<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1994
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
SEAGULL ENERGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------------
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<S> <C>
TEXAS 74-1764876
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
1001 FANNIN, SUITE 1700
HOUSTON, TEXAS 77002-6714
(713) 951-4700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------
ROBERT W. SHOWER, EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
1001 FANNIN, SUITE 1700
HOUSTON, TEXAS 77002-6714
(713) 951-4700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------------
Copies to:
<TABLE>
<S> <C>
VINSON & ELKINS L.L.P. SIMPSON THACHER & BARTLETT
1001 FANNIN 425 LEXINGTON AVENUE
2500 FIRST CITY TOWER NEW YORK, NEW YORK 10017-3909
HOUSTON, TEXAS 77002 ATTN: ANDREW R. KELLER, ESQ.
ATTN: J. MARK METTS, ESQ.
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS TO BE OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE* OFFERING PRICE* FEE
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<S> <C> <C> <C> <C>
Seagull Energy Corporation --
ENSTAR Alaska Group Common Stock,
par value, $.10 per share**..... 7,500,000 shares $20.00 $150,000,000 $51,725
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* Estimated solely for the purpose of calculating the registration fee.
** Including associated preferred stock purchase rights. Prior to the occurrence
of certain events, the preferred stock purchase rights will not be evidenced
or traded separately from the Seagull Energy Corporation -- ENSTAR Alaska
Group Common Stock.
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED MAY 20, 1994
PROSPECTUS
7,500,000 SHARES
(LOGO) ENSTAR ALASKA GROUP COMMON STOCK
OF
SEAGULL ENERGY CORPORATION
---------------------
The Seagull Energy Corporation -- ENSTAR Alaska Group Common Stock, par
value $.10 per share (the "ENSTAR Alaska Stock"), is common stock of Seagull
Energy Corporation (the "Company") and is intended to reflect the performance of
the ENSTAR Alaska Group, which engages in the transmission and distribution of
natural gas in South-Central Alaska (the "ENSTAR Alaska Group"). The ENSTAR
Alaska Stock will be one of two classes of the Company's common stock, the other
being Seagull Energy Corporation Common Stock (the "Seagull Common Stock").
Holders of ENSTAR Alaska Stock and Seagull Common Stock are holders of common
stock of the Company and continue to be subject to all of the risks associated
with an investment in the Company and all of its businesses and liabilities.
Dividends on the ENSTAR Alaska Stock will be payable when, as and if
declared by the Board of Directors of the Company (the "Board") out of the
lesser of (i) legally available funds of the Company and (ii) the Available
ENSTAR Alaska Dividend Amount (as defined herein). The Board intends to declare
and pay dividends on the ENSTAR Alaska Stock based primarily upon the financial
condition, results of operations and business requirements of the ENSTAR Alaska
Group. The Board currently intends to pay an initial quarterly dividend on the
ENSTAR Alaska Stock of $0.275 per share. The voting power of one share of ENSTAR
Alaska Stock relative to one share of Seagull Common Stock will fluctuate based
upon the relative Market Values thereof (as defined herein).
Upon the liquidation of the Company, the rights of the holders of the ENSTAR
Alaska Stock and the Seagull Common Stock will be based on the relative Market
Values thereof. In the event of a merger or consolidation providing for the
receipt of consideration by, or conversion of shares held by, holders of common
stock of the Company, the holders of the ENSTAR Alaska Stock and Seagull Common
Stock will receive merger consideration based on the relative Market Values
thereof. Subject to certain conditions, the ENSTAR Alaska Stock may be
exchanged, in the sole discretion of the Board, for shares of the common stock
of a wholly owned subsidiary of the Company to which the assets and liabilities
of the ENSTAR Alaska Group have been transferred as described herein. In the
event of a disposition by the Company of all or substantially all of the
properties and assets of the ENSTAR Alaska Group, the Company must either (i)
distribute to holders of ENSTAR Alaska Stock an amount equal to their
proportionate interests in the net proceeds of such disposition, either by
special dividend or by redemption of all or part of the outstanding shares of
the ENSTAR Alaska Stock; or (ii) exchange shares of ENSTAR Alaska Stock for a
number of shares of Seagull Common Stock equal to 110% of an average daily ratio
of the Market Values of one share of ENSTAR Alaska Stock to one share of Seagull
Common Stock. The Company could, in the sole discretion of the Board, at any
time, exchange shares of ENSTAR Alaska Stock for a number of shares of Seagull
Common Stock equal to 115% of the ratio of a time-weighted average of the Market
Values of one share of ENSTAR Alaska Stock to one share of Seagull Common Stock.
Prior to the Offering, there has been no public market for the ENSTAR Alaska
Stock. It is currently estimated that the initial offering price per share will
be in the range of $ to $ . For a discussion of the factors which will
be considered in determining the initial public offering price, see
"Underwriting." Proceeds from the Offering will be used to repay amounts
borrowed under the Company's revolving credit agreement (the "Revolver"), none
of which debt is attributable to the ENSTAR Alaska Group. The Company will apply
for a listing of the ENSTAR Alaska Stock on the New York Stock Exchange under
the symbol "SGE."
The features of the ENSTAR Alaska Stock, as well as other special
considerations, are more fully discussed under "Dividend Policy," "Special
Considerations" and "Description of Capital Stock."
SEE "SPECIAL CONSIDERATIONS" FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT
IN THE ENSTAR ALASKA STOCK.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO SEAGULL
PRICE TO DISCOUNTS ENERGY
PUBLIC AND COMMISSIONS(1) CORPORATION(2)
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<S> <C> <C> <C>
Per Share................................... $ $ $
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Total....................................... $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters (as defined herein)
against certain liabilities, including liabilities under the Securities Act
of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
---------------------
The shares of ENSTAR Alaska Stock offered by this Prospectus are offered by
the Underwriters subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
Underwriters and to certain further conditions. It is expected that delivery of
the shares of ENSTAR Alaska Stock will be made at the offices of Lehman Brothers
Inc., New York, New York, on or about , 1994.
---------------------
LEHMAN BROTHERS
MERRILL LYNCH & CO.
SMITH BARNEY SHEARSON INC.
, 1994
<PAGE> 3
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE ENSTAR ALASKA
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed by the Company may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549; and at regional
offices of the Commission at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and at 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material may be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Such material may be inspected and copied at the offices of
the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information contained in the Registration Statement on
Form S-3 (the "Registration Statement") of which this Prospectus is a part. For
such information, reference is made to the Registration Statement and the
exhibits thereto. Statements made in this Prospectus as to the contents of any
contract, agreement or other document are not necessarily complete; with respect
to each such contract, agreement or other document filed as an exhibit to the
Registration Statement or incorporated by reference herein, reference is made to
such contract, agreement or other document for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus the
following documents previously filed with the Commission pursuant to the
Exchange Act: (i) the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, together with the amendments thereto filed May 2, 1994; (ii)
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1994; (iii) the Company's Current Report on Form 8-K dated January 4, 1994, as
amended; and (iv) the description of the Seagull Common Stock contained in the
Registration Statement on Form 8-A declared effective by the Commission on
January 30, 1981, together with the amendments on Form 8 filed with the
Commission on January 29, 1981, January 30, 1981 and October 28, 1991.
Each document filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Offering made hereby shall be deemed to be incorporated
by reference in this Prospectus and to be a part of this Prospectus from the
date of filing of such document.
Any statement contained in this Prospectus or in a document incorporated or
deemed to be incorporated by reference in this Prospectus shall be deemed to be
modified or superseded for purposes of the Registration Statement and this
Prospectus to the extent that a statement contained in this Prospectus or in any
subsequently filed document that also is or deemed to be incorporated by
reference in this Prospectus modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of the Registration Statement or this
Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of any such person, a
copy of any or all of the documents that are incorporated by reference in this
Prospectus, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference into such documents). Requests should be
directed to Investor Relations, Seagull Energy Corporation, 1001 Fannin, Suite
1700, Houston, Texas 77002, telephone (713) 951-4700.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this Prospectus Summary is qualified
in its entirety by, the more detailed information contained in this Prospectus.
As used herein, the "Company" means Seagull Energy Corporation and its
consolidated subsidiaries, unless the context otherwise requires. Unless
otherwise defined herein, capitalized terms used in this Summary have the
respective meanings ascribed to them elsewhere in this Prospectus. See "Index of
Certain Terms" set forth in Annex I.
ENSTAR ALASKA GROUP
The operations of the ENSTAR Alaska Group are conducted through ENSTAR
Natural Gas Company ("ENG"), a division of the Company, and Alaska Pipeline
Company ("APC"), an Alaska corporation and a wholly owned subsidiary of the
Company. ENG and APC are currently operated as a single business unit and are
regulated by the Alaska Public Utilities Commission (the "APUC"). ENG engages in
the distribution of natural gas in Anchorage and other nearby communities in
Alaska and is APC's only customer. APC engages in the intrastate transmission of
natural gas in South-Central Alaska.
The ENSTAR Alaska Group is the sole provider of natural gas to the greater
Anchorage metropolitan area, which comprises approximately 45% of the population
of the State of Alaska. The ENSTAR Alaska Group's customer base has grown
consistently throughout its history, currently serving more than 90% of
Anchorage's residents with natural gas at rates that are consistently among the
lowest in any metropolitan area in the United States. In addition, Anchorage
area residential and office housing occupancy rates, employment and customer
additions have all shown positive trends over the last several years.
BUSINESS DESCRIPTION
ENG distributes natural gas through approximately 1,916 miles of gas mains
to approximately 88,600 residential, commercial, industrial and electrical power
generation customers including two municipal utilities and two military bases.
During 1993, ENG added approximately 55 miles of new service lines and added
approximately 1,800 net customers.
APC owns and operates the only natural gas transmission lines in its
service area that are operated for utility purposes. This transmission system is
composed of approximately 348 miles of intrastate pipelines that transport
natural gas from producing fields in South-Central Alaska to ENG's
Anchorage-based gas distribution system.
APC currently purchases all of its natural gas under long-term contracts
with two major international oil and gas companies in which the price is indexed
to changes in the price of crude oil futures contracts. In addition, ENG's sales
prices are adjusted to include the projected cost of its gas; as a result, there
is expected to be little or no impact on margins due to significant fluctuations
in oil prices as a result of worldwide political events and changing market
conditions.
FINANCIAL PERFORMANCE
The ENSTAR Alaska Group's strong market position and steady pace of
customer additions has enabled the ENSTAR Alaska Group to generate relatively
consistent operating profit. During the period of 1988 through 1992, operating
profit ranged from approximately $21 to $24 million. Despite a relatively warm
winter in 1993 (the heating degree days for 1993 were 9,382, approximately 10%
below the average for the 30-year period ended December 31, 1993), the ENSTAR
Alaska Group still generated an operating profit of $19 million.
In addition, the ENSTAR Alaska Group has consistently generated cash flow
from operations, before working capital changes, in excess of its capital
expenditure requirements, which enhances its financial flexibility. Contributing
to this cash flow generating capability is the ENSTAR Alaska Group's relatively
new transmission and distribution infrastructure, as well as advances provided
by customers to partially fund the
3
<PAGE> 5
expansion of the ENSTAR Alaska Group's system. From 1988 through 1993, cash flow
from operations, before working capital changes, ranged from $18 to $21 million
per year, compared to annual capital expenditure requirements of $8 to $10
million over the same period.
BUSINESS CLIMATE
Anchorage is served by a deep water port and an international airport, and
is the headquarters for the Alaska Railroad system. Several oil company
managerial offices and approximately half of state and regional federal
governmental employees are located in Anchorage. While the petroleum industry
and the resulting tax and royalty payments to the State of Alaska still provide
the largest influence on Anchorage's economy, some diversification is taking
place. Federal Express and United Parcel Service have both built international
distribution hubs in Anchorage. The Anchorage International Airport continues to
be a major refueling point for cargo flights between the Far East and Europe.
Tourism enjoys continued growth, with Alaska now a significant summer cruise
destination. In addition, the ENSTAR Alaska Group believes that, because of
Anchorage's strategic location, the military will continue to play a significant
role in Anchorage's economy. In fact, the military has announced $250 million in
construction projects over the next three years for both Elmendorf Air Force
Base and Fort Richardson Army Post.
National retailers, such as Kmart, Wal-Mart and Toys R Us, have recently
entered the ENSTAR Alaska Group's service area, fueling a significant expansion
of retail space for these firms and other retailers already in the market. In
Anchorage, 300,000 square feet of retail space was added in 1992, over a half
million square feet opened in 1993, and an additional half million is under
construction and scheduled for opening in 1994. Other portions of the ENSTAR
Alaska Group's service area saw 200,000 square feet of retail space open in
1993, with an additional 200,000 square feet under construction and scheduled
for opening in 1994.
Recent population and employment estimates continue to show modest economic
growth in the ENSTAR Alaska Group's service area through the mid-1990s, followed
by a leveling off. The Anchorage area population was reported at 174,000 in 1980
by the U.S. Bureau of the Census. The population level peaked in 1985 at an
estimated level of 248,000 and reached a subsequent low of 219,000 in 1988.
Current estimates place the population at 242,600, which is approximately 45% of
the total population of the state. As of July 1993, Anchorage employment had
increased by 2,700 from the prior year to 121,000 jobs.
Vacant Anchorage housing units that in 1988 amounted to about 17% of total
supply dropped to 4.2%, or about 3,800 units, in 1993. Apartment vacancies are
under 2%, and office building vacancy rates have dropped from a high of 18% in
1988 to 9.6% in 1993. Because of the severe weather conditions that the ENSTAR
Alaska Group's service area experiences during winter, even vacant structures
require gas service for heating to prevent structural damage or deterioration.
Since inception, the ENSTAR Alaska Group has been able to increase its
number of customers each year, despite the variations in population, employment
and vacancies described above. A portion of this customer growth has been
achieved by expanding the distribution system into areas not previously served
by the ENSTAR Alaska Group. See "New Markets" below.
NEW MARKETS
In addition to expected continued growth in the Anchorage area,
distribution system expansion into formerly unserved areas and transportation of
natural gas for large industrial customers offer growth opportunities.
Facilities planned for 1994 and 1995 will make gas available for the first time
in the Big Lake area. This project, like others completed by the ENSTAR Alaska
Group in the past, is being partially financed through customer-funded
improvement districts.
4
<PAGE> 6
SEAGULL ENERGY CORPORATION
The Company is an independent energy company primarily engaged in natural
gas exploration, development and production. The Company's operations are
focused in four principal geographic regions: (i) offshore Texas and Louisiana
in the Gulf of Mexico; (ii) in the Mid-Continent Region located in western
Oklahoma and the Texas Panhandle; (iii) in the Mid-South Region, primarily in
the Arklatex area in eastern Texas and northern Louisiana and the Arkoma Basin
in eastern Oklahoma and western Arkansas; and (iv) in western Canada.
The Company's two other business segments are also natural gas-related: (i)
the ENSTAR Alaska Group and (ii) pipeline and marketing operations, which
include natural gas supply, marketing and transportation, principally in the
southwestern United States; pipeline transportation of hydrocarbon products and
petrochemicals in Texas and Louisiana; pipeline engineering, design,
construction and operation; and natural gas processing in Texas. The ENSTAR
Alaska Group's operating profit was 25% of the operating profit for Seagull
Energy Corporation for 1993. The ENSTAR Alaska Group's total assets were 14% of
the total assets for Seagull Energy Corporation as of March 31, 1994.
Seagull Energy Corporation has two classes of common stock: ENSTAR Alaska
Stock and Seagull Common Stock. Each class of common stock is intended to
reflect separately the performance of the relevant business group. The ENSTAR
Alaska Stock will reflect the performance of the ENSTAR Alaska Group. The
Seagull Common Stock will reflect separately the performance of the Company's
remaining two business segments ("Seagull Energy") that consist of (i) natural
gas exploration, development and production, and (ii) pipeline and marketing
operations. Holders of Seagull Common Stock and ENSTAR Alaska Stock are holders
of common stock of the Company and continue to be subject to all of the risks
associated with an investment in the Company and all of its businesses and
liabilities.
The Company was incorporated in Texas in 1973 as a wholly owned subsidiary
of Houston Oil & Minerals Corporation ("HO&M"). In March 1981, the Company
became an independent entity as a result of the spinoff of its shares to the
stockholders of HO&M. The Company's principal executive offices are located at
1001 Fannin, Suite 1700, Houston, Texas 77002, and the Company's telephone
number is (713) 951-4700.
THE OFFERING
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ENSTAR Alaska Stock offered by the Company.... 7,500,000 shares
Percentage of Equity Represented by
Offered Shares.............................. The Company is offering shares of ENSTAR
Alaska Stock representing 100% of the equity
attributable to the ENSTAR Alaska Group.
Use of Proceeds............................... All of the net proceeds of the Offering will
be used to repay amounts borrowed under the
Revolver, none of which debt is attributable
to the ENSTAR Alaska Group.
New York Stock Exchange Listing............... Application will be made to list the ENSTAR
Alaska Stock under the symbol "SGE."
</TABLE>
5
<PAGE> 7
ENSTAR ALASKA GROUP
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------ -----------------------------------------
PRO HISTORICAL PRO HISTORICAL
FORMA ------------------- FORMA ------------------------------
1994(1) 1994 1993 1993(1) 1993 1992 1991
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<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT DATA:
Revenues......................... $ 36,266 $ 36,266 $ 39,192 $107,244 $107,244 $109,598 $129,615
Depreciation and amortization.... 1,949 1,949 1,856 7,511 7,511 7,184 6,978
Operating profit................. 9,447 9,447 9,099 18,955 18,955 22,439 21,024
Net earnings (2)................. 4,782 4,782 4,552 7,048 7,048 12,039 9,626
Earnings per common share........ $ 0.64 $ 0.94
SUMMARY BALANCE SHEET DATA
(END OF PERIOD):
Property, plant and equipment --
net............................ $161,140 $159,577 $162,004 $160,359 $160,136
Total assets..................... 187,456 189,115 185,701 186,519 189,059
Long-term debt................... 62,816 67,039 62,787 67,011 62,487
Common equity.................... 60,430 62,943 59,362 61,767 59,279
OPERATING DATA:
Heating degree days (3).......... 3,887 3,908 9,382 10,653 10,178
Volumes (Bcf)(4):
Gas sold....................... 11.1 10.8 28.9 30.9 35.3
Gas transported................ 2.4 2.7 11.3 10.2 4.3
Combined....................... 13.5 13.5 40.2 41.1 39.6
Margins ($ per Mcf)(4):
Gas sold....................... 1.45 1.45 1.49 1.47 1.32
Gas transported................ 0.39 0.37 0.36 0.40 0.27
Combined....................... 1.26 1.23 1.17 1.20 1.20
Customers (end of period)........ 88,576 86,653 88,198 86,413 84,816
Capital expenditures............. $ 1,385 $ 1,340 $ 10,094 $ 9,024 $ 10,492
</TABLE>
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(1) The summary income statement data give effect to the issuance and sale of
7,500,000 shares of ENSTAR Alaska Stock (representing 100% of the equity
attributable to the ENSTAR Alaska Group) pursuant to the Offering, as if
the sale had occurred on January 1, 1993. No pro forma adjustments were
necessary to the ENSTAR Alaska Group's historical combined balance sheet or
operating data as of March 31, 1994 to give effect to the pro forma
transaction described above. See "ENSTAR Alaska Group Unaudited Pro Forma
Condensed Statement of Earnings."
(2) 1992 includes the cumulative effect of two changes in accounting principles
aggregating $1.6 million. Effective January 1, 1992, the ENSTAR Alaska
Group adopted Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes, and SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions.
(3) A measure of weather severity calculated by subtracting the mean
temperature for each day from 65 degrees Fahrenheit. More heating degree
days equate to colder weather. The average annual heating degree days for
the 30 years, 10 years and 5 years ended December 31, 1993 were 10,431,
10,101 and 10,324, respectively. The average first quarter heating
degree days for the 30 years, 10 years and 5 years ended December 31,
1993 were 4,057, 3,917 and 4,177, respectively.
(4) Mcf and Bcf represent one thousand cubic feet and one billion cubic feet of
natural gas, respectively.
6
<PAGE> 8
SEAGULL ENERGY CORPORATION
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------------------- ------------------------------------------
PRO HISTORICAL PRO HISTORICAL
FORMA ---------------------- FORMA --------------------------------
1994(1) 1994 1993 1993(1) 1993 1992 1991
---------- ---------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT DATA (2):
Revenues......................... $ 127,063 $ 127,063 $ 103,192 $409,523 $ 377,165 $ 238,829 $248,537
Depreciation, depletion and
amortization................... 39,020 39,020 28,085 131,772 116,556 63,231 52,902
Operating profit................. 34,829 34,829 19,421 79,759 75,989 29,883 30,183
Net earnings (3)................. 13,880 12,915 3,853 27,690 27,198 6,688 5,107
Earnings per common share:
Historical (3)................. $ -- $ 0.35 $ 0.12 $ -- $ 0.76 $ 0.26 $ 0.23
Pro forma Seagull Energy....... 0.25 0.58
Pro forma ENSTAR Alaska
Group........................ 0.64 0.94
SUMMARY SEGMENT DATA:
Exploration and Production (2):
Depreciation, depletion and
amortization................. $ 35,849 $ 35,849 $ 24,900 $118,768 $ 103,552 $ 52,855 $ 42,646
Operating profit (loss)........ 22,175 22,175 6,419 46,739 42,969 (1,613) 1,275
Capital expenditures (4)....... 21,294 21,294 20,496 110,798 97,818 32,115 58,459
Pipeline and Marketing:
Depreciation, depletion and
amortization................. 1,222 1,222 1,329 5,493 5,493 3,192 3,278
Operating profit............... 3,207 3,207 3,903 14,065 14,065 9,057 7,884
Capital expenditures (5)....... 391 391 578 2,115 2,115 1,622 634
Alaska Transmission and
Distribution:
Depreciation, depletion and
amortization................. 1,949 1,949 1,856 7,511 7,511 7,184 6,978
Operating profit............... 9,447 9,447 9,099 18,955 18,955 22,439 21,024
Capital expenditures........... 1,385 1,385 1,340 10,094 10,094 9,024 10,492
SUMMARY BALANCE SHEET DATA
(END OF PERIOD) (2):
Property, plant and
equipment -- net............... $1,124,324 $1,124,324 $ 927,211 $ 933,189 $ 937,802 $500,255
Total assets..................... 1,317,578 1,317,578 1,087,989 1,118,251 1,102,964 618,552
Long-term debt................... 505,363 632,363 448,039 459,787 608,011 219,154
Shareholders' equity (6)......... 577,144 450,144 411,819 439,379 243,673 235,797
</TABLE>
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(1) The summary income statement data and the summary segment data give effect
to (i) the acquisition of Novalta Resources Inc. (the "Seagull Canada
Acquisition"), financed initially under the credit agreement for the
Company's Canadian subsidiary (the "Canadian Credit Agreement") and the
Revolver and (ii) the issuance and sale of 7,500,000 shares of ENSTAR Alaska
Stock (representing 100% of the equity attributable to the ENSTAR Alaska
Group) pursuant to the Offering and the application of the estimated net
proceeds of $127 million therefrom to repay amounts borrowed under the
Revolver, as if both events had occurred on January 1, 1993. The summary
balance sheet data as of March 31, 1994 give effect to the pro forma
transactions and events described in clause (ii) above as if the sale had
occurred on March 31, 1994. See "ENSTAR Alaska Group Unaudited Pro Forma
Condensed Statements of Earnings" and "Seagull Energy Corporation Unaudited
Pro Forma Condensed Financial Statements."
(2) Includes certain assets acquired in the Mid-Continent region (the
"Mid-Continent Assets") since March 8, 1991, Seagull Mid-South Inc.
(formerly Arkla Exploration Company) since December 31, 1992 and Seagull
Energy Canada Ltd. (formerly Novalta Resources Inc. ("Novalta")) since
January 4, 1994, the respective dates of such acquisitions.
(3) 1992 includes the cumulative effect of two changes in accounting principles
aggregating $2.3 million or $0.09 per share. Effective January 1, 1992, the
Company adopted SFAS No. 109, Accounting for Income Taxes, and SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions.
(4) Exclusive of consideration paid for the Mid-Continent Assets in 1991,
Seagull Mid-South Inc. in 1992 and Seagull Energy Canada Ltd. in 1994.
(5) Exclusive of consideration paid for two gas gathering systems in 1992.
(6) Reflects the December 13, 1991 and February 5, 1993 issuance and sale of
3,000,000 shares and 10,120,000 shares, respectively, of Seagull Common
Stock pursuant to underwritten public offerings.
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<PAGE> 9
THE ENSTAR ALASKA STOCK
The ENSTAR Alaska Stock will be one of two classes of common stock of the
Company, the other being Seagull Common Stock. The ENSTAR Alaska Stock is
intended to reflect the performance of the ENSTAR Alaska Group and to provide
holders with financial returns based on the ENSTAR Alaska Group's performance.
The Company will seek to attain these objectives through its dividend practices
and policies. Dividends on the ENSTAR Alaska Stock will be paid at the
discretion of the Board based primarily upon the financial condition, results of
operations and business requirements of the ENSTAR Alaska Group and, to a lesser
extent, the Company as a whole.
SPECIAL CONSIDERATIONS
ENSTAR ALASKA GROUP
Business Climate. The Anchorage area population was reported at 174,000 in
1980 by the U.S. Bureau of the Census. The population level peaked in 1985 at an
estimated level of 248,000 and reached a subsequent low of 219,000 in 1988.
Current estimates place the population at 242,600, which is approximately 45% of
the total population of the state. As of July 1993, Anchorage employment had
increased by 2,700 from the prior year to 121,000 jobs.
The rapid population growth in the early 1980s is believed to have been
caused by increased employment opportunities resulting from increased state
governmental expenditures that were fueled by petroleum related revenues. With
the collapse of oil prices in the mid-1980s, the state had to slow its level of
spending, resulting in employment reductions, especially in the construction
industry. While oil prices have seen some recovery since the mid-1980s, oil
production levels are declining, and petroleum revenues are expected to decrease
through the end of the century. Nevertheless, recent population and employment
estimates continue to show modest economic growth in the ENSTAR Alaska Group's
service area through the mid-1990s, followed by a leveling off. See "Business of
the ENSTAR Alaska Group -- Business Climate."
The ENSTAR Alaska Group historically has been able to increase its number
of customers each year, despite the variations in population and employment
described in "Business of the ENSTAR Alaska Group -- Business Climate." A
portion of this customer growth has been achieved by expanding the distribution
system into areas not previously served by the ENSTAR Alaska Group. Although the
ENSTAR Alaska Group will continue to pursue growth opportunities with such
expansions, there can be no assurance that such growth will continue to be
economically viable.
Competition. The ENSTAR Alaska Group competes primarily with municipal and
cooperative electric power distributors and with various suppliers of fuel oil
and propane for the available energy market. There are also extensive coal
reserves proximate to the ENSTAR Alaska Group's operating area; however, such
reserves are not presently being produced. Although the ENSTAR Alaska Group
supplies natural gas to its customers at prices that at the present time
economically preclude substitution of alternative fuels, there is no assurance
that the competitive advantage over other alternative fuels will not be reduced
or eliminated by the development of new energy technology or by changes in the
price of oil or refined products. See "Business of the ENSTAR Alaska Group --
Gas Distribution System."
Regulatory Considerations. The APUC has jurisdiction as to rates and
charges for gas sales, construction of new facilities, extensions and
abandonments of service and certain other matters. APC and ENG are regulated by
the APUC on a combined basis as though they were a single entity. As a regulated
company under APUC jurisdiction, the ENSTAR Alaska Group may apply to the APUC
for rate increases if increased costs or other factors warrant. Since its
inception in 1961, the ENSTAR Alaska Group has participated in only three formal
rate proceedings, which were filed by the ENSTAR Alaska Group in 1975, 1981 and
1984.
The 1984 proceeding was filed primarily in order to reflect the
construction of the Beluga Pipeline System in ENG's rates. See "Business of the
ENSTAR Alaska Group -- Gas Transmission System" and "-- Regulation." As a result
of this proceeding, which was concluded in May 1986, the APUC granted the ENSTAR
Alaska Group an aggregate rate increase of 20.27% and authorized a regulatory
rate of return on common equity of 15.65%. If a rate proceeding were initiated
with respect to the ENSTAR Alaska Group, the
8
<PAGE> 10
authorized rate of return on common equity could be reduced below the current
authorized rate, and the reduction could be material. If such a reduction were
to occur, the results of operations of the ENSTAR Alaska Group would be
adversely affected, and the level of dividends on the ENSTAR Alaska Stock could
be reduced. Although it has the power to do so, the APUC has never initiated a
rate proceeding concerning the ENSTAR Alaska Group, and the Company is not aware
of any plans by the APUC to take such an action. The Company is not aware of any
general rate proceedings that have ever been initiated by the APUC with respect
to any of the utilities subject to its jurisdiction, except as a direct result
of requests by the affected utility that some action be taken with respect to
its rates. See "Business of the ENSTAR Alaska Group -- Regulation."
Seasonality and Weather. A major determinant of gas usage for any period is
the weather, particularly with respect to residential and commercial customers
and, to a lesser extent, power customers. Accordingly, the ENSTAR Alaska Group's
business is seasonal, with approximately 65% of its revenues generated in the
first and fourth quarters of each year. The heating degree days for 1993 were
9,382, approximately 10% warmer than the average heating degree days for the
30-year period ended December 31, 1993. Generally, consumption for heating
purposes increases as heating degree days increase, with a corresponding
improvement in the results of operations. During periods in which the weather in
the ENSTAR Alaska Group's service area is warmer than normal, its results of
operations will be adversely affected.
Cash Flow from the ENSTAR Alaska Group to Seagull Energy. Since the Company
acquired the ENSTAR Alaska Group in 1985, Seagull Energy has provided certain
management and administrative services to the ENSTAR Alaska Group pursuant to a
management and administrative services agreement (the "Management Agreement").
In consideration for these services, the ENSTAR Alaska Group has agreed to pay
Seagull Energy an annual management fee equal to the greater of (i) $1,925,000
and (ii) the sum of (A) the direct cost of providing such services and (B) the
allocable portion of Seagull Energy's general and administrative expenses
associated with providing such services. The ENSTAR Alaska Group and Seagull
Energy are also parties to a tax sharing agreement (the "Tax Sharing Agreement")
pursuant to which the ENSTAR Alaska Group generally pays Seagull Energy an
amount equal to the amount of income taxes that would be payable by the ENSTAR
Alaska Group on a "stand alone" basis, excluding the effects of historical
purchase accounting adjustments. The ENSTAR Alaska Group will continue to be
included in the Company's consolidated group for income tax purposes and will
continue to make payments to Seagull Energy under both the Management Agreement
and the Tax Sharing Agreement. See "Special Considerations -- Cash Flow from the
ENSTAR Alaska Group to Seagull Energy," "Management and Accounting Policies,"
and "Description of Capital Stock -- ENSTAR Alaska Stock -- Voting Rights."
ENSTAR ALASKA STOCK
Shareholders of One Company; Financial Effects of Seagull Energy Could
Affect the ENSTAR Alaska Group. Holders of ENSTAR Alaska Stock and holders of
Seagull Common Stock will be common shareholders of the Company and will
continue to be subject to all of the risks associated with an investment in the
Company and all of its businesses and liabilities. Financial effects arising
from Seagull Energy that affect the Company's consolidated results of operations
or financial condition could affect the financial position of the ENSTAR Alaska
Group. If any of the Company's financial covenants in the Revolver is breached,
no dividends may be paid on the ENSTAR Alaska Stock. See "Dividend Policy." In
addition, any net losses of Seagull Energy and dividends or distributions on, or
repurchases of, Seagull Common Stock will reduce the assets of the Company
legally available for payment of dividends on the ENSTAR Alaska Stock.
Accordingly, the Company's consolidated financial information should be read in
conjunction with the ENSTAR Alaska Group's combined financial information.
Fiduciary Duties. Although the Company is aware of no precedent concerning
the manner in which Texas law would be applied to a board of directors' duties
in the context of multiple classes of common stock with divergent interests, the
Company believes that a Texas court would hold that a board of directors owes an
equal duty to all shareholders regardless of class and does not have separate or
additional duties to any group of shareholders.
9
<PAGE> 11
Potential Conflicts of Interest. The existence of separate classes of
common stock could give rise to occasions when the interests of holders of one
class and the holders of the other class may diverge or appear to diverge.
Examples include determinations by the Board to (i) pay or omit the payment of
dividends on either class of common stock of the Company, (ii) allocate the
proceeds of issuances of ENSTAR Alaska Stock subsequent to the Offering either
to Seagull Energy in respect of its Retained Interest, if any, or to the equity
of the ENSTAR Alaska Group, (iii) exchange Seagull Common Stock for ENSTAR
Alaska Stock at a premium, (iv) approve dispositions of assets of the ENSTAR
Alaska Group and (v) make operational and financial decisions with respect to
one business group that could be considered to be detrimental to the other
business group. Although the Board has not yet done so, the Board could, in its
sole discretion from time to time, establish one or more committees of the Board
to review matters raising conflict issues and report on such matters to the
Board.
Limited Additional Shareholder Rights. Holders of ENSTAR Alaska Stock will
have only the rights of common shareholders of the Company, and will not be
provided any rights specifically related to the ENSTAR Alaska Group, other than
as described below under "Exchange and Redemption" and "Voting Rights." See
"Special Considerations -- Limited Additional Shareholder Rights," "-- Limited
Separate Shareholder Voting Rights; Effects on Voting Power," "Description of
Capital Stock -- ENSTAR Alaska Stock -- Voting Rights" and "-- Exchange and
Redemption."
Limited Separate Shareholder Voting Rights; Effects on Voting
Power. Subject to certain limited exceptions, holders of shares of ENSTAR Alaska
Stock and holders of shares of Seagull Common Stock will vote together as a
single class (together with the holders of shares of all classes and series of
capital stock of the Company entitled to vote together with the holders of
shares of common stock of the Company) on all matters as to which common
shareholders generally are entitled to vote. Holders of each class of common
stock of the Company will have no rights to vote on matters as a separate class
(except in certain limited circumstances). Separate meetings for the holders of
each class of common stock of the Company will not be held.
Certain matters as to which the holders of the Company's common stock could
be so entitled to vote together as a single class could involve a divergence or
the appearance of a divergence of the interests of holders of ENSTAR Alaska
Stock and holders of Seagull Common Stock. Immediately following the Offering,
holders of outstanding ENSTAR Alaska Stock are expected to have approximately
12% of the total voting power of the Company and holders of outstanding Seagull
Common Stock are expected to have approximately 88% of the total voting power of
the Company. It is unlikely that during the foreseeable future the holders of
ENSTAR Alaska Stock would possess a majority of the total votes to which the
outstanding voting stock of the Company would be entitled, although, in the
event that there would be a significant increase in the Market Value of the
ENSTAR Alaska Stock relative to the Market Value of the Seagull Common Stock or
if additional shares of the ENSTAR Alaska Stock were issued, the number of votes
to which such outstanding ENSTAR Alaska Stock would be entitled would increase.
See "Special Considerations -- Limited Separate Shareholder Voting Rights;
Effects on Voting Power" and "Description of Capital Stock -- ENSTAR Alaska
Stock -- Voting Rights."
Limited Approval Rights of Future Issuances of Stock. The approval of the
shareholders of the Company would not be solicited by the Company for the
issuance from the authorized but unissued shares of common stock of any
additional shares of ENSTAR Alaska Stock or Seagull Common Stock (unless such
approval is deemed advisable by the Board of Directors or is required by stock
exchange regulations).
Management and Accounting Policies Subject to Change. The Board of
Directors has adopted certain management and accounting policies and agreements
described herein with respect to dividends, the allocation of corporate
expenses, assets and liabilities (including contingent liabilities) and
inter-group transactions, any and all of which could be modified or rescinded in
the sole discretion of the Board of Directors without approval of the
shareholders, although the Board of Directors has no present intention to do so.
In addition, the ENSTAR Alaska Group is subject to regulation by the APUC and
has historically been operated as a separate business unit for which separate
audited financial statements have been prepared on an annual basis. Accordingly,
a majority of the accounting and management policies described in this
Prospectus
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<PAGE> 12
have historically been employed by the Company with respect to the ENSTAR Alaska
Group, particularly in light of the regulation of the ENSTAR Alaska Group by the
APUC.
The Board of Directors may also adopt additional policies depending upon
the circumstances. Any determination of the Board of Directors to modify or
rescind such policies, or to adopt additional policies, including any such
decision that would have disparate impacts upon holders of ENSTAR Alaska Stock
and holders of Seagull Common Stock, would be made by the Board of Directors in
good faith and in the honest belief that such decision is in the best interests
of the Company. Any such determination would also be made in light of the
requirements imposed by the APUC that any transactions between the ENSTAR Alaska
Group and its affiliates, including Seagull Energy, must be on terms comparable
to arm's length transactions. In addition, generally accepted accounting
principles require that any change in accounting policy be preferable (in
accordance with such principles) to the policy previously established.
Potential Effects of Exchange of ENSTAR Alaska Stock. The terms of the
ENSTAR Alaska Stock permit the exchange of all outstanding shares of ENSTAR
Alaska Stock for Seagull Common Stock upon the terms described under
"Description of Capital Stock -- ENSTAR Alaska Stock -- Exchange and
Redemption." The Company cannot predict the impact of the potential for such
exchanges or of any issuance of additional shares of Seagull Common Stock in
connection with such an exchange on the market price of either class of common
stock of the Company. In addition, any such exchange would preclude holders of
ENSTAR Alaska Stock from retaining their investment in a security reflecting
separately the performance of the ENSTAR Alaska Group.
Limitations on Potential Unsolicited Acquisitions of the ENSTAR Alaska
Group. If the ENSTAR Alaska Group were a stand-alone corporation, any person
interested in acquiring such corporation without negotiation with management
could seek control of the outstanding shares of ENSTAR Alaska Stock by means of
a tender offer or proxy contest. Although the ENSTAR Alaska Stock is intended to
reflect the performance of the ENSTAR Alaska Group, a person interested in
acquiring only the ENSTAR Alaska Group without negotiation with the Company's
management will still be required to seek control of the voting power
represented by all of the outstanding capital stock of the Company entitled to
vote on such acquisition, including the Seagull Common Stock. See "Limited
Separate Shareholder Voting Rights; Effects on Voting Power" above.
No Prior Market. As discussed above, the ENSTAR Alaska Stock is intended to
reflect the performance of the Company's natural gas transmission and
distribution operations in South-Central Alaska. Since there has been no prior
market for ENSTAR Alaska Stock, however, there can be no assurance as to the
degree to which the market price of ENSTAR Alaska Stock will reflect either the
performance of the ENSTAR Alaska Group reflected in its financial statements or
the dividend policy established by the Board of Directors. In addition, the
Company cannot predict the impact on such market price of certain terms of the
ENSTAR Alaska Stock, such as the ability of the Company to exchange shares of
ENSTAR Alaska Stock for Seagull Common Stock, the discretion of the Board to
make various determinations and the minority voting power of the ENSTAR Alaska
Stock.
Public Utility Holding Company Act of 1935. Any company that directly or
indirectly owns, controls or holds with power to vote 10% or more of the
outstanding voting securities of the Company would generally be deemed to be a
"holding company" subject to the requirements of the Public Utility Holding
Company Act of 1935, as amended (the "1935 Act"). For purposes of the 1935 Act,
the calculation of ownership of the voting securities of the Company will be
made on the basis of the percentage of the voting power of the outstanding
shares of common stock of the Company. Because the relative voting power between
the ENSTAR Alaska Stock and the Seagull Common Stock fluctuates with the Market
Values of such shares, as described in "Description of Capital Stock -- ENSTAR
Alaska Stock -- Voting Rights," a shareholder could reach the 10% threshold
without acquiring any additional shares. The Articles of Incorporation provide
that, even if the respective Market Values of the ENSTAR Alaska Stock and the
Seagull Common Stock fluctuate relative to the other class of common stock from
time to time, the number of votes to which the ENSTAR Alaska Stock is entitled
will not change until the next applicable record date. See "Special
Considerations -- Public Utility Holding Company Act of 1935."
11
<PAGE> 13
For further discussion of the foregoing, see "Special Considerations."
DIVIDENDS AND DIVIDEND POLICY
Dividends on the ENSTAR Alaska Stock will be paid at the discretion of the
Board based primarily upon the financial condition, results of operations and
business requirements of the ENSTAR Alaska Group and, to a lesser extent, the
Company as a whole. The Board of Directors currently intends to pay an initial
quarterly dividend on the ENSTAR Alaska Stock of $0.275 per share. Subject to
the restrictions described below, if the financial condition and results of
operations for the ENSTAR Alaska Group improve, and the business requirements
for the ENSTAR Alaska Group permit, the Board of Directors currently intends
that the level of dividends would be increased. While the Board of Directors
does not currently intend to change the foregoing dividend policy, it reserves
the right to do so at any time and from time to time. Under the Articles of
Incorporation and Texas law, the Board of Directors would not be required to pay
dividends in accordance with the foregoing dividend policy. The ENSTAR Alaska
Group has paid a dividend in every year since 1972.
Dividends on the ENSTAR Alaska Stock will be limited to the amount of funds
of the Company legally available under the Texas Business Corporation Act (the
"TBCA") for the payment of dividends by the Company on its capital stock, and
subject to the prior payment of dividends on any outstanding shares of any class
or series of preferred stock of the Company. Dividends on the ENSTAR Alaska
Stock will be further limited to an amount not in excess of the Available ENSTAR
Alaska Dividend Amount, which is intended to be similar to the amount that would
be legally available for the payment of dividends on ENSTAR Alaska Stock under
the TBCA if the ENSTAR Alaska Group were a separate company. There can be no
assurance that there will be an Available ENSTAR Alaska Dividend Amount. See
"Dividend Policy."
The TBCA limits the amount of distributions on capital stock to the legally
available funds of the Company, which are determined on the basis of the entire
Company, and not just the respective business groups. Consequently, the amount
of legally available funds for payment of dividends on the ENSTAR Alaska Stock
will reflect the amount of any net losses of the ENSTAR Alaska Group and of
Seagull Energy and any distributions on, or repurchases of, the ENSTAR Alaska
Stock or the Seagull Common Stock.
For a description of the restrictions on the payment of dividends contained
in the Company's and APC's debt instruments, see "Dividend Policy." Under the
Revolver, as of March 31, 1994, approximately $27.5 million was generally
available for payment of dividends on or repurchases of capital stock of the
Company. In addition, the Revolver contains a special "basket" with respect to
dividend payments on the ENSTAR Alaska Stock. Pursuant to this basket, as of
March 31, 1994, $24.8 million was available for payment of dividends on the
ENSTAR Alaska Stock. See "Dividend Policy."
EXCHANGE AND REDEMPTION
If the Company were to dispose of all or substantially all of the
properties and assets of the ENSTAR Alaska Group, the Company would be required,
subject to certain exceptions and conditions, to:
(A) declare and pay a dividend to the holders of the ENSTAR Alaska Stock in
an amount equal to their proportionate interest in the Net Proceeds of
such Disposition; or
(B) (1) if the Disposition involves all (not merely substantially all) of
the assets and properties of the ENSTAR Alaska Group, then, if
there are funds of the Company legally available therefor, redeem
all outstanding shares of ENSTAR Alaska Stock for an aggregate
payment equal to their proportionate interest in the Net Proceeds
of such Disposition; or
(2) if the Disposition involves substantially all (but not all) of the
assets and properties of the ENSTAR Alaska Group or if the Company
does not have sufficient funds legally available to make the full
payment contemplated pursuant to clause (B)(1), then, to the
extent that there are funds of the Company legally available
therefor, redeem the number of whole shares of ENSTAR Alaska Stock
that has an aggregate average Market Value, calculated during a
specified 10-Business Day period following consummation of such
Disposition, closest to the Net Proceeds of such Disposition; or
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<PAGE> 14
(C) exchange each outstanding share of ENSTAR Alaska Stock for a number of
shares of Seagull Common Stock equal to 110% of an average daily ratio
of the Market Value of one share of ENSTAR Alaska Stock to one share of
Seagull Common Stock calculated during a specified 10-Business Day
period following the consummation of such Disposition.
For the definition of "substantially all of the properties and assets of
the ENSTAR Alaska Group," see "Description of Capital Stock -- ENSTAR Alaska
Stock -- Exchange and Redemption."
The Company could, in the sole discretion of the Board, within one year
after a dividend or partial redemption pursuant to clause (A) or (B)(2) above,
exchange each remaining outstanding share of ENSTAR Alaska Stock for a number of
shares of Seagull Common Stock equal to 110% of the ratio of a time-weighted
average of the Market Value of one share of ENSTAR Alaska Stock to one share of
Seagull Common Stock. For information concerning the ratios used to calculate
the number of shares of Seagull Common Stock to be received in the exchanges
described above, see "Description of Capital Stock -- ENSTAR Alaska
Stock -- Exchange and Redemption."
At any time on or after the date on which all of the assets and liabilities
of the ENSTAR Alaska Group (and no other assets or liabilities) are held
directly or indirectly by a wholly owned subsidiary of the Company, the
outstanding shares of the ENSTAR Alaska Stock could be exchanged, in the sole
discretion of the Board, for shares of common stock of such subsidiary.
The Company could, in the sole discretion of the Board, at any time
exchange each outstanding share of ENSTAR Alaska Stock for shares of Seagull
Common Stock equal to 115% of the ratio of a time-weighted average of the Market
Value of one share of ENSTAR Alaska Stock to one share of Seagull Common Stock.
This option provides the Company with flexibility to alter its capital structure
if warranted by future events and circumstances.
VOTING RIGHTS
The holders of ENSTAR Alaska Stock and Seagull Common Stock will vote
together as a single class (with the holders of all classes and series of
capital stock, if any, of the Company entitled to vote together with the holders
of common stock of the Company) on all matters as to which holders of common
stock of the Company are entitled to vote other than a matter with respect to
which such class would be entitled to vote separately. On all matters to be
voted on as a single class by the holders of all classes of common stock of the
Company (together with the holders of any such class or series of capital stock
entitled to vote therewith) (i) each outstanding share of Seagull Common Stock
will have one vote and (ii) each outstanding share of ENSTAR Alaska Stock will
have a number of votes equal to the ratio of a time-weighted average of the
Market Value of one share of ENSTAR Alaska Stock to one share of Seagull Common
Stock (calculated during a specified period prior to the record date or
shareholder consent date). If shares of only one class of common stock of the
Company were outstanding, each share of that class would have one vote. If
either class of common stock of the Company was entitled to vote separately as a
class with respect to any matter, each share of that class would be entitled to
one vote in the separate vote on such matter.
In addition to such other vote or consent as shall then be required by law,
the Articles of Incorporation or the Bylaws, the vote or consent of the holders
of at least two-thirds of all the shares of ENSTAR Alaska Stock then
outstanding, voting as a separate class, is necessary in certain other
circumstances. A separate class vote of the holders of Seagull Common Stock is
necessary in similar circumstances. See "Description of Capital Stock -- ENSTAR
Alaska Stock -- Voting Rights."
MERGERS AND CONSOLIDATIONS
The holders of the outstanding shares of ENSTAR Alaska Stock and Seagull
Common Stock will be entitled to receive, or have their shares converted into, a
fraction of the consideration, if any, attributable to the common stock of the
Company pursuant to the terms of any merger or consolidation to which the
Company is a party in proportion to the relative time-weighted average Market
Capitalization of each class of common stock.
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<PAGE> 15
LIQUIDATION
In the event of a liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, after preferential payments to the holders of
preferred stock of the Company, the holders of the outstanding shares of ENSTAR
Alaska Stock and Seagull Common Stock will be entitled to receive a fraction of
the funds of the Company remaining for distribution to its common shareholders
in proportion to the relative time-weighted average Market Capitalization of
each class of common stock.
RETAINED INTEREST OF SEAGULL ENERGY IN ENSTAR ALASKA GROUP; OUTSTANDING INTEREST
FRACTION
To the extent that the number of shares of ENSTAR Alaska Stock issued and
sold in the Offering represents less than 100% of the equity attributable to the
ENSTAR Alaska Group, the Company will retain and attribute to Seagull Energy a
"Retained Interest" in the ENSTAR Alaska Group. Seagull Energy's Retained
Interest in the ENSTAR Alaska Group will not be represented by actual shares of
the ENSTAR Alaska Stock and could not be voted by Seagull Energy.
The "Outstanding Interest Fraction" means the percentage interest in the
ENSTAR Alaska Group intended to be represented at any time by the outstanding
shares of ENSTAR Alaska Stock, and the "Retained Interest Fraction" means the
remaining percentage interest in the ENSTAR Alaska Group that is attributed to
Seagull Energy. The sum of the Outstanding Interest Fraction and the Retained
Interest Fraction would always equal 100%. The "Number of Shares Issuable with
Respect to the Retained Interest" means the number of shares of ENSTAR Alaska
Stock that could be sold or otherwise issued by the Company for the account of
Seagull Energy in respect of its Retained Interest.
The Company intends to use the net proceeds of the Offering to repay
amounts borrowed under the Revolver, none of which debt is attributable to the
ENSTAR Alaska Group. See "Use of Proceeds." In future offerings of ENSTAR Alaska
Stock, the Board would, in its sole discretion, determine the allocation of the
net proceeds of such sale between Seagull Energy in respect of its Retained
Interest, if any, and the ENSTAR Alaska Group. If the Board allocated 100% of
the net proceeds of a sale of ENSTAR Alaska Stock to the ENSTAR Alaska Group or
to Seagull Energy, the net proceeds would be reflected entirely in the financial
statements of the business group to which such proceeds would be allocated. If
the net proceeds of an offering of ENSTAR Alaska Stock were allocated to Seagull
Energy's Retained Interest in the ENSTAR Alaska Group, the Number of Shares
Issuable with Respect to the Retained Interest of Seagull Energy in the ENSTAR
Alaska Group would be reduced. Assuming the existence of a Retained Interest
following the Offering, if the net proceeds of a subsequent offering of ENSTAR
Alaska Stock were not allocated to Seagull Energy, the relevant Number of Shares
Issuable with Respect to the Retained Interest in the ENSTAR Alaska Group would
not be reduced, but the Retained Interest Fraction with respect to the ENSTAR
Alaska Group would nonetheless be reduced, and the Outstanding Interest Fraction
with respect to the ENSTAR Alaska Group would be increased accordingly.
In the event of any dividend or other distribution on outstanding shares of
ENSTAR Alaska Stock (including any dividend of, or redemption with, Net Proceeds
from a Disposition), while Seagull Energy has a Retained Interest in the ENSTAR
Alaska Group, Seagull Energy's financial statements would be credited with, and
the ENSTAR Alaska Group's financial statements would be charged with, an amount
that bears the same relation to the aggregate amount of such dividend or other
distribution as the ratio of the Number of Shares Issuable with Respect to the
Retained Interest to the number of shares of ENSTAR Alaska Stock then
outstanding.
In the event that the Company repurchases shares of ENSTAR Alaska Stock for
consideration that is attributable to the ENSTAR Alaska Group, the Number of
Shares Issuable with Respect to the Retained Interest would not change, but the
Retained Interest Fraction would increase, and the Outstanding Interest Fraction
would decrease accordingly. In the event that the Company repurchases shares of
ENSTAR Alaska Stock for consideration that is attributable to Seagull Energy,
the Number of Shares Issuable with Respect to the Retained Interest and the
Retained Interest Fraction would increase, and the Outstanding Interest Fraction
would decrease accordingly.
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<PAGE> 16
The Board of Directors could, in its sole discretion, determine from time
to time to transfer cash or other property from the ENSTAR Alaska Group to
Seagull Energy as a return of capital, which would decrease Seagull Energy's
Retained Interest in the ENSTAR Alaska Group and, accordingly, would decrease
the Retained Interest Fraction and increase the Outstanding Interest Fraction.
The Board of Directors could, in its sole discretion, determine from time to
time to contribute cash or other property of Seagull Energy as additional equity
to the ENSTAR Alaska Group, which would increase Seagull Energy's Retained
Interest in the ENSTAR Alaska Group and, accordingly, would increase the
Retained Interest Fraction and decrease the Outstanding Interest Fraction.
For further discussion of, and illustrations of the calculation of the
Retained Interest Fraction, the Outstanding Interest Fraction and the Number of
Shares Issuable with Respect to the Retained Interest and the effects thereon of
dividends on, and issuances and repurchases of, shares of the ENSTAR Alaska
Stock, and transfers of cash or other property attributed to Seagull Energy to
the ENSTAR Alaska Group, see "Description of Capital Stock -- Retained Interest
of Seagull Energy in ENSTAR Alaska Group; Outstanding Interest Fraction" and
Annex II to this Prospectus.
15
<PAGE> 17
USE OF PROCEEDS
The estimated net proceeds to Seagull Energy Corporation from the Offering,
after the deduction of estimated underwriting discounts and commissions and
offering expenses, will be approximately $127 million, which will be used to
repay borrowings under the Revolver. None of such indebtedness is attributable
to the ENSTAR Alaska Group. At April 30, 1994, the effective interest rate
applicable to borrowings under the Revolver was 5.0% per annum. See "Seagull
Energy Corporation -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
CAPITALIZATION
The following table sets forth the total capitalization of the ENSTAR
Alaska Group and the Company as of March 31, 1994, and as adjusted, with respect
to the Company, to give effect to the sale and issuance of the ENSTAR Alaska
Stock in the Offering and the application of the estimated net proceeds
therefrom of approximately $127 million to repay borrowings under the Revolver.
The net proceeds of the Offering will be reflected entirely in the combined
financial statements of Seagull Energy. The Offering will not have a pro forma
effect on the historical capitalization of the ENSTAR Alaska Group.
<TABLE>
<CAPTION>
MARCH 31, 1994
--------------------------------------
ENSTAR SEAGULL ENERGY
ALASKA CORPORATION
GROUP ------------------------
-------- AS
ACTUAL ACTUAL ADJUSTED
-------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Total debt (including current maturities of
$1,536,000 and unamortized debt discount of
$1,336,000)................................. $ 64,352 $ 633,899 $ 506,899
Common equity................................. 60,430 -- --
Shareholders' equity.......................... -- 450,144 577,144
-------- --------- ---------
Total capitalization.......................... $124,782 $1,084,043 $1,084,043
-------- --------- ---------
-------- --------- ---------
Total debt to total capitalization ratio...... 51.6% 58.5% 46.8%
-------- --------- ---------
-------- --------- ---------
</TABLE>
16
<PAGE> 18
DIVIDEND POLICY
The Board of Directors currently intends to pay an initial quarterly
dividend on the ENSTAR Alaska Stock of $0.275 per share. The Company currently
intends to begin paying dividends on the ENSTAR Alaska Stock in the third
quarter of 1994. Dividends on the ENSTAR Alaska Stock will be paid at the
discretion of the Board based primarily upon the financial condition, results of
operations and business requirements of the ENSTAR Alaska Group and, to a lesser
extent, the Company as a whole. Subject to the restrictions described below, if
the financial condition and results of operations for the ENSTAR Alaska Group
improve, and the business requirements for the ENSTAR Alaska Group permit, the
Board of Directors currently intends that the level of dividends would be
increased. While the Board of Directors does not currently intend to change the
dividend policy referred to above, it reserves the right to do so at any time
and from time to time. Under the Articles of Incorporation and Texas law, the
Board of Directors is not required to pay dividends in accordance with the
foregoing dividend policy. The ENSTAR Alaska Group has paid a dividend in every
year since 1972.
In making its dividend decisions with respect to the ENSTAR Alaska Stock,
the Board of Directors will rely on the financial statements of the ENSTAR
Alaska Group, as well as, to a lesser extent, the financial statements of the
Company. The method of calculating earnings per share for the ENSTAR Alaska
Stock reflects the intent of the Board of Directors that separately reported
surplus and earnings of the ENSTAR Alaska Group are to be the source for payment
of, and the basis for determining, dividends to be paid on the ENSTAR Alaska
Stock, although liquidation rights of the ENSTAR Alaska Stock and legally
available funds of the Company may be based on different factors.
Subject to the restrictions on the funds out of which dividends on each of
the ENSTAR Alaska Stock and the Seagull Common Stock may be paid, as described
below in the next paragraph and under "Description of Capital Stock -- ENSTAR
Alaska Stock -- Dividends" and "-- Seagull Common Stock -- Dividends," the Board
of Directors would be able, in its sole discretion, to declare and pay dividends
exclusively on either the ENSTAR Alaska Stock or the Seagull Common Stock, or on
both, in equal or unequal amounts, notwithstanding the respective amount of
funds available for dividends on each class, the amount of prior dividends
declared on each class or any other factor. The Company has not paid any cash
dividends on shares of Seagull Common Stock since it became an independent
entity in 1981.
The Revolver generally restricts the Company's declaration or payment of
dividends on and repurchases of capital stock of the Company except for dividend
payments (other than dividend payments made pursuant to the special provisions
described in the paragraph below) which do not exceed, in the aggregate, (i) $20
million, plus (ii) 33 1/3% of the net income of Seagull Energy after December
31, 1993, plus (iii) 100% of the net income of the ENSTAR Alaska Group after
December 31, 1993, minus (iv) any dividend payments attributable to the ENSTAR
Alaska Stock. As of March 31, 1994, approximately $27.5 million was available
for payment of dividends on or repurchase of capital stock of the Company
pursuant to this provision.
The Revolver also permits dividends in the form of additional shares of
common stock of the Company or dividends payable on up to $150 million of
preferred stock. The Revolver also contains a special "basket" with respect to
the ENSTAR Alaska Stock. This provision permits dividend payments on the ENSTAR
Alaska Stock that do not exceed, in the aggregate, (i) $20 million plus (ii)
100% of the net income of the ENSTAR Alaska Group after December 31, 1993. Under
the most restrictive of these tests, as of March 31, 1994, approximately $24.8
million was available for payment of dividends on or repurchase of the ENSTAR
Alaska Stock pursuant to this basket.
The Revolver prohibits the payment of any of the foregoing non-stock
dividends if an Event of Default or unmatured Event of Default shall have
occurred and be continuing. An Event of Default would occur if, among other
things, any of the financial covenants set forth in the Revolver is breached.
These financial covenants include covenants that provide that the Company will
not permit (i) the Tangible Net Worth of the Company (which was $450.1 million
as of March 31, 1994) to be less than $363.2 million plus 50% of the Company's
net income, if positive, after December 31, 1994 plus 75% of the net cash
proceeds of any issuance of equity securities after such date, (ii) the ratio of
the Company's earnings before interest expense, taxes, depreciation and
amortization to the Company's interest expense (including operating lease
rentals and
17
<PAGE> 19
capitalized interest) (which was 5.1:1.0 as of March 31, 1994) to be less than
3.5:1.0, or (iii) the Debt to Capitalization Ratio (which was 58.8% as of March
31, 1994) to be more than 65%. In addition, the Company cannot permit the ratio
of the funded debt of the ENSTAR Alaska Group to the sum of such funded debt
plus the Tangible Net Worth of the ENSTAR Alaska Group (which was 51.6% as of
March 31, 1994) to be more than 60%. Furthermore, the ratio of the ENSTAR Alaska
Group's indebtedness for borrowed money to the sum of such indebtedness plus the
Tangible Net Worth of the ENSTAR Alaska Group (which was 51.6% as of March 31,
1994) may not exceed 75%. The capitalized terms used herein to describe the
restrictions contained in the Revolver have the meanings assigned to them in the
Revolver.
The Company's ability to pay dividends on ENSTAR Alaska Stock will be
partially dependent on the availability of APC's cash flows to the Company by
way of dividends. The senior unsecured notes of APC provide for restrictions on
dividends, additional borrowings and purchases, redemptions or retirements of
shares of capital stock, other than in stock of APC. Under the most restrictive
of these provisions, approximately $14.3 million was available for the making of
restricted investments, restricted payments and restricted subordinated debt
payments by APC as of March 31, 1994.
18
<PAGE> 20
SPECIAL CONSIDERATIONS
ENSTAR ALASKA GROUP
BUSINESS CLIMATE
The Anchorage area population was reported at 174,000 in 1980 by the U.S.
Bureau of the Census. The population level peaked in 1985 at an estimated level
of 248,000 and reached a subsequent low of 219,000 in 1988. Current estimates
place the population at 242,600, which is approximately 45% of the total
population of the state. As of July 1993, Anchorage employment had increased by
2,700 from the prior year to 121,000 jobs.
The rapid population growth in the early 1980s is believed to have been
caused by increased employment opportunities resulting from increased state
governmental expenditures that were fueled by petroleum related revenues. With
the collapse of oil prices in the mid-1980s, the state had to slow its level of
spending, resulting in employment reductions, especially in the construction
industry. While oil prices have seen some recovery since the mid-1980s, oil
production levels are declining, and petroleum revenues are expected to decrease
through the end of the century. Nevertheless, recent population and employment
estimates continue to show modest economic growth in the ENSTAR Alaska Group's
service area through the mid-1990s, followed by a leveling off.
The ENSTAR Alaska Group historically has been able to increase its number
of customers each year, despite the variations in population and employment
described in "Business of the ENSTAR Alaska Group -- Business Climate." A
portion of this customer growth has been achieved by expanding the distribution
system into areas not previously served by the ENSTAR Alaska Group. Although the
ENSTAR Alaska Group will continue to pursue growth opportunities with such
expansions, there can be no assurance that such growth will continue to be
economically viable.
COMPETITION
The ENSTAR Alaska Group competes primarily with municipal and cooperative
electric power distributors and with various suppliers of fuel oil and propane
for the available energy market. There are also extensive coal reserves
proximate to the ENSTAR Alaska Group's operating area; however, such reserves
are not presently being produced. Although the ENSTAR Alaska Group supplies
natural gas to its customers at prices that at the present time economically
preclude substitution of alternative fuels, there is no assurance that the
competitive advantage over other alternative fuels will not be reduced or
eliminated by the development of new energy technology or by changes in the
price of oil or refined products. Additionally, if any existing customers of the
ENSTAR Alaska Group were to choose to purchase gas directly from producers, the
ENSTAR Alaska Group's natural gas volumes delivered on a purchase/resale basis
would decline. However, because the large distance of remaining user facilities
from producing fields would preclude pipeline by-pass, the ENSTAR Alaska Group
would expect to collect a fee for transporting that gas equivalent to the margin
earned on sales volumes for those customers. See "Business of the ENSTAR Alaska
Group -- Gas Distribution System."
REGULATORY CONSIDERATIONS
The APUC has jurisdiction as to rates and charges for gas sales,
construction of new facilities, extensions and abandonments of service and
certain other matters. APC and ENG are regulated by the APUC on a combined basis
as though they were a single entity. As a regulated company under APUC
jurisdiction, the ENSTAR Alaska Group may apply to the APUC for rate increases
if increased costs or other factors warrant. Since its inception in 1961, the
ENSTAR Alaska Group has participated in only three formal rate proceedings,
which were filed by the ENSTAR Alaska Group in 1975, 1981 and 1984.
The 1984 proceeding was filed primarily in order to reflect the
construction of the Beluga Pipeline System in ENG's rates. See "Business of the
ENSTAR Alaska Group -- Gas Transmission System" and "-- Regulation." As a result
of this proceeding, which was concluded in May 1986, the APUC granted the ENSTAR
Alaska Group an aggregate rate increase of 20.27% and authorized a regulatory
rate of return on common equity of 15.65%. If a rate proceeding were initiated
with respect to the ENSTAR Alaska Group, the
19
<PAGE> 21
authorized regulatory rate of return on common equity could be reduced below the
current authorized rate, and the reduction could be material. If such a
reduction were to occur, the results of operations of the ENSTAR Alaska Group
would be adversely affected, and the level of dividends on the ENSTAR Alaska
Stock could be reduced. Although it has the power to do so, the APUC has never
initiated a rate proceeding concerning the ENSTAR Alaska Group, and the Company
is not aware of any plans by the APUC to take such an action. The Company is not
aware of any general rate proceedings that have ever been initiated by the APUC
with respect to any of the utilities subject to its jurisdiction, except as a
direct result of requests by the affected utility that some action be taken with
respect to its rates. See "Business of the ENSTAR Alaska Group -- Regulation."
SEASONALITY AND WEATHER
A major determinant of gas usage for any period is the weather,
particularly with respect to residential and commercial customers and, to a
lesser extent, power customers. Accordingly, the ENSTAR Alaska Group's business
is seasonal, with approximately 65% of its revenues generated in the first and
fourth quarters of each year. The heating degree days for 1993 were 9,382,
approximately 10% warmer than the average heating degree days for the 30-year
period ended December 31, 1993. Generally, consumption for heating purposes
increases as heating degree days increase, with a corresponding improvement in
results of operations. During periods in which the weather in the ENSTAR Alaska
Group's service area is warmer than normal, its results of operations will be
adversely affected.
CASH FLOW FROM THE ENSTAR ALASKA GROUP TO SEAGULL ENERGY
Since 1985, Seagull Energy has provided certain management and
administrative services to the ENSTAR Alaska Group. In consideration for these
services, the ENSTAR Alaska Group has agreed to pay Seagull Energy an annual
management fee equal to the greater of (i) $1,925,000 and (ii) the sum of (A)
the direct cost of providing such services and (B) the allocable portion of
Seagull Energy's general and administrative expenses associated with providing
such services. The Management Agreement will continue in effect following the
Offering. The ENSTAR Alaska Group and Seagull Energy are also parties to the Tax
Sharing Agreement pursuant to which the ENSTAR Alaska Group generally pays
Seagull Energy an amount equal to the amount of income taxes that would be
payable by the ENSTAR Alaska Group on a "stand alone" basis, excluding the
effects of historical purchase accounting adjustments. The ENSTAR Alaska Group
will continue to be included in the Company's consolidated group for income tax
purposes after the Offering and the Tax Sharing Agreement would continue in
effect. See "Management and Accounting Policies" and "Description of Capital
Stock -- ENSTAR Alaska Stock -- Voting Rights."
ENSTAR ALASKA STOCK
SHAREHOLDERS OF ONE COMPANY; FINANCIAL EFFECTS OF SEAGULL ENERGY COULD AFFECT
THE ENSTAR ALASKA GROUP
Notwithstanding the allocation of assets and liabilities (including
contingent liabilities), shareholders' equity and items of income and expense
between the ENSTAR Alaska Group and Seagull Energy for the purpose of preparing
their respective financial statements, the change in the equity structure of the
Company will not affect title to the assets or responsibility for the
liabilities of the Company or any of its subsidiaries. The Company and its
subsidiaries will each continue to be responsible for their respective
liabilities. Holders of ENSTAR Alaska Stock and Seagull Common Stock will be
common shareholders of the Company and will continue to be subject to all of the
risks associated with an investment in the Company and all of its businesses and
liabilities.
Financial effects arising from Seagull Energy that affect the Company's
consolidated results of operations or financial condition could affect the
financial position of the ENSTAR Alaska Group or the market price of the ENSTAR
Alaska Stock. If any of the Company's financial covenants in the Revolver is
breached, no dividends may be paid on the ENSTAR Alaska Stock. See "Dividend
Policy." In addition, any net losses of Seagull Energy or the ENSTAR Alaska
Group and dividends or distribution on, or repurchases of, common
20
<PAGE> 22
stock will reduce the assets of the Company legally available for payment of
dividends on the ENSTAR Alaska Stock. Accordingly, the Company's consolidated
financial information should be read in conjunction with the ENSTAR Alaska
Group's combined financial information. The Company will continue to prepare
consolidated financial statements and also provide such consolidated financial
statements and upon request the financial information of Seagull Energy to the
holders of the ENSTAR Alaska Stock.
FIDUCIARY DUTIES
Although the Company is aware of no precedent concerning the manner in
which Texas law would be applied to a board of directors' duties in the context
of multiple classes of common stock with divergent interests, the Company
believes that a Texas court would hold that a board of directors owes an equal
duty to all shareholders regardless of class and does not have separate or
additional duties to any group of shareholders. That duty is the fiduciary duty
to act in good faith and in the honest belief that its actions are in the
Company's best interests. The Company believes that, under Texas law, a good
faith determination by a disinterested and adequately informed board, or a
committee thereof, which the directors honestly believe is in the best interests
of the corporation, would be a defense to any challenge by or on behalf of the
holders of either class of stock to a board determination that could have a
disparate effect on different classes of stock.
Disproportionate ownership interests of members of the Board of Directors
in one or both classes of common stock of the Company or disparate values
between both classes of common stock could create or appear to create potential
conflicts of interest when directors are faced with decisions that could have
different implications for different classes. Nevertheless, the Company believes
that a director would be able to discharge his or her fiduciary responsibilities
even if his or her interests in shares of both classes of common stock were
disproportionate and/or had disparate values. Under the terms of the Company's
employee stock option plans and the stock option plan for nonemployee directors,
employee and nonemployee directors will continue to receive options to purchase
only shares of Seagull Common Stock. However, the Company currently intends to
amend its thrift plans to provide employees (including directors who are
employees) with an option to have a portion of their accounts invested in shares
of ENSTAR Alaska Stock. In addition, the Company also currently intends to amend
its supplemental benefit plans and the plan that covers deferral of nonemployee
directors' retainer fees to provide employee and nonemployee directors, as
applicable, with an option to have a portion of their accounts under such plans
allocated to "phantom stock" units, which will be designed to have the same
value and the same dividend and liquidation characteristics as the ENSTAR Alaska
Stock.
POTENTIAL CONFLICTS OF INTEREST
The existence of separate classes of common stock could give rise to
occasions when the interests of holders of ENSTAR Alaska Stock and the holders
of Seagull Common Stock may diverge or appear to diverge. Examples include
determinations by the Board to (i) pay or omit the payment of dividends on
either class of common stock of the Company, (ii) allocate the proceeds of
issuances of ENSTAR Alaska Stock subsequent to the Offering either to Seagull
Energy in respect of its Retained Interest, if any, or to the equity of the
ENSTAR Alaska Group, (iii) exchange Seagull Common Stock for ENSTAR Alaska Stock
at a premium, (iv) approve dispositions of assets of the ENSTAR Alaska Group and
(v) make operational and financial decisions with respect to one group that
could be considered to be detrimental to the other business group. Each of the
foregoing potential conflicts of interest is discussed below:
NO ASSURANCE OF PAYMENT OF DIVIDENDS. Dividends on the ENSTAR Alaska Stock
are limited under Texas law to legally available funds and are subject to the
prior payment of dividends on outstanding shares of any class or series of
capital stock of the Company with preferential dividend provisions. Dividends on
the ENSTAR Alaska Stock will also be subject to the direct and indirect
restrictions contained in the Revolver and other financing arrangements. See
"Dividend Policy." Notwithstanding the amount of legally available funds of the
Company under Texas law or the Available ENSTAR Alaska Dividend Amount described
below, dividends on the capital stock in the aggregate may not at any time
exceed the amount then permitted under the limitations in such debt instruments.
Payment of dividends on either class of common stock will decrease the amount of
funds available under such limitations for the payment of dividends on both
classes of common
21
<PAGE> 23
stock. The Board of Directors reserves the right, in its sole discretion, to
declare and pay dividends exclusively on the ENSTAR Alaska Stock or exclusively
on the Seagull Common Stock, or on both, in equal or unequal amounts,
notwithstanding the respective amount of funds legally available for dividends
on each class, the amount of prior dividends declared on each class or any other
factor. See "Dividend Policy." The Company has not paid any cash dividends on
shares of Seagull Common Stock since it became an independent entity in 1981.
ALLOCATION OF PROCEEDS UPON ISSUANCE OF ENSTAR ALASKA STOCK. The Company
intends to use the net proceeds of the Offering to repay amounts borrowed under
the Revolver, none of which debt is attributable to the ENSTAR Alaska Group. In
future offerings of ENSTAR Alaska Stock, the Board would, in its sole
discretion, determine the allocation of the net proceeds of such sale between
Seagull Energy, in respect of its Retained Interest, if any, and the ENSTAR
Alaska Group. If the Board allocated 100% of the net proceeds of a sale of
ENSTAR Alaska Stock to the ENSTAR Alaska Group, the net proceeds would be
reflected entirely in the financial statements of the ENSTAR Alaska Group. To
the extent a Retained Interest in the ENSTAR Alaska Group continues to be
attributed to Seagull Energy, net proceeds from any future offerings of ENSTAR
Alaska Stock could be allocated to Seagull Energy or to both Seagull Energy and
the ENSTAR Alaska Group, in which event the net proceeds would be reflected in
the financial statements of the respective business group as allocated. See
"Description of Capital Stock -- Retained Interest of Seagull Energy in ENSTAR
Alaska Group; Outstanding Interest Fraction" below.
OPTIONAL EXCHANGE OF ENSTAR ALASKA STOCK. The Board could, in its sole
discretion, determine to exchange shares of ENSTAR Alaska Stock for shares of
Seagull Common Stock at a 15% premium at any time or a 10% premium following any
dividend or partial redemption undertaken in connection with a disposition of
all or substantially all of the properties or assets of the ENSTAR Alaska Group.
This determination could be made at a time when either or both the ENSTAR Alaska
Stock and the Seagull Common Stock may be considered to be overvalued or
undervalued. In addition, any such exchange at either the 10% or the 15% premium
would dilute the interests in the Company of the holders of Seagull Common Stock
and could preclude holders of both classes of common stock of the Company from
retaining their investment in a security that is intended to reflect separately
the performance of the relevant business group. See "Description of Capital
Stock -- ENSTAR Alaska Stock -- Exchange and Redemption" below.
DISPOSITIONS OF ENSTAR ALASKA GROUP ASSETS. Assuming the assets of the
ENSTAR Alaska Group continue to represent less than substantially all of the
properties and assets of the Company, the Board could, in its sole discretion
and without shareholder approval, approve sales and other dispositions of any
amount of the properties and assets of the ENSTAR Alaska Group since Texas law
requires shareholder approval only for a sale or other disposition of all or
substantially all of the properties and assets of the entire Company not in the
"usual and regular course of business." Furthermore, under the TBCA, a sale
would be in the "usual and regular course of business" if the Company, directly
or indirectly, either continues to engage in one or more businesses or applies a
portion of the consideration received in connection with the sale to the conduct
of a business in which the Company (either through the ENSTAR Alaska Group,
Seagull Energy or another business group) engages following the transaction.
However, the Articles of Incorporation contains provisions that, in the event of
a Disposition (as hereinafter defined) of all or substantially all of the
properties and assets of the ENSTAR Alaska Group, require the Company to either
(i) distribute to holders of the ENSTAR Alaska Stock an amount equal to their
proportionate interest in the Net Proceeds of such Disposition, either by
special dividend or by redemption of all or part of the outstanding shares of
the ENSTAR Alaska Stock, or (ii) exchange the outstanding shares of ENSTAR
Alaska Stock for a number of shares of Seagull Common Stock equal to 110% of an
average daily ratio of the Market Value of one share of ENSTAR Alaska Stock to
the Market Value of one share of Seagull Common Stock. See "Description of
Capital Stock -- ENSTAR Alaska Stock -- Exchange and Redemption" below.
OPERATIONAL AND FINANCIAL DECISIONS. The Board could, in its sole
discretion, from time to time, make operational and financial decisions that
affect disproportionately the businesses of the ENSTAR Alaska Group and Seagull
Energy, such as transfers of funds between such groups. The decision to provide
funds to one business group may adversely affect the ability of the other group
to obtain funds sufficient to implement its growth strategies. Although the
Board has not yet done so, the Board could, in its sole discretion, from time
22
<PAGE> 24
to time, establish one or more committees of the Board to review matters raising
conflict issues and to report to the Board on such matters.
LIMITED ADDITIONAL SHAREHOLDER RIGHTS
Holders of ENSTAR Alaska Stock will have only the rights of common
shareholders of the Company, and will not be provided any rights specifically
related to the ENSTAR Alaska Group, other than (i) the two-thirds separate class
vote requirements under certain limited circumstances, as described under
"Description of Capital Stock -- ENSTAR Alaska Stock -- Voting Rights" below,
(ii) the dividend/redemption/exchange provisions described under "Description
of Capital Stock -- ENSTAR Alaska Stock -- Exchange and Redemption" below and
(iii) certain limited class voting rights provided under Texas law. See
"Limited Separate Shareholder Voting Rights; Effects on Voting Power" below.
LIMITED SEPARATE SHAREHOLDER VOTING RIGHTS; EFFECTS ON VOTING POWER
Subject to certain limited exceptions, holders of shares of ENSTAR Alaska
Stock and holders of shares of Seagull Common Stock will vote together as a
single class (together with the holders of shares of all classes and series of
capital stock of the Company entitled to vote together with the holders of
shares of common stock of the Company) on all matters as to which common
shareholders generally are entitled to vote. Holders of each class of common
stock of the Company will have no rights to vote on matters as a separate class
(except in certain limited circumstances as described below). Separate meetings
for the holders of each class of common stock of the Company will not be held.
Certain matters as to which the holders of the Company's common stock could
be entitled to vote together as a single class could involve a divergence or the
appearance of a divergence of the interests of the holders of ENSTAR Alaska
Stock and holders of Seagull Common Stock. When a vote is taken on any matter as
to which all stock is voting together as one class, the class of common stock
that is entitled to more than the number of votes required to approve such
matter would be in a position to control the outcome of the vote on such matter.
See "Description of Capital Stock -- ENSTAR Alaska Stock -- Voting Rights"
below. The relative voting power of shares of ENSTAR Alaska Stock and Seagull
Common Stock will fluctuate from time to time, with each share of ENSTAR Alaska
Stock having a variable number of votes, based upon the relative Market Value of
one share of Seagull Common Stock to one share of ENSTAR Alaska Stock and each
share of Seagull Common Stock having one vote per share. Immediately following
the Offering, holders of outstanding ENSTAR Alaska Stock are expected to have
approximately 12% of the total voting power of the Company and holders of
outstanding Seagull Common Stock are expected to have approximately 88% of the
total voting power of the Company. It is unlikely that during the foreseeable
future the holders of ENSTAR Alaska Stock would possess a majority of the total
votes to which the outstanding voting stock of the Company would be entitled,
although, in the event that there would be a significant increase in the Market
Value of the ENSTAR Alaska Stock relative to the Market Value of the Seagull
Common Stock or if additional shares of the ENSTAR Alaska Stock were issued, the
number of votes to which such outstanding ENSTAR Alaska Stock would be entitled
would increase. See "Description of Capital Stock -- ENSTAR Alaska
Stock -- Voting Rights."
LIMITED APPROVAL RIGHTS OF FUTURE ISSUANCES OF STOCK
The Company is authorized to issue up to 25,000,000 shares of a new class
of common stock, the ENSTAR Alaska Stock. The authorized but unissued shares of
ENSTAR Alaska Stock and Seagull Common Stock would be available for issuance
from time to time by the Company at the sole discretion of the Board for any
proper corporate purpose, which could include raising capital, providing
compensation or benefits to employees, paying stock dividends or acquiring
companies or businesses. The approval of the shareholders of the Company would
not be solicited by the Company for the issuance from the authorized but
unissued shares of common stock of any additional shares of ENSTAR Alaska Stock
or Seagull Common Stock (unless such approval is deemed advisable by the Board
of Directors or is required by stock exchange regulations).
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<PAGE> 25
MANAGEMENT AND ACCOUNTING POLICIES SUBJECT TO CHANGE
The Board of Directors has adopted certain management and accounting
policies and agreements described herein with respect to dividends, the
allocation of corporate expenses, assets and liabilities (including contingent
liabilities) and inter-group transactions, any and all of which could be
modified or rescinded in the sole discretion of the Board of Directors without
approval of the shareholders, although the Board of Directors has no present
intention to do so. In addition, the ENSTAR Alaska Group is subject to
regulation by the APUC and has historically been operated as a separate business
unit for which separate audited financial statements have been prepared on an
annual basis. Accordingly, a majority of the accounting and management policies
described in this Prospectus have historically been employed by the Company with
respect to the ENSTAR Alaska Group, particularly in light of the regulation of
the ENSTAR Alaska Group by the APUC.
The Board of Directors may also adopt additional policies depending upon
the circumstances. Any determination of the Board of Directors to modify or
rescind such policies, or to adopt additional policies, including any such
decision that would have disparate impacts upon holders of ENSTAR Alaska Stock
and holders of Seagull Common Stock, would be made by the Board of Directors in
good faith and in the honest belief that such decision is in the best interests
of the Company. See "Fiduciary Duties" and "Potential Conflicts of Interest"
above. Any such determination would also be made in light of the requirements
imposed by the APUC that any transactions between the ENSTAR Alaska Group and
its affiliates, including Seagull Energy, must be on terms comparable to arm's
length transactions. In addition, generally accepted accounting principles
require that any change in accounting policy be preferable (in accordance with
such principles) to the policy previously established.
POTENTIAL EFFECTS OF EXCHANGE OF ENSTAR ALASKA STOCK
The terms of the ENSTAR Alaska Stock permit the exchange of all outstanding
shares of ENSTAR Alaska Stock for Seagull Common Stock upon the terms described
under "Description of Capital Stock -- ENSTAR Alaska Stock -- Exchange and
Redemption" below. The Company cannot predict the impact of the potential for
such exchanges or of any issuance of additional shares of Seagull Common Stock
in connection with such an exchange on the market price of either class of
common stock of the Company. In addition, any such exchange would preclude
holders of ENSTAR Alaska Stock from retaining their investment in a security
reflecting separately the performance of the ENSTAR Alaska Group.
LIMITATIONS ON POTENTIAL UNSOLICITED ACQUISITIONS OF THE ENSTAR ALASKA GROUP
If ENSTAR Alaska Group were a stand-alone corporation, any person
interested in acquiring such corporation without negotiation with management
could seek control of the outstanding ENSTAR Alaska Stock by means of a tender
offer or proxy contest. Although the ENSTAR Alaska Stock is intended to reflect
the performance of the ENSTAR Alaska Group, a person interested in acquiring
only the ENSTAR Alaska Group without negotiation with the Company's management
will still be required to seek control of the voting power represented by all of
the outstanding capital stock of the Company entitled to vote on such
acquisition, including the Seagull Common Stock. See "-- Limited Separate
Shareholder Voting Rights; Effects on Voting Power" above.
NO PRIOR MARKET
Since there has been no prior market for ENSTAR Alaska Stock, there can be
no assurance as to the price to be received by the Company upon the sale
thereof. The market price of the ENSTAR Alaska Stock will be determined in the
trading markets and could be influenced by many factors, including the
consolidated results of the Company, as well as the respective performances of
the ENSTAR Alaska Group and Seagull Energy, investors' expectations for the
Company as a whole, the ENSTAR Alaska Group and Seagull Energy, trading volume
and general economic and market conditions. There can be no assurance that
investors would assign values to ENSTAR Alaska Stock based on the reported
financial results and prospects of the ENSTAR Alaska Group or the dividend
policies established by the Board with respect to such group. Accordingly,
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<PAGE> 26
financial effects of either group that affect the Company's consolidated results
of operations or financial condition could affect the market price of shares of
both classes of common stock of the Company. In addition, the Company cannot
predict the impact on the market price of the ENSTAR Alaska Stock of certain
terms of such securities, such as the ability of the Company to exchange shares
of ENSTAR Alaska Stock for Seagull Common Stock, the discretion of the Board to
make various determinations and the minority voting power of the ENSTAR Alaska
Stock.
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
As a result of its ownership of the gas distribution operations included in
the ENSTAR Alaska Group, the Company is a "public utility company" within the
meaning of the 1935 Act. Accordingly, any company that directly or indirectly
owns, controls or holds with power to vote 10% or more of the outstanding voting
securities of the Company would generally be deemed to be a "holding company"
within the meaning of the 1935 Act, and therefore would be subject to the
registration, reporting and simplification requirements of the 1935 Act. For
purposes of the 1935 Act, the calculation of ownership of the voting securities
of the Company will be made on the basis of the percentage of the voting power
of the outstanding shares of the Company. Because of the fluctuation in relative
voting power between the ENSTAR Alaska Stock and the Seagull Common Stock based
on Market Value described below, a shareholder could reach the 10% threshold
without acquiring any additional shares. For example, if a shareholder owned
shares of Seagull Common Stock with 9.99% of the outstanding voting power of the
Company's shares, then a relatively modest drop in the Market Value of the
ENSTAR Alaska Stock (or increase in the Market Value of the Seagull Common
Stock) could increase the relative voting power of Seagull Common Stock and
cause the shareholder to become a "holding company" without acquiring any
additional shares. The Articles of Incorporation provide that, even if the
respective Market Values of the ENSTAR Alaska Stock and the Seagull Common Stock
fluctuate relative to the other from time to time, the number of votes to which
the ENSTAR Alaska Stock is entitled will not change until the next applicable
record date.
MANAGEMENT AND ACCOUNTING POLICIES
The Company will continue to prepare financial statements in accordance
with generally accepted accounting principles, consistently applied, for each of
the ENSTAR Alaska Group and Seagull Energy, and these financial statements,
taken together, will comprise all of the accounts included in the corresponding
consolidated financial statements of the Company. The financial statements of
the ENSTAR Alaska Group reflect the financial position, results of operations
and cash flows of the business included therein. Consistent with the Articles of
Incorporation and relevant policies, such financial statements could also
include contingent liabilities that are not separately identified with the
operations of the ENSTAR Alaska Group.
The ENSTAR Alaska Group is subject to regulation by the APUC and has
historically been operated as a separate business unit for which separate
audited financial statements have been prepared on an annual basis. The ENSTAR
Alaska Group has also conducted its own financing activities by issuing debt of
APC, and none of the other debt of the Company and its subsidiaries is for the
benefit of or attributable to the ENSTAR Alaska Group. Accordingly, a majority
of the accounting and management policies described below have historically been
employed by the Company with respect to the ENSTAR Alaska Group, particularly in
light of the regulation of the ENSTAR Alaska Group by the APUC.
Notwithstanding any allocations of assets or liabilities for the purpose of
preparing business group financial statements, holders of ENSTAR Alaska Stock
will continue to be subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities. See "Special
Considerations -- Shareholders of One Company; Financial Effects on Seagull
Energy Could Affect the ENSTAR Alaska Group" above.
Upon issuance of ENSTAR Alaska Stock, cash management and allocation of
principal corporate activities between the ENSTAR Alaska Group and Seagull
Energy would be based upon methods that
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<PAGE> 27
management of the Company believes to be reasonable and are reflected in the
combined financial statements, as follows:
(i) All debt incurred or preferred stock issued by the Company and its
subsidiaries would be specifically attributed to and reflected on the
financial statements of Seagull Energy, except (a) debt incurred or
preferred stock issued by APC and (b) the ENSTAR Alaska Series C Stock (as
hereinafter defined).
(ii) For the periods prior to the Offering, all financial impacts of
equity offerings are reflected entirely in the financial statements of
Seagull Energy. After the Offering, all financial impacts of issuances of
additional shares of ENSTAR Alaska Stock or additional shares of Seagull
Common Stock, the net proceeds of which are attributed to the Retained
Interest of Seagull Energy, would be reflected entirely in the financial
statements of Seagull Energy. All financial impacts of issuances of
additional shares of ENSTAR Alaska Stock, the net proceeds of which are
allocated to the ENSTAR Alaska Group, would be reflected entirely in the
financial statements of the ENSTAR Alaska Group. Financial impacts of
dividends or other distributions on, and purchases of, shares of the ENSTAR
Alaska Stock and Seagull Common Stock would be reflected entirely in the
financial statements of the ENSTAR Alaska Group and Seagull Energy,
respectively, except that, if Seagull Energy has a Retained Interest, the
ENSTAR Alaska Group financial statements would be charged with, and Seagull
Energy financial statements would be credited with, an amount that bears
the same relation to the aggregate amount of such dividend or other
distribution as the Number of Shares Issuable with respect to the Retained
Interest to the number of shares of ENSTAR Alaska Stock then outstanding.
(iii) It is currently anticipated that the ENSTAR Alaska Group will
continue to conduct its own financing activities by having APC incur debt
or issue shares of preferred stock. However, if funds were to be
transferred between the ENSTAR Alaska Group and Seagull Energy (other than
payments pursuant to the contracts described in paragraphs (v) and (vi)
below), such transfers of funds would generally be accounted for as
short-term loans at an interest rate comparable to the rate that the
Company could obtain in an arm's length transaction or as an equity
contribution to, or return of capital by, the ENSTAR Alaska Group. In such
latter event, Seagull Energy's Retained Interest in the ENSTAR Alaska Group
would be increased or decreased, as applicable, by the amount of such
contribution or return of capital, as a result of which (a) the Number of
Shares Issuable with Respect to the Retained Interest would be increased or
decreased by an amount equal to the amount of such contribution or return
of capital divided by the Market Value of a share of ENSTAR Alaska Stock
and (b) Seagull Energy's Retained Interest Fraction would be increased or
decreased and the Outstanding Interest Fraction would be decreased or
increased accordingly. The Board could determine, in its sole discretion,
to make such contribution or return of capital after consideration of a
number of factors, including, among others, the relative levels of
internally generated cash flows of each business group, the long-term
business prospects for each business group, the capital expenditure plans
of and the investment opportunities available to each business group, and
the availability, cost and time associated with alternative financing
sources.
(iv) The balance sheet of Seagull Energy will reflect any net
short-term loans to or borrowings from the ENSTAR Alaska Group, and the
balance sheet of the ENSTAR Alaska Group will reflect any net short-term
loans to or borrowings from Seagull Energy. Similarly, the respective
income statements of the ENSTAR Alaska Group and Seagull Energy will
reflect interest income or expense, as the case may be, associated with
such loans or borrowings and the respective statements of cash flows of the
ENSTAR Alaska Group and Seagull Energy will reflect changes in the amounts
thereof deemed outstanding.
(v) Since 1985, when the Company acquired the ENSTAR Alaska Group,
Seagull Energy has provided certain management and administrative services
to the ENSTAR Alaska Group pursuant to a series of written management
agreements. The most recent such agreement, the Agreement for Services, was
entered into effective as of January 1, 1993. Pursuant to such Management
Agreement, Seagull Energy provides certain management, financial reporting,
legal, human resources, treasury, investor relations and administrative
services to the ENSTAR Alaska Group. In consideration for these services,
the ENSTAR Alaska Group has agreed to pay Seagull Energy an annual
management fee equal to the
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<PAGE> 28
greater of (i) $1,925,000 and (ii) the sum of (A) the direct cost of
providing such services and (B) the allocable portion of Seagull Energy's
general and administrative expenses associated with providing such
services, primarily determined by reference to the relative amount of time
spent by Seagull Energy's employees to provide such services. The
Management Agreement will continue in effect following the Offering. The
Management Agreement may be amended by agreement between Seagull Energy and
the ENSTAR Alaska Group.
(vi) The ENSTAR Alaska Group and Seagull Energy are also parties to
the Tax Sharing Agreement dated as of January 1, 1986. Because the ENSTAR
Alaska Group is included in the Company's consolidated group for income tax
purposes, tax deductions and credits attributable to Seagull Energy tend to
reduce the amount of income tax that would be payable if such taxes were
calculated solely with respect to the operations of the ENSTAR Alaska
Group. Pursuant to the Tax Sharing Agreement, the ENSTAR Alaska Group
generally pays Seagull Energy an amount equal to the amount of income taxes
that would be payable by the ENSTAR Alaska Group on a "stand alone" basis,
excluding the effects of historical purchase accounting adjustments. In
this regard, the assets and liabilities of the ENSTAR Alaska Group are
accounted for based upon the ENSTAR Alaska Group's original historical cost
prior to the ENSTAR Alaska Group's acquisition by the Company in 1985. To
the extent current taxes paid by the ENSTAR Alaska Group to Seagull Energy
pursuant to the Tax Sharing Agreement differ from amounts computed based on
income and expenses included in the accompanying statements of earnings,
such amounts are recorded as an adjustment to common equity. The ENSTAR
Alaska Group will continue to be included in the Company's consolidated
group for income tax purposes after the Offering. The Tax Sharing Agreement
may be amended by agreement between the ENSTAR Alaska Group and Seagull
Energy.
The above policies and agreements could be modified or rescinded by the
Board, in its sole discretion, without approval of shareholders, although there
is no present intention to do so. The Board could also adopt additional policies
depending upon the circumstances. Any determination of the Board to modify or
rescind such policies, to adopt additional policies or to amend the Management
Agreement or the Tax Sharing Agreement, including any such decision that could
have disparate effects upon holders of each class of common stock of the
Company, would be made by the Board in good faith and in the honest belief that
such decision is in the best interests of the Company. Any such determination
would also be made in light of the requirements imposed by the APUC that any
transactions between the ENSTAR Alaska Group and its affiliates, including
Seagull Energy, must be on terms comparable to arm's length transactions. In
addition, generally accepted accounting principles will require that changes in
accounting policy must be preferable (in accordance with such principles) to the
policy previously in place.
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<PAGE> 29
BUSINESS OF THE ENSTAR ALASKA GROUP
The operations of the ENSTAR Alaska Group are conducted through ENG, a
division of the Company, and APC, an Alaska corporation and a wholly owned
subsidiary of the Company. ENG and APC are currently operated as a single
business unit, and are regulated by the APUC. See "Regulation" below. APC
engages in the intrastate transmission of natural gas in South-Central Alaska.
ENG engages in the distribution of natural gas in Anchorage and other nearby
communities in Alaska and is APC's only customer.
The ENSTAR Alaska Group's predecessor was formed in 1959 and began serving
the Anchorage area with natural gas in 1961. Five years later, in 1966, the
predecessor became one of the original entities that formed Alaska Interstate
Company, a newly organized public company the shares of which were traded on the
New York Stock Exchange. Alaska Interstate Company changed its name to ENSTAR
Corporation in 1982.
In 1985, the Company purchased the ENSTAR Alaska Group for $55 million in
cash plus $10 million in the form of a seven-year, unsecured, 10% subordinated
note. At the time of the acquisition, APC had outstanding debt of approximately
$65 million. The transaction received the final approval of the APUC in June
1985.
GAS DISTRIBUTION SYSTEM
ENG distributes natural gas through approximately 1,916 miles of gas mains
to approximately 88,600 residential, commercial, industrial and electric power
generation customers within the cities and environs of Anchorage, Eagle River,
Palmer, Wasilla, Soldotna, Kenai and the Nikiski area of the Kenai Peninsula in
South-Central Alaska. During the 1993 construction season, ENG added
approximately 55 miles of new gas distribution mains, installed 1,791 new
service lines and added approximately 1,800 net customers. ENG intends to
install additional main and service lines to service new customers. See
"Customers" and "New Markets" below.
ENG serves more than 90% of the residential population in the Anchorage
area with natural gas at rates that are consistently among the lowest in any
metropolitan area in the United States. As of January 1994, ENG's rate for
residential service was reduced to $3.67 per thousand cubic feet ("Mcf") for
ENG's customers as part of ENG's gas cost adjustment. See "Regulation" below. By
comparison, as of December 31, 1993, residential natural gas costs were $4.87 in
Denver, $6.62 in Chicago and $8.93 in New York City. In the winter heating cost
survey conducted by ENG in February 1994 in the Anchorage area, fuel oil cost
the equivalent of $6.65 per Mcf, propane cost the equivalent of $14.36 per Mcf
and electricity, efficiency adjusted, cost the equivalent of $21.35 per Mcf.
GAS TRANSMISSION SYSTEM
APC owns and operates the only natural gas transmission lines in its
service area that are operated for utility purposes. The pipeline transmission
system is composed of approximately 277 miles of 12-to 20-inch diameter pipeline
and approximately 71 miles of smaller diameter pipeline. The system's present
design delivery capacity is approximately 410 million cubic feet per day
("Mmcf/d"). The average throughput of the system in 1993, 1992 and 1991 was 110
Mmcf/d, 112 Mmcf/d and 109 Mmcf/d, respectively.
The APC gas transmission system consists of two separate pipeline systems
that extend from various natural gas fields on both sides of Cook Inlet into the
Anchorage metropolitan area. One pipeline system, the Kenai Pipeline System,
serves the east side of Cook Inlet and enters Anchorage from the south, while
the other pipeline system, the Beluga Pipeline System, serves the west side of
Cook Inlet and enters Anchorage from the north. The two pipeline systems are
interconnected in Anchorage, allowing the distribution system to serve all
customers from either of the two pipeline systems. The origination points of the
two pipeline systems are also interconnected by means of producer-owned
pipelines.
APC's eastern system, the Kenai Pipeline System, was originally constructed
in 1960 and currently obtains gas from the Kenai, Beaver Creek, Trading Bay,
West Fork and McArthur River gas fields. The main trunk line of the Kenai
Pipeline System, originating at the Kenai gas field and extending for a length
of approximately 85 miles, consists of a 12-inch diameter pipeline that is
looped by a combination of 12-inch
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<PAGE> 30
diameter and 16-inch diameter pipeline. The Royalty Lateral, consisting of 25
miles of 8-inch diameter pipeline, connects with the mainline and provides a
supply of gas from the other gas sources. The Kenai Pipeline System is powered
by two compressor stations that have an aggregate of 8,400 horsepower. With
these facilities the eastern system has a present delivery capacity of
approximately 210 Mmcf/d.
The Kenai Pipeline System includes an eight-mile twin crossing of the
Turnagain Arm of the Cook Inlet. The crossing includes two separate pipelines
that may be operated independently, and management believes that the lines are
buried at a depth sufficient to protect them from the elements.
APC's western system, the Beluga Pipeline System, was constructed in 1984
and extends from the Beluga River gas field through the Pretty Creek gas field
and near the Lewis River, Ivan River and Stump Lake gas fields to the Anchorage
metropolitan area. Along the mainline route, gas is provided to the
Matanuska-Susitna Borough and Eagle River residents. The mainline consists of a
single 102 mile, 20-inch diameter line with installed provisions for future
looping. The Lewis River, Pretty Creek, Ivan River, Stump Lake, Trading Bay and
McArthur River gas fields are connected to the Beluga mainline by lines owned by
the producers of the fields. Although no compressor stations currently exist,
valves have been installed on the mainline, and land has been acquired for the
installation of a compressor plant. The present delivery capacity of the system
is approximately 200 Mmcf/d.
CUSTOMERS
The ENSTAR Alaska Group classifies its sales customers into two major
categories: non-power customers, which includes residential and commercial
customers; and power customers, which includes sales to the military's central
heat and electric generation plants. The ENSTAR Alaska Group also provides
transportation service to additional power plant sites and to a liquefied
natural gas ("LNG") plant. In 1993, the ENSTAR Alaska Group began providing
off-peak transportation service to an ammonia plant under an interruptible
industrial transportation tariff approved by the APUC. The ENSTAR Alaska Group
expects this off-peak load to continue. The ENSTAR Alaska Group continues to
pursue expansion opportunities with respect to all classes of customers.
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The following table sets forth the number of customers, volumes and
operating margin per Mcf for the ENSTAR Alaska Group for 1993, 1992 and 1991 and
the three months ended March 31, 1994 and 1993, as well as the heating degree
days (as described below) for such periods:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------- --------------------------
1994 1993 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NUMBER OF CUSTOMERS (AT END OF PERIOD):
Residential............................... 76,262 74,516 75,912 74,293 72,833
Commercial................................ 12,305 12,129 12,277 12,112 11,976
Power (sales and transport)............... 7 6 7 7 6
Industrial................................ 2 2 2 1 1
------ ------ ------ ------ ------
Total........................... 88,576 86,653 88,198 86,413 84,816
------ ------ ------ ------ ------
------ ------ ------ ------ ------
VOLUMES (MMCF):
Residential............................... 5,343 5,244 13,413 14,221 13,385
Commercial................................ 4,345 4,087 10,829 11,725 11,312
Power (sales and transport)............... 3,746 3,783 13,215 13,879 14,471
Industrial................................ 73 410 2,757 1,343 440
------ ------ ------ ------ ------
Total........................... 13,507 13,524 40,214 41,168 39,608
------ ------ ------ ------ ------
------ ------ ------ ------ ------
OPERATING MARGIN PER MCF ($/MCF):
Residential............................... 1.80 1.80 1.91 1.90 1.87
Commercial................................ 1.31 1.33 1.37 1.35 1.34
Power (sales and transport)............... 0.45 0.45 0.46 0.46 0.51
Industrial................................ 0.24 0.24 0.21 0.24 0.24
------ ------ ------ ------ ------
Overall Average................. 1.26 1.23 1.18 1.20 1.20
------ ------ ------ ------ ------
------ ------ ------ ------ ------
HEATING DEGREE DAYS (*)................... 3,887 3,908 9,382 10,653 10,178
</TABLE>
- ---------------
(*) The average annual heating degree days for the 30 years, 10 years and 5
years ended December 31, 1993 were 10,431, 10,101 and 10,324, respectively.
The average first quarter heating degree days for the 30 years, 10 years and
5 years ended December 31, 1993 were 4,057, 3,917 and 4,177, respectively.
"Heating degree days" are a standard industry measure of temperature over a
specific time period and represent the extent by which the mean of daily
high and low temperatures, expressed in Fahrenheit degrees, is less than 65
degrees. More heating degree days equate to colder weather.
The ENSTAR Alaska Group purchases gas and resells it to its residential and
commercial customers, as well as to certain electric generation plants. In 1993,
purchase/resale volumes accounted for 72% of the ENSTAR Alaska Group's
throughput and 91% of the ENSTAR Alaska Group's operating margin. The remaining
volumes are transported for power and industrial customers for a transportation
fee.
The ENSTAR Alaska Group's five largest customers are Municipal Light and
Power ("ML&P"), an electric utility; the U. S. Air Force; the U. S. Army; the
Anchorage School District; and Unocal Corporation. Together, they account for
about 14 billion cubic feet ("Bcf") per year in volumes and about $6.8 million
in annual operating margin, which represent approximately 35% and 14%,
respectively, of the ENSTAR Alaska Group's totals.
During the last five years, the ENSTAR Alaska Group's natural gas volumes
delivered on a purchase/resale basis have declined primarily due to two of its
major customers electing to purchase gas directly from gas producers. During the
fourth quarter of 1991, ML&P and the larger of the two customers, began
purchasing gas directly from three gas producers which displaced gas sales of
approximately 8.0 Bcf per year. However, the APUC has approved a tariff allowing
the ENSTAR Alaska Group to transport these volumes from ML&P's purchase points
to the ML&P electric generation facilities for a transportation fee that
approximates the margin that would have been earned had ML&P remained a sales
customer rather than
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becoming a transportation customer. Deliveries of gas to ML&P during 1993, 1992
and 1991 amounted to approximately 18%, 19% and 19%, respectively, of the total
deliveries of gas by the ENSTAR Alaska Group.
During 1988, Chugach Electric Association, the smaller of the two
customers, entered into a contract to purchase gas directly from a producer. The
contract became effective on April 1, 1989, resulting in a displacement of gas
sales at that time of approximately 2.6 Bcf per year. The ENSTAR Alaska Group
currently continues to transport approximately 1.3 Bcf per year of Chugach
Electric Association's gas volumes, although at a lower fee than the margin
earned on sales volumes because of the proximity of the customer's facility to a
producing field and a producer-owned pipeline. The remaining 1.3 Bcf of natural
gas required by Chugach Electric Association in 1989 was displaced by a
90-megawatt hydroelectric facility at Bradley Lake, completed in September 1991.
See "Competition" below.
Should any other large customer choose to purchase gas directly from
producers, the ENSTAR Alaska Group would expect to collect a fee for
transporting that gas equivalent to the margin earned on sales volumes because,
unlike the situation with Chugach Electric Association, the large distance of
remaining user facilities from producing fields would preclude the by-pass of
the ENSTAR Alaska Group's pipelines.
ENG distributes gas to its customers under tariffs and contracts approved
by the APUC that provide for varying delivery priorities. All of the ENSTAR
Alaska Group's residential and commercial customers receive firm service, which
assures the customer that the gas supply will not be curtailed at the election
of the ENSTAR Alaska Group and diverted to other customers except under the most
extreme emergency conditions. Power sales and power transportation customers
also receive firm service. However, facilities with alternative generation
capabilities may be subject to varying interruptions or curtailments in times of
gas supply shortages. The gas cost adjustment provision of the ENSTAR Alaska
Group's tariff provides for the sharing of the additional cost of alternative
fuels used during an interruption between all of the ENSTAR Alaska Group's
customers. See "Regulation" below. The ENSTAR Alaska Group has not had to
interrupt or curtail service to any firm service customer for other than routine
maintenance since 1983.
A major determinant of gas usage for any period is the weather,
particularly with respect to residential and commercial customers and, to a
lesser extent, power customers. Accordingly, the ENSTAR Alaska Group's business
is seasonal with approximately 65% of its revenues generated in the first and
fourth quarters of each year. The heating degree days for 1993 were 9,382,
approximately 10% below the average for the 30-year period ended December 31,
1993. The average heating degree days for the 30 years, 10 years and 5 years
ended December 31, 1993 were 10,431, 10,101 and 10,324, respectively. Generally,
consumption for heating purposes increases as heating degree days increase.
GAS SUPPLY
In May 1988, the ENSTAR Alaska Group entered into a gas purchase contract
(the "Marathon Contract") with Marathon Oil Company ("Marathon") providing for
the delivery of approximately 450 Bcf of natural gas in the aggregate. The
Marathon Contract is a "requirements" contract with no specified daily
deliverability or annual take-or-pay quantities. APC has agreed to purchase, and
Marathon has agreed to deliver, all of APC's gas requirements in excess of those
provided for in other presently existing gas supply contracts, subject to
certain exceptions, until the commitment has been exhausted and without limit as
to time; however, Marathon's delivery obligations are subject to certain
specified annual limitations after 2001. The contract has a base price of $1.55
per Mcf plus reimbursements for any severance taxes and other charges. The base
price is subject to annual adjustment based on changes in the price of certain
traded oil futures contracts. During 1994, the cost of gas purchased under the
Marathon Contract is expected to average $1.66 per Mcf, including reimbursements
for severance taxes. The Marathon Contract, as amended in 1991, has been
approved by the APUC. See "Regulation" below.
Effective January 1, 1992, APC amended a gas purchase contract with Shell
Oil Company and ARCO Alaska, Inc. (the "Shell Contract") to extend the term of
the contract through the year 2009, modify the price, delivery and
deliverability provisions and provide procedures for reducing take-or-pay
volumes for the effect of APC sales volumes that are displaced by gas sales made
by others. The Shell Contract provides for the delivery of up to approximately
220 Bcf of gas. The amendments revised the price to a base price of $1.971
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<PAGE> 33
per Mcf plus reimbursements for any severance taxes and an annual adjustment
based on changes in the price of certain traded oil futures contracts from the
relevant base price. Certain portions of the gas purchased under the amendments
may be priced under a pricing term similar to the Marathon Contract. The 1994
price under the Shell Contract, after application of contractual adjustments
(including a drop in the price of the applicable oil futures contracts) is
expected to average approximately $1.64 per Mcf, including reimbursements for
severance taxes. The amendments provide for varying deliverability, before
displaced gas sales adjustments, up to a maximum of 110 Mmcf/d through 1995, and
take-or-pay quantities, before displaced gas sales adjustments, up to a maximum
of 15.4 Bcf per year through 1994. The Shell Contract, as amended, has been
approved by the APUC. See "Regulation" below.
Combined, the Marathon and Shell Contracts will supply all of the ENSTAR
Alaska Group's gas supply requirements through the year 2001. After that time,
supplies will still be available under these contracts in accordance with their
terms, but the annual limitations contained in the Marathon Contract will begin
to take effect. As a result, after 2001, at least a portion of the ENSTAR Alaska
Group's requirements are expected to be satisfied outside the terms of those
contracts, as currently in effect.
Based on gas purchases during the 12 months ended December 31, 1993, which
are not necessarily indicative of the volume of future purchases, the gas
reserves committed to the ENSTAR Alaska Group under the Marathon Contract and
the Shell Contract would have a current reserve life index of approximately 14
years.
The ENSTAR Alaska Group's average cost of gas sold in 1993, 1992 and 1991
was $2.07, $1.94 and $2.32 per Mcf, respectively. The average price of gas sold
by the ENSTAR Alaska Group in 1993, 1992 and 1991 was $3.56, $3.41 and $3.64 per
Mcf, respectively.
As stated above, the ENSTAR Alaska Group currently purchases all of its
natural gas under long-term contracts in which the price is indexed to changes
in the price of crude oil futures contracts. However, because the ENSTAR Alaska
Group's sales prices are adjusted to include the projected cost of its natural
gas, there has been and is expected to be little or no impact on margins derived
from the ENSTAR Alaska Group's gas sales as a result of fluctuations in oil
prices due to worldwide political events and changing market conditions.
The ENSTAR Alaska Group has no material take-or-pay obligations and does
not anticipate any such obligations in the foreseeable future.
BUSINESS CLIMATE
Anchorage is served by a deep water port and an international airport, and
is the headquarters for the Alaska Railroad system. Oil company managerial
offices and approximately half of state and regional federal governmental
employees are located in Anchorage. While the petroleum industry and the
resulting tax and royalty payments to the State of Alaska still provide the
largest influence on Anchorage's economy, some diversification is taking place.
Federal Express and United Parcel Service have both built international
distribution hubs in Anchorage. The Anchorage International Airport continues to
be a major refueling point for cargo flights between the Far East and Europe.
Tourism enjoys continued growth, with Alaska now a significant summer cruise
destination. In addition, the ENSTAR Alaska Group believes that, because of
Anchorage's strategic location, the military will continue to play a significant
role in Anchorage's economy. In fact, the military has announced $250 million in
construction projects over the next three years for both Elmendorf Air Force
Base and Fort Richardson Army Post.
National retailers, such as Kmart, Wal-Mart and Toys R Us, have recently
entered the ENSTAR Alaska Group's service area, fueling a significant expansion
of retail space for these firms and other retailers already in the market. In
Anchorage, 300,000 square feet of retail space was added in 1992, over a half
million square feet opened in 1993, and an additional half million is under
construction and scheduled for opening in 1994. Other portions of the ENSTAR
Alaska Group's service area saw 200,000 square feet of retail space open in
1993, with an additional 200,000 square feet under construction and scheduled
for opening in 1994.
Recent population and employment estimates continue to show modest economic
growth in the ENSTAR Alaska Group's service area through the mid-1990s, followed
by a leveling off. The Anchorage area
32
<PAGE> 34
population was reported at 174,000 in 1980 by the U.S. Bureau of the Census. The
population level peaked in 1985 at an estimated level of 248,000 and reached a
subsequent low of 219,000 in 1988. Current estimates place the population at
242,600, which is approximately 45% of the total population of the state. As of
July 1993, Anchorage employment had increased by 2,700 from the prior year to
121,000 jobs.
The rapid population growth in the early 1980s is believed to have been
caused by employment resulting from increased state governmental expenditures
that were fueled by petroleum related revenues. With the collapse of oil prices
in the mid-1980s, the state had to slow its level of spending, resulting in
employment reductions, especially in the construction industry. While oil prices
have seen some recovery since the mid-1980s, oil production levels are
declining, and petroleum revenues are expected to decrease through the end of
the century. During each of the past four years, Anchorage employment exceeded
the pre-recession peak of 114,300 jobs attained in 1985.
Vacant Anchorage housing units that in 1988 amounted to about 17% of total
supply dropped to 4.2%, or about 3,800 units, in 1993. Apartment vacancies are
under 2%, and office building vacancy rates have dropped from a high of 18% in
1988 to 9.6% in 1993. Because of the severe weather conditions that the ENSTAR
Alaska Group's service area experiences during winter, even vacant structures
require gas service for heating to prevent structural damage or deterioration.
Since inception, the ENSTAR Alaska Group has been able to increase its
number of customers each year, despite the variations in population, employment
and vacancies described above. A portion of this customer growth has been
achieved by expanding the distribution system into areas not previously served
by the ENSTAR Alaska Group. See "New Markets" below.
NEW MARKETS
Distribution system expansion into formerly unserved areas continues to
offer potential for increased markets. Gas distribution facilities planned for
1994 and 1995 will make gas available for the first time in the Big Lake area of
the Matanuska-Susitna Valley. The ENSTAR Alaska Group estimates that there are
approximately 1,000 potential customers in the Big Lake area. This project, like
others completed by the ENSTAR Alaska Group in the past, is being financed in
part through customer-funded improvement districts. The ENSTAR Alaska Group also
believes that transportation of natural gas for large industrial customers could
provide additional opportunities.
The ENSTAR Alaska Group continues to pursue expansion opportunities with
respect to all classes of customers.
COMPETITION
The ENSTAR Alaska Group competes primarily with municipal and cooperative
electric power distributors and with various suppliers of fuel oil and propane
for the available energy market. There are also extensive coal reserves
proximate to the ENSTAR Alaska Group's operating area; however, such reserves
are not presently being produced.
The ENSTAR Alaska Group supplies natural gas to its customers at prices
that at the present time economically preclude substitution of alternative
fuels. Since the Shell Contract and the Marathon Contract include prices that
fluctuate based on oil indices, a competitive margin favoring natural gas over
oil-based energy sources is expected to continue. However, there is no assurance
that the competitive advantage over other alternative fuels will not be reduced
or eliminated by the development of new energy technology or by changes in the
price of oil or refined products.
A 90-megawatt hydroelectric facility at Bradley Lake, completed in
September 1991, reduced the ENSTAR Alaska Group's lower-margin power volumes by
approximately 1.0 to 1.5 Bcf per year. The ENSTAR Alaska Group's margin on gas
sales was reduced by approximately $500,000 to $750,000 per year as a result of
this facility.
33
<PAGE> 35
As described above under "Customers," during the last five years, the
ENSTAR Alaska Group's natural gas volumes delivered on a purchase/resale basis
have declined primarily due to two of its major customers, ML&P and Chugach
Electric Association, electing to purchase gas directly from gas producers. If
any other existing large customer of the ENSTAR Alaska Group chooses to purchase
gas directly from producers, the ENSTAR Alaska Group would expect to collect a
fee for transporting that gas equivalent to the margin earned on sales volumes
for those customers because, unlike the situation with Chugach Electric
Association, the large distance of remaining user facilities from producing
fields would preclude the by-pass of the ENSTAR Alaska Group's pipelines.
REGULATION
The APUC has jurisdiction as to rates and charges for gas sales,
construction of new facilities, extensions and abandonments of service and
certain other matters. Rates are generally designed to permit the recovery of
the cost of providing service, including purchased gas costs, and a return on
investment in plant. APC and ENG are regulated by the APUC on a combined basis
as though they were a single entity. Because the ENSTAR Alaska Group's
operations are wholly intrastate, the ENSTAR Alaska Group is not subject to or
affected by Order 636 or any other economic regulation by the Federal Energy
Regulatory Commission.
The APUC consists of five members who serve staggered six-year terms. They
are appointed by the Governor of the State of Alaska and confirmed by the Alaska
State Legislature. Qualifications require that one member have expertise in law,
one member have expertise in engineering, one member have expertise in financial
matters and two members be consumers.
As a regulated company under APUC jurisdiction, the ENSTAR Alaska Group may
apply to the APUC for rate increases if increased costs or other factors
warrant. Such rates typically go into effect, subject to refund, pending final
APUC determination, 45 days after the rates are filed unless such rates are
suspended. The APUC normally suspends general rate increases filed to recover
costs, other than purchased gas costs, for at least a six-month period. Since
its inception in 1961, the ENSTAR Alaska Group has participated in only three
formal rate proceedings, which were filed by ENG in 1975, 1981 and 1984. The
1984 proceeding was filed primarily in order to reflect the construction of the
Beluga Pipeline System in ENG's rates. See "Gas Transmission System" above.
All gas rates are adjusted annually to reflect changes in the ENSTAR Alaska
Group's cost of purchased gas based on estimated costs for the upcoming 12-month
period. The Gas Cost Adjustment ("GCA") may be adjusted quarterly if it is
determined that there are significant variances from the estimates used in the
annual determination. Any purchased gas cost difference between actual costs
incurred and the APUC's approved rate adjustments is deferred and included, with
applicable carrying charges, in the next GCA.
Gas cost increases that may result from new gas supply contracts may be
recovered only upon approval of the APUC for inclusion in the GCA tariff or by
application for a general rate increase. The APUC has given overall approval of
the Marathon and Shell Contracts, including the 1991 amendments to both
contracts, and has approved recovery of gas costs attributable to the Shell
Contract and to the Marathon Contract. See "Gas Supply" above.
As a result of the proceeding filed in 1984, which was concluded in May
1986, the APUC granted the ENSTAR Alaska Group an aggregate rate increase of
20.27% and authorized a regulatory rate of return on common equity of 15.65%. In
January 1994, the APUC approved the ENSTAR Alaska Group's gas cost adjustment
filing for 1994. The 1994 gas cost adjustment resulted in a price decrease of
approximately 9% from 1993 levels for residential customers. The decrease
resulted primarily from lower gas costs associated with contract terms that
indexed gas prices to oil prices that decreased from the prior year. See "Gas
Supply" above.
The ENSTAR Alaska Group currently has no significant regulatory issues
pending before the APUC.
34
<PAGE> 36
MANAGEMENT OF THE ENSTAR ALASKA GROUP
The following table provides information with respect to the management of
the ENSTAR Alaska Group.
<TABLE>
<CAPTION>
NAME POSITION WITH THE ENSTAR ALASKA GROUP AGE
---------------------------- -------------------------------------------------- ----
<S> <C> <C>
Richard F. Barnes........... President and Chief Operating Officer; Director of
APC 50
David L. Sinclair........... Vice President -- Operations 46
Thomas J. Waldock........... Vice President -- Administration 45
Timothy J. Casey............ Controller and Assistant Treasurer 47
Daniel M. Dieckgraeff....... Assistant Treasurer 37
Barry J. Galt............... Director of APC 60
Robert W. Shower............ Director of APC 56
George M. Sullivan.......... Director of APC 72
</TABLE>
Mr. Barnes has been the chief operating officer of the ENSTAR Alaska Group
since 1987 and a director of APC since 1987. He has served in various management
and executive positions since his employment with the ENSTAR Alaska Group in
1967 following his graduation from San Diego State University.
Mr. Sinclair was appointed as Vice President -- Operations in 1990. He has
served in various managerial positions since his employment with the ENSTAR
Alaska Group in 1973. He graduated with a degree in civil engineering from the
University of Hawaii in 1971.
Mr. Waldock has serviced as Vice President -- Administration since his
employment with the ENSTAR Alaska Group in 1988. He graduated from New York
University Law School in 1975 and spent 13 years in private practice including
10 years as a partner in his own law firm.
Mr. Casey has served as Controller and Assistant Treasurer since 1987. He
has served in various supervisory accounting positions since his employment with
the ENSTAR Alaska Group in 1977. Previously he was employed in public
accounting. He is a Certified Public Accountant and graduated from Xavier
University in 1971 with a degree in accounting.
Mr. Dieckgraeff was appointed Assistant Treasurer in 1989. He has served in
supervisory and managerial positions responsible for regulatory matters and
corporate planning since his employment with the ENSTAR Alaska Group in 1982.
Previously he was employed in public accounting. He is a Certified Public
Accountant and graduated from Gonzaga University in 1979 with a degree in
accounting.
Mr. Galt has been a director of APC since 1985. He is also currently
Chairman of the Board, President and Chief Executive Officer of Seagull Energy
Corporation and serves as a director for both Standard Insurance Company and
Trinity Industries, Inc.
Mr. Shower has served as a director of APC since 1992. He is currently
Executive Vice President and Chief Financial Officer of Seagull Energy
Corporation and serves as a director for Lear Seating Corporation. Mr. Shower
also served for 22 years with the Williams Companies, most recently as Executive
Vice President, Finance and Administration and a director until 1986. He served
as a Managing Director, Corporate Finance, for Lehman Brothers Inc. (formerly
Shearson Lehman Hutton) from 1986 to 1990. He served as Vice President and Chief
Financial Officer with AmeriServ Food Company from 1990 to 1991. He served as
Senior Vice President, Corporate Development for Albert Fisher, Inc. from 1991
to 1992. Mr. Shower joined the Company as Senior Vice President and Chief
Financial Officer in March 1992. He was named to his present position in
December 1993.
Mr. Sullivan has been a director of APC since 1985 and of Seagull Energy
Corporation since 1989. Mr. Sullivan served as legislative liaison for the
Governor of Alaska during 1987 and as Chairman of the Board, Alaska Railroad
Corporation from August 1988 until his retirement in January 1991.
35
<PAGE> 37
EMPLOYEES
As of April 30, 1994, the ENSTAR Alaska Group had 197 full time employees.
The ENSTAR Alaska Group operates under collective bargaining agreements with
separate bargaining units for operating and clerical employees. These units
represent approximately 70% of the ENSTAR Alaska Group's work force. The
clerical collective bargaining agreement is scheduled to expire on April 1,
1995, and the collective bargaining agreement for the operating bargaining unit
was renegotiated during 1993 and is scheduled to expire on April 1, 1996. The
ENSTAR Alaska Group is not a party to any other collective bargaining agreement.
The ENSTAR Alaska Group considers its relations with its employees to be
satisfactory.
36
<PAGE> 38
ENSTAR ALASKA GROUP
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF EARNINGS
The unaudited pro forma condensed statements of earnings for the three
months ended March 31, 1994 and the year ended December 31, 1993 give effect to
the issuance and sale of 7,500,000 shares of ENSTAR Alaska Stock (representing
100% of the equity attributable to the ENSTAR Alaska Group) in the Offering as
if the sale occurred on January 1, 1993. The net proceeds of the Offering will
be used to repay amounts borrowed under the Revolver, none of which debt is
attributable to the ENSTAR Alaska Group. No pro forma adjustments were necessary
to the ENSTAR Alaska Group's historical combined balance sheet as of March 31,
1994 to give effect to the pro forma transaction described above.
The following unaudited pro forma information has been included as required
by the rules of the Commission and is provided for comparative purposes only.
The unaudited pro forma information presented is based on the historical
combined financial statements of the ENSTAR Alaska Group and should be read in
conjunction with the ENSTAR Alaska Group combined financial statements as well
as the Company's consolidated financial statements and the related notes thereto
and the Company's unaudited pro forma condensed financial statements. The
unaudited pro forma information presented does not purport to be indicative of
actual results, if the transactions had occurred on the dates or for the periods
indicated, or of future results.
37
<PAGE> 39
ENSTAR ALASKA GROUP
UNAUDITED PRO FORMA CONDENSED STATEMENT OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
PRO
CONFORMING FORMA
HISTORICAL ADJUSTMENTS COMBINED(B)
------- ------ -------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
Revenues..................................................... $36,266 $ -- $36,266
Costs of Operations:
Operating costs............................................ 24,870 -- 24,870
Depreciation and amortization.............................. 1,949 -- 1,949
------- ------ -------
Operating Profit............................................. 9,447 -- 9,447
Interest Expense............................................. 1,468 -- 1,468
Interest Income and Other.................................... (56) -- (56)
------- ------ -------
Earnings Before Income Taxes................................. 8,035 -- 8,035
Income Taxes................................................. 3,253 -- 3,253
------- ------ -------
Net Earnings................................................. $ 4,782 $ -- $ 4,782
------- ------ -------
------- ------ -------
Earnings Per Share........................................... $ 0.64
-------
-------
Weighted Average Number of Common Shares
Outstanding (in thousands)................................. 7,500(A) 7,500
------ -------
------ -------
</TABLE>
- ---------------
(A) To record the issuance and sale of 7,500,000 shares of ENSTAR Alaska Stock
(representing 100% of the equity attributable to the ENSTAR Alaska Group)
pursuant to the Offering.
(B) Based on the assumptions described above, the Available ENSTAR Alaska Group
Dividend Amount as of March 31, 1994, assuming no Retained Interest, would
be $59,680,000. For a description of the Available ENSTAR Alaska Group
Dividend Amount, see "Description of Capital Stock -- ENSTAR Alaska
Stock -- Dividends." For a description of the restrictions on the payment of
dividends contained in the Company's and APC's debt instruments, see
"Dividend Policy."
38
<PAGE> 40
ENSTAR ALASKA GROUP
UNAUDITED PRO FORMA CONDENSED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
PRO
CONFORMING FORMA
HISTORICAL ADJUSTMENTS COMBINED
---------- ----------- --------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues................................................. $107,244 $ -- $107,244
Costs of Operations:
Operating costs........................................ 80,778 -- 80,778
Depreciation and amortization.......................... 7,511 -- 7,511
-------- -------- --------
Operating Profit......................................... 18,955 -- 18,955
Interest Expense......................................... 6,298 -- 6,298
Interest Income and Other................................ (239) -- (239)
-------- -------- --------
Earnings Before Income Taxes............................. 12,896 -- 12,896
Income Taxes............................................. 5,848 -- 5,848
-------- -------- --------
Net Earnings............................................. $ 7,048 $ -- $ 7,048
-------- -------- --------
-------- -------- --------
Earnings Per Share....................................... $ 0.94
--------
--------
Weighted Average Number of Common Shares
Outstanding (in thousands)............................. 7,500(A) 7,500
-------- --------
-------- --------
</TABLE>
- ---------------
(A) To record the issuance and sale of 7,500,000 shares of ENSTAR Alaska Stock
(representing 100% of the equity attributable to the ENSTAR Alaska Group)
pursuant to the Offering.
39
<PAGE> 41
ENSTAR ALASKA GROUP
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth certain selected financial data of the
ENSTAR Alaska Group at the dates and for each of the periods indicated. This
selected financial data should be read in conjunction with the combined
financial statements and notes thereto of the ENSTAR Alaska Group set forth
herein beginning on page F-1.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------
1994 1993 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
SELECTED INCOME STATEMENT DATA:
Revenues:
Gas sales............................ $ 35,314 $ 38,169 $102,930 $105,511 $128,439
Transportation....................... 952 1,023 4,097 4,087 1,176
Other................................ -- -- 217 -- --
-------- -------- -------- -------- --------
36,266 39,192 107,244 109,598 129,615
Cost of gas sold........................ 19,250 22,528 59,898 59,999 81,935
-------- -------- -------- -------- --------
Operating margin........................ 17,016 16,664 47,346 49,599 47,680
Operations and maintenance expense...... 5,139 5,223 18,955 18,032 17,753
Management fees paid to Seagull
Energy............................... 481 486 1,925 1,944 1,925
Depreciation and amortization........... 1,949 1,856 7,511 7,184 6,978
-------- -------- -------- -------- --------
Operating profit........................ 9,447 9,099 18,955 22,439 21,024
Interest expense........................ (1,468) (1,673) (6,298) (6,074) (5,955)
Interest income and other............... 56 96 239 293 367
-------- -------- -------- -------- --------
Earnings before income taxes and
cumulative effect of changes in
accounting principles................ $ 8,035 $ 7,522 $ 12,896 $ 16,658 $ 15,436
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net earnings (1)........................ $ 4,782 $ 4,552 $ 7,048 $ 12,039 $ 9,626
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
CAPITAL EXPENDITURES...................... $ 1,385 $ 1,340 $ 10,094 $ 9,024 $ 10,492
DIVIDENDS PAID TO THE COMPANY:
Regular................................. $ 2,250 $ 2,000 $ 8,000 $ 8,000 $ 8,000
Special................................. -- -- -- -- 20,000
SELECTED BALANCE SHEET DATA (END OF
PERIOD):
Property, plant and equipment--net...... $161,140 $159,577 $162,004 $160,359 $160,136
Total assets............................ 187,456 189,115 185,701 186,519 189,059
Long-term debt.......................... 62,816 67,039 62,787 67,011 62,487
Common equity........................... 60,430 62,943 59,362 61,767 59,279
OPERATING DATA:
Heating degree days (2)................. 3,887 3,908 9,382 10,653 10,178
Volumes (Bcf):
Gas sold............................. 11.1 10.8 28.9 30.9 35.3
Gas transported...................... 2.4 2.7 11.3 10.2 4.3
Combined............................. 13.5 13.5 40.2 41.1 39.6
Margins ($ per Mcf):
Gas sold............................. $ 1.45 $ 1.45 $ 1.49 $ 1.47 $ 1.32
Gas transported...................... 0.39 0.37 0.36 0.40 0.27
Combined............................. 1.26 1.23 1.17 1.20 1.20
Customers (end of period)............... 88,576 86,653 88,198 86,413 84,816
</TABLE>
- ---------------
(1) 1992 includes the cumulative effect of two changes in accounting principles
aggregating $1.6 million. Effective January 1, 1992, the ENSTAR Alaska Group
adopted SFAS No. 109, Accounting for Income Taxes, and SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions.
(2) A measure of weather severity calculated by subtracting the mean temperature
for each day from 65 degrees Fahrenheit. More heating degree days equate to
colder weather. The average annual heating degree days for the 30 years, 10
years and 5 years ended December 31, 1993 were 10,431, 10,101 and 10,324,
respectively. The average first quarter heating degree days for the 30
years, 10 years and 5 years ended December 31, 1993 were 4,057, 3,917 and
4,177, respectively.
40
<PAGE> 42
ENSTAR ALASKA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (UNAUDITED)
BASIS OF PRESENTATION
On March 11, 1994, the Company announced that it would seek shareholder
approval of an amendment to the Company's Articles of Incorporation (the "ENSTAR
Alaska Stock Proposal") that upon implementation would result in (i) the
creation of a new class of common stock, the ENSTAR Alaska Stock, intended to
reflect separately the performance of the ENSTAR Alaska Group and (ii) the
amendment of certain terms of the existing Seagull Common Stock to allow for the
issuance of the ENSTAR Alaska Stock. This capital structure has not been
reflected in these financial statements. Implementation of the ENSTAR Alaska
Stock Proposal will not result in any adjustment to the carrying amounts of the
assets, liabilities or common equity presented in the accompanying combined
financial statements.
Because the ENSTAR Alaska Stock is intended to reflect separately the
performance of the ENSTAR Alaska Group, the Seagull Common Stock will reflect
the performance of Seagull Energy, the Company's remaining two business segments
that consist of (i) natural gas exploration, development and production, which
is the Company's primary business focus, and (ii) pipeline and marketing
operations. The ENSTAR Alaska Stock Proposal will be submitted to the Company's
shareholders for their consideration and approval.
The financial statements for the ENSTAR Alaska Group and for Seagull Energy
comprise all of the accounts included in the corresponding consolidated
financial statements of the Company. The ENSTAR Alaska Group financial
statements have been prepared based upon methods that management believes to be
reasonable and appropriate and reflect the combined historical financial
position, results of operations and cash flows of the ENSTAR Alaska Group.
Consistent with the Articles of Amendment to the Articles of Incorporation in
connection with the ENSTAR Alaska Stock Proposal and relevant policies, such
business group financial statements could also include contingent liabilities
that are not separately identified with the operations of the ENSTAR Alaska
Group.
For additional information with respect to the ENSTAR Alaska Stock
Proposal, see "Basis of Presentation" included in Note 1 of notes to the
accompanying combined financial statements of the ENSTAR Alaska Group for the
years ended December 31, 1993, 1992 and 1991 beginning on page F-6.
GENERAL
Operating profit for the ENSTAR Alaska Group is affected by weather,
regulatory action and customer growth and economic conditions in its market
area. The ENSTAR Alaska Group's business is seasonal with approximately 65% of
its sales made in the first and fourth quarters of each year. Since ENSTAR
Alaska Group's customer base is primarily residential and commercial, its
results of operations are significantly influenced by the severity of the
weather in its service area. The Company expects customer growth to continue to
be relatively modest. During the ENSTAR Alaska Group's 1993 summer construction
season, approximately 55 miles of new distribution pipeline were installed to
connect some 1,800 net new customers. The new customers were primarily
residential customers added by extending the ENSTAR Alaska Group's distribution
system into areas not previously serviced.
Because the ENSTAR Alaska Group's operations are wholly intrastate, it is
not subject to or affected by Order 636 or any other economic regulation by the
Federal Energy Regulatory Commission. The rates, services and operations of the
ENSTAR Alaska Group are subject to regulation by the APUC. In May 1986 the APUC
granted the ENSTAR Alaska Group an aggregate rate increase of 20.27% and
authorized a regulatory rate of return on common equity of 15.65%. The ENSTAR
Alaska Group has no significant regulatory issues pending before the APUC.
The ENSTAR Alaska Group currently purchases all of its natural gas under
long-term contracts with two major international oil and gas companies in which
the price is indexed to crude oil futures contracts. These contracts provide for
delivery of all the ENSTAR Alaska Group's gas requirements with varying daily
41
<PAGE> 43
deliverability. Prices include a base price plus reimbursement for any severance
taxes, with annual adjustments based upon changes in the price of certain traded
oil futures contracts. Both contracts have been approved by the APUC.
The ENSTAR Alaska Group supplies natural gas to its customers at prices
that at the present time economically preclude substitution of alternative
fuels. Since the ENSTAR Alaska Group's long-term supply contracts include prices
that fluctuate based on oil indices, a competitive margin favoring natural gas
over oil-based energy sources is expected to continue. However, there is no
assurance that the competitive advantage over other alternative fuels will not
be reduced or eliminated by the development of new energy technology or by
changes in the price of oil or refined products.
Because the ENSTAR Alaska Group's sales prices are adjusted to include the
projected cost of its natural gas, there has been and is expected to be little
or no impact on margins derived from the ENSTAR Alaska Group's gas sales as a
result of fluctuations in fuel oil prices due to world-wide political events and
changing market conditions.
Based on gas purchases during the 12 months ended December 31, 1993, which
are not necessarily indicative of the volume of future purchases, the gas
reserves committed to the ENSTAR Alaska Group under its gas contracts would have
a current reserve life index of approximately 14 years.
42
<PAGE> 44
The following discussion is intended to assist in an understanding of the
ENSTAR Alaska Group's financial position and results of operations for each of
the periods indicated. The ENSTAR Alaska Group's financial statements and the
notes thereto included herein contain detailed information that should be
referred to in conjunction with the following discussion.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
Summarized financial and operating data for the ENSTAR Alaska Group for the
years ended December 31, 1993, 1992 and 1991 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENT CHANGE
---------------------------------- --------------------
1993 1992 1991 1992-'93 1991-'92
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT PER
UNIT AMOUNTS)
Revenues:
Gas sales............................... $102,930 $105,511 $128,439 - 2 - 18
Transportation.......................... 4,097 4,087 1,176 -- +248
Other................................... 217 -- -- N/A --
-------- -------- -------- -------- --------
107,244 109,598 129,615 - 2 - 15
Cost of gas sold.......................... 59,898 59,999 81,935 -- - 27
-------- -------- -------- -------- --------
Operating margin.......................... 47,346 49,599 47,680 - 5 +4
Operations and maintenance expense........ 18,955 18,032 17,753 + 5 + 2
Management fees paid to Seagull Energy.... 1,925 1,944 1,925 - 1 + 1
Depreciation and amortization............. 7,511 7,184 6,978 + 5 + 3
-------- -------- -------- -------- --------
Operating profit.......................... 18,955 22,439 21,024 -16 + 7
Interest expense.......................... 6,298 6,074 5,955 + 4 + 2
Interest income and other................. (239) (293) (367) -18 - 20
-------- -------- -------- -------- --------
Earnings before income taxes and
cumulative effect of changes in
accounting principles................... $ 12,896 $ 16,658 $ 15,436 -23 + 8
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net earnings.............................. $ 7,048 $ 12,039 $ 9,626 -41 + 25
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
OPERATING DATA:
Heating degree days (*)................... 9,382 10,653 10,178 -12 + 5
Volumes (Bcf):
Gas sold................................ 28.9 30.9 35.3 - 6 - 12
Gas transported......................... 11.3 10.2 4.3 +11 +137
Combined................................ 40.2 41.1 39.6 - 2 + 4
Margins ($ per Mcf):
Gas sold................................ 1.49 1.47 1.32 + 1 + 11
Gas transported......................... 0.36 0.40 0.27 -10 + 48
Combined................................ 1.17 1.20 1.20 - 3 --
Customers (end of year)................... 88,198 86,413 84,816 + 2 + 2
</TABLE>
- ---------------
(*) A measure of weather severity calculated by subtracting the mean temperature
for each day from 65 degrees Fahrenheit. More heating degree days equate to
colder weather. The average annual heating degree days for the 30 years, 10
years and 5 years ended December 31, 1993 were 10,431, 10,101 and 10,324,
respectively.
43
<PAGE> 45
1993 Results Compared to 1992
Operating margin declined 5% in 1993 compared to 1992 primarily as a result
of a decline in higher margin, weather sensitive gas sales volumes due to
unusually warm weather in the ENSTAR Alaska Group's market area. Heating degree
days declined 12% in 1993 to 9,382 compared with 10,653 heating degree days in
1992. Since sales prices are adjusted to include the projected cost of gas sold,
operating margin is not materially impacted by changes in the price the ENSTAR
Alaska Group pays for its gas supply.
The 6% decline in sales volumes was primarily due to the warmer weather.
However, a net increase of 1,800 sales customers during 1993 partially offset
the negative effects of the weather. Transported volumes increased 11% in 1993
compared to 1992 primarily due to the addition of an industrial customer served
under a new interruptible transportation tariff.
Earnings before income taxes was 23% lower in 1993 compared to 1992
primarily as a result of the decrease in operating margin discussed above. In
addition, operations and maintenance expense, depreciation and amortization and
interest expense all increased slightly in 1993. Operations and maintenance
expense was higher due to increased payroll and payroll burden costs and ad
valorem taxes. The higher payroll costs resulted largely from the settlement of
a collective bargaining agreement in early 1993. Depreciation and amortization
increased in 1993 due to the higher depreciable asset base resulting from the
ENSTAR Alaska Group's capital expenditure program. Interest expense was higher
in 1993 as a result of the mid-1992 private placement of long-term debt of $50
million.
1993 net earnings reflects an increase in the ENSTAR Alaska Group's income
tax provision of approximately $800,000 resulting from a 1% increase in the
federal corporate tax rate from 34% to 35% called for in recently enacted tax
legislation. In addition, net earnings for 1992 included the cumulative effect
of two changes in accounting principles. Effective January 1, 1992, the ENSTAR
Alaska Group adopted SFAS No. 109, Accounting for Income Taxes, and SFAS No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions. The
cumulative effect of these accounting changes as of January 1, 1992 resulted in
an increase in net earnings of approximately $1.6 million as reflected in the
ENSTAR Alaska Group's combined statements of earnings for the year ended
December 31, 1992.
1992 Results Compared to 1991
Operating margin was 2% higher in 1992 compared to 1991 primarily as a
result of higher heating customer demand due to colder temperatures and an
increase in customers, primarily residential customers. Heating degree days and
combined sales and transported volumes increased 5% and 4%, respectively, in
1992 compared to 1991.
Sales volumes decreased 12% and transported volumes increased 137% because
one large utility customer that was previously a sales customer began purchasing
gas directly from gas producers in the fourth quarter of 1991. The ENSTAR Alaska
Group transports the utility's gas supplies for a transportation fee that
approximates the margin that would have been earned had the customer remained a
sales customer rather than becoming a transportation customer. Accordingly,
combined volumes and operating margin were not materially affected by these
factors in 1992. Because the transport fee for this large utility customer was
greater than the average transport fee for other customers, but lower than the
average operating margin for ENG's other sales customers, the operating margin
per Mcf increased for both sales and transport customers in 1992 compared to
1991.
Earnings before income taxes was 8% higher in 1992 compared to 1991 due to
the increase in operating margin partially offset by increased operations and
maintenance expense, depreciation and amortization and interest expense.
Operations and maintenance expense was 2% higher than the previous year
primarily due to increases in payroll-related costs. Depreciation and
amortization increased due to the higher depreciable asset base resulting from
the ENSTAR Alaska Group's capital expenditure program. Interest expense
increased slightly due to the mid-1992 private placement of long-term debt of
$50 million.
Net earnings for 1992 included the cumulative effect of the accounting
changes described above.
44
<PAGE> 46
QUARTERS ENDED MARCH 31, 1994 AND 1993
Summarized financial and operating data for the ENSTAR Alaska Group for the
quarters ended March 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------- PERCENT
1994 1993 CHANGE
------- ------- -------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS
EXCEPT PER UNIT
AMOUNTS)
Revenues:
Gas sales........................................ $35,314 $38,169 - 7
Transportation................................... 952 1,023 - 7
------- ------- -------
36,266 39,192 - 7
Cost of gas sold................................... 19,250 22,528 -15
------- ------- -------
Operating margin................................... 17,016 16,664 + 2
Operations and maintenance expense................. 5,139 5,223 - 2
Management fees paid to Seagull Energy............. 481 486 - 1
Depreciation and amortization...................... 1,949 1,856 + 5
------- ------- -------
Operating profit................................... 9,447 9,099 + 4
Interest expense................................... 1,468 1,673 -12
Interest income and other.......................... (56) (96) -42
------- ------- -------
Earnings before income taxes....................... $ 8,035 $ 7,522 + 7
------- ------- -------
------- ------- -------
Net earnings....................................... $ 4,782 $ 4,552 + 5
------- ------- -------
------- ------- -------
OPERATING DATA:
Heating degree days................................ 3,887 3,908 - 1
Volumes (Bcf):
Gas sold......................................... 11.1 10.8 + 3
Gas transported.................................. 2.4 2.7 -11
Combined......................................... 13.5 13.5 --
Margins ($ per Mcf):
Gas sold......................................... 1.45 1.45 --
Gas transported.................................. 0.39 0.37 + 5
Combined......................................... 1.26 1.23 + 2
Customers (end of period).......................... 88,576 86,653 + 2
</TABLE>
1994 Quarterly Results Compared to 1993
Operating margin increased 2% in 1994 compared to 1993. An increase in
higher margin gas sales volumes offset a decline in lower margin transportation
volumes. The increase in gas sales volumes resulted from the addition of 1,900
sales customers since the end of the first quarter in 1993, which more than
offset the negative effects of slightly warmer weather in the 1994 quarter.
Transportation volumes declined in 1994 primarily as a result of production
difficulties experienced by one gas supplier.
Net earnings was higher in the 1994 quarter in comparison to the 1993
period primarily as a result of the increase in operating margin discussed
above. In addition, declines in operations and maintenance and interest expense
more than offset increases in depreciation and amortization and income taxes.
Operations and maintenance expense was lower due primarily to lower trade
organization membership fees and bad debt expense. Interest expense declined 12%
as a result of debt principal repayments. Depreciation and amortization
increased in the 1994 quarter due to the higher depreciable asset base resulting
from the ENSTAR Alaska Group's capital expenditures program. Income taxes were
higher in 1994 primarily due to an increase in earnings before income taxes.
45
<PAGE> 47
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENT CHANGE
--------------------------- -------------------
1993 1992 1991 1992-'93 1991-'92
------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities............................... $24,603 $10,525 $27,468 +134 -62
Capital expenditures....................... 10,094 9,024 10,492 +12 -14
Dividends paid to the Company:
Regular.................................. 8,000 8,000 8,000 -- --
Special.................................. -- -- 20,000 -- -100
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------- PERCENT
1994 1993 CHANGE
------ ------ ----
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net cash provided by operating activities..... $9,653 $9,683 --
Capital expenditures.......................... 1,385 1,340 + 3
Regular dividends paid to the Company......... 2,250 2,000 +13
</TABLE>
Changes in net cash provided by operating activities from period to period
occurred primarily due to fluctuations in working capital which are the result
of the timing of the payment of certain accounts payable and collection of
certain accounts receivable. The ENSTAR Alaska Group has a $5 million revolving
line of credit, none of which was utilized during 1993. This is a one-year line
of credit that has historically been renewed annually and is used for seasonal
working capital requirements.
The ENSTAR Alaska Group is engaged in a continuous construction program
with the majority of construction activities taking place during the summer and
early fall. The decline in capital expenditures for the year ended December 31,
1992 in comparison to the 1993 and 1991 levels was due in part to a shorter
summer construction season resulting from colder weather in the ENSTAR Alaska
Group's market area during 1992. Approximately 43 miles of distribution pipeline
were installed to connect new customers during the 1992 summer construction
season, in comparison to approximately 55 miles and 60 miles installed during
the 1993 and 1991 seasons, respectively. Capital expenditures for the first
quarter of 1994 were basically unchanged from the 1993 period. Current plans for
1994 call for capital expenditures of approximately $10.2 million for the ENSTAR
Alaska Group, which are expected to be financed by cash flows from operations.
Management believes capital expenditures required on an annual basis in the
foreseeable future for betterments and expansion will approximate historical
levels.
The ENSTAR Alaska Group has paid a dividend in every year since 1972.
Regular dividends paid to the Company of $8 million in each of the years 1993,
1992 and 1991 and $2.25 million and $2.0 million in the first quarter of 1994
and 1993, respectively, were financed with cash flows from operations. A special
dividend of $20 million was paid to the Company in 1991, financed with a portion
of the proceeds from a $40 million unsecured credit facility entered into in
July 1991. The remaining proceeds were used to repay debt. The ENSTAR Alaska
Group's total debt to total capitalization ratio increased from approximately
39.4% as of December 31, 1990 to approximately 53.6% as of December 31, 1991
primarily as a result of these transactions. The ENSTAR Alaska Group's total
debt to total capitalization ratio was 52.0% and 53.4% as of December 31, 1993
and 1992, respectively, and 51.6% and 52.9% as of March 31, 1994 and 1993,
respectively.
Future dividends on the ENSTAR Alaska Stock will be paid at the discretion
of the Board of Directors based primarily upon the financial condition, results
of operations and business requirements of the ENSTAR Alaska Group and, to a
lesser extent, the Company as a whole. The Company's ability to pay dividends on
ENSTAR Alaska Stock will be partially dependent on the availability of APC's
cash flows to the Company by way of dividends. The senior unsecured notes of APC
provide for restrictions on dividends, additional borrowings and purchases,
redemptions or retirements of shares of capital stock, other than in stock of
APC. Under the most restrictive of these provisions, approximately $14.3 million
was available for the making of restricted investments, restricted payments and
restricted subordinated debt payments by APC as of
46
<PAGE> 48
March 31, 1994. Amounts available for dividends on the ENSTAR Alaska Stock are
further limited by covenants in the Company's bank credit agreements and other
financing documents. For a discussion of APC's debt instruments and financing
activities, see Note 4 of Notes to the accompanying combined financial
statements of the ENSTAR Alaska Group for the years ended December 31, 1993,
1992 and 1991 beginning on page F-6. For a discussion of the Company's bank
credit agreements and other financing documents, see Note 6 of Notes to the
Company's financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 1993, which is incorporated herein by
reference. Under the Revolver, as of March 31, 1994, approximately $27.5 million
was generally available for payment of dividends on or repurchases of capital
stock of the Company. In addition, the Revolver contains a special "basket" with
respect to dividend payments on the ENSTAR Alaska Stock. Pursuant to this
basket, as of March 31, 1994, $24.8 million was available for payment of
dividends on the ENSTAR Alaska Stock. Dividends will also be limited to the
lesser of (i) legally available funds of the Company under Texas law and (ii)
the Available ENSTAR Alaska Group Dividend Amount, as defined. See "Dividend
Policy" and "Description of Capital Stock -- ENSTAR Alaska Stock -- Dividends."
The ENSTAR Alaska Group believes that internally generated funds and APC's
access to debt markets will provide necessary working capital and liquidity for
capital expenditures, required debt payments and other cash needs in the
foreseeable future. In addition, a portion of the capital expenditures required
to expand ENG's distribution system into new areas is funded with non-interest
bearing advances from prospective customers.
To date, compliance with applicable environmental and safety regulations by
the ENSTAR Alaska Group has not required any significant capital expenditures or
materially affected its business or earnings. The ENSTAR Alaska Group believes
it is in substantial compliance with environmental and safety regulations and
foresees no material expenditures in the future; however, the ENSTAR Alaska
Group is unable to predict the impact that compliance with future regulations
may have on capital expenditures, earnings and competitive position.
The ENSTAR Alaska Group is a party to ongoing litigation in the normal
course of business. Management regularly analyzes current information and, as
necessary, provides accruals for probable liabilities on the eventual
disposition of these matters. While the outcome of lawsuits or other proceedings
against the ENSTAR Alaska Group cannot be predicted with certainty, management
believes that the effect on the combined financial condition and results of
operations, if any, will not be material.
47
<PAGE> 49
SEAGULL ENERGY CORPORATION
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma condensed statement of earnings for the year ended
December 31, 1993 gives effect to (i) the Seagull Canada Acquisition, financed
initially under the Canadian Credit Agreement and the Revolver, and (ii) the
issuance and sale of 7,500,000 shares of ENSTAR Alaska Stock (representing 100%
of the equity attributable to the ENSTAR Alaska Group) in the Offering and the
application of the estimated net proceeds therefrom of $127 million to repay
amounts borrowed under the Revolver, as if both events had occurred on January
1, 1993. The unaudited pro forma condensed statement of earnings for the three
months ended March 31, 1994 gives effect to the pro forma transactions and
events described in clause (ii) above as if the sale had occurred on January 1,
1993. Actual results of Seagull Canada's operations for the first quarter of
1994 are reflected in the Company's unaudited consolidated financial statements.
The unaudited pro forma condensed balance sheet as of March 31, 1994 gives
effect to the issuance and sale of 7,500,000 shares of ENSTAR Alaska Stock
(representing 100% of the equity attributable to the ENSTAR Alaska Group) in the
Offering and the application of the estimated net proceeds therefrom of $127
million to repay amounts borrowed under the Revolver as if the sale had occurred
on March 31, 1994.
The following unaudited pro forma information has been included as required
by the rules of the Commission and is provided for comparative purposes only.
The unaudited pro forma information presented is based on the respective
historical consolidated financial statements of the Company and Novalta and
should be read in conjunction with such financial statements and the related
notes thereto. The historical consolidated financial statements of Novalta as
presented do not reflect the effect of certain transactions between Novalta and
NOVA Corporation of Alberta and its subsidiaries that were completed prior to
the closing of the Seagull Canada Acquisition, such as the elimination of
intercompany debt balances. The effect of such transactions are reflected in the
conforming adjustments to the unaudited pro forma condensed financial
statements. The unaudited pro forma information presented does not purport to be
indicative of actual results, if the transactions had occurred on the dates or
for the periods indicated, or of future results.
The financial statements of Novalta for the years ended December 31, 1993
and 1992 are incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K dated January 4, 1994, as amended.
48
<PAGE> 50
SEAGULL ENERGY CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENT OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
PRO
CONFORMING FORMA
HISTORICAL ADJUSTMENTS COMBINED
---------- ----------- --------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
Revenues............................................. $127,063 $ -- $127,063
Costs of Operations:
Operating costs.................................... 53,214 -- 53,214
Depreciation, depletion and amortization........... 39,020 -- 39,020
-------- ------- --------
Operating Profit..................................... 34,829 -- 34,829
General and Administrative Expense................... 2,991 -- 2,991
Interest Expense..................................... 11,545 (1,485)(D) 10,060
Interest Income and Other............................ (107) -- (107)
-------- ------- --------
Earnings Before Income Taxes......................... 20,400 1,485 21,885
Income Taxes......................................... 7,485 520(E) 8,005
-------- ------- --------
Net Earnings......................................... $ 12,915 $ 965 $ 13,880
-------- ------- --------
-------- ------- --------
Earnings Per Share for Seagull Energy Corporation
Common Stock....................................... $ 0.35
--------
--------
Weighted Average Number of Seagull Energy Corporation
Common Shares Outstanding (in thousands)........... 36,928
--------
--------
Net Earnings Applicable to Seagull Common Stock...... $ 9,098
--------
--------
Earnings Per Share for Seagull Common Stock.......... $ 0.25
--------
--------
Weighted Average Number of Shares Outstanding of
Seagull Common Stock (in thousands)................ 36,928(F) 36,928
------- --------
------- --------
Net Earnings Applicable to ENSTAR Alaska Stock....... $ 4,782
--------
--------
Earnings Per Share for ENSTAR Alaska Stock........... $ 0.64
--------
--------
Weighted Average Number of Shares Outstanding of
ENSTAR Alaska Stock (in thousands)................. 7,500(G) 7,500
------- --------
------- --------
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Statements of Earnings.
49
<PAGE> 51
SEAGULL ENERGY CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
SEAGULL NOVALTA
ENERGY RESOURCES CONFORMING PRO FORMA
CORPORATION INC.(H) ADJUSTMENTS COMBINED
----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................................ $ 377,165 $32,358 $ -- $ 409,523
Costs of Operations:
Operating costs............................... 184,620 12,973 399 (A) 197,992
Depreciation, depletion and amortization...... 116,556 9,371 (9,371)(B) 131,772
15,216 (C)
----------- --------- ----------- ---------
Operating Profit................................ 75,989 10,014 (6,244) 79,759
General and Administrative Expense.............. 11,666 -- -- 11,666
Interest Expense................................ 36,753 1,083 (1,083)(B) 39,973
3,220 (D)
Interest Income and Other....................... (5,708) (3,102) -- (8,810)
----------- --------- ----------- ---------
Earnings Before Income Taxes.................... 33,278 12,033 (8,381) 36,930
Income Taxes.................................... 6,080 4,650 (4,650)(B) 9,240
3,160 (E)
----------- --------- ----------- ---------
Net Earnings.................................... $ 27,198 $ 7,383 $(6,891) $ 27,690
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Earnings Per Share for Seagull Energy
Corporation Common Stock...................... $ 0.76
-----------
-----------
Weighted Average Number of Seagull Energy
Corporation Common Shares Outstanding
(in thousands)................................ 35,790
-----------
-----------
Net Earnings Applicable to Seagull Common
Stock......................................... $ 20,642
---------
---------
Earnings Per Share for Seagull Common Stock..... $ 0.58
---------
---------
Weighted Average Number of Shares Outstanding
of Seagull Common Stock (in thousands)........ 35,790 (F) 35,790
----------- ---------
----------- ---------
Net Earnings Applicable to ENSTAR Alaska
Stock......................................... $ 7,048
---------
---------
Earnings Per Share for ENSTAR Alaska Stock...... $ 0.94
---------
---------
Weighted Average Number of Shares Outstanding
of ENSTAR Alaska Stock (in thousands)......... 7,500 (G) 7,500
----------- ---------
----------- ---------
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Statements of Earnings.
50
<PAGE> 52
SEAGULL ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED STATEMENTS OF EARNINGS
(A) To adjust general operating expenses to give effect to the Company's
increased personnel, rent, consultation, professional and other expenses
expected as a result of the Seagull Canada Acquisition.
(B) To eliminate depreciation, depletion and amortization, interest expense
and income taxes of Novalta.
(C) To adjust depreciation, depletion and amortization to give effect to the
Seagull Canada Acquisition.
(D) To adjust interest expense to give effect to the Seagull Canada
Acquisition initially financed under the Canadian Credit Agreement and the
Revolver, the reduction of the Revolver with the proceeds from the
issuance and sale of the ENSTAR Alaska Stock pursuant to the Offering and
the amortization of loan acquisition costs relating to the Canadian Credit
Agreement.
The pro forma interest expense adjustments were calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1994 DECEMBER 31, 1993
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Pro forma change in outstanding balance --
Canadian Credit Agreement
Seagull Canada Acquisition.................. $151,938
Estimated average interest rate............... 4.45%
--------
Pro forma interest expense on Canadian Credit
Agreement................................... 6,758
Pro forma change in outstanding balance --
Revolver
Seagull Canada Acquisition.................. 49,826
Proceeds from sale of ENSTAR Alaska Stock... (127,000) (127,000)
-------- --------
(127,000) (77,174)
Estimated average interest rate............... 4.68% 4.83%
-------- --------
Pro forma interest expense on the decreased
Revolver.................................... (1,485) (3,731)
Pro forma amortization of loan acquisition
costs related to the Canadian Credit
Agreement................................... 193
------- -------
$(1,485) $ 3,220
------- -------
------- -------
</TABLE>
(E) To adjust income taxes for the items discussed in Notes (A) through (D)
above.
(F) To reflect the amendment of the terms of the Seagull Common Stock to
provide for the issuance of the ENSTAR Alaska Stock.
(G) To record the issuance and sale of 7,500,000 shares of ENSTAR Alaska Stock
(representing 100% of the equity attributable to the ENSTAR Alaska Group)
pursuant to the Offering.
(H) Revenues, expenses and net income of Novalta were translated using the
average conversion rate during 1993 of $0.7752 per Canadian dollar(C$). A
reconciliation of the net income of Novalta as set forth in the historical
financial statements to net earnings provided in the pro forma financial
statements is as follows, in thousands except conversion rate:
<TABLE>
<S> <C>
Net income per historical financial statements presented in
accordance with U.S. generally accepted accounting
principles.................................................... C$ 9,524
Times average conversion rate.................................. US$ 0.7752/C$
--------------
Net earnings provided in the pro forma financial statements.... US$ 7,383
--------------
--------------
</TABLE>
51
<PAGE> 53
SEAGULL ENERGY CORPORATION
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
MARCH 31, 1994
<TABLE>
<CAPTION>
CONFORMING PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 7,760 $ -- $ 7,760
Accounts receivable, net......................... 111,863 -- 111,863
Other............................................ 9,242 -- 9,242
---------- -------- ----------
Total Current Assets..................... 128,865 -- 128,865
Property, Plant and Equipment -- at cost........... 1,509,341 -- 1,509,341
Accumulated Depreciation, Depletion and
Amortization..................................... 385,017 -- 385,017
---------- -------- ----------
1,124,324 -- 1,124,324
Other Assets....................................... 64,389 -- 64,389
---------- -------- ----------
Total Assets............................. $1,317,578 $ -- $1,317,578
---------- -------- ----------
---------- -------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................. $ 89,822 $ -- $ 89,822
Current maturities of long-term debt............. 1,536 -- 1,536
Other............................................ 26,410 -- 26,410
---------- -------- ----------
Total Current Liabilities................ 117,768 -- 117,768
Long-Term Debt..................................... 632,363 (127,000)(A) 505,363
Other Noncurrent Liabilities....................... 62,829 -- 62,829
Deferred Income Taxes.............................. 54,474 -- 54,474
Shareholders' Equity:
Seagull Common Stock............................. 3,639 -- 3,639
ENSTAR Alaska Stock.............................. -- 750 (A) 750
Additional paid-in capital....................... 324,281 126,250 (A) 450,531
Retained earnings................................ 133,628 -- 133,628
Foreign currency translation adjustment.......... (2,240) -- (2,240)
Less -- note receivable from ESOP................ (6,029) -- (6,029)
Less -- Seagull Common Stock held in
Treasury, at cost............................. (3,135) -- (3,135)
---------- -------- ----------
Total Shareholders' Equity............... 450,144 127,000 577,144
---------- -------- ----------
Total Liabilities and Shareholders'
Equity................................. $1,317,578 $ -- $1,317,578
---------- -------- ----------
---------- -------- ----------
</TABLE>
- ---------------
(A) To record the issuance and sale of 7,500,000 shares of ENSTAR Alaska Stock
(representing 100% of the equity attributable to the ENSTAR Alaska Group)
pursuant to the Offering and the corresponding decrease in long-term debt
outstanding resulting from the application of the net proceeds therefrom.
See "Underwriting."
52
<PAGE> 54
SEAGULL ENERGY CORPORATION
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth certain selected financial data of the
Company at the dates and for each of the periods indicated. This selected
financial data should be read in conjunction with the consolidated financial
statements and notes thereto of the Company set forth in the Company's Annual
Report on Form 10-K for the year ended December 31, 1993 and Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994, which are incorporated by
reference herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------
1994 1993 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
SELECTED INCOME STATEMENT DATA(1):
Revenues........................... $ 127,063 $ 103,192 $ 377,165 $ 238,829 $ 248,537
Costs of operations:
Operating costs................. 49,031 50,147 167,355 135,810 156,225
Exploration charges............. 4,183 5,539 17,265 9,905 9,227
Depreciation, depletion and
amortization.................. 39,020 28,085 116,556 63,231 52,902
---------- ---------- ---------- ---------- ---------
92,234 83,771 301,176 208,946 218,354
---------- ---------- ---------- ---------- ---------
Operating profit................... 34,829 19,421 75,989 29,883 30,183
Other (income) expense:
General and administrative
expenses...................... 2,991 3,498 11,666 10,099 8,427
Interest expense................ 11,545 10,535 36,753 17,574 17,875
Interest income and other....... (107) (505) (5,708) (4,705) (1,426)
---------- ---------- ---------- ---------- ---------
14,429 13,528 42,711 22,968 24,876
---------- ---------- ---------- ---------- ---------
Earnings before income taxes and
cumulative effect of changes in
accounting principles........... 20,400 5,893 33,278 6,915 5,307
Income taxes....................... 7,485 2,040 6,080 2,500 200
---------- ---------- ---------- ---------- ---------
Earnings before cumulative effect of
changes in accounting
principles...................... 12,915 3,853 27,198 4,415 5,107
Cumulative effect of changes in
accounting principles(2)........ -- -- -- 2,273 --
---------- ---------- ---------- ---------- ---------
Net earnings....................... $ 12,915 $ 3,853 $ 27,198 $ 6,688 $ 5,107
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Earnings per share:
Before cumulative effect of
changes in accounting
principles.................... $ 0.35 $ 0.12 $ 0.76 $ 0.17 $ 0.23
Cumulative effect of changes in
accounting principles(2)...... -- -- -- 0.09 --
---------- ---------- ---------- ---------- ---------
Net earnings............... $ 0.35 $ 0.12 $ 0.76 $ 0.26 $ 0.23
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
CAPITAL EXPENDITURES(3).............. $ 23,548 $ 22,948 $ 112,042 $ 43,651 $ 71,709
SELECTED BALANCE SHEET DATA(1):
Property, plant and
equipment -- net................ $1,124,324 $ 927,211 $ 933,189 $ 937,802 $ 500,255
Total assets....................... 1,317,578 1,087,989 1,118,251 1,102,964 618,552
Long-term debt..................... 632,363 448,039 459,787 608,011 219,154
Shareholders' equity(4)(5)......... 450,144 411,819 439,379 243,673 235,797
</TABLE>
- ---------------
(1) Includes the Mid-Continent Assets since March 8, 1991, Seagull Mid-South
Inc. since December 31, 1992 and Seagull Energy Canada Ltd. since January 4,
1994, the respective dates of such acquisitions.
(2) Effective January 1, 1992, the Company adopted SFAS No. 109, Accounting for
Income Taxes, and SFAS No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions.
(3) Exclusive of consideration paid for the Mid-Continent Assets in 1991,
Seagull Mid-South Inc. and two gas gathering systems in 1992 and Seagull
Energy Canada Ltd. in 1994.
(4) Reflects the December 13, 1991 and February 5, 1993 issuance and sale of
3,000,000 shares and 10,120,000 shares, respectively, of Seagull Common
Stock pursuant to underwritten public offerings.
(5) The Company has not declared any cash dividends on Seagull Common Stock
since it became a public entity in 1981.
53
<PAGE> 55
SEAGULL ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
GENERAL
The following discussion is intended to assist in an understanding of the
Company's financial position and results of operations for each of the periods
indicated. The Company's financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1993
and Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, which
are incorporated by reference herein, contain detailed information that should
be referred to in conjunction with the following discussion.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
CONSOLIDATED HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENT CHANGE
-------------------------------- --------------------
1993 1992 1991 1992-'93 1991-'92
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Exploration and production................ $227,437 $ 91,991 $ 81,099 + 147 + 13
Pipeline and marketing.................... 42,484 37,240 37,823 + 14 - 2
Alaska transmission and distribution...... 107,244 109,598 129,615 - 2 - 15
-------- -------- -------- -------- --------
$377,165 $238,829 $248,537 + 58 - 4
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Operating profit (loss):
Exploration and production................ $ 42,969 $ (1,613) $ 1,275 +2,764 - 227
Pipeline and marketing.................... 14,065 9,057 7,884 + 55 + 15
Alaska transmission and distribution...... 18,955 22,439 21,024 - 16 + 7
-------- -------- -------- -------- --------
$ 75,989 $ 29,883 $ 30,183 + 154 - 1
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings before cumulative effect of changes
in accounting principles.................. $ 27,198 $ 4,415 $ 5,107 + 516 - 14
Net earnings................................ $ 27,198 $ 6,688 $ 5,107 + 307 + 31
Earnings per share:
Earnings before cumulative effect of
changes
in accounting principles............... $ 0.76 $ 0.17 $ 0.23 + 347 - 26
Cumulative effect of changes in accounting
principles............................. -- 0.09 -- - 100 N/A
-------- -------- -------- -------- --------
Net earnings.............................. $ 0.76 $ 0.26 $ 0.23 + 192 + 13
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net cash provided by operating activities
before changes in operating assets and
liabilities............................... $160,762 $ 81,368 $ 66,654 + 98 + 22
Net cash provided by operating activities... $119,761 $ 72,187 $ 69,773 + 66 + 3
Weighted average number of common shares
outstanding (in thousands)................ 35,790 25,583 22,692 + 40 + 13
</TABLE>
Revenues and Operating Profit are discussed in the respective segment
sections.
1993 Results Compared to 1992
The Company recorded a significant increase in net earnings for the year
ended December 31, 1993 versus the prior year due to increases in operating
profit, partially offset by increases in interest and general and administrative
expenses. Net earnings for 1993 includes a pre-tax gain of approximately $3.8
million relating to the sales of non-strategic producing properties. The
Company's 1993 net earnings also benefitted from a
54
<PAGE> 56
reduction in the Company's income tax provision due to utilization of
approximately $4.8 million in Internal Revenue Code Section 29 tax credits,
which more than offset a 1% increase in the federal corporate tax rate from 34%
to 35%. In addition, net earnings for the prior year included a $4.6 million
pre-tax settlement of litigation (the "Seismic Litigation Settlement") and the
cumulative effect of two changes in accounting principles described below. See
"Other (Income) Expense" and "Income Taxes" sections below.
Effective January 1, 1992, the Company adopted SFAS No. 109, Accounting for
Income Taxes, and SFAS No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. The cumulative effect of these accounting changes
as of January 1, 1992 resulted in a net increase in net earnings of
approximately $2.3 million, or $0.09 per share, as reflected in the Company's
consolidated statement of earnings for the year ended December 31, 1992.
Net cash provided by operating activities before and after changes in
operating assets and liabilities for 1993 increased substantially in comparison
to 1992 primarily as a result of significant increases in the Company's natural
gas production primarily due to the Company's acquisition of Arkla Exploration
Company (the "Mid-South Acquisition") in December 1992.
On June 4, 1993, the Company effected, in the form of a 100 percent stock
dividend, a two-for-one stock split (the "Stock Split") of all the issued shares
of Seagull Common Stock. The weighted average number of common shares
outstanding and per share amounts for all periods have been restated to reflect
the Stock Split. All share amounts included in the consolidated balance sheets
and consolidated statements of shareholders' equity as of dates prior to June 4,
1993 were not adjusted to reflect the Stock Split.
The increase in the weighted average number of common shares outstanding in
1993 over 1992 was due to the February 1993 sale of 5,060,000 shares (10,120,000
shares after the Stock Split) of Seagull Common Stock pursuant to an
underwritten public offering.
1992 Results Compared to 1991
The Company's net earnings for 1992 increased from 1991 primarily due to
the Seismic Litigation Settlement and the cumulative effect of two changes in
accounting principles described above, partially offset by higher general and
administrative expenses and a higher effective income tax rate. See "Other
(Income) Expense" and "Income Taxes" sections below.
Net cash provided by operating activities before changes in operating
assets and liabilities increased 22% in 1992 in comparison to 1991 primarily due
to increases in cash flows generated by the Company's Exploration and Production
("E&P") segment and the Seismic Litigation Settlement. Net cash provided by
operating activities was not materially different from the 1991 amount.
The weighted average number of common shares outstanding in 1992 reflects
the full year effect of the December 1991 sale of 1,500,000 shares (3,000,000
shares after the Stock Split) of Seagull Common Stock pursuant to an
underwritten public offering.
55
<PAGE> 57
EXPLORATION AND PRODUCTION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENT CHANGE
------------------------------ --------------------
1993 1992 1991 1992-'93 1991-'92
-------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS
EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Natural gas................................. $203,137 $70,689 $55,691 + 187 + 27
Oil and condensate.......................... 23,597 18,849 22,546 + 25 - 16
Natural gas liquids......................... 3,132 2,706 2,518 + 16 + 7
Other....................................... (2,429) (253) 344 - 860 - 174
-------- ------- ------- -------- --------
227,437 91,991 81,099 + 147 + 13
Lifting costs................................. 53,243 26,230 24,018 + 103 + 9
General operating expense..................... 10,408 4,614 3,933 + 126 + 17
Exploration charges........................... 17,265 9,905 9,227 + 74 + 7
Depreciation, depletion and amortization...... 103,552 52,855 42,646 + 96 + 24
-------- ------- ------- -------- --------
Operating profit (loss)....................... $ 42,969 $(1,613) $ 1,275 +2,764 - 227
-------- ------- ------- -------- --------
-------- ------- ------- -------- --------
OPERATING DATA:
Net daily production:
Natural gas (MMcf).......................... 279.5 104.2 90.2 + 168 + 16
Oil and condensate (Bbl).................... 3,868 2,769 3,043 + 40 - 9
Natural gas liquids (Bbl)................... 773 725 618 + 7 + 17
Combined (MMcfe)(*)......................... 307.4 125.2 112.1 + 146 + 12
Average sales prices:
Natural gas ($ per Mcf)..................... 1.99 1.85 1.69 + 8 + 9
Oil and condensate ($ per Bbl).............. 16.72 18.60 20.30 - 10 - 8
Natural gas liquids ($ per Bbl)............. 11.10 10.20 11.17 + 9 - 9
Combined ($ per Mcfe)(*).................... 2.03 2.01 1.97 + 1 + 2
Lifting costs ($ per Mcfe)(*):
Lease operating............................. 0.25 0.33 0.37 - 24 - 11
Workovers................................... 0.04 0.05 0.05 - 20 --
Production taxes............................ 0.08 0.09 0.09 - 11 --
Transportation.............................. 0.07 0.06 0.04 + 17 + 50
Ad valorem taxes............................ 0.03 0.04 0.04 - 25 --
Total....................................... 0.47 0.57 0.59 - 18 - 3
DD&A rate ($ per Mcfe)(*)..................... 0.92 1.15 1.04 - 20 + 11
</TABLE>
- ---------------
(*) Mcfe and MMcfe represent the equivalent of one Mcf and one MMcf of natural
gas, respectively. Oil and condensate and natural gas liquids are converted
to gas at a ratio of one barrel of liquids per six Mcf of gas, based on
relative energy content.
The increase in operating profit of the E&P segment for the year ended
December 31, 1993 as compared to 1992 was due to a significant increase in
revenues as a result of increased natural gas production and higher natural gas
prices, which more than offset increases in depreciation, depletion and
amortization ("DD&A") expense, exploration charges and lifting costs.
DD&A expense and lifting costs increased as a result of the significant
increase in production. However, both DD&A expense and lifting costs per
equivalent unit of production declined in 1993. Exploration charges also
increased in 1993 due to higher dry hole costs as a result of increased
exploratory activity. In 1993, the Company was successful on eight gross
exploratory wells in 27 attempts, compared with three successes out of 15 wells
drilled during 1992.
56
<PAGE> 58
The increase in natural gas production was primarily due to contributions
from properties acquired in connection with the Mid-South Acquisition. On
December 31, 1992, the Company acquired the outstanding capital stock of Arkla
Exploration Company from Arkla, Inc. ("Arkla"), which more than doubled the
Company's proved natural gas reserves as of such date. In addition, because of
the improvement in natural gas prices, the Company had substantially no
price-related curtailments of gas production in 1993 compared with significant
curtailments in prior years. In response to the sustained growth in demand for
and shrinking industry deliverability of natural gas, particularly from the
offshore Gulf Coast, the Company continues to boost its deliverability through
accelerated exploration and exploitative activities. The Company's
deliverability increased significantly in the fourth quarter of 1993 primarily
due to production flowing for the first time from three newly installed Company
operated production facilities offshore Texas and Louisiana.
Although revenues for the E&P segment were much higher for the year ended
December 31, 1992 compared with 1991 due to an increase in production and higher
natural gas prices, these increases were more than offset by increased DD&A
expense, exploration charges and lifting costs. The higher DD&A charge was due
both to the increase in natural gas production and a higher DD&A rate per unit
of production. Exploration charges increased primarily due to higher dry hole
costs. Total lifting costs increased due to the increase in production; however,
lifting costs per unit of production declined slightly.
The increase in natural gas production in 1992 was primarily due to the
full period effect of production from certain gas and oil assets (the
"Mid-Continent Assets"), purchased from Mesa Limited Partnership, a predecessor
of Mesa, Inc., in March 1991, and to production flowing for the first time from
certain of the Company's discoveries. In addition, the improvement in prices and
growing demand for natural gas prompted the Company to increase production to
near maximum deliverability in late 1992 and for the 1992-93 winter season. The
Company's development activities were also accelerated in the fourth quarter of
1992 to boost deliverability further for 1993.
The E&P segment is the Company's primary growth area. That growth has been
achieved over the past six years primarily through acquisitions: Houston Oil &
Minerals Corporation ("HO&M") in 1988; the assets of Houston Oil Trust in 1989;
Wacker Oil Inc. ("Wacker") in 1990; the Mid-Continent Assets in 1991 and Seagull
Mid-South Inc., formerly Arkla Exploration Company, in 1992. In addition, on
January 4, 1994, the Company acquired all of the outstanding shares of stock of
Novalta and an intercompany note in the Seagull Canada Acquisition, which added
257.4 Bcf of natural gas and 2.8 million barrels ("MMbbl") of oil, condensate
and natural gas liquids to the Company's net proved reserves as of such date.
See Notes 2 and 17 of Notes to Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1993, which
is incorporated by reference herein.
In 1993, a four-company exploration group including the Company was awarded
four production licenses in United Kingdom waters. The awards gave the Company a
10% interest in three licenses in the Irish Sea totaling 398,319 acres and a 20%
interest in a fourth license in the North Sea which totals 60,785 acres. Seismic
studies and other evaluation activities on the licensed blocks have been ongoing
since mid-1993. The first two of eight planned exploratory wells are scheduled
during the latter part of 1994. During the first quarter of 1994, the Company
increased its interests in these licenses to 20% and 30%, respectively. The
Company anticipates that its share of exploration-related costs will approximate
$13 million over the next five years as the program is currently structured.
Finally, the future results of this segment will be affected by the market
prices of natural gas and oil. The availability of a ready market for oil, gas
and liquid products in the future will depend on numerous factors beyond the
control of the Company, including weather, production of other domestic crude
oil, natural gas and liquid products, imports, marketing of competitive fuels,
proximity and capacity of oil and gas pipelines and other transportation
facilities, any oversupply of oil, gas and liquid products, the regulatory
environment, and other domestic and political events, none of which can be
predicted with certainty. As in the past, the Company would expect to curtail
gas production during times of inferior prices. However, due to the sustained
improvements in natural gas prices and demand throughout 1993 and various field
operating considerations, the Company does not anticipate curtailing gas sales
in the coming year to the significant extent of curtailments in years prior to
1993.
57
<PAGE> 59
PIPELINE AND MARKETING
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENT CHANGE
----------------------------- ---------------------
1993 1992 1991 1992-'93 1991-'92
------ ------ ------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING PROFIT:
Pipelines................................... $ 8,561 $5,671 $3,331 + 51 + 70
Marketing and supply........................ 2,862 784 9 +265 N/A
Gas processing.............................. 518 2,157 3,093 - 76 - 30
Operating and construction services......... 2,124 445 1,451 +377 - 69
------- ------ ------ -------- --------
$14,065 $9,057 $7,884 + 55 + 15
------- ------ ------ -------- --------
------- ------ ------ -------- --------
OPERATING DATA:
Average daily volumes (MMcf):
Gas gathering............................. 311 196 193 + 59 + 2
Partnership systems (net)................. 117 102 91 + 15 + 12
Marketing and supply...................... 446 290 250 + 54 + 16
Gas processing(*):
Average daily inlet volumes (MMcf)........ 273 243 247 + 12 - 2
Average daily net production (Bbl)........ 3,305 3,198 3,453 + 3 - 7
</TABLE>
- ---------------
(*) 1993 data includes contributions from two small onshore Texas plants for the
first time.
In the pipeline and marketing segment, operating profit increased in 1993
over 1992 due primarily to improvements in the pipelines and marketing and
supply areas and as a result of profits recognized from a pipeline construction
project. These contributions more than offset a decline in operating profit in
the gas processing area.
Operating profit in the pipelines area, which includes the Company's
interests in two partnership systems, improved due primarily to increased
volumes transported through four new gas gathering systems, two acquired in June
1992 and two acquired as part of the Mid-South Acquisition in December 1992. An
increase in volumes delivered by the Company's partnership systems also
contributed to the improvement.
In the marketing and supply area, operating profit improved in 1993 due to
a 54% increase in sales volumes primarily as a result of increases in the E&P
segment's natural gas production discussed earlier and a 13% increase in
margins.
The Company recognized operating profit in 1993 on an 8.7 mile, 16-inch gas
pipeline that the Company constructed for an international exploration company
from a platform to a gathering pipeline offshore Louisiana. The project was
completed in early 1994.
Operating profit in the gas processing area declined in 1993 primarily due
to increases in natural gas costs and significant declines in prices received
for extracted products.
Operating profit in the pipeline and marketing segment increased in 1992 as
compared to 1991 due to improvements in the pipelines and marketing and supply
areas which more than offset declines in the operating and construction services
and gas processing areas.
Operating profit in the pipelines area improved primarily due to increased
volumes delivered by the Company's partnership systems. Volumes transported
through the two gas gathering systems acquired in June 1992 also contributed to
the improvement.
In the marketing and supply area, operating profit improved due to
increased sales volumes and higher margins. Operating profit from gas processing
declined 30% during 1992 as a result of lower average natural gas liquids prices
coupled with higher average natural gas prices. In addition, net natural gas
liquids production decreased because one significant producer elected to recover
ethane in 1992. The absence of construction profits comparable to those
recognized in 1991 also had a negative impact on 1992 operating profit.
58
<PAGE> 60
ALASKA TRANSMISSION AND DISTRIBUTION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENT CHANGE
-------------------------------- --------------------
1993 1992 1991 1992-'93 1991-'92
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS
EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues.................................... $107,244 $109,598 $129,615 - 2 - 15
Cost of gas sold............................ 59,898 59,999 81,935 -- - 27
Operations and maintenance expense.......... 20,880 19,976 19,678 + 5 + 2
Depreciation, depletion and amortization.... 7,511 7,184 6,978 + 5 + 3
-------- -------- -------- -------- --------
Operating profit............................ $ 18,955 $ 22,439 $ 21,024 - 16 + 7
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
OPERATING DATA:
Heating degree days (*)..................... 9,382 10,653 10,178 - 12 + 5
Volumes (Bcf):
Gas Sold.................................. 28.9 30.9 35.3 - 6 - 12
Gas Transported........................... 11.3 10.2 4.3 + 11 + 137
Combined.................................. 40.2 41.1 39.6 - 2 + 4
Margins ($ per Mcf):
Gas Sold.................................. 1.49 1.47 1.32 + 1 + 11
Gas Transported........................... 0.36 0.40 0.27 - 10 + 48
Combined.................................. 1.17 1.20 1.20 - 2 --
Customers (end of year)..................... 88,198 86,413 84,816 + 2 + 2
</TABLE>
- ---------------
(*) A measure of weather severity calculated by subtracting the mean temperature
for each day from 65 degrees Fahrenheit. More heating degree days equate to
colder weather.
Operating profit of the ENSTAR Alaska Group for the year ended December 31,
1993 declined from 1992 primarily due to unusually warm weather in the utility's
market area.
The ENSTAR Alaska Group's gas sales revenues and the associated cost of gas
sold both declined for the year ended December 31, 1992 from the 1991 period. In
the fourth quarter of 1991, one large utility customer began purchasing gas
directly from gas producers. However, the ENSTAR Alaska Group currently
transports the utility's gas supplies for a transportation fee that approximates
the price at which the ENSTAR Alaska Group sold gas to the utility previously,
less the cost of that gas. Accordingly, operating profit for the Alaska
transmission and distribution segment was not materially affected by these
factors in 1992. However, operating profit for 1992 improved over 1991 as a
result of higher non-power customer demand due to an increase in customers and
colder temperatures.
Future operating profit for this segment will be affected by weather,
regulatory action and customer growth in the ENSTAR Alaska Group's service area.
The Company expects customer growth to continue to be relatively modest. During
the 1993 summer construction season, approximately 55 miles of new distribution
pipeline were installed to connect some 1,800 new customers.
OTHER (INCOME) EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENT CHANGE
----------------------------- -------------------
1993 1992 1991 1992-'93 1991-'92
----- ---- ----- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
General and administrative....................... $11,666 $10,099 $ 8,427 + 16 + 20
Interest expense................................. 36,753 17,574 17,875 +109 - 2
Interest income and other........................ (5,708) (4,705) (1,426) + 21 +230
------- ------- ------- -------- --------
$42,711 $22,968 $24,876 + 86 - 8
------- ------- ------- -------- --------
------- ------- ------- -------- --------
</TABLE>
59
<PAGE> 61
General and administrative expenses increased for the year ended December
31, 1993 in comparison to 1992 due to costs associated with three compensation
plans, one for outside directors, one for key managers, and the other for all
Company employees, that are tied directly to the price of the Seagull Common
Stock. The closing price of Seagull Common Stock increased approximately 63%
from $15.563 (adjusted for Stock Split) at December 31, 1992 to $25.375 at
December 31, 1993. Also, increases in other payroll related expenses contributed
to the increase in general and administrative expenses in 1993. These increases
were partially offset by a decline in costs related to potential acquisitions
which were not consummated.
On December 31, 1992, the Company incurred additional debt to finance the
Mid-South Acquisition. In addition, a large portion of the Company's outstanding
floating rate debt was refinanced in July 1993 with longer term debt bearing
interest at fixed rates which were somewhat higher than the floating rates in
effect for the debt being replaced. As a result of these transactions, the
Company's interest expense and overall average interest rate increased for 1993.
Interest income and other for 1993 includes a pre-tax gain of approximately
$3.8 million relating to sales of non-strategic oil and gas producing
properties. Net proceeds from the sales totaled approximately $13.0 million,
resulting in an after-tax gain of approximately $2.8 million, or $0.08 per
share. The parcels sold had proven reserves estimated at approximately 19 Bcf of
natural gas equivalents.
General and administrative expenses increased for the year ended December
31, 1992 in comparison to 1991 as a result of increases in payroll related
expenses and a charge of approximately $1.2 million for costs related to a
potential acquisition which was not consummated.
During the first quarter of 1992, the Company incurred approximately
$400,000 in severance expenses (included in general and administrative expenses
and operations and maintenance costs) when the Company reduced its non-Alaskan
workforce by more than 10%. The workforce reduction was primarily a result of
the depressed state of natural gas demand and prices in early 1992, coupled with
a decrease in planned capital spending for 1992. The Company's workforce
temporarily increased by approximately 240 employees as a result of the
Mid-South Acquisition on December 31, 1992. The Company has retained a sizeable
group of these employees. All severance expenses incurred in connection with any
workforce reductions in the Mid-South area during 1993 were paid by Arkla. No
additional workforce reductions are currently planned.
Interest expense declined approximately 15% for the year ended December 31,
1992 in comparison to 1991 as a result of a decrease in the level of debt
outstanding during the year as well as a decline in the overall average interest
rate. This decline, however, was substantially offset by a fourth quarter 1992
charge to interest expense resulting from the expensing of $2.3 million in
unamortized debt acquisition costs relating to the repayment of the Company's
then existing revolving credit line in connection with the Mid-South
Acquisition.
Interest income and other for the year ended December 31, 1992 includes
$4.6 million relating to the Seismic Litigation Settlement resulting from a
claim made by the Company that certain of the seismic data acquired by it in
connection with its acquisition of HO&M was actually delivered to other
purchasers. In accordance with the settlement agreement, the Company received a
cash payment in July 1992 of $2.6 million and will receive up to $5 million in
pipeline business accommodations through December 31, 1995. If less than $3
million of business accommodations are realized, the Company will receive a cash
payment in early 1996 equal to the difference between $3 million and the sum of
the business accommodations realized. The $4.6 million in 1992 income includes
the $2.6 million cash payment plus the present value of the $3 million
guaranteed minimum payment for business accommodations less certain expenses.
INCOME TAXES
The Company's effective tax rate of 18.3% for the year ended December 31,
1993 was substantially lower than the statutory federal tax rate of 35%
primarily because the Company utilized approximately $4.8 million in credits
allowed under Section 29 of the Internal Revenue Code of 1986, as amended, to
reduce its 1993 regular income tax liability. The Section 29 (Tight Sands)
credits are allowed for production of fuels derived from nonconventional sources
that are sold to nonrelated parties.
60
<PAGE> 62
The effect of utilizing the Section 29 credits discussed above more than
offset the effect of an increase in the federal corporate tax rate from 34% to
35% called for in recently enacted tax legislation. The effect of this rate
change was an increase in the Company's 1993 provision for federal income taxes
of approximately $1.3 million.
The provision for income taxes for 1993 and 1992 is not comparable to 1991
due to the Company's adoption of SFAS No. 109 effective January 1, 1992. This
SFAS requires the use of the "liability method," which bases the amount of
current and future taxes payable on events recognized in the consolidated
financial statements and under existing tax laws. The Company recognized the
cumulative effect of this change in accounting principle in the line item
entitled "Cumulative Effect of Changes in Accounting Principles" in the
accompanying consolidated statement of earnings for the year ended December 31,
1992. Accordingly, periods prior to January 1, 1992 were not restated to reflect
this change.
QUARTERS ENDED MARCH 31, 1994 AND 1993
CONSOLIDATED HIGHLIGHTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------- PERCENT
1994 1993 CHANGE
-------- -------- -----
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
Revenues:
Exploration and production..................... $ 81,418 $ 52,580 + 55
Pipeline and marketing......................... 9,379 11,420 - 18
Alaska transmission and distribution........... 36,266 39,192 - 7
-------- -------- -----
$127,063 $103,192 + 23
-------- -------- -----
-------- -------- -----
Operating Profit:
Exploration and production..................... $ 22,175 $ 6,419 +235
Pipeline and marketing......................... 3,207 3,903 - 18
Alaska transmission and distribution........... 9,447 9,099 + 4
-------- -------- -----
$ 34,829 $ 19,421 + 79
-------- -------- -----
-------- -------- -----
Net earnings..................................... $ 12,915 $ 3,853 +235
Earnings per share............................... $ 0.35 $ 0.12 +192
Net cash provided by operating activities before
changes in operating assets and liabilities.... $ 61,185 $ 39,133 + 56
Net cash provided by operating activities........ $ 42,217 $ 22,638 + 86
Weighted average number of common shares
outstanding (in thousands)..................... 36,928 31,490 + 17
</TABLE>
Revenues and Operating Profit are discussed in the respective segment
sections.
The increase in net earnings for the first quarter of 1993 was due to the
increase in operating profit, which was partially offset by increases in
interest expense and income taxes (see "Other (Income) Expense" section below).
Net cash provided by operating activities before and after changes in
operating assets and liabilities increased in the 1994 quarter versus 1993
primarily due to a 40% increase in natural gas production and higher prices
received for the Company's natural gas production. The increase in natural gas
production was primarily due to production contributed from properties acquired
in connection with the Seagull Canada Acquisition, and to production flowing for
the first time from certain of the Company's discoveries and three newly
installed Company operated production facilities offshore Texas and Louisiana.
The weighted average number of common shares outstanding and per share
amounts for all periods have been restated to reflect the Stock Split.
61
<PAGE> 63
The increase in the weighted average number of common shares outstanding in
1994 over 1993 was due to the full period effect of the February 1993 sale of
5,060,000 shares (10,120,000 after the Stock Split) of Seagull Common Stock
pursuant to an underwritten public offering.
EXPLORATION AND PRODUCTION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------- PERCENT
1994 1993 CHANGE
------- ------- -----
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS
EXCEPT PER UNIT AMOUNTS)
REVENUES:
Natural gas............................................. $75,071 $45,778 + 64
Oil and condensate...................................... 5,504 6,494 - 15
Natural gas liquids..................................... 612 763 - 20
Other................................................... 231 (455) +151
------- ------- -----
81,418 52,580 + 55
Lifting costs............................................. 16,221 12,887 + 26
General operating expense................................. 2,990 2,835 + 5
Exploration charges....................................... 4,183 5,539 - 24
Depreciation, depletion and amortization.................. 35,849 24,900 + 44
------- ------- -----
Operating profit.......................................... $22,175 $ 6,419 +245
------- ------- -----
------- ------- -----
OPERATING DATA:
Net daily production:
Natural gas (MMcf)................................... 387.2 276.5 + 40
Oil and condensate (Bbl)............................. 4,462 4,106 + 9
Natural gas liquids (Bbl)............................ 894 698 + 28
Combined (MMcfe)..................................... 419.3 305.3 + 37
Average sales prices:
Natural gas ($ per Mcf).............................. 2.15 1.84 + 17
Oil and condensate ($ per Bbl)....................... 13.71 17.57 - 22
Natural gas liquids ($ per Bbl)...................... 7.61 12.14 - 37
Combined ($ per Mcfe)................................ 2.16 1.93 + 12
Lifting costs ($ per Mcfe):
Lease operating...................................... 0.23 0.28 - 18
Workovers............................................ 0.03 0.02 + 50
Production taxes..................................... 0.07 0.08 - 12
Transportation....................................... 0.08 0.06 + 33
Ad valorem taxes..................................... 0.02 0.03 - 33
Total................................................ 0.43 0.47 - 8
DD&A Rate ($ per Mcfe).................................. 0.95 0.91 + 4
</TABLE>
The increase in operating profit of the E&P segment for the first quarter
of 1994 as compared to the 1993 period was due to increases in revenues as a
result of a significant increase in natural gas production and higher natural
gas prices, which was partially offset by increased DD&A expense and lifting
costs.
The increase in natural gas production was primarily due to production
contributed from properties acquired in connection with the Seagull Canada
Acquisition on January 4, 1994, and to production flowing for the first time
from certain of the Company's discoveries and three newly installed Company
operated production facilities offshore Texas and Louisiana.
DD&A expense and lifting costs increased as a result of the significant
increase in production, although lifting costs per equivalent unit of production
declined for the 1994 quarter.
62
<PAGE> 64
Exploration charges declined for the 1994 quarter due to a significant
decrease in dry hole costs as a result of the Company's less active exploratory
program in comparison to the 1993 period. Two of the three wells drilled were
successes and four wells were drilling or being evaluated as of mid-April 1994
in comparison to five successes out of twelve wells drilled for the 1993 period.
However, the Company plans to drill approximately 30 exploratory wells in 1994,
primarily in the second half of the year, including several to be drilled in
Canada and two wells planned in United Kingdom waters.
In contrast, the Company's exploitative program was very active in early
1994. Through mid-April, 30 of 32 development wells drilled, all onshore, were
successful including five successes out of five wells drilled in Canada. The
Company plans to continue its exploitation activities at a comparable pace
throughout the year focusing its efforts primarily onshore in the Mid-Continent
and Mid-South areas, as well as in Canada.
As a result of its active exploration and exploitation programs, the
Company expects to maintain its current level of deliverability throughout 1994
with increases expected in late 1994 and early 1995 from several of its new
discoveries and from continued exploitation, especially in Canada. The Company
has had no price-related curtailments of gas production in the current quarter
compared with substantial curtailments in periods prior to 1993, and no
significant curtailments are anticipated in the near future due to the relative
stability of natural gas prices which the Company expects will be sustained
throughout 1994.
PIPELINE AND MARKETING
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------- PERCENT
1994 1993 CHANGE
------ ------ -----
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING PROFIT:
Pipelines.................................................... $1,583 $2,715 - 42
Marketing and supply......................................... 1,352 561 +141
Gas processing............................................... (356) 515 -169
Operating and construction services.......................... 628 112 +461
------ ------ -----
$3,207 $3,903 - 18
------ ------ -----
------ ------ -----
OPERATING DATA:
Average daily volumes (MMcf):
Gas gathering.............................................. 279 339 - 18
Partnership systems (net).................................. 109 139 - 22
Marketing and supply....................................... 607 437 + 39
Gas processing:
Average daily inlet volumes (MMcf)......................... 285 285 --
Average daily net production (Bbl)......................... 2,441 3,904 - 37
</TABLE>
In the pipeline and marketing segment, operating profit for the first
quarter of 1994 declined in comparison to the 1993 period due to the declines in
the pipelines and gas processing areas which more than offset improvements in
the marketing and supply and operating and construction services areas.
Operating profit in the pipelines area, which includes the Company's gas
gathering and product pipelines systems, as well as the Company's interest in
two partnership systems, declined primarily due to reduced volumes delivered for
the period. Gas processing operating profit declined in 1994 due to increases in
natural gas costs and significant declines in prices received for extracted
products.
In the marketing and supply area, operating profit improved in 1994 due to
a 39% increase in sales volumes due partially to increases in the E&P segment's
natural gas production discussed earlier and a 19% increase in margins.
In the first quarter of 1994, the Company recognized additional profit on
the construction project the Company began in mid-1993: an 8.7 mile, 16-inch gas
pipeline that the Company constructed for an
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international exploration company from a platform to a gathering pipeline
offshore Louisiana. The project was completed early in the first quarter of
1994.
Historically, the Company has not been engaged in pipeline construction
projects on a regularly recurring basis. The Company has no new projects
currently pending; however, the Company is currently conducting marketing
efforts in order to generate new projects.
ALASKA TRANSMISSION AND DISTRIBUTION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------- PERCENT
1994 1993 CHANGE
------- ------- -------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS
EXCEPT PER UNIT
AMOUNTS)
Revenues......................................... $36,266 $39,192 - 7
Cost of gas sold................................. 19,250 22,528 -15
Operations and maintenance expense............... 5,620 5,709 - 2
Depreciation, depletion and amortization......... 1,949 1,856 + 5
------- ------- ----
Operating profit................................. $ 9,447 $ 9,099 + 4
------- ------- ----
------- ------- ----
OPERATING DATA:
Heating degree days.............................. 3,887 3,908 - 1
Volumes (Bcf):
Gas sold....................................... 11.1 10.8 + 3
Gas transported................................ 2.4 2.7 -11
Combined....................................... 13.5 13.5 --
Margins ($ per Mcf):
Gas sold....................................... 1.45 1.45 --
Gas transported................................ 0.39 0.37 + 5
Combined....................................... 1.26 1.23 + 2
</TABLE>
Operating profit of the Alaska transmission and distribution segment for
the quarter ended March 31, 1994 improved slightly from that of the prior year
quarter. Margins on total volumes delivered remained relatively stable, while
the weather was only slightly warmer in 1994.
This segment's business is seasonal with approximately 65% of its sales
made in the first and fourth quarters of each year.
OTHER (INCOME) EXPENSE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------- PERCENT
1994 1993 CHANGE
------- ------- -------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
General and administrative....................... $ 2,991 $ 3,498 -14
Interest expense................................. 11,545 10,535 +10
Interest income and other........................ (107) (505) -79
------- ------- ----
$14,429 $13,528 + 7
------- ------- ----
------- ------- ----
</TABLE>
General and administrative expenses declined in 1994 due primarily to a
decline in costs associated with three compensation plans, one for outside
directors, one for key managers, and the other for all Company employees, that
are tied directly to the price of Seagull Common Stock. The closing price of
Seagull Common Stock declined 6% in the first quarter of 1994 from $25.375 at
December 31, 1993 to $23.75 on March 31, 1994, compared to a 52% increase in the
1993 period.
Interest expense increased in the first quarter of 1994 as a result of an
increase in the level of debt outstanding due primarily to new debt incurred to
finance the Seagull Canada Acquisition.
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<PAGE> 66
INCOME TAXES
The increase in income taxes in the 1994 quarter was primarily a result of
an increase in earnings before income taxes for the period.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for the year ended December 31, 1993 were
substantially higher than those for 1992 due to significant increases in the
Company's exploitative activities, primarily resulting from the large number of
prospects acquired in connection with the Mid-South Acquisition, and the
Company's exploratory activities in response to improvements in prices received
and demand for natural gas. The Company's E&P activities and related capital
expenditures had been dramatically reduced in 1992 as a result of unacceptable
natural gas prices early in the year.
Capital expenditures for the years ended December 31, 1993, 1992 and 1991
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENT CHANGE
---------------------------------- --------------------
1993 1992 1991 1992-'93 1991-'92
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES:
Exploration and production:
Lease acquisitions.................. $ 7,396 $ 5,396 $ 4,446 + 37 + 21
Exploration......................... 26,824 8,378 15,053 +220 - 44
Development......................... 63,598 18,341 38,960 +247 - 53
-------- -------- -------- -------- --------
97,818 32,115 58,459 +205 - 45
Pipeline and marketing................. 2,115 1,622 634 + 30 +156
Alaska transmission and distribution... 10,094 9,024 10,492 + 12 - 14
Corporate.............................. 2,015 890 2,124 +126 - 58
-------- -------- -------- -------- --------
$112,042 $ 43,651 $ 71,709 +157 - 39
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
ACQUISITIONS, NET OF CASH ACQUIRED:
Exploration and production............. $ 29,470 $391,531 $201,767 - 92 + 94
Pipeline and marketing................. -- 10,357 -- N/A N/A
-------- -------- -------- -------- --------
$ 29,470 $401,888 $201,767 - 93 + 99
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
Total capital expenditures for the first quarter of 1994 were basically
unchanged from those for the 1993 quarter. Significant increases in the
Company's exploitative activities, primarily resulting from the large number of
exploitative prospects in the Mid-South area as well as prospects from
properties acquired in connection with the Seagull Canada Acquisition,
substantially offset declines in the Company's exploratory activities for the
quarter. However, as discussed earlier, the Company has very active exploitation
and exploration programs planned for the remainder of 1994. Current plans for
1994 call for capital expenditures of slightly more than $170 million, including
about $160 million in exploration and production. Of the $160 million, the
Company anticipates spending approximately $100 million for development
activities.
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<PAGE> 67
Capital expenditures for the quarters ended March 31, 1994 and 1993 were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------- PERCENT
1994 1993 CHANGE
------- ------- ------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Exploration and production:
Lease acquisitions........................................ $ 1,884 $ 1,038 +82
Exploration............................................... 3,172 9,195 -66
Development............................................... 16,238 10,263 +58
------- ------- ------
21,294 20,496 + 4
Pipeline and marketing...................................... 391 578 -32
Alaska transmission and distribution........................ 1,385 1,340 + 3
Corporate................................................... 478 534 -10
------- ------- ------
$23,548 $22,948 + 3
------- ------- ------
------- ------- ------
</TABLE>
In October 1993, the Company purchased an interest in a producing natural
gas field in East Texas for approximately $26.6 million, effective September 1,
1993. The interest purchased contained proved reserves estimated at
approximately 28.3 Bcf of natural gas and approximately 143,000 Bbl of
condensate, or the equivalent of 29.2 Bcf of natural gas as of the October 1993
closing date.
The growth in the E&P segment over the past six years has been accomplished
primarily through acquisitions financed initially by bank borrowings; however,
since August 1990, the Company has reduced borrowings under existing bank
facilities by $520 million with net proceeds received from three separate
Seagull Common Stock offerings and the July 1993 sale of Senior and Senior
Subordinated Notes discussed below, all in underwritten public offerings. See
Notes 6 and 9 of Notes to Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1993, which
is incorporated by reference herein.
In connection with the Mid-South Acquisition, the Company entered into a
credit agreement (the "Credit Agreement") with a group of major U.S. and
international banks (the "Banks"). The Credit Agreement provided for a $150
million term loan, which was repaid in full in February 1993 with the net
proceeds of approximately $164 million from the sale of 5,060,000 shares
(10,120,000 shares after the Stock Split) of Seagull Common Stock and a $475
million revolving credit line. See Notes 2, 6 and 9 of Notes to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1993, which is incorporated by reference herein.
In June 1993, the Company amended and restated the Credit Agreement
converting the facility into the Revolver with a total commitment of $475
million and a final maturity of December 31, 1999.
Under the terms of the Revolver, the commitments thereunder begin to
decline on March 31, 1996 in equal quarterly reductions of $27.5 million and a
final reduction of $62.5 million on December 31, 1999. The amount of senior
indebtedness available to the Company under the provisions of the Revolver is
subject to a borrowing base (the "Borrowing Base") based upon the proved
reserves of the Company's E&P segment and the financial performance of the
Company's other business segments. The Borrowing Base is generally determined
annually, but may be redetermined, at the option of either the Company or the
Banks, one additional time each year and will be redetermined upon the sale of
certain assets included in the Borrowing Base.
Currently, the available commitment under the Revolver is subject to a $610
million Borrowing Base and is determined after consideration of outstanding
borrowings under the Company's other senior debt facilities. As of April 29,
1994, borrowings outstanding under the Revolver were $158.5 million, leaving
immediately available unused commitments of approximately $165.1 million, net of
outstanding letters of credit of $2.2 million, $100 million of borrowings
outstanding under the Senior Notes discussed below, the nominated
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<PAGE> 68
maximum borrowing availability of $160 million under the Canadian Credit
Agreement discussed below, and $24.2 million in borrowings outstanding under the
Company's money market facilities.
The Company is in negotiation with its banks to amend the Revolver to,
among other things, (i) increase the maximum commitment from $475 million to
$725 million, (ii) extend the maturity date by one year to December 31, 2000,
(iii) adjust certain financial covenants relating to dividend limitations and
permitted leverage ratios, and (iv) adjust the pricing features of the credit
facility. The Company is in possession of commitments from its banks sufficient
to permit these amendments, and anticipates finalizing the amendment by the end
of May 1994. Concurrently, the Borrowing Base is anticipated to be increased to
$625 million.
In connection with the Seagull Canada Acquisition, Seagull Energy Canada
Ltd. ("Seagull Canada"), the indirect wholly owned subsidiary of the Company
which acquired Novalta, entered into a new $175 million reducing revolving
credit facility (the "Canadian Credit Agreement") with a group of 10 Canadian
affiliates of major U.S. and international banks. The Canadian Credit Agreement
provides for dual currency borrowings in U.S. and Canadian dollars with a
nominated maximum borrowing availability of $160 million, which may be increased
or decreased by the Company at any time pursuant to provisions of the Canadian
Credit Agreement, up to a maximum commitment of $175 million. The Canadian
Credit Agreement matures on December 31, 1999 and commitments thereunder begin
to decline on March 31, 1996 in equal quarterly reductions of $10,937,500. As of
January 4, 1994, immediately following the Seagull Canada Acquisition,
approximately $152 million in borrowings were outstanding under this facility.
In July 1993, the Company sold $100 million of senior notes (the "Senior
Notes") and $150 million of senior subordinated notes (the "Senior Subordinated
Notes") (collectively the "Notes"). The Senior Notes bear interest at 7 7/8% per
annum, are not redeemable prior to maturity or subject to any sinking fund and
mature on August 1, 2003. The Senior Subordinated Notes bear interest at 8 5/8%
per annum, are not subject to any sinking fund and mature on August 1, 2005. On
or after August 1, 2000, the Senior Subordinated Notes are redeemable at the
option of the Company, in whole or in part, at redemption prices declining from
102.59% in 2000 to 100.00% in 2003 and thereafter. The Notes were issued at par
and interest is paid semi-annually. Net proceeds from the offering, totaling
approximately $245.0 million, were used to repay borrowings outstanding under
the Revolver.
In addition to the facilities discussed above, the Company has money market
facilities with two major U.S. banks with a combined maximum commitment of $70
million. These lines of credit bear interest at rates made available by the
banks at their discretion and may be canceled at either the Company's or the
banks' discretion. The lines are subject to annual renewal.
Management believes that the Company's capital resources will be sufficient
to finance current and forecasted operations. However, the Company continues to
actively pursue potential acquisitions and, depending upon the size and terms of
any such acquisition, additional financing may be required.
To date, compliance with applicable environmental and safety regulations by
the Company has not required any significant capital expenditures or materially
affected its business or earnings. The Company believes it is in substantial
compliance with environmental and safety regulations and foresees no material
expenditures in the future; however, the Company is unable to predict the impact
that compliance with future regulations may have on capital expenditures,
earnings and competitive position.
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<PAGE> 69
DESCRIPTION OF CAPITAL STOCK
The Company's Articles of Incorporation currently provide that the Company
is authorized without further shareholder action to issue 130,000,000 shares of
capital stock, consisting of 100,000,000 shares of Seagull Common Stock,
25,000,000 shares of ENSTAR Alaska Stock and 5,000,000 shares of Preferred
Stock, par value $1.00 per share (the "Preferred Stock"), of which 500,000
shares are designated as Series B Junior Participating Preferred Stock (the
"Seagull Energy Series B Stock") and 250,000 shares are designated as the Series
C Junior Participating Preferred Stock (the "ENSTAR Alaska Series C Stock"). As
further described below under "Restated Rights Agreement" the Board has
authorized and declared a distribution on all ENSTAR Alaska Stock that might be
issued from time to time of one preferred stock purchase right for each
outstanding share of the ENSTAR Alaska Stock that entitles the registered holder
to purchase from the Company a unit consisting of one one-hundredth of a share
of ENSTAR Alaska Series C Stock.
The treasury shares and the authorized but unissued shares of Preferred
Stock, Seagull Common Stock and ENSTAR Alaska Stock will be available for
issuance from time to time by the Company at the sole discretion of the Board
for any proper corporate purpose, which could include raising capital, providing
compensation or benefits to employees, paying stock dividends or acquiring
companies or businesses. The approval of the shareholders of the Company will
not be solicited by the Company for the issuance from the authorized but
unissued shares of Preferred Stock, Seagull Common Stock or ENSTAR Alaska Stock
(unless such approval is deemed advisable by the Board of Directors or is
required by stock exchange regulations). Any net proceeds from, or other effects
of, the issuance by the Company of ENSTAR Alaska Stock (other than unissued
shares of ENSTAR Alaska Stock which may be issued with respect to any Retained
Interest) or Seagull Common Stock will be attributed to the respective business
group. All preferred stock issued by the Company and its subsidiaries would be
specifically attributed to and reflected on the financial statements of Seagull
Energy, except (i) preferred stock issued by APC and (ii) the ENSTAR Alaska
Series C Stock. See "Management and Accounting Policies."
ENSTAR ALASKA STOCK
Dividends
Dividends on the ENSTAR Alaska Stock (and the Seagull Common Stock) will be
limited to the amount of funds of the Company legally available under the TBCA
for the payment of dividends by the Company on its capital stock, and subject to
the prior payment of dividends on any outstanding shares of any class or series
of preferred stock of the Company. Under the TBCA, no dividends may be paid to
the shareholders if, after giving effect to such dividend, the Company would not
be able to pay its debts as they become due in the usual course of business or
the Company's total assets would be less than its total liabilities. Assuming
the Offering had been completed as of March 31, 1994, the Company had legally
available assets at such date of $572.8 million, subject to the Company's
ability to continue to pay its debts as they become due in the usual course of
business after having distributed any such amount. Payment of dividends on
either series of common stock of the Company will decrease the amount of the
Company's assets legally available for the payment of dividends on both classes
of common stock. For a description of the restrictions on the payment of
dividends contained in the Company's and APC's debt instruments, see "Dividend
Policy."
Dividends on the ENSTAR Alaska Stock, in addition to the limitations set
forth above, will be further limited to an amount not in excess of the Available
ENSTAR Alaska Dividend Amount, which is intended to be similar to the amount
that would be legally available for the payment of dividends on ENSTAR Alaska
Stock under the TBCA if the ENSTAR Alaska Group were a separate company. There
can be no assurance that there will be an Available ENSTAR Alaska Dividend
Amount. See "Dividend Policy."
"Available ENSTAR Alaska Dividend Amount," on any date, means the product
of (x) the Outstanding Interest Fraction as of such date and (y) an amount equal
to the excess of (i) the amount by which the total assets of the ENSTAR Alaska
Group exceed the total debts of the ENSTAR Alaska Group, over (ii) the stated
capital attributable to the ENSTAR Alaska Stock and any class or series of
preferred stock of the Company attributed to the ENSTAR Alaska Group as of such
date, determined as provided in the TBCA as
68
<PAGE> 70
if the ENSTAR Alaska Group were a corporation for such purposes and on a basis
consistent with the determination of Seagull Energy Corporation Earnings
Attributable to the ENSTAR Alaska Group; provided that such excess must be
reduced by an amount, if any, sufficient to ensure that the ENSTAR Alaska Group
would be able to pay its debts as they become due in the usual course of its
business.
"Seagull Energy Corporation Earnings Attributable to the ENSTAR Alaska
Group," for any period, shall mean the net income or loss of the ENSTAR Alaska
Group for such period (or for the fiscal periods of the Company commencing prior
to the date of the first issuance of shares of ENSTAR Alaska Stock (the
"Effective Date"), the pro forma net income or loss of the ENSTAR Alaska Group
for such period as if the Effective Date had been the first day of such fiscal
period) determined in accordance with generally accepted accounting principles
in effect at such time, reflecting income and expense of the Company allocated
to the ENSTAR Alaska Group on a basis substantially consistent with allocations
made with respect to Seagull Energy, including, without limitation, corporate
administrative costs, net interest and other financial costs and income taxes.
Assuming the Offering had been completed as of March 31, 1994, the
Available ENSTAR Alaska Dividend Amount at such date would have been at least
$59.7 million, assuming no Retained Interest. Payment of dividends on any
preferred stock of the Company allocated to the ENSTAR Alaska Group will
decrease the Available ENSTAR Alaska Dividend Amount. The Company currently has
no outstanding shares of preferred stock.
For a description of the restrictions on the payment of dividends contained
in the Company's and APC's debt instruments, see "Dividend Policy."
The TBCA limits the amount of distributions on capital stock to the legally
available funds of the Company, which are determined on the basis of the entire
Company, and not just the respective business groups. Consequently, the amount
of legally available funds for payment of dividends on both classes of common
stock of the Company will reflect the amount of any net losses of the ENSTAR
Alaska Group and of Seagull Energy and any distributions on, or repurchases of,
the ENSTAR Alaska Stock or the Seagull Common Stock. Dividend payments on the
ENSTAR Alaska Stock or the Seagull Common Stock may be precluded because of the
unavailability of legally available funds under the TBCA, even though the
Available ENSTAR Alaska Dividend Amount test or Available Seagull Energy
Dividend Amount test, as the case may be, may be met.
To the extent that the ENSTAR Alaska Group pays any dividend or makes any
other distribution on the outstanding shares of ENSTAR Alaska Stock, an amount
that bears the same relation to the aggregate amount of such dividend or other
distribution as the ratio of the Number of Shares Issuable with respect to the
Retained Interest to the number of shares of ENSTAR Alaska Stock then
outstanding would be transferred from the ENSTAR Alaska Group to Seagull Energy
with respect to the Retained Interest, if any. See Annex II hereto for
illustrations of the effect of dividends on ENSTAR Alaska Stock.
Subject to the prior payment of dividends on outstanding shares of
Preferred Stock and the foregoing limitations, the Board may, in its sole
discretion, declare and pay dividends on both classes or only one class of
common stock of the Company in equal or unequal amounts, notwithstanding the
amount of funds available for dividends on either class, the respective voting
and liquidation rights of either class, the amount of prior dividends declared
on either class or any other factor.
Exchange and Redemption
If the Board should at any time determine to transfer all of the Company's
interest in the assets and liabilities of the ENSTAR Alaska Group (and no other
assets or liabilities) to a wholly owned subsidiary of the Company (the "ENSTAR
Alaska Group Subsidiary"), the Board may, in its sole discretion, provided that
there are funds of the Company legally available therefor, exchange all of the
outstanding shares of ENSTAR Alaska Stock for a number of outstanding shares of
the ENSTAR Alaska Group Subsidiary equal to the product of the Outstanding
Interest Fraction and the number of all outstanding shares of common stock of
the ENSTAR Alaska Group Subsidiary, on a pro rata basis. The Company will retain
any balance of the
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<PAGE> 71
outstanding shares of the ENSTAR Alaska Group Subsidiary in lieu of the Retained
Interest Fraction of Seagull Energy in the ENSTAR Alaska Group, if any.
The provisions described in the preceding paragraph provide a mechanism to
retire all of the outstanding shares of ENSTAR Alaska Stock in one transaction
if the Board determines to spin-off all the assets and liabilities of the ENSTAR
Alaska Group to the holders of the ENSTAR Alaska Stock. If shares of ENSTAR
Alaska Stock were exchanged for shares of an ENSTAR Alaska Group Subsidiary, the
subsidiary stock would not be common stock of the Company, and the holders of
the Seagull Common Stock would comprise all of the common shareholders of the
Company. Holders of the subsidiary stock (including the Company, if it retained
any interest in the subsidiary) would, however, vote on all matters presented to
a vote of shareholders of the subsidiary, which would then be a separate
corporation.
Upon the sale, transfer, assignment or other disposition (whether by
merger, consolidation, sale or contribution of assets or stock or otherwise, but
not including any pledge, mortgage, deed of trust or trust indenture) (a
"Disposition"), in one transaction or a series of related transactions, by the
Company and/or its subsidiaries of all or substantially all of the properties
and assets of the ENSTAR Alaska Group to one or more persons or entities (other
than (x) in connection with the Disposition by the Company of all of the
Company's properties and assets in one transaction or a series of related
transactions which results in a liquidation, dissolution or winding-up of the
Company, (y) on a pro rata basis to (1) the holders of all outstanding shares of
ENSTAR Alaska Stock and (2) the Company for the benefit of Seagull Energy with
respect to the Number of Shares Issuable with Respect to the Retained Interest,
or (z) to any person or entity controlled by the Company), the Company is
required, on or prior to the 75th Business Day (as defined below) following the
consummation of such Disposition, to:
(A) declare and pay a dividend in cash and/or in securities or other
property received as proceeds of such Disposition to the holders of
ENSTAR Alaska Stock, subject to the limitations on dividends on
ENSTAR Alaska Stock set forth under "Dividends" above, in an amount
equal to the product of the Outstanding Interest Fraction and the
Net Proceeds of such Disposition; or
(B)(1) if such Disposition involves all (not merely substantially all) of
the assets and properties of the ENSTAR Alaska Group, then, if
there are funds of the Company legally available therefor, redeem
all outstanding shares of ENSTAR Alaska Stock in consideration for
cash and/or for securities or other property received as proceeds
of such Disposition for an aggregate payment equal to the product
of the Outstanding Interest Fraction and the Net Proceeds of such
Disposition; or
(2) if such Disposition involves substantially all (but not all) of
the assets and properties of the ENSTAR Alaska Group or if the
Company does not have sufficient funds legally available to make
the full payment contemplated pursuant to clause (B)(1), then, to
the extent that there are funds of the Company legally available
therefor, redeem the number of whole shares outstanding of ENSTAR
Alaska Stock that has an aggregate average Market Value, during
the 10-Business Day period beginning on the sixth Business Day
following such consummation, closest to the value of the product
of the Outstanding Interest Fraction and the Net Proceeds of such
Disposition, for cash and/or for securities or other property
received as proceeds of such Disposition in an amount equal to
such product; or
(C) exchange each outstanding share of ENSTAR Alaska Stock for a number
of fully paid and nonassessable shares of Seagull Common Stock (or,
if there are no shares of Seagull Common Stock outstanding on such
Exchange Date (as hereinafter defined) and shares of any other
class of common stock of the Company (other than ENSTAR Alaska
Stock) are then outstanding, of such other class of common stock as
then has the largest Market Capitalization), equal to 110% of the
average daily ratio (calculated to the nearest five decimal places)
of the Market Value of one share of ENSTAR Alaska Stock to the
Market Value of one share of Seagull Common Stock or such other
class of common stock, as the case may be, during the 10-Business
Day period beginning on the sixth Business Day following such
consummation.
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<PAGE> 72
As of any date, "substantially all of the properties and assets of the
ENSTAR Alaska Group" means a portion of such properties and assets (1) that
represents at least 80% of the then-current market value (as determined by the
Board of Directors) of the properties and assets of the ENSTAR Alaska Group as
of such date or (2) from which were derived at least 80% of the aggregate
operating profit for the immediately preceding twelve fiscal quarterly periods
of the Company (calculated on a pro forma basis to include revenues derived from
any of such properties and assets acquired during such period) derived from the
properties and assets of the ENSTAR Alaska Group as of such date. Under the
TBCA, a sale of substantially all the assets of the Company would require
approval by the holders of at least two-thirds of the outstanding shares of the
Seagull Common Stock and the ENSTAR Alaska Stock, voting together as a single
class; however, such shareholder vote requirements would not apply, under
current circumstances, to a sale of only all or substantially all the assets of
the ENSTAR Alaska Group because such sale would not involve the sale of all or
substantially all of the assets of the Company. Furthermore, under the TBCA, a
sale would be in the "usual and regular course of business" if the Company,
directly or indirectly, either continues to engage in one or more businesses or
applies a portion of the consideration received in connection with the sale to
the conduct of a business in which the Company (either through the ENSTAR Alaska
Group, Seagull Energy or another business group) engages following the
transaction.
"Net Proceeds" means, as of any date with respect to any Disposition of any
of the properties and assets of the ENSTAR Alaska Group, an amount, if any,
equal to the gross proceeds of such Disposition after any payment of, or
reasonable provision for, (i) any taxes payable by the Company in respect of
such Disposition as described below, (ii) any taxes payable by the Company in
respect of any resulting dividend or redemption, (iii) any transaction costs,
including, without limitation, any legal, investment banking and accounting fees
and expenses and (iv) any liabilities (contingent or otherwise) of, allocated to
or related to the ENSTAR Alaska Group, including, without limitation, any
liabilities for deferred taxes or any indemnity or guarantee obligations
incurred in connection with the Disposition or any liabilities for future
purchase price adjustments and any preferential amounts plus any accumulated and
unpaid dividends in respect of Preferred Stock attributed to the ENSTAR Alaska
Group. The "taxes payable by the Company" in respect of a Disposition, as
contemplated by clause (i), shall be deemed to be an amount equal to the sum of
(x) the excess of the gross proceeds realized by the Company from such
Disposition over the aggregate federal or state income tax basis, as applicable
(the "realized gain," regardless of whether recognized for federal or state tax
purposes) of the properties and assets so disposed of multiplied by the highest
rate of tax applicable to corporations under section 11 of the Internal Revenue
Code of 1986 as then in effect or the corresponding provision of any
subsequently enacted federal tax law (the "federal tax rate") and (y) with
respect to each state that would impose income or similar tax with respect to a
taxable disposition of any of such properties or assets an amount equal to the
realized gain with respect to such properties or assets multiplied by the
product of the decimal that expresses the highest rate of such state tax
applicable to corporations and the decimal which expresses one minus the federal
tax rate. For purposes of determining "Net Proceeds," any properties and assets
of the ENSTAR Alaska Group remaining after such Disposition shall constitute
"reasonable provision" for such amount of taxes, costs and liabilities
(contingent or otherwise) as can be supported by such properties and assets. To
the extent the proceeds of any Disposition include any securities or other
property other than cash, the Board of Directors shall determine the value of
such securities or property in accordance with the TBCA.
"Business Day" shall mean each weekday other than any day on which any
relevant class of common stock of the Corporation is not traded on any national
securities exchange or the National Association of Securities Dealers Automated
Quotations National Market System or in the over-the-counter market.
In connection with any dividend or redemption referred to in clause (A) or
(B) above following a Disposition, the Board could, in its sole discretion, pay
the dividend or redemption price referred to in clause (A) or (B) above in cash
even if securities or other non-cash properties were received as proceeds of
such Disposition.
At the time of any dividend or redemption made as a result of a
Disposition, Seagull Energy financial statements will be credited with, and the
ENSTAR Alaska Group financial statements will be charged with, an amount equal
to the product of (i) the aggregate amount paid in respect of such dividend or
redemption times (ii) a fraction, the numerator of which is equal to the Number
of Shares Issuable with Respect to the
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Retained Interest and the denominator of which is equal to the number of shares
of ENSTAR Alaska Stock then outstanding. See Annex II for illustrations of the
calculation of the amount of the Retained Interest and the effects thereon of
dividends on, and repurchases of, shares of ENSTAR Alaska Stock.
The option described in clause (C) above provides the Company with
additional flexibility by allowing the Company to deliver consideration in the
form of shares of Seagull Common Stock rather than cash or securities or other
property received as proceeds of a Disposition. This alternative could be used,
for example, in circumstances when the Company does not have sufficient legally
available funds under the TBCA to pay the full amount of the dividend or
redemption described in clause (A) or (B) above or when the Company desires to
retain such proceeds.
The Board may, in its sole discretion within one year after a dividend or
partial redemption made as a result of a Disposition described in clause (A) or
(B)(2) above, exchange each remaining outstanding share of ENSTAR Alaska Stock
for a number of fully paid and nonassessable shares of Seagull Common Stock
equal to 110% of the Market Value Ratio (as defined below) as of the fifth
Business Day prior to the date notice of such exchange is mailed to such
holders. Any such exchange would dilute the interest in the Company of holders
of Seagull Common Stock and could preclude holders of either class of common
stock of the Company from retaining their investment in a security reflecting
separately the business of their respective business group. In determining
whether to effect any such exchange following such a dividend or partial
redemption, the Board, in its sole discretion and consistent with its fiduciary
duties to all the shareholders, in addition to other matters, would likely
consider whether the remaining properties and assets of the ENSTAR Alaska Group
continue to constitute a viable business. Other considerations could include the
number of shares of ENSTAR Alaska Stock remaining issued and outstanding, the
per share market price of the ENSTAR Alaska Stock and the cost of maintaining
shareholder accounts.
If less than substantially all of the assets of the ENSTAR Alaska Group are
disposed of by the Company in one transaction and an additional transaction is
consummated at a later time in which an amount of assets are disposed of by the
Company, which, together with the assets disposed of in the first transaction,
would have constituted substantially all of the assets of the ENSTAR Alaska
Group at the time of the first transaction, the Company will not be required to
pay a dividend on, redeem or exchange the outstanding shares of ENSTAR Alaska
Stock, unless such transactions constitute a series of related transactions. The
second transaction, however, could trigger such requirement if at the time of
the second transaction, the assets disposed of in such transaction constituted
at least substantially all of the assets of the ENSTAR Alaska Group at such
time. If less than substantially all of the properties and assets of the ENSTAR
Alaska Group are disposed of by the Company, the holders of the ENSTAR Alaska
Stock will not be entitled to receive any dividend or have their shares of
ENSTAR Alaska Stock redeemed or exchanged for Seagull Common Stock, although the
Board could determine, in its sole discretion, to pay a dividend on the ENSTAR
Alaska Stock in an amount related to the proceeds of such disposition. However,
subject to certain permitted inter-group transfers described herein, such
proceeds could not be used in the business of Seagull Energy without the
approval of two-thirds of the outstanding ENSTAR Alaska Stock, as set forth
under "Voting Rights" below.
The Board may also at any time, in its sole discretion, declare that each
of the outstanding shares of ENSTAR Alaska Stock shall be exchanged for a number
of fully paid and nonassessable shares of Seagull Common Stock equal to 115% of
the Market Value Ratio as of the fifth Business Day prior to the date notice of
such exchange is mailed to such holders. Any such exchange would preclude
holders of ENSTAR Alaska Stock from retaining their investment in a security
reflecting separately the business of the ENSTAR Alaska Group.
"Exchange Date" shall mean any date fixed for an exchange of shares of
ENSTAR Alaska Stock, as set forth in a notice to holders of ENSTAR Alaska Stock
or of convertible securities convertible into or exercisable for shares of
ENSTAR Alaska Stock pursuant to Section 3(c)(iv) of the Articles of
Incorporation.
"Market Capitalization" of any class or series of common stock of the
Company on any day shall mean the product of (i) the Market Value of one share
of such class or series of common stock of the Company on
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such day and (ii) the number of shares of such class or series of common stock
of the Company outstanding on such day.
"Market Value" of a share of any class or series of capital stock of the
Company on any Business Day shall mean the average of the high and low reported
sales prices regular way of such share of such class or series on such Business
Day or in case no such reported sale takes place on such Business Day the
average of the reported closing bid and asked prices regular way of a share of
such class or series on such Business Day, in either case on the New York Stock
Exchange Composite Tape, or if the shares of such class or series are not listed
or admitted to trading on such Exchange on such Business Day, on the principal
national securities exchange in the United States on which the shares of such
class or series are listed or admitted to trading, or if not listed or admitted
to trading on any national securities exchange on such Business Day, on the
National Association of Securities Dealers Automated Quotations National Market
System, or if the shares of such class or series are not listed or admitted to
trading on any national securities exchange or quoted on such National Market
System on such Business Day, the average of the closing bid and asked prices of
a share of such class or series in the over-the-counter market on such Business
Day as furnished by any New York Stock Exchange member firm selected from time
to time by the Company, or if such closing bid and asked prices are not made
available by any such New York Stock Exchange member firm on such Business Day,
the market value of a share of such class or series as determined by the Board
of Directors; provided that, for purposes of determining the ratios set forth in
Sections 3(b)(i), 3(b)(ii), 3(b)(iii), 4(a) and 5 of the Articles of
Incorporation, as calculated over any period, (i) the "Market Value" of any
share of any class or series of common stock of the Company on any day prior to
the "ex" date or any similar date occurring during such period for any dividend
or distribution (other than as contemplated by clause (ii)(B) hereof) paid or to
be paid with respect to such class or series of common stock of the Company
shall be reduced by the fair market value of the per share amount of such
dividend or distribution and (ii) the "Market Value" of any share of any class
or series of common stock of the Company on any day prior to (A) the effective
date of any subdivision (by stock split or otherwise) or combination (by reverse
stock split or otherwise) of outstanding shares of such class or series of
common stock of the Company occurring during such period or (B) the "ex" date or
any similar date occurring during such period for any dividend or distribution
with respect to such class or series of common stock of the Company in shares of
such class or series of common stock of the Company shall be appropriately
adjusted to reflect such subdivision, combination, dividend or distribution. For
the purposes of the foregoing clause (i) the Board of Directors shall determine
the fair market value of any dividend or distribution.
The "Market Value Ratio," as of any date, shall mean the highest of the
following (calculated to the nearest five decimal places): (A) the average ratio
of A to B for the five-Business Day period ending on such date, (B) the quotient
of (1) the sum of (w) four times the average ratio of A to B for the
five-Business Day period ending on such date, (x) three times the average ratio
of A to B for the next preceding five-Business Day period, (y) two times the
average ratio of A to B for the next preceding five-Business Day period and (z)
the average ratio of A to B for the next preceding five-Business Day period,
divided by (2) ten and (C) if the dividend pursuant to clause (A) above was
declared and paid or the redemption pursuant to clause (B) of Section 3(b)(i)
was made prior to the commencement of the most recently completed fiscal quarter
of the Company, the average ratio of A to B for such fiscal quarter, where A is
the Market Value of one share of ENSTAR Alaska Stock and B is the Market Value
of one share of Seagull Common Stock or such other class or series of common
stock of the Company as is to be exchanged for ENSTAR Alaska Stock, as the case
may be.
"Number of Shares Issuable with Respect to the Retained Interest" shall
initially be zero (assuming the Company sells shares of ENSTAR Alaska Stock
representing 100% of the equity interest attributable to the ENSTAR Alaska Group
in the Offering); provided that such number from time to time shall be:
(i) increased by (A) the number of outstanding shares of ENSTAR Alaska
Stock repurchased by the Company, the consideration for which is attributed
to Seagull Energy and (B) the number (rounded, if necessary, to the nearest
whole number) equal to the fair value (as determined by the Board of
Directors) of assets or properties contributed by Seagull Energy to the
ENSTAR Alaska Group in consideration for an increase in the Number of
Shares Issuable with Respect to the Retained Interest
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divided by the Market Value of one share of ENSTAR Alaska Stock as of the
date of such contribution; and
(ii) decreased by (A) the number of shares of ENSTAR Alaska Stock
issued or sold by the Company, the proceeds of which are attributed to
Seagull Energy, (B) the number of shares of ENSTAR Alaska Stock issued upon
conversion or exercise of convertible securities which are attributed to
Seagull Energy, (C) the number of shares of ENSTAR Alaska Stock issued by
the Company as a dividend or distribution or by reclassification or
exchange to holders of Seagull Common Stock and (D) the number (rounded, if
necessary, to the nearest whole number) equal to the fair value (as
determined by the Board of Directors) of assets or properties transferred
from the ENSTAR Alaska Group to Seagull Energy in consideration for a
reduction in the Number of Shares Issuable with Respect to the Retained
Interest divided by the Market Value of one share of ENSTAR Alaska Stock as
of the date of such transfer; and
(iii) adjusted as appropriate to reflect subdivisions (by stock split
or otherwise) and combinations (by reverse stock split or otherwise) of
ENSTAR Alaska Stock and dividends or distributions of shares of ENSTAR
Alaska Stock to holders thereof and other reclassifications of ENSTAR
Alaska Stock.
Not earlier than the 16th Business Day and not later than the 20th Business
Day following the consummation of a sale of all or substantially all of the
properties and assets of the ENSTAR Alaska Group, the Company would be required
to publish, in all editions of a daily newspaper with a national circulation
that publishes financial news, an announcement as to which of the actions
specified in clauses (A), (B) or (C) above it had irrevocably determined to
take.
If the Company determines to pay a dividend pursuant to clause (A) above,
the Company would promptly following such determination cause to be given to
each holder of ENSTAR Alaska Stock and of convertible securities convertible
into or exercisable for ENSTAR Alaska Stock a notice setting forth (i) the
record date for determining holders entitled to receive such dividend, which
date shall be not earlier than the 30th Business Day and not later than the 40th
Business Day following the consummation of such Disposition, (ii) the
anticipated payment date of such dividend, (iii) the kind and aggregate amount
of shares of capital stock, cash and/or other securities or property to be
distributed in respect of shares of ENSTAR Alaska Stock, (iv) the number of
outstanding shares of ENSTAR Alaska Stock and the number of shares of ENSTAR
Alaska Stock into or for which such convertible securities are then convertible
or exercisable and (v) a statement to the effect that holders of such
convertible securities shall only be entitled to receive such dividend if they
convert such convertible securities into or exercise them for ENSTAR Alaska
Stock prior to the record date.
If the Company determined to undertake a redemption pursuant to clause (B)
above, the Company would promptly following such determination cause to be given
to each holder of ENSTAR Alaska Stock and of convertible securities convertible
into or exercisable for ENSTAR Alaska Stock a notice setting forth (i) a date
not earlier than the 30th Business Day and not later than the 40th Business Day
following the consummation of such Disposition which shall be the date as of
which shares of ENSTAR Alaska Stock then outstanding shall be subject to
redemption pursuant to such provision, (ii) the anticipated redemption date,
(iii) the kind and aggregate amount (or, in the case of a partial redemption,
the per share amount) of shares of capital stock, cash and/or other securities
or property to be paid as a redemption price in respect of shares of ENSTAR
Alaska Stock, (iv) the number of shares of ENSTAR Alaska Stock to be redeemed,
(v) the number of outstanding shares of ENSTAR Alaska Stock and the number of
shares of ENSTAR Alaska Stock into or for which such convertible securities are
then convertible or exercisable and (vi) a statement to the effect that holders
of such convertible securities shall only be eligible to participate in such
redemption if they convert such convertible securities into or exercise them for
ENSTAR Alaska Stock prior to the date referred to in clause (i) of this
sentence, and a statement as to what, if anything, such holder shall be entitled
to receive pursuant to the terms of such convertible securities and the Articles
of Incorporation if such holder thereafter converts or exercises such
convertible securities. Promptly following the applicable record date, the
Company would cause to be given to each holder of record as of such date of
ENSTAR Alaska Stock to be so redeemed a notice setting forth (A) a statement
that shares of ENSTAR Alaska Stock will be redeemed, (B) the
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redemption date, (C) in the event of a partial redemption, the number of shares
of ENSTAR Alaska Stock held by such holder to be redeemed, (D) the kind and per
share amount of shares of capital stock, cash and/or other securities or
property to be distributed to such holder with respect to each share of ENSTAR
Alaska Stock to be redeemed, including details as to the calculation thereof,
(E) the place or places where certificates for shares of ENSTAR Alaska Stock,
properly endorsed or assigned for transfer (unless the Company shall waive such
requirement), are to be surrendered for delivery of certificates for shares of
such capital stock, cash and/or other securities or property, (F) if applicable,
a statement to the effect that the shares being redeemed may no longer be
transferred on the transfer books of the Company after the date of the
applicable record date and (G) a statement to the effect that dividends on such
shares of ENSTAR Alaska Stock shall cease to be paid as of such redemption date.
Such notice shall be sent by first-class mail, postage prepaid, not less than 25
Business Days nor more than 35 Business Days prior to the redemption date, and
in any case to each holder of ENSTAR Alaska Stock to be redeemed, at such
holder's address as the same appears on the transfer books of the Company.
If the Company determined to undertake any exchange described above, the
Company would promptly following such determination cause to be given to each
holder of record of the ENSTAR Alaska Stock and of convertible securities
convertible into or exercisable for shares of ENSTAR Alaska Stock, a further
notice setting forth (i) a statement that shares of ENSTAR Alaska Stock shall be
exchanged or redeemed, as the case may be, (ii) the Exchange Date, (iii) the
kind and per share amount of shares of common stock of the Company or the ENSTAR
Alaska Group Subsidiary, as the case may be, to be issued in exchange for each
share of ENSTAR Alaska Stock, including details as to the calculation thereof,
(iv) the place or places where certificates for shares of ENSTAR Alaska Stock,
properly endorsed or assigned for transfer (unless the Company shall waive such
requirement), are to be surrendered for delivery of certificates for shares of
such capital stock, cash and/or other securities or property, (v) a statement to
the effect that, except for dividends or distributions declared prior to the
Exchange Date, dividends on such shares of ENSTAR Alaska Stock shall cease to be
paid as of such Exchange Date, (vi) if applicable, a statement to the effect
that the shares being redeemed may no longer be transferred on the transfer
books of the Company after the date of the applicable record date; and (vii) a
statement to the effect that a holder of convertible securities convertible into
or exercisable for shares of ENSTAR Alaska Stock shall only be entitled to
receive shares of common stock of the Company or the ENSTAR Alaska Group
Subsidiary, as the case may be, upon such exchange if such holder converts or
exercises such convertible securities on or prior to such Exchange Date, and a
statement as to what, if anything, such holder shall be entitled to receive
pursuant to the terms of such convertible securities and the Articles of
Incorporation if such holder thereafter converted or exercised such convertible
securities. Such notice would be sent by first-class mail, postage prepaid, not
less than 25 Business Days nor more than 35 Business Days prior to the Exchange
Date and in any case to each holder of the ENSTAR Alaska Stock and to each
holder of convertible securities convertible into or exercisable for shares of
ENSTAR Alaska Stock, at such holder's address as the same appears on the
transfer books of the Company.
Neither the failure to mail any notice described above to any particular
holder of ENSTAR Alaska Stock or, if applicable, of convertible securities
convertible into or exercisable for shares of ENSTAR Alaska Stock, nor any
defect therein shall affect the sufficiency thereof with respect to any other
holder of ENSTAR Alaska Stock or, if applicable, of such convertible securities.
If less than all of the outstanding shares of ENSTAR Alaska Stock were to
be redeemed pursuant to clause (B)(2) above, such shares would be redeemed by
the Company pro rata or by lot, among the holders of ENSTAR Alaska Stock
outstanding at the close of business on the date referred to in clause (i) of
the last sentence in the second preceding paragraph, or by such other method as
may be determined by the Board of Directors to be equitable.
No adjustments in respect of dividends would be made upon the exchange or
redemption of any shares of ENSTAR Alaska Stock; provided, however, that if such
shares were exchanged or redeemed by the Company after the record date for
determining holders of ENSTAR Alaska Stock entitled to any dividend or
distribution thereon, the holders of such shares at the close of business on
such record date would be entitled to receive the dividend or other distribution
payable on or with respect to such shares as of the date set for
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payment of such dividend or other distribution, notwithstanding such exchange or
redemption, in each case without interest.
Before any holder of shares of ENSTAR Alaska Stock would be entitled to
receive certificates representing shares of any capital stock, cash and/or other
securities or property to be distributed to such holder with respect to any
exchange or redemption of shares of ENSTAR Alaska Stock, such holder would be
required to surrender at such office as the Company specified certificates for
such shares of ENSTAR Alaska Stock, properly endorsed or assigned for transfer
(unless the Company waived such requirement). As soon as practicable after the
Company's receipt of certificates representing such shares of ENSTAR Alaska
Stock, the Company would deliver to the person for whose account such shares of
ENSTAR Alaska Stock were so surrendered, or to his nominee or nominees,
certificates representing the number of whole shares of the kind of capital
stock or cash and/or other securities or property to which such person was
entitled as aforesaid, together with any fractional payment referred to below,
in each case without interest. If less than all of the shares of ENSTAR Alaska
Stock represented by any one certificate were to be redeemed, the Company would
issue and deliver a new certificate for the shares of ENSTAR Alaska Stock not
redeemed.
The Company would not be required to issue or deliver fractional shares of
any class of capital stock or any fractional securities to any holder of ENSTAR
Alaska Stock upon any exchange, redemption, dividend or other distribution
described above. If more than one share of ENSTAR Alaska Stock were held at the
same time by the same holder, the Company could aggregate the number of shares
of any class of capital stock that would be issuable or the amount of securities
that would be deliverable to such holder upon any exchange, redemption, dividend
or other distribution (including any fractions of shares or securities). If the
number of shares of any class of capital stock or the amount of securities
remaining to be issued or delivered to any holder of ENSTAR Alaska Stock is a
fraction, the Company would, if such fractional shares were not issued or
delivered to such holder, pay a cash adjustment in respect of such fractional
shares in an amount equal to the fair market value of such fractional shares on
the fifth Business Day prior to the date such payment is to be made. For
purposes of the preceding sentence, "fair market value" of any fractional share
means (i) in the case of any fraction of a share of capital stock of the
Company, the product of such fraction and the Market Value of one share of such
capital stock and (ii) in the case of any other fractional security, such value
as is determined by the Board of Directors.
From and after any exchange or redemption of shares of ENSTAR Alaska Stock,
all rights of a holder of shares of ENSTAR Alaska Stock that were exchanged or
redeemed would cease except for the right, upon surrender of the certificates
representing such shares of ENSTAR Alaska Stock, to receive certificates
representing shares of the kind and amount of capital stock or cash and/or other
securities or property for which such shares were exchanged or redeemed,
together with any fractional payment and rights to dividends as provided above.
No holder of a certificate, that immediately prior to the applicable exchange
for ENSTAR Alaska Stock represented shares of ENSTAR Alaska Stock, would be
entitled to receive any dividend or other distribution with respect to shares of
any kind of capital stock into which ENSTAR Alaska Stock was exchanged until
surrender of such holder's certificate for a certificate or certificates
representing shares of such kind of capital stock. Upon such surrender, there
would be paid to the holder the amount of any dividends or other distributions
(without interest) which theretofore became payable with respect to a record
date after the exchange, but that were not paid by reason of the foregoing, with
respect to the number of whole shares of the kind of capital stock represented
by the certificate or certificates issued upon such surrender. From and after an
exchange for ENSTAR Alaska Stock, the Company would, however, be entitled to
treat the certificates for ENSTAR Alaska Stock that were not yet surrendered for
exchange as evidencing the ownership of the number of whole shares of the kind
or kinds of capital stock for which the shares of such ENSTAR Alaska Stock
represented by such certificates should have been exchanged, notwithstanding the
failure to surrender such certificates.
The Company would pay any and all documentary, stamp or similar issue or
transfer taxes that might be payable in respect of the issue or delivery of any
shares of capital stock and/or other securities on exchange of shares of ENSTAR
Alaska Stock pursuant to the Articles of Incorporation. The Company would not,
however, be required to pay any tax that might be payable in respect of any
transfer involved in the issuance and delivery of any shares of capital stock
and/or other securities in a name other than that in which the
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shares of ENSTAR Alaska Stock so exchanged or redeemed were registered, and no
such issuances or delivery would be made unless and until the person requesting
such issuance paid to the Company the amount of any such tax, or established to
the satisfaction of the Company that such tax had been paid.
Voting Rights
The Articles of Incorporation provide that the holders of all classes of
common stock of the Company shall vote together as a single class (with the
holders of all classes and series of capital stock, if any, of the Company
entitled to vote together with the holders of common stock of the Company) on
all matters as to which holders of common stock of the Company are entitled to
vote other than a matter with respect to which such class would be entitled to
vote separately. On all matters to be voted on by the holders of all classes of
common stock of the Company and any such class or series of capital stock
together as a single class, (i) each outstanding share of Seagull Common Stock
would have one vote and (ii) each outstanding share of ENSTAR Alaska Stock would
have a number of votes equal to the quotient (calculated to the nearest three
decimal places), as of the fifth Business Day prior to the applicable record
date or shareholder consent date, of (A) the sum of (1) four times the average
ratio of X to Y for the five-Business Day period ending on such fifth Business
Day, (2) three times the average ratio of X to Y for the next preceding
five-Business Day period, (3) two times the average ratio of X to Y for the next
preceding five-Business Day period and (4) the average ratio of X to Y for the
next preceding five-Business Day period, divided by (B) ten, where X is the
Market Value of ENSTAR Alaska Stock and Y is the Market Value of the Seagull
Common Stock or, if there are no shares of Seagull Common Stock outstanding on
such record or other applicable date or on any of the 25 Business Days prior
thereto, the sum of the Market Values of each class of common stock of the
Company then outstanding; provided that until the ENSTAR Alaska Stock or such
other class of common stock of the Company has been traded after issuance on a
national securities exchange or the National Association of Securities Dealers
Automated Quotations National Market System for at least 25 Business Days, each
outstanding share of ENSTAR Alaska Stock would be entitled to a number of votes
equal to the average ratio (calculated to the nearest three decimal places) of
the Market Value of a share of ENSTAR Alaska Stock to the Market Value of a
share of Seagull Common Stock (or, if there are no shares of Seagull Common
Stock outstanding, the sum of the average of the Market Values of a share of
each class of common stock of the Company then outstanding) for each Business
Day during the period commencing on the date the ENSTAR Alaska Stock or such
other class of common stock of the Company, as the case may be, is initially so
traded and ending on the last Business Day on or before the applicable record
date or shareholder consent date. If shares of only one class of common stock of
the Company were outstanding, each share of that class would have one vote. If
either class of common stock of the Company was entitled to vote separately as a
class with respect to any matter, each share of that class would be entitled to
one vote in the separate vote on such matter.
To illustrate the foregoing, if the weighted average Market Values for the
ENSTAR Alaska Stock and the Seagull Common Stock, as determined using the above
formula, were $18.25 and $27.00, respectively, each share of Seagull Common
Stock would have one vote and each share of ENSTAR Alaska Stock would have .676
of a vote ($18.25/$27.00). In voting on any proposal where both classes of
common stock vote together as a single class (with the holders of all classes or
series of preferred stock, if any, entitled to vote together with the holders of
common stock of the Company) and assuming there were issued and outstanding
36,000,000 shares of Seagull Common Stock and 7,500,000 shares of ENSTAR Alaska
Stock, the shares of Seagull Common Stock and ENSTAR Alaska Stock would
represent approximately 88% and 12%, respectively, of the total voting power.
The Company will set forth the amount of outstanding shares of the Seagull
Common Stock and the ENSTAR Alaska Stock in its Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q filed pursuant to the Exchange Act and will
disclose in any proxy statement for a shareholder meeting the number of
outstanding shares and per share voting rights of the Seagull Common Stock and
the ENSTAR Alaska Stock.
The relative voting rights of the Seagull Common Stock and the ENSTAR
Alaska Stock could fluctuate as described above so that a holder's voting rights
could more closely reflect the Market Value of such holder's
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equity investment in the Company. Fluctuations in the relative voting rights of
the Seagull Common Stock and the ENSTAR Alaska Stock could influence an investor
interested in acquiring and maintaining a fixed percentage of the Company's
voting power to acquire such percentage of both classes of the Company's common
stock, and would limit the ability of investors in one class to acquire for the
same consideration relatively more or less votes per share than investors in the
other class.
As a result of its ownership of the gas distribution operations included in
the ENSTAR Alaska Group, the Company is a "public utility company" within the
meaning of the 1935 Act. Accordingly, any company that directly or indirectly
owns, controls or holds with power to vote 10% or more of the outstanding voting
securities of the Company would generally be deemed to be a "holding company"
within the meaning of the 1935 Act, and therefore would be subject to the
registration, reporting and simplification requirements of the 1935 Act. The
calculation of ownership of the voting securities of the Company will be made on
the basis of the percentage of the voting power of the outstanding shares of the
Company. Because of the fluctuation in relative voting power between the ENSTAR
Alaska Stock and the Seagull Common Stock described above, a shareholder could
reach the 10% threshold without acquiring any additional shares. For example, if
a shareholder owned shares of Seagull Common Stock with 9.99% of the outstanding
voting power of the Company's shares, then a relatively modest drop in the
Market Value of the ENSTAR Alaska Stock (or increase in the Market Value of the
Seagull Common Stock) could increase the relative voting power of Seagull Common
Stock and cause the shareholder to become a "holding company" without acquiring
any additional shares. The Articles of Incorporation provide that, even if the
respective Market Values of the ENSTAR Alaska Stock and the Seagull Common Stock
fluctuate relative to the other from time to time, the number of votes to which
the ENSTAR Alaska Stock is entitled will not change until the next applicable
record date.
In addition to such other vote or consent as shall then be required by law,
the Articles of Incorporation or the Bylaws, the vote or consent of the holders
of at least 66 2/3% of all of the shares of ENSTAR Alaska Stock then
outstanding, voting as a separate class, shall be necessary for:
(i) the declaration or payment of any dividend on, or the making of
any other payment or distribution with respect to, any shares of any other
class of common stock, if such dividend, payment or distribution is to be
made with (x) any of the properties and assets of the ENSTAR Alaska Group
or (y) shares of ENSTAR Alaska Stock (or convertible securities convertible
into or exercisable for ENSTAR Alaska Stock) or any security that
represents an equity interest in a person or entity (other than the
Company) that owns any of the properties or assets of the ENSTAR Alaska
Group, other than any shares of ENSTAR Alaska Stock (or convertible
securities convertible into or exercisable for ENSTAR Alaska Stock) issued
by the Company as a dividend or distribution on the Seagull Common Stock,
but only if the sum of (1) the number of shares of ENSTAR Alaska Stock to
be so dividended or distributed (or the number of shares of ENSTAR Alaska
Stock into which or for which the convertible securities to be so
dividended or distributed would be convertible or exercisable at such time)
and (2) the number of such shares that would be issuable at such time upon
conversion or exercise of any other convertible securities then outstanding
that are attributed to Seagull Energy is less than or equal to the Number
of Shares Issuable with Respect to the Retained Interest;
(ii) the use of any of the properties and assets of the ENSTAR Alaska
Group in any business of the Company other than a business of the ENSTAR
Alaska Group, unless such use arises from a transfer for value of such
properties or assets from the ENSTAR Alaska Group to Seagull Energy; or
(iii) any issuance or sale of shares of ENSTAR Alaska Stock, or
convertible securities convertible into or exercisable for ENSTAR Alaska
Stock, for the account of any business group other than (x) the ENSTAR
Alaska Group or (y) Seagull Energy but only if the sum of (1) the number of
shares of ENSTAR Alaska Stock to be so issued or sold (or the number of
shares of ENSTAR Alaska Stock into which or for which the convertible
securities to be so issued or sold would be convertible or exercisable at
such time), and (2) the number of such shares which would be issuable at
such time upon conversion or exercise of any other convertible securities
then outstanding which are attributed to Seagull Energy is less than or
equal to the Number of Shares Issuable with Respect to the Retained
Interest;
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provided that, notwithstanding the foregoing, no such vote shall be required for
loans by the ENSTAR Alaska Group to Seagull Energy at rates determined in a
manner consistent with the Company's policy with respect to loans between groups
at such time. See "Management and Accounting Policies."
Similarly, in addition to such other vote or consent as shall then be
required by law, the Articles of Incorporation or the Bylaws, the vote or
consent of the holders of at least 66 2/3% of all of the shares of Seagull
Common Stock then outstanding, voting as a separate class, shall be necessary
for:
(i) the declaration or payment of any dividend on, or the making of
any other payment or distribution with respect to, any shares of ENSTAR
Alaska Stock, if such dividend, payment or distribution is to be made with
(x) any of the properties and assets of Seagull Energy or (y) shares of
Seagull Common Stock (or convertible securities convertible into or
exercisable for Seagull Common Stock) or any security that represents an
equity interest in a person or entity (other than the Company) that owns
any of the properties or assets of Seagull Energy;
(ii) the use of any of the properties and assets of Seagull Energy in
any business of the Company other than a business of Seagull Energy, unless
such use arises from a transfer for value of such properties or assets from
Seagull Energy to the ENSTAR Alaska Group; or
(iii) any issuance or sale of shares of Seagull Common Stock, or
convertible securities convertible into or exercisable for Seagull Common
Stock, for the account of the ENSTAR Alaska Group;
provided that, notwithstanding the foregoing, no such vote shall be required for
loans by Seagull Energy to the ENSTAR Alaska Group at rates determined in a
manner consistent with the Company's policy with respect to loans between groups
at such time. See "Management and Accounting Policies."
The approval of the holders of at least two-thirds of the outstanding
shares of either class of common stock of the Company voting as a separate class
is currently required under the TBCA for any amendment to the Articles of
Incorporation that would (i) increase or decrease the aggregate number of
authorized shares of such class; (ii) increase or decrease the par value of the
shares of such class; (iii) effect an exchange, reclassification or cancellation
of all or part of the shares of such class; (iv) effect an exchange, or create a
right of exchange, of all or any part of the shares of another class into shares
of such class; (v) change the designations, preferences, limitations or relative
rights of the shares of such class; (vi) change the shares of such class,
whether with or without par value, into the same or a different number of
shares, either with or without par value, of the same class or another class or
series; (vii) create a new class or series of shares having rights and
preferences equal, prior, or superior to the shares of such class, or increase
the rights and preferences of any class or series having rights and preferences
equal, prior, or superior to the shares of such class, or increase the rights
and preferences of any class or series having rights or preferences later or
inferior to the shares of such class in such a manner as to become equal, prior,
or superior to the shares of such class; (viii) divide the shares of such class
into series and fix and determine the designation of such series and the
variations in the relative rights and preferences between the shares of such
series; or (ix) cancel or otherwise affect dividends on the shares of such class
which had accrued but had not been declared.
Mergers and Consolidations
The holders of the outstanding shares of each class of common stock would
be entitled to receive, or have their shares converted into, a fraction of the
consideration attributable to the common stock of the Company pursuant to the
terms of any merger or consolidation to which the Company is a party, where such
fraction is equal to the quotient of (A) the sum of (1) four times the average
ratio of x to y for the five-Business Day period ending on the Business Day
prior to the date of the first public announcement of the merger or
consolidation, (2) three times the average ratio of x to y for the next
preceding five-Business Day period, (3) two times the average ratio of x to y
for the next preceding five-Business Day period and (4) the average ratio of x
to y for the next preceding five-Business Day period, divided by (B) ten, where
x is the Market Capitalization of such class of common stock, and y is the
aggregate Market Capitalization of all classes of common stock of the Company.
As indicated above, the foregoing provisions would apply only if the terms of
the merger or consolidation provide for the receipt of consideration by, or
conversion of shares held by, holders
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of common stock of the Company. For example, in a merger in which the Company is
the surviving corporation, it is likely that all shares of common stock of the
Company would remain outstanding and the foregoing provisions would not apply.
Liquidation Rights
In the event of a liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, after the holders of the Preferred Stock
receive the full preferential amounts plus any accumulated and unpaid dividends
to which they are entitled, the holders of the outstanding shares of each class
of common stock would be entitled to receive a fraction of the funds of the
Company remaining for distribution to its shareholders, where such fraction is
equal to the quotient of (A) the sum of (1) four times the average ratio of x to
y for the five-Business Day period ending on the Business Day prior to the date
of the first public announcement of (I) a voluntary liquidation, dissolution or
winding-up by the Company or (II) the institution of the proceeding for the
involuntary liquidation, dissolution or winding-up of the Company, (2) three
times the average ratio of x to y for the next preceding five-Business Day
period, (3) two times the average ratio of x to y for the next preceding
five-Business Day period and (4) the average ratio of x to y for the next
preceding five-Business Day period, divided by (B) ten, where x is the Market
Capitalization of such class of common stock, and y is the aggregate Market
Capitalization of both classes of common stock of the Company. Neither the
merger nor consolidation of the Company into or with any other corporation, nor
the merger or consolidation of any other corporation into or with the Company,
nor a sale, transfer or lease of all or any part of the assets of the Company,
would be deemed a liquidation, dissolution or winding-up for these purposes. See
"Mergers and Consolidations" above.
Other Rights
Neither the holders of the ENSTAR Alaska Stock nor the holders of the
Seagull Common Stock have any preemptive rights or any rights to convert their
shares into any other securities of the Company.
RETAINED INTEREST OF SEAGULL ENERGY IN ENSTAR ALASKA GROUP; OUTSTANDING INTEREST
FRACTION
The Company currently intends to sell shares of ENSTAR Alaska Stock
representing 100% of the equity interest in the ENSTAR Alaska Group.
Nevertheless, the percentage of the equity of the Company attributable to the
ENSTAR Alaska Group to be sold to the public in the Offering will depend upon
then prevailing market and other conditions at the time of the Offering. To the
extent that the number of shares of ENSTAR Alaska Stock to be issued and sold in
the Offering would represent less than 100% of the equity attributable to the
ENSTAR Alaska Group, the Company would retain and attribute to Seagull Energy a
Retained Interest in the ENSTAR Alaska Group. Seagull Energy's Retained Interest
in the ENSTAR Alaska Group would not be represented by actual shares of the
ENSTAR Alaska Stock and could not be voted by Seagull Energy.
The "Outstanding Interest Fraction" means the percentage interest in the
ENSTAR Alaska Group intended to be represented at any time by the outstanding
shares of ENSTAR Alaska Stock, and the "Retained Interest Fraction" means the
remaining percentage interest in the ENSTAR Alaska Group that is attributed to
Seagull Energy. The sum of the Outstanding Interest Fraction and the Retained
Interest Fraction would always equal 100%. The "Number of Shares Issuable with
Respect to the Retained Interest" means the number of shares of ENSTAR Alaska
Stock that could be sold or otherwise issued by the Company for the account of
Seagull Energy in respect of its Retained Interest.
The Company intends to use the net proceeds from the Offering to repay
amounts borrowed under the Company's Revolver, none of which debt is
attributable to the ENSTAR Alaska Group. In future offerings of ENSTAR Alaska
Stock, the Board would, in its sole discretion, determine the allocation of the
net proceeds of such sale between Seagull Energy and the ENSTAR Alaska Group. If
the Board allocated 100% of the net proceeds of a sale of ENSTAR Alaska Stock to
the ENSTAR Alaska Group, the net proceeds would be reflected entirely in the
financial statements of the ENSTAR Alaska Group. To the extent a Retained
Interest in the ENSTAR Alaska Group continues to be attributed to Seagull
Energy, net proceeds from any future
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offerings of ENSTAR Alaska Stock could be allocated to Seagull Energy or to both
Seagull Energy and the ENSTAR Alaska Group, in which event the net proceeds
would be reflected in the financial statements of the respective business group
as allocated. If the net proceeds of an offering of ENSTAR Alaska Stock were
allocated to Seagull Energy's Retained Interest in the ENSTAR Alaska Group, the
Number of Shares Issuable with Respect to the Retained Interest of Seagull
Energy in the ENSTAR Alaska Group would be reduced. If the net proceeds of an
offering of ENSTAR Alaska Stock were not allocated to Seagull Energy, the Number
of Shares Issuable with Respect to the Retained Interest in the ENSTAR Alaska
Group would not be reduced, but the Retained Interest Fraction with respect to
the ENSTAR Alaska Group would nonetheless be reduced, and the Outstanding
Interest Fraction with respect to the ENSTAR Alaska Group would be increased
accordingly. A determination as to the allocation of such net proceeds would be
made by the Board, in its sole discretion, after consideration of a number of
factors, including, among others, the relative levels of internally generated
cash flows of each business group, the capital expenditure plans of and
investment opportunities available to each business group and the availability,
cost and time associated with alternative financing sources.
If the Company issued shares of ENSTAR Alaska Stock for the account of
Seagull Energy, the relative voting power of holders of shares of ENSTAR Alaska
Stock immediately prior to such issuance would be diluted even though any
consideration received for such shares would not be attributed to the ENSTAR
Alaska Group. At any time that all shares of ENSTAR Alaska Stock that were
issuable with respect to the Retained Interest in the ENSTAR Alaska Group were
issued, the Retained Interest would be zero and shares of ENSTAR Alaska Stock
could no longer be issued for the account of Seagull Energy.
In the event of any dividend or other distribution on outstanding shares of
ENSTAR Alaska Stock (including any dividend of, or redemption with, Net Proceeds
from a Disposition) while Seagull Energy has a Retained Interest in the ENSTAR
Alaska Group, Seagull Energy's financial statements would be credited with, and
the ENSTAR Alaska Group's financial statements would be charged with, an amount
equal to the product of (i) the aggregate amount paid in respect of such
dividend or other distribution, times (ii) a fraction, the numerator of which is
the Number of Shares Issuable with Respect to the Retained Interest and the
denominator of which is the number of shares of ENSTAR Alaska Stock then
outstanding.
If any shares of ENSTAR Alaska Stock were subsequently repurchased from
time to time by the Company, the Company would identify (i) the number of shares
of ENSTAR Alaska Stock repurchased for the account of Seagull Energy with
respect to its Retained Interest, the purchase price of which would be reflected
entirely in the financial statements of Seagull Energy, and (ii) the number of
such shares repurchased for the account of the ENSTAR Alaska Group, the purchase
price of which would be reflected entirely in the financial statements of the
ENSTAR Alaska Group. In the event that the Company repurchases shares of ENSTAR
Alaska Stock for consideration that is attributable to Seagull Energy, the
Number of Shares Issuable with Respect to the Retained Interest and the Retained
Interest Fraction would increase, and the Outstanding Interest Fraction would
decrease accordingly. In the event that the Company repurchases shares of ENSTAR
Alaska Stock for consideration that is attributable to the ENSTAR Alaska Group,
the Number of Shares Issuable with Respect to the Retained Interest would not
change, but the Retained Interest Fraction would increase, and the Outstanding
Interest Fraction would decrease accordingly. The Board of Directors could, in
its sole discretion, determine whether repurchases of ENSTAR Alaska Stock should
be made with consideration attributable to Seagull Energy or the ENSTAR Alaska
Group, by considering a number of factors, including, among others, the relative
levels of internally generated cash flows of each business group, the long-term
business prospects for each business group, the capital expenditure plans of and
the investment opportunities available to each business group and the
availability, cost and time associated with alternative financing sources.
The Board of Directors could, in its sole discretion, determine from time
to time to transfer cash or other property from the ENSTAR Alaska Group to
Seagull Energy as a return of capital, which would decrease Seagull Energy's
Retained Interest, if any, in the ENSTAR Alaska Group and, accordingly, would
decrease the Retained Interest Fraction and increase the Outstanding Interest
Fraction. The Board of Directors could, in its sole discretion, determine from
time to time to contribute cash or other property of Seagull Energy as
additional equity to the ENSTAR Alaska Group, which would increase Seagull
Energy's Retained Interest in
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<PAGE> 83
the ENSTAR Alaska Group and, accordingly, would increase the Retained Interest
Fraction and decrease the Outstanding Interest Fraction. The Board of Directors
could determine, in its sole discretion, to make such contributions or returns
of capital after consideration of a number of factors, including, among others
the relative levels of internally generated cash flows of the business groups,
the long-term business prospects for each business group, the capital
expenditure plans of and the investment opportunities available to each business
group and the availability, cost and time associated with alternative financing
sources. See "Management and Accounting Policies."
For further discussion of, and illustrations of the calculation of the
Retained Interest Fraction, the Outstanding Interest Fraction and the Number of
Shares Issuable with Respect to the Retained Interest and the effects thereon of
dividends on, and issuances and repurchases of, shares of ENSTAR Alaska Stock,
and transfers of cash or other property attributed to one business group to the
other business group, see Annex II hereto.
SEAGULL COMMON STOCK
Dividends
Subject to certain restrictions on the payment of dividends set forth
below, dividends may be paid on the Seagull Common Stock as determined by the
Board of Directors out of the lesser of (i) the funds of the Company legally
available therefor and (ii) the Available Seagull Energy Dividend Amount, which
is intended to be similar to the amount that would be legally available for the
payment of dividends on Seagull Common Stock under the TBCA if Seagull Energy
were a separate company. There can be no assurance that there will be an
Available Seagull Energy Dividend Amount. See "Dividend Policy."
"Available Seagull Energy Dividend Amount," on any date, means an amount
equal to the excess of (i) the amount by which the total assets of Seagull
Energy exceed the total debts of Seagull Energy, over (ii) the stated capital
attributable to the Seagull Common Stock and any class or series of preferred
stock of the Company attributed to Seagull Energy as of such date, determined as
provided in the TBCA as if Seagull Energy were a corporation for such purposes
and on a basis consistent with the determination of Seagull Energy Corporation
Earnings Attributable to Seagull Energy; provided that such excess must be
reduced by an amount, if any, sufficient to ensure that Seagull Energy would be
able to pay its debts as they become due in the usual course of its business.
"Seagull Energy Corporation Earnings Attributable to Seagull Energy," for
any period, means the net income or loss of Seagull Energy for such period (or
for fiscal periods of the Company commencing prior to the date on which the
Articles of Amendment became effective (the "Effective Date"), the pro forma net
income or loss of Seagull Energy for such period as if the Effective Date had
been the first day of such fiscal period) determined in accordance with
generally accepted accounting principles in effect at such time, reflecting
income and expense of the Company allocated to Seagull Energy on a basis
substantially consistent with allocations made with respect to the ENSTAR Alaska
Group, including, without limitation, corporate administrative costs, net
interest and other financial costs and income taxes.
Assuming the Offering had been completed as of March 31, 1994, the
Available Seagull Energy Dividend Amount at such date would have been at least
$513.1 million (assuming no Retained Interest). Payment of dividends on any
preferred stock of the Company allocated to Seagull Energy will decrease the
Available Seagull Energy Dividend Amount. The Company currently has no
outstanding shares of preferred stock.
Voting Rights
The holders of shares of Seagull Common Stock will have the voting rights
described under the caption "ENSTAR Alaska Stock -- Voting Rights" above.
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Mergers and Consolidations
In the event of a merger or consolidation to which the Company is a party,
the holders of shares of Seagull Common Stock will have the rights described
under the caption "ENSTAR Alaska Stock -- Mergers and Consolidations" above.
Liquidation Rights
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Company, the holders of shares of Seagull
Common Stock will be entitled to receive assets of the Company in the amount and
in the manner described under the caption "ENSTAR Alaska Stock -- Liquidation
Rights" above.
RESTATED RIGHTS AGREEMENT
Pursuant to a Rights Agreement entered into in March 1989 (the "Rights
Agreement"), preferred stock purchase rights ("Seagull Energy Rights") were
initially issued by the Board to all holders of Seagull Common Stock. Upon
issuance of the ENSTAR Alaska Stock, the Rights Agreement will be amended and
restated to reflect the change in the capital structure of the Company, and the
Board will authorize and declare a distribution on all the ENSTAR Alaska Stock
that might be issued from time to time of one preferred stock purchase right (an
"ENSTAR Alaska Right") for each outstanding share of the ENSTAR Alaska Stock.
The Rights Agreement, as amended and restated (the "Restated Rights Agreement"),
provides that each ENSTAR Alaska Right (together with each Seagull Energy Right,
a "Right") entitles the registered holder to purchase from the Company a unit
consisting of one one-hundredth of a share (an "ENSTAR Alaska Unit") of ENSTAR
Alaska Series C Stock, at a purchase price of $ in cash per ENSTAR Alaska
Unit, subject to adjustment from time to time to prevent dilution. The Restated
Rights Agreement provides that each Seagull Energy Right entitles the registered
holder to purchase from the Company a unit consisting of one one-hundredth of a
share (a "Seagull Energy Unit") of Seagull Energy Series B Stock, at a purchase
price of $ in cash per Seagull Energy Unit, subject to adjustment from time
to time to prevent dilution. The Seagull Energy Series B Stock is attributed to
Seagull Energy. The terms of the Seagull Energy Series B Stock will be amended
to take into account the authorization of two classes of common stock of the
Company. The ENSTAR Alaska Series C Stock is a newly designated series of
Preferred Stock of the Company and will be attributed to the ENSTAR Alaska
Group. The Seagull Energy Units and the ENSTAR Alaska Units are collectively
referred to as "Units."
The Rights would not be exercisable until the Distribution Date (as defined
below) and, unless earlier redeemed by the Company as described below, the
Restated Rights Agreement would expire on March 22, 1999.
The Restated Rights Agreement provides that, prior to a Distribution Date,
the Seagull Energy Rights and ENSTAR Alaska Rights will attach to all
certificates representing shares of Seagull Common Stock or ENSTAR Alaska Stock,
respectively, then outstanding and no separate Rights certificates would be
distributed. Each share of Seagull Common Stock would also represent one Seagull
Energy Right and each share of ENSTAR Alaska Stock would also represent one
ENSTAR Alaska Right. The Seagull Common Stock and the ENSTAR Alaska Stock are
sometimes hereinafter referred to together as the "Voting Common Stock."
Until the Distribution Date, (i) the Rights will be evidenced by the
certificates for the Voting Common Stock registered in the names of the holders
thereof (which certificates shall also be deemed to be Right certificates) and
not by separate Right certificates, and (ii) the right to receive Right
certificates will be transferable only in connection with the transfer of shares
of Voting Common Stock.
Generally, if the Company is acquired in a merger or other business
combination transaction or 50% or more of the Company's consolidated assets or
earning power is sold, proper provision will be made so that each holder of a
Right will thereafter have the right to receive, upon the exercise thereof at
the then current
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exercise price of the Right, the number of shares of common stock of the
acquiring company that at the time of such transaction will have a market value
of two times the exercise price of the Right.
After the tenth day following the date on which any person or group of
affiliated or associated persons (other than certain excepted persons) acquires
beneficial ownership representing 20% or more of the total votes of the
outstanding shares of Voting Common Stock (unless such person first acquires
shares with 20% or more of the total votes of the outstanding shares of Voting
Common Stock pursuant to a cash tender offer for all of the Voting Common Stock,
which purchase increases such person's beneficial ownership to shares
representing 85% or more of the total votes of the outstanding Voting Common
Stock) (an "Acquiring Person") or during such time as there is an Acquiring
Person, there shall be any reclassification of securities or recapitalization or
reorganization of the Company or other transaction or series of transactions
that has the effect of increasing by more than 1% the proportionate share of the
outstanding shares of any class of equity securities of the Company or any of
its subsidiaries beneficially owned by the Acquiring Person (the earliest of
such dates shall be the "Distribution Date"), proper provision shall be made so
that each holder of a Right, other than Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the right
to receive upon exercise that number of shares of Seagull Common Stock or ENSTAR
Alaska Stock, as applicable, having a market value of two times the exercise
price of the Right. If a person inadvertently becomes the beneficial owner of
Voting Common Stock representing 20% or more of the total votes to which all
outstanding shares of Voting Common Stock were entitled due to the fluctuation
of the relative voting rights of the ENSTAR Alaska Stock and the Seagull Common
Stock described above, such person would not be an Acquiring Person unless and
until such person acquired additional shares of Voting Common Stock; provided,
however, that for purposes of the Restated Rights Agreement, a determination as
to the percentage of Voting Common Stock owned by a person shall be made
assuming that the date on which such person acquired its shares was a record
date. See "Description of Capital Stock -- ENSTAR Alaska Stock -- Voting Rights"
above.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on a substantial number of Rights being acquired
or approval of the Board. The Rights should not interfere with any merger or
other business combination approved by the Board of Directors of the Company
since, among other things, the Board of Directors may, at its option, at any
time until 10 days (subject to extension) following the date on which a person
or group (other than certain excepted persons) acquires shares representing 20%
or more of the total votes of the outstanding Voting Common Stock, redeem all
but not less than all the then outstanding Rights at $.01 per Right.
Prior to the Distribution Date, the Company would issue Rights on each
share of ENSTAR Alaska Stock and on each share of Seagull Common Stock so that
all such shares would have attached Rights. Until a Right is exercised, the
holder thereof, as such, would have no rights as a shareholder of the Company,
including without limitation, the right to vote or to receive dividends.
The Company, without the approval of any holders of Right certificates,
would be able to amend any of the provisions of the Restated Rights Agreement in
order to cure any ambiguity, to correct or supplement any provision that may be
defective or inconsistent, or to make any other provisions with respect to the
Rights that the Company deems necessary or desirable; provided, however, that no
amendment to adjust the time period governing redemption would be made at such
time as the Rights are not redeemable.
The Restated Rights Agreement, dated as of March 17, 1989, as amended,
between the Company and The First National Bank of Boston, as Rights Agent,
specifies the terms of the Rights and the foregoing description of the Rights is
qualified in its entirety by reference to the Rights Agreement, a copy of which
is available upon written request to the Investor Relations Department, Seagull
Energy Corporation, 1001 Fannin, Suite 1700, Houston, Texas 77002, telephone
(713) 951-4700.
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UNDERWRITING
The underwriters of the Offering (the "Underwriters"), for whom Lehman
Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Smith
Barney Shearson Inc. are acting as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement (the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part), to purchase from the Company, and
the Company has agreed to sell to each Underwriter, the aggregate number of
shares of ENSTAR Alaska Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------------------------------------------------------------ ---------
<S> <C>
Lehman Brothers Inc...............................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................................
Smith Barney Shearson Inc.........................................
---------
Total................................................... 7,500,000
---------
---------
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions, and that if any of the foregoing
shares of ENSTAR Alaska Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares must be so purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer part of the shares to the public at the public offering price
set forth on the cover page hereof and to certain dealers at such public
offering price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other Underwriters or to certain other
brokers or dealers. After the offering to the public, the offering price, and
other selling terms may be changed by the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments the Underwriters may be required to make in respect thereof.
The Company has agreed that it will not, without the prior written consent
of the Representatives, directly or indirectly offer, sell, contract to sell or
otherwise dispose of (except for (i) the issuance of shares in the Offering,
(ii) the granting of options or the issuance of shares pursuant to existing
employee benefit and employee stock option plans, (iii) in connection with the
exercise of the Rights if the same were to become exercisable or (iv) the
granting of options to employees or directors that do not become exercisable for
a period of 90 days) any shares of ENSTAR Alaska Stock or any security
convertible into or exchangeable for ENSTAR Alaska Stock for a period of ____
days after the date of the initial public offering of the shares of ENSTAR
Alaska Stock offered hereby.
Each of the Underwriters has provided from time to time, and expects to
provide in the future, investment banking services to the Company for which such
Underwriters have received and will receive customary fees and commissions.
The Company has engaged Lehman Brothers Inc. as its exclusive targeted
stock financial advisor in connection with the amendment to the Company's
Articles of Incorporation to authorize the issuance of the
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ENSTAR Alaska Stock. In connection therewith, the Company has agreed to pay
Lehman Brothers Inc. a financial advisory fee of $1.25 million if such amendment
is approved by the Company's shareholders. The Company has also agreed to
reimburse Lehman Brothers Inc. for certain reasonable out-of-pocket expenses
(including fees and expenses of its legal counsel) and has agreed to indemnify
Lehman Brothers Inc. against certain liabilities, including liabilities under
the federal securities laws. In addition, the Company has agreed that Lehman
Brothers Inc. may act as lead manager or agent in connection with the Offering.
Prior to the Offering, there has been no public market for the ENSTAR
Alaska Stock and therefore there can be no assurance as to the price to be
received by the Company upon the sale thereof. There can be no assurance that
any active trading market will develop for shares of the ENSTAR Alaska Stock or
as to the price at which shares of the ENSTAR Alaska Stock may trade in the
public market from time to time subsequent to the Offering. There can be no
assurance that investors will assign values to ENSTAR Alaska Stock based on the
reported financial results and prospects of the ENSTAR Alaska Group or the
dividend policies established by the Board with respect to such group. The
initial public offering price will be determined by negotiation among the
Company, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Smith Barney Shearson Inc. Among the factors to be considered
in determining the initial public offering price, in addition to prevailing
market conditions, will be the financial and operating history and condition of
the ENSTAR Alaska Group, the ENSTAR Alaska Group's business and financial
prospects, the prospects for the industry in which the ENSTAR Alaska Group
operates, the recent market prices of securities of companies in businesses
similar to that of the ENSTAR Alaska Group and other relevant matters.
LEGAL MATTERS
Certain legal matters with respect to the valid issuance, due
authorization, full payment and nonassessability of the ENSTAR Alaska Stock
offered in the Offering will be passed upon for the Company by Vinson & Elkins
L.L.P., 2500 First City Tower, Houston, Texas 77002-6760, and for the
Underwriters by Simpson Thacher & Bartlett, a partnership which includes
professional corporations, 425 Lexington Avenue, New York, New York 10017-3909.
Simpson Thacher & Bartlett will rely upon Vinson & Elkins L.L.P. with respect to
matters of Texas law. Mr. J. Evans Attwell, a partner of Vinson & Elkins L.L.P.,
is a director of the Company. As of the date hereof, members of the firm of
Vinson & Elkins L.L.P. having responsibility for legal matters associated with
the Company own approximately 30,000 shares of Seagull Common Stock.
EXPERTS
The consolidated financial statements and schedules of Seagull Energy
Corporation and subsidiaries as of December 31, 1993 and 1992, and for each of
the years in the three-year period ended December 31, 1993, incorporated by
reference herein and elsewhere in the Registration Statement have been
incorporated herein and in the Registration Statement in reliance upon the
reports of KPMG Peat Marwick, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The combined financial statements of the ENSTAR Alaska Group as of December
31, 1993 and 1992, and for each of the years in the three-year period ended
December 31, 1993 have been included herein and elsewhere in the Registration
Statement in reliance upon the reports of KPMG Peat Marwick, independent
certified public accountants, and upon the authority of said firm as experts in
accounting and auditing.
The reports of KPMG Peat Marwick covering the financial statements as
discussed in the two preceding paragraphs each refer to a change in accounting
principle for the adoption of Financial Accounting Standards Board Statements of
Financial Accounting Standards No. 106, Employers' Accounting for Post
Retirement Benefits Other Than Pensions, and No. 109, Accounting for Income
Taxes, in 1992.
The consolidated financial statements of Novalta Resources Inc. and
subsidiaries for the years ended December 31, 1993 and 1992 have been included
herein and in the Registration Statement in reliance upon
86
<PAGE> 88
the reports of Ernst & Young, independent certified public accountants, and upon
the authority of said firm as experts in accounting and auditing.
Certain information with respect to the gas and oil reserves of Houston Oil
& Minerals, Inc. and Houston Oil Trust derived from the report of K&A Energy
Consultants, Inc., independent petroleum engineers, has been incorporated by
reference herein in reliance upon such firm as experts with respect to the
matters contained therein.
Certain information with respect to the gas and oil reserves of Wacker Oil
Inc. derived from the report of R.A. Lenser & Associates, Inc., independent
petroleum engineers, had been incorporated by reference herein in reliance upon
such firm as experts with respect to the matters contained therein.
Certain information with respect to the gas and oil reserves associated
with the Mid-Continent Properties and Seagull Canada derived from the report of
DeGolyer and MacNaughton, independent consulting petroleum engineers, has been
included and incorporated by reference herein upon the authority of said firm as
experts with respect to the matter covered by such report and in giving such
report.
Certain information with respect to the gas and oil reserves of Seagull
Mid-South Inc. derived from the report of Netherland, Sewell & Associates, Inc.,
independent petroleum engineers, has been included and incorporated by reference
herein in reliance upon such firm as experts with respect to the matters
contained therein.
Certain information with respect to the Company's other gas and oil
reserves derived from the report of Ryder Scott Company, independent petroleum
engineers, has been included and incorporated by reference herein in reliance
upon such firm as experts with respect to the matters contained therein. With
respect to the Company's gas and oil reserves that had been reported on by K&A
Energy Consultants, Inc. or R.A. Lenser & Associates, Inc. prior to 1992, as
described above, certain information as of December 31, 1992 derived from the
report of Ryder Scott Company has been included herein in reliance upon Ryder
Scott Company as experts with respect to the matters contained therein.
87
<PAGE> 89
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Combined Statements of Earnings for the Years Ended December 31, 1993, 1992 and
1991................................................................................ F-3
Combined Balance Sheets as of December 31, 1993 and 1992.............................. F-4
Combined Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and
1991................................................................................ F-5
Notes to Combined Financial Statements for the Years Ended December 31, 1993, 1992
and 1991............................................................................ F-6
Combined Statements of Earnings (Unaudited) for the Three Months Ended March 31, 1994
and 1993............................................................................ F-17
Combined Balance Sheets (Unaudited) as of March 31, 1994 and December 31, 1993........ F-18
Combined Statements of Cash Flows (Unaudited) for the Three Months Ended March 31,
1994 and 1993....................................................................... F-19
Notes to Combined Financial Statements (Unaudited) for the Three Months Ended March
31, 1994 and 1993................................................................... F-20
</TABLE>
F-1
<PAGE> 90
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Seagull Energy Corporation:
We have audited the accompanying combined balance sheets of the ENSTAR
Alaska Group (as defined in Note 1 to the combined financial statements) as of
December 31, 1993 and 1992, and the related combined statements of earnings and
cash flows for each of the years in the three-year period ended December 31,
1993. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in Note 1, the combined financial statements of the
ENSTAR Alaska Group should be read in conjunction with the audited consolidated
financial statements of Seagull Energy Corporation included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1993.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the ENSTAR Alaska
Group as of December 31, 1993 and 1992, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1993, in conformity with generally accepted accounting principles.
As discussed in Notes 7 and 8 to the combined financial statements,
respectively, the ENSTAR Alaska Group adopted the provisions of the Financial
Accounting Standards Board Statements of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions, and No.
109, Accounting for Income Taxes, in 1992.
KPMG PEAT MARWICK
Houston, Texas
January 31, 1994, except as to Note 1,
Basis of Presentation, which is as of
March 11, 1994.
F-2
<PAGE> 91
ENSTAR ALASKA GROUP
COMBINED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues....................................................... $107,244 $109,598 $129,615
Costs of Operations:
Cost of gas sold............................................. 59,898 59,999 81,935
Operations and maintenance................................... 18,955 18,032 17,753
Management fees paid to Seagull Energy....................... 1,925 1,944 1,925
Depreciation and amortization................................ 7,511 7,184 6,978
-------- -------- --------
88,289 87,159 108,591
-------- -------- --------
Operating Profit............................................... 18,955 22,439 21,024
Other (Income) Expense:
Interest expense............................................. 6,298 6,074 5,955
Interest income and other.................................... (239) (293) (367)
-------- -------- --------
6,059 5,781 5,588
-------- -------- --------
Earnings Before Income Taxes and Cumulative Effect of Changes
in Accounting Principles..................................... 12,896 16,658 15,436
Income Taxes................................................... 5,848 6,202 5,810
-------- -------- --------
Earnings Before Cumulative Effect of Changes in Accounting
Principles................................................... 7,048 10,456 9,626
Cumulative Effect of Changes in Accounting Principles.......... -- 1,583 --
-------- -------- --------
Net Earnings................................................... $ 7,048 $ 12,039 $ 9,626
-------- -------- --------
-------- -------- --------
</TABLE>
See Accompanying Notes to Combined Financial Statements.
F-3
<PAGE> 92
ENSTAR ALASKA GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
-------- --------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Current Assets:
Cash and cash equivalents............................................ $ 623 $ 1,219
Customer accounts receivable, net.................................... 17,713 20,068
Inventories.......................................................... 2,431 2,560
Prepaid expenses and other........................................... 1,630 813
-------- --------
Total Current Assets......................................... 22,397 24,660
Property, Plant and Equipment -- at cost............................... 216,883 208,419
Accumulated Depreciation and Amortization.............................. 54,879 48,060
-------- --------
162,004 160,359
Other Assets........................................................... 1,300 1,500
-------- --------
Total Assets........................................................... $185,701 $186,519
-------- --------
-------- --------
LIABILITIES AND COMMON EQUITY
Current Liabilities:
Accounts payable..................................................... $ 11,977 $ 11,301
Purchased gas cost adjustment........................................ 1,843 1,149
Accrued expenses:
Interest.......................................................... 2,680 507
Other............................................................. 3,985 4,670
Current maturities of long-term debt................................. 1,538 3,743
-------- --------
Total Current Liabilities.................................... 22,023 21,370
Long-Term Debt......................................................... 62,787 67,011
Refundable Customer Advances for Construction.......................... 11,623 10,379
Other Noncurrent Liabilities........................................... 2,138 2,147
Deferred Income Taxes.................................................. 27,768 23,845
Common Equity.......................................................... 59,362 61,767
Commitments and Contingencies..........................................
-------- --------
Total Liabilities and Common Equity.................................... $185,701 $186,519
-------- --------
-------- --------
</TABLE>
See Accompanying Notes to Combined Financial Statements.
F-4
<PAGE> 93
ENSTAR ALASKA GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities
Net earnings............................................. $ 7,048 $ 12,039 $ 9,626
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Cumulative effect of changes in accounting
principles.......................................... -- (1,583) --
Depreciation and amortization......................... 8,587 7,920 7,868
Amortization of loan acquisition costs................ 169 156 153
Deferred income taxes................................. 3,372 2,704 2,399
Other................................................. 120 120 120
-------- -------- --------
19,296 21,356 20,166
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable, net..... 2,355 (1,774) 4,508
Decrease (Increase) in inventories, prepaid expenses
and other........................................ (108) (84) 64
Increase (Decrease) in accounts payable............. 1,370 (8,060) 4,602
Increase (Decrease) in accrued expenses and other... 1,690 (913) (1,872)
-------- -------- --------
Net Cash Provided By Operating Activities........ 24,603 10,525 27,468
Investing Activities
Capital expenditures..................................... (10,094) (9,024) (10,492)
Proceeds from disposition of (Costs to retire) property,
plant and equipment................................... (138) 145 91
-------- -------- --------
Net Cash Used In Investing Activities............ (10,232) (8,879) (10,401)
Financing Activities
Proceeds from issuance of long-term debt and other
borrowings............................................ -- 59,500 58,900
Principal payments on long-term debt and other
borrowings............................................ (6,549) (57,210) (43,251)
Fees paid to acquire financing........................... -- (302) --
Dividends paid to the Company............................ (8,000) (8,000) (28,000)
Other.................................................... (418) (4) 873
-------- -------- --------
Net Cash Used In Financing Activities............ (14,967) (6,016) (11,478)
-------- -------- --------
Increase (Decrease) In Cash And Cash
Equivalents.................................... (596) (4,370) 5,589
Cash And Cash Equivalents At Beginning Of Year............. 1,219 5,589 --
-------- -------- --------
Cash And Cash Equivalents At End Of Year................... $ 623 $ 1,219 $ 5,589
-------- -------- --------
-------- -------- --------
</TABLE>
See Accompanying Notes to Combined Financial Statements.
F-5
<PAGE> 94
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
- ----- -----
<S> <C> <C>
1. Summary of Significant Accounting Policies...................................... F-6
2. Related Party Activities........................................................ F-9
3. Property, Plant and Equipment................................................... F-9
4. Long-Term Debt.................................................................. F-10
5. Fair Value of Financial Instruments............................................. F-11
6. Common Equity................................................................... F-11
7. Employee Benefit Plans.......................................................... F-12
8. Income Taxes.................................................................... F-13
9. Selected Quarterly Financial Data (Unaudited)................................... F-16
10. Sales to Major Customers........................................................ F-16
11. Commitments and Contingencies................................................... F-16
</TABLE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. On March 11, 1994, Seagull Energy Corporation (the
"Company") announced that it would seek shareholder approval of a comprehensive
plan (the "ENSTAR Alaska Stock Proposal") that upon implementation would result
in (i) the creation of a new class of common stock (the "ENSTAR Alaska Stock")
intended to reflect separately the performance of the Company's natural gas
transmission and distribution operations in South-Central Alaska (the "ENSTAR
Alaska Group") and (ii) the amendment of certain terms of the existing class of
common stock (the "Seagull Common Stock") to allow for the issuance of the
ENSTAR Alaska Stock. This capital structure has not been reflected in these
financial statements. The ENSTAR Alaska Stock Proposal will not result in any
adjustment to the carrying amounts of the assets, liabilities or common equity
presented in the accompanying combined financial statements.
Because the ENSTAR Alaska Stock is intended to reflect separately the
performance of the ENSTAR Alaska Group, the Seagull Common Stock will reflect
the performance of the Company's remaining two business segments ("Seagull
Energy") that consist of (i) natural gas exploration, development and
production, which is the Company's primary business focus, and (ii) pipeline and
marketing operations. The ENSTAR Alaska Stock Proposal, which is summarized
below, will be submitted to the Company's shareholders for their consideration
and approval.
The Company currently expects that, shortly after shareholder approval of
the ENSTAR Alaska Stock Proposal and subject to prevailing market and other
conditions, it will make a public offering for cash of shares of ENSTAR Alaska
Stock (the "ENSTAR Alaska Stock Offering") representing 100% of the equity
attributable to the ENSTAR Alaska Group. The Board of Directors reserves the
right to sell shares of ENSTAR Alaska Stock representing less than 100% of such
equity and also reserves the right not to proceed with the ENSTAR Alaska Stock
Offering if it determines that consummation of such offering is not in the best
interests of the Company. The net proceeds of the ENSTAR Alaska Stock Offering
would be used to repay amounts borrowed under the Company's revolving credit
agreement, none of which debt is attributable to the ENSTAR Alaska Group.
The financial statements for the ENSTAR Alaska Group and for Seagull Energy
comprise all of the accounts included in the corresponding consolidated
financial statements of the Company. The ENSTAR Alaska Group financial
statements have been prepared based upon methods that management believes to be
reasonable and appropriate and reflect the combined historical financial
position, results of operations and cash flows of ENSTAR Alaska Group.
Consistent with the Articles of Amendment to the Articles of Incorporation and
relevant policies, such business group financial statements could also include
contingent liabilities that are not separately identified with the operations of
the ENSTAR Alaska Group.
If the ENSTAR Alaska Stock Proposal receives the requisite shareholder
approval and the ENSTAR Alaska Stock Offering is consummated, the Company will
provide to holders of ENSTAR Alaska Stock
F-6
<PAGE> 95
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
separate audited financial statements, management's discussion and analysis,
description of business and other relevant information for the ENSTAR Alaska
Group and the Company. Notwithstanding the allocation of the Company's assets
and liabilities (including contingent liabilities) and shareholders' equity
between the ENSTAR Alaska Group and Seagull Energy for the purpose of preparing
their respective financial statements, holders of ENSTAR Alaska Stock (together
with the holders of Seagull Common Stock) will be shareholders of the Company
and will continue to be subject to all of the risks associated with an
investment in the Company and all of its businesses and liabilities. Such
allocation and the change in the equity structure of the Company contemplated by
the ENSTAR Alaska Stock Proposal will not affect legal title to the assets or
responsibility for the liabilities of the Company or any of its subsidiaries. As
a result, the ENSTAR Alaska Stock Proposal will not affect the rights of holders
of the Company's or any of its subsidiaries' debt. Financial impacts arising
from Seagull Energy that affect the Company's financial condition could affect
the results of operations or financial position of the ENSTAR Alaska Group. In
addition, any net losses of Seagull Energy and dividends or distributions on, or
repurchase of, Seagull Common Stock will reduce the legally available funds of
the Company available for payment of dividends on the ENSTAR Alaska Stock.
Accordingly, the Company's consolidated financial information and the combined
financial information for Seagull Energy should be read in conjunction with the
ENSTAR Alaska Group's combined financial information.
Dividends on the ENSTAR Alaska Stock will be limited to the lesser of (i)
legally available funds of the Company under Texas law and (ii) the Available
ENSTAR Alaska Group Dividend Amount, defined as the ENSTAR Alaska Group's net
assets less the stated capital of all common and preferred stock attributable to
the ENSTAR Alaska Group, assuming no Retained Interest by Seagull Energy.
Amounts available for dividends may be further limited by covenants in the
Company's bank credit agreements and other financing documents. See the
Company's consolidated financial statements and notes related thereto. Dividends
on the ENSTAR Alaska Stock will be paid at the discretion of the Board of
Directors based primarily upon the financial condition, results of operations
and business requirements of the ENSTAR Alaska Group and the Company as a whole.
For a description of the basis for determining voting rights and liquidation
rights for each class of common stock, see "Description of Capital
Stock -- ENSTAR Alaska Stock -- Voting Rights" and "-- Liquidation Rights."
The accounting policies applicable to the preparation of the financial
statements of the ENSTAR Alaska Group and Seagull Energy could be modified or
rescinded in the sole discretion of the Board of Directors without approval of
shareholders, although there is no present intention to do so. The Board of
Directors could also adopt additional policies depending upon the circumstances.
Any determination of the Board of Directors to modify or rescind such policies,
or to adopt additional policies, would be made by the Board of Directors in good
faith and in the honest belief that such decision is in the best interests of
the Company. Any such determination would also be made in light of the
requirements imposed by the Alaska Public Utilities Commission ("APUC") that any
transactions between the ENSTAR Alaska Group and its affiliates, including
Seagull Energy, must be on terms comparable to arm's length transactions. In
addition, generally accepted accounting principles require that any change in
accounting policy be preferable (in accordance with such principles) to the
policy previously established.
Combination. The accompanying combined financial statements include the
combined accounts of the businesses comprising the ENSTAR Alaska Group. The
ENSTAR Alaska Group operates in Alaska through ENSTAR Natural Gas Company
("ENG"), a division of the Company, and Alaska Pipeline Company ("APC"), a
wholly owned subsidiary. The accompanying combined financial statements of the
ENSTAR Alaska Group reflect the basis of accounting established by the Company
as of June 17, 1985, the date the ENSTAR Alaska Group was acquired by the
Company. All significant intercompany transactions between ENG and APC have been
eliminated in preparation of the accompanying combined financial statements.
Regulation. The ENSTAR Alaska Group is subject to regulation by the APUC,
which has jurisdiction over, among other things, rates, accounting procedures
and standards of service. The ENSTAR Alaska Group
F-7
<PAGE> 96
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
meets the criteria and, accordingly, follows the reporting and accounting
requirements of Statement of Financial Accounting Standards ("SFAS") No. 71,
Accounting for the Effects of Certain Types of Regulation.
Cash Equivalents. Cash equivalents include all highly liquid investments
with a maturity of three months or less when purchased.
Supplemental Disclosures of Cash Flow Information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1992 1991
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year for:
Interest, net of amount capitalized..................... $3,719 $6,688 $3,741
Income taxes............................................ $3,336 $3,339 $5,413
</TABLE>
Inventories. Inventories consisting of materials and supplies are valued at
the lower of average cost or market value (net realizable value).
Property, Plant and Equipment. Utility plant is reflected at cost, net of
contributions in aid of construction. Capitalized costs include costs of funds,
payroll costs and certain general and administrative costs. Depreciation of the
utility plant and other property is computed using the straight-line method over
their estimated useful lives, which vary from 4 to 33 years.
Utility plant facilities are subject to APUC regulation. When utility
properties are disposed of or otherwise retired, the original cost of the
property, plus cost of retirement, less salvage value, is charged to accumulated
depreciation.
Maintenance, repairs and renewals are charged to operations and maintenance
expense except that renewals which extend the life of the property are
capitalized.
Revenue Recognition. The ENSTAR Alaska Group's operating revenues are based
on rates authorized by the APUC which are applied to customers' consumption of
natural gas. The ENSTAR Alaska Group records unbilled revenue, including amounts
to be billed under a purchased gas adjustment clause, at the end of each
accounting period.
Income Taxes. Effective January 1, 1992, the ENSTAR Alaska Group adopted
SFAS No. 109, Accounting for Income Taxes. This SFAS requires the use of the
liability method under which deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as part of the
provision for income taxes in the period that includes the enactment date.
Prior to January 1, 1992, the ENSTAR Alaska Group used the deferral method
of accounting for income taxes, under which deferred taxes were provided for all
material timing differences arising from the recognition of certain items of
income and expense in different accounting periods for tax and financial
accounting purposes using the tax rate applicable for the year of the
calculation. Under the deferral method, deferred taxes were not adjusted for
subsequent changes in tax rates.
Earnings Per Share. Historical earnings per share are omitted from the
combined statements of earnings since the ENSTAR Alaska Stock was not part of
the equity structure of the Company and the Seagull Common Stock had not been
amended to allow for the issuance of the ENSTAR Alaska Stock for the periods
presented.
F-8
<PAGE> 97
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. RELATED PARTY ACTIVITIES
The following policies and agreements may be modified or rescinded by
action of the Board of Directors, or the Board of Directors may adopt additional
policies, without approval of the shareholders of the Company, although the
Board of Directors has no present intention to do so.
Corporate Overhead Costs. Since 1985, when the Company acquired the ENSTAR
Alaska Group, Seagull Energy has provided certain management and administrative
services to the ENSTAR Alaska Group pursuant to a series of written management
agreements. The most recent such agreement, the Agreement for Services, was
entered into effective as of January 1, 1993 (the "Management Agreement").
Pursuant to the Management Agreement, Seagull Energy provides certain
management, financial reporting, legal, human resources, treasury, investor
relations and administrative services to the ENSTAR Alaska Group. In
consideration for these services, the ENSTAR Alaska Group has agreed to pay
Seagull Energy an annual management fee equal to the greater of (i) $1,925,000
and (ii) the sum of (A) the direct cost of providing such services and (B) the
allocable portion of Seagull Energy's general and administrative expenses
associated with providing such services, primarily determined by reference to
the relative amount of time spent by Seagull Energy's employees to provide such
services. The Management Agreement would continue in effect following
implementation of the ENSTAR Alaska Stock Proposal. The Management Agreement may
be amended by agreement between Seagull Energy and the ENSTAR Alaska Group. Fees
paid by the ENSTAR Alaska Group pursuant to the Management Agreement totaled
$1.9 million in each of the years 1993, 1992 and 1991 and were included in costs
of operations. It is not practicable for management to provide a meaningful
estimate of what the expenses for management and administrative services would
have been on a stand alone basis. Management believes that the methodology used
to calculate the management fee pursuant to the Management Agreement is
reasonable.
Income Taxes. Seagull Energy and the ENSTAR Alaska Group are also parties
to a tax sharing agreement dated as of January 1, 1986 (the "Tax Sharing
Agreement"). Because the ENSTAR Alaska Group is included in the Company's
consolidated group for income tax purposes, tax deductions and credits
attributable to Seagull Energy tend to reduce the amount of income tax that
would be payable if such taxes were calculated solely with respect to the
operations of the ENSTAR Alaska Group. Pursuant to the Tax Sharing Agreement,
the ENSTAR Alaska Group generally pays Seagull Energy an amount equal to the
amount of income taxes that would be payable by the ENSTAR Alaska Group on a
"stand alone" basis excluding the effects of historical purchase accounting
adjustments. In this regard, the assets and liabilities of the ENSTAR Alaska
Group are accounted for based upon the ENSTAR Alaska Group's original historical
cost prior to the ENSTAR Alaska Group's acquisition by the Company in 1985. To
the extent current taxes paid by the ENSTAR Alaska Group to Seagull Energy
pursuant to the Tax Sharing Agreement differ from amounts computed based on
income and expenses included in the accompanying statements of earnings, such
amount is recorded as an adjustment to common equity. The ENSTAR Alaska Group
would continue to be included in the Company's consolidated group for income tax
purposes after the implementation of the ENSTAR Alaska Stock Proposal, and the
Tax Sharing Agreement would continue in effect. The Tax Sharing Agreement may be
amended by agreement between Seagull Energy and the ENSTAR Alaska Group.
3. PROPERTY, PLANT AND EQUIPMENT
The major classes of the ENSTAR Alaska Group's property, plant and
equipment are shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gas plant....................................................... $196,312 $188,714
General plant................................................... 10,131 9,609
Land, buildings and other....................................... 10,440 10,096
-------- --------
$216,883 $208,419
-------- --------
-------- --------
</TABLE>
F-9
<PAGE> 98
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Total depreciation and amortization related to property, plant and
equipment amounted to approximately $8.6 million in 1993 and $7.9 million in
both 1992 and 1991.
4. LONG-TERM DEBT
The ENSTAR Alaska Group's portion of the Company's consolidated long-term
debt for 1993 and 1992 was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
------- -------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Unsecured industrial development bonds:
7.75%-8.00% due in 1993-2008................................. $12,915 $13,100
Other unsecured indebtedness:
9.95%-12.80% notes, due in 1993-2000......................... 2,750 9,107
8.15%-8.81% notes, due in 1997-2009.......................... 50,000 50,000
Other debt..................................................... 26 33
------- -------
65,691 72,240
Less: Current maturities....................................... 1,538 3,743
Unamortized debt discount................................ 1,366 1,486
------- -------
Total long-term debt........................................... $62,787 $67,011
------- -------
------- -------
</TABLE>
The combined financial statements reflect debt and related interest expense
incurred directly by the ENSTAR Alaska Group. The change in the equity structure
of the Company contemplated by the ENSTAR Alaska Stock Proposal will not affect
responsibility for the liabilities of the Company or any of its subsidiaries.
All long-term debt of the ENSTAR Alaska Group is issued by APC. The
majority of the capital requirements of ENG are met by loans from APC pursuant
to intercompany notes secured by a mortgage on the properties, rights and
franchises (other than certain excepted properties) of ENG. The senior unsecured
notes of APC provide for restrictions on dividends, additional borrowings and
purchases, redemptions or retirements of shares of capital stock, other than in
stock of APC. Under the most restrictive provisions of these financing
arrangements, approximately $14.2 million was available for the making of
restricted investments, restricted stock payments, including dividends, and
restricted subordinated debt payments as of December 31, 1993.
In July 1992, APC issued three new series of senior unsecured notes
totaling $50 million to a group of institutional investors. The notes have
interest rates ranging from 8.15% to 8.81% and have final maturities ranging
from 2001 to 2009. The proceeds were used to retire APC's then existing $40
million unsecured credit agreement, to meet sinking fund requirements on other
APC debt and for working capital purposes. The Company has not guaranteed
payment of the new senior unsecured notes of APC.
APC has a $5 million revolving line of credit, none of which was utilized
during 1993. This is a one year line of credit which has historically been
renewed annually and is used for seasonal working capital requirements.
F-10
<PAGE> 99
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Annual Maturities. At December 31, 1993, the ENSTAR Alaska Group's
aggregate annual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (DOLLARS IN THOUSANDS)
- ------------------------ ----------------------
<S> <C>
1994...................................................... $ 1,538
1995...................................................... $ 1,550
1996...................................................... $ 1,564
1997...................................................... $ 7,577
1998...................................................... $ 7,097
Thereafter................................................ $46,365
</TABLE>
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the ENSTAR Alaska Group's financial
instruments are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1993 1992
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............. $ 623 $ 623 $ 1,219 $ 1,219
Liabilities:
Customer deposits..................... (1,672) (1,571) (1,809) (1,701)
Refundable customer advances for
construction....................... (11,983) (9,858) (10,812) (8,314)
Long-term debt, including current
maturities......................... (64,325) (75,800) (70,754) (75,667)
</TABLE>
Cash and Cash Equivalents. The carrying amount approximates fair value
because of the short maturity of these instruments.
Customer Deposits and Refundable Customer Advances for Construction. The
fair value is based on discounted cash flow analyses utilizing a discount rate
of 6% with monthly payments ratably over the estimated period of deposit or
advance refunding.
Long-Term Debt. The fair value of APC's long-term debt is estimated based
on quoted market prices for the same or similar issues.
6. COMMON EQUITY
The sources of change in common equity are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1992 1991
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Common equity, beginning of year..................... $61,767 $59,279 $ 77,537
Net earnings......................................... 7,048 12,039 9,626
Dividends paid to the Company........................ (8,000) (8,000) (28,000)
Net equity transactions with Seagull Energy.......... (1,453) (815) (788)
Other................................................ -- (736) 904
------- ------- --------
Common equity, end of year........................... $59,362 $61,767 $ 59,279
------- ------- --------
------- ------- --------
</TABLE>
F-11
<PAGE> 100
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Net equity transactions with the ENSTAR Alaska Group represent the extent
current taxes paid by the ENSTAR Alaska Group to Seagull Energy pursuant to the
Tax Sharing Agreement differ from amounts computed on income and expenses.
7. EMPLOYEE BENEFIT PLANS
Retirement Plans. The ENSTAR Alaska Group has two defined benefit
retirement plans which cover salaried employees (the "Salaried Retirement Plan")
and operating employees (the "Operating Unit Plan"). Clerical unit personnel,
which constitute approximately 25% of total ENSTAR Alaska Group personnel, are
not covered under a retirement plan. Determination of benefits for the salaried
employees is based upon a combination of years of service and final monthly
compensation. Benefits for operating employees are based solely on years of
service. The ENSTAR Alaska Group's policy is to fund the minimum contributions
required by applicable regulations. The net pension costs are included in
operations and maintenance costs.
The following table sets forth the ENSTAR Alaska Group plans' funded status
and the amounts recognized in the combined financial statements at December 31,
1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
--------------------- ---------------------
SALARIED OPERATING SALARIED OPERATING
EMPLOYEES EMPLOYEES EMPLOYEES EMPLOYEES
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefit obligation............................ $(4,756) $(2,753) $(4,196) $(2,449)
--------- --------- --------- ---------
--------- --------- --------- ---------
Accumulated benefit obligation....................... $(4,866) $(2,773) $(4,285) $(2,465)
--------- --------- --------- ---------
--------- --------- --------- ---------
Projected benefit obligation for services rendered to
date................................................. $(5,921) $(2,773) $(5,778) $(2,465)
Plan assets at fair value, primarily listed stocks and
corporate and U. S. bonds............................ 4,094 2,790 3,721 2,467
--------- --------- --------- ---------
Plan assets in excess of (less than) projected benefit
obligation........................................... (1,827) 17 (2,057) 2
Unrecognized prior service cost........................ 90 19 245 21
Unrecognized net loss.................................. 417 632 618 585
Unrecognized net obligation (asset) arising out of the
initial application of SFAS No. 87, amortized over 15
years (salaried) and 18 years (operating)............ 748 (101) 842 (111)
Additional minimum liability........................... (200) -- (212) --
--------- --------- --------- ---------
Prepaid (accrued) pension cost......................... $ (772) $ 567 $ (564) $ 497
--------- --------- --------- ---------
--------- --------- --------- ---------
Net pension cost includes the following components:
Service cost -- benefits earned during the period.... $ 232 $ 110 $ 195 $ 84
Interest cost on projected benefit obligation........ 413 190 386 162
Actual return on plan assets......................... (333) (224) (185) (197)
Net amortization and deferral........................ 147 40 22 18
--------- --------- --------- ---------
Net periodic pension cost.............................. $ 459 $ 116 $ 418 $ 67
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The assumed weighted average discount rate for both ENSTAR Alaska Group
plans was 7.25% for 1993 and 1992, and the rate of increase in future
compensation for the Salaried Retirement Plan used in determining the projected
benefit obligation was 5% and 5.5% for 1993 and 1992, respectively. The expected
long-term rate of return on plan assets for both ENSTAR Alaska Group plans was
8%.
Profit Sharing Plans. The ENSTAR Alaska Group has profit sharing plans for
salaried employees and union employees. Annual contributions for each plan are
determined by the Company's Board of Directors pursuant to formulae which
contain minimum contribution requirements. Profit sharing expense was
F-12
<PAGE> 101
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $0.3 million for each of the years 1993, 1992 and 1991, and is
included in operations and maintenance costs.
Thrift Plan. The ENSTAR Natural Gas Company Thrift Plan (the "Thrift Plan")
is a qualified employee savings plan in accordance with the provisions of
Section 401(k) of the Internal Revenue Code of 1986, as amended. The ENSTAR
Alaska Group contributions to the Thrift Plan were approximately $0.2 million in
each of the years 1993, 1992 and 1991. The Thrift Plan's costs are included in
operations and maintenance costs.
Postretirement Benefits Other Than Pensions. The ENSTAR Alaska Group has a
postretirement medical plan which covers all of its salaried employees.
Determination of benefits is based upon the combined age of the retiree and
years of service at retirement. Prior to January 1, 1992, the ENSTAR Alaska
Group accounted for these obligations on a "pay-as-you-go" basis.
Effective January 1, 1992, the ENSTAR Alaska Group adopted SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions. This SFAS
changes the accounting treatment for such benefits from a pay-as-you-go basis to
a method where the expected costs for these benefits are accrued during the
years the plan participants render service. The ENSTAR Alaska Group recognized
the cumulative effect of this change in accounting principles in the line item
entitled "Cumulative Effect of Changes in Accounting Principles" in the
accompanying combined statement of earnings for the year ended December 31,
1992. Accordingly, periods prior to January 1, 1992 were not restated to reflect
this change.
The cumulative effect of this accounting change as of January 1, 1992,
resulted in a reduction in earnings of $0.7 million (after income taxes of $0.4
million). The effect of this change on earnings before the cumulative effect for
the year ended December 31, 1992, and the pro forma effect of retroactive
application of this accounting change on earnings for the year ended December
31, 1991, were not material.
The accrued postretirement benefit cost recognized in the combined balance
sheet at December 31, 1993 and 1992 was $1.3 million and $1.2 million,
respectively.
8. INCOME TAXES
Total income tax expense for the years ended December 31, 1993 and 1992 was
allocated as follows:
<TABLE>
<CAPTION>
1993 1992
------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Income tax provision before cumulative effect of changes in
accounting principles......................................... $5,848 $ 6,202
Adjustment for change in accounting principles.................. -- (2,783)
------ -------
$5,848 $ 3,419
------ -------
------ -------
</TABLE>
F-13
<PAGE> 102
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes for each of the years ended December 31,
1993, 1992 and 1991 was as follows:
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Current:
Federal................................................ $1,427 $1,901 $2,241
State.................................................. 1,049 1,597 1,170
------ ------ ------
Total current..................................... 2,476 3,498 3,411
------ ------ ------
Deferred:
Federal................................................ 3,263 2,729 2,214
State.................................................. 109 (25) 185
------ ------ ------
Total deferred.................................... 3,372 2,704 2,399
------ ------ ------
Income tax provision before cumulative effect of changes
in accounting principles............................... $5,848 $6,202 $5,810
------ ------ ------
------ ------ ------
</TABLE>
The provision for income taxes before cumulative effect of changes in
accounting principles for the years ended December 31, 1993 and 1992 is not
comparable to 1991 due to the ENSTAR Alaska Group's adoption of SFAS No. 109,
Accounting for Income Taxes, effective January 1, 1992. The ENSTAR Alaska Group
recognized the cumulative effect of this change in accounting principle in the
line item entitled "Cumulative Effect of Changes in Accounting Principles" in
the accompanying combined statement of earnings for the year ended December 31,
1992. Accordingly, periods prior to January 1, 1992 were not restated to reflect
this change. The cumulative effect of this accounting change as of January 1,
1992 resulted in an increase in earnings of approximately $2.3 million. The
effect of this change on earnings before income taxes for the year ended
December 31, 1992 was not material.
The provision for income taxes before cumulative effect of changes in
accounting principles for each of the years ended December 31, 1993, 1992 and
1991 was different than the amount computed using the federal statutory rate
(35% for 1993, 34% for 1992 and 1991) for the following reasons:
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Amount computed using the statutory rate................. $4,514 $5,664 $5,248
Increase (Reduction) in taxes resulting from:
State income taxes, net................................ 753 1,038 894
Excess of tax bases over book bases of acquired
assets.............................................. -- -- (381)
Increase in the beginning-of-the-year balance of the
deferred tax liabilities due to the increase in the
corporate federal
income tax rate..................................... 651 -- --
Other.................................................. (70) (500) 49
------ ------ ------
Income tax provision before cumulative effect of changes
in
accounting principles.................................. $5,848 $6,202 $5,810
------ ------ ------
------ ------ ------
</TABLE>
F-14
<PAGE> 103
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of deferred income tax expense attributable to
income from continuing operations for the years ended December 31, 1993 and 1992
are as follows:
<TABLE>
<CAPTION>
1993 1992
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax expense (exclusive of the effects of other
components
listed below)................................................. $2,721 $2,704
Increase in the beginning-of-the-year balance of the deferred
tax liabilities due to the increase in the corporate federal
income tax rate............................................... 651 --
------ ------
$3,372 $2,704
------ ------
------ ------
</TABLE>
As discussed in Note 1, under SFAS No. 109 deferred income taxes have been
provided for all temporary differences between the carrying amounts of assets
and liabilities for financial accounting and tax purposes. In 1991, prior to the
adoption of SFAS No. 109, deferred income taxes were provided based on timing
differences in certain items of income and expense recognized for income tax
purposes in periods different from the periods for financial accounting
purposes.
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax liabilities and deferred tax assets as of December
31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Deferred tax liabilities:
Property, plant and equipment, due to differences in
depreciation, depletion and amortization................. $29,485 $25,617
Other....................................................... 1,024 1,226
------- -------
Deferred tax liabilities...................................... 30,509 26,843
------- -------
Deferred tax assets:
Minimum tax credit carryforwards............................ -- (41)
Investment tax credit carryforwards......................... (1,432) (1,643)
Deferred compensation/retirement related items accrued for
financial reporting purposes............................. (241) (42)
Other....................................................... (2,251) (1,905)
------- -------
Deferred tax assets........................................... (3,924) (3,631)
------- -------
Net deferred tax liabilities.................................. $26,585 $23,212
------- -------
------- -------
</TABLE>
For federal income tax purposes, as of December 31, 1993, the ENSTAR Alaska
Group has unused investment tax credits of approximately $1.4 million which will
expire in 1999 and 2000.
During 1991, the tax effects of timing differences were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1991
--------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Depreciation......................................................... $2,947
Minimum tax credit carryforward for tax purposes..................... (132)
Other................................................................ (416)
--------
Total deferred tax provision............................... $2,399
--------
--------
</TABLE>
F-15
<PAGE> 104
9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
<TABLE>
<CAPTION>
REVENUES OPERATING PROFIT NET EARNINGS (LOSS)
---------------------- -------------------- --------------------
1993 1992 1993 1992 1993 1992
-------- -------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
March 31,........ $ 39,192 $ 37,456 $ 9,099 $ 9,365 $ 4,552 $ 6,379(*)
June 30,......... 18,925 20,151 1,360 2,556 (115) 744
September 30,.... 14,921 15,980 617 1,364 (1,325) (121)
December 31,..... 34,206 36,011 7,879 9,154 3,936 5,037
-------- -------- ------- ------- ------- -------
Total... $107,244 $109,598 $18,955 $22,439 $ 7,048 $12,039
-------- -------- ------- ------- ------- -------
-------- -------- ------- ------- ------- -------
</TABLE>
- ---------------
(*) Includes the cumulative effect of two changes in accounting principles in
the first quarter of 1992 representing an increase in earnings of
approximately $1.6 million. (See Notes 1, 7 and 8).
10. SALES TO MAJOR CUSTOMERS
The ENSTAR Alaska Group had sales of 10% or more of total combined revenues
to the following customers:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1992 1991
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U. S. Governmental Agencies................... $12,312 11% $12,210 11% $13,508 10%
Municipality of Anchorage..................... 3,303 3% 3,673 3% 17,038 13%
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
Concentrations of Credit Risk. The ENSTAR Alaska Group operates in the
transmission and distribution phases of the natural gas industry with sales to
end-users such as commercial businesses, industrial concerns and residential
consumers. While certain of these customers are affected by periodic downturns
in the economy in general or in their specific industry, the ENSTAR Alaska Group
believes that its level of credit-related losses due to such economic
fluctuations has been immaterial and will continue to be immaterial to the
ENSTAR Alaska Group's results of operations in the long term.
Litigation. The Company is a party to ongoing litigation in the normal
course of business or other litigation with respect to which the Company is
indemnified pursuant to various purchase agreements or other contractual
arrangements. Management regularly analyzes current information and, as
necessary, provides accruals for probable liabilities on the eventual
disposition of these matters. While the outcome of lawsuits or other proceedings
against the Company cannot be predicted with certainty, management believes that
the effect on the ENSTAR Alaska Group's financial condition and results of
operations, if any, will not be material.
F-16
<PAGE> 105
ENSTAR ALASKA GROUP
COMBINED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1994 1993
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenues................................................................. $36,266 $39,192
Costs of Operations:
Cost of gas sold....................................................... 19,250 22,528
Operations and maintenance............................................. 5,139 5,223
Management fees paid to Seagull Energy................................. 481 486
Depreciation and amortization.......................................... 1,949 1,856
------- -------
26,819 30,093
------- -------
Operating Profit......................................................... 9,447 9,099
Other (Income) Expense:
Interest expense....................................................... 1,468 1,673
Interest income and other.............................................. (56) (96)
------- -------
1,412 1,577
------- -------
Earnings Before Income Taxes............................................. 8,035 7,522
Income Taxes............................................................. 3,253 2,970
------- -------
Net Earnings............................................................. $ 4,782 $ 4,552
------- -------
------- -------
</TABLE>
See Accompanying Notes to Unaudited Combined Financial Statements.
F-17
<PAGE> 106
ENSTAR ALASKA GROUP
COMBINED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
--------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................... $ 4,869 $ 623
Customer accounts receivable, net.................................. 15,698 17,713
Inventories........................................................ 2,777 2,431
Prepaid expenses and other......................................... 1,724 1,630
--------- ------------
Total Current Assets....................................... 25,068 22,397
Property, Plant and Equipment -- at cost............................. 218,067 216,883
Accumulated Depreciation and Amortization............................ 56,927 54,879
--------- ------------
161,140 162,004
Other Assets......................................................... 1,248 1,300
--------- ------------
Total Assets............................................... $ 187,456 $185,701
--------- ------------
--------- ------------
LIABILITIES AND COMMON EQUITY
Current Liabilities:
Accounts payable................................................... $ 9,531 $ 11,977
Purchased gas cost adjustment...................................... 2,273 1,843
Accrued expenses:
Interest........................................................ 1,587 2,680
Other........................................................... 7,057 3,985
Current maturities of long-term debt............................... 1,536 1,538
--------- ------------
Total Current Liabilities.................................. 21,984 22,023
Long-Term Debt....................................................... 62,816 62,787
Refundable Customer Advances for Construction........................ 11,306 11,623
Other Noncurrent Liabilities......................................... 2,256 2,138
Deferred Income Taxes................................................ 28,664 27,768
Common Equity........................................................ 60,430 59,362
Commitments and Contingencies........................................
--------- ------------
Total Liabilities and Common Equity........................ $ 187,456 $185,701
--------- ------------
--------- ------------
</TABLE>
See Accompanying Notes to Unaudited Combined Financial Statements.
F-18
<PAGE> 107
ENSTAR ALASKA GROUP
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1994 1993
------ ------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Operating Activities
Net earnings........................................................... $4,782 $4,552
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization....................................... 2,205 2,126
Amortization of loan acquisition costs.............................. 42 43
Deferred income taxes............................................... 896 1,713
Other............................................................... 30 30
------ ------
7,955 8,464
Changes in operating assets and liabilities:
Decrease in accounts receivable, net................................ 2,015 2,154
Increase in inventories, prepaid expenses and other................. (423) (811)
Decrease in accounts payable........................................ (2,016) (2,640)
Increase in accrued expenses and other.............................. 2,122 2,516
------ ------
Net Cash Provided By Operating Activities.................... 9,653 9,683
Investing Activities
Capital expenditures................................................... (1,385) (1,340)
Proceeds from disposition of (Costs to retire) property, plant and
equipment........................................................... 28 (3)
------ ------
Net Cash Used In Investing Activities........................ (1,357) (1,343)
Financing Activities
Proceeds from issuance of long-term debt and other borrowings.......... 1,800 --
Principal payments on long-term debt and other borrowings.............. (1,803) (2)
Dividends paid to the Company.......................................... (2,250) (2,000)
Other.................................................................. (1,797) (1,564)
------ ------
Net Cash Used In Financing Activities........................ (4,050) (3,566)
------ ------
Increase In Cash And Cash Equivalents........................ 4,246 4,774
Cash And Cash Equivalents At Beginning Of Period......................... 623 1,219
------ ------
Cash And Cash Equivalents At End Of Period............................... $4,869 $5,993
------ ------
------ ------
</TABLE>
See Accompanying Notes to Unaudited Combined Financial Statements.
F-19
<PAGE> 108
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combination. The accompanying combined financial statements include the
combined accounts of the businesses comprising the ENSTAR Alaska Group. The
ENSTAR Alaska Group operates in Alaska through ENG, a division of the Company,
and APC, a wholly owned subsidiary.
Supplemental Disclosures of Cash Flow Information.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
1994 1993
------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash paid during the period for:
Interest, net of amount capitalized............................... $2,531 $360
Income taxes...................................................... $ 106 $967
</TABLE>
2. COMMON EQUITY
The sources of change in common equity are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1994 1993
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Common equity, beginning of year................................ $59,362 $61,767
Net earnings.................................................... 4,782 4,552
Dividends paid to the Company................................... (2,250) (2,000)
Net equity transactions with Seagull Energy..................... (1,464) (1,376)
------- -------
Common equity, end of period.................................... $60,430 $62,943
------- -------
------- -------
</TABLE>
Net equity transactions with Seagull Energy represent the extent current
taxes paid by the ENSTAR Alaska Group to Seagull Energy pursuant to the tax
sharing agreement between Seagull Energy and the ENSTAR Alaska Group differ from
amounts computed on income and expenses.
3. COMMITMENTS AND CONTINGENCIES
The Company is a party to ongoing litigation in the normal course of
business. Management regularly analyzes current information and, as necessary,
provides accruals for probable liabilities on the eventual disposition of these
matters. While the outcome of lawsuits or other proceedings against the Company
cannot be predicted with certainty, management believes that the effect on the
ENSTAR Alaska Group's financial condition and results of operations, if any,
will not be material.
F-20
<PAGE> 109
ANNEX I
INDEX OF CERTAIN TERMS
<TABLE>
<CAPTION>
PAGE ON WHICH TERM
IS DEFINED IN THE
TERM PROSPECTUS
- ---------------------------------------------------------------------------- ------------------
<S> <C>
1935 Act.................................................................... 11
Acquiring Person............................................................ 84
APC......................................................................... 3
APUC........................................................................ 3
Available ENSTAR Alaska Dividend Amount..................................... 68
Available Seagull Energy Dividend Amount.................................... 82
Banks....................................................................... 66
Board....................................................................... cover
Borrowing Base.............................................................. 66
Business Day................................................................ 71
Canadian Credit Agreement................................................... 67
Commission.................................................................. 2
Company..................................................................... cover
Credit Agreement............................................................ 66
Disposition................................................................. 70
Distribution Date........................................................... 84
Effective Date.............................................................. 69
ENG......................................................................... 3
ENSTAR Alaska Group......................................................... cover
ENSTAR Alaska Group Subsidiary.............................................. 69
ENSTAR Alaska Right......................................................... 83
ENSTAR Alaska Series C Stock................................................ 68
ENSTAR Alaska Stock......................................................... cover
ENSTAR Alaska Unit.......................................................... 83
Exchange Act................................................................ 2
Exchange Date............................................................... 72
Heating degree days......................................................... 30
Management Agreement........................................................ 9
Market Capitalization....................................................... 72
Market Value................................................................ 73
Market Value Ratio.......................................................... 73
Net Proceeds................................................................ 71
Novalta..................................................................... 7
Number of Shares Issuable with Respect to the Retained Interest............. 73
Outstanding Interest Fraction............................................... 14
Preferred Stock............................................................. 68
Registration Statement...................................................... 2
Representatives............................................................. 85
Restated Rights Agreement................................................... 83
Retained Interest........................................................... 14
Retained Interest Fraction.................................................. 14
Revolver.................................................................... cover
Right....................................................................... 83
Rights Agreement............................................................ 83
Seagull Canada.............................................................. 67
Seagull Canada Acquisition.................................................. 7
</TABLE>
I-1
<PAGE> 110
<TABLE>
<CAPTION>
PAGE ON WHICH TERM
IS DEFINED IN THE
TERM PROSPECTUS
- ---------------------------------------------------------------------------- ------------------
<S> <C>
Seagull Common Stock........................................................ cover
Seagull Energy.............................................................. 5
Seagull Energy Corporation Earnings Attributable to the ENSTAR Alaska
Group..................................................................... 69
Seagull Energy Corporation Earnings Attributable to Seagull Energy.......... 82
Seagull Energy Rights....................................................... 83
Seagull Energy Series B Stock............................................... 68
Seagull Energy Unit......................................................... 83
Stock Split................................................................. 55
Tax Sharing Agreement....................................................... 9
TBCA........................................................................ 12
Underwriters................................................................ 85
Units....................................................................... 83
Voting Common Stock......................................................... 83
</TABLE>
I-2
<PAGE> 111
ANNEX II
ILLUSTRATIONS OF CERTAIN TERMS
RETAINED INTEREST
The following illustrations demonstrate the calculations of Seagull
Energy's Retained Interest in the ENSTAR Alaska Group based on the assumptions
set forth herein. In the illustrations below, (i) 1,200 shares of ENSTAR Alaska
Stock are assumed to be authorized for issuance and (ii) 600 shares are assumed
to be the number of shares of ENSTAR Alaska Stock initially issuable with
respect to Seagull Energy's Retained Interest in the ENSTAR Alaska Group (the
"Number of Shares Issuable with Respect to the Retained Interest"). Unless
otherwise specified, each illustration below should be read independently as if
none of the other transactions referred to below had occurred. Actual
calculations may be slightly different due to rounding. For purposes of this
Annex II, the offering of shares of ENSTAR Alaska Stock to which this Prospectus
relates is referred to as the "ENSTAR Alaska Stock Offering."
At any given time, the fractional interest in the earnings and equity
attributable to the ENSTAR Alaska Group that is held by the holders of the
outstanding ENSTAR Alaska Stock (the "Outstanding Interest Fraction") would be
equal to:
Outstanding Shares of
ENSTAR Alaska Stock
-------------------------------------------------------------------------
Outstanding Shares of ENSTAR Alaska Stock + Number of Shares
Issuable with Respect to the Retained Interest
The balance of the equity attributable to the ENSTAR Alaska Group is
retained by Seagull Energy ("Retained Interest") and, at any given time, the
fractional interest in the equity attributable to the ENSTAR Alaska Group that
is intended to be represented by the Retained Interest (the "Retained Interest
Fraction") would be equal to:
Number of Shares Issuable with
Respect to the Retained Interest
-------------------------------------------------------------------------
Outstanding Shares of ENSTAR Alaska Stock + Number of Shares
Issuable with Respect to the Retained Interest
The sum of the Outstanding Interest Fraction and the Retained Interest
Fraction would always equal 100%.
ENSTAR ALASKA STOCK OFFERING
The following illustrations reflect an assumed sale by the Company of 450
shares of ENSTAR Alaska Stock in the ENSTAR Alaska Stock Offering.
Offering for Account of Seagull Energy
Assume all of such shares are identified as sold for the account of Seagull
Energy in respect of its Retained Interest, with the net proceeds reflected
entirely in the financial statements of Seagull Energy.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 0
Newly issued shares for account of Seagull Energy...................... 450
----
Total issued and outstanding after ENSTAR Alaska Stock
Offering................................................... 450
----
----
</TABLE>
II-1
<PAGE> 112
- - The Number of Shares Issuable with Respect to the Retained Interest would
decrease by the number of shares of ENSTAR Alaska Stock issued in the ENSTAR
Alaska Stock Offering for the account of Seagull Energy.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Retained Interest prior
to ENSTAR Alaska Stock Offering...................................... 600
Shares issued in ENSTAR Alaska Stock Offering.......................... 450
----
Number of Shares Issuable with Respect to the Retained Interest after
ENSTAR Alaska Stock Offering......................................... 150
----
----
</TABLE>
- - As a result, the Outstanding Interest Fraction that is represented by the
issued and outstanding shares of ENSTAR Alaska Stock (450) is 75%, calculated
as follows:
450
------------
450 + 150
The Retained Interest Fraction would accordingly be 25%.
- - In this case, in the event of any dividend or other distribution paid on the
outstanding shares of ENSTAR Alaska Stock (other than a dividend or other
distribution payable in shares of ENSTAR Alaska Stock), the financial
statements of Seagull Energy would be credited, and the financial statements
of the ENSTAR Alaska Group would be charged, with an amount equal to 33.3%
(representing the ratio of the Number of Shares Issuable with Respect to the
Retained Interest (150) to the total number of shares of ENSTAR Alaska Stock
issued and outstanding following the ENSTAR Alaska Stock Offering (450)) of
the aggregate amount of such dividend or distribution. If, for example, a
dividend of $1.00 per share were declared and paid on the 450 shares of
ENSTAR Alaska Stock outstanding (an aggregate of $450), Seagull Energy
financial statements would be credited with $150, and the ENSTAR Alaska Group
financial statements would be charged with that amount in addition to the
$450 dividend paid to the holders of ENSTAR Alaska Stock (a total of $600).
- - Immediately after the ENSTAR Alaska Stock Offering, the Company would have
750 authorized and unissued shares of such ENSTAR Alaska Stock remaining
(1,200 minus 450 issued and outstanding).
Offering for Account of the ENSTAR Alaska Group
Assume all of such shares are identified as sold for the account of the
ENSTAR Alaska Group as an increase in its equity, with the net proceeds
reflected entirely in the financial statements of the ENSTAR Alaska Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 0
Newly issued shares for account of the ENSTAR Alaska Group............. 450
----
Total issued and outstanding after ENSTAR Alaska Stock
Offering................................................... 450
----
----
</TABLE>
- - The Number of Shares Issuable with Respect to the Retained Interest (600)
would remain unchanged.
- - As a result, the issued and outstanding shares (450) would represent an
Outstanding Interest Fraction of 42.9%, calculated as follows:
450
------------
450 + 600
The Retained Interest Fraction would accordingly be 57.1%.
- - In this case, in the event of any dividend or other distribution paid on the
outstanding shares of ENSTAR Alaska Stock (other than a dividend or other
distribution payable in shares of ENSTAR Alaska Stock), the financial
statements of Seagull Energy would be credited, and the financial statements
of the ENSTAR Alaska Group would be charged, with an amount equal to 133%
(representing the ratio of the
II-2
<PAGE> 113
Number of Shares Issuable with Respect to the Retained Interest (600) to the
total number of shares of ENSTAR Alaska Stock issued and outstanding
following the ENSTAR Alaska Stock Offering (450)) of the aggregate amount of
such dividend or distribution.
- - Immediately after the ENSTAR Alaska Stock Offering, the Company would have
750 authorized and unissued shares of such ENSTAR Alaska Stock remaining
(1,200 minus 450 issued and outstanding).
ADDITIONAL OFFERINGS OF ENSTAR ALASKA STOCK
The following illustrations reflect an assumed sale by the Company of an
additional 100 shares of ENSTAR Alaska Stock after the assumed initial issuance
of 450 shares of ENSTAR Alaska Stock for the account of Seagull Energy.
Additional Offering for Account of Seagull Energy
Assume all of such shares are identified as sold for the account of Seagull
Energy in respect of its Retained Interest, with the net proceeds reflected
entirely in the financial statements of Seagull Energy.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 450
Newly issued shares for account of Seagull Energy...................... 100
----
Total issued and outstanding after additional public
offering................................................... 550
----
----
</TABLE>
- - The Number of Shares Issuable with Respect to the Retained Interest would
decrease by the number of any shares of ENSTAR Alaska Stock issued for the
account of Seagull Energy.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Retained Interest prior
to additional public offering........................................ 150
Shares issued in additional public offering............................ 100
----
Number of Shares Issuable with Respect to the Retained Interest after
additional public offering........................................... 50
----
----
</TABLE>
- - As a result, the total issued and outstanding shares (550) would in the
aggregate represent an Outstanding Interest Fraction of 91.7%, calculated as
follows:
550
------------
550 + 50
The Retained Interest Fraction would accordingly be reduced to 8.3%.
- - In this case, in the event of any dividend or other distribution paid on
ENSTAR Alaska Stock (other than a dividend or other distribution payable in
shares of ENSTAR Alaska Stock), the financial statements of Seagull Energy
would be credited, and the financial statements of the ENSTAR Alaska Group
would be charged, with an amount equal to 9.1% (representing the ratio of the
Number of Shares Issuable with Respect to the Retained Interest (50) to the
total number of shares of ENSTAR Alaska Stock issued and outstanding
following the public offering (550)) of the aggregate amount of such dividend
or distribution.
- - The Company would have 650 authorized and unissued shares of such ENSTAR
Alaska Stock remaining (1,200 minus 550 issued and outstanding).
II-3
<PAGE> 114
Additional Offering for Account of the ENSTAR Alaska Group
Assume all of such shares are identified as sold for the account of the
ENSTAR Alaska Group as an increase in its equity, with the net proceeds
reflected entirely in the financial statements of the ENSTAR Alaska Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 450
Newly issued shares for account of the ENSTAR Alaska Group............. 100
----
Total issued and outstanding after additional public
offering................................................... 550
----
----
</TABLE>
- - The Number of Shares Issuable with Respect to the Retained Interest (150)
would remain unchanged.
- - As a result, the total issued and outstanding shares (550) would in the
aggregate represent an Outstanding Interest Fraction of 78.6%, calculated as
follows:
550
------------
550 + 150
The Retained Interest Fraction would accordingly be reduced to 21.4%.
- - In this case, in the event of any dividend or other distribution paid on
ENSTAR Alaska Stock (other than a dividend or other distribution payable in
shares of ENSTAR Alaska Stock), the financial statements of Seagull Energy
would be credited, and the financial statements of the ENSTAR Alaska Group
would be charged, with an amount equal to 27.3% (representing the ratio of
the Number of Shares Issuable with Respect to the Retained Interest (150) to
the total number of shares of ENSTAR Alaska Stock issued and outstanding
following the public offering (550)) of the aggregate amount of such dividend
or distribution.
- - The Company would have 650 authorized and unissued shares of such ENSTAR
Alaska Stock remaining (1,200 minus 550 issued and outstanding).
Offerings of Convertible Securities
If the Company were to issue any Convertible Securities convertible into or
exercisable for shares of ENSTAR Alaska Stock, the Outstanding Interest Fraction
and the Retained Interest Fraction would be unchanged at the time of such
issuance. If any shares of ENSTAR Alaska Stock were issued upon conversion or
exercise of such Convertible Securities, however, then the Outstanding Interest
Fraction and the Retained Interest Fraction would be affected as shown above
under "Additional Offering for Account of Seagull Energy," if such Convertible
Securities were attributed to Seagull Energy, or under "Additional Offering for
Account of the ENSTAR Alaska Group," if such Convertible Securities were
attributed to the ENSTAR Alaska Group.
REPURCHASES OF ENSTAR ALASKA STOCK
The following illustrations reflect an assumed repurchase by the Company of
50 shares of ENSTAR Alaska Stock after the ENSTAR Alaska Stock Offering.
Repurchase for Account of Seagull Energy
Assume all of such shares are identified as repurchased for the account of
Seagull Energy as an increase in its Retained Interest in the ENSTAR Alaska
Group, with the financial statements of Seagull Energy being charged entirely
with the consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 450
Shares repurchased for account of Seagull Energy....................... 50
----
Total issued and outstanding after repurchase................ 400
----
----
</TABLE>
II-4
<PAGE> 115
- - The Number of Shares Issuable with Respect to the Retained Interest would be
increased by the number of any shares of ENSTAR Alaska Stock repurchased for
the account of Seagull Energy.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Retained Interest prior
to repurchase........................................................ 150
Number of shares repurchased for the account of Seagull Energy......... 50
----
Number of Shares Issuable with Respect to the Retained Interest after
repurchase........................................................... 200
----
----
</TABLE>
- - As a result, the total issued and outstanding shares (400) would in the
aggregate represent an Outstanding Interest Fraction of 66.7%, calculated as
follows:
400
------------
400 + 200
The Retained Interest Fraction would accordingly be increased to 33.3%.
- - The Company would have 800 authorized and unissued shares of such ENSTAR
Alaska Stock remaining (1,200 minus 400 issued and outstanding).
Repurchase for Account of the ENSTAR Alaska Group
Assume all of such shares are identified as repurchased for the account of
the ENSTAR Alaska Group, with the financial statements of the ENSTAR Alaska
Group being charged entirely with the consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 450
Shares repurchased for account of the ENSTAR Alaska Group.............. 50
----
Total issued and outstanding after repurchase................ 400
----
----
</TABLE>
- - The Number of Shares Issuable with Respect to the Retained Interest (150)
would remain unchanged.
- - As a result, the total issued and outstanding shares (400) would in the
aggregate represent an Outstanding Interest Fraction of 72.7%, calculated as
follows:
400
------------
400 + 150
The Retained Interest Fraction would accordingly be increased to 27.3%.
- - The Company would have 800 authorized and unissued shares of such ENSTAR
Alaska Stock remaining (1,200 minus 400 issued and outstanding).
ENSTAR ALASKA STOCK DIVIDENDS
The following illustrations reflect assumed dividends of ENSTAR Alaska
Stock on outstanding shares of Seagull Common Stock and outstanding shares of
ENSTAR Alaska Stock, respectively, after the assumed initial issuance of 450
shares of ENSTAR Alaska Stock for the account of Seagull Energy.
ENSTAR Alaska Stock Dividend on Seagull Common Stock
Assume 5,000 shares of Seagull Common Stock are outstanding and the Company
declares a dividend of 1/50 of a share of ENSTAR Alaska Stock on each
outstanding share of Seagull Common Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 450
Newly issued shares for account of Seagull Energy...................... 100
----
Total issued and outstanding after dividend.................. 550
----
----
</TABLE>
II-5
<PAGE> 116
- - Any dividend of shares of ENSTAR Alaska Stock to the holders of shares of
Seagull Energy would be treated as a dividend of shares issuable with respect
to Seagull Energy's Retained Interest. As a result, the Number of Shares
Issuable with Respect to the Retained Interest would decrease by the number
of shares of ENSTAR Alaska Stock distributed to the holders of Seagull Common
Stock.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Retained Interest prior
to dividend.......................................................... 150
Number of shares dividended on outstanding shares of Seagull Common
Stock................................................................ 100
----
Number of Shares Issuable with Respect to the Retained Interest after
dividend............................................................. 50
----
----
</TABLE>
The Company will not dividend to holders of Seagull Common Stock a number of
shares of ENSTAR Alaska Stock exceeding the number of shares then issuable with
respect to the Retained Interest.
- - As a result, the total issued and outstanding shares (550) would in the
aggregate represent an Outstanding Interest Fraction of 91.7%, calculated as
follows:
550
-----------
550 + 50
The Retained Interest Fraction would accordingly be reduced to 8.3%. Note,
however, that after the dividend, the holders of Seagull Common Stock would also
hold 100 shares of ENSTAR Alaska Stock, which would represent a direct interest
of 16.7% in the equity attributable to the ENSTAR Alaska Group together with the
8.3% Retained Interest of Seagull Energy would represent a 25% interest in such
equity, which is the percentage interest the holders of the Seagull Common Stock
had prior to the dividend.
- - The Company would have 650 authorized and unissued shares of such ENSTAR
Alaska Stock remaining (1,200 minus 550 issued and outstanding).
ENSTAR Alaska Stock Dividend on ENSTAR Alaska Stock
Assume the Company declares a dividend of 1/5 of a share of ENSTAR Alaska
Stock on each outstanding share of ENSTAR Alaska Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 450
Newly issued shares for account of the ENSTAR Alaska Group............. 90
----
Total issued and outstanding after dividend.................. 540
----
----
</TABLE>
- - The Number of Shares Issuable with Respect to the Retained Interest would be
increased proportionately to reflect the stock dividend payable in shares of
ENSTAR Alaska Stock to holders of shares of ENSTAR Alaska Stock. That is, the
Number of Shares Issuable with Respect to the Retained Interest would be
increased by a number equal to 33.3% (representing the ratio of the Number of
Shares Issuable with Respect to the Retained Interest (150) to the number of
shares of ENSTAR Alaska Stock issued and outstanding (450), in each case
immediately prior to such dividend) of the aggregate number of shares issued
in connection with such dividend or outstanding shares of ENSTAR Alaska Stock
(90), or 30.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Retained Interest prior
to dividend.......................................................... 150
Proportionate increase to reflect dividend of shares on outstanding
shares of ENSTAR Alaska Stock........................................ 30
----
Number of Shares Issuable with Respect to the Retained Interest after
dividend............................................................. 180
----
----
</TABLE>
- - As a result, the total issued and outstanding shares (540) would in the
aggregate continue to represent an Outstanding Interest Fraction of 75%,
calculated as follows:
540
------------
540 + 180
II-6
<PAGE> 117
The Retained Interest Fraction would accordingly continue to be 25%.
- - The Company would have 660 authorized and unissued shares of ENSTAR Alaska
Stock remaining (1,200 minus 540 issued and outstanding).
TRANSFERS OF ASSETS BETWEEN SEAGULL ENERGY AND THE ENSTAR ALASKA GROUP
Contribution of Assets from Seagull Energy to the ENSTAR Alaska Group
The following illustration reflects the assumed contribution by Seagull
Energy to the ENSTAR Alaska Group, after the assumed initial issuance of 150
shares of ENSTAR Alaska Stock for the account of Seagull Energy, of $400 of
assets allocated to Seagull Energy on a date on which the Market Value of the
ENSTAR Alaska Stock is $10 per share.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 450
Newly issued shares.................................................... 0
----
Total issued and outstanding after contribution.............. 450
----
----
</TABLE>
- - The Number of Shares Issuable with Respect to the Retained Interest would be
increased to reflect the contribution to the ENSTAR Alaska Group of assets
theretofore allocated to Seagull Energy by the number equal to the value of
the assets contributed ($400) divided by the Market Value of the ENSTAR
Alaska Stock at that time ($10), or 40 shares.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Retained Interest prior
to contribution...................................................... 150
Increase to reflect contribution to the ENSTAR Alaska Group of assets
allocated to Seagull Energy.......................................... 40
----
Number of Shares Issuable with Respect to the Retained Interest after
contribution......................................................... 190
----
----
</TABLE>
- - As a result, the total issued and outstanding shares (450) would in the
aggregate represent an Outstanding Interest Fraction of 70.3%, calculated as
follows:
450
------------
450 + 190
The Retained Interest Fraction would accordingly be increased to 29.7%.
- - The Company would have 750 authorized and unissued shares of such ENSTAR
Alaska Stock remaining (1,200 minus 450 issued and outstanding).
Return of Capital to Seagull Energy from the ENSTAR Alaska Group
The following illustration reflects the assumed return of capital to
Seagull Energy by the ENSTAR Alaska Group, after the assumed initial issuance of
150 shares of ENSTAR Alaska Stock for the account of Seagull Energy, of $400 of
assets allocated to the ENSTAR Alaska Group on a date on which the Market Value
of the ENSTAR Alaska Stock is $10 per share.
<TABLE>
<S> <C>
Shares previously issued and outstanding...................... 450
Change in number of shares.................................... 0
---
Total issued and outstanding after return of
capital........................................... 450
---
---
</TABLE>
II-7
<PAGE> 118
- - The Number of Shares Issuable with Respect to the Retained Interest would be
decreased to reflect the return of capital to Seagull Energy of assets
theretofore allocated to the ENSTAR Alaska Group by the number equal to the
value of the assets transferred to Seagull Energy ($400) divided by the Market
Value of the ENSTAR Alaska Stock at that time ($10), or 40 shares.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Retained
Interest prior to return of capital......................... 150
Decrease to reflect return of capital to Seagull Energy of
assets allocated to the ENSTAR Alaska Group................. 40
---
Number of Shares Issuable with Respect to the Retained
Interest after contribution................................. 110
---
---
</TABLE>
- - As a result, the total issued and outstanding (450) would in the aggregate
represent an Outstanding Interest Fraction of 80.4%, calculated as follows:
450
------------
450 + 110
The Retained Interest Fraction would accordingly be decreased to 19.6%.
- - The Company would have 750 authorized and unissued shares of such ENSTAR
Alaska Stock remaining (1,200 minus 450 issued and outstanding).
II-8
<PAGE> 119
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesman, or other person has been authorized to give any
information or to make any representations not contained in, or incorporated by
reference in, this Prospectus, and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or any of the Underwriters. This Prospectus does not constitute an offer to sell
to, or a solicitation of an offer to buy from, any person in any jurisdiction
where such an offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information contained herein is correct as of
any time subsequent to the date hereof.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................... 2
Incorporation of Certain Documents by
Reference.............................. 2
Prospectus Summary....................... 3
Use of Proceeds.......................... 16
Capitalization........................... 16
Dividend Policy.......................... 17
Special Considerations................... 19
Management and Accounting Policies....... 25
Business of the ENSTAR Alaska Group...... 28
ENSTAR Alaska Group -- Unaudited Pro
Forma Condensed Statements of
Earnings............................... 37
ENSTAR Alaska Group -- Selected
Historical Financial Data.............. 40
ENSTAR Alaska Group -- Management's
Discussion and Analysis................ 41
Seagull Energy Corporation -- Unaudited
Pro Forma Condensed Financial
Statements............................. 48
Seagull Energy Corporation -- Selected
Historical Financial Data.............. 54
Seagull Energy
Corporation -- Management's Discussion
and Analysis........................... 55
Description of Capital Stock............. 69
Underwriting............................. 86
Legal Matters............................ 87
Experts.................................. 87
Index to Financial Statements............ F-1
Annex I: Index of Certain Terms......... I-1
Annex II: Illustrations of Certain
Terms.................................. II-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7,500,000 SHARES
ENSTAR ALASKA
GROUP
COMMON STOCK
OF
SEAGULL ENERGY CORPORATION
(LOGO)
---------------------------
PROSPECTUS
, 1994
---------------------------
LEHMAN BROTHERS
MERRILL LYNCH & CO.
SMITH BARNEY SHEARSON INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 120
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the ENSTAR
Alaska Stock being registered are estimated as follows:
<TABLE>
<S> <C>
Registration fee................................................... $51,725
NASD filing fee.................................................... 15,500
Blue Sky fees and expenses......................................... *
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
Printing and engraving expenses.................................... *
Agent's fees and expenses.......................................... *
Miscellaneous expenses............................................. *
-------
Total.................................................... $ *
-------
-------
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02-1 of the Texas Business Corporation Act provides that any
director or officer of a Texas corporation may be indemnified against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by him
in connection with or in defending any action, suit or proceeding in which he is
a party by reason of his position. With respect to any proceeding arising from
actions taken in his official capacity, as a director or officer, he may be
indemnified so long as it shall be determined that he conducted himself in good
faith and that he reasonably believed that such conduct was in the corporation's
best interest. In cases not concerning conduct in his official capacity as a
director or officer, a director or officer may be indemnified so long as it
shall be determined that he conducted himself in good faith and that he
reasonably believed that his conduct was not opposed to the corporation's best
interest. In the case of any criminal proceeding, a director or officer may be
indemnified if he had no reasonable cause to believe his conduct was unlawful.
If a director or officer is wholly successful, on the merits or otherwise, in
connection with such a proceeding, such indemnification is mandatory.
Article VI of the Company's Bylaws requires the indemnification of officers
and directors to the fullest extent permitted by the Texas Business Corporation
Act. The Company also has policies insuring its officers and directors against
certain liabilities for actions taken in such capacities, including liabilities
under the Securities Act of 1933.
Reference is made to Article Eleven of the Articles of Incorporation of the
Registrant, which was adopted by the Company's shareholders on May 11, 1988 and
which provides as follows:
"ARTICLE ELEVEN
A director of the corporation shall not be liable to the corporation
or its shareholders for monetary damages for an act or omission in the
director's capacity as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its
shareholders; (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law; (iii)
for any transaction from which the director received an improper
benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office; (iv) for acts or omissions
for which the liability of a director is expressly provided for by
statute; or (v) for acts related to an unlawful stock repurchase or
dividend payment. Any repeal or amendment of this
II-1
<PAGE> 121
Article by the shareholders of the corporation shall be prospective
only, and shall not adversely affect any limitation on the liability
of a director of the corporation existing at the time of such repeal
or amendment. In addition to the circumstances in which a director of
the corporation is not liable as set forth in the preceding sentences,
a director shall not be liable to the fullest extent permitted by any
provision of the statutes of Texas hereafter enacted that further
limits the liability of a director."
Effective as of August 28, 1989, Article 7.06.B of the Texas Miscellaneous
Corporation Laws Act was amended to read in its entirety as follows:
"B. The articles of incorporation of a corporation may provide
that a director of the corporation shall not be liable, or shall be
liable only to the extent provided in the articles of incorporation,
to the corporation or its shareholders or members for monetary damages
for an act or omission in the director's capacity as a director,
except that this article does not authorize the elimination or
limitation of the liability of a director to the extent the director
is found liable for:
(1) a breach of the director's duty of loyalty to the
corporation or its shareholders or members;
(2) an act or omission not in good faith that constitutes a
breach of duty of the director to the corporation or an act or
omission that involves intentional misconduct or a knowing
violation of the law;
(3) a transaction from which the director received an improper
benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office; or
(4) an act or omission for which the liability of a director
is expressly provided for by an applicable statute."
ITEM 16. EXHIBITS.
<TABLE>
<S> <C>
**1.1 -- Form of Underwriting Agreement.
3.1 -- Articles of Incorporation of the Company, as amended, including
Articles of Amendment filed May 12, 1988 and May 21, 1991 with the
Secretary of State of the State of Texas, that certain Statement of
Relative Rights and Preferences related to the designation and
issuance of the Company's $2.25 Convertible Exchangeable Preferred
Stock, Series A, filed August 6, 1986 with the Secretary of State of
the State of Texas, that certain Statement of Resolution Establishing
Series of Shares of Series B Junior Participating Preferred Stock of
Seagull Energy Corporation filed March 21, 1989 with the Secretary of
State of the State of Texas (incorporated by reference to Exhibit 3.1
to Quarterly Report on Form 10-Q for the quarter ended June 30,
1993).
3.2 -- Bylaws of the Company, as amended (incorporated by reference to
Exhibit 3.2 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993).
4.1 -- Rights Agreement dated as of March 17, 1989 between the Company and
NCNB Texas National Bank, as Rights Agent, which includes the form of
Statement of Resolution setting forth the terms of the Series B
Junior Participating Preferred Stock, par value $1.00 per share, as
Exhibit A, the form of Right Certificate as Exhibit B and the Summary
of Rights to Purchase Preferred Shares as Exhibit C (incorporated by
reference to Exhibit 4.8 to Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993).
4.2 -- First Amendment to Rights Agreement by and between the Company and
NationsBank of Texas, N.A. (formerly NCNB Texas National Bank) dated
as of June 18, 1992 (incorporated by reference to Exhibit 3.4 to
Registration Statement on Form S-3 (File No. 33-55426)).
</TABLE>
II-2
<PAGE> 122
<TABLE>
<S> <C>
**4.3 -- Second Amendment to Rights Agreement by and between the Company and
First National Bank of Boston.
**5.1 -- Opinion of Vinson & Elkins L.L.P.
*23.1 -- Consent of KPMG Peat Marwick.
*23.2 -- Consent of Ernst & Young.
**23.3 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit 5.1).
*23.4 -- Consent of Ryder Scott Company, independent petroleum engineers.
*23.5 -- Consent of K&A Energy Consultants, Inc., independent petroleum
engineers.
23.6 -- Consent of R. A. Lenser & Associates, Inc., independent petroleum
engineers (incorporated by reference to Exhibit 24.6 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992).
*23.7 -- Consent of DeGolyer and MacNaughton, independent consulting petroleum
engineers.
*23.8 -- Consent of Netherland, Sewell & Associates, Inc., independent
petroleum engineers.
**24.1 -- Powers of Attorney (contained in the Signature section of this
Prospectus).
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant further hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 123
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions set forth in response to Item 15, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE> 124
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED IN THE CITY OF HOUSTON, STATE OF TEXAS, ON THE 20TH DAY OF MAY, 1994.
SEAGULL ENERGY CORPORATION
By: BARRY J. GALT
Barry J. Galt
Chairman of the Board, President
and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
POWER OF ATTORNEY
Each person whose signature appears below appoints Barry J. Galt and Robert
W. Shower, and both of them, either of whom may act without the joinder of the
other, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him, and in his name, place and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto and all other documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or their substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
<TABLE>
<S> <C> <C>
J. EVANS ATTWELL Director May 20, 1994
(J. Evans Attwell)
RODNEY W. BRIDGES Vice President and Controller May 20, 1994
(Rodney W. Bridges) (Principal Accounting Officer)
Director
(John B. Brock)
JOHN W. ELIAS Executive Vice President and May 20, 1994
(John W. Elias) Director
PETER J. FLUOR Director May 20, 1994
(Peter J. Fluor)
BARRY J. GALT Chairman of the Board, May 20, 1994
(Barry J. Galt) President, Chief Executive
Officer and Director
(Principal Executive Officer)
WILLIAM R. GRANT Director May 20, 1994
(William R. Grant)
Director
(Dean P. Guerin)
</TABLE>
II-5
<PAGE> 125
<TABLE>
<S> <C> <C>
RICHARD M. MORROW Director May 20, 1994
(Richard M. Morrow)
DEE S. OSBORNE Director May 20, 1994
(Dee S. Osborne)
SAM F. SEGNAR Director May 20, 1994
(Sam F. Segnar)
ROBERT W. SHOWER Executive Vice President, May 20, 1994
(Robert W. Shower) Chief Financial Officer and
Director (Principal Financial
Officer)
GEORGE M. SULLIVAN Director May 20, 1994
(George M. Sullivan)
</TABLE>
II-6
<PAGE> 126
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGES
- ---------- ------------------------------------------------------------------------- --------
<C> <S> <C>
**1.1 -- Form of Underwriting Agreement.
3.1 -- Articles of Incorporation of the Company, as amended, including
Articles of Amendment filed May 12, 1988 and May 21, 1991 with the
Secretary of State of the State of Texas, that certain Statement of
Relative Rights and Preferences related to the designation and
issuance of the Company's $2.25 Convertible Exchangeable Preferred
Stock, Series A, filed August 6, 1986 with the Secretary of State of
the State of Texas, that certain Statement of Resolution Establishing
Series of Shares of Series B Junior Participating Preferred Stock of
Seagull Energy Corporation filed March 21, 1989 with the Secretary of
State of the State of Texas (incorporated by reference to Exhibit 3.1
to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993).
3.2 -- Bylaws of the Company, as amended (incorporated by reference to
Exhibit 3.2 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993).
4.1 -- Rights Agreement dated as of March 17, 1989 between the Company and
NCNB Texas National Bank, as Rights Agent, which includes the form of
Statement of Resolution setting forth the terms of the Series B Junior
Participating Preferred Stock, par value $1.00 per share, as Exhibit
A, the form of Right Certificate as Exhibit B and the Summary of
Rights to Purchase Preferred Shares as Exhibit C (incorporated by
reference to Exhibit 4.8 to Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993).
4.2 -- First Amendment to Rights Agreement by and between the Company and
NationsBank of Texas, N.A. (formerly NCNB Texas National Bank) dated
as of June 18, 1992 (incorporated by reference to Exhibit 3.4 to
Registration Statement on Form S-3 (File No. 33-55426)).
**4.3 -- Second Amendment to Rights Agreement by and between the Company and
First National Bank of Boston.
**5.1 -- Opinion of Vinson & Elkins L.L.P.
*23.1 -- Consent of KPMG Peat Marwick.
*23.2 -- Consent of Ernst & Young.
**23.3 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit 5.1).
*23.4 -- Consent of Ryder Scott Company, independent petroleum engineers.
*23.5 -- Consent of K&A Energy Consultants, Inc., independent petroleum
engineers.
23.6 -- Consent of R. A. Lenser & Associates, Inc., independent petroleum
engineers (incorporated by reference to Exhibit 24.6 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992).
*23.7 -- Consent of DeGolyer and MacNaughton, independent consulting petroleum
engineers.
*23.8 -- Consent of Netherland, Sewell & Associates, Inc., independent
petroleum engineers.
**24.1 -- Powers of Attorney (contained in the Signature section of this
Prospectus).
</TABLE>
- ---------------------------
* Filed herewith.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Seagull Energy Corporation:
We consent to the use of our reports included in or incorporated by
reference into the Registration Statement of Seagull Energy Corporation on Form
S-3 to which this consent is an exhibit and to the reference to our firm under
the heading "Experts" in any prospectus included therein.
KPMG PEAT MARWICK
Houston, Texas
May 20, 1994
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement of Seagull Energy Corporation on Form S-3 filed on May
20, 1994 and to the incorporation by reference therein of our report dated
January 21, 1994 with respect to the consolidated financial statements of
Novalta Resources Inc. (which was acquired by Seagull Energy Corporation from
Novacor Petrochemicals, Ltd.) as of December 31, 1993 and 1992, and for each of
the years in the two-year period ended December 31, 1993 included in Amendment
No. 1 on Form 8-KA filed February 16, 1994 to the Current Report on Form 8-K of
Seagull Energy Corporation filed January 19, 1994.
ERNST & YOUNG
Calgary, Alberta, Canada
May 20, 1994
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the use of our name in the Annual Report on Form 10-K
of Seagull Energy Corporation and Subsidiaries (the "Company") for the year
ended December 31, 1993, and the incorporation by reference thereof into the
Company's Registration Statement on Form S-3 initially filed in May 1994.
We hereby consent to the references to our firm under the heading "Experts"
in any prospectus included in the Registration Statement.
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
May 20, 1994
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the use of our name in the Annual Report on Form 10-K
of Seagull Energy Corporation and Subsidiaries (the "Company") for the year
ended December 31, 1993, and the incorporation by reference thereof into the
Company's Registration Statement on Form S-3 initially filed in May, 1994.
We hereby consent to the references to our firm under the heading "Experts"
in any prospectus included in the Registration Statement.
K&A ENERGY CONSULTANTS, INC.
PETROLEUM ENGINEERS
Houston, Texas
May 20, 1994
<PAGE> 1
EXHIBIT 23.7
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the use of our name in the Annual Report on Form 10-K
of Seagull Energy Corporation and Subsidiaries (the "Company") for the year
ended December 31, 1993 (the "Form 10-K") under the heading "Exploration and
Production" of Item 1 and the incorporation by reference of the Form 10-K into
the Company's Registration Statement on Form S-3 to be initially filed in May
1994 (the Registration Statement); provided, however, since the Form 10-K
contains only aggregate reserve information that combines the reserve and
discounted present worth estimates prepared by DeGolyer and MacNaughton (as
reflected in our reports, as of December 31, 1993, based upon information
available to us at such time, which have not been updated) with the reserve and
discounted present worth estimates of other petroleum consultants, in providing
our consent we have necessarily relied on a letter dated March 9, 1994 from the
Company with respect to the estimates of such other petroleum consultants to
verify that the Form 10-K correctly reflects our estimates.
We also further consent to the reference to our firm under the heading
"Experts" in the prospectus included in the Registration Statement.
DeGOLYER and MacNAUGHTON
PETROLEUM ENGINEERS
Dallas, Texas
May 19, 1994
<PAGE> 1
EXHIBIT 23.8
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the use of our name in the Annual Report on Form 10-K
of Seagull Energy Corporation and Subsidiaries (the "Company") for the year
ended December 31, 1993, and the incorporation by reference thereof into the
Company's Registration Statement on Form S-3 initially filed in May 1994.
We hereby consent to the references to our firm under the heading "Experts"
in any prospectus included in the Registration Statement on Form S-3.
NETHERLAND, SEWELL &
ASSOCIATES, INC.
PETROLEUM ENGINEERS
Houston, Texas
May 20, 1994
