<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/X/ Preliminary proxy statement
/ / Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
SEAGULL ENERGY CORPORATION
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
SEAGULL ENERGY CORPORATION
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(i)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
- - --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- - --------------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- - --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- - --------------------------------------------------------------------------------
(3) Filing Party:
- - --------------------------------------------------------------------------------
(4) Date Filed:
- - --------------------------------------------------------------------------------
<PAGE> 2
{LOGO}
PRELIMINARY COPY DATED MARCH 11, 1994
SEAGULL ENERGY CORPORATION
April , 1994
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders (the
"Annual Meeting") of Seagull Energy Corporation (the "Company") to be held at
the Four Seasons Hotel, 1300 Lamar Street, Houston, Texas, at 10:00 a.m.,
Houston Time, on Wednesday, June 1, 1994.
At this Annual Meeting, you will be asked to consider and approve a
comprehensive plan (the "ENSTAR Alaska Stock Proposal") being recommended by
your Board of Directors to authorize a new class of common stock that is
intended to reflect separately the performance of our natural gas transmission
and distribution operations in South-Central Alaska (the "ENSTAR Alaska Group").
The key elements of this plan are set forth below in order of their proposed
occurrence.
- Creation of ENSTAR Alaska Stock. A new class of the Company's common
stock to be called Seagull Energy Corporation -- ENSTAR Alaska Group Common
Stock ("ENSTAR Alaska Stock") will be created. The ENSTAR Alaska Stock is
intended to reflect the performance of the 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 direct wholly-owned subsidiary of the
Company. ENG and APC are currently operated as a single business unit, and
are regulated together by the Alaska Public Utilities Commission. The Board
of Directors believes that the creation of the ENSTAR Alaska Stock and its
distribution in the public equity markets will enable investors to gain a
better understanding of this line of business and its future prospects as
well as afford investors the opportunity to invest solely in a stock based
on the performance of the ENSTAR Alaska Group.
Dividends on the ENSTAR Alaska Stock will be paid at the discretion of
the Board of Directors of the Company based primarily upon the financial
condition, results of operations and business requirements of the ENSTAR
Alaska Group and the Company as a whole. The Board of Directors currently
intends to pay an initial dividend on the ENSTAR Alaska Stock of $8.25
million per year in the aggregate.
- Amendment of Seagull Common Stock. As part of the ENSTAR Alaska
Stock Proposal, the terms of the Company's existing common stock, par value
$.10 per share (the "Seagull Common Stock"), will be amended to allow for
the issuance of the ENSTAR Alaska Stock. Accordingly, after the ENSTAR
Alaska Stock Proposal is implemented, 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, which is the Company's primary business focus, and (ii)
pipeline and marketing operations.
- Public Offering of ENSTAR Alaska Stock. 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
representing 100% of the equity attributable to the ENSTAR Alaska Group.
The net proceeds from this offering are currently estimated to be
approximately $140 million. The Company intends to use the proceeds from
such offering to repay amounts borrowed under the Company's revolving
credit agreement, none of which debt is attributable to the ENSTAR Alaska
Group. Based upon the assumptions set forth in the pro forma financial
information included in the accompanying Proxy Statement, the pro forma
debt to capital ratio for the Company as a whole as of December 31, 1993
would improve from 59.8% (after taking into account our recent Canadian
acquisition) to 47.0% as a result of the ENSTAR Alaska Stock Proposal and
the related offering, and the pro forma debt to capital ratio for Seagull
Energy (without ENSTAR Alaska Group) as of December 31, 1993 would improve
from 60.8% to 46.4%.
<PAGE> 3
The ENSTAR Alaska Stock Proposal is the result of the Board's review of
various alternatives for maximizing shareholder value with respect to the
Company's operations in South-Central Alaska. Among the options that have been
considered by the Board are (i) selling the ENSTAR Alaska Group, (ii)
distributing the ENSTAR Alaska Group to the Company's shareholders in a spin-off
and (iii) conducting a public offering of securities issued directly by the
ENSTAR Alaska Group representing a portion of the equity ownership of the ENSTAR
Alaska Group. After taking into account a variety of factors, including the
expected financial, regulatory and tax consequences of these alternatives, as
well as structuring constraints imposed by the Public Utility Holding Company
Act of 1935, the Board currently believes that the ENSTAR Alaska Stock Proposal
is the best alternative for maximizing shareholder value with respect to the
ENSTAR Alaska Group. However, the Board will continue to evaluate each of the
other alternatives mentioned above in light of prevailing market and other
conditions, even after shareholder approval is obtained for the ENSTAR Alaska
Stock Proposal.
The Board of Directors has carefully considered the terms of the ENSTAR
Alaska Stock Proposal and believes its adoption is in the best interests of the
Company and its shareholders and unanimously recommends its adoption by the
shareholders. In arriving at its recommendation, the Board of Directors gave
careful consideration to a number of factors including those described in the
accompanying Proxy Statement.
At the Annual Meeting, you will also be asked to consider and approve
proposals (i) to elect four directors; (ii) to ratify the selection of the
Company's auditors for the year ending December 31, 1994; and (iii) to transact
such other business as may properly come before such meeting or any
adjournment(s) or postponement(s) thereof.
Please give these proxy materials your careful attention. It is important
that your shares be represented and voted at the Annual Meeting regardless of
the size of your holdings. Accordingly, whether or not you plan to attend the
Annual Meeting, please complete, sign, date and return the accompanying proxy
card in the enclosed postage pre-paid envelope to make certain that your shares
will be represented at the Annual Meeting.
Sincerely,
Barry J. Galt
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 4
PRELIMINARY COPY DATED MARCH 11, 1994
SEAGULL ENERGY CORPORATION
HOUSTON, TEXAS
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD WEDNESDAY, JUNE 1, 1994
To the Shareholders:
The 1994 Annual Meeting of Shareholders (the "Annual Meeting") of Seagull
Energy Corporation (the "Company") will be held on Wednesday, June 1, 1994 at
10:00 a.m., local time, at the Four Seasons Hotel, 1300 Lamar Street, Houston,
Texas, for the following purposes:
1. To elect four directors to serve until the 1997 Annual Meeting of
Shareholders;
2. To consider and vote upon a proposal to authorize certain amendments to
the Company's Articles of Incorporation that would, among other things
(i) authorize 25,000,000 shares of a new class of common stock of the
Company, the Seagull Energy Corporation -- ENSTAR Alaska Group Common
Stock, par value $.10 per share (the "ENSTAR Alaska Stock"), with the
voting powers and relative, participating, optional and other special
rights and qualifications, limitations and restrictions thereof as are
described in the accompanying Proxy Statement and (ii) amend the terms
of the existing capital stock of the Company to allow for the issuance
of the ENSTAR Alaska Stock;
3. To ratify the selection of KPMG Peat Marwick as independent auditors of
the Company for the fiscal year ending December 31, 1994; and
4. To transact such other business as may properly come before such meeting
or any adjournment(s) or postponement(s) thereof.
The close of business on April 4, 1994, has been fixed as the record date
for the determination of shareholders entitled to receive notice of and to vote
at the Annual Meeting or any adjournment(s) or postponement(s) thereof.
You are cordially invited to attend the Annual Meeting. WHETHER OR NOT YOU
PLAN TO ATTEND THE ANNUAL MEETING, WE ASK THAT YOU SIGN AND RETURN THE ENCLOSED
PROXY AS PROMPTLY AS POSSIBLE. A SELF-ADDRESSED, POSTPAID ENVELOPE IS ENCLOSED
FOR YOUR CONVENIENCE.
By Order of the Board of Directors,
Sylvia Sanchez
Secretary
April , 1994
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
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PAGE
-----
<S> <C>
GENERAL INFORMATION.................................................................. 1
SUMMARY COMPARISON OF TERMS OF EXISTING SEAGULL COMMON STOCK WITH TERMS OF AMENDED
SEAGULL COMMON STOCK AND ENSTAR
ALASKA STOCK....................................................................... 3
PROXY STATEMENT SUMMARY.............................................................. 8
PRICE RANGE OF AND DIVIDENDS ON SEAGULL COMMON STOCK................................. 21
PRINCIPAL SHAREHOLDERS............................................................... 22
PROPOSAL 1 -- ELECTION OF DIRECTORS.................................................. 23
Security Ownership of Directors and Management..................................... 25
Directors' Meetings and Committees of the Board of Directors....................... 26
Compensation of Directors.......................................................... 26
Certain Transactions and Other Matters............................................. 27
EXECUTIVE COMPENSATION............................................................... 29
Summary Compensation Table......................................................... 29
Compensation Arrangements.......................................................... 29
Option Exercises and Fiscal Year-End Values........................................ 30
Option Grants...................................................................... 30
Compensation Committee Report on Executive Compensation............................ 31
Shareholder Return Performance Presentation........................................ 31
Executive Supplemental Retirement Plan............................................. 32
ENSTAR Natural Gas Company Retirement Plan......................................... 33
PROPOSAL 2 -- THE ENSTAR ALASKA STOCK PROPOSAL....................................... 35
General............................................................................ 35
Special Considerations............................................................. 36
Dividend Policy.................................................................... 41
Management and Accounting Policies................................................. 41
Description of Seagull Common Stock and ENSTAR Alaska Stock........................ 45
Retained Interest of Seagull Energy in ENSTAR Alaska Group; Outstanding Interest
Fraction........................................................................ 57
Background and Reasons for the ENSTAR Alaska Stock Proposal and the ENSTAR Alaska
Stock Offering.................................................................. 58
Stock Exchange Listings............................................................ 60
Financial Advisor.................................................................. 60
Stock Transfer Agent and Registrar................................................. 60
Certain Federal Income Tax Considerations.......................................... 60
Restated Rights Agreement.......................................................... 61
Anti-takeover Considerations....................................................... 63
PROPOSAL 3 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS.................... 65
SHAREHOLDER PROPOSALS................................................................ 65
OTHER MATTERS........................................................................ 65
ANNEX I: GLOSSARY OF CERTAIN TERMS................................................... I-1
ANNEX II: ILLUSTRATION OF CERTAIN TERMS.............................................. II-1
ANNEX III: ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION........................ III-1
ANNEX IV: SEAGULL ENERGY CORPORATION................................................. IV-1
ANNEX V: SEAGULL ENERGY (WITHOUT ENSTAR ALASKA GROUP)................................ V-1
ANNEX VI: ENSTAR ALASKA GROUP........................................................ VI-1
</TABLE>
<PAGE> 6
PRELIMINARY COPY DATED MARCH 11, 1994
SEAGULL ENERGY CORPORATION
1001 FANNIN, SUITE 1700
HOUSTON, TEXAS 77002
(713) 951-4700
---------------
PROXY STATEMENT
---------------
GENERAL INFORMATION
The enclosed proxy is solicited by and on behalf of the Board of Directors
(the "Board of Directors" or the "Board") of Seagull Energy Corporation (the
"Company") for use at the 1994 Annual Meeting of Shareholders (the "Annual
Meeting") to be held on Wednesday, June 1, 1994, at 10:00 a.m., local time, at
the Four Seasons Hotel, 1300 Lamar Street, Houston, Texas, or at any
adjournment(s) or postponement(s) thereof. The Company's annual report to
shareholders for the year ended December 31, 1993, including financial
statements, has been previously mailed to all shareholders entitled to vote at
the Annual Meeting. The annual report does not constitute a part of the proxy
soliciting material.
REQUIRED VOTE
The presence of a majority of the shares of the Company's existing common
stock, par value $.10 per share (the "Seagull Common Stock") represented in
person or by proxy at the Annual Meeting will constitute a quorum. Shares
represented by proxies that are marked "abstain" will be counted as shares
present for purposes of determining the presence of a quorum on all matters.
Proxies with "broker non-votes" will nevertheless be treated as shares present
for purposes of determining the presence of a quorum on all matters. A "broker
non-vote" occurs if a broker or other nominee does not have discretionary
authority and has not received instructions with respect to a particular item.
Proposal 1 -- Election of Directors. A plurality of votes cast in person or
by proxy by the holders of Seagull Common Stock is required to elect a director.
Accordingly, under Texas law and the Company's Articles of Incorporation and
Bylaws, abstentions and broker non-votes would have no effect on the election of
directors. Shareholders may not cumulate their votes in the election of
directors.
Proposal 2 -- ENSTAR Alaska Stock Proposal. The ENSTAR Alaska Stock
Proposal will require the affirmative vote of the holders of at least two-thirds
of all issued and outstanding shares of Seagull Common Stock. Accordingly, under
Texas law, with respect to the ENSTAR Alaska Stock Proposal, abstentions and
broker non-votes will have the same effect as negative votes (even though this
may not have been the intent of the person voting or giving the proxy).
Proposal 3 -- Ratification of Auditors. Ratification of the selection of
auditors requires the affirmative vote of the holders of a majority of the
shares of Seagull Common Stock present or represented by proxy and entitled to
vote at the Annual Meeting. Under Texas law, an abstention would have the same
legal effect as a vote against this proposal (even though this may not have been
the intent of the person voting or giving the proxy), but a broker non-vote
would not be counted for purposes of determining whether a majority had been
achieved.
NO APPRAISAL RIGHTS
Under applicable Texas law, none of the holders of Seagull Common Stock has
appraisal rights in connection with any proposal to be acted upon at the Annual
Meeting, including without limitation the ENSTAR Alaska Stock Proposal.
<PAGE> 7
RECORD DATE AND OUTSTANDING SHARES
The Board of Directors has fixed the close of business on April 4, 1994 as
the record date ("Record Date") for determining holders of outstanding shares of
Seagull Common Stock entitled to notice of and to vote at the Annual Meeting or
any adjournment(s) or postponement(s) thereof. As of the Record Date, there were
outstanding 36,064,649 shares of Seagull Common Stock, each share of which is
entitled to one vote. Seagull Common Stock is the only class of outstanding
securities of the Company entitled to notice of and to vote at the Annual
Meeting. On June 4, 1993, the Company effected, in the form of a 100% stock
dividend, a two-for-one stock split (the "Stock Split") of all issued shares of
Seagull Common Stock. The per share prices, weighted average number of shares
outstanding and per share amounts in this Proxy Statement have been adjusted to
reflect the Stock Split. However, share amounts included in the balance sheets
and statements of shareholders' equity as of dates prior to June 4, 1993 have
not been adjusted to reflect the Stock Split.
SOLICITATION OF PROXIES
The entire cost of soliciting proxies will be borne by the Company. Proxies
may be solicited by mail, telecopy, telegraph or telex, or by directors,
officers and regular employees of the Company in person or by telephone. The
Company has retained Georgeson & Company Inc. to assist in the distribution of
proxy solicitation materials at a cost of approximately $14,000 plus
out-of-pocket expenses. The Company will also reimburse brokerage houses and
other custodians, nominees and fiduciaries for their reasonable out-of-pocket
expenses for forwarding soliciting material to the beneficial owners of the
Seagull Common Stock. No person or firm has been paid to solicit proxies in
connection with the ENSTAR Alaska Proposal, and no person or firm will solicit
such proxies other than directors, officers and regular employees of the
Company.
Questions concerning the proposals to be acted upon at the Annual Meeting
should be directed to the Company's Investor Relations Department at (713)
951-4700. Additional copies of this Proxy Statement or the proxy card may be
obtained from the Company's Investor Relations Department.
REVOCATION OF PROXIES
The enclosed proxy, even though executed and returned, may be revoked at
any time prior to the voting of the proxy (a) by the execution and submission of
a revised proxy, (b) by written notice to the Secretary of the Company or (c) by
voting in person at the Annual Meeting. In the absence of such revocation,
shares represented by the proxies will be voted at the Annual Meeting.
VOTING OF PROXIES
The persons named as proxies on the proxy card accompanying this Proxy
Statement were designated by the Board of Directors. Any proxy given pursuant to
such solicitation and received in time for the Annual Meeting will be voted as
specified in such proxy. Unless otherwise instructed or unless authority to vote
is withheld, proxies will be voted FOR the ENSTAR Alaska Stock Proposal, FOR the
election of the nominees to the Board of Directors, FOR ratification of the
engagement of KPMG Peat Marwick and, in accordance with the judgment of the
persons named in the proxy, on such other matters as may properly come before
such meeting or any adjournment(s) or postponement(s) thereof.
Dated: April , 1994.
2
<PAGE> 8
SUMMARY COMPARISON OF TERMS OF EXISTING SEAGULL COMMON STOCK
WITH TERMS OF AMENDED SEAGULL COMMON STOCK AND ENSTAR ALASKA STOCK
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Proxy Statement. See "Proxy Statement
Summary" and "Proposal 2 -- The ENSTAR Alaska Stock Proposal -- Special
Considerations" and "-- Description of Seagull Common Stock and ENSTAR Alaska
Stock." Capitalized terms used in this summary have the respective meanings
ascribed to them elsewhere in this Proxy Statement. See Annex I -- Glossary of
Certain Terms.
<TABLE>
<CAPTION>
ENSTAR ALASKA STOCK PROPOSAL
EXISTING SEAGULL --------------------------------------------------------------
COMMON STOCK SEAGULL COMMON STOCK ENSTAR ALASKA STOCK
----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
Businesses: All businesses of the Company Seagull Energy -- (i) Natural ENSTAR Alaska Group --
gas exploration, development Natural gas transmission and
and production and (ii) distribution in South-Central
pipeline and marketing Alaska.
operations. Although the
Company currently expects to
sell shares of ENSTAR Alaska
Stock representing 100% of
the equity attributable to
the ENSTAR Alaska Group, if
less than such amount is
sold, Seagull Energy would
also initially have a
"Retained Interest" in the
business, assets and
liabilities of the ENSTAR
Alaska Group.
Issuance: -- Shareholders will continue to The Company currently expects
own their existing Seagull that, shortly after
Common Stock, certain terms shareholder approval of the
of which will be amended to ENSTAR Alaska Stock Proposal
allow for the issuance of the and subject to prevailing
ENSTAR Alaska Stock. market and other conditions,
it will make a public
offering for cash of shares
of ENSTAR Alaska Stock
representing 100% of the
equity attributable to the
ENSTAR Alaska Group (the
"ENSTAR Alaska Stock
Offering"). The net proceeds
from the ENSTAR Alaska Stock
Offering are currently
estimated to be approximately
$140 million.
Dividends: No cash dividends have been The ENSTAR Alaska Stock Dividends on the ENSTAR
paid since the Company became Proposal would not change the Alaska Stock will be paid at
an independent entity in Company's dividend policy the discretion of the Board
1981. Dividends are payable with respect to the Seagull based primarily upon the
out of funds of the Company Common Stock. Accordingly, financial condition, results
legally available for the Board does not currently of operations and business
dividends. intend to pay dividends on requirements of the ENSTAR
the Seagull Common Stock. Alaska Group and the Company
Determinations as to future as a whole. The Board of
dividends on the Seagull Directors currently intends
Common Stock would be based to pay an initial dividend on
primarily upon the financial the ENSTAR Alaska Stock of
condition, results of $8.25 million per year in the
operations and business aggregate. Dividends will be
requirements of Seagull payable out of the lesser of
Energy and the Company as a (i) funds of the Company
whole. Dividends would be legally available therefor
payable out of the lesser of and (ii) the Available ENSTAR
(i) funds of the Company Alaska Dividend Amount. The
legally available therefor Available ENSTAR Alaska
and (ii) the Available Dividend
</TABLE>
3
<PAGE> 9
<TABLE>
<CAPTION>
ENSTAR ALASKA STOCK PROPOSAL
EXISTING SEAGULL --------------------------------------------------------------
COMMON STOCK SEAGULL COMMON STOCK ENSTAR ALASKA STOCK
----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
Seagull Energy Dividend Amount is intended to be an
Amount. The Available Seagull amount similar to the amount
Energy Dividend Amount is that would be legally
intended to be an amount available for dividends if
similar to the amount that the ENSTAR Alaska Group were
would be legally available a separate company.
for dividends if Seagull
Energy were a separate Subject to the restrictions
company. on the funds out of which
dividends on the Seagull
Subject to the restrictions Common Stock and the ENSTAR
on the funds out of which Alaska Stock may be paid, the
dividends on the Seagull Board may, in its sole
Common Stock and the ENSTAR discretion, declare and pay
Alaska Stock may be paid, the dividends exclusively on
Board may, in its sole either the Seagull Common
discretion, declare and pay Stock or the ENSTAR Alaska
dividends exclusively on Stock in any amount, and may
either the Seagull Common decide not to declare and pay
Stock or the ENSTAR Alaska dividends on either or both
Stock in any amount, and may classes, notwithstanding the
decide not to declare and pay amount of funds available for
dividends on either or both dividends on each class, the
classes, notwithstanding the amount of prior dividends
amount of funds available for declared on each class or any
dividends on each class, the other factor. If Seagull
amount of prior dividends Energy owns a Retained
declared on each class or any Interest, then to the extent
other factor. that the Company pays a
dividend on outstanding
shares of the ENSTAR Alaska
Stock, the ENSTAR Alaska
Group would be charged with,
and Seagull Energy would be
credited with, an amount that
bears the same relation to
the aggregate amount of such
dividend as the Number of
Shares Issuable with Respect
to the Retained Interest, if
any, bears to the number of
shares of ENSTAR Alaska Stock
outstanding.
Dividend, Redemption None. None. If the Company sells all or
and Exchange Rights on substantially all of the
Dispositions: 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
interest in the Net Proceeds
of such sale, either by
special dividend or by
redemption of all or part of
the outstanding shares of the
ENSTAR Alaska Stock; or (ii)
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 Values of
one share of ENSTAR Alaska
Stock to one share of Seagull
Common
</TABLE>
4
<PAGE> 10
<TABLE>
<CAPTION>
ENSTAR ALASKA STOCK PROPOSAL
EXISTING SEAGULL --------------------------------------------------------------
COMMON STOCK SEAGULL COMMON STOCK ENSTAR ALASKA STOCK
----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
Stock.
The Company could, in the
sole discretion of the Board,
at any time prior to the
first anniversary of a
dividend on or a partial
redemption of the outstanding
shares of ENSTAR Alaska Stock
following a sale of all or
substantially all of the
properties and assets of the
ENSTAR Alaska Group, exchange
each remaining outstanding
share of ENSTAR Alaska Stock
for shares of Seagull Common
Stock equal to 110% 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.
Other Exchange Rights: None. None. The Company could, in the
sole discretion of the Board,
at any time, exchange the
outstanding 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.
The Company could, in the
sole discretion of the Board,
at any time, exchange all
outstanding shares of ENSTAR
Alaska Stock for shares of
any wholly owned subsidiary
that holds all the assets and
liabilities of the ENSTAR
Alaska Group.
Voting Rights: The existing Seagull Common The Seagull Common Stock will Each share of the ENSTAR
Stock has one vote per share. have one vote per share. The Alaska Stock will have a
The existing Seagull Common holders of Seagull Common variable number of votes
Stock votes as a single class Stock will vote together as a equal to the ratio of a
on all matters submitted to single class with the holders time-weighted average of the
shareholders. of the ENSTAR Alaska Stock Market Values of one share of
(and any other class or ENSTAR Alaska Stock to one
series of capital stock of share of Seagull Common Stock
the Company entitled to vote and may have more than, less
together with the holders of than or exactly one vote per
shares of common stock of the share. The ENSTAR Alaska
Company) on all matters Stock will vote together as a
submitted to shareholders single class with the holders
other than a matter with of the Seagull Common Stock
respect to which shares of (and any other class or
the Seagull Common Stock series of capital stock of
would be entitled to a the Company entitled to vote
separate class vote. together with the holders of
shares of common stock of the
The approval of the holders Company) on all matters
of at least two-thirds of the submitted to shareholders
outstanding Seagull Common other than a matter
</TABLE>
5
<PAGE> 11
<TABLE>
<CAPTION>
ENSTAR ALASKA STOCK PROPOSAL
EXISTING SEAGULL --------------------------------------------------------------
COMMON STOCK SEAGULL COMMON STOCK ENSTAR ALASKA STOCK
----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
Stock, voting separately as a with respect to which shares
class, would be required to of the ENSTAR Alaska Stock
approve, subject to certain would be entitled to a
exceptions, (i) any dividend separate class vote.
or distribution to holders of
the ENSTAR Alaska Stock of The approval of the holders
any of the properties or of at least two-thirds of the
assets of Seagull Energy or outstanding ENSTAR Alaska
of any shares of Seagull Stock, voting separately as a
Common Stock (or Convertible class, would be required to
Securities convertible into approve, subject to certain
Seagull Common Stock) or of exceptions, (i) any dividend
any security that represents or distribution to holders of
an equity interest in an Seagull Common Stock of any
entity (other than the of the properties or assets
Company) that owns any of the of the ENSTAR Alaska Group or
properties or assets of of any shares of ENSTAR
Seagull Energy, (ii) the use Alaska Stock (or Convertible
of any properties or assets Securities convertible into
of Seagull Energy in any ENSTAR Alaska Stock) or of
business of the Company other any security that represents
than a business of Seagull an equity interest in an
Energy or (iii) any issuance entity (other than the
or sale of Seagull Common Company) that owns any of the
Stock (or Convertible properties or assets of the
Securities convertible into ENSTAR Alaska Group, other
Seagull Common Stock) for the than a dividend or
account of the ENSTAR Alaska distribution on the Seagull
Group. Common Stock of shares of
ENSTAR Alaska Stock (or
Convertible Securities
convertible into shares of
ENSTAR Alaska Stock) to the
extent of Seagull Energy's
Retained Interest, if any, in
the ENSTAR Alaska Group, (ii)
the use of any properties or
assets of the ENSTAR Alaska
Group in any business of the
Company other than a business
of the ENSTAR Alaska Group or
(iii) any issuance or sale of
shares of ENSTAR Alaska Stock
(or Convertible Securities
convertible into ENSTAR
Alaska Stock) for the account
of Seagull Energy except to
the extent of Seagull
Energy's Retained Interest,
if any, in the ENSTAR Alaska
Group.
Mergers and Holders of existing Seagull Holders of Seagull Common Holders of ENSTAR Alaska
Consolidations: Common Stock are entitled to Stock will be entitled to Stock will be entitled to
receive the merger or share the merger or share the merger or
consolidation consideration, consolidation consideration, consolidation consideration,
if any, attributable to the if any, attributable to the if any, attributable to the
existing Seagull Common Stock common stock of the Company common stock of the Company
pursuant to the terms of the with holders of ENSTAR Alaska with holders of Seagull
merger or consolidation, on a Stock based upon the relative Common Stock based upon the
pro rata basis. Market Capitalizations of the relative Market
Seagull Common Stock and the Capitalizations of the ENSTAR
ENSTAR Alaska Stock. Alaska Stock and the Seagull
Common Stock.
Liquidation: Holders of existing Seagull Holders of Seagull Common Holders of ENSTAR Alaska
Common Stock are entitled to Stock will share the funds, Stock will share the funds,
if if
</TABLE>
6
<PAGE> 12
<TABLE>
<CAPTION>
ENSTAR ALASKA STOCK PROPOSAL
EXISTING SEAGULL --------------------------------------------------------------
COMMON STOCK SEAGULL COMMON STOCK ENSTAR ALASKA STOCK
----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
receive the funds, if any, any, remaining for any, remaining for
remaining for distribution to distribution to common distribution to common
common shareholders. shareholders of the Company shareholders of the Company
with holders of ENSTAR Alaska with holders of Seagull
Stock based upon the relative Common Stock based upon the
Market Capitalizations of the relative Market
Seagull Common Stock and the Capitalizations of the ENSTAR
ENSTAR Alaska Stock. Alaska Stock and the Seagull
Common Stock.
Stock Exchange NYSE under the symbol "SGO." NYSE under the symbol "SGO." NYSE under the symbol
Listings: " ."
</TABLE>
7
<PAGE> 13
PROXY STATEMENT SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and the Annexes hereto. Reference is made to, and this
Proxy Statement Summary is qualified in its entirety by, the more detailed
information contained in this Proxy Statement and the Annexes hereto. 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 Proxy Statement Summary have the
respective meanings ascribed to them elsewhere in this Proxy Statement or in
Annex III hereto. See Annex I -- Glossary of Certain Terms. Shareholders are
urged to read this Proxy Statement and the Annexes hereto in their entirety.
PROPOSAL 1 -- ELECTION OF DIRECTORS
The Board of Directors has nominated each of the existing Class II
directors, Messrs. Peter J. Fluor, Barry J. Galt, Dean P. Guerin and Robert W.
Shower, for three year terms expiring at the 1997 Annual Meeting of
Shareholders.
Directors are elected by a plurality of the votes cast by the holders of
Seagull Common Stock present in person or represented by proxy and entitled to
vote at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RE-ELECTION OF MESSRS.
FLUOR, GALT, GUERIN AND SHOWER TO THE BOARD OF DIRECTORS. SEE "PROPOSAL
1 -- ELECTION OF DIRECTORS."
PROPOSAL 2 -- THE ENSTAR ALASKA STOCK PROPOSAL
GENERAL
The holders of shares of Seagull Common Stock are being asked to consider
and approve a proposal (the "ENSTAR Alaska Stock Proposal") which, if approved,
would authorize the amendments to the Articles of Incorporation set forth in
Annex III hereto. Such amendments would, among other things (i) authorize
25,000,000 shares of a new class of common stock of the Company, the Seagull
Energy Corporation -- ENSTAR Alaska Group Common Stock (the "ENSTAR Alaska
Stock"), with the voting powers and relative, participating, optional and other
special rights and qualifications, limitations and restrictions thereof set
forth in the Articles of Amendment set forth in Annex III hereto and described
below and (ii) amend the terms of the existing capital stock of the Company to
allow for the issuance of the ENSTAR Alaska Stock.
While the Seagull Common Stock and the ENSTAR Alaska Stock would both
constitute common stock of the Company, each class is intended to reflect
separately the performance of the relevant business group. The ENSTAR Alaska
Stock is intended to reflect the performance of the Company's natural gas
transmission and distribution operations in South-Central Alaska (the "ENSTAR
Alaska Group"). The Seagull Common Stock would reflect separately 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 Company currently expects that, shortly after shareholder approval of
the ENSTAR Alaska Stock Proposal and subject to then prevailing market and other
conditions, it will make a public offering for cash of shares of ENSTAR Alaska
Stock representing 100% of the equity attributable to the ENSTAR Alaska Group in
the ENSTAR Alaska Stock Offering. 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 from the ENSTAR Alaska Stock Offering are
currently estimated to be approximately $140 million. 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. Based upon the assumptions set forth in the pro forma
financial information included in Annexes IV and V, the pro forma debt to
capital ratio for the Company as a whole as of December 31, 1993 would improve
from 59.8% (after taking into account the Seagull Canada Acquisition
8
<PAGE> 14
described below) to 47.0% as a result of the ENSTAR Alaska Stock Proposal and
the ENSTAR Alaska Stock Offering, and the pro forma debt to capital ratio for
Seagull Energy (without ENSTAR Alaska Group) as of December 31, 1993 would
improve from 60.8% to 46.4%. See "Unaudited Condensed Pro Forma Financial
Statements" in Annexes IV and V.
Notwithstanding approval by the shareholders of the ENSTAR Alaska Stock
Proposal, the Company would not file the Articles of Amendment to the Articles
of Incorporation set forth in Annex III hereto with the Texas Secretary of State
until immediately prior to consummation of the ENSTAR Alaska Stock Offering.
IF THE ENSTAR ALASKA STOCK PROPOSAL IS NOT APPROVED BY THE SHAREHOLDERS OR
THE ENSTAR ALASKA STOCK OFFERING IS NOT CONSUMMATED, THE ARTICLES OF AMENDMENT
WILL NOT BE FILED AND THE ENSTAR ALASKA STOCK WILL NOT BE ISSUED.
The authorized but unissued shares of Seagull Common Stock and ENSTAR
Alaska Stock would be available for issuance from time to time by the Company at
the discretion of the Board of Directors for any proper corporate purpose, which
could include raising capital, payment of stock dividends, providing
compensation or benefits to employees 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 common stock of the
Company of any additional shares of 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). Having separate equity securities will
afford the Company increased flexibility to raise capital and make acquisitions
with an equity security specifically related to a particular business group.
SPECIAL CONSIDERATIONS
Shareholders of One Company; Financial Effects on One Group Could Affect
Other Group. Holders of Seagull Common Stock and ENSTAR Alaska Stock will be
common shareholders of the Company and would 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 either Seagull Energy or the
ENSTAR Alaska Group that affect the Company's consolidated results of operations
or financial condition could affect the results of operations or financial
position of the other business group or the market price of both classes of
common stock of the Company. In addition, any net losses of Seagull Energy or
the ENSTAR Alaska Group and dividends or distributions on, or repurchases of,
either class of common stock of the Company will reduce the assets of the
Company legally available for payment of dividends on both classes of common
stock of the Company. Accordingly, the combined financial information of Seagull
Energy and the ENSTAR Alaska Group should be read in conjunction with the
Company's consolidated 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.
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 ENSTAR Alaska
Stock 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.
9
<PAGE> 15
Limited Additional Shareholder Rights. Under the ENSTAR Alaska Stock
Proposal, holders of Seagull Common Stock and ENSTAR Alaska Stock will have only
the rights of common shareholders of the Company, and would not be provided any
rights specifically related to their respective business groups, other than in
certain limited circumstances. See "Proposal 2 -- The ENSTAR Alaska Stock
Proposal -- Special Considerations -- Limited Separate Shareholder Voting
Rights; Effects on Voting Power" and "-- Description of Seagull Common Stock and
ENSTAR Alaska Stock -- Voting Rights" and "-- Exchange and Redemption."
Limited Separate Shareholder Voting Rights; Effects on Voting Power. Under
the ENSTAR Alaska Stock Proposal, subject to certain limited exceptions, holders
of shares of Seagull Common Stock and holders of shares of ENSTAR Alaska Stock
would 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 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 Seagull Common
Stock and holders of ENSTAR Alaska Stock. If the ENSTAR Alaska Stock Proposal is
approved by the shareholders and implemented by the Board of Directors, holders
of Seagull Common Stock would continue to be entitled to a substantial majority
of the total votes to which the then outstanding voting stock of the Company is
entitled. 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, although it is unlikely that during the foreseeable future the
holders of Seagull Common Stock would possess less than a majority of the total
votes to which the outstanding voting stock of the Company would be entitled.
See "Proposal 2 -- The ENSTAR Alaska Stock Proposal -- Description of Seagull
Common Stock and 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 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).
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 Alaska
Public Utilities Commission (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 Proxy Statement 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 Seagull Common Stock
and holders of ENSTAR Alaska 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
10
<PAGE> 16
addition, generally accepted accounting principles require that any change in
accounting policy be preferable (in accordance with such principles) to the
policy previously established.
Effect on Cash Flow from the ENSTAR Alaska Group to Seagull Energy. The
Company has historically received cash from the ENSTAR Alaska Group in the form
of dividends and payments under the Management Agreement and Tax Sharing
Agreement described below. These dividends and contractual payments, after
taking into account the costs and tax obligations related to the contractual
payments, have been used by Seagull Energy (together with other funds available
to it) to fund its operations, including its capital expenditure programs. If
the ENSTAR Alaska Stock Proposal is adopted, Seagull Energy will no longer
receive the benefit of dividends from the ENSTAR Alaska Group, but will continue
to receive payments under the Management Agreement and the Tax Sharing
Agreement. During the three years ended December 31, 1993, the ENSTAR Alaska
Group paid regular dividends of $8 million per year and a special dividend of
$20 million in 1991. See "Proposal 2 -- The ENSTAR Alaska Stock
Proposal -- Special Considerations -- Effect on Cash Flow from the ENSTAR Alaska
Group," "-- Management and Accounting Policies," and "-- Description of Seagull
Common Stock and ENSTAR Alaska Stock -- Voting Rights."
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 would continue in effect following
implementation of the ENSTAR Alaska Stock Proposal. Seagull Energy and the
ENSTAR Alaska Group are also parties to a 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 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.
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 "Proposal
2 -- The ENSTAR Alaska Stock Proposal -- Description of Seagull Common Stock and
ENSTAR Alaska Stock -- Exchange and Redemption." Since any such exchange would
be at a premium to the then current market price of the ENSTAR Alaska Stock
being exchanged, the issuance of additional shares of Seagull Common Stock in
connection with such an exchange would dilute the interests in the Company of
all holders of Seagull Common Stock. 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.
No Assurance as to Market Price. 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. It is also not possible to predict the impact
of the sale of ENSTAR Alaska Stock on the market price of the Seagull Common
Stock and, accordingly, there can be no assurance that the market price of the
Seagull Common Stock would equal or exceed the market price of such stock prior
to the Company's announcement or implementation of the ENSTAR Alaska Stock
Proposal. Furthermore, there can be no assurance that investors would assign
values to the Seagull Common Stock and ENSTAR Alaska Stock based on the reported
financial results and prospects of the relevant business group or the dividend
policies established by the Board of Directors with respect to such group.
Accordingly, 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 either
class of common stock of the Company 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.
Limitations on Potential Unsolicited Acquisitions of a Group. If Seagull
Energy and the ENSTAR Alaska Group were stand-alone corporations, any person
interested in acquiring either of such corporations
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<PAGE> 17
without negotiation with management could seek control of the outstanding stock
of such corporation by means of a tender offer or proxy contest. Although
adoption of the ENSTAR Alaska Stock Proposal would create a new class of common
stock of the Company intended to reflect the performance of the ENSTAR Alaska
Group, a person interested in acquiring only one business group without
negotiation with the Company's management would 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 class of
common stock related to the other business group. See "Limited Separate
Shareholder Voting Rights; Effects on Voting Power" above. This result is
similar to the consequences under the Company's current capital structure, since
a person interested in acquiring an interest in any of the Company's business
segments without negotiation with the Company's management would still be
required to seek control of the voting power represented by all of the
outstanding common stock of the Company.
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"). Following implementation of
the ENSTAR Alaska Stock Proposal, the calculation of ownership of the voting
securities of the Company would 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
"Proposal 2 -- ENSTAR Alaska Stock Proposal -- Description of Seagull Common
Stock and ENSTAR Alaska Stock -- Voting Rights," a shareholder could reach the
10% threshold without acquiring any additional shares. The Articles of Amendment
to 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 "Proposal 2 -- ENSTAR Alaska Stock
Proposal -- Special Considerations -- Public Utility Holding Company Act of
1935."
For further discussion of the foregoing and certain other considerations,
see "Proposal 2 -- The ENSTAR Alaska Stock Proposal -- Special Considerations."
DIVIDEND POLICY
The Company has not paid any cash dividends on shares of Seagull Common
Stock since it became an independent entity in 1981. The ENSTAR Alaska Stock
Proposal would not change the Company's dividend policy with respect to the
Seagull Common Stock. Accordingly, the Board does not currently intend to pay
dividends on the Seagull Common Stock.
Dividends on the ENSTAR Alaska Stock would 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 the Company as a whole. If
the ENSTAR Alaska Stock Proposal is approved and the ENSTAR Alaska Stock
Offering is completed, the Board of Directors currently intends to pay an
initial dividend on the ENSTAR Alaska Stock of $8.25 million per year in the
aggregate.
While the Board of Directors does not currently intend to change the
dividend policies referred to above, it reserves the right to do so at any time
and from time to time. Under the ENSTAR Alaska Stock Proposal and Texas law, the
Board of Directors would not be required to pay dividends in accordance with the
foregoing dividend policies. For information concerning restrictions on the
funds from which dividends on the Seagull Common Stock and the ENSTAR Alaska
Stock may be paid, see "Proposal 2 -- The ENSTAR Alaska Stock
Proposal -- Dividend Policy" and "-- Description of Seagull Common Stock and
ENSTAR Alaska Stock -- Dividends."
DESCRIPTION OF SEAGULL COMMON STOCK AND ENSTAR ALASKA STOCK
Dividends. Dividends on the Seagull Common Stock and the ENSTAR Alaska
Stock will be subject to the same limitations as dividends on the existing
Seagull Common Stock, which are limited to the amount of
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<PAGE> 18
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 Seagull
Common Stock, in addition to such limitations, will be further limited to an
amount not in excess of 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. 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 Group 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
Seagull Energy Dividend Amount or an Available ENSTAR Alaska Group Dividend
Amount. See "Proposal 2 -- The ENSTAR Alaska Stock Proposal -- 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 Seagull Energy
and of the ENSTAR Alaska Group and any distributions on, or repurchases, of the
Seagull Common Stock or the ENSTAR Alaska Stock. For restrictions on the payment
of dividends contained in the Company's debt instruments, see "Proposal 2 -- The
ENSTAR Alaska Stock Proposal -- Dividend Policy."
Exchange and Redemption. The Articles of Incorporation currently do not
provide for either mandatory or optional exchange or redemption of the Seagull
Common Stock. The ENSTAR Alaska Stock Proposal will permit the exchange or
redemption of the ENSTAR Alaska Stock (but not the Seagull Common Stock) upon
the terms below.
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 facts and circumstances.
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 either:
(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;
(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;
(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 (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
(C) exchange each outstanding share of ENSTAR Alaska Stock for 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.
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<PAGE> 19
For the definition of "substantially all of the properties and assets of
the ENSTAR Alaska Group," see Section 3(b) of Annex III hereto.
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 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 the definition of "Market Value Ratio" in Section 3(b)(iv) of Annex
III hereto.
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.
Voting Rights. The Articles of Incorporation currently provide that holders
of Seagull Common Stock have one vote per share on all matters submitted to a
shareholder vote. The ENSTAR Alaska Stock Proposal provides 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 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 Seagull Common Stock then
outstanding, voting as a separate class, is necessary in certain other
circumstances. A separate class vote of the holders of ENSTAR Alaska Stock is
necessary in similar circumstances. See "Proposal 2 -- The ENSTAR Alaska Stock
Proposal -- Description of Seagull Common Stock and ENSTAR Alaska Stock --
Voting Rights."
Mergers and Consolidations. Under the TBCA, the holders of the Seagull
Common Stock currently would be entitled to share proportionately in the
consideration, if any, attributable to the Seagull Common Stock pursuant to the
terms of any merger or consolidation to which the Company is a party. Under the
ENSTAR Alaska Stock Proposal, 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 in proportion to the relative time-weighted Market
Capitalization of each class of common stock.
Liquidation Rights. Currently, 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, holders
of the Seagull Common Stock will receive the funds remaining for distribution to
common shareholders. Under the ENSTAR Alaska Stock Proposal, 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 common
shareholders in proportion to the relative time-weighted average Market
Capitalization of each class of common stock.
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<PAGE> 20
RETAINED INTEREST OF SEAGULL ENERGY IN ENSTAR ALASKA GROUP; OUTSTANDING INTEREST
FRACTION
The Company currently expects to sell shares of ENSTAR Alaska Stock
representing 100% of the equity attributable to 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 ENSTAR Alaska Stock Offering
will depend upon then prevailing market and other conditions at the time of the
ENSTAR Alaska Stock Offering. To the extent that the number of shares of ENSTAR
Alaska Stock to be issued and sold in the ENSTAR Alaska Stock 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 of the ENSTAR Alaska Stock
Offering to repay amounts borrowed under the Company's revolving credit
agreement, 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 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. If the net proceeds of an offering of ENSTAR
Alaska Stock subsequent to the ENSTAR Alaska Stock Offering 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.
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
15
<PAGE> 21
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 "Proposal 2 -- The ENSTAR Alaska Stock Proposal --
Retained Interest of Seagull Energy in ENSTAR Alaska Group; Outstanding Interest
Fraction" and Annex II hereto.
STOCK EXCHANGE LISTINGS
The Seagull Common Stock is currently listed on the New York Stock Exchange
(the "NYSE") under the symbol "SGO." If the ENSTAR Alaska Stock Proposal is
implemented, the symbol for the Seagull Common Stock would remain "SGO."
Application will be made to the NYSE for listing of the ENSTAR Alaska Stock on
the NYSE under the symbol " ." See "The ENSTAR Alaska Stock Proposal -- Stock
Exchange Listings."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The Company has been advised by tax counsel that the ENSTAR Alaska Stock
and the Seagull Common Stock each will be treated for federal income tax
purposes as common stock of the Company, and that no gain or loss would be
recognized by the Company or its shareholders by reason of the implementation of
the ENSTAR Alaska Stock Proposal or the issuance and sale of ENSTAR Alaska Stock
in the ENSTAR Alaska Stock Offering. However, there are no court decisions
bearing directly on transactions similar to the ENSTAR Alaska Stock Proposal,
and the Internal Revenue Service has had under study since 1987 the federal
income tax treatment of stock similar to the ENSTAR Alaska Stock. If, contrary
to the opinion of counsel, the ENSTAR Alaska Stock were treated as stock of a
subsidiary of the Company, the Company would recognize gain on the issuance of
such stock in an amount equal to the excess of the fair market value of such
stock over its federal income tax basis to the Company, and (assuming that the
Outstanding Interest Fraction is greater than 20%) the ENSTAR Alaska Group would
not be includable in the Company's consolidated federal income tax return. See
"Proposal 2 -- The ENSTAR Alaska Stock Proposal -- Certain Federal Income Tax
Considerations."
REQUIRED VOTE
The ENSTAR Alaska Stock Proposal will require the affirmative vote of the
holders of at least two-thirds of all issued and outstanding shares of Seagull
Common Stock.
BACKGROUND AND REASONS FOR THE ENSTAR ALASKA STOCK PROPOSAL AND THE ENSTAR
ALASKA STOCK OFFERING
The ENSTAR Alaska Stock Proposal is intended to provide investors with
securities reflecting the performance of Seagull Energy separately from the
ENSTAR Alaska Group, and to give investors an opportunity to invest in either or
both securities depending on their investment objectives, while at the same time
retaining the benefits of remaining a single corporation. The ENSTAR Alaska
Stock Offering is also intended to provide the Company with significant
additional liquidity in an attractive and tax efficient manner.
The ENSTAR Alaska Stock Proposal is the result of the Board's review of
various alternatives for maximizing shareholder value with respect to the ENSTAR
Alaska Group. Among the options that have been considered by the Board are (i)
selling the ENSTAR Alaska Group, (ii) distributing the ENSTAR Alaska Group to
the Company's shareholders in a spin-off and (iii) conducting a public offering
of securities issued directly by the ENSTAR Alaska Group representing a portion
of the equity ownership of the ENSTAR Alaska Group. After taking into account a
variety of factors, including the expected financial, regulatory and tax
consequences of these alternatives, as well as structuring constraints imposed
by the 1935 Act, the Board
16
<PAGE> 22
currently believes that the ENSTAR Alaska Stock Proposal is the best alternative
for maximizing shareholder value with respect to the ENSTAR Alaska Group.
However, the Board will continue to evaluate each of the other alternatives
mentioned above in light of prevailing market and other conditions, even after
shareholder approval is obtained for the ENSTAR Alaska Stock Proposal.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE ENSTAR ALASKA STOCK
PROPOSAL (INCLUDING THE AMENDMENTS TO THE ARTICLES OF INCORPORATION WHICH
CONSTITUTE A PART THEREOF) AND BELIEVES THAT ITS ADOPTION IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS. ACCORDINGLY, THE BOARD OF
DIRECTORS UNANIMOUSLY DECLARES THE ENSTAR ALASKA STOCK PROPOSAL ADVISABLE AND
RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF THE ENSTAR ALASKA STOCK PROPOSAL.
MARKET PRICES OF SEAGULL COMMON STOCK
For information concerning market prices of Seagull Common Stock, see
"Price Range of and Dividends on Seagull Common Stock."
PROPOSAL 3 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The shareholders are being asked to ratify the selection of the firm of
KPMG Peat Marwick as independent auditors for the fiscal year ending December
31, 1994. Representatives of KPMG Peat Marwick will be present at the Annual
Meeting, will have the opportunity to make a statement if they desire to do so
and will be available to respond to appropriate questions from shareholders.
Approval of the selection of auditors requires the affirmative vote of the
holders of a majority of the shares of Seagull Common Stock present or
represented by proxy and entitled to vote at the Annual Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE IN
FAVOR OF PROPOSAL 3.
---------------------
Under applicable Texas law, none of the holders of Seagull Common Stock has
appraisal rights in connection with any proposal to be acted upon at the Annual
Meeting, including without limitation the ENSTAR Alaska Stock Proposal.
17
<PAGE> 23
SEAGULL ENERGY CORPORATION
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------
YEAR ENDED DECEMBER 31,
PRO FORMA ----------------------------------
1993(1) 1993 1992 1991
---------- ---------- ---------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT DATA (2):
Revenues....................................... $ 409,523 $ 377,165 $ 238,829 $248,537
Depreciation, depletion and amortization....... 131,772 116,556 63,231 52,902
Operating profit............................... 79,759 75,989 29,883 30,183
Net earnings (3)............................... 28,085 27,198 6,688 5,107
Earnings per common share:
Historical (3).............................. $ -- $ 0.76 $ 0.26 $ 0.23
Pro forma Seagull Energy.................... 0.59 -- -- --
Pro forma ENSTAR Alaska Group (4)........... 0.94 -- -- --
SUMMARY SEGMENT DATA:
Exploration and Production (2):
Depreciation, depletion and amortization.... $ 118,768 $ 103,552 $ 52,855 $ 42,646
Operating profit (loss)..................... 46,739 42,969 (1,613) 1,275
Capital expenditures (5).................... 114,562 97,818 32,115 58,459
Pipeline and Marketing:
Depreciation, depletion and amortization.... 5,493 5,493 3,192 3,278
Operating profit............................ 14,065 14,065 9,057 7,884
Capital expenditures (6).................... 2,115 2,115 1,622 634
Alaska Transmission and Distribution:
Depreciation, depletion and amortization.... 7,511 7,511 7,184 6,978
Operating profit............................ 18,955 18,955 22,439 21,024
Capital expenditures........................ 10,094 10,094 9,024 10,492
SUMMARY BALANCE SHEET DATA (END OF PERIOD) (2):
Property, plant and equipment -- net........... $1,149,783 $ 933,189 $ 937,802 $500,255
Total assets................................... 1,342,654 1,118,251 1,102,964 618,552
Long-term debt................................. 513,093 459,787 608,011 219,154
Shareholders' equity (7)....................... 579,379 439,379 243,673 235,797
</TABLE>
- - ---------------
(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
Company's revolving credit agreement, and (ii) the application of the
estimated net proceeds of $140 million from the issuance and sale for cash
of shares of ENSTAR Alaska Stock representing 100% of the equity
attributable to the ENSTAR Alaska Group pursuant to the ENSTAR Alaska Stock
Offering to repay amounts borrowed under the Company's revolving credit
agreement, as if both events had occurred on January 1, 1993. The summary
balance sheet data give effect to the pro forma transactions and events
described in clauses (i) and (ii) above as if both events had occurred on
December 31, 1993.
(2) Includes certain assets acquired in the Mid-Continent region (the
"Mid-Continent Assets") since March 8, 1991 and Seagull Mid-South Inc.
(formerly Arkla Exploration Company) since December 31, 1992, the
respective dates of acquisition of these entities or assets.
(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 Statement of Financial Accounting Standards ("SFAS") No.
109, Accounting for Income Taxes, and SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions.
(4) Assumes that 7,500,000 shares of ENSTAR Alaska Stock are issued in the
ENSTAR Alaska Stock Offering.
(5) Exclusive of consideration paid for the Mid-Continent Assets in 1991 and
Seagull Mid-South Inc. in 1992.
(6) Exclusive of consideration paid for two gas gathering systems in 1992.
(7) 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.
18
<PAGE> 24
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
HISTORICAL
------------------------------
YEAR ENDED DECEMBER 31,
PRO FORMA ------------------------------
1993(1) 1993 1992 1991
---------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT DATA (2):
Revenues.......................................... $ 302,279 $269,921 $129,231 $118,922
Depreciation, depletion and amortization.......... 124,261 109,045 56,047 45,924
Operating profit.................................. 60,804 57,034 7,444 9,159
Net earnings (loss) (3)........................... 21,037 20,150 (5,351) (4,519)
Earnings per common share......................... $ 0.59 -- -- --
SUMMARY SEGMENT DATA:
Exploration and Production (2):
Depreciation, depletion and amortization....... $ 118,768 $103,552 $ 52,855 $ 42,646
Operating profit (loss)........................ 46,739 42,969 (1,613) 1,275
Capital expenditures (4)....................... 114,562 97,818 32,115 58,459
Pipeline and Marketing:
Depreciation, depletion and amortization....... 5,493 5,493 3,192 3,278
Operating profit............................... 14,065 14,065 9,057 7,884
Capital expenditures (5)....................... 2,115 2,115 1,622 634
SUMMARY BALANCE SHEET DATA (END OF PERIOD) (2):
Property, plant and equipment -- net.............. $ 987,779 $771,185 $777,443 $340,119
Total assets...................................... 1,156,953 932,550 917,078 429,493
Long-term debt.................................... 450,306 397,000 541,000 156,667
Common equity..................................... 520,017 380,017 181,906 176,518
</TABLE>
- - ---------------
(1) The summary income statement data and the summary segment data give effect
to (i) the Seagull Canada Acquisition, financed initially under the
Canadian Credit Agreement and the Company's revolving credit agreement, and
(ii) the application of the estimated net proceeds of $140 million from the
issuance and sale for cash of shares of ENSTAR Alaska Stock representing
100% of the equity attributable to the ENSTAR Alaska Group pursuant to the
ENSTAR Alaska Stock Offering to repay amounts borrowed under the the
Company's revolving credit agreement, as if both events had occurred on
January 1, 1993. The summary balance sheet data give effect to the pro
forma transactions and events described in clauses (i) and (ii) above as if
both events had occurred on December 31, 1993.
(2) Includes the Mid-Continent Assets since March 8, 1991 and Seagull Mid-South
Inc. since December 31, 1992, the respective dates of acquisition of these
entities or assets.
(3) 1992 includes the cumulative effect of a change in accounting principles of
$0.7 million. Effective January 1, 1992, the Company adopted SFAS No. 109,
Accounting for Income Taxes.
(4) Exclusive of consideration paid for the Mid-Continent Assets in 1991 and
Seagull Mid-South Inc. in 1992.
(5) Exclusive of consideration paid for two gas gathering systems in 1992.
19
<PAGE> 25
ENSTAR ALASKA GROUP
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
HISTORICAL
------------------------------
PRO YEAR ENDED DECEMBER 31,
FORMA ------------------------------
1993(1) 1993 1992 1991
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT DATA:
Revenues............................................ $107,244 $107,244 $109,598 $129,615
Depreciation and amortization....................... 7,511 7,511 7,184 6,978
Operating profit.................................... 18,955 18,955 22,439 21,024
Net earnings (2).................................... 7,048 7,048 12,039 9,626
Earnings per common share (3)....................... $ 0.94 -- -- --
SUMMARY SEGMENT DATA:
Alaska Transmission and Distribution:
Depreciation and amortization.................... $ 7,511 $ 7,511 $ 7,184 $ 6,978
Operating profit................................. 18,955 18,955 22,439 21,024
Capital expenditures............................. 10,094 10,094 9,024 10,492
SUMMARY BALANCE SHEET DATA (END OF PERIOD):
Property, plant and equipment -- net................ $162,004 $162,004 $160,359 $160,136
Total assets........................................ 185,701 185,701 186,519 189,059
Long-term debt...................................... 62,787 62,787 67,011 62,487
Common equity....................................... 59,362 59,362 61,767 59,279
OPERATING DATA:
Degree days (4).............................................. 9,382 10,653 10,178
Volumes (Bcf)(5)
Gas Sold.................................................. 28.9 30.9 35.3
Gas Transported........................................... 11.3 10.2 4.3
Combined.................................................. 40.2 41.1 39.6
Margins ($ per Mcf)(5):
Gas Sold.................................................. 1.49 1.47 1.32
Gas Transported........................................... 0.36 0.40 0.27
Combined.................................................. 1.17 1.20 1.20
Year-end customers........................................... 88,200 86,400 84,800
</TABLE>
- - ---------------
(1) The summary income statement data and the summary segment data give effect
to the issuance and sale of shares of ENSTAR Alaska Stock representing 100%
of the equity attributable to the ENSTAR Alaska Group pursuant to the
ENSTAR Alaska Stock 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 as of December 31, 1993 to give effect to
the pro forma transaction described above.
(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 SFAS No. 109, Accounting for Income Taxes, and SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions.
(3) Assumes that 7,500,000 shares of ENSTAR Alaska Stock are issued in the
ENSTAR Alaska Stock Offering.
(4) A measure of weather severity calculated by subtracting the mean temperature
for each day from 65 degrees Fahrenheit. More degree days equate to
colder weather.
(5) Mcf and Bcf represent one thousand cubic feet and one billion cubic feet of
natural gas, respectively.
20
<PAGE> 26
PRICE RANGE OF AND DIVIDENDS ON SEAGULL COMMON STOCK
The Seagull Common Stock is traded on the NYSE under the symbol "SGO." The
following table sets forth, for the periods indicated, the high and low sales
price per share for the Seagull Common Stock, as reported on the NYSE Composite
Tape.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1992
First Quarter............................................ $12 3/4 $10 7/8
Second Quarter........................................... 14 1/4 11 3/8
Third Quarter............................................ 16 11 7/8
Fourth Quarter........................................... 16 7/8 14 5/8
1993
First Quarter............................................ $24 1/2 $14 7/8
Second Quarter........................................... 30 22 7/8
Third Quarter............................................ 32 7/8 24
Fourth Quarter........................................... 31 1/4 21
1994
First Quarter (through March 10, 1994)................... $28 5/8 $24
</TABLE>
On June 4, 1993, the Company effected the Stock Split. The per share
prices, weighted average number of shares outstanding and per share amounts in
this Proxy Statement have been adjusted to reflect the Stock Split. However,
share amounts included in the balance sheets and statements of shareholders'
equity as of dates prior to June 4, 1993 have not been adjusted to reflect the
Stock Split.
As of March 10, 1994, the number of holders of record of Seagull Common
Stock was 2,910. On March 10, 1994, the day before the public announcement of
the ENSTAR Alaska Stock Proposal, the last sales price of the Seagull Common
Stock reported on the NYSE Composite Tape was $24 1/4. On , 1994,
the last full day of trading before the date of this Proxy Statement, the last
sales price of the Seagull Common Stock reported on the NYSE Composite Tape was
$ .
No cash dividends have been paid on the Seagull Common Stock since the
Company became an independent entity as a result of the spin-off of its shares
to the stockholders of Houston Oil & Minerals Corporation in March 1981. The
ENSTAR Alaska Stock Proposal would not change the Company's dividend policy with
respect to the Seagull Common Stock. Accordingly, the Board does not currently
intend to pay dividends on the Seagull Common Stock. See "Proposal 2 -- The
ENSTAR Alaska Stock Proposal -- Dividend Policy" and "-- Description of Seagull
Common Stock and ENSTAR Alaska Stock -- Dividends."
21
<PAGE> 27
PRINCIPAL SHAREHOLDERS
To the knowledge of the management of the Company and based upon filings
with the Securities and Exchange Commission (the "SEC"), the only persons who
may be deemed to own beneficially more than 5% of the outstanding Seagull Common
Stock (including any "group" as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of February
28, 1994, are named in the following table:
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER PERCENT
OF BENEFICIAL OWNER OF SHARES OF CLASS
-------------------------------------------------------- ---------- --------
<S> <C> <C>
The Equitable Companies Incorporated(1)................. 3,399,600 9.4%
787 Seventh Avenue
New York, NY 10019
FMR Corp.(2)............................................ 2,891,574 8.0%
82 Devonshire Street
Boston, MA 02109
RCM Capital Management(3)............................... 2,442,800 6.7%
Four Embarcadero Center, Suite 2900
San Francisco, CA 94111
</TABLE>
- - ---------------
(1) According to information provided to the Company by The Equitable Companies
Incorporated, The Equitable Companies Incorporated and their subsidiaries
and certain affiliates (collectively, the "Equitable Entities")
beneficially own in the aggregate the shares of Seagull Common Stock
indicated above. Except as described below the Equitable Entity holding
such shares has sole voting and disposition power with respect to the
shares respectively owned by such entity. Alliance Capital Management, L.P.
has sole dispositive power with respect to the 3,369,300 shares that it
beneficially owns, but has sole voting power with respect to only 2,794,000
shares, shared voting power with respect to 53,800 shares and no voting
power with respect to the remaining 521,500 shares.
(2) According to information furnished by FMR Corp., 2,891,574 shares (8.0%) are
beneficially owned by Fidelity Management & Research Company, a
wholly-owned subsidiary of FMR Corp. and an investment adviser registered
under Section 203 of the Investment Advisers Act of 1940. Beneficial
ownership by Fidelity Management & Research Company arises as a result of
its acting as investment adviser to the Fidelity Magellan Fund, an
investment company registered under Section 8 of the Investment Company Act
of 1940 (the "Fund"). The Fund had beneficial ownership of all 2,891,574
shares. Edward C. Johnson 3d, Chairman of FMR Corp., owns 34.0% of the
outstanding voting common stock of FMR Corp. Various Johnson family members
and trusts for the benefit of Johnson family members own FMR Corp. voting
common stock. These Johnson family members, through their ownership of
voting common stock, form a controlling group with respect to FMR Corp. FMR
Corp., through its control of Fidelity Management & Research Company, and
the Fund each has sole power to dispose of the 2,891,574 shares. Neither
FMR Corp. nor Edward C. Johnson 3d has the sole power to vote or direct the
voting of the shares owned directly by the Fund, which power resides with
the Fund's Board of Trustees. Fidelity Management & Research Company
carries out the voting of the shares under written guidelines established
by the Fund's Board of Trustees.
(3) According to information furnished by RCM Capital Management ("RCM"), RCM is
an investment adviser and in such capacity may have discretionary authority
to dispose of or to vote securities that are under its management, and as a
result may be deemed to have beneficial ownership of such securities. RCM
Limited L.P. ("RCM Limited") is the General Partner of RCM and RCM General
Corporation ("RCM General") is the General Partner of RCM Limited. RCM
General and RCM Limited may be deemed to have beneficial ownership of
shares as to which RCM is deemed to have beneficial ownership. RCM had sole
dispositive power with respect to 2,402,800 of the shares set forth above,
shared dispositive power with respect to 40,000 of the shares set forth
above, sole voting power with respect to 1,914,450 of such shares and no
voting power with respect to the balance of such shares. RCM serves as
investment manager for the RCM Growth Equity Fund and the RCM Small Cap
Fund, two series of the RCM Capital Funds, Inc. (the "RCM Funds"). As of
December 31, 1993, the RCM Funds held 601,500 shares of Seagull Common
Stock (which shares are included in the shares as to which RCM is deemed to
have beneficial ownership). All of these shares were held by the RCM Growth
Equity Fund.
22
<PAGE> 28
PROPOSAL 1 -- ELECTION OF DIRECTORS
Four directors are to be elected at the Annual Meeting. The Company's
Bylaws provide for a classified Board of Directors. Thus, the Board of Directors
is divided into Classes I, II and III, the terms of office of which are
currently scheduled to expire, respectively, on the dates of the Company's
Annual Meetings of Shareholders in 1996, 1994 and 1995. Peter J. Fluor, Barry J.
Galt, Dean P. Guerin and Robert W. Shower have been nominated to serve in Class
II and, if elected, will serve until the Company's 1997 Annual Meeting of
Shareholders and until their respective successors shall have been elected and
qualified. Each of the nominees for director currently serves as a director of
the Company. The remaining eight directors named below will not be required to
stand for election at the Annual Meeting because their present terms expire in
either 1995 or 1996. A plurality of the votes cast in person or by proxy by the
holders of Seagull Common Stock is required to elect a director. Accordingly,
under Texas law and the Company's Articles of Incorporation and Bylaws,
abstentions and broker non-votes would have no effect on the election of
directors. Shareholders may not cumulate their votes in the election of
directors.
Unless otherwise instructed or unless authority to vote is withheld, the
enclosed proxy will be voted FOR the election of the nominees listed below.
Although the Board of Directors does not contemplate that any of the nominees
will be unable to serve, if such a situation arises prior to the Annual Meeting,
the persons named in the enclosed proxy will vote for the election of such other
person(s) as may be nominated by the Board of Directors.
The following table sets forth information regarding the names, ages and
principal occupations of the nominees and directors, other directorships in
certain companies held by them and the length of continuous service as a
director of the Company:
<TABLE>
<CAPTION>
NOMINEES DIRECTOR
AND DIRECTORS PRINCIPAL OCCUPATION AND DIRECTORSHIPS AGE SINCE
- - ------------------- ------------------------------------------------------ --- --------
<S> <C> <C> <C>
CLASS II NOMINEES
Peter J. Fluor President, Texas Crude Energy, Inc. (independent oil 46 1980
and gas company); Director, Fluor Corporation
Barry J. Galt Chairman of the Board, President and Chief Executive 60 1983
Officer of the Company; Director, Standard Insurance
Company and Trinity Industries, Inc.
Dean P. Guerin Chairman, President and Chief Executive Officer, 72 1982
Berry-Barnett Food Distribution Co., Inc. (wholesale
grocery); Director, Lone Star Technologies and Trinity
Industries, Inc.
Robert W. Shower Executive Vice President and Chief Financial Officer 56 1992
of the Company; Director, Lear Seating Corporation
CLASS I DIRECTORS
John B. Brock Chief Executive Officer, President and Director, 61 1980
United Meridian Corporation (oil and gas exploration
and production); Director, Southwest Bank of Texas
John W. Elias Executive Vice President of the Company 53 1993
Sam F. Segnar Retired Chairman of the Board and Chief Executive 66 1986
Officer, Enron Corp.; Director, MAPCO, Inc., Hartmarx
Corporation, Textron, Inc. and Gulf States Utilities
Company
George M. Sullivan Retired Chairman of the Board, Alaska Railroad 72 1989
Corporation
CLASS III DIRECTORS
J. Evans Attwell Attorney, Vinson & Elkins L.L.P.; Director, American 63 1974
General Corporation, First City Bancorporation of
Texas, Inc. and Galveston-Houston Company
</TABLE>
(Table continued on following page)
23
<PAGE> 29
<TABLE>
<CAPTION>
NOMINEES DIRECTOR
AND DIRECTORS PRINCIPAL OCCUPATION AND DIRECTORSHIPS AGE SINCE
- - ------------------- ------------------------------------------------------ --- --------
<S> <C> <C> <C>
William R. Grant Chairman, Galen Associates (venture capital health 69 1986
care); Director, Allergan, Inc., Fluor Corporation,
New York Life Insurance Company, SmithKline Beecham,
p.l.c. and Witco Corporation
Richard M. Morrow Retired Chairman of the Board and Chief Executive 68 1992
Officer, Amoco Corporation; Director, First Chicago
Corporation, The First National Bank of Chicago, R.R.
Donnelley and Sons Company, Potlatch Corporation,
Westinghouse Electric Corporation and Marsh & McLennan
Companies, Inc.
Dee S. Osborne President, Finial Investment Corporation 63 1983
(investments); Director, General Atlantic Resources,
Inc. and People's Choice TV of Houston, Inc.;
Director, EOTT Energy Corp. (the general partner of
EOTT Energy Partners, L.P.)
</TABLE>
Each of the nominees and directors named above has been engaged in the
principal occupation set forth opposite his name for the past five years except
as follows:
Mr. Guerin served as Chairman of the Board of Eppler, Guerin & Turner, Inc.
(an investment banking firm) from 1951 until his retirement in December 1987. He
was named to his present position in June 1990.
Mr. Shower 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. Brock served as Chief Executive Officer, President and a director of
Ensource Inc. from January 1986 to October 1989, at which time Ensource, Inc.
was merged into its parent company, United Meridian Corporation. He served as
President, Chief Operating Officer and a director from October 1989 to February
1992. Mr. Brock was named to his present position in February 1992.
Mr. Elias served for 30 years with Amoco Production Company and its parent,
Amoco Corporation, in a variety of operational and management positions. Most
recently, he served as Group Vice President of Worldwide Natural Gas for Amoco
Production from November 1988 to January 1993. Mr. Elias was elected to his
present position with the Company in March 1993.
Mr. Segnar served as Chairman of the Board and Chief Executive Officer of
HNG/InterNorth, Inc. (now known as Enron Corp.) from 1984 until his retirement
in early 1986. He served as Chairman of the Board of Vista Chemical, Inc. from
October 1986 to October 1988 and as Chairman of the Board of Collecting Bank,
National Association from April 1988 to February 1993.
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.
Mr. Grant served as Chairman of New York Life International Investment,
Inc. from August 1987 to April 1989. Mr. Grant was named to his present position
in May 1989.
Mr. Morrow served as Chairman of the Board and Chief Executive Officer of
Amoco Corporation from September 1983 until his retirement in February 1991.
24
<PAGE> 30
SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
<TABLE>
<CAPTION>
SEAGULL COMMON STOCK
BENEFICIALLY OWNED(1)
-------------------------
NUMBER PERCENT
OF SHARES OF CLASS
--------- --------
<S> <C> <C>
NONEMPLOYEE DIRECTORS
J. Evans Attwell................................................. 31,200(2) *
John B. Brock.................................................... 76,572(2)(3) *
Peter J. Fluor................................................... 27,198(2)(4) *
William R. Grant................................................. 2,800(2) *
Dean P. Guerin................................................... 41,200(2) *
Richard M. Morrow................................................ 7,200(2) *
Dee S. Osborne................................................... 48,000(2) *
Sam F. Segnar.................................................... 2,600(2) *
George M. Sullivan............................................... 2,200(2) *
EXECUTIVE OFFICERS
Barry J. Galt.................................................... 578,321(2)(5)(6) 1.6%
John W. Elias.................................................... 7,112(2)(6) *
Robert W. Shower................................................. 38,460(2)(5)(6) *
Richard F. Barnes................................................ 45,820(2)(5)(6) *
Thomas P. McConn................................................. 64,635(2)(5)(6) *
Directors and executive officers as a group (18 persons)......... 1,042,151(7) 2.8
</TABLE>
- - ---------------
* Less than 1%.
(1) Unless otherwise indicated, beneficial owners have sole voting and
investment power with respect to the shares listed. Amounts shown are as of
April 4, 1994, except for amounts held by the trustee of the Company's
Thrift Plan and Employee Stock Ownership Plan, which are as of December 31,
1993.
(2) Includes 517,020 shares that the nonemployee directors and executive
officers have a right to purchase within 60 days pursuant to stock options
("Options") granted under the Company's stock option plans as follows: each
nonemployee director -- 1,200, Mr. Galt -- 380,400, Mr. Shower -- 36,000,
Mr. Barnes -- 35,820 and Mr. McConn -- 54,000. Prior to exercising these
Options, the officers will have no voting or investment power with respect
to said shares.
(3) Includes 51,372 shares held directly by family members for which Mr. Brock
disclaims any power to vote or dispose of or have direct disposition.
(4) Includes 8,000 shares held by certain trusts with respect to which Mr. Fluor
is the sole trustee but for which he disclaims any beneficial ownership.
(5) Includes 19,786 shares held by the trustee of the Company's Thrift Plan for
which executive officers have sole voting power and no investment power.
Shares held are as follows: Mr. Galt -- 12,395, Mr. Shower -- 1,164 and Mr.
McConn -- 6,227.
(6) Includes 11,676 shares held by the trustee of the Company's Employee Stock
Ownership Plan for which executive officers have sole voting power and no
investment power. Shares held are as follows: Mr. Galt -- 5,526, Mr.
Elias -- 446, Mr. Shower -- 1,296 and Mr. McConn -- 4,408.
(7) Includes 58,135 shares held for directors and executive officers as a group
in the Company's Thrift Plan and Employee Stock Ownership Plan for which
such persons have sole voting power and no investment power. Also, includes
594,046 shares for directors and executive officers as a group that said
persons have the right to purchase within 60 days pursuant to Options
granted under the Company's stock option plans. Prior to exercising these
Options, said persons will have no voting or investment power with respect
to said shares.
25
<PAGE> 31
DIRECTORS' MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors held 14 meetings during 1993. Each director attended
at least 75% of the aggregate total meetings of the Board of Directors and any
committee on which such director served.
The Company has the following standing committees:
Audit Committee. The Audit Committee, which currently consists of
Messrs. Grant, Guerin, Morrow and Segnar, met three times during 1993. Its
principal functions are to confirm the existence of effective accounting
and internal control systems and to oversee the entire audit function, both
independent and internal.
Compensation Committee. The Compensation Committee, which currently
consists of Messrs. Brock, Fluor and Osborne, met nine times during 1993.
Its principal functions are to study, advise and consult with the Company's
management respecting the compensation of officers and other key employees
of the Company. Members of the Compensation Committee are not eligible to
participate in any of the plans or programs they administer.
Executive Committee. The Executive Committee, which currently consists
of Messrs. Attwell, Brock, Galt, Osborne and Segnar, met two times during
1993. Its principal function is to aid and assist the Company's management
in the day-to-day operation of the Company.
Nominating Committee. The Nominating Committee, which currently
consists of Messrs. Attwell, Grant, Morrow and Sullivan, met two times
during 1993. Its principal function is to make proposals to the full Board
of Directors for candidates to be nominated by the Board to fill vacancies
or for new directorship positions, if any, which may be created from time
to time. The Nominating Committee will consider suggestions from any
source, including shareholders, regarding possible candidates for director.
No procedure has yet been established for the consideration of nominees
recommended by shareholders.
COMPENSATION OF DIRECTORS
During 1993, each director of the Company who is not a full-time employee
was paid an annual director's fee of $20,000 per year plus $1,000 for each
meeting of the Board of Directors attended. Audit, Executive, Compensation and
Nominating Committee members are paid $750 for each committee meeting attended.
Each outside committee chairman receives an additional $1,000 per year. In
addition, a nonemployee director who attends a meeting of a committee of which
he is not a member is entitled to an attendance fee of $750.
Stock Options. The Company has a Nonemployee Directors Stock Option Plan
(the "Directors Option Plan") which was approved at the 1993 annual meeting of
shareholders (the "1993 Annual Meeting"). The Company utilizes stock options in
order to award and retain highly-qualified independent directors, and to allow
them to develop a sense of proprietorship and personal involvement in the
development and financial success of the Company.
The Directors Option Plan provides for the grant of options to acquire
Seagull Common Stock to each director who is not and never has been an employee
of the Company (an "Eligible Director"). On the date of the 1993 Annual Meeting,
each Eligible Director received an option to purchase 6,000 shares of Seagull
Common Stock at an exercise price equal to the fair market value of the Seagull
Common Stock on the date of grant. In addition, each Eligible Director who is
elected or appointed to the Board of Directors for the first time will receive
on the date of such director's election or appointment an option to purchase
6,000 shares of Seagull Common Stock at an exercise price equal to the fair
market value of the Seagull Common Stock on the date of grant.
On the date of any Annual Meetings of Shareholders prior to the termination
of the Directors Option Plan, each Eligible Director who is continuing in office
will automatically receive an option to purchase an additional 6,000 shares of
Seagull Common Stock at an exercise price equal to the fair market value of the
Seagull Common Stock on the date of grant. All outstanding options have terms of
ten years and vest 20% per year over the initial five years of their terms.
26
<PAGE> 32
Deferred Fee Plan. The Company has an Outside Directors Deferred Fee Plan
(the "Deferred Fee Plan"), a non-qualified plan, which was amended and restated
effective May 1, 1991. The Deferred Fee Plan requires the automatic deferral of
one-half of the annual retainer fee for all directors who are not employees of
the Company ("Outside Directors"). In addition, Outside Directors may elect to
defer all or a portion of their remaining directors' fees under the Deferred Fee
Plan. Amounts automatically deferred under the Deferred Fee Plan are credited
based upon "phantom stock" units, which have the same value as Seagull Common
Stock, which increase or decrease in value to the full extent of any increase or
decrease in the value of Seagull Common Stock and which receive credit for any
cash or stock dividends paid with respect to Seagull Common Stock. With respect
to fees deferred by Outside Directors prior to January 1, 1991, or fees deferred
in excess of the one-half automatic deferral, Outside Directors are permitted to
make quarterly elections regarding the method of income crediting for these
deferrals, which may be credited either based upon "phantom stock" units or with
interest equivalents based upon the prime rate of interest as published in The
Wall Street Journal on the last day of the quarter, plus a bonus rate of
interest of up to 2% depending on the number of years the Outside Director has
served on the Board. All "phantom stock" units credited to Outside Directors'
accounts must remain so credited until distribution or, if distribution is to be
in a form other than lump sum, the effective date of a final income crediting
election made after Board of Directors membership has ceased. Subject to certain
restrictions, Outside Directors may elect the timing and mode of their
distributions from the Deferred Fee Plan, except on the occurrence of events
such as death, plan termination or change of control. Distributions under the
Deferred Fee Plan can be made only in cash. Benefits under the Deferred Fee Plan
constitute unfunded, unsecured obligations of the Company. As of April 4, 1994
all Outside Directors were participants in the Deferred Fee Plan. If the ENSTAR
Alaska Stock Proposal is approved by the shareholders and implemented, the
Company currently intends to amend the Deferred Fee Plan to allow Outside
Directors to elect to have a portion of their deferred fees credited based on
"phantom stock" units, which will be designed to have the same value and the
same dividend and liquidation characteristics as the ENSTAR Alaska Stock.
The following table sets forth Seagull Common Stock "phantom stock" units
credited to each participant's account during 1993 and total units credited as
of April 4, 1994:
<TABLE>
<CAPTION>
SEAGULL COMMON STOCK
PHANTOM STOCK UNITS
CREDITED
---------------------------
IN FISCAL AS OF APRIL
1993 4, 1994
--------- -------------
<S> <C> <C>
J. Evans Attwell....................................... 1,652
John B. Brock.......................................... 1,583
Peter J. Fluor......................................... 1,613
William R. Grant....................................... 1,404
Dean P. Guerin......................................... 1,510
Richard M. Morrow...................................... 1,434
Dee S. Osborne......................................... 1,568
Sam F. Segnar.......................................... 382
George M. Sullivan..................................... 747
</TABLE>
CERTAIN TRANSACTIONS AND OTHER MATTERS
The Company's Thrift Plan invests in three different mutual funds (the
"Fidelity Funds") affiliated with FMR Corp. (a beneficial owner of more than 5%
of the outstanding Seagull Common Stock; see "Principal Shareholders"). However,
the amount of money invested in those Fidelity Funds depends upon elections made
by the Company's employee participants in the Thrift Plan. The Company believes
that the Thrift Plan invests on the same basis in terms of rates and fees as are
offered generally to similar employee investment vehicles. As of January 31,
1994, the aggregate amount of funds invested by the Thrift Plan in these funds
was $9.2 million.
27
<PAGE> 33
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), an Equitable
Entity has acted as an underwriter for various equity and debt offerings
conducted by the Company. In February 1993, DLJ acted as an underwriter in the
Company's public offering of 10,120,000 shares of Seagull Common Stock, in
consideration for underwriting discounts and commissions of $839,602, together
with reimbursements for certain out-of-pocket expenses. In July 1993, DLJ acted
as an underwriter in the Company's public offering of an aggregate of $250
million of senior and senior subordinated debentures, in consideration for
underwriting discounts and commissions of $900,000, together with reimbursements
for certain out-of-pocket expenses. The consideration paid to DLJ in these
securities offerings was comparable to the commissions and discounts for the
other investment banking firms in these transactions that were not affiliated
with the Equitable Entities. See "Principal Shareholders."
During 1993, the Company retained the law firm of Moyers, Martin, Santee,
Imel & Tetrick ("Moyers, Martin"), of Tulsa, Oklahoma, with respect to matters
of Oklahoma law. Moyers, Martin has been retained to perform similar services
with respect to matters of Oklahoma law in 1994. Mr. D. Stanley Tacker, Mr.
Galt's son-in-law, is a partner in Moyers, Martin. Mr. Galt is Chairman,
President and Chief Executive Officer of the Company.
Pursuant to the requirements of Section 16(a) of the Exchange Act, Janice
K. Hartrick, Chief Counsel and Vice President, Environmental Affairs of the
Company, filed a report of change in beneficial ownership on Form 4 with the SEC
during February 1994. However, because the sale to which the Form 4 related
occurred during September 1993, Ms. Hartrick's filing was not timely made. Ms.
Hartrick has advised the Company that she has made all other Section 16(a)
filings during 1993 on a timely basis.
Compensation Committee Interlocks and Insider Participation
J. Evans Attwell, a director of the Company, served as a member of the
Compensation Committee during 1993 until May 11, 1993, the date of the 1993
Annual Meeting of Shareholders, at which time his term expired. During 1993, the
Company retained the law firm of Vinson & Elkins L.L.P., of which Mr. Attwell is
an attorney, to perform various legal services for the Company. Vinson & Elkins
L.L.P. has been retained to perform similar services in 1994.
The Company and UMC Petroleum Corporation, a subsidiary of United Meridian
Corporation ("UMC"), entered into a Lease Purchase and Drilling Agreement in
1992 in connection with a UMC-operated gas and oil property. Based on this
agreement, $ was paid during 1993 to UMC by the Company. The foregoing
transaction was on terms consistent with general industry terms. John B. Brock,
a director of the Company and a member of the Compensation Committee, is Chief
Executive Officer, President and Director of UMC.
28
<PAGE> 34
EXECUTIVE COMPENSATION
The following table sets forth annual and long-term compensation for
services in all capacities to the Company for the fiscal years ended December
31, 1991, 1992 and 1993, of those persons who were, at December 31, 1993, the
Chief Executive Officer and the other four most highly compensated executive
officers of the Company (the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION --------------
------------------------------------------ AWARDS
OTHER ANNUAL -------------- ALL OTHER
NAME & PRINCIPAL COMPENSATION OPTIONS/(SARS) COMPENSATION
POSITION YEAR SALARY($) BONUS($)(1) ($)(2)(3) (SHS.)(4) ($)(2)(5)
- - ------------------------------------------ ---- --------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Barry J. Galt............................. 1993 $ 465,000 $ 298,000 $ 0 100,000 $ 31,155
Chairman of the Board 1992 $ 440,000 $ 440,000 $ 0 150,000 $ 75,913
and Chief Executive Officer 1991 $ 410,000 $ 140,000 0
John W. Elias............................. 1993 $ 187,500(6) $ 80,000 $110,431(7) 100,000 $ 11,250
Executive Vice President
Robert W. Shower.......................... 1993 $ 204,000 $ 86,000 $ 0 30,000 $ 12,240
Executive Vice President 1992 $ 149,205(8) $ 95,730 $ 85,637(9) 90,000 $ 23,951
and Chief Financial Officer
Richard F. Barnes......................... 1993 $ 222,000 $ 17,500 $ 0 16,000 $ 13,413
President, ENSTAR 1992 $ 210,000 $ 30,000 $ 0 25,000 $ 13,800
Natural Gas Company 1991 $ 185,000 $ 20,000 0
Thomas P. McConn.......................... 1993 $ 204,000 $ 84,000 $ 0 24,000 $ 12,240
President, Seagull 1992 $ 184,000 $ 107,560 $ 0 40,000 $ 30,381
Energy E&P Inc. 1991 $ 168,000 $ 32,000 0
</TABLE>
- - ---------------
(1) Amounts shown include cash compensation earned and received by executive
officers as well as amounts earned but deferred under the Executive
Incentive Plan for the respective fiscal years.
(2) The rules of the SEC permit a phase in, beginning in 1992, for the
disclosures under the headings "Other Annual Compensation" and "All Other
Compensation."
(3) No amounts are included for perquisites and personal benefits unless they
exceed the lesser of $50,000 or 10% of annual salary and bonus.
(4) No grants of stock appreciation rights have been made.
(5) Amounts reported under "All Other Compensation" represent contributions by
the Company to defined contribution plans.
(6) Mr. Elias joined the Company as an employee on March 8, 1993.
(7) Includes a one-time payment of $100,000 given at the time of Mr. Elias's
employment in lieu of reimbursement for relocation expenses.
(8) Mr. Shower joined the Company as an employee on March 9, 1992.
(9) Includes a one-time payment of $75,000 given at the time of Mr. Shower's
employment in lieu of reimbursement for relocation expenses.
COMPENSATION ARRANGEMENTS
Mr. Galt has an employment agreement which had an initial term of three
years. This term is extended an additional year on December 31 of each year that
Mr. Galt remains an employee of the Company, with the result that the remaining
term of the employment agreement is not less than two years nor more than three
years at any given time. If, however, the Company terminates Mr. Galt's
employment because of gross negligence or willful misconduct in the performance
of his duties, the employment agreement will terminate immediately. Similarly,
if Mr. Galt terminates his employment voluntarily other than in connection with
a "change in control" of the Company or other than because he is not re-elected
to his current positions (including as a director) or is assigned materially
inconsistent duties, the employment agreement will terminate. Mr. Galt's current
annual salary under his employment agreement is $496,000.
29
<PAGE> 35
During the term of his employment, Mr. Galt will also receive the use of an
automobile, various club memberships and certain other personal and business
related benefits. Mr. Galt also had an outstanding loan from the Company made in
connection with his purchase of his principal residence in Houston, Texas.
During 1993, the highest balance on the loan, which accrued interest at 6% per
annum, was $200,000. Mr. Galt made a regularly scheduled principal payment of
$25,000 during 1993, and the remaining principal balance of $175,000 was paid in
full on August 27, 1993.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following is information with respect to the unexercised options to
purchase Seagull Common Stock under the Company's stock option plans granted to
the Named Officers and held by them at December 31, 1993.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF IN-THE-MONEY OPTIONS/SARS
UNEXERCISED OPTIONS/SARS
SHARES AT DECEMBER 31, 1993 AT DECEMBER 31, 1993(1)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE (SHS.) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---------------------------------------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barry J. Galt.................. 173,740 $4,436,229 350,400 289,600 $5,658,525 $ 2,405,100
John W. Elias.................. 0 $ 0 0 100,000 $ 0 $ 0
Robert W. Shower............... 0 $ 0 18,000 102,000 $ 241,875 $ 967,500
Richard F. Barnes.............. 0 $ 0 40,820 45,200 $ 641,994 $ 385,950
Thomas P. McConn............... 0 $ 0 46,000 71,000 $ 647,250 $ 606,813
</TABLE>
- - ---------------
(1) Value based on the closing price on the NYSE Composite Tape for the Seagull
Common Stock on December 31, 1993 ($25.375).
OPTION GRANTS
The following is information with respect to grants of stock options in
fiscal 1993 pursuant to the Company's stock option plans to the Named Officers
reflected in the Summary Compensation Table on page 29. No stock appreciation
rights were granted under those plans in fiscal 1993.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------- ANNUAL RATE OF
% OF TOTAL STOCK PRICE APPRECIATION
OPTIONS/SARS
GRANTED TO EXERCISE FOR OPTION TERM(2)
OPTIONS/SARS EMPLOYEES IN OR BASE EXPIRATION ------------------------
NAME GRANTED (SHS.)(1) FISCAL 1993 PRICE ($/SH.) DATE 5% 10%
- - ---------------------------------------------- ----------------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Barry J. Galt................ 100,000 18% $26.375 5/11/2003 $1,658,710 $4,203,496
John W. Elias................ 100,000 18% $26.375 5/11/2003 $1,658,710 $4,203,496
Robert W. Shower............. 30,000 5% $26.375 5/11/2003 $ 497,613 $1,261,049
Richard F. Barnes............ 16,000 3% $26.375 5/11/2003 $ 265,394 $ 672,559
Thomas P. McConn............. 24,000 4% $26.375 5/11/2003 $ 398,090 $1,008,839
</TABLE>
- - ---------------
(1) Options were granted to Named Officers on May 11, 1993. The exercise price
per share is equal to the closing price of the Seagull Common Stock on the
NYSE Composite Tape on the date of grant. Options granted vest
incrementally in three years beginning three years from the date of grant
and will not begin to become exercisable until May 11, 1996, except for
options granted to Mr. Elias, which vest at a rate of 20% per year
beginning one year from the date of grant. If a "change of control" were to
occur, vesting of all outstanding Options is subject to acceleration by the
Compensation Committee, so that such Options could be exercisable for a
period of time determined by the Compensation Committee of the Board of
Directors.
(2) The dollar amounts under these columns represent the potential realizable
value of each grant of options assuming that the market price of the
Seagull Common Stock appreciates in value from the date of grant at the 5%
and 10% annual rates of return prescribed by the SEC. These calculations
are not intended to forecast possible future appreciation, if any, of the
price of Seagull Common Stock.
30
<PAGE> 36
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
{1993 COMMITTEE REPORT TO COME}
Compensation Committee
Peter J. Fluor, Chairman
John B. Brock
Dee S. Osborne
SHAREHOLDER RETURN PERFORMANCE PRESENTATION
The performance graph shown below was prepared by Towers Perrin (benefits
consultants retained by the Company) using data from the Standard and Poor's
Compustat Database for use in this Proxy Statement. As required by applicable
rules of the SEC, the graph was prepared based upon the following assumptions:
1. $100 was invested in Seagull Common Stock, the S&P 500 and the Peer
Group (as defined below) on January 1, 1989.
2. Peer Group investment is weighted based on the market
capitalization of each individual company within the Peer Group at the
beginning of each year.
3. Dividends are reinvested on the ex-dividend dates.
The companies that comprise the Company's Peer Group are as follows:
Anadarko Petroleum Corporation, Apache Corporation, Burlington Resources, Inc.,
Cabot Oil & Gas Corporation, Devon Energy Corporation, Enron Oil & Gas Company,
Equitable Resources, Inc., The Louisiana Land & Exploration Company, Maxus
Energy Corporation, Mesa Inc., Mitchell Energy & Development Corp., Murphy Oil
Corporation, Noble Affiliates, Inc., Oryx Energy Company, Parker & Parsley
Petroleum Company, Plains Petroleum Company, Pogo Producing Company, Santa Fe
Energy Resources, Inc., Southwestern Energy Company and Union Texas Petroleum
Holdings, Inc. (collectively, the "Peer Group").
31
<PAGE> 37
SEAGULL ENERGY CORPORATION
COMPARATIVE TOTAL RETURNS
JANUARY 1989 -- DECEMBER 1993
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG SEAGULL ENERGY CORPORATION, S&P 500 INDEX AND PEER GROUP**
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) SEAGULL ENERGY CORPORATION S&P 500 PEER GROUP
<S> <C> <C> <C>
1/1/89 100.00 100.00 100.00
12/31/89 148.00 132.00 153.00
12/30/90 196.00 127.00 126.00
12/31/91 161.00 166.00 114.00
12/31/92 202.00 179.00 132.00
12/31/93 330.00 197.00 158.00
</TABLE>
<TABLE>
<CAPTION>
1/1/89 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Seagull Energy Corporation $ 100 $ 148 $ 196 $ 161 $ 202 $ 330
S&P 500 Index $ 100 $ 132 $ 127 $ 166 $ 179 $ 197
Peer Group $ 100 $ 153 $ 126 $ 114 $ 132 $ 158
</TABLE>
Assumes $100 invested on January 1, 1989 in Seagull Common Stock, S&P 500 Index
and the Peer Group.
* Total Return assumes the reinvestment of dividends.
** Fiscal year ending December 31.
EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN
The Company has an Executive Supplemental Retirement Plan (the "Retirement
Plan") in which Barry J. Galt is the only current participant. The Retirement
Plan was established to provide supplemental retirement benefits for those
employees who are designated by the Board of Directors as members and who
complete the required period of employment with the Company. Benefits under the
Retirement Plan constitute unfunded, unsecured obligations of the Company. The
Retirement Plan provides a benefit for the surviving spouse of a participant who
dies before retirement with a vested benefit.
Subject to specified vesting requirements, a participant is entitled to
receive when his or her employment is terminated or at his or her normal
retirement date, whichever is later, a pension equal to the applicable
percentage of average monthly compensation less 50% of his social security
benefit. Compensation covered by the Retirement Plan includes base salary only.
Mr. Galt is fully vested under the Retirement Plan.
32
<PAGE> 38
For Mr. Galt, the applicable percentage is 50% and his average monthly base
compensation (which does not include bonuses) is determined based on his last
three consecutive calendar years of employment with the Company. Based on Mr.
Galt's current annual salary, the estimated annual benefit for Mr. Galt,
assuming retirement at age 65, is $277,734 with such payment continuing to the
survivor for life upon the death of either Mr. Galt or his spouse.
ENSTAR NATURAL GAS COMPANY RETIREMENT PLAN
Richard F. Barnes is the only Named Officer eligible to participate in the
ENSTAR Natural Gas Company Retirement Plan (the "ENSTAR Retirement Plan").
The salaried employees of ENSTAR Natural Gas Company, a division of the
Company, are eligible to participate in the ENSTAR Retirement Plan. Under the
non-contributory plan, a participant who retires at or after the age of 65 with
four years of plan participation is eligible for a monthly retirement benefit
equal to 2% of a participant's average monthly compensation multiplied by his or
her years of benefit service not to exceed ten full years, added to an amount
equal to 1% of the participant's average monthly compensation multiplied by his
or her benefit service exceeding ten full years. Benefits under the ENSTAR
Retirement Plan are not subject to reduction because of Social Security benefits
but are reduced by benefits payable under another defined benefit plan to the
extent that there is a duplication of benefits for the same period of service.
The ENSTAR Retirement Plan provides that a participant's benefit will be
determined pursuant to the above formula as of the date of termination of
employment, but also provides that such benefit will be at least equal to the
participant's accrued benefit as of December 31, 1988.
A participant (or his or her beneficiary) may also be entitled to the
foregoing benefit under the ENSTAR Retirement Plan if the participant terminates
employment by reason of early retirement (i.e., after the participant has
attained the age of 55 and completed five years of vesting service), by reason
of total and permanent disability, by reason of death or if the participant
terminates employment after the participant has attained a "vested percentage"
in his or her ENSTAR Retirement Plan benefit based on his or her years of
vesting service under the following schedule:
<TABLE>
<CAPTION>
YEARS OF VESTED
SERVICE PERCENTAGE
--------- ----------
<S> <C>
Less than 5........................................................ 0%
5 or more.......................................................... 100%
</TABLE>
The following table shows estimated annual benefits payable upon normal
retirement at age 65 based on certain salary assumptions and years of service.
PENSION PLAN TABLE*
<TABLE>
<CAPTION>
YEARS OF SERVICE
RANGE OF -------------------------------------------------------
COMPENSATION 15 20 25 30 35
- - ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 50,000.................................... $12,500 $15,000 $17,500 $20,000 $22,500
$ 75,000.................................... $18,750 $22,500 $26,250 $30,000 $33,750
$100,000.................................... $25,000 $30,000 $35,000 $40,000 $45,000
$125,000.................................... $31,250 $37,500 $43,750 $50,000 $56,250
$150,000.................................... $37,500 $45,000 $52,500 $60,000 $67,500
</TABLE>
- - ---------------
* For purposes of determining the benefits shown above, plan compensation for
all years of service has been limited to $150,000 in accordance with the
limits on qualified plan compensation under Section 401(a)(17) of the Code,
without regard to any future adjustments for changes in the cost of living,
and benefits accrued prior to January 1, 1994 with respect to plan
compensation in excess of $150,000 have been disregarded.
33
<PAGE> 39
The following table sets forth the estimated annual benefits payable under
normal retirement at age 65, assuming current remuneration levels and
participation until normal retirement at age 65, with respect to Mr. Barnes
under the provisions of the ENSTAR Retirement Plan:
<TABLE>
<CAPTION>
ESTIMATED
CREDITED
CURRENT YEARS CURRENT ESTIMATED
CREDITED OF SERVICE COMPENSATION CURRENT COMPENSATION ANNUAL
YEARS OF AT COVERED BY ADJUSTED FOR PLAN BENEFIT PAYABLE
SERVICE AGE 65 PLAN COMPENSATION LIMITS UPON RETIREMENT
-------- ------------ ------------ -------------------- ---------------
<S> <C> <C> <C> <C> <C>
Richard F. Barnes 21 36 $249,500 $150,000 $ 60,700*
</TABLE>
- - ---------------
* This benefit assumes the current limitation on plan compensation, $150,000,
will remain at $150,000 (with no inflationary adjustments). Mr. Barnes'
service from 1967 through 1980 has been recognized under this plan and another
retirement plan. Accordingly, his benefit under the ENSTAR Retirement Plan
formula has been reduced by $7,896 per year, which is his accrued benefit
under the other plan.
34
<PAGE> 40
PROPOSAL 2 -- THE ENSTAR ALASKA STOCK PROPOSAL
GENERAL
The holders of shares of Seagull Common Stock are being asked to consider
and approve the ENSTAR Alaska Stock Proposal that, if approved, would authorize
the amendments to the Articles of Incorporation set forth in Annex III hereto.
Such amendments would, among other things (i) authorize 25,000,000 shares of a
new class of common stock of the Company, the ENSTAR Alaska Stock, with the
voting powers and relative, participating, optional and other special rights and
qualifications, limitations and restrictions thereof set forth in the Articles
of Amendment set forth in Annex III hereto and described below and (ii) amend
the terms of the existing capital stock of the Company to allow for the issuance
of the ENSTAR Alaska Stock.
While the Seagull Common Stock and the ENSTAR Alaska Stock will both
constitute common stock of the Company, each class is intended to reflect
separately the performance of the relevant business group. The ENSTAR Alaska
Stock is intended to reflect the performance of the ENSTAR Alaska Group, which
is comprised of the Company's natural gas transmission and distribution
operations in South-Central Alaska. The Seagull Common Stock would reflect
separately the performance of 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 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 in the ENSTAR Alaska Stock Offering. The timing and size of such offering
and the price at which such shares would be sold would be determined by the
Board at the time of such offering based upon then prevailing market and other
conditions; however, it is currently contemplated that the Company would offer
to the public shares of ENSTAR Alaska Stock that would represent 100% of the
equity attributable to the ENSTAR Alaska Group and that Seagull Energy would not
own a Retained Interest. The net proceeds from the ENSTAR Alaska Stock Offering
are currently estimated to be approximately $140 million. 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. Based upon the assumptions set forth in the pro forma
financial information included in Annexes IV and V, the pro forma debt to
capital ratio for the Company as a whole as of December 31, 1993 would improve
from 59.8% (after taking into account the Seagull Canada Acquisition) to 47.0%
as a result of the ENSTAR Alaska Stock Proposal and the ENSTAR Alaska Stock
Offering, and the pro forma debt to capital ratio for Seagull Energy (without
ENSTAR Alaska Group) as of December 31, 1993 would improve from 60.8% to 46.4%.
See "Unaudited Condensed Pro Forma Financial Statements" in Annexes IV and V.
Notwithstanding approval by shareholders of the ENSTAR Alaska Stock
Proposal, the Company would not file the Articles of Amendment to the Articles
of Incorporation set forth in Annex III hereto with the Texas Secretary of State
until immediately prior to consummation of the ENSTAR Alaska Stock Offering. At
any time prior to such filing, notwithstanding approval of the ENSTAR Alaska
Stock Proposal by shareholders, the Board could, in its sole discretion, abandon
the entire ENSTAR Alaska Stock Proposal or the ENSTAR Alaska Stock Offering
without further action by shareholders. The determination of whether to proceed
with the ENSTAR Alaska Stock Offering would be made by the Board based on, among
other things, the proposed terms of such offering and then prevailing market and
other conditions. The Board reserves the right to sell shares of ENSTAR Alaska
Stock representing less than 100% of the equity attributable to the ENSTAR
Alaska Group 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.
IF THE ENSTAR ALASKA STOCK PROPOSAL IS NOT APPROVED BY THE SHAREHOLDERS OR
THE ENSTAR ALASKA STOCK OFFERING IS NOT CONSUMMATED, THE ARTICLES OF AMENDMENT
WILL NOT BE FILED AND THE ENSTAR ALASKA STOCK WILL NOT BE ISSUED.
The authorized but unissued shares of Seagull Common Stock and ENSTAR
Alaska Stock would be available for issuance from time to time by the Company at
the discretion of the Board of Directors for any proper corporate purpose, which
could include raising capital, payment of stock dividends, providing
35
<PAGE> 41
compensation or benefits to employees 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 any additional
shares of 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). Having separate equity securities will afford the Company
increased flexibility to raise capital and make acquisitions with an equity
security specifically related to a particular business group.
The affirmative vote of the holders of at least two-thirds of the
outstanding shares of Seagull Common Stock is required for approval of the
ENSTAR Alaska Stock Proposal.
SPECIAL CONSIDERATIONS
Shareholders of One Company; Financial Effects on One Group Could Affect
Other Group. Notwithstanding the allocation of assets and liabilities (including
contingent liabilities), shareholders' equity and items of income and expense
between Seagull Energy and the ENSTAR Alaska Group for the purpose of preparing
their respective financial statements, the change in the equity structure of the
Company contemplated by the ENSTAR Alaska Stock Proposal would not affect title
to the assets or responsibility for the liabilities of the Company or any of its
subsidiaries. The Company and its subsidiaries would each continue to be
responsible for their respective liabilities. Holders of Seagull Common Stock
and ENSTAR Alaska Stock will be common shareholders of the Company and would
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 either Seagull Energy or the ENSTAR Alaska
Group that affect the Company's consolidated results of operations or financial
condition could affect the results of operations or financial position of the
other business group or the market price of both classes of common stock of the
Company. In addition, any net losses of Seagull Energy or the ENSTAR Alaska
Group and dividends or distribution on, or repurchases of, either class of
common stock of the Company will reduce the assets of the Company legally
available for payment of dividends on both classes of common stock of the
Company. Accordingly, the Company's consolidated financial information should be
read in conjunction with Seagull Energy's and the ENSTAR Alaska Group's combined
financial information.
If the ENSTAR Alaska Stock Proposal is approved by the shareholders and
implemented by the Board of Directors, following issuance of the ENSTAR Alaska
Stock, the Company would provide to holders of Seagull Common Stock and ENSTAR
Alaska Stock separate financial statements, management's discussion and analysis
of financial condition and results of operations, business descriptions and
other information for the relevant business group and for the consolidated
Company. The financial statements of each business group would reflect the
financial position, results of operations and cash flows of the businesses
included therein. However, such group financial statements could also include
contingent liabilities that are not separately identified with the operations of
a specific business group. Upon request, the Company would provide to any holder
of Seagull Common Stock or ENSTAR Alaska Stock a copy of the separate financial
statements of the other business group. See "Management and Accounting Policies"
below and the financial information of the Company, Seagull Energy and the
ENSTAR Alaska Group set forth in Annexes IV, V and VI hereto, respectively.
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.
36
<PAGE> 42
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 Directors Option Plan, if the ENSTAR Alaska
Stock Proposal is approved by shareholders and implemented by the Board,
employee and nonemployee directors would continue to receive options to purchase
only shares of Seagull Common Stock. If the ENSTAR Alaska Stock Proposal is
approved by the shareholders and implemented, 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 Deferred Fee Plan 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
Seagull Common Stock and the holders of ENSTAR Alaska 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
ENSTAR Alaska Stock 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 Seagull Common
Stock and 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 Seagull Common
Stock and the ENSTAR Alaska Stock would also be subject to the direct and
indirect restrictions contained in the Company's Credit Agreement and other
financing arrangements. See "Dividend Policy" below. Notwithstanding the
amount of legally available funds of the Company under Texas law or the
Available Seagull Energy Dividend Amount and 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 stock.
The Board of Directors reserves the right, in its sole discretion, to
declare and pay dividends exclusively on the Seagull Common Stock or
exclusively on the ENSTAR Alaska 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" below. The Company has not
paid any cash dividends on shares of Seagull Common Stock since it became
an independent entity in 1981. See "Price Range of and Dividends on Seagull
Common Stock."
Allocation of Proceeds upon Issuance of ENSTAR Alaska Stock. The
Company intends to use the net proceeds of the ENSTAR Alaska Stock Offering
to repay amounts borrowed under the Company's revolving credit agreement,
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
37
<PAGE> 43
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
"-- 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 Seagull Common Stock and the ENSTAR Alaska 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 Seagull
Common Stock and 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 ENSTAR Alaska Stock Proposal 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 Seagull Common Stock
and 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 Seagull Energy and the
ENSTAR Alaska Group, 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 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. Under the ENSTAR Alaska Stock
Proposal, holders of Seagull Common Stock and holders of ENSTAR Alaska Stock
would have only the rights of common shareholders of the Company, and would not
be provided any rights specifically related to their respective business groups,
other than (i) the two-thirds separate class vote requirements under certain
limited circumstances, as described under "Description of Seagull Common Stock
and ENSTAR Alaska Stock -- Voting Rights" below, (ii) with respect to the ENSTAR
Alaska Stock, the dividend/redemption/exchange provisions described under
"Description of Seagull Common Stock and 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.
38
<PAGE> 44
Limited Separate Shareholder Voting Rights; Effects on Voting Power. Under
the ENSTAR Alaska Stock Proposal, subject to certain limited exceptions, holders
of shares of Seagull Common Stock and holders of shares of ENSTAR Alaska Stock
would 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 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 so 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 Seagull Common
Stock and holders of ENSTAR Alaska 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 Seagull Common Stock and ENSTAR Alaska Stock -- Voting
Rights" below. The relative voting power of shares of Seagull Common Stock and
ENSTAR Alaska Stock would fluctuate from time to time, with each share of
Seagull Common Stock having one vote and 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. If the ENSTAR
Alaska Stock Proposal is approved by the shareholders and implemented by the
Board of Directors, holders of Seagull Common Stock would continue to be
entitled to a substantial majority of the total votes to which the then
outstanding voting stock of the Company is entitled. 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, although it is
unlikely that during the foreseeable future the holders of Seagull Common Stock
would possess less than a majority of the total votes to which the outstanding
voting stock of the Company would be entitled. See "Description of Seagull
Common Stock and ENSTAR Alaska Stock -- Voting Rights" below.
Limited Approval Rights of Future Issuances of Stock. The ENSTAR Alaska
Stock Proposal provides authorization for the issuance of up to 25,000,000
shares of a new class of common stock, the ENSTAR Alaska Stock. The authorized
but unissued shares of Seagull Common Stock and ENSTAR Alaska 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
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).
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 Proxy
Statement 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 Seagull Common Stock
and holders of ENSTAR Alaska 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
39
<PAGE> 45
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.
Effect on Cash Flow from the ENSTAR Alaska Group to Seagull Energy. The
Company has historically received cash from the ENSTAR Alaska Group in the form
of dividends and payments under the Management Agreement and Tax Sharing
Agreement described below. These dividends and contractual payments, after
taking into account the costs and tax obligations related to the contractual
payments, have been used by Seagull Energy (together with other funds available
to it) to fund its operations, including its capital expenditure programs. If
the ENSTAR Alaska Stock Proposal is adopted, Seagull Energy will no longer
receive the benefit of dividends from the ENSTAR Alaska Group, but will continue
to receive payments under the Management Agreement and the Tax Sharing
Agreement. During the three years ended December 31, 1993, the ENSTAR Alaska
Group paid regular dividends of $8 million per year and a special dividend of
$20 million in 1991. See "Management and Accounting Policies" and "Description
of Seagull Common Stock and ENSTAR Alaska Stock -- Voting Rights" below.
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 would continue in effect following
implementation of the ENSTAR Alaska Stock Proposal. Seagull Energy and the
ENSTAR Alaska Group 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 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. See "Management and Accounting Policies" below.
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 Seagull Common Stock and ENSTAR Alaska Stock -- Exchange and
Redemption" below. Since any such exchange would be at a premium to the then
current market price of the ENSTAR Alaska Stock being exchanged, the issuance of
additional shares of Seagull Common Stock in connection with such an exchange
would dilute the interests in the Company of all holders of Seagull Common
Stock. 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.
No Assurance as to Market Price. 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. It is also not possible to predict the impact
of the sale of ENSTAR Alaska Stock on the market price of the Seagull Common
Stock and, accordingly, there can be no assurance that the market price of the
Seagull Common Stock would equal or exceed the market price of such stock prior
to the Company's announcement or implementation of the ENSTAR Alaska Stock
Proposal. See "Price Range of and Dividends on Seagull Common Stock."
The market prices of the Seagull Common Stock and the ENSTAR Alaska Stock
would 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 Seagull Energy and the ENSTAR Alaska Group,
investors' expectations for the Company as a whole, Seagull Energy and the
ENSTAR Alaska Group, trading volume and general economic and market conditions.
There can be no assurance that investors would assign values to the Seagull
Common Stock and ENSTAR Alaska Stock based on the reported financial results and
prospects of the relevant business group or the dividend policies established by
the Board with respect to such
40
<PAGE> 46
group. Accordingly, 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 either
class of common 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.
Limitations on Potential Unsolicited Acquisitions of a Group. If Seagull
Energy and the ENSTAR Alaska Group were stand-alone corporations, any person
interested in acquiring either of such corporations without negotiation with
management could seek control of the outstanding stock of such corporation by
means of a tender offer or proxy contest. Although adoption of the ENSTAR Alaska
Stock Proposal would create a new class of common stock of the Company intended
to reflect the performance of the ENSTAR Alaska Group, a person interested in
acquiring only one business group without negotiation with the Company's
management would 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 class of common stock related to the
other business group. See " -- Limited Separate Shareholder Voting Rights;
Effects on Voting Power" above. This result is similar to the consequences under
the Company's current capital structure, since a person interested in acquiring
an interest in any of the Company's business segments without negotiation with
the Company's management would still be required to seek control of the voting
power represented by all of the outstanding common stock of the Company.
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. Following implementation of the
ENSTAR Alaska Stock Proposal, the calculation of ownership of the voting
securities of the Company would 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 Amendment to 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.
DIVIDEND POLICY
The Company has not paid any cash dividends on shares of Seagull Common
Stock since it became an independent entity in 1981. The ENSTAR Alaska Stock
Proposal would not change the Company's dividend policy with respect to the
Seagull Common Stock. Accordingly, the Board does not currently intend to pay
dividends on the Seagull Common Stock.
Dividends on the ENSTAR Alaska Stock would 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 the Company as a whole. If
the ENSTAR Alaska Stock Proposal is approved and the ENSTAR Alaska Stock
Offering is completed, the Board of Directors currently intends to pay an
initial dividend on the ENSTAR Alaska Stock of $8.25 million per year in the
aggregate.
While the Board of Directors does not currently intend to change the
dividend policies referred to above, it reserves the right to do so at any time
and from time to time. Under the ENSTAR Alaska Stock Proposal
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and Texas law, the Board of Directors would not be required to pay dividends in
accordance with the foregoing dividend policies.
In making its dividend decisions with respect to the Seagull Common Stock
and the ENSTAR Alaska Stock, the Board of Directors will rely on the financial
statements of Seagull Energy and the ENSTAR Alaska Group, respectively. See
Annexes V and VI hereto for the historical financial statements and pro forma
financial data of Seagull Energy and the ENSTAR Alaska Group, respectively. The
method of calculating earnings per share for the Seagull Common Stock and the
ENSTAR Alaska Stock reflects the intent of the Board of Directors that
separately reported surplus and earnings of Seagull Energy and the ENSTAR Alaska
Group are to be the source for payment of, and the basis for determining,
dividends to be paid on the respective class of stock, although liquidation
rights of the respective class of 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 the
Seagull Common Stock and the ENSTAR Alaska Stock may be paid, as described below
in the next paragraph and under " -- Description of Seagull Common Stock and
ENSTAR Alaska Stock -- Dividends," the Board of Directors would be able, in its
sole discretion, to declare and pay dividends exclusively on either the Seagull
Common Stock or the ENSTAR Alaska 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's credit agreement (the "Credit Agreement") restricts the
Company's declaration or payment of dividends on and repurchases of capital
stock of the Company unless each of the following tests have been met and after
making such dividend payment such tests continue to be met: (i) the Tangible Net
Worth is not less than $350 million, (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 capitalized interest) is
not less than 3.5:1.0, (iii) the Debt to Capitalization Ratio is less than 60%,
(iv) the aggregate amount of outstanding loans under the Credit Agreement,
together with all other senior indebtedness of the Company and its subsidiaries
(excluding Alaska Pipeline Company ("APC")) then outstanding, must not exceed
the Borrowing Base and (v) no Event of Default or unmatured Event of Default
shall have occurred and be continuing; provided that in any event the aggregate
dividend payments may not exceed 33 1/3% of the consolidated cumulative net
income of the Company and its subsidiaries on a cumulative annual basis from
January 1, 1993. The foregoing restrictions do not apply to dividends payable
solely in the form of additional shares of common stock of the Company or to
dividends payable on up to $100 million of preferred stock. The capitalized
terms used herein to describe the restrictions contained in the Credit Agreement
have the meanings assigned to them in the Credit Agreement. Under the most
restrictive of these tests, as of December 31, 1993, approximately $9.1 million
was available for payment of dividends on (other than the stock dividends
described above) or repurchase of capital stock of the Company. In connection
with the consummation of the ENSTAR Alaska Stock Offering, the Credit Agreement
will be required to be amended to allow for the payment of cash dividends on the
ENSTAR Alaska Stock. 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 $14.2 million was available for the making of
restricted investments, restricted payments and restricted subordinated debt
payments by APC as of December 31, 1993.
MANAGEMENT AND ACCOUNTING POLICIES
If the ENSTAR Alaska Stock Proposal is approved by shareholders and
implemented by the Board, the Company would continue to prepare financial
statements in accordance with generally accepted accounting principles,
consistently applied, for each of Seagull Energy and the ENSTAR Alaska Group,
and these financial statements, taken together, would comprise all of the
accounts included in the corresponding consolidated financial statements of the
Company. The financial statements of each of the business groups reflect the
financial position, results of operations and cash flows of the businesses
included therein. 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 a specific business group.
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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 Seagull Common Stock
or of ENSTAR Alaska Stock would 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 One Group Could Affect the Other Group" above.
If the ENSTAR Alaska Stock Proposal is approved by shareholders and
implemented by the Board, 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 management of the Company
believes to be reasonable and are reflected in the combined financial statements
reflected in Annexes V and VI, 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 ENSTAR Alaska Stock Offering, all
financial impacts of equity offerings are reflected entirely in the
financial statements of Seagull Energy. After the ENSTAR Alaska Stock
Offering, all financial impacts of issuances of additional shares of
Seagull Common Stock or additional shares of ENSTAR Alaska 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 Seagull Common Stock or ENSTAR Alaska Stock
would be reflected entirely in the financial statements of Seagull Energy
and the ENSTAR Alaska Group, respectively, except that, while Seagull
Energy has a Retained Interest, Seagull Energy financial statements would
be credited, and the ENSTAR Alaska Group financial statements would be
charged, with an amount that is proportionate to the aggregate amount paid
in respect of any such dividend on, or other distribution with respect to,
shares of ENSTAR Alaska Stock.
(iii) It is currently anticipated that the ENSTAR Alaska Group would
continue to conduct its own financing activities by having APC incur debt
or issue shares of preferred stock. It is also currently anticipated that
Seagull Energy would continue to conduct its own financing activities.
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,
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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 would reflect any net
short-term loans to or borrowings from the ENSTAR Alaska Group, and the
balance sheet of the ENSTAR Alaska Group would reflect any net short-term
loans to or borrowings from Seagull Energy. Similarly, the respective
income statements of Seagull Energy and the ENSTAR Alaska Group would
reflect interest income or expense, as the case may be, associated with
such loans or borrowings and the respective statements of cash flows of
Seagull Energy and the ENSTAR Alaska Group would 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 (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.
(vi) 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 amounts are 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.
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
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affiliates, including Seagull Energy, must be on terms comparable to arm's
length transactions. In addition, generally accepted accounting principles would
require that changes in accounting policy must be preferable (in accordance with
such principles) to the policy previously in place.
DESCRIPTION OF SEAGULL COMMON STOCK AND ENSTAR ALASKA STOCK
THE FOLLOWING DESCRIPTION IS QUALIFIED BY REFERENCE TO ANNEX I -- GLOSSARY
OF CERTAIN TERMS AND TO ANNEX III TO THIS PROXY STATEMENT, WHICH CONTAINS THE
FULL TEXT OF THE PROPOSED AMENDMENT TO ARTICLE FOUR OF THE ARTICLES OF
INCORPORATION.
GENERAL
The Company's Articles of Incorporation currently provide that the Company
is authorized without further shareholder action to issue 105,000,000 shares of
capital stock, consisting of 100,000,000 shares of Seagull Common 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"). As of April 4, 1994, the
Company had issued and outstanding 36,064,649 shares of Seagull Common Stock and
no shares of Seagull Energy Series B Stock. If the ENSTAR Alaska Stock Proposal
is adopted, the Articles of Incorporation will be amended to authorize the
issuance of 130,000,000 shares of capital stock, of which 25,000,000 shall be
shares of a new class of the Company's common stock, the ENSTAR Alaska Stock,
with the voting powers and relative, participating, optional and other special
rights and qualifications, limitations and restrictions thereof set forth in
Annex III hereto and described herein. Upon implementation of the ENSTAR Alaska
Stock Proposal by the Board, the Board would also designate 250,000 shares as a
new series of preferred stock 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 would authorize and declare 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 would entitle 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 Seagull Common Stock or ENSTAR Alaska Stock
(other than unissued shares of ENSTAR Alaska Stock which may be issued with
respect to any Retained Interest) 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" above.
DIVIDENDS
Dividends on the Seagull Common Stock and the ENSTAR Alaska Stock will be
subject to the same limitations as dividends on the existing Seagull Common
Stock, which are 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 Seagull Canada Acquisition and the ENSTAR Alaska Stock
Offering had been completed as of December 31, 1993, the Company had legally
available assets of $575.0 million (assuming no Retained Interest), subject to
the
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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.
Dividends on the Seagull Common Stock, in addition to such limitations,
will be further limited to an amount not in excess of 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" above.
"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 Seagull Canada Acquisition and the ENSTAR Alaska Stock
Offering had been completed as of December 31, 1993, the Available Seagull
Energy Dividend Amount at such date would have been at least $516.4 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.
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 Group 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 Group
Dividend Amount. See "Dividend Policy" above.
"Available ENSTAR Alaska Group 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 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 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
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allocations made with respect to Seagull Energy, including, without limitation,
corporate administrative costs, net interest and other financial costs and
income taxes.
Assuming the ENSTAR Alaska Stock Offering had been completed as of December
31, 1993, the Available ENSTAR Alaska Dividend Amount at such date would have
been at least $58.6 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 Group Dividend Amount. The Company
currently has no outstanding shares of preferred stock.
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 Seagull Energy
and of the ENSTAR Alaska Group and any distributions on, or repurchases of, the
Seagull Common Stock or the ENSTAR Alaska Stock. Dividend payments on the
Seagull Common Stock or the ENSTAR Alaska Stock may be precluded because of the
unavailability of legally available funds under the TBCA, even though the
Available Seagull Energy Dividend Amount test or Available ENSTAR Alaska Group
Dividend Amount test, as the case may be, may be met. For restrictions on the
payment of dividends contained in the Company's debt instruments, see "Dividend
Policy" above.
To the extent that the ENSTAR Alaska Group pays any dividend or makes any
other distribution on the outstanding share of ENSTAR Alaska Stock, an amount
proportionate to such dividend or distribution 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
The Articles of Incorporation currently do not provide for either mandatory
or optional exchange or redemption of the Seagull Common Stock. The ENSTAR
Alaska Stock Proposal will permit the exchange or redemption of the ENSTAR
Alaska Stock (but not the Seagull Common Stock) upon the terms described below
for such class.
If the Board should at any time determine to transfer all of its 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 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.
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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 in Annex III hereto)
following the consummation of such Disposition, to either:
(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 defined in Annex III hereto) 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.
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) as of such date 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
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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.
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 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 of the fifth Business Day prior to
the date notice of such exchange
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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 dilute the
interest of holders of Seagull Common Stock in the Company 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.
For the definitions of "Disposition," "Exchange Date," "Market
Capitalization," "Market Value," "Market Value Ratio" and "Number of Shares
Issuable with Respect to the Retained Interest," see Annex III hereto.
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 an announcement in all editions of a daily newspaper with a national
circulation that publishes financial news 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
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
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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 (as
defined in Annex III hereto), (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 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
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, and (vi) 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
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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 such Convertible Securities
nor any defect therein shall affect the sufficiency thereof with respect to any
other holder of ENSTAR Alaska Stock or, if applicable, of Convertible Securities
convertible into or exercisable for shares of ENSTAR Alaska Stock.
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, such dividend or distribution would be payable to the
holders of such shares at the close of business on such record date
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
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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 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 currently provide that holders of Seagull
Common Stock have one vote per share on all matters submitted to a shareholder
vote. The ENSTAR Alaska Stock Proposal provides 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. 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.
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To illustrate the foregoing, if the weighted average Market Values for the
Seagull Common Stock and the ENSTAR Alaska Stock, as determined using the above
formula, were $30.00 and $20.00, respectively, each share of Seagull Common
Stock would have one vote and each share of ENSTAR Alaska Stock would have
two-thirds of a vote ($20.00 / $30.00). 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 37,000,000 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 88% and 12%, respectively, of the total voting power.
If the ENSTAR Alaska Stock Proposal is approved, 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 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 would 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 Amendment to the Articles of
Incorporation would 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 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
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(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" above.
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 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;
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" above.
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
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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
Under the TBCA, the holders of the Seagull Common Stock currently would be
entitled to share proportionately in the consideration, if any, attributable to
the Seagull Common Stock pursuant to the terms of any merger or consolidation to
which the Company is a party. Under the ENSTAR Alaska Stock Proposal, 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 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
Currently, 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, holders of the Seagull Common Stock will
receive the funds remaining for distribution to common shareholders. Under the
ENSTAR Alaska Stock Proposal, 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.
Determinations by the Board of Directors
Any determinations made in good faith by the Board of Directors under any
provision described above under "-- Description of Seagull Common Stock and
ENSTAR Alaska Stock," and any determinations with respect to any business group
or the rights of holders of either class of common stock of the Company made
pursuant to or in furtherance of any provision described above under
"-- Description of Seagull Common Stock and ENSTAR Alaska Stock," shall be final
and binding on all shareholders.
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Other Rights
Neither the holders of the Seagull Common Stock nor the holders of the
ENSTAR Alaska 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 ENSTAR Alaska Stock Offering
will depend upon then prevailing market and other conditions at the time of the
ENSTAR Alaska Stock Offering. To the extent that the number of shares of ENSTAR
Alaska Stock to be issued and sold in the ENSTAR Alaska Stock 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 ENSTAR Alaska Stock
Offering to repay amounts borrowed under the Company's revolving credit
agreement, 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
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 Offering 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 flow of each group, the capital expenditure plans of and
investment opportunities available to each group, the long-term business
prospects for each 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.
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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 flow of each business group, the capital
expenditure plans of and investment opportunities available to each business
group, the long-term business prospects for each business group and the
availability, costs 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 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 flow of the groups, the long-term business prospects for each group, the
capital expenditure plans of and the investment opportunities available to each
group and the availability, cost and time associated with alternative financing
sources. See "Management and Accounting Policies" above.
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.
BACKGROUND AND REASONS FOR THE ENSTAR ALASKA STOCK PROPOSAL
AND THE ENSTAR ALASKA STOCK OFFERING
The Board continually reviews each of the Company's businesses to determine
the best way to realize their inherent values. At a meeting held on January 27,
1994, the Board received reports from management on its analysis of the targeted
stock proposal and considered the adoption of a targeted stock program. On
February 28, 1994, the Board reviewed the specific terms of the ENSTAR Alaska
Stock Proposal and authorized the Company's management to proceed with the
ENSTAR Alaska Stock Proposal.
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The ENSTAR Alaska Stock Proposal is the result of the Board's review of
various alternatives for maximizing shareholder value with respect to the ENSTAR
Alaska Group. Among the options that have been considered by the Board are (i)
selling the ENSTAR Alaska Group, (ii) distributing the ENSTAR Alaska Group to
the Company's shareholders in a spin-off, (iii) conducting a public offering of
securities issued directly by the ENSTAR Alaska Group representing a portion of
the equity ownership of the ENSTAR Alaska Group. After taking into account a
variety of factors, including the expected financial, regulatory and tax
consequences of these alternatives, as well as structuring constraints imposed
by the 1935 Act, the Board currently believes that the ENSTAR Alaska Stock
Proposal is the best alternative for maximizing shareholder value with respect
to the ENSTAR Alaska Group. However, the Board will continue to evaluate each of
the other alternatives mentioned above in light of prevailing market and other
conditions, even after shareholder approval is obtained for the ENSTAR Alaska
Stock Proposal. Notwithstanding approval by the shareholders of the ENSTAR
Alaska Stock Proposal, the Company would not file the Articles of Amendment to
the Articles of Incorporation set forth in Annex III hereto with the Texas
Secretary of State until immediately prior to consummation of the ENSTAR Alaska
Stock Offering.
The ENSTAR Alaska Stock Proposal is intended to provide investors with
securities reflecting the performance of Seagull Energy separately from the
ENSTAR Alaska Group, and to give investors an opportunity to invest in either or
both securities depending on their investment objectives, while at the same time
retaining the benefits of remaining a single corporation. The ENSTAR Alaska
Stock Offering is also intended to provide the Company with significant
additional liquidity in an attractive and tax efficient manner. The Board
believes that the ENSTAR Alaska Stock Offering will enable the Company to raise
capital without sacrificing the advantages of maintaining a single consolidated
entity, such as avoiding the incremental increase in administrative costs, and
enjoying lower borrowing costs than would be incurred by separate entities. The
Board also believes there will be additional benefits, such as the ability to
file consolidated tax returns.
In arriving at its recommendation and its determination that the ENSTAR
Alaska Stock Proposal is in the best interests of the Company, the Board
considered carefully various aspects of the proposal at its meetings. In
addition to the considerations described above, the Board considered, among
other things, the following:
- The ENSTAR Alaska Stock Offering would enable the Company to raise
significant additional capital that would reduce the Company's
debt-to-equity ratio. Based upon the assumptions set forth in the pro
forma financial information included in Annexes IV and V, the pro forma
debt to capital for the Company as of December 31, 1993 would improve
from 59.8% (after taking into account the Seagull Canada Acquisition) to
47.0% as a result of the ENSTAR Alaska Stock Proposal and the ENSTAR
Alaska Stock Offering, and the pro forma debt to capital ratio for
Seagull Energy (without ENSTAR Alaska Group) as of December 31, 1993
would improve from 60.8% to 46.4%. See "Unaudited Condensed Pro Forma
Financial Statements" in Annexes IV and V.
- The separate recording of the financial results for each business group
and separate trading of each class of common stock of the Company could
result in a broader and more focused equity research coverage by
financial analysts, which should enable the investment community to gain
a better understanding of each business group and could serve as an
additional discipline on the performance of each business group.
- From a credit perspective, Seagull Energy would benefit from the credit
rating of the Company as a whole and, therefore, Seagull Energy would
continue to benefit from having the ENSTAR Alaska Group as a part of the
Company's organization.
In connection therewith, the Board also evaluated the potentially adverse
aspects of the ENSTAR Alaska Stock Proposal, including the uncertainty with
respect to the proceeds to be realized in the ENSTAR Alaska Stock Offering and
its impact on the market price of the Seagull Common Stock, as well as the fact
that implementation of the ENSTAR Alaska Stock Proposal would, to a certain
extent, make the capital structure of the Company more complex and require
additional disclosure to be made with respect to the ENSTAR
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Alaska Group. The Board determined, however, that the positive aspects of the
ENSTAR Alaska Stock Proposal outweighed any potentially adverse aspects and
concluded that the ENSTAR Alaska Stock Proposal is in the best interests of the
Company.
STOCK EXCHANGE LISTINGS
The Seagull Common Stock is currently listed on the NYSE under the symbol
"SGO." If the ENSTAR Alaska Stock Proposal is implemented, the symbol for the
Seagull Common Stock would remain "SGO." Application will be made to the NYSE
for listing of the ENSTAR Alaska Stock on the NYSE under the symbol
" ." The Company cannot predict to what extent a public market will
develop for the shares of the ENSTAR Alaska Stock or the prices at which the
shares of ENSTAR Alaska Stock may trade in such market or otherwise. It is also
not possible to predict the impact of the ENSTAR Alaska Stock Proposal on the
prices at which the shares of Seagull Common Stock may trade following
implementation of such proposal. See "Special Considerations -- No Assurance as
to Market Price" above.
FINANCIAL ADVISOR
The Company has engaged Lehman Brothers Inc. as its exclusive targeted
stock financial advisor in connection with the ENSTAR Alaska Stock Proposal. In
connection therewith, the Company has agreed to pay Lehman Brothers Inc. a
financial advisory fee of $1.25 million if the ENSTAR Alaska Stock Proposal is
approved by the Company's shareholders. Lehman Brothers Inc. has not been paid
to solicit proxies in connection with the ENSTAR Alaska Stock Proposal. 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 ENSTAR Alaska Stock Offering contemplated herein.
STOCK TRANSFER AGENT AND REGISTRAR
First National Bank of Boston acts as the registrar and transfer agent for
the Seagull Common Stock, and if the ENSTAR Alaska Stock Proposal is approved,
First National Bank of Boston will act as the registrar and transfer agent for
both the Seagull Common Stock and the ENSTAR Alaska Stock.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations applicable to the ENSTAR Alaska Stock Proposal in the opinion of
Vinson & Elkins L.L.P., counsel to the Company. The opinion of counsel and the
following summary are based upon the relevant authorities in effect as of the
date hereof, including the Code, Treasury regulations and proposed regulations,
court decisions and current administrative rulings and pronouncements of the
IRS, all of which are subject to change, possibly with retroactive effect. In
particular, Congress could enact legislation affecting the treatment of stock
with characteristics similar to the ENSTAR Alaska Stock and the Seagull Common
Stock or the Treasury Department could change the current law in future
regulations, including regulations issued pursuant to its authority under
section 337(d) of the Code. However, based upon the advice of counsel, the
Company is of the belief that, as a practical matter, it is unlikely that such
legislation or regulations would apply retroactively. The Company has not
applied for an advance ruling from the IRS because the IRS announced in 1987
that it is studying the federal income tax treatment of stock that has certain
voting and liquidation rights in an issuing corporation but whose dividend
rights are determined by reference to the earnings of a segregated portion of
the issuing corporation's assets, and that rulings with respect to such stock
would not be issued until the IRS resolves the issue of such treatment. The
ENSTAR Alaska Stock Proposal contemplates the possibility of the passage of time
between the date hereof, the Company's 1994 Annual Meeting and the ENSTAR Alaska
Stock Offering. Therefore, the Company will conduct an appropriate reassessment
of the law prior to the Annual Meeting and the issuance of the ENSTAR Alaska
Stock.
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This summary assumes that the Seagull Common Stock is held as a "capital
asset" (generally, property held for investment) as defined in the Code; it does
not purport to be complete and does not address the tax consequences to holders
that are subject to special tax rules. Shareholders should consult their own tax
advisors with respect to the application of the federal income tax laws to their
particular situation, as well as the applicability and effect of any state,
local or foreign tax laws to which they may be subject.
Treatment as Common Stock. In the opinion of counsel, the ENSTAR Alaska
Stock and the Seagull Common Stock each will be treated for federal income tax
purposes as common stock of the Company. So treated, (i) no income, gain or loss
will be recognized to the holders of Seagull Common Stock and there will be no
change to a shareholder's basis or holding period for such shareholder's shares
of Seagull Common Stock as a result of the implementation of the ENSTAR Alaska
Stock Proposal (including the amendment and restatement of the Rights Agreement
described below), (ii) implementation of the ENSTAR Alaska Stock Proposal will
have no effect on the federal income taxation of dividends received by holders
of Seagull Common Stock or of a sale or other disposition of Seagull Common
Stock and (iii) no gain or loss will be recognized to the Company upon the
implementation of the ENSTAR Alaska Stock Proposal or upon the issuance and sale
of ENSTAR Alaska Stock in the ENSTAR Alaska Stock Offering.
There are no court decisions or other authorities that bear directly on
transactions similar to the ENSTAR Alaska Stock Proposal, and as noted above the
federal income tax treatment of stock similar to ENSTAR Alaska Stock is
currently under study by the IRS. If, contrary to the opinion of counsel, the
ENSTAR Alaska Stock were treated as stock of a subsidiary of the Company, the
Company would recognize gain on the issuance of such stock in an amount equal to
the excess of the fair market value of such stock over its federal income tax
basis to the Company, and (assuming that the Outstanding Interest Fraction is
greater than 20%) the ENSTAR Alaska Group would not be includable in the
Company's consolidated federal income tax return.
Backup Withholding. Noncorporate holders of Seagull Common Stock may be
subject to backup withholding at the rate of 31% with respect to dividends on,
or the proceeds of a sale of, Seagull Common Stock if the holder fails to
furnish its taxpayer identification number ("TIN," which for an individual would
be such individual's social security number), furnishes an incorrect TIN, or,
with respect to dividends, under certain other circumstances. The amount of any
backup withholding from a payment to a holder would be allowed as a credit
against the holder's federal income tax liability, if any, or refunded, provided
the required information is furnished to the IRS.
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. If the
ENSTAR Alaska Stock Proposal is approved by shareholders and implemented by the
Board, upon issuance of the ENSTAR Alaska Stock, the Rights Agreement would be
amended and restated to reflect the change in the capital structure of the
Company, and the Board would 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"), would provide that each ENSTAR Alaska Right
(together with each Seagull Energy Right, a "Right") would entitle 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 would provide that each Seagull Energy Right would entitle 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 would be attributed to Seagull Energy. Pursuant to the Articles
of Amendment to the Articles of Incorporation set forth as Annex III, the terms
of the Seagull Energy Series B Stock would also be amended to take into account
the authorization of two classes of common stock of the Company. The ENSTAR
Alaska Series C Stock would be a newly designated
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series of Preferred Stock of the Company and would 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 would provide that, prior to a Distribution
Date, the Seagull Energy Rights and ENSTAR Alaska Rights would 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 represent one Seagull
Energy Right and each share of ENSTAR Alaska Stock would 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 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 Seagull Common Stock and 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.
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Prior to the Distribution Date, the Company would issue Rights on each
share of Seagull Common Stock and on each share of ENSTAR Alaska 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.
ANTI-TAKEOVER CONSIDERATIONS
The following information is provided with respect to certain matters, in
addition to the Restated Rights Agreement, that could be viewed as having the
effect of discouraging an attempt to obtain control of the Company.
Undesignated Preferred Stock. The Articles of Incorporation currently
provides for the issuance of preferred stock in series at the discretion of the
Board of Directors without further action by the shareholders of the Company
(except as provided by Texas law or the rules or regulations of any securities
exchange on which either class of outstanding common stock of the Company may
then be listed). The Board of Directors may designate any of such series of
preferred stock and may establish the relative voting and other rights of each
such series.
One of the effects of the existence of unissued and unreserved preferred
stock could be to enable the Board of Directors to issue shares to persons
friendly to current management which could render more difficult or discourage
an attempt to obtain control of the Company by means of a merger, tender offer,
proxy contest or otherwise, and thereby protect the continuity of the Company's
management. Such additional shares also could be used to dilute the stock
ownership of persons seeking to obtain control of the Company.
Pursuant to the Articles of Incorporation, the Board of Directors is
authorized without any further action by the shareholders to determine the
voting powers and relative, participating, optional and other special rights and
qualifications, limitations and restrictions of the unissued preferred stock.
The purpose of authorizing the Board of Directors to determine such powers,
rights, qualifications, limitations and restrictions is to eliminate delays
associated with a shareholder vote on specific issuances. The Board of Directors
could, in its sole discretion, issue series of preferred stock with voting
and/or conversion rights that could dilute the relative voting power of any or
all classes of common stock of the Company, and which could, among other things,
have the effect of delaying, deterring or preventing a change in control of the
Company. It is not possible to state the actual effect of the authorization and
issuance of preferred stock of the Company upon the rights of holders of the
Seagull Common Stock or the ENSTAR Alaska Stock unless and until the Board of
Directors determines the attributes of the preferred stock of the Company and
the specific rights of its holders. Such effects might include, however, (i)
restrictions on dividends on Seagull Common Stock or ENSTAR Alaska Stock if
dividends on Preferred Stock have not been paid; (ii) dilution of the voting
power of Voting Common Stock to the extent that preferred stock has voting
rights, or to the extent that any series of preferred stock of the Company is
convertible into either class of common stock of the Company; (iii) dilution of
the equity interest of the common stock of the Company; and (iv) limitation on
the right of holders of common stock of the Company to share in the Company's
assets upon liquidation until satisfaction of any liquidation preference
attributable to preferred stock of the Company. The treasury shares and the
authorized but unissued shares of Seagull Common Stock and ENSTAR Alaska Stock
would also be available for issuance from time to time by the Company at the
sole discretion of the Board for any proper corporate purpose. The approval of
the
63
<PAGE> 69
shareholders of the Company will not be solicited by the Company for the
issuance from the authorized but unissued shares of 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).
Classified Board; Removal of Directors. The Bylaws of the Company provide
that the members of the Company's Board of Directors are divided into three
classes as nearly equal as possible. Each class is elected for a three-year
term. At each annual meeting of shareholders, approximately one-third of the
members of the Board of Directors are elected for a three-year term and the
other directors remain in office until their three-year terms expire.
Furthermore, the Bylaws of the Company provide that neither any director nor the
Board of Directors may be removed without cause, and that any removal for cause
would require the affirmative vote of the holders of at least a majority of the
voting power of the outstanding capital stock entitled to vote for the election
of directors. Thus, control of the Board of Directors cannot be changed in one
year without removing the directors for cause as described above; rather, at
least two annual meetings must be held before a majority of the members of the
Board of Directors could be changed. The Bylaws of the Company provide that the
Bylaw provisions related to the classified board and removal of directors cannot
be altered, amended or repealed without the approval of the holders of at least
two-thirds of the outstanding shares entitled to vote thereon.
Certain provisions described above may have the effect of delaying
shareholder actions with respect to certain business combinations and the
election of new members to the Board of Directors. As such, the provisions could
have the effect of discouraging open market purchases of common stock of the
Company because they may be considered disadvantageous by a shareholder who
desires to participate in a business combination or elect a new director.
------------------------
Approval of the ENSTAR Alaska Stock Proposal will require the affirmative
vote of at least two-thirds of all issued and outstanding shares of Seagull
Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ENSTAR ALASKA STOCK
PROPOSAL.
64
<PAGE> 70
PROPOSAL 3 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed the firm of KPMG Peat Marwick, which
has served as independent auditors of the Company since 1981, as independent
auditors of the Company for the fiscal year ending December 31, 1994, and
recommends ratification by the shareholders of such appointment. Such
ratification requires the affirmative vote of the holders of a majority of the
shares of Seagull Common Stock present or represented by proxy and entitled to
vote at the Annual Meeting. Under Texas law, an abstention would have the same
legal effect as a vote against this proposal, but a broker non-vote would not be
counted for purposes of determining whether a majority has been achieved. The
persons named in the accompanying proxy intend to vote for ratification of such
appointment unless instructed otherwise on the proxy. The Board of Directors
recommends a vote "FOR" this proposal.
In the event the appointment is not ratified, the Board of Directors will
consider the appointment of other independent auditors. The Board of Directors
may terminate the appointment of KPMG Peat Marwick as the Company's independent
auditors without the approval of the shareholders of the Company whenever the
Board of Directors deems such termination necessary or appropriate. A
representative of KPMG Peat Marwick is expected to attend the Annual Meeting and
will have the opportunity to make a statement, if such representative desires to
do so, and will be available to respond to appropriate questions.
SHAREHOLDER PROPOSALS
Any shareholder who wishes to submit a proposal for inclusion in the proxy
material and for presentation at the Company's 1995 Annual Meeting of
Shareholders must forward such proposal to the Secretary of the Company at the
address indicated on the second page of this Proxy Statement, so that the
Secretary receives it no later than .
OTHER MATTERS
The Board of Directors does not know of any other matters that are to be
presented for action at the Annual Meeting. However, if any other matters
properly come before the Annual Meeting or any adjournment(s) or postponement(s)
thereof, it is intended that the enclosed proxy will be voted in accordance with
the judgment of the persons named in the proxy.
By Order of the Board of Directors,
Sylvia Sanchez
Secretary
April , 1994
65
<PAGE> 71
ANNEX I
GLOSSARY OF CERTAIN TERMS
<TABLE>
<CAPTION>
PAGE ON WHICH TERM
IS DEFINED IN THE
TERM PROXY STATEMENT
- - ---------------------------------------------------------------------------- ------------------
<S> <C>
1935 Act.................................................................... 12
Acquiring Person............................................................ 62
Annual Meeting.............................................................. 1
APUC........................................................................ 10
Available ENSTAR Alaska Group Dividend Amount............................... 46
Available Seagull Energy Dividend Amount.................................... 46
Board....................................................................... 1
Board of Directors.......................................................... 1
Business Day................................................................ III-11
Canadian Credit Agreement................................................... 18
Code........................................................................
Company..................................................................... 1
Convertible Securities...................................................... III-11
Credit Agreement............................................................ 42
Disposition................................................................. 48
Distribution Date........................................................... 62
Effective Date.............................................................. 46
ENSTAR Alaska Group......................................................... 8
ENSTAR Alaska Group Subsidiary.............................................. 47
ENSTAR Alaska Right......................................................... 61
ENSTAR Alaska Series C Stock................................................ 45
ENSTAR Alaska Stock......................................................... 8
ENSTAR Alaska Stock Offering................................................ 3
ENSTAR Alaska Stock Proposal................................................ 8
ENSTAR Alaska Unit.......................................................... 61
Exchange Act................................................................ 22
Exchange Date............................................................... III-11
Federal tax rate............................................................ 49
IRS.........................................................................
Management Agreement........................................................ 44
Market Capitalization....................................................... III-11
Market Value................................................................ III-12
Market Value Ratio.......................................................... III-3
Named Officers.............................................................. 29
Net Proceeds................................................................ 49
Number of Shares Issuable with Respect to the Retained Interest............. 15
NYSE........................................................................ 16
Options..................................................................... 25
Outstanding Interest Fraction............................................... 15
Peer Group.................................................................. 31
Preferred Stock............................................................. 45
Record Date................................................................. 2
Redemption Date............................................................. III-13
Restated Rights Agreement................................................... 61
Retained Interest........................................................... 3
Retained Interest Fraction.................................................. 15
</TABLE>
I-1
<PAGE> 72
<TABLE>
<CAPTION>
PAGE ON WHICH TERM
IS DEFINED IN THE
TERM PROXY STATEMENT
- - ---------------------------------------------------------------------------- ------------------
<S> <C>
Right....................................................................... 61
Rights Agreement............................................................ 61
Seagull Canada Acquisition.................................................. 18
Seagull Common Stock........................................................ 1
Seagull Energy.............................................................. 8
Seagull Energy Corporation Earnings Attributable to the ENSTAR Alaska
Group..................................................................... 46
Seagull Energy Corporation Earnings Attributable to Seagull Energy.......... 46
Seagull Energy Rights....................................................... 61
Seagull Energy Series B Stock............................................... 45
Seagull Energy Unit......................................................... 61
SEC......................................................................... 22
Stock Split................................................................. 2
Tax Sharing Agreement....................................................... 44
TBCA........................................................................ 13
Units....................................................................... 62
Voting Common Stock......................................................... 62
</TABLE>
I-2
<PAGE> 73
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.
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> 74
- - - 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> 75
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> 76
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> 77
- - - 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> 78
- - - 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> 79
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> 80
- - - 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> 81
ANNEX III
PROPOSED ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
SEAGULL ENERGY CORPORATION
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, the undersigned corporation adopts the following Articles of
Amendment to its Articles of Incorporation:
ARTICLE I
The name of the corporation is Seagull Energy Corporation.
ARTICLE II
The following amendments to the Articles of Incorporation were adopted by
the shareholders of the corporation on , 1994. Upon effectiveness of
these amendments, the terms of the Corporation's existing common stock, par
value $.10 per share, are amended to have the terms of the Seagull Common Stock
described in the amendments set forth below in Article Four of the Articles of
Incorporation. Pursuant to the first amendment, Article Four of the Articles of
Incorporation is hereby amended so as to read in its entirety as follows:
"ARTICLE FOUR
Section 1. Total Number of Shares; Classes; Preemptive Rights. The total
number of shares of stock that the Corporation shall have authority to issue is
130,000,000 shares, divided into 100,000,000 shares of Common Stock of the par
value of $.10 per share (the "Seagull Common Stock"), 25,000,000 shares of
Seagull Energy Corporation -- ENSTAR Alaska Group Common Stock of the par value
of $.10 per share (the "ENSTAR Alaska Stock") and 5,000,000 shares of Preferred
Stock of the par value of $1.00 per share ("Preferred Stock").
No shareholder shall have a preemptive right to acquire any shares or
securities of any class, whether now or hereafter authorized, which may at any
time be issued, sold or offered for sale by the corporation.
Section 2. Dividend Rights. Subject to the rights of the holders of any
series of Preferred Stock (or any other class of preferred stock or similar
stock or any series thereof), dividends may be declared and paid upon the
following classes of stock upon the terms provided for below with respect to
each such class solely in the discretion of the Board of Directors:
(a) Dividends on Seagull Common Stock. Dividends on the Seagull Common
Stock may be declared and paid only out of the lesser of (i) funds of the
Corporation legally available therefor and (ii) the Available Seagull
Energy Dividend Amount.
(b) Dividends on ENSTAR Alaska Stock. Dividends on the ENSTAR Alaska
Stock may be declared and paid only out of the lesser of (i) funds of the
Corporation legally available therefor and (ii) the Available ENSTAR Alaska
Dividend Amount.
(c) Discrimination Between Seagull Common Stock and ENSTAR Alaska
Stock. The Board of Directors, subject to the provisions of Sections 2(a)
and 2(b), may, in its sole discretion, declare and pay dividends on all or
less than all classes of common stock of the Corporation in equal or
unequal amounts, notwithstanding the amount of funds available for
dividends on any class, the respective voting and liquidation rights of any
class, the amount of prior dividends declared on any class or any other
factor.
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<PAGE> 82
Section 3. Exchange and Redemption.
(a) Seagull Common Stock Not Subject to Exchange or Redemption. Shares
of Seagull Common Stock are not subject to exchange or redemption.
(b) Exchange and Redemption of ENSTAR Alaska Stock. Shares of ENSTAR
Alaska Stock are subject to exchange or redemption, as the case may be,
upon the terms provided below:
(i) In the event of the Disposition, in one transaction or a series
of related transactions, by the Corporation 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 Corporation of all of the
Corporation's properties and assets in one transaction or a series of
related transactions which results in a liquidation, dissolution or
winding-up of the Corporation referred to in Section 6, (y) on a pro
rata basis to (1) the holders of all outstanding shares of ENSTAR Alaska
Stock and (2) the Corporation 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 Corporation),
the Corporation shall, on or prior to the 75th Business Day following
the consummation of such Disposition:
(A) subject to Section 2(b) above, 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 in an amount
equal to the product of the Outstanding Interest Fraction and the Net
Proceeds of such Disposition; or
(B) (i) if such Disposition involves all (not merely
substantially all) of the assets and properties of the
ENSTAR Alaska Group), then, if there are sufficient funds of
the Corporation legally available for the full payment
contemplated by this clause (B)(i), 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 in an aggregate amount equal to the
product of the Outstanding Interest Fraction and the Net
Proceeds of such Disposition; or
(ii) if such Disposition involves substantially all
(but not all) of the assets and properties of the
ENSTAR Alaska Group or if the Corporation does not have
sufficient funds legally available to make the full
payment contemplated pursuant to clause (B)(i), then to
the extent that there are funds of the Corporation
legally available therefor, redeem the number of whole
shares outstanding of ENSTAR Alaska Stock that has an
aggregate average Market Value, during the ten-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 and shares of any other class or series of common
stock of the Corporation (other than ENSTAR Alaska Stock) are then
outstanding, of such other class or series of common stock has the
largest Market Capitalization as of the close of business on the
Business Day immediately preceding the date of the notice sent
pursuant to Section 3(c)(iv)) 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 or series of common
stock of the Corporation, as the case may be, during the ten-Business
Day period beginning on the sixth Business Day following such
consummation.
For purposes of this Section 3(b):
III-2
<PAGE> 83
(x) as of any date, "substantially all of the properties and
assets of the ENSTAR Alaska Group" shall mean 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)
as of such date 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 Corporation (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;
(y) in the case of a Disposition of properties and assets in a
series of related transactions, such Disposition shall not be deemed
to have been consummated until the consummation of the last of such
transactions; and
(z) the Board of Directors may, in its sole discretion, pay the
dividend or redemption price referred to in clause (A) or (B) of this
Section 3(b)(i) in cash even if securities or other non-cash
properties are received as proceeds of any Disposition referred to in
this Section 3(b)(i).
(ii) After the payment of any dividend or redemption price with
respect to ENSTAR Alaska Stock pursuant to clause (A) or (B)(ii),
respectively, of Section 3(b)(i), the Board of Directors may, in its
sole discretion, declare that each of the remaining outstanding shares
of ENSTAR Alaska Stock shall be exchanged, on an Exchange Date prior to
the first anniversary of the payment of such dividend or redemption
price (as set forth in a notice delivered in accordance with Section
3(c)(iv) to holders of ENSTAR Alaska Stock and Convertible Securities
convertible into or exercisable for shares 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 and shares of any other class or series of common stock of
the Corporation (other than ENSTAR Alaska Stock) are outstanding as of
the close of business on the Business Day immediately preceding the date
of the notice sent pursuant to Section 3(c)(iv), of such other class or
series of common stock of the Corporation as has the largest Market
Capitalization as of such Business Day) equal to 110% of the Market
Value Ratio as of the fifth Business Day prior to the date such notice
is mailed to such holders.
(iii) At any time, the Board of Directors may, in its sole
discretion, declare that each of the outstanding shares of ENSTAR Alaska
Stock shall be exchanged, on an Exchange Date set forth in a notice
delivered in accordance with Section 3(c)(iv) to holders of ENSTAR
Alaska Stock and Convertible Securities convertible into or exercisable
for shares 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 and shares of
any other class or series of common stock of the Corporation (other than
ENSTAR Alaska Stock) are outstanding as of the close of business on the
Business Day immediately preceding the date of the notice sent pursuant
to Section 3(c)(iv), of such other class or series of common stock of
the Corporation as has the largest Market Capitalization as of such
Business Day) equal to 115% of the Market Value Ratio as of the fifth
Business Day prior to the date such notice is mailed to such holders.
(iv) For purposes of Section 3(b)(ii) and 3(b)(iii), 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) of Section 3(b)(i) 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 Corporation, 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
III-3
<PAGE> 84
Value of one share of Seagull Common Stock or such other class or series
of common stock of the Corporation as is to be exchanged for ENSTAR
Alaska Stock, as the case may be.
(v) 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 Corporation (the "ENSTAR Alaska Group Subsidiary"),
the Board of Directors may, in its sole discretion, provided that there
are funds of the Corporation legally available therefor, declare that
all of the outstanding shares of ENSTAR Alaska Stock shall be exchanged,
on an Exchange Date set forth in a notice delivered in accordance with
Section 3(c)(iv) to holders of ENSTAR Alaska Stock and Convertible
Securities convertible into or exercisable for shares of ENSTAR Alaska
Stock, for the number of outstanding shares of common stock of such
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, each
of which shall, upon such issuance, be fully paid and nonassessable.
(vi) After any Exchange Date or Redemption Date on which all of the
outstanding shares of ENSTAR Alaska Stock were exchanged or redeemed,
any share of ENSTAR Alaska Stock that is issued on conversion or
exercise of any Convertible Securities shall, immediately upon issuance
pursuant to such conversion or exercise and without any notice or any
other action on the part of the Corporation or its Board of Directors or
the holder of such share of ENSTAR Alaska Stock:
(A) in the event then-outstanding shares of ENSTAR Alaska Stock
were exchanged for Seagull Common Stock or another class or series of
common stock of the Corporation on such Exchange Date pursuant to
Section 3(b)(i)(C), 3(b)(ii) or 3(b)(iii), be exchanged for the kind
and amount of shares of capital stock, cash and/or other securities
or property that a holder of such Convertible Security would have
been entitled to receive pursuant to the terms of such Convertible
Security had such terms provided that the conversion or exercise
privilege in effect immediately prior to any exchange by the
Corporation of any of its capital stock for shares of any other
capital stock of the Corporation would be adjusted so that the holder
of any such Convertible Security thereafter surrendered for
conversion or exercise would be entitled to receive the kind and
amount of shares of capital stock, cash and/or other securities or
property such holder would have received immediately following such
action had such Convertible Security been converted or exercised
immediately prior thereto; or
(B) in the event then-outstanding shares of ENSTAR Alaska Stock
were redeemed in whole pursuant to clause (B) of Section 3(b)(i) or
exchanged for common stock of the ENSTAR Alaska Group Subsidiary
pursuant to Section 3(b)(v), be redeemed, to the extent of funds of
the Corporation legally available therefor, for $.01 per share in
cash.
The provisions of clauses (A) and (B) of this Section 3(b)(vi)
shall not apply in the event that adjustments in respect of such
exchange or redemption are otherwise made pursuant to the provisions of
such Convertible Securities.
(c) General Exchange and Redemption Provisions.
(i) Not earlier than the 16th Business Day and not later than the
20th Business Day following the consummation of a Disposition referred
to in Section 3(b)(i), the Corporation shall publish an announcement in
all editions of a daily newspaper with a national circulation that
publishes financial news as to which of the actions specified in clauses
(A), (B) or (C) of Section 3(b)(i) it has irrevocably determined to
take.
(ii) If the Corporation determines to pay a dividend pursuant to
clause (A) of Section 3(b)(i), the Corporation shall 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 (A) the record date for
determining holders entitled to receive such dividend, which shall be
not earlier than the 30th Business Day and not later than the
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<PAGE> 85
40th Business Day following the consummation of such Disposition, (B)
the payment date of such dividend, (C) 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, (D) 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 (E) subject to the last sentence of
Section 3(b)(vi), a statement to the effect that holders of such
Convertible Securities shall be entitled to receive such dividend only
if they convert such Convertible Securities into or exercise them for
ENSTAR Alaska Stock prior to the record date referred to in clause (A)
of this sentence.
(iii) If the Corporation determines to undertake a redemption
pursuant to clause (B) of Section 3(b)(i), the Corporation shall
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 (A) 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, (B) the
anticipated Redemption Date, (C) 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, (D) the
number of shares of ENSTAR Alaska Stock held by such holder to be
redeemed, (E) 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 (F)
subject to the last sentence of Section 3(b)(vi), a statement to the
effect that holders of such Convertible Securities shall be eligible to
participate in such redemption only if they convert such Convertible
Securities into or exercise them for ENSTAR Alaska Stock prior to the
date referred to in clause (A) 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 this Section 3 if such
holder thereafter converts or exercises such Convertible Securities.
Promptly following the date referred to in clause (A) of the preceding
sentence, the Corporation shall 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 shall
be redeemed, (B) the Redemption Date, (C) in the event of a partial
redemption, the number of shares of ENSTAR Alaska Stock 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 Corporation 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,
and (F) a statement to the effect that, subject to Section 3(c)(ix),
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 Corporation.
(iv) If the Corporation determines to undertake any exchange
pursuant to this Section 3 (other than Section 3(b)(vi)), the
Corporation shall promptly following such determination cause to be
given to each holder of record of ENSTAR Alaska Stock and of Convertible
Securities convertible into or exercisable for shares of ENSTAR Alaska
Stock a notice setting forth (A) a statement that all outstanding shares
of ENSTAR Alaska Stock shall be exchanged, (B) the Exchange Date, (C)
the kind and per share amount of shares of common stock of the
Corporation 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, (D) the place or places
where certificates for shares of ENSTAR Alaska Stock, properly endorsed
or assigned for transfer (unless
III-5
<PAGE> 86
the Corporation shall waive such requirement), are to be surrendered for
delivery of certificates for shares of such common stock, (E) a
statement to the effect that, subject to Section 3(c)(vii), dividends on
such shares of ENSTAR Alaska Stock shall cease to be paid as of such
Exchange Date, (F) if applicable, a statement to the effect that the
shares being redeemed may no longer be transferred on the transfer books
of the Corporation after the applicable record date and (G) subject to
the last sentence of Section 3(b)(vi), a statement to the effect that a
holder of Convertible Securities convertible into or exercisable for
shares of ENSTAR Alaska Stock shall be entitled to receive shares of
such common stock upon such exchange only 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 this
Section 3 if such holder thereafter converts or exercises such
Convertible Securities. 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 Exchange Date and in any case to each holder
of 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
Corporation.
(v) If less than all of the outstanding shares of ENSTAR Alaska
Stock are to be redeemed pursuant to clause (B) of Section 3(b)(i), such
shares shall be redeemed by the Corporation 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 (A) of the last sentence of Section
3(c)(iii) or by such other method as may be determined by the Board of
Directors to be equitable.
(vi) The Corporation shall 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 pursuant to this Section 3.
If more than one share of ENSTAR Alaska Stock shall be held at the same
time by the same holder, the Corporation may aggregate the number of
shares of any class of capital stock that shall be issuable or the
amount of securities that shall 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
Corporation shall, if such fraction is not issued or delivered to such
holder, pay a cash adjustment in respect of such fraction in an amount
equal to the fair market value of such fraction 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 fraction shall be (i) in
the case of any fraction of a share of capital stock of the Corporation,
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.
(vii) No adjustments in respect of dividends shall be made upon the
exchange or redemption of any shares of ENSTAR Alaska Stock; provided,
however, that if the Exchange Date or Redemption Date with respect to
ENSTAR Alaska Stock shall be subsequent to the record date for the
payment of a dividend or other distribution thereon or with respect
thereto, the holders of shares of ENSTAR Alaska Stock at the close of
business on such record date shall be entitled to receive the dividend
or other distribution payable on or with respect to such shares on the
date set for payment of such dividend or other distribution,
notwithstanding the exchange or redemption of such shares or the
Corporation's default in payment of the dividend or distribution due on
such date.
(viii) Before any holder of shares of ENSTAR Alaska Stock shall be
entitled to receive certificates representing shares of any capital
stock, cash and/or other securities or property to be received by such
holder with respect to such shares of ENSTAR Alaska Stock pursuant to
this Section 3, such holder shall surrender at such office as the
Corporation shall specify certificates for such shares of ENSTAR Alaska
Stock, properly endorsed or assigned for transfer (unless the
Corporation shall waive such requirement). The Corporation will as soon
as practicable after such surrender of certificates representing such
shares of ENSTAR Alaska Stock deliver to the person for whose account
such shares of ENSTAR Alaska Stock were so surrendered, or to his
nominee or
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<PAGE> 87
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 shall be entitled as aforesaid, together with any
fractional payment contemplated by Section 3(c)(vi). If less than all of
the shares of ENSTAR Alaska Stock represented by any one certificate are
to be redeemed, the Corporation shall issue and deliver a new
certificate for the shares of ENSTAR Alaska Stock not redeemed.
(ix) From and after any applicable Exchange Date or Redemption
Date, all rights of a holder of shares of ENSTAR Alaska Stock that were
exchanged or redeemed shall 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
contemplated by Section 3(c)(vi) and rights to dividends as provided in
Section 3(c)(vii). No holder of a certificate, that immediately prior to
the applicable Exchange Date for ENSTAR Alaska Stock represented shares
of ENSTAR Alaska Stock, shall 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 shall
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 Date, 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 Date for ENSTAR Alaska Stock,
the Corporation shall, however, be entitled to treat the certificates
for ENSTAR Alaska Stock that have not yet been 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 ENSTAR Alaska Stock
represented by such certificates shall have been exchanged,
notwithstanding the failure to surrender such certificates.
(x) The Corporation will pay any and all documentary, stamp or
similar issue or transfer taxes that may 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 hereto. The
Corporation shall not, however, be required to pay any tax that may be
payable in respect of any transfer involved in the issue and delivery of
any shares of capital stock and/or other securities in a name other than
that in which the shares of ENSTAR Alaska Stock so exchanged were
registered, and no such issue or delivery shall be made unless and until
the person requesting such issue has paid to the Corporation the amount
of any such tax, or has established to the satisfaction of the
Corporation that such tax has been paid.
(xi) Neither the failure to mail any notice required by this
Section 3(c) to any particular holder of ENSTAR Alaska Stock or, if
applicable, of such Convertible Securities nor any defect therein shall
affect the sufficiency thereof with respect to any other holder of
ENSTAR Alaska Stock or, if applicable, of Convertible Securities
convertible into or exercisable for shares of ENSTAR Alaska Stock.
Section 4. Voting Rights.
(a) Except as provided in Section 4(b) or 4(c) below, in Article Four
of the amended Articles of Incorporation or in any statement of resolution
establishing series of shares filed pursuant thereto, the holders of all
classes or series of common stock of the Corporation and the holders of
each series of Preferred Stock entitled to vote together with the holders
of ENSTAR Alaska Stock and Seagull Common Stock shall vote together as a
single class on all matters as to which holders of ENSTAR Alaska Stock and
Seagull Common Stock are entitled to vote. On all matters to be voted on by
the holders of all classes or series of common stock of the Corporation and
such series of Preferred Stock together as a single class, (i) each
outstanding share of Seagull Common Stock shall have one vote, (ii) each
outstanding share of ENSTAR Alaska Stock shall 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
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<PAGE> 88
record date or as of a date on which a consent of shareholders is given, 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
twenty-five Business Days prior thereto, the sum of the Market Values of
each class or series of common stock of the Corporation then outstanding;
provided that until the ENSTAR Alaska Stock or such other class or series
of common stock of the Corporation 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
twenty-five Business Days, each outstanding share of ENSTAR Alaska Stock
shall 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 or series of common stock of the Corporation then outstanding) for
each Business Day during the period commencing on the date ENSTAR Alaska
Stock or such other class or series of common stock of the Corporation, as
the case may be, is initially so traded and ending on the last Business Day
on or before the applicable record date or date as of which a shareholder
consent is given. If shares of only one class or series of common stock of
the Corporation are outstanding, each share of that class or series shall
have one vote. If any class or series of common stock of the Corporation is
entitled to vote separately as a series with respect to any matter, each
share of that series shall be entitled to one vote in the separate vote on
such matter. Notwithstanding any fluctuation in the Market Values described
above or the ratios described above after a record date or date on which a
shareholder consent is given, the number of votes to which a share of
ENSTAR Alaska Stock shall be entitled shall not change until the next
record date or date on which a shareholder consent is given; provided,
however, that from the Effective Date until the first record date or date
as of which a shareholder consent is given, each share of ENSTAR Alaska
Stock shall be entitled to the number of votes to which such share would be
entitled if the Effective Date were a record date.
(b) In addition to such other vote or consent as shall then be
required by law, the amended 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 any of the following transactions, except as provided below
or as otherwise permitted by the terms of the amended Articles of
Incorporation:
(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 or series of common stock of the Corporation, 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 Corporation) 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 Corporation 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 another 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 any Group other than Seagull Energy;
provided that, notwithstanding the foregoing, no such vote shall be required for
loans by Seagull Energy to another Group at rates determined in a manner
consistent with the Corporation's policy with respect to loans between Groups at
such time.
III-8
<PAGE> 89
(c) In addition to such other vote or consent as shall then be
required by law, the amended 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 any of the following transactions, except as provided below
or as otherwise permitted by the terms of the amended Articles of
Incorporation:
(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 or series of common stock of the Corporation, 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 Corporation) 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 Corporation
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 Corporation 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
another Group; 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 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;
provided that, notwithstanding the foregoing, no such vote shall be required for
loans by the ENSTAR Alaska Group to another Group at rates determined in a
manner consistent with the Corporation's policy with respect to loans between
Groups at such time.
Section 5. Mergers and Consolidations. In the event of a merger or
consolidation to which the Corporation is a party and pursuant to which the
holders of common stock of the Corporation are entitled to receive consideration
or shares of common stock are converted into securities or other consideration,
the holders of the outstanding shares of each class or series of common stock of
the Corporation would be entitled to receive, or have their shares converted
into, a fraction of the consideration attributable to the common stock of the
Corporation pursuant to the terms of any such merger or consolidation, 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 such 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 or series of common stock, and y is
the aggregate Market Capitalization of all classes and series of common stock of
the Corporation.
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<PAGE> 90
Section 6. Liquidation Rights. In the event of the liquidation, dissolution
or winding-up of the Corporation, whether voluntary or involuntary, after there
shall have been paid or set apart for the holders of preferred stock the full
preferential amounts to which they are entitled, the holders of the outstanding
shares of each class or series of common stock of the Corporation shall be
entitled to receive a fraction of the funds of the Corporation 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 Corporation or (II) the institution of the proceeding for the
involuntary liquidation, dissolution or winding-up of the Corporation, (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 or series of common stock of the Corporation, and Y
is the aggregate Market Capitalization of all classes or series of common stock
of the Corporation. Neither the merger nor consolidation of the Corporation into
or with any other corporation, nor the merger or consolidation of any other
corporation into or with the Corporation, nor a sale, transfer or lease of all
or any part of the assets of the Corporation, shall be deemed a liquidation,
dissolution or winding-up for purposes of this Section 6.
Section 7. Determinations by the Board of Directors. Any determinations
made in good faith by the Board of Directors under any provision in the amended
Articles of Incorporation or in any statement of resolution establishing series
of shares filed pursuant thereto, and any determinations with respect to any
Group or the rights of holders of any class or series of common stock made
pursuant to or in furtherance of the amended Articles of Incorporation, shall be
final and binding on all shareholders.
Section 8. Definitions. As used in the amended Articles of Incorporation,
the following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless another definition is provided or the context otherwise requires. As used
in this Section 8, a "contribution" or "transfer" of assets or properties from
one Group to another shall be deemed to include a reallocation of such assets or
properties from the contributing or transferring Group to the other Group (and
correlative phrases shall have correlative meanings).
"Articles of Amendment" shall mean the articles of amendment that
amended the Articles of Incorporation of the Corporation to first include
this Section 8 in the Article Four of the Articles of Incorporation.
"Available Seagull Energy Dividend Amount," on any date, shall mean 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 series of
Preferred Stock 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 shall 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.
"Available ENSTAR Alaska Dividend Amount," on any date, shall mean 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 series of Preferred Stock attributed to the ENSTAR Alaska Group as of
such date, determined as provided in the TBCA as 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 shall 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.
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<PAGE> 91
"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.
"Convertible Securities" shall mean any securities of the Corporation
that are convertible into or exercisable for or evidence the right to
acquire any shares of any class or series of common stock of the
Corporation, whether at such time or upon the occurrence of certain events,
pursuant to antidilution provisions of such securities or otherwise.
"Disposition" shall mean the sale, transfer, assignment or other
disposition (whether by merger, consolidation, sale or contribution of
assets or stock or otherwise) of properties or assets, but not including
any pledge, mortgage, deed of trust or trust indenture.
"Effective Date" shall mean the date on which the Articles of
Amendment shall become effective.
"ENSTAR Alaska Group" shall mean, as of any date:
(i) the interest of the Corporation and its subsidiaries in (x) all
of the businesses in which any of ENSTAR Natural Gas Company or Alaska
Pipeline Company (or any of their predecessors or successors) (the
"ENSTAR Alaska companies") is or has been engaged, directly or
indirectly, and (y) all of the assets and liabilities of the ENSTAR
Alaska companies;
(ii) all assets and liabilities of the Corporation or any of its
subsidiaries to the extent attributed to any of the businesses of the
ENSTAR Alaska companies, whether or not such assets or liabilities are
or were assets and liabilities of the ENSTAR Alaska companies;
(iii) all assets and properties contributed or transferred to the
ENSTAR Alaska Group from Seagull Energy; and
(iv) the interest of the Corporation or any of its subsidiaries in
the businesses, assets and liabilities acquired by the Corporation or
any of its subsidiaries for the ENSTAR Alaska Group, as determined by
the Board of Directors;
provided that, (a) from and after any dividend, distribution or redemption
with respect to any shares of ENSTAR Alaska Stock (other than a dividend or
distribution payable in shares of ENSTAR Alaska Stock, or Convertible
Securities convertible into or exercisable for shares of ENSTAR Alaska
Stock), the ENSTAR Alaska Group shall no longer include an amount of assets
or properties equal to the aggregate amount of such kind of assets or
properties so paid in respect of such dividend, distribution or redemption
with respect to outstanding shares of ENSTAR Alaska Stock multiplied by a
fraction, the numerator of which is equal to the Number of Shares Issuable
with Respect to the Retained Interest and the denominator of which is equal
to the number of outstanding shares of ENSTAR Alaska Stock at such time,
and (b) from and after any transfer of assets or properties from the ENSTAR
Alaska Group to Seagull Energy, the ENSTAR Alaska Group shall no longer
include the assets or properties so transferred.
"ENSTAR Alaska Group Subsidiary" shall have the meaning set forth in
Section 3(b)(v).
"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).
"Groups" shall mean Seagull Energy, the ENSTAR Alaska Group and any
other business group of the Corporation in respect of which the Corporation
issues a class or series of common stock of the Corporation.
"Market Capitalization" of any class or series of common stock of the
Corporation 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 Corporation on
such day and (ii) the number of shares of such class or series of common
stock of the Corporation outstanding on such day.
III-11
<PAGE> 92
"Market Value" of a share of any class or series of capital stock of
the Corporation 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 Corporation, 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 hereof, as calculated over any
period, (i) the "Market Value" of any share of any class or series of
common stock of the Corporation 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 Corporation
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 Corporation 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 Corporation 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 Corporation in shares of such class or series
of common stock of the Corporation 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.
"Net Proceeds" shall mean, 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
Corporation in respect of such Disposition, (ii) any taxes payable by the
Corporation in respect of any dividend or redemption pursuant to clause (A)
or (B), respectively, of Section 3(b)(i) hereof, (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. For
purposes of this definition, 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, including for the purpose of determining the cash
equivalent thereof if the Board of Directors determines to pay a dividend
or redemption price in cash as provided in Section 3(b)(i)(z) hereof. For
purposes of this definition, the term "taxes payable by the Corporation in
respect of a Disposition" shall be deemed to be an amount equal to the sum
of (x) the excess of the gross proceeds realized by the Corporation 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
III-12
<PAGE> 93
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 which 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 which expresses the highest rate
of such state tax applicable to corporations and the decimal which
expresses one minus the federal tax rate.
"Number of Shares Issuable with Respect to the Retained Interest"
shall initially be ; provided that such number from time to time
shall be:
(i) 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;
(ii) decreased by (A) the number of shares of ENSTAR Alaska Stock
issued or sold by the Corporation, 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 Corporation 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) increased by (A) the number of outstanding shares of ENSTAR
Alaska Stock repurchased by the Corporation, 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 divided by the Market Value of one
share of ENSTAR Alaska Stock as of the date of such contribution.
"Outstanding Interest Fraction," as of any date, is a fraction the
numerator of which shall be the number of shares of ENSTAR Alaska Stock
outstanding on such date and the denominator of which shall be the sum of
the number of shares of ENSTAR Alaska Stock outstanding on such date and
the Number of Shares Issuable with Respect to the Retained Interest on such
date. A statement setting forth the Outstanding Interest Fraction shall be
filed with the Secretary of the Corporation within 30 days after the end of
each fiscal quarter of the Corporation.
"Redemption Date" shall mean any date fixed for a redemption 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)(iii).
"Retained Interest Fraction," as of any date, shall mean a fraction
the numerator of which shall be the Number of Shares Issuable with Respect
to the Retained Interest on such date and the denominator of which shall be
the sum of the number of shares of ENSTAR Alaska Stock outstanding on such
date and the Number of Shares Issuable with Respect to the Retained
Interest on such date.
"Seagull Energy" shall mean, as of any date:
(i) the interest of the Corporation or any of its subsidiaries in
all of the businesses in which the Corporation or any of its
subsidiaries (or any of their predecessors or successors) is or has been
engaged, directly or indirectly, and the assets and liabilities of the
Corporation or any of its subsidiaries other than any businesses, assets
or liabilities of the ENSTAR Alaska Group;
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<PAGE> 94
(ii) a proportionate interest in the businesses, assets and
liabilities of the ENSTAR Alaska Group as of such date equal to the
Retained Interest Fraction;
(iii) from and after any dividend, distribution or redemption with
respect to any shares of ENSTAR Alaska Stock (other than a dividend or
distribution payable in shares of ENSTAR Alaska Stock, or Convertible
Securities convertible into or exercisable for shares of ENSTAR Alaska
Stock), an amount of assets or properties of the ENSTAR Alaska Group
equal to the aggregate amount of such kind of assets or properties so
paid in respect of such dividend, distribution or redemption with
respect to outstanding shares of ENSTAR Alaska Stock multiplied by a
fraction, the numerator of which is equal to the Number of Shares
Issuable with Respect to the Retained Interest and the denominator of
which is equal to the number of shares of ENSTAR Alaska Stock
outstanding at such time; and
(iv) any assets or properties transferred from the ENSTAR Alaska
Group to Seagull Energy;
provided that, from and after any contribution or transfer of assets or
properties from Seagull Energy to the ENSTAR Alaska Group, Seagull Energy
shall no longer include such assets or properties so contributed or
transferred (other than pursuant to its interest in the ENSTAR Alaska Group
pursuant to clause (ii) above).
"Seagull Energy Corporation Earnings Attributable to Seagull Energy,"
for any period, shall mean the net income or loss of Seagull Energy for
such period (or for fiscal periods of the Corporation commencing prior to
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
Corporation 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.
"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 Corporation
commencing prior to 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 Corporation 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.
Section 9. Preferred Stock. The Preferred Stock may be divided into and
issued from time to time in one or more series as may be fixed and determined by
the Board of Directors. The relative rights and preferences of the Preferred
Stock of each series shall be such as shall be stated in any resolution or
resolutions adopted by the Board of Directors setting forth the designation of
the series and fixing and determining the relative rights and preferences
thereof, any such resolution or resolutions being herein called a "Directors'
Resolution." The Board of Directors is hereby authorized to fix and determine
such variations in the designations, preferences and relative, participating,
optional and other special rights (including, without limitation, rights of
conversion into any class or series of common stock of the Corporation or other
securities, redemption provisions or sinking fund provisions) as between series
and as between the Preferred Stock or any series thereof and any class or series
of common stock of the Corporation, and the qualifications, limitations or
restrictions of such rights, all as shall be stated in a Directors' Resolution,
and the shares of Preferred Stock or any series thereof may have full or limited
voting powers, or be without voting powers, all as shall be stated in a
Directors' Resolution."
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<PAGE> 95
ARTICLE THREE
The second amendment is an amendment to the Statement of Resolution
Establishing Series of Shares of Series B Junior Participating Preferred Stock
of Seagull Energy Corporation to provide that, upon the effectiveness of this
Amendment, references to Common Stock in Sections [2, 6 and 7] thereof shall be
deemed to be references to Seagull Common Stock, and references to Common Stock
in Section [3] thereof shall be deemed to be references to all classes and
series of common stock of the Corporation, including without limitation the
Seagull Common Stock and the ENSTAR Alaska Stock.
ARTICLE FOUR
The number of shares of the corporation outstanding on the record date on
which the amendment was adopted by the shareholders was ; and the number
of shares entitled to vote thereon was . No shares were entitled to vote
thereon as a class.
ARTICLE FIVE
The number of shares voted for such amendment was ; and the number
of shares voted against such amendment was . The number of shares
abstaining was .
ARTICLE SIX
The amendment does not effect a change in the amount of the stated capital
of the corporation.
Dated: , 1994.
SEAGULL ENERGY CORPORATION
By:__________________________________
{Name}
{Title}
STATE OF TEXAS )
COUNTY OF HARRIS ) SS.:
Before me, a notary public, on this day personally appeared
, known to me to be the person whose name is subscribed to the
foregoing document and, being by me first duly sworn, declared that the
statements therein contained are true and correct.
Given under my hand and seal of office this day of 1994.
__________________________________
(printed or stamped name)
Notary Public, State of Texas
(Notarial Seal)
My commission expires:
___________________________________
III-15
<PAGE> 96
ANNEX IV
SEAGULL ENERGY CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Unaudited Pro Forma Condensed Financial Statements................................... IV-2
Unaudited Pro Forma Condensed Balance Sheet........................................ IV-3
Notes to Unaudited Pro Forma Condensed Balance Sheet............................... IV-4
Unaudited Pro Forma Condensed Statement of Earnings................................ IV-5
Notes to Unaudited Pro Forma Condensed Statement of Earnings....................... IV-6
Management's Discussion and Analysis of Financial Condition and Results of Operations
(Unaudited):
Results of Operations.............................................................. IV-7
Liquidity and Capital Resources.................................................... IV-14
Consolidated Financial Statements:
Consolidated Statements of Earnings................................................ IV-17
Consolidated Balance Sheets........................................................ IV-18
Consolidated Statements of Cash Flows.............................................. IV-19
Consolidated Statements of Shareholders' Equity.................................... IV-20
Notes to Consolidated Financial Statements......................................... IV-21
Independent Auditors' Report....................................................... IV-46
</TABLE>
IV-1
<PAGE> 97
SEAGULL ENERGY CORPORATION
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma condensed balance sheet as of December 31, 1993
gives effect to (i) the acquisition (the "Seagull Canada Acquisition") of all
the outstanding shares of stock of Novalta Resources Inc. ("Novalta"), financed
initially under the Canadian Credit Agreement and the Revolver, defined herein,
and (ii) the issuance and sale for cash of shares of ENSTAR Alaska Stock
representing 100% of the equity attributable to the ENSTAR Alaska Group pursuant
to a public offering and the application of the estimated net proceeds therefrom
of $140 million to repay amounts borrowed under the Revolver, as if both events
had occurred on December 31, 1993. The unaudited pro forma condensed statement
of earnings for the year ended December 31, 1993 gives effect to the pro forma
transactions and events described in clauses (i) and (ii) above as if both
events had occurred on January 1, 1993.
The following unaudited pro forma information has been included as required
by the rules of the Securities and Exchange Commission and is provided for
comparative purposes only. The unaudited pro forma information presented is
based on the respective historical consolidated financial statements of Seagull
Energy Corporation (the "Company") and Novalta and should be read in conjunction
with such financial statements and the related notes thereto, as well as the
Seagull Energy unaudited pro forma condensed financial statements and the ENSTAR
Alaska Group unaudited pro forma condensed financial statements. 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
pro forma unaudited 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.
IV-2
<PAGE> 98
SEAGULL ENERGY CORPORATION
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1993
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
------------------------
SEAGULL NOVALTA
ENERGY RESOURCES CONFORMING PRO FORMA
CORPORATION INC. ADJUSTMENTS COMBINED
----------- --------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents................. $ 5,572 $ 415 $ -- $ 5,987
Accounts receivable, net.................. 98,734 11,136 -- 109,870
Other..................................... 10,902 688 -- 11,590
----------- --------- ----------- ----------
Total Current Assets................. 115,208 12,239 -- 127,447
Property, Plant and Equipment -- at
cost................................... 1,278,701 166,067 (166,067)(A) 1,495,295
216,594 (B)
Accumulated Depreciation, Depletion and
Amortization........................... 345,512 69,038 (69,038)(A) 345,512
----------- --------- ----------- ----------
933,189 97,029 119,565 1,149,783
Other Assets.............................. 69,854 3,145 883 (B 65,424
(8,458)(C)
----------- --------- ----------- ----------
Total Assets.............................. $ 1,118,251 $ 112,413 $ 111,990 $1,342,654
----------- --------- ----------- ----------
----------- --------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................... $ 84,904 $ 7,060 $ -- $ 91,964
Current maturities of long-term debt...... 1,538 -- -- 1,538
Other..................................... 37,724 746 -- 38,470
----------- --------- ----------- ----------
Total Current Liabilities............ 124,166 7,806 -- 131,972
Long-Term Debt............................ 459,787 64,316 (64,316)(D) 513,093
193,306 (C)
(140,000)(E)
Other Noncurrent Liabilities.............. 66,785 1,965 (602)(B) 68,148
Deferred Income Taxes..................... 28,134 7,899 (7,899)(D) 50,062
21,928 (B)
Shareholders' Equity...................... 439,379 30,427 (30,427)(D) 579,379
140,000 (E)
----------- --------- ----------- ----------
Total Liabilities and Shareholders'
Equity................................. $ 1,118,251 $ 112,413 $ 111,990 $1,342,654
----------- --------- ----------- ----------
----------- --------- ----------- ----------
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Balance Sheet.
IV-3
<PAGE> 99
SEAGULL ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED BALANCE SHEET
(A) To eliminate Novalta's historical cost of property, plant and equipment
and accumulated depreciation, depletion and amortization.
(B) To adjust the assets acquired and liabilities assumed in the Seagull
Canada Acquisition to reflect the allocation of the estimated purchase
price. The adjusted cost of property, plant and equipment was calculated
as follows:
<TABLE>
<CAPTION>
(DOLLARS
IN
THOUSANDS)
<S> <C>
Estimated purchase price................................................ $200,455
Estimated transaction costs............................................. 1,309
Less -- other assets acquired:
Current assets........................................................ (12,239)
Other assets.......................................................... (4,028)
Plus -- liabilities assumed:
Current liabilities................................................... 7,806
Deferred credits...................................................... 1,363
Deferred income taxes................................................. 21,928
--------
$216,594
--------
--------
</TABLE>
The purchase price was determined pursuant to arm's length negotiations
between the Company and Novacor Petrochemicals, based on the economic
effective date of December 31, 1993. The purchase price was based to a
large extent on the net present value of oil reserves attributable to the
properties acquired as a result of the Seagull Canada Acquisition.
(C) To record the financing of the Seagull Canada Acquisition, including
approximately $193.3 million of borrowings under the Canadian Credit
Agreement and the Revolver, a cash deposit of approximately $7.5 million
paid in November 1993 and other costs in connection with the acquisition.
(D) To eliminate the long-term debt, deferred income taxes and shareholder's
equity of Novalta.
(E) To record the issuance and sale for cash of shares of ENSTAR Alaska Stock
representing 100% of the equity attributable to the ENSTAR Alaska Group
pursuant to a public offering and the corresponding decrease in long-term
debt outstanding resulting from the application of the net proceeds
therefrom.
The following sets forth the historical and adjusted consolidated
capitalization of the Company as of December 31, 1993. The table should be
read in conjunction with the Company's consolidated financial statements
and the notes related thereto included in this Annex.
<TABLE>
<CAPTION>
DECEMBER 31, 1993
------------------------------------
PRO FORMA
HISTORICAL PRO FORMA(1) ADJUSTED(2)
-------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Borrowings under Seagull's bank arrangements.... $397,000 $ 590,306 $ 450,306
APC debt (including current maturities of
$1,538,000 and unamortized debt discount of
$1,366,000).................................. 64,325 64,325 64,325
-------- ---------- ----------
Total debt........................................ 461,325 654,631 514,631
Shareholders' equity.............................. 439,379 439,379 579,379
-------- ---------- ----------
Total capitalization.............................. $900,704 $1,094,010 $1,094,010
-------- ---------- ----------
-------- ---------- ----------
Total debt to total capitalization ratio.......... 51.2% 59.8% 47.0%
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
- - ---------------
(1) Adjusted to give effect to approximately $193.3 million of borrowings
under the Canadian Credit Agreement and Revolver that were incurred
in connection with the Seagull Canada Acquisition.
(2) Adjusted to give effect to (i) the adjustment described in note (1)
above and (ii) the issuance and sale of 7,500,000 shares of ENSTAR
Alaska Stock pursuant to the ENSTAR Alaska Stock Offering and the
application of the estimated net proceeds therefrom of $140 million
to repay a portion of the amounts borrowed under the Revolver.
IV-4
<PAGE> 100
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. 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) 39,348
2,595 (D)
Interest Income and Other....................... (5,708) (3,102) -- (8,810)
----------- --------- ----------- ---------
Earnings Before Income Taxes.................... 33,278 12,033 (7,756) 37,555
Income Taxes.................................... 6,080 4,650 (4,650)(B) 9,470
3,390 (E)
----------- --------- ----------- ---------
Net Earnings.................................... $ 27,198 $ 7,383 $(6,496) $ 28,085
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Earnings per Share:
Earnings per share for Seagull Energy
Corporation Common Stock...................... $ 0.76
-----------
-----------
Weighted Average Number of Seagull Energy
Corporation Common Shares Outstanding......... 35,790
-----------
-----------
Net earnings applicable to Seagull Common
Stock......................................... $ 21,037
---------
---------
Earnings per share for Seagull Common Stock..... $ 0.59
---------
---------
Weighted Average Number of Shares Outstanding
of Seagull Common Stock....................... 35,790(G)
---------
---------
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........................ 7,500(F) 7,500(H)
----------- ---------
----------- ---------
</TABLE>
See Accompanying Notes to Unaudited Condensed Statement of Earnings.
IV-5
<PAGE> 101
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 and the amortization of loan
acquisition costs relating to the Canadian Credit Agreement.
(E) To adjust income taxes for the items discussed in Notes (A) through (D)
above.
(F) 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 a public offering.
(G) The weighted average number of shares of Seagull Common Stock outstanding
is calculated assuming the implementation of the ENSTAR Alaska Stock
Proposal.
(H) The weighted average number of shares of ENSTAR Alaska Stock outstanding
is calculated assuming the issuance and sale of 7,500,000 shares of ENSTAR
Alaska Stock in the ENSTAR Alaska Stock Offering.
IV-6
<PAGE> 102
SEAGULL ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
RESULTS OF OPERATIONS
CONSOLIDATED HIGHLIGHTS
<TABLE>
<CAPTION>
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
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
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
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
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
Seagull Energy Corporation and Subsidiaries (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 nonstrategic producing properties. The Company's 1993 net earnings also
benefitted from a 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 two Statements of Financial
Accounting Standards ("SFAS"), SFAS No. 109, Accounting for Income Taxes, and
SFAS No. 106, Employers' Accounting for
IV-7
<PAGE> 103
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 10,120,000 shares (adjusted
for 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 versus 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 3.0 million (adjusted for
Stock Split) shares of Seagull Common Stock pursuant to an underwritten public
offering.
IV-8
<PAGE> 104
EXPLORATION AND PRODUCTION
<TABLE>
<CAPTION>
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(1):
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)(2)......................... 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).................... 2.03 2.01 1.97 + 1 + 2
Lifting costs ($ per Mcfe)(2):
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)(2)..................... 0.92 1.15 1.04 - 20 + 11
-------- ------- ------- -------- --------
-------- ------- ------- -------- --------
</TABLE>
- - ---------------
(1) Natural gas stated in million cubic feet ("MMcf") or thousand cubic feet
("Mcf"); oil and condensate and natural gas liquids stated in barrels
("Bbl").
(2) Mcfe and MMcfe represent the equivalent of one thousand cubic feet and one
million cubic feet 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.
IV-9
<PAGE> 105
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 billion cubic feet ("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 beginning on page IV-21 of this Annex.
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.
IV-10
<PAGE> 106
PIPELINE AND MARKETING
<TABLE>
<CAPTION>
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
Gas marketing............................... 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
Gas marketing............................. 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 gas marketing 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 gas marketing 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 a pipeline construction
project; 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 gas marketing areas
which more than offset declines in the construction 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 gas marketing 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
IV-11
<PAGE> 107
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.
Historically, the Company has not been engaged in pipeline construction
projects on a regularly recurring basis. The Company currently has no
construction projects pending; however, several projects are actively being
pursued.
ALASKA TRANSMISSION AND DISTRIBUTION
<TABLE>
<CAPTION>
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:
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 --
Year-end customers.......................... 88,200 86,400 84,800 + 2 + 2
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- - ---------------
(*) A measure of weather severity calculated by subtracting the mean temperature
for each day from 65 degrees Fahrenheit. More degree days equate to colder
weather.
Operating profit of the Alaska transmission and distribution segment
(ENSTAR Natural Gas Company, a division of the Company, and Alaska Pipeline
Company, a wholly owned subsidiary (collectively referred to herein as "ENSTAR
Alaska")) for the year ended December 31, 1993 declined from 1992 primarily due
to unusually warm weather in the utility's market area.
ENSTAR Alaska'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, ENSTAR Alaska currently transports the utility's
gas supplies for a transportation fee that approximates the price at which
ENSTAR Alaska 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 ENSTAR Alaska'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.
IV-12
<PAGE> 108
OTHER (INCOME) EXPENSE
<TABLE>
<CAPTION>
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>
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 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 nonstrategic 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 percent. 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
IV-13
<PAGE> 109
$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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for 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 1993, 1992 and 1991 were as follows:
<TABLE>
<CAPTION>
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>
IV-14
<PAGE> 110
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.
Plans for 1994 call for capital expenditures of approximately $173 million,
including about $160 million in exploration and production. The Company
anticipates spending approximately $100 million for development, $10 million for
lease acquisitions and $50 million will be devoted to exploration.
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 beginning on page
IV-21 of this Annex.
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 10,120,000 shares
(adjusted for 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
beginning on page IV-21 of this Annex.
In June 1993, the Company amended and restated the Credit Agreement
converting the facility into a single revolving credit facility (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 exploration and production 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.
As of January 4, 1994, immediately following the Seagull Canada
Acquisition, 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 February 28,
1994, borrowings outstanding under the Revolver were $188.5 million, leaving
immediately available unused commitments of approximately $141.1 million, net of
outstanding letters of credit of $2.2 million, $100 million of borrowings
outstanding under the Senior Notes discussed below, the nominated maximum
borrowing availability of $160 million under the Canadian Credit Agreement
discussed below, and $18.2 million in borrowings outstanding under the Company's
money market facilities.
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.
IV-15
<PAGE> 111
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.
IV-16
<PAGE> 112
SEAGULL ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Exploration and production............................... $227,437 $ 91,991 $ 81,099
Pipeline and marketing................................... 42,484 37,240 37,823
Alaska transmission and distribution..................... 107,244 109,598 129,615
-------- -------- --------
377,165 238,829 248,537
-------- -------- --------
Costs of Operations:
Alaska transmission and distribution cost of gas sold.... 59,898 59,999 81,935
Cost of other gas sold................................... 2,660 3,888 5,913
Operations and maintenance............................... 104,797 71,923 68,377
Exploration charges...................................... 17,265 9,905 9,227
Depreciation, depletion and amortization................. 116,556 63,231 52,902
-------- -------- --------
301,176 208,946 218,354
-------- -------- --------
Operating Profit........................................... 75,989 29,883 30,183
Other (Income) Expense:
General and administrative............................... 11,666 10,099 8,427
Interest expense......................................... 36,753 17,574 17,875
Interest income and other................................ (5,708) (4,705) (1,426)
-------- -------- --------
42,711 22,968 24,876
-------- -------- --------
Earnings Before Income Taxes and Cumulative Effect of
Changes in Accounting Principles......................... 33,278 6,915 5,307
Income Taxes............................................... 6,080 2,500 200
-------- -------- --------
Earnings Before Cumulative Effect of Changes in Accounting
Principles............................................... 27,198 4,415 5,107
Cumulative Effect of Changes in Accounting Principles...... -- 2,273 --
-------- -------- --------
Net Earnings............................................... $ 27,198 $ 6,688 $ 5,107
-------- -------- --------
-------- -------- --------
Earnings Per Share:
Earnings before cumulative effect of changes in
accounting principles................................. $ 0.76 $ 0.17 $ 0.23
Cumulative effect of changes in accounting principles.... -- 0.09 --
-------- -------- --------
Net Earnings............................................. $ 0.76 $ 0.26 $ 0.23
-------- -------- --------
-------- -------- --------
Weighted Average Number of Common Shares Outstanding (in
thousands)............................................... 35,790 25,583 22,692
-------- -------- --------
-------- -------- --------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
IV-17
<PAGE> 113
SEAGULL ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1993 1992
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................................... $ 5,572 $ 3,882
Accounts receivable, net.......................................... 98,734 89,823
Inventories....................................................... 4,382 4,153
Prepaid expenses and other........................................ 6,520 926
---------- ----------
Total Current Assets......................................... 115,208 98,784
Property, Plant and Equipment -- at cost (successful efforts method
for gas and oil properties)....................................... 1,278,701 1,191,575
Accumulated Depreciation, Depletion and Amortization................ 345,512 253,773
---------- ----------
933,189 937,802
Other Assets........................................................ 69,854 66,378
---------- ----------
Total Assets........................................................ $1,118,251 $1,102,964
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................. $ 84,904 $ 99,520
Accrued expenses.................................................. 30,134 12,713
Prepaid gas and oil sales......................................... 7,590 27,933
Current maturities of long-term debt.............................. 1,538 3,743
---------- ----------
Total Current Liabilities.................................... 124,166 143,909
Long-Term Debt...................................................... 459,787 608,011
Other Noncurrent Liabilities........................................ 66,785 80,928
Deferred Income Taxes............................................... 28,134 26,443
Shareholders' Equity:
Common Stock, $.10 par value; authorized 100,000,000 shares (1993)
and 40,000,000 shares (1992); issued 36,378,659 shares (1993)
and 12,977,257 shares (1992)................................... 3,638 1,298
Additional paid-in capital........................................ 324,192 158,503
Retained earnings................................................. 120,713 93,515
Less -- note receivable from employee stock ownership plan........ (6,029) (6,508)
Less -- 326,812 shares (1993) and 163,406 shares (1992) of Common
Stock held in Treasury, at cost................................ (3,135) (3,135)
---------- ----------
Total Shareholders' Equity................................... 439,379 243,673
Commitments and Contingencies.......................................
---------- ----------
Total Liabilities and Shareholders' Equity.......................... $1,118,251 $1,102,964
---------- ----------
---------- ----------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
IV-18
<PAGE> 114
SEAGULL ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1992 1991
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Net earnings.......................................... $ 27,198 $ 6,688 $ 5,107
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Cumulative effect of changes in accounting
principles....................................... -- (2,273) --
Depreciation, depletion and amortization........... 119,544 65,238 54,811
Amortization of loan acquisition costs............. 4,261 2,927 745
Deferred income taxes.............................. 1,050 2,305 438
Dry hole expense................................... 10,534 5,232 4,195
Gain on sales of property, plant and equipment..... (3,929) (177) (46)
Distributions in excess of earnings from
partnerships..................................... 1,506 872 888
Other.............................................. 598 556 516
--------- --------- ---------
160,762 81,368 66,654
Changes in operating assets and liabilities, net of
acquisitions:
Decrease (Increase) in accounts receivable, net.... (7,029) 5,039 (1,764)
Decrease (Increase) in inventories, prepaid
expenses and other............................... 757 (457) (1,089)
Increase (Decrease) in accounts payable............ (16,292) (11,334) 7,781
Decrease in prepaid gas and oil sales.............. (27,933) -- --
Increase (Decrease) in accrued expenses and
other............................................ 9,496 (2,429) (1,809)
--------- --------- ---------
Net Cash Provided By Operating Activities........ 119,761 72,187 69,773
Investing Activities:
Capital expenditures.................................. (112,042) (43,651) (71,709)
Acquisitions, net of cash acquired.................... (29,470) (401,888) (201,767)
Proceeds from sales of property, plant and
equipment.......................................... 13,428 1,347 1,394
--------- --------- ---------
Net Cash Used In Investing Activities............ (128,084) (444,192) (272,082)
Financing Activities:
Proceeds from revolving lines of credit and other
borrowings......................................... 599,490 756,500 365,900
Principal payments on revolving lines of credit and
other borrowings................................... (750,039) (369,877) (198,205)
Fees paid to acquire financing........................ (6,535) (18,282) (3,201)
Proceeds from sales of common stock................... 166,140 794 37,571
Purchase of treasury stock............................ -- (210) --
Other................................................. 957 765 1,272
--------- --------- ---------
Net Cash Provided By Financing Activities........ 10,013 369,690 203,337
--------- --------- ---------
Increase (Decrease) In Cash And Cash
Equivalents................................... 1,690 (2,315) 1,028
Cash And Cash Equivalents At Beginning Of Year.......... 3,882 6,197 5,169
--------- --------- ---------
Cash And Cash Equivalents At End Of Year................ $ 5,572 $ 3,882 $ 6,197
--------- --------- ---------
--------- --------- ---------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
IV-19
<PAGE> 115
SEAGULL ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL NOTE
COMMON PAID-IN RETAINED RECEIVABLE TREASURY
STOCK CAPITAL EARNINGS FROM ESOP STOCK TOTAL
------ ---------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
January 1, 1991.................... $1,137 $ 119,924 $ 81,720 $(7,340) $ (2,925) $192,516
Net earnings..................... -- -- 5,107 -- -- 5,107
Issuance of common stock,
1,500,000 shares.............. 150 36,586 -- -- -- 36,736
Exercise of employee stock
options, 60,304 shares........ 6 829 -- -- -- 835
Repayment of Note Receivable by
ESOP.......................... -- -- -- 396 -- 396
Other............................ -- 207 -- -- -- 207
------ ---------- -------- --------- -------- --------
December 31, 1991.................. 1,293 157,546 86,827 (6,944) (2,925) 235,797
Net earnings..................... -- -- 6,688 -- -- 6,688
Purchase of treasury stock, 9,438
shares........................ -- -- -- -- (210) (210)
Exercise of employee stock
options, 50,235 shares........ 5 789 -- -- -- 794
Repayment of Note Receivable by
ESOP.......................... -- -- -- 436 -- 436
Other............................ -- 168 -- -- -- 168
------ ---------- -------- --------- -------- --------
December 31, 1992.................. 1,298 158,503 93,515 (6,508) (3,135) 243,673
Net earnings..................... -- -- 27,198 -- -- 27,198
Issuance of common stock,
5,060,000 shares.............. 506 163,131 -- -- -- 163,637
Two-for-one stock split.......... 1,807 (1,807) -- -- -- --
Exercise of employee stock
options, 271,645 shares....... 27 2,476 -- -- -- 2,503
Repayment of Note Receivable by
ESOP.......................... -- -- -- 479 -- 479
Other............................ -- 1,889 -- -- -- 1,889
------ ---------- -------- --------- -------- --------
December 31, 1993.................. $3,638 $ 324,192 $120,713 $(6,029) $ (3,135) $439,379
------ ---------- -------- --------- -------- --------
------ ---------- -------- --------- -------- --------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
IV-20
<PAGE> 116
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
- - ----- -----
<S> <C> <C>
1. Summary of Significant Accounting Policies................................... IV-21
2. Acquisitions................................................................. IV-23
3. Property, Plant and Equipment................................................ IV-24
4. Supplemental Gas and Oil Producing Activities (Unaudited).................... IV-24
5. Other Noncurrent Assets...................................................... IV-28
6. Long-Term Debt............................................................... IV-30
7. Other Noncurrent Liabilities................................................. IV-33
8. Fair Value of Financial Instruments.......................................... IV-34
9. Shareholders' Equity......................................................... IV-35
10. Stock Option Plans........................................................... IV-35
11. Employee Benefit Plans....................................................... IV-36
12. Interest Income and Other.................................................... IV-38
13. Income Taxes................................................................. IV-39
14. Business Segments............................................................ IV-42
15. Selected Quarterly Financial Data (Unaudited)................................ IV-43
16. Commitments and Contingencies................................................ IV-43
17. Subsequent Events............................................................ IV-44
</TABLE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The accompanying consolidated financial statements include
the accounts of Seagull Energy Corporation and Subsidiaries (the "Company"), all
of which are wholly owned. All significant intercompany transactions have been
eliminated.
The results of operations of Seagull Mid-South Inc. ("Seagull Mid-South"),
formerly Arkla Exploration Company ("Arkla Exploration") have been included with
those of the Company since December 31, 1992, and the results of operations of
certain gas and oil assets (the "Mid-Continent Assets") purchased from Mesa
Limited Partnership, a predecessor of Mesa, Inc., ("Mesa") have been included
with those of the Company since March 8, 1991, the respective acquisition dates
(See Note 2).
Partnerships in which the Company holds a 50% interest or less are
accounted for using the equity method.
Regulation. The Company operates in Alaska through ENSTAR Natural Gas
Company ("ENG"), a division of the Company, and Alaska Pipeline Company ("APC"),
a wholly owned subsidiary (collectively referred to herein as "ENSTAR Alaska").
ENSTAR Alaska is subject to regulation by the Alaska Public Utilities Commission
("APUC"), which has jurisdiction over, among other things, rates, accounting
procedures and standards of service.
Cash Equivalents. The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
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......................... $ 26,753 $ 19,079 $ 16,114
Income taxes................................................ $ 7,140 $ 878 $ 3,748
</TABLE>
IV-21
<PAGE> 117
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories. Materials and supplies are valued at the lower of average cost
or market value (net realizable value). Inventories of hydrocarbon products are
valued on a first-in, first-out (FIFO) basis at the lower of cost or market
value.
Gas And Oil Properties. The Company uses the successful efforts method of
accounting for its gas and oil operations. The costs of unproved leaseholds are
capitalized pending the results of exploration efforts. Unproved leaseholds with
significant acquisition costs are assessed periodically, on a
property-by-property basis, and a loss is recognized to the extent, if any, that
the cost of the property has been impaired. Unproved leaseholds whose
acquisition costs are not individually significant are aggregated, and the
portion of such costs estimated to ultimately prove nonproductive, based on
experience, is amortized over an average holding period. As unproved leaseholds
are determined to be productive, the related costs are transferred to proved
leaseholds. Exploratory dry holes and geological and geophysical charges are
expensed. Depletion of proved leaseholds and amortization and depreciation of
the costs of all development and successful exploratory drilling are provided by
the unit-of-production method based upon estimates of proved gas and oil
reserves on a field-by-field basis. Estimated costs (net of salvage value) of
dismantling and abandoning gas and oil production facilities are computed and
included in depreciation and depletion using the unit-of-production method. The
total estimated future dismantlement and abandonment cost being amortized as of
December 31, 1993 was approximately $23.2 million. On a world-wide basis, should
the net capitalized costs exceed the estimated future undiscounted after tax net
cash flows from proved gas and oil reserves, such excess costs would be charged
to expense.
Other Property, Plant And Equipment. Depreciation of gas gathering pipeline
facilities is computed principally using the unit-of-production method based on
the estimated proved reserves to be transported through the pipeline facility.
Depreciation of the utility plant, gas processing plants and other property is
computed using the straight-line method over their estimated useful lives, which
vary from 3 to 33 years. Gain or loss on sale or disposition of non-utility
property is credited or charged to interest income and other.
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.
Treasury Stock. The Company follows the cost method of accounting for
treasury stock transactions.
Revenue Recognition. The Company records revenue following the entitlement
method of accounting for production gas imbalances.
The Company constructs pipeline systems for third parties and recognizes
profits on construction under the percentage-of-completion method.
ENSTAR Alaska's operating revenues are based on rates authorized by the
APUC which are applied to customers' consumption of natural gas. ENSTAR Alaska
records unbilled revenue, including amounts to be billed under a purchased gas
adjustment clause, at the end of each accounting period.
General and Administrative Expense. General and administrative expenses
represent various overhead costs of corporate departments. All overhead expenses
directly related to the operations of the Company's business segments are
included in operations and maintenance costs and exploration charges.
Interest Rate Swap Agreements. The Company has entered into interest rate
swap agreements to manage the impact of changes in interest rates. The
differential interest to be paid or received is accrued as interest rates change
and is recognized over the life of the agreements as a component of interest
expense.
IV-22
<PAGE> 118
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes. Effective January 1, 1992, the Company adopted Statement of
Financial Accounting Standards ("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 Company 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. The weighted average number of common shares
outstanding for the computation of earnings per share for the year ended
December 31, 1993 gives effect to the assumed exercise of dilutive stock options
as of the beginning of the year. The effect of dilutive stock options is
insignificant on the earnings per share computations for the years ended
December 31, 1992 and 1991.
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 the Company's common stock ("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.
Changes in Financial Presentation. Certain reclassifications have been made
in the 1992 and 1991 financial statements to conform to the presentation used in
1993.
2. ACQUISITIONS
Seagull Mid-South Inc. On December 31, 1992, the Company purchased all of
the outstanding capital stock of Arkla Exploration from Arkla, Inc. ("Arkla")
for approximately $397 million in cash, subject to certain customary
post-closing adjustments (the "Mid-South Acquisition"). The purchase price was
adjusted for, among other things, certain title defects and an adjustment
relating to the net aggregate gas imbalances attributable to Arkla Exploration's
interest in the properties it owned. The final adjusted purchase price was
approximately $393 million. The acquisition was accounted for as a purchase.
Seagull Mid-South's assets (the "Mid-South Properties") consist almost
exclusively of natural gas and oil reserves and developed and undeveloped lease
acreage concentrated principally in a small number of fields located in
Arkansas, Louisiana, Mississippi, Oklahoma and Texas. Arkla Exploration entered
into prepaid gas and oil sales contracts prior to its acquisition by the
Company. As of December 31, 1992, Seagull Mid-South was obligated to deliver for
no future consideration approximately 13 billion cubic feet ("Bcf") of gas and
approximately one million barrels ("MMbbl") of oil and condensate pursuant to
these contracts over periods expiring January 31, 1994 and June 30, 1995,
respectively. As of December 31, 1993, approximately 620 million cubic feet
("MMcf") of gas and 529,000 barrels of oil and condensate remain to be delivered
under these contracts.
Mid-Continent Assets. On March 8, 1991, the Company purchased the
Mid-Continent Assets from Mesa for approximately $199 million in cash after
certain adjustments. In addition, the Company and Mesa entered into a contingent
gas price payment agreement at the closing pursuant to which the Company would
generally pay an additional $450,000 (up to a maximum of $25 million) for each
$.01 that the weighted average
IV-23
<PAGE> 119
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
wellhead price, as defined, of natural gas sold from the Mid-Continent Assets
exceeds $1.80 per thousand cubic feet ("Mcf") for the three year period ending
December 31, 1993. The estimated weighted average wellhead price, as defined, of
natural gas sold for the three year period ended December 31, 1993 was $1.76 per
Mcf. Based upon this estimated price, the Company does not anticipate that any
payment will be required under the contingent gas price payment agreement. The
Mid-Continent Assets include gas and oil interests generally located in Western
Oklahoma and the Texas Panhandle and certain related assets. The acquisition was
accounted for as a purchase.
See Note 17 for information concerning the Company's acquisition of Novalta
Resources Inc. ("Novalta") (the "Seagull Canada Acquisition") in January 1994.
3. PROPERTY, PLANT AND EQUIPMENT
The major classes of the Company's property, plant and equipment are shown
below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1992
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gas and oil properties.............................................. $ 972,460 $ 888,178
Pipeline facilities................................................. 63,019 72,413
Gas processing plants............................................... 15,808 12,301
Utility plant....................................................... 216,883 208,419
Equipment and other................................................. 10,531 10,264
---------- ----------
$1,278,701 $1,191,575
---------- ----------
---------- ----------
</TABLE>
Interest cost capitalized as property, plant and equipment amounted to
approximately $0.9 million in 1993 and 1992 and $1.7 million in 1991. Total
depreciation, depletion and amortization related to property, plant and
equipment amounted to approximately $119.5 million, $65.2 million and $54.8
million in 1993, 1992 and 1991, respectively.
4. SUPPLEMENTAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED)
CAPITALIZED COSTS RELATING TO GAS AND OIL PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Proved properties...................................................... $956,604 $876,419
Unproved properties.................................................... 15,856 11,759
-------- --------
972,460 888,178
Accumulated depreciation, depletion and amortization................... 224,451 137,201
-------- --------
$748,009 $750,977
-------- --------
-------- --------
</TABLE>
IV-24
<PAGE> 120
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COSTS INCURRED IN GAS AND OIL PROPERTY ACQUISITION,
EXPLORATION AND DEVELOPMENT ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Acquisition of properties:
Proved................................................... $ 22,568 $455,970 $199,499
Unproved................................................. 7,750 3,078 6,500
Exploration costs.......................................... 26,824 8,378 15,053
Development costs.......................................... 63,598 18,341 38,960
-------- -------- --------
$120,740 $485,767 $260,012
-------- -------- --------
-------- -------- --------
</TABLE>
RESULTS OF OPERATIONS FOR GAS AND OIL PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1992 1991
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues..................................................... $227,437 $91,991 $81,099
Lifting costs:
Lease operating expense.................................... 28,806 15,334 14,946
Workover expense........................................... 4,249 2,449 2,058
Production taxes........................................... 9,133 4,045 3,531
Transportation expenses.................................... 7,764 2,757 1,827
Ad valorem taxes........................................... 3,291 1,645 1,656
-------- ------- -------
53,243 26,230 24,018
General operating expense.................................... 10,408 4,614 3,933
Exploration charges.......................................... 17,265 9,905 9,227
Depreciation, depletion and amortization..................... 103,552 52,855 42,646
-------- ------- -------
Operating profit (loss)...................................... 42,969 (1,613) 1,275
Income tax expense (benefit)(*).............................. 7,851 (584) 48
-------- ------- -------
Results of operations from producing activities.............. $ 35,118 $(1,029) $ 1,227
-------- ------- -------
-------- ------- -------
</TABLE>
- - ---------------
(*) Income tax expense is calculated by applying the current effective tax rate
to operating profit.
IV-25
<PAGE> 121
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESERVE QUANTITY INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1993 1992 1991
--------------------- -------------------- --------------------
GAS OIL GAS OIL GAS OIL
(MMCF) (MBBL)(1) (MMCF) (MBBL)(1) (MMCF) (MBBL)(1)
-------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Proved developed and
undeveloped reserves:
Beginning of year............ 884,327 18,149 335,121 11,014 127,709 5,791
Purchases of reserves in
place..................... 34,350 198 573,526 6,691 167,098 4,639
Sales of reserves in place... (9,587) (1,554) (181) (24) (506) (52)
Revisions of previous
estimates................. 24,924 (1,281) (5,503) 1,548 7,675 982
Extensions and discoveries... 83,158 972 19,501 199 66,051 990
Production................... (102,025) (1,694) (38,137) (1,279) (32,906) (1,336)
-------- --------- ------- --------- ------- ---------
End of year(2)............... 915,147 14,790 884,327 18,149 335,121 11,014
-------- --------- ------- --------- ------- ---------
-------- --------- ------- --------- ------- ---------
Proved developed reserves:
Beginning of year............ 675,861 11,552 265,987 7,213 106,369 3,901
-------- --------- ------- --------- ------- ---------
-------- --------- ------- --------- ------- ---------
End of year.................. 693,610 9,362 675,861 11,552 265,987 7,213
-------- --------- ------- --------- ------- ---------
-------- --------- ------- --------- ------- ---------
</TABLE>
- - ---------------
(1) "Mbbl" represents one thousand barrels of oil.
(2) At December 31, 1993 and 1992, includes approximately 620 MMcf and 13 Bcf of
gas, respectively, and 529 Mbbl and one MMbbl of oil, respectively, related
to prepaid gas and oil sales.
Proved reserves attributable to the properties obtained on January 4, 1994
in connection with the Seagull Canada Acquisition (see Note 17) were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
------------------
GAS OIL
(MMCF) (MBBL)
------- ------
<S> <C> <C>
Proved developed and undeveloped reserves................................. 257,382 2,783
------- ------
------- ------
Proved developed reserves................................................. 236,945 2,529
------- ------
------- ------
</TABLE>
The Company's standardized measure of discounted future net cash flows and
changes therein as of December 31, 1993, 1992 and 1991 are provided based on the
present value of future net revenues from proved gas and oil reserves (all
located in the United States prior to 1994) estimated by independent petroleum
engineers in accordance with guidelines established by the Securities and
Exchange Commission. These estimates were computed by applying appropriate
current prices for gas and oil to estimated future production of proved gas and
oil reserves over the economic lives of the reserves and assuming continuation
of existing economic conditions. Year end 1993 calculations were made utilizing
average prices for natural gas and oil, condensate and natural gas liquids that
existed at December 31, 1993 of $2.33 per Mcf and $12.13 per barrel ("Bbl"),
respectively. Income taxes are computed by applying the statutory federal income
tax rate to the net cash inflows relating to proved gas and oil reserves less
the tax bases of the properties involved and giving effect to any net operating
loss carryforwards, tax credits and allowances relating to such properties. The
reserve volumes provided by the independent petroleum engineers are estimates
only and should not be construed as being exact quantities. These reserves may
or may not be recovered and may increase or decrease as a result of future
operations of the Company and changes in market conditions.
IV-26
<PAGE> 122
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1992
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Future cash inflows(*).............................................. $2,318,243 $2,168,259
Future development costs............................................ (234,494) (206,574)
Future production costs............................................. (564,915) (522,686)
--------- ---------
Future net cash flows before income taxes........................... 1,518,834 1,438,999
10% annual discount................................................. (625,504) (604,461)
--------- ---------
Discounted future net cash flows before income taxes................ 893,330 834,538
Discounted income taxes............................................. (165,682) (140,090)
--------- ---------
Standardized measure of discounted future net cash flows(*)......... $ 727,648 $ 694,448
--------- ---------
--------- ---------
</TABLE>
- - ---------------
(*) At December 31, 1993 and 1992, future cash inflows include approximately
$10.3 million and $38.3 million, respectively, for prepaid gas and oil
sales made by Arkla Exploration prior to its acquisition by the Company. In
addition, the standardized measure of discounted future net cash flows
includes approximately $6.2 million and $23.7 million, respectively,
relating to these prepaid sales. As discussed in Note 2, Seagull Mid-South
was obligated, as of December 31, 1992, under prepaid gas and oil sales
contracts to deliver for no future consideration approximately 13 Bcf of
gas and approximately one MMbbl of oil and condensate over periods expiring
January 31, 1994 and June 30, 1995, respectively. As of December 31, 1993,
620 MMcf of gas and 529 Mbbl of oil and condensate remain to be delivered
under these contracts.
The standardized measure of discounted future net cash flows relating to
the properties obtained on January 4, 1994 in connection with the Seagull Canada
Acquisition (see Note 17) is as follows:
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-----------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Future cash inflows.......................................................... $ 493,067
Future development costs..................................................... (22,113)
Future production costs...................................................... (121,425)
-----------------
Future net cash flows before income taxes.................................... 349,529
10% annual discount.......................................................... (160,085)
-----------------
Discounted future net cash flows before income taxes......................... 189,444
Discounted income taxes...................................................... (62,149)
-----------------
Standardized measure of discounted future net cash flows..................... $ 127,295
-----------------
-----------------
</TABLE>
IV-27
<PAGE> 123
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRINCIPAL SOURCES OF CHANGE IN THE STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1992 1991
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure of discounted future net cash flows,
beginning of year....................................... $ 694,448 $289,881 $158,757
Purchases of reserves in place.......................... 28,871 486,048 166,477
Sales of reserves in place.............................. (13,679) (259) (776)
Revisions of previous quantity estimates less related
costs................................................ 16,660 (4,155) 11,457
Extensions and discoveries less related costs........... 87,345 13,760 56,308
Net changes in prices and production costs.............. 28,393 15,790 (48,457)
Development costs incurred during period and changes in
estimated future development costs................... 22,248 8,595 13,245
Sales of gas and oil produced during period, net of
lifting costs........................................ (174,194) (65,761) (57,081)
Accretion of discount................................... 83,454 35,407 20,181
Net change in income taxes.............................. (25,591) (75,900) (21,137)
Other................................................... (20,307) (8,958) (9,093)
--------- -------- --------
33,200 404,567 131,124
--------- -------- --------
Standardized measure of discounted future net cash flows,
end of year............................................. $ 727,648 $694,448 $289,881
--------- -------- --------
--------- -------- --------
</TABLE>
5. OTHER NONCURRENT ASSETS
Other assets include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1992
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Natural gas imbalances................................................... $31,271 $35,418
Debt acquisition costs................................................... 19,007 17,305
Investments in partnerships.............................................. 7,377 8,883
Acquisition costs -- Seagull Canada Acquisition.......................... 7,745 --
Other.................................................................... 4,454 4,772
------- -------
$69,854 $66,378
------- -------
------- -------
</TABLE>
Natural Gas Imbalances. The Company records revenue following the
entitlement method of accounting for production imbalances, in which any excess
amount received above the Company's share is treated as a liability. If less
than the Company's entitlement is received, the underproduction is recorded as
an asset. The Company records revenue from gas marketing sales net of the cost
of gas and third-party delivery fees, with any resulting transportation
imbalances recorded as a current receivable or payable.
IV-28
<PAGE> 124
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's natural gas imbalance assets and liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1993 1992
--------------------- ---------------------
AMOUNT VOLUMES AMOUNT VOLUMES
------- ------- ------- -------
(DOLLARS IN THOUSANDS AND VOLUMES IN BCF)
<S> <C> <C> <C> <C>
ASSETS:
Current.............................. $ 5,808 3.6 $ 2,686 1.8
Noncurrent........................... 31,271 20.9 35,418 23.8
------- ------- ------- -------
$37,079 24.5 $38,104 25.6
------- ------- ------- -------
------- ------- ------- -------
LIABILITIES:
Current.............................. $ 7,546 4.5 $ 5,552 3.7
Noncurrent........................... 31,693 20.7 39,011 25.7
------- ------- ------- -------
$39,239 25.2 $44,563 29.4
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Debt Acquisition Costs. Debt acquisition costs represent financing costs
incurred in connection with the execution of various facilities entered into or
securities issued by the Company. These costs are capitalized and amortized to
interest expense over the life of the related debt. As discussed in Note 6, the
Company has a $475 million revolving credit line which matures in 1999.
Financing costs initially incurred in 1992 of approximately $16.7 million were
capitalized in connection with this facility and will be amortized to interest
expense over periods ending December 31, 1999. Approximately $5.0 million in
financing costs incurred were capitalized in connection with the Company's July
1993 issuance of $250 million in senior and senior subordinated notes, and will
be amortized to interest expense over periods ending August 1, 2005 (see Note
6).
Investments in Partnerships.
Seagull Shoreline System. The Company, through one of its wholly owned
subsidiaries, serves as operator and at December 31, 1993 held
approximately a 19% interest in the Seagull Shoreline System ("SSS"), a
partnership that owns an offshore gas pipeline. At December 31, 1993, the
Company's investment in SSS amounted to $2.3 million.
Cavallo Pipeline Company. A wholly owned subsidiary of the Company
owns a 50% interest in, and operates, Cavallo Pipeline Company ("Cavallo").
The Cavallo system consists of an offshore pipeline system. At December 31,
1993, the Company's investment in Cavallo amounted to approximately $5.1
million.
Acquisition Costs -- Seagull Canada Acquisition. Acquisition costs
represent costs incurred in connection with the Seagull Canada Acquisition,
including a deposit of approximately $7.5 million paid in November 1993 which
was applied as part of the cash purchase price paid in January 1994 (see Note
17).
IV-29
<PAGE> 125
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt for 1993 and 1992 was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1992
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Seagull Energy Corporation:
Money market facilities, variable rates (3.875%-4.75% at December 31,
1993) due in 1994.................................................. $ 70,000 $ --
Term Loan, variable rates (8% at December 31, 1992) due in
1993-1995.......................................................... -- 150,000
Revolving credit, variable rates (6% and 8% at December 31, 1993 and
1992) due in 1996-1999............................................. 77,000 391,000
Senior notes, 7.875%, due August 1, 2003.............................. 100,000 --
Senior subordinated notes, 8.625%, due August 1, 2005................. 150,000 --
Alaska Pipeline Company:
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
-------- --------
462,691 613,240
Less: Current maturities................................................ 1,538 3,743
Unamortized debt discount......................................... 1,366 1,486
-------- --------
Total long-term debt.................................................... $459,787 $608,011
-------- --------
-------- --------
</TABLE>
Money Market Facilities. 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. In connection with the Seagull Canada Acquisition
(see Note 17), borrowings outstanding under the Company's money market
facilities were reduced to $10 million in January 1994 and the remaining $60
million was refinanced with borrowings under the Revolver (defined below).
Seagull Energy Corporation Revolving Credit. During 1993, the Company
amended and restated its credit agreement with a group of major U.S. and
international banks (the "Banks") converting the facility into a single
revolving credit facility (the "Revolver") with a total commitment of $475
million and a final maturity of December 31, 1999. The facility was also amended
to, among other things, release as security all of the following: (i) a pledge
of the stock of all direct or indirect subsidiaries of the Company whose shares
had been pledged; (ii) a mortgage on all gas and oil properties of the Company
and its subsidiaries; and (iii) guaranties from each of the Company's
subsidiaries pledging stock or mortgaging properties as described above. 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 Revolver is an unsecured credit facility that contains restrictive
provisions regarding the incurrence of additional debt, the making of
investments outside existing lines of business, the maintenance of certain
financial ratios (based upon the Company's consolidated financial condition and
results of operations), the incurrence of additional liens, the declaration or
payment of dividends (other than dividends payable on up to $100 million of
preferred stock or dividends payable solely in the form of additional shares of
the Company's common stock) and the repurchase or redemption of capital stock.
Under the most restrictive of these provisions, approximately $9.1 million was
available for payment of cash dividends on Seagull Common Stock
IV-30
<PAGE> 126
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or to repurchase Seagull Common Stock as of December 31, 1993. As of January 4,
1994, immediately following the Seagull Canada Acquisition, the Company's
consolidated Debt to Capitalization Ratio, as defined under the Revolver,
increased to 60.2%. In the event the Company's consolidated Debt to
Capitalization Ratio is in excess of 60% as of March 31, 1994, the Company would
not be able to pay any cash dividends on or repurchase any Seagull Common Stock
under these provisions. No cash dividends have been paid on Seagull Common Stock
since the Company became an independent entity in 1981. However, in connection
with the consummation of the ENSTAR Alaska Stock Offering (see Note 17), the
Revolver will be required to be amended to allow for the payment of cash
dividends on the ENSTAR Alaska Stock.
The Revolver bears interest, at the Company's option, at a rate equal to
(i) either one, two, three or six month Adjusted LIBOR, plus a margin (the
"LIBOR Margin") or (ii) the Reference Rate, plus a margin (the "Prime Margin").
The "Reference Rate" is the greater of (i) 0.5% per annum above the daily
federal funds rate or (ii) the prime rate of the agent bank. The LIBOR Margin
ranges from 0.625% to 2.5% per annum, depending upon the Company's credit rating
and consolidated Debt to Capitalization Ratio (as defined under the Revolver),
and the Prime Margin ranges from 0% to 1.5% per annum, depending upon the same
factors.
Under provisions included in the Revolver, the amount of senior
indebtedness available to the Company is subject to a borrowing base (the
"Borrowing Base"), based upon the proved reserves of the Company's exploration
and production 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. If the Borrowing Base is redetermined in
such a manner that the amount outstanding under the Revolver (or any other
permitted senior debt facility) exceeds the new Borrowing Base, then the Company
must repay the Revolver or such other indebtedness in an amount necessary to
cure the deficiency. If such deficiency has not been cured within 30 days, such
deficiency must be cured in three equal quarterly installments.
As of January 4, 1994, immediately following the Seagull Canada
Acquisition, 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. On that date,
borrowings outstanding under the Revolver were $188.5 million, leaving
immediately available unused commitments of approximately $149.3 million, net of
outstanding letters of credit of $2.2 million, $100 million of borrowings
outstanding under the Senior Notes (defined below), the nominated maximum
borrowing availability of $160 million under the Canadian Credit Agreement
(defined below), and $10 million in borrowings outstanding under the Company's
money market facilities.
Canadian Credit Agreement. In connection with the Seagull Canada
Acquisition (see Note 17), 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, which are currently denominated
in Canadian dollars.
Borrowings outstanding in Canadian dollars bear interest, at Seagull
Canada's option, at a rate equal to (i) either one, two, three or six month
Bankers' Acceptance Rate plus the LIBOR Margin or (ii) the Paying Agent's prime
rate plus the Prime Margin. Borrowings outstanding under the Canadian Credit
Agreement
IV-31
<PAGE> 127
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
funded in U.S. dollars bear interest, at Seagull Canada's option, in a manner
similar to borrowings outstanding under the Revolver as described above. The
Canadian Credit Agreement is an unsecured credit facility guaranteed by the
Company and contains restrictive provisions similar to those included in the
Revolver.
Senior and Senior Subordinated Notes. In July 1993, Seagull sold $100
million of senior notes (the "Senior Notes") and $150 million of senior
subordinated notes (the "Senior Subordinated Notes") (collectively the "Notes")
in an underwritten public offering. 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 (expressed as a percentage of
principal amount), plus accrued interest to the redemption date. The Notes were
issued at par and interest is paid semiannually.
The Notes represent unsecured obligations of the Company. The Senior Notes
rank pari passu with senior indebtedness of the Company while the Senior
Subordinated Notes are subordinate in right of payment to all existing and
future senior indebtedness of the Company. The Notes contain conditions and
restrictive provisions including, among other things, restrictions on additional
indebtedness by the Company and by its subsidiaries, as well as restrictions on
the incurrence of secured debt and entering into sale and leaseback
transactions. Net proceeds from the offering, totaling approximately $245.0
million, were used to repay borrowings outstanding under the Revolver.
Interest Rate Swap Agreements. The Company enters into interest rate swap
agreements to manage the impact of changes in interest rates. During 1993, the
following interest rate swap agreements were in effect:
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
- - ----------- INTEREST RATE
(DOLLARS IN EFFECTIVE MATURITY ----------------------
THOUSANDS) DATE DATE RECEIVED PAID
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
$15,000 9/11/92 9/11/93 Floating 5.52%
40,000 9/11/92 9/11/95 Floating 6.76%
20,000 9/16/92 9/16/94 Floating 6.265%
25,000 9/11/92 9/11/94 Floating 6.265%
50,000 8/2/93 7/31/98 5.635% Floating
50,000 8/2/93 7/31/97 5.43% Floating
50,000 8/2/93 7/31/96 5.199% Floating
</TABLE>
While notional amounts are used to express the volume of the interest rate
swap transactions discussed above, the amount potentially subject to credit
risk, in the event of nonperformance by the Company's counterparties, is
significantly smaller. For the year ended December 31, 1993, interest expense
included approximately $1.8 million net expense relating to these agreements.
Alaska Pipeline Company. All long-term debt of ENSTAR Alaska 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 and restricted subordinated
debt payments as of December 31, 1993.
IV-32
<PAGE> 128
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1992, APC issued three new series of APC 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.
Annual Maturities. At December 31, 1993, the Company'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...................................................... $ 9,097
Thereafter................................................ $441,365
</TABLE>
For purposes of the above table, the required payments related to the money
market facilities are considered to be funded with amounts available under the
Revolver.
7. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1992
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Natural gas imbalances................................................... $31,693 $39,011
Refundable customer advances for construction............................ 11,623 10,379
Prepaid gas and oil sales................................................ 2,732 10,322
Contingent consideration -- Wacker....................................... -- 3,104
Other.................................................................... 20,737 18,112
------- -------
$66,785 $80,928
------- -------
------- -------
</TABLE>
Natural Gas Imbalances. Revenues for natural gas production received and
sold by the Company in excess of the Company's ownership percentage of total gas
production (See Note 5).
Refundable Customer Advances For Construction. Customer deposits received
by ENSTAR Alaska for construction of main extensions refundable either wholly or
in part over a period not to exceed 10 years.
Prepaid Gas and Oil Sales. Prepayments received pursuant to prepaid gas and
oil sales contracts Arkla Exploration entered into prior to its acquisition by
the Company (See Notes 2 and 4).
Contingent Consideration -- Wacker. A portion of the adjusted purchase
price of Wacker Oil Inc. ("Wacker") withheld pending resolution of issues that
developed with respect to two of its producing gas wells prior to the closing of
the acquisition of Wacker by the Company in 1990. The disposition of the
contingent consideration was settled through arbitration on December 2, 1993
pursuant to provisions of the agreements executed in connection with the
acquisition. The arbitration resulted in a payment to the seller of $1 million
of
IV-33
<PAGE> 129
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the funds withheld at closing. This amount was paid in December 1993, and the
remaining unpaid contingent consideration was accounted for as a reduction to
the purchase price.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company'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..................... $ 5,572 $ 5,572 $ 3,882 $ 3,882
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:
Seagull Energy Corporation:
Term Loan................................ -- -- (150,000) (150,000)
Revolver and money market facilities..... (147,000) (147,000) (391,000) (391,000)
Senior Notes............................. (100,000) (99,500) -- --
Senior Subordinated Notes................ (150,000) (149,250) -- --
Alaska Pipeline Company, including current
maturities............................... (64,325) (75,800) (70,754) (75,667)
Interest rate swap agreements:
In a receivable position...................... -- 1,986 -- --
In a payable position......................... -- (2,709) -- (3,161)
</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.
Seagull Energy Corporation. The carrying amount of borrowings outstanding
under the Company's Term Loan, Revolver and money market facilities approximates
fair value because these instruments bear interest at rates tied to current
market rates.
The fair value of the Company's Senior and Senior Subordinated Notes is
estimated based on quoted market prices for the same issues.
Alaska Pipeline Company. The fair value of APC's long-term debt is
estimated based on quoted market prices for the same or similar issues.
Interest Rate Swap Agreements. The fair values are obtained from the
financial institutions that are counterparties to the transactions. These values
represent the estimated amount the Company would pay or receive to terminate the
agreements, taking into consideration current interest rates and the current
creditworthiness of the counterparties. The Company's interest rate swap
agreements are off balance sheet
IV-34
<PAGE> 130
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transactions and, accordingly, there are no respective carrying amounts for
these transactions included in the accompanying consolidated balance sheets as
of December 31, 1993 and 1992.
9. SHAREHOLDERS' EQUITY
Seagull Common Stock. In February 1993, the Company sold 10,120,000 shares
(adjusted for Stock Split) of Seagull Common Stock in an underwritten public
offering. Net proceeds from the offering, totaling approximately $163.6 million,
were used to repay the Company's then existing term loan in full, with the
remaining $13.6 million being used to repay borrowings outstanding under the
Revolver.
In December 1991, the Company sold 3,000,000 shares (adjusted for Stock
Split) of Seagull Common Stock in an underwritten public offering. Net proceeds
from the offering, totaling approximately $37 million, were used to repay
borrowings outstanding under the Company's then existing revolving credit line.
See Note 6 for information concerning restrictions imposed by the Revolver
on the Company's future purchases of Common Stock.
Preferred Stock. The Company is authorized to issue 5,000,000 shares of
preferred stock, par value $1.00 per share, in one or more series. There were no
shares issued or outstanding as of December 31, 1993, 1992 and 1991.
Preferred Share Purchase Rights. In 1989, the Company adopted a Share
Purchase Rights Plan to protect the Company's shareholders from coercive or
unfair takeover tactics. Under the Plan, each outstanding share and each share
of Seagull Common Stock subsequently issued has attached to it one Right,
exercisable at $32.75 (adjusted for Stock Split), subject to certain
adjustments. Generally, in the event a person or group acquires 20% or more of
the outstanding Seagull Common Stock other than pursuant to a cash tender offer
for all shares of such Seagull Common Stock (provided that the tender offer
increases the acquiring person's or group's ownership to at least 85% of the
outstanding Seagull Common Stock), or in the event the Company is acquired in a
merger or other business combination or 50% or more of the Company's
consolidated assets or earning power is sold, each Right entitles the holder to
purchase shares of Seagull Common Stock of the Company or of the acquiring
company, having a value of twice the exercise price. The Rights, under certain
circumstances, are redeemable at the option of the Company's Board of Directors
at a price of $0.01 per Right, within 10 days (subject to extension) following
the day on which the acquiring person or group exceeds the 20% threshold. The
Rights expire on March 22, 1999.
10. STOCK OPTION PLANS
The Company currently has six stock option plans: the 1981 Stock Option
Plan; the 1983 Stock Option Plan; the 1986 Stock Option Plan; the 1990 Stock
Option Plan; the 1993 Stock Option Plan and the 1993 Nonemployee Directors'
Stock Option Plan. Twenty percent of (i) all options granted through December
31, 1992, (ii) 100,000 options granted in May 1993, and (iii) all options
granted under the 1993 Nonemployee Directors' Stock Option Plan become
exercisable on a cumulative basis in each of the first five years and expire 10
years after the date of grant. Beginning in 1993, 40% of all other options
granted become exercisable after three years and 20% become exercisable on a
cumulative basis in each of the next three years, and the options expire 10
years after the date of grant. The options are granted at the quoted market
value of Seagull Common Stock on the date of grant. Accordingly, no compensation
expense is recognized in the Company's results of operations relating to these
options.
IV-35
<PAGE> 131
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information relating to stock options is summarized as follows (adjusted
for Stock Split):
<TABLE>
<CAPTION>
1993 1992 1991
------------------- ------------------- -------------------
OPTION OPTION OPTION
PRICE PRICE PRICE
PER PER PER
SHARES SHARE SHARES SHARE SHARES SHARE
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance outstanding --
Beginning of year........... 1,862,872 1,366,736 1,513,344
Granted.................. 615,000 $26.38 711,000 $11.94 -- --
Exercised................ (304,952) $ 6.31- (100,664) $ 3.25- (120,608) $ 5.56-
$14.88 $14.88 $10.81
Cancelled................ (13,028) (114,200) (26,000)
--------- --------- ---------
Balance outstanding --
End of year................. 2,159,892 $ 6.31- 1,862,872 $ 6.31- 1,366,736 $ 3.25-
$26.38 $14.88 $14.88
--------- --------- ---------
Options exercisable --
End of year................. 763,892 764,736 726,168
--------- --------- ---------
--------- --------- ---------
Options available for grant --
End of year................. 1,430,060 242,104 858,904
--------- --------- ---------
--------- --------- ---------
</TABLE>
11. EMPLOYEE BENEFIT PLANS
Retirement Plans. Effective January 1, 1986, the Company adopted an
unfunded retirement plan which provides for supplemental benefits to certain
officers and key employees. As of December 31, 1993, only one person was
designated to participate in such plan. Total expenses of the plan were
approximately $0.2 million for 1993 and 1992 and $0.3 million for 1991. The
retirement plan's costs are included in general and administrative expenses.
ENSTAR Alaska 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 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. ENSTAR Alaska's policy is to
fund the minimum contributions required by applicable regulations. The net
pension costs are included in operations and maintenance costs.
IV-36
<PAGE> 132
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the ENSTAR Alaska plans' funded status and
the amounts recognized in the consolidated financial statements at December 31,
1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
---------------------- ----------------------
SALARIED OPERATING SALARIED OPERATING
EMPLOYEES EMPLOYEES EMPLOYEES EMPLOYEES
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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 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 plans was 8%.
Profit Sharing Plans. ENSTAR Alaska 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 approximately $0.3 million
for each of the years 1993, 1992 and 1991, and is included in operations and
maintenance costs.
Thrift Plans. The Seagull Thrift Plan and the ENSTAR Natural Gas Company
Thrift Plan (collectively, the "Thrift Plans") are qualified employee savings
plans in accordance with the provisions of Section 401(k) of the Internal
Revenue Code of 1986. Company contributions to the Thrift Plans were
approximately $1.3 million, $0.9 million and $0.8 million for the years 1993,
1992 and 1991, respectively. The Thrift Plans' costs are included in operations
and maintenance costs and general and administrative expenses.
Employee Stock Ownership Plan. On November 15, 1989, the Company formed the
Seagull Employee Stock Ownership Plan (the "ESOP") for the benefit of the
non-Alaskan employees of the Company. The ESOP borrowed from the Company $7.7
million at an interest rate of 10% per annum to be repaid in 12 equal annual
installments of principal and interest. The ESOP used the borrowed funds and the
1989 contributions
IV-37
<PAGE> 133
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from the Company to purchase 948,150 shares (adjusted for Stock Split) of
Seagull Common Stock at $8.438 per share (adjusted for Stock Split) from the
Company's treasury. The purchase price was based upon the closing price of the
Seagull Common Stock on the New York Stock Exchange on the date the ESOP was
formed.
The promissory note has been and will be funded entirely by contributions
from the Company. Company contributions of approximately $0.5 million in 1993
and $0.4 million in 1992 and 1991 are included in operations and maintenance
costs and general and administrative expenses.
Postretirement Benefits Other Than Pensions. ENSTAR Alaska 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, ENSTAR Alaska
accounted for these obligations on a "pay-as-you-go" basis.
Effective January 1, 1992, the Company 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 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.
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), or $0.03 per share. 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.
12. INTEREST INCOME AND OTHER
Interest income and other includes the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1992 1991
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest income.................................................. $ 454 $ 413 $ 493
Seismic Litigation Settlement.................................... -- 4,606 --
Gain on sales of property, plant and equipment................... 4,175 177 46
Other............................................................ 1,079 (491) 887
------ ------ ------
$5,708 $4,705 $1,426
------ ------ ------
------ ------ ------
</TABLE>
Seismic Litigation Settlement. 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 1988 acquisition of Houston
Oil & Minerals Corporation ("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.
Gain on Sales of Property, Plant and Equipment. Interest income and other
for the year ended December 31, 1993 includes a pre-tax gain of approximately
$3.8 million relating to sales of non-strategic oil
IV-38
<PAGE> 134
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and gas producing properties. Net proceeds from the sales totaled approximately
$13.0 million, resulting in an after-tax gain of $2.8 million, or $0.08 per
share. The parcels sold had proven reserves estimated at approximately 19
billion cubic feet of natural gas equivalents.
13. 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.......................................................... $6,080 $ 2,500
Adjustments for certain changes in accounting principles.............. -- (3,473)
Additional paid-in capital for compensation expense for tax purposes
in excess of amounts recognized for financial reporting purposes.... (1,966) (214)
------ -------
$4,114 $(1,187)
------ -------
------ -------
</TABLE>
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
------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal......................................................... $3,667 $ 131 $ 285
State........................................................... 1,363 64 (523)
------ ------ -----
Total current.............................................. 5,030 195 (238)
------ ------ -----
Deferred:
Federal......................................................... 1,128 (212) (485)
State........................................................... (78) 2,517 923
------ ------ -----
Total deferred............................................. 1,050 2,305 438
------ ------ -----
Income tax provision before cumulative effect of changes in
accounting principles........................................... $6,080 $2,500 $ 200
------ ------ -----
------ ------ -----
</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 Company's adoption of SFAS No. 109, Accounting for
Income Taxes, effective January 1, 1992. 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. The cumulative effect of this accounting change as of January 1, 1992
resulted in an increase in earnings of approximately $3.0 million, or $0.12 per
share. The effect of this change on earnings before income taxes for the year
ended December 31, 1992 was not material.
IV-39
<PAGE> 135
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount computed using the statutory rate...................... $11,647 $ 2,351 $ 1,804
Increase (Reduction) in taxes resulting from:
Utilization of Internal Revenue Code Section 29 (Tight
Sands) credits........................................... (4,773) -- --
Excess of tax basis over book basis of acquired assets...... -- -- (2,093)
State income taxes, net..................................... 835 1,703 264
Increase (Decrease) in deferred tax asset valuation
allowance................................................ (859) 1,119 --
Adjustments to beginning-of-the-year tax bases per the 1992
and 1991 tax returns..................................... (657) (1,828) --
Increase in the beginning-of-the-year balance of the
deferred tax liabilities due to the increase in the
corporate federal income tax rate........................ 960 -- --
Other....................................................... (1,073) (845) 225
------- ------- -------
Income tax provision before cumulative effect of changes in
accounting principles....................................... $ 6,080 $ 2,500 $ 200
------- ------- -------
------- ------- -------
</TABLE>
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)........................................................ $ 949 $1,186
Increase (Decrease) in deferred tax asset valuation allowance.......... (859) 1,119
Increase in the beginning-of-the-year balance of the deferred tax
liabilities due to the increase in the corporate federal income tax
rate................................................................. 960 --
------ ------
$1,050 $2,305
------ ------
------ ------
</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.
IV-40
<PAGE> 136
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment, due to differences in depreciation,
depletion and amortization........................................ $ 45,296 $ 38,619
Investments in partnership, due to difference in depreciation........ 606 1,307
Other................................................................ 509 546
-------- --------
Deferred tax liabilities............................................... 46,411 40,472
-------- --------
Deferred tax assets:
Minimum tax credit carryforwards..................................... (12,221) (9,065)
Investment tax credit carryforwards.................................. (2,771) (3,334)
Deferred compensation/retirement related items accrued for
financial reporting purposes...................................... (3,269) (2,263)
Contingent consideration related to acquisitions/dispositions........ (604) (1,975)
Other................................................................ (3,134) (1,332)
-------- --------
Deferred tax assets.................................................... (21,999) (17,969)
Less -- valuation allowance............................................ 1,943 2,802
-------- --------
Net deferred tax assets................................................ (20,056) (15,167)
-------- --------
Net deferred tax liabilities........................................... $ 26,355 $ 25,305
-------- --------
-------- --------
</TABLE>
For federal income tax purposes, as of December 31, 1993, the Company has
unused investment tax credits of approximately $2.8 million which will expire in
the years 1998 through 2000, and unused minimum tax credits of approximately
$12.2 million which are available over an indefinite period.
During 1991, the tax effects of timing differences were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1991
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Net operating loss offsetting deferred taxes for financial accounting
purposes...................................................................... $ (7,778)
Depreciation, depletion and partnership earnings................................ (1,890)
Gas and oil property costs capitalized for financial accounting purposes........ 12,180
Minimum tax credit carryforward for tax purposes................................ (1,462)
Other........................................................................... (612)
------------
Total deferred tax provision.................................................... $ 438
------------
------------
</TABLE>
IV-41
<PAGE> 137
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. BUSINESS SEGMENTS
Information on the Company's operations by business segment is as follows
for the year ended December 31:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES(*):
Exploration and production.............................. $ 227,437 $ 91,991 $ 81,099
Pipeline and marketing.................................. 42,484 37,240 37,823
Alaska transmission and distribution.................... 107,244 109,598 129,615
---------- --------- --------
$ 377,165 $ 238,829 $248,537
---------- --------- --------
---------- --------- --------
OPERATING PROFIT:
Exploration and production.............................. $ 42,969 $ (1,613) $ 1,275
Pipeline and marketing.................................. 14,065 9,057 7,884
Alaska transmission and distribution.................... 18,955 22,439 21,024
---------- --------- --------
75,989 29,883 30,183
---------- --------- --------
General and administrative expense...................... (11,666) (10,099) (8,427)
Interest expense........................................ (36,753) (17,574) (17,875)
Interest income and other............................... 5,708 4,705 1,426
---------- --------- --------
Earnings before income taxes.............................. $ 33,278 $ 6,915 $ 5,307
---------- --------- --------
---------- --------- --------
OPERATIONS AND MAINTENANCE EXPENSE:
Exploration and production.............................. $ 63,651 $ 30,844 $ 27,951
Pipeline and marketing.................................. 20,266 21,103 20,748
Alaska transmission and distribution.................... 20,880 19,976 19,678
---------- --------- --------
$ 104,797 $ 71,923 $ 68,377
---------- --------- --------
---------- --------- --------
DEPRECIATION, DEPLETION AND AMORTIZATION:
Exploration and production.............................. $ 103,552 $ 52,855 $ 42,646
Pipeline and marketing.................................. 5,493 3,192 3,278
Alaska transmission and distribution.................... 7,511 7,184 6,978
---------- --------- --------
$ 116,556 $ 63,231 $ 52,902
---------- --------- --------
---------- --------- --------
IDENTIFIABLE ASSETS:
Exploration and production.............................. $ 816,812 $ 831,222 $371,208
Pipeline and marketing.................................. 70,675 65,378 49,611
Alaska transmission and distribution.................... 185,701 186,519 189,059
Corporate............................................... 45,063 19,845 8,674
---------- --------- --------
$1,118,251 $1,102,964 $618,552
---------- --------- --------
---------- --------- --------
CAPITAL EXPENDITURES:
Exploration and production.............................. $ 97,818 $ 32,115 $ 58,459
Pipeline and marketing.................................. 2,115 1,622 634
Alaska transmission and distribution.................... 10,094 9,024 10,492
Corporate............................................... 2,015 890 2,124
---------- --------- --------
$ 112,042 $ 43,651 $ 71,709
---------- --------- --------
---------- --------- --------
ACQUISITIONS, NET OF CASH ACQUIRED:
Exploration and production.............................. $ 29,470 $ 391,531 $201,767
Pipeline and marketing.................................. -- 10,357 --
---------- --------- --------
$ 29,470 $ 401,888 $201,767
---------- --------- --------
---------- --------- --------
</TABLE>
- - ---------------
(*) Intersegment revenues are recorded at market prices.
IV-42
<PAGE> 138
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
<TABLE>
<CAPTION>
EARNINGS (LOSS)
REVENUES OPERATING PROFIT NET EARNINGS (LOSS) PER SHARE(1)
--------------------- ------------------- -------------------- -----------------
1993 1992 1993 1992 1993 1992 1993 1992
-------- -------- ------- ------- ------- ------ ----- -----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31,................ $103,192 $ 67,533 $19,421 $ 6,854 $ 3,853 $2,942(2) $0.12 $0.12(2)
June 30,................. 86,973 49,216 15,201 4,902 3,624 2,603(3) 0.10 0.10(3)
September 30,............ 81,790 48,898 17,077 2,547 7,273(5) (2,310) 0.20(5) (0.09)
December 31,............. 105,210 73,182 24,290 15,580 12,448 3,453(4) 0.34 0.13(4)
-------- -------- ------- ------- ------- ------ ----- -----
Total.................... $377,165 $238,829 $75,989 $29,883 $27,198 $6,688 $0.76 $0.26
-------- -------- ------- ------- ------- ------ ----- -----
-------- -------- ------- ------- ------- ------ ----- -----
</TABLE>
- - ---------------
(1) Adjusted for the two-for-one stock split of the Seagull Common Stock
effected June 4, 1993. (See Notes 1 and 9).
(2) Includes the cumulative effect of two changes in accounting principles in
the first quarter of 1992 representing an increase in earnings of
approximately $2.3 million, or $0.09 per share. (See Notes 1, 11 and 13).
(3) Includes an after-tax gain in the second quarter of 1992 of approximately
$2.9 million, or $0.12 per share, relating to the Seismic Litigation
Settlement. (See Note 12).
(4) Includes two charges in the fourth quarter of 1992 resulting from the
expensing of $2.3 million in unamortized loan acquisition costs relating to
the repayment of the Company's then existing revolving credit line and $1.2
million in costs related to a potential acquisition which was not
consummated. The effect of these charges on net earnings was a reduction of
approximately $1.5 million and $0.8 million, respectively, or $0.06 and
$0.03 per share, respectively.
(5) Includes an after-tax gain in the third quarter of 1993 of approximately
$2.7 million, or $0.08 per share, relating to sales of non-strategic oil
and gas producing properties. (See Note 12).
16. COMMITMENTS AND CONTINGENCIES
Lease Commitments. The Company leases certain office space and equipment
under operating lease arrangements which contain renewal options and escalation
clauses. Future minimum rental payments under these leases are $2.8 million and
$2.4 million in 1994 and 1995, respectively, range between $1.6 million and $2.4
million in each of the years 1996-1998, and total $10.4 million for all
subsequent years. Total rental expense under operating leases for 1993, 1992 and
1991 was approximately $1.7 million, $1.8 million and $1.7 million,
respectively.
Concentrations of Credit Risk. The Company operates in all phases of the
natural gas industry with sales to resellers such as pipeline companies and
local distribution companies as well as 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 segment of the natural gas industry, the Company believes that
its level of credit-related losses due to such economic fluctuations has been
immaterial and will continue to be immaterial to the Company'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 its financial condition and results of operations, if any, will
not be material.
IV-43
<PAGE> 139
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUBSEQUENT EVENTS
Seagull Canada Acquisition. In January 1994, an indirect wholly owned
subsidiary of the Company acquired all of the outstanding shares of stock of
Novalta and an intercompany note (the "Note") from Novalta to its parent,
Novacor Petrochemicals Ltd. ("Novacor Petrochemicals") for a purchase price of
approximately $203 million in cash, subject to customary postclosing adjustments
described below (the "Seagull Canada Acquisition"). The economic effective date
of the Seagull Canada Acquisition was December 31, 1993 (the "Effective Date").
The purchase price was adjusted for, among other things, working capital and
capital expenditures for 1993 in excess of a specified threshold pursuant to the
provisions of the Sale Agreement, dated November 19, 1993, between Seagull and
Novacor Petrochemicals. Effective as of the January 1994 Closing Date, Novalta
was amalgamated with Seagull Canada, the indirect subsidiary of the Company that
acquired Novalta. As a result of the amalgamation, the Note was extinguished.
The acquisition was accounted for as a purchase.
Seagull Canada's assets (the "Seagull Canada Properties") consist primarily
of natural gas and oil reserves and developed and undeveloped lease acreage
concentrated principally in a small number of fields located in Alberta, Canada.
According to reserve estimates prepared as of December 31, 1993 by an
independent petroleum engineering firm, the Seagull Canada Properties had proved
reserves totaling 257.4 Bcf of natural gas and 2.8 MMbbl of oil, condensate and
natural gas liquids. Approximately 80 percent of these reserves and 75 percent
of Seagull Canada's total producing wells are concentrated in 16 of 95 total
fields. As of December 31, 1993, the Seagull Canada Properties consisted of
lease acreage holdings including approximately 200,000 net developed acres and
approximately 250,000 net undeveloped acres.
In connection with the Seagull Canada Acquisition, the Company entered into
the Canadian Credit Agreement (see Note 6).
The following table presents the unaudited pro forma results of the
combined operations of the Company and Novalta for the year ended December 31,
1993 as though the acquisition of Novalta had occurred on January 1, 1993,
financed primarily with borrowings under the Canadian Credit Agreement as well
as borrowings under the Revolver (see Note 6).
The results presented give effect to depreciation, depletion and
amortization of assets recognized in recording the purchase, interest on debt
incurred to effect the purchase and the related income tax effects of these
items. The unaudited pro forma information presented does not purport to be
indicative of actual results if the combination had been in effect on the date
or for the period indicated, or of future results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993
------------------------
PRO FORMA
ACTUAL (UNAUDITED)
-------- -----------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Revenues............................................................. $377,165 $ 409,523
Net earnings......................................................... $ 27,198 $ 22,162
Earnings per share................................................... $ 0.76 $ 0.62
-------- -----------
-------- -----------
</TABLE>
IV-44
<PAGE> 140
SEAGULL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the pro forma consolidated total assets and
pro forma capitalization of the Company as of December 31, 1993 as though the
acquisition of Novalta had occurred on December 31, 1993, financed primarily
with borrowings under the Canadian Credit Agreement as well as borrowings under
the Revolver (see Note 6).
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-------------------------
PRO FORMA
ACTUAL (UNAUDITED)
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total assets.................................................... $1,118,251 $1,342,654
---------- ----------
---------- ----------
Long-term portion of debt....................................... $ 459,787 $ 653,093
Shareholders' equity............................................ 439,379 439,379
---------- ----------
Total capitalization............................................ $ 899,166 $1,092,472
---------- ----------
---------- ----------
Long-term portion of debt to total capitalization............... 51.1% 59.8%
---------- ----------
---------- ----------
</TABLE>
ENSTAR Alaska Stock Proposal. In March 1994, the Board of Directors
approved, subject to shareholder approval, a plan (the "ENSTAR Alaska Stock
Proposal") to create and issue a new class of common stock of the Company
intended to reflect separately the performance of ENSTAR Alaska (the "ENSTAR
Alaska Stock"). As part of the ENSTAR Alaska Stock Proposal, and following the
issuance of the ENSTAR Alaska Stock, currently outstanding Seagull Common Stock
will reflect separately the performance of the Company's exploration and
production and pipeline and marketing segments. In addition, certain terms of
the Seagull Common Stock will be amended to allow for the creation and issuance
of the ENSTAR Alaska Stock.
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 (the "ENSTAR Alaska Stock Offering")
for cash of shares of ENSTAR Alaska Stock. Net proceeds from the ENSTAR Alaska
Stock Offering would be used to repay amounts borrowed under the Revolver, none
of which is attributable to ENSTAR Alaska.
The ENSTAR Alaska Stock Proposal will be submitted to shareholders at the
Company's Annual Meeting of Shareholders in June 1994.
IV-45
<PAGE> 141
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Seagull Energy Corporation:
We have audited the accompanying consolidated balance sheets of Seagull
Energy Corporation and Subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1993. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Seagull
Energy Corporation and Subsidiaries as of December 31, 1993 and 1992, and the
results of their operations and their 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 11 and 13 to the consolidated financial statements,
respectively, the Company 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
the last three paragraphs of
Note 17, Subsequent Events,
which are as of March 11, 1994.
IV-46
<PAGE> 142
ANNEX V
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of Business:
Exploration and Production.......................................................... V-2
Pipeline and Marketing.............................................................. V-9
Unaudited Pro Forma Condensed Financial Statements.................................... V-13
Unaudited Pro Forma Condensed Balance Sheet......................................... V-14
Notes to Unaudited Pro Forma Condensed Balance Sheet................................ V-15
Unaudited Pro Forma Condensed Statement of Earnings................................. V-16
Notes to Unaudited Pro Forma Condensed Statement of Earnings........................ V-17
Management's Discussion and Analysis of Financial Condition and Results of Operations
(Unaudited):
Basis of Presentation............................................................... V-18
Results of Operations............................................................... V-19
Liquidity and Capital Resources..................................................... V-22
Combined Financial Statements:
Combined Statements of Earnings..................................................... V-24
Combined Balance Sheets............................................................. V-25
Combined Statements of Cash Flows................................................... V-26
Notes to Combined Financial Statements.............................................. V-27
Independent Auditors' Report........................................................ V-47
</TABLE>
V-1
<PAGE> 143
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
DESCRIPTION OF BUSINESS
EXPLORATION AND PRODUCTION
Seagull Energy's exploration and production ("E&P") segment is Seagull
Energy's primary growth area and is comprised of the following material direct
and indirect wholly owned subsidiaries of Seagull Energy: Seagull Energy E&P
Inc.; HO&M; Wacker Oil Inc; Seagull Midcon Inc.; Seagull Mid-South Inc.,
formerly Arkla Exploration Company; and Seagull Energy Canada Ltd., formerly
Novalta Resources Inc.
On January 4, 1994, an indirect wholly owned subsidiary of Seagull Energy
acquired all of the outstanding shares of stock of Novalta Resources Inc.
("Novalta") from Novacor Petrochemicals Ltd. (the "Seagull Canada Acquisition").
Effective as of the January 1994 Closing Date, Novalta was amalgamated with
Seagull Energy Canada Ltd., the indirect subsidiary of Seagull Energy that
acquired Novalta. The resulting amalgamated company was named Seagull Energy
Canada Ltd. ("Seagull Canada").
Seagull Canada's assets (the "Seagull Canada Properties") consist primarily
of natural gas and oil reserves and developed and undeveloped lease acreage
concentrated principally in a small number of fields located in Alberta, Canada.
According to reserve estimates prepared as of December 31, 1993 by the
independent petroleum engineering firm, DeGolyer and MacNaughton, the Seagull
Canada Properties had proved reserves totaling 257.4 billion cubic feet of
natural gas and 2.8 million barrels of oil, condensate and natural gas liquids.
Approximately 80% of these reserves and 75% of Seagull Canada's total producing
wells are concentrated in 16 of 95 total fields. As of December 31, 1993, the
Seagull Canada Properties consisted of lease acreage holdings including
approximately 200,000 net developed acres and approximately 250,000 net
undeveloped acres.
In 1993, a four-company exploration group including Seagull Energy was
awarded four production licenses in United Kingdom waters. The awards gave
Seagull Energy a 10% interest in three licenses in the Irish Sea totaling
398,319 acres and a 20 percent 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, Seagull Energy increased its interests in these
licenses to 20% and 30%, respectively. Seagull Energy anticipates that its share
of exploration-related costs will approximate $13.0 million over the next five
years as the program is currently structured.
Seagull Energy also has an active ongoing exploration program that has
resulted in numerous natural gas discoveries since 1988 in the Gulf of Mexico,
primarily in shallow waters off the central Texas Gulf Coast. Seagull Energy has
in the past financed its gas and oil exploration and development activities
through internally generated funds, bank borrowings and participation by
industry partners on a prospect-by-prospect basis. Seagull Energy believes that
its gas and oil exploration and development activities in the foreseeable future
will be financed by internally generated funds. In 1994, Seagull Energy expects
E&P capital expenditures to total approximately $160 million. Of this amount,
about $50 million will be devoted to exploration, primarily in the Gulf of
Mexico, $100 million to development and $10 million to leasehold acquisition. Of
the expected development capital expenditures, about $34 million is targeted for
the Mid-South Region, $31 million for the Gulf of Mexico, $20 million for the
Mid-Continent Region and $15 for Western Canada. By comparison, 1993 capital
expenditures for E&P activities totaled $98 million.
Revenues from the sale of gas and liquids accounted for 60%, 38% and 32% of
the Company's consolidated revenues for 1993, 1992 and 1991, respectively. As
used in this Annex V, liquids means oil, condensate and natural gas liquids,
unless otherwise indicated or the context otherwise suggests. Gas production in
1993 increased primarily as a result of contributions attributable to properties
in the Mid-South Region acquired in December 1992. Production of gas and liquids
for 1993 averaged 279.5 MMcf per day ("MMcf/d") and 4,641 barrels ("Bbl") per
day, respectively, compared to 104.2 MMcf/d and 3,494 Bbl per day, respectively,
in 1992.
V-2
<PAGE> 144
Seagull Energy's principal gas and oil properties include the following:
<TABLE>
<CAPTION>
AVERAGE NET DAILY
PRODUCTION
FOR THE YEAR ENDED
AT DECEMBER 31, 1993 DECEMBER 31, 1993
--------------------------- ---------------------------
NUMBER OF PROVED NATURAL
GROSS RESERVES GAS LIQUIDS
FIELD/PROVINCE STATE WELLS (BCFE)(1) (MMCF) (BBL)
- - ---------------------------------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
UNITED STATES
Mid-South Region:
Arklatex Area:
Carthage......................... Texas 242 194 27.4 631
Waskom........................... Texas 77 66 17.6 129
Ruston........................... Louisiana 48 47 10.0 109
Sligo............................ Louisiana 73 16 4.4 32
Arkoma Basin:
Cecil............................ Arkansas 223 73 26.6 --
Aetna............................ Arkansas 151 35 12.4 --
Wilburton........................ Oklahoma 69 25 11.4 --
Other............................................ 332 145 49.0 962
Mid-Continent Region:
Panhandle West..................... Texas 61 59 12.7 2
Panhandle Gray..................... Texas 119 31 0.3 677
Watonga-Chickasha.................. Oklahoma... 221 40 11.4 73
Strong City........................ Oklahoma... 96 35 11.4 99
Other............................................ 340 78 17.5 325
Offshore Texas...................................... 46 92 55.9 197
Offshore Louisiana.................................. 13 49 6.2 367
Gulf Coast Onshore.................................. 29 19 5.3 1,038
---------- ---------- ---------- ----------
2,140 1,004 279.5 4,641
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
CANADA (2)
Alberta............................................. 648 272 49.9 797
Saskatchewan........................................ 10 2 -- 334
---------- ---------- ---------- ----------
658 274 49.9 1,131
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- - ---------------
(1) The equivalent of one billion cubic feet ("Bcfe") of natural gas. Liquids
are converted to gas at a ratio of one barrel of liquids per six Mcf ("Mcf"
represents one thousand cubic feet) of gas, based on relative energy
content.
(2) The Seagull Canada Properties were acquired on January 4, 1994 in connection
with the Seagull Canada Acquisition. Average net daily production amounts
assume the Seagull Canada Acquisition occurred on December 31, 1992.
For additional information relating to Seagull Energy's gas and oil
reserves, based substantially upon reports of Netherland, Sewell & Associates,
Inc. (for the years ended December 31, 1993 and 1992), DeGolyer and MacNaughton
(for the years ended December 31, 1993, 1992 and 1991), Ryder Scott Company (for
the years ended December 31, 1993, 1992 and 1991), and K&A Energy Consultants,
Inc. and R. A. Lenser & Associates, Inc. (for the year ended December 31, 1991),
independent petroleum engineers (collectively the "Engineers"), see Note 4 of
Notes to Consolidated Financial Statements beginning on page IV-21 of Annex IV.
The Engineers provided the estimates of "proved developed and undeveloped
reserves" and "proved developed reserves" at the beginning and end of each of
the three years included in Note 4. Under "Standardized Measure of Discounted
Future Net Cash Flows" in Note 4, the Engineers provided all information except
"discounted income taxes" and "standardized measure of discounted future
V-3
<PAGE> 145
net cash flows." All information in Note 4 not provided by the Engineers was
supplied by Seagull Energy. As required, Seagull Energy also files estimates of
gas and oil reserve data with various governmental regulatory authorities and
agencies. The basis for reporting reserves to these authorities and agencies, in
some cases, may not be comparable. However, the difference in estimates does not
exceed five percent.
The future results of this segment will be affected by the market prices of
natural gas and liquids. The availability of a ready market for gas and liquids
products in the future will depend on numerous factors beyond the control of
Seagull Energy, including weather, production of other domestic natural gas and
liquids products, imports, marketing of competitive fuels, proximity and
capacity of gas and liquids pipelines and other transportation facilities, any
oversupply of gas and liquids products, the regulatory environment, and other
domestic and political events, none of which can be predicted with certainty. As
in the past, Seagull Energy 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,
Seagull does not anticipate curtailing gas sales in the coming year to the
significant extent of curtailments in years prior to 1993.
Gas and Oil Drilling Activities
Seagull Energy's gas and oil exploratory and developmental drilling
activities are as follows for the periods indicated. Totals shown in each
category include wells completed as productive wells and wells abandoned as dry
holes. A well is considered productive for purposes of the following table if it
justifies the installation of permanent equipment for the production of gas or
oil. A well is deemed to be a dry hole if it is determined to be incapable of
commercial production. The term "gross wells" means the total number of wells in
which Seagull Energy owns an interest, while the term "net wells" means the sum
of the fractional working interests Seagull Energy owns in gross wells.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1993 1992 1991
-------------- -------------- --------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Exploratory Drilling:
Productive Wells............................... 8 5.19 3 1.28 8 2.86
Dry Holes...................................... 19 9.20 12 5.51 10 6.38
Development Drilling:
Productive Wells............................... 100 54.62 24 16.11 24 16.23
Dry Holes...................................... 21 13.16 2 0.73 6 3.87
</TABLE>
From January 1, 1994 to February 28, 1994, Seagull Energy has drilled 2
gross (1.16 net) successful exploratory wells and 1 gross (1.0 net) dry
exploratory well. In addition, Seagull Energy has drilled 11 gross (7.53 net)
successful development wells. Seagull Energy is currently drilling 21 gross
(15.46 net) development wells. As of the beginning of 1994, Seagull Energy had
an inventory of approximately 90 exploratory prospects, including at least 20 in
Canada.
V-4
<PAGE> 146
Production
The following table summarizes Seagull Energy's production, average sales
prices and lifting costs for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1992 1991
------- ------ ------
<S> <C> <C> <C>
Net Production:
Gas (MMcf).................................................... 102,025 38,137 32,906
Oil and condensate (Mbbl) (1)................................. 1,412 1,014 1,111
Natural gas liquids (Mbbl).................................... 282 265 225
Combined (MMcfe).............................................. 112,188 45,809 40,922
Average sales price (2):
Gas (per Mcf)................................................. $ 1.99 $ 1.85 $ 1.69
Oil and condensate (per Bbl).................................. $ 16.72 $18.60 $20.30
Natural gas liquids (per Bbl)................................. $ 11.10 $10.20 $11.17
Combined (per Mcfe) (3)....................................... $ 2.03 $ 2.01 $ 1.97
Average lifting costs of gas and liquids (per Mcfe) (4)....... $ 0.47 $ 0.57 $ 0.59
</TABLE>
- - ---------------
(1) Thousands of Bbl ("Mbbl").
(2) Before deduction of production, severance, and other taxes.
(3) The equivalent of one thousand cubic feet ("Mcfe") of natural gas.
(4) Lifting costs represent costs incurred to operate and maintain wells and
related equipment and facilities. These costs include, among other things,
repairs and maintenance, workover expenses, labor, materials, supplies,
property taxes, insurance, severance taxes and transportation costs.
The following table sets forth information regarding the number of
productive wells in which Seagull Energy held a working interest at December 31,
1993. Productive wells are either producing wells or wells capable of commercial
production although currently shut in. One or more completions in the same
borehole are counted as one well.
<TABLE>
<CAPTION>
GROSS(2) NET(2)
------ -------
<S> <C> <C>
Oil...................................................... 305 159.52
Gas (1).................................................. 1,840 896.31
------ --------
Total.................................................... 2,145 1,055.83
------ --------
------ --------
</TABLE>
- - ---------------
(1) Includes 314 gross (152.36 net) gas wells with multiple completions.
(2) Excludes 15 gross (10.40 net) oil wells and 643 gross (346.10 net) gas wells
acquired January 4, 1994 in connection with the Seagull Canada Acquisition.
For additional information relating to gas and oil producing activities,
see Note 4 of Notes to Consolidated Financial Statements beginning on page IV-21
of Annex IV.
V-5
<PAGE> 147
Productive and Undeveloped Gas and Oil Acreage
As of December 31, 1993, Seagull Energy owned working interests in the
following developed and undeveloped gas and oil acreage:
<TABLE>
<CAPTION>
DEVELOPED(2) UNDEVELOPED(2)
-------------------- -------------------
GROSS NET(1) GROSS NET(1)
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Onshore:
Oklahoma........................................ 393,005 127,711 119,645 49,169
Arkansas........................................ 348,363 96,946 86,011 57,793
Texas........................................... 183,988 82,981 36,008 13,724
Louisiana....................................... 53,717 25,672 9,986 8,364
Mississippi..................................... 24,355 11,139 28,582 13,518
Other........................................... 8,779 6,450 9,837 7,477
Bays and State Waters........................... 1,045 792 8,398 6,970
Federal Offshore:
Texas........................................... 133,624 57,624 119,685 73,956
Louisiana....................................... 39,658 15,758 84,259 54,821
--------- ------- ------- -------
Total........................................... 1,186,534 425,073 502,411 285,792
--------- ------- ------- -------
--------- ------- ------- -------
</TABLE>
- - ---------------
(1) When describing acreage on drilling locations, the term "net" refers to the
total acres on drilling locations in which Seagull Energy has a working
interest, multiplied by the percentage working interest owned by Seagull
Energy.
(2) Excludes 396,800 gross (195,985 net) developed acres and 451,510 gross
(244,010 net) undeveloped acres acquired January 4, 1994 in connection with
the Seagull Canada Acquisition.
Additionally, as of December 31, 1993, Seagull Energy owned mineral and/or
royalty interests in 375,488 gross (45,547 net) developed and 158,447 gross
(28,040 net) undeveloped gas and oil acreage.
Competition
Seagull Energy's competitors in gas and oil exploration, development,
production and marketing include major oil companies, as well as numerous
independent oil and gas companies, individuals and drilling programs. Some of
these competitors have financial and personnel resources substantially in excess
of those available to Seagull Energy and, therefore, Seagull Energy may be
placed at a competitive disadvantage. Seagull Energy's success in discovering
reserves will depend on its ability to select suitable prospects for future
exploration in today's competitive environment.
Markets
Seagull Energy believes there currently exists a very delicate balance
between supply and demand in the marketplace. Extreme fluctuations in weather
conditions may cause a real or perceived imbalance at any given time, in any
given area of the United States. Although markets project their usage well in
advance of actual purchases based on historical data and weather forecasting,
the projections may be adjusted for unexpected weather conditions, creating a
temporary increase or decrease in demand. These unexpected demand fluctuations,
combined with conservation and competition from alternative fuels, continue to
cause radical swings in gas prices. Monthly pricing indices often do not follow
the trends of prior years and, with each passing month, average price
projections continue to be adjusted and revised.
U.S. Regulation
Aspects of the production, sale and transportation of natural gas and crude
oil in federal Outer Continental Shelf waters are regulated pursuant to various
federal statutes, including the Outer Continental Shelf Lands Act ("OCSLA"). The
interstate transportation of natural gas is regulated under the Natural Gas
V-6
<PAGE> 148
Act ("NGA") or the Natural Gas Policy Act of 1978 ("NGPA"). Until January 1,
1993, certain first sales (generally, wellhead or producing field sales) of
natural gas remained price regulated under the NGPA. Effective January 1, 1993,
all price-regulation of first sales of natural gas was eliminated by the Natural
Gas Wellhead Decontrol Act of 1989.
Operations conducted by Seagull Energy on federal gas and oil leases must
comply with numerous statutory and regulatory restrictions. Additionally,
certain operations must be conducted pursuant to appropriate permits issued by
government agencies, such as the Bureau of Land Management and the Minerals
Management Service of the Department of Interior and, in regard to certain
federal leases, prior approval of drill site locations must be obtained from the
Environmental Protection Agency.
In all states in which Seagull Energy engages in gas and oil exploration
and production, its activities are subject to regulation. These regulations
generally require permits for the drilling and spacing of wells, the prevention
of waste of gas and oil reserves, the prevention and cleanup of pollution and
other matters. Government agencies in various states regulate, among other
things, the amount and rate of gas and oil production. The states of Texas and
Oklahoma have recently revised their regulations regarding proration of
production. These kinds of regulations by state agencies may affect
determinations of deliverability under certain of Seagull Energy's gas purchase
contracts and thereby affect the purchasers' volumetric purchase obligations. In
addition to the proration changes, Oklahoma has promulgated regulations pursuant
to Senate Bill 168, which governs sharing of gas markets among working interest
owners and disbursement of royalty proceeds.
Over the past several years, the Federal Energy Regulatory Commission (the
"FERC") has issued certain orders that have brought sweeping changes to the
fundamental regulatory structure governing interstate sales and transportation
of natural gas. Collectively, these orders have changed the gas pricing
structure and altered the traditional relationship among producers, pipelines
and end-use markets. Most pipelines are in the process of transforming
themselves from their strictly-merchant role to a combination of merchant and
open-access transporter. Producers frequently contract directly with end-users
or other gas buyers and, if the transporting pipeline is open-access,
transportation services can be arranged by either the buyer, the seller or a
broker on a first-come, first-serve basis. These FERC orders therefore provide
Seagull Energy with greater marketing options.
Canadian Regulation
Seagull Canada has exploration and development operations in Alberta and
Saskatchewan. The oil and natural gas industry is subject to extensive controls
and regulations imposed by various levels of government in Canada.
Crude Oil Pricing. Since June 1, 1985, producers of oil have been entitled
to negotiate sales contracts directly with oil purchasers, with the result that
the market determines the price of oil. Such price depends on oil quality,
prices of competing oils, distance to market and the value of refined products.
Oil exporters are entitled to export oil pursuant to contracts, the terms of
which do not exceed one year in the case of light crude and two years in the
case of heavy crude, provided that an order approving the export has been
obtained from the Natural Energy Board ("NEB"). Any export to be made pursuant
to a contract of a larger duration requires the exporter obtain a license from
the NEB, and the issuance of such a license requires the approval of the
Governor General in Council.
Natural Gas Pricing. Prior to deregulation of natural gas markets, prices
in Canada were legislated by the government having jurisdiction. In the current
deregulated environment, the price of natural gas is determined by negotiation
between buyers and sellers in an open and competitive market. The Provincial and
Federal governments continue to monitor the sale of natural gas to ensure that
there is adequate long term natural gas reserves to meet federal and provincial
future requirements. Exports of natural gas require approvals similar to those
required for exports of oil.
Provincial Royalties and Incentives. The royalty regime is a significant
factor in the profitability of oil and gas production. Royalties payable on
production from lands other than Crown lands are determined by
V-7
<PAGE> 149
negotiations between the mineral owner and the lessee. Crown royalties are
determined by government regulation and are generally calculated as a percentage
of the value of the gross production; the rate of royalties payable depends in
part on well productivity and field discovery date. From time to time the
governments of Canada, Alberta and Saskatchewan have established incentive
programs which have included royalty rate reductions, royalty holidays and tax
credits for the purpose of encouraging oil and gas exploration.
In November 1991, the Government of Alberta announced temporary royalty
incentives for oil, exploration and development. The relief program provides
for: (i) a two year royalty holiday for oil exploration wells drilled between
November 1, 1991 and March 31, 1992 and a one year royalty holiday for
exploratory wells drilled between April 1, 1992 and March 31, 1993 and an extra
one year royalty holiday for exploratory wells drilled in the foothills and
northern regions of the Province, with a cap of $1 million per well; (ii) a one
year royalty holiday on development oil wells drilled between November 1, 1991
and March 31, 1993 with a cap of $400,000 per well; (iii) a five year royalty
holiday for reactivated oil wells which obtained a well license prior to July
30, 1993 and which have been continuously inactive since August 31, 1990, with a
25,000 barrel cap which was raised to 50,000 barrels pursuant to the October 13,
1992 announcement; and (iv) new oil royalty rates for reactivated wells.
On October 13, 1992, the Government of Alberta announced major changes to
its royalty structure and permanent incentives for exploring and developing oil
and gas reserves. The regulations incorporating these changes were adopted on
January 20, 1993. The significant changes announced include the following: (i)
new oil discovered after September 30, 1992 will have a permanent one year oil
royalty holiday, subject to a maximum of $1 million and a reduced royalty rate
thereafter; (ii) reduction of royalties on existing production of oil and gas;
(iii) incentives by way of royalty holidays and reduced royalties on reactivated
and horizontal wells; (iv) introduction of separate par pricing for light,
medium and heavy oil; and (v) modification of the royalty formula structure to
provide for sensitivity to price fluctuations.
The Government of Alberta recently announced a plan to simplify the natural
gas royalty scheme. The regulations are not yet available and it is anticipated
the new scheme will take effect some time in 1994.
A price and productivity sensitive royalty structure for crude oil and
natural gas in the Province of Saskatchewan has been in effect since 1987. The
royalty structure provides for royalty holidays for certain categories of wells
drilled in the Province of Saskatchewan and royalties which vary with the price
of a particular commodity.
Free Trade Agreements. The Free Trade Agreement between Canada and the U.
S. ("FTA") encompasses bilateral trade. In the context of energy resources,
Canada continues to remain free to determine whether exports to the U. S. will
be allowed provided that any export restrictions do not: (i) reduce the
proportion of energy resource exported relative to domestic use, (ii) impose an
export price higher than the domestic price, and (iii) disrupt normal channels
of supply. Both countries are prohibited from imposing minimum export or import
price requirements. The FTA provides a mechanism for dispute resolution with
respect to oil and natural gas matters when direct consultations between the
affected parties fail.
On August 12, 1992, the government of Canada announced that an agreement in
principle had been reached with the government of the U. S. and Mexico for a
North American Free Trade Agreement ("NAFTA"). NAFTA was ratified by all three
parties and became effective January 1, 1994. NAFTA contemplates the reduction
of Mexico's restrictive trade practices in the energy sector and prohibits
discriminatory border restrictions and export taxes. The agreement also
contemplates clearer disciplines on regulators to avoid discriminatory actions
and to minimize disruption of contractual arrangements, which is important for
Canadian natural gas exports.
Environmental and Operational Regulation. The Canadian oil and gas industry
is currently subject to environmental and operational regulation pursuant to
provincial and federal legislation.
Operationally, the Energy Resources Conservation Board ("ERCB") is the body
with jurisdiction over the oil and gas industry. It enforces legislation which
regulates all aspects of exploration, development and production, including the
licensing of wells, pipelines and facilities. Environmental legislation provides
for restrictions and prohibitions on releases or emissions of various substances
produced in association with certain
V-8
<PAGE> 150
oil and gas industry operations. In addition, legislation requires that well and
facility sites must be abandoned and reclaimed to the satisfaction of provincial
authorities, typically to pre-disturbance quality. A breach of such legislation
may result in the imposition of fines and penalties.
Environmental legislation in Alberta has recently undergone a major
revision to update and consolidate the various acts applicable into the
Environmental Protection and Enhancement Act, which was proclaimed on April 21,
1993 and took effect on September 1, 1993. The Act imposes stricter
environmental standards requiring more stringent compliance and significantly
increased penalties.
Seagull Canada is committed to meeting its responsibilities to protect the
environment wherever it operates and anticipates making increased expenditures
of both a capital and expense nature as a result of the increasingly stringent
laws relating to the protection of the environment, and will be taking such
steps as are required to ensure compliance with the Environmental Protection and
Enhancement Act.
Seagull Canada regularly meets with and submits to field inspections by the
ERCB and other government departments. During 1992, Seagull Canada implemented a
comprehensive safety awareness and training program and manual for all of its
oilfield employees and contractors. Field personnel are being trained on
environmental issues and minimum standards of safety training have been
established. As well, Seagull Canada is in the final stages of developing a
corporate response plan and waste management plan detailing procedures to follow
in the event of an emergency during field operations. These measures have been
taken for the safety and protection of the general public, residents in
surrounding vicinities, service company representatives and company employees.
Seagull Canada follows a responsible program for site reclamation and
restoration of non-productive wells. Seagull Canada has a schedule of wells to
be abandoned and does not allow any wells to become "orphan wells" nor remain as
a hidden liability. Seagull Canada believes its existing capital budget for
future abandonment of sites and other environmental matters is more than
adequate to meet current environmental regulations.
PIPELINE AND MARKETING
Seagull Energy is involved in the pipeline transportation of natural gas,
hydrocarbon products and petrochemicals in Texas and Louisiana. In addition,
Seagull Energy is engaged in pipeline engineering, design, construction and
operation, natural gas processing, third-party natural gas marketing and the
marketing of all of Seagull Energy's uncommitted natural gas and liquids
production. Revenue from the pipeline and marketing segment accounted for 11%,
16% and 15% of the Company's consolidated revenues for 1993, 1992 and 1991,
respectively.
Gas Pipelines
Seagull Energy owns and operates short and medium length gathering
pipelines that carry gas from producing fields to other pipelines which are
owned by utility companies, large gas transmission companies, or others, and to
industrial customers (referred to herein collectively as "Gas Purchasers").
Seagull Energy owns and operates 22 onshore and offshore natural gas gathering
systems having an aggregate length of approximately 431 miles. Seagull Energy's
gas pipelines, which do not form an interconnected system, are principally
located in Texas, Louisiana and offshore along the Texas coast. In addition,
Seagull Energy owns partial interests in and operates two other offshore gas
pipelines.
Seagull Energy transports gas under arrangements where customers are
charged a fee for gas carried through Seagull Energy's pipelines. Seagull Energy
also delivers gas through its pipelines pursuant to contracts whereby it
purchases and resells gas. In the case of purchase and sales contracts, the
margin between Seagull Energy's cost of gas and its resale revenues constitutes,
in effect, a transportation fee.
Natural gas producers prefer flexibility in commitment of gas reserves both
as to term and pricing. Some of the wells connected to Seagull Energy's
pipelines are not dedicated to those pipelines. It is probable that most gas
wells currently connected to Seagull Energy gas gathering systems will remain
connected from year
V-9
<PAGE> 151
to year with deliverability of reserves declining until depleted. It is no
longer practical for a major pipeline company to consider gas reserves to be
firmly committed to its facilities. Several systems are located in good
prospective gas development areas where some new gas wells have been drilled,
and more development may occur. In areas of active drilling, it is likely that
new wells and additional gas volumes can be added to the systems.
The following table shows the volumes of gas transported for the periods
shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1992 1991
------- ------ ------
<S> <C> <C> <C>
Volumes (MMcf):
Sales Contracts............................................... 1,419 2,290 3,734
Transportation Fee Arrangements............................... 112,081 69,660 66,602
------- ------ ------
Total................................................. 113,500 71,950 70,336
------- ------ ------
------- ------ ------
</TABLE>
Hydrocarbon Products and Petrochemical Pipelines
Seagull Energy owns and/or operates pipelines for the transportation of
liquid hydrocarbon products and petrochemicals. Seagull Energy operates seven
such pipelines, four of which it owns and all of which are located in Texas and
Louisiana.
Gas Marketing
Seagull Energy actively provides marketing services geared toward matching
gas supplies available in the major producing areas with attractive markets
available in the Midwest, Northeast, Mid-Atlantic, Appalachian and
Texas/Louisiana Gulf Coast areas. The matching process includes arranging
transportation on a network of open-access pipelines on a firm or interruptible
basis to ensure the receipt and deliveries of contracted volumes.
Marketing profit margins are often small due to competition, and results
can vary significantly from month to month. Large amounts of cash are involved
for relatively small net margins, which makes working capital management
critical. Seagull Energy has policies and procedures in place that are designed
to minimize any potential risk of loss from these transactions. These policies
and procedures are reviewed and updated periodically by Seagull Energy's
management.
Pipeline Operations and Construction
Seagull Energy operates certain pipelines owned by other companies. In some
cases the operating agreements provide for reimbursement of expenses incurred in
connection with operation plus a profit margin. In other cases Seagull Energy
receives a negotiated annual fee.
Seagull Energy also builds pipelines for other companies for which it
receives construction fees that are fixed, cost plus or a combination of both.
Seagull Energy recognized operating profit in 1993 on a pipeline construction
project; an 8.7 mile, 16-inch gas pipeline that Seagull Energy constructed for
an international exploration company from a platform to a gathering pipeline
offshore Louisiana. The project was completed in early 1994. Seagull Energy also
recognized profits from two earlier pipeline construction projects in 1990 and
1991. The larger of the two projects was completed in the fall of 1990 and the
smaller construction project was completed in early 1991.
Historically, Seagull Energy has not been engaged in pipeline construction
projects on a regularly recurring basis. Seagull Energy had no other new
construction projects in 1993 and none are currently pending; however, several
projects are currently being pursued.
V-10
<PAGE> 152
Gas Processing
Seagull Energy owns interests in a number of gas processing plants. The
largest of the plants is located in Matagorda County, Texas (the "Matagorda
Plant"), and has been in operation since March 1981. Seagull Energy owns a 65%
undivided interest in and operates the Matagorda Plant, and the other 35%
interest is owned by a subsidiary of Enron Corp.
The Matagorda Plant processes natural gas, producing a full-range
demethanized raw mix products stream. The actual throughput at the Matagorda
Plant varies depending upon gas sales demand and production-related mechanical
factors. For the year ended December 31, 1993, throughput averaged approximately
244 MMcf/d, which is close to maximum capacity but slightly lower than the prior
year. Throughput volumes are expected to remain at the same levels for the
foreseeable future. Profitability will depend largely on the relative prices of
products and natural gas.
Competition
Seagull Energy actively competes with numerous other companies for the
construction and operation of short and medium length pipelines. Seagull
Energy's competitors include oil companies, other pipeline companies, natural
gas gatherers and petrochemical transporters, many of which have financial
resources, staffs and facilities substantially larger than those of Seagull
Energy. In addition, many of Seagull Energy's Gas Purchasers are also
competitors or potential competitors in the sense that they have extensive
pipeline building capabilities and experience and generally operate large
pipeline systems of their own. Seagull Energy believes that its ability to
compete will depend primarily on its ability to complete pipeline projects
quickly and cost effectively, and to operate pipelines efficiently.
Seagull Energy's gas marketing activities are in competition with numerous
other companies offering the same services. Some of these competitors are
affiliates of companies with extensive pipeline systems that are used for
transportation from producers to end-users. Seagull Energy believes its ability
to compete depends upon building strong relationships with producers and
end-users by consistently purchasing and supplying gas at competitive prices.
Regulation
Government regulation has a significant effect on various segments of
Seagull Energy's pipeline operations. Its pipeline systems are regulated by
state regulatory commissions with respect to safety, location and other matters.
Seagull Energy's operations in Texas are subject to the Texas Gas Utility
Regulatory Act, the Cox Act, the Common Purchaser Act and environmental and
other statutes, as implemented by the Railroad Commission of Texas (the
"Railroad Commission"). Generally, the Railroad Commission is vested with
authority to ensure that rates charged by gas pipelines and gas utilities for
intrastate gas sales and transportation services are just and reasonable.
The FERC has jurisdiction over, among other things, the construction and
operation of pipelines and related facilities used in the transportation,
storage and sale of natural gas in interstate commerce. The FERC also has
jurisdiction over the rates and charges levied by companies subject to the NGA
for the transportation of natural gas in interstate commerce and for the sale of
natural gas for resale in interstate commerce. At Seagull Energy's request, FERC
has decertified Seagull Energy's former interstate facility and it is no longer
subject to NGA jurisdiction.
Sales of natural gas by Seagull Energy's marketing subsidiary were
generally not regulated by the FERC prior to January 1, 1993, and will not be
subject to any FERC regulation on or after that date. Transportation and sales
for resale of gas in interstate commerce by Seagull Energy's intrastate
pipelines are regulated by the FERC pursuant to Section 311 of the NGPA. Section
311 permits intrastate pipelines to engage in certain transactions with
interstate pipelines and their customers without being regulated as interstate
pipelines under the NGA, thus allowing more flexibility in operations between
intrastate and interstate gas pipeline companies. The FERC has recently revised
its Section 311 regulations to allow intrastate pipelines to transport
V-11
<PAGE> 153
gas destined for interstate commerce under new self-implementing blanket
certificates. Seagull Energy currently offers these services on several of its
intrastate pipelines.
In April 1992, the FERC issued its Order No. 636 (and related orders),
which basically requires interstate pipelines to "unbundle" or separate their
transportation services from their merchant sales of gas. This permits end-users
of gas to contract directly with producers to purchase gas and to contract
separately with pipelines for transportation services. It is difficult to
predict the actual impact Order No. 636 will have on Seagull Energy, but it will
likely afford additional opportunities to market and transport natural gas. The
extensive regulatory proceedings required under this order has not directly
affected the Company's pipelines significantly to date.
With regard to pipeline design, construction, operation and maintenance,
state regulatory commissions generally have the authority to take all steps
necessary to ensure compliance by intrastate pipeline and gathering companies
with applicable safety regulations. The FERC also regulates certain aspects of
intrastate pipeline construction related to Section 311 transportation or
storage services. Seagull Energy is also subject to safety regulations imposed
by the Office of Pipeline Safety of the Department of Transportation (the
"DOT"), promulgated pursuant to the Natural Gas Pipeline Safety Act of 1968 and
enforced by the Railroad Commission.
Pursuant to regulations regarding drug abuse recently enacted by the DOT
and adopted by the Railroad Commission, Seagull Energy has implemented a drug
abuse program that strives for a safe and drug-free workplace for its
employees.
V-12
<PAGE> 154
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma condensed balance sheet as of December 31, 1993
gives effect to (i) the Seagull Canada Acquisition, financed initially under the
Canadian Credit Agreement and the Revolver and (ii) the application of the
estimated net proceeds from the issuance and sale for cash of shares of ENSTAR
Alaska Stock representing 100% of the equity attributable to the ENSTAR Alaska
Group pursuant to a public offering to repay amounts borrowed under the
Revolver, as if both events had occurred on December 31, 1993. The unaudited pro
forma condensed statement of earnings for the year ended December 31, 1993 gives
effect to the pro forma transactions and events described in clauses (i) and
(ii) above, as if they occurred on January 1, 1993.
The following unaudited pro forma information has been included as required
by the rules of the Securities and Exchange Commission and is provided for
comparative purposes only. The unaudited pro forma information presented is
based on the respective historical financial statements of Seagull Energy and
Novalta and should be read in conjunction with such 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 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 pro forma unaudited 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.
V-13
<PAGE> 155
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1993
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
NOVALTA
SEAGULL RESOURCES CONFORMING PRO FORMA
ENERGY INC. ADJUSTMENTS COMBINED
---------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............... $ 4,949 $ 415 $ -- $ 5,364
Accounts receivable, net................ 81,021 11,136 -- 92,157
Other................................... 6,841 688 -- 7,529
---------- -------- --------- ----------
Total Current Assets............ 92,811 12,239 -- 105,050
Property, Plant and Equipment -- at
cost.................................... 1,061,818 166,067 (166,067)(A) 1,278,412
216,594 (B)
Accumulated Depreciation, Depletion and
Amortization............................ 290,633 69,038 (69,038)(A) 290,633
---------- -------- --------- ----------
771,185 97,029 119,565 987,779
Other assets.............................. 68,554 3,145 883 (B) 64,124
(8,458)(C)
---------- -------- --------- ----------
Total Assets.............................. $ 932,550 $112,413 $ 111,990 $1,156,953
---------- -------- --------- ----------
---------- -------- --------- ----------
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable........................ $ 71,084 $ 7,060 -- $ 78,144
Other................................... 31,059 746 -- 31,805
---------- -------- --------- ----------
Total Current Liabilities....... 102,143 7,806 -- 109,949
Long-Term Debt............................ 397,000 64,316 (64,316)(D) 450,306
193,306 (C)
(140,000)(E)
Other Noncurrent Liabilities.............. 53,024 1,965 (602)(B) 54,387
Deferred Income Taxes..................... 366 7,899 21,928 (B) 22,294
(7,899)(D)
Common Equity............................. 380,017 30,427 (30,427)(D) 520,017
140,000 (E)
---------- -------- --------- ----------
Total Liabilities and Equity.............. $ 932,550 $112,413 $ 111,990 $1,156,953
---------- -------- --------- ----------
---------- -------- --------- ----------
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Balance Sheet.
V-14
<PAGE> 156
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
(A) To eliminate Novalta's historical cost of property, plant and equipment and
accumulated depreciation, depletion and amortization.
(B) To adjust the assets acquired and liabilities assumed in the Seagull Canada
Acquisition to reflect the allocation of the estimated purchase price. The
adjusted cost of property, plant and equipment was calculated as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Estimated purchase price.......................................... $200,455
Estimated transaction costs....................................... 1,309
Less -- other assets acquired:
Current assets............................................ (12,239)
Other assets.............................................. (4,028)
Plus -- liabilities assumed:
Current liabilities....................................... 7,806
Deferred credits.......................................... 1,363
Deferred income taxes..................................... 21,928
-----------
$216,594
-----------
-----------
</TABLE>
The purchase price was determined pursuant to arm's length negotiations
between the Company and Novacor Petrochemicals, based on the economic
effective date of December 31, 1993. The purchase price was based to a
large extent on the net present value of oil reserves attributable to the
properties acquired as a result of the Seagull Canada Acquisition.
(C) To record the financing of the Seagull Canada Acquisition, including
approximately $193.3 million of borrowings under the Canadian Credit
Agreement and the Revolver, a cash deposit of approximately $7.5 million
paid in November 1993 and other costs related to the Acquisition.
(D) To eliminate the long-term debt, deferred income taxes and shareholder's
equity of Novalta.
(E) To record the net proceeds of $140 million from the issuance and sale of
ENSTAR Alaska Stock representing 100% of the equity attributable to the
ENSTAR Alaska Group and the corresponding decrease in long-term debt
outstanding.
The following table sets forth the historical and adjusted combined
capitalization of Seagull Energy as of December 31, 1993. The table should
be read in conjunction with Seagull Energy's combined financial statements
and the notes related thereto included in this Annex.
<TABLE>
<CAPTION>
DECEMBER 31, 1993
------------------------------------------
PRO
PRO FORMA
HISTORICAL FORMA(1) ADJUSTED(2)
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total debt.............................. $397,000 $590,306 $450,306
Common equity........................... 380,017 380,017 520,017
-------- -------- --------
Total capitalization.................... $777,017 $970,323 $970,323
-------- -------- --------
-------- -------- --------
Total debt to total capitalization
ratio................................. 51.1% 60.8% 46.4%
-------- -------- --------
-------- -------- --------
</TABLE>
- - ---------------
(1) Adjusted to give effect to approximately $193.3 million of borrowings
under the Canadian Credit Agreement and Revolver that were incurred in
connection with the Seagull Canada Acquisition.
(2) Adjusted to give effect to (i) the adjustment described in note (1)
above and (ii) the issuance and sale of 7,500,000 shares of ENSTAR
Alaska Stock pursuant to the ENSTAR Alaska Stock Offering and the
application of the estimated net proceeds therefrom of $140 million to
repay a portion of the amounts borrowed under the Revolver.
V-15
<PAGE> 157
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
UNAUDITED PRO FORMA CONDENSED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
HISTORICAL
---------------------
NOVALTA
SEAGULL RESOURCES CONFORMING PRO FORMA
ENERGY INC. ADJUSTMENTS COMBINED
-------- --------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues......................................... $269,921 $32,358 $ -- $ 302,279
Costs of Operations:
Operating costs................................ 103,842 12,973 399 (A) 117,214
Depreciation, depletion and amortization....... 109,045 9,371 (9,371)(B) 124,261
15,216 (C)
-------- --------- ----------- -----------
Operating Profit................................. 57,034 10,014 (6,244) 60,804
General and Administrative Expense............... 11,666 -- -- 11,666
Interest Expense................................. 30,455 1,083 (1,083)(B) 33,050
2,595 (D)
Interest Income and Other........................ (5,469) (3,102) -- (8,571)
-------- --------- ----------- -----------
Earnings Before Income Taxes..................... 20,382 12,033 (7,756) 24,659
Income Taxes..................................... 232 4,650 (4,650)(B) (3,622)
3,390 (E)
-------- --------- ----------- -----------
Net Earnings..................................... $ 20,150 $ 7,383 $(6,496) $ 21,037
-------- --------- ----------- -----------
-------- --------- ----------- -----------
Earnings Per Share............................... $ 0.59
-----------
-----------
Weighted Average Number of Common Shares
Outstanding.................................... 35,790 (F) 35,790(G)
----------- -----------
----------- -----------
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Statement of Earnings.
V-16
<PAGE> 158
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO UNAUDITED PRO FORMA
CONDENSED STATEMENTS OF EARNINGS
(A) To adjust general operating expenses to give effect to Seagull Energy'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 and the amortization of loan acquisition costs
relating to the Canadian Credit Agreement.
(E) To adjust income taxes for the items discussed in Notes (A) through (D)
above.
(F) To reflect the issuance and sale of the ENSTAR Alaska Stock and the
amendment of the terms of the Seagull Common Stock to provide for the
issuance of the ENSTAR Alaska Stock.
(G) The weighted average number of shares of Seagull Common Stock outstanding is
calculated assuming the implementation of the ENSTAR Alaska Stock Proposal.
V-17
<PAGE> 159
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED)
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 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 will be submitted to the
Company's shareholders for their consideration and approval.
The financial statements for Seagull Energy and for the ENSTAR Alaska Group
comprise all of the accounts included in the corresponding consolidated
financial statements of the Company. The Seagull Energy 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 Seagull Energy. 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 Seagull Energy.
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 Seagull Energy beginning on page
V-27 of this Annex V.
V-18
<PAGE> 160
RESULTS OF OPERATIONS
COMBINED HIGHLIGHTS
<TABLE>
<CAPTION>
PERCENT CHANGE
-------------------
1993 1992 1991 1992-'93 1991-'92
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<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
-------- -------- -------- -------- --------
$269,921 $129,231 $118,922 + 109 + 9
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
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
-------- -------- -------- -------- --------
$ 57,034 $ 7,444 $ 9,159 + 666 - 19
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings (Loss) before cumulative effect of
change in accounting principles............ $ 20,150 $ (6,041) $ (4,519) + 434 - 34
Net earnings (loss).......................... $ 20,150 $ (5,351) $ (4,519) + 477 - 18
Net cash provided by operating activities
before changes in operating assets and
liabilities................................ $141,466 $ 60,012 $ 46,488 + 136 + 29
Net cash provided by operating activities.... $ 95,158 $ 61,662 $ 41,916 + 54 + 47
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
For discussions regarding revenues, operating profit and operating results
of the Exploration and Production and Pipeline and Marketing segments, reference
is made to "Results of Operations" included in Management's Discussion and
Analysis of Financial Condition and Results of Operations of Seagull Energy
Corporation beginning on page IV-7 of Annex IV.
1993 Results Compared to 1992
Seagull Energy 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. Net
earnings of Seagull Energy also benefitted from a reduction in income taxes 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 a change in accounting principles
described below. See "Other (Income) Expense" and "Income Taxes" sections below.
Effective January 1, 1992, Seagull Energy adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. The
cumulative effect of this accounting change as of January 1, 1992 resulted in a
reduction to the net loss of approximately $0.7 million as reflected in Seagull
Energy's combined 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 exploration and
production ("E&P") segment's natural gas production primarily due to its
acquisition of Arkla Exploration Company (the "Mid-South Acquisition") from
Arkla, Inc. ("Arkla") in December 1992.
1992 Results Compared to 1991
Net earnings for 1992 increased from 1991 primarily due to the Seismic
Litigation Settlement and the cumulative effect of a change in accounting
principles described above, partially offset by higher general and
V-19
<PAGE> 161
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 and after changes in
operating assets and liabilities for 1992 increased in comparison to 1991
primarily due to increases in cash flows generated by the E&P segment and the
Seismic Litigation Settlement.
OTHER (INCOME) EXPENSE
<TABLE>
<CAPTION>
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............................... 30,455 11,500 11,920 +165 - 4
Interest income and other...................... (5,469) (4,412) (1,059) + 24 +317
------- ------- ------- -------- --------
$36,652 $17,187 $19,288 +113 - 11
------- ------- ------- -------- --------
------- ------- ------- -------- --------
</TABLE>
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
Seagull Energy employees, that are tied directly to the price of Seagull Common
Stock. The closing price of Seagull Common Stock increased approximately 63%
from 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, Seagull Energy incurred additional debt to finance
the Mid-South Acquisition. In addition, a large portion of its 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, Seagull
Energy'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
billion cubic feet ("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, Seagull Energy incurred approximately
$400,000 in severance expenses (included in general and administrative expenses
and operations and maintenance costs) when it reduced its 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. Seagull Energy's workforce temporarily increased by
approximately 240 employees as a result of the Mid-South Acquisition on December
31, 1992. Seagull Energy 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 Seagull Energy's
then existing revolving credit line in connection with the Mid-South
Acquisition.
V-20
<PAGE> 162
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 Seagull Energy that certain of the seismic data acquired by it in
connection with its acquisition of Houston Oil & Minerals Corporation was
actually delivered to other purchasers. In accordance with the settlement
agreement, Seagull Energy 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, Seagull Energy 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
Seagull Energy's effective tax rate for the year ended December 31, 1993
was substantially lower than the statutory federal tax rate of 35% primarily
because it 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.
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 Seagull Energy's 1993 provision for federal income
taxes of approximately $0.5 million.
The provision for income taxes for 1993 and 1992 is not comparable to 1991
due to Seagull Energy'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. Seagull Energy recognized the
cumulative effect of this change in accounting principle in the line item
entitled "Cumulative Effect of Change 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.
V-21
<PAGE> 163
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for 1993 were substantially higher than those for 1992
due to significant increases in Seagull Energy's exploitative activities,
primarily resulting from the large number of prospects acquired in connection
with the Mid-South Acquisition, and its exploratory activities in response to
improvements in prices received and demand for natural gas. Seagull Energy'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 1993, 1992 and 1991 were as follows:
<TABLE>
<CAPTION>
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
Corporate................................... 2,015 890 2,124 +126 - 58
-------- -------- -------- -------- --------
$101,948 $ 34,627 $ 61,217 +194 - 43
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
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>
In October 1993, Seagull Energy 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.
Plans for 1994 call for capital expenditures of approximately $163 million,
including about $160 million in exploration and production. Seagull Energy
anticipates spending approximately $100 million for development, $10 million for
lease acquisitions and $50 million will be devoted to exploration.
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, Seagull Energy 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, all in underwritten public offerings.
In connection with the Mid-South Acquisition, Seagull Energy 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 10,120,000 shares of
Seagull Common Stock, and a $475 million revolving credit line.
In June 1993, Seagull Energy amended and restated the Credit Agreement
converting the facility into a single revolving credit facility (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 Seagull Energy under the provisions of the Revolver is
subject to a borrowing base (the "Borrowing Base") based upon the proved
reserves of the exploration and production segment and the financial performance
of the Pipeline and Marketing segment and the ENSTAR Alaska Group. The Borrowing
Base is generally determined annually, but may be redetermined, at the option of
either Seagull Energy or the Banks, one additional time each year, and will be
redetermined upon the sale of certain assets included in the Borrowing Base.
V-22
<PAGE> 164
As of January 4, 1994, immediately following the Company's acquisition of
Novalta Resources Inc. ("Novalta") ("Seagull Canada Acquisition"), the available
commitment under the Revolver is subject to a $610 million Borrowing Base and is
determined after consideration of outstanding borrowings under Seagull Energy's
other senior debt facilities. As of February 28, 1994, borrowings outstanding
under the Revolver were $188.5 million, leaving immediately available unused
commitments of approximately $141.1 million, net of outstanding letters of
credit of $2.2 million, $100 million of borrowings outstanding under the Senior
Notes, the nominated maximum borrowing availability of $160 million under the
Canadian Credit Agreement, and $18.2 million in borrowings outstanding under
Seagull Energy's money market facilities.
In connection with the Seagull Canada Acquisition, Seagull Energy Canada
Ltd. ("Seagull Canada"), the indirect wholly owned subsidiary of Seagull Energy
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 Seagull Energy 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, Seagull Energy 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 Seagull Energy, 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, Seagull Energy 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 Seagull Energy's or
the banks' discretion. The lines are subject to annual renewal.
Management believes that Seagull Energy's capital resources will be
sufficient to finance current and forecasted operations. However, Seagull Energy
continues to actively pursue potential acquisitions and, depending upon the size
and terms of any such acquisition, additional financing may be required. The
Company has historically received cash from the ENSTAR Alaska Group in the form
of dividends and payments under the Management Agreement and Tax Sharing
Agreement, as defined below. These dividends and contractual payments, after
taking into account the costs and tax obligations related to the contractual
payments, have been used by Seagull Energy (together with other funds available
to it) to fund its operations, including its capital expenditure programs. If
the ENSTAR Alaska Stock Proposal is adopted, Seagull Energy will no longer
receive the benefit of dividends from the ENSTAR Alaska Group, but will continue
to receive payments under the Management Agreement and the Tax Sharing
Agreement. During the three years ended December 31, 1993, the ENSTAR Alaska
Group paid regular dividends of $8 million per year and a special dividend of
$20 million in 1991.
To date, compliance with applicable environmental and safety regulations by
Seagull Energy has not required any significant capital expenditures or
materially affected its business or earnings. Seagull Energy believes it is in
substantial compliance with environmental and safety regulations and foresees no
material expenditures in the future; however, Seagull Energy is unable to
predict the impact that compliance with future regulations may have on capital
expenditures, earnings and competitive position.
V-23
<PAGE> 165
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
COMBINED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Exploration and production............................... $227,437 $ 91,991 $ 81,099
Pipeline and marketing................................... 42,484 37,240 37,823
-------- -------- --------
269,921 129,231 118,922
-------- -------- --------
Costs of Operations:
Cost of gas sold......................................... 2,660 3,888 5,913
Operations and maintenance............................... 83,917 51,947 48,699
Exploration charges...................................... 17,265 9,905 9,227
Depreciation, depletion and amortization................. 109,045 56,047 45,924
-------- -------- --------
212,887 121,787 109,763
-------- -------- --------
Operating Profit........................................... 57,034 7,444 9,159
Other (Income) Expense:
General and administrative............................... 11,666 10,099 8,427
Interest expense......................................... 30,455 11,500 11,920
Interest income and other................................ (5,469) (4,412) (1,059)
-------- -------- --------
36,652 17,187 19,288
-------- -------- --------
Earnings (Loss) Before Income Taxes and Cumulative Effect
of Change in Accounting Principles....................... 20,382 (9,743) (10,129)
Income Tax Expense (Benefit)............................... 232 (3,702) (5,610)
-------- -------- --------
Earnings (Loss) Before Cumulative Effect of Change in
Accounting Principles.................................... 20,150 (6,041) (4,519)
Cumulative Effect of Change in Accounting Principles....... -- 690 --
-------- -------- --------
Net Earnings (Loss)........................................ $ 20,150 $ (5,351) $ (4,519)
-------- -------- --------
-------- -------- --------
</TABLE>
See Accompanying Notes to Combined Financial Statements.
V-24
<PAGE> 166
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1992
--------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................................... $ 4,949 $ 2,663
Accounts receivable, net........................................... 81,021 69,755
Inventories........................................................ 1,951 1,593
Prepaid expenses and other......................................... 4,890 746
--------- --------
Total Current Assets.......................................... 92,811 74,757
Property, Plant and Equipment -- at cost (successful efforts method
for
gas and oil properties)............................................ 1,061,818 983,156
Accumulated Depreciation, Depletion and Amortization................. 290,633 205,713
--------- --------
771,185 777,443
Other Assets......................................................... 68,554 64,878
--------- --------
Total Assets.................................................. $ 932,550 $917,078
--------- --------
--------- --------
LIABILITIES AND COMMON EQUITY
Current Liabilities:
Accounts payable................................................... $ 71,084 $ 87,070
Accrued expenses................................................... 23,469 8,169
Prepaid gas and oil sales.......................................... 7,590 27,933
--------- --------
Total Current Liabilities..................................... 102,143 123,172
Long-Term Debt....................................................... 397,000 541,000
Other Noncurrent Liabilities......................................... 53,024 68,402
Deferred Income Taxes................................................ 366 2,598
Common Equity........................................................ 380,017 181,906
Commitments and Contingencies........................................
--------- --------
Total Liabilities and Common Equity........................... $ 932,550 $917,078
--------- --------
--------- --------
</TABLE>
See Accompanying Notes to Combined Financial Statements.
V-25
<PAGE> 167
SEAGULL ENERGY
(WITHOUT 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 (loss).................................. $ 20,150 $ (5,351) $ (4,519)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Cumulative effect of change in accounting
principles...................................... -- (690) --
Depreciation, depletion and amortization.......... 110,957 57,318 46,943
Amortization of loan acquisition costs............ 4,092 2,771 592
Deferred income taxes............................. (2,322) (399) (1,961)
Dry hole expense.................................. 10,534 5,232 4,195
Gain on sales of property, plant and equipment.... (3,929) (177) (46)
Distributions in excess of earnings from
partnerships.................................... 1,506 872 888
Other............................................. 478 436 396
---------- ---------- ----------
141,466 60,012 46,488
Changes in operating assets and liabilities, net
of acquisitions:
Decrease (Increase) in accounts receivable,
net.......................................... (9,384) 6,813 (6,272)
Decrease (Increase) in inventories, prepaid
expenses and other........................... 865 (373) (1,153)
Increase (Decrease) in accounts payable......... (17,662) (3,274) 3,179
Decrease in prepaid gas and oil sales........... (27,933) -- --
Increase (Decrease) in accrued expenses and
other........................................ 7,806 (1,516) (326)
---------- ---------- ----------
Net Cash Provided By Operating Activities....... 95,158 61,662 41,916
Investing Activities
Capital expenditures................................. (101,948) (34,627) (61,217)
Acquisitions, net of cash acquired................... (29,470) (401,888) (201,767)
Proceeds from sales of property, plant and
equipment......................................... 13,566 1,202 1,303
---------- ---------- ----------
Net Cash Used In Investing Activities........... (117,852) (435,313) (261,681)
Financing Activities
Proceeds from revolving lines of credit and other
borrowings........................................ 599,490 697,000 307,000
Principal payments on revolving lines of credit and
other borrowings.................................. (743,490) (312,667) (154,954)
Fees paid to acquire financing....................... (6,535) (17,980) (3,201)
Contributions from the Company....................... 174,063 8,538 65,571
Other................................................ 1,452 815 788
---------- ---------- ----------
Net Cash Provided By Financing Activities....... 24,980 375,706 215,204
---------- ---------- ----------
Increase (Decrease) In Cash And Cash
Equivalents.................................. 2,286 2,055 (4,561)
Cash And Cash Equivalents At Beginning Of Year......... 2,663 608 5,169
---------- ---------- ----------
Cash And Cash Equivalents At End Of Year............... $ 4,949 $ 2,663 $ 608
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See Accompanying Notes to Combined Financial Statements.
V-26
<PAGE> 168
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
- - ----- ----
<S> <C> <C>
1. Summary of Significant Accounting Policies....................................... V-27
2. Related Party Activities......................................................... V-30
3. Acquisitions..................................................................... V-31
4. Property, Plant and Equipment.................................................... V-32
5. Supplemental Gas and Oil Producing Activities (Unaudited)........................ V-32
6. Other Noncurrent Assets.......................................................... V-32
7. Long-Term Debt................................................................... V-34
8. Other Noncurrent Liabilities..................................................... V-37
9. Fair Value of Financial Instruments.............................................. V-38
10. Common Equity.................................................................... V-38
11. Employee Benefit Plans........................................................... V-39
12. Interest Income and Other........................................................ V-39
13. Income Taxes..................................................................... V-40
14. Business Segments................................................................ V-43
15. Selected Quarterly Financial Data (Unaudited).................................... V-44
16. Commitments and Contingencies.................................................... V-44
17. Subsequent Event................................................................. V-45
</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.
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 plans, shortly after shareholder approval of the
ENSTAR Alaska Stock Proposal and subject to prevailing market and other
conditions, to 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 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 Seagull Energy and for the ENSTAR Alaska Group
comprise all of the accounts included in the corresponding consolidated
financial statements of the Company. The Seagull Energy 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 Seagull Energy. Consistent with the Articles of
Amendment to the Articles of Incorporation and relevant
V-27
<PAGE> 169
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
policies, such business group financial statements could also include contingent
liabilities that are not separately identified with the operations of Seagull
Energy.
If the ENSTAR Alaska Stock Proposal receives the requisite shareholder
approval and the ENSTAR Alaska Stock Offering is consummated, Seagull will
provide to holders of Seagull Common Stock separate audited financial
statements, management's discussion and analysis, description of business and
other relevant information for Seagull Energy and the Company. Notwithstanding
the allocation of the Company's assets and liabilities (including contingent
liabilities) and shareholders' equity between Seagull Energy and the ENSTAR
Alaska Group for the purpose of preparing their respective financial statements,
holders of Seagull Common Stock (together with the holders of ENSTAR Alaska
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 the ENSTAR Alaska Group that
affect the Company's financial condition could affect the results of operations
or financial position of Seagull Energy. In addition, any net losses of the
ENSTAR Alaska Group and dividends or distributions on, or repurchase of, ENSTAR
Alaska Stock will reduce the legally available funds of the Company available
for payment of dividends on the Seagull Common Stock. Accordingly, the Company's
consolidated financial information and the combined financial information for
the ENSTAR Alaska Group should be read in conjunction with Seagull Energy's
combined financial information.
Dividends on the Seagull Common Stock will be limited to the lesser of (i)
legally available funds of the Company under Texas law and (ii) the Available
Seagull Energy Dividend Amount, as defined. 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. The Company has not paid any cash dividends on shares
of Seagull Common Stock since it became an independent entity in 1981. The
ENSTAR Alaska Stock Proposal would not change the Company's dividend policy with
respect to the Seagull Common Stock. Accordingly, the Board of Directors does
not currently intend to pay dividends on the Seagull Common Stock.
The accounting policies applicable to the preparation of the financial
statements of Seagull Energy and of the ENSTAR Alaska Group 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 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 Seagull Energy.
The results of operations of Seagull Mid-South Inc. ("Seagull Mid-South"),
formerly Arkla Exploration Company ("Arkla Exploration") have been included with
those of Seagull Energy since December 31, 1992, and the results of operations
of certain gas and oil assets (the "Mid-Continent Assets") purchased from Mesa
Limited Partnership, a predecessor of Mesa, Inc., ("Mesa") have been included
with those of Seagull Energy since March 8, 1991, the respective acquisition
dates (see Note 3).
V-28
<PAGE> 170
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Partnerships in which Seagull Energy holds a 50% interest or less are
accounted for using the equity method.
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..................... $23,034 $12,391 $12,373
Income taxes............................................ $ 3,804 $(2,461) $(1,665)
</TABLE>
Inventories. Materials and supplies are valued at the lower of average cost
or market value (net realizable value). Inventories of hydrocarbon products are
valued on a first-in, first-out (FIFO) basis at the lower of cost or market
value.
Gas and Oil Properties. Seagull Energy uses the successful efforts method
of accounting for its gas and oil operations. The costs of unproved leaseholds
are capitalized pending the results of exploration efforts. Unproved leaseholds
with significant acquisition costs are assessed periodically, on a
property-by-property basis, and a loss is recognized to the extent, if any, that
the cost of the property has been impaired. Unproved leaseholds whose
acquisition costs are not individually significant are aggregated, and the
portion of such costs estimated to ultimately prove nonproductive, based on
experience, is amortized over an average holding period. As unproved leaseholds
are determined to be productive, the related costs are transferred to proved
leaseholds. Exploratory dry holes and geological and geophysical charges are
expensed. Depletion of proved leaseholds and amortization and depreciation of
the costs of all development and successful exploratory drilling are provided by
the unit-of-production method based upon estimates of proved gas and oil
reserves on a field-by-field basis. Estimated costs (net of salvage value) of
dismantling and abandoning gas and oil production facilities are computed and
included in depreciation and depletion using the unit-of-production method. The
total estimated future dismantlement and abandonment cost being amortized as of
December 31, 1993 was approximately $23.2 million. On a world-wide basis, should
the net capitalized costs exceed the estimated future undiscounted after tax net
cash flows from proved gas and oil reserves, such excess costs would be charged
to expense.
Other Property, Plant and Equipment. Depreciation of gas gathering pipeline
facilities is computed principally using the unit-of-production method based on
the estimated proved reserves to be transported through the pipeline facility.
Depreciation of the gas processing plants and other property is computed using
the straight-line method over their estimated useful lives, which vary from 3 to
20 years. Gain or loss on sale or disposition of property is credited or charged
to interest income and other.
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. Seagull Energy records revenue following the
entitlement method of accounting for production gas imbalances.
Profits on construction of pipeline systems for third parties is recognized
under the percentage-of-completion method.
V-29
<PAGE> 171
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
General and Administrative Expense. General and administrative expenses
represent various overhead costs of corporate departments. All overhead expenses
directly related to the operations of Seagull Energy's business segments are
included in operations and maintenance costs and exploration charges.
Interest Rate Swap Agreements. Seagull Energy has entered into interest
rate swap agreements to manage the impact of changes in interest rates. The
differential interest to be paid or received is accrued as interest rates change
and is recognized over the life of the agreements as a component of interest
expense.
Income Taxes. Effective January 1, 1992, Seagull Energy adopted Statement
of Financial Accounting Standards ("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, Seagull Energy 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.
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 as a
reduction in general and administrative expenses.
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
V-30
<PAGE> 172
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 ENSTAR Alaska Group's
statements of earnings, such amounts are 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. ACQUISITIONS
Seagull Mid-South Inc. On December 31, 1992, Seagull Energy purchased all
of the outstanding capital stock of Arkla Exploration from Arkla, Inc. ("Arkla")
for approximately $397 million in cash, subject to certain customary
post-closing adjustments (the "Mid-South Acquisition"). The purchase price was
adjusted for, among other things, certain title defects and an adjustment
relating to the net aggregate gas imbalances attributable to Arkla Exploration's
interest in the properties it owned. The final adjusted purchase price was
approximately $393 million. The acquisition was accounted for as a purchase.
Seagull Mid-South's assets (the "Mid-South Properties") consist almost
exclusively of natural gas and oil reserves and developed and undeveloped lease
acreage concentrated principally in a small number of fields located in
Arkansas, Louisiana, Mississippi, Oklahoma and Texas. Arkla Exploration entered
into prepaid gas and oil sales contracts prior to its acquisition by Seagull
Energy. As of December 31, 1992, Seagull Mid-South was obligated to deliver for
no future consideration approximately 13 billion cubic feet ("Bcf") of gas and
approximately one million barrels ("MMbbl") of oil and condensate pursuant to
these contracts over periods expiring January 31, 1994 and June 30, 1995,
respectively. As of December 31, 1993, approximately 620 million cubic feet
("MMcf") of gas and 529,000 barrels of oil and condensate remain to be delivered
under these contracts.
Mid-Continent Assets. On March 8, 1991, Seagull Energy purchased the
Mid-Continent Assets from Mesa for approximately $199 million in cash after
certain adjustments. In addition, Seagull Energy and Mesa entered into a
contingent gas price payment agreement at the closing pursuant to which Seagull
Energy would generally pay an additional $450,000 (up to a maximum of $25
million) for each $.01 that the weighted average wellhead price, as defined, of
natural gas sold from the Mid-Continent Assets exceeds $1.80 per thousand cubic
feet ("Mcf") for the three year period ending December 31, 1993. The estimated
weighted average wellhead price, as defined, of natural gas sold for the three
year period ended December 31, 1993 was $1.76 per Mcf. Based upon this estimated
price, Seagull Energy does not anticipate that any payment will be required
under the contingent gas price payment agreement. The Mid-Continent Assets
include gas and oil interests generally located in Western Oklahoma and the
Texas Panhandle and certain related assets. The acquisition was accounted for as
a purchase.
See Note 17 for information concerning the acquisition of Novalta Resources
Inc. ("Novalta") (the "Seagull Canada Acquisition") in January 1994.
V-31
<PAGE> 173
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1992
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gas and oil properties....................................... $ 972,460 $888,178
Pipeline facilities.......................................... 63,019 72,413
Gas processing plants........................................ 15,808 12,301
Equipment and other.......................................... 10,531 10,264
---------- --------
$1,061,818 $983,156
---------- --------
---------- --------
</TABLE>
Interest cost capitalized as property, plant and equipment amounted to
approximately $0.8 million in 1993 and 1992 and $1.6 million in 1991. Total
depreciation, depletion and amortization related to property, plant and
equipment amounted to approximately $111.0 million, $57.3 million and $46.9
million in 1993, 1992 and 1991, respectively.
5. SUPPLEMENTAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED)
For disclosures with respect to supplemental gas and oil producing
activities, reference is made to Note 4 of notes to the consolidated financial
statements of Seagull Energy Corporation beginning on page IV-21 of Annex IV.
6. OTHER NONCURRENT ASSETS
Other assets include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1992
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Natural gas imbalances........................................... $31,271 $35,418
Debt acquisition costs........................................... 18,387 16,656
Investments in partnerships...................................... 7,377 8,883
Acquisition costs -- Seagull Canada Acquisition.................. 7,745 --
Other............................................................ 3,774 3,921
------- -------
$68,554 $64,878
------- -------
------- -------
</TABLE>
Natural Gas Imbalances. Seagull Energy records revenue following the
entitlement method of accounting for production imbalances, in which any excess
amount received above its share is treated as a liability. If less than Seagull
Energy's entitlement is received, the underproduction is recorded as an asset.
Seagull Energy records revenue from gas marketing sales net of the cost of gas
and third-party delivery fees, with any resulting transportation imbalances
recorded as a current receivable or payable.
V-32
<PAGE> 174
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Seagull Energy's natural gas imbalance assets and liabilities were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1993 1992
------------------- -------------------
AMOUNT VOLUMES AMOUNT VOLUMES
------- ------- ------- -------
(DOLLARS IN THOUSANDS AND VOLUMES IN BCF)
<S> <C> <C> <C> <C>
ASSETS:
Current.................................... $ 5,808 3.6 $ 2,686 1.8
Noncurrent................................. 31,271 20.9 35,418 23.8
------- ------- ------- -------
$37,079 24.5 $38,104 25.6
------- ------- ------- -------
------- ------- ------- -------
LIABILITIES:
Current.................................... $ 7,546 4.5 $ 5,552 3.7
Noncurrent................................. 31,693 20.7 39,011 25.7
------- ------- ------- -------
$39,239 25.2 $44,563 29.4
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Debt Acquisition Costs.
Debt acquisition costs represent financing costs incurred in connection
with the execution of various facilities entered into or securities issued by
Seagull Energy. These costs are capitalized and amortized to interest expense
over the life of the related debt. As discussed in Note 7, Seagull Energy has a
$475 million revolving credit line which matures in 1999. Financing costs
initially incurred in 1992 of approximately $16.7 million were capitalized in
connection with this facility and will be amortized to interest expense over
periods ending December 31, 1999. Approximately $5.0 million in financing costs
incurred were capitalized in connection with the July 1993 issuance of $250
million in senior and senior subordinated notes, and will be amortized to
interest expense over periods ending August 1, 2005 (See Note 7).
Investments in Partnerships.
Seagull Shoreline System. Seagull Energy, through one of its combined
subsidiaries, serves as operator and at December 31, 1993 held
approximately a 19% interest in the Seagull Shoreline System ("SSS"), a
partnership that owns an offshore gas pipeline. At December 31, 1993, the
investment in SSS amounted to $2.3 million.
Cavallo Pipeline Company. A combined subsidiary of Seagull Energy owns
a 50% interest in, and operates, Cavallo Pipeline Company ("Cavallo"). The
Cavallo system consists of an offshore pipeline system. At December 31,
1993, the investment in Cavallo amounted to approximately $5.1 million.
The financial position and results of operations of SSS and Cavallo are
summarized below. The amounts in the table include interests that are not 100%
attributable to Seagull Energy:
V-33
<PAGE> 175
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SSS CAVALLO
------------------------------- -------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------- -------------------------------
1993 1992 1991 1993 1992 1991
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA (for the
year):
Revenues..................... $ 9,309 $ 7,366 $ 6,718 $ 4,737 $ 4,061 $ 2,931
Earnings before income
taxes..................... 5,467 3,575 2,899 2,624 2,061 839
BALANCE SHEET DATA
(at December 31):
Current assets............... 1,782 1,513 1,545 982 1,175 1,017
Noncurrent assets............ 12,975 15,152 17,326 10,148 11,412 12,665
Current liabilities.......... 435 653 720 163 118 179
</TABLE>
Seagull Energy's interest in the combined earnings of SSS and Cavallo for
the years ended December 31, 1993, 1992 and 1991 was $2.5 million, $2.2 million
and $1.5 million, respectively.
In April 1993, SSS filed an application with the Federal Energy Regulatory
Commission (the "FERC") requesting an increase in its per unit transportation
tariff to $0.09 per MMbtu. To date, the FERC has not approved nor disapproved
SSS's application and it cannot be determined what rate the FERC will ultimately
approve. As a result, the 1993 revenues and earnings before income taxes
disclosed above for SSS could be reduced by as much as approximately $2.5
million if the tariff increase is ultimately not approved by the FERC. Seagull
Energy's interest in the 1993 combined earnings of SSS and Cavallo reflects a
reduction of approximately $0.5 million for 1993 transportation tariffs which
may not ultimately be approved by the FERC.
Acquisition Costs -- Seagull Canada Acquisition. Acquisition costs
represent costs incurred in connection with the Seagull Canada Acquisition,
including a deposit of approximately $7.5 million paid in November 1993 which
was applied as part of the cash purchase price paid in January 1994 (see Note
17).
7. LONG-TERM DEBT
Long-term debt for 1993 and 1992 was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Money market facilities, variable rates (3.875%-4.75% at December 31,
1993)
due in 1994.......................................................... $ 70,000 $ --
Term Loan, variable rates (8% at December 31, 1992) due in 1993-1995... -- 150,000
Revolving credit, variable rates (6% and 8% at December 31, 1993 and
1992)
due in 1996-1999..................................................... 77,000 391,000
Senior notes, 7.875%, due August 1, 2003............................... 100,000 --
Senior subordinated notes, 8.625%, due August 1, 2005.................. 150,000 --
-------- --------
Total long-term debt......................................... $397,000 $541,000
-------- --------
-------- --------
</TABLE>
The combined financial statements reflect debt and related interest expense
incurred directly by Seagull Energy. The change in the equity structure of the
Company contemplated by the ENSTAR Stock Proposal will not affect responsibility
for the liabilities of the Company or any of its subsidiaries.
Money Market Facilities. Seagull Energy 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
V-34
<PAGE> 176
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the banks at their discretion and may be canceled at either Seagull Energy's or
the banks' discretion. The lines are subject to annual renewal. In connection
with the Seagull Canada Acquisition (see Note 17), borrowings outstanding under
Seagull Energy's money market facilities were reduced to $10 million in January
1994 and the remaining $60 million was refinanced with borrowings under the
Revolver (defined below).
Seagull Energy Corporation Revolving Credit. During 1993, Seagull Energy
amended and restated its credit agreement with a group of major U. S. and
international banks (the "Banks") converting the facility into a single
revolving credit facility (the "Revolver") with a total commitment of $475
million and a final maturity of December 31, 1999. The facility was also amended
to, among other things, release as security all of the following: (i) a pledge
of the stock of all direct or indirect subsidiaries of the Company whose shares
had been pledged; (ii) a mortgage on all gas and oil properties of the Company
and its subsidiaries; and (iii) guaranties from each of the Company's
subsidiaries pledging stock or mortgaging properties as described above. 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 Revolver is an unsecured credit facility that contains restrictive
provisions regarding the incurrence of additional debt, the making of
investments outside existing lines of business, the maintenance of certain
financial ratios (based upon the Company's consolidated financial condition and
results of operations), the incurrence of additional liens, the declaration or
payment of dividends (other than dividends payable on up to $100 million of
preferred stock or dividends payable solely in the form of additional shares of
Seagull Common Stock) and the repurchase or redemption of capital stock. Under
the most restrictive of these provisions, approximately $9.1 million was
available for payment of cash dividends on Seagull Common Stock or to repurchase
Seagull Common Stock as of December 31, 1993. As of January 4, 1994, immediately
following the Seagull Canada Acquisition, the Company's consolidated Debt to
Capitalization Ratio, as defined under the Revolver, increased to 60.2%. In the
event the Company's consolidated Debt to Capitalization Ratio is in excess of
60% as of March 31, 1994, the Company would not be able to pay any cash
dividends on or repurchase any Seagull Common Stock under these currently
existing provisions. No cash dividends have been paid on Seagull Common Stock
since the Company became an independent entity in 1981. However, in connection
with the consummation of the ENSTAR Alaska Stock Offering, the Revolver will be
required to be amended to allow for the payment of cash dividends on the ENSTAR
Alaska Stock.
The Revolver bears interest, at Seagull Energy's option, at a rate equal to
(i) either one, two, three or six month Adjusted LIBOR, plus a margin (the
"LIBOR Margin") or (ii) the Reference Rate, plus a margin (the "Prime Margin").
The "Reference Rate" is the greater of (i) 0.5% per annum above the daily
federal funds rate or (ii) the prime rate of the agent bank. The LIBOR Margin
ranges from 0.625% to 2.5% per annum, depending upon the Company's credit rating
and consolidated Debt to Capitalization Ratio (as defined under the Revolver),
and the Prime Margin ranges from 0% to 1.5% per annum, depending upon the same
factors.
Under provisions included in the Revolver, the amount of senior
indebtedness available to Seagull Energy is subject to a borrowing base (the
"Borrowing Base"), based upon the proved reserves of the exploration and
production segment and the financial performance of the Pipeline and Marketing
segment and the ENSTAR Alaska Group. The Borrowing Base is generally determined
annually, but may be redetermined, at the option of either Seagull or the Banks,
one additional time each year, and will be redetermined upon the sale of certain
assets included in the Borrowing Base. If the Borrowing Base is redetermined in
such a manner that the amount outstanding under the Revolver (or any other
permitted senior debt facility) exceeds the new Borrowing Base, then Seagull
Energy must repay the Revolver or such other indebtedness in an amount necessary
to cure the deficiency. If such deficiency has not been cured within 30 days,
such deficiency must be cured in three equal quarterly installments.
V-35
<PAGE> 177
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of January 4, 1994, immediately following the Seagull Canada
Acquisition, the available commitment under the Revolver is subject to a $610
million Borrowing Base and is determined after consideration of outstanding
borrowings under Seagull Energy's other senior debt facilities. On that date,
borrowings outstanding under the Revolver were $188.5 million, leaving
immediately available unused commitments of approximately $149.3 million, net of
outstanding letters of credit of $2.2 million, $100 million of borrowings
outstanding under the Senior Notes (defined below), the nominated maximum
borrowing availability of $160 million under the Canadian Credit Agreement
(defined below), and $10 million in borrowings outstanding under the money
market facilities.
Canadian Credit Agreement. In connection with the Seagull Canada
Acquisition (see Note 17), Seagull Energy Canada Ltd., 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 Seagull Energy 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, which are currently denominated
in Canadian dollars.
Borrowings outstanding in Canadian dollars bear interest, at Seagull Energy
Canada Ltd.'s option, at a rate equal to (i) either one, two, three or six month
Bankers' Acceptance Rate plus the LIBOR Margin or (ii) the Paying Agent's prime
rate plus the Prime Margin. Borrowings outstanding under the Canadian Credit
Agreement funded in U. S. dollars bear interest, at Seagull Energy Canada Ltd.'s
option, in a manner similar to borrowings outstanding under the Revolver as
described above. The Canadian Credit Agreement is an unsecured credit facility
guaranteed by the Company and contains restrictive provisions similar to those
included in the Revolver.
Senior and Senior Subordinated Notes. In July 1993, Seagull Energy sold
$100 million of senior notes (the "Senior Notes") and $150 million of senior
subordinated notes (the "Senior Subordinated Notes") (collectively the "Notes")
in an underwritten public offering. 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 Seagull Energy, in whole or in part, at redemption prices declining
from 102.59% in 2000 to 100.00% in 2003 and thereafter (expressed as a
percentage of principal amount), plus accrued interest to the redemption date.
The Notes were issued at par and interest is paid semi-annually.
The Notes represent unsecured obligations of Seagull Energy. The Senior
Notes rank pari passu with senior indebtedness of the Company while the Senior
Subordinated Notes are subordinate in right of payment to all existing and
future senior indebtedness of the Company. The Notes contain conditions and
restrictive provisions including, among other things, restrictions on additional
indebtedness by the Company and by its subsidiaries, as well as restrictions on
the incurrence of secured debt and entering into sale and leaseback
transactions. Net proceeds from the offering, totaling approximately $245.0
million, were used to repay borrowings outstanding under the Revolver.
Interest Rate Swap Agreements. Seagull Energy enters into interest rate
swap agreements to manage the impact of changes in interest rates. During 1993,
the following interest rate swap agreements were in effect:
V-36
<PAGE> 178
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
INTEREST RATE
NOTIONAL EFFECTIVE MATURITY ----------------------
AMOUNT DATE DATE RECEIVED PAID
- - ----------- -------- -------- --------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C>
$15,000 9/11/92 9/11/93 Floating 5.52%
40,000 9/11/92 9/11/95 Floating 6.76%
20,000 9/16/92 9/16/94 Floating 6.265%
25,000 9/11/92 9/11/94 Floating 6.265%
50,000 8/2/93 7/31/98 5.635% Floating
50,000 8/2/93 7/31/97 5.43% Floating
50,000 8/2/93 7/31/96 5.199% Floating
</TABLE>
While notional amounts are used to express the volume of the interest rate
swap transactions discussed above, the amount potentially subject to credit
risk, in the event of nonperformance by the counterparties, is significantly
smaller. For the year ended December 31, 1993, interest expense included
approximately $1.8 million net expense relating to these agreements.
Annual Maturities. $2.0 million of long-term debt at December 31, 1993 will
mature in 1998 with the remainder maturing thereafter. The required payments
related to the money market facilities are considered to be funded with amounts
available under the Revolver.
8. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Natural gas imbalances........................................ $31,693 $39,011
Prepaid gas and oil sales..................................... 2,732 10,322
Contingent consideration -- Wacker............................ -- 3,104
Other......................................................... 18,599 15,965
------- -------
$53,024 $68,402
------- -------
------- -------
</TABLE>
Natural Gas Imbalances. Revenues for natural gas production received and
sold by Seagull Energy in excess of its ownership percentage of total gas
production (See Note 6).
Prepaid Gas And Oil Sales. Prepayments received pursuant to prepaid gas and
oil sales contracts Arkla Exploration entered into prior to its acquisition by
Seagull Energy (See Notes 3 and 5).
Contingent Consideration -- Wacker. A portion of the adjusted purchase
price of Wacker Oil Inc. ("Wacker") withheld pending resolution of issues that
developed with respect to two of its producing gas wells prior to the closing of
the acquisition of Wacker by the Company in 1990. The disposition of the
contingent consideration was settled through arbitration on December 2, 1993
pursuant to provisions of the agreements executed in connection with the
acquisition. The arbitration resulted in a payment to the seller of $1 million
of the funds withheld at closing. This amount was paid in December 1993, and the
remaining unpaid contingent consideration was accounted for as a reduction to
the purchase price.
V-37
<PAGE> 179
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1993 1992
--------------------- ---------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents....................... $ 4,949 $ 4,949 $ 2,663 $ 2,663
Liabilities:
Long-term debt:
Term Loan.................................... -- -- (150,000) (150,000)
Revolver and money market facilities......... (147,000) (147,000) (391,000) (391,000)
Senior Notes................................. (100,000) (99,500) -- --
Senior Subordinated Notes.................... (150,000) (149,250) -- --
Interest rate swap agreements:
In a receivable position........................ -- 1,986 -- --
In a payable position........................... -- (2,709) -- (3,161)
</TABLE>
Cash and Cash Equivalents. The carrying amount approximates fair value
because of the short maturity of these instruments.
Long-Term Debt. The carrying amount of borrowings outstanding under the
Term Loan, Revolver and money market facilities approximates fair value because
these instruments bear interest at rates tied to current market rates.
The fair value of the Senior and Senior Subordinated Notes is estimated
based on quoted market prices for the same issues.
Interest Rate Swap Agreements. The fair values are obtained from the
financial institutions that are counterparties to the transactions. These values
represent the estimated amount Seagull Energy would pay or receive to terminate
the agreements, taking into consideration current interest rates and the current
creditworthiness of the counterparties. The interest rate swap agreements are
off balance sheet transactions and, accordingly, there are no respective
carrying amounts for these transactions included in the accompanying combined
balance sheets as of December 31, 1993 and 1992.
10. COMMON EQUITY
The sources of change in common equity are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Common equity, beginning of year........................... $181,906 $176,518 $114,979
Net earnings (loss)........................................ 20,150 (5,351) (4,519)
Contributions from the Company............................. 176,509 9,924 65,270
Net equity transactions with the ENSTAR Alaska Group....... 1,452 815 788
-------- -------- --------
Common equity, end of year................................. $380,017 $181,906 $176,518
-------- -------- --------
-------- -------- --------
</TABLE>
V-38
<PAGE> 180
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. EMPLOYEE BENEFIT PLANS
Retirement Plan. Effective January 1, 1986, Seagull Energy adopted an
unfunded retirement plan which provides for supplemental benefits to certain
officers and key employees. As of December 31, 1993, only one person was
designated to participate in such plan. Total expenses of the plan were
approximately $0.2 million for 1993 and 1992 and $0.3 million for 1991. The
retirement plan's costs are included in general and administrative expenses.
Thrift Plan. The Seagull 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. Seagull Energy contributions to the Thrift Plan
were approximately $1.1 million, $0.7 million and $0.6 million for the years
1993, 1992 and 1991, respectively. The Thrift Plan's costs are included in
operations and maintenance costs and general and administrative expenses.
Employee Stock Ownership Plan. On November 15, 1989, the Company formed the
Seagull Employee Stock Ownership Plan (the "ESOP") for the benefit of the
employees of Seagull Energy. Contributions from Seagull Energy to the ESOP of
approximately $0.5 million in 1993 and $0.4 million in 1992 and 1991 are
included in operations and maintenance costs and general and administrative
expenses.
12. INTEREST INCOME AND OTHER
Interest income and other includes the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1992 1991
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest income.................................................. $ 229 $ 150 $ 178
Seismic Litigation Settlement.................................... -- 4,606 --
Gain on sales of property, plant and equipment................... 4,175 177 46
Other............................................................ 1,065 (521) 835
------ ------ ------
$5,469 $4,412 $1,059
------ ------ ------
------ ------ ------
</TABLE>
Seismic Litigation Settlement. 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 1988 acquisition of Houston
Oil & Minerals Corporation ("HO&M") was actually delivered to other purchasers.
In accordance with the settlement agreement, Seagull Energy 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, Seagull Energy 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.
Gain on Sales of Property, Plant and Equipment. Interest income and other
for the year ended December 31, 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 $2.8 million. The parcels sold had proven
reserves estimated at approximately 19 Bcf of natural gas equivalents.
V-39
<PAGE> 181
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
13. 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.............................................. $ 232 $(3,702)
Adjustment for change in accounting principles....................... -- (690)
Common equity for compensation expense for tax purposes
in excess of amounts recognized for financial reporting purposes... (1,966) (214)
------- -------
$(1,734) $(4,606)
------- -------
------- -------
</TABLE>
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
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal..................................................... $ 2,240 $(1,770) $(1,956)
State....................................................... 314 (1,533) (1,693)
------- ------- -------
Total current....................................... 2,554 (3,303) (3,649)
------- ------- -------
Deferred:
Federal..................................................... (2,135) (2,941) (2,699)
State....................................................... (187) 2,542 738
------- ------- -------
Total deferred...................................... (2,322) (399) (1,961)
------- ------- -------
Income tax provision before cumulative effect of change in
accounting principles....................................... $ 232 $(3,702) $(5,610)
------- ------- -------
------- ------- -------
</TABLE>
The provision for income taxes before cumulative effect of change in
accounting principles for the years ended December 31, 1993 and 1992 is not
comparable to 1991 due to the adoption of SFAS No. 109, Accounting for Income
Taxes, effective January 1, 1992. Seagull Energy recognized the cumulative
effect of this change in accounting principle in the line item entitled
"Cumulative Effect of Change 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 to the net loss of approximately $0.7 million. The
effect of this change on earnings before income taxes for the year ended
December 31, 1992 was not material.
V-40
<PAGE> 182
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes before cumulative effect of change 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
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount computed using the statutory rate.......... $ 7,134 $(3,313) $(3,444)
Increase (Reduction) in taxes resulting from:
Utilization of Internal Revenue Code Section 29
(Tight Sands) credits........................ (4,773) -- --
Excess of tax basis over book basis of acquired
assets....................................... -- -- (1,712)
State income taxes, net......................... 82 665 (630)
Increase (Decrease) in deferred tax asset
valuation allowance.......................... (859) 1,119 --
Adjustments to beginning-of-the-year tax bases
per the 1992 and 1991 tax returns............ (657) (1,828) --
Increase in the beginning-of-the-year balance of
the deferred tax liabilities due to the
increase in the corporate federal income tax
rate......................................... 309 -- --
Other........................................... (1,004) (345) 176
------- ------- -------
Income tax provision before cumulative effect of
change in accounting principles................. $ 232 $(3,702) $(5,610)
------- ------- -------
------- ------- -------
</TABLE>
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)................................................ $(1,772) $(1,518)
Increase (Decrease) in deferred tax asset valuation
allowance.................................................... (859) 1,119
Increase in the beginning-of-the-year balance of the deferred
tax
liabilities due to the increase in the corporate federal
income
tax rate..................................................... 309 --
------- -------
$(2,322) $ (399)
------- -------
------- -------
</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.
V-41
<PAGE> 183
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment, due to differences in
depreciation, depletion and amortization.................. $ 15,811 $ 13,002
Investments in partnership, due to difference in
depreciation.............................................. 606 1,307
Other........................................................ (515) (680)
-------- --------
Deferred tax liabilities....................................... 15,902 13,629
-------- --------
Deferred tax assets:
Minimum tax credit carryforwards............................. (12,221) (9,024)
Investment tax credit carryforwards.......................... (1,339) (1,691)
Deferred compensation/retirement related items accrued for
financial reporting purposes.............................. (3,028) (2,221)
Contingent consideration related to
acquisitions/dispositions................................. (604) (1,975)
Other........................................................ (883) 573
-------- --------
Deferred tax assets............................................ (18,075) (14,338)
Less -- valuation allowance.................................... 1,943 2,802
-------- --------
Net deferred tax assets........................................ (16,132) (11,536)
-------- --------
Net deferred tax liabilities (assets).......................... $ (230) $ 2,093
-------- --------
-------- --------
</TABLE>
For federal income tax purposes, as of December 31, 1993, Seagull Energy
has unused investment tax credits of approximately $1.3 million which will
expire in the years 1998 through 2000, and unused minimum tax credits of
approximately $12.2 million which are available over an indefinite period.
During 1991, the tax effects of timing differences were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1991
-----------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Net operating loss offsetting deferred taxes for financial accounting
purposes........................................................... $(7,778)
Depreciation, depletion and partnership earnings..................... (4,837)
Gas and oil property costs capitalized for financial accounting
purposes........................................................... 12,180
Minimum tax credit carryforward for tax purposes..................... (1,330)
Other................................................................ (196)
-----------------
Total deferred tax provision......................................... $(1,961)
-----------------
-----------------
</TABLE>
V-42
<PAGE> 184
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
14. BUSINESS SEGMENTS
Information on operations by business segment is as follows for the year
ended December 31:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:(*)
Exploration and production............................... $227,437 $ 91,991 $ 81,099
Pipeline and marketing................................... 42,484 37,240 37,823
-------- -------- --------
$269,921 $129,231 $118,922
-------- -------- --------
-------- -------- --------
OPERATING PROFIT:
Exploration and production............................... $ 42,969 $ (1,613) $ 1,275
Pipeline and marketing................................... 14,065 9,057 7,884
-------- -------- --------
57,034 7,444 9,159
-------- -------- --------
General and administrative expense....................... (11,666) (10,099) (8,427)
Interest expense......................................... (30,455) (11,500) (11,920)
Interest income and other................................ 5,469 4,412 1,059
-------- -------- --------
Earnings (Loss) before income taxes........................ $ 20,382 $ (9,743) $(10,129)
-------- -------- --------
-------- -------- --------
OPERATIONS AND MAINTENANCE EXPENSE:
Exploration and production............................... $ 63,651 $ 30,844 $ 27,951
Pipeline and marketing................................... 20,266 21,103 20,748
-------- -------- --------
$ 83,917 $ 51,947 $ 48,699
-------- -------- --------
-------- -------- --------
DEPRECIATION, DEPLETION AND AMORTIZATION:
Exploration and production............................... $103,552 $ 52,855 $ 42,646
Pipeline and marketing................................... 5,493 3,192 3,278
-------- -------- --------
$109,045 $ 56,047 $ 45,924
-------- -------- --------
-------- -------- --------
IDENTIFIABLE ASSETS:
Exploration and production............................... $816,812 $831,222 $371,208
Pipeline and marketing................................... 70,675 65,378 49,611
Corporate................................................ 45,063 20,478 8,706
-------- -------- --------
$932,550 $917,078 $429,525
-------- -------- --------
-------- -------- --------
CAPITAL EXPENDITURES:
Exploration and production............................... $ 97,818 $ 32,115 $ 58,459
Pipeline and marketing................................... 2,115 1,622 634
Corporate................................................ 2,015 890 2,124
-------- -------- --------
$101,948 $ 34,627 $ 61,217
-------- -------- --------
-------- -------- --------
ACQUISITIONS, NET OF CASH ACQUIRED:
Exploration and production............................... $ 29,470 $391,531 $201,767
Pipeline and marketing................................... -- 10,357 --
-------- -------- --------
$ 29,470 $401,888 $201,767
-------- -------- --------
-------- -------- --------
</TABLE>
- - ---------------
(*) Intersegment revenues are recorded at market prices.
V-43
<PAGE> 185
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
15. 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,............... $ 64,000 $ 30,077 $10,322 $(2,511) $ (699) $(3,437)(1)
June 30,................ 68,048 29,065 13,841 2,346 3,739 1,859(2)
September 30,........... 66,869 32,918 16,460 1,183 8,598(4) (2,189)
December 31,............ 71,004 37,171 16,411 6,426 8,512 (1,584)(3)
-------- -------- ------- ------- ------- -------
Total......... $269,921 $129,231 $57,034 $ 7,444 $20,150 $(5,351)
-------- -------- ------- ------- ------- -------
-------- -------- ------- ------- ------- -------
</TABLE>
- - ---------------
(1) Includes the cumulative effect of a change in accounting principles in the
first quarter of 1992 representing a reduction to the net loss of
approximately $0.7 million. (See Notes 1 and 13).
(2) Includes an after-tax gain in the second quarter of 1992 of approximately
$2.9 million relating to the Seismic Litigation Settlement. (See Note 12).
(3) Includes two charges in the fourth quarter of 1992 resulting from the
expensing of $2.3 million in unamortized loan acquisition costs relating to
the repayment of the then existing revolving credit line and $1.2 million in
costs related to a potential acquisition which was not consummated. The
effect of these charges on net earnings was a reduction of approximately
$1.5 million and $0.8 million, respectively.
(4) Includes an after-tax gain in the third quarter of 1993 of approximately
$2.7 million relating to sales of non-strategic oil and gas producing
properties. (See Note 12).
16. COMMITMENTS AND CONTINGENCIES
Lease Commitments. Seagull Energy leases certain office space and equipment
under operating lease arrangements which contain renewal options and escalation
clauses. Future minimum rental payments under these leases range between $1.6
million and $2.8 million in each of the years 1994-1998, and total $10.3 million
for all subsequent years.
Total rental expense under operating leases for 1993, 1992 and 1991 was
approximately $1.6 million, $1.7 million and $1.6 million, respectively.
Concentrations of Credit Risk. Seagull Energy operates in various phases of
the natural gas industry with sales to resellers such as pipeline companies and
local distribution companies as well as 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 segment of the natural gas industry, the Company believes that
its level of credit-related losses due to such economic fluctuations has been
immaterial and will continue to be immaterial to the results of operations in
the long term.
Litigation. Seagull Energy is a party to ongoing litigation in the normal
course of business or other litigation with respect to which Seagull Energy 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 Seagull Energy cannot be predicted with certainty, management believes
that the effect on its financial condition and results of operations, if any,
will not be material.
V-44
<PAGE> 186
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUBSEQUENT EVENT
In January 1994, an indirect wholly owned subsidiary of Seagull Energy
acquired all of the outstanding shares of stock of Novalta and an intercompany
note (the "Note") from Novalta to its parent, Novacor Petrochemicals Ltd.
("Novacor Petrochemicals") for a purchase price of approximately $203 million in
cash, subject to customary post-closing adjustments described below (the
"Seagull Canada Acquisition"). The economic effective date of the Seagull Canada
Acquisition was December 31, 1993 (the "Effective Date"). The purchase price was
adjusted for, among other things, working capital and capital expenditures for
1993 in excess of a specified threshold pursuant to the provisions of the Sale
Agreement, dated November 19, 1993, between Seagull Energy and Novacor
Petrochemicals. Effective as of the January 1994 Closing Date, Novalta was
amalgamated with Seagull Energy Canada Ltd., the indirect subsidiary of Seagull
Energy that acquired Novalta. The resulting amalgamated company was named
Seagull Energy Canada Ltd. ("Seagull Canada"). As a result of the amalgamation,
the Note was extinguished. The acquisition was accounted for as a purchase.
Seagull Canada's assets (the "Seagull Canada Properties") consist primarily
of natural gas and oil reserves and developed and undeveloped lease acreage
concentrated principally in a small number of fields located in Alberta, Canada.
According to reserve estimates prepared as of December 31, 1993 by an
independent petroleum engineering firm, the Seagull Canada Properties had proved
reserves totaling 257.4 Bcf of natural gas and 2.8 MMbbl of oil, condensate and
natural gas liquids. Approximately 80% of these reserves and 75% of Seagull
Canada's total producing wells are concentrated in 16 of 95 total fields. As of
December 31, 1993, the Seagull Canada Properties consisted of lease acreage
holdings including approximately 200,000 net developed acres and approximately
250,000 net undeveloped acres.
In connection with the Seagull Canada Acquisition, Seagull Energy entered
into the Canadian Credit Agreement (see Note 7).
The following table presents the unaudited pro forma results of the
combined operations of Seagull Energy and Novalta for the year ended December
31, 1993 as though the acquisition of Novalta had occurred on January 1, 1993,
financed primarily with borrowings under the Canadian Credit Agreement as well
as borrowings under the Revolver (see Note 7).
The results presented give effect to depreciation, depletion and
amortization of assets recognized in recording the purchase, interest on debt
incurred to effect the purchase and the related income tax effects of these
items. The unaudited pro forma information presented does not purport to be
indicative of actual results if the combination had been in effect on the date
or for the period indicated, or of future results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993
---------------------------
PRO
FORMA
ACTUAL (UNAUDITED)
-------- --------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Revenues......................................................... $269,921 $302,279
Net earnings..................................................... $ 20,150 $ 15,114
</TABLE>
The following table sets forth the pro forma consolidated total assets and
pro forma capitalization of Seagull Energy as of December 31, 1993 as though the
acquisition of Novalta had occurred on December 31, 1993, financed primarily
with borrowings under the Canadian Credit Agreement as well as borrowings under
the Revolver (see Note 7).
V-45
<PAGE> 187
SEAGULL ENERGY
(WITHOUT ENSTAR ALASKA GROUP)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------
PRO FORMA
ACTUAL (UNAUDITED)
-------- ----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Total assets........................................................... $932,550 $1,156,953
-------- ----------
-------- ----------
Long-term portion of debt.............................................. $397,000 $ 590,306
Common equity.......................................................... 380,017 380,017
-------- ----------
Total capitalization................................................... $777,017 $ 970,323
-------- ----------
-------- ----------
Long-term portion of debt to total capitalization...................... 51.1% 60.8%
-------- ----------
-------- ----------
</TABLE>
V-46
<PAGE> 188
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Seagull Energy Corporation:
We have audited the accompanying combined balance sheets of Seagull Energy
(without 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
Seagull Energy (without ENSTAR Alaska Group) should be read in conjunction with
the audited consolidated financial statements of Seagull Energy Corporation as
listed in the index on page IV-1.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Seagull Energy
(without 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 Note 13 to the combined financial statements, Seagull
Energy (without ENSTAR Alaska Group) adopted the provisions of the Financial
Accounting Standards Board Statement of Financial Accounting Standards 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.
V-47
<PAGE> 189
ENSTAR ALASKA GROUP
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Description of Business.............................................................. VI-2
Unaudited Pro Forma Condensed Statement of Earnings.................................. VI-6
Management's Discussion and Analysis of Financial Condition and Results of Operations
(Unaudited)........................................................................ VI-8
Combined Financial Statements:
Combined Statements of Earnings.................................................... VI-14
Combined Balance Sheets............................................................ VI-15
Combined Statements of Cash Flows.................................................. VI-16
Notes to Combined Financial Statements............................................. VI-17
Independent Auditors' Report....................................................... VI-28
</TABLE>
VI-1
<PAGE> 190
ENSTAR ALASKA GROUP
DESCRIPTION OF BUSINESS
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"). 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. Revenues from the ENSTAR Alaska Group
accounted for 29%, 46% and 52% of the Company's consolidated revenues for 1993,
1992 and 1991, respectively.
The ENSTAR Alaska Group's predecessor was formed 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 1992.
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 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").
GAS DISTRIBUTION SYSTEM
ENG distributes natural gas through approximately 1,916 miles of gas mains
to approximately 88,200 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 year ended December 31, 1993, ENG added
approximately 55 miles of new gas distribution mains, installed 1,791 new
service lines and added approximately 1,800 net customers. ENG anticipates
relatively modest growth in its residential customer base and will install
additional main and service lines to accommodate this growth.
ENG distributes gas to its customers under tariffs and contracts approved
by the APUC that provide for varying delivery priorities. ENG's business is
seasonal with approximately 65% of its sales made in the first and fourth
quarters of each year.
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. For residential service, that rate, as
of February 1994, was $3.67 per Mcf of natural gas, versus comparable costs of
$4.31 in Houston, $6.71 in Chicago and $8.77 in New York City. At the same time
in the Anchorage area, fuel oil costs were 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.
In 1993, purchase/resale volumes represented 72% of ENG's throughput. The
remaining volumes are transported for power and industrial customers for a
transportation fee. Purchase/resale volumes accounted for 91% of ENG's operating
margin in 1993.
ENG'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
VI-2
<PAGE> 191
for about $6.8 million in annual operating margin and about 14 Billion cubic
feet ("Bcf") per year in volumes, which represent about 14% and 35%,
respectively, of ENG totals.
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. 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
will average $1.72 per Mcf, including reimbursements for severance taxes. The
Marathon Contract, as amended, has been approved by the APUC.
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 the
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 amendments revised the price to a base price of $1.971 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 1993 price
under the Shell Contract, after application of contractual adjustments, was
approximately $2.03 per Mcf, including reimbursements of 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.
Combined, the Marathon and Shell Contracts will supply all of ENSTAR
Alaska's gas supply requirements through the year 2001.
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.
The ENSTAR Alaska Group purchases its natural gas under contracts in which
the price is indexed to 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
fuel oil prices due to world-wide 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.
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 APC under the Marathon Contract and the Shell Contract
would have a current reserve life index of approximately 14 years.
BUSINESS CLIMATE
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. 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.
VI-3
<PAGE> 192
Recent population and employment estimates continue to show modest economic
growth in ENSTAR Alaska Group's service area into the mid-1990's, followed by a
leveling off. Anchorage's population, which is about 45% of the state's total,
was 242,600 as of July 1993, up approximately 2,400 from the prior year.
Anchorage employment increased by 2,700 for the same period to 121,000 jobs. For
the past four years, Anchorage employment exceeded the pre-recession peak of
114,300 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%. 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. Accordingly, the ENSTAR Alaska Group estimates that the
number of customers who are connected to its system but do not consume gas is
approximately 0.6% of the ENSTAR Alaska Group's total accounts, as compared to
2.1% at the end of 1988.
NEW MARKETS
Distribution system expansion into formerly unserved areas also continues
to offer potential for increased markets. The ENSTAR Alaska Group also believes
that transportation of natural gas for large industrial customers could provide
additional opportunities. Facilities planned for 1994 and 1995 will make gas
available for the first time in the Big Lake area of the Matanuska-Susitna
Valley. This project, like others completed by the ENSTAR Alaska Group in the
past, is being financed through customer-funded improvement districts.
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.
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.
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, 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 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 natural 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, displacing gas sales of
approximately 1.3 Bcf per year. However, the ENSTAR Alaska Group continues to
transport these volumes, although at a lower fee than the margin earned on sales
volumes. The net result of this loss of business has been approximately $800,000
in operating margin per year.
If any other existing large customers of the ENSTAR Alaska Group 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 for those customers because the large distance of remaining user
facilities from producing fields would preclude pipeline by-pass.
VI-4
<PAGE> 193
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.
REGULATION
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 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 a rate increase of
3.26% and authorized a rate of return on common equity of 15.65%. The ENSTAR
Alaska Group has no significant regulatory issues pending before the APUC. Since
its inception in 1961, the ENSTAR Alaska Group has participated in only three
formal rate proceedings.
EMPLOYEES
As of February 28, 1994, the ENSTAR Alaska Group had 198 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.
VI-5
<PAGE> 194
ENSTAR ALASKA GROUP
UNAUDITED PRO FORMA CONDENSED STATEMENT OF EARNINGS
The unaudited pro forma condensed statement of earnings for the year ended
December 31, 1993 gives effect to the issuance and sale of shares of ENSTAR
Alaska Group representing 100% of the equity attributable to the ENSTAR Alaska
Group in a public offering as if the sale occurred on January 1, 1993. The net
proceeds of the ENSTAR Alaska Stock Offering would 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 December 31, 1993 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 Securities and Exchange 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.
VI-6
<PAGE> 195
ENSTAR ALASKA GROUP
UNAUDITED PRO FORMA CONDENSED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
CONFORMING PRO 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
General and Administrative Expense................ -- -- --
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..................................... 7,500(A) 7,500(B)
----------- ---------
----------- ---------
</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 ENSTAR Alaska Stock Offering.
(B) The weighted average number of common shares outstanding of ENSTAR Alaska
Stock is calculated assuming the issuance and sale of 7,500,000 shares of
ENSTAR Alaska Stock in the ENSTAR Alaska Stock Offering.
VI-7
<PAGE> 196
ENSTAR ALASKA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (UNAUDITED)
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.
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 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 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 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 beginning
on page VI-15 of this Annex.
GENERAL
Operating profit for the ENSTAR Alaska Group is affected by weather,
regulatory action and customer growth 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 Alaska Public Utilities
Commission (the "APUC"). In May 1986 the APUC granted the ENSTAR Alaska Group a
rate increase of 3.26% and authorized a rate of return on common equity of
15.65%. The ENSTAR Alaska Group has no significant regulatory issues pending
before the APUC.
VI-8
<PAGE> 197
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
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.
Because the ENSTAR Alaska Group's sales prices are adjusted to include the
projected cost of its 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 significant fluctuations in fuel oil prices due to world wide political
events and changing market conditions.
Based on gas purchases during the twelve 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.
VI-9
<PAGE> 198
RESULTS OF OPERATIONS
Summarized financial and operating data for the ENSTAR Alaska Group are as
follows:
<TABLE>
<CAPTION>
PERCENT CHANGE
--------------------
1993 1992 1991 1992-'93 1991-'92
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
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........ 20,880 19,976 19,678 + 5 + 2
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:
Degree days (1)........................... 9,382 10,653 10,178 -12 + 5
Volumes (Bcf)(2):
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)(2):
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 --
Year-end customers........................ 88,200 86,400 84,800 + 2 + 2
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- - ---------------
(1) A measure of weather severity calculated by subtracting the mean temperature
for each day from 65 degrees Fahrenheit. More degree days equate to colder
weather.
(2) Mcf and Bcf represent one thousand cubic feet and one billion cubic feet of
natural gas, respectively.
1993 Results Compared to 1992
Operating margin for 1993 declined from 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. Degree days declined 12%
in 1993 to 9,382 compared with 10,653 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.
VI-10
<PAGE> 199
Earnings before income taxes was 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 two Statements of Financial Accounting Standards ("SFAS"),
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.
Operating margin was 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. 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.
Earnings before income taxes was 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.
VI-11
<PAGE> 200
ENSTAR ALASKA GROUP
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
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>
Changes in net cash provided by operating activities from year to year
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 decline in capital expenditures for 1992 in comparison to the 1993 and
1991 levels was primarily due 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. 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. The ENSTAR Alaska Group, is engaged
in a continuous construction program. Management believes capital expenditures
required on an annual basis in the foreseeable future for betterments and
expansion will approximate historical levels.
Regular dividends paid to the Company of $8 million in each of the years
1993, 1992 and 1991 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 debt to total capitalization ratio increased from approximately 35% as
of December 31, 1990 to approximately 49% as of December 31, 1991 primarily as a
result of these transactions. The ENSTAR Alaska Group's debt to total
capitalization ratio was 53% and 54% as of December 31, 1993 and 1992,
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 the
Company as a whole. Under the most restrictive provisions of the ENSTAR Alaska
Group's financing arrangements, approximately $14.2 million of Alaska Pipeline
Company's retained earnings was available for the making of restricted
investments, restricted stock payments, including dividends, and restricted
subordinated debt payments as of December 31, 1993. Amounts available for
dividends on the ENSTAR Alaska Stock will be further limited by covenants in the
Company's bank credit agreements and other financing documents. Such 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 Annex IV.
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. For a discussion of APC's debt instruments, see Note 4 of
Notes to the accompanying combined financial statements of the ENSTAR Alaska
Group beginning on page VI-17 of this Annex.
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
VI-12
<PAGE> 201
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.
VI-13
<PAGE> 202
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................................... 20,880 19,976 19,678
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.
VI-14
<PAGE> 203
ENSTAR ALASKA GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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.
VI-15
<PAGE> 204
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.
VI-16
<PAGE> 205
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
- - ----- -----
<S> <C> <C>
1. Summary of Significant Accounting Policies...................................... VI-17
2. Related Party Activities........................................................ VI-20
3. Property, Plant and Equipment................................................... VI-20
4. Long-Term Debt.................................................................. VI-21
5. Fair Value of Financial Instruments............................................. VI-22
6. Common Equity................................................................... VI-22
7. Employee Benefit Plans.......................................................... VI-23
8. Income Taxes.................................................................... VI-24
9. Selected Quarterly Financial Data (Unaudited)................................... VI-26
10. Sales to Major Customers........................................................ VI-27
11. Commitments and Contingencies................................................... VI-27
</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, Seagull will
provide to holders of ENSTAR Alaska Stock separate
VI-17
<PAGE> 206
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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, as defined. 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.
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 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 Alaska
Public Utilities Commission ("APUC"), which has jurisdiction over, among other
things, rates, accounting procedures and standards of service. The ENSTAR Alaska
Group 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.
VI-18
<PAGE> 207
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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............................................ $3,765 $2,779 $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 3 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.
VI-19
<PAGE> 208
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 an 1991 and were included in
operations and maintenance costs.
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 ENSTAR Alaska 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>
VI-20
<PAGE> 209
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 Group's portion of the Company's consolidated long-term debt for
1993 and 1992 was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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.
VI-21
<PAGE> 210
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 (DOLLARS IN
DECEMBER 31, 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>
VI-22
<PAGE> 211
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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 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
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
VI-23
<PAGE> 212
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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>
VI-24
<PAGE> 213
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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>
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.
VI-25
<PAGE> 214
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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>
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).
VI-26
<PAGE> 215
ENSTAR ALASKA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 ENSTAR Alaska Group 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 ENSTAR Alaska Group cannot be predicted with certainty, management
believes that the effect on its financial condition and results of operations,
if any, will not be material.
VI-27
<PAGE> 216
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 as listed in the index on
page IV-1.
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.
VI-28
<PAGE> 217
- - --------------------------------------------------------------------------------
PRELIMINARY COPY DATED MARCH 11, 1994
PROXY
SEAGULL ENERGY CORPORATION
ANNUAL MEETING OF SHAREHOLDERS -- JUNE 1, 1994
PROXY SOLICITED ON BEHALF OF BOARD OF DIRECTORS
The undersigned hereby appoints Barry J. Galt and Robert W.
Shower as Proxies, each with the power to appoint his substitute, and
hereby authorizes each of them to represent and to vote as designated
below, all the shares of Common Stock of Seagull Energy Corporation
(the "Company"), held of record by the undersigned on April 4, 1994,
at the Annual Meeting of Shareholders to be held June 1, 1994 or any
adjournment(s) or postponement(s) thereof.
The undersigned hereby revokes any proxy to vote said shares
heretofore given. THE UNDERSIGNED ACKNOWLEDGES THAT THIS PROXY WHEN
PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE
UNDERSIGNED SHAREHOLDER AND THAT IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR ALL NOMINEES LISTED IN PROPOSAL 1 AND IN FAVOR OF
PROPOSALS 2 AND 3.
Please sign exactly as name appears hereon. When shares are held
by joint tenants, both should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title
as such. If a corporation, please sign in full corporate name by
President or other authorized officer. If a partnership, please sign
in partnership name by authorized person.
I plan to attend the meeting (Please check if yes) / /
1. Election of four directors to serve until the 1997 Annual Meeting
of Shareholders: Class II -- Peter J. Fluor, Barry J. Galt, Dean
P. Guerin and Robert W. Shower.
<TABLE>
<S> <C> <C>
TO WITHHOLD AUTHORITY TO VOTE FOR ANY
Withhold INDIVIDUAL NOMINEE, MARK THIS BOX AND
For Authority STRIKE HIS NAME FROM ABOVE LISTING.
/ / / / / /
</TABLE>
(continued on reverse side)
- - --------------------------------------------------------------------------------
<PAGE> 218
- - --------------------------------------------------------------------------------
2. Proposal to amend the Company's Articles of Incorporation to,
among other things (i) authorize 25,000,000 shares of a new class
of common stock of the Company, the Seagull Energy Corporation --
ENSTAR Alaska Group Common Stock, par value $.10 per share
("ENSTAR Alaska Stock"), and (ii) amend the terms of existing
capital stock of the Company to allow for the issuance of the
ENSTAR Alaska Stock.
<TABLE>
<S> <C> <C>
For Against Abstain
/ / / / / /
</TABLE>
3. Proposal to ratify the appointment by the Board of Directors of
the firm of KPMG Peat Marwick as independent public auditors of
the Company for the fiscal year ending December 31, 1994.
<TABLE>
<S> <C> <C>
For Against Abstain
/ / / / / /
</TABLE>
4. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING, OR ANY
ADJOURNMENT(S) OR POSTPONEMENT(S) THEREOF.
(Shareholder Address) If you receive more than one
proxy card, please sign and
return all cards in the
accompanying envelope.
Date , 1994
Signature
Signature if held jointly
This proxy may be revoked at any time prior to the voting of the
proxy by the execution and submission of a revised proxy, by written
notice to the Secretary of the Company or by voting in person at the
meeting.
- - --------------------------------------------------------------------------------
