<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1999
REGISTRATION NUMBER 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MARINER ENERGY LLC
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 52-2130735
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or Classification Code Number) No.)
organization)
</TABLE>
580 WESTLAKE PARK BLVD., SUITE 1300
HOUSTON, TEXAS 77079
(281) 584-5500
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
CHRISTOPHER E. LINDSEY
GENERAL COUNSEL
MARINER ENERGY LLC
580 WESTLAKE PARK BLVD., SUITE 1300
HOUSTON, TEXAS 77079
(281) 584-5500
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
Copies to:
<TABLE>
<S> <C>
MR. CHARLES H. STILL MR. JAMES M. PRINCE
FULBRIGHT & JAWORSKI L.L.P. ANDREWS & KURTH L.L.P.
1301 MCKINNEY, SUITE 5100 600 TRAVIS, SUITE 4200
HOUSTON, TEXAS 77010-3095 HOUSTON, TEXAS 77002
(713) 651-5151 (713) 220-4200
</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 (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 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 filed to register additional securities for an offering
pursuant to Rule 462(c) 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(d)
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
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Shares, par value $.01 per share................... $200,000,000 $55,600
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) In accordance with Rule 457(o) of the Securities Act, the number of shares
being registered and the proposed maximum offering price per share are not
included in this table.
-------------------------
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 1999
Shares
Mariner Energy Logo
MARINER ENERGY LLC
Common Shares
------------------
We are selling common shares and the selling shareholders
are selling common shares.
Prior to this offering, there has been no public market for our common
shares. The initial public offering price of the common shares is expected to be
between $ and $ per share. We will make application to list our common
shares on The Nasdaq Stock Market's National Market under the symbol .
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
We have elected to be treated as a taxable corporation for United States
federal income tax purposes. Under current United States federal income tax law,
the tax treatment of ownership of common shares should be identical to the tax
treatment of ownership of common stock in a publicly traded corporation.
INVESTING IN THE COMMON SHARES INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE
8.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS MARINER SHAREHOLDERS
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Per Share............................ $ $ $ $
Total................................ $ $ $ $
</TABLE>
Delivery of the common shares will be made on or about ,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
BANC OF AMERICA SECURITIES LLC
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
PETRIE PARKMAN & CO.
The date of this prospectus is , 1999.
<PAGE> 3
[Map depicting our proved properties,
exploratory prospects and prospects subject
to lease awards; blow-up map of the Gulf of
Mexico region;]
WHEN DESCRIBING NATURAL GAS
- ---------------------------
Mcf = One thousand cubic feet of natural gas.
MMBtu = One million British Thermal Units
MMcf = One million cubic feet of natural gas.
Bcf = One billion cubic feet of natural gas.
WHEN DESCRIBING OIL
- -------------------
Bbl = One stock tank barrel, or 42 U.S. gallons liquid volume, used in this
prospectus in reference to crude oil, condensate or other liquid
hydrocarbons.
Mbbls = One thousand barrels of crude oil or other liquid hydrocarbons.
WHEN COMPARING OIL TO NATURAL GAS
- ---------------------------------
1 Bbl of Oil = Six Mcf of natural gas
Mcfe = One thousand cubic feet of natural gas equivalent,
converting one barrel of oil to six Mcf of natural
gas based on commonly accepted rough equivalency of
energy content.
Bcfe = One billion cubic feet of natural gas equivalent,
converting one barrel of oil to six Mcf of natural gas
based on commonly accepted rough equivalency of
energy content.
<PAGE> 4
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY..................... 1
SUMMARY CONSOLIDATED FINANCIAL DATA.... 5
RISK FACTORS........................... 8
CAUTIONARY STATEMENT ABOUT
FORWARD-LOOKING STATEMENTS........... 18
USE OF PROCEEDS........................ 19
DIVIDEND POLICY........................ 19
DILUTION............................... 20
CAPITALIZATION......................... 21
SELECTED CONSOLIDATED FINANCIAL DATA... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................... 23
BUSINESS AND PROPERTIES................ 34
MARINER HISTORY AND ORGANIZATION....... 48
MANAGEMENT............................. 49
PRINCIPAL AND SELLING SHAREHOLDERS..... 57
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS......................... 59
DESCRIPTION OF OUR COMPANY AGREEMENT
AND COMMON SHARES.................... 62
SHARES ELIGIBLE FOR FUTURE SALE........ 68
UNDERWRITING........................... 70
NOTICE TO CANADIAN RESIDENTS........... 72
LEGAL MATTERS.......................... 73
EXPERTS................................ 73
INDEPENDENT PETROLEUM ENGINEERS........ 73
WHERE YOU CAN FIND MORE INFORMATION.... 73
GLOSSARY OF OIL AND NATURAL GAS
TERMS................................ 74
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS........................... F-1
REPORT OF INDEPENDENT PETROLEUM
ENGINEERS............................ A-1
</TABLE>
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
---------------------
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER
OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
ii
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus but does
not contain all information that may be important to you. The estimates of our
proved reserves as of June 30, 1999, included in this prospectus are derived
from the report of Ryder Scott Company, L.P., our independent petroleum
engineers, a summary of which report is attached to this prospectus as Annex A.
The "Glossary of Oil and Natural Gas Terms" on page 74 of this prospectus
defines some of the industry terms used in this prospectus.
ABOUT MARINER
Mariner Energy is an independent oil and natural gas exploration,
development and production company with principal operations in the Gulf of
Mexico and along the U.S. Gulf Coast. Our increasing focus on Gulf water depths
greater than 600 feet, or the deepwater, since the early 1990s has made us one
of the most experienced independent operators in the deepwater Gulf. We have
been an active explorer in the Gulf Coast area since the mid-1980s, when we
operated as Hardy Oil & Gas USA Inc., and have increased our production and
reserve base through the exploitation and development of internally generated
prospects, which we refer to as growth "through the drillbit." Members of our
senior management team, most of whom have worked together for over 15 years, and
an affiliate of Enron North America Corp. ("ENA") led a buyout of Mariner from
Hardy Oil & Gas, plc in April 1996. We believe that our operating experience,
exploration expertise, extensive deepwater lease inventory and seasoned
management team give us a unique competitive advantage with substantial growth
potential.
Since beginning deepwater operations in 1994, we have:
- operated six successful subsea development projects in water depths of
400 feet to 2,700 feet;
- developed three deepwater exploitation projects acquired from major oil
companies, including our "Pluto" project;
- discovered five new fields in nine deepwater Gulf exploration tests,
including a potentially significant recent discovery at our "Aconcagua"
prospect; and
- acquired 64 deepwater Gulf lease blocks, most of which are free of
royalty payment obligations.
Ryder Scott Company estimated that we had proved reserves of 162.8 Bcfe as
of June 30, 1999, attributable to 168 wells in 33 fields, of which 67% were
natural gas and 33% were oil and condensate. For the six months ended June 30,
1999, we produced an average of 70 MMcfe per day.
We expect our production levels and operating cash flow to increase
significantly based on production from our "Dulcimer" project, which began in
April 1999, and our Pluto project, which we expect to begin producing in the
fourth quarter of 1999 at a rate of approximately 30 to 40 MMcfe per day net to
our interest. We expect further increases on commencement of production from the
"Black Widow" project, currently scheduled for the second half of 2000. We also
expect to drill 11 of our exploration prospects by the end of 2000, nine of
which are in the deepwater Gulf.
Our planned capital expenditures for 2000 consist of approximately $100
million for leasehold acquisition, exploration drilling and development
projects, which are double our planned capital expenditures of approximately $50
million for 1999.
1
<PAGE> 6
OUR STRENGTHS AND STRATEGY
We have several competitive strengths that we believe will allow us to
compete successfully in oil and natural gas exploration, production and
development activities in the Gulf:
- EARLY ENTRY INTO THE DEEPWATER GULF. We began focusing on the deepwater
Gulf in 1992 as one of the first independent oil and natural gas
companies to recognize the opportunity for acquiring smaller deepwater
discoveries not meeting a large company's field size threshold and for
partnering with major oil companies to develop these discoveries. We
believe our seven years in the deepwater Gulf have provided us with the
geophysical and geological skills, operating expertise and relationships
necessary to operate successfully in the deepwater.
- SUBSTANTIAL ACREAGE, SEISMIC DATA AND PROSPECT INVENTORY. Our Gulf
leasehold inventory as of September 1, 1999, consisted of 123 lease
blocks, including 69 in the deepwater. Our prospect inventory includes 19
drillable exploration prospects, 15 of which are in the deepwater Gulf.
We expect to drill 11 of our exploration prospects by the end of 2000,
nine of which are in the deepwater Gulf. Our seismic database includes
3-D seismic that covers approximately 7,500 square miles of the Gulf and
modern 2-D seismic that covers more than 250,000 miles of the deepwater
Gulf. We internally generate substantially all of our exploration and
exploitation prospects using 3-D seismic data.
- EXPERIENCED OPERATIONS AND TECHNICAL STAFF AND MANAGEMENT. Our 12
geoscientists average more than 20 years of experience in the exploration
and production business, including extensive experience in the deepwater
Gulf and with major oil companies. Our four deepwater operations managers
average over 25 years of experience with major oil companies and large
independents around the world. Most of our senior management team
participated in our acquisition from Hardy and have worked together for
over 15 years. Management and other key personnel currently own
approximately 4% of the common shares and have options that, if
exercised, would increase their ownership to 17%. We believe that
management's ownership aligns its interests with those of other
shareholders.
Our business strategy -- to increase reserves, production and cash flow
profitably by emphasizing growth through the drillbit in the deepwater
Gulf -- consists primarily of the following elements:
- FOCUS ON THE DEEPWATER GULF. With our current prospect and seismic
inventory and many more deepwater Gulf lease blocks scheduled to become
available via lease sales, we believe we are well-positioned to increase
our deepwater Gulf activity and to continue to generate and exploit
prospects that are below the size thresholds of larger companies.
- MANAGE DEEPWATER RISKS. We intend to minimize our deepwater risks by
targeting projects with relatively low exploratory risks and gross
drilling costs below $20 million. We use 3-D seismic technology to
analyze direct hydrocarbon indicators and generally limit projects to
drilling depths of less than 10,000 feet below the sea floor. Also, we
intend to limit the financial exposure of our deepwater portfolio by
selling a portion of our working interests in our deepwater projects to
industry partners, typically on a promoted basis.
- APPLY OUR EXPERTISE AND EXPERIENCE. Through our technical staff's
understanding of the geology and geophysics of the deepwater Gulf, we
intend to generate the majority of our prospects internally. We also
intend to apply our deepwater operational expertise to shorten project
cycle times and manage risks by using proven equipment and procedures,
matching the facilities to the reservoir, focusing on full cycle costs
and leveraging off the experience of our vendors.
2
<PAGE> 7
PROVED PROPERTIES
Our proved properties as of June 30, 1999 are summarized in the table
below:
<TABLE>
<CAPTION>
NET
MARINER APPROXIMATE DATE PROVED
WORKING WATER DEPTH PRODUCTION RESERVES
OPERATOR INTEREST (FEET) COMMENCED/EXPECTED (BCFE)
-------- -------- ----------- ------------------ --------
<S> <C> <C> <C> <C> <C>
DEEPWATER GULF:
Mississippi Canyon
718(Pluto).................. Mariner 37%/51%(1) 2,710 November 1999 25.6
Ewing Bank 966 (Black Widow)... Mariner 45% 1,850 September 2000 14.0
Garden Banks 367 (Dulcimer).... Mariner 41.7% 1,100 April 1999 13.9
Garden Banks 240 (Mustique).... Mariner 33% 830 January 1996 6.0
Green Canyon 136(Shasta)....... Texaco 25% 1,040 November 1995 2.6
SHALLOW WATER GULF:
Brazos A-105................... Spirit Energy 12.5% 192 January 1993 12.1
Galveston 151 (Rembrandt)...... Mariner 33.3% 50 November 1996 9.4
Matagorda Island 683, 703...... Vastar 25% 112 March 1993 4.0
ONSHORE:
Spraberry Aldwell Unit......... Mariner 70.3% Onshore 1949 52.2
Sandy Lake Field............... Mariner 50%/33%(2) Onshore August 1994 6.7
OTHER FIELDS..................... -- -- -- -- 16.3
-----
TOTAL PROVED RESERVES............ 162.8
=====
</TABLE>
- -------------------------
(1) We have a 37% working interest before project payout and a 51% working
interest after project payout.
(2) We have a 50% working interest in three production units in the Sandy Lake
Field, a 40% working interest in a fourth unit and a 33% interest in the
fifth unit.
SIGNIFICANT EXPLORATION PROSPECTS
Mariner and its partners announced a discovery well with multiple
productive sands on the Aconcagua prospect in March 1999. We expect to commence
drilling an appraisal well on Aconcagua in the fourth quarter of 1999. Our
higher potential exploration prospects are summarized in the table below, all of
which are in the deepwater Gulf. As part of our risk management strategy, we
expect to sell a portion of our working interest in most of these prospects to
industry partners.
<TABLE>
<CAPTION>
CURRENT
MARINER APPROXIMATE QUARTER DRILLING
WORKING WATER DEPTH EXPECTED
OPERATOR INTEREST (FEET) TO COMMENCE
-------- -------- ----------- ----------------
<S> <C> <C> <C> <C>
Mississippi Canyon 305 (Aconcagua)...... Elf 25% 7,100 4th Quarter 1999
Mississippi Canyon 773 (Devil's
Tower)................................ Mariner 50% 5,700 4th Quarter 1999
Keathley Canyon 18 (Kilimanjaro)........ Kerr-McGee 25% 4,700 2nd Quarter 2000
East Breaks 623 (Falcon)................ Mariner 50% 3,267 1st Quarter 2001
Green Canyon 649 (Ham).................. Mariner 100% 4,400 4th Quarter 2000
Mississippi Canyon 767 (Cascade)........ Mariner 50% 4,200 4th Quarter 2000
Green Canyon 516 (Yosemite)............. Mariner 100% 4,075 2nd Quarter 2000
Mississippi Canyon 296 (Gypsy Moth)..... Texaco 23% 5,100 3rd Quarter 1999
Atwater Valley 133 (Silverfish)......... Mariner 100% 3,500 2nd Quarter 2001
Green Canyon 737 (Mighty Joe Young)..... Mariner 100% 4,450 3rd Quarter 2000
</TABLE>
3
<PAGE> 8
THE OFFERING
Common shares offered by:
Mariner.................. shares
Selling shareholders..... shares
Common shares to be
outstanding after the
offering................. shares
Voting rights.............. One vote per common share
Dividend policy............ We do not anticipate that we will pay cash
dividends in the foreseeable future.
Use of proceeds............ We expect the net proceeds to us from the offering
to be approximately $ million ($
million if the underwriters exercise their
over-allotment option). We intend to use these net
proceeds to repay all outstanding borrowings under
our revolving credit facility and under credit
facilities with ENA. We will use any remaining net
proceeds, as well as additional future borrowings
under our revolving credit facility, to fund a
portion of our exploration and development program.
See "Use of Proceeds." We will not receive any of
the proceeds of the sale of common shares by the
selling shareholders.
Risk factors............... For a discussion of factors you should consider in
making an investment, see "Risk Factors."
Proposed Nasdaq National
Market symbol............
Unless we state otherwise, the information in this prospectus does not take
into account the issuance of up to common shares that the underwriters
have the option to purchase solely to cover over-allotments. If the underwriters
exercise this option in full, common shares will be outstanding after
the offering.
The number of common shares to be outstanding immediately after the
offering does not take into account:
- 2,076,120 common shares that may be issued on the exercise of stock
options, at a weighted average price of $9.17, all of which will be
exercisable immediately following the offering; and
- common shares that may be issued upon conversion of the debt we owe under
one of the ENA credit facilities, which debt will not be outstanding
after the offering.
Unless the context indicates otherwise, the information in this prospectus,
including share and per share data, has been adjusted to give effect to our
internal reorganization in October 1998, under which each share of the common
stock of Mariner Holdings, Inc. was exchanged for 12 of our common shares. The
purpose of this reorganization was to change the form of the parent entity to a
limited liability company. Mariner Holdings, Inc. was formed in 1996 and in
April 1996 acquired all of the outstanding shares of Mariner Energy, Inc.,
formerly known as Hardy Oil & Gas USA Inc. Before April 1996, Hardy Oil & Gas
USA Inc. was an indirect wholly owned subsidiary of Hardy Oil & Gas, plc.
EXECUTIVE OFFICES
Our executive offices are located at 580 WestLake Park Blvd., Suite 1300,
Houston, Texas 77079, and our telephone number is (281) 584-5500.
4
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table shows some of our historical financial data. The
results of operations for the six months ended June 30, 1999 are not necessarily
indicative of the results for the full fiscal year. You should read the
following data in connection with "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
ACQUIRED
COMPANY(1)
----------
THREE
MONTHS NINE MONTHS YEAR ENDED SIX MONTHS ENDED
ENDED ENDED DECEMBER 31, JUNE 30,
MARCH 31, DECEMBER 31, --------------------- ---------------------
1996 1996 1997 1998 1998 1999
---------- ------------ --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................... $ 13,309 $ 47,079 $ 62,771 $ 56,690 $ 28,980 $ 25,846
Lease operating expenses......... 2,403 6,495 9,376 9,858 4,851 5,764
Depreciation, depletion and
amortization................... 6,309 24,747 31,719 33,833 16,274 15,803
Impairment of oil and gas
properties..................... -- 22,500 28,514 50,800 -- --
General and administrative
expenses....................... 712 2,406 3,195 4,749 1,853 2,821
Provision for litigation(2)...... -- -- -- 2,800 2,960 --
--------- --------- --------- --------- --------- ---------
Operating income (loss)........ 3,885 (9,069) (10,033) (45,350) 3,042 1,458
Interest income.................. 2,167 515 467 313 283 21
Interest expense................. (3,391) (7,746) (10,644) (13,384) (6,252) (9,924)
Write-off of bridge loan fees.... -- (2,392) -- -- -- --
--------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes........................ 2,661 (18,692) (20,210) (58,421) (2,927) (8,445)
Provision for income taxes....... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss).............. $ 2,661 $ (18,692) $ (20,210) $ (58,421) $ (2,927) $ (8,445)
========= ========= ========= ========= ========= =========
Basic and diluted earnings per
share(3)....................... $ (1.58) $ (1.71) $ (4.47) $ (0.24) $ (0.61)
Average outstanding shares(3).... 11,831 11,842 13,080 12,209 13,928
CASH FLOW DATA:
Net cash provided by (used in)
operating activities........... $ 5,630 $ 38,705 $ 52,878 $ 40,345 $ 20,770 $ (21,588)
Net cash used in investing
activities..................... (5,648) (216,191) (68,868) (141,855) (83,658) (19,290)
Net cash provided by financing
activities..................... -- 188,305 14,302 93,181 57,050 40,600
OTHER FINANCIAL DATA:
EBITDA(4)........................ $ 10,194 $ 38,178 $ 50,200 $ 42,083 $ 22,276 $ 17,261
Capital expenditures............. 7,648 38,977 68,868 141,855 83,658 19,290(5)
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
---------------------------
ACTUAL AS ADJUSTED(6)
---------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................................... $ 524 $
Total assets................................................................... 268,180
Total debt..................................................................... 218,648
Shareholders' equity........................................................... 19,089
</TABLE>
- -------------------------
(1) Effective April 1, 1996 for accounting purposes, our predecessor, Mariner
Holdings, Inc. acquired all the capital stock of Mariner Energy, Inc. from a
subsidiary of Hardy Oil & Gas, plc, as part of a management-led buyout. In
connection with this acquisition, a substantial amount of our intercompany
indebtedness and receivables and third-party indebtedness were eliminated.
This acquisition was accounted for using the purchase method of
5
<PAGE> 10
accounting. Mariner Holdings, Inc.'s cost of acquiring us was allocated to our
assets and liabilities based on estimated fair values. As a result, our
financial position and operating results subsequent to this acquisition reflect
a new basis of accounting and are not comparable to prior periods. "Acquired
Company" refers to Mariner Energy, Inc. (formerly Hardy Oil & Gas USA Inc.)
before the effective date of this acquisition.
(2) Represents a non-cash charge recorded in the first quarter of 1998 to
provide for a litigation-related cost contingency. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(3) Basic earnings per share and average shares outstanding are not presented
for the three months ended March 31, 1996, as our capital structure before
the acquisition is not comparable.
(4) EBITDA means earnings before interest, income taxes, depreciation, depletion
and amortization, provision for litigation and impairment of oil and gas
properties. We believe that EBITDA is a widely accepted financial indicator
that provides additional information about our ability to meet our future
requirements for debt service, capital expenditures and working capital, but
EBITDA should not be considered in isolation or as a substitute for net
income, operating income, net cash provided by operating activities or any
other measure of financial performance presented in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity. Our definition of EBITDA may not be comparable
to similarly titled measures of other companies.
(5) Our capital expenditures for the first six months of 1999 were $39.1
million, excluding $19.8 million related to our sale of a working interest
in the Pluto project.
(6) Adjusted to reflect the sale of common shares in this offering at a
purchase price of $ per share and the payment of all of our debt to
ENA and of all of our debt under our revolving credit facility.
6
<PAGE> 11
SUMMARY OPERATING AND RESERVE DATA
The following table shows some of our operating and reserve data. Reserve
data are based on reserve reports prepared by Ryder Scott Company, L.P. A
summary of Ryder Scott's report on our proved reserves as of June 30, 1999 is
attached to this prospectus as Annex A. You should refer to "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business and Properties -- Reserves," "Business and
Properties -- Production" and the Ryder Scott report included in this prospectus
in evaluating the material presented below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PRODUCTION:
Oil (MBbls)................................ 750 977 786 441 348
Natural gas (MMcf)......................... 20,429 18,004 19,477 9,483 10,583
Natural gas equivalent (MMcfe)............. 24,929 23,866 24,193 12,129 12,671
Average daily production (MMcfe)........... 68 65 66 67 70
AVERAGE REALIZED SALES PRICES (INCLUDING
EFFECTS OF HEDGING):
Oil (per Bbl).............................. $ 18.04 $ 18.48 $ 12.80 $ 13.59 $ 13.28
Natural gas (per Mcf)...................... 2.29 2.48 2.39 2.42 2.01
Natural gas equivalent (per Mcfe).......... 2.42 2.63 2.34 2.39 2.04
EXPENSES (PER MCFE):
Lease operating............................ 0.36 0.39 0.41 0.40 0.45
General and administrative, net(1)......... 0.13 0.13 0.20 0.15 0.22
Depreciation, depletion and amortization,
before impairment provision............. 1.25 1.33 1.40 1.34 1.25
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------- AS OF JUNE 30,
1996 1997 1998 1999
--------- --------- --------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
PROVED RESERVES:
Total proved reserves (MMcfe)............... 123,964 161,146 185,049 162,793(2)
Annual reserve replacement ratio(3)......... 124% 256% 199%
Present value of estimated future net
revenues(4).............................. $303,363 $183,829 $147,629 $177,920
Standardized measure of discounted net cash
flows(5)................................. 254,376 176,459 147,629
Average prices at indicated date:
Natural gas (per Mcf).................... $ 4.50 $ 2.79 $ 2.22 $ 2.42
Oil (per Bbl)............................ 25.16 16.43 10.36 17.52
</TABLE>
- -------------------------
(1) General and administrative expenses are shown net of amounts capitalized
under the full cost method of accounting and overhead reimbursements we
receive from owners of working interests in the properties we operate.
(2) In June 1999, we sold a portion of our working interest in the Pluto
project, resulting in a reduction to our proved reserves of 14.4 MMcfe.
(3) We calculate the annual reserve replacement ratio for a year by dividing
aggregate net reserve additions from all sources for the year by actual
production for the year ended on the indicated date.
(4) Discounted at an annual rate of 10%. See "Glossary of Oil and Natural Gas
Terms" included elsewhere in this prospectus for the definition of
"present value of estimated future net revenues."
(5) Represents after-tax present value of estimated future net revenues, if
applicable.
7
<PAGE> 12
RISK FACTORS
Investing in our common shares will provide you with an equity ownership
interest in Mariner. The trading price of your shares will be affected by the
performance of our business relative to, among other things, competition, market
conditions and general economic and industry conditions. The value of your
investment may decrease, resulting in a loss. You should consider carefully the
following factors and the other information contained in this prospectus before
deciding to invest in our common shares. The following important factors could
affect our actual future results.
EXPLORING AND DEVELOPING OIL AND NATURAL GAS WELLS INVOLVE BUSINESS AND
OPERATING RISKS AND OTHER UNINSURED RISKS, ANY ONE OF WHICH COULD ADVERSELY
AFFECT OUR BUSINESS.
Our oil and natural gas drilling activities are subject to numerous risks
beyond our control, including the risk that drilling will not result in
commercially viable oil or natural gas production. Our decisions to purchase,
explore, develop or otherwise exploit prospects or properties will depend in
part on the evaluation of data obtained through geophysical and geological
analyses, production data and engineering studies, the results of which are
often inconclusive or subject to varying interpretations. See "-- Reserve
estimates depend on many assumptions that may turn out to be inaccurate." Our
cost of drilling, completing and operating wells, especially offshore wells, is
often uncertain before drilling commences. Overruns in budgeted expenditures are
common risks that can make a particular project uneconomical. Further, many
factors may curtail, delay or cancel drilling, including the following:
- title problems;
- weather conditions;
- compliance with governmental permitting requirements;
- shortages of or delays in obtaining equipment;
- reductions in product prices; and
- limitations in the market for products.
Losses and liabilities arising from uninsured and underinsured events could
have a material adverse effect on our financial condition and operations. Our
oil and natural gas business is subject to all of the operating risks associated
with drilling for and producing oil and natural gas, including:
- uncontrollable flows of oil, natural gas, brine or well fluids into the
environment, including groundwater and shoreline contamination;
- blowouts and cratering;
- mechanical difficulties;
- fires and explosions;
- personal injuries and death;
- pollution;
- natural disasters; and
- environmental hazards such as natural gas leaks, oil spills, pipeline
ruptures and discharges of toxic gases.
Any of these risks could result in substantial losses to us and others.
Moreover, offshore operations are subject to a variety of operating risks
associated with the marine environment, such as hurricanes or other adverse
weather conditions, and to interruption or termination by government authorities
based on environmental or other considerations. Although we maintain insurance
at levels we believe are consistent with industry practices, we are not fully
insured against all risks.
8
<PAGE> 13
OUR DEEPWATER OPERATIONS INVOLVE SPECIAL RISKS THAT COULD NEGATIVELY AFFECT OUR
OPERATIONS.
Drilling operations in the deepwater are by their nature more difficult and
costly than drilling operations in shallower water. They require longer time
frames and the application of more advanced drilling technologies, involving a
higher risk of technological failure and usually resulting in significantly
higher drilling costs. Our deepwater wells are completed using subsea completion
techniques that involve the installation of subsea wellheads and the use of
bundled flow lines to tie back to production facilities. The installation of
these subsea wellheads and bundled flow lines requires substantial time and the
use of advanced remote installation mechanics. These operations involve a high
risk of encountering mechanical difficulties and equipment failures that, if
encountered, could result in significant cost overruns. Furthermore, the
deepwater operations lack the physical and oilfield service infrastructure
present in shallower waters. Therefore, they require a longer lag time between
discovery and marketing, increasing the risk involved with these operations.
OIL AND NATURAL GAS PRICE DECREASES MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION
AND OUR ABILITY TO MEET OUR CAPITAL EXPENDITURE OBLIGATIONS AND FINANCIAL
COMMITMENTS.
The price we receive for production heavily influences our revenue,
profitability, access to capital and future rate of growth. Oil, natural gas and
natural gas liquids are commodities and, therefore, their prices are subject to
wide fluctuations in response to relatively minor changes in supply and demand.
Historically, the markets for oil, natural gas and natural gas liquids have been
volatile. These markets may continue to be volatile in the future. The prices we
receive for our production, and the levels of our production, are subject to
wide fluctuations and depend on numerous factors beyond our control. These
factors include:
- market uncertainty;
- changes in global supply of and demand for oil, natural gas and natural
gas liquids;
- weather conditions;
- the condition of the United States economy;
- the price and quantity of foreign imports;
- the price and availability of alternative fuels;
- political conditions, including embargoes, in or affecting other
oil-producing and natural gas-producing countries;
- the actions of the Organization of Petroleum Exporting Countries; and
- domestic and foreign government regulation, legislation and policies.
It is impossible to predict oil and natural gas price movements with
certainty. Lower oil and natural gas prices may not only decrease our revenues
on a per unit basis but also may reduce the amount of oil and natural gas that
we can produce economically. Declines in oil and natural gas prices may
materially and adversely affect our future financial condition, results of
operations, liquidity and ability to finance planned capital expenditures and
repay outstanding amounts under our revolving credit facility and other
indebtedness. Further, oil prices and natural gas prices do not necessarily move
together. Because approximately 67% of our estimated proved reserves as of June
30, 1999 were natural gas reserves, our financial results are more sensitive to
movements in natural gas prices. See "-- We may not be able to raise sufficient
additional capital to implement fully our business plan" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
OIL OR NATURAL GAS PRICE DECREASES AND OTHER EVENTS MAY REQUIRE US TO RECORD
CARRYING VALUE WRITEDOWNS, WHICH WOULD RESULT IN A CHARGE TO EARNINGS.
We periodically review the carrying value of our oil and natural gas
properties under the full cost accounting rules of the Securities and Exchange
Commission. Under these rules, capitalized costs of oil
9
<PAGE> 14
and natural gas properties may not exceed the present value of estimated future
net revenues from proved reserves, discounted at 10%, plus the lower of cost or
fair market value of unproved properties. Application of this "ceiling" test
generally requires pricing future revenues at the prices in effect as of the end
of each fiscal quarter and requires a writedown of the carrying value of oil and
natural gas properties, resulting in a non-cash charge against earnings for
accounting purposes if the ceiling is exceeded, even if prices declined for only
a short period of time. These writedowns cannot be reversed even if prices
increase later. The risk that we will be required to write down the carrying
value of our oil and natural gas properties increases when oil and natural gas
prices are depressed or decline substantially or when there is an extended delay
in recognizing proved reserves associated with significant capital expenditures.
When a writedown is required, it results in a charge to earnings but does not
affect our cash flow from operating activities. In the last three fiscal years,
we have recorded three writedowns. We refer to writedowns as impairments of oil
and gas properties. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 1 of our consolidated financial
statements.
OUR HEDGING TRANSACTIONS COULD LIMIT POTENTIAL GAINS IF OIL AND NATURAL GAS
PRICES RISE SUBSTANTIALLY.
To reduce our exposure to fluctuations in the prices of oil and natural
gas, we regularly enter into hedging transactions for our oil and natural gas
production and intend to continue doing so. These transactions may limit our
potential gains if oil and natural gas prices rise substantially over the price
the hedges establish. These hedges also may expose us to the risk of financial
loss in other circumstances, including instances in which our production is less
than expected. The revolving credit facility limits our ability to enter into
hedging transactions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 7 of our consolidated financial
statements.
WE MAY NOT BE ABLE TO RAISE SUFFICIENT ADDITIONAL CAPITAL TO IMPLEMENT FULLY OUR
BUSINESS PLAN.
We depend on our ability to obtain financing for operations beyond our
internally generated cash flow. Historically, we have financed these activities
primarily with bank borrowings, proceeds from the sale of oil and natural gas
properties, the issuance of notes, privately raised equity and borrowings from
ENA. In the future, we will require substantial additional financing to fund our
business plan and operations. We cannot assure you that additional financing
will be available on acceptable terms or at all. If additional capital resources
are unavailable, we may curtail our drilling, development and other activities
or be forced to sell some of our assets on an untimely or unfavorable basis.
We expect to continue using our revolving credit facility to borrow funds
to supplement our available cash. The amount we may borrow under our revolving
credit facility is determined by the lenders in their sole discretion, based on
the lenders' projections of our future net revenues, commodity prices, industry
conditions and other considerations. The lenders may adjust the borrowings
permitted under our revolving credit facility semiannually and on one other
occasion each year. If our borrowings exceed the lenders' limit, the lenders may
require that we repay borrowings in excess of the limit. If our borrowing base
is decreased, we may not be able to finance future activities contemplated in
our current business plan or make any mandatory principal payments required by
the lenders. We expect to use the proceeds of the offering to repay borrowings
under our revolving credit facility. Our revolving credit facility also
restricts the amounts we may borrow from other sources. For a description of our
revolving credit facility and its principal terms and conditions, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We expect our capital expenditures to be approximately $50 million for 1999
and approximately $100 million for 2000. Capital expenditures planned for 1999
and 2000 may exceed our available sources of cash flow from internal sources and
our revolving credit facility. In September 1998, we established a credit
facility with ENA to help fund our capital expenditures during 1998. Amounts
owed under this credit facility are due on April 30, 2000, unless converted into
our common shares at ENA's option. In April 1999, we established a $25 million
senior credit facility with ENA that is due and payable on December 31, 1999.
After the offering, both credit facilities with ENA will expire and we will not
be able to borrow additional amounts under either credit facility. See "Use of
Proceeds," "Management's
10
<PAGE> 15
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity, Capital Expenditures and Capital Resources" and
"Certain Relationships and Related Transactions."
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO SERVICE OUR EXISTING
INDEBTEDNESS OR ENSURE THAT FUTURE CREDIT WILL BE AVAILABLE TO US.
At June 30, 1999, after giving pro forma effect to the offering, we would
have had total indebtedness of approximately $ million and shareholders'
equity of approximately $ million. We intend to incur additional indebtedness
after the offering as we execute our business strategy.
Our leverage could have important consequences, including the following:
- our ability to refinance existing debt or obtain additional debt or
equity financing may be impaired in the future;
- a substantial portion of our cash flow from operations will be required
for the payment of principal and interest on our indebtedness, which will
reduce the funds available to us for our operations and other purposes;
- we may be substantially more leveraged than our competitors, which may
place us at a competitive disadvantage; and
- we may be unable to adjust rapidly to changing market conditions.
These consequences could make us more vulnerable than a less leveraged
competitor in the event of a downturn in general economic conditions or our
business. See "-- We may not be able to raise sufficient additional capital to
implement fully our business plan," "Capitalization," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Our ability to make scheduled payments or to refinance our indebtedness
depends on our future performance and successful implementation of our strategy,
both of which are subject not only to our actions but also to general economic,
financial, competitive, legislative and regulatory conditions, the prevailing
market prices for oil, natural gas and natural gas liquids and other factors
beyond our control. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity, Capital Expenditures and
Capital Resources."
RESTRICTIVE DEBT COVENANTS LIMIT OUR OPERATIONAL AND CAPITAL FLEXIBILITY.
Our revolving credit facility and the indenture relating to our subsidiary
Mariner Energy, Inc.'s 10 1/2% senior subordinated notes due 2006 contain
significant covenants that, among other things, restrict our ability to:
- dispose of assets;
- incur additional indebtedness;
- repay other indebtedness;
- pay dividends;
- enter into specified investments or acquisitions;
- repurchase or redeem capital stock;
- merge or consolidate; or
- engage in specified transactions with subsidiaries and affiliates and
that otherwise restrict corporate activities.
These restrictions could adversely affect our ability to finance our future
operations or capital needs or engage in other business activities that may be
in our interest.
11
<PAGE> 16
Also, our revolving credit facility requires us to maintain compliance with
the financial ratios included in that facility. Our ability to comply with these
ratios may be affected by events beyond our control. A breach of any of these
covenants or our inability to comply with the required financial ratios could
result in a default under our revolving credit facility. If a default were to
occur, the lenders could require us to repay all borrowings outstanding under
our revolving credit facility, require us to apply all of our available cash to
repay these borrowings or prevent us from making debt service payments on the
senior subordinated notes. We cannot assure you that, if the indebtedness under
the revolving credit facility or the senior subordinated notes were accelerated,
our assets would be sufficient to repay this indebtedness in full. See Note 4 of
our consolidated financial statements.
RESERVE ESTIMATES DEPEND ON MANY ASSUMPTIONS THAT MAY TURN OUT TO BE INACCURATE.
ANY MATERIAL INACCURACIES IN THESE RESERVE ESTIMATES OR UNDERLYING ASSUMPTIONS
WILL MATERIALLY AFFECT THE QUANTITIES AND PRESENT VALUE OF OUR RESERVES.
The process of estimating oil and natural gas reserves is complex. It
requires interpretations of available technical data and many assumptions,
including assumptions relating to economic factors. Any significant inaccuracies
in these interpretations or assumptions could materially affect the estimated
quantities and present value of reserves shown in this prospectus. See "Business
and Properties -- Reserves."
In order to prepare these estimates we must project production rates and
timing of development expenditures. We must also analyze available geological,
geophysical, production and engineering data. The extent, quality and
reliability of this data can vary. The process also requires economic
assumptions about matters such as natural gas and oil prices, drilling and
operating expenses, capital expenditures, taxes and availability of funds.
Therefore, estimates of oil and natural gas reserves are inherently imprecise.
Actual future production, oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and natural gas reserves most likely will vary from our estimates. Any
significant variance could materially affect the estimated quantities and
present value of reserves shown in this prospectus. In addition, we may adjust
estimates of proved reserves to reflect production history, results of
exploration and development, prevailing oil and natural gas prices and other
factors, many of which are beyond our control. At June 30, 1999, 53% of our
proved reserves were either proved undeveloped or proved non-producing.
You should not assume that the present value of future net revenues from
our proved reserves referred to in this prospectus is the current market value
of our estimated oil and natural gas reserves. In accordance with SEC
requirements, we generally base the estimated discounted future net cash flows
from our proved reserves on prices and costs on the date of the estimate. Actual
future prices and costs may differ materially from those used in the present
value estimate.
A SIGNIFICANT PART OF THE VALUE OF OUR PRODUCTION AND RESERVES IS CONCENTRATED
IN A SMALL NUMBER OF PROPERTIES. BECAUSE OF THIS CONCENTRATION, ANY PRODUCTION
PROBLEMS OR INACCURACIES IN RESERVE ESTIMATES RELATED TO THOSE PROPERTIES ARE
MORE LIKELY TO IMPACT OUR BUSINESS ADVERSELY.
During June 1999, over 84% of our daily production came from seven of our
fields. If mechanical problems, storms or other events curtailed a substantial
portion of this production, our cash flow would be affected adversely. Also, at
June 30, 1999, approximately 90% of our proved reserves were located on 10
properties. If the actual reserves associated with any one of these properties
are less than our estimated reserves, our results of operations and financial
condition could be adversely affected.
UNLESS WE REPLACE OUR OIL AND NATURAL GAS RESERVES, OUR RESERVES AND PRODUCTION
WILL DECLINE.
Without reserve additions in excess of production, our reserves and
production will decline. Producing oil and natural gas reservoirs generally are
characterized by declining production rates that vary depending upon reservoir
characteristics and other factors. Our future oil and natural gas reserves and
production, and, therefore, our cash flow and income, are highly dependent on
our success in efficiently developing and
12
<PAGE> 17
exploiting our current reserves and economically finding additional recoverable
reserves. We cannot assure you that we will be able to find and develop or
acquire additional reserves to replace our current and future production.
RELATIVELY SHORT PRODUCTION PERIODS FOR GULF PROPERTIES SUBJECT US TO HIGHER
RESERVE REPLACEMENT NEEDS AND MAY IMPAIR OUR ABILITY TO REDUCE PRODUCTION DURING
PERIODS OF LOW OIL AND NATURAL GAS PRICES.
Production of reserves from reservoirs in the Gulf generally declines more
rapidly than from reservoirs in many other producing regions of the world. This
results in recovery of a relatively higher percentage of reserves from
properties in the Gulf during the initial few years of production, and as a
result, our reserve replacement needs from new prospects are relatively greater.
Also, our revenues and return on capital will depend significantly on
prices prevailing during these relatively short production periods. Our
potential need to generate revenues to fund ongoing capital commitments or
reduce indebtedness may limit our ability to slow or shut-in production from
producing wells during periods of low prices for oil and natural gas.
MARKET CONDITIONS OR OPERATIONAL IMPEDIMENTS MAY HINDER OUR ACCESS TO OIL AND
NATURAL GAS MARKETS OR DELAY OUR PRODUCTION.
Market conditions, the unavailability of satisfactory oil and natural gas
transportation arrangements or the remote location of our drilling operations
may hinder our access to oil and natural gas markets or delay our production.
The availability of a ready market for our oil and natural gas production
depends on a number of factors, including the demand for and supply of oil and
natural gas and the proximity of reserves to pipelines or trucking and terminal
facilities. In offshore operations, the availability of a ready market depends
on the proximity of and our ability to tie into existing production platforms
owned or operated by others and the ability to negotiate commercially
satisfactory arrangements with the owners or operators. We may be required to
shut-in natural gas wells for lack of a market or because of inadequacy or
unavailability of natural gas pipeline or gathering system capacity. When that
occurs, we are unable to realize revenue from those wells until the production
can be tied to a gathering system. As a result of our strategy of using subsea
technology to tie offshore wells back to existing platforms, we sometimes drill
away from gathering systems. Currently, we have drilling operations miles from
existing infrastructure. This can result in considerable delays from the initial
discovery of a reservoir to the actual production of the oil and natural gas and
realization of revenues.
WE MAY HAVE TO PAY ABOVE-MARKET RATES FOR A LONG-TERM DRILLING RIG.
Along with another company, on an equally shared basis, in February 1998 we
executed a letter of intent with a third party to use a drilling rig. The third
party is converting the drilling rig for use in the deepwater Gulf. The letter
of intent provided for a five-year term for the drilling rig beginning in early
2000. We are currently in discussions with the third party to determine if a
mutually acceptable contract can be negotiated. If a long-term contract is
executed, it may require us to pay day rates in excess of market-based rates
over the contract term that could cause significant increased costs on our
projects.
THE UNAVAILABILITY OR HIGH COST OF ADDITIONAL DRILLING RIGS, EQUIPMENT, SUPPLIES
AND PERSONNEL COULD ADVERSELY AFFECT OUR ABILITY TO EXECUTE ON A TIMELY BASIS
OUR EXPLORATION AND DEVELOPMENT PLANS WITHIN BUDGET.
Shortages or the high cost of drilling rigs, equipment, supplies or
personnel could delay or adversely affect our development and exploration
operations, which could have a material adverse effect on our financial
condition and results of operations. If drilling activity in the United States
increases, associated costs may also increase, including more related to
drilling rigs, equipment, supplies and personnel and the services and products
of other vendors to the industry. Increased drilling activity in the Gulf could
decrease the availability and increase the costs of offshore rigs. We cannot
assure you that costs will not increase or that necessary equipment and services
will be available to us at economical prices.
13
<PAGE> 18
COMPETITION IN THE OIL AND NATURAL GAS INDUSTRY IS INTENSE, AND WE MAY BE UNABLE
TO COMPETE SUCCESSFULLY.
We may not be able to compete successfully in our industry. We operate in a
highly competitive environment for acquiring prospects, marketing oil and
natural gas and securing trained personnel. Many of our competitors possess and
employ financial, technical and personnel resources substantially greater than
ours, which can be particularly important in deepwater Gulf activities. Those
companies may be able to pay more for productive oil and natural gas properties
and exploratory prospects and to define, evaluate, bid for and purchase a
greater number of properties and prospects than our financial or personnel
resources permit. Our ability to acquire additional prospects and to discover
reserves in the future will depend on our ability to evaluate and select
suitable properties and to consummate transactions in a highly competitive
environment. Also, there is substantial competition for capital available for
investment in the oil and natural gas industry. We cannot assure you that we
will be able to compete successfully in the future in acquiring prospective
reserves, developing reserves, marketing hydrocarbons, attracting and retaining
quality personnel and raising additional capital.
GOVERNMENT LAWS AND REGULATIONS CAN INCREASE OUR COSTS.
From time to time, in varying degrees, political developments and federal
and state laws and regulations affect our operations. In particular, price
controls, taxes and other laws relating to the oil and natural gas industry,
changes in these laws and changes in administrative regulations have affected
oil and natural gas production, operations and economics. We cannot predict how
agencies or courts will interpret existing laws and regulations, whether
additional laws and regulations will be adopted or the effect these
interpretations and adoptions may have on our business or financial condition.
Our operations are subject to complex and constantly changing federal,
state and local environmental laws and regulations. The discharge of oil and
natural gas and production wastes or other pollutants into the air, soil or
water may make us liable to the government and third parties for remediation
costs and other damages. Also, we may have to make large expenditures to comply
with environmental and other governmental regulations. We cannot assure you that
existing environmental laws or regulations, as currently interpreted or
reinterpreted in the future, or future laws or regulations, will not materially
adversely affect our operations and financial condition or that material
indemnity claims will not arise against us related to properties we acquire or
sell. See "Business and Properties -- Regulation."
WE MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO RETAIN OUR KEY EXECUTIVES AND
CONSULTANTS.
We believe that our operations are dependent to a significant extent on the
efforts of several members of our senior management and one of our consultants,
most of whom have been with us for more than 15 years. The loss of the services
of any of these key individuals could have a material adverse effect on us. We
do not maintain any insurance against the loss of any of these individuals.
ENRON WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL OVER US; ENRON'S INTERESTS
MAY CONFLICT WITH OURS AND ENRON MAY NOT RESOLVE THESE CONFLICTS IN OUR FAVOR.
Enron Corp. is the parent of ENA. An affiliate of Enron and ENA is the
general partner of JEDI, which currently owns approximately 96% of our
outstanding common shares and will own approximately % of our outstanding
common shares following the offering. Also, seven of our directors are officers
of Enron or of affiliates of Enron. As the owners of a significant portion of
our outstanding common shares, Enron and ENA will have the ability to influence
our management and may be deemed to control us. Enron and certain of its
subsidiaries and other affiliates collectively participate in nearly all phases
of the oil and natural gas industry and may, therefore, compete with us. Also,
Enron affiliates may provide or arrange for financing for our competitors.
Because of these various possible conflicting interests, our
14
<PAGE> 19
company agreement, which is analogous to the certificate of incorporation and
bylaws of a corporation, includes provisions designed to clarify that Enron and
its affiliates have no duty to make business opportunities available to us and
no duty to refrain from conducting activities that may be competitive with us.
Enron and its affiliates will not necessarily resolve conflicts of interest that
arise in our favor. See "Description of Our Company Agreement and Common
Shares."
In September 1998 and April 1999, we entered into two credit facilities
with ENA, under which we have borrowed an aggregate of $75 million. We are
required to repay all amounts outstanding under both facilities with ENA with a
portion of the proceeds of the offering. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity, Capital Expenditures and Capital Resources."
We expect that from time to time we will engage in various commercial
transactions and have various commercial relationships with Enron and certain
affiliates of Enron. The terms of future arrangements between us and Enron or
affiliates of Enron will not necessarily be on terms as favorable to us as would
exist in an agreement with a third party. See "Certain Relationships and Related
Transactions."
IF A CHANGE OF CONTROL OCCURS, WE WOULD HAVE TO REPAY INDEBTEDNESS. WE MAY NOT
HAVE THE FINANCIAL RESOURCES TO MEET THIS OBLIGATION.
If a change of control occurs, we may not have the financial resources to
repay all of our indebtedness that would become payable. On the occurrence of a
change of control of Mariner Energy, Inc., a holder of senior subordinated notes
may require Mariner Energy, Inc. to repurchase all or a portion of the holder's
notes at 101% of the principal amount of the notes, together with accrued and
unpaid interest to the date of repurchase. An aggregate of $100 million
principal amount of the senior subordinated notes is outstanding. The senior
subordinated notes indenture requires that, prior to this repurchase, we must
either repay all outstanding senior indebtedness or obtain any required consents
to the repurchase. A change of control of Mariner Energy, Inc. will be deemed to
have occurred under the terms of the indenture if:
- JEDI and its affiliates cease to beneficially own 35% of the voting power
of Mariner Energy, Inc. and another person or entity acquires a greater
ownership in Mariner Energy, Inc. than JEDI; and
- during any two-year period, the directors of Mariner Energy, Inc. at the
beginning of that period, and their nominees, cease to control the board
of directors of Mariner Energy, Inc.; or
- Mariner Energy, Inc. merges or consolidates with another entity and the
stockholders of Mariner Energy, Inc. do not hold a majority of the voting
power of the surviving entity.
Further, under our revolving credit facility, an event of default is deemed
to occur if JEDI and its affiliates, or a combination of these entities, cease
to own, directly or indirectly, outstanding capital shares of Mariner, on either
a basic or diluted basis, that in the aggregate permits these entities to elect
a majority of our board of directors. In those circumstances, the lenders could
require the repayment of all outstanding borrowings under the revolving credit
facility.
OUR COMMON SHARES HAVE NOT BEEN PUBLICLY TRADED, SO THE COMMON SHARE PRICE IS
LIKELY TO BE VOLATILE, AND WE CANNOT PREDICT THE EXTENT TO WHICH A TRADING
MARKET WILL DEVELOP FOR OUR COMMON SHARES.
Before the offering, there has been no public market for the common shares.
We cannot assure you that an active trading market will develop, or, if
developed, will continue upon completion of the offering. The initial public
offering price of the common shares will be determined by negotiations between
us and the underwriters and may not be indicative of the market price of the
common shares after the offering. For a discussion of the factors to be
considered in determining the initial public offering price, see "Underwriting."
The market price of the common shares could be subject to significant
fluctuations in response to changes in oil and natural gas prices, variations in
quarterly and yearly operating results, the success of our business strategy,
general trends in the oil and natural gas industry, competition, changes in
federal
15
<PAGE> 20
regulations affecting us or the oil and natural gas industry and other factors.
In addition, the stock market in recent years has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of affected companies. These broad fluctuations may
adversely affect the market price of the common shares.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase common shares, the tangible net book value of your common
shares will immediately be diluted by approximately $ per share. See
"Dilution."
OUR DEBT INSTRUMENTS RESTRICT OUR ABILITY TO PAY DIVIDENDS, AND WE DO NOT INTEND
TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
Our debt instruments restrict us from declaring or paying dividends on the
common shares. We do not intend to pay cash dividends on the common shares in
the foreseeable future. See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT SHAREHOLDERS COULD ADVERSELY
AFFECT OUR COMMON SHARE PRICE.
Sales of a substantial number of common shares after the offering could
adversely affect the market price of common shares and could impair our ability
to raise capital through the sale of equity securities. After giving effect to
the offering, we will have approximately common shares,
assuming no exercise of the underwriters' over-allotment option. Of these,
approximately may be freely tradeable in the public market
following the offering.
Also, JEDI holds 13,334,184 common shares and ENA has the right to convert
debt and accrued interest into 3,554,290 common shares as of August 31, 1999. We
have granted JEDI and ENA demand and piggyback registration rights related to
these shares. The exercise of these rights would permit JEDI and ENA to sell all
or a portion of these shares. The sale by JEDI or ENA of a significant number of
common shares could adversely impact the market price of the common shares. See
"Shares Eligible for Future Sale."
ANTI-TAKEOVER PROVISIONS IN OUR GOVERNING DOCUMENTS AND DEBT INSTRUMENTS COULD
PREVENT OR DELAY A CHANGE IN CONTROL.
Our company agreement and our debt instruments contain provisions that may
delay, deter or prevent the acquisition of us or a substantial portion of the
common shares. For example, our company agreement authorizes our board of
directors to issue preferred shares in one or more series and to fix the rights
and preferences of the shares of a series without shareholder approval. Any
series of preferred shares may be senior to the common shares as to dividends,
liquidation rights and, possibly, voting rights of the common shares. The
ability to issue preferred shares could discourage unsolicited acquisition
proposals. Also, on a change of control of Mariner Energy LLC or Mariner Energy,
Inc., we may be required to repay or repurchase outstanding debt at a premium to
the principal amount of the debt. Furthermore, our company agreement includes a
provision of Delaware corporate law not normally applicable to Delaware limited
liability companies that prohibits, in some circumstances, significant
transactions without the approval of the board of directors. These provisions
also may discourage attempted acquisitions, unsolicited or otherwise. By
deterring takeover attempts, these provisions could inhibit an increase in the
market price of the common shares that otherwise might result from a takeover
attempt. See "Description of Our Company Agreement and Common Shares."
WE AND OUR SUPPLIERS MAY NOT BE YEAR 2000 COMPLIANT, WHICH COULD RESULT IN
DISRUPTION OF OUR OPERATIONS.
Actual effects of the year 2000 issue are uncertain. Our year 2000 program
may not completely identify every potential problem that may arise. Our
inability to solve completely all potential problems or address all potentially
affected systems could partially hurt our business. Likewise our business
suppliers and partners may experience unanticipated year 2000 problems that
could in turn effect our operation.
16
<PAGE> 21
We have relied on representations from third parties that our systems and the
systems of third parties with whom we conduct business are year 2000 compliant.
However, because of the difficulty in anticipating all effects of the year 2000
issue, these representations are not guaranties.
If there are year 2000 related failures in our critical systems or our
business suppliers' and partners' critical systems that create substantial or
prolonged complications to our business, the adverse impact on us could
materially affect our financial conditions or results of operations.
17
<PAGE> 22
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements. These statements express, or are based on, our expectations about
future events. These include such matters as:
- amount, nature and timing of capital expenditures;
- drilling of wells;
- timing and amount of future production of oil and natural gas;
- operating costs and other expenses;
- cash flow and anticipated liquidity;
- prospect development and property acquisitions;
- marketing of oil and natural gas; and
- year 2000 compliance activities.
There are many factors that could cause these forward-looking statements to
be incorrect, including, but not limited to, the risks described under "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." These factors include, among others:
- the risks associated with exploration;
- our ability to find, acquire, market, develop and produce new properties;
- natural gas and oil price volatility;
- uncertainties in the estimation of proved reserves and in the projection
of future rates of production and timing of development expenditures;
- operating hazards attendant to the oil and natural gas business;
- downhole drilling and completion risks that result in losses or
liabilities that are generally not recoverable from third parties or
insurance;
- potential mechanical failure or underperformance of significant wells;
- climatic conditions;
- availability and cost of material and equipment;
- delays in anticipated start-up dates;
- actions or inactions of third-party operators of our properties;
- our ability to find and retain skilled personnel;
- availability of capital;
- the strength and financial resources of our competitors;
- regulatory developments;
- environmental risks;
- year 2000 compliance actions; and
- general economic conditions.
When you consider these forward-looking statements, you should keep in mind
these risk factors and the other cautionary statements in this prospectus. Our
forward-looking statements speak only as of the date made.
18
<PAGE> 23
USE OF PROCEEDS
Our net proceeds from the offering are estimated to be approximately $
million, or $ million if the underwriters exercise their over-allotment
option in full. We will use the net proceeds as follows:
- $ million to repay amounts then outstanding under our revolving
credit facility;
- $ million to repay all amounts then outstanding under the credit
facilities with ENA; and
- any remaining net proceeds, as well as additional future borrowings under
our revolving credit facility, to continue funding our exploration and
development program.
We used the proceeds we received during the last year from our borrowings
under our revolving credit facility and our credit facilities with ENA to
finance our exploration and development activities.
As of June 30, 1999, the balance on our revolving credit facility was
approximately $44 million. The indebtedness under our revolving credit facility,
which has a variable interest rate, bore interest at approximately 7% per annum
as of June 30, 1999 and has a final maturity date of October 1, 2002. As of June
30, 1999, the balance on the ENA credit facility was $50 million and
indebtedness under the ENA credit facility bore interest at approximately 9.5%
per annum. The balance on the senior credit facility with ENA as of June 30,
1999 was $25 million and bore interest at approximately 7.5% per annum. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity, Capital Expenditures and Capital Resources."
After the offering, both of our credit facilities with ENA will terminate;
otherwise the ENA credit facility would terminate on December 31, 1999 and the
senior credit facility with ENA would expire on April 30, 2000. We will not
receive any proceeds from the sale of common shares by the selling shareholders.
DIVIDEND POLICY
We have not paid cash dividends since our formation in 1996 and do not
anticipate paying cash dividends in the foreseeable future. We presently intend
to retain any future earnings to finance our exploration and development
program. Also, covenants in our debt instruments prohibit or significantly
restrict our ability to pay dividends. The declaration and payment in the future
of any cash dividends will be at the election of our board of directors and will
depend on our earnings, capital requirements and financial position, future loan
covenants, general economic conditions and other pertinent factors.
19
<PAGE> 24
DILUTION
Our net tangible book value as of June 30, 1999, was $19.1 million, or
$1.37 per common share. Net tangible book value per share represents the amount
of our total tangible assets less the amount of our total liabilities divided by
the total number of common shares outstanding. After giving effect to our sale
of common shares in the offering, and after deducting the underwriting
discounts and our estimated offering expenses, the net tangible book value on
June 30, 1999, would have been $ million, or $ per common share.
This represents an immediate increase in net tangible book value of $ per
share to existing shareholders and an immediate dilution of $ per share to
investors purchasing common shares in the offering.
The following table illustrates this dilution per common share to investors
purchasing shares in the offering:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net tangible book value per share as of June 30, 1999..... $
Increase in net tangible book value per share attributable
to the sale of shares offered in this prospectus....... $
Pro forma net tangible book value per share after the
offering.................................................. $
Dilution in net tangible book value per share to new
investors................................................. $
</TABLE>
The following table shows the number of common shares purchased from us,
the total consideration paid, and the average price per share paid by existing
shareholders and by purchasers of common shares offered in the offering, before
deducting underwriting discounts and commissions and estimated offering
expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------------- --------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
-------------- ---------- -------------- ---------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing shareholders...... % $ %
New investors..............
Total............
</TABLE>
20
<PAGE> 25
CAPITALIZATION
The following table shows our consolidated capitalization as of June 30,
1999, and as adjusted to give pro forma effect to the offering and the use of
the net proceeds as described in "Use of Proceeds," assuming an aggregate of
shares sold in the offering at $ per share and net proceeds of
$ million. You should refer to "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements included elsewhere in this prospectus
in evaluating the material presented below. The table excludes the common
shares to be sold by the selling shareholders in the offering.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
--------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
SHORT-TERM DEBT:
Senior credit facility with ENA due December 31, 1999....... $ 25,000 $
ENA credit facility due April 30, 2000...................... 50,000
--------- ---------
Total short-term debt............................. 75,000
LONG-TERM DEBT:
Revolving credit facility due October 1, 2002............... 44,000
10 1/2% senior subordinated notes due 2006.................. 99,648 99,648
--------- ---------
Total long-term debt.............................. 143,648
SHAREHOLDERS' EQUITY:
Preferred shares, par value $.01 per share, 1,000,000 shares
authorized, none issued................................... -- --
Common shares, par value $.01 per share, 50,000,000 shares
authorized, 13,928,304 shares issued and outstanding
historically, shares issued and outstanding pro
forma..................................................... 139
Additional paid-in capital.................................. 124,718
Accumulated deficit......................................... (105,768) (105,768)
--------- ---------
Total shareholders' equity........................ 19,089
--------- ---------
TOTAL CAPITALIZATION.............................. $ 237,737 $
========= =========
</TABLE>
- -------------------------
(1) Adjusted to reflect the sale of common shares in this offering at
a purchase price of $
per share and the payment of all of our debt to ENA and all of our debt
under our revolving credit facility.
21
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table shows some of our historical financial data. The
results of operations for the six months ended June 30, 1999 are not necessarily
indicative of the results for the full fiscal year. You should read the
following data in connection with "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
ACQUIRED COMPANY(1)
-------------------------------
THREE NINE
YEAR ENDED MONTHS MONTHS YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, ENDED ENDED DECEMBER 31, JUNE 30,
------------------- MARCH 31, DECEMBER 31, -------------------------- -------------------
1994 1995 1996 1996 1997 1998 1998 1999
-------- -------- --------- ------------ ------------ ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues.......... $ 34,861 $ 32,386 $ 13,309 $ 47,079 $ 62,771 $ 56,690 $ 28,980 $ 25,846
Lease operating
expenses.............. 6,123 6,408 2,403 6,495 9,376 9,858 4,851 5,764
Depreciation, depletion
and amortization...... 16,221 15,635 6,309 24,747 31,719 33,833 16,274 15,803
Impairment of oil and
gas properties........ 6,257 -- -- 22,500 28,514 50,800 -- --
General and
administrative
expenses.............. 1,830 2,028 712 2,406 3,195 4,749 1,853 2,821
Provision for
litigation(2)......... -- -- -- -- -- 2,800 2,960 --
-------- -------- -------- --------- --------- --------- -------- --------
Operating income
(loss).............. 4,430 8,315 3,885 (9,069) (10,033) (45,350) 3,042 1,458
Interest income......... 1,084 9,255 2,167 515 467 313 283 21
Interest expense........ (8,125) (12,772) (3,391) (7,746) (10,644) (13,384) (6,252) (9,924)
Write-off of bridge loan
fees.................. -- -- -- (2,392) -- -- -- --
-------- -------- -------- --------- --------- --------- -------- --------
Income (loss) before
income taxes........ (2,611) 4,798 2,661 (18,692) (20,210) (58,421) (2,927) (8,445)
Provision for income
taxes................. -- 338 -- -- -- -- -- --
-------- -------- -------- --------- --------- --------- -------- --------
Net income (loss)..... $ (2,611) $ 4,460 $ 2,661 $ (18,692) $ (20,210) $ (58,421) $ (2,927) $ (8,445)
======== ======== ======== ========= ========= ========= ======== ========
Basic and diluted
earnings per
share(3).............. -- -- -- $ (1.58) $ (1.71) $ (4.47) $ (0.24) $ (0.61)
Average shares
outstanding(3)........ -- -- -- 11,831 11,842 13,080 12,209 13,928
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
ACQUIRED AS OF
COMPANY(1) JUNE 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 4,335 $ 5,456 $ 10,819 $ 9,131 $ 802 $ 524
Total assets....................................... 138,202 250,726 196,749 212,577 262,792 268,180
Total debt......................................... 108,500 165,500 99,525 113,574 178,024 218,648
Shareholders' equity............................... 18,798 69,258 77,053 57,174 27,534 19,089
</TABLE>
- ---------------
(1) Effective April 1, 1996 for accounting purposes, Mariner Holdings, Inc.
acquired all the capital stock of Mariner Energy, Inc. from Hardy Holdings
Inc., a subsidiary of Hardy Oil & Gas, plc, as part of a management-led
buyout. In connection with this acquisition, a substantial amount of our
intercompany indebtedness and receivables and third-party indebtedness were
eliminated. This acquisition was accounted for using the purchase method of
accounting, and Mariner Holdings, Inc.'s cost of acquiring us was allocated
to our assets and liabilities based on estimated fair values. As a result,
our financial position and operating results subsequent to this acquisition
reflect a new basis of accounting and are not comparable to prior periods.
"Acquired Company" refers to Mariner Energy, Inc. (formerly Hardy Oil & Gas
USA Inc.) before the effective date of this acquisition.
(2) Provision for litigation represents a non-cash charge recorded in the first
quarter of 1998 to provide for a litigation-related cost contingency. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Basic earnings per share and average shares outstanding are not presented
for the years ended December 31, 1994 and 1995 or the three months ended
March 31, 1996, as our capital structure before the acquisition is not
comparable.
22
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should refer to the financial statements included in this prospectus in
evaluating the material presented below.
OVERVIEW
We are an independent oil and natural gas exploration, development and
production company with principal operations in the Gulf and along the U.S. Gulf
Coast. Our strategy is to profitably increase reserves, production and cash flow
primarily through the drillbit with a heavy emphasis on the deepwater Gulf.
During 1998 and the first six months of 1999 we:
- made an exploratory discovery in the deepwater Gulf on the Aconcagua
prospect located in 7,100 feet of water, making us five of nine in
deepwater Gulf exploratory test wells drilled since our acquisition from
Hardy;
- added net reserves in 1998 of 48.1 Bcfe, which were approximately 200% of
our 1998 production of 24.2 Bcfe;
- commenced production from the Dulcimer deepwater project in April 1999,
14 months after discovery;
- added 20 deepwater blocks from successes at three Gulf lease sales,
giving us 127 blocks in the Gulf with 69 in the deepwater Gulf as of June
30, 1999; and
- sold a 63% interest in the Pluto deepwater exploitation project to
Burlington Resources, retaining a 37% working interest, which will
increase to 51% after payout.
We expect capital expenditures for 1999 to be approximately $50 million and
for 2000 to be approximately $100 million, which we intend to use to explore,
develop and continue to build our prospect inventory. We expect to fund our
capital expenditures by a combination of proceeds of the offering, internally
generated cash flow and borrowings against our revolving credit facility.
Our revenue, profitability, access to capital and future rate of growth are
heavily influenced by the price we receive for our production. The markets for
oil, natural gas and natural gas liquids have been historically volatile and may
continue to be volatile in the future. We regularly enter into hedging
transactions for our oil and natural gas production and intend to continue doing
so. These transactions may limit our potential gains if oil and natural gas
prices were to rise substantially over the price established by the hedges.
These hedges also may expose us to the risk of financial loss in some
circumstances, including possibly instances in which our production is less than
expected or there is an unexpected event materially affecting prices.
Another significant factor affecting us will be competition, both from
other sources of energy such as electricity and from within the industry. Many
of our larger competitors possess and employ financial and personnel resources
substantially greater than those available to us, which can be particularly
important in deepwater Gulf activities. These companies may be able to pay more
for productive oil and natural gas properties and exploratory prospects and to
define, evaluate, bid for and purchase a greater number of properties and
prospects than our financial or personnel resources permit.
We use the full cost method of accounting for our investments in oil and
natural gas properties. Under this methodology, all costs of exploration,
development and acquisition of oil and natural gas reserves are capitalized into
a "full cost pool" as incurred and properties in the pool are depleted and
charged to operations using the unit-of-production method based on a ratio of
current production to total proved oil and natural gas reserves. To the extent
that capitalized costs (net of accumulated depreciation, depletion, and
amortization) less deferred applicable taxes exceed the present value, using a
10% discount
23
<PAGE> 28
rate, of estimated future net cash flows from proved oil and natural gas
reserves and the lower of cost or fair market value of unproved properties, the
excess costs are charged to operations. If a writedown were required, it would
result in a charge to earnings but would not have an impact on cash flows.
Our results of operations may vary significantly from year to year based on
the factors discussed above and on other factors such as exploratory and
development drilling success, curtailments of production due to workover and
recompletion activities and the timing and amount of reimbursement for overhead
costs we receive from co-owners. Therefore, the results of any one year may not
be indicative of future results.
RESULTS OF OPERATIONS
The following table shows information related to our oil and natural gas
production, average sales price received and expenses per unit of production
during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (MBbls)................................ 750 977 786 441 348
Natural gas (MMcf)......................... 20,429 18,004 19,477 9,483 10,583
Natural gas equivalent (MMcfe)............. 24,929 23,866 24,193 12,129 12,671
Average daily production (MMcfe)........... 68 65 66 67 70
AVERAGE REALIZED SALES PRICES (INCLUDING
EFFECTS OF HEDGING):
Oil (per Bbl).............................. $ 18.04 $ 18.48 $ 12.80 $ 13.59 $ 13.28
Natural gas (per Mcf)...................... 2.29 2.48 2.39 2.42 2.01
Natural gas equivalent (per Mcfe).......... 2.42 2.63 2.34 2.39 2.04
EXPENSES (PER MCFE):
Lease operating............................ 0.36 0.39 0.41 0.40 0.45
General and administrative, net(1)......... 0.13 0.13 0.20 0.15 0.22
Depreciation, depletion and amortization,
before impairment provision............. 1.25 1.33 1.40 1.34 1.25
</TABLE>
- -------------------------
(1) General and administrative expenses are presented net of amounts capitalized
under the full cost method of accounting and overhead reimbursements we
received from owners of working interests in the properties we operate.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net production increased 4% to 12.7 Bcfe for the first six months of 1999
from 12.1 Bcfe for the same period of 1998. Production from our offshore Gulf
properties increased to 8.7 Bcfe in the six-month period ending June 30, 1999
from 6.4 Bcfe in the same period of 1998, primarily as a result of production
commencing from a new well in the Dulcimer field located in Garden Banks block
367 and two new wells in the Rembrandt field located in Galveston block 151.
This increase was offset by reduced production from our Sandy Lake field onshore
Texas due to continuing production problems in two wells in the field. Our
production for the remainder of 1999 is anticipated to increase primarily as a
result of the expected commencement of production from the Pluto field in the
fourth quarter.
Oil and natural gas revenues decreased 11% to $25.8 million for the first
six months of 1999 from $29 million for the comparable period of 1998, primarily
due to a 15% decrease in realized prices to $2.04 per Mcfe in the first six
months of 1999 from $2.39 per Mcfe in the same period last year, which decrease
was offset in part by the production increase discussed above.
Hedging activities in the first six months of 1999 decreased our average
realized natural gas sales price received by $0.08 per Mcf and revenues by $0.8
million, compared with an increase of $0.05 per Mcf and $0.5 million for the
same period of 1998. Hedging related to crude oil during the first six months of
1999
24
<PAGE> 29
decreased our average realized crude oil sales price received by $0.28 per Bbl
and revenues by $0.1 million. We had no hedging activities for crude oil in the
same period of 1998.
Lease operating expenses increased 19% to $5.8 million for the first six
months of 1999, from $4.9 million for the comparable period of 1998, primarily
due to the higher offshore production discussed above and the two well workovers
in our Sandy Lake field.
Depreciation, depletion, and amortization expense decreased 3% to $15.8
million for the first six months of 1999 from $16.3 million for the comparable
period of 1998, as a result of the decrease in our unit-of-production
depreciation, depletion, and amortization rate to $1.25 per Mcfe from $1.34 per
Mcfe, offset in part by a 4% increase in equivalent volumes produced. The lower
rate for the first six months of 1999 was primarily due to our $50.8 million
non-cash full cost ceiling test impairment recorded in 1998.
General and administrative expenses, which are net of overhead
reimbursements received by us from other working interest owners, increased 52%
to $2.8 million for the first six months of 1999 from $1.9 million for the
comparable period of 1998, due primarily to increased personnel-related costs in
1999 required for us to pursue our deepwater Gulf exploration and development
plan.
Interest expense for the first six months of 1999 increased 59% to $9.9
million from $6.3 million for the comparable period of 1998, primarily due to
additional borrowings under affiliate credit facilities totalling $75 million,
entered into subsequent to June 30, 1998.
Income (loss) before income taxes decreased to a loss of $8.4 million for
the first six months of 1999 from a loss of $2.9 million in the comparable
period of 1998, primarily as a result of the oil and gas revenue decreases and
increased expenses discussed above.
1998 COMPARED TO 1997
Net production increased 1% to 24.2 Bcfe in 1998 from 23.9 Bcfe in 1997.
Natural gas production increased by 1.5 Bcf, or 8%, to 19.5 Bcf from 18 Bcf.
Natural gas production from our offshore properties decreased 0.3 Bcf, or 3%,
primarily due to the natural production decline offset by the addition of two
offshore properties, while natural gas production from our onshore properties
increased 1.8 Bcf, or 32%.
Oil and natural gas revenues for 1998 decreased by $6.1 million, or 10%,
compared to 1997 primarily due to decreased oil and natural gas sales prices
partially offset by the production increase described above. The average
realized sales price of natural gas decreased 4%, to $2.39 per Mcf in 1998 from
$2.48 per Mcf in 1997, while the average realized oil sales price decreased by
31% to $12.80 per Bbl in 1998 from $18.48 per Bbl in 1997.
Hedging activities in 1998 increased our average realized natural gas sales
price received by $0.12 per Mcf and revenues by $2.3 million. In 1997, our
natural gas hedging activities decreased the average realized natural gas sales
price received by $0.22 per Mcf and revenues by $3.9 million. We had no hedging
activities for oil in 1998. Our hedging activities with respect to crude oil
during 1997 reduced the average sales price received by $0.63 per Bbl and
revenues by $0.6 million. During 1998, approximately 40% of our equivalent
production was subject to hedge positions compared to 60% in 1997.
Lease operating expenses increased 5% to $9.9 million for 1998 from $9.4
million for 1997. Lease operating expense per Mcfe increased to $0.41 per Mcfe
for 1998 from $0.39 per Mcfe for 1997, due primarily to higher fixed costs
associated with offshore properties.
Depreciation, depletion and amortization expense increased 7% to $33.8
million for 1998, from $31.7 million for 1997, as a result of a 5% increase in
the unit-of-production depreciation, depletion and amortization rate to $1.40
per Mcfe from $1.33 per Mcfe, due primarily to increased drilling and completion
costs, and a 1% increase in equivalent volumes produced.
Impairment of oil and gas properties of $50.8 million was recorded in the
fourth quarter of 1998 for a non-cash full cost ceiling test impairment using
prices in effect at December 31, 1998. During the first quarter of 1997, a $28.5
million non-cash full cost ceiling writedown was also recorded due to low
commodity prices in effect as of the end of that period.
25
<PAGE> 30
General and administrative expenses, which are net of overhead
reimbursements received from other working interest owners on properties
operated by us, increased 49% to $4.7 million in 1998, up from $3.2 million in
1997, due primarily to higher employment levels to build the necessary expertise
for deepwater Gulf projects and related office costs in 1998. General and
administrative expense increased $0.07 per Mcfe from 1997 to 1998. In addition,
during 1998 we recognized a one-time charge of $2.8 million relating to
litigation expense.
Interest expense increased 26% to $13.4 million for 1998, from $10.6
million for 1997, due primarily to the 47% increase in average outstanding debt
to $151.4 million in 1998, from $103.2 million in 1997, which was partially
offset by a 10% decrease in the average interest rate paid on outstanding debt
to 9.33%, from 10.38%.
Income (loss) before income taxes decreased to a loss of $58.4 million for
1998, from a loss of $20.2 million for 1997, as a result of the factors
described above.
1997 COMPARED TO 1996
Net production decreased 4% to 23.9 Bcfe in 1997 from 24.9 Bcfe in 1996.
Natural gas production decreased by 2.4 Bcf, or 12%, to 18 Bcf from 20.4 Bcf.
Natural gas production from our offshore properties decreased 3.8 Bcf or 23%,
primarily due to natural production decline, while natural gas production from
our onshore properties increased 1.4 Bcf or 34%, due to the capacity expansion
of the Sandy Lake Central facility, which became operational in the first
quarter of 1997. Oil and condensate production increased by 227 MBbls to 977
MBbls from 750 MBbls, also due primarily to the expansion of our Sandy Lake
Central facility, offset in part by a decrease in other onshore oil production
resulting from the sale of non-core Permian Basin properties in early 1996.
Oil and natural gas revenues for 1997 increased by $2.4 million, or 4%,
compared to 1996. The increase was primarily the result of increased oil and
natural gas sales prices, offset in part by the production decrease described
above. The average realized sales price of natural gas increased 8%, to $2.48
per Mcf in 1997 from $2.29 per Mcf in 1996, while the realized oil sales price
increased by 2% to $18.48 per Bbl in 1997 from $18.04 per Bbl in 1996.
Hedging activities for 1997 reduced our average realized natural gas sales
price received by $0.22 per Mcf and revenues by $3.9 million. In 1996, our
natural gas hedging activities decreased the average realized sales price
received by $0.18 per Mcf and revenues by $3.7 million. Hedging activities of
our crude oil during 1997 reduced the average sales price we received by $0.63
per Bbl and our revenues by $0.6 million, compared with a reduction in the
average realized sales price of $2.55 per Bbl and revenues of $1.9 million
during 1996. During 1997, approximately 60% of our equivalent production was
subject to hedge positions compared to 64% in 1996.
Lease operating expenses increased 6% to $9.4 million for 1997, from $8.9
million for 1996. Lease operating expense per Mcfe increased to $0.39 for 1997
from $0.36 for 1996, due primarily to relatively fixed operating expenses spread
over reduced production volumes.
Depreciation, depletion and amortization expense increased 2% to $31.7
million for 1997, from $31.1 million for 1996, as a result of a 6% increase in
the unit-of-production depreciation, depletion and amortization rate to $1.33
per Mcfe from $1.25 per Mcfe, due primarily to increased drilling and completion
costs, partially offset by a 4% reduction in equivalent volumes produced.
Impairment of oil and natural gas properties of $28.5 million was recorded
in the first quarter of 1997 for a non-cash full cost ceiling test impairment
using prices in effect at March 31, 1997. Price increases subsequent to March
31, 1997 were sufficient to avoid the impairment charge, but given the
unpredictable volatility of future prices, we elected to record the charge in
order to more conservatively state the book value of our assets. During the
second quarter of 1996, a $22.5 million full cost ceiling writedown was recorded
in conjunction with our acquisition from Hardy.
26
<PAGE> 31
General and administrative expenses, which are net of overhead
reimbursements received by us from other working interest owners on properties
operated by us, increased 3% to $3.2 million in 1997, up from $3.1 million in
1996, due primarily to higher employment and office costs in 1997 which were
almost entirely offset by increased overhead reimbursements during 1997.
Accordingly, there was no change in general and administrative expense per Mcfe
of $0.13 for both 1997 and 1996.
Interest expense decreased 5% to $10.6 million for 1997, from $11.1 million
for 1996, due primarily to the 9% decrease in our average outstanding debt to
$103.2 million in 1997, from $113.2 million in 1996, which decrease was
partially offset by a 7% increase in our average interest rate paid on
outstanding debt to 10.38%, from 9.68%. During 1996, we wrote off $2.4 million
of loan fees related to debt incurred in connection with the management-led
buyout in the second quarter of 1996. Interest income also decreased 83% to $0.5
million for 1997, from $2.7 million for 1996, due primarily to the retirement of
receivables from affiliates resulting from the acquisition by management of our
stock.
Income (loss) before income taxes decreased to a loss of $20.2 million for
1997, from a $16 million loss for 1996, as a result of the factors described
above.
LIQUIDITY, CAPITAL EXPENDITURES AND CAPITAL RESOURCES
CASH FLOW
As of June 30, 1999, we had a working capital deficit of approximately
$76.6 million, compared to a working capital deficit of $30.7 million at
December 31, 1998. The increase was attributable to $50 million of additional
short-term affiliate credit facilities and the reclassification of $25 million
of affiliate credit facilities previously classified as long-term. This increase
was offset in part by a $29.8 million reduction in accounts payable and accrued
liabilities. We expect our 1999 capital expenditures, including capitalized
indirect costs and reduced by proceeds from the sale of 63% of our Pluto
project, to be approximately $50 million, which would exceed cash flow from
operations. We expect our 2000 capital expenditures to be approximately $100
million, which would exceed cash flow from operations for 2000. We cannot assure
you that our access to capital will be sufficient to meet our needs for capital.
As such, we may be required to reduce our planned capital expenditures and
forego planned exploratory drilling or monetize portions of our proved reserves
or undeveloped inventory if additional capital resources are not available to us
on terms we consider reasonable.
Our primary sources of cash during the three year period ended December 31,
1998 were funds generated from operations, proceeds from the sale of oil and gas
properties, proceeds from the issuance of notes, bank borrowings and capital
contributions by our former and present parent companies. Primary uses of cash
for the same period were funds used in exploration and production activities,
repayment of notes and bank debt, and the purchase of Hardy Oil & Gas USA, Inc.
Our primary sources of cash during the first six months of 1999 were from
$50 million in proceeds from affiliate credit facilities provided by ENA. The
primary uses of cash for the same period were $19.3 million for capital
expenditures (net of $19.8 million in proceeds from the sale of a partial
interest in the Pluto project), $9.4 million in net payments on our revolving
credit facility and $27.4 million for the reduction of accounts payable.
We had a net cash outflow of $0.3 million for the six months ended June 30,
1999, and a net cash outflow of $8.3 million in 1998, compared to a net cash
outflow of $1.7 million in 1997 and a net cash inflow of $10.8 million in 1996.
A discussion of the major components of cash flows for these periods follows.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ --------------
1996 1997 1998 1998 1999
------ ------ ------ ----- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used for) our operating
activities
(in millions)....................................... $44.3 $52.9 $40.3 $20.8 $(21.6)
</TABLE>
27
<PAGE> 32
Net cash used by our operating activities was $21.6 million in the first
six months of 1999, a decrease of $42.4 million for the same period of 1998
primarily due to decreased oil and gas prices and changes in working capital.
Cash provided by our operating activities in 1998 decreased by $12.6 million
compared to 1997 primarily due to decreased oil and gas prices. Cash from our
operating activities in 1997 increased by $8.6 million from 1996 primarily due
to increased oil and gas prices and changes in our working capital.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- --------------
1996 1997 1998 1998 1999
------ ----- ------ ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash used in our investing activities (in
millions).......................................... $221.8 $68.9 $141.9 $83.7 $19.3
</TABLE>
Net cash used in our investing activities for the first six months of 1999
decreased to $19.3 million from $83.7 million for the same period of 1998 due to
fewer exploratory leasehold acquisitions, lower exploratory drilling
expenditures and reimbursements received from a partner on our Pluto project.
Cash used in our investing activities in 1998 increased by $73 million compared
to 1997 primarily due to increased capital expenditures to acquire leasehold
inventory. Cash flows used in our investing activities in 1997 decreased by
$152.9 million compared to 1996 primarily because in 1996 cash was used to fund
our acquisition of Hardy Oil & Gas USA, Inc. for $184.7 million. This decrease
was partially offset by an increase of $22.6 million for capital expenditures
for oil and gas properties in 1997 over 1996 and $7.5 million lower proceeds
from the sale of oil and gas properties in 1997 from 1996.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- --------------
1996 1997 1998 1998 1999
------- ------ ------ ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by our financing activities (in
millions)........................................... $188.3 $14.3 $93.2 $57.1 $40.6
</TABLE>
Net cash provided by our financing activities was $40.6 million for the
first six months of 1999 compared to $57.1 million for the same period in 1998.
Our primary source of cash for the first six months of 1999 was $50 million from
the credit facilities with ENA, offset in part by a net $9.4 million repayment
of borrowings under our revolving credit facility. Cash provided by our
financing activities in 1998 increased by $78.9 million as compared to 1997 due
to us receiving approximately $28.8 million in equity contributions and $64.4
million from our revolving credit facilities. Cash provided by our financing
activities in 1997 decreased by $174 million compared to 1996 primarily because
in 1996 cash was provided by $92.2 million of equity contributed by our
shareholders and the issuance of $99.5 million of senior subordinated notes,
offset in part by proceeds of borrowings from the revolving credit facility in
1997 of $14 million.
CHANGES IN PRICES AND HEDGING ACTIVITIES
The energy markets have historically been very volatile. We cannot assure
you that oil and natural gas prices will not be subject to wide fluctuations in
the future. In an effort to reduce the effects of the volatility of the price of
oil and natural gas on our operations, we have adopted a policy of hedging oil
and natural gas prices from time to time through the use of commodity futures,
options and swap agreements. While the use of these hedging arrangements limits
the downside risk of adverse price movements, it also limits future gains from
favorable movements.
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<PAGE> 33
The following table shows the increase (decrease) in our oil and gas sales
as a result of hedging transactions and the effects of hedging transactions on
prices during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ------------
1996 1997 1998 1998 1999
------- ------- ------ ---- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Increase (decrease) in our natural gas sales (in
thousands)...................................... $(3,701) $(3,931) $2,337 $455 $(843)
Increase (decrease) in our oil sales (in
thousands)...................................... (1,912) (614) -- -- (96)
Effect of hedging transactions on our average gas
sales price (per Mcf)........................... (0.18) (0.22) 0.12 0.05 (0.08)
Effect of hedging transactions on our average oil
sales price (per Bbl)........................... (2.55) (0.63) -- -- (0.28)
</TABLE>
The following table shows our open hedging positions as of June 30, 1999.
<TABLE>
<CAPTION>
PRICES
NOTIONAL ------------------------
TIME PERIOD QUANTITIES FLOOR CEILING FIXED FAIR VALUE
- ----------- ---------- ----- ------- ----- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NATURAL GAS (MMBTU)
July 1 -- October 31, 1999................. 7,380 $1.85 $2.05 $ -- $(1,994)
November 1 -- December 31, 1999
Fixed Price Swap...................... 2,684 -- -- 2.18 (1,240)
Market Sensitive Swap................. 1,220 -- -- 2.60 58
January 1 -- December 31, 2000
Fixed Price Swap...................... 10,980 -- -- 2.18 (2,784)
Market Sensitive Swap................. 1,820 -- -- 2.60 60
January 1 -- December 31, 2001
Fixed Price Swap...................... 4,380 -- -- 2.18 (1,139)
January 1 -- October 31, 2002
Fixed Price Swap...................... 1,824 -- -- 2.18 (476)
CRUDE OIL (BBLS)
May 1 -- December 31, 1999................. 294,000 -- -- 16.54 (520)
</TABLE>
After June 30, 1999, we entered into a fixed price swap for crude oil for
the period November 1, 1999 through December 31, 2000. Notional quantities for
November and December 1999 are 94,583 Bbls at an average price of $19.89 per
Bbl. Notional quantities for January 1 through December 31, 2000 are 1,481,991
Bbls at an average price of $18.72 per Bbl. After June 30, 1999, we also
purchased two natural gas call options for November 1999 and December 1999 for a
cumulative notional quantity of 1,098 MMBtu at exercise prices of $4.25 per
MMBtu for November and $4.50 per MMBtu for December. Hedging arrangements for
1999 cover approximately 59% of our anticipated equivalent production for the
year. Hedging arrangements for 2000, 2001 and 2002 cover approximately 45% for
2000, 9% for 2001 and 3% for 2002, of our anticipated equivalent production. The
fair value for our hedging instruments was determined based on brokers' forward
price quotes and NYMEX forward price quotes as of June 30, 1999. As of June 30,
1999, a commodity price increase of 10% would have resulted in an unfavorable
change in the fair value of our hedging instruments of $8.8 million and a
commodity price decrease of 10% would have resulted in a favorable change in the
fair value of our hedging instruments of $2.9 million.
Mariner Energy, Inc.'s senior subordinated notes have a fixed rate and,
therefore, do not expose us to risk of earnings loss due to changes in market
interest rates. However, we are subject to interest rate risk under our
revolving credit facility and affiliate credit facilities with ENA. For example
a 10% increase in the London Interbank Offered Rate would have increased our
1998 interest expense by $0.3 million. The carrying value of the revolving
credit facility and affiliate credit facilities approximates
29
<PAGE> 34
market since these instruments have floating interest rates. The market value of
the senior subordinated notes was approximately $100 million based on borrowing
rates available at the end of the periods presented.
CAPITAL EXPENDITURES AND CAPITAL RESOURCES
The following table presents major components of our capital and
exploration expenditures for each of the three years in the period ended
December 31, 1998 and the six month periods ended June 30, 1998 and 1999.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -------------
1996 1997 1998 1998 1999
------ ------ ------- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES (IN MILLIONS):
Leasehold acquisition -- unproved properties........ $14.3 $21.6 $ 43.1 $40.3 $(0.1)
Leasehold acquisition -- proved properties.......... -- 3.2 -- -- --
Oil and natural gas exploration..................... 22.7 27.4 35.7 17.2 0.4
Oil and natural gas development and other........... 9.6 16.7 63.1 26.2 19.0
----- ----- ------ ----- -----
TOTAL CAPITAL EXPENDITURES............................ $46.6 $68.9 $141.9 $83.7 $19.3
===== ===== ====== ===== =====
</TABLE>
Our capital expenditures for the first six months of 1999 were $39.1
million, excluding the $19.8 million related to our sale of a 63% working
interest in the Pluto project. Our capital expenditures included $12.5 million
for exploration activities and $21.9 million for developments and $4.7 million
of capitalized indirect costs. Included in exploration expenditures was $8.9
million for lease bonus payments on three deepwater Gulf blocks awarded to us in
the March 1999 Central Gulf lease sale.
Our total capital expenditures for 1998 were $73 million more than 1997.
The increase was due primarily to:
- our continued focus on building and evaluating our exploration and
exploitation prospect inventory, as evidenced by the increase in both
leasehold acquisition of unproved properties and oil and gas exploration,
and
- increased development related spending, both to acquire additional
interests in existing proved properties and to develop successful
exploratory prospects.
Total capital expenditures for 1997 were $22.3 million more than 1996. The
increase was due primarily to:
- our continued focus on building and evaluating our exploration and
exploitation prospect inventory, as evidenced by the increase in both
leasehold acquisition -- unproved properties and geological and
geophysical expenditures; and
- our increased development related spending, both to acquire additional
interest in an existing proved property and in development expenditures
on successful exploratory prospects.
Our capital expenditure plan for the second half of 1999 includes drilling
four exploratory wells, including three in the deepwater Gulf. The majority of
our share of exploratory costs on one of the anticipated deepwater Gulf wells
would be covered by our partners in the well. We also expect to drill two or
three development wells, including the appraisal well on the Aconcagua
discovery, and to complete the drilling of the production well and related
facilities necessary for our Pluto project to commence production in the fourth
quarter of 1999. We also have entered into an agreement with an affiliate to
sell the Pluto flow line and related facilities, and we entered into a firm
transportation agreement for the flow line. We expect our capital expenditures
for 1999, including capitalized indirect costs and reduced by
30
<PAGE> 35
proceeds from the sale of 63% of our Pluto deepwater Gulf exploitation project,
to be approximately $50 million.
Our planned capital expenditures for 2000 total approximately $100 million.
The plan includes approximately $22 million to drill seven exploratory wells,
including six in the deepwater Gulf. Our share of exploratory well costs on one
of these deepwater wells will be paid by our partners. Our plan anticipates
spending approximately $20 million to acquire deepwater lease blocks and to
build our seismic inventory. We also anticipate expenditures of approximately
$50 million for development projects, including our Black Widow and Aconcagua
projects, and costs that are contingent on the success of our future exploratory
drilling.
Our debt outstanding as of June 30, 1999 was approximately $218.7 million,
including $99.7 million of senior subordinated notes, $44 million drawn on our
revolving credit facility, both of which we classified as long-term debt, $50
million drawn on our ENA credit facility and $25 million on our senior credit
facility. Following our semi-annual borrowing base redetermination in June 1999,
our borrowing base under the revolving credit facility was reaffirmed at $60
million and the maturity date of the facility was extended from October 1, 1999
to October 1, 2002. As part of the redetermination, we pledged mineral interests
to secure our revolving credit facility. In April 1999, we established a $25
million senior credit facility with ENA to obtain funds needed to execute our
1999 capital expenditure program and for short-term working capital needs. As of
June 30, 1999, we had fully drawn this facility. Restrictions on Mariner Energy,
Inc. in the revolving credit facility and the senior subordinated notes
effectively restrict us from using Mariner Energy, Inc.'s assets or cash flow to
satisfy interest or principal payments for the affiliate facilities. We expect
to repay the facilities from internally generated cash flows or from proceeds of
the offering.
In the second quarter of 1998, management shareholders and an affiliate of
Enron contributed $28.8 million of net equity capital, which was used to reduce
borrowings on our revolving credit facility and to supplement funding of our
1998 capital expenditure plan.
In future periods, our capital resources may not be sufficient to meet our
anticipated future requirements for working capital, capital expenditures and
scheduled payments of principal and interest on our indebtedness. We cannot
assure you that anticipated growth will be realized, that our business will
generate sufficient cash flow from operations or that future borrowings or
equity capital will be available in an amount sufficient to enable us to service
our indebtedness or make necessary capital expenditures. In addition, depending
on the levels of our cash flow and capital expenditures, we may need to
refinance a portion of the principal amount of our senior subordinated debt at
or prior to maturity. However, we cannot assure you that we would be able to
obtain financing on acceptable terms to complete a refinancing.
We expect to fund our activities in the remainder of 1999 and for 2000
through a combination of proceeds of the offering, cash flow from operations and
borrowings under our revolving credit facility. However, we cannot assure you
that we will realize our anticipated growth, that our business will generate
sufficient cash flow from operations or that future borrowings or equity capital
will be available in an amount sufficient to enable us to service our
indebtedness or make necessary capital expenditures.
YEAR 2000 COMPLIANCE
The year 2000 issue concerns the ability of information technology and
non-information technology systems and processes to recognize and process
properly date-sensitive information before, during and after December 31, 1999.
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<PAGE> 36
STATE OF READINESS
We have been following a year 2000 project life cycle methodology that
includes the following phases:
- an initial assessment and inventory of our year 2000 issues;
- the development of a detailed plan to address our year 2000 issues;
- the testing of our systems with year 2000 issues;
- the remediation and upgrade of our year 2000 issues;
- contingency planning related to our worst-case scenarios; and
- an assessment of our business partners' readiness.
We had completed the first three phases and were nearly complete with the
remediation and upgrade phase as of August 31, 1999. We are now focusing on the
contingency planning and business partner readiness phases.
We conducted the initial assessment and inventory phase in February 1999.
This phase consisted of an assessment of all computer automation in the
following areas:
- business application systems;
- information technology infrastructure and computing environment;
- geophysical and exploration hardware and software;
- field automation and process control;
- communications; and
- corporate office infrastructure.
Our initial assessment and inventory results showed that, according to
third-party providers, manufacturers and vendors, over 90% of these items were
year 2000-ready. We are currently executing a detailed plan to remediate the
remaining 10%. We expect to complete this remediation by October 31, 1999. Also,
we verified the readiness of all hardware and operating systems. The remaining
remediation items consist of installing vendor-supplied upgrades to one business
software application and integrating one non-compliant operations control system
to an existing year 2000-ready system at the Garden Banks 367.
Because the year 2000 issue is a unique event with no historical
perspective, we cannot guarantee we will have no year 2000 problems or that
these problems will not be material. However, we are taking reasonable measures
to prevent year 2000 business process failures. We are following a structured
plan, we have established an executive committee to oversee the plan and we have
recently completed various technology updates.
BUSINESS PARTNER READINESS
The year 2000 issue affects all of our customers, vendors and other key
business partners. Therefore, we have implemented a business partner readiness
program in which we will assess all key business partners' year 2000 readiness
by:
- directly contacting the business partner;
- accessing the business partner's web site; or
- reviewing the business partner's Securities and Exchange Commission
filings.
We expect to complete this program by October 31, 1999.
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<PAGE> 37
COSTS TO ADDRESS YEAR 2000 ISSUES
Our costs directly related to the year 2000 issue have been approximately
$110,000, including external consulting fees. Approximately $50,000 of this
amount has been capitalized and attributed to the replacement of desktop and
server hardware acquisitions. We expensed the remaining $60,000. We do not
expect to incur any additional costs directly related to the year 2000 issue.
However, we cannot assure you that we will not incur additional costs.
YEAR 2000 RISK FACTORS
Our most significant year 2000 risk factor relates to the readiness of
third-party hardware and software manufacturers and key business partners. We
are relying on their responses that they will be ready. However, we cannot
assure you that these third parties will be ready or predict with certainty the
effect of their unreadiness.
Our most likely "worst case" scenarios are:
- prolonged loss of power or mechanical failure that could jeopardize our
production and transportation operations;
- third-party suppliers' failure to deliver production supplies, which
failure would adversely affect our drilling and production process; and
- our inability to process financial transactions with banks or to bill,
receive or process payments from customers.
CONTINGENCY PLANS
We intend to develop written contingency plans related to each of our worst
case scenarios by October 31, 1999.
Statements in this section are "Year 2000 Readiness Disclosure" within the
meaning of the Year 2000 Information and Readiness Disclosure Act.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which was amended in June 1999 by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- an
amendment of FASB Statement No. 133." SFAS No. 133, as amended, is effective for
fiscal years beginning after June 15, 2000 and establishes accounting and
reporting standards for derivative instruments and for hedging activities. We
are currently evaluating what effect, if any, SFAS No. 133 will have on our
financial statements. We will adopt this statement no later than January 1,
2001.
33
<PAGE> 38
BUSINESS AND PROPERTIES
ABOUT MARINER
Mariner Energy is an independent oil and natural gas exploration,
development and production company with principal operations in the Gulf and
along the U.S. Gulf Coast. Our increasing focus on the deepwater Gulf since the
early 1990s has made us one of that area's most experienced independent
operators. We have been an active explorer in the Gulf Coast area since the
mid-1980s, when we operated as Hardy Oil & Gas USA Inc., and have increased our
production and reserve base through the drillbit. Members of our senior
management team, most of whom have worked together for over 15 years, and an
affiliate of ENA led a buyout of Mariner from Hardy Oil & Gas, plc in April
1996. We believe that our operating experience, exploration expertise, extensive
deepwater lease inventory and seasoned management team give us a unique
competitive advantage with substantial growth potential.
Since beginning deepwater operations in 1994, we have:
- operated six successful subsea development projects in water depths of
400 feet to 2,700 feet;
- developed three deepwater exploitation projects acquired from major oil
companies, including our Pluto project;
- discovered five new fields in nine deepwater Gulf exploration tests,
including a potentially significant recent discovery at our Aconcagua
prospect; and
- acquired 64 deepwater Gulf lease blocks, most of which are free of
royalty payment obligations.
Ryder Scott Company estimated that we had proved reserves of 162.8 Bcfe as
of June 30, 1999, attributable to 168 wells in 33 fields, of which 67% were
natural gas and 33% were oil and condensate. For the six months ended June 30,
1999, we produced an average of 70 MMcfe per day.
We expect our production levels and operating cash flow to increase
significantly based on production from our Dulcimer project, which began in
April 1999, and our Pluto project, which we expect to begin producing in the
fourth quarter of 1999 at a rate of approximately 30 to 40 MMcfe per day net to
our interest. We expect further increases on commencement of production from the
Black Widow project, currently scheduled for the second half of 2000. We also
expect to drill 11 of our exploration prospects by the end of 2000, nine of
which are in the deepwater Gulf.
Our planned capital expenditures for 2000 consist of approximately $100
million for leasehold acquisition, exploration drilling and development
projects, which are double our planned capital expenditures of approximately $50
million for 1999.
COMPETITIVE STRENGTHS
We have several competitive strengths that we believe will allow us to
compete successfully in oil and natural gas exploration, production and
development activities in the Gulf:
EARLY ENTRY INTO THE DEEPWATER GULF. We began focusing in the deepwater
Gulf in 1992 as one of the first independent oil and natural gas companies to
recognize the opportunity for acquiring smaller deepwater discoveries not
meeting a large company's field size threshold and for partnering with major oil
companies to develop these discoveries. We believe our seven years in the
deepwater Gulf have provided us with the geophysical and geological skills,
operating expertise and relationships necessary to operate successfully in the
deepwater. Our deepwater Gulf expertise includes:
- a strong understanding of the geology and geophysics of the deepwater
Gulf;
- familiarity with challenges peculiar to operating in the deepwater Gulf;
and
34
<PAGE> 39
- relationships with vendors, major oil companies and other partners having
complementary skills and knowledge of the area.
SUBSTANTIAL ACREAGE, SEISMIC DATA AND PROSPECT INVENTORY. Our Gulf
leasehold inventory as of September 1, 1999, consisted of 123 lease blocks,
including 69 in the deepwater. Our prospect inventory includes 19 drillable
exploration prospects, 15 of which are in the deepwater Gulf. We expect to drill
11 of our exploration prospects by the end of 2000, nine of which are in the
deepwater Gulf. Our seismic database includes 3-D seismic that covers
approximately 7,500 square miles of the Gulf and modern 2-D seismic that covers
more than 250,000 miles of the deepwater Gulf. We internally generate
substantially all of our exploration and exploitation prospects using 3-D
seismic data.
EXPERIENCED OPERATIONS AND TECHNICAL STAFF AND MANAGEMENT. Our 12
geoscientists average more than 20 years of experience in the exploration and
production business, including extensive experience in the deepwater Gulf and
with major oil companies. Our four deepwater operations managers average over 25
years of experience with major oil companies and large independents around the
world. Most of our senior management team participated in our acquisition from
Hardy and have worked together for over 15 years. Management and other key
personnel currently own approximately 4% of the common shares and have options
that, if exercised, would increase their ownership to 17%. We believe that
management's ownership aligns its interests with those of other shareholders.
STRATEGY
Our business strategy -- to increase reserves, production and cash flow
profitably by emphasizing growth through the drillbit in the deepwater
Gulf -- consists primarily of the following elements:
PURSUE A BALANCED PORTFOLIO APPROACH TO OUR DRILLING PROGRAM. We target six
to eight new prospects each year, with a strong deepwater emphasis. The program
is designed to provide reserve replacement and production growth through
low-risk deepwater exploitation projects and opportunities for substantial
growth through moderate-risk exploration prospects that can significantly
increase our reserve base. We intend to use up to 90% of our available capital
on deepwater Gulf exploration and exploitation projects. We focus on the
deepwater Gulf because of:
- the potential for discovery of large hydrocarbon deposits;
- relatively favorable reservoir characteristics;
- the prevalence of 3-D seismic direct hydrocarbon indicators;
- the relatively under-explored nature of the deepwater Gulf;
- the recent advances in deepwater production technology that reduce
development costs and expedite production; and
- the favorable operating margins resulting from generally favorable prices
for Gulf production and lower operating costs per unit. These lower costs
per unit are associated with prolific wells, concentration of labor and
equipment, absence of severance and ad valorem taxes and generally lower
royalties.
FOCUS ON THE DEEPWATER GULF. With our current prospect and seismic
inventory and many more deepwater Gulf lease blocks scheduled to become
available via lease sales, we believe we are well-positioned to increase our
deepwater Gulf activity and to continue to generate and exploit prospects that
are below the size thresholds of larger companies. We intend to continue:
- exploring below the reserve potential threshold of the major oil
companies; and
- generating prospects and operating projects within our expertise but
beyond the capability of most independents.
35
<PAGE> 40
MANAGE DEEPWATER RISKS BY CONTROLLING COSTS. A key to our growth and
operations in the deepwater Gulf is controlling our costs. To control our costs,
we intend to:
- target projects with gross drilling costs of less than $20 million;
- use 3-D seismic analysis to analyze direct hydrocarbon indicators;
- operate the wells in which we participate;
- limit projects generally to drilling depths of less than 10,000 feet
below the sea floor;
- use our expertise in existing technology, including subsea production
technology, to reduce our capital expenditures and accelerate the
commencement of production; and
- use the strong business relationships that we have developed with service
companies to reduce our costs.
MANAGE DEEPWATER RISKS THROUGH COMPLEMENTARY OPERATIONS AND RISK
SPREADING. A key to our strategy is managing our deepwater exploration risks
through complementary operations and risk spreading. To further this strategy,
we intend to:
- complement our exploration activities by developing exploitation
projects, such as the Pluto project, and making strategic acquisitions of
additional deepwater interests;
- maximize production from our proved onshore and shallow water properties
to supplement our cash flow;
- maintain a risk-weighted, diversified portfolio of drilling
opportunities; and
- sell a portion of our working interests to industry partners, typically
on a promoted basis.
APPLY OUR EXPERTISE AND EXPERIENCE. We intend to use our technical staff's
expertise to implement our deepwater Gulf growth and risk management strategies.
To benefit from our technical staff's expertise, we intend to:
- use our geological and geophysical staff to generate internally a
majority of our prospects;
- use our engineering and operations staff to develop practical and proven
technical solutions to drilling, development and production problems; and
- shorten project cycle times and manage risks by using proven equipment
and procedures, matching the facilities to the reservoir, focusing on
full cycle costs and leveraging off the experience of our vendors.
PRINCIPAL OIL AND NATURAL GAS PROPERTIES
DEEPWATER GULF OF MEXICO
Mississippi Canyon 718 ("Pluto"). We acquired a 30% interest in this
project in 1997, two years after British Petroleum discovered gas on the
project. We later increased our ownership to 97%, acquiring operatorship and
gaining overall control of project planning and implementation. In 1998, we
increased our working interest to 100% and submitted a Deepwater Royalty Relief
application that was granted in July 1999. In June 1999, we sold a 63% working
interest in the project to Burlington Resources, Inc., reducing our working
interest to 37%. After project payout, our working interest increases to 51% and
Burlington's working interest decreases to 49%. We are developing the field with
a single subsea well in approximately 2,700 feet of water and a flow line tied
back approximately 29 miles to a production platform on the shelf. The project
is underway, and we expect to begin production in the fourth quarter of 1999 at
an estimated rate of 50 to 60 MMcf of natural gas per day and 6,000 to 8,000
Bbls of oil per day. As of June 30, 1999, the field had estimated net proved
reserves of 25.6 Bcfe, 71% of which was natural gas.
36
<PAGE> 41
Ewing Bank 966 ("Black Widow"). We generated the Black Widow prospect and
acquired it at a federal offshore Gulf lease sale in March 1997. We operate and
have a 45% working interest in this project, which is located in the deepwater
Gulf approximately 130 miles south of New Orleans, Louisiana at a water depth of
approximately 1,850 feet. In early 1998, we drilled a successful exploration
well on the prospect. We expect the well to commence production in the third or
fourth quarter of 2000 via subsea tieback to an existing platform at an
estimated rate of 5,000 to 8,000 Bbls of oil per day. Estimated net proved
reserves from Black Widow were approximately 14 Bcfe, 85% of which was oil, as
of June 30, 1999.
Garden Banks 367 ("Dulcimer"). We generated the Dulcimer prospect and
acquired it at a federal offshore Gulf lease sale in September 1996. The well is
located in the deepwater Gulf approximately 170 miles south of Lake Charles,
Louisiana at a water depth of approximately 1,100 feet. We operate and have a
42% working interest in the property. In late 1997, we drilled a successful
exploration well in two productive intervals between 9,900 feet and 10,500 feet.
The well commenced production in April 1999 at a rate of approximately 58 MMcf
of natural gas per day, after tieback to a production platform located
approximately 14 miles from the well. The field had estimated net proved
reserves of 13.9 Bcfe, 99% of which was natural gas, as of June 30, 1999.
Garden Banks 240 ("Mustique"). We generated the Mustique prospect and
acquired it through a swap transaction with Shell Oil Company. Mustique is
located offshore Louisiana in a water depth of approximately 830 feet. We own a
33% working interest in and operate this single well subsea development. The
well is tied back via a subsea flowline to a Chevron-operated platform
approximately 11 miles from the wellsite, where its production is commingled and
marketed with Chevron's production. Initial production was in January 1996. As
of June 30, 1999, the field had produced 6.6 Bcfe net to us. Remaining net
proved reserves were estimated to be 6 Bcfe, 96% of which is natural gas. The
estimated remaining field life is six years.
Green Canyon 136 ("Shasta"). We generated the Shasta prospect and obtained
it in a farmout agreement with Texaco, Inc. Shasta is located offshore Louisiana
in water depths of 840 to 1,040 feet. We operated subsea development of this
project from planning through drilling and equipment installation until the date
of first production. Following completion of this development, Texaco assumed
operation of the project. We own a 25% working interest in this two-well subsea
development that is tied back via subsea flowline to a Texaco-operated platform
approximately ten miles from the well sites. At the platform, production is
commingled and marketed with Texaco's production. Initial production was in
November 1995. As of June 30, 1999, the field had produced 10.1 Bcfe net to us
and remaining net proved reserves were estimated to be 2.6 Bcfe, 99% of which is
natural gas. The estimated remaining field life is three years.
GULF LEASE ACTIVITIES
At the federal offshore Gulf lease sale in March 1998, we were awarded the
leases on nine deepwater Gulf blocks covering seven drillable prospects in water
depths to approximately 7,000 feet. We generated all of the prospects and will
be the operator on eight of the nine blocks. The net share of our bids was $29.2
million, and our average working interest is 69%. We bid on seven of the ten
most actively-bid deepwater tracts in the sale, winning three. At the federal
offshore Gulf lease sale in August 1998, we were awarded the leases on eight
deepwater Gulf blocks in water depths to 4,700 feet. The net share of our bids
was $6.8 million, and our average working interest is 69%. At the federal
offshore Gulf lease sale in March 1999, we were awarded the leases on three
deepwater Gulf blocks in water depths ranging from 4,000 feet to 5,000 feet. The
net share of our bids was $8.9 million, and our average working interest is 83%.
On three of the blocks we acquired in the lease sales described above, our
partners have agreed to pay approximately $16 million of our exploration
drilling costs, representing most of our share of these costs.
37
<PAGE> 42
DEEPWATER GULF EXPLORATION PROSPECTS
We held an inventory of 19 drillable exploration prospects as of September
1, 1999, including 15 in the deepwater Gulf, which we expect to drill over the
next two to three years. The following is a description of several of the more
significant exploration prospects included in our exploration prospect
inventory.
Mississippi Canyon 305 ("Aconcagua"). Along with a partner, we generated
the Aconcagua prospect and acquired it at a federal offshore Gulf lease sale in
March 1998. During the first quarter of 1999, we drilled a successful
exploration well on the prospect. The well logged multiple pay sands, and we
encountered additional sands with productive potential. The well is located 40
miles from the shelf edge in 7,100 feet of water approximately 150 miles
southeast of New Orleans. We anticipate drilling an appraisal well in the fourth
quarter of 1999. We hold a 25% working interest in the block, and we expect a
determination of proved reserves when we drill the first appraisal well. One of
our partners bore our exploration costs.
Mississippi Canyon 773 ("Devil's Tower"). The Devil's Tower exploration
prospect is located approximately 130 miles southeast of New Orleans in 5,700
feet of water. We acquired the prospect in the March 1998 federal lease sale for
a gross bid of $24.6 million. We paid 50% of the leasehold costs, and industry
partners paid the remaining 50% of leasehold costs. We are the operator, and we
have currently sold 34% of the prospect to industry partners. Under our
arrangements with these partners, 68% of our share of exploration drilling costs
on this prospect, estimated to be approximately $8 million, will be paid by
these partners.
No wells have been drilled on the block, though the prospect is in an area
characterized with significant production history. Immediately east of the block
is Shell's "Mensa" field. Approximately 20 to 30 miles to the west of the
prospect lie the "Mars" and "Ursa" fields. We believe that the objective
interval for the Devil's Tower prospect can be correlated with excellent quality
sands in both of these fields.
We have acquired and interpreted two 3-D seismic surveys over the prospect.
The seismic data show favorable amplitude anomalies at seven levels, which we
interpret to be direct hydrocarbon indicators. We anticipate drilling a 13,000
foot well on the prospect to test those three objective intervals in late 1999.
Green Canyon Blocks 514/516/558/646/649/737 ("Gorilla Area"). The Gorilla
Area is located 170 miles south of New Orleans in water depths from 4,100 feet
to 4,400 feet. We, as 100% working interest owner, acquired these blocks at the
1998 and 1999 lease sales at a cost of $15.9 million. We expect to sell as much
as 80% in these prospects on a promoted basis before drilling and, in return,
anticipate increasing our working interest after prospect payout.
No drilling has occurred on the Gorilla Area to date. A key producing
analog in the prospect area is the "King Kong" discovery immediately north of
the prospect. Conoco drilled two wells that encountered hydrocarbons in an
interval that correlates with the objective section on several of the Gorilla
Area blocks. The remaining Gorilla area blocks are correlates with recent
discoveries at "Holstein" (Green Canyon 644) and "Mad Dog" (Green Canyon 826).
These recent discoveries, along with ongoing developments at King Kong, "Brutus"
and "Allegheny", offer us the opportunity for cooperative ventures with the
working interest owners that could favorably affect the economic return of our
Gorilla Area prospects.
Using 3-D seismic, we have mapped five primary prospects in the Gorilla
Area. Each of the prospects has amplitude anomalies that we believe to be direct
hydrocarbon indicators. These amplitude anomalies are similar in character to
those observed in the area discoveries we mentioned above. We plan our initial
drilling in the prospect area in 2000.
Keathley Canyon Blocks 17, 18, 62, Garden Banks Block 986 ("Kilimanjaro").
This deepwater Gulf prospect is located 230 miles southeast of Houston in 4,700
feet of water. We acquired the four prospect blocks at the August 1998 lease
sale with our partner Oryx (now Kerr-McGee) for a combined bid of
38
<PAGE> 43
$11.3 million. Subsequent to the sale, we sold half of our interest to a third
party in return for that party paying our share of the exploratory drilling
costs and proportionate leasehold reimbursement.
The prospect is controlled by a 3-D seismic survey. We have mapped a
structural closure with amplitude anomalies at three levels within the objective
section. We have observed similar amplitude anomalies at several recent
deepwater discoveries. Kerr-McGee, the operator of the prospect, anticipates
drilling the initial well in the first half of 2000.
SHALLOW WATER GULF AND GULF COAST AREAS
Galveston 151 ("Rembrandt"). We generated the Rembrandt prospect and
acquired it at a federal offshore Gulf of Mexico lease sale in September 1995.
In late 1996, we drilled a successful exploration well on the prospect. In June
1998, we drilled a second successful well on the prospect in a separate fault
block adjacent to the initial discovery well. The second well commenced
production in August 1998. We drilled a third successful well in another fault
block on the prospect in 1998 and commenced production in November 1998. We
operate and have a 33% working interest in this project, which is located
offshore Texas at a water depth of approximately 50 feet. The field had produced
4.3 Bcfe net to us since its inception through June 30, 1999. The field had
estimated net proved reserves of 9.4 Bcfe, 79% of which was natural gas, as of
June 30, 1999.
Brazos A-105. We generated the Brazos A-105 prospect and own a 13% working
interest in this Spirit Energy-operated property, which commenced production in
January 1993. Five wells exploit a single reservoir. No additional wells are
currently anticipated. The field has produced 22.1 Bcfe net to us from its
inception through June 30, 1999. The field has an estimated remaining economic
life of 11 years and estimated remaining net proved reserves of 12.1 Bcfe as of
June 30, 1999.
Sandy Lake. We generated the Sandy Lake prospect, located in the Pine
Island Bayou Field, and commenced production there in August 1994. We operate
the field and own 33% to 50% working interest in the producing wells. The
majority of the 4,680-acre property is located within the city limits of
Beaumont, Texas. Nine productive wells have been drilled thus far, four of which
are producing. The field has produced a total of 25.7 Bcfe net to us as of June
30, 1999. The estimated remaining field life is five years and estimated net
proved reserves are 6.7 Bcfe as of June 30, 1999.
Matagorda Island 683/703. We acquired Matagorda Island blocks 683 and 703
as part of a bid group and commenced production in March 1993. We own a 25%
working interest in the two 5,760-acre, Vastar Resources, Inc.-operated blocks.
Four successful wells have been drilled on the property and no additional
drilling is currently planned. However, a significant portion of the field's
remaining reserves are non-producing. We expect to access these reserves by
workover operations in the next six to 12 months. The field has produced, as of
June 30, 1999, a total of 9.9 Bcfe net to us. The field has an estimated
remaining life of eight years and estimated net proved reserves of 4 Bcfe.
PERMIAN BASIN (WEST TEXAS)
Spraberry Aldwell Unit. We acquired our interest in the Spraberry Aldwell
Unit, located in Reagan County, Texas, in 1985. The 18,250-acre unit is located
in the heart of the Spraberry Trend southeast of Midland, Texas and has produced
oil since 1949. We operate the unit and own working interests in individual
wells ranging from approximately 33% to 84%. We initiated an infill drilling
program in 1987 innovatively commingling the unitized Spraberry formation with
the non-unitized Dean formation. To date, 72 infill wells have been drilled
resulting in 71 productive wells. One well was a mechanical failure and will
likely be redrilled. Currently there are a total of 83 producing wells in the
unit. Depending on, among other things, the future prices of oil and natural
gas, we may drill 20 to 40 additional infill wells, bringing proved undeveloped
reserves into production, in the next two to four years at a projected cost of
approximately $340,000 to $400,000 per well. We estimate that the field's
remaining net proved reserves as of June 30, 1999 were 52.2 Bcfe. We believe
that the field's potential for continued economic oil production exceeds 40
years.
39
<PAGE> 44
RESERVES
The following table shows information related to our estimated proved
reserves by geographic area as of June 30, 1999. Estimated reserve volumes and
values were determined under the method prescribed by the Securities and
Exchange Commission that requires the application of period-end prices for each
period, held constant throughout the projected reserve life. You should not
assume that the present value of estimated future net revenues referred to in
this prospectus is the current market value of our estimated oil and natural gas
reserves.
The reserve information as of June 30, 1999 is based upon a reserve report
prepared by the independent petroleum consulting firm of Ryder Scott Company,
L.P. Producing oil and natural gas reservoirs generally are characterized by
declining production rates that vary depending upon reservoir characteristics
and other factors. Therefore, without reserve additions in excess of production
through successful exploration and development activities, our reserves and
production will decline. Although we estimate our reserves and the estimated
costs of developing them according to industry standards, the estimated costs
may be inaccurate, development may not occur as scheduled and actual results
will likely differ from estimates.
The present value of estimated future net revenues before income tax as of
June 30, 1999 was determined by using actual realized prices as of June 30,
1999, which averaged $17.52 per Bbl of oil and $2.42 per Mcf of natural gas.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
--------------------------------------------------------------------
PRESENT VALUE OF
PROVED RESERVES ESTIMATED FUTURE NET REVENUES(1)
------------------------------- ----------------------------------
OIL NATURAL GAS TOTAL DEVELOPED UNDEVELOPED TOTAL
GEOGRAPHIC AREA (MBBLS) (MMCF) (MMCFE) ($000) ($000) ($000)
- --------------- ------- ----------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Deepwater Gulf..................... 3,292 46,705 66,457 $ 37,626 $47,091 $ 84,717
Gulf Shallow Water and Gulf Coast
Areas............................ 935 38,453 44,063 62,137 2,411 64,548
Permian Basin...................... 4,731 23,887 52,273 16,437 12,218 28,655
----- ------- ------- -------- ------- --------
Total.................... 8,958 109,045 162,793 $116,200 $61,720 $177,920
===== ======= ======= ======== ======= ========
Proved Developed Reserves.......... 2,990 73,594 91,534 $116,200
===== ======= ======= ========
</TABLE>
- -------------------------
(1) Discounted at 10% present value (period-end prices held constant). The
amounts are before income taxes and therefore are not the same as the
"Standardized Measure" disclosed in Note 10 of the notes to our consolidated
financial statements.
The process of estimating oil and natural gas reserves is complex. It
requires many assumptions, including assumptions relating to natural gas and oil
prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds. Actual future production, oil and natural gas prices,
operating expenses and quantities of oil and natural gas reserves most likely
will vary from our estimates. See Note 10 of the notes to our consolidated
financial statements for a discussion of the risks inherent in oil and natural
gas estimates and for additional information concerning our proved reserves.
Our estimates of proved reserves in the table above do not differ
materially from those we have filed with other federal agencies.
40
<PAGE> 45
PRODUCTION
The following table shows information related to oil and natural gas
production, average sales price received and expenses per unit of production
during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (MBbls)................................ 750 977 786 441 348
Natural gas (MMcf)......................... 20,429 18,004 19,477 9,483 10,583
Natural gas equivalent (MMcfe)............. 24,929 23,866 24,193 12,129 12,671
Average daily production (MMcfe)........... 68 65 66 67 70
AVERAGE REALIZED SALES PRICES
(INCLUDING EFFECTS OF HEDGING):
Oil (per Bbl).............................. $ 18.04 $ 18.48 $ 12.80 $ 13.59 $ 13.28
Natural gas (per Mcf)...................... 2.29 2.48 2.39 2.42 2.01
Natural gas equivalent (per Mcfe).......... 2.42 2.63 2.34 2.39 2.04
EXPENSES (PER MCFE):
Lease operating............................ 0.36 0.39 0.41 0.40 0.45
General and administrative, net(1)......... 0.13 0.13 0.20 0.15 0.22
Depreciation, depletion and amortization,
before impairment....................... 1.25 1.33 1.40 1.34 1.25
</TABLE>
- -------------------------
(1) General and administrative expenses are shown net of amounts capitalized
under the full cost method of accounting and overhead reimbursements we
receive from owners of working interests in the properties operated by us.
PRODUCTIVE WELLS
The following table shows the number of productive oil and natural gas
wells in which we owned a working interest as of June 30, 1999:
<TABLE>
<CAPTION>
TOTAL
PRODUCTIVE
WELLS
------------
GROSS NET
----- ----
<S> <C> <C>
Oil......................................................... 89 60.4
Natural gas................................................. 63 12.4
--- ----
Total............................................. 152 72.8
=== ====
</TABLE>
Productive wells consist of producing wells and wells capable of
production, including natural gas wells awaiting pipeline connections. We have
six wells that are completed in more than one producing horizon; those wells
have been counted as single wells.
41
<PAGE> 46
ACREAGE
The following table shows information relating to our developed and
undeveloped acreage as of June 30, 1999.
<TABLE>
<CAPTION>
DEVELOPED ACRES(1) UNDEVELOPED ACRES(2)
------------------ ---------------------
GROSS NET GROSS NET
-------- ------- --------- ---------
<S> <C> <C> <C> <C>
Texas (Onshore)................................. 21,109 13,890 5,547 2,451
All other states (Onshore)...................... 671 212 644 196
Offshore........................................ 206,531 44,738 438,207 222,278
------- ------ ------- -------
Total................................. 228,311 58,840 444,398 224,925
======= ====== ======= =======
</TABLE>
- -------------------------
(1) Developed acres are acres spaced or assigned to productive wells.
(2) Undeveloped acres are acres on which wells have not been drilled or
completed to a point that would permit the production of commercial
quantities of oil and natural gas regardless of whether this acreage
contains proved reserves.
DRILLING ACTIVITY
The following table sets forth information with regard to our drilling
activity during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- -----------
GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EXPLORATORY WELLS:
Productive.................. 3 0.8 4 1.4 3 1.1 2 0.7 1 0.3
Dry......................... 4 1.4 7 1.6 5 1.5 3 0.9 -- --
-- --- -- --- -- ---- -- --- -- ---
Total............... 7 2.2 11 3.0 8 2.6 5 1.6 1 0.3
== === == === == ==== == === == ===
DEVELOPMENT WELLS:
Productive.................. 5 1.7 11 5.3 19 8.6 11 6.4 6 0.8
Dry......................... -- -- -- -- 3 1.1 1 0.7 -- --
-- --- -- --- -- ---- -- --- -- ---
Total............... 5 1.7 11 5.3 22 9.7 12 7.1 6 0.8
== === == === == ==== == === == ===
TOTAL WELLS:
Productive.................. 8 2.5 15 6.7 22 9.7 13 7.1 7 1.1
Dry......................... 4 1.4 7 1.6 8 2.6 4 1.6 -- --
-- --- -- --- -- ---- -- --- -- ---
Total............... 12 3.9 22 8.3 30 12.3 17 8.7 7 1.1
== === == === == ==== == === == ===
</TABLE>
The results for the six months ended June 30, 1999 include a successful
exploratory well on the Aconcagua prospect. However, no proved reserves are yet
attributable to this well pending drilling of an appraisal well.
DISPOSITION OF PROPERTIES
We periodically evaluate, and, when appropriate, sell, some of our
producing properties that we consider to be marginally profitable or outside of
our areas of concentration. These sales enable us to maintain financial
flexibility, reduce overhead and redeploy the proceeds from the sale to
activities that we believe have a higher potential financial return. We made no
property dispositions during 1997 or 1998. During 1999, we sold a portion of our
working interest in the Pluto deepwater Gulf exploitation project.
42
<PAGE> 47
TITLE TO PROPERTIES
Our properties are subject to customary royalty interests, liens incident
to operating agreements, liens for current taxes and other burdens, including
other mineral encumbrances and restrictions. We do not believe that any of these
burdens materially interferes with the use of our properties in the operation of
our business.
We believe that we have satisfactory title to or rights in all of our
producing properties. As is customary in the oil and natural gas industry,
minimal investigation of title is made at the time of acquisition of undeveloped
properties. We investigate title and obtain title opinions from local counsel,
only before commencement of drilling operations. We believe that title issues
generally are not as likely to arise on offshore oil and gas properties as on
onshore properties.
MARKETING, CUSTOMERS AND HEDGING ACTIVITIES
We market substantially all of the oil and gas production from properties
we operate and from properties others operate where our interest is significant.
The majority of our natural gas, oil and condensate production is sold to a
variety of purchasers under short-term (less than 12 months) contracts, usually
at market-sensitive prices. We have a gas processing agreement for our gas
production from Sandy Lake. We believe that the price we receive for that gas
production is favorable compared to market prices at that location. The
following table lists customers accounting for more than 10% of our total
revenues for the year indicated. A "--" indicates that revenues from the
customer accounted for less than 10% of our total revenues for that year.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
CUSTOMER 1996 1997 1998
- -------- ----- ----- -----
<S> <C> <C> <C>
Duke Energy................................................. -- 19% 29%
Transco Energy Marketing Company............................ 15% 14% 16%
Enron North America Corp. .................................. -- 18% 15%
Genesis Crude Oil LP........................................ 13% 19% 10%
Texaco Natural Gas, Inc. ................................... 13% -- --
Seneca Resources Corporation................................ 10% -- --
</TABLE>
Due to the nature of the markets for oil and natural gas, we do not believe that
the loss of any one of these customers would have a material adverse effect on
our financial condition or results of operations.
Historically, demand for natural gas has been seasonal in nature, with peak
demand and typically higher prices during the colder winter months.
We regularly use hedging transactions related to a portion of our oil and
natural gas production to reduce our exposure to price fluctuations and to
achieve a more predictable cash flow. We do not hedge for speculative purposes.
We customarily hedge through swap arrangements that establish an index-related
price above which we pay the hedging partner and below which the hedging partner
pays us. Approximately 40% of our equivalent production was subject to hedge
positions during 1998. Hedging arrangements entered into through August 31,
1999, cover approximately 59% of our anticipated equivalent production for 1999.
In August 1999, we purchased two gas call options for November and December 1999
for a cumulative notional quantity of 1,098 MMBtu. The November option is at
$4.25 per MMBtu and the December option is at $4.50 per MMBtu. Hedging
arrangements may expose us to the risk of financial loss in certain
circumstances, including instances where our production, which is in effect
hedged, is less than expected or where there is a sudden, unexpected event
materially impacting prices. Our revolving credit facility places restrictions
on our use of hedging. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity, Capital Expenditures and
Capital Resources -- Changes in prices and hedging activities."
43
<PAGE> 48
COMPETITION
We believe that the locations of our leasehold acreage; our exploration,
drilling and production capabilities; and the experience of our management
generally enable us to compete effectively. However, our competitors include
major integrated oil and natural gas companies and numerous independent oil and
natural gas companies, individuals and drilling and income programs. Many of our
larger competitors possess and employ financial and personnel resources
substantially greater than those available to us. These companies may be able to
pay more for productive oil and natural gas properties and exploratory prospects
and to define, evaluate, bid for and purchase a greater number of properties and
prospects than our financial or personnel resources permit. Our ability to
acquire additional prospects and to discover reserves in the future depends on
our ability to evaluate and select suitable properties and to close transactions
in a highly competitive environment. Also, there is substantial competition for
capital available for investment in the oil and natural gas industry.
ROYALTY RELIEF
The Outer Continental Shelf Deep Water Royalty Relief Act (the "RRA"),
signed into law on November 28, 1995, provides that all tracts in the Gulf of
Mexico west of 87 degrees, 30 minutes West longitude in water more than 200
meters deep offered for bid within five years of the RRA will be relieved from
normal federal royalties as follows:
<TABLE>
<CAPTION>
WATER DEPTH ROYALTY RELIEF
- ----------- --------------
<S> <C>
200-400 meters......................... no royalty payable on the first 105 Bcfe produced
400-800 meters......................... no royalty payable on the first 315 Bcfe produced
800 meters or deeper................... no royalty payable on the first 525 Bcfe produced
</TABLE>
The RRA also allows mineral interest owners the opportunity to apply for
royalty relief for new production on leases acquired before the RRA was enacted.
If the United State Minerals Management Service determines that new production
would not be economical without royalty relief, then a portion of the royalty
may be relieved to make the project economical.
The impact of royalty relief is significant, as normal royalties for leases
in water depths of 400 meters or less is 16.7% and normal royalties for leases
in water depths greater than 400 meters is 12.5%. Royalty relief can
substantially improve the economics of projects in deep water. We have acquired
50 new deepwater leases that are qualified for royalty relief and have received
royalty relief on the Pluto leases.
REGULATION
Our operations are subject to extensive and continually changing
regulation, as legislation affecting the oil and natural gas industry is under
constant review for amendment and expansion. Many departments and agencies, both
federal and state, are authorized by statute to issue and have issued rules and
regulations binding on the oil and natural gas industry and its individual
participants. The failure to comply with these rules and regulations can result
in substantial penalties. The regulatory burden on the oil and natural gas
industry increases our cost of doing business and, consequently, affects our
profitability. However, we do not believe that we are affected in a
significantly different manner by these regulations than are our competitors in
the oil and natural gas industry.
TRANSPORTATION AND SALE OF NATURAL GAS
The Federal Energy Regulatory Commission ("FERC") regulates interstate
natural gas pipeline transportation rates as well as the terms and conditions of
service. FERC's regulations affect the marketing of the natural gas we produce,
as well as the revenues we receive for sales of that natural gas. In 1985, the
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FERC adopted policies that make natural gas transportation accessible to natural
gas buyers and sellers on an open-access, nondiscriminatory basis. The FERC
issued Order No. 636 on April 8, 1992, which, among other things, prohibits
interstate pipelines from making sales of gas tied to the provision of other
services and requires pipelines to "unbundle" the services they provide. This
has enabled buyers to obtain natural gas supplies from any source and secure
independent delivery service from the pipelines. All of the interstate pipelines
subject to the FERC's jurisdiction are now operating under Order No. 636 open
access tariffs. On July 29, 1998, the FERC issued a Notice of Proposed
Rulemaking regarding the regulation of short-term natural gas transportation
services. The FERC proposes to revise its regulations to require all available
short-term capacity, including capacity released by shippers holding firm
entitlements, to be allocated through an auction process. The FERC also proposes
to require pipelines to offer additional services under open access principles,
such as "park and loan" services. In a related initiative, the FERC issued a
Notice of Inquiry on July 29, 1998 seeking input from natural gas industry
players and affected entities regarding virtually every aspect of the regulation
of interstate natural gas transportation services. Among other things, FERC is
seeking input on whether to retain cost-based rate regulation for long term
transportation services, potential changes in the manner in which rates are
designed and the use of index driven or incentive rates for pipelines. The July
29, 1998 Notice of Inquiry may lead to a subsequent Notice of Proposed
Rulemaking to further revise the FERC's regulations.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. We cannot predict when or if any of these
proposals might become effective or their effect, if any, on our operations. The
natural gas industry historically has been closely regulated; thus there is no
assurance that the less stringent regulatory approach recently pursued by the
FERC and Congress will continue.
REGULATION OF PRODUCTION
The production of oil and natural gas is subject to regulation under a wide
range of state and federal statutes, rules, orders and regulations. State and
federal statutes and regulations require permits for drilling operations,
drilling bonds and reports concerning operations. Most states in which we own
and operate properties have regulations governing conservation matters,
including provisions for the unitization or pooling of oil and natural gas
properties, the establishment of maximum rates of production from oil and
natural gas wells and the regulation of the spacing, plugging and abandonment of
wells. Many states also restrict production to the market demand for oil and
natural gas and several states have indicated interest in revising applicable
regulations. The effect of these regulations is to limit the amount of oil and
natural gas we can produce from our wells and to limit the number of wells or
the locations at which we can drill. Moreover, each state generally imposes a
production or severance tax with respect to production and sale of crude oil,
natural gas and gas liquids within its jurisdiction.
Most of our offshore operations are conducted on federal leases that are
administered by the United States Minerals Management Service (the "MMS") and
are required to comply with the regulations and orders promulgated by MMS. Among
other things, we are required to obtain prior MMS approval for our exploration
plans and our development and production plans for these leases. The MMS
regulations also establish construction requirements for production facilities
located on our federal offshore leases and govern the plugging and abandonment
of wells and the removal of production facilities from these leases. Under
certain circumstances, the MMS could require us to suspend or terminate our
operations on a federal lease.
In addition, a portion of our Sandy Lake Properties are located within the
boundaries of the Big Thicket National Preserve (the "BTNP"), which is under the
jurisdiction of the United States National Park Service (the "NPS"). Our
operations within the BTNP must comply with regulations of the NPS. In general,
these regulations require us to obtain NPS approval of a plan of operations for
any activity within the BTNP or to demonstrate that a waiver of a plan of
operations is appropriate. Compliance with these regulations increases our cost
of operations and may delay the commencement of specific operations.
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<PAGE> 50
ENVIRONMENTAL REGULATIONS
General. Various federal, state and local laws and regulations governing
the discharge of materials into the environment, or otherwise relating to the
protection of the environment, affect our operations and costs. In particular,
our exploration, development and production operations, our activities in
connection with storage and transportation of crude oil and other liquid
hydrocarbons and our use of facilities for treating, processing or otherwise
handling hydrocarbons and related wastes are subject to stringent environmental
regulation. As with the industry generally, compliance with existing regulations
increases our overall cost of business. The areas affected include:
- unit production expenses primarily related to the control and limitation
of air emissions and the disposal of produced water;
- capital costs to drill exploration and development wells resulting from
expenses primarily related to the management and disposal of drilling
fluids and other oil and gas exploration wastes; and
- capital costs to construct, maintain and upgrade equipment and
facilities.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as "Superfund," imposes liability, without
regard to fault or the legality of the original act, on some classes of persons
that contributed to the release of a "hazardous substance" into the environment.
These persons include the "owner" or "operator" of the site and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. CERCLA also authorizes the Environmental Protection Agency and, in some
instances, third parties to act in response to threats to the public health or
the environment and to seek to recover from the responsible classes of persons
the costs they incur. In the course of our ordinary operations, we may generate
waste that may fall within CERCLA's definition of a "hazardous substance." We
may be jointly and severally liable under CERCLA or comparable state statutes
for all or part of the costs required to clean up sites at which these wastes
have been disposed.
We currently own or lease, and have in the past owned or leased, numerous
properties that for many years have been used for the exploration and production
of oil and gas. Although we have used operating and disposal practices that were
standard in the industry at the time, hydrocarbons or other wastes may have been
disposed of or released on or under the properties owned or leased by us or on
or under other locations where these wastes have been taken for disposal. In
addition, many of these properties have been operated by third parties whose
actions with respect to the treatment and disposal or release of hydrocarbons or
other wastes were not under our control. These properties and wastes disposed on
these properties may be subject to CERCLA and analogous state laws. Under these
laws, we could be required:
- to remove or remediate previously disposed wastes, including wastes
disposed of or released by prior owners or operators;
- to clean-up contaminated property, including contaminated groundwater; or
- to perform remedial plugging operations to prevent future contamination.
Oil Pollution Act of 1990. The Oil Pollution Act of 1990 (the "OPA") and
regulations thereunder impose liability on "responsible parties" for damages
resulting from crude oil spills into or upon navigable waters, adjoining
shorelines or in the exclusive economic zone of the United States. Liability
under the OPA is strict, joint and several, and potentially unlimited. A
"responsible party" includes the owner or operator of an onshore facility and
the lessee or permittee of the area in which an offshore facility is located.
The OPA also requires the lessee or permittee of the offshore area in which a
covered offshore facility is located to establish and maintain evidence of
financial responsibility in the amount of $35 million ($10 million if the
offshore facility is located landward of the seaward boundary of a state) to
cover liabilities related to a crude oil spill for which such person is
statutorily responsible. The amount of required financial responsibility may be
increased above the minimum amounts to an amount not exceeding $150 million
depending on the risk represented by the quantity or quality of crude oil that
is
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<PAGE> 51
handled by the facility. The MMS has promulgated regulations that implement the
financial responsibility requirements of the OPA. A failure to comply with the
OPA's requirements or inadequate cooperation during a spill response action may
subject a responsible party to civil or criminal enforcement actions. We are not
aware of any action or event that would subject us to liability under the OPA
and we believe that compliance with the OPA's financial responsibility and other
operating requirements will not have a material adverse effect on us.
Clean Water Act. The Federal Water Pollution Control Act of 1972, as
amended (the "Clean Water Act"), imposes restrictions and controls on the
discharge of produced waters and other oil and gas wastes into navigable waters.
These controls have become more stringent over the years, and it is possible
that additional restrictions will be imposed in the future. Permits must be
obtained to discharge pollutants into state and federal waters. Certain state
regulations and the general permits issued under the Federal National Pollutant
Discharge Elimination System program prohibit the discharge of produced waters
and sand, drilling fluids, drill cuttings and certain other substances related
to the oil and gas industry into certain coastal and offshore water. The Clean
Water Act provides for civil, criminal and administrative penalties for
unauthorized discharges for oil and other hazardous substances and imposes
liability on parties responsible for those discharges for the costs of cleaning
up any environmental damage caused by the release and for natural resource
damages resulting from the release. Comparable state statutes impose liabilities
and authorize penalties in the case of an unauthorized discharge of petroleum or
its derivatives, or other hazardous substances, into state waters. We believe
that our operations comply in all material respects with the requirements of the
Clean Water Act and state statutes enacted to control water pollution.
Resources Conservation Recovery Act. The Resource Conservation Recovery Act
("RCRA") is the principle federal statute governing the treatment, storage and
disposal of hazardous wastes. RCRA imposes stringent operating requirements (and
liability for failure to meet such requirements) on a person who is either a
"generator" or "transporter" of hazardous waste or an "owner" or "operator" of a
hazardous waste treatment, storage or disposal facility. At present, RCRA
includes a statutory exemption that allows most crude oil and natural gas
exploration and production waste to be classified as nonhazardous waste. A
similar exemption is contained in many of the state counterparts to RCRA. As a
result, we are not required to comply with a substantial portion of RCRA's
requirements because our operations generate minimal quantities of hazardous
wastes. At various times in the past, proposals have been made to amend RCRA to
rescind the exemption that excludes crude oil and natural gas exploration and
production wastes from regulation or hazardous waste. Repeal or modification of
the exemption by administrative, legislative or judicial process, or
modification of similar exemptions in applicable state statutes, would increase
the volume of hazardous waste we are required to manage and dispose of and would
cause us to incur increased operating expenses.
EMPLOYEES
As of June 30, 1999, we had approximately 80 full-time employees. Our
employees are not represented by any labor union. We consider relations with our
employees to be satisfactory. We have never experienced a work stoppage or
strike.
LEGAL PROCEEDINGS
In the ordinary course of business, we are a claimant or a defendant in
various other legal proceedings, including proceedings as to which we have
insurance coverage. We do not consider our exposure in these proceedings,
individually or in the aggregate, to be material.
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MARINER HISTORY AND ORGANIZATION
The issuer in this offering is Mariner Energy LLC, a Delaware limited
liability company. Mariner Energy LLC owns all of the common stock of Mariner
Holdings, Inc., a Delaware corporation. Mariner Holdings, Inc. owns all of the
common stock of Mariner Energy, Inc., a Delaware corporation and currently our
only operating company. References to "we," "us" and "our" used in this
prospectus are references to the three companies together, taken as a whole,
unless the context otherwise indicates.
Mariner Energy, Inc. was formed in 1983 as Trafalgar Oil & Gas Co. and
later changed its name to Hardy Oil & Gas USA, Inc. Before April 1996, Hardy Oil
& Gas USA, Inc. was an indirect, wholly owned subsidiary of Hardy Oil & Gas plc.
In April 1996, ENA, JEDI and members of Hardy Oil & Gas USA, Inc.'s management
created Mariner Holdings, Inc., for the purpose of acquiring Hardy Oil & Gas
USA, Inc. The acquisition was completed in May 1996. We refer to this
transaction as our "acquisition."
In connection with our acquisition:
- JEDI acquired approximately 96% of the equity interests of Mariner
Holdings, Inc.; and
- management members and employees purchased the remaining 4% for cash and
other value.
In September 1998, we formed Mariner Energy LLC, which became the parent
company of Mariner Holdings, Inc. We effected this reorganization so that we
could clarify, through our limited liability company agreement, the fiduciary
duties of our principal shareholder and its affiliates.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Shown below are the names, ages and positions of our executive officers and
directors and a key consultant as of August 31, 1999. All directors are elected
for a term of one year and serve until their successors are elected and
qualified. All executive officers hold office until their successors are elected
and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert E. Henderson....................... 46 Chairman of the Board, President and Chief
Executive Officer
Richard R. Clark.......................... 44 Executive Vice President and Director
L. V. "Bud" McGuire....................... 57 Senior Vice President -- Operations and
Director
Michael W. Strickler...................... 43 Senior Vice President -- Exploration &
Land and Director
Frank A. Pici............................. 43 Vice President -- Finance, Chief Financial
Officer and Treasurer
Gregory K. Harless........................ 50 Vice President -- Oil & Gas Marketing
W. Hunt Hodge............................. 43 Vice President -- Administration
Thomas E. Young........................... 41 Vice President -- Land
Christopher E. Lindsey.................... 33 General Counsel and Secretary
David S. Huber............................ 49 Consultant and Director of Deepwater
Developments
Richard B. Buy............................ 46 Director
D. Brad Dunn.............................. 36 Director
Mark E. Haedicke.......................... 44 Director
Stephen R. Horn........................... 41 Director
Jeffrey McMahon........................... 37 Director
Jere C. Overdyke, Jr. .................... 46 Director
Frank Stabler............................. 45 Director
</TABLE>
MR. HENDERSON has been our President and Chief Executive Officer since
1987, our Chairman of the Board of Directors since May 1996, and a director
since 1985. Mr. Henderson served as a director of London-based Hardy plc, our
former parent company, between 1989 and 1996. From 1984 to 1987, he served us or
our predecessors as Vice President of Finance and Chief Financial Officer. From
1976 to 1984, he held various positions with ENSTAR Corporation, including
treasurer of ENSTAR Petroleum, which operated in the United States and
Indonesia.
MR. CLARK has been our Executive Vice President since May 1998. He served
as Senior Vice President of Production from 1991 to 1998, and has been a
director since 1988. Before joining us in 1984, he worked for Shell Oil Company
in their offshore division.
MR. MCGUIRE has been our Senior Vice President -- Operations since joining
us in June 1998. He has been a director since June 1999. Before joining us, Mr.
McGuire was Vice President -- Operations for Enron Oil & Gas International, Inc.
Before joining Enron, he served five years with Kerr-McGee Corporation, an
energy and chemical company, as Senior Vice President overseeing worldwide
production operations. His experience before Kerr-McGee included employment with
Hamilton Oil Corporation from 1981 to 1991, where he served as Vice President of
Production for Hamilton in the North Sea. He began his career in 1966 with
Conoco Inc.
MR. STRICKLER has been our Senior Vice President -- Exploration and Land
since 1991 and a director since 1989. Before joining us in 1984, Mr. Strickler
worked for several independent oil companies as an exploration geologist
generating and evaluating exploration plays in various domestic and overseas
basins.
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MR. PICI has been Vice President -- Finance and Chief Financial Officer
since joining us in December 1996. From 1989 to 1996, Mr. Pici was employed by
Cabot Oil & Gas Corporation, holding several financial management positions
including Corporate Controller. Before joining Cabot Oil & Gas, an exploration
and production company, he was controller of an independent oil and gas company
in Pittsburgh. Mr. Pici began his career at Coopers & Lybrand LLP, an accounting
firm, and is a certified public accountant.
MR. HARLESS has been Vice President -- Oil and Gas Marketing since 1990.
His experience before joining us in 1988 included Vice President of marketing
and regulatory affairs of Enron Oil and Gas Company and District Operations
Manager with Coastal States Oil & Gas Co.
MR. HODGE has been Vice President -- Administration since 1991. Before
joining us in 1985, he was Purchasing Manager of Santa Fe Minerals Company.
MR. YOUNG has been our Vice President -- Land since November 1998. Before
November 1998, he was our Manager of International Negotiations since December
1997. Before December 1997, he was our Land Manager-Central Gulf. Before joining
us in 1985, Mr. Young served as a landman for TXO Production Corp.
MR. LINDSEY has been General Counsel and Secretary since August 1998.
Before joining us, Mr. Lindsey was associated with Bracewell & Patterson,
L.L.P., a law firm, for five years.
MR. HUBER began his association with us in 1991 as a deepwater project
management consultant. Before joining us, Mr. Huber was employed by Hamilton Oil
Corporation in the North Sea from 1981 to 1991, holding positions of Production
Manager, Planning and Economics Manager and Engineering Manager. He was the
Deepwater Drilling Engineering Supervisor for Esso Exploration, Inc. from 1974
to 1980.
MR. BUY has served as a director since January 1997. Since 1994, he has
been an employee of ENA or its affiliates, currently serving as an Executive
Vice President and the Chief Risk Officer of Enron Corp. Before joining ENA, Mr.
Buy was a Vice President at Bankers' Trust Company in the Energy Group.
MR. DUNN has served as a director since May 1999. He is a Vice President of
ENA and has held various positions with ENA since September 1994. Before 1994,
Mr. Dunn worked as a Petroleum Engineer with Delhi Gas Pipeline Corporation and
Mobil Oil Corporation.
MR. HAEDICKE has served as a director since October 1997. He is currently a
Managing Director and General Counsel of ENA. Mr. Haedicke also serves on the
board of directors of the International Swaps and Derivatives Association, Inc.
and holds a seat on the New York Mercantile Exchange. He has been associated
with ENA since its inception in 1990.
MR. HORN has served as a director since November 1997. He has been an
employee of ENA since 1996 and is currently a Vice President of ENA. Before
joining ENA, Mr. Horn was a principal in Yellowstone Energy Partners, a private
equity investing firm in Houston, Texas, a position he had held since 1993.
MR. MCMAHON has served as a director since September 1998. Since 1994, he
has been an employee of ENA or its affiliates, currently serving as Executive
Vice President, Finance and the Treasurer of Enron Corp. Before joining ENA, Mr.
McMahon served as Senior Vice President and Chief Financial Officer of MG
Natural Gas Corp., a medium-sized natural gas marketing and finance company in
Houston, Texas.
MR. OVERDYKE has served as a director since May 1996. Since 1991, he has
been an employee of ENA or its affiliates, currently serving as a Managing
Director of Enron Corp. Mr. Overdyke has over 20 years of experience in the
energy sector and has held various financial and management positions with
public and private independent exploration and production companies.
MR. STABLER has served as a director since May 1996. He is currently the
President and Chief Operating Officer of Caribbean Basin Limited, an Enron
affiliate, and has held positions with ENA or its affiliates since 1992. From
1989 to 1992, Mr. Stabler served as manager of investor services for American
Exploration Company.
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We anticipate that two additional directors will be elected before the
closing of the offering.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has established three standing committees: an audit
committee, a compensation committee and an executive committee. The audit
committee is charged with recommending to our board of directors the appointment
of our independent auditors, reviewing the compensation of our auditors and
reviewing with our accountants the plans for and the results of their auditing
engagement. The compensation committee reviews the performance and compensation
of directors, executive officers and key employees and makes recommendations to
the board of directors regarding those matters. It also administers any
long-term incentive compensation and share option plans.
SUMMARY COMPENSATION TABLE
The following table shows the annual compensation for our Chief Executive
Officer and the four other most highly compensated executive officers for the
three fiscal years ended December 31, 1998, and includes two additional persons
who were not executive officers as of December 31, 1998. These individuals are
sometimes referred to as the "named executive officers."
<TABLE>
<CAPTION>
CURRENT YEAR
COMPENSATION
ANNUAL COMPENSATION UNDER OUR
-------------------------- OVERRIDING
YEAR OTHER ANNUAL ROYALTY ALL OTHER
NAME AND PRINCIPAL POSITION ENDED SALARY COMPENSATION(1) PROGRAM(2) COMPENSATION(3)
- --------------------------- ----- -------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Robert E. Henderson............. 1998 $285,000 $4,800 $1,292 $ 522
President and 1997 255,000 6,000 1,904 315
Chief Executive Officer 1996 236,000 6,000 1,167 306
Richard R. Clark................ 1998 225,000 4,800 821 306
Executive Vice President 1997 185,000 6,000 1,205 306
of Production 1996 166,500 6,000 710 306
Michael W. Strickler............ 1998 182,000 4,800 821 306
Senior Vice President 1997 165,000 6,000 1,205 306
of Exploration 1996 150,000 5,880 710 306
Frank A. Pici(4)................ 1998 160,000 4,380 356 306
Vice President of Finance and 1997 146,000 2,747 152 306
Chief Financial Officer 1996 12,167 0 0 26
Gregory K. Harless.............. 1998 143,000 3,813 527 522
Vice President of Oil & Gas 1997 127,100 4,911 779 522
Marketing 1996 121,000 4,760 491 522
Clinton D. Smith(5)............. 1998 111,993 4,221 520 183,229
Formerly Vice President of 1997 140,700 5,367 766 306
Operations 1996 131,500 5,154 468 306
James M. Fitzpatrick(5)......... 1998 107,269 3,720 527 151,227
Formerly Vice President of 1997 124,000 4,762 779 522
Land & Legal 1996 120,000 4,390 491 522
</TABLE>
- -------------------------
(1) These amounts reflect our contribution under the discretionary profit
sharing feature of our Employee Capital Accumulation Plan. See "401(k)
Plan." For each of the named executive officers, the aggregate amount of
perquisites and other personal benefits did not exceed the lesser of $50,000
or 10% of the officer's total annual salary and bonus and those amounts are
not included in the table.
(2) These amounts include the value conveyed during the applicable year
attributable to overriding royalty interests assigned to the named executive
officer during the applicable year and distributions received, if any,
during the applicable year attributable to overriding royalty interests
assigned to the named
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<PAGE> 56
executive officers during the applicable year. For information on overriding
royalty payments received during the applicable year attributable to
overriding royalty interests assigned to the named executive officer during
past years, see the table below under "-- Overriding Royalty Program." These
amounts also do not include amounts received during the applicable year as a
result of sales of overriding royalty interests by individuals, normally in
connection with sales of properties by us. No such sales were made in 1998,
1997 or 1996.
(3) These amounts reflect insurance premiums paid by us for term life insurance
for the benefit of the named executive officers.
(4) Mr. Pici joined us in December 1996.
(5) Mr. Smith's employment with us terminated in September 1998, and Mr.
Fitzpatrick's employment with us terminated in October 1998. The "All Other
Compensation" column reflects both insurance premiums paid by us for term
life insurance and severance benefits pursuant to their employment
agreements with us.
OPTIONS
We did not grant any options to the named executive officers in 1998. None
of the named executive officers exercised stock options in 1998. The following
table shows the number and value of options owned by our named executive
officers at December 31, 1998. With the exception of options held by Mr. Pici,
all options held by the named executive officers were granted in connection with
our acquisition from Hardy in 1996.
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998(1)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert E. Henderson............................ 95,448 143,172
Richard R. Clark............................... 67,164 100,764
Michael W. Strickler........................... 67,164 100,764
Frank A. Pici.................................. 14,616 58,464
Gregory K. Harless............................. 17,136 25,704
</TABLE>
- ---------------
(1) Assumes a market value equal to $ per share, the mid point of the
range shown on the cover of this prospectus.
EMPLOYMENT AGREEMENTS
We and each of the named executive officers are parties to employment
agreements for initial terms of:
- five years in the case of Mr. Henderson;
- five years in the case of Mr. Clark;
- five years in the case of Mr. Strickler;
- two and one-half years in the case of Mr. Pici; and
- three years in the case of Mr. Harless.
Following the expiration of the initial term or any extended term, the
employment agreements extend for:
- six months in the case of Messrs. Henderson, Clark, Strickler and Pici;
and
- three months in the case of Mr. Harless,
unless notice of termination is given by either us or the named executive
officer at least three or six (as applicable) months before the end of the
initial term or extended term, as applicable.
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Under the employment agreements, the current annual salaries are $285,000
for Mr. Henderson, $225,000 for Mr. Clark, $190,000 for Mr. Strickler, $160,000
for Mr. Pici, and $143,000 for Mr. Harless. Our board of directors may in its
discretion increase their salaries.
The named executive officers are entitled to participate in any medical,
dental, life and accidental death and dismemberment insurance programs and
retirement, pension, deferred compensation and other benefit programs instituted
by us from time to time. The employees are also entitled to vacation,
reimbursement of specified expenses and, depending on the employment agreement,
either an automobile allowance or a leased vehicle of our choice and
reimbursement for expenses related to the use of that leased vehicle. As
incentive compensation, the named executive officers are entitled to receive
overriding royalty interests in some oil and gas prospects that we acquire. See
" -- Overriding Royalty Program."
If we terminate a named executive officer's employment agreement without
cause, if the named executive officer terminates his employment contract for
good reason, or if either we or the named executive officer gives notice of
termination on the expiration of his term of employment, then the named
executive officer will be entitled to, among other things:
- the value of his salary and other benefits through the end of the initial
term or any extended term of the employment agreement;
- a lump sum cash payment equal to 12 months salary in the case of Mr.
Henderson, nine months salary in the case of Messrs. Clark and Strickler,
and six months salary in the case of Messrs. Pici and Harless;
- a lump sum cash payment equal to all earned and unused vacation time for
the previous year and the then current year; and
- an assignment of his vested interests under our incentive compensation
plans, including overriding royalty interests. See " -- Overriding
Royalty Program."
If a named executive officer's employment agreement is terminated by the named
executive officer without good reason, he will be entitled to:
- the value of his salary and benefits through the date that his employment
agreement is terminated;
- a lump sum cash payment equal to all earned and unused vacation time for
the previous year and the then current year; and
- an assignment of his vested interests under our incentive compensation
plan, including overriding royalty interests. See "-- Overriding Royalty
Program."
If a named executive officer's employment agreement is terminated by us for
cause, we will have no obligation to that employee other than to:
- pay his salary through the day of termination;
- pay him the value of his benefits under the employment agreement through
the month of termination; and
- assign to him his vested interests under our incentive compensation plan,
including overriding royalty interests. See "-- Overriding Royalty
Program."
To the extent any amounts paid on termination of an employment agreement
are subject to the "golden parachutes" excise tax, those amounts are grossed-up
to cover the excise tax and any applicable taxes on the gross-up amount.
Each named executive officer has agreed that during the term of his
employment agreement, and, if the named executive officer's employment agreement
is terminated by us for cause or terminated by the
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named executive officer other than for good reason, for 12 months after the term
expires in the case of Messrs. Henderson, Clark and Strickler and six months
after the term expires in the case of Messrs. Pici and Harless, he will not
compete with us for business or hire away our employees.
SHARE OPTION PLAN
Under the Mariner Energy LLC 1996 Stock Option Plan, a committee of our
board of directors is authorized to grant options to purchase common shares,
including options qualifying as "incentive stock options" under Section 422 of
the Internal Revenue Code and options that do not so qualify, to employees and
consultants as additional compensation for their services to us. This plan is
intended to promote our long-term financial interests by providing a means by
which designated employees and consultants may develop a sense of proprietorship
and personal involvement in our development and financial success. We believe
that this encourages them to remain with and devote their best efforts to our
business and to advance the mutual interests of us and our shareholders.
A total of 2,433,600 common shares may be issued under options granted
under this plan, subject to adjustment in the event of a share split, share
dividend or other change in the common shares or our capital structure. On
completion of the offering, options to purchase 2,076,120 common shares will be
outstanding under this plan, of which will be exercisable. The exercise
price for outstanding options to purchase an aggregate of 1,799,112 shares is
$8.33 per share, and the exercise price for options to purchase the remaining
outstanding aggregate of 277,008 shares is $14.58 per share. Subject to the
provisions of this plan, the compensation committee is authorized to determine
who may participate in this plan, the number of shares that may be issued under
each option and the terms, conditions and limitations applicable to each grant.
Subject to some limitations, our board of directors is authorized to amend,
alter or terminate this plan.
OVERRIDING ROYALTY PROGRAM
Employees participating in our overriding royalty program receive incentive
compensation in the form of overriding royalty interests in some of the oil and
natural gas prospects we acquire. The aggregate overriding royalty interests do
not exceed 1.5% of our working interest in these prospects before well payout or
6% of our working interest in these prospects after payout.
Under the overriding royalty program, an employee receives overriding
royalty interests equal to specified undivided percentages of our working
interest percentage in prospects we acquire within the United States and U.S.
coastal waters during the term of the employee's employment.
The overriding royalty interest percentage of our working interest to which
each named executive officer is entitled for the period before well payout is
one-fourth of the overriding royalty interest percentage for the period after
well payout. These percentages currently range from 0.09375% to 0.23250% before
payout and from 0.37500% to 0.93000% after payout for the named executive
officers.
If all or a portion of our working interest in a prospect is sold or farmed
out to unaffiliated third parties and we determine in good faith that our
interest will not be marketable on satisfactory terms if marketed subject to the
named executive officer's overriding royalty interest affecting the prospect, we
may adjust the named executive officer's overriding royalty interest in the
prospect. These adjustments are determined by a committee designated by our
board of directors, at least half of the members of which are individuals who
have been granted an overriding royalty interest by us. Some committee decisions
require the approval of our board of directors. These adjustments apply only to
the portion of our working interest sold or farmed out to a third party and do
not affect the named executive officer's overriding royalty interest in the
portion of a prospect retained by us.
We may also elect, within 60 days after the end of our fiscal year, to
reduce a named executive officer's overriding royalty interest in prospects that
we acquired during the fiscal year. We must base these reductions on the levels
of exploration and development costs related to these prospects actually
incurred during the fiscal year. With respect to certain deepwater prospects, we
also may elect, in our sole
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discretion, to make other reductions and adjustments to the employee's
overriding royalty interest based on estimated exploration levels and
development costs to be incurred in connection with these deepwater prospects.
We retain a right of first refusal to purchase any overriding royalty
interest assigned to a named executive officer. This right applies to any
third-party offer received by the named executive officer during or within one
year after the named executive officer's employment is terminated.
The following table shows distributions received during the applicable year
by the named executive officers, some of which were paid by third parties, from
overriding royalty interests we granted to the officers during the last 15
years.
<TABLE>
<CAPTION>
AGGREGATE CASH AMOUNTS RECEIVED
FROM PREVIOUSLY ASSIGNED OVERRIDING
ROYALTY INTERESTS(1)
-----------------------------------
NAME 1996 1997 1998
- ---- --------- --------- ---------
<S> <C> <C> <C>
Robert E. Henderson.............................. $421,311 $394,136 $354,857
Richard R. Clark................................. 247,971 237,982 218,077
Michael W. Strickler............................. 258,731 234,603 212,803
Frank A. Pici.................................... 0 0 0
Gregory K. Harless............................... 86,383 81,725 70,541
Clinton D. Smith................................. 96,447 60,449 N/A(2)
James M. Fitzpatrick............................. N/A(2) N/A(2) N/A(2)
</TABLE>
- -------------------------
(1) For information on the value conveyed and distributions received, if any,
during the applicable year attributable to overriding royalty interests
assigned to the named executive officer during the applicable year, see the
table under " -- Summary Compensation Table."
(2) Information is not available because the named individuals are no longer our
employees.
We are contemplating discontinuing the overriding royalty interests program
in favor of a more traditional equity-based management incentive program and are
evaluating several possible alternatives.
DIRECTORS' COMPENSATION
Following the offering, we expect that members of our board of directors
who are not employees of us, Enron or Enron's subsidiaries will be compensated
in an amount to be determined for any services provided in their capacities as
directors, in addition to the reimbursement of reasonable expenses incurred in
connection with attending meetings of the board of directors.
401(K) PLAN
We have an employee capital accumulation plan that is intended to be a
Section 401(k) plan under the Internal Revenue Code. All of our employees,
including the named executive officers, are eligible to participate in this
plan. Employees may make contributions to the plan under a salary withholding
program. We may, in our discretion, make contributions to the plan on behalf of
the plan participants. Employee contributions and our contributions to the plan
are restricted in number and amount. Our aggregate contributions are not
significant.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until our acquisition from Hardy Oil & Gas, plc in April 1996, we were a
wholly owned subsidiary of Hardy, which, through its board of directors and
officers, set the compensation of our executive officers. As a director of Hardy
until our acquisition, Mr. Henderson participated in deliberations concerning
the compensation of our executive officers. After our acquisition, our board of
directors set the compensation of the executive officers, and Mr. Henderson
participated in deliberations on those matters. In January 1997, our board of
directors established a compensation committee, currently composed of Messrs.
Henderson, Horn and Dunn.
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PRINCIPAL AND SELLING SHAREHOLDERS
The selling shareholders, JEDI and ENA, are the only shareholders that we
know own more than 5% of our outstanding common shares. The following table
shows:
- the name and address of the selling shareholders; and
- the number of shares beneficially owned by the selling shareholders and
the percentage of outstanding common shares each owns, as of August 31,
1999, and as adjusted to reflect the offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
BEFORE THE OFFERING SHARES TO BE AFTER THE OFFERING
NAME AND ADDRESS ----------------------- SOLD -------------------
OF BENEFICIAL OWNER NUMBER PERCENTAGE IN THE OFFERING NUMBER PERCENTAGE
------------------- ---------- ---------- --------------- ------ ----------
<S> <C> <C> <C> <C> <C>
Joint Energy Development
Investments Limited
Partnership(1)................... 13,334,184 95.7% %
1400 Smith Street
Houston, Texas 77002
Enron North America Corp........... 16,888,474(2) 96.6%(2) %
1400 Smith Street
Houston, Texas 77002
</TABLE>
- ---------------
(1) JEDI primarily invests in and manages natural gas and energy related
assets. JEDI's general partner is Enron Capital Management Limited
Partnership, a Delaware limited partnership, whose general partner is Enron
Capital Corp., a Delaware corporation and a wholly owned subsidiary of ENA.
The general partner of JEDI exercises sole voting and investment power over
these shares.
(2) ENA has the right to acquire 3,554,290 shares upon the exercise by ENA of
its right to convert into our common shares the principal and accrued
interest we owe ENA under the ENA credit facility, based on the current
conversion price of $14.58 per share (which is subject to adjustment) and
an outstanding balance of principal and accrued interest of $51,833,283 as
of August 31, 1999. ENA may be deemed to be the beneficial owner of the
shares owned by JEDI because of the relationships described in footnote 1,
but ENA disclaims such beneficial ownership. ENA is a wholly owned
subsidiary of Enron Corp., which may be deemed to be the beneficial owner
of all shares beneficially owned by ENA; Enron Corp. disclaims any
beneficial ownership of any shares beneficially owned by JEDI or ENA. The
common shares into which the ENA credit facility are convertible are deemed
outstanding solely for purposes of calculating ENA's percentage beneficial
ownership.
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The table appearing below shows information as of August 31, 1999, relating
to common shares beneficially owned by
- each of our directors;
- the named executive officers;
- a key consultant; and
- all directors and executive officers and this key consultant as a group.
In computing the number of shares a person beneficially owns, he is deemed
to own common shares subject to options he holds that were exercisable as of
August 31, 1999 or become exercisable within 60 days following August 31, 1999.
We had 33 record common shareholders and there were 13,928,304 common shares
outstanding as of August 31, 1999.
<TABLE>
<CAPTION>
DIRECTORS, KEY CONSULTANT AND AMOUNT AND NATURE OF PERCENT
NAMED EXECUTIVE OFFICERS BENEFICIAL OWNERSHIP(1) OF CLASS
----------------------------- ----------------------- --------
<S> <C> <C>
Robert E. Henderson......................................... 228,012(2) 1.6%
Richard R. Clark............................................ 162,192(2) 1.2%
Michael W. Strickler........................................ 162,192(2) 1.2%
L. V. McGuire............................................... 42,468(2) *
Frank A. Pici............................................... 49,704(2) *
Gregory K. Harless.......................................... 38,904(2) *
David S. Huber.............................................. 158,976(2) 1.1%
Richard B. Buy.............................................. 0 0
D. Brad Dunn................................................ 0 0
Mark E. Haedicke............................................ 0 0
Stephen R. Horn............................................. 0 0
Jeffrey McMahon............................................. 0 0
Jere C. Overdyke, Jr. ...................................... 0 0
Frank Stabler............................................... 0 0
All directors and executive officers and key consultant as a
group (17 persons)........................................ 955,020 6.6%
</TABLE>
- ---------------
* Less than one percent.
(1) All shares are owned directly by the named person and the named person has
sole voting and investment power over the shares.
(2) Includes common shares subject to options that are currently exercisable or
will become exercisable on completion of the offering.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE SHAREHOLDERS' AGREEMENT AND RELATED MATTERS
Mariner, JEDI, ENA and other shareholders are parties to a shareholders'
agreement. The shareholders' agreement was originally entered into by us, ENA,
and Messrs. Henderson, Clark, Strickler and Huber (the "Management
Shareholders") in contemplation of our acquisition from Hardy. The shareholders'
agreement will terminate on closing of the offering, except for provisions
relating to registration rights of the current shareholders and indemnities for
tax losses in favor of members of management. See "Description of Our Company
Agreement and Common Shares -- Registration Rights."
Also, in connection with the acquisition and pursuant to the requirements
of the shareholders' agreement, our predecessor and JEDI entered into a credit,
subordination and further assurances agreement dated May 16, 1996 under which
JEDI provided a loan commitment to us. We borrowed $92 million under this JEDI
bridge loan to partially fund the acquisition. We repaid all amounts outstanding
under the JEDI bridge loan, including approximately $2.6 million in fees, in
August 1996. There is no outstanding balance under the JEDI bridge loan, and it
has terminated according to its terms.
In August 1996, our subsidiary issued the senior subordinated notes. An
affiliate of ENA was a placement agent in connection with that issuance, and our
subsidiary paid that affiliate approximately $2.9 million in fees in connection
with that issuance.
Under the shareholders' agreement, we paid or agreed to pay certain
amounts, including payment or reimbursement to ENA, JEDI and the Management
Shareholders for all reasonable fees and expenses of third parties they incur in
connection with the shareholders' agreement, the JEDI bridge loan and the
acquisition. Also, we agreed to reimburse each Management Shareholder who paid
for our equity by assigning overriding royalty interests for any additional
taxes and related costs the Management Shareholder incurs to the extent, if any,
that the transfer of the overriding royalty interests did not qualify as a
tax-free exchange under federal tax laws. This obligation will survive the
offering.
ENRON AND AFFILIATES
ENA is formerly known as Enron Capital & Trade Resources Corp. Enron is the
parent of ENA, and an affiliate of Enron and ENA is the general partner of JEDI.
Accordingly, Enron may be deemed to control JEDI and us. See "Principal and
Selling Shareholders." Also, seven of our directors are officers of Enron or of
affiliates of Enron: Mr. Buy is an Executive Vice President and the Chief Risk
Officer of Enron Corp., Mr. Dunn is a Vice President of ENA, Mr. Haedicke is a
Managing Director and the General Counsel of ENA, Mr. McMahon is the Executive
Vice President, Finance and the Treasurer of Enron Corp., Mr. Horn is a Vice
President of ENA, Mr. Overdyke is a Managing Director of Enron Corp. and Mr.
Stabler is the President and Chief Operating Officer of Caribbean Basin Limited.
Enron and certain of its subsidiaries and other affiliates collectively
participate in nearly all phases of the oil and natural gas industry and,
therefore, compete with us. Also, Enron affiliates may provide or arrange for
financing for our competitors. Because of these various possible conflicting
interests, our company agreement includes provisions designed to clarify that
generally Enron and its affiliates have no duty to make business opportunities
available to us and no duty to refrain from conducting activities that may be
competitive with us. See "Description of Our Company Agreement and Common
Shares -- Fiduciary and Other Duties."
Under the terms of the company agreement, Enron and its affiliates, which
include ENA and JEDI, are specifically permitted to compete with us. Neither
Enron nor any of its affiliates has any obligation to bring any business
opportunity to us. See "Description of Our Company Agreement and Common
Shares -- Reasons We Chose the Limited Liability Company Form."
TRANSACTIONS WITH AFFILIATES UNDER OUR REVOLVING CREDIT FACILITY
Under our revolving credit facility, we have covenanted that we will not
engage in any transaction with any of our affiliates providing for the rendering
of services or sale of property unless the transaction is
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<PAGE> 64
as favorable to us as could be obtained in an arm's-length transaction with an
unaffiliated party in accordance with prevailing industry customs and practices.
The revolving credit facility excludes from this covenant:
- any transaction permitted by the shareholders' agreement;
- the grant of options to purchase or sales of equity securities to our
directors, officers, employees and consultants; and
- the assignment of any overriding royalty interest pursuant to an employee
incentive compensation plan.
TRANSACTIONS WITH AFFILIATES UNDER OUR INDENTURE
The indenture, dated as of August 1, 1996, between Mariner Energy, Inc. and
United States Trust Company of New York, under which the senior subordinated
notes were issued, contains similar restrictions. Under the indenture, our
subsidiary has covenanted not to engage in any transaction with an affiliate
unless the terms of that transaction are no less favorable to our subsidiary
than could be obtained in an arm's-length transaction with a nonaffiliate.
Further, if the transaction involves more than $1 million, it must be approved
in writing by a majority of our subsidiary's disinterested directors. If the
transaction involves more than $5 million, it must be determined by a nationally
recognized investment banking firm to be fair, from a financial standpoint, to
our subsidiary. However, this covenant is subject to several significant
exceptions, including:
- some industry-related agreements made in the ordinary course of business
where the agreements are approved by a majority of our subsidiary's
disinterested directors as being the most favorable of several bids or
proposals;
- transactions under employment agreements or compensation plans entered
into in the ordinary course of business and consistent with industry
practice; and
- some prior transactions.
Further, Mariner Energy LLC is not a party to the indenture and these
provisions of the indenture are not applicable to Mariner Energy LLC.
OTHER TRANSACTIONS WITH AFFILIATES
We expect that from time to time we will engage in various commercial
transactions and have various commercial relationships with Enron and affiliates
of Enron, such as holding, exploring, exploiting and developing joint working
interests in particular prospects and properties, engaging in hydrocarbon price
hedging arrangements and entering into other oil and gas related or financial
transactions. For example, there are several prospects in which both an
affiliate of Enron and we have working interests. These interests were acquired
in the ordinary course of business pursuant to bids, joint or otherwise. Any
wells drilled will be subject to joint operating agreements relating to
exploration and possible production and will be subject to customary business
terms. Furthermore, we have entered into a number of agreements with Enron or
affiliates of Enron for the purpose of hedging oil and natural gas prices on our
future production. We also have sold a flow line and related facilities to an
affiliate of Enron in exchange for a long-term commitment to pay a tariff rate
for the use of that flow line. We believe that our current agreements with Enron
and its affiliates are on terms no less favorable to us than would be contained
in an agreement with a third party, but we cannot assure you that future
agreements will be on similar terms.
1998 EQUITY INVESTMENT
In June 1998, Mariner Holdings, Inc. issued additional equity to its
existing shareholders, including JEDI, for approximately $14.58 per share, for
an aggregate investment of $30 million. Mariner Holdings, Inc. paid
approximately $1.2 million as a structuring fee, on a pro rata basis, to
existing shareholders
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participating in this transaction. Approximately $1 million of this fee was paid
to ENA Securities Corp., an affiliate of JEDI.
ENA CREDIT FACILITY
We established the ENA credit facility in September 1998 to provide us with
additional capital. The ENA credit facility provides for unsecured, subordinated
loans of up to $50 million, bearing interest at LIBOR plus 4.5%, payable at
April 30, 2000. The full amount available under this credit facility had been
drawn as of September 1, 1999. This facility requires us to repay the loan
within one day of the closing of a public offering. ENA may convert into our
common shares the outstanding debt and accrued interest owed under this facility
at a rate of $14.58 per common share. We intend to use a portion of the proceeds
of the offering to repay all amounts outstanding under this facility and
terminate this facility.
SENIOR CREDIT FACILITY WITH ENA
We established the senior credit facility with ENA in April 1999 primarily
to provide us with additional working capital. The facility provides for senior
unsecured revolving loans up to $25 million, bearing interest at LIBOR plus
2.5%, payable quarterly. The full amount available under the senior credit
facility had been drawn as of September 1, 1999. The senior credit facility
requires us to repay the loan by December 31, 1999. We intend to use a portion
of the proceeds of the offering to repay all amounts outstanding under this
facility and terminate this facility.
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DESCRIPTION OF OUR COMPANY AGREEMENT AND COMMON SHARES
The following is a description of the material terms of our limited
liability company agreement. This company agreement is analogous to the
certificate of incorporation and bylaws of a corporation. Our company agreement
is filed as an exhibit to the registration statement of which this prospectus is
a part. We refer you to that exhibit for a more complete description of its
provisions. Our company agreement sets forth our purpose, our duration,
provisions relating to our capital structure and other matters relating to our
governance. Except for matters specifically described below, our company
agreement provides for our operation in a manner that is substantially identical
to the operation of a Delaware corporation.
ORGANIZATION AND DURATION
We were recently organized as a limited liability company under Delaware
limited liability company law. We will have perpetual existence unless sooner
dissolved pursuant to the terms of our company agreement. See "-- Termination
and Dissolution."
PURPOSE
Our purpose is to engage in any lawful act or activity for which limited
liability companies may be formed under the Delaware limited liability company
law and engage in any and all activities necessary, convenient, desirable or
incidental to this act or activity, including the acquisition, disposition,
ownership, exploration, development and operation of oil or natural gas
producing properties and the purchase, transportation, sale and marketing of
natural gas, crude oil, natural gas liquids and other hydrocarbons.
TAX TREATMENT
We have elected to be treated as a taxable corporation for United States
federal income tax purposes. Under current United States federal income tax law,
the tax treatment of ownership of common shares should be identical to the tax
treatment of ownership of common stock in a publicly traded corporation.
MANAGEMENT
General
Although we are a limited liability company, our management and corporate
governance structure is similar to that of a corporation in that our business is
managed by a board of directors and officers whose authority and functions are
identical to the authority and functions of the board of directors and officers
of a corporation organized under Delaware corporate law. Our company agreement
provides explicitly that, except as otherwise specifically provided in our
company agreement, the duties and obligations our officers and directors owe us
and our shareholders, and any duties that may be owed by any shareholder or by
any affiliates of any shareholder, are the same as the respective duties and
obligations owed to a corporation organized under Delaware corporate law by its
officers and directors and any similarly situated stockholder or its affiliate.
However, our company agreement contains provisions that relieve Enron and its
affiliates from some duties that would otherwise be owed to us and our
shareholders. See "-- Reasons We Chose the Limited Liability Company Form."
Board of Directors
Our business is managed by, or under the direction of, our board of
directors. Each board member serves until the next annual meeting of
shareholders and until the director's successor has been elected and qualified.
Our company agreement provides that the number of directors to serve on our
board of directors will be determined from time to time by our board of
directors but may not be less than one. Our board of directors may not decrease
the size of our board of directors if doing so would shorten the term of any
director. A majority of the directors then in office may elect any person to
fill a vacancy on our board of directors, including a vacancy created by virtue
of an increase in the size of our board of directors. The number of members of
our board of directors has been set at nine but will be increased to eleven in
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connection with the offering. For a description and background of our directors,
see "Management -- Directors and Executive Officers."
Our company agreement provides that our board of directors may have a
standing oversight committee and that a majority of the oversight committee will
be composed of directors who are not with Enron. The oversight committee, among
other things, would be charged with reviewing proposed transactions between
Enron and its affiliates (other than Mariner) and us.
An election of directors will be held and new directors will be elected, or
existing directors will be reelected, at each annual meeting of shareholders. We
will hold this meeting annually at the time our board of directors determines.
We must have an annual meeting at least once every 13 months. At each election
of directors, the holders of common shares will be entitled to one vote per
share, and the presence, in person or by proxy, of the holders of shares of all
classes or series of our equity securities possessing a majority of the voting
power of all outstanding equity securities entitled to vote will constitute a
quorum. To be elected as a director, a person who has been properly nominated
must receive a majority of the votes cast on the election of directors at the
meeting, in person or by proxy, or, if the nomination is contested, a plurality
of the votes cast. Since JEDI is expected to hold a substantial majority of the
common shares, it will control the election of all directors.
Any director may be removed, with or without cause, by written consent or
other approval of the holders of a majority of our equity securities.
Officers
Our board of directors has the authority to appoint our officers. We will
have a Chairman of the Board of Directors and Chief Executive Officer, a
President and a Secretary, and we may have one or more Vice Presidents, a
Treasurer and one or more Assistant Secretaries and Assistant Treasurers and
other officers as our board of directors may appoint. Each of our officers will
have certain authority by virtue of being appointed an officer and may be
further authorized from time to time to take any action that our board of
directors delegates to the officer.
SHAREHOLDERS' MEETINGS; VOTING
Holders of record of common shares will be entitled to notice of, and to
vote at, meetings of the shareholders and to act on matters as to which
approvals may be solicited. There will be an annual meeting of the shareholders.
Special meetings of the shareholders may be called by our board of directors or
by shareholders holding at least 35% of our voting power. Each record holder of
common shares will have one vote per share, although additional classes or
series of equity securities may have special voting rights. See "-- Preferred
Shares." Our company agreement provides that:
- our equity securities held in nominee accounts will be voted by the
clearing agent, or other nominee, pursuant to the instruction of the
beneficial owner, unless the arrangement between the beneficial owner and
the beneficial owner's nominee provides otherwise; and
- we may assume without inquiry that the nominee is so voting.
COMMON SHARES
Our company agreement authorizes the issuance of up to 50 million common
shares for the consideration and on the terms and conditions that our board of
directors establishes, in its sole discretion, without the approval of any
holders of common shares. Shares so issued and paid for will be fully paid and
nonassessable, except to the extent a shareholder knowingly receives an illegal
dividend. Subject to the
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prior rights, if any, of the holders of any other of our company securities, the
holders of common shares are:
- entitled to receive dividends ratably as our board of directors declare,
if any;
- on our liquidation or dissolution, entitled to share ratably in all
remaining assets after satisfaction of our liabilities to creditors; and
- entitled to one vote per common share on the election of directors and on
all other matters submitted to a vote of shareholders.
Each common share is identical in all respects with each other common share.
Holders of common shares have no preemptive rights and no cumulative voting
rights. The affirmative vote of a majority of the outstanding common shares is
required to constitute shareholder action. The common shares will be our only
equity interests outstanding immediately following the offering.
Payment of dividends on the common shares is subject to restrictions
contained in our revolving credit facility. The decision to pay dividends is
subject to the other financial considerations our board of directors may deem
relevant. We cannot assure you as to the timing or amount of any dividend that
we may declare on the common shares. We have not paid any dividends to our
shareholders.
PREFERRED SHARES
Our company agreement authorizes the issuance of up to one million
preferred shares for the consideration and on the terms and conditions our board
of directors establishes, in its sole discretion, without the approval of any
holders of common shares. Preferred shares may be entitled to preference over
the common shares on dividends, voting rights, conversion or redemption rights,
amounts payable on liquidation and other matters. Preferred shares of any class
or series may be entitled to other rights and privileges, or subject to other
restrictions, our board of directors establishes in its sole discretion.
TRANSFERS OF SHARES
The common shares are generally freely transferable, subject to applicable
securities laws, in the same manner as capital stock of a corporation. Our
company agreement provides that each purchaser of common shares, by virtue of
the purchase, will become a member of Mariner and will be bound by our company
agreement, without the need to execute the company agreement.
LIMITED LIABILITY
Generally, the debts, obligations and liabilities of a Delaware limited
liability company, whether arising in contract, tort or otherwise, are solely
the debts, obligations and liabilities of the limited liability company. No
owner of an equity interest in us is obligated personally for any debt,
obligation or liability of the limited liability company solely by reason of
being an owner of the equity interest.
MERGER, CONSOLIDATION OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS
We may merge or consolidate with, or sell all or substantially all of our
assets to, one or more corporations, limited liability companies, business
trusts or associations, real estate investment trusts, common law trusts or
unincorporated businesses, including general or limited partnerships, only if
the transaction is approved by our board of directors and a majority in interest
of our equity securities.
A holder of common shares opposing any proposed merger or consolidation,
where the proposed transaction requires shareholder approval, will be afforded
appraisal rights in the same manner and to the same extent that these rights
would be available to the holder of stock of a Delaware corporation under the
Delaware corporate law. Those rights must be perfected by the same procedure
that would be required of a holder of stock of a Delaware corporation.
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AMENDMENT OF COMPANY AGREEMENT
In order to adopt a proposed amendment to our company agreement, our board
of directors must seek written approval of the shareholders required to approve
the amendment or call a meeting of shareholders to consider and vote upon the
proposed amendment, except as described below. Proposed amendments must be
approved by a majority in interest of our equity securities unless otherwise
provided in our company agreement.
REASONS WE CHOSE THE LIMITED LIABILITY COMPANY FORM
Although we have a corporate management structure, we were organized as a
limited liability company, rather than a Delaware corporation, solely for
purposes of creating more certainty regarding the duties of Enron and our
officers and directors to us and our shareholders. Section 18-110 of the
Delaware Limited Liability Company Act contains explicit provisions designed to
give the maximum effect to the principle of freedom of contract and
enforceability of limited liability company agreements. It provides explicitly
that to the extent a shareholder or other person, including a director or
officer, has fiduciary or other duties or liabilities to a Delaware limited
liability company or its shareholders, these duties or liabilities may be
expanded or restricted by provisions of the limited liability company agreement.
It also provides that no person who relies in good faith on the provisions of
the limited liability company agreement will be liable to the limited liability
company or its shareholders. There are no comparably explicit provisions under
Delaware corporate law. Therefore, the enforceability of exculpatory provisions
in corporate charters is less certain.
Under Delaware law, a controlling shareholder of a Delaware corporation has
certain fiduciary duties to the corporation, including the duty not to pursue
for its own account a business opportunity that is in the same line of business
as the corporation or in which the corporation has an interest or expectancy,
unless the controlling shareholder first offers the opportunity to the
corporation and the corporation declines to pursue it. Not all business
opportunities are required to be offered, and there is a lack of clear guidance
in case law regarding which opportunities are required to be offered and which
are not. Our company agreement contains provisions explicitly:
- relieving Enron and its affiliates, other than Mariner, from any
obligation to offer business opportunities to us or to any of our
subsidiaries;
- waiving any claim that any business opportunity pursued by or to be
pursued by Enron or any of its affiliates constitutes a business
opportunity that was misappropriated; and
- providing generally that neither Enron nor any affiliate of Enron has any
obligation to refrain from engaging in activities that may be competitive
with our activities.
Our company agreement does not, however, permit:
- a natural person to usurp, solely for his or her personal benefit, a
business opportunity of ours presented to that person in his or her
capacity as an officer or director, unless the officer or director first
presented the opportunity to us and we declined to pursue it; or
- Enron or any of its affiliates, other than Mariner, to usurp a business
opportunity of ours presented to an officer or director serving as such
at the request of Enron solely in his or her capacity as an officer or
director of Mariner unless the officer or director first presented the
opportunity to us and we declined to pursue it.
Our company agreement does provide that Enron or any of its affiliates, other
than us, may pursue any business opportunity that is separately presented to or
identified by Enron or any of its affiliates, other than us, even if the
opportunity has also been presented to one of our officers or directors. The
provisions of the company agreement applicable to Enron may also be applicable
to an entity that acquires Enron's common shares other than in a public
offering.
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FIDUCIARY AND OTHER DUTIES
The fiduciary obligations of officers, directors and affiliates of limited
liability companies is a developing area of the law. In an effort to create more
certainty regarding the duties of Enron and its affiliates, other than Mariner,
to us and our shareholders and the duties of our officers and directors to us
and our shareholders, our company agreement specifies the standards of behavior
required of these persons, establishes procedures that may be used for
resolutions of conflicts of interest and describes activities that will not be
deemed to violate fiduciary or other duties.
Our company agreement provides that, except as otherwise specifically
provided, the duties and obligations of our officers, directors and affiliates
to us and our shareholders will be the same as the duties owed by officers,
directors and affiliates of a corporation organized under the Delaware corporate
law to the corporation and its stockholders. We believe that there is more
certainty under the Delaware corporate law regarding duties owed by these
persons than under Delaware limited liability company law, primarily because
there are many judicial decisions under the Delaware corporate law and
comparable corporate statutes. Other provisions of our company agreement modify
these fiduciary duties and limit the liability of officers, directors and
affiliates to us and our shareholders. These provisions are intended to permit
Enron and its affiliates, other than Mariner, to deal with us and others, and to
permit our officers and directors to perform their duties to us, without undue
uncertainty regarding the standards by which they will be judged or undue risk
of liability. We believe that these provisions are necessary to provide
certainty and fairness in the relationships between Enron and its affiliates,
other than Mariner, and us, many of which involve conflicts of interest, and to
permit Enron to continue to conduct its business without undue risk of
liability. See "Certain Relationships and Related Transactions -- Enron and
Affiliates." Our company agreement provides, among other things, that:
- our officers, directors or affiliates will not be liable for errors in
judgment or for any act or omission if the person acted in good faith;
- Enron and its affiliates, other than Mariner, will have no obligation to
offer to sell us any assets or related interest;
- it will not constitute a breach of fiduciary or other duty for Enron and
its affiliates to engage in activities of the type we conduct, even if in
direct competition with us, including the ownership and operation of
interests in companies that engage in oil and gas exploration and
production activities;
- the approval by our oversight committee of the terms of any proposed
transaction between Enron or its affiliates, other than Mariner, and us,
including the amendment of any contract, shall be deemed to be a
conclusive determination that this transaction does not constitute a
breach of fiduciary or other duty owed by Enron or its affiliates, other
than Mariner, as long as the material facts known to Enron or its
affiliates regarding this proposed transaction were disclosed to our
oversight committee at the time it gave its approval;
- it will not constitute a breach of fiduciary or other duty for Enron and
its affiliates and our officers or directors, including the oversight
committee, to resolve conflicts of interest, as long as the resolution of
these conflicts is fair to us, taking into account the relevant interests
of the parties;
- it will not constitute a breach of fiduciary or other duty for one of our
officers or directors to engage attorneys, accountants, engineers and
other advisors on our behalf or our board of directors or any committee,
even though these persons may also be retained from time to time by Enron
or its affiliates; and these persons may be engaged with respect to any
matter in which our interests and Enron and its affiliates may differ, or
may be engaged by both us and Enron or its affiliates with respect to a
matter, as long as the officer or director reasonably believes that any
conflict between us and Enron and its affiliates, other than Mariner,
related to the matter is not material; and
- each holder of common shares, in becoming a holder of common shares,
consents to the terms and provisions of our company agreement.
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Our company agreement provides that any resolution or course of action
related to a conflict of interest will be conclusively deemed fair to us if the
resolution or course of action is:
- approved by our oversight committee without bad faith and after
disclosure of all known material facts;
- made or taken on terms no less favorable to us than those generally
provided to or available from unrelated third parties; or
- a commercially fair resolution or course of action, taking into account
the circumstances surrounding the course of action or conflict of
interest and the totality of the relationships among the parties involved
and the relative interests of the parties.
INDEMNIFICATION
Our company agreement provides that we will indemnify our directors and
officers from liabilities arising in the course of these persons' service to us.
The indemnitee must have acted in good faith and in a manner that the indemnitee
believed to be in or not opposed to our best interests. If the proceeding is
criminal, the indemnity must have had no reasonable cause to believe the
indemnitee's conduct was unlawful. These liabilities include all damages,
including reasonable legal fees and expenses. We carry directors' and officers'
liability insurance for potential liability under this indemnification. The
holders of common shares will not be personally liable for the indemnification,
although our responsibility for the cost of this indemnification could adversely
affect the value of the common shares.
RIGHT TO INFORMATION
In addition to other rights specifically listed in our company agreement,
and subject to the reasonable standards as we establish, each shareholder is
entitled to all information to which a member of a Delaware limited liability
company is entitled to have access pursuant to Section 18-305 of the Delaware
Limited Liability Company Act under the circumstances and subject to the
conditions stated in that provision.
TERMINATION AND DISSOLUTION
We will have perpetual existence, unless sooner terminated pursuant to our
company agreement. Our company agreement provides that we will be dissolved
upon:
- the consent of the board of directors and holders of a majority of our
equity interest; or
- the entry of a decree of our judicial dissolution.
The death, resignation, dissolution or bankruptcy of any shareholder will not
constitute a dissolution event.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
On our dissolution, the liquidator will liquidate our assets and apply the
proceeds of liquidation in the order of priority our company agreement
establishes. Generally, after discharging our debts and liabilities, including
the costs of liquidation, any remaining proceeds will be distributed to our
shareholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common shares is .
COMPARISON OF US WITH A DELAWARE CORPORATION
We will be managed in a manner similar to that of a corporation. Under the
Delaware limited liability company act, a limited liability company may elect in
its limited liability company agreement to be governed in a manner essentially
the same as a Delaware corporation, a Delaware general or limited partnership, a
Delaware close corporation or any combination. Our company agreement establishes
the
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relationship of our shareholders to us and to one another and how we will
conduct our operations and the manner by which we will be governed, much like
the articles and bylaws of a Delaware corporation does for that corporation.
Although we are not subject to the Delaware corporate law, the Delaware limited
liability act permits a limited liability company agreement to provide, and our
company agreement does provide:
- that the management of a limited liability company will be conducted by a
board of directors and officers designated by the board; and
- that the holders of shares in the limited liability company, as is the
case with the holders of our common shares, except as otherwise expressly
provided in our company agreement, will be afforded substantially all of
the rights that are afforded holders of common stock issued by a
corporation organized under the Delaware corporate law.
Specifically, our company agreement and the Delaware limited liability
company act provide the following corporate governance provisions and
shareholders rights, among others, that are consistent with the analogous
features of a Delaware corporation:
- our affairs will be managed by our board of directors elected by our
shareholders;
- our officers will be elected by our board of directors and serve at the
discretion and pleasure of our board of directors;
- shareholder actions will be conducted at annual or special meetings of
shareholders called by our board of directors;
- holders of our common shares generally are not personally liable or
assessable for our obligations;
- holders of our common shares are entitled to receive dividends when, as
and if declared by our board of directors;
- holders of our common shares generally are entitled to receive a ratable
portion of our assets after payment of our liabilities upon dissolution;
- holders of our common shares have the right to bring a derivative action
against our management on our behalf;
- holders of our common shares after the offering will not be entitled to
preemptive rights with respect to the issuance of our securities; and
- holders of our common shares opposing any proposed merger or
consolidation, where the proposed transaction requires shareholder
approval, will be afforded appraisal rights in the same manner and to the
same extent that these rights would be available to the holder of stock
of a Delaware corporation under the Delaware corporate law, and those
rights must be perfected by the same procedure that would be required of
a holder of stock of a Delaware corporation.
REGISTRATION RIGHTS
Under the terms of our shareholders' agreement, we are obligated to
register, on three occasions, the common shares held by JEDI and ENA under
certain circumstances, after the expiration of 90 days after the consummation of
any underwritten initial public offering. In connection with the offering, JEDI
and ENA have agreed with the underwriters that they will not exercise these
rights or sell any shares, other than shares JEDI and ENA may sell in the
offering, within 180 days of the offering. In addition, if we propose to
register any common shares under applicable securities laws, we are required to
afford our existing shareholders the right to include their common shares in
that registration, with some limitations.
SHARES ELIGIBLE FOR FUTURE SALE
There is currently no public market for our common shares. Future sales of
substantial amounts of our common shares in the public market, or the perception
that those sales could occur, could adversely affect the market price of our
common shares.
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After the offering, we will have outstanding common shares. Of
these shares, the shares sold in the offering will be freely tradeable without
restriction or further registration under the Securities Act, unless they are
purchased by our "affiliates," as that term is defined in Rule 144 under the
Securities Act, which sales would be subject to certain restrictions under Rule
144. The remaining outstanding common shares will be "restricted
securities," as that term is defined in Rule 144, and may be sold only if
registered or pursuant to an exemption from registration such as that provided
by Rule 144. JEDI, ENA and the existing shareholders also have registration
rights. See "Description of Our Company Agreement and Common
Shares -- Registration Rights." In connection with the offering, we, our
executive officers and directors, existing shareholders, JEDI and ENA, who in
the aggregate own or have the right to acquire common shares, have
agreed that, subject to exceptions relating to transfers that will not occur in
market transactions, will not sell, offer or contract to sell any common shares
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 180 days after the date of this prospectus. We also have outstanding
options to purchase an aggregate of 2,076,120 common shares.
We intend to file a Registration Statement on Form S-8 under the Securities
Act to register common shares reserved for issuance under our share
option plan.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we and the selling shareholders have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, Banc of America Securities LLC, Morgan Stanley & Co. Incorporated,
PaineWebber Incorporated and Petrie Parkman & Co., Inc. are acting as
representatives, the following respective numbers of common shares:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Banc of America Securities LLC..............................
Morgan Stanley & Co. Incorporated...........................
PaineWebber Incorporated....................................
Petrie Parkman & Co., Inc...................................
--------
Total.............................................
========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the common shares in this offering if any are purchased, other than
those shares covered by the over-allotment option described below. The
underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or this
offering of common shares may be terminated.
We and the selling shareholders have granted to the underwriters a 30-day
option to purchase on a pro-rata basis up to additional shares from us and
additional outstanding shares from the selling shareholders at the initial
public offering price less the underwriting discounts and commissions. The
option may be exercised only to cover any over-allotments of common shares.
The underwriters propose to offer the common shares initially at the public
offering price set forth on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to broker/dealers may be
changed by the underwriters.
The following table summarizes the compensation and the estimated expenses
we and the selling shareholders will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and Commissions
payable by us............................. $ $ $ $
Expenses payable by us...................... $ $ $ $
Underwriting Discounts and Commissions paid
by the selling shareholders............... $ $ $ $
Expenses payable by the selling
shareholders.............................. $ $ $ $
</TABLE>
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Bank of America, N.A. is the agent and a lender under our revolving credit
facility. We have paid Bank of America, N.A. customary interest, fees and
compensation in connection with our revolving credit facility. We may use more
than 10% of the net proceeds from the sale of the common shares to repay all
indebtedness owed by us to Bank of America, N.A. under the revolving credit
facility. Accordingly, this offering is being made in compliance with the
requirements of Rule 2710(c)(8) of the National Association of Securities
Dealers, Inc. Conduct Rules. This rule provides generally that if more than 10%
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of the net proceeds from the sale of common stock, not including underwriting
compensation, is paid to the underwriters or their affiliates, the initial
public offering price of the shares may not be higher than that recommended by a
"qualified independent underwriter" meeting specified standards. Accordingly, if
Bank of America, N.A. receives more than 10% of the net proceeds, Credit Suisse
First Boston Corporation will assume the responsibilities of acting as the
qualified independent underwriter in pricing this offering and conducting due
diligence. The initial public offering price of the common shares set forth on
the cover page of this prospectus will be no higher than the price recommended
by Credit Suisse First Boston Corporation.
We, each of our directors and executive officers, existing shareholders,
JEDI and ENA have agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the SEC a
registration statement under the Securities Act relating to any of our common
shares, other than the shares JEDI and ENA sell in the offering, or any
securities convertible into or exchangeable or exercisable for any of our common
shares, or publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, without the prior written consent of Credit Suisse First
Boston Corporation for a period of 180 days after the date of this prospectus,
except, in our case, for the issuance of common shares under our employee
benefit plans and registration of these issuances.
We and the selling shareholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or to contribute to payments that
the underwriters may be required to make in that respect.
We will make application to list our common shares on The Nasdaq Stock
Market's National Market.
In the ordinary course of their business, some of the underwriters and
their affiliates have in the past and may in the future engage in investment
banking and other financial transactions with us, including providing financial
advisory services.
Before this offering, there has been no public market for our common
shares. The initial public offering price will be determined by negotiations
between us and the underwriters. The principal factors considered in determining
the initial public offering price include:
- market conditions for initial public offerings;
- the history of and prospects for our business;
- our past and present operations;
- our past and present earnings and current financial position;
- an assessment of our management;
- the market for securities of companies in businesses similar to our
business; and
- the general condition of the securities markets.
We cannot assure you that the initial public offering price will correspond to
the price at which the common shares will trade in the public market after the
offering or that an active trading market for the common shares will develop and
continue after the offering.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common shares in
the open market after the distribution has been completed in order to
cover syndicate short positions.
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- Penalty bids permit the underwriters to reclaim a selling concession from
a syndicate member when the common shares originally sold by the
syndicate member are purchased in a stabilizing transaction or in a
syndicate covering transaction to cover syndicate short positions.
- In "passive" market making, market makers in the common shares who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common shares until the
time, if any, at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of our common shares to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common shares in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common shares are effected. Accordingly, any resale of the common
shares in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction and which may require
resales to be made in accordance with available statutory exemptions or pursuant
to a discretionary exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal advice prior to any
resale of the common shares.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common shares in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that: (i) the purchaser is entitled under
applicable provincial securities laws to purchase common shares without the
benefit of a prospectus qualified under those securities laws; (ii) where
required by law, the purchaser is purchasing as principal and not as agent; and
(iii) the purchaser has reviewed the text above under "-- Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario's securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages, rescission or rights of action under the civil liability provisions of
the United States federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named in
this prospectus may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada upon
the issuer or these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or these persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common shares to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days
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of the sale of any common shares acquired by the purchaser pursuant to the
offering. This report must be in the form attached to British Columbia
Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained
from us. Only one report must be filed related to the common shares acquired on
the same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common shares should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
shares in their particular circumstances and with respect to the eligibility of
the common shares for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
Legal matters related to the common shares being issued in the offering are
being passed upon for us by Fulbright & Jaworski L.L.P., Houston, Texas. Legal
matters in connection with the offering will be passed upon for the underwriters
by Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998 included in
this prospectus and the related financial statement schedule included elsewhere
in the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing in this prospectus,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
INDEPENDENT PETROLEUM ENGINEERS
The estimated reserve evaluations and related calculations of Ryder Scott
Company, L.P., our independent petroleum engineers, have been included in this
prospectus in reliance upon the authority of that firm as an expert in petroleum
engineering.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-1 under the
Securities Act relating to our common shares. As permitted by Securities and
Exchange Commission rules, this prospectus does not include all the information
we have included in the registration statement. You may refer to the
registration statement and the related exhibits and schedules we filed with the
Securities and Exchange Commission for more information about us and our common
shares. You can read and copy the registration statement, exhibits and schedules
at the Securities and Exchange Commission's public reference room at, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at the Securities and
Exchange Commission's regional offices located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and at Seven World Trade Center, Suite 1300, New
York, New York 10048. You can obtain information about the operation of the
Securities and Exchange Commission's public reference room at 1-800-SEC-0330.
The Securities and Exchange Commission also maintains an Internet site that
contains reports, proxy and information statements, and other information about
issuers that file electronically with the Securities and Exchange Commission.
The address of that site is http://www.sec.gov.
Following this offering, we will be required to file current reports,
quarterly reports, annual reports, proxy statements and other information with
the Securities and Exchange Commission. You may read and copy those reports,
proxy statements and other information at the Securities and Exchange
Commission's public reference room and regional offices or through its Internet
site. We intend to furnish our shareholders with annual reports that will
include a description of our operations and audited financial statements
certified by an independent public accounting firm.
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GLOSSARY OF OIL AND NATURAL GAS TERMS
"3-D SEISMIC" (Three-Dimensional Seismic Data) Geophysical data that
depicts the subsurface strata in three dimensions. 3-D seismic typically
provides a more detailed and accurate interpretation of the subsurface strata
than 2-D seismic.
"2-D SEISMIC" Seismic data that are acquired and processed to yield a
two-dimensional cross section of the substance.
"APPRAISAL WELL" means a well drilled several spacing locations away from a
producing well to determine the boundaries or extent of a productive formation
and to establish the existence of additional reserves.
"BBL" One stock tank barrel, or 42 U.S. gallons liquid volume, used in this
prospectus in reference to crude oil, condensate or other liquid hydrocarbons.
"BCF" One billion cubic feet of natural gas.
"BCFE" One billion cubic feet of natural gas equivalent (see Mcfe for
equivalency).
"DEVELOPMENT WELL" A well drilled within the proved boundaries of an oil or
natural gas reservoir with the intention of completing the stratigraphic horizon
known to be productive.
"EXPLOITATION WELL" Ordinarily considered to be a development well drilled
within a known reservoir. We use the word to refer to deepwater wells that are
drilled on offshore leaseholds held (usually under farmout agreements) where a
previous exploratory well showing the existence of potentially productive
reservoirs was drilled, but the reservoir was by-passed for development by the
owner who drilled the exploratory well; thus we distinguish our development
wells on our own properties from these exploitation wells.
"EXPLORATORY WELL" A well drilled to find and produce oil or natural gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.
"FARMOUT" The term used to describe the action taken by the person making a
transfer of a leasehold interest in an oil and gas property pursuant to a
farmout agreement.
"FARMOUT AGREEMENT" A common form of agreement between oil and gas
operators pursuant to which an owner of an oil and gas leasehold interest that
does not want to drill at the time agrees to assign the leasehold interest, or
some portion of it, to another operator that does want to drill the tract. The
assignor in these transactions may retain some interest in the property such as
an overriding royalty interest or a production payment, and, typically, the
assignee of the leasehold interest has an obligation to drill one or more wells
on the assigned acreage as a prerequisite to completion of the transfer to it.
"GENERATE" Generally refers to the creation of an exploration or
exploitation idea after evaluation of seismic and other available data.
"INFILL WELL" A well drilled between known producing wells to better
exploit the reservoir.
"LEASE OPERATING EXPENSES" The expenses of lifting oil or gas from a
producing formation to the surface, and the transportation and marketing
thereof, constituting part of the current operating expenses of a working
interest, and also including labor, superintendence, supplies, repairs,
short-lived assets, maintenance, allocated overhead costs, ad valorem taxes and
other expenses incidental to production, but not including lease acquisition or
drilling or completion expenses.
"MBBLS" One thousand barrels of crude oil or other liquid hydrocarbons.
"MCF" One thousand cubic feet of natural gas.
"MCFE" One thousand cubic feet of natural gas equivalent (converting one
barrel of oil to six Mcf of natural gas based on commonly accepted rough
equivalency of energy content).
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"MMBTU" One million British thermal units.
"MMCF" One million cubic feet of natural gas.
"MMCFE" One million cubic feet of natural gas equivalent (see Mcfe for
equivalency).
"NET REVENUE INTEREST" An interest in all oil and natural gas produced and
saved from, or attributable to, a particular property, net of all royalties,
overriding royalties, net profits interests, carried interests, reversionary
interests and any other burdens to which the person's interest is subject.
"PAYOUT" Generally refers to the recovery by the incurring party to an
agreement of its costs of drilling, completing, equipping and operating a well
before another party's participation in the benefits of the well commences or is
increased to a new level.
"PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES" An estimate of the present
value of the estimated future net revenues from proved oil and gas reserves at a
date indicated after deducting estimated production and ad valorem taxes, future
capital costs and operating expenses, but before deducting any estimates of
federal income taxes. The estimated future net revenues are discounted at an
annual rate of 10%, in accordance with the Securities and Exchange Commission's
practice, to determine their "present value." The present value is shown to
indicate the effect of time on the value of the revenue stream and should not be
construed as being the fair market value of the properties. Estimates of future
net revenues are made using oil and natural gas prices and operating costs at
the date indicated and held constant for the life of the reserves.
"PRODUCING WELL" or "PRODUCTIVE WELL" A well that is producing oil or
natural gas or that is capable of production without further capital
expenditure.
"PROVED DEVELOPED RESERVES" Proved developed reserves are those quantities
of crude oil, natural gas and natural gas liquids that, upon analysis of
geological and engineering data, are expected with reasonable certainty to be
recoverable in the future from known oil and natural gas reservoirs under
existing economic and operating conditions. This classification includes:
- proved developed producing reserves, which are those expected to be
recovered from currently producing zones under continuation of present
operating methods; and
- proved developed non-producing reserves, which consist of (1) reserves
from wells that have been completed and tested but are not yet producing
due to lack of market or minor completion problems that are expected to
be corrected, and (2) reserves currently behind the pipe in existing
wells that are expected to be productive due to both the well log
characteristics and analogous production in the immediate vicinity of the
well.
"PROVED RESERVES" The estimated quantities of crude oil, natural gas and
other hydrocarbon liquids that 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" Proved reserves that may be expected to be
recovered from existing wells that will require a relatively major expenditure
to develop or from undrilled acreage adjacent to productive units that are
reasonably certain of production when drilled.
"ROYALTY INTEREST" An interest in an oil and gas lease that gives the owner
of the interest the right to receive a portion of the production from the leased
acreage or the proceeds from the sale of the production, but generally does not
require the owner to pay any portion of the costs of drilling or operating the
wells on the leased acreage. Royalty interests may be either landowner's royalty
interests, which are reserved by the owner of the leased acreage at the time the
lease is granted, or overriding royalty interests, which are usually carved from
the leasehold interest pursuant to an assignment to a third party or reserved by
an owner of the leasehold in connection with a transfer of the leasehold to a
subsequent owner.
"SUBSEA TIEBACK" A productive well that has its wellhead equipment located
on the sea floor and is connected by control and flow lines to an existing
production platform located in the vicinity.
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"WORKING INTEREST" The interest in an oil and gas property (normally a
leasehold interest) that gives the owner the right to drill, produce and conduct
oil and gas operations on the property and the right to a share of production,
subject to all royalties, overriding royalties and other burdens and to all
costs of exploration, development and operations and all risks in connection
therewith.
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MARINER ENERGY LLC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
(Mariner Energy LLC)...................................... F-3
Consolidated Statements of Operations for the three months
ended March 31, 1996, (Acquired Company), the nine months
ended December 31, 1996, and the years ended December 31,
1997 and 1998 (Mariner Energy LLC)........................ F-4
Consolidated Statements of Stockholders' Equity for the
three months ended March 31, 1996, (Acquired Company), the
nine months ended December 31, 1996, and the years ended
December 31, 1997 and 1998 (Mariner Energy LLC)........... F-5
Consolidated Statements of Cash Flow for the three months
ended March 31, 1996 (Acquired Company), the nine months
ended December 31, 1996, and the years ended December 31,
1997 and 1998 (Mariner Energy LLC)........................ F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Balance Sheets as of December 31,
1998 and June 30, 1999 (unaudited)........................ F-21
Condensed Consolidated Statements of Operations for the Six
Months Ended June 30, 1998 and 1999 (unaudited)........... F-22
Condensed Consolidated Statements of Cash Flow for the Six
Months Ended June 30, 1998 and 1999 (unaudited)........... F-23
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-24
</TABLE>
F-1
<PAGE> 82
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Mariner Energy LLC
Houston, Texas
We have audited the accompanying financial statements of Mariner Energy LLC
(the "Company"), formerly Hardy Oil & Gas USA Inc. (the "Acquired Company"), as
listed in the Index to Consolidated Financial Statements. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mariner
Energy LLC as of December 31, 1997 and 1998, and the results of its operations
and cash flows for the three months ended March 31, 1996, the nine months ended
December 31, 1996, and the years ended December 31, 1997 and 1998, in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Houston, Texas
April 14, 1999 (September 1, 1999, with respect to the
first and last paragraph of Note 1 and the
third paragraph of Note 4)
F-2
<PAGE> 83
MARINER ENERGY LLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 9,131 $ 802
Receivables............................................... 18,585 15,657
Prepaid expenses and other................................ 3,628 7,234
-------- ---------
Total current assets.............................. 31,344 23,693
-------- ---------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at full cost:
Proved................................................. 222,829 316,056
Unproved, not subject to amortization.................. 36,526 84,076
-------- ---------
Total............................................. 259,355 400,132
Other property and equipment.............................. 2,222 3,300
Accumulated depreciation, depletion and amortization...... (84,236) (167,846)
-------- ---------
Total property and equipment, net................. 177,341 235,586
-------- ---------
OTHER ASSETS, net of amortization........................... 3,892 3,513
-------- ---------
TOTAL ASSETS................................................ $212,577 $ 262,792
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 5,556 $ 20,375
Accrued liabilities....................................... 29,908 29,082
Accrued interest.......................................... 4,443 4,953
-------- ---------
Total current liabilities................................. 39,907 54,410
-------- ---------
ACCRUAL FOR FUTURE ABANDONMENT COSTS........................ 1,922 2,824
LONG-TERM DEBT:
Subordinated notes........................................ 99,574 99,624
Revolving credit facility................................. 14,000 53,400
ENA credit facility....................................... -- 25,000
-------- ---------
Total long-term debt.............................. 113,574 178,024
-------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $0.01 par value (authorized 1,000,000
shares; none issued)................................... -- --
Common stock, $0.01 par value (authorized 50,000,000
shares; issued and outstanding 1997 -- 11,871,156,
1998 -- 13,928,304 shares)............................. 119 139
Additional paid-in-capital................................ 95,957 124,718
Accumulated deficit....................................... (38,902) (97,323)
-------- ---------
Total stockholders' equity........................ 57,174 27,534
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $212,577 $ 262,792
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE> 84
MARINER ENERGY LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACQUIRED
COMPANY
---------
THREE
MONTHS NINE MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997 1998
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Oil sales................................. $ 3,632 $ 9,897 $ 18,061 $ 10,066
Gas sales................................. 9,677 37,182 44,710 46,624
------- ----------- ----------- -----------
Total revenues.................... 13,309 47,079 62,771 56,690
------- ----------- ----------- -----------
COSTS AND EXPENSES:
Lease operating expenses.................. 2,403 6,495 9,376 9,858
Depreciation, depletion and
amortization........................... 6,309 24,747 31,719 33,833
Impairment of oil and gas properties...... -- 22,500 28,514 50,800
General and administrative expenses....... 712 2,406 3,195 4,749
Provision for litigation.................. -- -- -- 2,800
------- ----------- ----------- -----------
Total costs and expenses.......... 9,424 56,148 72,804 102,040
------- ----------- ----------- -----------
OPERATING INCOME (LOSS)..................... 3,885 (9,069) (10,033) (45,350)
INTEREST:
Related party income...................... 57 -- -- --
Other income.............................. 2,110 515 467 313
Related party expense..................... (381) -- -- (993)
Other expense............................. (3,010) (7,746) (10,644) (12,391)
Write-off of bridge loan fees............. -- (2,392) -- --
------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES........... 2,661 (18,692) (20,210) (58,421)
PROVISION FOR INCOME TAXES.................. -- -- -- --
------- ----------- ----------- -----------
NET INCOME (LOSS)........................... $ 2,661 $ (18,692) $ (20,210) $ (58,421)
======= =========== =========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE..................................... -- $ (1.58) $ (1.71) $ (4.47)
======= =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................... -- 11,831,364 11,841,793 13,079,742
======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE> 85
MARINER ENERGY LLC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ACQUIRED COMPANY:
Balance at December 31, 1995........ 1,000 $ 1 $ 81,094 $(11,837) $ 69,258
Net income.................. -- -- -- 2,661 2,661
---------- ---- -------- -------- --------
Balance at March 31, 1996............. 1,000 1 81,094 (9,176) 71,919
POST ACQUISITION:
Formation of Mariner Energy LLC..... 11,831,364 118 14,532 9,176 23,826
Net loss.................... -- -- -- (18,692) (18,692)
---------- ---- -------- -------- --------
Balance at December 31, 1996.......... 11,831,364 119 95,626 (18,692) 77,053
Sale of common stock................ 39,792 -- 331 -- 331
Net loss.................... -- -- -- (20,210) (20,210)
---------- ---- -------- -------- --------
Balance at December 31, 1997.......... 11,871,156 119 95,957 (38,902) 57,174
Capital contribution -- proceeds
sale of common stock............. 2,057,148 20 28,761 -- 28,781
Net loss.................... -- -- -- (58,421) (58,421)
---------- ---- -------- -------- --------
Balance at December 31, 1998.......... 13,928,304 $139 $124,718 $(97,323) $ 27,534
========== ==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE> 86
MARINER ENERGY LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACQUIRED
COMPANY
-----------
THREE
MONTHS NINE MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997 1998
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................... $ 2,661 $(18,692) $(20,210) $(58,421)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation, depletion and
amortization........................... 6,437 27,706 32,588 33,762
Impairment of oil and gas properties..... -- 22,500 28,514 50,800
Provision for litigation................. -- -- -- 2,800
Imputed interest......................... -- 1,322 -- --
Changes in operating assets and liabilities:
Receivables.............................. (1,873) (769) (5,014) 2,928
Receivables from affiliates.............. (2,109) -- -- --
Other current assets..................... (307) (317) (3,210) (3,606)
Other assets............................. -- -- (483) 379
Accounts payable and accrued
liabilities............................ 832 6,955 20,693 11,703
Payables to affiliates................... (11) -- -- --
------- -------- -------- --------
Net cash provided by operating
activities........................ 5,630 38,705 52,878 40,345
------- -------- -------- --------
INVESTING ACTIVITIES:
Purchase of Acquired Company, net of cash of
$5,438................................... -- (184,742) -- --
Additions to oil and gas properties......... (7,495) (38,236) (68,317) (140,777)
Additions to other property and equipment... (153) (741) (551) (1,078)
Proceeds from sale of oil and gas
properties............................... -- 7,528 -- --
Issuance of long-term receivable to
affiliates............................... (1,000) -- -- --
Repayment of long-term receivable from
affiliates............................... 3,000 -- -- --
------- -------- -------- --------
Net cash used in investing
activities........................ (5,648) (216,191) (68,868) (141,855)
------- -------- -------- --------
FINANCING ACTIVITIES:
Principal payments on long-term debt........ -- (92,000) -- --
Principal payments on revolving credit
facility................................. -- (50,000) -- --
Payments of debt issue costs................ -- (3,961) (29) --
Proceeds from subordinated notes............ -- 99,506 -- --
Proceeds from long-term debt................ -- 92,000 -- --
Proceeds from revolving credit facility,
net...................................... -- 50,000 14,000 39,400
Proceeds from ENA credit facility........... -- -- -- 25,000
Additional capital contributed.............. -- 92,150 -- --
Proceeds from sale of common stock.......... -- 610 331 28,781
------- -------- -------- --------
Net cash provided by financing
activities........................ -- 188,305 14,302 93,181
------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. (18) 10,819 (1,688) (8,329)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD...................................... 5,456 -- 10,819 9,131
------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.... $ 5,438 $ 10,819 $ 9,131 $ 802
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE> 87
MARINER ENERGY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- For the three months ended March 31, 1996, Hardy Oil & Gas
USA Inc., (the "Acquired Company"), was a wholly owned subsidiary of Hardy
Holdings Inc., which is a wholly owned subsidiary of Hardy Oil & Gas plc ("Hardy
plc"), a public company incorporated in the United Kingdom. Pursuant to a stock
purchase agreement dated April 1, 1996, Joint Energy Development Investments
Limited Partnership ("JEDI"), which is an affiliate of Enron Capital & Trade
Resources Corp., as of September 1, 1999 known as Enron North America Corp.
("ENA"), together with members of management of the Acquired Company, formed
Mariner Holdings, Inc. ("Mariner Holdings"), which then purchased from Hardy
Holdings Inc. all of the issued and outstanding stock of the Acquired Company
for a purchase price of approximately $185.5 million effective April 1, 1996 for
financial accounting purposes (the "Acquisition"). See Notes 2 and 3. As a
result of the sale of Hardy Oil & Gas USA Inc.'s common stock, the Acquired
Company changed its name to Mariner Energy, Inc. ("Mariner Energy").
Additionally, ENA and Mariner Holdings entered into agreements with certain
members of the Acquired Company's management providing for a continued role of
management after the Acquisition. In October 1998 Mariner Energy Inc., JEDI and
other shareholders exchanged all of their common shares of Mariner Holdings for
common shares of Mariner Energy LLC. As of December 31, 1998 Mariner Energy LLC
owns 100% of Mariner Holdings (collectively, the "Company"). The Company is
primarily engaged in the exploration and exploitation for and development and
production of oil and gas reserves, with principal operations both onshore and
offshore Texas and Louisiana.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the Company and all subsidiaries in which a controlling interest is
held. All significant intercompany accounts and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS -- All short-term, highly liquid investments that
have an original maturity date of three months or less are considered cash
equivalents.
RECEIVABLES -- Substantially all of the Company's receivables arise from
sales of oil or natural gas, or from reimbursable expenses billed to the other
participants in oil and gas wells for which the Company serves as operator.
OIL AND GAS PROPERTIES -- Oil and gas properties are accounted for using
the full-cost method of accounting. All direct costs and certain indirect costs
associated with the acquisition, exploration and development of oil and gas
properties are capitalized. Amortization of oil and gas properties is provided
using the unit-of-production method based on estimated proved oil and gas
reserves. No gains or losses are recognized upon the sale or disposition of oil
and gas properties unless the sale or disposition represents a significant
quantity of oil and gas reserves. The net carrying value of proved oil and gas
properties is limited to an estimate of the future net revenues (discounted at
10%) from proved oil and gas reserves based on period-end prices and costs plus
the lower of cost or estimated fair value of unproved properties. As a result of
this limitation, permanent impairments of oil and gas properties of
approximately $22,500,000, $28,514,000 and $50,800,000 were recorded during
1996, 1997 and 1998, respectively. Subsequent to year-end, natural gas prices
have declined. This decline could result in an additional writedown in 1999.
Unproved properties are reviewed for impairment quarterly.
OTHER PROPERTY AND EQUIPMENT -- Depreciation of other property and
equipment is provided on a straight-line basis over their estimated useful lives
which range from five to seven years.
F-7
<PAGE> 88
MARINER ENERGY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED LOAN COSTS -- Deferred loan costs, which are included in other
assets, are stated at cost and amortized straight-line over their estimated
useful lives, not to exceed the life of the related debt.
INCOME TAXES -- The Acquired Company's taxable income was and the Company's
taxable income is included in a consolidated United States income tax return
with Hardy Holdings Inc. and Mariner Holdings Inc., respectively. The
intercompany tax allocation policy provides that each member of the consolidated
group compute a provision for income taxes on a separate return basis. The
Company records its income taxes using an asset and liability approach which
results in the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the book
carrying amounts and the tax bases of assets and liabilities. (See Note 8)
CAPITALIZED INTEREST COSTS -- The Company capitalizes interest based on the
cost of major development projects which are excluded from current depreciation,
depletion, and amortization calculations. Capitalized interest costs were
approximately $449,000, $729,000 and $1,702,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
ACCRUAL FOR FUTURE ABANDONMENT COSTS -- Provision is made for abandonment
costs calculated on a unit-of-production basis, representing the Company's
estimated liability at current prices for estimated costs in the removal and
abandonment of production facilities at the end of the producing life of each
property.
HEDGING PROGRAM -- The Company utilizes derivative instruments in the form
of natural gas and crude oil price swap and price collar agreements in order to
manage price risk associated with future crude oil and natural gas production
and fixed-price crude oil and natural gas purchase and sale commitments. Such
agreements are accounted for as hedges using the deferral method of accounting.
Gains and losses resulting from these transactions are deferred and included in
other assets or accrued liabilities, as appropriate, until recognized as
operating income in the Company's Consolidated Statement of Operations as the
physical production required by the contracts is delivered.
The net cash flows related to any recognized gains or losses associated
with these hedges are reported as cash flows from operations. If the hedge is
terminated prior to expected maturity, gains or losses are deferred and included
in income in the same period as the physical production required by the
contracts is delivered.
The conditions to be met for a derivative instrument to qualify as a hedge
are the following: (i) the item to be hedged exposes the Company to price risk;
(ii) the derivative reduces the risk exposure and is designated as a hedge at
the time the derivative contract is entered into; and (iii) at the inception of
the hedge and throughout the hedge period there is a high correlation of changes
in the market value of the derivative instrument and the fair value of the
underlying item being hedged.
When the designated item associated with a derivative instrument matures,
is sold, extinguished or terminated, derivative gains or losses are recognized
as part of the gain or loss on sale or settlement of the underlying item. When a
derivative instrument is associated with an anticipated transaction that is no
longer expected to occur or if correlation no longer exists, the gain or loss on
the derivative is recognized in income to the extent the future results have not
been offset by the effects of price or interest rate changes on the hedged item
since the inception of the hedge.
REVENUE RECOGNITION -- The Company recognizes oil and gas revenue from its
interests in producing wells as oil and gas from those wells is produced and
sold. Oil and gas sold is not significantly different from the Company's share
of production.
FINANCIAL INSTRUMENTS -- The Company's financial instruments consist of
cash and cash equivalents, receivables, payables, and debt. At December 31, 1997
and 1998, the estimated fair value of the Company's Senior Subordinated Notes
was approximately $100,000,000. The estimated fair value was
F-8
<PAGE> 89
MARINER ENERGY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined based on borrowing rates available at December 31, 1997 and 1998,
respectively, for debt with similar terms and maturities. The carrying amount of
the Company's other financial instruments approximates fair value.
EARNINGS PER SHARE -- The Company calculates earnings per share by dividing
net income or loss by the weighted average number of outstanding common shares
as the Company has incurred losses since establishing its own capital structure
and therefore any common stock equivalents, options or conversions would be
antidilutive.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
MAJOR CUSTOMERS -- During the year ended December 31, 1998, sales of oil
and gas to four purchasers, including an affiliate, accounted for 29%, 16%, 15%
and 10% of total revenues. During the year ended December 31, 1997, sales of oil
and gas to four purchasers accounted for 19%, 19%, 18% and 14% of total
revenues. During the year ended December 31, 1996, sales of oil and gas to four
purchasers accounted for 15%, 13%, 13% and 10% of total revenues. Management
believes that the loss of any of these purchasers would not have a material
impact on the Company's financial condition or results of operations.
RECENT ACCOUNTING PRONOUNCEMENT -- In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities"
which was amended in June 1999 by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133 -- an amendment of FASB Statement No. 133." SFAS No. 133, as
amended, is effective for fiscal years beginning after June 15, 2000 and
establishes accounting and reporting standards for derivative instruments and
for hedging activities. The Company is currently evaluating what effect, if any,
SFAS No. 133 will have on the Company's financial statements. The Company will
adopt this statement no later than January 1, 2001.
2. THE ACQUISITION
Effective April 1, 1996, Mariner Holdings acquired all the capital stock of
the Acquired Company from Hardy Holdings Inc. for an aggregate purchase price of
approximately $185.5 million, including $14.5 for net working capital. In
connection with the Acquisition, substantial intercompany indebtedness and
receivables and third-party indebtedness of the Acquired Company were
eliminated.
The sources and uses of funds related to financing the Acquisition (See
Note 1) were as follows:
<TABLE>
<CAPTION>
SOURCES OF FUNDS
----------------
(IN MILLIONS)
<S> <C>
Bridge loan provided by JEDI(1)............................. $ 92.0
Common stock purchased by JEDI(2)........................... 95.0
Working capital provided by the Company..................... 6.0
------
Total............................................. $193.0
======
</TABLE>
F-9
<PAGE> 90
MARINER ENERGY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
USES OF FUNDS
-------------
(IN MILLIONS)
<S> <C>
Acquisition purchase price.................................. $185.5
Acquisition costs and other expenses(3)..................... 7.5
------
Total............................................. $193.0
======
</TABLE>
- -------------------------
(1) The JEDI Bridge Loan (see Note 4) was incurred by Mariner Holdings to fund a
portion of the consideration paid in the Acquisition.
(2) As contemplated in connection with the Acquisition and shortly after the
consummation thereof, certain members of the Company's management purchased
approximately 4% of the capital stock of Mariner Holdings for an aggregated
consideration valued at approximately $3.6 million. Such consideration
consisted of approximately $0.6 million in cash and approximately $3.0
million of overriding royalty interests, which amounts are not included in
the above sources and uses of funds related to the Acquisition.
(3) Includes $2.9 million of fees and expenses paid to JEDI associated with the
purchase of the common stock by JEDI, $2.6 million of expenses paid to JEDI
associated with the implementation of the JEDI Bridge Loan and $2.0 million
of other transaction fees and expenses (See Note 4).
The Acquisition was accounted for using the purchase method of accounting.
As such, JEDI's cost to acquire the Acquired Company, including transaction
costs, have been allocated to the assets and liabilities acquired based on
estimated fair values. As a result, the Company's financial position and
operating results subsequent to the date of the Acquisition reflect a new basis
of accounting and are not comparable to prior periods. In addition, $1.3 million
of interest was imputed for the period from April 1, 1996 to the date of
closing.
The allocation of JEDI's purchase price to the assets and liabilities of
the Company resulted in a significant increase in the carrying value of the
Company's oil and gas properties. Under the full cost method of accounting, the
carrying value of oil and gas properties is generally not permitted to exceed
the sum of the present value (10% discount rate) of estimated future net cash
flows from proved reserves, based on current prices and costs, plus the lower of
cost or estimated fair value of unproved properties (the "cost center ceiling").
Based upon the allocation of JEDI's purchase price, estimated proved reserves
and product prices in effect at the date of the Acquisition, the purchase price
allocated to oil and gas properties was in excess of the cost center ceiling by
approximately $22.5 million. The resulting writedown was a non-cash charge and
was included in the results of operations for the nine months ended December 31,
1996.
The allocation of the purchase price (including fees and expenses) is
summarized as follows (in millions of dollars):
<TABLE>
<S> <C>
Current assets............................................. $ 18.3
Property and equipment..................................... 181.4
Other noncurrent assets.................................... 2.6
Liabilities assumed........................................ (12.2)
------
Total............................................ $190.1
======
</TABLE>
F-10
<PAGE> 91
MARINER ENERGY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma financial data have been prepared
assuming that the Acquisition and the related financing were consummated on
January 1, 1996. Amounts are in thousands:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Revenues............................................... $60,388
Net income............................................. $ 6,511
</TABLE>
3. RELATED-PARTY TRANSACTIONS
RECEIVABLES FROM AFFILIATES -- Prior to the management buyout, the Acquired
Company had four lending facilities with Hardy plc. These facilities earned
interest income of approximately $2,110,000 for the three month period ending
March 31, 1996.
DEBT TO AFFILIATE -- Prior to the management buyout, the Acquired Company
had one loan facility outstanding with Hardy plc. The Acquired Company incurred
approximately $381,000 of interest expense relating to this debt for the three
month period ending March 31, 1996.
SALES TO AFFILIATES -- For the years ending December 31, 1996, 1997 and
1998, sales to affiliates were approximately $29,000, $13.0 million and $8.9
million, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES -- Prior to April 1, 1996, the Acquired
Company paid an affiliate for various administrative support services. Included
in general and administrative expenses was approximately $29,000 for the three
months ended March 31, 1996, for such services. In management's opinion, such
allocated expenses reasonably represented expenses incurred by the affiliate on
behalf of the Acquired Company.
AFFILIATE TRANSACTIONS SUBSEQUENT TO THE ACQUISITION -- Enron Corp.
("Enron") is the parent of ENA, and an affiliate of Enron and ENA is the general
partner of JEDI. Accordingly, Enron may be deemed to control JEDI and the
Company. In addition, six of the Company's directors are officers of Enron or
affiliates of Enron. Enron and certain of its subsidiaries and other affiliates
collectively participate in many phases of the oil and natural gas industry and
are, therefore, competitors of the Company. In addition, ENA and JEDI have
provided, and may in the future provide, and another affiliate has assisted, and
may in the future assist, in arranging financing to non-affiliated participants
in the oil and natural gas industry who are or may become competitors of the
Company. Because of these various conflicting interests, ENA, the Company, JEDI
and the members of the Company's management have entered into an agreement that
is intended to make clear that Enron and its affiliates have no duty to make
business opportunities available to the Company.
The Company expects that from time to time it will engage in various
commercial transactions and have various commercial relationships with Enron and
certain affiliates of Enron, such as holding and exploring, exploiting and
developing joint working interests in particular prospects and properties,
engaging in hydrocarbon price hedging arrangements and entering into other oil
and gas related or financial transactions. For example, there are several
prospects in which both an affiliate of Enron and the Company have working
interests. Such interests were acquired in the ordinary course of business
pursuant to bids, joint or otherwise. Any wells drilled will be subject to joint
operating agreements relating to exploration and possible production and will be
subject to customary business terms. Furthermore, the Company has entered into
several agreements with Enron or affiliates of Enron for the purpose of hedging
oil and natural gas prices on the Company's future production. Certain of the
Company's debt instruments restrict the Company's ability to engage in
transactions with its affiliates, but those restrictions are subject to
significant exceptions. The Company believes that its current agreements with
Enron and its affiliates are,
F-11
<PAGE> 92
MARINER ENERGY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and anticipates that any future agreements with Enron and its affiliates will
be, on terms no less favorable to the Company than would be contained in an
agreement with a third party.
4. LONG-TERM DEBT
JEDI BRIDGE LOAN -- In connection with the Acquisition, JEDI and Mariner
Holdings entered into a Credit, Subordination and Further Assurances Agreement
dated May 16, 1996, pursuant to which JEDI provided a loan commitment to Mariner
Holdings of $105 million. Under this commitment Mariner Holdings borrowed $92
million (the "JEDI Bridge Loan") to partially fund the Acquisition. The JEDI
Bridge Loan bore interest at 6% above LIBOR. The JEDI Bridge Loan was repaid
with proceeds of $50 million from borrowings under the Revolving Credit Facility
(see below) and $42 million from the issuance of the 10 1/2% Senior Subordinated
Notes (see below). As a result of the repayments, the JEDI Bridge Loan was
terminated. In connection with the $92 million repayment, $2.4 million of the
JEDI Bridge Loan debt fees were written off during the nine months ended
December 31, 1996.
REVOLVING CREDIT FACILITY -- On June 28, 1996, the Company entered into an
unsecured revolving credit facility (the "Revolving Credit Facility") with Bank
of America as agent for a group of lenders (the "Lenders"). On that date, the
Company borrowed $50 million under the Revolving Credit Facility and used the
proceeds to partially repay the JEDI Bridge Loan. During August 1996, the
outstanding balances of both the Revolving Credit Facility and the JEDI Bridge
Loan were repaid with the proceeds from the issuance of the Company's 10 1/2%
Senior Subordinated Notes.
The Revolving Credit Facility provides for a maximum $150 million revolving
credit loan which matures on October 1, 1999. The borrowing base under the
Revolving Credit Facility is currently $60 million and is subject to periodic
redetermination. The Revolving Credit Facility, had an outstanding balance of
$53.4 million at December 31, 1998. On June 28, 1999, the Revolving Credit
Facility was amended to extend the maturity date to October 1, 2002 and to
pledge certain mineral interests to secure the Revolving Credit Facility.
Accordingly, this liability was classified as long-term at December 31, 1998.
Borrowings under the Revolving Credit Facility bear interest, at the option
of the Company, at either (i) LIBOR plus 0.75% to 1.25% (depending upon the
level of utilization of the Borrowing Base) or (ii) the higher of (a) the
agent's prime rate or (b) the federal funds rate plus 0.5%. On December 31, 1998
the effective rate was 6.90%. The Company incurs a quarterly commitment fee
ranging from 0.25% to 0.375% per annum on the average unused portion of the
Borrowing Base, depending upon the level of utilization.
The Revolving Credit Facility contains various restrictive covenants which,
among other things, restrict the payment of dividends, limit the amount of debt
the Company's subsidiary, Mariner Energy, may incur, limit Mariner Energy's
ability to make certain loans and investments, limit Mariner Energy's ability to
enter into certain hedge transactions and provide that the Mariner Energy must
maintain specified relationships between cash flow and fixed charges and cash
flow and interest on indebtedness. As of December 31, 1998, Mariner Energy was
in compliance with all such requirements.
ENA CREDIT FACILITY -- Mariner Energy LLC entered into an agreement with
ENA to provide a $25 million unsecured, subordinated credit facility (the "ENA
Credit Facility"). The ENA Credit Facility accrues interest at an annual rate of
LIBOR plus 2.5% and requires a structuring fee of 4% of the borrowed amount. The
effective interest rate as of December 31, 1998 was 8.06%. The ENA Credit
Facility requires that a portion of the proceeds of any private or public equity
or debt offering by the Company be applied to repay amounts outstanding under
the ENA Credit Facility. The terms of the ENA Credit Facility required that if
financing did not become available by March 1, 1999, up to $25 million of the
ENA Credit Facility would be converted to equity. Interest expense recorded as a
result of this ENA Credit Facility for the year ended December 31, 1998, was
approximately $993,000.
F-12
<PAGE> 93
MARINER ENERGY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to December 31, 1998, the ENA Credit Facility was amended to (i)
increase the size of the ENA Credit Facility to $50 million, (ii) extend the
maturity to April 30, 2000, (iii) accrue interest at an annual rate of LIBOR
plus 4.5%, and (iv) provide for an optional conversion to common shares for the
outstanding debt and accrued interest at a rate of $14.58 per common shares of
Mariner Energy LLC by ENA.
SENIOR CREDIT FACILITY WITH ENA -- In April 1999, the Company established a
$25 million Senior Credit Facility with ENA ("Senior Credit Facility") to obtain
funds needed to execute the Company's 1999 capital expenditure program and for
short-term working capital needs. The borrowing base under the Senior Credit
Facility is currently $25 million and is subject to periodic redetermination.
The Senior Credit Facility accrues interest at an annual rate of LIBOR plus 2.5%
and requires a structuring fee of 1% of the committed amount. The Senior Credit
Facility will mature on December 31, 1999 and is expected to be repaid from
internally-generated cash flows.
Restrictions for Mariner Energy within the Revolving Credit Facility and
10 1/2% Senior Subordinated Notes restrict Mariner Energy's ability to pay
interest or principal on the ENA Credit Facility and Senior Credit Facility.
10 1/2% SENIOR SUBORDINATED NOTES -- On August 14, 1996 the Company
completed the sale of $100 million principal amount of 10 1/2% Senior
Subordinated Notes Due 2006, (the "Notes"). The proceeds of the Notes were used
by the Company to (i) fully repay the JEDI Bridge Loan incurred in the
Acquisition, and (ii) repay the Revolving Credit Facility. The Notes bear
interest at 10 1/2% payable semiannually in arrears on February 1 and August 1
of each year. The Notes are unsecured obligations of the Company, and are
subordinated in right of payment to all senior debt (as defined in the indenture
governing the Notes) of the Company, including indebtedness under the Revolving
Credit Facility.
The indenture pursuant to which the Notes are issued contains certain
covenants that, among other things, limit the ability of Mariner Energy to incur
additional indebtedness, pay dividends, redeem capital stock, make investments,
enter into transactions with affiliates, sell assets and engage in mergers and
consolidations. As of December 31, 1998, the Company was in compliance with all
such requirements.
The Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after August 1, 2001, initially at 105.25% of their principal
amount, plus accrued interest, declining ratably to 100% of their principal
amount, plus accrued interest, on or after August 1, 2003. In addition, at the
option of the Company, at any time prior to August 1, 1999, up to an aggregate
of 35% of the original principal amount of the Notes may be redeemable from the
net proceeds of one or more public equity offerings, at 110.5% of their
principal amount, plus accrued interest, provided that any such redemption shall
occur within 60 days of the date of the closing of such public equity offering.
In the event of a change of control of the Company (as defined in the
indenture pursuant to which the Notes are issued), each holder of the Notes (the
"Holder") will have the right to require the Company to repurchase all or any
portion of such Holder's Notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued interest.
As required in the indenture, in January 1997 the Company exchanged all of
the Notes for Series B notes with substantially the same terms as to principal
amount, interest rate, maturity and redemption rights. If the exchange offer had
not been consummated, the interest rate on the Notes would have increased by
0.5% per annum.
CASH PAID FOR INTEREST, -- Cash paid for interest for the nine month period
ending December 31, 1996, for the years ending December 31, 1997 and 1998 were
$10,656,000, $10,926,000 and $15,649,260, respectively.
5. STOCKHOLDERS' EQUITY
STOCK OPTION PLAN -- During June 1996, Mariner Holdings established the
Mariner Holdings, Inc. 1996 Stock Option Plan (the "Plan") providing for the
granting of stock options to key employees and
F-13
<PAGE> 94
MARINER ENERGY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consultants. Options granted under the Plan will not be less than the fair
market value of the shares at the date of grant. The maximum number of shares of
Mariner Holdings common shares that may be issued under the Plan was 142,800. In
June 1998, the Plan was amended to increase the number of eligible shares to be
issued to 202,800. In September 1998, concurrent with the exchange of each
common share of Mariner Holdings for twelve common shares of Mariner Energy LLC
the maximum number of shares of common shares that can be issued under the Plan
was 2,433,600.
During the year ending December 31, 1996, 1997 and 1998 the Company granted
stock options of 1,539,972, 142,056 and 329,160, respectively. No options have
been exercised or cancelled during the three year period. At December 31, 1998,
options (the "Options") to purchase 2,011,188 shares had been granted at
exercise prices ranging from $8.33 to $14.58 per share. The Options generally
become exercisable as to one-fifth to one-third on each of the first three or
five anniversaries of the date of grant. The Options expire from seven years to
ten years after the date of grant.
The Company applies APB Opinion 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation cost has been recognized
for the Plan. Had compensation cost for the Company's Plan been determined based
on the fair value at the grant date for awards under the Plan consistent with
the method of SFAS No. 123, the Company's net loss for the nine months ended
December 31, 1996 and for the years ended December 31, 1997 and 1998 would have
increased $356,000, $777,000 and $912,000, respectively to $19,048,000,
$20,987,000 and $59,333,000 respectively. The effects of applying SFAS No. 123
in this pro forma disclosure are not indicative of future amounts. The fair
value of each option grant is estimated on the date of grant using a present
value calculation, risk free interest of 4.6%, no dividends and expected life of
5 years. Stock options available for future grant amounted to 422,412 shares at
December 31, 1998. Exercisable stock options amounted to 644,292 shares at
December 31, 1998.
PREFERRED SHARES -- Company agreement authorizes the issuance of up to one
million preferred shares for the consideration and on the terms and conditions
the board of directors establishes, in its sole discretion, without the approval
of any holders of common shares. Preferred shares may be entitled to preference
over the common shares on dividends, voting rights, conversion or redemption
rights, amounts payable on liquidation and other matters. Preferred shares of
any class or series may be entitled to other rights and privileges, or subject
to other restrictions, the board of directors establishes in its sole
discretion.
EQUITY INVESTMENT -- In June 1998, the Company reached an agreement with
management shareholders and an affiliate of Enron to purchase common shares of
approximately $28.8 million of net equity capital, which was used to supplement
funding of the Company's 1998 capital expenditure plan.
6. EMPLOYEE BENEFIT AND ROYALTY PLANS
EMPLOYEE CAPITAL ACCUMULATION PLAN -- The Company provides all full-time
employees participation in the Employee Capital Accumulation Plan (the "Plan")
which is comprised of a contributory 401(k) savings plan and a discretionary
profit sharing plan. Under the 401(k) feature, the Company, at its sole
discretion, may contribute an employer-matching contribution equal to a
percentage not to exceed 50% of each eligible participant's matched salary
reduction contribution as defined by the Plan. Under the discretionary profit
sharing contribution feature of the Plan, the Company's contribution, if any,
shall be determined annually and shall be 4% of the lesser of the Company's
operating income or total employee compensation and shall be allocated to each
eligible participant pro rata to his or her compensation. During 1996, 1997 and
1998, the Company contributed $165,000, $200,000, and $182,000, respectively, to
the Plan. This plan is a continuation of a plan provided by the Acquired
Company.
OVERRIDING ROYALTY INTERESTS -- Pursuant to agreements, certain key
employees and consultants are entitled to receive, as incentive compensation,
overriding royalty interests ("Overriding Royalty Interests") in certain oil and
gas prospects acquired by the Company. Such Overriding Royalty Interests entitle
the
F-14
<PAGE> 95
MARINER ENERGY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
holder to receive a specified percentage of the gross proceeds from the future
sale of oil and gas (less production taxes), if any, applicable to the
prospects. For the year ending December 31, 1996, 1997 and 1998 the Company paid
$2.2 million, $1.3 million and $1.0 million, respectively.
7. COMMITMENTS AND CONTINGENCIES
MINIMUM FUTURE LEASE PAYMENTS -- The Company leases certain office
facilities and other equipment under long-term operating lease arrangements.
Minimum rental obligations under the Company's operating leases in effect at
December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $1,112
2000........................................................ 1,046
2001........................................................ 1,073
2002........................................................ 1,082
2003........................................................ 464
------
Total............................................. $4,767
======
</TABLE>
Rental expense, before capitalization, was approximately $427,000,
$544,000, and $1,000,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
HEDGING PROGRAM -- The Company conducts a hedging program with respect to
its sales of crude oil and natural gas using various instruments whereby monthly
settlements are based on the differences between the price or range of prices
specified in the instruments and the settlement price of certain crude oil and
natural gas futures contracts quoted on the open market. The instruments
utilized by the Company differ from futures contracts in that there is no
contractual obligation which requires or allows for the future delivery of the
product.
The following table sets forth the results of hedging transactions during
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
----------- ----------- ----------
<S> <C> <C> <C>
Natural gas quantity hedged (MMBtu)............ 13,482,900 13,573,500 9,800,000
Increase (decrease) in natural gas sales....... $(3,701,000) $(3,931,000) $2,337,000
Crude oil quantity hedged (Bbls)............... 428,000 118,000 0
Increase (decrease) in crude oil sales......... $(1,912,000) $ (614,000) $ 0
</TABLE>
Subsequent to year-end, the Company entered into a costless natural gas
collar with an affiliate from April to October 1999 with an extension at the
collar parties' option to extend the collar at a higher price through March
2000. In addition, in March, the Company entered into a three-year gas swap with
an affiliate. The following tables set forth the Company's position as of March
15, 1999.
<TABLE>
<CAPTION>
NOTIONAL PRICE
QUANTITY -----------------------
TYPE LOCATION TIME PERIOD (MMBTU) FLOOR CEILING FIXED
- ---- -------- ----------- -------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Collar Henry Hub April 1 -- October 31, 1999 12,840 $1.85 $2.05 --
Swap Henry Hub November 1 -- December 31, 2,684 -- -- $2.18
1999
Swap Henry Hub January 1 -- December 31, 2000 10,980 -- -- $2.18
Swap Henry Hub January 1 -- December 31, 2001 4,380 -- -- $2.18
Swap Henry Hub January 1 -- October 31, 2002 1,824 -- -- $2.18
</TABLE>
DEEPWATER RIG -- The Company executed a letter of intent in February 1998
regarding the provision of a deepwater rig to the Company and another company on
an equally shared basis for five years
F-15
<PAGE> 96
MARINER ENERGY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
beginning in late 1999 or early 2000. The Company is currently in discussions
with the owner of the rig to determine if a mutually acceptable drilling
contract can be negotiated.
LITIGATION -- In the ordinary course of business, the Company is a claimant
and/or a defendant in various legal proceedings, including proceedings as to
which the Company has insurance coverage. The Company does not consider its
exposure in these proceedings, individually or in the aggregate, to be material.
In December, 1996, ETOCO, Inc., which owns a 20% interest in one producing
well operated by the Company, filed a lawsuit against the Company in the
district court of Hardin County, Texas, alleging damage due to the Company's
refusal to drill an additional well. In April 1998, after a trial on the merits,
a jury awarded ETOCO $2.38 million in damages. In August, the court awarded
ETOCO $0.5 million in attorneys' fees. On February 8, 1999, the case was
settled.
8. INCOME TAXES
The following table sets forth a reconciliation of the statutory federal
income tax with the income tax provision (in thousands):
<TABLE>
<CAPTION>
ACQUIRED
COMPANY
-------------
THREE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997 1998
------------- ------------- ------------- -------------
$ % $ % $ % $ %
------ ---- ------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes... 2,661 -- (18,692) -- (20,210) -- (58,421) --
Income tax expense (benefit)
computed at statutory rates....... 931 35 (6,542) (35) (7,074) (35) (20,447) (35)
Change in valuation allowances...... (3,597) (135) 8,125 43 6,871 34 18,804 32
Other............................... 2,666 100 (1,583) (8) 203 1 1,643 3
------ ---- ------- --- ------- --- ------- ---
Tax expense......................... -- -- -- -- -- -- -- --
====== ==== ======= === ======= === ======= ===
</TABLE>
No federal income taxes were paid by the Company during the three months
ending March 31, 1996, the nine months ending December 31, 1996 or the years
ended December 31, 1997 or 1998.
The Company's deferred tax position reflects the net tax effects of the
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax reporting.
Significant components of the deferred tax assets and liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carry forwards................... $ 6,323 $ 10,410 $ 34,771
Differences between book and tax bases of
properties....................................... 1,802 4,586 --
------- -------- --------
8,125 14,996 34,771
Valuation allowance................................... (8,125) (14,996) (33,800)
------- -------- --------
Total net deferred tax assets......................... -- -- 971
------- -------- --------
Deferred tax liabilities --
Differences between book and tax bases of
properties....................................... -- -- (971)
------- -------- --------
Total net deferred taxes.................... $ -- $ -- $ --
======= ======== ========
</TABLE>
F-16
<PAGE> 97
MARINER ENERGY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, the Company has a cumulative net operating loss
carryforward ("NOL") for federal income tax purposes of approximately $98
million, which begins to expire in the year 2012. A valuation allowance is
recorded against tax assets which are not likely to be realized. Because of the
uncertain nature of their ultimate realization, as well as past performance and
the NOL expiration date, the Company has established a valuation allowance
against this NOL carryforward benefit and for all net deferred tax assets in
excess of net deferred tax liabilities.
9. OIL AND GAS PRODUCING ACTIVITIES AND CAPITALIZED COSTS
The results of operations from the Company's oil and gas producing
activities were as follows (in thousands):
<TABLE>
<CAPTION>
ACQUIRED
COMPANY
--------------
THREE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997 1998
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Oil and gas sales.................. $13,309 $ 47,079 $ 62,771 $ 56,690
Production costs................... (2,403) (6,495) (9,376) (9,858)
Depreciation, depletion and
amortization..................... (6,309) (24,747) (31,719) (33,833)
Impairment of oil and gas
properties....................... -- (22,500) (28,514) (50,800
Income tax expense................. -- -- -- --
------- -------- -------- --------
Results of operations.... $ 4,597 $ (6,663) $ (6,838) $(37,801)
======= ======== ======== ========
</TABLE>
Costs incurred in property acquisition, exploration and development
activities were as follows (in thousands, except per equivalent mcf amounts):
<TABLE>
<CAPTION>
ACQUIRED YEAR ENDED
COMPANY DECEMBER 31,
------------ 1998
THREE MONTHS NINE MONTHS ------------
ENDED ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
------------ -------------- ------------
<S> <C> <C> <C> <C>
Property acquisition costs
Unproved properties............ $ 949 $13,477 $21,569 $ 43,143
Proved properties.............. -- -- 3,250 --
Exploration costs................ 3,903 18,627 27,364 35,674
Development costs................ 2,643 6,132 16,134 61,960
------ ------- ------- --------
Total costs............ $7,495 $38,236 $68,317 $140,777
====== ======= ======= ========
Depreciation, depletion and
amortization rate per
equivalent Mcf before
impairment provisions.......... $1.00 $1.33 $1.33 $1.40
</TABLE>
The Company capitalizes internal costs associated with exploration
activities. These capitalized costs were approximately $4,362,000, $4,418,000
and $6,386,000, for the years ended December 31, 1996, 1997 and 1998,
respectively.
The following table summarizes costs related to unevaluated properties
which have been excluded from amounts subject to amortization at December 31,
1998. The Company regularly evaluates these costs
F-17
<PAGE> 98
MARINER ENERGY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to determine whether impairment has occurred. The majority of these costs are
expected to be evaluated and included in the amortization base within three
years.
<TABLE>
<CAPTION>
ACQUIRED COMPANY
------------------
THREE NINE
MONTHS MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED TOTAL AT
PRIOR MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
YEARS 1996 1996 1997 1998 1998
------ --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Property acquisition
costs.................. $1,628 $24 $7,949 $19,509 $53,936 $83,046
Exploration costs........ -- -- -- -- 1,030 1,030
------ --- ------ ------- ------- -------
Total.......... $1,628 $24 $7,949 $19,509 $54,966 $84,076
====== === ====== ======= ======= =======
</TABLE>
Approximately 95% of excluded costs at December 31, 1998 relate to
activities in the Deepwater Gulf of Mexico and the remaining 5% relates to
activities in the Gulf of Mexico shallow waters and onshore areas near the Gulf.
10. SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE
INFORMATION (UNAUDITED)
Estimated proved net recoverable reserves as shown below include only those
quantities that are expected to be commercially recoverable at prices and costs
in effect at the balance sheet dates under existing regulatory practices and
with conventional equipment and operating methods. Proved developed reserves
represent only those reserves expected to be recovered through existing wells.
Proved undeveloped reserves include those reserves expected to be recovered from
new wells on undrilled acreage or from existing wells on which a relatively
major expenditure is required for recompletion. Also included in the Company's
proved undeveloped reserves as of December 31, 1998 were reserves expected to be
recovered from wells for which certain drilling and completion operations had
occurred as of that date, but for which significant future capital expenditures
were required to bring the wells into commercial production.
Reserve estimates are inherently imprecise and may change as additional
information becomes available. Furthermore, estimates of oil and gas reserves,
of necessity, are projections based on engineering data, and there are
uncertainties inherent in the interpretation of such data as well as in the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured
exactly, and the accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and judgment.
Accordingly, estimates of the economically recoverable quantities of oil and
natural gas attributable to any particular group of properties, classifications
of such reserves based on risk of recovery and estimates of the future net cash
flows expected therefrom prepared by different engineers or by the same
engineers at different times may vary substantially. There also can be no
assurance that the reserves set forth herein will ultimately be produced or that
the proved undeveloped reserves set forth herein will be developed within the
periods anticipated. It is likely that variances from the estimates will be
material. In addition, the estimates of future net revenues from proved reserves
of the Company and the present value thereof are based upon certain assumptions
about future production levels, prices and costs that may not be correct when
judged against actual subsequent experience. The Company emphasizes with respect
to the estimates prepared by Ryder Scott Company, L.P., independent petroleum
engineers, that the discounted future net cash flows should not be construed as
representative of the fair market value of the proved reserves owned by the
Company since discounted future net cash flows are based upon projected cash
flows which do not provide for changes in oil and natural gas prices from those
in effect on the date indicated or for escalation of expenses and capital costs
subsequent to such date. The meaningfulness of such estimates is highly
dependent upon the accuracy of the assumptions upon which they are based. Actual
results will differ, and are likely to differ materially, from the results
estimated.
F-18
<PAGE> 99
MARINER ENERGY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ESTIMATED QUANTITIES OF PROVED RESERVES
<TABLE>
<CAPTION>
OIL (BBL) GAS (MCF)
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
December 31, 1995........................................... 6,669 98,330
Revisions of previous estimates........................... 3 (518)
Extensions, discoveries and other additions............... 1,168 24,326
Sales of reserves in place................................ (1,810) (9,425)
Production................................................ (750) (20,429)
------ -------
December 31, 1996........................................... 5,280 92,284
Revisions of previous estimates........................... 210 (1,817)
Extensions, discoveries and other additions............... 2,062 46,166
Purchase of reserves in place............................. 55 2,737
Production................................................ (977) (18,004)
------ -------
December 31, 1997........................................... 6,630 121,366
Revisions of previous estimates........................... (836) (410)
Extensions, discoveries and other additions............... 4,351 27,416
Production................................................ (786) (19,477)
------ -------
December 31, 1998........................................... 9,359 128,895
====== =======
</TABLE>
ESTIMATED QUANTITIES OF PROVED DEVELOPED RESERVES
<TABLE>
<CAPTION>
OIL (BBL) GAS (MCF)
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
December 31, 1996........................................... 3,456 83,529
December 31, 1997........................................... 3,486 76,343
December 31, 1998........................................... 2,886 86,024
</TABLE>
The following is a summary of a standardized measure of discounted net cash
flows related to the Company's proved oil and gas reserves. The information
presented is based on a valuation of proved reserves using discounted cash flows
based on year-end prices, costs and economic conditions and a 10% discount rate.
The additions to proved reserves from new discoveries and extensions could vary
significantly from year to year. Additionally, the impact of changes to reflect
current prices and costs of reserves proved in prior years could also be
significant. Accordingly, the information presented below should not be viewed
as an estimate of the fair value of the Company's oil and gas properties, nor
should it be considered indicative of any trends.
F-19
<PAGE> 100
MARINER ENERGY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Future cash inflows....................................... $ 548,451 $ 447,681 $ 383,490
Future production costs................................... (103,777) (109,405) (103,400)
Future development costs.................................. (20,413) (73,568) (81,090)
Future income taxes....................................... (90,971) (35,346) --
--------- --------- ---------
Future net cash flows..................................... 333,290 229,362 199,000
Discount of future net cash flows at 10% per annum........ (78,914) (52,903) (51,371)
--------- --------- ---------
Standardized measure of discounted future net cash
flows................................................... $ 254,376 $ 176,459 $ 147,629
========= ========= =========
</TABLE>
During recent years, there have been significant fluctuations in the prices
paid for crude oil in the world markets and in the United States, including the
posted prices paid by purchasers of the Company's crude oil. The year-end
average prices of oil and gas at December 31, 1996, 1997 and 1998, used in the
above table, were $25.16, $16.43 and $10.36 per Bbl, respectively, and $4.50,
$2.79 and $2.22 per Mcf, respectively.
The following are the principal sources of change in the standardized
measure of discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
-------- --------- --------
<S> <C> <C> <C>
Sales and transfers of oil and gas produced, net of
production costs.................................. $(51,505) $ (53,395) $(46,832)
Net changes in prices and production costs.......... 120,843 (132,658) (67,815)
Extensions and discoveries, net of future
development and production costs.................. 62,551 42,717 23,730
Development costs during period and net change in
development costs................................. -- 4,188 30,799
Revision of previous quantity estimates............. (1,293) (730) (6,846)
Purchases of reserves in place...................... -- 6,071 --
Sales of reserves in place.......................... (10,813) -- --
Net change in income taxes.......................... (36,082) 29,619 27,193
Accretion of discount before income taxes........... 17,342 30,336 20,365
Changes in production rates (timing) and other...... (7,182) (4,065) (9,424)
-------- --------- --------
Net change.......................................... $ 93,861 $ (77,917) $(28,830)
======== ========= ========
</TABLE>
********************************************************************************
F-20
<PAGE> 101
MARINER ENERGY LLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 802 $ 524
Receivables............................................... 15,657 17,667
Prepaid expenses and other................................ 7,234 7,266
--------- ---------
Total current assets.............................. 23,693 25,457
PROPERTY AND EQUIPMENT:
Oil and gas properties, at full cost:
Proved................................................. 316,056 333,354
Unproved, not subject to amortization.................. 84,076 85,777
--------- ---------
Total............................................. 400,132 419,131
Other property and equipment.............................. 3,300 3,590
Accumulated depreciation, depletion and amortization...... (167,846) (183,289)
--------- ---------
Total property and equipment, net................. 235,586 239,432
--------- ---------
OTHER ASSETS, NET OF AMORTIZATION........................... 3,513 3,291
--------- ---------
TOTAL ASSETS................................................ $ 262,792 $ 268,180
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 20,375 $ 8,074
Accrued liabilities....................................... 29,082 13,048
Accrued interest.......................................... 4,953 5,906
ENA credit facility....................................... -- 50,000
Senior credit facility.................................... -- 25,000
--------- ---------
Total current liabilities......................... 54,410 102,028
--------- ---------
ACCRUAL FOR FUTURE ABANDONMENT COSTS........................ 2,824 3,415
LONG-TERM DEBT:
Senior Subordinated Notes................................. 99,624 99,648
Revolving credit facility................................. 53,400 44,000
ENA credit facility....................................... 25,000 --
--------- ---------
Total long-term debt.............................. 178,024 143,648
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred Stock $0.01 par value (authorized 1,000,000
shares, none issued)................................... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 13,928,304 issued and outstanding, at June
30, 1999 and December 31, 1998......................... 139 139
Additional paid-in-capital................................ 124,718 124,718
Accumulated deficit....................................... (97,323) (105,768)
--------- ---------
Total stockholders' equity........................ 27,534 19,089
--------- ---------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY.................. $ 262,792 $ 268,180
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 102
MARINER ENERGY LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
REVENUES:
Oil sales................................................. $ 5,995 $ 4,624
Gas sales................................................. 22,985 21,222
----------- -----------
Total revenues.................................... 28,980 25,846
----------- -----------
COSTS AND EXPENSES:
Lease operating expenses.................................. 4,851 5,764
Depreciation, depletion and amortization.................. 16,274 15,803
General and administrative expenses....................... 1,853 2,821
Provision for litigation.................................. 2,960 --
----------- -----------
Total costs and expenses.......................... 25,938 24,388
----------- -----------
OPERATING INCOME............................................ 3,042 1,458
INTEREST:
Income.................................................... 283 21
Expense................................................... (6,252) (9,924)
----------- -----------
LOSS BEFORE TAXES........................................... (2,927) (8,445)
PROVISION FOR INCOME TAXES.................................. -- --
----------- -----------
NET LOSS.................................................... $ (2,927) $ (8,445)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE............................ $ (0.24) $ (0.61)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 12,209,424 13,928,304
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 103
MARINER ENERGY LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $ (2,927) $ (8,445)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation, depletion and amortization............... 16,756 16,059
Provision for litigation.................................. 2,960 --
Changes in operating assets and liabilities:
Receivables............................................ (3,900) (2,010)
Other current assets................................... (1,001) (32)
Other assets........................................... (190) 222
Accounts payable and accrued liabilities............... 9,072 (27,382)
-------- --------
Net cash provided by (used for) operating activities...... 20,770 (21,588)
-------- --------
INVESTING ACTIVITIES:
Additions to oil and gas properties....................... (83,076) (38,757)
Sale of mineral interest.................................. -- 19,757
Additions to other property and equipment................. (582) (290)
-------- --------
Net cash used in investing activities.................. (83,658) (19,290)
-------- --------
FINANCING ACTIVITIES:
Proceeds from (repayment of) revolving credit facility.... 28,250 (9,400)
Sale of common stock...................................... 28,800 --
Proceeds from the affiliate credit facilities............. -- 50,000
-------- --------
Net cash provided by financing activities.............. 57,050 40,600
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS....................... (5,838) (278)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 9,131 802
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 3,293 $ 524
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 104
MARINER ENERGY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of Mariner Energy LLC, Mariner Energy
Holdings and Mariner Energy Inc. ("Mariner Energy") (collectively, the
"Company") included herein have been prepared, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, they reflect all adjustments (consisting only of normal, recurring
accruals) which are, in the opinion of management, necessary for a fair
presentation of the financial results for the interim periods. Certain
information and notes normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's annual consolidated financial
statements for the year ended December 31, 1998. The result of operations for
the six months ending June 30, 1998 and 1999 are not necessarily indicative of
the results for the full year.
2. OIL AND GAS PROPERTIES
Under the full cost method of accounting for oil and gas properties, the
net carrying value of proved oil and gas properties is limited to an estimate of
the future net revenues, discounted at 10%, from proved oil and gas reserves
based on period-end prices and costs plus the lower of cost or estimated fair
value of unproved properties.
In the second quarter of 1999, the Company sold a 63% working interest in
its Pluto Deepwater Gulf exploitation project. Net proceeds from this sale were
approximately $19.8 million.
3. REVOLVING CREDIT FACILITY
Following the semi-annual borrowing base redetermination on June 28, 1999
the borrowing base under the Company's revolving credit facility (the "Revolving
Credit Facility"), with Bank of America as agent for a group of lenders, was
reaffirmed at $60 million, and the maturity date of the Revolving Credit
Facility was extended from October 1, 1999 to October 1, 2002. As part of the
redetermination, the Company pledged certain mineral interests to secure the
Revolving Credit Facility.
4. AFFILIATE CREDIT FACILITIES
During the first quarter of 1999, the Company and Enron Capital & Trade
Resources Corp., as of September 1, 1999, known as Enron North America, Corp.
("ENA") amended an existing unsecured, subordinated credit facility provided by
ENA to the Company to increase the amount available thereunder from $25 million
to $50 million (the "ENA Credit Facility"). The ENA Credit Facility requires
that any funds received pursuant to a private or public equity or debt offering
by the Company must first be applied to repay the amount outstanding thereunder.
Once funds outstanding under the ENA Credit Facility have been repaid, those
funds may not be reborrowed. The ENA Credit Facility has been amended to extend
its maturity date from April 30, 1999 to April 30, 2000 and to give ENA the
option to convert the ENA Credit Facility to equity in the Company at any time
through maturity. Interest accruing on the outstanding principal under the ENA
Credit Facility from April 15, 1999 through April 30, 2000 will be payable at
maturity by the Company. At June 30, 1999, the Company had fully drawn the ENA
Credit Facility.
In April 1999, the Company established a $25 million borrowing-based,
short-term credit facility with ENA (the "Senior Credit Facility"). The Senior
Credit Facility matures on December 31, 1999 and has
F-24
<PAGE> 105
MARINER ENERGY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an annual interest rate of LIBOR plus 2.5%, with interest payments due
quarterly. As of June 30, 1999, the Company had fully drawn the Senior Credit
Facility.
Restrictions for Mariner Energy within the Revolving Credit Facility and
the 10 1/2% Senior Subordinated Notes restricts the use of Mariner Energy's
assets or cash flow to satisfy interest or principal payments for the ENA Credit
Facility and Senior Credit Facility.
5. COMMITMENTS AND CONTINGENCIES
HEDGING -- The Company uses crude oil and natural gas price swaps and other
similar hedging transactions to reduce its exposure to price decreases. In
January 1999, the Company entered into a 36 month long-term natural gas fixed
price swap ("Fixed Price Swap") to establish the price the Company receives for
a portion of its natural gas production to $2.18 per Mmbtu. In May 1999, the
Company entered into a five month market sensitive swap ("Market Sensitive
Swap") where the Company pays to the counterparty $2.60 per MMBtu in return for
a market sensitive price. The effect of the Market Sensitive Swap is to limit
hedging losses on a portion of the Fixed Price Swap described above. In the
six-month period ended June 30, 1999, the Company recognized approximately $0.9
million in losses before recovery in the cash market as a result of these
contracts.
The following table sets forth the Company's open hedging positions as of
June 30, 1999.
<TABLE>
<CAPTION>
NOTIONAL PRICE
QUANTITIES ------------------------ FAIR VALUE AT
TIME PERIOD (MMBTU/BBL) FLOOR CEILING FIXED JUNE 30, 1999
- ----------- ----------- ----- ------- ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NATURAL GAS
July 1 -- October 31, 1999................. 7,380 $1.85 $2.05 -- $(1,994)
November 1 -- December 31, 1999
Fixed Price Swap......................... 2,684 -- -- $ 2.18 $(1,240)
Market Sensitive Swap.................... 1,220 -- -- $ 2.60 $ 58
January 1 -- December 31, 2000
Fixed Price Swap......................... 10,980 -- -- $ 2.18 $(2,784)
Market Sensitive Swap.................... 1,820 -- -- $ 2.60 $ 60
January 1 -- December 31, 2001
Fixed Price Swap......................... 4,380 -- -- $ 2.18 $(1,139)
January 1 -- October 31, 2002
Fixed Price Swap......................... 1,824 -- -- $ 2.18 $ (476)
CRUDE OIL
May 1 -- December 31, 1999................. 294,000 -- -- $16.54 $ (520)
</TABLE>
At the counterparty's option, the Company's costless collar on natural gas
covering the period July 1, 1999 through October 31, 1999 can be extended at a
floor price of $2.00 per Mmbtu and a ceiling of $2.70 per Mmbtu for the period
November 1999 through March 2000. Subsequent to June 30, 1999, the Company
entered into an oil hedge for the period November 1, 1999 through December 31,
2000. Notional quantities for the period November and December 1999 are 94,583
barrels at an average price of $19.89 per barrel. Average notional quantities
for January 1 through December 31, 2000 are 1,481,991 barrels at an average
price of $18.72 per barrel. All hedging contracts mentioned above were entered
into with an affiliate of the Company. Including these contracts, hedging
arrangements for 1999 cover approximately 59% of the Company's expected 1999
equivalent production. Subsequent to June 30, 1999, we purchased two gas call
options for November 1999 and December 1999 for a cumulative notional quantity
of 1,098 MMBtu at an exclusive price of $4.25 per MMBtu and $4.50 per MMBtu,
respectively.
F-25
<PAGE> 106
MARINER ENERGY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of our hedging instruments were determined based on brokers'
forward price quote and NYMEX forward price quote. As of June 30, 1999 a
commodity price increase of 10% would have resulted in an unfavorable change in
fair value of $8.8 million and a commodity price decrease of 10% would have
resulted in a favorable change in fair value of $2.9 million.
DEEPWATER RIG -- The Company executed a letter of intent in February 1998
regarding the provision of a deepwater rig to the Company and another company on
an equally shared basis for five years beginning in late 1999 or early 2000. The
Company is currently in discussions with the owner of the rig to determine if a
mutually acceptable drilling contract can be negotiated.
FLOW LINE SALE -- The Company has entered into negotiations with an
affiliate to sell the Pluto flow line and related facilities and enter into a
firm transportation agreement for the same flow line.
6. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which was amended in June 1999 by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- an
amendment of FASB Statement No. 133." SFAS No. 133, as amended, is effective for
fiscal years beginning after June 15, 2000 and establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Company is currently evaluating what effect, if any, SFAS No. 133 will have on
the Company's financial statements. The Company will adopt this statement no
later than January 1, 2001.
F-26
<PAGE> 107
ANNEX A
[Ryder Scott Company, L.P. Letterhead]
August 17, 1999
Mariner Energy, Inc.
580 WestLake Park Blvd., Suite 1300
Houston, Texas 77079
Gentlemen:
At your request, we have prepared an estimate of the reserves, future
production, and income attributable to certain leasehold interests of Mariner
Energy, Inc. (Mariner) as of June 30, 1999. The subject properties are located
in the states of Louisiana, Mississippi, and Texas and in the federal waters
offshore Louisiana and Texas. The income data were estimated using the
Securities and Exchange Commission (SEC) guidelines for future price and cost
parameters.
The estimated reserves and future income amounts presented in this report
are related to hydrocarbon prices. June 1999 hydrocarbon prices were used in the
preparation of this report as required by SEC guidelines; however, actual future
prices may vary significantly from June 1999 prices. Therefore, volumes of
reserves actually recovered and amounts of income actually received may differ
significantly from the estimated quantities presented in this report. The
results of this study are summarized below.
SEC PARAMETERS
Estimated Net Reserves and Income Data
Certain Leasehold Interests of
MARINER ENERGY, INC.
As of June 30, 1999
<TABLE>
<CAPTION>
DEVELOPED PROVED
PRODUCING NON-PRODUCING UNDEVELOPED TOTAL PROVED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
NET REMAINING RESERVES
Oil/Condensate -- Barrels.......... 2,650,514 329,949 5,966,826 8,947,289
Plant Products -- Barrels.......... 8,137 772 1,385 10,294
Gas -- MMCF........................ 60,121 13,473 35,451 109,045
INCOME DATA
Future Gross Revenue............... $185,847,775 $36,035,271 $188,197,579 $410,080,625
Deductions......................... 58,237,896 11,496,322 89,530,356 159,264,574
------------ ----------- ------------ ------------
Future Net Revenue (FNR)........... $127,609,879 $24,538,949 $ 98,667,223 $250,816,051
Discounted FNR @ 10%................. $ 98,419,144 $17,780,866 $ 61,720,452 $177,920,462
</TABLE>
Liquid hydrocarbons are expressed in standard 42 gallon barrels. All gas
volumes are sales gas expressed in millions of cubic feet (MMCF) at the official
temperature and pressure bases of the areas in which the gas reserves are
located.
A-1
<PAGE> 108
Mariner Energy, Inc.
August 17, 1999
Page 2
The future gross revenue is after the deduction of production taxes. The
deductions are comprised of the normal direct costs of operating the wells, ad
valorem taxes, recompletion costs, development costs, and certain abandonment
costs net of salvage. The future net income is before the deduction of state and
federal income taxes and general administrative overhead, and has not been
adjusted for outstanding loans that may exist nor does it include any adjustment
for cash on hand or undistributed income. No attempt was made to quantify or
otherwise account for any accumulated gas production imbalances that may exist.
Gas reserves account for approximately 62.7 percent of the total future gross
revenue from proved reserves. Liquid hydrocarbon reserves account for
approximately 37.2 percent and plant product reserves account for the remaining
0.1 percent of total future gross revenue from proved reserves.
The discounted future net revenues shown above was calculated using a
discount rate of 10 percent per annum compounded monthly. The discounted future
net revenue results shown above are presented for your information and should
not be construed as our estimate of fair market value.
RESERVES INCLUDED IN THIS REPORT
Reserves included in this report are proved reserves which conform to the
definition as set forth in the Securities and Exchange Commission's Regulation
S-X Part 210.4-10(a) as clarified by subsequent Commission Staff Accounting
Bulletins. The definitions of proved reserves are included in the section
"Reserve Definitions and Pricing Assumptions" attached as Appendix A.
ESTIMATES OF RESERVES
In general, the reserves included herein were estimated by performance
methods or the volumetric method; however, other methods were used in certain
cases where characteristics of the data indicated such other methods were more
appropriate in our opinion. The reserves estimated by the performance method
utilized extrapolations of various historical data in those cases where such
data were definitive. Reserves were estimated by the volumetric method in those
cases where there were inadequate historical performance data to establish a
definitive trend or where the use of production performance data as a basis for
the reserve estimates was considered to be inappropriate.
The reserves included in this report are estimates only and should not be
construed as being exact quantities. They may or may not be actually recovered,
and if recovered, the revenues therefrom and the actual costs related thereto
could be more or less than the estimated amounts. Moreover, estimates of
reserves may increase or decrease as a result of future operations.
FUTURE PRODUCTION RATES
Initial production rates are based on the current producing rates for those
wells now on production. Test data and other related information were used to
estimate the anticipated initial production rates for those wells or locations
which are not currently producing. If no production decline trend has been
established, future production rates were held constant, or adjusted for the
effects of curtailment where appropriate, until a decline in ability to produce
was anticipated. An estimated rate of decline was then applied to depletion of
the reserves. If a decline trend has been established, this trend was used as
the basis for estimating future production rates. For reserves not yet on
production, sales were estimated to commence at an anticipated date furnished by
Mariner.
A-2
<PAGE> 109
Mariner Energy, Inc.
August 17, 1999
Page 3
In general, we estimate that future gas production rates limited by
allowables or marketing conditions will continue to be the same as the average
rate for the latest available 12 months of actual production until such time
that the well or wells are incapable of producing at this rate. The well or
wells were then projected to decline at their decreasing delivery capacity rate.
Our general policy on estimates of future gas production rates is adjusted when
necessary to reflect actual gas market conditions in specific cases.
The future production rates from wells now on production may be more or
less than estimated because of changes in market demand or allowables set by
regulatory bodies. Wells or locations which are not currently producing may
start producing earlier or later than anticipated in our estimates of their
future production rates.
HYDROCARBON PRICES
Mariner furnished us with prices in effect at June 30, 1999 and these
prices were held constant except for known and determinable escalations. In
accordance with Securities and Exchange Commission guidelines, changes in liquid
and gas prices subsequent to June 30, 1999 were not taken into account in this
report. Future prices used in this report are discussed in more detail under the
Section "Reserve Definitions and Pricing Assumptions" attached as Appendix A.
COSTS
Operating costs for the leases and wells in this report are based on the
operating expense reports of Mariner and include only those costs directly
applicable to the leases or wells. When applicable, the operating costs include
a portion of general and administrative costs allocated directly to the leases
and wells under terms of operating agreements. No deduction was made for
indirect costs such as general administration and overhead expenses, loan
repayments, interest expenses, and exploration and development prepayments that
are not charged directly to the leases or wells.
Development costs were furnished to us by Mariner and are based on
authorizations for expenditure for the proposed work or actual costs for similar
projects. The estimated net cost of abandonment after salvage was included for
properties where abandonment costs net of salvage are significant. The estimates
of the net abandonment costs furnished by Mariner were accepted without
independent verification.
Current costs were held constant throughout the life of the properties.
GENERAL
While it may reasonably be anticipated that the future prices received for
the sale of production and the operating costs and other costs relating to such
production may also increase or decrease from existing levels, such changes
were, in accordance with rules adopted by the SEC, omitted from consideration in
making this evaluation.
The estimates of reserves presented herein were based upon a detailed study
of the properties in which Mariner owns an interest; however, we have not made
any field examination of the properties. No consideration was given in this
report to potential environmental liabilities which may exist nor were any costs
included for potential liability to restore and clean up damages, if any, caused
A-3
<PAGE> 110
Mariner Energy, Inc.
August 17, 1999
Page 4
by past operating practices. Mariner has informed us that they have furnished us
all of the accounts, records, geological and engineering data, and reports and
other data required for this investigation. The ownership interests, prices, and
other factual data furnished by Mariner were accepted without independent
verification. The estimates presented in this report are based on data available
through June 1999.
Neither we nor any of our employees have any interest in the subject
properties and neither the employment to make this study nor the compensation is
contingent on our estimates of reserves and future income for the subject
properties.
This report was prepared for the exclusive use and sole benefit of Mariner
Energy, Inc. The data, work papers, and maps used in this report are available
for examination by authorized parties in our offices. Please contact us if we
can be of further service.
Very truly yours,
RYDER SCOTT COMPANY, L.P.
/s/ RONALD HARRELL
------------------------------------
Ronald Harrell, P.E.
President
A-4
<PAGE> 111
APPENDIX A
RESERVES DEFINITIONS AND PRICING ASSUMPTIONS
A-5
<PAGE> 112
DEFINITIONS OF RESERVES
PROVED RESERVES (SEC DEFINITION)
Proved reserves of crude oil, condensate, natural gas, and natural gas
liquids are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from known
reservoirs under existing operating conditions, i.e., prices and costs as of the
date the estimate is made. Prices include consideration of changes in existing
prices provided only by contractual arrangements, but not on escalation based on
future conditions.
Reservoirs are considered proved if economic producibility is supported by
either actual production or conclusive formation test. In certain instances,
proved reserves are assigned on the basis of a combination of core analysis and
electrical and other type logs which indicate the reservoirs are analogous to
reservoirs in the same field which are producing or have demonstrated the
ability to produce on a formation test. The area of a reservoir considered
proved includes (1) that portion delineated by drilling and defined by fluid
contacts, if any, and (2) the adjoining portions not yet drilled that can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of data on fluid contacts, the
lowest known structural occurrence of hydrocarbons controls the lower proved
limit of the reservoir.
Reserves that can be produced economically through the application of
improved recovery techniques are included in the proved classification when
these qualifications are met: (1) successful testing by a pilot project or the
operation of an installed program in the reservoir provides support for the
engineering analysis on which the project or program was based, and (2) it is
reasonably certain the project will proceed. Improved recovery includes all
methods for supplementing natural reservoir forces and energy, or otherwise
increasing ultimate recovery from a reservoir, including (1) pressure
maintenance, (2) cycling, and (3) secondary recovery in its original sense.
Improved recovery also includes the enhanced recovery methods of thermal,
chemical flooding, and the use of miscible and immiscible displacement fluids.
Proved natural gas reserves are comprised of non-associated, associated and
dissolved gas. An appropriate reduction in gas reserves has been made for the
expected removal of natural gas liquids, for lease and plant fuel, and for the
exclusion of non-hydrocarbon gases if they occur in significant quantities and
are removed prior to sale. Estimates of proved reserves do not include crude
oil, natural gas, or natural gas liquids being held in underground or surface
storage.
Proved reserves are estimates of hydrocarbons to be recovered from a given
date forward. They may be revised as hydrocarbons are produced and additional
data become available.
A-6
<PAGE> 113
RESERVE STATUS CATEGORIES
Reserve status categories define the development and producing status of
wells and/or reservoirs.
PROVED DEVELOPED (SEC DEFINITION)
Proved developed oil and gas reserves are reserves that can be expected to
be recovered through existing wells with existing equipment and operating
methods. Additional oil and gas expected to be obtained through the application
of fluid injection or other improved recovery techniques for supplementing the
natural forces and mechanisms of primary recovery should be included as "proved
developed reserves" only after testing by a pilot project or after the operation
of an installed program has confirmed through production response that increased
recovery will be achieved.
Developed reserves may be subcategorized as producing or non-producing
using the SPE/SPEE Definitions:
Producing
Producing reserves are expected to be recovered from completion intervals
open at the time of the estimate and producing. Improved recovery reserves are
considered to be producing only after an improved recovery project is in
operation.
Non-Producing
Non-producing reserves include shut-in and behind pipe reserves. Shut-in
reserves are expected to be recovered from completion intervals open at the time
of the estimate, but which had not started producing, or were shut-in for market
conditions or pipeline connection, or were not capable of production for
mechanical reasons, and the time when sales will start is uncertain. Behind pipe
reserves are expected to be recovered from zones behind casing in existing
wells, which will require additional completion work or a future recompletion
prior to the start of production.
PROVED UNDEVELOPED (SEC DEFINITION)
Proved undeveloped oil and gas reserves are 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. Reserves on undrilled
acreage shall be limited to those drilling units offsetting productive units
that are reasonably certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Estimates for proved undeveloped reserves are attributable to any
acreage for which an application of fluid injection or other improved technique
is contemplated, only when such techniques have been proved effective by actual
tests in the area and in the same reservoir.
A-7
<PAGE> 114
HYDROCARBON PRICING PARAMETERS
SECURITIES AND EXCHANGE COMMISSION PARAMETERS
OIL AND CONDENSATE
Mariner furnished us with oil and condensate prices in effect June 30, 1999
and these prices were held constant to depletion of the properties. In
accordance with Securities and Exchange Commission guidelines, changes in liquid
prices subsequent to June 30, 1999 were not considered in this report.
PLANT PRODUCTS
Mariner furnished us with plant product prices in effect at June 30, 1999
and these prices were held constant to depletion of the properties.
GAS
Mariner furnished us with gas prices in effect at June 30, 1999 and with
its forecasts of future gas prices which take into account SEC guidelines,
current spot market prices, contract prices, and fixed and determinable price
escalations where applicable. In accordance with SEC guidelines, the future gas
prices used in this report make no allowances for future gas price increases
which may occur as a result of inflation nor do they make any allowance for
seasonal variations in gas prices which may cause future yearly average gas
prices to be somewhat lower than June 30, 1999 gas prices. For gas sold under
contact, the contract gas price including fixed and determinable escalations,
exclusive of inflation adjustments, was used until the contract expires and then
was adjusted to the current market price for the area and held at this adjusted
price to depletion of the reserves.
A-8
<PAGE> 115
[MARINER LOGO]
<PAGE> 116
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. EXPENSES OF THE OFFERING
The estimated expenses in connection with the Offering are:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $55,600
NASD Filing Fee............................................. 20,500
NASDAQ Listing Fee.......................................... *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Printing Expenses........................................... *
Transfer Agent and Registrar Fees........................... *
Miscellaneous............................................... *
-------
Total............................................. *
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The limited liability agreement (the "Company Agreement") of Mariner Energy
LLC (the "Company") contains provisions that eliminate the personal liability of
a director to the Company and its shareholders for monetary damages for breach
of his fiduciary duty as a director to the extent currently allowed under the
Delaware General Corporation Law ("Delaware Corporation Law") and to the extent
that Delaware law may impose a duty on certain persons to bring or share a
business opportunity with the Company. These provisions are discussed in greater
detail under the heading "Description of Our Company Agreement and Common
Shares" in the prospectus included in this registration statement. If a director
were to breach this duty in performing his duties as a director, neither the
Company nor its shareholders could recover monetary damages from the director,
and the only course of action available to the Company's shareholders would be
equitable remedies, such as an action to enjoin or rescind a transaction
involving a breach of fiduciary duty. To the extent certain claims against
directors are limited to equitable remedies, the Company Agreement may therefore
reduce the likelihood of derivative litigation and may discourage shareholders
or management from initiating litigation against directors for breach of their
fiduciary duty. Additionally, equitable remedies may not be effective in many
situations. If a shareholder's only remedy is to enjoin the completion of the
directors' action, the remedy would be ineffective if the shareholder does not
become aware of a transaction or event until after it has been completed. In
that situation, it is possible that the shareholders and the Company would have
no effective remedy against the directors. Under the Company Agreement,
liability for monetary damages remains for (i) any breach of the duty of loyalty
to the Company or its shareholders, (ii) acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) payment
of an improper dividend or improper repurchase of the Company's securities that
would violate Section 174 of the Delaware Corporation Law if the Company were a
corporation organized under Delaware law and (iv) any transaction from which the
director derived an improper personal benefit.
Under the Company Agreement, the Company will indemnify each person who is
or was a director or officer of the Company or a subsidiary of the Company, or
who serves or served any other enterprise or organization at the request of the
Company or a subsidiary of the Company, to the full extent permitted by Delaware
law.
Under Delaware law, to the extent that a person is successful on the merits
in defense of a suit or proceeding brought against him by reason of the fact
that he is or was a director or officer of the Company, or serves or served any
other enterprise or organization at the request of the Company, the Company will
indemnify that person against expenses (including attorneys' fees) actually and
reasonably incurred in connection with the action.
II-1
<PAGE> 117
Under Delaware law, to the extent an indemnified person is not successful
in defense of a third-party civil suit or a criminal suit, or if such suit is
settled, the Company may indemnify that person against both (i) expenses,
including attorneys' fees, and (ii) judgments, fines and amounts paid in
settlement if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Company and, with respect to
any criminal action, had no reasonable cause to believe his conduct was
unlawful, except that if the person is adjudged to be liable in the suit for
negligence or misconduct in the performance of his duty to the Company, he
cannot be made whole even for expenses unless the court determines that he is
fully and reasonably entitled to indemnity for those expenses.
The Company maintains insurance to protect officers and directors from
certain liabilities, including liabilities against which the corporation cannot
indemnify its directors and officers.
The above discussion of Delaware law and of the Company Agreement is not
intended to be exhaustive and is qualified in its entirety by Delaware law and
the Company Agreement.
Reference is made to the form of Underwriting Agreement filed as Exhibit
1.1 to the Registration Statement for certain provisions regarding the
indemnification of the Company, its officers and directors and any controlling
persons by the underwriters against certain liabilities for information
furnished by the underwriters.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company was formed in September 1998. Shortly following the Company's
formation, it offered to exchange twelve of its common shares for each
outstanding share of the common stock of Mariner Holdings, Inc. Pursuant to this
exchange, the Company issued an aggregate of 13,928,304 common shares on October
13, 1998 and Mariner Holdings, Inc. became a wholly owned subsidiary of the
Company. These issuances were exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933 and Regulation D promulgated thereunder, as no
public offerings were involved.
Under the amended and restated credit agreement between the Company and
Enron North America Corp. ("ENA") dated April 15, 1999, ENA was granted the
right to convert all or any part of the principal and interest outstanding under
that agreement into the Company's common shares at a rate of $14.5833 per share.
The issuance of that conversion right was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as no public offering was involved.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
Exhibits designated by the symbol * are filed with this Registration
Statement. Exhibits designated by the symbol + are to be filed with an amendment
to this Registration Statement. All exhibits not so designated are incorporated
by reference to a prior filing as indicated.
<TABLE>
<CAPTION>
<C> <S>
1.1+ -- Form of Underwriting Agreement.
3.1* -- Certificate of Formation of the Company.
3.2* -- The Company Agreement.
4.1+ -- Form of Common Share Certificate.
4.2(a) -- Indenture, dated as of August 1, 1996, between Mariner
Energy, Inc. and United States Trust Company of New York,
as Trustee.
</TABLE>
II-2
<PAGE> 118
<TABLE>
<CAPTION>
<C> <S>
4.3(d) -- First Amendment to Indenture, dated as of January 31,
1997, between Mariner Energy, Inc. and United States
Trust Company of New York, as Trustee.
4.4(a) -- Form of Mariner Energy, Inc.'s 10 1/2% Senior
Subordinated Note Due 2006, Series B.
4.5(g) -- Amended and Restated Credit Agreement, dated June 28,
1999, among Mariner Energy, Inc., NationsBank of Texas,
N.A., as Agent, Toronto Dominion (Texas), Inc., as
Co-agent, and the financial institutions listed on
schedule 1 thereto.
4.6(i) -- Second Amended and Restated Credit Agreement, dated as of
April 15, 1999, between Mariner Energy LLC and Enron
North America Corp. (formerly Enron Capital & Trade
Resources Corp.).
4.7(i) -- Revolving Credit Agreement dated as of April 15, 1999,
between Mariner Energy, Inc. and Enron North America
Corp. (formerly Enron Capital & Trade Resources Corp.).
5.1+ -- Opinion of Fulbright & Jaworski L.L.P.
10.1(h) -- Amended and Restated Shareholders' Agreement, dated
October 12, 1998, among Enron North America Corp.
(formerly Enron Capital & Trade Resources Corp.), Mariner
Energy LLC, Mariner Holdings, Inc., Joint Energy
Development Investments Limited Partnership and the other
shareholders of Mariner Energy LLC.
10.2(a) -- Amended and Restated Employment Agreement, dated June 27,
1996, between Mariner Energy, Inc. and Robert E.
Henderson.
10.3(a) -- Amended and Restated Employment Agreement, dated June 27,
1996, between Mariner Energy, Inc. and Richard R. Clark.
10.4(a) -- Amended and Restated Employment Agreement, dated June 27,
1996, between Mariner Energy, Inc. and Michael W.
Strickler.
10.5(a) -- Amended and Restated Employment Agreement, dated June 27,
1996, between Mariner Energy, Inc. and Gregory K.
Harless.
10.6* -- Third Amendment to Amended and Restated Employment
Agreement, dated as of December 27, 1998, between Mariner
Energy, Inc. and Gregory K. Harless.
10.7(b) -- Amended and Restated Employment Agreement, dated June 27,
1996, between Mariner Energy, Inc. and W. Hunt Hodge.
10.8(h) -- Third Amendment to Amended and Restated Employment
Agreement, dated as of December 27, 1998, between Mariner
Energy, Inc. and William Hunt Hodge.
10.9(d) -- Employment Agreement, dated as of December 2, 1996,
between Mariner Energy, Inc. and Frank A. Pici.
10.10* -- Second Amendment to Employment Agreement, dated as of
December 1, 1998, between Mariner Energy, Inc. and Frank
A. Pici.
10.11(h) -- Amended and Restated Employment Agreement, dated June 27,
1996, between Mariner Energy, Inc. and Tom E. Young.
10.12(h) -- Employment Agreement, dated as of August 1, 1998, between
Mariner Energy, Inc. and Christopher E. Lindsey.
10.13(h) -- Employment Agreement, dated as of June 1, 1998, between
Mariner Energy, Inc. and L. V. McGuire.
10.14(a) -- Amended and Restated Consulting Services Agreement, dated
June 27, 1996, between Mariner Energy, Inc. and David S.
Huber.
10.15(a) -- Mariner Energy LLC 1996 Share Option Plan.
</TABLE>
II-3
<PAGE> 119
<TABLE>
<CAPTION>
<C> <S>
10.16(a) -- Form of Incentive Share Option Agreement (pursuant to the
Mariner Energy LLC 1996 Share Option Plan).
10.17(h) -- List of executive officers who are parties to an
Incentive Share Option Agreement.
10.18(a) -- Form of Nonstatutory Share Option Agreement (pursuant to
the Mariner Energy LLC 1996 Share Option Plan).
10.19(h) -- List of executive officers who are parties to a
Nonstatutory Stock Option Agreement.
10.20(a) -- Nonstatutory Stock Option Agreement, dated June 27, 1996,
between Mariner Holdings, Inc. and David S. Huber.
21.1* -- Subsidiaries of Registrant.
23.1* -- Consent of Deloitte & Touche LLP.
23.2* -- Consent of Ryder Scott Company, L.P.
23.3+ -- Consent of Fulbright & Jaworski L.L.P. (Included in
Exhibit 5.1).
27.1* -- Financial Data Schedule.
</TABLE>
- -------------------------
(a) Incorporated by reference to Mariner Energy, Inc.'s Registration Statement
on Form S-4 (Registration No. 333-12707), filed September 25, 1996.
(b) Incorporated by reference to Amendment No. 1 to Mariner Energy, Inc.'s
Registration Statement on Form S-4 (Registration No. 333-12707), filed
December 6, 1996.
(c) Incorporated by reference to Amendment No. 2 to Mariner Energy, Inc.'s
Registration Statement on Form S-4 (Registration No. 333-12707), filed
December 19, 1996.
(d) Incorporated by reference to Mariner Energy, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1996 filed March 31, 1997.
(e) Incorporated by reference to Mariner Energy, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1997 filed March 30, 1998.
(f) Incorporated by reference to Mariner Energy, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 filed August 14, 1998.
(g) Incorporated by reference to Mariner Energy, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 filed August 16, 1999.
(h) Incorporated by reference to Mariner Energy, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1998 filed April 15, 1999.
(i) Incorporated by reference to Mariner Energy, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended March 30, 1999 filed May 17, 1999.
(b) Financial Statement Schedule.
Schedule I Condensed Financial Information of Registrant (Parent
only) (FS-1-FS-3)
All schedules other than the one listed above, for which provision is made
in applicable accounting regulations of the Securities and Exchange Commission
have been omitted as the schedules are either not required under the related
instructions, are not applicable or the information required thereby is set
forth in the Financial Statements or the Notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company,
the Company has been advised that in the
II-4
<PAGE> 120
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 Company of expenses incurred or paid
by a director, officer or controlling person of the Company 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
Company 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.
The undersigned Company hereby undertakes to provide to the underwriters at
the closing 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.
The undersigned Company hereby undertakes that:
(1) 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 a
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 a part of this
Registration Statement as of the time it was declared effective.
(2) 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-5
<PAGE> 121
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on September 17, 1999.
MARINER ENERGY LLC
By: /s/ ROBERT E. HENDERSON
------------------------------------
Robert E. Henderson,
Chairman of the Board, President
and Chief Executive Officer
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Robert E. Henderson and Christopher E.
Lindsey, and each of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same
and all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting said attorney-in-fact and agent,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
This report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ ROBERT E. HENDERSON Chairman of the Board, September 17, 1999
- --------------------------------------------------- President and Chief
Robert E. Henderson Executive Officer (Principal
Executive Officer)
/s/ FRANK A. PICI Vice President of Finance and September 17, 1999
- --------------------------------------------------- Chief Financial Officer
Frank A. Pici (Principal Financial Officer
and Principal Accounting
Officer)
/s/ L. V. MCGUIRE Senior Vice President of September 17, 1999
- --------------------------------------------------- Operations and Director
L. V. McGuire
/s/ RICHARD R. CLARK Executive Vice President and September 17, 1999
- --------------------------------------------------- Director
Richard R. Clark
/s/ MICHAEL W. STRICKLER Senior Vice President of September 17, 1999
- --------------------------------------------------- Exploration and Director
Michael W. Strickler
/s/ RICHARD B. BUY Director September 17, 1999
- ---------------------------------------------------
Richard B. Buy
/s/ D. BRAD DUNN Director September 17, 1999
- ---------------------------------------------------
D. Brad Dunn
/s/ MARK E. HAEDICKE Director September 17, 1999
- ---------------------------------------------------
Mark E. Haedicke
/s/ STEPHEN R. HORN Director September 17, 1999
- ---------------------------------------------------
Stephen R. Horn
/s/ JEFFREY MCMAHON Director September 17, 1999
- ---------------------------------------------------
Jeffrey McMahon
/s/ JERE C. OVERDYKE, JR. Director September 17, 1999
- ---------------------------------------------------
Jere C. Overdyke, Jr.
/s/ FRANK STABLER Director September 17, 1999
- ---------------------------------------------------
Frank Stabler
</TABLE>
II-6
<PAGE> 122
SCHEDULE I
MARINER ENERGY LLC
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ -- $ 800
Prepaid expenses and other................................ -- 457
-------- ---------
Total Current Assets.............................. -- 1,257
INVESTMENT IN SUBSIDIARIES, AT EQUITY....................... 57,174 51,727
-------- ---------
TOTAL ASSETS...................................... 57,174 52,984
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES -- Accrued Interest..................... -- 450
LONG-TERM DEBT -- ENA credit facility....................... -- 25,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 par value (authorized 1,000,000
shares; none issued)................................... -- --
Common stock, $0.01 par value (authorized 50,000,000
shares; issued and outstanding 1997 -- 11,871,156;
1998 -- 13,928,304 shares)............................. 119 139
Additional paid-in-capital................................ 95,957 124,718
Accumulated deficit....................................... (38,902) (97,323)
-------- ---------
Total stockholders' equity........................ 57,174 27,534
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 57,174 $ 52,984
======== =========
</TABLE>
FS-1
<PAGE> 123
SCHEDULE I
(CONTINUED)
MARINER ENERGY LLC
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
----------------- ------------ ------------
<S> <C> <C> <C>
Interest expense.................................... $ -- $ -- $ 993
Loss before income taxes and equity in earnings of
wholly owned subsidiaries......................... -- -- (993)
-------- -------- --------
Provision for income taxes.......................... -- -- --
-------- -------- --------
Loss of wholly owned subsidiaries................... $(18,692) $(20,210) $(57,428)
-------- -------- --------
Net loss............................................ (18,692) (20,210) (58,421)
======== ======== ========
Basic and diluted net loss per share................ $ (1.58) $ (1.71) $ (4.47)
======== ======== ========
</TABLE>
FS-2
<PAGE> 124
SCHEDULE I
(CONTINUED)
MARINER ENERGY LLC
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
----------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss......................................... $(18,692) $(20,210) $(58,421)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in loss of wholly owned subsidiaries... 18,692 20,210 57,428
Changes in operating assets and liabilities:
Prepaid expenses and other.................... -- -- (457)
Accrued interest.............................. -- -- 450
-------- -------- --------
Net cash used in operating activities............ -- -- (1,000)
INVESTING ACTIVITIES
Investment in wholly owned subsidiaries.......... (92,760) (331) (51,981)
-------- -------- --------
Net cash used in operating activities............ (92,760) (331) (51,981)
FINANCING ACTIVITIES
Proceeds from long-term debt..................... 92,000
Principal payments on long-term debt............. (92,000)
Proceeds from ENA credit facility................ -- -- 25,000
Proceeds from sale of common stock............... 92,760 331 28,781
-------- -------- --------
Net cash provided by financing activities........ 92,760 331 53,781
-------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS.............. -- -- 800
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD... -- -- --
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......... $ -- $ -- $ 800
======== ======== ========
Noncash items -- contribution of mineral
interests..................................... $ 2,985 $ -- $ --
======== ======== ========
</TABLE>
FS-3
<PAGE> 125
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1+ -- Form of Underwriting Agreement.
3.1* -- Certificate of Formation of the Company.
3.2* -- The Company Agreement.
4.1+ -- Form of Common Share Certificate.
4.2(a) -- Indenture, dated as of August 1, 1996, between Mariner
Energy, Inc. and United States Trust Company of New York,
as Trustee.
4.3(d) -- First Amendment to Indenture, dated as of January 31,
1997, between Mariner Energy, Inc. and United States
Trust Company of New York, as Trustee.
4.4(a) -- Form of Mariner Energy, Inc.'s 10 1/2% Senior
Subordinated Note Due 2006, Series B.
4.5(g) -- Amended and Restated Credit Agreement, dated June 28,
1999, among Mariner Energy, Inc., NationsBank of Texas,
N.A., as Agent, Toronto Dominion (Texas), Inc., as
Co-agent, and the financial institutions listed on
schedule 1 thereto.
4.6(i) -- Second Amended and Restated Credit Agreement, dated as of
April 15, 1999, between Mariner Energy LLC and Enron
North America Corp. (formerly Enron Capital & Trade
Resources Corp.).
4.7(i) -- Revolving Credit Agreement dated as of April 15, 1999,
between Mariner Energy, Inc. and Enron North America
Corp. (formerly Enron Capital & Trade Resources Corp.).
5.1+ -- Opinion of Fulbright & Jaworski L.L.P.
10.1(h) -- Amended and Restated Shareholders' Agreement, dated
October 12, 1998, among Enron North America Corp.
(formerly Enron Capital & Trade Resources Corp.), Mariner
Energy LLC, Mariner Holdings, Inc., Joint Energy
Development Investments Limited Partnership and the other
shareholders of Mariner Energy LLC.
10.2(a) -- Amended and Restated Employment Agreement, dated June 27,
1996, between Mariner Energy, Inc. and Robert E.
Henderson.
10.3(a) -- Amended and Restated Employment Agreement, dated June 27,
1996, between Mariner Energy, Inc. and Richard R. Clark.
10.4(a) -- Amended and Restated Employment Agreement, dated June 27,
1996, between Mariner Energy, Inc. and Michael W.
Strickler.
10.5(a) -- Amended and Restated Employment Agreement, dated June 27,
1996, between Mariner Energy, Inc. and Gregory K.
Harless.
10.6* -- Third Amendment to Amended and Restated Employment
Agreement, dated as of December 27, 1998, between Mariner
Energy, Inc. and Gregory K. Harless.
10.7(b) -- Amended and Restated Employment Agreement, dated June 27,
1996, between Mariner Energy, Inc. and W. Hunt Hodge.
10.8(h) -- Third Amendment to Amended and Restated Employment
Agreement, dated as of December 27, 1998, between Mariner
Energy, Inc. and William Hunt Hodge.
10.9(d) -- Employment Agreement, dated as of December 2, 1996,
between Mariner Energy, Inc. and Frank A. Pici.
10.10* -- Second Amendment to Employment Agreement, dated as of
December 1, 1998, between Mariner Energy, Inc. and Frank
A. Pici.
10.11(h) -- Amended and Restated Employment Agreement, dated June 27,
1996, between Mariner Energy, Inc. and Tom E. Young.
10.12(h) -- Employment Agreement, dated as of August 1, 1998, between
Mariner Energy, Inc. and Christopher E. Lindsey.
</TABLE>
<PAGE> 126
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.13(h) -- Employment Agreement, dated as of June 1, 1998, between
Mariner Energy, Inc. and L. V. McGuire.
10.14(a) -- Amended and Restated Consulting Services Agreement, dated
June 27, 1996, between Mariner Energy, Inc. and David S.
Huber.
10.15(a) -- Mariner Energy LLC 1996 Share Option Plan.
10.16(a) -- Form of Incentive Share Option Agreement (pursuant to the
Mariner Energy LLC 1996 Share Option Plan).
10.17(h) -- List of executive officers who are parties to an
Incentive Share Option Agreement.
10.18(a) -- Form of Nonstatutory Share Option Agreement (pursuant to
the Mariner Energy LLC 1996 Share Option Plan).
10.19(h) -- List of executive officers who are parties to a
Nonstatutory Stock Option Agreement.
10.20(a) -- Nonstatutory Stock Option Agreement, dated June 27, 1996,
between Mariner Holdings, Inc. and David S. Huber.
21.1* -- Subsidiaries of Registrant.
23.1* -- Consent of Deloitte & Touche LLP.
23.2* -- Consent of Ryder Scott Company, L.P.
23.3+ -- Consent of Fulbright & Jaworski L.L.P. (Included in
Exhibit 5.1).
27.1* -- Financial Data Schedule.
</TABLE>
- -------------------------
(a) Incorporated by reference to Mariner Energy, Inc.'s Registration Statement
on Form S-4 (Registration No. 333-12707), filed September 25, 1996.
(b) Incorporated by reference to Amendment No. 1 to Mariner Energy, Inc.'s
Registration Statement on Form S-4 (Registration No. 333-12707), filed
December 6, 1996.
(c) Incorporated by reference to Amendment No. 2 to Mariner Energy, Inc.'s
Registration Statement on Form S-4 (Registration No. 333-12707), filed
December 19, 1996.
(d) Incorporated by reference to Mariner Energy, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1996 filed March 31, 1997.
(e) Incorporated by reference to Mariner Energy, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1997 filed March 30, 1998.
(f) Incorporated by reference to Mariner Energy, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 filed August 14, 1998.
(g) Incorporated by reference to Mariner Energy, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 filed August 16, 1999.
(h) Incorporated by reference to Mariner Energy, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1998 filed April 15, 1999.
(i) Incorporated by reference to Mariner Energy, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended March 30, 1999 filed May 17, 1999.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF FORMATION
OF
MARINER ENERGY LLC
This Certificate of Formation of Mariner Energy LLC (the "Company"),
dated August 20, 1998, is being duly executed and filed by Robert E. Henderson,
as an authorized person, to form a limited liability company under the Delaware
Limited Liability Company Act.
FIRST. The name of the limited liability company formed hereby is
Mariner Energy LLC.
SECOND. The address of the registered office of the Company in the
State of Delaware is c/o The Corporation Trust Company, Corporation Trust
Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801.
THIRD. The name and address of the registered agent for service of
process on the Company in the State of Delaware is The Corporation Trust
Company, Corporation Trust Center, 1209 Orange Street, Wilmington, New
Castle County, Delaware 19801.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Formation as of the date first above written.
/s/ Robert E. Henderson
Robert E. Henderson,
Authorized Person
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 11:15 AM 09/01/1998
981341152 - 2939976
<PAGE> 1
EXHIBIT 3.2
LIMITED LIABILITY COMPANY AGREEMENT
OF
MARINER ENERGY LLC
A DELAWARE LIMITED LIABILITY COMPANY
DATED AND EFFECTIVE AS OF SEPTEMBER 2, 1998
<PAGE> 2
LIMITED LIABILITY COMPANY AGREEMENT
OF
MARINER ENERGY LLC
A DELAWARE LIMITED LIABILITY COMPANY
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I: DEFINITIONS ................................................................. 1
SECTION 1.1 DEFINITIONS .............................................................. 1
SECTION 1.2 CONSTRUCTION ............................................................. 5
ARTICLE II: FORMATION AND ORGANIZATION ................................................. 6
SECTION 2.1 FORMATION ................................................................ 6
SECTION 2.2 NAME ..................................................................... 6
SECTION 2.3 REGISTERED OFFICE; REGISTERED AGENT; PRINCIPAL AND OTHER OFFICES ......... 6
SECTION 2.4 PURPOSE .................................................................. 6
SECTION 2.5 FOREIGN QUALIFICATION .................................................... 6
SECTION 2.6 TERM ..................................................................... 7
SECTION 2.7 TAXATION AS CORPORATION; NO STATE-LAW PARTNERSHIP ........................ 7
SECTION 2.8 TITLE TO COMPANY ASSETS .................................................. 7
SECTION 2.9 ORGANIZATION; ORGANIZATIONAL MEMBER ...................................... 7
ARTICLE III: SHAREHOLDERS; CERTIFICATES; TRANSFER OF COMPANY SECURITIES ................ 8
SECTION 3.1 SHAREHOLDERS ............................................................. 8
SECTION 3.2 NO LIABILITY TO THIRD PARTIES ............................................ 8
SECTION 3.3 NO EXPULSION ............................................................. 8
SECTION 3.4 CERTIFICATES ............................................................. 8
SECTION 3.5 REGISTER, REGISTRATION OF TRANSFER AND EXCHANGE .......................... 9
SECTION 3.6 MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES ........................ 10
ARTICLE IV: AUTHORIZATION AND ISSUANCE OF COMPANY SECURITIES ........................... 11
SECTION 4.1 COMPANY SECURITIES ....................................................... 11
SECTION 4.2 ADDITIONAL COMPANY SECURITIES ............................................ 11
SECTION 4.3 COMMON SHARES ............................................................ 13
SECTION 4.4 PREFERRED SHARES ......................................................... 13
SECTION 4.5 SPLITS AND COMBINATIONS; FRACTIONAL SHARES ............................... 15
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
SECTION 4.6 WITHHOLDING .............................................................. 15
ARTICLE V: MANAGEMENT .................................................................. 16
SECTION 5.1 MANAGEMENT OF THE COMPANY'S AFFAIRS ...................................... 16
SECTION 5.2 BOARD OF DIRECTORS ....................................................... 17
SECTION 5.3 RESTRICTIONS ON BOARD AUTHORITY; REQUIRED BOARD APPROVAL ................. 20
SECTION 5.4 OFFICERS ................................................................. 21
SECTION 5.5 COMPENSATION ............................................................. 23
SECTION 5.6 BUSINESS OPPORTUNITIES ................................................... 23
SECTION 5.7 INTERESTED OFFICERS OR DIRECTORS ......................................... 24
SECTION 5.8 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS ............. 25
SECTION 5.9 EXCULPATION OF LIABILITY OF OFFICERS AND DIRECTORS ....................... 28
SECTION 5.10 DUTIES OF OFFICERS AND DIRECTORS ........................................ 29
SECTION 5.11 ADDITIONAL LIMITATIONS ON DUTIES; RESOLUTION OF CONFLICTS OF INTEREST ... 29
SECTION 5.12 FACSIMILE SIGNATURES .................................................... 31
ARTICLE VI: BOOKS AND RECORDS, INFORMATION AND ACCOUNTS ................................ 31
SECTION 6.1 MAINTENANCE OF BOOKS AND RECORDS ......................................... 31
SECTION 6.2 INFORMATION .............................................................. 31
SECTION 6.3 ACCOUNTS ................................................................. 32
ARTICLE VII: DISSOLUTION, WINDING-UP AND TERMINATION ................................... 32
SECTION 7.1 DISSOLUTION .............................................................. 32
SECTION 7.2 WINDING-UP AND TERMINATION ............................................... 32
ARTICLE VIII: DIVIDENDS; ACQUISITION BY COMPANY OF COMPANY SECURITIES .................. 33
SECTION 8.1 DIVIDENDS ................................................................ 33
SECTION 8.2 REDEMPTION OF COMPANY SECURITIES ......................................... 34
ARTICLE IX: AMENDMENT OF AGREEMENT; SHAREHOLDER MEETINGS; RECORD DATE .................. 35
SECTION 9.1 AMENDMENT PROCEDURES ..................................................... 35
SECTION 9.2 AMENDMENT REQUIREMENTS ................................................... 35
SECTION 9.3 SHAREHOLDER MEETINGS ..................................................... 36
SECTION 9.4 NOTICE OF SHAREHOLDER MEETINGS ........................................... 37
SECTION 9.5 RECORD DATE .............................................................. 37
SECTION 9.6 SHAREHOLDER LISTS ........................................................ 38
SECTION 9.7 ADJOURNMENT .............................................................. 38
</TABLE>
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<TABLE>
<S> <C>
SECTION 9.8 WAIVER OF NOTICE; APPROVAL OF MEETING; APPROVAL OF MINUTES ............... 38
SECTION 9.9 QUORUM; REQUIRED VOTE FOR SHAREHOLDER ACTION ............................. 39
SECTION 9.10 CONDUCT OF MEETING ...................................................... 39
SECTION 9.11 ACTION WITHOUT A MEETING ................................................ 40
SECTION 9.12 VOTING AND OTHER RIGHTS ................................................. 40
ARTICLE X: MERGER OR SALE OF ASSETS .................................................... 41
SECTION 10.1 AUTHORITY ............................................................... 41
SECTION 10.2 PROCEDURE FOR MERGER, CONSOLIDATION OR SALE ............................. 41
SECTION 10.3 APPROVAL BY SHAREHOLDERS OF MERGER, CONSOLIDATION OR SALE ............... 42
SECTION 10.4 CERTIFICATE OF MERGER OR CONSOLIDATION .................................. 43
SECTION 10.5 APPRAISAL RIGHTS ........................................................ 43
SECTION 10.6 EFFECT OF MERGER OR CONSOLIDATION ....................................... 43
SECTION 10.7 LIMITATIONS ON TRANSACTIONS WITH INTERESTED SHAREHOLDERS ................ 44
ARTICLE XI: GENERAL PROVISIONS ......................................................... 49
SECTION 11.1 FISCAL YEAR ............................................................. 49
SECTION 11.2 OFFSET .................................................................. 49
SECTION 11.3 NOTICES ................................................................. 49
SECTION 11.4 ENTIRE AGREEMENT ........................................................ 50
SECTION 11.5 EFFECT OF WAIVER OR CONSENT ............................................. 50
SECTION 11.6 BINDING EFFECT .......................................................... 50
SECTION 11.7 GOVERNING LAW; SEVERABILITY ............................................. 50
SECTION 11.8 FURTHER ASSURANCES ...................................................... 50
SECTION 11.9 WAIVER OF CERTAIN RIGHTS ................................................ 50
ANNEX A ................................................................................ A-1
</TABLE>
iii
<PAGE> 5
LIMITED LIABILITY COMPANY AGREEMENT
OF
MARINER ENERGY LLC
A DELAWARE LIMITED LIABILITY COMPANY
This Limited Liability Company Agreement of Mariner Energy LLC (the
"Company") dated and effective as of September 2, 1998, is adopted, executed and
agreed to, for good and valuable consideration, by and among Mariner Holdings,
Inc., a Delaware corporation, and any Persons or entities who become
Shareholders (as defined below) of the Company or parties hereto as provided
herein.
ARTICLE I: DEFINITIONS
SECTION 1.1 DEFINITIONS. As used in this Agreement, the following terms
have the respective meanings set forth below:
Act - means the Delaware Limited Liability Company Act and any
successor statute, as amended from time to time.
Affiliate - means, with respect to any Person, any other Person
controlling, controlled by or under common control with that first Person. As
used in this definition, the term "control" includes, with respect to any
Entity, (a) the ownership of or power to vote, directly or indirectly, shares or
the equivalent representing 50% or more of the power to vote in the election of
directors, managers or Persons performing similar functions, (b) ownership of
50% or more of the equity or equivalent interest in such Entity and (c) the
ability to direct the business and affairs of such Entity by acting as a general
partner, manager or otherwise.
Agreement - means this Limited Liability Company Agreement, as amended
from time to time.
Bankruptcy or Bankrupt - means with respect to any Person, that (a)
such Person (i) makes an assignment for the benefit of creditors; (ii) files a
voluntary petition in bankruptcy; (iii) is insolvent, or has entered against
such Person an order for relief in any bankruptcy or insolvency proceeding; (iv)
files a petition or answer seeking for such Person any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any Law; (v) files an answer or other pleading admitting or failing
to contest the material allegations of a petition filed
1
<PAGE> 6
against such Person in a proceeding of the type described in subclauses (i)
through (iv) of this clause (a); or (vi) seeks, consents to or acquiesces in the
appointment of a trustee, receiver or liquidator of such Person or of all or any
substantial part of such Person's properties; or (b) 120 days have passed after
the commencement of any proceeding seeking reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
Law, if the proceeding has not been dismissed, or 90 days have passed after the
appointment without such Person's consent or acquiescence of a trustee, receiver
or liquidator of such Person or of all or any substantial part of such Person's
properties, if the appointment is not vacated or stayed, or 90 days have passed
after the date of expiration of any such stay, if the appointment has not been
vacated.
Board of Directors - has the meaning assigned to it in Section 5.1.
Certificate of Formation - has the meaning assigned to it in Section
2.1.
Certificates - has the meaning assigned to it in Section 3.4.
Chairman of the Board - has the meaning assigned to it in Section
5.2(i).
Code - means the United States Internal Revenue Code of 1986, as
amended from time to time. All references herein to sections of the Code shall
include any corresponding provision or provisions of succeeding Law.
Common Share - means an undivided fractional equity interest in the
Company having the powers, preferences, rights and duties set forth in Section
4.3. Each Common Share shall represent an equal right or interest as any other
Common Share and shall have a par value of $.01.
Company - means Mariner Energy LLC, a Delaware limited liability
company.
Company Securities - means Common Shares and Preferred Shares. To the
extent set forth in Article 4 and in any Designation creating a series of
Preferred Shares, Company Securities represent a fractional part of the
Shareholder Interests.
Court of Chancery - has the meaning of such term as used in the Act and
the GCLD.
Designation - has the meaning assigned to it in Section 4.4.
Director - means a member of the Board of Directors.
Dissolution Event - has the meaning assigned to it in Section 7.1.
2
<PAGE> 7
Dividends - means all distributions of cash, securities or other
property of the Company, other than distributions on liquidation, lawfully paid
or payable to any Shareholder pursuant to the terms of the Company Securities
held by such Shareholder.
Enron - means Enron Corp., an Oregon corporation, and any successor
(but not assignee) of Enron Corp.
Entity - means a corporation, limited liability company, partnership,
limited partnership, venture, trust, estate, governmental entity or other
entity.
GCLD - means the General Corporation Law of the State of Delaware, as
amended from time to time.
Indemnitee - has the meaning assigned to it in Section 5.8(a).
Initial Public Offering - means the consummation of the first
underwritten public offering of Common Shares pursuant to an effective
registration statement filed under the Securities Act (other than any
registration statement relating to warrants, options or shares of capital stock
granted or to be granted or sold primarily to employees, directors, or officers
of the Company, a registration statement filed in connection with a transaction
subject to Rule 145 under the Securities Act or any successor rule, a
registration statement relating to employee benefit plans or interests therein
and any registration statement covering preferred stock or securities issued in
connection with any debt or preferred stock financing of the Company).
Law - means any applicable constitutional provision, statute, act, code
(including the Code), law, regulation, rule, ordinance, order, decree, ruling,
proclamation, resolution, judgment, decision, declaration or interpretative or
advisory opinion or letter of a governmental authority, and includes any
applicable rule of any exchange or automated quotation system on which Company
Securities are traded or listed.
Majority Interest - means, with respect to any matter, Shareholders
holding Outstanding Company Securities possessing a majority of the voting power
of all Outstanding Company Securities entitled to vote with respect to such
matter.
Officer - means any Person appointed as an officer of the Company as
provided in Section 5.4(c), but such term does not include any Person who has
ceased to be an officer of the Company.
Organizational Member - means Mariner Holdings, Inc., a Delaware
corporation.
3
<PAGE> 8
Outstanding - means, with respect to the Company Securities, all
Company Securities that are issued by the Company and reflected as outstanding
on the Company's books and records as of the date of determination, but excludes
any Company Securities held by the Company.
Oversight Committee - has the meaning assigned to it in Section
5.11(d).
Person - means a natural person or an Entity.
Preferred Share - means an undivided fractional equity interest in the
Company having the powers, preferences, rights and duties set forth in the
Designation establishing the applicable series of Preferred Shares. Each
Preferred Share shall have a par value of $.01.
Record Date - has the meaning assigned to it in Section 9.5.
Record Holder - means the Person in whose name a Company Security is
registered in the books and records of the Transfer Agent as contemplated in
Section 3.5.
Securities Act - means the United States Securities Act of 1933, as
amended from time to time, and all rules and regulations promulgated thereunder.
Shareholder - means any Person executing this Agreement as of the date
of this Agreement and any Person who thereafter purchases or otherwise lawfully
acquires any Company Securities (with or without execution of this Agreement)
and becomes a Record Holder of any Company Security as provided in this
Agreement, but such term does not include any Person who has ceased to be a
Record Holder of any Company Security. Shareholders are "members" (as such term
is defined in the Act) of the Company.
Shareholder Interests - means all the limited liability company
interests (as such term is defined in the Act) of the Shareholders, including
(i) the right to receive Dividends and other distributions from the Company,
(ii) all other rights, benefits and privileges enjoyed by the Shareholders
(under the Act, the Certificate of Formation, this Agreement or otherwise) in
their capacity as Shareholders, including rights to vote, consent and approve
and (iii) all obligations, duties and liabilities imposed on the Shareholders
(under the Act, the Certificate of Formation, this Agreement or otherwise) in
their capacity as Shareholders.
Shareholders' Agreement - means that certain agreement originally among
Enron Capital & Trade Resources Corp., Mariner Holdings, Inc. and the
stockholders of Mariner Holdings, Inc., as amended to date and as to be amended
and/or restated at any future date.
4
<PAGE> 9
Shares - means Common Shares and/or Preferred Shares, as the context
requires.
Surviving Business Entity - has the meaning assigned to it in Section
10.2.
Transfer Agent - means any bank, trust company or other Person
(including Affiliates of any Shareholder) appointed from time to time by the
Board of Directors to act as registrar and transfer agent for the Company
Securities. The initial Transfer Agent shall be the Company.
Treasury Regulations - means the regulations promulgated by the United
States Department of the Treasury pursuant to and in respect of provisions of
the Code. All references herein to sections of the Treasury Regulations shall
include any corresponding provisions of succeeding, similar, substitute,
proposed or final Treasury Regulations.
Other terms defined herein have the meanings so given them.
SECTION 1.2 CONSTRUCTION.
(a) Unless the context requires otherwise: (i) the gender (or lack of
gender) of all words used in this Agreement includes the masculine, feminine and
neuter; (ii) references to Articles and Sections (other than in connection with
the Code or the Treasury Regulations) refer to Articles and Sections of this
Agreement; and "including" means "including, without limitation."
(b) In the event of a direct conflict between the provisions of this
Agreement and any mandatory, non-waivable provision of the Act or the GCLD, such
provision of the Act or the GCLD shall control; provided that the provisions of
Section 5.3, Section 5.6, Section 5.7, Section 5.8, Section 5.9, Section 5.10
and Section 5.11 shall control over any contrary provision of the GCLD to the
extent permitted under the Act and applicable Law. In that regard, to the extent
this Agreement or the Act does not control, the Company shall be subject to the
provisions of the GCLD mutatis mutandis. If any provision of the Act provides
that it may be varied or superseded in the limited liability company agreement
(or otherwise by agreement of the members or managers of a limited liability
company), such provision shall be deemed superseded and waived in its entirety
if this Agreement contains a provision addressing the same issue or subject
matter. In the event of a direct conflict between the provisions of this
Agreement and the provisions of the Shareholders' Agreement, (i) before
completion of an Initial Public Offering, the provisions of the Shareholders'
Agreement shall control, and (ii) following completion of an Initial Public
Offering, the provisions of this Agreement shall control.
5
<PAGE> 10
ARTICLE II: FORMATION AND ORGANIZATION
SECTION 2.1 FORMATION. The Company has been formed as a Delaware
limited liability company by the filing of a Certificate of Formation (the
"Certificate of Formation") on September 1, 1998, under and pursuant to the Act.
SECTION 2.2 NAME. The name of the Company is "Mariner Energy LLC" and
all Company business must be conducted in that name or such other names that
comply with Law and as the Board of Directors may select.
SECTION 2.3 REGISTERED OFFICE; REGISTERED AGENT; PRINCIPAL AND OTHER
OFFICES. The registered office of the Company required by the Act to be
maintained in the State of Delaware shall be the office of the initial
registered agent for service of process named in the Certificate of Formation or
such other office (which need not be a place of business of the Company) as the
Board of Directors may designate in the manner provided by Law. The registered
agent for service of process of the Company in the State of Delaware shall be
the initial registered agent for service of process named in the Certificate of
Formation or such other Person or Persons as the Board of Directors may
designate in the manner provided by Law. The principal office of the Company in
the United States shall be located at 580 WestLake Park Blvd., Suite 1300,
Houston, Texas 77079-2638, or such other place as the Board of Directors may
from time to time designate, which need not be in the State of Delaware, and the
Company shall maintain records there and shall keep the street address of such
principal office at the registered office of the Company in the State of
Delaware. The Company may have such other offices as the Board of Directors may
designate and may maintain records (including records of minutes of meetings of
and actions taken by the Board of Directors) at such other places as the Board
of Directors may designate.
SECTION 2.4 PURPOSE. The Company is formed for the object and purpose
of, and the nature of the business to be conducted and promoted by the Company
is, engaging in any lawful act or activity for which limited liability companies
may be formed under the Act and engaging in any and all activities necessary,
convenient, desirable or incidental to the foregoing, including, without
limitation, the acquisition, disposition, ownership, exploration, development
and operation of oil or natural gas producing properties and the purchase,
transportation, sale and marketing of natural gas, crude oil, natural gas
liquids and other hydrocarbons.
SECTION 2.5 FOREIGN QUALIFICATION. Prior to the Company's conducting
business in any jurisdiction other than Delaware, the Board of Directors shall
cause the Company to comply, to the extent procedures are available and those
matters are reasonably within the control of the Board of Directors, with all
requirements necessary to qualify the Company as a foreign limited liability
6
<PAGE> 11
company or other relevant entity in that jurisdiction, which qualifications may
be under the name of the Company, the name (Delaware) Mariner Energy LLC or such
other assumed name as the Board of Directors may designate.
SECTION 2.6 TERM. The term of the Company commenced on the effective
date of this Agreement and its existence shall be perpetual, unless and until it
is dissolved in accordance with Article VII.
SECTION 2.7 TAXATION AS CORPORATION; NO STATE-LAW PARTNERSHIP. The
Company shall elect pursuant to Section 301.7701-2 and 3 of the Treasury
Regulations to be treated as a corporation for all purposes under the Code. Any
Officer of the Company is authorized to cause the Company to make any and all
necessary filings with the United States Internal Revenue Service or any other
applicable body to effect this election. The Shareholders intend that the
Company not be a partnership (including a limited partnership) or joint venture
that no Shareholder be a partner or joint venturer of any other Shareholder, and
that this Agreement may not be construed to suggest otherwise.
SECTION 2.8 TITLE TO COMPANY ASSETS. Title to Company assets, whether
real, personal or mixed and whether tangible or intangible, shall be deemed to
be owned by the Company as an Entity, and no Shareholder, Director or Officer,
individually or collectively, shall have any ownership interest in such Company
assets or any portion thereof. Title to any or all of the Company assets may be
held in the name of the Company or one or more of its Affiliates or one or more
nominees, as the Board of Directors may determine. All Company assets shall be
recorded as the property of the Company in its books and records, irrespective
of the name in which record title to such Company assets is held.
SECTION 2.9 ORGANIZATION; ORGANIZATIONAL MEMBER. The Organizational
Member is organizing the Company by executing this Agreement, and until issuance
of Company Securities is the sole "member" of the Company as defined in the Act.
Immediately following the issuance of any Company Securities and the admission
to the Company of at least one other Person as a member of the Company, the
Organizational Member shall no longer be a "member" of the Company as defined in
the Act. By executing this Agreement, the Organizational Member is vesting the
management of the Company in the initial Board of Directors designated herein.
Notwithstanding anything to the contrary herein, before any Company Securities
are issued, any act required by this Agreement to be approved by the
Shareholders may be approved by the Board of Directors.
7
<PAGE> 12
ARTICLE III: SHAREHOLDERS; CERTIFICATES; TRANSFER OF COMPANY SECURITIES
SECTION 3.1 SHAREHOLDERS.
(a) A Person shall be admitted as a Shareholder, and shall become bound
by this Agreement, if such Person executes this Agreement or, without such
execution, if such Person purchases or otherwise lawfully acquires any Company
Securities and becomes the Record Holder of such Company Securities in
accordance with the provisions of Section 3.5. Unless otherwise provided in the
Shareholders' Agreement or as otherwise provided with respect to a series of
Preferred Shares in any Designation creating such series, a Person may become a
Record Holder without the consent or approval of any of the Shareholders.
(b) The name and mailing address of each Shareholder shall be listed on
the books and records of the Company. The Secretary of the Company shall update
the books and records from time to time as necessary to reflect accurately the
information therein (or to cause the Transfer Agent to do so, as applicable). A
Shareholder's Company Securities shall be represented by the Certificate(s) held
by such Shareholder.
SECTION 3.2 NO LIABILITY TO THIRD PARTIES. The debts, obligations and
liabilities of the Company, whether arising in contract, tort or otherwise,
shall be solely the debts, obligations and liabilities of the Company. No
Shareholder, beneficial owner of Company Securities or Director shall be liable
for the debts, obligations or liabilities of the Company, whether arising in
contract, tort or otherwise, solely by reason of being a Shareholder, beneficial
owner or Director.
SECTION 3.3 NO EXPULSION. A Shareholder may not be expelled or removed
as a Shareholder of the Company.
SECTION 3.4 CERTIFICATES. Certificates ("Certificates") evidencing
Company Securities shall be in such form, not inconsistent with that required by
the Act or any other Law and this Agreement, as shall be approved by the Board
of Directors. The Company shall issue to each Shareholder one or more
Certificates, signed by (a) the Chairman of the Board, the President or a Vice
President and (b) the Secretary, an Assistant Secretary, the Treasurer or an
Assistant Treasurer of the Company and countersigned by the Transfer Agent (if
the Company is not the Transfer Agent), certifying the number of Company
Securities (and, if there shall be more than one class or series of Company
Securities, the class and series of such Company Securities) owned by such
Shareholder; provided, however, that any of or all the signatures on the
Certificate may be a facsimile. If any Officer or Transfer Agent who shall have
signed or whose facsimile signature or signatures shall have been placed upon
any such Certificate or Certificates shall have ceased to be such Officer or
Transfer Agent before such Certificate is issued by the Company, such
Certificate may nevertheless be issued by the Company with the same effect as if
such Person were such Officer or Transfer
8
<PAGE> 13
Agent at the date of issue. Certificates shall be consecutively numbered and
shall be entered in the books and records of the Company as they are issued and
shall exhibit the holder's name and number of Company Securities. No Certificate
shall be valid for any purpose until it has been countersigned by the Transfer
Agent (if the Company is not the Transfer Agent).
SECTION 3.5 REGISTER, REGISTRATION OF TRANSFER AND EXCHANGE.
(a) The Company shall keep or cause to be kept on behalf of the Company
a register that, subject to any requirements of the Board of Directors and
subject to the provisions of Section 3.5(b), will provide for the registration
and transfer of Company Securities. The Transfer Agent is hereby appointed
registrar and transfer agent for the purpose of registering Company Securities
and transfers of Company Securities as herein provided. The Company shall not
recognize transfers of Company Securities unless the same are effected in the
manner described in this Section 3.5. Upon surrender for registration of
transfer of any Certificate and subject to the provisions of Section 3.5(b), the
appropriate Officers of the Company shall execute (or cause a facsimile
signature to be attached to) and the Transfer Agent shall countersign and
deliver, in the name of the holder or the designated transferee or transferees,
as required pursuant to the Record Holder's instructions, one or more new
Certificates evidencing the same aggregate number and type of Company Securities
as were evidenced by the Certificate so surrendered.
(b) The Company shall not recognize any transfer of Company Securities
until the Certificates evidencing such Company Securities are surrendered to the
Transfer Agent for registration of transfer. No charge shall be imposed by the
Company for such transfer, provided, that, as a condition to the issuance of any
new Certificate under this Section 3.5, the Company may require the payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
with respect thereto.
(c) By transfer of Company Securities in accordance with this Section,
(i) each transferee of Company Securities (including any nominee holder or an
agent acquiring such Company Securities for the account of another Person) shall
be admitted to the Company as a Shareholder with respect to the Company
Securities so transferred to such Person when any such transfer and admission is
reflected in the books and records of the Company, with or without execution of
this Agreement and (ii) each transferee of Company Securities (including any
nominee holder or an agent acquiring such Company Securities for the account of
another Person) shall be deemed to agree to be bound by the terms of this
Agreement.
(d) The Company shall be entitled to recognize the Record Holder as the
owner of Company Securities and, accordingly, shall not be bound to recognize
any equitable or other claim
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<PAGE> 14
to or interest in such Company Securities on the part of any other Person,
whether or not the Company shall have actual or other notice thereof, except as
otherwise provided by Law, the Shareholders' Agreement or any applicable rule,
regulation, guideline or requirement of any securities exchange on which the
Company Securities are listed for trading. Subject to (i) the foregoing
sentence, (ii) with respect to any series of Preferred Shares, the provisions of
any Designation creating such series, (iii) any contractual provision binding
upon any Shareholder, including this Agreement and the Shareholders' Agreement
and (iv) the provisions of any Law including the Securities Act, Company
Securities shall be freely transferable to any Person. The transfer of any
Company Securities and the admission of any new Shareholder shall not constitute
an amendment to this Agreement.
(e) Any Dividends in respect of Company Securities shall be paid by the
Company, directly or through the Transfer Agent or through any other Person or
agent, only to the Record Holders thereof as of the Record Date set for the
Dividends. Such payment shall constitute full payment and satisfaction of the
Company's liability in respect of such payment regardless of any claim of any
Person who may have an interest in such payment by reason of an assignment or
otherwise.
SECTION 3.6 MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES.
(a) If any mutilated Certificate is surrendered to the Transfer Agent,
then the appropriate Officers on behalf of the Company shall execute (or cause a
facsimile signature to be attached to), and, upon the Company's request, the
Transfer Agent shall countersign and deliver in exchange therefor, a new
Certificate evidencing the same aggregate number and type of Company Securities
as the Certificate so surrendered.
(b) The appropriate Officers on behalf of the Company shall execute (or
cause a facsimile signature to be attached to), and, upon the Company's request,
the Transfer Agent shall countersign and deliver, a new Certificate in place of
any Certificate previously issued if the Record Holder of the Certificate:
(i) makes proof by affidavit in form and substance satisfactory to
an Officer that a previously issued Certificate has been lost,
destroyed or stolen;
(ii) requests the issuance of a new Certificate before the Company
has notice that the Certificate has been acquired by a "protected
purchaser" (as defined in 6 Del.C. 8-303);
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(iii) if requested, delivers to the Company a bond, in form and
substance satisfactory to the Company, with surety or sureties and with
fixed or open penalty as the Company may reasonably direct, in its sole
discretion, to indemnify the Company and the Transfer Agent against any
claim that may be made on account of the alleged loss, destruction or
theft of the Certificate; and
(iv) satisfies any other reasonable requirements imposed by the
Company.
If a Shareholder fails to notify the Company within a reasonable time after he
has notice of the loss, destruction or theft of a Certificate and a transfer of
the Company Securities represented by the Certificate is registered before the
Company or the Transfer Agent receives such notification, the Shareholder shall
be precluded from making any claim against the Company or the Transfer Agent for
such transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate under this
Section 3.6, the Company may require the payment of a sum sufficient to cover
any tax or other governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the Transfer Agent)
reasonably connected therewith.
ARTICLE IV: AUTHORIZATION AND ISSUANCE OF COMPANY SECURITIES
SECTION 4.1 COMPANY SECURITIES. The total number of Company Securities
which the Company shall have authority to issue is 51,000,000 Shares, of which
50,000,000 Shares are to be Common Shares, par value $0.01 per Share, and
1,000,000 Shares are to be Preferred Shares, par value $0.01 per Share. The
number of Company Securities authorized for issuance pursuant to this Section
4.1 may be increased or decreased only by amendment of this Agreement in
accordance with the provisions hereof. The "par value" of Company Securities
shall have the same meaning and application as that term does to the capital
stock of a Delaware corporation, and the "capital" and "surplus" of the Company,
and the "impairment" of capital, shall have corresponding meanings and be
calculated in accordance with the GCLD.
SECTION 4.2 ADDITIONAL COMPANY SECURITIES.
(a) Subject to the guidelines set forth in this Section 4.2 and the
requirements of the Act and other applicable Law, the Board of Directors may, at
any time and from time to time, if all of the Company Securities authorized by
Section 4.1 have not been issued, subscribed for, or otherwise
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committed to be issued, issue or take subscriptions for additional Company
Securities up to the maximum number authorized in Section 4.1.
(b) Company Securities may be issued for such consideration, having a
value not less than the par value thereof, as determined from time to time by
the Board of Directors.
(c) The consideration for subscriptions to, or the purchase of, Company
Securities shall be paid in such form and in such manner as the Board of
Directors shall determine. In the absence of actual fraud in the transaction,
the judgment of the Board of Directors as to the value of such consideration
shall be conclusive. Company Securities so issued in accordance with the
determination of the Board of Directors shall be deemed to be fully paid and,
except to the extent specified in Section 18-607(b) of the Act, non-assessable
if the entire amount of such consideration has been received by the Company for
such Company Securities in the form of cash, services rendered, personal
property, real property, leases of real property or a combination thereof; or
not less than the par value of such Company Securities has been received by the
Company in such form and the Company has received a binding obligation of the
subscriber or purchaser to pay the balance of the subscription or purchase
price.
(d) The Board of Directors shall have the power to create and cause the
Company to issue, whether or not in connection with the issue and sale of any
Company Securities or other securities of the Company, rights or options
entitling the holders thereof to purchase from the Company any Company
Securities of any class or series (whether or not such class or series have
theretofore been created), such rights or options to be evidenced by such
instrument or instruments as shall be approved by the Board of Directors. The
terms upon which, including the time or times (which may be limited or unlimited
in duration) at or within which, and the price or prices at which any such
Company Securities may be purchased from the Company upon the exercise of any
such right or option shall be such as shall be stated in a resolution adopted by
the Board of Directors providing for the creation and issue of such rights or
options and, in every such case, shall be set forth or incorporated by reference
in the instrument or instruments evidencing such rights or options. In the
absence of actual fraud in the transaction, the judgment of the Board of
Directors as to the consideration for the issuance of such rights or options and
the sufficiency thereof shall be conclusive; provided that the price or prices
to be received for Company Securities to be issued upon the exercise of such
rights or options shall not be less than the par value thereof.
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SECTION 4.3 COMMON SHARES.
(a) The voting powers, designations, preferences and relative,
participating, optional or other special rights, powers and duties, and
qualifications, limitations and restrictions thereof, relating to the Common
Shares are as set forth in this Section 4.3.
(b) Subject to the rights, if any, of the holders of any other classes
or series of Company Securities, the Record Holders of Common Shares shall be
entitled on a pro rata basis to such Dividends, if any, as shall be declared
thereon from time to time by the Board of Directors, except to the extent
otherwise provided in Section 7.2, upon liquidation or dissolution of the
Company shall be entitled on a pro rata basis to all remaining assets after
satisfaction (by payment or reasonable provision for payment) of the Company's
liabilities to creditors, shall not be subject to any right of redemption by the
Company, shall have no conversion or exchange rights and shall be entitled to
one vote per Common Share on matters submitted to a vote or consent of
Shareholders, which votes shall not be cumulative in the election of Directors
or on any other matter. Each Common Share shall be identical in all respects
with each other Common Share. Holders of Common Shares shall have no preemptive
or similar rights, except as may otherwise be provided in the Shareholders'
Agreement.
SECTION 4.4 PREFERRED SHARES.
(a) Without the need for the consent of any Shareholder, Preferred
Shares shall be issuable from time to time in one or more series, with such
voting powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights,
powers and duties, and qualifications, limitations and restrictions thereof, as
shall be fixed by the Board of Directors in the exercise of its sole discretion
(subject to the guidelines set forth in this Section 4.4 and the requirements of
applicable Law) and reflected in a written action or actions approved by the
Board of Directors (each, a "Designation," each of which shall be deemed an
amendment to this Agreement). Each Designation when approved by the Board of
Directors shall be deemed to be set forth in this Article IV and shall
constitute a part of this Agreement. Each Designation shall provide for the
issue of Preferred Shares of a particular series and may set forth, without
limitation, (i) the rights of such series of Preferred Shares to share in
Dividends, and the priority of such series relative to the rights of other
classes or series of Company Securities to share in Dividends; (ii) the rights
of such series of Preferred Shares upon dissolution of or upon any distribution
of the assets of the Company and the priority of such series relative to the
rights of other classes or series of Company Securities upon dissolution of or
upon any distribution of the assets of the Company; (iii) whether such series of
Preferred Shares is redeemable by the Company and, if so, the price at which,
and the terms and conditions upon which, such series of Preferred Shares may
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<PAGE> 18
be redeemed by the Company; (iv) whether such series of Preferred Shares is
issued with the privilege of conversion into, or exchange for, at the option of
the holder or the Company or upon the happening of a specified event, Company
Securities or another security or other property of the Company and, if (vi) so,
the rate at which, and the terms and conditions upon which, such series of
Preferred Shares may be so converted; (v) the terms and conditions upon which
such series of Preferred Shares will be issued and assigned or transferred; and
(vi) the right, if any, of such series of Preferred Shares to vote on Company
matters, including matters relating to the relative rights, powers, preferences
and privileges of such series. Without limitation of the foregoing, the Board of
Directors may, in its sole discretion, authorize the issuance of Preferred
Shares that have preference over each or certain other classes or series of
Company Securities in any of the foregoing rights, including with respect to
voting rights, participation in the profits and assets of the Company, including
the right to receive Dividends and the right to receive in-kind payments of the
assets of the Company upon voluntary or involuntary dissolution, winding up or
termination of the Company, conversion or redemption rights, or other rights,
privileges or matters. The Board of Directors may authorize one or more Officers
to execute, certify, acknowledge, deliver, file and record whatever documents
may be required, convenient or desirable in connection with the issue from time
to time of such Preferred Shares and to do all other things necessary to comply
with the Act and other applicable Law. A Designation shall be effective when a
duly executed and attested original of the same is delivered to the Secretary of
the Company for inclusion among the permanent records of the Company and upon
the satisfaction of any requirements of the Act.
(b) Subject to the rights of the holders of any series of Preferred
Shares as set forth in any Designation, the number of Shares of any series of
Preferred Shares may be increased (but not above the total number of authorized
Preferred Shares) or decreased (but not below the number of Shares thereof then
Outstanding) only by a certificate duly executed by the Secretary of the Company
for inclusion among the permanent records of the Company setting forth a
statement that a specified increase or decrease therein has been authorized by a
resolution or resolutions adopted by the Board of Directors. If the number of
such Shares shall be decreased, the number of Shares so specified in the
certificate shall resume the status of authorized Preferred Shares undesignated
as to series. Any such certificate shall be deemed to be set forth in the
applicable Designation and shall constitute a part of that Designation. When no
Shares of a series of Preferred Shares are Outstanding, either because none were
issued or no issued Shares remain outstanding, a certificate setting forth a
resolution or resolutions adopted by the Board of Directors that no Shares of
such series are Outstanding and that none will be issued may be executed,
attested and delivered to the Secretary of the Company for inclusion among the
permanent records of the Company, and such certificate shall have the effect of
eliminating from this Agreement all matters set forth in the Designation with
respect to such series, and all Shares of such series shall resume the status of
authorized Preferred Shares undesignated as to series.
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SECTION 4.5 SPLITS AND COMBINATIONS; FRACTIONAL SHARES .
(a) Except as otherwise provided with respect to a series of Preferred
Shares in any Designation creating such series and, subject to Section 4.5(b),
the Board of Directors may make a pro rata distribution of Company Securities to
all Record Holders or may effect a subdivision or combination of any class or
series of Company Securities; provided, however, that after such distribution,
subdivision or combination, each Shareholder shall have the same Shareholder
Interest (except by operation of Section 4.5(b)) as before such distribution,
subdivision or combination.
(b) The Company may, but shall not be required to, issue fractions of a
share with respect to any Company Securities. If it does not issue fractions of
a share, it shall (i) arrange for the disposition of fractional interests by
those entitled hereto, (ii) pay in cash the fair value of fractions of a share
as of the time when those entitled to receive such fractions are determined or
(iii) issue scrip or warrants in registered form (either represented by a
certificate or uncertificated) or in bearer form (represented by a certificate)
which shall entitle the holder to receive a full share upon the surrender of
such scrip or warrants aggregating a full share. A certificate for a fractional
share or an uncertificated fractional share shall, but scrip or warrants shall
not unless otherwise provided therein, entitle the holder to exercise voting
rights, to receive dividends thereon and to participate in any of the assets of
the Company in the event of liquidation or dissolution of the Company. The Board
of Directors may cause scrip or warrants to be issued subject to the conditions
that they shall become void if not exchanged for certificates representing the
full Shares or uncertificated full Shares before a specified date, or subject to
the condition that the Shares for which scrip or warrants are exchangeable may
be sold by the Company and the proceeds thereof distributed to the holders of
scrip or warrants, or subject to any other conditions which the Board of
Directors may impose.
SECTION 4.6 WITHHOLDING. Notwithstanding any other provision of this
Agreement, the Company shall comply with any withholding requirements under any
Law in connection with the payment of Dividends in respect of Company Securities
and shall remit amounts withheld to and file required forms with applicable
taxing authorities. In the event of any claimed over-withholding, Shareholders
shall be limited to an action against the applicable taxing authority. If an
amount required to be withheld was not withheld from an actual distribution, the
Company may reduce subsequent distributions by the amount of such required
withholding. Each Shareholder agrees to furnish the Company such forms or other
documentation as are necessary to assist the Company in determining the extent
of, and in fulfilling, its withholding obligations.
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ARTICLE V: MANAGEMENT
SECTION 5.1 MANAGEMENT OF THE COMPANY'S AFFAIRS. As provided in this
Agreement, all management powers over the business and affairs of the Company
shall be exclusively vested in a Board of Directors (the "Board of Directors")
and, subject to the direction of the Board of Directors, the Officers, who shall
collectively (Officers and Directors) constitute "managers" of the Company
within the meaning of the Act. No Shareholder, by virtue of having the status of
a Shareholder, shall have any management power over the business and affairs of
the Company or actual or apparent authority to enter into contracts on behalf
of, or to otherwise bind, the Company. Except as otherwise specifically provided
in this Agreement, the authority and functions of the Board of Directors on the
one hand and of the Officers on the other shall be identical to the authority
and functions of the board of directors and officers, respectively, of a
corporation organized under the GCLD. Thus, except as otherwise specifically
provided in this Agreement, the business and affairs of the Company shall be
managed under the direction of the Board of Directors, and the day-to-day
activities of the Company shall be conducted on the Company's behalf by the
Officers, who shall be agents of the Company with such authority as specifically
provided in this Agreement or as authorized by the Board of Directors. In
addition to the powers that now or hereafter can be granted to managers under
the Act and to all other powers granted under any other provision of this
Agreement, the Board of Directors (subject to Section 5.3) and the Officers
(subject to Section 5.4 and the direction of the Board of Directors) shall have
full power and authority to do all things on such terms as they, in their
individual sole discretion, may deem necessary or appropriate to conduct, or to
cause to be conducted, the business and affairs of the Company, including (a)
the making of any expenditures, the lending or borrowing of money, the
assumption or guarantee of, or other contracting for, indebtedness and other
liabilities, the issuance of evidences of indebtedness and the incurring of any
other obligations; (b) the making of tax, regulatory and other filings, or
rendering of periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Company; (c) subject to the
requirements of Article X, the merger or other combination of the Company with
or into, or the sale, lease or exchange of substantially all of the assets to,
another Person; (d) the use of the assets of the Company (including cash on
hand) for any purpose consistent with the terms of this Agreement and the
repayment of obligations of the Company; (e) the negotiation, execution and
performance of any contracts, conveyances or other instruments; (f) the
distribution of Company cash; (g) the selection, engagement and dismissal of
Officers, employees and agents, outside attorneys, accountants, engineers,
consultants and contractors and the determination of their compensation and
other terms of employment or hiring; (h) the maintenance of such insurance for
the benefit of the Company, as it deems necessary or appropriate; (i) the
acquisition or disposition of assets; (j) the formation of, or acquisition of an
interest in, or the contribution of property to, any Entity; (k) the control of
any matters affecting the rights and obligations of the Company, including the
commencement, prosecution and defense of actions at law or in equity and
otherwise engaging in the conduct of litigation and the incurring of legal
expense and the settlement of claims and litigation; (l) the indemnification of
any Person
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against liabilities and contingencies to the extent permitted by law; and the
entering into of listing agreements with any securities exchange and the
delisting of some or all of the Company Securities from, or requesting that
trading be suspended on, any such exchange.
SECTION 5.2 BOARD OF DIRECTORS.
(a) Composition; Term; Initial Directors. The Board of Directors shall
consist of not less than one natural person. Each Director shall be elected as
provided in Section 5.2(b) and shall serve in such capacity until his successor
has been duly elected and qualified or until such Director dies, resigns or is
removed. The Board of Directors may from time to time determine the number of
Directors then constituting the whole Board of Directors, but the Board of
Directors shall not decrease the number of Persons that constitute the whole
Board of Directors if such decrease would shorten the term of any Director. The
initial Board of Directors shall consist of nine Directors, who shall be the
following Persons:
Richard B. Buy
Richard R. Clark
Mark E. Haedicke
Robert E. Henderson
Stephen R. Horn
Jeffrey McMahon
Frank Stabler
Michael W. Strickler
Jere C. Overdyke, Jr.
(b) Election of Directors. At each annual meeting of Shareholders, an
election of Directors shall be held and new Directors shall be elected (or
existing Directors shall be re-elected), each to serve until his successor has
been duly elected and qualified or until such Director dies, resigns or is
removed, except as provided by Section 5.2(d). To be elected as a Director, a
natural person must (i) be elected in accordance with Section 5.2(c) or (ii)
have been properly nominated for a position as a Director in accordance with
Section 5.2(e) and must receive a majority of the votes cast in respect of
Company Securities for the position at a meeting of Shareholders held for such
purpose at which a quorum is present in Person or by proxy, or if there are more
than two nominees for such position, a plurality of the votes cast in respect of
Company Securities for the position.
(c) Vacancies and Removal. Subject to applicable Law and the rights of
the holders of any series of Preferred Shares, vacancies existing on the Board
of Directors (including a vacancy created by virtue of an increase in the size
of the Board of Directors) may be filled by the affirmative
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vote of a majority of the Directors then serving, even if less than a quorum.
Any Director chosen to fill a vacancy shall hold office for a term expiring at
the next annual meeting of Shareholders and until his successor has been duly
elected and qualified. Subject to the rights of the holders of any series of
Preferred Shares, any Director, or the entire Board of Directors, may be removed
from office at any time, with or without cause, but only by the affirmative vote
or consent of the holders of a majority of the Company Securities entitled to
vote with respect to the election of Directors.
(d) Rights of Classes Separately to Elect Directors. Notwithstanding
anything else contained in this Agreement to the contrary, whenever holders of
any one or more series of Preferred Shares shall have the right, voting
separately by class, classes or series, to elect Directors at any annual or
special meeting of Shareholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
provisions of this Agreement, including any applicable Designation creating any
series of Preferred Shares pursuant to Section 4.4 hereof. Directors so elected
shall not be divided into classes and shall be elected by such holders annually
unless expressly provided otherwise by those provisions or resolutions, and,
during the prescribed terms of office of those Directors, the Board of Directors
shall consist of a number of Directors equal to the number of those Directors
plus the number of Directors determined as provided in Section 5.2(a).
(e) Nominations; Qualifications. Prior to a meeting of the Shareholders
at which an election of Directors is to be held, the Board of Directors shall
nominate its slate of persons to be presented for election at such meeting.
Other nominations for Directors may be made by any Shareholder, but any such
Shareholder nominations must be in writing and delivered to the Secretary of the
Company not less than 120 days prior to the anniversary of the date on which
proxy materials were first mailed to Shareholders in connection with the
previous year's annual meeting of the Shareholders at which an election of
Directors is to be held. To be in proper form, such Shareholder nomination must
set forth in writing as to each person whom such Shareholder proposes to
nominate for election or re-election as a Director all information relating to
such person as is required to be disclosed in solicitations of proxies for the
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended, or any
successor or regulation promulgated thereunder.
(f) Voting; Quorum; Required Vote for Action. Unless otherwise required
by the Act, other Law or the provisions hereof,
(i) each member of the Board of Directors shall have one vote;
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(ii) the presence at a meeting of the Board of Directors of a
majority of the members of the Board of Directors shall constitute a
quorum at any such meeting for the transaction of business; and
(iii) the act of a majority of the members of the Board of
Directors present at a meeting of the Board of Directors at which a
quorum is present shall be deemed to constitute the act of the Board of
Directors.
(g) Meetings. Regular meetings of the Board of Directors and any
committee thereof shall be held at such times and places as shall be designated
from time to time by resolution of the Board of Directors or such committee.
Notice of such regular meetings shall not be required. Special meetings of the
Board of Directors or meetings of any committee thereof may be called by the
Chairman of the Board, the President (should the President be a director) or on
the written request of any two Directors or committee members, as applicable, by
the Secretary, in each case on at least twenty-four (24) hours personal,
written, facsimile, electronic, telegraphic, cable or wireless notice to each
Director or committee member, which notice may be waived by any Director. Any
such notice, or waiver thereof, need not state the purpose of such meeting
except as may otherwise be required by Law. Attendance of a Director at a
meeting (including pursuant to the last sentence of this Section 5.02(g)) shall
constitute a waiver of notice of such meeting, except where such Director
attends the meeting for the express purpose of objecting to the transaction of
any business on the ground that the meeting is not lawfully called or convened.
Any action required or permitted to be taken at a meeting of the Board of
Directors, or any committee thereof, may be taken without a meeting, without
prior notice and without a vote if a consent or consents in writing, setting
forth the action so taken, are signed by all members of the Board of Directors
or committee. Members of the Board of Directors or any committee thereof may
participate in and hold a meeting by means of conference telephone, video
conference or similar communications equipment by means of which all Persons
participating in the meeting can hear each other, and participation in such
meetings shall constitute presence in Person at the meeting.
(h) Committees. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the Directors. The Board
of Directors may designate one or more Directors as alternate members of any
committee, who may replace any absent or disqualified Director at any meeting of
such committee. Any such committee, to the extent provided in the resolution of
the Board of Directors or in this Agreement, shall have and may exercise all
powers and authority of the Board of Directors in the management of the business
and affairs of the Company, and may authorize the seal of the Company to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to the following matters: (i) approving or
adopting, or recommending to the Shareholders, any action or matter expressly
required by this Agreement or the Act or the GCLD to be submitted to the
Shareholders for approval or (ii)
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adopting, amending or repealing any provision of this Agreement. Any
committee designated pursuant to this Section 5.2(h) shall choose its own
chairman, shall keep regular minutes of its proceedings and report the same to
the Board of Directors when requested, and, subject to Section 5.2(g), shall fix
its own rules or procedures and shall meet at such times and at such place or
places as may be provided by such rules or by resolution of such committee or
resolution of the Board of Directors. At every meeting of any such committee,
the presence of a majority of all the members thereof shall constitute a quorum
and the affirmative vote of a majority of the members present shall be necessary
for the adoption by the committee of any resolution.
(i) Chairman. The Board of Directors may elect one of its members as
Chairman of the Board (the "Chairman of the Board"). The Chairman of the Board,
if any, and if present and acting, shall preside at all meetings of the Board of
Directors and of Shareholders, unless otherwise directed by the Board of
Directors. If the Board of Directors does not elect a Chairman, the President,
if present and a Director, or any other Director chosen by the Board of
Directors, shall preside. Unless the Board of Directors provides otherwise, the
Chairman of the Board shall be an Officer of the Company and shall have the same
power and authority as the President.
SECTION 5.3 RESTRICTIONS ON BOARD AUTHORITY; REQUIRED BOARD APPROVAL.
(a) The Board of Directors may not without approval of the specific act
by a Majority Interest take any action in contravention of this Agreement,
including, (i) any act that would make it impossible to carry on the ordinary
business of the Company, except as otherwise provided in this Agreement; (ii)
possessing Company property, or assigning any rights in specific Company
property, for other than a Company purpose; or (iii) amending or modifying this
Agreement in any manner, except as otherwise provided in this Agreement. For
purposes of this Section, "Company purposes" shall include, without limitation,
the assignment of overriding royalty interests in minerals pursuant to the terms
of any employment agreement or consulting agreement between the Company or any
Affiliate of the Company and any of its or their employees or consultants.
Except as otherwise expressly permitted by this Agreement or by resolution of
the Board of Directors, (A) no Director or group of Directors shall have any
actual or apparent authority to enter into contracts on behalf of, or to
otherwise bind, the Company, nor take any action in the name of or on behalf of
the Company or conduct any business of the Company other than by action of the
Board of Directors taken in accordance with the provisions of this Agreement,
and (B) no Director shall have the power or authority to delegate to any Person
such Director's rights and powers as a Director to manage the business and
affairs of the Company.
(b) Until after completion of the Initial Public Offering,
notwithstanding anything to the contrary in this Agreement, the provisions of
Annex A hereto shall apply to the management of the
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business and affairs of the Company. Upon completion of the Initial Public
Offering, this Agreement shall be deemed to be amended to delete Annex A in its
entirety. Following the completion of the Initial Public Offering, the Board of
Directors, by resolution, may establish policies regarding the authority of the
Company to take action without approval of the Board of Directors.
SECTION 5.4 OFFICERS.
(a) Generally. The Board of Directors, as set forth below, shall
appoint agents of the Company, having the authority set forth in this Agreement
or otherwise as authorized by the Board of Directors, which agents are referred
to as "Officers" of the Company. Unless provided otherwise by resolution of the
Board of Directors, the Officers shall have the titles, power, authority and
duties described below in this Section 5.4.
(b) Titles and Number. The Officers of the Company shall be the
Chairman of the Board (unless the Board of Directors provides that the Chairman
shall not be an officer), the President, any and all Vice Presidents, the
Secretary and any Treasurer, any and all Assistant Secretaries and Assistant
Treasurers and any other officer position or title as the Board of Directors may
desire. There shall be appointed from time to time, in accordance with Section
5.4(c) below, such Vice Presidents, Secretaries, Assistant Secretaries,
Treasurers, Assistant Treasurers and other officers as the Board of Directors
may desire. Any Person may hold two or more offices.
(c) Appointment and Term of Office. The Officers shall be appointed by
the Board of Directors at such times and for such terms as the Board of
Directors shall determine. Any Officer may be removed, with or without cause,
only by the Board of Directors. Vacancies in any office may be filled only by
the Board of Directors.
(d) Chairman of the Board. Subject to the limitations imposed by this
Agreement, any employment agreement, any employee plan or any determination or
resolution of the Board of Directors, the Chairman of the Board, subject to the
direction of the Board of Directors, shall be the chief executive officer of the
Company and, as such, shall preside at all meetings of the Shareholders and the
Board of Directors, shall supervise generally the President and the other
Officers and shall have full authority to execute all documents and take all
actions that the Company may legally take. The Chairman of the Board shall
exercise such other powers and perform such other duties as may be assigned to
him by this Agreement or the Board of Directors, including any duties and powers
stated in any employment agreement approved by the Board of Directors.
(e) President. Subject to the limitations imposed by this Agreement,
any employment agreement, any employee plan or any determination or resolution
of the Board of Directors, the
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President, subject to the direction of the Board of Directors, shall be
responsible for the management and direction of the day-to-day business and
affairs of the Company, its other Officers, employees and agents, shall
supervise generally the affairs of the Company and shall have full authority to
execute all documents and take all actions that the Company may legally take.
The President shall exercise such other powers and perform such other duties as
may be assigned to him by this Agreement or the Board of Directors, including
any duties and powers stated in any employment agreement approved by the Board
of Directors.
(f) Vice Presidents. In the absence of the President and the Chairman
of the Board (if one is appointed), each Vice President appointed by the Board
of Directors shall have all of the powers and duties conferred upon the
President, including the same power as the President to execute documents on
behalf of the Company. Each such Vice President shall perform such other duties
and may exercise such other powers as may from time to time be assigned to him
by the Board of Directors, the Chairman of the Board or the President. Vice
Presidents may be designated Executive Vice Presidents, Senior Vice Presidents,
or any other title determined by the Board of Directors.
(g) Secretary and Assistant Secretaries. The Secretary shall record or
cause to be recorded in books provided for that purpose the minutes of the
meetings or actions of the Board of Directors and Shareholders, shall see that
all notices are duly given in accordance with the provisions of this Agreement
and as required by law, shall be custodian of all records (other than
financial), shall see that the books, reports, statements, certificates and all
other documents and records required by applicable Law are properly kept and
filed, and, in general, shall perform all duties incident to the office of
Secretary and such other duties as may, from time to time, be assigned to him by
this Agreement, the Board of Directors, the Chairman of the Board or the
President. The Assistant Secretaries shall exercise the powers of the Secretary
during that Officer's absence or inability or refusal to act.
(h) Treasurer and Assistant Treasurers. The Treasurer shall keep or
cause to be kept the books of account of the Company and shall render statements
of the financial affairs of the Company in such form and as often as required by
this Agreement, the Board of Directors, the Chairman of the Board or the
President. The Treasurer, subject to the order of the Board of Directors, shall
have the custody of all funds and securities of the Company. The Treasurer shall
perform all other duties commonly incident to his office and shall perform such
other duties and have such other powers as this Agreement, the Board of
Directors, the Chairman of the Board or the President shall designate from time
to time. The Assistant Treasurers shall exercise the power of the Treasurer
during that Officer's absence or inability or refusal to act. Each of the
Assistant Treasurers shall possess the same power as the Treasurer to sign all
certificates, contracts, obligations and other instruments of the Company. If no
Treasurer or Assistant Treasurer is appointed and serving or in the absence of
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the appointed Treasurer and Assistant Treasurer, such other Officer as the Board
of Directors shall select shall have the powers and duties conferred upon the
Treasurer.
(i) Powers of Attorney. The Company may grant powers of attorney or
other authority as appropriate to establish and evidence the authority of the
Officers and other Persons.
(j) Delegation of Authority. Unless otherwise provided by resolution of
the Board of Directors, no Officer shall have the power or authority to delegate
to any Person such Officer's rights and powers as an Officer to manage the
business and affairs of the Company.
SECTION 5.5 COMPENSATION. The Officers shall receive such compensation
for their services as may be designated by the Board of Directors. In addition,
the Officers shall be entitled to be reimbursed for out-of-pocket costs and
expenses incurred in the course of their service hereunder. The members of the
Board of Directors who are not employees of the Company or its subsidiaries
shall receive such compensation for their services as Directors or committee
members as the Board of Directors shall determine. In addition, the members of
the Board of Directors shall be entitled to be reimbursed for out-of-pocket
costs and expenses incurred in the course of their service hereunder.
SECTION 5.6 BUSINESS OPPORTUNITIES.
(a) None of Enron, any Affiliate (other than the Company and its
subsidiaries) of Enron or any Officer or Director of the Company who is an
officer, director or employee of Enron or any of its Affiliates (other than the
Company and its subsidiaries) shall have any obligation to offer or otherwise
share any business opportunities with the Company or its subsidiaries. Enron and
its Affiliates may compete directly with the Company or its subsidiaries. The
Company and each Shareholder waive any claim that any business opportunity
pursued by or to be pursued by Enron or any of its Affiliates (other than the
Company and its subsidiaries) or any Officer or Director of the Company who is
an officer, director or employee of Enron or any of its Affiliates (other than
the Company and its subsidiaries) constitutes a business opportunity of the
Company that was misappropriated. The Company and each Shareholder further
acknowledge that, and agree that Enron and its Affiliates may, among other
things (i) continue to engage in oil and gas exploration and development in
competition with the Company; (ii) continue to engage in oil and gas marketing
activities; (iii) continue to engage in financing other entities or in
furnishing services in connection therewith (including financing of or services
in connection with business opportunities pursued by others in competition with
the Company); and (iv) acquire other entities, or interests therein, engaged in
oil and gas exploration and production or 3-D seismic interpretation and
analysis that will compete with the Company. No activity described in this
paragraph (a) shall constitute a breach of any
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fiduciary duty by Enron or any of its Affiliates (other than the Company and its
subsidiaries), or any Officer or Director of the Company who is an officer,
director or employee of Enron or any of its Affiliates (other than the Company
and its subsidiaries), to the Company or the Shareholders. However, nothing in
this Agreement shall be construed to permit (x) a natural person to usurp,
solely for his or her personal benefit, a business opportunity of the Company
presented to that person in his or her capacity as an Officer or Director unless
the Officer or Director first presented the opportunity to the Company and the
Company declined to pursue it or (y) Enron or any of its Affiliates (other than
the Company and its subsidiaries) to usurp a business opportunity of the Company
presented to an Officer or Director serving as such at the request of Enron
solely in his or her capacity as an Officer or Director unless such Officer or
Director first presented the opportunity to the Company and the Company declined
to pursue it; provided that Enron or any of its Affiliates (other than the
Company and any of its subsidiaries) may pursue any business opportunity that is
separately presented to or identified by Enron or any of its Affiliates (other
than the Company and any of its subsidiaries), even if it has also been
presented to an Officer or Director of the Company.
(b) For purposes of this Section 5.6, a "business opportunity" means
any opportunity for a Person (i) to enter into any transaction pursuant to which
the Person would acquire (whether by purchase, lease or other transaction), own,
invest in, finance, lend funds to, contribute capital to, manage, operate or
otherwise participate in any Person, assets or transaction, or (ii) to act as a
broker, finder, financial adviser or investment banker with respect to any such
transaction by any other Person.
(c) The benefits of this Section 5.6 shall inure to the benefit of
Enron and any of its Affiliates (other than the Company and its subsidiaries)
and any successor owner of Company Securities who purchases such Company
Securities directly from Enron or any of its Affiliates (other than through a
public offering) and any Affiliates of such successor owner.
SECTION 5.7 INTERESTED OFFICERS OR DIRECTORS. No contract or
transaction between the Company and one or more of its Officers or Directors, or
between the Company and any other Entity in which one or more such Officers or
Directors owns an interest or of which such Officer or Director is an Affiliate,
officer, director or employee, shall be void or voidable or be deemed to
constitute a breach of duty if:
(a) The material facts as to his or its relationship or interest and as
to the contract or transaction are disclosed or are known to the Board of
Directors or the committee and the Board of Directors or committee in good faith
authorizes the contract or transaction by the affirmative votes of a majority of
the disinterested Directors, even though the disinterested Directors be less
than a
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quorum and even though interested directors are present at or participate in the
meeting that authorizes the contract or transaction;
(b) The material facts as to his or its relationship or interest and as
to the contract or transaction are disclosed or are known to the Shareholders
entitled to vote thereon and the contract or transaction is specifically
approved in good faith by vote of the Shareholders; or
(c) The contract or transaction is fair as to the Company as of the
time it is authorized, approved or ratified by the Board of Directors, a
committee of the Board of Directors or the Shareholders (as determined in
accordance with Section 5.11).
Interested directors may be counted in determining the presence of a quorum at a
meeting of the Board of Directors or a committee thereof that authorizes the
contract or transaction in question.
SECTION 5.8 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
AGENTS.
(a) To the fullest extent permitted by Law but subject to the
limitations expressly provided in this Agreement, the Company shall indemnify
any Person who was or is a party or is threatened to be made a party to any
threatened, pending or complete action, suit or proceeding (each an
"Indemnitee"), whether civil, criminal, administrative or investigative (other
than an action by or in the right of the Company) by reason of the fact that
such Indemnitee is or was a Director or Officer, or was serving at the request
of the Company as a director or officer of another Entity, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such Indemnitee in connection with such
action, suit or proceeding if such Indemnitee acted in good faith and in a
manner that such Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such Indemnitee's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere, or its equivalent,
shall not, of itself, create a presumption that the Indemnitee did not act in
good faith and in a manner that such Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, or, with respect to any
criminal action or proceeding, had reasonable cause to believe such Indemnitee's
conduct was unlawful. Any indemnification pursuant to this Section 5.8 shall be
made only out of the assets of the Company.
(b) To the fullest extent permitted by Law but subject to the
limitations expressly provided in this Agreement, the Company shall indemnify
any Indemnitee who was or is a party or is threatened to be made a party to any
threatened, pending or complete action or suit by or in the
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right of the Company to procure a judgment in its favor by reason of the fact
that such Indemnitee is or was a Director or Officer, or was serving at the
request of the Company as a director or officer of another Entity, against
expenses (including attorneys' fees) actually and reasonably incurred by such
Indemnitee in connection the defense or settlement of such action or suit if
such Indemnitee acted in good faith and in a manner which such Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, except that no indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable to
the Company unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
(c) The Company may indemnify any employee or agent of the Company, or
any Person serving at the request of the Company as an employee or agent of
another Entity, in the same manner and to the same extent that the Company is
required, pursuant to clauses (a) and (b) above, to indemnify Directors and
Officers and Indemnitees serving at the request of the Company as a director or
officer of another Entity.
(d) Any indemnification under subsections (a), (b) and (c) of this
Section 5.8 (unless ordered by a court) shall be made by the Company only as
authorized in the specific case upon a determination that indemnification of the
Indemnitee is proper in the circumstances because such Indemnitee has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made, with respect to an Indemnitee who is
a Director or Officer at the time of such determination, promptly (i) by a
majority vote of the Directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (ii) by a committee of such
Directors designated by majority vote of such Directors, even though less than a
quorum, or (iii) if there are no such Directors or if such Directors so direct,
by independent legal counsel in a written opinion, or (iv) by the Shareholders.
(e) Expenses (including attorney's fees) incurred by an Indemnitee who
is indemnified pursuant to this Section 5.8 in defending any civil, criminal,
administrative or investigative action, suit or proceeding shall, from time to
time, be paid by the Company in advance of the final disposition of such action,
suit or proceeding upon receipt by the Company of an undertaking by or on behalf
of such Indemnitee to repay such amount if it shall ultimately be determined
that the such Person is not entitled to be indemnified by the Company as
authorized in this Section 5.8.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Section 5.8 shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any agreement, vote of
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Shareholders or disinterested Directors, as a matter of Law or otherwise, both
as to actions in the Indemnitee's official capacity and as to action in another
capacity while holding such office or position, and shall continue as to an
Indemnitee who has ceased to serve in such capacity and shall inure to the
benefit of the heirs, successors, assigns and administrators of the Indemnitee.
(g) The Company may purchase and maintain insurance, on behalf of any
person who is or was a member of the Board of Directors or an Officer and on
behalf of such other Persons as the Board of Directors shall determine, against
any liability that may be asserted against or expense that may be incurred by
such Person in connection with the Company's activities, regardless of whether
the Company would have the power to indemnify such Person against such liability
under the provisions of this Agreement.
(h) For purposes of this Section 5.8, the Company shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by the Indemnitee of such Indemnitee's duties to the
Company also imposes duties on, or otherwise involves services by, the
Indemnitee to the plan or participants or beneficiaries of the plan; excise
taxes assessed on an Indemnitee with respect to an employee benefit plan
pursuant to applicable Law shall constitute "fines" within the meaning of this
Section 5.8; action taken or omitted by the Indemnitee with respect to an
employee benefit plan in the performance of such Indemnitee's duties for a
purpose reasonably believed by such Indemnitee to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be for a purpose
which is in, or not opposed to, the best interests of the Company.
(i) In no event may an Indemnitee subject the Shareholders to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(j) An Indemnitee shall not be denied indemnification in whole or in
part under this Section 5.8 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the transaction
was otherwise permitted by the terms of this Agreement.
(k) The provisions of this Section 5.8 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(l) No amendment, modification or repeal of this Section 5.8 or any
provision hereof shall in any manner terminate, reduce or impair either the
right of any past, present or future Indemnitee to be indemnified by the Company
or the obligation of the Company to indemnify any such Indemnitee under and in
accordance with the provisions of this Section 5.8 as in effect immediately
prior to such amendment, modification or repeal with respect to claims arising
from or
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relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may be asserted.
(m) THE PROVISIONS OF THE INDEMNIFICATION PROVIDED IN THIS SECTION 5.8
ARE INTENDED BY THE PARTIES TO APPLY EVEN IF SUCH PROVISIONS HAVE THE EFFECT OF
EXCULPATING THE INDEMNITEE FROM LEGAL RESPONSIBILITY FOR THE CONSEQUENCES OF
SUCH PERSON'S OWN SIMPLE, FULL, PARTIAL OR CONCURRENT NEGLIGENCE.
SECTION 5.9 EXCULPATION OF LIABILITY OF OFFICERS AND DIRECTORS.
(a) Notwithstanding anything to the contrary set forth in this
Agreement, no Director shall be liable to the Company or the Shareholders for
monetary damages for losses sustained or liabilities incurred as a result of any
act or omission constituting a breach of such Director's fiduciary duty, except:
(i) For a breach of the Director's duty of loyalty to the Company or the
Shareholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) for liabilities that
would be imposed on such Director under Section 174 of the GCLD if the Company
were a Delaware corporation; or (iv) for any transaction from which the Director
derived an improper personal benefit. No action permitted to be taken by any
Director or by Enron or any of its Affiliates (other than the Company and its
subsidiaries) pursuant to the provisions of Section 5.6 shall be deemed to be a
breach of the duty of loyalty or a transaction from which such Director derived
an improper personal benefit. If the GCLD is amended after the date of this
Agreement to authorize Delaware corporations to further eliminate or limit the
personal liability of directors of Delaware corporations, then the liability of
a director to the Company, in addition to the personal limitation provided
herein, shall be further limited to the fullest extent permitted of Delaware
corporations under the GCLD as so amended.
(b) Subject to its obligations and duties as set forth in this
Article V, the Board of Directors and any committee thereof may exercise any of
the powers granted to it by this Agreement and perform any of the duties imposed
upon it hereunder either directly or by or through the Company's agents, and
neither the Board of Directors nor any committee thereof shall be responsible
for any misconduct or negligence on the part of any such agent appointed by the
Board of Directors or any committee thereof in good faith.
(c) Any amendment, modification or repeal of this Section 5.9 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on liability under this Section 5.9 as in effect immediately prior
to such amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may be asserted.
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SECTION 5.10 DUTIES OF OFFICERS AND DIRECTORS. Except as otherwise
specifically provided in Section 5.3, Section 5.6, Section 5.7, Section 5.8,
Section 5.9, Section 5.10 or Section 5.11, the duties and obligations owed to
the Company and to the Shareholders by the Officers of the Company and by
members of the Board of Directors of the Company, and any such duties that may
be owed by any Shareholder or by any Affiliates of any Shareholder, shall be the
same as the respective duties and obligations owed to a corporation organized
under the GCLD by its officers and directors and any such duties that may be
owed to such corporation by any similarly situated stockholder or Affiliate
thereof, respectively.
SECTION 5.11 ADDITIONAL LIMITATIONS ON DUTIES; RESOLUTION OF CONFLICTS
OF INTEREST.
(a) The duties and obligations owed to the Company and to the
Shareholders by the Officers of the Company and by members of the Board of
Directors of the Company, and any such duties that may be owed by any
Shareholder or by any Affiliates of any Shareholder, are specifically modified
or limited as follows (which are in addition to any modifications or limitations
elsewhere in this Agreement):
(i) an Officer, Director or Affiliate of the Company will not
be liable for errors in judgment or for any act or omission
if such Person acted in good faith;
(ii) Enron and its Affiliates (other than the Company and its
subsidiaries) will have no obligation to offer to sell to
the Company any assets or interest therein;
(iii) it will not constitute a breach of fiduciary or other duty
for Enron and its Affiliates to engage in activities of the
type conducted by the Company and its subsidiaries, even if
in direct competition with the Company, including without
limitation the ownership and operation of interests in
companies that engage in oil and gas exploration and
production activities;
(iv) the approval by the Oversight Committee of the Board of
Directors of the terms of any proposed transaction between
Enron or its Affiliates (other than the Company and its
subsidiaries) on one hand and the Company or any of its
subsidiaries on the other hand, including the amendment of
any contract, shall be deemed to be a conclusive
determination that such transaction does not constitute a
breach of fiduciary or other duty owed by Enron or its
Affiliates (other than the Company and its subsidiaries),
as long as the material facts known to the officers and
directors of Enron or its Affiliates (to the extent
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Enron or such Affiliate is a party to the transaction)
regarding such proposed transaction were disclosed to the
Oversight Committee at the time it gave its approval;
(v) it will not constitute a breach of fiduciary or other duty
for Enron and its Affiliates and the Officers or Directors
of the Company (including the Oversight Committee) to
resolve conflicts of interest, as long as the resolution of
such conflicts is fair to the Company and its subsidiaries
(taking into account the relevant interests of the
parties);
(vi) it will not constitute a breach of fiduciary or other duty
for an Officer or Director of the Company to engage
attorneys, accountants, engineers and other advisors on
behalf of the Company, its Board of Directors or any
committee thereof, even though such Persons may also be
retained from time to time by Enron or its Affiliates, and
such Persons may be engaged with respect to any matter in
which the interests of the Company and its subsidiaries, on
one hand, and Enron and its Affiliates, on the other, may
differ, or may be engaged by both the Company and Enron or
its Affiliates with respect to a matter, as long as such
Officer or Director reasonably believes that any conflict
between the Company and its subsidiaries, on one hand, and
Enron and its Affiliates (other than the Company and its
subsidiaries), on the other, with respect to such matter is
not material.
(b) Any resolution or course of action in respect of a conflict of
interest regarding Enron and its Affiliates, including, without limitation, any
course of action involving the issuance of any Company Securities to Enron or
any of its Affiliates, shall be conclusively deemed fair to the Company and its
subsidiaries if such resolution or course of action is (i) approved, in the
absence of bad faith, by the Oversight Committee of the Board of Directors, as
long as the material facts known to the officers and directors of Enron or its
Affiliates (to the extent Enron or such Affiliate is a party to the transaction
or involved in such course of action) regarding such proposed transaction or
course of action were disclosed to the Oversight Committee at the time it gave
its approval (ii) made or taken on terms no less favorable to the Company than
those generally being provided to or available from unrelated third parties, or
(iii) a commercially fair resolution or course of action, taking into account
the circumstances surrounding the course of action or conflict of interest and
the totality of the relationships between the parties involved and the relative
interests of the parties.
(c) In connection with a determination of what is "fair" to the Company
and in connection with a resolution of any conflict of interest, the following
factors, along with any other appropriate factors, shall be considered: (i) the
relative interests of each of the parties to such
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conflict, agreement, transaction or situation and the benefits and burdens
relating to such interest; (ii) any customary or accepted industry practices and
any customary or historical dealings with a particular Person; (iii) any
applicable generally accepted accounting or engineering practices or principles;
and (iv) such additional factors as such member of the Oversight Committee of
the Board of Directors or such Officer, Director or employee of the Company
determines in his sole discretion to be relevant, reasonable or appropriate
under the circumstances. In the absence of bad faith by any such Person, the
resolution, action or terms so made, taken or provided by any such Person with
respect to such matter shall not constitute a breach of this Agreement or any
other agreement contemplated herein or a breach of any standard of care or duty
imposed herein or therein or under the Act or any other Law.
(d) For purposes of this Section, the "Oversight Committee" shall be a
committee of the Board of Directors established in accordance with the terms of
this Agreement, which committee shall consist of at least two Directors and a
majority of which shall not be officers, directors or employees of Enron or any
Affiliate of Enron.
SECTION 5.12 FACSIMILE SIGNATURES. In addition to the provisions for
the use of facsimile signatures elsewhere specifically authorized in this
Agreement, facsimile signatures of any Officer of the Company may be used
whenever and as authorized by the Board of Directors.
ARTICLE VI: BOOKS AND RECORDS, INFORMATION AND ACCOUNTS
SECTION 6.1 MAINTENANCE OF BOOKS AND RECORDS. The Company shall keep at
its principal office or such other office designated by the Board of Directors
complete and accurate books and records of the Company, supporting documentation
of the transactions with respect to the conduct of the Company's business and
affairs and minutes of the proceedings of the Board of Directors, the
Shareholders and each committee of the Board of Directors. The records shall
include, but not be limited to, complete and accurate information regarding the
state of the business and financial condition of the Company; a copy of the
Certificate of Formation and this Agreement and all amendments thereto; a
current list of the names and last known business, residence, or mailing
addresses of all Directors and Officers; and the Company's federal, state and
local tax returns for the Company's six most recent tax years.
SECTION 6.2 INFORMATION. In addition to the other rights specifically
set forth in this Agreement and subject to such reasonable standards (including
standards governing what information and documents are to be furnished and at
what time and location and at whose expense) as may be established by the Board
of Directors or any Officer, for a purpose reasonably related to such
Shareholder's interest in the Company, each Shareholder is entitled to all
information to which
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a member of a Delaware limited liability company is entitled to have access
pursuant to the Act under the circumstances and subject to the conditions
therein stated, including the condition that the Board of Directors shall have
the right to keep certain information confidential in accordance with Section
18-305(c) of the Act.
SECTION 6.3 ACCOUNTS. The Board of Directors may establish, or direct
or authorize any Officer to establish, one or more separate bank and investment
accounts and arrangements for the Company, which shall be maintained in the
Company's name with financial institutions and firms that the Board of
Directors, or any Officer so directed or authorized, determines.
ARTICLE VII: DISSOLUTION, WINDING-UP AND TERMINATION
SECTION 7.1 DISSOLUTION.
(a) The Company shall dissolve and its affairs shall be wound up on the
first to occur of the following events (each a "Dissolution Event"):
(i) the consent of the Board of Directors and a Majority
Interest; or
(ii) the last remaining Shareholder's ceasing to be a member of
the Company, unless the Company is continued without
dissolution in accordance with the Act; or
(iii) entry of a decree of judicial dissolution of the Company
under Section 18-802 of the Act.
(b) Except as provided in Section 7.1(a)(ii), the death, dissolution or
Bankruptcy of any Shareholder or the occurrence of any other event that causes a
Shareholder to cease to be a member of the Company shall not constitute a
Dissolution Event (and the business of the Company shall be continued without
dissolution after such event). The bankruptcy (as defined in Section 18-101 of
the Act) of a Shareholder shall not, of itself, cause the Shareholder to cease
to be a member of the Company.
SECTION 7.2 WINDING-UP AND TERMINATION.
(a) On the occurrence of a Dissolution Event, the Board of Directors
shall select one or more Persons to act as liquidating trustee. The liquidating
trustee shall proceed diligently to wind up the affairs of the Company and make
final distributions as provided herein and in the Act. The
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costs of winding up shall be borne as a Company expense. Until final
distribution, the liquidating trustee shall continue to operate the Company's
properties with all of the power and authority of the Board of Directors.
(b) Any assets of the Company remaining after satisfaction of the
creditors of the Company (whether by payment or reasonable provision for
payment) shall be distributed among the Shareholders pro rata, subject to the
provisions of any Designation.
(c) On completion of such final distribution, the liquidating trustee,
as an authorized person, shall file a Certificate of Cancellation with the
Secretary of State of the State of Delaware, cancel any other filings made
pursuant to Section 2.5, and take such other actions as may be necessary to
terminate the existence of the Company.
ARTICLE VIII: DIVIDENDS; ACQUISITION BY COMPANY OF COMPANY SECURITIES
SECTION 8.1 DIVIDENDS.
(a) The Board of Directors may declare, and the Company may pay,
Dividends either (i) out of surplus or (ii) if there shall be no such surplus,
out of its net profits for the fiscal year in which the Dividend is declared
and/or the preceding fiscal year. If the capital of the Company shall have been
diminished by depreciation in the value of its property, or by losses, or
otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding Company Securities of all classes
having a preference on the distribution of assets, the Directors shall not
declare and pay out of such net profits any Dividends upon any Company
Securities until the deficiency in the amount of capital represented by the
issued and outstanding Company Securities of all classes having a preference on
the distribution of assets shall have been repaired. The Directors may determine
the net profits derived from the exploitation of the Company's wasting assets
(including oil and natural gas reserves) or the net proceeds derived from such
liquidation without taking into consideration the depletion of such assets
resulting from the lapse of time, consumption, liquidation or exploitation of
such assets.
(b) Dividends may be paid in cash, property, or Company Securities. If
a Dividend is to be paid in unissued Company Securities, the Board of Directors
shall, by resolution, direct that there be designated as capital in respect of
such Company Securities an amount that is not less than the aggregate par value
of Company Securities being declared as a Dividend. No such designation of
capital shall be necessary if Company Securities are being distributed pursuant
to a split-up or division of Company Securities rather than as payment of a
Dividend declared payable in Company Securities.
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(c) In order that the Company may determine the Shareholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the Shareholders entitled to exercise any rights in respect of any
change, conversion or exchange of Company Securities, or for the purpose of any
other lawful action, the Board of Directors may fix a Record Date, which Record
Date shall not precede the date upon which the resolution fixing the Record Date
is adopted, and which Record Date shall be not more than 60 days prior to such
action. If no Record Date is fixed, the Record Date for determining Shareholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
(d) Notwithstanding anything in this Agreement to the contrary, the
Company, and the Board of Directors on behalf of the Company, may not declare
and pay Dividends to the extent that the payment of such Dividends violates
Section 18-607 of the Act or other applicable Law.
SECTION 8.2 REDEMPTION OF COMPANY SECURITIES.
(a) Unless otherwise provided in this Agreement or as otherwise
provided with respect to a class or series of Company Securities in any
Designation creating such class or series, the Board of Directors may cause the
Company to purchase, redeem or otherwise acquire Company Securities; provided
that the Company may not:
(i) purchase or redeem Company Securities for cash or other
property when the capital of the Company is impaired or when such
purchase or redemption would cause any impairment of the capital of the
Company, except that the Company may purchase or redeem out of capital
any Company Securities that are entitled upon any distribution of the
Company's assets, whether by Dividend or in liquidation, to a
preference over another class or series of stock, or, if no Shares
entitled to such a preference are Outstanding, any Company Securities
if such Company Securities will be retired upon their acquisition and
the capital of the Company will be reduced accordingly;
(ii) purchase, for more than the price at which they may be
redeemed, any Company Securities that are redeemable at the option of
the Company; or
(iii) redeem any Company Securities unless their redemption
would be authorized under the GCLD if the Company were a Delaware
corporation, and then only in accordance with the provisions thereof.
(b) Shares of any class of Company Securities that are converted into
other securities or property, redeemed, purchased or otherwise acquired by the
Company or any wholly-owned
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subsidiary of the Company, shall resume the status of authorized and unissued
Shares of such class and, in the case of Preferred Shares, undesignated as to
series, and shall no longer be Outstanding. The Company shall not vote any
Company Securities held by it, nor shall such Company Securities be counted in
determining a quorum.
ARTICLE IX: AMENDMENT OF AGREEMENT; SHAREHOLDER MEETINGS; RECORD DATE
SECTION 9.1 AMENDMENT PROCEDURES. Except as provided in Section 4.4
(with respect to the adoption or termination of a Designation) and Section 9.3,
all amendments to this Agreement shall be made in accordance with the following
requirements. A proposed amendment shall be effective upon its approval by at
least a Majority Interest unless a greater or different percentage is required
under this Agreement. Each proposed amendment that requires the approval of the
holders of a specified percentage of Company Securities shall be set forth in a
writing that contains the text of the proposed amendment. If such an amendment
is proposed, the Board of Directors shall seek the written approval of the
holders of the requisite percentage of Company Securities, call a meeting of the
Shareholders to consider and vote on such proposed amendment or direct that the
proposed amendment be considered and voted on at the next annual meeting of
Shareholders. The Board of Directors shall notify all Record Holders upon final
adoption of any such proposed amendments that are adopted other than at a duly
called meeting of Shareholders at which a quorum is present in person or by
proxy.
SECTION 9.2 AMENDMENT REQUIREMENTS.
(a) Notwithstanding the provisions of Section 9.1, no provision of this
Agreement or any Designation that establishes a specified percentage of Company
Securities, the approval of the holders of which is required to take any action,
shall be amended, altered, changed, repealed or rescinded in any respect that
would have the effect of reducing such voting requirements unless such amendment
is approved by the written consent or the affirmative vote of Shareholders whose
aggregate Company Securities constitute not less than the voting requirement
sought to be reduced.
(b) Notwithstanding the provisions of Section 9.1, no amendment to this
Agreement may enlarge the obligations of any Shareholder without its consent.
(c) Except as otherwise provided in this Agreement or as otherwise
provided with respect to a series of Preferred Shares in any Designation
creating such series, any amendment to this Agreement that would increase or
decrease the aggregate number of authorized Shares of any class of Company
Securities, increase or decrease the par value of the Shares of any class of
Company Securities, or alter or change the powers, preferences, or special
rights of any class or series of
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Company Securities so as to affect them adversely must be approved by the Record
Holders of not less than a majority of the Company Securities of the class or
series affected; provided, however, that any increase in the number of
authorized Common Shares shall not be deemed or construed to have such an
adverse effect on any series of Preferred Shares, and provided further that this
provision shall not limit the authority of the Board of Directors to designate
and issue series of Preferred Shares pursuant to Section 4.4.
SECTION 9.3 SHAREHOLDER MEETINGS.
(a) Except as otherwise provided in this Agreement, all acts of
Shareholders to be taken hereunder shall be taken in the manner provided in this
Article IX. An annual meeting of the Shareholders for the transaction of such
business as may properly come before the meeting shall be held at such time and
place as the Board of Directors shall specify in the notice of the meeting,
which date shall be within thirteen (13) months subsequent to the last annual
meeting of shareholders and which notice shall be delivered to each Shareholder
entitled to vote at such meeting at least 10 and not more than 60 days prior to
such meeting.
(b) A failure to hold the annual meeting at the designated time or to
elect a sufficient number of Directors to conduct the business of the Company
shall not affect otherwise valid acts of the Company or work a forfeiture or
dissolution of the Company. If the annual meeting for election of Directors is
not held on the date designated therefor or action by written consent to elect
Directors in lieu of an annual meeting has not been taken, the Directors shall
cause the meeting to be held as soon as is convenient. If there be a failure to
hold the annual meeting or to take action by written consent to elect Directors
in lieu of an annual meeting for a period of 30 days after the date designated
for the annual meeting, or if no date has been designated, for a period of 13
months after the latest to occur of the organization of the corporation, its
last annual meeting or the last action by written consent to elect Directors in
lieu of an annual meeting, the Court of Chancery may summarily order a meeting
to be held upon the application of any Shareholder or Director. The Company
Securities represented at such meeting, either in person or by proxy, and
entitled to vote thereat, shall constitute a quorum for the purpose of such
meeting, notwithstanding any other provision of this Agreement to the contrary.
The Court of Chancery may issue such orders as may be appropriate, including,
without limitation, orders designating the time and place of such meeting, the
Record Date for determination of Shareholders entitled to vote, and the form of
notice of such meeting.
(c) Special meetings of the Shareholders may be called by the Board of
Directors, the Chairman of the Board or by Shareholders owning at least
thirty-five percent (35%) of the voting power of the Company Securities of the
class or classes for which a meeting is proposed. Shareholders shall call a
meeting by delivering to the Board of Directors one or more requests in
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writing stating that the signing Shareholders wish to call a meeting and
indicating the general or specific purposes for which the meeting is to be
called. Within 60 days after receipt of such a call from Shareholders or within
such greater time as may be reasonably necessary for the Company to comply with
any statutes, rules, regulations, listing agreements or similar requirements
governing the holding of a meeting or the solicitation of proxies for use at
such meeting, the Board of Directors shall send a notice of the meeting to the
Shareholders owning Company Securities of the class or classes for which a
meeting is being called either directly or indirectly through the Transfer
Agent. Such meeting shall be held at a time and place determined by the Board of
Directors on a date not more than 60 nor less than 10 days after the mailing of
notice of the meeting.
SECTION 9.4 NOTICE OF SHAREHOLDER MEETINGS. Notice of a meeting called
pursuant to Section 9.3 shall be given to the Record Holders in writing by mail
or other means of written communication in accordance with Section 11.3. The
notice shall be deemed to have been given at the time when deposited in the
mail, postage prepaid, directed to the Shareholder at his address as it appears
on the records of the Company or sent by other means of written communication.
SECTION 9.5 RECORD DATE.
(a) For purposes of determining the Shareholders entitled to notice of
or to vote at a meeting of the Shareholders or to give approvals without a
meeting as provided in Section 9.11, the Board of Directors may set a record
date ("Record Date"), which shall not be less than 10 nor more than 60 days
before the date of the meeting. If no Record Date is fixed by the Board of
Directors, the Record Date for determining Shareholders entitled to notice of or
to vote at a meeting of Shareholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held. A determination of Shareholders of record entitled to notice of or to vote
at a meeting of Shareholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new Record Date for the
adjourned meeting.
(b) In order that the Company may determine the Shareholders entitled
to consent to action in writing without a meeting, the Board of Directors may
fix a Record Date, which Record Date shall not precede the date upon which the
resolution fixing the Record Date is adopted by the Board of Directors, and
which date shall not be more than 10 days after the date upon which the
resolution fixing the Record Date is adopted by the Board of Directors. If no
Record Date has been fixed by the Board of Directors, the Record Date for
determining Shareholders entitled to consent to action in writing without a
meeting, when no prior action by the Board of Directors is required, shall be
the first date on which a signed written consent setting forth the action taken
or proposed to be taken is delivered to the Company by delivery to its
registered office in Delaware, its principal
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place of business or an Officer or agent of the Company having custody of the
book in which proceedings of meetings of Shareholders are recorded. Delivery
made to the Company's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no Record Date has been fixed by
the Board of Directors and prior action by the Board of Directors is required,
the Record Date for determining Shareholders entitled to consent to action in
writing without a meeting shall be at the close of business on the day on which
the Board of Directors adopts the resolution taking such prior action.
SECTION 9.6 SHAREHOLDER LISTS. A complete list of Shareholders entitled
to vote at any meeting of Shareholders, arranged in alphabetical order for each
class of Company Securities and showing the address of each such Shareholder and
the number of Shares registered in the name of such Shareholder, shall be open
to the examination of any Shareholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The Shareholder list
shall also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any Shareholder who is present. Upon
the wilful neglect or refusal of the Directors to produce such a list at any
meeting for the election of Directors, they shall be ineligible for election to
any office at such meeting.
SECTION 9.7 ADJOURNMENT. When a meeting is adjourned to another time or
place, notice need not be given of the adjourned meeting and a new Record Date
need not be fixed, if the time and place thereof are announced at the meeting at
which the adjournment is taken, unless such adjournment shall be for more than
30 days. At the adjourned meeting, the Company may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than 30 days or if a new Record Date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given in accordance with this Article
IX.
SECTION 9.8 WAIVER OF NOTICE; APPROVAL OF MEETING; APPROVAL OF MINUTES.
The transactions of any meeting of Shareholders, however called and noticed, and
whenever held, shall be as valid as if had at a meeting duly held after regular
call and notice, if a quorum is present either in person or by proxy, and if,
either before or after the meeting, Shareholders representing such quorum who
were present in person or by proxy and entitled to vote, sign a written waiver
of notice or an approval of the holding of the meeting or an approval of the
minutes thereof. All waivers and approvals shall be filed with the Company
records or made a part of the minutes of the meeting. Attendance of a
Shareholder at a meeting shall constitute a waiver of notice of the meeting,
except when the Shareholder does not approve, at the beginning of the meeting,
of the transaction of any business because the meeting is not lawfully called or
convened; and except that attendance at a
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meeting is not a waiver of any right to disapprove the consideration of matters
required to be included in the notice of the meeting, but not so included, if
the disapproval is expressly made at the meeting.
SECTION 9.9 QUORUM; REQUIRED VOTE FOR SHAREHOLDER ACTION. The holders
of a majority of the voting power of the Company Securities of the class or
classes entitled to vote at a meeting of Shareholders, present in person or
represented by proxy, shall constitute a quorum at a meeting of Shareholders of
such class or classes unless (a) the provisions of this Agreement or the Act
require (or the GCLD would require, if the Company were a Delaware corporation)
that any act of the Shareholders to be taken at such meeting be approved by
holders of a different amount of Company Securities or (b) the Board of
Directors designates a different amount (which amount shall not be less than
one-third of the Shares entitled to vote at the meeting), in which case the
quorum with respect to such act shall be such different amount. In all matters
other than the election of directors, the vote of Shareholders holding Company
Securities in the aggregate possessing a majority of the voting power of the
Company Securities entitled to vote and present in person or represented by
proxy at such meeting shall be deemed to constitute the act of the Shareholders,
unless (i) the provisions of this Agreement, applicable Law or the Act require
(or the GCLD would require, if the Company were a Delaware corporation) that
such act be approved by holders of a different amount of Company Securities or
(ii) the Board of Directors designates that such act need be approved by holders
of a different amount of Company Securities, in which case the act of the
Shareholders holding Company Securities that in the aggregate represent at least
such different amount shall be required. The Shareholders present at a duly
called or held meeting at which a quorum is present may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
Shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by the required percentage of Company Securities
specified in this Agreement. In the absence of a quorum, any meeting of
Shareholders may be adjourned from time to time by the affirmative vote of a
majority of the Company Securities represented either in Person or by proxy.
SECTION 9.10 CONDUCT OF MEETING. The Board of Directors shall have full
power and authority concerning the manner of conducting any meeting of the
Shareholders or solicitation of approvals in writing, including the
determination of Persons entitled to vote, the existence of a quorum, the
satisfaction of the requirements of this Article IX, the conduct of voting, the
validity and effect of any proxies and the determination of any controversies,
votes or challenges arising in connection with or during the meeting or voting.
The Board of Directors shall designate a Person to serve as chairman of any
meeting and shall further designate a Person to take the minutes of any meeting.
All minutes shall be kept with the records of the Company. The Board of
Directors may make such other regulations consistent with applicable Law and
this Agreement as it may deem advisable concerning the conduct of any meeting of
the Shareholders or solicitation of approvals in
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writing, including regulations in regard to the appointment of proxies, the
appointment and duties of inspectors of votes and approvals, the submission and
examination of proxies and other evidence of the right to vote and the
revocation of approvals in writing.
SECTION 9.11 ACTION WITHOUT A MEETING.
(a) Any action permitted or required to be taken at a meeting of
Shareholders may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the Record Holders of Outstanding Company Securities having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all Company Securities entitled to
vote thereon were present and voted and shall be delivered to the Company by
delivery to its registered office in Delaware, its principal place of business,
or an Officer or agent of the Company having custody of the book in which
proceedings of meetings of Shareholders are recorded. Delivery made to the
Company's registered office shall be by hand or by certified or registered mail,
return receipt requested.
(b) Every written consent shall bear the date of signature of each
Shareholder who signs the consent, and no written consent shall be effective to
take the action referred to therein unless, within sixty (60) days of the
earliest dated consent delivered in the manner required by this Section to the
Company, written consents signed by a sufficient number of Shareholders to take
action are delivered to the Company by delivery to its registered office in
Delaware, its principal place of business, or an Officer or agent of the Company
having custody of the book in which proceedings of meetings of Shareholders are
recorded. Delivery made to the Company's registered office shall be by hand or
by certified or registered mail, return receipt requested.
(c) Prompt notice of the taking of action without a meeting by less
than a unanimous written consent shall be given by the Secretary to those
Shareholders who have not consented in writing.
SECTION 9.12 VOTING AND OTHER RIGHTS.
(a) Only those Record Holders of Company Securities on the Record Date
set pursuant to Section 9.5 (and also subject to the limitations contained in
the definition of Outstanding) shall be entitled to notice of, and to vote at, a
meeting of Shareholders or to act with respect to matters as to which the
holders of the Company Securities have the right to vote or to act, including
the election of Directors. All references in this Agreement to votes of, or
other acts that may be taken by, the
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Company Securities shall be deemed to be references to the votes or acts of the
Record Holders of such Company Securities.
(b) With respect to Company Securities that are held for a Person's
account by another Person (such as a broker, dealer, bank, trust company or
clearing corporation, or an agent of any of the foregoing), in whose name such
Company Securities are registered, such broker, dealer or other agent shall, in
exercising the voting rights in respect of such Company Securities on any
matter, and unless the arrangement between such Persons provides otherwise, vote
such Company Securities in favor of, and at the direction of, the Person who is
the beneficial owner, and the Company shall be entitled to assume it is so
acting without further inquiry.
(c) With respect to any Shareholder action, broker non-votes shall not
be counted as votes for or against any matter unless otherwise required by Law.
ARTICLE X: MERGER OR SALE OF ASSETS
SECTION 10.1 AUTHORITY. The Company may merge or consolidate with, or
sell all or substantially all of its assets to, one or more limited liability
companies, corporations, business trusts or associations, real estate investment
trusts, common law trusts or unincorporated businesses, including a general
partnership or limited partnership, formed under the laws of the State of
Delaware or any other jurisdiction, pursuant to a written agreement of merger,
consolidation or sale, as applicable ("Transaction Agreement"), in accordance
with this Article X.
SECTION 10.2 PROCEDURE FOR MERGER, CONSOLIDATION OR SALE. The merger or
consolidation of the Company or the sale of all or substantially all of the
Company's assets pursuant to this Article X requires the prior approval of the
Board of Directors. If the Board of Directors shall determine, in the exercise
of its sole discretion, to consent to such transaction, the Board of Directors
shall approve the Transaction Agreement, which shall set forth:
(a) The names and jurisdictions of formation or organization of each of
the business entities to be parties to the proposed transaction;
(b) The name and jurisdiction of formation or organization of the
business entity that is to survive the proposed merger or consolidation or
acquire substantially all of the Company's assets (the "Surviving Business
Entity");
(c) The terms and conditions of the proposed transaction including the
consideration to be received in any sale transaction;
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(d) With respect to a proposed merger or consolidation, the manner and
basis of exchanging or converting the equity securities of each constituent
business entity for, or into, cash, property, interests, rights, securities or
obligations of the Surviving Business Entity; and (i) if any interests, rights,
securities or obligations of any constituent business entity are not to be
exchanged or converted solely for, or into, cash, property, interests, rights,
securities or obligations of the Surviving Business Entity, the cash, property,
interests, rights, securities or obligations of any general or limited
partnership, limited liability, company, corporation, trust or other entity
(other than the Surviving Business Entity) which the holders of such interests,
rights, securities or obligations of the constituent business entity are to
receive in exchange for, or upon conversion of, their interests, rights,
securities or obligations and (ii) in the case of securities represented by
certificates, upon the surrender of such certificates, which cash, property,
interests, rights, securities or obligations of the Surviving Business Entity or
any general or limited partnership, limited liability company, corporation,
trust or other entity (other than the Surviving Business Entity), or evidences
thereof, are to be delivered;
(e) With respect to a merger or consolidation, a statement of any
changes in the constituent documents or the adoption of new constituent
documents (the articles or certificate of incorporation, articles of trust,
declaration of trust, certificate or agreement of limited partnership or limited
liability company or other similar charter or governing document) of the
Surviving Business Entity to be effected by such merger or consolidation, or if
no such amendments or changes are desired, a statement that the constituent
documents of the Surviving Business shall be its constituent documents;
(f) The effective time of the merger or consolidation, which may be the
date of the filing of the certificate of merger pursuant to Section 10.4 or a
later date specified in or determinable in accordance with the Transaction
Agreement (provided, that if the effective time of the merger or consolidation
is to be later than the date of the filing of the certificate of merger or
consolidation, the effective time shall be fixed no later than the time of the
filing of the certificate of merger or consolidation and stated therein); and
(g) Such other provisions with respect to the proposed transaction as
are deemed necessary or appropriate by the Board of Directors.
SECTION 10.3 APPROVAL BY SHAREHOLDERS OF MERGER, CONSOLIDATION OR SALE.
(a) The Board of Directors, upon its approval of the Transaction
Agreement, shall direct that the Transaction Agreement be submitted to a vote of
Shareholders whether at a meeting or by written consent, in either case in
accordance with the requirements of Article IX. A copy or a
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summary of the Transaction Agreement shall be included in or enclosed with the
notice of a meeting or the written consent.
(b) The Transaction Agreement shall be adopted upon receiving the
affirmative vote or consent of at least a Majority Interest unless the
Transaction Agreement contains any provision which, if contained in an amendment
to this Agreement, the provisions of this Agreement or the Act would require the
vote or consent of a greater percentage of the Company Securities or of any
class thereof, in which case such greater percentage vote or consent shall be
required for adoption of the Transaction Agreement.
(c) After such adoption by vote or consent of the Shareholders and at
any time prior to the filing of the certificate of merger or consolidation
pursuant to Section 10.4, the proposed transaction may be abandoned by the Board
of Directors pursuant to provisions therefor, if any, set forth in the
Transaction Agreement.
(d) Notwithstanding any other provision of this Agreement, any
Transaction Agreement that would not be required to be submitted to a vote of
stockholders if the Company were a Delaware corporation will only require
adoption by the Shareholders if so provided pursuant to the provisions of such
Transaction Agreement or resolution of the Board of Directors.
SECTION 10.4 CERTIFICATE OF MERGER OR CONSOLIDATION. Upon the required
approval by the Board of Directors and the Shareholders of a Transaction
Agreement relating to a merger or consolidation, a certificate of merger or
consolidation shall be executed and filed with the Secretary of State of the
State of Delaware in conformity with the requirements of the Act.
SECTION 10.5 APPRAISAL RIGHTS. With respect to any Transaction
Agreement requiring Shareholder adoption, Shareholders shall have appraisal
rights in the same manner and to the same extent that such rights would be
available to the holder of stock of a Delaware corporation under the GCLD, and
those rights must be perfected by the same procedures that would be required of
a holder of common stock of a Delaware corporation.
SECTION 10.6 EFFECT OF MERGER OR CONSOLIDATION.
(a) The effect of any merger or consolidation shall be as set forth in
applicable Law.
(b) A merger or consolidation effected pursuant to this Article X shall
not be deemed to result in a transfer or assignment of assets or liabilities
from one entity to another having occurred.
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SECTION 10.7 LIMITATIONS ON TRANSACTIONS WITH INTERESTED SHAREHOLDERS.
(a) Notwithstanding any other provision of this Agreement, the Company
shall not engage in any Business Combination with any Interested Shareholder for
a period of 3 years following the time that such Shareholder became an
Interested Shareholder, unless:
(1) Prior to such time the Board of Directors of the Company
approved either the Business Combination or the transaction which
resulted in the Shareholder becoming an Interested Shareholder;
(2) Upon consummation of the transaction which resulted in the
Shareholder becoming an Interested Shareholder, the Interested
Shareholder owned at least 85% of the voting Shares of the Company
outstanding at the time the transaction commenced, excluding for
purposes of determining the number of Shares outstanding those Shares
owned (i) by Persons who are Directors and also Officers and (ii)
employee stock plans in which employee participants do not have the
right to determine confidentially whether Shares held subject to the
plan will be tendered in a tender or exchange offer; or
(3) At or subsequent to such time the Business Combination is
approved by the Board of Directors and authorized at an annual or
special meeting of Shareholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting Company
Securities not owned by the Interested Shareholder.
(b) The restrictions contained in this section shall not apply if:
(1) The Company does not have a class of voting stock that is:
(i) Listed on a national securities exchange; (ii) authorized for
quotation on the NASDAQ Stock Market; or (iii) held of record by more
than 2,000 Shareholders, unless any of the foregoing results from
action taken, directly or indirectly, by an Interested Shareholder or
from a transaction in which a Person becomes an Interested Shareholder;
(2) A Shareholder becomes an Interested Shareholder inadvertently
and (i) as soon as practicable divests itself of ownership of
sufficient Shares so that the Shareholder ceases to be an Interested
Shareholder; and (ii) would not, at any time within the 3-year period
immediately prior to a Business Combination between the Company and
such Shareholder, have been an Interested Shareholder but for the
inadvertent acquisition of ownership;
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(3) The Business Combination is proposed prior to the consummation
or abandonment of and subsequent to the earlier of the public
announcement or the notice required hereunder of a proposed transaction
which (i) constitutes one of the transactions described in the 2nd
sentence of this paragraph; (ii) is with or by a Person who either was
not an Interested Shareholder during the previous 3 years or who became
an Interested Shareholder with the approval of the Company's Board of
Directors or during the period described in paragraph (4) of this
subsection (b); and (iii) is approved or not opposed by a majority of
the members of the Board of Directors then in office (but not less than
1) who were directors prior to any Person becoming an Interested
Shareholder during the previous 3 years or were recommended for
election or elected to succeed such directors by a majority of such
directors. The proposed transactions referred to in the preceding
sentence are limited to (x) a merger or consolidation of the Company
(except for a merger in respect of which no vote of the Shareholders of
the Company is required); (y) a sale, lease, exchange, mortgage,
pledge, transfer or other disposition (in 1 transaction or a series of
transactions), whether as part of a dissolution or otherwise, of assets
of the Company or of any direct or indirect majority-owned subsidiary
of the Company (other than to any direct or indirect wholly-owned
subsidiary or to the Company) having an aggregate market value equal to
50% or more of either that aggregate market value of all of the assets
of the Company determined on a consolidated basis or the aggregate
market value of all the outstanding stock of the Company; or (z) a
proposed tender or exchange offer for 50% or more of the outstanding
voting stock of the Company. The Company shall give not less than 20
days' notice to all Interested Shareholders prior to the consummation
of any of the transactions described in clause (x) or (y) of the 2nd
sentence of this paragraph; or
(4) The Business Combination is with an Interested Shareholder who
became an Interested Shareholder at a time when the restrictions
contained in this section did not apply by reason of paragraph (1) of
this subsection (b). Specifically, the restrictions contained in this
section shall not apply to any Business Combination among the Company
or any of its subsidiaries, on one hand, and Enron or any of its
Affiliates on the other.
(c) As used in this Section 10.7 only, the term:
(1) "Affiliate" means a Person that directly, or indirectly through
1 or more intermediaries, Controls, or is Controlled by, or is under
common Control with, another Person.
(2) "Associate," when used to indicate a relationship with any
Person, means: (i) Any corporation, partnership, unincorporated
association or other entity of which such Person is a director, officer
or partner or is, directly or indirectly, the owner of 20% or more
45
<PAGE> 50
of any class of voting stock; (ii) any trust or other estate in which
such Person has at least a 20% beneficial interest or as to which such
Person serves as trustee or in a similar fiduciary capacity; and (iii)
any relative or spouse of such Person, or any relative of such spouse,
who has the same residence as such Person.
(3) "Business Combination," when used in reference to the Company
and any Interested Shareholder of the Company, means:
(i) Any merger or consolidation of the Company or any direct
or indirect majority-owned subsidiary of the Company with (A) the
Interested Shareholder, or (B) with any other corporation,
partnership, unincorporated association or other entity if the
merger or consolidation is caused by the Interested Shareholder and
as a result of such merger or consolidation subsection (a) of this
Section 10.7 is not applicable to the surviving entity;
(ii) Any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in 1 transaction or a series of transactions),
except proportionately as a Shareholder of the Company, to or with
the Interested Shareholder, whether as part of a dissolution or
otherwise, of assets of the Company or of any direct or indirect
majority-owned subsidiary of the Company which assets have an
aggregate market value equal to 10% or more of either the aggregate
market value of all the assets of the Company determined on a
consolidated basis or the aggregate market value of all the
outstanding Company Securities;
(iii) Any transaction which results in the issuance or
transfer by the Company or by any direct or indirect majority-owned
subsidiary of the Company of any Company Securities or stock of
such subsidiary to the Interested Shareholder, except: (A) Pursuant
to the exercise, exchange or conversion of securities exercisable
for, exchangeable for or convertible into Company Securities or
stock of such subsidiary which securities were outstanding prior to
the time that the Interested Shareholder became such; (B) pursuant
to a merger of the Company with or into a direct or indirect
wholly-owned subsidiary of the Company (to the extent that such
merger would be permitted of the Company pursuant to Section 251(g)
of the GCLD if the Company were a Delaware corporation); (C)
pursuant to a dividend or distribution paid or made, or the
exercise, exchange or conversion of securities exercisable for,
exchangeable for or convertible into Company Securities or stock of
such subsidiary, which security is distributed, pro rata, to all
holders of a class or series of Company Securities subsequent to
the time the Interested Shareholder became such; (D) pursuant to an
exchange offer by the Company to purchase any
46
<PAGE> 51
Company Securities made on the same terms to all holders of such
Company Securities; or (E) any issuance or transfer of Company
Securities by the Company; provided however, that in no case under
items (C)-(E) of this subparagraph shall there be an increase in
the Interested Shareholder's proportionate share of any class or
series of voting Company Securities.
(iv) Any transaction involving the Company or any direct or
indirect majority-owned subsidiary of the Company which has the
effect, directly or indirectly, of increasing the proportionate
share of any class or series of Company Securities, or securities
convertible into any class or series of Company Securities, or
stock of any such subsidiary, which is owned by the Interested
Shareholder, except as a result of immaterial changes due to
fractional share adjustments or as a result of any purchase or
redemption of any Company Securities or stock of such subsidiary
not caused, directly or indirectly, by the Interested Shareholder;
or
(v) Any receipt by the Interested Shareholder of the benefit,
directly or indirectly (except proportionately as a Shareholder of
the Company), of any loans, advances, guarantees, pledges or other
financial benefits (other than those expressly permitted in
subparagraphs (i)-(iv) of this paragraph) provided by or through
the Company or any direct or indirect majority-owned subsidiary.
(4) "Control," including the terms "Controlling," "Controlled
by" and "under common Control with," means the possession, directly or
indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of
voting stock, by contract or otherwise. A Person who is the owner of
20% or more of the outstanding voting stock of any corporation,
partnership, unincorporated association or other entity shall be
presumed to have Control of such entity, in the absence of proof by a
preponderance of the evidence to the contrary. Notwithstanding the
foregoing, a presumption of Control shall not apply where such Person
holds voting securities, in good faith and not for the purpose of
circumventing this section, as an agent, bank, broker, nominee,
custodian or trustee for 1 or more owners who do not individually or as
a group have Control of such entity.
(5) "Interested Shareholder" means any Person (other than the
Company and any direct or indirect majority-owned subsidiary of the
Company) that (i) is the owner of 15% or more of the outstanding voting
Company Securities, or (ii) is an Affiliate or Associate of the Company
and was the owner of 15% or more of the outstanding voting Company
Securities at any time within the 3-year period immediately prior to
the date on which it is sought to be determined whether such Person is
an Interested Shareholder; and the Affiliates
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<PAGE> 52
and Associates of such Person; provided, however, that the term
"Interested Shareholder" shall not include any Person whose ownership
of Shares in excess of the 15% limitation set forth herein is the
result of action taken solely by the Company; provided that such Person
shall be an Interested Shareholder if thereafter such Person acquires
additional Shares of voting Company Securities, except as a result of
further action not caused, directly or indirectly, by such Person. For
the purpose of determining whether a Person is an Interested
Shareholder, the voting Company Securities deemed to be outstanding
shall include Shares deemed to be owned by the Person through
application of paragraph (8) of this subsection but shall not include
any other unissued Company Securities which may be issuable pursuant to
any agreement, arrangement or understanding, or upon exercise of
conversion rights, warrants or options, or otherwise.
(6) "Person" means any individual, corporation, limited liability
company, trust, partnership, unincorporated association or other
entity.
(7) "Stock" means, with respect to any corporation, capital stock
and, with respect to any other entity, any equity interest.
(8) "Voting stock" means, with respect to any corporation, stock of
any class or series entitled to vote generally in the election of
directors and, with respect to any entity that is not a corporation,
any equity interest entitled to vote generally in the election of the
governing body of such entity. With respect to the Company, "voting
stock" includes Common Shares and any Preferred Shares entitled to vote
generally in the election of Directors according to the Designation
applicable to such Preferred Shares.
(9) "Owner," including the terms "own" and "owned," when used with
respect to Company Securities or any stock, means a Person that
individually or with or through any of its Affiliate or Associates:
(i) Beneficially owns such Company Securities or stock,
directly or indirectly; or
(ii) Has (A) the right to acquire such Company Securities or
stock (whether such right is exercisable immediately or only after
the passage of time) pursuant to any agreement, arrangement or
understanding, or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise; provided, however, that
a Person shall not be deemed the owner of Company Securities or
stock tendered pursuant to a tender or exchange offer made by such
Person or any of such Person's Affiliates or Associates until such
tendered Company Securities or
48
<PAGE> 53
stock is accepted for purchase or exchange; or (B) the right to vote
such Company Securities or stock pursuant to any agreement,
arrangement or understanding; provided, however, that a Person shall
not be deemed the owner of any Company Securities or stock because
of such Person's right to vote such Company Securities or stock if
the agreement, arrangement or understanding to vote such Company
Securities or stock arises solely from a revocable proxy or consent
given in response to a proxy or consent solicitation made to 10 or
more Persons; or
(iii) Has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting (except voting pursuant to a
revocable proxy or consent as described in item (B) of subparagraph
(ii) of this paragraph), or disposing of such Company Securities or
stock with any other Person that beneficially owns, or whose
Affiliates or Associates beneficially own, directly or indirectly,
such Company Securities or stock.
(d) Notwithstanding any other provision of this Agreement, no vote of
Shareholders required by this Section 10.7 shall require a greater vote of
Shareholders than that specified in this Section 10.7.
(e) The Company and the Shareholders acknowledge that the Court of
Chancery is vested with exclusive jurisdiction to hear and determine all matters
with respect to this Section 10.7.
ARTICLE XI: GENERAL PROVISIONS
SECTION 11.1 FISCAL YEAR. The fiscal year of the Company shall be the
calendar year unless otherwise designated by the Board of Directors.
SECTION 11.2 OFFSET. Whenever the Company is to pay any sum to any
Shareholder, any amounts that Shareholder owes the Company may be deducted from
that sum before payment.
SECTION 11.3 NOTICES. Except as expressly set forth to the contrary in
this Agreement, all notices, requests or consents provided for or permitted to
be given under this Agreement must be in writing and must be delivered to the
recipient in person, by courier or mail or by facsimile, telegram, telex,
cablegram or similar transmission; and a notice, request or consent given under
this Agreement is effective on receipt by the Person to receive it. Whenever any
notice is required to be given by Law or this Agreement, a written waiver
thereof, signed by the Person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to the giving of such notice.
49
<PAGE> 54
SECTION 11.4 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the Shareholders and their Affiliates relating to the Company and
supersedes all prior contracts or agreements with respect to the Company,
whether oral or written; provided that this Section shall not affect the
validity of any Shareholders' Agreement.
SECTION 11.5 EFFECT OF WAIVER OR CONSENT. A waiver or consent, express
or implied, to or of any breach or default by any Person in the performance by
that Person of its obligations with respect to the Company is not a consent to
or waiver of any other breach or default in the performance by that Person of
the same or any other obligations of that Person with respect to the Company.
Failure on the part of a Person to complain of any act of any Person or to
declare any Person in default with respect to the Company, irrespective of how
long that failure continues, does not constitute a waiver by that Person of its
rights with respect to that default until the applicable statute of limitations
period has run.
SECTION 11.6 BINDING EFFECT. This Agreement is binding on and shall
inure to the benefit of the Shareholders and their respective heirs, legal
representatives, successors and assigns.
SECTION 11.7 GOVERNING LAW; SEVERABILITY. THIS AGREEMENT IS GOVERNED BY
AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE,
EXCLUDING ANY CONFLICT OF LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE GOVERNANCE
OR THE CONSTRUCTION OF THIS AGREEMENT TO THE LAWS OF ANOTHER JURISDICTION. If
any provision of this Agreement or the application thereof to any Person or
circumstance is held invalid or unenforceable to any extent, the remainder of
this Agreement and the application of that provision to other Persons or
circumstances is not affected thereby and that provision shall be enforced to
the greatest extent permitted by Law.
SECTION 11.8 FURTHER ASSURANCES. In connection with this Agreement and
the transactions contemplated hereby, each Shareholder shall execute and deliver
any additional documents and instruments and perform any additional acts that
may be necessary or appropriate to effectuate and perform the provisions of this
Agreement and those transactions.
SECTION 11.9 WAIVER OF CERTAIN RIGHTS. To the extent permitted by the
Act and other Law, each Shareholder irrevocably waives any right it may have to
maintain any action for dissolution of the Company or for partition of the
property of the Company.
50
<PAGE> 55
IN WITNESS WHEREOF, the Organizational Member has executed this
Agreement as of the date first set forth above.
ORGANIZATIONAL MEMBER:
MARINER HOLDINGS, INC.
By: /s/ ROBERT E. HENDERSON
--------------------------------
Robert E. Henderson, President
and Chief Executive Officer
51
<PAGE> 56
ANNEX A
PROVISIONS RELATING TO THE MANAGEMENT OF THE
BUSINESS AND AFFAIRS OF THE COMPANY
BEFORE AN INITIAL PUBLIC OFFERING
A. Following a merger of Mariner Holdings, Inc. with and into the Company,
the provisions of the Stockholders' Agreement by and among Mariner
Holdings, Inc. and its stockholders, as amended, shall apply to the
Company and its Shareholders mutatis mutandis.
B. The Company shall not take (or permit to be taken in its capacity as a
shareholder or partner or permit any subsidiary of the Company to take)
any of the actions set forth below unless approved by a majority of
Directors present at a meeting at which a quorum is in attendance:
(i) approving any capital or operating budget for any fiscal year;
(ii) making a commitment for any payment, whether as or in
connection with a capital expenditure, asset purchase, investment, rental,
settlement, equity contribution, loan, guaranty or otherwise, other than
specific commitments for projects included in any current capital or
operating budget approved by the Board of Directors, (a) in excess of
$1,500,000, but equal to or less than $3,000,000, per transaction or
contract (or series of related transactions or contracts) unless expressly
approved by a member of the Executive Committee of the Board of Directors
that is not a member of management of the Company, (b) in excess of
$3,000,000, but equal to or less than $5,000,000, per transaction or
contract (or series of related transactions or contracts) unless expressly
approved by the Executive Committee of the Board of Directors, and (c) in
excess of $5,000,000 per transaction or contract (or series of related
transactions or contracts); provided, that, in the event an Executive
Committee is not established, a director not a member of management of the
Company may provide the approvals contemplated above that may be granted
by the Executive Committee or a member thereof;
(iii) borrowing any amount (other than pursuant to a credit facility
or loan arrangement previously approved by the Board of Directors) (a) in
excess of $3,000,000, but equal to or less than $5,000,000, per
transaction or contract (or series of related transactions or contracts)
unless expressly approved by a member of the Executive Committee of the
Board of Directors that is not a member of management of the Company, (b)
in excess of $5,000,000, but equal to or less than $7,500,000, per
transaction or contract (or series of related transactions or contracts)
unless expressly approved by the Executive Committee of
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<PAGE> 57
the Board of Directors, and (c) in excess of $7,500,000 per transaction or
contract (or series of related transactions or contracts); provided, that,
if an Executive Committee is not established, a director not a member of
management of the Company may provide the approvals contemplated above
that may be granted by the Executive Committee or a member thereof;
(iv) disposing of or otherwise transferring any capital asset (or
related capital assets) whose fair market value or book value is (a) in
excess of $1,500,000, but equal to or less than $3,000,000, unless
expressly approved by a member of the Executive Committee of the Board of
Directors that is not a member of management of the Company, (b) in excess
of $3,000,000, but equal to or less than $5,000,000, unless expressly
approved by the Executive Committee of the Board of Directors, and (c) in
excess of $5,000,000; provided, that, if an Executive Committee is not
established, a director not a member of management of the Company may
provide the approvals contemplated above that may be granted by the
Executive Committee or a member thereof;
(v) entering into any agreement, contract or transaction (or series
of contracts or transactions), not related solely to the marketing of
hydrocarbons in the ordinary course of business, pursuant to which the
Company or any subsidiary is to receive an amount that is (a) in excess of
$1,750,000, but equal to or less than $3,500,000, per transaction or
contract (or a series of related transactions or contracts) unless
expressly approved by a member of the Executive Committee of the Board of
Directors that is not a member of management of the Company, (b) in excess
of $3,500,000, but equal to or less than $5,000,000, per transaction or
contract (or series of related transactions or contracts) unless expressly
approved by the Executive Committee of the Board of Directors, and (c) in
excess of $5,000,000 per transaction or contract (or series of related
transactions or contracts); provided, that, in the event an Executive
Committee is not established, a director not a member of management of the
Company may provide the approvals contemplated above that may be granted
by the Executive Committee or a member thereof;
(vi) entering into any agreement, contract or transaction (or series
of contracts or transactions) related to the marketing of hydrocarbons in
the ordinary course of business pursuant to which the Company or any
subsidiary is to receive an amount that is (i) in excess of $1,750,000 but
equal to or less than $5,000,000, per transaction or contract (or a series
of related transactions or contracts) unless expressly approved by a
member of the Executive Committee of the Board of Directors that is not a
member of management of the Company, (ii) in excess of $5,000,000, but
equal to or less than $15,000,000, per transaction or contract (or series
of related transactions or contracts) unless expressly approved by the
Executive
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<PAGE> 58
committee of the Board of Directors, and (iii) in excess of $15,000,000
per transaction or contract (or series of related transactions or
contracts); provided, that in the event an Executive Committee is not
established, a director not a member of management of the Company may
provide the approvals contemplated above that may be granted by the
Executive Committee or a member thereof;
(vii) entering into any agreement (a) pursuant to which the Company
or any subsidiary agrees not to enter into any negotiations, arrangements
or agreements relating to a consolidation or merger or, the sale or
disposition of its stock that would involve a change in control or a sale
of all or substantially all of its assets, (b) that binds or purports to
bind any Person affiliated with the Company other than the Company's
subsidiaries or (c) that restricts the Company or any of its subsidiaries,
directly or indirectly, from (1) acquiring or disposing of securities or
assets of any other Person, (2) voting or seeking proxies with respect to
securities of any other Person or (3) taking any other action the effect
of which involves the seeking of control or influence of the management of
any other Person;
(viii) the indemnification of any officer or any other Person except
as specifically provided in this Agreement;
(ix) executing or otherwise entering into any employment agreement,
appointing or removing (with or without cause) any officer or hiring or
firing (with or without cause) any officer or other similarly compensated
person;
(x) setting or amending the compensation level of any director,
officer, consultant or employee, which employee's aggregate annual
compensation from the Company or its affiliates would exceed $130,000;
(xi) making an equity investment in any non-affiliated Person;
(xii) filing any claim or lawsuit against any Person except where
the amount claimed is for less than $250,000 or (b) settling any claim or
lawsuit except where the fair market value of the settlement amount is
less than $250,000;
(xiii) adopting or amending this Agreement;
(xiv) any approval of any financial statements for any fiscal year;
and
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<PAGE> 59
(xv) authorizing any merger (or other sale or disposition of stock
involving a change of control) or sale of all or substantially all of the
assets of the Company or any of its subsidiaries.
C. A quorum of the Board of Directors shall be deemed to be present at any
meeting if (a) a majority of the total number of Directors are present at
the meeting and (b) either (i) at least one Management Director
(comprising Robert E. Henderson, Richard R. Clark and Michael W.
Strickler) is present at the meeting or (ii) all Management Directors
received at least three business days' written notice of the meeting; for
purposes of the foregoing, a notice given by electronic mail or other
electronic communication shall not constitute a "written notice". The vote
of a majority of the Directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors. At every meeting of
any committee of the Board of Directors, a quorum shall be present if (a)
a majority of all the members of the committee are present and (b) if one
or more Management Directors is a member of the committee, either (i) at
least one Management Director who is a member of the committee is present
at the meeting or (ii) each Management Director who is a member of the
committee received at least three business days' written notice of the
meeting; for purposes of the foregoing, a notice given by electronic mail
or other electronic communication shall not constitute a "written notice".
The affirmative vote of a majority of the members present at a meeting at
which there is a quorum shall be necessary for the adoption by it of any
resolution.
A-4
<PAGE> 1
EXHIBIT 10.6
THIRD AMENDMENT
TO
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
BETWEEN
MARINER ENERGY, INC.
AND
GREGORY K. HARLESS
THIS THIRD AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this
"Third Amendment") is made and entered into by and between MARINER ENERGY, INC.
(the "Company") and GREGORY K. HARLESS ("Employee").
W I T N E S S E T H :
WHEREAS, (i) the Company and Employee entered into that certain Amended
and Restated Employment Agreement dated effective as of June 27, 1996 (the
"Original Employment Agreement"), and (ii) the Original Employment Agreement was
amended pursuant to (A) that certain First Amendment to Amended and Restated
Employment Agreement executed as of March 18, 1997 (the "First Amendment"), by
and between the Company and Employee, and (B) that certain Second Amendment to
Amended and Restated Employment Agreement effective as of January 1, 1998 (the
"Second Amendment"), by and between the Company and Employee (the Original
Employment Agreement as amended by the First Amendment and the Second Amendment
is referred to herein as the "Employment Agreement"); and
WHEREAS, the Company and Employee desire to further amend the
Employment Agreement as hereinafter provided;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
1. Paragraph 2 of the Employment Agreement is hereby amended to
read in its entirety as follows:
"2. Term.
The term of employment shall be for a term of four
and one-half (4 1/2) years beginning on the Effective
Date, subject, however, to the provisions of
paragraph 3."
2. The Employment Agreement is hereby amended to add a new
paragraph 9.8 which reads in its entirety as follows:
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<PAGE> 2
"9.8 Substitution of Other Incentive Compensation.
9.8.1 Notwithstanding anything contained herein to the contrary, but
subject to the provisions of this paragraph 9.8, if:
(a) the Board of Directors of the Company approves an
incentive compensation program providing for annual
incentive compensation and long-term, equity-based
incentive compensation (through, for example and not
for purposes of limitation, the use of stock options)
(the "New Program"), and
(b) a majority of the "Executives" (as defined in
paragraph 9.8.3) have each entered into one or more
written agreements with the Company (including, but
not limited to, a written amendment to and/or
restatement of an existing written employment
agreement) (such agreements entered into by such
majority of the Executives being collectively
referred to herein as the "Executive Amendments")
providing for:
(i) such Executive's participation in the New
Program; and
(ii) termination of such Executive's future
participation in incentive compensation in
the form of assignments of overriding oil
and gas royalty interests ("ORRI Incentive
Compensation"), and
(c) the Company has offered Employee the opportunity to
participate in the New Program on a basis at least as
favorable as the most favorable participation
provided to other participants in the New Program who
are or were in the same position within the same
grade level as Employee at any time during the period
beginning 90 days before the "Triggering Date" (as
hereinafter defined) and ending on the date Employee
and the Company enter into the "Amendment" (as
hereinafter defined) (participation in the New
Program that is offered to Employee and satisfies the
terms of this clause (c) is referred to herein as
"Qualifying Participation");
then Employee and the Company shall enter into a written
amendment to this Agreement (the "Amendment") which:
(x) shall provide for Employee's participation in the New
Program on a basis no less favorable than the
Qualifying Participation;
(y) shall provide for the termination of Employee's
participation in the incentive compensation program
described in this paragraph 9 for periods after a
date (the "Termination Date") that is no earlier than
the latest date (the "Triggering Date") on which any
of the Executives terminated his participation in
ORRI Incentive Compensation under the Executive
Amendments; and
(z) except as otherwise provided in clauses (x) and (y)
of this sentence, shall otherwise be in substantially
the same form, and contain substantially the same
terms and conditions, as the Executive Amendments.
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<PAGE> 3
9.8.2 For purposes of clause (y) of paragraph 9.8.1, the Company and
Employee acknowledge and agree that under the Amendment, (i)
Employee will be entitled under this paragraph 9 to receive an
Overriding Royalty Interest equal to an undivided percentage
(as specified in paragraph 9.2.1 of this Agreement) of the
Company's Working Interest in each well on any Prospect
acquired, or deemed to have been acquired under this paragraph
9, by the Company on or before the Termination Date, and the
lease or leases allocated thereto (collectively, the "Earned
ORIs"), (ii) Employee will not be entitled to receive any
Overriding Royalty Interest or other interest in or benefits
with respect to any Prospect or Prospects acquired, or deemed
to have been acquired under this paragraph 9, by the Company
after the Termination Date, or in the lease or leases
allocated thereto, and (iii) the provisions of this Agreement
that state they survive, by their terms survive, or are
otherwise designed to survive the Termination Date and/or the
termination of Employee's participation in the incentive
compensation program described in this paragraph 9, and the
respective rights and obligations of the Company and Employee
under such provisions with respect to the Existing ORIs in the
Existing Prospects and the Earned ORIs, shall survive the
Termination Date and/or such termination of Employee's
participation in the incentive compensation program described
in this paragraph 9 for the period or periods provided for in
this Agreement.
9.8.3 For purposes of this paragraph 9.8, the term "Executives"
means the following employees of the Company: Robert E.
Henderson, Richard R. Clark, Michael W. Strickler and Frank A.
Pici; provided, however, that the term "Executives" shall not
include any such individual to the extent he is no longer an
employee of the Company at the time the Company has offered
Qualifying Participation to Employee; provided further,
however, that if all of such individuals have ceased to be an
employee of the Company prior to the time the Company has
offered Qualifying Participation to Employee, then Employee
shall have no obligation whatsoever (whether under this
Paragraph 9.8 or otherwise) to enter into the Amendment.
9.8.4 For purposes of clause (b) of paragraph 9.8.1, the phrase "a
majority of the Executives" shall have the following meaning,
as applicable:
(a) if there are four (4) Executives employed by the
Company at the time the Company offers Qualifying
Participation to Employee, the phrase "a majority of
the Executives" shall mean three (3) of the
Executives;
(b) if there are three (3) Executives employed by the
Company at the time the Company offers Qualifying
Participation to Employee, the phrase "a majority of
the Executives" shall mean two (2) of the Executives;
(c) if there are two (2) Executives employed by the
Company at the time the Company offers Qualifying
Participation to Employee, the phrase "a majority of
the Executives" shall mean all of the Executives; and
(d) if there is one (1) Executive employed by the Company
at the time the Company offers Qualifying
Participation to Employee, the phrase "a majority of
the Executives" shall mean such Executive."
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<PAGE> 4
3. All references to "this Agreement" contained in the Employment
Agreement shall be deemed to be a reference to the Employment
Agreement, as amended by this Third Amendment.
4. This Third Amendment is made and will be performed under, and shall be
governed by and construed in accordance with, the law of the State of
Texas.
5. Except as amended by this Third Amendment, the Employment Agreement
shall remain in full force and effect.
6. This Third Amendment may be executed in one or more counterparts, and
by the different parties hereto in separate counterparts, each of which
when executed shall be deemed to be an original but all of which shall
constitute one and the same agreement.
IN WITNESS WHEREOF, the Company and Employee have executed this Third
Amendment to be effective as December 27, 1998.
Acknowledged by: MARINER ENERGY, INC.
By:
- ---------------------------------------- --------------------------------
W. Hunt Hodge Robert E. Henderson
Vice President - Administration President and
Chief Executive Officer
"COMPANY"
--------------------------------
Gregory K. Harless
"EMPLOYEE"
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<PAGE> 1
EXHIBIT 10.10
SECOND AMENDMENT
TO
EMPLOYMENT AGREEMENT
BETWEEN
MARINER ENERGY, INC.
AND
FRANK A. PICI
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT (this "Second
Amendment") is made and entered into by and between MARINER ENERGY, INC. (the
"Company") and FRANK A. PICI ("Employee").
W I T N E S S E T H :
WHEREAS, (i) the Company and Employee entered into that certain
Employment Agreement dated effective as of December 2, 1996 (the "Original
Employment Agreement"), and (ii) the Original Employment Agreement was amended
pursuant to that certain First Amendment to Employment Agreement effective as
of January 1, 1998 (the "First Amendment), by and between the Company and
Employee (the Original Employment Agreement as amended by the First Amendment
is referred to herein as the "Employment Agreement"); and
WHEREAS, the Company and Employee desire to further amend the
Employment Agreement as hereinafter provided;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
1. Paragraph 3.1 of the Employment Agreement is hereby amended to read
in its entirety as follows:
"3.1 If either Employee or Company elects to terminate this
Agreement at the end of the initial term, or at the end of
any extended term hereof as hereinafter provided, notice of
the election to terminate shall be given to the other party
no later than six (6) months before the end of this
Agreement. Except as otherwise provided in paragraph 21.1, if
no such six-month notice is given by either party on or
before June 2, 1997, the initial term shall be deemed to have
been extended for an additional three (3) years through
December 1, 2000 (the "first extended term"), and thereafter
if no such six-month notice is given by either party before
the end of the first extended term, or at the end of any
subsequent extended term, the first extended term and any
such subsequent extended term of this Agreement, as the case
may be, shall deemed to have been extended for an additional
six (6) months."
2. The Employment Agreement is hereby amended to add a new paragraph
9.8 which reads in its entirety as follows:
-1-
<PAGE> 2
"9.8 Substitution of Other Incentive Compensation.
9.8.1 Notwithstanding anything contained herein to the contrary,
but subject to the provisions of this paragraph 9.8, if:
(a) the Board of Directors of the Company approves an
incentive compensation program providing for annual
incentive compensation and long-term, equity-based
incentive compensation (through, for example and not
for purposes of limitation, the use of stock
options) (the "New Program"), and
(b) a majority of the "Executives" (as defined in
paragraph 9.8.3) have each entered into one or more
written agreements with the Company (including, but
not limited to, a written amendment to and/or
restatement of an existing written employment
agreement) (such agreements entered into by such
majority of the Executives being collectively
referred to herein as the "Executive Amendments")
providing for:
(i) such Executive's participation in the New
Program; and
(ii) termination of such Executive's future
participation in incentive compensation in
the form of assignments of overriding oil
and gas royalty interests ("ORRI Incentive
Compensation"), and
(c) the Company has offered Employee the opportunity to
participate in the New Program on a basis at least
as favorable as the most favorable participation
provided to other participants in the New Program
who are or were in the same position within the same
grade level as Employee at any time during the
period beginning 90 days before the "Triggering
Date" (as hereinafter defined) and ending on the
date Employee and the Company enter into the
"Amendment" (as hereinafter defined) (participation
in the New Program that is offered to Employee and
satisfies the terms of this clause (c) is referred
to herein as "Qualifying Participation");
then Employee and the Company shall enter into a written
amendment to this Agreement (the "Amendment") which:
(x) shall provide for Employee's participation in the
New Program on a basis no less favorable than the
Qualifying Participation;
(y) shall provide for the termination of Employee's
participation in the incentive compensation program
described in this paragraph 9 for periods after a
date (the "Termination Date") that is no earlier
than the latest date (the "Triggering Date") on
which any of the Executives terminated his
participation in ORRI Incentive Compensation under
the Executive Amendments; and
(z) except as otherwise provided in clauses (x) and (y)
of this sentence, shall otherwise be in
substantially the same form, and contain
substantially the same terms and conditions, as the
Executive Amendments.
-2-
<PAGE> 3
9.8.2 For purposes of clause (y) of paragraph 9.8.1, the Company
and Employee acknowledge and agree that under the Amendment,
(i) Employee will be entitled under this paragraph 9 to
receive an Overriding Royalty Interest equal to an undivided
percentage (as specified in paragraph 9.2 of this Agreement)
of the Company's Working Interest in each well on any
Prospect acquired, or deemed to have been acquired under this
paragraph 9, by the Company on or before the Termination
Date, and the lease or leases allocated thereto
(collectively, the "Earned ORIs"), (ii) Employee will not be
entitled to receive any Overriding Royalty Interest or other
interest in or benefits with respect to any Prospect or
Prospects acquired, or deemed to have been acquired under
this paragraph 9, by the Company after the Termination Date,
or in the lease or leases allocated thereto, and (iii) the
provisions of this Agreement that state they survive, by
their terms survive, or are otherwise designed to survive the
Termination Date and/or the termination of Employee's
participation in the incentive compensation program described
in this paragraph 9, and the respective rights and
obligations of the Company and Employee under such provisions
with respect to the Earned ORIs, shall survive the
Termination Date and/or such termination of Employee's
participation in the incentive compensation program described
in this paragraph 9 for the period or periods provided for in
this Agreement.
9.8.3 For purposes of this paragraph 9.8, the term "Executives"
means the following employees of the Company: Robert E.
Henderson, Richard R. Clark, Michael W. Strickler and Frank
A. Pici; provided, however, that the term "Executives" shall
not include any such individual to the extent he is no longer
an employee of the Company at the time the Company has
offered Qualifying Participation to Employee; provided
further, however, that if all of such individuals have ceased
to be an employee of the Company prior to the time the
Company has offered Qualifying Participation to Employee,
then Employee shall have no obligation whatsoever (whether
under this Paragraph 9.8 or otherwise) to enter into the
Amendment.
9.8.4 For purposes of clause (b) of paragraph 9.8.1, the phrase "a
majority of the Executives" shall have the following meaning,
as applicable:
(a) if there are four (4) Executives employed by the
Company at the time the Company offers Qualifying
Participation to Employee, the phrase "a majority of
the Executives" shall mean three (3) of the
Executives;
(b) if there are three (3) Executives employed by the
Company at the time the Company offers Qualifying
Participation to Employee, the phrase "a majority of
the Executives" shall mean two (2) of the
Executives;
(c) if there are two (2) Executives employed by the
Company at the time the Company offers Qualifying
Participation to Employee, the phrase "a majority of
the Executives" shall mean all of the Executives;
and
(d) if there is one (1) Executive employed by the
Company at the time the Company offers Qualifying
Participation to Employee, the phrase "a majority of
the Executives" shall mean such Executive."
-3-
<PAGE> 4
3. All references to "this Agreement" contained in the
Employment Agreement shall be deemed to be a reference to the
Employment Agreement, as amended by this Second Amendment.
4. This Second Amendment is made and will be performed under,
and shall be governed by and construed in accordance with,
the law of the State of Texas.
5. Except as amended by this Second Amendment, the Employment
Agreement shall remain in full force and effect.
6. This Second Amendment may be executed in one or more
counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to
be an original but all of which shall constitute one and the
same agreement.
IN WITNESS WHEREOF, the Company and Employee have executed this Second
Amendment to be effective as of December 1, 1998.
Acknowledged by: MARINER ENERGY, INC.
By:
- ------------------------------- ------------------------------------
W. Hunt Hodge Robert E. Henderson
Vice President - Administration President and
Chief Executive Officer
"COMPANY"
------------------------------------
Frank A. Pici
"EMPLOYEE"
-4-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
NAME OF SUBSIDIARY STATE OF INCORPORATION
- ------------------ ----------------------
Mariner Holdings, Inc. Delaware
Mariner Energy, Inc. Delaware
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
Mariner Energy LLC
Houston, Texas
We consent to the use in this Registration Statement of Mariner Energy LLC
on Form S-1 of our report dated April 14, 1999 (September 1, 1999, with respect
to the first and last paragraph of Note 1 and the third paragraph of Note 4),
appearing in the Prospectus, which is a part of this Registration Statement, and
to the references to us under the heading "Experts" in such Prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedule of Mariner
Energy LLC, Schedule I Condensed Financial Information of Registrant (Parent
only). This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
September 16, 1999
<PAGE> 1
EXHIBIT 23.2
[RYDER SCOTT COMPANY, L.P. LETTERHEAD]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the inclusion of our letter dated August 17, 1999
to Mariner Energy LLC (the "Company") regarding our estimates of proved
reserves, future production and income attributable to certain leasehold
interests of the Company in this Registration Statement on Form S-1 (the
"Registration Statement") of the Company and all references to Ryder Scott
Company and/or the reports prepared by Ryder Scott Company entitled, "Estimated
Future Reserves and Income Attributable to Certain Leasehold Interests (SEC
Parameters) as of June 30, 1999" in this Registration Statement to the
reference to our firm as experts in this Registration Statement.
/s/ RYDER SCOTT COMPANY L.P.
RYDER SCOTT COMPANY, L.P.
September 15, 1999
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