<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended JUNE 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ______ to ______
Commission file number 1-1098
THE COLUMBIA GAS SYSTEM, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1594808
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12355 Sunrise Valley Drive, Suite 300, Reston, VA 20191-3420
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 295-0300
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, $10
Par Value: 55,382,267 shares outstanding at June 30, 1997.
<PAGE> 2
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Statements of Consolidated Income 3
Condensed Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Consolidated Statements of Common Stock Equity 7
Notes 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II OTHER INFORMATION
Item 1 Legal Proceedings 30
Item 2 Changes in Securities 30
Item 3 Defaults Upon Senior Securities 30
Item 4 Submission of Matters to a Vote of Security Holders 31
Item 5 Other Information 31
Item 6 Exhibits and Reports on Form 8-K 31
Signature 33
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
The Columbia Gas System, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME (unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(millions, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Gas sales $ 625.3 $ 432.0 $ 1,933.7 $ 1,434.3
Transportation 123.6 113.3 275.0 255.9
Other 61.8 37.1 129.7 95.2
---------- ---------- ---------- ----------
Total Operating Revenues 810.7 582.4 2,338.4 1,785.4
---------- ---------- ---------- ----------
OPERATING EXPENSES
Products purchased 403.6 205.9 1,303.2 757.7
Operation 200.6 214.6 399.5 421.4
Maintenance 26.8 27.4 51.4 51.3
Depreciation and depletion 49.2 50.9 120.4 119.0
Other taxes 46.2 47.6 123.0 121.8
---------- ---------- ---------- ----------
Total Operating Expenses 726.4 546.4 1,997.5 1,471.2
---------- ---------- ---------- ----------
OPERATING INCOME 84.3 36.0 340.9 314.2
---------- ---------- ---------- ----------
OTHER INCOME (DEDUCTIONS)
Interest income and other, net 6.1 13.7 20.4 16.8
Interest expense and related charges (38.0) (39.2) (78.3) (82.9)
---------- ---------- ---------- ----------
Total Other Income (Deductions) (31.9) (25.5) (57.9) (66.1)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 52.4 10.5 283.0 248.1
Income Taxes 17.5 2.3 85.4 88.6
---------- ---------- ---------- ----------
NET INCOME $ 34.9 $ 8.2 $ 197.6 $ 159.5
========== ========== ========== ==========
EARNINGS PER SHARE OF COMMON STOCK $ 0.63 $ 0.15 $ 3.57 $ 3.04
DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.25 $ 0.15 $ 0.40 $ 0.30
AVERAGE COMMON SHARES OUTSTANDING (thousands) 55,367 55,044 55,346 52,544
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
3
<PAGE> 4
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of
-----------------------
June 30, December 31,
1997 1996
-------- ------------
(unaudited)
ASSETS (millions)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Gas utility and other plant, at original cost $7,091.8 $6,994.4
Accumulated depreciation and depletion (3,413.7) (3,344.5)
-------- --------
Net Gas Utility and Other Plant 3,678.1 3,649.9
-------- --------
Gas and oil producing properties, full cost method 504.7 502.8
Accumulated depletion (156.9) (146.4)
-------- --------
Net Gas and Oil Producing Properties 347.8 356.4
-------- --------
Net Property, Plant and Equipment 4,025.9 4,006.3
-------- --------
INVESTMENTS AND OTHER ASSETS 101.8 103.3
-------- --------
CURRENT ASSETS
Cash and temporary cash investments 190.2 49.8
Accounts receivable, net 593.8 597.6
Gas inventory 153.2 237.8
Other inventories - at average cost 42.6 45.1
Prepayments 105.5 73.8
Regulatory assets 68.8 63.4
Underrecovered gas costs 15.8 104.7
Prepaid property tax 35.5 81.1
Exchange gas receivable 104.7 114.6
Deferred taxes 75.1 52.8
Other 6.6 15.2
-------- --------
Total Current Assets 1,391.8 1,435.9
-------- --------
REGULATORY ASSETS 396.9 410.1
DEFERRED CHARGES 66.9 49.0
-------- --------
TOTAL ASSETS $5,983.3 $6,004.6
======== ========
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
4
<PAGE> 5
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of
----------------------
June 30, December 31,
1997 1996
-------- ------------
(unaudited)
CAPITALIZATION AND LIABILITIES (millions)
<S> <C> <C>
CAPITALIZATION
Common stock equity $1,734.5 $1,553.6
Long-term debt 2,003.7 2,003.8
-------- --------
Total Capitalization 3,738.2 3,557.4
-------- --------
CURRENT LIABILITIES
Short-term debt -- 250.0
Accounts and drafts payable 387.8 348.6
Accrued taxes 175.9 142.6
Accrued interest 14.8 14.8
Estimated rate refunds 86.9 114.0
Estimated supplier obligations 78.0 115.1
Transportation and exchange gas payable 74.3 95.4
Overrecovered gas costs 118.4 --
Retirement income plan 57.9 57.4
Other 274.0 313.7
-------- --------
Total Current Liabilities 1,268.0 1,451.6
-------- --------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes, noncurrent 576.1 557.7
Investment tax credits 36.4 37.1
Postretirement benefits other than pensions 157.4 172.3
Regulatory liabilities 43.0 44.5
Other 164.2 184.0
-------- --------
Total Other Liabilities and Deferred Credits 977.1 995.6
-------- --------
TOTAL CAPITALIZATION AND LIABILITIES $5,983.3 $6,004.6
======== ========
</TABLE>
5
<PAGE> 6
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-----------------
1997 1996
------ ------
(millions)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $197.6 $159.5
Adjustments for items not requiring (providing) cash:
Depreciation and depletion 120.4 119.0
Deferred income taxes (6.5) 33.1
Other - net (34.9) (19.5)
Change in components of working capital:
Accounts receivable 2.8 172.9
Income tax refunds -- 271.5
Gas inventory 84.6 23.2
Prepayments (31.4) (4.5)
Accounts payable 54.4 16.1
Accrued taxes 33.3 (26.4)
Accrued interest 2.5 (71.1)
Estimated rate refunds (27.1) (1.3)
Estimated supplier obligations (37.1) (49.1)
Under/Overrecovered gas costs 207.3 (83.9)
Exchange gas payable (20.9) (5.5)
Other working capital 20.8 20.2
------ ------
Net Cash from Operations 565.8 554.2
------ ------
INVESTMENT ACTIVITIES
Capital expenditures (141.4) (112.9)
Proceeds received on the sale of Columbia Development -- 188.9
Other investments - net (2.3) 14.7
------ ------
Net Investment Activities (143.7) 90.7
------ ------
FINANCING ACTIVITIES
Retirement of preferred stock -- (400.0)
Retirement of long-term debt (0.5) (0.5)
Dividends paid (22.1) (15.6)
Issuance of common stock 5.5 242.5
Net decrease in short-term debt (250.0) (338.9)
Other financing activities (14.6) (65.0)
------ ------
Net Financing Activities (281.7) (577.5)
------ ------
Increase in Cash and Temporary Cash Investments 140.4 67.4
Cash and temporary cash investments at beginning of year 49.8 8.0
------ ------
Cash and temporary cash investments at June 30 * $190.2 $ 75.4
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest 71.6 79.1
Cash paid for income taxes (net of refunds) 34.7 (175.7)
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
* The Corporation considers all highly liquid debt instruments to be cash
equivalents.
6
<PAGE> 7
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMMON STOCK EQUITY
<TABLE>
<CAPTION>
As of
-----------------------------
June 30, December 31,
1997 1996
-------- ------------
(unaudited)
(millions)
<S> <C> <C>
COMMON STOCK EQUITY
Common stock, $10 par value, authorized
100,000,000 shares, outstanding 55,382,267
and 55,263,659 shares, respectively $ 553.8 $ 552.6
Additional paid in capital 747.1 743.2
Retained earnings 434.7 259.3
Unearned employee compensation (1.1) (1.5)
-------- --------
TOTAL COMMON STOCK EQUITY $1,734.5 $1,553.6
======== ========
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
7
<PAGE> 8
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
NOTES
1. Basis of Accounting Presentation
The accompanying unaudited condensed consolidated financial statements for
The Columbia Gas System, Inc. (Columbia) reflect all normal recurring
adjustments which are necessary, in the opinion of management, to present
fairly the results of operations in accordance with generally accepted
accounting principles.
The accompanying financial statements should be read in conjunction with
the financial statements and notes thereto included in Columbia's 1996
Annual Report on Form 10-K and First Quarter 1997 Quarterly Report on Form
10-Q. Income for interim periods may not be indicative of results for the
calendar year due to weather variations and other factors. Certain
reclassifications have been made to the 1996 financial statements to
conform to the 1997 presentation.
2. Bankruptcy Matters
On November 28, 1995, Columbia and its wholly-owned subsidiary, Columbia
Gas Transmission Corporation (Columbia Transmission), emerged from Chapter
11 protection of the Federal Bankruptcy Code under the jurisdiction of the
United States Bankruptcy Court for the District of Delaware (Bankruptcy
Court). Both Columbia and Columbia Transmission had operated under Chapter
11 protection since July 31, 1991. Certain residual unresolved
bankruptcy-related matters are still within the jurisdiction of the
Bankruptcy Court.
Unsettled Producer Claims
Columbia Transmission's approved plan of reorganization (Plan) provided
that producers who rejected settlement offers contained in Columbia
Transmission's Plan may continue to litigate their claims under the
Bankruptcy Court-approved claims estimation procedures, described below,
and receive the same percentage payout on their allowed claims, when and
if ultimately allowed, as received by the settling producers. Columbia
Transmission's Plan further provided that the actual distribution
percentage for all producer claims, which would not be less than 68.875%
or greater than 72.5%, could not be determined until the total amount of
contested producer claims is established, and until such time, 5% of the
maximum amount (based on a 72.5% payout) to be distributed to producer
claimants for allowed claims and to Columbia for unsecured debt will be
withheld. Additional distributions, if any, will be made when the total
amount of allowed producer claims has been determined.
Producer Claims Estimation Process
In 1992, the Bankruptcy Court approved the appointment of a claims
mediator and the implementation of a claims estimation procedure for the
quantification of claims arising from the rejection of above-market gas
purchase contracts and other claims by producers related to gas purchase
contracts with Columbia Transmission. In late 1994 and early 1995, the
claims mediator issued Initial and Supplemental Reports On Generic Issues
for Natural Gas Contract Claims and directed producer claimants to submit
recalculated claims. The recommendations and instructions set out in the
reports have not been considered by the Bankruptcy Court. In mid-1995,
most producers with which Columbia Transmission had not yet negotiated
settlements submitted recalculated claims to the claims mediator. Those
recalculated claims amounted to over $2 billion. Since mid-1995, numerous
additional producers have settled their claims. Some of those settlements
became final with the confirmation of Columbia Transmission's Plan while
others were approved subsequent to confirmation and have become final. In
addition, several recalculated claims have been amended by producer
claimants, and several claims have been resolved by means of litigation
within the claims estimation process.
The claims estimation procedures remain in place for use in the
post-confirmation liquidation of those producer claims that remain
unresolved. The claims mediator continues to schedule and hold evidentiary
hearings with respect to individual producer claims, including
claim-specific issues not addressed by the report.
Recommendations made by the claims mediator are subject to review by the
Bankruptcy Court and all parties have rights of appellate review. When
claims are allowed by the Bankruptcy Court and the
8
<PAGE> 9
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
allowances become final, Columbia Transmission will make distributions
with respect to those claims pursuant to the Plan. The timing of this
litigation process is impossible to predict.
Based on the information received and evaluated to date, Columbia believes
adequate reserves have been established for resolution of the remaining
producer claims and the payment of any amounts ultimately due to producers
with respect to the 5% holdback.
3. Statement of Financial Accounting Standards No. 128, "Earnings per Share"
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128). This statement supersedes APB Opinion No. 15, "Earnings
per Share" and simplifies the computation of earnings per share (EPS).
Primary EPS is replaced with a presentation of basic EPS. Basic EPS
includes no dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. In addition, fully diluted EPS is replaced
with diluted EPS. Diluted EPS reflects the potential dilution if certain
securities are converted. This statement requires dual presentation of
basic and diluted EPS by entities with complex capital structures and also
requires restatement of all prior-period EPS data presented. SFAS No. 128
will be effective for financial statements for both interim and annual
periods ending after December 15, 1997, and Columbia plans to adopt the
statement for year-end 1997. Columbia does not expect the effect of
adopting SFAS No. 128 to have a material impact on its EPS calculation. If
adopted currently, SFAS No. 128 would not have a material impact on
Columbia's reported EPS.
4. Accounting for Commodity Hedging Activities
In accordance with Statement of Financial Accounting Standards No. 80,
"Accounting for Futures Contracts" a futures contract qualifies as a hedge
if the commodity to be hedged is exposed to price risk and the futures
contract reduces that exposure and is designated as a hedge. Subsidiaries
in Columbia's production, marketing and propane operations engage in
commodity hedging activities to minimize the risk of market fluctuations
associated with the price of natural gas production, propane inventories
and commitments for natural gas purchases and sales. The hedging
objectives include assurance of stable and known minimum cash flows,
fixing favorable prices and margins when they become available and
participation in any long-term increases in value. Under internal
guidelines, speculative positions are prohibited.
Columbia's exploration and production company utilizes futures, options
and swaps on futures as well as commodity price swaps and basis swaps.
Futures help manage commodity price risk by fixing prices for future
production volumes. The options provide a price floor for future
production volumes and the opportunity to benefit from any increases in
prices. Swaps are negotiated and executed over-the-counter and are
structured to provide the same risk protection as futures and options.
Basis swaps are used to manage risk by fixing the basis or differential
that exists between a delivery location index and the commodity futures
prices.
Columbia's marketing and propane operations utilize futures contracts and
basis swaps to assure adequate margins on the purchase and resale of
natural gas as well as protecting the value and margins of its propane
inventories.
Premiums paid for option and swap agreements are included as current
assets in the consolidated balance sheet until they are exercised or
expire. Margin requirements for natural gas and propane futures are also
recorded as current assets. Unrealized gains and losses on all futures
contracts are deferred on the consolidated balance sheet as either current
assets or other deferred credits. Realized gains and losses from the
settlement of natural gas futures, options and swaps are included in
revenues or products purchased as appropriate concurrent with the
associated physical transaction. Realized gains and losses from the
settlement of propane futures contracts are included in products
purchased. The cash flows from commodity hedging are included in operating
activities in the consolidated statement of cash flows.
Columbia and its subsidiaries are exposed to credit losses in the event of
nonperformance by the counterparties to its various hedging contracts.
Management has evaluated such risk and believes that overall business risk
is minimized as a result of these hedging contracts which are primarily
with major investment grade financial institutions or their affiliates.
9
<PAGE> 10
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
10
<PAGE> 11
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING INCOME (LOSS) BY SEGMENT
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
(millions)
<S> <C> <C> <C> <C>
Transmission and Storage $ 66.0 $ 39.0 $158.9 $124.5
Distribution 21.3 (3.0) 161.9 165.0
Exploration and Production 5.4 6.4 17.1 17.2
Marketing, Propane and Power Generation (1.8) (1.2) 8.1 13.5
Corporate (6.6) (5.2) (5.1) (6.0)
------ ------ ------ ------
TOTAL $ 84.3 $ 36.0 $340.9 $314.2
====== ====== ====== ======
</TABLE>
DEGREE DAYS (DISTRIBUTION SERVICE TERRITORY)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ---------------------
1997 1996 1997 1996
---- ---- ----- -----
<S> <C> <C> <C> <C>
Actual 837 705 3,530 3,807
Normal 580 580 3,527 3,559
% Colder (warmer) than normal 44 22 -- 7
% Colder (warmer) than prior period 19 13 (7) 13
</TABLE>
11
<PAGE> 12
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
Management's Discussion and Analysis contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Investors and prospective investors
should understand that several factors govern whether any forward-looking
statement contained herein will be or can be achieved. Any one of those factors
could cause actual results to differ materially from those projected herein.
These forward-looking statements include statements concerning Columbia's plans,
objectives and expected performance, expenditures and recovery of expenditures
through rates, including any and all underlying assumptions and other statements
that are other than statements of historical fact. From time to time, Columbia
may publish or otherwise make available forward-looking statements of this
nature. All such subsequent forward-looking statements, whether written or oral
and whether made by or on behalf of Columbia, are also expressly qualified by
these cautionary statements. All forward-looking statements are based on
assumptions that management believes to be reasonable; however, there can be no
assurance that actual results will not differ materially. Realization of
Columbia's objectives and expected performance is subject to a wide range of
risks and can be adversely affected by, among other things, competition,
weather, regulatory and legislative changes as well as changes in general
economic and capital market conditions, many of which are beyond the control of
Columbia. In addition, the relative contributions to profitability by segment
may change over time due to changes in the market place.
With respect to any references made to ratings assigned to Columbia's debt
securities, there can be no assurance that Columbia will be successful at
maintaining its credit quality or that such credit ratings will continue for any
given period of time or that they will not be revised downward or withdrawn
entirely by these rating agencies. Credit ratings reflect only the views of the
rating agencies, whose methodology and the significance of their ratings may be
obtained from them.
THREE MONTH RESULTS
Net Income
Columbia's second quarter 1997 net income of $34.9 million, or $0.63 per share,
was up sharply over the same period last year, increasing $26.7 million, or
$0.48 per share. This increase included a $12.4 million improvement for Columbia
Transmission's sale of base gas from a deactivated storage field, as provided
for by its rate settlement, together with colder weather experienced early in
the current quarter. Also contributing to the increase was a lower level of
restructuring costs in the current period -- $7.7 million in the current quarter
compared to $18.6 million last year. Restructuring initiatives implemented over
the past several months have allowed Columbia to improve operating efficiencies.
In the second quarter of 1996, an improvement of $5.6 million was recorded to
reflect an adjustment from the sale of Columbia Gas Development Corporation
(Columbia Development). The sale was effective year-end 1995.
Revenues
Operating revenues for the second quarter of 1997 were $810.7 million, a $228.3
million improvement over the same period last year, due mainly to increased gas
marketing activity and increased sales for the distribution subsidiaries,
resulting from 19% colder weather. Sales volumes for the gas marketing
operations of 121.7 Bcf, more than doubled last year's level. Also contributing
to the increase in revenues was $18.8 million from the effect of recording
Columbia Transmission's rate settlement as discussed later in the Transmission
and Storage Operations section.
Expenses
For the three months ended June 30, 1997, operating expenses of $726.4 million
were $180 million higher than the prior period, primarily reflecting a $197.7
million increase in products purchased that resulted from higher natural gas
sales requirements primarily for gas marketing activities. In the current
period, $11.9 million of restructuring expense was recorded for severance and
benefit costs, whereas in the second quarter last year $28.6 million of this
type of expense was incurred.
Other Income (Deductions)
Other Income (Deductions) reduced income $31.9 million in the current quarter
compared to a reduction to income of $25.5 million in the same period last year.
This change largely reflected recording an $8.6 million pre-tax favorable
adjustment in 1996 to the sale of Columbia Development. Second quarter income
benefited from not having any short-term debt outstanding, whereas last year
Columbia had $1.5 million of interest expense on short-term borrowings, which
was paid off in the first quarter of 1997.
12
<PAGE> 13
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
SIX MONTH RESULTS
Net Income
Columbia's net income for the first half of 1997 of $197.6 million, or $3.57 per
share, increased $38.1 million, or $0.53 per share, over the same period last
year despite unseasonably mild temperatures during the first quarter.
More than offsetting the impact of mild first quarter weather were several items
that included recording the terms of Columbia Transmission's rate settlement
mentioned previously, a $12.8 million reduction to tax expense resulting from
benefits gained through the filing of a consolidated state tax return, $5.5
million from a gain on the temporary deactivation of a storage field, the full
period effect of higher rates for Columbia Transmission and Columbia Gas of
Kentucky, Inc. and reduced interest costs because Columbia paid-off its
short-term borrowings. Also, as mentioned previously, last year's net income
included a reduction of $18.6 million for restructuring activities, compared to
$7.7 million this year. Last year's results also included a $5.6 million
increase to 1996's net income as an adjustment for the Columbia Development
sale.
Revenues
For the first half of 1997, operating revenues were $2,338.4 million, an
increase of $553 million over the previous year. The increase was principally
due to increased sales for the gas marketing operations and higher rates in
effect for the distribution subsidiaries that provided for the recovery of
increased gas costs. Also improving revenues were increased transportation
services, the beneficial effect of Columbia Transmission's rate settlement and
$4.1 million received by Columbia Natural Resources, Inc. (Columbia Resources)
for a gas purchase contract buyout by the Binghamton Cogeneration Partnership
project (Binghamton Partnership) that ceased operations in early 1997. The
facility had a contract to purchase natural gas for its operations from Columbia
Resources. This cogeneration project was a partnership between a Columbia
affiliate, TriStar Ventures Corporation (TriStar), and third parties. In
addition, TriStar received $3.2 million from the Binghamton Partnership for
accepting the assignment of a transportation agreement. Tempering these
increases was the effect of the unseasonably warm weather in the first quarter
that resulted in lower sales volumes for the distribution subsidiaries and lower
wellhead prices for gas production.
Expenses
Total operating expenses of $1,997.5 million for the first six months of 1997,
increased $526.3 million over last year. This was primarily the result of $545.5
million higher product purchased expense attributable to the higher cost of gas
purchased by the distribution subsidiaries and additional sales requirements for
the gas marketing operations. After adjusting for the effect of the
restructuring charges recorded in the second quarters of both years, operation
and maintenance expense decreased reflecting the lower costs that resulted from
implementing restructuring initiatives.
Other Income (Deductions)
Other Income (Deductions) reduced income $57.9 million in the first six months
of 1997 and $66.1 million in the first six months of last year. Interest income
and other, net, of $20.4 million, increased income $3.6 million compared to the
prior year due in large part to recording a $8.5 million gain for the payment
received from the deactivation of a storage field that will allow the owner of
coal reserves in the area to mine the property as well as increased interest
income on temporary cash investments. In the second quarter of 1996, an $8.6
million favorable adjustment was recorded for the sale of Columbia Development.
Total interest expense and related charges of $78.3 million, decreased $4.6
million from last year due primarily to lower interest costs on short-term
borrowings.
Liquidity and Capital Resources
A significant portion of Columbia's operations is subject to seasonal
fluctuations in cash flow. During the heating season, which is primarily from
November through March, cash receipts from sales and transportation services
typically exceed cash requirements. Conversely, during the remainder of the
year, cash on hand, together with external financing as needed, is used to
purchase gas to place in storage for heating season deliveries, make capital
improvements in plant, perform necessary maintenance of the facilities, and
expand service into new areas.
13
<PAGE> 14
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
Net cash from operations for the first half of 1997 was $565.8 million, an
increase of $11.6 million over the same period last year. This improvement
primarily reflected a higher gas cost recovery level by the distribution
subsidiaries in the current period. Tempering this increase were lower sales
attributable to warmer weather for the first six months of 1997 compared to the
same period last year. In 1996 cash from operations was improved approximately
$213 million due to the net effect of income tax refunds.
The higher level of recovery reflected the rise in prices experienced in 1996
that resulted in an increase in the commodity portion of the distribution
subsidiaries' rates as provided for under the current regulatory process.
Previously, the distribution subsidiaries were in an underrecovered position
because the rapid increase in the cost of gas exceeded the recovery levels that
were allowed at that time. The improvement also reflected the full period effect
of higher base rates for Columbia Transmission and Columbia of Kentucky.
Partially offsetting these improvements was the effect of lower sales volumes
for the distribution subsidiaries due to the warmer weather.
Columbia satisfies its liquidity requirements through internally generated funds
and the use of its $1 billion unsecured bank revolving credit facility (Credit
Facility). Columbia also may pursue obtaining additional short-term financing
through the use of bid notes and the establishment of a commercial paper
program.
Columbia's $1 billion Credit Facility provides for scheduled quarterly
reductions of $25 million of the aggregate committed amount starting December
31, 1997, that will reduce the Credit Facility commitments to $700 million by
September 30, 2000. The Credit Facility also provides for the issuance of up to
$150 million of letters of credit. As of June 30, 1997, Columbia had no
borrowings and approximately $139.1 million of letters of credit outstanding
under the Credit Facility. During the first quarter, Columbia was able to repay
its remaining short-term borrowings which at year-end 1996 was $250 million.
Interest rates on borrowings are based upon the London Interbank Offered Rate,
Certificate of Deposit rates or other short-term interest rates. The facility
fee on the commitment amount is based on Columbia's public debt rating. In 1997,
Fitch Investor Service, Moody's Investors Service and Standard & Poors upgraded
Columbia's long-term debt rating to BBB+, Baa1 and BBB+, respectively. These
higher ratings will result in lower interest rates on any borrowings that
Columbia makes under the facility.
Columbia has an effective shelf registration statement on file with the U. S.
Securities and Exchange Commission for the issuance of up to $1 billion in
aggregate of debentures, common stock or preferred stock in one or more series.
In March 1996, Columbia issued 5,750,000 shares of common stock under the shelf
registration and used the proceeds to reduce borrowings incurred under the
Credit Facility. No further issuances of the remaining $750 million available
under the shelf registration are scheduled at this time.
Recent Acquisitions
Columbia has as a strategic goal to increase its investment in generally
non-rate regulated (nonregulated) businesses to a level that would provide for
its nonregulated operations to contribute approximately 30% of Columbia's
consolidated operating income by 2002. In 1996 this segment contributed
approximately 9% toward Columbia's consolidated operating income. Consistent
with this objective, Columbia Energy Services Corporation (Columbia Energy)
recently purchased PennUnion Energy Services, L.L.C. (PennUnion), an
energy-marketing affiliate of the Pennzoil Company (Pennzoil), for
approximately $14.75 million, subject to certain purchase price adjustments. In
addition, Columbia Resources recently acquired Alamco, Inc. (Alamco), an
Appalachian oil and gas exploration and development company, for approximately
$101 million including the assumption of approximately $24 million of Alamco
debt. For additional information on the Alamco acquisition, see the Exploration
and Production segment, and see the Marketing, Propane and Power Generation
segment for a further discussion of PennUnion. Columbia continually evaluates
acquisition and strategic alliance opportunities made available to it by the
marketplace. However, it is Columbia's general policy not to comment on the
specifics of any such opportunity.
14
<PAGE> 15
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION AND STORAGE OPERATIONS
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
(millions)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Transportation revenues $136.8 $137.6 $317.0 $320.6
Storage revenues 48.3 40.5 91.8 79.2
Other revenues 25.0 5.2 34.7 10.1
------ ------ ------ ------
Total Operating Revenues 210.1 183.3 443.5 409.9
------ ------ ------ ------
OPERATING EXPENSES
Operation and maintenance 103.6 101.7 203.7 200.3
Depreciation 26.6 28.2 52.9 55.2
Other taxes 13.9 14.4 28.0 29.9
------ ------ ------ ------
Total Operating Expenses 144.1 144.3 284.6 285.4
------ ------ ------ ------
OPERATING INCOME $ 66.0 $ 39.0 $158.9 $124.5
====== ====== ====== ======
THROUGHPUT (BCF)
Transportation
Columbia Transmission
Market area 196.4 197.6 574.2 627.1
Columbia Gulf
Main-line 161.9 159.1 312.9 329.3
Short-haul 57.0 64.1 119.0 133.4
Intrasegment eliminations (160.6) (158.2) (305.4) (324.7)
------ ------ ------ ------
Total Throughput 254.7 262.6 700.7 765.1
====== ====== ====== ======
</TABLE>
15
<PAGE> 16
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
Marketing Initiatives
Proposed Millennium Pipeline Project
As previously reported, the proposed Millennium Pipeline Project, in which
Columbia Transmission is participating, and will serve as operator, will
transport western gas supplies to east coast markets. The 380-mile pipeline will
link with TransCanada Pipelines Limited at a new Lake Erie point and transport
up to approximately 650,000 Mcf per day to eastern markets utilizing existing
Columbia Transmission rights-of-way for the majority of the route. A 45-day
"open season" that provided potential customers an opportunity to express
interest in capacity, ended on June 16, 1997, and resulted in non-binding
nominations for service that significantly exceeded the pipeline's anticipated
operating capacity. Negotiations are proceeding for binding precedent
agreements. A filing with the Federal Energy Regulatory Commission (FERC),
requesting approval for this project is planned for later this year with an
anticipated in-service date of late 1999.
On August 7, 1997, it was announced that TransCanada Pipelines and IPL Energy
Inc. (IPL) would become project sponsors in the Millennium project. Also on
August 7, 1997, Columbia Transmission announced its intention to become a
sponsor of IPL's proposed Vector Pipeline project that will transport gas from
the Chicago area to the Millennium pipeline.
Market Expansion Project
Final FERC approval for Columbia Transmission's market expansion project was
received on May 14, 1997. Construction on the facilities required to provide the
first phase of service commenced in late-May. The expansion will add
approximately 500,000 Mcf per day of firm service to 23 customers. The first
phase of service will begin on November 1, 1997. The New York State Electric &
Gas Corporation (NYSEG) filed an appeal with the U. S. Court of Appeals for the
District of Columbia Circuit. NYSEG has not requested a stay of Columbia
Transmission's certificate order. Accordingly, construction is proceeding.
Regulatory Matters
Columbia Transmission's Rate Filing
Columbia Transmission's rate case settlement that went into effect, subject to
refund, on February 1, 1996, became effective June 1, 1997. In addition to an
increase in revenues to recover higher costs incurred since its last rate case
in 1991, the settlement provides an opportunity for the recovery of Columbia
Transmission's net investment in gathering and certain gas processing
facilities. The settlement also provides customers with rate certainty through
February 1, 2000, and allows Columbia Transmission to retain the gain from the
1996 sale of base gas from one of its storage fields, as well as certain future
base gas sales. The settlement permits Columbia Transmission to retain
approximately 95% of the initial $60 million pre-tax gain from base gas sales.
After that level has been reached, Columbia Transmission would share equally
with customers any gain from additional base gas sales. An after-tax improvement
of $12.4 million was recorded in the second quarter of 1997 to reflect the terms
of the settlement, including the base gas sale.
Excluded from the settlement is the environmental cost recovery issue which will
be addressed in the second phase of the proceeding scheduled for hearings during
the third quarter of 1998. Pursuant to a provision of the settlement, the New
York Public Service Commission has the right to initiate a hearing challenging
the appropriateness of the Straight Fixed Variable (SFV) rate design for
Columbia Transmission, with any change from the current SFV methodology to be
placed into effect no earlier than February 1, 2000.
Recovery of Columbia Gulf's Pre-November 1994 Transportation Costs
In March 1995, Columbia Transmission filed with the FERC to recover $39 million
of transportation costs that were billed to Columbia Transmission by Columbia
Gulf Transmission Company (Columbia Gulf). Several parties filed protests with
the FERC regarding the Columbia Gulf charges. The FERC subsequently ruled that
approximately $19 million of the Columbia Gulf charges were recoverable by
Columbia Transmission, subject to a general FERC audit, which has been completed
with no adjustment to the amounts billed. The remaining $20 million of costs are
associated with environmental issues.
Columbia Transmission and the parties to the case filed an uncontested offer of
settlement in May 1997 that provides for the resolution of issues previously
scheduled for hearing as well as other related issues including environmental.
The proposed settlement provides for a refund of $4 million, inclusive of
interest. Previously
16
<PAGE> 17
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
established reserves are sufficient and the settlement does not have an effect
on operating income. In addition, the settlement establishes a method for
determining whether Columbia Gulf may seek recovery of future environmental
costs incurred at specific sites and provides for the withdrawal of a number of
related court appeals. On June 25, 1997, the FERC approved the settlement.
Columbia Gulf Show Cause Proceeding
As reported in Columbia's 1996 Annual Report on Form 10-K, the FERC directed
Columbia Gulf to show cause as to why it had not filed for FERC abandonment
authorization to reduce capacity on its mainline facilities. On August 8, 1997,
the FERC issued an order approving a Stipulation and Consent Agreement that
requires Columbia Gulf to conduct a 30-day open season during which it will
make capacity available on its mainline pipeline system up to its certificated
capacity. Prospective shippers desiring the capacity will be required to
execute firm transportation agreements and will be responsible for securing
necessary capacity on upstream and downstream pipelines.
Gathering Facilities
Columbia Transmission began the process of selling portions of its gathering
facilities as a result of FERC's Order No. 636, which requires natural gas
pipelines to unbundle their gathering costs and services from other
transportation costs. During 1997, approximately 3,800 miles of gathering lines
in Kentucky, West Virginia and Pennsylvania will be sold to Columbia Resources
at Columbia Transmission's net book value. An agreement in principle has been
reached with a third party for the sale of approximately 1,700 miles of
gathering lines in Ohio, expected to occur in late 1997. Columbia Transmission
has completed an open-bidding process for the remaining 800 miles of gathering
lines. Subsequent negotiations have resulted in letters of intent to sell to
various parties certain of the remaining gathering systems located in Ohio,
Pennsylvania, West Virginia and Maryland. It is anticipated that the majority of
these facilities will be sold before year-end 1997 and will not have a material
effect on consolidated results.
Environmental Matters
Columbia's transmission subsidiaries have implemented programs to continually
review compliance with existing environmental standards. Columbia Transmission
is currently conducting assessment, characterization and remediation activities
at specific sites under a 1995 EPA Administrative Order by Consent.
Expenditures of approximately $2.1 million in the second quarter of 1997 have
been charged against the liability previously established resulting in a
remaining overall liability of $121.9 million. Consistent with Statement of
Financial Accounting Standards No. 71, a regulatory asset has been recorded to
the extent environmental expenditures are expected to be recovered through
rates. Columbia Transmission is also currently involved in pursuing recovery of
environmental expenditures from its insurance carriers; however at this time,
management is unable to determine the extent, if any, of recovery. Management
does not believe that Columbia Transmission's environmental expenditures will
have a material adverse effect on its operations, liquidity or financial
position, based on known facts and existing laws and regulations and the long
period over which expenditures will be made.
Volumes
Columbia Transmission's throughput consists of transportation and storage
services for local distribution companies and other customers within its market
area. Throughput is recorded for market-area storage services as gas is
withdrawn from storage. Throughput for Columbia Gulf reflects mainline
transportation services from Rayne, Louisiana to West Virginia and short-haul
transportation services from the Gulf of Mexico to Rayne, Louisiana.
Total throughput for the transmission and storage segment totaled 254.7 Bcf for
the second quarter of 1997, a decrease of 7.9 Bcf from the same period last year
due largely to a reduction in short-haul deliveries. For the six month period
ended June 1997, total throughput decreased 64.4 Bcf to 700.7 Bcf, primarily due
to warmer weather.
Under Order 636, a significant portion of the transmission and storage segment's
fixed costs are being recovered through a monthly demand charge. As a result,
variations in throughput do not have a significant impact on income.
Operating Revenues
Total operating revenues for the second quarter of 1997 of $210.1 million
increased $26.8 million over the same period last year. This increase is the
result of a variety of factors, primarily the base gas sales that were part of
Columbia Transmission's overall rate case settlement, and increased revenues
from transportation and storage services. For the first six months of 1997,
total operating revenues were $443.5 million, an increase of $33.6 million over
the same period in 1996, primarily due to the full period effect of higher rates
and the rate case settlement as well as revenues from transportation and storage
services as mentioned previously.
Operating Income
Operating income for the second quarter and six months ended June 30, 1997 was
$66 million and $158.9 million, respectively. This reflects an increase of $27
million and $34.4 million for the second quarter and year-to-date periods ended
June 30, 1997, respectively, largely due to higher operating revenues as
discussed above.
17
<PAGE> 18
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
(millions)
<S> <C> <C> <C> <C>
NET REVENUES
Sales revenues $ 342.8 $ 299.9 $1,368.0 $1,156.6
Less: Cost of gas sold 207.5 168.8 926.6 687.5
-------- -------- -------- --------
Net Sales Revenues 135.3 131.1 441.4 469.1
-------- -------- -------- --------
Transportation revenues 33.3 30.5 75.4 66.4
Less: Associated gas costs 3.3 4.2 6.2 7.4
-------- -------- -------- --------
Net Transportation Revenues 30.0 26.3 69.2 59.0
-------- -------- -------- --------
Net Revenues 165.3 157.4 510.6 528.1
-------- -------- -------- --------
OPERATING EXPENSES
Operation and maintenance 102.6 118.6 212.8 235.1
Depreciation 12.4 12.2 48.0 43.8
Other taxes 29.0 29.6 87.9 84.2
-------- -------- -------- --------
Total Operating Expenses 144.0 160.4 348.7 363.1
-------- -------- -------- --------
OPERATING INCOME (LOSS) $ 21.3 $ (3.0) $ 161.9 $ 165.0
======== ======== ======== ========
THROUGHPUT (BCF)
Sales
Residential 29.7 30.0 118.1 132.7
Commercial 10.6 11.7 44.7 54.0
Industrial and other 0.7 1.6 1.0 5.1
-------- -------- -------- --------
Total Sales 41.0 43.3 163.8 191.8
Transportation 61.0 60.0 133.0 131.7
-------- -------- -------- --------
Total Throughput 102.0 103.3 296.8 323.5
Off-System Sales 10.9 0.9 42.2 5.3
-------- -------- -------- --------
Total Sold or Transported 112.9 104.2 339.0 328.8
======== ======== ======== ========
SOURCES OF GAS FOR THROUGHPUT (BCF)
Sources of Gas Sold
Spot market* 76.8 88.2 138.4 167.2
Producers 8.1 9.4 19.6 25.6
Storage withdrawals (injections) (50.7) (60.6) 32.0 7.9
Other 17.7 7.2 16.0 (3.6)
-------- -------- -------- --------
Total Sources of Gas Sold 51.9 44.2 206.0 197.1
Transportation received for delivery to customers 61.0 60.0 133.0 131.7
-------- -------- -------- --------
Total Sources 112.9 104.2 339.0 328.8
======== ======== ======== ========
</TABLE>
* Purchase contracts of less than one year.
18
<PAGE> 19
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
Market Conditions
The second quarter weather was 19% colder than 1996 and 44% colder than normal
as April/May 1997 was the second-coldest April/May period since 1950. As a
result, Columbia's distribution subsidiaries' (Distribution) weather-sensitive
deliveries in the second quarter of 1997 increased approximately 5 Bcf from the
same quarter last year. Weather in Distribution's market area through the first
half of 1997 was 7 % warmer than 1996, but returned to essentially normal after
the colder second quarter weather. For the first six months of 1997,
Distribution's weather-sensitive deliveries were down 17 Bcf from last year.
Regulatory Matters
Distribution has been pursuing initiatives that give retail customers the
opportunity to purchase natural gas directly from marketers and using
Distribution's facilities for transportation service. Distribution has been
pursuing these opportunities through regulatory initiatives in all of its
jurisdictions which have resulted in pilot transportation programs being offered
in three of its five service areas as discussed in the 1996 Annual Report on
Form 10-K and Quarterly Report on Form 10-Q for the first quarter of 1997 and
further updated below. Once fully implemented, these programs would reduce
Distribution's merchant function and provide customers with the opportunity for
reduced energy costs. Stranded costs and costs associated with providing gas if
the marketing company cannot supply the gas that customers purchased, sometimes
referred to as the supplier of last resort, are two threshold issues that must
be addressed as these programs expand to all customers. The state commissions in
Distribution's five jurisdictions are at various stages in addressing these
issues. Distribution is currently recovering all stranded costs resulting from
the unbundling of its services and believes that future stranded costs and costs
resulting from being the supplier of last resort, will be fully recovered.
Columbia Gas of Ohio, Inc.'s (Columbia of Ohio) "Customer Choice" pilot
transportation program continues to expand. There are over 36,000 customers
participating, including 31,000 residential customers. There are 11 active
marketers in the program out of a total of 17 approved for participation. The
Public Utilities Commission of Ohio (PUCO) approved the initial program for a
one-year period. If the pilot program is successful, Columbia of Ohio expects to
expand the program to all of its nearly 1.3 million customers.
Columbia Gas of Pennsylvania, Inc.'s (Columbia of Pennsylvania) two-year pilot
program, which began on November 1, 1996 in Washington County, has about 5,300
customers participating. In June 1997, Columbia of Pennsylvania received
approval from the Pennsylvania Public Utility Commission (PPUC) to extend its
pilot customer choice program into Allegheny County, including the city of
Pittsburgh, beginning on November 1, 1997. As approved by the PPUC, the new
program will give marketers the option of obtaining their own pipeline capacity,
rather than taking assignment of capacity held by Columbia of Pennsylvania. The
company has approximately 100,000 customers in Allegheny County who are eligible
for the new program.
In Virginia, Commonwealth Gas Services, Inc. (Commonwealth Services) filed a
rate case with the Virginia State Corporation Commission in May 1997 requesting
a $10.1 million increase in annual revenue. The new rates would be effective on
October 18, 1997, subject to refund. The filing was made under recently passed
legislation providing for performance-based ratemaking. In its filing,
Commonwealth Services also proposed a residential/small commercial
transportation pilot program called "Commonwealth Choice Program." The pilot
program would also commence on October 18, 1997, and would be open to
approximately 26,000 customers in the Gainesville market area. Commonwealth
Services is the first company in Virginia to file tariffs to support such a
program. Additionally, as provided for by the new legislation and consistent
with Columbia's strategy to avoid frequent rate cases, the filing included a
request for future annual revenue increases of $1.9 million effective October
18, 1998 and $900,000 effective October 18, 1999. These increases are needed to
recover plant additions, that would not represent new revenue producing
additions, such as those required to replace facilities due to age and
condition. The revenue increases will be contingent upon Commonwealth Services
achieving performance benchmarks in the area of pipeline operations.
On August 1, 1997, the Maryland People's Counsel filed a petition with the
Public Service Commission (PSC) seeking a $1.6 million reduction in Columbia
Gas of Maryland, Inc.'s (Columbia of Maryland) annual revenues. Among the
issues cited, the petition claimed that Columbia of Maryland's 12-month
earnings through March 31, 1997, exceeded its authorized return on equity.
Columbia of Maryland is currently reviewing this matter.
19
<PAGE> 20
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
Gas Supply
Distribution's gas supply portfolio, with its large storage component, has the
reliability and flexibility to accommodate the impact of weather variations on
traditional customer demand as well as provide opportunities to increase
revenues through off-system sales and other incentive programs. Off-system sales
are sales or other transactions conducted outside of Distribution's traditional
market. In the first half of 1997, Distribution had off-system sales of 42.2
Bcf. This was a significant increase of 36.9 Bcf over the first half of 1996 due
indirectly to the mild first quarter weather this year as Distribution
aggressively marketed its storage volumes in March 1997. Columbia of
Pennsylvania, Columbia of Maryland and Columbia of Kentucky have incentive
programs in place that have been approved by their respective regulatory
commissions that provide for the sharing of the proceeds from off-system sales
with customers.
As previously reported, Columbia of Ohio's 1996 rate agreement permitted the
retainage of up to $51 million, from off-system sales, over three years subject
to an earnings limitation. The revenues eligible for retention, $19.7 million in
1997, are primarily from off-system sales transactions completed or agreed to
prior to August 31, 1996.
Proceeds from releasing unused pipeline capacity totaled $9.3 million in the
first half of 1997, up $1.5 million from the prior year's first half total.
Where capacity release incentive benchmarks are established, a portion of the
proceeds generated in excess of the benchmark provides income for Distribution.
The majority of the proceeds are recorded as a reduction to gas costs and the
benefit passed through to customers. In the first half of 1997, both Columbia of
Pennsylvania and Columbia of Maryland were able to retain a small amount of
capacity release proceeds. As residential and small commercial transportation
programs develop into widespread practice and marketers take assignment of the
LDC's pipeline capacity contracts, earnings from these non-traditional services
may decline.
Environmental Matters
As previously reported, Distribution's primary environmental issues relate to 15
former manufactured gas plant sites. In the second quarter, investigation
activity began at one of these sites, bringing to seven the number of sites
currently under remediation or being investigated. At this time, it is not
possible to estimate the costs associated with this site.
To the extent Distribution's site investigations have been conducted,
remediation plans developed and any responsibility for remediation action
established, the appropriate liabilities have been recorded. Regulatory assets
have been recorded for a majority of these costs as rate recovery has been
allowed or is anticipated.
Volumes
Throughput for the second quarter of 1997 was 102 Bcf, a decrease of 1.3 Bcf
from last year as the effect of colder weather was offset by a decline of
approximately 3.8 Bcf due to a labor strike at Wheeling-Pittsburgh Steel Corp.
as well as reduced usage from other customers.
For the first half of 1997, throughput of 296.8 Bcf decreased 26.7 Bcf from the
same period last year reflecting reduced sales as a result of the mild first
quarter of 1997. Partially offsetting the decrease in sales was an increased
demand for transportation services reflecting competitive natural gas spot
prices, favorable economic conditions and decreased interruptions by upstream
suppliers. Industrial throughput was negatively impacted by a decrease of
approximately 6 Bcf due to the strike at Wheeling-Pittsburgh Steel Corp.
Net Revenues
Net revenues for the second quarter of 1997 were $165.3 million, up $7.9 million
from the second quarter of 1996. The 19% colder weather in the current quarter
increased net revenues by $9 million. The effect of higher transportation
revenues and Columbia of Ohio's retention in the current period of certain
off-system sales revenues, resulting from a 1996 rate settlement, was tempered
by decreased customer usage.
For the first six months of 1997, net revenues were $510.6 million, a decrease
of $17.5 million from 1996. Weather that was 7% warmer than last year reduced
net revenues by approximately $25 million. This decrease was tempered by
Columbia of Ohio's retention in the current period of $11 million of off-system
sales revenues.
20
<PAGE> 21
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
Operating Income
Operating income for the second quarter of 1997 of $21.3 million reflected a
$24.3 million improvement over the $3 million prior period loss due to the
higher net revenues and a $16.4 million decline in operating expenses. The
reduction in operating expenses primarily reflects a decrease of approximately
$12.6 million for restructuring charges and the beneficial effect of recently
implemented cost containment measures.
For the first six months of 1997, operating income of $161.9 million was down
$3.1 million from 1996 due to the decline in net revenues partially offset by a
decrease of $14.4 million in operating expenses reflecting lower restructuring
charges as well as the favorable impact of cost containment measures. Increased
plant additions contributed to the $4.2 million increase in depreciation expense
while higher property taxes were responsible for the $3.7 million rise in taxes
other than income.
21
<PAGE> 22
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ------------------
1997 1996 1997 1996
------- ------- ------- -------
(millions)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Gas $ 25.8 $ 23.5 $ 53.7 $ 51.2
Oil and liquids 0.9 1.6 2.0 2.8
------- ------- ------- -------
Total Operating Revenues 26.7 25.1 55.7 54.0
------- ------- ------- -------
OPERATING EXPENSES
Operation and maintenance 11.4 9.1 20.1 18.0
Depreciation and depletion 7.8 7.4 14.6 14.3
Other taxes 2.1 2.2 3.9 4.5
------- ------- ------- -------
Total Operating Expenses 21.3 18.7 38.6 36.8
------- ------- ------- -------
OPERATING INCOME $ 5.4 $ 6.4 $ 17.1 $ 17.2
======= ======= ======= =======
GAS PRODUCTION STATISTICS
Production (Bcf) 8.4 8.0 16.7 16.5
Average Price (per Mcf) $ 2.67 $ 2.81 $ 2.72 $ 2.98
OIL AND LIQUIDS PRODUCTION STATISTICS
Production (000Bbls) 48 83 100 153
Average Price (per Bbl) $ 17.67 $ 19.10 $ 19.45 $ 18.00
</TABLE>
22
<PAGE> 23
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EXPLORATION AND PRODUCTION OPERATIONS (CONTINUED)
Acquisition of Alamco
On August 7, 1997, Columbia Resources acquired Alamco, a gas and oil production
company that operates in the Appalachian Basin, for $101 million including the
assumption of $24 million of outstanding debt. Under the agreement, holders of
Alamco received, on a fully diluted basis, $15.75 per share of common stock.
The combined companies will produce approximately 125 million cubic feet (Mmcf)
of natural gas per day, making Columbia Resources one of the largest-volume
natural gas and oil producers in the Appalachian Basin. This acquisition will
provide contiguous assets that give Columbia Resources a major presence in
north-central West Virginia, southern Kentucky and northern Tennessee with
proved reserves of nearly 800 Bcf of gas equivalent.
Gathering Facilities
On April 26, 1996, Columbia Transmission filed a request with FERC for
abandonment and transfer of certain gathering facilities to Columbia Resources.
Final FERC approval for the abandonment and transfer of these assets was
received May 19, 1997. Closing is scheduled to take place September 1, 1997.
Drilling Activity
During the first half of 1997, Columbia Resources participated in 17 gross
wells, of which 14 were successful, and added 1.9 Bcfe to net reserves.
Volumes
Gas production for the current quarter of 8.4 Bcf increased nearly 5% over the
second quarter of 1996. Production in last year's second quarter was reduced due
to production shut-ins resulting from facility problems at Columbia
Transmission's Kanawha Extraction Plant. For the six months ended June 30, 1997,
gas production was relatively unchanged from last year.
Oil and liquids production for the three and six months ended June 30, 1997, was
down 42% and 35%, respectively, primarily due to Columbia Resources' sale of the
Granny's Creek production field in December 1996.
Revenues
Second quarter revenues increased $1.6 million from the same period last year to
$26.7 million due to a reclassification in the recording of gathering costs. In
order to appropriately report the results of Columbia Resources gathering
activity, as discussed above, beginning in the second quarter of 1997 gas
revenues are recorded before deducting any gathering costs. Gathering costs are
included as an operating expense; therefore, the change in reporting has no
impact on operating income. Previously, gas revenues were based on gas prices
that had been reduced for gathering costs. After adjusting for the gathering
costs in the current quarter, total operating revenues decreased $700,000 from
the second quarter of 1996 reflecting reduced oil and liquids production and
prices. In the current quarter, gas prices averaged $2.67 per Mcf, down 5% from
the second quarter of 1996. The effect of lower gas prices was offset by a 0.4
Bcf increase in gas production.
Revenues for the first six months of 1997 increased $1.7 million to $55.7
million over the same period last year as of result of gas revenues being
reflected before deducting gathering costs as mentioned above. After adjusting
for these costs, revenues decreased $600,000 due to reduced oil and liquids
production and lower natural gas prices. The weaker natural gas prices reflected
the impact of warmer weather and ample storage inventory. Columbia Resources'
average gas sales price for the first six months was $2.72 per Mcf, down nearly
9%, from the same period last year. The effect of lower prices was partially
offset by a $4.1 million first quarter 1997 improvement for revenues related to
a contract buyout by a cogeneration facility.
Operating Income
Operating income for the current quarter of $5.4 million decreased $1 million
from the 1996 second quarter primarily due to reduced oil and liquids production
and prices. Total operating expenses increased $2.6 million over the second
quarter of 1996 primarily reflecting gathering expense. As discussed above, this
expense offsets
23
<PAGE> 24
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EXPLORATION AND PRODUCTION OPERATIONS (CONTINUED)
a like increase in gas revenues and has no operating income effect.
Operating income of $17.1 million for the first six months of 1997 was
essentially unchanged from the same period last year. The effect of lower
natural gas prices in the current period was mitigated by revenues received from
the buyout of a purchase contract by a cogeneration project.
24
<PAGE> 25
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARKETING, PROPANE AND POWER GENERATION OPERATIONS
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
(millions)
<S> <C> <C> <C> <C>
NET REVENUES
Gas marketing revenues $296.4 $152.3 $602.1 $310.4
Less: Products purchased 291.7 149.5 592.1 299.4
------ ------ ------ ------
Net Gas Marketing Revenues 4.7 2.8 10.0 11.0
------ ------ ------ ------
Propane revenues 12.7 10.9 41.2 43.2
Less: Products purchased 7.0 6.3 23.2 24.2
------ ------ ------ ------
Net Propane Revenues 5.7 4.6 18.0 19.0
------ ------ ------ ------
Other Revenues 2.5 2.3 8.4 5.3
------ ------ ------ ------
Net Revenues 12.9 9.7 36.4 35.3
------ ------ ------ ------
OPERATING EXPENSES
Operation and maintenance 13.0 9.5 24.9 18.8
Depreciation 1.0 0.7 1.9 1.5
Other taxes 0.7 0.7 1.5 1.5
------ ------ ------ ------
Total Operating Expenses 14.7 10.9 28.3 21.8
------ ------ ------ ------
OPERATING INCOME (LOSS) $ (1.8) $ (1.2) $ 8.1 $ 13.5
====== ====== ====== ======
PROPANE SALES (MILLIONS OF GALLONS)
Retail 8.8 8.3 29.9 33.1
Wholesale and Other 3.3 2.5 7.0 8.9
------ ------ ------ ------
Total Propane Sales 12.1 10.8 36.9 42.0
====== ====== ====== ======
MARKETING SALES (BCF) 121.7 59.9 228.4 106.4
</TABLE>
25
<PAGE> 26
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARKETING, PROPANE AND POWER GENERATION OPERATIONS (CONTINUED)
Expansion of Energy Marketing Operations
On June 30, 1997, Columbia Energy purchased PennUnion, an energy-marketing
subsidiary of Pennzoil, for approximately $14.75 million, subject to working
capital and certain other adjustments. The PennUnion acquisition will add sales
of 2.1 Bcf per day, increasing Columbia Energy's trading volumes to more than 3
Bcf per day. A significant portion of Columbia Energy's marketing volumes are
represented by a contract committing Columbia Energy to purchase most, at
certain index-priced prices, of Pennzoil's U.S. natural gas production of
approximately 585 Mmcf per day. This contract is for a 4 year period. As a
result of this transaction, Pennzoil will become Columbia Energy's largest
single supplier and places Columbia Energy among the top 15 marketers in the
United States.
Effective May 1, 1997, Columbia Energy began purchasing and marketing the
offshore natural gas production for the Kerr-McGee Corporation (Kerr-McGee) of
approximately 250 Mmcf per day or 90 Bcf a year. The marketing alliance will
continue for three years. Columbia Energy will manage all of Kerr-McGee's United
States natural gas marketing activities including scheduling, nominating and
balancing pipeline transportation as well as providing financial risk management
services.
Columbia Energy is Columbia's nonregulated natural gas marketing company. It
provides gas supply, fuel management and transportation-related services to a
diverse customer base, including cogenerators, local distribution companies,
industrial plants, commercial businesses, joint marketing partners and
residences.
Columbia Network Services Corporation (Columbia Network)
As previously discussed in the 1996 Annual Report on Form 10-K, Columbia
Network, a wholly-owned subsidiary, entered into an agreement with The SABRE
Group, Inc. (SABRE) to jointly develop an electronic energy information system.
In the second quarter of 1997, Columbia Network and SABRE formed a limited
liability company, Energy Net, L. L. C., that will operate under the name of The
SABRE Energy Network. The SABRE Energy Network will serve as a central access
point for the scheduling of natural gas transportation.
Net Revenues
Net revenues for the second quarter of 1997 increased $3.2 million over last
year to $12.9 million primarily due to higher net revenues for both gas
marketing and the propane operations. Gas marketing's net revenues increased
$1.9 million as a result of higher sales volumes that more than doubled to 121.7
Bcf. The improvement attributable to increased sales was partially offset by
lower margins. Propane sales increased 1.3 million gallons reflecting two new
districts being added with the purchase of the assets of Supertane Gas
Corporation in the first quarter of 1997. The higher propane sales coupled with
nearly 30% higher margins led to an increase of $1.1 million in net revenues for
the propane operations.
For the first six months of 1997, net revenues of $36.4 million increased $1.1
million over last year's results of $35.3 million primarily reflecting $3.1
million higher other revenues. This increase was largely due to revenues
received by TriStar for assuming Binghamton Partnership's gas transportation
contract with Columbia Transmission. This increase was offset partially by lower
net revenues for both gas marketing and the propane operations. While gas
marketing sales volumes increased from 106.4 Bcf to 228.4 Bcf, margins were down
in the first six months of 1997 resulting in $1 million lower net revenues. The
colder than normal weather experienced in the first quarter of 1996 provided gas
marketing operations the opportunity to earn significantly higher margins.
Propane net revenues were down $1 million due to lower weather-related sales in
the first quarter of 1997 that were partially offset by 9% higher margins.
Operating Income (Loss)
An operating loss of $1.8 million for the second quarter of 1997 was $600,000
greater than the $1.2 million loss in last year's second quarter. Increased net
revenues were more than offset by higher operating expense associated with
business expansion, an additional loss on the sale of the Binghamton Partnership
assets, and additional start-up costs incurred by Columbia Network. In the
second quarter of 1996, operation and maintenance expense included $1.4 million
of restructuring costs.
26
<PAGE> 27
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARKETING, PROPANE AND POWER GENERATION OPERATIONS (CONTINUED)
Operating income for the six months ended June 30, 1997, was $8.1 million, a
decrease of $5.4 million from last year primarily due to lower margins and
higher operating expense due to business expansion for Columbia Energy, as well
as reduced propane sales in the first quarter of 1997. Additional startup costs
for Columbia Network also negatively impacted operating income. The decrease in
operating income was mitigated by the $2.6 million received from the termination
of the Binghamton Partnership, higher gas marketing volumes and lower operation
and maintenance expense due to the restructuring charges recorded in the second
quarter of 1996.
27
<PAGE> 28
PART II - OTHER INFORMATION (CONTINUED)
Item l. Legal Proceedings
No new reportable matters have arisen and there have been no material
developments in any legal proceedings reported in Columbia's Annual
Report on Form 10-K for the year ended December 31, 1996, Quarterly
Report on Form 10-Q for the first quarter of 1997 except as follows:
I. Purchase and Production Matters
A. New Ulm v. Columbia Gas Transmission Corp., C.A. No. 88-V-655
(155th Judicial Dist. Ct. of Austin County, TX). On October 18,
1996, the Texas Supreme Court affirmed, in part, the appellate
Court's judgment by remanding New Ulm's fraud claim to the trial
court for further proceedings. On July 31, 1997, the jury
returned a verdict that awarded plaintiff $512,070 compensatory
damages and $2,560,350 punitive damages. The court has not yet
entered judgement on the verdict. No final order has been
rendered. Furthermore, any final order will be subject to the
terms of Columbia Transmission's plan of reorganization.
II. Regulatory Matters
A. Columbia Gas Transmission Corp., Docket No. RP95-196 and UGI
Utilities, Inc. v. Columbia Gulf Transmission Co. and Columbia
Gas Transmission Corp., Docket No. RP95-392. The Form 10-Q for
the First Quarter reported that Columbia Transmission and the
parties in this case had reached a settlement in principle. The
FERC approved the settlement on June 25, 1997. No requests for
rehearing were filed, thereby concluding this proceeding.
Item 2.Changes in Securities
None.
Item 3.Defaults Upon Senior Securities
None.
28
<PAGE> 29
PART II - OTHER INFORMATION (CONTINUED)
Item 4. Submission of Matters to a Vote of Security Holders
On May 21, 1997, the Annual Meeting of Stockholders of The Columbia Gas
System, Inc. was held. On the record date, Columbia had outstanding
55,349,562 shares of common stock, each of which was entitled to one
vote at the meeting. The election of four directors each to serve a
term of three years and the election of Arthur Andersen LLP as
independent public accountants were voted upon and approved by the
requisite number of shares present in person or by proxy at the
meeting.
The following is a summary of the results of that meeting:
A. Election of Directors
<TABLE>
<CAPTION>
Name of Director Votes For Votes Withheld
---------------- ---------- --------------
<S> <C> <C>
Wilson K. Cadman 43,827,165 416,325
James P. Heffernan 43,942,789 386,656
J. Bennett Johnston 43,844,644 421,207
James R. Thomas, II 43,886,571 402,524
</TABLE>
B. Election of Arthur Andersen LLP as independent public accountants:
<TABLE>
<CAPTION>
Votes For Votes Against Abstain
---------- ------------- -------
<S> <C> <C>
43,783,538 391,712 106,720
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit
Number
------
2-A* Unit Purchase Agreement between Pennzoil Exploration and
Production Company, Pennzoil Gas Marketing Company,
Pennzoil Energy Marketing Company and Columbia Energy
Services Corporation dated June 2, 1997.
2-B Agreement and Plan of Merger between Columbia Natural
Resources, Inc. and Alamco, Inc. dated May 27, 1997.
10-BG* Natural Gas Purchase Agreement between Columbia Energy
Services Corporation and Kerr-McGee Corporation dated March
31, 1997.
10-BH* Gas Sales Agreement between Pennzoil Exploration and
Production Company and Columbia Energy Services Corporation
dated June 2, 1997.
11 Statement re Computation of Per Share Earnings
12 Statements of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends
27 Financial Data Schedule
* A request for confidential treatment for certain sections of
these documents has been filed with the Commission.
The following reports on Form 8-K were filed during the second quarter of 1997.
29
<PAGE> 30
PART II - OTHER INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Financial
Item Statements
Reported Included Date of Event Date Filed
-------- ---------- --------------------------- -------------
<S> <C> <C> <C>
5 No May, 21, 1997; May 27, 1997 May 28, 1997
5 No June 3, 1997 June 5, 1997
5 Yes ** July 14, 1997 July 16, 1997
</TABLE>
** Summary of Financial and Operational data for three and six
months ended June 30, 1997
30
<PAGE> 31
PART II - OTHER INFORMATION (CONTINUED)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Columbia Gas System, Inc.
---------------------------------------
(Registrant)
Date: August 14, 1997 By: /s/ Jeffrey W. Grossman
-------------------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
31
<PAGE> 1
EXHIBIT 2-A
PENNZOIL EXPLORATION AND PRODUCTION COMPANY
PENNZOIL GAS MARKETING COMPANY
PENNZOIL ENERGY MARKETING COMPANY
AND
COLUMBIA ENERGY SERVICES CORPORATION
------------------------------
UNIT PURCHASE AGREEMENT
------------------------------
Dated effective as of June 2, 1997
----------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE I Purchase and Sale................................................... 1
1.01 Transfer of Units................................................... 1
1.02 Purchase Price...................................................... 1
1.03 Purchase Price and Pennzoil Credit Facility Adjustment Mechanism.... 2
1.04 Post-Closing Adjustments and Indebtedness........................... 3
1.05 Accounts Receivable and Related Matters............................. 5
1.06 The Closing......................................................... 5
1.07 Purchase Price Allocation........................................... 5
ARTICLE II Representations and Warranties of Pennzoil and Sellers.............. 6
2.01 Organization and Good Standing...................................... 6
2.02 Corporate Authority; Authorization of Agreement..................... 6
2.03 The Company......................................................... 6
2.04 No Violations....................................................... 7
2.05 No Default; Compliance with Laws.................................... 7
2.06 Financial Statements................................................ 8
2.07 Bank, Brokerage and Trading Accounts................................ 8
2.08 Accounts Receivable; Guaranties..................................... 8
2.09 Trade Names and Intellectual Property Rights........................ 8
2.10 Absence of Certain Changes.......................................... 8
2.11 Absence of Undisclosed Liabilities.................................. 9
2.12 Taxes............................................................... 10
2.13 Title to Properties; Encumbrances................................... 10
2.14 Subsidiaries........................................................ 10
2.15 Contracts, Agreements, Plans and Commitments........................ 10
2.16 Contracts and Permits............................................... 11
2.17 Litigation.......................................................... 11
2.18 Environmental Matters............................................... 12
2.19 Insurance Policies.................................................. 12
2.20 Employment Arrangements............................................. 12
2.21 Labor Relations; Employees.......................................... 12
2.22 Employee Benefit Matters............................................ 12
2.23 Illegal Payments.................................................... 14
2.24 June and July Gas Sales............................................. 14
2.25 Public Utility Holding Company...................................... 14
2.26 Books and Records................................................... 15
2.27 Full Disclosure..................................................... 15
ARTICLE III Representations and Warranties of Purchaser......................... 15
3.01 Organization and Good Standing...................................... 15
3.02 Corporate Authority; Authorization of Agreement..................... 15
3.03 No Violations....................................................... 15
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
3.04 Funds Available..................................................... 16
3.05 Litigation.......................................................... 16
ARTICLE IV Additional Agreements and Covenants................................. 16
4.01 Covenants of Pennzoil and Sellers................................... 16
4.02 Covenants of Purchaser.............................................. 19
ARTICLE V Conditions to Closing............................................... 20
5.01 Conditions to the Obligations of Purchaser.......................... 20
5.02 Conditions to the Obligations of Pennzoil and Sellers............... 21
ARTICLE VI Taxes............................................................... 22
6.01 Tax Return.......................................................... 22
ARTICLE VII Termination......................................................... 22
7.01 Grounds for Termination............................................. 22
7.02 Effect of Termination............................................... 22
ARTICLE VIII Survival of Representations and Warranties; Indemnification......... 23
8.01 Scope of Representations of Pennzoil and Sellers.................... 23
8.02 Indemnification of Purchaser........................................ 23
8.03 Indemnification of Sellers.......................................... 24
8.04 Claims.............................................................. 24
8.05 Limitation on Indemnification....................................... 24
8.06 Survival............................................................ 25
8.07 Tax Benefits; Insurance Proceeds.................................... 25
8.08 Exclusive Remedy.................................................... 25
ARTICLE IX Notices; Miscellaneous.............................................. 25
9.01 Notices............................................................. 25
9.02 Brokers............................................................. 26
9.03 Expenses............................................................ 26
9.04 Books and Records................................................... 26
9.05 Miscellaneous....................................................... 26
Appendix A Definitions .................................................. A-1
Appendix B Gas Sales Agreement................................................. B-1
Appendix C Assignment and Assumption Agreement................................. C-1
</TABLE>
Schedule 2.04 Consents, Violations, Etc.
Schedule 2.07 Banks, Brokerage Accounts and Trading Accounts
Schedule 2.08 Accounts Receivable and Guaranties
Schedule 2.09 Trade names and Intellectual Property Rights
Schedule 2.10 Changes
ii
<PAGE> 4
Schedule 2.11 Undisclosed Liabilities
Schedule 2.13 Contested Ad Valorem Taxes Not Delinquent
Schedule 2.14 Subsidiaries
Schedule 2.15 Contracts
Schedule 2.16 Defaults on Contracts and Permits
Schedule 2.17 Litigation
Schedule 2.18 Environmental Claims and Environmental Conditions
Schedule 2.19 Insurance Policies
Schedule 2.20 Employment Arrangements
Schedule 2.21 Employees, Officers, Directors, Etc.
Schedule 2.22 Plans
iii
<PAGE> 5
UNIT PURCHASE AGREEMENT
This UNIT PURCHASE AGREEMENT (this "Agreement"), dated
effective as of June 2, by and between, (a) on the one hand, (i) Pennzoil
Exploration and Production Company, a Delaware corporation ("Pennzoil") and,
(ii) Pennzoil Gas Marketing Company, a Delaware corporation and Pennzoil Energy
Marketing Company, a Delaware corporation ("Sellers"), and, (b) on the other
hand, Columbia Energy Services Corporation, a Kentucky corporation
("Purchaser");
W I T N E S S E T H:
WHEREAS, Sellers are the only members of PennUnion Energy
Services, L.L.C., a Delaware limited liability company (the "Company"), pursuant
to that Amended and Restated Limited Liability Company Agreement of the Company
(the "LLC Agreement") dated as of March 21, 1995;
WHEREAS, Sellers are the owners of 2,000 Class A Units (as
defined in the LLC Agreement) of the Company (the "Units"), which constitute all
of the Membership Interests (as defined in the LLC Agreement) in the Company;
WHEREAS, Purchaser desires to acquire the Units and Sellers
have agreed to sell the Units to Purchaser, upon the terms and subject to the
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and of the
respective representations, warranties, covenants, agreements and conditions
contained herein, the parties hereto hereby agree as follows. Unless defined
elsewhere in this Agreement, all capitalized terms used herein shall have the
respective meanings given them in Appendix A hereto, which is incorporated
herein by reference and shall be deemed to be a part of this Agreement for all
purposes.
ARTICLE I
Purchase and Sale
I.1 Transfer of Units. Upon the terms and subject to the conditions of
this Agreement, at the Closing, Sellers will sell and assign the Units and
deliver to Purchaser (and/or Purchaser's designees) certificates representing
the Units, duly registered in Purchaser's (and/or Purchaser's designees) name,
against receipt of payment for such Units as provided in Section 1.02.
I.2 Purchase Price. Upon the terms and subject to the conditions of
this Agreement, at the Closing, Purchaser will purchase the Units for
$14,750,000 (the "Purchase Price"), subject
<PAGE> 6
to the adjustments provided in Sections 1.03 and 1.04. The Purchase Price shall
be paid to Sellers at the Closing by wire transfer in federal or other
immediately available funds in the amounts and to the accounts to be specified
by Sellers at least two business days prior to the Closing.
I.3 Purchase Price and Pennzoil Credit Facility Adjustment Mechanism.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
2
<PAGE> 7
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
I.4 Post-Closing Adjustments and Indebtedness.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
3
<PAGE> 8
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
(f) Within 15 days after the earlier of (i) the expiration of
Sellers' 30-day review and audit period without delivery of a notice of
disagreement or (ii) the date on which the parties or the Accounting
Arbitrator, as applicable, finally determines the disputed matters,
Purchaser, Sellers and Pennzoil shall make the following adjustments to
the Purchase Price and the Pennzoil Credit Facility:
4
<PAGE> 9
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
I.5 Accounts Receivable and Related Matters. At Closing, the Company
shall execute and deliver one or more assignments in favor of Sellers of all
rights to the Olympic Receivable and Olympic Payable and gas imbalances related
to the Carthage Plant pursuant to an Assignment and Assumption Agreement in the
form of Appendix C. At the time of the payment pursuant to Section 1.04(f), all
of the Remaining Accounts Receivable and the Remaining Accounts Payable shall be
assigned to Seller pursuant to an Assignment and Assumption Agreement in the
form of Appendix C attached hereto. Purchaser shall use the same efforts during
the 180 day period to collect the Actual Accounts Receivable that Purchaser uses
to collect Purchaser's other accounts receivable; provided, however, Purchaser
shall be under no obligation to initiate any legal proceedings to collect the
Actual Accounts Receivable.
I.6 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Baker & Botts,
L.L.P., One Shell Plaza, 910 Louisiana, Houston, Texas on or before June 30,
1997 or at such other time and place as the parties may mutually agree following
satisfaction of the conditions precedent as outlined in Sections 5.01 and 5.02.
I.7 Purchase Price Allocation. The Purchase Price, as adjusted, and the
liabilities of the Company as of the Closing Date, including the Pennzoil Credit
Facility, shall be allocated among the assets represented by the Units in
accordance with Section 1060 of the Internal Revenue Code of 1986, as amended
(the "Code"), and the Treasury regulations thereunder. Such allocation shall be
jointly established by Purchaser and Sellers and shall be attached to the
Agreement as Schedule 1.07 at Closing. Schedule 1.07 shall be based on the most
currently available financial statements of the Company and shall be adjusted,
if necessary, by Purchaser and Sellers to reflect the Purchase Price, as
adjusted by application of Sections 1.03 and 1.04, and Actual Closing Financial
Statements, once they have been determined. Such adjusted Schedule 1.07 shall be
delivered to Sellers in accordance with the notice provisions of Section 9.01.
The allocations will be used by Purchaser and Sellers as the basis for reporting
asset values and other items for purposes of all required returns, statements
and reports with respect to taxes,
5
<PAGE> 10
including any reports required to be filed under Section 1060(b) of the Code and
the Treasury regulations promulgated thereunder. Sellers and Purchaser agree not
to assert, in connection with any audit or other proceeding with respect to
taxes, any asset values or other items inconsistent with the allocations set
forth in Schedule 1.07.
ARTICLE II
Representations and Warranties of Pennzoil and Sellers
Except as otherwise provided for or disclosed in this
Agreement or in the Schedules attached hereto, Pennzoil and Sellers hereby
represent and warrant to Purchaser that:
II.1 Organization and Good Standing. Each Seller and the Company is a
corporation or a limited liability company, as the case may be, duly organized,
validly existing and in good standing under the laws of its respective
jurisdiction of incorporation or formation, and each has all requisite power and
authority to own and lease the properties and assets it currently owns and
leases and to carry on its business as such business is currently conducted. The
Company is duly licensed or qualified to do business as a limited liability
company and is in good standing in all jurisdictions in which the character of
the properties and assets now owned or leased by it or the nature of the
business now conducted by it requires it to be so licensed or qualified except
where the failure so to qualify or to be so licensed would not reasonably be
expected to have a Material Adverse Effect.
II.2 Corporate Authority; Authorization of Agreement. Pennzoil and each
Seller has all requisite corporate power and authority to execute and deliver
this Agreement, to consummate the transactions contemplated hereby and to
perform all the terms and conditions hereof to be performed by it. The execution
and delivery of this Agreement by Pennzoil and each Seller, the performance by
Pennzoil and each Seller of all the terms and conditions hereof to be performed
by it and the consummation of the transactions contemplated hereby have been
duly authorized and approved by the Board of Directors of Pennzoil and each
Seller. This Agreement has been duly executed and delivered by Pennzoil and each
Seller and constitutes the valid and binding obligation of Pennzoil and each
Seller, enforceable against it in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency or other laws relating
to or affecting the enforcement of creditors' rights generally and general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
II.3 The Company. The authorized membership interests of the Company
consist solely of 2,000 Class A Units, all of which are issued and outstanding
on the date hereof. Sellers own beneficially and of record the Units, free and
clear of all liens, charges, encumbrances, rights of others, mortgages, pledges
or security interests. There are no outstanding subscriptions, options,
convertible securities, warrants or calls of any kind issued or granted by or
binding upon Sellers or the Company to purchase or otherwise acquire any
security of or membership interest in the Company.
6
<PAGE> 11
II.4 No Violations. Except as set forth on Schedule 2.04, this
Agreement and the execution and delivery hereof by Sellers does not, and the
fulfillment and compliance with the terms and conditions hereof and the
consummation of the transactions contemplated hereby, will not:
(a) conflict with, or require the consent of any Person under,
any of the terms, conditions or provisions of the charter or bylaws or
other organizational documents of any of Sellers or the Company;
(b) violate any provision of, or require any filing, consent,
authorization or approval under, any Legal Requirement applicable to or
binding upon Sellers or the Company (assuming receipt of all routine
governmental consents typically received after consummation of
transactions of the nature contemplated by this Agreement);
(c) conflict with, result in a breach of, constitute a default
under (without regard to requirements of notice or the lapse of time or
both), accelerate or permit the acceleration of the performance
required by, or require any consent, authorization or approval under,
(i) any mortgage, indenture, loan, credit agreement or other agreement
or instrument evidencing indebtedness for borrowed money to which any
of Sellers or the Company is a party or by which any of Sellers or the
Company is bound or to which any of their respective properties is
subject or (ii) any lease, license, contract or other agreement or
instrument to which any of Sellers or the Company is a party or by
which any of them is bound or to which any of their respective
properties is subject; or
(d) result in the creation or imposition of any lien, charge
or other encumbrance upon the assets of the Company or upon the Units,
which violation, breach or encumbrance with respect to the matters specified in
clauses (c) through (d) of this Section 2.04 might reasonably be expected to
have a Material Adverse Effect.
II.5 No Default; Compliance with Laws. To the best of their knowledge:
(a) the Company is not in default under, and no condition
exists that with notice or lapse of time or both would constitute a
default under, (i) any mortgage, indenture, loan, credit agreement or
other agreement or instrument evidencing indebtedness for borrowed
money to which the Company is a party or by which the Company is bound
or to which any of its properties is subject, (ii) any order, judgment
or decree of any Governmental Authority or (iii) any other agreement,
contract, lease, license or other instrument, which default or
potential default might reasonably be expected to have a Material
Adverse Effect; and
(b) the Company is in compliance with all Legal Requirements
applicable to
7
<PAGE> 12
its business and operations, noncompliance with which might reasonably
be expected to have a Material Adverse Effect;
II.6 Financial Statements. Sellers have heretofore delivered to
Purchaser true and complete copies of the unaudited financial statements of the
Company as of and for the period ended March 31, 1997 (including a balance
sheet, a statement of income, a statement of cash flows and any notes and
schedules thereto) (the "Financial Statements"). The Financial Statements are
true and complete in all material respects; have been prepared from the books
and records of the Company; have been prepared in accordance with generally
accepted accounting principles that have been consistently applied by the
Company throughout the periods indicated; and fairly represent the financial
position of the Company as at the date thereof and the results of its operations
for the period then ended.
II.7 Bank, Brokerage and Trading Accounts. Schedule 2.07 sets forth a
complete and correct listing of names and addresses of all banks or other
financial institutions in which Company has bank accounts, brokerage accounts,
deposit or safe-deposit boxes, with the names of all persons authorized to draw
on these accounts or deposits or to these boxes.
II.8 Accounts Receivable; Guaranties. Schedule 2.08 sets forth a
complete and accurate schedule of (a) the accounts receivable and accounts
receivable - owner, and accounts payable of Company as of April 30, 1997, (b)
gas in storage and gas imbalances to Sellers and Company's knowledge as of April
30, 1997, and (c) Guaranties given by Pennzoil or the Sellers and/or received by
the Company as of the date hereof, together with an accurate aging of such
accounts receivable and accounts payable. These accounts receivable and accounts
payable, and all accounts receivable and accounts payable of Company created
after such date, arose from valid purchases and sales in the ordinary course of
business. To the knowledge of Sellers, except as set forth on Schedule 2.08, all
accounts receivable are collectible at their full amounts without any defense or
right of set off or counterclaim.
II.9 Trade Names and Intellectual Property Rights. Schedule 2.09 sets
forth all patents, trade names, trademarks, service marks and copyrights and
their registrations, owned by Company or in which it has any rights or licenses,
together with a brief description of each. Company has not infringed, and is not
now infringing, on any trade name, trademark, patent service mark, copyright or
other intellectual property rights belonging to any other person, firm or
corporation. Except as set forth in Schedule 2.09, the Company is not a party to
any license, agreement or arrangement, whether licensor, licensee, or otherwise,
with respect to any patents, trademarks, service marks, trade names or
applications for them, or any copyrights. Company owns, or holds adequate
licenses or other rights to use, all patents, trademarks, service marks, trade
names and copyrights and other intellectual property rights necessary for the
conduct of its businesses as presently conducted. All such licenses and other
rights to use are freely assignable or otherwise transferable, without any fees,
assessments or third party consents following consummation of the transactions
contemplated by this Agreement.
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II.10 Absence of Certain Changes. Except as indicated in Schedule 2.10,
since May 8, 1997, there has not been:
(a) any material adverse change in the business, financial
condition or results of operations of the Company taken as a whole,
including the departure of full-time Company employees necessary to
carry out each operation of the Company, which change was not the
result of an industry-wide development affecting other companies in the
natural gas marketing industry;
(b) any damage, destruction or loss to or of any material
properties of the Company, whether or not covered by insurance, that
has had, or might reasonably be expected to have, a Material Adverse
Effect;
(c) any issuance or attempted issuance by the Company of any
Units;
(d) any sale, lease or other disposition of properties and
assets of the Company other than in the ordinary course of business;
(e) any merger or consolidation of the Company with any other
Person or any acquisition by the Company of the stock or business of
another Person;
(f) any borrowing of, or agreement to borrow, funds by the
Company;
(g) any mortgage, pledge or grant of a lien or security
interest in any property of the Company, other than in the ordinary
course of business (except any such encumbrance that will be released
at or before the Closing);
(h) any loan by the Company to any Person, other than accounts
receivable for goods furnished or services rendered which are payable
in accordance with customary terms, or guaranty by the Company of any
loan;
(i) any written waiver or release of any material right or
claim of the Company;
(j) any increase in the salary or other compensation payable
to or to become payable by the Company to any of its officers, managers,
employees, or the declaration, payment, commitment or obligation of any kind for
the payment of any bonus, award, severance or other salary or compensation to
any Person other than the vesting of employees' benefits under the Company's
qualified plans; or
(k) any contract or commitment to do any of the foregoing.
II.11 Absence of Undisclosed Liabilities. To the knowledge of Sellers,
except as set
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<PAGE> 14
forth in Schedule 2.11, the Company has no debt, liens, charges, assessments,
demands, liabilities, or obligations of any nature, whether accrued, absolute,
contingent or otherwise, and whether due or to become due, that is not reflected
or reserved against in the Financial Statements.
II.12 Taxes. Sellers have (or will have by the Closing Date) caused to
be timely filed with the appropriate Governmental Authorities all Tax Returns,
information returns or statements and reports required to be filed on or before
the Closing Date by or with respect to the Company which, if not so filed, would
have a Material Adverse Effect, and have (or will have by the Closing Date)
caused to be paid or deposited or made adequate provision for the payment of all
Taxes shown to be due on such returns or reports. Sellers have not received and
have no knowledge of any notice of deficiency, statutory notice of deficiency or
notice of partnership administrative proceedings or proposed deficiency or
assessment with respect to the Company or any of its properties from any taxing
authority, and there are no outstanding agreements or waivers by or with respect
to the Company that extend the statutory period of limitations applicable to any
federal, foreign, state or local income or franchise tax returns for any period.
For federal income tax purposes, the Company is characterized as a partnership
and not as an association taxable as a corporation pursuant to Treas. Reg.
Section 301.7701-2. The Company has taken the position on all of its federal
income Tax Returns that it is a partnership. There are no present disputes as to
taxes of any nature payable by Company. The Company is not and will not be
liable for any claim for taxes of the Sellers or any member of any affiliated or
consolidated group of which either Seller is a member.
II.13 Title to Properties; Encumbrances. The Company has good title to
all the properties and assets (whether real, personal or mixed and whether
tangible or intangible) that it purports to own, including all of the properties
and assets reflected in the Financial Statements (except for assets held under
capitalized leases and personal property sold since the date of the Financial
Statements in the ordinary course of business and consistent with past
practice), and all of the properties and assets purchased or otherwise acquired
by the Company since the date of the Financial Statements (except for personal
property acquired and sold since the date of the Financial Statements in the
ordinary course of business and consistent with past practice). All Material
Properties and assets reflected in the Financial Statements are free and clear
of all Encumbrances other than Permitted Encumbrances. As used herein, the term
"Permitted Encumbrances" means (a) liens for current taxes or securing payments
to mechanics and materialmen that are not yet delinquent or are being contested,
as set forth in Schedule 2.13, in good faith in the ordinary course of business,
and (b) with respect to real property, (i) minor imperfections of title, if any,
none of which is substantial in amount, materially detracts from the value or
impairs the use of the property subject thereto, or impairs the operations of
the Company, (ii) Legal Requirements that do not impair the present or
anticipated use of the property subject thereto, and (iii) utility and similar
easements and rights of way which, individually and in the aggregate, do not
materially interfere with the use of such real property in the business of the
Company.
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<PAGE> 15
II.14 Subsidiaries. Except as set forth in Schedule 2.14, the Company
does not own, directly or indirectly, any interest or investment (whether equity
or debt) in any corporation, partnership, business, trust, or other entity.
II.15 Contracts, Agreements, Plans and Commitments. Schedule 2.15
includes a list of the following contracts, leases, licenses, agreements, plans
and commitments to which the Company is a party or by which the Company or any
of its material properties is bound (the "Contracts"):
(a) any contract, commitment or agreement that involves
expenditures by the Company of more than $10,000 per year, other than
(i) contracts, commitments or agreements listed pursuant to other
clauses of this Section 2.15 or 2.19 and (ii) contracts, commitments or
agreements entered into in the ordinary course of business, which
collectively involve expenditures by the Company of less than $10,000
per year;
(b) any indenture, trust agreement, loan agreement or note
under which the Company has outstanding indebtedness, obligations or
liabilities for borrowed money;
(c) any lease, sublease, installment purchase or similar
arrangement for the use or occupancy of real property that involves
aggregate expenditures by the Company of more than $50,000 per year,
together with a list of the location of such leased property, the date
of termination of such arrangements, the name of the other party and
the annual rental payments required to be made for such arrangements;
(d) any agreement of surety, guaranty or indemnification by
the Company other than indemnification of managers and officers as
provided for in the Company's organization documents and guarantees
resulting from the endorsement, in the ordinary course of business, of
negotiable instruments for deposit or collection; and
(e) any written contract or agreement with either Sellers or
any Affiliate of either Seller relating to the provision of goods or
services.
II.16 Contracts and Permits. Each Contract and each license and permit
issued to the Company by any Governmental Authority is valid and binding upon
each party thereto and is in full force and effect according to its terms, and
there have been no amendments, modifications or supplements thereto other than
in the ordinary course of business or such as are specifically described on
Schedule 2.16. To the knowledge of Sellers, except as set forth on Schedule
2.16, there is no default or claim of default under any such Contract, license
or permit and no event has occurred which, with the passage of time or the
giving of notice (or both), would constitute a default by the Company, or any
other party thereto, under any such Contract, license or permit, or would permit
modifications, acceleration or termination of any such Contract, license or
permit, or result in the creation of any lien or encumbrance on any of the
assets of the Company. Except as indicated on Schedule 2.16, none of the
permits, licenses or Contracts will require the consent of or notice to any
person thereto with respect to any of the transactions contemplated hereby. None
of the licenses or permits requires the payments of any further fees before
Closing except as listed on Schedule 2.16, nor do any facts or circumstances
exist which would indicate
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<PAGE> 16
that the Company will not be entitled to renew any license or permit upon its
expiration or would be required to pay an extraordinary fee or change in
connection therewith. Except for the licenses or permits listed on Schedule
2.16, no other permit is required for the operation of the properties or
businesses of the Company as presently conducted.
II.17 Litigation.
(a) Except as set forth in Schedule 2.17, there is no action,
suit or proceeding pending or, to the knowledge of Pennzoil or Sellers,
threatened against the Company or any of its properties or assets.
(b) The Company has not been charged with a violation of, or,
to the knowledge of Sellers, threatened with a charge of a violation
of, any Legal Requirement relating to any aspect of its business, which
violation might reasonably be expected to have a Material Adverse
Effect.
II.18 Environmental Matters. Except as specified in Schedule 2.18,
there is no material Environmental Claim or environmental condition with respect
to the properties and assets of the Company or resulting from the operation
thereof.
II.19 Insurance Policies. Schedule 2.19 hereto sets forth a list of all
material insurance policies, including directors' and officers' liability
policies, by which the Company or any of its properties or assets are covered
against present losses, all of which are now in full force and effect. All these
policies are in the respective principal amounts set forth in Schedule 2.19.
II.20 Employment Arrangements. Schedule 2.20 attaches a correct and
current list of all contracts with respect to employment and collective
bargaining agreements, to which Company is a party or by which Company is bound;
all these contracts and agreements are in full force and effect, and neither
Company nor, to the knowledge of Sellers, any other party is in default under
any of them.
II.21 Labor Relations; Employees. Company has paid all salaries, wages,
bonuses and severance, accrued to the present to or for the benefit of its past
and/or present employees and has complied in all respects with all applicable
legal requirements relating to the employment of labor, including those relating
to wages, hours, collective bargaining and the payment and withholding of taxes,
and has withheld and paid to the appropriate governmental authority, or is
holding for payment not yet due to such authority, all amounts required by law
or agreement to be withheld from the wages or salaries of such employees. A
complete and correct list of the names and addresses of all officers, managers,
employees and agents (who are individuals) of Company (and its subsidiaries),
stating the rates of compensation payable to each is set forth in Schedule 2.21.
II.22 Employee Benefit Matters.
(a) Each Plan is listed on Schedule 2.22 hereto. No Plan is or
has been (A) covered by Title IV of ERISA, (B) a "multi-employer plan"
as defined in Section 3(37) of ERISA or (D) a voluntary employees'
beneficiary association within the meaning of Code Section 501(c)(9).
Each Plan intended to be qualified under Section 401(a) of
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<PAGE> 17
the Code is designated as a tax-qualified plan on Schedule 2.22 and is
so qualified.
(b) Sellers have heretofore delivered to Purchaser true and
correct copies of the following:
(i) each written Plan and all amendments thereto as of
the date hereof;
(ii) a complete description of each other Plan;
(iii) all current summary plan descriptions provided to
employees regarding the Plans;
(iv) the most recent determination letter issued by the
Internal Revenue Service with respect to any Plan qualified
under Section 401(a) of the Code;
(v) the trust agreement or other funding arrangement
for each Plan; and
(vi) all contracts or agreements related to each Plan.
(c) Except as set forth on Schedule 2.22, each Plan and
related trust as in effect on the date hereof is, to the extent
applicable, a duly qualified plan and trust under Section 401 and
501(a), respectively, of the Code; a favorable determination letter has
been received from the Internal Revenue Service with respect to each
such plan and trust; there have been no amendments to the respective
plan or trust since the date of such determination letter and no
actions have been taken which would adversely affect such
qualification.
(d) Each Plan and each funding medium which may be attendant
thereto, including group annuity contracts, has been in all material
respects operated and administered in accordance with its provisions
and applicable legal requirements.
(e) At or prior to the Closing Date, there will have been
contributed to each Plan not less than the greater of the amounts
required pursuant to any applicable union contracts or such amounts
necessary to comply with the minimum funding standards of Section 412
of the Code, as the case may be, for all plan years prior to the
current plan year;
(f) As of the Closing Date, the fair market value of assets
under each Plan will be sufficient to satisfy the liability to
participants thereunder for benefits accrued through the Closing Date.
(g) The Company has made or will have made prior to the
Closing Date all other contributions or payments required to be paid or
accrued with respect to such Plan.
(h) Other than routine claims or obligations for benefits or
payments under the Plans in the ordinary course of business, there are
no actions, suits or claims pending or, to the knowledge of the Company
threatened against any Plan or any of its assets, and the Company has
no knowledge of any facts which could give rise to any such actions,
suits
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<PAGE> 18
or claims which if adversely determined would be expected to have a
material adverse effect on the financial position of any Plan or, to
the extent applicable, qualified status under the Code or ERISA of any
Plan.
(i) The Company and its respective affiliates, directors,
officers, representatives and employees have not, with respect to the
Plans, engaged in any "prohibited transaction" (as such term is defined
in the Code and ERISA) which has not been exempted under the statutory
as opposed to administrative provisions of Section 408 of ERISA, and to
the knowledge of Sellers no such Plan, related trust, trustee,
administrator or other "party-in-interest" (as defined in ERISA) has
engaged in any transactions, directly or indirectly, to which
prohibited transaction, sanctions, taxes or penalties may be imposed
under the Code or ERISA.
(j) The Company and its respective directors, officers,
representatives and employees, and, to the best of Seller's knowledge,
any other "fiduciary" (as defined in ERISA), has not, with respect to
any Plan, committed any breach of fiduciary responsibility imposed by
ERISA or any other applicable Law which could subject the Company or
any of its respective directors or officers to liability under ERISA or
any Legal Requirements.
(k) The Company and its subsidiaries do not have any leased
employees within the meaning of Code Section 414(n).
(l) Except for continuation coverage provided pursuant to Code
Section 4980B, no Plan provides any medical or other welfare benefit
plan coverage beyond termination of employment and there is no
obligation to do so.
(m) The Company will not have on or after the Closing any
liability, obligation or responsibility for any Plan (except as to its
severance plan referred to in Section 4.02(d)), or for any other
employee benefit or compensation plan, agreement or arrangement
maintained, sponsored or contributed to by the Company or by any trade
or business, whether or not incorporated, which is a member of a
control group of companies or is otherwise treated with the Company as
a single employer within the meaning of ERISA Section 4001 or Code
Section 414.
II.23 Illegal Payments. Neither Sellers, Company, or to the best
knowledge of Sellers and Company have any of their respective Affiliates,
managers, officers, agents, unitholder or employees:
(a) made or has agreed to make any contributions, payments, or
gifts of funds or property through any governmental official, employee
or agent where either the payment or purpose of such contribution,
payment or gift was or is illegal under the laws of the United States,
or any state thereof, or any other jurisdiction (foreign or domestic);
(b) established or maintained any unrecorded fund or asset for
any purpose, or has made any false or artificial entries on any of its
books or records for any reason; or
(c) made or had agreed to make any contribution or
expenditure, or has
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reimbursed any political gift or contribution or any expenditure made
by any other person to candidates for public office, whether federal,
state or local (foreign or domestic) where such contributions were or
would be in violation of applicable Legal Requirement.
II.24 June and July Gas Sales. All gas purchased by the Company from
Pennzoil during the month of June and July 1997 will be purchased on the
financial terms and conditions set forth in the Gas Sales Agreement attached as
Appendix B hereto.
II.25 Public Utility Holding Company. The Company does not own or
operate any facilities used for the retail distribution of natural or
manufactured gas for heat, light or power, nor does the Company, directly or
indirectly, own, control or hold with power to vote 10% or more of the
outstanding stock of, or exercise direct or indirect controlling influence over
the management or policies of, such a company or a company so controlling such a
company.
II.26 Books and Records. To their knowledge, all existing records of
every type and description of the Company and that are in the possession of
Pennzoil or Sellers are, or shall prior to the Closing Date be, located in the
offices of the Company. The books and records of Company accurately reflect in
all material respects the business, financial condition and result of operations
of Company and have been maintained in all material respects in accordance with
good business and bookkeeping practices.
II.27 Full Disclosure. Except as set forth in the letter dated May 7,
1997, from the Company to Purchaser, none of the representations and warranties
made by Pennzoil or Sellers, or made in any certificate, document, instrument or
other writing furnished or to be furnished by Pennzoil, Sellers or Company or on
any of their behalf, contain or will contain any untrue statement of material
fact, or omit any material fact the omission of which would be misleading.
ARTICLE III
Representations and Warranties of Purchaser
Except as otherwise provided for or disclosed in this
Agreement or in the Schedules attached hereto, Purchaser hereby represents and
warrants to Sellers that:
III.1 Organization and Good Standing. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation.
III.2 Corporate Authority; Authorization of Agreement. Purchaser has
all requisite corporate power and authority to execute and deliver this
Agreement, to consummate the transactions contemplated hereby and to perform all
the terms and conditions hereof to be performed by it. The execution and
delivery of this Agreement by Purchaser, the performance by Purchaser of all the
terms and conditions hereof to be performed by it and the consummation of the
transactions contemplated hereby have been duly authorized and approved by the
Board of Directors of Purchaser. This Agreement has been duly executed and
delivered by Purchaser and constitutes the valid and binding obligation of
Purchaser, enforceable against it in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency or other laws relating
to or affecting the enforcement of creditors' rights generally and general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at
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<PAGE> 20
law).
III.3 No Violations. This Agreement and the execution and delivery
hereof by Purchaser do not, and the fulfillment and compliance with the terms
and conditions hereof and the consummation of the transactions contemplated
hereby will not:
(a) conflict with, or require the consent of any Person under,
any of the terms, conditions or provisions of the certificate of
incorporation or bylaws of Purchaser;
(b) violate any provision of, or require any filing, consent,
authorization or approval under, any Legal Requirement applicable to or
binding upon Purchaser (assuming receipt of all routine governmental
consents typically received after consummation of transactions of the
nature contemplated by this Agreement);
(c) conflict with, result in a breach of, constitute a default
under (without regard to requirements of notice or the lapse of time or
both), accelerate or permit the acceleration of the performance
required by, or require any consent, authorization or approval under,
(i) any mortgage, indenture, loan, credit agreement or other agreement
or instrument evidencing indebtedness for borrowed money to which
Purchaser is a party or by which Purchaser is bound or to which any of
its properties is subject or (ii) any lease, license, contract or other
agreement or instrument to which Purchaser is a party or by which it is
bound or to which any of its properties is subject; or
(d) result in the creation or imposition of any lien, charge
or other encumbrance upon the assets of Purchaser;
which violation, breach or encumbrance with respect to the matters specified in
clauses (c) through (d) of this Section 3.03 might reasonably be expected to
have a Material Adverse Effect.
III.4 Funds Available. Purchaser has, or will have prior to the Closing
Date, sufficient cash, available lines of credit or other sources of immediately
available funds to enable it to make payment of the Purchase Price at the
Closing.
III.5 Litigation. There is no action, suit, proceeding or governmental
investigation or inquiry pending or, to the knowledge of Purchaser, threatened
against Purchaser or its subsidiaries or any of their respective properties that
might delay, prevent or hinder the consummation of the transactions contemplated
hereby.
ARTICLE IV
Additional Agreements and Covenants
IV.1 Covenants of Pennzoil and Sellers. Pennzoil and Sellers covenant
and agree with Purchaser that from the date of execution of this Agreement until
Closing:
(a) New Transactions; Consent. Sellers agree to cause Company
to carry on its businesses and activities diligently and in
substantially the same manner as it had
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<PAGE> 21
previously been carried out, and shall not make agreements to any
unusual or novel methods of manufacture, purchase, sale, lease,
management, accounting or operation that will vary materially from
those methods previously used by Company.
(b) Compliance with and Performance of Agreement and Legal
Requirements. Sellers shall and shall cause Company to:
(i) perform all acts to be performed by it as
contemplated by this Agreement and that may be necessary to be
performed by it to keep this Agreement and the transactions
contemplated by this Agreement from (i) violating any Legal
Requirement, or (ii) resulting in the creation of any lien,
charge or encumbrance upon any of the properties and assets of
the Company;
(ii) refrain from taking any action that would in any
way prevent or invalidate the consummation of the transactions
contemplated by this Agreement, or that would cause or permit
this Agreement and the consummation of the transactions
contemplated by this Agreement to (a) violate any Legal
Requirements or the Company's policies and procedures, or (b)
result in the creation of any lien, charge or encumbrance upon
any of the properties and assets of the Company; and
(iii) notify Purchaser of any inaccuracy of any
representation or warranty contained in Article II of this
Agreement or the Schedules hereto promptly after receiving
notice of the same.
(c) Operation of Properties. Except as may be expressly
permitted hereunder or as set forth in any Schedule hereto, from the
date hereof until the Closing, without first obtaining the written
consent of Purchaser (which consent will not be unreasonably withheld,
conditioned or delayed), Sellers will not permit the Company to:
(i) waive any right of material value relating to any
of the properties and assets of the Company;
(ii) convey, encumber, mortgage, pledge or dispose of
properties or assets of the Company with a fair market value
exceeding either $50,000 or an individual basis or $50,000 in
the aggregate; and
(iii) commit itself to do any of the foregoing.
provided, however, that nothing contained in this Section 4.01(c) or
elsewhere in this Agreement shall limit the rights of the Company to
operate the properties and assets of the Company in the ordinary course
of business.
(d) Certain Changes. Except as may be expressly permitted by
this Agreement or set forth in any Schedule hereto, from the date
hereof until the Closing, without first obtaining the written consent
of Purchaser (which consent will not be unreasonably withheld,
conditioned or delayed), Sellers will not permit the Company to:
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<PAGE> 22
(i) declare or pay any distributions;
(ii) make any material change in the conduct of the
business or operations, of the Company, including, without
limitation, its trading activities and the payment (including
the timing of payments) of accounts payable of the Company;
(iii) except in the ordinary course of business and
consistent with past practices, enter into, assign, terminate
or amend in any material respect any contract or agreement
required to be disclosed pursuant to Section 2.15;
(iv) issue any equity interests, or repurchase, redeem
or otherwise acquire any such interests or make or propose to
make any other change in its capitalization;
(v) merge into or with or consolidate with any other
Entity or acquire all or substantially all of the business or
assets of any Person;
(vi) make any change in the LLC Agreement;
(vii) purchase any securities of any Person except for
short-term investments made in the ordinary course of business
consistent with past practices;
(viii) make or cause to be made any amendment to any
Plan;
(ix) fail to maintain the insurance policies now in
force with respect to the Company, its officers, managers and
employees (or insurance that is substantially equivalent);
(x) fail to perform and comply with all covenants and
conditions contained in the Company's contracts, leases,
licenses and other agreements in any material respect;
(xi) fail to comply, in all material respects, with the
legal requirements of any Governmental Authority having
jurisdiction over the business and operations of the Company;
or
(xii) commit itself to do any of the foregoing.
(e) Access. Pennzoil and Sellers will cause the Company to
afford to Purchaser and its authorized representatives, at Purchaser's
sole expense, risk and cost and upon reasonable notice, reasonable
access from the date hereof until the Closing Date, during normal
business hours, to the Company's personnel, properties, books and
records to the extent that such access and disclosure would not
unreasonably interfere with the normal operation of the business of the
Company or violate the terms of any agreement by which Sellers or the
Company is bound or any applicable Legal Requirement; provided,
however, that the confidentiality of any data or information so
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<PAGE> 23
acquired shall be maintained by Purchaser and its representatives in
accordance with Section 4.02(f).
(f) Reasonable Efforts. Pennzoil and Sellers will use their
respective Reasonable Efforts to obtain the satisfaction of the
conditions to Closing set forth in Section 5.02.
(g) No Negotiations. Pennzoil and Sellers shall not, and shall
not permit the Company to, solicit from any Person any proposals or
offers, or enter into any negotiations relating to the disposition of
all or substantially all the Company's assets or business, the
acquisition of the Units or the merger or consolidation of the Company
with any Entity.
(h) Public Announcements. Subject to applicable securities
laws or stock exchange requirements, at all times until the Closing
Date, Pennzoil and Sellers shall obtain the written approval of
Purchaser before issuing, or permitting any of the directors, officers,
employees or agents or Affiliates of Pennzoil, Sellers or the Company
to issue, any press release with respect to this Agreement or the
transactions contemplated hereby.
(i) Employee Benefit Plans and Employees. Pennzoil and Sellers
shall, on or before the Closing Date become plan sponsors of, or
terminate, the Company's Plans other than the Severance Pay Plan (as
described on Schedule 2.22), and shall satisfy all obligations and
liabilities with respect thereto, including but not limited to funding
all contributions, maintaining a Plan to the extent necessary to
continue its qualification under appropriate provisions of the Code or
to otherwise comply with applicable law, and providing COBRA
continuation benefits under Code Section 4980B for all employees whose
initial "qualifying event" (within the meaning of Code Section 4980B)
was on or prior to the Closing Date. Pennzoil and Sellers shall not
take any action inconsistent with the Purchaser's intent to treat all
employees of the Company and its subsidiaries who are employed on and
after the Closing Date as new employees (except as the Purchaser in its
sole discretion determines otherwise) for the purposes of the
Purchaser's compensation and employee benefit plans. Effective at
Closing, employees of the Company who remain in the employ of the
Company or Purchaser shall be covered by Purchaser's health insurance
plan.
IV.2 Covenants of Purchaser. Purchaser covenants and agrees with
Sellers as follows:
(a) Reasonable Efforts. Purchaser will use its Reasonable
Efforts to obtain the satisfaction of the conditions to Closing set
forth in Section 5.01.
(b) Public Announcements. Subject to applicable securities
laws or stock exchange requirements, at all times until the Closing
Date, Purchaser shall obtain the written approval of Sellers before
issuing, or permitting any of Purchaser's directors, officers,
employees, agents or Affiliates to issue, any press release with
respect to this Agreement or the transactions contemplated hereby.
(c) Tradenames. After the Closing, Purchaser and its
Affiliates shall not use the name "PennUnion" or "Pennzoil" or any
tradename incorporating or derivative of the
19
<PAGE> 24
name "PennUnion" or "Pennzoil," except as to notify the Company's
customers, suppliers and business associates. Within thirty (30) days
after the Closing, Purchaser will change the name of the Company so
that it does not include the name "PennUnion" or "Pennzoil."
(d) Severance. Sellers shall be responsible for and shall pay
to Purchaser all costs and expenses incurred pursuant to the Company's
current Severance Pay Plan) related to the severance ________________
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
associated with severing such
employees. Purchaser shall be responsible for, and shall indemnify
Sellers for, any and all severance costs incurred by Sellers pursuant
to the Company's currently effective Severance Pay Plan in excess of
those for which Sellers are responsible as stated above. Within ten
(10) days after receipt of the notice, Sellers shall pay to Purchaser,
as designated by Purchaser, the severance costs and expenses associated
with the designated employees.
(e) Guaranties. Seller shall maintain all Guaranties
outstanding and Purchaser shall use its Reasonable Efforts to obtain
from the appropriate parties and deliver to Pennzoil, within _______
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
after Closing, releases of any obligations of Pennzoil arising after
Closing pursuant to the Guaranties and other commitments identified in
Part III of Schedule 2.10 (the "Guaranties"). Purchaser agrees to
indemnify and hold harmless Pennzoil from and against any and all
claims under the Guaranties arising after Closing.
(f) Confidential Information. In the event that this Agreement
is terminated or, if not terminated, until the Closing Date, the
confidentiality of any data or information received by Purchaser
regarding the business and assets of the Company shall be maintained by
Purchaser and its representatives in accordance with the
Confidentiality Agreement dated December 10, 1996 executed by
Purchaser.
ARTICLE V
Conditions to Closing
V.1 Conditions to the Obligations of Purchaser. The obligations of
Purchaser to proceed with the Closing contemplated hereby are subject to the
satisfaction on or prior to the Closing Date of all of the following conditions,
any one or more of which may be waived, in whole or in part, in writing by
Purchaser:
(a) Compliance. Except for such breaches of representations or
warranties by and covenants of Pennzoil and/or Sellers made herein as
would not have a Material Adverse Effect, the representations and
warranties made herein by Pennzoil and Sellers shall be correct on and
as of the Closing Date as though such representations and warranties
were made on and as of the Closing Date, and Pennzoil and Sellers shall
have complied with all the covenants hereof required by this Agreement
to be performed by them at or prior to the Closing Date.
20
<PAGE> 25
(b) Consents. All consents identified on Schedule 2.04 shall
have been received.
(c) Officer's Certificates. Purchaser shall have received
certificates dated the Closing Date, of an executive officer of
Pennzoil and each Seller certifying as to the matters specified in
Section 5.01(a).
(d) No Orders. The Closing hereunder shall not violate any
order or decree of any Governmental Authority having competent
jurisdiction over the transactions contemplated by this Agreement;
provided, however, that if such order or decree is a temporary
restraining order or other ex parte order or decree and all other
conditions precedent to Closing have been satisfied or waived, the
Closing Date shall be extended to a date five business days subsequent
to the date on which such temporary restraining order or other ex parte
order or decree ceases to be in effect.
(e) Amendment of Pennzoil Credit Facility. Pennzoil shall have
amended the Pennzoil Credit Facility to provide for the Facilities'
continued existence as provided for in Section 1.03.
(f) Gas Sales Agreement. Pennzoil and the Company shall have
terminated the gas sales agreement dated April 1, 1995. Pennzoil and
the Purchaser shall have executed, delivered and closed the Gas Sales
Agreement in the form of Appendix B (the "Gas Sales Agreement").
(g) Resignations. The Company shall have delivered to
Purchaser, except as otherwise requested by Purchaser, the written
resignations of the board of managers of the Company, and will cause
any other actions to be taken with respect to these resignations that
Purchaser may reasonably request.
(h) Purchaser shall have received a release from Sellers, in
their capacity as members of the Company, releasing the Company from
all claims and causes of action arising from Sellers' capacity as
members (except as may arise from this Agreement) including any claim
that Sellers are owed any sums or are entitled to distributions from
the Company.
(i) All liens on the assets of the Company in favor of
Canadian Imperial Bank shall have been released.
V.2 Conditions to the Obligations of Pennzoil and Sellers. The
obligations of Pennzoil and Sellers to proceed with the Closing contemplated
hereby are subject to the satisfaction on or prior to the Closing Date of all of
the following conditions, any one or more of which may be waived, in whole or in
part, in writing by Pennzoil and Sellers:
(a) Compliance. The representations and warranties made herein
by Purchaser shall be correct on and as of the Closing Date as though
such representations and warranties were made on and as of the Closing
Date, and Purchaser shall have complied with all the covenants hereof
required by this Agreement to be performed by it at or prior to the
Closing Date.
21
<PAGE> 26
(b) Officer's Certificate. Sellers shall have received a
certificate dated the Closing Date of an executive officer of
Purchaser, certifying as to the matters specified in Section 5.02(a)
hereof.
(c) No Orders. The Closing hereunder shall not violate any
order or decree of any Governmental Authority having competent
jurisdiction over the transactions contemplated by this Agreement;
provided, however, that if such order or decree is a temporary
restraining order or other ex parte order or decree and all other
conditions precedent to Closing have been satisfied or waived, the
Closing Date shall be extended to a date five business days subsequent
to the date on which the temporary restraining order or such other ex
parte order or decree ceases to be in effect.
(d) Gas Sales Agreement. Pennzoil and the Company shall have
terminated the gas sales agreement dated April 1, 1995. Pennzoil and
the Purchaser shall have executed, delivered and closed the Gas Sales
Agreement and all guarantees and letters of credit called for under the
Gas Sales Agreement.
(e) Assignment and Assumption Agreement. The Company shall
have executed and delivered to Sellers one or more Assignment and
Assumption Agreements required to be delivered at Closing pursuant to
Section 1.05.
ARTICLE VI
Taxes
VI.1 Tax Return. The tax year of the Company will close effective as of
the end of the Closing Date pursuant to Code Section 708(b)(1)(B). Sellers shall
prepare and file all required federal income Tax Returns of the Company for
periods ending on or before the Closing Date, and pay and discharge all Taxes
resulting from taxable income shown on such Tax Returns. Sellers shall cause the
Company to file an election pursuant to Code Section 754 to adjust the basis of
Company property in the manner provided in Code Sections 734(b) and 743(b) on
the Company's federal income Tax Return for the short taxable year beginning on
January 1, 1997 and ending on the Closing Date. Purchaser and the Company shall
cooperate with Sellers and shall make available to Sellers all information and
timely take any action reasonably necessary to allow Sellers to prepare and file
any such Tax Return and pay and discharge any such taxes. Sellers shall
indemnify and hold Purchaser harmless from any federal income taxes imposed with
respect to the Company for periods prior to the Closing. Purchaser shall
indemnify and hold Sellers harmless from any federal income taxes arising from
any transaction involving the Company (including a liquidation or deemed
liquidation of the Company) occurring at or after the Closing.
ARTICLE VII
Termination
VII.1 Grounds for Termination. This Agreement may be terminated at any
time prior to the Closing:
(a) by the mutual written agreement of all of the parties
hereto; or
22
<PAGE> 27
(b) by either Pennzoil and Sellers or Purchaser if (i) the
Closing has not occurred by June 30, 1997, or (ii) the consummation of
the transactions contemplated hereby would violate any nonappealable
final order, decree or judgment of any Governmental Authority having
competent jurisdiction enjoining, restraining or otherwise preventing,
or awarding substantial damages in connection with, the consummation of
this Agreement or the transactions contemplated hereby; provided,
however, that a party shall not be allowed to exercise any right of
termination pursuant to this Section 7.01(b) if the event giving rise
to such right shall be due to the negligent or willful failure of such
party to perform or observe in any material respect any of the
covenants or agreements set forth herein to be performed or observed by
such party.
VII.2 Effect of Termination. The following provisions shall apply in
the event of a termination of this Agreement:
(a) If this Agreement is terminated as permitted under Section
7.01 and not as the result of the negligent or willful failure of any
party to perform its obligations hereunder, such termination shall be
without liability of any party to this Agreement or any Affiliate,
shareholder, director, officer, employee, agent or representative of
such party.
(b) If this Agreement is terminated as a result of the
negligent or willful failure of Purchaser to perform its obligations
hereunder, Purchaser shall be fully liable for any and all damages,
costs and expenses (including, but not limited to, reasonable
attorneys' fees) thereby sustained or incurred by Sellers.
(c) If this Agreement shall be terminated as a result of the
negligent or willful failure of Pennzoil or Sellers to perform their
respective obligations hereunder, Pennzoil and Sellers shall be fully
liable for any and all damages, costs and expenses (including, but not
limited to, reasonable attorneys' fees) thereby sustained or incurred
by Purchaser.
(d) The parties hereto hereby agree that the provisions of
Section 4.02(f) shall survive any termination of this Agreement.
ARTICLE VIII
Survival of Representations
and Warranties; Indemnification
VIII.1 Scope of Representations of Pennzoil and Sellers. Except as and
to the extent expressly set forth in Article II hereof, Pennzoil and Sellers
make no representations or warranties whatsoever, and disclaim all liability and
responsibility for any representation, warranty, statement or information made
or communicated (orally or in writing) to Purchaser (including, but not limited
to, any opinion, information or advice which may have been provided to Purchaser
by any Affiliate, officer, unitholder, director, employee, agent, consultant or
representative of Pennzoil, Sellers or the Company. Purchaser acknowledges and
affirms that Purchaser has made its own independent investigation, analysis and
evaluation of the Company
23
<PAGE> 28
and its properties, assets, business, financial condition, operations and
prospects.
VIII.2 Indemnification of Purchaser.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
VIII.3 Indemnification of Sellers.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
VIII.4 Claims. If a claim under the indemnities set forth in Sections
8.02 or 8.03 above is to be made by an indemnified party in connection with any
third party claim asserted against such indemnified party, the indemnified party
shall promptly notify the indemnifying party of such claim. The indemnifying
party shall have 30 days after receipt of such notice to undertake, conduct and
control, through counsel of its own choosing (subject to the consent of the
indemnified party, such consent not be unreasonably withheld) and at its
expense, the settlement or defense of such third party claim, and the
indemnified party shall cooperate in connection therewith; provided that (a) the
indemnifying party shall not thereby permit to exist any lien, encumbrance or
other adverse charge upon any asset of the indemnified party arising as a result
of such third party claim unless such lien, encumbrance or charge is being
contested in good faith by appropriate proceedings, and (b) the indemnifying
party shall permit the indemnified party to participate in such settlement or
defense through counsel chosen by the indemnified party, provided that the fees
and expenses of such counsel shall be borne by the indemnified party.
The indemnified party shall not pay or settle any third party claim
without first notifying the indemnifying party and providing the indemnifying
party with the option, for 30 days
24
<PAGE> 29
following receipt of such notice, to (i) admit in writing its liability for such
claim, if it has not already done so, and (ii) if liability is so admitted,
reject, in its reasonable judgment, the proposed settlement. Notwithstanding the
foregoing, the indemnified party shall have the right to pay or settle any such
third party claim to the extent, but only to the extent, that such settlement
provides for payments of money; provided that in such event it shall waive any
right to indemnity therefor by the indemnifying party.
VIII.5 Limitation on Indemnification.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
VIII.6 Survival. Except for the representations and warranties
contained in Section 2.22 which shall survive in perpetuity, the representations
and warranties set forth in this Agreement and in any certificate or instrument
delivered in connection herewith shall survive until four years after the
Closing Date, following which date none of the parties may bring any action or
present any claim for a breach of such representations and warranties; provided
that there shall be no termination of any representation or warranty as to which
a bona fide claim has been asserted if the Indemnifying Party has received
notice of such claim prior to the fourth anniversary of the Closing Date.
VIII.7 Tax Benefits; Insurance Proceeds. In determining the amount of
any loss, liability or expense for which any party is entitled to
indemnification under this Article VIII, the gross amount thereof will be
reduced by any correlative tax benefit or insurance proceeds realized or to be
realized by such party (or, in the case of Purchaser, by the Company or its
Subsidiaries), and such correlative insurance benefit shall be net of any
insurance premium that becomes due as a result of such claim.
VIII.8 Exclusive Remedy. The rights and remedies in this Article VIII
shall, to the fullest extent permitted by applicable law, be the exclusive
rights and remedies of the parties with respect to breaches of the
representations and warranties contained in this Agreement, and the affirmations
of such representations and warranties in the certificates contemplated by
Sections 5.01(c) and 5.02(b), and the covenants and agreements contained in
Sections 4.01 and 4.02(a) and (b) of this Agreement.
ARTICLE IX
Notices; Miscellaneous
IX.1 Notices. All notices and other communications given hereunder
shall be in writing and shall be deemed given if telecopied, delivered
personally or mailed by registered or certified mail, return receipt requested,
to the parties at the following addresses:
25
<PAGE> 30
(A) If to Purchaser to:
Columbia Energy Services Corporation
121 Hillpointe Drive, Suite 100
Canonsburg, PA 15317
Attn: Robert Gustafson
Telephone: 412/873-1300
Telecopy: 412/873-1411
(B) If to Pennzoil and Sellers to:
Pennzoil Company
P.O. Box 2967
Houston, Texas 77252-2967
Attention: John Chapman
Telephone: 713/546-8859
Telecopy: 713/546-6405
IX.2 Brokers. Pennzoil and Sellers have retained Lehman Brothers, Inc.
to assist and advise them in connection with the transactions contemplated by
this Agreement. Each of Purchaser and each of Pennzoil and the Sellers
represents to the other parties that, except as set forth in the preceding
sentence, it has not, directly or indirectly, employed any broker, finder or
intermediary in connection with such transactions that might be entitled to a
fee or commission upon the execution of this Agreement or the consummation of
such transactions.
IX.3 Expenses. The parties agree that Pennzoil and Sellers shall pay
the costs and expenses of the engagement of Lehman Brothers, Inc. to advise them
in connection with the transactions contemplated by this Agreement. Except as
specifically provided herein, all legal and other costs and expenses in
connection with this Agreement and the transactions contemplated hereby shall be
paid by Pennzoil, Sellers (and not the Company) or Purchaser, as the case may
be, depending upon which party incurred such costs and expenses.
IX.4 Books and Records. Pennzoil and Sellers agree that they will
deliver or cause to be delivered to Purchaser on the Closing Date all books and
records of the Company, to the extent that such books and records are not then
in the possession of the Company, provided that Pennzoil and Sellers may retain
copies of all tax and accounting records and of any matters for which Pennzoil
and Sellers may retain responsibility under the terms of this Agreement.
IX.5 Miscellaneous.
(a) Exclusive Agreement. This Agreement supersedes all prior
written or oral agreements between the parties with respect to the
transactions contemplated herein, other than the Confidentiality
Agreement between Sellers and Purchaser dated December 10, 1996, and,
except for such Confidentiality Agreement, is intended as a complete
and exclusive statement of the terms of the agreement between the
parties with respect to the transactions contemplated herein. Each
party represents to the other that it is not a party to any agreement
with any other party relating to the transactions contemplated by this
26
<PAGE> 31
Agreement.
(b) Choice of Law; Amendments; Headings. This Agreement shall
be governed by the internal laws of the State of Texas, without giving
effect to principles of conflicts of laws. This Agreement may not be
changed or terminated orally. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Terms such as "herein",
"hereby", "hereto" and "hereof" refer to this Agreement as a whole. The
term "include" and derivatives thereof are used in an illustrative
sense and not a limitative sense.
(c) Arbitration. Any issue, controversy, dispute or claim
arising out of or relating to this Agreement or its alleged breach that
cannot be resolved by mutual agreement shall be resolved exclusively by
final and binding arbitration by a panel of three arbitrators in
Houston, Texas, in accordance with the Commercial Arbitration Rules of
the American Arbitration Association ("AAA"), and judgment on the award
rendered by the panel may be entered by any court having jurisdiction
thereof. The arbitrators shall be selected by mutual agreement of the
parties (i.e., Pennzoil and Sellers on the one hand, and Purchaser on
the other), if possible. If the parties fail to reach agreement upon
appointment of the arbitrators within thirty days after a demand for
arbitration is made, the arbitrators shall be selected from a list of
proposed arbitrators submitted by AAA. The selection process shall be
that which is set forth in the AAA commercial arbitration rules then
prevailing, except that (1) the number of preemptory strikes shall not
be limited, and (2), if the parties fail to select the arbitrators from
one or more lists, AAA shall not have the power to make an appointment
but shall continue to submit additional lists until the arbitrators
have been selected. If an arbitrator should die, withdraw, or otherwise
become incapable of serving, a replacement shall be selected and
appointed in a like manner. If the arbitrators have not been selected
following submission of three or more lists by AAA, either party may
declare the existence of an impasse by giving written notice to the
other. In that event, the arbitrators shall be selected in the
following manner: Each party shall designate five proposed arbitrators
whose names appear on any of the lists previously submitted by AAA. The
parties shall then eliminate seven of the designated names by
alternately striking one, and the three persons whose names remain
shall serve as arbitrators. If necessary, the party to make the first
strike shall be designated by lot.
(d) Modification and Waiver. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing
by all the parties. No waiver of any of the provisions of this
Agreement shall be deemed, or shall constitute, a waiver of any other
provision, whether or not similar, nor shall any waiver constitute a
continuing waiver. No waiver shall be binding unless executed in
writing by the party making the waiver.
(e) Assignments and Third Parties. No party hereto shall
assign this Agreement or any part hereof without the prior written
consent of the other parties. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns. No such assignment
shall release Purchaser of any of its obligations under this Agreement.
Nothing in this Agreement shall entitle any person other than the
parties hereto or their
27
<PAGE> 32
respective permitted successors and assigns to any claim, cause of
action, remedy or right of any kind.
(f) Schedules. Pennzoil and Sellers may revise or supplement
the Schedules attached to this Agreement at any time on or prior to the
Closing; provided, however, that no such revision or supplement shall
revise or supplement any such Schedules so as to reflect any
information materially adverse to the Company that was not heretofore
disclosed to Purchaser.
(g) Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any
rule of law or public policy, all other conditions and provisions of
this Agreement shall nevertheless remain in full force and effect so
long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner adverse to any party.
Upon any binding determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in an
acceptable and legally enforceable manner, to the end that the
transactions contemplated hereby may be completed to the extent
possible.
(h) Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original and
all of which together shall constitute but one and the same agreement.
(i) Further Assurances. The parties hereto each agree to
deliver or cause to be delivered to the others on the Closing Date, and
at such other times thereafter as shall be reasonably requested, any
additional instrument that the other may reasonably request for the
purpose of carrying out this Agreement.
(j) Preservation of Books and Records. For a period of six (6)
years after the Closing Date, Purchaser shall (i) preserve and retain
the corporate, accounting, legal, auditing, contractual and other books
and records of the Company that relate to the conduct of its businesses
and operations prior to the Closing Date (including, but not limited
to, any documents relating to any governmental or nongovernmental
actions, suits, proceedings or investigations arising out of the
conduct of the business and operations of the Company prior to the
Closing Date) and (ii) make such books and records available at the
then current administrative headquarters of Purchaser to Pennzoil and
Sellers and their respective partners, officers, employees, agents and
Affiliates upon reasonable notice and at reasonable times, it being
understood that Pennzoil and Sellers shall be entitled to make and
retain copies of any such books and records as it shall deem necessary.
Purchaser agrees to permit representatives of Sellers to meet with
employees of Purchaser or the Company on a mutually convenient basis in
order to enable Sellers to obtain additional information and
explanations of any materials provided pursuant to this Section
9.05(j). Additionally, Purchaser shall retain such other records and
books of the Company that Sellers reasonably request beyond the
six-year period if Sellers are involved in any dispute or proceeding
regarding the use of such records if Sellers have notified Purchaser,
in writing, of the records that need to be maintained beyond the
six-year period prior to the termination of such six-year period.
28
<PAGE> 33
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
29
<PAGE> 34
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first written above.
PENNZOIL EXPLORATION AND
PRODUCTION COMPANY
By: /s/ Michael A. Osborne
--------------------------------------
Name: Michael A. Osborne
Title: Agent & Attorney in Fact
PENNZOIL GAS MARKETING COMPANY
By: /s/ Steven J. Dalts
--------------------------------------
Name: Steven J. Dalts
Title: President
PENNZOIL ENERGY MARKETING COMPANY
By: /s/ Steven J. Dalts
--------------------------------------
Name: Steven J. Dalts
Title: President
SELLERS
COLUMBIA ENERGY SERVICES CORPORATION
By: /s/ James C. McDonnell
--------------------------------------
Name: James C. McDonnell
Title: Vice President
PURCHASER
30
<PAGE> 35
APPENDIX A
Definitions
Capitalized terms used in this Agreement shall have the
meanings ascribed to them in this Appendix A unless such terms are defined
elsewhere in this Agreement. A cross reference sheet of terms defined elsewhere
in this Agreement follows this list of definitions.
Actual Accounts Receivable: The sum of the "Accounts Receivable" and
"Accounts Receivable-Owner," as identified in the Actual Effective Date
Financial Statements as of the Effective Date,
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
Actual Accounts Payable: The sum of "accounts payable" and "Accounts
Payable-Owner" as identified in the Actual Effective Date Financial Statements,
as of the Effective Date, less any accounts payable whose write-off is reflected
in the Actual Operating Loss Amount.
Actual Closing Date Pennzoil Credit Facility: The balance (including
accrued interest) on the Pennzoil Credit Facility as of the Closing Date.
Actual Effective Date Pennzoil Credit Facility: The balance (including
accrued interest) on the Pennzoil Credit Facility as of the Effective Date.
Actual Operating Loss Amount: The actual aggregate change in Total
Member's Equity of the Company calculated from January 31, 1997 through the
Effective Date plus ___________.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
Affiliate: Any Person that is an affiliate within the meaning of the
regulations promulgated under the Securities Act of 1933, as such regulations
are amended or in effect on the date in question.
Closing: The closing of the transactions contemplated by this
Agreement.
Closing Date. The date of the Closing.
Code: The Internal Revenue Code of 1986, as amended.
Commission: The U.S. Securities and Exchange Commission.
Effective Date: The effective date shall be May 31, 1997.
Encumbrance: Any mortgage, lien, security interest, pledge, charge,
encumbrance, easement, claim, restriction, limitation, irregularity, burden or
defect.
Entity: A corporation, partnership, joint venture, trust or
unincorporated organization or association, Governmental Authority or other
entity.
Environmental Claim: Any action, suit, investigation, proceeding or
written notice by
A-1
<PAGE> 36
any Person alleging or inquiring as to potential liability arising out of, based
on or resulting from any violation, or alleged violation, of any environmental
Legal Requirement.
ERISA: The Employee Retirement Income Security Act of 1974, as amended.
Estimated Operating Loss Amount:
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
Governmental Authority: The United States of America, any state,
commonwealth, territory or possession thereof and any political subdivision of
any of the foregoing, including but not limited to courts, departments,
commission, boards, bureaus, agencies or other instrumentalities.
Legal Requirements: Any law, statute, ordinance, decree, requirement,
order, judgment, rule or regulation of, including the terms of any license or
permit issued by, any Governmental Authority.
Material Adverse Effect: Any material adverse effect on the business,
financial condition or results of operations of the Company taken as a whole.
Material Properties: Any property of the Company, real, personal or
intangible with a fair market value greater than $50,000.
Olympic Payable:
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
Olympic Receivable:
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
Pennzoil Credit Facility: The credit facility between Pennzoil and the
Company pursuant to that certain Revolving Demand Loan Agreement dated as of
December 1, 1996 between Pennzoil and the Company as amended as of the Closing
Date.
Person: Any individual or Entity.
Plan: Each "employee benefit plan", as such term is defined in Section
3(2) of ERISA, which is covered by Title I of ERISA or such other plan or
arrangement, whether written or oral, designated to provide benefits or
remuneration to employees, including, without limitation, any pension, profit
sharing, savings, bonus, incentive, option, insurance, welfare, phantom stock or
A-2
<PAGE> 37
similar arrangement and which is or had been maintained, or otherwise
contributed to, by the Company or its subsidiaries for the benefit of the
employees (or former employees) of the Company or its subsidiaries or to which
the Company or its Subsidiaries has an obligation, responsibility or liability.
Purchaser Indemnified Loss:
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
Reasonable Efforts: The standard of performance that is in accordance
with reasonable commercial practices and without the incurrence of unreasonable
expense.
Realized Accounts Payable: The Actual Accounts Payable which have been
paid or, if applicable, reclassified as "gas held in storage" or "gas
imbalances", by ____ days after the Closing Date.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
Realized Accounts Receivable: The Actual Accounts Receivable which have
been received or, if applicable, reclassified as "gas held in storage" or "gas
imbalances", by ____ days after the Closing Date.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
Remaining Accounts Payable: The Actual Amounts Payable which have not
been paid or, if applicable, reclassified as "gas held in storage" or "gas
imbalances", by ____ days after the Closing Date.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
Remaining Accounts Receivable: The Actual Accounts Receivable which
have not been received or, if applicable, reclassified as "gas held in storage"
or "gas imbalances", by ____ days after the Closing Date.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
Securities Act: Securities Act of 1933, as amended.
Seller Indemnified Loss: Any loss, charge, assessment, damage or
expense (including reasonable attorneys' fees) sustained by Sellers arising out
of or resulting from any act or omission of Purchaser in its operation of the
Company after the Closing Date or any inaccuracy in or breach of any of the
representations, warranties or covenants made by Purchaser in this Agreement.
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<PAGE> 38
Taxes: All federal, foreign, state or local net or gross income, gross
receipts, petroleum revenue, sales, use, ad valorem, value added, franchise,
withholding, payroll, employment, excise, property, windfall profits or similar
taxes, assessments, duties, fees, levies or other governmental charges, together
with any interest thereon, any penalties, additions to tax or additional amounts
with respect thereto and any interest in respect of such penalties, additions or
additional amounts.
Tax Return: Any federal or state Tax return filed or to be filed by the
Company or any of its Subsidiaries.
Total Members' Equity: The sum of the "paid in capital" and "retained
earnings" as identified in the applicable financial statements of the Company.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
AAA................................... 9.05(c)
Agreement............................. Preamble
Closing............................... 1.05
Company............................... Recitals
Contracts............................. 2.10
Financial Statements.................. 2.06
Guaranties............................ 4.02(e)
Pennzoil.............................. Preamble
Purchase Price........................ 1.02
Purchaser............................. Preamble
Sellers............................... Preamble
Units................................. Recitals
</TABLE>
A-4
<PAGE> 1
EXHIBIT 2B
AGREEMENT AND PLAN OF MERGER
among
Columbia Natural Resources, Inc.
Appalachian Acquisition Company
and
Alamco, Inc.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1 DEFINITIONS............................................................. 1
ARTICLE 2 THE MERGER.............................................................. 1
2.1 Effective Time of the Merger............................................ 1
2.2 Closing................................................................. 1
2.3 Effects of the Merger................................................... 1
ARTICLE 3 CONVERSION OF SHARES; PAYMENT OF MERGER CONSIDERATION................... 2
3.1 Conversion of Shares.................................................... 2
3.2 Payment................................................................. 2
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................... 3
4.1 Organization and Good Standing.......................................... 3
4.2 Capitalization of the Company........................................... 3
4.3 Subsidiaries............................................................ 3
4.4 Authority; No Conflicts................................................. 4
4.5 SEC Filings............................................................. 4
4.6 Consents................................................................ 5
4.7 No Brokers.............................................................. 5
4.8 Proxy Statement......................................................... 5
4.9 Absence of Changes...................................................... 5
4.10 Absence of Undisclosed Liabilities...................................... 6
4.11 Tax Returns............................................................. 6
4.12 Trade Names and Rights.................................................. 6
4.13 Material Contracts...................................................... 6
4.14 Contracts and Permits................................................... 6
4.15 Labor Matters........................................................... 7
4.16 Benefit Plans........................................................... 7
4.17 Litigation.............................................................. 8
4.18 Absence of Sensitive Payments........................................... 8
4.19 Compliance with Laws.................................................... 8
4.20 Disclaimers............................................................. 8
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB......................... 9
5.1 Organization and Good Standing.......................................... 9
5.2 Execution and Effect of Agreement....................................... 9
5.3 No Conflicts............................................................ 9
5.4 Consents................................................................ 9
5.5 Availability of Funds................................................... 10
5.6 No Brokers.............................................................. 10
5.7 Proxy Statement and Other Information................................... 10
ARTICLE 6 ADDITIONAL PROVISIONS REGARDING REPRESENTATIONS AND WARRANTIES.......... 10
6.1 Limitation; No Survival................................................. 10
6.2 Right to Update Schedules............................................... 10
6.3 Schedules and Exhibits.................................................. 10
ARTICLE 7 ADDITIONAL COVENANTS AND UNDERTAKINGS................................... 10
7.1 Stockholder Approval.................................................... 10
7.2 Further Assurances and Assistance....................................... 11
7.3 Access to Information................................................... 11
7.4 Conduct of Business Prior to Closing.................................... 12
7.5 H-S-R Act............................................................... 13
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
7.6 Books and Records....................................................... 13
7.7 Inquiries and Negotiations.............................................. 13
7.8 Indemnification; Director's and Officer's Insurance..................... 13
7.9 Notice of Default....................................................... 14
7.10 Benefit Matters After Closing........................................... 14
ARTICLE 8 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PARTIES TO CLOSE............. 15
8.1 Conditions Precedent to the Obligation of Buyer and Sub................. 15
8.2 Conditions Precedent to the Obligation of the Company................... 15
ARTICLE 9 EXPENSES................................................................ 16
ARTICLE 10 TERMINATION............................................................. 16
10.1 Termination............................................................. 16
10.2 Deposit Escrow.......................................................... 17
10.3 Break-Up Fee............................................................ 17
ARTICLE 11 NOTICES................................................................. 17
ARTICLE 12 MISCELLANEOUS........................................................... 18
12.1 Headings................................................................ 18
12.2 Schedules and Exhibits.................................................. 18
12.3 Execution in Counterparts............................................... 18
12.4 Entire Agreement........................................................ 18
12.5 Governing Law........................................................... 18
12.6 Modification............................................................ 18
12.7 Successors and Assigns.................................................. 18
12.8 Waiver.................................................................. 18
12.9 Severability............................................................ 18
12.10 Announcements........................................................... 19
</TABLE>
ii
<PAGE> 4
ANNEX I DEFINITIONS
EXHIBITS
A -- Certificate of Incorporation
B -- Escrow Agreement
SCHEDULES
4.3 -- Subsidiaries
4.4 -- Conflicts
4.6 -- Company Consents
4.9 -- Absence of Changes
4.12 -- Trade Names
4.13 -- Material Contracts
4.14 -- Contracts and Permits
4.15 -- Labor Matters
4.16 -- Benefit Plans
4.17 -- Litigation
5.4 -- Buyer and Sub Consents
7.4 -- Transactions Prior to Closing
8.1 -- Indemnified Individuals
iii
<PAGE> 5
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of this 27th
day of May, 1997, is entered into by and among Columbia Natural Resources, Inc.,
a Texas corporation ("Buyer"), Appalachian Acquisition Company, a Delaware
corporation and a wholly-owned subsidiary of Buyer ("Sub"), and Alamco, Inc., a
Delaware corporation (the "Company"). The Company and Sub are the only parties
to the merger hereby contemplated and are sometimes referred to herein as the
"Constituent Corporations," and the Company is sometimes referred to herein as
the "Continuing Corporation."
WITNESSETH:
WHEREAS, the Company is an independent gas and oil producer engaged in the
acquisition, exploitation, exploration, development and production of natural
gas and oil primarily in West Virginia, Tennessee and Kentucky.
WHEREAS, the respective Boards of Directors of the Constituent Corporations
have approved this Agreement and deem it advisable and in the best interests of
their respective corporations and stockholders that Sub merge with and into the
Company on the terms and conditions herein set forth, whereby the Company will
become a wholly-owned subsidiary of Buyer (the "Merger").
NOW, THEREFORE, for the purpose of consummating the above transaction and
in consideration of the promises and mutual covenants herein contained, the
parties hereby agree as follows:
ARTICLE 1
DEFINITIONS
As used in this Agreement, capitalized terms shall have the meanings
specified in the text hereof or on Annex I hereto (which is incorporated herein
by reference), which meanings shall be applicable to both the singular and
plural forms of the terms defined.
ARTICLE 2
THE MERGER
2.1 Effective Time of the Merger. Subject to the provisions of this
Agreement, a Certificate of Merger (the "Certificate of Merger") in such form as
required by the relevant provisions of the Delaware General Corporation Law (the
"GCL") shall be duly prepared, executed and acknowledged by each of the
Constituent Corporations and thereafter delivered to the Secretary of State of
the State of Delaware for filing, as provided in the GCL, on the Closing Date.
The Merger shall become effective upon the filing of the Certificate of Merger
with the Secretary of State of the State of Delaware or at such time thereafter
as is provided in the Certificate of Merger (the "Effective Time").
2.2 Closing. The closing of the Merger (the "Closing") will take place at
the offices of Kirkpatrick & Lockhart LLP, 1500 Oliver Building, Pittsburgh,
Pennsylvania 15222-2312 at 10:00 a.m., prevailing time, on (i) the earlier of
(A) October 15, 1997 and (B) the first Business Day after the last of the
conditions set forth in Article 8 is fulfilled or waived, or (ii) on such other
date as is specified by Buyer and the Company after all of the conditions to the
Merger set forth in Article 8 have been satisfied or waived, subject to the
rights of termination and abandonment hereinafter set forth (the "Closing
Date").
2.3 Effects of the Merger.
(a) At the Effective Time (i) the separate existence of Sub shall cease and
Sub shall be merged with and into the Company, (ii) the Certificate of
Incorporation of the Company, as the Continuing Corporation, shall be amended to
read in its entirety as set forth in Exhibit A, (iii) the Bylaws of Sub as in
effect immediately prior to the Effective Time shall be the Bylaws of the
Continuing Corporation, and (iv) the officers and
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<PAGE> 6
directors of Sub at the Effective Time shall be the officers and directors of
the Continuing Corporation and hold office as provided in the Bylaws of the
Continuing Corporation.
(b) At and after the Effective Time, the Continuing Corporation shall
possess all the rights, privileges, powers and franchises of a public as well as
of a private nature, and be subject to all the restrictions, disabilities and
duties of each of the Constituent Corporations; and all and singular rights,
privileges, powers and franchises of each of the Constituent Corporations, and
all property, real, personal and mixed, and all debts due to either of the
Constituent Corporations on whatever account, as well as for stock subscriptions
and all other things in action or belonging to each of the Constituent
Corporations, shall be vested in the Continuing Corporation, and all property,
rights, privileges, powers and franchises, and all and every other interest
shall be thereafter as effectually the property of the Continuing Corporation as
they were of the Constituent Corporations, and the title to any real estate
vested by deed or otherwise, in either of the Constituent Corporations, shall
not revert or be in any way impaired; but all rights of creditors and all liens
upon any property of either of the Constituent Corporations shall be preserved
unimpaired, and all debts, liabilities and duties of the Constituent
Corporations shall thereafter attach to the Continuing Corporation, and may be
enforced against it to the same extent as if such debts and liabilities had been
incurred by it.
ARTICLE 3
CONVERSION OF SHARES; PAYMENT
OF MERGER CONSIDERATION
3.1 Conversion of Shares. As of the Effective Time, by virtue of the Merger
and without any action on the part of the holder of any shares of capital stock
of Sub or the Company:
(a) All issued and outstanding shares of Stock of the Company shall be
canceled and extinguished and each share shall be converted into the right to
receive $15.75 in cash (the "Merger Consideration"). Until surrendered, the
certificates representing shares of the Company's Stock shall represent for all
purposes only the right to receive the Merger Consideration. At and after the
Effective Time, the holders of such certificates shall cease to have any rights
as stockholders of the Company, except such rights, if any, as they may have
pursuant to the GCL.
(b) Each issued and outstanding share of the capital stock of Sub shall be
converted into and become one validly issued, fully paid and non-assessable
share of Common Stock, par value $.01 per share, of the Continuing Corporation.
Until surrender, each certificate representing shares of Sub Common Stock shall,
following the Merger, represent for all purposes a like number of shares of
Common Stock of the Continuing Corporation as the number of shares of Common
Stock of Sub formerly represented by such certificate.
(c) The parties acknowledge that options to purchase shares of Stock (the
"Options") shall not be converted into and become rights to purchase shares of
Common Stock of the Continuing Corporation. Accordingly, the Company shall take
all necessary action to provide that all options under the Benefit Plans listed
on Schedule 4.16 shall become exercisable in full prior to the Effective Date of
the Merger, in accordance with the terms of the relevant Benefit Plans. For
purposes of this Agreement, all shares of Stock receivable upon exercise of the
Options and the Warrant shall be deemed outstanding at the Effective Time of the
Merger, to the extent the Options and the Warrant have not, in fact, been
exercised, and holders of such Options and the Warrant shall be entitled to
receive the Merger Consideration payable for the aggregate number of shares of
Stock subject to such Options or the Warrant less the sum of (i) any applicable
withholding and (ii) the aggregate amount of the exercise price for the
aggregate number of shares of Stock subject to such Option or the Warrant.
3.2 Payment.
(a) Simultaneously with the execution and delivery of this Agreement,
$5,000,000 (the "Deposit Escrow") shall be delivered to Bank One, Texas,
National Association to be held in escrow pursuant to the Escrow Agreement in
the form of Exhibit B hereto (the "Escrow Agreement"). At the Closing, Buyer and
the Company shall cause the Deposit Escrow to be released to the Disbursing
Agent.
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<PAGE> 7
(b) Five Business Days prior to the Effective Date, the Company shall
designate a bank account to receive the Aggregate Merger Consideration. Sub
shall, immediately prior and as a condition to the Merger, pay the Aggregate
Merger Consideration less the amount of the Deposit Escrow by wire transfer to
the account designated by the Company and such Aggregate Merger Consideration
shall thereafter be disbursed to the stockholders of the Company by the
Disbursing Agent.
(c) As soon as practicable after the Effective Time, the Disbursing Agent
shall mail or otherwise cause to be delivered to each record holder of
certificates representing shares of the Company's Stock who has not already
delivered a transmittal form and related stock certificates to the Disbursing
Agent, a notice and transmittal form for use in effecting the surrender of such
holder's stock certificates for payment therefor. Upon surrender to the
Disbursing Agent of stock certificates together with such letter of transmittal
duly executed, the holder of such certificate(s) shall be entitled to receive in
exchange therefor cash in an amount equal to the product of the number of shares
of Stock previously represented by such certificate and the Merger
Consideration, and such certificate shall forthwith be canceled. Any cash
deposited with the Disbursing Agent for payment to former stockholders of the
Company pursuant to this Agreement which remains unclaimed after the expiration
of six months after the Effective Date shall be delivered to the Continuing
Corporation by the Disbursing Agent (together with any interest earned thereon)
and thereafter the Disbursing Agent shall not be liable to any person claiming
the same and former stockholders of the Company shall be entitled to look only
to the Company (subject to abandoned property, escheat and other similar laws)
for payment of the Merger Consideration upon due surrender of their stock
certificates.
(d) All payments made in respect of shares of Stock of the Company which
are made in accordance with the terms of this Article shall be deemed to have
been made in full satisfaction of all rights pertaining to such shares of Stock.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Buyer and Sub as follows:
4.1 Organization and Good Standing. The Company and each Subsidiary is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of formation, and has full power and authority to carry on its
business as it is now being conducted. The Company and each Subsidiary is
qualified as a foreign corporation and is in good standing under the laws of
each jurisdiction in which the conduct of its business or the ownership of its
properties requires such qualification, except where the failure to be so
qualified would not have a Material Adverse Effect.
4.2 Capitalization of the Company. The authorized capital stock of the
Company consists of 15,000,000 shares of Common Stock, par value $.10 per share
(the "Stock"), of which 4,774,031 shares are issued and outstanding and
1,000,000 shares of Preferred Stock, par value $1.00 per share, of which no
shares are issued and outstanding as of May 1, 1997. All the outstanding shares
of Stock have been validly issued and are fully paid and nonassessable. Except
as described in the Company's SEC Reports, (i) no shares of capital stock of the
Company are held in treasury, (ii) there are no other issued or outstanding
equity securities of the Company and (iii) there are no other issued or
outstanding securities of any of the Company convertible at any time into equity
securities of the Company. Except for outstanding stock options granted pursuant
to the Company's stock option plans, rights pursuant to the Company's Rights
Plan and the Warrant, the Company is not subject to any commitment or obligation
that would require the issuance or sale of additional shares of capital stock of
the Company at any time under options, subscriptions, warrants, rights or any
other obligations that require the Company to purchase or redeem any common
stock or other securities convertible into, exchangeable for or evidencing the
right to subscribe for any shares of capital stock of or other ownership right
in the Company.
4.3 Subsidiaries. The Company has no Subsidiaries except Hawg Hauling &
Disposal, Inc., a West Virginia corporation, Alamco-Delaware, Inc., a Delaware
corporation and Phoenix-Alamco Ventures, a West Virginia limited liability
company. All of the outstanding shares of capital stock of each of the
wholly-owned
A-3
<PAGE> 8
Subsidiaries (Hawg Hauling & Disposal, Inc. and Alamco-Delaware, Inc.) are duly
authorized, validly issued, fully paid and nonassessable and are owned of record
by the Company and fifty percent of the membership interests in Phoenix-Alamco
Ventures are owned by the Company. There are no existing options, warrants,
calls, commitments or agreements obligating any Subsidiary to issue shares of
capital stock of any Subsidiary to any person or that require any of the
Subsidiaries to purchase or redeem any common stock or other securities
convertible into, exchangeable for or evidencing the right to subscribe for any
shares of capital stock or other ownership interest in any Subsidiary. Except as
set forth on Schedule 4.3, neither the Company nor its Subsidiaries directly or
indirectly owns any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for, any corporation, partnership, joint
venture or other business association or entity.
4.4 Authority; No Conflicts.
(a) The Company has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject only to the approval of
this Agreement and the Merger by the Company's stockholders. This Agreement has
been duly executed and delivered by the Company and, assuming the due
authorization, execution and delivery by Buyer and Sub, constitutes the valid
and binding obligation of the Company, enforceable in accordance with its terms,
except as such enforceability may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
creditors rights generally and (ii) the availability of injunctive relief and
other equitable remedies.
(b) Except as described on Schedule 4.4, neither the execution and delivery
of this Agreement nor the consummation of the transactions contemplated hereby
will (i) conflict with or result in any violation or breach of any provision of
the Certificate of Incorporation or Bylaws of the Company, or (ii) result in any
violation or breach of, or constitute a default under the terms, conditions or
provisions of any agreement, indenture, mortgage or instrument to which the
Company or any Subsidiary is a party or to which their property is subject, or
(iii) subject to obtaining the approval of the Company's stockholders of the
Merger and compliance with the requirements of Section 4.6 below, conflict with
or result in any violation of any judgment, order, decree, statute or law
applicable to the Company or any of its Subsidiaries or any of its or their
properties or assets, except, in the case of (ii) and (iii) for any such
conflicts, violations, defaults, terminations, cancellations or accelerations
which would not have a Material Adverse Effect.
(c) Except as contemplated by this Agreement, no consent, approval, order
or authorization of, or registration, declaration or filing with any
Governmental Authority is required by or with respect to the Company or any of
its Subsidiaries in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby.
4.5 SEC Filings. The Company has filed all forms, reports and documents
required to be filed by the Company with the SEC and has previously furnished to
Buyer a true and complete copy of each of (i) its Annual Report on Form 10-K for
each of the years ended December 31, 1996, 1995 and 1994, and any amendments
thereto, (ii) its Quarterly Report on Form 10-Q for the period ended March 31,
1997, and the periods ended March 31, June 30 and September 30 in each of the
years 1996, 1995 and 1994, and any amendments thereto, (iii) its definitive
proxy statement with respect to the annual meeting of stockholders in each of
the years 1995 and 1994, and (iv) all other reports or other correspondence
filed by it with the SEC pursuant to the Exchange Act, since January 1, 1994, in
each case, as filed with the SEC (collectively, together with any forms, reports
and documents filed by the Company with the SEC after the date hereof until the
Closing, the "Company SEC Reports"). Each such report, when filed, complied in
all material respects with the requirements of the Exchange Act and all
applicable regulations thereunder and, as of their respective dates, none of
such reports contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Any statement contained in any Company SEC Report shall be
deemed to be modified, corrected or superseded to the extent that a statement
contained in any subsequent Company SEC Report modifies, corrects, or supersedes
such statement.
A-4
<PAGE> 9
4.6 Consents. Except (i) for filings, consents, approvals and
authorizations that the failure to obtain or make would not have a Material
Adverse Effect, (ii) as set forth on Schedule 4.6 hereto or (iii) for filings
pursuant to the H-S-R Act (to the extent necessary), no filing, consent,
approval or authorization of any governmental authority or of any third party on
the part of the Company or any Subsidiary is required in connection with the
execution and delivery of this Agreement or the consummation of any of the
transactions contemplated hereby.
4.7 No Brokers. Neither the Company nor anyone acting on its behalf has
employed any broker or finder or incurred any liability for any brokerage fees,
commissions or finders' fees in connection with the sale of the Company and the
transactions contemplated by this Agreement, other than the Company's engagement
of Principal Financial Securities, Inc. as financial advisor to the Company.
4.8 Proxy Statement. None of the information included in the Proxy
Statement (as amended or supplemented) will, at the time the Proxy Statement is
mailed or at the time of the meeting of stockholders of the Company to which the
Proxy Statement relates, contain any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, except that no
representation or warranty is made with respect to information relating to Buyer
or Sub supplied by Buyer or Sub for inclusion in the Proxy Statement. The Proxy
Statement will comply in all material respects, as to form and otherwise, with
the requirements of the Exchange Act and the rules and regulations promulgated
by the SEC thereunder.
4.9 Absence Of Changes. Except as disclosed on Schedule 4.9, from March 31,
1997 until the date hereof, there has not been any:
(a) transaction by the Company or any Subsidiary except in the ordinary
course of business as conducted on that date;
(b) capital expenditure by the Company or any Subsidiary exceeding
$2,000,000;
(c) material adverse change with respect to the Companies;
(d) destruction, damage to, or loss of any asset of the Company or any
Subsidiary (whether or not covered by insurance) that could have a Material
Adverse Effect;
(e) labor trouble affecting the Company or any Subsidiary that could have a
Material Adverse Effect;
(f) change in accounting methods or practices (including, without
limitation, any change in depreciation or amortization policies or rates) by the
Company or any Subsidiary;
(g) re-valuation by the Company or any Subsidiary of any of its Assets;
(h) declaration, setting aside or payment of a dividend or other
distribution in respect to the capital stock of the Company or any Subsidiary,
or any direct or indirect redemption, purchase or other acquisition by the
Company or any Subsidiary of any of its shares of capital stock;
(i) increase in the salary or other compensation payable or to become
payable by the Company or any Subsidiary to any of its officers, directors or
employees, or the declaration, payment or commitment or obligation of any kind
for the payment by the Company or any Subsidiary of a bonus or other additional
salary or compensation to any such person except, in each case any increase or
payment in the ordinary course of business or pursuant to existing contractual
arrangements;
(j) sale or transfer of any Asset of the Company or any Subsidiary, except
in the ordinary course of business;
(k) amendment or termination of any material Contract, to which the Company
or any Subsidiary is a party, except in the ordinary course of business;
(l) loan by the Company or any Subsidiary to any Person or guaranty by the
Company or any Subsidiary of any loan;
A-5
<PAGE> 10
(m) mortgage, pledge or other encumbrance of any Asset of the Company or
any Subsidiary other than as provided under existing bank credit arrangements
(as identified on Schedule 4.4) or other contracts;
(n) waiver or release of any material right or claim of the Company or any
Subsidiary other than settlements of pending litigation in the ordinary cause;
(o) issuance or sale by the Company or any Subsidiary of any shares of its
capital stock of any class, or of any other of its securities, except upon
exercise of outstanding options or warrants for the Company's stock; or
(p) agreement by the Company or any Subsidiary to do any of the things
described in the preceding clauses (a) through (o).
4.10 Absence of Undisclosed Liabilities. Except as set forth in the Company
SEC Reports filed prior to the date of this Agreement, at the date of the most
recent audited financial statements of the Company included in the Company SEC
Reports, neither the Company nor any of its Subsidiaries had, and since such
date neither the Company nor any of such Subsidiaries has incurred, any
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise) required by generally accepted accounting principles to be set
forth on a financial statement or in the notes thereto or which, individually or
in the aggregate, could reasonably be expected to have a Material Adverse Effect
on the Company.
4.11 Tax Returns. Within the times and in the manner prescribed by Law, the
Company and each Subsidiary have filed all federal, state and local tax returns
required by Law and have paid all taxes, assessments and penalties due and
payable. The federal income tax returns of the Company and each Subsidiary have
been audited by the Internal Revenue Service for the fiscal year ended December
31, 1993, and the results of that audit are accurately reflected in the
financial statements filed with the Company SEC Reports. The provisions for
taxes reflected in the financial statements are adequate for any and all
federal, state, county and local taxes for the period ending on the date of the
financial statements and for all prior periods, whether or not disputed. There
are no present disputes as to taxes of any nature payable by the Company or any
Subsidiary.
4.12 Trade Names and Rights. Schedule 4.12 sets forth all trade names,
trademarks, service marks and copyrights and their registrations, owned by the
Company or any Subsidiary or in which it has any rights or licenses, together
with a brief description of each. To the Company's knowledge, neither the
Company nor any Subsidiary has infringed, and is not now infringing, on any
trade name, trademarks, service mark, copyright or other right belonging to any
other person, firm or corporation. Except as set forth in Schedule 4.12, neither
the Company nor any Subsidiary is a party to any license, agreement or
arrangement, whether as licensor, licensee, or otherwise, with respect to any
trademarks, service marks and trade names or applications for them, or any
copyrights. The Company and each Subsidiary own, or hold adequate licenses or
other rights to use, all trademarks, service marks, trade names and copyrights
necessary for their respective businesses as now conducted by them.
4.13 Material Contracts. Except for (i) Contracts which are terminable
within a year from the date hereof and (ii) Contracts providing for aggregate
consideration of less than $250,000 in any fiscal year, Schedule 4.13 sets forth
a complete and current list of all material Contracts of the Company and the
Subsidiaries.
4.14 Contracts and Permits. Each material Contract and material Permit is
valid and binding upon each party thereto and is in full force and effect
according to its terms, and there have been no amendments, modifications or
supplements thereto other than such as are specifically described on Schedule
4.14. Except as set forth on Schedule 4.14, to the Company's knowledge, there is
no default or claim of default under any material Contract or material Permit
and no event has occurred which, with the passage of time or the giving of
notice (or both), would constitute a default by the Company or any Subsidiary,
or any other party thereto, under any material Contract or material Permit, or
would permit modification, acceleration or termination of any material Contract
or material Permit, or result in the creation of any lien or encumbrance on any
of the Assets which would have Material Adverse Effect. Except as indicated on
Schedule 4.14, none of the material Contracts or material Permits will require
the consent of or notice to any Person thereto with respect to any of the
transactions contemplated hereby, except to the extent that the failure to
obtain such consent or provide
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notice will not have a Material Adverse Effect. None of the material Permits
requires the payments of any further extraordinary fees except as listed on
Schedule 4.14, nor, to the Company's knowledge, do any facts or circumstances
exist which would indicate that the Company or any Subsidiary will not be
entitled to renew any material Permit upon its expiration or would be required
to pay an extraordinary fee or charge in connection therewith. Except for the
Permits listed on Schedule 4.14 and except where the failure to have such
Permits would not have a Material Adverse Effect, no other Permit is required
for the operation of the businesses of the Company or any Subsidiaries as
presently conducted.
4.15 Labor Matters. Except as set forth on Schedule 4.15, there are no
collective bargaining agreements or other labor union agreements or
understandings to which the Company or any of its Subsidiaries is a party or by
which any of them is bound, nor is it nor any of its Subsidiaries the subject of
any proceeding asserting that it or any subsidiary has committed an unfair labor
practice or seeking to compel it to bargain with any labor organization as to
wages or conditions. Except as set forth on Schedule 4.15, to the best knowledge
of the Company, since December 31, 1993, neither the Company nor any of its
Subsidiaries has encountered any labor union organizing activity, or had any
actual or threatened employee strikes, work stoppages, slowdowns or lockouts.
4.16 Benefit Plans. Neither the Company nor any Subsidiary contributes to
or has any current or future liability for any Benefit Plan, except for the
Benefit Plans set forth on Schedule 4.16, and they do not, and have not had or
contributed to, any Benefit Plans which are "Multiemployer Plans" within the
meaning of Sections 3(2) and 3(37)(A) of ERISA or "defined benefit plans" within
the meaning of Section 3(35) of ERISA.
Except as set forth on Schedule 4.16:
(a) Each Benefit Plan and related trust intending to qualify under Section
401 and 501(a), respectively, of the Code does so qualify in form and operation
in all material respects; a favorable determination letter has been received
from the Internal Revenue Service with respect to each such plan and trust; and
there have been no amendments to the respective plan or trust since the date of
such determination letter;
(b) Each Benefit Plan and each funding medium which may be attendant
thereto, including group annuity contracts, has been in all material respects
operated and administered in accordance with its provisions and applicable Law;
(c) The Company has made or will have made prior to the Closing all other
contributions or payments required to be paid or accrued with respect to such
Benefit Plan;
(d) Other than routine claims for benefits under the Benefit Plans in the
ordinary course of business, there are no actions, suits or claims pending or,
to the knowledge of the Company threatened against any Benefit Plan or any of
its assets, to the knowledge of the Company there are no actions, suits or
claims pending or threatened against any fiduciary of any Benefit Plan and the
Company has no knowledge of any facts which could give rise to any such actions,
suits or claims which if adversely determined would be expected to have a
material adverse effect on the Company or the financial position of any Benefit
Plan or qualified status under the Code or ERISA of any Benefit Plan;
(e) The Company and the Subsidiaries and their respective affiliates,
directors, officers, representatives and employees have not, with respect to the
Benefit Plans, engaged in any "prohibited transaction" (as such term is defined
in the Code and ERISA) which has not been exempted under the statutory as
opposed to administrative provisions of Section 408 of ERISA, and, to the
Company's knowledge, no such Benefit Plan, related trust, trustee, administrator
or other "party-in-interest" (as defined in ERISA) has engaged directly or
indirectly, in any transaction to which any sanctions, taxes or penalties on or
with respect to prohibited transactions may be imposed under the Code or ERISA;
(f) The Company and the Subsidiaries and their respective directors,
officers, representatives and employees, and, to the best of Seller's knowledge,
any other "fiduciary" (as defined in ERISA), has not, with respect to any
Benefit Plan, committed any breach of fiduciary responsibility imposed by ERISA
or any other
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applicable Law which could subject the Company or any of the Subsidiaries, or
any of their respective directors or officers to a material liability under
ERISA or any Laws; and
(g) No Benefit Plan provides any material medical, life, disability or
other form of welfare benefits to employees or independent contractors of the
Company or any Subsidiary beyond termination of their employment with the
Company or any Subsidiary, as the case may be, by reason of retirement or
otherwise, other than coverage that may be required under Code Section 4980B or
Part 6 of ERISA, or under any continuation of coverage provisions of the laws of
any state or locality. The Company and its Subsidiaries have complied with all
material requirements under Code Section 4980B and Part 6 of ERISA and all
applicable laws of any state or locality with regard to continuation of
benefits.
4.17 Litigation. Except as disclosed on Schedule 4.17, there is no suit,
action, proceeding or investigation pending or, to the best of the Company's
knowledge, threatened against or affecting the Company or any of its
Subsidiaries or their respective officers and directors (in their capacity as
such) nor is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against the Company or any of its
Subsidiaries having, or which, insofar as reasonably foreseen, in the future
could have, any such effect.
4.18 Absence of Sensitive Payments. Since December 31, 1991, neither the
Company nor any wholly-owned Subsidiary nor, to the knowledge of the Company,
Phoenix-Alamco Ventures, or any of their respective directors, officers, agents,
stockholders or employees has:
(a) made or has agreed to make any contributions, payments or gifts of
funds or property through any governmental official, employee or agent where
either the payment or purpose of such contribution, payment or gift was or is
illegal under applicable Law (foreign or domestic);
(b) established or maintained any unrecorded fund or asset for any purpose,
or has made any false or artificial entries on any of its books or records for
any reason; or
(c) made or had agreed to make any contribution or expenditure, or had
reimbursed any political gift or contribution or any expenditure made by any
other person to candidates for public office, whether federal, state or local
(foreign or domestic) where such contributions were or would be in violation of
applicable Law.
4.19 Compliance with Laws. Neither the Company nor any of its Subsidiaries
has violated or failed to comply with any statute, law, ordinance, regulation,
rule, permit or order of any Federal, state or local government, domestic or
foreign, or any Governmental Entity, applicable to the Company or any of its
Subsidiaries or their respective business, assets, or operations, except for
violations and failures to comply that could not, individually or in the
aggregate, reasonably be deemed to have a Material Adverse Effect on the
Company.
4.20 Disclaimers. THE EXPRESS REPRESENTATIONS AND WARRANTIES OF THE COMPANY
CONTAINED IN THIS ARTICLE 4 ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER
REPRESENTATIONS AND WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AND
THE COMPANY EXPRESSLY DISCLAIMS ANY AND ALL SUCH OTHER WARRANTIES. WITHOUT
LIMITATION OF THE FOREGOING, THE COMPANY SHALL NOT BE DEEMED TO HAVE MADE ANY
REPRESENTATION OR WARRANTY, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, OR
RELATING TO THE TITLE, CONDITION, QUANTITY, QUALITY, FITNESS FOR A PARTICULAR
PURPOSE OR FITNESS FOR ANY PURPOSE, WITH RESPECT TO THE COMPANY AND ITS
SUBSIDIARIES OR ITS OR THEIR ASSETS. BUYER SHALL HAVE INSPECTED, OR WAIVED (AND
UPON CLOSING SHALL BE DEEMED TO HAVE WAIVED) ITS RIGHT TO INSPECT, ANY
PROPERTIES OF THE COMPANIES FOR ALL PURPOSES AND SATISFIED ITSELF AS TO THE
TITLE TO SUCH PROPERTIES, THEIR PHYSICAL AND ENVIRONMENTAL CONDITION, BOTH
SURFACE AND SUBSURFACE, INCLUDING BUT NOT LIMITED TO CONDITIONS RELATED TO THE
PRESENCE, RELEASE OR DISPOSAL OF HAZARDOUS SUBSTANCES, SOLID WASTES, ASBESTOS
AND OTHER MAN MADE FIBERS, OR NATURALLY OCCURRING RADIOACTIVE MATERIALS. BUYER
IS RELYING SOLELY UPON ITS OWN INSPECTION OF THE TITLE RECORDS
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AND PROPERTIES OF THE COMPANIES, AND BUYER SHALL, EXCEPT AS PROVIDED OTHERWISE
HEREIN, ACCEPT ALL OF THE SAME IN THEIR "AS IS, WHERE IS" CONDITION. ALSO
WITHOUT LIMITATION OF THE FOREGOING, THE COMPANY MAKES NO REPRESENTATION OR
WARRANTY, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AS TO THE ACCURACY OR
COMPLETENESS OF ANY DATA, REPORTS, RECORDS, PROJECTIONS, INFORMATION OR
MATERIALS NOW, HERETOFORE OR HEREAFTER FURNISHED OR MADE AVAILABLE TO BUYER IN
CONNECTION WITH THIS AGREEMENT INCLUDING, WITHOUT LIMITATION, RELATIVE TO
PRICING ASSUMPTIONS, OR QUALITY OR QUANTITY OF HYDROCARBON RESERVES (IF ANY)
ATTRIBUTABLE TO THE PROPERTIES OF THE COMPANIES OR THE COMPANIES' TITLE OR
RIGHTS THERETO OR THE ABILITY OR POTENTIAL OF THE PROPERTIES TO PRODUCE
HYDROCARBONS OR THE ENVIRONMENTAL CONDITION OF THE PROPERTIES OR ANY OTHER
MATTERS CONTAINED IN THE DATA OR ANY OTHER MATERIALS FURNISHED OR MADE AVAILABLE
TO BUYER BY THE COMPANY OR BY THE COMPANY'S AGENTS OR REPRESENTATIVES OR BY ANY
OTHER PARTY. ANY AND ALL SUCH DATA, RECORDS, REPORTS, PROJECTIONS, INFORMATION
AND OTHER MATERIALS (WRITTEN OR ORAL) FURNISHED OR OTHERWISE MADE AVAILABLE OR
DISCLOSED TO BUYER ARE PROVIDED TO BUYER AS A CONVENIENCE AND SHALL NOT CREATE
OR GIVE RISE TO ANY LIABILITY OF OR AGAINST THE COMPANY AND ANY RELIANCE ON OR
USE OF THE SAME SHALL BE AT BUYER'S SOLE RISK TO THE MAXIMUM EXTENT PERMITTED BY
LAW.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB
Buyer and Sub hereby jointly and severally represent and warrant to the
Company as follows:
5.1 Organization and Good Standing. Each of Buyer and Sub is a corporation
duly organized, validly existing, and in good standing under the laws of the
jurisdiction of its formation. Each of Buyer and Sub has full power and
authority to carry on its business as it is now being conducted.
5.2 Execution and Effect of Agreement. Each of Buyer and Sub has full power
and authority to enter into this Agreement. The consummation of the transactions
contemplated hereby has been duly authorized by all necessary action on the part
of Buyer and Sub. This Agreement has been duly executed and delivered by Buyer
and Sub and constitutes a legal, valid and binding obligation of Buyer and Sub,
enforceable against Buyer and Sub in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and other laws
affecting the rights of creditors generally and to the exercise of judicial
discretion in accordance with general principles of equity (whether applied by a
court of law or equity).
5.3 No Conflicts. Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will (i) violate any of
the provisions of the charter or by-laws of Buyer and Sub, (ii) to Buyer's or
Sub's Knowledge, violate any provision of applicable law, rule or regulation
which violation would have a material adverse effect on the business or
financial condition of Buyer or Sub or prevent or materially interfere with
Buyer's or Sub's ability to perform hereunder or (iii) conflict with or result
in a breach of, or give rise to a right of termination of, or accelerate the
performance required by the terms of any judgment, court order or consent
decree, or any agreement, indenture, mortgage or instrument to which either
Buyer or Sub is a party or to which their respective properties are subject, or
constitute a default thereunder, except where such conflict, breach, right of
termination, acceleration or default would not have a material adverse effect on
the business or financial condition of Buyer or Sub or prevent or materially
interfere with Buyer's or Sub's ability to perform hereunder.
5.4 Consents. Except (i) as set forth on Schedule 5.4 hereto, or (ii) for
filings pursuant to the H-S-R Act, to the extent necessary, no filing, consent,
approval or authorization of any governmental authority or of any third party on
the part of Buyer or Sub is required in connection with the execution and
delivery of this Agreement by Buyer or Sub or the consummation of any of the
transactions contemplated hereby.
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5.5 Availability of Funds. Buyer and Sub have available and will have
available on the Closing Date sufficient funds to enable them to consummate the
transactions contemplated by this Agreement, including the payment of the
Aggregate Merger Consideration. At the Company's request, Buyer and Sub shall
provide the Company with evidence reasonably satisfactory to the Company of the
availability of such funds.
5.6 No Brokers. Neither Buyer nor Sub nor anyone acting on their behalf has
employed any broker or finder or incurred any liability for any brokerage fees,
commissions or finders' fees in connection with the purchase of the Company and
the transactions contemplated by this Agreement. Buyer has obtained at its sole
expense an opinion from Bear Stearns & Co. in form and substance satisfactory to
Buyer as to the consideration payable in connection with the Merger.
5.7 Proxy Statement and Other Information. None of the information relating
to Buyer or Sub which is supplied by Buyer for inclusion in the Proxy Statement
(as amended or supplemented) will, at the time the Proxy Statement is mailed or
at the time of the meeting of the stockholders of the Company to which the Proxy
Statement relates, contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, except that no
representation or warranty is otherwise made by Buyer or Sub with respect to the
Proxy Statement.
ARTICLE 6
ADDITIONAL PROVISIONS REGARDING
REPRESENTATIONS AND WARRANTIES
6.1 Limitation: No Survival. Except as specifically set forth herein or in
any Schedule, Exhibit or other document delivered pursuant hereto, no party has
made any representation or warranty with respect to the transactions to be
consummated hereunder. The representations and warranties herein shall not
survive the Closing.
6.2 Right to Update Schedules. The Company shall have the right, without
being deemed to be in breach of its representations and warranties set forth in
this Agreement, to supplement or amend the Schedules to this Agreement with
respect to any matter arising after the date hereof or, as to any representation
and warranty that is limited to Company's Knowledge, discovered by Company
between the date hereof and the Closing Date. Copies of any amended or
supplemented Schedules shall be promptly provided to the Buyer. Any such amended
or supplemented disclosure shall not give Buyer or Sub the right not to proceed
to Closing, unless the facts underlying such amended or supplemented disclosure
have a Material Adverse Effect.
6.3 Schedules and Exhibits. Any fact or item disclosed in any Schedule or
Exhibit hereto shall be deemed to have been disclosed in all other Schedules or
Exhibits requiring such disclosure and for purposes of all other representations
and warranties made herein.
ARTICLE 7
ADDITIONAL COVENANTS AND UNDERTAKINGS
7.1 Stockholder Approval.
(a) As soon as reasonably practicable following the date of this Agreement,
the Company shall take all action necessary in accordance with the Exchange Act,
the laws of the State of Delaware and its Certificate of Incorporation and
Bylaws to call, give notice of and convene a meeting (the "Meeting") of its
stockholders to consider and vote upon the approval and adoption of this
Agreement and the Merger and for such other purposes as may be necessary or
desirable. The Board of Directors of the Company shall, subject to its fiduciary
duties, recommend that the Company's stockholders vote to approve and adopt this
Agreement and the Merger and any other matters to be submitted to the Company's
stockholders in connection therewith. The Board of Directors of the Company
shall, subject to its fiduciary duties, use its reasonable best efforts to
solicit and secure from stockholders of the Company such approval and adoption,
which efforts include
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without limitation causing the Company to solicit stockholder proxies therefor
and to advise Buyer upon its request from time to time as to the status of the
stockholder vote then tabulated.
(b) Promptly following the date of this Agreement, the Company shall
prepare and file with the SEC under the Exchange Act and the rules and
regulations promulgated by the SEC thereunder, a preliminary draft of the Proxy
Statement. Buyer and Sub shall have an opportunity to preview all filings to be
made with the SEC and cooperate fully with the Company in the preparation and
filing of the Proxy Statement and any amendments and supplements thereto. The
Proxy Statement shall not be filed, and no amendment or supplement thereto shall
be made by the Company, without in each case, prior consultation with Buyer and
Sub. The Company will use its best efforts to have any review of the Proxy
Statement conducted by the SEC promptly. As soon as reasonably practicable
following the date of this Agreement, the Company shall cause to be mailed a
definitive Proxy Statement to its stockholders entitled to vote at the Meeting
promptly following completion of any review by, or in the absence of such
review, the termination of any applicable waiting period of, the SEC.
7.2 Further Assurances and Assistance. Buyer, Sub and the Company agree
that each will execute and deliver to the other any and all documents, in
addition to those expressly provided for herein, that may be necessary or
appropriate to implement the provisions of this Agreement, whether before, at or
after the Closing. The parties agree to cooperate with each other to any extent
reasonably required in order to accomplish fully the transactions herein
contemplated.
7.3 Access to Information.
(a) The Company has made available to Buyer the information requested by
Buyer in its letter dated April 24, 1997, as indicated in the Company's
correspondence dated May 2, 1997 and May 19, 1997. Buyer acknowledges that the
Company, prior to the date of this Agreement, has given Buyer, Sub and their
respective employees and counsel full and complete access to all officers,
employees, offices, properties, agreements, records and affairs of the Company
or otherwise relating to the Business (including but not limited to all of the
Company's existing title files, title opinions, division order files, marketing
files, accounting and production revenue disbursement files and production,
severance and ad valorem tax records), has provided Buyer with all regularly
prepared financial statements of the Company and copies of such information
concerning the Company and the Business as Buyer and Sub may have reasonably
requested.
(b) The Company from and after the date of this Agreement and until the
Closing Date, shall give Buyer, Sub and their respective employees and counsel
full and complete access upon reasonable notice during normal business hours, to
all officers, employees, offices, properties, agreements, records and affairs of
the Company or otherwise relating to the Business, will provide Buyer with all
regularly prepared financial statements of the Company, and will provide copies
of such information concerning the Company and the Business as Buyer or Sub may
reasonably request; provided however, that the foregoing shall not permit Buyer,
Sub or any agent thereof to (i) disrupt the Business or (ii) contact any
employee of the Company without providing reasonable prior notice to the Company
and allowing a representative of the Company to be present. Buyer shall return
all copies so made to the Company if the Closing does not occur. BUYER
RECOGNIZES AND AGREES THAT ALL MATERIALS PREPARED BY THIRD PARTIES AND MADE
AVAILABLE TO IT IN CONNECTION WITH THE TRANSACTION CONTEMPLATED HEREBY PURSUANT
TO THIS SECTION ARE MADE AVAILABLE TO IT AS AN ACCOMMODATION AND WITHOUT
REPRESENTATION OR WARRANTY OF ANY KIND AS TO THE ACCURACY AND COMPLETENESS OF
SUCH MATERIALS. NO WARRANTY OF ANY KIND IS MADE BY THE COMPANY AS TO ANY OF SUCH
INFORMATION SUPPLIED TO BUYER OR WITH RESPECT TO THE COMPANY'S PROPERTIES TO
WHICH ANY OF SUCH INFORMATION RELATES, AND BUYER EXPRESSLY AGREES THAT ANY
CONCLUSIONS DRAWN THEREFROM SHALL BE THE RESULT OF ITS OWN INDEPENDENT REVIEW
AND JUDGMENT.
(c) To the extent not completed prior to the date of the Agreement, the
Company shall make a good faith effort to obtain for Buyer, or Buyer's
authorized representatives, upon adequate notice to the Company, physical access
to the Company's properties for the purpose of inspecting same. Buyer recognizes
that some of the properties are operated by parties other than the Company and
that the Company's ability to obtain access
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to such properties, and the manner and extent of such access, is subject to the
consent of such third parties. Buyer agrees to comply fully with the rules,
regulations and instructions issued by the Company (and, where properties are
operated by other parties, such other parties) regarding the actions of Buyer
while upon, entering or leaving the properties. If Buyer exercises rights of
access under this Section or otherwise, or conducts examinations or inspections
under this Section or otherwise, then (a) such access, examination and
inspection shall be at Buyer's sole risk, cost and expense and Buyer waives and
releases all claims against the Company (and its affiliates and the directors,
officers, employees, attorneys, contractors and agents of the Company and such
affiliates) arising in any way therefrom or in any way connected therewith or
arising in connection with the conduct of its directors, officers, employees,
attorneys, contractors and agents in connection therewith and (b) Buyer shall
indemnify, defend and hold harmless the Company (and its affiliates and the
officers, directors, employees, attorneys, contractors and agents of the Company
and such affiliates) from any and all claims, actions, causes of action,
liabilities, damages, losses, costs or expenses (including, without limitation,
court costs and attorney's fees), or liens or encumbrances for labor or
materials, arising out of or in any way connected with such matters.
7.4 Conduct of Business Prior to Closing. Except as contemplated by this
Agreement, from and after the date hereof the Company shall use commercially
reasonable efforts (without requiring the Company to incur material costs or
expenses outside the ordinary course of the Business) to conduct such Business
in the ordinary course. Except as contemplated by this Agreement or as consented
to by Buyer (which consent shall not unreasonably be withheld), from and after
the date hereof the Company shall act, and shall cause the Companies to act, as
follows:
(a) The Companies will not adopt any material change in any method of
accounting or accounting practice, except as contemplated or required by GAAP;
(b) The Companies will not amend their charters or by-laws;
(c) Except (i) for the disposition of obsolete equipment in the ordinary
course of business, or (ii) as set forth on Schedule 7.4 hereto, the Companies
will not sell, mortgage, pledge or otherwise dispose of any material assets or
properties owned or used in the operation of their Business;
(d) Subject to the provisions of Section 7.7 hereof, the Companies will not
merge or consolidate with, or agree to merge or consolidate with, or purchase or
agree to purchase all or substantially all of the assets of, or otherwise
acquire, any other business entity;
(e) Except as provided pursuant to the terms of the Company's Rights Plan
or in connection with the exercise of any outstanding stock options and
warrants, the Companies will not authorize for issuance, issue or sell any
additional shares of its capital stock or any securities or obligations
convertible into shares of its capital stock or issue or grant any option,
warrant or other right to purchase any shares of its capital stock;
(f) The Companies will not incur, or agree to incur, any debt for borrowed
money other than borrowings under the Company's existing revolving credit
facility;
(g) The Company will not declare, set aside, or pay, directly or
indirectly, any dividend, cash or stock, or other distribution in respect to its
securities (except in accordance with past practices and without any increase
from the previous dividends paid by the Company);
(h) No stock of the Company shall be redeemed or acquired by the Companies
(other than as permitted by subparagraph (e) hereof);
(i) Except with respect to increases in the salary of employees who are not
officers or directors of the Company that arise pursuant to normal merit reviews
in the ordinary course of business, between the date of this Agreement and prior
to the Closing Date, the Company shall not make any increase in the compensation
payable to any employee, officer or director of any of the Companies without the
prior approval of Buyer;
(j) The Company shall not make or cause to be made any amendment to any
Benefit Plan;
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(k) The Company shall use commercially reasonable efforts to preserve the
business relationships of the Companies, their directors, officers, employees or
agents, suppliers, customers, and others having business relations with the
Companies;
(l) The Companies shall use commercially reasonable efforts to develop,
maintain and operate the Oil and Gas Properties which are operated by them in a
good and workmanlike manner and conduct themselves with respect to the Oil and
Gas Properties which are not operated by them in substantially the same manner
as heretofore;
(m) The Company shall use commercially reasonable efforts to maintain the
insurance now in force with respect to the Companies (or insurance that is
substantially equivalent); and
(n) The Companies shall use all commercially reasonable efforts to keep the
Oil and Gas Contracts (taken as a whole) in full force and effect in all
material respects, unless any such Oil and Gas Contract terminates pursuant to
its own terms or in the ordinary course of business and to otherwise perform and
comply with all of the material covenants and conditions contained in such Oil
and Gas Contracts in all material respects (except for good faith disputes).
7.5 H-S-R Act. Each of Buyer and Sub and the Company shall, within ten
Business Days following the date hereof, file, if necessary, duly completed and
executed Pre-Merger Notification and Report Forms as required under the H-S-R
Act and shall otherwise use their respective best efforts (without requiring any
of Buyer, Sub or the Company to incur material costs or expenses) to comply
promptly with any requests made by the Federal Trade Commission or the
Department of Justice pursuant to the H-S-R Act or the regulations promulgated
thereunder. All filing fees and other payments in connection with the H-S-R Act
shall be paid by Buyer.
7.6 Books and Records. Following the Closing, Buyer and Sub shall permit
the Company (i) to have reasonable access to the books and records of Buyer and
Sub and those retained or maintained by the Company relating to the operation of
the Business prior to the Closing or after the Closing to the extent related to
transactions or events occurring prior to the Closing, and (ii) to have
reasonable access to employees of the Company, Buyer and Sub to obtain
information relating to such matters. Buyer and Sub shall maintain such books
and records for a period of seven years following the Closing.
7.7 Inquiries and Negotiations. The Company shall immediately cease and
cause to be terminated any existing activities, discussions or negotiations with
any Person conducted heretofore in respect of the acquisition of all or any
substantial part of the business and properties of the Company, whether by sale
of assets or shares of capital stock of the Company, or by merger,
consolidation, recapitalization, liquidation or similar transaction including
the Company (each, an "Acquisition Transaction"). The Company shall not, and
shall not permit its officers, employees, representatives, or agents to,
directly or indirectly, (i) solicit or initiate discussions or negotiations
with, or provide any non-public information to, any person other than Buyer or
its affiliates concerning an Acquisition Transaction, or (ii) otherwise solicit,
initiate or encourage inquiries or the submissions or any proposal contemplating
an Acquisition Transaction. The Company shall promptly communicate to Buyer the
terms of any inquiry or proposal which it may receive in respect of an
Acquisition Transaction. The Company's notification under this Section 7.7 shall
include the identity of the person making such proposal or any other such
information with respect thereto as Buyer may reasonably request. Nothing
contained in this Agreement shall be construed to prohibit the Company from (a),
if advised in writing by counsel to be required by fiduciary obligations under
applicable law, providing non-public information to, and participating in
negotiations with, a Person who has made a bona fide offer to effect an
Acquisition Transaction for an all cash purchase price in excess of the
Aggregate Merger Consideration and (b) accepting an offer for an Acquisition
Transaction which the Board of Directors of the Company, on the advice in
writing of its financial advisor, believes is more favorable to the Company's
stockholders than the Merger contemplated hereby; provided, however, in the
event that an offer for an Acquisition Transaction is accepted by the Company
pursuant to this Section, the provisions of Section 10.3 shall be applicable.
7.8 Indemnification; Director's and Officer's Insurance. After the
Effective Time, the Continuing Corporation shall indemnify and hold harmless
(and shall also advance expenses as incurred to the fullest
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extent permitted under applicable law) to each person who is now, or has been
prior to the date hereof or who becomes prior to the Effective Time an officer
or director of the Company or any of its subsidiaries (the "Indemnified
Parties") against (i) all losses, claims, damages, costs, expenses (including
without limitation counsel fees and expenses), settlement payments or
liabilities arising out of, or in connection with any claim, demand, action,
suit, proceeding or investigation based in whole or in part on, or arising in
whole or in part out of, the fact that such person is or was an officer or
director of the Company whether or not pertaining to any matter existing or
occurring at or prior to the Effective Time and whether or not asserted or
claimed prior to or at or after the Effective Time ("Indemnified Liabilities")
and (ii) all Indemnified Liabilities based in whole or in part on, or arising in
whole or in part out of, or pertaining to this Agreement, any Related Agreement
or the transactions contemplated hereby or thereby, in each case to the fullest
extent permitted for officers and directors under the Certificate of
Incorporation and Bylaws of The Columbia Gas System, Inc. Any determination
required to be made with respect to whether an Indemnified Party's conduct
complies with the standards set forth under applicable law or the Certificate of
Incorporation or Bylaws of The Columbia Gas System, Inc. shall be made by
independent counsel mutually acceptable to the Continuing Corporation and the
Indemnified Party. The parties hereto intend, to the extent not prohibited by
applicable law, that the indemnification provided for in this Section 7.8 shall
apply without limitation to negligent acts or omissions by an Indemnified Party.
The Continuing Corporation shall maintain, for not less than five years after
the Effective Time, director's and officer's liability insurance with an
aggregate limit of liability of $15,000,000 covering each Indemnified Person on
terms not materially less favorable than the insurance maintained in effect by
the Company on the date hereof in terms of coverage (including without
limitation types of claims, time period of claims, exclusions and persons
covered), amounts and deductibles and including coverage with respect to claims
arising or events which occurred before the Effective Time. Buyer hereby
guarantees the payment and performance of the Continuing Corporation's
obligations in this Section 7.8 and shall provide the indemnification provided
herein only in the event such insurance coverage is not available or such
coverage is denied. Each Indemnified Party is intended to be a third party
beneficiary of this Section 7.8 and may specifically enforce its terms. This
Section 7.8 shall not limit or otherwise adversely affect any rights any
Indemnified Party may have under any agreement with the Company or under the
Company's Certificate of Incorporation or Bylaws.
7.9 Notice of Default. The Company shall give written notice to Buyer
promptly after the Company or any of its Subsidiaries obtains knowledge of the
occurrence, or promptly after the receipt by the Company or any of its
Subsidiaries of any notice claiming or alleging the occurrence of:
(a) any event or omission which would result in any of the Company's
representations and warranties contained in this Agreement being or becoming
materially inaccurate or misleading; or
(b) any material breach by Company of this Agreement.
7.10 Benefit Matters After Closing.
(a) Continuation of Benefits. Buyer shall maintain the Company's existing
401(k) Savings and Protection Plan and medical, life and disability insurance
plans until at least December 31, 1997.
(b) Waiver of Pre-existing Conditions. If any employee of the Company
becomes eligible to participate in a medical, dental or health plan of the Buyer
(or its affiliates) after the Closing Date, the Buyer shall cause such plan to
waive any pre-existing condition limitations for conditions covered under the
applicable medical, dental or health plans. If an employee becomes eligible to
participate in a group term life insurance plan maintained by the Buyer or its
affiliates, the Buyer shall cause such plan to waive any medical certification
for such employee up to the amount of coverage provided under Buyer's plans.
(c) Continuation Coverage. The Continuing Corporation shall perform the
duties required of a successor employer with respect to continuation coverage
required by Section 4980B of the Code, including, but not limited to, making
such coverage available to the employees of the Company on and after the Closing
Date upon their termination of employment with the Continuing Corporation to the
extent required by law.
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<PAGE> 19
ARTICLE 8
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PARTIES TO CLOSE
8.1 Conditions Precedent to the Obligation of Buyer and Sub. The obligation
of Buyer and Sub to consummate the Closing is subject to the fulfillment or
waiver, on or prior to the Closing Date, of each of the following conditions
precedent:
(a) The Company shall have complied in all material respects with its
agreements and covenants contained herein to be performed at or prior to the
Closing, and the representations and warranties of the Company contained herein,
shall be true and correct in all material respects on and as of the Closing Date
with the same effect as though made on and as of the Closing Date, except that
representations and warranties that were made as of a specified date shall
continue on the Closing Date to have been true as of the specified date, and
Buyer and Sub shall have received an officer's certificate in form and substance
satisfactory to Buyer and its counsel of the Company, dated as of the Closing
Date, certifying as to the fulfillment of the condition set forth in this
Section 8.1 (a) ("Company's Bring-Down Certificate").
(b) No statute, rule or regulation, or order of any court or administrative
agency shall be in effect which restrains or prohibits Buyer or Sub from
consummating the transactions contemplated hereby and no proceeding seeking such
an order shall have been instituted or threatened.
(c) All applicable waiting periods under the H-S-R Act shall have expired
or been terminated.
(d) All consents identified on Schedule 4.6 shall have been received.
(e) This Agreement and the Merger shall have been approved and adopted by
the affirmative vote of the holders of a majority of the outstanding shares of
the Company's Stock.
(f) The Rights issued to the stockholders of the Company pursuant to the
Rights Plan shall have been redeemed in accordance with the terms of the Rights
Plan.
(g) Buyer shall have received the written opinion of Kirkpatrick & Lockhart
LLP, counsel for the Company, dated the Closing Date in form and substance
reasonably satisfactory to Buyer and its counsel relating to due incorporation,
authorization and noncontravention of the Agreement with Law and material
Contracts (and the transactions contemplated thereby) to which the Company is a
party.
(h) Buyer shall have received an opinion from its financial advisor, in
form and substance satisfactory to it, to the effect that the Merger is fair
from a financial point of view to the Buyer. Buyer acknowledges that it has
received such opinion dated as of the date hereof satisfying this condition.
(i) The Indemnification Agreements between the Company and the individuals
identified on Schedule 8.1 (collectively, the "Indemnification Agreements")
shall have been amended by the Company and the scheduled individuals to (x)
limit the aggregate amount of indemnification provided by such agreements to
$15,000,000 and (y) require the Continuing Corporation to obtain and maintain
the insurance required by Section 7.8 hereof to insure performance by the
Continuing Corporation of its obligations under such amended Indemnification
Agreements, it being understood that in no event will the aggregate amount of
such indemnification or insurance coverage exceed $15,000,000 with respect to
the Indemnification Agreements.
8.2 Conditions Precedent to the Obligation of the Company. The obligation
of the Company to consummate the Closing is subject to the fulfillment or
waiver, on or prior to the Closing Date, of each of the following conditions
precedent:
(a) Each of Buyer and Sub shall have complied in all material respects with
its agreements and covenants contained herein to be performed at or prior to the
Closing, and the representations and warranties of Buyer and Sub contained
herein shall be true and correct in all material respects on and as of the
Closing Date with the same effect as though made on and as of the Closing Date,
except that representations and warranties that were made as of a specified date
shall continue on the Closing Date to have been true as of the specified date,
and the Company shall have received officer's certificates of Buyer and Sub,
dated as of the
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<PAGE> 20
Closing Date, certifying as to the fulfillment of the condition set forth in
this Section 8.2(a) ("Buyer's Bring-Down Certificate").
(b) No statute, rule, or regulation or order of any court or administrative
agency shall be in effect which restrains or prohibits the Company from
consummating the transactions contemplated hereby and no proceeding seeking such
an order shall have been instituted or threatened.
(c) All applicable waiting periods under the H-S-R Act shall have expired
or been terminated.
(d) Sub shall have delivered to the Company the Aggregate Merger
Consideration.
(e) This Agreement and the Merger shall have been approved and adopted by
the affirmative vote of the holders of a majority of the outstanding shares of
the Company's Stock.
(f) The Rights issued to the stockholders of the Company pursuant to the
Rights Plan shall have been redeemed in accordance with the terms of the Rights
Plan.
(g) The Company's Board of Directors shall have received an opinion from
its financial advisor, in form and substance satisfactory to the Board, as of
the date of this Agreement and as of the mailing date of the Proxy Statement
referred to as Section 7.1(b) hereof, to the effect that the Merger is fair from
a financial point of view to the stockholders of the Company and such opinion
shall not have been withdrawn on or prior to the Closing Date.
(h) All payments required pursuant to the terms of the Benefits Plans by
virtue of the Merger shall have been made.
(i) Buyer shall have either paid in full all indebtedness owed by the
Company to Bank One, Texas, National Association or it shall have obtained the
consent of such bank to the Merger.
ARTICLE 9
EXPENSES
Each party will pay its own fees, expenses, and disbursements and those of
its counsel in connection with the subject matter of this Agreement (including
the negotiations with respect hereto and the preparation of any documents) and
all other costs and expenses incurred by it in the performance and compliance
with all conditions and obligations to be performed by it pursuant to this
Agreement or as contemplated hereby. The payment of costs and expenses by Buyer
or the Company shall not reduce the Aggregate Merger Consideration. Buyer shall
cause the Continuing Corporation to make all payments which under this Article
were to be paid by the Company on or prior to the Closing Date, but which are
not so paid prior to the Effective Time, including, without limitation, fees
payable to the Company's financial advisor.
ARTICLE 10
TERMINATION
10.1 Termination. This Agreement may be terminated and the transactions
contemplated hereby may be abandoned at any time prior to Closing: (a) by mutual
written consent of Buyer, Sub and the Company; (b) by the Board of Directors of
the Company if the Board of Directors shall have withdrawn or modified in a
manner adverse to Buyer or Sub its approval or recommendation of the Merger in
order to approve an Acquisition Transaction with any third party; (c) by the
Company if stockholder approval is not obtained or (d) by any party to this
Agreement, upon written notice to the other parties, at any time after October
15, 1997 except that the right to terminate this Agreement pursuant to this
Article 10 shall not be available to (A) the Company, if the failure to
consummate the Closing on or before such date was caused by or resulted from
Company's failure to fulfill any of its obligations under this Agreement or (B)
Buyer or Sub, if the failure to consummate the Closing on or before such date
was caused by or resulted from Buyer's or Sub's failure to fulfill any of their
obligations under this Agreement. Upon such termination, all further obligations
of the parties hereto shall become null and void and no party shall have any
liability to any other party, unless
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<PAGE> 21
the basis for such termination was the failure by such party to fulfill its
covenants and agreements set forth herein. Notwithstanding anything to the
contrary herein, (i) the provisions of the Confidentiality Letter dated as of
March 14, 1997 between Buyer and the Company (the "Confidentiality Agreement"),
shall remain in effect either until the Closing, if it occurs, or for the stated
term thereof, if there is no Closing and (ii) the Escrow Agreement shall remain
in effect in accordance with its terms.
10.2 Deposit Escrow. Notwithstanding anything to the contrary contained in
this Agreement, if Buyer or Sub shall default in their respective obligations to
consummate this Agreement other than as a result of the failure by the Company
to fulfill its obligations under Article 8 of this Agreement, then the Company
shall be entitled to receive on demand the Deposit Escrow.
10.3 Break-Up Fee. In the event that the Company terminates this Agreement
pursuant to Article 10.1 (b) above, the Company shall pay to Buyer within ten
(10) days of termination of this Agreement the sum of EIGHT MILLION DOLLARS
($8,000,000) in immediately available funds as directed by Buyer. This
obligation shall survive termination of this Agreement and shall be Buyer's sole
remedy in the event of termination by the Company pursuant to Article 10.1 (b).
ARTICLE 11
NOTICES
All notices, requests, consents, payments, demands, and other communications
required or contemplated under this Agreement shall be in writing and (a)
personally delivered or sent via telecopy (receipt confirmed), or (b) sent by
Federal Express or other reputable overnight delivery service (for next Business
Day delivery), shipping prepaid, as follows:
If to Buyer or Sub to:
Columbia Natural Resources, Inc.
900 Pennsylvania Avenue
P. O. Box 6070
Charleston, WV 25362-0070
Attention: W.H. Harmon, President and CEO
With a copy to:
Mr. Neal Pierce, General Counsel
Columbia Natural Resources, Inc.
900 Pennsylvania Avenue
P. O. Box 6070
Charleston, WV 25362-0070
If to the Company to:
Alamco, Inc.
200 West Main Street
Clarksburg,WV 26301
Attention: John L. Schwager, President
with a copy to:
Michael C. McLean, Esquire
Kirkpatrick & Lockhart LLP
1500 Oliver Building
Pittsburgh, PA 15222
or to such other Persons or addresses as any Person may request by notice given
as aforesaid. Notices shall be deemed given and received at the time of personal
delivery or completed telecopying, or, if sent by Federal Express or such other
overnight delivery service one Business Day after such sending.
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<PAGE> 22
ARTICLE 12
MISCELLANEOUS
12.1 Headings. The headings contained in this Agreement (including but not
limited to the titles of the Schedules and Exhibits hereto) have been inserted
for the convenience of reference only, and neither such headings nor the
placement of any term hereof under any particular heading shall in any way
restrict or modify any of the terms or provisions hereof. Terms used in the
singular shall be read in the plural, and vice versa, and terms used in the
masculine gender shall be read in the feminine or neuter gender when the context
so requires.
12.2 Schedules and Exhibits. All Schedules, Annexes and Exhibits attached
to this Agreement constitute an integral part of this Agreement as if fully
rewritten herein.
12.3 Execution in Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
12.4 Entire Agreement. This Agreement, the Related Agreements and the
documents to be delivered hereunder and thereunder constitute the entire
understanding and agreement between the parties hereto concerning the subject
matter hereof. All negotiations and writings between the parties hereto are
merged into this Agreement, and there are no representations, warranties,
covenants, understandings, or agreements, oral or otherwise, in relation thereto
between the parties other than those incorporated herein or to be delivered
hereunder.
12.5 Governing Law. This Agreement is to be delivered in and should be
construed in accordance with and governed by the laws of the State of Delaware
without giving effect to conflict of laws principles.
12.6 Modification. Except as provided in Section 6.2, this Agreement cannot
be modified or amended except in writing signed by each of the parties hereto.
After approval of the Merger by the stockholders of the Company, no amendment
may be made which decreases the Aggregate Merger Consideration or otherwise
materially adversely affects the stockholders of the Company without the further
approval of the stockholders of the Company.
12.7 Successors and Assigns. Neither this Agreement nor any of the rights
and obligations hereunder shall be assigned, delegated, sold, transferred,
sublicensed, or otherwise disposed of by operation of law or otherwise, without
the prior written consent of each of the other parties hereto. In the event of
such permitted assignment or other transfer, all of the rights, obligations,
liabilities, and other terms and provisions of this Agreement shall be binding
upon, inure to the benefit of, and be enforceable by and against, the respective
successors and assigns of the parties hereto, whether so expressed or not.
12.8 Waiver. Any waiver of any provision hereof (or in any related document
or instrument) shall not be effective unless made expressly and in a writing
executed in the name of the party sought to be charged. The failure of any party
to insist, in any one or more instances, on performance of any of the terms or
conditions of this Agreement shall not be construed as a waiver or
relinquishment of any rights granted hereunder or of the future performance of
any such term, covenant, or condition, but the obligations of the parties with
respect hereto shall continue in full force and effect.
12.9 Severability. The provisions of this Agreement shall be deemed
severable, and if any part of any provision is held to be illegal, void,
voidable, invalid, nonbinding or unenforceable in its entirety or partially or
as to any party, for any reason, such provision may be changed, consistent with
the intent of the parties hereto, to the extent reasonably necessary to make the
provision, as so changed, legal, valid, binding, and enforceable. If any
provision of this Agreement is held to be illegal, void, voidable, invalid,
nonbinding or unenforceable in its entirety or partially or as to any party, for
any reason, and if such provision cannot be changed consistent with the intent
of the parties hereto to make it fully legal, valid, binding and enforceable,
then such provisions shall be stricken from this Agreement, and the remaining
provisions of this Agreement shall not in any way be affected or impaired, but
shall remain in full force and effect.
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<PAGE> 23
12.10 Announcements. From the date of this Agreement, all further public
announcements relating to this Agreement or the transactions contemplated hereby
will be made only as agreed upon jointly by the parties hereto, except that
nothing herein shall prevent the Company, Buyer or Sub from making any
disclosure in connection with the transactions contemplated by this Agreement if
required by applicable law or otherwise as a result of its being a public
company, provided that prior notice of such disclosure is given to the other
party hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date and year first written above.
Alamco, Inc.
By: /s/ JOHN L. SCHWAGER
------------------------------------
President and CEO
Columbia Natural Resources, Inc.
By: /s/ W. H. HARMON
------------------------------------
President and CEO
Appalachian Acquisition Company
By: /s/ W. H. HARMON
------------------------------------
President
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<PAGE> 24
ANNEX I
DEFINITIONS
As used in the attached Agreement and Plan of Merger, the following terms
shall have the corresponding meaning set forth below:
a. "Acquisition Transaction" has the meaning set forth in Section 7.7 of
the Agreement.
b. "Aggregate Merger Consideration" means an amount equal to the product of
the total number of shares of Stock outstanding immediately prior to the Merger
and the Merger Consideration.
c. "Assets" means properties, privileges, rights, interests and claims for
interests therein, tangible and intangible, of every type and description, to
and including, trademarks, trade names, labels and brands of the Company and its
Subsidiaries.
d. "Agreement" has the meaning set forth in the preamble to the attached
Agreement and Plan of Merger.
e. "Benefit Plan" means any pension, profit sharing, savings, bonus,
phantom stock, severance, incentive, option, insurance, welfare or other
employee benefit plans, contracts or arrangements providing for employee or
director remuneration or benefits.
f. "Business" means the natural gas and oil operations of the Company.
g. "Business Day" means any day on which banks in New York City are open
for business.
h. "Buyer" has the meaning set forth in the preamble to the Agreement.
i. "Buyer's Bring-Down Certificate" has the meaning set forth in Section
8.2(a) of the Agreement.
j. "Certificate of Merger" has the meaning set forth in Section 2.1 of the
Agreement.
k. "Closing" has the meaning set forth in Section 2.2 of the Agreement.
l. "Closing Date" has the meaning set forth in Section 2.2 of the
Agreement.
m. "Code" means the Internal Revenue Code of 1986, as amended.
n. "Companies" means the Company and each of its Subsidiaries.
o. "Company" has the meaning set forth in the preamble to the Agreement.
p. "Company SEC Reports" has the meaning set forth in Section 4.5 of the
Agreement.
q. "Company's Bring-Down Certificate" has the meaning set forth in Section
8.1 (a) of this Agreement.
r. "Company's Knowledge" means the actual knowledge, with due inquiry being
required, of the officers or directors of the Companies.
s. "Confidentiality Agreement" has the meaning set forth in Section 10(a)
of the Agreement.
t. "Contracts" means any contract or instrument, including without
limitation, any mortgages, deeds of trust, notes or guarantees, leases, pledges,
liens, charges or conditional sales agreements to which the Person referred to
is a party or by which any of its Assets may be bound.
u. "Disbursing Agent" means Bank One, or such other person as the Company
may determine.
v. "Effective Time" has the meaning set forth in Section 2.1 of the
Agreement.
w. "ERISA" means the Employee Retirement Income Security Act of 1994.
x. "Exchange Act" means the Securities Exchange Act of 1934, as amended.
y. "GAAP" means generally accepted accounting principles.
z. "GCL" has the meaning set forth in Section 2.1 of the Agreement.
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<PAGE> 25
aa. "H-S-R Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
bb. "Indemnified Liabilities" has the meaning set forth in Section 7.8 of
the Agreement.
cc. "Indemnified Parties" has the meaning set forth in Section 7.8 of the
Agreement.
dd. "Law" means applicable state and federal law and rules and regulations
promulgated thereunder.
ee. "Material Adverse Effect" shall mean a material adverse effect on the
business or financial condition of the Companies taken as a whole.
ff. "Meeting" has the meaning set forth in Section 7.1 of the Agreement.
hh. "Merger" has the meaning set forth in the recitals to the Agreement.
ii. "Merger Consideration" has the meaning set forth in Section 3.1 of the
Agreement.
jj. "Oil and Gas Contracts" means all of the oil and gas leases, operating
agreements, unit agreements, farmout agreements, farmin agreements, joint
venture agreements, partnership agreements, gas purchase and sale agreements,
gas gathering agreements, gas processing agreements, gas transportation
agreements, surface leases, licences, permits, rights-of-way, easements, and
other contracts and agreements of every nature and kind which are presently in
force and effect and which relate to the Oil and Gas Properties.
kk. "Oil and Gas Properties" means the interests of the Company or any
Subsidiary in (i) the Wells, together with the oil and gas leases and lands
related to each Well, (ii) the oil and gas leases and lands identified by the
Company as being owned by the Company, and (iii) the perpetual mineral
interests, term mineral interests, executive rights and other interests in real
property identified by the Company as being owned by the Company and its
Subsidiaries.
ll. "Options" has the meaning set forth in Section 3.1(c) of the Agreement.
mm. "Permit" means any federal or state governmental approval,
authorization, certificate, franchise, license or permit.
nn. "Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government (or agency or political subdivision thereof).
oo. "Proxy Statement" means a proxy statement as contemplated by Rules 14
a-1 et. seq. under the Exchange Act.
pp. "Related Agreement" means any document delivered at the Closing and any
contract which is to be entered into at the Closing or otherwise pursuant to
this Agreement, including, without limitation the Confidentiality Agreement.
qq. "Reserve Report" means the Evaluation of Oil and Gas Reserves for the
Interests of Alamco, Inc. in Certain Properties located in Kentucky, Tennessee
and West Virginia, effective as of January 1, 1997, prepared by Wright &
Company.
rr. "Rights Plan" means the Company's Preferred Stock Purchase Rights Plan
adopted on November 30, 1994.
ss. "SEC" means the Securities and Exchange Commission.
tt. "Stock" has the meaning set forth in Section 4.2 of the Agreement.
uu. "Sub" has the meaning set forth in the preamble to the Agreement.
vv. "Subsidiary" means any person which is an affiliate within the meaning
of the regulations promulgated under the Securities Act of 1933, as such
regulations and act are amended or in effect on the date in question.
ww. "Tax" means any federal, state, local, domestic or foreign income tax,
premium tax, ad valorem tax, excise tax, sales tax, use tax, franchise tax,
employment, payroll or withholding tax, real or personal property
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<PAGE> 26
tax, windfall profits tax, transfer tax, or other tax, together with and
including, without limitation, any and all interest, fines, penalties and
additions to tax resulting from, relating to, or incurred in connection with
such tax or any content or dispute thereof.
xx. "Warrant" means the warrant in respect of 50,000 shares of Common Stock
of the Company exercisable by Principal/Eppler, Guerin & Turner, Inc., now known
as Principal Financial Securities, Inc.
yy. "Wells" means the oil and gas wells and the units that are identified
in the Reserve Report or that are owned by the Company.
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<PAGE> 1
EXHIBIT 10-BG
NATURAL GAS PURCHASE AGREEMENT
THIS NATURAL GAS PURCHASE AGREEMENT ("Agreement") is made and entered
into this 31st day of March, 1997, effective as to natural gas produced
commencing May 1, 1997, by and between COLUMBIA ENERGY SERVICES CORPORATION, a
Kentucky corporation (hereinafter called "Buyer"), and KERR-MCGEE CORPORATION, a
Delaware corporation (hereinafter called "Seller").
W I T N E S S E T H:
WHEREAS, Seller is a producer of natural gas and has a supply of
natural gas which is available for sale to Buyer;
WHEREAS, Buyer is seeking to purchase a supply of natural gas for
resale;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are mutually acknowledged, the parties do hereby covenant and agree as
follows:
ARTICLE I
DEFINITIONS
The following terms used herein are intended and shall be construed to
have meanings as follows:
1.0 The term "Basis" shall mean the mathematical premium or discount
added to or subtracted from the NYMEX natural gas
<PAGE> 2
futures price to determine the price of natural gas at a specific location.
1.1 The term "Btu" shall mean British Thermal Unit, and "MMBtu" shall
mean one million (1,000,000) British Thermal Units. One MMBtu is equal to one
"dekatherm" ("Dth").
1.2 The term "Business Day" shall mean the period between 8:00 A.M. and
5:00 P.M. Central Time, Monday through Friday, excluding federal holidays and
other days that are designated as company holidays at the headquarters of both
Seller and Buyer, a list of which shall be provided by each Party upon execution
and which may be amended by each Party without the other Party's consent.
1.3 The term "Contract Month" shall mean each calendar month Gas is
being sold under the terms of this Agreement.
1.4 The term "Contract Year" shall mean a period of twelve (12)
consecutive Months beginning at 8:00 A.M. Central Time on May 1 of a year in
which this Agreement is in effect, and ending at 8:00 A.M. Central Time on May 1
of the next succeeding year.
1.5 The term "Daily Baseload Quantity" shall mean the quantity of Gas
that the parties can reasonably expect to be produced and sold hereunder from a
Source each day during the Contract Month taking into account any anticipated
operational work that may be performed during the Contract Month.
1.6 The term "Daily Contract Quantity", for each Source, shall mean the
sum of the Daily Baseload Quantity and the Daily Swing Quantity produced from
such Source on a Day.
2
<PAGE> 3
1.7 The term "Daily Swing Quantity" shall mean gas produced and sold
hereunder from a Source during a Day in excess of the Daily Baseload Quantity
for such Source on such Day.
1.8 The term "Day" shall mean a period of twenty-four (24) consecutive
hours beginning at 8:00 A.M. Central Time and ending at 8:00 A.M. Central Time
the next succeeding day.
1.9 The term "Delivery Point" shall mean the point at which Seller
first delivers Gas to a third party gathering or transportation system and is
the point at which title to the Gas delivered, sold, and purchased hereunder
shall pass from Seller to Buyer. The Delivery Point for each Source of Gas is
identified on Exhibit "A" hereto.
1.10 The term "Designated Representative" with respect to a party
hereto shall refer to the individual designated from time to time by such party
to receive telephone calls or notices with respect to particular issues or
geographic areas. Such designation shall be in writing, which may be transmitted
as provided herein for notices.
1.11 The term "Exhibit 'A'" shall mean the exhibit attached hereto, as
such may be amended from time to time as necessary, and shall include, but not
be limited to, a list of the Source(s), the Delivery Point, Transporter and
pricing information applicable for each Source, signature lines for approval of
the Exhibit "A" by both parties and the effective date of the Exhibit "A".
3
<PAGE> 4
1.12 The term "Initial Margin" shall mean the up-front, per contract
margin deposit required by the NYMEX when natural gas futures contracts are
traded multiplied times the number of contracts sold if the parties establish a
NYMEX-based price under Section 4.1 of this Agreement.
1.13 The term "Margin Request"
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
1.14 The term "Month" shall mean a calendar month beginning on the
first calendar Day of such month.
1.15 The terms "Natural Gas" and "Gas" shall mean natural gas that
meets pipeline quality specifications of the Transporter and which is produced
from wells and delivered to the Delivery Point(s) hereunder and shall include
casinghead gas produced with crude oil, natural gas from gas wells, gas from
wells producing gas with condensate, or residue gas resulting from processing
casinghead gas, gas well gas, or other natural gas.
1.16 The term "NYMEX" shall mean the New York Mercantile Exchange.
1.17 The term "PVR" shall mean plant volume reduction, which shall be
the reduction in volumes resulting from processing the Gas.
1.18 The word "Source" shall mean the well or production unit from
which Gas sold hereunder is produced. Each Source shall be identified on Exhibit
"A" hereto, as such Exhibit "A" may be
4
<PAGE> 5
amended from time to time, and the Delivery Point, Transporter and pricing
information shall be stated for each Source on such Exhibit "A".
1.19 The term "Total Margin Requirement" shall mean the Initial Margin
plus the Variation Margin. The Total Margin Requirement is zero for any Month
for which a NYMEX natural gas futures contract has expired.
1.20 The term "Transporter", with respect to each Delivery Point, shall
mean the third party gathering or transportation system which receives and
handles Gas delivered at such Delivery Point. The Transporter for each Delivery
Point at which Gas is to be delivered hereunder shall be listed on Exhibit "A".
If more than one Transporter is available at a particular Delivery Point, all
potential Transporter(s) shall be identified on the Exhibit "A" and Buyer shall
keep records identifying the Transporter used with respect to Gas purchased
hereunder at such Delivery Point.
1.21 The term "Variation Margin", shall mean the sum of the products of
the differences, if any, between the daily NYMEX natural gas futures contract's
closing price (Henry Hub) for each forward Contract Month for which a fixed
price has been agreed to, and the NYMEX price used in determining the
agreed-upon fixed price for such Contract Month, multiplied by the quantity of
MMBtus of Gas to be purchased by the Buyer at a fixed price during each such
Contract Month.
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ARTICLE II
TERM
2.0 This Agreement shall become effective for Gas produced beginning
May 1, 1997, and shall remain in full force and effect for a term of three (3)
Contract Years
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Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
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ARTICLE III
QUANTITY
3.0 Seller shall sell and deliver and Buyer shall purchase and receive
all of Seller's existing domestic Natural Gas production available for purchase,
upon the terms and conditions set forth herein. Exhibit "A" attached hereto
identifies each Source of Seller's production.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
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Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
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3.1 Seller expressly reserves the right to conduct well operations free
from all control by Buyer and in such a manner as Seller deems advisable,
including without limitation, the right to rework old wells, the right to
shut-in production for operational or safety reasons and the right to abandon
any well or lease agreement. Seller also expressly reserves all natural gas
needed in order to operate its wells and leases as it deems best.
3.2
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Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
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ARTICLE IV
PRICE FOR GAS
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
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8
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********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
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9
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********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
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10
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********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
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********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
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12
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********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
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Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
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********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
ARTICLE V
DELIVERY POINTS
5.0 The Gas to be purchased and sold hereunder shall be delivered to
Transporter(s) from Sources identified on Exhibit "A" at the Delivery Point
identified on Exhibit "A" for each such Source. In the event that there are
capacity constraints preventing access to Transporter's system and Gas cannot be
delivered to or received from a Delivery Point, the parties may mutually agree
to other Delivery Point(s).
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ARTICLE VI
TRANSPORTATION, NOMINATION, AND GAS CONTROL
6.0 Buyer shall be responsible for paying all transportation costs
downstream from the Delivery Points including any in-kind payment of Gas for
Transporter's fuel and losses from the Delivery Points; provided, however, that
"Currently Effective Deductions" as set forth in Exhibit "A" shall be borne by
Seller and deducted by Buyer from the amounts paid to Seller hereunder.
6.1 Buyer shall be responsible for making all nominations required to
cause Seller's Natural Gas production to be transported from the Delivery Points
set forth in Exhibit "A". Buyer shall work with Seller and operators other than
Seller to stay informed about both production and downstream variances to reduce
imbalances. Buyer shall be responsible for all pipeline imbalances to the extent
Buyer causes such imbalances. Buyer shall bear all penalties and
cash-in/cash-out losses incurred by either party as a result of imbalances for
which Buyer is responsible. Seller shall be responsible for all pipeline
imbalances to the extent Seller causes such imbalances. Seller shall bear all
penalties and cash-in/cash-out losses incurred by either party as a result of
imbalances for which Seller is responsible.
6.2 With respect to each Source, Buyer shall be responsible for certain
Gas control activities normally performed by a producer or a well or facility
operator or a shipper as set forth in this Section 6.2, including volume control
nominations with the applicable pipeline, the other working interest owners,
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and other operators of Sources from which Seller provides Gas. On
Seller-operated Sources, Buyer shall notify Seller's co-owners of their
respective shares of production prior to the 20th Day of the Month preceding the
Contract Month, using diligent efforts to ensure that working interest owner
imbalances are minimized. On non-operated Sources, Buyer shall contact the
operators to receive volumes available for sale each Month and shall use
diligent efforts to remain cognizant of planned down time on both non-operated
and operated Sources.
Buyer will in no event be responsible for tracking working interest
owner imbalances or for taking any action to correct existing or future
imbalances. Buyer will be entitled to rely conclusively on (i) individual well
working interest owner entitlement percentages provided by Seller with respect
to Sources operated by Seller to calculate availability for each interest owner
at the appropriate Delivery Point unless notified otherwise by Seller, and (ii)
information provided by operators to schedule production from Sources that are
not operated by Seller. In the event of disagreement among Seller, working
interest owners, and/or operators with respect to available production and
well-balancing issues, such issues shall be referred to Seller's Designated
Representative.
6.3 (a) Buyer shall indemnify, and hold Seller free and harmless from
and against any and all losses, damages, penalties and reasonable expenses
incurred by Seller and arising out of or resulting from Buyer's breach of its
obligations under this Article
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VI; provided, however, that such indemnification shall not apply to that portion
of such losses, damages, penalties and expenses that results from the negligence
(including, without limitation, failure to keep Buyer adequately informed) or
willful misconduct of Seller.
(b) Seller shall indemnify and hold Buyer free and harmless
from and against any and all losses, damages, penalties and reasonable expenses
incurred by Buyer and arising out of or resulting from Seller's breach of its
obligations under this Article VI; provided however, that such indemnification
shall not apply to that portion of such losses, damages, penalties, or expenses
that result from the negligence or willful misconduct of Buyer.
6.4 As consideration for performing the Gas control services described
herein, Seller shall pay Buyer ____________________________________
____________ per Month during the initial Contract Year and ___________________
__________________ per Month in the next succeeding Contract Years
commencing May 1, 1998. If Seller adds new Sources to this Agreement and Buyer
reasonably believes that additional manpower will be required to perform the Gas
control services, Buyer shall notify Seller of this event and recommend an
addition to the monthly fee for these services. Buyer and Seller shall mutually
agree to such increase in the monthly fee as is required to perform the
additional Gas control services resulting from the new Sources.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
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6.5 Seller shall be responsible for connecting new Sources to gathering
systems or pipelines (i.e. well-tie-ins) and for negotiating and connecting any
additional tie-ins for existing Sources, all at Seller's sole cost and expense.
Seller shall notify Buyer at least 90 Days in advance should an existing
connection with a gathering system or pipeline be affected.
6.6 Buyer is not obligated to obtain firm gathering or transportation
on behalf of Seller. Seller, in its own discretion, may obtain firm
transportation of gathering, which shall either be assigned to Buyer for use
hereunder at Seller's cost or Buyer shall act as agent on Seller's behalf. In
addition, Seller has certain gathering and transportation agreements which it
desires to retain in its own name. In order to evidence Buyer's authority to
perform the gas control, nomination, and other duties on Seller's behalf as
provided in this Article VI, the parties shall enter agency agreements with
Transporters from time to time. As between Seller and Buyer hereunder, it is
understood that such agency agreements will be interpreted in connection with
this Article VI. If either party receives notices from Transporters that
specifically apply to gathering or transportation agreements retained by Seller,
but as to which Buyer is acting as Seller's agent, the party receiving such
notice shall provide the other party with a copy or other adequate notice
thereof.
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ARTICLE VII
PROCESSING
7.0 Seller reserves the right, at its sole cost, to process Gas
delivered hereunder, prior to and after its delivery, for the extraction of any
components contained therein other than methane, except for such methane
reasonably removed or used in such processing.
7.1 Such processing shall be at a point or points acceptable to Seller.
Such processing shall not render the Gas incapable of meeting the applicable
quality specifications herein. Buyer shall only be entitled or obligated to buy
the residue Gas resulting from such processing.
7.2 Buyer shall assist Seller in arranging transportation and shall
handle nominations in order to enable Gas to be delivered to any applicable
post-delivery processing plant, but shall not have any responsibility for nor
incur any liability in connection with any such separation, extraction, or
processing by Seller or costs attendant thereto, including, but not limited to,
PVR, fuel, and the cost of transporting PVR and fuel to such point or points.
7.3 Buyer shall be responsible for nominating and scheduling the
transportation of all PVR in accordance with Article VI above. Seller shall
notify Buyer in the event of changes in the status of any of Seller's processing
arrangements that would impact Buyer's performance under this Section 7.3,
including, without limitation, changes in agreements, recovery rates and ethane
rejection/recovery status, Seller's election not to process and any
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other factors that might impact plant inlet or outlet volumes to be scheduled by
Buyer.
ARTICLE VIII
WARRANTY AND TITLE
8.0 As between the parties hereto, title to all Gas sold hereunder
shall pass from Seller to Buyer upon delivery to the Transporter at the Delivery
Points listed in Exhibit "A"; provided, however, that where any Gas sold
hereunder is to be processed, title and risk of loss shall revert to Seller at
the inlet to the processing plant and shall again revert to Buyer at the outlet
of the processing plant.
8.1 Seller warrants title to all Gas sold hereunder, that it has the
right to sell the same, and that such Gas is free from liens, encumbrances, and
adverse claims of every kind. Seller will pay, or cause to be paid, all
applicable royalties, taxes and other sums due on production and transportation
of the Gas until the Gas is delivered to Buyer at the Delivery Point(s).
8.2 Until title passes to Buyer at the Delivery Point(s), and again if
Gas is delivered by Buyer to a processing plant for processing by Seller or for
Seller's account, as between the parties hereto, Seller shall be in full control
and possession of the Gas under this Agreement and shall be responsible for, and
indemnify Buyer against, any damage or injury caused thereby, including death,
except for any damage, injury, or death caused by the willful misconduct or
gross negligence of Buyer. Upon passage
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of title to Buyer at the Delivery Point(s) and again upon delivery of residue
Gas to Buyer after processing at a processing plant by Seller or for Seller's
account, as between the parties hereto, Buyer shall be in full control and
possession of the Gas, and shall be responsible for, and indemnify Seller
against, any damage or injury caused thereby, including death, except for any
damage, injury or death caused by the willful misconduct or gross negligence of
Seller.
8.3 Neither Buyer nor Seller shall be required to odorize the Gas.
ARTICLE IX
QUALITY, MEASUREMENT AND OTHER SPECIFICATIONS
9.0 The terms and provisions of each applicable Transporter's governing
tariff ("Tariff") shall define and set forth, among other things, the units of
measurement, measurement specifications, quality, heating value, testing
specifications, and delivery terms and specifications of the Gas to be delivered
to each Delivery Point. Seller shall be responsible for ensuring that such Gas
meets such specifications. All such definitions, specifications, procedures and
terms, and all other terms and provisions of the Tariff relating to the delivery
of gas to each Transporter are hereby expressly incorporated herein by reference
with respect to the Gas to be delivered to such Transporter.
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ARTICLE X
BILLINGS AND PAYMENT
10.0 On or before the tenth (10th) Day of the Month following each
Month of deliveries, Buyer will provide Seller monthly statements showing
volumes and thermal quantities of Gas sold from each Source during the Month of
deliveries, along with the applicable price.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
10.1 In the event it should subsequently be determined that the actual
quantity of Gas sold to Buyer by Seller during a Contract Month was greater than
or less than the quantity paid for by Buyer, then Buyer and Seller shall
cooperate to correct such underage or overage to the mutual satisfaction of the
parties. Buyer shall provide Seller with any pipeline or meter statement(s) or
other appropriate documentation verifying volumes credited to Buyer's account
from the Delivery Point(s) hereunder. All statements, billings, and payments
shall be subject to correction of any error for a period of two (2) years, but
not thereafter, unless specific written claim therefor is made within said
period.
10.2 A delayed payment charge equal to the lesser of (a) the maximum
lawful rate of interest or (b) the prime rate being charged from time to time at
Citibank, N.A., New York, New York (or its successor), plus _______________ per
annum, shall be due on all amounts not paid by Buyer from the due date until the
same are
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
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paid; provided, however, that such delayed payment charges shall not apply to
amounts due under Section 10.1 above. If Seller has not received a payment due
it hereunder on or before the date when such payment is due, Seller shall
immediately notify Buyer of such nonpayment. If such default in payment
continues for five (5) Business Days after the date of such notice, Seller may
at its election and in addition to all other remedies, suspend deliveries of Gas
quantities hereunder and may cancel and terminate this Agreement; provided,
however, that the provisions for suspending deliveries or terminating this
Agreement shall not apply if Buyer's refusal to pay any amount claimed by Seller
is the result of a bona fide dispute and Buyer pays all amounts not in dispute.
10.3 Each party and its duly authorized representatives shall have
access to the accounting records and other documents maintained by the other
party which relate to the Gas being delivered under this Agreement, including
such rights of access as either may have to the relevant charts and records of
the Transporter, as the case may be.
ARTICLE XI
DISPUTE RESOLUTION
11.0 In the event a dispute arises between Buyer and Seller, or the
successors or assigns of either of them, regarding the application or
interpretation of any provision of this Agreement, the aggrieved party shall
promptly notify the other party of its intent to invoke this dispute resolution
procedure
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after such dispute arises. If the parties shall have failed to resolve the
dispute within ten (10) Days after delivery of such notice, each party shall,
within five (5) Days thereafter nominate a senior officer of its management to
meet at Buyer's office or any other mutually agreed location to resolve the
dispute. Should the parties be unable to resolve the dispute to their mutual
satisfaction within ten (10) Days after such nomination, either party may seek
to enforce its rights by whatever legal means are available to it.
11.1 Without prejudice to the provisions of Section 11.0, either party
may file suit prior to exhaustion of the dispute resolution procedure of 11.0 if
it believes in good faith the same is necessary to toll a statue of limitations,
to establish venue, or to secure a preliminary injunction or other temporary
relief to avoid irreparable damage or to preserve the status quo.
ARTICLE XII
NOTICES
12.0 Except as otherwise permitted in this Agreement, any notice,
request, demand, or other communication required or permitted to be given
hereunder shall be in writing and shall be deemed to have been duly given when
received by a party at its following address, facsimile number or other address
for verifiable electronic communication given below:
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BUYER
Correspondence, Columbia Energy Services Corporation
Invoices and 121 Hillpointe Drive, Suite 100
Notices: Canonsburg, PA 43215
Attn: Vice President, Operations
Telephone: (412) 873-1300
Facsimile: (412) 873-1310
Payments: WIRE TRANSFER
Columbia Energy Services Corporation
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
SELLER
Correspondence, Kerr-McGee Corporation
Invoices and E & P Division
Notices: Attn: Natural Gas Department
P.O. Box 25861
Oklahoma City, OK 73125
or
123 Robert S. Kerr Avenue
Oklahoma City, OK 73102
Telephone: (405) 270-2048
Facsimile: (405) 270-2296
Payments: WIRE TRANSFER
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
12.1 All notices required by this Agreement shall, if given by
telephone, be confirmed in writing as provided herein and sent by registered or
certified mail, postage prepaid, or sent by facsimile message or other
verifiable electronic method, addressed to the party at the address set forth in
this Agreement or actually delivered by the party giving notice. Either party
may change its address and/or its facsimile number for receiving notices or its
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telephone number by written notice to the other party, effective upon receipt.
ARTICLE XIII
ASSIGNMENT
13.0 This Agreement may not be assigned by either party without the
prior written consent of the other party, which consent shall not be
unreasonably withheld; provided, however, that Buyer may assign this Agreement
to a direct or indirect subsidiary of the Columbia Gas System, Inc., that is at
least fifty percent (50%) owned by the Columbia Gas System, Inc. without
Seller's prior consent. This Agreement shall inure to the benefit of, and be
binding upon, the parties hereto and their successors, assigns and personal
representatives. Any assignment will not release the assignor of any obligations
under this Agreement, unless there is a written release from the non-assigning
party.
ARTICLE XIV
CREDIT REQUIREMENTS
14.0 Seller and Buyer agree that this Agreement is conditioned upon
Buyer continuing to meet the credit requirements of Seller. Buyer has agreed
that Seller may require Buyer to provide a sufficient bond, letter of credit,
parent guarantee, surety or other evidence of credit worthiness, all with
sureties, terms and amount reasonably satisfactory to Seller, as same may change
from time-to-time.
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ARTICLE XV
EARLY TERMINATION
15.0 In the event that either party shall (i) make an assignment or any
general arrangement for the benefit of creditors; (ii) file a petition or
otherwise commence or authorize commencement of a proceeding or cause under any
bankruptcy or similar law for the protection of creditors or have such petition
filed or proceeding commenced against it; (iii) otherwise become bankrupt or
insolvent; (iv) be unable to pay its debts to the other party as they fall due;
or (v) fail to give adequate assurance of its ability to perform its obligations
within three Business Days of a reasonable request by the other party, then the
other party may terminate this Agreement immediately upon notice.
15.1 It is anticipated by the parties that Buyer will purchase and
receive all or substantially all of Seller's available production that is
subject to the Agreement at all times. If Buyer fails to do so, Seller shall
have the right but not the obligation to terminate this Agreement upon 30 Days
prior written notice; provided, however, that such failure is not excused under
Article XVI.
ARTICLE XVI
FORCE MAJEURE
16.0 In the event that either Buyer or Seller is rendered unable, by an
event of Force Majeure, to perform wholly or in part any obligation or
commitment set forth in this Agreement, then upon
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such party's giving notice, as prescribed in Article XII above, and full
particulars of such event of Force Majeure as soon as possible after the
occurrence of the cause relied on, the obligation of the party affected by such
event of Force Majeure, other than the obligation to make payments hereunder,
shall be suspended during the continuance of any inability but for no longer
period. The party claiming Force Majeure shall use reasonable diligence to
remedy the situation and to remove the cause in an adequate manner and with all
reasonable dispatch, except that the settlement of strikes, lockouts and
industrial disputes and disturbances shall be in the sole discretion of the
party claiming Force Majeure.
16.1 The term "Force Majeure" as stated in this Agreement shall mean
acts of God; strikes, lockouts or industrial disputes or disturbances; civil
disturbances; acts of a public enemy; wars; riots; blockades; insurrections;
freezing of pipelines or wells; failure of machinery due to accident or
breakage; requisitions or restraints of federal, state or municipal government
agencies; curtailment of transportation or any other cause, whether of the kind
herein enumerated or otherwise, not reasonably within the control of the party
claiming Force Majeure.
16.2 Seller and Buyer will provide the names and telephone numbers of
individuals employed by Seller and Buyer who can be reached during non-business
hours in case of Force Majeure events.
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ARTICLE XVII
MISCELLANEOUS
17.0 No waiver by either party of any one or more defaults by the other
in the performance of any provisions of this Agreement shall operate or be
construed as a waiver of any other default or defaults, whether of a like or a
different character.
17.1 Neither party shall be liable to the other party for indirect,
consequential, incidental, or punitive damages, including but not limited to
those arising from business interruption or loss or profits.
17.2 The interpretation and performance of this Agreement shall be in
accordance with the laws of the State of _________ applicable to contracts made
and to be wholly performed within such state. The parties agree that
non-exclusive venue is proper in the courts of competent jurisdiction in ___
_____________________.
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Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
17.3 The terms and conditions contained herein constitute the full and
complete agreement between the parties hereto, and any change to this Agreement
must be submitted in writing and agreed to by both parties.
17.4 This Agreement was jointly prepared by the parties hereto and no
interpretation hereof shall depend on the identity of the party deemed to have
written the provision being interpreted.
17.5 The headings used herein are for the convenience of the parties
and shall not be used in interpreting this Agreement.
17.6 Each party reserves the right to set-off amounts it owes to the
other party against amounts currently due and payable
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to it from such other party, but in exercising this right, shall give a full
explanation, with appropriate backup materials to support the amounts used for
set-off.
17.7 The terms of this Agreement shall be kept confidential, except (i)
as necessary to effect transportation, (ii) as required by law, regulation, or
order of governmental authority, (iii) as required for accounting or audit
purposes, (iv) as necessary to inform an individual or entity considering in
good faith the purchase of one or more Sources, or (v) as required by counsel,
investment advisors, financial institutions, and other consultants retained by
either party from time to time, provided, however that the party retaining such
counsel, advisors, institutions and consultants shall cause each to agree to be
bound by the confidentiality provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first written above.
BUYER SELLER
COLUMBIA ENERGY SERVICES KERR-MCGEE CORPORATION
CORPORATION
By: By:
------------------------------- ----------------------------------
Name: Name: Robert C. Scharp
----------------------------- --------------------------------
Title: Title: Senior Vice President
---------------------------- -------------------------------
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EXHIBIT 10 BH
GAS SALES AGREEMENT
THIS AGREEMENT dated June 30, 1997 but to be effective as of the first
day of July, 1997 is made and entered by and between PENNZOIL EXPLORATION AND
PRODUCTION COMPANY, a Delaware corporation, hereinafter referred to as "Seller"
and COLUMBIA ENERGY SERVICES CORPORATION, a Kentucky corporation, hereinafter
referred to as "Buyer".
W I T N E S S E T H:
WHEREAS, Seller desires to sell and Buyer desires to purchase natural
gas as specified in this Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, Seller and Buyer do hereby contract and agree with each other as
follows:
ARTICLE I.
DEFINITIONS
For the purposes hereof, the following words, phrases and terms shall
have meanings as defined below:
I.1 An "affiliate" shall mean, in relation to any entity, another
entity which owns or controls, is owned or controlled by or is under common
ownership or control with such entity.
I.2 The term "Base Load Volumes" shall mean the base load volumes
computed as set forth in Section 3.4.
I.3 The term "Base Price" shall have the meaning set forth in Section
7.1.
<PAGE> 2
I.4 The abbreviation "BTU" shall mean British Thermal Unit. One (1) BTU
shall mean one British Thermal Unit, and is defined as the quantity of heat
required to raise the temperature of one (1) pound avoirdupois of pure water
from fifty-eight and five-tenths degrees Fahrenheit (58.5/F) to fifty-nine and
five-tenths degrees Fahrenheit (59.5/F) under standard conditions.
I.5 The term "business day", for purposes other than nominations, shall
mean a calendar day, other than a Saturday, Sunday or legally recognized United
States holiday. For purposes of nominations, the term "business day" shall mean
any day on which the First Transporter allows nominations to be submitted.
I.6 The term "Contract Price" shall mean the applicable price payable
for gas sold hereunder determined as provided in Article VII.
I.7 The word "day" shall mean a period of twenty-four (24) consecutive
hours commencing at 7:00 a.m. Central Time ("C.T.") on one calendar day and
ending at 7:00 a.m. C.T. on the following calendar day; provided, however, that
the hour of commencement and conclusion of a "day" for any gas delivered under
this Agreement shall be modified to be consistent with the standard used by the
First Transporter of that gas.
I.8 The term "DBQ" shall have the meaning set forth in Section 3.3.
I.9 The term "Delivery Point(s)" shall mean the point(s) at which title
to the gas delivered, sold, and purchased hereunder shall pass from Seller to
Buyer as identified on Exhibit "B" hereto, as such Exhibit may be amended from
time to time by agreement of the parties.
I.10 The term "Excess Volume Price" shall have the meaning set forth in
Section 7.1.
<PAGE> 3
I.11 The term "Excess Volumes" shall mean excess volumes computed as
set forth in Section 3.4.
I.12 The term "First Transporter" shall mean the first entity
transporting or gathering gas downstream of the Delivery Point.
I.13 The word "gas" shall mean any mixture of hydrocarbons and
noncombustible gases in a gaseous state, consisting essentially of methane.
I.14 The abbreviation "MMBtu" shall mean one million (1,000,000)
British Thermal Units.
I.15 The word "month" shall mean the period beginning at the start of
the first day of a calendar month and ending at the start of the first day of
the next succeeding calendar month.
I.16 The term "Pricing Points" shall mean the locations identified as
Pricing Points on Exhibit "B" for which gas prices are published.
I.17 The word "tariff" shall mean the applicable rate schedules, terms
and conditions and other provisions filed with the agency having jurisdiction
over the service provided by a transporter of gas sold and purchased hereunder;
or, for service provided by an entity that does not file rate schedules or terms
and conditions of service with a regulatory body, its general terms and
conditions included in the applicable contract for service from that entity.
I.18 A "transporter" of gas (or a "pipeline") shall mean an interstate
pipeline, intrastate pipeline or gathering company transporting or gathering the
gas sold and purchased hereunder.
I.19 A "year" shall be a period of twelve (12) consecutive calendar
months.
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ARTICLE II.
SUBJECT MATTER
II.1 Subject to the terms and conditions of this Agreement, Seller
hereby agrees to sell to Buyer and Buyer hereby agrees to purchase from Seller
quantities of gas in accordance with the terms and conditions herein stipulated.
II.2 The parties understand and agree that Buyer intends to make
arrangements for the resale and possibly the transportation of gas sold
hereunder, and Seller agrees to provide reasonable cooperation as may be
necessary to effectuate such resale and transportation.
ARTICLE III.
QUANTITY
III.1 During the term hereof and subject to any limitations herein set
forth, Seller shall sell to Buyer and Buyer shall purchase from Seller all gas
production owned or controlled by Seller in the United States of America (the
lower 48 states only) on the date hereof (except the gas and properties
described on Exhibit "A" hereto), together with all gas production subsequently
developed from properties currently owned by Seller (except properties described
on Exhibit "A") ("later-developed production"), in addition to gas production
("after-acquired production") acquired or obtained by Seller in the United
States of America (the lower 48 states only) after the effective date hereof, to
the extent the after-acquired production is not burdened or committed prior to
or in connection with its acquisition;
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
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********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
III.2 Gas which is covered hereby shall no longer be committed to the
performance of this Agreement upon the disposition, to a third party which is
not an affiliate of Seller, of the property(ies) from which the gas is produced.
A "disposition" of property(ies) shall include a sale, trade, exchange or other
disposition of property(ies) which will exclude from Seller's commitment
hereunder the gas produced from the property(ies). Notwithstanding the
foregoing, the disposition of properties by Seller shall not reduce or diminish
Seller's obligations pursuant to Sections 6.8 and 6.9.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
5
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********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
ARTICLE IV.
RESERVATIONS
IV.1 Seller reserves unto itself, its successors, assigns and
affiliates the following rights and quantities of gas sufficient to satisfy such
rights:
(i) To operate Seller's leaseholds, lands and/or interests
therein, free from any control by Buyer, in such manner as Seller deems
advisable, including, but not limited to, the right (but never the
obligation) to drill new wells, to repair and rework old wells, to
renew and extend (in whole or in part) any lease, to combine any
leases(s) by way of unitization, to go nonconsent under an operating
agreement, to abandon any well or surrender any lease (in whole or in
part) for any reason, and to abandon, modify, extend or dispose of any
facilities owned or installed (in whole or in part) by Seller.
(ii) To deliver gas to lessors in quantities sufficient to
fulfill Seller's lease obligations from time to time including, without
limitation, the right to deliver gas to satisfy take-in-kind lease
provisions.
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(iii) To use gas for the development and operation of Seller's
leases.
(iv) To produce gas without waste and in accordance with
prudent oil and gas field practices. Seller shall not be required to
produce any well at a rate in excess of the rate fixed by law or
regulation or in excess of the rate of flow which Seller determines, in
its sole discretion, exercised in good faith, should be produced from
such well.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
(vi) To encumber gas production pursuant to prepayment,
production payment or other financing arrangements, including the right
to deliver gas that is subject to the provisions of this Agreement to
any third party in connection with such arrangements. Any third party
to whom gas is delivered pursuant to this Subsection 4.1(vi) shall also
have the right to deliver gas to any other third party in accordance
with the terms of this subsection.
(vii) To dispose of properties the production from which is
committed to the performance of this Agreement.
(viii) To process gas to be delivered hereunder for the
extraction of substances contained therein. Such processing shall occur
at the point or points as Seller may designate (which may be upstream
or downstream of the Delivery Point(s)), for the
7
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recovery and disposition of liquids, liquefiable hydrocarbons
(including only such methane as is necessarily or unavoidably removed
in processing) and nonhydrocarbons (including sulphur, helium, carbon
dioxide or other substances which can be extracted from the gas sold or
to be sold and purchased hereunder).
(ix) To use gas in facilities owned by Seller or its
affiliates. If asked to do so by Seller, Buyer will assist Seller in
obtaining, managing and administering the transportation and storage
necessary for such use.
(x) To use gas to generate electricity for use in facilities
owned by Seller. If asked to do so by Seller, Buyer will assist Seller
in obtaining, managing and administering the transportation and storage
necessary for such use.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
IV.2 If gas purchased hereunder is processed downstream of any Delivery
Point, volumes delivered and paid for pursuant to this Agreement shall be
adjusted by Seller for plant volume and Btu reductions pursuant to Seller's
processing agreements. Invoices or statements submitted by Seller hereunder
shall reflect Seller's best estimate of plant volume and Btu reductions for the
period covered by the invoice or statement, and subsequent billings shall
include an adjustment to reflect any difference between Seller's original
estimates of plant volume and Btu reductions and the actual amount of such
reductions as finally determined by Seller and agreed to by Buyer, such
reductions to be derived from statements provided by plant operators. Seller at
its option may account to Buyer for such reductions by restoring the difference
in MMBtu from other sources of gas meeting the quality specifications hereof at
a
8
<PAGE> 9
mutually agreed location. Seller shall reimburse Buyer for any costs or Btu
reductions incurred by Buyer which are associated with the transportation of
plant volume. Buyer shall cooperate with Seller and shall provide, pursuant to
one or more ancillary agreements, such assistance as Seller may reasonably
request to facilitate the exercise of Seller's processing rights, including,
without limitation, assistance in accounting for and handling plant volume and
Btu reductions, condensate removal and transportation and any other matters
arising in connection with the processing of gas by Seller.
IV.3 From time to time upon reasonable request by Seller, Buyer shall
provide Seller with services to obtain, manage, administer and schedule the
transportation and storage necessary for Seller's use of the gas permitted by
Section 4.1. Seller shall pay Buyer _______________ for any such services
provided by Buyer to Seller, other than services relating to gas to be processed
pursuant to Section 4.1 (viii) and Section 4.2. Any services provided by Buyer
and relating to obtaining, managing, administering, or scheduling processing
services and related transportation for gas to be processed pursuant to Section
4.1 (viii) and Section 4.2 shall be provided without charge to Seller.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
IV.4 In order to evidence Buyer's authority to perform the gas control
and other duties on Seller's behalf as provided in this Article IV, it may be
necessary for the parties to enter into agency agreements with transporters from
time to time. Such agency agreements shall be mutually acceptable to Buyer and
Seller and, to the extent such agency agreement is required prior to Buyer
performing services hereunder, Buyer shall not be obligated to provide such
services until such agency agreement is executed and delivered by Buyer and
Seller.
ARTICLE V.
QUALITY, PRESSURE AND MEASUREMENT
V.1 Gas sold and purchased or to be sold and purchased hereunder shall
be of the
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quality and shall be delivered at the pressure and measured in the manner
provided in the effective tariff of the First Transporter.
V.2 If gas covered hereunder fails to meet the quality or pressure
specifications above set forth and such specifications are not waived by the
First Transporter, either party may, but neither shall be obligated to, install
and operate facilities to bring the gas into conformity with such
specifications. Any such facilities shall be installed, operated and maintained
at the sole cost, risk and expense of the party which elected to install such
facilities. Either party may discontinue the operation of such facilities if, in
the sole judgment of the party installing same, such operation is uneconomical.
If neither party elects to install or continue the operation of such facilities
and the quality or pressure specifications are not waived by the First
Transporter, nonconforming gas shall be released from the terms hereof within
thirty (30) days of Buyer's or Seller's written request for such a release.
Notwithstanding the foregoing, any such release of nonconforming gas shall not
reduce or diminish Seller's obligations pursuant to Sections 6.8 and 6.9.
ARTICLE VI.
PRICE
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
10
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********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
11
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********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
12
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********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
13
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********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
ARTICLE VII.
BILLING AND PAYMENT
VII.1 Seller shall render an invoice or invoices to Buyer setting out:
the total quantity of gas delivered hereunder at each Delivery Point during the
preceding month; the quantity delivered at each Delivery Point on each day
during the preceding month that was attributable to
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<PAGE> 15
Base Volumes; the quantity delivered at each Delivery Point on each day during
the preceding month that was attributable to Excess Volumes; the quantity
delivered at each Delivery Point on each day during the preceding month that was
attributable to later-developed production or after-acquired production first
delivered during such month; the applicable Contract Price for each category of
gas delivered at each Delivery Point for such month; the total amount due for
gas delivered hereunder during such preceding month; any amounts due Buyer or
Seller under Section 6.8; any amounts due Buyer under Section 6.9; any amounts
due Seller or Buyer to correct to actuals any estimated volumes or prices used
to compute prior invoices; and any amounts due Seller or Buyer under Article X.
Buyer, or Seller, as applicable, shall pay in such manner as may be mutually
agreed, or by wire transfer of funds to the account specified in Section 13.5
hereof (or to such other account as may be specified in writing by Seller), the
amount due as reflected in Seller's invoice(s) _____________________________
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
_______________________________________________________________ in which the
invoice was delivered. Seller may base its invoices on the best information
known at a billing date, followed by adjustments reflecting actual volumes
delivered. The invoices shall include such documentation as may be agreed upon
by the parties. To the extent practicable, revised invoices shall be sent in the
month following any month in which an invoice was prepared upon the basis of
estimated volumes and estimated deductions for gathering, transportation and
other costs reflected in the applicable Contract Price. Buyer may adjust its
payment of Seller's invoice to account for volume information received by Buyer
following the date of invoice, provided that supporting documentation for the
adjustment is furnished with payment. Additionally, any refunds due to Buyer or
any additional payments due Seller as a result of correction of Sellers
estimated invoices shall accrue interest at the rate provided in Section 7.2.
VII.2 If payment is not made on the date due, Buyer or Seller, as
applicable, shall be liable for the principal amount due plus interest accruing
on the unpaid balance from the due date to the date of payment at the then
current prime rate of interest (Chase Manhattan, N.A.) plus _____ per annum
(or, if less, the maximum rate permitted by law). In addition, if Seller or
Buyer
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
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initiates legal action to recover amounts owed by the other, the losing party
shall reimburse the prevailing party's court costs and reasonable attorneys'
fees incurred in recovering the amounts or defending against the claim.
VII.3 If Buyer in good faith disputes the amount of any statement or
invoice rendered by Seller, Buyer shall pay to Seller such amounts as it
concedes to be correct and shall notify Seller of the amounts in dispute not
later than the due date for payment established pursuant to the provisions of
this Article VIII. Buyer and Seller shall use all reasonable efforts to resolve
the disputed amounts. Upon such resolution, Buyer, or Seller if amounts are owed
by Seller, shall be liable for payment of interest in accordance with Section
7.2 only upon such amounts not timely paid by Buyer, or Seller as applicable, as
are ultimately determined to be payable. Neither party shall be liable for
interest on amounts as to which a dispute arises due to actions of third parties
beyond the control of a party.
VII.4 No adjustment shall be made concerning a disputed billing unless
a claim is made therefor prior to the expiration of two (2) years from the date
of such disputed billing. Each party will have the right at reasonable times and
upon reasonable notice to examine the books and records of the other party to
verify the accuracy of any statement, charge or computation hereunder. Buyer and
Seller shall maintain all statements, reports, records, allocations, supporting
invoices, books of accounts and other documentation necessary to verify the
accuracy of any statement, charge or computation made under or pursuant to any
of the provisions of this Agreement for a period of not less than three (3)
calendar years.
VII.5 If Seller receives notice or otherwise learns of a royalty claim
being made for unpaid or underpaid royalties, or if Seller becomes aware of any
regulatory action, pending litigation or other occurrence which in Seller's good
faith opinion indicates that a change is about to take place in the standards by
which royalty is assessed on gas covered hereunder, then Seller shall have the
right, at any time thereafter, to release gas that is the subject of the
potential price adjustment claim or change in standards ("Released Gas").
Notwithstanding the foregoing, the
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release of gas pursuant to this Section 7.5 shall not reduce or diminish
Seller's obligations pursuant to Sections 6.8 and 6.9.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
ARTICLE VIII.
EFFECTIVE DATE AND TERM
VIII.1 This Agreement shall be effective as of the date first
hereinabove written and shall continue and remain in full force and effect for a
primary term (the "Primary Term") ending four (4) years from the effective date
hereof, and continuing year to year thereafter unless terminated by either party
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
ARTICLE IX.
FORCE MAJEURE
IX.1 In the event of either party hereto being rendered unable wholly
or in part by force majeure to carry out its obligations under this Agreement,
other than the obligation to make payments due hereunder, such party shall
notify the other party by telephone as soon as possible
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but in no event later than twenty-four (24) hours after the occurrence of the
force majeure event and thereafter provide full particulars of such force
majeure in writing as provided in Section 13.5 to the other party within three
(3) days after the occurrence of the cause relied on. The obligations of the
parties, so far as they are affected by such force majeure, shall be suspended
from the inception of such force majeure during the continuance of any inability
so caused but for no longer period, and such cause shall be remedied with all
reasonable dispatch.
The term "force majeure" as employed herein shall mean acts of
God, strikes, lockouts or other industrial disturbances, acts of the public
enemy, wars, blockades, insurrection, riots, epidemics, landslides, lightning,
earthquakes, fires, storms, floods, washouts, arrests and restraints of the
government (federal, state or local), inability of any party hereto to obtain
necessary materials, supplies or permits due to existing or future rules, orders
and laws of governmental authorities (federal, state or local), interruptions by
government or court orders, present and future orders of any regulatory body
having proper jurisdiction, civil disturbances, explosions, sabotage, breakage
or accident to machinery or lines of pipe the necessity for making emergency
repairs or alterations to machinery or lines of pipe _________________________
____________, freezing of wells or lines of pipe, partial or entire failure of
wells due to events beyond Seller's control __________________________________
____________, inability of any transporter of gas to receive, transport or
deliver gas sold and purchased hereunder ____________________________________
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
_____________ and any other causes, whether of the kind herein enumerated or
otherwise, not within the control of the party claiming suspension and which by
the exercise of due diligence such party is unable to overcome. Such term shall
also include the inability to acquire, or the delays in acquiring, at reasonable
cost and after the exercise of reasonable diligence, any
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servitudes, right-of-way grants, permits or licenses required to be obtained to
enable a party hereto to fulfill its obligations hereunder.
IX.2 Notwithstanding the provisions of Section 9.1, force majeure shall
not include changes in market conditions, changes in the market price for gas,
or lack of market for gas.
IX.3 Increases or decreases in Seller's gas supply due to allocation or
reallocation of past production by well operators shall not constitute events of
force majeure hereunder.
IX.4 It is understood and agreed that the settlement of strikes or
lockouts shall be entirely within the discretion of the party having the
difficulty.
ARTICLE X.
IMBALANCE RESOLUTION
X.1 Seller agrees that gas will be delivered as nearly as practicable
at a relatively constant daily rate over the month, but each party shall be
entitled to operate within the tolerances specified in the effective filed gas
tariff of the First Transporter.
X.2 The parties recognize that imbalances may occur on the First
Transporter. Accordingly, Buyer and Seller agree to make every reasonable effort
to promptly clear such imbalances, with primary responsibility placed on the
party which is the shipper under the transportation agreement with the First
Transporter. Further, the party without a transportation agreement with the
transporter ("Non-Shipper") agrees to provide reasonable cooperation with the
Shipper in its efforts to clear any imbalance. (Where Buyer is not a shipper but
instead resells to the shipper, Buyer shall be deemed a "Shipper" for purposes
of this Agreement.)
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
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********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
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<PAGE> 21
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
ARTICLE XI.
DEFAULT
XI.1 If any of the following events shall occur and be continuing:
(i) Buyer shall fail to pay or cause to be paid any amount
owing under this Agreement when due (unless Buyer is in compliance with
Section 7.3 with respect to such unpaid amount); or
(ii) Either party shall fail to perform or observe any term,
covenant, or
21
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agreement contained in this Agreement (including, without limitation,
Buyer's failure to take gas made available by Seller in accordance with
the terms hereof), and any such failure shall remain unremedied for ten
(10) days after written notice thereof shall have been given by the
other party; or
(iii) Either party shall generally not pay its debts as such
debts become due, or shall admit in writing its inability to pay its
debts generally, or shall make a general assignment for the benefit of
creditors, or any proceeding shall be instituted by or against that
party seeking to adjudicate it as bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment,
protestation, relief, or composition of it or its debts under any
proceeding relating to bankruptcy, insolvency, or reorganization or
relief of debtors, or seeking the entry of any order for relief or the
appointment of a receiver, trustee, or other similar official for it or
for any substantial part of its property; or the party shall take any
corporate action to authorize any of the actions set forth above in
this subsection (iii);
(iv) Buyer fails to maintain credit support required pursuant
to Article XII of this Agreement.
then, and in any such event (and in addition to rather than in lieu of all other
remedies available to it), the non-defaulting party: (A) in the case of Seller
(a) may, by notice to Buyer, declare its obligation to deliver gas to Buyer
hereunder to be terminated, whereupon the same shall forthwith terminate, and
(b) may, by notice to Buyer, declare all amounts owing to Seller under this
Agreement to be forthwith due and payable, whereupon all such amounts shall
become and be forthwith due and payable, without demand, protest, or further
notice of any kind, all of which are hereby expressly waived by Buyer; and (B)
in the case of either party may, by notice to the defaulting party, declare this
Agreement to be terminated.
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XI.2 Neither party shall be liable to the other for any special,
incidental, consequential or punitive damages as a result of any breach of or
default under this Agreement or as a result of any act or omission in connection
with this Agreement; provided, however, that this clause shall not be construed
to preclude any remedy expressly provided in this Agreement.
ARTICLE XII.
CREDIT SUPPORT
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
23
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********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
24
<PAGE> 25
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
25
<PAGE> 26
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
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<PAGE> 27
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
ARTICLE XIII.
MISCELLANEOUS
XIII.1 Seller hereby warrants title to the gas delivered hereunder,
Seller's right to sell the same, and that same is free from all liens and
adverse claims. Seller shall be responsible for all production, severance or
similar taxes and all royalties due and payments to mineral and royalty owners
under Seller's leases; provided, however, that where Buyer is required by law to
be
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responsible for the payment of production, severance or similar taxes, Buyer
shall make such payment and shall deduct such taxes from amounts due to Seller
by Buyer hereunder unless it is demonstrated to the reasonable satisfaction of
Buyer that the amount of such payment is reflected in the applicable pricing
index or the pricing adjustment on Exhibit "B". Seller does hereby indemnify
Buyer, its successors and assigns and save them harmless from all suits,
actions, debts, accounts, damages, costs, losses and expenses arising from or
out of adverse claims of any or all parties to said gas which are applicable
before title to the gas passes to Buyer.
XIII.2 As between the parties hereto, Seller shall be responsible for
any damage or injury caused by the gas until it has been delivered to Buyer at
the Delivery Point(s), after which Buyer shall be responsible for any damage or
injury caused thereby; provided, however, that if Seller causes gas to be
processed downstream of any Delivery Point, Buyer shall not be responsible for
and Seller shall indemnify and hold Buyer harmless from and against any claimed
damages or injuries while the gas is processed. Title to the gas shall pass to
Buyer at the Delivery Point(s).
XIII.3 The waiver by either party of any breach of any of the
provisions of this Agreement shall not constitute a continuing waiver of other
breaches of the same or other provisions of this Agreement.
XIII.4 This Agreement is subject to all present and future valid laws,
orders, rules and regulations of any regulatory body of the Federal Government
or any State having jurisdiction.
XIII.5 Any notice, demand or document which either party is required or
may desire to give hereunder shall be in writing and, except to the extent
provided in the other provisions of this Agreement, given by messenger, telecopy
or other electronic transmission, or United States registered or certified mail,
postage prepaid, return receipt requested, addressed to such party at its
address and telecopy number shown below, or at such other address as either
party shall have furnished to the other by notice given in accordance with this
provision.
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SELLER: WIRE TRANSFER PAYMENTS:
Pennzoil Exploration and Production Company
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
CONFIRMATION OF TRANSFER:
___________
Pennzoil Exploration and Production Company
P. O. Box 2967
Houston, Texas 77252-2967
_____________________
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
NOTICES AND CORRESPONDENCE:
___________
Pennzoil Exploration and Production Company
P. O. Box 2967
Houston, Texas 77252-2967
_____________________
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
BUYER:
Correspondence, Columbia Energy Services Corporation
Invoices and 121 Hillpointe Drive, Suite 100
Notice: Canonsburg, PA 43215
Attn: Vice President, Operations
Telephone: (412) 873-1300
Facsimile: (412) 873-1310
Payments: WIRE TRANSFER
Columbia Energy Services Corporation
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Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
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Any notice delivered or made by messenger, telecopy, or United States
mail shall be deemed to be given on the date of actual delivery as shown by
messenger receipt, the addressor's telecopy machine confirmation or other
verifiable electronic receipt, or the registry or certification receipt.
XIII.6 Neither this Agreement nor any obligation under this Agreement
may be assigned by either party to an entity which is not an affiliate of the
assigning party without the prior written consent of the other party. This
Agreement may be assigned by either party to an affiliate without the prior
written consent of the other party; provided, however, that such assignment
shall not relieve the assigning party of its obligations under this Agreement.
The foregoing notwithstanding, a party may pledge, sell, or assign its rights to
receive payments hereunder without the consent of the other party.
XIII.7 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF ______, WITHOUT REGARD TO ITS PRINCIPLES OF
CONFLICTS OF LAWS. Any dispute concerning the rights and obligations of Buyer
and Seller hereunder, or the interpretation of any provision of this Agreement,
shall be litigated in the state or federal courts of _______________________.
********************************************
Information has been omitted
pursuant to a confidential treatment request
filed with the Commission.
********************************************
XIII.8 This Agreement sets forth all understandings of Buyer and Seller
with respect to the purchase and sale of gas covered herein. All other
agreements, oral or written, concerning such purchase and sale are merged into
and superseded by this Agreement. No modification or amendment hereof shall be
effective unless in writing and signed by both parties.
XIII.9 The terms of this Agreement shall be kept confidential by Buyer
and Seller except to the extent that any information is required to be disclosed
by law or must be disclosed to a third party for the purpose of arranging
transportation of gas subject to this Agreement.
XIII.10 Seller and Buyer shall meet on a quarterly basis to discuss the
future production
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capabilities of Seller's properties and prospects for attaching additional
properties.
XIII.11 This agreement does not confer upon any person, other than the
parties hereto, any rights or remedies hereunder as a third-party beneficiary or
otherwise.
XIII.12 Seller agrees to permit Buyer to describe itself in sales and
advertising literature as the primary purchaser of gas produced by Seller in the
lower-48 states of the United States; provided, however, that no such
description shall be made unless the description has been approved in advance,
in writing, by Seller. Any such description shall clearly indicate that Seller
does not have any interest in, and does not in any way guarantee Buyer's
performance of its obligation under, any of Buyer's agreements for sale of gas,
and that none of Buyer's customers may be considered third-party beneficiaries
of this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed in duplicate
originals by the parties hereto as of the day and year first herein written.
PENNZOIL EXPLORATION AND
PRODUCTION COMPANY
By:___________________________________
SELLER
Name:___________________________________
Title:___________________________________
COLUMBIA ENERGY
SERVICES CORPORATION
By:___________________________________
BUYER
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Name:___________________________
Title:___________________________
32
<PAGE> 1
Exhibit 11
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
Statements Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Computation for Statements of Consolidated
Income ($ in millions)
Net income 34.9 8.2 197.6 159.5
- ----------------------------------------------------------------------------------------------------------
Earnings per share of common stock
(based on average shares outstanding) ($)
Earnings on common stock 0.63 0.15 3.57 3.04
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Additional computation of average common
shares outstanding (thousands) (NOTE)
- ----------------------------------------------------------------------------------------------------------
Average shares of common stock outstanding 55,367 55,044 55,346 52,544
Incremental common shares applicable to
common stock based on the common stock
daily average market price:
Applicable to contingent stock awards 5 10 5 10
Applicable to contingent stock options 121 66 123 58
- ----------------------------------------------------------------------------------------------------------
Average common shares as adjusted 55,493 55,120 55,474 52,612
- ----------------------------------------------------------------------------------------------------------
Average shares of common stock outstanding 55,367 55,044 55,346 52,544
Incremental common shares applicable to
common stock based on the more dilutive
of the common stock ending or daily average
market price during the period:
Applicable to contingent stock awards 5 10 5 10
Applicable to contingent stock options 157 114 157 114
- ----------------------------------------------------------------------------------------------------------
Average common shares assuming full dilution 55,529 55,168 55,508 52,668
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Earnings on common stock as adjusted ($) 0.63 0.15 3.56 3.03
- ----------------------------------------------------------------------------------------------------------
Earnings on common stock assuming full dilution ($) 0.63 0.15 3.56 3.03
- ----------------------------------------------------------------------------------------------------------
</TABLE>
NOTE
These calculations are submitted in accordance with the Securities Exchange Act
of 1934 Release No. 9083 although not required by footnote 2 to paragraph 14 of
Accounting Principles Opinion No. 15 because they result in dilution of less
than 3%.
<PAGE> 1
Exhibit 12
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
Statements of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
($ in millions)
<TABLE>
<CAPTION>
Twelve Months Twelve Months
Ended June 30, Ended December 31,
----------------- ---------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Income (Loss) from Continuing Operations
before Income Taxes 372.5 (650.7) 337.5 (643.0) 392.2 288.1 161.4
Adjustments:
Interest during construction 1.6 (20.8) (1.1) (20.2) -- -- --
Distributed (Undistributed) equity income 1.8 (3.1) 1.5 (7.9) (0.9) (0.1) (0.1)
Fixed charges * 181.2 1,133.1 184.6 1,061.3 33.7 120.0 33.0
------- ------- ------- ------- ------- ------- -------
Earnings Available 557.1 458.5 522.5 390.2 425.0 408.0 194.3
------- ------- ------- ------- ------- ------- -------
Fixed Charges:
Interest on long-term and short-term debt 145.3 1,064.7 150.8 987.2 0.7 3.1 4.9
Other interest 14.8 47.9 13.5 53.6 14.1 98.4 8.8
Portion of rentals representing interest 21.1 20.5 20.3 20.5 18.9 18.5 19.3
------- ------- ------- ------- ------- ------- -------
Total Fixed Charges **, *** 181.2 1,133.1 184.6 1,061.3 33.7 120.0 33.0
------- ------- ------- ------- ------- ------- -------
Ratio of Earnings Before Taxes to Fixed Charges 3.07 N/A(a) 2.83 N/A(a) 12.61 3.40 5.89
======= ======= ======= ======= ======= ======= =======
</TABLE>
(a) To achieve a one-to-one coverage, the Corporation would need an additional
$674.6 and $671.1 million of earnings, for the twelve months ended June 30, 1996
and the twelve months ended December 31, 1995, respectively.
* Amounts for the twelve months ended December 31, 1992 through December 31,
1996 have been restated to conform to 1997 presentation.
** This amount excludes approximately $230 million, $210 million and $204
million of interest expense not recorded for the twelve months ended December
31, 1994, 1993 and 1992, respectively. This amount includes interest expense of
$982.9 million including the write-off of unamortized discounts on debentures
recorded in 1995. Reference is made to the Statements of Consolidated Income for
the quarterly period ended June 30, 1996, as reported in Form 10-Q.
*** This amount excludes $8.6 million of interest expense not recorded with
respect to the registrant's guarantee of LESOP Trust's debentures for the twelve
months ended December 31, 1994, 1993 and 1992.
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<NAME> THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
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<NAME> CGS
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