<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR
- ----- 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ --------------------------
Commission file number 1-8094
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Seagull Energy Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1764876
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Fannin, Suite 1700, Houston, Texas 77002-6714
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(713) 951-4700
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(Registrant's telephone number, including area code)
None
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 31, 1995
----- -------------------------------
Common Stock, $.10 par value 36,204,078
<PAGE> 2
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C>
Presentation of Financial Information.................................... 3
Consolidated Statements of Earnings - Three and Nine Months
Ended September 30, 1995 and 1994 (Unaudited).......................... 4
Consolidated Balance Sheets - September 30, 1995
and December 31, 1994 (Unaudited)...................................... 5
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1995 and 1994 (Unaudited).......................... 6
Notes to Consolidated Financial Statements (Unaudited)................... 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited)................................ 10
PART II. OTHER INFORMATION............................................... 22
SIGNATURES................................................................ 23
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
PRESENTATION OF FINANCIAL INFORMATION
In the opinion of management, the following unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of Seagull Energy Corporation and Subsidiaries (the
"Company" or "Seagull") as of September 30, 1995, and the results of its
operations for the three and nine month periods ended September 30, 1995 and
1994, and cash flows for the nine month periods then ended. As discussed in
Note 1 to the Company's Unaudited Consolidated Financial Statements, Seagull
adopted Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," effective March 31, 1995. Under SFAS No. 121, the Company
recorded a non-cash impairment of gas and oil properties as a separate line
item in the accompanying consolidated statement of earnings for the nine months
ended September 30, 1995. All other adjustments made are of a normal,
recurring nature. The results of operations for the three and nine months
ended September 30, 1995 are not necessarily indicative of the results to be
expected for the full year.
The financial information presented herein should be read in
conjunction with the consolidated financial statements and notes included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1994.
-3-
<PAGE> 4
Item 1. FINANCIAL STATEMENTS
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(Dollars in Thousands Except Per-Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Exploration and production............... $ 47,949 $ 57,104 $ 152,088 $ 208,222
Pipeline and marketing................... 7,783 9,829 26,131 29,984
Alaska transmission and distribution..... 12,355 14,111 66,205 69,460
------------ ------------ ------------ ------------
68,087 81,044 244,424 307,666
Costs of Operations:
Alaska transmission and distribution
cost of gas sold....................... 4,779 6,559 31,267 35,407
Operations and maintenance............... 25,487 29,295 82,229 88,820
Exploration charges...................... 7,733 7,178 21,752 17,396
Depreciation, depletion and amortization. 29,633 34,594 96,217 110,550
Impairment of gas and oil properties..... - - 44,376 -
------------ ------------ ------------ ------------
67,632 77,626 275,841 252,173
------------ ------------ ------------ ------------
Operating Profit (Loss).................... 455 3,418 (31,417) 55,493
Other (Income) Expense:
General and administrative............... 2,876 1,709 15,377 8,754
Interest expense......................... 13,568 14,243 41,499 37,790
Gain on sales of property,
plant and equipment, net............... (82,028) (355) (82,365) (360)
Interest income and other................ 224 (748) (188) (1,016)
------------ ------------ ------------ ------------
(65,360) 14,849 (25,677) 45,168
------------ ------------ ------------ ------------
Earnings (Loss) Before Income Taxes........ 65,815 (11,431) (5,740) 10,325
Income Tax Expense (Benefit)............... 24,265 (5,140) (1,615) 1,120
------------ ------------ ------------ ------------
Net Earnings (Loss)........................ $ 41,550 $ (6,291) $ (4,125) $ 9,205
============ ============ ============ ============
Earnings (Loss) Per Share.................. $ 1.13 $ (0.17) $ (0.11) $ 0.25
============ ============ ============ ============
Weighted Average Number of Common
Shares Outstanding....................... 36,768,095 36,908,710 36,128,123 36,933,090
============ ============ ============ ============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
-4-
<PAGE> 5
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
--------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 12,462 $ 6,432
Accounts receivable, net................................ 74,148 101,346
Inventories............................................. 5,112 4,530
Prepaid expenses and other.............................. 1,642 7,055
-------------- --------------
Total Current Assets.................................. 93,364 119,363
Property, Plant and Equipment - at cost
(successful efforts method for gas and oil properties).. 1,590,562 1,592,152
Accumulated Depreciation, Depletion and Amortization...... 564,930 467,845
-------------- --------------
1,025,632 1,124,307
Other Assets.............................................. 42,933 55,880
-------------- --------------
Total Assets.............................................. $ 1,161,929 $ 1,299,550
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................ $ 60,750 $ 97,315
Accrued expenses........................................ 24,652 31,598
Prepaid gas and oil sales............................... - 2,732
Current maturities of long-term debt.................... 1,564 1,549
-------------- --------------
Total Current Liabilities............................. 86,966 133,194
Long-Term Debt............................................ 538,490 620,805
Other Noncurrent Liabilities.............................. 53,937 57,737
Deferred Income Taxes..................................... 39,416 46,713
Shareholders' Equity:
Common Stock, $.10 par value; authorized
100,000,000 shares; issued 36,499,890 shares (1995)
and 36,432,514 shares (1994)........................... 3,650 3,643
Additional paid-in capital.............................. 325,920 324,820
Retained earnings....................................... 119,834 123,959
Foreign currency translation adjustment................. 2,182 (2,684)
Less - note receivable from employee stock
ownership plan........................................ (5,502) (5,502)
Less - 308,812 shares (1995) and 326,812 shares (1994)
of Common Stock held in Treasury, at cost.............. (2,964) (3,135)
-------------- --------------
Total Shareholders' Equity............................ 443,120 441,101
Commitments and Contingencies.............................
-------------- --------------
Total Liabilities and Shareholders' Equity................ $ 1,161,929 $ 1,299,550
============== ==============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
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<PAGE> 6
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1995 1994
------------ -----------
<S> <C> <C>
Operating Activities:
Net earnings (loss).......................................... $ (4,125) $ 9,205
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization................... 98,624 112,763
Impairment of gas and oil properties....................... 44,376 -
Amortization of deferred financing costs................... 2,570 3,121
Deferred income taxes...................................... (7,506) (3,108)
Dry hole expense........................................... 11,407 9,526
Distributions in excess of (less than) earnings
from equity investments.................................. (395) 1,179
Gain on sales of property, plant and equipment, net........ (82,365) (360)
Other...................................................... - 90
------------ -----------
62,586 132,416
Changes in operating assets and
liabilities, net of acquisitions:
Decrease in accounts receivable.......................... 26,705 31,724
Decrease in inventories, prepaid expenses and other...... 7,911 4,795
Decrease in accounts payable............................. (35,939) (13,356)
Decrease in prepaid gas and oil sales.................... (2,732) (5,925)
Decrease in accrued expenses and other................... (10,178) (11,509)
------------ -----------
Net Cash Provided By Operating Activities............. 48,353 138,145
Investing Activities:
Capital expenditures......................................... (57,208) (96,980)
Acquisitions, net of cash acquired........................... - (195,128)
Proceeds from sales of property, plant and equipment......... 102,865 542
------------ -----------
Net Cash Provided By (Used In) Investing Activities... 45,657 (291,566)
Financing Activities:
Proceeds from revolving lines of credit and other borrowings. 550,296 688,306
Principal payments on revolving lines of credit and
other borrowings............................................ (683,569) (531,731)
Proceeds from monetary production payment.................... 46,242 -
Fees paid to acquire financing............................... (125) (13)
Proceeds from sales of common stock.......................... 764 328
Other........................................................ (1,368) (315)
------------ -----------
Net Cash Provided by (Used in) Financing Activities... (87,760) 156,575
Effect of Exchange Rate Changes on Cash........................ (220) 97
------------ -----------
Increase In Cash And Cash Equivalents................. 6,030 3,251
Cash And Cash Equivalents At Beginning Of Period............... 6,432 5,572
------------ -----------
Cash And Cash Equivalents At End Of Period..................... $ 12,462 $ 8,823
============ ===========
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
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<PAGE> 7
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Supplemental Disclosures of Cash Flow Information.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Nine Months Ended September 30,
-------------------------------
Cash paid during the period for: 1995 1994
-------------------------------
<S> <C> <C>
Interest, net of amount capitalized .................... $46,436 $38,491
Income taxes............................................ $ 833 $ 1,269
- ------------------------------------------------------------------------------------------------
</TABLE>
Gas and Oil Properties.
Effective March 31, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This SFAS
requires that an impairment loss be recognized when the carrying amount of an
asset exceeds the sum of the estimated future cash flow (undiscounted) of the
asset. Under SFAS No. 121, the Company reviewed the impairment of gas and oil
properties on a depletable unit basis. For each depletable unit determined to
be impaired, an impairment loss equal to the difference between the carrying
value and the fair value of the depletable unit was recognized. Fair value, on
a depletable unit basis, was estimated to be the present value of expected
future cash flows computed by applying estimated future gas and oil prices, as
determined by management, to estimated future production of gas and oil
reserves over the economic lives of the reserves. As a result of the adoption
of SFAS No. 121, the Company recognized a non-cash pre-tax charge against
earnings during the first quarter of 1995 of $44.4 million.
Prior to March 31, 1995, the Company determined the impairment of
proved gas and oil properties on a world-wide basis. Using the world-wide
basis, if the net capitalized costs exceeded the estimated future undiscounted
after-tax net cash flows from proved gas and oil reserves using period-end
pricing, such excess costs would be charged to expense.
Earnings Per Share.
The weighted average number of common shares outstanding used in the
computation of earnings per share for the three months ended September 30, 1995
and 1994 and nine months ended September 30, 1994 gives effect to the assumed
exercise of dilutive stock options as of the beginning of the period. The
effect of the assumed exercise of stock options as of the beginning of the
period has an anti-dilutive effect on the computation of loss per share for the
nine months ended September 30, 1995 and has therefore not been included in the
weighted average number of common shares outstanding.
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<PAGE> 8
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Changes in Financial Presentation.
Certain reclassifications have been made in the 1994 financial
statements to conform to the presentation used in 1995.
NOTE 2. DISPOSITION OF ASSETS
On September 25, 1995, the Company and three other sellers completed
the sale of their disparate interests in 19 natural gas gathering systems and a
gas processing plant. The purchaser, a subsidiary of Tejas Power Corporation,
paid Seagull and the other sellers $154.8 million in cash for the assets. The
Company's share of gross proceeds was approximately $100 million. Net proceeds
after payment of approximately $3 million in transaction costs were used to
lower the Company's borrowings under its U.S. revolving credit facility (the
"U.S. Credit Agreement"). From its share of the proceeds, Seagull realized a
one-time, pre-tax gain of approximately $82 million recorded in the third
quarter. For the three and nine months ended September 30, 1995, the pipeline
assets disposed of (the "Pipeline Assets") contributed $2.1 million and $6.2
million, respectively, to the operating profit of the pipeline and marketing
segment.
In September 1995, the Company sold Section 29 tax credit-bearing gas
properties to an investment group which includes a Seagull subsidiary and two
financial investors. For accounting purposes, the Company has treated the sale
as a non-recourse monetary production payment reflected in long-term debt on
the balance sheet. Net of transaction costs, the proceeds from the sale of
approximately $46.3 million in cash were used to pay down the Company's
borrowings under the U.S. Credit Agreement.
NOTE 3. WORKFORCE REDUCTION AND CONSOLIDATION
In April 1995, the Company announced plans to reduce its workforce and
consolidate operations into a smaller number of locations. Company-wide,
approximately 90 of about 770 positions were eliminated in the combined
workforce reduction and consolidation. The eliminated positions primarily
represent technical and administrative positions in two regional offices.
During the quarter ended June 30, 1995, the Company recorded one-time pre-tax
charges, included in general and administrative expense, of $8 million to
account for the expenses involved in the workforce reduction and consolidation.
Furthermore, the sale of the Pipeline Assets resulted in the elimination of
approximately 35 primarily field positions.
NOTE 4. LONG-TERM DEBT
Revolving Credit Facilities.
Under a provision included in the U.S. Credit Agreement, 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
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<PAGE> 9
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. LONG-TERM DEBT, continued
financial performance of the Company's other business segments. The Borrowing
Base is generally determined annually but may be redetermined one additional
time each year, at the option of either Seagull or the banks, and upon the sale
of certain assets included in the Borrowing Base. As a result of the sale of
the Pipeline Assets and Section 29 tax credit-bearing gas properties, the
available Borrowing Base decreased by approximately $75 million to $500
million. In June 1995, the Company requested the maximum commitment under the
U.S. Credit Agreement be reduced from $725 million to $650 million. Under the
terms of the U.S. Credit Agreement, the maximum commitment reduces in equal
quarterly amounts of $45 million commencing on March 31, 1997, with a final
reduction of $20 million on September 30, 2000.
In June 1995, the Company requested the maximum commitment under its
Canadian revolving credit facility (the "Canadian Credit Agreement") be reduced
from $175 million to $100 million. Under the terms of the Canadian Credit
Agreement, the maximum commitment reduces in equal quarterly installments of
approximately $10.9 million commencing on March 31, 1997, with a final
reduction of $1.6 million on June 30, 1999.
Interest Rate Swap Agreements.
The Company enters into interest rate swaps to manage the impact of
changes in interest rates. During the nine months ended September 30, 1995,
the following interest rate swap agreements were in effect:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Interest Rate
Notional Effective Maturity -------------------------------
Amount Date Date Receive Pay
----------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
$40,000 09/11/92 09/11/95 Floating 6.76%
50,000 08/02/93 07/31/98 5.635% Floating
50,000 08/02/93 07/31/97 5.43% Floating
50,000 08/02/93 07/31/96 5.199% Floating
65,000 05/02/95 12/29/95 Floating 6.35%
35,000 05/02/95 12/29/95 Floating 6.355%
65,000 01/02/96 12/30/96 Floating 6.83%
35,000 01/02/96 12/30/96 Floating 6.837%
</TABLE>
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company is a party to ongoing litigation in the normal course of
business. Management regularly analyzes current information and, as necessary,
provides accruals for probable liabilities on the eventual disposition of these
matters. While the outcome of lawsuits or other proceedings against the
Company cannot be predicted with certainty, management believes that the effect
on its financial condition and results of operations, if any, will not be
material.
-9-
<PAGE> 10
ITEM 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
GENERAL
The following discussion is intended to assist in an understanding of
the Company's financial position and results of operations for each of the
periods indicated. The Company's accompanying unaudited financial statements
and the notes thereto and the consolidated financial statements and notes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 contain detailed information that should be referred to in
conjunction with the following discussion.
RESULTS OF OPERATIONS
CONSOLIDATED HIGHLIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- Percent ---------------------- Percent
1995 1994 Change 1995 1994 Change
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Exploration and production ............ $ 47,949 $57,104 - 16 $152,088 $208,222 - 27
Pipeline and marketing ................ 7,783 9,829 - 21 26,131 29,984 - 13
Alaska transmission and distribution .. 12,355 14,111 - 12 66,205 69,460 - 5
- --------------------------------------------------------------------------------------------------------------------------
$ 68,087 $81,044 - 16 $244,424 $307,666 - 21
==========================================================================================================================
Operating Profit (Loss):
Exploration and production ............ $(3,053) $ 78 -4,014 $(53,763) $ 33,709 -259
Pipeline and marketing ................ 2,601 2,800 - 7 8,511 9,663 - 12
Alaska transmission and distribution... 907 540 + 68 13,835 12,121 + 14
- --------------------------------------------------------------------------------------------------------------------------
$ 455 $ 3,418 - 87 $(31,417) $ 55,493 -157
==========================================================================================================================
Net Earnings (Loss) ..................... $ 41,550 $(6,291) + 760 $ (4,125) $ 9,205 -145
Earnings (Loss) Per Share ............... $ 1.13 $ (0.17) + 765 $ (0.11) $ 0.25 -144
Net Cash Provided by Operating
Activities Before Changes in Operating
Assets and Liabilities .............. $ 15,767 $28,725 - 45 $ 62,586 $132,416 - 53
Net Cash Provided by Operating
Activities ............................ $ 12,123 $45,357 - 73 $ 48,353 $138,145 - 65
Weighted Average Number of Common
Shares Outstanding (in thousands) ....... 36,768 36,909 - 36 ,128 36,933 - 2
==========================================================================================================================
</TABLE>
The decrease in net earnings for the nine months ended September 30,
1995 was due to the decrease in operating profit and increases in general and
administrative ("G&A") expense and interest expense, which were partially
offset by the pre-tax gain on sale of certain pipeline assets (the "Pipeline
Assets") of $82 million and the decrease in income taxes. The increase in net
earnings for the 1995 third quarter was due to the pre-tax gain on sale of the
Pipeline Assets of $82 million partially offset by a decrease in operating
profit and an increase in income taxes.
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<PAGE> 11
ITEM 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
CONSOLIDATED HIGHLIGHTS, CONTINUED
Revenues and operating profit are discussed in the respective segment
sections. The pre-tax gain on the sale of the Pipeline Assets is discussed in
the "Pipeline and Marketing" section, G&A expense and interest expense are
discussed under the "Other (Income) Expense" section, and income taxes are
discussed under the "Income Tax" section.
Net cash provided by operating activities before and after changes in
operating assets and liabilities decreased for the three and nine month periods
of 1995 versus 1994 primarily due to decreases in exploration and production
("E&P") revenues which are due to decreases in natural gas prices coupled with
lower natural gas production. In addition, net cash provided by operating
activities before and after changes in operating assets and liabilities for the
nine month period of 1995 was lower due to one-time pre-tax charges, included
in general and administrative expense, of $8 million to account for the
expenses involved in the workforce reduction and consolidation recorded during
the second quarter.
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<PAGE> 12
ITEM 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
EXPLORATION AND PRODUCTION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Unit Amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- Percent ------------------------- Percent
1995 1994 Change 1995 1994 Change
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Natural Gas.......................... $41,754 $50,875 - 18 $134,512 $188,898 - 29
Oil and Condensate................... 4,821 5,866 - 18 15,287 17,703 - 14
Natural Gas Liquids.................. 688 812 - 15 2,109 2,119 -
Other................................ 686 (449) + 253 180 (498) +136
- -------------------------------------------------------------------------------------------------------------------------
47,949 57,104 - 16 152,088 208,222 - 27
Lifting Costs.......................... 14,414 15,515 - 7 43,937 47,136 - 7
General Operating Expense.............. 1,512 2,850 - 47 7,162 8,890 - 19
Exploration Charges.................... 7,734 7,178 + 8 21,753 17,396 + 25
Depreciation, Depletion and
Amortization......................... 27,342 31,483 - 13 88,623 101,091 - 12
Impairment of Gas and Oil Properties - - - 44,376 - NA
- -------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss)................ $(3,053) $ 78 -4,014 $(53,763) $ 33,709 -259
=========================================================================================================================
OPERATING DATA:
Net Daily Production (1):
Natural Gas (MMcf)................... 308.4 330.2 - 7 333.6 360.1 - 7
Oil and Condensate (Bbl)............. 3,304 3,869 - 15 3,377 4,265 - 21
Natural Gas Liquids (Bbl)............ 1,092 987 + 11 890 898 - 1
Combined (MMcfe) (2)................. 334.8 359.4 - 7 359.2 391.1 - 8
Average Sales Prices:
Natural Gas ($ per Mcf)............... 1.47 1.67 - 12 1.48 1.92 - 23
Oil and Condensate ($ per Bbl)........ 15.85 16.48 - 4 16.58 15.20 + 9
Natural Gas Liquids ($ per Bbl)....... 6.86 8.94 - 23 8.68 8.64 -
Combined ($ per Mcfe) (2)............. 1.56 1.72 - 9 1.55 1.95 - 21
Lifting Costs ($ per Mcfe):
Lease Operating....................... 0.29 0.28 + 4 0.27 0.25 + 8
Workovers............................. 0.01 0.02 - 50 0.02 0.02 -
Production Taxes...................... 0.05 0.06 - 17 0.05 0.07 - 29
Transportation........................ 0.09 0.08 + 13 0.08 0.08 -
Ad Valorem Taxes...................... 0.03 0.03 - 0.03 0.02 + 50
Total................................. 0.47 0.47 - 0.45 0.44 + 2
DD&A Rate ($ per Mcfe).................. 0.89 0.95 - 6 0.90 0.95 - 5
=========================================================================================================================
</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) MMcfe and Mcfe represent the equivalent of one million and one
thousand 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.
-12-
<PAGE> 13
ITEM 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
EXPLORATION AND PRODUCTION, CONTINUED
The decrease in operating profit of the E&P segment for the nine
months ended September 30, 1995 as compared to the 1994 period was primarily
due to a 27% decrease in the Company's revenues coupled with an increase in
exploration charges partially offset by decreased depreciation, depletion and
amortization ("DD&A") expense, lifting costs and general operating expense. In
addition, the nine month period of 1995 was lower due to a non-cash charge for
impairment of gas and oil properties. The decrease in operating profit for the
1995 third quarter as compared to the 1994 period was primarily due to a 16%
decrease in revenues, partially offset by decreased DD&A, general operating
expense and lifting costs.
The decrease in revenues for the three and nine months ended September
30, 1995 as compared to 1994 was primarily the result of decreases in the
Company's average realized price of natural gas of 12% and 23%, respectively,
due to several factors beyond the control of the Company (warm weather, new gas
supply, utilization of competitive fuels, low demand for storage refills,
etc.). Additionally, because of the lower natural gas prices, the Company
voluntarily curtailed production throughout each of the first nine months of
1995, versus only June, August and September in 1994. In addition, production
decreased as a result of lower deliverability during 1995 due to the natural
production declines of the reserves and substantially less development capital
expenditures being spent to maintain deliverability. However, sustainable gas
deliverability should reach nearly 370 MMcfd by the end of 1995 as five new
offshore platforms are connected and begin flowing during the fourth quarter.
Lifting costs decreased for the three and nine months ended September
30, 1995 as a result of the lower production. While the overall amount of
lifting costs decreased, lifting costs per equivalent unit of production
increased slightly due to the element of fixed costs included in total lifting
costs.
General operating expense was lower for the three and nine months
ended September 30, 1995 in comparison to the 1994 periods as a result of the
workforce reduction and consolidation implemented by the Company during the
second quarter of 1995. Estimated annual savings from the Company's workforce
reduction and consolidation are expected to total approximately $8 million and
will be reflected in lower general operating and G&A expenses.
Exploration charges increased for the nine months ended September 30,
1995 due to a significant increase in seismic and dry hole costs during the
first quarter of 1995. The increase in seismic costs is primarily due to an
increase in 3-D seismic surveys on offshore exploratory blocks. Eight of
twenty exploratory wells drilled were successful, two wells were being
completed and four wells were drilling or being evaluated as of early November
1995 in comparison to four successes out of fourteen exploratory wells drilled
for the 1994 period.
Effective March 31, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". As a result of
the adoption of SFAS No. 121, the Company recognized a non-cash pre-tax charge
against earnings during the first quarter of $44.4
-13-
<PAGE> 14
ITEM 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
EXPLORATION AND PRODUCTION, CONTINUED
million. As a result of the impairment and a change in the mix of properties
being produced, the Company's average DD&A rate per equivalent unit of
production decreased from $0.96 per Mcfe for the first quarter of 1995 to $0.89
per Mcfe for the third quarter of 1995. DD&A expense for the three and nine
months ended September 30, 1995 decreased as compared to the 1994 periods due
to the lower average DD&A rate per equivalent unit of production and the 7% to
8% decrease in total production.
If natural gas prices remain at their current level, E&P operating
results will be substantially lower in 1995 versus the prior year. As in the
past, the Company will curtail production whenever prices are deemed to be
below acceptable levels. As E&P operating profit represented nearly one-half
of the Company's total operating profit for the year ended December 31, 1994, a
substantial decrease in E&P operating results will have a significant impact on
the Company's total operating results. The Company's operating profit from
pipeline and marketing is expected to decrease in 1995 from the year ended
December 31, 1994 due to the sale of the Pipeline Assets (see "Pipeline and
Marketing" section below). Operating profit for the Alaska transmission and
distribution segment is not expected to change significantly in 1995 from that
of 1994. The Company expects its interest costs to increase slightly in 1995
due to the effect of higher interest rates for the entire year, partially
offset by a decrease in the overall level of debt due to the sale of certain
pipeline assets and Section 29 tax credit-bearing gas properties.
-14-
<PAGE> 15
ITEM 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
PIPELINE AND MARKETING
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- Percent ------------------------- Percent
1995 1994 Change 1995 1994 Change
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING PROFIT:
Pipelines (*)......................... $1,933 $1,695 +14 $5,468 $5,066 + 8
Marketing and Supply.................. 216 364 -41 1,172 3,313 - 65
Gas Processing (*).................... 370 529 -30 1,216 307 +296
Operating and Construction
Services............................ 82 212 -61 655 977 - 33
- -------------------------------------------------------------------------------------------------------------------------
$2,601 $2,800 - 7 $8,511 $9,663 - 12
=========================================================================================================================
Average Daily Volumes (MMcf):
Gas Gathering......................... 200 287 -30 214 283 - 24
Partnership Systems (net)............. 104 111 - 6 106 112 - 5
Marketing and Supply.................. 534 528 + 1 535 563 - 5
Gas Processing:
Average Daily Inlet Volumes (MMcf).... 255 274 - 7 238 279 - 15
Average Daily Net Production (Bbl).... 2,982 4,709 -37 3,926 3,892 + 1
=========================================================================================================================
</TABLE>
(*) On September 25, 1995, the Company sold substantially all of its pipelines
and gas processing assets.
On September 25, 1995, the Company and three other sellers completed
the sale of their disparate interests in 19 natural gas gathering systems and a
gas processing plant. The purchaser, a subsidiary of Tejas Power Corporation,
paid Seagull and the other sellers $154.8 million in cash for the assets. The
Company's share of gross proceeds was approximately $100 million. Net proceeds
after payment of approximately $3 million in transaction costs were used to
lower the Company's borrowings under its U.S. revolving credit facility (the
"U.S. Credit Agreement"). From its share of the proceeds, Seagull realized a
one-time, pre-tax gain of approximately $82 million recorded in the third
quarter. For the three and nine months ended September 30, 1995, the Pipeline
Assets contributed $2.1 million and $6.2 million, respectively, to the
operating profit of the pipeline and marketing segment.
In the pipeline and marketing segment, operating profit for the nine
months ended September 30, 1995 declined in comparison to the 1994 period due
primarily to declines in the marketing and supply area which more than offset
improvements in the pipelines and gas processing areas.
The improvements in operating profit for the pipelines area for both
the three and nine months ended September 30, 1995 in comparison to the prior
year were primarily due to decreases in DD&A. In accordance with SFAS No. 121,
the Company ceased depreciating the Pipeline Assets at the time of the
announcement in April 1995 of the Company's intention to sell those assets.
-15-
<PAGE> 16
ITEM 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
PIPELINE AND MARKETING, CONTINUED
Operating profit in the marketing and supply area declined for the
three and nine months ended September 30, 1995 in comparison to the prior year
primarily due to significant decreases in the margins received on third party
marketing sales and on the marketing fees received from the sale of gas
produced by the E&P segment due to lower gas prices and production.
In the gas processing area, operating profit improved for the nine
months ended September 30, 1995 in comparison to the prior year due to
decreases in the cost of gas processed and decreases in DD&A. In accordance
with SFAS No. 121, the Company ceased depreciating the gas processing plant
sold at the time of the announcement in April 1995 of the Company's intention
to sell this asset.
For the nine months ended September 30, 1994, operating profit for the
operating and construction area included profit related to a gas pipeline
construction project the Company completed in the first quarter of 1994. The
Company recognized additional operating profit of $250,000 during the nine
months ended September 30, 1995 when the warranty period for this project
expired. In June 1995, Seagull was engaged to build an approximately 114 mile
onshore pipeline. The Company expects to begin recognizing profit on this
project during the fourth quarter of 1995. The project is expected to be
completed in late 1996.
-16-
<PAGE> 17
ITEM 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
ALASKA TRANSMISSION AND DISTRIBUTION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- Percent ------------------------- Percent
1995 1994 Change 1995 1994 Change
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................... $12,355 $14,111 -12 $66,205 $69,460 - 5
Cost of Gas Sold........................... 4,779 6,559 -27 31,267 35,407 -12
Operations and Maintenance Expense......... 4,674 5,093 - 8 15,166 16,114 - 6
Depreciation, Depletion and Amortization... 1,995 1,919 + 4 5,937 5,818 + 2
- ----------------------------------------------------------------------------------------------------------------------------
Operating Profit........................... $ 907 $ 540 +68 $13,835 $12,121 +14
============================================================================================================================
OPERATING DATA:
Degree Days (1)............................ 732 851 -14 6,417 6,313 + 2
Volumes (Bcf) (2):
Gas Sold................................. 2.7 3.8 -29 17.7 20.4 -13
Gas Transported.......................... 5.5 4.3 +28 13.2 9.7 +36
Combined................................. 8.2 8.1 + 1 30.9 30.1 + 3
Margins ($ per Mcf):
Gas Sold................................. 2.03 1.64 +24 1.67 1.51 +11
Gas Transported.......................... 0.38 0.31 +23 0.40 0.34 +18
Combined................................. 0.93 0.93 - 1.13 1.13 -
Customers (end of period).................. 91,174 89,285 + 2 91,174 89,285 + 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) Bcf represents one billion cubic feet.
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 three and nine month periods ended September 30, 1995
improved from the 1994 periods primarily as a result of slightly higher volumes
coupled with lower operations and maintenance expense.
In the first quarter of 1995, two large utility customers that
previously purchased gas from ENSTAR Alaska began purchasing gas directly from
gas producers. However, ENSTAR Alaska has been approved by the Alaska Public
Utilities Commission to transport the customers' gas supplies for a fee that is
comparable to the margin (revenues net of the associated cost of gas sold) it
previously earned. Accordingly, overall operating profit for the Alaska
transmission and distribution segment was basically unaffected by this change.
This segment's business is seasonal with approximately 65% of its
sales made in the first and fourth quarters of each year.
-17-
<PAGE> 18
ITEM 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
OTHER (INCOME) EXPENSE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- Percent ------------------------- Percent
1995 1994 Change 1995 1994 Change
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
General and Administrative $ 2,876 $ 1,709 + 68 $15,377 $ 8,754 + 76
Interest Expense 13,568 14,243 - 5 41,499 37,790 + 10
Gains on Sale of Property, Plant and
Equipment, net (82,028) (355) +23,006 (82,365) (360) +22,779
Interest Income and Other 224 (748) - 130 (188) (1,016) - 81
- ----------------------------------------------------------------------------------------------------------------------------
$(65,360) $14,849 - 540 $(25,677) $45,168 - 157
============================================================================================================================
</TABLE>
G&A expenses increased for the nine months ended September 30, 1995 in
comparison to 1994 primarily due to one-time pre-tax charges of $8 million to
account for expenses involved in the Company's workforce reduction and
consolidation and increases in costs associated with three compensation plans,
one for outside directors, one for key managers, and the other for all Seagull
employees, that are tied directly to the price of Seagull Common Stock,
partially offset by declines in the costs relating to potential acquisitions
which were not consummated and accrued incentive compensation expense. The
closing price of Seagull Common Stock increased 6% for the nine months ended
September 30, 1995 from $19.125 at December 31, 1994 to $20.25 on September 30,
1995, compared to a 8% decrease in the 1994 period. G&A expenses increased for
the three months ended September 30, 1995 in comparison to 1994 primarily due
to costs associated with the three compensation plans discussed above. The
closing price of Seagull Common Stock increased 23% in the third quarter of
1995 from $16.50 at June 30, 1995 to $20.25 on September 30, 1995 compared to a
10% decrease in the 1994 period. Lower operations and maintenance expenses and
G&A expenses resulting from the Company's workforce reduction and consolidation
are expected to total approximately $8 million annually.
Increases in interest expense for the nine months ended September 30,
1995 over 1994 were a result of an increase in the overall level of interest
rates since the 1994 period. The average interest rates on the Company's U.S.
Credit Agreement were 6.8% and 5.0% for the nine months ended September 30,
1995 and 1994, respectively.
The decrease in interest expense for the third quarter of 1995 as
compared to 1994 is primarily due to a lower average debt balance outstanding
under the Company's Canadian revolving credit facility (the "Canadian Credit
Agreement") partially offset by an increase in specific interest rates since
the 1994 period. While the payment of the Canadian Credit Agreement was funded
through additional borrowings under the U.S. Credit Agreement, the average
interest rate for the U.S. Credit Agreement was significantly lower than the
average interest rate for the Canadian Credit Agreement.
-18-
<PAGE> 19
ITEM 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
OTHER (INCOME) EXPENSE, CONTINUED
Approximately 55% to 65% of the Company's long-term debt bears
interest at various fixed rates through the end of 1996. The remainder of the
outstanding debt bears interest at various market sensitive interest rates.
As proceeds from the sale of the Pipeline Assets and the Section 29
tax credit-bearing properties were used to pay down the Company's borrowings
under the U.S. Credit Agreement, the Company's expects its interest costs to
decrease substantially for the three months ended December 31, 1995 and the
year ended December 31, 1996.
The increase in the gain on sale of property, plant and equipment for
both the three and nine month periods ended September 30, 1995 as compared to
the 1994 periods is primarily due to the $82 million pre-tax gain on sale of
the Pipeline Assets recorded in the third quarter.
INCOME TAXES
The decrease in income taxes for the nine months ended September 30,
1995 was primarily a result of the decrease in earnings before income
taxes for the period. The increase in income taxes for the three months ended
September 30, 1995 was primarily a result of the increase in earnings
before income taxes for the periods.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- Percent ------------------------- Percent
1995 1994 Change 1995 1994 Change
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exploration and Production:
Lease acquisitions $ 3,207 $ 2,887 +11 $ 5,430 $10,283 -47
Exploration costs 5,854 10,249 -43 21,515 18,069 +19
Development costs 10,800 22,951 -53 24,283 58,411 -58
- ----------------------------------------------------------------------------------------------------------------------------
19,861 36,087 -45 51,228 86,763 -41
============================================================================================================================
Pipeline and Marketing - 313 NA 137 901 -85
Alaska Transmission and Distribution 2,178 2,438 -11 4,992 5,602 -11
Corporate 378 877 -57 851 3,714 -77
- ----------------------------------------------------------------------------------------------------------------------------
$22,417 $39,715 -44 $57,208 $96,980 -41
============================================================================================================================
</TABLE>
Current plans for 1995 call for capital expenditures of approximately
$100 million, including about $90 million in exploration and production, of
which about $40 million is
-19-
<PAGE> 20
ITEM 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
exploration. Since the Company funds capital expenditures from internally
generated funds, the Company will reduce or increase capital expenditures as
economic conditions dictate.
Under provisions in the U.S. Credit Agreement the Company, at its
option, may request a reduction in the maximum commitment. In June 1995, the
Company requested the maximum commitment under the U.S. Credit Agreement be
reduced from $725 million to $650 million. The maximum commitment under the
U.S. Credit Agreement reduces in equal quarterly amounts of $45 million
commencing on March 31, 1997, with a final reduction of $20 million on
September 30, 2000. Under provisions included in the U.S. Credit Agreement,
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 one additional time each year, at
the option of either Seagull or the banks, and upon the sale of certain assets
included in the Borrowing Base. The sale of the Pipeline Assets and Section 29
tax credit-bearing gas properties reduced the available Borrowing Base under
the U.S. Credit Agreement by approximately $75 million to $500 million.
As of November 7, 1995, borrowings outstanding under the U.S. Credit
Agreement were $89.0 million, leaving immediately available unused commitments
of approximately $206.2 million, net of outstanding letters of credit of $2.9
million, $100.0 million of borrowings outstanding under the Company's senior
notes, the nominated borrowing availability of $95.0 million under the Canadian
Credit Agreement and $6.9 million of borrowings outstanding under Seagull's
money market facilities.
In September 1995, the Company sold its Section 29 tax credit-bearing
gas properties to an investment group which includes a Seagull subsidiary and
two financial investors. For accounting purposes, the Company has treated the
sale as a non-recourse monetary production payment reflected in long-term debt
on the balance sheet. Net of transaction costs, the proceeds from the sale of
approximately $46.3 million in cash were used to pay down the Company's
borrowings under the U.S. Credit Agreement.
During the first quarter of 1995, the Company made a capital
contribution of approximately $73 million to a wholly-owned subsidiary, Seagull
Energy Canada Ltd. ("Seagull Canada"). The Company funded the capital
contribution by an additional borrowing under the U.S. Credit Agreement.
Seagull Canada used the proceeds to repay a portion of the balance outstanding
under the Canadian Credit Agreement and concurrently elected to reduce the
nominated maximum borrowing available under the Canadian Credit Agreement from
$160 million to $95 million. The Canadian Credit Agreement provides for dual
currency borrowings in U.S. and Canadian dollars and has a flexible nominated
maximum borrowing availability which amount is taken into consideration in the
calculation of availability under the U.S. Credit Agreement, and which may be
increased or decreased by Seagull Canada at its discretion.
-20-
<PAGE> 21
ITEM 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
In addition to the facilities discussed above, Seagull 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's or the
banks' discretion. The lines are subject to annual renewal.
On November 7, 1995, Seagull filed a shelf registration statement with
the Securities and Exchange Commission to issue up to $300 million in one or
more forms of securities. The shelf registration statement provides for the
issuance of debt securities, depositary shares, preferred stock, common stock
or securities warrants from time to time in the future. No securities have yet
been issued pursuant to the registration statement and the Company has no
current plans to issue the securities pursuant to the registration statement.
Seagull believes the shelf registration statement provides the Company with
the ability, should the appropriate situation arise, to promptly and
efficiently pursue a more aggressive capital spending program or other
promising growth opportunities.
-21-
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
* 10.1 Trust Agreement dated as of September 1, 1995 for the Seagull Series
1995 Trust.
* 10.2 Guaranty by Seagull Energy Corporation in favor of the Seagull
Series 1995 Trust.
*#10.3 Severance Agreement between Seagull Energy Corporation and Barry J.
Galt.
*#10.4 Seagull Employee Stock Ownership Plan (the "Plan") as amended,
including First through Fourth Amendments thereto (incorporated by
reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1993; the Fifth and Sixth
Amendments are incorporated by reference to Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1995 and the Seventh
Amendment is filed herewith).
*27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
There were no Reports on Form 8-K filed during the three months ended
September 30, 1995.
_______________
* Filed herewith.
# Identifies management contracts and compensatory plans or arrangements.
-22-
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEAGULL ENERGY CORPORATION
By: /s/ Robert W. Shower
-----------------------------------
Robert W. Shower, Executive Vice
President and Chief Financial
Officer (Principal Financial
Officer)
Date: November 13, 1995
-----------------------------------
By: /s/ Rodney W. Bridges
-----------------------------------
Rodney W. Bridges, Vice President
and Controller (Principal
Accounting Officer)
Date: November 13, 1995
-----------------------------------
-23-
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
*10.1 Trust Agreement dated as of September 1, 1995 for the Seagull
Series 1995 Trust.
*10.2 Guaranty by Seagull Energy Corporation in favor of the Seagull
Series 1995 Trust.
*#10.3 Severance Agreement between Seagull Energy Corporation and
Barry J. Galt.
* 10.4 Seagull Employee Stock Ownership Plan (the "Plan") as amended, including First through
Fourth Amendments thereto (incorporated by reference to Exhibit 10.9 to the Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1993; the Fifth and Sixth
Amendments are incorporated by reference to Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995 and the Seventh Amendment is filed herewith).
*27.1 Financial Data Schedule.
</TABLE>
_______________
* Filed herewith.
# Identifies management contracts and compensatory plans or arrangements.
<PAGE> 1
EXHIBIT 10.1
TRUST AGREEMENT
DATED AS OF SEPTEMBER 1, 1995
SEAGULL SERIES 1995 TRUST
THE SECURITIES ISSUED PURSUANT TO THIS TRUST AGREEMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES ACT. NO TRANSFER OF
ANY SECURITIES MENTIONED HEREIN WILL BE PERMITTED UNTIL THE TRANSFEROR HAS
COMPLIED WITH ALL RESTRICTIONS ON TRANSFER SET FORTH HEREIN AND SUCH SECURITIES
HAVE BEEN REGISTERED UNDER SUCH ACTS OR UNTIL THE MANAGING TRUSTEE FOR THE
TRUST HAS RECEIVED A FAVORABLE OPINION FROM LEGAL COUNSEL ACCEPTABLE TO THE
MANAGING TRUSTEE, TO THE EFFECT THAT SUCH TRANSFER IS EXEMPT FROM REGISTRATION
UNDER SUCH ACTS.
<PAGE> 2
TRUST AGREEMENT
SEAGULL SERIES 1995 TRUST
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1
DEFINITIONS
1.1 CERTAIN DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.3 CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 2
DECLARATION OF TRUST
2.1 DECLARATION AND ACCEPTANCE OF TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.2 NAME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.3 OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.4 PURPOSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.5 DELAWARE CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.6 CONDUCTING BUSINESS IN OTHER JURISDICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.7 TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.8 THE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF INITIAL HOLDERS
3.1 REPRESENTATIONS AND WARRANTIES OF SERIES B HOLDER . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.2 REPRESENTATIONS AND WARRANTIES OF THE SERIES A HOLDERS . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE 4
RESTRICTIONS ON TRANSFERS OF TRUST INTERESTS;
ADDITIONAL HOLDERS
4.1 GENERAL RESTRICTION ON TRANSFERS AND ENCUMBRANCES . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.2 TRANSFERS AND ENCUMBRANCES BY SERIES B HOLDER . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.3 TRANSFERS AND ENCUMBRANCES BY SERIES A HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.4 ISSUANCES OF NEW TRUST INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE 5
TRANSFER OF ASSETS TO TRUST; FUNDING TRANSFERS
5.1 TRANSFER OF ASSETS TO TRUST; TITLE TO TRUST PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . 32
5.2 INITIAL FUNDING TRANSFERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.3 SUBSEQUENT FUNDING TRANSFERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.4 NO RIGHT TO RETURN OF FUNDING TRANSFERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.5 WORKING CAPITAL LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE 6
FUNDING ACCOUNTS; ALLOCATIONS; DISTRIBUTIONS
6.1 FUNDING ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.2 ALLOCATIONS FOR FUNDING ACCOUNT PURPOSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.3 INCOME TAX ALLOCATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.4 TRANSFERS OF TRUST INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
6.5 DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE 7
MANAGEMENT
7.1 MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.2 STANDARD OF CARE; CONFLICTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.3 OPERATING AGREEMENTS; OPERATING STANDARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.4 SALE OF PRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
7.5 RESTRICTIONS ON MANAGING TRUSTEE'S POWER AND AUTHORITY; NEGATIVE COVENANTS . . . . . . . . . . . . . 49
7.6 ENFORCEMENT OF TRUST RIGHTS UNDER THE ASSIGNMENTS, THE NEW OPERATING AGREEMENT AND THE GUARANTY . . 52
7.7 REMOVAL OF MANAGING TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
7.8 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
7.9 PERSONAL LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
7.10 INFILL DRILLING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
7.11 RECOMPLETIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
7.12 CONCERNING THE SPECIAL TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
ARTICLE 8
ADMINISTRATIVE AND TAX MATTERS
8.1 CHARACTERIZATION OF TRUST ARRANGEMENT FOR INCOME TAX PURPOSES . . . . . . . . . . . . . . . . . . . 59
8.2 BOOKS AND RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
8.3 INFORMATION AND ACCESS RIGHTS; CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
8.4 REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
8.5 PERMITTED INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
</TABLE>
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<TABLE>
<S> <C> <C>
8.6 TAX ELECTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
8.7 TAX MATTERS PARTNER AND TRUST TAX FILINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
8.8 PAYMENT OF TRANSACTION EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
8.9 FINANCIAL ACCOUNTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
ARTICLE 9
INDEMNIFICATION
9.1 GENERAL INDEMNIFICATION BY SERIES B HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
9.2 TAX INDEMNIFICATION BY SERIES B HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
9.3 GENERAL INDEMNIFICATION PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
9.4 TAX INDEMNIFICATION PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
9.5 GROSS-UP OF INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
ARTICLE 10
DISSOLUTION, LIQUIDATION, AND TERMINATION
10.1 DISSOLUTION; BUYOUT OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
10.2 LIQUIDATION AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
10.3 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
ARTICLE 11
PURCHASE OPTION
11.1 PURCHASE OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
11.2 APPRAISAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
11.3 CLOSING OF PURCHASE OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
ARTICLE 12
GENERAL PROVISIONS
12.1 OFFSET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
12.2 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
12.3 ENTIRE AGREEMENT; SUPERSEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
12.4 EFFECT OF WAIVER OR CONSENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
12.5 AMENDMENT OR MODIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
12.6 BINDING EFFECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
12.7 GOVERNING LAW; SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
12.8 FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
12.9 WAIVER OF CERTAIN RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
12.10 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
12.11 DISCLAIMER OF AGENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
</TABLE>
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EXHIBITS
<TABLE>
<S> <C>
1.1.1G Net Revenue Interests and Working Interests
1.1.1P Initial Holders
2.8.1 Form of Series A, Class I, COP's
2.8.2 Form of Series A, Class II, COP's
2.8.3 Form of Series B COP's
3.1(b) Consents and Approvals
3.1(r) Gas Imbalances
5.5 Form of Promissory Note for Working Capital Loans
7.3 Form of New Operating Agreement
7.4 Listing of Persons "Related To" FC Energy Finance
7.5(a)(xv)Insurance
8.8 Reimbursed Transaction Expenses
</TABLE>
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<PAGE> 6
TRUST AGREEMENT
This TRUST AGREEMENT (this "Agreement"), is made and entered into as
of the Effective Date, by and between SEAGULL ENERGY E&P INC., a Delaware
corporation ("Seagull E&P"), in its capacity as the Depositor and Managing
Trustee, Mark A. Ferrucci, a resident of the State of Delaware, as Special
Trustee and the Holders.
PRELIMINARY STATEMENT
The Board of Directors of the Depositor has duly authorized the
formation of a trust (the "Trust"), the corpus of which will be composed of,
among other things, the Assets. As of the Effective Date, the Depositor is
causing the Assets to be Transferred to the Trust (or in the case of the
Oklahoma Assets, to the Managing Trustee for the benefit of the Holders, and in
the case of the Louisiana Assets, to the LLC), by causing the Depositor's
directly wholly-owned subsidiaries, Mid-South and Midcon, to make such
Transfers pursuant to the Assignments (such subsidiaries being the present
holders of record and beneficial title to the Assets). The parties acknowledge
that in order to comply with the requirements of the Law of the State of
Louisiana, the Louisiana Assets will be transferred to the LLC and the Trust
will own the LLC Interest and that therefore the corpus of the Trust will
include the LLC Interest in lieu of the Louisiana Assets. For convenience and
brevity all references in this Agreement to the Transfer of the Assets to the
Trust shall be deemed to refer in the case of the Louisiana Assets to the
Transfer of such Assets to the LLC and the issuance of the LLC Interest to the
Trust. The consideration for such Transfers of the Assets is (i) the payment
by the Trust to Mid-South and Midcon, respectively, of cash in the aggregate
amount of the Purchase Price, which is being funded by Funding Transfers from
(A) FC Energy in consideration of the issuance to it of the Series A COP's,
Class I, and (B) Carthage in consideration of the issuance to it of the Series
A COP's, Class II, and (ii), as directed by Mid-South and Midcon, the issuance
by the Trust to the Depositor of the Series B COP's.
ARTICLE 1
DEFINITIONS
1.1 CERTAIN DEFINITIONS. As used in this Agreement, the
following terms have the following meanings:
"AAA" means the American Arbitration Association, and any
successor entity.
"Act" means Chapter 38 of Title 12 of the Delaware Code and
any successor statute, as amended from time to time.
"Additional Properties" has the meaning given that term in
Section 7.10(f).
"Additional Recompletions" has the meaning given that term in
Section 7.11(b).
<PAGE> 7
"Adjusted Funding Account" means the Funding Account
established and maintained for each Holder as of the end of each
fiscal year, as the same is specially computed to reflect the
adjustments required or permitted to be taken into account in applying
Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations (including
adjustments in respect of a Holder's personal liability under Section
7.9).
"Adjusted Property" means any property the Carrying Value of
which has been adjusted pursuant to Section 6.1(d)(i) or 6.1(d)(ii).
Once an Adjusted Property is deemed distributed by, and recontributed
to, the Trust for federal income tax purposes upon a Tax Termination
thereof, such property will thereafter constitute a Contributed
Property until the Carrying Value of such property is subsequently
adjusted pursuant to Section 6.1(d)(i) or 6.1(d)(ii).
"Affected Holder" has the meaning given that term in Section
10.1(b).
"Affected Well" has the meaning given that term in Section
7.10(b).
"Affiliate" means, with respect to any Person, any other
Person Controlling, Controlled by, or under common Control with, that
first Person.
"After-Tax IRR" has the meaning given that term in Section
7.10(b).
"Agreed Value" of any Contributed Property means the fair
market value of such property or other consideration at the time of
contribution as agreed by the Holders.
"Agreement" means this Trust Agreement, as amended or
restated from time to time pursuant to the provisions hereof.
"Applicable Price" has the meaning given that term in Section
7.10(g)(A).
"Assets" has the meaning given that term in the Assignments,
including the Assignment to the LLC, and includes the Properties.
"Assignment and Assumption Agreement" means the Assignment
and Assumption Agreement, dated as of the Effective Date, pursuant to
which Seagull assigns the Initial Swaps to the Trust.
"Assignments" means, collectively, each Assignment,
Conveyance and Bill of Sale, dated as of the Effective Date, pursuant
to which Mid-South and Midcon, respectively, are transferring the
Assets to the Trust (or in the case of the Louisiana Assets, to the
LLC).
"Bankrupt" with respect to any Person, means that such Person
(a) files in any court pursuant to any statute of the United States or
of any state a petition in bankruptcy or insolvency, (b) files for
reorganization or for the appointment of a
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<PAGE> 8
receiver or a trustee of all or a material portion of such Person's
assets, (c) makes an assignment for the benefit of creditors, (d)
admits in writing its inability to pay its debts as they fall due, or
(e) seeks, consents to or acquiesces in the appointment of a trustee,
receiver or liquidator of any material portion of its assets. If
there shall be filed against any Person in any court, pursuant to any
statute of the United States or of any state, a petition in bankruptcy
or insolvency, or for reorganization, or for the appointment of a
receiver or trustee of all or a substantial portion of such Person's
assets, and within ninety (90) days after the commencement of any such
proceeding, such petition shall not have been dismissed, then such
Person against whom such petition has been filed shall be considered
Bankrupt for purposes of this Agreement. In addition, if the whole or
any portion of the Certificates of any Holder evidencing such Holder's
Trust Interest is subject to levy or attachment, and such levy or
attachment is not released or discharged within 90 days, such Holder
shall be deemed Bankrupt for purposes of this Agreement.
"Book Basis" means, with respect to each Holder and each
Depletable Property owned by the Trust, (i) as of the time of the
Trust's acquisition thereof, the portion of the Carrying Value
allocated to such Holder pursuant to Section 6.2(e) and (ii) as of any
time following the Trust's acquisition thereof, the Holder's Book
Basis therein, increased by the capital expenditures of the Trust
related to such Depletable Property allocated to such Holder, and
decreased by Book Depletion theretofore reflected in such Holder's
Funding Account.
"Book Depletion" means the depletion deduction computed by or
on behalf of each Holder pursuant to Section 6.2(e) for Funding
Account maintenance purposes in respect of each Depletable Property of
the Trust; provided, however, in no event will the Holder's aggregate
Book Depletion deductions with respect to a Depletable Property exceed
its Book Basis in such Depletable Property.
"Carrying Value" means (a) with respect to a Contributed
Property or an Adjusted Property (other than a Depletable Property),
the Agreed Value of such Contributed Property or Adjusted Property
reduced (but not below zero) by all depreciation, and cost recovery
deductions charged to the Holders' Funding Accounts pursuant to
Section 6.1 with respect to such Contributed Property or Adjusted
Property, (b) with respect to a Depletable Property, the aggregate of
the Holders' Book Bases in such Depletable Property at the time of the
determination, and (c) with respect to any other Asset or the LLC
Interest, the adjusted basis of such Asset or the LLC Interest for
federal income tax purposes, as of the time of determination. The
Carrying Value of any Asset or the LLC Interest will be adjusted from
time to time in accordance with Sections 6.1(d)(i) and 6.1(d)(ii), and
to reflect changes, additions or other adjustments to the Carrying
Value for Transfers, acquisitions or improvements of Assets or the LLC
Interest of the Trust as deemed appropriate by the Managing Trustee.
"Carthage" means Carthage Field Corp., a Delaware corporation.
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<PAGE> 9
"Certificate" has the meaning given that term in Section
2.8(a).
"Claims" means all claims, suits, liabilities, losses,
demands, actions, causes of action, assessments, cleanup and remedial
obligations, judgments, awards, damages, fines, fees, penalties, costs
and expenses (including litigation costs and attorneys' and experts'
fees and expenses).
"Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor statute.
"Contracts" has the meaning given that term in the Assignment.
"Contributed Property" means each Asset, but excluding cash
and cash equivalents, Transferred to the Trust (or deemed contributed
to the Trust upon a Tax Termination and reconstitution thereof
pursuant to Section 708 of the Code) that has an Agreed Value
differing from its basis to the Trust for federal income tax purposes.
Once the Carrying Value of a Contributed Property is adjusted pursuant
to Section 6.1(d), such property will no longer constitute a
Contributed Property but will be deemed an Adjusted Property.
"Control" means (a) with respect to any corporation or other
entity having voting shares or the equivalent and elected directors,
managers, or Persons performing similar functions, the ownership or
power to vote more than 50% of shares or the equivalent having the
power to vote in the election of directors, managers, or Persons
performing similar functions, and (b) with respect to any other
entity, the ability to direct its business and affairs.
"Delaware Certificate" means the Certificate of Business
Trust filed with the Secretary of State of the State of Delaware, as
amended or restated from time to time pursuant to the provisions
hereof.
"Depletable Property" means any Property, the production from
which is or would be (in the case of nonproducing property) subject to
depletion under Sections 611, et seq., of the Code.
"Depositor" means Seagull E&P in its capacity as the sole
shareholder of each of Mid-South and Midcon in causing the Transfer of
the Properties and other Assets to the Trust and the LLC pursuant to
the Assignments.
"Discount Rate" has the meaning given that term in Section
7.10(g)(B).
"Dispute" has the meaning given that term in Section 11.1.
"Disputing Party" has the meaning given that term in Section
11.1.
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<PAGE> 10
"Effective Date" means 7:00 a.m. (Central Daylight Savings
Time) on September 1, 1995.
"Encumbrance" means a mortgage, deed of trust, lien, pledge,
conditional sale arrangement, security interest or other encumbrance,
whether effected voluntarily, involuntarily or by operation of Law.
The term "Encumber" means the creation of an Encumbrance.
"Environmental Laws" means any and all Laws pertaining to the
protection or preservation of the environment, including the Clean Air
Act, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, the Federal Water Pollution Control Act or
Clean Water Act, the Occupational Safety and Health Act of 1970, the
Resource Conservation and Recovery Act of 1976, the Safe Drinking
Water Act, the Toxic Substances Control Act, the Hazardous & Solid
Waste Amendments Act of 1984 and the Superfund Amendments and
Reauthorization Act of 1986.
"Escalated Index Price" has the meaning specified in Section
8.4(a)
"Estimated Payout Date" has the meaning given that term in
Section 7.10(b).
"Exercise Date" shall mean July 1 of the calendar year
following the calendar year in which Payout occurs.
"Excess Recoupable Lost Production Value" has the meaning
given that term in Section 7.10(d).
"Excess Transaction Expenses" has the meaning specified in
Section 8.8.
"Exercise Price" has the meaning specified in Section 11.1.
"FC Energy" means FC Energy Finance I, Inc., a Delaware
corporation.
"Final Determination" means, with respect to any federal
income tax issue affecting the Trust or any Holder's interest in the
Trust , the earliest to occur of the following: (a) the date on which
a decision, judgment, decree or other order has been issued by any
court of competent jurisdiction with respect to such issue, which
decision, judgment, decree or other order has become final (i.e., all
allowable appeals requested by the parties to the action have been
exhausted); (b) the date on which the IRS has entered into a binding
agreement with the Trust with respect to such issue or on which the
IRS has reached a final administrative or judicial determination with
respect to such issue that, whether by Law or agreement, is not
subject to appeal; (c) the date on which the time for instituting a
claim for refund with respect to such issue has expired, or, if a
claim has been filed, the time for instituting suit with respect
thereto has expired; or (d) the date on which the applicable statute
of limitations for raising such issue has expired.
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"Financial Advisor" means NationsBanc Capital Markets, Inc.
"Funding Account" means the capital account (as such term is
used in the Section 704 Regulations) established and maintained for a
Holder pursuant to Section 6.1.
"Funding Transfers" means any cash, cash equivalents or the
Net Agreed Value of Contributed Property or any other Asset that a
Holder pays or Transfers, directly or indirectly, to the Trust,
whether in payment of the initial purchase price for the Certificates
or otherwise.
"GAAP" means United States generally accepted accounting
principles consistently applied.
"Gas Production" means all natural gas produced and sold from
the Properties expressed in MMBtus.
"Good Title" means such record title and beneficial title
deducible of record that (a) will entitle the Trust to receive a
percentage of all Oil and Gas produced, saved and marketed from each
Well that is not less than the percentage shown for such Well under
the column "NRI" on Exhibit 1.1.1G; (b) will obligate the Trust to
bear a percentage of the costs and expenses relating to operations on,
and the maintenance and development of, each Well that is not greater
than the percentage shown for such Well under the column "WI" on
Exhibit 1.1.1G; and (c) is free and clear of any Encumbrances,
encroachments, irregularities, defects, preferential purchase rights,
consent requirements, and other burdens, except for Permitted
Encumbrances.
"Governmental Authority" means a federal, state or local
governmental authority; any executive, legislative or other governing
body of any of the foregoing; any agency, authority, board,
department, system, service (including the IRS), office, commission,
committee, council or other administrative body of any of the
foregoing; any court or other judicial body; and any officer, official
or other representative of any of the foregoing.
"Guaranty" means that certain Guaranty, of even date
herewith, made by Seagull in favor of the Trust and the Series A
Holders.
"Holder" means any Series B Holder or any Series A Holder.
"Indebtedness" means indebtedness for borrowed money and
capitalized lease obligations, but expressly does not include trade
payables incurred in the ordinary course of business.
"Indemnified Holder" has the meaning given that term in
Sections 9.1 and 9.2(a).
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<PAGE> 12
"Indemnified Tax Credit Losses" has the meaning given that
term in Section 9.2(a).
"Indemnify" means to indemnify, protect, defend, hold
harmless and release.
"Index Price" has the meaning given that term in Section
8.4(a).
"Infill Report" has the meaning given that term in Section
7.10(c).
"Infill Report Date" has the meaning given that term in
Section 7.10(c).
"Infill Well" has the meaning given that term in Section
7.10(a).
"Initial Swap Agreements" has the meaning given that term in
Section 2.8(b)(i)(B).
"Initial Swaps" has the meaning given that term in Section
2.8(b)(i)(B).
"IRS" means the United States Internal Revenue Service and
any successor Governmental Authority.
"Knowledge" with respect to the Depositor (in such capacity
or as Series B Holder or Managing Trustee), means the actual knowledge
of the members of Depositor's executive management group and
operational management team (including the Depositor's vice president
of reservoir engineering), expressly excluding field personnel and
other employees of Depositor who do not report directly to officers of
Depositor. The term "Knowledge" does not include any knowledge (other
than actual knowledge) that a person might acquire from conducting any
due diligence or investigation as to the applicable matter, including
a review of such person's files, and such term does not imply or
create any obligation to conduct any such due diligence or other
investigation. The term "Knowledge" also does not include any
constructive knowledge a person might otherwise be deemed to have
under applicable Law, such as constructive knowledge imparted by
official public records or by the existence of a partnership or
similar relationship.
"Law" means any law, statute, constitutional provision, code
(including the Code), rule, regulation, ordinance, order, decree,
ruling or other legal requirement of any Governmental Authority,
including Environmental Laws.
"Leases" has the meaning given that term in the Assignments.
"LLC" means Seagull Series 1995 L.L.C., a Delaware limited
liability company.
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<PAGE> 13
"LLC Agreement" means that certain Limited Liability Company
Agreement of Seagull Series 1995 L.L.C. dated as of September 1, 1995
between the Trust and Seagull E&P.
"LLC Interest" means a 99% membership interest in the LLC.
"Liquidating Events" has the meaning given that term in
Section 10.1(a).
"Lost Production" has the meaning given that term in Section
7.10(c)(i).
"Lost Production Value" has the meaning given that term in
Section 7.10(c)(ii).
"Louisiana Assets" means that portion of the Assets which is
located within the State of Louisiana.
"Managing Trustee" means initially and as of the Effective
Date, the initial Series B Holder as contemplated in Section 7.1(a),
or any successor Managing Trustee appointed by the Series A
Supermajority Interest in accordance with Section 7.7.
"Midcon" means Seagull Midcon Inc., a Delaware corporation.
"Mid-South" means Seagull Mid-South Inc., a Delaware
corporation.
"MMBtu" means one million British thermal units.
"Net Agreed Value" means (a) in the case of any Contributed
Property, the Agreed Value of such Contributed Property reduced by any
liabilities either assumed by the Trust upon such contribution or to
which such Contributed Property is subject when contributed, and (b)
in the case of any Asset or the LLC Interest distributed to a Holder,
the Trust's Carrying Value of such Asset or the LLC Interest (in all
cases as such Carrying Value is adjusted pursuant to Section
6.1(d)(ii) to reflect Unrealized Gain or Unrealized Loss at the time
such Asset or the LLC Interest is distributed) reduced by any
indebtedness either assumed by such Holder upon such distribution or
to which such Asset or the LLC Interest is subject at the time of
distribution, in either case, as determined under Section 752 of the
Code.
"New Operating Agreements" has the meaning given that term in
Section 7.3(a).
"NGPA" means the Natural Gas Policy Act of 1978, as amended.
"Non-Operated Properties" has the meaning given that term in
Section 7.3(a).
"Oil and Gas" means oil, natural gas, condensate and other
hydrocarbons.
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"Oklahoma Assets" means that portion of the Assets which is
located within the State of Oklahoma.
"Operated Properties" has the meaning given that term in
Section 7.3(a).
"Operating Agreements" means any agreement, including the New
Operating Agreements, pursuant to which a Property is operated by any
Person, including an Operator Affiliate.
"Operator Affiliates" means Midcon and Mid-South and any
other Affiliate of the Depositor that operates any of the Operated
Properties.
"Payout" means the first day of the calendar month following
the month in which the Series A Holders' After-Tax Return of 9.16% is
achieved; provided, however, that Payout may be extended in accordance
with the provisions of Section 7.10(e).
"Permitted Encumbrances" means (a) tax, operators',
mechanics', materialmen's, employees', contractors' and similar
statutory Encumbrances securing obligations not yet due; (b)
Encumbrances created by Law for royalty, bonus, deferred bonus
payments or rental or for compliance with the terms of the Leases and
other instruments creating the Properties; which are listed on Exhibit
A to the Assignments; (c) Laws applicable to the Properties, and the
terms of permits applicable to the Properties; (d) requirements that
the approval of Governmental Authorities be obtained in connection
with the Transfer of Oil and Gas properties, if the same are
customarily obtained contemporaneously with or subsequent to such
Transfer; (e) the terms of the Leases (f) the terms of the Contracts;
(g) division orders and contracts for the sale of Oil and Gas from the
Properties that are terminable without penalty upon no more than 30
days' notice to the purchaser of such Oil and Gas; (h) easements,
rights-of-way, servitudes, permits, surface leases and other rights in
respect of surface operations, to the extent such rights do not
materially interfere with operations on the Properties; (i) existing
calls on Oil and Gas produced from the Properties appearing in or
referred to in the chain of title to the Properties; (j) rights of
reassignment prior to abandonment, surrender or release of oil, gas
and/or mineral leases requiring notice to the holders of such rights;
and (k) other minor defects or irregularities generally waived by
prudent purchasers of Oil and Gas properties (such as (i) defects
cured by possession under applicable statutes of limitation, and (ii)
defects in the early chain of title, including such things as omission
of heirship or succession proceedings or failure to record releases of
liens, production payments, or oil and gas leases that have expired on
their own terms); provided, however, that an item described in clauses
(g), (h), (i), (j) or (k) will constitute a Permitted Encumbrance only
if it does not (A) materially interfere with operations on the
Properties, (B) reduce the percentage of Oil and Gas produced, saved
and marketed from each Well that the Trust will be entitled to receive
not less than the percentage shown for the applicable Well under the
column "NRI" on Exhibit 1.1.1G, or (C) increase the percentage of the
costs and expenses
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<PAGE> 15
relating to operations on, and the maintenance and development of,
each Well that the Trust will be obligated to bear to greater than the
percentage shown for such Well under the column "WI" on Exhibit
1.1.1G.
"Person" means a natural person, partnership, limited
partnership, limited liability company, trust, business trust, estate,
association, corporation, custodian, nominee or any other individual
or entity in its own or any represented capacity.
"Petroleum Engineer" has the meaning given that term in
Section 8.4(a).
"Post-Payout Lost Production" has the meaning given that term
in Section 7.10(c)(i).
"Post-Payout Sharing Ratio" means (a) 90% as to the Series B
Holder and (b) 10%, in the aggregate, as to the Series A Holders, with
such 10% being allocated among the Series A Holders, Class I and Class
II in the manner shown on Exhibit 1.1.1P under the column "Post-Payout
Sharing Ratio."
"Preliminary Infill Report" has the meaning given that term
in Section 7.10(c).
"Pre-Payout Lost Production" has the meaning given that term
in Section 7.10(c)(i).
"Pre-Payout Sharing Ratio" means (a) 1% as to the Series B
Holder and (b) 99%, in the aggregate, as to the Series A Holders, with
such 99% being allocated among the Series A Holders, Class I and Class
II in the manner shown on Exhibit 1.1.1P under the column "Pre-Payout
Sharing Ratio."
"Prime Rate" means a rate per annum equal to the lesser of
(a) a varying rate per annum that is equal to the interest rate
publicly quoted by Texas Commerce Bank National Association from time
to time as its prime commercial or similar reference interest rate,
with adjustments in that varying rate to be made on the same date as
any change in that rate, and (b) the maximum rate permitted by
applicable Law.
"Property" has the meaning given that term in the
Assignments, including the Assignment to the LLC.
"Prudent Operator Standard" has the meaning given that term
in Section 7.3(b).
"Purchase Price" has the meaning given that term in Section
5.1(a)(i).
"Purchase Option Assets" has the meaning given that term in
Section 11.1.
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<PAGE> 16
"Reasonable Basis" for a position shall exist if tax counsel
may properly advise reporting such position on a tax return in
accordance with Formal Opinion 85-352 issued by the standing Committee
on Ethics and Professional Responsibility of the American Bar
Association.
"Recapture Income" means any gain recognized by the Trust
(but computed without regard to any adjustment required by Section 734
or 743 of the Code) upon the Transfer of any property or asset of the
Trust that does not constitute capital gain for federal income tax
purposes because such gain represents the recapture of deductions
previously taken with respect to such property or assets.
"Recompletion" means (a) an operation that is conducted after
the Effective Date to attempt a new completion in a Well, including
perforating and fracturing conducted in connection with such
operation; and (b) if such operation is successful, the resulting new
completion.
"Recoupable Lost Production Value" has the meaning given that
term in Section 7.10(d).
"Register" means the register or registers maintained by the
Managing Trustee in accordance with Section 2.8(f) for the
registration, and registration of Transfer, of the Certificates.
"Reimbursed Transaction Expenses" has the meaning given that
term in Section 8.8.
"Reserve Report" has the meaning given that term in Section
8.4(a).
"Rework" means any downhole work, other than a Recompletion,
that is performed in a Property to restore or improve production of
Oil and Gas from a Zone that is included in the Properties and that is
open to production at the time such work is conducted, including
acidizing, fracturing, reperforating and cleaning the wellbore of
sand, salt, silt, paraffin, scale or other buildups.
"S&P" means Standard & Poors Ratings Group.
"Seagull" means Seagull Energy Corporation, a Texas
corporation.
"Seagull E&P" has the meaning given that term in the
introductory paragraph of this Agreement.
"Section 704(b) Regulations" means the Treasury Regulations
promulgated under Section 704(b) of the Code and any successor
Treasury Regulations, as amended from time to time.
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<PAGE> 17
"Section 29 Tax Credits" means the tax credits that are
allowable for federal income tax purposes under Section 29 of Code.
"Securities Act" means the Securities Act of 1933 or any
successor statute, as amended from time to time.
"Series A COP's" has the meaning given that term in Section
2.8(a).
"Series B COP's" has the meaning given that term in Section
2.8(a).
"Series A Holder" means each Person whose name appears on the
Register as the registered owner of any Series A COP; initially and as
of the Effective Date, Series A Holder means FC Energy with respect to
the Series A COP's, Class I, and Carthage, with respect to the Series
A COP's, Class II.
"Series A Holders' After-Tax Cash Flow" means, in each
calendar month, an amount that equals the sum of:
(a) The aggregate amount of cash distributed by
the Trust to the Series A Holders in such month;
minus
(b) In April, June, September and December of
each taxable year of the Trust, an amount equal to the
product of (i) 35% multiplied by (ii) 25% of the sum of (A)
the aggregate net taxable income (determined without regard
to any deduction in respect of Excess Transaction Expenses)
for such taxable year that is allocated to the Series A
Holders from the Trust prepared for such taxable year as
reported on the federal income tax return of the Trust and
(B) the aggregate gain, if any, for federal income tax
purposes, that is recognized by the Series A Holders in such
taxable year from the Transfer of Depletable Properties that
is computed for the Series A Holders in accordance with
Section 6.3; provided, however that the amounts calculated in
this subsection shall be computed and based on the Tax
Assumptions, and any calculation herein that is inconsistent
with the Tax Assumptions will be adjusted accordingly.
plus
(c) In April, June, September and December of
each taxable year of the Trust, an amount equal to the
product of (i) 35% multiplied by (ii) 25% of the sum of (A)
the aggregate loss, if any, for federal income tax purposes,
that is recognized by the Series A Holders in such taxable
year from the Transfer of Depletable Properties that is
computed for the Series A Holders in accordance with Section
6.3 and (B) the aggregate net taxable loss (determined
without regard to any deduction in respect of Excess
Transaction
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<PAGE> 18
Expenses) for such taxable year that is allocated to the
Series A Holders from the Trust as reported on the federal
income tax return of the Trust prepared for such taxable year
and (C) the aggregate depletion deductions in respect of the
Depletable Properties for the Series A Holders computed for
federal income tax purposes in accordance with Section 6.3;
provided, however, that the amounts calculated in this
subsection shall be computed and based on the Tax
Assumptions, and any calculation herein that is inconsistent
with the Tax Assumptions will be adjusted accordingly.
plus
(d) In April, June, September and December of
each taxable year of the Trust ending prior to January 1,
2003, an amount equal to the product of (i) 25% multiplied by
(ii) the aggregate Section 29 Tax Credits allocable (as
determined under Section 6.3(a)) to the Series A Holders from
the Trust based on the gross sales of Gas Production;
provided, however that the amounts calculated in this
subsection shall be computed and based on the Tax
Assumptions, and any calculation herein that is inconsistent
with the Tax Assumptions will be adjusted accordingly.
plus
(e) The aggregate indemnity payments actually
received by the Series A Holders during such month under
Article 9 (less all amounts paid by the Series A Holders that
are the basis for the indemnity payments and excluding any
amount payable to the Series A Holders pursuant to Section
9.5);
provided, however, that in approximating when Payout occurs within a
taxable year, the amounts in subsections (b), (c) and (d) will be
calculated using the monthly production reports pursuant to Section
8.4(f); and provided, further, that the amounts calculated in
subsections (b), (c) and (d) (and the timing of Payout) shall be
adjusted to take into account any adjustments to the Trust's tax
returns (to the extent such calculation is not inconsistent with the
Tax Assumptions) in respect of a Final Determination of an audit or
contest with respect to such allocations or computations and any
discrepancy between the amounts calculated in subsections (b), (c) or
(d) using the monthly production reports and the amounts calculated
using the Trust's tax returns.
"Series A Holders' After-Tax Return" means the rate of return
equal to (a) the sum of (i) Series A Holders' Monthly After-Tax Return
and (ii) 1.0, such sum of (i) and (ii) raised to the twelfth power,
minus (b) 1.0, which rate of return is also expressed in the following
formula:
Series A Holders' After-Tax Return = [(MATR + 1.0)
RAISED 12] - 1.0
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<PAGE> 19
"Series A Holders' Monthly After-Tax Return" (or "MATR")
means, for any calendar month, the rate of return that, when used to
discount each amount of the Series A Holders' After-Tax Cash Flow for
such month and all preceding months, generates a present value equal
to the sum of the Series A Holders' initial Funding Transfers
(exclusive of any Funding Transfers made by the Series A Holders in
respect of the Excess Transaction Expenses).
"Series A Majority Interest" means one or more Series A
Holders having among them 50% or more of the Sharing Ratios of all
Series A Holders.
"Series A Supermajority Interest" means one or more Series A
Holders having among them 66-2/3% or more of the Sharing Ratios of all
Series A Holders.
"Series B Holder" means the Person whose name appears on the
Register as the registered owner of any Series B Certificate;
initially and as of the Effective Date, Series B Holder means Seagull
Energy E&P, Inc., a Delaware corporation.
"Series B Majority Interest" means one or more Series B
Holders having among them 50% or more of the Sharing Ratios of all
Series B Holders.
"Sharing Ratio" as to any Holder means (a) prior to Payout,
such Holder's Pre-Payout Sharing Ratio, and (b) from and after Payout,
such Holder's Post-Payout Sharing Ratio.
"SMSI" means Seagull Marketing Services, Inc., a Delaware
corporation.
"Special Trustee" means initially and as of the Effective
Date, Mark A. Ferrucci, or any successor Special Trustee appointed by
the Managing Trustee with the approval of the Series A Supermajority
Interest in accordance with Section 7.12.
"Special Trustee Expenses" shall mean the reasonable
expenses, disbursements and advances incurred by the Special Trustee
pursuant to this agreement, including without limitation, the
reasonable fees, expenses and disbursements of its counsel and of his
agents not regularly employed by him or his employer, excluding
administrative costs, overhead and expenses relating to the Special
Trustee's ordinary duties.
"Special Trustee Fee" means the fees payable to the Special
Trustee pursuant to the schedule of fees set forth in the Special
Trustee Fee Agreement.
"Special Trustee Fee Agreement" means that certain letter
agreement dated August 31, 1995, between the Special Trustee and the
Depositor, as the same may be amended from time to time with the
consent of the Series A Supermajority Interest, and any fee agreement
entered into between any successor Special Trustee and the Managing
Trustee and approved by the Series A Supermajority Interest.
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<PAGE> 20
"Swap Agreement" means any commodity swap, hedge or other
agreement (including a "master swap agreement") that has as its
purpose the hedging of the price risk of the Trust's Oil and Gas
production.
"Swap" means any commodity swap, hedge or other trade
executed under a Swap Agreement.
"Target Rate" has the meaning given that term in Section
7.10(d).
"Tax Assumptions" means the following assumptions: (a) the
federal income tax rate applicable to the Series A Holders will be
35%, and the state and local income tax rate applicable to the Series
A Holders will be 0%; (b) no Series A Holder will be subject to the
alternative minimum tax or the limitations imposed by Sections 465,
469 or 29(b)(6) of the Code; (c) the Trust, the LLC and each Series A
Holder will compute its taxable income utilizing the accrual method of
accounting and the calendar year as its tax year; (d) cost depletion
deductions computed in the manner described in Section 6.3(c) will be
taken into account in determining the Series A Holders' taxable
income; (e) estimated taxes will be paid on a 100% current basis on
April 15, June 15, September 15 and December 15 of each year; (f) the
Series A Holders will have sufficient federal taxable income and
liability to currently use any federal income tax losses, depletion
deductions and Section 29 Tax Credits (calculated by disregarding any
event assumed not to have occurred pursuant to clause (i) below)
generated (or deemed generated) by the Trust and allocated to them
(except as a result of an act or omission described in Section
9.2(a)(ii)(D)); (g) the Trust and the LLC will each have an initial
short taxable year beginning September 1, 1995 and ending December 31,
1995, (h) no Series A Holder will fail to claim, on a timely and
proper basis, the Section 29 Tax Credits, intangible drilling costs
deductions, depletion or depreciation allocated to it under this
Agreement (except as a result of an act or omission described in
Section 9.2(a)(ii)); (i) neither the Code nor the Treasury
Regulations promulgated thereunder will be amended or repealed
subsequent to the Effective Date (regardless of the effective date of
any such action); (j) the Trust and the LLC each will be treated as a
partnership for federal income tax purposes, (except as result of an
act or omission described in Section 9.2(a)(ii)(C)); (k) the Trust
will be treated as the owner of both the Assets (excluding the
Louisiana Assets) and the LLC Interest, and the LLC will be treated as
the owner of the Louisiana Assets, for federal income tax purposes
(except as a result of an act or omission described in Section
9.2(a)(ii)) and (l) the allocations of income, gain, loss, deduction
and credits set forth in this Agreement and the LLC Agreement will be
respected under Sections 7.04(b) and 704(c) of the Code (except as a
result of an act or omission described in Section 9.2(a)(ii)(D)).
"Tax Representations" has the meaning given that term in
Section 3.1(f).
"Tax Termination" means a termination of the Trust for
federal income tax purposes under Section 708(b)(1)(B) of the Code.
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<PAGE> 21
"Timmins Litigation" means that certain lawsuit styled "B. H.
Timmins, Jr. et al. vs. Seagull Mid-South Inc.," which is currently
pending in the District Court for the 123rd Judicial District of
Panola County, Texas, and which was the subject of a letter dated July
14, 1995 from Seagull to an Affiliate of FC Energy.
"Total Lost Production Value" has the meaning given that term
in Section 7.10(c)(iii).
"Transfer" as to any asset means a sale, assignment,
conveyance, gift, exchange, lease or other disposition or transfer of
such asset, whether effected voluntarily, involuntarily or by
operation of Law (including a merger or consolidation in which the
Person owning such asset is not the surviving entity). The term
"Transfer" will not include the creation of an Encumbrance, but it
will include a transfer in connection with, or in lieu of, the
foreclosure of an Encumbrance.
"Transferee" means a Person to which a Transfer is made.
"Treasury Regulations" means the temporary or final
regulations promulgated by the United States Department of the
Treasury pursuant to the Code.
"Trust" has the meaning given that term in the Preliminary
Statement above.
"Trust Estate" means the Properties, the LLC Interest, and
the other Assets, all collections, proceeds and products of or from
the same, all deposit accounts and investments evidencing or
comprising such collections or proceeds, and all other monies,
amounts, property, rights, contract rights, privileges and franchises
of every kind and description, whether previously granted, conveyed,
assigned, pledged over and confirmed, or intended, agreed or
covenanted so to be, to the Trust, including all rights to payment
owing, or amounts actually paid, hereunder by the Depositor (or at the
direction of the Depositor) to the Trust; all rights of the Trust
under the Assignments (including all rights under any Operating
Agreements, and rights to use or lease of equipment, transport systems
and the like necessary for operation of the Properties in accordance
with this Agreement as assigned to the Trust pursuant to the
Assignments); all rights under, and amounts owing or actually paid to
the Trust in respect of, the Initial Swaps and any other Swaps
executed in accordance with this Agreement; and all rights under, and
amounts owing or actually paid to the Trust in respect of, the
Guaranty.
"Trust Interest" means the interest of a Holder in the Trust
Estate as evidenced by the Certificates, including rights to
distributions (liquidating or otherwise), allocations, information,
and to consent or approve.
"Trustee" means each of the Managing Trustee and the Special
Trustee.
"Unrealized Gain" attributable to any Asset or the LLC
Interest means, as of any date of determination, the excess, if any,
of (a) the fair market value of such
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<PAGE> 22
Asset or the LLC Interest as of such date (as determined under Section
6.1(d)) over (b) the Carrying Value of such Asset or the LLC Interest
as of such date (prior to any adjustment to be made pursuant to
Section 6.1(d) as of such date).
"Unrealized Loss" attributable to any Asset or the LLC
Interest means, as of any date of determination, the excess, if any,
of (a) the Carrying Value of such Asset or the LLC Interest as of such
date (prior to any adjustment to be made pursuant to Section 6.1(d) as
of such date) over (b) the fair market value of such Asset or the LLC
Interest as of such date (as determined under Section 6.1(d)).
"Well" has the meaning given that term in the Assignments.
"Working Capital Loan" has the meaning given that term in
Section 5.5.
"Zone" means a zone, horizon, interval or other stratum of
earth containing, or thought to contain, a common accumulation of Oil
and Gas.
1.2 OTHER DEFINITIONS. Other terms defined in this Agreement
have the meanings so given them.
1.3 CONSTRUCTION. Whenever the context requires, the gender of
all words used in this Agreement includes the masculine, feminine, and neuter.
All references to Articles and Sections refer to articles and sections of this
Agreement, and all references to Exhibits are to Exhibits attached to this
Agreement, each of which is made a part of this Agreement for all purposes.
The term "including" means "including, without limitation,".
ARTICLE 2
DECLARATION OF TRUST
2.1 DECLARATION AND ACCEPTANCE OF TRUST. There is hereby
organized a business trust within the meaning of Section 3801 of the Act. As
of the Effective Date and pursuant to the Assignments, the Depositor is causing
the Assets to be irrevocably Transferred to the Trust (and with respect to the
Louisiana Assets, to the LLC), without recourse, representation or warranty
except as set forth herein, in consideration of (a) the payment by the Trust
(and with respect to the Louisiana Assets, by the LLC) to Mid-South and Midcon,
respectively, of cash in the aggregate amount of the Purchase Price and (b) at
the direction of Mid-South and Midcon, the issuance by the Trust to the
Depositor of the Series B COP's. The Trustees hereby declare that they do and
will hold the Trust Estate, and such additional property as may comprise the
Trust Estate from time to time, upon the trusts herein set forth, subject to
and in accordance with the terms hereof, for the equal and ratable use and
benefit of the Holders without preference, priority or distinction of any
thereof over any other, except as set forth herein. This Agreement imposes,
for the benefit of the Holders, a business trust, as governed by this Agreement
and the Act, on the Trust Estate for the benefit of the interest of each Holder
of a Trust Interest evidenced by the Certificates.
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<PAGE> 23
2.2 NAME. The name of the Trust created by this Trust Agreement
is "Seagull Series 1995 Trust" and all Trust business must be conducted in that
name or such other names that comply with applicable Law as the Managing
Trustee may select with the prior written consent of the Series A Majority
Interest and the Series B Majority Interest.
2.3 OFFICES. The principal office of the Trust will be at the
principal office of the initial Managing Trustee in Houston, Texas. The Trust
may maintain such other offices as the Managing Trustee may designate from time
to time, written notice of which shall be provided to each Holder.
2.4 PURPOSES. The purposes of the Trust are (a) to acquire, own,
manage and deal with the Trust Estate, (b) to produce Oil and Gas from the
Properties, (c) to market and sell such Oil and Gas and other products derived
therefrom, and (d) to engage in such incidental activities as may be directly
related to the foregoing and not prohibited by this Agreement.
2.5 DELAWARE CERTIFICATE. The Managing Trustee and the Special
Trustee have caused the Delaware Certificate to the filed with the Secretary of
State of the State of Delaware. At the request of the Managing Trustee, each
Holder shall execute, acknowledge, swear to, and deliver all certificates and
other instruments conforming with this Agreement that are necessary or
appropriate to form, qualify, continue, and terminate the Trust as a business
trust under the Laws of the State of Delaware.
2.6 CONDUCTING BUSINESS IN OTHER JURISDICTIONS. The Trustees may
not permit the Trust to conduct business in any jurisdiction other than the
States of Delaware, Louisiana, Oklahoma and Texas without (a) obtaining the
prior written consent of the Series A Majority Interest and Series B Majority
Interest and (b) registering or qualifying the Trust as a foreign business
trust in such other jurisdiction, if the Laws of such jurisdiction require such
registration or qualification.
2.7 TERM. The Trust was formed and commenced operations on the
Effective Date (which was not earlier than the effective date of the Delaware
Certificate) and will continue in existence until its business and affairs are
wound up following dissolution automatically at the close of Trust business on
December 31, 2015, or such earlier time as this Agreement may specify.
2.8 THE CERTIFICATES. The following provisions will govern the
authorization, issuance, execution, authentication, registration and
cancellation of the Certificates:
(a) AUTHORIZATION. There is hereby authorized and
created under this Agreement the following series of certificates of
participation in the Trust: (i) a series designated "Certificate of
Series A Participation" (the "Series A COP's"), of which there will be
the following two classes: (A) "Class I," which will be in the
initial face amount of $27,069,200 and in substantially the form of
Exhibit 2.8.1, and (B) "Class II," which will be in the initial face
amount of $20,130,800 and in substantially the form of Exhibit 2.8.2;
and (ii) a series designated "Certificate of
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<PAGE> 24
Series B Participation" (the "Series B COP's"), which will be in the
initial face amount of $18,413,494 and in substantially the form of
Exhibit 2.8.3. As used in this Agreement, the term "Certificate"
means any of, and "Certificates" means all of, collectively, the
Series A COP's and the Series B COP's. The Certificates shall
collectively evidence the entire beneficial ownership of the Trust.
(b) CONDITIONS TO ISSUANCE. The Certificates will be
issued only upon the satisfaction of the following conditions:
(i) The following agreements must have been
executed, acknowledged (if applicable) and delivered to the
appropriate recipient by each of the Persons that is a party
thereto, and executed original counterparts of each such
agreement must also have been deposited with the Holders:
(A) this Agreement, the Guaranty, the
Assignments and the New Operating Agreements;
(B) Swap Agreements, and confirmations
of the initial Swaps executed thereunder, that are
entered into by the Managing Trustee on behalf of the
Trust and that satisfy the following requirements:
(I) the initial Swaps executed
under such Swap Agreements must cover an
aggregate notional amount of gas equal to
approximately 75% of the projected gas
portion of the Oil and Gas projected to be
produced from the Properties for the period
from the Effective Date through December 31,
1998,
(II) such Swap Agreements must be
entered into with counterparties having
senior unsecured debt obligations or long
term deposit liabilities which are rated not
less than "A" by S&P,
(III) such Swap Agreements, and the
confirmation of the initial Swaps executed
thereunder, shall otherwise be in form and
substance acceptable to the Series A Holders,
and
(IV) such Swap Agreements may be
initially entered into by Seagull, and
Seagull may execute the initial Swaps
thereunder, if such Swap Agreements and
initial Swaps are assigned by Seagull to the
Trust, prior to the issuance of the
Certificates, pursuant to assignments that
are in form and substance acceptable to the
Series A Holders;
(such Swap Agreements are referred to herein as the
"Initial Swap Agreements," and such initial Swaps
executed thereunder are referred to herein as the
"Initial Swaps");
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<PAGE> 25
(C) executed counterparts (or copies
thereof) of any credit support arrangements required
or contemplated by the Initial Swap Agreements; and
(D) such other closing documents and
opinions of counsel as the Depositor or the initial
Series A Holders may reasonably request (which may be
done through the inclusion of such items on a final
closing agenda prepared in connection with the
issuance of the Certificates).
(ii) Each Holder must have made the Funding
Transfer required to be made by it under Section 5.2(b).
(c) ISSUANCE. Upon satisfaction of the conditions set
forth in Section 2.8(b), and in consideration of the Holders'
respective Funding Transfers under Section 5.2(b), the Managing
Trustee, on behalf of the Trust, shall execute (in accordance with
Section 2.8(d)) and deliver (i) the Series A COP's, Class I, to FC
Energy, (ii) the Series A COP's, Class II, to Carthage, and (iii) the
Series B COP's to the Depositor. All of the Certificates (v) will be
issued as fully-registered certificates of participation, without
coupons, (w) will be dated the Effective Date, and (x) will entitle
their holders to the rights given them in this Agreement, including
the rights to receive distributions in accordance with Section 6.5 and
liquidating distributions in accordance with Section 10.2(c).
(d) EXECUTION. The Certificates shall be executed on
behalf of the Trust by the manual or facsimile signature of an
authorized officer of the Managing Trustee and attested by the manual
or facsimile signature of its Secretary or Assistant Secretary (or
such other officer as may be designated by the Managing Trustee). The
facsimile signatures of said officers shall have the same force and
effect as if such officers had manually signed the Certificates. In
case any officer the facsimile of whose signature shall appear on the
Certificates shall cease to be such officer before the delivery of
such Certificates, such facsimile signature shall nevertheless be
valid and sufficient for all purposes, the same as if he had remained
in office until delivery.
(e) REGISTER.
(i) The Managing Trustee shall maintain at its
principal office a sufficient register (the "Register") for
the registration of the Certificates and their Transfer. The
Certificates, names and addresses of the Holders, all
Transfers of the Certificates and the names and addresses of
the Transferees will be registered in the Register under such
reasonable procedures as the Managing Trustee may prescribe.
At reasonable times and under reasonable regulations
established by the Managing Trustee, the Register may be
inspected and copied by any Holder.
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<PAGE> 26
(ii) The entries in the Register shall be
conclusive and binding for all purposes, absent manifest
error. The Managing Trustee and any Holder may treat the
registered owner of any Certificate as the absolute owner
thereof for all purposes, and shall not be bound by any
notice to the contrary. All payments or distributions of or
on account of any such Certificate as herein provided shall
be made only to or upon the written order of the registered
owner thereof or such owner's legal representative, but such
registration may be changed as herein provided.
(f) REPLACEMENT CERTIFICATES.
(i) If a Trust Interest is Transferred in
accordance with Article 4, then, upon surrender to the
Managing Trustee of the Certificate representing the
Transferred Trust Interest, duly endorsed by, or accompanied
by a written instrument or instruments of Transfer in form
satisfactory to the Managing Trustee and duly executed by the
Transferring Holder or such Holder's attorney-in-fact duly
authorized in writing, the Managing Trustee shall execute and
deliver to the Transferee a replacement Certificate
representing such Trust Interest.
(ii) If any Certificate is mutilated, lost, stolen
or destroyed, the Managing Trustee shall execute, and deliver
to the applicable Holder a replacement Certificate
representing such Trust Interest; provided, however, that, in
the case of any mutilated Certificate, such mutilated
Certificate shall first be surrendered to the Managing
Trustee, and in the case of any lost, stolen or destroyed
Certificate, there shall be first furnished to the Managing
Trustee evidence of such loss, theft or destruction
satisfactory to it, together with indemnity satisfactory to
it.
(iii) All replacement Certificates issued pursuant
to this Section 2.8(f) will (A) be of the same series, class,
form, tenor, maturity and face amount as the Certificates
they replace, (B) bear a number not contemporaneously
outstanding, and (C) constitute original, valid contractual
obligations of the Trust, evidencing the same Trust Interest
as the Certificates they replace, and shall be entitled to
all of the security and benefits hereof to the same extent as
the Certificates they replace (in each case, whether or not
lost, stolen or destroyed Certificates be at any time found
by anyone).
(iv) No service charge will be imposed by the
Managing Trustee for issuing replacement Certificates
pursuant to this Section 2.8(f).
(v) Any Certificate surrendered for replacement
pursuant to this Section 2.8(f) shall be canceled, and may be
destroyed, by the Managing Trustee.
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(g) BENEFICIARIES. The Holders are the owners of the
beneficial interests in the Trust and are "beneficial owners" within
the meaning of Section 3801(b) of the Act and any Person who becomes a
Holder shall become a beneficial owner.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF INITIAL HOLDERS
3.1 REPRESENTATIONS AND WARRANTIES OF SERIES B HOLDER. The
Series B Holder represents and warrants to the other Holders that the following
statements are true and correct as of the Effective Date:
(a) Each of the Series B Holder, Mid-South and Midcon is
duly incorporated, validly existing and in good standing under the
Laws of its state of incorporation. The Series B Holder has the
right, power and authority to enter into this Agreement, to perform
its obligations hereunder, to become a Holder and to act as Managing
Trustee hereunder. Mid-South and Midcon have the right, power and
authority to enter into the Assignments and the New Operating
Agreements and to perform their obligations thereunder.
(b) The execution, delivery and performance of this
Agreement by the Series B Holder and the Assignments and New Operating
Agreements by Mid-South and Midcon (i) have been duly authorized by
all requisite corporation action of such party, (ii) do not violate or
conflict with the Certificate of Incorporation or Bylaws of such party
or any Law, material contract or material obligation applicable to
such party or any of its properties, and (iii) do not require any
material consent, approval, authorization or order of any Governmental
Authority or other Person with respect to such party, except (A) for
those that have been previously obtained and (B) with respect to the
Assignments, for ministerial consents of Governmental Authorities that
are customarily obtained after the Transfer of Oil and Gas interests,
and (C) with respect to the Contracts, those consents and approvals
set forth on Exhibit 3.1(b).
(c) This Agreement represents the legal, valid and
binding obligation of the Series B Holder. The respective Assignments
and New Operating Agreements represent the legal, valid and binding
obligations of Mid-South and Midcon as parties thereto.
(d) Neither the Series B Holder nor any Affiliate thereof
has employed or retained any broker, agent, investment banker or
finder, other than the Placement Agent, in connection with this
Agreement or the transactions contemplated hereby, or paid or agreed
to pay any brokerage fee, finder's fee, commission or similar payments
to any Person, other than the Placement Agent, on account of this
Agreement or the transactions contemplated hereby.
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(e) Pursuant to the Assignments, the Trust will acquire
Good Title to the Assets (other than the Louisiana Assets) and the LLC
will acquire Good Title to the Louisiana Assets. Pursuant to the LLC
Agreement, the Trust will acquire good title to the LLC Interest free
and clear of any Encumbrances, encroachments, irregularities, defects,
preferential purchase rights, consent requirements and other burdens,
except for the terms of the LLC Agreement.
(f) All of the following statements are true and correct
with respect to the Assets: (i) all Gas Production in fact (A)
constitutes qualified fuels within the meaning of Section 29(c) of the
Code; (B) is produced from a property from which gas from a tight
sands formation was not produced in marketable quantities before
January 1, 1980 within the meaning of Section 29(d)(4) of the Code;
and (C) is produced from within the United States within the meaning
of Section 638(1) of the Code; (ii) each gas Well included in the
Assets is a tight formation gas well and was drilled, within the
meaning of Section 29(f) of the Code, after December 31, 1979 and
prior to January 1, 1993; (iii) no grants have been provided by the
United States, a state or a political subdivision "for use in
connection with [any] project" (within the meaning of Section
29(b)(3)(A)(i)(I) of the Code) that includes any of the Assets; (iv)
no proceeds of any issue of state or local governmental obligations
has been "used to provide financing for [any] project" (within the
meaning of Section 29(b)(3)(A)(i)(II) of the Code) that includes any
of the Assets; (v) no "subsidized energy financing" (within the
meaning of Section 48(a)(4)(C) of the Code) has been "provided in
connection with [any] project" (within the meaning of Section
29(b)(3)(A)(i)(III) of the Code) that includes any of the Assets; (vi)
no Gas Production has been sold under any contract for sale at a price
that is either unlawful or determined with regard to Section 107 of
the NGPA or Subtitle B of Title I of the NGPA; and (vii) no energy
credit or enhanced oil recovery credit has been taken with respect to
any of the Assets or any project therein that requires a reduction in
credit pursuant to Section 29(b)(4) or (5) of the Code. The
representations and warranties in this Section 3.1(f) are referred to
herein as the "Tax Representations."
(g) All development and construction of the Assets has
been completed in all material respects in accordance with applicable
Law, including Environmental Laws.
(h) The Trust is not required to register or qualify as a
foreign business trust in the States of Louisiana, Oklahoma or Texas,
except for filing of the Trust Agreement in Custer and Roger Mill
Counties, Oklahoma.
(i) Midcon and Mid-South have obtained all licenses,
certificates and permits required to operate the Operated Properties,
other than immaterial licenses, certificates and permits, if any.
(j) The Trust complies in all material respects with all
applicable Laws.
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(k) Except for the Timmins Litigation, no pending or, to
the Series B Holder's Knowledge, threatened litigation exists with
respect to the Trust or the Properties or other Assets.
(l) The Trust has no Indebtedness and has not assumed or
otherwise become obligated to pay any trade payables relating to the
Properties or other Assets that arose prior to the Effective Date
(except as set forth in Section 5.1(c)).
(m) All factual information (excluding interpretations
and assumptions, other than those assumptions described in the next
sentence) regarding the Assets that was provided to Netherland, Sewell
& Associates and Dames & Moore by the Series B Holder or any of its
Affiliates for purposes of their reports concerning the Assets (and to
DeGolyer and MacNaughton for purposes of their report dated January 1,
1995) is accurate and complete in all material respects. To the
Series B Holder's Knowledge (i) all factual information relevant to
such reports available to Seagull has been provided to the firms
preparing such reports, and (ii) the technical assumptions (excluding
economic assumptions such as future prices and inflation) used by the
firms preparing such reports to estimate quantities of production are
not unreasonable.
(n) The Trust is not a party to or subject to any
agreements, other than this Agreement, the Assignments, the Leases,
the Contracts, the New Operating Agreements, the Initial Swap
Agreements, the Assignment and Assumption Agreement and any agreements
that constitute Permitted Encumbrances.
(o) To Series B Holder's Knowledge, no event has occurred
since January 1, 1995 that would have a material adverse affect on the
Trust's ability to market and sell the Oil and Gas, and products
thereof, that are produced by the Trust, other than events generally
affecting the oil and gas industry as a whole.
(p) All Leases and other material agreements, licenses,
permits and easements in which the Trust has rights, as contemplated
in the Assignments, are in full force and effect.
(q) To Series B Holder's Knowledge, each gas Well
included in the Operated Properties has been drilled, completed,
equipped and maintained in all material respects in a good and
workmanlike manner in accordance with good oil field practices;
provided, however, that the qualification that such representation and
warranty is made only to Series B Holder's Knowledge does not apply to
any gas Wells that were drilled by Series B Holder or its Affiliates
(but only if such Affiliate was an Affiliate of Depositor at the time
such Well was drilled). The Trust owns, leases, or otherwise has an
enforceable right of access to all equipment and facilities reasonably
necessary for the operation of the Operated Properties; and, to Series
B Holder's Knowledge, there is no material hazard or dangerous
condition existing with respect to such equipment or facilities.
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(r) Except as described in Exhibit 3.1(r), as of the
dates shown on said Exhibit there were no gas imbalances with respect
to any Well included in the Assets, and no Wells are subject to
penalty because they have produced materially in excess of any
production allowable prescribed by any Governmental Authority.
(s) Except for real property transfer taxes, sales taxes
and local taxes imposed on the Transfer of the Oklahoma Assets not to
exceed $40,000 in the aggregate, there are no (i) real property
transfer or similar taxes imposed under the Laws of the United States,
or any state or political subdivision thereof, that arise out of the
Transfer of the Assets to the Trust, or (ii) any other transfer,
sales, purchase, use, value added, excise or similar taxes or charges
imposed under the Laws of the United States, or any state or political
subdivision thereof, that arise out of the Transfer of any of the
other Assets to the Trust (or with respect to the Oklahoma Assets to
the Managing Trustee for the benefit of the Holders or with respect to
the Louisiana Assets, to the LLC).
3.2 REPRESENTATIONS AND WARRANTIES OF THE SERIES A HOLDERS. Each
Series A Holder, by accepting issuance and delivery of its respective Series A
COP's, represents and warrants to each other Holder that the following
statements are true and correct as of the Effective Date:
(a) Such Series A Holder is duly incorporated, validly
existing and in good standing under the Laws of its state of
incorporation. Such Series A Holder has the right, power and
authority to enter into this Agreement, to become a Holder and to
perform its obligations hereunder.
(b) The execution, delivery and performance of this
Agreement by such Series A Holder (i) have been duly authorized by all
requisite corporate action of such Series A Holder, (ii) do not
violate or conflict with the certificate or articles of incorporation
or bylaws of such Series A Holder or any Law, material contract or
material obligation applicable to such Series A Holder, and (iii) do
not require any material consent, approval, authorization or order of
any Governmental Authority or other Person with respect to such Series
A Holder, except for those that have been previously obtained.
(c) This Agreement represents the legal, valid and
binding obligation of such Series A Holder.
(d) Such Series A Holder has such knowledge and
experience in financial and business matters (including Oil and Gas
investments) that it is capable of evaluating the merits and risks of
its investment in the Trust and of making an informed investment
decision and is capable of bearing the economic risk of its
investment.
(e) Such Series A Holder has been provided with, or had
access to, such information that it deems necessary to or useful in
its evaluation of the merits and
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risks of an investment in the Trust and the making of an informed
investment decision.
(f) Such Series A Holder is acquiring its Trust Interest
for its own account and not with a view to, or for resale in
connection with, any distribution or public offering.
(g) Such Series A Holder understands that the Series A
COP's evidencing its Trust Interest have not been registered under the
Securities Act, or any state securities Laws and that, in addition to
the restrictions on Transfers of Trust Interests set forth in this
Agreement, such Series A Holder may not Transfer its Trust Interest in
a manner inconsistent with its status as an unregistered security.
(h) Such Series A Holder is an "accredited investor," as
defined in Rule 501 of Regulation D under the Securities Act.
(i) Such Series A Holder is not relying on any
representations or warranties by the Depositor/Series B Holder or any
Affiliate or agent thereof (including the Placement Agent), other than
those expressly made by the Depositor/Series B Holder in this
Agreement. Without limiting the generality of the foregoing, such
Series A Holder acknowledges that the Depositor is not providing any
representation or warranty as to the actual all in total after-tax
rate of return, if any, that will be achieved by such Series A Holder,
it being understood that such rate of return will be a function of
factors such as the actual price of Oil and Gas, the volumes of Oil
and Gas actually produced by the Trust, expenses actually incurred by
the Trust, and the actual individual income tax situation of such
Series A Holder.
(j) Neither such Series A Holder nor any Affiliate
thereof has employed or retained any broker, agent, investment banker
or finder in connection with this Agreement or the transactions
contemplated hereby, or paid or agreed to pay any brokerage fee,
finder's fee, commission or similar payments to any Person on account
of this Agreement or the transactions contemplated hereby, except that
Carthage has agreed to pay a fee to an Affiliate of FC Energy in
connection with its participation in the transactions contemplated
hereby.
ARTICLE 4
RESTRICTIONS ON TRANSFERS OF TRUST INTERESTS;
ADDITIONAL HOLDERS
4.1 GENERAL RESTRICTION ON TRANSFERS AND ENCUMBRANCES. (a)
Unless the context clearly requires a different meaning, all references in this
Article 4 to the Transfer or Encumbrance of a Trust Interest or Certificate
will refer to the Transfer or Encumbrance of all or any portion of such Trust
Interest or Certificate.
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(b) Transfers and Encumbrances of Trust Interests (and
Certificates evidencing the same) may be effected only in strict compliance
with this Article 4. Any attempted Transfer or Encumbrance of a Trust Interest
other than in strict compliance with this Article 4 is null and void and the
Trust need not recognize it.
(c) Notwithstanding any other provision of this Article 4, no
Transfer of a portion of a Holder's interest in the Trust shall be permitted
if, as a result of such Transfer, the Transferor or the Transferee would not
have an interest in the Trust at least equal to that which could have been
acquired for $20,000 on the Effective Date.
4.2 TRANSFERS AND ENCUMBRANCES BY SERIES B HOLDER. (a) Except
as set forth in Section 4.2(b), the Series B Holder may not Transfer its Trust
Interest evidenced by the Series B COP's unless (i) the Series B Holder first
obtains the written consent of the Series A Supermajority Interest to such
Transfer, which consent may be granted or withheld in the sole and absolute
discretion of the Series A Supermajority Interest, and (ii) the Transfer
complies with Section 4.2(c) and, if the Transferee is to become the Managing
Trustee, Section 4.2(d). In the case of a Series B Holder that is Controlled
by another Person, any event that causes such Series B Holder to cease to be
Controlled by such other Person (such as a Transfer of a Controlling equity
interest in such Series B Holder) shall be deemed a Transfer of such Series B
Holder's Trust Interest for purposes of this Section 4.2. A merger or
consolidation of the Series B Holder, or a Transfer by the Series B Holder of
all or substantially all of its assets, shall not be considered a Transfer of
the Series B Holder's Trust Interest for purposes of Sections 4.2(a) and (b),
such transactions being specifically addressed in Section 4.2(f).
(b) The Series B Holder may make the following Transfers of its
Trust Interest without complying with Section 4.2(a):
(i) The Series B Holder may Transfer its Trust Interest
to an Affiliate of the Series B Holder, if (A) such Transfer complies
with Section 4.2(c), (B) the Guaranty remains in full force and effect
and is modified to be applicable to all of the obligations of such
Affiliate (including all performance obligations of such Affiliate),
(C) if such Transfer occurs before the later of (x) December 31, 2002
and (y) Payout, such Transfer does not cause any adverse federal
income tax consequences to the Trust or any Series A Holder, including
any such adverse federal income tax consequences from a Tax
Termination and (D) if the Transferee is to become the Managing
Trustee, such Transfer complies with Section 4.2(d); and
(ii) The Series B Holder may Transfer its Trust Interest
to a Person that is not an Affiliate of the Series B Holder, if (A)
such Transfer complies with Section 4.2(c), (B) if the Transferee is
to become the Managing Trustee, such Transfer complies with Section
4.2(d), and (C) such Transfer also complies with either of the
following paragraphs:
(I) such Transfer complies with all of the
following requirements: (x) the transferor Series B Holder
(1) retains a Sharing Ratio of at least 1%
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and (2) retains and agrees to maintain a Funding Account
balance equal to at least 1% of the aggregate balances in all
Funding Accounts; (y) the transferor Series B Holder remains
the Managing Trustee and remains liable for its obligations
as such under this Agreement; and (z) such Transfer does not
cause any adverse federal income tax consequences to the
Trust or any Series A Holder, including any such adverse
federal income tax consequences from a Tax Termination; or
(II) such Transfer complies with all of the
following requirements: (y) the Transferee of such Trust
Interest (1) is a recognized and experienced operator of Oil
and Gas properties, (2) has either (aa) unsecured obligations
having a public credit rating of at least "BB" as determined
by S&P, or (bb) in the absence of a credit rating by S&P,
creditworthiness determined in good faith by the Series A
Majority Interest to be the equivalent of such a "BB" rating
by S&P, and (3) has a tangible net worth, as determined in
accordance with GAAP, of at least $250,000,000; and (z) if
such Transfer occurs before the later of (1) December 31,
2002 and (2) Payout, such Transfer does not cause any adverse
federal income tax consequences to the Trust or any Series A
Holder, including any such adverse federal income tax
consequences from a Tax Termination.
(c) Any Transfer of a Trust Interest under Section 4.2(a) or (b),
and any transaction described in Section 4.2(f), must satisfy the following
requirements:
(i) such Transfer must comply with the Securities Act and
all other applicable federal and state securities Laws and must be
exempt from the registration requirements thereof;
(ii) such Transfer, alone or in combination with all prior
Transfers from and after the Effective Date, must not cause the Trust
to be treated as a "publicly traded partnership" under Section 7704 of
the Code;
(iii) such Transfer must not require the Trust to register
as an "investment company" under the Investment Company Act of 1940;
(iv) prior to the date of the Transfer, the Series A
Holders must receive favorable legal opinions of legal counsel to the
Transferor Series B Holder, or the proposed Transferee, acceptable to
the Series A Majority Interest, that the requirements of subparagraphs
(i), (ii) and (iii) of this Section 4.2(c) have been satisfied;
(v) all expenses related to such Transfer (including any
taxes or other governmental fees) must be borne by the transferor
Series B Holder or the Transferee of such Trust Interest, and not by
the Trust or any Series A Holder; and
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(vi) each Series A Holder must receive a document executed
by both the transferor Series B Holder and the Transferee of such
Trust Interest, and containing the following information and
agreements: (A) the address of such Transferee, (B) the Sharing Ratios
and the Funding Account balances, after the Transfer, of the
transferor Series B Holder and the Transferee of such Trust Interest
(which together must total the Sharing Ratio and the Funding Account
balance of the transferor Series B Holder before the Transfer), (C) an
agreement by the Transferee to be bound by this Agreement with respect
to such Trust Interest, (D) representations and warranties by the
Transferee that are equivalent to those set forth in Section 3.1(a)
through (d), and (E) a representation and warranty by each signatory
that the Transfer was made in accordance with the requirements of this
Section 4.2; and
(vii) such Transfer will be effective immediately upon the
satisfaction of all applicable requirements of this Section 4.2, and
the registration of the Transfer in accordance with Section 2.8(e).
(d) Upon the Transfer of a Trust Interest pursuant to Section
4.2(a) or (b) (other than with respect to Section 4.2(b)(ii)(C)(I)), the
Transferee will have the right to become the Managing Trustee, effective on the
date specified in Section 4.2(c)(vii), if (i) the transferor Series B Holder
grants the Transferee such right, and (ii) the instrument described in Section
4.2(c)(vi) also contains agreements by such Transferee (A) to be bound by this
Agreement in the capacity as the Managing Trustee and (B) confirming that the
representations and warranties in Sections 3.1(a) through (d) are true and
correct with respect to it.
(e) A Series B Holder may freely Encumber its Trust Interest,
without the consent of any Series A Holder, if it gives written notice to the
Person to which the Encumbrance is granted (with a copy to each Series A
Holder) that a Transfer in connection with, or in lieu of, the foreclosure of
such Encumbrance will be subject to the provisions of Sections 4.1 and 4.2.
(f) Prior to Payout, the Series B Holder may not merge,
consolidate, sell or otherwise dispose of all or substantially all of its
assets unless (x) such transaction complies with Section 4.2(c), (y) if the
surviving entity or Transferee of assets is to become the Managing Trustee,
such Transfer complies with Section 4.2(d), and (z) such transaction also
complies with either of the following paragraphs:
(i) the Series B Holder may engage in such a transaction
with an Affiliate of the Series B Holder, if (A) the Guaranty remains
in full force and effect and is modified to be applicable to all of
the obligations of such Affiliate (including all performance
obligations of such Affiliate), and (B) if such transaction occurs
before the later of (x) December 31, 2002 and (y) Payout, such
transaction does not cause any adverse federal income tax consequences
to the Trust or any Series A Holder, including any such adverse
federal income tax consequences from a Tax Termination; or
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(ii) such transaction complies with all of the following
requirements: (A) the surviving entity or Transferee of assets, as
the case may be, (1) has either (aa) unsecured obligations having a
public credit rating of at least "BB" as determined by S&P, or (bb) in
the absence of a credit rating by S&P, creditworthiness determined in
good faith by the Series A Majority Interest to be the equivalent of
such a "BB" rating by S&P, and (2) has a tangible net worth, as
determined in accordance with GAAP, of at least $250,000,000; and (B)
if such transaction occurs before the later of (I) December 31, 2002
and (II) Payout, such transaction does not cause any adverse federal
income tax consequences to the Trust or any Series A Holder, including
any such adverse federal income tax consequences from a Tax
Termination.
4.3 TRANSFERS AND ENCUMBRANCES BY SERIES A HOLDERS. (a) Except
as set forth in Section 4.3(b), a Series A Holder may not Transfer its Trust
Interest (as evidenced by its Series A COP's) unless (i) the Series A Holder
first obtains the written consent of the Series B Majority Interest to such
Transfer, which consent may be granted or withheld in the sole and absolute
discretion of the Series B Majority Interest, and (ii) such Transfer complies
with Section 4.3(c).
(b) A Series A Holder may Transfer all or any part of its Trust
Interest without complying with Section 4.3(a) if (i) such Transfer complies
with Section 4.3(c), and (ii) such Transfer also complies with all of the
following requirements:
(I) the Trust Interest that is Transferred has a
Sharing Ratio of at least 10% of the total Sharing Ratios of
all Series A Holders;
(II) the Series A Holder first obtains the written
consent of the Series B Majority Interest to such Transfer,
which consent will not be unreasonably withheld; and
(III) if the Transferee is not an Affiliate of such
Series A Holder, such Series A Holder (A) has first delivered
to the Series B Holders a written offer proposing to Transfer
such Trust Interest to the Series B Holders on terms at least
as favorable as those offered to such potential Transferee;
(B) the Series B Holders have had a period of 30 days after
receipt of such offer to elect to purchase such Trust
Interest on the terms and conditions set forth in the offer,
and have not exercised such right; and (C) the Series A
Holder consummates the Transfer within 180 days after the end
of such 30-day period, at a price not less than 95% of the
price offered to the Series B Holders. The rights of the
Series B Holders under this Section may be exercised by the
Series B Holders prorata in accordance with their respective
Funding Account balances (or in such other proportions as
they may agree among themselves). The provisions of this
paragraph (III) shall not apply to, and each Series A Holder
may otherwise make, a Transfer to an Affiliate of the Series
A Holder making the Transfer.
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(c) Any Transfer under Section 4.3(a) or (b) must satisfy the
following requirements:
(i) such Transfer must comply with the Securities Act and
all other applicable federal and state securities Laws and must be
exempt from the registration requirements thereof;
(ii) such Transfer must not cause a Tax Termination that
results in adverse federal income tax consequences to the Trust or the
Series B Holders;
(iii) such Transfer, alone or in combination with all prior
Transfers from and after the Effective Date, must not cause the Trust
to be treated as a "publicly traded partnership" under Section 7704 of
the Code;
(iv) such Transfer must not require the Trust to register
as an "investment company" under the Investment Company Act of 1940;
(v) prior to the date of the Transfer, the Managing
Trustee and the Series B Holders must receive favorable opinions of
legal counsel to the transferor Series A Holder, or the proposed
Transferee, acceptable to the Series B Majority Interest that the
requirements of subparagraphs (i), (ii), (iii) and (iv) of this
Section 4.3(c) have been satisfied;
(vi) all expenses related to such Transfer (including the
legal fees incurred in connection with obtaining the legal opinions
referred to in Section 4.3(c)(v) and any taxes and other governmental
fees) must be borne by the Series A Holder making such Transfer or the
Transferee of such Trust Interest, and not by the Trust, the Series B
Holders or any other Series A Holder;
(vii) the Managing Trustee must receive a document executed
by both the Series A Holder making the Transfer and the Transferee of
such Trust Interest, and containing the following information and
agreements: (A) the address of such Transferee, (B) the Sharing Ratios
and the Funding Account balances, after the Transfer, of the Series A
Holder making the Transfer and the Transferee of such Trust Interest
(which together must total the Sharing Ratio and the Funding Account
balance of the Series A Holder making the Transfer before the
Transfer), (C) an agreement by the Transferee to be bound by this
Agreement with respect to such Trust Interest, (D) representations and
warranties by the Transferee that are equivalent to those set forth in
Section 3.2, and (E) a representation and warranty by each signatory
that the Transfer was made in accordance with the requirements of this
Section 4.3; and
(viii) such Transfer will be effective immediately upon
satisfaction of all applicable requirements of this Section 4.3, and
the registration of the Transfer in accordance with Section 2.8(e).
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(d) A Series A Holder may freely Encumber its Trust Interest,
without the written consent of the Series B Majority Interest, if it gives
written notice to the Person to which the Encumbrance is granted (with a copy
to the Series B Holders) that a Transfer in connection with, or in lieu of, the
foreclosure of such Encumbrance will be subject to the provisions of Sections
4.1 and 4.3.
4.4 ISSUANCES OF NEW TRUST INTERESTS. Additional Trust
Interests, evidenced by Certificates, may be issued, and additional Persons may
be admitted as Holders in connection with such issuances, in consideration for
Funding Transfers or for services, only with the prior written consent of the
Series A Supermajority Interest and the Series B Majority Interest. The terms
of issuance and admission must specify the Sharing Ratios applicable to the new
Trust Interest and may provide for the creation of different classes or groups
of Series A Holders or Series B Holders and having different rights, powers,
and duties. The Managing Trustee shall reflect the creation of any new class
or group in an amendment to this Agreement indicating the different rights,
powers, and duties, and such an amendment must be executed by the Managing
Trustee, the Series A Supermajority Interest and the Series B Majority Interest
to become effective.
ARTICLE 5
TRANSFER OF ASSETS TO TRUST; FUNDING TRANSFERS
5.1 TRANSFER OF ASSETS TO TRUST; TITLE TO TRUST PROPERTY. (a)
Pursuant to the Assignments, the Depositor is causing the Assets to be
Transferred to the Trust (and with respect to the Louisiana Assets, to the LLC,
and with respect to the Oklahoma Assets to the Managing Trustee for the benefit
of the Trust) effective as of the Effective Date. The Holders agree that such
Transfers will be treated and construed on the books and records of the Trust
and the Holders as the following separate Transfers:
(i) a sale by Mid-South and Midcon to the Trust of an
undivided 71.16% interest in the Assets (other than the Louisiana
Assets), in consideration of a cash payment by the Trust to Mid-South
and Midcon equal to $45,450,000 and a sale by Mid-South to the LLC of
the Louisiana Assets in consideration of a cash payment by the LLC
equal to $800,000, the aggregate of the cash payments by the Trust and
the LLC are hereinafter referred to as the "Purchase Price";
(ii) a Funding Transfer made by Mid-South and Midcon on
behalf of the Series B Holder of an undivided 28.84% interest in the
Assets (other than the Louisiana Assets), the aggregate Net Agreed
Value of which is the amount shown for the Series B Holder on Exhibit
1.1.1P under the column "Initial Funding Transfer."
(b) All of the Trust Estate, whether real, personal or mixed, and
whether tangible or intangible, shall be deemed to be owned by the Trust as an
entity, and no Trustee or Holder, individually, shall have any ownership
interest in the Trust Estate. Legal title to all of the Trust Estate shall be
held in the name of the Trust, except that legal title to the Oklahoma Assets
shall be held in the name of the Managing Trustee as Managing Trustee
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of the Trust until the transfer of title described in Section 7.6 is made.
Each Holder shall have no legal title to any part of the Trust Estate and
Holders shall have an undivided interest in the proceeds of the Trust Estate
only to the extent created hereunder; and shall only be entitled to receive
payments or distributions with respect to their interest in accordance with the
terms of this Agreement. No Transfer of any Certificate shall entitle any
successor or Transferee of a Holder to an accounting or to the Transfer to it
of legal title to any part of the Trust Estate.
(c) The transfer of the Assets from Mid-South and Mid-Con
pursuant to Section 5.1 shall be effective as of the Effective Date. Mid-South
and Mid-Con shall pay and be responsible for all costs, expenses, taxes,
royalties and other burdens incurred with respect to the Assets which are
attributable to the period prior to the Effective Date, and the Trust shall pay
and be responsible for all costs, expenses, taxes, royalties and other burdens
incurred with respect to the Assets that are attributable to the period after
the Effective Date. Mid-South and Mid-Con shall be entitled to all revenues
attributable to production from the Properties which occurred prior to the
Effective Date and the Trust shall be entitled to all revenues attributable to
production from the Properties which occurs after the Effective Date. In the
event the Effective Date does not occur on the first day of a calendar month,
all costs, expenses, taxes, royalties and other burdens and revenues
attributable to the Assets that relate to the calendar month in which the
Effective Date occurs will be pro-rated between Mid-South and Mid-Con as the
transferors of the Assets, on the one hand, and the Trust or the LLC as the
Transferee of the Assets, on the other hand, on a per diem basis based on the
number of days in such month prior to the Effective Date and the number of days
in such month after the Effective Date.
5.2 INITIAL FUNDING TRANSFERS. In connection with the formation
of the Trust, the Holders are making the following Funding Transfers:
(a) the Depositor is causing Mid-South and Midcon to make
the Funding Transfer described in Section 5.1(a)(ii) on behalf of the
Depositor; and
(b) each Series A Holder is making a cash Funding
Transfer in the amount shown for such Series A Holder on Exhibit
1.1.1P under the column "Initial Funding Transfer."
5.3 SUBSEQUENT FUNDING TRANSFERS. Except as otherwise set forth
in this Agreement, (a) no Holder will be required to make any Funding Transfers
other than as set forth in Section 5.2, 6.5(b), 7.9, 7.10(f), 7.11(c), and 8.8
no Holder will be permitted to make any Funding Transfers other than as set
forth in such Sections except with the written consent of the Series B Majority
Interest and the Series A Supermajority Interest. A Series B Holder shall not
be treated as making additional Funding Transfers to the Trust in the event
that such Series B Holder Indemnifies the Series A Holders pursuant to Section
9.2.
5.4 NO RIGHT TO RETURN OF FUNDING TRANSFERS. Except as otherwise
provided in this Agreement, no Holder may require a return of its Funding
Transfers or the payment of interest thereon, either from the Trust or from
another Holder.
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5.5 WORKING CAPITAL LOANS. If, at any time, the Trust or the LLC
lacks sufficient funds to pay their respective obligations (other than
obligations of the Trust to make distributions to the Holders), the Managing
Trustee (but only so long as the Managing Trustee is an Affiliate of Seagull)
shall be obligated to make a loan of such funds to the Trust, or to the LLC on
behalf of the Trust as appropriate (each such loan being referred to herein as
a "Working Capital Loan"). Notwithstanding the foregoing, the Managing Trustee
will not be obligated to make a Working Capital Loan in any of the following
circumstances, although it may elect to make such Working Capital Loan in its
sole and absolute discretion: (a) the sum of (i) the principal amount of such
Working Capital Loan and (ii) the aggregate unpaid principal and interest of
all then-outstanding Working Capital Loans, would equal or exceed $3,000,000;
(b) immediately prior to the time the Working Capital Loan would otherwise be
made, the Trust is Bankrupt; or (c) from and after Payout, if the Managing
Trustee does not have a reasonable expectation of repayment of such Working
Capital Loan. If the Managing Trustee elects to make a Working Capital Loan in
any of the circumstances described in clause (a) of the immediately-preceding
sentence, the Managing Trustee shall notify the Series A Holders of such
Working Capital Loan and describe the Trust obligation that will be funded from
the proceeds of such Working Capital Loan. Each Working Capital Loan will (i)
not constitute a Funding Transfer, (ii) bear interest at the Prime Rate from
the date it is made until the date it is repaid in full, (iii) be nonrecourse
to each Series A Holder, (iv) be evidenced by a promissory note or notes in
substantially the form of Exhibit 5.5, and (v) be repaid in accordance with
Section 6.5 and Exhibit 5.5. From and after Payout, the Managing Trustee may
cause the Trust to grant a mortgage, deed of trust or other applicable
Encumbrance on its assets (pursuant to security documents that are customary in
each applicable jurisdiction for loans secured by Oil and Gas properties) to
secure the repayment of Working Capital Loans, including Working Capital Loans
outstanding at the occurrence of Payout.
ARTICLE 6
FUNDING ACCOUNTS; ALLOCATIONS; DISTRIBUTIONS
6.1 FUNDING ACCOUNTS. (a) Consistent with the intended tax
characterization for the Trust as set forth in Article 8, the Trust shall
maintain for each Holder a separate Funding Account in accordance with the
rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Funding Account
will be increased by (i) the cash amount or Net Agreed Value of all Funding
Transfers made by or on behalf of such Holder pursuant to this Agreement and
(ii) all items of Trust income and gain (including income and gain exempt from
tax) computed in accordance with Section 6.1(b) and allocated to such Holder
pursuant to Section 6.2, and will be decreased by (iii) the cash amount or the
Net Agreed Value of all actual and deemed distributions of cash, Assets (other
than the Louisiana Assets) or the LLC Interest, respectively, made to such
Holder pursuant to this Agreement and (iv) all items of Trust deduction and
loss computed in accordance with Section 6.1(b) and allocated to such Holder
pursuant to Section 6.2. The foregoing provisions and the other provisions of
this Agreement relating to the maintenance of Funding Accounts are intended to
comply with the Section 704(b) Regulations, and will be interpreted and applied
in a manner consistent therewith. In making the credits and debits to the
Holders' Funding Accounts in accordance with the Section 704(b) Regulations,
the Series B Holder shall
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make such allocations and adjustments provided in the Section 704(b)
Regulations as may be necessary or appropriate to maintain the validity of the
allocations set forth in this Agreement; provided, however, that no such
allocation or adjustment shall be made that is likely to reduce the amounts
otherwise distributable to any Series A Holder under this Agreement.
(b) For purposes of computing the amount of any item of income,
gain, deduction or loss to be reflected in the Holders' Funding Accounts, the
determination, recognition and classification of any such item will be the same
as its determination, recognition and classification for federal income tax
purposes (including any method of depletion, depreciation, cost recovery or
amortization used for this purpose); provided, however, that:
(i) In accordance with the requirements of the Section
704(b) Regulations, any deductions for depreciation, cost recovery, or
amortization attributable to a Contributed Property will be determined
as if the adjusted basis of such Contributed Property on the date it
was acquired by the Trust was equal to the Agreed Value of such
Contributed Property. Upon an adjustment pursuant to Section 6.1(d)
to the Carrying Value of any Asset subject to depreciation, cost
recovery or amortization, any further deductions for such
depreciation, cost recovery or amortization attributable to such Asset
will be determined as if the adjusted basis of such Asset was equal to
the Carrying Value of such Asset immediately following such
adjustment.
(ii) In lieu of any other deduction or allowance for
depletion, each Holder's Funding Account will be reduced by such
Holder's Book Depletion in respect of each Depletable Property.
(iii) Any income, gain or loss attributable to the taxable
Transfer of any Asset (other than the Louisiana Assets and other than
Depletable Property) or the LLC Interest will be determined by the
Trust as if the adjusted basis of such Asset or the LLC Interest as of
such date of Transfer was equal in amount to the Trust's Carrying
Value with respect to such Asset or the LLC Interest as of such date.
(iv) Any fees and other expenses incurred by the Trust to
promote the sale of (or to sell) a Trust Interest that can neither be
deducted nor amortized under Section 709 of the Code will, for
purposes of Funding Account maintenance, be treated as an item of
deduction and will be allocated among the Holders pursuant to Section
6.2.
(v) Except as otherwise provided in Treasury Regulation
1.704-1(b)(2)(iv)(m), the computation of all items of income, gain,
loss and deduction will be made without regard to any election under
Section 754 of the Code that may be made by the Trust and, as to those
items described in Section 705(a)(1)(B) or Section 705(a)(2)(B) of the
Code, without regard to the fact that such items are not includable in
gross income or are neither currently deductible nor capitalizable for
federal income tax purposes.
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(c) A Transferee of a Trust Interest will succeed to the Funding
Account relating to the Trust Interest Transferred; provided, however, if the
Transfer causes a Tax Termination of the Trust, the Assets (other than the
Louisiana Assets) and the LLC Interest will be deemed to have been distributed
in liquidation of the Trust to the Holders (including the Transferee of a Trust
Interest) pursuant to Section 10.2 and deemed recontributed by such Holders and
Transferees in reconstitution of the Trust. The Funding Accounts of such
reconstituted Trust will be maintained in accordance with the principles of
this Section 6.1.
(d) (i) In accordance with the provisions of Treasury Regulation
Section 1.704-1(b)(2)(iv)(f)(5)(i), upon a Holder's contribution to the Trust
of non-de minimis cash or properties in exchange for an interest in the Trust,
the Funding Accounts of all Holders and the Carrying Values of all Assets
(other than the Louisiana Assets) and the LLC Interest will, immediately prior
to such contribution, be adjusted upward or downward to reflect any Unrealized
Gain or Unrealized Loss attributable to each such Asset and the LLC Interest ,
as if such Unrealized Gain or Unrealized Loss had been recognized upon an
actual sale of each such Asset and the LLC Interest, immediately prior to such
contribution, and had been allocated to the Holders at such time pursuant to
Section 6.2. In determining such Unrealized Gain or Unrealized Loss, the
aggregate fair market value of the Assets (other than the Louisiana Assets) and
the LLC Interest as of any date of determination will be determined by the
Managing Trustee, with the written consent of the Series A Supermajority
Interest, using such reasonable methods of valuation as it may adopt.
(ii) In accordance with Treasury Regulation Section
1.704(b)(2)(iv)(f)(5)(ii), immediately prior to the liquidation of the Trust
(including a deemed liquidation resulting from a Tax Termination of the Trust)
or a non-de minimis distribution of money or property, the Funding Accounts of
all Holders and the Carrying Values of all Assets (other than the Louisiana
Assets) and the LLC Interest will, immediately prior to any such distribution
or liquidation, be adjusted (consistent with the provisions hereof) upward or
downward to reflect any Unrealized Gain or Unrealized Loss attributable to each
Asset (other than the Louisiana Assets) and the LLC Interest not sold (as if
such Unrealized Gain or Unrealized Loss had been recognized upon an actual sale
of each Asset (other than the Louisiana Assets) or the LLC Interest,
immediately prior to such distribution, and had been allocated to the Holders,
at such time, pursuant to Section 6.2). In determining such Unrealized Gain or
Unrealized Loss, the aggregate fair market value of Trust properties as of any
date of determination will be determined by the Managing Trustee, with the
written consent of the Series A Supermajority Interest, using such reasonable
methods of valuation as it may adopt.
(e) Except to the extent necessary to comply with Section 7.9,
upon liquidation and termination of the Trust as provided under Section 10.2,
no Holder shall have any obligation to restore any deficit in its Funding
Account.
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6.2 ALLOCATIONS FOR FUNDING ACCOUNT PURPOSES.
(a) Allocation of Deduction and Loss. Except as provided in
paragraphs (i), (ii) (iii) and (iv) below, all Trust items of deduction and
loss (which items shall include production taxes, marketing costs, operating
expenses, certain capital expenditures, intangible drilling and development
costs, transaction expenses, interest expense and allowable depreciation, cost
recovery and amortization), shall be allocated to the Holders, pro rata, in
accordance with their applicable Sharing Ratios.
(i) All Trust items of deduction and loss attributable to
the Reimbursed Transaction Expenses shall be allocated and charged
100% to the Series A Holders.
(ii) All Trust items of deduction and loss attributable to
Additional Recompletions shall be allocated to the Holders in
accordance with their Post-Payout Sharing Ratios without regard to
whether or not Payout has occurred.
(iii) All Trust items of deduction and loss attributable to
the Additional Properties shall be allocated to the Holders in
accordance with their Pre-Payout Sharing Ratios without regard to
whether or not Payout has occurred.
(iv) All Trust items of deduction and loss attributable to
any Excess Transaction Expenses shall be allocated and charged to the
Holders in accordance with the ratio of their respective Funding
Transfers made to the Trust to fund such Excess Transaction Expenses.
(b) Allocation of Income and Gain. All Trust items of income and
gain (which shall include income recognized by the Trust pursuant to the
Assignments, income from the sale of Oil and Gas, gain recognized from the
Transfer of Trust assets and interest income) shall be allocated and credited
to the Holders as follows:
(i) All net amounts realized (i.e., amounts realized less
costs and expenses of Transfer) resulting from the Transfer of a
Depletable Property shall be allocated to the Holders, pro rata, in
proportion to each such Holder's Book Basis in such property up to an
amount equal to the aggregate Book Bases of all Holders in such
property at the time of such sale. Any amount realized from any such
sale or disposition that exceeds the aggregate Book Bases of all
Holders in such property shall be allocated to the Holders in a manner
to cause, to the maximum extent possible, the total amount realized
allocated to each Holder under this Section 6.2(b)(i) to equal such
Holder's Sharing Ratio of the proceeds from the Transfer of such
Depletable Property.
(ii) All gross income attributable to the sales of Oil and
Gas derived from Additional Recompletions shall be allocated to the
Holders in accordance with their Post-Payout Sharing Ratios without
regard to whether or not Payout has occurred.
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(iii) All gross income attributable to the sales of Oil and
Gas derived from Additional Properties shall be allocated to the
Holders in accordance with their Pre-Payout Sharing Ratios without
regard to whether or not Payout has occurred.
(iv) All other items of income of the Trust not
specifically allocated above shall be allocated to the Holders, pro
rata, in accordance with their applicable Sharing Ratios, provided,
however, if a Holder makes a Funding Transfer required by clauses (y)
or (z) of Section 6.5(b), all items of gross income derived from the
sale of Oil and Gas (including items of gross income allocated in
clauses (ii) and (iii) above) otherwise allocable to such Holder shall
instead be allocated to the other Holders in accordance with their
respective Sharing Ratios until the total amount of such gross income
reallocated to such other Holders equals the amount of the Funding
Transfer.
(c) Special Allocations.
(i) Notwithstanding any other provision in this
Agreement, no Holder shall be allocated any net loss for any fiscal
year if the result of such allocation would be to cause or increase a
deficit in such Holder's Adjusted Funding Account as of the end of
such fiscal year; however, to the extent that any Series A Holder
would have an Adjusted Funding Account deficit, such losses or
expenses instead shall be allocated to the Series B Holder. To the
extent that any Holders unexpectedly receive an adjustment, allocation
or distribution described in Treasury Regulation
1.704-1(b)(2)(ii)(d)(4), (5) or (6) that causes or increases a deficit
Adjusted Funding Account such Holders will be allocated items of Trust
income and gain in proportion to their deficit Adjusted Funding
Accounts, to eliminate such deficit as quickly as possible.
(ii) It is the intention of the Holders that the
allocations described in this Section 6.2(a), (b) and (c) comply with
the requirements of Treasury Regulation Sections 1.704-1 and 1.704-2.
To the extent any changes to these allocations are required by the
applicable Treasury Regulations with respect to such items, the Series
B Holder may make such changes with the written consent of the
Majority Interest.
(d) Curative Allocation. The allocations required under Section
6.2(c) will be taken into account in making the other allocations under
Sections 6.2(a) and (b) so that, to the extent possible, the net amount of
items of income, gain, loss and deduction allocated to each Holder pursuant to
the allocations required under Section 6.2(c) and the allocations under
Sections 6.2(a) and (b), together, will be equal to the net amount of such
items that would have been allocated to each such Holder under Sections 6.2(a)
and (b) if the allocations required under this Section 6.2(d) had not been
made.
(e) Book Basis; Book Depletion. For purposes of computing Book
Depletion, the initial Book Basis in each Depletable Property will be allocated
to each Holder in a manner that corresponds to the manner in which the adjusted
tax basis in each Depletable Property
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is allocated to the Holders in Section 6.3(b). The deduction for Book
Depletion with respect to each Depletable Property for purposes of maintaining
Funding Accounts will, in accordance with Treasury Regulations Section 1.704-
1(b)(2)(iv)(k)(3), be computed for Funding Account maintenance purposes at the
Holder level. For convenience of the Holders, the Managing Trustee shall
compute Book Depletion amounts for the Holders, and maintain accounts
reflecting each Holder's Book Basis, and cumulative Book Depletion thereon, in
each Depletable Property. For purposes of such computation, the Managing
Trustee shall utilize (i) such Holder's Book Basis in each Depletable Property,
as theretofore adjusted, (ii) cost depletion (unless percentage depletion
produces a greater Book Depletion deduction) and (iii) a computation method for
cost depletion (if applicable) under which the Book Depletion for any period
bears the same relationship to the Holder's remaining Book Basis as the
Holder's depletion deduction computed for tax purposes with respect to such
Depletable Property for such period bears to the Holder's remaining allocated
share of the adjusted tax basis of such Depletable Property. The Managing
Trustee shall make downward adjustments to each Holder's Funding Account for
the Book Depletion computed for each Holder by the Managing Trustee as
described in this Section 6.2(e); provided that the aggregate adjustments to
the Funding Account of a Holder for Book Depletion with respect to a Depletable
Property shall not exceed the Book Basis allocated to such Holder with respect
to such Depletable Property. Upon the taxable disposition of a Depletable
Property by the Trust, the Funding Account of each Holder shall be adjusted
upward by the amount of any excess of such Holder's allocable share of the
total amount realized (allocated to such Holder under Section 6.2(b)(i)) from
the disposition of such Depletable Property over such Holder's remaining Book
Basis in such Depletable Property. If there is no such excess, the Funding
Account of such Holder shall be adjusted downward by the amount of any excess
of such Holder's remaining Book Basis in such Depletable Property over such
Holder's allocable share of the total amount realized (allocated to such Holder
under Section 6.2(b)(i)) from the disposition thereof. The Holders intend the
foregoing to constitute an agreement to adjust the Holders' Funding Accounts
for actual depletion as provided in Treasury Regulations Sections
1.704-1(b)(2)(iv)(k)(3), (4), and the provisions of this Section 6.2(e) shall
be interpreted consistently with such intent.
6.3 INCOME TAX ALLOCATIONS. (a) Except as otherwise provided
within this Section 6.3, for federal, state and local income tax purposes each
item of income, gain, deduction and loss of the Trust shall be allocated to the
Holders in the same manner as the correlative item computed for purposes of the
Funding Accounts is allocated and credited or debited pursuant to Sections
6.2(a) and 6.2(b). Section 29 Tax Credits allowable for federal income tax
purposes shall be allocated to the Holders in the same manner as the gross
income from the sale of Gas Production giving rise to such credits is
allocated.
(b) For purposes of Section 613A(c)(7)(D) of the Code, the
Trust's initial adjusted basis in each Depletable Property will be allocated
among the Holders in accordance with the following principles:
(i) in the case of a Depletable Property acquired in
whole or in part by the Trust with funds contributed by the Holders,
to the Holders in proportion to the manner in which such Holders
contributed the funds;
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(ii) in the case of a Depletable Property (whether or not
such Depletable Property constitutes a Contributed Property)
contributed in whole or in part to the Trust as a Funding Transfer, to
the Holder contributing such Depletable Property; and
(iii) in all other cases, to the Holders, pro rata, in
accordance with their Sharing Ratios at the time the Depletable
Property is acquired.
(c) As required by Section 613A(c)(7)(D) of the Code, depletion
and gain or loss on the Transfer of each Depletable Property shall be
determined separately by the Holders rather than by the Trust. For the
convenience of the Holders and subject to Section 6.3(g), the Managing Trustee
shall compute depletion, and gain or loss, with respect to each Depletable
Property, for the Holders. The Holders agree that, for purposes of such
computations and each Holder's tax reporting , cost depletion shall be
determined in such a manner as to cause each Holder's allocated adjusted basis
in each Depletable Property to be recovered ratably with such Holder's relative
participation in the production revenue from the Depletable Property over its
productive life.
(d) The amount realized for income tax purposes on the Transfer
of each Depletable Property shall be allocated to the Holders in proportion to
each Holder's respective share of the amount realized from the Transfer of such
Depletable Property provided for in Section 6.2(b).
(e) For the convenience of the Holders, the Managing Trustee
shall separately keep records of each Holder's share of the adjusted basis in
each separate Depletable Property, adjust such share of the adjusted basis for
any cost or percentage depletion allowable to the Holder with respect to such
Depletable Property and use such adjusted basis in the computation of such
Holder's gain or loss on the disposition of such Depletable Property by the
Trust. Upon the request of a Series A Holder, the Managing Trustee shall
advise the Series A Holder of its adjusted basis in each separate Depletable
Property and any depletion computed with respect thereto, both as computed in
accordance with the provisions of this Section 6.3.
(f) All Recapture Income resulting from the Transfer of Assets
(other than a Depletable Property) shall be allocated between the Holders in
the ratio in which the deductions giving rise to such recapture were allocated,
but each Holder shall be allocated recapture only to the extent that such
Holder is allocated any gain from the Transfer of such Asset. The balance of
such recapture, if any, shall be allocated to each Holder whose share of gain
exceeds its share of Recapture Income, pro rata, in proportion to each such
Holder's share of excess gain.
(g) The Holders recognize that, with respect to a Contributed
Property and an Adjusted Property, there may be a difference between the Agreed
Value or Carrying Value, as the case may be, of such Contributed Property or
Adjusted Property at the time of contribution or revaluation, as the case may
be, and the adjusted tax basis of such Contributed Property or Adjusted
Property at the time. In the case of such Contributed
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Property or Adjusted Property, other than a Depletable Property, all items of
tax depreciation, cost recovery, amortization, gain or loss with respect to
such Contributed Properties and Adjusted Properties will be allocated among the
Holders to take into account the disparities between the Carrying Values and
the adjusted tax basis with respect to such properties in accordance with the
provisions of Section 704(c) of the Code and the Treasury Regulations.
(h) Allocations under this Section 6.3 are made solely for
federal, state and local income tax purposes and shall not affect any Holder's
Funding Account.
6.4 TRANSFERS OF TRUST INTERESTS. All items of income, gain,
loss, deduction, and credit allocable to any Trust Interest that may have been
Transferred will be allocated between the Holder making the Transfer and the
Transferee based upon that portion of the particular calendar year during which
each was recognized as owning such Trust Interest, without regard to the
results of Trust operations during any particular portion of the calendar year
and without regard to whether cash distributions were made to the Holder making
the Transfer or the Transferee during such calendar year; provided, however,
that the Trust in all events shall allocate such items in accordance with a
method permissible under Section 706 of the Code and the Treasury Regulations
promulgated thereunder.
6.5 DISTRIBUTIONS. (a) Except as provided in Section 10.2, not
less than once each calendar month (commencing the first full calendar month
following commencement of the Trust), all cash funds of the Trust (including
all investments made by, or on behalf of, the Trust), other than (i) such
amounts as may be necessary to repay the remaining balance, if any, of
principal and interest on Working Capital Loans, (ii) such amounts as the
Managing Trustee may elect, from and after Payout, to set aside to fund a
reasonable reserve for plugging and abandonment liabilities, and (iii) such
additional amounts as may be approved by the Series A Majority Interest in
writing, remaining after payment by the Trust of all costs, expenses,
obligations and liabilities then due which have been incurred in accordance
with the terms of this Agreement, shall be distributed to the Holders. All
such cash funds of the Trust shall be distributed to the Holders in accordance
with their applicable Sharing Ratios at the time of distribution; provided,
however, that (x) all cash funds of the Trust contributed under Section 6.5(b)
shall be distributed to the Holders (other than the Holders that contributed
such funds) in accordance with their relative Pre-Payout or Post-Payout Sharing
Ratios, as applicable, (y) all cash funds of the Trust that are attributable to
Additional Properties shall be distributed to the Holders in accordance with
their applicable Pre-Payout Sharing Ratios (regardless of whether Payout has
occurred), and (z) all cash funds of the Trust that are attributable to
Additional Recompletions shall be distributed to the Holders in accordance with
their applicable Post-Payout Sharing Ratios (regardless of whether Payout has
occurred).
(b) (i) If it is determined (as a result of (x) a Final
Determination, (y) a correction of a previous approximation of Payout, as
described in the definition of Series A Holder's After-Tax Cash Flow, or (z) a
correction of any other computational error) that Payout actually occurs on a
date other than that previously determined by the Managing Trustee, then (A) if
any Series B Holder received excess distributions because the Managing
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Trustee did not correctly determine Payout, then such Series B Holder will have
an unconditional obligation to make an additional cash Funding Transfer in an
amount equal to the sum of (i) 98.89% of the aggregate amount of distributions
that were actually made during the period in which the Managing Trustee did not
correctly determine Payout, plus (ii) to the extent that the Series A Holders
are unable to claim Section 29 Tax Credits that they otherwise would have been
entitled to claim if not for an event described in clause (y) or (z) above, the
sum of (I) the amount of such Section 29 Tax Credits, as determined under
clause (d) of the definition of Series A Holder's After-Tax Cash Flow if Payout
were determined correctly, plus (II) a gross-up amount in respect of the
additional taxable income allocated to the Series A Holders in respect of such
amount for taxes pursuant to the proviso in Section 6.2(b)(iv), determined
using the same methodology as is used in Section 9.5 concerning the indemnity
payments, plus (iii) interest computed thereon at a rate equal to 14.09% per
annum from the date each such excess distribution was paid to the date the
corresponding Funding Transfer is made, and (B) if the Series A Holders
received excess distributions because the Managing Trustee did not correctly
determine Payout, then the Series A Holders will have an unconditional
obligation to make an additional cash Funding Transfer in an amount equal to
the sum of (I) 89.89% of the aggregate amount of distributions that were
actually made during the period in which the Managing Trustee did not correctly
determine Payout plus (II) interest computed thereon at a rate equal to 14.09%
per annum from the date each such excess distribution was paid to the date the
corresponding Funding Transfer is made.
(ii) If the IRS proposes an administrative adjustment to
the tax returns of the Trust that, if ultimately sustained in a Final
Determination would affect the Series A Holders' After-Tax Cash Flow and
thereby delay Payout beyond the date on which Payout otherwise has occurred or
is estimated to occur, the amount necessary to satisfy the Series B Holders'
obligation to make additional Funding Transfers of the type described in
Section 6.5(b)(i) shall be mutually agreed upon by the Series B Majority
Interest and the Series A Majority Interest (each acting reasonably) based upon
all relevant considerations, including the likelihood that such administrative
adjustment will result in such a Final Determination adverse to the Trust and
the Holders, and the Series B Holders shall furnish the Trust with either (A)
credit enhancements, reasonably satisfactory to the Series A Majority Interest,
in support of such agreed upon obligation or (B) an opinion of Series B
Holder's tax counsel to the effect that such administrative adjustment will not
be sustained. Any credit enhancements which would otherwise be required under
this Section 6.5(b)(ii), shall not be required if the Guaranty is in full force
and effect with respect to the obligations of the Series B Holders under this
Section 6.5(b)(ii), Seagull's senior unsecured debt is rated not lower than BB+
by S&P, and the obligations of the Series B Holders under this Section
6.5(b)(ii) are not junior in right of payment to the payment of the
indebtedness under the principal revolving credit facility of Seagull.
(c) The distributions described in Section 6.5(a) will be payable
by wire transfer in immediately-available funds to the registered owner of
each applicable Certificate as of the close of business on the business day
immediately preceding the applicable date of distribution at an account
specified by such Holder prior to such date of payment.
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(d) The distributions described in Section 6.5(a) shall be made
only from the income and proceeds from the Trust Estate and only to the extent
that there shall be sufficient income or proceeds from the Trust Estate to
enable the Managing Trustee to make payments in accordance with the terms
hereof. Each Holder by its acceptance of Certificates, agrees that it will
look solely to the income and proceeds from the Trust Estate to the extent
available for distribution to it as herein provided and that the Managing
Trustee is not personally liable to any Holder for any amount distributable in
respect of any Certificates or for any other liability in respect of any
Certificates; provided, however, that this Section 6.5(d) does not limit the
liability of the Managing Trustee, Series B Holder or Depositor expressly set
forth elsewhere in this Agreement or the Assignments.
ARTICLE 7
MANAGEMENT
7.1 MANAGEMENT.
(a) Managing Trustee. The Series B Holder is hereby appointed as
the Managing Trustee of the Trust. Except as provided in Section 7.5 or
otherwise as expressly provided herein, and subject to Sections 7.2 and 7.3
with respect to the matters described therein, the Managing Trustee shall
conduct, direct and exercise control over all activities of the Trust and shall
have full power and authority on behalf of the Trust to manage and administer
the business and affairs of the Trust and to do or cause to be done any and all
acts considered by the Managing Trustee to be necessary or appropriate to
conduct the business of the Trust, including the authority to bind the Trust in
making contracts and incurring obligations in the Trust's name in the course of
the Trust's business, without obtaining the consent of the other Holders.
Without limiting the generality of the foregoing and subject to Section 7.5,
the Managing Trustee's power and authority shall include the power and
authority:
(i) To purchase and otherwise acquire real or personal
property of every nature considered necessary or appropriate to carry
on and conduct the business of the Trust for such consideration and on
such terms as the Managing Trustee considers necessary or appropriate;
(ii) To borrow funds as the Managing Trustee considers
necessary or appropriate;
(iii) To maintain, operate, Rework, Recomplete, manage and
defend the Properties; to test, plug and abandon or complete and
equip, Rework and Recomplete the Wells for the production of Oil and
Gas; to contract with third parties for such purposes; and to do any
and all other things considered necessary or appropriate by the
Managing Trustee to carry out the terms and provisions of this
Agreement;
(iv) To enter into and execute necessary operating
agreements, pooling and unitization agreements, gas processing
agreements and any other applicable
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agreements customarily employed in the Oil and Gas industry in
connection with the acquisition, sale, management or operation of Oil
and Gas properties, agreements as to rights-of-way and any and all
other instruments or documents considered by the Managing Trustee to
be necessary or appropriate to carry on and conduct the business of
the Trust, for such consideration and on such terms as the Managing
Trustee may determine necessary or appropriate;
(v) To sell the Trust's production and to execute
necessary gas sales contracts, casinghead gas contracts, transfer
orders, division orders or any other applicable instruments in
connection with the sale of the Trust's production in accordance with
Section 7.4;
(vi) To enter into Swap Agreements (including the Initial
Swap Agreements and other Swap Agreements), and to execute Swaps
thereunder, subject to the counterparty credit quality requirement in
Section 2.8(b)(i)(C)(II);
(vii) To Transfer, for such consideration and upon such
terms and conditions as the Managing Trustee considers necessary or
appropriate, all or any part of the Trust assets, any interest
therein, or any interest payable therefrom, and in connection
therewith to execute and deliver such deeds, assignments and
conveyances containing such warranties as the Managing Trustee may
consider necessary and appropriate;
(viii) To purchase, lease, rent or otherwise acquire or
obtain the use of facilities, machinery, equipment, tools, materials
and all other kinds and types of real or personal property that may in
any way be considered necessary or appropriate in connection with
carrying on the business of the Trust for such consideration and on
such terms as the Managing Trustee considers necessary or appropriate;
(ix) To pay delay rentals, bonus payments, royalties,
production payments, overriding royalties, shut-in gas royalty
payments, all applicable taxes (other than income taxes) and any other
amounts considered by the Managing Trustee to be necessary or
appropriate to the maintenance or operation of the Properties for such
consideration and on such terms as the Managing Trustee considers
necessary or appropriate;
(x) To make and enter into such agreements and contracts
with such parties and to give such receipts, releases and discharges
with respect to any and all of the foregoing and any matters incident
thereto as the Managing Trustee may consider necessary or appropriate
for such consideration and on such terms as the Managing Trustee
considers necessary or appropriate;
(xi) To sue and be sued, complain, defend and settle in
the name of and on behalf of the Trust as the Managing Trustee
considers necessary or appropriate;
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(xii) To quitclaim, surrender, release or abandon any Trust
asset that is not a material asset, with or without consideration
therefor as the Managing Trustee considers necessary or appropriate;
(xiii) To execute and deliver all checks, drafts,
endorsements and other orders for the payment of Trust funds as the
Managing Trustee considers necessary or appropriate;
(xiv) To appear and to represent the Trust before any
Governmental Authority and to make all filings before such
Governmental Authority as the Managing Trustee considers necessary or
appropriate;
(xv) To elect to go "non-consent" under any Operating
Agreement applicable to any Wells or to elect to pay the costs and
expenses of any non-consenting party under any such Operating
Agreement as the Managing Trustee considers necessary or appropriate;
(xvi) To take such other action, execute and deliver such
other documents and perform such other acts as the Managing Trustee
may consider necessary or appropriate to carry out the business and
affairs of the Trust in accordance with this Agreement;
(xvii) To propose or agree to a proposal to plug and abandon
a Well, provided the Managing Trustee considers it necessary or
appropriate that such Well be plugged and abandoned;
(xviii) To delegate power and authority to operate
the Properties to the operators thereof pursuant to the Operating
Agreements, including to the applicable Operator Affiliates pursuant
to, and to the extent contemplated in, the New Operating Agreements;
and
(xix) To exercise all rights of the Trust as the owner of
the LLC Interest.
(b) Required Vote or Approval. Unless otherwise provided in this
Agreement, the consent of the Series B Majority Interest and the Series A
Supermajority Interest is required to constitute the approval by, or the
authorization of, any action by or on behalf of the Trust that requires a vote,
consent, approval or action of or an election by the Holders, except for
actions that may be taken hereunder by the Managing Trustee without the vote,
consent, approval, action of or election by any Holder. Such vote may be taken
at a meeting of the Holders in accordance with the provisions of this Agreement
or by a consent executed by the requisite Holders. Whenever the consent, vote
or approval of the Holders is required for any action, except for any action
that may be taken by the Managing Trustee without the consent, vote or approval
of the Holders, written notice of the proposed action shall be sent to each
Holder.
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7.2 STANDARD OF CARE; CONFLICTS.
(a) In carrying out its duties hereunder, the Managing Trustee
shall act in good faith in a manner believed by it to be in the best interests
of the Trust; provided, however, that the Managing Trustee will only be liable
to the Trust and the Holders for actions that constitute (i) gross negligence,
willful misconduct, or fraud of the Managing Trustee (or the Series B Holder or
any Operator Affiliate, if such Person is Affiliated with the Managing Trustee
at such time), (ii) the inaccuracy, breach or failure of any representation,
warranty or covenant made by the Managing Trustee or the Series B Holder in
this Agreement or any other agreement contemplated hereby or by an Operator
Affiliate under an Assignment or Operating Agreement, or (iii) a matter for
which the Managing Trustee is required to Indemnify the Trust and the Series A
Holders pursuant to Section 9.1 or 9.2.
(b) The Managing Trustee may consult with legal counsel,
accountants, appraisers, petroleum engineers, management consultants,
investment bankers, and other consultants and advisers selected by it. The
opinion of any such Person as to matters that the Managing Trustee believes to
be within such Person's professional or expert competence will be full and
complete authorization and protection in respect of any action taken or
suffered or omitted by the Managing Trustee in good faith and in accordance
with such opinion.
(c) The Managing Trustee shall devote such time and effort to the
Trust business and operations as is necessary to promote the interests of the
Trust; provided, however, the Managing Trustee need not devote full time to
Trust business.
(d) The Managing Trustee at any time and from time to time may
engage in and possess interests in other business ventures of any and every
type and description, independently or with others, including ones in
competition with the Trust, with no obligation to offer to the Trust or any
Series A Holder the right to participate in those activities.
(e) The Trust may transact business with any Holder or Affiliate
of a Holder, provided the terms of transactions with the Managing Trustee or an
Affiliate thereof are no less favorable than those the Trust could obtain from
responsible unrelated third parties.
(f) The Series A Holders hereby direct, approve of, and ratify,
the execution, delivery and performance by the Trust of (i) the Initial Swap
Agreements and Initial Swaps as assigned by Seagull to the Trust, (ii) the
Assignments, (iii) the New Operating Agreements, and (iv) the LLC Agreement.
7.3 OPERATING AGREEMENTS; OPERATING STANDARD.
(a) With respect to all Properties operated by an Operator
Affiliate on the Effective Date for which there is not an existing Operating
Agreement, the Managing Trustee shall cause the Trust to enter into Operating
Agreements with the applicable Operator Affiliates in substantially the form of
Exhibit 7.3 (the "New Operating Agreements"). With respect to all Properties
operated by an Operator Affiliate on the Effective Date for which there is an
existing Operating Agreement, such Operator Affiliate
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shall continue to operate such Properties in accordance with and subject to
such Operating Agreement that may give other working interest owners who are a
party to such Operating Agreement the right to remove the Operator Affiliate as
operator. Notwithstanding the foregoing, the Managing Trustee, unless it
determines in good faith that it is in the Trust's best interests to allow a
third party to operate any Property, shall use all commercially reasonable
efforts to keep the Operator Affiliate as operator of such Properties
(provided, that the exercise of such commercially reasonable efforts shall not
require the Managing Trustee or the Operator Affiliates to pay any amounts in
excess of expenses the Managing Trustee in good faith deems reasonable and
necessary to cause the Operator Affiliates to operate the Properties or agree
to the modification of any Operating Agreement or other related agreements).
The Managing Trustee may not allow any Operator Affiliate to voluntarily resign
as operator of any Property (unless operatorship is immediately assumed by
another Operator Affiliate) without the prior written consent of the Series A
Majority Interest. The Properties operated by the Operator Affiliates are
referred to as the "Operated Properties" and the other Properties are referred
to as the "Non-Operated Properties."
(b) The Managing Trustee shall cause the Operator Affiliates to
manage and operate the Operated Properties as would a reasonable prudent
operator (which may currently benefit from Section 29 Tax Credits) owning such
Properties, in a good and workmanlike manner, in accordance with good oil field
practices recognized under the reasonable prudent operator standard, and in
compliance in all material respects with applicable Laws, with due regard for
the common rights and mutual advantages of all Holders (and not only those
rights and advantages of the Managing Trustee or any Operator Affiliate in its
individual capacity) recognizing that the primary purpose of the Trust is the
production and sale of Oil and Gas from the Properties. The standard set forth
in the preceding sentence is referred to herein as the "Prudent Operator
Standard." In accordance with the Prudent Operator Standard, the Managing
Trustee shall, as to the Operated Properties, cause the Operator Affiliates to
(i) operate, manage, repair, maintain, Rework, Recomplete and plug and abandon
the Properties as necessary to (A) produce Oil and Gas from the Properties to
the extent of the Managing Trustee's obligation to sell the Trust's production
under Section 7.4, in each case having due regard for the interests of each
Holder, and (B) comply in all material respects with all applicable Laws
relating to the Operated Properties, (ii) install or cause to be installed, or
utilize, such separation, dehydration, compression, treatment, measurement,
transportation, water disposal and other facilities as may be reasonably
necessary and economically justified (taking into account Section 29 Tax
Credits) to market the Oil and Gas produced from the Properties under the
standard described in clause (i)(A) above, (iii) seek such favorable action
before regulatory agencies as may be reasonably necessary for the prudent
management and operation of the Operated Properties and to produce Oil and Gas
from the Properties under the standard described in clause (i)(A) above and
(iv) pay, subject to Section 7.3(f), (at the expense of the Trust and any other
working interest owners) all expenses incurred in the operation of the Operated
Properties and keep the Operated Properties free from material liens and
encumbrances, except Permitted Encumbrances.
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(c) The Managing Trustee shall in good faith make reasonable
efforts to require the respective operators of the Non-Operated Properties (i)
to operate the same in a good and workmanlike manner in accordance with all
Laws of any Governmental Authorities having jurisdiction to regulate the manner
in which the operation of said Properties should be carried on and (ii) to
comply in all material respects with the terms and conditions of any Leases to
which the Non-Operated Properties are subject and the applicable Operating
Agreements, subject to the approval rights of other working interest owners
relating to those Non-Operated Properties.
(d) To the extent the aggregate production allowables,
transportation capabilities or market demand for a given unit, communitized
area or field, for any period, are less than the capabilities of all wells
(including both the Wells and other wells, whether or not owned in whole or
part by the Depositor or any Operator Affiliate and whether such wells exist at
the Effective Date or are thereafter drilled or completed), the Managing
Trustee will in good faith, to the extent such action is within the Managing
Trustee's control (or the control of the Operator Affiliates)), allocate to the
Wells a pro rata share of the available allowables, transportation capabilities
or market demand within such unit, communitized area or field. The pro rata
share for the Wells will be calculated based upon the ratio of such applicable
Wells' most recent deliverability tests required or provided for by the
appropriate commission or agency having jurisdiction over the production of oil
and gas to the aggregate of the deliverability tests of all wells within the
applicable unit, communitized area or field. Such allocation, to the extent
effected by the Managing Trustee or an Operator Affiliate, shall be deemed to
be in compliance with the Prudent Operator Standard described in this Section
7.3.
(e) In the event of any differences between the obligations of
the Managing Trustee under the other subsections of this Section 7.3 and the
obligations of the Managing Trustee or Operator Affiliates (i) to other working
interest or royalty owners of the Properties under the terms of the Leases and
Contracts or which constitute Permitted Encumbrances of the type described in
clauses (i) and (j) of the definition thereof, or (ii) to other working
interest owners or royalty owners in other lands covered by such Leases,
Contracts and Permitted Encumbrances of the type described in clauses (i) and
(j) of the definition thereof, then the Managing Trustee shall use, and shall
cause such Operator Affiliate to use, all commercially reasonable efforts to
adhere to the Prudent Operator Standard; provided, however, that the
obligations of the Managing Trustee under this Section 7.3 shall not require
the Managing Trustee or Operator Affiliate to breach its obligations, (iii) to
other working interest or royalty owners of the Properties under the terms of
the Leases and Contracts or which constitute Permitted Encumbrances of the type
described in clauses (i) and (j) of the definition thereof, or (iv) to other
working interest or royalty owners in other lands covered by such Leases and
Contracts, or to discriminate against their production from existing wells or
wells subsequently drilled by or with the participation of the Depositor or its
Affiliates (including the Operator Affiliates) adjacent to or in the vicinity
of the Operated Properties.
(f) The Managing Trustee shall not permit any Operator Affiliates
to charge the Trust for any overhead costs incurred by the Operator Affiliates
in operating the Operated
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Properties, including any costs described in Part III of Exhibit C to the New
Operating Agreements.
(g) The Managing Trustee shall cause the Louisiana Assets to be
managed by the LLC in the same manner as if the Louisiana Assets were owned
directly by the Trust.
(h) The Managing Trustee shall use all reasonable efforts to
obtain the consents and approvals required pursuant to the Contracts set forth
on Exhibit 3.1(b) as soon as practicable after the Effective Date and in any
event within sixty days after the Effective Date.
7.4 SALE OF PRODUCTION. (a) The Managing Trustee, SMSI or an
Affiliate of the Managing Trustee (approved by the Series A Majority Interest)
shall in good faith make all commercially reasonable efforts to cause the Trust
(i) to sell all of the Trust's production that is marketable in paying
quantities (taking into account Section 29 Tax Credits), (ii) not to sell any
of the Trust's production to any Person related to the Managing Trustee, the
Trust, or a Person identified to the Managing Trustee by any Series A Holder as
related to such Holder, in each case as the term "related to" is used in
Section 29(d)(7) of the Code, (iii) not to discriminate, except to the extent
that it is normal business practice, against the Trust's production in favor of
any other production the Managing Trustee or any Affiliate thereof may be
selling for its account or for the account of other parties, and (iv) not to
voluntarily limit, curtail or shut-in any of the Trust's production for reason
of dissatisfaction with the realizable sales price of such production (after
taking into account Section 29 Tax Credits). Exhibit 7.4 is a listing prepared
by FC Energy, which has an initial Pre-Payout Sharing Ratio greater than 50%,
of Persons "related to" such Series A Holder as of the date of this Agreement.
FC Energy agrees that, for so long as it has a Pre-Payout Sharing Ratio greater
than 50%, it will not, and will not permit its Affiliates to, purchase any of
the Trust's production.
(b) Notwithstanding Section 7.4(a), the Managing Trustee (and,
indirectly, the Operator Affiliates) will have no obligation (i) to deny the
right of other working interest owners of the Leases to make up production
imbalances as expressly permitted in the gas balancing agreements that are
included in the Contracts, (ii) to refrain from curtailing production for any
reason (other than dissatisfaction with the realizable sales price of such
production after taking into account Section 29 Tax Credits) consistent with
good oil field practices, or (iii) to continue to operate and produce from any
Well if, in the Managing Trustee's good faith judgment (or the good faith
judgment of an Operator Affiliate), such continued operation would lead to a
risk of breach of any applicable Laws, including Environmental Laws.
7.5 RESTRICTIONS ON MANAGING TRUSTEE'S POWER AND AUTHORITY;
NEGATIVE COVENANTS.
(a) Notwithstanding any other provision of this Agreement to the
contrary, the Managing Trustee may not cause or permit the Trust (or an
Operator Affiliate on behalf of the Trust) to take any of the following actions
without having first obtained the written
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consent of the Series A Majority Interest (or the Series A Supermajority
Interest, in the case of the provisions that specifically refer to the consent
of the Series A Supermajority Interest):
(i) incur any Indebtedness other than that referred to in
Section 5.5 without the written consent of the Series A Supermajority
Interest);
(ii) Transfer (other than through abandonment) (A) any
Well or (B) any material portion of the equipment used in generating
production from the Properties, unless such equipment is determined by
the Managing Trustee to be non-essential to the management or
operation of the Properties (in accordance with the standards set
forth in Section 7.3(b));
(iii) enter into or amend any gas sales contract that (A)
either (x) has a term longer than five years, or (y) obligates the
Trust to deliver more than 75% of the Trust's estimated annual
production for any year covered by the contract (based on the Trust's
most recent Reserve Report, with appropriate adjustments to reflect
production from the date of such report to the date of such
determination), and (B) obligates the Trust to warrant the production
of specific quantities of Oil and Gas;
(iv) Encumber, or permit to be Encumbered, any of the
Properties or other Trust assets, except for (A) Permitted
Encumbrances and (B) Encumbrances granted from and after Payout to
secure Working Capital Loans pursuant to Section 5.5;
(v) guarantee in the name or on behalf of the Trust the
payment of money or the performance of any contract or other
obligation of any Person other than the Trust;
(vi) cause the Trust to engage in any business or activity
that is not within the purpose of the Trust, as set forth in Section
2.4, or to change such purpose without, in either case, the written
consent of the Series A Supermajority Interest;
(vii) use the Trust's name, credit or property for other
than Trust purposes without the written consent of the Series A
Supermajority Interest;
(viii) loan any Trust funds to any Holder or any of their
Affiliates;
(ix) merge or consolidate the Trust with any other Person
without the written consent of the Series A Supermajority Interest;
(x) except as expressly provided or contemplated herein,
take any action with respect to the assets or property of the Trust
that benefits any Holder or an Affiliate thereof to the detriment of
another Holder or the Trust (other than in accordance with Section
7.2(e) without the written consent of the Series A Supermajority
Interest);
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(xi) terminate voluntarily the Initial Swaps and thereby
cause the Trust to become obligated to make a cash payment to the
counterparties under the Initial Swap Agreements; or offset the
Initial Swaps unless the effect of such Initial Swaps is substantially
replaced through long-term, fixed-price gas sales contracts with
consumers that have a senior unsecured credit rating of at least "BBB"
(as determined by S&P);
(xii) confess a judgment against the Trust in connection
with a threatened or pending legal action involving the payment by the
Trust of more than $25,000;
(xiii) cause the Trust to, or to itself, commingle Trust
funds with those of any other Person, after the Managing Trustee has
deposited such Trust funds in a separate account of the Trust in
accordance with Section 8.5;
(xiv) fail to cause the Trust to comply in all material
respects with all applicable Laws, including Environmental Laws, or
fail to cause the Trust to be qualified to transact business in any
jurisdictions in which it is required to be so qualified;
(xv) fail to obtain and maintain insurance coverage for
the Assets of the types and in the amounts customarily maintained by
the Managing Trustee and its Affiliates for similar Oil and Gas
properties, but in no event may the Managing Trustee fail (i) to
obtain and maintain insurance against the types of risks set forth on
Exhibit 7.5(a)(xv) in amounts at least equal to those set forth on
such Exhibit, or (ii) to cause the Trust and each of the Holders to be
named as "additional insureds" with respect to all liability coverage
and the Trust to be named as "loss payee" with respect to all property
coverages;
(xvi) file in any court pursuant to any statute of the
United States or of any state a petition in bankruptcy or insolvency,
file for reorganization or for the appointment of a receiver or a
trustee of all or a material portion of the Trust's assets, or seek
the appointment of a trustee, receiver or liquidator of any material
portion of the Trust's assets;
(xvii) pay any fees to any Affiliate of the Managing Trustee
for marketing the Trust's Oil and Gas;
(xviii) permit, or cause, the LLC to take any action with
respect to the Louisiana Assets which could not be taken hereunder if
the Louisiana Assets were owned directly by the Trust; or
(xix) amend the LLC Agreement.
(b) Notwithstanding any other provision of this Agreement to the
contrary, if the Managing Trustee is not an Affiliate of Seagull, the Managing
Trustee may not cause or
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permit the Trust to take any of the following actions without having first
obtained the written consent of the Series B Majority Interest:
(i) any action described in Section 7.5(a)(i), other than
loans for operational purposes (and not for the purpose of funding
distributions) on commercially reasonable terms and conditions which
do not exceed an aggregate principal amount outstanding at any time of
$3,000,000;
(ii) any action described in Section 7.5(a)(ii) unless the
Series B Holders have been offered the right to purchase such Well or
equipment to be Transferred in accordance with the procedures in
Section 4.3(b)(III) which would apply if such Transfer were of the
Trust Interest of a Series A Holder;
(iii) any action described in Sections 7.5(a)(iii), (v),
(vi), (vii), (viii), (ix), (x), (xiii), (xvii), (xviii) or (xix);
(iv) any action described in Section 7.5(a)(iv) except to
secure loans made pursuant to Section 7.5(b)(i);
(v) any action described in Section 7.5(a)(xii), unless
no Funding Transfer is required from the Series B Holders to pay the
judgment or settlement or to satisfy any obligations arising out of
such judgment or settlement;
(vi) any action described in Section 7.5(a)(xiv), other
than actions resulting from any failure by an Operator of the
Properties to comply with Laws; or
(vii) any action described in Section 7.5(a)(xv), unless
the Managing Trustee has used all commercially reasonable efforts to
obtain the insurance required and to cause the Trust and the Holders
to be named as "additional insureds" or "loss payees" as applicable.
7.6 ENFORCEMENT OF TRUST RIGHTS UNDER THE ASSIGNMENTS, THE NEW
OPERATING AGREEMENT AND THE GUARANTY. The Managing Trustee shall cause
Mid-South and Midcon to take such further actions and to execute, acknowledge
and deliver all such additional instruments as may be necessary to fully and
effectively Transfer to the Trust and the LLC, the Assets Transferred or
intended to be Transferred by the Assignments and will cause such Assignments
and other documents and instruments to be recorded in the appropriate public
records of the jurisdictions in which the Assets are located as may be
necessary or reasonably requested by the Series A Majority Interest to fully
effect and maintain the Trust's ownership of the Assets and the LLC's ownership
of the Louisiana Assets. In addition as soon as reasonably practical after
November 1, 1995, the Managing Trustee shall take all actions necessary to
cause legal title to the Oklahoma Assets to be Transferred to the Trust and
held in the name of the Trust. The Managing Trustee will investigate whether
the Trust is entitled at any time to enforce its right to receive any amount
payable under or in respect of the Assignments, the New Operating Agreements
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or the Guaranty and shall proceed in good faith and in the best interests of
the Trust to enforce any such right that is available.
7.7 REMOVAL OF MANAGING TRUSTEE. The Managing Trustee will be
subject to removal as Managing Trustee by a vote of the Series A Supermajority
Interest in the case of (a) gross negligence; (b) willful misconduct; (c)
fraud; (d) the breach of a material covenant under this Agreement, if such
breach remains uncured for a period of 30 days after the Managing Trustee is
notified of such breach by any other Holder (or, if such breach is incapable of
being cured within such 30-day period, the Managing Trustee fails promptly to
commence curative efforts and diligently pursue them to completion and, in any
event, shall have completed such cure within 180 days after the Managing
Trustee is notified of such breach); (e) failure of the Managing Trustee to
make an Indemnification payment to the Trust or the Series A Holders pursuant
to Article 9 within 30 days after such Indemnification payment becomes due; or
(f) the Managing Trustee becoming Bankrupt. The running of the time periods in
clauses (d) and (e) will be suspended during the pendency of any legal
proceedings with respect to an alleged failure to make an Indemnification
payment. If the Managing Trustee is so removed, the Series A Supermajority
Interest shall elect a successor Managing Trustee from such Holders to succeed
to all the rights, and to perform all of the obligations, of the Managing
Trustee hereunder.
7.8 INDEMNIFICATION. To the fullest extent permitted by Law, on
written request by the Person Indemnified, the Trust shall Indemnify any
Trustee and their respective officers, directors, agents and employees from and
against all Claims any of them may incur as, or in performing the obligations
of, a Trustee of the Trust, specifically including the Person Indemnified's
sole, partial, or concurrent negligence, and on request by the Person
Indemnified the Trust shall advance expenses associated with the defense of any
related action; provided, however, that this Indemnity does not apply to
actions of the Person Indemnified constituting (a) gross negligence, (b)
willful misconduct, (c) fraud, (d) the inaccuracy, breach or failure in any
material respect of any representation, warranty or covenant made by such
Indemnified Person in this Agreement, the Assignments or the Operating
Agreements, or (e) a matter for which the Managing Trustee is required to
Indemnify the Trust and the Series A Holders pursuant to Section 9.1 or 9.2.
7.9 PERSONAL LIABILITY. Pursuant to Section 3803(a) of the Act,
each Holder agrees that it shall be personally liable to the creditors of the
Trust for the debts, obligations, expenses and liabilities of the Trust. Each
Holder agrees to indemnify each other Holder for any liability pursuant to the
preceding sentence in excess of such Holder's proportionate share of any such
liability, which shall be equal to the amount of such liability times the
fraction (on the date such liability is payable) of such Holder's unreturned
Funding Transfers over the total of all unreturned Funding Transfers.
7.10 INFILL DRILLING. (a) Nothing in this Agreement shall
restrict the right of the Depositor, any Series B Holder or any of their
Affiliates to drill any well (an "Infill Well") after the Effective Date that
could produce Oil and Gas reserves that could otherwise be produced from a
Well, subject however to the other provisions of this Section 7.10.
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(b) At the time the Managing Trustee delivers to the Series A
Holders each Reserve Report, it shall also deliver to them a report setting
forth (i) the date on which it expects Payout to occur, based on the Series A
Holders' After-Tax Cash Flow through the date of such Reserve Report and
projected Series A Holders' After-Tax Cash Flow from the date of such Reserve
Report, the latter being based on the information set forth in such Reserve
Report the "Estimated Payout Date"), (ii) an estimate of the Series A Holders'
after-tax rate of return through depletion of the Properties as calculated
pursuant to Section 7.10(b)(i) on their initial Funding Transfers (exclusive of
Excess Transaction Expenses) if Payout occurs on the Estimated Payout Date (the
"After-Tax IRR") and (iii) a list of each of the Wells (an "Affected Well")
that has been offset by an Infill Well (x) drilled after the Effective Date on
an adjacent spacing unit, and (y) operated by the Depositor or an Affiliate of
the Depositor.
(c) If any Reserve Report furnished pursuant to Section 8.4
hereof shows that there has been a net cumulative downward adjustment in proved
reserves from Affected Wells since January 1, 1996 in excess of 500 MMcf of gas
equivalent (adjusted for actual production since such date), then the Managing
Trustee shall cause the Petroleum Engineer to prepare a report (an "Infill
Report"), as of January 1 of such year (the "Infill Report Date"), concerning
each Affected Well including the following information:
(i) the amount, if any, determined by the
Petroleum Engineer with a reasonable degree of certainty
based on customary petroleum engineering standards and
practices by which the Trust's interest in production from
proved reserves from each Affected Well has been, and is
reasonably likely to be, decreased as a direct result of
drainage from the applicable Infill Well ("Lost Production"),
calculated separately for each of the following periods: (A)
the period from the date such Infill Well was drilled to the
Estimated Payout Date ("Pre-Payout Lost Production"), and (B)
the period from the Estimated Payout Date to the date on
which it is anticipated that the Affected Well will be
abandoned (based on the most recent Reserve Report)
("Post-Payout Lost Production");
(ii) the value, as of the Estimated Payout Date,
of the Series A Holders' indirect interest in the Lost
Production from each Affected Well (the "Lost Production
Value"), calculated as follows and based, in each case, on
the Applicable Price (as defined below): (i) the future
value as of the Estimated Payout Date (including the Section
29 Tax Credits as calculated in accordance with the Tax
Assumptions and taking into account projected ad valorem,
severance and other production taxes, lease operating,
gathering, transportation, processing, and other costs of
production and marketing such production), computed at the
Discount Rate, of 99% of the Pre-Payout Lost Production, plus
(ii) the present value as of the Estimated Payout Date,
(including the Section 29 Tax Credits as calculated in
accordance with the Tax Assumptions and taking into account
projected ad valorem, severance and other production taxes,
lease operating, gathering, transportation, processing,
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and other costs of production and marketing such production),
computed at the Discount Rate, of 10% of the Post-Payout Lost
Production; and
(iii) the sum of the Lost Production Values of all
Affected Wells (the "Total Lost Production Value").
(d) The amount, if any, by which Total Lost Production Value
exceeds $500,000 is called "Recoupable Lost Production Value"; provided,
however, that the Recoupable Lost Production Value shall not exceed the amount
that if paid to the Series A Holders as a distribution on the Estimated Payout
Date would cause their After-Tax IRR (taking into account such payment and
their pre-Payout and post-Payout interests in the Trust) to exceed 11.14% per
annum (the "Target Rate"). The amount, if any, by which Recoupable Lost
Production Value exceeds $1,500,000 is called "Excess Recoupable Lost
Production Value"; provided, however, that the Excess Recoupable Lost
Production Value shall not exceed the amount that if paid to the Series A
Holders as a distribution on the Estimated Payout Date would cause their
After-Tax IRR (taking into account such payment and their pre-Payout and
post-Payout interests in the Trust) to exceed the Target Rate.
(e) If the Infill Report identifies a Recoupable Lost Production
Value, Payout shall be extended from the date it would have otherwise occurred
until the Series A Holders have realized Series A Holders' After-Tax Cash Flow
during such extended period with a present value as of the date Payout would
have otherwise occurred computed at the Target Rate equal to the lesser of (i)
such Recoupable Lost Production Value or (ii) $1,500,000.
(f) If any Infill Report identifies an Excess Recoupable Lost
Production Value, the Series B Holders shall Transfer, or cause their
Affiliates to Transfer on their behalf, to the Trust, as a Funding Transfer,
additional proved developed producing Oil and Gas properties ("Additional
Properties") having a present value as of the date of Transfer that is not less
than 101.0101% of the amount if any by which (i) the Excess Recoupable Lost
Production Value exceeds (ii) the value of any Additional Properties
theretofore Transferred (valued as of the dates such previous Transfers of
Additional Properties were made) to the Trust pursuant to the provisions of
this Section 7.10. The present value of any Additional Properties Transferred
pursuant to this Section 7.10 shall be determined by the Petroleum Engineer
using the Applicable Prices and the Discount Rate. If any Infill Report
indicates that the Series B Holders have previously contributed Additional
Properties to the Trust pursuant to this Section 7.10 in excess of the value
required pursuant to such Infill Report, then the Series B Holders shall have
the right to receive from the Trust as a special distribution, the portion of
such Additional Properties valued in excess of the amount the Series B Holders
should have Transferred in accordance with such Infill Report.
(g) For purposes of this Section 7.10, the following terms have
the following meanings:
(A) "Applicable Price" means the following: (I) with
respect to any Oil and Gas production that has been marketed prior to
the applicable Infill Report Date, the actual price at which such
production was marketed plus or minus any gain or
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loss under any Swap entered into by the Trust with respect to such
production; and (II) with respect any Oil and Gas production to be
marketed after the applicable Infill Report Date, the prices used by
the Petroleum Engineer in the most recent Reserve Report; and
(B) "Discount Rate" means 10% per annum;
7.11 RECOMPLETIONS. (a) With respect to any Well, the Managing
Trustee may not cause or permit the Trust (or an Operator Affiliate on behalf
of the Trust), without the written consent of the Series A Supermajority
Interest, to abandon a Zone that is currently producing in such Well and
Recomplete such Well in a Zone that is not included in such Property, without
first determining that (i) the Well is not producing in paying quantities from
that Zone, taking into account the Section 29 Tax Credits, (ii) no Reworking
operations that are economically-justified (taking into account Section 29 Tax
Credits) will restore production in paying quantities from the
currently-producing Zone, and (iii) there are no behind-pipe reserves capable
of producing in paying quantities in a Zone in which a Recompletion could be
economically-justified (taking into account Section 29 Tax Credits) included in
such Property. No costs incurred in connection with the Recompletion of a Well
in a Zone that is not included in the Properties shall be borne by the Trust or
any Series A Holder in any respect.
(b) At such time as the aggregate cost to the Trust of
Recompletions attempted in the Properties prior to Payout first exceeds
$3,000,000, then all subsequent Recompletions that are attempted in the
Properties prior to Payout will constitute "Additional Recompletions" for
purposes of this Agreement (including Sections 6.2(a)(ii), 6.2(b)(ii) and 6.5),
and, with respect to each Additional Recompletion, the Series B Holder will
make a cash Funding Transfer in an amount equal to 90% of the cost of such
Additional Recompletion.
(c) If, during an attempted Recompletion, the aggregate cost of
Recompletions exceeds the stated threshold amount in Section 7.11(b) (the
amount of such excess being hereinafter referred to as the "Recompletion
Overrun"), then the Series B Holders shall make a cash Funding Transfer in an
amount equal to 90% of the amount by which such Recompletion Overrun is greater
than $300,000 and the Trust will pay for (i) the first $300,000 of such
Recompletion Overrun and (ii) 10% of all amounts in excess of $300,000 for such
Recompletion Overrun. Any Recompletion funded in accordance with the terms of
the immediately preceding sentence shall not be an Additional Recompletion.
7.12 CONCERNING THE SPECIAL TRUSTEE. (a) The Special Trustee may
at any time resign, and be discharged from the Trust by giving not less than 30
days prior written notice thereof to the Managing Trustee and the Holders. In
addition the Managing Trustee may at any time remove the Special Trustee, with
or without cause, by giving not less than 5 days' prior written notice thereof
to the Special Trustee and the Holders.
(b) In the event of the resignation or removal of the Special
Trustee, the Managing Trustee, with the written consent of the Series A
Supermajority Interest, shall
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appoint a successor Special Trustee by written instrument or instruments, in
triplicate, signed by the Managing Trustee, and the Series A Supermajority
Interest, one complete set of which shall be delivered to the Special Trustee
who was removed or resigned, one complete set of which shall be delivered to
the successor Special Trustee so appointed, and one complete set of which shall
be retained by the Managing Trustee. Any resignation or removal of the Special
Trustee and appointment of a successor Special Trustee pursuant to any of the
provisions of this Section 7.12 shall become effective upon acceptance of
appointment by the successor Special Trustee as provided in this Section 7.12.
(c) Any successor Special Trustee appointed as provided in
Section 7.12(b) shall execute, acknowledge and deliver to the Managing Trustee
and to its predecessor Special Trustee an instrument accepting such appointment
hereunder, and thereupon the resignation or removal of the predecessor Special
Trustee shall become effective and such successor Special Trustee, without any
further act, deed or conveyance, shall become fully vested with all the rights,
powers, duties and obligations of its predecessor hereunder, with like effect
as if originally named as Special Trustee herein. In addition, the predecessor
Special Trustee, upon request of the Managing Trustee, shall execute and
deliver such instruments and do such other things as may reasonably be required
for more fully and certainly vesting and confirming in the successor Special
Trustee all rights, powers, duties and obligations of the Special Trustee
hereunder.
(d) In the event of the death of a Special Trustee, the Managing
Trustee, with the written consent of the Series A Supermajority Interest may
appoint a successor Special Trustee by written instrument or instruments, in
triplicate, signed by the Managing Trustee, and the Series A Supermajority
Interest, one complete set of which shall be delivered to the personal
representative of the Special Trustee who died, one complete set of which shall
be delivered to the successor Special Trustee so appointed, and one complete
set of which shall be retained by the Managing Trustee. Any successor Special
Trustee appointed as provided in this Section 7.12(d) shall execute,
acknowledge and deliver to the Managing Trustee an instrument accepting such
appointment hereunder, and thereupon such a successor Special Trustee, without
any further act, deed or conveyance, shall become fully vested with all of the
rights, powers, duties and obligations of its predecessor hereunder, with like
effect as if originally named as Special Trustee herein. In addition, the
personal representative of the predecessor Special Trustee, upon request of the
Managing Trustee shall execute and deliver such instruments and do such other
things as may reasonably be required for more fully and certainly vesting and
confirming in the successor Special Trustee all rights, powers, duties and
obligations of the Special Trustee hereunder. To the fullest extent permitted
by applicable Law, in the event of the death of a Special Trustee, The
Corporation Trust Company, a Delaware corporation, shall be deemed to be the
Special Trustee until a successor Special Trustee is appointed in accordance
with the other provisions of this Section 7.12(d).
(e) No successor Special Trustee shall accept appointment as
provided in this Section unless at the time of such acceptance such successor
Special Trustee shall be eligible under the provisions hereof.
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(f) Upon acceptance of appointment of a successor Special Trustee
as provided in this Section 7.12, the Managing Trustee shall mail notice of the
succession of such Special Trustee hereunder to all Holders.
(g) The Special Trustee shall be a Person who is a resident of
the State of Delaware.
(h) The Special Trustee agrees to continue to be a resident of
the State of Delaware until such Special Trustee has resigned or been removed,
and a successor Special Trustee appointed in accordance with the terms hereof.
(i) In consideration for its services hereunder, the Special
Trustee shall be entitled to the Special Trustee Fee. Such fee shall be an
expense of the Trust and shall be payable to the Special Trustee in accordance
with the terms of the Special Trustee Fee Agreement. The Special Trustee shall
be entitled to be reimbursed for all Special Trustee expenses paid by the
Special Trustee, except any such Special Trustee expenses as may arise from the
Special Trustee's negligence, bad faith, fraud or willful misconduct. In
addition, the Trust shall indemnify and hold harmless the Special Trustee from
and against any and all loss, liability or expense incurred (other than by
reason of willful misconduct, bad faith or gross negligence) on the part of the
Special Trustee, arising out of or in connection with the acceptance or
administration of its duties as Special Trustee, including the costs and
expenses of defending itself both individually and in its representative
capacity against any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder. In addition, the Trust
shall indemnify and hold harmless the Special Trustee if the Special Trustee is
required to pay, in its individual capacity from its separate assets, income
taxes imposed upon the Trust. Such indemnification of the Special Trustee
shall continue as to all acts by it while serving in such capacity,
notwithstanding the subsequent replacement of such Special Trustee by a
successor pursuant to the terms hereof.
(j) The Managing Trustee shall provide each Holder a copy of each
agreement, document or instrument executed by the Special Trustee (including
any predecessor Special Trustee or successor Special Trustee) pursuant to
Sections 7.12(b), (c) and (d).
(k) The Special Trustee has been appointed as Trustee and joined
as a party hereunder in order to satisfy the requirements of Section 3807 of
the Act and any successor Special Trustee shall meet the requirements of
Section 3807 of the Act.
(l) Notwithstanding any other term or provision hereof to the
contrary, the Managing Trustee alone may exercise all of the rights and powers
granted to a Trustee herein and shall be solely charged with the performance of
the duties herein declared on the part of a Trustee to be had and exercised or
to be performed; provided, however, that if the Managing Trustee deems it
necessary or desirable for the Special Trustee to act in a particular matter,
the Special Trustee shall have and exercise the rights and powers granted
herein and shall be charged with the performance of the duties herein declared
on the part of a Trustee to be had and exercised or to be performed, but only
for such
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particular matter, and the foregoing shall not relieve the Managing Trustee
from any liability or obligation of the Managing Trustee to any Holder.
(m) The Managing Trustee, alone may execute and deliver, on
behalf of the Trust, any writing, document or instrument which a Trustee is
required or authorized to execute and deliver on behalf of the Trust.
ARTICLE 8
ADMINISTRATIVE AND TAX MATTERS
8.1 CHARACTERIZATION OF TRUST ARRANGEMENT FOR INCOME TAX
PURPOSES. The Managing Trustee, the Holders and the Depositor intend that, on
and after the Effective Date, the Trust will be treated as a partnership for
federal, state and local income tax purposes, and the Series B Holder and the
Series A Holders will be treated as the partners in such partnership. To this
end, the Managing Trustee will file all applicable partnership returns with
respect to the Trust and income, gain, deduction and loss relating to the
Certificates and the Holders thereof will be reported thereon based on the
respective allocable shares of such amounts as provided herein.
8.2 BOOKS AND RECORDS. The Managing Trustee shall keep books of
account for the Trust on an accrual basis in accordance with GAAP; provided,
however, that the Funding Accounts will be maintained in accordance with
Section 6.1. Such books will be maintained at the Managing Trustee's principal
office. The calendar year will be the fiscal year of the Trust.
8.3 INFORMATION AND ACCESS RIGHTS; CONFIDENTIALITY. (a) In
addition to the other rights set forth in this Agreement, the Managing Trustee
shall provide each Series A Holder all such factual information (and
clarifications of such factual information) regarding the Trust and the Trust
Estate as such Series A Holder may from time to time reasonably request.
However, the Managing Trustee will have no obligation to furnish any Series A
Holder with judgments, opinions or interpretations of fact, or to assist any
Series A Holder in arriving at its own judgment, opinion or interpretation.
(b) The Series A Holders and their respective agents will have
the right, at their sole risk and expense and upon 15 days' prior notice to the
Managing Trustee, to inspect the Assets and all relevant Trust books and
records no more often than once a year (for all Series A Holders); provided,
however, that the Series A Holders may conduct additional inspections if the
Managing Trustee has breached its obligations under this Agreement or if any
other material event has occurred that necessitates such additional
inspections. Any such inspection will be conducted during the normal business
hours of the Managing Trustee under conditions reasonably acceptable to the
Managing Trustee. If any Series A Holder seeks to inspect Assets that are
operated by a Person other than the Managing Trustee or an Affiliate thereof,
or books and records in the possession of such an operator, then such
inspection will be conducted during the normal business hours of such operator,
under conditions reasonably acceptable to such operator, and only with the
consent of such operator (unless such consent is not required).
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(c) Each Holder acknowledges that, from time to time, it may
receive information from or regarding the Trust in the nature of trade secrets
or that otherwise is confidential, the release of which may be damaging to the
Trust or Persons with which it does business. Accordingly, each Holder shall
hold in strict confidence, not use (except for matters involving the Trust),
and not disclose to any Person other than another Holder or a Trustee, the
following information:
(i) in the case of any Holder, any information regarding
(A) the tax position or tax returns of the Trust, (B) the tax position
or tax returns of any other Holder or its Affiliates, (C) any legal or
regulatory information regarding any other Holder that such other
Holder has specifically identified as confidential, or (D)
calculations required to be made under this Agreement, including the
calculation of (I) Series A Holders' After-Tax Cash Flow, (II) Series
A Holders' Monthly After-Tax Return, (III) Series A Holders' After-Tax
Return, (IV) the occurrence of Payout, (V) the status of the Funding
Accounts, and (VI) the amount of distributions made or to be made
hereunder;
(ii) in the case of a Series A Holder, any information (A)
contained in the reports described in Section 8.4 or (B) regarding the
Assets, other than information that the Managing Trustee has
specifically identified as non-confidential.
This Section 8.3(c) shall not apply to the following types of disclosures:
(x) disclosures compelled by Law or securities exchange
requirements; provided, however, that the Holder must notify the
Managing Trustee and the other Holders promptly of any request for
that information, before disclosing it if practicable or unless such
notice is prohibited by Law; but the foregoing proviso does not apply
to the following types of disclosures: (I) disclosure by Seagull of
the occurrence of the transaction contemplated hereby in, and
inclusion by Seagull of a copy of this Agreement as an exhibit to,
any Quarterly Report on Form 10-Q, any Current Report on Form 8-K
and/or any other periodic filing that it will file with the Securities
and Exchange Commission; or (II) disclosure by any Holder to its
regulators made in the ordinary course;
(y) disclosures to advisers or representatives of the
Holder (or Transferees of its Trust Interest) as permitted by this
Agreement, but only if the recipients have agreed to be bound by the
provisions of this Section 8.3(c); or
(z) disclosures of information that the Holder also has
received from a source independent of the Trust that such Holder
reasonably believes obtained that information without breach of any
obligation of confidentiality.
The Holders acknowledge that breach of the provisions of this Section 8.3(c)
may cause irreparable injury to the Trust or the other Holders for which
monetary damages are inadequate, difficult to compute, or both. Accordingly,
the Holders agree that the provisions of this Section 8.3(c) may be enforced by
specific performance.
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(d) Except for a disclosure of the type described in Section
8.3(c)(x), no party to this Agreement may issue a press release or otherwise
make a written public announcement regarding the formation of the Trust or the
consummation of the transactions contemplated hereby without the prior written
consent of the Series B Majority Interest and the Series A Majority Interest,
and no party may be mentioned in such a press release or other written public
announcement without that party's written consent.
8.4 REPORTS. The Managing Trustee shall deliver to each Series A
Holder the following reports and financial statements for the Trust at the
times indicated below:
(a) Annually, within 90 days after the end of each year,
a report (a "Reserve Report") prepared effective as of January 1 of
the current year containing (i) an estimate of the total oil and gas
reserves, classified by appropriate categories, attributable to the
interest of the Trust, (ii) a projection of the rate of production of,
and net revenues from, such reserves with respect to each such
interest, (iii) a calculation of the present worth of such net
revenues discounted at a rate or rates designated from time to time by
the Managing Trustee, and (iv) a schedule or complete description of
all assumptions, estimates and projections made or used in the
preparation of such Reserve Report, including estimated future product
prices, capital expenditures, operating expenses and taxes. Each such
Reserve Report will be prepared in accordance with customary and
generally accepted standards and practices for petroleum engineers,
will be based on such assumptions as to costs and similar factors as
the Managing Trustee will designate from time to time and will be
prepared by an independent engineer consulting to the Managing Trustee
which shall be DeGolyer & MacNaughton or such other independent
engineer selected by the Managing Trustee with the written approval of
the Series A Majority Interest (the "Petroleum Engineer"). The future
Oil and Gas prices used in each Reserve Report shall be determined as
follows:
(i) The price of gas shall be the Escalated Index Price
adjusted by the Managing Trustee (and approved by the
Petroleum Engineer as reasonable) to take into account the
difference between the price of natural gas at the Henry Hub
in Louisiana and the location of the applicable Properties.
(ii) The price of natural gas liquids, crude oil, condensate
and other liquids production shall be the future prices
determined by the Managing Trustee (and approved by the
Petroleum Engineer as reasonable).
(iii) "Index Price" means for the twelve months beginning on
the applicable Infill Report Date, the lesser of (A) average
settlement price on the first five trading days of such year
on the New York Mercantile Exchange or its successor of the
natural gas futures contracts traded on such exchange for
each of the first twelve nearby months and (B) $4.00.
(iv) "Escalated Index Price" means (A) with respect to the
twelve months beginning on any applicable Infill Report Date,
the Index Price; and (B) with
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respect to each subsequent twelve month period, the lesser of
(1) the Escalated Index price for the immediately preceding
twelve months escalated by 3% per year, and (2) $4.00.
(b) Annually, within 90 days after the end of each year,
audited financial statements prepared effective as of the end of the
immediately-preceding year, including a balance sheet and statements
of income, Holders' equity, and changes in cash flows, prepared in
accordance with GAAP and accompanied by a report of the Trust's
independent certified public accountants stating that their
examination was made in accordance with generally accepted auditing
standards and that in their opinion such financial statements present
the Trust's cash flows, results of operations and changes in financial
position in accordance with GAAP.
(c) Annually, on or before January 31 of each year, an
estimated annual operating budget for the Trust for such year.
(d) Such tax reports as set forth in Section 8.7(b).
(e) Quarterly, within 60 days after the end of each
quarter (other than the quarter ending December 31), (i) unaudited
financial statements prepared effective as of the end of the
immediately-preceding quarter, including a balance sheet and
statements of income, Holders' equity, and changes in cash flow,
prepared in accordance with GAAP, and (ii) a production report for the
immediately preceding quarter.
(f) Monthly, within 30 days after the end of each month,
reports setting forth the estimated income and expense for the
immediately-preceding month.
Any third-party costs of such reporting will be paid by the Trust as a Trust
expense, except that the cost of each Reserve Report prepared after Payout
occurs shall be paid by the Series A Holders out of their share of
distributions hereunder unless the Series A Supermajority Interest notifies the
Managing Trustee, and the other Holders that the Series A Supermajority
Interest has elected to waive the obligation of the Managing Trustee to provide
the Reserve Report and the related Infill Report for a given year.
8.5 PERMITTED INVESTMENTS. The Managing Trustee shall cause an
account to be maintained in the name of the Trust in a bank or other financial
institution selected by the Managing Trustee. There will not be deposited in
such account any funds other than funds belonging to the Trust. All such funds
of the Trust will be invested in (a) obligations of the United States of
America, (b) deposit or other accounts at financial institutions having a
rating of "A" or better by any nationally-recognized ratings agency, or (c)
commercial paper obligations of any company having a rating of "A-1" by S&P; in
each case having a maturity not exceeding the date such funds are required to
be paid or distributed in accordance with the provisions hereof, and in no
event greater than 30 days.
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8.6 TAX ELECTIONS. The Managing Trustee shall make the following
elections on the appropriate Trust tax returns:
(a) to elect the calendar year as the Trust's fiscal year;
(b) to elect the accrual method of accounting;
(c) if there is a distribution of Trust property as
described in Section 734 of the Code or if there is a Transfer of a
Trust Interest as described in Section 743 of the Code, upon the
request of any Holder, to elect, pursuant to Section 754 of the Code,
to adjust the basis of the Trust's assets;
(d) to elect to amortize the organizational and start-up
expenses of the Trust ratably over a period of 60 months as permitted
by Sections 709(b) and 195 of the Code;
(e) to elect to use actual depletion for purposes of
maintaining the Holders' Funding Accounts under Treasury Regulation
Section 1.704-1(b)(2)(iv)(k)(3); and
(f) to elect to deduct intangible drilling costs as
incurred under Section 263(c) of the Code and Treasury Regulations
Section 1.612-4.
Neither the Trust nor any Holder may make an election for the Trust to
be excluded from the application of the provisions of subchapter K of chapter 1
of subtitle A of the Code or any similar provisions of applicable state Law.
8.7 TAX MATTERS PARTNER AND TRUST TAX FILINGS. (a) The Managing
Trustee will be the tax matters partner of the Trust pursuant to Section
6231(a)(7) of the Code, and the Managing Trustee is authorized to make such
filings with the IRS as may be required to designate itself as such. The
Managing Trustee shall keep the other Holders fully informed of any audit,
administrative or judicial proceedings or other similar matters that come to
its attention in its capacity as tax matters partner. Notwithstanding anything
else in this Agreement to the contrary, without the prior written consent of
the Series A Majority Interest, the Tax Matters Partner shall not extend the
statute of limitations, file a request for administrative adjustment, file suit
concerning any tax refund or deficiency relating to any Trust administrative
adjustment, enter into any settlement agreement relating to any Trust item of
income, gain, loss, deduction or credit for any taxable year of the Trust or
otherwise take or not take any action in respect of an audit or contest the
taking or omission of which, respectively, would adversely affect the Series A
Holders, except for any matters with respect to which the Series B Holder (i)
has provided the Series A Holders with a written acknowledgment of its
Indemnity obligation to such Series A Holders pursuant to Section 9.2 and has
provided, to the extent necessary as determined by the Series A Majority
Interest, satisfactory credit enhancements with respect to such Indemnification
obligations, or (ii) otherwise agrees to Indemnify the Series A Holders
pursuant to an Indemnification agreement in form and substance acceptable to
the Series A Holders. The Tax Matters Partner will not take any action
contemplated by Sections
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6221 through 6233 of the Code unless the Tax Matters Partner has first given
the Holders notice of the contemplated action. This Section 8.7 is not
intended to authorize the Tax Matters Partner to take any action that is left
to the determination of any individual Holder under Sections 6221 through 6233
of the Code.
(b) The Tax Matters Partner shall cause to be prepared and filed
by a nationally-recognized accounting firm, chosen by the Tax Matters Partner
and satisfactory to the Series A Majority Interest, all necessary federal, and
state income and other tax returns for the Trust based on and in accordance
with this Agreement, including Tax Representations, and, treating the
Reimbursed Transaction Expenses in excess of $100,000 (and all of the Excess
Transaction Expenses) as amortizable expenses under Section 195 or 709(b) of
the Code unless the Tax Matters Partner shall provide a written opinion
(setting forth in reasonable detail the facts and analysis upon which it is
based) of independent tax counsel selected by Tax Matters Partner and
satisfactory to the Series A Majority Interest to the effect that there is no
Reasonable Basis to take such a position on such tax returns based upon facts
that become known after the Effective Date or a change in the Code or
Regulations occurring after the Effective Date; provided, further, that such
opinion is delivered to the Series A Holders promptly upon its receipt and
prior to any Holder's filing of the federal tax return reflecting the failure
or delay in the claim. Not less than the earlier of (i) 45 days prior to the
date (as may be extended) on which the Trust intends to file each federal and
state income tax return, and (ii) as soon as practicable, but in no event later
than 150 days after the end of the taxable year, the Tax Matters Partner shall
furnish each Holder with a copy of the proposed return for its review and
comments and such reports as may be necessary for each Series A Holder to
complete its federal income tax return. Each Holder shall furnish to the Tax
Matters Partner all pertinent information in its possession relating to Trust
operations that is necessary to enable the Trust's income tax returns to be
prepared and filed.
(c) Subject to Sections 8.7(a) and 9.4 and consistent with
Sections 6221 through 6233 of the Code, each Holder will allow any adjustment
proposed by the IRS with respect to any "partnership item" (as defined in
Section 6231(a)(3) of the Code) to be handled by the Tax Matters Partner. If
any Holder intends to file a notice of inconsistent treatment under Section
6222(b) of the Code, to file, pursuant to Section 6227 of the Code, a request
for an administrative adjustment of any partnership item of the Trust, or to
file a petition under Sections 6226, 6228 or other sections of the Code with
respect to any partnership item or any other tax matter involving the Trust,
such Holder shall, at least 30 days prior to any such filing, notify the other
Holders of such intent, which notification must include a reasonable
description of the contemplated action and the reasons therefor.
(d) The provisions of this Section 8.7 will survive the
termination of the Trust or the termination of any Holder's interest in the
Trust and will remain binding on the Holders for the period of time necessary
to resolve with the IRS or the Department of the Treasury any and all federal
income tax matters relating to the Trust that are subject to Sections 6221
through 6233 of the Code.
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8.8 PAYMENT OF TRANSACTION EXPENSES. The Managing Trustee, on
behalf of the Trust, will apply part of the proceeds received from the sale of
the Series A COP's to pay, or reimburse the Series A Holders, for the
reasonable legal, engineering, environmental and other related fees and
expenses incurred by them in connection with the organization, negotiation,
documentation and closing of the Trust; provided that the aggregate legal fees
and expenses of the Series A Holders to be so paid or reimbursed will not
exceed $100,000 and the aggregate engineering fees and expenses incurred by the
Series A Holders to be paid or reimbursed by the Trust will not exceed $5,000.
The Managing Trustee will also pay, or reimburse the Depositor, from such
proceeds for all legal, engineering, environmental, Placement Agent and other
related fees and expenses incurred by it in connection with the organization,
negotiation, documentation and closing of the Trust, not to exceed $950,000.
Such transaction expenses of the Holders to be so paid or reimbursed shall be
as set forth on Exhibit 8.8 and shall be referred to herein collectively, as
"Reimbursed Transaction Expenses." Transaction expenses of any Holder in
excess of the Reimbursed Transaction Expenses (the "Excess Transaction
Expenses") shall be paid by the Trust only to the extent that such Holder
contributes additional Funding Transfers to the Trust for such purpose by no
later than December 31, 1995.
8.9 FINANCIAL ACCOUNTING. Each Holder may report the
transactions contemplated hereby for financial accounting purposes in such
manner as the Holder and its accountants may determine appropriate.
ARTICLE 9
INDEMNIFICATION
9.1 GENERAL INDEMNIFICATION BY SERIES B HOLDERS. The Series B
Holders shall jointly and severally Indemnify the Series A Holders from and
against any and all Claims that may be imposed on or asserted against the Trust
or any Series A Holder arising out of (a) the inaccuracy, breach or failure of
any warranty, representation or covenant made by any Series B Holder or any
Operator Affiliate in this Agreement, the Assignments or any Operating
Agreement, including (i) if the Managing Trustee is a Series B Holder or an
Affiliate thereof, the Managing Trustee's failure to comply with its
obligations hereunder; (ii) with respect to Claims imposed on or asserted
against the Trust, material adverse environmental condition of the Assets on
the Effective Date; or (iii) with respect to Claims imposed on or asserted
against any Holder, the environmental condition of the Assets on the Effective
Date; or (b) the Timmins Litigation. Notwithstanding the foregoing, this
Section 9.1 does not apply to the following types of Claims:
(i) Claims that are attributable to the (A) gross
negligence, willful misconduct or fraud of the Series A Holder seeking
Indemnification hereunder, or (B) inaccuracy, breach or failure of any
warranty, representation or covenant made in this Agreement by the
Series A Holder seeking Indemnification hereunder; and
(ii) Claims described in Section 9.4(a), for which Section
9.2 provides the sole and exclusive remedy.
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Each Series A Holder that seeks Indemnification under this Section 9.1 is an
"Indemnified Holder."
9.2 TAX INDEMNIFICATION BY SERIES B HOLDERS. (a) If as a result of
(i) an inaccuracy in any Tax Representation, or
(ii) any act or omission by the Series B Holder (including
any act or omission in respect of the Trust's role as a member of the
LLC) (other than negotiating and entering into this Agreement or the
LLC Agreement or any act permitted by Section 8.9) that causes (A) the
Properties not to qualify for Section 29 Tax Credits, (B) the Gas
Production not to qualify for Section 29 Tax Credits, (C) the Trust or
the LLC not to be taxed as a partnership for federal income tax
purposes, or (D) the allocations of income, gain, loss, deduction or
credit set forth in this Agreement or the LLC Agreement not to be
respected under Sections 704(b) or 704(c) of the Code.
any Series A Holder shall not have the right to claim, or shall suffer a
disallowance of, all or a portion of the Section 29 Tax Credits to which such
Series A Holder would otherwise be entitled under this Agreement to claim (the
amount of the loss of Section 29 Tax Credits for which the Series B Holders
must Indemnify the Series A Holders under this Section 9.2 is referred to
herein as "Indemnified Tax Credit Loss"), then, subject to Section 9.2(b), the
Series B Holders shall jointly and severally be obligated to pay to such Series
A Holder (the "Indemnified Holder") an indemnity with respect to such loss in
an aggregate amount determined pursuant to Section 9.4.
(b) Exclusions. The Indemnity provided by Section 9.2(a) to an
Indemnified Holder will not apply to any Indemnified Tax Credit Loss to the
extent that it results from one or more of the following events:
(i) any failure by the Indemnified Holder to timely or
properly claim any Section 29 Tax Credits, intangible drilling cost
deductions, depletion or depreciation (except as a result of an act or
omission described in Section 9.2(a)(ii));
(ii) any failure of the Indemnified Holder to have
sufficient income or tax liability to benefit fully on a quarterly
basis from Section 29 Tax Credits and other credits and deductions
allocated to such Indemnified Holder in accordance with this Agreement
from the Trust after giving effect to carryovers and carrybacks
(except as a result of an act or omission described in Section
9.2(a)(ii)(D));
(iii) any amendment to, or repeal of, the Code or the
Treasury Regulations promulgated thereunder subsequent to the
Effective Date (regardless of the effective date thereof);
(iv) any application of rules relating to short taxable
years (except as a result of an act or omission described in Section
9.2(a)(ii));
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(v) any failure of the Trust or the LLC to be treated as
a partnership for federal income tax purposes (except as a result of
an act or omission described in Section 9.2(a)(ii)(C));
(vi) any application of Sections 465, 469 or 29(b)(1),
(2), or (6) of the Code or the "alternative minimum tax" (as defined
in the Code); or
(vii) any disallowance or loss of the Section 29 Tax
Credits allocable to the Indemnified Holder as a direct result of the
Trust not being treated as an owner of the Properties (excluding any
Louisiana Assets) or the LLC not being treated as the owner of the
Louisiana Assets, for federal income tax purposes (except as a result
of an act or omission described in Section 9.2(a)(ii)).
9.3 GENERAL INDEMNIFICATION PROCEDURES. (a) The provisions of
Section 9.1 shall constitute the sole and exclusive remedies for the
Indemnified Holders with respect to the matters covered thereby, except that
this Section 9.3(a) will in no way limit (i) the right of the Holders to remove
the Managing Trustee under Section 7.7 or (ii) the calculation of Payout, other
than in determining amounts paid under subsection (e) of the definition of
"Series A Holders' After-Tax Cash Flow." All claims for Indemnification by
the Indemnified Holders under Section 9.1 will be asserted and resolved in
accordance with this Section 9.3, and the rights of the Indemnified Holders to
obtain such Indemnification is hereby conditioned on material compliance with
this Section 9.3.
(b) If a Series A Holder learns of an actual or potential Claim
for which the Series A Holder may seek Indemnification under Section 9.1, such
Series A Holder, as an Indemnified Holder, shall promptly notify the Series B
Holders thereof, specifying the nature of and specific basis for such Claim and
the actual or estimated amount thereof to the extent then feasible; provided,
however, that the failure to promptly provide such notice shall not terminate
the Indemnified Holders' right to Indemnification under Section 9.1, except to
the extent that the Series B Holders' ability to defend such Claim is
prejudiced by such delay. Each Series B Holder shall have 20 days from the
date such notice is delivered to notify all Indemnified Holders whether or not
it disputes its obligation to Indemnify the Indemnified Holders against such
Claim; and provided, however, that the Indemnified Holders are hereby
authorized prior to and during such 20-day period to file any motion, answer or
other pleading that may be necessary to protect their interests or those of the
Series B Holders (and of which notice and opportunity to comment has been given
by the Indemnified Holders to the Series B Holders) and that are not
prejudicial to the Series B Holders. If any Series B Holder notifies the
Indemnified Holders within such 20-day period that it does not dispute its
obligation to Indemnify the Indemnified Holders against such Claim, then,
except as hereinafter provided, the Series B Holder shall have the right
(together with all other Series B Holders that do not dispute their obligation
to Indemnify) to defend by all appropriate proceedings, and with counsel of
their own choosing, which proceedings will be promptly settled or prosecuted by
it to a final conclusion. If the Indemnified Holders desire to participate in,
but not control, any such defense or settlement, they may do so at their sole
cost and expense. If requested by any such Series B Holders, the Indemnified
Holders agree to cooperate with the Series B
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Holders, their insurers and their respective counsel in contesting any third
party Claims that the Series B Holders elect to contest, including with respect
to (x) choice of forum and other procedural matters, (y) any appeals that may
be requested by such Series B Holders, and (z) if related to the claim in
question, any counterclaim or cross-claim against the Person asserting the
claim giving rise to such Claim; provided, however, that such Series B Holders
(A) have furnished the Indemnified Holders with a written opinion of counsel to
such Series B Holders to the effect that a reasonable basis exists to contest
such Claim and (B) have agreed to reimburse the Indemnified Holders for all
out-of-pocket costs and expenses that the Indemnified Holders may incur in so
cooperating in the contest of such claim. No claim may be settled or otherwise
compromised without the prior written consent of the Series B Majority
Interest.
9.4 TAX INDEMNIFICATION PROCEDURES. (a) The provisions of
Section 9.2 shall constitute the sole and exclusive remedies for the
Indemnified Holders with respect to Claims that constitute taxes, tax
deductions, tax credits, other tax benefits, or, with respect to taxes, any
interest, penalties and additions to tax, except to the extent expressly set
forth in Section 9.5. The Series A Holders acknowledge that Section 9.2
constitutes their sole and exclusive right of Indemnification with respect to
losses of Section 29 Tax Credits; provided however, that the provisions of
Section 9.2 and this Section 9.4 in no way (i) limit the right of the Holders
to remove the Managing Trustee under Section 7.7 or (ii) affect the calculation
of Payout, other than in determining the appropriate amounts payable under
subsection (e) of the definition of "Series A Holders' After-Tax Cash Flow."
All claims for Indemnification by the Indemnified Holders under Section 9.2
will be asserted and resolved in accordance with this Section 9.4, and the
rights of the Indemnified Holders to obtain such Indemnification is hereby
conditioned on material compliance with this Section 9.4.
(b) In the case of any Indemnified Tax Credit Loss, the Tax
Matters Partner shall give the Series A Holders notice of such Indemnified Tax
Credit Loss within 30 days of learning of such Indemnified Tax Credit Loss.
Upon receipt of such written notice, the Indemnified Holders shall give the
Series B Holders a written certificate setting forth in reasonable detail the
computation of the sum of (i) the Section 29 Tax Credits attributable to such
Indemnified Tax Credit Loss, plus (ii) any interest, penalties and additions to
tax payable by the Indemnified Holder attributable to such Indemnified Tax
Credit Loss, minus (iii) any tax benefit from all deductions and credits
available to the Indemnified Holders as a result of such Indemnified Tax Credit
Loss. If the Series B Holders shall agree with such computations, the Series B
Holders shall pay such amount or amounts in accordance with Section 9.4(c). If
any Series B Holder shall disagree with such computations and so requests in a
written notice delivered to Indemnified Holder within 30 days following the
Series B Holders' receipt of the certificate, such amount shall be reviewed and
determined by an independent public accounting firm of national recognition
selected by the Indemnified Holders and acceptable to such Series B Holder.
The costs of such verification shall be borne by such Series B Holder, unless
the amount by which such verification shows the certificates to be incorrect is
greater than 10% of the correct amount, in which event such costs will be borne
by the Indemnified Holders. Each Indemnified Holder and any Affiliate agree to
cooperate with such independent accounting firm and to supply it with all
information reasonably necessary to permit it to accomplish such review and
determination.
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Such information will be for the confidential use of such accountants and may
not be disclosed to the Series B Holders, any other Series A Holder or any
other Person. The sole responsibility of the independent public accounting
firm shall be to verify the amount of a payment pursuant to this Section, and
matters of interpretation of this Section are not within the scope of the
independent accounting firm's responsibilities. The Series B Holders will have
no right to inspect the tax returns or books and records of the Indemnified
Holder or any Affiliate thereof.
(c) If an indemnity is due pursuant to Section 9.4(b) with regard
to an Indemnified Tax Credit Loss, the Series B Holders will pay the
Indemnified Holders an aggregate amount calculated in accordance with Section
9.4(b). Subject to the Series B Holders' contest rights outlined in Section
9.4(d), the Series B Holders shall pay the Indemnified Holders any indemnity
amount due under Section 9.4(b) within 30 days after the later of (i) the
Series B Holders' receipt of the written certificate pursuant to Section 9.4(b)
and, if required, (ii) the independent accounting firm's verification of the
computations in Indemnified Holder's notice to the Series B Holders pursuant to
Section 9.4(b).
(d) If any Series B Holder notifies the Indemnified Holders
within such 30-day period following its receipt of the written certificate
described in Section 9.4(b), that it desires to defend the Indemnified Holders
against such Indemnified Tax Credit Loss, then, except as hereinafter provided,
such Series B Holder shall have the right to defend (or direct the Tax Matters
Partner's defense) by all appropriate proceedings, and with counsel of the
Series B Holder's own choosing, which proceedings will be promptly settled or
prosecuted by them to a Final Determination. The Series B Holders shall
contest (or the Tax Matters Partner shall contest as directed by the Series B
Holders) in accordance with Article 8, and the Indemnified Holders shall waive
any right to individual participation in proceedings or exclusion from
partnership-level settlements; provided, however, that the Indemnified Holders
are hereby authorized prior to and during such 30-day period to file any
motion, answer or other pleading that may be necessary to protect their
interests or those of the Managing Trustee (and of which they have given notice
and opportunity to comment to the Managing Trustee) and that are not
prejudicial to the Managing Trustee. If the Indemnified Holders desire to
participate in, but not control, any such defense or settlement they may do so
at their sole cost and expense. The Series B Holders' liability for
indemnification under Section 9.4(c) shall be deferred until 30 days after a
Final Determination of the Indemnified Holder's liability. If requested by the
Series B Holders, the Indemnified Holders agree to cooperate with the Managing
Trustee, its insurers and their respective counsel in contesting any
Indemnified Tax Credit Losses that the Series B Holders elect to contest,
including with respect to (x) choice of forum and other procedural matters, (y)
any appeals that may be requested by the Series B Holders, and (z) if related
to the claim in question, any counterclaim or cross-claim against the Person
asserting the claim giving rise to such Indemnified Tax Credit Loss; provided,
however, that the Series B Holders (A) have furnished the Indemnified Holders
with a written opinion of counsel, satisfactory to such Indemnified Holders, to
the effect that a Reasonable Basis exists to contest such Indemnified Tax
Credit Loss and (B) have agreed to pay the Indemnified
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Holders for all out-of-pocket costs and expenses that the Indemnified Holders
may incur in cooperating in the contest of such claim.
9.5 GROSS-UP OF INDEMNITY. At the time that the Series B Holders
make any Indemnity payment under this Article 9, the Series B Holders shall
also pay as part of such indemnity an additional amount that, when added to
such Indemnification payment, will result in the recipients receiving an amount
equal to such Indemnity payment, after taking into account (i) all federal (but
not state and local) income taxes that are actually payable by the recipients
with respect to the receipt of such Indemnity payment, and (ii) all federal
(but not state and local) income tax deductions allowed to the recipients for
any items of loss and expense for which the recipients are being Indemnified.
In each case, the federal income tax rate shall be deemed to be 35%.
ARTICLE 10
DISSOLUTION, LIQUIDATION, AND TERMINATION
10.1 DISSOLUTION; BUYOUT OPTION. (a) The Trust will dissolve and
its business and affairs will be wound up on the first to occur of the
following (the "Liquidating Events"):
(i) the unanimous written consent of the Holders;
(ii) any Holder becomes Bankrupt, dissolves or withdraws
from the Trust unless, in any such case, Holders (other than the
Holder with respect to which such event occurs,) unanimously elect in
writing, within 90 days of the date such event described in Section
10.1(a)(ii) occurs, to continue the business of the Trust;
(iii) the Transfer by the Trust of all or substantially all
of the Assets, including pursuant to the exercise of the Purchase
Option; or
(iv) the date set forth in Section 2.7;
No other event will dissolve the Trust, including any other event occurring to
a Trustee (except to the extent a Trustee is also a Holder).
(b) Each Holder agrees that it will not dissolve or withdraw from
the Trust. If a Holder (y) becomes Bankrupt (within the meaning of the first
sentence, but not the second or third sentence, of the definition of "Bankrupt"
in Section 1.1) at a time when the Trust is solvent and not otherwise Bankrupt,
or (z) in violation of the immediately-preceding sentence, dissolves or
withdraws from the Trust (the "Affected Holder"), then, in addition to their
other rights under this Article 10, the other Holders will have the option, pro
rata in accordance with their respective Funding Account balances, and
exercisable by notice to the Affected Holder at any time prior to the 60th day
after receipt of notice of the occurrence of the event causing it to become an
Affected Holder, to buy, and on the exercise of this option the Affected Holder
shall sell, its Trust Interest (including the Certificates representing such
Trust Interest). The purchase price will be an amount equal to 80% of the fair
market value of the Trust Interest determined by agreement by the Affected
Holder
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and each other Holder that exercises such option, minus any damages incurred by
the other Holders as a result of such Bankruptcy, dissolution or withdrawal
(and any resulting dissolution of the Trust); provided, however, that if the
applicable Holders do not agree on the fair market value on or before the 30th
day following the exercise of the option, any such Holder, by notice to the
others, may require the determination of fair market value to be made by an
independent appraiser specified in that notice. If the Holder receiving that
notice objects on or before the tenth day following receipt to the independent
appraiser designated in that notice, and those Holders otherwise fail to agree
on an independent appraiser, any such Holder may request the AAA to designate
an independent appraiser. The determination of the independent appraiser,
however designated, is final and binding on all parties. The Affected Holder,
on the one hand, and the Holders exercising such option, on the other hand,
shall each shall pay one-half of the costs of the appraisal. The purchasing
Holders shall pay the fair market value as so determined in four equal cash
installments, the first due on closing and the remainder (together with
accumulated interest on the amount unpaid at the Prime Rate) due on each of the
first three anniversaries of the closing. As the Affected Holder will no
longer be a Holder, such payments will be in lieu of any distributions to which
the Affected Holder would otherwise have been entitled under Section 10.2(c)
(if the Trust is liquidated).
10.2 LIQUIDATION AND TERMINATION. On dissolution of the Trust,
the Managing Trustee shall act as liquidator or may appoint one or more other
Persons as liquidator; provided, however, that if the Trust dissolves on
account of an event of the type described in Section 10.1(a)(ii) occurring with
respect to the Managing Trustee, the liquidator will be one or more Persons
selected in writing by the Series A Supermajority Interest and the Series B
Majority Interest. The liquidator shall proceed diligently to wind up the
affairs of the Trust and make final distributions as provided in this
Agreement. The costs of liquidation will be borne as a Trust expense. Until
final distribution, the liquidator shall continue to operate the Trust
properties with all of the power and authority of the Managing Trustee. The
steps to be accomplished by the liquidator are as follows:
(a) as promptly as reasonably practicable after
dissolution and again after final liquidation, the liquidator shall
cause a proper accounting to be made by a recognized firm of certified
public accountants of the Trust's assets, liabilities, and operations
through the last day of the calendar month in which the dissolution
occurs or the final liquidation is completed, as applicable;
(b) the liquidator shall sell all Trust assets and pay
from Trust funds all of the debts and liabilities of the Trust
(including all expenses incurred in liquidation and any unpaid
principal and interest of any Working Capital Loans) or otherwise make
adequate provision for them (including the establishment of a cash
escrow fund for contingent liabilities in such amount and for such
term as the liquidator may reasonably determine); and
(c) any gain or loss resulting from the sale of Trust
assets will be computed and allocated to the Funding Accounts of the
Holders and the proceeds remaining after the payments and provisions
made pursuant to Section 10.2(b) will be
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distributed among the Holders in accordance with the positive Funding
Account balances of the Holders, as determined after taking into
account all Funding Account adjustments for the taxable year of the
Trust during which the liquidation of the Trust occurs; and those
distributions will be made by the end of the taxable year of the Trust
during which the liquidation of the Trust occurs (or, if later, 90
days after the date of the liquidation).
The distribution to a Holder in accordance with the provisions of this Section
10.2 constitutes a complete return to the Holder of its Funding Transfers and a
complete distribution to the Holder of its Trust Interest and all the Trust's
property. To the extent that a Holder returns funds to the Trust, it has no
claim against any other Holder for those funds.
10.3 TERMINATION. On completion of the distribution of Trust
assets as provided in this Agreement, the Trust is terminated, and the Managing
Trustee (or such other Person or Persons as the Act may require or permit)
shall cause the cancellation of the Certificate and any filings made as
provided in Section 2.5 and shall take such other Delaware actions as may be
necessary to terminate the Trust. The provisions of Sections 9.1, 9.3 and 9.5
will survive any termination of the Trust. The provisions of Sections 9.2 and
9.4 will survive termination of the Trust only if such termination occurs as a
result of the purchase by the Depositor of the Purchase Option Assets pursuant
to Section 11.3.
ARTICLE 11
PURCHASE OPTION
11.1 PURCHASE OPTION. Depositor shall have the right to purchase
all Assets owned by Trust and the LLC Interest (the "Purchase Option Assets")
from the Trust on the Exercise Date at a price (the "Exercise Price") equal to
the fair market value of the Purchase Option Assets as established in this
Section 11.1. Depositor may exercise this right by written notice to the
Holders given not more than 180 days, nor less than 60 days, prior to the
Exercise Date. After delivery of such notice, the Depositor, the Series A
Supermajority Interest and Series B Majority Interest shall mutually attempt to
determine the fair market value of the Assets as of the Exercise Date. If the
Depositor, the Series A Supermajority Interest and Series B Majority Interest
fail to agree upon such fair market value within 30 days after the Holders'
receipt of Depositor's notice, the Depositor, the Series A Supermajority
Interest or the Series B Majority Interest may require that the fair market
value of the Purchase Option Assets be determined in accordance with Section
11.2.
11.2 APPRAISAL. (a) After the thirty (30)-day period mentioned in
Section 11.1, the Depositor, the Series A Supermajority Interest or Series B
Majority Interest may invoke the appraisal procedure of this Section 11.2 by
written notice to the others. If an appraisal is required pursuant to this
Section 11.2, each of the Depositor, the Series A Majority Interest and the
Series B Majority Interest shall consult for the purpose of appointing a
mutually acceptable, qualified investment banking firm of national reputation
with no conflict of interest with respect to Depositor or any Holder, and with
substantial experience in the valuation of natural gas reserves (a "Qualified
Expert"). If such parties are unable
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to agree on a single Qualified Expert within ten (10) days, then the appraisal
shall be arrived at by mutual agreement of two Qualified Experts, one chosen by
the Depositor and one chosen by the Series A Supermajority Interest (and, if
the Depositor is not an Affiliate of any Series B Holder, the Series B Majority
Interest), and, if such appraisers cannot agree on the amount of such
appraisal, their appraisals shall be treated in the manner described in Section
11.2(b) below (with an appraisal arrived at by a third Qualified Expert chosen
by the mutual consent of such two appraisers); provided, however; that if
either the Depositor on the one hand or the Series A Supermajority Interest
(and, if the Depositor is not an Affiliate of any Series B Holder, Series B
Majority Interest) on the other, shall fail to appoint a Qualified Expert
within fifteen (15) days after a written request to do so by the other party,
or if such two appraisers cannot agree on the amount of such appraisal and fail
to appoint a third Qualified Expert within twenty (20) days after the date of
appointment of the second of such Qualified Experts, then either party may
initiate an arbitration proceeding with the AAA for purposes of appointing a
Qualified Expert. At any time prior to final determination of the market value
of the Purchase Option Assets pursuant to this Section 11.2, each of the
Depositor, the Series A Supermajority Interest and the Series B Majority
Interest shall be entitled to submit to the appraisers (and shall submit to
each other any bids submitted to the appraisers) bids from unrelated third
parties, and such bids shall be accorded the weight such appraisers deem
appropriate. Each of the Depositor, the Series A Supermajority Interest and
the Series B Majority Interest shall each have an opportunity to comment on any
such bids after receiving a copy thereof.
(b) If one appraiser is chosen, the value determined by such
appraiser shall be final and binding upon each of the Depositors and the
Holders. If two appraisers are chosen, one appraiser by the Depositor and one
by the Series A Supermajority Interest (and, if the Depositor is an Affiliate
of any Series B Holder, jointly with the Series B Majority Interest) and such
appraisers agree on the value, such value shall be final and binding upon the
Depositor and the Holders. If three appraisers shall be appointed and the
differences between the determination which is farther from the middle is more
than 125% of the difference between the middle determination and the third
determination, then such farther determination shall be excluded, the remaining
two determinations shall be averaged, and such average shall be final and
binding upon the Depositor and the Holders. Otherwise, the average of all
three determinations shall be final and binding upon the Depositor and the
Holders.
(c) Any appraisal pursuant to this Section 11.2 shall be
conducted in accordance with the commercial rules of the AAA as then in effect,
to the extent not in conflict with the provisions of this Section 11.2.
(d) If the Exercise Price is determined pursuant to this Section
11.2, the Depositor may elect to withdraw its election to purchase the Purchase
Option Assets by notice to the Holders given within 10 days after receipt by
the Depositor from the appraisers of written determination of fair market value
under this Section 11.2.
(e) Each party shall bear its own costs and expenses and share
prorata in accordance with their Sharing Ratios, the costs and expenses of the
appraiser or appraisers,
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provided that if the Depositor withdraws its election to purchase pursuant to
Section 11.2(d), the Depositor shall pay all of the costs and expenses of the
appraiser or appraisers.
11.3 CLOSING OF PURCHASE OPTION. On a date selected by Depositor
in a notice to the Holders (the "Purchase Option Closing Date), which date
shall be no sooner than five (5) days, nor later than thirty (30) days, after
the later of (i) the date the fair market value is established under Section
11.1 or 11.2 or (ii) expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act (the "HSR Act") if a filing is
required thereunder, unless Depositor has withdrawn its election to purchase
pursuant to Section 11.2, the Trust and the LLC shall convey to Depositor the
Purchase Option Assets, without representations or warranties (other than that,
neither the Trust nor the LLC has taken any action to encumber or convey the
Purchase Option Assets) against payment therefor, by wire transfer to an
account in a bank located in the United States designated by the Managing
Trustee for such purpose, in an amount equal to the Exercise Price, as adjusted
to reflect the terms and conditions of the three immediately succeeding
sentences of this Section 11.3. The Trust shall pay and be responsible for all
costs, expenses, taxes, royalties and other burdens incurred with respect to
the Assets which are attributable to the period prior to the Purchase Option
Closing Date, and the Depositor shall pay and be responsible for all costs,
expenses, taxes, royalties and other burdens incurred with respect to the
Assets that are attributable to the period from and after the Purchase Option
Closing Date. The Trust shall be entitled to all revenues attributable to
production from the Properties which occurred prior to the Purchase Option
Closing Date and the Depositor shall be entitled to all revenues attributable
to production from the Properties which occurs from and after the Purchase
Option Closing Date. The Depositor shall assume all obligations attributable
to the Assets, including environmental obligations and plugging and abandoning
obligations, existing or arising in the future in connection with the Assets.
The right of Depositor to purchase the Assets shall be a covenant running with
the land and shall be enforceable against any successor or assignee of the
Trust. The Depositor and the Holders agree to make such filings, if any,
required under the HSR Act in connection with any purchase under this Article
11. The Depositor will pay all filing fees required under the HSR Act. Except
for such filing fees under the HSR Act, each party shall bear all costs and
expenses incurred by it in connection with the sale of the Purchase Option
Assets pursuant this Section 11.3.
ARTICLE 12
GENERAL PROVISIONS
12.1 OFFSET. Whenever the Trust is to pay any sum to any Holder
(including any amounts owed under any Working Capital Loan), any amounts that
Holder owes the Trust may be deducted from that sum before payment.
12.2 NOTICES. All notices, requests, or consents provided for or
permitted to be given under this Agreement must be in writing and must be given
either by depositing that writing in the United States mail, addressed to the
recipient, postage paid, and registered or certified with return receipt
requested or by delivering that writing to the recipient in person, by courier,
or by facsimile transmission. A notice, request, or consent given under
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this Agreement is effective on receipt at the address of the Person to receive
it. All notices, requests, and consents to be sent to a Holder must be sent to
or made at the addresses given for that Holder on Exhibit 1.1.1P or in the
instrument executed by such Holder when it was admitted the Trust, or such
other address as that Holder may specify by notice to the other Holders. Any
notice, request, or consent to the Trust must be given to the Managing Trustee.
12.3 ENTIRE AGREEMENT; SUPERSEDURE. This Agreement, together with
the Guaranty, the Assignments and the New Operating Agreements, constitutes the
entire agreement of the Holders and their Affiliates relating to the Trust and
supersedes all prior contracts or agreements with respect to the Trust, whether
oral or written, including those certain letter agreements dated May 26, 1995
and July 5, 1995, between Seagull and an Affiliate of FC Energy.
12.4 EFFECT OF WAIVER OR CONSENT. A waiver or consent, express or
implied, to or of any breach or default by any Person in the performance by
that Person of its obligations with respect to the Trust is not a consent or
waiver to or of any other breach or default in the performance by that Person
of the same or any other obligations of that Person with respect to the Trust.
Failure on the part of a Person to complain of any act of any Person or to
declare any Person in default with respect to the Trust, irrespective of how
long that failure continues, does not constitute a waiver by that Person of its
rights with respect to that default until the applicable statute-of-limitations
period has run.
12.5 AMENDMENT OR MODIFICATION. This Agreement may be amended or
modified from time to time only by a written instrument executed by the
Depositor, Managing Trustee, the Series A Supermajority Interest and the Series
B Majority Interest; provided, however, that (a) an amendment or modification
reducing a Holder's Sharing Ratio or Funding Account balance (other than to
reflect changes otherwise provided by this Agreement) is effective only with
that Holder's consent, (b) an amendment or modification reducing the required
Sharing Ratio or other measure for any consent or vote in this Agreement is
effective only with the consent or vote of Holders having the Sharing Ratio or
other measure previously required, and (c) amendments of the type described in
Section 4.4 may be adopted as provided in that Section.
12.6 BINDING EFFECT. Subject to the restrictions on Transfers set
forth in this Agreement, this Agreement is binding on and inures to the benefit
of the Holders and their respective heirs, legal representatives, successors,
and assigns.
12.7 GOVERNING LAW; SEVERABILITY. THIS AGREEMENT IS GOVERNED BY
AND WILL BE CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF DELAWARE,
EXCLUDING ANY CONFLICT-OF-LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE
GOVERNANCE OR THE CONSTRUCTION OF THIS AGREEMENT TO THE LAW OF ANOTHER
JURISDICTION. Notwithstanding the foregoing, and except as set forth in the
proviso to Section 3809 of the Act (regarding Delaware state tax
classification), the Holders and the Trustees hereby disclaim any applicability
to this Agreement of the laws of the State of Delaware that pertain to trusts,
other than the Act
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<PAGE> 81
itself. If any provision of this Agreement or its application to any Person or
circumstance is held invalid or unenforceable to any extent, the remainder of
this Agreement and the application of that provision to other Persons or
circumstances is not affected and that provision will be enforced to the
greatest extent permitted by applicable Law.
12.8 FURTHER ASSURANCES. In connection with this Agreement and
the transactions contemplated by it, each Holder shall execute and deliver any
additional documents and instruments and perform any additional acts that may
be necessary or appropriate to effectuate and perform the provisions of this
Agreement and those transactions.
12.9 WAIVER OF CERTAIN RIGHTS. Each Holder irrevocably waives any
right it may have to maintain any action for dissolution of the Trust or for
partition of the property of the Trust.
12.10 COUNTERPARTS. This Agreement may be executed in any number
of counterparts with the same effect as if all signing parties had signed the
same document. All counterparts will be construed together and constitute the
same instrument.
12.11 DISCLAIMER OF AGENCY. This Agreement does not create any
partnership beyond the scope set forth herein and except as otherwise expressly
provided herein, this Agreement shall not constitute any Trustee or Holder the
legal representative or agent of the other, nor shall any Trustee or Holder
have the right or authority to assume, create or incur any liability or
obligation, express or implied, against, in the name of or on behalf of any
other Trustee or Holder or the Trust.
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<PAGE> 82
EXECUTED as of the Effective Date.
DEPOSITOR, MANAGING TRUSTEE
AND INITIAL SERIES B HOLDER:
SEAGULL ENERGY E&P INC.
By: /s/ ROBERT M. KING
----------------------------
Robert M. King
Vice President and Treasurer
INITIAL SPECIAL TRUSTEE: /s/ MARK A. FERRUCCI
---------------------------------
Mark A. Ferrucci
INITIAL SERIES A HOLDERS: FC ENERGY FINANCE I, INC.
By: /s/ JOHN M. EBER
-----------------------------
John M. Eber
Vice President
CARTHAGE FIELD CORP.
By: /s/ LYDIA E. YORK
-----------------------------
Lydia E. York
President
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<PAGE> 83
STATE OF TEXAS
COUNTY OF HARRIS
This instrument was acknowledged before me on September 1, 1995 by
Robert M. King, Vice President and Treasurer of SEAGULL ENERGY E&P INC., a
Delaware corporation, on behalf of the said corporation.
/s/ GLENNDA GRIGSBY
[SEAL] -----------------------------
Notary Public, in and for
THE STATE OF TEXAS
My Commission Expires:
- ------------------------
STATE OF DELAWARE
COUNTY OF NEW CASTLE
--------------
This instrument was acknowledged before me on August 31, 1995 by Mark
A. Ferrucci.
/s/ CONNIE U. DENNY
-------------------------------
Notary Public, in and for
THE STATE OF DELAWARE
My Commission Expires:
September 22, 1995
- ------------------------
STATE OF TEXAS
COUNTY OF HARRIS
This instrument was acknowledged before me on September 1, 1995 by
John M. Eber, Vice President of FC ENERGY FINANCE I, INC., a Delaware
corporation, on behalf of the said corporation.
/s/ GLENNDA GRIGSBY
[SEAL] -------------------------------
Notary Public, in and for
THE STATE OF TEXAS
My Commission Expires:
- ------------------------
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<PAGE> 84
STATE OF TEXAS
COUNTY OF HARRIS
This instrument was acknowledged before me on September 1, 1995 by
Lydia E. York, President of CARTHAGE FIELD CORP., a Delaware corporation, on
behalf of the said corporation.
/s/ GLENNDA GRIGSBY
[SEAL] -------------------------------
Notary Public, in and for
THE STATE OF TEXAS
My Commission Expires:
- -----------------------
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<PAGE> 1
EXHIBT 10.2
GUARANTY
This GUARANTY is made and entered into as of the Effective Date (as
defined below) by SEAGULL ENERGY CORPORATION, a Texas corporation
("Guarantor"), in favor of the Beneficiaries (as defined below).
RECITALS:
1. Guarantor owns all of the issued and outstanding common stock
of Seagull Energy E&P Inc., a Delaware corporation ("Seagull E&P").
2. Seagull E&P, as Depositor, initial Series B Holder and
Managing Trustee, Mark A. Ferrucci, as Special Trustee, and FC Energy Finance
I, Inc., a Delaware corporation ("FC Energy"), and Carthage Field Corp., a
Delaware corporation ("Carthage"), as Series A Holders, are this day forming
Seagull Series 1995 Trust as a Delaware business trust (the "Trust") pursuant
to that certain Trust Agreement, of even date herewith (the "Trust Agreement").
Capitalized terms that are used but not defined herein shall have the meanings
given them in the Trust Agreement.
3. Seagull E&P is the Depositor, Managing Trustee and the initial
Series B Holder and FC Energy and Carthage are the initial Series A Holders.
For the purposes hereof, "Beneficiaries" shall mean collectively, the Series A
Holders, the Trust and the Trustees (unless such Trustee is an Affiliate of
Guarantor). As used herein, the term "Obligor" shall mean Seagull E&P,
Mid-South, Midcon and each other Person that (a) becomes a Holder, Managing
Trustee or an Operator Affiliate and (b) at such time is an Affiliate of
Guarantor.
NOW THEREFORE, to induce the Beneficiaries to enter into the Trust
Agreement, Guarantor agrees as follows:
ARTICLE 1
GUARANTY
1.1 GUARANTY. Guarantor hereby irrevocably, absolutely and
unconditionally guarantees the full and prompt payment by Obligor of all
amounts that Obligor may become obligated to pay under the Trust Agreement, any
Assignment or any Operating Agreement, including any payments due under
Sections 5.5, 6.5, 7.9 and 7.11 and Article 9 of the Trust Agreement and money
damages arising from any failure by an Obligor to perform any non-payment
obligation (the "Obligations").
<PAGE> 2
1.2 IRREVOCABILITY. This Guaranty is an irrevocable and
continuing guaranty that will remain in full force and effect until all of the
Obligations are either paid in full or otherwise fully and finally discharged
and satisfied, at which time this Guaranty shall automatically terminate.
1.3 NATURE OF GUARANTY. (a) This Guaranty is a guaranty of
payment and not of collection. Accordingly, the Beneficiaries need not enforce
any rights or remedies they may have against any Obligor before exercising
their rights against Guarantor under this Guaranty.
(b) Being a guaranty of payment, this Guaranty is not a guaranty
of performance and does not obligate Guarantor to perform any non-payment
obligations of Obligor under the Trust Agreement, any Assignment or any
Operating Agreement, except to the extent that any failure by Obligor to
perform any such non-payment obligation has evolved into a payment obligation
under the Trust Agreement, any Assignment or any Operating Agreement.
1.4 WAIVERS. Guarantor hereby waives (a) presentment, demand,
protest, promptness and diligence with respect to the Obligations and this
Guaranty, (b) any right of subrogation it may have against Obligor with respect
to any payment Guarantor makes under this Guaranty, and (c) notices of all
kinds with respect to the Obligations and this Guaranty, including (i) notice
of protest, non-payment, default and dishonor, (ii) any notices with respect to
any of the events described in Section 1.5, and (iii) notice of acceptance of
this Guaranty (acceptance on the part of the Beneficiaries being conclusively
presumed by the Initial Series A Holders' and the Trust's request for this
Guaranty and delivery of the same to them).
1.5 GUARANTY UNAFFECTED BY CERTAIN EVENTS. The obligations of
Guarantor under this Guaranty are absolute and unconditional, irrespective of
any lack of value, genuineness, validity, legality, regularity or
enforceability of the Trust Agreement or any part of the Obligations or any
agreement or instrument relating to the Obligations, or any substitution,
release or exchange of any other guarantee of or security for any of the
Obligations, and, to the fullest extent permitted by applicable Law,
irrespective of any other circumstance whatsoever that might otherwise
constitute a legal or equitable discharge or defense of a surety or guarantor;
Guarantor shall, however, have the benefit of and the right to assert any
defenses against the claims of any Beneficiary which are available to any
Obligor (other than any defenses arising out of or relating to the bankruptcy,
insolvency or dissolution of any Obligor). Without limiting the generality of
the foregoing, it is agreed that this Guaranty will not be released,
terminated, diminished, impaired or otherwise affected by the occurrence of any
of the following events:
(a) any amendment or other modification of the Trust
Agreement, the Assignments or the Operating Agreements, including any
increase, decrease, extension, renewal, rearrangement or other
amendment or modification of any of the Obligations;
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<PAGE> 3
(b) any failure of the Beneficiaries to exercise their
rights under the Trust Agreement, any delay by the Beneficiaries in
exercising such rights; or any release, waiver, adjustment,
indulgence, forbearance or compromise with respect to such rights;
(c) the creation or existence of any other guaranty,
security, collateral or other assurance of payment for the repayment
of all or any of the Obligations ("Additional Security"); any failure
of the Beneficiaries to exercise such rights; any delay by the
Beneficiaries in exercising such rights, including any deterioration
of any Additional Security caused thereby; any release, waiver,
adjustment, indulgence, forbearance or compromise with respect to such
rights; any failure of any such Additional Security to be properly
created or perfected; any subordination of any Additional Security;
(d) any failure to join any Obligor in any suit under
this Guaranty, and any failure to join Guarantor in any suit with
respect to the Obligations or any Additional Security;
(e) any Transfer by a Beneficiary of its rights,
interests and obligations under the Trust Agreement, this Guaranty or
any Additional Security;
(f) any consent to any Transfer by any Obligor of its
rights, interests and obligations under the Trust Agreement;
(g) any Bankruptcy, insolvency or dissolution of any
Obligor;
(h) any other action taken or omitted to be taken with
respect to the Obligations or the Additional Security, whether or not
such action or omission prejudices Guarantor or increases the
likelihood that Guarantor will be required to pay the Obligations
pursuant to the terms hereof;
(i) any merger or consolidation of, sale of substantial
assets by or other restructuring or termination of the corporate
existence of Guarantor or any Obligor into or with any other Person,
or any consent thereto;
(j) any change in the beneficial ownership of or
interests in Guarantor or any Obligor; or
(k) any regulatory change or other governmental action.
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<PAGE> 4
1.7 RETURNED PAYMENTS. This Guaranty will continue to be
effective or be automatically reinstated, as the case may be, if any payment of
any of the Obligations is rescinded, or must otherwise be returned by any
Beneficiary, for any reason, including the Bankruptcy of any Obligor, all as
though such payment had not been made. In such event, Guarantor shall pay to
such Beneficiary an amount equal to any such payment that has been rescinded or
returned and shall indemnify such Beneficiary on demand for all reasonable
costs and expenses (including reasonable attorneys' fees) incurred by such
Beneficiary in connection with its compliance with or reasonable resistance to
any such rescission or return.
1.8 REPRESENTATIONS AND WARRANTIES. Guarantor represents and
warrants to, and agrees with, the Beneficiaries as follows:
(a) Guarantor is duly incorporated, validly existing and
in good standing under the Laws of the State of Texas. Guarantor has
the right, power and authority to enter into this Guaranty and to
perform its obligations hereunder.
(b) The execution, delivery and performance of this
Guaranty by Guarantor (i) have been duly authorized by all requisite
corporate action of Guarantor, (ii) do not violate or conflict with
the Articles of Incorporation or Bylaws of Guarantor or any Law,
material contract or material obligation applicable to Guarantor or
any of its properties, and (iii) do not require any material consent,
approval, authorization or order of any Governmental Authority or
other Person with respect to the Guarantor, except for ones that have
been previously obtained.
(c) This Guaranty represents legal, valid and binding
obligations of Guarantor.
(d) The execution and delivery of the Trust Agreement,
the Assignments and the New Operating Agreements is reasonably
expected to benefit, directly or indirectly, Guarantor.
(e) Guarantor has established adequate means of obtaining
financial and other information pertaining to the business, operations
and condition (financial and otherwise) of Obligor and the Assets on a
continuing basis and Guarantor is now and will in the future remain
fully familiar with the business, operations and condition (financial
and otherwise) of Obligor and the Assets. Guarantor further
represents and warrants that it is familiar with the transactions
contemplated by the Trust Agreement and that it will in the future
remain fully familiar with such transactions and with any new,
amended, modified or revised Trust Agreement and the transactions
contemplated thereby. Guarantor hereby expressly waives and
relinquishes any duty on the part of any Beneficiary (should any such
duty exist) to disclose to Guarantor any matter of fact or other
information related to the business,
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<PAGE> 5
operations or condition (financial or otherwise) of Obligor or the
Assets or to the Trust Agreement or the transactions undertaken
pursuant to, or contemplated by, such Trust Agreement, whether now or
in the future known by any Beneficiary.
1.9 CONTROL OF OBLIGOR. Guarantor agrees that it will not cease
to control any Obligor, directly or indirectly, other than (i) in the case of
Seagull E&P, as contemplated in Section 4.2(f)(ii) of the Trust Agreement, and
(ii) in the case of any other Obligor, in a transaction that would be permitted
under Section 4.2(f)(ii) of the Trust Agreement if such Obligor were the Series
B Holder under such Section 4.2(f)(ii).
1.10 SUBORDINATION. Guarantor hereby subordinates any and all
indebtedness of Obligor owing to it, whether now existing or hereafter arising,
to the full and final satisfaction by Obligor of all of the Obligations.
1.11 ENFORCEMENT. Guarantor hereby agrees to pay all costs and
expenses, including reasonable attorneys' fees and disbursements, incurred by
any Beneficiary in the enforcement of any and all terms of this Guaranty after
a claim for payment has been made against Guarantor.
1.12 TERMINATION. This Guaranty shall terminate as to any
Obligations of any Obligor arising after the time that Guarantor ceases to
Control such Obligor in accordance with the provisions of Section 1.9.
ARTICLE 2
GENERAL PROVISIONS
2.1 NOTICES. All notices, requests, or consents to Guarantor
under this Guaranty must be in writing and must be given either by depositing
that writing in the United States mail, addressed to Guarantor, postage paid,
and registered or certified with return receipt requested or by delivering that
writing to Guarantor in person, by courier, or by facsimile transmission, at
the following address (or such other address as Guarantor may specify by notice
to the Beneficiaries):
Seagull Energy Corporation
1001 Fannin, Suite 1700
Houston, Texas 77002-6714
Attention: Vice President, Corporate Development
and Treasurer
Fax: (713) 951-4846
A notice, request, or consent given under this Guaranty is effective on receipt
at such address.
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<PAGE> 6
2.2 ENTIRE GUARANTY; SUPERSEDURE. This Guaranty constitutes the
entire agreement of Guarantor and the Beneficiaries relating to the guarantee
of the Obligations and supersedes all prior contracts or agreements with
respect to thereto, whether oral or written, including those certain letter
agreements dated May 26, 1995 and July 5, 1995, between an Affiliate of FC
Energy and Guarantor.
2.3 EFFECT OF WAIVER OR CONSENT. A waiver or consent, express or
implied, to or of any breach or default by Guarantor in the performance of its
obligations hereunder is not a consent or waiver to or of any other breach or
default in the performance by Guarantor of any other obligations of Guarantor
hereunder. Failure on the part of the Beneficiaries to complain of any act of
Guarantor or to declare Guarantor in default with respect hereunder,
irrespective of how long that failure continues, does not constitute a waiver
by the Beneficiaries of their rights with respect to that default until the
applicable statute-of-limitations period has run.
2.4 AMENDMENT OR MODIFICATION. This Guaranty may be amended or
modified from time to time only by a written instrument executed by Guarantor
and the Series A Supermajority Interest.
2.5 BINDING EFFECT. This Guaranty (a) is binding on Guarantor and
its successors and assigns, and (b) subject to the restrictions on Transfers
set forth in the Trust Agreement, will inure to the benefit of the
Beneficiaries and their respective legal representatives, successors, and
assigns.
2.6 GOVERNING LAW; SEVERABILITY. THIS GUARANTY IS GOVERNED BY AND
WILL BE CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS, EXCLUDING
ANY CONFLICT-OF-LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE GOVERNANCE OR THE
CONSTRUCTION OF THIS GUARANTY TO THE LAW OF ANOTHER JURISDICTION. If any
provision of this Guaranty or its application to any circumstance is held
invalid or unenforceable to any extent, the remainder of this Guaranty and the
application of that provision to other circumstances is not affected and that
provision will be enforced to the greatest extent permitted by applicable Law.
EXECUTED as of the Effective Date.
SEAGULL ENERGY CORPORATION
By: /s/ ROBERT M. KING
-----------------------------------------
Robert M. King
Vice President, Corporate Development and
Treasurer
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<PAGE> 1
EXHIBIT 10.3
SEVERANCE AGREEMENT
AGREEMENT between SEAGULL ENERGY CORPORATION, a Texas corporation (the
"COMPANY"), and BARRY J. GALT ("EXECUTIVE"),
W I T N E S S E T H :
WHEREAS, the Company desires to retain certain key employee personnel
and, accordingly, the Board of Directors of the Company (the "BOARD") has
approved the Company entering into a severance agreement with Executive in
order to encourage his continued service to the Company; and
WHEREAS, Executive is prepared to commit such services in return for
specific arrangements with respect to severance compensation and other
benefits;
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the Company and Executive agree as follows:
1. DEFINITIONS.
(a) "CHANGE IN DUTIES" shall mean the occurrence, within
two years after the date upon which a Change of Control occurs, of any one or
more of the following:
(i) A significant reduction in the duties of
Executive from those applicable to him immediately prior to the date
on which a Change of Control occurs;
(ii) A reduction in Executive's annual salary or
target opportunity under any applicable bonus or incentive
compensation plan from that provided to him immediately prior to the
date on which a Change of Control occurs;
(iii) Receipt of employee benefits (including but
not limited to medical, dental, life insurance, accidental, death, and
dismemberment, and long-term disability plans) and perquisites by
Executive that are materially inconsistent with the employee benefits
and perquisites provided by the Company to executives with comparable
duties; or
(iv) A change in the location of Executive's
principal place of employment by the Company by more than 50 miles
from the location where he was principally employed immediately prior
to the date on which a Change of Control occurs.
(b) "CHANGE OF CONTROL" means the occurrence of either of
the following events:
(i) The Company (A) shall not be the surviving
entity in any merger, consolidation or other reorganization (or
survives only as a subsidiary of an
<PAGE> 2
entity other than a previously wholly-owned subsidiary of the Company)
or (B) is to be dissolved and liquidated, and as a result of or in
connection such transaction, the persons who were directors of the
Company before such transaction shall cease to constitute a majority
of the Board; or
(ii) Any person or entity, including a "GROUP" as
contemplated by Section 13(d)(3) of the Securities Exchange Act of
1934, as amended, acquires or gains ownership or control (including,
without limitation, power to vote) of 20% or more of the outstanding
shares of the Company's voting stock (based upon voting power), and as
a result of or in connection with such transaction, the persons who
were directors of the Company before such transaction shall cease to
constitute a majority of the Board.
(c) "CODE" shall mean the Internal Revenue Code of 1986,
as amended.
(d) "COMPENSATION" shall mean the greater of:
(i) Executive's annual salary plus his Targeted
EIP Award immediately prior to the date on which a Change of Control
occurs, or
(ii) Executive's annual salary plus his Targeted
EIP Award at the time of his Involuntary Termination.
(e) "EIP" shall mean the Seagull Energy Corporation
Executive Incentive Plan or any successor thereto.
(f) "INVOLUNTARY TERMINATION" shall mean any termination
of Executive's employment with the Company which:
(i) does not result from a resignation by Executive
(other than a resignation pursuant to clause (ii) of this subparagraph
(f)); or
(ii) results from a resignation by Executive on or
before the date which is sixty days after the date upon which
Executive receives notice of a Change in Duties;
provided, however, the term "INVOLUNTARY TERMINATION" shall not include a
Termination for Cause or any termination as a result of death, disability under
circumstances entitling him to benefits under the Company's long-term
disability plan, or Retirement.
(g) "OBJECTIVE EIP AWARD" shall mean, with respect to
Executive, the amount, if any, earned under the objective criterion of the EIP
in effect for the calendar year preceding Executive's Involuntary Termination.
(h) "RETIREMENT" shall mean Executive's resignation on or
after the date he reaches age sixty-five.
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<PAGE> 3
(i) "SEVERANCE AMOUNT" shall mean an amount equal to 2.99
times Executive's Compensation, reduced by the present value of any salary
continuation or severance payments payable to Executive under any other Company
plan, policy or agreement, other than a "plan" within the meaning of section
3(3) of the Employee Retirement Income Security Act of 1974, as amended. Such
present value shall be determined using the rate of interest referred to in
Paragraph 4 hereof as of the last day of Executive's employment with the
Company.
(j) "TARGETED EIP AWARD" shall mean Executive's Incentive
Target as set forth under the EIP in effect for the year with respect to which
such award is being determined, if any, or for the last preceding year in which
an EIP was in effect, expressed as a dollar amount based on such Executive's
annual salary for such year.
(k) "TERMINATION FOR CAUSE" shall mean termination of
Executive's employment by the Company (or its subsidiaries) by reason of
Executive's (i) gross negligence in the performance of his duties, (ii) willful
and continued failure to perform his duties, (iii) willful engagement in
conduct which is materially injurious to the Company or its subsidiaries
(monetarily or otherwise) or (iv) conviction of a felony or a misdemeanor
involving moral turpitude.
(l) "WELFARE BENEFIT COVERAGES" shall mean the medical,
dental, life insurance, accidental death and dismemberment and long-term
disability coverages provided by the Company to its active employees.
2. SERVICES. Executive agrees that he will render services to
the Company (as well as any subsidiary thereof or successor thereto) during the
period of his employment to the best of his ability and in a prudent and
businesslike manner and that he will devote substantially the same time,
efforts and dedication to his duties as heretofore devoted.
3. SEVERANCE BENEFITS. If Executive's employment by the Company
or any subsidiary thereof or successor thereto shall be subject to an
Involuntary Termination which occurs within two years after the date upon which
a Change of Control occurs, then Executive shall be entitled to receive, as
additional compensation for services rendered to the Company (including its
subsidiaries), the following severance benefits:
(a) A lump sum cash payment in an amount equal to
Executive's Severance Amount.
(b) A lump sum cash payment in an amount equal to the
remaining portion of any award to Executive under any prior years' EIP.
Further, if Executive's Involuntary Termination occurs on or after the date an
award has been earned under the EIP, but prior to the date such award is paid,
Executive shall receive an additional lump sum cash payment in an amount equal
to two times his Objective EIP Award.
(c) Executive shall be entitled to continue the Welfare
Benefit Coverages for himself and, where applicable, his eligible dependents
following his Involuntary
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<PAGE> 4
Termination for up to thirty-six months, as long as Executive continues either
to pay the premiums paid by active employees of the Company for such coverages
or to pay the actual (nonsubsidized) cost of such coverages for which the
Company does not subsidize for active employees. Such benefit rights shall
apply only to those Welfare Benefit Coverages which the Company has in effect
from time to time for active employees, and the applicable payments shall
adjust as premiums for active employees of the Company or actual costs,
whichever is applicable, change. Welfare Benefit Coverage(s) shall immediately
end upon Executive's obtainment of new employment and eligibility for similar
Welfare Benefit Coverage(s) (with Executive being obligated hereunder to
promptly report such eligibility to the Company). Nothing herein shall be
deemed to adversely affect in any way the additional rights, after
consideration of this extension period, of Executive and his eligible
dependents to health care continuation coverage as required pursuant to Part 6
of Title I of the Employee Retirement Income Security Act of 1974, as amended.
(d) Executive shall be entitled to receive out-placement
services in connection with obtaining new employment up to a maximum cost of
$6,000.
(e) The severance benefits payable under this Agreement
shall be paid to an Executive on or before the fifth day after the last day of
Executive's employment with the Company. Any severance benefits paid pursuant
to this Paragraph will be deemed to be a severance payment and not compensation
for purposes of determining benefits under the Company's qualified plans and
shall be subject to any required tax withholding.
4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided
for in Paragraph 3(a) or 3(b) hereof is not made when due, the Company shall
pay to Executive interest on the amount payable from the date that such payment
should have been made under such paragraph until such payment is made, which
interest shall be calculated at the prime or base rate of interest announced by
Texas Commerce Bank N.A. (or any successor thereto) at its principal office in
Houston, Texas and shall change when and as any such change in such prime or
base rate shall be announced by such bank.
5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding
anything in this Agreement to the contrary, if the severance benefits provided
for in Paragraph 3, together with any other payments which Executive has the
right to receive from the Company, would constitute a "parachute payment" (as
defined in Section 280G(b)(2) of the Code), the severance benefits provided
hereunder shall be either (a) reduced (but not below zero) so that the present
value of such total amounts received by Executive from the Company will be one
dollar ($1.00) less than three times Executive's base amount (as defined in
Section 280G of the Code) and so that no portion of such amounts received by
Executive shall be subject to the excise tax imposed by Section 4999 of the
Code or (b) paid in full, whichever produces the better net after-tax position
to Executive (taking into account any applicable excise tax under Section 4999
of the Code and any applicable income tax). The Company and Executive shall
make an initial determination as to whether a reduction is required and, if so
required, the amount of any such reduction. Executive shall notify the Company
immediately in writing of any claim by the Internal Revenue Service which, if
successful, would require the Company to make a reduction (or a further
reduction in
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<PAGE> 5
excess of that, if any, initially determined by the Company and Executive)
within five days of the receipt of such claim. The Company shall notify
Executive in writing at least five days prior to the due date of any response
required with respect to such claim if it plans to contest the claim. If the
Company decides to contest such claim, Executive shall cooperate fully with the
Company in such action; provided, however, the Company shall bear and pay
directly or indirectly all costs and expenses (including additional interest
and penalties) incurred in connection with such action. If, as a result of the
Company's action with respect to a claim, the amount of the reduction is found
to have been in excess of the correct reduction amount, the Company shall
promptly pay to Executive the difference between such amounts with respect to
such claim.
6. GENERAL.
(a) TERM. The effective date of this Agreement is March
17, 1995. Within sixty days from and after the expiration of two years after
said effective date and within sixty days after each successive two-year period
of time thereafter that this Agreement is in effect, the Company shall have the
right to review this Agreement, and in its sole discretion either continue and
extend this Agreement, terminate this Agreement, and/or offer Executive a
different agreement. The Board (excluding any member of the Board who is
covered by this Agreement or by a similar agreement with the Company) will vote
on whether to so extend, terminate, and/or offer Executive a different
agreement and will notify Executive of such action within said sixty-day time
period mentioned above. This Agreement shall remain in effect until so
terminated and/or modified by the Company. Failure of the Board to take any
action within said sixty days shall be considered as an extension of this
Agreement for an additional two-year period of time. Notwithstanding anything
to the contrary contained in this "SUNSET PROVISION," it is agreed that if a
Change of Control occurs while this Agreement is in effect, then this Agreement
shall not be subject to termination or modification under this "SUNSET
PROVISION," and shall remain in force for a period of two years after such
Change of Control, and if within said two years the contingency factors occur
which would entitle Executive to the benefits as provided herein, this
Agreement shall remain in effect in accordance with its terms. If, within such
two years after a Change of Control, the contingency factors that would entitle
Executive to said benefits do not occur, thereupon this two-year "SUNSET
PROVISION" shall again be applicable with the sixty-day time period for Board
action to thereafter commence at the expiration of said two years after such
Change of Control and on each two-year anniversary date thereafter.
(b) INDEMNIFICATION. If Executive shall obtain any money
judgment or otherwise prevail with respect to any litigation brought by
Executive or the Company to enforce or interpret any provision contained
herein, the Company, to the fullest extent permitted by applicable law, hereby
indemnifies Executive for his reasonable attorneys' fees and disbursements
incurred in such litigation and hereby agrees (i) to pay in full all such fees
and disbursements and (ii) to pay prejudgment interest on any money judgment
obtained by Executive from the earliest date that payment to him should have
been made under this Agreement until such judgment shall have been paid in
full, which interest shall be calculated at the prime or base rate of interest
announced by Texas Commerce Bank
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<PAGE> 6
N.A. (or any successor thereto) at its principal office in Houston, Texas, and
shall change when and as any such change in such prime or base rate shall be
announced by such bank.
(c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's
obligation to pay (or cause one of its subsidiaries to pay) Executive the
amounts and to make the arrangements provided herein shall be absolute and
unconditional and shall not be affected by any circumstances, including,
without limitation, any set-off, counterclaim, recoupment, defense or other
right which the Company (including its subsidiaries) may have against him or
anyone else. All amounts payable by the Company (including its subsidiaries
hereunder) shall be paid without notice or demand. Executive shall not be
obligated to seek other employment in mitigation of the amounts payable or
arrangements made under any provision of this Agreement, and, except as
provided in Paragraph 3(c) hereof, the obtaining of any such other employment
shall in no event effect any reduction of the Company's obligations to make (or
cause to be made) the payments and arrangements required to be made under this
Agreement.
(d) SUCCESSORS. This Agreement shall be binding upon and
inure to the benefit of the Company and any successor of the Company, by merger
or otherwise. This Agreement shall also be binding upon and inure to the
benefit of Executive and his estate. If Executive shall die prior to full
payment of amounts due pursuant to this Agreement, such amounts shall be
payable pursuant to the terms of this Agreement to his estate.
(e) SEVERABILITY. Any provision in this Agreement which
is prohibited or unenforceable in any jurisdiction by reason of applicable law
shall, as to such jurisdiction, be ineffective only to the extent of such
prohibition or unenforceability without invalidating or affecting the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
(f) NON-ALIENATION. Executive shall not have any right
to pledge, hypothecate, anticipate or assign this Agreement or the rights
hereunder, except by will or the laws of descent and distribution.
(g) NOTICES. Any notices or other communications
provided for in this Agreement shall be sufficient if in writing. In the case
of Executive, such notices or communications shall be effectively delivered if
hand delivered to Executive at his principal place of employment or if sent by
registered or certified mail to Executive at the last address he has filed with
the Company. In the case of the Company, such notices or communications shall
be effectively delivered if sent by registered or certified mail to the Company
at its principal executive offices.
(h) CONTROLLING LAW. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of Texas. Further,
Executive agrees that any legal proceeding to enforce the provisions of this
Agreement shall be brought in Houston, Harris County, Texas, and hereby waives
his right to any pleas regarding subject matter or personal jurisdiction and
venue.
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<PAGE> 7
(i) RELEASE. As a condition to the receipt of any
benefit under Paragraph 3 hereof, Executive shall first execute a release, in
the form established by the Company, releasing the Company, its shareholders,
partners, officers, directors, employees and agents from any and all claims and
from any and all causes of action of any kind or character, including but not
limited to all claims or causes of action arising out of Executive's employment
with the Company or the termination of such employment.
(j) FULL SETTLEMENT. If Executive is entitled to and
receives the benefits provided hereunder, performance of the obligations of the
Company hereunder will constitute full settlement of all claims that Executive
might otherwise assert against the Company on account of his termination of
employment.
(k) UNFUNDED OBLIGATION. The obligation to pay amounts
under this Agreement is an unfunded obligation of the Company (including its
subsidiaries), and no such obligation shall create a trust or be deemed to be
secured by any pledge or encumbrance on any property of the Company (including
its subsidiaries).
(l) NOT A CONTRACT OF EMPLOYMENT. This Agreement shall
not be deemed to constitute a contract of employment, nor shall any provision
hereof affect (a) the right of the Company (or its subsidiaries) to discharge
Executive at will or (b) the terms and conditions of any other agreement
between the Company and Executive except as provided herein.
(m) NUMBER AND GENDER. Wherever appropriate herein,
words used in the singular shall include the plural and the plural shall
include the singular. The masculine gender where appearing herein shall be
deemed to include the feminine gender.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the 23rd day of March, 1995.
"EXECUTIVE"
/s/ BARRY J. GALT
"COMPANY"
SEAGULL ENERGY CORPORATION
BY: /s/ ROBERT W. SHOWER
NAME: Robert W. Shower
TITLE: Exec. VP & CFO
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<PAGE> 1
EXHIBIT 10.4
SEVENTH AMENDMENT TO
SEAGULL EMPLOYEE STOCK OWNERSHIP PLAN
WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has heretofore
adopted and maintains the SEAGULL EMPLOYEE STOCK OWNERSHIP PLAN (the "Plan")
for the benefit of its eligible employees; and
WHEREAS, the Company desires to amend the Plan;
NOW, THEREFORE, the Plan is hereby amended as follows, effective as of
January 1, 1989:
1. The following shall be added at the beginning of Section 10.04(e)
of the Plan:
"Financed Stock allocated to a Member's Stock Account may be forfeited
pursuant to Paragraphs (a), (c) or (d) above only after assets other
than Financed Stock allocated to the Member's Account have been
forfeited. Further, if Financed Stock allocated to a Member's Stock
Account is forfeited pursuant to Paragraphs (a), (c) or (d) above and
if such Financed Stock includes more than one class of Company Stock,
such Member must be treated as forfeiting the same proportion of each
such class of Company Stock."
2. As amended hereby, the Plan is specifically ratified and
reaffirmed.
EXECUTED this 28th day of September, 1995.
SEAGULL ENERGY CORPORATION
/s/ ROBERT W. SHOWER
By ______________________________________
Robert W. Shower
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