<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 18, 1996.
REGISTRATION NO. 333-4525
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
INTERCOAST ENERGY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 1311 42-1456354
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION OF INDUSTRIAL EMPLOYER
INCORPORATION OR CLASSIFICATION IDENTIFICATION
ORGANIZATION) CODE NUMBER) NO.)
666 GRAND AVENUE, 26TH FLOOR
DES MOINES, IOWA 50309
(515) 281-2693
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DONALD C. HEPPERMANN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
666 GRAND AVENUE, 26TH FLOOR
DES MOINES, IOWA 50309
(515) 281-2693
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
LYNNWOOD R. MOORE, JR., ESQ. MARGO S. SCHOLIN, ESQ.
CONNER & WINTERS, A PROFESSIONAL CORPORATION BAKER & BOTTS, L.L.P.
2400 FIRST PLACE TOWER, 15 EAST 5TH STREET 3000 ONE SHELL PLAZA, 910 LOUISIANA
TULSA, OKLAHOMA 74103-4391 HOUSTON, TEXAS 77002
</TABLE>
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) FEE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $0.01 par
value................. 8,222,500 shares $17.00 $139,782,500 $48,201(3)
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 1,072,500 shares subject to an over-allotment option to be
granted to the Underwriters.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457.
(3) $45,366 of such registration fee has been previously paid by the
Registrant.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K.
<TABLE>
<CAPTION>
REGISTRATION
STATEMENT ITEM HEADING IN THE FORM PROSPECTUS CAPTION
-------------- ------------------- ------------------
<C> <S> <C>
1. Forepart of the
Registration Statement and
Outside Front Cover Page
of Prospectus............. Outside Front Cover Page
2. Inside Front and Outside
Back Cover Pages of
Prospectus................ Inside Front and Outside Back Cover
Pages
3. Summary Information, Risk
Factors and Ratio of
Earnings to Fixed
Charges................... Prospectus Summary; Risk Factors;
The Company
4. Use of Proceeds............ Prospectus Summary; Use of Proceeds
5. Determination of Offering
Price..................... Outside Front Cover Page;
Underwriting
6. Dilution................... Dilution
7. Selling Security Holders... Principal and Selling Stockholder
8. Plan of Distribution....... Outside Front Cover Page;
Underwriting
9. Description of Securities
to Be Registered.......... Description of Capital Stock
10. Interests of Named Experts
and Counsel............... *
11. Information with Respect to
the Registrant............ Prospectus Summary; The Company;
Dividend Policy; Unaudited Pro
Forma Combined Financial
Statements; Selected Historical
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business and
Properties; Relationship Between
the Company and the Parent;
Management; Certain Transactions;
Principal and Selling Stockholder;
Description of Capital Stock;
Shares Eligible for Future Sale;
Financial Statements
12. Disclosure of Commission
Position on
Indemnification for
Securities Act
Liabilities............... *
</TABLE>
- --------
* Not applicable or answer thereto is negative.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 18, 1996
7,150,000 SHARES
INTERCOAST ENERGY COMPANY
COMMON STOCK
-----------
Of the 7,150,000 shares of Common Stock offered hereby (the "Offering"),
6,150,000 shares are being offered by InterCoast Energy Company ("InterCoast"
or the "Company") and 1,000,000 shares are being offered by MidAmerican Capital
Company ("MidAmerican Capital" or the "Selling Stockholder"), the Company's
sole stockholder. See "Principal and Selling Stockholder." The Company will not
receive any proceeds from the sale of shares by the Selling Stockholder.
Prior to the Offering, there has been no public market for the Common Stock
of the Company (the "Common Stock"). It is currently estimated that the initial
public offering price will be between $15.00 and $17.00 per share. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Common Stock has been approved for listing
on the New York Stock Exchange, subject to notice of issuance, under the symbol
"ICE."
SEE "RISK FACTORS" ON PAGES 9 TO 16 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-TIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions (1) Company (2) Stockholder
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
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Total....................... $ $ $ $
- ------------------------------------------------------------------------------
Total Assuming Full Exercise
of Over-Allotment Option
(3)........................ $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting."
(2) Before deducting expenses estimated at $895,000, payable pro rata by the
Company and the Selling Stockholder.
(3) Assuming exercise in full of the 30-day option granted by the Selling
Stockholder to the Underwriters to purchase up to 1,072,500 additional
shares, on the same terms, solely to cover over-allotments. See
"Underwriting" and "Principal and Selling Stockholder."
-----------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders in whole or in part. It is expected
that delivery of the Common Stock will be made in New York City on or about
, 1996.
-----------
PAINEWEBBER INCORPORATED MERRILL LYNCH & CO.
-----------
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
PRIMARY AREAS OF NATURAL GAS AND OIL ACTIVITY
[MAP IDENTIFYING PRIMARY GEOGRAPHIC AREAS OF THE COMPANY'S NATURAL GAS AND OIL
OPERATING ACTIVITIES APPEARS HERE.]
CPEX(TM) SUBSCRIBERS
[MAP OF UNITED STATES IDENTIFYING LOCATIONS OF SUBSCRIBERS TO CPEX(TM) APPEARS
HERE.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. References to "InterCoast" or the "Company"
herein include InterCoast Energy Company and its subsidiaries and their
predecessors unless the context otherwise requires. The information in this
Prospectus assumes an initial public offering price of $16.00 per share of
Common Stock and that, unless otherwise indicated, the Underwriters' over-
allotment option will not be exercised. Pro forma information gives effect to
the April 1996 Sawyer Canyon Acquisition (as hereinafter defined) and to the
acquisition of the assets of GED Gas Services, L.L.C. ("GED"), a natural gas
marketing company, effective November 1995. Certain terms relating to the
energy industry are defined in "Glossary." Investors should carefully consider
the information set forth under the heading "Risk Factors."
THE COMPANY
InterCoast is an energy company engaged primarily in (i) the development,
exploration, acquisition and production of natural gas and crude oil, (ii) the
marketing of natural gas and electricity, and (iii) the development and
operation of the first market-based national electronic exchange ("CPEX(TM)")
for the buying and selling of wholesale electric power and transmission
services. The Company's principal natural gas and oil operations are located in
Texas, Louisiana, Oklahoma and New Mexico. The Company has increased its
natural gas and oil reserves and cash flow through a balanced focus on
Extensional Infill drilling (as hereinafter defined), strategic acquisitions of
producing properties and regionally focused exploratory drilling. The Company
believes its success has resulted from its ability to (i) identify internally a
large number of desirable Extensional Infill drilling locations, (ii) apply
strict economic and reserve risk criteria to both drilling and acquisition
operations, and (iii) operate as an efficient, low-cost producer. Through the
implementation of this approach, the Company has replaced 390% of its
production at an average finding cost from all sources of $0.85 per Mcfe for
the three-year period ended December 31, 1995, after giving pro forma effect to
the Sawyer Canyon Acquisition.
In April 1996, the Company acquired properties in the Sawyer Canyon Field,
Sutton County, Texas (the "Sawyer Canyon Acquisition") from Enron Oil & Gas
Company at a net purchase price of $45.2 million. The acquired properties
include 350 gross (319 net) wells (of which approximately 95% are operated by
the Company) and had estimated net proved reserves of 58.2 Bcfe at December 31,
1995, virtually all of which are natural gas. The acquired properties also
include 37.2 miles of associated gas gathering lines. After giving pro forma
effect to the Sawyer Canyon Acquisition, the Company's estimated net proved
reserves have grown by 201%, from 83.5 Bcfe at December 31, 1992, to 251.0 Bcfe
at December 31, 1995. At December 31, 1995, on a pro forma basis, approximately
76% of the Company's estimated net proved reserves were natural gas, and the
Company's PV-10 Reserve Value was $223.6 million and its standardized measure
of discounted future net cash flows was $189.8 million (the $33.8 million
difference between the Company's PV-10 Reserve Value and its standardized
measure of discounted future net cash flows being the present value of income
taxes applicable to such future net cash flows). Average daily production has
improved from 27.2 MMcfe during 1992 to 87.1 MMcfe during April 1996,
representing an increase of 220%. At March 31, 1996, on a pro forma basis, the
net tangible assets and properties of the Company's natural gas and oil
operations comprised over 97% of the Company's total tangible asset base.
The Company is also engaged in natural gas and wholesale electric power
marketing. The Company provides a range of natural gas marketing services to
industrial and utility customers and natural gas producers in addition to
marketing substantially all of the natural gas produced from Company-operated
wells. In the electric power sector, which is rapidly shifting from being
heavily regulated to becoming a more competitive industry, the Company actively
pursues opportunities for the wholesale brokering, purchasing and marketing of
electricity. The Company's Federal Energy Regulatory Commission ("FERC")
certification as a power marketer became effective in July 1995, allowing it to
purchase electricity and resell it to wholesale purchasers. As a recent entrant
into this business, the Company's strategic thrust is to expand its electric
power marketing business to
3
<PAGE>
keep pace with the competitive changes in the electric industry. In a further
move, the Company established commercial operation of CPEX(TM) in May 1995.
CPEX(TM) permits subscribers, including utilities and other electric power
generation, transmission and marketing companies, to electronically buy and
sell wholesale electricity and transmission services via the Company's
proprietary network.
BUSINESS STRENGTHS AND STRATEGIES
The Company believes that it has several key strengths and strategies that
position it to continue as a successful energy company and respond effectively
and rapidly to changing market opportunities. These include:
. Active Extensional Infill Drilling Program. The Company targets drilling
prospects that enhance the economic recovery of natural gas and oil in
producing areas to a level greater than that previously achieved by the
owners of the prevailing leasehold by increasing the density of wells that
penetrate known reservoirs. Typically, development of these prospects
requires that the Company obtain some or all of the rights to drill on
acreage that is held by production. The Company refers to this approach as
"Extensional Infill" drilling which has been implemented by various members
of the Company's current management team since 1985. The Company focuses on
internally generated Extensional Infill drilling opportunities within the
Mid-Continent region, with particular emphasis on north Louisiana, northwest
Oklahoma and the Texas panhandle, and southeast New Mexico. Through its
Extensional Infill drilling program, the Company has developed 53.7 Bcfe of
estimated net proved reserves through the end of 1995 at an average cost of
$0.75 per Mcfe. The Company utilizes an experienced team of geologists,
petroleum engineers and landmen to generate, evaluate and acquire
Extensional Infill prospects, applying strict economic and reserve risk
criteria. The Company's geologists regularly monitor and analyze drilling
and production activities within their geographic areas of expertise to
generate new drilling prospects. Because a majority of the Company's
Extensional Infill prospects involve farmouts on acreage not currently
leased by the Company, the Company is able to maintain a large number of
Extensional Infill prospects without making a major capital investment in an
inventory of undeveloped leasehold acreage. As a result of this approach,
the Company is able to drill prospects on the basis of their technical and
economic merits rather than to retain expiring leasehold positions. During
the three-year period ended December 31, 1995, the Company drilled 87
Extensional Infill wells, 52 of which were completed as commercial
producers. At April 30, 1996, the Company had in excess of 150 Extensional
Infill prospects identified in the core areas in which it operates and
anticipates identifying at least 50 additional prospects during the
remainder of 1996. The Company currently plans to drill at least 27
Extensional Infill wells based on its $12 million 1996 capital budget for
Extensional Infill drilling.
. Strategic Producing Property Acquisitions. The Company seeks strategic
acquisitions of producing properties where it can obtain operational control
and where opportunities exist both to reduce operating costs and increase
production and reserves through Extensional Infill drilling and other
exploitation activities. From April 1, 1992 through April 30, 1996, the
Company acquired 188.7 Bcfe of estimated net proved reserves through 31
acquisitions at an average acquisition cost of $0.67 per Mcfe. In many
situations, the Company's acquisition of producing properties originates
from the identification of Extensional Infill drilling prospects. The
Company's most successful acquisition involving this approach was the
acquisition of its interests in the Elm Grove Field, Bossier Parish,
Louisiana. In early 1994, a Company geologist generated a number of
Extensional Infill drilling prospects in the Elm Grove Field. The Company
was able to acquire the 15 marginal producing wells in the field at a cost
of $6.7 million in August 1994. It then assumed operations of the field and
has since drilled 11 productive wells, recompleted 6 of the 15 existing
wells to access the behind pipe reserves and discovered a deeper productive
zone not previously produced in the field. As a result of the Company's
enhancement efforts, gross average daily production from the Elm Grove Field
has increased from 2 MMcf when acquired to a rate of 10 MMcf during April
1996, and estimated net proved reserves increased from 15.2 Bcfe at the time
of acquisition to approximately 31.6 Bcfe (including net production of 3.1
Bcfe since its acquisition) at December 31, 1995.
. Regionally Focused Exploratory Drilling Program. The Company initiated a
regionally focused exploratory drilling program in 1994. The Company
generally seeks larger exploratory prospects which are based upon good
subsurface geologic control on unproved structures or features which provide
both
4
<PAGE>
significant reserve potential and an opportunity for multiple well
locations. The Company focuses its exploratory efforts primarily in the Gulf
Coast region where its personnel have extensive experience. The Company
currently plans to drill 6 to 8 exploratory wells in 1996, primarily in the
Gulf Coast region, based on a 1996 budget for exploratory drilling of $4
million, which represents 25% of the Company's total drilling budget.
. Efficient Operator. The Company pursues workovers, recompletions and other
production optimization methods in order to exploit the additional
production capabilities of its existing reserve base, new well completions
and newly acquired properties. For this reason, the Company prefers to
operate its properties in order to enhance its ability to maximize their
present value and to maintain control of operating expenses and the timing
and amount of capital expenditures. At April 30, 1996, the Company owned
interests in 2,051 gross (667 net) wells, approximately 32% gross (83% net)
of which are operated by the Company. The Company believes that it is a low-
cost operator as indicated by its lease operating expenses of $0.61 per Mcfe
during 1995 ($0.50 per Mcfe during the first quarter of 1996). The Company
has generally found that it has been able to increase product prices and
reduce costs when compared to the prior operators of its newly acquired
properties.
. Natural Gas Marketing. During the first quarter of 1996, the Company
marketed over 200 MMcf per day of natural gas, including approximately 50
MMcf per day of natural gas from its operated wells. The Company's natural
gas marketing activities provide the Company with the opportunity to
maximize both the current sales volumes and the price received for its
natural gas production and to minimize marketing and transportation costs.
The Company intends to expand its existing natural gas marketing business
and acquire other natural gas marketing companies where strategic synergies
exist. Effective November 1995, the Company acquired the assets of GED, a
natural gas marketing company that specializes in aggregating volumes
purchased from producers, and, in the first quarter of 1996, the Company
opened a natural gas marketing office to focus on market opportunities in
the northern end of the Mid-Continent area.
. Electric Power Marketing. The electric industry is rapidly shifting from
being heavily regulated to becoming a more competitive industry. In 1992,
Congress passed the Energy Policy Act which accelerated competitive trends
within the electric industry. The Company commenced electric wholesale power
brokering operations in October 1993. As a broker, the Company acts as an
intermediary between wholesale buyers and sellers. Effective July 1995, the
Company's FERC certification as a power marketer became effective which
allows it to fully engage in the wholesale purchase and sale of electricity.
To date, the Company has brokered and marketed sales of electricity among
over 60 utilities. Since attaining marketer status, the Company has
experienced a steady increase in total quarterly sales. The Company believes
it will be able to capitalize on expanding marketing opportunities created
within the increasingly competitive electric power industry.
. First Market-Based National Electronic Power Exchange. In May 1995, the
Company launched commercial operation of CPEX(TM), the first market-based
national electronic exchange for the buying and selling of wholesale
electric power and transmission services. As of April 30, 1996, CPEX(TM) had
30 subscribers with operations in 25 states. Subscribers utilize CPEX(TM) to
electronically buy and sell electricity and transmission services through
on-site computers in the competitive wholesale market for the next one-hour
and four-hour durations. As both the number of CPEX(TM) subscribers and
their familiarity with the competitive exchange of electric power have
increased, the Company has seen a rise in the number of megawatt hours
("MWh") traded on CPEX(TM). The Company's strategy is to continually upgrade
the capabilities of CPEX(TM) and expand market penetration in order to
maintain its industry-leading position in the market-based electronic
trading of wholesale electric power.
RELATIONSHIP WITH MIDAMERICAN CAPITAL
The Company is currently an indirect wholly owned subsidiary of MidAmerican
Energy Company ("MidAmerican Energy"). MidAmerican Energy, an electric and gas
utility, was formed in July 1995 as a result of the merger of Iowa-Illinois Gas
and Electric Company and Midwest Resources Inc. MidAmerican Energy,
5
<PAGE>
through its wholly owned subsidiary, MidAmerican Capital, currently owns a
total of 7,927,500 shares of Common Stock that were acquired on May 23, 1996,
in exchange for the stock of the Company's operating subsidiaries valued at
$104.8 million as of March 31, 1996, consisting of aggregate retained earnings
of $18.7 million and aggregate cash capital contributions of $86.1 million.
After the Offering, MidAmerican Capital will own 6,927,500 shares of Common
Stock (or 5,855,000 shares of Common Stock if the Underwriters exercise their
over-allotment option in full) or approximately 49% (or 42% if the Underwriters
exercise their over-allotment option in full) of the outstanding shares of
Common Stock. As a result of such stock ownership, MidAmerican Capital and
MidAmerican Energy will in all likelihood be able to elect all members of the
Board of Directors of the Company (the "Board of Directors") and to control the
vote on matters submitted to the Board of Directors. It is contemplated that
upon completion of the Offering the Board of Directors will be comprised of
seven members, five of whom will be directors or current or former officers of
MidAmerican Energy, MidAmerican Capital or the Company.
In connection with the Offering, the Company and MidAmerican Capital will
enter into certain agreements providing for, among other things, demand
registration rights, tax sharing arrangements, general indemnification of
MidAmerican Capital, subleases of office space and administrative services to
be provided by either party to the other. The Company and MidAmerican Capital
and its other affiliates may enter into other transactions and agreements from
time to time in the future. The relationship between the Company and
MidAmerican Capital and its other affiliates may give rise to conflicts of
interest with respect to, among other things, transactions and agreements among
the Company and MidAmerican Capital and its other affiliates, potential
competitive business activities or business opportunities, issuances of
additional shares of voting securities, the election of directors or the
payment of dividends, if any, by the Company. There can be no assurance that
conflicts will be resolved in favor of the Company.
The Board of Directors will utilize procedures in evaluating the terms and
provisions of any material transactions between the Company and MidAmerican
Capital or its affiliates as the Board of Directors may deem appropriate in
light of its fiduciary duties under state law, including, when appropriate,
consideration by the disinterested directors. The Company intends that all
future transactions and agreements between the Company and MidAmerican Capital
or its other affiliates will be at least as favorable to the Company as could
be obtained from third parties.
MidAmerican Energy and MidAmerican Capital will realize certain benefits as a
result of the Offering, including proceeds from the sale of shares of Common
Stock and the creation of a public market for the Common Stock. In addition,
all of the net proceeds to the Company from the Offering will be used to repay
indebtedness under the Company's revolving credit facility, which was borrowed
to repay notes payable to MidAmerican Capital.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Compa- 6,150,000 shares
ny................................
Common Stock Offered by the Selling 1,000,000 shares
Stockholder.......................
Common Stock to be Outstanding af- 14,079,500 shares (1)
ter the Offering..................
Use of Proceeds.................... The net proceeds to the Company of the
Offering are estimated to be $90.7 million
and will be used to repay the indebtedness
outstanding under the Company's revolving
credit facility. See "Use of Proceeds."
New York Stock Exchange Symbol..... ICE
</TABLE>
- --------
(1) Includes 2,000 restricted shares of Common Stock issuable under the
Company's Non-Employee Director Restricted Stock Plan upon completion of
the Offering but does not include 541,600 shares of Common Stock reserved
for issuance pursuant to outstanding options under the Company's Long Term
Incentive Plan. See "Management--Long-Term Incentive Stock Plan" and
"Management--Director Stock Plan."
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth, as of and for each of the periods indicated,
certain summary historical and summary pro forma financial data for the Company
giving effect to certain acquisitions and the Offering. The historical data as
of March 31, 1996 and for the three months ended March 31, 1996 and 1995 are
unaudited and the results for such periods are not necessarily indicative of
results for the full year. In the opinion of management, such unaudited
historical data reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation. The summary pro forma financial
information, except in the case of balance sheet data, reflects the Sawyer
Canyon Acquisition and the acquisition of the assets of GED as if such
acquisitions occurred on January 1, 1995 and gives effect to the Offering. The
unaudited summary pro forma balance sheet data reflect the Sawyer Canyon
Acquisition as if it occurred on March 31, 1996 and give effect to the
Offering. The summary historical financial data should be read in conjunction
with the consolidated financial statements of the Company included elsewhere in
this Prospectus and "Selected Historical Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
summary pro forma financial data are derived from the Unaudited Pro Forma
Combined Financial Statements included elsewhere in this Prospectus, and should
be read in conjunction therewith.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------- ------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
1993 1994 1995 1995 1995 1996 1996
-------- -------- -------- ----------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
InterCoast Oil and Gas
Company
Gas and oil revenues... $ 37,359 $ 44,466 $ 48,109 $ 61,193 $10,995 $ 15,647 $ 19,072
Gas and oil operating
expenses.............. (9,616) (15,016) (14,552) (17,505) (3,645) (3,508) (4,122)
Depreciation, depletion
and amortization
expense............... (13,535) (18,602) (21,489) (27,897) (5,115) (6,214) (7,567)
General and
administrative
expense, net.......... (2,183) (2,633) (2,288) (2,508) (640) (714) (769)
-------- -------- -------- -------- ------- -------- --------
12,025 8,215 9,780 13,283 1,595 5,211 6,614
-------- -------- -------- -------- ------- -------- --------
InterCoast Energy
Marketing
Natural gas sales
revenues.............. 16,715 13,700 24,066 82,269 1,996 34,972 34,972
Cost of gas sold....... (16,216) (13,142) (23,218) (80,434) (1,874) (34,184) (34,184)
Gathering system
revenues.............. -- -- -- 1,594 -- -- 315
Gathering system
expenses.............. -- -- -- (105) -- -- (31)
Electric power sales
revenues.............. 19 446 421 421 -- 406 406
Cost of electric power
sold.................. -- -- (325) (325) -- (292) (292)
Operating expenses..... (369) (778) (952) (1,918) (209) (596) (596)
General and
administrative
expense............... (163) (314) (410) (410) (103) (181) (181)
-------- -------- -------- -------- ------- -------- --------
(14) (88) (418) 1,092 (190) 125 409
-------- -------- -------- -------- ------- -------- --------
Continental Power
Exchange, Inc.
Administrative and
development expense,
net................... -- (849) (3,442) (3,442) (460) (739) (739)
-------- -------- -------- -------- ------- -------- --------
Corporate expenses..... (1,013) (1,553) (1,554) (2,738) (389) (472) (705)
-------- -------- -------- -------- ------- -------- --------
Income before income
taxes................. 10,998 5,725 4,366 8,195 556 4,125 5,579
Provision for income
taxes................. 4,984 2,324 1,481 2,821 189 1,529 2,037
-------- -------- -------- -------- ------- -------- --------
Net income............. $ 6,014 $ 3,401 $ 2,885 $ 5,374 $ 367 $ 2,596 $ 3,542
======== ======== ======== ======== ======= ======== ========
Average common shares
outstanding........... 7,928 7,928 7,928 14,078 7,928 7,928 14,078
Earnings per common
share................. $ 0.76 $ 0.43 $ 0.36 $ 0.38 $ 0.05 $ 0.33 $ 0.25
======== ======== ======== ======== ======= ======== ========
CASH FLOW AND OTHER DA-
TA:
EBITDA (1)............. $ 24,670 $ 25,356 $ 27,359 $ 37,596 $ 6,179 $ 10,477 $ 13,284
Net cash provided
(used) by:
Operating activities... 25,535 22,800 38,186 47,083 12,271 13,793 16,092
Investing activities... (73,700) (43,491) (43,522) (88,762) (11,155) (14,310) (59,550)
Financing activities... 50,441 22,186 8,512 53,752 (1,438) (5,907) 39,333
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
PRO FORMA
HISTORICAL AS ADJUSTED
---------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 1,879 $ 381
Working capital......................................... 1,761 263
Total assets............................................ 204,091 247,833
Long-term debt.......................................... 47,000 --
Stockholders' equity.................................... 104,757 195,499
</TABLE>
- -------
(1) EBITDA is income before income taxes, interest, depreciation, depletion and
amortization. EBITDA is a financial measure commonly used in the Company's
industry and should not be considered in isolation or as a substitute for
net income, cash flow provided by operating activities or other income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA NATURAL GAS AND OIL OPERATING AND RESERVE DATA
The following table sets forth summary information, on a historical and pro
forma basis for the Sawyer Canyon Acquisition, with respect to the operation of
the Company's natural gas and oil properties and the Company's estimated proved
natural gas and oil reserves at the end of the periods indicated. See "Business
and Properties--Natural Gas and Oil Reserves" and "Business and Properties--
Production, Prices and Operating Expenses."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- -----------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995 1995 1996 1996
------- ------- ------- --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION:
Natural gas (MMcf)..... 12,742 15,591 17,835 25,980 4,066 5,113 6,727
Oil and liquids
(MBbls)............... 691 1,024 1,028 1,045 252 316 320
Total (MMcfe).......... 16,887 21,737 24,003 32,250 5,578 7,008 8,648
AVERAGE SALES PRICE:
Natural gas (per Mcf)
(1)................... $ 2.04 $ 1.82 $ 1.65 $ 1.63 $ 1.61 $ 2.00 $ 2.02
Oil (per Bbl).......... 16.07 14.93 16.45 16.43 16.41 17.64 17.70
AVERAGE COSTS (PER
MCFE):
Lease operating ex-
pense................. $ 0.57 $ 0.69 $ 0.61 $ 0.54 $ 0.65 $ 0.50 $ 0.48
Depreciation, depletion
and amortization...... 0.80 0.86 0.90 0.87 0.92 0.89 0.87
General and administra-
tive, net (2)......... 0.13 0.12 0.10 0.08 0.11 0.10 0.09
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
PRO FORMA
1993 1994 1995 1995
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
ESTIMATED PROVED RESERVES:
Natural gas (MMcf).................... 112,023 148,611 133,673 191,427
Oil and liquids (MBbls)............... 8,955 7,304 9,844 9,923
Total (MMcfe)......................... 165,754 192,434 192,737 250,965
Estimated future net cash flows before
income taxes, discounted at 10% per
annum (in thousands) (3)............. $137,711 $144,595 $168,159 $223,571
Standardized measure of discounted fu-
ture net cash flows (in thousands)
(3).................................. $118,202 $126,044 $136,924 $189,778
Percent of proved developed reserves.. 90% 81% 83% 86%
Reserve Life Index (in years) (4)..... 9.8 8.9 8.0 7.8
RESERVE REPLACEMENT DATA:
Finding costs (per Mcfe) (5).......... $ 0.73 $ 0.73 $ 0.85 $ 0.85
Production replacement ratio (6)...... 612% 263% 107% 349%
</TABLE>
- --------
(1) Includes the results of the Company's price risk management activities. See
"Business and Properties--Natural Gas and Oil Production Marketing
Activities."
(2) Before allocation of corporate expenses.
(3) The difference between estimated future net cash flows before income taxes,
discounted at 10% per annum and the standardized measure of discounted
future net cash flows of $19,509,000, $18,551,000, $31,235,000 and
$33,793,000 for 1993, 1994, 1995 and 1995 on a pro forma basis,
respectively, is the present value of income taxes applicable to such
future net cash flows.
(4) Calculated by dividing year-end proved reserves by annual actual or pro
forma production (as applicable) for the most recent year.
(5) Represents the average finding costs over a three-year period, ending at
the end of the period presented.
(6) Equals current period reserve additions through acquisitions of reserves,
extensions and discoveries, and revisions to prior estimates divided by the
production for such period.
8
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information contained in this Prospectus before purchasing the shares of
Common Stock offered hereby.
VOLATILITY OF NATURAL GAS AND OIL PRICES; INDUSTRY CONDITIONS
The Company's financial condition, profitability and future rate of growth
and the carrying value of its natural gas and oil properties are significantly
dependent upon prevailing prices for natural gas, oil and condensate. The
Company's ability to maintain its borrowing capacity and to obtain additional
capital on attractive terms is also substantially dependent upon natural gas
and oil prices. The energy markets have historically been, and are likely to
continue to be, volatile and prices for natural gas and oil are subject to
large fluctuations in response to relatively minor changes in the supply and
demand for natural gas and oil, market uncertainty and a variety of additional
factors beyond the control of the Company. These factors include weather
conditions in the United States, the condition of the United States economy,
the actions of the Organization of Petroleum Exporting Countries, governmental
regulation, political stability in the Middle East and other petroleum
producing areas, the foreign and domestic supply of natural gas and oil, the
price of foreign imports and the availability of alternate fuel sources. A
substantial or extended decline in natural gas and oil prices could have a
material adverse effect on the Company's financial position, results of
operations, quantities of natural gas and oil reserves that may be
economically produced, carrying value of its proved reserves and access to
capital. In addition, the marketability of the Company's and third party
production depends upon a number of factors beyond the Company's control,
including the availability and capacity of transportation and processing
facilities, the effect of federal and state regulation of natural gas and oil
production and transportation, changes in supply due to drilling by other
producers and changes in demand. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business and Properties--
Natural Gas and Oil Production Marketing Activities."
PRICE RISK MANAGEMENT
In connection with the marketing of its own natural gas production, the
Company has entered into, and intends in the future to enter into, price risk
management contracts and arrangements. See "Business and Properties--Natural
Gas and Oil Production Marketing Activities." These contracts involve fixed
for floating price swap agreements on notional volumes which require payments
to (or the receipt of payments from) counterparties to such agreements based
on the differential between a fixed and variable price for natural gas. The
Company maintains coverage of such notional volumes with adequate physical
volume deliveries at the hub points used to price such agreements. The Company
utilizes these contracts in an effort to reduce risks relating to the
volatility of natural gas prices. However, such transactions may also limit
potential gains by the Company if natural gas prices were to rise
substantially over the price established by the contracts. The contracts are
subject to market risks relating to potential future increases in natural gas
prices which must be managed by the Company on a portfolio basis.
Additionally, credit risks exist because a party to a contract may not be able
to perform the contract in accordance with its terms. The Company is currently
party to swap arrangements covering an amount of natural gas volumes which is
equal to approximately 50% of its current total monthly production of its
equity gas, at a weighted average price of $2.047 per MMBtu at May 1, 1996.
In connection with its third party natural gas marketing activities, the
Company also has entered into, and intends in the future to enter into, price
risk management contracts and arrangements. See "Business and Properties--
Natural Gas and Oil Production Marketing Activities." These contracts and
arrangements relate to natural gas and include forward contracts involving
physical delivery of natural gas, swap agreements which require payments to
(or the receipt of payments from) counterparties to such agreements based on
the differential between a fixed and variable price for natural gas, swap
agreements designed to translate geographic pricing differences ("basis"), New
York Mercantile Exchange ("NYMEX") or other exchange-traded options, over-the-
counter options and other similar contractual arrangements. The Company
utilizes these contracts in an effort to reduce risks relating to the
volatility of natural gas prices. The contracts themselves involve certain
risks, including volatility risks and regional supply and demand aberrations
which must be managed by the Company
9
<PAGE>
on a portfolio basis. Additionally, credit risks exist because a party to a
contract may not be able to perform the contract in accordance with its terms.
There also exists a delivery or receipt risk that the Company or a
counterparty may not be able to fulfill its physical requirements due to
reasons within or outside its control. In the event of non-performance, the
Company may be required to purchase or sell natural gas at prices greatly
above or below market prices to fulfill contractual obligations or the Company
may be required to make certain payments in order to satisfy its obligations
under the contracts, possibly without legal recourse against the non-
performing party. While the Company is not currently involved in similar
contracts and arrangements with respect to electric power, it is anticipated
that in the future similar types of activities may be undertaken with respect
to electric power.
Certain employees of the Company are authorized to enter into risk
management contracts and arrangements within the Company's risk management
guidelines. There is no assurance that these guidelines will prevent
significant losses relating to these contracts and arrangements. Further,
these guidelines may not adequately address market volatility and other risks
associated with these contracts and arrangements. In addition, the risk exists
that these contracts and arrangements could be entered into or traded outside
of the guidelines. If these employees enter into or buy and sell these
contracts and arrangements outside these guidelines, such activity could
result in significant losses.
RESERVE REPLACEMENT RISKS
The Company's future performance is dependent upon its ability to find,
develop and acquire additional natural gas and oil reserves that are
economically recoverable. Without successful drilling or acquisition
activities, the Company's reserves and revenues will decline. No assurances
can be given that the Company will be able to find and develop or acquire
additional reserves at an acceptable cost. Further, the Company's approach to
obtaining drilling rights for its Extensional Infill drilling prospects
depends upon the willingness of property owners to grant the necessary
drilling rights to the Company after the prospects have been identified by the
Company. The Company may encounter difficulty in obtaining grants of farmouts
on certain of its locations on reasonable terms, in which case the Company may
not be able to obtain the drilling rights at all, or it may incur substantial
costs or burdens or experience significant delays before finally obtaining the
desired rights.
The Company's natural gas and oil business is capital intensive and, to
maintain its asset base of natural gas and oil reserves, a significant amount
of cash flow from operations must be reinvested in property acquisitions and
development and exploration activities. To the extent cash flow from
operations is reduced and external sources of capital become limited or
unavailable, the Company's ability to make the necessary capital investments
to maintain or expand its asset base would be impaired. Without such
investment, the Company's natural gas and oil reserves would decline.
The successful acquisition of producing properties requires an assessment of
recoverable reserves, future natural gas and oil prices and operating costs,
potential environmental and other liabilities and other factors. Such
assessments are necessarily inexact and their accuracy inherently uncertain.
In addition, no assurances can be given that the Company's exploitation and
development activities will result in any increases in reserves. The Company's
operations may be curtailed, delayed or canceled as a result of lack of
adequate capital and other factors, such as title problems, weather,
compliance with governmental regulations or price controls, mechanical
difficulties or shortages or delays in the delivery of equipment. In addition,
the costs of exploitation and development may materially exceed initial
estimates.
RELIANCE ON ESTIMATES OF NATURAL GAS AND OIL RESERVES
The reserve data set forth in this Prospectus represent only estimates of
Netherland, Sewell and Associates, Inc., other third-party petroleum engineers
and the Company. Reserve engineering is a subjective process of estimating the
recovery of underground accumulations of natural gas and oil that cannot be
measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of the available data, of the assumptions made, and of
engineering and geological interpretation and judgment. Estimates of
economically recoverable natural gas and oil reserves and of future net cash
flows therefrom necessarily depend upon a number of variable factors and
assumptions, such as historical production from the area compared with
production from other producing areas, the assumed effects of regulations by
governmental agencies and assumptions concerning future natural gas and oil
prices, future operating costs, severance and excise taxes, development costs
and
10
<PAGE>
workover and remedial costs, all of which may in fact vary considerably from
actual results. As a result, any such estimates are inherently imprecise, and
estimates by other engineers, or by the same engineers at a different time,
might differ materially from those included herein. Actual prices, production,
development expenditures, operating expenses and quantities of recoverable
natural gas and oil reserves will vary from those assumed in the estimates and
such variances may be significant. Any significant variance from the
assumptions could result in the actual quantity of the Company's reserves and
future net cash flow therefrom being materially different from the estimates
set forth in this Prospectus. In addition, the Company's estimated reserves
may be subject to downward or upward revision, based upon production history,
results of future exploration and development, prevailing natural gas and oil
prices, operating and development costs and other factors. The Company's
properties may also be susceptible to hydrocarbon drainage from production by
other operators on adjacent properties. See "Business and Properties--Natural
Gas and Oil Reserves."
The present worth of future net cash flows set forth herein should not be
construed as the current market value or the value at any prior date of the
estimated natural gas and oil reserves attributable to the Company's
properties. In accordance with applicable requirements of the Securities and
Exchange Commission (the "Commission"), the estimated discounted future net
revenues from estimated proved reserves are based on prices and costs as of
the date of the estimate unless such prices or costs are contractually
determined at such date. Actual future prices and costs may be materially
higher or lower. Actual future net revenues also will be affected by factors
such as actual production, supply and demand for natural gas and oil,
curtailments or increases in consumption by natural gas purchasers, changes in
governmental regulations or taxation and the impact of inflation on costs.
OPERATING RISKS
The natural gas and oil business involves a variety of operating risks,
including the risk of fire, explosions, blow-outs, pipe failure, abnormally
pressured formations and environmental hazards such as oil spills, gas leaks,
ruptures or discharges of toxic gases. Any of these occurrences could result
in substantial losses to the Company due to injury or loss of life, severe
damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities, regulatory
investigation and penalties and suspension of operations. Moreover, offshore
operations are subject to a variety of operating risks peculiar to the marine
environment, such as hurricanes or other adverse weather conditions, to more
extensive governmental regulation, including regulations that may, in certain
circumstances, impose strict liability for pollution damage, and to
interruption or termination of operations by governmental authorities based on
environmental or other considerations. The presence of unanticipated pressure
or irregularities in formations, miscalculations or accidents may cause such
activity to be unsuccessful, resulting in a total loss of the Company's
investment in such activity. Although the Company maintains insurance coverage
considered to be customary in the industry, it is not fully insured against
certain of these risks, either because such insurance is not available or
because of the high premium costs. There can be no assurance that any
insurance obtained by the Company will be adequate to cover any losses or
liabilities, or that such insurance will continue to be available or available
on terms which are acceptable to the Company. See "Business and Properties--
Operational Hazards and Insurance."
CERTAIN RISKS OF NATURAL GAS MARKETING OPERATIONS
The profitability of the Company's natural gas marketing operations depends
in large part on the ability of the Company's management to assess and respond
to changing market conditions in negotiating natural gas purchase and sales
agreements. The inability of management to respond appropriately to changing
market conditions could have a negative effect on the profitability of the
Company's natural gas marketing businesses. Under certain agreements, the
Company is obligated to purchase or sell specified quantities of natural gas
at prices related to the market price. Although the Company attempts to match
its purchase obligations with sales obligations in certain instances, it is
still subject to price risk, particularly where the index or market for
determining the purchase price under a contract is different from the index or
market for determining the sales price under the corresponding contract. The
Company uses financial risk management techniques to hedge its price risk, but
these techniques and actions do not eliminate all such risk. See "--Price Risk
Management."
11
<PAGE>
In the natural gas marketing business, a buyer's ability to purchase natural
gas is affected by its financial strength. In the past, MidAmerican Capital
has provided letters of credit and guarantees to support certain of the
Company's purchases of natural gas. Accordingly, the Company's historical
ability to purchase and the volumes and terms of its purchases have been
dependent, in part, on the financial support of MidAmerican Capital. After the
Offering, the Company's own financial strength may affect its ability to
purchase and the volumes and terms under which it will be able to purchase
natural gas. The Company's working capital decreased from $11.5 million at
December 31, 1995, to $1.8 million at March 31, 1996, primarily on account of
the use of cash to reduce debt and fund certain investments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." The Company believes that its cash flow from
operations and amounts available under its revolving credit facility will
provide the Company with sufficient liquidity to finance its ongoing business
activities, including its natural gas marketing operations. There can be no
assurance, however, that the Company's financial strength will be sufficient
to provide the financial support that may be required to continue the present
volume of purchases or to permit increased volumes of purchases at acceptable
prices.
CERTAIN RISKS AFFECTING CPEX(TM)
The electric energy power exchange business is an emerging industry
characterized by technological change, new product and service introductions
and evolving industry standards. The future success of CPEX(TM) will depend in
large part on the Company's ability to anticipate industry standards, quickly
adopt and integrate industry advancements and enhance its products and
services on a timely basis to keep pace with technological changes and changes
in the power exchange market. Any delay or failure to respond to market or
technological changes or evolving industry standards, or the failure of
CPEX(TM) to achieve market acceptance, could have a material adverse effect on
the future operations of CPEX(TM). Although the Company is developing in-house
capabilities to support its current CPEX(TM) software applications and to
develop new software applications for its CPEX(TM) operations, it will
continue to rely heavily on the services of third party specialty software
development firms. Because of the Company's reliance on such third party
services, it may not be able to control either the software support services
required in its CPEX(TM) operations or the timing of the development and
implementation of new software and hardware configurations, delays in which
could cause the Company to lose market share to its competitors. Further,
there can be no assurance that legal protections relied upon by the Company to
protect the proprietary intellectual property rights underlying its trading
network will be adequate or that the Company's competitors will not
independently develop technologies which are substantially equivalent or
superior to the Company's technologies. The Company's CPEX(TM) operations have
incurred losses since their inception, and there can be no assurance that such
operations will become profitable. CPEX(TM) is in the early stage of
commercial operation, and there can be no assurance of its future viability or
that the Company will recover its investment in CPEX(TM).
CERTAIN RISKS AFFECTING ELECTRIC POWER MARKETING OPERATIONS
Although in the early stages of development, the wholesale electric power
marketing business is very competitive with approximately 200 companies to
date having received FERC certification as power marketers. Many of these
competitors have greater financial resources than the Company and direct
access to generating resources. The Company neither owns nor has any long-term
rights to any electric generating resources. There can be no assurance that
the Company will be able to procure adequate amounts of electricity at
reasonable prices or to find markets for such electricity. The Company has
only recently entered the power marketing business, and its power marketing
operations have incurred losses in the past. There can be no assurance that
such operations will become profitable.
DEPENDENCE ON KEY PERSONNEL; LIMITED OPERATING HISTORY
The Company's operations are dependent upon a relatively small group of
management and technical personnel. The loss of one or more of these
individuals could have a material adverse effect on the Company.
12
<PAGE>
See "Management--Directors and Executive Officers." In addition, the Company's
power marketing and CPEX(TM) operations have a limited operating history and
are essentially start-up operations.
COMPETITION
The energy industry is highly competitive, particularly with respect to the
acquisition of desirable natural gas and oil properties and in marketing
natural gas and oil production and electricity. The Company competes with
major and independent energy companies (including public utilities), as well
as numerous individuals and marketers. The availability of funds and
information relating to a property, the investment criteria utilized by the
Company and the availability of alternate fuel sources are factors which also
affect the Company's ability to compete. In addition, the Company faces
intense competition in the natural gas marketing and power marketing
businesses. Competition is also emerging in electric energy exchange networks.
The Company expects competition to increase in these markets from both
existing competitors and other companies that may enter these markets in the
future. Many of the Company's competitors in its business activities have
financial and other resources and acquisition, exploration and development
budgets that are substantially greater than those of the Company, which may
adversely affect the Company's ability to compete with these companies. See
"Business and Properties--Competition."
GOVERNMENTAL REGULATION
Oil and gas operations are subject to various federal, state and local
governmental regulations which may be changed from time to time in response to
economic or political conditions. Matters subject to regulation include
discharge permits for drilling operations, drilling and abandonment bonds,
reports concerning operations, the spacing of wells, unitization and pooling
of properties and taxation. From time to time, regulatory agencies have
imposed price controls and limitations on production by restricting the rate
of flow of oil and gas wells below actual production capacity in order to
conserve supplies of oil and gas. In addition, the production, handling,
storage, transportation and disposal of oil and gas, by-products thereof and
other substances and materials produced or used in connection with oil and gas
operations are subject to regulation under federal, state and local laws and
regulations primarily relating to protection of human health and the
environment. These laws and regulations have continually imposed increasingly
strict requirements for water and air pollution control and solid waste
management. To date, expenditures related to compliance with these laws have
not been significant. The Company believes, however, that the trend of more
expansive and stricter environmental legislation and regulations will continue
and such legislation may result in additional costs to the Company in the
future. Amendments to the Resource Conservation and Recovery Act to regulate
further the handling, transportation, storage and disposal of oil and gas
exploration and production wastes have been considered by Congress and may be
adopted. Such legislation, if enacted, could have a significant adverse impact
on the Company's operating costs. See "Business and Properties--Regulation."
Although the Company's natural gas marketing business is generally not
subject to federal or state regulation, many of the parties with whom the
Company does business (including interstate and intrastate pipelines,
gathering and storage companies, and local distribution companies) are subject
to federal and state regulation. As a result, changes in governmental
regulations may have an adverse impact on the Company's natural gas marketing
business. In addition, such parties may also file tariffs at the federal
and/or state level on account of their regulated status, changes in which may
have an adverse effect on the Company's natural gas marketing business.
Finally, because the Company's natural gas marketing business is affiliated
with a regulated utility, it is possible that government regulation could
directly or indirectly adversely impact such a business. See "Business and
Properties--Regulation."
The timing and direction of future federal and state regulatory actions will
likely impact the Company's power marketing and electricity trading exchange
operations. The Company has designed CPEX(TM) and has plans for future system
developments predicated on the regulatory freedom for wholesale and,
eventually, retail electricity users to choose among supply sources and
transmission paths. Federal and state legislation and decisions that federal
and various state regulators make about whether, when and how retail
competition may
13
<PAGE>
come about, the terms and conditions under which traditional utilities will be
allowed to compete, and whether state or federal governmental authorities will
establish or approve power exchanges, will likely have a significant bearing
on the Company's ability to compete in this market. Additionally, future
changes in the regulation of power marketers and the regulation of power
marketing in general by the FERC or state authorities are possible. Currently,
the Company is essentially free to compete for wholesale electricity customers
across the United States, except for certain transactions involving
MidAmerican Energy. While there are no regulatory proceedings currently
pending or in the planning stages of which the Company is aware that would
further restrict the Company's ability to compete, there can be no assurance
that regulatory changes might not take place in the future that could
adversely impact the Company's ability to compete. See "Business and
Properties--Regulation."
PRINCIPAL STOCKHOLDER
MidAmerican Energy, through its wholly owned subsidiary MidAmerican Capital,
currently owns 7,927,500 shares of Common Stock and after the Offering will
own 6,927,500 shares of Common Stock (or 5,855,000 shares of Common Stock if
the Underwriters exercise their over-allotment option in full) or
approximately 49% (or 42% if the Underwriters exercise their over-allotment
option in full) of the outstanding shares of Common Stock. Such concentration
of ownership of Common Stock may have an adverse effect on the market price of
the Common Stock. As a result of such stock ownership, MidAmerican Capital and
MidAmerican Energy will in all likelihood be able to elect all members of the
Board of Directors and to control the vote on matters submitted to the Board
of Directors or stockholders, including, without limitation, matters relating
to the Company's exploration, development, capital, operating and acquisition
expenditure plans. It is contemplated that upon completion of the Offering the
Board of Directors will be comprised of seven members, five of whom will be
directors or current or former officers of MidAmerican Energy, MidAmerican
Capital or the Company. See "Relationship Between the Company and the Parent"
and "Principal and Selling Stockholder."
In connection with the Offering, the Company and MidAmerican Capital will
enter into certain agreements, including a registration rights agreement, a
tax sharing agreement, an administrative services agreement, two sublease
agreements and a general indemnification agreement, to provide for certain
transactions and relationships between the parties. Pursuant to the
indemnification agreement, the Company will agree to indemnify MidAmerican
Capital and its affiliates against liabilities associated, among other things,
with the Company's business prior to and after the Offering, employment and
employee benefit matters arising from the corporate restructuring of
MidAmerican Capital, and the Offering. Some of these liabilities could be
substantial. See "Relationship Between the Company and the Parent--Contractual
Arrangements." The Company and MidAmerican Capital and its other affiliates
may enter into other transactions and agreements from time to time in the
future. The relationship between the Company and MidAmerican Capital and its
other affiliates may give rise to conflicts of interest with respect to, among
other things, transactions and agreements among the Company and MidAmerican
Capital and its other affiliates, potential competitive business activities or
business opportunities, issuances of additional shares of voting securities,
the election of directors or the payment of dividends, if any, by the Company.
There can be no assurance that conflicts will be resolved in favor of the
Company. There are no contractual or other restrictions on the ability of
MidAmerican Capital or its other affiliates to engage in oil and gas
exploration and production, natural gas marketing or electric power marketing
or in the operation of an electric power trading exchange. Circumstances
presently exist and could arise in the future in which the Company and
MidAmerican Capital or its other affiliates engage in activities in
competition with one another. See "Relationship Between the Company and the
Parent--Potential Conflicts of Interest."
MidAmerican Energy and MidAmerican Capital will realize certain benefits as
a result of the Offering, including proceeds from the sale of shares of Common
Stock owned by MidAmerican Capital and the creation of a public market for the
Common Stock which will provide a market indication of the value of the
Company. See "Principal and Selling Stockholder" and "Shares Eligible for
Future Sale." In addition, all of the net proceeds to the Company from the
Offering will be used to repay indebtedness under the Company's revolving
credit facility which was borrowed to repay notes payable to MidAmerican
Capital. See "Use of Proceeds."
14
<PAGE>
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; DILUTION
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiations between
the Company, MidAmerican Capital and the Underwriters and may not be
indicative of the future market price for the Common Stock. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. There can be no assurance that an active trading market
for the Common Stock will develop following the Offering or, if developed,
that it will be sustained. The market price of the Common Stock could also be
subject to significant fluctuation in response to variations in results of
operations and other factors. Investors in the Common Stock offered hereby
will also experience immediate and substantial dilution in the net tangible
book value of their shares of Common Stock. At an assumed public offering
price of $16.00 per share, the dilution to investors would be $2.42 per share.
In addition, MidAmerican Capital acquired its shares of Common Stock at a per
share price that is substantially less than the initial public offering price.
See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
MidAmerican Capital has agreed not to dispose of any shares of Common Stock,
other than pursuant to the Offering, without the prior consent of PaineWebber
Incorporated for a period of 180 days from the date of this Prospectus. The
shares of Common Stock held by MidAmerican Capital are deemed "restricted
securities" within the meaning of Rule 144 under the Securities Act of 1933,
as amended (the "Securities Act"), and may be resold after the 180-day period
only upon registration under the Securities Act or pursuant to an exemption
from registration, including exemptions contained in Rule 144. MidAmerican
Capital will be granted certain rights to demand registration of its shares of
Common Stock at any time commencing six months from the date of the closing of
the Offering. See "Relationship Between the Company and the Parent--
Contractual Arrangements--Registration Rights Agreement." As of the date
hereof, options exercisable for 541,600 shares of Common Stock were
outstanding under the Company's 1996 Long Term Incentive Plan, none of which
are currently exercisable. Generally, all shares issued upon the exercise of
such options will be freely tradeable under the Securities Act. Future sales
of substantial amounts of Common Stock in the public market following the
Offering could adversely affect the market price of Common Stock. The Company
is unable to make any prediction as to the effect, if any, that the future
sales of Common Stock or the availability of Common Stock for sale will have
on the market price of the Common Stock prevailing from time to time. See
"Shares Eligible for Future Sale."
FORWARD-LOOKING STATEMENTS
There are a number of statements in this Prospectus which address
activities, events or developments which the Company expects or anticipates
will or may occur in the future, including such things as future capital
expenditures (including the amount and nature thereof), wells to be drilled or
reworked, natural gas and oil prices and demand, drilling prospects to be
identified, expansion and other development trends of industry segments in
which the Company is active, acquisitions of assets and businesses, production
of natural gas and oil reserves, expansion and growth of the Company's
businesses and operations, and other such matters. These statements are based
on certain assumptions and analyses made by the Company in light of its
experience and its perception of historical trends, current conditions and
expected future developments as well as other factors it believes are
appropriate under the circumstances. However, whether actual results and
developments will conform with the Company's expectations and predictions is
subject to a number of risks and uncertainties, including the risk factors
discussed in this section; general economic, market or business conditions;
the business opportunities (or lack thereof) that may be presented to and
pursued by the Company; changes in laws or regulations and other factors, most
of which are beyond the control of the Company. Consequently, all of the
forward-looking statements made in this Prospectus are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations.
15
<PAGE>
BLANK CHECK PREFERRED STOCK
The Company's Certificate of Incorporation (the "Certificate of
Incorporation") authorizes blank check preferred stock which may have the
effect of discouraging unsolicited acquisition proposals. See "Description of
Capital Stock--Preferred Stock."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on the Common Stock.
The Company currently intends to retain its earnings to provide funds for
reinvestment in the Company's businesses, and, therefore, does not anticipate
declaring or paying cash dividends in the foreseeable future. See "Dividend
Policy."
16
<PAGE>
THE COMPANY
InterCoast is an energy company engaged primarily in (i) the development,
exploration, acquisition and production of natural gas and crude oil, (ii) the
marketing of natural gas and electricity, and (iii) the development and
operation of the first market-based national electronic exchange, CPEX(TM),
for the buying and selling of wholesale electric power and transmission
services. The Company's principal natural gas and oil operations are located
in Texas, Louisiana, Oklahoma and New Mexico. The Company has increased its
natural gas and oil reserves and cash flow through a balanced focus on
Extensional Infill drilling, strategic acquisitions of producing properties
and regionally focused exploratory drilling. The Company believes its success
has resulted from its ability to (i) identify internally a large number of
desirable Extensional Infill drilling locations, (ii) apply strict economic
and reserve risk criteria to both drilling and acquisition operations, and
(iii) operate as an efficient, low-cost producer.
The Company was incorporated in Delaware on May 17, 1996, in connection with
the corporate restructuring of MidAmerican Capital and is an indirect wholly
owned subsidiary of MidAmerican Energy, an electric and gas utility.
MidAmerican Energy was formed in July 1995 as a result of the merger of Iowa-
Illinois Gas and Electric Company and Midwest Resources Inc. MidAmerican
Energy, through its wholly owned subsidiary MidAmerican Capital, will in all
likelihood continue to maintain effective control over the Company and its
operations, including the election of the Board of Directors, election of
officers and dividend policy, as well as other operational matters.
The Company is organized as a holding company with four direct wholly owned
subsidiaries: (i) InterCoast Oil and Gas Company, formerly named Medallion
Production Company ("InterCoast Oil and Gas"), which conducts the Company's
natural gas and oil exploration and production business, (ii) InterCoast Gas
Services Company ("InterCoast Gas Services"), which conducts the Company's
natural gas marketing business, (iii) Continental Power Exchange, Inc.
("Continental Power Exchange"), which operates CPEX(TM), the Company's market-
based electronic exchange for the buying and selling of wholesale electricity
and transmission services, and (iv) InterCoast Power Marketing Company
("InterCoast Power Marketing"), which conducts the Company's power marketing
and brokering operations.
In 1992, InterCoast Oil and Gas acquired from Medallion Petroleum, Inc.
certain undeveloped natural gas and oil properties, prospect inventory and
goodwill (name, personnel and operating and management rights of certain
natural gas and oil properties). The acquired management of Medallion
Petroleum, Inc. had been engaged in the natural gas and oil business since
1985. Prior to 1992, the Company participated in the oil and gas business
principally as a passive investor in drilling and acquisition operations
conducted by other industry members, including Medallion Petroleum, Inc.
InterCoast Gas Services was formed in May 1996. Portions of its natural gas
marketing operations have been in business since 1985. Continental Power
Exchange was formed in 1994 and commenced commercial operation of CPEX(TM) in
May 1995. InterCoast Power Marketing was formed in 1993. It commenced
brokering electric power transactions in October 1993 and commenced marketing
electric power in July 1995.
The Company's principal executive offices are located at 666 Grand Avenue,
26th Floor, Des Moines, Iowa 50309, and its telephone number is (515) 281-
2693. The principal operating offices of InterCoast Oil and Gas are located at
7130 South Lewis Avenue, Suite 700, Tulsa, Oklahoma 74136, and its telephone
number is (918) 488-8283.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
to be sold by the Company in the Offering are estimated to be $90.7 million
after deducting estimated underwriting discounts and commissions and the
estimated offering expenses payable by the Company. The Company intends to use
all of the net proceeds to repay all the outstanding indebtedness under its
five-year unsecured $100 million revolving credit facility (the "Credit
Facility"). At July 17, 1996, the outstanding principal under the Credit
Facility was $90 million. Approximately $45.2 million of the outstanding
indebtedness under the Credit Facility was incurred to repay in full
indebtedness due MidAmerican Capital under a promissory note (the "MidAmerican
Capital Note"), which was payable on or before April 12, 1997. The proceeds of
the MidAmerican Capital Note were utilized in connection with the Sawyer
Canyon Acquisition. See "Business and Properties--Producing Property
Acquisitions--Sawyer Canyon Acquisition." The remaining portion of the
outstanding indebtedness under the Credit Facility was incurred in order to
repay non-interest bearing indebtedness due MidAmerican Capital incurred in
connection with financing the Company's operating and acquisition activities.
Outstanding advances under the Credit Facility bear interest payable
quarterly at a floating rate based on the higher of The First National Bank of
Chicago's corporate base rate or a rate based on the federal funds rate or, at
the Company's option, at a fixed rate based on LIBOR for certain interest rate
periods. At July 17, 1996, the interest rate on the outstanding borrowings
under the Credit Facility was 6.19%. Future borrowings under the Credit
Facility will be available for Extensional Infill and exploratory drilling,
acquisition activities and for general corporate purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." The Company will not receive any proceeds
from the sale of shares of Common Stock by MidAmerican Capital in the
Offering, and MidAmerican Capital will pay its pro rata share of offering
expenses.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on the Common Stock.
The Company currently intends to retain its earnings to provide funds for
reinvestment in the Company's businesses and, therefore, does not anticipate
declaring or paying cash dividends in the foreseeable future. The Company is a
holding company that conducts substantially all of its operations through its
subsidiaries. As a result, the Company's ability to pay dividends on the
Common Stock will be dependent on the cash flow of its subsidiaries. Payment
of dividends is also subject to then existing business conditions and the
business results, cash requirements and financial condition of the Company,
and will be at the discretion of the Board of Directors. In addition, under
the terms of the Credit Facility the payment of dividends will be limited to
25% of the Company's consolidated net income for its immediately preceding
fiscal quarter. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
18
<PAGE>
CAPITALIZATION
The following table sets forth at March 31, 1996: (a) the capitalization of
the Company, (b) the pro forma capitalization of the Company after giving
effect to debt incurred in connection with the Sawyer Canyon Acquisition, and
(c) the as adjusted capitalization of the Company after giving effect to the
transaction described in (b) above, the use of borrowings under the Credit
Facility to pay long-term debt due to MidAmerican Capital as described under
"Use of Proceeds," and the Offering and the application of the estimated net
proceeds therefrom as described under "Use of Proceeds." This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Company's historical and
unaudited pro forma combined financial statements, including the notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------
PRO FORMA PRO FORMA
ACTUAL FOR ACQUISITION AS ADJUSTED
-------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt:
Due to MidAmerican Capital............... $ 47,000 $ 47,000 $ --
MidAmerican Capital Note................. -- 45,240 --
-------- -------- --------
Total long-term debt................... 47,000 92,240 --
-------- -------- --------
Stockholders' equity:
Preferred stock, $0.01 par value,
5,000,000 shares authorized; no shares
issued and outstanding.................. -- -- --
Common stock, $0.01 par value, 25,000,000
shares authorized;
7,927,500 shares issued and outstanding;
14,077,500 shares pro forma as adjusted
(1)..................................... 79 79 141
Additional paid-in capital............... 85,995 85,995 176,675
Retained earnings........................ 18,683 18,683 18,683
-------- -------- --------
Total stockholders' equity............. 104,757 104,757 195,499
-------- -------- --------
Total capitalization...................... $151,757 $196,997 $195,499
======== ======== ========
</TABLE>
- --------
(1) Excludes 2,000 restricted shares of Common Stock to be issued under the
Company's Non-Employee Director Restricted Stock Plan upon completion of
the Offering. See "Management--Director Stock Plan."
19
<PAGE>
DILUTION
At March 31, 1996, the net tangible book value of the Company was $100.4
million or $12.66 per share of Common Stock. "Net tangible book value" per
share represents the amount of the Company's tangible net worth (tangible
assets less liabilities) divided by the total number of shares of Common Stock
outstanding. After giving effect as of March 31, 1996, to the receipt of $90.7
million of estimated net proceeds (net of estimated underwriting discounts and
commissions and other estimated offering expenses to be borne by the Company)
from the sale by the Company of 6,150,000 shares of Common Stock at an assumed
public offering price of $16.00 per share, the net tangible book value of the
Common Stock outstanding at March 31, 1996, would have been approximately
$191.1 million or $13.58 per share, representing an immediate increase in net
tangible book value of approximately $0.92 per share to MidAmerican Capital
and an immediate dilution of approximately $2.42 per share to new investors
purchasing the Common Stock at the initial public offering price. The
following table illustrates such per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $16.00
Net tangible book value per share at March 31, 1996... $12.66
Increase in net tangible book value per share
attributable to new investors........................ 0.92
------
Net tangible book value per share after the Offering........... 13.58
------
Dilution in net tangible book value per share to new invest-
ors........................................................... $ 2.42
======
</TABLE>
The following table summarizes as of March 31, 1996, after giving effect to
the Offering, the number of shares of Common Stock purchased or to be
purchased from the Company, the total consideration paid or to be paid and the
average price per share paid or to be paid by MidAmerican Capital and by new
investors purchasing shares of Common Stock in the Offering (assuming an
initial public offering price of $16.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION AVERAGE
-------------------------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------- ---------------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholder.... 7,927,500 56% $104,757,000 52% $13.21
New investors........... 6,150,000 44 98,400,000 48 16.00
------------- ------ ------------ ---
Total................. 14,077,500 100% $203,157,000 100%
============= ====== ============ ===
</TABLE>
- --------
(1) Sales by MidAmerican Capital in the Offering will reduce the number of
shares owned by it, the sole existing stockholder, to 6,927,500 shares
(assuming no exercise of the Underwriters' over-allotment option), or
approximately 49% of the total number of shares of Common Stock to be
outstanding after the Offering, and will increase the number of shares
held by new investors to 7,150,000 shares, or approximately 51% of the
total number of shares of Common Stock to be outstanding after the
Offering.
The above computations assume no exercise of the Underwriters' over-
allotment option and no exercise of any outstanding stock options. As of the
date hereof, there were outstanding options to purchase 541,600 shares of
Common Stock at an exercise price equal to the initial public offering price
per share for the Common Stock in the Offering. See "Management--Long-Term
Incentive Stock Plan." The above computations also exclude 2,000 restricted
shares of Common Stock to be issued under the Company's Non-Employee Director
Restricted Stock Plan upon completion of the Offering. See "Management--
Director Stock Plan."
20
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The accompanying unaudited pro forma combined statements of income are
presented as if the acquisitions of the Sawyer Canyon Properties (as
hereinafter defined) and the assets of GED (the "Gas Marketing Assets") and
this Offering had been completed January 1, 1995. The Sawyer Canyon Properties
were acquired in April 1996 for total consideration of $45.2 million, subject
to post-closing adjustment, and the Gas Marketing Assets were acquired
effective November 1995 for total consideration of $1.8 million, subject to
post-closing adjustment. The historical results of the Company include the
results of the Gas Marketing Assets effective as of November 1, 1995. The
accompanying unaudited pro forma combined balance sheet as of March 31, 1996
is presented as if the acquisition of the Sawyer Canyon Properties and this
Offering had occurred on March 31, 1996.
The unaudited pro forma combined financial statements are based on the
assumptions set forth in the notes to such statements. Such pro forma
information should be read in conjunction with the Company's financial
statements and related notes thereto and is not necessarily indicative of the
results that actually would have occurred had the transactions been in effect
on the dates or for the periods indicated, or of results that may occur in the
future.
21
<PAGE>
INTERCOAST ENERGY COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------- -------------------------------------
INTERCOAST SAWYER GAS
ENERGY CANYON MARKETING ACQUISITION OFFERING AS
COMPANY PROPERTIES ASSETS ADJUSTMENTS ADJUSTMENTS ADJUSTED
---------- ---------- --------- ----------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
INTERCOAST OIL AND GAS
COMPANY
Gas and oil revenues... $ 48,109 $13,084 -- -- -- $ 61,193
Gas and oil operating
expenses.............. (14,552) (2,953) -- -- -- (17,505)
Depreciation, depletion
and amortization
expense............... (21,489) -- -- $ (6,408)(1) -- (27,897)
General and
administrative
expense, net.......... (2,288) -- -- (220)(2) -- (2,508)
-------- ------- ------- -------- ------- --------
9,780 10,131 -- (6,628) -- 13,283
-------- ------- ------- -------- ------- --------
INTERCOAST ENERGY MAR-
KETING
Natural gas sales
revenues.............. 24,066 -- $58,203 -- -- 82,269
Cost of gas sold....... (23,218) -- (57,216) -- -- (80,434)
Gathering system
revenues.............. -- 1,594 -- -- -- 1,594
Gathering system
expenses.............. -- (105) -- -- -- (105)
Electric power sales
revenues.............. 421 -- -- -- -- 421
Cost of electric power
sold.................. (325) -- -- -- -- (325)
Operating expenses..... (952) -- (966) -- -- (1,918)
General and
administrative
expense............... (410) -- -- -- -- (410)
-------- ------- ------- -------- ------- --------
(418) 1,489 21 -- -- 1,092
-------- ------- ------- -------- ------- --------
CONTINENTAL POWER EX-
CHANGE, INC.
Administrative and
development expense,
net................... (3,442) -- -- -- -- (3,442)
-------- ------- ------- -------- ------- --------
Corporate expenses...... (1,554) -- -- -- $(1,184)(3) (2,738)
-------- ------- ------- -------- ------- --------
Interest expense........ -- -- -- (2,961)(4) 2,961 (5) --
-------- ------- ------- -------- ------- --------
Income before income
taxes.................. 4,366 11,620 21 (9,589) 1,777 8,195
Provision for income
taxes.................. 1,481 -- -- 718 (6) 622 (6) 2,821
-------- ------- ------- -------- ------- --------
Net income.............. $ 2,885 $11,620 $ 21 $(10,307) $ 1,155 $ 5,374
======== ======= ======= ======== ======= ========
Average common shares
outstanding............ 7,928 6,150 (7) 14,078
======== ======= ========
Earnings per common
share.................. $ 0.36 $ 0.38
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
22
<PAGE>
INTERCOAST ENERGY COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------- ------------------------------------
INTERCOAST SAWYER
ENERGY CANYON ACQUISITION OFFERING AS
COMPANY PROPERTIES ADJUSTMENTS ADJUSTMENTS ADJUSTED
---------- ---------- ------------ ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INTERCOAST OIL AND GAS
COMPANY
Gas and oil revenues... $ 15,647 $3,425 -- -- $ 19,072
Gas and oil operating
expenses.............. (3,508) (614) -- -- (4,122)
Depreciation, depletion
and amortization
expense............... (6,214) -- $(1,353)(1) -- (7,567)
General and administra-
tive expense, net..... (714) -- (55)(2) -- (769)
-------- ------ ------- ----- --------
5,211 2,811 (1,408) -- 6,614
-------- ------ ------- ----- --------
INTERCOAST ENERGY MAR-
KETING
Natural gas sales reve-
nues.................. 34,972 -- -- -- 34,972
Cost of gas sold....... (34,184) -- -- -- (34,184)
Gathering system reve-
nues.................. -- 315 -- -- 315
Gathering system ex-
penses................ -- (31) -- -- (31)
Electric power sales
revenues.............. 406 -- -- -- 406
Cost of electric power
sold.................. (292) -- -- -- (292)
Operating expenses..... (596) -- -- -- (596)
General and administra-
tive expense.......... (181) -- -- -- (181)
-------- ------ ------- ----- --------
125 284 -- -- 409
-------- ------ ------- ----- --------
CONTINENTAL POWER EX-
CHANGE, INC.
Administrative and de-
velopment expense,
net................... (739) -- -- -- (739)
-------- ------ ------- ----- --------
Corporate expense....... (472) -- -- $(233)(3) (705)
-------- ------ ------- ----- --------
Interest expense........ -- -- (740)(4) 740 (5) --
-------- ------ ------- ----- --------
Income before income
taxes.................. 4,125 3,095 (2,148) 507 5,579
Provision for income
taxes.................. 1,529 -- 331 (6) 177 (6) 2,037
-------- ------ ------- ----- --------
Net income.............. $ 2,596 $3,095 $(2,479) $ 330 $ 3,542
======== ====== ======= ===== ========
Average common shares
outstanding............ 7,928 6,150 (7) 14,078
======== ===== ========
Earnings per common
share.................. $ 0.33 $ 0.25
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
23
<PAGE>
INTERCOAST ENERGY COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1996
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
INTERCOAST -------------------------------------
ENERGY ACQUISITION OFFERING AS
COMPANY ADJUSTMENTS ADJUSTMENTS ADJUSTED
---------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.... $ 1,879 -- $ 90,742 (7) $ 381
(92,240)(5)
Accounts receivable.......... 25,656 -- -- 25,656
Other........................ 1,393 -- -- 1,393
--------- ------- -------- ---------
Total current assets........ 28,928 -- (1,498) 27,430
Gas and oil properties, net.... 166,231 $45,240(8) -- 211,471
Continental Power Exchange,
Inc., net..................... 4,338 -- -- 4,338
Intangible and other assets,
net........................... 4,594 -- -- 4,594
--------- ------- -------- ---------
Total assets................ $ 204,091 $45,240 $ (1,498) $ 247,833
========= ======= ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Accounts payable............. $ 22,642 -- -- $ 22,642
Other current liabilities.... 4,525 -- -- 4,525
--------- ------- -------- ---------
Total current liabilities... 27,167 -- -- 27,167
--------- ---------
Accumulated deferred income
taxes, net.................... 25,167 -- -- 25,167
--------- ---------
Long-term debt
MidAmerican Capital Note..... -- $45,240(8) $(45,240)(5) --
Due to MidAmerican Capital... 47,000 -- (47,000)(5) --
--------- ------- -------- ---------
47,000 45,240 (92,240) --
--------- ------- -------- ---------
Stockholders' equity
Common stock $0.01 par value,
25,000,000 shares
authorized; 7,927,500 shares
issued and outstanding;
14,077,500 pro forma as
adjusted.................... 79 -- 62 (7) 141
Additional paid-in capital... 85,995 -- 90,680 (7) 176,675
Retained earnings............ 18,683 -- -- 18,683
--------- ------- -------- ---------
Total stockholders' equity.. 104,757 -- 90,742 195,499
--------- ------- -------- ---------
Total liabilities and stock-
holders' equity............ $ 204,091 $45,240 $ (1,498) $ 247,833
========= ======= ======== =========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) Reflects additional estimated depreciation, depletion and amortization,
calculated using the unit-of-production method, after giving effect to the
Sawyer Canyon Acquisition as if such acquisition had occurred on January
1, 1995. The Company's actual and pro forma depreciation, depletion and
amortization rates for the year ended December 31, 1995 and the three
months ended March 31, 1996 were $0.90 ($0.87 on a pro forma basis) and
$0.89 ($0.87 on a pro forma basis) per Mcfe produced, respectively.
(2) Reflects estimated incremental general and administrative expenses due to
the Sawyer Canyon Acquisition.
(3) Reflects estimated incremental corporate expenses primarily related to the
Company becoming publicly held.
(4) Reflects increased interest expense as if the Company incurred borrowings
under the MidAmerican Capital Note to finance $45.2 million of the
acquisition cost for the Sawyer Canyon Properties as of January 1, 1995.
(5) Reflects the assumed repayment of outstanding indebtedness from the
estimated net proceeds of the Offering and a corresponding elimination of
interest expense on such indebtedness. See "Use of Proceeds."
(6) Reflects pro forma adjustments for income tax expense using the Company's
statutory federal tax rate.
(7) Reflects the assumed sale by the Company, net of Underwriters' discount
and estimated offering costs payable by the Company, of 6,150,000 shares
of Common Stock at an assumed initial offering price of $16.00 per share.
(8) Reflects pro forma adjustments to reflect the acquisition of the Sawyer
Canyon Properties for total consideration of $45.2 million as if such
acquisition had occurred on March 31, 1996.
25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth selected consolidated financial data for the
Company as of and for each of the periods indicated. The selected financial
information presented in the table below for and at the end of each of the
years in the three-year period ended December 31, 1995 is derived from the
audited financial statements of the Company. The selected financial
information for and at the end of the years ended December 31, 1991 and 1992
and for and at the end of the three months ended March 31, 1995 and 1996 is
derived from the unaudited financial statements of the Company which, in the
opinion of management, include all adjustments (which consist only of normal
recurring adjustments) necessary for a fair presentation of the selected
financial information for such periods. The results for the three months ended
March 31, 1996 are not necessarily indicative of the results to be achieved
for the full year. The following information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's consolidated financial statements and
unaudited pro forma combined financial statements and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------ ------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
InterCoast Oil and Gas
Company
Gas and oil revenues... $ 7,133 $ 20,767 $ 37,359 $ 44,466 $ 48,109 $ 10,995 $ 15,647
Gas and oil operating
expenses.............. (1,972) (4,587) (9,616) (15,016) (14,552) (3,645) (3,508)
Depreciation, depletion
and amortization
expense............... (3,025) (8,517) (13,535) (18,602) (21,489) (5,115) (6,214)
General and
administrative
expense, net.......... (284) (1,264) (2,183) (2,633) (2,288) (640) (714)
-------- -------- -------- -------- -------- -------- --------
1,852 6,399 12,025 8,215 9,780 1,595 5,211
-------- -------- -------- -------- -------- -------- --------
InterCoast Energy
Marketing
Natural gas sales
revenues.............. -- 7,554 16,715 13,700 24,066 1,996 34,972
Cost of gas sold....... -- (7,262) (16,216) (13,142) (23,218) (1,874) (34,184)
Electric power sales
revenues.............. -- -- 19 446 421 -- 406
Cost of electric power
sold.................. -- -- -- -- (325) -- (292)
Operating expenses..... -- (127) (369) (778) (952) (209) (596)
General and
administrative
expense............... -- -- (163) (314) (410) (103) (181)
-------- -------- -------- -------- -------- -------- --------
-- 165 (14) (88) (418) (190) 125
-------- -------- -------- -------- -------- -------- --------
Continental Power
Exchange, Inc.
Administrative and
development expense,
net................... -- -- -- (849) (3,442) (460) (739)
-------- -------- -------- -------- -------- -------- --------
Corporate expenses..... (338) (795) (1,013) (1,553) (1,554) (389) (472)
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes................. 1,514 5,769 10,998 5,725 4,366 556 4,125
Provision for income
taxes................. 522 2,471 4,984 2,324 1,481 189 1,529
-------- -------- -------- -------- -------- -------- --------
Net income............. $ 992 $ 3,298 $ 6,014 $ 3,401 $ 2,885 $ 367 $ 2,596
======== ======== ======== ======== ======== ======== ========
Average common shares
outstanding........... 7,928 7,928 7,928 7,928 7,928 7,928 7,928
Earnings per common
share................. $ 0.13 $ 0.42 $ 0.76 $ 0.43 $ 0.36 $ 0.05 $ 0.33
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
EBITDA (1)............. $ 4,539 $ 14,372 $ 24,670 $ 25,356 $ 27,359 $ 6,179 $ 10,477
Net cash provided
(used) by:
Operating activities... 7,764 10,627 25,535 22,800 38,186 12,271 13,793
Investing activities... (34,585) (24,839) (73,700) (43,491) (43,522) (11,155) (14,310)
Financing activities... 26,737 15,337 50,441 22,186 8,512 (1,438) (5,907)
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash and cash
equivalents........... $ 231 $ 1,356 $ 3,632 $ 5,127 $ 8,303 $ 4,805 $ 1,879
Working capital........ 1,078 5,889 6,336 10,233 11,511 7,391 1,761
Total assets........... 47,782 72,793 137,843 160,976 200,164 166,912 204,091
Long-term debt......... -- -- 46,368 60,724 52,907 58,117 47,000
Stockholder's equity... 42,994 61,629 71,716 82,947 102,161 84,483 104,757
</TABLE>
- --------
(1) EBITDA is income before income taxes, interest, depreciation, depletion
and amortization. EBITDA is a financial measure commonly used in the
Company's industry and should not be considered in isolation or as a
substitute for net income, cash flow provided by operating activities or
other income or cash flow data prepared in accordance with generally
accepted accounting principles or as a measure of a company's
profitability or liquidity.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the
Company's historical financial position and results of operations as of and
for each year of the three-year period ended December 31, 1995 and the
unaudited three-month periods ended March 31, 1996 and 1995. The Company's
historical financial statements and notes thereto included elsewhere in this
Prospectus contain detailed information that should be referred to in
conjunction with the following discussion. Also included in this Prospectus
are (i) separate financial statements relating to producing natural gas and
oil properties acquired in April 1996 and (ii) unaudited pro forma combined
financial statements reflecting such acquisition, the acquisition of the
assets of a natural gas marketing company effective November 1995 and the
Offering.
OVERVIEW
InterCoast is an energy company engaged primarily in (i) the development,
exploration, acquisition and production of natural gas and crude oil, (ii) the
marketing of natural gas and electricity, and (iii) the development and
operation of the first market-based national electronic exchange, CPEX(TM),
for the buying and selling of wholesale electric power and transmission
services. The Company's principal natural gas and oil operations are located
in Texas, Louisiana, Oklahoma and New Mexico. The Company has increased its
natural gas and oil reserves through a balanced focus on Extensional Infill
drilling, strategic acquisitions of producing properties and regionally
focused exploratory drilling. The Company believes its success has resulted
from its ability to (i) identify internally a large number of desirable
Extensional Infill drilling locations, (ii) apply strict economic and reserve
risk criteria to both drilling and acquisition operations, and (iii) operate
as an efficient low-cost producer.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Consolidated
The Company had net income of $2.6 million, or $0.33 per share, for the
three months ended March 31, 1996, compared to net income of $0.4 million, or
$0.05 per share, for the same period in 1995. The increase was primarily
attributable to the Company's natural gas and oil operations which contributed
pre-tax income of $5.2 million and $1.6 million for the quarters ended March
31, 1996 and 1995, respectively. The Company's energy marketing activity added
$0.1 million to pre-tax income for the three-month period ended March 31, 1996
as compared to the $0.2 million loss incurred by this activity for the same
period in 1995. In addition, Continental Power Exchange realized losses of
$0.7 million for the three months ended March 31, 1996 compared to the $0.5
million loss for the same period in 1995. The Company also incurred during the
first quarter of 1996 $0.5 million and $1.5 million of corporate expenses and
income tax expense, respectively, as compared to $0.4 million of corporate
expenses and $0.2 million of income tax expense incurred during the same
period in 1995.
Natural Gas and Oil Operations
Production. The Company's production increased to 7.0 Bcfe during the first
three months of 1996 as compared to 5.6 Bcfe during the first three months of
1995, a 25% increase. This additional production primarily resulted from
successful drilling activity in north Louisiana, Gulf Coast--Texas, and
northwest Oklahoma and the Texas panhandle. The increase in production was
also due to the Company's exchange of certain non-operated limited partnership
interests for working interests in operated properties and the acquisition of
producing properties in south Louisiana, both of which took place after March
1995.
Gas and Oil Revenues. Revenues from natural gas and oil for the three months
ended March 31, 1996, increased from $11.0 million to $15.6 million, or 42%,
as compared to the same period during 1995, primarily due to increased
production. The Company also realized increases in product prices during the
first quarter of 1996 as compared to the same period in 1995. The Company's
natural gas price swap activity for the three
27
<PAGE>
months ended March 31, 1996 resulted in an average natural gas price of $2.00
per Mcf, or 87% of the $2.29 per Mcf average price that would have otherwise
been received, resulting in a $1.4 million decrease in gas and oil revenues.
For the same period in 1995, the average gas sales price realized by the
Company was $1.61 per Mcf, including the effects of natural gas price swap
arrangements, or 109% of the $1.48 per Mcf average natural gas price that
otherwise would have been received, resulting in a $0.6 million increase in
gas and oil revenues. The Company realized an average oil price of $17.64 per
Bbl during the first three months of 1996, which was a 7% increase over the
$16.41 per Bbl average oil price for the comparable period of 1995.
Gas and Oil Operating Expenses. Gas and oil operating expenses for the
three-month period ended March 31, 1996 decreased to $3.5 million, or $0.50
per Mcfe, from $3.6 million, or $0.65 per Mcfe, for the comparable period of
1995. This decrease was primarily the result of cost reduction procedures
implemented in the Newhall-Potrero Field, the disposition of the Company's
interests in the relatively high-cost Montague Field and lower relative
operating costs on the properties acquired as a result of the exchange of
certain of the Company's non-operated limited partnership interests for
working interests in operated properties. These operating expense reductions
were partially offset by higher production taxes resulting from increased
production volumes. Operating expenses included $0.6 million and $0.5 million
of production taxes during the first three months of 1996 and 1995,
respectively.
Depreciation, Depletion and Amortization Expense. During the three-month
period ended March 31, 1996, depreciation, depletion and amortization expense
increased to $6.2 million from $5.1 million for the comparable period of 1995.
This increase was attributable to the increase in natural gas and oil
production during the first quarter of 1996 as compared to the first quarter
of 1995 and was partially offset by a decline in the Company's depreciation,
depletion and amortization rate per unit to $0.89 per Mcfe during the three-
month period ended March 31, 1996, from $0.92 per Mcfe for the comparable
period in 1995. The decrease in the depreciation, depletion and amortization
rate was primarily due to the relatively low-cost reserve additions made
during 1995.
General and Administrative Expense, Net. General and administrative
expense, which is recorded net of overhead reimbursements received by the
Company from other working interest owners in Company-operated wells,
increased slightly to $0.7 million for the three months ended March 31, 1996,
as compared to $0.6 million for the same period in 1995. The increase was
primarily attributable to the hiring of additional personnel during 1995.
Overhead reimbursements from the Company-operated wells during the first three
months of each of 1996 and 1995 were $0.5 million.
Energy Marketing Operations
Natural Gas Sales Revenues and Cost of Gas Sold. The Company's natural gas
sales revenues for the first three months of 1996 increased to $35.0 million
as compared to $2.0 million during the same period of 1995, while cost of gas
sold increased to $34.2 million from $1.9 million during those periods. As a
result, the Company's natural gas sales margin improved to $0.8 million for
the first quarter of 1996 as compared to $0.1 million during the same period
in 1995. This margin improvement primarily resulted from increased marketed
volumes due to the acquisition of additional gas marketing assets effective
November 1995, increased marketed volumes from Company-operated wells and
generally higher natural gas prices.
Electric Power Sales Revenues and Cost of Electric Power Sold. During the
first quarter of 1996, the Company marketed approximately 17,000 MWh which
added $0.3 million to electric power sales revenues at a nominal margin. In
addition, the Company realized $0.1 million in brokered electric power
revenues during the three months ended March 31, 1996, on approximately
130,000 MWh brokered. As a result, the Company's electric power sales margin
for the first three months of 1996 was $0.1 million. The Company had no
electric power marketing activity during the first quarter of 1995.
Operating Expenses. Operating expenses increased to $0.6 million for the
three months ended March 31, 1996, as compared to $0.2 million during the same
period of 1995. This increase primarily resulted from the purchase of gas
marketing assets effective November 1995 and additional start-up operating
costs.
28
<PAGE>
Electric Energy Power Exchange
Administrative and Development Expense, Net. During the first three months
of 1996, the administrative and development expense of the Company's electric
energy power exchange operations increased to $0.7 million compared to $0.5
million during the first three months of 1995. This increase was primarily
attributable to increased non-product development general and administrative
expenses. First quarter 1996 administrative and development expenses were
partially offset by transaction and fee revenues of $0.1 million.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Consolidated
The Company had net income of $2.9 million, or $0.36 per share, in 1995 as
compared to net income of $3.4 million, or $0.43 per share, in 1994. The
Company's natural gas and oil operations contributed pre-tax income in 1995 of
$9.8 million as compared to $8.2 million for 1994. The Company's energy
marketing activity reduced 1995 pre-tax income by $0.4 million as compared to
the $0.1 million loss incurred by this activity during 1994. Continental Power
Exchange realized losses of $3.4 million for 1995 and $0.8 million during
1994. Pre-tax income was further reduced by $1.6 million in corporate expenses
in both 1995 and 1994, while income tax expense of $1.5 million and $2.3
million, respectively, was also incurred during the same periods.
Natural Gas and Oil Operations
Production. The Company's production rose to 24.0 Bcfe in 1995 as compared
to 21.7 Bcfe in 1994, an increase of 11%. This increase primarily resulted
from increased gas production due to drilling and acquisition additions in
Louisiana, southeast New Mexico, Offshore Gulf of Mexico and Texas.
Gas and Oil Revenues. Gas and oil revenues for 1995 increased from $44.5
million to $48.1 million, or 8%, as compared to 1994, primarily due to
increases in production. This improvement was partially offset by a 9%
decrease in the average gas sales price from $1.82 per Mcf in 1994 to $1.65
per Mcf in 1995. After giving effect to the Company's natural gas price swap
activity, the 1995 price of $1.65 per Mcf was 106% of the $1.55 per Mcf
average gas sales price that would have otherwise been received, resulting in
a $1.8 million increase in gas and oil revenues. The Company did not have any
natural gas price swap arrangements in effect during 1994. The Company also
realized an average sales price for oil of $16.45 per Bbl in 1995 as compared
to $14.93 per Bbl during 1994, a 10% increase.
Gas and Oil Operating Expenses. Gas and oil operating expenses for 1995
decreased to $14.6 million, or $0.61 per Mcfe, from $15.0 million, or $0.69
per Mcfe, for 1994. This reduction was primarily due to the sale in mid-1994
of the Company's interest in the Sacatosa Field. At the time of this
disposition, the Sacatosa Field was uneconomic to the Company's interest and
represented approximately 29% of its total monthly gas and oil operating
expenses. These operating expense reductions were partially offset by
increases in production taxes from $1.8 million in 1994 to $2.1 million in
1995.
Depreciation, Depletion and Amortization Expense. During 1995, depreciation,
depletion and amortization expense increased to $21.5 million from $18.6
million for 1994. This increase was attributable to the increase in natural
gas and oil production during 1995 as compared to 1994. In addition, the
Company's depreciation, depletion and amortization rate per unit increased to
$0.90 per Mcfe during 1995 from $0.86 per Mcfe for 1994. The increase in the
depreciation, depletion and amortization rate was primarily due to revisions
in previous reserve estimates caused by low natural gas prices at the end of
1994.
General and Administrative Expense, Net. General and administrative expense,
which is recorded net of overhead reimbursements received by the Company from
other working interest owners in Company-operated wells, decreased to $2.3
million in 1995 as compared to $2.6 million in 1994. The decrease was
primarily attributable to an increase in overhead reimbursements from Company-
operated wells to $2.0 million in 1995 from $1.5 million in 1994.
29
<PAGE>
Energy Marketing Operations
Natural Gas Sales Revenues and Cost of Gas Sold. The Company's natural gas
sales revenues for 1995 increased to $24.1 million as compared to $13.7
million in 1994, while cost of gas sold increased to $23.2 million from $13.1
million during the same period. As a result, the Company's natural gas sales
margin improved to $0.9 million in 1995 as compared to $0.6 million in 1994.
This margin improvement primarily resulted from the acquisition of additional
gas marketing assets effective November 1995, but was partially offset by
generally lower natural gas prices in 1995 as compared to 1994.
Electric Power Sales Revenues and Cost of Electric Power Sold. The Company
began marketing electric power after its FERC certification as a power
marketer became effective in July 1995. During 1995, the Company marketed
20,000 MWh which added $0.3 million to electric power sales revenues at a
nominal margin. In addition, the Company realized $0.1 million in brokered
electric power revenues during 1995 as compared to $0.4 million of brokered
electric power revenues in 1994. As a result, the Company's electric power
sales margin for 1995 decreased to $0.1 million as compared to $0.4 million in
1994. The decrease in electric power sales margin was primarily due to lower
volumes brokered during 1995 of 99,000 MWh as compared to 640,000 MWh brokered
during 1994, but was partially offset by the addition of marketed volumes in
1995.
Operating Expenses. Operating expenses increased to $1.0 million in 1995 as
compared to $0.8 million in 1994 primarily due to the purchase of gas
marketing assets effective November 1995.
Electric Energy Power Exchange
Administrative and Development Expense, Net. During 1995, administrative and
development expenses increased to $3.4 million from $0.8 million in 1994. This
increase was primarily attributable to non-product development general and
administrative expenses in 1995. Administrative and development expenses
incurred during 1995 were partially offset by transaction and fee revenues of
$0.1 million.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Consolidated
The Company had net income of $3.4 million, or $0.43 per share, in 1994 as
compared to net income of $6.0 million, or $0.76 per share, in 1993. The
decrease was primarily attributable to the Company's natural gas and oil
operations which contributed pre-tax income in 1994 of $8.2 million as
compared to $12.0 million for 1993. The Company's energy marketing activity
reduced 1994 pre-tax income by $0.1 million while it essentially broke even
during 1993. Continental Power Exchange realized a loss of $0.8 million in
1994 during its first year of operation. Pre-tax income was further reduced by
$1.6 million and $1.0 million of corporate expenses during 1994 and 1993,
respectively. In addition, the Company incurred income tax expense of $2.3
million and $5.0 million during 1994 and 1993, respectively.
Natural Gas and Oil Operations
Production. The Company's production increased 28% in 1994, to 21.7 Bcfe, as
compared to 16.9 Bcfe in 1993. This increase was primarily attributable to a
full twelve months of production from the Company's acquisition of DKM
Resources, Inc. ("DKM") in September 1993. The Company also realized increased
production from numerous acquisitions in 1994, principally the interests in 17
fields acquired from Union Oil Company of California in July 1994 and the
purchase of certain properties in the Elm Grove Field in August 1994.
Additionally, the Company realized production increases resulting from
significant reserve additions from its drilling activity during 1994.
Gas and Oil Revenues. Gas and oil revenues for 1994 increased from $37.4
million to $44.5 million, or 19%, as compared to 1993, primarily due to
increases in production. This improvement was tempered by decreases of 11% and
7%, respectively, in the Company's average sales price of natural gas and oil.
The
30
<PAGE>
Company realized an average natural gas price of $1.82 per Mcf in 1994 as
compared to an average natural gas price of $2.04 per Mcf in 1993. The Company
did not have any natural gas price swap arrangements in effect during 1994.
During 1993, however, the Company's natural gas price swap activity resulted
in a decrease in gas and oil revenues of $0.6 million, or $0.05 per Mcf, and
reduced its average natural gas price to 98% of the $2.09 per Mcf average
price that would have otherwise been realized. The Company's average oil sales
price was $14.93 per Bbl in 1994 as compared to an average oil sales price of
$16.07 per Bbl in 1993.
Gas and Oil Operating Expenses. Gas and oil operating expenses for 1994
increased to $15.0 million from $9.6 million for 1993. This increase was
primarily due to the acquisition of a substantial number of relatively higher
operating cost properties in the Company's acquisition of DKM and higher
production taxes resulting from increased production volumes. Operating
expenses included $1.8 million and $1.6 million of production taxes during
1994 and 1993, respectively.
Depreciation, Depletion and Amortization Expense. During 1994, depreciation,
depletion and amortization expense increased to $18.6 million from $13.5
million for 1993. This increase was attributable to increased natural gas and
oil production during 1994 as compared to 1993. In addition, the Company's
depreciation, depletion and amortization rate per unit increased to $0.86 per
Mcfe during 1994 from $0.80 per Mcfe for 1993. The increase in the
depreciation, depletion and amortization rate was primarily due to the
addition of relatively shorter-lived oil properties in the Company's
acquisition of DKM and revisions to previous reserve estimates.
General and Administrative Expense, Net. General and administrative expense,
which is recorded net of overhead reimbursements received by the Company from
other working interest owners in Company-operated wells, increased to $2.6
million in 1994 as compared to $2.2 million in 1993. This increase was
primarily attributable to additional personnel hired in late 1993 as a result
of the DKM acquisition and was partially offset by increased overhead
reimbursements from Company-operated wells which totaled $1.5 million in 1994
as compared to $0.9 million in 1993.
Energy Marketing Operations
Natural Gas Sales Revenues and Cost of Gas Sold. The Company's natural gas
sales revenues for 1994 decreased to $13.7 million as compared to $16.7
million in 1993, while cost of gas sold decreased to $13.1 million from $16.2
million during the same period. As a result, the Company's natural gas sales
margin improved slightly to $0.6 million in 1994 as compared to $0.5 million
in 1993.
Electric Power Sales Revenues and Cost of Electric Power Sold. The Company
realized $0.4 million in brokered electric power sales during 1994 as compared
to nominal amounts of brokered electric power sales in 1993. The increase in
electric power sales revenue and margin was primarily due to higher volumes
brokered during 1994 of 640,000 MWh as compared to 38,000 MWh brokered during
1993.
Operating Expenses. Operating expenses increased to $0.8 million in 1994 as
compared to $0.4 million in 1993 primarily due to increased staffing.
CORPORATE EXPENSES
Certain general and administrative costs reported by the Company are for
services provided by MidAmerican Energy or MidAmerican Capital. The Company
currently intends to utilize certain of such services on a transitional basis
through the end of 1996. The costs of the services received, including
overhead costs, are classified as directly assigned costs or allocable costs.
Allocable costs are allocated based on the Company's relative percentage of
three factors. The three factors are total revenues, total assets and total
payroll. Wages and salaries, of the Company's corporate staff, MidAmerican
Capital and MidAmerican Energy, are classified as directly assigned or
allocable based upon individual employee time reporting, along with associated
payroll taxes and the costs of benefits. In addition, certain directly
assigned Company expenses paid by MidAmerican Energy are billed to the
Company.
31
<PAGE>
The Company incurred corporate expenses of $1.6 million, $1.6 million and
$1.0 million in 1995, 1994 and 1993, respectively, and $0.5 million and $0.4
million during the first quarters of 1996 and 1995, respectively. Increases in
corporate expenses have been primarily due to increases in payroll and related
personnel expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $6.3 million, $10.2 million and $11.5
million at December 31, 1993, 1994 and 1995, respectively. Historically, the
Company has funded its operations principally through cash flow from natural
gas and oil operations and contributed capital and borrowings from MidAmerican
Capital. The decrease in the Company's working capital from $11.5 million at
December 31, 1995, to $1.8 million at March 31, 1996, was primarily
attributable to a $6.4 million reduction in cash and cash equivalents which
was used to reduce debt and fund certain investments. Such use of cash and
cash equivalents resulted from management's desire to reduce the Company's
debt and to make more efficient use of the Company's cash. Other components of
such working capital decrease include a $2.2 million reduction in the
difference between the Company's accounts receivable and accounts payable
attributable to its natural gas marketing operations.
The Company's net cash flow from operations for the first three months of
1996 was $13.8 million compared to $12.3 million for the same period in 1995.
The increase in cash flow was attributable to increases in both natural gas
and oil production and average realized product prices, the acquisition of
additional gas marketing assets effective November 1995, and the start-up of
another natural gas marketing operation in February 1996. Net cash flow from
operations during 1995 was $38.2 million as compared to $22.8 million and
$25.5 million for 1994 and 1993, respectively. The increase in cash flow for
1995 as compared to 1994 was principally due to increased natural gas and oil
production, reduced operating and administrative costs, and the acquisition of
additional natural gas marketing assets effective November 1995. The decrease
in cash flow for 1994 as compared to 1993 was primarily attributable to
increased general and administrative expense and corporate expense due to
Company growth.
In April 1996, the Company acquired the interests of Enron Oil & Gas Company
in certain properties located in the Sawyer Canyon Field, Sutton County,
Texas. The purchase price was financed with a floating interest rate note from
MidAmerican Capital in the amount of $45.2 million. The initial interest rate
was 6.17% for a six-month period. The pro forma pre-tax operating cash flows
for the year ended December 31, 1995 relating to the Sawyer Canyon Acquisition
were $11.4 million (excluding $3.0 million of pro forma interest expense).
From January 1, 1993 through March 31, 1996, after giving effect to the
Sawyer Canyon Acquisition described above, the Company had invested $220.3
million, principally in additions to natural gas and oil properties. The
Company's total capital budget for the last nine months of 1996 is
approximately $23.2 million. The Company has allocated $8.4 million of this
budget to Extensional Infill drilling, $2.3 million to exploratory drilling,
$5.0 million to enhancement of its existing natural gas and oil reserve base,
and $7.5 million to energy marketing and electric energy power exchange
activities. For the calendar year 1997, the Company currently anticipates
total capital expenditures of $57.0 million. Of this total 1997 capital
budget, the Company currently intends to allocate $14.0 million to Extensional
Infill drilling, $4.0 million to exploratory drilling, $25.0 million to
producing natural gas and oil property acquisitions, $9.5 million to
enhancement of its existing natural gas and oil reserve base, and $4.5 million
to energy marketing and electric energy power exchange activities. The
majority of the Company's capital expenditures are discretionary in nature and
actual levels of capital expenditures may vary significantly due to a variety
of factors, including drilling results, natural gas and oil prices, industry
conditions, the cost of goods and services and the extent to which proved
properties are acquired. The Company anticipates that these capital
expenditures will be funded principally from cash flow from natural gas and
oil operations, working capital and borrowings under credit facilities.
The Company is actively pursuing acquisitions of producing natural gas and
oil properties and natural gas marketing companies. The timing and size of any
acquisition and the related capital requirements are
32
<PAGE>
unpredictable. The Company intends to fund acquisitions and operating
activities through a combination of cash flow from operations, working capital
and borrowings under credit facilities.
On July 15, 1996, the Company entered into a five-year unsecured $100
million revolving credit facility. Prior to consummation of the Offering, the
Company's borrowing base under the Credit Facility is based on the Company's
natural gas and oil reserves and certain receivables. After consummation of
the Offering, the Company's borrowing base under the Credit Facility will be
based upon the Company's natural gas and oil reserves (initially $81 million)
and will be subject to redetermination on a semi-annual basis. Advances under
the Credit Facility may be utilized by the Company for working capital and
other general corporate purposes and repayment of indebtedness. Outstanding
advances will bear interest payable quarterly at a floating rate based on the
higher of The First National Bank of Chicago's corporate base rate or a rate
based on the federal funds rate or, at the Company's option, at a fixed rate
based on LIBOR for certain interest rate periods. The Company pays a
commitment fee on the unused portion of the Credit Facility. The Credit
Facility contains customary covenants which, among other things, restricts the
sale of assets, mergers and consolidations and limits additional indebtedness
and the payment of dividends. In addition, the Company is required to maintain
a minimum net worth, which will be adjusted for the Offering, and an interest
coverage ratio. Upon completion of the Offering and the application of
estimated net proceeds therefrom as set forth in "Use of Proceeds," the Credit
Facility will be available to fund the Company's operating and acquisition
activities.
ACCOUNTING AND TAX MATTERS
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121) regarding accounting for asset impairments. This
statement requires the Company to review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The adoption of SFAS 121 had no impact on
the Company's results of operations or financial position. Although the
Company's electric energy power exchange operations are in the early stage of
commercial development and have incurred losses since inception, management
believes that future cash flows will be in excess of capitalized costs at
March 31, 1996.
The Company has been included in the consolidated federal and, where
appropriate, state income tax returns of MidAmerican Energy. The consolidated
income tax currently payable (or receivable) has been allocated among the
Company and other members of the affiliated income tax reporting group based
on the respective contributions of these group members to total consolidated
taxable income and tax credits. The Company has received (or made) payments
for the income tax reductions (or increases) attributable to its activities.
In 1995, the amount received was approximately $9.0 million. Actual current
income tax liabilities or benefits, including alternative minimum tax, may
vary primarily depending on the number of wells drilled, intangible drilling
costs incurred and other investments in natural gas and oil properties by the
Company. Subsequent to the Offering, the Company will no longer be included in
consolidated tax returns of MidAmerican Energy. See "Relationship Between the
Company and the Parent--Contractual Arrangements--Tax Sharing Agreement."
BUSINESS AND PROPERTIES
InterCoast is an energy company engaged primarily in (i) the development,
exploration, acquisition and production of natural gas and crude oil, (ii) the
marketing of natural gas and electricity, and (iii) the development and
operation of the first market-based national electronic exchange, CPEX(TM),
for the buying and selling of wholesale electric power and transmission
services. The Company's principal natural gas and oil operations are located
in Texas, Louisiana, Oklahoma and New Mexico. The Company has increased its
natural gas and oil reserves and cash flow through a balanced focus on
Extensional Infill drilling, strategic acquisitions of producing properties
and regionally focused exploratory drilling. The Company believes its success
has resulted from its ability to (i) identify internally a large number of
desirable Extensional Infill drilling locations, (ii) apply strict economic
and reserve risk criteria to both drilling and acquisition operations, and
(iii) operate as an efficient, low-cost producer. Through the implementation
of this approach, the Company has replaced 390% of its
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<PAGE>
production at an average finding cost from all sources of $0.85 per Mcfe for
the three-year period ended December 31, 1995, after giving pro forma effect
to the Sawyer Canyon Acquisition.
In April 1996, the Company acquired properties in the Sawyer Canyon Field,
Sutton County, Texas from Enron Oil & Gas Company at a net purchase price of
$45.2 million. The acquired properties include 350 gross (319 net) wells (of
which approximately 95% are operated by the Company) and had estimated net
proved reserves of 58.2 Bcfe at December 31, 1995, virtually all of which are
natural gas. The acquired properties also include 37.2 miles of associated gas
gathering lines. After giving pro forma effect to the Sawyer Canyon
Acquisition, the Company's estimated net proved reserves have grown by 201%,
from 83.5 Bcfe at December 31, 1992, to 251.0 Bcfe at December 31, 1995. At
December 31, 1995, on a pro forma basis, approximately 76% of the Company's
estimated net proved reserves were natural gas, and the Company's PV-10
Reserve Value was $223.6 million and its standardized measure of discounted
future net cash flows was $189.8 million (the $33.8 million difference between
the Company's PV-10 Reserve Value and its standardized measure of discounted
future net cash flows being the present value of income taxes applicable to
such future net cash flows). Average daily production has improved from 27.2
MMcfe during 1992 to 87.1 MMcfe during April 1996, representing an increase of
220%. At March 31, 1996, on a pro forma basis, the net tangible assets and
properties of the Company's natural gas and oil operations comprised over 97%
of the Company's total tangible asset base.
The Company is also engaged in natural gas and wholesale electric power
marketing. The Company provides a range of natural gas marketing services to
industrial and utility customers and natural gas producers in addition to
marketing substantially all of the natural gas produced from Company-operated
wells. In the electric power sector, which is rapidly shifting from being
heavily regulated to becoming a more competitive industry, the Company
actively pursues opportunities for the wholesale brokering, purchasing and
marketing of electricity. The Company's FERC certification as a power marketer
became effective in July 1995, allowing it to purchase electricity and resell
it to wholesale purchasers. As a recent entrant into this business, the
Company's strategic thrust is to expand its electric power marketing business
to keep pace with the competitive changes in the electric industry. In a
further move, the Company established commercial operation of CPEX(TM) in May
1995. CPEX(TM) permits subscribers, including utilities and other electric
power generation, transmission and marketing companies, to electronically buy
and sell wholesale electricity and transmission services via the Company's
proprietary network.
BUSINESS STRENGTHS AND STRATEGIES
The Company believes that it has several key strengths and strategies that
position it to continue as a successful energy company and respond effectively
and rapidly to changing market opportunities. These include:
. Active Extensional Infill Drilling Program. The Company targets drilling
prospects that enhance the economic recovery of natural gas and oil in
producing areas to a level greater than that previously achieved by the
owners of the prevailing leasehold by increasing the density of wells that
penetrate known reservoirs. Typically, development of these prospects
requires that the Company obtain some or all of the rights to drill on
acreage that is held by production. The Company refers to this approach as
"Extensional Infill" drilling which has been implemented by various members
of the Company's current management team since 1985. The Company focuses on
internally generated Extensional Infill drilling opportunities within the
Mid-Continent region, with particular emphasis on north Louisiana,
northwest Oklahoma and the Texas panhandle, and southeast New Mexico.
Through its Extensional Infill drilling program, the Company has developed
approximately 53.7 Bcfe of estimated net proved reserves through the end of
1995 at an average cost of $0.75 per Mcfe. The Company utilizes an
experienced team of geologists, petroleum engineers and landmen to
generate, evaluate and acquire Extensional Infill prospects, applying
strict economic and reserve risk criteria. The Company's geologists
regularly monitor and analyze drilling and production activities within
their geographic areas of expertise to generate new drilling prospects.
Because a majority of the Company's Extensional Infill prospects involve
farmouts on acreage not currently leased by the Company, the Company is
able to maintain a large number of Extensional Infill prospects without
making a major capital investment in an inventory of undeveloped leasehold
acreage. As a result of this approach, the
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<PAGE>
Company is able to drill prospects on the basis of their technical and
economic merits rather than to retain expiring leasehold positions. During
the three-year period ended December 31, 1995, the Company drilled 87
Extensional Infill wells, 52 of which were completed as commercial
producers. At April 30, 1996, the Company had in excess of 150 Extensional
Infill prospects identified in the core areas in which it operates and
anticipates identifying at least 50 additional prospects during the
remainder of 1996. The Company currently plans to drill at least 27
Extensional Infill wells based on its $12 million 1996 capital budget for
Extensional Infill drilling. See "Business and Properties--Extensional
Infill Drilling."
. Strategic Producing Property Acquisitions. The Company seeks strategic
acquisitions of producing properties where it can obtain operational
control and where opportunities exist both to reduce operating costs and
increase production and reserves through Extensional Infill drilling and
other exploitation activities. From April 1, 1992 through April 30, 1996,
the Company acquired 188.7 Bcfe of estimated net proved reserves through 31
acquisitions at an average acquisition cost of $0.67 per Mcfe. In many
situations, the Company's acquisition of producing properties originates
from the identification of Extensional Infill drilling prospects. The
Company's most successful acquisition involving this approach was the
acquisition of its interests in the Elm Grove Field, Bossier Parish,
Louisiana. In early 1994, a Company geologist generated a number of
Extensional Infill drilling prospects in the Elm Grove Field. The Company
was able to acquire the 15 marginal producing wells in the field at a cost
of $6.7 million in August 1994. It then assumed operations of the field and
has since drilled 11 productive wells, recompleted 6 of the 15 existing
wells to access the behind pipe reserves and discovered a deeper productive
zone not previously produced in the field. As a result of the Company's
enhancement efforts, gross average daily production from the Elm Grove
Field has increased from 2 MMcf when acquired to a rate of 10 MMcf during
April 1996, and estimated net proved reserves increased from 15.2 Bcfe at
the time of acquisition to approximately 31.6 Bcfe (including net
production of 3.1 Bcfe since its acquisition) at December 31, 1995. See
"Business and Properties--Producing Property Acquisitions."
. Regionally Focused Exploratory Drilling Program. The Company initiated a
regionally focused exploratory drilling program in 1994. The Company
generally seeks larger exploratory prospects which are based upon good
subsurface geologic control on unproved structures or features which
provide both significant reserve potential and an opportunity for multiple
well locations. The Company focuses its exploratory efforts primarily in
the Gulf Coast region where its personnel have extensive experience. The
Company currently plans to drill 6 to 8 exploratory wells in 1996,
primarily in the Gulf Coast region, based on a 1996 budget for exploratory
drilling of $4 million, which represents 25% of the Company's total
drilling budget. See "Business and Properties--Exploratory Drilling."
. Efficient Operator. The Company pursues workovers, recompletions and other
production optimization methods in order to exploit the additional
production capabilities of its existing reserve base, new well completions
and newly acquired properties. For this reason, the Company prefers to
operate its properties in order to enhance its ability to maximize their
present value and to maintain control of operating expenses and the timing
and amount of capital expenditures. At April 30, 1996, the Company owned
interests in 2,051 gross (667 net) wells, approximately 32% gross (83% net)
of which are operated by the Company. The Company believes that it is a
low-cost operator as indicated by its lease operating expenses of $0.61 per
Mcfe during 1995 ($0.50 per Mcfe during the first quarter of 1996). The
Company has generally found that it has been able to increase product
prices and reduce costs when compared to the prior operators of its newly
acquired properties. See "Business and Properties--Production, Prices and
Operating Expenses."
. Natural Gas Marketing. During the first quarter of 1996, the Company
marketed over 200 MMcf per day of natural gas, including approximately 50
MMcf per day of natural gas from its operated wells. The Company's natural
gas marketing activities provide the Company with the opportunity to
maximize both the current sales volumes and the price received for its
natural gas production and to minimize marketing and transportation costs.
The Company intends to expand its existing natural gas marketing business
and acquire other natural gas marketing companies where strategic synergies
exist. In December 1995, the Company acquired the assets of GED, a natural
gas marketing company that specializes in aggregating volumes purchased
from producers, and, in the first quarter of 1996, the Company opened a
natural gas
35
<PAGE>
marketing office to focus on market opportunities in the northern end of
the Mid-Continent area. See "Business and Properties--Natural Gas and Oil
Production Marketing Activities."
. Electric Power Marketing. The electric industry is rapidly shifting from
being heavily regulated to becoming a more competitive industry. In 1992,
Congress passed the Energy Policy Act which accelerated competitive trends
within the electric industry. The Company commenced electric wholesale
power brokering operations in October 1993. As a broker, the Company acts
as an intermediary between wholesale buyers and sellers. Effective July
1995, the Company's FERC certification as a power marketer became effective
which allows it to fully engage in the wholesale purchase and sale of
electricity. To date, the Company has brokered and marketed sales of
electricity among over 60 utilities. Since attaining marketer status, the
Company has experienced a steady increase in total quarterly sales. The
Company believes it will be able to capitalize on expanding marketing
opportunities created within the increasingly competitive electric power
industry. See "Business and Properties--Electric Power Marketing."
. First Market-Based National Electronic Power Exchange. In May 1995, the
Company launched commercial operation of CPEX(TM), the first market-based
national electronic exchange for the buying and selling of wholesale
electric power and transmission services. As of April 30, 1996, CPEX(TM)
had 30 subscribers with operations in 25 states. Subscribers utilize
CPEX(TM) to electronically buy and sell electricity and transmission
services through on-site computers in the competitive wholesale market for
the next one-hour and four-hour durations. As both the number of CPEX(TM)
subscribers and their familiarity with the competitive exchange of electric
power have increased, the Company has seen a rise in the number of MWh
traded on CPEX(TM). The Company's strategy is to continually upgrade the
capabilities of CPEX(TM) and expand market penetration in order to maintain
its industry-leading position in the market-based electronic trading of
wholesale electric power. See "Business and Properties--Continental Power
Exchange, Inc."
NATURAL GAS AND OIL EXPLORATION AND PRODUCTION
The Company implements its balanced approach of Extensional Infill drilling,
strategic producing property acquisitions and regionally focused exploratory
drilling by using an integrated team of geologists, reservoir engineers,
geologic engineers and landmen who have extensive experience in all facets of
oil and gas exploration and production. This integrated team approach allows
the Company to direct its professional and technical resources between its
drilling and acquisition efforts, as needed, with the result that the efforts
of each technical group serve to complement each other. The Company's
professionals perform subsurface and geologic analysis and a thorough
reservoir engineering evaluation of proved developed reserves to generate its
drilling and acquisition prospects. The Company also utilizes exploitation
techniques and seismic delineation to enhance the overall potential of its
natural gas and oil properties and prospects. Additionally, the Company
markets production from its operated properties for its own account as well as
that of third parties.
EXTENSIONAL INFILL DRILLING
The Company's primary and continuing focus has been the drilling of
Extensional Infill wells throughout the southern half of the Mid-Continent
region of the United States. The Company employs a geological engineering
approach and an application of tight sands technology to this effort, and
specifically concentrates on drilling opportunities in northern Louisiana,
northwest Oklahoma and the Texas panhandle, and southeast New Mexico. The
Company has focused its Extensional Infill drilling program in these areas due
to attractive economic conditions (lower leasehold, drilling and operating
cost environment, and proximity to established markets), reservoir
characteristics (multiple, stacked pay potential; established, analog field
data; and long-lived reserves) and a favorable regulatory climate. In
addition, the Company's technical staff has many years of prospect generating
and operating experience in these regions.
The Company's Extensional Infill drilling prospects are generally
characterized by lower permeability reservoirs which lend themselves to
application of tight sand fracturing technology and sophisticated completion
engineering techniques. The Company's engineers have considerable experience
in these technologies. While with a previous employer, the Company's President
was directly involved (in conjunction with Halliburton
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<PAGE>
Company engineers) in the development and patenting of the CO/2/ Foam
Fracturing process which enhances the performance of tight sand reservoirs
and, since its development in the early 1980s, has become the prevalent
completion technology in tight sand areas throughout the Mid-Continent region.
The Company currently has geologists with regionally specific expertise and
an average of nineteen years experience in offices located in Tulsa, Oklahoma;
Dallas, Houston and Midland, Texas; and Shreveport, Louisiana. The Company
provides an incentive program to these professionals through the assignment of
an overriding royalty interest to the generating geologist on each prospect
drilled which allows for the attraction and retention of highly qualified,
experienced geologists who are motivated and rewarded based on success. In
addition, the Company believes that this program provides for effective
management of fixed overhead costs because the Company sets the base salaries
of its geologists below the industry average. The Company minimizes potential
conflicts of interest in this incentive program by subjecting each prospect
proposal to intense engineering, operational and economic scrutiny and by
requiring that final drilling and completion decisions be made by senior
members of management who do not receive overriding royalties.
Minimizing capital commitments to leasehold acreage positions is another key
component to the Company's Extensional Infill drilling approach. Many
companies commit large amounts of capital in acreage positions with the
potential for prospects. In contrast, the Company acquires ownership positions
only after identifying a specific geologic prospect. This approach delays the
required capital exposure on leasehold positions, thereby enhancing the
overall economic return on the Company's drilling activities. Moreover, as a
result of this approach, the Company is able to drill prospects on the basis
of their technical and economic merits and not because of expiring leasehold
positions. This approach demands a team of landmen who are skilled and
experienced at structuring transactions to acquire the necessary ownership
position by utilizing a variety of acquisition techniques and maintaining
close relationships with industry members. From 1992 through 1995, this team
has acquired drilling rights in 120 Extensional Infill drilling prospects, on
which the Company has drilled 87 wells, 52 of which were completed as
commercial producers. These wells have added reserves totaling 53.7 Bcfe
through the end of 1995 at an average finding cost of $0.75 per Mcfe. At April
30, 1996, the Company had in excess of 150 Extensional Infill prospects
identified in the core areas in which it operates and anticipates identifying
at least 50 additional prospects during the remainder of 1996. The Company
currently plans to drill at least 27 Extensional Infill wells based on its $12
million 1996 capital budget for Extensional Infill drilling. The Company's
approach to obtaining drilling rights for its Extensional Infill drilling
prospects depends upon the willingness of property owners to grant the
necessary drilling rights to the Company after the prospects have been
identified by the Company, and the Company may encounter difficulty in
obtaining, or may not be able to obtain, such rights. See "Risk Factors--
Reserve Replacement Risks."
EXPLORATORY DRILLING
The Company initiated an active, regionally focused exploratory drilling
program in 1994 which generally seeks larger exploratory prospects which are
based upon good subsurface geologic control on unproved structures or features
which provide both significant reserve potential and an opportunity for
multiple well locations. The Company believes that while these exploratory
prospects have an inherently higher risk profile, they have significantly
higher upside reward potential. The Company focuses its exploratory efforts
primarily in the Gulf Coast region where its personnel have extensive
experience.
The Company consistently applies its geological engineering approach to its
exploratory drilling effort and utilizes the strict economic criteria employed
in its Extensional Infill drilling analysis adjusted, however, for the
increased risk characteristics associated with exploratory drilling. The
Company broadens its exposure to a variety of exploration opportunities by
seeking to limit its risk capital in any individual prospect from 10% to 20%
of the exploratory drilling budget, depending on the Company's perception of
the risk associated with each individual prospect.
The Company's primary exploratory successes have come in the Louisiana Gulf
Coast region of the United States. The Company's most recent discovery on an
exploratory prospect occurred in April 1996. The new well, located in
Jefferson Parish, Louisiana, is perforated in the lower of two productive sand
lobes and is currently
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<PAGE>
shut-in, pending connection to a gas pipeline. The Company is also currently
attempting to acquire offsetting leasehold. Upon completion of the pipeline
connection and testing of the lower sand, the Company expects the upper sand
lobe to be perforated and produced at an estimated combined rate of 5 MMcf to
8 MMcf per day based upon its analysis of logs and results of other wells in
the surrounding area completed in that zone. The Company has evaluated the
prospect geology and determined that at least one delineation well will be
required in 1996 to exploit this discovery further.
The Company's 1996 capital budget for exploratory drilling is $4 million,
representing 25% of the Company's total drilling budget. During 1996, the
Company currently plans to drill five to seven additional exploratory wells
primarily in south Louisiana. The Company has also expanded its exploration
activity into southeast New Mexico where it currently intends to drill a
prospect generated as a result of a 3-D seismic survey.
PRODUCING PROPERTY ACQUISITIONS
The Company actively pursues acquisitions of producing natural gas and oil
properties that strategically complement its drilling and operational
activities. The Company's acquisition strategy focuses on negotiated
transactions where it can obtain operational control. In addition, the Company
directs its acquisition efforts toward properties where its technical team
perceives that opportunities exist to enhance value. These opportunities can
include reducing operating costs and increasing existing production and
reserves through Extensional Infill drilling and other exploitation
activities, including deeper tests to explore for new zones not currently
producing. These acquisition-related efforts often result from a direct
synergy with the Company's other activities. For example, on several occasions
the Company's acquisitions have been the result of obtaining leasehold
positions to drill locations identified through its Extensional Infill
drilling program. In addition, the Company has successfully acquired
additional interests in fields and properties where it already owns
significant interests, thereby benefiting from the Company's prior operating
experience and existing marketing relationships.
The Company dedicates two professional employees to its natural gas and oil
acquisition activities. In keeping with the Company's integrated team
approach, these employees coordinate the expertise of other Company personnel
and, as needed, highly qualified independent consultants to review, negotiate,
close and assimilate significant acquisitions. In addition, these
professionals and the Company's management seek to ensure that all
acquisitions meet the Company's strict economic, operational and reserve risk
criteria. Although this approach results in fluctuating amounts spent on
acquisitions from year to year, the Company believes it has resulted in the
acquisition of higher quality properties.
From April 1, 1992 through April 30, 1996, the Company completed 31 natural
gas and oil property acquisitions, involving total acquisition costs of
approximately $126.5 million. Of these completed acquisitions, 18
transactions, at a cost of $10 million, were acquisitions of additional
interests in properties already owned by the Company.
The following table presents a summary of the Company's acquisitions of
estimated net proved reserves.
<TABLE>
<CAPTION>
PROVED ACQUISITION ACQUISITION
NUMBER OF RESERVES COST COST
ACQUISITIONS ACQUISITIONS (MMCFE) (1) (THOUSANDS) (2) ($/MCFE)
------------ ------------ ----------- --------------- -----------
<S> <C> <C> <C> <C>
1992 6 7,964 $ 3,823 $0.48
1993 15 90,782 58,277 0.64
1994 7 32,743 17,358 0.53
1995 2 1,195 1,786 1.49
Sawyer Canyon 1 56,058 45,240 0.81
--- ------- -------- -----
Total 31 188,742 $126,484 $0.67
=== ======= ======== =====
</TABLE>
- --------
(1) Estimated net proved reserves at date of acquisition for properties
purchased prior to April 1996 are based on the first year-end reserve
report prepared following the acquisition date and adjusted for production
between the acquisition date and the first year-end. The estimated net
proved reserves are not identical to the current amount of such reserves
due to subsequent production and drilling activities.
(2) Acquisition cost is based on the price paid at the acquisition date.
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<PAGE>
Sawyer Canyon Acquisition
In April 1996, the Company purchased the interests of Enron Oil & Gas
Company in the Sawyer Canyon Field, Sutton County, Texas (the "Sawyer Canyon
Properties") at a net purchase price of approximately $45.2 million. The
Sawyer Canyon Properties include 350 gross (319 net) wells (of which virtually
all of the net wells are operated by the Company) that produced 17.4 MMcf of
natural gas and 48 Bbls of oil per day in April 1996 net to the acquired
interest. At December 31, 1995, the Company estimated the proved reserves of
the Sawyer Canyon Properties at 57.8 Bcf of natural gas and 78.6 MBbls of oil,
of which 96% was proved developed. The Sawyer Canyon Properties also include
37.2 miles of associated gas gathering lines. The Company believes the
attributes of the Sawyer Canyon Properties are similar to previously acquired
properties that the Company has enhanced through operating, marketing and
drilling activities, but there can be no assurance that such enhancement will
occur in the case of the Sawyer Canyon Properties. See "--Significant Natural
Gas and Oil Properties."
The Company conveyed certain of its interests in the Sawyer Canyon
Properties with production qualifying for credits under Section 29 of the
Internal Revenue Code of 1986, as amended (the "Code"), to another subsidiary
of MidAmerican Capital. See "Certain Transactions."
SIGNIFICANT NATURAL GAS AND OIL PROPERTIES
The following table sets forth certain information which relates to the
Company's principal natural gas and oil property areas, including the pro
forma effects of the Sawyer Canyon Acquisition, for the periods indicated.
<TABLE>
<CAPTION>
PRO FORMA DECEMBER 31, 1995
----------------------------------------------------------
NET PROVED RESERVES
----------------------------------------------------
PV-10 PV-10
NATURAL OIL AND RESERVE RESERVE
GROSS GAS LIQUIDS TOTAL VALUE VALUE
PROPERTY--AREA WELLS (MMCF) (MBBLS) (MMCFE) (IN THOUSANDS) (% OF TOTAL)
-------------- ----- ------- -------- ------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sawyer Canyon Field......... 350 57,754 79 58,228 $ 55,412 25%
ArkLaTex Area............... 74 39,572 305 41,402 44,109 20
Anadarko Basin.............. 213 34,195 310 36,055 29,657 13
Gulf Coast Louisiana........ 38 10,396 546 13,672 22,511 10
Offshore Gulf of Mexico..... 76 11,226 514 14,310 19,977 9
Gulf Coast and South Texas.. 57 7,341 525 10,491 11,261 5
Newhall-Potrero............. 36 2,959 1,969 14,773 8,437 4
Other....................... 1,207 27,984 5,675 62,034 32,207 14
----- ------- ----- ------- -------- ---
Total..................... 2,051 191,427 9,923 250,965 $223,571(1) 100%
===== ======= ===== ======= ======== ===
</TABLE>
- --------
(1) The pro forma standardized measure of discounted future net cash flows as
of December 31, 1995 was $189.8 million. The $33.8 million difference
between the Company's PV-10 Reserve Value and its standardized measure of
discounted future net cash flows is the present value of income taxes
applicable to such future net cash flows.
Sawyer Canyon Field
The Company's largest concentration of reserve holdings, consisting of 23%
of its proved reserves as of December 31, 1995 on a pro forma basis, is the
Sawyer Canyon Field, Sutton County, Texas, which was purchased in April 1996.
See "--Producing Property Acquisitions--Sawyer Canyon Acquisition." The
Company owns interests in 350 gross (319 net) wells of which 327 gross (319
net) wells are operated by the Company. The Company's average working interest
in this field is 91%. The Company's leasehold position consists of
approximately 34,887 gross (34,053 net) acres. During April 1996, the Company
realized average daily production of 17.4 MMcf of natural gas and 48 Bbls of
oil from the Sawyer Canyon Field.
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<PAGE>
The main producing formation in the Sawyer Canyon Field is the Canyon
sandstone at a depth of approximately 5,500 feet. Natural gas in the Canyon
formation is stratigraphically trapped in lenticular sandstone reservoirs. A
typical Sawyer Canyon Field well encounters multiple productive reservoirs
within the 800 foot to 1,400 foot thickness of the Canyon formation. These
Canyon reservoirs tend to be discontinuous and generally exhibit lower
porosity and permeability, characteristics which reduce the area that can be
effectively drained by a single well to units as small as 40 acres.
The Company's 58.2 Bcfe of proved reserves attributable to the Sawyer Canyon
Field are 96% proved developed. The Company currently plans on drilling seven
additional infill locations to exploit the remaining proved undeveloped
reserves. The Company also believes that additional proved reserves may
ultimately be attributed to many of the 60 or more 40-acre locations remaining
on the property. The Company has also identified additional enhancement
potential through several recompletion possibilities in existing wellbores
into Canyon sand reservoirs not currently producing. In addition to exploiting
these Canyon sand development opportunities, the Company currently intends to
evaluate portions of the Sawyer Canyon Field for potential in the shallower
Wolfcamp and deeper Strawn formations which have been found to be productive
in the area.
ArkLaTex Area
The Company's second largest concentration of reserve holdings, representing
approximately 16% of total proved reserves as of December 31, 1995 on a pro
forma basis, is located in the ArkLaTex Area primarily in Bossier, Claiborne,
Lincoln, and Union Parishes in northern Louisiana. The Company owns an
interest in 74 gross (38 net) wells of which 42 gross (36 net) wells are
operated by the Company. The Company's average working interest in its
ArkLaTex Area operated wells is approximately 86%. Average daily production
from the ArkLaTex Area, net to the Company's interest, was approximately 10.7
MMcf of natural gas and 103 Bbls of oil during April 1996.
Certain members of the Company's management have been active in the ArkLaTex
Area since 1977. Production in the ArkLaTex Area is primarily from the
Hosston, Cotton Valley and Haynesville formations of Cretaceous and Jurassic
age at depths of 5,500 feet to 10,000 feet. These formations are lower
permeability sandstones which were developed on 640-acre spacing and require
Extensional Infill drilling and advanced fracture stimulations to drain the
reserves in place adequately.
Elm Grove Field. The Company's net proved reserves in the Elm Grove Field,
Bossier Parish, Louisiana, at December 31, 1995, were 28.5 Bcfe, of which 97%
was proved developed. Production out of the Elm Grove Field is natural gas
from the Hosston and Cotton Valley formations at depths of 7,000 feet to 9,600
feet. The Company owns an interest in 42 gross (27 net) wells, of which 29
gross (27 net) wells are operated by the Company. The Company's average
working interest in its operated properties in the Elm Grove Field is
approximately 92%. In addition, the Company acquired in 1995 non-operated
properties with an average working interest of approximately 3% with acreage
offsetting the Company's operated properties. The Company's operated leasehold
position consists of approximately 5,760 gross (5,649 net) acres. Average
daily production from the Elm Grove Field, net to the Company's interest, was
approximately 7.7 MMcf of natural gas and 30 Bbls of oil during April 1996.
Due to the Company's operational enhancements, average gross production from
the original properties has reached a rate of 10 MMcf per day during April
1996, up from an average daily production level of 2 MMcf per day when the
Company assumed operations in August 1994. The Company has acquired additional
interests in the area through multiple acquisitions that have increased
reserves with minimal additional administrative costs. The Company has
identified several behind pipe zones and three to five additional infill
locations that have not been classified as proved reserves but which the
Company believes have significant potential to increase proved reserves.
40
<PAGE>
Since the Company acquired its first interest in the Elm Grove Field, it has
drilled 11 productive wells, recompleted 6 of the 15 existing wells to access
behind pipe reserves and discovered a deeper productive zone not previously
produced in the field. The Company has also drilled 10 productive wells in
five ArkLaTex fields other than Elm Grove. The Company expects to continue to
generate drilling prospects in the fields in which it is currently active and
other ArkLaTex Area fields. The Company currently plans to drill at least 8
prospects during 1996 in the ArkLaTex Area.
Anadarko Basin Area
The Company's Anadarko Basin properties are located in northwest Oklahoma
and the Texas panhandle. The Company owns an interest in 213 gross (82 net)
wells of which it operates 153 gross (75 net) wells. Average daily production
from the area, net to the Company's interest, was approximately 10.1 MMcf of
natural gas and 81 Bbls of oil during April 1996.
Certain members of the Company's management team have been actively involved
in the development of reserves in the Anadarko Basin since 1974. The majority
of the Company's properties in this area are located on the Northern Shelf and
are predominantly natural gas producing from various formations of
Pennsylvanian and Pre-Pennsylvanian age at depths of 7,000 feet to 12,000
feet. The Company's Mills Ranch Field, operated by Chevron, is in the deeper
part of the basin with production from depths of 10,000 feet to 20,000 feet.
Pre-Pennsylvanian reservoirs include the Mississippi, Chester and Hunton
formations and are typically fractured carbonates. Pennsylvanian reservoirs
include the Redfork, Atoka and Morrow sandstones.
Spacing across the Anadarko Basin is generally on 640 acre units with
extensive Extensional Infill drilling having occurred over the last 15 years.
The Company has participated in the drilling of 44 gross (37 net) Extensional
Infill wells in this area since 1992. Of the 36.1 Bcfe total proved reserves
as of December 31, 1995, net to the Company's interest and attributable to the
Anadarko Basin area, 82% are proved developed. The Company plans to continue
to exploit areas of the Anadarko Basin that require Extensional Infill
drilling for adequate reserve drainage.
Gulf Coast Louisiana Area
The Company's onshore Gulf Coast Louisiana properties are located in 10
fields in south Louisiana. The Company owns an interest in 38 gross (7 net)
wells of which it operates 9 gross (5 net) wells. During April 1996, average
daily production from the area, net to the Company's interest, was
approximately 6 MMcf of natural gas and 295 Bbls of oil.
The Company has 22 years of management experience in the Gulf Coast
Louisiana Area. Since 1992, the Company has actively developed its reserves in
the area through its Extensional Infill and exploratory drilling programs and
producing property acquisitions. The Company's proved reserves of 13.7 Bcfe as
of December 31, 1995 in the Gulf Coast Louisiana Area are 90% proved
developed.
Offshore Gulf of Mexico Area
The Company has non-operated working interests ranging from 2% to 14% in 14
offshore fields (including blocks located in the Eugene Island, Ship Shoal,
South Timbalier, Vermilion, West Cameron and Galveston Island areas) which are
operated primarily by Newfield Exploration Company ("Newfield"). The Company
has interests in 76 gross (6 net) wells with an average working interest of
approximately 8%. During April 1996, average daily production from this area,
net to the Company's interest, was approximately 7.8 MMcf of natural gas and
350 Bbls of oil.
These fields produce from various Pleistocene, Pliocene and Miocene sands
ranging from 6,000 feet to 15,000 feet in depth. The Company's participation
with Newfield in the development of these offshore reserves was initiated in
1990. The last year of active participation in new leasehold acquisition with
Newfield was 1992,
41
<PAGE>
although the Company has continued to participate in the development of the
properties where it already owns leases.
In 1995, Newfield added reserves through drilling in the Ship Shoal 159,
South Timbalier 148 and South Timbalier 193 Fields which resulted in upward
revisions of 2.9 Bcfe of net proved reserves to the Company. In total, the
Company has net proved reserves of 14.3 Bcfe as of December 31, 1995 in the
Offshore Gulf of Mexico Area which are 92% proved developed.
Gulf Coast and South Texas
The Company's onshore Gulf Coast and South Texas properties are located in
eight fields in south Texas. The Company owns an interest in 57 gross (15 net)
wells, of which it operates 10 gross (4 net) wells. Average production from
the area, net to the Company's interest, was approximately 4.6 MMcf of natural
gas and 184 Bbls of oil per day during April 1996.
The Company has been developing its reserves in the onshore Gulf Coast and
South Texas Area that were acquired prior to 1992 through its participation in
various exploratory drilling programs. In 1993 and 1994, the Company expanded
its Gulf Coast and South Texas reserve base with the acquisition of one non-
operated and three operated fields. The Company has generally been successful
in improving the profitability of the properties acquired from other operators
by increasing production rates through an aggressive workover program,
improving marketing arrangements for natural gas and oil sales and lowering
the lifting cost per unit of production.
The Company's proved reserves of 10.5 Bcfe as of December 31, 1995 from the
onshore Gulf Coast and South Texas Area are 94% proved developed. The Company
has identified three workovers to re-establish production from currently shut-
in wells that it operates in the Gillock Field and is currently installing
artificial lift and a saltwater disposal system.
Newhall-Potrero Field
The Newhall-Potrero Field is located in Los Angeles County, California,
outside the city of Valencia. The Company owns a 100% working interest in 36
active wells, all of which are operated by the Company. The Company's
leasehold position consists of approximately 1,250 acres. During April 1996,
average daily production from the field, net to the Company's interest, was
approximately 360 Bbls of oil and 0.7 MMcf of natural gas.
The Company's interest in the Newhall-Potrero Field was acquired in 1993 and
is comprised of the Rancho San Francisco and Ferguson leases. Production is
predominantly oil produced from the multiple Modelo sands in the Miocene
formation at a depth range of 6,000 feet to 13,000 feet.
The Company has been able to increase oil production in April 1996 by 89
Bbls of oil per day over 1994 average daily levels by converting certain wells
from gas lift to pumping unit operations and reworking other wells. The
Company has also realized a 31% reduction in lifting costs from $6.32 per BOE
in 1994 to $4.35 per BOE in 1995. The Company believes that there are other
production enhancement opportunities in the Newhall-Potrero Field through the
recompletion of wells to undrained portions of the oil reservoirs and
installing additional pumping units. The Company currently plans 4 to 6
workovers in an attempt to enhance production further during 1996.
42
<PAGE>
NATURAL GAS AND OIL RESERVES
The Company's estimated total proved and proved developed reserves of
natural gas and oil as of December 31, 1993, 1994 and 1995, and pro forma for
the Sawyer Canyon Acquisition as of December 31, 1995, were as follows:
<TABLE>
<CAPTION>
PROVED RESERVES (1) PROVED DEVELOPED RESERVES (2)
----------------------------------- -----------------------------------
NATURAL GAS OIL AND LIQUIDS TOTAL NATURAL GAS OIL AND LIQUIDS TOTAL
DECEMBER 31, (MMCF) (MBBL) (MMCFE) (MMCF) (MBBL) (MMCFE)
------------ ----------- --------------- ------- ----------- --------------- -------
<S> <C> <C> <C> <C> <C> <C>
1993.................... 112,023 8,955 165,754 100,660 8,173 149,698
1994.................... 148,611 7,304 192,434 115,099 6,717 155,401
1995.................... 133,673 9,844 192,737 111,189 8,255 160,719
Pro Forma 1995.......... 191,427 9,923 250,965 166,735 8,327 216,697
</TABLE>
- --------
(1) Estimated quantities of proved natural gas and oil reserves for 1994 and
1995 (on an historical and pro forma basis) are based upon reserve reports
prepared by Netherland, Sewell and Associates, Inc. ("Netherland,
Sewell"), the Company's independent petroleum engineers, except that, of
the quantities set forth above, (a) 35,872 MMcf of natural gas, 681 MBbls
of oil and 39,958 MMcfe of the Company's proved undeveloped reserves and
the Company's net APPL limited partnership proved reserves for 1994 and
(b) 20,736 MMcf of natural gas, 1,951 MBbls of oil and 32,442 MMcfe of the
Company's proved undeveloped reserves and the Company's net Merit limited
partnership proved reserves for 1995 (on an historical and pro forma
basis) are based upon estimates evaluated by the Company. Estimated
quantities of natural gas and oil reserves for 1993 are based upon
compilations of estimates of independent petroleum engineers and the
Company's engineers.
(2) Estimated quantities of proved developed natural gas and oil reserves for
1994 and 1995 (on an historical and pro forma basis) are based upon
reserve reports prepared by Netherland, Sewell, except that, of the
quantities set forth above, (a) 2,360 MMcf of natural gas, 94 MBbls of oil
and 2,924 MMcfe of the Company's net APPL limited partnership proved
developed reserves for 1994 and (b) 1,509 MMcf of natural gas, 401 MBbls
of oil and 3,915 MMcfe of the Company's net Merit limited partnership
proved reserves for 1995 (on an historical and pro forma basis) are based
on estimates evaluated by the Company. Estimated quantities of natural gas
and oil reserves for 1993 are based upon compilations of estimates of
independent petroleum engineers and the Company's engineers.
The following table sets forth the estimated future net cash flows from the
Company's estimated proved reserves as of December 31, 1993, 1994 and 1995,
and pro forma for the Sawyer Canyon Acquisition as of December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------------- DECEMBER 31,
1993 1994 1995 1995
-------- -------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Estimated future net cash flows
before income
taxes (1)........................... $220,335 $221,513 $258,220 $346,803
Estimated future net cash flows be-
fore income taxes, discounted at 10%
per annum (2) (3)................... $137,711 $144,595 $168,159 $223,571
Standardized measure of discounted
future net cash flows (3)........... $118,202 $126,044 $136,924 $189,778
</TABLE>
- --------
(1) Estimated future net cash flows before income taxes for 1994 and 1995 (on
an historical and pro forma basis) are based upon reserve estimates
prepared by Netherland, Sewell, except that, of the estimates of such cash
flows set forth above, (a) $47,155,000 of such estimates for 1994 is
attributable to the Company's proved undeveloped reserves and the
Company's net APPL Limited Partnership proved reserves which are based
upon reserve estimates evaluated by the Company and (b) $30,232,000 of
such estimate for 1995 (on an historical and pro forma basis) is
attributable to the Company's proved undeveloped reserves and the
Company's net Merit Limited Partnership proved reserves which are also
based upon reserve estimates evaluated by the Company. Such estimate for
1993 is based upon compilations of reserve estimates of independent
petroleum engineers and the Company's engineers.
(2) Estimated future net cash flows before income taxes, discounted at 10%,
for 1994 and 1995 (on an historical and pro forma basis) are based upon
reserve estimates prepared by Netherland, Sewell, except that, of the
estimates of such cash flows set forth above, (a) $28,400,000 of such
estimate for 1994 is attributable to the Company's proved undeveloped
reserves and the Company's net APPL limited partnership proved reserves
which are based upon reserve estimates evaluated by the Company and (b)
$15,717,000 of such estimate for 1995 (on an historical and pro forma
basis) is attributable to the Company's proved undeveloped reserves and
the Company's net Merit limited partnership proved reserves which are also
based upon reserve estimates evaluated by the Company. Such estimate for
1993 is based upon compilations of reserve estimates of independent
petroleum engineers and the Company's engineers.
(3) The difference between estimated future net cash flows before income
taxes, discounted at 10% per annum and the standardized measure of
discounted future net cash flows of $19,509,000, $18,551,000, $31,235,000
and $33,793,000 for 1993, 1994, 1995 and 1995 on a pro forma basis,
respectively, is the present value of income taxes applicable to such
future net cash flows.
43
<PAGE>
The reserve data set forth in this Prospectus represent only estimates of
Netherland, Sewell, other third-party engineers and the Company. A summary of
Netherland, Sewell's report dated May 13, 1996 for pro forma December 31, 1995
is filed as an exhibit to the registration statement of which this Prospectus
is a part. Reserve engineering is a subjective process of estimating the
recovery of underground accumulations of natural gas and oil that cannot be
measured in an exact manner, and the accuracy of any reserve estimate is the
function of the quality of the available data, of the assumptions made, and of
engineering and geological interpretation and judgment. Estimates of
economically recoverable natural gas and oil reserves and of future net cash
flows therefrom necessarily depend upon a number of variable factors and
assumptions, such as historical production from the area compared with
production from other producing areas, the assumed effects of regulations by
governmental agencies and assumptions concerning future natural gas and oil
prices, future operating costs, severance and excise taxes, development costs
and workover and remedial costs, all of which may in fact vary considerably
from actual results. For those reasons, estimates of the economically
recoverable natural gas and oil reserves attributable to any particular group
of properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenues expected therefrom, prepared by different
engineers or by the same engineers at different times, may vary substantially.
All such estimates are to some degree speculative, and classifications of
reserves are only attempts to define the degree of speculation involved.
Actual prices, production, development expenditures, operating expenses and
quantities of recoverable natural gas and oil reserves will vary from those
assumed in the estimates and such variances may be significant. Any
significant variance from the assumptions could result in the actual quantity
of the Company's reserves and future net cash flow therefrom being materially
different from the estimates set forth herein. In addition, the Company's
estimated reserves may be subject to downward or upward revision, based upon
production history, results of future exploration and development, prevailing
natural gas and oil prices, operating and development costs and other factors.
Estimates with respect to proved undeveloped reserves that may be developed
and produced in the future are often based upon volumetric calculations and
upon analogy to similar types of reserves rather than actual production
history. Estimates based on these methods are generally less reliable than
those based on actual production history. Subsequent evaluation of the same
reserves based upon production history will result in variations, which may be
substantial, in the estimated reserves.
The present worth of future net cash flows shown above should not be
construed as the current market value, or the market value as of December 31,
1995, or any prior date, of the estimated natural gas and oil reserves
attributable to the Company's properties. In accordance with applicable
requirements of the Commission, the estimated discounted future net revenues
from estimated proved reserves are based on prices and costs as of the date of
the estimate unless such prices or costs are contractually determined at such
date. Actual future prices and costs may be materially higher or lower. Actual
future net revenues also will be affected by factors such as actual
production, supply and demand for natural gas and oil, curtailments or
increases in consumption by natural gas purchasers, changes in governmental
regulations or taxation and the impact of inflation on costs.
In accordance with methodology approved by the Commission, specific
assumptions were applied in the estimates of future net cash flows. Under this
methodology, estimated future net cash flows are determined by reducing
estimated future gross cash flows to the Company for natural gas and oil sales
by the estimated costs to develop and produce the underlying reserves,
including future capital expenditures, operating costs, transportation costs,
royalty and overriding royalty burdens. Estimated future production costs were
based on actual annual production costs incurred during the reported period. A
portion of the Company's proved reserves are undeveloped, and future
development costs thereon were calculated based on a continuation of present
economic conditions.
Future net cash flows were discounted at 10% per annum to arrive at
discounted future net cash flows. The 10% discount factor used to calculate
present value is required by the Commission, but such rate is not necessarily
the most appropriate discount rate. Present worth of future net cash flows,
irrespective of the discount rate used, is materially affected by assumptions
as to timing of future natural gas and oil prices and production,
44
<PAGE>
which may prove to be inaccurate. In addition, the calculations of estimated
net revenues do not take into account the effect of certain cash outlays,
including, among other things, general and administrative costs, interest
expense and dividends.
The Company does not file reserve reports with any federal agency other than
the Commission.
PRODUCTIVE WELLS
The following table sets forth the number of productive natural gas and oil
wells in which the Company owned an interest as of April 30, 1996. Productive
wells consist of producing wells and wells capable of production, including
natural gas wells awaiting pipeline connections to commence deliveries and oil
wells awaiting connection to production facilities. Wells which are completed
in more than one producing horizon are counted as one well. Of the gross wells
reported below, five had multiple completions.
<TABLE>
<CAPTION>
GROSS NET
----- -----
<S> <C> <C>
Natural gas wells............................................. 999 532.8
Oil wells..................................................... 1,052 134.4
----- -----
Total....................................................... 2,051 667.2
===== =====
</TABLE>
ACREAGE DATA
The following table sets forth certain information regarding the Company's
developed and undeveloped lease acreage as of April 30, 1996.
<TABLE>
<CAPTION>
DEVELOPED ACREAGE UNDEVELOPED ACREAGE
----------------- -------------------
STATE GROSS NET GROSS NET
- ----- ----------------- -------------------
<S> <C> <C> <C> <C>
Oklahoma.................................. 41,360 32,848 17,011 11,229
Texas (1)................................. 71,577 51,458 9,931 8,403
Louisiana................................. 20,338 6,915 7,133 6,172
Montana................................... 21,946 8,955 -- --
Colorado.................................. 16,985 4,440 4,186 2,699
Wyoming................................... 9,823 6,255 -- --
Other..................................... 19,652 12,436 4,443 3,367
-------- -------- --------- ---------
Total................................... 201,681 123,307 42,704 31,870
======== ======== ========= =========
</TABLE>
- --------
(1) 34,887 gross (34,053 net) acres of the developed acreage and none of the
gross undeveloped acreage are attributable to the Sawyer Canyon
Acquisition.
DRILLING ACTIVITIES
During the periods indicated, the Company drilled or participated in the
drilling of the following exploratory and development wells:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
-------------------------------- ENDED
1993 1994 1995 MARCH 31, 1996
---------- ---------- ---------- ----------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory:
Productive................. 9 1.1 11 1.1 9 0.8 1 0.4
Non-Productive............. 7 1.9 8 4.0 7 3.4 1 1.0
--- ---- --- ---- --- ---- ------- -------
Total.................... 16 3.0 19 5.1 16 4.2 2 1.4
=== ==== === ==== === ==== ======= =======
Development:
Productive................. 20 10.2 22 15.7 32 21.4 2 2.0
Non-Productive............. 7 6.5 15 10.4 17 12.3 3 2.2
--- ---- --- ---- --- ---- ------- -------
Total.................... 27 16.7 37 26.1 49 33.7 5 4.2
=== ==== === ==== === ==== ======= =======
</TABLE>
45
<PAGE>
At April 30, 1996, the Company was participating in the drilling or
completion of 6 gross (4.3 net) wells, 2 of which are still being drilled and
4 of which were determined to be productive. All of the Company's drilling
activities are conducted with independent contractors. The Company owns no
drilling equipment.
The information contained in the foregoing table should not be considered
indicative of future performance, nor should it be assumed that there is
necessarily any correlation between the number of productive wells drilled and
the natural gas and oil reserves generated therefrom.
PRODUCTION, PRICES AND OPERATING EXPENSES
The following table sets forth the Company's net production of natural gas
and oil, average sales prices and certain production data during the periods
indicated on a historical and pro forma basis:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ ---------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995 1995 1996 1996
------ ------ ------ --------- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net production volumes:
Natural gas (MMcf)..... 12,742 15,591 17,835 25,980 4,066 5,113 6,727
Oil and liquids
(MBbls)............... 691 1,024 1,028 1,045 252 316 320
Average sales prices:
Natural gas (per Mcf)
(1)................... $ 2.04 $ 1.82 $ 1.65 $ 1.63 $1.61 $2.00 $2.02
Oil (per Bbl).......... 16.07 14.93 16.45 16.43 16.41 17.64 17.70
Average production costs
per Mcfe (2)............ $ 0.57 $ 0.69 $ 0.61 $ 0.54 $0.65 $0.50 $0.48
</TABLE>
- --------
(1) Includes the results of the Company's price risk management activities.
See "--Natural Gas and Oil Production Marketing Activities."
(2) Production costs are equivalent to lease operating expenses and may vary
substantially among wells depending on the methods of recovery employed
and other factors.
NATURAL GAS AND OIL PRODUCTION MARKETING ACTIVITIES
The Company markets substantially all of the natural gas production from
Company-operated wells to pipelines and third party gas marketers. The Company
believes that its marketing activities add value by giving the Company
opportunities to obtain competitive prices for products, rapidly connect new
wells to pipelines, minimize pipeline and purchaser balancing problems,
maintain continuous sales of production and secure prompt payment. The
Company's production marketing group utilizes strict economic and risk-reward
analysis and the experience of other technical groups to evaluate the various
marketing alternatives for each project.
Substantially all of the Company's natural gas is sold either under short-
term contracts (one year or less) providing for variable or market sensitive
prices or under various long-term contracts providing for fixed prices which
dedicate the natural gas to a single purchaser for an extended period of time.
In connection with the marketing of its natural gas production, the Company
engages in natural gas price risk management activities primarily through the
use of fixed for floating price swap agreements on notional volumes that
require payments to (or the receipt of payments from) counterparties to such
agreements based on the differential between a fixed and variable price for
natural gas. The Company maintains coverage of such notional volumes with
adequate physical volume deliveries at the hub points used to price such
arrangements. The Company intends to continue to consider various risk
management arrangements to stabilize cash flow and earnings and reduce the
Company's susceptibility to volatility in natural gas prices. These agreements
involve certain risks, see "Risk Factors--Price Risk Management."
The Company utilizes, from time to time, natural gas price swaps for a
portion of its natural gas production to achieve a more predictable cash flow
and to reduce its exposure to product price fluctuations. The Company records
these transactions under settlement accounting guidelines and, accordingly,
includes gains or losses in gas and oil revenues in the period of the swapped
production. The Company currently has three separate natural
46
<PAGE>
gas price swaps in place. Effective January 1, 1995, the Company effectively
fixed the sales price for a portion of its natural gas production at a NYMEX
price of $1.905 per MMBtu for a five-year term. In September 1995, the Company
effectively fixed the sales price for an additional portion of its natural gas
production at a NYMEX price of $2.055 per MMBtu for ten years. In May 1996,
the Company effectively fixed the sales price for an additional portion of its
natural gas production at a NYMEX price of $2.23 per MMBtu for a one-year
term. The Company, in May 1996, also fixed a basis component of the net
wellhead sales price for a portion of its natural gas production at the NYMEX
price less $0.096 per MMBtu for a one-year term. For the calendar years 1996,
1997 and 1998, these transactions cover aggregate notional volumes of
11,720,000 MMBtus, 8,060,000 MMBtus and 4,836,000 MMBtus, respectively, and
result at annual weighted average prices per MMBtu of $2.0325, $1.9942 and
$1.9832, respectively. The Company currently intends to limit its natural gas
price swap activity to no more than 50% of its natural gas production.
Since early 1995, the Company has been more aggressively marketing a portion
of the oil production from its properties through the off lease marketing of
volumes in its core oil producing areas. As a result of this marketing
activity, the Company has realized improvements to the price received for its
oil production in these areas.
The Company, in May 1996, in order to integrate its various natural gas
marketing activities, reorganized its corporate structure so that all of its
natural gas marketing operations are conducted through InterCoast Gas
Services. This action coordinates the Company's natural gas and oil production
marketing activities described above with the natural gas marketing operations
described below, which the Company has recently acquired and started. The
Company intends that InterCoast Gas Services will be able to provide an
assorted range of services and believes that it can provide value to its
natural gas and oil exploration and production operations and to its electric
marketing and brokering business.
In the past, MidAmerican Capital has provided letters of credit and
guarantees to support certain of the Company's purchases of natural gas.
Accordingly, the Company's historical ability to purchase and the volumes and
terms of its purchases have been dependent, in part, on the financial support
of MidAmerican Capital. After the Offering, the Company's own financial
strength may affect its ability to purchase and the volumes and terms under
which it will be able to purchase natural gas. There can be no assurance that
the Company's financial strength will be sufficient to provide the financial
support that may be required to continue the present volume of purchases or to
permit increased volumes of purchases at acceptable prices. See "Risk
Factors--Certain Risks of Natural Gas Marketing Operations."
In late 1995, the Company initiated a plan to grow its wholesale natural gas
marketing business. This plan involved two components: (i) strategic
acquisitions of other natural gas marketing companies and (ii) the start-up of
its own natural gas marketing company. During that time period, the Company
acquired for $1.8 million the assets of GED, a small natural gas marketing
company located in Tulsa, Oklahoma. This operation focuses on aggregating
natural gas volumes from producers and providing services (including
nomination, pipeline balancing, royalty payment administration, and other
accounting and administrative services) to these producers. As of April 30,
1996, this portion of InterCoast Gas Services purchased natural gas from over
600 wells located primarily in Oklahoma and the Texas panhandle. The volumes
of natural gas purchased from these producers are aggregated with volumes
purchased from other gas marketing companies and resold to natural gas
distribution companies, industrial end-users and other natural gas marketing
companies. This portion of InterCoast Gas Services' operations enters into
both short-term and long-term sales agreements, as well as utilizes various
price risk management contracts and arrangements, including NYMEX options and
basis swap agreements, fixed for floating price swap agreements, fixed price
forward purchase and sale agreements, options and other similar contractual
arrangements. See "Risk Factors--Price Risk Management."
In the first quarter of 1996, the Company opened a natural gas marketing
office to focus on market opportunities in the northern end of the Mid-
Continent region, concentrating on wholesale customers in that region. This
portion of InterCoast Gas Services' operations purchases natural gas from
producers, pipelines and other marketing companies and resells the natural gas
to industrial end-users, natural gas distribution companies,
47
<PAGE>
producing companies, pipelines and other marketing companies. Sales and
purchases are made generally on a firm basis but may also be on a swing or
interruptible basis. The terms of the agreements have been for periods of less
than one year; however, longer term contracts may be entered into in the
future. This operation also utilizes various price risk management contracts
and arrangements, including NYMEX options and basis swap agreements, fixed for
floating price swap agreements, fixed price forward purchase and sale
agreements, over the counter option contracts and other similar contractual
arrangements. See "Risk Factors--Price Risk Management."
ELECTRIC POWER MARKETING
The Company engages in the purchase and sale of wholesale electric power,
both as a broker and marketer. As a broker, the Company acts as an
intermediary by facilitating transactions between buyers and sellers of
electricity. When acting as a marketer, the Company purchases and takes title
to electricity and resells that electricity to other utilities. In connection
with its marketing activity, the Company may also contract with electric
utilities for transmission services. The Company began its electric marketing
business in October 1993, and its FERC certification as a power marketer
became effective in July 1995. Prior to the effectiveness of its power
marketer certification, the Company's electric marketing business was limited
to brokering transactions. Through the first quarter of 1996, the Company had
brokered and marketed approximately 925,000 MWh among over 60 utilities. The
Company's strategy is to establish itself as a reliable trading and marketing
partner for wholesale electricity transactions throughout the United States
and Canada.
The Company has secured interchange and transmission agreements which
specify the terms and conditions under which market participants transact
business with one another. Through April 1996, the Company has executed 82
interchange agreements and 29 transmission agreements with utilities and other
clients across the United States. The Company is currently negotiating the
terms of approximately 50 additional such agreements. The Company has also
applied to become a member of the Western Systems Power Pool which would allow
it to transact business with over 100 additional market participants.
The Company's electric power marketing operations currently do not use price
risk management contracts and arrangements, however, the Company in the future
may utilize such contracts and arrangements in its electric power marketing
business. See "Risk Factors--Price Risk Management."
Although in the early stages of development, the wholesale electric power
marketing business is very competitive. Many of these competitors have greater
financial resources than the Company and have direct access to generating
resources. The Company neither owns nor has any long-term rights to any
electric generating resources. See "Risk Factors--Certain Risks Affecting
Electric Power Marketing Operations."
The Company believes it will be able to capitalize on expanding market
opportunities created by the deregulation of the electric power industry, the
most recent of which is FERC Order Numbers 888 and 889 which effectively
mandate open access transmission for the electric industry but there can be no
assurance that the Company will be successful in this area. See "Risk
Factors--Governmental Regulation."
CONTINENTAL POWER EXCHANGE, INC.
The Company's wholly owned subsidiary, Continental Power Exchange, developed
and launched in May 1995 commercial operation of the first market-based
national electronic exchange for the buying and selling of wholesale
electricity and transmission services, CPEX(TM). CPEX(TM) is an on-line
computer and telecommunications system that links subscribers electronically
for the purpose of buying, selling and wheeling wholesale electric power. The
first-of-its-kind software and network automatically determines the least-cost
transmission path for moving wholesale electricity between two points. In a
matter of seconds, CPEX(TM) identifies the least-cost transmission path and
electronically displays to subscribers offers to buy and sell electricity.
Subscribers are able to electronically initiate and consummate transactions
through the CPEX(TM) system and clear transactions through its electric funds
network.
48
<PAGE>
The Company commenced commercial operation of CPEX(TM) in May 1995 with 11
charter subscribers and had 30 subscribers with operations in 25 states as of
April 30, 1996. Until February 1996, CPEX(TM) subscribers were limited to
trades of only one-hour duration for the following hour. Currently, CPEX(TM)
has been expanded to permit trades over the next four-hour duration also.
The Company focuses on continuous enhancements to its electronic network, as
well as the expansion of marketing and sales efforts. In an effort to
accelerate the pace of its software development and marketing activities, the
Company may attempt to form strategic alliances with other participants which
may involve equity investments by such participants.
During 1996, the number of trades conducted by CPEX(TM) subscribers and the
aggregate amount and value of energy traded have increased each month. The
Company's current target customers are electric generation and transmission
companies, including investor owned utilities, municipally owned and operated
power systems, public power authorities, and rural electric generation and
transmission systems. Subject to regulatory changes implemented by the FERC
and state regulatory authorities, the Company expects that future target
customers will also include large industrial and commercial end-users,
independent power producers, co-generators, power marketers, energy
aggregators and power marketers. CPEX(TM) is still in its introductory stage,
however, and there can be no assurances that it will be commercially accepted
on a widespread basis. See "Risk Factors--Certain Risks Affecting CPEX(TM)."
COMPETITION
Natural Gas and Oil Activities and Natural Gas Marketing Activities
The oil and gas industry is highly competitive. The Company faces
competition both from major and independent oil and gas companies and from
numerous individuals in seeking to acquire producing properties, in obtaining
labor and equipment to conduct its operations, and in marketing. Many of these
competitors have financial and other resources substantially in excess of
those available to the Company.
Competitors of the Company in the natural gas marketing business include
other producers, natural gas pipelines and their affiliated marketing
companies, local gas distribution companies, independent marketers and
providers of alternate energy supplies. Increases in worldwide energy
production capability have brought about surpluses in energy supplies in
recent years. This, in turn, has resulted in substantial competition in
markets historically served by domestic natural gas from alternative sources
of energy, such as residual fuel oil, and among domestic natural gas
suppliers. Changes in government regulations relating to the production,
transportation and marketing of natural gas have also resulted in significant
changes in the historical marketing patterns of the industry. Generally, these
changes have resulted in the shifting of the focus of pipeline companies from
the regulated purchase of natural gas to the provision of transportation
services, the development by natural gas producers of their own marketing
programs to take advantage of new regulations requiring pipelines to transport
natural gas for regulated fees, and the emergence of various types of
marketing companies and other aggregators of natural gas supplies. As a
consequence, natural gas prices, which were once effectively determined by
government regulations, are now largely established by competition.
CPEX(TM)
Competition in electronic energy exchange networks is emerging. The
Company's principal competitors at this time come primarily from within the
electric industry or from the natural gas industry which was partially
deregulated several years ago. Nevertheless, the Company believes that the
size of the wholesale and retail energy markets, and the expected cost savings
resulting from less regulation, will likely cause numerous competitors to
develop their own electronic energy trading networks. Competitive networks are
being developed by companies with greater financial and other resources than
the Company. The Company believes its ability to compete successfully in this
business depends on a number of factors both within and outside its control,
including product pricing, quality and performance; success in developing new
products; effectiveness of sales
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and marketing resources and strategies; strategic relationships with other
energy management system vendors; timing of new product and service launchings
by the Company and its competitors; general market and economic conditions;
and government and regulatory authority actions. Further, some utilities may
still regard the effects of less regulation, with the resultant creation of
market economies, as a threat to their current market dominance. Accordingly,
these utilities may attempt to delay the implementation of regulatory changes,
which could diminish the benefits of certain of the Company's products and
services. In addition, utilities have formed regional and national reliability
councils whose main purpose is to monitor and control the interconnected
transmission grid. Through their actions, these councils could adopt rules to
circumvent or delay the introduction of competition or to otherwise diminish
the benefits of certain of the Company's products and services.
Power Marketing
Several hundred companies are competing today to serve the same markets that
the Company is serving, and the Company anticipates that numerous additional
companies will soon be competing with it. The number of power marketers that
currently have received FERC certification is approximately 200. A significant
number of these power marketers are backed by companies having greater
financial and other resources than the Company, including energy companies,
natural gas marketing companies, electric utilities and financial trading
companies.
REGULATION
General
The oil and gas industry is extensively regulated by federal, state and
local authorities. Legislation affecting the oil and gas industry is under
constant review for amendment or expansion. Numerous departments and agencies
have issued rules and regulations affecting the oil and gas industry and its
individual members, some of which carry substantial penalties for the failure
to comply. The regulatory burden on the oil and gas industry increases its
cost of doing business and, consequently, affects its profitability. Inasmuch
as such laws and regulations are frequently amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with such
regulations.
Exploration and Production
Exploration and production operations of the Company are subject to various
types of regulation at the federal, state and local levels. Such regulation
includes requiring drilling permits, requiring the maintenance of bonds in
order to drill or operate wells, and regulating the location of wells
(including limitation on the spacing and density of field development), the
method of drilling and casing wells, the surface use and restoration of
properties upon which wells are drilled, and the plugging and abandoning of
wells. The Company's operations are also subject to various conservation
regulations, including regulation of the size of drilling and spacing units or
proration units, the density of wells which may be drilled, and the
unitization or pooling of oil and gas properties. In this regard, some states,
including the states in which the Company operates, allow the forced pooling
or integration of lands and leases to facilitate exploration, while other
states rely on voluntary pooling of lands and leases. In addition, state
conservation laws establish maximum rates of production from oil and gas
wells, generally prohibit the venting or flaring of gas, and may impose
certain requirements regarding the ratability of production. The effect of
these regulations is to limit the amounts of crude oil and natural gas the
Company can produce from its wells and the number of wells or the locations at
which the Company can drill.
Oklahoma and Texas have adopted limits on natural gas production that
attempt to match production with market demand. In March 1992, Oklahoma
enacted legislation which places statewide limits on natural gas production.
The Oklahoma Corporation Commission sets production levels quarterly. The
production of natural gas from a single well is limited to the greater of a
specified Mcf per day or a percentage of the total daily production capacity
of the well. In April 1992, the Texas Railroad Commission (the "TRC"), which
is the state agency that regulates oil and gas production in Texas,
unanimously approved a new proration system that eliminated monthly purchaser
nominations as the starting point for determining reservoir market demand.
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Instead, the TRC relies upon certain information filed monthly by well
operators, in addition to using historical production data for each well
during the same month from the previous year, subject to certain adjustments,
to arrive at a production allowable. The Company cannot predict whether other
states will adopt similar regulations or legislation governing natural gas
production. However, the effect of such legislation and regulations may be to
decrease the allowable daily production and the revenues from natural gas
properties, including properties that produce both oil and natural gas. It is
also possible that such legislation and regulations may result in a decrease
in natural gas production in such states, which could exert upward pressure on
the price of natural gas.
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 exploration, development and production
operations of the Company. Both operators and non-operators may be liable for
obligations such as the proper plugging and abandoning of wells and
remediation of oil spills. The costs of compliance with such obligations, and
penalties for violations of environmental laws, can be substantial. The
Company is also subject to laws and regulations concerning occupational safety
and health. It is not anticipated that the Company will be required in the
near future to expend amounts that are material to its overall operations by
reason of environmental or occupational safety and health laws and
regulations, but because such laws and regulations are frequently changed, the
Company is unable to predict the ultimate costs of compliance.
Natural Gas Sales, Gathering and Transportation
Federal legislation and regulatory controls have historically affected the
price of the natural gas produced and sold by the Company and the manner in
which such production is marketed. Historically, the transportation and sale
for resale of natural gas in interstate commerce were regulated pursuant to
the Natural Gas Act of 1938 (the "NGA"), the Natural Gas Policy Act of 1978
(the "NGPA") and the regulations promulgated thereunder by the FERC. Since
1978, maximum selling prices of certain categories of natural gas sold in so-
called "first sales" (which include sales from the Company's own production),
whether sold in interstate or intrastate commerce, were regulated pursuant to
the NGPA. Pursuant to provisions of the NGPA and the Natural Gas Decontrol Act
of 1989, price and non-price controls were removed at various times with all
remaining controls for "first sales" lifted as of January 1, 1993.
In addition, in December 1992, the FERC issued Order 547, which is a blanket
certificate of public convenience and necessity pursuant to Section 7 of the
NGA and which authorizes any company which is not an interstate natural gas
pipeline or an affiliate thereof to make certain sales for resale in
interstate commerce that would otherwise be subject to the FERC's NGA
jurisdiction. The blanket certificate which covers the Company's non-first
sale marketing activities was effective January 7, 1993, and permits sales at
negotiated rates on an effectively deregulated basis.
The cumulative impact on the Company of the NGPA, the Natural Gas Wellhead
Decontrol Act and Order 547 is that none of the Company's natural gas sales
are subject to price regulation. Rather, the Company is able to obtain that
price contractually agreed upon with the purchaser. Under current market
conditions, natural gas prices under recently negotiated contracts tend to be
lower than most regulated price ceilings previously prescribed by the NGPA.
Historically, interstate pipeline companies generally acted as wholesale
merchants by purchasing natural gas from producers and reselling the natural
gas to local distribution companies and large end-users. Under the NGA and
NGPA, the transportation and sale of natural gas by interstate pipeline
companies have been subject to extensive regulation, and the construction of
new pipelines, the extension of existing pipelines and the commencement and
cessation of sales or transportation services by pipeline companies generally
have required prior FERC authorization.
Commencing in 1985, the FERC promulgated a series of orders and regulations
adopting changes that significantly altered the transportation and marketing
of natural gas. These changes were intended to foster competition in the
natural gas industry by, among other things, inducing or mandating that
interstate pipeline
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companies provide nondiscriminatory transportation services to producers,
distributors and other shippers (so-called "open access" requirements).
In April 1992 (and clarified in August 1992 and finalized in November 1992),
the FERC issued Order 636, a complex regulation which had a major impact on
natural gas pipeline operations, services and rates. Among other things, Order
636 required each interstate pipeline company to "unbundle" its traditional
wholesale services and create and make available on an open and
nondiscriminatory basis numerous constituent services (such as gathering
services, storage services, firm and interruptible transportation services,
and stand-by sales services) and to adopt a new rate making methodology to
determine appropriate rates for those services. To the extent the pipeline
company or its sales affiliate makes natural gas sales as a merchant in the
future, they must do so in direct competition with all other sellers pursuant
to private contracts; however, pipeline companies are not required to remain
"merchants" of natural gas. Most of the interstate pipeline companies have
transferred their sales activities to marketing affiliates and have become
transporters only. Order 636 and various pipeline filings to implement Order
636 are the subject of numerous appeals. The Company cannot predict whether
and to what extent judicial review will affect these matters.
As a result of Order 636, a number of interstate pipeline companies have (i)
"spun down" their gathering systems from regulated pipeline transportation
companies to unregulated affiliates, (ii) spun-off gathering systems to non-
related entities, and/or (iii) "refunctionalized" portions of their pipeline
facilities from transmission to gathering. A consequence of this divestiture
of gathering facilities could be separate, and higher, gathering fees.
With respect to oil pipeline rates subject to the FERC's jurisdiction, in
October 1993 the FERC issued Order 561 in order to fulfill the requirements of
Title XVIII of the Energy Policy Act of 1992. Order 561 establishes an
indexing system, effective January 1, 1995, under which oil pipelines will be
able to readily change their rates to track changes in the Producer Price
Index for Finished Goods (PPI-FG), minus one percent. This index will
establish ceiling levels for rates. Order 561 also permits cost-of-service
proceedings to establish just and reasonable rates for initial rates for new
service. Cost-of-service review may also be invoked when an oil pipeline
company claims it is significantly under-recovering its costs, or when
customers claim the pipeline's rates are excessive in relation to actual
costs. The order does not alter the right of a pipeline to seek FERC
authorization to charge market-based rates. However, until the FERC makes the
finding that the pipeline does not exercise significant market power, the
pipeline's rates cannot exceed the applicable index ceiling level or a level
justified by the pipeline's cost of service.
Environmental Matters
The Company's operations and properties are subject to extensive federal,
state and local laws and regulations relating to the generation, storage,
handling, emission, transportation and discharge of materials into the
environment. Permits are required for various of the Company's operations, and
these permits are subject to revocation, modification and renewal by issuing
authorities. Governmental authorities have the power to enforce compliance
with their regulations, and violations are subject to fines or injunctions, or
both. It is possible that increasingly strict requirements will be imposed by
environmental laws and enforcement policies thereunder. Based on the existing
regulatory structure, the Company does not anticipate that it will be required
in the near future to expend amounts that are material in relation to its
total capital expenditure program by reason of environmental laws and
regulations, but because such laws and regulations are frequently changed, the
Company is unable to predict the ultimate cost of such compliance.
Natural Gas Marketing Operations
Although the Company's natural gas marketing business is generally not
subject to federal or state regulation, many of the parties with whom the
Company does business (including interstate and intrastate pipeline, gathering
and storage companies, and local distribution companies) are subject to
federal and state regulation. As a result, changes in governmental regulations
may have an adverse impact on the Company's natural gas marketing business. In
addition, such parties may also file tariffs at the federal and/or state level
on
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<PAGE>
account of their regulated status, changes in which may have an adverse effect
on the Company's natural gas marketing business. Finally, because the
Company's natural gas marketing business is affiliated with a regulated
utility, it is possible that government regulation could directly or
indirectly adversely affect such a business.
CPEX(TM) and Power Marketing
Federal and state regulations currently prohibit open competition for retail
electric customers. CPEX(TM) can thus only be used by utilities and power
marketers in the wholesale electric market. The timing and direction of future
federal and state regulatory actions will likely impact the Company's power
marketing and electricity trading exchange operations. The Company has
designed CPEX(TM) and has plans for future system developments predicated on
its assumption that the development of increased regulatory freedom for
wholesale and, eventually retail, electricity users to choose among supply
sources and transmission paths. Federal and state legislation and decisions
that federal and various state regulators make about whether, when and how
retail competition may come about, and the terms and conditions under which
traditional utilities will be allowed to compete, will likely have a
significant bearing on the Company's ability to compete in this market.
Additionally, future changes in the regulation of power marketers and the
regulation of power marketing in general by the FERC or state authorities are
possible. The Company is essentially free to compete for wholesale electricity
customers across the United States, except for certain transactions involving
MidAmerican Energy. While there are no regulatory proceedings currently
pending or in the planning stages of which the Company is aware that would
further restrict the Company's ability to compete, there can be no assurance
that regulatory changes might not take place in the future that could
adversely impact the Company's ability to compete.
In April 1996, the FERC released Order Number 888 which establishes the
criteria by which the nation's public electric utilities must open their
transmission lines to wholesale competitors. Companion FERC Order Number 889
requires the same public utilities to establish electronic bulletin boards to
share information openly about available transmission capacity. The Company
believes the practical result of these orders will be to increase
significantly the volume of competitive wholesale electric power transactions
creating new business opportunities for power marketers.
OPERATIONAL HAZARDS AND INSURANCE
The operations of the Company are subject to all risks inherent in the
exploration for, and development and production of, natural gas and oil
(including natural hazards such as blowouts, cratering and fires) which could
result in damage or injury to, or destruction of, drilling rigs and equipment,
formations, producing facilities or other property, or could result in
personal injury, loss of life, pollution or other environmental damage. Any
such event could result in substantial cost to the Company which could have a
material adverse effect upon the financial condition of the Company in the
event it is not fully insured against such risk. Although the Company
maintains insurance coverage considered to be customary in the industry, it is
not fully insured against certain of these risks, either because such
insurance is not available or because of the high premium costs. There can be
no assurance that any insurance obtained by the Company will be adequate to
cover any losses or liabilities, or that such insurance will continue to be
available or available on terms which are acceptable to the Company. Although
such operational risks and hazards may to some extent be minimized, no
combination of experience, knowledge and scientific evaluation can eliminate
the risk of investment or assure a profit to any company engaged in oil and
gas operations.
TITLE TO PROPERTIES
The Company believes it has satisfactory title to all of its producing
natural gas and oil properties in accordance with standards generally accepted
in the oil and gas industry. The Company's properties are subject to customary
royalty interests, liens for current taxes and other burdens which the Company
believes do not materially interfere with the use of or affect the value of
such properties.
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EMPLOYEES
The Company had approximately 130 full-time employees as of April 30, 1996.
From time to time the Company uses the services of independent contractors for
various field and other services. Management believes that its relations with
its employees are excellent.
LEGAL PROCEEDINGS
On June 19, 1996, an action was brought by Nab Nat. Resources, L.L.C.
against several defendants, including InterCoast Oil and Gas, in the Second
Judicial District Court, Claiborne Parish, State of Louisiana, seeking a
declaration of the court that certain leases (the "Subject Leases") had
lapsed, in accordance with their terms, by reason of a cessation of production
of oil or gas in paying quantities that allegedly occurred prior to the mid-
1980's. The plaintiff also seeks, among other things, an accounting of the
production of oil, gas and other minerals from the properties covered by the
Subject Leases since their alleged lapse, damages of not less than $5,000,000
for restoration and clean up of the lands covered by the Subject Leases and
certain other unquantified damages for trespass and mental anguish. InterCoast
Oil and Gas acquired its interests in the Subject Leases only within the past
two years. Reserves attributable to the Company's wells located on the Subject
Leases represented approximately 1.1% of the Company's estimated net proved
reserves as of December 31, 1995, on a pro forma basis after taking into
account the Sawyer Canyon Acquisition.
InterCoast Oil and Gas is in the preliminary stages of investigating the
facts on which the lawsuit appear to be based. InterCoast Oil and Gas believes
that there has been commercial production from the Subject Leases in which it
owns an interest and that, consequently, those Subject Interests have not
terminated for cessation of production of oil or gas in paying quantities but
continue in effect. Further, based on the Company's preliminary
investigations, the claim of damages for restoration and clean up of certain
properties appears to relate to waterflooding activities that took place in
oil-producing horizons that are shallower than the portion of the Subject
Leases in which InterCoast Oil and Gas owns an interest. Thus, it appears that
the claim for restoration and clean up relates to the defendants in the
lawsuit that have owned or presently own interests in those shallower
waterflood properties. The balance of the other damages and relief sought by
the plaintiff appear only to apply in the event the plaintiff is successful in
its efforts to have the Subject Leases terminated.
While the Company cannot predict the outcome of this litigation, the Company
believes that an adverse judgment in this lawsuit would not have a material
adverse effect on its financial condition or results of operations. The
Company currently intends to continue its investigation of the lawsuit and to
defend the action vigorously.
The Company is a defendant in certain other legal proceedings that have
resulted from the ordinary conduct of its business. In the opinion of the
Company's management, none of these proceedings will have a material adverse
effect on the Company's financial condition or results of operations.
RELATIONSHIP BETWEEN THE COMPANY AND THE PARENT
OWNERSHIP OF STOCK
MidAmerican Energy, through its wholly owned subsidiary MidAmerican Capital,
currently owns 7,927,500 shares of Common Stock that were acquired on May 23,
1996, in exchange for the stock of the Company's operating subsidiaries valued
at $104.8 million as of March 31, 1996, consisting of aggregate retained
earnings of $18.7 million and aggregate cash capital contributions of $86.1
million. After the Offering, MidAmerican Capital will own 6,927,500 shares of
the Common Stock (or 5,855,000 shares if the Underwriters exercise their over-
allotment option in full) or approximately 49% (or 42% if the Underwriters
exercise their over-allotment option in full) of the outstanding shares of
Common Stock. Such concentration of ownership of Common Stock may have an
adverse effect on the market price of the Common Stock. As a result of such
stock ownership, MidAmerican Capital and MidAmerican Energy will in all
likelihood be able to elect all members of the Board of Directors and to
control the vote on matters submitted to the Board of Directors or
stockholders, including, without limitation, matters relating to the Company's
exploration, development, capital, operating and
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acquisition expenditure plans. It is contemplated that upon completion of the
Offering the Board of Directors will be comprised of seven members, five of
whom will be directors or current or former officers of MidAmerican Energy,
MidAmerican Capital or the Company.
CONTRACTUAL ARRANGEMENTS
In connection with the Offering, the Company and MidAmerican Capital will
enter into a number of agreements for the purpose of defining the ongoing
relationship between them. These agreements will not be the result of arm's
length negotiations between independent parties. The Company intends that all
future transactions between the Company, MidAmerican Capital and other
affiliates will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties. Because of its affiliate status, the
Company is restricted from entering into certain agreements with MidAmerican
Energy without regulatory approval.
The discussion below includes summaries of the material provisions of
certain of the contractual arrangements between MidAmerican Capital and the
Company. These summaries do not purport to be complete. Reference is made to
the provisions of, and such summaries are qualified in their entirety by
reference to, such agreements, which are filed as exhibits to the Registration
Statement of which this Prospectus is a part.
Registration Rights Agreement. In connection with the Offering, the Company
and MidAmerican Capital will enter into a Registration Rights Agreement (the
"Registration Rights Agreement"), which, among other things, provides that
upon the request of MidAmerican Capital, the Company will register under the
Securities Act any of the shares of Common Stock then held by MidAmerican
Capital, for sale in accordance with MidAmerican Capital's intended method of
disposition thereof (a "Demand Registration"). MidAmerican Capital will have
the right to request two Demand Registrations. The Company will have the right
under certain circumstances to delay the filing of a Demand Registration, or
if a shelf registration statement is then effective, to postpone the sale of
shares of Common Stock under such registration statement, for up to 90 days.
MidAmerican Capital also will have "piggy-back" registration rights to include
the shares of Common Stock then held by it in certain other registrations of
Common Stock. MidAmerican Capital will be required to pay its pro rata share
of all costs and expenses in connection with each registration of its shares
of Common Stock. Under the Registration Rights Agreement, MidAmerican Capital
cannot exercise a Demand Registration for at least six months after completion
of the Offering.
Tax Sharing Agreement. For federal income tax purposes, the Company has been
included in the affiliated group of which MidAmerican Energy is the parent
corporation (the "Tax Group"). The Company has also been included in certain
state and local tax returns of MidAmerican Energy or its subsidiaries. The
consolidated income tax payable (or receivable) has historically been
allocated among the Company and other members of the Tax Group based on the
respective contributions to the consolidated taxable income and tax credits of
the Tax Group. The Company has received (or made) payments for the income tax
reductions (or increases) contributed to the Tax Group. In connection with the
Offering, the Company and MidAmerican Capital will enter into a Tax Sharing
Agreement (the "Tax Sharing Agreement") which provides for the allocation of
payments of taxes for periods during which the Company is included in the Tax
Group. The Tax Sharing Agreement will also provide for the allocation of
responsibility for filing of tax returns and other related matters. As a
result of the Offering, the Company will no longer be included in the Tax
Group.
Administrative Services Agreement. In connection with the Offering, the
Company and MidAmerican Capital will enter into an Administrative Services
Agreement (the "Administrative Services Agreement"), under which MidAmerican
Capital may provide or procure from other MidAmerican Capital subsidiaries
certain administrative services. The services which will be included under the
Administrative Services Agreement and which may be provided to the Company
include the use of office facilities and equipment, airplanes, vehicles and
personal services by executives, management, professional and technical
employees, as well as accounting, tax, legal, information processing,
financial/treasury, risk management, insurance, fuel supply, transportation
and other administrative services. The Administrative Services Agreement will
be reciprocal in that it also provides that the Company may provide or procure
similar administrative services for MidAmerican Capital.
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MidAmerican Capital has a reciprocal administrative services agreement with
MidAmerican Energy for services similar to those provided under the
Administrative Services Agreement. Under the Administrative Services Agreement,
either party will be able to terminate all or particular services upon 50 days'
prior written notice to the other and each party to the Administrative Services
Agreement will agree to indemnify the other party for damages caused by its
gross negligence or willful misconduct. The charges for the personal services
will be based on the direct and indirect labor costs attributable to the
provision of such services and the office and equipment rental charges will be
set based upon cost and value studies, or, in both cases, at rates mutually
agreed upon by the parties.
Upon completion of the Offering, it is intended that the Company and
MidAmerican Energy will participate as separate employers in a "multiple
employer" plan under Section 401(k) of the Code. In addition, it is anticipated
that the Company will be a participating employer in various health and welfare
(e.g., medical, disability, dental and life insurance) benefit plans
administered by MidAmerican Energy. The Company is charged the costs of such
administration pursuant to the Administrative Services Agreement. The Company
currently intends to establish its own 401(k) plan and health and welfare
benefits plans in the future.
Indemnification Agreement. In connection with the Offering, the Company and
MidAmerican Capital will enter into an Indemnification Agreement (the
"Indemnification Agreement") whereby the Company will indemnify MidAmerican
Capital and its affiliates against certain losses, claims, damages and
liabilities, including those arising out of: (i) the conduct by the Company of
its businesses prior to and after the Offering, (ii) employment and employee
benefit matters arising from the corporate restructuring of MidAmerican
Capital, and (iii) the Offering. In addition, the Indemnification Agreement
will provide for the assignment by MidAmerican Capital and the assumption by
the Company of certain contracts relating to the Company's business and for the
indemnification of MidAmerican Capital by the Company for claims and
liabilities relating to those contracts.
Sublease Agreement. Also in connection with the Offering, the Company will
enter into two Sublease Agreements pursuant to which the Company will sublease
office space in Des Moines, Iowa and Dallas, Texas from MidAmerican Capital and
one of its wholly owned subsidiaries, respectively, and rent and related
expenses will be allocated between the parties based on the amount of space
utilized. The agreements will provide for termination upon the earlier of
expiration of the underlying sublease or lease or 90 days after either party
notifies the other of its desire to terminate the subleasing arrangement. Any
such 90-day termination notice cannot be given prior to September 30, 1996,
with respect to the office space in Des Moines, Iowa.
POTENTIAL CONFLICTS OF INTEREST
The relationship between the Company and MidAmerican Capital and its other
affiliates may give rise to conflicts of interest with respect to, among other
things, transactions and agreements among the Company and MidAmerican Capital
and its other affiliates, potential competitive business activities and
business opportunities, issuances of additional shares of voting securities,
the election of directors or the payment of dividends, if any, by the Company
or the exercise by MidAmerican Capital of its ability to control the management
and affairs of the Company. There can be no assurance that conflicts will be
resolved in favor of the Company. There are no contractual or other
restrictions on the ability of MidAmerican Capital or its other affiliates to
engage in oil and gas exploration and production, natural gas marketing or
electric wholesale power marketing or the operation of an electric power
trading exchange. The Company and MidAmerican Capital and its other affiliates
presently compete to a certain extent in energy marketing, and other
circumstances could arise in which the Company and MidAmerican Capital or its
other affiliates would engage in activities in competition with one another.
One of MidAmerican Capital's other wholly owned subsidiaries is presently
engaged in the business of retail marketing of natural gas.
The Company and MidAmerican Capital or its other affiliates may enter into
transactions and agreements in the future in addition to those described above
under "--Contractual Arrangements." The Board of Directors will utilize
procedures in evaluating the terms and provisions of any material transactions
between the Company and MidAmerican Capital or its other affiliates as the
Board of Directors may deem appropriate in light of its
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fiduciary duties under state law. The Company intends that all future
transactions and agreements between the Company and MidAmerican Capital or its
other affiliates will be at least as favorable to the Company as could be
obtained from third parties.
Directors and executive officers of the Company who are also directors or
executive officers of MidAmerican Energy or MidAmerican Capital may have
conflicts of interest with respect to matters potentially or actually
involving or affecting the Company, including acquisitions, financings and
other corporate opportunities that may be suitable for the Company and
MidAmerican Energy or MidAmerican Capital. To the extent such conflicts arise,
such directors and executive officers may consult with their legal advisors
and make a determination after consideration of a number of factors, including
whether such opportunity is presented to any such director or executive
officer in his or her capacity as a director or officer of the Company,
whether such opportunity is within the Company's line of business or
consistent with its strategic objectives and whether the Company will be able
to undertake or benefit from such opportunity. In addition, determinations may
be made by the Board of Directors, when appropriate, by a vote of
disinterested directors. See "Risk Factors--Principal Stockholder."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information about each of the persons that will
serve as directors and executive officers of the Company upon completion of
the Offering. The Company will have a total of seven directors, including two
who are not affiliated with the Company, MidAmerican Energy or MidAmerican
Capital. Directors will hold office for one-year terms and will be elected at
each annual meeting of the stockholders of the Company. The Company's
executive officers serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Donald C. Heppermann..... 53 Chairman and Chief Executive Officer of the
Company, Director
William E. Warnock, Jr... 43 President of the Company and President and
Chief Executive Officer of InterCoast Oil
and Gas, Director
Russell E. Christiansen.. 61 Director
Stanley J. Bright........ 56 Director
John A. Rasmussen, Jr.... 50 Director
Dr. George G. Daly....... 55 Director
Robert C. Thomas......... 67 Director
Norman R. Foreman........ 58 President and Chief Executive Officer of
Continental Power Exchange
Senior Vice President-Energy Marketing of
Lon P. Compton........... 52 the Company
Daniel E. Lonergan....... 39 Vice President-Finance, Controller and
Treasurer of the Company
Gene C. Daley............ 46 Senior Vice President-Exploration and
Development of InterCoast Oil and Gas
J. Chris Jacobsen........ 41 Senior Vice President-Reserves and
Production of InterCoast Oil and Gas
Brian L. Cantrell........ 36 Vice President-Finance, Secretary and
Treasurer of InterCoast Oil and Gas
John P. Stojka........... 51 Senior Vice President and Chief Operating
Officer of Continental Power Exchange
</TABLE>
Donald C. Heppermann serves as Chairman and Chief Executive Officer and is
currently sole Director of the Company. Mr. Heppermann joined the Company in
1990 and served as its President and Chief Operating Officer from 1990 to
1996. Prior to joining the Company, he was Vice President and Treasurer of
Pinnacle West Capital Corp. (the holding company of Arizona Public Service
Company), Phoenix, Arizona. Prior to joining Pinnacle West, he was Vice
President-Finance and Administration for the pipeline group of Enron Corp.,
Houston, Texas, and had earlier served in other capacities with a predecessor
of Enron, InterNorth Inc., Omaha, Nebraska. Mr. Heppermann holds a Bachelor of
Science degree in Accounting from the University of Missouri and an M.B.A.
from Creighton University.
William E. Warnock, Jr. is the President and, upon completion of the
Offering, will become a Director of the Company and he also serves as
President and Chief Executive Officer of InterCoast Oil and Gas. Mr. Warnock
joined InterCoast Oil and Gas in 1992 as its President and Chief Operating
Officer. Prior to joining InterCoast Oil and Gas, Mr. Warnock co-founded
Medallion Petroleum, Inc. in 1985 and served as its President. Prior to
founding Medallion Petroleum, Inc., Mr. Warnock was Senior Vice President of
Oil and Gas Operations with Crystal Oil Company. Prior to that time, he was
Reservoir Engineering Manager of the Offshore Division with
58
<PAGE>
Exxon Company U.S.A. Mr. Warnock graduated magna cum laude from Auburn
University with a Bachelor of Science in Civil Engineering, and he is a
registered professional engineer in both petroleum and civil engineering. Mr.
Warnock is a member of the Young President's Organization and a regional
director of the Independent Petroleum Association of America (and on its
Natural Gas Committee); he is also a charter member of U.S. Representative
Steve Largent's Energy Roundtable and a member of Energy Advocates of America,
the Society of Petroleum Engineers and the Oklahoma Independent Petroleum
Association.
Russell E. Christiansen will become a Director of the Company upon
completion of the Offering. Mr. Christiansen is Chairman and a Director of
MidAmerican Energy. Mr. Christiansen was Chairman, President and Chief
Executive Officer of Midwest Resources Inc. ("Midwest Resources") and its
utility and non-utility operations, a predecessor of MidAmerican Energy, from
October 1992 to June 1995. Mr. Christiansen earned his Bachelor of Science
degree in engineering from South Dakota State University in Brookings and is a
graduate of Edison Electric Institute's Executive Graduate School. Mr.
Christiansen joined Midwest Resources in 1959 as an engineer. Mr. Christiansen
is a past director and executive committee member of Edison Electric
Institute. He serves on the Board of Directors of Des Moines Development
Corp., Norwest Bank Iowa, N.A., Greater Des Moines Committee, Iowa Association
of Business & Industry, Siouxland Foundation and Greater Siouxland, Inc. He is
past president of the North Central Electric Association and past chairman of
the Iowa Nature Conservancy.
Stanley J. Bright will become a Director of the Company upon completion of
the Offering. Mr. Bright is President, Chief Executive Officer and a Director
of MidAmerican Energy, and is a Director of Utilx Corporation. He was
Chairman, President and Chief Executive Officer of Iowa-Illinois Gas and
Electric Company ("Iowa-Illinois"), a predecessor of MidAmerican Energy. Mr.
Bright joined Iowa-Illinois in September 1986 as Vice President-Finance and
Chief Financial Officer. He was elected President and a Director of Iowa-
Illinois Investment Co. (a predecessor of MidAmerican Capital) upon that
company's formation in June 1987. Mr. Bright was elected President and Chief
Operating Officer of Iowa-Illinois in April 1990 and assumed the additional
positions of Chairman and Chief Executive Officer in May 1991. Previously, Mr.
Bright was a financial officer of Potomac Electric Power Company ("PEPCO"),
Washington, D.C. He was also President and a Director of Potomac Capital
Investment Corporation, a wholly owned subsidiary of PEPCO. Prior to joining
PEPCO, Mr. Bright was associated with Price Waterhouse. He is a graduate of
George Washington University and is a certified public accountant.
John A. Rasmussen, Jr. will become a Director of the Company upon completion
of the Offering. Mr. Rasmussen serves as Group Vice President and General
Counsel of MidAmerican Energy. Mr. Rasmussen was Group Vice President, Midwest
Capital Group, Inc., a subsidiary of Midwest Resources, from 1992 to 1995 and
Vice President and General Counsel of Midwest Resources from 1989 to 1995. Mr.
Rasmussen joined Midwest Resources in 1987 as Associate General Counsel.
Previously, he was Vice President and General Counsel at Enron Oil & Gas
Company, a subsidiary of Enron Corp., and held positions with Enron Corp.
predecessors, InterNorth Inc. and Northern Natural Gas. Mr. Rasmussen has a
Bachelor of Arts degree and Doctor of Jurisprudence from the University of
Nebraska.
Dr. George G. Daly will become a Director of the Company upon completion of
the Offering. Dr. Daly is Dean and Professor of Economics and Management at
the Leonard N. Stern School of Business, New York University. Prior to joining
NYU in 1993, he served for ten years as the Dean of the University of Iowa's
School of Business. He has served as an Assistant Director at the Institute
for Defense Analyses in Washington, D.C., and Chief Economist at the Office of
Energy Research and Development in the White House. He received an A.B. from
Miami University in Ohio and both his M.A. and Ph.D. from Northwestern
University.
Robert C. Thomas will become a Director of the Company upon completion of
the Offering. Mr. Thomas served as Chairman and Chief Executive Officer of
Tenneco Gas from 1990 until his retirement in 1994. During that time, he had
executive responsibility for all of Tenneco Inc.'s gas pipeline companies and
natural gas liquids, methanol and MTBE interests. He joined Tenneco in 1956
and held successively higher management positions in Tenneco's exploration and
production and natural gas operations. He is a past board member of the
Interstate Natural Gas Association of America, American Gas Association, Gas
Research Institute, and Institute of Gas
59
<PAGE>
Technology. He is currently serving as Chairman of the Board of The Sarkeys
Energy Center at the University of Oklahoma, as a Vice President of the
International Association of LNG Importers and as a Senior Associate of
Cambridge Energy Research Associates. He is a graduate of the University of
Oklahoma with a Bachelor of Science degree in Geological Engineering.
Norman R. Foreman is President and Chief Executive Officer of Continental
Power Exchange. Mr. Foreman joined the Company in 1992 as Executive Vice
President-Corporate Development and has served as the President of its energy
services group since 1994. Prior to joining the Company, Mr. Foreman served as
Vice President, Industries Group of Midwest Resources from 1991 to 1992 and
held several other senior executive positions at Midwest Resources. Prior to
joining Midwest Resources, he was Vice President and General Manager-Enron
Liquids Marketing at Enron Corp., Houston, Texas, and had earlier served in
other executive capacities with a predecessor of Enron, InterNorth Inc.,
Omaha, Nebraska. Mr. Foreman holds a business organization and management
degree from the University of Nebraska.
Lon P. Compton is the Company's Senior Vice President-Energy Marketing. Mr.
Compton joined AmGas Inc., a subsidiary of MidAmerican Capital, in September
1995 as its Director of Sales and Business Development and was made its Vice
President and General Manager in April 1996. Prior to joining AmGas Inc., he
had been President and Chief Operating Officer of Consolidated Fuel
Corporation, a natural gas marketing company, from 1989 to September 1995. Mr.
Compton also served as Executive Vice President of Sunrise Energy Company, a
natural gas marketing company, from 1991 to 1994 and as its President and
Chief Operating Officer from October 1994 to September 1995. Sunrise Energy
Company filed for protection under the federal bankruptcy laws in October
1994. Prior to joining Consolidated Fuel Corporation, he was President and
Chief Operating Officer of NAGASCO, Inc., a natural gas marketing and
gathering company. He has also held natural gas marketing, gathering and
supply management positions with Lear Petroleum Corporation (Producers Gas
Company), Tennessee Gas Pipeline Company and Valero Energy Company. He
graduated with a degree in economics and finance from the University of
Houston.
Daniel E. Lonergan is Vice President-Finance, Controller and Treasurer of
the Company. Mr. Lonergan joined the Company in 1987 and held a variety of
positions prior to his appointment to Treasurer and General Manager Finance in
1991. He was appointed Vice President-Finance and Controller in 1993. Mr.
Lonergan joined Iowa-Illinois in 1984. Mr. Lonergan is a graduate of the
University of Iowa with Bachelor of Arts and M.B.A. degrees.
Gene C. Daley has served as Senior Vice President-Exploration and
Development of InterCoast Oil and Gas since 1993. Mr. Daley had previously
served as Executive Vice President-Oil & Gas Operations of InterCoast Oil and
Gas since 1993 and as Vice President and General Manager Oil & Gas since 1991.
His association with the Company began with the acquisition of Carter
Resources, Inc., where Mr. Daley served as President from the inception of
that company until its acquisition in 1991, a period of 16 years. Prior to
that, Mr. Daley was an offshore exploration geologist for Texaco, Inc. Mr.
Daley graduated from South Dakota School of Mines and Technology with a
Bachelor of Science degree in Geological Engineering. He is a member of the
Oklahoma Independent Petroleum Association.
J. Chris Jacobsen has served as Senior Vice President-Reserves and
Production of InterCoast Oil and Gas since 1995 and had been its Vice
President--Reserves and Production since 1994. Mr. Jacobsen had formerly been
a Senior Vice President of Netherland, Sewell & Associates, Inc. since 1989,
where he performed field and well reserve analyses for over 12 years. In
addition, Mr. Jacobsen had been involved through Netherland, Sewell in the
supervision and management of Hamon Operating Company's oil and gas operations
for five years. Mr. Jacobsen has 19 years of experience in petroleum
engineering. His career commenced in 1977 with Exxon Company U.S.A., where he
held various engineering and supervisory assignments for five years. Mr.
Jacobsen graduated from Rose-Hulman Institute of Technology with a Bachelor of
Science degree in Chemical Engineering. He is a registered professional
engineer in petroleum engineering and is a member of the Oklahoma Independent
Petroleum Association.
Brian L. Cantrell serves as Vice President-Finance, Secretary and Treasurer
of InterCoast Oil and Gas. Prior to his association with InterCoast Oil and
Gas in 1992, Mr. Cantrell had been Vice President of Medallion
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<PAGE>
Petroleum, Inc. since 1985. Prior to that time, Mr. Cantrell was associated
with Peat, Marwick, Mitchell and Company. Mr. Cantrell is a certified public
accountant and graduated with honors from the University of Oklahoma earning a
Bachelor of Accountancy degree and a Masters Degree in Accountancy (Taxation).
He is a member of the American Institute of Certified Public Accountants, the
Oklahoma Society of Certified Public Accountants and the Oklahoma Independent
Petroleum Association.
John P. Stojka is Senior Vice President and Chief Operating Officer of
Continental Power Exchange. Mr. Stojka joined Continental Power Exchange as
its Vice President and General Manager in 1994. Prior to joining the Company,
Mr. Stojka was Director-Business Development with Electronic Data Systems from
1992 to 1994 and was Director, Consulting of Energy Management Associates,
Inc. from 1989 to 1991. Prior to that time he held several positions with
Niagara Mohawk Power Corporation. Mr. Stojka holds a Bachelor of Science in
electrical engineering from Clarkson University and an M.B.A. from Syracuse
University.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Bylaws provide that the Board of Directors may elect such
directorate committees as it may from time to time determine. Two committees
of the Board of Directors are expected to be established: the Audit Committee
and the Compensation Committee. It is expected that Dr. George G. Daly and
Robert C. Thomas will be the only members of these committees.
COMPENSATION OF DIRECTORS
Each Director of the Company is reimbursed for expenses incurred in
attending meetings of the Board of Directors and meetings of committees of the
Board of Directors. Each Director is paid $12,000 annually, and each Director
that is not an employee of the Company, MidAmerican Energy or one of their
affiliates receives $750 for each meeting of the Board of Directors or
committee thereof attended by the Director in person and $400 for each such
meeting attended by telephone and also receives Common Stock under the
Company's Non-Employee Director Restricted Stock Plan. See "--Director Stock
Plan."
61
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the
compensation of, and the grant of options to purchase shares of common stock
of MidAmerican Energy to, the Company's chief executive officer and for each
of its four other most highly compensated executive officers (the "named
executive officers") during fiscal 1995.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------
AWARDS PAYOUTS
--------------------- ---------
SECURITIES
RESTRICTED UNDERLYING LONG-TERM
OTHER ANNUAL STOCK OPTIONS/ INCENTIVE ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION ($) ($) ($) (1)(2) ($) (#) ($) ($) (3)
------------------ ------- ------ ------------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Donald C. Heppermann.... 213,208 46,125 61,775 81,302 60,000 -- 5,930
Chairman and Chief
Executive Officer
William E. Warnock,
Jr. ................... 158,000 39,067 0 -- -- -- 5,023
President
Norman R. Foreman....... 147,750 30,015 20,211 -- -- -- 4,955
President and Chief
Executive Officer of
Continental Power
Exchange
John P. Stojka.......... 160,625 15,000 3,717 -- -- -- 3,284
Senior Vice President
and Chief Operating
Officer of Continental
Power Exchange
J. Chris Jacobsen....... 131,875 13,350 21,852 -- -- -- --
Senior Vice President--
Reserves and Production
of InterCoast Oil and
Gas
</TABLE>
- --------
(1) Does not include the value of perquisites and other personal benefits
because the aggregate amount of such compensation, if any, does not exceed
the lesser of $50,000 or 10 percent of the total amount of annual salary
and bonus for the named executive officers.
(2) Consists of (i) compensation provided by MidAmerican Capital's employee
relocation policy and reimbursement for income taxes, if any, paid in
connection with the executive's relocation of $61,775, $20,211 and $21,852
to Messrs. Heppermann, Foreman and Jacobsen, respectively, and (ii) a
reimbursement payment of $3,717 to Mr. Stojka pursuant to his employment
arrangement with the Company.
(3) Amounts consist of matching contributions by the Company to the Company's
401(k) Plan.
62
<PAGE>
The following table sets forth information concerning stock option grants to
named executive officers to purchase shares of MidAmerican Energy's common
stock.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ---------------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED TO EXERCISE GRANT DATE
OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT VALUE
NAME GRANTED(#) FISCAL YEAR (1) ($/SHARE) DATE (2) ($) (3)
---- ---------- ------------------ --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Donald C. Heppermann.... 60,000 8% 14.50 7/26/05 94,800
William E. Warnock,
Jr..................... 0 -- -- -- --
Norman R. Foreman....... 0 -- -- -- --
John P. Stojka.......... 0 -- -- -- --
J. Chris Jacobsen....... 0 -- -- -- --
</TABLE>
- --------
(1) Represents percentage of total options to purchase shares of MidAmerican
Energy common stock granted to all employees of MidAmerican Energy,
including employees of the Company.
(2) During the exercise period the recipient of the option grant may exercise
25% of the total options granted after one year from the date of the
grant, 50% after two years from the date of the grant, 75% after three
years from the date of the grant and all of the options after four years
from the date of the grant. Options become fully exercisable in the event
of termination of employment with the Company by reason of disability,
retirement at age 55 and after five years of service with the Company,
death or a change in control as defined in the plan.
(3) The Black-Scholes Option Pricing Model was used to determine the grant
date present value of the stock options granted in 1995 by MidAmerican
Energy to the named executive officers. Under the Black-Scholes Option
Pricing Model, the grant date present value of the stock options referred
to in the table was $1.58.
The ultimate values of the options will depend on the future market price of
MidAmerican Energy's common stock, which cannot be forecast with reasonable
accuracy. The actual value, if any, an optionholder will realize upon exercise
of an option will depend on the excess of the market price of MidAmerican
Energy's common stock over the exercise price on the date the option is
exercised.
The material assumptions and adjustments incorporated in the model in
estimating the value of the options include the following:
--An exercise price of the option of $14.50, equal to the fair market value
of the underlying stock on the date of the grant.
--An option term of ten years.
--An interest rate of 6.28% that represents the interest rate on a U.S.
Treasury security on the date of the grant with a maturity date
corresponding to that of the option term.
--Volatility of 23% calculated using daily stock prices, including
predecessor companies, for the six month period prior to the grant date.
--Dividends at the rate of $1.20 per share representing the annualized
dividends paid with respect to a share of MidAmerican Energy common stock
at the date of the grant.
63
<PAGE>
The following table sets forth information concerning year end option values
of options to purchase shares of MidAmerican Energy common stock held by the
named executive officers.
FISCAL YEAR END OPTIONS VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT DECEMBER 31, 1995 DECEMBER 31, 1995 (1)
-------------------- ---------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
---- -------------------- ---------------------
<S> <C> <C>
Donald C. Heppermann................. 0/60,000 0/$135,000
William E. Warnock, Jr. ............. 0/0 N/A
Norman R. Foreman.................... 0/0 N/A
John P. Stojka....................... 0/0 N/A
J. Chris Jacobsen.................... 0/0 N/A
</TABLE>
- --------
(1) Based on the closing price of MidAmerican Energy's common stock at
December 31, 1995 of $16.75 per share.
No options were exercised during 1995.
The following table sets forth information concerning the awards of
restricted shares of common stock of MidAmerican Energy to named executive
officers in 1995.
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SHARES, PERFORMANCE OR OTHER
UNITS OR OTHER PERIOD UNTIL
NAME RIGHTS(#) (1) MATURATION OR PAYOUT
---- ----------------- --------------------
<S> <C> <C>
Donald C. Heppermann.................... 5,607 6/30/98
William E. Warnock, Jr.................. 0 N/A
Norman R. Foreman....................... 0 N/A
John P. Stojka.......................... 0 N/A
J. Chris Jacobsen....................... 0 N/A
</TABLE>
- --------
(1) The restricted stock awards shown in the foregoing table were made
pursuant to the MidAmerican Energy Company 1995 Long-Term Incentive Plan.
Such awards consist of restricted shares of common stock of MidAmerican
Energy and are subject to the achievement by MidAmerican Energy of
specific performance measures during a three-year performance period
ending June 30, 1998. During this performance period, the holder of the
restricted stock will be entitled to receive the dividends on the
restricted stock and vote the stock; however, the stock will not be vested
until the achievement of the performance measures. The restrictions will
lapse, however, in the event of termination of employment with MidAmerican
Energy by reason of retirement, disability, death or a change in control
as defined in the plan.
RETIREMENT PLANS
MidAmerican Energy maintains an unfunded Supplemental Retirement Plan
("Supplemental Plan") for certain designated officers of MidAmerican Energy,
including certain officers of the Company, to provide additional retirement
benefits to designated participants, as determined by the Board of Directors
of MidAmerican Energy. Messrs. Heppermann, Warnock, and Foreman participated
in the Supplemental Plan in fiscal 1995. The Supplemental Plan provides
retirement benefits up to sixty-five percent of a participant's Total Cash
Compensation in effect immediately prior to retirement. "Total Cash
Compensation" means the highest amount payable to a participant as annual base
salary during the five years immediately prior to retirement plus the average
of the participant's last three years' awards under an annual incentive bonus
program. Participants must be credited with five years service in order to be
eligible to receive benefits under the Supplemental Plan. A participant who
elects early retirement is entitled to reduced benefits under the Supplemental
Plan.
64
<PAGE>
The supplemental retirement benefit will be reduced by the amount of the
participant's regular retirement benefit under the Iowa-Illinois Gas and
Electric Company Pension Plan ("Iowa-Illinois Pension Plan") and by benefits
under the Iowa-Illinois Gas and Electric Company Supplemental Retirement Plan.
The Iowa-Illinois Pension Plan provides for the payment of fixed pension
benefits upon retirement determined under a formula based on the eligibility
date of the employee, age at retirement, final average compensation and years
of credited service. Final average compensation is determined by the highest
sixty consecutive months of compensation during the ten years prior to
retirement.
A survivor benefit is payable to a surviving spouse under the Supplemental
Plan. Benefits from the Supplemental Plan will be paid out of general
corporate funds. Deferred compensation is considered part of the salary
covered by the Supplemental Plan.
The table below shows the estimated aggregate annual benefits payable under
the Supplemental Plan and the Iowa-Illinois Pension Plan. The amounts exclude
Social Security and are based on a straight life annuity and retirement at
ages 55, 60 and 65. Federal law limits the amount of benefits payable to an
individual through the tax qualified defined benefit plans, and benefits
exceeding such limitation are payable under the Supplemental Plan.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFIT
------------------------------------------------------------------
TOTAL CASH AGE AT RETIREMENT
COMPENSATION AT ------------------------------------------------------------------
RETIREMENT 55 60 65
--------------- -------- -------- --------
<S> <C> <C> <C>
$100,000 $ 55,000 $ 60,000 $ 65,000
150,000 82,500 90,000 97,500
200,000 110,000 120,000 130,000
250,000 137,500 150,000 162,500
300,000 165,000 180,000 195,000
350,000 192,500 210,000 227,500
400,000 220,000 240,000 260,000
450,000 247,500 270,000 292,500
500,000 275,000 300,000 325,000
</TABLE>
Upon completion of the Offering, it is contemplated that the Company will
implement an unfunded supplemental retirement plan for certain designated
officers which will be substantially identical to the Supplemental Plan. Any
supplemental retirement benefit under the Company's supplemental retirement
plan will be reduced by a participant's retirement benefit under any
retirement plan maintained by MidAmerican Energy.
Compensation Committee Interlocks and Insider Participation. For fiscal
1995, all compensation decisions with respect to executive officers of the
Company were made by the Compensation Committee of the Board of Directors of
MidAmerican Capital. Stanley J. Bright, Russell E. Christiansen, Lance E.
Cooper and John A. Rasmussen, Jr., each an executive officer of MidAmerican
Energy, served as members of the Compensation Committee during 1995. See
"Relationship Between the Company and the Parent" and "Certain Transactions."
Messrs. Bright, Christiansen and Rasmussen are also directors of the Company.
See "--Directors and Executive Officers."
LONG-TERM INCENTIVE STOCK PLAN
The Board of Directors and MidAmerican Capital, the sole stockholder of the
Company, have approved the InterCoast Energy Company Long Term Incentive Plan
(the "Stock Plan"). The Stock Plan will become effective upon, and only in the
event of, consummation of the Offering. A copy of the Stock Plan has been
filed
65
<PAGE>
as an exhibit to the registration statement of which this Prospectus is a
part, and the following summary is qualified in its entirety by reference to
the text of the Stock Plan.
That number of shares of Common Stock which equals 10% of the number of such
shares issued and outstanding immediately after the closing of the Offering
have been reserved for issuance upon exercise of options granted under the
Stock Plan. The Board of Directors may use authorized but unissued shares of
the Common Stock or shares held in the treasury of the Company for the
exercise of options. The Stock Plan is not subject to the provisions of the
Employee Retirement Income Security Act of 1974 and the options granted
thereunder are not and will not be "incentive stock options," as such term is
defined at Section 422 of the Code.
Administration. The Stock Plan will be administered by the Compensation
Committee of the Board of Directors (the "Committee"), the composition of
which shall, unless otherwise determined by the Board of Directors, at all
times satisfy the provisions of Rule 16b-3 of the Securities Exchange Act of
1934, as from time to time in effect, and Section 162(m) of the Code. The
Committee has the authority, in its discretion, to select the eligible
employees to whom options shall be granted and the number of shares of Common
Stock covered by such options. The Committee has the power to construe and
interpret the Stock Plan and to establish and amend rules and regulations for
its administration subject to the express provisions of the Stock Plan. Any
determination by the Committee is final and binding upon all persons.
Eligible Employees. Any key employee of the Company, or a subsidiary of the
Company, is eligible for selection by the Committee as an optionee under the
Stock Plan.
Purchase Price. The purchase price of a share of Common Stock under each
option granted under the Stock Plan shall be no less than the fair market
value of a share of Common Stock on the date of grant.
Vesting of Rights to Exercise Option. Each option granted under the Stock
Plan will become exercisable in full or in installments as determined by the
Committee at the time of the grant. The Committee has the power to accelerate
the vesting of any option for which vesting requirements are established.
Vesting will accelerate automatically upon the occurrence of certain events.
Subject to any vesting provisions and to termination of employment, each
option may be exercised at any time, or from time to time, during the option
period of 10 years, as to all or any part of the shares of Common Stock
covered thereby.
Method of Exercise. Each option granted may be exercised, at the optionee's
election, by: (i) cash payment of the full amount of the exercise price, (ii)
through the delivery of shares of Common Stock held by the optionee for at
least six months and having a fair market value equal to the full amount of
the exercise price, (iii) by the withholding by the Company from the shares of
Common Stock upon any exercise of the option that number of shares having a
fair market value equal to the full amount of the exercise price pursuant to a
written election delivered to the Committee at least six months prior to the
date of exercise, or (iv) by a combination of such methods. The optionee will
be required to pay to the Company for remittance an amount necessary to
satisfy federal, state and local income taxes incurred by reason of exercise,
or at the optionee's election, shares having a fair market value equal to the
amount of such income taxes may be withheld by the Company. No fractional
shares of Common Stock will be issued upon the exercise of options.
Effect of Termination of Employment. If, during the option period, the
optionee's employment with the Company or one of its subsidiaries terminates
other than for cause or by reason of the optionee's death, disability or
retirement in accordance with the terms of a Company retirement plan, the
option may thereafter be exercised only to the extent it was exercisable at
the time of such termination of employment until the earlier of the expiration
of the option or ninety days following such termination. In the event of the
death, disability or retirement of the optionee while employed by the Company
or one of its subsidiaries, the option granted to such optionee will become
fully vested to the extent it is not otherwise and the optionee, his or her
guardian or legal representative, or distributees or heirs, as the case may
be, will be permitted to exercise such option at any time before the earlier
of the expiration of such option or three years after the optionee's death,
disability or retirement. In the event an optionee's employment with the
Company or a subsidiary of the Company is terminated for cause, any options
granted to such optionee and not previously exercised will expire forthwith.
66
<PAGE>
Option Agreement. Options granted under the Stock Plan are and will be
subject to the terms and conditions of the Stock Plan and will be evidenced by
a written agreement between the optionee and the Company. The option agreement
will incorporate the Stock Plan by reference, set forth the number of shares,
the time or times at and after which the option is exercisable in whole or in
part, the expiration date of the option, and other details deemed pertinent by
the Committee.
Adjustments Resulting from Changes in Capitalization. The Stock Plan
provides that in the event of a merger, consolidation, reorganization,
recapitalization, stock split or stock dividend or a combination or
reclassification of shares, the number and kind of shares subject to options
then outstanding and the exercise price of outstanding options shall be
adjusted proportionately. In the event of any other change affecting the
Common Stock, such adjustments as may be deemed equitable by the Board of
Directors, in its sole discretion, shall be made to give proper effect to such
event.
Amendment and Termination. The Board of Directors may suspend or terminate
the Stock Plan at any time and may amend the Stock Plan from time to time in
such respects as the Board of Directors may deem advisable. Without
shareholder approval the Board of Directors may not (i) increase the maximum
number of shares that may be purchased pursuant to the exercise of options
except to make appropriate adjustments in the event of certain changes in the
capital structure of the Company; or (ii) withdraw the administration of the
Stock Plan from the Committee. No amendments or termination of the Stock Plan
may affect or impair the rights or obligations under any options theretofore
granted without the consent of the optionee.
Federal Income Tax Aspects
Under applicable provisions of the Code: (i) the grant of an option under
the Stock Plan results in no taxable income to the optionee or deductions to
the Company at the time it is granted, (ii) upon exercise of the option the
optionee will realize taxable income, and the Company will realize a
deduction, in an amount equal to the amount, if any, by which the then fair
market value of the shares thereby acquired exceeds the purchase price for
such shares, and (iii) upon the disposition of the shares so acquired the
optionee will realize a gain or loss if the amount realized on such
disposition differs from the fair market value of the shares at the time of
the exercise of the option.
The following table sets forth information concerning stock option grants
made by the Company, subject to consummation of the Offering, to certain
directors and employees of the Company. Options to purchase an aggregate of
541,600 shares of Common Stock have been granted under the Stock Plan at the
date of this Prospectus. The purchase price per share of Common Stock subject
to the options will be the initial offering price of the Common Stock in the
Offering. The outstanding options become exercisable with respect to one-third
of the shares of Common Stock covered thereby on each anniversary of the date
of grant and will expire on the tenth anniversary of the date of grant.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND POSITION UNDERLYING OPTIONS
----------------- ------------------
<S> <C>
Donald C. Heppermann,....................................... 85,000
Chairman and Chief Executive Officer
William E. Warnock, Jr.,.................................... 85,000
President
Norman R. Foreman,.......................................... 38,500
President and Chief Executive Officer of Continental Power
Exchange
John P. Stojka,............................................. 25,800
Senior Vice President and Chief Operating Officer of Conti-
nental Power Exchange
J. Chris Jacobsen,.......................................... 40,000
Senior Vice President--Reserves and Production of Inter-
Coast Oil and Gas
All executive officers, including the above................. 402,300
All directors who are not executive officers................ 0
All employees, excluding executive officers................. 139,300
</TABLE>
67
<PAGE>
DIRECTOR STOCK PLAN
The Board of Directors and MidAmerican Capital, the sole stockholder of the
Company, have approved and adopted the InterCoast Energy Company Non-Employee
Director Restricted Stock Plan (the "Director Plan"). The Director Plan will
become effective upon, and only in the event of, consummation of the Offering.
A copy of the Director Plan has been filed as an exhibit to the registration
statement of which this Prospectus is a part, and the following summary is
qualified in its entirety by reference to the text of the Director Plan.
A total of 50,000 shares of Common Stock has been reserved for issuance
under the Director Plan. The Director Plan provides for the automatic award of
shares of Common Stock to directors of the Company who are not also employees
of the Company or of an affiliate (each, an "Eligible Director"). The shares
of Common Stock issuable under the Director Plan are subject to restrictions
in that they may not be sold, transferred, assigned, pledged, hypothecated or
otherwise encumbered until the happening of certain events. The Director Plan
is not subject to the provisions of the Employee Retirement Income Security
Act of 1974.
Under the Director Plan, each Eligible Director will be awarded 1,000
restricted shares of Common Stock on the date such director is first elected
or appointed to the Board of Directors (the "Initial Awards"). Thereafter, on
the day of each successive annual meeting of the Company's stockholders, each
Eligible Director who will continue to serve as a director of the Company
after such meeting will be awarded an additional 800 restricted shares of
Common Stock (the "Annual Awards"). The restrictions on the shares granted
under the Director Plan terminate upon an Eligible Director's death or
disability while serving as a member of the Board of Directors, failure to be
re-elected to the Board of Directors after being duly nominated, removal from
the Board of Directors or failure to be duly nominated for re-election
following a change in control of the Company, retirement from the Board of
Directors, or removal from the Board of Directors other than for cause.
The term of the Director Plan is ten years and no shares of Common Stock may
be awarded to Eligible Directors after the tenth anniversary of the Director
Plan's approval by the sole stockholder of the Company. The Board of Directors
may terminate the Director Plan at any time.
Federal Income Tax Consequences
An Eligible Director will realize income for federal income tax purposes,
and the Company will be entitled to a deduction, on the dates shares of Common
Stock are issued in respect of Initial Awards and Annual Awards. Income
realized by an Eligible Director by reason of the receipt of an Initial Award
or an Annual Award will constitute self-employment income of such Eligible
Director.
ANNUAL INCENTIVE COMPENSATION PLANS
Each of the Company and its subsidiary InterCoast Oil and Gas maintains a
Performance Incentive Plan under which cash awards are made to eligible
participants. The plans are designed to reward eligible employees for the
respective company's attainment of certain performance goals approved by the
Compensation Committee of the Board of Directors. Bonus payments are awarded
under the plans upon the achievement of the pre-established operating and
financial performance goals and, with respect to certain participants, a
portion of each award is discretionary based on individual performance. The
Compensation Committee establishes target, minimum and maximum award levels
for all participants and, with respect to certain participants, a mega-maximum
award level, all expressed as a percentage of salary. The largest targeted
award opportunity levels under each plan in 1995 ranged from 20% to 120% of
base salary. The minimum target levels ranged from 5% to 20% under the
Company's plan and 2% to 8% under the InterCoast Oil and Gas plan.
Participation in the Company's Performance Incentive Plan is limited to key
employees of the Company as selected by the Compensation Committee. All
employees of InterCoast Oil and Gas are eligible to participate in the
InterCoast Oil and Gas Performance Incentive Plan.
68
<PAGE>
401(K) PLAN
The Company currently participates in the MidAmerican Energy 401(k) Plan
(the "401(k) Plan"). All full-time employees of the Company and its
subsidiaries are eligible to participate in the 401(k) Plan. Each eligible
employee may elect to contribute to the 401(k) Plan, through payroll
deductions, up to 15% of his or her salary, subject to a statutorily
prescribed annual limit. The Company currently makes a matching contribution
on behalf of participating employees equal to 65% of the first 6% of
compensation contributed by an employee. Employee and Company contributions
are held and invested by the 401(k) Plan's trustee. Distributions may be made
from a participating employee's account upon termination of employment,
retirement, termination of the 401(k) Plan or in the event of financial
hardship.
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the Delaware General Corporation Law (the
"DGCL"), the Certificate of Incorporation provides that no director of the
Company shall be held personally liable to the Company or its stockholders for
monetary damages for breach of his or her fiduciary duty as director, except
for liability (a) for any breach of the director's duty of loyalty to the
Company or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) for
unlawful dividend payments or stock redemptions or repurchases or (d) for any
transaction from which the director derived an improper personal benefit. The
effect of such provisions of the Certificate of Incorporation will be to
eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits brought on behalf of the Company) to recover
monetary damages against a director for breach of fiduciary duty as a director
(including breaches resulting from negligence or gross negligence), except in
situations described above. The provisions of the Certificate of Incorporation
do not eliminate the liability of a director for violation of federal
securities laws or limit the rights of the Company or its stockholders, in
appropriate circumstances, to seek equitable remedies such as injunctive or
other forms of non-monetary relief. Such remedies may not be available in all
cases.
The Certificate of Incorporation and the Company's Bylaws (the "Bylaws")
provide that the Company shall indemnify all directors and officers of the
Company to the fullest extent permitted by the DGCL. Under such provisions,
any director or officer, who in his capacity as such, is made or threatened to
be made a party to any suit or proceeding may be indemnified if the Board of
Directors determines such director of officer acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company. The Bylaws and the DGCL further provide that such indemnification
is not exclusive of any other rights to which such individuals may be entitled
under the Certificate of Incorporation, the Bylaws, any agreement, vote of
stockholders or disinterested directors or otherwise. The Company intends to
enter into certain agreements ("Indemnity Agreements") with each of its
directors and certain executive officers designed to give effect to the
foregoing provisions of the Certificate of Incorporation and to provide
additional protection against the possibility of uninsured liability. Pursuant
to the Indemnity Agreements, the Company will, to the extent permitted under
applicable law, indemnify such persons against all expenses, judgments, fines,
ERISA excise taxes and penalties incurred in connection with the defense,
settlement or appeal of any actions or proceedings brought against them by
reason of the fact that they are or were directors or officers of the Company.
CERTAIN TRANSACTIONS
The Company receives general and administrative services from MidAmerican
Capital and MidAmerican Energy. The cost of such services received, including
overhead costs, are billed to the Company. Overhead costs are allocated to the
Company based on measures of use such as percent of payroll hours and number
of employees. Wages and salaries are charged directly to the Company based
upon individual employee time reporting, along with associated payroll taxes
and the costs of benefits. In addition, certain Company expenses paid by
MidAmerican Capital are billed to the Company. The amounts of such MidAmerican
Energy costs billed to general and administrative expense during 1993, 1994
and 1995 were $355,000, $393,000 and $516,000, respectively. See "Relationship
Between the Company and the Parent."
69
<PAGE>
In September 1993, InterCoast Oil and Gas assigned to Medallion Petroleum
Inc. ("Medallion Petroleum"), of which William E. Warnock, Jr. (President of
the Company) and Brian L. Cantrell (Vice President--Finance of InterCoast Oil
and Gas) are officers, directors and stockholders, a 0.692% overriding royalty
interest in the oil and gas properties of DKM Resources, Inc. and its
subsidiary in satisfaction of a finder's fee earned by one of Medallion
Petroleum's stockholders in connection with the acquisition by InterCoast Oil
and Gas of the outstanding capital stock of DKM Resources, Inc. For the years
ended December 31, 1993, 1994 and 1995, Medallion Petroleum received $18,377,
$63,720 and $71,219, respectively, on account of such overriding royalty
interest.
Production from a significant number of wells included in the Sawyer Canyon
Acquisition qualifies for Section 29 tax credits under the Code ("Section 29
Credits"). The Company is not able to take full advantage of Section 29 Credits
because it is subject to alternative minimum tax which, among other things,
limits a taxpayer's ability to utilize Section 29 Credits. Concurrently with
the Sawyer Canyon Acquisition and in order to realize value from the Section 29
Credits, the Company conveyed certain interests in such wells to InterCoast
Global Management, Inc., a wholly owned subsidiary of MidAmerican Capital, and
retained a production payment on 100% of the net proceeds of production from
such wells until approximately 80% of the estimated proved developed natural
gas reserves attributable to the wells (approximately 24 Bcf of natural gas)
has been produced. In consideration of its conveyance, the Company received
from InterCoast Global Management, Inc. $5,615,000 in cash and a promissory
note in the amount of $2,315,000, which is payable in 48 monthly installments
over four years and bears interest at the prime rate. The Company manages the
operations of the Section 29 Wells and has the option to purchase at any time
all or a portion of the Section 29 Wells for their then fair market value.
In connection with the employment of J. Chris Jacobsen, Senior Vice
President--Reserves and Production of InterCoast Oil and Gas, InterCoast Oil
and Gas committed that it would assist Mr. Jacobsen in the sale of his former
residence and adjoining land in Dallas County, Texas. Mr. Jacobsen sold the
residence in December 1995, but has not sold 17 acres of adjoining land. It is
currently contemplated that, pursuant to its commitment, InterCoast Oil and Gas
will purchase the 17 acres. InterCoast Oil and Gas and Mr. Jacobsen have agreed
that the purchase price will be $180,000, which is the lower of two independent
appraisals of the property, and it is expected that Mr. Jacobsen will bear a
portion of the obligation for future real estate taxes and will receive a
portion of the gain, if any, upon a sale of the property by InterCoast Oil and
Gas.
PRINCIPAL AND SELLING STOCKHOLDER
Of the 7,150,00 shares of Common Stock offered hereby, 1,000,000 shares are
being offered by MidAmerican Capital. As of June 26, 1996, MidAmerican Capital
beneficially owned 7,927,500 shares of Common Stock. After the Offering,
MidAmerican Capital will beneficially own 6,927,500 shares of Common Stock (or
49% of the outstanding shares of Common Stock). For a description of the
relationship between MidAmerican Capital and the Company see "Relationship
Between the Company and the Parent" and "Certain Transactions." MidAmerican
Capital's address is 666 Grand Avenue, Des Moines, Iowa 50309.
MidAmerican Capital has granted to the Underwriters an option, exercisable
during the 30-day period after the date of this Prospectus, to purchase up to
an additional 1,072,500 shares of Common Stock at the initial public offering
price set forth on the cover page of this Prospectus, less the underwriting
discounts and commissions. The Underwriters may exercise such option only to
cover over-allotments, if any, incurred in the sales of the shares of Common
Stock offered hereby. To the extent the Underwriters exercise such option, each
of the Underwriters will be obligated, subject to certain conditions, to
purchase such percentage of such additional shares of Common Stock as is
approximately equal to the percentage of shares of Common Stock that
70
<PAGE>
it is obligated to purchase as shown in the table set forth in "Underwriting."
If such option is exercised in full, the number of shares of Common Stock
beneficially owned by MidAmerican Capital after the Offering will be 5,855,000
(or 42% of the outstanding shares of Common Stock).
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Under the Certificate of Incorporation, the Company is currently authorized
to issue 25,000,000 shares of Common Stock, par value $0.01 per share. As of
the date of this Prospectus, there were 7,927,500 shares of Common Stock
outstanding. All of such outstanding shares of Common Stock are fully paid and
nonassessable. Each share of Common Stock has an equal and ratable right to
receive dividends when, as and if declared by the Board of Directors out of
assets legally available therefor, subject to any preferential dividend rights
of any preferred stock then outstanding.
In the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share equally and ratably in the
assets available for distribution after payment of all liabilities, and
subject to any prior rights of any holders of preferred stock that at the time
may be outstanding. The holders of Common Stock have no preemptive,
subscription, conversion or redemption rights. Each share of Common Stock is
entitled to one vote in the election of directors and on all other matters
submitted to a vote of stockholders. Holders of Common Stock do not have
cumulative voting rights, which means that the holders of a majority of shares
voting for the election of directors can elect all members of the Board of
Directors subject to election.
PREFERRED STOCK
Under the Certificate of Incorporation, the Board of Directors is
authorized, without further approval or action by the stockholders of the
Company, to issue 5,000,000 shares of preferred stock, par value $0.01 per
share (the "Preferred Stock"), from time to time in one or more series, and to
fix the dividend rates and terms, conversion rights, voting rights, redemption
rights and terms, liquidation preferences, sinking fund and any other rights,
preferences, privileges and restrictions applicable to each series of
Preferred Stock. The purpose of authorizing the Board of Directors to
determine such rights, preferences, privileges and restrictions is to
eliminate delays associated with a stockholder vote on specific issuances of
Preferred Stock. The issuance of Preferred Stock, while providing flexibility
in connection with possible acquisitions and other corporate purposes, could,
among other things, adversely affect the voting power of the holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no current
plans to issue any shares of Preferred Stock.
SECTION 203 OF THE DGCL
The Certificate of Incorporation provides that the Company has opted out of
Section 203 of the DGCL which, under certain circumstances, prevents an
interested stockholder (generally defined as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a business
combination with a Delaware corporation for a period of three years following
the date such person became an interested stockholder of such corporation.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The Bank of New
York.
71
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock. Future
sales of substantial amounts of Common Stock in the public market could
adversely affect the market price of the Common Stock.
Upon completion of the Offering, the Company will have outstanding an
aggregate of 14,079,500 shares of Common Stock. All of the 7,150,000 shares
sold in the Offering (8,222,500 shares if the over-allotment option granted to
the Underwriters is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act, except for any
shares purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act (whose sales would be subject to certain
limitations and restrictions described below).
The 7,927,500 shares of Common Stock held by the Company's existing sole
stockholder, MidAmerican Capital, were issued and sold by the Company in
reliance on an exemption from the registration requirements of the Securities
Act. The outstanding shares of Common Stock held by MidAmerican Capital after
the Offering will be subject to the "lock-up" agreement described below. After
expiration of such lock-up agreement 180 days after the date of this
Prospectus, the Common Stock then owned by MidAmerican Capital may be resold
only upon registration under the Securities Act (see "Relationship Between the
Company and the Parent--Contractual Arrangements--Registration Rights
Agreement") or pursuant to an exemption from such registration requirements,
including exemptions contained in Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
two years (including the holding period of any prior owner except an
affiliate) is entitled to sell in "broker's transactions" or to market makers,
within any three-month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of (i) 1% of
the number of shares of Common Stock then outstanding (approximately 140,000
shares immediately after the Offering) or (ii) generally, the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
the required filing of a Form 144 with respect to such sale. Sales under Rule
144 are generally subject to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been
an affiliate of the Company at any time during the 90 days preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least
three years, is entitled to sell such shares without having to comply with the
manner of sale, public information, volume limitation or notice filing
provisions of Rule 144. Under Rule 701 under the Securities Act, persons who
purchase shares upon exercise of options granted prior to the effective date
of the Offering are entitled to sell such shares 90 days after the effective
date of the Offering in reliance on Rule 144, without having to comply with
the holding period and notice filing requirements of Rule 144 and, in the case
of non-affiliates, without having to comply with the public information,
volume limitation or notice filing provisions of Rule 144. The Commission has
proposed certain amendments to Rule 144 that would reduce the requisite
holding period from two years to one year.
As soon as practicable following the Offering, the Company intends to file a
registration statement on Form S-8 under the Securities Act covering an
aggregate of up to 1,457,750 shares of Common Stock reserved for issuance
pursuant to the Stock Plan and Director Plan. Shares of Common Stock issued
upon exercise of the stock options granted under the Stock Plan or issued
pursuant to the Director Plan after the effective date of such registration
statement will be freely tradeable, except for any such shares acquired by an
"affiliate" of the Company, as that term is defined in Rule 144 under the
Securities Act.
The Company and MidAmerican Capital have agreed not to offer, sell, contract
to sell, grant any option to purchase or otherwise dispose of, directly or
indirectly, any shares of capital stock of the Company or any securities
convertible into or exercisable or exchangeable for any capital stock or
warrants or other rights to purchase shares of capital stock of the Company
owned by any of them prior to the expiration of 180 days from the date of this
Prospectus, except (i) for shares of Common Stock offered hereby, (ii) with
the prior written consent of PaineWebber Incorporated and (iii) in the case of
the Company, for the issuance of shares of Common Stock upon the exercise of
options, or the grant of options to purchase shares of Common Stock under the
Stock Plan or the grant of restricted stock awards under the Director Plan.
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<PAGE>
UNDERWRITING
The Underwriters named below, acting through PaineWebber Incorporated and
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Representatives"),
have severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement by and among the Company, MidAmerican Capital and the
Representatives (the "Underwriting Agreement"), to purchase from the Company
and MidAmerican Capital, and the Company and MidAmerican Capital have
severally agreed to sell to the Underwriters, respectively, 6,150,000 shares
and 1,000,000 shares of Common Stock, which in the aggregate equals the number
of shares of Common Stock set forth opposite the name of such Underwriters
below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
PaineWebber Incorporated...........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
---------
Total............................................................ 7,150,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the shares of Common Stock listed above are subject to certain
conditions. The Underwriting Agreement also provides that the Underwriters are
committed to purchase, and the Company and MidAmerican Capital are obligated
to sell, all of the shares of Common Stock offered by this Prospectus, if any
of the shares of Common Stock being sold pursuant to the Underwriting
Agreement are purchased (without consideration of any shares that may be
purchased through the exercise of the Underwriters' over-allotment option).
The Representatives have advised the Company and MidAmerican Capital that
the Underwriters propose to offer the shares of Common Stock to the public
initially at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession to other dealers not in excess of $ per share. After
the initial public offering of the shares of Common Stock, the public offering
price, the concessions to selected dealers and the reallowance to other
dealers may be changed by the Representatives.
MidAmerican Capital has granted to the Underwriters an option, exercisable
during the 30-day period after the date of this Prospectus, to purchase up to
an additional 1,072,500 shares of Common Stock at the initial public offering
price set forth on the cover page of this Prospectus, less the underwriting
discounts and commissions. The Underwriters may exercise such option only to
cover over-allotments, if any, incurred in the sales of shares of Common
Stock. To the extent the Underwriters exercise such option, each of the
Underwriters will become obligated, subject to certain conditions, to purchase
such percentage of such additional shares of Common Stock as is approximately
equal to the percentage of shares of Common Stock that it is obligated to
purchase as shown in the table set forth above.
The Company and MidAmerican Capital have jointly and severally, subject to
certain limitations with respect to MidAmerican Capital, agreed to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
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<PAGE>
The Representatives have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
Up to 5% of the shares of Common Stock offered hereby will be made available
by the Underwriters for purchase by (i) directors, officers and employees of
the Company and MidAmerican Capital, (ii) directors of MidAmerican Energy, and
(iii) certain other individuals selected by management of the Company. The
sale of shares of Common Stock to such persons will be at the initial public
offering price. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such
shares. Any shares of Common Stock not so purchased will be offered by the
Underwriters on the same terms as the other shares of Common Stock offered
hereby.
Each of the Representatives has from time to time performed various
investment banking and financial advisory services for MidAmerican Energy or
certain of its subsidiaries, for which they have received customary fees and
reimbursement of their out-of-pocket expenses.
MidAmerican Capital and the Company and each of the Company's directors and
executive officers have agreed not to offer, sell, contract to sell, or grant
any option to purchase or otherwise dispose of, directly or indirectly, any
shares of capital stock of the Company or any securities convertible into or
exercisable or exchangeable for any capital stock or warrants or other rights
to purchase shares of capital stock of the Company owned by any of them prior
to the expiration of 180 days from the date of this Prospectus, except (i) for
the shares of Common Stock offered hereby, (ii) with the prior written consent
of PaineWebber Incorporated, and (iii) in the case of the Company, for the
issuance of shares of Common Stock upon the exercise of options, or the grant
of options to purchase shares of Common Stock under the Stock Plan or the
grant of restricted stock awards under the Director Plan.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price was determined pursuant to negotiations
between the Company, MidAmerican Capital and the Representatives. Among the
factors considered in determining the initial public offering price, in
addition to prevailing market conditions, were certain financial information
of the Company, the history of, and the prospects for, the Company and the
industry in which it competes, an assessment of the Company's management, its
past and present operations, the prospects for, and timing of, future revenues
of the Company, the present state of the Company's development, and the above
factors in relation to market values and various valuation measures of other
companies engaged in activities similar to the Company. The initial public
offering price set forth on the cover page of this Prospectus should not,
however, be considered an indication of the actual value of the Common Stock.
Such price is subject to change as a result of market conditions and other
factors. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offering at or above the initial public offering price.
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to notice of issuance. In order to meet one of the
requirements for listing the Common Stock on the New York Stock Exchange, the
Underwriters have undertaken to sell lots of 100 or more shares to a minimum
of 2,000 beneficial holders.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Conner & Winters, A Professional
Corporation, Tulsa, Oklahoma. Certain legal matters in connection with the
Common Stock offered hereby will be passed upon for the Underwriters by Baker
& Botts, L.L.P., Houston, Texas.
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<PAGE>
EXPERTS
The audited financial statements of the Company included in this Prospectus
or elsewhere in the Registration Statement of which this Prospectus is a part
and the statements of revenues and direct operating expenses of the Sawyer
Canyon Properties for the years ended December 31, 1994 and 1995, have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their reports with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in giving said reports.
Information appearing in this Prospectus regarding the Company's estimated
quantities of natural gas and oil reserves and the discounted present value of
future pre-tax cash flows therefrom is based, to the extent described herein,
upon estimates of such reserves and present values prepared by Netherland,
Sewell and Associates, Inc., independent petroleum engineers. Such information
has been so included herein in reliance upon the authority of such firm
experts in petroleum engineering.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1 (the
"Registration Statement") with respect to the shares of Common Stock offered
hereby with the Securities and Exchange Commission (the "Commission") under
the Securities Act. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain items of which are contained in schedules and
exhibits to the Registration Statement as permitted by the rules and
regulations of the Commission. Statements contained in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such
reference.
Upon completion of the Offering, the Company will be subject to the
informational reporting requirements of the Securities Exchange Act of 1934,
as amended, and, in accordance therewith, will file reports, proxy statements
and other information with the Commission. The Registration Statement and the
exhibits and schedules forming a part thereof, as well as such reports, proxy
statements and other information, may be inspected and copied at the Public
Reference Room of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Commission: Northeast
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048,
and Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can be obtained from the Public
Reference Section of the Commission at its Washington address at prescribed
rates. In addition, the Commission maintains a Web site that contains reports,
proxy and information statements and other information filed electronically by
the Company with the Commission which can be accessed over the Internet at
http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information.
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<PAGE>
GLOSSARY
The following are definitions of certain terms used in this Prospectus.
BBL. One barrel of crude oil, condensate or other liquids equal to 42 U.S.
gallons.
BCF. Billion cubic feet.
BCFE. Billion cubic feet of natural gas equivalent.
BOE. Barrels of oil equivalent, determined using the ratio of six Mcf of
natural gas to one Bbl of crude oil, condensate or natural gas liquids.
BTU. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 degrees Fahrenheit to 59.5
degrees Fahrenheit under specific conditions.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive in an
attempt to recover proved undeveloped reserves.
EXPLORATORY WELL. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir or to extend a known reservoir.
EXTENSIONAL INFILL DRILLING. Drilling of a well to enhance the economic
recovery of natural gas and oil in producing areas to a level greater than
that previously achieved by the owners of the prevailing leasehold by
increasing the density of wells that penetrate known reservoirs. Typically,
development of these prospects requires that the Company obtain some or all of
the rights to drill on acreage that is held by production.
FARMOUT. An assignment of an interest in a drilling location and related
acreage conditional upon the drilling of a well or the establishment of
production on that location. The assignor usually retains a royalty interest
or a working interest after payout in the lease.
FINDING COSTS. Expressed in terms of dollars per Mcfe, calculated by
dividing the amount of total costs incurred for oil and gas activities by the
amount of proved reserves added during the same period (including the effect
on proved reserves of reserve revisions).
GROSS ACRES OR GROSS WELLS. The number of acres or wells in which the
Company has a working interest.
LEASE OPERATING EXPENSE. Costs incurred to operate and maintain wells and
related equipment and facilities including depreciation and applicable
operating costs of support equipment and facilities and other costs of
operating and maintaining those wells and related equipment and facilities.
MBBL. One thousand barrels.
MCF. One thousand cubic feet.
MCFE. One thousand cubic feet of natural gas equivalent.
MMBBL. One million barrels.
MMBTU. One million Btus.
MMCF. One million cubic feet.
76
<PAGE>
MMCFE. One million cubic feet of natural gas equivalent.
MWH. Megawatt hour, a unit of power equal to that expended by one million
watts in one hour.
NATURAL GAS EQUIVALENT. Cubic feet of natural gas equivalent, determined
using the ratio of one Bbl of crude oil, condensate or natural gas liquids to
six Mcf of natural gas.
NET ACRES OR NET WELLS. The sum of the fractional working interests owned in
gross acres or gross wells.
NET PROFITS INTEREST. An interest in an oil and gas property entitling the
owner to a share of the gross revenues from oil and gas production less all
operating, production, development, transportation, transmission and marketing
expenses, production, sales and ad valorem taxes attributable to such
production.
OVERRIDING ROYALTY INTEREST. A royalty interest which is carved out of a
lessee's interest under an oil and gas lease.
PRODUCTIVE WELL. A well that is producing oil and gas or that is capable of
production.
PROVED DEVELOPED NONPRODUCING RESERVES. Proved developed reserves expected
to be recovered from zones behind casing in existing wells.
PROVED DEVELOPED PRODUCING RESERVES. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and able to produce to market.
PROVED DEVELOPED RESERVES. Proved reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods.
PROVED RESERVES. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
PROVED UNDEVELOPED RESERVES. Reserves that are expected to be recovered from
new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion.
PV-10 RESERVE VALUE. The pre-tax present value, discounted at 10% per annum,
of future net cash flows from estimated proved reserves, calculated holding
prices and costs constant at amounts in effect on the date of the estimate
(unless such prices or costs are subject to change pursuant to contractual
provisions). The difference between the PV-10 Reserve Value and the
standardized measure of discounted future net cash flows is the present value
of income taxes applicable to such future net cash flows.
RESERVE LIFE INDEX. Calculated by dividing year-end proved reserves by
annual production for the most recent year.
ROYALTY INTEREST. An interest in an oil and gas property entitling the owner
to a share of oil or gas production free of costs of production.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS. The present value,
discounted at 10% per annum, of future net cash flows from estimated proved
reserves, calculated holding prices and costs constant at amounts in effect on
the date of the estimate (unless such prices or costs are subject to change
pursuant to contractual provisions) and in all instances in accordance with
the Commission's rules for inclusion of oil and gas reserve information in
financial statements filed with the Commission.
UNDEVELOPED ACREAGE. Lease acreage on which wells have not been participated
in or completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether such acreage contains proved
reserves.
WHEELING. Involves the movement of electricity through the transmission
systems of transmission owners who do not own title to the electricity.
WORKING INTEREST. A cost bearing interest which gives the owner the right to
drill, produce and conduct oil and gas operations on the property, as well as
a right to a share of production therefrom.
77
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
InterCoast Energy Company Consolidated Financial Statements
Report of independent public accountants................................ F-2
Consolidated balance sheets as of December 31, 1994 and 1995............ F-3
Consolidated statements of income for the years ended December 31, 1993,
1994 and 1995.......................................................... F-4
Consolidated statements of stockholder's equity for the years ended
December 31, 1993, 1994 and 1995....................................... F-5
Consolidated statements of cash flows for the years ended December 31,
1993, 1994 and 1995.................................................... F-6
Notes to consolidated financial statements.............................. F-7
InterCoast Energy Company Interim Consolidated Financial Statements
(Unaudited)
Consolidated balance sheets as of December 31, 1995 and March 31, 1996.. F-18
Consolidated statements of income for the three months ended March 31,
1995 and 1996.......................................................... F-19
Consolidated statement of stockholder's equity for the three months
ended March 31, 1996................................................... F-20
Consolidated statements of cash flows for the three months ended March
31, 1995 and 1996...................................................... F-21
Notes to unaudited consolidated financial statements.................... F-22
Sawyer Canyon Properties
Report of independent public accountants................................ F-24
Statements of revenues and direct operating expenses for the years ended
December 31, 1994 and 1995 and for the three months ended March 31,
1996 (Unaudited)....................................................... F-25
Notes to statements of revenues and direct operating expenses........... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors of
InterCoast Energy Company:
We have audited the accompanying consolidated balance sheets of InterCoast
Energy Company (a Delaware corporation and an indirect wholly owned subsidiary
of MidAmerican Energy Company) and Subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of income, changes in
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InterCoast Energy Company
and Subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Tulsa, Oklahoma
June 28, 1996
F-2
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................. $ 5,127 $ 8,303
Accounts receivable........................................ 6,641 23,016
Other...................................................... 2,562 1,640
-------- --------
Total current assets..................................... 14,330 32,959
Gas and oil properties, net.................................. 141,070 158,597
Continental Power Exchange, Inc., net........................ 3,078 4,030
Intangible and other assets, net............................. 2,498 4,578
-------- --------
Total assets............................................. $160,976 $200,164
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable........................................... $ 3,104 $ 17,482
Other current liabilities.................................. 993 3,966
-------- --------
Total current liabilities................................ 4,097 21,448
-------- --------
Accumulated deferred income taxes, net....................... 13,208 23,648
-------- --------
Long-term debt due to MidAmerican Capital.................... 60,724 52,907
-------- --------
Stockholder's equity
Common stock ($0.01 par value, 25,000,000 shares
authorized, 7,927,500 shares issued and outstanding)...... 79 79
Additional paid-in capital................................. 69,666 85,995
Retained earnings.......................................... 13,202 16,087
-------- --------
Total stockholder's equity............................... 82,947 102,161
-------- --------
Total liabilities and stockholder's equity............... $160,976 $200,164
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-3
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
INTERCOAST OIL AND GAS COMPANY
Gas and oil revenues............ $ 37,359 $ 44,466 $ 48,109
Gas and oil operating expenses.. (9,616) (15,016) (14,552)
Depreciation, depletion and
amortization expense........... (13,535) (18,602) (21,489)
General and administrative
expense, net................... (2,183) (2,633) (2,288)
------------- ------------- -------------
12,025 8,215 9,780
------------- ------------- -------------
INTERCOAST ENERGY MARKETING
Natural gas sales revenues...... 16,715 13,700 24,066
Cost of gas sold................ (16,216) (13,142) (23,218)
Electric power sales revenues... 19 446 421
Cost of electric power sold..... -- -- (325)
Operating expenses.............. (369) (778) (952)
General and administrative
expense........................ (163) (314) (410)
------------- ------------- -------------
(14) (88) (418)
------------- ------------- -------------
CONTINENTAL POWER EXCHANGE, INC.
Administrative and development
expense, net................... -- (849) (3,442)
------------- ------------- -------------
Corporate expenses................ (1,013) (1,553) (1,554)
------------- ------------- -------------
Income before income taxes........ 10,998 5,725 4,366
Provision for income taxes........ 4,984 2,324 1,481
------------- ------------- -------------
Net income........................ $ 6,014 $ 3,401 $ 2,885
============= ============= =============
Average common shares
outstanding...................... 7,928 7,928 7,928
============= ============= =============
Earnings per common share......... $ 0.76 $ 0.43 $ 0.36
============= ============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON SHARES
------------- ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL
------ ------ --------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992.. 7,928 $79 $57,763 $ 3,787 $ 61,629
Net income.................... -- -- -- 6,014 6,014
Contributions from MidAmerican
Capital...................... -- -- 4,073 -- 4,073
----- --- ------- ------- --------
BALANCE AT DECEMBER 31, 1993.. 7,928 79 61,836 9,801 71,716
Net income.................... -- -- -- 3,401 3,401
Contributions from MidAmerican
Capital...................... -- -- 7,830 -- 7,830
----- --- ------- ------- --------
BALANCE AT DECEMBER 31, 1994.. 7,928 79 69,666 13,202 82,947
Net income.................... -- -- -- 2,885 2,885
Contributions from MidAmerican
Capital...................... -- -- 16,329 -- 16,329
----- --- ------- ------- --------
BALANCE AT DECEMBER 31, 1995.. 7,928 $79 $85,995 $16,087 $102,161
===== === ======= ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................... $ 6,014 $ 3,401 $ 2,885
Adjustments to reconcile net income to net cash
from operating activities:
Deferred income taxes, net..................... 4,020 2,168 10,410
Provision for depreciation, depletion and
amortization.................................. 13,672 19,631 22,993
Change in working capital items:
Accounts receivable........................... (2,791) 3,254 (16,375)
Other current assets.......................... 45 (1,032) 922
Accounts payable.............................. 2,869 (2,782) 14,378
Other current liabilities..................... 1,706 (1,840) 2,973
-------- -------- --------
Net cash from operating activities........... 25,535 22,800 38,186
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in:
Gas and oil properties......................... (74,984) (42,849) (40,845)
Continental Power Exchange, Inc................ -- (3,927) (2,223)
Other.......................................... (162) (180) (2,283)
Proceeds from sale of gas and oil properties.... 1,446 3,465 1,829
-------- -------- --------
Net cash from investing activities........... (73,700) (43,491) (43,522)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of borrowings from MidAmerican
Capital....................................... 47,486 16,716 --
Repayments of borrowings from MidAmerican
Capital....................................... (1,118) (2,360) (7,817)
Contributions from MidAmerican Capital......... 4,073 7,830 16,329
-------- -------- --------
Net cash from financing activities........... 50,441 22,186 8,512
-------- -------- --------
Net increase in cash and cash equivalents........ 2,276 1,495 3,176
Cash and cash equivalents at beginning of
period.......................................... 1,356 3,632 5,127
-------- -------- --------
Cash and cash equivalents at end of period....... $ 3,632 $ 5,127 $ 8,303
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) during the period for:
Income taxes................................... $ 964 $ 156 $ (8,929)
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ACCOUNTING POLICIES
Corporate Structure
InterCoast Energy Company (InterCoast or the Company), a Delaware
corporation, is a wholly owned subsidiary of MidAmerican Capital Company
(MidAmerican Capital). MidAmerican Capital, a Delaware corporation, is a
wholly owned subsidiary of MidAmerican Energy Company (MidAmerican Energy).
MidAmerican Capital reorganized its businesses and formed the Company on May
17, 1996 as a holding company for four wholly owned subsidiaries: InterCoast
Oil and Gas Company (formerly Medallion Production Company), primarily engaged
in the acquisition, development, exploration and production of natural gas and
oil, InterCoast Gas Services Company, primarily engaged in the marketing of
natural gas, InterCoast Power Marketing Company, primarily engaged in the
wholesale marketing and brokering of electric power, and Continental Power
Exchange, Inc., developer and operator of a proprietary network facilitating
electronic electric power exchange. InterCoast Gas Services Company and
InterCoast Power Marketing Company are combined as InterCoast Energy Marketing
on the Consolidated Statements of Income. The Company accounted for the
reorganization in a manner similar to that in pooling-of-interests accounting.
Principles of Consolidation
The consolidated financial statements include the Company and its wholly
owned subsidiaries. Intercompany transactions have been eliminated.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reported period.
Actual results may differ from those estimates.
Common Stock Conversion and Split
The financial statements and notes thereto reflect retroactively the common
shares authorized, issued and outstanding at the date of formation.
Earnings Per Share
Net income per share is calculated by dividing net income by the weighted
average shares of common stock and common stock equivalents outstanding.
Gas and Oil Properties
The Company accounts for its gas and oil properties using the full cost
method of accounting which provides for the capitalization of all acquisition,
exploration and development costs incurred for the purpose of finding natural
gas and oil reserves. The unamortized cost of gas and oil properties,
including estimated future development and abandonment costs, is amortized
using the unit-of-production method based on the ratio of volumes produced to
proved reserves.
Unevaluated properties and associated costs not currently being amortized
and included in gas and oil properties were $1.5 million, $1.6 million and
$2.1 million at December 31, 1993, 1994 and 1995, respectively. Such costs
relate to projects which were at such dates undergoing exploration or
development activities or in which the Company intends to commence such
activities in the future. The Company will begin to amortize these costs when
proved reserves are established or impairment is determined.
The Company's unamortized costs of gas and oil properties are limited to the
sum of the future net revenues attributable to proved gas and oil reserves
discounted at ten percent plus the cost of any unproved properties. If the
Company's unamortized costs in gas and oil properties exceed this ceiling
amount, a provision for additional
F-7
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
depreciation, depletion and amortization is required. At December 31, 1993,
1994 and 1995, the Company's unamortized costs of gas and oil properties did
not exceed such ceiling amount.
Proceeds from the sale of gas and oil properties are applied to reduce the
costs in the full cost pool unless the sale involves a significant quantity of
reserves in relation to the cost center, in which case a gain or loss would be
recognized.
The Company conducts certain of its drilling activities (Programs), on a
joint venture basis, together with working interest participants. The
agreements under which these investors participate provide the Company with
certain reversionary interests in the properties in the Programs and current
reimbursement of proportionate amounts of overhead and seismic costs. Overhead
reimbursements of $872,000, $1,520,000 and $2,047,000 are included in the
Consolidated Statements of Income as a reduction of general and administrative
expenses for InterCoast Oil and Gas Company for 1993, 1994 and 1995,
respectively.
Production Imbalances
Joint interest owners may take more or less than their ownership interest of
natural gas volumes from jointly owned reservoirs. The Company follows the
sales method of accounting for imbalances, whereby the Company recognizes
revenues based on the actual volumes of gas sold to purchasers. The Company
records a liability if its sales of gas volumes in excess of its entitlements
from a jointly owned reservoir exceed its interest in the remaining estimated
gas reserves of such reservoir. Volumetric production is monitored to minimize
imbalances, and such imbalances were not significant at December 31, 1993,
1994 and 1995.
Amortization of Goodwill
Goodwill was recognized with the acquisition of operating rights, certain
other assets and personnel of Medallion Petroleum, Inc. in 1992 and with the
acquisition of certain assets and personnel of GED Gas Services, L.L.C. in
1995. Goodwill is amortized over the expected period of benefit of forty years
using the straight line method. The unamortized balance of goodwill included
on the Consolidated Balance Sheets as Intangible and Other Assets at December
31, 1994 and 1995 is $1,829,000 and $3,486,000, respectively.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of". This statement, which the Company plans to
adopt for reporting periods after January 1, 1996, requires the Company to
review long-lived assets for impairment whenever circumstances indicate that
the carrying amount of an asset may not be recoverable. Adoption of SFAS No.
121 is not expected to have a material impact on the Company's results of
operations or financial position at the time of adoption.
Stock-Based Compensation Plans
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation" regarding accounting for stock-based compensation plans. This
statement, which is effective for reporting periods beginning January 1, 1996,
allows for alternative methods of adoption. The Company does not expect the
accounting provisions or the alternative disclosure provisions of SFAS No. 123
to have a material impact on the Company's compensation costs.
Accounting for Commodity Price Risk Management
The Company engages in price risk management activities to minimize the
impact of market fluctuations on assets, liabilities, production or other
contractual commitments. Changes in the market value of these transactions are
deferred until the gain or loss on the underlying item is recognized. See Note
8 for further discussion of the Company's price risk management activities.
F-8
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Consolidated Statements of Cash Flows
For purposes of the Consolidated Balance Sheets and Statements of Cash
Flows, the Company considers all highly liquid debt instruments purchased with
a remaining maturity of three months or less to be cash equivalents. There
were no material non-cash investing or financing activities in 1993, 1994 or
1995.
2) GAS AND OIL PROPERTIES, NET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Gas and oil properties.................................. $186,131 $225,147
Accumulated depreciation, depletion and amortization.... (45,061) (66,550)
-------- --------
Gas and oil properties, net............................. $141,070 $158,597
======== ========
</TABLE>
The 1993, 1994 and 1995 provision for depreciation, depletion and
amortization of the Company's gas and oil properties was recorded at the rate
of $0.80, $0.86 and $0.90, respectively, per equivalent thousand cubic feet of
natural gas production.
3) CONTINENTAL POWER EXCHANGE, INC., NET
Continental Power Exchange, Inc., a development stage company, was
established in 1994 to operate a computerized information system facilitating
the real-time exchange of power in the electric industry. The Company's
capitalized costs represent (a) costs incurred in obtaining a Federal Energy
Regulatory Commission ("FERC") ruling granting FERC regulated entities the
right to participate in the system without further regulatory filings, (b)
capitalized network development costs including hardware, communication
systems and software development costs and (c) plant assets including
furniture and fixtures, leasehold improvements, office computers and other
equipment.
Capitalized costs incurred were as follows:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
FERC ruling.................................................... $1,432 $ 461
Network development............................................ 1,760 1,396
Plant assets................................................... 735 366
------ ------
$3,927 $2,223
====== ======
</TABLE>
Costs relating to the FERC ruling are amortized over 12 months beginning the
quarter in which incurred. Depreciation of the capitalized network development
costs began in the second quarter of 1996. Depreciation of plant assets over a
period of 5-7 years begins when the related assets are placed in service.
Accumulated depreciation and amortization was $849,000 and $2,120,000 at
December 31, 1994 and 1995, respectively.
Revenues representing primarily initial sign-up fees and testing period
transaction revenues of $80,000 for the year ending December 31, 1995 are
included in the Consolidated Statements of Income as a reduction to
Administrative and Development Expense.
F-9
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4) INCOME TAXES
The Company is included in the consolidated federal and, where appropriate,
state income tax returns of MidAmerican Energy. The consolidated income tax
currently payable (or receivable) has been allocated among the Company and
other members of the affiliated income tax reporting group (Group) based on
the respective contributions to the consolidated taxable income and tax
credits of the Group. The Company has received (or made) payments for the
income tax reductions (or increases) contributed to the Group.
The components of the provision for income taxes are shown below:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current--Federal.................................... $ 804 $ 107 $(7,980)
--State............................................. 160 49 (979)
Deferred--Federal................................... 3,135 1,495 9,498
--State............................................. 885 673 942
------ ------ -------
Total............................................... $4,984 $2,324 $ 1,481
====== ====== =======
</TABLE>
A reconciliation of the statutory federal income tax rate to the overall
effective income tax rate follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate....................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit... 1.9 2.1 0.4
State tax true-ups...................................... 3.6 -- --
Other items, net........................................ 4.8 3.5 (1.5)
---- ---- ----
Overall effective income tax rate....................... 45.3% 40.6% 33.9%
==== ==== ====
</TABLE>
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Accelerated depreciation/depletion methods............. $(4,604) $(15,380)
Intangible drilling costs.............................. 17,062 38,278
Other.................................................. 750 750
------- --------
Accumulated deferred income taxes...................... $13,208 $ 23,648
======= ========
</TABLE>
F-10
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5) LONG-TERM DEBT DUE TO MIDAMERICAN CAPITAL
At December 31, 1994 and 1995, the Company had $60,724,000 and $52,907,000,
respectively, relating to intercompany loans from MidAmerican Capital due
December 31, 1997. Borrowings under the loans are non-interest bearing. The
proceeds of the loans were primarily used to acquire natural gas and oil
reserves. The Company may prepay the loans without incurring any penalty. The
Company's average monthly balance outstanding for the years ended December 31,
1993, 1994 and 1995 was $19,314,000, $52,863,000 and $58,117,000,
respectively. The following table reconciles the borrowings and repayments for
each of the three years in the period ended December 31, 1995.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance at December 31, 1992........................... $ --
Cash transfers to acquire gas and oil reserves........ 47,486
Repayments from operating cash flows.................. (1,118)
-------
Balance at December 31, 1993........................... 46,368
Cash transfers to acquire gas and oil reserves........ 16,716
Repayments from operating cash flows.................. (2,360)
-------
Balance at December 31, 1994........................... 60,724
Repayments from operating cash flows.................. (7,817)
-------
Balance at December 31, 1995........................... $52,907
=======
</TABLE>
6) RELATED PARTY TRANSACTIONS
The Company receives general and administrative services from MidAmerican
Capital and MidAmerican Energy. The costs of such services received, including
overhead costs, are classified as directly assigned costs or allocable costs.
Directly assigned costs are assigned (and billed) to the Company. Costs that
are not directly assigned are allocated based on the Company's relative
percentage of three factors. The three factors are total revenues, total
assets and total payroll. Wages and salaries of the Company's corporate staff
and personnel of MidAmerican Capital and MidAmerican Energy are classified as
directly assigned or allocable based upon individual employee time reporting,
along with associated payroll taxes and the costs of benefits. In addition,
certain directly assigned Company expenses paid by MidAmerican Capital are
billed to the Company. The amounts of such allocated MidAmerican Energy costs
billed and charged to corporate expense during 1993, 1994 and 1995 were
$355,000, $393,000 and $516,000, respectively.
7) EMPLOYEE BENEFITS
MidAmerican Energy provides certain health care benefits for certain Company
employees upon retirement. MidAmerican Energy is amortizing the discounted
present value of the obligation at January 1, 1993 to expense over 20 years.
Provisions for post-retirement benefits other than pensions are allocated to
the Company based on participants' compensation. The amount expensed during
1993, 1994 and 1995 was $16,000, $45,000 and $49,000, respectively.
The Company's employees participate in MidAmerican Energy's noncontributory
defined benefit retirement income plan. Benefits under the plan are based on
participants' compensation, years of service and age at retirement. Funding is
based on the actuarially determined costs of the plan and the requirements of
the Internal Revenue Code and the Employee Retirement Income Security Act.
As of December 31, 1993, 1994 and 1995, the Company has not been required to
contribute to the plan. Pension costs are allocated to the Company based on
participants' compensation. The amount the Company expensed during 1993, 1994
and 1995 was $17,000, $73,000 and $2,000, respectively. At December 31, 1994
and 1995, the Company's pension accrual included in the Consolidated Balance
Sheets as Other Current Liabilities was $90,000 and $92,000, respectively.
F-11
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Price Risk Management
The Company has entered into swaps, futures and options to manage risks
associated with fluctuations in the price of natural gas production and
marketing activities.
Commodity Price Swaps. Commodity price swap agreements require the Company
to make payments to (or entitle it to receive payments from) the
counterparties based upon the differential between a specified fixed and
variable price. The Company accounts for these transactions on a settlement
basis and, accordingly, gains or losses are included in gas and oil revenues
in the period in which the underlying natural gas is produced. These
agreements do not impose cash margin requirements on the Company or provide
for collateral to the Company. At December 31, 1995, the Company was party to
commodity price swap agreements covering approximately 8.0 MMBtu, 6.3 MMBtu
and 23.2 MMBtu of natural gas for the years 1996 and 1997 and for the period
1998 through 2005, respectively.
Futures and Options Contracts. Natural gas futures require the Company to
buy or sell natural gas at a fixed price. Natural gas options held to hedge
price risk only provide the right, not the requirement, to buy or sell natural
gas at a fixed price. The Company uses futures to manage margins on offsetting
fixed-price purchase or sale commitments for physical quantities of natural
gas. The Company uses options to limit overall price risk exposure. Futures
contracts mandate initial margin requirements. The Company maintains such
margin accounts and funds in cash any daily settlement requirements relating
to futures contracts.
At December 31, 1995, the Company had futures contracts to purchase natural
gas for approximately 10.1 MMBtu and to sell natural gas for approximately 4.9
MMBtu. The associated unrecognized gain on futures contracts was $486,000.
Basis Swaps. Basis swap agreements require the Company to make payments to
(or entitle it to receive payments from) the counterparties based upon the
differential between the variable costs associated with the delivery of
natural gas production to specific delivery points and a contractually
specified fixed cost. At December 31, 1995, the Company had basis swap
arrangements relating to a total of approximately 2.1 MMBtu during 1996.
Credit Risk. Credit risk relates to the risk of loss that the Company would
incur as a result of the nonperformance by counterparties pursuant to the
terms of their contractual obligations. The Company's overall exposure to
credit risk may be affected positively or negatively in that the
counterparties may be similarly affected by changes in economic, regulatory or
other conditions. The Company maintains credit policies with regard to its
counterparties that management believes minimize overall credit risk. With
regard to commodity price and basis swaps, these policies include an
evaluation of potential counterparties' financial condition (including credit
rating), collateral agreements under certain circumstances and the use of
standardized agreements. With regard to futures and options contracts, the
Company utilizes New York Mercantile Exchange (NYMEX) contracts. Such
contracts are guaranteed by the NYMEX and, accordingly, have nominal credit
risk. As a result, the Company's risk is limited to the initial purchase price
of the options and to changes in the market value of the futures contracts.
Accordingly, the Company does not anticipate any material impact on its
financial position or results of operations as a result of nonperformance by
the counterparties to the financial instruments related to its natural gas
production and marketing activities.
The Company has entered into letters of credit and financial guarantees to
support certain well costs and the natural gas and electric power purchases of
its marketing subsidiaries. Letters of credit and financial guarantees are
conditional commitments issued by the Company to guarantee performance to a
third party.
F-12
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company had letters of credit totaling $1,103,000 and $1,914,000 and
financial guarantees amounting to $0 and $2,750,000 which were not reflected
on the Consolidated Balance Sheets as of December 31, 1994 and 1995,
respectively.
The fair value of the Company's letters of credit was $8,000 and $14,000 at
December 31, 1994 and 1995, respectively, estimated based on fees currently
charged for similar agreements. The fair value of the Company's financial
guarantees is not determinable based on the specific characteristics of the
guarantees.
9) CONCENTRATION OF CREDIT RISK
Although credit risk is inherent to the foregoing types of financial
instruments and the Company is exposed to losses in the event of non-
performance by the counterparties, the Company believes that the aggregate
credit risk associated with its present swap and hedge arrangements is not
significant due to the nature of the contracts and the counterparties thereto.
The Company's gas and oil production purchasers consist primarily of
independent marketers and major gas pipeline companies. The Company performs
credit evaluations of its customers' financial condition and obtains credit
support if the Company believes it is warranted. The Company has not
experienced any significant losses from uncollectible accounts.
10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of current assets and current liabilities approximate
fair value due to the short-term nature of those instruments. The fair value
of the Company's long-term debt due to MidAmerican Capital based on current
rates offered to the Company for debt of similar maturity at December 31, 1994
and 1995 was $50,270,000 and $46,822,000, respectively, as compared to a book
value at December 31, 1994 and 1995 of $60,724,000 and $52,907,000,
respectively.
11) COMMITMENTS
The Company is a lessee in several agreements to lease office space at
various locations. The lease agreements expire in 1999 through 2001, with
various options for renewal. The following is a schedule by year of estimated
future rent expense on such leases as of December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996....................................................... $ 514,000
1997....................................................... 519,000
1998....................................................... 524,000
1999....................................................... 472,000
2000....................................................... 318,000
Thereafter................................................. 205,000
----------
Total.................................................. $2,552,000
==========
</TABLE>
12) SUBSEQUENT EVENTS
In April 1996, the Company acquired the interests of Enron Oil & Gas Company
in certain gas and oil properties, associated gas gathering lines and other
well equipment located in Texas. The net purchase price at closing was
approximately $53.2 million. The Company concurrently conveyed certain
interests in particular wells to InterCoast Global Management, Inc., a wholly
owned subsidiary of MidAmerican Capital. The Company retained a production
payment on 100 percent of the net proceeds of production from such wells until
approximately 80 percent of the estimated proved developed natural gas
reserves attributable to the wells is
F-13
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
produced. In consideration, the Company received from InterCoast Global
Management, Inc. $5.6 million in cash and a promissory note in the amount of
$2.3 million, which is payable in 48 monthly installments over four years and
bears interest at the prime rate. The total adjusted purchase price was $45.2
million. The Company recorded no gain or loss related to this transaction. The
proved reserves associated with the production payment are included in the
Company's estimated net quantities of oil and gas reserves presented in Note
14. The revenues and direct operating expenses for the acquired properties and
gathering systems for 1995 were $14.7 million and $3.1 million, respectively.
On May 22, 1996, the Company's Board of Directors and sole stockholder
approved the Intercoast Energy Long Term Incentive Plan (the Stock Plan) which
is to become effective upon, and only in the event of, consummation of the
offering contemplated by the Registration Statement described below. The
number of shares of Common Stock reserved for issuance upon exercise of
options to be granted under the Stock Plan equals 10% of the number of shares
issued and outstanding immediately after closing of the offering. The Board
has granted options for 541,600 shares at a purchase price equal to the
initial offering price at which shares are to be issued to the public. These
options vest at a rate of one-third per year commencing one year from the date
of the grant and expire ten years from the date of grant.
On May 24, 1996, the Company filed a registration statement with the
Securities and Exchange Commission relating to the proposed public offering by
the Company of 6,150,000 previously unissued shares of its common stock.
On June 19, 1996, an action was brought by Nab Nat. Resources, L.L.C.
against several defendants, including InterCoast Oil and Gas, in the Second
Judicial District Court, Claiborne Parish, State of Louisiana, seeking a
declaration of the court that certain leases and a unit agreement had lapsed
by reason of a cessation of production of oil or gas in paying quantities that
allegedly occurred in the mid 1980's. The plaintiff also seeks, among other
things, an accounting of the production of oil, gas and other minerals from
the properties since the alleged lapse of the leases, damages of not less than
$5,000,000 for restoration and clean up of the properties covered by the
leases and certain other unquantified damages for trespass and mental anguish.
The Company is in the preliminary stages of investigating the facts on which
the lawsuit appear to be based. While the Company cannot predict the outcome
of this litigation, the Company believes that an adverse judgment in this
lawsuit would not have a material adverse effect on its financial condition or
results of operations. The Company currently intends to continue its
investigation of the lawsuit and to defend the action vigorously.
13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The results of operations by quarter for the years ended December 31, 1994
and 1995 are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1994 QUARTER ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues....................... $ 15,612 $ 15,529 $ 14,139 $ 13,332
Income before income taxes........... $ 1,976 $ 2,280 $ 1,187 $ 282
Net income........................... $ 1,235 $ 1,247 $ 553 $ 366
Net income per share................. $ 0.16 $ 0.16 $ 0.07 $ 0.04
<CAPTION>
1995 QUARTER ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues....................... $ 12,991 $ 14,223 $ 14,047 $ 31,335
Income before income taxes........... $ 556 $ 1,219 $ 581 $ 2,010
Net income........................... $ 367 $ 591 $ 214 $ 1,713
Net income per share................. $ 0.05 $ 0.07 $ 0.03 $ 0.21
</TABLE>
F-14
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the fourth quarter of 1994, the Company experienced a significant decline
in its realized gas price causing reductions in gas and oil revenues and
income before income taxes as compared to the prior three quarters of 1994.
In the fourth quarter of 1995, the Company acquired certain assets of GED
Gas Services, L.L.C. The acquisition generated natural gas sales revenues of
$14.1 million in such quarter that were not included in the 1994 fourth
quarter results or the prior three quarters of 1995. Additionally, in the
fourth quarter of 1995, the Company's gas production volumes and realized gas
prices increased resulting in higher gas and oil revenues and income before
income taxes as compared to the prior three quarters of 1995.
14) SUPPLEMENTARY OIL AND GAS DISCLOSURES
Users of the following information should be aware that the process of
estimating quantities of proved and proved developed oil and gas reserves is
very complex, requiring significant subjective decisions in the evaluation of
all available geological, engineering and economic data for each reservoir.
The data for a given reservoir may also change substantially over time as a
result of numerous factors including, but not limited to, additional
development activity, evolving production history and continual reassessment
of the viability of production under varying economic conditions.
Consequently, material revisions to existing reserve estimates occur from time
to time. Although every reasonable effort is made to ensure that reserve
estimates reported represent the most accurate assessment possible, the
significance of the subjective decisions required and variances in available
data for various reservoirs make these estimates generally less precise than
other estimates presented in connection with financial statement disclosures.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate that geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs under
economic and operating conditions existing at the time the estimates were
made.
Proved developed reserves are proved reserves that can be expected to be
recovered through wells and equipment in place and under operating methods
being utilized at the time the estimates were made.
Capitalized costs for oil and gas producing activities consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Proved properties............................... $146,422 $184,502 $223,088
Unproved properties............................. 1,487 1,629 2,059
Accumulated depletion, depreciation and
amortization................................... (26,459) (45,061) (66,550)
-------- -------- --------
Net capitalized costs....................... $121,450 $141,070 $158,597
======== ======== ========
</TABLE>
Costs incurred for oil and gas property acquisition, exploration and
development activities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Development............................................. $12,749 $22,000 $34,639
Property acquisitions................................... 59,913 18,705 2,726
Exploration............................................. 2,322 2,144 3,480
------- ------- -------
$74,984 $42,849 $40,845
======= ======= =======
</TABLE>
F-15
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Estimated Net Quantities of Oil and Gas Reserves--(Unaudited)
The following table sets forth the Company's net proved reserves, including
the changes therein, and proved developed reserves (all within the United
States) at the end of each of the three years in the period ended December 31,
1995:
<TABLE>
<CAPTION>
NATURAL OIL AND
GAS LIQUIDS TOTAL
(MMCF) (MBBL) (MMCFE)
--------- -------- ---------
<S> <C> <C> <C>
Net proved reserves at December 31, 1992........ 64,806.5 3,111.0 83,472.5
Revisions of previous estimates............... (6,649.3) 441.8 (3,998.5)
Extensions, discoveries and other additions... 14,911.6 288.4 16,642.0
Purchases of reserves in place................ 55,740.1 5,840.3 90,781.9
Production.................................... (12,741.8) (690.8) (16,886.6)
Sales of reserves in place.................... (4,043.7) (35.6) (4,257.3)
--------- -------- ---------
Net proved reserves at December 31, 1993........ 112,023.4 8,955.1 165,754.0
Revisions of previous estimates............... (10,931.0) (1,089.0) (17,465.0)
Extensions, discoveries and other additions... 39,713.5 375.0 41,963.5
Purchases of reserves in place................ 23,804.9 1,489.6 32,742.5
Production.................................... (15,590.9) (1,024.4) (21,737.3)
Sales of reserves in place.................... (408.9) (1,402.5) (8,823.9)
--------- -------- ---------
Net proved reserves at December 31, 1994........ 148,611.0 7,303.8 192,433.8
Revisions of previous estimates............... (22,594.8) 3,265.8 (3,000.0)
Extensions, discoveries and other additions... 24,372.5 514.0 27,456.5
Purchases of reserves in place................ 1,119.2 12.7 1,195.4
Production.................................... (17,835.4) (1,027.9) (24,002.8)
Sales of reserves in place.................... 0.0 (224.4) (1,346.4)
--------- -------- ---------
Net proved reserves at December 31, 1995........ 133,672.5 9,844.0 192,736.5
========= ======== =========
Net proved developed reserves
at December 31, 1993.......................... 100,660.0 8,173.0 149,698.0
at December 31, 1994.......................... 115,099.0 6,717.0 155,401.0
at December 31, 1995.......................... 111,189.0 8,255.0 160,719.0
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves (Unaudited)
The following information has been developed utilizing procedures prescribed
by Statement of Financial Accounting Standards No. 69 "Disclosures about Oil
and Gas Producing Activities" (SFAS No. 69) and based on natural gas and crude
oil reserve and production volumes estimated, in part by the Company, but
primarily by the Company's independent petroleum engineers, Netherland, Sewell
and Associates, Inc. It may be useful for certain comparative purposes, but
should not be solely relied upon in evaluating the Company or its performance.
Further, information contained in the following table should not be considered
as representative of realistic assessments of future cash flows, nor should
the Standardized Measure of Discounted Future Net Cash Flows be viewed as
representative of the current value of the Company.
The Company believes that the following factors should be taken into account
in reviewing the following information: (1) future costs and selling prices
will probably differ from those required to be used in these calculations; (2)
due to future market conditions and governmental regulations, actual rates of
production achieved in future years may vary significantly from the rate of
production assumed in the calculations; (3) selection of a 10% discount rate
is arbitrary and may not be reasonable as a measure of the relative risk
inherent in realizing future net oil and gas revenues; and (4) future net
revenues may be subject to different rates of income taxation.
F-16
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the Standardized Measure, future cash inflows were estimated by
applying period-end oil and gas prices adjusted for fixed and determinable
escalations to the estimated future production of period-end reserves. As of
December 31, 1995, approximately 37.5 Bcf of gas of the Company's future
production was subject to commodity price swap agreements (see Note 8). Future
cash inflows were reduced by estimated future development, abandonment and
production costs based on period-end costs in order to arrive at future net
cash flow before tax. Future income tax expense has been computed by applying
period-end statutory tax rates to aggregate future pre-tax net cash flows,
reduced by the tax basis of the properties involved and tax carryforwards. Use
of a 10% discount rate is required by SFAS No. 69.
Management does not rely solely upon the following information in making
investment and operating decisions. Such decisions are based upon a wide range
of factors, including estimates of probable as well as possible reserves and
varying price and cost assumptions considered more representative of a range
of possible economic conditions that may be anticipated.
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves is as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows....................... $ 354,076 $ 369,430 $ 430,282
Future production costs................... (119,855) (123,914) (155,984)
Future development and abandonment costs.. (13,886) (24,003) (16,078)
--------- --------- ---------
Future net cash flows before income
taxes.................................... 220,335 221,513 258,220
Future income tax expense................. (50,633) (47,526) (65,314)
10% annual discount for estimating timing
of cash flows............................ (51,500) (47,943) (55,982)
--------- --------- ---------
Standardized measure of discounted future
net cash flows........................... $ 118,202 $ 126,044 $ 136,924
========= ========= =========
</TABLE>
A summary of the principal changes in the standardized measure of discounted
future net cash flows applicable to proved oil and gas reserves is as follows
(unaudited):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning of the period...................... $ 62,177 $118,202 $126,044
-------- -------- --------
Revisions of previous estimates:
Changes in prices and costs.................. (551) (25,715) 8,275
Changes in quantities........................ (3,957) (13,134) (2,627)
Changes in future development costs.......... (6,016) (7,323) (2,948)
Previously estimated development costs
incurred during the period.................. 8,951 11,572 17,954
Additions to proved reserves resulting from
extensions and discoveries, less related
costs....................................... 16,314 31,935 26,998
Sales of reserves in place................... (2,763) (663) (769)
Purchases of reserves in place............... 68,074 27,006 2,085
Accretion of discount........................ 7,760 13,771 14,460
Sales of oil and gas, net of production
costs....................................... (27,728) (29,129) (32,961)
Net changes in income taxes.................. (4,089) 958 (12,684)
Changes in estimated timing of production and
other....................................... 30 (1,436) (6,903)
-------- -------- --------
Net increase................................. 56,025 7,842 10,880
-------- -------- --------
End of period................................ $118,202 $126,044 $136,924
======== ======== ========
</TABLE>
F-17
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................... $ 8,303 $ 1,879
Accounts receivable......................... 23,016 25,656
Other....................................... 1,640 1,393
-------- --------
Total current assets...................... 32,959 28,928
Gas and oil properties, net................... 158,597 166,231
Continental Power Exchange, Inc., net......... 4,030 4,338
Intangible and other assets, net.............. 4,578 4,594
-------- --------
Total assets.............................. $200,164 $204,091
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable............................ $ 17,482 $ 22,642
Other current liabilities................... 3,966 4,525
-------- --------
Total current liabilities................. 21,448 27,167
-------- --------
Accumulated deferred income taxes, net........ 23,648 25,167
-------- --------
Long-term debt due to MidAmerican Capital..... 52,907 47,000
-------- --------
Stockholder's equity
Common stock ($.01 par value, 25,000,000
shares authorized, 7,927,500 shares issued
and outstanding)........................... 79 79
Additional paid-in capital.................. 85,995 85,995
Retained earnings........................... 16,087 18,683
-------- --------
Total stockholder's equity................ 102,161 104,757
-------- --------
Total liabilities and stockholder's
equity................................... $200,164 $204,091
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-18
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1995 1996
-------------- --------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
INTERCOAST OIL AND GAS COMPANY
Gas and oil revenues.......................... $ 10,995 $ 15,647
Gas and oil operating expenses................ (3,645) (3,508)
Depreciation, depletion and amortization
expense...................................... (5,115) (6,214)
General and administrative expense, net....... (640) (714)
------------- --------------
1,595 5,211
------------- --------------
INTERCOAST ENERGY MARKETING
Natural gas sales revenues.................... 1,996 34,972
Cost of gas sold.............................. (1,874) (34,184)
Electric power sales revenues................. -- 406
Cost of electric power sold................... -- (292)
Operating expenses............................ (209) (596)
General and administrative expense............ (103) (181)
------------- --------------
(190) 125
------------- --------------
CONTINENTAL POWER EXCHANGE, INC.
Administrative and development expense, net... (460) (739)
------------- --------------
Corporate expenses.............................. (389) (472)
------------- --------------
Income before income taxes...................... 556 4,125
Provision for income taxes...................... 189 1,529
------------- --------------
Net income...................................... $ 367 $ 2,596
============= ==============
Average common shares outstanding............... 7,928 7,928
============= ==============
Earnings per common share....................... $ 0.05 $ 0.33
============= ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-19
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL
------------- PAID- RETAINED
SHARES AMOUNT IN CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995........ 7,928 $79 $85,995 $16,087 $102,161
Net income.......................... -- -- -- 2,596 2,596
----- --- ------- ------- --------
BALANCE AT MARCH 31, 1996........... 7,928 $79 $85,995 $18,683 $104,757
===== === ======= ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
F-20
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1995 1996
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................... $ 367 $ 2,596
Adjustments to reconcile net income to net
cash from operating activities:
Deferred income taxes, net................... 3,761 1,519
Provision for depreciation, depletion and
amortization................................ 5,623 6,352
Change in working capital items:
Accounts receivable......................... (1,046) (2,640)
Other current assets........................ 320 247
Accounts payable............................ 1,560 5,160
Other current liabilities................... 1,686 559
-------------- --------------
Net cash from operating activities......... 12,271 13,793
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in:
Gas and oil properties....................... (10,389) (13,847)
Continental Power Exchange, Inc.............. (752) (362)
Other......................................... (14) (101)
-------------- --------------
Net cash from investing activities......... (11,155) (14,310)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of borrowings from MidAmerican
Capital...................................... -- 3,246
Repayments of borrowings from MidAmerican
Capital...................................... (2,607) (9,153)
Contributions from MidAmerican Capital........ 1,169 --
-------------- --------------
Net cash from financing activities......... (1,438) (5,907)
-------------- --------------
Net decrease in cash and cash equivalents...... (322) (6,424)
Cash and cash equivalents at beginning of
period........................................ 5,127 8,303
-------------- --------------
Cash and cash equivalents at end of period..... $ 4,805 $ 1,879
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) during the period for:
Income taxes................................. $ (3,573) $ 10
============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-21
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1) GENERAL
The accompanying consolidated financial statements have been prepared by
InterCoast Energy Company (Company), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company, all
adjustments are of a normal and recurring nature and have been made to present
fairly the financial position, the results of operations, the changes in cash
flows and the changes in stockholder's equity for the periods presented.
Although the Company believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these financial
statements be read in conjunction with the audited, consolidated financial
statements and notes thereto included in this Prospectus.
2) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
On January 1, 1996, the Company adopted SFAS No. 121 regarding accounting
for asset impairments. This statement requires the Company to review long-
lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of SFAS 121 had no impact on the Company's results of operations or
financial position.
3) SUBSEQUENT EVENTS
In April 1996, the Company acquired the interests of Enron Oil & Gas Company
in certain gas and oil properties, associated gas gathering lines and other
well equipment located in Texas. The net purchase price at closing was
approximately $53.2 million. The Company concurrently conveyed certain
interests in particular wells to InterCoast Global Management, Inc., a wholly
owned subsidiary of MidAmerican Capital Company, the Company's sole
stockholder. The Company retained a production payment on 100 percent of the
net proceeds of production from such wells until approximately 80 percent of
the estimated proved developed natural gas reserves attributable to the wells
is produced. In consideration, the Company received from InterCoast Global
Management, Inc. $5.6 million in cash and a promissory note in the amount of
$2.3 million, which is payable in 48 monthly installments over four years and
bears interest at the prime rate. The total adjusted purchase price was $45.2
million. The Company recorded no gain or loss related to this transaction. The
proved reserves associated with the production payment are included in the
Company's estimated net quantities of oil and gas reserves. The revenues and
direct operating expenses for the acquired properties and gathering systems
for the first quarter of 1996, which were not included in the Company's
results of operations for the first quarter of 1996, were $3.7 million and
$0.6 million, respectively.
On May 22, 1996, the Company's Board of Directors and sole stockholder
approved the Intercoast Energy Long Term Incentive Plan (the Stock Plan) which
is to become effective upon, and only in the event of, consummation of the
offering contemplated by the Registration Statement described below. The
number of shares of Common Stock reserved for issuance upon exercise of
options to be granted under the Stock Plan equals 10% of the number of shares
issued and outstanding immediately after closing of the offering. The Board
has granted options for 541,600 shares at a purchase price equal to the
initial offering price at which shares are to be issued to the public. These
options vest at a rate of one-third per year commencing one year from the date
of the grant and expire ten years from the date of grant.
On May 24, 1996, the Company filed a registration statement with the
Securities and Exchange Commission relating to the proposed offering by the
Company of 6,150,000 previously unissued shares of its Common Stock.
On June 19, 1996, an action was brought by Nab Nat. Resources, L.L.C.
against several defendants, including InterCoast Oil and Gas, in the Second
Judicial District Court, Claiborne Parish, State of Louisiana, seeking a
declaration of the court that certain leases and a unit agreement had lapsed
by reason of a cessation of
F-22
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
production of oil or gas in paying quantities that allegedly occurred in the
mid 1980's. The plaintiff also seeks, among other things, an accounting of the
production of oil, gas and other minerals from the properties since the
alleged lapse of the leases, damages of not less than $5,000,000 for
restoration and clean up of the properties covered by the leases and certain
other unquantified damages for trespass and mental anguish. The Company is in
the preliminary stages of investigating the facts on which the lawsuit appear
to be based. While the Company cannot predict the outcome of this litigation,
the Company believes that an adverse judgment in this lawsuit would not have a
material adverse effect on its financial condition or results of operations.
The Company currently intends to continue its investigation of the lawsuit and
to defend the action vigorously.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors of
InterCoast Energy Company:
We have audited the accompanying statements of revenues and direct operating
expenses of the Sawyer Canyon Properties (see Note 1) for the years ended
December 31, 1995 and 1994. These statements are the responsibility of
InterCoast Energy Company's management. Our responsibility is to express an
opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of revenues and
direct operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the statements of revenues and direct operating expenses
referred to above presents fairly, in all material respects, the revenues and
direct operating expenses of the Sawyer Canyon Properties (see Note 1) for the
years ended December 31, 1995 and 1994, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Houston, Texas
June 28, 1996
F-24
<PAGE>
SAWYER CANYON PROPERTIES
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
----------------------------------- ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Gas and oil.............. $20,661 $13,084 $3,425
Gathering systems........ 2,033 1,594 315
------- ------- ------
Total revenues......... 22,694 14,678 3,740
------- ------- ------
DIRECT OPERATING EXPENSES:
Gas and oil operating.... 2,625 2,953 614
Gathering systems........ 163 105 31
------- ------- ------
Total expenses......... 2,788 3,058 645
------- ------- ------
Excess of revenues over
direct operating
expenses.................. $19,906 $11,620 $3,095
======= ======= ======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-25
<PAGE>
SAWYER CANYON PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(1) THE SAWYER CANYON PROPERTIES
On March 30, 1996, Enron Oil & Gas Company (EOG) entered into a purchase and
sale agreement (the Agreement) to sell certain gas and oil properties and
related assets and two gathering systems (collectively, the Sawyer Canyon
Properties) to InterCoast Oil and Gas Company (the Company). The purchase
price as of the January 1, 1996 effective date, $55.5 million, was subject to
certain adjustments including the net revenues (as defined in the Agreement)
between the effective date and the closing date. The net purchase price at
closing, April 12, 1996, was approximately $53.2 million of which $3.0 million
was assigned to the carrying value of related gathering systems which were
transferred to InterCoast Gas Services Company, an affiliated company. The
properties, predominantly natural gas, and the associated gathering systems
are located in West Texas. The Company has recorded the acquisition of the
Sawyer Canyon Properties for accounting purposes as of April 12, 1996, the
closing date of the acquisition.
Concurrent with the closing of the acquisition of the Sawyer Canyon
Properties from EOG, the Company conveyed certain interests in particular
wells to InterCoast Global Management, Inc., a wholly owned subsidiary of
MidAmerican Capital Company, the Company's indirect parent. The Company
retained a production payment on 100 percent of the net proceeds of production
of such wells until approximately 80 percent of the estimated proved developed
natural gas reserves attributable to the wells has been produced. The Company
received from InterCoast Global Management, Inc. $5.6 million in cash and a
promissory note in the amount of $2.3 million, which is payable in 48 monthly
installments over four years and bears interest at the prime rate. The Company
recorded no gain or loss on this transaction.
(2) BASIS OF PRESENTATION
Certain costs, such as depreciation, depletion and amortization, general and
administrative expenses and federal and state income taxes were not allocated
to the above properties because the property interests and related assets and
gathering systems acquired represent only a portion of EOG's business and the
costs incurred by EOG are not necessarily indicative of the costs to be
incurred by the Company. Historical financial information reflecting financial
position, results of operations and cash flows of the Sawyer Canyon Properties
are not presented because the entire acquisition cost was assigned to the gas
and oil property interests and the related gathering systems. Accordingly, the
historical statements of revenues and direct operating expenses have been
presented in lieu of the financial statements required under Rule 3-05 of
Securities and Exchange Commission Regulation S-X.
Revenues and direct operating expenses for the gas and oil properties
included in the accompanying statement represent EOG's interest in the
properties and are presented on the accrual basis of accounting and may not be
representative of future operations. Revenues on the gas and oil properties
are shown net of any applicable severance taxes. Certain of the gas and oil
properties qualify as high-cost natural gas wells and are currently exempt
from Texas severance taxes. Depreciation, depletion and amortization,
allocated general and administrative expenses and federal and state income
taxes have been excluded.
Revenues and direct operating expenses for the two gathering systems are
presented on the accrual basis of accounting and may not be representative of
future operations. Depreciation, depletion and amortization, allocated general
and administrative expenses and federal and state income taxes have been
excluded.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and direct operating
expenses during the reporting period. Actual results could differ from those
estimates.
(3) RELATED PARTY TRANSACTIONS
Included in gas and oil revenues (excluding severance taxes and gathering
and transportation expenses) for the gas and oil properties is approximately
$21.2 million, $13.0 million and $3.0 million for the years ended
F-26
<PAGE>
SAWYER CANYON PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES--(CONTINUED)
December 31, 1994 and 1995, and the three months ended March 31, 1996,
respectively, related to the sale of natural gas and crude oil and condensate
volumes to affiliates of EOG.
Included in revenues for the two gathering systems is approximately $1.8
million, $1.2 million and $0.3 million for the years ended December 31, 1994
and 1995, and the three months ended March 31, 1996, respectively, from the
transportation of natural gas for EOG's production volumes, which are shown as
a reduction in the related gas and oil revenues.
(4) COMMITMENTS AND CONTINGENCIES
Pursuant to the terms of the Agreement, certain claims, litigation, or
disputes pending as of the effective date and certain matters arising in
connection with ownership of the properties or the gathering systems prior to
the effective date are retained by EOG.
(5) SUPPLEMENTAL FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Users of the following information should be aware that the process of
estimating quantities of proved and proved developed oil and gas reserves is
very complex, requiring significant subjective decisions in the evaluation of
all available geological, engineering and economic data for each reservoir.
The data for a given reservoir may also change substantially over time as a
result of numerous factors including, but not limited to, additional
development activity, evolving production history and continual reassessment
of the viability of production under varying economic conditions.
Consequently, material revisions to existing reserve estimates occur from time
to time. Although every reasonable effort is made to ensure that reserve
estimates reported represent the most accurate assessments possible, the
significance of the subjective decisions required and variances in available
data for various reservoirs make these estimates generally less precise than
other estimates presented in connection with financial statement disclosures.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate, that geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs under
economic and operating conditions existing at the time the estimates were
made.
Proved developed reserves are proved reserves expected to be recovered
through wells and equipment in place and under operating methods being
utilized at the time the estimates were made.
Estimates of proved and proved developed reserves at December 31, 1994 and
1993 were based on studies performed by the engineering staff of EOG.
Estimates of proved and proved developed reserves at December 31, 1995 are
based on estimates prepared by Netherland, Sewell and Associates, Inc.
Estimated Net Quantities of Oil and Gas Reserves
<TABLE>
<CAPTION>
OIL AND
GAS LIQUIDS
(MMCF) (MBBL)
------- --------
<S> <C> <C>
Net proved reserves at December 31, 1993................... 79,614 51
Production............................................... (10,903) (32)
------- ---
Net proved reserves at December 31, 1994................... 68,711 19
Production............................................... (8,145) (17)
Revisions of previous estimates and other................ (2,812) 77
------- ---
Net proved reserves at December 31, 1995................... 57,754 79
======= ===
Net proved developed reserves
at December 31, 1994...................................... 66,449 40
at December 31, 1995...................................... 55,546 72
</TABLE>
F-27
<PAGE>
SAWYER CANYON PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES--(CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows Relating to Oil and
Gas Properties
The following information has been developed utilizing procedures described
by Statement of Financial Accounting Standards No. 69 "Disclosures About Oil
and Gas Producing Activities" and based on natural gas and crude oil reserve
and production volumes estimated by the engineering staff of Netherland,
Sewell and Associates, Inc. It may be useful for certain comparison purposes,
but should not be solely relied upon in evaluating the oil and gas properties
or their performance. Further, information contained in the following table
should not be considered as representative of realistic assessments of future
cash flows, nor should the Standardized Measure of Discounted Future Net Cash
Flows be viewed as representative of the current value of the oil and gas
properties.
The future cash flows presented below are based on sales prices, cost rates,
and statutory income tax rates in existence as of the date of the projections
estimated by Netherland, Sewell and Associates, Inc. It is possible that
material revisions to some estimates of natural gas and crude oil reserves may
occur in the future, development and production of the reserves may occur in
periods other than those assumed, and actual prices realized and costs
incurred may vary significantly from those used.
The future cash flows presented by the Company in the future will be based
on the Company's cost structure and timing of future development and
production and accordingly may be significantly different from those of EOG.
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Future cash inflows.................... $145,946 $133,190
Future production costs................ (45,659) (43,034)
Future development costs............... (1,573) (1,573)
-------- --------
Future net cash flows.................. 98,714 88,583
Discount to present value at 10% annual
rate.................................. (39,129) (33,171)
-------- --------
Standardized measure of discounted
future net cash flows relating to
proved oil and gas reserves........... $ 59,585 $ 55,412
======== ========
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows
The following table sets forth the changes in the standardized measure of
discounted future net cash flows relating to proved oil and gas reserves for
the years ended December 31, 1994 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Beginning of period.................... $ 70,565 $ 59,585
Accretion of discount.................. 7,056 5,958
Sales of oil and gas, net of production
costs................................. (18,036) (10,131)
-------- --------
Net decrease........................... (10,980) (4,173)
-------- --------
End of period.......................... $ 59,585 $ 55,412
======== ========
</TABLE>
F-28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES
IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
The Company.............................................................. 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Unaudited Pro Forma Combined Financial Statements........................ 21
Selected Historical Financial Data....................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business and Properties.................................................. 33
Relationship Between the Company and the Parent.......................... 54
Management............................................................... 58
Certain Transactions..................................................... 69
Principal and Selling Stockholder........................................ 70
Description of Capital Stock............................................. 71
Shares Eligible for Future Sale.......................................... 72
Underwriting............................................................. 73
Legal Matters............................................................ 74
Experts.................................................................. 75
Additional Information................................................... 75
Glossary................................................................. 76
Index to Financial Statements............................................ F-1
</TABLE>
----------------
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7,150,000 SHARES
INTERCOAST ENERGY
COMPANY
COMMON STOCK
----------------
PROSPECTUS
----------------
PAINEWEBBER INCORPORATED
MERRILL LYNCH & CO.
----------------
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
All amounts, except SEC and NASD fees, are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.......... $ 45,366
NASD filing fee.............................................. 13,656
New York Stock Exchange listing fee.......................... 125,000
Transfer agent's fees........................................ 3,000
Printing, engraving and shipping expenses.................... 125,000
Legal fees and expenses...................................... 150,000
Blue sky fees and expenses................................... 15,000
Accounting fees.............................................. 300,000
Investment advisory fees..................................... 100,000
Miscellaneous................................................ 17,978
--------
Total.................................................... $895,000(1)
========
</TABLE>
--------
(1) MidAmerican Capital, as a selling stockholder, will pay a
pro rata share of such expenses based on the ratio of the
total number of shares sold by it in the Offering to the
total number of shares sold in the Offering.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides generally that
a corporation may indemnify any person who was or is a party to or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
in nature, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) and, in a proceeding not by or in the right of the
corporation, judgments, fines and amounts paid in settlement, actually and
reasonably incurred by him in connection with such suit or proceeding, if he
acted in good faith and in a manner believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reason to believe his conduct was unlawful. Delaware law
further provides that a corporation may not indemnify any person against
expenses incurred in connection with an action by or in the right of the
corporation if such person shall have been adjudged to be liable in the
performance of his duty to the corporation unless and only to the extent that
the court in which such action or suit was brought shall determine that,
despite the adjudication of liability but in the view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for
the expenses which such court shall deem proper. The Certificate of
Incorporation and Bylaws provide that the Company shall indemnify an officer
or director against liabilities incurred by such person as authorized under
the Delaware General Corporation Law. In addition, in connection with the
Offering the Company anticipates entering into specific agreements with the
directors and officers of the Company providing for indemnification of such
persons under certain circumstances. The Certificate of Incorporation also
eliminates, subject to certain limitations, the liability of the Company's
directors for monetary damages for breach of their fiduciary duty as
directors.
The form of Underwriting Agreement included as Exhibit 1.1 provides for
indemnification of the Company and certain controlling persons under certain
circumstances, including liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information is furnished as to securities of the Company sold
within the past three years which were not registered under the Securities
Act. Each of the issuances and sales described below was effected and relies
upon an exemption from registration under Section 4(2) of the Securities Act,
for transactions by an
II-1
<PAGE>
issuer not involving any public offering, or other exemptions as set forth
below. Grants of options are included only to the extent that such grants are
considered to be sales. No underwriting discounts or commissions were paid in
connection with such issuances and sales.
1. On May 23, 1996, in connection with the organization of the Company,
the Company issued 7,927,500 shares of Common Stock to MidAmerican Capital
as consideration for the transfer to the Company of the stock of the
Company's operating subsidiaries valued at $104.8 million as of March 31,
1996, consisting of aggregate retained earnings of $18,683,000 and
aggregate cash capital contributions of $86,074,000.
2. Effective May 22, 1996, the Company granted stock options for the
purchase of 541,600 shares of the Common Stock to certain officers and key
employees of the Company pursuant to the Stock Plan.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits*:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
1.1**** Form of Underwriting Agreement.
3.1** Certificate of Incorporation of the Company.
3.2** Bylaws of the Company.
4.1*** Form of stock certificate for the Company's Common Stock, par
value $0.01 per share.
5.1*** Opinion of Conner & Winters, A Professional Corporation.
10.1** Purchase and Sale Agreement dated March 30, 1996, between the
Company and Enron Oil & Gas Company and Enron Oil & Gas
Marketing Inc.
10.2** Amendment to Purchase and Sale Agreement dated April 10, 1996,
between the Company and Enron Oil & Gas Company and Enron Oil
& Gas Marketing, Inc.
10.3 Revolving Credit Facility dated July 15, 1996, between the
Company and The First National Bank of Chicago.
10.4**** Form of Administrative Services Agreement between the Company
and MidAmerican Capital Company ("MidAmerican Capital").
10.5** InterCoast Energy Company Long Term Incentive Plan.
10.6** InterCoast Energy Company Non-Employee Director Restricted
Stock Plan.
10.7** Purchase and Sale Agreement dated April 12, 1996, between the
Company and InterCoast Global Management, Inc.
10.8**** Form of Tax Sharing Agreement between the Company and
MidAmerican Capital.
10.9**** Form of Indemnification Agreement between the Company and
MidAmerican Capital.
10.10*** Promissory Note dated April 12, 1996, in the original
principal amount of $45,240,000 made by the Company in favor
of MidAmerican Capital.
10.11 Variable Balance Promissory Note and Loan Agreement dated May
23, 1996, in the maximum principal amount of $65,000,000 made
by the Company in favor of MidAmerican Capital.
10.12** InterCoast Energy Company Performance Incentive Plan.
10.13** Medallion Production Company Performance Incentive Plan dated
April 1992, and addendums dated January 1994 and March 1994.
10.14*** Asset Purchase Agreement dated December 15, 1995, between GED
Gas Services, L.L.C., Unit Corporation, Kevin J. Sullivan, as
Trustee of the Karen S. Sullivan Trust dated June 9, 1992,
Robert L. Bayless, Bill A. Queen, Burt B. Holmes, and Kent
Bogart, and GED Energy Services, Inc., and InterCoast Energy
Company.
10.15**** Form of Sublease Agreement between the Company and MidAmerican
Capital.
10.16**** Form of Sublease Agreement between Intercoast Gas Services
Company and AmGas, Inc.
10.17**** Form of Registration Rights Agreement between the Company and
MidAmerican Capital.
21.1*** Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2** Consent of Netherland, Sewell and Associates, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
23.3** Consent of Conner & Winters, A Professional Corporation
(included in Exhibit 5).
23.4** Consent of William E. Warnock, Jr.
23.5** Consent of Russell E. Christiansen.
23.6** Consent of Stanley J. Bright.
23.7** Consent of John A. Rasmussen, Jr.
23.8** Consent of George G. Daly.
23.9** Consent of Robert C. Thomas.
24.1** Power of Attorney (included in this Part II).
27.1*** Financial Data Schedule.
99.1*** Summary reserve report of Netherland, Sewell & Associates,
Inc. dated May 13, 1996.
</TABLE>
--------
*Exhibits excluded are not applicable.
**Filed with the Registration Statement on Form S-1, No. 333-4525, on
May 24, 1996.
*** Filed with Amendment No. 1 to the Registration Statement on Form
S-1, No. 333-4525 on June 28, 1996.
**** To be filed by Amendment.
(b) Financial Statement Schedules:
None.
All other schedules are omitted as inapplicable or because the required
information is contained in the financial statements or included in the
footnotes thereto.
ITEM 17. UNDERTAKINGS.
1. The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closings specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
3. The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF DALLAS AND STATE OF TEXAS ON THE 18TH DAY OF JULY, 1996.
InterCoast Energy Company
/s/ Donald C. Heppermann
By: _________________________________
DONALD C. HEPPERMANN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
NAME TITLE DATE
---- ----- ----
/s/ Donald C. Heppermann Chairman, Chief July 18, 1996
- ------------------------------------- Executive Officer
DONALD C. HEPPERMANN and Director
(Principal
Executive Officer)
/s/ Daniel E. Lonergan Vice President-- July 18, 1996
- ------------------------------------- Finance, Controller
DANIEL E. LONERGAN and Treasurer
(Principal
Accounting Officer
and Principal
Financial Officer)
II-4
<PAGE>
EXHIBIT 10.3
CREDIT AGREEMENT
Dated as of July 15, 1996
AMONG
INTERCOAST ENERGY COMPANY
AND
THE FIRST NATIONAL BANK OF CHICAGO,
individually and as Agent
THE LENDERS FROM TIME TO TIME PARTY HERETO
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TABLE OF CONTENTS
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ARTICLE I. DEFINITIONS........................................ 1
ARTICLE II. THE CREDITS........................................ 18
2.1. Commitment......................................... 18
2.2. Termination; Required Payments..................... 18
2.3. Ratable Loans...................................... 18
2.4. Types of Advances.................................. 18
2.5. Commitment Fee; Reductions in
Aggregate Commitment............................ 18
2.6. Minimum Amount of Each
Advance......................................... 18
2.7. Optional Principal Payments........................ 19
2.8. Mandatory Principal Payments....................... 19
2.8.1. Borrowing Base Deficiency................... 19
2.8.2. Sale of Oil and Gas Interests............... 19
2.8.3. Prepayment of Eurodollar Advances........... 19
2.9. Method of Selecting Types and Interest
Periods for New Advances........................... 20
2.10. Conversion and Continuation of
Outstanding Advances............................... 20
2.11. Changes in Interest Rate, etc...................... 21
2.12. Rates Applicable After Default..................... 21
2.13. Method of Payment.................................. 21
2.14. Notes; Telephonic Notices.......................... 22
2.15. Interest Payment Dates; Interest and Fee
Basis........................................... 22
2.16. Notification of Advances, Interest Rates,
Prepayments and Commitment Reductions........... 22
2.17. Lending Installations.............................. 23
2.18. Non-Receipt of Funds by the Agent.................. 23
ARTICLE III. CHANGE IN CIRCUMSTANCES............................ 23
3.1. Yield Protection................................... 23
3.2. Changes in Capital Adequacy Regulations............ 24
3.3. Availability of Types of Advances.................. 24
3.4. Funding Indemnification............................ 25
3.5. Lender Statements; Survival of Indemnity........... 25
ARTICLE IV. OIL AND GAS BORROWING BASE......................... 25
4.1. Initial Oil and Gas Borrowing Base................. 25
4.2. Determination of the Oil and Gas
Borrowing Base.................................. 26
4.3. Reduction Upon Sale of Oil
and Gas Interests............................... 26
ARTICLE V. CONDITIONS PRECEDENT; WITHHOLDING TAX
EXEMPTION....................................... 26
5.1. Initial Advance.................................... 26
5.2. Each Advance....................................... 28
(i)
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5.3. Withholding Tax Exemption.......................... 29
ARTICLE VI. REPRESENTATIONS AND WARRANTIES..................... 30
6.1. Corporate Existence and Standing................... 30
6.2. Authorization and Validity......................... 30
6.3. No Conflict; Government Consent.................... 30
6.4. Amendments to MidAmerican Capital Agreements....... 30
6.5. Financial Statements .............................. 31
6.6. Material Adverse Change............................ 31
6.7. Taxes.............................................. 31
6.8. Litigation and Contingent Obligations.............. 31
6.9. Subsidiaries....................................... 31
6.10. ERISA.............................................. 31
6.11. Accuracy of Information............................ 32
6.12. Regulation U....................................... 32
6.13. Material Agreements................................ 32
6.14. Compliance With Laws............................... 32
6.15. Ownership of Properties............................ 32
6.16. Plan Assets; Prohibited Transactions............... 32
6.17. Oil and Gas Interests.............................. 33
6.18. Environmental Matters.............................. 33
6.19. Investment Company Act............................. 33
6.20. Public Utility Holding Company Act................. 33
ARTICLE VII. COVENANTS......................................... 34
7.1. Financial Reporting................................ 34
7.2. Use of Proceeds.................................... 36
7.3. Notice of Default.................................. 36
7.4. Conduct of Business................................ 37
7.5. Taxes.............................................. 37
7.6. Insurance.......................................... 37
7.7. Compliance with Laws............................... 37
7.8. Maintenance of Properties.......................... 37
7.9. Audit of Accounts and Inspections.................. 37
7.10. Consolidated Tangible Net Worth.................... 38
7.11. Interest Coverage Ratio............................ 38
7.12. Dividends.......................................... 38
7.13. Indebtedness....................................... 39
7.14. Merger............................................. 39
7.15. Sale of Assets..................................... 39
7.16. Investments and Acquisitions....................... 39
7.17. Liens.............................................. 40
7.18. Affiliates......................................... 40
7.19. Sale of Accounts................................... 40
7.20. Sale and Leaseback................................. 40
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(ii)
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7.21. No Negative Pledges................................ 40
7.22. Commodity Contracts and Interest Rate
Hedging Agreements................................. 41
ARTICLE VIII. DEFAULTS......................................... 41
ARTICLE IX. ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES..... 44
9.1. Acceleration....................................... 44
9.2. Amendments......................................... 44
9.3. Preservation of Rights............................. 45
ARTICLE X. GENERAL PROVISIONS................................. 45
10.1. Survival of Representations....................... 45
10.2. Governmental Regulation........................... 45
10.3. Taxes............................................. 45
10.4. Headings.......................................... 45
10.5. Entire Agreement.................................. 45
10.6. Several Obligations; Benefits of this
Credit Agreement................................. 46
10.7. Expenses.......................................... 46
10.8. Indemnification................................... 46
10.9. Numbers of Documents.............................. 47
10.10. Accounting........................................ 47
10.11. Severability of Provisions........................ 47
10.12. Nonliability of Lenders........................... 47
10.13. Confidentiality................................... 48
10.14. Nonreliance....................................... 48
ARTICLE XI. THE AGENT.......................................... 48
11.1. Appointment; Nature of Relationship............... 48
11.2. Powers............................................ 48
11.3. General Immunity.................................. 49
11.4. No Responsibility for Loans, Recitals, etc........ 49
11.5. Action on Instructions of Lenders................. 49
11.6. Employment of Agents and Counsel.................. 49
11.7. Reliance on Documents; Counsel.................... 50
11.8. Agent's Reimbursement and Indemnification......... 50
11.9. Notice of Default................................. 50
11.10. Rights as a Lender................................ 50
11.11. Lender Credit Decision............................ 51
11.12. Successor Agent................................... 51
11.13. Agent's Fee....................................... 51
ARTICLE XII. SETOFF; RATABLE PAYMENTS.......................... 52
12.1. Setoff............................................ 52
12.2. Ratable Payments.................................. 52
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(iii)
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ARTICLE XIII. BENEFIT OF AGREEMENT; ASSIGNMENTS;
PARTICIPATIONS.................................. 52
13.1. Successors and Assigns............................. 52
13.2. Participations..................................... 53
13.2.1. Permitted Participants; Effect............. 53
13.2.2. Voting Rights.............................. 53
13.2.3. Benefit of Setoff.......................... 53
13.3. Assignments........................................ 54
13.3.1. Permitted Assignments...................... 54
13.3.2. Effect; Effective Date..................... 54
13.4. Dissemination of Information....................... 55
13.5. Tax Treatment...................................... 55
ARTICLE XIV. NOTICES........................................... 55
14.1. Notices............................................ 55
14.2. Change of Address.................................. 55
ARTICLE XV. COUNTERPARTS....................................... 55
ARTICLE XVI. CHOICE OF LAW, CONSENT TO JURISDICTION, WAIVER OF
JURY TRIAL......................................... 56
16.1 CHOICE OF LAW...................................... 56
16.2. CONSENT TO JURISDICTION............................ 56
16.3. WAIVER OF JURY TRIAL............................... 56
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EXHIBIT "A" PROMISSORY NOTE
EXHIBIT "B" GUARANTY AGREEMENT
EXHIBIT "C" COMPLIANCE CERTIFICATE
EXHIBIT "D" BORROWING BASE REPORT
EXHIBIT "E-1" FORM OF OPINION OF BORROWER'S COUNSEL
EXHIBIT "E-2" FORM OF OPINION OF GUARANTORS' COUNSEL
EXHIBIT "F" ASSIGNMENT AGREEMENT
EXHIBIT "G" LOAN/CREDIT RELATED MONEY TRANSFER INSTRUCTION
(iv)
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CREDIT AGREEMENT
This Credit Agreement, dated as of July 15, 1996 is among InterCoast
Energy Company, a Delaware corporation, the Lenders from time to time party
hereto and The First National Bank of Chicago, as Agent. The parties hereto
agree as follows:
ARTICLE I.
DEFINITIONS
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As used in this Credit Agreement:
"Acquisition" means any transaction, or any series of related
transactions, consummated on or after the date of this Credit Agreement, by
which the Borrower or any of its Subsidiaries (i) acquires any going business or
all or substantially all of the assets of any firm, corporation or limited
liability company, or division thereof, whether through purchase of assets,
merger or otherwise or (ii) directly or indirectly acquires (in one transaction
or as the most recent transaction in a series of transactions) at least a
majority (in number of votes) of the securities of a corporation which have
ordinary voting power for the election of directors (other than securities
having such power only by reason of the happening of a contingency) or a
majority (by percentage or voting power) of the outstanding ownership interests
of a partnership or limited liability company.
"Advance" means a borrowing hereunder (or conversion or continuation
thereof) consisting of the aggregate amount of the several Loans made on the
same Borrowing Date (or date of conversion or continuation) by the Lenders to
the Borrower of the same Type and, in the case of Eurodollar Advances, for the
same Interest Period.
"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control another Person if the controlling Person owns 20% or
more of any class of voting securities (or other ownership interests having
ordinary voting power) of the controlled Person or possesses, directly or
indirectly, the power to direct or cause the direction of the management or
policies of the controlled Person, whether through ownership of stock, by
contract or otherwise.
"Agent" means The First National Bank of Chicago in its capacity as agent
for the Lenders pursuant to Article XI, and not in its individual capacity as a
Lender, and any successor Agent appointed pursuant to Article XI.
"Aggregate Commitment" means the aggregate of the Commitments of all the
Lenders, as reduced from time to time pursuant to the terms hereof.
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"Alternate Base Rate" means, for any day, a rate of interest per annum
equal to the higher of (i) the Corporate Base Rate for such day, and (ii) the
sum of Federal Funds Effective Rate for such day plus 1/2% per annum.
"Applicable Margin" means, with respect to any Eurodollar Advance,
Floating Rate Advance or payment of the commitment fee due under Section 2.5, as
the case may be,
(a) For each day which is a Control Day, the applicable percentage
set forth in the table below based upon the Utilization Percentage as of
the last day of the immediately preceding fiscal quarter of the Borrower:
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Floating
Utilization Percentage Eurodollar Rate Commitment
("UP") Advance Advance Fee
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UP [GREATER THAN OR 0.750% 0.0% 0.25%
EQUAL TO] 75%
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UP [GREATER THAN OR 0.600% 0.0% 0.25%
EQUAL TO] and [LESS
THAN] 75%
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UP [GREATER THAN OR 0.450% 0.0% 0.20%
EQUAL TO] and [LESS
THAN] 55%
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UP [LESS THAN] 25% 0.375% 0.0% 0.20%
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and
(b) For each day which is not a Control Day, the applicable percentage
set forth in the table below based upon the Utilization Percentage as of
the last day of the immediately preceding fiscal quarter of the Borrower:
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Floating
Utilization Percentage Eurodollar Rate Commitment
("UP") Advance Advance Fee
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UP [GREATER THAN OR 1.000% 0.0% 0.30%
EQUAL TO] 75%
UP [GREATER THAN OR 0.750% 0.0% 0.25%
EQUAL TO] 55% and
[LESS THAN] 75%
UP [GREATER THAN OR 0.625% 0.0% 0.20%
EQUAL TO] 25% and
[LESS THAN]55%
UP [LESS THAN] 25% 0.500% 0.0% 0.20%
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"Arranger" means First Chicago Capital Markets, Inc. and its successors.
"Article" means an article of this Credit Agreement unless another
document is specifically referenced.
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"Authorized Officer" means any Executive Officer and any of the Treasurer,
any Assistant Treasurer, the Controller, any Assistant Controller or the
Secretary of the Borrower, acting singly.
"Available Borrowing Base" means, at any date of determination, (i) the
Borrowing Base as of such date, minus (ii) the aggregate principal amount of all
Indebtedness of the Borrower and its Subsidiaries (other than the Advances)
outstanding on such date.
"Bankruptcy Code" means Title 11, United States Code, Sections 1 et seq.,
as the same may have been and may hereafter be amended from time to time, and
any successor thereto or replacement therefor which may be hereafter enacted.
"Borrower" means InterCoast Energy Company, a Delaware corporation, and
its successors and assigns.
"Borrowing Base" means (i) at any date of determination prior to the
earlier of (A) the first date on which a public offering of the Borrower's
common stock is consummated, and (B) the first anniversary of the Closing Date,
an amount equal to the sum of (1) 80% of the Eligible Accounts on such date,
plus (2) the Oil and Gas Borrowing Base as of such date, and (ii) at any date of
determination on or after the earlier of (A) the first date on which a public
offering of the Borrower's common stock is consummated, and (B) the first
anniversary of the Closing Date, the Oil and Gas Borrowing Base as of such date.
"Borrowing Base Report" means at any date of determination prior to the
earlier of (A) the first date on which a public offering of the Borrower's
common stock is consummated, and (B) the first anniversary of the Closing Date,
a report furnished to the Agent by the Borrowers from time to time in
substantially the form attached hereto as Exhibit "D" (or in such other form as
the Agent may approve from time to time) which certifies the amount of the
Available Borrowing Base and each component thereof as of the date of such
report.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Borrowing Notice" is defined in Section 2.9.
"Business Day" means (i) with respect to any borrowing, payment or rate
selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on
which banks generally are open in Chicago and New York for the conduct of
substantially all of their commercial lending activities and on which dealings
in United States dollars are carried on in the London interbank market and (ii)
for all other purposes, a day (other than a Saturday or Sunday) on which banks
generally are open in Chicago for the conduct of substantially all of their
commercial lending activities.
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"Capitalized Lease" of a Person means any lease of Property by such Person
as lessee which would be capitalized on a balance sheet of such Person prepared
in accordance with generally accepted accounting principles.
"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with
generally accepted accounting principles.
"Closing Date" means the Business Day which shall not be later than August
15, 1996 on which (i) the Borrower, the Agent and the Lenders have executed and
delivered this Credit Agreement, and (ii) all of the conditions precedent set
forth in Section 5.1 shall have been satisfied.
"Commitment" means, for each Lender, the obligation of such Lender to make
Loans not exceeding the amount set forth opposite its signature below or as set
forth in any Notice of Assignment relating to any assignment that has become
effective pursuant to Section 13.3.2, as such amount may be modified from time
to time pursuant to the terms hereof.
"Commitment Percentage" means at any date of determination for any Lender,
100% times a fraction, the numerator of which equals such Lender's Commitment as
of such date and the denominator of which equals the Aggregate Commitment as of
such date.
"Commodity Contract" means any agreement, device or arrangement providing
for payments to or by any party thereto which are related to current market or
forward prices of Hydrocarbons, electric power or any other commodity,
including, but not limited to, single delivery or installment contracts for the
purchase or sale of Hydrocarbons, electric power or any other commodity, futures
contracts and commodity swaps, puts and warrants with respect to Hydrocarbons,
electric power or any other commodity.
"Condemnation" is defined in Section 8.8.
"Consolidated EBITDA" means for any period (i) Consolidated Pre-Tax Income
for such period, plus (ii) Consolidated Interest Expense for such period, plus
(iii) for any period (but not for any other period) which begins or ends on or
includes the Tax Separation Date, the Consolidated Tax Benefits for such period,
plus (iv) the consolidated depreciation and amortization expense of the Borrower
and its consolidated Subsidiaries for such period, determined in accordance with
generally accepted accounting principles.
"Consolidated Interest Expense" means (i) for any period ending on or
before September 30, 1996, (A) the consolidated interest expense of the Borrower
and its consolidated Subsidiaries for such period, determined in accordance with
generally
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accepted accounting principles, minus (B) the aggregate amount included in such
consolidated interest expense for such period with respect to Indebtedness for
borrowed money of the Borrower and its Subsidiaries which was paid before the
end of such period out of the proceeds of either an initial public offering of
the Borrower's common stock or Advances made hereunder, and (ii) for any period
ending after September 30, 1996, the consolidated interest expense of the
Borrower and its consolidated Subsidiaries for such period, determined in
accordance with generally accepted accounting principles.
"Consolidated Net Income" means for any period, the consolidated net
income or loss (exclusive of any non-recurring, non-cash gains or losses) of the
Borrower and its consolidated Subsidiaries for such period, determined in
accordance with generally accepted accounting principles.
"Consolidated Pre-Tax Income" means for any period, the consolidated
earnings (exclusive of any non-recurring, non-cash gains or losses) before
provision for taxes in respect of, or measured by, income or excess profits of
the Borrower and its consolidated Subsidiaries for such period, determined in
accordance with generally accepted accounting principles.
"Consolidated Tangible Net Worth" means at any date the consolidated
stockholder's equity of the Borrower and its consolidated Subsidiaries, less
their Intangible Assets, all determined in accordance with generally accepted
accounting principles as of such date. For purposes of this definition,
"Intangible Assets" means the amount (to the extent reflected in determining
such stockholder's equity reduced by the income tax effect which will occur upon
any reduction of such assets) of all writeups in the book value of any asset
(other than Financial Securities) owned by the Borrower or any of its
consolidated Subsidiaries and all unamortized debt discount and expense,
unamortized deferred charges, goodwill, patents, trademarks, service marks,
trade names, copyrights and organization or developmental expense. For purposes
of this definition, oil and gas assets will be valued based upon the average
prices used in the ceiling test calculation computed in accordance with
Securities and Exchange Commission Regulation S-X, Rule 4-10, as amended from
time to time, for the four most recent quarters escalated at 2.5% annually into
the future.
"Consolidated Tax Benefits" means for any period which begins or ends on
or includes the Tax Separation Date, the amount shown on the Borrower's
consolidated income statement for such period as "Provision for Income Taxes"
provided that such amount shall be included in Consolidated Tax Benefits only to
the extent that it represents an addition to income before the provision for
income taxes in the determination of net income and was actually received in
cash by the Borrower from the Parent in respect of consolidated tax savings.
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"Control Day" means any day on which the Parent owns directly or
indirectly more than 50% of the outstanding shares of voting stock of the
Borrower on a fully diluted basis.
"Controlled Group" means all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with the Borrower or any of its Subsidiaries, are treated as a
single employer under Section 414 of the Internal Revenue Code.
"Conversion/Continuation Notice" is defined in Section 2.10.
"Corporate Base Rate" means a rate per annum equal to the corporate base
rate of interest announced by First Chicago from time to time, changing when and
as said corporate base rate changes.
"CPEX" means Continental Power Exchange, Inc., a Delaware corporation.
"Credit Agreement" means this credit agreement, as it may be amended,
supplemented or otherwise modified and in effect from time to time.
"Default" means an event described in Article VIII.
"Eligible Accounts" means, at any date of determination, the aggregate
amount of all enforceable accounts receivable of the Eligible Obligors that are
acceptable to the Agent in its sole discretion and each of which satisfies all
of the following conditions: (i) results from the sale and delivery to or for
the account of the account debtor of Hydrocarbons in which an Eligible Obligor
has an interest or which are subject to a production payment reserved by or
payable to an Eligible Obligor; (ii) to the Borrower's knowledge after due
inquiry, has been earned by full performance on the part of the operator of the
well or wells which produced the Hydrocarbons the sale of which gave rise to
such account receivable; (iii) if the Eligible Obligor to which such account
receivable is payable does not in accordance with generally accepted accounting
principles and such Eligible Obligor's ordinary business and accounting practice
issue an invoice with respect to such account receivable (such an account
receivable being hereinafter referred to as an "Accrual Account"), (A) the
amount of such Accrual Account has been accrued on the books of such Eligible
Obligor in accordance with generally accepted accounting principles and such
Eligible Obligor's ordinary business and accounting practice within 30 days
after the last date on which the Hydrocarbons the sale of which gave rise to
such Accrual Account were delivered to the account debtor, and (B) such Accrual
Account has been outstanding for not more than 90 days after the date on which
such Accrual Account was so accrued on the books of such Eligible Obligor; (iv)
if such account receivable is not an Accrual Account, (A) the amount of such
account receivable has been included in an invoice issued to the account debtor
by an Eligible Obligor within 30 days after the last date on which Hydrocarbons
covered by such invoice were delivered to the account debtor, (B) such account
receivable
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has been outstanding for not more than 90 days after the date of the applicable
invoice, (C) such account receivable is evidenced by a writing, and (D) pursuant
to the terms of such writing such account receivable is due within 30 days of
the date of the applicable invoice; (v) is not subject to any Lien other than an
Excepted Lien; (vi) represents a complete bona fide transaction which requires
no further act under any circumstances on the part of any Eligible Obligor or,
to the Borrower's knowledge after due inquiry, the operator or the well or wells
which produced the Hydrocarbons the sale of which gave rise to such account
receivable or any other Person to make such account receivable payable by the
account debtor; (vii) the Hydrocarbons which gave rise to such account
receivable were delivered on an absolute sale basis and not on consignment, a
sell or return basis, or on the basis of any similar understanding; (viii) the
Hydrocarbons giving rise to such account receivable were not, at the time of
sale thereof, subject to any Lien other than an Excepted Lien; (ix) is not
subject to any legally valid provision prohibiting assignment or requiring
notice of or consent to such assignment; (x) is not subject to setoff (whether
or not such setoff has actually been asserted and whether or not any notice of
an assignment of such account receivable to the Agent or the Lenders has been
given to or received by the account debtor), counterclaim, defense, allowance,
dispute, or adjustment other than (A) normal discounts for prompt payment, and
(B) only in the case of Accrual Accounts, potential setoffs by the operator of
the well or wells which produced the Hydrocarbons the sale of which gave rise to
such Accrual Account for amounts payable by the Eligible Obligor having an
interest in such well or wells under the operating agreement governing such well
or wells for the expenses of operating such well or wells; (xi) the Hydrocarbons
which gave rise to such account receivable have not been returned, rejected,
repossessed, lost, or damaged; (xii) has arisen in the ordinary course of
business of the Eligible Obligor; (xiii) for which no notice of bankruptcy,
insolvency, or financial difficulty of the account debtor shall have been
received or be anticipated by the Eligible Obligor or the Agent; (xiv) is not
evidenced by chattel paper or an instrument of any kind; (xv) is owed by a
Person that is a citizen of or organized under the laws of the United States,
any state thereof or Canada or any province thereof and is not owed by any
Person located outside of the United States or Canada; (xvi) is not owed by any
Eligible Obligor or any other Affiliate of the Borrower; and (xvii) if owed by
the United States or any department, agency, or instrumentality thereof, the
Federal Assignment of Claims Act shall have been complied with); provided,
--------
however, that notwithstanding the foregoing, (a) no account
- -------
receivable owed by an account debtor to an Eligible Obligor shall be included as
an Eligible Account if more than fifty percent (50%) of the balances then
outstanding on accounts receivable arising pursuant to the sale, gathering or
transportation of Hydrocarbons by any Eligible Obligor owed by such account
debtor to any Eligible Obligor have remained unpaid for more than 90 days after
the date of the applicable invoice, (b) no account receivable which, when
aggregated with all other accounts receivable from such account debtor to the
Eligible Obligors, constitutes more than ten percent (10%) of the aggregate of
all accounts receivable of the Eligible Obligors shall be an Eligible Account,
and (c) the amount of any Eligible Accounts owed by an account debtor to any
Eligible Obligor shall be reduced
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by (1) the amount of all "contra accounts" and other obligations owed by any
Eligible Obligor or other Affiliate of the Borrower to such account debtor, and
(2) the amount of all payables due to the operator of the well or wells which
produced the Hydrocarbons the sale of which gave rise to such Eligible Accounts
owing by any Eligible Obligor or other Affiliate of the Borrower under the
operating agreement governing such well or wells for the expenses of operating
such well or wells.
"Eligible Obligor" means any Obligor other than CPEX.
"Engineering Report" means (i) the Summary Projection of Reserves and
Revenues as of January 1, 1996 prepared by Netherland, Sewell & Associates, Inc.
with respect to the Oil and Gas Interests of the Obligors which was previously
delivered to the Lenders, and (ii) a reserve report delivered pursuant to
Section 4.2, Section 5.1(vi), Section 7.1(x), Section 7.1(xi) or Section
7.1(xii).
"Environmental Laws" means any and all federal, state, local and foreign
statutes, laws, judicial decisions, regulations, ordinances, rules, judgments,
orders, decrees, plans, injunctions, permits, concessions, grants, franchises,
licenses, agreements and other governmental restrictions relating to (i) the
protection of the environment, (ii) the effect of the environment on human
health, (iii) emissions, discharges or releases of pollutants, contaminants,
hazardous substances or wastes into surface water, ground water or land, or (iv)
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, hazardous substances or
wastes or the clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any rule or regulation issued thereunder.
"Eurodollar Advance" means an Advance which bears interest at a Eurodollar
Rate.
"Eurodollar Base Rate" means, with respect to a Eurodollar Advance for the
relevant Interest Period, the rate determined by the Agent to be the rate at
which First Chicago offers to place deposits in U.S. dollars with first-class
banks in the London interbank market at approximately 11 a.m. (London time) two
Business Days prior to the first day of such Interest Period, in the approximate
amount of First Chicago's relevant Eurodollar Loan and having a maturity
approximately equal to such Interest Period.
"Eurodollar Loan" means a Loan which bears interest at a Eurodollar Rate.
"Eurodollar Rate" means, with respect to a Eurodollar Advance for each day
during the relevant Interest Period, the sum of (i) the quotient of (a) the
Eurodollar Base Rate applicable to such Interest Period, divided by (b) one
minus the Reserve Requirement (expressed as a decimal) applicable to such
Interest Period, plus (ii) the
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Applicable Margin for such day. The Eurodollar Rate shall be rounded to the
next higher multiple of 1/16 of 1% if the rate is not such a multiple.
"Excepted Liens" means with respect to any Property of any Person (i) Liens
for taxes, assessments or governmental charges or levies on such Property if the
same shall not at the time be delinquent or thereafter can be paid without
penalty, or are being contested in good faith and by appropriate proceedings and
for which adequate reserves in accordance with generally accepted accounting
principles shall have been set aside on its books, (ii) Liens imposed by law,
such as carriers', warehousemen's and mechanics' liens and other similar liens
arising in the ordinary course of business or incident to the exploration,
development, operation and maintenance of the Oil and Gas Interests of such
person and related facilities and assets which secure payment of obligations not
more than 60 days past due or which are being contested in good faith by
appropriate proceedings and for which adequate reserves in accordance with
generally accepted accounting principles shall have been set aside on its books,
(iii) Liens arising out of pledges or deposits under worker's compensation laws,
unemployment insurance, old age pensions, or other social security or retirement
benefits, or similar legislation, (iv) utility easements, building restrictions
and such other encumbrances or charges against real property as are of a nature
generally existing with respect to properties of a similar character and which
do not in any material way affect the marketability of the same or interfere
with the use thereof in its business, (v) rights of a common owner of any
interest in Property held by such Person, and (vi) farmout, carried working
interest, joint operating, unitization, royalty, overriding royalty, sales and
similar agreements relating to the exploration, development or operation of, or
production from, Oil and Gas Interests of such Person incurred in the ordinary
course of business.
"Executive Officer" means any of the Chairman, the President or any Vice
President of the Borrower, acting singly.
"Federal Funds Effective Rate" means, for any day, an interest rate per annum
equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding 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 at approximately 10 a.m. (Chicago
time) on such day on such transactions received by the Agent from three Federal
funds brokers of recognized standing selected by the Agent in its sole
discretion.
"Financial Securities" means and includes cash deposits with financial
institutions, obligations of the U.S. Government, obligations guaranteed by the
United States or agencies of the United States, securities issued and guaranteed
by a financial institution, money market instruments, commercial paper,
preferred (or preference) stock, common stock or bonds traded on an exchange or
the over-the-counter market and any funds or managed programs that include but
are
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not limited to such securities, and similar securities, the values of which
shall be determined in accordance with generally accepted accounting principles.
"First Chicago" means The First National Bank of Chicago in its individual
capacity, and its successors.
"Floating Rate" means, for any day, a rate per annum equal to (i) the
Alternate Base Rate for such day, changing when and as the Alternate Base Rate
changes.
"Floating Rate Advance" means an Advance which bears interest at the Floating
Rate.
"Floating Rate Loan" means a Loan which bears interest at the Floating Rate.
"Guarantors" means InterCoast Oil and Gas Company, a Delaware corporation
formerly known as Medallion Production Company, Medallion California Properties
Company, a Texas corporation, InterCoast Power Marketing Company, a Delaware
corporation, CPEX, InterCoast Gas Services Company, a Delaware corporation,
InterCoast Gas Services Company, an Oklahoma corporation, GED Energy Services,
Inc., a Delaware corporation, InterCoast Trade & Resources Inc., a Delaware
corporation, and each other Subsidiary of the Borrower which may from time to
time become a Guarantor party to the Guaranty Agreement pursuant to Article VIII
thereof by satisfying each of the conditions precedent set forth in said Article
VIII of the Guaranty Agreement with respect to it, and "Guarantor" means any one
of the Guarantors.
"Guaranty Agreement" means a Guaranty Agreement in substantially the form of
Exhibit "B" hereto among the Agent and the Guarantors, as it may be amended,
supplemented or otherwise modified and in effect from time to time.
"Guaranty Default" means an event described in Article IV of the Guaranty
Agreement.
"Guaranty Obligation" of a Person means any obligation (except the endorsement
in the ordinary course of business of negotiable instruments for deposit or
collection) of such Person guaranteeing or in effect guaranteeing any
indebtedness, dividend or other obligation of any other Person in any manner,
whether directly or indirectly, including (without limitation) obligations
incurred through an agreement, contingent or otherwise, by such Person (i) to
purchase such indebtedness or obligation or any property constituting security
therefor; (ii) to advance or supply funds (A) for the purchase or payment of
such indebtedness or obligation, or (B) to maintain any working capital or other
balance sheet condition or any income statement condition of any other Person or
otherwise to advance or make available funds for the purchase or payment of such
indebtedness or obligation, (iii) to lease properties or to purchase properties
or services primarily for
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the purpose of assuring the owner of such indebtedness or obligation of the
ability of any other Person to make payment of the indebtedness or obligation,
or (iv) otherwise to assure the owner of such indebtedness or obligation against
loss in respect thereof.
"Hydrocarbon Marketing Companies" means those Subsidiaries of the Borrower
engaged in the business of marketing Hydrocarbons.
"Hydrocarbons" means all oil, natural gas, casinghead gas, drip gasoline,
natural gas condensates and all other liquid or gaseous hydrocarbons.
"Indebtedness" means, with respect to any Person, at any time, without
duplication, (i) its liabilities for borrowed money; (ii) its liabilities for
the deferred purchased price of property acquired by it (including all
liabilities created or arising under any conditional sale or other title
retention agreement with respect to any such property), (iii) the liabilities
(excluding deferred taxes) appearing on its balance sheet in accordance with
Agreement Accounting Principles in respect of Capital Lease Obligations, (iv)
its liabilities for borrowed money secured by any Lien with respect to any
property owned by such Person (even if it has not assumed or otherwise become
liable for such liabilities), (v) its liabilities in respect of letters of
credit or instruments serving a similar function issued or accepted for its
account by banks and other financial institutions (whether or not representing
obligations for borrowed money), (vi) its obligations which are evidenced by
notes, acceptances, or similar financial instruments, and (vii) any Guaranty
Obligation of such Person with respect to liabilities of a type described in any
of clauses (i) through (vi) hereof of any other Person; provided, however, that
notwithstanding the foregoing, Indebtedness shall not include accounts payable
or obligations to provide goods or services, or guaranties thereof, arising in
the ordinary course of business and payable on terms customary in the trade.
"Interest Period" means, with respect to a Eurodollar Advance, (i) through and
including the date which is four weeks after the Closing Date, a Weekly Interest
Period commencing on a Business Day on or before the date which is three weeks
after the Closing Date selected by the Borrower pursuant to this Credit
Agreement, and (ii) a Monthly Interest Period commencing on a Business Day
selected by the Borrower pursuant to this Credit Agreement.
"Interest Rate Hedging Agreement" means any agreement, device or arrangement
providing for payments which are related to fluctuations in interest rates,
exchange rates or forward interest rates or exchange rates, including, but not
limited to, dollar-denominated or cross-currency interest rate exchange
agreements, forward currency exchange agreements, interest rate cap or collar
protection agreements, interest rate or currency futures, and forward rate
currency or interest rate options, puts and warrants.
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"Internal Revenue Code" means the Internal Revenue Code of 1986, as amended,
reformed or otherwise modified from time to time.
"Investment" of a Person means any loan, advance (other than commission,
travel and similar advances to officers and employees made in the ordinary
course of business), extension of credit (other than accounts receivable arising
in the ordinary course of business on terms customary in the trade) or
contribution of capital by such Person; stocks, bonds, mutual funds, partnership
interests, notes, debentures or other securities owned by such Person; any
deposit accounts and certificate of deposit owned by such Person; and structured
notes, derivative financial instruments and other similar instruments or
contracts owned by such Person.
"Lenders" means the lending institutions listed on the signature pages of this
Credit Agreement and their respective successors and assigns.
"Lending Installation" means, with respect to a Lender or the Agent, any
office, branch, subsidiary or affiliate of such Lender or the Agent.
"Lien" means any lien (statutory or other), mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance or preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, the interest of a vendor or lessor under any
conditional sale, Capitalized Lease or other title retention agreement).
"Loan" means, with respect to a Lender, such Lender's loan made pursuant to
Article II (or any conversion or continuation thereof).
"Loan Documents" means this Credit Agreement and the Notes and the other
documents and agreements contemplated hereby and executed by the Borrower in
favor of the Agent or any Lender.
"Material Adverse Effect" means a material adverse effect on (i) the business,
Property, condition (financial or otherwise), results of operations, or
prospects of the Obligors and their respective Subsidiaries taken as a whole,
(ii) the ability of the Borrower to perform its obligations under the
Transaction Documents to which it is a party, or (iii) the validity or
enforceability of any of the Transaction Documents or the rights or remedies of
the Agent or the Lenders thereunder.
"Money Market Investments" means and includes (i) commercial paper with a
rating, at the time of purchase, of 'P-2' (or higher) according to Moody's
Investors Service, Inc. or 'A-2' (or higher) according to Standard & Poor's
Ratings Group or a comparable ratings according to Duff & Phelps, Inc., (ii)
certificates of deposit maturing within one year of the date of purchase,
repurchase agreements having a term of one year or less with respect to
obligations of the United States government or any agency thereof that are
backed by the full faith and credit of the United
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States, or obligations fully guaranteed by the United States government (which
guaranties are backed by the full faith and credit of the United States),
bankers acceptances maturing within one year of the date of purchase, money
market accounts, demand deposits and time deposits maturing within one year with
or issued by a bank or trust company organized under the laws of the United
States or any state thereof, having capital, surplus and undivided profits
aggregating at least $50,000,000 or having a rating, at the time as of which any
determination thereof is to be made, of 'P-2' (or higher) according to Moody's
Investors Service, Inc. or 'A-2' (or higher) according to Standard & Poor's
Ratings Group or a comparable rating according to Duff & Phelps, Inc., (iii)
obligations of the United States government or any agency thereof that are
backed by the full faith and credit of the United States, and obligations fully
guaranteed by the United States government (which guaranties are backed by the
full faith and credit of the United States), provided that such obligations
--------
mature within one year from the date of purchase, and (iv) mutual funds all of
the assets of which are included within one of the types of investments referred
to in clause (i), (ii) or (iii) of this definition.
"Monthly Interest Period" means, with respect to a Eurodollar Advance, a
period of one, two, three or six months, commencing on a Business Day selected
by the Borrower pursuant to this Credit Agreement. Such Monthly Interest Period
shall end on the day which corresponds numerically to such date one, two, three
or six months thereafter; provided, however, that if there is no such
numerically corresponding day in such next, second, third or sixth succeeding
month, such Monthly Interest Period shall end on the last Business Day of such
next, second, third or sixth succeeding month. If a Monthly Interest Period
would otherwise end on a day which is not a Business Day, such Monthly Interest
Period shall end on the next succeeding Business Day; provided, however, that if
said next succeeding Business Day falls in a new calendar month, such Monthly
Interest Period shall end on the immediately preceding Business Day.
"Multiemployer Plan" means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which the Borrower or any
member of the Controlled Group is a party to which more than one employer is
obligated to make contributions.
"Net Mark-to-Market Exposure" of a Person means, as of any date of
determination with respect to Commodity Contracts covering a specified
commodity, the excess (if any) of all Unrealized Losses over all Unrealized
Profits of such Person arising from Commodity Contracts covering the specified
commodity. "Unrealized Losses" means, with respect to any particular Commodity
Contract, the fair market value of the cost, if any, to such Person of replacing
such Commodity Contract as of the date of determination (assuming such Commodity
Contract was terminated as of that date), and "Unrealized Profits" means with
respect to any Commodity Contract, the fair market value of the gain, if any, to
such Person of replacing such Commodity Contract as of the date of determination
(assuming such Commodity Contract was terminated as of that date).
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"Note" means a promissory note, in substantially the form of Exhibit "A"
hereto, duly executed by the Borrower and payable to the order of a Lender in
the amount of its Commitment, including any amendment, modification, renewal or
replacement of such promissory note.
"Notice of Assignment" is defined in Section 13.3.2.
"Obligations" means all unpaid principal of and accrued and unpaid interest on
the Notes, and all accrued and unpaid fees and all expenses, reimbursements,
indemnities and other obligations of the Borrower to the Lenders or to any
Lender, the Agent or any indemnified party hereunder arising under the Loan
Documents.
"Obligors" means, collectively, the Borrower and the Guarantors, and "Obligor"
means each of the Obligors.
"Oil and Gas Borrowing Base" means (i) until redetermined pursuant to Section
4.2 or reduced pursuant to Section 4.3, the amount specified in Section 4.1, and
(ii) upon any redetermination of the Oil and Gas Borrowing Base pursuant to
Section 4.2, an amount equal to the value of the Oil and Gas Borrowing Base
Properties determined by the Agent and approved by Lenders constituting the
Required Lenders in its and their sole discretion pursuant to Section 4.2 based
on the customary and standard practices for lending to oil and gas companies of
the Agent and each Lender, including, without limitation, the standard
engineering, economic and oil and gas lending criteria of the Agent and each
Lender, and it is acknowledged and agreed that such customary and standard
practices for lending to oil and gas companies, including, without limitation,
such standard engineering, economic and oil and gas lending criteria, shall be
determined by the Agent and each Lender, as the case may be, in its sole
discretion, and any such determination shall be conclusive and binding.
"Oil and Gas Borrowing Base Properties" means, at any particular time, the Oil
and Gas Interests then owned by any of the Obligors other than CPEX which (i)
are free and clear of all Liens other than Excepted Liens, and (ii) were
evaluated in the Engineering Reports used for the most recent redetermination of
the Oil and Gas Borrowing Base.
"Oil and Gas Interests" means all leasehold interests, mineral fee interests,
overriding royalty and royalty interests, net revenue and net working interests,
production payments and all other rights and interests relating to Hydrocarbons,
including, without limitation, all Hydrocarbon reserves.
"Parent" means (i) MidAmerican Energy Company, an Iowa corporation, and its
successors and assigns ("MidAmerican Energy"), (ii) any Person which owns or
controls, directly or indirectly through one or more of its Subsidiaries, more
than 50% of the outstanding securities having ordinary voting power of
MidAmerican Energy or any Person which acquires a majority of the assets of
MidAmerican
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Energy, and (iii) any Person which acquires a majority of the assets of
MidAmerican Energy.
"Participants" is defined in Section 13.2.1.
"Payment Date" means the last day of each March, June, September and December
hereafter.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
"Person" means any natural person, corporation, firm, joint venture,
partnership, association, enterprise, trust or other entity or organization, or
any government or political subdivision or any agency, department or
instrumentality thereof.
"Plan" means an employee pension benefit plan which is covered by Title IV of
ERISA or subject to the minimum funding standards under Section 412 of the
Internal Revenue Code as to which the Borrower or any member of the Controlled
Group may have any liability.
"Power Marketing Companies" means those Subsidiaries of the Borrower engaged
in the business of marketing electric power.
"Property" of a Person means any and all property, whether real, personal,
tangible, intangible, or mixed, of such Person, or other assets owned or leased
by such Person.
"Purchasers" is defined in Section 13.3.1.
"Regulation D" means Regulation D of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor thereto or other
regulation or official interpretation of said Board of Governors relating to
reserve requirements applicable to member banks of the Federal Reserve System.
"Regulation U" means Regulation U of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stocks applicable to member banks of the Federal Reserve System.
"Reportable Event" means a reportable event as defined in Section 4043 of
ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC by regulation waived the
requirement of Section 4043(a) of ERISA that it be notified within 30 days of
the occurrence of such event; provided, however, that a failure to meet the
minimum
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funding standard of Section 412 of the Internal Revenue Code and of Section 302
of ERISA shall be a Reportable Event regardless of the issuance of any such
waiver of the notice requirement in accordance with either Section 4043(a) of
ERISA or Section 412(d) of the Internal Revenue Code.
"Required Lenders" means Lenders in the aggregate having at least 66% of the
Aggregate Commitment or, if the Aggregate Commitment has been terminated,
Lenders in the aggregate holding at least 66% of the aggregate unpaid principal
amount of the outstanding Advances.
"Reserve Requirement" means, with respect to a Interest Period, the maximum
aggregate reserve requirement (including all basic, supplemental, marginal and
other reserves) which is imposed under Regulation D on Eurocurrency liabilities.
"Section" means a numbered section of this Credit Agreement, unless another
document is specifically referenced.
"Single Employer Plan" means a Plan maintained by the Borrower or any member
of the Controlled Group for employees of the Borrower or any member of the
Controlled Group.
"Subsidiary" of a Person means (i) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(ii) any partnership, limited liability company, association, joint venture or
similar business organization more than 50% of the ownership interests having
ordinary voting power of which shall at the time be so owned or controlled.
"Substantial Portion" means, as of any date with respect to the Property of
the Borrower and its Subsidiaries, Property which (i) represents more than 10%
of the consolidated assets of the Borrower and its Subsidiaries as would be
shown on the consolidated balance sheet of the Borrower and its Subsidiaries as
of the last day of the most recently ended calendar month, or (ii) is
responsible for more than 10% of the aggregate net revenue or of the
consolidated net income of the Borrower and its Subsidiaries as reflected in a
consolidated income statement of the Borrower and its Subsidiaries for the
twelve month period ending on the last day of the most recently ended calendar
month.
"Tax Separation Date" means the first day hereafter on which the Borrower is
not eligible under the Internal Revenue Code to be included on the consolidated
federal income tax return of the Parent and its Subsidiaries.
"Termination Date" means July 31, 2001 or any earlier date on which the
Aggregate Commitment is reduced to zero or otherwise terminated pursuant to the
terms hereof.
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"Transaction Documents" means the Loan Documents, the Guaranty Agreement
and any other documents and agreements contemplated hereby and executed by any
Obligor in favor of the Agent or any Lender.
"Transferee" is defined in Section 13.4.
"Type" means, with respect to any Advance, its nature as a Floating Rate
Advance or Eurodollar Advance.
"Unfunded Liabilities" means the amount (if any) by which the present value of
all vested and unvested accrued benefits under all Single Employer Plans exceeds
the fair market value of all such Plan assets allocable to such benefits, all
determined as of the then most recent valuation date for such Plans using PBGC
actuarial assumptions for single employer plan terminations.
"Unmatured Default" means an event which but for the lapse of time or the
giving of notice, or both, would constitute a Default.
"Utilization Percentage" means, as of the last day of any fiscal quarter of
the Borrower, a fraction, expressed as a percentage, the numerator of which is
the daily average of the aggregate principal amount of the Advances and all
other Indebtedness of the Borrower and its Subsidiaries outstanding during such
fiscal quarter, and the denominator of which is the daily average of the
Borrowing Base during such fiscal quarter. The Utilization Percentage shall be
determined by the Agent at the end of each fiscal quarter of the Borrower and
shall remain in effect for the following fiscal quarter of the Borrower.
Notwithstanding to above or anything else in this Credit Agreement to the
contrary, upon and during the continuance of any Default, the Utilization
Percentage shall be deemed to be 100%.
"Weekly Interest Period" means, with respect to a Eurodollar Advance, a period
of seven days, commencing on a Business Day selected by the Borrower pursuant to
this Credit Agreement. Such Weekly Interest Period shall end on the seventh day
thereafter. If an Weekly Interest Period would otherwise end on a day which is
not a Business Day, such Weekly Interest Period shall end on the next succeeding
Business Day.
"Wholly-Owned Subsidiary" of a Person means any Subsidiary of such Person all
of the outstanding voting securities (or other ownership interests having
ordinary voting power) of which shall at the time be owned or controlled,
directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries
of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of
such Person.
The foregoing definitions shall be equally applicable to both the singular and
plural forms of the defined terms.
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ARTICLE II.
THE CREDITS
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2.1. Commitment. From and including the date of this Credit Agreement and
----------
prior to the Termination Date, each Lender severally agrees, on the terms and
conditions set forth in this Credit Agreement, to make Loans to the Borrower
from time to time in amounts not to exceed in the aggregate at any one time
outstanding the lesser of (i) its Commitment Percentage of the Available
Borrowing Base or (ii) the amount of its Commitment. Subject to the terms of
this Credit Agreement, the Borrower may borrow, repay and reborrow at any time
prior to the Termination Date.
2.2. Termination; Required Payments. The Commitments to lend hereunder shall
------------------------------
expire on the Termination Date, and all outstanding Advances and all other
unpaid Obligations shall be paid in full by the Borrower on the Termination
Date.
2.3. Ratable Loans. Each Advance hereunder shall consist of Loans made from
-------------
the several Lenders ratably in proportion to the ratio that their respective
Commitments bear to the Aggregate Commitment.
2.4. Types of Advances. The Advances may be Floating Rate Advances or
-----------------
Eurodollar Advances, or a combination thereof, selected by the Borrower in
accordance with Sections 2.9 and 2.10.
2.5. Commitment Fee; Reductions in Aggregate Commitment. The Borrower agrees
--------------------------------------------------
to pay to the Agent for the account of each Lender a commitment fee at a rate
per annum equal to the Applicable Margin on the daily average unborrowed portion
of such Lender's Commitment from the date hereof to and including the
Termination Date, payable on each Payment Date hereafter and on the Termination
Date. The Borrower may permanently reduce the Aggregate Commitment in whole, or
in part ratably among the Lenders in integral multiples of $5,000,000, upon at
least ten Business Days' written notice to the Agent, which notice shall specify
the amount of any such reduction; provided, however, that the amount of the
Aggregate Commitment may not be reduced below the aggregate principal amount of
the outstanding Advances. All accrued commitment fees shall be payable on the
effective date of any termination of the obligations of the Lenders to make
Loans hereunder.
2.6. Minimum Amount of Each Advance. Each Eurodollar Advance shall be in the
------------------------------
minimum amount of $3,000,000 (and in multiples of $500,000 if in excess
thereof), and each Floating Rate Advance shall be in the minimum amount of
$1,000,000 (and in multiples of $500,000 if in excess thereof); provided,
however, that any Floating Rate Advance may be in the amount of the unused
Aggregate Commitment.
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2.7. Optional Principal Payments. The Borrower may from time to time pay,
---------------------------
without penalty or premium, all outstanding Floating Rate Advances, or, in a
minimum aggregate amount of $1,000,000 or any integral multiple of $500,000 in
excess thereof, any portion of the outstanding Floating Rate Advances upon two
Business Days' prior notice to the Agent. The Borrower may from time to time
pay, without penalty or premium other than as provided for in Section 3.4, all
outstanding Eurodollar Advances, or, in a minimum aggregate amount of $1,000,000
or any integral multiple of $500,000 in excess thereof, any portion of the
outstanding Eurodollar Rate Advances upon two Business Days' prior notice to the
Agent. Upon any prepayment of a Eurodollar Advance pursuant to this Section
2.7, the Borrower shall also pay all amounts, if any, due in connection with
such prepayment pursuant to Section 3.4.
2.8. Mandatory Principal Payments.
----------------------------
2.8.1. Borrowing Base Deficiency. If at any time the Agent determines that
-------------------------
the aggregate principal amount of the outstanding Advances exceeds the Available
Borrowing Base, the Borrower shall with in sixty (60) days after notice of such
excess either (i) prepay the Advances in an amount equal to such excess, or (ii)
request a redetermination of the Oil and Gas Borrowing Base pursuant to clause
(iv) of Section 4.2 and demonstrate ownership of Oil and Gas Interests which the
Agent and the Required Lenders determine in their sole discretion will so
increase the Oil and Gas Borrowing Base that, after giving effect to such
increase and any subsequent prepayment of the Advances, the aggregate principal
amount of the outstanding Advances does not exceed the Available Borrowing Base.
2.8.2. Sale of Oil and Gas Interests. If on any date (a "Receipt Date") on
-----------------------------
which the Borrower or any other Obligor receives any proceeds of any sale or
other disposition of any Oil and Gas Interests owned by the Borrower or any
other Obligor (other than a sale in the ordinary course of business of
Hydrocarbons produced from any such Oil and Gas Interests) the aggregate net
proceeds (net only of reasonable and customary cost of such sale or other
disposition) of all sales or other dispositions of Oil and Gas Interests owned
by the Borrower or any of the other Obligors (other than a sale in the ordinary
course of business of Hydrocarbons produced from any such Oil and Gas Interests)
received by the Borrower and the other Obligors on or within one year prior to
the Receipt Date exceeds $5,000,000, the Borrower shall on such date prepay the
Advances in an amount equal to the excess if any, of all such net proceeds
received on or within one year of the Receipt Date over $5,000,000 minus the
aggregate amount of all previous prepayments of the Advances made pursuant to
this Section 2.8.2 within one year of the Receipt Date.
2.8.3. Prepayment of Eurodollar Advances. Upon any prepayment of a
---------------------------------
Eurodollar Advance pursuant to this Section 2.8, the Borrower shall also pay all
amounts, if any, due in connection with such prepayment pursuant to Section 3.4.
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2.9. Method of Selecting Types and Interest Periods for New Advances. The
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Borrower shall select the Type of Advance and, in the case of each Eurodollar
Advance, the Interest Period applicable to each Advance from time to time. The
Borrower shall give the Agent irrevocable notice (a "Borrowing Notice") not
later than 9:00 a.m. (Chicago time) on the Borrowing Date of each Floating Rate
Advance and three Business Days before the Borrowing Date for each Eurodollar
Advance, specifying:
(i) the Borrowing Date, which shall be a Business Day, of such
Advance,
(ii) the aggregate amount of such Advance,
(iii) the Type of Advance selected, and
(iv) in the case of each Eurodollar Advance, the Interest Period
applicable thereto.
Not later than noon (Chicago time) on each Borrowing Date, each Lender shall
make available its Loan or Loans, in funds immediately available in Chicago to
the Agent at its address specified pursuant to Article XIV. The Agent will make
the funds so received from the Lenders available to the Borrower at the Agent's
aforesaid address.
2.10. Conversion and Continuation of Outstanding Advances. Floating Rate
---------------------------------------------------
Advances shall continue as Floating Rate Advances unless and until such Floating
Rate Advances are converted into Eurodollar Advances. Each Eurodollar Advance
shall continue as a Eurodollar Advance until the end of the then applicable
Interest Period therefor, at which time such Eurodollar Advance shall be
automatically converted into a Floating Rate Advance unless the Borrower shall
have given the Agent a Conversion/Continuation Notice requesting that, at the
end of such Interest Period, such Eurodollar Advance continue as a Eurodollar
Advance for the same or another Interest Period. Subject to the terms of
Section 2.6, the Borrower may elect from time to time to convert all or any part
of an Advance of any Type into any other Type or Types of Advances; provided,
however, that any conversion of any Eurodollar Advance shall be made on, and
only on, the last day of the Interest Period applicable thereto. The Borrower
shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") of
each conversion of an Advance or continuation of a Eurodollar Advance not later
than 10:00 a.m. (Chicago time) at least one Business Day, in the case of a
conversion into a Floating Rate Advance or three Business Days, in the case of a
conversion into or continuation of a Eurodollar Advance, prior to the date of
the requested conversion or continuation, specifying:
(i) the requested date which shall be a Business Day, of such conversion
or continuation,
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<PAGE>
(ii) the aggregate amount and Type of the Advance which is to be
converted or continued, and
(iii) the amount and Type(s) of Advance(s) into which such Advance is
to be converted or continued and, in the case of a conversion into or
continuation of a Eurodollar Advance, the duration of the Interest Period
applicable thereto.
2.11. Changes in Interest Rate, etc. Each Floating Rate Advance shall bear
------------------------------
interest on the outstanding principal amount thereof, for each day from and
including the date such Advance is made or is converted from a Eurodollar
Advance into a Floating Rate Advance pursuant to Section 2.10 to but excluding
the date it becomes due or is converted into a Eurodollar Advance pursuant to
Section 2.10, at a rate per annum equal to the Floating Rate for such day.
Changes in the rate of interest on that portion of any Advance maintained as a
Floating Rate Advance will take effect simultaneously with each change in the
Alternate Base Rate. Each Eurodollar Advance shall bear interest on the
outstanding principal amount thereof from and including the first day of the
Interest Period applicable thereto to (but not including) the last day of such
Interest Period at the interest rate determined as applicable to such Eurodollar
Advance. No Interest Period may end after the Termination Date.
2.12. Rates Applicable After Default. Notwithstanding anything to the
------------------------------
contrary contained herein, at any time and from time to time during the
continuance of a Default or Unmatured Default the Required Lenders may, at their
option, by notice to the Borrower (which notice may be revoked at the option of
the Required Lenders notwithstanding any provision of Section 9.2 requiring
unanimous consent of the Lenders to changes in interest rates), (i) declare that
no Advance may be made as, converted into or continued as a Eurodollar Advance,
and/or (ii) declare that (A) each Eurodollar Advance shall bear interest for the
remainder of the applicable Interest Period at the rate otherwise applicable to
such Interest Period plus 2% per annum, and (B) each Floating Rate Advance shall
bear interest at a rate per annum equal to the Floating Rate otherwise
applicable to the Floating Rate Advance plus 2% per annum. If any Advance is
not paid at maturity, whether by acceleration or otherwise, such Advance shall
be automatically converted into a Floating Rate Advance and shall thereafter
bear interest at a rate per annum equal to the Floating Rate plus 2% per annum.
2.13. Method of Payment. All payments of the Obligations hereunder shall be
-----------------
made, without setoff, deduction, or counterclaim, in immediately available funds
to the Agent at the Agent's address specified pursuant to Article XIV, or at any
other Lending Installation of the Agent specified in writing by the Agent to the
Borrower, by noon (local time) on the date when due and shall be applied ratably
by the Agent among the Lenders. Each payment delivered to the Agent for the
account of any Lender shall be delivered promptly by the Agent to such Lender in
the same type of funds that the Agent received at its address specified pursuant
to
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<PAGE>
Article XIV or at any Lending Installation specified in a notice received by the
Agent from such Lender. The Agent is hereby authorized to charge the account of
the Borrower maintained with First Chicago for each payment of principal,
interest and fees as it becomes due hereunder.
2.14. Notes; Telephonic Notices. Each Lender is hereby authorized to record
-------------------------
the principal amount of each of its Loans and each repayment on the schedule
attached to its Note; provided, however, that neither the failure to so record
nor any error in such recordation shall affect the Borrower's obligations under
such Note. The Borrower hereby authorizes the Lenders and the Agent to extend,
convert or continue Advances, effect selections of Types of Advances and to
transfer funds based on telephonic notices made by any person or persons the
Agent or any Lender in good faith believes to be acting on behalf of the
Borrower. The Borrower agrees to deliver promptly to the Agent a written
confirmation, if such confirmation is requested by the Agent or any Lender, of
each telephonic notice signed by an Authorized Officer. If the written
confirmation differs in any material respect from the action taken by the Agent
and the Lenders, the records of the Agent and the Lenders shall govern absent
manifest error.
2.15. Interest Payment Dates; Interest and Fee Basis. Interest accrued on
----------------------------------------------
each Floating Rate Advance shall be payable on each Payment Date, commencing
with the first such date to occur after the date hereof, on any date on which
the Floating Rate Advance is prepaid, whether due to acceleration or otherwise,
and at maturity. Interest accrued on that portion of the outstanding principal
amount of any Floating Rate Advance converted into a Eurodollar Advance on a day
other than a Payment Date shall be payable on the date of conversion. Interest
accrued on each Eurodollar Advance shall be payable on the last day of its
applicable Interest Period, on any date on which the Eurodollar Advance is
prepaid, whether by acceleration or otherwise, and at maturity. Interest
accrued on each Eurodollar Advance having an Interest Period longer than three
months shall also be payable on the last day of each three-month interval during
such Interest Period. Interest on Eurodollar Advances and all commitment fees
due under Section 2.5 shall be calculated for the actual number of days elapsed
on the basis of a year consisting of 360 days. Interest on Floating Rate
Advances shall be calculated for the actual number of days elapsed on the basis
of a year consisting of 365, or, when appropriate, 366 days. Interest shall be
payable for the day an Advance is made but not for the day of any payment on the
amount paid if payment is received prior to noon (local time) at the place of
payment. If any payment of principal of or interest on an Advance shall become
due on a day which is not a Business Day, such payment shall be made on the next
succeeding Business Day and, in the case of a principal payment, such extension
of time shall be included in computing interest in connection with such payment.
2.16. Notification of Advances, Interest Rates, Prepayments and Commitment
--------------------------------------------------------------------
Reductions. Promptly after receipt thereof, the Agent will notify each Lender
- ----------
of the contents of each Aggregate Commitment reduction notice, Borrowing
Page 22
<PAGE>
Notice, Conversion/Continuation Notice, and repayment notice received by it
hereunder. The Agent will notify each Lender of the interest rate applicable to
each Eurodollar Advance promptly upon determination of such interest rate and
will give each Lender prompt notice of each change in the Alternate Base Rate.
2.17. Lending Installations. Each Lender may book its Loans at any Lending
---------------------
Installation selected by such Lender and may change its Lending Installation
from time to time. All terms of this Credit Agreement shall apply to any such
Lending Installation and the Notes shall be deemed held by each Lender for the
benefit of such Lending Installation. Each Lender may, by written or telex
notice to the Agent and the Borrower, designate a Lending Installation through
which Loans will be made by it and for whose account Loan payments are to be
made.
2.18. Non-Receipt of Funds by the Agent. Unless the Borrower or a Lender, as
---------------------------------
the case may be, notifies the Agent prior to the date on which it is scheduled
to make payment to the Agent of (i) in the case of a Lender, the proceeds of a
Loan or (ii) in the case of the Borrower, a payment of principal, interest or
fees to the Agent for the account of the Lenders, that it does not intend to
make such payment, the Agent may assume that such payment has been made. The
Agent may, but shall not be obligated to, make the amount of such payment
available to the intended recipient in reliance upon such assumption. If such
Lender or the Borrower, as the case may be, has not in fact made such payment to
the Agent, the recipient of such payment shall, on demand by the Agent, repay to
the Agent the amount so made available together with interest thereon in respect
of each day during the period commencing on 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 (i) in the case of payment by a Lender, the Federal Funds
Effective Rate for such day or (ii) in the case of payment by the Borrower, the
interest rate that would have been applicable hereunder to the Loan that would
have been made by the applicable Lender had the Agent's assumption that such
Lender would make such Loan been correct.
ARTICLE III.
CHANGE IN CIRCUMSTANCES
-----------------------
3.1. Yield Protection. If any law or any governmental or quasi-governmental
----------------
rule, regulation, policy, guideline or directive (whether or not having the
force of law), or any interpretation thereof, or the compliance of any Lender
therewith,
(i) subjects any Lender or any applicable Lending Installation to any
tax, duty, charge or withholding on or from payments due from the Borrower
(excluding taxation of the overall net income of any Lender or applicable
Lending Installation by any jurisdiction in which such Lender or such
applicable Lending Installation is located), or changes the basis of
taxation of payments to any Lender in respect of its Loans or other amounts
due it hereunder, or
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<PAGE>
(ii) imposes or increases or deems applicable any reserve, assessment,
insurance charge, special deposit or similar requirement against assets of,
deposits with or for the account of, or credit extended by, any Lender or
any applicable Lending Installation (other than reserves and assessments
taken into account in determining the interest rate applicable to
Eurodollar Advances), or
(iii) imposes any other condition the result of which is to increase
the cost to any Lender or any applicable Lending Installation of making,
funding or maintaining loans or reduces any amount receivable by any Lender
or any applicable Lending Installation in connection with loans, or
requires any Lender or any applicable Lending Installation to make any
payment calculated by reference to the amount of loans held or interest
received by it, by an amount deemed material by such Lender,
then, within 15 days of demand by such Lender, the Borrower shall pay such
Lender that portion of such increased expense incurred or reduction in an amount
received which such Lender determines is attributable to making, funding and
maintaining its Loans and its Commitment.
3.2. Changes in Capital Adequacy Regulations. If a Lender determines the
---------------------------------------
amount of capital required or expected to be maintained by such Lender, any
Lending Installation of such Lender or any corporation controlling such Lender
is increased as a result of a Change, then, within 15 days of demand by such
Lender, the Borrower shall pay such Lender the amount necessary to compensate
for any shortfall in the rate of return on the portion of such increased capital
which such Lender determines is attributable to this Credit Agreement, its Loans
or its obligation to make Loans hereunder (after taking into account such
Lender's policies as to capital adequacy). "Change" means (i) any change after
the date of this Credit Agreement in the Risk-Based Capital Guidelines, or (ii)
any adoption of or change in any other law, governmental or quasi-governmental
rule, regulation, policy, guideline, interpretation, or directive (whether or
not having the force of law) after the date of this Credit Agreement which
affects the amount of capital required or expected to be maintained by any
Lender or any Lending Installation or any corporation controlling any Lender.
"Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in
effect in the United States on the date of this Credit Agreement, including
transition rules, and (ii) the corresponding capital regulations promulgated by
regulatory authorities outside the United States implementing the July 1988
report of the Basle Committee on Banking Regulation and Supervisory Practices
Entitled "International Convergence of Capital Measurements and Capital
Standards," including transition rules, and any amendments to such regulations
adopted prior to the date of this Credit Agreement.
3.3. Availability of Types of Advances. If any Lender determines that
---------------------------------
maintenance of any of its Eurodollar Loans at a suitable Lending Installation
would violate any applicable law, rule, regulation or directive, whether or not
having the
Page 24
<PAGE>
force of law, the Agent shall suspend the availability of Eurodollar Advances to
be made after the date of any such determination and require any outstanding
Eurodollar Advances to be repaid. If the Required Lenders determine that
deposits of a type or maturity appropriate to match fund Eurodollar Advances are
not available, the Agent shall suspend the availability of the Eurodollar
Advances to be made after the date of any such determination. If the Required
Lenders determine that an interest rate applicable to a Eurodollar Advance does
not accurately reflect the cost of making a Eurodollar Advance, then, if for any
reason whatsoever the provisions of Section 3.1 are inapplicable, the Agent
shall suspend the availability of the Eurodollar Advances to be made after the
date of any such determination.
3.4. Funding Indemnification. If any payment of a Eurodollar Advance occurs
-----------------------
on a date which is not the last day of the applicable Interest Period, whether
because of acceleration, prepayment or otherwise, or a Eurodollar Advance is not
made on the date specified by the Borrower for any reason other than default by
the Lenders, the Borrower will indemnify each Lender for any loss or cost
incurred by it resulting therefrom, including, without limitation, any loss or
cost in liquidating or employing deposits acquired to fund or maintain the
Eurodollar Advance.
3.5. Lender Statements; Survival of Indemnity. To the extent reasonably
----------------------------------------
possible, each Lender shall designate an alternate Lending Installation with
respect to its Eurodollar Loans to reduce any liability of the Borrower to such
Lender under Section 3.1 or Section 3.2 or to avoid the unavailability of
Eurodollar Advances under Section 3.3, so long as such designation is not
disadvantageous to such Lender. Each Lender shall deliver a written statement
of such Lender to the Borrower (with a copy to the Agent) as to the amount due,
if any, under Section 3.1, Section 3.2 or Section 3.4. Such written statement
shall set forth in reasonable detail the calculations upon which such Lender
determined such amount and shall be final, conclusive and binding on the
Borrower in the absence of manifest error. Determination of amounts payable
under Section 3.1, Section 3.2 or Section 3.4 in connection with a Eurodollar
Loan shall be calculated as though each Lender funded its Eurodollar Loan
through the purchase of a deposit of the type and maturity corresponding to the
deposit used as a reference in determining the Eurodollar Rate applicable to
such Loan, whether in fact that is the case or not. Unless otherwise provided
herein, the amount specified in the written statement of any Lender shall be
payable on demand after receipt by the Borrower of such written statement. The
obligations of the Borrower under Sections 3.1, 3.2 and 3.4 shall survive
payment of the Obligations and termination of this Credit Agreement.
ARTICLE IV.
OIL AND GAS BORROWING BASE
--------------------------
4.1. Initial Oil and Gas Borrowing Base. Until redetermined pursuant to
----------------------------------
Section 4.2 or reduced pursuant to Section 4.3, the Oil and Gas Borrowing Base
shall be $81,000,000.
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<PAGE>
4.2. Determination of the Oil and Gas Borrowing Base. The Oil and Gas
-----------------------------------------------
Borrowing Base will be redetermined (i) promptly after receipt of the reserve
report referred to in Section 7.1(x), (ii) promptly after receipt of the reserve
report referred to in Section 7.1(xi), (iii) upon the request of the Required
Lenders, (iv) upon the request of the Borrower, and (v) promptly after any sale
or other disposition of any substantial portion of the Oil and Gas Interests of
the Obligors; provided, however, that (A) the Required Lenders may not request a
redetermination of the Oil and Gas Borrowing Base pursuant to clause (iii) of
this Section 4.2 more than two times in any twelve month period, (B) the
Borrower may not request a redetermination of the Oil and Gas Borrowing Base
pursuant to clause (iv) of this Section 4.2 more than two times in any twelve
month period, and (C) no redetermination of the Oil and Gas Borrowing Base shall
be made pursuant to either clause (iv) or clause (v) of this Section 4.2 until
the Borrower shall have delivered to the Agent with sufficient copies for all of
the Lenders an updated reserve report with respect to the Oil and Gas Interests
of the Obligors prepared by an independent engineering firm of recognized
national standing acceptable to the Required Lenders in accordance with accepted
industry practices and otherwise acceptable in form and substance to the
Required Lenders. Any redetermination of the Oil and Gas Borrowing Base shall
be made initially by the Agent and submitted to the Lenders. The redetermined
Oil and Gas Borrowing Base shall then be effective when approved by the Required
Lenders.
4.3. Reduction Upon Sale of Oil and Gas Interests. Upon receipt by the
--------------------------------------------
Borrower or any of the other Obligors of any proceeds of any sale or other
disposition of any Oil and Gas interests owned by the Borrower or any of the
other Obligors (other than a sale in the ordinary course of business of
Hydrocarbons produced from any such Oil and Gas Interests), the amount of the
Oil and Gas Borrowing Base then in effect pursuant to Section 4.1 or 4.2 shall
be automatically reduced by the aggregate net proceeds (net only of reasonable
and customary cost of such sale or other disposition) received by the Borrower
and the other Obligors as a result of such sale or other disposition, and such
reduced Oil and Gas Borrowing Base shall remain in effect until the Oil and Gas
Borrowing Base is redetermined pursuant to Section 4.2 or further reduced
pursuant to this Section 4.3.
ARTICLE V.
CONDITIONS PRECEDENT; WITHHOLDING TAX EXEMPTION
-----------------------------------------------
5.1. Initial Advance. The Lenders shall not be required to make the initial
---------------
Advance hereunder unless on the date that the Borrower and the Lenders signed
this Credit Agreement the Borrower paid the Arranger all fees due to the
Arranger under that certain letter agreement among InterCoast Energy Company,
First Chicago and the Arranger dated May 24, 1996 and paid the Agent all fees
then due to the Agent pursuant to Section 11.13, and on the Closing Date the
Borrower shall have furnished to the Agent with sufficient copies for each of
the Lenders:
(i) Notes payable to the order of each of the Lenders.
Page 26
<PAGE>
(ii) Evidence satisfactory to the Agent that all of the outstanding
capital stock of InterCoast Power Marketing Company shall have been transferred
to the Borrower.
(iii) Evidence satisfactory to the Agent that all outstanding
Indebtedness for borrowed money (other than Advances made hereunder) of the
Borrower and its Subsidiaries shall have been paid with the proceeds of either
an initial public offering of the Borrower's common stock or the initial
Advances made hereunder.
(iv) Copies of a consolidated unaudited balance sheet for the Borrower
and its Subsidiaries as at May 31, 1996 and a consolidated unaudited profit and
loss statement for the Borrower and its Subsidiaries for such month and year to
date, all certified by an Executive Officer.
(v) A Borrowing Base Report dated May 31, 1996.
(vi) A summary of the invoiced accounts receivable of each Obligor, in
each case aged in thirty (30) day intervals, as of May 31, 1996.
(vii) A report detailing all collections on the accounts receivable of
each Obligor for May of 1996.
(viii) The Guaranty Agreement duly executed and delivered by each of the
Guarantors.
(ix) A certificate, signed by an Executive Officer, stating that on the
Closing Date no Default or Unmatured Default has occurred and is continuing.
(x) Copies of all of the following with respect to the Borrower:
(A) Its certificate or articles of incorporation, together with
all amendments, certified by the appropriate governmental officer in its
jurisdiction of incorporation.
(B) Certificate of good standing for it from the appropriate
governmental officer in its jurisdiction of incorporation.
(C) Its By-Laws, certified by its Secretary or one of its
Assistant Secretaries.
(D) Resolutions of its Board of Directors authorizing the
execution of the Loan Documents, certified by its Secretary or one of its
Assistant Secretaries .
Page 27
<PAGE>
(E) An incumbency certificate, executed by its Secretary or one of
its Assistant Secretaries, which shall identify by name and title and
bear the signature of the officers of the Borrower authorized to sign the
Loan Documents and to make borrowings hereunder, upon which certificate
the Agent and the Lenders shall be entitled to rely until informed of any
change in writing by the Borrower.
(xi) A written opinion of the Borrower's counsel, addressed to the
Lenders in substantially the form of Exhibit "E-1" hereto.
(xii) Copies of all of the following with respect to each Guarantor:
(A) Its certificate or articles of incorporation, together
with all amendments, certified by the appropriate governmental officer
in its jurisdiction of incorporation.
(B) Certificate of good standing for it from the appropriate
governmental officer in its jurisdiction of incorporation.
(C) Its By-Laws, certified by its Secretary or one of its
Assistant Secretaries.
(D) Resolutions of its Board of Directors authorizing the
execution of the Guaranty Agreement, certified by its Secretary or one
of its Assistant Secretaries.
(E) An incumbency certificate, executed by its Secretary or one
of its Assistant Secretaries, which shall identify by name and title and
bear the signature of the officers of such Guarantor authorized to
sign the Guaranty Agreement, upon which certificate the Agent and the
Lenders shall be entitled to rely until informed of any change in
writing by the such Guarantor.
(xiii) A written opinion of counsel to the Guarantors, addressed to the
Lenders in substantially the form of Exhibit "E-2" hereto.
(xiv) Written money transfer instructions, in substantially the form of
Exhibit "G" hereto, addressed to the Agent and signed by an Authorized
Officer, together with such other related money transfer authorizations
as the Agent may have reasonably requested.
(xv) Such other documents as any Lender or its counsel may have
reasonably requested.
5.2. Each Advance. The Lenders shall not be required to make any Advance
------------
(other than an Advance that, after giving effect thereto and to the
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<PAGE>
application of the proceeds thereof, does not increase the aggregate amount of
outstanding Advances), unless on the applicable Borrowing Date:
(i) There exists no Default or Unmatured Default.
(ii) The representations and warranties contained in Article VI are true
and correct as of such Borrowing Date except to the extent any such
representation or warranty is stated to relate solely to an earlier date,
in which case such representation or warranty shall be true and correct on
and as of such earlier date.
(iii) All legal matters incident to the making of such Advance shall be
satisfactory to the Lenders and their counsel.
Each Borrowing Notice with respect to each such Advance shall constitute a
representation and warranty by the Borrower that the conditions contained in
Sections 5.2(i) and (ii) have been satisfied. Any Lender may require a duly
completed compliance certificate in substantially the form of Exhibit "C" hereto
as a condition to making an Advance.
5.3. Withholding Tax Exemption. At least five Business Days prior to the
-------------------------
first date on which interest or fees are payable hereunder for the account of
any Lender, each Lender that is not incorporated under the laws of the United
States of America, or a state thereof, agrees that it will deliver to each of
the Borrower and the Agent two duly completed copies of United States Internal
Revenue Service Form 1001 or 4224, certifying in either case that such Lender is
entitled to receive payments under this Credit Agreement and the Notes without
deduction or withholding of any United States federal income taxes. Each Lender
which so delivers a Form 1001 or 4224 further undertakes to deliver to each of
the Borrower and the Agent two additional copies of such form (or a successor
form) on or before the date that such form expires (currently, three successive
calendar years for Form 1001 and one calendar year for Form 4224) or becomes
obsolete or after the occurrence of any event requiring a change in the most
recent forms so delivered by it, and such amendments thereto or extensions or
renewals thereof as may be reasonably requested by the Borrower or the Agent, in
each case certifying that such Lender is entitled to receive payments under this
Credit Agreement and the Notes without deduction or withholding of any United
States federal income taxes, unless an event (including without limitation any
change in treaty, law or regulation) has occurred prior to the date on which any
such delivery would otherwise be required which renders all such forms
inapplicable or which would prevent such Lender from duly completing and
delivering any such form with respect to it and such Lender advises the Borrower
and the Agent that it is not capable of receiving payments without any deduction
or withholding of United States federal income tax.
Page 29
<PAGE>
ARTICLE VI.
REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower represents and warrants to the Lenders as of the Closing Date
and each Borrowing Date that:
6.1. Corporate Existence and Standing. Each of the Borrower and its
--------------------------------
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all
requisite authority to conduct its business in each jurisdiction in which its
business is conducted.
6.2. Authorization and Validity. The Borrower has the corporate power
--------------------------
and authority and legal right to execute and deliver the Loan Documents and to
perform its obligations thereunder. The execution and delivery by the Borrower
of the Loan Documents and the performance of its obligations thereunder have
been duly authorized by proper corporate proceedings, and the Loan Documents
constitute legal, valid and binding obligations of the Borrower enforceable
against the Borrower in accordance with their terms, except as enforceability
may be limited by bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally.
6.3. No Conflict; Government Consent. Neither the execution and deliver
-------------------------------
by any Obligor of the Transaction Documents to which it is a party, nor the
consummation of the transactions therein contemplated, nor compliance with the
provisions thereof will violate any law, rule, regulation, order, writ,
judgment, injunction, decree or award binding on the Borrower or any of its
Subsidiaries or the certificate or articles of incorporation or by-laws of the
Borrower or any of its Subsidiaries or the provisions of any indenture,
instrument or agreement to which the Borrower or any of its Subsidiaries is a
party or is subject, or by which it, or its Property, is bound, or conflict with
or constitute a default thereunder, or result in the creation or imposition of
any Lien in, of or on any Property of the Borrower or any of its Subsidiaries
pursuant to the terms of any such indenture, instrument or agreement. No order,
consent, approval, license, authorization, or validation of, or filing,
recording or registration with, or exemption by, or other action in respect of
any governmental or public body or authority, or any subdivision thereof, is
required to authorize, or is required in connection with the execution, delivery
and performance of, or the legality, validity, binding effect or enforceability
of, any of the Transaction Documents.
6.4. Amendments to MidAmerican Capital Agreements. All agreements
--------------------------------------------
governing Indebtedness of MidAmerican Capital Company, a Delaware corporation,
or any of its Subsidiaries have been amended or otherwise modified so that
neither the execution and delivery by any Obligor of the Transaction Documents
to which it is a party, nor the consummation of the transactions therein
contemplated, nor compliance with the provisions thereof will violate any
provisions of any such agreement, or conflict with or constitute a default
thereunder.
Page 30
<PAGE>
6.5. Financial Statements. The consolidated financial statements of the
--------------------
Borrower and its Subsidiaries included in the preliminary prospectus filed by
the Borrower with the Securities and Exchange Commission on June 28, 1996 and
the consolidated financial statements of the Borrower and its Subsidiaries
delivered to the Lenders pursuant to Section 5.1(iv) were prepared in accordance
with generally accepted accounting principles in effect on the date such
statements were prepared and fairly present the consolidated financial condition
and operations of the Borrower and its Subsidiaries at such date and the
consolidated results of their operations for the period then ended.
6.6. Material Adverse Change. Since the date of the December 31, 1995
-----------------------
consolidated financial statements of the Borrower and its Subsidiaries included
in the preliminary prospectus filed by the Borrower with the Securities and
Exchange Commission on June 28, 1996, there has been no change in the business,
Property, prospects, condition (financial or otherwise) or results of operations
of the Borrower and its Subsidiaries which could have a Material Adverse Effect.
6.7. Taxes. The Borrower and its Subsidiaries have filed all United
-----
States federal tax returns and all other tax returns which are required to be
filed and have paid all taxes due pursuant to said returns or pursuant to any
assessment received by the Borrower or any of its Subsidiaries, except such
taxes, if any, as are being contested in good faith and as to which adequate
reserves have been provided in accordance with generally accepted accounting
principles and as to which no Lien exists. No tax liens have been filed and no
claims are being asserted with respect to any such taxes. The charges, accruals
and reserves on the books of the Borrower and its Subsidiaries in respect of any
taxes or other governmental charges are adequate.
6.8. Litigation and Contingent Obligations. Except as specifically
-------------------------------------
disclosed in the preliminary prospectus filed by the Borrower with the
Securities and Exchange Commission on June 28, 1996, there is no litigation,
arbitration, governmental investigation, proceeding or inquiry pending or, to
the knowledge of any of their officers, threatened against or affecting the
Borrower or any of its Subsidiaries which could have a Material Adverse Effect
or which seeks to prevent, enjoin or delay the making of the Loans or the
Advances. Other than any liability incident to such litigation, arbitration or
proceedings, the Borrower has no material contingent obligations not provided
for or disclosed in the financial statements referred to in Section 6.5.
6.9. Subsidiaries. All of the issued and outstanding shares of capital
------------
stock of each Subsidiary of the Borrower have been duly authorized and issued
and are fully paid and non-assessable.
6.10. ERISA. No accumulated funding deficiency (as defined in Section
-----
302 of ERISA and Section 412 of the Internal Revenue Code), whether or not
waived, exists with respect to any Plan (other than a Multiemployer Plan). No
liability to the
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<PAGE>
PBGC has been or is expected by any of the Obligors to be incurred with respect
to any Plan (other than a Multiemployer Plan) by the Borrower or any other
member of the Controlled Group which might result in a Material Adverse Effect.
Neither the Borrower nor any other member of the Controlled Group has incurred
or presently expects to incur any withdrawal liability under Title IV of ERISA
with respect to any Multiemployer Plan which might result in a Material Adverse
Effect.
6.11. Accuracy of Information. No information, exhibit or report furnished
-----------------------
by the Borrower or any of its Subsidiaries to the Agent or to any Lender in
connection with the negotiation of, or compliance with, the Loan Documents
contained any material misstatement of fact or omitted to state a material fact
or any fact necessary to make the statements contained therein not misleading.
6.12. Regulation U. Margin stock (as defined in Regulation U) constitutes
------------
less than 25% of those assets of the Borrower and its Subsidiaries which are
subject to any limitation on sale, pledge, or other restriction hereunder.
6.13. Material Agreements. Neither the Borrower nor any of its Subsidiaries
-------------------
is a party to any agreement or instrument or subject to any charter or other
corporate restriction which has a Material Adverse Effect. Neither the Borrower
nor any of its Subsidiaries is in default in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in (i)
any agreement to which it is a party, which default could have a Material
Adverse Effect or (ii) any agreement or instrument evidencing or governing
Indebtedness.
6.14. Compliance With Laws. The Borrower and its Subsidiaries have complied
--------------------
with all applicable statutes, rules, regulations, orders and restrictions of any
domestic or foreign government or any instrumentality or agency thereof, having
jurisdiction over the conduct of their respective businesses or the ownership of
their respective Property except for any failure to so comply that could not
have a Material Adverse Effect.
6.15. Ownership of Properties. Except as specifically disclosed in the
-----------------------
preliminary prospectus filed by the Borrower with the Securities and Exchange
Commission on June 28, 1996, each of the Borrower and its Subsidiaries has good
title, free of all Liens other than those permitted by Section 7.17, to all of
the Property and assets reflected in the financial statements as owned by it.
6.16. Plan Assets; Prohibited Transactions. The Borrower is not an entity
------------------------------------
deemed to hold "plan assets" within the meaning of 29 C.F.R. (S) 2510.3-101 of
an employee benefit plan (as defined in Section 3(3) of ERISA) which is subject
to Title I of ERISA or any plan (within the meaning of Section 4975 of the
Internal Revenue Code); neither the execution of this Credit Agreement nor the
making of Loans hereunder will give rise to a prohibited transaction within the
meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code;
and "benefit plan
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<PAGE>
investors" (as defined in 29 C.F.R. (S) 2510.3-101(f)) do not own 25% or more of
the value of any class of equity interests in the Borrower.
6.17. Oil and Gas Interests. Except as specifically disclosed in the
---------------------
preliminary prospectus filed by the Borrower with the Securities and Exchange
Commission on June 28, 1996 all wells operated by the Borrower or any other
Obligor or any Subsidiary of the Borrower or any other Obligor, and, to the best
of the knowledge of the Borrower, the other Obligors and the Subsidiaries of the
Borrower and the other Obligors, all other wells in which the Borrower, any
other Obligor or any Subsidiary of the Borrower or any other Obligor has an
interest, have been drilled, operated, shut-in, abandoned or suspended in
accordance with good oil and gas field practices and in compliance with all
applicable laws, permits, statutes, orders, licenses, rules and regulations,
except where the failure of any such action or condition could not have a
Material Adverse Effect. Except as specifically disclosed in the preliminary
prospectus filed by the Borrower with the Securities and Exchange Commission on
June 28, 1996, all leases with respect to any Oil and Gas Interests owned by the
Borrower, any other Obligor or any Subsidiary of the Borrower or any other
Obligor are in good standing and are in full force and effect, all royalties,
rents, taxes, assessments and other payments thereunder or with respect thereto
have been properly and timely paid and all conditions necessary to keep such
leases in full force have been fully performed, including, without limitation,
any condition to maintain continuous production or other activity with respect
thereto, except where the failure of any such action or condition could not have
a Material Adverse Effect.
6.18. Environmental Matters. Neither the Borrower nor any of its
---------------------
Subsidiaries is in violation of any Environmental Laws applicable to it or its
Properties except for violations which could not have a Material Adverse Effect.
Neither the Borrower nor any of its Subsidiaries has received any notice to the
effect that its operations are not in material compliance with any of the
requirements of applicable Environmental Laws or are the subject of any federal
or state investigation evaluating whether any remedial action is needed to
respond to a release of any toxic or hazardous waste or substance into the
environment, which non-compliance or remedial action could have a Material
Adverse Effect.
6.19. Investment Company Act. Neither the Borrower nor any of its
----------------------
Subsidiaries is an "investment company" or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
6.20. Public Utility Holding Company Act. Either one of the following
----------------------------------
statements is true and correct:
(i) Neither the Parent, the Borrower, any of the Obligors nor any other
Subsidiary of the Borrower is a "holding company" or a "subsidiary company"
of a "holding company", or an "affiliate" of a "holding company" or of a
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<PAGE>
"subsidiary company" of a "holding company", within the meaning of the
Public Utility Holding Company Act of 1935, as amended (the "Holding
Company Act").
(ii) The Parent (A) is a "holding company" as such term is defined in the
Holding Company Act, (B) has complied with all rules and regulations of the
Holding Company Act necessary to conduct its business as presently
conducted and to allow each of the Obligors to enter into and perform its
respective obligations under the Transaction Documents to which it is a
party, and (iii) is currently exempt from all provisions of the Holding
Company Act, except Section 9(a)(2) thereof, pursuant to Section 3(a)(1) of
the Holding Company Act.
ARTICLE VII.
COVENANTS
---------
During the term of this Credit Agreement, unless the Required Lenders shall
otherwise consent in writing:
7.1. Financial Reporting. The Borrower will maintain, for itself and each of
-------------------
its Subsidiaries, a system of accounting established and administered in
accordance with generally accepted accounting principles, and furnish to the
Lenders:
(i) Within 90 days after the close of each of its fiscal years, an
unqualified (except for qualifications relating to changes in accounting
principles or practices reflecting changes in generally accepted principles
of accounting and required or approved by the Borrower's independent
certified public accountants) audit report certified by independent
certified public accountants of recognized national standing selected by
the Borrower prepared in accordance with generally accepted accounting
principles on a consolidated basis for itself and its Subsidiaries,
including a balance sheet as of the end of such period, related profit and
loss and reconciliation of surplus statements, and a statement of cash
flows, accompanied by any management letter prepared by said accountants.
(ii) Within 45 days after the close of the first three quarterly periods
of each of its fiscal years, for itself and its Subsidiaries, a
consolidated, unaudited balance sheet as at the close of each such period
and consolidated profit and loss and reconciliation of surplus statements
and a statement of cash flows for the period from the beginning of such
fiscal year to the end of such quarter, all certified by an Executive
Officer.
(iii) Together with the financial statements required under Sections
7.1(i) and (ii), a compliance certificate in substantially the form of
Exhibit "C" hereto signed by an Executive Officer showing the calculations
necessary to determine compliance with this Credit Agreement and stating
that no Default
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<PAGE>
or Unmatured Default exists, or if any Default or Unmatured Default exists,
stating the nature and status thereof.
(iv) Promptly upon the Borrower's becoming aware of (A) any Reportable
Event, or (B) any nonexempt "prohibited transaction", as defined in
Sections 406 and 408 of ERISA and Section 4975 of the Internal Revenue
Code, in connection with any Plan maintained or contributed to by or on
behalf of the Borrower or any other member of the Controlled Group for
employees of the Borrower or any other member of the Controlled Group or
any trust created thereunder, a written notice specifying the nature
thereof, what action the Borrower or such member of the Controlled Group
has taken, is taking or proposes to take, or has been taken or proposed to
be taken by the Internal Revenue Service or the PBGC with respect thereto.
(v) As soon as possible and in any event within 10 days after receipt by
the Borrower, a copy of (a) any notice or claim to the effect that the
Borrower or any of its Subsidiaries is or may be liable to any Person as a
result of the release by the Borrower, any of its Subsidiaries, or any
other Person of any toxic or hazardous waste or substance into the
environment, and (b) any notice alleging any violation of any federal,
state or local environmental, health or safety law or regulation by the
Borrower or any of its Subsidiaries, which, in either case, could have a
Material Adverse Effect.
(vi) Promptly upon the furnishing thereof to the shareholders of the
Borrower, copies of all financial statements, reports and proxy statements
so furnished.
(vii) Promptly upon the filing thereof, copies of all registration
statements and annual, quarterly, monthly or other regular reports which
the Borrower or any of its Subsidiaries files with the Securities and
Exchange Commission.
(viii) Promptly after receipt, copies of all title or other information
received by the Borrower or any of its Subsidiaries which discloses any
material defect in the title to any portion of the Oil and Gas Interests of
the Borrower and the other Obligors which could reasonably be expected to
have a Material Adverse Effect.
(ix) Within fifteen (15) days after the close of each calendar month
ending prior to the earlier of (A) the first date on which a public
offering of the Borrower's common stock is consummated, and (B) the first
anniversary of the Closing Date, a Borrowing Base Report as of the end of
such month.
(x) As soon as available and in any event no later than April 30 of each
calendar year, an annual reserve report with respect to the Oil and Gas
Interests of the Borrower and the other Obligors prepared as of the most
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<PAGE>
recent December 31 by an independent engineering firm of recognized
national standing acceptable to the Required Lenders in accordance with
accepted industry practices and otherwise acceptable in form and substance
to the Required Lenders.
(xi) As soon as available and in any event no later than October 31 of
each calendar year, starting October 31, 1997, an updated reserve report
with respect to the Oil and Gas Interests of the Borrower and the other
Obligors prepared as of the most recent June 30 by an engineer employed by
the Borrower in accordance with accepted industry practices and otherwise
acceptable in form and substance to the Required Lenders.
(xii) As soon as available and in any event within 30 days after the
Borrower's receipt of a written request (which request may not be given
more than two times during any twelve month period) from the Required
Lenders or the Agent acting on behalf of the Required Lenders, an updated
reserve report with respect to the Oil and Gas Interests of the Borrower
and the other Obligors prepared as of a date no more than ten days prior to
the delivery of such report by an independent engineering firm of
recognized national standing acceptable to the Required Lenders in
accordance with accepted industry practices and otherwise acceptable in
form and substance to the Required Lenders.
(xiii) Within 30 days after the close of each of its fiscal quarters
which ends prior to the earlier of (A) the first date on which a public
offering of the Borrower's common stock is consummated, and (B) the first
anniversary of the Closing Date, (1) a summary of the invoiced accounts
receivable of each Obligor as of the end of such fiscal quarter, in each
case aged in thirty (30) day intervals, and (2) a report detailing all
collections on the accounts receivable of each Obligor during such fiscal
quarter.
(xiv) Such other information (including non-financial information) as
the Agent or any Lender may from time to time reasonably request.
7.2. Use of Proceeds. The Borrower will, and will cause each of its
---------------
Subsidiaries to, use the proceeds of the Advances to repay outstanding
Indebtedness of the Borrower and its Subsidiaries, for working capital and other
general corporate purposes and to repay outstanding Advances. The Borrower will
not, nor will it permit any of its Subsidiaries to, use any of the proceeds of
the Advances to purchase or carry any "margin stock" (as defined in Regulation
U).
7.3. Notice of Default. The Borrower will, and will cause each of its
-----------------
Subsidiaries to, give prompt notice in writing to the Lenders of the occurrence
of any Default or Unmatured Default and of any other development, financial or
otherwise, which could have a Material Adverse Effect.
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<PAGE>
7.4. Conduct of Business. The Borrower will, and will cause each of its
-------------------
Subsidiaries to, (i) carry on and conduct its business in substantially the same
manner and in substantially the same fields of enterprise as it is presently
conducted except where the discontinuance of any part of its business is
advantageous and could not have a Material Adverse Effect, (ii) do all things
necessary to remain duly incorporated, validly existing and in good standing as
a domestic corporation in its jurisdiction of incorporation except for the
dissolution of a Subsidiary of the Borrower which is advantageous and could not
have a Material Adverse Effect, and (iii) maintain all requisite authority to
conduct its business in each jurisdiction in which its business is conducted
except where the abandonment of any such authority is advantageous and could not
have a Material Adverse Effect.
7.5. Taxes. The Borrower will, and will cause each of its Subsidiaries
-----
to timely file complete and correct United States federal and applicable
foreign, state and local tax returns required by law and pay when due all taxes,
assessments and governmental charges and levies upon it or its income, profits
or Property, except those which are being contested in good faith by appropriate
proceedings and with respect to which adequate reserves have been set aside in
accordance with generally accepted accounting principles.
7.6. Insurance. The Borrower will, and will cause each of its
---------
Subsidiaries to, maintain with financially sound and reputable insurance
companies insurance on all their Property in such amounts and covering such
risks as is consistent with sound business practice, and the Borrower will
furnish to any Lender upon request full information as to the insurance carried.
7.7. Compliance with Laws. The Borrower will, and will cause each of
--------------------
its Subsidiaries to, comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject except for
any failure to so comply that could not have a Material Adverse Effect.
7.8. Maintenance of Properties. The Borrower will, and will cause each
-------------------------
of its Subsidiaries to, (i) do all things necessary to maintain, preserve,
protect and keep its Property in good repair, working order and condition, and
make all necessary and proper repairs, renewals and replacements so that its
business carried on in connection therewith may be properly conducted at all
times, (ii) operate all wells for which the Borrower or any of its Subsidiaries
is the operator in accordance with good oil and gas field practices and in
compliance with all applicable laws, permits, statutes, orders, licenses, rules
and regulations, and (iii) comply with all of its duties and obligations under,
and take all actions to maintain, consistent with prudent oil and gas practices
all leases with respect to any Oil and Gas Interests owned by the Borrower, any
of the other Obligors or any Subsidiary or the Borrower or any of the other
Obligors.
7.9. Audit of Accounts and Inspections. The Borrower will, and will
---------------------------------
cause each of its Subsidiaries to, (i) at any time after August 15, 1996 when
Eligible
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<PAGE>
Accounts are included in the Borrowing Base, permit the Agent to conduct an
audit or examination of the accounts receivables and related records of the
Obligors at such reasonable times and intervals as the Agent may designate, and
(ii) permit the Agent and the Lenders, by their respective representatives and
agents, to inspect any of the Property, corporate books and financial records of
the Borrower and each of its Subsidiaries, to examine and make copies of the
books of accounts and other financial records of the Borrower and each of its
Subsidiaries, and to discuss the affairs, finances and accounts of the Borrower
and each of its Subsidiaries with, and to be advised as to the same by, their
respective officers at such reasonable times and intervals as the Lenders may
designate.
7.10. Consolidated Tangible Net Worth. The Borrower will at all times
-------------------------------
maintain Consolidated Tangible Net Worth of not less than the sum of (i)
$90,000,000, plus (ii) 75% of the net proceeds, if any, received by the Borrower
or the Borrower's shareholders from the initial public offering of the
Borrower's common stock, plus (iii) 50% of the positive Consolidated Net Income,
if any, of the Borrower and its Subsidiaries for its 1996 fiscal year and each
fiscal year thereafter.
7.11. Interest Coverage Ratio. The Borrower will maintain a ratio of (i)
-----------------------
Consolidated EBITDA for the Applicable Period, to (ii) Consolidated Interest
Expense for the Applicable Period, of not less than 4.25 to 1.00. As used in
this Section 7.11, the term "Applicable Period" means (A) until December 31,
1996, the period from and including June 1, 1996 to and including September 30,
1996, (B) on or after December 31, 1996 and prior to March 31, 1997, the period
from and including June 1, 1996 to and including December 31, 1996, (C) on or
after March 31, 1997 and prior to June 30, 1997, the period from and including
June 1, 1996 to and including March 31, 1997, and (D) on or after June 30, 1997,
the period consisting of the four most recently ended fiscal quarters of the
Borrower.
7.12. Dividends. The Borrower will not, nor will it permit any of its
---------
Subsidiaries to, declare or pay any dividends or make any distributions on its
capital stock (other than dividends payable in its own capital stock) or redeem,
repurchase or otherwise acquire or retire any of its capital stock at any time
outstanding, except:
(i) any of the Borrower's Subsidiaries may declare and pay dividends or
make distributions to the Borrower or to a Wholly-Owned Subsidiary of the
Borrower.
(ii) The Borrower may declare and pay cash dividends on its common stock
provided that, both before and after giving effect to the declaration or
payment of any such dividend, (A) there exists no Default or Unmatured
Default, and (B) the aggregate amount of all dividends declared or paid by
the Borrower on its common stock during any fiscal quarter of the Borrower
does not exceed 25% of the Consolidated Net Income, if any, of the Borrower
and its Subsidiaries for the immediately preceding fiscal quarter of the
Borrower.
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<PAGE>
7.13. Indebtedness. The Borrower will not, nor will it permit any of its
------------
Subsidiaries to, create, incur or suffer to exist any Indebtedness, except:
(i) The Loans.
(ii) Obligations under or with respect to letters of credit having
an aggregate face amount at any one time outstanding not in excess of (A)
the Borrowing Base in effect at such time, minus (B) the aggregate
principal amount of the Advances then outstanding.
7.14. Merger. The Borrower will not, nor will it permit any of its
------
Subsidiaries to, merge or consolidate with or into any other Person, except that
a Subsidiary of the Borrower may merge into the Borrower or a Wholly-Owned
Subsidiary of the Borrower.
7.15. Sale of Assets. The Borrower will not, nor will it permit any of
--------------
its Subsidiaries to, lease, sell or otherwise dispose of its Property, to any
other Person, except:
(i) Sales of inventory (including, without limitation, sales of
Hydrocarbons produced from the Oil and Gas Interests of the Borrower and
its Subsidiaries) in the ordinary course of business.
(ii) Sales or other dispositions of any Property of the Borrower
and its Subsidiaries other than Oil and Gas Interests provided that the
aggregate proceeds of all such sales and other dispositions made during any
period of twelve consecutive months does not exceed $5,000,000.
(iii) Sales or other dispositions of any Oil and Gas Interests of
the Borrower and its Subsidiaries provided that the Borrower makes any
prepayment of the Advances required by Section 2.8.2 as a result of any
such sale.
(iv) Sales of any of the capital stock of CPEX and sales or other
dispositions by CPEX of any of its Properties provided that at the time of
any such sale or other disposition CPEX does not own any Oil and Gas
Interests.
7.16. Investments and Acquisitions. The Borrower will not, nor will it
----------------------------
permit any of its Subsidiaries to, make or suffer to exist any Investments
(including without limitation, loans and advances to, and other Investments in,
Subsidiaries), or commitments therefor, or to create any of its Subsidiaries or
to become or remain a partner in any partnership or joint venture, or to make
any Acquisition of any Person, except:
(i) Money Market Instruments.
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<PAGE>
(ii) Investments outstanding on the date hereof in Subsidiaries of
the Borrower.
(iii) Investments in Guarantors provided that each Guarantor in
which an Investment is made uses the proceeds of such Investment to make
expenditures necessary or appropriate for the operation of its existing
lines of business.
(iv) The $2,315,000 promissory Note dated April 12, 1996 payable
to InterCoast Oil and Gas Company (formerly known as Medallion Production
Company) by InterCoast Global Management, Inc.
7.17. Liens. The Borrower will not, nor will it permit any of its
-----
Subsidiaries to, create, incur, or suffer to exist any Lien in, of or on the
Property of the Borrower or any of its Subsidiaries, except:
(i) Excepted Liens on Property of the Borrower or any of its
Subsidiaries which are incurred in the ordinary course of business.
(ii) Additional Liens not otherwise permitted by this Section 7.17
provided that the aggregate amount of the obligations of the Borrower and
its Subsidiaries secured by such additional Liens does not at any time
exceed $1,000,000.
7.18. Affiliates. The Borrower will not, and will not permit any of its
----------
Subsidiaries to, enter into any transaction (including, without limitation, the
purchase or sale of any Property or service) with, or make any payment or
transfer to, any Affiliate except in the ordinary course of business and
pursuant to the reasonable requirements of the Borrower's or such Subsidiary's
business and upon fair and reasonable terms no less favorable to the Borrower or
such Subsidiary than the Borrower or such Subsidiary would obtain in a
comparable arms-length transaction.
7.19. Sale of Accounts. The Borrower will not, nor will it permit any
----------------
of its Subsidiaries to, sell or otherwise dispose of any notes receivable or
accounts receivable, with or without recourse.
7.20. Sale and Leaseback. The Borrower will not, nor will it permit any
------------------
of its Subsidiaries to, enter into any sale or other transfer of any of its
Property with the intent to lease such Property as lessee, except for any such
sales made in accordance with and permitted by the terms of Section 7.15(ii).
7.21. No Negative Pledges. The Borrower will not, nor will it permit any
-------------------
of its Subsidiaries to, enter into any agreement prohibiting the creation or
assumption of any Lien upon any of its Property, whether now owned or hereafter
acquired.
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<PAGE>
7.22. Commodity Contracts and Interest Rate Hedging Agreements. The
--------------------------------------------------------
Borrower will not, nor will it permit any of its Subsidiaries to, enter into any
Commodity Contract or Interest Rate Hedging Agreement, except:
(i) Commodity Contracts with respect to Hydrocarbons entered into
with the purpose and effect of fixing prices on Hydrocarbons reasonably
expected to be produced from the Oil and Gas Interests of the Borrower and
the other Obligors provided that all such Commodity Contracts taken
together shall not cover for any individual period covered thereby more
than the aggregate volume of Hydrocarbons reasonably expected to be
produced from the Oil and Gas Interests of the Borrower and the other
Obligors during such period.
(ii) Commodity Contracts with respect to Hydrocarbons entered into
in the ordinary course of the Hydrocarbon marketing business of the
Hydrocarbon Marketing Companies or with the purpose and effect of reducing
or eliminating the exposure of the Hydrocarbon Marketing Companies to
losses caused by changes in the market prices of Hydrocarbons provided that
the aggregate Net Mark-to-Market Exposure of the Borrower and the other
Obligors under all such Commodity Contracts does not exceed $1,000,000.
(iii) Commodity Contracts with respect to electric power entered
into in the ordinary course of the electric power marketing business of the
Power Marketing Companies or with the purpose and effect of reducing or
eliminating the exposure of the Power Marketing Companies to losses caused
by changes in the market prices of electric power provided that the
aggregate Net Mark-to-Market Exposure of the Borrower and the other
Obligors under all such Commodity Contracts does not exceed $500,000.
(iv) Interest Rate Hedging Agreements entered into with the
purpose and effect of fixing interest rates on a principal amount of
Indebtedness of the Borrower or any of its Subsidiaries that is accruing
interest at a variable rate provided that the aggregate notional amount of
all such Interest Rate Hedging Agreements does not exceed the aggregate
principal amount of the variable rate Indebtedness of the Borrower and its
Subsidiaries outstanding at the time any such Interest Rate Hedging
Agreement is entered into.
ARTICLE VIII.
DEFAULTS
--------
The occurrence of any one or more of the following events shall constitute
a Default:
8.1. Any representation or warranty made or deemed made by or on behalf
of the Borrower, any other Obligor or any of their respective Subsidiaries to
the Lenders or the Agent under or in connection with this Credit Agreement, any
Loan,
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<PAGE>
or any certificate or information delivered in connection with this Credit
Agreement or any other Transaction Document shall be materially false on the
date as of which made.
8.2. Nonpayment of principal of any Note when due, or nonpayment of
interest upon any Note or of any commitment fee or other obligations under any
of the Loan Documents within five days after the same becomes due.
8.3. The breach by the Borrower of any of the terms or provisions of
Section 7.10, Section 7.11, Section 7.12, Section 7.13, Section 7.14,
Section 7.15, Section 7.16, Section 7.17, Section 7.18, Section 7.19,
Section 7.20, Section 7.21 or Section 7.22.
8.4. The breach by the Borrower (other than a breach which constitutes a
Default under Section 8.1, Section 8.2 or Section 8.3) of any of the terms or
provisions of this Credit Agreement which is not remedied within twenty (20)
days after written notice from the Agent or any Lender.
8.5. Failure of the Borrower or any of its Subsidiaries to pay when due
any Indebtedness aggregating in excess of $2,000,000 ("Material Indebtedness");
or the default by the Borrower or any of its Subsidiaries in the performance of
any term, provision or condition contained in any agreement under which any
Material Indebtedness was created or is governed, or any other event shall occur
or condition exist, the effect of which is to cause, or to permit the holder or
holders of any Material Indebtedness to cause, such Material Indebtedness to
become due prior to its stated maturity; or any Material Indebtedness of the
Borrower or any of its Subsidiaries shall be declared to be due and payable or
required to be prepaid or repurchased (other than by a regularly scheduled
payment) prior to the stated maturity thereof; or the Borrower or any of its
Subsidiaries shall not pay, or admit in writing its inability to pay, its debts
generally as they become due.
8.6. The Borrower or any of its Subsidiaries shall (i) have an order for
relief entered with respect to it under the Bankruptcy Code as now or hereafter
in effect, (ii) make an assignment for the benefit of creditors, (iii) apply
for, seek, consent to, or acquiesce in, the appointment of a receiver,
custodian, trustee, examiner, liquidator or similar official for it or any
Substantial Portion of its Property, (iv) institute any proceeding seeking an
order for relief under the Bankruptcy Code as now or hereafter in effect or
seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution,
winding up, liquidation, reorganization, arrangement, adjustment or composition
of it or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors or fail to file an answer or other pleading
denying the material allegations of any such proceeding filed against it, (v)
take any corporate action to authorize or effect any of the foregoing actions
set forth in this Section 8.6 or (vi) fail to contest in good faith any
appointment or proceeding described in Section 8.7.
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8.7. Without the application, approval or consent of the Borrower or any
of its Subsidiaries, a receiver, trustee, examiner, liquidator or similar
official shall be appointed for the Borrower or any of its Subsidiaries or any
Substantial Portion of its Property, or a proceeding described in Section
8.6(iv) shall be instituted against the Borrower or any of its Subsidiaries and
such appointment continues undischarged or such proceeding continues undismissed
or unstayed for a period of 30 consecutive days.
8.8. Any court, government or governmental agency shall condemn, seize or
otherwise appropriate, or take custody or control of (each a "Condemnation"),
all or any portion of the Property of the Borrower and its Subsidiaries which,
when taken together with all other Property of the Borrower and its Subsidiaries
so condemned, seized, appropriated, or taken custody or control of, during the
twelve-month period ending with the month in which any such Condemnation occurs,
constitutes a Substantial Portion.
8.9. The Borrower or any of its Subsidiaries shall fail within 30 days to
pay, bond or otherwise discharge any judgment or order for the payment of money
in excess of $2,000,000, which is not stayed on appeal or otherwise being
appropriately contested in good faith.
8.10. The Unfunded Liabilities of all Single Employer Plans shall exceed
in the aggregate $2,000,000, whether or not waived, or the Borrower or any other
member of the Controlled Group shall terminate or permit the termination of any
Plan in a manner which could result in the imposition of a Lien on Property of
the Borrower or any other member of the Controlled Group pursuant to Section
4068 of ERISA securing an amount in excess of $2,000,000, and such amount shall
remains unsatisfied for any period of 60 consecutive days without a stay of
execution.
8.11. The Borrower or any other member of the Controlled Group shall have
been notified by the sponsor of any Multiemployer Plan that it has incurred
withdrawal liability to such Multiemployer Plan in an amount, which when
aggregated with all other amounts required to be paid to Multiemployer Plans by
the Borrower or any other member of the Controlled Group as withdrawal
liabilities (determined as of the date of such notification), exceeds
$2,000,000, and such liability remains outstanding for any period of 60
consecutive days without a stay of execution.
8.12. The Borrower or any of its Subsidiaries shall be the subject of any
proceeding or investigation pertaining to the release by the Borrower or any of
its Subsidiaries, or any other Person of any toxic or hazardous waste or
substance into the environment, or any violation of any federal, state or local
environmental, health or safety law or regulation, which, in either case, could
reasonably be expected to have a Material Adverse Effect.
8.13. Any Guaranty Default shall occur and be continuing.
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8.14. The Guaranty Agreement shall cease to remain in full force and
effect as a valid and binding obligation of each Guarantor, or any action shall
be taken to discontinue or to assert the invalidity or unenforceability of any
obligation of any Guarantor under the Guaranty Agreement, or any Guarantor
denies that it has any further liability under the Guaranty Agreement, or gives
notice to such effect.
ARTICLE IX.
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
----------------------------------------------
9.1. Acceleration. If any Default described in Section 8.6 or 8.7 occurs
------------
with respect to the Borrower, the obligations of the Lenders to make Loans
hereunder shall automatically terminate and the Obligations shall immediately
become due and payable without any election or action on the part of the Agent
or any Lender. If any other Default occurs, the Required Lenders (or the Agent
with the consent of the Required Lenders) may terminate or suspend the
obligations of the Lenders to make Loans hereunder, or declare the Obligations
to be due and payable, or both, whereupon the Obligations shall become
immediately due and payable, without presentment, demand, protest or notice of
any kind, all of which the Borrower hereby expressly waives. If, within 30 days
after acceleration of the maturity of the Obligations or termination of the
obligations of the Lenders to make Loans hereunder as a result of any Default
(other than any Default as described in Section 8.6 or 8.7 with respect to the
Borrower) and before any judgment or decree for the payment of the Obligations
due shall have been obtained or entered, the Required Lenders (in their sole
discretion) shall so direct, the Agent shall, by notice to the Borrower, rescind
and annul such acceleration and/or termination.
9.2. Amendments. Subject to the provisions of this Article IX, the Required
----------
Lenders (or the Agent with the consent in writing of the Required Lenders) and
the Borrower may enter into agreements supplemental hereto for the purpose of
adding or modifying any provisions to the Loan Documents or changing in any
manner the rights of the Lenders or the Borrower hereunder or waiving any
Default hereunder; provided, however, that no such supplemental agreement shall,
without the consent of each Lender affected thereby:
(i) Extend the maturity of any Loan or Note or forgive all or any
portion of the principal amount thereof, or reduce the rate or extend the
time of payment of interest or fees thereon.
(ii) Reduce the percentage specified in the definition of Required
Lenders.
(iii) Extend the Termination Date, or reduce the amount or extend the
payment date for, the mandatory payments required under Section 2.8, or
increase the amount of the Commitment of any Lender hereunder, or permit
the Borrower to assign its rights under this Credit Agreement.
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(iv) Amend this Section 9.2.
No amendment of any provision of this Credit Agreement relating to the Agent
shall be effective without the written consent of the Agent. The Agent may
waive payment of the fee required under Section 13.3.2 without obtaining the
consent of any other party to this Credit Agreement.
9.3. Preservation of Rights. No delay or omission of the Lenders or the
----------------------
Agent to exercise any right under the Loan Documents shall impair such right or
be construed to be a waiver of any Default or an acquiescence therein, and the
making of a Loan notwithstanding the existence of a Default or the inability of
the Borrower to satisfy the conditions precedent to such Loan shall not
constitute any waiver or acquiescence. Any single or partial exercise of any
such right shall not preclude other or further exercise thereof or the exercise
of any other right, and no waiver, amendment or other variation of the terms,
conditions or provisions of the Loan Documents whatsoever shall be valid unless
in writing signed by the Lenders required pursuant to Section 9.2, and then only
to the extent in such writing specifically set forth. All remedies contained in
the Loan Documents or by law afforded shall be cumulative and all shall be
available to the Agent and the Lenders until the Obligations have been paid in
full.
ARTICLE X.
GENERAL PROVISIONS
------------------
10.1. Survival of Representations. All representations and warranties of the
---------------------------
Borrower contained in this Credit Agreement shall survive delivery of the Notes
and the making of the Loans herein contemplated.
10.2. Governmental Regulation. Anything contained in this Credit Agreement
-----------------------
to the contrary notwithstanding, no Lender shall be obligated to extend credit
to the Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
10.3. Taxes. Any taxes (excluding federal income taxes on the overall net
-----
income of any Lender) or other similar assessments or charges made by any
governmental or revenue authority in respect of the Loan Documents shall be paid
by the Borrower, together with interest and penalties, if any.
10.4. Headings. Section headings in the Loan Documents are for convenience
--------
of reference only, and shall not govern the interpretation of any of the
provisions of the Loan Documents.
10.5. Entire Agreement. The Loan Documents embody the entire agreement and
----------------
understanding among the Borrower, the Agent and the Lenders and supersede all
prior agreements and understandings among the Borrower, the Agent
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<PAGE>
and the Lenders relating to the subject matter thereof other than the fee letter
referred to in Section 11.13.
10.6. Several Obligations; Benefits of this Credit Agreement. The respective
------------------------------------------------------
obligations of the Lenders hereunder are several and not joint and no Lender
shall be the partner or agent of any other (except to the extent to which the
Agent is authorized to act as such). The failure of any Lender to perform any
of its obligations hereunder shall not relieve any other Lender from any of its
obligations hereunder. This Credit Agreement shall not be construed so as to
confer any right or benefit upon any Person other than the parties to this
Credit Agreement and their respective successors and assigns.
10.7. Expenses. The Borrower hereby agrees to reimburse the Agent for all
--------
reasonable out-of-pocket expenses (including, without limitation, reasonable
attorneys fees and reasonable travel expenses and related costs), internal time
charges of attorneys employed by the Agent and internal charges of the employees
of the Agent or any Affiliate of the Agent conducting an audit or examination of
the accounts receivables and related records of the Obligors at any time after
August 15, 1996 when Eligible Accounts are included in the Borrowing Base paid
or incurred by the Agent in connection with the preparation, negotiation,
execution, delivery, review, amendment, modification, and administration of the
Transaction Documents. The Borrower also agrees to reimburse the Agent and the
Lenders for any reasonable costs, internal charges and out-of-pocket expenses
(including reasonable attorneys' fees and time charges of attorneys for the
Agent and the Lenders, which attorneys may be employees of the Agent or the
Lenders) paid or incurred by the Agent or any Lender in connection with the
collection and enforcement of the Transaction Documents. The obligations of the
Borrower under this Section 10.7 shall survive the termination of this Credit
Agreement.
10.8. Indemnification. The Borrower agrees to indemnify and hold harmless
---------------
the Agent, each Lender and their respective directors, officers and employees
(each an "Indemnified Person") against all losses, claims, damages, penalties,
judgments, liabilities and expenses (including, without limitation, all
reasonable expenses of litigation or preparation therefor whether or not any
Indemnified Person is a party thereto) which any of them may pay or incur
arising out of or relating to (i) this Credit Agreement, (ii) any of the other
Transaction Documents, (iii) the transactions contemplated hereby, (iv) the
direct or indirect application or proposed application of the proceeds of any
Loan made hereunder, (v) any investigation, litigation or proceeding related to
any environmental cleanup, audit, compliance proceeding or other matter relating
to any release by the Borrower or any of its Subsidiaries of any hazardous waste
or substance or any violation or alleged violation of Environmental Law, or (vi)
the presence on or under, or the escape, seepage, leakage, spillage, discharge,
emission or release from, any Property owned or operated by the Borrower or any
of its Subsidiaries of any hazardous waste or substance regardless of whether
caused by, or within the control of, the Borrower or any of its Subsidiaries,
except to the extent that any of
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<PAGE>
the foregoing are determined by a court of competent jurisdiction in a final and
non-appealable order to have resulted from (i) activities of the Indemnified
Person seeking indemnification hereunder on any Property of the Borrower or any
of its Subsidiaries conducted subsequent to a foreclosure on such Property by
the Agent or the Lenders, or (ii) the gross negligence or willful misconduct of
the Indemnified Person seeking indemnification hereunder. If and to the extent
that any part of the foregoing undertaking may be unenforceable for any reason,
the Borrower hereby agrees to make the maximum contribution to the payment and
satisfaction of the indemnified losses, claims, damages, penalties, judgments,
liabilities and expenses which is permissible under applicable law. The
Borrower shall be obligated to indemnify each of the Indemnified Persons
pursuant to this Section 10.8 regardless of whether the Borrower or any of this
Subsidiaries had knowledge of any of the facts and circumstances giving rise to
any loss, claim, damage, penalty, judgment, liability or expense indemnified
hereunder. The obligations of the Borrower under this Section 10.8 shall
survive the termination of this Credit Agreement.
10.9. Numbers of Documents. All statements, notices, closing documents, and
--------------------
requests hereunder shall be furnished to the Agent with sufficient counterparts
so that the Agent may furnish one to each of the Lenders.
10.10. Accounting. Except as provided to the contrary herein, all accounting
----------
terms used herein shall be interpreted and all accounting determinations
hereunder shall be made in accordance with generally accepted accounting
principles.
10.11. Severability of Provisions. Any provision in any Loan Document that
--------------------------
is held to be inoperative, unenforceable, or invalid in any jurisdiction shall,
as to that jurisdiction, be inoperative, unenforceable, or invalid without
affecting the remaining provisions in that jurisdiction or the operation,
enforceability, or validity of that provision in any other jurisdiction, and to
this end the provisions of all Loan Documents are declared to be severable.
10.12. Nonliability of Lenders. The relationship between the Borrower and
-----------------------
the Lenders and the Agent shall be solely that of borrower and lender. Neither
the Agent nor any Lender shall have any fiduciary responsibilities to the
Borrower. Neither the Agent nor any Lender undertakes any responsibility to the
Borrower to review or inform the Borrower of any matter in connection with any
phase of the Borrower's business or operations. The Borrower agrees that
neither the Agent nor any Lender shall have liability to the Borrower (whether
sounding in tort, contract or otherwise) for losses suffered by the Borrower in
connection with, arising out of, or in any way related to, the transactions
contemplated and the relationship established by the Loan Documents, or any act,
omission or event occurring in connection therewith, unless it is determined by
a court of competent jurisdiction in a final and non-appealable order that such
losses resulted from the gross negligence or willful misconduct of the party
from which recovery is sought. Neither the Agent nor any Lender shall have any
liability with respect to, and the Borrower hereby
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<PAGE>
waives, releases and agrees not to sue for, any special, indirect or
consequential damages suffered by the Borrower in connection with, arising out
of, or in any way related to the Loan Documents or the transactions contemplated
thereby.
10.13. Confidentiality. Each Lender agrees to hold any confidential
---------------
information which it may receive from the Borrower pursuant to this Credit
Agreement in confidence, except for disclosure (i) to its Affiliates and to
other Lenders and their respective Affiliates, (ii) to the officers, employees,
legal counsel, accountants, and other professional advisors to any Lender, any
Affiliate of a Lender or any Transferee, (iii) to regulatory officials, (iv) to
any Person as requested pursuant to or as required by law, regulation, or legal
process, (v) to any Person in connection with any legal proceeding to which that
Lender is a party, and (vi) permitted by Section 13.4.
10.14. Nonreliance. Each Lender hereby represents that it is not relying on
-----------
or looking to any margin stock (as defined in Regulation U of the Board of
Governors of the Federal Reserve System) for the repayment of the Loans provided
for herein.
ARTICLE XI.
THE AGENT
---------
11.1. Appointment; Nature of Relationship. The First National Bank of
-----------------------------------
Chicago is hereby appointed by the Lenders as the Agent hereunder and under each
other Transaction Document, and each of the Lenders irrevocably authorizes the
Agent to act as the contractual representative of such Lender with the rights
and duties expressly set forth herein and in the other Transaction Documents.
The Agent agrees to act as such contractual representative upon the express
conditions contained in this Article XI. Notwithstanding the use of the defined
term "Agent," it is expressly understood and agreed that the Agent shall have
not have any fiduciary responsibilities to any Lender by reason of this Credit
Agreement or any other Transaction Document and that the Agent is merely acting
as the representative of the Lenders with only those duties as are expressly set
forth in this Credit Agreement and the other Transaction Documents. In its
capacity as the Lenders' contractual representative, the Agent (i) does not
hereby assume any fiduciary duties to any of the Lenders, (ii) is a
"representative" of the Lenders within the meaning of Section 9-105 of the
Uniform Commercial Code and (iii) is acting as an independent contractor, the
rights and duties of which are limited to those expressly set forth in this
Credit Agreement and the other Transaction Documents. Each of the Lenders
hereby agrees to assert no claim against the Agent on any agency theory or any
other theory of liability for breach of fiduciary duty, all of which claims each
Lender hereby waives.
11.2. Powers. The Agent shall have and may exercise such powers under the
------
Transaction Documents as are specifically delegated to the Agent by the terms of
each thereof, together with such powers as are reasonably incidental thereto.
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<PAGE>
The Agent shall have no implied duties to the Lenders, or any obligation to the
Lenders to take any action thereunder except any action specifically provided by
the Transaction Documents to be taken by the Agent.
11.3. General Immunity. Neither the Agent nor any of its directors,
----------------
officers, agents or employees shall be liable to the Borrower, the Lenders or
any Lender for any action taken or omitted to be taken by it or them hereunder
or under any other Transaction Document or in connection herewith or therewith
except for its or their own gross negligence or willful misconduct.
11.4. No Responsibility for Loans, Recitals, etc. Neither the Agent nor any
-------------------------------------------
of its directors, officers, agents or employees shall be responsible for or have
any duty to ascertain, inquire into, or verify (i) any statement, warranty or
representation made in connection with any Transaction Document or any borrowing
hereunder; (ii) the performance or observance of any of the covenants or
agreements of any Obligor under any Transaction Document, including, without
limitation, any agreement by an Obligor to furnish information directly to each
Lender; (iii) the satisfaction of any condition specified in Article V, except
receipt of items required to be delivered to the Agent; (iv) the validity,
enforceability, effectiveness, sufficiency or genuineness of any Transaction
Document or any other instrument or writing furnished in connection therewith;
or (v) the value, sufficiency, creation, perfection or priority of any interest
in any collateral security. The Agent shall have no duty to disclose to the
Lenders information that is not required to be furnished by the Borrower to the
Agent at such time, but is voluntarily furnished by the Borrower to the Agent
(either in its capacity as Agent or in its individual capacity).
11.5. Action on Instructions of Lenders. The Agent shall in all cases be
---------------------------------
fully protected in acting, or in refraining from acting, hereunder and under any
other Transaction Document in accordance with written instructions signed by the
Required Lenders, and such instructions and any action taken or failure to act
pursuant thereto shall be binding on all of the Lenders and on all holders of
Notes. The Lenders hereby acknowledge that the Agent shall be under no duty
to take any discretionary action permitted to be taken by it pursuant to the
provisions of this Credit Agreement or any other Transaction Document unless it
shall be requested in writing to do so by the Required Lenders or, if required
by Section 9.2, all of the Lenders. The Agent shall be fully justified in
failing or refusing to take any action hereunder and under any other Transaction
Document unless it shall first be indemnified to its satisfaction by the Lenders
pro rata against any and all liability, cost and expense that it may incur by
reason of taking or continuing to take any such action.
11.6. Employment of Agents and Counsel. The Agent may execute any of its
--------------------------------
duties as Agent hereunder and under any other Transaction Document by or through
employees, agents, and attorneys-in-fact and shall not be answerable to the
Lenders, except as to money or securities received by it or its authorized
agents, for
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<PAGE>
the default or misconduct of any such agents or attorneys-in-fact selected by it
with reasonable care. The Agent shall be entitled to advice of counsel
concerning all matters pertaining to the agency hereby created and its duties
hereunder and under any other Transaction Document.
11.7. Reliance on Documents; Counsel. The Agent shall be entitled to rely
------------------------------
upon any Note, notice, consent, certificate, affidavit, letter, telegram,
statement, paper or document believed by it to be genuine and correct and to
have been signed or sent by the proper person or persons, and, in respect to
legal matters, upon the opinion of counsel selected by the Agent, which counsel
may be employees of the Agent.
11.8. Agent's Reimbursement and Indemnification. The Lenders agree to
-----------------------------------------
reimburse and indemnify the Agent ratably in proportion to their respective
Commitments (or, if the Commitments have been terminated, in proportion to their
Commitments immediately prior to such termination) (i) for any amounts not
reimbursed by the Borrower for which the Agent is entitled to reimbursement by
the Borrower under the Transaction Documents, (ii) for any other expenses
incurred by the Agent on behalf of the Lenders, in connection with the
preparation, execution, delivery, administration and enforcement of the
Transaction Documents and (iii) for any liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind and nature whatsoever which may be imposed on, incurred by or
asserted against the Agent in any way relating to or arising out of the
Transaction Documents or any other document delivered in connection therewith or
the transactions contemplated thereby, or the enforcement of any of the terms
thereof or of any such other documents; provided, however, that no Lender shall
be liable for any of the foregoing to the extent they arise from the gross
negligence or willful misconduct of the Agent. The obligations of the Lenders
under this Section 11.8 shall survive payment of the Obligations and termination
of this Credit Agreement.
11.9. Notice of Default. The Agent shall not be deemed to have knowledge or
-----------------
notice of the occurrence of any Default or Unmatured Default hereunder unless
the Agent has received written notice from a Lender or the Borrower referring to
this Credit Agreement describing such Default or Unmatured Default and stating
that such notice is a "notice of default". In the event that the Agent receives
such a notice, the Agent shall give prompt notice thereof to the Lenders.
11.10. Rights as a Lender. In the event the Agent is a Lender, the Agent
------------------
shall have the same rights and powers hereunder and under any other Transaction
Document as any Lender and may exercise the same as though it were not the
Agent, and the term "Lender" or "Lenders" shall, at any time when the Agent is a
Lender, unless the context otherwise indicates, include the Agent in its
individual capacity. The Agent may accept deposits from, lend money to, and
generally engage in any kind of trust, debt, equity or other transaction, in
addition to those
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<PAGE>
contemplated by this Credit Agreement or any other Transaction Document, with
the Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary
is not restricted hereby from engaging with any other Person. The Agent, in its
individual capacity, is not obligated to remain a Lender.
11.11. Lender Credit Decision. Each Lender acknowledges that it has,
----------------------
independently and without reliance upon the Agent or any other Lender and based
on the financial statements prepared by the Borrower and such other documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Credit Agreement and the other Transaction
Documents. Each Lender also acknowledges that it will, independently and
without reliance upon the Agent or any other Lender 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 this Credit Agreement
and the other Transaction Documents.
11.12. Successor Agent. The Agent may resign at any time by giving written
---------------
notice thereof to the Lenders and the Borrower, such resignation to be effective
upon the appointment of a successor Agent or, if no successor Agent has been
appointed, forty-five days after the retiring Agent gives notice of its
intention to resign. Upon any such resignation, the Required Lenders shall have
the right to appoint, on behalf of the Borrower and the Lenders, a successor
Agent. If no successor Agent shall have been so appointed by the Required
Lenders within thirty days after the resigning Agent's giving notice of its
intention to resign, then the resigning Agent may appoint, on behalf of the
Borrower and the Lenders, a successor Agent. If the Agent has resigned and no
successor Agent has been appointed, the Lenders may perform all the duties of
the Agent hereunder and the Borrower shall make all payments in respect of the
Obligations to the applicable Lender and for all other purposes shall deal
directly with the Lenders. No successor Agent shall be deemed to be appointed
hereunder until such successor Agent has accepted the appointment. Any such
successor Agent shall be a commercial bank having capital and retained earnings
of at least $50,000,000. Upon the acceptance of any appointment as Agent
hereunder by a successor Agent, such successor Agent shall thereupon succeed to
and become vested with all the rights, powers, privileges and duties of the
resigning Agent. Upon the effectiveness of the resignation of the Agent, the
resigning Agent shall be discharged from its duties and obligations hereunder
and under the Transaction Documents. After the effectiveness of the resignation
of an Agent, the provisions of this Article XI shall continue in effect for the
benefit of such Agent in respect of any actions taken or omitted to be taken by
it while it was acting as the Agent hereunder and under the other Transaction
Documents.
11.13. Agent's Fee. The Borrower agrees to pay to the Agent, for its own
-----------
account, the administrative agency and engineering fees agreed to in that
certain letter agreement among InterCoast Energy Company, First Chicago and the
Arranger
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<PAGE>
dated May 24, 1996, or as the Borrower and the Agent may otherwise agree from
time to time.
ARTICLE XII.
SETOFF; RATABLE PAYMENTS
------------------------
12.1. Setoff. In addition to, and without limitation of, any rights of the
------
Lenders under applicable law, if the Borrower becomes insolvent, however
evidenced, or any Default or Unmatured Default occurs, any and all deposits
(including all account balances, whether provisional or final and whether or not
collected or available) and any other Indebtedness at any time held or owing by
any Lender to or for the credit or account of the Borrower may be offset and
applied toward the payment of the Obligations owing to such Lender, whether or
not the Obligations, or any part hereof, shall then be due.
12.2. Ratable Payments. If any Lender, whether by setoff or otherwise, has
----------------
payment made to it upon its Loans (other than payments received pursuant to
Section 3.1, 3.2 or 3.4) in a greater proportion than that received by any other
Lender, such Lender agrees, promptly upon demand, to purchase a portion of the
Loans held by the other Lenders so that after such purchase each Lender will
hold its ratable proportion of Loans. If any Lender, whether in connection with
setoff or amounts which might be subject to setoff or otherwise, receives
collateral or other protection for its Obligations or such amounts which may be
subject to setoff, such Lender agrees, promptly upon demand, to take such action
necessary such that all Lenders share in the benefits of such collateral ratably
in proportion to their Loans. In case any such payment is disturbed by legal
process, or otherwise, appropriate further adjustments shall be made.
ARTICLE XIII.
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
-------------------------------------------------
13.1. Successors and Assigns. The terms and provisions of the Transaction
----------------------
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lenders and their respective successors and assigns, except that (i) the
Borrower shall not have the right to assign its rights or obligations under the
Transaction Documents and (ii) any assignment by any Lender must be made in
compliance with Section 13.3. Notwithstanding clause (ii) of this Section, any
Lender may at any time, without the consent of the Borrower or the Agent, assign
all or any portion of its rights under this Credit Agreement and its Notes to a
Federal Reserve Bank; provided, however, that no such assignment to a Federal
Reserve Bank shall release the transferor Lender from its obligations hereunder.
The Agent may treat the payee of any Note as the owner thereof for all purposes
hereof unless and until such payee complies with Section 13.3 in the case of an
assignment thereof or, in the case of any other transfer, a written notice of
the transfer is filed with the Agent. Any assignee or transferee of a Note
agrees by acceptance thereof to be bound by all the terms and provisions of the
Transaction Documents. Any request,
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authority or consent of any Person, who at the time of making such request or
giving such authority or consent is the holder of any Note, shall be conclusive
and binding on any subsequent holder, transferee or assignee of such Note or of
any Note or Notes issued in exchange therefor.
13.2. Participations.
--------------
13.2.1. Permitted Participants; Effect. Any Lender may, in the ordinary
------------------------------
course of its business and in accordance with applicable law, at any time
sell to one or more banks or other entities ("Participants") participating
interests in any Loan owing to such Lender, any Note held by such Lender,
any Commitment of such Lender or any other interest of such Lender under
the Transaction Documents. In the event of any such sale by a Lender of
participating interests to a Participant, such Lender's obligations under
the Transaction Documents shall remain unchanged, such Lender shall remain
solely responsible to the other parties hereto for the performance of such
obligations, such Lender shall remain the holder of any such Note for all
purposes under the Transaction Documents, all amounts payable by the
Borrower under this Credit Agreement shall be determined as if such Lender
had not sold such participating interests, and the Borrower and the Agent
shall continue to deal solely and directly with such Lender in connection
with such Lender's rights and obligations under the Transaction Documents.
13.2.2. Voting Rights. Each Lender shall retain the sole right to
-------------
approve, without the consent of any Participant, any amendment,
modification or waiver of any provision of the Transaction Documents other
than any amendment, modification or waiver with respect to any Loan or
Commitment in which such Participant has an interest which forgives
principal, interest or fees or reduces the interest rate or fees payable
with respect to any such Loan or Commitment, postpones any date fixed for
any regularly-scheduled payment of principal of, or interest or fees on,
any such Loan or Commitment, releases any guarantor of any such Loan or
releases any substantial portion of collateral, if any, securing any such
Loan.
13.2.3. Benefit of Setoff. The Borrower agrees that each Participant
-----------------
shall be deemed to have the right of setoff provided in Section 12.1 in
respect of its participating interest in amounts owing under the
Transaction Documents to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under the
Transaction Documents, provided that each Lender shall retain the right of
setoff provided in Section 12.1 with respect to the amount of participating
interests sold to each Participant. The Lenders agree to share with each
Participant, and each Participant, by exercising the right of setoff
provided in Section 12.1, agrees to share with each Lender, any amount
received pursuant to the exercise of its right of setoff, such amounts to
be shared in accordance with Section 12.2 as if each Participant were a
Lender.
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13.3. Assignments.
-----------
13.3.1. Permitted Assignments. Any Lender may, in the ordinary course
---------------------
of its business and in accordance with applicable law, at any time assign to
one or more banks or other entities ("Purchasers") all or any part of its
rights and obligations under the Transaction Documents. Such assignment shall
be substantially in the form of Exhibit "F" hereto or in such other form as
may be agreed to by the parties thereto. The consent of the Agent shall be
required prior to an assignment becoming effective with respect to a Purchaser
which is not a Lender or an Affiliate thereof. Such consent shall not be
unreasonably withheld or delayed. Each such assignment shall be in an amount
not less than the lesser of (i) $5,000,000 or (ii) the remaining amount of the
assigning Lender's Commitment (calculated as at the date of such assignment).
as may be agreed to by the parties thereto. Unless a Default has occurred
and is continuing, the Lender making any such Assignment to a Purchaser which
is not a Lender or an Affiliate thereof shall give ten Business Days' prior
written notice of such Assignment to the Borrower and the Agent.
13.3.2. Effect; Effective Date. Upon (i) delivery to the Agent of a
----------------------
notice of assignment, substantially in the form attached as Exhibit "I" to
Exhibit "F" hereto (a "Notice of Assignment"), together with any consents
required by Section 13.3.1, and (ii) payment of a $4,000 fee to the Agent for
processing such assignment, such assignment shall become effective on the
effective date specified in such Notice of Assignment. The Notice of
Assignment shall contain a representation by the Purchaser to the effect that
none of the consideration used to make the purchase of the Commitment and
Loans under the applicable assignment agreement are "plan assets" as defined
under ERISA and that the rights and interests of the Purchaser in and under
the Transaction Documents will not be "plan assets" under ERISA. On and after
the effective date of such assignment, such Purchaser shall for all purposes
be a Lender party to this Credit Agreement and any other Transaction Document
executed by the Lenders and shall have all the rights and obligations of a
Lender under the Transaction Documents, to the same extent as if it were an
original party hereto, and no further consent or action by the Borrower, the
Lenders or the Agent shall be required to release the transferor Lender with
respect to the percentage of the Aggregate Commitment and Loans assigned to
such Purchaser. Upon the consummation of any assignment to a Purchaser
pursuant to this Section 13.3.2, the transferor Lender, the Agent and the
Borrower shall make appropriate arrangements so that replacement Notes are
issued to such transferor Lender and new Notes or, as appropriate, replacement
Notes, are issued to such Purchaser, in each case in principal amounts
reflecting their Commitment, as adjusted pursuant to such assignment.
Page 54
<PAGE>
13.4. Dissemination of Information. The Borrower authorizes each Lender to
----------------------------
disclose to any Participant or Purchaser or any other Person acquiring an
interest in the Transaction Documents by operation of law (each a "Transferee")
and any prospective Transferee any and all information in such Lender's
possession concerning the creditworthiness of the Borrower and its Subsidiaries
provided that each Transferee and prospective Transferee agrees to be bound by
Section 10.13 of this Credit Agreement.
13.5. Tax Treatment. If any interest in any Transaction Document is
-------------
transferred to any Transferee which is organized under the laws of any
jurisdiction other than the United States or any State thereof, the transferor
Lender shall cause such Transferee, concurrently with the effectiveness of such
transfer, to comply with the provisions of Section 5.3.
ARTICLE XIV.
NOTICES
-------
14.1. Notices. Except as otherwise permitted by Section 2.14 with respect to
-------
Borrowing Notices, all notices, requests and other communications to any party
hereunder shall be in writing (including bank wire, facsimile transmission or
similar writing) and shall be given to such party: (x) in the case of the
Borrower or the Agent, at its address or facsimile number set forth on the
signature pages hereof, (y) in the case of any Lender, at its address or
facsimile number set forth below its signature hereto or (z) in the case of any
party, such other address or facsimile number as such party may hereafter
specify for the purpose by notice to the Agent and the Borrower. Each such
notice, request or other communication shall be effective (i) if given by
facsimile transmission, when transmitted to the facsimile number specified in
this Section and confirmation of receipt is received, (ii) if given by mail, 72
hours after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (iii) if given by any other means,
when delivered at the address specified in this Section; provided, however, that
notices to the Agent under Article II shall not be effective until received.
14.2. Change of Address. The Borrower, the Agent and any Lender may each
-----------------
change the address for service of notice upon it by a notice in writing to the
other parties hereto.
ARTICLE XV.
COUNTERPARTS
------------
This Credit Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one agreement, and any of the parties
hereto may execute this Credit Agreement by signing any such counterpart. This
Credit Agreement shall be effective when it has been executed by the Borrower,
the Agent and the Lenders and each party has notified the Agent by telex or
telephone, that it has taken such action.
Page 55
<PAGE>
ARTICLE XVI.
CHOICE OF LAW, CONSENT TO JURISDICTION, WAIVER OF JURY TRIAL
------------------------------------------------------------
16.1. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
-------------
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
16.2. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO
-----------------------
THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE
COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS
IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH
COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO
THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT
SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF
THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS
OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE
AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO,
ILLINOIS.
16.3. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER HEREBY
--------------------
WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.
THE REMAINING PORTION OF THIS PAGE IS INTENTIONALLY LEFT BLANK
Page 56
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed this
Credit Agreement as of the date first above written.
INTERCOAST ENERGY COMPANY
By: /s/ Daniel E. Lonergan
---------------------------------
Printed Name: Daniel E. Lonergan
-----------------------
Title: Vice President - Finance
------------------------------
666 Grand Avenue
Des Moines, Iowa 50309
Attention: Daniel E. Lonergan
Vice President-Finance
Facsimile No.: 515-281-2703
Commitments
-----------
$22,000,000 THE FIRST NATIONAL BANK OF CHICAGO,
Individually and as Agent
By: /s/ George R. Schanz
---------------------------------
Printed Name: George R. Schanz
-----------------------
Title: Vice President
------------------------------
One First National Plaza
Chicago, Illinois 60670
Attention: Energy & Minerals Division
Facsimile No.: 312-732-3055
$19,500,000 THE BANK OF NEW YORK
By: /s/ Kresten M. Bjornsson
---------------------------------
Printed Name: Kresten M. Bjornsson
-----------------------
Title: Assistant Vice President
------------------------------
One Wall Street, 19th Floor
New York, New York 10286
Attention: Kresten M. Bjornsson
Energy Industries Division
Facsimile No.: 212-635-7923
Page 57
<PAGE>
$19,500,000 CIBC, INC.
By: /s/ M. A. G. Corkum
__________________________________
Printed Name: M. A. G. Corkum
________________________
Title: Director
_______________________________
2727 Paces Ferry Road, Suite 1200
Atlanta, Georgia 30339
Attention: Gary C. Gaskill
Facsimile No.: 770-319-4950
$19,500,000 NATIONSBANK OF TEXAS N.A.
By: /s/ Angela M. Klock
__________________________________
Printed Name: Angela M. Klock
________________________
Title: Vice President
_______________________________
901 Main Street
Dallas, Texas 75202
Attention: Denise A. Smith
Facsimile No.: 214-508-1285
$19,500,000 THE CHASE MANHATTAN BANK N.A.
By: /s/ Ronald Potter
__________________________________
Printed Name: Ronald Potter
_______________________
Title: Managing Director
_______________________________
c/o Texas Commerce Bank
2200 Ross - 3rd Floor
Dallas, Texas 75201
Attention: Tim Perry
Facsimile No.: 214-965-2389
====================
$100,000,000
Page 58
<PAGE>
EXHIBIT "A"
to Credit Agreement
PROMISSORY NOTE
$_________ _______, 19__
InterCoast Energy Company, a Delaware corporation (the "Borrower"),
promises to pay to the order of ___________________ (the "Lender") the lesser of
the principal sum of ____________ Dollars or the aggregate unpaid principal
amount of all Loans made by the Lender to the Borrower pursuant to Article II of
the Credit Agreement (as hereinafter defined), in immediately available funds at
the main office of The First National Bank of Chicago in Chicago, Illinois, as
Agent, together with interest on the unpaid principal amount hereof at the rates
and on the dates set forth in the Credit Agreement. The Borrower shall pay the
principal of and accrued and unpaid interest on the Loans in full on the
Termination Date.
The Lender shall, and is hereby authorized to, record on the schedule
attached hereto, or to otherwise record in accordance with its usual practice,
the date and amount of each Loan and the date and amount of each principal
payment hereunder.
This Promissory Note is one of the Notes issued pursuant to, and is
entitled to the benefits of, the Credit Agreement dated as of July 15, 1996
(which, as it may be amended, supplemented or otherwise modified and in effect
from time to time, is herein called the "Credit Agreement"), among the Borrower,
the lenders from time to time party thereto, including the Lender, and The First
National Bank of Chicago, as Agent, to which Credit Agreement reference is
hereby made for a statement of the terms and conditions governing this
Promissory Note, including the terms and conditions under which this Promissory
Note may be prepaid or its maturity date accelerated. Capitalized terms used
herein and not otherwise defined herein are used with the meanings attributed to
them in the Agreement.
INTERCOAST ENERGY COMPANY
By:_______________________________
Printed Name:_____________________
Title:____________________________
<PAGE>
SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL
TO
PROMISSORY NOTE OF INTERCOAST ENERGY COMPANY,
DATED _____________, 19__
<TABLE>
<CAPTION>
Principal Maturity Principal
Amount of of Interest Amount Unpaid
Date Loan Period Paid Balance
- ----------- ----------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
EXHIBIT "B"
to Credit Agreement
GUARANTY AGREEMENT
This Guaranty Agreement dated as of July 15, 1996 is made by InterCoast Oil
and Gas Company, a Delaware corporation formerly known as Medallion Production
Company, Medallion California Properties Company, a Texas corporation,
InterCoast Power Marketing Company, a Delaware corporation, Continental Power
Exchange, Inc., a Delaware corporation, InterCoast Gas Services Company, a
Delaware corporation, InterCoast Gas Services Company, an Oklahoma corporation,
GED Energy Services, Inc., a Delaware corporation, InterCoast Trade & Resources
Inc., a Delaware corporation, and each subsidiary of InterCoast Energy Company
which may from time to time become a Guarantor party hereto pursuant to Article
VIII hereof (collectively, the "Guarantors") in favor of The First National Bank
of Chicago, as Agent for the ratable benefit of the Lenders (as such term is
defined below) pursuant to the Credit Agreement (as such term is defined below).
The parties hereto agree as follows:
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, InterCoast Energy Company, a Delaware corporation (the "Borrower"),
is entering into a Credit Agreement dated as of July 15, 1996 (as it may from
time to time be amended, supplemented or otherwise modified, the "Credit
Agreement") among the Borrower, each of the Lenders from time to time party
thereto, and The First National Bank of Chicago, as Agent for such Lenders;
WHEREAS, it is desirable and in the best interests of the Guarantors that the
Borrower be able to obtain credit under the Credit Agreement; and
WHEREAS, it is a condition precedent to the initial extension of credit by the
Lenders to the Borrower under the Credit Agreement that the Guarantors shall
have executed and delivered this Guaranty Agreement;
NOW, THEREFORE, in consideration of the financial and other support that
the Borrower has provided, and such financial and other support as the Borrower
may in the future provide, to the Guarantors, and in order to induce the Lenders
and the Agent to enter into the Credit Agreement, the Agent and each of the
Guarantors hereby agrees as follows:
ARTICLE I
DEFINITIONS
1.1. Credit Agreement Definitions. Unless the context shall otherwise
----------------------------
require, all terms used herein which are defined in the Credit Agreement and not
<PAGE>
defined in Section 1.2 hereof shall have the meanings assigned to them in
Article I of the Credit Agreement.
1.2. Other Definitions. As used in this Guaranty Agreement:
-----------------
"Article" means an article of this Guaranty Agreement unless another document
is specifically referenced.
"Credit Agreement" has the meaning given such term in the first recital of
this Guaranty Agreement.
"Guarantied Obligations" means (i) the unpaid principal of, and accrued and
unpaid interest (including, without limitation, all interest accruing subsequent
to the commencement of any case, proceeding or other action relating to the
Borrower under the Bankruptcy Code or any similar law with respect to the
bankruptcy, insolvency or reorganization of the Borrower, and all interest
which, but for any such case, proceeding or other action would otherwise accrue)
on, the Notes, whether or not any of the Notes have matured and whether or not
any of the holders of the Notes have presented any of them for payment, (ii) all
accrued and unpaid commitment fees (including, without limitation, all fees
accruing subsequent to the commencement of any case, proceeding or other action
relating to the Borrower under the Bankruptcy Code or any similar law with
respect to the bankruptcy, insolvency or reorganization of the Borrower, and all
fees which, but for any such case, proceeding or other action would otherwise
accrue) payable by the Borrower under the Credit Agreement, and (iii) all other
indebtedness, obligations and liabilities of the Borrower to the Agent or any
Lender, whether absolute or contingent, due or to become due, now existing or
hereafter incurred, under, arising out of or in connection with the Credit
Agreement or any of the Notes.
"Guarantors" means, collectively, InterCoast Oil and Gas Company, a Delaware
corporation formerly known as Medallion Production Company, Medallion California
Properties Company, a Texas corporation, InterCoast Power Marketing Company, a
Delaware corporation, Continental Power Exchange, Inc., a Delaware corporation,
InterCoast Gas Services Company, a Delaware corporation, InterCoast Gas Services
Company, an Oklahoma corporation, GED Energy Services, Inc., a Delaware
corporation, and InterCoast Trade & Resources Inc., a Delaware corporation, and
their respective successors and assigns; and "Guarantor" means any one of the
Guarantors.
"Guaranty Agreement" means this Guaranty Agreement, as supplemented by any
Guaranty Joinder Agreement and as it may be otherwise amended, supplemented or
otherwise modified from time to time.
"Guaranty Default" means an event described in Article IV.
Page 2
<PAGE>
"Guaranty Joinder Agreement" means, a Guaranty Joinder Agreement, in
substantially the form of Annex "1" hereto, executed by a Subsidiary of the
Borrower pursuant to Article VIII, as it may be amended, supplemented or
otherwise modified from time to time, and "Guaranty Joinder Agreements" means,
collectively, all such Guaranty Joinder Agreements executed from time to time by
any and all Subsidiaries of the Borrower pursuant to Article VIII.
"Joinder Date" means, with respect to any Subsidiary of the Borrower, the date
upon which such Subsidiary becomes a Guarantor party to this Guaranty Agreement
by satisfying each of the conditions precedent set forth in Article VIII with
respect to it.
"Section" means a section of this Guaranty Agreement unless another document
is specifically referenced.
"Unmatured Guaranty Default" means an event which but for the lapse of time or
the giving of notice, or both, would constitute a Guaranty Default.
The foregoing definitions shall be equally applicable to both the singular and
plural forms of the defined terms.
ARTICLE II
GUARANTY
2.1. In order to induce the Lenders to extend credit to the Borrower by
(whether by making loans to the Borrower under the Credit Agreement or
otherwise), each Guarantor hereby requests the Lenders to extend credit or to
permit credit to remain outstanding under the Credit Agreement to the Borrower
as the Borrower may desire and as the Lenders may extend or permit from time to
time under the Credit Agreement, and, in consideration of any credit granted or
continued to the Borrower under the Credit Agreement, each Guarantor hereby
absolutely, irrevocably and unconditionally guaranties prompt payment when due,
whether at stated maturity, upon acceleration or otherwise, and at all times
thereafter, of any and all existing and future Guarantied Obligations,
(including all renewals, extensions and modifications thereof other than an
increase in the Aggregate Commitment and all attorneys' fees incurred by the
Agent or any Lender in connection with the collection or enforcement thereof).
2.2. Each Guarantor hereby waives notice of the acceptance of its guaranty of
the Guarantied Obligations pursuant to this Guaranty Agreement and of the
extension or continuation of the Guarantied Obligations or any part thereof.
Each Guarantor further waives presentment, protest, notice, demand or action on
delinquency in respect of the Guarantied Obligations or any part thereof,
including any right to require the Agent or any Lender to sue the Borrower, any
other Guarantor, any other guarantor of any part or all of the Guarantied
Obligations or any other Person obligated with respect to the Guarantied
Obligations or any part
Page 3
<PAGE>
thereof, or otherwise to enforce payment thereof against any collateral securing
the Guarantied Obligations or any part thereof.
2.3. Credit may be granted or continued from time to time by the Lenders to
the Borrower without notice to or authorization from any of the Guarantors
regardless of the financial or other condition of the Borrower at the time of
any such grant or continuation. Neither the Agent nor any of the Lenders shall
have any obligation to disclose or discuss with any of the Guarantors its
assessment of the financial condition of the Borrower or any other Guarantor.
2.4. Each Guarantor hereby also guaranties that all of the Guarantied
Obligations will be paid strictly in accordance with the terms of the Credit
Agreement regardless of any law, regulation or order now or hereafter in effect
in any jurisdiction affecting any of the Guarantied Obligations or the rights of
the Agent or any Lender with respect thereto. The guaranty of each Guarantor
set forth in this Article II is a guaranty of payment and not of collection, is
a primary obligation of such Guarantor and not one of surety, and the validity
and enforceability of the guaranty of each Guarantor set forth in this Article
II and the liability of each Guarantor hereunder shall be absolute and
unconditional irrespective of, and shall not be impaired or affected by, any of
the following: (i) any extension, modification or renewal of, or indulgence with
respect to, or substitution for, the Guarantied Obligations, or any part
thereof, or any agreement relating thereto at any time; (ii) any failure or
omission to enforce any right, power or remedy with respect to the Guarantied
Obligations, or any part thereof, or any agreement relating thereto, or any
collateral securing the Guarantied Obligations or any part thereof; (iii) any
waiver of any right, power or remedy or of any default with respect to the
Guarantied Obligations, or any part thereof, or any agreement relating thereto
or with respect to any collateral securing the Guarantied Obligations or any
part thereof; (iv) any release, surrender, compromise, settlement, waiver,
subordination or modification, with or without consideration, of any collateral
securing the Guarantied Obligations, or any part thereof, any other guaranties
with respect to the Guarantied Obligations or any part thereof, or any other
obligation of any Person or entity with respect to the Guarantied Obligations or
any part thereof; (v) the enforceability or validity of the Guarantied
Obligations or any part thereof or the genuineness, enforceability or validity
of any agreement relating thereto or with respect to any collateral securing the
Guarantied Obligations or any part thereof; (vi) the application of payments
(other than any payment received from the Borrower which either the Agent or the
Lenders are obligated, or directed by the Borrower, to apply to the payment of
Guarantied Obligations, whether as a result of instructions given by the
Borrower, the terms of the Credit Agreement or otherwise) received from any
source other than such Guarantor to the payment of indebtedness other than the
Guarantied Obligations, any part thereof or amounts which are not covered by the
guaranty set forth in this Article II even though any of the Lenders might
lawfully have elected to apply such payments to any part or all of the
Guarantied Obligations or to amounts which are not covered by the guaranty set
forth in this Article II; (vii) any change of ownership of the Borrower or the
insolvency,
Page 4
<PAGE>
bankruptcy or any other change in the legal status of the Borrower; (viii) the
change in or the imposition of any law, decree, regulation or other governmental
act which does or might impair, delay or in any way affect the validity,
enforceability or the payment when due of the Guarantied Obligations; (ix) the
failure of the Borrower or any Guarantor to maintain in full force, validity or
effect or to obtain or renew when required all governmental and other approvals,
licenses or consents required in connection with the Guarantied Obligations or
this Guaranty Agreement, or to take any other action required in connection with
the performance of any of the Guarantied Obligations or any provision of this
Guaranty Agreement; (x) the existence of any claim, setoff or other rights which
any Guarantor may have at any time against the Borrower in connection herewith
or an unrelated transaction; or (xi) any other circumstance which might
otherwise constitute a defense available to, or a discharge of, any Guarantor in
respect of its obligations under the guaranty set forth in this Article II, all
whether or not the Borrower or any Guarantor shall have had notice or knowledge
of any act or omission referred to in the foregoing clauses (i) through (xi) of
this Section 2.4. It is agreed that each Guarantor's liability under this
Article II is several and independent of the guaranties of the other Guarantors
set froth in this Article II and of any other guaranties or other obligations at
any time in effect with respect to the Guarantied Obligations or any part
thereof and that each Guarantor's liability under this Article II may be
enforced regardless of the existence, validity, enforcement or non-enforcement
of any such other guaranties or other obligations or any provision of any
applicable law or regulation purporting to prohibit payment by the Borrower of
any of the Guarantied Obligations in the manner agreed upon by the Borrower.
2.5. The guaranty of each Guarantor set forth in this Article II shall
continue in effect, notwithstanding any extensions, modifications, renewals or
indulgences with respect to, or substitution for, the Guarantied Obligations or
any part thereof, until all of the Guarantied Obligations shall have been paid
in full and the Commitments shall have expired or been terminated. The guaranty
of each Guarantor set forth in this Article II shall also continue to be
effective or be reinstated, as the case may be, if at any time any payment of
the Guarantied Obligations, or any part thereof, is rescinded or must otherwise
be returned by the Agent or any Lender upon the insolvency, bankruptcy or
reorganization of the Borrower or any Guarantor, or otherwise, all as though
such payment had not been made.
2.6. Until all of the Guaranteed Obligations are paid in full, no Guarantor
will exercise any right of subrogation with respect to payments made by any
Guarantor pursuant to this Guaranty Agreement.
2.7. Each Guarantor hereby waives any benefit of the collateral, if any,
which may from time to time secure the Guarantied Obligations or any part
thereof and authorizes the Agent and the Lenders to take any action or exercise
any remedy with respect thereto, which the Agent or the Lenders in its or their
sole discretion shall determine, without notice to the Borrower or any Guarantor
other than the
Page 5
<PAGE>
Guarantor which owns such collateral. In the event the Agent or any Lender in
its sole discretion elects to give notice of any action with respect to the
collateral, if any, securing the Guarantied Obligations or any part thereof, ten
days' written notice mailed to the Guarantors by ordinary mail at its address
specified pursuant to Article VII shall be deemed reasonable notice of any
matters contained in such notice.
2.8. If any acceleration of the time for payment of any Guarantied Obligation
(including, without limitation, any amount payable by the Borrower under the
Credit Agreement, any Note or any other document or agreement relating to any of
the Guarantied Obligations) is stayed upon the insolvency, bankruptcy or
reorganization of the Borrower, all such amounts otherwise subject to
acceleration under the terms of any of the Loan Documents shall nonetheless be
payable, jointly and severally, by the Guarantors hereunder forthwith on demand
by the Agent made at the request of the Required Lenders.
2.9. The provisions of this Article II are severable, and in any action or
proceeding involving any state corporate law, or any state or federal
bankruptcy, insolvency, reorganization or other law affecting the rights of
creditors generally, if the obligations of any Guarantor hereunder would
otherwise be held or determined to be avoidable, invalid or unenforceable on
account of the amount of such Guarantor's liability under this Article II, then,
notwithstanding any other provision of this Article II to the contrary, the
amount of such liability shall, without any further action by such Guarantor,
the Agent or any Lender be automatically limited and reduced to the highest
amount which is valid and enforceable as determined in such action or
proceeding.
2.10 It is the intention of each of the Guarantors, the Agent and the Lenders
that the obligations of each of the Guarantors under its guaranty of the
Guarantied Obligations pursuant to this Article II shall be equal to, but not in
excess of, as of any date, the greater of the following amounts (such greater
amount determined hereunder being the relevant Guarantor's "Maximum Liability"):
(i) the aggregate amount of all monies received by such Guarantor from the
Borrower after the date hereof (whereof by loan, distribution or otherwise), or
(ii) the maximum amount (such amount being such Guarantor's "Alternative
Limitation") not subject to avoidance under the Bankruptcy Code or any
applicable state law. To that end, but as to the Alternative Limitation of each
Guarantor, only to the extent such obligations would otherwise be subject to
avoidance under the Bankruptcy Code or any applicable state law if such
Guarantor is not deemed to have received valuable consideration, fair value or
reasonably equivalent value for its obligations under its guaranty of the
Guarantied Obligations pursuant to this Article II, such Guarantor's obligations
under this Article II shall be reduced to that amount which, after giving effect
thereto, would not render such Guarantor insolvent, or leave such Guarantor with
an unreasonably small capital to conduct its business, or cause such Guarantor
to have incurred debts (or intended to have incurred debts) beyond its ability
to pay such debts as they mature, at the time such obligations are deemed to
have been
Page 6
<PAGE>
incurred under the Bankruptcy Code or any applicable state law. As used herein,
the terms "insolvent" and "unreasonably small capital" shall likewise be
determined in accordance with the Bankruptcy Code or any applicable state law.
This Section 2.10 with respect to the Alternative Limitation of each Guarantor
is intended solely to preserve the rights of the Agent and the Lenders hereunder
to the maximum extent not subject to avoidance under the Bankruptcy Code or any
applicable state law, and neither any Guarantor nor any other Person shall have
any right or claim under this Section 2.10 with respect to the Alternative
Limitation, except to the extent necessary so that the obligations of the
Guarantors hereunder shall not be rendered voidable under the Bankruptcy Code or
any applicable state law.
2.11. In the event that any Guarantor (a "Paying Guarantor") shall make any
payment or payments under this Guaranty Agreement or shall suffer any loss as a
result of any realization upon any collateral granted by it to secure its
obligations under this Guaranty Agreement, each other Guarantor (each a "Non-
Paying Guarantor") shall contribute to such Paying Guarantor an amount equal to
such Non-Paying Guarantor's "Pro Rata Share" (as defined below) of such payment
or payments made, or losses suffered, by such Paying Guarantor. For purposes
hereof, each Non-Paying Guarantor's "Pro Rata Share" with respect to any such
payment or loss by a Paying Guarantor shall be determined as of the date on
which such payment or loss was made or incurred by reference to the ratio of (i)
such Non-Paying Guarantor's Maximum Liability as of such date (without giving
effect to any right to receive, or obligations to make, any contribution
hereunder) to (ii) the aggregate Maximum Liability of all Guarantors hereunder
(including such Paying Guarantor) as of such date (without giving effect to any
right to receive, or obligations to make, any contribution hereunder). Nothing
in this Section 2.11 shall affect any Guarantor's several liability for the
entire amount of the Guarantied Obligations (up to the amount of such
Guarantor's Maximum Liability). Each of the Guarantors covenants and agrees
that its right to receive any contributions under this Guaranty Agreement from a
Non-Paying Guarantor shall be subordinate and junior in right of payment to all
of the Guarantied Obligations and as a result no Guarantor shall take any action
to enforce any such right until all of the Guarantied Obligations shall have
been paid in full and the Commitments shall have expired or been terminated.
All of the Guarantors recognize and agree that, except for any right of
contribution arising pursuant to this Section 2.11, each Guarantor who makes any
payment in respect of the Guarantied Obligations shall have no right of
contribution or subrogation against any other Guarantor in respect of any such
payment, any such right of contribution or subrogation arising under applicable
law being expressly waived by each Guarantor. The provisions of this Section
2.11 are for the benefit of both the Agent and the Guarantors and may be
enforced by any one, or more, or all of them in accordance with the terms
hereof.
Page 7
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Each Guarantor hereby represents and warrants to the Lenders that:
3.1. Corporate Existence and Standing. It is a corporation duly
--------------------------------
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all requisite authority to conduct its
business in each jurisdiction in which its business is conducted where the
failure to have such authority could reasonably be expected to have a Material
Adverse Effect.
3.2. Authorization and Validity. It has the corporate power and authority
--------------------------
and legal right to execute and deliver this Guaranty Agreement and to perform
its obligations hereunder. The execution and delivery by it of this Guaranty
Agreement and the performance of its obligations hereunder have been duly
authorized by proper corporate proceedings, and this Guaranty Agreement
constitutes a legal, valid and binding obligation of such Guarantor enforceable
against it in accordance with its terms, except as enforceability may be limited
by bankruptcy, insolvency or similar laws affecting the enforcement of
creditors' rights generally.
3.3. No Conflict; Government Consent. Neither the execution and delivery by
-------------------------------
it of this Guaranty Agreement nor the consummation of the transactions therein
contemplated, nor compliance with the provisions thereof will violate any law,
rule, regulation, order, writ, judgment, injunction, decree or award binding on
it or its certificate of incorporation or by-laws or the provisions of any
indenture, instrument or agreement to which it is a party or is subject, or by
which it, or its Property, is bound, or conflict with or constitute a default
thereunder, or result in the creation or imposition of any Lien in, of or on any
of its Property pursuant to the terms of any such indenture, instrument or
agreement. No order, consent, approval, license, authorization, or validation
of, or filing, recording or registration with, or exemption by, any governmental
or public body or authority, or any subdivision thereof, is required to
authorize, or is required in connection with the execution, delivery and
performance of, or the legality, validity, binding effect or enforceability of,
this Guaranty Agreement or any part thereof.
ARTICLE IV
DEFAULTS
The occurrence of any one or more of the following events shall constitute a
Guaranty Default:
4.1. The occurrence of any Default under and as defined in the Credit
Agreement.
4.2. Any representation or warranty made or deemed made by or on behalf of
any Guarantor to the Lenders or the Agent under or in connection with this
Page 8
<PAGE>
Guaranty Agreement or the Credit Agreement or any certificate or information
delivered by any Guarantor in connection with this Guaranty Agreement or the
Credit Agreement shall be materially false on the date as of which made.
4.3. The breach by any Guarantor (other than a breach which constitutes a
Guaranty Default under Section 4.1 or 4.2) of any of the terms or provisions of
this Guaranty Agreement which is not cured within ten days from the earlier of
the date of such Guarantor's discovery of such breach or the date of a written
notice of such breach given to the Guarantors by the Agent or any Lender.
ARTICLE V
REMEDIES AND AMENDMENTS
5.1. Remedies. If any Guaranty Default occurs, the Agent may, or, at the
--------
direction of the Required Lenders the Agent shall, pursuant to and as provided
for in the Credit Agreement, pursue any and all rights and remedies available to
it under or with respect to any of this Guaranty Agreement, the Credit Agreement
or any other Transaction Document or otherwise available to it at law or in
equity.
5.2. Preservation of Rights. No delay or omission of the Lenders or the
----------------------
Agent to exercise any right under Section 5.1 shall impair such right or be
construed to be a waiver of any Guaranty Default or an acquiescence therein, and
the extension of any credit notwithstanding the existence of a Guaranty Default
shall not constitute any waiver or acquiescence. Any single or partial exercise
of any such right shall not preclude other or further exercise thereof or the
exercise of any other right, and no waiver, amendment or other variation of the
terms, conditions or provisions of this Guaranty Agreement whatsoever shall be
valid unless in writing signed by the Lenders required pursuant to Section 5.3,
and then only to the extent in such writing specifically set forth. All
remedies referred to in Section 5.1 shall be cumulative and all shall be
available to the Agent and the Lenders until all of the Guarantied Obligations
shall have been paid in full and the Commitments of the Lenders to make loans
under the Credit Agreement shall have expired or been terminated.
5.3. Amendments. Subject to the provisions of this Section 5.3, the Agent
----------
(with the consent in writing of the Required Lenders) and the Guarantors may
enter into agreements supplemental hereto for the purpose of adding or modifying
any provisions to this Guaranty Agreement or changing in any manner the rights
of the Lenders or the Guarantors hereunder or waiving any Guaranty Default;
provided, however, that no such supplemental agreement shall, without the
- -------- -------
consent of all of the Lenders:
(a) Modify any of the terms and provisions of Article II; or
(b) Change the definition of Required Lenders; or
Page 9
<PAGE>
(c) Permit any Guarantor to assign its rights or delegate its
obligations under this Guaranty Agreement; or
(d) Release any Guarantor from its obligations under this Guaranty
Agreement; or
(e) Amend this Section 5.3.
No amendment of any provision of this Guaranty Agreement relating to the Agent
shall be effective without the written consent of the Agent.
ARTICLE VI
GENERAL PROVISIONS
6.1. Successors and Assigns. The terms and provisions of this Guaranty
----------------------
Agreement shall be binding upon and inure to the benefit of the Guarantors and
the Agent for the benefit of the Lenders and their respective successors and
assigns, except that no Guarantor shall have the right to assign any of its
rights or obligations under this Guaranty Agreement. Each Guarantor authorizes
each Lender to disclose to any purchaser or prospective purchaser of an interest
in the Guarantied Obligations due to such Lender any financial or other
information pertaining to such Guarantor provided that each such purchaser or
--------
prospective purchaser agrees to hold any confidential information which it may
receive from such Lender in confidence, except for disclosures of information to
(A) other Lenders and their respective Affiliates, (B) legal counsel,
accountants, and other professional advisors to a Lender or to a Transferee, (C)
regulatory officials, (D) any Person as requested pursuant to or as required by
law, regulation, or legal process, and (E) any Person in connection with any
legal proceeding to which that Lender is a party.
6.2. Survival of Representations. All representations and warranties of the
---------------------------
Guarantors contained in this Guaranty Agreement shall survive the execution and
delivery of this Guaranty Agreement.
6.3. CHOICE OF LAW. THIS GUARANTY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
-------------
WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS,
BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
6.4. CONSENT TO JURISDICTION. EACH GUARANTOR HEREBY IRREVOCABLY SUBMITS TO
-----------------------
THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE
COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO THIS GUARANTY AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT AND EACH GUARANTOR
HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH
Page 10
<PAGE>
COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO
THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT
SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF
THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST ANY GUARANTOR IN THE COURTS
OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY ANY GUARANTOR AGAINST THE
AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH THIS GUARANTY AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT SHALL
BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS.
6.5. WAIVER OF JURY TRIAL. EACH GUARANTOR, THE AGENT AND EACH LENDER HEREBY
--------------------
WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS GUARANTY AGREEMENT OR ANY
OTHER TRANSACTION DOCUMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER OR
THEREUNDER.
6.6. Headings. Section headings in this Guaranty Agreement are for
--------
convenience of reference only, and shall not govern the interpretation of any of
the provisions of this Guaranty Agreement.
6.7. Entire Agreement. This Guaranty Agreement shall embody the entire
----------------
agreement and understanding among the Guarantors and the Agent and supersede all
prior agreements and understandings among the Guarantors and the Agent relating
to the subject matter thereof.
6.8. Expenses; Indemnification. The Guarantors hereby agree, jointly and
-------------------------
severally, to reimburse the Agent and the Lenders for any reasonable costs,
internal charges and out-of-pocket expenses (including attorneys' fees and time
charges of attorneys for the Agent and the Lenders, which attorneys may be
employees of the Agent or the Lenders) paid or incurred by the Agent or any of
the Lenders in connection with the collection and enforcement of this Guaranty
Agreement. The obligations of the Guarantors under this Section 6.6 shall
survive the termination of this Guaranty Agreement.
6.9. Numbers of Documents. All statements, notices, closing documents, and
--------------------
requests hereunder shall be furnished to the Agent with sufficient counterparts
so that the Agent may furnish one to each of the Lenders.
6.10. Severability of Provisions. Any provision in this Guaranty Agreement
--------------------------
that is held to be inoperative, unenforceable, or invalid in any jurisdiction
shall, as to that jurisdiction, be inoperative, unenforceable, or invalid
without affecting the remaining provisions in that jurisdiction or the
operation, enforceability, or validity of
Page 11
<PAGE>
that provision in any other jurisdiction, and to this end the provisions of this
Guaranty Agreement are declared to be severable.
ARTICLE VII
NOTICES
7.1. Giving Notice. Any notice required or permitted to be given under this
-------------
Guaranty Agreement may be, and shall be deemed, given when sent by certified or
registered United States mail, postage prepaid, or by telecopy when transmitted,
addressed:
To each of the Guarantors as follows:
[Name of Guarantor]
c/o InterCoast Energy Company
666 Grand Avenue
Des Moines, Iowa 50309
Attention: Daniel E. Lonergan
Vice President-Finance
Telecopy No.: 515-281-2703
To the Agent as follows:
The First National Bank of Chicago
Suite 0363
One First National Plaza
Chicago, Illinois 60670
Attn: Energy & Minerals Division
Telecopy No.: 312-732-3055
To each Lender at its address specified pursuant to Article XIV
of the Credit Agreement.
7.2. Change of Address. Each of the Guarantors and the Agent may change the
-----------------
address for service of notice upon it by a notice in writing to the other party
hereto.
ARTICLE VIII.
NEW GUARANTORS
Any Subsidiary of the Borrower may become a Guarantor party to this Guaranty
Agreement provided that (i) after giving effect to such Subsidiary becoming a
Guarantor there exists no Default or Unmatured Default, and (ii) such Subsidiary
shall have furnished to the Agent, with sufficient copies for each of the
Lenders, all of the following:
Page 12
<PAGE>
(a) A Guaranty Joinder Agreement dated the applicable Joinder Date,
executed by such Subsidiary and acknowledged and confirmed by the Agent and
each of the other Guarantors; and
(b) Copies of all of the following with respect to such Subsidiary:
(i) Its certificate or articles of incorporation, together with all
amendments, certified by the appropriate governmental officer in its
jurisdiction of incorporation.
(ii) A certificate of good standing for it from the appropriate
governmental officer in its jurisdiction of incorporation.
(iii) Its By-Laws, certified by its Secretary or one of its Assistant
Secretaries.
(iv) Resolutions of its Board of Directors authorizing the
execution of its Guaranty Joinder Agreement and the performance of its
obligations under this Guaranty Agreement, certified by its Secretary
or one of its Assistant Secretaries.
(v) An incumbency certificate, executed by its Secretary or one of
its Assistant Secretaries, which shall identify by name and title and
bear the signature of the officers of such Guarantor authorized to
sign its Guaranty Joinder Agreement, upon which certificate the Agent
and the Lenders shall be entitled to rely until informed of any change
in writing by such Guarantor.
(c) A written opinion of counsel to such Subsidiary, addressed to the
Lenders in substantially the form (with appropriate changes) of Annex "2"
to this Guaranty Agreement.
ARTICLE IX
COUNTERPARTS
This Guaranty Agreement may be executed in any number of counterparts, all
of which taken together shall constitute one agreement, and either of the
parties hereto may execute this Guaranty Agreement by signing any such
counterpart.
Page 13
<PAGE>
IN WITNESS WHEREOF, the Guarantors and the Agent have executed this Guaranty
Agreement as of the date first above written.
INTERCOAST OIL AND GAS COMPANY
By:
--------------------------
Title:
-----------------------
MEDALLION CALIFORNIA PROPERTIES COMPANY
By:
--------------------------
Title:
-----------------------
INTERCOAST POWER MARKETING COMPANY
By:
--------------------------
Title:
-----------------------
CONTINENTAL POWER EXCHANGE, INC.
By:
--------------------------
Title:
-----------------------
INTERCOAST GAS SERVICES COMPANY
By:
--------------------------
Title:
-----------------------
INTERCOAST GAS SERVICES COMPANY
By:
--------------------------
Title:
-----------------------
Page 14
<PAGE>
GED ENERGY SERVICES, INC.
By:
--------------------------
Title:
-----------------------
INTERCOAST TRADE & RESOURCES INC.
By:
--------------------------
Title:
-----------------------
THE FIRST NATIONAL BANK OF CHICAGO,
as Agent
By:
--------------------------
Title:
-----------------------
Page 15
<PAGE>
ANNEX "1"
to Guaranty Agreement
GUARANTY JOINDER AGREEMENT
THIS GUARANTY JOINDER AGREEMENT, executed and delivered as of this ___ day of
_______, ____, by ____________, a ____________ corporation (the "Joining
Guarantor") to and in favor of The First National Bank of Chicago, in its
capacity as agent under the Credit Agreement (as defined in the Guaranty
Agreement referred to below) for the benefit of each of the Lenders (as defined
in the Guaranty Agreement referred to below).
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Joining Guarantor desires to become a Guarantor under and as
defined in the Guaranty Agreement dated as of July 15, 1996 (as amended,
supplemented or otherwise modified from time to time, the "Guaranty Agreement")
made by InterCoast Oil and Gas Company, a Delaware corporation formerly known as
Medallion Production Company, Medallion California Properties Company, a Texas
corporation, InterCoast Power Marketing Company, a Delaware corporation,
Continental Power Exchange, Inc., a Delaware corporation, InterCoast Gas
Services Company, a Delaware corporation, InterCoast Gas Services Company, an
Oklahoma corporation, GED Energy Services, Inc., a Delaware corporation,
InterCoast Trade & Resources Inc., a Delaware corporation, and each subsidiary
of InterCoast Energy Company which may from time to time become a Guarantor
party hereto pursuant to Article VIII thereof (collectively, the "Guarantors")
in favor of The First National Bank of Chicago, as Agent for the ratable benefit
of the Lenders (as such term is defined below) pursuant to the Credit Agreement
dated as of July 15, 1996 (as it may from time to time be amended, supplemented
or otherwise modified from time to time, the "Credit Agreement") among
InterCoast Energy Company, a Delaware corporation (the "Borrower"), each of the
Lenders from time to time party thereto, and The First National Bank of Chicago,
as Agent for such Lenders; and
WHEREAS, Article VIII of the Guaranty Agreement sets forth a procedure for one
or more subsidiaries of the Borrower to become Guarantors party to the Guaranty
Agreement, and which procedure includes, without limitation, the execution and
delivery of this Guaranty Joinder Agreement;
NOW THEREFORE, in consideration of the foregoing and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Joining Guarantor hereby represents, warrants, acknowledges and agrees with the
Agent, for the benefit of each of the Lenders, as follows:
<PAGE>
1. Definitions. Unless the context otherwise requires, all terms used herein
-----------
which are defined in the Guaranty Agreement shall have the meanings assigned to
them in the Guaranty Agreement.
2. Representations and Warranties. The Joining Guarantor hereby represents
------------------------------
and warrants to the Agent and each of the Lenders that, as of the date of this
Guaranty Joinder Agreement: (i) the Joining Guarantor is a Subsidiary of the
Borrower, (ii) the representations and warranties contained in Article III of
the Guaranty Agreement are true and correct, and (iii) each of the conditions
contained in Article ViiI of the Guaranty Agreement has been satisfied with
respect to the Joining Guarantor.
3. Acknowledgements and Agreements. The Joining Guarantor hereby
-------------------------------
acknowledges and agrees that: (i) the Joining Guarantor shall be a Guarantor
party to, and as defined in, the Guaranty Agreement with all of the rights and
obligations of a Guarantor thereunder to the same extent as if the Joining
Guarantor had been a Guarantor party thereto from its inception, and (ii) the
obligations of the Joining Guarantor as a Guarantor under the Guaranty Agreement
shall include, without limitation, all of the obligations as a Guarantor under
Article II of the Guaranty Agreement.
4. Successors and Assigns. The terms and provisions of this Guaranty Joinder
----------------------
Agreement shall be binding upon and inure to the benefit of the Joining
Guarantor and the Agent for the benefit of the Lenders and their respective
successors and assigns, except that the Joining Guarantor shall not have the
right to assign any of its rights or obligations under this Guaranty Joinder
Agreement.
5. Giving Notice. Any notice required or permitted to be given to the
-------------
Joining Guarantor under the Guaranty Agreement may be, and shall be deemed,
given when sent by certified or registered United States mail, postage prepaid,
or by facsimile transmission, as follows:
-------------------------
-------------------------
-------------------------
IN WITNESS WHEREOF, the Joining Guarantor has executed and delivered this
Guaranty Joinder Agreement to and in favor of the Agent, for the benefit of the
Lenders, as of the date first above written.
---------------------------------
By:
------------------------------
Title:
---------------------------
Page 2
<PAGE>
GUARANTOR ACKNOWLEDGEMENT AND CONFIRMATION
Each of the undersigned hereby represents that it is a Guarantor under and as
defined in the Guaranty Agreement referred to in the foregoing Guaranty Joinder
Agreement. Unless the context otherwise requires, all capitalized terms used in
this Guarantor Acknowledgment and Confirmation shall have the meanings
attributed to them in the Guaranty Agreement referred to in the foregoing
Guaranty Joinder Agreement.
Each of the undersigned acknowledges receipt of an executed counterpart of the
foregoing Guaranty Joinder Agreement and hereby acknowledges and consents to all
of the terms and provisions thereof. Each of the undersigned hereby jointly and
severally represents and warrants to each of the Agent and the Lenders that, as
of the date of the foregoing Guaranty Joinder Agreement: (i) the Person who has
executed the foregoing Guaranty Joinder Agreement (the "Joining Guarantor") is a
Subsidiary of the Borrower, (ii) the representations and warranties contained in
Article III of the Guaranty Agreement are true and correct, and (iii) each of
the conditions contained in Article VIII of the Guaranty Agreement has been
satisfied with respect to the Joining Guarantor.
Accordingly, each of the undersigned hereby acknowledges and agrees that, as
of the date of the foregoing Guaranty Joinder Agreement, the Joining Guarantor
has become a Guarantor under and as defined in the Guaranty Agreement. Each of
the undersigned hereby ratifies and confirms all of the terms, provisions and
conditions of the Guaranty Agreement (including, without limitation, its
guaranty of the Guarantied Obligations set forth in Article II of the Guaranty
Agreement) and hereby acknowledges and confirms that the Guaranty Agreement, by
its terms, guaranties any and all existing and future Guarantied Obligations
incurred by the Borrower to finance any extension of credit by the Borrower to
the Joining Guarantor.
The foregoing Guaranty Joinder Agreement and this Guarantor Acknowledgement
and Confirmation may be executed in any number of counterparts, all of which
taken together shall constitute one agreement, and any of the parties hereto may
execute the same by signing any such counterpart.
IN WITNESS WHEREOF, each of the undersigned has executed this Guarantor
Acknowledgement and Confirmation as of the same date as the foregoing Guaranty
Joinder Agreement.
[Insert appropriate signature lines
for all current Guarantors]
Page 3
<PAGE>
AGENT ACKNOWLEDGEMENT
The First National Bank of Chicago, in its capacity as agent under the Credit
Agreement (as defined in the Guaranty Agreement referred to above) for the
benefit of each of the Lenders under said Credit Agreement, hereby acknowledges
receipt of the foregoing Guaranty Joinder Agreement, including the Guarantor
Acknowledgement and Confirmation contained therein.
THE FIRST NATIONAL BANK OF CHICAGO,
as Agent
By:
----------------------------------------
Title:
-------------------------------------
Page 4
<PAGE>
ANNEX "2"
to Guaranty Agreement
FORM OF OPINION OF JOINING GUARANTORS' COUNSEL
____________, 19__
The Agent and the Lenders who are parties to the
Credit Agreement described below.
Ladies and Gentlemen:
I am counsel for ___________, a _______ corporation (the "Joining Guarantor"),
and have represented the Joining Guarantor in connection with its execution and
delivery of a Guaranty Joinder Agreement dated as of ______, ____ (the "Guaranty
Joinder Agreement") with respect to that certain Guaranty Agreement dated as of
July 15, 1996 (as amended, supplemented or otherwise modified from time to time,
the "Guaranty Agreement") among InterCoast Oil and Gas Company, a Delaware
corporation formerly known as Medallion Production Company, Medallion California
Properties Company, a Texas corporation, InterCoast Power Marketing Company, a
Delaware corporation, Continental Power Exchange, Inc., a Delaware corporation,
InterCoast Gas Services Company, a Delaware corporation, InterCoast Gas Services
Company, an Oklahoma corporation, GED Energy Services, Inc., a Delaware
corporation, InterCoast Trade & Resources Inc., a Delaware corporation, and each
subsidiary of InterCoast Energy Company which may from time to time become a
Guarantor party hereto pursuant to Article VIII thereof (each a "Guarantor" and,
collectively, the "Guarantors"). All capitalized terms used in this opinion and
not otherwise defined herein shall have the meanings attributed to them in the
Guaranty Agreement or in the Credit Agreement referred to therein.
I have examined the certificate or articles of incorporation, by-laws and
resolutions of the Joining Guarantor, the Guaranty Agreement, the Loan Documents
and such other matters of fact and law which I deem necessary in order to render
this opinion. Based upon the foregoing, it is my opinion that:
1. The Joining Guarantor is a corporation duly incorporated, validly
existing and in good standing under the laws of its state of incorporation
and has all requisite authority to conduct its business in each
jurisdiction in which its business is conducted.
2. The execution and delivery of the Guaranty Joinder Agreement by the
Joining Guarantor and the performance by the Joining Guarantor of its
obligations thereunder and under the Guaranty Agreement have been duly
authorized by all necessary corporate action and proceedings on the part of
the Joining Guarantor and will not (a) require any consent of the Joining
<PAGE>
Guarantor's shareholders, (b) violate any law, rule, regulation, order,
writ, judgment, injunction, decree or award binding on the Joining
Guarantor or any of its Subsidiaries or the Joining Guarantor's or any of
its Subsidiaries' certificate or articles of incorporation or by-laws or
any indenture, instrument or agreement binding upon the Joining Guarantor
or any of its Subsidiaries, or (c) result in, or require, the creation or
imposition of any Lien pursuant to the provisions of any indenture,
instrument or agreement binding upon the Joining Guarantor or any of its
Subsidiaries.
3. The Guaranty Joinder Agreement has been duly executed and delivered
by the Joining Guarantor and each of the Guaranty Joinder Agreement and the
Guaranty Agreement constitutes a legal, valid and binding obligation of the
Joining Guarantor enforceable against the Joining Guarantor in accordance
with its terms except to the extent the enforcement thereof may be limited
by bankruptcy, insolvency or similar laws affecting the enforcement of
creditors' rights generally and subject also to the availability of
equitable remedies if equitable remedies are sought.
4. No approval, authorization, consent, adjudication or order of any
governmental authority is required to be obtained by the Joining Guarantor
in connection with the execution and delivery of the Guaranty Joinder
Agreement or the performance by the Joining Guarantor of its obligations
thereunder and under the guaranty Agreement.
I am licensed to practice in the State of Iowa and the opinions expressed
above are limited to the laws of the State of Iowa, the corporate laws of the
State of Delaware, and the Federal law of the United States of America. As each
of the Guaranty Joinder Agreement and the Guaranty Agreement explicitly states
that it is governed by the internal law of the State of Illinois, I have assumed
(with your consent) for the purpose of rendering my opinions set forth herein
that the substantive laws of the State of Illinois relating to the matters
discussed herein are substantially similar to those of the State of Iowa.
This opinion may be relied upon by the Agent, the Lenders and their
participants, assignees and other transferees.
Very truly yours,
----------------------------
Page 2
<PAGE>
EXHIBIT "C"
to Credit Agreement
COMPLIANCE CERTIFICATE
To: The Lenders parties to the
Credit Agreement Described Below
This Compliance Certificate is furnished pursuant to that certain Credit
Agreement dated as of July 15, 1996 (as amended, modified, renewed or extended
from time to time, the "Credit Agreement") among InterCoast Energy Company, a
Delaware corporation (the "Borrower"), the lenders party thereto and The First
National Bank of Chicago, as Agent for the Lenders. Unless otherwise defined
herein, capitalized terms used in this Compliance Certificate have the meanings
ascribed thereto in the Credit Agreement.
THE UNDERSIGNED HEREBY CERTIFIES THAT:
1. I am the duly elected _____________________ of the Borrower.
2. I have reviewed the terms of the Credit Agreement and I have made, or
have caused to be made under my supervision, a detailed review of the
transactions and conditions of the Borrower and its Subsidiaries during the
accounting period covered by the attached financial statements.
3. Set forth below are financial data and computations showing the state
of the Borrower's compliance with Section 7.10 of the Credit Agreement as
of _________, ____, all of which data and computations are true, complete
and correct:
$ 90,000,000 Minimum Amount
75% of net proceeds of initial public
$ offering of Borrower's common stock
------------
50% of aggregate positive Consolidated
Net Income for fiscal 1996 and each
$ subsequent fiscal year
============
$ Required Consolidated
------------
Tangible Net Worth
$ Actual Consolidated
------------
Tangible Net Worth
<PAGE>
4. Set forth below are financial data and computations showing the state
of the Borrower's compliance with the requirement set forth in Section 7.11
of the Credit Agreement that the Borrower maintain an Interest Coverage
Ratio of not less than 4.25 to 1.00 for the period from and including
_______, ____ to and including _________, ____, all of which data and
computations are true, complete and correct:
Consolidated EBITDA
----------------------- = ____ to 1.00
Consolidated Interest Expense
5. The examinations described in paragraph 2 and the financial data and
computations set forth in paragraphs 3 and 4 did not disclose, and I have
no knowledge of, the existence of any condition or event which constitutes
a Default or Unmatured Default during or at the end of the accounting
period covered by the attached financial statements or as of the date of
this Certificate, except as follows:
---------------------------------------------------------
Describe the exceptions, if any, to paragraph 5 by listing, in
detail, the nature of the condition or event, the period during
which it has existed and the action which the Borrower has taken,
is taking, or proposes to take with respect to each such
condition or event.
The foregoing certifications and computations and the financial statements
delivered with this Certificate in support hereof, are made and delivered this
___ day of __________, 19__.
INTERCOAST ENERGY COMPANY
By:
------------------------------
Printed Name:
--------------------
Title:
---------------------------
Page 2
<PAGE>
EXHIBIT "D"
to Credit Agreement
BORROWING BASE REPORT
To: The Lenders parties to the
Credit Agreement Described Below
This Borrowing Base Report is furnished pursuant to that certain Credit
Agreement dated as of July 15, 1996 (as amended, modified, renewed or extended
from time to time, the "Credit Agreement") among InterCoast Energy Company, a
Delaware corporation (the "Borrower"), the lenders party thereto and The First
National Bank of Chicago, as Agent for the Lenders. Unless otherwise defined
herein, capitalized terms used in this Compliance Certificate have the meanings
ascribed thereto in the Credit Agreement.
THE UNDERSIGNED HEREBY CERTIFIES THAT:
The Available Borrowing Base as of ________, 19__ was $_________ computed as
follows:
A. Aggregate Accounts
Receivable of the Obligors $_____________
B. Accounts Receivable of
the Obligors which are
not Eligible Accounts ($ )
=============
C. Eligible Accounts
(line A minus line B) $____________
D. 80% of Eligible Accounts $____________
(80% of line C)
E. Oil and Gas Borrowing Base $
============
F. Borrowing Base (line A plus line B) $____________
G. Other Indebtedness Outstanding ($ )
============
H. AVAILABLE BORROWING BASE $____________
(line E minus line F)
The foregoing computations are made and delivered this __ day of _________,
19__.
INTERCOAST ENERGY COMPANY
By:
------------------------------
Title:
---------------------------
<PAGE>
EXHIBIT "E-1"
to Credit Agreement
FORM OF OPINION OF BORROWER'S COUNSEL
____________, 19__
The Agent and the Lenders who are parties to the
Credit Agreement described below.
Ladies and Gentlemen:
I am counsel for InterCoast Energy company, a Delaware corporation (the
"Borrower"), and have represented the Borrower in connection with its execution
and delivery of a Credit Agreement dated as of July 15, 1996 (the "Credit
Agreement") among the Borrower, the Lenders party thereto, and The First
National Bank of Chicago, as Agent, and providing for Advances in an aggregate
principal amount not exceeding $100,000,000 at any one time outstanding. All
capitalized terms used in this opinion and not otherwise defined herein shall
have the meanings attributed to them in the Credit Agreement.
I have examined the Borrower's certificate of incorporation, by-laws,
resolutions, the Loan Documents and such other matters of fact and law which I
deem necessary in order to render this opinion. Based upon the foregoing, it is
my opinion that:
1. The Borrower and each of its Subsidiaries is a corporation duly
incorporated, validly existing and in good standing under the laws of its
state of incorporation and has all requisite authority to conduct its
business in each jurisdiction in which its business is conducted.
2. The execution and delivery of the Loan Documents by the Borrower and
the performance by the Borrower of the Obligations have been duly
authorized by all necessary corporate action and proceedings on the part of
the Borrower and will not (a) require any consent of the Borrower's
shareholders, (b) violate any law, rule, regulation, order, writ, judgment,
injunction, decree or award binding on the Borrower or any of its
Subsidiaries or the certificate incorporation or by-laws of the Borrower or
any of its Subsidiaries or any indenture, instrument or agreement binding
upon the Borrower or any of its Subsidiaries, or (c) result in, or require,
the creation or imposition of any Lien pursuant to the provisions of any
indenture, instrument or agreement binding upon the Borrower or any of its
Subsidiaries.
3. All agreements governing Indebtedness of MidAmerican Capital Company,
a Delaware corporation, or any of its Subsidiaries have been
<PAGE>
amended or otherwise modified so that neither the execution and delivery by
the Borrower of the Loan Documents, nor the consummation of the
transactions therein contemplated, nor compliance with the provisions
thereof will violate any provisions of any such agreement, or conflict with
or constitute a default thereunder.
4. The Loan Documents have been duly executed and delivered by the
Borrower and constitute legal, valid and binding obligations of the
Borrower enforceable in accordance with their terms except to the extent
the enforcement thereof may be limited by bankruptcy, insolvency or similar
laws affecting the enforcement of creditors' rights generally and subject
also to the availability of equitable remedies if equitable remedies are
sought.
5. To the best of my knowledge, except as specifically disclosed in the
preliminary prospectus filed by the Borrower with the Securities and
Exchange Commission on June 28, 1996, there is no litigation or proceeding
against the Borrower or any of its Subsidiaries which, if adversely
determined, could reasonably be expected to have a Material Adverse Effect.
6. No approval, authorization, consent, adjudication or order of any
governmental authority is required to be obtained by the Borrower or any of
its Subsidiaries in connection with the execution and delivery of the Loan
Documents, the borrowings under the Credit Agreement or in connection with
the payment by the Borrower of the Obligations.
I am licensed to practice in the State of Iowa and the opinions expressed
above are limited to the laws of the State of Iowa, the corporate laws of the
State of Delaware, and the Federal law of the United States of America. As the
Loan Documents explicitly state that they are governed by the internal law of
the State of Illinois, I have assumed (with your consent) for the purpose of
rendering my opinions set forth herein that the substantive laws of the State of
Illinois relating to the matters discussed herein are substantially similar to
those of the State of Iowa.
This opinion may be relied upon by the Agent, the Lenders and their
participants, assignees and other transferees.
Very truly yours,
---------------------------------
Page 2
<PAGE>
EXHIBIT "E-2"
to Credit Agreement
FORM OF OPINION OF GUARANTORS' COUNSEL
____________, 19__
The Agent and the Lenders who are parties to the
Credit Agreement described below.
Ladies and Gentlemen:
I am counsel for InterCoast Oil and Gas Company, a Delaware corporation
formerly known as Medallion Production Company, Medallion California Properties
Company, a Texas corporation, InterCoast Power Marketing Company, a Delaware
corporation, Continental Power Exchange, Inc., a Delaware corporation,
InterCoast Gas Services Company, a Delaware corporation, InterCoast Gas Services
Company, an Oklahoma corporation, GED Energy Services, Inc., a Delaware
corporation, and InterCoast Trade & Resources Inc., a Delaware corporation,
(each a "Guarantor" and, collectively, the "Guarantors"), and have represented
the Guarantors in connection with their execution and delivery of a Guaranty
Agreement dated as of July 15, 1996 (the "Guaranty Agreement") among the
Guarantors and The First National Bank of Chicago, as Agent for the Lenders
party to that certain Credit Agreement dated as of July 15, 1996 (the "Credit
Agreement") among InterCoast Energy Company, a Delaware corporation, the Lenders
party thereto, and The First National Bank of Chicago, as Agent. All
capitalized terms used in this opinion and not otherwise defined herein shall
have the meanings attributed to them in the Guaranty Agreement or in the Credit
Agreement referred to therein.
I have examined the certificate or articles of incorporation, by-laws and
resolutions of each Guarantor, the Guaranty Agreement, the Loan Documents and
such other matters of fact and law which I deem necessary in order to render
this opinion. Based upon the foregoing, it is my opinion that:
1. Each Guarantor is a corporation duly incorporated, validly existing
and in good standing under the laws of its state of incorporation and has
all requisite authority to conduct its business in each jurisdiction in
which its business is conducted.
2. The execution and delivery of the Guaranty Agreement by each
Guarantor and the performance by each Guarantor of its obligations
thereunder have been duly authorized by all necessary corporate action and
proceedings on the part of such Guarantor and will not (a) require any
consent of such Guarantor's shareholders, (b) violate any law, rule,
regulation, order, writ, judgment, injunction, decree or award binding on
such
<PAGE>
Guarantor or any of its Subsidiaries or such Guarantor's or any of its
Subsidiaries' certificate or articles of incorporation or by-laws or any
indenture, instrument or agreement binding upon such Guarantor or any of
its Subsidiaries, or (c) result in, or require, the creation or imposition
of any Lien pursuant to the provisions of any indenture, instrument or
agreement binding upon such Guarantor or any of its Subsidiaries.
3. All agreements governing Indebtedness of MidAmerican Capital Company,
a Delaware corporation, or any of its Subsidiaries have been amended or
otherwise modified so that neither the execution and delivery by any
Guarantor of the Guaranty Agreement, nor the consummation of the
transactions therein contemplated, nor compliance with the provisions
thereof will violate any provisions of any such agreement, or conflict with
or constitute a default thereunder.
4. The Guaranty Agreement has been duly executed and delivered by each
Guarantor and constitutes a legal, valid and binding obligation of each
Guarantor enforceable against such Guarantor in accordance with its terms
except to the extent the enforcement thereof may be limited by bankruptcy,
insolvency or similar laws affecting the enforcement of creditors' rights
generally and subject also to the availability of equitable remedies if
equitable remedies are sought.
5. No approval, authorization, consent, adjudication or order of any
governmental authority is required to be obtained by any Guarantor in
connection with the execution and delivery of the Guaranty Agreement or the
performance by any Guarantor of its obligations thereunder.
I am licensed to practice in the State of Iowa and the opinions expressed
above are limited to the laws of the State of Iowa, the corporate laws of the
State of Delaware, and the Federal law of the United States of America. As the
Guaranty Agreement explicitly states that it is governed by the internal law of
the State of Illinois, I have assumed (with your consent) for the purpose of
rendering my opinions set forth herein that the substantive laws of the State of
Illinois relating to the matters discussed herein are substantially similar to
those of the State of Iowa.
This opinion may be relied upon by the Agent, the Lenders and their
participants, assignees and other transferees.
Very truly yours,
---------------------------------
Page 2
<PAGE>
EXHIBIT "F"
to Credit Agreement
ASSIGNMENT AGREEMENT
This Assignment Agreement (this "Assignment Agreement") between ___________
(the "Assignor") and _______________ (the "Assignee") is dated as of ________,
19__. The parties hereto agree as follows:
1. PRELIMINARY STATEMENT. The Assignor is a party to a Credit Agreement
---------------------
(which, as it may be amended, modified, renewed or extended from time to time is
herein called the "Credit Agreement") described in Item 1 of Schedule 1 attached
hereto ("Schedule 1"). Capitalized terms used herein and not otherwise defined
herein shall have the meanings attributed to them in the Credit Agreement.
2. ASSIGNMENT AND ASSUMPTION. The Assignor hereby sells and assigns to the
-------------------------
Assignee, and the Assignee hereby purchases and assumes from the Assignor, an
interest in and to the Assignor's rights and obligations under the Credit
Agreement such that after giving effect to such assignment the Assignee shall
have purchased pursuant to this Assignment Agreement the percentage interest
specified in Item 3 of Schedule 1 of all outstanding rights and obligations
under the Credit Agreement relating to the facilities listed in Item 3 of
Schedule 1 and the other Transaction Documents. The aggregate Commitment (or
Loans, if the applicable Commitment has been terminated) purchased by the
Assignee hereunder is set forth in Item 4 of Schedule 1.
3. EFFECTIVE DATE. The effective date of this Assignment Agreement (the
--------------
"Effective Date") shall be the later of the date specified in Item 5 of Schedule
1 or two Business Days (or such shorter period agreed to by the Agent) after a
Notice of Assignment substantially in the form of Exhibit "I" attached hereto
has been delivered to the Agent. Such Notice of Assignment must include any
consents required to be delivered to the Agent by Section 13.3.1 of the Credit
Agreement. In no event will the Effective Date occur if the payments required
to be made by the Assignee to the Assignor on the Effective Date under Sections
4 and 5 hereof are not made on the proposed Effective Date. The Assignor will
notify the Assignee of the proposed Effective Date no later than the Business
Day prior to the proposed Effective Date. As of the Effective Date, (i) the
Assignee shall have the rights and obligations of a Lender under the Transaction
Documents with respect to the rights and obligations assigned to the Assignee
hereunder and (ii) the Assignor shall relinquish its rights and be released from
its corresponding obligations under the Transaction Documents with respect to
the rights and obligations assigned to the Assignee hereunder.
4. PAYMENTS OBLIGATIONS. On and after the Effective Date, the Assignee shall
--------------------
be entitled to receive from the Agent all payments of principal, interest and
fees with respect to the interest assigned hereby. The Assignee shall advance
<PAGE>
funds directly to the Agent with respect to all Loans and reimbursement payments
made on or after the Effective Date with respect to the interest assigned
hereby. [In consideration for the sale and assignment of Loans hereunder, (i)
the Assignee shall pay the Assignor, on the Effective Date, an amount equal to
the principal amount of the portion of all Floating Rate Loans assigned to the
Assignee hereunder and (ii) with respect to each Eurodollar Loan made by the
Assignor and assigned to the Assignee hereunder which is outstanding on the
Effective Date, (a) on the last day of the Interest Period therefor or (b) on
such earlier date agreed to by the Assignor and the Assignee or (c) on the date
on which any such Eurodollar either becomes due (by acceleration or otherwise)
or is prepaid (the date as described in the foregoing clauses (a), (b) or (c)
being hereinafter referred to as the "Payment Date"), the Assignee shall pay the
Assignor an amount equal to the principal amount of the portion of such
Eurodollar Loan assigned to the Assignee which is outstanding on the Payment
Date. If the Assignor and the Assignee agree that the Payment Date for such
Eurodollar Loan shall be the Effective Date, they shall agree to the interest
rate applicable to the portion of such Loan assigned hereunder for the period
from the Effective Date to the end of the existing Interest Period applicable to
such Eurodollar Loan (the "Agreed Interest Rate") and any interest received by
the Assignee in excess of the Agreed Interest Rate shall be remitted to the
Assignor. In the event interest for the period from the Effective Date to but
not including the Payment Date is not paid by the Borrower with respect to any
Eurodollar Loan sold by the Assignor to the Assignee hereunder, the Assignee
shall pay to the Assignor interest for such period on the portion of such
Eurodollar Loan sold by the Assignor to the Assignee hereunder at the applicable
rate provided by the Credit Agreement. In the event a prepayment of any
Eurodollar Loan which is existing on the Payment Date and assigned by the
Assignor to the Assignee hereunder occurs after the Payment Date but before the
end of the Interest Period applicable to such Eurodollar Loan, the Assignee
shall remit to the Assignor the excess of the prepayment penalty paid with
respect to the portion of such Eurodollar Loan assigned to the Assignee
hereunder over the amount which would have been paid if such prepayment penalty
was calculated based on the Agreed Interest Rate. The Assignee will also
promptly remit to the Assignor (i) any principal payments received from the
Agent with respect to Eurodollar Loans prior to the Payment Date and (ii) any
amounts of interest on Loans and fees received from the Agent which relate to
the portion of the Loans assigned to the Assignee hereunder for periods prior to
the Effective Date, in the case of Floating Rate Loans or fees, or the Payment
Date, in the case of Eurodollar Loans, and not previously paid by the Assignee
to the Assignor.]/1/ In the event that either party hereto receives any payment
to which the other party hereto is entitled under this Assignment Agreement,
then the party receiving such amount shall promptly remit it to the other party
hereto.
5. FEES PAYABLE BY THE ASSIGNEE. The Assignee shall pay to the Assignor a
----------------------------
fee on each day on which a payment of interest or commitment fees is
- ------------------------
/1/Each Assignor may insert its standard payment provisions in lieu of the
payment terms included in this Exhibit.
Page 2
<PAGE>
made under the Credit Agreement with respect to the amounts assigned to the
Assignee hereunder (other than a payment of interest or commitment fees for the
period prior to the Effective Date or, in the case of Eurodollar Loans, the
Payment Date, which the Assignee is obligated to deliver to the Assignor
pursuant to Section 4 hereof). The amount of such fee shall be the difference
between (i) the interest or fee, as applicable, paid with respect to the amounts
assigned to the Assignee hereunder and (ii) the interest or fee, as applicable,
which would have been paid with respect to the amounts assigned to the Assignee
hereunder if each interest rate was ___ of 1% less than the interest rate paid
by the Borrower or if the commitment fee was ___ of 1% less than the commitment
fee paid by the Borrower, as applicable. In addition, the Assignee agrees to
pay ____% of the recordation fee required to be paid to the Agent in connection
with this Assignment Agreement.
6. REPRESENTATIONS OF THE ASSIGNOR; LIMITATIONS ON THE ASSIGNOR'S
--------------------------------------------------------------
LIABILITY. The Assignor represents and warrants that it is the legal and
- ---------
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any adverse claim created by the Assignor. It is
understood and agreed that the assignment and assumption hereunder are made
without recourse to the Assignor and that the Assignor makes no other
representation or warranty of any kind to the Assignee. Neither the Assignor
nor any of its officers, directors, employees, agents or attorneys shall be
responsible for (i) the due execution, legality, validity, enforceability,
genuineness, sufficiency or collectability of any Transaction Document,
including without limitation, documents granting the Assignor and the other
Lenders a security interest in assets of the Borrower or any guarantor, (ii) any
representation, warranty or statement made in or in connection with any of the
Transaction Documents, (iii) the financial condition or creditworthiness of the
Borrower or any guarantor, (iv) the performance of or compliance with any of the
terms or provisions of any of the Transaction Documents, (v) inspecting any of
the Property, books or records of the Borrower, (vi) the validity,
enforceability, perfection, priority, condition, value or sufficiency of any
collateral securing or purporting to secure the Loans or (vii) any mistake,
error of judgment, or action taken or omitted to be taken in connection with the
Loans or the Transaction Documents.
7. REPRESENTATIONS OF THE ASSIGNEE. The Assignee (i) confirms that it has
-------------------------------
received a copy of the Credit Agreement, together with copies of the financial
statements requested by the Assignee and such other documents and information as
it has deemed appropriate to make its own credit analysis and decision to enter
into this Assignment Agreement, (ii) agrees that it will, independently and
without reliance upon the Agent, the Assignor or any other Lender and based on
such documents and information at it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
the Transaction Documents, (iii) appoints and authorizes the Agent to take such
action as agent on its behalf and to exercise such powers under the Transaction
Documents as are delegated to the Agent by the terms thereof, together with such
powers as are
Page 3
<PAGE>
reasonably incidental thereto, (iv) agrees that it will perform in accordance
with their terms all of the obligations which by the terms of the Transaction
Documents are required to be performed by it as a Lender, (v) agrees that its
payment instructions and notice instructions are as set forth in the attachment
to Schedule 1, (vi) confirms that none of the funds, monies, assets or other
consideration being used to make the purchase and assumption hereunder are "plan
assets" as defined under ERISA and that its rights, benefits and interests in
and under the Transaction Documents will not be "plan assets" under ERISA, [and
(vii) attaches the forms prescribed by the Internal Revenue Service of the
United States certifying that the Assignee is entitled to receive payments under
the Transaction Documents without deduction or withholding of any United States
federal income taxes]./2/
8. INDEMNITY. The Assignee agrees to indemnify and hold the Assignor
---------
harmless against any and all losses, costs and expenses (including, without
limitation, reasonable attorneys' fees) and liabilities incurred by the Assignor
in connection with or arising in any manner from the Assignee's non-performance
of the obligations assumed under this Assignment Agreement.
9. SUBSEQUENT ASSIGNMENTS. After the Effective Date, the Assignee shall have
----------------------
the right pursuant to Section 13.3.1 of the Credit Agreement to assign the
rights which are assigned to the Assignee hereunder to any entity or person,
provided that (i) any such subsequent assignment does not violate any of the
terms and conditions of the Transaction Documents or any law, rule, regulation,
order, writ, judgment, injunction or decree and that any consent required under
the terms of the Transaction Documents has been obtained and (ii) unless the
prior written consent of the Assignor is obtained, the Assignee is not thereby
released from its obligations to the Assignor hereunder, if any remain
unsatisfied, including, without limitation, its obligations under Sections 4, 5
and 8 hereof.
10. REDUCTIONS OF AGGREGATE COMMITMENT. If any reduction in the Aggregate
----------------------------------
Commitment occurs between the date of this Assignment Agreement and the
Effective Date, the percentage interest specified in Item 3 of Schedule 1 shall
remain the same, but the dollar amount purchased shall be recalculated based on
the reduced Aggregate Commitment.
11. ENTIRE AGREEMENT. This Assignment Agreement and the attached Notice of
----------------
Assignment embody the entire agreement and understanding between the parties
hereto and supersede all prior agreements and understandings between the parties
hereto relating to the subject matter hereof.
12. GOVERNING LAW. This Assignment Agreement shall be governed by the
-------------
internal law, and not the law of conflicts, of the State of Illinois.
- ------------------------
/2/To be inserted if the Assignee is not incorporated under the laws of the
United States, or a state thereof.
Page 4
<PAGE>
13. NOTICES. Notices shall be given under this Assignment Agreement in the
-------
manner set forth in the Credit Agreement. For the purpose hereof, the addresses
of the parties hereto (until notice of a change is delivered) shall be the
address set forth in the attachment to Schedule 1.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment
Agreement by their duly authorized officers as of the date first above written.
[NAME OF ASSIGNOR]
By:
-----------------------------------
Title:
--------------------------------
[NAME OF ASSIGNEE]
By:
-----------------------------------
Title:
--------------------------------
Page 5
<PAGE>
SCHEDULE 1
to Assignment Agreement
1. Description and Date
of Credit Agreement: Credit Agreement, dated as of July 15, 1996 among
InterCoast Energy Company, a Delaware corporation, the
Lenders from time to time party thereto and The First
National Bank of Chicago, as Agent.
2. Date of Assignment Agreement: _________, 19__
3. Amounts (As of Date of Item 2 above):
a. Total of Commitments (Loans)/1/
under Credit Agreement $__________
b. Assignee's Percentage of
Facility purchased under
the Assignment Agreement/2/ __________%
c. Amount of Assigned Share in
Facility purchased under
the Assignment Agreement $__________
4. Assignee's (Loan Amount)/3/
Commitment Amount
Purchased Hereunder: $__________
5. Proposed Effective Date: _________, 19__
ACCEPTED AND AGREED:
[NAME OF ASSIGNOR] [NAME OF ASSIGNEE]
By: By:
------------------------- -------------------------
Title: Title:
---------------------- ----------------------
- ----------------------
/1/If Commitments have been terminated, insert outstanding Loans in place of
aggregate Commitments.
/2/Percentage taken to 10 decimal places.
/3/If Commitments have been terminated, insert Assignee's outstanding Loans in
place of Assignee's Commitment.
<PAGE>
ATTACHMENT TO SCHEDULE 1
TO ASSIGNMENT AGREEMENT
Attach Assignor's Administrative Information Sheet, which must
include notice address for the Assignor and the Assignee
<PAGE>
EXHIBIT "I"
to Assignment Agreement
NOTICE OF ASSIGNMENT
____________, 19___
To: [NAME OF BORROWER]*
-------------------
-------------------
[NAME OF AGENT]
-------------------
-------------------
From: [NAME OF ASSIGNOR] (the "Assignor")
[NAME OF ASSIGNEE] (the "Assignee")
1. We refer to that Credit Agreement (the "Credit Agreement") described in
Item 1 of Schedule 1 attached hereto ("Schedule 1"). Capitalized terms used
herein and not otherwise defined herein shall have the meanings attributed to
them in the Credit Agreement.
2. This Notice of Assignment (this "Notice") is given and delivered to the
Agent pursuant to Section 13.3.2 of the Credit Agreement.
3. The Assignor and the Assignee have entered into an Assignment Agreement,
dated as of _______, 19__ (the "Assignment"), pursuant to which, among other
things, the Assignor has sold, assigned, delegated and transferred to the
Assignee, and the Assignee has purchased, accepted and assumed from the Assignor
the percentage interest specified in Item 3 of Schedule 1 of all outstandings,
rights and obligations under the Credit Agreement relating to the facilities
listed in Item 3 of Schedule 1. The Effective Date of the Assignment shall be
the later of the date specified in Item 5 of Schedule 1 or two Business Days (or
such shorter period as agreed to by the Agent) after this Notice of Assignment
and any consents and fees required by Sections 13.3.1 and 13.3.2 of the Credit
Agreement have been delivered to the Agent, provided that the Effective Date
shall not occur if any condition precedent agreed to by the Assignor and the
Assignee has not been satisfied.
4. The Assignor and the Assignee hereby give to the Borrower and the Agent
notice of the assignment and delegation referred to herein. The Assignor will
confer with the Agent before the date specified in Item 5 of Schedule 1 to
determine if the
<PAGE>
Assignment Agreement will become effective on such date pursuant to Section 3
hereof, and will confer with the Agent to determine the Effective Date pursuant
to Section 3 hereof if it occurs thereafter. The Assignor shall notify the
Agent if the Assignment Agreement does not become effective on any proposed
Effective Date as a result of the failure to satisfy the conditions precedent
agreed to by the Assignor and the Assignee. At the request of the Agent, the
Assignor will give the Agent written confirmation of the satisfaction of the
conditions precedent.
5. The Assignor or the Assignee shall pay to the Agent on or before the
Effective Date the processing fee of $4,000 required by Section 13.3.2 of the
Credit Agreement.
6. If Notes are outstanding on the Effective Date, the Assignor and the
Assignee request and direct that the Agent prepare and cause the Borrower to
execute and deliver new Notes or, as appropriate, replacements notes, to the
Assignor and the Assignee. The Assignor and, if applicable, the Assignee each
agree to deliver to the Agent the original Note received by it from the Borrower
upon its receipt of a new Note in the appropriate amount.
7. The Assignee advises the Agent that notice and payment instructions are
set forth in the attachment to Schedule 1.
8. The Assignee hereby represents and warrants that none of the funds,
monies, assets or other consideration being used to make the purchase pursuant
to the Assignment are "plan assets" as defined under ERISA and that its rights,
benefits, and interests in and under the Transaction Documents will not be "plan
assets" under ERISA.
9. The Assignee authorizes the Agent to act as its agent under the
Transaction Documents in accordance with the terms thereof. The Assignee
acknowledges that the Agent has no duty to supply information with respect to
the Borrower or the Transaction Documents to the Assignee until the Assignee
becomes a party to the Credit Agreement./1/
[NAME OF ASSIGNOR] [NAME OF ASSIGNEE]
By: By:
------------------------- -------------------------
Title: Title:
---------------------- ----------------------
[Attach photocopy of Schedule 1 to Assignment]
- -----------------------
/1/May be eliminated if Assignee is a party to the Credit Agreement prior to the
Effective Date.
Page 2
<PAGE>
EXHIBIT "G"
to Credit Agreement
LOAN/CREDIT RELATED MONEY TRANSFER INSTRUCTION
To The First National Bank of Chicago,
as Agent (the "Agent") under the Credit Agreement
Described Below.
Re: Credit Agreement, dated as of July 15, 1996 (as the same may be amended,
supplemented or otherwise modified, the "Credit Agreement"), among
InterCoast Energy Company, a Delaware corporation (the "Borrower"), the
Lenders from time to time party thereto and the Agent. Capitalized terms
used herein and not otherwise defined herein shall have the meanings
assigned thereto in the Credit Agreement.
The Agent is specifically authorized and directed to act upon the following
standing money transfer instructions with respect to the proceeds of Advances or
other extensions of credit from time to time until receipt by the Agent of a
specific written revocation of such instructions by the Borrower; provided,
however, that the Agent may otherwise transfer funds as hereafter directed in
writing by the Borrower in accordance with Section 14.1 of the Credit Agreement
or based on any telephonic notice made in accordance with Section 2.14 of the
Credit Agreement.
Facility Identification Number(s)
----------------------------------------------
Customer/Account Name
----------------------------------------------------------
Transfer Funds To
--------------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
For Account No.
----------------------------------------------------------------
Reference/Attention To
---------------------------------------------------------
Authorized Officer (Customer Representative) Date
-----------------------------
- ----------------------------------------- -----------------------------
(Please Print) Signature
Bank Officer Name Date
----------------------------
- ----------------------------------------- ----------------------------
(Please Print) Signature
(Deliver Completed Form to Credit Support Staff For Immediate Processing)
<PAGE>
VARIABLE BALANCE PROMISSORY NOTE Exhibit 10.11
--------------------------------
AND LOAN AGREEMENT
------------------
$65,000,000 May 23, 1996
THIS VARIABLE BALANCE PROMISSORY NOTE AND LOAN AGREEMENT (the "Note")
is made and entered into this 23rd day of May 1996, by and between InterCoast
Energy Company, a Delaware corporation ("InterCoast"), and MidAmerican Capital
Company, a Delaware corporation ("MidAmerican").
Rentals
-------
1. Prior to this date, MidAmerican made intercompany loans to its
wholly owned subsidiaries.
2. On this date, InterCoast became a wholly owned subsidiary of
MidAmerican and MidAmerican was restructured so that certain
subsidiaries (previously wholly owned by MidAmerican) became
wholly owned subsidiaries of InterCoast.
3. As a result of this reorganization, it was necessary for
financial reporting purposes to separate the two companies and
to recapitalize MidAmerican.
4. The parties desire that the intercompany loan resulting from
such recapitalization be evidenced by a written note.
In consideration of the promises herein contained, and each intending to
be legally bound thereby, the parties agree as follows:
1. On the maturity date, for value received, InterCoast promises to pay to
the order of MidAmerican, at its office in Des Moines, Iowa, or at such other
place as the holder hereof may from time to time direct, the principal amount
the indebtedness evidenced by this Note which remains outstanding and unpaid as
of the maturity date. Unless otherwise agreed by InterCoast and MidAmerican,
the maturity date of this Note shall be December 31, 1997. This Note shall
terminate one business day prior to the closing date of an initial public
offering of the InterCoast common stock, a merger or other business combination,
or the transfer of substantially all of the assets of InterCoast. Upon the
earlier of the maturity date or termination, the outstanding principal balance
shall be fully due and payable.
2. The amount of the principal balance evidenced by this Note shall be the
aggregate of all advances made hereunder, less the aggregate of all principal
repayments, but in no event shall the unpaid balance exceed the sum of Sixty
Five Million and 00/100 Dollars ($65,000,000). If from time to time no balance
is due hereunder, this Note shall nevertheless continue as an effective
instrument to evidence future advances which may be made by MidAmerican
hereunder.
3. MidAmerican's obligation to make advances under the terms of this Note
shall be conditioned on and subject to the following terms: InterCoast may
obtain advances pursuant to this Note by means of notice to MidAmerican prior to
funding by MidAmerican. Such notice must be made by a person or persons
authorized to sign on behalf of InterCoast. All funds advanced to pursuant
to this Note shall be deposited by MidAmerican into an account designated
by InterCoast.
4. The outstanding principal balance shall bear no interest. InterCoast may
prepay all or a portion of each advance without penalty.
5. Each payment hereunder shall be applied to the principal amount hereof.
Any prepayment of principal shall be applied to outstanding advances as
designated by InterCoast.
<PAGE>
6. This Note and any rights hereunder may not be assigned or transferred
by InterCoast without the express written consent of MidAmerican.
7. If any provision in this Note shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
8. THIS NOTE SHALL BE GOVERNED BY AND INTERPRETED UNDER THE LAWS OF THE
STATE OF IOWA.
IN WITNESS WHEREOF, MidAmerican and InterCoast have executed this Note
as of the date first above written.
MIDAMERICAN CAPITAL COMPANY INTERCOAST ENERGY COMPANY
By: /s/ Daniel H. Melstead By: /s/ Daniel E. Lonergan
--------------------------- --------------------------
Name: Daniel H. Melstead Name: Daniel E. Lonergan
------------------------- ------------------------
Title: Vice President Title: Vice-President--Finance
and Treasurer
------------------------ ------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and all references to our Firm) included in this Registration
Statement.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
July 18, 1996
