereunder, to use reasonable best efforts to perform faithfully and efficiently such duties and responsibilities. 4. BASE COMPENSATION. For services rendered by Employee under this Agreement, the Company shall pay to Employee a base salary ("Base Compensation") of $515,000 per annum payable in accordance with the Company's customary payroll practice for its executive officers. The amount of Base Compensation shall be reviewed periodically and may be increased to reflect inflation or such other adjustments as the Board may deem appropriate but Base Compensation, as increased, may not be decreased thereafter. 5. ADDITIONAL BENEFITS. In addition to the Base Compensation provided for in Section 4 herein, Employee shall be entitled to receive all fringe benefits and prerequisites offered by the Company to its executive officers, including, without limitation, participation in the Company's Annual Incentive Compensation Plan and other incentive plans offered generally to key employees, the various employee benefit plans or programs provided to the employees of the Company in general, subject to the regular eligibility requirements with respect to each of such benefit plans or programs, and such other benefits or prerequisites as may be approved by the Board during the Term of this Agreement. Nothing in this paragraph shall be deemed to prohibit the Company from making any changes in any of the plans, programs or benefits described in this Section 5, provided the change similarly affects all executives of the Company similarly situated. 6. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in Control" shall mean the occurrence of one of the following events: (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any affiliate, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of the Company, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section) whose election by the Board of Directors of the Company or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (hereinafter referred to as "Continuing Directors"), cease for any reason to constitute at least a majority thereof; -2- (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 65% of the combined voting power of the voting securities of the Company (or such surviving entity) outstanding immediately after such merger or consolidation; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. For purposes of this clause (iv), the term "the sale or disposition by the Company of all or substantially all of the Company's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of the Company or of any direct or indirect subsidiary of the Company (including the stock of any direct or indirect subsidiary of the Company) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of the Company determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than two-thirds of the "fair market value of the Company" (as hereinafter defined). For purposes of the preceding sentence, the "fair market value of the Company" shall be the aggregate market value of the Company's outstanding common stock (on a fully diluted basis) plus the aggregate market value of the Company's other outstanding equity securities. The aggregate market value of the Company's common stock shall be determined by multiplying the number of shares of the Company's common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement with respect to the transaction or series of related transactions (the "Transaction Date") by the average closing price for the Company's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of the Company shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of the Company's common stock or by such other method as the Board of Directors of the Company shall determine is appropriate. However, notwithstanding anything in this clause (iv) to the contrary, a spinoff or distribution of the stock of a subsidiary of the Company to those persons who were stockholders of the Company immediately prior to such spinoff or distribution in substantially the same proportion as their ownership of Company stock immediately prior to such spinoff or distribution shall not constitute a "sale or disposition by the Company of all or substantially all of the Company's assets." 7. TERMINATION. This Agreement may be terminated prior to the end of its Term as set forth below. (a) RESIGNATION. Employee may resign, including by reason of retirement, his position at any time. In the event of such resignation, except in the case of resignation for -3- Good Reason (as defined below) on or following a Change in Control, the Company shall have no obligations to Employee with respect to this Agreement other than the payment of any Base Compensation and vacation pay which had accrued hereunder at the date of Employee's termination. (b) DEATH. If Employee's employment is terminated due to his death, this Agreement shall terminate and the Company shall have no obligations to Employee's legal representatives with respect to this Agreement other than the payment of any Base Compensation and vacation pay which had accrued hereunder at the date of Employee's death. (c) DISCHARGE. (i) The Company may terminate Employee's employment for any reason deemed sufficient by the Company upon notice as provided in Section 10. In the event of such termination prior to a Change in Control, the Company shall have no obligations to Employee with respect to this Agreement other than the payment of any Base Compensation and vacation pay which had accrued hereunder at the date of Employee's termination. However, in the event that Employee's employment is terminated during the Term by the Company on or within two years following a Change in Control and for any reason other than his Misconduct (as defined in Section 7(c)(ii) below) then, subject to Sections 7(g) and (h): (A) the Company shall pay in a lump sum in cash to Employee, within 15 days of the Date of Termination, an amount equal to three times the sum of (1) Employee's Base Compensation and (2) the greater of (i) Employee's target incentive award under the Company's Annual Incentive Plan for such year or (ii) the average award received by Employee under the Annual Incentive Plan for the three fiscal years preceding the year of termination; (B) for the 36-month period after such Date of Termination, the Company shall provide or arrange to provide Employee (and Employee's dependents) with life, disability, accident and group health insurance benefits substantially similar to those which Employee (and Employee's dependents) were receiving immediately prior to the Notice of Termination, with the Employee charged a monthly premium(s) for such coverage(s) that does not exceed the premium(s) charged to an active employee for comparable coverage(s); provided, however, the Company shall pay Employee each month during such period of continued coverage an amount that, on a net after-tax basis to Employee, is equal to the monthly premium charged Employee for such coverage and to the extent coverage and/or benefits received are taxable to Employee, the Company shall make Employee "whole" on a net after tax basis; provided, however, benefits otherwise receivable by Employee pursuant to this clause (B) shall be reduced to the extent other comparable benefits are actually received by Employee (and Employee's dependents) during the 36-month period following Employee's termination, and any such benefits actually received by Employee shall be reported to the Company; (C) within 15 days of the Date of -4- Termination or, if later, the first date on which such payment would not subject Employee to suit under Section 16(b) of the Securities Exchange Act of 1934, if applicable, the Company shall pay to Employee in cancellation of all outstanding Company stock-based awards of Employee which are not vested on the Date of Termination (collectively, "Awards"), a lump sum amount in cash equal to the sum of the value (with respect to an option or stock appreciation right, the "spread"; and with respect to restricted stock or phantom stock, the value of an unrestricted share) determined as of the Date of Termination of all such nonvested Awards, calculated, where applicable, as if all corporate performance goals had been achieved at the maximum level (thus warranting payment of the maximum value of the Award); and (D) the Company shall provide to Employee outplacement services by a nationally recognized firm. (ii) Notwithstanding the foregoing provisions of this Section 7, in the event Employee is terminated because of Misconduct, the Company shall have no compensation obligations pursuant to this Agreement after the Date of Termination. As used herein, "Misconduct" means (a) the willful and continued failure by Employee to substantially perform his duties with the Company (other than any such failure resulting from Employee's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination by Employee for Good Reason), after a written demand for substantial performance is delivered to Employee by the Board, which demand specifically identifies the manner in which the Board believes that Employee has not substantially performed his duties, or (b) the willful engaging by Employee in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes hereof, no act, or failure to act, on Employee's part shall be deemed "willful" unless done, or omitted to be done, by Employee not in good faith and without reasonable belief that Employee's action or omission was in the best interest of the Company. Notwithstanding the forgoing, Employee shall not be deemed to have been terminated for Misconduct unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Employee and an opportunity for Employee, together with Employee's counsel, to be heard before the Board), finding that in the good faith opinion of the Board Employee was guilty of conduct set forth above and specifying the particulars thereof in detail. (d) RESIGNATION FOR GOOD REASON. In the event of a Change in Control, Employee shall be entitled to terminate his employment for Good Reason as defined herein. If Employee terminates his employment for Good Reason on or within two years following a Change in Control, Employee shall be entitled to the compensation and benefits provided in Paragraph 7(c)(i) hereof. "Good Reason" shall mean (1) the material breach of any of the Company's obligations under this agreement without Employee's express written consent -5- or (2) the occurrence of any of the following circumstances without Employee's express written consent unless such breach or circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination pursuant to Subsections 7(e) and 7(f), respectively, given in respect thereof: (i) the assignment to Employee of any duties inconsistent with the position in the Company that Employee held immediately prior to the Change in Control, or a significant adverse alteration in the nature or status of Employee's office, title, responsibilities, including reporting responsibilities, or the conditions of Employee's employment from those in effect immediately prior to such Change in Control or a failure to reelect Employee as Chairman of the Board; (ii) a reduction in Employee's Base Compensation; (iii) the failure by the Company to pay to Employee any portion of Employee's current compensation or to pay to Employee any portion of an installment of deferred compensation under any deferred compensation program of the Company within seven days of the date such compensation is due; (iv) the failure by the Company to continue in effect any compensation plan in which Employee participates immediately prior to the Change in Control that is material to Employee's total compensation unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue Employee's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of Employee's participation relative to other participants, as existed at the time of the Change in Control; (v) the failure by the Company to continue to provide Employee with benefits substantially similar to those enjoyed by Employee under any of the Company's life insurance, medical, health and accident, or disability plans in which Employee was participating at the time of the Change in Control; the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive Employee of any material fringe benefit enjoyed by Employee at the time of the Change in Control, or the failure by the Company to provide Employee with the number of paid vacation days to which Employee is entitled on the basis of years of service with the Company (and its predecessors) in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; -6- (vi) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 12 hereof; (vii) the relocation of the Company's principal executive offices to a location outside the greater Houston, Texas area, or the Company's requiring Employee to relocate anywhere other than the location of the Company's principal executive offices, except for required travel on the Company's business to an extent substantially consistent with Employee's business travel obligations immediately prior to the Change in Control; (viii) the amendment, modification or repeal of any provision of the Certificate of Incorporation, or the Bylaws of the Company which was in effect immediately prior to such Change in Control, if such amendment, modification or repeal would materially adversely effect Employee's right to indemnification by the Company; or (ix) any purported termination of Employee's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (f) hereof, which purported termination shall not be effective for purposes of this Agreement. Notwithstanding anything in this Agreement to the contrary, if Employee's employment with the Company terminates prior to, but within six months of, the date on which a Change in Control occurs and it is reasonably demonstrated by Employee that such termination of employment was in connection with or anticipation of the Change in Control (i) by the Company or (ii) by Employee under circumstances which would have constituted Good Reason if the circumstances arose on or after the Change in Control, then, for purposes of this Agreement, Employee shall be deemed to have continued employment with the Company until the date of the Change in Control and then terminated his employment on such date for Good Reason (which such date for purposes of this Agreement shall be Date of Termination). In addition, any Company stock-based awards forfeited by Employee as a result of such termination shall be included as non-vested awards for purposes of calculating the payment due Employee pursuant to Section 7(e)(i)(C). Employee's right to terminate his employment pursuant to this subsection shall not be affected by his incapacity due to physical or mental illness. Employee's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. (e) NOTICE OF TERMINATION. On or within two years after a Change in Control, any purported termination of Employee's employment by the Company or by Employee in the case of resignation for Good Reason shall be communicated by written Notice of -7- Termination to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall set forth in reasonable detail the Date of Termination (which shall be no sooner than the 15th day from the date the Notice of Termination is communicated), the reason for termination of Employee's employment, or in the case of resignation for Good Reason, said notice must specify in reasonable detail the basis for such resignation. No purported termination which is not effected pursuant to this Section 7(e) shall be effective. (f) DATE OF TERMINATION, ETC. "Date of Termination" shall mean the date specified in the Notice of Termination. Either party may, within 10 days after any Notice of Termination is given, provide notice to the other party pursuant to Section 10 hereof that a dispute exists concerning the termination. Notwithstanding the pendency of any such dispute, the Company will continue to pay Employee his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Compensation) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved, but in no event past the second anniversary of the Change in Control except to the extent such plans otherwise provide for continued participation by a similarly terminated employee. (g) MITIGATION. Employee shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement by reduced by any compensation earned by Employee as a result of employment by another employer, self-employment earnings, by retirement benefits, by offset against any amount claimed to be owing by Employee to the Company, or otherwise, except that any severance amounts otherwise payable to Employee pursuant to a Company severance plan or policy for employees in general. (h) GROSS-UP OF PARACHUTE PAYMENTS. (1) To provide Employee with adequate protection in connection with his ongoing employment with the Company, this Agreement provides Employee with various benefits in the event of termination of Employee's employment with the Company. If Employee's employment is terminated following a "change in control" of the Company, within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), a portion of those benefits could be characterized as "excess parachute payments" within the meaning of Section 280G of the Code. The parties hereto acknowledge that the protections set forth herein are important, and it is agreed that Employee should not have to bear the burden of any excise tax that might be levied under Section 4999 of the Code, in the event that a portion of the benefits payable to Employee pursuant to this Agreement are treated as an excess parachute payment. The parties, therefore, have agreed as set forth herein. -8- (2) Anything in this Agreement or in any plan or program of the Company to the contrary notwithstanding, if it shall be determined that any payment or distribution by the Company or any other person to or for the benefit of Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required hereunder (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Company shall pay an additional payment (a "Gross-Up Payment") in an amount such that after payment by Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Employee retains an amount of hte Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (3) Subject to the provisions of subparagraph (4) below, all determinations required to be made hereunder, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by an independent public accounting firm with a national reputation that is selected by Employee (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and to Employee within 15 business days after the receipt of notice from Employee that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the change in control of the Company, Employee shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. (The Company shall indemnify and hold harmless Employee, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed on Employee as a result of such payment of fees and expenses.) Any Gross-Up Payment, as determined pursuant hereto, shall be paid by the Company to Employee within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by Employee, it shall furnish Employee and the Company with a written opinion that failure to report the Excise Tax on Employee's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and Employee. As a result of uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments may not have been made by the Company which should have been made -9- ("Underpayment"), consistent with the calculations required to be made hereunder. If the Company exhausts its remedies pursuant to subparagraph (4) below and Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Employee. (4) Employee shall notify the Company in writing of any claim (including any threatened tax lien related to or based upon any such claim) by the Internal Revenue Service that, if successful, would require the payment of the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after Employee is informed in writing of such claim (or threatened lien) and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which Employee gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due or such tax lien would be imposed). If the Company notifies Employee in writing prior to the expiration of such period that it desires to contest such claim (or threatened lien), Employee shall: (a) give the Company any information reasonably requested by the Company relating to such claim (or threatened lien); (b) take such action in connection with contesting such claim (or threatened lien) as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (c) cooperate with the Company in good faith in order effectively to contest such claim (or threatened lien); and (d) permit the Company to participate in any proceedings relating to such claim (or threatened lien); PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this subparagraph (4), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, -10- proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Employee shall determine (but in no event shall the Company permit or direct Employee to allow a tax lien to be imposed on Employee's property); PROVIDED, FURTHER, that if the Company directs Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Employee, on an interest-free basis, and shall indemnify and hold Employee harmless on an after-tax basis, from any Excise Tax or income tax (including interest and penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and FURTHER, PROVIDED that any extension of the statute of limitations relating to payment of taxes for the taxable year of Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. In addition, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (5) If, after the receipt by Employee of an amount advanced by the Company pursuant to subparagraph (4), Employee becomes entitled to receive any refund with respect to such claim, Employee shall (subject to the Company's complying with the requirements of subparagraph (4) above) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If after the receipt by Employee of an amount advanced by the Company pursuant to subparagraph (4) above, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Company does not notify Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (6) The Company hereby acknowledges that, as a consequence of this full parachute tax gross-up to Employee under this Agreement, any provision in a Company plan or program that provides for a parachute payment, "cut-back" to 2.99, if such "cut-back" would result in the employee being in a better net after-tax position, shall be inapplicable to Employee. (8) NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit Employee's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which Employee may -11- qualify, nor shall anything herein limit or otherwise adversely affect such rights as Employee may have under any stock option or other agreements with the Company or any of its affiliated companies. (9) ASSIGNABILITY. The obligations of Employee hereunder are personal and may not be assigned or delegated by him or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. The Company shall have the right to assign this Agreement only pursuant to the terms of Section 12(a). (10) NOTICE. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Company at its principal office address, directed to the attention of the Board with a copy to the Secretary of the Company, and to Employee at Employee's residence address on the records of the Company or to such other address as either party may have furnished to the other in writing in accordance herewith except that notice of change of address shall be effective only upon receipt. (11) VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. (12) SUCCESSORS: BINDING AGREEMENT. (a) The Company will require any successor (whether direct or indirect, by merger, consolidation or otherwise or by acquisition of) all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The phrase "all or substantially all of the business and/or assets of the Company" has the meaning as defined in Section 6(iv). Failure of the Company to obtain such agreement no later than 30 days prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from the Company in the same amount and on the same terms as Employee would be entitled to hereunder if Employee terminated Employee's employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used herein, the term "Company" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 12 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of Employee hereunder shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. Any payments or benefits hereunder which have accrued to Employee at the time of his death, unless otherwise provided herein, shall be paid -12- in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. 13. INDEMNIFICATION. In consideration of the premises and of the mutual agreements set forth in this Agreement, the parties hereto further agree as follows: 1. The Company shall pay on behalf of Employee and Employee's executors, administrators or assigns, any amount which Employee is or becomes legally obligated to pay as a result of any claim or claims made against Employee by reason of the fact that Employee served as an employee, director and/or officer of the Company or because of any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or other act done, or suffered or wrongfully attempted by Employee in Employee's capacity as an employee, Director and/or Officer of the Company. The payments that the Company will be obligated to make hereunder shall include (without limitation) damages, judgments, settlements, costs and expenses of investigation, costs and expenses of defense of legal actions, claims and proceedings and appeals therefrom, and costs of attachments and similar bonds; PROVIDED, HOWEVER, that the Company shall not be obligated to pay fines or other obligations or fees imposed by law or otherwise that it is prohibited by applicable law from paying as indemnity or for any other reason. 2. Costs and expenses (including, without limitation, attorneys' fees) incurred by Employee in defending or investigating any action, suit, proceeding or claim shall be paid by the Company in advance of the final disposition of such matter upon receipt of a written undertaking by or on behalf of Employee to repay any such amounts if it is ultimately determined that Employee is not entitled to indemnification under the terms of this Agreement. 3. If the claim under this Section 13 is not paid by or on behalf of the Company within ninety days after a written claim has been received by the Company, Employee may at any time thereafter bring suit or commence arbitration proceedings against the Company to recover the unpaid amount of the claim and, if successful in whole or in part, Employee shall also be entitled to be paid the expense of prosecuting such claim. 4. In the event of payment under this Section 13, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Employee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. -13- 5. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Employee: (a) for which payment is actually made to Employee under an insurance policy maintained by the Company, except in respect of any excess beyond the amount of payment under such insurance; (b) for which payment is made to or on behalf of Employee by the Company otherwise than pursuant to this Agreement; (c) based upon or attributable to Employee gaining in fact any personal profit or advantage to which Employee was not legally entitled; (d) for an accounting of profits made from the purchase or sale by Employee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto; or (e) brought about or contributed to by the dishonesty of Employee; PROVIDED, HOWEVER, that notwithstanding the foregoing, Employee shall be protected under this Agreement as to any claims upon which suit may be brought alleging dishonesty on the part of Employee, unless a judgment or other final adjudication thereof adverse to Employee shall establish that Employee committed acts of active and deliberate dishonesty with actual dishonest purpose and intent, which acts were material to the cause of action so adjudicated. 6. Employee, as a condition precedent to his right to be indemnified under this Agreement, shall give to the Company notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Company shall be directed to the Company, 1616 S. Voss, Suite 1000, Houston, Texas 77057, Attention: Secretary (or such other address as the Company shall designate in writing to Employee). Notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, Employee shall give the Company such information and cooperation as it may reasonably require and as shall be within Employee's power. 7. Nothing herein shall operate or be construed to diminish or otherwise restrict Employee's right to indemnification under any provision of the Certificate of Incorporation or the Bylaws of the Company, the Indemnification Agreement between the Company and Employee dated as of March 1, 1990, or under Delaware law. 14. MISCELLANEOUS. This Agreement may not be amended unless such amendment is agreed to in writing and signed by Employee and such officer as may be specifically authorized by the Board. In addition, no provision of this Agreement may be waived unless such waiver is in -14- writing and signed by the party entitled to the benefits of such provision. No waiver by either party hereto at any time of any breach by the other party hereto of, or in compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware. 15. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 16. RESOLUTION OF DISPUTES. Employee shall be permitted (but not required) to elect that any dispute or controversy arising under or in connection with this Agreement be settled by arbitration in Houston, Texas, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. All legal fees and costs incurred by Employee in connection with the resolution of any dispute or controversy under or in connection with this Agreement with the exception of any dispute or controversy under or in connection with Section 13 of this Agreement shall be paid by the Company as bills for such services are presented by Employee to the Company. With respect to any claim by Employee arising under Section 13, Section 13.3 shall govern any payment of legal fees and costs. IN WITNESS WHEREOF, the parties have executed this Agreement on ______________, 1997, effective for all purposes as provided above. SANTA FE ENERGY RESOURCES, INC. By:________________________________ Name: _____________________________ Title: ____________________________ James L. Payne -15- EMPLOYMENT AGREEMENT NO. 2 This Employment Agreement ("Agreement") is entered into effective as of December 31, 1996 by and between Santa Fe Energy Resources, Inc., a Delaware corporation ("Company"), and ______________ ("Employee"). WHEREAS, the Company employs Employee and desires to continue such employment relationship and Employee desires to continue such employment; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties, and agreements contained herein, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby accepts employment by the Company, on the terms and conditions set forth in this Agreement. 2. TERM OF EMPLOYMENT. Subject to the provisions for earlier termination provided in the Agreement, the term of this Agreement (the "Term") shall commence on the effective date of this Agreement as stated above and shall terminate on December 31, 1999; PROVIDED, HOWEVER, commencing on January 1, 1998 and on each January 1 thereafter, the term of this Agreement shall automatically be extended one additional year unless, not later than September 30 of the preceding year, the Board of Directors of the Company (the "Board") shall give written notice to Employee that the Term of the Agreement shall cease to be so extended; PROVIDED, FURTHER, that if a Change in Control, as defined in Section 6, shall have occurred during the original or extended Term of this Agreement, the Term shall continue in effect for a period of not less than two years from the date of such Change in Control. In no event, however, shall the Term of this Agreement extend beyond the end of the calendar month in which Employee's 65th birthday occurs. Notwithstanding any provision of this Agreement to the contrary, termination of this Agreement shall not alter or impair any rights of Employee (or Employee's estate or beneficiaries) that have arisen under this Agreement prior to such termination. 3. EMPLOYEE'S DUTIES. During the Term of this Agreement, Employee shall serve as _______________________ of the Company, with such customary duties and responsibilities as may from time to time be assigned to him by the Chief Executive Officer of the Company, provided that such duties are at all times consistent with the duties of such position. Employee agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the duties and responsibilities assigned to Employee hereunder, to use reasonable best efforts to perform faithfully and efficiently such duties and responsibilities. 4. BASE COMPENSATION. For services rendered by Employee under this Agreement, the Company shall pay to Employee a base salary ("Base Compensation") of $_______ per annum payable in accordance with the Company's customary payroll practice for its executive officers. The amount of Base Compensation shall be reviewed periodically and may be increased to reflect inflation or such other adjustments as the Board may deem appropriate but Base Compensation, as increased, may not be decreased thereafter. 5. ADDITIONAL BENEFITS. In addition to the Base Compensation provided for in Section 4 herein, Employee shall be entitled to receive all fringe benefits and perquisites offered by the Company to its executive officers, including, without limitation, participation in the Company's Annual Incentive Compensation Plan and other incentive plans offered generally to key employees, the various employee benefit plans or programs provided to the employees of the Company in general, subject to the regular eligibility requirements with respect to teach of such benefit plans or programs, and such other benefits or prerequisites as may be approved by the Board during the Term of this Agreement. Nothing in this paragraph shall be deemed to prohibit the Company from making any changes in any of the plans, programs or benefits described in this Section 5, provided the change similarly affects all executives of the Company similarly situated. 6. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in Control" shall mean the occurrence of one of the following events: (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any affiliate, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of the Company, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section) whose election by the Board of Directors of the Company or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was -2- previously so approved (hereinafter referred to as "Continuing Directors"), cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 65% of the combined voting power of the voting securities of the Company (or such surviving entity) outstanding immediately after such merger or consolidation; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. For purposes of this clause (iv), the term "the sale or disposition by the Company of all or substantially all of the Company's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of the Company or of any direct or indirect subsidiary of the Company (including the stock of any direct or indirect subsidiary of the Company) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of the Company determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than two-thirds of the "fair market value of the Company" (as hereinafter defined). For purposes of the preceding sentence, the "fair market value of the Company" shall be the aggregate market value of the Company's outstanding common stock (on a fully diluted basis) plus the aggregate market value of the Company's other outstanding equity securities. The aggregate market value of the Company's common stock shall be determined by multiplying the number of shares of the Company's common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement with respect to the transaction or series of related transactions (the "Transaction Date") by the average closing price for the Company's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of the Company shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of the Company's common stock or by such other method as the Board of Directors of the Company shall determine is appropriate. However, notwithstanding anything in this clause (iv) to the contrary, a spinoff or distribution of the stock of a subsidiary of the Company to those persons who were stockholders of the Company immediately prior to such spinoff or distribution in substantially the same proportion as their ownership of Company stock immediately prior to such spinoff or distribution shall not constitute a "sale or disposition by the Company of all or substantially all of the Company's assets." 7. TERMINATION. This Agreement may be terminated prior to the end of its Term as set forth below. -3- (a) RESIGNATION. Employee may resign, including by reason of retirement, his position at any time. In the event of such resignation, except in the case of resignation for Good Reason (as defined below) on or following a Change in Control, the Company shall have no obligations to Employee with respect to this Agreement other than the payment of any Base Compensation and vacation pay which had accrued hereunder at the date of Employee's termination. (b) DEATH. If Employee's employment is terminated due to his death, this Agreement shall terminate and the Company shall have no obligations to Employee's legal representatives with respect to this Agreement other than the payment of any Base Compensation and vacation pay which had accrued hereunder at the date of Employee's death. (c) DISCHARGE. (i) The Company may terminate Employee's employment for any reason deemed sufficient by the Company upon notice as provided in Section 10. In the event of such termination prior to a Change in Control, the Company shall have no obligations to Employee with respect to this Agreement other than the payment of any Base Compensation and vaction pay which had accrued hereunder at the date of Employee's termination. However, in the event that Employee's employment is terminated during the Term by the Company on or within two years following a Change in Control and for any reason other than his Misconduct (as defined in Section 7(c)(ii) below) then, subject to Sections 7(g) and (h): (A) the Company shall pay in a lump sum in cash to Employee, within 15 days of the Date of Termination, an amount equal to two times the sum of (1) Employee's Base Compensation and (2) the greater of (i) Employee's target incentive award under the Company's Annual Incentive Plan for such year or (ii) the average award received by Employee under the Annual Incentive Plan for the three fiscal years preceding the year of termination; (B) for the 24-month period after such Date of Termination, the Company shall provide or arrange to provide Employee (and Employee's dependents) with life, disability, accident and group health insurance benefits substantially similar to those which Employee (and Employee's dependents) were receiving immediately prior to the Notice of Termination, with the Employee charged a monthly premium(s) for the coverage(s) that does not exceed the premium(s) charged to an active employee for comparable coverage(s); PROVIDED, HOWEVER, the Company shall pay Employee each month during such period of continued coverage an amount that, on a net after-tax basis to Employee, is equal to the monthly premium charged Employee for such coverage and to the extent coverage and/or benefits received are taxable to Employee, the Company shall make Employee "whole" on a net after tax basis; PROVIDED, HOWEVER, benefits otherwise receivable by Employee pursuant to this clause (B) shall be reduced to the extent other comparable benefits are actually recieved by -4- Employee (and Employee's dependents) during the 24-month period following Employee's termination, and any such benefits actually received by Employee shall be reported to the Company; (C) within 15 days of the Date of Termination or, if later, the first date on which such payment would not subject Employee to suit under Section 16(b) of the Securities Exchange Act of 1934, if applicable, the Company shall pay to Employee in cancellation of all outstanding Company stock-based awards of Employee which are not vested on the Date of Termination (collectively, "Awards"), a lump sum amount in cash equal to the sum of the value (with respect to an option or stock appreciation right, the "spread"; and with respect to restricted stock or phantom stock, the vale of an unrestricted share) determined as of the Date of Termination of all such nonvested Awards, calculated, where applicable, as if all corporate performance goals had been achieved at the maximum level (thus warranting payment of the maximum value of the Award); and (D) the Company shall provide to Employee outplacement services by a nationally recognized firm. (ii) Notwithstanding the foregoing provisions of this Section 7, in the event Employee is terminated because of Misconduct, the Company shall have no compensation obligations pursuant to this Agreement after the Date of Termination. As used herein, "Misconduct" means (a) the willful and continued failure by Employee to substantially perform his duties with the Company (other than any such failure resulting from Employee's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination by Employee for Good Reason), after a written demand for substantial performance is delivered to Employee by the Board, which demand specifically identifies the manner in which the Board believes that Employee has not substantially performed his duties, or (b) the willful engaging by Employee in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes hereof, no act, or failure to act, on Employee's part shall be deemed "willful" unless done, or omitted to be done, by Employee not in good faith and without reasonable belief that Employee's action or omission was in the best interest of the Company. Notwithstanding the forgoing, Employee shall not be deemed to have been terminated for Misconduct unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Employee and an opportunity for Employee, together with Employee's counsel, to be heard before the Board), finding that in good faith opinion of the Board Employee was guilty of conduct set forth above and specifying the particulars thereof in detail. (d) RESIGNATION FOR GOOD REASON. In the event of a Change in Control, Employee shall be entitled to terminate his employment for Good Reason as defined herein. If Employee terminates his employment for Good Reason on or within two years following a -5- Change in Control, Employee shall be entitled to the compensation and benefits provided in Paragraph 7(c)(i) hereof. "Good Reason" shall mean (1) the material breach of any of the Company's obligations under this Agreement without Employee's express written consent or (2) the occurrence of any of the following circumstances without Employee's express written consent unless such breach or circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination pursuant to Subsections 7(e) and 7(f), respectively, given in respect thereof: (i) the assignment to Employee of any duties inconsistent with the position in the Company that Employee held immediately prior to the Change in Control, or a significant adverse alteration in the nature or status of Employee's office, title, responsibilities, including reporting responsibilities, or the conditions of Employee's employment from those in effect immediately prior to such Change in Control; (ii) a reduction in Employee's Base Compensation; (iii) the failure by the Company to pay to Employee any portion of Employee's current compensation or to pay to Employee any portion of an installment of deferred compensation under any deferred compensation program of the Company within seven days of the date such compensation is due; (iv) the failure by the Company to continue in effect any compensation plan in which Employee participates immediately prior to the Change in Control that is material to Employee's total compensation unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue Employee's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of Employee's participation relative to other participants, as existed at the time of the Change in Control; (v) the failure by the Company to continue to provide Employee with benefits substantially similar to those enjoyed by Employee under any of the Company's life insurance, medical, health and accident, or disability plans in which Employee was participating at the time of the Change in Control; the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive Employee of any material fringe benefit enjoyed by Employee at the time of the Change in Control, or the failure by the Company to provide Employee with the number of paid vacation days to which Employee is entitled on the basis of years of service with the Company (and its predecessors) in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; -6- (vi) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 12 hereof; (vii) the relocation of the Company's principal executive offices to a location outside the greater Houston, Texas area, or the Company's requiring Employee to relocate anywhere other than the location of the Company's principal executive offices, except for required travel on the Company's business to an extent substantially consistent with Employee's business travel obligations immediately prior to the Change in Control; (viii) the amendment, modification or repeal of any provision of the Certificate of Incorporation, or the Bylaws of the Company which was in effect immediately prior to such Change in Control, if such amendment, modification or repeal would materially adversely effect Employee's right to indemnification by the Company; or (ix) any purported termination of Employee's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (f) hereof, which purported termination shall not be effective for purposes of this Agreement. Notwithstanding anything in this Agreement to the contrary, if Employee's employment with the Company terminates prior to, but within six months of, the date on which a Change in Control occurs and it is reasonably demonstrated by Employee that such termination of employment was in connection with or anticipation of the Change in Control (i) by the Company or (ii) by Employee under circumstances which would have constituted Good Reason if the circumstances arose on or after the Change in Control, then, for purposes of this Agreement, Employee shall be deemed to have continued employment with the Company until the date of the Change in Control and then terminated his employment on such date for Good Reason (which such date for purposes of this Agreement shall be Date of Termination). In addition, any Company stock-based awards forfeited by Employee as a result of such termination shall be included as non-vested awards for purposes of calculating the payment due Employee pursuant to Section 7(c)(i)(C). Employee's right to terminate his employment pursuant to this subsection shall not be affected by his incapacity due to physical or mental illness. Employee's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. (e) NOTICE OF TERMINATION. On or within two years after a Change in Control, any purported termination of Employee's employment by the Company or by Employee in the -7- case of resignation for Good Reason shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall set forth in reasonable detail the Date of Termination (which shall be no sooner than the 15th day from the date the Notice of Termination is communicated), the reason for termination of Employee's employment, or in the case of resignation for Good Reason, said notice must specify in reasonable detail the basis for such resignation. No purported termination which is not effected pursuant to this Section 7(e) shall be effective. (f) DATE OF TERMINATION, ETC. "Date of Termination" shall mean the date specified in the Notice of Termination. Either party may, within 10 days after any Notice of Termination is given, provide notice to the other party pursuant to Section 10 hereof that a dispute exists concerning the termination. Notwithstanding the pendency of any such dispute, the Company will continue to pay Employee his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Compensation) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved, but in no event past the second anniversary of the Change in Control except to the extent such plans otherwise provide for continued participation by a similarly terminated employee. (g) MITIGATION. Employee shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement by reduced by any compensation earned by Employee as a result of employment by another employer, self-employment earnings, by retirement benefits, by offset against any amount claimed to be owing by Employee to the Company or otherwise, except that any severance amounts otherwise payable to Employee pursuant to a Company severance plan or policy for employees in general or the receipt by Employee (and Employee's dependents) of other comparable benefits as described in Section 7(c)(i)(B) shall reduce the amount or benefitts otherwise payable or provided, respectively, pursuant to Section 7(c)(i). (h) PARACHUTE PAYMENTS. The parties to this Agreement recognize that certain provisions of the 1990 Incentive Stock Compensation Plan, as amended, and the 1995 Incentive Stock Compensation Plan for Nonexecutive Employees (the "Stock Plans") require a reduction in payments or benefits under such Stock Plans to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"); such reduction will be made, however, only if, by reason of such reduction, Employee's net after-tax benefit shall exceed the net after-tax benefit if such reduction were not made. It is the intent of the parties that, notwithstanding the above or any provision of this Agreement or any other plan or program of the Company to the contrary, in the event any payment to be made and/or any benefits to be provided to or on behalf of Employee pursuant to this Agreement, when aggregated with -8- payments and/or benefits under the Stock Plans or any other plans or programs, would constitute an "excess parachute payment", within the meaning of Section 280G of the Code, Employee may elect in advance which payment and/or benefit will be reduced in whole or in part so that the aggregated payments and/or benefits received will not constitute excess parachute payments. Such reduction will only be made, however, if by reason of such reductions, Employee's net after-tax benefit shall exceed Employee's net after-tax benefit if such reductions were not made. The determination of whether any amount or benefit under this Agreement would be such an excess parachute payment shall be made by tax counsel selected by the Company and reasonably acceptable to Employee. The costs of obtaining such determination shall be borne by the Company. (8) NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit Employee's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which Employee may qualify, nor shall anything herein limit or otherwise adversely affect such rights as Employee may have under any stock option or other agreements with the Company or any of its affiliated companies. (9) ASSIGNABILITY. The obligations of Employee hereunder are personal and may not be assigned or delegated by him or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. The Company shall have the right to assign this Agreement only pursuant to the terms of Section 12(a). (10) NOTICE. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Company at its principal office address, directed to the attention of the Board with a copy to the Secretary of the Company, and to Employee at Employee's residence address on the records of the Company or to such other address as either party may have furnished to the other in writing in accordance herewith except that notice of change of address shall be effective only upon receipt. (11) VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. (12) SUCCESSORS: BINDING AGREEMENT. (a) The Company will require any successor (whether direct or indirect, by merger, consolidation or otherwise or by acquisition of all or substantially all of the business and/or assets of the Company) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The phrase "all or substantially all of the business and/or assets of the Company" has the -9- meaning as defined in Section 6(iv). Failure of the Company to obtain such agreement no later than 30 days prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from the Company in the same amount and on the same terms as Employee would be entitled to hereunder if Employee terminated Employee's employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used herein, the term "Company" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 12 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of Employee hereunder shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. Any payments or benefits hereunder which have accrued to Employee at the time of his death, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. 13. INDEMNIFICATION. In consideration of the premises and of the mutual agreements set forth in this agreement, the parties hereto further agree as follows: 1. The Company shall pay on behalf of Employee and Employee's executors, administrators or assigns, any amount which Employee is or becomes legally obligated to pay as a result of any claim or claims made against Employee by reason of the fact that Employee served as an employee, director and or/officer of the Company or because of any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or other act done, or suffered or wrongly attempted by Employee in Employee's capacity as an employee, Director and/or Officer of the Company. The payments that the Company will be obligated to make hereunder shall include (without limitation) damages, judgments, settlements, costs and expenses of investigation, costs and expenses of defense of legal actions, claims and proceedings and appeals therefrom, and costs of attachments and similar bonds; PROVIDED, HOWEVER, that the Company shall not be obligated to pay fines or other obligations or fees imposed by law or otherwise that it is prohibited by applicable law from paying as indemnity or for any other reason. 2. Costs and expenses (including, without limitation, attorney's fees) incurred by Employee in defending or investigating any action, suit, proceeding or claim shall be paid by the Company in advance of the final disposition of such matter upon receipt of a written undertaking by or on the behalf of Employee to repay any such amounts if it is ultimately determined that Employee is not entitled to indemnification under the terms of this Agreement. 3. If a claim under this Section 13 is not paid by or on behalf of the Company within ninety days after a written claim has been received by the Company, Employee may -10- at any time thereafter bring suit or commence arbitration proceedings against the Company to recover the unpaid amount of the claim and, if successful in whole or in part, Employee shall also be entitled to be paid the expense of prosecuting such claim. 4. In the event of payment under this Section 13, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Employee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 5. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Employee: (a) for which payment is actually made to Employee under insurance policy maintained by the Company, except in respect of any excess beyond the amount of payment under such insurance; (b) for which payment is made to or on behalf of Employee by the Company otherwise than pursuant to this Agreement; (c) based upon or attributable to Employee gaining in fact any personal profit or advantage to which Employee was not legally entitled; (d) for an accounting of profits made from the purchase or sale by Employee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto; or (e) brought about or contributed to by the dishonesty of Employee; PROVIDED, HOWEVER, that notwithstanding the foregoing, Employee shall be protected under this Agreement as to any claims upon which suit may be brought alleging dishonesty on the part of Employee, unless a judgment or other final adjudication thereof adverse to Employee shall establish that Employee committed acts of active and deliberate dishonesty with actual dishonest purpose and intent, which acts were material to the cause of action so adjudicated. 6. Employee, as a condition precedent to his right to be indemnified under this Agreement, shall give to the Company notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Company shall be directed to the Company, 1616 S. Voss, Suite 1000, Houston, Texas 77057, Attention: Secretary (or such other address as the Company shall designate in writing to Employee). Notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, Employee shall give the -11- Company such information and cooperation as it may reasonably require and shall be within Employee's power. 7. Nothing herein shall operate or be construed to diminish or otherwise restrict Employee's right to indemnification under any provision of the Certificate of Incorporation or the Bylaws of the Company, the Indemnification Agreement between the Company and Employee dated as of March 1, 1990, or under Delaware law. 14. MISCELLANEOUS. This Agreement may not be amended unless such amendment is agreed to in writing and signed by Employee and such officer as may be specifically authorized by the Board. In addition, no provision of this Agreement may be waived unless such waiver is in writing and signed by the party entitled to the benefits of such provision. No waiver by either party hereto at any time of any breach by other party hereto of, or in compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the state of Delaware. 15. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 16. RESOLUTION OF DISPUTES. Employee shall be permitted (but not required) to elect that any dispute or controversy arising under or in connection with this Agreement be settled by arbitration in Houston, Texas, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. All legal fees and costs incurred by Employee in connection with the resolution of any dispute or controversy under or in connection with this Agreement with the exception of any dispute or controversy under or in connection with Section 13 of this Agreement shall be paid by the Company as bills for such services are presented by Employee to the Company. With respect to any claim by Employee arising under Section 13, Section 13.3 shall govern any payment of legal fees and costs. 17. PRIOR AGREEMENTS. This Agreement shall supersede and replace in full that certain Employment Agreement entered into effective March 1, 1990 between the Company and Employee and such agreement is hereby terminated and of no further force or effect as of the effective date of this Agreement. -12- IN WITNESS WHEREOF, the parties have executed this Agreement on ______________, 1997, effective for all purposes as provided above. SANTA FE ENERGY RESOURCES, INC. By:________________________________ Name: _____________________________ Title: ___________________________ Jerry L. Bridwell -13- EMPLOYMENT AGREEMENT NO. 3 This Employment Agreement ("Agreement") is entered into effective as of December 31, 1996 by and between Santa Fe Energy Resources, Inc., a Delaware corporation ("Company"), and ______________ ("Employee"). WHEREAS, the Company employs Employee and desires to continue such employment relationship and Employee desires to continue such employment; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties, and agreements contained herein, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby accepts employment by the Company, on the terms and condition set forth in this Agreement. 2. TERM OF EMPLOYMENT. Subject to the provisions for earlier termination provided in the Agreement, the term of this Agreement (the "Term") shall commence on the effective date of this Agreement as stated above and shall terminate on December 31, 1999; PROVIDED, HOWEVER, commencing on January 1, 1998 and on each January 1 thereafter, the term of this Agreement shall automatically be extended one additional year unless, not later than September 30 of the preceding year, the Board of Directors of the Company (the "Board") shall give written notice to Employee that the Term of the Agreement shall cease to be so extended; PROVIDED, FURTHER, that if a Change in Control, as defined in Section 6, shall have occurred during the original or extended Term of this Agreement, the Term shall continue in effect for a period of not less than three years from the date of such Change in Control. In no event, however, shall the Term of this Agreement extend beyond the end of the calendar month in which Employee's 65th birthday occurs. Notwithstanding any provision of this Agreement to the contrary, termination of this Agreement shall not alter or impair any rights of Employee (or Employee's estate or beneficiaries) that have arisen under this Agreement prior to such termination. 3. EMPLOYEE'S DUTIES. During the Term of this Agreement, Employee shall serve as the _______________________ of the Company, with such customary duties and responsibilities as may from time to time be assigned to him by the Chief Executive Officer of the Company, provided that such duties are at all times consistent with the duties of such position. Employee agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the duties and responsibilities assigned to Employee hereunder, to use reasonable best efforts to perform faithfully and efficiently such duties and responsibilities. 4. BASE COMPENSATION. For services rendered by Employee under this Agreement, the Company shall pay to Employee a base salary ("Base Compensation") of $_______ per annum payable in accordance with the Company's customary payroll practice for its executive officers. The amount of Base Compensation shall be reviewed periodically and may be increased to reflect inflation or such other adjustments as the Board may deem appropriate but Base Compensation, as increased, may not be decreased thereafter. 5. ADDITIONAL BENEFITS. In addition to the Base Compensation provided for in Section 4 herein, Employee shall be entitled to receive all fringe benefits and perquisites offered by the Company to its executive officers, including, without limitation, participation in the Company's Annual Incentive Compensation Plan and other incentive plans offered generally to key employees, the various employee benefit plans or programs provided to the employees of the Company in general, subject to the regular eligibility requirements with respect to each of such benefit plans or programs, and such other benefits or prerequisites as may be approved by the Board during the Term of this Agreement. Nothing in this paragraph shall be deemed to prohibit the Company from making any changes in any of the plans, programs or benefits described in this Section 5, provided the change similarly affects all executives of the Company similarly situated. 6. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in Control" shall mean the occurrence of one of the following events: (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Secutiries Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any affiliate, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of the Company, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section) whose election by the Board of Directors of the Company or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was -2- previously so approved (hereinafter referred to as "Continuing Directors"), cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 65% of the combined voting power of the voting securities of the Company (or such surviving entity) outstanding immediately after such merger or consolidation; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. For purposes of this clause (iv), the term "the sale or disposition by the company of all or substantially all of the Company's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of the Company or of any direct or indirect subsidiary of the Company (including the stock of any direct or indirect subsidiary of the Company) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of the Company determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than two-thirds of the "fair market value of the Company" (as hereinafter defined). For purposes of the preceding sentence, the "fair market value of the Company" shall be the aggregate market value of the Company's outstanding common stock (on a fully diluted basis) plus the aggregate market value of the Company's other outstanding equity securities. The aggregate market value of the Company's common stock shall be determined by multiplying the number of shares of the Company's common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement with respect to the transaction or series of related transactions (the "Transaction Date") by the average closing price for the Company's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of the Company shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of the Company's common stock or by such other method as the Board of Directors of the Company shall determine is appropriate. However, notwithstanding anything in this clause (iv) to the contrary, a spinoff or distribution of the stock of a subsidiary of the Company to those persons who were stockholders of the Company immediately prior to such spinoff or distribution in substantially the same proportion as their ownership of Company stock immediately prior to such spinoff or distribution shall not constitute a "sale or disposition by the Company of all or substantially all of the Company's assets." 7. TERMINATION. This Agreement may be terminated prior to the end of its Term as set forth below. -3- (a) RESIGNATION. Employee may resign, including by reason of retirement, his position at any time. In the event of such resignation, except in the case of resignation for Good Reason (as defined below) on or following a Change in Control, the Company shall have no obligations to employee with respect to this Agreement other than the payment of any Base Compensation and vacation pay which had accrued hereunder at the date of Employee's termination. (b) DEATH. If Employee's employment is terminated due to his death, this Agreement shall terminate and the Company shall have no obligations to Employee's legal representatives with respect to this Agreement other than the payment of any Base Compensation and vacation pay which had accrued hereunder at the date of employee's death. (c) DISCHARGE. (i) The Company may terminate Employee's employment for any reason deemed sufficient by the Company upon notice as provided in Section 10. In the event of such termination prior to a Change in Control, the Company shall have no obligations to Employee with respect to this Agreement other than the payment of any Base Compensation and vacation pay which had accrued hereunder at the date of Employee's termination. However, in the event that Employee's employment is terminated during the Term by the Company on or within two years following a Change in Control and for any reason other than his Misconduct (as defined in Section 7(c)(ii) below) then, subject to Sections 7(g) and (h): (A) the Company shall pay in a lump sum in cash to Employee, within 15 days of the Date of Termination, an amount equal to two times the sum of (1) Employee's Base Compensation and (2) the maximum incentive award payable to Employee under the Company's Annual Incentive Compensation Plan for such year in lieu of any payment thereunder, assuming for purposes hereof that all performance objectives for such year had been met at the maximum level and that Employee is entitled to a full award thereunder; (B) for the 24-month period after such Date of Termination, the Company shall provide or arrange to provide Employee (and Employee's dependents) with life, disability, accident and group health insurance benefits substantially similar to those which Employee (and Employee's dependents) were receiving immediately prior to the Notice of Termination, with the Employee charged a monthly premium(s) for the coverage(s) that does not exceed the premium(s) charged to an active employee for comparable coverage(s); PROVIDED, HOWEVER, the Company shall pay Employee each month during such period of continued coverage an amount that, on a net after-tax basis to Employee, is equal to the monthly premium charged Employee for such coverage and to the extent coverage and/or benefits received are taxable to Employee, the Company shall make Employee "whole" on a net after tax basis; PROVIDED, HOWEVER, benefits otherwise receivable by Employee pursuant to this clause -4- (B) shall be reduced to the extent other comparable benefits are actually received by Employee (and Employee's dependents) during the 24-month period following Employee's termination, and any such benefits actually received by Employee shall be reported to the Company; (C) within 15 days of the Date of Termination or, if later, the first date on which such payment would not subject Employee to suit under Section 16(b) of the Securities Exchange Act of 1934, if applicable, the Company shall pay to Employee in cancellation of all outstanding Company stock-based awards of Employee which are not vested on the Date of Termination (collectively, "Awards"), a lump sum amount in cash equal to the sum of the value (with respect to an option or stock appreciation right, the "spread"; and with respect to restricted stock or phantom stock, the value of an unrestricted share) determined as of the Date of Termination of all such nonvested Awards, calculated, where applicable, as if all corporate performance goals had been achieved at the maximum level (thus warranting payment of the maximum value of the Award); and (D) the Company shall provide to Employee outplacement services by a nationally recognized firm. (ii) Notwithstanding the foregoing provisions of this Section 7, in the event Employee is terminated because of Misconduct, the Company shall have no compensation obligations pursuant to this Agreement after the Date of Termination. As used herein, "Misconduct" means (a) the willful and continued failure by Employee to substantially perform his duties with the Company (other than any such failure resulting from Employee's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination by Employee for Good Reason), after a written demand for substantial performance is delivered to Employee by the Board, which demand specifically identifies the manner in which the Board believes that Employee has not substantially performed his duties, or (b) the willful engaging by Employee in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes hereof, no act, or failure to act, on Employee's part shall be deemed "willful" unless done, or omitted to be done, by Employee not in good faith and without reasonable belief that Employee's action or omission was in the best interest of the Company. Notwithstanding the foregoing, Employee shall not be deemed to have been terminated for Misconduct unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Employee and an opportunity for Employee, together with Employee's counsel, to be heard before the Board), finding that in good faith opinion of the Board Employee was guilty of conduct set forth above and specifying the particulars thereof in detail. (d) RESIGNATION FOR GOOD REASON. In the event of a Change in Control, Employee shall be entitled to terminate his employment for Good Reason as defined herein. If -5- Employee terminates his employment for Good Reason on or within two years following a Change in Control, Employee shall be entitled to the compensation and benefits provided in Paragraph 7(c)(i) hereof. "Good Reason" shall mean (1) the material breach of any of the Company's obligations under this Agreement without Employee's express written consent or (2) the occurrence of any of the following circumstances without Employee's express written consent unless such breach or circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination pursuant to Subsections 7(e) and 7(f), respectively, given in respect thereof: (i) the assignment to Employee of any duties inconsistent with the position in the Company that Employee held immediately prior to the Change in Control, or a significant adverse alteration in the nature or status of Employee's office, title, responsibilities, including reporting responsibilities, or the conditions of Employee's employment from those in effect immediately prior to such Change in Control; (ii) a reduction in Employee's Base Compensation; (iii) the failure by the Company to pay to Employee any portion of Employee's current compensation or to pay to Employee any portion of an installment of deferred compensation under any deferred compensation program of the Company within seven days of the date such compensation is due; (iv) the failure by the Company to continue in effect any compensation plan in which employee participates immediately prior to the Change in Control that is material to Employee's total compensation unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue Employee's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of Employee's participation relative to other participants, as existed at the time of the Change in Control; (v) the failure by the Company to continue to provide Employee with benefits substantially similar to those enjoyed by Employee under any of the Company's life insurance, medical, health and accident, or disability plans in which Employee was participating at the time of the Change in Control; the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive Employee of any material fringe benefit enjoyed by Employee at the time of the Change in Control, or the failure by the Company to provide Employee with the number of paid vacation days to which employee is entitled on the basis of years of service with the Company (and its predecessors) in -6- accordance with the Company's normal vacation policy in effect at the time of the Change in Control; (vi) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 12 hereof; (vii) the relocation of the Company's principal executive offices to a location outside the greater Houston, Texas area, or the Company's requiring Employee to relocate anywhere other than the location of the Company's principal executive offices, except for required travel on the Company's business to an extent substantially consistent with Employee's business travel obligations immediately prior to the Change in Control; (viii) the amendment, modification or repeal of any provision of the Certificate of Incorporation, or the Bylaws of the Company which was in effect immediately prior to such Change in Control, if such amendment, modification or repeal would materially adversely effect Employee's right to indemnification by the Company; or (ix) any purported termination of Employee's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (f) hereof, which purported termination shall not be effective for purposes of this Agreement. Notwithstanding anything in this Agreement to the contrary, if Employee's employment with the Company terminates prior to, but within six months of, the date on which a Change in Control occurs and it is reasonably demonstrated by Employee that such termination of employment was in connection with or anticipation of the Change in Control (i) by the Company or (ii) by Employee under circumstances which would have constituted Good Reason if the circumstances arose on or after the Change in Control, then, for purposes of this Agreement, Employee shall be deemed to have continued employment with the Company until the date of the Change in Control and then terminated his employment on such date for Good Reason (which such date for purposes of this Agreement shall be Date of Termination). In addition, any Company stock-based awards forfeited by Employee as a result of such termination shall be included as non-vested awards for purposes of calculating the payment due Employee pursuant to Section 7(e)(i)(C). Employee's right to terminate his employment pursuant to this subsection shall not be affected by his incapacity due to physical or mental illness. Employee's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. -7- (e) NOTICE OF TERMINATION. On or within two years after a Change in Control, any purported termination of Employee's employment by the Company or by Employee in the case of resignation for Good Reason shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall set forth in reasonable detail the Date of Termination (which shall be no sooner than the 15th day from the date the Notice of Termination is communicated), the reason for termination of Employee's employment, or in the case of resignation for Good Reason, said notice must specify in reasonable detail the basis for such resignation. No purported termination which is not effected pursuant to this Section 7(e) shall be effective. (f) DATE OF TERMINATION, ETC. "Date of Termination" shall mean the date specified in the Notice of Termination. Either party may, within 10 days after any Notice of Termination is given, provide notice to the other party pursuant to Section 10 hereof that a dispute exists concerning the termination. Notwithstanding the pendency of any such dispute, the Company will continue to pay Employee his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Compensation) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved, but in no event past the second anniversary of the Change in Control except to the extent such plans otherwise provide for continued participation by a similarly terminated employee. (g) MITIGATION. Employee shall not be required to mitigate the amounts of any payment provided for in this Section 7 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement by reduced by any compensation earned by Employee as a result of employment by another employer, self-employment earnings, by retirement benefits, by offset against any amount claimed to be owing by Employee to the Company or otherwise, except that any severance amounts otherwise payable to Employee pursuant to a Company severance plan or policy for employees in general or the receipt by Employee (and Employee's dependents) of other comparable benefits as described in Section 7(c)(i)(B) shall reduce the amount or benefits otherwise payable or provided, respectively, pursuant to Section 7(c)(i). (h) PARACHUTE PAYMENTS. The parties to this Agreement recognize that certain provisions of the 1990 Incentive Stock Compensation Plan, as amended, and the 1995 Incentive Stock Compensation Plan for Nonexecutive Employees (the "Stock Plans") require a reduction in payments or benefits under such Stock Plans to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"); such reduction will be made, however, only if, by reason of such reduction, Employee's net after-tax benefit shall exceed the net after-tax benefit if such reduction were not made. It is the intent of the parties that, notwithstanding the above or any provision of this Agreement or any other plan or program -8- of the Company to the contrary, in the event any payment to be made and/or any benefits to be provided to or on behalf of Employee pursuant to this Agreement, when aggregated with payments and/or benefits under the Stock Plans or any other plans or programs, would constitute an "excess parachute payment", within the meaning of Section 280G of the Code, Employee may elect in advance which payment and/or benefit will be reduced in whole or in part so that the aggregated payments and/or benefits received will not constitute excess parachute payments. Such reduction will only be made, however, if by reason of such reductions, Employee's net after-tax benefit shall exceed Employee's net after-tax benefit if such reductions were not made. The determination of whether any amount or benefit under this Agreement would be such an excess parachute payment shall be made by tax counsel selected by the Company and reasonably acceptable to Employee. The costs of obtaining such determination shall be borne by the Company. 8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit Employee's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which Employee may qualify, nor shall anything herein limit or otherwise adversely affect such rights as Employee may have under any stock option or other agreements with the Company or any of its affiliated companies. 9. ASSIGNABILITY. The obligations of Employee hereunder are personal and may not be assigned or delegated by him or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. The Company shall have the right to assign this Agreement only pursuant to the terms of Section 12(a). 10. NOTICE. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Company at its principal office address, directed to the attention of the Board with a copy to the Secretary of the Company, and to Employee at Employee's residence address on the records of the Company or to such other address as either party may have furnished to the other in writing in accordance herewith except that notice of change of address shall be effective only upon receipt. 11. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 12. SUCCESSORS: BINDING AGREEMENT. (a) The Company will require any successor (whether direct or indirect, by merger, consolidation or otherwise or by acquisition of all or substantially all of the business and/or the assets of the Company) to expressly assume and agree to perform this Agreement in the same manner and -9- to the same extent that the Company would be required to perform it if no such succession had taken place. The phrase "all or substantially all of the business and/or assets of the Company" has the meaning as defined in Section 6(iv). Failure of the Company to obtain such agreement no later than 30 days prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from the Company in the same amount and on the same terms as Employee would be entitled to hereunder if Employee terminated Employee's employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used herein, the term "Company" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 12 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of Employee hereunder shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. Any payments or benefits hereunder which have accrued to Employee at the time of his death, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. 13. INDEMNIFICATION. In consideration of the premises and of the mutual agreements set forth in this Agreement, the parties hereto further agree as follows: 1. The Company shall pay on behalf of Employee and Employee's executors, administrators or assigns, any amount which Employee is or becomes legally obligated to pay as a result of any claim or claims made against Employee by reason of the fact that Employee served as an employee, director and or/officer of the Company or because of any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or other act done, or suffered or wrongly attempted by Employee in Employee's capacity as an employee, Director and/or Officer of the Company. The payments that the Company will be obligated to make hereunder shall include (without limitation) damages, judgments, settlements, costs and expenses of investigation, costs and expenses of defense of legal actions, claims and proceedings and appeals therefrom, and costs and expenses of defense of legal actions, claims and proceedings and appeals therefrom, and costs of attachments and similar bonds; PROVIDED, HOWEVER, that the Company shall not be obligated to pay fines or other obligations or fees imposed by law or otherwise that it is prohibited by applicable law from paying as indemnity or for any other reason. 2. Costs and expenses (including, without limitation, attorney's fees) incurred by Employee in defending or investigating any action, suit, proceeding or claim shall be paid by the Company in advance of the final disposition of such matter upon receipt of a written undertaking by or on the behalf of Employee to repay any such amounts if it is ultimately determined that Employee is not entitled to indemnification under the terms of this Agreement. -10- 3. If the claim under this Section 13 is not paid by or on behalf of the Company within ninety days after a written claim has been received by the Company, Employee may at any time thereafter bring suit or commence arbitration proceedings against the Company to recover the unpaid amount of the claim and, if successful in whole or in part, Employee shall also be entitled to be paid the expense of prosecuting such claim. 4. In the event of payment under this Section 13, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Employee, who shall execute all papers required and shall do everything that may be necessary to enable the Company effectively to bring suit to enforce such rights. 5. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Employee: (a) for which payment is actually made to Employee under an insurance policy maintained by the Company, except in respect of any excess beyond the amount of payment under such insurance; (b) for which payment is made to or on behalf of Employee by the Company otherwise than pursuant to this Agreement; (c) based upon or attributable to Employee gaining in fact any personal profit or advantage to which Employee was not legally entitled; (d) for an accounting of profits made from the purchase or sale by Employee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto; or (e) brought about or contributed to by the dishonesty of Employee; PROVIDED, HOWEVER, that notwithstanding the foregoing, Employee shall be protected under this Agreement as to any claims upon which suit may be brought alleging dishonesty on the part of Employee, unless a judgment or other final adjudication thereof adverse to Employee shall establish that Employee committed acts of active and deliberate dishonesty with actual dishonest purpose and intent, which acts were material to the cause of action so adjudicated. 6. Employee, as a condition precedent to his right to be indemnified under this Agreement, shall give to the Company notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Company shall be directed to the Company, 1616 S. Voss, Suite 1000, Houston, Texas 77057, Attention: Secretary (or such other address as the Company shall designate in writing to Employee). Notice shall be deemed received if sent by prepaid mail properly addressed, -11- the date of such notice being the date postmarked. In addition, Employee shall give the Company such information and cooperation as it may reasonably require and shall be within Employee's power. 7. Nothing herein shall operate or be construed to diminish or otherwise restrict Employee's right to indemnification under any provision of the Certificate of Incorporation or the Bylaws of the Company, the Indemnification Agreement between the Company and Employee dated as of March 1, 1990, or under Delaware law. 14. MISCELLANEOUS. This Agreement may not be amended unless such amendment is agreed to in writing and signed by Employee and such officer as may be specifically authorized by the Board. In addition, no provision of this Agreement may be waived unless such waiver is in writing and signed by the party entitled to the benefits of such provision. No waiver by either party hereto at any time of any breach by the other party hereto of, or in compliance with, any condition or provision of this Agreement to be preformed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware. 15. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrumant. 16. RESOLUTION OF DISPUTES. Employee shall be permitted (but not required) to elect that any dispute or controversy arising under or in connection with this Agreement be settled by arbitration in Houston, Texas, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. All legal fees and costs incurred by Employee in connection with the resolution of any dispute or controversy under or in connection with this Agreement with the exception of any dispute or controversy under or in connection with Section 13 of this Agreement shall be paid by the Company as bills for such services are presented by Employee to the Company. With respect to any claim by Employee arising under Section 13, Section 13.3 shall govern any payment of legal fees and costs. 17. PRIOR AGREEMENTS. This Agreement shall supersede and replace in full that certain Employment Agreement entered into effective March 1, 1990 between the Company and Employee and such agreement is hereby terminated and of no further force or effect as of the effective date of this Agreement. -12- IN WITNESS WHEREOF, the parties have executed this Agreement on ______________, 1997, effective for all purposes as provided above. SANTA FE ENERGY RESOURCES, INC. By:________________________________ Name: _____________________________ Title: ___________________________ David L. Hicks -13- EX-10.E 3 EXHIBIT 10(e) SANTA FE ENERGY RESOURCES, INC. INDEMNITY AGREEMENT Agreement dated as of __________by and between Santa Fe Energy Resources, Inc., a Delaware corporation (the "Corporation"), and the undersigned Indemnitee. Indemnitee currently is serving as an Officer of the Corporation and the Corporation desires that Indemnitee continue to serve in such capacity. Indemnitee is willing to continue to serve in such capacity if Indemnitee is adequately protected against the risks associated with such service. Accordingly, the indemnity provided by this Agreement is offered as an inducement for Indemnitee's agreeing to continue to serve as an Officer; provided, however, that Indemnitee's service to the Corporation may be terminated at the option of either party at any time as further discussed at paragraph 8 of this Agreement. In addition to the indemnification to which Indemnitee is entitled pursuant to the Bylaws of the Corporation, and as additional consideration for Indemnitee's continued service, the Corporation has furnished at its expense directors and officers liability insurance protecting Indemnitee in connection with such service. Such insurance excludes or limits coverage for certain types of claims for which coverage applied in prior years. The Corporation and Indemnitee have concluded that the indemnities available under the Corporation's Bylaws and the insurance currently in effect need to be supplemented to more fully protect Indemnitee against the risks associated with Indemnitee's service to the Corporation. In consideration of the premises and of the mutual agreements hereinafter set forth, the parties hereto agree as follows: 1. The Corporation shall pay on behalf of Indemnitee and Indemnitee's executors, administrators or assigns, any amount which Indemnitee is or becomes legally obligated to pay as a result of any claim or claims made against Indemnitee by reason of the fact that Indemnitee served as an Officer of the Corporation or because of any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or other act done, or suffered or wrongfully attempted by Indemnitee in Indemnitee's capacity as an Officer of the Corporation. The payments that the Corporation will be obligated to make hereunder shall include (without limitation) damages, judgments, settlements, costs and expenses of investigation, costs and expenses of defense of legal actions, claims and proceedings and appeals therefrom, and costs of attachments and similar bonds; provided, however, that the Corporation shall not be obligated to pay fines or other obligations or fees imposed by law or otherwise that it is prohibited by applicable law from paying as indemnity or for any other reason. 2. Costs and expenses (including, without limitation, attorneys' fees) incurred by the Indemnitee in defending or investigating any action, suit, proceeding or claim shall be paid by the Corporation in advance of the final disposition of such matter upon receipt of a written undertaking by or on behalf of Indemnitee to repay any such amounts if it is ultimately determined that Indemnitee is not entitled to indemnification under the terms of this Agreement. 3. If a claim under this Agreement is not paid by or on behalf of the Corporation within ninety days after a written claim has been received by the Corporation, Indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, Indemnitee shall also be entitled to be paid the expense of prosecuting such claim. 4. In the event of payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Corporation effectively to bring suit to enforce such rights. 5. The Corporation shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee: (a) for which payment is actually made to Indemnitee under an insurance policy maintained by the Corporation, except in respect of any excess beyond the amount of payment under such insurance; (b) for which Indemnitee is indemnified by the Corporation otherwise than pursuant to this Agreement; (c) based upon or attributable to Indemnitee gaining in fact any personal profit or advantage to which Indemnitee was not legally entitled; (d) for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Corporation within the meaning of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto; or (e) brought about or contributed to by the dishonesty of Indemnitee; provided, however, that notwithstanding the foregoing, Indemnitee shall be protected under this Agreement as to any claims upon which suit may be brought alleging dishonesty on the part of Indemnitee, unless a judgment or other final adjudication thereof adverse to Indemnitee shall establish that Indemnitee committed acts of active and deliberate dishonesty with actual dishonest purpose and intent, which acts were material to the cause of action so adjudicated. -2- 6. Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to the Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to Santa Fe Energy Resources, Inc., 1616 S. Voss, Suite 1000, Houston, Texas 77057, Attention: Secretary (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. 7. Nothing herein shall be deemed to diminish or otherwise restrict Indemnitee's right to indemnification under any provision of the Certificate of Incorporation or Bylaws of the Corporation or under Delaware law. 8. Indemnitee agrees to serve as an Officer of the Corporation to the best of Indemnitee's ability; however, nothing in this Agreement is intended to create a contract of employment and Indemnitee's employment may be terminated at the option of either party at any time, with or without cause. 9. This Agreement shall be governed by and construed in accordance with Delaware law. 10. This Agreement shall be binding upon all successors and assigns of the Corporation (including any transferee of all or substantially all of its assets and any successor by merger or operation of law) and shall inure to the benefit of the heirs, personal representatives and estate of Indemnitee. 11. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever (i) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not by themselves, invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent of the parties that the Corporation provide protection to Indemnitee to the fullest enforceable extent. -3- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. ATTEST: SANTA FE ENERGY RESOURCES, INC. ____________________________ By:_________________________________ Secretary James L. Payne President INDEMNITEE ____________________________________ -4- EX-10.F 4 EXHIBIT 10(f) SPIN-OFF TAX INDEMNIFICATION AGREEMENT THIS SPIN-OFF TAX INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered into this 20th day of April, 1990 by and between SANTA FE PACIFIC CORPORATION ("SFP"), a Delaware corporation, and SANTA FE ENERGY RESOURCES, INC. ("SFER"), a Delaware corporation. RECITALS: WHEREAS, SFP is the common parent of an affiliated group of corporations (the "SFP Group") under Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"), and owns shares of common stock, par value $0.01 per share ("Common Stock"), of SFER constituting "control" within the meaning of Section 368(c) of the Code; and WHEREAS, SFP is considering, among various alternatives, distributing to its shareholders all the stock of SFER that it owns (the "Spin-Off"); and WHEREAS, the parties hereto are entering into this Agreement to indemnify SFP as hereinafter provided in the event the Spin-Off fails to qualify under Section 355 due to actions by SFER after the Spin-Off; NOW, THEREFORE, for and in consideration of $10.00 paid to SFER upon execution hereof and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties, SFP and SFER hereby agree as follows: 1. CONTINUED CONDUCT OF BUSINESS. During the one-year period commencing with the Spin-Off (the "Restricted Period"), SFER agrees that it will not cease the active conduct of its trade or business within the meaning of Section 355(b) of the Code. 2. OPINION REQUIREMENT FOR MAJOR TRANSACTIONS UNDERTAKEN BY SFER DURING THE RESTRICTED PERIOD. SFER agrees that during the Restricted Period it will not (i) merge or consolidate with or into any other corporation, (ii) liquidate or partially liquidate (within the meaning of such terms as defined in Sections 346 and Section 302, respectively, of the Code), (iii) sell or transfer all or substantially all its assets (within the meaning of Rev. Proc. 77-37, 1977 - 2 C.B. 568) in a single transaction or series of related transactions, (iv) redeem or otherwise repurchase any of SFER's capital stock, or (v) except in connection with capital stock issued to the officers, directors or employees of SFER and its subsidiaries pursuant to employee benefit or compensation plans of SFER, issue additional shares of SFER's capital stock, unless SFER first obtains, and permits SFP to review, an opinion of Andrews & Kurth or other law firm of similar repute, or a supplemental ruling from the Internal Revenue Service, that such transaction, and any transaction related thereto, will not affect the qualification of the Spin-Off (or the distribution by SFP Properties, Inc. to SFP of the capital stock of SFER that was made on December 27, 1989 (the "Initial Spin" and together with the Spin-Off, the "Spinoffs")) under Section 355 of the Code. 3. INDEMNIFICATION. 3.1. INDEMNITY. If during the Restricted Period (A) SFER takes any action or enters into any agreement to take any action, including, without limitation, (i) any merger or consolidation of SFER with or into another corporation, (ii) any complete or partial liquidation of SFER (within the meaning of such terms as defined in Sections 346 and 302, respectively, of the Code), (iii) a sale or transfer of all or substantially all SFER's assets (within the meaning of Rev. Proc. 77-37, 1977-2 C.B. 568) in a single transaction or series of related transactions, (iv) ceasing to actively conduct its trade or business within the meaning of Section 355 of the Code, (v) redeeming or otherwise repurchasing any of SFER's outstanding capital stock, or (vi) issuing any additional shares of SFER stock, and the Spin-Off or the Initial Spin shall fail to qualify under Section 355 of the Code primarily as a result of such action or actions; or (B) SFER amends any Shareholder Rights Plan implemented by SFER prior to, and in effect at the time of, the Spin-Off ("Rights Plan"), or redeems any outstanding common share purchase rights (the "Rights") issued pursuant to such Rights Plan, and the Spin-Off or the Initial Spin shall fail to qualify under Section 355 of the Code primarily as a result of any person thereafter, but within the Restricted Period, acquiring stock of SFER which acquisition would have caused the Rights to become exercisable had the Rights remained outstanding under the Rights Plan as originally adopted; or (C) any person shall consummate a Qualifying Offer (as such term is defined in a Rights Plan in effect at the time of the Spin-Off) for the stock of SFER, and the Spin-Off or the Initial Spin shall fail to qualify under Section 355 of the Code primarily as a result of the consummation of such Qualifying Offer; then SFER shall indemnify and hold harmless SFP and each member of the SFP Group against any and all federal, state and local taxes, interest, penalties and additions to tax imposed upon or incurred by the SFP Group or any member thereof as a result of the failure of the Spin-Off or the Initial Spin to so qualify to the extent provided herein. SFP and each other member of the SFP Group shall be indemnified and held harmless under this Paragraph 3.1 without regard to the fact that SFP or any other member of the SFP Group may have reviewed an opinion or supplemental ruling pertaining to the action pursuant to Paragraph 2. 3.2 INDEMNIFIED LIABILITY. For purposes of this Agreement, the term "Indemnified Liability" means any liability imposed upon or incurred by the SFP Group or any member of the SFP Group for which SFP or any other member of the SFP Group is indemnified and held harmless under Paragraph 3.1, but shall not refer to the amount of such liability. - 2 - 3.3 AMOUNT OF INDEMNIFIED LIABILITY FOR INCOME TAXES. The amount of an Indemnified Liability for a federal or state tax based on or determined with reference to income shall be deemed to be the amount of tax computed by multiplying (i) the taxing jurisdiction's highest marginal tax rate applicable to taxable income of corporations such as SFP of the character subject to tax as a result of the failure of the Spin-Off (or the Initial Spin) to qualify under Section 355 of the Code for the taxable period in which the Spin-Off occurs, times (ii) the gain or income of the SFP Group or member thereof which is subject to tax in the taxing jurisdiction as a result of the failure of the Spin-Off (or the Initial Spin) to qualify under Section 355 of the Code, and, in the case of a state, times (iii) the percentage representing the extent to which such gain or income is apportioned or allocated to such state; PROVIDED, HOWEVER, that in the case of a state tax determined as a percentage of federal income tax liability, the amount of Indemnified Liability shall be deemed to be the amount of tax computed by multiplying (i) that state's highest percentage rate applicable to the taxable income of corporations such as SFP of the character subject to tax as a result of the failure of the Spin-Off (or the Initial Spin) to qualify under Section 355 of the Code for the taxable period in which the Spin-Off occurs, times (ii) the amount of deemed federal income tax (whether or not incurred) imposed upon the SFP Group or any member thereof from the failure of the Spin-Off (or the Initial Spin) to qualify under Section 355 of the Code computed in accordance with this Paragraph 3.3, times (iii) the percentage representing the extent to which the gain or income required to be recognized on the Spin-Off (or the Initial Spin) is apportioned or allocated to such state. 3.4 INDEMNITY REDUCED BY INCOME TAX BENEFITS FROM INDEMNIFIED LIABILITY. If an Indemnified Liability is of a type that constitutes a deduction from income in any taxable period in determining the SFP Group's or any of its member's liability for a federal or state tax based upon or determined with reference to income, the amount that SFER would otherwise be required to pay as indemnification for such Indemnified Liability shall be reduced by the aggregate deemed reduction, on account of such deduction of the Indemnified Liability, in the tax liability of the SFP Group or any member to all taxing jurisdictions over all taxable periods in which the Indemnified Liability is deductible. The deemed reduction in tax liability to a taxing jurisdiction for any taxable period in which all or a portion of the Indemnified Liability is deductible shall be deemed to be the amount computed by multiplying (i) such taxing jurisdiction's highest marginal tax rate applicable to the taxable income of corporations such as SFP of the character against which the Indemnified Liability is deductible, times (ii) the portion of the Indemnified Liability that constitutes a deduction in such taxing jurisdiction in such taxable period, and, in the case of a state, times (iii) the percentage representing the extent to which the deduction for the Indemnified Liability is apportioned or allocated to such state; PROVIDED, HOWEVER, that in the case of a state tax determined as a percentage of federal income tax liability, the amount of deemed reduction in tax liability to such state for any taxable period in which all or a portion of the Indemnified Liability is deductible shall be deemed to be the amount computed by multiplying (i) such state's highest percentage rate applicable to the taxable income of corporations such as SFP in such taxable period of such character against which the Indemnified Liability is deductible, times (ii) the deemed reduction in federal income tax in such taxable period resulting from the deductibility of the Indemnified Liability computed in accordance with this Paragraph 3.4, times (iii) the percentage representing the extent to which the deduction for the Indemnified Liability is apportioned or allocated to such state. The amount of such reduction in SFER's liability shall be unaffected by any interest - 3 - paid to the SFP Group, or any member thereof, by a taxing authority by reason of any such deduction. 3.5 INDEMNITY AMOUNT. With respect to any Indemnified Liability, the amount which SFER shall pay to or on behalf of SFP as indemnification (the "Indemnity Amount") shall be the amount of the Indemnified Liability, as determined and adjusted under Paragraphs 3.3 and 3.4. 4. PROCEDURAL MATTERS. 4.1 NOTICE. If either SFP or SFER receives any written notice of deficiency, claim or adjustment or any other written communication from a taxing authority that may result in an Indemnified Liability, the party receiving such notice or communication shall promptly give written notice thereof to the other party, PROVIDED that any delay by SFP in so notifying SFER shall not relieve SFER of any liability to SFP hereunder except to the extent SFER is materially and adversely prejudiced by such delay. SFP undertakes and agrees that from and after such time as SFP obtains knowledge that any representative of a taxing authority has begun to investigate or inquire into the Spin-Off or the Initial Spin (whether or not such investigation or inquiry is a formal or informal investigation or inquiry), SFP shall (i) notify SFER thereof, PROVIDED that any delay by SFP in so notifying SFER shall not relieve SFER of any liability to SFP hereunder, (ii) consult with SFER from time to time as to the conduct of such investigation or inquiry, (iii) provide SFER with copies of all correspondence between SFP or its representatives and such taxing authority or any representative thereof pertaining to such investigation or inquiry and (iv) arrange for a representative of SFER to be present at (but not participate in) all meetings with such taxing authority or any representative thereof pertaining to such investigation or inquiry. 4.2 WRITTEN ACKNOWLEDGMENT. Promptly upon receipt of notice as provided in Paragraph 4.1, SFER shall confirm in writing to SFP that the liability asserted in the notice of deficiency, claim or adjustment or other written communication would, if imposed upon or incurred by the SFP Group or any member thereof, be an Indemnified Liability, unless SFER believes in good faith that such liability would not be an Indemnified Liability in which case SFER shall set forth in writing to SFP the grounds for such belief. 4.3 TAX PROCEEDINGS CONTROLLED BY SFER. Any tax proceeding that may result in an Indemnified Liability, which is acknowledged as such by SFER, shall be conducted in accordance with this Paragraph 4.3. Promptly upon SFER's written acknowledgment that the asserted liability is an Indemnified Liability, SFER shall assume and direct the defense or settlement of the proceeding. If the Indemnified Liability is grouped with other unrelated asserted liabilities or issues in the proceeding, SFP and SFER shall use their respective best efforts to cause the Indemnified Liability to be the subject of a separate proceeding. If such severance is not possible, SFER shall assume and direct and be responsible only for the matters relating to the Indemnified Liability. - 4 - Upon request, during the course of the tax proceedings, SFER shall from time to time furnish SFP with evidence reasonably satisfactory to SFP of its ability to pay the full amount of the Indemnified Liability. If at any time during such tax proceedings SFP reasonably determines, after due investigation, that SFER could not pay the full amount of the Indemnified Liability, if required, then SFP may assume control of the tax proceedings in accordance with Paragraph 4.4. SFER shall pay all expenses related to the Indemnity Liability, including but not limited to fees for attorneys, accountants, expert witnesses or other consultants retained by it. To the extent that any such expenses have been or are paid by SFP or any member of the SFP Group, SFER shall promptly reimburse SFP or such member therefor. SFP shall not pay (unless otherwise required by a proper notice of levy and after prompt notification to SFER of SFP's receipt of notice and demand for payment), settle, compromise or concede any portion of the Indemnified Liability without the written consent of SFER. SFP shall, at SFER's sole cost (including but not limited to any reasonable out-of-pocket costs incurred by SFP), take such action as SFER may reasonably request (including but not limited to the execution of powers of attorney for one or more persons designated by SFER, and the filing of a petition, complaint, amended return or claim for refund) in contesting the Indemnified Liability. SFER shall, on a timely basis, keep SFP informed of all developments in the proceedings and provide SFP with copies of all pleadings, briefs, orders, and other written papers pertaining thereto. Subject to satisfaction of the conditions herein set forth, SFER may direct SFP to settle the Indemnified Liability on such terms and for such amount as SFER may direct. SFP may condition such settlement on receipt, prior to the settlement, from SFER of the Indemnity Amount less any amounts to be paid directly by SFER to the taxing authority. SFER may direct SFP, at SFER's expense, to pay an asserted deficiency for the Indemnified Liability out of funds provided by SFER, and to file a claim for refund. If SFER pays SFP the Indemnified Amount pursuant to Paragraph 4.5 and SFP or any other member of the SFP Group receives a refund of any portion of amounts paid to a taxing jurisdiction in respect of the Indemnified Liability, SFP shall pay any and all such refund proceeds to SFER, together with interest thereon for each day and the actual number of days commencing on the date such refund is received by SFP at the rate of one (1) percentage point above the monthly average of the daily Effective Funds Rate, as stated by The Federal Reserve Bank of New York; PROVIDED, HOWEVER, that the provision for interest herein shall not be construed to give SFP the right to defer payment to SFER of any refund proceeds hereunder. 4.4 TAX PROCEEDINGS CONTROLLED BY SFP. Should SFER not provide SFP with the confirmation contemplated by Section 4.2 within thirty (30) days following receipt of notice provided in Section 4.1 or, following such confirmation, should SFER fail within thirty (30) days following request therefor to furnish to SFP evidence of its ability to pay the full amount of the Indemnified Liability or should SFP reasonably believe after due investigation that SFER could not pay the full amount of the Indemnified Liability if required, then SFP may assume control of the tax proceeding upon the following terms: (i) SFP will diligently defend against the claim of any taxing authority that the Spin-Off (or the Initial Spin) resulted in taxable income to it or any other member of the SFP Group, without regard to the indemnification provided herein, including the pursuit of the appeal of any adverse determinations to the appropriate tribunal (unless advised by - 5 - independent counsel in its reasonable judgment that SFP or such other member of the SFP Group would not prevail upon any such appeal) and shall employ such resources, including independent counsel, in conducting such defense as are reasonably commensurate to the nature and magnitude of the claim; (ii) SFP will consult with SFER as to the conduct of all proceedings, will provide SFER with copies of all protests, pleadings, briefs, filings, correspondence and similar materials relative to the proceedings and will arrange for a representative of SFER to be present at (but not to participate in) all meetings with the relevant taxing authorities and all hearings before any court; and (iii) neither SFP nor any other member of the SFP Group will settle, compromise or concede any claim that would result in an Indemnified Liability unless SFP has made the determination, and has been so advised by independent counsel, that such settlement is fair to SFER and its stockholders and is reasonable in the circumstance. Subject to the above, any such tax proceeding shall be controlled and directed exclusively by SFP and may be contested, defended, paid, settled, compromised or conceded by SFP and any related expenses incurred by SFP or any member of the SFP Group, including but not limited to, fees for attorneys, accountants, expert witnesses or other consultants shall be reimbursed by SFER, if SFER admits or is found to have incorrectly failed to acknowledge the asserted liability as an Indemnified Liability as provided in Paragraph 4.2; PROVIDED, HOWEVER, that if after SFP's assumption of control of the proceedings, SFER acknowledges in writing that the asserted liability is an Indemnified Liability or demonstrates its ability to pay the full amount of the Indemnified Liability if required, SFER shall (if practical and upon its request) promptly assume and direct a proceeding which shall thenceforth be conducted in accordance with Paragraph 4.3, PROVIDED, FURTHER HOWEVER, that SFP will not be required to pursue the claim in the federal district court, Court of Claims or any state court if as a prerequisite to such Court's jurisdiction, it is required to pay the asserted liability unless the funds necessary to invoke such jurisdiction are provided by SFER. 4.5 TIME AND MANNER OF PAYMENT. Unless otherwise agreed in writing, SFER shall pay to SFP the Indemnity Amount (less any amount paid directly by SFER to the taxing authority) within seven (7) business days after the date payment of the Indemnified Liability is made, whether by SFP or SFER, to the taxing authority. Such payment shall be paid by SFER to SFP by wire transfer of immediately available funds to an account designated by SFP by written notice to SFER prior to the due date of such payment. If SFER delays making payment beyond the due date hereunder, SFER shall pay interest to SFP on the amount unpaid at the rate of one (1) percentage point above the monthly average of the daily Effective Federal Funds Rate, as stated by The Federal Reserve Bank of New York for each day and the actual number of days for which any amount due hereunder is unpaid; PROVIDED, HOWEVER, that this provision for interest shall not be construed to give SFER the right to defer payment beyond the due date hereunder. 4.6 REFUND OF AMOUNTS PAID BY SFER. Should SFP or any other member of the SFP Group receive a refund in respect of amounts paid by SFER to any taxing authority on SFP's behalf, or should any such amounts that would otherwise be refundable to SFER be applied by the taxing authority to obligations of SFP or any other member of the SFP Group unrelated to the Spinoffs, then SFP shall, promptly following receipt (or notification of credit), remit such refund, together with interest thereon, which interest shall be paid at the rate of one (1) percentage point above the monthly average of the daily Effective Federal Funds Rate, as stated by The Federal Reserve Bank of New York for each day and the actual number of days commencing on the date such refund is received (or credit - 6 - applied); PROVIDED, HOWEVER, that the provision for interest herein shall to be construed to give SFP the right to defer payment to SFER of any refund proceeds hereunder. 4.7 COOPERATION. SFP and SFER shall cooperate with one another in a timely manner in any administrative or judicial proceeding involving any matter that may result in an Indemnified Liability. SFP and SFER agree that such cooperation shall include, without limitation, making available to the other party, during normal business hours, all books, records and information, officers and employees (without substantial interruption of employment) necessary or useful in connection with any such judicial or administration proceeding. The party requesting or otherwise entitled to any books, records, information, officers or employees pursuant to this Paragraph 4.7 shall bear all reasonable out-of-pocket costs and expenses (except reimbursement of salaries, employee benefits and general overhead) incurred in connection with providing such books, records, information, officers or employees. 4.8 DISPUTE RESOLUTION. In an effort to resolve informally and amicably any claim or controversy arising out of or related to the interpretation or performance of this Agreement without resorting to litigation, each party shall first notify the other in writing of its position with respect to any difference or dispute hereunder that requires resolution. SFP and SFER shall each designate an employee to investigate, discuss and seek to settle the matter between them. If the two are unable to settle the matter within 30 days after the latest such notification (or, if one party gives such notification and the other party fails to do so within 15 days after receipt of such notification, within 30 days after such notification), the matter shall be submitted to a senior officer of each of SFP and SFER for consideration. If settlement cannot be reached through their efforts within an additional 30 days, or such longer time period as they shall agree upon, the parties shall consider arbitration or other alternative means to resolve the dispute; PROVIDED, HOWEVER, that the parties hereby agree that any disputes concerning the calculation of amounts (E.G., an Indemnity Amount) or similar accounting matter shall be resolved by a nationally recognized public accounting firm selected by the parties, whose fees and expenses shall be shared equally by SFP and SFER. With respect to any dispute concerning other matters, if they are unable to agree on an alternative dispute resolution mechanism, either party may initiate legal proceedings to resolve such matter. 5. MISCELLANEOUS. 5.1 NOTICES. Any notice, request, instruction or other document to be given under this Agreement by any party to another party shall be in writing, and shall be deemed to have been duly given or delivered when delivered personally, or telecopied (receipt confirmed, with a copy sent by certified or registered mail as set forth in this Agreement) or, upon receipt (as indicated by return receipt), when sent by certified or registered mail, postage prepaid, return receipt requested, or by Federal Express or other overnight delivery service, to the address of the party set forth below or to such address as the party to whom notice is to be given may provide in a written notice to the other party to this Agreement: - 7 - If to SFP, to: Santa Fe Pacific Corporation 224 South Michigan Avenue Chicago, Illinois 60604-2401 Telecopier No.: (312) 786-6846 Telephone No.: (312) 786-6000 Attention: Daniel Westerbeck Vice President - Tax Counsel If to SFER, to: Santa Fe Energy Resources, Inc. 1616 South Voss Road Suite No. 1000 Houston, Texas 77057 Telecopier No.: (713) 268-5341 Telephone No.: (713) 783-2401 Attention: James L. Payne, President and David L. Hicks, Esq., General Counsel 5.2 TERMINATION. The parties hereto agree that if the Spin-Off has not occurred prior to 5:00 p.m., Chicago time, on December 31, 1991, this Agreement shall terminate and cease to be of any force or effect. 5.3 GOVERNING LAW: JURISDICTION. This Agreement shall be governed by and construed under the laws of the State of Illinois as applied to agreements made and to be performed in the State of Illinois without regard to the conflict of laws principles thereof. Each of the parties consents to personal jurisdiction in respect of any action arising under or in connection with this Agreement instituted in the United States District Court for the Northern District of Illinois, and to service of process upon it in any manner permitted under the laws of the State of Illinois. 5.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 5.5 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 5.6 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of each of the parties. 5.7 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms to the fullest extent permitted by law. - 8 - 5.8 FURTHER ASSURANCE. Each of the parties shall, without further consideration, use reasonable efforts to execute and deliver such additional documents and take such other action, as the other parties, or any of them may reasonably request to carry out the intent of this Agreement and the transactions contemplated by this Agreement. 5.9 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding of the parties in respect of the actions and transactions contemplated by this Agreement. There are no restrictions, promises, inducements, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to in this Agreement. 5.10 SPECIFIC PERFORMANCE. Each of the parties acknowledges and agrees that in the event of any breach of this Agreement, except for the failure of SFER to pay any Indemnity Amount, the non-breaching party would be irreparably harmed and could not be made whole by monetary damages. It is accordingly agreed that the parties will waive the defense in any action for specific performance that a remedy at law would be adequate and that the parties, in addition to any other remedy to which they may be entitled at law or in equity, shall be entitled to compel specific performance of this Agreement in any action instituted in any court of the United States or any state thereof having jurisdiction for such action. 5.11 PARTIES IN INTEREST. Neither party may assign its rights or delegate any of its duties under this Agreement (except to another person acquiring substantially all of the assets of such party by purchase, merger, consolidation or otherwise) without the prior written consent of the other. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and, except as otherwise prohibited, their respective successors and assigns. Nothing contained in this Agreement, express or implied, is intended to confer upon any other person or entity any benefits, rights or remedies PROVIDED, HOWEVER, that other members of the SFP Group shall be deemed third party beneficiaries of this Agreement. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed by their respective duly authorized officers as of the date first above written. SANTA FE PACIFIC CORPORATION SANTA FE ENERGY RESOURCES, INC. By: /s/ SIGNATURE ILLEGIBLE By: /s/ J. L. PAYNE Title: Title: EX-10.G 5 EXHIBIT 10(g) AGREEMENT CONCERNING TAXES THIS AGREEMENT (this "Agreement"), dated as of [March] 20, 1990, is by and between SANTA FE PACIFIC CORPORATION ("SFP") and SANTA FE ENERGY RESOURCES, INC. ("Energy"), and those subsidiaries of Energy signatory hereto (the "Energy Subsidiaries"). WHEREAS, Energy and the Energy Subsidiaries are members of an affiliated group of corporations within the meaning of Section 1504 (a) of the Internal Revenue Code of 1986, as amended (the "Code"), of which SFP is the common parent (the "SFP Group"), and which files consolidated federal income tax returns as well as certain consolidated, combined or unitary state tax returns; WHEREAS, SFP, Energy and the Energy Subsidiaries are parties to the Agreement for the Allocation of the Consolidated Federal Income Tax Liability Among the Members of the Santa Fe Pacific Corporation Affiliated Group (the "Tax Sharing Agreement") as well as the Agreement for the Allocation of the Combined Arizona Income Tax Liability Among the Members of the Santa Fe Pacific Corporation Affiliated Group, the Agreement for the Allocation of the Combined California Franchise Tax Liability Among the Members of the Santa Fe Pacific Corporation Affiliated Group, the Agreement for the Allocation of the Combined Illinois Income Tax Liability Among the Members of the Santa Fe Pacific Corporation Affiliated Group, the Agreement for the Allocation of the Combined Kansas Income Tax Liability Among the Members of the Santa Fe Pacific Corporation Affiliated - 2 - Group, the Agreement for the Allocation of the Consolidated New Mexico Income Tax Liability Among the Members of the Santa Fe Pacific Corporation Affiliated Group, the Agreement for the Allocation of the Combined Oregon Excise Tax Liability Among the Members of the Santa Fe Pacific Corporation Affiliated Group, and the Agreement for the Allocation of the Combined Utah Franchise Tax Liability Among the Members of the Santa Fe Pacific Corporation Affiliated Group (the "State Tax Sharing Agreements"); and WHEREAS, the parties desire to set forth their agreements with regard to their respective liabilities for federal, state and local taxes as well as their agreements if Energy and the Energy Subsidiaries cease to be members of the SFP Group; NOW THEREFORE, it is agreed as follows: 1. DEFINITIONS. For all purposes of this Agreement, the terms defined in this Section 1 shall have the meanings assigned to them in this Section 1. "Code" shall have the meaning specified in the preamble hereof. "Disaffiliation" means the Energy Companies ceasing to be members of the SFP Group. "Disaffiliation Date" means the date Disaffiliation shall occur as determined in conformity with Treasury Regulation Section 1.1502-76(b). - 3 - "Energy Companies" means Energy, the Energy Subsidiaries, their respective divisions and their successors and assigns. "Return" shall mean any SFP Consolidated Return and any State and Local Return. "SFP Consolidated Return" means any consolidated federal income tax return of the SFP Group which includes one or more of the Energy Companies. "SFP Consolidated Return Year" means any taxable period of the SFP Group ending on or before the Disaffiliation Date. "SFP Group" shall have the meaning specified in the preamble hereof. "SFP Subsidiary" means any corporation (other than an Energy Company) the stock of which is owned directly or indirectly by SFP and which joins in the filing of State and Local Returns. "State and Local Returns" shall have the meaning specified in paragraph 3 of Section 3 hereof. 2. TAX SHARING AGREEMENT TO CONTINUE IN EFFECT. Except to the extent that it is expressly modified or supplemented herein, the Tax Sharing Agreement, including Article 8.4 thereof, shall continue in full force and effect, and the State Tax Sharing Agreements, as modified by SFP's agreement with regard to tax consolidation in connection with - 4 - the Credit Agreement dated as of December 29, 1989, among SFER and various banks, shall continue in full force and effect. Consequently, for example, for taxable periods ending on or before the Disaffiliation Date, payments to SFP or any Energy Company, as the case may be, shall continue to be made in accordance with the Tax Sharing Agreement and the State Tax Sharing Agreements. The provisions of the Tax Sharing Agreement and the State Tax Sharing Agreements shall fix the rights and obligations of the parties as to the matters covered thereby whether or not followed for federal income tax or other purposes by the SFP Group including but not limited to the computation of earnings and profits for federal income tax purposes. 3. TAX RETURN FILING. A. FEDERAL RETURNS. If at any time and from time to time SFP so elects, Energy and each Energy Subsidiary agree to continue to join in the filing of consolidated federal income tax returns for the calendar year 1989 and for any subsequent taxable periods of SFP ending before, on or after the Disaffiliation Date for which the SFP Group is eligible to file a consolidated federal income tax return including any Energy Company with respect to pre-Disaffiliation operations. SFP shall continue to prepare and file all consolidated federal income tax returns which are required to be filed by the SFP Group for all such taxable periods and pay all taxes due thereon. Such returns shall include all income, gains, losses, deductions and credits of the Energy Companies. SFP will make all decisions relating to the preparation and filing of such returns. Energy and each Energy Subsidiary further agree to file, or join in the filing of such authorizations, elections, consents and other documents and take such other actions as may - 5 - be necessary or appropriate in the opinion of SFP to carry out the purposes and intent of this paragraph A of Section 3. Energy shall furnish SFP at least forty five (45) days before such return is due (with extensions) with its completed section of each year's consolidated federal income tax return, prepared in accordance with instructions from SFP, on the Price Waterhouse Domestic Tax Management System ("DTMS"). Energy shall also furnish DTMS workpapers and such other information and documentation as is requested by SFP. Such information shall have been reviewed and approved by Energy's independent auditors prior to its submission to SFP. SFP and Energy shall each pay one half of the cost of such review and approval by Energy's independent auditors, provided, however, that Energy's portion of such costs shall not exceed $10,000. B. STATE AND LOCAL RETURNS. For the calendar year 1989 and for any subsequent taxable periods ending before, on or after the Disaffiliation Date, SFP will prepare and file all combined, consolidated or unitary state or local income or franchise tax returns (herein "State and Local Returns") which are required to be filed and which include the pre-Disaffiliation operations of any Energy Company and SFP or any SFP subsidiary. SFP will pay all taxes due on such returns. SFP will timely advise Energy of the inclusion of any Energy Companies in any State and Local Returns and the states and localities in which such returns will be filed. Each of the Energy Companies whose tax information is included in any State and Local Return will evidence its agreement to be included in such return on the appropriate form and take such other action as may be appropriate, in the opinion of SFP, to carry out the purposes and intent of this paragraph B of Section 3. Energy shall furnish SFP with a final copy of the information necessary for SFP to complete such combined, consolidated or unitary returns at least forty five (45) days before such returns are due (with extension). - 6 - 4. CARRYOVERS OF ENERGY TAX BENEFITS. SFP shall notify Energy, after Disaffiliation, of any consolidated carryover item which may be partially or totally attributed to and carried over by an Energy Company and will notify such Energy Company of subsequent adjustments which may effect such carryover item. 5. AUDIT ADJUSTMENTS. Pursuant to Article 8.4 of the Tax Sharing Agreement, if an Energy Company ceases to be a member of the SFP Group, the Tax Sharing Agreement shall apply with respect to any period in which the income of the terminating member is included in the SFP Consolidated Return. The terminating member shall remain liable to SFP for payments required under the Tax Sharing Agreement, including, but not limited to, payments of tax and estimated tax for periods in which the member's income is included in the SFP Consolidated Return and payments attributable to adjustments referred to in Article 7.1 of the Tax Sharing Agreements and to interest and penalties referred to in Articles 5.3 and 7.2 of the Tax Sharing Agreement. Additionally, the terminating member shall cooperate and provide reasonable access to books, records and other information needed in connection with audits, administrative proceedings, litigation and other similar matters related to periods in which the member was a member of the SFP Group. However, Article 8.4 of the Tax Sharing Agreement and any similar Article contained in the State Tax Sharing Agreements is hereby modified so that an Energy Company that ceases to be a member of the SFP Group shall be entitled to compensation or reimbursement with respect to any tax refund, overpayment, benefit or other similar item realized by the SFP Group after such member leaves the SFP Group, including carrybacks into a return of the SFP Group, which is attributable to such Energy Company. Nothing - 7 - contained herein or in the Tax Sharing Agreement shall be construed to prevent Energy and the Energy Subsidiaries from making an election in a post-Disaffiliation year under Section 172(b)(3)(C) of the Code or under similar provisions of applicable state law. Any such payments or reimbursements shall be made in accordance with Article 7.1 and Article 7.3 of the Tax Sharing Agreement. Notwithstanding the foregoing, Energy and the Energy Subsidiaries will not be required under the State Tax Sharing Agreements to pay more tax on a combined or consolidated basis than that which they would have been required to pay had Energy and the Energy Subsidiaries filed combined or consolidated State and Local Returns with Energy as the common parent. If for any period in which an Energy Company was included in the State and Local Returns there is a final determination that any Energy Company should not have been included in one or more of such returns, SFP shall refund to such Energy Company any sums paid by such Energy Company to the SFP Group with respect to such returns which are not credited against such Energy Company's separate state or local tax liability as well as any interest that the SFP Group receives from a state or local government with respect to sums paid by such Energy company to the SFP Group with respect to such returns which are credited against the SFP Group's separate state or local tax liability, and such Energy Company shall have no further rights or obligations with respect to such State and Local Returns, including the right to compensation, reimbursement or refund with respect to such returns. 6. CONTEST. If an audit adjustment is proposed or any other claim is made by any taxing authority with respect to a tax liability of Energy or an Energy Subsidiary with regard to an SFP Consolidated Return or a State and Local Tax Return, SFP shall promptly notify Energy of such proposed adjustment or claim (unless Energy previously was notified directly by the relevant - 8 - tax authority). If Energy so requests and at Energy's expense. SFP shall contest or shall permit the relevant Energy Company to contest such claim on audit or in a related administrative or judicial proceeding or by appropriate claim for refund or credit of taxes, subject, however to SFP's right to control the prosecution of any such audit or refund claim or related administrative or judicial proceeding with respect to those matters which could affect SFP's tax liability, including its liability under this Agreement and, where deemed necessary by SFP, the relevant entity shall authorize by appropriate powers of attorney such persons as SFP shall designate to represent such entity with respect to such audit or refund claim or related administrative or judicial proceeding. 7. ALLOCATION; INFORMATION AND COOPERATION. A. ALLOCATION. Federal income taxes will be calculated for the taxable period ending on the Disaffiliation Date on the basis of allocations made in accordance with the Tax Sharing Agreement. State and local taxes will be calculated for such period in accordance with the State Tax Sharing Agreements with regard to the allocation of state and local tax liabilities where combined, consolidated or unitary state and local tax returns are filed. B. INFORMATION AND COOPERATION. From and after the Disaffiliation Date, Energy shall deliver to SFP, as soon as practicable after SFP's request, such information and data concerning the pre-Disaffiliation operations of Energy and the Energy Subsidiaries and make available such knowledgeable employees of Energy or the Energy Subsidiaries as SFP may reasonably request, including providing the information and data required by SFP's customary internal tax and accounting - 9 - procedures, in order to enable SFP to complete and file all tax forms or reports that it may be required to file with respect to the activities of Energy and the Energy Subsidiaries for taxable periods ending on, prior to or including the Disaffiliation Date, to respond to audits by any taxing authorities with respect to such activities, to prosecute or defend any administrative or judicial proceeding and to otherwise enable SFP to satisfy its accounting and tax requirements. From and after the Disaffiliation Date, SFP shall deliver to Energy as soon as practical after Energy's request, such information and data concerning any tax attributes which were allocated to Energy or the Energy Subsidiaries that is reasonably necessary in order to enable Energy to complete and file all tax forms or reports that it may be required to file with respect to such activities of Energy and the Energy Subsidiaries from and after the Disaffiliation Date, to respond to audits by any tax authorities with respect to such activities, to prosecute or defend claims for taxes in any administrative or judicial proceeding, and to otherwise enable Energy to satisfy its accounting and tax requirements. In addition, SFP shall make available to Energy such of its knowledgeable employees for such purposes. 8. PAYMENTS. Payments with respect to federal income taxes shall be made in accordance with the Tax Sharing Agreement. Any interest or penalties for underpayment of estimated taxes which are allocated to an Energy Company shall be paid no later than 30 days after billing by SFP. Energy shall pay the portion of the taxes shown on each State and Local Tax Return which is allocable to the Energy Companies in accordance with the State Tax Sharing Agreement no later than 30 days after such return - 10 - is filed. All payments in excess of $50,000 to be made hereunder shall be made in immediately available funds. All payments not made when due hereunder or under the Tax Sharing Agreement or the State Tax Sharing Agreements shall bear interest from the due date until paid at a rate per annum equal to one (1) percentage point above the monthly average of the daily Effective Federal Funds Rate as stated by The Federal Reserve Bank of New York. 9. NOTICES. Any notice, request, instruction or other document to be given under this Agreement by any party to another party shall be in writing, shall be deemed to have been duly given or delivered personally, or telecopied (receipt confirmed, with a copy sent by certified or registered mail as set forth in this Agreement) or, upon receipt (as indicated by return receipt), when sent by certified or registered mail, postage prepaid, return receipt requested, or by Federal Express or other overnight delivery service, to the address of the party set forth below or to such address as the party to whom notice is to be given may provide in a written notice to each of the other parties to this Agreement: If to SFP, to: Santa Fe Pacific Corporation 224 South Michigan Avenue Chicago, Illinois 60604-2401 Telecopier No.: (312) 786-6977 Telephone No.: (312) 786-6901 Attention: Daniel J. Westarbeck Vice President and Tax Counsel - 11 - If to Energy or any Energy Company: Santa Fe Energy Resources, Inc. 1616 South Voss Road, Suite 1000 Houston, Texas 77057 Telecopier No.: (713) 268-5341 Telephone No.: (713) 783-2401 Attention: Mr. James L. Payne, President and David L. Hicks, General Counsel 10. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successor to the parties hereto as if such successor had been a party to this agreement; provided, nothing in this agreement is intended to confer any rights or impose any obligations on any third parties. 11. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Illinois and shall be construed in accordance with such laws. 12. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13. TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. - 12 - 14. AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of each of the parties. 15. SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms to the fullest extent permitted by law. 16. FURTHER ASSURANCES. Each of the parties shall, without further consideration, use reasonable efforts to execute and deliver such additional documents and take such other action, as the other parties, or any of them may reasonably request to carry out the intent of this Agreement and the transactions contemplated by this Agreement. 17. ENTIRE AGREEMENT. This Agreement, embodies the entire agreement and understanding of the parties in respect of the actions and transactions contemplated by this Agreement. There are no restrictions, promises, inducements, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to in this Agreement. - 13 - 18. SPECIFIC PERFORMANCE. Each of the parties acknowledges and agrees that in the event of any breach of this Agreement, the non-breaching party or parties would be irreparably harmed and could not be made whole by monetary damages. It is accordingly agreed that the parties will waive the defense in any action for specific performance that a remedy at law would be adequate and that the parties, in addition to any other remedy to which they may be entitled at law or in equity, shall be entitled to compel specific performance of this Agreement in any action instituted in the United States District Court for the Northern District of Illinois or, in the event said Court would not have jurisdiction for such action, in any court of the United States or any state thereof having jurisdiction for such action. IN WITNESS WHEREOF, the undersigned have caused this Agreement to the executed by their respective duly authorized officers as of the date first above written. SANTA FE PACIFIC CORPORATION SFELP, Inc. By: /s/ R. D. KREBS R. D. Krebs Its President SANTA FE ENERGY RESOURCES, INC. SANTA FE ENERGY PRODUCTS COMPANY SANTA FE OIL COMPANY SANTA FE PACIFIC EXPLORATION COMPANY SANTA FE PACIFIC FUELS COMPANY SF ENERGY COMPANY OF ARGENTINA SF ENERGY COMPANY OF BOLIVIA SF ENERGY COMPANY OF COLOMBIA SF ENERGY COMPANY OF INDONESIA SF ENERGY COMPANY OF INDONESIA-BUNYU BLOCK SF ENERGY COMPANY OF PAKISTAN SF ENERGY COMPANY OF TUNISIA By: /s/ J. L. PAYNE J. L. Payne Its President EX-10.H 6 EXHIBIT 10(h) SANTA FE ENERGY RESOURCES SUPPLEMENTAL RETIREMENT PLAN 1. THE PLAN: The Santa Fe Energy Resources Supplemental Retirement Plan (the "Supplemental Plan") evidenced hereby is an unfunded, non-contributory, defined benefit plan designed to provide supplemental retirement benefits to certain highly compensated employees of Santa Fe Energy Resources, Inc. (the "Company") and its subsidiaries which participate in the Santa Fe Energy Resources Retirement Income Plan (the "Plan"). The provisions of the Supplemental Plan shall apply to those participants in the Plan whose benefits under the Plan: (a) would exceed the limits imposed thereon by Section 415 of the Internal Revenue Code of 1986, as amended (the "Code"); and/or (b) would be limited as a result of the limitation on annual compensation that may be considered under the Plan as imposed by Section 401(a)(17) of the Code; and/or (c) would be reduced as a result of the participant making elective deferrals under the Company's Deferred Compensation Plan or other similar programs. The above limitations and reductions are hereafter referred to collectively as the "Reductions." References to the Code and to Sections 401(a)(17) and 415 thereunder shall include any successors thereto. 2. SUPPLEMENTAL RETIREMENT BENEFITS: A participant in the Supplemental Plan eligible for retirement benefits pursuant to the Plan shall be entitled to a monthly supplemental retirement benefit under this Supplemental Plan commencing on the first day of the month coincident with the participant's retirement date pursuant to the Plan and his surviving spouse or contingent annuitant, as the case may be, shall be entitled to a monthly benefit commencing on the first day of the month coincident with or next following the date of participant's death after such retirement date or, in the event of the participant's death prior to his actual retirement date, the date his surviving spouse begins receiving a preretirement survivor's benefit under the Plan, provided such spouse or contingent annuitant is entitled to a benefit pursuant to the Plan. Such monthly supplemental retirement benefit shall be equal to the amount determined by the following method: (a) by calculating the amount of the monthly benefit to which the participant, surviving spouse, or contingent annuitant, as the case may be, would be entitled to receive under the Plan but for the Reductions, which amount shall not be less than that amount determined under section 2(a) of the Santa Fe Pacific Corporation Supplemental Executive Retirement Plan for such participant as of the effective date of this Supplemental Plan; and (b) by subtracting from the amount computed under (a) the monthly benefit payable to such participant, surviving spouse, or contingent annuitant pursuant to the Plan, including (i) any subsequent increases therein due to increases in the maximum benefit permitted under Section 415 of the Code as such increases are recognized under the Plan and (ii) any benefit paid to an alternate payee pursuant to a qualified domestic relations order issued to the Plan with respect to the participant's benefits thereunder. Such calculations shall be made utilizing the form of benefits actually paid pursuant to the Plan. - 2 - 3. PAYMENTS OF SUPPLEMENTAL BENEFITS: Payments of supplemental benefits shall be made by the Company from its general assets or, in its discretion, through a "rabbi" trust or other similar arrangement. However, at no time shall this Supplemental Plan be funded in any manner which would cause the Supplemental Plan to be subject to the funding requirements of the Employee Retirement Income Security Act of 1974, as amended. 4. TERMINATION OF SUPPLEMENTAL RETIREMENT BENEFITS: The entitlement of a participant, surviving spouse or contingent annuitant, as the case may be, to supplemental retirement benefits hereunder shall terminate on: (a) Subject to Section 7 below, the date that benefits cease to be payable to the participant, surviving spouse or contingent annuitant pursuant to the terms of the Plan, other than by termination of the Plan; or (b) The effective date of any change in existing federal or state statutes which would cause the Plan to lose its qualified status because of the existence of the Supplemental Plan. 5. LUMP SUMS: Notwithstanding anything above, the Company, in its sole discretion, may direct at any time on or after a participant's termination of employment or death that the actuarial present value of any supplemental benefits expected to be paid (or remaining to be paid if already in pay status) under this Supplemental Plan, as determined in accordance with the appropriate actuarial factors and rates in effect at the beginning of the calendar year for an immediate or deferred annuity (as the case may be) upon a plan termination under Pension Benefit Guaranty Corporation requirements, be immediately paid to the participant, his surviving spouse or contingent annuitant, as the case may be, in a lump sum in cash (by check). - 3 - 6. ADMINISTRATION: This Supplemental Plan shall be administered by the Plan Administrator of the Plan with the same powers, duties and protections as set forth in the Plan with respect to its administration being incorporated herein by reference, including, without limitation, the power to interpret and construe the Supplemental Plan and any such interpretation or construction shall be binding for purposes of the Supplemental Plan. The Plan Administrator shall determine the amount and manner of payment of the benefits due to, or on behalf of, each participant under the Supplemental Plan and the commencement and termination dates of such benefit payments. In the absence of a Plan Administrator, the Supplemental Plan shall be administered by the Board of Directors of the Company. A participant, surviving spouse or contingent annuitant who has been denied a benefit hereunder, either in whole or in part, may appeal that decision to the Plan Administrator. The appeals procedures shall be the same as those under the Plan. 7. AMENDMENT AND TERMINATION: The Company by action of its Board of Directors may amend and/or terminate the Supplemental Plan at any time for whatever reasons it may deem appropriate. However, no such amendment or termination of the Supplemental Plan shall reduce or eliminate any participant's, spouse's or contingent annuitant's right to a benefit accrued hereunder as of the date of such amendment or termination; provided, however, that subsequent increases in the benefit payable to the participant, spouse or contingent annuitant, as the case may be, under the Plan can operate to reduce the supplemental benefit accrued hereunder as of the date of such amendment or termination of this Supplemental Plan. - 4 - 8. LIQUIDATION AND SUCCESSION: In the event that the Company is liquidated or dissolved, the value of all benefits accrued under the Supplemental Plan as of the date of such event shall become immediately payable to the participant, surviving spouse or contingent annuitant, as the case may be, in a lump sum. For purposes of this Supplemental Plan, the benefit accrued will be determined in accordance with Sections 2 and 5 and, if not already in pay status, will be assumed to be payable at either (1) the participant's normal retirement date as defined under the Plan (or immediately if the participant has attained such normal retirement date) or (2) the earliest date upon which benefits are payable under the Plan, whichever produces the greater benefit. The Company shall require any successor, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all of the business or assets of the Company, expressly to assume and agree to pay the benefits accrued under this Supplemental Plan as of the date of such succession in the same manner and to the same extent as the Company would have been required if no such succession had taken place. If a successor fails to assume such obligations, such failure shall entitle a participant (surviving spouse or contingent annuitant, as the case may be, if then in pay status) to be paid from the Company the lump sum amount determined in the preceding paragraph as if the Company had been liquidated. 9. NO EMPLOYMENT RIGHTS: Nothing contained in the Supplemental Plan shall be construed as a contract of employment between the Company (or any affiliate) and any employee, or as creating a right in any employee to be continued in the employment of the Company (or any affiliate) or as a limitation of the right of the Company (or any affiliate) to discharge any employee, with or without cause. - 5 - 10. ASSIGNMENT: The benefits payable under this Supplemental Plan may not be assigned, alienated, pledged, transferred or hypothecated in any manner. 11. WITHHOLDING OF TAXES: The Company shall have the right to deduct from all payments made under the Supplemental Plan, any federal, state or local taxes required by law to be withheld from such payments. 12. LAW APPLICABLE: This Supplemental Plan shall be governed by the laws of the State of Texas except to the extent preempted by applicable federal law. IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Supplemental Plan this December 4, 1990, effective for all purposes as of December 4, 1990. SANTA FE ENERGY RESOURCES, INC. By: /s/ JAMES L. PAYNE Title: President EX-10.K 7 EXHIBIT 10(k) CREDIT AGREEMENT DATED AS OF NOVEMBER 13, 1996 AMONG SANTA FE ENERGY RESOURCES, INC., THE BANKS SIGNATORY HERETO THE CHASE MANHATTAN BANK AS ADMINISTRATIVE AGENT AND ABN AMRO BANK N.V. AS CO-AGENT TABLE OF CONTENTS Section 1. DEFINITIONS AND ACCOUNTING MATTERS........................1 1.1. CERTAIN DEFINED TERMS.....................................1 1.2. ACCOUNTING TERMS AND DETERMINATIONS......................21 1.3. TYPES OF LOANS...........................................22 Section 2. COMMITMENTS..............................................22 2.1. LOANS....................................................22 2.2. LETTERS OF CREDIT........................................23 2.3 BORROWING BASE AND AVAILABLE BORROWING BASE..............25 2.4 BORROWING BASE DEFICIENCIES..............................26 2.5. TERMINATIONS, REDUCTIONS AND CHANGES OF COMMITMENTS......26 2.6. FEES.....................................................26 2.7. AFFILIATES; LENDING OFFICES..............................27 2.8. SEVERAL OBLIGATIONS......................................27 2.9. NOTES....................................................27 2.10. USE OF PROCEEDS..........................................28 Section 3. BORROWINGS AND PREPAYMENTS...............................28 3.1. BORROWINGS...............................................28 3.2. PREPAYMENTS..............................................28 Section 4. PAYMENTS OF PRINCIPAL AND INTEREST.......................29 4.1. REPAYMENT OF LOANS AND REIMBURSEMENT OBLIGATIONS.........29 4.2. INTEREST.................................................29 4.3. SELECTION OF INTEREST RATES..............................29 Section 5. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS, ETC..........30 5.1. PAYMENTS.................................................30 5.2. PRO RATA TREATMENT.......................................31 5.3. COMPUTATIONS.............................................31 5.4. MINIMUM AND MAXIMUM AMOUNTS..............................31 5.5. CERTAIN ACTIONS, NOTICES, ETC............................32 5.6. NON-RECEIPT OF FUNDS BY THE AGENT........................33 5.7. SHARING OF PAYMENTS, ETC.................................33 Section 6. YIELD PROTECTION AND ILLEGALITY..........................34 6.1. ADDITIONAL COSTS.........................................34 6.2. LIMITATION ON TYPES OF LOANS.............................36 6.3. ILLEGALITY...............................................36 6.4. SUBSTITUTE ALTERNATE BASE RATE LOANS.....................37 6.5. COMPENSATION.............................................38 6.6. ADDITIONAL COSTS IN RESPECT OF LETTERS OF CREDIT.........38 6.7. CAPITAL ADEQUACY.........................................40 Section 7. CONDITIONS PRECEDENT.....................................41 7.1. INITIAL CONDITIONS PRECEDENT.............................41 7.2. ALL LOANS AND LETTERS OF CREDIT..........................42 7.3. CONVERSIONS AND CONTINUATIONS OF EURODOLLAR LOANS........43 Section 8. REPRESENTATIONS AND WARRANTIES...........................44 8.1. CORPORATE EXISTENCE......................................44 8.2. INFORMATION..............................................44 8.3. LITIGATION; COMPLIANCE...................................44 8.4. NO BREACH................................................45 8.5. NECESSARY ACTION.........................................45 8.6. APPROVALS................................................45 8.7. REGULATIONS G, T, U AND X................................45 8.8. ERISA....................................................46 8.9. TAXES....................................................46 8.10. SUBSIDIARIES.............................................46 8.11. INVESTMENT COMPANY ACT...................................47 8.12. PUBLIC UTILITY HOLDING COMPANY ACT; FEDERAL POWER ACT....47 8.13. ENVIRONMENTAL MATTERS....................................47 8.14. TITLE....................................................48 Section 9. COVENANTS................................................48 9.1. FINANCIAL STATEMENTS AND CERTIFICATES....................48 9.2. INSPECTION OF PROPERTY...................................51 9.3. COMPLIANCE WITH ENVIRONMENTAL LAWS.......................51 9.4. PAYMENT OF TAXES.........................................52 9.5. MAINTENANCE OF INSURANCE.................................52 9.6. RESTRICTED PAYMENTS......................................52 9.7. INDEBTEDNESS, LIEN AND OTHER RESTRICTIONS................54 9.8. ISSUANCE OF STOCK BY RESTRICTED SUBSIDIARIES.............61 9.9. CAPITALIZATION...........................................61 9.10. INTEREST COVERAGE........................................61 9.11. SENIOR TOTAL DEBT; SPECIAL DEBT..........................61 9.12. RESTRICTED AND UNRESTRICTED SUBSIDIARIES.................62 Section 10. DEFAULTS.................................................62 10.1. EVENTS OF DEFAULT........................................62 Section 11. THE AGENT................................................66 11.1. APPOINTMENT, POWERS AND IMMUNITIES.......................66 11.2. RELIANCE BY AGENT........................................66 11.3. DEFAULTS.................................................66 11.4. RIGHTS AS A BANK.........................................67 11.5. INDEMNIFICATION..........................................67 11.6. NON-RELIANCE ON THE AGENT AND OTHER BANKS................68 11.7. FAILURE TO ACT...........................................68 11.8. RESIGNATION OR REMOVAL OF THE AGENT......................68 Section 12. MISCELLANEOUS............................................69 12.1. WAIVER...................................................69 12.2. NOTICES..................................................69 12.3. EXPENSES.................................................69 12.4. INDEMNIFICATION..........................................70 12.5. AMENDMENTS, ETC..........................................71 12.6. SUCCESSORS AND ASSIGNS...................................72 12.7. SURVIVAL; TERMINATION; REINSTATEMENT.....................75 12.8. LIMITATION OF INTEREST...................................75 12.9. CAPTIONS.................................................76 12.10. COUNTERPARTS.............................................76 12.11. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL.....................................76 12.12. CONFIDENTIALITY..........................................77 12.13. ENTIRE AGREEMENT.........................................77 12.14. CONSTRUCTION.............................................78 12.15. SEVERABILITY.............................................78 12.16. SFER MRI LOANS...........................................78 12.17. EXISTING CREDIT FACILITY TERMINATED......................78 PRICING SCHEDULE APPENDIX I EXHIBITS: A - Form of Note B - Form of Request for Extension of Credit C - Form of Assignment Agreement D -Form of Application E - Form of Rate Designation Notice SCHEDULES: I - Restricted and Unrestricted Subsidiaries II - Liens and Total Debt and Guaranties III - Opinion of Andrews & Kurth L.L.P. IV - Opinion of David L. Hicks V - Subordination Provisions VI - Jurisdictions for which Certificates are to be Provided CREDIT AGREEMENT This Credit Agreement (as amended, modified, supplemented or restated from time to time, this "AGREEMENT") dated as of November 13, 1996, is by and among SANTA FE ENERGY RESOURCES, INC. (the "COMPANY"), a Delaware corporation; each of the financial institutions which is or may from time to time become a party hereto (individually a "BANK" and collectively the "BANKS"); ABN AMRO BANK N.V. as Co-Agent (in such capacity, the "CO- AGENT"); and THE CHASE MANHATTAN BANK ("CHASE"), a New York banking corporation, as Administrative Agent for the Banks (in such capacity, together with any other Person who becomes the Agent pursuant to SECTION 11.8, the "AGENT"). AGREEMENTS. The parties agree as follows: Section 1. DEFINITIONS AND ACCOUNTING MATTERS. 1.1. CERTAIN DEFINED TERMS. As used in this Agreement or the other Credit Documents, the following terms shall have the following meanings: "ADDITIONAL COSTS" shall have the meaning ascribed to such term in SECTION 6.1. "ADJUSTED EBITDA" shall mean, for any period, EBITDA for such period minus the aggregate of all Restricted Distributions made by the Company and the Restricted Subsidiaries in such period. "AFFILIATE" shall mean, as to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person; and with respect to an individual, "AFFILIATE" shall also mean any individual related to such individual by blood or marriage. As used in this definition, "CONTROLS", "CONTROLLED BY" and "UNDER COMMON CONTROL WITH" shall mean the possession, directly or indirectly, of power to direct or cause the direction of the management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). "AGENT" shall have the meaning ascribed to such term in the introduction. "AGGREGATE COMMITMENT" shall mean the total of all Commitments of all Banks. "AGREEMENT" shall have the meaning ascribed to such term in the introduction. "ALTERNATE BASE RATE" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next higher 1/100%) equal to the greater of (a) the Prime Rate in effect on such day or (b) the Fed Funds Rate in effect for such day plus 1/2%. Any change in the Alternate Base Rate due to a change in the Fed Funds Rate or the Prime Rate shall be effective on the effective date of such change in the Fed Funds Rate or the Prime Rate. If for any reason the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Fed Funds Rate for any reason, including the inability or failure of the Agent to obtain sufficient bids or publications in accordance with the terms hereof, the Alternate Base Rate shall be the Prime Rate until the circumstances giving rise to such inability no longer exist. "ALTERNATE BASE RATE LOANS" shall mean Loans which bear interest at a rate based upon the Alternate Base Rate. "APPLICABLE ENVIRONMENTAL LAWS" shall mean all applicable environmental or pollution-control Legal Requirements governing, without limitation, wastewater effluent, solid and hazardous waste or substances, and air emissions, together with any applicable requirements for conducting, on a timely basis, reporting, record-keeping, periodic tests and monitoring for contamination of ground water, surface water, air and land and for biological toxicity of the aforesaid, including, without limitation, the Resource Conservation and Recovery Act of 1976, The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (as amended by the Superfund Amendments and Reauthorization Act), the Emergency Planning and Community Right-to-Know Act, the Toxic Substances Control Act, the Solid Waste Disposal Act, the Safe Drinking Water Act, the Hazardous Materials Transportation Act, the Clean Air Act, the Clean Water Act, the Oil Pollution Act, and the Federal Insecticide, Fungicide and Rodenticide Act, in each case as amended from time to time. "APPLICABLE LENDING OFFICE" shall mean, for each Bank and for each Type of Loan, the lending office of such Bank (or of an Affiliate of such Bank) designated for such Type of Loan below its name on the signature pages hereof or such other office of such Bank (or of an Affiliate of such Bank) as such Bank may from time to time specify to the Agent and the Company as the office by which its Loans of such Type are to be made and/or issued and maintained. "APPLICABLE MARGIN" shall mean (a) on any day during any Margin Period, with respect to any Eurodollar Loan, the percent per annum determined for each day during such Margin Period according to the Pricing Schedule; (b) on any day during any Margin Period, with respect to any Letter of Credit, the percent per annum determined for each day during such Margin Period according to the Pricing Schedule; and (c) if no Margin Period is in effect, the rate determined from time to time according to SECTION 4.3(B). "APPLICATION" shall mean an application for a letter of credit substantially in the form of EXHIBIT D. "ASSET SALE OF PETROLEUM PROPERTIES" shall mean any transfer, sale or other disposition (including pursuant to any consolidation or merger) by the Company or any Restricted Subsidiary in any single transaction or series of transactions of (a) shares of capital stock or other ownership 2 interests of a Restricted Subsidiary which owns Petroleum Properties or (b) any Petroleum Properties; PROVIDED, HOWEVER, that the term "Asset Sale of Petroleum Properties" shall not include (i) a transfer, sale or other disposition of Hydrocarbons in the ordinary course of the oil and gas production or marketing operations conducted by the Company and the Restricted Subsidiaries; (ii) any transfer, sale or other disposition effected in connection with the Monterey Transactions; or (iii) the transfer, sale or other disposition of any capital stock or Petroleum Properties by the Company to a Restricted Subsidiary or by a Restricted Subsidiary to the Company or by a Restricted Subsidiary to a Restricted Subsidiary. "ASSIGNMENT AGREEMENT" shall mean an Assignment and Acceptance Agreement substantially in the form of EXHIBIT C. "ATTRIBUTABLE DEBT" shall mean the lesser of (a) the fair market value of the assets sold pursuant to any Sale and Leaseback Transaction (which determination shall be based upon a written opinion (the cost of which shall be borne exclusively by the Company) as to valuation from an independent valuation expert selected by the Company) or (b) the present value (discounted according to GAAP at the interest rate implicit in the lease) of the obligations of the lessee for rental payments during the term of any lease constituting a part of such Sale and Leaseback Transaction; PROVIDED, that no Attributable Debt shall be assigned to Sale and Leaseback Transactions of the type described in SECTION 9.7(E)(2). "AVAILABLE BORROWING BASE" shall mean the lesser of (a) the Aggregate Commitment and (b) the Borrowing Base minus Other Liabilities. "BANKS" shall have the meaning ascribed to such term in the introduction. "BOARD" shall mean the Board of Governors of the Federal Reserve System of the United States or any entity succeeding to all or part of its functions. "BORROWING BASE" shall mean, as of the most recent determination pursuant to this Agreement and continuing until the next determination of a Borrowing Base in accordance with this Agreement, the amount of Total Debt which the Agent (with the consent of the Required Banks) shall determine in its sole discretion (using its normal and customary oil and gas lending practices) can be supported by the proved producing and proved non-producing oil and gas reserves of the Company and the Restricted Subsidiaries, based on the Most Recent Engineering Report and the Most Recent Other Liabilities Report. "BORROWING BASE DEFICIENCY" shall mean at any time the amount, if any, by which the sum of (a) the aggregate outstanding principal balance of the Notes and (if the Available Borrowing Base at such time shall be determined by reference to the Aggregate Commitment as provided in CLAUSE (A) of the definition of "Available Borrowing Base") the SFER MRI Loans at such time PLUS (b) the aggregate Letter of Credit Liabilities at such time shall exceed the Available Borrowing Base then in effect. 3 "BUSINESS DAY" shall mean any day other than a day on which commercial banks are authorized or required to close in New York, New York, and where such term is used in the definition of "QUARTERLY DATE" or, if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, or an Interest Period for, a Eurodollar Loan or a notice by the Company with respect to any such borrowing, payment, prepayment or Interest Period, which is also a day on which dealings in Dollar deposits are carried out in the relevant Eurodollar interbank market. "BUSINESS ENTITY" shall mean a corporation, partnership, limited partnership, limited liability company, joint stock association, business trust or other separate business entity. "CAPITAL GAINS" shall mean gains (net of expenses and income taxes applicable thereto) in excess of losses resulting from the sale, conversion or other disposition of capital assets (I.E., assets other than current assets). "CAPITALIZATION" shall mean the aggregate of stockholders equity of the Company and the Restricted Subsidiaries as shown on the most recent balance sheet furnished pursuant to SECTION 9.1(A) OR (B) and Total Debt of the Company and the Restricted Subsidiaries. "CAPITALIZED LEASE OBLIGATION" shall mean any rental obligation which, under GAAP, is or will be required to be capitalized on the books of the Company or any Restricted Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expense) in accordance with GAAP. "CHANGE OF CONTROL" shall mean (a) any change so that any Person (or any Persons acting together which would constitute a Group), together with any Affiliates or Related Persons thereof, other than Permitted Holders, shall at any time either (1) Beneficially Own more than 50% of the aggregate voting power of all classes of Voting Stock of the Company or (2) succeed in having sufficient of its or their nominees elected to the Board of Directors of the Company such that such nominees, when added to any existing director remaining on the Board of Directors of the Company after such election who is an Affiliate or Related Person of such Person or Group, shall constitute a majority of the Board of Directors of the Company; or (b) the Company shall convey, exchange, transfer or otherwise dispose of all or substantially all of its assets except as permitted by SECTION 9.7(E); PROVIDED that the Monterey Transactions shall not constitute a Change of Control. As used herein (a) "BENEFICIALLY OWN" shall mean beneficially own as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), or any successor provision thereto; (b) "GROUP" shall mean a "group" for purposes of Section 13(d) of the Exchange Act; (c) "RELATED PERSON" of any Person shall mean any other Person owning (1) 5% or more of the outstanding common stock of such Person or (2) 5% or more of the Voting Stock of such Person, and (d) "VOTING STOCK" of any Person shall mean capital stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. 4 "CHASE" shall have the meaning ascribed to such term in the introduction. "CODE" shall mean the Internal Revenue Code of 1986, as amended, or any successor statute, together with all publicly available written regulations, rulings and interpretations thereof or thereunder by the Internal Revenue Service or any entity succeeding to all or part of its functions. "COMBINED GROUP" shall mean the Company and the Restricted Subsidiaries. "COMMITMENT" shall mean, as to any Bank, the obligation, if any, of such Bank to extend credit to the Company in the form of Loans and Letter of Credit Liabilities in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set forth opposite such Bank's name on the signature pages hereof under the caption "Commitment" or in its Assignment Agreement (as the same may be reduced from time to time or terminated pursuant to SECTION 2.5 or modified pursuant to SECTION 12.6). "COMMITMENT FEE" shall have the meaning ascribed to such term in SECTION 2.6. "COMMITMENT PERCENTAGE" shall mean, as to any Bank at any time, the percentage equivalent of a fraction, the numerator of which is such Bank's Commitment at such time and the denominator of which is the Aggregate Commitment at such time. "COMPANY" shall have the meaning ascribed to such term in the introduction. "COMPANY REPORT" shall mean one or more reports, in form satisfactory to the Agent and the Required Banks, prepared by petroleum engineers employed by the Company or its Subsidiaries, which shall evaluate (i) at least 85% of the present value of the producing and non-producing proved oil and gas reserves of the Company and the Restricted Subsidiaries evaluated in the Most Recent Engineering Report and (ii) any other properties as to which the Company has conducted successful exploration activities subsequent to the Most Recent Engineering Report, in each case effective as of the immediately preceding July 1. Each Company Report shall set forth production, drilling and acquisition information and other information requested by the Agent and shall be based upon updated economic assumptions acceptable to the Agent. "CONSOLIDATED NET EARNINGS" shall mean consolidated gross revenues (including Capital Gains) of the Company and the Restricted Subsidiaries less all operating and non-operating expenses of the Company and the Restricted Subsidiaries including all charges of a proper character (including current and deferred taxes on income, provision for taxes on unremitted foreign earnings which are included in gross revenues, and current additions to reserves), but not including in gross revenues any gains resulting from write-up of assets, any equity of the Company or any Restricted Subsidiary in the unremitted earnings of any Person which is not a Restricted Subsidiary, any earnings of any Person acquired by the Company or any Restricted Subsidiary through purchase, merger or consolidation or otherwise for any year prior to the year 5 of acquisition, or any deferred credit representing the excess of equity in any Restricted Subsidiary at the date of acquisition over the cost of the investment in such Restricted Subsidiary; all determined in accordance with GAAP. "CONSOLIDATED NET WORTH" shall mean, at any date, the consolidated stockholders' equity of the Company and the Restricted Subsidiaries MINUS (to the extent included in the calculation of consolidated shareholders' equity) the aggregate amount of Investments in Unrestricted Subsidiaries, all determined in accordance with the last sentence of the definition of "Investment" and GAAP. "CONTINUATION" shall have the meaning ascribed to such term in SECTION 4.3. "CONVERSION" shall have the meaning ascribed to such term in SECTION 4.3. "COVER" for Letter of Credit Liabilities shall be effected by paying to the Agent immediately available funds in the amount of such Letter of Credit Liabilities, such amount to be held by the Agent until such time as such Letter of Credit Liabilities expire according to their terms or become Letter of Credit Advances, whereupon the Agent may use such funds to repay such Letter of Credit Advances. "CREDIT DOCUMENTS" shall mean this Agreement, the Notes, all Applications, all Letters of Credit, the Notice of Entire Agreement, and all instruments, certificates and agreements now or hereafter executed or delivered to the Agent or any Bank pursuant to any of the foregoing. "DEFAULT" shall mean an Event of Default or an event, circumstance or condition which with notice or lapse of time or both would, unless cured or waived, become an Event of Default; PROVIDED that a Borrowing Base Deficiency shall not be a Default so long as the Company complies with SECTION 2.4. "EBITDA" shall mean for any period Consolidated Net Earnings for such period (calculated, for purposes of this definition only, without taking into account extraordinary items under GAAP or capital gains or capital losses), plus the aggregate amounts deducted in deter mining Consolidated Net Earnings in respect of (a) all provisions for any federal, state or other income taxes made by the Company and the Restricted Subsidiaries during such period; (b) Fixed Charges of the Company and the Restricted Subsidiaries during such period; (c) depreciation, depletion and amortization charges of the Company and the Restricted Subsidiaries for such period, and (d) all other non-cash charges of the Company and the Restricted Subsidiaries for such period, all determined in accordance with GAAP; PROVIDED, HOWEVER, that EBITDA shall mean, for any calculation, $47,500,000, $31,800,000, $35,200,000 and $39,700,000 for the fiscal quarters ended December 31, 1995, March 31, 1996, June 30, 1996 and September 30, 1996, respectively; PROVIDED FURTHER, that on and after the Financial Statement Delivery Date for the fiscal quarter ended December 31, 1996, EBITDA for the fiscal quarter ended December 31, 1996, shall be $16,200,000.00 plus EBITDA (determined in accordance with the first clause of 6 this sentence) for the two months ended December 31, 1996. "ELIGIBLE ASSIGNEE" shall mean (a) a commercial bank organized or licensed under the laws of the United States of America, or a state thereof, and having total assets in excess of $1,000,000,000, (b) a commercial bank organized under the laws of any other country which is a member of the OECD, or a political subdivision of any such country, and having total assets in excess of $1,000,000,000; provided that such bank is acting through a branch or agency located in the country in which it is organized or another country that also is a member of the OECD, and (c) a finance company, insurance company, other financial institution or fund, acceptable to the Agent and the Company, which is regularly engaged in making, purchasing or investing in loans and having total assets in excess of $1,000,000,000. "ENVIRONMENTAL CLAIM" shall mean any claim, demand, action, cause of action, suit, judgment, Governmental or private investigation or proceeding relating to remediation or compliance with Applicable Environmental Laws, or any proceeding or lien, whether threatened, sought, brought or imposed, that seeks to recover costs, damages, punitive damages, expenses, fines, criminal liability, judgments, response costs, investigative and monitoring costs, abatement costs, attorney's fees, expert's fees or consultant's fees, or seeks to impose liability regarding the Company or any of its Subsidiaries, or any of their sites or properties for violations of Applicable Environmental Laws or for pollution, contamination, investigation, preservation, protection, remediation or clean up of the air, surface water, ground water, soil or wetlands, or otherwise in relation to the use, storage, generation, release, handling or disposal of materials and substances that are regulated by or subject to Applicable Environmental Laws. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor statute, and all rules, regulations and interpretations by the Internal Revenue Service or the Department of Labor, or any entity succeeding to all or part of their respective functions. "ERISA AFFILIATE" shall mean any trade or business (whether or not incorporated) which is a member of a group of which the Company is a member and which is under common control with the Company within the meaning of the regulations under Section 414 of the Code. "EURODOLLAR LOANS" shall mean Loans which bear interest at a rate based on a rate referred to in the definition of "EURODOLLAR RATE". "EURODOLLAR RATE" shall mean, for any Interest Period for any Eurodollar Loan, the rate per annum (rounded upwards, if necessary, to the nearest 1/100%) determined by the Agent based upon rates quoted at approximately 10:00 a.m. (local time in the relevant Eurodollar interbank market) (or as soon thereafter as practicable) on the day two Business Days prior to the first day of such Interest Period for the offering by Chase to leading dealers in such Eurodollar interbank market of Dollar deposits for delivery on the first day of such Interest Period, in immediately available funds and having a term comparable to such Interest Period and in an amount 7 comparable to the principal amountof the respective Eurodollar Loan to which such Interest Period relates. Each determination of the Eurodollar Rate shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. "EXISTING CREDIT FACILITY" shall mean the Second Amended and Restated Revolving Credit Agreement dated as of April 1, 1995, by and among the Company; Texas Commerce Bank National Association as the Agent; Texas Commerce Bank National Association and NationsBank of Texas, N.A. as Co-Agents; and the financial institutions from time to time party thereto. "EVENT OF DEFAULT" shall have the meaning assigned to such term in SECTION 10. "FDIC" shall mean the Federal Deposit Insurance Corporation or any entity succeeding to any or all of its functions. "FED FUNDS RATE" shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) on the succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Agent from three federal funds brokers of recognized standing selected by it. "FINANCIAL STATEMENT DELIVERY DATE" shall mean the date on which the quarterly or annual financial statements of the Company are delivered pursuant to SECTION 9.1(A) or SECTION 9.1(B), as the case may be. "FIXED CHARGES" shall mean (without duplication) for any period the sum of interest expense in respect of all Total Debt of the Person for which the determination is made, including imputed interest expense in respect of Capitalized Lease Obligations; PROVIDED, that Fixed Charges shall mean, for any calculation, $3,400,000 for each of the fiscal quarters ended December 31, 1995, March 31, 1996, June 30, 1996 and September 30, 1996, respectively; PROVIDED FURTHER, that Fixed Charges of the Combined Group for the fiscal quarter ended December 31, 1996, shall be $1,100,000 plus Fixed Charges (determined in accordance with the first clause of this sentence) of the Combined Group for the two months ended December 31, 1996. "GAAP" shall mean, as to a particular Person, such accounting practice as, in the opinion of the independent accountants of recognized national standing regularly retained by such Person and acceptable to the Agent, conforms at the time to United States generally accepted accounting principles, consistent with those applied in the preparation of the financial statements referred to in SECTION 8.2(A), together with changes with which the Company's independent auditors concur and which are noted in the financial statements provided pursuant to SECTION 9.1(B). 8 "GOVERNMENTAL AUTHORITY" shall mean any sovereign governmental authority, the United States of America, any State of the United States and any political subdivision of any of the foregoing, and any agency, instrumentality, department, commission, board, bureau, central bank, authority, court or other tribunal, in each case whether executive, legislative, judicial, regulatory or administrative, having jurisdiction over the Company, any of the Company's Subsidiaries, any of their respective property, the Agent or any Bank. "GUARANTY" shall mean and include, without limitation, any obligation of the Company or a Restricted Subsidiary (a) constituting a guaranty, endorsement (other than an endorsement of a negotiable instrument for collection in the ordinary course of business) or other contingent liability (whether direct or indirect) in connection with the obligations, stock or dividends of any Person (other than the Company or a Restricted Subsidiary); (b) payable under any contract (other than the Tax Indemnification Agreement and any other tax indemnification or tax sharing agreement) providing for the making of loans, advances or capital contributions to any Person (other than the Company or a Restricted Subsidiary), or for the purchase of any property from any Person, in each case in order primarily to enable such Person to maintain working capital, net worth or any other balance sheet condition or to pay debts, dividends or expenses; (c) payable under any contract for the purchase of materials, supplies or other property or services (OTHER THAN any natural gas transportation contract or any electrical, water supply, steam purchase, natural gas purchase or other utility supply contract) if such contract (or any related document) requires that payment for such materials, supplies or other property or services shall be made regardless of whether or not delivery of such materials, supplies or other property or services is ever made or tendered; PROVIDED that the exceptions contained in this CLAUSE (C) shall not apply to any contract for the purchase or transportation of natural gas where payment is required regardless of whether the delivery of such natural gas is ever made or tendered, unless at the time such contract is entered into the aggregate of such payments under such contract and all such existing contracts would not exceed $10,000,000 in any calendar year based on existing rates and automatic escalations in such rates under such contracts. (d) payable under any contract to rent or lease (as lessee) any real or personal property (other than any oil and gas leases) if such contract (or any related document) provides that the obligation to make payments thereunder is absolute and unconditional under conditions not customarily found in commercial leases then in general use or requires that the lessee purchase or otherwise acquire securities or obligations of the lessor; or (e) payable under any other contract which, in economic effect, is substantially equivalent to a guarantee for any payment or performance of an obligation of a Person other than the Company or a Restricted Subsidiary. 9 "HIGHEST LAWFUL RATE" shall mean, on any day, the maximum nonusurious rate of interest permitted for that day by whichever of applicable federal or state law permits the higher interest rate, stated as a rate per annum. "HYDROCARBONS" shall mean crude oil, condensate, natural gas, natural gas liquids and associated substances. "INDEMNIFIED PERSON" shall mean the Agent (including the Agent in its capacity as the Issuer), Chase, each of the Banks, each Affiliate of any such Person, and their respective directors, officers, employees, agents and counsel. "INDENTURE" shall mean the Indenture between the Company and The First National Bank of Boston, as Trustee, dated as of May 25, 1994, providing for issuance by the Company of its 11% Senior Subordinated Notes Due 2004 in the aggregate principal amount of up to $100,000,000 (the "SENIOR SUBORDINATED NOTES"), as amended and supplemented by the First Supplemental Indenture dated as of October 18, 1996. "INDEPENDENT ENGINEERING REPORT" shall mean a report prepared by an Independent Petroleum Engineer which sets forth the gross and net volume of Hydrocarbons projected to be produced from the Petroleum Properties, the Net Proceeds of Production and the present net worth of the Net Proceeds of Production, using assumptions provided by the Agent and the Required Banks (through the Agent), in each case by calendar year, for the remaining economic life of the Petroleum Properties. Each Independent Engineering Report shall also contain a list of Petroleum Properties of the members of the Combined Group and shall identify which of the Petroleum Properties covered thereby are "proved developed producing", "proved developed non-producing" and "proved undeveloped" (as defined in the "Definitions for Oil and Gas Reserves" as published by the Society of Petroleum Engineers). Each such report shall be prepared in accordance with established criteria generally accepted in the oil and gas industry and standards customarily used by independent petroleum engineers well regarded in the industry in making reserve determinations or appraisals, and shall be based on such assumptions, estimates and projections as are fully disclosed in such Independent Engineering Report. "INDEPENDENT PETROLEUM ENGINEER" shall mean Ryder Scott Company Petroleum Engineers or another independent petroleum engineer retained by the Company acceptable to the Required Banks. "INTEREST PAYMENT DATE" shall mean with respect to any Eurodollar Loan or Alternate Base Rate Loan, the last day of each Interest Period applicable thereto; PROVIDED that in the case of a Eurodollar Loan with an Interest Period of six months, the Interest Payment Dates shall be the days that would have been the Interest Payment Dates for such Loan had two successive Interest Periods of three months been applicable to such Loan. 10 "INTEREST PERIOD" shall mean: (a) with respect to any Eurodollar Loan, the period commencing on (i) the date such Loan is made or designated as, or the effective date of any Conversion into, a Eurodollar Loan or (ii) in the case of a Continuation to a successive Interest Period, the last day of the immediately preceding Interest Period, and in each case ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, as the Company may select as provided in SECTION 4.3, except that each such Interest Period which commences on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month shall end on the last Business Day of the appropriate subsequent calendar month; and (b) with respect to any Alternate Base Rate Loan, the period commencing on the date such Loan is made as, or converted into, an Alternate Base Rate Loan and on each Quarterly Date thereafter and ending on each next succeeding Quarterly Date or, if earlier, the date such Loan is converted into a Eurodollar Loan; PROVIDED that (x) each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day unless, with respect to Eurodollar Loans only, such next succeeding Business Day falls in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day; and (y) no Interest Period may be selected for any Loan that ends later than the Termination Date. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. "INVESTMENT" shall mean any purchase or other acquisition of the stock, obligations or securities of, or any interest in, or any capital contribution, loan or advance to, or any Guaranty in respect of the obligations of any Person, but in any event shall include as an investment in any Person the amount of all Total Debt owed to any member of the Combined Group by such Person, and all accounts receivable from such Person which are not current assets or did not arise from sales to such Person in the ordinary course of business. As used herein, any capital contribution of assets by the Company or any Restricted Subsidiary shall be valued at the book value of such assets as reflected in the consolidated financial statements of the Company and the Restricted Subsidiaries as at the end of the quarter ending immediately prior to such contribution. "ISSUER" shall mean the Agent in its capacity as the issuer of Letters of Credit. "LEGAL REQUIREMENT" shall mean any applicable law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or official interpretation by any Governmental Authority of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority, in each case as now or hereafter in effect. "LETTER OF CREDIT" shall mean a letter of credit issued pursuant to SECTION 2.2. "LETTER OF CREDIT ADVANCES" shall mean all sums which are from time to time paid by the 11 Agent pursuant to Letters of Credit, or any of them, together with all other sums, fees, reimbursements or other obligations which are due to the Agent pursuant to the Letters of Credit, or any of them. "LETTER OF CREDIT FEE" shall mean, with respect to any Letter of Credit, a fee equal to, for each day during the term thereof, the product of (a) the Applicable Margin for Letters of Credit in effect on such day multiplied by (b) the amount available on such day for drawings under such Letter of Credit. "LETTER OF CREDIT LIABILITIES" shall mean, at any time, the sum of (a) the aggregate undrawn amount of all Letters of Credit outstanding at such time plus (b) the aggregate unpaid amount of all Letter of Credit Advances for which the Agent shall not have been reimbursed and which remain unpaid at such time. . "LIEN" shall mean any mortgage, pledge, security interest, collateral assignment, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing) and shall include conditional sale and other title retention agreements, leases intended as security, and the filing of, or agreement to give, any financing statement under the Uniform Commercial Code of any jurisdiction or any other type of preferential arrangement. "LOAN" shall mean a loan made pursuant to SECTION 2.1(A). "MARGIN PERIOD" shall mean (a) the period commencing on the date of this Agreement and ending on the earlier of (i) the first Financial Statement Delivery Date and (ii) March 31, 1997, and (b) thereafter, each period beginning on a Financial Statement Delivery Date and ending on the earlier of (x) the next Financial Statement Delivery Date and (y) the date on which financial statements are next required to be delivered pursuant to SECTION 9.1(A) OR (B). "MATERIAL ADVERSE CHANGE" shall mean an occurrence of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding), which after taking into account actual insurance coverage and effective indemnification with respect to such occurrence, (a) has a material adverse effect on the financial condition, business, operations or properties of the Company and its Subsidiaries taken as a whole and (b) impairs in any material respect either (1) the ability of the Company to perform any of its obligations under the Credit Documents or (2) the ability of the Agent and the Banks to enforce any of such obligations or any of their rights and remedies under or in connection with the Credit Documents. "MATURITY DATE" shall mean the earlier of (a) the date the principal amount then outstanding of and accrued interest on the Loans, all Letter of Credit Liabilities, all fees and all other amounts payable hereunder and under the Notes become due and payable pursuant to SECTION 10.1 or (b) November 13, 2001. "MONTEREY" shall mean Monterey Resources, Inc., a Delaware corporation. 12 "MONTEREY CREDIT AGREEMENT" shall mean that certain Credit Agreement dated as of November 13, 1996, by and among Monterey, Chase as the Agent, and the Banks from time to time party thereto, as in effect on the date hereof without giving effect to any subsequent amendment, waiver or termination thereof. "MONTEREY TRANSACTIONS" shall mean the "Other Transactions" as such term is defined in the Indenture. "MOODY'S" shall mean Moody's Investors Service, Inc. "MOST RECENT ENGINEERING REPORT" shall mean, as of any date of determination, the most recent Independent Engineering Report delivered pursuant to this Agreement on or before such date. "MOST RECENT OTHER LIABILITIES REPORT" shall mean, as of any date of determination, the most recent Other Liabilities Report delivered pursuant to SECTION 9.1 on or before such date. "NET PROCEEDS OF PRODUCTION" shall mean, for any period and for any Person, (a) an amount of projected gross revenues received by or otherwise credited to the account of such Person from the sale of Hydrocarbons produced from the Petroleum Properties, subject to no entitlement of any other Person but including appropriate adjustments for over- and under-produced status, during such period as set forth in the Most Recent Engineering Report LESS (b) the amount of projected royalties, overriding royalties, windfall profit, production, ad valorem, severance and all other similar taxes, and operating and capital expenditures required to be incurred during such period in order to generate such gross revenues (but not including general and administrative expenses or principal and interest payable with respect to Total Debt), as set forth in the Most Recent Engineering Report. "NOTES" shall mean the promissory notes of the Company evidencing the Loans, substantially in the form of EXHIBIT A. "NOTICE OF ENTIRE AGREEMENT" shall mean that certain Notice of Entire Agreement and Release of Claims of even date herewith between the Company and the Agent. "OBLIGATIONS" shall mean, as at any date of determination thereof, the sum of (a) the aggregate principal amount of Loans outstanding on such date PLUS (b) the aggregate outstanding amount of all Letter of Credit Liabilities on such date PLUS (c) all accrued and unpaid interest thereon PLUS (d) all fees and other indebtedness of the Company to the Banks or the Agent in connection with the Credit Documents on such date. "OECD" shall mean the Organization for Economic Cooperation and Development (or any successor). 13 "OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of the Company by its Chief Executive Officer, President, Chief Financial Officer or Treasurer. "ORGANIZATIONAL DOCUMENTS" shall mean, with respect to a corporation, the certificate of incorporation or articles of incorporation and bylaws of such corporation; with respect to a partnership or a limited partnership, the partnership agreement establishing such partnership; with respect to a limited liability company, the regulations or limited liability company agreement; with respect to a joint venture, the joint venture agreement establishing such joint venture; and with respect to a trust, the instrument establishing such trust; in each case including any and all modifications thereof as of the date of the Credit Document referring to such Organizational Document. "OTHER LETTERS OF CREDIT" shall mean all letters of credit issued for the account of any member of the Combined Group, OTHER THAN AND EXCEPT FOR the Letters of Credit. "OTHER LIABILITIES" shall mean, at any time, the sum of (a) the aggregate principal balance of the Total Debt of the Combined Group (including SFER MRI Loans) at such time PLUS (b) all liabilities, contingent and otherwise, in respect of Other Letters of Credit at such time; PROVIDED, HOWEVER, that Other Liabilities shall never include the Obligations or the Senior Subordinated Notes. "OTHER LIABILITIES REPORT" shall mean a report in a form to be agreed on by the Company and the Agent setting forth the aggregate Other Liabilities and such other information with respect thereto as may from time to time be reasonably requested by the Agent, certified as true and correct by the Chief Executive Officer, President, the Chief Financial Officer or the Treasurer of the Company. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERMITTED ENCUMBRANCES" shall mean: (a) liens for taxes, assessments, levies or other governmental charges not yet due and delinquent, and for taxes, assessments, levies or other governmental charges already due, but the validity of which is being contested by the Company in good faith by appropriate proceedings diligently conducted for which reserves have been established in accordance with GAAP; (b) materialmen's, mechanics', repairmen's, employees', operators', landlords' and other similar liens and charges incidental to the conduct of the Company's business or the ownership of its property which are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than advances or credit on open account, includable in current liabilities, for goods and services in 14 the ordinary course of business and on terms and conditions which are customary in the oil, gas and mineral exploration and development business) or the guaranteeing of the obligations of another Person, and which do not in the aggregate materially detract from the value of the property covered thereby or materially impair the use thereof in the operation of the Company's business; (c) royalties, overriding royalties, net profits interests, production sharing interests, production payment interests, carried interests and other burdens on production of a scope and nature customary in the conduct of the Company's business; (d) defects, imperfections and irregularities in title; (e) liens, security interests, charges, claims and encumbrances that arise under operating agreements or pooling and unitization designations, declarations, orders and agreements and other similar agreements of a scope and nature customary in the oil and gas industry; (f) the terms of concessions, production sharing agreements, operating agreements, assignments, farmout agreements, hydrocarbon sales, purchase, exchange and processing agreements, area-of-mutual-interest agreements, gas balancing and deferred production agreements, plant agreements, pipeline gathering and transportation agreements, injection, repressuring and recycling agreements, salt water or other disposal agreements, seismic or geophysical permits and agreements, and other contracts, division orders and agreements of a scope and nature customary in the oil and gas industry; (g) the right of third parties under oil and gas leases to take production in kind; (h) all liens, charges, claims, encumbrances, contracts and other matters consented to in writing from time to time by the Agent; (i) all rights to consent by, required notices to, and filings with or other actions by governmental or tribal entities, if any, in connection with the change of ownership or control of an interest in federal, state, tribal or other foreign or domestic governmental oil and gas leases or properties, if the same are customarily obtained after such change of ownership or control, but only insofar as such consents, notices, filings and other actions are obtained within the time required under applicable Legal Requirements; (j) required third-party consents to assignments, to the extent they could not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect; 15 (k) liabilities for royalty suspense accounts, to the extent they could not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect; and (l) easements, rights-of-way and the like, incidental to the conduct of the Company's business or the ownership of its property which are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than advances or credit on open account, includable in current liabilities, for goods and services in the ordinary course of business and on terms and conditions which are customary in the oil, gas and mineral exploration and development business) or the guaranteeing of the obligations of another Person, and which do not in the aggregate materially detract from the value of the property covered thereby or materially impair the use thereof in the operation of the Company's business; PROVIDED that all Permitted Encumbrances shall not in the aggregate have a Material Adverse Effect. "PERSON" shall mean any individual, Business Entity, voluntary association, trust, unincorporated organization, Governmental Authority or other form of entity. The term "Person" shall not, however, mean or include an arrangement that is not a separate legal entity, such as the legal arrangement between two or more parties owning interests in the same property or unit. "PETROLEUM PROPERTIES" shall mean all proved reserves of Hydrocarbons in place which are (a) owned by a member of the Combined Group; (b) estimated to be recoverable with reasonable certainty and are otherwise consistent with the "Definitions for Oil and Gas Reserves" published by the Society of Petroleum Engineers, and (c) covered in the Most Recent Engineering Report. "PLAN" shall mean an employee benefit plan which is covered by ERISA which is either (a) maintained by the Company or any ERISA Affiliate for employees of the Company or such ERISA Affiliate or (b) a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which (i) the Company, (ii) any ERISA Affiliate or (iii) any trade or business which was previously under common control with the Company within the meaning of Section 414 of the Code (but only with respect to such period of common control with the Company), has an obligation to make contributions (or with respect to (iii) above, had an obligation to make contributions during any portion of time that the limitations period under Section 4301(f) of ERISA with respect to such obligation has not expired). "POST-DEFAULT RATE" shall mean a rate per annum on each day equal to the lesser of (a) the sum of (i) 2% per annum PLUS (ii) the Alternate Base Rate as in effect for that day or (b) the Highest Lawful Rate for that day. 16 "PRICING SCHEDULE" shall mean the schedule of that name attached to this Agreement. As used in the Pricing Schedule, "TOTAL DEBT" shall mean the Total Debt of the Company and the Restricted Subsidiaries at the end of the fiscal quarter of the Company then most recently ended, and "ADJUSTED EBITDA" shall mean Adjusted EBITDA of the Company and the Restricted Subsidiaries for the four fiscal quarters ending with that fiscal quarter. "PRIME RATE" shall mean, as of a particular date, the generally applicable prime rate most recently determined by Chase. Without notice to the Company or any other Person, the Prime Rate shall change automatically from time to time as and in the amount by which said prime rate shall fluctuate. The prime rate is a reference rate and may not necessarily represent the lowest or best rate actually charged to any customer. Chase may make commercial loans or other loans at rates of interest at, above or below the prime rate. "PRINCIPAL OFFICE" shall mean the principal banking office of the Agent, presently located at 270 Park Avenue, New York, New York 10017. "PROPER FORM" shall mean in form and substance satisfactory to the Agent in its discretion. "QUARTERLY DATES" shall mean the last day of each March, June, September and December; PROVIDED that if any such date is not a Business Day, the relevant Quarterly Date shall be the next succeeding Business Day. "RATE DESIGNATION NOTICE" shall mean (a) in the case of a new Loan, the Request for Extension of Credit with respect to such Loan and (b) in the case of Conversions and Continuations, a notice in the form of EXHIBIT E, executed by an authorized officer of the Company. "REGULATION D" shall mean Regulation D of the Board as the same may be amended or supplemented from time to time and any successor or other regulation relating to reserve requirements. "REGULATORY CHANGE" shall mean, with respect to any Bank, any change on or after the date of this Agreement in any Legal Requirement (including Regulation D) or the adoption or making on or after such date of any official interpretation, directive or request applying to a class of banks including such Bank under any Legal Requirement (whether or not having the force of law) by any Governmental Authority charged with the interpretation or administration thereof. "REIMBURSEMENT OBLIGATIONS" shall mean, as at any date, the obligations of the Company then outstanding to reimburse the Agent for Letter of Credit Advances. "REQUEST FOR EXTENSION OF CREDIT" shall mean a request for extension of credit duly executed by the Chief Executive Officer, President, Chief Financial Officer or Treasurer of the Company, or such other officer of the Company as its Chief Financial Officer may from time to 17 time designate in a writing delivered to the Agent, appropriately completed and substantially in the form of EXHIBIT B. "REQUIRED BANKS" shall mean, at any time that no Obligations are outstanding, Banks having equal to or greater than 66-2/3% of the Aggregate Commitment, and at any time that Obligations are outstanding, Banks holding equal to or greater than 66-2/3% of the aggregate amount of such Obligations. "RESTRICTED DISTRIBUTION" shall mean, with respect to the Company and the Restricted Subsidiaries, any payment of any dividend on any class of stock of such Person or any other distribution on account of any class of stock or other indicia of equity ownership of such Person, and any redemption, purchase or acquisition, direct or indirect, of any shares of stock or other indicia of equity ownership of such Person; PROVIDED, that Restricted Distributions shall not include (x) dividends paid or declared by the Company or any of the Restricted Subsidiaries in respect of stock thereof held by any Person, or distributions made to any Person in stock of the Company or any Restricted Subsidiary; (y) exchanges of stock of one or more classes of the Company or any Restricted Subsidiary for common stock of the Company or such Restricted Subsidiary, as the case may be, or for stock of the Company or such Restricted Subsidiary, as the case may be, of the same class, except to the extent that cash or other value is paid by the Company or a Restricted Subsidiary in such exchange; or (z) dividends paid or declared in respect of stock held by, or distributions made to, or redemptions, purchases or other acquisitions of stock made from, the Company or a wholly-owned Restricted Subsidiary; PROVIDED FURTHER, that "Restricted Distribution" shall mean, with respect to the Company and the Restricted Subsidiaries, for any calculation, $1,958,000 for each of the fiscal quarters ended December 31, 1995, March 31, 1996, June 30, 1996 and September 30, 1996, respectively, and the Restricted Distributions of the Company and the Restricted Subsidiaries for the fiscal quarter ended December 31, 1996, shall be $652,667.00 plus the Restricted Distributions (determined in accordance with the first sentence of this definition) of the Combined Group for the two months ended December 31, 1996. The term "stock" as used in this definition shall include warrants, options to purchase stock and redeemable rights. "RESTRICTED SUBSIDIARY" shall mean each Subsidiary of the Company designated as a Restricted Subsidiary on SCHEDULE I, as supplemented from time to time by notice from the Company to the Agent, together with any Subsidiary of the Company hereafter created or acquired and, at the time of creation or acquisition, not designated by the Board of Directors of the Company as an Unrestricted Subsidiary. "SALE AND LEASEBACK TRANSACTION" shall mean any arrangement in which any member of the Combined Group shall sell any building, equipment or surface real property and thereafter enter into a lease as lessee of such building, equipment or surface real property. 18 "SENIOR SUBORDINATED NOTES" shall have the meaning ascribed to such term in the definition of "Indenture". "SFP GROUP" shall mean Santa Fe Pacific Corporation and its successors, and their affiliated group of corporations which together constitute an affiliated group of corporations within the meaning of Section 1504(a) of the Code. "SFER MRI LOANS" shall mean the borrowings by the Company under the Monterey Credit Agreement. At such time as such Loans are repaid in full and the Company may no longer borrow under the Monterey Credit Agreement, all references in this Agreement to "SFER MRI Loans" and the "Monterey Credit Agreement" shall be deemed deleted and of no further force or effect. "S&P" shall mean Standard & Poor's Ratings Group. "SPECIAL DEBT" shall mean, at any time, the sum of (a) Attributable Debt of the Company and the Restricted Subsidiaries outstanding at such time, (b) all Total Debt of the Company and the Restricted Subsidiaries outstanding at such time that is secured by a Lien permitted by SECTION 9.7(A)(11) on any property or assets of the Company or any Restricted Subsidiary, and (c) all Total Debt of the Restricted Subsidiaries (whether or not secured by any Lien) outstanding at such time. "SPIN-OFF" shall mean (a) the distribution by dividend to the stockholders of Santa Fe Pacific Corporation of the shares of capital stock of the Company owned by Santa Fe Pacific Corporation, which distribution was commenced on December 4, 1990, and (b) the distribution by SFP Properties, Inc. to Santa Fe Pacific Corporation of the capital stock of the Company that was made December 27, 1989. "STATUTORY RESERVES" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the weighted average of the reserve percentages (including any marginal, special, emergency, or supplemental reserves), expressed as a decimal, actually required to be maintained by any Bank by the Board or any other Governmental Authority to which any of the Banks is subject as required by Regulation D during the applicable Interest Period for "eurocurrency liabilities" (as such term is used in Regulation D) and any other reserves actually required to be maintained by any Bank by reason of any Regulatory Change against (a) any category of liabilities which includes deposits by reference to which the Eurodollar Rate is to be determined as provided in the definition of "Eurodollar Rate" or (b) any category of extensions of credit or other assets which include Eurodollar Loans. Such reserve percentages shall include, without limitation, those imposed under Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. Each determination of the Statutory Reserves by the Agent shall be conclusive and binding, absent manifest error, and may be made using any reasonable averaging and attribution method. 19 "SUBSIDIARY" shall mean, with respect to any Person, any Business Entity of which 50% or more of the capital stock or other indicia of equity rights is at the time directly or indirectly legally or beneficially owned or controlled by such Person or by one or more of its Affiliates. "TAX ALLOCATION AGREEMENT" shall mean those nine certain agreements among the SFP Group, dated as of January 1, 1990 unless otherwise specified in this definition and styled as follows: (a) Agreement for the Allocation of the Combined Utah Franchise Tax Liability; (b) Agreement for the Allocation of the Combined Oregon Excise Tax Liability; (c) Agreement for the Allocation of the Consolidated New Mexico Income Tax Liability; (d) Agreement for the Allocation of the Combined Kansas Income Tax Liability; (e) Agreement for the Allocation of the Combined Illinois Income Tax Liability; (f) Agreement for the Allocation of the Combined California Franchise Tax Liability; (g) Agreement for the Allocation of the Combined Arizona Income Tax Liability; (h) Agreement Concerning Taxes, and (i) Agreement for the Allocation of the Consolidated Federal Income Tax Liability Among the Members of the Santa Fe Southern Pacific Corporation Affiliated Group, dated as of January 1, 1987. "TAX INDEMNIFICATION AGREEMENT" shall mean any agreement pursuant to which the Company agrees to indemnify Santa Fe Pacific Corporation or its successor or any member of the SFP Group from and against any and all federal, state or local taxes, interest, penalties or additions to tax imposed upon or incurred by the SFP Group or any member thereof as a result of the Spin-Off to the extent specified in any such agreement. "TERMINATION DATE" shall mean the earlier of (a) the Maturity Date and (b) the date the Commitments are terminated pursuant to SECTION 2.3. "TOTAL DEBT" shall mean, as of any date and for any Person, without duplication, (a) all obligations for borrowed money; (b) all obligations evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business; (d) all Capitalized Lease Obligations; (e) all obligations in respect of production payments, proceeds production payments and similar financing arrangements; (f) all reimbursement obligations with respect to letters of credit issued for the account of such Person, including the Letter of Credit Liabilities; (g) all obligations of the types described in CLAUSES (A) THROUGH (F) of this definition (collectively, "ORDINARY DEBT") of another Person secured by a Lien on any property of the Person as to which Total Debt is being determined, regardless of whether such Ordinary Debt is assumed by such Person, and (h) all Ordinary Debt of another Person guaranteed by such Person; PROVIDED, HOWEVER, that Total Debt of the Combined Group shall not include (x) any obligation of the Company owing to a wholly-owned Restricted Subsidiary which is subordinated to the Obligations upon the terms set forth on SCHEDULE V, or (y) any obligation of a Restricted Subsidiary owing to the Company or one or more other Restricted Subsidiaries. "TYPE" shall have the meaning assigned to such term in SECTION 1.3. 20 "UNFUNDED LIABILITIES" shall mean, with respect to any Plan, at any time, the amount (if any) by which (a) the present value of all benefits under such Plan exceeds (b) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan (in accordance with GAAP), but only to the extent that such excess represents a potential liability of the Company or any ERISA Affiliate to the PBGC or a Plan under Title IV of ERISA. "UNRESTRICTED SUBSIDIARY" shall mean Monterey and each other Subsidiary of the Company designated as an Unrestricted Subsidiary on SCHEDULE I, as supplemented from time to time by notice from the Company to the Agent, together with any Subsidiary of the Company which is hereafter designated by the Board of Directors of the Company as an Unrestricted Subsidiary. "UNUSED COMMITMENT" shall mean, on any date, the difference of (a) the lesser of (i) the Aggregate Commitment and (ii) the Borrowing Base MINUS (b) the sum of (1) the aggregate outstanding principal balance of the Notes and the SFER MRI Loans PLUS (2) the aggregate Letter of Credit Liabilities, all determined on such date. 1.2. ACCOUNTING TERMS AND DETERMINATIONS. Except where specifically otherwise provided: (a) The symbol "$" and the word "dollars" shall mean lawful money of the United States of America. (b) Any accounting term not otherwise defined shall have the meaning ascribed to it under GAAP. (c) Unless otherwise expressly provided, any accounting concept and all financial covenants shall be determined on a consolidated basis, and financial measurements shall be computed without duplication. (d) Wherever the term "including" or any of its correlatives appears in the Credit Documents, it shall be read as if it were written "including (by way of example and without limiting the generality of the subject or concept referred to)". (e) Wherever the word "herein" or "hereof" is used in any Credit Document, it is a reference to that entire Credit Document and not just to the subdivision of it in which the word is used. (f) References in any Credit Document to Section numbers are references to the Sections of such Credit Document. 21 (g) References in any Credit Document to Exhibits, Schedules, Annexes and Appendices are to the Exhibits, Schedules, Annexes and Appendices to such Credit Document, and they shall be deemed incorporated into such Credit Document by reference. (h) Except as otherwise provided herein, any term defined in the Credit Documents which refers to a particular agreement, instrument or document shall also mean, refer to and include all modifications, amendments, supplements, restatements, renewals, extensions and substitutions of the same; PROVIDED that nothing in this subsection shall be construed to authorize any such modification, amendment, supplement, restatement, renewal, extension or substitution except as may be permitted by other provisions of the Credit Documents. (i) All times of day used in the Credit Documents mean local time in New York, New York. (j) Defined terms may be used in the singular or plural, as the context requires. 1.3. TYPES OF LOANS. Loans hereunder are distinguished by "Type". The "Type" of a Loan refers to the determination whether such Loan is a Eurodollar Loan or an Alternate Base Rate Loan. Section 2. COMMITMENTS. 2.1. LOANS. (a) Each Bank severally agrees, subject to the terms and conditions of this Agreement, from time to time on or after the date hereof and prior to the Termination Date, to make Loans to the Company in an aggregate principal amount at any one time outstanding up to but not exceeding the lesser of (1) such Bank's Commitment at such time and (2) such Bank's Commitment Percentage of the Available Borrowing Base at such time, MINUS, in either case, such Bank's Commitment Percentage of all Letter of Credit Liabilities and (if the Available Borrowing Base at such time shall be determined by reference to the Aggregate Commitment as provided in CLAUSE (A) of the definition of "Available Borrowing Base") all SFER MRI Loans outstanding at such time (whether or not such Bank shall in fact have advanced any SFER MRI Loan). Subject to the conditions precedent in this Agreement, any Loan repaid prior to the Termination Date may be reborrowed prior to the Termination Date pursuant to the terms of this Agreement; PROVIDED, that any and all Loans shall be due and payable in full on the Maturity Date. (b) Notwithstanding anything in this Agreement to the contrary, (i) no Bank shall be required to make Loans at any one time outstanding in an amount which, together with such Bank's Commitment Percentage of outstanding Letter of Credit Liabilities, shall exceed such Bank's Commitment MINUS such Bank's Commitment Percentage of all SFER MRI Loans outstanding at such time (whether or not such Bank shall in fact have advanced any SFER MRI 22 Loan), and (ii) if a Bank fails to make a Loan as and when required hereunder and the Companysubsequently makes a repayment on the Notes, such repayment shall be split among the non-defaulting Banks ratably in accordance with their respective Commitment Percentages (computed without regard to the Commitment Percentage of the defaulting Bank) until each Bank has its Commitment Percentage of all outstanding Loans. Any balance of such repayment shall be divided among all Banks in accordance with their respective Commitment Percentages. 2.2. LETTERS OF CREDIT. (a) Subject to the terms and conditions of this Agreement, the Company shall have the right to utilize the Available Borrowing Base from time to time prior to the Termination Date by obtaining the issuance by the Issuer of letters of credit for the account of the Company in such amounts and in favor of such beneficiaries as the Company from time to time shall request; PROVIDED, that in no event shall the Issuer have any obligation to issue any Letter of Credit if (1) the face amount of such Letter of Credit PLUS any additional Letter of Credit Liabilities at such time would exceed $30,000,000 (as adjusted downward from time to time to the extent the Available Borrowing Base is reduced below $30,000,000), (2) the aggregate amount of Loans (and SFER MRI Loans) and Letter of Credit Liabilities outstanding at such time would exceed the Available Borrowing Base, (3) such Letter of Credit would have an expiry date later than the earlier of (x) one year from the date thereof or (y) the Termination Date, (4) such Letter of Credit is not in Proper Form, (5) the Company has not executed and delivered to the Issuer an Application and such other customary instruments and agreements relating to such Letter of Credit as the Issuer shall have reasonably requested, or (6) a Default has occurred and is continuing. The Company promises to pay to the Agent for the account of each Bank, on demand, each Letter of Credit Advance, together with interest thereon at (i) prior to the third Business Day following each such Letter of Credit Advance, the Alternate Base Rate, and (ii) on and after such third Business Day, the Post-Default Rate. All rights, powers, benefits and privileges of this Agreement with respect to the Notes, all security therefor and guaranties thereof and all restrictions, provisions for repayment or acceleration and all other covenants, warranties, representations and agreements contained in the Credit Documents with respect to the Notes shall apply to each Letter of Credit Advance. Upon the date of the issuance of a Letter of Credit, the Issuer shall be deemed, without further action by any party to this Agreement, to have sold to each Bank, and each Bank shall be deemed, without further action by any party to this Agreement, to have purchased from the Issuer, a participation, to the extent of such Bank's Commitment Percentage, in such Letter of Credit and the related Letter of Credit Liabilities. Any Letter of Credit with an expiry date after the Termination Date shall be fully Covered or shall be backed by a letter of credit in Proper Form issued by an issuer acceptable to the Issuer in its sole discretion. (b) The following additional provisions shall apply to each Letter of Credit: (1) The Company shall give the Agent at least three Business Days' irrevocable 23 prior notice (effective upon receipt) specifying the date such Letter of Credit is to be issued, describing the proposed terms of such Letter of Credit and the nature of thetransaction proposed to be supported thereby, and shall furnish such additional information regarding such transaction as the Agent may request. Upon receipt of such notice the Agent shall promptly notify each Bank of the contents thereof and of such Bank's Commitment Percentage of the amount of such proposed Letter of Credit. (2) On each day during the period commencing with the issuance of any Letter of Credit and until such Letter of Credit shall have expired or been terminated, the Commitment of each Bank shall be deemed to be utilized for all purposes of this Agreement in an amount equal to such Bank's Commitment Percentage of the sum of (i) the undrawn amount of such Letter of Credit PLUS (ii) the unpaid amount of all Letter of Credit Advances with respect to such Letter of Credit. (3) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment thereunder, the Issuer shall promptly notify the Company and each Bank as to the amount to be paid as a result of such demand and the payment date. If at any time the Issuer shall have made a payment to a beneficiary of a Letter of Credit in respect of a drawing or in respect of an acceptance created in connection with a drawing under such Letter of Credit, each Bank will pay to the Agent immediately upon demand by the Agent at any time during the period commencing after such payment until reimbursement thereof in full by the Company, an amount equal to such Bank's Commitment Percentage of such payment, together with interest on such amount for each day from the date of demand for such payment (or, if such demand is made after 12:00 noon on such date, from the next succeeding Business Day) to the date of payment by such Bank of such amount at a rate of interest per annum equal to the Fed Funds Rate for such day. (4) The Company shall be irrevocably and unconditionally obligated forthwith to reimburse the Issuer for the account of each Bank for any amount paid by it upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly WAIVED by the Company to the extent not prohibited by law. Such reimbursement may, subject to satisfaction of the conditions in SECTION 7 and to the existence of sufficient Available Borrowing Base (after adjustment in the same to reflect the elimination of the corresponding Letter of Credit Liability) be made by borrowing of Loans. The Issuer will pay to each Bank such Bank's Commitment Percentage of all amounts received from the Company for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Letter of Credit, but only to the extent such Bank has made payment to the Issuer in respect of such Letter of Credit pursuant to CLAUSE (3) above. (5) The Company will pay to the Agent at the Principal Office for the account of each Bank the Letter of Credit Fee on such Bank's Commitment Percentage of the amount available for drawings under each Letter of Credit, in each case for the period from and including the date of issuance of each such Letter of Credit to and including the date of expiration or 24 termination thereof, such Letter of Credit Fees to be paid in arrears on the Quarterly Dates and on the Termination Date. The Agent will pay to each Bank, promptly after receiving any payment in respect of Letter of Credit Fees referred to in this CLAUSE (5), anamount equal to such Bank's Commitment Percentage of such Letter of Credit Fee. The aggregate Letter of Credit Fee for any Letter of Credit is subject to a minimum of $600 per annum. (6) The Company shall pay to the Agent for the account of the Issuer, in arrears on each Quarterly Date and on the Termination Date, a fronting fee for each Letter of Credit equal to 1/8 of 1% per annum times the face amount of such Letter of Credit, in each case for the period from and including the date of issuance of such Letter of Credit to and including the date of expiration or termination thereof. (c) Each Letter of Credit shall be subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (and any subsequent revision thereof approved by a Congress of the International Chamber of Commerce) and, to the extent not inconsistent therewith, the laws of the State of New York. (d) To the extent that any provision of any Application is contrary to or inconsistent with the provisions of this Agreement, the provisions of this Agreement shall control. 2.3 BORROWING BASE AND AVAILABLE BORROWING BASE. (a) The initial Borrowing Base shall be $225,000,000. Within 30 days after receipt of each Independent Engineering Report, the Agent shall, subject to the approval of the Required Banks, determine the Borrowing Base and shall notify the Company in writing of the amount of the Borrowing Base. Such Borrowing Base shall be the Borrowing Base from the date of such notification until the date of the next determination of the Borrowing Base in accordance with this Agreement. Each determination of the Borrowing Base shall be made by the Agent (subject to the approval of the Required Banks) in its sole discretion using its normal and customary oil and gas lending practices, based on the Most Recent Engineering Report furnished by the Company. (b) Upon any Asset Sale of Petroleum Properties which causes the aggregate net proceeds from the sale of all Petroleum Properties subject to Asset Sales of Petroleum Properties since the effective date of the Most Recent Engineering Report to exceed $20,000,000, the Agent may, and shall at the request of the Required Banks, redetermine the Borrowing Base in accordance with the procedures described in this Agreement on the basis of the information with respect to the remaining Petroleum Properties set forth in the Most Recent Engineering Report. The Company shall provide the Agent with all such information as the Agent may reasonably request and shall otherwise cooperate in good faith with and assist the Agent and the Required Banks in any such determination. (c) The initial Available Borrowing Base shall be $150,000,000. Upon each receipt by the Agent of an Other Liabilities Report, and upon each determination of the Borrowing Base, 25 the Agent shall redetermine the Available Borrowing Base. (d) In addition to the determinations of the Borrowing Base provided for elsewhere in this SECTION 2.3, each of the Company or the Required Banks may, in their sole discretion, require the Agent to determine the Borrowing Base one additional time in each 12-month period. Such additional determination shall be in accordance with the procedures described in this Agreement on the basis of the information with respect to the Petroleum Properties at the time of such determination set forth in (at the option of the Person requiring the determination) a new Independent Engineering Report or the Most Recent Engineering Report. The Company shall provide the Agent with all such information as the Agent may reasonably request and shall otherwise cooperate in good faith with and assist the Agent and the Required Banks in any such redetermination. 2.4 BORROWING BASE DEFICIENCIES. Should there exist at any time a Borrowing Base Deficiency (other than a Borrowing Base Deficiency resulting in whole or in part from an Asset Sale of Petroleum Properties, the effects of which are addressed in SECTION 3.2(B)(2), the Agent may, but shall not be obligated to (unless requested to do so by the Required Banks), notify the Company in writing of such deficiency. Within 90 days after the giving of such notice, the Company shall make a prepayment on the Loans or take such other steps as may be approved by the Agent, or a combination thereof, so that the Available Borrowing Base is increased by an amount equal to at least 50% of such Borrowing Base Deficiency. Within 180 days after the giving of such notice, the Company shall make a prepayment on the Loans or take such other steps as may be approved by the Agent, or a combination thereof, so that the Borrowing Base Deficiency is eliminated. 2.5. TERMINATIONS, REDUCTIONS AND CHANGES OF COMMITMENTS. (a) On the Termination Date, all Commitments shall be terminated in their entirety. (b) The Company shall have the right to terminate or reduce the unused portion of the Aggregate Commitment at any time or from time to time; PROVIDED that (i) the Company shall give notice of each such termination or reduction to the Agent as provided in SECTION 5.5; (ii) each such partial reduction shall be in an integral multiple of $5,000,000, and (iii) the Company may not cause the Aggregate Commitment to be less than the aggregate principal amount of the Loans (including SFER MRI Loans, if any) and Letter of Credit Liabilities then outstanding (after giving effect to any concurrent repayment of the Loans and reduction of Letter of Credit Liabilities). (c) No reduction in or termination of the Aggregate Commitment pursuant to this SECTION 2.3 may be reinstated without the written approval of the Agent and all Banks. 2.6. FEES. In consideration of the Commitments, the Company shall pay to the Agent for the account of each Bank in accordance with its Commitment Percentage commitment fees (the "COMMITMENT FEES") (a) for each Margin Period from the date of this Agreement to and including 26 the date such Bank's Commitment is terminated at a rate per annum for such Margin Period determined in accordance with the Pricing Schedule and (b) if no Margin Period is in effect, the rate set forth for commitment fees in Level IV of the Pricing Schedule. The Commitment Fees shall be computed for each day and shall be based on such Bank's Commitment Percentage of the Unused Commitment for such day. Accrued Commitment Fees shall be due in arrears on the date of the initial Loans, within three days after demand therefor on or about the Quarterly Dates, and within three days after demand therefor on or about the Termination Date. Upon receipt, the Agent shall disburse such fees to the Banks in accordance with their respective Commitment Percentages. All past due Commitment Fees shall bear interest at the Post-Default Rate. 2.7. AFFILIATES; LENDING OFFICES. (a) Any Bank may, if it so elects, fulfill its Commitment as to any Eurodollar Loan by causing a branch, foreign or otherwise, or Affiliate of such Bank to make such Loan and may transfer and carry such Loan at, to or for the account of any branch office or Affiliate of such Bank; PROVIDED that in such event, for the purposes of this Agreement, such Loan shall be deemed to have been made by such Bank and the obligation of the Company to repay such Loan shall nevertheless be to such Bank and shall be deemed to be held by such Bank, to the extent of such Loan, for the account of such branch or Affiliate. (b) Notwithstanding any provision of this Agreement to the contrary, each Bank shall be entitled to fund and maintain its funding of all or any part of its Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations shall be made as if such Bank had actually funded and maintained each Eurodollar Loan during each Interest Period through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the applicable Eurodollar Rate for such Interest Period. 2.8. SEVERAL OBLIGATIONS. The failure of any Bank to make any Loan to be made by it on the date specified therefor shall not relieve any other Bank of its obligation to make its Loan on such date, but neither the Agent nor any Bank shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank. 2.9. NOTES. The Loans made by each Bank shall be evidenced by a single Note of the Company in substantially the form of EXHIBIT A (each, together with all renewals, extensions, modifications and replacements thereof and substitutions therefor, a "NOTE") payable to the order of such Bank in a principal amount equal to the Commitment of such Bank as originally in effect and otherwise duly completed. Each Bank is hereby authorized by the Company to endorse on the schedule (or a continuation thereof) attached to the Note of such Bank, to the extent applicable, the date, amount and Type of each Loan made by such Bank to the Company hereunder, and each Continuation thereof, each Conversion of all or a portion thereof to another Type, the date and amount of each payment or prepayment of principal thereof received by such Bank and, in the case of Eurodollar Loans, the length of each Interest Period; PROVIDED that any 27 failure by such Bank to make any such endorsement shall not affect the obligations of the Company under such Note or this Agreement in respect of such Loan. 2.10. USE OF PROCEEDS. The proceeds of the Loans shall be used and the Letters of Credit shall be issued for working capital and for general corporate purposes of the Company and may not be utilized (a) to pay dividends other than usual dividends in the ordinary course of business or (b) for the buyout or acquisition of any Person unless the board of directors of such Person has first approved such buyout or acquisition. Section 3. BORROWINGS AND PREPAYMENTS. 3.1. BORROWINGS. The Company shall give the Agent notice of each borrowing to be made under this Agreement as provided in SECTION 5.5. Each borrowing shall be in an amount of $1,000,000 or any integral multiple thereof. Not later than 2:00 p.m. on the date specified for each such borrowing, each Bank shall make available the amount of the Loan, if any, to be made by it on such date to the Agent, at its Principal Office, in immediately available funds, for the account of the Company. The amounts so received by the Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account designated by the Company and maintained with the Agent at its Principal Office. 3.2. PREPAYMENTS. (a) OPTIONAL PREPAYMENTS. Except as provided in this SECTION 3.2 or in SECTION 5 or 6, the Company shall have the right to prepay, on any Business Day, in whole or in part, without the payment of any penalty or fee, Loans at any time or from time to time; PROVIDED that the Company shall give the Agent notice of each such prepayment as provided in SECTION 5.5. Eurodollar Loans may be prepaid on the last day of an Interest Period applicable thereto and may not be otherwise prepaid unless prepayment is accompanied by payment of all compensation required by SECTION 6.5. (b) MANDATORY PREPAYMENTS. (1) The Company shall from time to time on demand by the Agent prepay the Loans (or SFER MRI Loans, if any) or reduce Letter of Credit Liabilities in such amounts as shall be necessary so that at all times the aggregate outstanding principal amount of the Loans (and SFER Loans, if any) and the aggregate Letter of Credit Liabilities shall not exceed the Available Borrowing Base. Any such payment shall be allocated between Loans and Letter of Credit Liabilities and, if to Letter of Credit Liabilities, first to Reimbursement Obligations and then to other obligations as the Company may elect. (2) Concurrently with any Asset Sale of Petroleum Properties which would cause the aggregate amount of such Asset Sales of Petroleum Properties since the effective date 28 of the last calculation of the Borrowing Base to exceed $20,000,000, the Agent may, and shall at the request of the Required Banks, redetermine the Borrowing Base and the Available Borrowing Base in each case to the effective date of such Asset Sale of Petroleum Properties on the basis of the Most Recent Engineering Report and the Most Recent Other Liabilities Report. If a Borrowing Base Deficiency exists as a result of any such redetermination, the Company shall prepay on the Business Day following the date of such Asset Sale of Petroleum Properties an amount equal to the lesser of (x) the net proceeds of all such Asset Sales of Petroleum Properties not previously prepaid and (y) the amount of the Borrowing Base Deficiency, for application to the unpaid principal balance of the Notes. Should the payment of the net proceeds of all such Asset Sales of Petroleum Properties not previously prepaid not eliminate the Borrowing Base Deficiency, SECTION 2.4 shall apply. (3) The Company shall maintain records of all Asset Sales of Petroleum Properties and shall otherwise maintain books and records which enable it to comply, and to demonstrate to the Agent on request compliance, with the obligations of the Company in this SECTION 3.2(B). Section 4. PAYMENTS OF PRINCIPAL AND INTEREST. 4.1. REPAYMENT OF LOANS AND REIMBURSEMENT OBLIGATIONS. The Company will pay to the Agent for the account of each Bank the principal of each Loan made by such Bank on the Maturity Date and the amount of each Reimbursement Obligation forthwith upon its incurrence. The amount of any Reimbursement Obligation may, if the applicable conditions precedent specified in SECTION 7 (other than any Default resulting solely from the nonpayment of such Reimbursement Obligation) have been satisfied, be paid with the proceeds of Loans. 4.2. INTEREST. Subject to SECTIONS 12.8 AND 4.3(B), the Company will pay to the Agent for the account of each Bank interest on the unpaid principal amount of each Loan made by such Bank for the period commencing on the date of such Loan to but excluding the date such Loan shall be paid in full, at the lesser of (1) the following rates per annum: (A) if such Loan is an Alternate Base Rate Loan, the Alternate Base Rate; or (B) if such Loan is a Eurodollar Loan, the applicable Eurodollar Rate PLUS the Applicable Margin for Eurodollar Loans; or (2) the Highest Lawful Rate. 4.3. SELECTION OF INTEREST RATES. (a) Subject to SECTION 6 and SECTION 12.8, the Company shall have the right, by giving a Rate Designation Notice to the Agent as provided in SECTION 5.5, to designate any Loan as a Loan of a particular Type, to convert (a "CONVERSION") any Loan (in whole or in part) into a Loan 29 of another Type or to continue (a "CONTINUATION") any Loan (in whole or in part) as a Loan of the same Type. The records of the Agent with respect to interest rate designations, Interest Periods and the amount of Loans to which they are applicable shall be binding and conclusive, absent manifest error. Loans shall be Alternate Base Rate Loans except where the Company has complied with all requirements of this Agreement for the designation, Conversion or Continuation of such Loan as a Eurodollar Loan. Interest on the amount of each Loan shall accrue on the amount of that Loan and from the date it is made. Any such notice of designation, Conversion or Continuation shall specify the new Interest Period. In the event the Company fails to so give such notice prior to the end of any Interest Period for any Eurodollar Loan, such Loan shall become an Alternate Base Rate Loan on the last day of such Interest Period. No more than 10 Eurodollar Interest Periods shall be in effect at any time. Except as otherwise provided in this Agreement, each such designation, Conversion or Continuation shall apply to all Notes ratably in accordance with their respective principal balances. If any Bank assigns an interest in its Note when any Eurodollar Loan is outstanding with respect thereto, the assignee shall have its ratable interest in such Eurodollar Loan. (b) Notwithstanding the foregoing but subject to SECTION 12.8, the Company will pay to the Agent for the account of each Bank interest (i) except as otherwise provided in CLAUSE (II) or CLAUSE (III) of this SECTION 4.3(B), at a rate per annum 2% above the otherwise applicable rate on any principal of any Loan made by such Bank, for the period commencing on the first day on which any Event of Default exists and continuing through and including the date no Event of Default exists and is continuing; (ii) at the rate provided in SECTION 2.2 for unpaid Letter of Credit Advances, and (iii) at the Post-Default Rate for any other amount due under the Credit Documents which is not paid in full when due (whether at stated maturity, by acceleration, or otherwise) (but, if such amount is interest, only to the extent legally enforceable). (c) Accrued interest shall be due and payable on the applicable Interest Payment Dates, except that (1) accrued interest pursuant to SECTION 4.3(B) shall be due and payable from time to time on demand of the Agent or the Required Banks (through the Agent), (2) accrued interest on any amount converted from one Type of Loan to another Type of Loan shall be paid on the amount so converted at the time of such Conversion, and (3) accrued interest on any Eurodollar Loan paid or prepaid shall be due at the time of such payment or prepayment. Section 5. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS, ETC. 5.1. PAYMENTS. (a) Except to the extent otherwise provided in this Agreement, all payments of principal of or interest on the Loans, of Reimbursement Obligations and of other amounts to be made by the Company under the Credit Documents shall be made in dollars, in immediately available funds, to the Agent at its Principal Office (or in the case of a successor Agent, at the principal office of such successor Agent in the United States), not later than 12:00 noon on the date on which such payment shall become due, and each such payment made after such time on 30 such due date shall be deemed to have been made on the next succeeding Business Day. The Agent or any Bank for whose account any such payment is made may (but shall not be obligated to) debit the amount of any such payment which is not made by such time to any ordinary deposit account of the Company with the Agent or such Bank, as the case may be. (b) The Company shall, at the time it makes each payment under this Agreement or any other Credit Document, specify to the Agent the Loans or other amounts payable by the Company to which such payment is to be applied (and in the event that it fails so to specify, such payment shall be applied as the Agent may designate to the Loans or other amounts then due and payable); PROVIDED that if no Loans or other amounts are then due and payable or an Event of Default has occurred and is continuing, the Agent may apply any payment to the Obligations in such order as it may elect in its sole discretion, but subject to the other terms and conditions of this Agreement, including SECTION 5.2. Each payment received by the Agent under this Agreement or any other Credit Document for the account of a Bank shall be paid promptly to such Bank in immediately available funds for the account of such Bank's Applicable Lending Office. (c) If the due date of any payment under this Agreement or any other Credit Document falls on a day which is not a Business Day, the due date for such payment (except as otherwise provided in the definition of "Interest Period") shall be extended to the next succeeding Business Day and interest shall be payable for any principal so extended for the period of such extension at the rate in effect on such due date. 5.2. PRO RATA TREATMENT. Except to the extent otherwise provided herein, (a) each borrowing from the Banks hereunder, each payment of Commitment Fees and other fees and each termination or reduction of the Aggregate Commitment under SECTION 2.3 shall be made PRO RATA according to the Banks' respective Commitment Percentages; (b) except as otherwise provided in this Agreement, each payment by the Company of principal of or interest on Loans of a particular Type shall be made to the Agent for the account of the Banks PRO RATA according to the Banks' respective Commitment Percentages; and (c) the Banks (other than the Issuer) shall purchase from the Issuer participations in each Letter of Credit and its related Letter of Credit Liabilities PRO RATA according to the Banks' respective Commitment Percentages. 5.3. COMPUTATIONS. Interest based on the Alternate Base Rate (to the extent determined by reference to the Prime Rate), and fees hereunder, will be computed on the basis of 365 (or 366) days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. All other interest and fees shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable, unless the effect of so computing shall be to cause the rate of interest to exceed the Highest Lawful Rate (in which event interest and fees shall be calculated on the basis of the actual number of days elapsed in a year composed of 365 or 366 days, as the case may be). 5.4. MINIMUM AND MAXIMUM AMOUNTS. Except for prepayments made pursuant to 31 SECTION 3.2(B), each borrowing and repayment of principal of Loans, each optional partial prepayment and each designation, Continuation or Conversion of Type shall be in an aggregate principal amount equal to $1,000,000 or an integral multiple thereof (borrowings or prepayments of Loans of different Types or, in the case of Eurodollar Loans, having different Interest Periods at the same time hereunder, to be deemed separate borrowings and prepayments for purposes of the foregoing, one for each Type or Interest Period), and each termination or reduction of the Aggregate Commitment shall be in an aggregate principal amount equal to $5,000,000 or an integral multiple thereof. Upon any mandatory prepayment that would reduce Eurodollar Loans having the same Interest Period to less than $1,000,000, such Eurodollar Loans shall automati cally be converted into Alternate Base Rate Loans. Each issuance of a Letter of Credit shall be in a face amount of at least $25,000. 5.5. CERTAIN ACTIONS, NOTICES, ETC. Notices to the Agent of any termination or reduction of the Aggregate Commitment, of prepayments of Loans and of the duration of Interest Periods, each Request for Extension of Credit and each Rate Designation Notice shall be irrevocable and shall be effective only if received by the Agent not later than 12:00 noon (1:00 p.m. in the case of a Request for Extension of Credit or Rate Designation Notice related to a Eurodollar Loan) on the day that is the applicable number of Business Days prior to the date of the relevant termination, reduction, issuance, borrowing and/or prepayment specified below: NUMBER OF BUSINESS DAYS PRIOR NOTICE ------------------ Termination or reduction of Aggregate Commitment ........................... 5 Borrowing or prepayment of or Conversion into Alternate Base Rate Loans ......................... same day Borrowing or prepayment of or Conversion into or Continuation of Eurodollar ........................ Loans 3 Issuance of Letter of Credit ...................... 3 32 Prepayments required pursuant to SECTION 3.2(b) ........................ 1 Each such notice of reduction shall specify the amount to which the Aggregate Commitment is to be reduced. Each such notice of prepayment or Request for Extension of Credit shall specify the amount and Type of such Loans to be borrowed or prepaid (subject to SECTIONS 3.2 and 5.4), the date of borrowing or prepayment (which shall be a Business Day) and, in the case of Eurodollar Loans, the duration of the Interest Period therefor (subject to the definition of "Interest Period"). Each Rate Designation Notice with respect to a Conversion of a Loan (or portion thereof) shall specify the amount and Type of the Loan (or portion thereof) being converted, the amount and Type of Loan into which such Loan is being converted (subject to SECTION 5.4), the date for Conversion (which shall be a Business Day) and, unless such Loan is being converted into an Alternate Base Rate Loan, the duration (subject to the definition of "Interest Period") of the Interest Period therefor which is to commence as of the last day of the then current Interest Period therefor (or the date of Conversion, if such Loan is being converted from an Alternate Base Rate Loan). Each Rate Designation Notice with respect to a Continuation of a Loan (or portion thereof) as the same Type of Loan shall specify the amount and Type of such Loan (or portion thereof) being continued (subject to SECTION 5.4) and the duration (subject to the definition of "Interest Period") of the Interest Period therefor which is to commence as of the last day of the then current Interest Period therefor. The Agent shall promptly notify the Banks of the contents of each such notice, Request for Extension of Credit, or Rate Designation Notice. Notice of any prepayment having been given, the principal amount specified in such notice, together with interest thereon to the date of prepayment, shall be due and payable on such prepayment date. 5.6. NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Agent shall have been notified by a Bank prior to 2 p.m. on the date on which such Bank is to make payment to the Agent of the proceeds of a Loan (or the payment of any amount by such Bank to reimburse the Issuer for a drawing under any Letter of Credit) to be made by it hereunder or by the Company prior to the date on which the Company is to make a payment to the Agent for the account of the Agent, the Issuer or one or more of the Banks, as the case may be (such Bank or the Company being herein called the "PAYOR" and such payment being herein called the "REQUIRED PAYMENT"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on the date that such Required Payment is to be made. If the Payor is the Company and the Company has not in fact made the Required Payment to the Agent on or before such date, the Banks, ratably in proportion to their respective Commitment Percentages, shall, on demand, repay to the Agent the amount made available by the Agent, together with interest thereon from the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Fed Funds Rate for the first three days after demand and thereafter at the Fed Funds Rate plus 2%. (If the Payor is the Company, the provisions of SECTION 2.2(A) AND SECTION 4.3(B) shall also apply.) If the Payor is a Bank and such Bank has not in fact made the Required Payment to the Agent on or before such date, such Bank 33 shall, on demand, pay to the Agent the amount made available by the Agent on behalf of such Bank, together with interest thereon from the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Fed Funds Rate for each of the first three days after demand and for each day thereafter at the Fed Funds Rate plus 2%. 5.7. SHARING OF PAYMENTS, ETC. If a Bank or any participant of a Bank shall obtain payment of any principal of or interest on any Loan made by it under this Agreement or of any Reimbursement Obligation or other obligation to it under this Agreement, through the exercise of any right of set-off, banker's lien, counterclaim or similar right, or otherwise, such Bank or participant shall promptly purchase from the other Banks participations in the Loans made or Reimbursement Obligations or other obligations held by the other Banks in such amounts, and make such other adjustments from time to time as shall be equitable to the end that all the Banks and participants shall share the benefit of such payment (net of any expenses which may be incurred by such Bank or its participant in obtaining or preserving such benefit) PRO RATA in accordance with the respective amounts then due to each of them. To such end all the Banks and their participants shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. The Company agrees, to the fullest extent it may effectively do so under applicable law, that any Person so purchasing a participation in the Obligations may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans, Reimbursement Obligations or other obligations in the amount of such participation. Nothing in this Agreement shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Company. Section 6. YIELD PROTECTION AND ILLEGALITY. 6.1. ADDITIONAL COSTS. (a) Subject to SECTION 12.8, the Company shall pay to the Agent, on demand, for the account of such Bank, from time to time such amounts as any Bank may reasonably determine to be necessary to compensate it for any costs incurred by such Bank which such Bank reasonably determines are attributable to its making or maintaining any Eurodollar Loan hereunder or its obligation to make or maintain any such Loan hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any of such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "ADDITIONAL COSTS"), in each case resulting from any Regulatory Change which: (1) subjects such Bank (or makes it apparent that such Bank is subject) to any tax (including any United States interest equalization tax), levy, impost, duty, charge or fee (collectively, "TAXES"), or any deduction or withholding for any Taxes on or from the payment due under any Eurodollar Loan or other amounts due hereunder, other than income and franchise 34 taxes of the jurisdiction (or any subdivision thereof) in which such Bank has an office or its Applicable Lending Office; or (2) changes the basis of taxation of any amounts payable to such Bank under this Agreement or its Note in respect of any of such Loans, other than changes which affect taxes measured by or imposed on the overall net income or franchise taxes of such Bank or of its Applicable Lending Office for any of such Loans by the jurisdiction (or any subdivision thereof) in which such Bank has an office or such Applicable Lending Office; or (3) imposes or modifies or increases or deems applicable any Statutory Reserves or any other reserve, special deposit or similar requirement (including any such requirement imposed by the Board) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Bank or loans made by such Bank, or against any other funds, obligations or other property owned or held by such Bank; or (4) imposes any other condition affecting this Agreement (or any of such extensions of credit or liabilities). Each Bank will notify the Company through the Agent of any event occurring after the date of this Agreement which will entitle such Bank to compensation pursuant to this SECTION 6.1 as promptly as practicable after it obtains knowledge thereof and determines to request such compensation, and (if so requested by the Company through the Agent) will designate a different available Applicable Lending Office for the Eurodollar Loans of such Bank or take such other action as the Company may reasonably request if such designation or action is consistent with the internal policy of such Bank and legal and regulatory restrictions, can be undertaken at no additional cost, will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Bank, be disadvantageous to such Bank (PROVIDED that such Bank shall have no obligation so to designate an Applicable Lending Office located in the United States of America). Each Bank will furnish the Company with a statement setting forth the basis and amount of each request by such Bank for compensation under this SECTION 6.1, with each such statement to cover amounts accruing under this SECTION 6.1 with respect to a period beginning not earlier than 120 days from the date thereof and using any reasonable averaging and attribution methods. (b) Without limiting the effect of the foregoing provisions of this SECTION 6.1, in the event that, by reason of any Regulatory Change, any Bank either (1) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank which includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Bank which includes Eurodollar Loans or (2) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, if such Bank so elects by notice to the Company (with a copy to the Agent), the obligation of such Bank to make Eurodollar Loans hereunder shall be suspended until the date such Regulatory Change ceases to be in effect (in which case the provisions of SECTION 6.4 shall be applicable). 35 (c) Determinations and allocations by any Bank for purposes of this SECTION 6.1 of the effect of any Regulatory Change on its costs of maintaining its obligations to make Loans or of making or maintaining Eurodollar Loans or on amounts receivable by it in respect of Eurodollar Loans, and of the additional amounts required to compensate such Bank in respect of any Additional Costs, shall be conclusive, absent manifest error, and may be made using any reasonable averaging and attribution methods. (d) In the event any Bank shall seek compensation pursuant to this SECTION 6.1, the Company may give notice to such Bank (with copies to the Agent) that it wishes to seek one or more Eligible Assignees (which may be one or more of the Banks) to purchase and assume the Commitment, Loans, Note, Letter of Credit Liabilities and interests in this Agreement of such Bank. Each Bank requesting compensation pursuant to this SECTION 6.1 agrees to sell its Commitment, Loans, Note, Letter of Credit Liabilities and interests in this Agreement pursuant to SECTION 12.6 (without recourse, representation or warranty except as provided in SECTION 12.6) to any such Eligible Assignee for an amount equal to (x) the sum of the outstanding unpaid principal of and accrued interest on such Loans, Note and Letter of Credit Advances, plus (y) in the case of the Issuer, Cover for the face amount of all undrawn Letter of Credit Liabilities plus (z) all other fees and amounts (including any compensation claimed by such Bank under this SECTION 6.1) owing to such Bank under the Credit Documents, calculated, in each case, to the date on which such Commitment, Loans, Note, Letter of Credit Liabilities and interests are purchased, whereupon such Bank shall have no further Commitment or other obligation to the Company under this Agreement or any other Credit Document in respect of matters arising after the consummation of such purchase, but shall continue to be entitled to the benefit of, and subject to any obligations incurred by it under, this Agreement and the other Credit Documents in respect of matters occurring during the time it was a Bank under this Agreement. 6.2. LIMITATION ON TYPES OF LOANS. Anything in this Agreement to the contrary notwithstanding, if, with respect to any Eurodollar Loans: (a) the Agent determines (which determination shall be conclusive absent manifest error) that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Rate" in SECTION 1.1 are not being provided in the relevant amounts or for the relevant maturities for purposes of determining the rate of interest for such Loans for Interest Periods therefor as provided in this Agreement; or (b) the Required Banks determine (which determination shall be conclusive absent manifest error) and notify the Agent that the relevant rates of interest referred to in the definition of "Eurodollar Rate" in SECTION 1.1 upon the basis of which the rates of interest for such Loans are to be determined do not accurately reflect the cost to such Banks of making or maintaining such Loans for any proposed Interest Periods therefor; or (c) the Agent determines (which determination shall be conclusive absent manifest error) that by reason of circumstances affecting the Eurodollar interbank market generally, 36 deposits in dollars in the relevant Eurodollar interbank market are not being offered for the applicable Interest Period and in an amount equal to the amount of the Eurodollar Loan requested by the Company; the Agent shall promptly notify the Company and each Bank thereof, and, so long as such condition remains in effect, the Banks shall be under no obligation to make Eurodollar Loans (but shall maintain until the end of the Interest Period then in effect the Eurodollar Loans then outstanding). 6.3. ILLEGALITY. Notwithstanding any other provision of this Agreement to the contrary, if by reason of (x) the adoption or effectiveness of any applicable Legal Requirement, or any change in any applicable Legal Requirement or in the interpretation or administration thereof by any Governmental Authority, or compliance by any Bank with any request or directive (whether or not having the force of law) of any central bank or other Governmental Authority or (y) circumstances affecting the relevant Eurodollar interbank market or the position of a Bank therein, it shall at any time be unlawful or impracticable in the sole discretion of a Bank for such Bank or its Applicable Lending Office to (a) honor its obligation to permit the establishment of Eurodollar Loans hereunder or (b) maintain Eurodollar Loans hereunder, then such Bank through the Agent shall promptly notify the Company thereof, and the obligation of such Bank to establish or maintain Eurodollar Loans hereunder shall be suspended until such time as such Bank may again establish and maintain Eurodollar Loans, in which case the provisions of SECTION 6.4 shall be applicable. Before giving such notice pursuant to this SECTION 6.3, such Bank will designate a different available Applicable Lending Office for the Eurodollar Loans of such Bank or take such other action as the Company may reasonably request if such designation or action is consistent with the internal policy of such Bank and legal and regulatory restrictions, can be undertaken at no additional cost, will avoid the need to suspend such Bank's obligation to make Eurodollar Loans hereunder and will not, in the sole opinion of such Bank, be disadvantageous to such Bank (PROVIDED that such Bank shall have no obligation so to designate an Applicable Lending Office located in the United States of America). In the event any Bank shall seek to invoke the benefits of this SECTION 6.3, the Company may give notice to such Bank (with copies to the Agent) that it wishes to seek one or more Eligible Assignees (which may be one or more of the Banks) to purchase and assume the Commitment, Loans, Note, Letter of Credit Liabilities and interests in this Agreement of such Bank. Each Bank requesting to invoke the benefits of this SECTION 6.3 agrees to sell its Commitment, Loans, Note, Letter of Credit Liabilities and interests in this Agreement pursuant to SECTION 12.6 (without recourse, representation or warranty except as provided in SECTION 12.6) to any such Eligible Assignee for an amount equal to (x) the sum of the outstanding unpaid principal of and accrued interest on such Loans, Note and Letter of Credit Advances, plus (y) in the case of the Issuer, Cover for the face amount of all undrawn Letter of Credit Liabilities, plus (z) all other fees and amounts owing to such Bank under the Credit Documents, calculated, in each case, to the date on which such Commitment, Loans, Note, Letter of Credit Liabilities and interests are purchased, whereupon such Bank shall have no further Commitment or other 37 obligation to the Company hereunder or any other Credit Document in respect of matters arising after the consummation of the purchase, but shall continue to be entitled to the benefit of, and subject to any obligation incurred by it under, this Agreement and the other Credit Documents in respect of matters occurring during the time it was a Bank under this Agreement. 6.4. SUBSTITUTE ALTERNATE BASE RATE LOANS. If the obligation of any Bank to make or maintain Eurodollar Loans shall be suspended pursuant to SECTION 6.1, 6.2 or 6.3, all Loans which would otherwise be made by such Bank as Eurodollar Loans shall be made instead as Alternate Base Rate Loans (and, if an event referred to in SECTION 6.1(B) or 6.3 has occurred and such Bank so requests by notice to the Company with a copy to the Agent, each Eurodollar Loan of such Bank then outstanding shall be automatically converted into an Alternate Base Rate Loan on the date specified by such Bank in such notice which shall be the last day of the current Interest Period with respect to such Eurodollar Loan or on such earlier date as required by law) and, to the extent that such Eurodollar Loans are so made as (or converted into) Alternate Base Rate Loans, all payments of principal which would otherwise be applied to such Eurodollar Loans shall be applied instead to such Alternate Base Rate Loans. 6.5. COMPENSATION. Subject to SECTION 12.8, the Company shall pay to the Agent for the account of each Bank, within two Business Days after demand therefor by such Bank through the Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost or expense incurred by it as a result of: (a) any payment, prepayment or Conversion of a Eurodollar Loan made by such Bank on a date other than the last day of an Interest Period for such Loan; or (b) any failure by the Company to borrow a Eurodollar Loan to be made by such Bank on the date for such borrowing specified in the relevant notice of borrowing under SECTION 5.5 or to convert an Alternate Base Rate Loan into a Eurodollar Loan on such date after giving notice of such Conversion or to continue a Eurodollar Loan after giving notice of such Continuation; or (c) any payment, prepayment or Conversion of a Eurodollar Loan required by any provision of this Agreement or otherwise made or deemed made on a date other than the last day of an Interest Period for such Eurodollar Loan; or (d) any cessation of the Eurodollar Rate to apply to any Loan or any part thereof; including, in each case, any actual loss or expense sustained or incurred or to be sustained or incurred in liquidating or employing deposits acquired to effect or maintain such Eurodollar Loan or any part thereof. Such compensation shall include an amount equal to the excess, if any, as reasonably determined by each Bank, of (1) its cost of obtaining the funds for the Loan being paid, prepaid or converted or not borrowed, converted or continued (assumed to be the applicable Eurodollar Rate) for the period from the date of such payment, prepayment or Conversion or failure to borrow, convert or continue to the last day of the Interest Period for such Loan (or, in 38 the case of a failure to borrow, convert or continue the Interest Period for such Loan which would have commenced on the date of such failure to borrow, convert or continue) over (2) the amount of interest (as reasonably determined by such Bank) that would be realized by such Bank in reemploying the funds so paid, prepaid or converted or not borrowed, converted or continued for such period or Interest Period, as the case may be. Each determination of the amount of such compensation by a Bank shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. 6.6. ADDITIONAL COSTS IN RESPECT OF LETTERS OF CREDIT. If as a result of any Regulatory Change there shall be imposed, modified or deemed applicable any tax, reserve, special deposit or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued under this Agreement or participations in such Letters of Credit, and the result shall be to increase the cost to the Issuer or any Bank of issuing or maintaining any Letter of Credit or any participation therein, or reduce any amount receivable by the Issuer or any Bank in respect of any Letter of Credit or any participation therein (which increase in cost, or reduction in amount receivable, shall be the result of such Issuer's or such Bank's reasonable allocation of the aggregate of such increases or reductions resulting from such event), such Issuer or such Bank shall notify the Company through the Agent, and upon demand therefor by such Issuer or such Bank through the Agent, the Company (subject to SECTION 12.8) shall pay to the Issuer or such Bank, from time to time as specified by the Issuer or such Bank, such additional amounts as shall be sufficient to compensate the Issuer or such Bank for such increased costs or reductions in amount. Before making such demand pursuant to this SECTION 6.6, the Issuer or such Bank will designate a different available Applicable Lending Office for the Letter of Credit or participation or take such other action as the Company may request, if such designation or action will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of the Issuer or such Bank, be disadvantageous to the Issuer or such Bank. A statement as to such increased costs or reductions in amount incurred by the Issuer or such Bank, submitted by the Issuer or such Bank to the Company, shall cover amounts accruing under this SECTION 6.6 with respect to a period beginning not earlier than 120 days from the date thereof, shall be conclusive as to the amount thereof, absent manifest error, and may be prepared using any reasonable averaging and attribution method. In the event any Bank shall seek compensation pursuant to this SECTION 6.6, the Company may give notice to such Bank (with copies to the Agent) that it wishes to seek one or more Eligible Assignees (which may be one or more of the Banks) to purchase and assume the Commitment, Loans, Note, Letter of Credit Liabilities and interests in this Agreement of such Bank. Each Bank requesting compensation pursuant to this SECTION 6.6 each agrees to sell its Commitment, Loans, Note, Letter of Credit Liabilities and interests in this Agreement pursuant to SECTION 12.6 (without recourse, representation or warranty except as provided in SECTION 12.6) to any such Eligible Assignee for an amount equal to (x) the sum of the outstanding unpaid principal of and accrued interest on such Loans, Note and Letter of Credit Advances, plus (y) all other fees and amounts (including any compensation claimed by such Bank under this SECTION 6.6) owing to such Bank under the Credit Documents, calculated, in each case, to the date such 39 Commitment, Loans, Note, Letter of Credit Liabilities and interests in this Agreement are purchased, whereupon such Bank shall have no further Commitment or other obligation to the Company under this Agreement or any other Credit Document in respect of matters arising after the consummation of such purchase, but shall continue to be entitled to the benefit of, and subject to any obligation incurred by it under, this Agreement and the other Credit Documents in respect of matters occurring during the time it was a Bank under this Agreement. In the event any Issuer shall seek compensation pursuant to this SECTION 6.6, the Company may give notice to such Issuer (with copies to the Agent) that it wishes another of the Banks to become the Issuer for future Letters of Credit (including any Letters of Credit which the Company may arrange to substitute for any Letter of Credit issued by the retiring Issuer), whereupon such retiring Issuer shall have no further obligation to issue Letters of Credit, but shall continue to be entitled to the benefit of, and subject to any obligation incurred by it under, this Agreement and the other Credit Documents in respect of matters occurring and Letters of Credit issued during the time it was the Issuer under this Agreement. Notwithstanding its retirement, the retiring Issuer shall continue to be entitled to reimbursement of any and all Letter of Credit Advances made by it under each Letter of Credit issued by it. All fees and other amounts (including any compensation claimed by the retiring Issuer under this SECTION 6.6) owing to the retiring Issuer under the Credit Documents shall be paid to the retiring Issuer at the time of its retirement as Issuer, and the retiring Issuer shall continue to be the Issuer for all purposes of this Agreement with respect to any outstanding Letters of Credit theretofore issued by it. 6.7. CAPITAL ADEQUACY. If any Bank shall have determined that (a) the adoption after the date of this Agreement or the effectiveness after the date of this Agreement (regardless of whether previously announced) of any applicable Legal Requirement or treaty regarding capital adequacy, or (b) any change after the date of this Agreement in any existing or future Legal Requirement or treaty regarding capital adequacy, or (c) any change after the date of this Agreement in the interpretation or administration of any existing or future Legal Requirement or treaty regarding capital adequacy by any Governmental Authority or comparable agency charged with the interpretation or administration thereof, or (d) compliance by any Bank (or its Applicable Lending Office) with any request or directive after the date of this Agreement regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority or comparable agency has or would have the effect of reducing the rate of return on the capital of such Bank (or any holding company of which such Bank is a part) as a consequence of its obligations under this Agreement and the other Credit Documents to a level below that which such Bank or holding company could have achieved but for such adoption, change or compliance by an amount deemed by such Bank or holding company 40 to be material, then, from time to time, on demand by such Bank (with a copy to the Agent), the Company (subject to SECTION 12.8) shall pay to such Bank such additional amount or amounts as will compensate such Bank or holding company for such reduction. The certificate of any Bank setting forth such amount or amounts as shall be necessary to compensate it and the basis therefor shall cover amounts accruing under this SECTION 6.7 with respect to a period beginning not earlier than 120 days from the date thereof and shall be conclusive and binding, absent manifest error. The Company shall pay the amount shown as due on any such certificate upon delivery of such certificate. In preparing such certificate, a Bank may take into consideration such Bank's and such holding company's policies with respect to capital adequacy, employ such assumptions and allocations of costs and expenses as it shall in good faith deem reasonable, and use any reasonable averaging and attribution method. In the event any Bank shall seek compensation pursuant to this SECTION 6.7, the Company may give notice to such Bank (with copies to the Agent) that it wishes to seek one or more Eligible Assignees (which may be one or more of the Banks) to purchase and assume the Commitment, Loans, Note, Letter of Credit Liabilities and interests in this Agreement of such Bank. Each Bank requesting compensation pursuant to this SECTION 6.7 agrees to sell its Commitment, Loans, Note, Letter of Credit Liabilities and interests in this Agreement pursuant to SECTION 12.6 (without recourse, representation or warranty except as provided in SECTION 12.6) to any such Eligible Assignee for an amount equal to (x) the sum of the outstanding unpaid principal of and accrued interest on such Loans, Note and Letter of Credit Advances, plus (y) in the case of the Issuer, Cover for the face amount of all undrawn Letter of Credit Liabilities, plus (z) all other fees and amounts (including any compensation claimed by such Bank under this SECTION 6.7) owing to such Bank under the Credit Documents, calculated, in each case, to the date on which such Commitment, Loans, Note, Letter of Credit Liabilities and interests are purchased, whereupon such Bank shall have no further Commitment or other obligation to the Company under this Agreement or any other Credit Document in respect of matters arising after the consummation of such purchase, but shall continue to be entitled to the benefit of, and subject to any obligation incurred by it under, this Agreement and the other Credit Documents in respect of matters occurring during the time it was a Bank under this Agreement. Section 7. CONDITIONS PRECEDENT. 7.1. INITIAL CONDITIONS PRECEDENT. The obligation of each Bank to make its initial Loan to the Company pursuant to this Agreement and the obligation of the Issuer to issue the first Letter of Credit pursuant to this Agreement are each subject to the following conditions precedent, each of which shall have been fulfilled or waived in the discretion of the Agent: (a) CORPORATE ACTION AND STATUS. The Agent shall have received copies of the Organizational Documents of the Company certified by the Secretary of the Company, and resolutions of the Board of Directors of the Company, certified by the Secretary of the Company, for all corporate action taken by the Company authorizing the execution, delivery and performance of the Credit Documents to which the Company is a party, together with such certificates as may 41 beappropriate to demonstrate the existence, qualification and good standing of and payment of taxes by each member of the Combined Group in each jurisdiction in which such qualification is required to make true the representations contained in SECTION 8.1. (b) INCUMBENCY. The Company shall have delivered to the Agent a certificate in respect of the name and signature of each officer who (i) is authorized to sign on its behalf the applicable Credit Documents to which the Company is a party and (ii) will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with this Agreement and the other Credit Documents. The Agent and each Bank may conclusively rely on such certificates until they receive notice in writing from the Company to the contrary. (c) NOTES. The Agent shall have received the appropriate Note of the Company for each Bank, duly completed and executed. (d) CREDIT DOCUMENTS. The Company shall have duly executed and delivered the other Credit Documents to which it is a party, and each such Credit Document shall be in Proper Form. Each such Credit Document shall be in substantially the form furnished to the Banks prior to their execution of this Agreement, together with such changes therein as the Agent may approve in its discretion. The Company shall have paid to the Agent all fees and expenses in the amounts previously agreed upon in writing among the Company and the Agent and all amounts due under SECTION 12.3. (e) OPINION OF COUNSEL TO THE COMPANY. The Agent shall have received the opinions of Andrews & Kurth L.L.P. and of David L. Hicks, counsel to the Company, substantially in the forms of SCHEDULES III and IV, respectively. (f) COUNTERPARTS. The Agent shall have received counterparts of each of the Credit Documents duly executed and delivered by or on behalf of each of the parties thereto (or, in the case of any Bank as to which the Agent shall not have received such a counterpart, the Agent shall have received evidence satisfactory to it of the execution and delivery by such Bank of a counterpart hereof). (g) CONSENTS. The Agent shall have received evidence satisfactory to it in its discretion that all consents of each Governmental Authority and of each other Person, if any, required in connection with the Loans and Letters of Credit or the execution, delivery and performance of the Credit Documents have been received and remain in full force and effect. (h) OTHER DOCUMENTS. The Agent shall have received such other documents consistent with the terms of this Agreement and relating to the transactions contemplated hereby as the Agent may reasonably request. (i) TERMINATION OF EXISTING CREDIT FACILITY. The Agent shall have received evidence 42 satisfactory to it in its discretion that the Company has terminated the Existing Credit Facility; the Company shall have repaid all borrowings thereunder, and all commitments thereunder shall have terminated. (j) SENIOR SUBORDINATED DEBT. The Agent shall have received evidence satisfactory to it in its discretion that the aggregate principal amount of Total Debt outstanding pursuant to the Indenture does not exceed $100,000,000. All provisions and payments required by this SECTION 7.1 are subject to the provisions of SECTION 12.8. 7.2. ALL LOANS AND LETTERS OF CREDIT. The obligation of each Bank to make any Loan (including its initial Loan) to be made by it hereunder and the obligation of the Issuer to issue any Letter of Credit (including the first Letter of Credit) are each subject to the additional conditions precedent that, as of the date of such Loan or such issuance, and after giving effect thereto: (a) for each Loan which is not a Conversion or a Continuation, no Default shall have occurred and be continuing and no Borrowing Base Deficiency shall exist; (b) for each Loan which is not a Conversion or a Continuation, and for each Letter of Credit, there shall have been no Material Adverse Change since the date of this Agreement; (c) for each Loan which is not a Conversion or a Continuation, and for each Letter of Credit, all representations and warranties made in each Credit Document shall be true and correct in all material respects on and as of the date of the making of such Loan or the issuance of such Letter of Credit, with the same force and effect as if made on and as of such date (except as the same are expressly stated in the Credit Documents to be made only as of a specific earlier date, in which case the same shall have been true and correct in all material respects as of such earlier date); (d) except for Loans and Letters of Credit made or issued on the date of this Agreement, the Company shall have delivered to the Agent a Request for Extension of Credit (and, in the case of a Letter of Credit, a completed Application) within the time specified in SECTION 5.5; and (e) the making of such Loan or the issuance of such Letter of Credit shall not be prohibited by, or subject the Agent or such Bank to any penalty under, any Legal Requirement applicable to the Agent or such Bank. The borrowing of the initial Loans and the issuance of the initial Letter of Credit under this Agreement and each Request for Extension of Credit in respect of each Loan and each Letter of Credit by the Company hereunder shall constitute and include a representation and warranty by the Company to the effect set forth in SUBSECTIONS (A) through (C) (if applicable) of this SECTION 43 7.2 (both as of the date of such notice and, unless the Company otherwise notifies the Agent prior to the date of such borrowing or issuance, as of the date of such borrowing or issuance). Except in the case of Loans and Letters of Credit made or issued on the date hereof, such representation and warranty shall be accompanied by a certificate of the Chief Executive Officer, President, Chief Financial Officer or Treasurer of the Company setting forth in reasonable detail the calculations of the Company in making such representation and warranty. 7.3. CONVERSIONS AND CONTINUATIONS OF EURODOLLAR LOANS. The obligation of each of the Banks to convert any Alternate Base Rate Loan into a Eurodollar Loan or to continue any Eurodollar Loan for a new Interest Period is subject to the conditions precedent that on the date of such Conversion or Continuation and after giving effect thereto (a) no Default shall have occurred and be continuing, (b) the Company shall have delivered to the Agent a Rate Designation Notice within the time specified in SECTION 5.5, and (c) such Conversion or Continuation shall not be prohibited by, or subject such Bank to any penalty under, any Legal Requirement applicable to such Bank. The acceptance of the benefits of such Conversion or Continuation shall constitute a representation and warranty by the Company to each of the Banks to the effect set forth in CLAUSE (A). Section 8. REPRESENTATIONS AND WARRANTIES. To induce the Agent and the Banks to enter into this Agreement and to extend credit under it, the Company represents and warrants (such representations and warranties to survive any investigation, the making of the Loans and the issuance of the Letters of Credit) to the Banks and the Agent as follows: 8.1. CORPORATE EXISTENCE. Each member of the Combined Group (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite power and authority, and has all licenses, permits, authorizations, consents and approvals necessary, to own its property and carry on its business as now being conducted, and (c) is qualified to do business, and is in good standing, in all jurisdictions in which any of the Petroleum Properties which it owns are located or the nature of the business conducted by it makes such qualification necessary or advisable, unless the failure to be so qualified or in good standing would not individually or in the aggregate have a material adverse effect on the business, financial condition or results of operations of the Combined Group taken as a whole. 8.2. INFORMATION. (a) The most recent consolidated balance sheet of the Company and its Subsidiaries and the related consolidated statements of operations, changes in financial position and cash flows for the period then ended, together with the respective notes thereto, delivered to each of the Banks in accordance with the provisions of SECTION 9.1(A) or (B), as the case may be (the latest of such financial statements and the notes thereto being referred to herein as the "MOST RECENT FINANCIAL STATEMENTS"), fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of such date and their consolidated results of operations for the period then ended in conformity with GAAP. 44 (b) Since the date of this Agreement, there has been no Material Adverse Change. 8.3. LITIGATION; COMPLIANCE. Except as disclosed in writing to the Banks prior to the date hereof, there are no legal or arbitral proceedings or any proceedings by or before any Governmental Authority now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any of its Subsidiaries which, if adversely determined, would cause a Material Adverse Change. The Company and its Subsidiaries comply in all material respects with all applicable material (based on the Company and its Subsidiaries taken as a whole) Legal Requirements (other than the Applicable Environmental Laws, representations and warranties regarding which are found in SECTION 8.13). Neither the Company nor any of its Subsidiaries is in default in any material respect under, or in violation of, any material (based on the Company and its Subsidiaries taken as a whole) judgment, order or decree of any Governmental Authority. 8.4. NO BREACH. None of the execution and delivery of the Credit Documents, the consummation of the transactions therein contemplated or compliance with the terms and provisions thereof will conflict with or result in a breach of, or require any consent that has not been obtained under, the Organizational Documents of the Company or any of its Subsidiaries or any material Legal Requirement (including any securities law, rule or regulation) applicable to the Company or any of its Subsidiaries or (except for the Liens permitted by this Agreement) result in the creation or imposition of any Lien upon any of the revenues or property of the Company or any of its Subsidiaries. Such execution, delivery, consummation and compliance do not and will not conflict with or result in a breach of any material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound or to which any of them is subject, or constitute a default under any such agreement or instrument. 8.5. NECESSARY ACTION. The Company has all necessary power and authority to execute, deliver and perform its obligations under the Credit Documents and the documentation relating to the Monterey Transactions and to consummate the transactions contemplated therein. The execution, delivery and performance of the Credit Documents by the Company and the consummation by the Company of the transactions contemplated therein have been duly authorized by all necessary action on the part of the Company. The Credit Documents have been duly and validly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws relating to the enforcement of creditors' rights generally and by general equitable principles. 8.6. APPROVALS. All authorizations, approvals and consents of, and all filings and registrations with, all Governmental Authorities, the holders of the Senior Subordinated Notes and each other Person necessary for the execution, delivery or performance of any Credit Document or the consummation by the Company of the transactions contemplated therein or for the validity or enforceability thereof have been obtained and are in full force and effect. 45 8.7. REGULATIONS G, T, U AND X. Neither the Company nor any agent acting on its behalf has taken or will take any action which might cause this Agreement, the Loans or the Notes to violate Regulations G, T, U or X or any other regulation of the Board or to violate the Securities Exchange Act of 1934, as amended, in each case as in effect now or as the same may hereafter be in effect. No portion of the Loans shall be drawn or used for any purpose which would cause this Agreement, the Notes or the Loans to be "purpose credit" under Regulation U of the Board. The parties acknowledge that neither the Agent nor any Bank is relying upon as collateral any margin stock, whether issued by the Company, currently owned by the Company or any Restricted Subsidiary or intended to be acquired by the Company or any Restricted Subsidiary. The Company warrants and covenants that it shall not take any action that would result, in the absence of the application of the following sentence, in any credit that may be (or that may have been) advanced under this Agreement being classified as purpose credit directly or indirectly secured by margin stock within the meaning of Regulation U. Notwithstanding any term contained in this Agreement to the contrary, if any purpose credit extended or deemed to be extended under this Agreement should nevertheless ever be deemed to be indirectly secured by margin stock, then, during such time that such condition exists: (i) the Company (without regard to any restriction contained in the Credit Documents) may sell, pledge or otherwise dispose of the Excess Portion of margin stock (and the exercise of such right shall not constitute cause for accelerating the maturity of the Obligations); and (ii) the Company shall not utilize any of its assets that are not margin stock to acquire any margin stock directly or indirectly. As used in this SECTION 8.7: (A) "REGULATION U" means those regulations concerning credit provided by banks for the purpose of purchasing or carrying margin stock set forth at Part 211 of Volume 12 of the Code of Federal Regulations, as the same may be amended from time to time; (B) "INDIRECTLY SECURED" and "PURPOSE CREDIT" shall have the meanings ascribed to those phrases in Section 221.2 of Regulation U; (iii) "EXCESS PORTION OF MARGIN STOCK" means that portion of the margin stock directly or indirectly owned by the Company (and, where the value of all margin stock so owned by the Company exceeds the Regulation U Limit, the Company shall promptly identify to the Agent the particular shares from among them which shall be included in such portion exceeding the Regulation U Limit) that has a value, when added to the value all other margin stock indirectly securing the credit extended under this Agreement, that would cause the total value of the margin stock indirectly securing the credit to exceed the Regulation U Limit; and (iv) "REGULATION U LIMIT" means that amount equal to twenty-five (25%) of the value of the Company's properties or assets that are then subject to any restriction in this Agreement on the disposition thereof or the creation of Liens thereon. 8.8. ERISA. The Company and each ERISA Affiliate have fulfilled their contribution obligations under each Plan subject to Title IV of ERISA and have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan subject to Title IV of ERISA, and in all other regards with respect to each Plan are in material compliance with the applicable provisions of ERISA, the Code, and all other applicable laws, regulations and rules, to the extent that noncompliance with such provisions would result in a Material Adverse Change. The Company has no knowledge of any event with respect to each Plan which could result in a Material Adverse Change. 46 8.9. TAXES. Each of the Company and its Subsidiaries has filed all United States federal income tax returns and all other material tax returns which are required to be filed by it and has paid all taxes due pursuant to such returns or pursuant to any assessment received by it, except to the extent the same may be contested in good faith by appropriate proceedings diligently conducted for which adequate reserves have been established in accordance with GAAP. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes and other governmental charges, as made on a periodic basis, are adequate. 8.10. SUBSIDIARIES. SCHEDULE I as supplemented from time to time by notice from the Company to the Agent is a complete and correct list of all Subsidiaries of the Company. All shares or other indicia of equity interest of the Restricted Subsidiaries directly or indirectly owned by the Company are free and clear of Liens (except Permitted Encumbrances and Liens permitted by SECTION 9.7(A)(7)), and all such shares are validly issued, fully paid and non-assessable. 8.11. INVESTMENT COMPANY ACT. No member of the Combined Group is an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or directly or indirectly controlled by or acting on behalf of any Person which is an "investment company", within the meaning of said Act. 8.12. PUBLIC UTILITY HOLDING COMPANY ACT; FEDERAL POWER ACT. No member of the Combined Group is a "public utility company", or an "affiliate" or a "subsidiary company" of a "public utility company", or a "holding company", or an "affiliate" or a "subsidiary company" of a "holding company" or of a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended, or a "public utility" as such term is defined in the Federal Power Act, as amended. 8.13. ENVIRONMENTAL MATTERS. Except as disclosed in writing to the Agent prior to the date hereof, the Company and its Subsidiaries, and the plants and sites of each, have complied with all Applicable Environmental Laws, except, in any such case, where such failure to so comply would not result in a Material Adverse Change. Without limiting the generality of the preceding sentence, neither the Company nor any of its Subsidiaries has received notice of or has actual knowledge of any actual or claimed or asserted failure so to comply with Applicable Environmental Laws or of any other Environmental Claim which alone or together with all other such failures or Environmental Claims is material and would result in a Material Adverse Change. Except as disclosed in writing to the Agent prior to the date hereof, neither the Company nor any of its Subsidiaries nor their plants or other sites manage, generate or dispose of, or during their respective period of use, ownership, occupancy or operation by the Company or its Subsidiaries have managed, generated, released or disposed of, any hazardous wastes, solid wastes, petroleum substances, hazardous substances, hazardous materials, toxic substances or toxic pollutants, as those terms are used or defined in the Applicable Environmental Laws, in material violation of or in a manner which would result in liability under the Applicable Environmental Laws or any other applicable Legal Requirement, or in a manner which would result in an Environmental Claim except where such noncompliance or liability or Environmental Claim would not result in 47 a Material Adverse Change. The representation and warranty contained in this SECTION 8.13 is based in its entirety upon (a) current interpretations and enforcement policies that have been publicly disseminated and are used by Governmental Authorities charged with the enforcement of the Applicable Environmental Laws or which apply to the Company or any of its Subsidiaries with respect to any property or sites in a particular jurisdiction and (b) current levels of publicly disseminated scientific knowledge concerning the detection of, and the health and environmental risks associated with the discharge of, substances and pollutants regulated pursuant to the Applicable Environmental Laws. 8.14. TITLE. (a) Each member of the Combined Group has good and defensible title to the oil, gas and mineral properties shown as owned by it and included in the Most Recent Engineering Report furnished to the Banks. (b) Such properties and facilities are free and clear of all Liens, except Permitted Encumbrances and other Liens permitted hereby. (c) All oil, gas and mineral leases and leasehold estates, gas purchase and sales contracts and other agreements comprising or relating to any of such properties are valid and subsisting and in full force and effect, except for those leases, estates, contracts, easements, rights-of-way and agreements which are in the aggregate not material to oil, gas and mineral properties included in the Most Recent Engineering Report furnished to the Banks, taken as a whole. (d) All rights, permits, easements, servitudes and rights-of-way, failure to have or maintain which would materially interfere with the development, maintenance and operation of such properties so as to cause a Material Adverse Change, have been obtained and are in full force and effect. Section 9. COVENANTS. The Company covenants to and agrees with the Banks and the Agent that until the termination of this Agreement pursuant to SECTION 12.7: 9.1. FINANCIAL STATEMENTS AND CERTIFICATES. The Company will deliver in duplicate: (a) to each Bank, as soon as practicable and in any event within 45 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, consolidated and consolidating statements of operations, stockholders' equity and cash flows of the Company and its Subsidiaries for the period from the beginning of the then-current fiscal year to the end of such quarterly period, and a consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of such quarterly period, setting forth (1) as to each account affected thereby, all eliminating entries for the Unrestricted Subsidiaries as a group and (2) the resulting consolidated and consolidating figures for the Company and the Restricted Subsidiaries, and 48 setting forth in each case in comparative form figures as of the end of and for the corresponding period in the preceding fiscal year, all in reasonable detail and unaudited but certified by an authorized financial officer of the Company as fairly presenting the financial position and results of operations of the Company and its Subsidiaries as of the date thereof and the period then ended, subject to changes resulting from year-end adjustments; (b) to each Bank, as soon as practicable and in any event within 90 days after the end of each fiscal year, consolidated and consolidating statements of operations, stockholders' equity and cash flows of the Company and its Subsidiaries for such year, and a consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of such fiscal year, setting forth (1) as to each account affected thereby, all eliminating entries for the Unrestricted Subsidiaries as a group and (2) the resulting consolidating figures for the Company and the Restricted Subsidiaries, and setting forth in each case in comparative form corresponding consolidating figures from the preceding annual audit, all in reasonable detail and which shall be reported on by Price Waterhouse LLP or other independent public accountants of recognized national standing selected by the Company whose report shall (A) contain an opinion that shall be unqualified as to the scope or limitations imposed by the Company and shall not be subject to any other material qualification and (B) state that such financial statements present fairly, in all material respects, the financial position of the Company and its Subsidiaries at the dates indicated and their cash flows and the results of their operations and the changes in their financial position for the periods indicated in conformity with GAAP, and shall be accompanied by a report of such independent public accountants stating that (W) such audit was made for the purpose of forming an opinion on the consolidated financial statements taken as a whole; (X) the consolidating information set forth therein is presented for purposes of additional analysis rather than to present the financial position, results of operations and cash flows of the individual companies; (Y) such consolidating information has been subjected to the auditing procedures applied in the audit of the basic financial statements, and (Z) in such independent public accountants' opinion, such consolidating information is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole, with such changes thereto as such accountants reasonably determine to be appropriate under the circumstances; (c) to each Bank, promptly upon transmission thereof, copies of all financial statements, proxy statements, notices and reports as it shall send to its public stockholders and copies of all registration statements (without exhibits, and other than registration statements and reports relating to employee benefit or compensation plans) and all reports which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to any or all of the functions of the Securities and Exchange Commission); (d) to each Bank, promptly upon receipt thereof, a copy of each other report submitted to the Company or any of its Subsidiaries by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any such Subsidiary; 49 (e) to each Bank, as soon as practicable and in any event within 15 days after any executive officer of the Company obtains knowledge (1) of any Default or any condition or event which, in the opinion of management of the Company, would cause a Material Adverse Change (to the extent affecting the Company and its Subsidiaries in a materially different manner or extent than the oil and gas industry generally); (2) that any Person has given any notice to the Company or any of its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in SECTION 10.1(B) or (M); (3) of the institution of any litigation involving claims against the Company or any of its Subsidiaries equal to or greater than $5,000,000 with respect to any single cause of action or of any adverse determination in any court proceeding in any litigation involving a potential liability to the Company or any of its Subsidiaries equal to or greater than $5,000,000 with respect to any single cause of action which makes the likelihood of an adverse determination in such litigation against the Company or such Subsidiary substantially more probable; and (4) of any regulatory proceeding which, if determined adversely to the Company, would cause a Material Adverse Change (to the extent affecting the Company and its Subsidiaries in a materially different manner or extent than the oil and gas industry generally), an Officer's Certificate specifying the nature and period of existence of any such Default, condition or event, or specifying the notice given or action taken by such Person and the nature of any such claimed Default, event or condition, or specifying the details of such proceeding, litigation or dispute and, in each case, what action the Company and any affected Subsidiary has taken, is taking or proposes to take with respect thereto; (f) to each Bank, (1) promptly after the filing or receiving thereof, copies of all annual reports and such other material reports and notices which the Company or any ERISA Affiliate files under ERISA with the Internal Revenue Service, the PBGC, the U.S. Department of Labor or any entity succeeding to any or all of their respective functions with respect to a Plan that is subject to Title IV of ERISA; (2) promptly upon acquiring knowledge of any "reportable event" (as defined in Section 4043 of ERISA) or of any "prohibited transaction," as such term is defined in the Code or ERISA, in connection with any Plan which may result in a Material Adverse Change, a statement executed by the President or Chief Financial Officer of the Company or the applicable ERISA Affiliate, setting forth the details thereof and the action which the Company or the ERISA Affiliate proposes to take with respect thereto and, when known, any action taken by the PBGC, the Internal Revenue Service, the U.S. Department of Labor (or any entity succeeding to any or all of the functions of any such entity) with respect thereto; (3) promptly after the filing or receiving thereof by the Company or any ERISA Affiliate, any notice of the institution of any proceedings or other actions which may result in the termination of any Plan or notice of complete or partial withdrawal liability under Title IV of ERISA, and (4) each request for waiver of the funding standards or extension of the amortization periods required by Sections 303 and 304 of ERISA or Section 412 of the Code promptly after the request is submitted by the Company or any ERISA Affiliate, to the Secretary of the Treasury, the U.S. Department of Labor or the Internal Revenue Service (or any entity succeeding to any or all of the functions of any such entity), as the case may be; (g) to each Bank, as soon as available but in no event later than February 28 of each 50 year, an Independent Engineering Report reflecting data as of December 31 of the prior year and, upon the request of the Agent promptly after June 30 of each year, but in no event later than September 1 of each year, a Company Report; (h) to the Agent, no later than the first Quarterly Date after the formation or acquisition of any Subsidiary of the Company, notice of such formation or acquisition stating the name, jurisdiction of organization, percentage owned by the Company, whether such Subsidiary is a Restricted Subsidiary or an Unrestricted Subsidiary, and other relevant information; (i) to the Agent, (i) on or before each Quarterly Date, (ii) at any time the aggregate amount of Other Liabilities reported in the Most Recent Other Liabilities Report shall exceed the aggregate amount of Other Liabilities reported in the immediately preceding Other Liabilities Report by $10,000,000 or more, (iii) concurrently with each Request for Extension of Credit, and (iv) whenever the Company shall desire, an Other Liabilities Report; and (j) with reasonable promptness, such other information respecting the business, financial condition or results of operations of the Company or any of its Subsidiaries as the Agent or any Bank may reasonably request. Additionally, the Company will deliver to each Bank: (x) Together with each delivery of financial statements required by SUBSECTION (A) above, an Officer's Certificate demonstrating (with applicable computations in reasonable detail) compliance by the Company and the Restricted Subsidiaries with the provisions of SECTIONS 9.6, 9.7(B), 9.7(C)(2) and (3), 9.7(D), 9.7(E), 9.7(F), 9.9, 9.10 and 9.11 as at the date of the balance sheet included in such financial statements and stating that at the date of such Officer's Certificate there exists no Default, or, if any Default exists, specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto; and (y) Together with each delivery of financial statements required by SUBSECTION (B) above, a certificate of such accountants stating that, in conducting the audit of the Company's consolidated financial statements in accordance with generally accepted auditing standards they have obtained no knowledge of any Default arising under SECTION 10.1(A), (B) or (I) or any Default arising under SECTION 10.1(D) that occurs as result of the breach or violation by the Company or the Restricted Subsidiaries of SECTIONS 9.6, 9.7(A) 9.7(B), (C), (D), (E), (F), or (G), 9.8, 9.9, 9.10 or 9.11 or, if they have obtained knowledge of any such Default, specifying the nature and period of existence thereof. Such accountants, however, shall not be liable to the Agent or any Bank by reason of their failure to obtain knowledge of any such Default which would not be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards. 9.2. INSPECTION OF PROPERTY. The Company will permit, and cause each of its Subsidiaries to permit, any Person designated in writing by any Bank, at such Bank's expense and risk, to visit and inspect any of the properties of the Company and its Subsidiaries; and also to 51 examine the corporate books and financial records of the Company and its Subsidiaries and to make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of such Persons with the executive officers of the Company and its Subsidiaries, the petroleum reserve engineers employed by the Company and its Subsidiaries and the Company's independent public accountants, all at such reasonable times, with a representative of the Company present and as often as such Bank may reasonably request, and will assist such Person or Persons in all such activities. 9.3. COMPLIANCE WITH ENVIRONMENTAL LAWS. The Company will, and will cause each of its Subsidiaries and each of its Affiliates that are controlled by the Company or its Subsidiaries to, comply in a timely fashion with, or operate pursuant to valid waivers of the provisions of, all Applicable Environmental Laws, except where non-compliance would neither (a) result in a Material Adverse Change nor (b) subject the Agent or any Bank to any liability for such non-compliance (PROVIDED that the Company shall not be in default of this CLAUSE (B) if the Company indemnifies each of the Agent, Banks or any of them subjected to such liability and provides collateral to secure such indemnification, all to the extent required by the Person subjected to such liability in its sole and unfettered discretion). THE COMPANY AGREES TO INDEMNIFY AND HOLD THE AGENT AND EACH BANK, AND THEIR RESPECTIVE OFFICERS, AGENTS AND EMPLOYEES HARMLESS FROM ANY LOSS, LIABILITY, CLAIM OR EXPENSE WHICH ANY SUCH PERSON MAY INCUR OR SUFFER AS A RESULT OF A BREACH BY THE COMPANY OR ITS SUBSIDIARIES OR AFFILIATES, AS THE CASE MAY BE, OF THIS COVENANT. The Company shall not be deemed to have breached or violated this SECTION 9.3 if the Company or the applicable Subsidiary or Affiliate, as the case may be, is challenging in good faith by appropriate proceedings diligently pursued, and subject to the indemnification obligations of this SECTION 9.3, the application or enforcement of any such Applicable Environmental Laws for which adequate reserves have been established in accordance with GAAP. 9.4. PAYMENT OF TAXES. The Company will, and will cause each of its Subsidiaries to, pay, or have paid on its behalf, before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property, except to the extent contested in good faith by appropriate proceedings diligently conducted for which adequate reserves have been established in accordance with GAAP. 9.5. MAINTENANCE OF INSURANCE. The Company and each of its Subsidiaries will carry and maintain insurance (subject to self-insurance in the maximum amount of $10,000,000, customary deductibles and retentions) in at least such amounts and against such liabilities and hazards and by such methods as customarily maintained by other companies operating similar businesses and, together with each delivery of financial statements required by SECTION 9.1(B) will deliver to the Agent for each Bank an Officer's Certificate specifying the details of such insurance in effect. Upon the request of the Agent or any Bank, the Company shall promptly deliver to the Agent one or more current certificates of the insurer or insurers providing the insurance required by this SECTION 9.5 to the effect that such insurance may not be canceled, reduced or affected in 52 any manner without 30 days' prior written notice to the Agent. 9.6. RESTRICTED PAYMENTS. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any dividend on, or make any distribution on or in respect of, its Capital Stock or Redeemable Stock (including any such payment (other than payments solely in its Capital Stock or in options, warrants or other rights to purchase its Capital Stock) in connection with any merger or consolidation involving the Company), except dividends or distributions payable solely in its Capital Stock or in options, warrants or other rights to purchase such Capital Stock and except dividends or distributions payable solely to the Company or any Restricted Subsidiary, (ii) purchase, redeem or otherwise acquire for value any Capital Stock or Redeemable Stock of the Company or any Restricted Subsidiary held by Persons other than the Company or any Restricted Subsidiary; (iii) make any principal payment on, or redeem, purchase, repurchase, defease or otherwise acquire or retire for value prior to any scheduled repayment, scheduled sinking fund payment or other scheduled maturity, any Indebtedness that is subordinated in right of payment to the Obligations or (iv) make any Investment in any Person (any such dividend, distribution, purchase, redemption, repurchase, defeasance, other acquisition, retirement or investment being referred to in this SECTION 9.6 as a "RESTRICTED PAYMENT"), unless at the time of and after giving effect to the proposed Restricted Payment (a) no Default or Event of Default or Borrowing Base Deficiency shall have occurred and be continuing under this Agreement, (b) the Company could Incur at least $1.00 of additional Indebtedness under SECTION 9.7(B) and (c) the aggregate amount of such Restricted Payment and all other Restricted Payments (the amount so expended, if other than in cash, to be determined in good faith by the board of directors of the Company, whose determination shall be evidenced by a resolution of such board) declared or made since the Recalculation Date would not exceed, without duplication, the sum of (1) 50% of the Consolidated Adjusted Net Income accrued during the period (treated as one accounting period) from the quarter end on or before the Recalculation Date to the end of the Company's most recent fiscal quarter immediately preceding such proposed Restricted Payment (or, if such Consolidated Adjusted Net Income shall be a deficit, minus 50% of such deficit), (2) the aggregate net proceeds, including cash and the Fair Market Value of Property other than cash, received by the Company from the issue or sale of its Capital Stock (including pursuant to the exercise of options or warrants or the making of any equity contribution by stockholders of the Company subsequent to the Recalculation Date (other than an issuance or sale to a Subsidiary of the Company or any employee stock ownership plan or other trust established by the Company or any of its Subsidiaries)), (3) the amount by which the Indebtedness of the Company or any Restricted Subsidiary is reduced on the Company's balance sheet upon the conversion or exchange (other than by a Subsidiary of the Company), subsequent to the Recalculation Date of any Indebtedness or Redeemable Stock of the Company or any Restricted Subsidiary into or for Capital Stock of the Company (less the amount of any cash (other than cash distributed in payment of interest on such Indebtedness accrued and unpaid to the date of such conversion or exchange) or other property distributed by the Company or any Restricted Subsidiary upon such conversion or exchange) and (4) $50 million. Any payments made pursuant to CLAUSES (A) through (F) of the definition of "Permitted 53 Investment" shall be excluded for purposes of any calculation of the aggregate amount of Restricted Payments. Any payments made pursuant to CLAUSES (G), (H) AND (I) of the definition of "Permitted Investment" shall be included for purposes of any calculation of the aggregate amount of Restricted Payments. The foregoing limitations will not prevent the Company or any Restricted Subsidiary from (a) paying a dividend on its Capital Stock within 60 days after declaration thereof if, on the declaration date, such dividend could have been paid in compliance with this SECTION 9.6 and declared without creating any Total Debt which would cause a breach of SECTION 9.11 or (b) making Permitted Investments so long as no Default or Event of Default shall have occurred and be continuing. Furthermore, notwithstanding anything to the contrary in this Agreement, no payment under any of the Monterey Transactions shall constitute a Restricted Payment except any payment of greater than $100 million with respect to the Preferred Stock Purchases. As used in this SECTION 9.6 only, the following terms shall have the meanings ascribed to them in the Indenture in effect on the date of this Agreement, without giving effect to any subsequent amendment, waiver or termination thereof: "Capital Stock", "Consolidated Adjusted Net Income", "Fair Market Value", "Incur", "Indebtedness", "Investment", "Permitted Investment", "Preferred Stock Purchases", ""Recalculation Date" and "Redeemable Stock" (and all other defined terms used in any thereof). The text of these terms is set forth on APPENDIX I. 9.7. INDEBTEDNESS, LIEN AND OTHER RESTRICTIONS. The Company will not and will not permit any Restricted Subsidiary to: (a) LIENS. Create, assume or suffer to exist any Lien upon any of its properties or assets, whether now owned or hereafter acquired, except Permitted Encumbrances and (1) Liens for taxes or assessments or other governmental charges or levies not yet due or which are being actively contested in good faith by appropriate proceedings; (2) Liens (including mechanics' and materialmen's liens, landlord liens, easements, rights-of-way or the like) incidental to the conduct of its business or the ownership of its property and assets which are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than advances or credit on open account, includable in current liabilities, for goods and services in the ordinary course of business and on terms and conditions which are customary in the oil, gas and mineral exploration and development business) or the guaranteeing of the obligations of another Person, and which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of its business; (3) Liens for lessor's royalties, overriding royalties, net profits interests, carried interests, reversionary interests and other similar burdens, production sales contracts, division orders, contracts for the sale, purchase, exchange, or processing of hydrocarbons, unitization and 54 pooling designations, declarations, orders and agreements, operating agreements, agreements of development, area of mutual interest agreements, gas balancing or deferred production agreements, processing agreements, plant agreements, pipeline gathering and transportation agreements, injection, repressuring and recycling agreements, salt water or other disposal agreements, seismic or geophysical permits or agreements, and other agreements which are customary in the oil, gas and mineral exploration and development business or in the business of processing gas and gas condensate production for the extraction of products therefrom, if the net cumulative effect of such burdens does not operate to reduce the net revenue interest of any oil and gas properties to less than (A) the "Net Revenue Interest" set forth in the Most Recent Engineering Report for those oil and gas properties included in the Most Recent Engineering Report or (B) the net revenue interest so acquired for those oil and gas properties acquired after the date of the Most Recent Engineering Report; PROVIDED that such Liens are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than advances or credit on open account, includable in current liabilities, for goods and services in the ordinary course of business and on terms and conditions which are customary in the oil, gas and mineral exploration and development business) or the guaranteeing of the obligations of another Person; (4) Liens described in SCHEDULE II securing Total Debt of the Company or a Restricted Subsidiary set forth in SCHEDULE II; (5) Liens existing on any real property of any Person at the time such Person becomes a Restricted Subsidiary, or any Liens existing prior to the time of acquisition upon any real property acquired by the Company or any Restricted Subsidiary through purchase, merger or consolidation or otherwise, whether or not the obligation secured by such Lien is assumed by the Company or such Restricted Subsidiary; PROVIDED that except as otherwise permitted by SECTION 9.7(A), any such Lien (A) shall not encumber any other property of the Company or any Restricted Subsidiary and (B) shall not have been created or modified in any respect in anticipation of such Person's becoming a Restricted Subsidiary or in anticipation of the acquisition by the Company or any Restricted Subsidiary of the real property subject thereto (other than to reflect the assumption of such Lien or other ministerial acts relating thereto); (6) Liens placed on property at the time of acquisition, construction, development or improvement thereof, or created in respect of such property within six months after the time of acquisition thereof or the commencement of construction, development or improvement thereof, as the case may be, to secure all or a portion of (or to secure Total Debt incurred to pay all or a portion of) the purchase price of such acquisition, or the cost of such construction, development or improvement, as the case may be; PROVIDED that (A) such property is not and shall not thereby become encumbered in an amount in excess of the lesser of the cost or fair market value thereof; (B) except as otherwise permitted in SECTION 9.7(A), any such Lien shall not encumber any other property of the Company or a Restricted Subsidiary, and (C) any such Lien shall not encumber property of the Company or a Restricted Subsidiary for the purpose of securing an obligation of the Company or a Restricted Subsidiary or securing a Guaranty by the Company or any Restricted Subsidiary in connection with the sale, exchange, transfer or other 55 disposition by the Company or a Restricted Subsidiary of net profits interests; PROVIDED that the Company or a Restricted Subsidiary may assign all or part of the proceeds of production of property in which a net profits interest has been granted to secure its obligation to make net profits interests payments therefrom; and PROVIDED FURTHER that any such Lien shall not encumber any other property of the Company or any Restricted Subsidiary; (7) Liens on the capital stock of a Restricted Subsidiary acquired after the Commencement Date by the Company or a Restricted Subsidiary and created or assumed contemporaneously with such acquisition, to secure Total Debt assumed or incurred to finance all or a part of the purchase price of such acquisition; (8) Liens on the capital stock of an Unrestricted Subsidiary; (9) Liens on property of the Company or a Restricted Subsidiary to secure Total Debt assumed or incurred in the form of Capitalized Lease Obligations or industrial revenue bonds, pollution control bonds or similar tax-exempt financings; PROVIDED that any such Lien shall not encumber any property of the Company or a Restricted Subsidiary other than the property the acquisition or construction of which is financed or refinanced, in whole or in part, with proceeds from such Total Debt; (10) any Lien renewing or extending any Lien permitted by CLAUSES (4), (5), (6), (7), (8), or (9) above; PROVIDED that the principal amount of the Total Debt secured thereby is not increased and such Lien is not extended to other property; and (11) other Liens on any property of the Company or a Restricted Subsidiary securing any Debt of the Company or a Restricted Subsidiary permitted by the last sentence of SECTION 9.11. (b) INDEBTEDNESS. Create, incur, suffer or permit to exist, or assume or enter into any Total Debt or any Guaranty, whether direct, indirect, absolute, contingent or otherwise, EXCEPT: (a) Total Debt under the Credit Documents and the SFER MRI Loans; (b) Total Debt secured by Liens permitted by SECTION 9.7(A); (c) the Senior Subordinated Notes; (d) Total Debt in respect of Other Letters of Credit; (e) bonds or surety obligations required by any Governmental Authority in connection with the operation of the property of the Company and its Subsidiaries; (f) Total Debt or Guaranties to and among the Company and the Restricted Subsidiaries or Guaranties of Total Debt of the Company and the Restricted Subsidiaries; (g) other Total Debt having a weighted average life to maturity of not less than seven years from the date of issuance thereof and subject to terms (including representations, warranties, covenants and defaults and events of default) no more restrictive (as determined by the Agent in its sole discretion) with respect to the issuer thereof than the terms of the Credit Documents; and (h) unsecured Total Debt or Guaranties in an aggregate amount at any time outstanding not to exceed $25,000,000. Notwithstanding anything to the contrary in this SECTION 9.7(B), no member of the 56 Combined Group shall create, incur or assume any Total Debt or Guaranty if to do so would cause or enlarge a Borrowing Base Deficiency or violate any other provision of this Agreement. (c) SALE OF LESS THAN SUBSTANTIALLY ALL ASSETS. Sell, exchange, transfer or otherwise dispose of part, but less than all or substantially all, of their respective assets unless (1) such sale, exchange, transfer or other disposition is made in the ordinary course of business (including abandonments, farm-ins, farm-outs, leases and subleases of developed or undeveloped properties owned or held by the Company or any Restricted Subsidiary that are made or entered into in the ordinary course of business, but EXCLUDING, however, any sale of net profits interests in developed oil and gas properties); or (2) after giving effect to such sale, exchange, transfer or other disposition, (A) the aggregate net book value of (i) all assets of the Company and the Restricted Subsidiaries (including the sale of net profits interests in developed oil and gas properties) sold, exchanged, transferred or otherwise disposed of (on a consolidated basis) (but excluding assets sold, exchanged, transferred or otherwise disposed of in the ordinary course of business pursuant to SECTION 9.7(C)(1)) during the period of 12 consecutive months immediately preceding such sale, exchange, transfer or other disposition and (ii) the assets of all Restricted Subsidiaries, the stock of which have been sold or otherwise disposed of pursuant to SECTION 9.7(D)(2)(A) during such 12-month period shall not exceed 10% of the consolidated total assets of the Company and the Restricted Subsidiaries as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition, and (B) the assets described in the foregoing CLAUSE (A) shall not have contributed more than 10% of EBITDA of the Company and the Restricted Subsidiaries for the four most recently completed fiscal quarters taken as a single accounting period; or (3) after giving effect to such sale, exchange, transfer or other disposition, (A) the aggregate net book value of (i) all assets of the Company and the Restricted Subsidiaries (including the sale of net profits interests in developed oil and gas properties) sold, exchanged, transferred or otherwise disposed of (on a consolidated basis) (but excluding assets sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(C)(1) and (2)) during the period of 12 consecutive months immediately preceding such sale, exchange, transfer or other disposition and (ii) the assets of all Restricted Subsidiaries, the stock of which has been sold or otherwise disposed of pursuant to SECTION 9.7(D)(2)(B) during such 12-month period, shall not exceed 10% of the consolidated total assets of the Company and the Restricted Subsidiaries as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition; (B) the assets described in the foregoing CLAUSE (A) shall not have contributed more than 10% of EBITDA for the four most recently completed fiscal quarters taken as a single accounting period, and (C) within six months after such sale, exchange, transfer or other disposition, the net proceeds thereof are applied toward, or the exchange results in, (1) the acquisition by the Company or a Restricted Subsidiary of (i) assets which have an aggregate fair market value at least equal to the net proceeds received by the Company and the Restricted 57 Subsidiaries from such sale, exchange, transfer or other disposition; (ii) if the assets so sold, exchanged, transferred or otherwise disposed of were located in the United States of America or Canada, the assets acquired are located in the United States of America or Canada, and (iii) the assets so acquired are of a type usual and customary in the oil and gas business; PROVIDED that no Liens shall at any time exist on the assets so acquired which secure any Total Debt except as permitted by SECTION 9.7(A)(1), (2), (3) OR (11) or (2) the prepayment of an aggregate principal amount of all Obligations plus accrued interest thereon in accordance with this Agreement or the payment of an aggregate principal amount of other Total Debt (other than Total Debt subordinate in right of payment to the Obligations) plus accrued interest and premium, if any, in either case in an amount at least equal to the aggregate net proceeds that the Company or a Restricted Subsidiary receives from the sale, exchange, transfer or other disposition of such assets. (d) SALE OF STOCK OF RESTRICTED SUBSIDIARIES. Sell or otherwise dispose of, or part with control of, any shares of stock of any Restricted Subsidiary, except (1) to the Company or another wholly-owned Restricted Subsidiary and (2) that all shares of stock of any Restricted Subsidiary at the time owned by the Company and all Restricted Subsidiaries may be sold as an entirety for a cash consideration which represents the fair market value (as determined in good faith by the Board of Directors of the Company) at the time of sale of the shares of stock so sold; PROVIDED that for purposes of this exception: (A) (i) the net book value of the assets of such Restricted Subsidiary together with (x) the net book value of the assets of any other Restricted Subsidiary the stock of which was sold during the preceding 12-month period and (y) the net book value of the assets of the Company and all Restricted Subsidiaries sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(C)(2) during the preceding 12-month period, does not represent more than 10% of the consolidated total assets of the Company and the Restricted Subsidiaries as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition and (ii) the earnings of such Restricted Subsidiary together with (x) the earnings of any other Restricted Subsidiary the stock of which was sold or otherwise disposed of pursuant to the exception described in this CLAUSE (A) during the preceding 12-month period and (y) the earnings attributable to the assets sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(C)(2) during such 12-month period, do not represent more than 10% of EBITDA for the four most recently completed fiscal quarters taken as a single accounting period; and PROVIDED FURTHER that, at the time of such sale, such Restricted Subsidiary shall not own, directly or indirectly, any shares of stock of the Company or any other Restricted Subsidiary unless all of the shares of stock of such other Restricted Subsidiary owned, directly or indirectly, by the Company and all Restricted Subsidiaries are simultaneously being sold as permitted by the exception described in this CLAUSE (A); or (B) (i) the net book value of the assets of such Restricted Subsidiary together with (x) the net book value of the assets of any other Restricted Subsidiary the stock of which was sold during the preceding 12-month period (but excluding stock sold pursuant to SECTION 9.7(D)(A)) and (y) the net book value of the assets of the Company and any Restricted Subsidiary sold, 58 exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(C)(3) during the preceding 12-month period, does not represent more than 10% of the consolidated total assets of the Company and the Restricted Subsidiaries as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition; (ii) the earnings of such Restricted Subsidiary together with (x) the earnings of any other Restricted Subsidiary the stock of which was sold or otherwise disposed of pursuant to the exception described in this CLAUSE (B) during the preceding 12-month period and (y) the earnings attributable to the assets sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(C)(3) during such 12-month period, do not represent more than 10% of EBITDA for the four most recently completed fiscal quarters taken as a single accounting period, and (iii) within six months after such sale or other disposition, the proceeds thereof are applied toward (i) the acquisition by the Company or a Restricted Subsidiary of (1) assets which have an aggregate fair market value at least equal to the net proceeds received by the Company and the Restricted Subsidiaries from such sale or other disposition and (2) the assets so acquired are of a type usual and customary in the oil and gas business; PROVIDED that no Liens shall at any time exist on the assets so acquired which secure any Total Debt except as permitted by SECTION 9.7(A)(1), (2), (3) OR (11), or (ii) the prepayment of an aggregate principal amount of all Obligations in accordance with this Agreement or the payment of an aggregate principal amount of other Total Debt (other than Total Debt subordinate in right of payment to the Obligations) plus accrued interest and premium, if any, in either case in an amount at least equal to the aggregate net proceeds that the Company or a Restricted Subsidiary receives from the sale or other disposition; and PROVIDED FURTHER that, at the time of such sale or other disposition, such Restricted Subsidiary shall not own, directly or indirectly, (y) any shares of stock of the Company or any other Restricted Subsidiary unless all of the shares of stock of such other Restricted Subsidiary owned, directly or indirectly, by the Company and all Restricted Subsidiaries are simultaneously being sold as permitted by the exception described in this CLAUSE (B). (e) MERGER AND SALE OF ALL OR SUBSTANTIALLY ALL ASSETS. Convey, exchange, transfer or otherwise dispose of all or a substantial part of its assets (I.E., assets which could not otherwise be disposed of pursuant to SECTION 9.7(C)(2) or (3)) to any Person; or merge or consolidate with or into any other Person or, except that (1) any wholly-owned Restricted Subsidiary may merge with the Company (PROVIDED that the Company shall be the continuing or surviving corporation) or with any one or more other wholly-owned Restricted Subsidiaries; (2) any Restricted Subsidiary may sell, exchange, transfer or otherwise dispose of any of its assets to the Company or to a wholly-owned Restricted Subsidiary; (3) any Restricted Subsidiary may sell, exchange, transfer or otherwise dispose of all or substantially all of its assets subject to the conditions and provisions specified in SECTIONS 9.7(C)(2) and (3); 59 (4) any Restricted Subsidiary may merge into or consolidate with any Person which does not thereupon become a Restricted Subsidiary, subject to the conditions and provi sions specified in SECTION 9.7(D) with respect to a sale or other disposition of the stock of such Restricted Subsidiary; (5) any Restricted Subsidiary may permit any Person to be merged into such Restricted Subsidiary or may consolidate with or merge into a Person which thereupon becomes a Restricted Subsidiary; PROVIDED that immediately after any such merger or consolidation, no Default shall have occurred and be continuing; (6) the Company may permit any Person to be merged into the Company (such that the Company shall be the continuing or surviving corporation); and (7) the Company may permit any corporation to consolidate with the Company and the Company may merge into any solvent corporation organized under the laws of the United States of America or any state thereof and having at least 80% of its consolidated assets located in the United States of America and Canada which expressly assumes in writing the due and punctual performance of the obligations of the Company under the Credit Documents, to the same extent as if such successor or transferee corporation had originally executed the Credit Documents in the place of the Company (it being agreed that such assumption shall, upon the request of any Bank and at the expense of such successor corporation, be evidenced by the exchange of such Bank's Note for another Note executed by such successor corporation, with such changes in phraseology and form as may be appropriate but in substance of like terms as the Note surrendered for such exchange and of like unpaid principal amount, and that each Note executed pursuant to this Agreement after such assumption shall be executed by and in the name of such successor corporation); PROVIDED that for purposes of SECTIONS 9.7(E)(6) and (7) immediately after such merger or consolidation, and after giving effect thereto, (x) such successor Person could incur at least $1.00 of additional Total Debt without violation of SECTION 9.11, and (y) no Default shall have occurred and be continuing. As soon as practicable, and in any event at least 75 days prior to the proposed consummation date of any merger or consolidation described in SECTION 9.7(E)(7), the Company shall give written notice thereof to each Bank describing in reasonable detail the proposed transaction, the date on which it is proposed to be consummated and the identity, jurisdiction of organization, and geographic composition of assets of the proposed successor corporation. (f) SALE AND LEASEBACK. Enter into any Sale and Leaseback Transaction unless: (1) the net sales proceeds received by the Company or a Restricted Subsidiary in respect of the assets sold pursuant to such Sale and Leaseback Transaction are greater than or equal to the fair market value of the assets sold (which determination shall be based upon a written opinion (the cost of which shall be borne exclusively by the Company) as to valuation from an independent valuation expert selected by the Company) and such proceeds are concurrently 60 applied to (A) the purchase, acquisition, development or construction of assets having a value at least equal to such net proceeds, and to be used in the Company's or such Restricted Subsidiary's business; PROVIDED that no Liens shall at any time exist on such assets which secure any Total Debt except as permitted by SECTION 9.7(a)(1), (2), (3) OR (11); (B) the prepayment in accordance with this Agreement of any aggregate principal amount of all the Obligations (plus accrued interest and premium, if any) at least equal to the amount of such net proceeds; or (C) the payment of other Total Debt (other than Total Debt subordinate in right of payment to the Obligations) in an aggregate principal amount at least equal to the amount of such net sales proceeds; or (2) the Sale and Leaseback Transaction involves the sale of assets by the Company to a wholly-owned Restricted Subsidiary or by a Restricted Subsidiary to the Company or to another wholly-owned Restricted Subsidiary; PROVIDED that if the Company is the seller under any such Sale and Leaseback Transaction, its lease obligations thereunder shall be subord inated to the Obligations upon terms set forth on SCHEDULE V. (g) TRANSACTIONS WITH AFFILIATES. Except for the Monterey Transactions, directly or indirectly purchase, acquire or lease any property from, or sell, transfer or lease any property to, or otherwise deal with, in the ordinary course of business or otherwise, (1) any Affiliate (except any employee compensation benefit plan or any Restricted Subsidiary) or (2) any Person (other than a Restricted Subsidiary) in which an Affiliate or the Company (directly or indirectly) owns, beneficially or of record, 5% or more of the outstanding voting stock or similar equity interest, except that (A) any Affiliate may be a director, officer or employee of the Company or any Restricted Subsidiary and may be paid reasonable compensation in connection therewith and (B) acts and transactions that would otherwise be prohibited by this subsection may be performed or engaged in if upon terms not less favorable to the Company or any Restricted Subsidiary than if no relationship described in CLAUSES (1) and (2) above existed. With respect to any capital contribution to, or transaction with, a Subsidiary, the requirement that the transaction be on "terms not less favorable to the Company or any Restricted Subsidiary than if no relationship described in CLAUSES (1) and (2) above existed" shall be satisfied if such transaction is fair, from a financial point of view, to the Company or such Restricted Subsidiary. (h) TAX CONSOLIDATION. Except as provided for in the Tax Allocation Agreement or the Spin Off Tax Indemnification Agreement, the Company will not, and will not permit any of its Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person unless such other Person shall have agreed in writing with the Company that the Company's or such Subsidiary's liability with respect to taxes as a result of the filing of any such consolidated income tax return with such Person shall not be materially greater, nor the receipt of any tax benefits materially less, than they would have been had the Company and its Subsidiaries continued to file a consolidated income tax return with the Company as the parent corporation. 9.8. ISSUANCE OF STOCK BY RESTRICTED SUBSIDIARIES. The Company will not permit any Restricted Subsidiary (either directly or indirectly, by the issuance of rights or options for, or securities convertible into, such shares) to issue, sell or otherwise dispose of any shares of any 61 authorized but unissued or treasury class of such Restricted Subsidiary's stock (other than directors' qualifying shares) except to the Company or another Restricted Subsidiary. 9.9. CAPITALIZATION. The Company will not permit the ratio of Total Debt of the Combined Group to Capitalization to exceed 0.60. 9.10. INTEREST COVERAGE. The Company will not permit the ratio of (a) EBITDA for the four fiscal quarters then most recently ended to (b) Fixed Charges on Total Debt of the Combined Group for that period to be less than 3.00 to 1.00. 9.11. SENIOR TOTAL DEBT; SPECIAL DEBT. The Company will not at any time create, incur, assume or suffer to exist any Total Debt of the Combined Group PARI PASSU with the Obligations other than such Total Debt of the Combined Group which does not at any time exceed the product of (a) 3.00 times (b) Adjusted EBITDA for the four consecutive fiscal quarters then most recently ended. The Company will not at any time create, incur, assume or suffer to exist any Special Debt that would cause the aggregate principal amount of Special Debt to exceed 15% of Consolidated Net Worth. 9.12. RESTRICTED AND UNRESTRICTED SUBSIDIARIES. The Board of Directors of the Company may designate any Subsidiary of the Company or any Restricted Subsidiary to be an Unrestricted Subsidiary if (a) the Subsidiary to be so designated does not own any capital stock, redeemable stock or Total Debt of, or own or hold any Lien on any property of, the Company or any other Restricted Subsidiary of the Company, (b) the Subsidiary to be so designated is not obligated by any Total Debt or Lien that, if in default, would result (with the passage of time or notice or otherwise) in a default on any Total Debt of the Company or any Restricted Subsidiary, and (c) either (A) the Subsidiary to be so designated has total assets of $1,000 or less, or (B) such designation is effective immediately upon such Person's becoming a Subsidiary of the Company or of a Restricted Subsidiary. Unless so designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company or any Restricted Subsidiary will be classified as a Restricted Subsidiary. Except as provided in the first sentence of this SECTION 9.12, no Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. An Unrestricted Subsidiary may not be redesignated as a Restricted Subsidiary. Any designation by the Board of Directors of the Company will be evidenced to the Agent by promptly filing with the Agent a copy of the resolution of such Board giving effect to such designation and an Officer's Certificate certifying that such designation complies with this SECTION 9.12. Section 10. DEFAULTS. 10.1. EVENTS OF DEFAULT. If one or more of the following events (herein called "EVENTS OF DEFAULT") shall occur and be continuing: (a) the Company shall fail to pay any principal of any Loan, Reimbursement Obligation, fee or other principal amount payable hereunder or under any other Credit Document, 62 or any SFER MRI Loan, as and when due, or shall fail to pay any interest on any amount hereunder or under any other Credit Document or any SFER MRI Loan for more than three days after the date due; or (b) any member of the Combined Group shall default in any payment of principal of or interest on any other obligation for money borrowed (or any Capitalized Lease Obligation, any obligation under a conditional sale or other title retention agreement, any obligation issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafts accepted representing extensions of credit) beyond any period of grace provided with respect thereto; or any member of the Combined Group shall fail to perform or observe any other agreement, term or condition contained in any agreement under which any such obligation is created (or if any other event thereunder or under any such agreement shall occur and be continuing) and the effect of such failure or other event is to cause, or to permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due prior to any stated maturity; or any member of the Combined Group shall fail to pay any Guaranty relating to Total Debt for borrowed money in accordance with its terms; PROVIDED, in each case, that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing or permitting acceleration shall occur and be continuing shall exceed $10,000,000; and PROVIDED, FURTHER that a default for purposes of this SECTION 10.1(B) shall not be deemed to exist by reason of the acceleration of the maturity of any such obligation solely by reason of a default in the performance of a term or condition in any agreement or instrument under or by which such obligation is created, evidenced or secured, which term or condition restricts the right of the Company or any other Person to sell, pledge or otherwise dispose of any margin stock (as such term is defined in Regulation U of the Board) held by the Company or such other Person; or (c) any representation or warranty made by the Company or any of its officers in any Credit Document or in any other writing furnished to the Agent or any Bank in connection with any Credit Document shall prove to have been false or misleading in any material respect on the date as of which it was made; or (d) the Company shall default in the performance of any of its obligations under SECTIONS 9.6 through 9.11; or (e) the Company shall default in the performance of any of its obligations in any Credit Document other than those specified elsewhere in this SECTION 10.1 and such default shall not be remedied within 30 days after any executive officer of the Company obtains actual knowledge thereof; or (f) any member of the Combined Group shall make an assignment for the benefit of creditors; generally fail to pay its debts as such debts become due; or admit in writing its inability to generally pay its debts as such debts become due; or 63 (g) a Governmental Authority shall enter any decree or order for relief in respect of any member of the Combined Group under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, whether now or hereafter in effect (herein called the "BANKRUPTCY LAW"); or (h) any member of the Combined Group shall petition or apply for or consent to the appointment of, or taking possession by, a trustee, receiver, custodian, sequestrator, liquidator or other similar official of or for itself or any substantial part of its assets, or shall commence a voluntary case under any Bankruptcy Law or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Restricted Subsidiary) relating to any member of the Combined Group under any Bankruptcy Law; or (i) any such petition or application referred to in SECTION 10.1(H) shall be filed, or any such proceeding referred to in SECTION 10.1(H) shall be commenced, against any member of the Combined Group and such member of the Combined Group by any act shall indicate its approval thereof, consent thereto or acquiescence therein; or an order, judgment or decree shall be entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree shall remain unstayed and in effect for more than 60 consecutive days; or (j) any order, judgment or decree shall be entered in any proceedings against any member of the Combined Group decreeing the dissolution or liquidation of any member of the Combined Group and such order, judgment or decree shall remain unstayed and in effect for more than the appeal time provided by law; or (k) any order, judgment or decree shall be entered in any proceedings against any member of the Combined Group decreeing a split-up of such member of the Combined Group which requires (1) the divestiture of assets which exceed, or the divestiture of the stock of a Restricted Subsidiary whose assets exceed, 10% of the consolidated total assets of the Company and the Restricted Subsidiaries as of the end of the fiscal quarter immediately preceding or coinciding with such divestiture or (2) the divestiture of assets or stock of a Restricted Subsidiary which shall have contributed more than 10% of EBITDA for the four most recently completed fiscal quarters, and such order, judgment or decree shall remain unstayed and in effect for more than 60 consecutive days; or (l) any judgment or order, or series of judgments or orders, for the payment of money in an amount in excess of $10,000,000 shall be rendered against any member of the Combined Group and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within the appeal time provided by law from the date of entry thereof, or such member of the Combined Group shall not, within said appeal time, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or 64 (m) the Company or any ERISA Affiliate shall fail to pay when due any amount or amounts aggregating in excess of $10,000,000 which it shall have become liable to pay with respect to any Plan; or notice of intent to terminate a Plan or Plans (other than a multiemployer plan under Section 4001(a)(3) of ERISA) having aggregate Unfunded Liabilities in excess of $10,000,000 shall be filed under Title IV of ERISA by the Company or any ERISA Affiliate, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Plan or Plans (other than a multiemployer plan under Section 4001(a)(3) of ERISA) having aggregate Unfunded Liabilities in excess of $10,000,000 or a proceeding shall be instituted by a fiduciary of any such Plan or Plans against the Company or any ERISA Affiliate to enforce Section 515 or 4219(c)(5) of ERISA; or the Company or any ERISA Affiliate shall incur a complete or partial withdrawal liability under Title IV of ERISA in an annual amount in excess of $2,000,000 (and in the aggregate $10,000,000 in connection with any Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Plan or Plans having aggregate Unfunded Liabilities in excess of $10,000,000 must be terminated; or there shall occur any event or condition that might reasonably constitute grounds for the termination of any Plan or Plans having aggregate Unfunded Liabilities in excess of $10,000,000 or with respect to such Plan or Plans either the imposition of any liability in excess of $10,000,000 (other than contributions in the ordinary course) or any Lien provided under Section 4068 of ERISA securing an amount in excess of $10,000,000 on any property of the Company or any ERISA Affiliate; PROVIDED, HOWEVER, that any amounts owing by the Company pursuant to the ERISA Indemnification Agreement between Santa Fe Pacific Corporation or its successor and the Company shall be deducted from the dollar threshold amounts set forth above in determining whether any such condition or event constitutes an Event of Default under this paragraph; or (n) one or more demands for payment is made upon the Company by Santa Fe Pacific Corporation or its successor or any other Person pursuant to the Tax Indemnification Agreement and such demands exceed $5,000,000 in the aggregate; or (o) any Default or Event of Default, as defined in Appendix A to the Monterey Credit Agreement, shall occur; or (p) any Change of Control shall occur; THEREUPON: (I) the Agent may (and, if directed by the Required Banks, shall) do any or all of the following: (a) declare the Commitments terminated (whereupon the Commitments shall be terminated); (b) terminate any Letter of Credit pursuant to which such termination is permitted; (c) declare the unpaid amount of the Loans (principal and accrued and unpaid interest) and all Reimbursement Obligations, fees and other amounts payable under the Credit Documents to be forthwith due and payable, whereupon such amounts shall be and become immediately due and payable, without notice (including notice of acceleration and notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly WAIVED by the Company to the extent permitted by law; PROVIDED that in the case of the 65 occurrence of an Event of Default with respect to the Company referred to in SECTION 10.1(G) through (I), the Commitments shall be automatically terminated and the unpaid amount of the Loans (principal and accrued and unpaid interest) and all Reimbursement Obligations, fees and all other amounts payable under the Credit Documents shall be and become automatically and immediately due and payable, without notice (including notice of intent to accelerate and to the extent permitted by the law, notice of acceleration) and without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly WAIVED by the Company; and (d) require Cover for all Letter of Credit Liabilities; (II) each Bank may exercise its rights of offset against each account and all other property of the Company in the possession of such Bank, which right is hereby granted by the Company to the Banks; and (III) the Agent and each Bank may exercise any and all other rights available to them pursuant to the Credit Documents, at law and in equity. Section 11. THE AGENT. 11.1. APPOINTMENT, POWERS AND IMMUNITIES. Each Bank hereby irrevocably appoints and authorizes the Agent to act as its agent under the Credit Documents with such powers as are specifically delegated to the Agent by the terms thereof, together with such other powers as are reasonably incidental thereto. The Agent (which term as used in this SECTION 11 shall include reference to its Affiliates and its own and its Affiliates' officers, directors, employees and agents) (a) shall have no duties or responsibilities except those expressly set forth in the Credit Documents and shall not by reason of any Credit Document be a trustee or fiduciary for any Bank; (b) shall not be responsible to any Bank for any recitals, statements, representations or warranties contained in any Credit Document, or in any certificate or other document referred to or provided for in, or received by any of them under, any Credit Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any Credit Document or any other document referred to or provided for therein or any property covered thereby or for any failure by the Company or any other Person to perform any of its obligations thereunder; (c) shall not be required to initiate or conduct any enforcement, litigation or collection proceedings hereunder or under any Credit Document except to the extent requested by the Required Banks (and SECTION 11.7 shall apply), and (d) shall not be responsible to any Bank for any action taken or omitted to be taken by it under any Credit Document or any other document or instrument referred to or provided for therein or in connection therewith, including any such action pursuant to its own negligence, except for its own gross negligence or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Without in any way limiting any of the foregoing, each Bank acknowledges that the Agent shall have no greater responsibility in the operation of the Letters of Credit than is specified in the Uniform Customs and Practice of Documentary Credits (1993 Revision, International Chamber of Commerce Publication No. 500). 11.2. RELIANCE BY AGENT. The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, facsimile, telegram or cable) 66 believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel (which may be counsel for the Company), independent accountants and other experts selected by the Agent. As to any matters not expressly provided for by any Credit Document, the Agent shall in all cases be fully protected in acting, or in refraining from acting, in accordance with instructions of the Required Banks, and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. 11.3. DEFAULTS. The Agent shall not be deemed to have knowledge of the occurrence of a Default (other than the nonpayment of Loans, Reimbursement Obligations, Commitment Fee or Letter of Credit Fee) unless it has received notice from a Bank or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Banks (and shall give each Bank prompt notice of each such nonpayment). The Agent shall (subject to SECTIONS 11.7 and 12.5) take such action with respect to such Default as shall be directed by all Banks or the Required Banks, as appropriate, and within its rights under the Credit Documents and at law or in equity; PROVIDED that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, permitted hereby with respect to such Default as it shall deem advisable in the best interests of the Banks and within its rights under the Credit Documents, at law or in equity, and shall be fully protected in doing so. 11.4. RIGHTS AS A BANK. With respect to its Commitment, Loans and Letter of Credit Liabilities, Chase in its capacity as a Bank hereunder shall have the same rights and powers under the Credit Documents as any other Bank and may exercise the same as though it were not acting as the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent may (without having to account therefor to any Bank) accept deposits from, lend money to and generally engage in any kind of banking, trust, letter of credit, agency or other business with the Company (and any of its Affiliates) as if it were not acting as the Agent, and the Agent may accept fees and other consideration from the Company and its Affiliates (in addition to the fees heretofore agreed to between the Company and the Agent) for services in connection with this Agreement or otherwise without having to account for the same to the Banks. Without limiting the rights and remedies of the Banks specifically set forth herein, no other Bank by virtue of being a Bank hereunder shall have any interest in any such activities, any present or future guaranty by or for the account of the Company, any present or future offset exercised by the Agent in respect of any such other activities, or any present or future property at any time taken as security for any such other activities; PROVIDED, HOWEVER, that if any payment in respect of such guaranties or such property or the proceeds thereof shall be applied to the Obligations, each Bank shall be entitled to share in such application PRO RATA according to its portion of the Obligations. 11.5. INDEMNIFICATION. THE BANKS SHALL INDEMNIFY THE AGENT AND EACH OTHER INDEMNIFIED PERSON (TO THE EXTENT NOT REIMBURSED 67 UNDER SECTION 12.3 OR 12.4, BUT WITHOUT LIMITING THE OBLIGATIONS OF THE COMPANY UNDER SAID SECTIONS 12.3 AND 12.4), RATABLY IN ACCORDANCE WITH THEIR RESPECTIVE COMMITMENT PERCENTAGES, FOR ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS OF ANY KIND AND NATURE WHATSOEVER (INCLUDING THE CONSEQUENCES OF THE NEGLIGENCE OF THE AGENT OR ANY OTHER INDEMNIFIED PERSON) WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE AGENT OR ANY INDEMNIFIED PERSON IN ANY WAY RELATING TO OR ARISING OUT OF ANY CREDIT DOCUMENT (AS DEFINED HEREIN) OR ANY OTHER DOCUMENTS CONTEMPLATED BY OR REFERRED TO THEREIN OR THE TRANSACTIONS CONTEMPLATED BY ANY CREDIT DOCUMENT (INCLUDING THE COSTS AND EXPENSES WHICH THE COMPANY IS OBLIGATED TO PAY UNDER SECTIONS 12.3 AND 12.4 BUT EXCLUDING, UNLESS A DEFAULT HAS OCCURRED AND IS CON TINUING, NORMAL ADMINISTRATIVE COSTS AND EXPENSES INCIDENT TO THE PERFORMANCE OF ITS DUTIES UNDER THE CREDIT DOCUMENT) OR THE ENFORCEMENT OF ANY OF THE TERMS OF ANY CREDIT DOCUMENT OR OF ANY SUCH OTHER DOCUMENTS; PROVIDED THAT NO BANK SHALL BE LIABLE FOR ANY OF THE FOREGOING TO THE EXTENT THEY ARISE FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY TO BE INDEMNIFIED. The obligations of the Banks under this SECTION 11.5 shall survive the termination of this Agreement. 11.6. NON-RELIANCE ON THE AGENT AND OTHER BANKS. Each Bank agrees that it has received current financial information with respect to the Company and its Subsidiaries and that it has, independently and without reliance on the Agent or any other Bank and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under the Credit Documents. The Agent shall not be required to keep itself informed as to the performance or observance by the Company of any Credit Document or any other document referred to or provided for therein or to inspect the property or books of the Company or any other Person. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent under the Credit Documents, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Company (or any of its Affiliates) which may come into the possession of the Agent. 11.7. FAILURE TO ACT. Except for action expressly required of the Agent under the Credit Documents, the Agent shall in all cases be fully justified in failing or refusing to act under the Credit Documents unless it shall have received further assurances to its satisfaction by the Banks of their indemnification obligations under SECTION 11.5 against any and all liability and expense 68 which may be incurred by it by reason of taking or continuing to take any such action. 11.8. RESIGNATION OR REMOVAL OF THE AGENT. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Banks and the Company, and the Agent may be removed at any time with or without cause by the Required Banks. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or the Required Banks' removal of the retiring Agent, the retiring Agent may, on behalf of the Banks, appoint a successor Agent. Any successor Agent shall be a bank which has an office in the United States and a combined capital and surplus of at least $250,000,000 and with its deposits insured by the FDIC. Upon the acceptance of any such appointment, the successor Agent shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under the Credit Documents. Such successor Agent shall promptly specify its Principal Office referred to in SECTIONS 3.1 and 5.1 by notice to the Company and the Banks. After any retiring Agent's resignation or removal hereunder as the Agent, the provisions of this SECTION 11 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. Section 12. MISCELLANEOUS. 12.1. WAIVER. No waiver of any Default shall be a waiver of any other Default. No failure on the part of the Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Credit Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided in the Credit Documents are cumulative and not exclusive of any remedies provided by law or in equity. 12.2. NOTICES. All notices and other communications provided for in the Credit Documents (including any modifications of, or waivers or consents under, this Agreement) shall be in writing and (a) delivered against receipt therefor, (b) sent by overnight courier (such as Federal Express), charges prepaid, (c) mailed by registered or certified mail, return receipt requested, postage prepaid, or (d) given or made by telegraph, telecopy (confirmed by mail), cable or other writing, in each case addressed to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party, at such other address as shall be designated by such party in a notice to the Company and the Agent given in accordance with this SECTION 12.2. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when delivered; on the Business Day following delivery to an overnight courier; when transmitted before 5 p.m. on a Business Day by telecopier or delivered to the telegraph or cable office (when transmitted after 5 p.m. on a Business Day, at 9 a.m. on the next Business Day); or on the second Business Day after its deposit in the mails; 69 PROVIDED, HOWEVER, that notices required or permitted by SECTION 5.5 shall be effective only when actually received by the Agent. Actual notice shall always be effective. 12.3. EXPENSES. Whether or not any Loan is ever made or any Letter of Credit ever issued, the Company shall pay or reimburse on demand each of the Banks and the Agent for paying: (a) the reasonable fees and expenses of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., special counsel to the Agent, in connection with (1) the preparation, execution and delivery of the Credit Documents (including exhibits and schedules) and the making of the Loans and the issuance of Letters of Credit hereunder and (2) any modification, supplement or waiver of any of the terms of any Credit Document; (b) all reasonable out-of-pocket costs and expenses of the Banks or the Agent (including costs of preparing an Independent Engineering Report and reasonable counsels' fees) in connection with any Event of Default or the enforcement of any Credit Document; (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of any Credit Document or any other document referred to therein; (d) all costs, expenses, taxes, assessments and other charges incurred in connection with any filing or registration contemplated by any Credit Document or any document referred to therein; and (e) reasonable expenses of due diligence and syndication, and mutually agreed advertising and marketing costs. 12.4. INDEMNIFICATION. (I) TO THE FULLEST EXTENT PERMITTED BY LAW, THE COMPANY SHALL INDEMNIFY THE AGENT (INCLUDING THE AGENT WHEN ACTING AS ISSUER OF LETTERS OF CREDIT), EACH BANK AND EACH OTHER INDEMNIFIED PERSON FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, COSTS, EXPENSES, CLAIMS OR DAMAGES TO WHICH ANY OF THEM MAY BECOME SUBJECT, REGARDLESS OF AND INCLUDING LOSSES, LIABILITIES, COSTS, EXPENSES, CLAIMS AND DAMAGES ARISING FROM THE NEGLIGENCE OF THE AGENT OR THE BANKS OR ANY OTHER INDEMNIFIED PERSON, INSOFAR AS SUCH LOSSES, LIABILITIES, COSTS, EXPENSES, CLAIMS OR DAMAGES ARISE OUT OF OR IN CONNECTION WITH (A) ANY ACTUAL OR PROPOSED USE BY THE COMPANY OF THE PROCEEDS OF ANY EXTENSION OF CREDIT UNDER THIS AGREEMENT; (B) ANY BREACH BY THE COMPANY OF ANY CREDIT DOCUMENT (AS DEFINED HEREIN); (C) ANY VIOLATION BY THE COMPANY OR ANY OF ITS SUBSIDIARIES OF ANY LEGAL REQUIREMENT, INCLUDING, WITHOUT LIMITATION, APPLICABLE ENVIRONMENTAL LAWS; (D) ANY ENVIRONMENTAL CLAIMS OR (E) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO ANY OF THE FOREGOING, AND THE COMPANY SHALL REIMBURSE EACH INDEMNIFIED PERSON, UPON DEMAND, FOR ANY EXPENSES (INCLUDING REASONABLE LEGAL FEES) INCURRED IN CONNECTION WITH ANY SUCH INVESTIGATION OR PROCEEDING; BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, COSTS OR EXPENSES INCURRED BY 70 SUCH INDEMNIFIED PERSON BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY INDEMNIFIED PERSON. (II) TO THE FULLEST EXTENT PERMITTED BY LAW, THE COMPANY SHALL INDEMNIFY THE AGENT (INCLUDING THE AGENT WHEN ACTING AS ISSUER OF LETTERS OF CREDIT), AND EACH OTHER INDEMNIFIED PERSON FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, COSTS, EXPENSES, CLAIMS OR DAMAGES TO WHICH ANY OF THEM MAY BECOME SUBJECT, REGARDLESS OF AND INCLUDING LOSSES, LIABILITIES, COSTS, EXPENSES, CLAIMS AND DAMAGES ARISING FROM THE NEGLIGENCE OF THE AGENT OR THE BANKS OR ANY OTHER INDEMNIFIED PERSON, IN CONNECTION WITH THE EXECUTION AND DELIVERY OR TRANSFER OF OR PAYMENT OR FAILURE TO PAY UNDER ANY LETTER OF CREDIT, INCLUDING, WITHOUT LIMITATION, ANY CLAIMS, DAMAGES, LOSSES, LIABILITIES, COSTS OR EXPENSES WHICH THE AGENT, OR SUCH OTHER INDEMNIFIED PERSON, AS THE CASE MAY BE, MAY INCUR (WHETHER INCURRED AS A RESULT OF ITS OWN NEGLIGENCE OR OTHERWISE) BY REASON OF OR IN CONNECTION WITH THE FAILURE OF ANY OTHER BANK (WHETHER AS A RESULT OF ITS OWN NEGLIGENCE OR OTHERWISE) TO FULFILL OR COMPLY WITH ITS OBLIGATIONS TO THE AGENT OR ANY BANK, AS THE CASE MAY BE, WITH RESPECT TO SUCH LETTER OF CREDIT HEREUNDER (BUT NOTHING HEREIN CONTAINED SHALL AFFECT THE RIGHTS THE COMPANY MAY HAVE AGAINST SUCH DEFAULTING BANK); BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, COSTS OR EXPENSES INCURRED BY SUCH INDEMNIFIED PERSON BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY INDEMNIFIED PERSON. (III) The obligation of the Company to provide indemnification under this SECTION 12.4 for fees and expenses of counsel shall be limited to the reasonable fees and expenses of one counsel in each jurisdiction representing all of the Persons entitled to such indemnification, except to the extent that, in the reasonable judgment of any such Indemnified Person, the existence of actual or potential conflicts of interest make representation of all of such indemnified Persons by the same counsel inappropriate; in such a case, the Person exercising such judgment shall be indemnified for the reasonable fees and expenses of its separate counsel to the extent provided in this SECTION 12.4 without giving effect to the first clause of this sentence. Nothing in this SECTION 12.4 is intended to limit the obligations of the Company under any other provision of this Agreement. 12.5. AMENDMENTS, ETC. No amendment or waiver of any provision of any Credit Document, nor any consent to any departure by the Company therefrom, shall in any event be effective unless the same shall be agreed or consented to by the Required Banks and the Company, as appropriate, and each such waiver or consent shall be effective only in the specific instance 71 and for the specific purpose for which given; PROVIDED that no amendment, waiver or consent shall, unless in writing and signed by each Bank affected thereby, do any of the following: (a) increase the Commitment of any of the Banks or subject any Bank to any additional obligation; (b) reduce the principal of, or interest on, any Loan, Reimbursement Obligation, fee or other sum to be paid under any Credit Document; (c) postpone any scheduled date fixed for any payment of principal of, or interest on, any Loan, Reimbursement Obligation, fee or other sum to be paid under any Credit Document; (d) change the percentage of the Aggregate Commitment, or of the aggregate unpaid principal amount of any of the Loans, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Agreement or any other Credit Document; or (e) change any provision contained in SECTIONS 2.3, 5.2, 5.7, 6, 12.3 or 12.4 or this SECTION 12.5. Anything in this SECTION 12.5 to the contrary, no amendment, waiver or consent shall be made with respect to SECTION 11 without the consent of the Agent. 12.6. SUCCESSORS AND ASSIGNS. (a) This Agreement and the other Credit Documents shall be binding upon and inure to the benefit of the Company, the Agent and the Banks and their respective successors and assigns. The Company may not assign or transfer any of its rights or obligations under any of the Credit Documents without the prior written consent of all of the Banks. (b) Each Bank may sell participations to any Person in all or part of its Loans, Reimbursement Obligations, Note and Commitment, in which event, without limiting the foregoing, the provisions of SECTION 6 shall inure to the benefit of each purchaser of a participation and the PRO RATA treatment of payments, as described in SECTION 5.2, shall be determined as if such Bank had not sold such participation. In the event any Bank shall sell any participation, (1) the Company, the Agent and the other Banks shall continue to deal solely and directly with such selling Bank in connection with such selling Bank's rights and obligations under the Credit Documents (including the Note held by such selling Bank); (2) such Bank shall retain the sole right and responsibility to enforce the obligations of the Company under the Credit Documents, including the right to approve any amendment, modification or waiver of any provision of this Agreement or any other Credit Document other than amendments, modifications or waivers with respect to (A) any fees payable hereunder to the Banks and (B) the amount of principal or the rate of interest payable on, or the dates fixed for the scheduled repayment of principal of, the Loans, Reimbursement Obligations and other sums to be paid to the Banks under the Credit Documents, and (3) the Company agrees, to the fullest extent it may effectively do so under applicable law, that any participant of a Bank may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such participant were a direct holder of Loans and Reimbursement Obligations if such Bank has previously given notice of the sale of such participation to the Company. (c) Each Bank may assign to one or more Banks or Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement and the other Credit Documents (including all or a portion of its Commitment and the same portion of the Loans and 72 Letter of Credit Advances at the time owing to it and of its outstanding Letter of Credit Liabilities at the time and the Note held by it); PROVIDED THAT (1) other than in the case of an assignment to a Person at least 50% owned by the assignor Bank, or by a common parent of both, or to another Bank, the Agent and the Company must give their respective prior written consent, which consent will not be unreasonably withheld; (2) the aggregate amount of the Commitment, Loans and outstanding Letter of Credit Liabilities of the assigning Bank subject to each such assignment (determined as of the date the Assignment Agreement with respect to such assignment is delivered to the Agent) shall in no event be less than $10,000,000 (or $1,000,000 in the case of an assignment between Banks) (except for certain exceptions approved by the Company and the Agent or where all of a Bank's Commitment, Loans and outstanding Letter of Credit Liabilities are being assigned) and shall be in an amount that is an integral multiple of $1,000,000 (except for certain exceptions approved by the Company and the Agent or where all of a Bank's Commitment, Loans and outstanding Letter of Credit Liabilities are being assigned); and (3) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in its records, an Assignment Agreement with blanks appropriately completed, together with the Note subject to such assignment and a processing and recordation fee of $2,500 (for which the Company shall have no liability except in the case of assignments required by the Company pursuant to SECTION 6.1, 6.3, 6.6 or 6.7, in which case such fee shall be paid by the Company). Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment Agreement, which shall be at least five Business Days after the date of execution thereof (unless otherwise agreed by the parties thereto and the Agent), (A) the assignee thereunder shall be a party to this Agreement and, to the extent provided in such Assignment Agreement, have the rights and obligations of a Bank under the Credit Documents, and (B) the Bank making such assignment shall, to the extent provided in such Assignment Agreement, be released from its obligations under this Agreement and the other Credit Documents (and, in the case of an Assignment Agreement covering all or the remaining portion of an assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto) but shall be entitled to the benefit of this Agreement and the other Credit Documents for matters occurring during the time it was a Bank under this Agreement. (d) By executing and delivering an Assignment Agreement, the assigning Bank and the assignee thereunder confirm to and agree with each other and the other parties to this Agreement as follows: (1) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with any Credit Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of any Credit Document; (2) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance or observance by the Company of any of its obligations under any Credit Document; (3) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements of the Company previously delivered by the Company in accordance herewith and such other documents and information as it has deemed appropriate to make its own 73 credit analysis and decision to enter into such Assignment Agreement; (4) such assignee will, independently and without reliance upon the Agent, such assigning Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Documents; (5) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Credit Documents as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto, and (6) such assignee agrees that it will perform in accordance with their terms all obligations that by the terms of the Credit Documents are required to be performed by it as a Bank. (e) The Agent shall maintain at its office a copy of each Assignment Agreement delivered to it and a record of the names and addresses of the Banks and the Commitment of, and the principal amount of the Loans and Letter of Credit Advances owing to, and the outstanding Letter of Credit Liabilities of, each Bank from time to time. The entries in such record shall be conclusive, in the absence of manifest error, and the Company, the Agent and the Banks may treat each Person the name of which is recorded therein as a Bank hereunder for all purposes of the Credit Documents. Such records shall be available for inspection by the Company or any Bank at any reasonable time and from time to time upon reasonable prior notice. (f) Upon its receipt of an Assignment Agreement executed by an assigning Bank and the assignee thereunder together with the Note subject to such assignment, any required consent to such assignment and the fee payable in respect thereto, the Agent shall, if such Assignment Agreement has been completed with blanks appropriately filled, (1) accept such Assignment Agreement; (2) record the information contained therein in its records, and (3) give prompt notice thereof to the Company. Contemporaneously with the receipt by the Agent of an Assignment Agreement, the Company, at its own expense, shall execute and deliver to the Agent in exchange for each surrendered Note a new Note payable to the order of such assignee in an amount equal to the Commitment and/or Loans assumed by it pursuant to such Assignment Agreement and, if the assigning Bank has retained any Commitment and/or Loans hereunder, a new Note payable to the order of the assignor Bank in an amount equal to the Commitment and/or Loans retained by it. Such new Notes shall be in an aggregate face amount equal to the face amount of each surrendered Note, shall be dated the effective date of such Assignment Agreement and shall otherwise be in substantially the form of the surrendered Note. Thereafter, the surrendered Note shall be marked canceled and returned to the Company. (g) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this SECTION 12.6, disclose to the assignee or participant or proposed assignee or participant any information relating to the Company furnished to such Bank by or on behalf of the Company. (h) Notwithstanding anything herein to the contrary, each Bank may pledge and assign all or any portion of its rights and interests under the Credit Documents to any Federal Reserve Bank. No such assignment shall release the assigning Bank from its obligations 74 hereunder. (i) All transfers of any interest in any Note hereunder shall be in compliance with all federal and state securities laws, if applicable. Notwithstanding the foregoing sentence, however, the parties to this Agreement do not intend that any transfer under this SECTION 12.6 be construed as a "purchase" or "sale" of a "security" within the meaning of any applicable federal or state securities laws. (j) Notwithstanding any other provision of this SECTION 12.6 (except SUBSECTION (H)), Chase and its Affiliates may not make any assignment of their rights hereunder which would reduce their aggregate Commitment Percentages below 10%. 12.7. SURVIVAL; TERMINATION; REINSTATEMENT. (a) In addition to the other provisions of the Credit Documents expressly stated to survive the termination of this Agreement, the obligations of the Company under SECTIONS 6, 12.3 and 12.4 and the last sentence of this SECTION 12.7 and the obligations of the Banks under SECTIONS 11.5, 12.8 and 12.12 shall survive the termination of this Agreement. (b) This Agreement shall terminate upon (i) the full and final payment of all Notes and Reimbursement Obligations, (ii) the expiry of all Letters of Credit, (iii) the termination of all Commitments and (iv) the payment of all non-contingent amounts due under the Credit Documents. Notwithstanding the foregoing, if all conditions to the termination of this Agreement set forth in this SECTION 12.7(B) shall have been satisfied other than the expiry of all Letters of Credit, and all outstanding Letters of Credit shall have been fully Covered or shall be backed by a letter of credit in Proper Form issued by an issuer acceptable to the Issuer in its sole discretion, the Company shall in such event no longer be required to comply with SECTION 9. (c) If at any time all or any part of any payment previously applied by the Agent or any Bank to any Loan, Reimbursement Obligation or other sum hereunder is or must be returned by or recovered from the Agent or such Bank for any reason (including the order of any bankruptcy court), to the extent permitted by law, the Credit Documents shall automatically be reinstated to the same effect as if such prior application had not been made, and the Company shall indemnify the Agent or such Bank against, and save and hold the Agent and such Bank harmless from, any required return by or recovery from the Agent or such Bank of any such payment because of its being deemed preferential under any applicable Legal Requirement or for any other reason. 12.8. LIMITATION OF INTEREST. The parties to the Credit Documents intend to strictly comply with all applicable laws, including applicable usury laws. Accordingly, the provisions of this SECTION 12.8 shall govern and control over every other provision of any Credit Document which conflicts or is inconsistent with this SECTION 12.8, even if such provision declares that it controls. To the maximum extent permitted by applicable law, (a) any non-principal payment shall 75 be characterized as an expense or as compensation for something other than the use, forbearance or detention of money and not as interest and (b) all interest at any time contracted for, taken, reserved, retained, charged or received shall be amortized, prorated, allocated and spread, in equal parts, during the full term of the Loans and the Commitments. In no event shall the Company or any other Person be obligated to pay, or the Agent or any Bank have any right or privilege to reserve, take, receive or retain, any interest in excess of the maximum amount of nonusurious interest permitted under applicable law. If the term of any of the Notes is shortened by reason of acceleration of maturity as a result of any Default or by any other cause, or by reason of any required or permitted prepayment, and if for that (or any other) reason the Agent or any Bank at any time, including the stated maturity, is owed or receives (and/or has reserved, taken or received) interest in excess of interest calculated at the Highest Lawful Rate, then and in any such event all of any such excess interest shall be canceled automatically as of the date of such acceleration, prepayment or other event which produces the excess, and, if such excess interest has been paid to the Agent or such Bank, it shall be credited PRO TANTO against the then-outstanding principal balance of the Company's obligations to the Agent or such Bank, effective as of the date or dates when the event occurs which causes it to be excess interest, until such excess is exhausted or all of such principal has been fully paid and satisfied, whichever occurs first, and any remaining balance of such excess shall be promptly refunded to its payor. 12.9. CAPTIONS. Captions and section headings appearing in the Credit Documents are included solely for convenience and shall not be considered in construing the Credit Documents. 12.10. COUNTERPARTS. Each Credit Document may be executed in any number of identical counterparts, and by the parties on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original instrument, and all such separate counterparts together shall constitute but one and the same agreement. 12.11. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. (A) EXCEPT TO THE EXTENT OTHERWISE SPECIFIED IN THE CREDIT DOCUMENTS, EACH CREDIT DOCUMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (TO THE EXTENT PERMITTED BY LAW, OTHER THAN ITS CONFLICT OF LAW RULES) AND THE FEDERAL LAWS OF THE UNITED STATES OF AMERICA. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK AND THE COMPANY HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS. THE COMPANY HEREBY IRREVOCABLY DESIGNATES, APPOINTS AND EMPOWERS CT CORPORATION SYSTEM, WITH OFFICES ON THE DATE HEREOF AT 1633 BROADWAY, NEW YORK, NEW YORK 10019 AS ITS DESIGNEE, APPOINTEE AND AGENT TO RECEIVE, ACCEPT 76 AND ACKNOWLEDGE FOR AND ON ITS BEHALF, AND IN RESPECT OF ITS PROPERTY, SERVICE OF ANY AND ALL LEGAL PROCESS, SUMMONSES, NOTICES AND DOCUMENTS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING. IF FOR ANY REASON SUCH DESIGNEE, APPOINTEE AND AGENT SHALL CEASE TO BE AVAILABLE TO ACT AS SUCH OR THE COMPANY DESIRES TO DESIGNATE A NEW DESIGNEE, APPOINTEE AND AGENT, THE COMPANY AGREES TO DESIGNATE A NEW DESIGNEE, APPOINTEE AND AGENT IN NEW YORK, NEW YORK ON THE TERMS AND FOR THE PURPOSES OF THIS PROVISION SATISFACTORY TO THE AGENT UNDER THIS AGREEMENT. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS SET FORTH OPPOSITE ITS SIGNATURE BELOW, SUCH SERVICE TO BECOME EFFECTIVE TEN DAYS AFTER SUCH MAILING. NOTHING IN THIS AGREEMENT SHALL AFFECT THE RIGHT OF THE AGENT, ANY BANK OR THE HOLDER OF ANY NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO THE EXTENT PERMITTED BY LAW TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE TO PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. (B) TO THE EXTENT PERMITTED BY LAW, EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE IN ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT BROUGHT IN THE NEW YORK COURTS REFERRED TO IN CLAUSE (A) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (C) EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED BY ANY CREDIT DOCUMENT. 12.12. CONFIDENTIALITY. Each Bank agrees to exercise its best efforts to keep any information delivered or made available by the Company to it (including any information obtained pursuant to SECTION 9.1) which is clearly indicated to be confidential information, confidential from anyone other than Persons employed or retained by such Bank who are or are expected to become engaged in evaluating, approving, structuring or administering the Loans or the Letters of Credit; PROVIDED that nothing herein shall prevent any Bank from disclosing such information (a) to any other Bank, (b) pursuant to subpoena or upon the order of any court or administrative 77 agency, (c) upon the request or demand of any regulatory agency or authority having jurisdiction over such Bank, (d) which has been publicly disclosed, (e) to the extent reasonably required in connection with any litigation to which the Agent, any Bank, or their respective Affiliates may be a party, (f) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Credit Document, (g) to such Bank's legal counsel and independent auditors and (h) to any actual or proposed participant or assignee of all or part of its rights hereunder which has agreed in writing to be bound by the provisions of this SECTION 12.12. Each Bank will promptly notify the Company of any information that it is required or requested to deliver pursuant to CLAUSE (B) OR (C) of this SECTION 12.12 and, if the Company is not a party to any such litigation, CLAUSE (E) of this SECTION 12.12. 12.13. ENTIRE AGREEMENT. This Agreement and the other Credit Documents embody the entire agreement among the parties with respect to their subject matter and supersede all prior proposals, agreements and understandings related to the subject matter of this Agreement and the other Credit Documents. 12.14. CONSTRUCTION. The parties agree that this Agreement and the other Credit Documents were negotiated agreements and accordingly no presumption shall attach based on the identity of the drafting party. 12.15. SEVERABILITY. Whenever possible, each provision of the Credit Documents shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of any Credit Document shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions of such Credit Document shall not be affected or impaired thereby. 12.16. SFER MRI LOANS. The Banks acknowledge and agree that the Company may have up to $20,000,000 in SFER MRI Loans outstanding at any time and that such SFER MRI Loans shall be due and payable no later than December 31, 1996. Such SFER MRI Loans shall be PARI PASSU with the Obligations. The Banks consent to Chase's serving as Agent under the Monterey Credit Agreement, WAIVE any conflict of interest in connection therewith, and agree that Chase may exercise its rights and remedies as the Agent under this Agreement and under the Monterey Credit Agreement and at law, all as Chase may in its sole discretion deem appropriate. 12.17. EXISTING CREDIT FACILITY TERMINATED. By their execution and delivery hereof, the Company and the other parties to the Existing Credit Facility terminate the Existing Credit Facility (except for the portions thereof which are stated therein to survive the termination thereof). 78 IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement to be duly executed and delivered. SANTA FE ENERGY RESOURCES, INC., a Delaware corporation By: /s/ JAMES L. PAYNE James L. Payne Chairman of the Board, President and Chief Executive Officer Address for Notices: Santa Fe Energy Resources, Inc. 1616 South Voss Road, Suite 1000 Houston, Texas 77057 Telecopy: (713) 507-5341 Attention: Treasurer 79 THE CHASE MANHATTAN BANK, individually and as Administrative Agent By: /s/ MARTHA FETNER Martha Fetner, Vice President Address for Notices: Domestic and Eurodollar Lending Offices: The Chase Manhattan Bank c/o Texas Commerce Bank National Association 707 Travis, 5 TCBN-86 COMMITMENT: $100,000,000 Houston, Texas 77002 Telephone: (713) 216-4316 Telecopy: (713) 216-4117 Attention: James C. Nicholas The Chase Manhattan Bank 1 Chase Manhattan Plaza, 3rd Floor New York, New York 10081 Telephone: (212) 552-3165 Telecopy: (212) 552-1687 Attention: David R. D'Amico, Operations Officer 80 COMMITMENT: ABN AMRO BANK N.V., Individually and as Co-Agent $50,000,000 By: ABN AMRO NORTH AMERICA, INC. By: /s/ MICHAEL N. OAKES Name: Michael N. Oakes Title: Vice President and Director By: /s/ H. GENE SHIELS Name: H. Gene Shiels Title: Vice President and Director Address for Notices: Domestic and Eurodollar Lending Offices: 81 PRICING SCHEDULE APPENDIX I EXHIBITS: A - Form of Note B - Form of Request for Extension of Credit C - Form of Assignment Agreement D - Form of Application E - Form of Rate Designation Notice SCHEDULES: I - Restricted and Unrestricted Subsidiaries II - Liens and Total Debt and Guaranties III - Opinion of Andrews & Kurth L.L.P. IV - Opinion of David L. Hicks V - Subordination Provisions VI - Jurisdictions for which Certificates are to be Provided 82 EX-21 8 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Santa Fe Energy Resources, Inc. ("SFER") has 33 wholly-owned subsidiaries, all of which are engaged in the exploration for and development and production of oil and natural gas. Four subsidiaries conduct operations in the United States and 29 subsidiaries conduct operations in foreign areas. In addition, SFER owns approximately 83% of Monterey Resources, Inc. which conducts oil and gas exploration, development and production operations in the United States. EX-23.A 9 EXHIBIT 23(A) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-37175, 33-44541, 33-44542, 33-58613, 33-59253, 33-59255 and 333-07949) of Santa Fe Energy Resources, Inc. of our report dated February 21, 1997 appearing on page 63 of this Form 10-K. PRICE WATERHOUSE LLP Houston, Texas March 11, 1997 EX-23.B 10 EXHIBIT 23(B) CONSENT OF EXPERTS As petroleum engineers, we hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-37175, 33-44541, 33-44542, 33-58613, 33-59253, 33-59255 and 333-07949) of our oil and gas reserve reports as of December 31, 1993, December 31, 1994, December 31, 1995 and December 31, 1996 included in the Santa Fe Energy Resources, Inc. Form 10-K for the year ended December 31, 1996. RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas March 11, 1997 EX-24 11 EXHIBIT 24 POWER OF ATTORNEY Know all men by these presents that W. E. GREEHEY constitutes and appoints J. L. PAYNE, JANET F. CLARK and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1996 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 19, 1997 __________________________________ W. E. Greehey POWER OF ATTORNEY Know all men by these presents that M. N. KLEIN constitutes and appoints J. L. PAYNE, JANET F. CLARK and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1996 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 19, 1997 __________________________________ M. N. Klein POWER OF ATTORNEY Know all men by these presents that A. V. MARTINI constitutes and appoints J. L. PAYNE, JANET F. CLARK and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1996 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 19, 1997 __________________________________ A. V. Martini POWER OF ATTORNEY Know all men by these presents that M. J. SHAPIRO constitutes and appoints J. L. PAYNE, JANET F. CLARK and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1996 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 19, 1997 __________________________________ M. J. Shapiro POWER OF ATTORNEY Know all men by these presents that K. D. WRISTON constitutes and appoints J. L. PAYNE, JANET F. CLARK and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1996 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 19, 1997 __________________________________ K. D. Wriston POWER OF ATTORNEY Know all men by these presents that J. L. PAYNE constitutes and appoints JANET F. CLARK and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1996 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 19, 1997 __________________________________ J. L. Payne EX-27 12
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE INCOME STATEMENT FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 DEC-31-1996 14,600 0 111,600 2,500 13,600 172,500 2,574,200 1,664,400 1,120,000 179,400 0 111,100 0 900 434,500 1,120,000 582,300 583,300 493,800 493,800 0 0 32,400 58,000 14,300 42,400 0 (6,000) 0 36,400 (0.12) (0.12)
-----END PRIVACY-ENHANCED MESSAGE-----