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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-9808
PLAINS RESOURCES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2898764
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
500 DALLAS STREET
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(713) 654-1414
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value $0.10 per share American Stock Exchange
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 [ ]
On March 15, 2000, there were 17,948,856 shares of the registrant's Common Stock
outstanding. The aggregate value of the Common Stock held by non-affiliates of
the registrant (treating all executive officers and directors of the registrant,
for this purpose, as if they may be affiliates of the registrant) was
approximately $243,674,442 on March 15, 2000 (based on $13 15/16 per share, the
last sale price of the Common Stock as reported on the American Stock Exchange
Composite Tape on such date).
DOCUMENTS INCORPORATED BY REFERENCE: The information required in Part III of the
Annual Report on Form 10-K is incorporated by reference to the Registrant's
definitive proxy statement to be filed pursuant to Regulation 14A for the
Registrant's Annual Meeting of Stockholders.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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PLAINS RESOURCES INC. AND SUBSIDIARIES
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 29
Item 3. Legal Proceedings..................................................................... 33
Item 4. Submission of Matters to a Vote of Security Holders................................... 33
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.................. 35
Item 6. Selected Financial Data............................................................... 36
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 38
Item 7a. Quantitative and Qualitative - Disclosures About Market Risks......................... 51
Item 8. Financial Statements and Supplementary Data........................................... 52
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 52
PART III
Item 10. Directors and Executive Officers...................................................... 52
Item 11. Executive Compensation................................................................ 52
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 52
Item 13. Certain Relationships and Related Transactions........................................ 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 53
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FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements and
information that are based on our beliefs, as well as assumptions made by, and
information currently available to us. All statements, other than statements of
historical fact, included in this report are forward-looking statements,
including, but not limited to, statements identified by the words "anticipate,"
"believe," "estimate," "expect," "plan," "intend" and "forecast" and similar
expressions and statements regarding our business strategy, plans and objectives
of our management for future operations. Such statements reflect our current
views with respect to future events, based on what we believe are reasonable
assumptions. These statements, however, are subject to certain risks,
uncertainties and assumptions, including, but not limited to (1) uncertainties
inherent in the exploration for and development and production of oil and gas
and in estimating reserves, (2) unexpected future capital expenditures
(including the amount and nature thereof), (3) impact of crude oil price
fluctuations, (4) the effects of competition, (5) the success of our risk
management activities, (6) the availability (or lack thereof) of acquisition or
combination opportunities, (7) the availability of adequate supplies of and
demand for crude oil in areas of midstream operations, (8) the impact of current
and future laws and governmental regulations, (9) environmental liabilities that
are not covered by an indemnity or insurance and (10) general economic, market
or business conditions. If one or more of these risks or uncertainties
materialize, or if underlying assumptions prove incorrect, actual results may
vary materially from those in the forward-looking statements. Except as required
by applicable securities laws, we do not intend to update these forward-looking
statements and information.
CERTAIN DEFINITIONS
As used in this report, "Bbl" means barrel, "MBbl" means thousand barrels,
"MMBbls" means million barrels, "Mcf" means thousand cubic feet, "MMcf" means
million cubic feet, "Bcf" means billion cubic feet, "Btu" means British Thermal
Unit, "Mbtus" means thousand Btus, "BOE" means net barrel of oil equivalent and
"MCFE" means Mcf of natural gas equivalent. Natural gas equivalents and crude
oil equivalents are determined using the ratio of six Mcf of natural gas to one
Bbl of crude oil, condensate or natural gas liquids. A "gross acre" is an acre
in which an interest is owned. The number of "net acres" is the sum of the
fractional working interests owned in gross acres. "Net" oil and natural gas
wells are obtained by multiplying "gross" oil and natural gas wells by our
working interest in the applicable properties. "Present Value of Proved
Reserves" means the present value (discounted at 10%) of estimated future cash
flows from proved oil and natural gas reserves reduced by estimated future
operating expenses, development expenditures and abandonment costs (net of
salvage value) associated therewith (before income taxes), calculated using
product prices in effect on the date of determination, and "Standardized
Measure" is such amount further reduced by the present value (discounted at 10%)
of estimated future income taxes on such cash flows. "NYMEX" means New York
Mercantile Exchange.
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PART I
ITEMS 1. BUSINESS
GENERAL
We are an independent energy company that acquires, exploits, develops,
explores and produces crude oil and natural gas. Through our majority ownership
in Plains All American Pipeline, L.P. ("PAA"), we are also engaged in the
midstream activities of marketing, transportation, terminalling and storage of
crude oil. Our upstream crude oil and natural gas activities are focused in
California in the Los Angeles Basin, the Arroyo Grande Field, and the Mt. Poso
Field, offshore California in the Point Arguello Field, the Sunniland Trend of
South Florida and the Illinois Basin in southern Illinois. Our midstream
activities are concentrated in California, Texas, Oklahoma, Louisiana and the
Gulf of Mexico.
One of our wholly owned subsidiaries, Plains All American Inc., is both the
general partner and majority owner of PAA. Because it holds the general partner
interest and owns approximately 18.2 million common and subordinated units,
Plains All American Inc. holds an approximate 54% interest in PAA. For financial
statement purposes, the assets, liabilities and earnings of PAA are included in
our consolidated financial statements, with the public unitholders' interest
reflected as a minority interest. The following chart sets forth the
organization relationship of our upstream and midstream subsidiaries:
[PLAINS RESOURCES ORGANIZATIONAL CHART]
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UNAUTHORIZED TRADING LOSSES
In November 1999, we discovered that a former employee of PAA had engaged in
unauthorized trading activity, resulting in losses of approximately $162.0
million ($174.0 million, including estimated associated costs and legal
expenses). A full investigation into the unauthorized trading activities by
outside legal counsel and independent accountants and consultants determined
that the vast majority of the losses occurred from March through November 1999,
and the impact warranted a restatement of previously reported financial
information for 1999 and 1998. Because the financial statements of PAA are
consolidated with our financial statements, adverse effects on the financial
statements of PAA directly affect our consolidated financial statements. As a
result, we have restated our previously reported 1999 and 1998 results to
reflect the losses incurred from these unauthorized trading activities (see Note
3 in the notes to our consolidated financial statements appearing elsewhere in
this report.
Normally, as PAA purchases crude oil, it establishes a margin by selling crude
oil for physical delivery to third-party users or by entering into a future
delivery obligation with respect to futures contracts. The employee in question
violated PAA's policy of maintaining a position that is substantially balanced
between crude oil purchases and sales or future delivery obligations. The
unauthorized trading and associated losses resulted in a default of certain
covenants under PAA's credit facilities and significant short-term cash and
letter of credit requirements. See Item 7. --"Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital Resources,
Liquidity and Financial Condition."
Although one of our wholly-owned subsidiaries is the general partner of and
owns 54% of PAA, the trading losses do not affect the operations or assets of
our upstream business. The debt of PAA is nonrecourse to us. In addition, our
indirect ownership in PAA does not collateralize any of our credit facilities.
Our $225.0 million credit facility is collateralized by our oil and natural gas
properties.
In December 1999, PAA executed amended credit facilities and obtained default
waivers from all of its lenders. The amended credit facilities:
. waived defaults under covenants contained in the existing credit
facilities;
. increased availability under PAA's letter of credit and borrowing
facility from $175.0 million in November 1999 to $295.0 million in
December 1999, $315.0 million in January 2000, and thereafter decreasing
to $239.0 million in February through April 2000, to $225.0 million in
May and June 2000 and to $200.0 million in July 2000 through July 2001;
. required the lenders' consent prior to the payment of distributions to
unitholders;
. prohibited contango inventory transactions subsequent to January 20,
2000; and
. increased interest rates and fees under certain of the facilities.
PAA paid approximately $13.7 million to its lenders in connection with the
amended credit facilities. This amount was capitalized as debt issue costs and
will be amortized over the remaining term of the amended facilities. In
connection with the amendments, we loaned approximately $114.0 million to PAA.
This subordinated debt is due not later than November 30, 2005. We financed the
$114.0 million that we loaned PAA with:
. the issuance of a new series of our 10% convertible preferred stock for
proceeds of $50.0 million;
. cash distributions of approximately $9.0 million made in November 1999
to PAA's general partner; and
. $55.0 million of borrowings under our revolving credit facility.
In the period immediately following the disclosure of the unauthorized trading
losses, a significant number of PAA's suppliers and trading partners reduced or
eliminated the open credit previously extended to PAA. Consequently, the amount
of letters of credit PAA needed to support the level of its crude oil purchases
then in effect increased significantly. In addition, PAA's cost of obtaining
letters of credit increased under the amended credit facility. In many instances
PAA arranged for letters of credit to secure its obligations to purchase crude
oil from its customers, which increased its letter of credit costs and decreased
its unit margins. In other instances, primarily involving lower margin wellhead
and bulk purchases, certain of PAA's purchase contracts were terminated. As a
result of these changes, aggregate volumes purchased are expected to decrease by
150,000 barrels per day, consisting primarily of lower unit margin purchases.
Approximately 50,000 barrels per day of the decrease is related to barrels
gathered at producer lease locations and 100,000 barrels per day is attributable
to bulk purchases. As a result of the increase in letter of credit costs and
reduced volumes, annual EBITDA is expected to be adversely affected by
approximately $5.0 million, excluding the positive impact of current favorable
market conditions. EBITDA means earnings before interest expense, income taxes,
depreciation, depletion and amortization.
4
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We have taken appropriate and aggressive steps within our organization to
enhance our processes and procedures to prevent future unauthorized trading. One
of such steps includes the creation of a new professional risk management
position. This risk manager has direct responsibility and authority for our
trading controls and procedures and other aspects of corporate risk management.
However, we can give no assurance that such steps will detect and prevent all
violations of our trading policies and procedures, particularly if deception or
other intentional misconduct is involved.
RESULTS OF OPERATIONS
For the year ended December 31, 1999, our EBITDA, cash flow from operations
and net loss totaled $139.1 million, $70.4 million and $25.3 million,
respectively. Excluding the unauthorized trading losses, our net income for the
year ended December 31, 1999 would have been $32.9 million. Cash flow from
operations represents net income before noncash items. EBITDA and cash flow from
operations both exclude the unauthorized trading losses, noncash compensation
expense, restructuring expense, gain on unit offerings, linefill gain and
extraordinary loss from extinguishment of debt. Our upstream operations
contributed approximately 38% of our EBITDA for the fiscal year ending
December 31, 1999, while our midstream activities accounted for approximately
62%.
UPSTREAM ACTIVITIES
Our upstream business strategy is to increase our proved reserves and cash
flow by:
. exploiting and producing crude oil and associated natural gas from our
existing properties;
. acquiring additional underdeveloped crude oil properties; and
. exploring for significant new sources of reserves.
We concentrate our acquisition and exploitation efforts on mature but
underdeveloped crude oil producing properties that meet our targeted criteria.
Generally, the properties that we consider acquiring and exploiting are owned by
major integrated or large independent oil and natural gas companies and have
produced significant volumes since initial discovery and also have significant
estimated remaining reserves in place. Our management believes that it has
developed a proven record in acquiring and exploiting underdeveloped crude oil
properties where we can make substantial reserve additions and cash flow
increases by implementing improved production practices and recovery techniques
and by relatively low risk development drilling. An integral component of our
exploitation effort is to increase unit operating margins, and therefore cash
flow, by reducing unit production expenses and increasing wellhead price
realizations.
We seek to complement these efforts by committing a minor portion of our
capital to pursue higher risk exploration opportunities that offer potentially
higher rewards in areas synergistic to our acquisition and exploitation
activities. As part of our business strategy, we periodically evaluate selling,
and from time to time have sold, certain of our mature producing properties that
we consider to be nonstrategic or fully valued. These sales enable us to focus
on our core properties, maintain our financial flexibility, control our overhead
and redeploy the sales proceeds to activities that have potentially higher
financial returns. We are able to take advantage of the marketing expertise that
PAA has developed through our marketing agreement with PAA, under which PAA is
the exclusive purchaser/marketer of all our equity crude oil production.
During the five-year period ended December 31, 1999, we incurred aggregate
acquisition, exploitation, development, and exploration costs of approximately
$436.6 million, resulting in proved crude oil and natural gas reserve additions
(including revisions of estimates but excluding production) of approximately
204.9 million BOE, or $2.13 per BOE, through implementation of this business
strategy. We spent approximately 97% of this capital in acquisition,
exploitation and development activities and we spent approximately 3% on our
exploration activities.
To manage our exposure to commodity price risk, our upstream business
routinely hedges a portion of its crude oil production. For 2000, we have
entered into various arrangements under which we will receive an average minimum
NYMEX West Texas Intermediate ("WTI") crude oil price of approximately $16.00
per barrel on 18,500 barrels per day (equivalent to 79% of fourth quarter 1999
crude oil production levels). Approximately 10,000 barrels per day of the
volumes that we have hedged in 2000 will participate in price increases above
the $16.00 floor price, subject to a ceiling limitation of approximately $19.75
per barrel. For 2001, we have entered into arrangements under which we will
receive an average minimum NYMEX WTI price of approximately $18.75 per barrel on
3,000 barrels per day. The 2001 hedges participate in price increases and are
not subject to a ceiling limitation. All of our NYMEX WTI crude oil prices are
before quality and location differentials. Our management intends to continue to
maintain hedging arrangements for a significant portion of our production. These
contracts may expose us to the risk of financial loss in certain circumstances.
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The following table sets forth certain information with respect to our
reserves over the last five years. Our reserve volumes and values were
determined under the method prescribed by the Securities and Exchange Commission
("SEC"), which requires the application of year-end crude oil and natural gas
prices for each year, held constant throughout the projected reserve life. The
benchmark NYMEX crude oil price of $25.60 per barrel used in preparing year-end
1999 reserve estimates was more than double the $12.05 per barrel used in
preparing reserve estimates at the end of 1998. The year-end 1998 NYMEX crude
oil price was the lowest year-end crude oil price since oil was deregulated in
1980.
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AS OF OR FOR THE YEAR ENDED DECEMBER 31,
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1999 1998 1997 1996 1995
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(IN THOUSANDS, EXCEPT RATIOS AND PER UNIT AMOUNTS)
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Present Value of Proved Reserves $1,246,049(1) $226,943(1) $510,993 $764,774 $366,780
Proved Reserves
Crude oil and natural gas liquids (Bbls) 218,922 120,208 151,627 115,996 94,408
Natural gas (Mcf) 90,873 86,781 60,350 37,273 43,110
Oil equivalent (BOE) 234,068(1) 134,672(1) 161,685 122,208 101,593
Reserve Replacement Ratio (2) 1,263% NM(3) 603%(4) 454% 647%(5)
Reserve Replacement Cost per BOE (6) $ 0.68 NM(3) $ 2.71 $ 1.76 $ 2.14
Total upstream capital costs incurred $ 72,979 $100,935 $127,378 $ 51,255 $ 84,012
Percentage of total upstream capital
costs attributable to:
Acquisition 5% 10% 34% 7% 71%
Development 89% 88% 65% 88% 27%
Exploration 6% 2% 1% 5% 2%
Year-end NYMEX Crude Oil Price $ 25.60 $12.05 $ 18.34 $ 25.92 $ 19.55
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(1) A large portion of our reserve base (approximately 94% of year-end 1999
reserve volumes) is comprised of long-life crude oil properties that are
sensitive to crude oil price volatility. By comparison, calculating these
amounts using a normalized NYMEX crude oil price of $18.50 per barrel
results in a pre-tax Present Value of Proved Reserves of $664.7 million and
$710.2 million and estimated net proved reserves of 212.7 million BOE and
219.3 million BOE at December 31, 1999 and 1998, respectively. Such
information is based upon reserve reports prepared by independent petroleum
engineers, in accordance with the rules and regulations of the SEC, except
that it uses a normalized NYMEX crude oil price. See "Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Capital Resources, Liquidity and Financial Condition -- Changing Crude Oil
and Natural Gas Prices".
(2) The reserve replacement ratio is calculated by dividing (a) the sum of
reserves added during each respective year through purchases of reserves in
place, extensions, discoveries and other additions and the effect of
revisions, if any, by (b) each respective years' production.
(3) NM -- Due to a negative volume revision related solely to price, such
information is not meaningful.
(4) Pro forma as if the acquisitions of the Montebello and Arroyo Grande Fields
occurred on January 1, 1997. Such acquisitions closed in March and November
1997, respectively, with effective dates of February 1, 1997, and November
1, 1997, respectively.
(5) Pro forma as if the acquisition of the Illinois Basin Properties occurred
on January 1, 1995. Such acquisition closed in December 1995 with an
effective date of November 1, 1995.
(6) Reserve replacement cost per BOE for a year is calculated by dividing
upstream capital costs incurred for such year by such year's reserve
additions.
ACQUISITION AND EXPLOITATION
Acquisition and Exploitation Strategy
We are continually engaged in the exploitation and development of our
existing property base and the evaluation and pursuit of additional
underdeveloped properties for acquisition. We focus on mature but underdeveloped
producing crude oil properties in areas where we believe substantial reserve
additions and cash flow increases can be made through relatively low-risk
drilling, improved production practices and recovery techniques and improved
operating margins. Generally, we seek to improve a property's operating margin
by reducing costs, investing capital to increase production rates and enhancing
the marketing arrangements of the crude oil production.
Once we identify a prospective property for acquisition, we conduct a
technical review of existing production and operating practices to identify and
quantify underexploitated value. If the initial studies indicate undeveloped
potential, the various producing and potentially productive formations in the
area are mapped in detail. Historical production data is
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evaluated to determine if additional wells or other capital expenditures appear
necessary to optimize the recovery of reserves from the property. Geologic and
engineering information and operating practices utilized by operators on
offsetting leases are analyzed to identify potential additional exploitation and
development opportunities. A market study is also performed analyzing product
markets, available pipeline connections, access to trading locations and
existing contractual arrangements with the goal of maximizing sales and profit
margins from the area. See "--Product Markets and Major Customers". A
comprehensive plan of exploitation is then prepared and used as a basis for our
offer to purchase.
We seek to acquire a majority interest in the properties we have identified
and to act as operator of those properties. We have in the past and may in the
future hedge a significant portion of the acquired production, thereby partially
mitigating product price volatility that could have an adverse impact on
exploitation opportunities. If we successfully purchase properties, we then
implement our exploitation plan by modifying production practices, realigning
existing waterflood patterns, drilling wells and performing workovers,
recompletions and other production and reserve enhancements. After the initial
acquisition, we may also seek to increase our interest in the properties through
acquisitions of offsetting acreage, farmout drilling arrangements and the
purchase of minority interests in the properties.
By implementing our exploitation plan, we seek to increase cash flows and
enhance the value of our asset base. The results of these activities are
reflected in additions and revisions to proved reserves. During the five-year
period ending December 31, 1999, net additions and revisions to proved reserves
totaled 129.7 million BOE or approximately 368% of cumulative net production for
this period. These reserves were added at an aggregate average cost of $2.44 per
BOE. This activity excludes reserves added as a result of our acquisition
activities. Reserve additions related solely to our acquisition activities
totaled 75.2 million BOE and were added at an aggregate average cost of $1.60
per BOE.
The properties in our four core areas represent approximately 99% of total
proved reserves at December 31, 1999. These properties were previously owned and
operated by major integrated oil and natural gas companies and are comprised of
underdeveloped crude oil properties that we believed to have significant upside
potential that can be evaluated through development and exploitation activities.
During 2000, we estimate that we will spend approximately $72.0 million on the
development and exploitation of our upstream crude oil and natural gas
properties. Set forth below is a discussion of these properties.
Current Exploitation Projects
The following table sets forth certain information with respect to our crude
oil and gas properties (dollars in millions):
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CALIFORNIA PROPERTIES
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ARROYO POINT SUNNILAND ILLINOIS
LA BASIN MONTEBELLO GRANDE MT. POSO ARGUELLO TREND BASIN
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Year(s) Acquired 1992 1997 1997 1998 1999 1993/1994 1995
Year(s) Discovered 1924 - 1966 1917 1906 1926 1981 1943 1905
Proved reserves at acquisition - MMBOE 17.7 23.3 19.9 7.7 6.4 5.0 17.3
CUMULATIVE FROM ACQUISITION DATE:
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Direct acquisition, development and
exploitation capital spent $ 174.7 $ 55.2 $ 27.3 $ 13.9 $ 1.8 $ 81.8 $ 79.6
Production - MMBOE 26.3 1.6 1.2 0.3 0.8 9.0 5.2
Cumulative gross margin $ 199.4 $ 9.6 $ 5.0 $ 2.8 $ 4.0 $ 58.1 $ 51.4
Aggregate reserve addition cost $ 1.49 $ 2.72 $ 0.43 $ 1.74 $0.28 $ 2.50 $ 2.74
AS OF DECEMBER 31, 1999:
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Proved Reserves - MMBOE 90.8 18.7 62.4 7.6 5.6 23.7 23.8
Future Net Revenues(1) $ 1,197.2 $201.8 $800.1 $103.2 $47.8 $ 205.9 $277.9
Pre-tax Present Value of
Proved Reserves(1) $ 535.0 $ 90.1 $264.3 $ 60.0 $40.5 $ 136.7 $115.5
% Proved Undeveloped 30% 20% 87% 55% 43% 34% 12%
1999 Unit Gross Margin $ 7.45 $ 8.83 $ 7.53 $ 7.92 $4.92 $ 2.48 $ 9.63
Estimated development and
exploitation capital budgeted
in 2000 $ 31.0 $ 3.0 $ 10.0 $ 7.0 $ 9.0 $ 2.0 $ 10.0
</TABLE>
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(1) We have reduced the pre-tax present value of proved reserves and the future
net revenues of certain properties to reflect applicable abandonment and
hedging costs and with respect to the L.A. Basin Properties, a net profits
interest owned by a third party.
Onshore California Properties. In 1992, we acquired Stocker Resources, a sole
purpose company formed in 1990 to acquire substantially all of Chevron USA's
producing crude oil properties in the LA Basin. Following the initial
acquisition, we expanded our holdings in this area by acquiring additional
interests within the existing fields, including all of Texaco Exploration and
Production, Inc.'s interest in the Vickers Lease. We refer to all of our
properties in the LA Basin acquired
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prior to 1997 collectively as the LA Basin Properties. The LA Basin Properties
consist of long-life crude oil reserves discovered at various times between 1924
and 1966. We have performed various exploitation activities, including drilling
additional wells, returning previously marginal wells to economic production,
optimizing waterflood operations, improving artificial lift and facility
equipment, reducing unit production expenses and improving marketing margins.
Through these acquisition and exploitation activities, our net average daily
production from this area has increased from approximately 6,700 BOE per day in
1992 to an average of 11,000 BOE per day during the fourth quarter of 1999.
We expanded our operations in the LA Basin with the acquisition of the
Montebello Field, and expanded into other California areas with the acquisition
of the Arroyo Grande Field and the Mt. Poso Field. Combined, these three fields
added approximately 50.9 million BOE to our proved reserves at the acquisition
dates.
In March 1997, we completed the acquisition of Chevron's interest in the
Montebello Field for approximately $25.0 million, effective February 1, 1997.
The assets acquired consisted of a 100% working interest and a 99.2% net revenue
interest in 55 producing crude oil wells and related facilities and also
included approximately 450 acres of surface fee land. The Montebello Field is
located approximately 15 miles from our existing LA Basin operations. Our net
average daily production from this field has increased from approximately 930
BOE per day at the acquisition date to an average of approximately 2,100 BOE per
day during the fourth quarter of 1999.
In November 1997, we acquired a 100% working interest and a 97% net revenue
interest in the Arroyo Grande Field which is located in San Luis Obispo County,
California from subsidiaries of Shell Oil Company ("Shell"). The Arroyo Grande
field was discovered in 1906 and has produced approximately 11 MMBbls of crude
oil or approximately 5% of the estimated original crude oil in place. The assets
acquired included surface and development rights to approximately 1,000 acres
included in the 1,500 acre unit. The field is under continuous steam injection
and at the acquisition date, was producing approximately 1,600 barrels per day
(approximately 1,500 barrels net to our interest) of 14 degree API gravity crude
oil from 70 wells. The aggregate consideration for the Arroyo Grande Field
consisted of (1) rights to a non-producing property interest conveyed to Shell,
(2) the issuance of 46,600 shares of Series D Cumulative Convertible Preferred
Stock with an aggregate stated value of $23.3 million, and (3) a five-year
warrant to purchase 150,000 shares of our common stock at $25.00 per share. No
proved reserves had been assigned to the rights to the property interest
conveyed. Unit production expenses for the Arroyo Grande Field, which averaged
$9.36 per BOE at the acquisition date, averaged $5.26 per BOE during the fourth
quarter of 1999. Our net average daily production from this field was
approximately 1,600 barrels per day during 1999.
During 1998, we acquired the Mt. Poso Field from Aera Energy LLC for
approximately $7.7 million. The field is located approximately 27 miles north of
Bakersfield, California, in Kern County. At acquisition, the field was producing
900 barrels of crude oil per day of 15 - 17 degree API gravity crude and added
approximately 7.7 MMBbls of crude oil to our proved reserves. Our net average
daily production from this field was approximately 950 barrels per day during
1999.
Offshore California Properties. In July 1999, Arguello Inc., our wholly owned
subsidiary, acquired Chevron's interests in Point Arguello. The acquisition,
which was funded from our working capital, had an effective date of July 1,
1999. The interests acquired include Chevron's 26% working interest in the Point
Arguello Unit, its 26% interest in various partnerships owning the associated
transportation, processing and marketing infrastructure, and Chevron's right to
participate in surrounding leases and certain fee acreage onshore. We assumed
Chevron's 26% share of (1) plugging and abandoning all existing well bores, (2)
removing conductors, (3) flushing hydrocarbons from all lines and vessels and
(4) removing/abandoning all structures, fixtures and conditions created
subsequent to closing. Chevron retained the obligation for all other
abandonment costs, including but not limited to (1) removing, dismantling and
disposing of the existing offshore platforms, (2) removing and disposing of all
existing pipelines and (3) removing, dismantling, disposing and remediation of
all existing onshore facilities. Arguello Inc. is the operator of record for the
Point Arguello Unit and has entered into an outsourcing agreement with a unit of
Torch Energy Advisors, Inc. for the conduct of certain field operations and
other professional services. At acquisition, gross production from the field was
approximately 20,100 barrels of crude oil per day (approximately 5,200 barrels
per day, net to our interest) from 25 wells located on 3 offshore platforms. The
acquisition added approximately 6.4 MMBbls of crude oil to our proved reserves.
Our net average daily production from this property was approximately 4,400
barrels per day during the six months we owned the property in 1999.
As with our other properties, we intend to aggressively exploit Point
Arguello to evaluate additional reserve potential identified during our
acquisition analysis. Our exploitation plans for this property target improving
the unit gross margin by lowering costs and increasing production volumes
through production enhancement activities similar to those employed in our other
properties.
8
<PAGE>
Sunniland Trend Properties. We have a 100% working interest in four producing
fields in South Florida located in the Sunniland Trend that were previously
owned and operated by Exxon Corporation. We acquired 50% of our interest in the
properties in 1993 and the remaining 50% in 1994. At the time of our initial
acquisition, production net to our interest was approximately 900 barrels per
day. As a result of increasing our interest to 100%, development drilling on the
property, and the implementation of exploitation activities designed primarily
to repair failed wells and to increase the fluid lift capacity of certain wells,
our net production peaked at an annual average of 5,300 barrels per day in 1997.
During 1999, production from this area averaged 2,600 barrels per day.
Illinois Basin Properties. In December 1995, we acquired all of Marathon Oil
Company's producing and nonproducing upstream crude oil and natural gas assets
in the Illinois Basin for approximately $51.5 million, including transaction
costs. The Illinois Basin Properties consist of long-life crude oil reserves.
Our initial exploitation plan for the Illinois Basin Properties included
improving the unit gross margin by decreasing unit production expenses and
increasing price realizations. Unit production expenses for these properties,
which averaged $12.00 per BOE in the fourth quarter of 1995, averaged
approximately $8.64 per BOE during 1999. The primary focus of our development
and exploitation program during 2000 for the Illinois Basin Properties will be
directed towards development drilling, performing reservoir characterization and
selecting chemical mixtures to potentially implement an alkaline-surfactant-
polymer pilot enhanced oil recovery project. Our net average daily production
from this property was approximately 3,000 barrels per day during 1999.
General. We believe that our properties in our four core areas hold potential
for additional increases in production, reserves and cash flow. However, our
ability to achieve such increases could be adversely affected by future
decreases in the demand for crude oil and natural gas, impediments in marketing
production, operating risks, unavailability of capital, adverse changes in
governmental regulations or other currently unforeseen developments.
Accordingly, we can give no assurance that such increases will be achieved.
We believe that attractive acquisition opportunities that fit our criteria
will continue to be made available by both major and independent oil companies.
In addition to more typical acquisitions, we also intend to pursue joint
ventures and strategic alliances that provide us the opportunity to use our
exploitation and operating skillsets and our capital without acquiring the
entire property interest. While we are continually evaluating such
opportunities, there can be no assurance that any of these efforts will be
successful. Our ability to continue to acquire attractive properties may be
adversely affected by:
. a reduction in the number of attractive properties offered for sale;
. increased competition for properties from other independent oil
companies;
. unavailability of capital;
. incorrect estimates of reserves;
. exploitation potential or environmental liabilities or other factors.
Although we have historically acquired producing properties located only in the
continental United States, from time to time we evaluate, and may in the future
seek to acquire, properties located outside the continental United States.
DISPOSITION OF PROPERTIES
We periodically evaluate, and from time to time have elected to sell, certain
of our mature producing properties that we consider to be nonstrategic or fully
valued. Such sales enable us to focus on our core properties, maintain financial
flexibility, reduce overhead and redeploy the proceeds therefrom to activities
that we believe have a higher potential financial return.
MIDSTREAM ACTIVITIES
GENERAL
We conduct our midstream activities through PAA, which was formed in 1998 to
acquire and operate the business and assets of our wholly owned midstream
subsidiaries. PAA engages in interstate and intrastate crude oil transportation,
terminalling and storage, as well as crude oil gathering and marketing
activities. In 1999, PAA grew through acquisitions and internal development to
become one of the largest transporters, terminal operators, gatherers and
marketers of crude oil in the United States. PAA currently transports,
terminals, gathers and markets an aggregate of approximately 650,000 barrels of
crude oil per day. Its operations are concentrated in California, Texas,
Oklahoma, Louisiana and the Gulf of Mexico.
9
<PAGE>
Our midstream business strategy is to capitalize on the regional crude oil
supply and demand imbalances that exist in the continental United States by
combining the strategic location and unique capabilities of our transportation
and terminalling assets with our extensive marketing and distribution expertise
to generate sustainable earnings and cash flow. We intend to execute our
midstream business strategy by:
. increasing and optimizing the amount of crude oil we transport on our
various pipeline and gathering assets;
. realizing cost efficiencies through operational improvements and
potential strategic alliances;
. utilizing our Cushing Terminal and other assets to service the needs of
refiners and to profit from merchant activities that take advantage of
crude oil pricing and quality differentials; and
. pursuing strategic and accretive acquisitions of crude oil pipeline
assets, gathering systems and terminalling and storage facilities that
complement our existing asset base and distribution capabilities.
Our midstream operations can be categorized into two primary business
activities:
. CRUDE OIL PIPELINE TRANSPORTATION. Our activities from pipeline
operations generally consist of transporting third-party volumes of
crude oil for a tariff, as well as merchant activities designed to
capture location and quality price differentials. We own and operate
several pipeline systems including:
. a segment of the All American Pipeline that extends
approximately 140 miles from Las Flores, California to Emidio,
California. In March 2000, we sold the 1,089-mile segment of the
All American Pipeline that extends from Emidio, California to
McCamey, Texas. See "All American Pipeline Linefill Sale and
Asset Disposition";
. the San Joaquin Valley Gathering System in California;
. the West Texas Gathering System, the Spraberry Pipeline System,
and the East Texas Pipeline System, which are all located in
Texas;
. the Sabine Pass Pipeline System in southwest Louisiana and
southeast Texas;
. the Ferriday Pipeline System in eastern Louisiana and western
Mississippi; and
. the Illinois Basin Pipeline System in southern Illinois.
. TERMINALLING AND STORAGE ACTIVITIES AND GATHERING AND MARKETING
ACTIVITIES. We own and operate a state-of-the-art, 3.1 million barrel,
above-ground crude oil terminalling and storage facility at Cushing,
Oklahoma, the largest crude oil trading hub in the United States and the
designated delivery point for NYMEX crude oil futures contracts. We also
have an additional 6.6 million barrels of terminalling and storage
capacity in our other facilities, including tankage associated with our
pipeline and gathering systems. Our terminalling and storage operations
generate revenue through a combination of storage and throughput fees.
Our storage facilities also complement our merchant activities.
We own or lease approximately 280 trucks, 325 tractor-trailers and
290 injection stations, which we use in our gathering and marketing
activities. Our gathering and marketing operations include:
. the purchase of crude oil at the wellhead and the bulk purchase
of crude oil at pipeline and terminal facilities;
. the transportation of crude oil on trucks, barges or pipelines;
and
. the subsequent resale or exchange of crude oil at various points
along the crude oil distribution chain.
MIDSTREAM ACQUISITIONS AND DISPOSITIONS
Scurlock Acquisition
On May 12, 1999, we completed the acquisition of Scurlock Permian LLC and
certain other pipeline assets from Marathon Ashland Petroleum LLC. Including
working capital adjustments and closing and financing costs, the cash purchase
price was approximately $141.7 million.
Scurlock, previously a wholly owned subsidiary of Marathon Ashland Petroleum,
is engaged in crude oil transportation, gathering and marketing, and owns
approximately 2,300 miles of active pipelines, numerous storage terminals and a
fleet of more than 250 trucks. Its largest asset is an 800-mile pipeline and
gathering system located in the Spraberry Trend in West Texas that extends into
Andrews, Glasscock, Martin, Midland, Regan and Upton Counties, Texas. The assets
we acquired also included approximately one million barrels of crude oil
linefill.
10
<PAGE>
Financing for the Scurlock acquisition was provided through:
. borrowings of approximately $92.0 million under Plains Scurlock's
limited recourse bank facility with BankBoston, N.A.;
. the sale to the general partner of 1.3 million Class B common units of
PAA for a total cash consideration of $25.0 million, or $19.125 per
unit, the price equal to the market value of PAA's common units on May
12, 1999; and
. a $25.0 million draw under PAA's existing revolving credit agreement.
The funds for the purchase of the Class B Units by the general partner were
provided by a capital contribution from us. We financed our capital contribution
through our revolving credit facility. The Class B units are initially pari
passu with common units with respect to distributions, and are convertible into
common units upon approval of a majority of the common unitholders. The Class B
unitholders may request that PAA call a meeting of common unitholders to
consider approval of the conversion of Class B units into common units. If the
approval of a conversion by the common unitholders is not obtained within 120
days of a request, each Class B unitholder will be entitled to receive
distributions, on a per unit basis, equal to 110% of the amount of distributions
paid on a common unit, with such distribution right increasing to 115% if such
approval is not secured within 90 days after the end of the 120-day period.
Except for the vote to approve the conversion, Class B units have the same
voting rights as the common units.
West Texas Gathering System Acquisition
On July 15, 1999, we completed the acquisition of the West Texas Gathering
System from Chevron Pipe Line Company for approximately $36.0 million. Financing
for the amounts paid at closing was provided by a draw under the term loan
portion of the Plains Scurlock credit facility. See Item 7. - "Management's
Discussion and Analysis of Financial Condition and Results of Operations". The
assets acquired include approximately 450 miles of crude oil transmission
mainlines, approximately 400 miles of associated gathering and lateral lines,
and approximately 2.9 million barrels of tankage located along the system.
All American Pipeline Linefill Sale and Asset Disposition
We initiated the sale of approximately 5.2 million barrels of crude oil
linefill from the All American Pipeline in November 1999. This sale was
substantially completed in February 2000. The linefill was located in the
segment of the All American Pipeline that extends from Emidio, California, to
McCamey, Texas. Except for minor third party volumes, one of our subsidiaries
has been the sole shipper on this segment of the pipeline since its predecessor
acquired the line from the Goodyear Tire & Rubber Company in July 1998. Proceeds
from the sale of the linefill were approximately $100 million, net of associated
costs, and were used for working capital purposes. We estimate that we will
recognize a total gain of approximately $44.0 million in connection with the
sale of linefill. As of December 31, 1999, we had delivered approximately 1.8
million barrels of linefill and recognized a gain of $16.5 million.
On March 24, 2000, we completed the sale of the above referenced segment of
the All American Pipeline to a unit of El Paso Energy Corporation for total
proceeds of $129.0 million. The proceeds from the sale were used to reduce
outstanding debt. Our net proceeds are expected to be approximately $124.0
million, net of associated transaction costs and estimated costs to remove
certain equipment. We estimate that we will recognize a gain of approximately
$20.0 million in connection with the sale. During 1999, we reported gross margin
of approximately $5.0 million from volumes transported on the segment of the
line that was sold.
CRUDE OIL PIPELINE OPERATIONS
We present below a description of our principal pipeline assets. All of our
pipeline systems are operated from one of two central control rooms with SCADA
computer systems designed to continuously monitor real time operational data
including measurement of crude oil quantities injected in and delivered through
the pipelines, product flow rates and pressure and temperature variations. This
monitoring and measurement technology provides us the ability to efficiently
batch differing crude oil types with varying characteristics through the
pipeline systems. The SCADA systems are designed to enhance leak detection
capabilities, sound automatic alarms in the event of operational conditions
outside of pre-established parameters and provide for remote-controlled shut-
down of pump stations on the pipeline systems. Pump stations, storage facilities
and meter measurement points along the pipeline systems are linked by telephone,
microwave, satellite or radio communication systems for remote monitoring and
control, which reduces our requirement for full time site personnel at most of
these locations.
11
<PAGE>
We perform scheduled maintenance on all of our pipeline systems and make
repairs and replacements when necessary or appropriate. We attempt to control
corrosion of the mainlines through the use of corrosion inhibiting chemicals
injected into the crude stream, external coatings and anode bed based or
impressed current cathodic protection systems. Maintenance facilities containing
equipment for pipe repairs, spare parts and trained response personnel are
strategically located along the pipelines and in concentrated operating areas.
We believe that all of our pipelines have been constructed and are maintained in
all material respects in accordance with applicable federal, state and local
laws and regulations, standards prescribed by the American Petroleum Institute
and accepted industry practice.
All American Pipeline
The segment of the All American Pipeline that was not sold to El Paso (see
" - All American Pipeline Linefill Sale and Asset Disposition") is a common
carrier crude oil pipeline system that transports crude oil produced from fields
offshore and onshore California to locations in California pursuant to tariff
rates regulated by the Federal Energy Regulatory Commission ("FERC") (see
" - Regulation - Transportation of Crude Oil"). As a common carrier, the All
American Pipeline offers transportation services to any shipper of crude oil,
provided that the crude oil tendered for transportation satisfies the conditions
and specifications contained in the applicable tariff. The All American Pipeline
transports crude oil for third parties as well as for us.
We currently operate the segment of the system that extends approximately 10
miles from Exxon's onshore facilities at Las Flores on the California coast to
our onshore facilities at Gaviota, California (24 inch diameter pipe) and
continues from Gaviota approximately 130 miles to our station in Emidio,
California (30-inch pipe). Between Gaviota and our Emidio Station, the All
American Pipeline interconnects with our SJV Gathering System as well as various
third party intrastate pipelines, including the Unocap Pipeline System, Pacific
Pipeline, and a pipeline owned by EOTT Energy Partners, L.P.
System Supply. The All American Pipeline currently transports Outer
Continental Shelf crude oil received at the onshore facilities of the Santa Ynez
field at Las Flores, California and the onshore facilities of the Point Arguello
field located at Gaviota, California.
Effective December 1, 1999, the segment of the All American Pipeline that was
sold to El Paso ceased being used for crude oil transportation. Exxon, which
owns all of the Santa Ynez production, Texaco and Sun Operating L.P., which
together own approximately 25% of the Point Arguello production, have entered
into transportation agreements committing to transport all of their production
from these fields on the segment of the All American Pipeline which we retained.
These agreements, which expire in August 2007, provide for a minimum tariff with
annual escalations. At December 31, 1999, the tariffs averaged $1.41 per barrel
for deliveries to connecting pipelines in California. The agreements do not
require these owners to transport a minimum volume. The producers from the Point
Arguello field who do not have contracts with us have no other means of
transporting their production and, therefore, ship their volumes on the All
American Pipeline at the posted tariffs. For the year ended December 31, 1999,
approximately $30.6 million, or 17%, of our gross margin was attributable to the
Santa Ynez field and approximately $10.6 million, or 6% was attributable to the
Point Arguello field. Transportation of volumes from the Point Arguello field on
the All American Pipeline commenced in 1991 and from the Santa Ynez field in
1994.
The table below sets forth the historical volumes received from both of these
fields.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992 1991
-------- ------- ------- -------- --------- -------- -------- ------- -------
(BARRELS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average daily volumes received from:
Point Arguello (at Gaviota) 20 26 30 41 60 73 63 47 29
Santa Ynez (at Las Flores) 59 68 85 95 92 34 - - -
------- ------ ------ ------- ------- ------ ------ ------ -------
Total 79 94 115 136 152 107 63 47 29
======= ====== ====== ======= ======= ====== ====== ====== =======
</TABLE>
In July 1999, a wholly-owned subsidiary of ours acquired Chevron USA's 26%
working interest in Point Arguello and is the operator of record for the Point
Arguello Unit. All of the volumes attributable to our interests are committed
for transportation on the All American Pipeline and are subject to our Marketing
Agreement with PAA. We believe that opportunities may exist to minimize
production decline and, barring operational or economic disruptions, to offset
production decline or increase production. We anticipate that average daily
production received from the Santa Ynez field for 2000 will generally
approximate 55,000 to 60,000 barrels, although we can provide no assurance in
that regard.
12
<PAGE>
According to information published by the Minerals Management Service ("MMS"),
significant additional proved, undeveloped reserves have been identified
offshore California which have the potential to be delivered on the All American
Pipeline. Future volumes of crude oil deliveries on the All American Pipeline
will depend on a number of factors that are beyond our control, including
. the economic feasibility of developing the reserves;
. the economic feasibility of connecting such reserves to the All American
Pipeline; and
. the ability of the owners of such reserves to obtain the necessary
governmental approvals to develop such reserves.
The owners of these reserves have filed development plans with the MMS. On
August 13, 1999, the MMS cancelled 4 of the 40 undeveloped leases offshore
California concluding they did not qualify for further lease suspensions. At the
same time, they directed 90-day extensions to the suspensions for the remaining
36 leases to gather additional information. On November 12, 1999, the Secretary
of the Interior directed suspensions for the 36 leases ending at various periods
between June 1, 2001 and August 1, 2003 for the purpose of (1) completion of an
environmental review including cumulative analysis taking into account changed
circumstances, (2) obtaining detailed plans of lessee's additional exploration
and development activities, and (3) the maximum review of these plans allowed
under law. Immediately thereafter, the State of California filed suit claiming
that the California Coastal Commission must review requests for suspension
consistency under California's Coastal Plan before the MMS can approve
suspensions. We cannot assure you that the owners will develop such reserves,
that the MMS will approve development plans or that future regulations or
litigation will not prevent or delay their ultimate development and production.
We also cannot assure you that, if such reserves were developed, a competing
pipeline will not be built to transport the production. In addition, a June 12,
1998 Executive Order of the President of the United States extends until the
year 2012 a statutory moratorium on new leasing of offshore California fields.
Existing fields are authorized to continue production, but federal, state and
local agencies may restrict permits and authorizations for their development,
and may restrict new onshore facilities designed to serve offshore production of
crude oil. San Luis Obispo and Santa Barbara counties have adopted zoning
ordinances that prohibit development, construction, installation or expansion of
any onshore support facility for offshore oil and gas activity in the area,
unless approved by a majority of the votes cast by the voters of the affected
county in an authorized election. Any such restrictions, should they be imposed,
could adversely affect the future delivery of crude oil to the All American
Pipeline.
San Joaquin Valley Supply. The San Joaquin Valley is one of the most prolific
oil producing regions in the continental United States, producing approximately
559,000 barrels per day of crude oil during the first nine months of 1999 that
accounted for approximately 67% of total California production and 11% of the
total production in the lower 48 states.
The following table reflects the historical production for the San Joaquin
Valley as well as total California production (excluding OCS volumes) as
reported by the California Division of Oil and Gas.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1999 (1) 1998 1997 1996 1995 1994 1993 1992 1991 1990
---------- ------ -------- -------- -------- -------- -------- -------- ------- -------
(BARRELS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average daily volumes:
San Joaquin Valley production (2) 559 592 584 579 569 578 588 609 634 629
Total California production
(excluding OCS volumes) 731 781 781 772 764 784 803 835 875 879
</TABLE>
- -----------
(1) Reflects information through September 1999.
(2) Consists of production from California Division of Oil and Gas District IV.
System Demand. Deliveries from the All American Pipeline are made to
California refineries through connections with third-party pipelines at Sisquoc,
Pentland and Emidio. Deliveries at Mojave were discontinued in the second
quarter of 1999, and volumes previously delivered to Mojave are delivered to
Emidio. Except for the purging of the linefill volumes, deliveries to Texas were
discontinued effective December 1, 1999.
13
<PAGE>
The following table sets forth All American Pipeline average deliveries per
day within and outside California.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ----------- ----------- ----------- -----------
(BARRELS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average daily volumes delivered to:
California
Sisquoc 27 24 21 17 11
Pentland 52 69 74 71 65
Mojave 7 22 32 6 -
Emidio 15 - - - -
------------- ----------- ----------- ----------- -----------
Total California 101 115 127 94 76
Texas (1) 56 59 68 113 141
------------- ----------- ----------- ----------- -----------
Total 157 174 195 207 217
============= =========== =========== =========== ===========
</TABLE>
- ---------
(1) See " Midstream Acquisitions and Dispositions - All American Linefill and
Asset Disposition".
SJV Gathering System
The SJV Gathering System is a proprietary pipeline system. As a proprietary
pipeline, the SJV Gathering System is not subject to common carrier regulations.
The SJV Gathering System was constructed in 1987 with a design capacity of
approximately 140,000 barrels per day. The system consists of a 16-inch pipeline
that originates at the Belridge station and extends 45 miles south to a
connection with the All American Pipeline at the Pentland station. The SJV
Gathering System is connected to several fields, including the South Belridge,
Elk Hills and Midway Sunset fields, three of the seven largest producing fields
in the lower 48 states. In 1999, we leased a pipeline that provides us access to
the Lost Hills field. The SJV Gathering System also includes approximately
586,000 barrels of tank capacity, which can be used to facilitate movements
along the system as well as to support our other activities.
The SJV Gathering System is supplied with the crude oil production primarily
from major oil companies' equity production from the South Belridge, Cymeric,
Midway Sunset, Elk Hills and Lost Hills fields. The table below sets forth the
historical volumes received into the SJV Gathering System.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
------------- --------- --------- --------- ---------
(BARRELS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total average daily volumes 84 85 91 67 50
</TABLE>
West Texas Gathering System
We purchased the West Texas Gathering System from Chevron Pipe Line Company
in July 1999 for approximately $36.0 million. The West Texas Gathering System is
a common carrier crude oil pipeline system located in the heart of the Permian
Basin producing area. The West Texas Gathering System has lease gathering
facilities in Crane, Ector, Upton, Ward and Winkler counties. In aggregate,
these counties have produced on average in excess of 150,000 barrels per day of
crude oil over the last four years. The West Texas Gathering System was
originally built by Gulf Oil Corporation in the late 1920's, expanded during the
late 1950's and updated during the mid 1990's. The West Texas Gathering System
provides us with considerable flexibility, as major segments are bi-directional
and allow us to move crude oil between three of the major trading locations in
West Texas.
Lease volumes gathered into the system are approximately 50,000 barrels per
day. Chevron USA has agreed to transport its equity crude oil production from
fields connected to the West Texas Gathering System on the system through July
2011 (currently representing approximately 22,000 barrels per day, or 44% of
total system gathering volumes and 22% of the total system volumes). Other large
producers connected to the gathering system include Burlington, Devon, Anadarko,
Altura, Bass, and Fina. Volumes from connecting carriers, including Exxon,
Phillips and Unocal, average approximately 42,000 barrels per day. Our West
Texas Gathering System has the capability to transport approximately 190,000
barrels per day. At the time of the acquisition, truck injection stations were
limited and provided less than 1,000 barrels per day. We have installed ten
truck injection stations on the West Texas Gathering System since the
acquisition. Our trucks are used to pick up crude oil produced in the areas
adjacent to the West Texas Gathering System and deliver these volumes into the
pipeline. These additional injection stations allowed us to reduce the distance
of our truck hauls in this area, increase the utilization of
14
<PAGE>
our pipeline assets and reduce our operating costs. Volumes received from truck
injection stations were increased to 10,000 barrels per day by the fourth
quarter of 1999. The West Texas Gathering System also includes approximately 2.9
million barrels of tank capacity located along the pipeline system.
Spraberry Pipeline System
The Spraberry Pipeline System, acquired in the Scurlock acquisition, is a
proprietary pipeline system that gathers crude oil from the Spraberry Trend of
West Texas and transports it to Midland, Texas, where it interconnects with the
West Texas Gathering System and other pipelines. The Spraberry Pipeline System
consists of approximately 800 miles of pipe of varying diameter, and has a
throughput capacity of approximately 50,000 barrels of crude oil per day. The
Spraberry Trend is one of the largest producing areas in West Texas, and we are
one of the largest gatherers in the Spraberry Trend. The Spraberry Pipeline
System gathers approximately 34,000 barrels per day of crude oil. Large
suppliers to the Spraberry Pipeline System include Lantern Petroleum and Pioneer
Natural Resources. The Spraberry Pipeline System also includes approximately
173,000 barrels of tank capacity located along the pipeline.
Sabine Pass Pipeline System
The Sabine Pass Pipeline System, acquired in the Scurlock acquisition, is a
common carrier crude oil pipeline system. The primary purpose of the Sabine Pass
Pipeline System is to gather crude oil from onshore facilities of offshore
production near Johnson's Bayou, Louisiana, and deliver it to tankage and barge
loading facilities in Sabine Pass, Texas. The Sabine Pass Pipeline System
consists of approximately 34 miles of pipe ranging from 4 to 6 inches in
diameter and has a throughput capacity of approximately 26,000 barrels of
Louisiana light sweet crude oil per day. For the year ended December 31, 1999,
the system transported approximately 16,500 barrels of crude oil per day. The
Sabine Pass Pipeline System also includes 245,000 barrels of tank capacity
located along the pipeline.
Ferriday Pipeline System
The Ferriday Pipeline System, acquired in the Scurlock acquisition, is a
common carrier crude oil pipeline system which is located in East Louisiana and
West Mississippi. The Ferriday Pipeline System consists of approximately 600
miles of pipe ranging from 2 inches to 12 inches in diameter. The Ferriday
Pipeline System delivers 9,000 barrels per day of crude oil to third-party
pipelines that supply refiners in the Midwest. The Ferriday Pipeline System also
includes approximately 348,000 barrels of tank capacity located along the
pipeline.
In November 1999, we completed the construction of an 8-inch pipeline
underneath the Mississippi River that connects our Ferriday Pipeline System in
West Mississippi with the portion of the system located in East Louisiana. This
connection provides us with bi-directional capability to access additional
markets and enhances our ability to service our pipeline customers and take
advantage of additional high margin merchant activities.
East Texas Pipeline System
The East Texas Pipeline System, acquired in the Scurlock acquisition, is a
proprietary crude oil pipeline system that is used to gather approximately
10,000 barrels per day of crude oil in East Texas and transport approximately
22,000 barrels per day of crude oil to Crown Central's refinery in Longview,
Texas. The deliveries to Crown Central are subject to a five-year throughput and
deficiency agreement, which extends through 2004. The East Texas Pipeline System
also includes approximately 221,000 barrels of tank capacity located along the
pipeline.
Illinois Basin Pipeline System
The Illinois Basin Pipeline System, acquired in the Scurlock acquisition,
consists of common carrier pipeline and gathering systems and truck injection
facilities in southern Illinois. The Illinois Basin Pipeline System consists of
approximately 170 miles of pipe of varying diameter and delivers approximately
6,400 barrels per day of crude oil to third-party pipelines that supply refiners
in the Midwest. During 1999, approximately 3,600 barrels per day of the supply
on this system are from fields operated by us.
15
<PAGE>
TERMINALLING AND STORAGE ACTIVITIES AND GATHERING AND MARKETING ACTIVITIES
Terminalling and Storage Activities
We own approximately 9.7 million barrels of terminalling and storage assets,
including tankage associated with our pipeline and gathering systems. Our
terminalling and storage operations generate revenue through terminalling and
storage fees paid by third parties as well as by utilizing the tankage in
conjunction with our merchant activities. Storage fees are generated when we
lease tank capacity to third parties. Terminalling fees, also referred to as
throughput fees, are generated when we receive crude oil from one connecting
pipeline and redeliver such crude oil to another connecting carrier in volumes
that allow the refinery to receive its crude oil on a ratable basis throughout a
delivery period. Both terminalling and storage fees are generally earned from:
. refiners and gatherers that segregate or custom blend crudes for
refining feedstocks;
. pipeline operators, refiners or traders that need segregated tankage for
foreign cargoes;
. traders who make or take delivery under NYMEX contracts; and
. producers and resellers that seek to increase their marketing
alternatives.
The tankage that is used to support our arbitrage activities positions us to
capture margins in a contango market or when the market switches from contango
to backwardation.
Our most significant terminalling and storage asset is our Cushing Terminal
which was constructed in 1993, and expanded by approximately 50% in 1999, to
capitalize on the crude oil supply and demand imbalance in the Midwest. The
imbalance was caused by the continued decline of regional production supplies,
increasing imports and an inadequate pipeline and terminal infrastructure. The
Cushing Terminal is also used to support and enhance the margins associated with
our merchant activities relating to our lease gathering and bulk trading
activities.
The Cushing Terminal has total storage capacity of approximately 3.1 million
barrels. The Cushing Terminal is comprised of fourteen 100,000 barrel tanks,
four 150,000 barrel tanks and four 270,000 barrel tanks which are used to store
and terminal crude oil. The Cushing Terminal also includes a pipeline manifold
and pumping system that has an estimated daily throughput capacity of
approximately 800,000 barrels per day. The pipeline manifold and pumping system
is designed to support more than ten million barrels of tank capacity. The
Cushing Terminal is connected to the major pipelines and terminals in the
Cushing Interchange through pipelines that range in size from 10 inches to 24
inches in diameter.
The Cushing Terminal is a state-of-the-art facility designed to serve the
needs of refiners in the Midwest. In order to service an expected increase in
the volumes as well as the varieties of foreign and domestic crude oil projected
to be transported through the Cushing Interchange, we incorporated certain
attributes into the design of the Cushing Terminal including:
. multiple, smaller tanks to facilitate simultaneous handling of multiple
crude varieties in accordance with normal pipeline batch sizes;
. dual header systems connecting each tank to the main manifold system to
facilitate efficient switching between crude grades with minimal
contamination;
. bottom drawn sumps that enable each tank to be efficiently drained down
to minimal remaining volumes to minimize crude contamination and
maintain crude integrity during changes of service;
. mixer(s) on each tank to facilitate blending crude grades to refinery
specifications; and
. a manifold and pump system that allows for receipts and deliveries with
connecting carriers at their maximum operating capacity.
As a result of incorporating these attributes into the design of the Cushing
Terminal, we believe we are favorably positioned to serve the needs of Midwest
refiners to handle an increase in varieties of crude transported through the
Cushing Interchange.
The Cushing Terminal also incorporates numerous environmental and operational
safeguards. We believe that our terminal is the only one at the Cushing
Interchange in which each tank has a secondary liner (the equivalent of double
bottoms), leak detection devices and secondary seals. The Cushing Terminal is
the only terminal at the Cushing Interchange equipped with aboveground
pipelines. Like the pipeline systems we operate, the Cushing Terminal is
operated by a SCADA system and each tank is cathodically protected. In addition,
each tank is equipped with an audible and visual high level alarm system to
prevent overflows; a double seal floating roof that minimizes air emissions and
prevents the possible accumulation
16
<PAGE>
of potentially flammable gases between fluid levels and the roof of the tank;
and a foam dispersal system that, in the event of a fire, is fed by a fully-
automated fire water distribution network.
The Cushing Interchange is the largest wet barrel trading hub in the U.S. and
the delivery point for crude oil futures contracts traded on the NYMEX. The
Cushing Terminal has been designated by the NYMEX as an approved delivery
location for crude oil delivered under the NYMEX light sweet crude oil futures
contract. As the NYMEX delivery point and a cash market hub, the Cushing
Interchange serves as a primary source of refinery feedstock for the Midwest
refiners and plays an integral role in establishing and maintaining markets for
many varieties of foreign and domestic crude oil.
The following table sets forth throughput volumes for our terminalling and
storage operations, and quantity of tankage leased to third parties from 1995
through 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ---------- ---------- ---------
(BARRELS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Throughput volumes (average daily volumes):
Cushing Terminal 72 69 69 56 43
Ingleside Terminal 11 11 8 3 -
----------- ------- -------- ------- --------
Total 83 80 77 59 43
=========== ======= ======== ======= ========
Storage leased to third parties
(monthly average volumes):
Cushing Terminal 1,743 890 414 203 208
Ingleside Terminal 232 260 254 211 -
----------- ------- -------- ------- --------
Total 1,975 1,150 668 414 208
=========== ======= ======== ======= ========
</TABLE>
Gathering and Marketing Activities
Our gathering and marketing activities are conducted in 23 states; however,
the vast majority of those activities are in Texas, Louisiana, California,
Illinois and the Gulf of Mexico. These activities include:
. purchasing crude oil from producers at the wellhead and in bulk from
aggregators at major pipeline interconnects and trading locations;
. transporting this crude oil on our own proprietary gathering assets or
assets owned and operated by third parties when necessary or cost
effective;
. exchanging this crude oil for another grade of crude oil or at a
different geographic location, as appropriate, in order to maximize
margins or meet contract delivery requirements; and
. marketing crude oil to refiners or other resellers.
We purchase crude oil from many independent producers and believe that we
have established broad-based relationships with crude oil producers in our areas
of operations. For the year ended December 31, 1999, we purchased approximately
265,000 barrels per day of crude oil directly at the wellhead from more than
2,200 producers from approximately 10,700 leases. We purchase crude oil from
producers under contracts that range in term from a thirty-day evergreen to
three years. Gathering and marketing activities are characterized by large
volumes of transactions with lower margins relative to pipeline and terminalling
and storage operations.
In the period immediately following the disclosure of the unauthorized
trading losses, a significant number of PAA's suppliers and trading partners
reduced or eliminated the open credit previously extended to PAA. Consequently,
the amount of letters of credit PAA needed to support the level its crude oil
purchases then in effect increased significantly. In many instances PAA arranged
for letters of credit to secure its obligations to purchase crude oil from its
customers. In other instances, certain of PAA's purchase contracts were
terminated. As a result of these changes, aggregate volumes purchased are
expected to decrease by 150,000 barrels per day, consisting primarily of lower
unit margin purchases. Approximately 50,000 barrels per day of the decrease is
related to barrels gathered at producer lease locations and 100,000 barrels per
day is attributable to bulk purchases. See "Unauthorized Trading Losses" and
Item 7. - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Capital Resources, Liquidity and Financial Condition".
17
<PAGE>
The following table shows the average daily volume of our lease gathering and
bulk purchases from 1995 through 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1999 (1) 1998 1997 1996 1995
------------- ----------- ----------- ----------- -----------
(BARRELS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Lease gathering 239 88 71 59 46
Bulk purchases 138 98 49 32 10
--- --- --- -- --
Total volumes 377 186 120 91 56
=== === === == ==
</TABLE>
- ----------------
(1) Includes volumes from Scurlock Permian since May 1, 1999.
Crude Oil Purchases. In a typical producer's operation, crude oil flows from
the wellhead to a separator where the petroleum gases are removed. After
separation, the crude oil is treated to remove water, sand and other
contaminants and is then moved into the producer's on-site storage tanks. When
the tank is full, the producer contacts our field personnel to purchase and
transport the crude oil to market. We utilize our truck fleet and gathering
pipelines and third-party pipelines, trucks and barges to transport the crude
oil to market. We own or lease approximately 280 trucks, 325 tractor-trailers
and 290 injection stations.
We have a Marketing Agreement with PAA, under which they are the exclusive
marketer/purchaser for all of our equity crude oil production. The Marketing
Agreement provides that they will purchase for resale at market prices all of
our crude oil production for which they charge a fee of $0.20 per barrel. This
fee will be adjusted every three years based upon then existing market
conditions. The Marketing Agreement will terminate upon a "change of control" of
us or the general partner.
Bulk Purchases. In addition to purchasing crude oil at the wellhead from
producers, we purchase crude oil in bulk at major pipeline terminal points. This
production is transported from the wellhead to the pipeline by major oil
companies, large independent producers or other gathering and marketing
companies. We purchase crude oil in bulk when we believe additional
opportunities exist to realize margins further downstream in the crude oil
distribution chain. The opportunities to earn additional margins vary over time
with changing market conditions. Accordingly, the margins associated with our
bulk purchases will fluctuate from period to period. Our bulk purchasing
activities are concentrated in California, Texas, Louisiana and at the Cushing
Interchange.
Crude Oil Sales. The marketing of crude oil is complex and requires detailed
current knowledge of crude oil sources and end markets and a familiarity with a
number of factors including grades of crude oil, individual refinery demand for
specific grades of crude oil, area market price structures for the different
grades of crude oil, location of customers, availability of transportation
facilities and timing and costs (including storage) involved in delivering crude
oil to the appropriate customer. We sell our crude oil to major integrated oil
companies, independent refiners and other resellers in various types of sale and
exchange transactions, at market prices for terms ranging from one month to
three years.
As we purchase crude oil, we establish a margin by selling crude oil for
physical delivery to third party users, such as independent refiners or major
oil companies, or by entering into a future delivery obligation with respect to
futures contracts on the NYMEX. Through these transactions, we seek to maintain
a position that is substantially balanced between crude oil purchases and sales
and future delivery obligations. We from time to time enter into fixed price
delivery contracts, floating price collar arrangements, financial swaps and
crude oil futures contracts as hedging devices. Our policy is generally to
purchase only crude oil for which we have a market and to structure our sales
contracts so that crude oil price fluctuations do not materially affect the
gross margin which we receive. We do not acquire and hold crude oil, futures
contracts or other derivative products for the purpose of speculating on crude
oil price changes that might expose us to indeterminable losses. In November
1999, we discovered that this policy was violated and we incurred $174.0 million
in unauthorized trading losses, including estimated associated costs and legal
expenses. See "Unauthorized Trading Losses".
Risk management strategies, including those involving price hedges using NYMEX
futures contracts, have become increasingly important in creating and
maintaining margins. Such hedging techniques require significant resources
dedicated to managing futures positions. We are able to monitor crude oil
volumes, grades, locations and delivery schedules and to coordinate marketing
and exchange opportunities, as well as NYMEX hedging positions. This
coordination ensures that our NYMEX hedging activities are successfully
implemented. We have recently hired a Risk Manager that has direct
responsibility and authority for our risk policies and our trading controls and
procedures and other aspects of corporate risk management.
18
<PAGE>
Crude Oil Exchanges. We pursue exchange opportunities to enhance margins
throughout the gathering and marketing process. When opportunities arise to
increase our margin or to acquire a grade of crude oil that more nearly matches
our delivery requirement or the preferences of our refinery customers, we
exchange physical crude oil with third parties. These exchanges are effected
through contracts called exchange or buy-sell agreements. Through an exchange
agreement, we agree to buy crude oil that differs in terms of geographic
location, grade of crude oil or delivery schedule from crude oil we have
available for sale. Generally, we enter into exchanges to acquire crude oil at
locations that are closer to our end markets, thereby reducing transportation
costs and increasing our margin. We also exchange our crude oil to be delivered
at an earlier or later date, if the exchange is expected to result in a higher
margin net of storage costs, and enter into exchanges based on the grade of
crude oil, which includes such factors as sulfur content and specific gravity,
in order to meet the quality specifications of our delivery contracts.
Producer Services. Crude oil purchasers who buy from producers compete on the
basis of competitive prices and highly responsive services. Through our team of
crude oil purchasing representatives, we maintain ongoing relationships with
more than 2,200 producers. We believe that our ability to offer high-quality
field and administrative services to producers is a key factor in our ability to
maintain volumes of purchased crude oil and to obtain new volumes. High-quality
field services include efficient gathering capabilities, availability of trucks,
willingness to construct gathering pipelines where economically justified,
timely pickup of crude oil from tank batteries at the lease or production point,
accurate measurement of crude oil volumes received, avoidance of spills and
effective management of pipeline deliveries. Accounting and other administrative
services include securing division orders (statements from interest owners
affirming the division of ownership in crude oil purchased by us), providing
statements of the crude oil purchased each month, disbursing production proceeds
to interest owners and calculation and payment of ad valorem and production
taxes on behalf of interest owners. In order to compete effectively, we must
maintain records of title and division order interests in an accurate and timely
manner for purposes of making prompt and correct payment of crude oil production
proceeds, together with the correct payment of all severance and production
taxes associated with such proceeds.
Credit. Our merchant activities involve the purchase of crude oil for resale
and require significant extensions of credit by our suppliers of crude oil. In
order to assure our ability to perform our obligations under crude oil purchase
agreements, various credit arrangements are negotiated with our crude oil
suppliers. Such arrangements include open lines of credit directly with us and
standby letters of credit issued under our letter of credit facility. Due to the
unauthorized trading losses, the amount of letters of credit that we are
required to provide to secure our crude oil purchases has increased. See Item 7
- -- "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources, Liquidity and Financial Condition --
Unauthorized Trading Losses".
When we market crude oil, we must determine the amount, if any, of the line of
credit to be extended to any given customer. If we determine that a customer
should receive a credit line, we must then decide on the amount of credit that
should be extended. Since our typical sales transactions can involve tens of
thousands of barrels of crude oil, the risk of nonpayment and nonperformance by
customers is a major consideration in our business. We believe our sales are
made to creditworthy entities or entities with adequate credit support.
Credit review and analysis are also integral to our leasehold purchases.
Payment for all or substantially all of the monthly leasehold production is
sometimes made to the operator of the lease. The operator, in turn, is
responsible for the correct payment and distribution of such production proceeds
to the proper parties. In these situations, we must determine whether the
operator has sufficient financial resources to make such payments and
distributions and to indemnify and defend us in the event any third party should
bring a protest, action or complaint in connection with the ultimate
distribution of production proceeds by the operator.
OPERATING ACTIVITIES
See Note 22 in the notes to our consolidated financial statements located
elsewhere in this report for information with respect to the operating
activities of our upstream and midstream segments.
PRODUCT MARKETS AND MAJOR CUSTOMERS
Our revenues are highly dependent upon the prices of, and demand for, crude
oil and natural gas. Historically, the markets for crude oil and natural gas
have been volatile and are likely to continue to be volatile in the future. The
prices we receive for our crude oil and natural gas production and the levels of
such production are subject to wide fluctuations and depend on numerous factors
beyond our control, including seasonality, the condition of the United States
economy (particularly the manufacturing sector), foreign imports, political
conditions in other crude oil-producing and natural gas-producing countries, the
actions of the Organization of Petroleum Exporting Countries and domestic
government regulation,
19
<PAGE>
legislation and policies. Decreases in the prices of crude oil and natural gas
have had, and could have in the future, an adverse effect on the carrying value
of our proved reserves and our revenues, profitability and cash flow. The
benchmark NYMEX crude oil price of $25.60 per barrel at December 31, 1999 was
more than double the $12.05 per barrel at the end of 1998. See Item 7. -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources, Liquidity and Financial Condition -- Changing
Crude Oil and Natural Gas Prices".
In order to manage our exposure to price risks in the marketing of our crude
oil and natural gas, from time to time we purchase put options, enter into fixed
price delivery contracts, floating price collar arrangements, financial swaps
and crude oil and natural gas futures contracts as hedging devices. To ensure a
fixed price for future production, we may sell a futures contract and thereafter
either (1) make physical delivery of our product to comply with such contract or
(2) buy a matching futures contract to unwind our futures position and sell our
production to a customer. These same techniques are also utilized to manage
price risk for certain production purchased from customers of PAA. Such
contracts may expose us to the risk of financial loss in certain circumstances,
including instances where production is less than expected, our customers fail
to purchase or deliver the contracted quantities of crude oil or natural gas, or
a sudden, unexpected event materially impacts crude oil or natural gas prices.
Such contracts may also restrict our ability to benefit from unexpected
increases in crude oil and natural gas prices. See Item 2. -- "Properties --
Crude Oil and Natural Gas Reserves".
Substantially all of our California crude oil and natural gas production and
our Sunniland Trend oil production is transported by pipelines, trucks and
barges owned by third parties. The inability or unwillingness of these parties
to provide transportation services to us for a reasonable fee could result in
our having to find transportation alternatives, increased transportation costs
or involuntary curtailment of a significant portion of our crude oil and natural
gas production.
Certain of our natural gas production has been in the past, and may be in the
future, curtailed from time to time depending on the quality of the natural gas
produced and transportation alternatives. In addition, market, economic and
regulatory factors, including issues regarding the quality of certain of our
natural gas, may in the future adversely affect our ability to sell our natural
gas production.
Deregulation of natural gas prices has increased competition and volatility of
natural gas prices. Since demand for natural gas is generally highest during
winter months, prices received for our natural gas are subject to seasonal
variations and other fluctuations. All of our natural gas production is
currently sold under various arrangements at spot indexed prices. In certain
instances we enter into financial arrangements to hedge our exposure to spot
price fluctuations. See Item 7. -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources, Liquidity
and Financial Condition -- Changing Crude Oil and Natural Gas Prices" and Item
2. -- "Properties -- Production and Sales".
Customers accounting for more than 10% of total sales for the periods
indicated are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL SALES
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
Customer 1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Sempra Energy Trading Corporation 22% 27% 11%
Koch Oil Company 18% 15% 27%
PERCENTAGE OF OIL AND GAS SALES (1)
--------------------------------------------------------
Chevron 43% - -
Tosco Refining Company 21% 50% -
Conoco Inc. 12% - -
Scurlock Permian LLC - 17% -
Unocal Energy Trading, Inc. - - 52%
Marathon Oil Company 17% - 23%
Exxon Company U.S.A. - - 10%
</TABLE>
- ----------------
(1) PAA is the exclusive marketer/purchaser for all our equity crude oil
production. These percentages represent the entities that purchased our
equity crude production from PAA. We believe that the loss of an individual
customer would not have a material adverse effect.
20
<PAGE>
Competition
Crude Oil and Natural Gas Producing Activities
Our competitors include major integrated oil and natural gas companies and
numerous independent oil and natural gas companies, individuals and drilling and
income programs. Many of our larger competitors possess and employ financial and
personnel resources substantially greater than those available to us. Such
companies are able to pay more for productive crude oil and natural gas
properties and exploratory prospects and to define, evaluate, bid for and
purchase a greater number of properties and prospects than our financial or
human resources permit. Our ability to acquire additional properties and to
discover reserves in the future will depend on our ability to evaluate and
select suitable properties and to consummate transactions in a highly
competitive environment. In addition, there is substantial competition for
capital available for investment in the oil and natural gas industry.
Midstream Activities
Competition among pipelines is based primarily on transportation charges,
access to producing areas and demand for the crude oil by end users. We believe
that high capital requirements, environmental considerations and the difficulty
in acquiring rights of way and related permits make it unlikely that competing
pipeline systems comparable in size and scope to our pipeline systems will be
built in the foreseeable future.
We face intense competition in our terminalling and storage activities and
gathering and marketing activities. Our competitors include other crude oil
pipelines, the major integrated oil companies, their marketing affiliates and
independent gatherers, brokers and marketers of widely varying sizes, financial
resources and experience. Some of these competitors have capital resources many
times greater than ours and control substantially greater supplies of crude oil.
REGULATION
Our operations are subject to extensive regulation. Many departments and
agencies, both federal and state, are authorized by statute to issue and have
issued rules and regulations binding on the oil industry and its individual
participants. The failure to comply with such rules and regulations can result
in substantial penalties. The regulatory burden on the oil industry increases
our cost of doing business and, consequently, affects our profitability.
However, we do not believe that we are affected in a significantly different
manner by these regulations than are our competitors. Due to the myriad of
complex federal and state statutes and regulations which may affect us, directly
or indirectly, you should not rely on the following discussion of certain
statutes and regulations as an exhaustive review of all regulatory
considerations affecting our operations.
OSHA
We are also subject to the requirements of the Federal Occupational Safety and
Health Act ("OSHA") and comparable state statutes that regulate the protection
of the health and safety of workers. In addition, the OSHA hazard communication
standard requires that certain information be maintained about hazardous
materials used or produced in operations and that this information be provided
to employees, state and local government authorities and citizens. We believe
that our operations are in substantial compliance with OSHA requirements,
including general industry standards, record keeping requirements and monitoring
of occupational exposure to regulated substances.
Trucking Regulation
We operate a fleet of trucks to transport crude oil and oilfield materials as
a private, contract and common carrier. We are licensed to perform both
intrastate and interstate motor carrier services. As a motor carrier, we are
subject to certain safety regulations issued by the Department of
Transportation. The trucking regulations cover, among other things, driver
operations, keeping of log books, truck manifest preparations, the placement of
safety placards on the trucks and trailer vehicles, drug and alcohol testing,
safety of operation and equipment, and many other aspects of truck operations.
We are also subject to OSHA with respect to our trucking operations.
Pipeline Regulation
Our pipelines are subject to regulation by the Department of Transportation
under the Hazardous Liquids Pipeline Safety Act of 1979, as amended ("HLPSA")
relating to the design, installation, testing, construction, operation,
replacement and management of pipeline facilities. The HLPSA requires us and
other pipeline operators to comply with regulations issued
21
<PAGE>
pursuant to HLPSA, to permit access to and allow copying of records and to make
certain reports and provide information as required by the Secretary of
Transportation.
The Pipeline Safety Act of 1992 amends the HLPSA in several important
respects. It requires the Research and Special Programs Administration of the
Department of Transportation to consider environmental impacts, as well as its
traditional public safety mandate, when developing pipeline safety regulations.
In addition, the Pipeline Safety Act mandates the establishment by the
Department of Transportation of pipeline operator qualification rules requiring
minimum training requirements for operators, and requires that pipeline
operators provide maps and records to the Research and Special Programs
Administration. It also authorizes the Research and Special Programs
Administration to require that pipelines be modified to accommodate internal
inspection devices, to mandate the installation of emergency flow restricting
devices for pipelines in populated or sensitive areas and to order other changes
to the operation and maintenance of petroleum pipelines. We believe that our
pipeline operations are in substantial compliance with applicable HLPSA and
Pipeline Safety Act requirements. Nevertheless, we could incur significant
expenses in the future if additional safety measures are required or if safety
standards are raised and exceed the current pipeline control system
capabilities.
States are largely preempted by federal law from regulating pipeline safety
but may assume responsibility for enforcing federal intrastate pipeline
regulations and inspection of intrastate pipelines. In practice, states vary
considerably in their authority and capacity to address pipeline safety. We do
not anticipate any significant problems in complying with applicable state laws
and regulations in those states in which we operate.
Transportation of Crude Oil
General Interstate Regulation. Our interstate common carrier pipeline
operations are subject to rate regulation by the FERC under the Interstate
Commerce Act. The Interstate Commerce Act requires that tariff rates for
petroleum pipelines, which includes crude oil, as well as refined product and
petrochemical pipelines, be just and reasonable and non-discriminatory. The
Interstate Commerce Act permits challenges to proposed new or changed rates by
protest, and challenges to rates that are already final and in effect by
complaint. Upon the appropriate showing, a successful complainant may obtain
reparations for overcharges sustained for a period of up to two years prior to
the filing of a complaint.
The FERC is authorized to suspend the effectiveness of a new or changed tariff
rate for a period of up to seven months and to investigate the rate. If upon the
completion of an investigation the FERC finds that the rate is unlawful, it may
require the pipeline operator to refund to shippers, with interest, any
difference between the rates the FERC determines to be lawful and the rates
under investigation. In addition, the FERC will order the pipeline to change its
rates prospectively to the lawful level.
In general, petroleum pipeline rates must be cost-based, although settlement
rates, which are rates that have been agreed to by all shippers, are permitted,
and market-based rates may be permitted in certain circumstances. Under a cost-
of-service basis, rates are permitted to generate operating revenues, on the
basis of projected volumes, not greater than the total of the following:
. operating expenses;
. depreciation and amortization;
. federal and state income taxes; and
. an overall allowed rate of return on the pipeline's "rate base."
Energy Policy Act of 1992 and Subsequent Developments. In October 1992
Congress passed the Energy Policy Act of 1992. The Energy Policy Act deemed
petroleum pipeline rates in effect for the 365-day period ending on the date of
enactment of the Energy Policy Act or that were in effect on the 365th day
preceding enactment and had not been subject to complaint, protest or
investigation during the 365-day period to be just and reasonable under the
Interstate Commerce Act. The Energy Policy Act also provides that complaints
against such rates may only be filed under the following limited circumstances:
. a substantial change has occurred since enactment in either the economic
circumstances or the nature of the services which were a basis for the
rate;
. the complainant was contractually barred from challenging the rate prior to
enactment; or
. a provision of the tariff is unduly discriminatory or preferential.
22
<PAGE>
The Energy Policy Act further required the FERC to issue rules establishing a
simplified and generally applicable ratemaking methodology for petroleum
pipelines, and to streamline procedures in petroleum pipeline proceedings. On
October 22, 1993, the FERC responded to the Energy Policy Act directive by
issuing Order No. 561, which adopts a new indexing rate methodology for
petroleum pipelines. Under the new regulations, which were effective January 1,
1995, petroleum pipelines are able to change their rates within prescribed
ceiling levels that are tied to the Producer Price Index for Finished Goods,
minus one percent. Rate increases made pursuant to the index will be subject to
protest, but such protests must show that the portion of the rate increase
resulting from application of the index is substantially in excess of the
pipeline's increase in costs. The new indexing methodology can be applied to any
existing rate, even if the rate is under investigation. If such rate is
subsequently adjusted, the ceiling level established under the index must be
likewise adjusted.
In Order No. 561, the FERC said that as a general rule pipelines must utilize
the indexing methodology to change their rates. The FERC indicated, however,
that it was retaining cost-of-service ratemaking, market-based rates, and
settlements as alternatives to the indexing approach. A pipeline can follow a
cost-of-service approach when seeking to increase its rates above index levels
for uncontrollable circumstances. A pipeline can seek to charge market- based
rates if it can establish that it lacks market power. In addition, a pipeline
can establish rates pursuant to settlement if agreed upon by all current
shippers. Initial rates for new services can be established through a cost-of-
service proceeding or through an uncontested agreement between the pipeline and
all of its shippers, including at least one shipper not affiliated with the
pipeline.
On May 10, 1996, the Court of Appeals for the District of Columbia Circuit
affirmed Order No. 561. The Court held that by establishing a general indexing
methodology along with limited exceptions to indexed rates, FERC had reasonably
balanced its dual responsibilities of ensuring just and reasonable rates and
streamlining ratemaking through generally applicable procedures. The FERC
indicated in Order No. 561 that it will assess in 2000 how the rate-indexing
method is operating.
In a proceeding involving Lakehead Pipe Line Company, Limited Partnership
(Opinion No. 397), FERC concluded that there should not be a corporate income
tax allowance built into a petroleum pipeline's rates to reflect income
attributable to noncorporate partners since noncorporate partners, unlike
corporate partners, do not pay a corporate income tax. This result comports with
the principle that, although a regulated entity is entitled to an allowance to
cover its incurred costs, including income taxes, there should not be an element
included in the cost of service to cover costs not incurred. Opinion No. 397 was
affirmed on rehearing in May 1996. Appeals of the Lakehead opinions were taken,
but the parties to the Lakehead proceeding subsequently settled the case, with
the result that appellate review of the tax and other issues never took place.
A proceeding is also pending on rehearing at the FERC involving another
publicly traded limited partnership engaged in the common carrier transportation
of crude oil (the "Santa Fe Proceeding") in which the FERC could further limit
its current position related to the tax allowance permitted in the rates of
publicly traded partnerships, as well as possibly alter the FERC's current
application of the FERC oil pipeline ratemaking methodology. On January 13,
1999, the FERC issued Opinion No. 435 in the Santa Fe Proceeding, which, among
other things, affirmed Opinion No. 397's determination that there should not be
a corporate income tax allowance built into a petroleum pipeline's rates to
reflect income attributable to noncorporate partners. Requests for rehearing of
Opinion No. 435 are pending before the FERC. Petitions for review of Opinion No.
435 are before the D.C. Circuit Court of Appeals, but are being held in abeyance
pending FERC action on the rehearing requests. Once the FERC acts on rehearing,
the FERC's position on the income tax allowance and on other rate issues could
be subject to judicial review.
Our Crude Oil Pipelines. The FERC generally has not investigated rates, such
as those currently charged by us, which have been mutually agreed to by the
pipeline and the shippers or which are significantly below cost of service rates
that might otherwise be justified by the pipeline under the FERC's cost-based
ratemaking methods. Substantially all of our gross margins on transportation are
produced by rates that are either grandfathered or set by agreement of the
parties. These rates have not been decreased through application of the indexing
method. Rates for OCS crude are set by transportation agreements with shippers
that do not expire until 2007 and provide for a minimum tariff with annual
escalation. The FERC has twice approved the agreed OCS rates, although
application of the PPFIG-1 index method would have required their reduction.
When these OCS agreements expire in 2007, they will be subject to renegotiation
or to any of the other methods for establishing rates under Order No. 561. As a
result, we believe that the rates now in effect can be sustained, although no
assurance can be given that the rates currently charged would ultimately be
upheld if challenged. In addition, we do not believe that an adverse
determination on the tax allowance issue in the Santa Fe Proceeding would have a
detrimental impact upon our current rates.
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<PAGE>
Transportation and Sale of Natural Gas
Prior to January 1993, the FERC, under the Natural Gas Policy Act of 1978
("NGPA"), prescribed maximum lawful prices for natural gas sales. Effective
January 1, 1993, natural gas prices were completely deregulated. Consequently,
sales of our natural gas after such date have been made at market prices.
The FERC regulates interstate natural gas pipeline transportation rates and
service conditions, both of which affect our marketing of gas, as well as our
revenues from sales of such gas. Since the latter part of 1985, culminating in
1992 in the Order No. 636 series of orders, the FERC has endeavored to make
natural gas transportation more accessible to gas buyers and sellers on an open
and non-discriminatory basis. FERC's "open access" policies are designed to
improve the competitive structure of the interstate natural gas pipeline
industry and to create a regulatory framework that will put gas sellers into
more direct contractual relations with gas buyers. As a result of the Order No.
636 program, the marketing and pricing of natural gas has been significantly
altered. The interstate pipelines' traditional role as wholesalers of natural
gas has been terminated and replaced by regulations which require pipelines to
provide transportation and storage service to others who buy and sell natural
gas. In addition, on February 9, 2000, FERC issued Order No. 637, promulgating
new regulations designed to refine the Order No. 636 "open access" policies and
revise the rules applicable to capacity release transactions. These new rules
will, among other things, permit existing holders of firm capacity to release or
"sell" their capacity to others at rates in excess of FERC's regulated rate for
transportation services.
Although the FERC does not regulate natural gas producers such as ourselves,
the agency's actions are intended to foster increased competition within all
phases of the natural gas industry. To date, the FERC's pro-competition policies
have not materially affected our business or operations. It is unclear what
impact, if any, future rules or increased competition within the natural gas
transportation industry will have on our gas sales efforts.
Additional proposals and/or proceedings that might affect the natural gas
industry may be considered by FERC, Congress, or state regulatory bodies. We
cannot predict when or if any of these proposals may become effective or what
effect, if any, they may have on our operations. The natural gas industry has
historically been very heavily regulated; thus there is no assurance that the
less stringent regulatory approach recently pursued by the FERC and Congress
will continue indefinitely into the future. The regulatory burden on the oil and
natural gas industry increases our cost of doing business and, consequently,
affects our profitability and cash flow. In as much as laws and regulations are
frequently expanded, amended or reinterpreted, we are unable to predict the
future cost or impact of complying with such regulations. We do not believe,
however, that our operations will be affected any differently than other gas
producers or marketers with which we compete.
Regulation of Production
The production of crude oil and natural gas is subject to regulation under a
wide range of federal and state statutes, rules, orders and regulations. State
and federal statutes and regulations require permits for drilling operations,
drilling bonds and reports concerning operations. The states in which we own and
operate properties have regulations governing conservation matters, including
provisions for the unitization or pooling of oil and natural gas properties, the
establishment of maximum rates of production from crude oil and natural gas
wells and the regulation of the spacing, plugging and abandonment of wells. Many
states also restrict production to the market demand for oil and natural gas and
several states have indicated interest in revising applicable regulations. The
effect of these regulations is to limit the amount of oil and natural gas we can
produce from our wells and to limit the number of wells or the locations at
which we can drill. Moreover, each state generally imposes an ad valorem,
production or severance tax with respect to production and sale of crude oil,
natural gas and natural gas liquids within its jurisdiction.
ENVIRONMENTAL REGULATION
General
Various federal, state and local laws and regulations governing the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, affect our operations and costs. In particular, our activities
in connection with storage and transportation of crude oil and other liquid
hydrocarbons and our use of facilities for treating, processing or otherwise
handling hydrocarbons and wastes are subject to stringent environmental
regulation. As with the industry generally, compliance with existing and
anticipated regulations increases our overall cost of business. Areas affected
include capital costs to construct, maintain and upgrade equipment and
facilities. While these regulations affect our capital expenditures and
earnings, we believe that these regulations do not affect our competitive
position in that the operations of our competitors that comply with such
regulations are similarly affected. Environmental regulations have historically
been subject to frequent change by regulatory authorities, and we are unable to
predict the ongoing cost to us of complying with
24
<PAGE>
these laws and regulations or the future impact of such regulations on our
operations. Violation of federal or state environmental laws, regulations and
permits can result in the imposition of significant civil and criminal
penalties, injunctions and construction bans or delays. A discharge of
hydrocarbons or hazardous substances into the environment could, to the extent
such event is not insured, subject us to substantial expense, including both the
cost to comply with applicable regulations and claims by neighboring landowners
and other third parties for personal injury and property damage.
Although we obtained environmental studies on our properties in California,
the Sunniland Trend and the Illinois Basin, and we believe that such properties
have been operated in accordance with standard oil field practices, certain of
the fields have been in operation for more than approximately 90 years, and
current or future local, state and federal environmental laws and regulations
may require substantial expenditures to comply with such rules and regulations.
In December 1995, we negotiated an agreement with Chevron, a prior owner of the
LA Basin Properties, to remediate sections of the properties impacted by prior
drilling and production operations. Under this agreement, Chevron agreed to
investigate and potentially remediate specific areas contaminated with hazardous
components, such as volatile organic substances and heavy metals, and we agreed
to excavate and remediate nonhazardous crude oil contaminated soils. We are
obligated to construct and operate (for the next 11 years) a minimum of five
acres of bioremediation cells for crude oil contaminated soils designated for
excavation and treatment by Chevron. While we believe that we do not have any
material obligations for operations conducted prior to Stocker's acquisition of
the properties from Chevron, other than our obligation to plug existing wells
and those normally associated with customary oil field operations of similarly
situated properties (such as the Chevron agreement described above), there can
be no assurance that current or future local, state or federal rules and
regulations will not require us to spend material amounts to comply with such
rules and regulations or that any portion of such amounts will be recoverable
from Chevron, either under the December 1995 agreement or the limited indemnity
from Chevron contained in the original purchase agreement.
A portion of our Sunniland Trend properties are located within the Big Cypress
National Preserve and our operations therein are subject to regulations
administered by the National Park Service ("NPS"). Under such regulations, a
Master Plan of Operations has been approved by the Regional Director of the NPS.
The Master Plan of Operations is a comprehensive plan of practices and
procedures for our drilling and production operations designed to minimize the
effect of such operations on the environment. The Master Plan of Operations must
be modified and permits must be secured from the NPS for new wells which require
the use of additional land for drilling operations. The Master Plan of
Operations also requires that we restore the surface property affected by its
drilling and production operations upon cessation of these activities. We do not
anticipate that expenditures required to comply with such regulations will have
a material adverse effect on its current operations.
Approximately 183 acres of the 450 acres acquired in the Montebello Field have
been designated as California Coastal Sage Scrub, a known habitat for the
gnatcatcher, a species of bird designated as a federal threatened species under
the Endangered Species Act. Approximately 40 pairs of gnatcatchers are believed
to inhabit the property. In addition, the 450 acres acquired have been or will
shortly be committed to the Natural Community Conservation Program/Coastal Sage
Scrub Project, a voluntary conservation program. A variety of existing laws,
rules and guidelines govern activities that can be conducted on properties that
contain coastal sage scrub and gnatcatchers. These laws, rules and guidelines
generally limit the scope of operations that can be conducted on such properties
to those activities which do not materially interfere with such vegetation, the
gnatcatcher or its habitat. While there can be no assurance that the presence of
coastal sage scrub and gnatcatchers on the Montebello Field and existing or
future laws, rules and guidelines will not prohibit or limit our operations and
our planned activities or future commercial and/or residential development, we
believe that we will be able to operate the existing wells and realize the
reserve potential identified in our acquisition analysis without undue
restrictions or prohibitions.
Water
The Oil Pollution Act ("OPA") was enacted in 1990 and amends provisions of the
Federal Water Pollution Control Act of 1972 ("FWPCA") and other statutes as they
pertain to prevention and response to oil spills. The OPA subjects owners of
facilities to strict, joint and potentially unlimited liability for removal
costs and certain other consequences of an oil spill, where such spill is into
navigable waters, along shorelines or in the exclusive economic zone of the U.S.
In the event of an oil spill into navigable waters, substantial liabilities
could be imposed upon us. States in which we operate have also enacted similar
laws. Regulations are currently being developed under OPA and state laws that
may also impose additional regulatory burdens on our operations.
The FWPCA imposes restrictions and strict controls regarding the discharge of
pollutants into navigable waters. Permits must be obtained to discharge
pollutants into state and federal waters. The FWPCA imposes substantial
potential liability for the costs of removal, remediation and damages. We
believe that compliance with existing permits and compliance with
25
<PAGE>
foreseeable new permit requirements will not have a material adverse effect on
our financial condition or results of operations.
Some states maintain groundwater protection programs that require permits for
discharges or operations that may impact groundwater conditions. We believe that
we are in substantial compliance with these state requirements.
Air Emissions
Our operations are subject to the Federal Clean Air Act and comparable state
and local statutes. We believe that our operations are in substantial compliance
with these statutes in all states in which we operate.
Amendments to the Federal Clean Air Act enacted in late 1990 (the "1990
Federal Clean Air Act Amendments") require or will require most industrial
operations in the U.S. to incur capital expenditures in order to meet air
emission control standards developed by the Environmental Protection Agency (the
"EPA") and state environmental agencies. In addition, the 1990 Federal Clean Air
Act Amendments include a new operating permit for major sources ("Title V
permits"), which applies to some of our facilities. Although we can give no
assurances, we believe implementation of the 1990 Federal Clean Air Act
Amendments will not have a material adverse effect on our financial condition or
results of operations.
Solid Waste
We generate non-hazardous solid wastes that are subject to the requirements of
the Federal Resource Conservation and Recovery Act ("RCRA") and comparable state
statutes. The EPA is considering the adoption of stricter disposal standards for
non-hazardous wastes, including oil and gas wastes. RCRA also governs the
disposal of hazardous wastes. We are not currently required to comply with a
substantial portion of the RCRA requirements because our operations generate
minimal quantities of hazardous wastes. However, it is possible that additional
wastes, which could include wastes currently generated during operations, will
in the future be designated as "hazardous wastes." Hazardous wastes are subject
to more rigorous and costly disposal requirements than are non-hazardous wastes.
Such changes in the regulations could result in additional capital expenditures
or operating expenses.
Hazardous Substances
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as "Superfund", imposes liability, without regard to
fault or the legality of the original act, on certain classes of persons that
contributed to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of the site and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. CERCLA also authorizes the EPA and, in some instances, third parties to
act in response to threats to the public health or the environment and to seek
to recover from the responsible classes of persons the costs they incur. In the
course of our ordinary operations, we may generate waste that falls within
CERCLA's definition of a "hazardous substance." We may be jointly and severally
liable under CERCLA for all or part of the costs required to clean up sites at
which such hazardous substances have been disposed of or released into the
environment.
We currently own or lease, and have in the past owned or leased, properties
where hydrocarbons are being or have been handled. Although we have utilized
operating and disposal practices that were standard in the industry at the time,
hydrocarbons or other wastes may have been disposed of or released on or under
the properties owned or leased by us or on or under other locations where these
wastes have been taken for disposal. In addition, many of these properties have
been operated by third parties whose treatment and disposal or release of
hydrocarbons or other wastes was not under our control. These properties and
wastes disposed thereon may be subject to CERCLA, RCRA and analogous state laws.
Under such laws, we could be required to remove or remediate previously disposed
wastes (including wastes disposed of or released by prior owners or operators),
to clean up contaminated property (including contaminated groundwater) or to
perform remedial plugging operations to prevent future contamination.
Hazardous Materials Transportation Requirements
The DOT regulations affecting pipeline safety require pipeline operators to
implement measures designed to reduce the environmental impact of oil discharge
from onshore oil pipelines. These regulations require operators to maintain
comprehensive spill response plans, including extensive spill response training
for pipeline personnel. In addition, DOT regulations contain detailed
specifications for pipeline operation and maintenance. We believe our operations
are in substantial compliance with such regulations.
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<PAGE>
FEDERAL TAXATION
For federal income tax purposes, Plains All American Inc. is the general
partner of PAA, holding a direct and indirect ownership at December 31, 1999 of
approximately 54% in PAA. Because PAA is a pass-through entity for tax purposes,
the income or loss of PAA is generally allocated based upon the owners'
respective ownership percentage. However, the Internal Revenue Code requires
certain items of partnership income, deduction, gain or loss to be allocated so
as to account for the difference between the tax basis and the fair market value
of the property contributed to PAA by the general partner. The federal income
tax burden associated with the difference between allocations based upon the
fair market value of the property contributed by the general partner and the
actual tax basis established for such property will be borne by the general
partner.
At December 31, 1999, we and our subsidiaries that are taxed as corporations
for federal income tax purposes, which together file a consolidated federal
income tax return, had remaining federal income tax NOL carryforwards of
approximately $229.3 million and approximately $209.8 million of alternative
minimum tax ("AMT") net operating loss carryforwards available as a deduction
against future AMT income. In addition, we had approximately $0.3 million of
enhanced oil recovery credits, $1.4 million of AMT credits and $7.0 million of
statutory depletion carryforwards at December 31, 1999. The NOL carryforwards
expire from 2005 through 2019. The value of these carryforwards depends on our
ability to generate federal taxable income. In addition, for AMT purposes, only
90% of AMT income in any given year may be offset by AMT NOLs.
Our ability to utilize NOL carryforwards to reduce our future federal taxable
income and federal income tax is subject to various limitations under the
Internal Revenue Code of 1986, as amended (the "Code"). The utilization of such
carryforwards may be limited upon the occurrence of certain ownership changes,
including the issuance or exercise of rights to acquire stock, the purchase or
sale of stock by 5% stockholders, as defined in the Treasury Regulations, and
our offering of stock during any three-year period resulting in an aggregate
change of more than 50% ("Ownership Change") in our beneficial ownership.
In the event of an Ownership Change, Section 382 of the Code imposes an annual
limitation on the amount of a corporation's taxable income that can be offset by
these carryforwards. The limitation is generally equal to the product of (1) the
fair market value of our equity multiplied by (2) a percentage approximately
equivalent to the yield on long-term tax exempt bonds during the month in which
an Ownership Change occurs. In addition, the limitation is increased if there
are recognized built-in gains during any post-change year, but only to the
extent of any net unrealized built-in gains (as defined in the Code) inherent in
the assets sold. Although no assurances can be made, we do not believe that an
Ownership Change has occurred as of December 31, 1999. Equity transactions after
the date hereof by us or by 5% stockholders (including relatively small
transactions and transactions beyond our control) could cause an Ownership
Change and therefore a limitation on the annual utilization of NOLs.
In the event of an Ownership Change, the amount of our NOLs available for use
each year will depend upon future events that cannot currently be predicted and
upon interpretation of complex rules under Treasury Regulations. If less than
the full amount of the annual limitation is utilized in any given year, the
unused portion may be carried forward and may be used in addition to successive
years' annual limitation.
OTHER BUSINESS MATTERS
We must continually acquire, explore for, develop or exploit new crude oil and
natural gas reserves to replace those produced or sold. Without successful
drilling, acquisition or exploitation operations, our crude oil and natural gas
reserves and revenues will decline. Drilling activities are subject to numerous
risks, including the risk that no commercially viable crude oil or natural gas
production will be obtained. The decision to purchase, explore, exploit or
develop an interest or property will depend in part on the evaluation of data
obtained through geophysical and geological analyses and engineering studies,
the results of which are often inconclusive or subject to varying
interpretations. See Item 2. - "Properties -- Crude Oil and Natural Gas
Reserves". The cost of drilling, completing and operating wells is often
uncertain. Drilling may be curtailed, delayed or canceled as a result of many
factors, including title problems, weather conditions, compliance with
government permitting requirements, shortages of or delays in obtaining
equipment, reductions in product prices or limitations in the market for
products. The availability of a ready market for our crude oil and natural gas
production also depends on a number of factors, including the demand for and
supply of crude oil and natural gas and the proximity of reserves to pipelines
or trucking and terminal facilities. Natural gas wells may be shut in for lack
of a market or due to inadequacy or unavailability of natural gas pipeline or
gathering system capacity.
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<PAGE>
Substantially all of our California crude oil and natural gas production and
our Sunniland Trend oil production is transported by pipelines, trucks and
barges owned by third parties. The inability or unwillingness of these parties
to provide transportation services to us for a reasonable fee could cause us to
seek transportation alternatives, which in turn could result in increased
transportation costs to us or involuntary curtailment of a significant portion
of our crude oil and natural gas production.
Our operations are subject to all of the risks normally incident to the
exploration for and the production of crude oil and natural gas, including
blowouts, cratering, oil spills and fires, each of which could result in damage
to or destruction of crude oil and natural gas wells, production facilities or
other property, or injury to persons. The relatively deep drilling conducted by
us from time to time involves increased drilling risks of high pressures and
mechanical difficulties, including stuck pipe, collapsed casing and separated
cable. Our operations in California, including transportation of crude oil by
pipelines within the city of Los Angeles, are especially susceptible to damage
from earthquakes and involve increased risks of personal injury, property damage
and marketing interruptions because of the population density of the area.
Although we maintain insurance coverage considered to be customary in the
industry, we are not fully insured against certain of these risks, including, in
certain instances, earthquake risk in California, either because such insurance
is not available or because of high premium costs. The occurrence of a
significant event that is not fully insured against could have a material
adverse effect on our financial position.
A pipeline may experience damage as a result of an accident or other natural
disaster. These hazards can cause personal injury and loss of life, severe
damage to and destruction of property and equipment, pollution or environmental
damages and suspension of operations. We maintain insurance of various types
that we consider to be adequate to cover our operations and properties. The
insurance covers all of our assets in amounts considered reasonable. The
insurance policies are subject to deductibles that we consider reasonable and
not excessive. Our insurance does not cover every potential risk associated with
operating pipelines, including the potential loss of significant revenues.
Consistent with insurance coverage generally available to the industry, our
insurance policies provide limited coverage for losses or liabilities relating
to pollution, with broader coverage for sudden and accidental occurrences.
The occurrence of a significant event not fully insured or indemnified
against, or the failure of a party to meet its indemnification obligations,
could materially and adversely affect our operations and financial condition. We
believe that we are adequately insured for public liability and property damage
to others with respect to our operations. With respect to all of our coverage,
no assurance can be given that we will be able to maintain adequate insurance in
the future at rates we consider reasonable.
Our revenues are highly dependent upon the prices of, and demand for, crude
oil and natural gas. Historically, the prices for crude oil and natural gas have
been volatile and are likely to continue to be volatile in the future. The price
we receive for our crude oil and natural gas production and the level of such
production are subject to wide fluctuations and depend on numerous factors
beyond our control, including seasonality, the condition of the United States
economy (particularly the manufacturing sector), foreign imports, political
conditions in other crude oil-producing and natural gas-producing countries, the
actions of the Organization of Petroleum Exporting Countries and domestic
government regulation, legislation and policies. Decreases in the prices of
crude oil and natural gas have had, and could have in the future, an adverse
effect on the carrying value of our proved reserves and our revenues,
profitability and cash flow. Almost all of our reserve base (approximately 94%
of year-end 1999 reserve volumes) is comprised of long-life crude oil properties
that are sensitive to crude oil price volatility. The benchmark NYMEX crude oil
price of $25.60 per barrel at December 31, 1999 was more than double the $12.05
per barrel at the end of 1998. Although we are not currently experiencing any
significant involuntary curtailment of our crude oil or natural gas production,
market, logistic, economic and regulatory factors may in the future materially
affect our ability to sell our production.
In order to manage our exposure to price risks in the marketing of our crude
oil and natural gas, from time to time we purchase put options, enter into fixed
price delivery contracts, floating price collar arrangements, financial swaps
and crude oil and natural gas futures contracts as hedging devices. To ensure a
fixed price for future production, we may sell a futures contract and thereafter
either (1) make physical delivery of our product to comply with such contract or
(2) buy a matching futures contract to unwind our futures position and sell our
production to a customer. These same techniques are also utilized to manage
price risk for certain production purchased from customers of PAA. Such
contracts may expose us to the risk of financial loss in certain circumstances,
including instances where production is less than expected, our customers fail
to purchase or deliver the contracted quantities of crude oil or natural gas, or
a sudden, unexpected event materially impacts crude oil or natural gas prices.
Such contracts may also restrict our ability to benefit from unexpected
increases in crude oil and natural gas prices. See Item 7. -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Capital Resources, Liquidity and Financial Condition -- Changing Crude Oil and
Natural Gas Prices" and Item 7a. -- "Quantitative and Qualitative Disclosures
about Market Risks".
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TITLE TO PROPERTIES
Our properties are subject to customary royalty interests, liens incident to
operating agreements, liens for current taxes and other burdens, including other
mineral encumbrances and restrictions. We do not believe that any of these
burdens materially interferes with the use of such properties in the operation
of our business.
We believe that we have generally satisfactory title to or rights in all of
our producing properties. As is customary in the oil and natural gas industry,
minimal investigation of title is made at the time of acquisition of undeveloped
properties. Title investigation is made and title opinions of local counsel are
generally obtained only before commencement of drilling operations.
Substantially all of our pipelines are constructed on rights-of-way granted by
the apparent record owners of such property and in some instances such rights-
of-way are revocable at the election of the grantor. In many instances, lands
over which rights-of-way have been obtained are subject to prior liens which
have not been subordinated to the right-of-way grants. In some cases, not all of
the apparent record owners have joined in the right-of-way grants, but in
substantially all such cases, signatures of the owners of majority interests
have been obtained. We have obtained permits from public authorities to cross
over or under, or to lay facilities in or along water courses, county roads,
municipal streets and state highways, and in some instances, such permits are
revocable at the election of the grantor. We have also obtained permits from
railroad companies to cross over or under lands or rights-of-way, many of which
are also revocable at the grantor's election. In some cases, property for
pipeline purposes was purchased in fee. All of the pump stations are located on
property owned in fee or property under long-term leases. In certain states and
under certain circumstances, we have the right of eminent domain to acquire
rights-of-way and lands necessary for our common carrier pipelines.
Some of the leases, easements, rights-of-way, permits and licenses transferred
to PAA, upon its formation in 1998 and in connection with acquisitions they
have made since that time, required the consent of the grantor to transfer such
rights, which in certain instances is a governmental entity. We believe that we
have obtained such third-party consents, permits and authorizations that are
sufficient for the transfer to us of the assets necessary for us to operate our
business in all material respects as described in this report. With respect to
any consents, permits or authorizations which have not yet been obtained, we
believe that such consents, permits or authorizations will be obtained within a
reasonable period, or that the failure to obtain such consents, permits or
authorizations will have no material adverse effect on the operation of our
business.
We believe that we have satisfactory title to all of our other assets.
Although title to such properties are subject to encumbrances in certain cases,
such as customary interests generally retained in connection with acquisition of
real property, liens related to environmental liabilities associated with
historical operations, liens for current taxes and other burdens and minor
easements, restrictions and other encumbrances to which the underlying
properties were subject at the time of acquisition by PAA's predecessor or us,
we believe that none of such burdens will materially detract from the value of
such properties or from our interest therein or will materially interfere with
their use in the operation of our business.
EMPLOYEES
As of December 31, 1999, we had approximately 1,080 full-time employees, none
of whom is represented by any labor union. Approximately 675 of such full-time
employees are field personnel involved in crude oil and natural gas producing
activities, trucking and transport activities and crude oil terminalling and
storage activities. Approximately 910 employees spend the majority of their time
on the business of PAA.
ITEM 2. PROPERTIES
We are an independent energy company that acquires, exploits, develops,
explores and produces crude oil and natural gas. Through our majority ownership
in PAA, we are also engaged in the midstream activities of marketing,
transportation, terminalling and storage of crude oil. Our crude upstream crude
oil and natural gas activities are focused in California in the Los Angeles
Basin, the Arroyo Grande Field, and the Mt. Poso Field, offshore California in
the Point Arguello Field, the Sunniland Trend of South Florida and the Illinois
Basin in southern Illinois. Our midstream activities are concentrated in
California, Texas, Oklahoma, Louisiana and the Gulf of Mexico.
OIL AND NATURAL GAS RESERVES
The following tables set forth certain information with respect to our
reserves based upon reserve reports prepared by the independent petroleum
consulting firms of H.J. Gruy and Associates, Inc., Netherland, Sewell &
Associates, Inc., and Ryder Scott Company in 1999, 1998 and 1997, and in
addition in 1997 by System Technology Associates, Inc. Such reserve
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volumes and values were determined under the method prescribed by the SEC which
requires the application of year-end prices for each year, held constant
throughout the projected reserve life.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------
OIL GAS OIL GAS OIL GAS
(BBL) (MCF) (BBL) (MCF) (BBL) (MCF)
-----------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PROVED RESERVES
Beginning balance 120,208 86,781 151,627 60,350 115,996 37,273
Revision of previous estimates 62,895 (8,234) (46,282) 2,925 (16,091) 3,805
Extensions, discoveries, improved
recovery and other additions 37,393 15,488 14,729 29,306 17,884 8,126
Sale of reserves in-place - - - (2,799) (26) (547)
Purchase of reserves in-place 6,442 - 7,709 - 40,764 14,566
Production (8,016) (3,162) (7,575) (3,001) (6,900) (2,873)
------- ------- ------- ------ ------- ------
Ending balance 218,922 90,873 120,208 86,781 151,627 60,350
======= ====== ======= ====== ======= ======
PROVED DEVELOPED RESERVES
Beginning balance 73,264 58,445 99,193 38,233 86,515 25,629
======= ====== ======= ====== ======= ======
Ending balance 120,141 49,255 73,264 58,445 99,193 38,233
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth the pre-tax Present Value of Proved Reserves at
December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Proved developed $ 721,151 $185,961 $386,463
Proved undeveloped 524,898 40,982 124,530
---------- -------- --------
Total Proved $1,246,049 $226,943 $510,993
========== ======== ========
</TABLE>
There are numerous uncertainties inherent in estimating quantities and values
of proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond our control. Reserve
engineering is a subjective process of estimating the recovery from underground
accumulations of crude oil and natural gas that cannot be measured in an exact
manner, and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Because all reserve estimates are to some degree speculative, the quantities of
crude oil and natural gas that are ultimately recovered, production and
operating costs, the amount and timing of future development expenditures and
future crude oil and natural gas sales prices may all differ from those assumed
in these estimates. In addition, different reserve engineers may make different
estimates of reserve quantities and cash flows based upon the same available
data. Therefore, the Present Value of Proved Reserves shown above represents
estimates only and should not be construed as the current market value of the
estimated crude oil and natural gas reserves attributable to our properties. The
information set forth in the preceding tables includes revisions of reserve
estimates attributable to proved properties included in the preceding year's
estimates. Such revisions reflect additional information from subsequent
exploitation and development activities, production history of the properties
involved and any adjustments in the projected economic life of such properties
resulting from changes in product prices. A large portion of our reserve base
(approximately 94% of year-end 1999 reserve volumes) is comprised of long-life
oil properties that are sensitive to crude oil price volatility. The benchmark
NYMEX crude oil price at December 31, 1999, 1998, and 1997 upon which proved
reserve volumes, the Present Value of Proved Reserves and the Standardized
Measure as of such dates were based, was $25.60 per barrel, $12.05 per barrel
and $18.34 per barrel, respectively. Revisions of previous estimates set forth
above, including upward price related revisions, were 64 million BOE in 1999
and, including downward price related revisions, were 46 million BOE and 16
million BOE in 1998 and 1997, respectively. See Item 7. - "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Capital Resources, Liquidity and Financial Condition -- Changing Crude Oil and
Natural Gas Prices".
In accordance with the SEC guidelines, the reserve engineers' estimates of
future net revenues from our properties and the present value thereof are made
using crude oil and natural gas sales prices in effect as of the dates of such
estimates and are held constant throughout the life of the properties, except
where such guidelines permit alternate treatment, including the use of fixed and
determinable contractual price escalations. The crude oil price in effect at
December 31, 1999, is based on the NYMEX crude oil price of $25.60 per barrel
with variations therefrom based on location and quality of crude oil. We
30
<PAGE>
have entered into various arrangements to fix the NYMEX crude oil price for a
significant portion of our crude oil production. On December 31, 1999, these
arrangements provided for a NYMEX crude oil price for 18,500 barrels per day
from January 1, 2000, through December 31, 2000, at approximately $16.00 per
barrel. Approximately 10,000 barrels per day of the volumes hedged in 2000 will
participate in price increases above the $16.00 per barrel floor price, subject
to a ceiling limitation of $19.75 per barrel. Location and quality differentials
attributable to our properties are not included in the foregoing prices.
Arrangements in effect at December 31, 1999 are reflected in the reserve reports
through the term of the arrangements. The overall average prices used in the
reserve reports as of December 31, 1999 were $20.94 per barrel of crude oil,
condensate and natural gas liquids and $2.77 per Mcf of natural gas. See
Item 1. -- "Business -- Product Markets and Major Customers". Prices for natural
gas and, to a lesser extent, oil are subject to substantial seasonal
fluctuations and prices for each are subject to substantial fluctuations as a
result of numerous other factors.
Since December 31, 1998, we have not filed any estimates of total proved net
crude oil or natural gas reserves with any federal authority or agency other
than the SEC. See Note 20 in our consolidated financial statements appearing
elsewhere in this report for certain additional information concerning our
proved reserves.
PRODUCTIVE WELLS AND ACREAGE
As of December 31, 1999, we had working interests in 1,811 gross (1,796 net)
active oil wells. The following table sets forth certain information with
respect to our developed and undeveloped acreage as of December 31, 1999.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------------------------------------------------------
DEVELOPED ACRES (1) UNDEVELOPED ACRES (2)
--------------------------------------- ---------------------------------------
GROSS NET GROSS NET (3)
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Onshore California (4) 9,049 9,003 3,180 1,702
Offshore California 15,326 4,033 41,720 1,449
Florida (5) 12,182 12,182 82,048 78,096
Illinois 16,412 14,423 16,250 7,940
Indiana 1,155 854 1,280 575
Kansas - - 48,147 37,647
Kentucky - - 1,321 521
Louisiana - - 4,875 4,858
------ ------ ------- -------
Total 54,124 40,495 198,821 132,788
====== ====== ======= =======
</TABLE>
- ------------
(1) Developed acres are acres spaced or assigned to productive wells.
(2) Undeveloped acres are acres on which wells have not been drilled or
completed to a point that would permit the production of commercial
quantities of oil and natural gas, regardless of whether such
acreage contains proved reserves.
(3) Less than 10% of total net undeveloped acres are covered by leases
that expire from 2000 through 2003.
(4) Does not include 9,000 acres covered by a farmout from Chevron, in
which we own a 50% interest.
(5) Does not include 29,000 gross (28,000 net) acres under a seismic
option.
31
<PAGE>
DRILLING ACTIVITIES
Certain information with regard to our drilling activities during the years
ended December 31, 1999, 1998 and 1997 is set forth below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------------- ---------------------------------
GROSS NET GROSS NET GROSS NET
----------- ----------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells:
Oil - - - - 2.00 2.00
Natural gas - - - - - -
Dry 1.00 0.50 - - - -
------ ------ ----- ----- ----- -----
Total 1.00 0.50 - - 2.00 2.00
====== ====== ===== ===== ===== =====
Development Wells:
Oil 105.00 105.00 76.00 76.00 58.00 57.06
Natural gas - - - - - -
Dry - - - - - -
------ ------ ----- ----- ----- -----
Total 105.00 105.00 76.00 76.00 58.00 57.06
====== ====== ===== ===== ===== =====
Total Wells:
Oil 105.00 105.00 76.00 76.00 60.00 59.06
Natural gas - - - - - -
Dry 1.00 0.50 - - - -
------ ------ ----- ----- ----- -----
Total 106.00 105.50 76.00 76.00 60.00 59.06
====== ====== ===== ===== ===== =====
</TABLE>
See Item 1. - "Business -- Acquisition and Exploitation" and -- "Productive
Wells and Acreage" for additional information regarding exploitation activities,
including waterflood patterns, workovers and recompletions.
PRODUCTION AND SALES
The following table presents certain information with respect to crude oil and
natural gas production attributable to our properties, the revenue derived from
the sale of such production, average sales prices received and average
production costs during the three years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
(IN THOUSANDS EXCEPT PER UNIT DATA)
<S> <C> <C> <C>
Production:
Crude oil and natural gas liquids (Bbls) 8,016 7,574 6,900
Natural gas (Mcf) 3,163 3,001 2,873
BOE 8,543 8,075 7,379
Revenue:
Crude oil and natural gas liquids $111,128 $ 98,664 $104,988
Natural gas 5,095 4,090 4,415
-------- -------- --------
Total $116,223 $102,754 $109,403
======== ======== ========
Average sales price:
Crude oil and natural gas liquids per Bbl $ 13.85 $ 13.03 $ 15.22
Natural gas per Mcf 1.61 1.36 1.54
Per BOE 13.61 12.73 14.83
Production expenses per BOE 6.51 6.29 6.16
</TABLE>
PAA PROPERTIES
See description of PAA's properties under Item 1. -- "Business -- Midstream
Activities".
32
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Texas Securities Litigation. On November 29, 1999, a class action lawsuit was
filed in the United States District Court for the Southern District of Texas
entitled Di Giacomo v. Plains All American Pipeline, et al. The suit alleged
that Plains All American Pipeline, L.P. and certain of the general partner's
officers and directors violated federal securities laws, primarily in connection
with unauthorized trading by a former employee. An additional nineteen cases
were filed in the Southern District of Texas, some of which name the general
partner and us as additional defendants. Plaintiffs allege that the defendants
are liable for securities fraud violations under Rule 10b-5 and Section 20(a) of
the Securities Exchange Act of 1934 and for making false registration statements
under Sections 11 and 15 of the Securities Act of 1933. The court has
consolidated all subsequently filed cases under the first filed action described
above. Two unopposed motions are currently pending to appoint lead plaintiffs.
These motions ask the court to appoint two distinct lead plaintiffs to represent
two different plaintiff classes: (1) purchasers of our common stock and options
and (2) purchasers of PAA's common units. Once lead plaintiffs have been
appointed, the plaintiffs will file their consolidated amended complaints. No
answer or responsive pleading is due until thirty days after a consolidated
amended complaint is filed.
Delaware Derivative Litigation. On December 3, 1999, two derivative lawsuits
were filed in the Delaware Chancery Court, New Castle County, entitled Susser v.
Plains All American Inc., et al and Senderowitz v. Plains All American Inc., et
al. These suits, and three others which were filed in Delaware subsequently,
named the general partner, its directors and certain of its officers as
defendants, and allege that the defendants breached the fiduciary duties that
they owed to Plains All American Pipeline, L.P. and its unitholders by failing
to monitor properly the activities of its employees. The derivative complaints
allege, among other things, that Plains All American Pipeline has been harmed
due to the negligence or breach of loyalty of the officers and directors that
are named in the lawsuits. These cases are currently in the process of being
consolidated. No answer or responsive pleading is due until these cases have
been consolidated and a consolidated complaint has been filed.
We intend to vigorously defend the claims made in the Texas securities
litigation and the Delaware derivative litigation. However, there can be no
assurance that we will be successful in our defense or that these lawsuits will
not have a material adverse effect on our financial position or results of
operation.
On July 9, 1987, Exxon Corporation ("Exxon") filed an interpleader action in
the United States District Court for the Middle District of Florida, Exxon
Corporation v. E. W. Adams, et al., Case Number 87-976-CIV-T-23-B. This action
was filed by Exxon to interplead royalty funds as a result of a title
controversy between certain mineral owners in a field in Florida. One group of
mineral owners, John W. Hughes, et al. (the "Hughes Group"), filed a
counterclaim against Exxon alleging fraud, conspiracy, conversion of funds,
declaratory relief, federal and Florida RICO, breach of contract and accounting,
as well as challenging the validity of certain oil and natural gas leases owned
by Exxon, and seeking exemplary and treble damages. In March 1993, but effective
November 1, 1992, Calumet Florida Inc. ("Calumet"), our wholly-owned subsidiary,
acquired all of Exxon's leases in the field affected by this lawsuit. In order
to address those counterclaims challenging the validity of certain oil and
natural gas leases, which constitute approximately 10% of the land underlying
this unitized field, Calumet filed a motion to join Exxon as plaintiff in the
subject lawsuit, which was granted July 29, 1994. In August 1994, the Hughes
Group amended its counterclaim to add Calumet as a counter-defendant. Exxon and
Calumet filed a motion to dismiss the counterclaims. On March 22, 1996, the
Court granted Exxon's and Calumet's motion to dismiss the counterclaims alleging
fraud, conspiracy, and federal and Florida RICO violations and challenging the
validity of certain of our oil and natural gas leases but denied such motion as
to the counterclaim alleging conversion of funds. We have reached an agreement
in principle to settle with the Hughes group. In consideration for full and
final settlement, and dismissal with prejudice, we have agreed to pay to the
Hughes group the total sum of $100,000. We and Exxon have filed motions for
summary judgment with respect to the claims of the remaining parties. The court
has not yet set a date for hearing of these motions. The trial date is currently
scheduled in June 2000.
We, in the ordinary course of business, are a claimant and/or a defendant in
various other legal proceedings in which our exposure, individually and in the
aggregate, is not considered material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders, through
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
33
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
Information regarding our executive officers is presented below. All executive
officers hold office until their successors are elected and qualified.
Greg L. Armstrong, President and Chief Executive Officer Officer Since 1981
Mr. Armstrong, age 41, has been President, Chief Executive Officer and a
director since 1992. He was President and Chief Operating Officer from October
to December 1992, and Executive Vice President and Chief Financial Officer from
June to October 1992. He was Senior Vice President and Chief Financial Officer
from 1991 to June 1992, Vice President and Chief Financial Officer from 1984 to
1991, Corporate Secretary from 1981 to 1988, and Treasurer from 1984 to 1987.
William C. Egg, Jr., Executive Vice President Officer Since 1984
Mr. Egg, age 48, has been Executive Vice President and Chief Operating
Officer-Upstream since May 1998. He was Senior Vice President from 1991 to 1998.
He was Vice President-Corporate Development from 1984 to 1991 and Special
Assistant-Corporate Planning from 1982 to 1984.
Cynthia A. Feeback, Vice President - Accounting Officer Since 1993
and Assistant Treasurer
Ms. Feeback, age 42, has been Vice President and Assistant Treasurer since May
1999. She was Assistant Treasurer, Controller and Principal Accounting Officer
of the Company from May 1998 to May 1999. She was Controller and Principal
Accounting Officer from 1993 to 1998. She was Controller from 1990 to 1993 and
Accounting Manager from 1988 to 1990.
Jim G. Hester, Vice President - Business Development Officer Since 1999
and Acquisitions
Mr. Hester, age 40, has been Vice President -- Business Development and
Acquisitions since May 1999. He was Manager of Business Development and
Acquisitions from 1997 to May 1999, Manager of Corporate Development from 1995
to 1997 and Manager of Special Projects from 1993 to 1995. He was Assistant
Controller from 1991 to 1993, Accounting Manager from 1990 to 1991 and Revenue
Accounting Supervisor from 1988 to 1990.
Phillip D. Kramer, Executive Vice President, Chief Officer Since 1987
Financial Officer and Treasurer
Mr. Kramer, age 44, has been Executive Vice President, Chief Financial Officer
and Treasurer since May 1998. He was Senior Vice President and Chief Financial
Officer from May 1997 to May 1998. He was Vice President and Chief Financial
Officer from 1992 to 1997, Vice President and Treasurer from 1988 to 1992,
Treasurer from 1987 to 1988, and Controller from 1983 to 1987.
Michael R. Patterson, Vice President and General Counsel Officer Since 1985
Mr. Patterson, age 52, has been Vice President and General Counsel since 1985
and Corporate Secretary since 1988.
Harry N. Pefanis, Executive Vice President Officer Since 1988
Mr. Pefanis, age 42, has been Executive Vice President-Midstream since May
1998. He was Senior Vice President from February 1996 to May 1998. He had been
Vice President-Products Marketing since 1988. From 1987 to 1988 he was Manager
of Products Marketing. From 1983 to 1987 he was Special Assistant for Corporate
Planning. Mr. Pefanis is also President and Chief Operating Officer of Plains
All American Inc.
Mary O. Peters, Vice President - Administration and Officer Since 1991
Human Resources
Ms. Peters, age 51, has been Vice President-Administration and Human Resources
since 1991. She was Manager of Office Administration from 1984 to 1991.
34
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is listed and traded on the American Stock Exchange under the
symbol "PLX". The number of stockholders of record of the common stock as of
March 15, 2000 was 1,133.
The following table sets forth the range of high and low closing sales prices
for the common stock as reported on the American Stock Exchange Composite Tape
for the periods indicated below.
<TABLE>
<CAPTION>
HIGH LOW
---------- ---------
<S> <C> <C>
1999:
1st Quarter $15 1/2 $ 8 1/8
2nd Quarter 20 3/16 13 1/8
3rd Quarter 20 16 1/4
4th Quarter 20 9 1/16
1998:
1st Quarter $17 13/16 $14 7/16
2nd Quarter 21 16 7/8
3rd Quarter 19 3/4 14 5/8
4th Quarter 18 7/8 13 5/8
</TABLE>
We have not paid cash dividends on shares of our common stock since our
inception and do not anticipate paying any cash dividends on our common stock in
the foreseeable future. In addition, we are restricted by provisions of the
indentures governing the issue of $275.0 million 10.25% Senior Subordinated
Notes Due 2006 (the "10.25% Notes") and prohibited by our $225.0 million
revolving credit facility from paying dividends on our common stock.
On December 14, 1999, we sold in a private placement 50,000 shares of our
Series F Preferred Stock for $50.0 million. Each share of the Series F Preferred
Stock has a stated value of $1,000 per share and bears a dividend of 10% per
annum. Dividends are payable semi-annually in either cash or additional shares
of Series F Preferred Stock at our option and are cumulative from the date of
issue. Dividends paid in additional shares of Series F Preferred Stock are
limited to an aggregate of six dividend periods. Each share of Series F
Preferred Stock is convertible into 81.63 shares of common stock (an initial
effective conversion price of $12.25 per share) and in certain circumstances may
be converted at our option into common stock if the average trading price for
any sixty-day trading period is equal to or greater than $21.60 per share. After
December 15, 2003, the Series F Preferred Stock is redeemable at our option at
110% of stated value through December 15, 2004, and at declining amounts
thereafter. If not previously redeemed or converted, the Series F Preferred
Stock is required to be redeemed in 2007.
On April 1, 1999, we paid a dividend on our Series E Preferred Stock for the
period from October 1, 1998 through March 31, 1999. The dividend amount of
approximately $4.1 million was paid by issuing 8,209 additional shares of the
Series E Preferred Stock. On September 9, 1999, 3,408 shares of Series E
Preferred Stock, including accrued dividends, were converted into 98,613 shares
of common stock at a conversion price of $18.00 per share. On October 1, 1999,
we paid a cash dividend of approximately $4.2 million on the Series E Preferred
Stock for the period April 1, 1999 through September 30, 1999.
On March 22, 2000, our Board of Directors declared cash dividends on our
Series D Preferred Stock, Series F Preferred Stock and Series G Preferred Stock,
all of which are payable on April 3, 2000 to holders of record on March 23,
2000. The dividend amount of $350,000 on the Series D Preferred Stock is for the
period January 1, 2000 through March 31, 2000. The dividend amount of $1,475,000
on the Series F Preferred Stock is for the period December 15, 1999 (the date of
original issuance) through March 31, 2000. The dividend amount of $4,219,000 for
the Series G Preferred Stock is for the period October 1, 1999 through March 31,
2000.
35
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The following selected historical financial information was derived from, and
is qualified by reference to our consolidated financial statements, including
the notes thereto, appearing elsewhere in this report. The selected financial
data should be read in conjunction with the consolidated financial statements,
including the notes thereto, and "Item 7. -- Management's Discussion and
Analysis of Financial Condition and Results of Operations" (in thousands, except
per share information).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998(1) 1997 1996 1995
---------- ---------- --------- -------- ---------
(RESTATED)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales $ 116,223 $ 102,754 $109,403 $ 97,601 $ 64,080
Marketing, transportation,
storage and terminalling revenues 4,700,434 1,129,689 752,522 531,698 339,826
Gain on PAA unit offerings (2) 9,787 60,815 - - -
Gain on sale of linefill 16,457 - - - -
Interest and other income 1,237 834 319 309 319
---------- ---------- --------- -------- --------
Total revenue 4,844,138 1,294,092 862,244 629,608 404,225
---------- ---------- --------- -------- --------
Expenses:
Production expenses 55,645 50,827 45,486 38,735 30,256
Marketing, transportation,
storage and terminalling expenses 4,592,744 1,091,328 740,042 522,167 333,460
Unauthorized trading losses and
related expenses (1) 166,440 7,100 - - -
General and administrative 30,389 10,778 8,340 7,729 7,215
Noncash compensation expense 1,013 - - - -
Depreciation, depletion and
amortization 36,998 31,020 23,778 21,937 17,036
Reduction of carrying cost of oil
and natural gas properties (3) - 173,874 - - -
Interest expense 46,378 35,730 22,012 17,286 13,606
Litigation settlement - - - 4,000(4) -
---------- ---------- --------- -------- --------
Total expenses 4,929,607 1,400,657 839,658 611,854 401,573
---------- ---------- --------- -------- --------
Income (loss) before income taxes,
minority interest and
extraordinary item (85,469) (106,565) 22,586 17,754 2,652
Minority interest (40,203) 786 - - -
Income tax expense (benefit):
Current (7) 862 352 - -
Deferred (20,472) (45,867) 7,975 (3,898) -
---------- ---------- --------- -------- --------
Income (loss) before extraordinary
item (24,787) (62,346) 14,259 21,652 2,652
Extraordinary item, net of tax
benefit and minority interest (5) (544) - - (5,104) -
---------- ---------- --------- -------- --------
Net income (loss) (25,331) (62,346) 14,259 16,548 2,652
Less: cumulative preferred stock
dividends 10,026 4,762 163 - -
---------- ---------- --------- -------- --------
Net income (loss) applicable to
common shareholders $ (35,357) $ (67,108) $ 14,096 $ 16,548 $ 2,652
========== ========== ========= ======== ========
Income (loss) per common
share - basic:
Before extraordinary item $ (2.02) $ (3.99) $ 0.85 $ 1.32 $ 0.19
Extraordinary item, net of
income taxes (0.03) - - (0.31) -
---------- ---------- --------- -------- ---------
$ (2.05) $ (3.99) $ 0.85 $ 1.01 $ 0.19
========== ========== ========= ======== =========
Income (loss) per common share -
assuming dilution:
Before extraordinary item $ (2.02) $ (3.99) $ 0.77 $ 1.23 $ 0.16
Extraordinary item, net of
income taxes (0.03) - - (0.29) -
---------- ---------- --------- -------- ---------
$ (2.05) $ (3.99) $ 0.77 $ 0.94 $ 0.16
========== ========== ========= ======== =========
Table and footnotes continued on following page
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 (1) 1997 1996 1995
---------- ---------- -------- -------- --------
(RESTATED)
<S> <C> <C> <C> <C> <C>
Other Financial Data:
Cash flow from operations (6) $ 70,382 $ 42,033 $ 46,233 $ 39,942 $ 19,688
EBITDA (7) 139,116 80,344 68,376 56,977 33,294
Net cash provided by (used in) operating
activities (75,964) 37,630 30,307 39,008 16,984
Net cash used in investing activities 266,396 483,422 107,634 52,496 64,398
Net cash provided by financing activities 404,044 448,622 78,524 9,876 52,252
AS OF DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 (1) 1997 1996 1995
---------- ---------- -------- -------- --------
(RESTATED)
Balance Sheet Data:
Cash and cash equivalents $ 68,228 $ 6,544 $ 3,714 $ 2,517 $ 6,129
Working capital (deficit) (8) 115,867 (21,041) (6,011) (4,843) (4,749)
Property and equipment, net 787,653 661,726 413,308 311,040 280,538
Total assets 1,689,560 972,838 556,819 430,249 352,046
Long-term debt 676,703 431,983 285,728 225,399 205,089
Other long-term liabilities 21,107 10,253 5,107 2,577 1,547
Redeemable preferred stock 138,813 88,487 - - -
Non-redeemable preferred stock,
common stock and other stockholders'
equity 40,619 69,170 133,193 95,572 77,029
</TABLE>
- -----------
(1) In November 1999, we discovered that a former employee of PAA had engaged in
unauthorized trading activity, resulting in losses of approximately $162.0
million ($174.0 million, including estimated associated costs and legal
expenses). Approximately $7.1 million was recognized in 1998 and the
remainder in 1999. As a result we have restated our 1998 financial
information. See Item 1. -- "Business -- Unauthorized Trading Losses".
(2) For 1999, includes a $9.8 million noncash gain related to the change in our
ownership of PAA resulting from PAA's 1999 public offering of common units.
For 1998, includes a $60.8 million noncash gain recognized upon the
formation of PAA. See Item 7. -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
(3) Includes a $173.9 million pre-tax ($109.0 million after tax) noncash charge
related to a writedown of the capitalized costs of our proved crude oil and
natural gas properties due to low crude oil prices at December 31, 1998.
See Item 7.-- "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
(4) Represents charge related to the settlement of two lawsuits filed in 1992
and 1993.
(5) Relates to the early redemption of PAA debt in 1999 and of our 12% Senior
Subordinated Notes in 1996.
(6) Represents net cash provided by operating activities after minority
interest but before changes in assets and liabilities and other noncash
items.
(7) EBITDA means earnings before interest, taxes, depreciation, depletion,
amortization and other noncash items. Our EBITDA calculation also excludes
the unauthorized trading losses, noncash compensation expense,
restructuring expense, gain on unit offerings, linefill gain and
extraordinary loss from extinguishment of debt. EBITDA is not a measurement
presented in accordance with generally accepted accounting principles
("GAAP") and is not intended to be used in lieu of GAAP presentations of
results of operations and cash provided by operating activities. EBITDA is
commonly used by debt holders and financial statement users as a
measurement to determine the ability of an entity to meet its interest
obligations.
(8) For working capital includes $37.9 million of pipeline linefill and $103.6
million for the segment of the All American Pipeline that were both sold in
the first quarter of 2000. See Item 1. -- "Midstream Acquisitions and
Dispositions -- All American Pipeline Linefill Sale and Asset Disposition".
37
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We are an independent energy company that acquires, exploits, develops,
explores and produces crude oil and natural gas. Through our majority ownership
in PAA, we are also engaged in the midstream activities of marketing,
transportation, terminalling and storage of crude oil. For financial statement
purposes, the assets, liabilities and earnings of PAA are included in our
consolidated financial statements, with the public unitholders' interest
reflected as a minority interest. Our upstream crude oil and natural gas
activities are focused in California in the Los Angeles Basin, the Arroyo Grande
Field, and the Mt. Poso Field, offshore California in the Point Arguello Field,
the Sunniland Trend of South Florida and the Illinois Basin in southern
Illinois. Our midstream activities are concentrated in California, Texas,
Oklahoma, Louisiana and the Gulf of Mexico.
1999 ACQUISITIONS
On May 12, 1999, PAA completed the acquisition of Scurlock Permian LLC and
certain other pipeline assets from Marathon Ashland Petroleum LLC. Including
working capital adjustments and closing and financing costs, the cash purchase
price was approximately $141.7 million. The assets, liabilities and results of
operations of the Scurlock acquisition are included in our consolidated
financial statements effective May 1, 1999.
Scurlock, previously a wholly-owned subsidiary of Marathon Ashland Petroleum,
is engaged in crude oil transportation, gathering and marketing, and owns
approximately 2,300 miles of active pipeline, numerous storage terminals and a
fleet of more than 250 trucks.
On July 1, 1999, we acquired Chevron's interests in Point Arguello. The
interests acquired include Chevron's 26% working interest in the Point Arguello
Unit and associated onshore processing facilities, Chevron's right to
participate in surrounding leases and certain fee acreage onshore. The
acquisition, which was funded from our working capital, has an effective date of
July 1, 1999.
On July 15, 1999, PAA completed the acquisition of the West Texas gathering
system from Chevron Pipe Line Company for approximately $36.0 million, including
transaction costs. The assets acquired include approximately 450 miles of crude
oil transmission mainlines, approximately 400 miles of associated gathering and
lateral lines, and approximately 2.9 million barrels of tankage located along
the system.
UNAUTHORIZED TRADING LOSSES
In November 1999, we discovered that a former employee of PAA had engaged in
unauthorized trading activity, resulting in losses of approximately $162.0
million ($174.0 million, including estimated associated costs and legal
expenses). Approximately $7.1 million of the unauthorized trading loss was
recognized in 1998 and the remainder in 1999. As a result, we have restated our
1998 financial information. Normally, as PAA purchases crude oil, it establishes
a margin by selling crude oil for physical delivery to third-party users or by
entering into a future delivery obligation with respect to futures contracts.
The employee in question violated PAA's policy of maintaining a position that is
substantially balanced between crude oil purchases and sales or future delivery
obligations. The unauthorized trading and associated losses resulted in a
default of certain covenants under PAA's credit facilities and significant
short-term cash and letter of credit requirements. See "Capital Resources,
Liquidity and Financial Condition".
RESULTS OF OPERATIONS
For the year ended December 31, 1999, we reported a net loss of $25.3 million,
or $2.05 per share on total revenue of $4.8 billion as compared to a net loss of
$62.3 million, or $3.99 per share on total revenue of $1.3 billion in 1998. For
the year ended December 31, 1997, we reported net income of $14.3 million or
$0.85 per share ($0.77 per share diluted), on total revenue of $862.2 million.
38
<PAGE>
The net losses for the years ended December 31, 1999 and 1998 include the
following nonrecurring items:
1999
. $166.4 million of unauthorized trading losses;
. a $16.5 million gain on the segment of the All American Pipeline linefill
that was sold in 1999;
. a $9.8 million gain related to the sale of units by PAA;
. restructuring expense of $1.4 million; and
. an extraordinary loss of $0.5 million related to the early extinguishment
of debt (net of minority interest and tax benefit).
1998
. $7.1 million of unauthorized trading losses;
. a $109.0 million after-tax ($173.9 million pre-tax) reduction in carrying
cost of oil and natural gas due to low crude oil prices at December 31,
1998; and
. a $37.5 million after-tax ($60.8 million pre-tax) gain associated with the
initial public offering of PAA.
Excluding these nonrecurring items we would have reported net income of
approximately $17.0 million and $8.4 million in 1999 and 1998, respectively.
EBITDA increased 73% in 1999 to $139.1 million from the $80.3 million reported
in 1998 and 103% from the $68.4 million reported in 1997. Cash flow from
operations (net income before noncash items) was $70.4 million, $42.0 million
and $46.2 million in 1999, 1998 and 1997, respectively. EBITDA and cash flow
from operations also exclude the nonrecurring items discussed above. Net cash
used in operating activities was $76.0 million for the year ended December 31,
1999, compared to net cash provided by operating activities of $37.6 million for
1998 and $30.3 million for 1997.
Upstream Results
The following table sets forth certain of our upstream operating information
for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C>
AVERAGE DAILY PRODUCTION VOLUMES:
Barrels of oil equivalent
California (approximately 91% oil) 15.6 13.8 11.2
Offshore California (100% oil) 2.2 - -
Gulf Coast (100% oil) 2.6 4.8 5.3
Illinois Basin (100% oil) 3.0 3.5 3.6
Sold properties - - 0.1
------ ------ ------
Total (approximately 94% oil) 23.4 22.1 20.2
====== ====== ======
UNIT ECONOMICS:
Average sales price per BOE $13.61 $12.73 $14.83
Production expense per BOE 6.51 6.29 6.16
------ ------ ------
Gross margin per BOE 7.10 6.44 8.67
Upstream G&A expense per BOE 0.85 0.68 0.65
------ ------ ------
Gross profit per BOE $ 6.25 $ 5.76 $ 8.02
====== ====== ======
</TABLE>
Total oil equivalent production increased approximately 6% to an average of
23,400 BOE per day over the 1998 level of 22,100 BOE per day and 16% above the
1997 level of 20,200 BOE per day. The volume increase in 1999 is primarily
associated with our ongoing acquisition and exploitation activities, offset
somewhat by decreased production from certain of our other properties. The
offshore California Point Arguello Unit, which we acquired from Chevron in July
1999, accounted for approximately 2,200 BOE per day of the increase. Net daily
production from our onshore California properties increased to approximately
15,600 BOE per day in 1999, up 1,800 BOE per day, or 13% over 1998 and 39% over
1997. Excluding production from the Mt. Poso Field, which we acquired in
December 1998, California production was up 6% from 1998. The increase in 1998
as compared to 1997 is partially attributable to the acquisition of the Arroyo
Grande Field in the fourth quarter of 1997. Net daily production for our Gulf
Coast properties averaged approximately 2,600 BOE per day in 1999,
39
<PAGE>
compared to 4,800 BOE per day in 1998 and 5,300 BOE per day in 1997. The Gulf
Coast production decrease is due to mechanical downtime and the effects of
natural decline. This is our most volatile area in terms of maintaining
production levels. Net daily production in the Illinois Basin averaged 3,000 BOE
per day during 1999, 3,500 BOE per day in 1998 and 3,600 BOE per day in 1997.
Oil and natural gas revenues were $116.2 million in 1999, an increase of 13%
over 1998 due to higher prices and increased production volumes. Oil and natural
gas revenues decreased to $102.8 million in 1998 as compared to $109.4 million
in 1997 due to decreased product prices which offset increased production
volumes. Our average product price, which represents a combination of fixed and
floating price sales arrangements and incorporates location and quality
discounts from the benchmark NYMEX prices, averaged $13.61 per BOE in 1999, 7%
higher than the price received in 1998 and 8% lower than the price received in
1997. The NYMEX benchmark WTI crude oil price averaged $19.25 per barrel in
1999, $14.43 per barrel in 1998, and $20.63 per barrel in 1997. Financial swap
and collar arrangements and futures transactions that we entered into to hedge
production are included in our average product prices. These transactions had
the effect of decreasing the overall average price we received by $1.30 per BOE
in 1999, increasing the price by $2.98 per BOE in 1998 and decreasing the price
by $1.26 per BOE in 1997. We maintained hedges on approximately 63% of our crude
oil production throughout 1999 at an average NYMEX WTI crude oil price of
approximately $18.00 per barrel. We routinely hedge a portion of our crude oil
production. See "-- Capital Resources, Liquidity and Financial Condition --
Changing Crude Oil and Natural Gas Prices" and Item 7a. -- "Quantitative and
Qualitative Disclosures about Market Risk".
Upstream unit gross margin (well-head revenue less production expenses) for
1999 was $7.10 per BOE, compared to $6.44 per BOE in 1998 and $8.67 per BOE in
1997. Average unit production expenses were $6.51 per BOE, $6.29 per BOE and
$6.16 per BOE in 1999, 1998, and 1997, respectively. Total production expenses
increased to $55.6 million from $50.8 million and $45.5 million in 1998 and
1997, respectively, primarily due to increased production volumes resulting from
our acquisition and exploitation activities. Unit general and administrative
expense increased to $0.85 per BOE in 1999 compared to $0.68 per BOE during 1998
and $0.65 per BOE during 1997. Total upstream general and administrative expense
was $7.3 million, $5.5 million and $4.8 million in 1999, 1998 and 1997,
respectively. The increases are primarily attributable to increased personnel
costs, expenses related to our Year 2000 project, and legal and other expenses
associated with royalty owner litigation.
Upstream depreciation, depletion and amortization per BOE was $2.13, $3.00 and
$2.83 per BOE in 1999, 1998 and 1997, respectively. Total upstream depreciation,
depletion and amortization expense was $18.2 million, $24.2 million and $20.9
million in 1999, 1998 and 1997, respectively. These amounts exclude the
reduction in the carrying cost of our oil and natural gas properties in 1998.
Midstream Results
The following table sets forth certain of our midstream operating information
for the periods presented (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
--------- -------- --------
(RESTATED)
<S> <C> <C> <C>
Operating Results:
Gross margin
Pipeline $ 56,864 $16,490 $ -
Terminalling and storage
and gathering and marketing 50,826 21,871 12,480
Unauthorized trading losses (166,440) (7,100) -
--------- ------- -------
Total (58,750) 31,261 12,480
General and administrative expense (22,586) (5,297) (3,529)
--------- ------- -------
Gross profit $ (81,336) $25,964 $ 8,951
========= ======= =======
</TABLE>
Table continued on following page
40
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Average Daily Volumes (barrels):
Pipeline Activities:
All American
Tariff activities 101 113 -
Margin activities 56 50 -
Other 61 - -
----- ----- -----
Total 218 163 -
===== ===== =====
Lease gathering 239 88 71
Bulk purchases 138 98 49
----- ----- -----
Total 377 186 120
===== ===== =====
Terminal throughput 83 80 77
===== ===== =====
Storage leased to third parties,
monthly average volumes 1,975 1,150 668
===== ===== =====
</TABLE>
Pipeline Operations. Gross margin from pipeline operations was $56.9 million
for the year ended December 31, 1999 compared to $16.5 million for 1998. The
increase resulted from twelve months of results from the All American Pipeline
in 1999 versus five months in 1998, increased margins from our pipeline merchant
activities, and to the 1999 acquisitions of Scurlock and the West Texas
gathering system which contributed approximately $4.8 million of pipeline gross
margin. The increase was partially offset by lower tariff transport volumes, due
to lower production from Exxon's Santa Ynez Field and the Point Arguello Field,
both offshore California.
The margin between revenue and direct cost of crude purchased was $33.5
million for the year ended December 31, 1999 compared to $3.9 million in 1998.
Pipeline tariff revenues were approximately $46.4 million for the year ended
December 31, 1999 compared to approximately $19.0 million in 1998. Pipeline
operations and maintenance expenses were approximately $24.0 million for the
year ended December 31, 1999 as compared to $6.1 million for 1998.
Tariff transport volumes on the All American Pipeline decreased from an
average of 113,000 barrels per day for the year ended December 31, 1998 to
101,000 barrels per day in 1999 due primarily to a decrease in shipments of
offshore California production, which decreased from 90,000 barrels per day in
1998 to 79,000 barrels per day in 1999. Barrels associated with our merchant
activities on the All American Pipeline increased from 50,000 barrels per day in
1998 to 56,000 barrels per day for the year ended December 31, 1999. Tariff
volumes shipped on the Scurlock and West Texas Gathering systems averaged 61,000
barrels per day during 1999.
In March 2000, we sold the segment of the All American Pipeline that extends
from Emidio, California to McCamey, Texas. We initiated the sale of
approximately 5.2 million barrels of crude oil linefill from the All American
Pipeline in November 1999. The sale of the linefill was substantially complete
in February 2000. We estimate that we will recognize a total gain of
approximately $44.0 million in connection with the sale of the linefill. As of
December 31, 1999, we had delivered approximately 1.8 million barrels of
linefill and recognized a gain of $16.5 million. During 1999, we reported gross
margin of approximately $5.0 million associated with operating the segment of
the All American Pipeline that was sold. See "Capital Resources, Liquidity and
Financial Condition".
The following table sets forth from July 30, 1998, our date of acquisition,
the All American Pipeline average deliveries per day within and outside
California (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
---- ----
<S> <C> <C>
Deliveries:
Average daily volumes (barrels):
Within California 101 111
Outside California 56 52
---- ----
Total 157 163
==== ====
</TABLE>
41
<PAGE>
Gathering and Marketing Activities and Terminalling and Storage Activities.
Excluding the unauthorized trading losses, gross margin from terminalling and
storage and gathering and marketing activities was approximately $50.8 million
for the year ended December 31, 1999, reflecting a 132% increase over the $21.9
million reported for 1998 and a 307% increase over the $12.5 million reported
for 1997. The increase in gross margin is due to an increase in lease gathering
and bulk purchase volumes, primarily as a result of the Scurlock acquisition,
which contributed approximately $26.3 million of 1999 gross margin, and an
increase in storage capacity leased at our Cushing Terminal. Lease gathering
volumes increased from an average of 88,000 and 71,000 barrels per day in 1998
and 1997, respectively, to approximately 239,000 barrels per day in 1999. Bulk
purchase volumes increased from approximately 98,000 and 49,000 barrels per day
for 1998 and 1997, respectively, to approximately 138,000 barrels per day this
year. Leased terminal capacity increased significantly from approximately 1.1
and 0.7 million barrels per month in 1998 and 1997, respectively, to 2.0 million
barrels per month during 1999. The 1.1 million barrel expansion of our Cushing
Terminal was placed in service in the second quarter of 1999. Throughput volumes
at our terminals increased approximately 3,000 and 6,000 barrels per day in the
current year period from 1998 and 1997, respectively.
In the period immediately following the disclosure of the unauthorized trading
losses, a significant number of PAA's suppliers and trading partners reduced or
eliminated the open credit previously extended to PAA. Consequently, the amount
of letters of credit PAA needed to support the level of crude oil purchases then
in effect increased significantly. In addition, the cost to PAA of obtaining
letters of credit increased under the amended credit facility. In many instances
PAA arranged for letters of credit to secure its obligations to purchase crude
oil from its customers, which increased its letter of credit costs and decreased
its unit margins. In other instances, primarily involving lower margin wellhead
and bulk purchases, certain of PAA's purchase contracts were terminated. As a
result of these changes, aggregate volumes purchased are expected to decrease by
150,000 barrels per day, consisting primarily of lower unit margin purchases.
Approximately 50,000 barrels per day of the decrease is related to barrels
gathered at producer lease locations and 100,000 barrels per day is attributable
to bulk purchases. As a result of the increase in letter of credit costs and
reduced volumes, annual EBITDA is expected to be adversely affected by
approximately $5.0 million, excluding the positive impact of current favorable
market conditions.
Midstream General and Administrative. General and administrative expenses were
$22.6 million for the year ended December 31, 1999, compared to $5.3 million and
$3.5 million for 1998 and 1997, respectively. These increases were primarily
attributable to the Scurlock and West Texas Gathering System acquisitions in
1999, the All American Pipeline acquisition in 1998, continued expansion of our
midstream business activities and expenses related to the operation of Plains
All American Pipeline as a public entity. As a result of the unauthorized
trading losses, we will incur increased expenses in 2000, primarily accounting
and consulting related.
Midstream Depreciation and Amortization. Depreciation and amortization expense
was $17.4 million in 1999, $5.4 million in 1998 and $1.2 million in 1997. The
increase in 1999 is due primarily to the Scurlock and West Texas Gathering
System acquisitions in 1999 and the All American Pipeline acquisition in July
1998. The increase in 1998 is due to the All American Pipeline acquisition.
General
Primarily as a result of aforementioned acquisitions and increased production
levels, total depreciation, depletion and amortization expense for the year
ended December 31, 1999, was $37.0 million as compared to $31.0 million and
$23.8 million in 1998 and 1997, respectively.
Interest expense, net of capitalized interest, for 1999 increased to $46.4
million as compared to $35.7 million in 1998 and $22.0 million in 1997. The
increase in 1999 is due to (1) interest associated with the debt incurred for
the Scurlock and West Texas Gathering System acquisitions, (2) interest for a
full year on debt outstanding from the All American Pipeline acquisition, (3) an
increase in interest related to hedged inventory transactions and (4) higher
debt levels related to our acquisition, exploitation, development and
exploration activities. The increase in interest expense in 1998 is primarily
associated with the debt incurred for the acquisition of the All American
Pipeline and the SJV Gathering System and our upstream acquisition,
exploitation, development and exploration activities.
The extraordinary item of $0.5 million (net of tax and minority interest) in
1999 relates to the write-off of certain debt issue costs and penalties
associated with the prepayment of debt. During 1999, 1998 and 1997, we
capitalized $4.4 million, $3.7 million and $3.3 million of interest,
respectively.
In 1999, we recognized a pre-tax gain of $9.8 million in connection with PAA's
October 1999 public offering. The gain is the result of an increase in the book
value of our equity in PAA to reflect our proportionate share of the underlying
net assets of PAA due to the sale of the units. During 1998, we recognized a
pre-tax gain of $60.8 million (net of approximately $9.2 million in formation
related expenses) in connection with the formation of PAA as a result of an
increase in the book
42
<PAGE>
value of our equity as previously discussed. The formation related expenses
consist primarily of amounts due to certain key employees in connection with the
successful formation of PAA and debt prepayment penalties.
For the year ended December 31, 1999, we recognized a net deferred tax benefit
of $20.5 million. For the year ended December 31, 1998, we recognized a deferred
tax benefit of $45.9 million and a current tax provision of $0.9 million. For
the year ended December 31, 1997, we recognized a deferred federal tax provision
of $8.0 million and a current tax provision of $0.4 million. At December 31,
1999, we have a net deferred tax asset of $69.0 million. Management believes
that it is more likely than not that we will generate taxable income sufficient
to realize such asset based on certain tax planning strategies available.
During 1999, we incurred a charge of $1.0 million related to noncash incentive
compensation paid to certain officers and key employees of Plains All American
Inc., the general partner of PAA. In 1998, Plains All American Inc. granted the
employees the right to earn ownership in common units of PAA owned by Plains All
American Inc. The units vest over a three-year period subject to PAA paying
distributions on their common and subordinated units. In addition, a $1.4
million restructuring charge, primarily associated with severance-related
expenses, was also incurred by PAA. As a result of the restructuring, PAA
expects to reduce costs by approximately $1.3 million per year.
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION
Unauthorized Trading Losses
In November 1999, we discovered that a former employee of PAA had engaged in
unauthorized trading activity, resulting in losses of approximately $162.0
million ($174.0 million, including estimated associated costs and legal
expenses). A full investigation into the unauthorized trading activities by
outside legal counsel and independent accountants and consultants determined
that the vast majority of the losses occurred primarily from March through
November 1999, and the impact warranted a restatement of previously reported
financial information for 1999 and 1998. Because the financial statements of PAA
are consolidated with our financial statements, adverse effects on the financial
statements of PAA directly affect our consolidated financial statements. As a
result, we have restated our previously reported 1999 and 1998 results to
reflect the losses incurred from these unauthorized trading activities (see Note
3 in the notes to our consolidated financial statements appearing elsewhere in
this report).
Normally, as PAA purchases crude oil, it establishes a margin by selling crude
oil for physical delivery to third-party users or by entering into a future
delivery obligation with respect to futures contracts. The trader in question
violated PAA's policy of maintaining a position that is substantially balanced
between crude oil purchases and sales or future delivery obligations. The
unauthorized trading and associated losses resulted in a default of certain
covenants under PAA's credit facilities and significant short-term cash and
letter of credit requirements.
Although one of our wholly-owned subsidiaries is the general partner of and
owns 54% of PAA, the trading losses do not affect the operations or assets of
our upstream business. The debt of PAA is nonrecourse to us. In addition, our
indirect ownership in PAA does not collateralize any of our credit facilities.
Our $225.0 million credit facility is collateralized by our crude oil and
natural gas properties.
In December 1999, PAA executed amended credit facilities and obtained default
waivers from all of its lenders. The amended credit facilities:
. waived defaults under covenants contained in the existing credit
facilities;
. increased availability under PAA's letter of credit and borrowing facility
from $175.0 million in November 1999 to $295.0 million in December 1999,
$315.0 million in January 2000, and thereafter decreasing to $239.0 million
in February through April 2000, to $225.0 million in May and June 2000 and
to $200.0 million in July 2000 through July 2001;
. required the lenders' consent prior to the payment of distributions to
unitholders;
. prohibited contango inventory transactions subsequent to January 20, 2000;
and
. increased interest rates and fees under certain of the facilities.
PAA paid approximately $13.7 million to its lenders in connection with the
amended credit facilities. This amount was capitalized as debt issue costs and
will be amortized over the remaining term of the amended facilities. In
connection with the amendments, we loaned approximately $114.0 million to PAA.
This subordinated debt is due not later than November 30, 2005. We financed the
$114.0 million that we loaned PAA with:
43
<PAGE>
. the issuance of a new series of our 10% convertible preferred stock for
proceeds of $50.0 million;
. cash distributions of approximately $9.0 million made to PAA's general
partner in November 1999; and
. $55.0 million of borrowings under our revolving credit facility.
We have taken appropriate and aggressive steps within our organization to
enhance our processes and procedures to prevent future unauthorized trading. One
of such steps includes the creation of a new professional risk management
position. This risk manager has direct responsibility and authority for our
trading controls and procedures and other aspects of corporate risk management.
However, we can give no assurance that such steps will detect and prevent all
violations of our trading policies and procedures, particularly if deception or
other intentional misconduct is involved.
All American Pipeline Linefill Sale and Asset Disposition
We initiated the sale of approximately 5.2 million barrels of crude oil
linefill from the All American Pipeline in November 1999. This sale was
substantially completed in February 2000. The linefill was located in the
segment of the All American Pipeline that extends from Emidio, California, to
McCamey, Texas. Except for minor third party volumes, one of our subsidiaries
has been the sole shipper on this segment of the pipeline since its predecessor
acquired the line from the Goodyear Tire & Rubber Company in July 1998. Proceeds
from the sale of the linefill were approximately $100.0 million, net of
associated costs, and were used for working capital purposes. We estimate that
we will recognize a total gain of approximately $44.0 million in connection with
the sale of linefill. As of December 31, 1999, we had delivered approximately
1.8 million barrels of linefill and recognized a gain of $16.5 million.
On March 24, 2000, we completed the sale of the above referenced segment of
the All American Pipeline to a unit of El Paso Energy Corporation for total
proceeds of $129.0 million. The proceeds from the sale were used to reduce
outstanding debt. Our net proceeds are expected to be approximately $124.0
million, net of associated transaction costs and estimated costs to remove
certain equipment. We estimate that we will recognize a gain of approximately
$20.0 million in connection with the sale. During 1999, we reported gross margin
of approximately $5.0 million from volumes transported on the segment of the
line that was sold.
Scurlock Acquisition
On May 12, 1999, we completed the acquisition of Scurlock Permian LLC and
certain other pipeline assets from Marathon Ashland Petroleum LLC. Including
working capital adjustments and closing and financing costs, the cash purchase
price was approximately $141.7 million. Financing for the Scurlock acquisition
was provided through:
. borrowings of approximately $92.0 million under Plains Scurlock's limited
recourse bank facility with BankBoston, N.A.;
. the sale to the general partner of 1.3 million Class B common units of PAA
for a total cash consideration of $25.0 million, or $19.125 per unit, the
price equal to the market value of its common units on May 12, 1999; and
. a $25.0 million draw under PAA's existing revolving credit agreement.
The funds for the purchase of the Class B common units by the general partner
were provided by a capital contribution from us. We financed our capital
contribution through our revolving credit facility. The Class B units are
initially pari passu with common units with respect to distributions, and are
convertible into common units upon approval of a majority of the common
unitholders. The Class B unitholders may request that PAA call a meeting of
common unitholders to consider approval of the conversion of Class B units into
common units. If the approval of a conversion by the common unitholders is not
obtained within 120 days of a request, each Class B unitholder will be entitled
to receive distributions, on a per unit basis, equal to 110% of the amount of
distributions paid on a common unit, with such distribution right increasing to
115% if such approval is not secured within 90 days after the end of the 120-day
period. Except for the vote to approve the conversion, Class B units have the
same voting rights as the common units.
West Texas Gathering System Acquisition
On July 15, 1999, Plains Scurlock Permian, L.P. completed the acquisition of a
West Texas crude oil pipeline and gathering system from Chevron Pipe Line
Company for approximately $36.0 million, including transaction costs. Our total
acquisition cost was approximately $38.9 million including costs to address
certain issues identified in the due diligence process. The principal assets
acquired include approximately 450 miles of crude oil transmission mainlines,
approximately 400 miles of associated gathering and lateral lines and
approximately 2.9 million barrels of crude oil storage and terminalling capacity
in Crane, Ector, Midland, Upton, Ward and Winkler Counties, Texas. Financing for
the amounts paid at closing was provided by a draw under the term loan portion
of the Plains Scurlock credit facility.
44
<PAGE>
Point Arguello Acquisition
In July 1999, Arguello Inc., our wholly owned subsidiary, acquired Chevron's
interests in Point Arguello. The interests acquired include Chevron's 26%
working interest in the Point Arguello Unit, its 26% interest in various
partnerships owning the associated transportation, processing and marketing
infrastructure, and Chevron's right to participate in surrounding leases and
certain fee acreage onshore. We assumed Chevron's 26% share of (1) plugging and
abandoning all existing well bores, (2) removing conductors, (3) flushing
hydrocarbons from all lines and vessels and (4) removing/abandoning all
structures, fixtures and conditions created subsequent to closing. Chevron
retained the obligation for all other abandonment costs, including but not
limited to (1) removing, dismantling and disposing of the existing offshore
platforms, (2) removing and disposing of all existing pipelines, and (3)
removing, dismantling, disposing and remediation of all existing onshore
facilities. Arguello Inc. is the operator of record for the Point Arguello Unit
and has entered into an outsourcing agreement with a unit of Torch Energy
Advisors, Inc. for the conduct of certain field operations and other
professional services.
Subordinated Debt Issuance
On September 22, 1999, we sold $75.0 million principal amount of Senior
Subordinated Notes due 2006, Series E, bearing a coupon rate of 10.25%. The
Series E Notes were issued pursuant to a Rule 144A private placement at
approximately 101% of par, for a yield-to-worst of 9.97%. The stated coupon rate
of interest and maturity date are the same as those of our existing $200.0
million principal amount of senior subordinated notes. Our net proceeds, after
costs of the transaction, were approximately $74.6 million, and were used to
reduce the outstanding balance on our revolving credit facility.
In connection with the sale of the Series E Notes, we agreed to offer to
exchange 10.25% Senior Subordinated Notes due 2006, Series F for all of the
Series E Notes. The Series F Notes will be substantially identical (including
principal amount, interest rate, maturity and redemption rights) to the Series E
Notes except for certain transfer restrictions relating to the Series E Notes.
We also agreed to file a registration statement with the SEC with respect to
this exchange offer and to use our best efforts to cause such registration
statement to be declared effective by January 20, 2000. If such registration
statement was not declared effective by such date, with respect to the first 90-
day period thereafter, the interest rate on the Series E Notes increases by
0.50% per annum and will increase by an additional 0.50% per annum with respect
to each subsequent 90-day period until the registration statement has been
declared effective, up to maximum increase of 2% per annum. While the
registration statement has been filed, we will not request the SEC to declare
it effective until after the filing of this Form 10-K. As a result, the
interest rate on the Series E Notes has increased to 10.75% for the 90-day
period following January 20, 2000. At such time as the registration statement is
declared effective by the SEC, the interest rate will revert to 10.25% per
annum.
The Series E Notes are redeemable, at our option, on or after March 15, 2001
at 105.13% of the principal amount thereof, at decreasing prices thereafter
prior to March 15, 2004, and thereafter at 100% of the principal amount thereof
plus accrued interest to the date of redemption.
Credit Facilities
Amounts borrowed under our credit agreements at December 31, 1999 were as
follows (in thousands):
<TABLE>
<S> <C>
Revolving credit facility $137,300
PAA bank credit agreement 225,000
Plains Scurlock bank credit agreement 85,100
PAA letter of credit and borrowing facility 13,719
PAA secured term credit facility 45,000
--------
$506,119
========
</TABLE>
PLAINS RESOURCES
We have a $225.0 million revolving credit facility with a group of banks. The
revolving credit facility is guaranteed by all of our upstream subsidiaries and
is collateralized by our upstream oil and natural gas properties and those of
the guaranteeing subsidiaries and the stock of all upstream subsidiaries. The
borrowing base under the revolving credit facility at December 31, 1999, is
$225.0 million and is subject to redetermination from time to time by the
lenders in good faith, in the exercise of the lenders' sole discretion, and in
accordance with customary practices and standards in effect from time to time
for crude oil and natural gas loans to borrowers similar to our company. Our
borrowing base may be affected from time to
45
<PAGE>
time by the performance of our oil and natural gas properties and changes in oil
and natural gas prices. We incur a commitment fee of 3/8% per annum on the
unused portion of the borrowing base. The revolving credit facility, as amended,
matures on July 1, 2001, at which time the remaining outstanding balance
converts to a term loan which is repayable in sixteen equal quarterly
installments commencing October 1, 2001, with a final maturity of July 1, 2005.
The revolving credit facility bears interest, at our option of either LIBOR plus
1 3/8% or Base Rate (as defined therein). At December 31, 1999, letters of
credit of $0.6 million and borrowings of approximately $137.3 million were
outstanding under the revolving credit facility.
PAA CREDIT FACILITIES
The discussion below relates to credit facilities of PAA, which are
nonrecourse to us, but included in our consolidated financial statements. In
addition, our indirect ownership in PAA does not collarteralize any of our
credit facilities.
Concurrently with the closing of PAA's initial public offering in November
1998, PAA entered into a $225.0 million bank credit agreement that includes a
$175.0 million term loan facility and a $50.0 million revolving credit facility.
As a result of the unauthorized trading losses discovered in November 1999, the
facility was in default of certain covenants, with those defaults being
subsequently waived and the facility amended in December. The bank credit
agreement is secured by a lien on substantially all of PAA's assets except the
assets which secure the Plains Scurlock credit facility. PAA may borrow up to
$50.0 million under the revolving credit facility for acquisitions, capital
improvements, working capital and general business purposes. At December 31,
1999, PAA had $175.0 million outstanding under the term loan facility and $50.0
million outstanding under the revolving credit facility. The term loan facility
matures in 2005, and no principal is scheduled for payment prior to maturity.
The term loan facility may be prepaid at any time without penalty. The revolving
credit facility expires in November 2000. The term loan and revolving credit
facility bear interest at PAA's option at either the base rate, as defined, plus
an applicable margin, or reserve adjusted LIBOR plus an applicable margin. PAA
incurs a commitment fee on the unused portion of the revolving credit facility.
Plains Scurlock has a bank credit agreement which consists of a five-year
$82.6 million term loan facility and a three-year $35.0 million revolving credit
facility. The Plains Scurlock credit facility is nonrecourse to PAA, Plains
Marketing, L.P. and All American Pipeline, L.P. and is secured by substantially
all of the assets of Plains Scurlock Permian, L.P. and its subsidiaries,
including the Scurlock assets and the West Texas Gathering System. Borrowings
under the term loan and the revolving credit facility bear interest at LIBOR
plus the applicable margin. A commitment fee equal to 0.5% per year is charged
on the unused portion of the revolving credit facility. The revolving credit
facility, which may be used for borrowings or letters of credit to support crude
oil purchases, matures in May 2002. The term loan provides for principal
amortization of $0.7 million annually beginning May 2000, with a final maturity
in May 2004. As of December 31, 1999, letters of credit of approximately $29.5
million were outstanding under the revolver and borrowings of $82.6 million and
$2.5 million were outstanding under the term loan and revolver, respectively.
The term loan was reduced to $82.6 million from $126.6 million with proceeds
from PAA's October 1999 public offering.
PAA has a letter of credit and borrowing facility, the purpose of which is to
provide standby letters of credit to support the purchase and exchange of crude
oil for resale and borrowings primarily to finance crude oil inventory which has
been hedged against future price risk or designated as working inventory. As a
result of the unauthorized trading losses discovered in November 1999, the
facility was in default of certain covenants, with those defaults being
subsequently waived and the facility amended in December. As amended, the letter
of credit facility has a sublimit for cash borrowings of $40.0 million at
December 31, 1999, with decreasing amounts thereafter through April 30, 2000, at
which time the sublimit is eliminated. The letter of credit and borrowing
facility provides for an aggregate letter of credit availability of $295.0
million in December 1999, $315.0 million in January 2000, and thereafter
decreasing to $239.0 million in February through April 2000, to $225.0 million
in May and June 2000, and to $200.0 million in July 2000 through July 2001.
Aggregate availability under the letter of credit facility for direct borrowings
and letters of credit is limited to a borrowing base which is determined monthly
based on certain of PAA's current assets and current liabilities, primarily
accounts receivable and accounts payable related to the purchase and sale of
crude oil. This facility is secured by a lien on substantially all of PAA's
assets except the assets which secure the Plains Scurlock credit facility. At
December 31, 1999, there were letters of credit of approximately $292.0 million
and borrowings of $13.7 million outstanding under this facility.
On December 30, 1999, PAA entered into a $65.0 million senior secured term
credit facility to fund short-term working capital requirements resulting from
the unauthorized trading losses. The facility was secured by a portion of the
5.2 million barrels of linefill that was sold and receivables from certain sales
contracts applicable to the linefill. The facility had a maturity date of March
24, 2000 and was repaid with the proceeds from the sale of the linefill securing
the facility. At December 31, 1999, there were borrowings of $45.0 million
outstanding.
46
<PAGE>
All of PAA's credit facilities contain prohibitions on distributions on, or
purchases or redemptions of, units if any default or event of default is
continuing. In addition, PAA's facilities contain various covenants limiting its
ability to:
. incur indebtedness;
. grant liens;
. sell assets in excess of certain limitations;
. engage in transactions with affiliates;
. make investments;
. enter into hedging contracts; and
. enter into a merger, consolidation or sale of assets.
Each of PAA's facilities treats a change of control as an event of default. In
addition, the terms of PAA's letter of credit and borrowing facility and its
bank credit agreement require lenders' consent prior to the payment of
distributions to unitholders and require it to maintain:
. a current ratio of 1.0 to 1.0:
. a debt coverage ratio which is not greater than 5.0 to 1.0;
. an interest coverage ratio which is not less than 3.0 to 1.0;
. a fixed charge coverage ratio which is not less than 1.25 to 1.0; and
. a debt to capital ratio of not greater than 0.60 to 1.0.
The terms of the Plains Scurlock bank credit agreement require Plains Scurlock
to maintain at the end of each quarter:
. a debt coverage ratio of 6.0 to 1.0 from October 1, 1999 through June 30,
2000; 5.0 to 1.0 from July 1, 2000 through June 30, 2001; and 4.0 to 1.0
thereafter; and
. an interest coverage ratio of 2.0 to 1.0 from October 1, 1999 through
June 30, 2000 and 2.5 to 1.0 thereafter.
In addition, the Plains Scurlock bank credit agreement contains limitations on
the Plains Scurlock operating partnership's ability to make distributions to PAA
if its indebtedness and current liabilities exceed certain levels as well as the
amount of expansion capital it may expend.
PAA is currently in discussions with its lenders to restructure and
consolidate its various credit facilities. If completed, this will enable PAA to
increase its current bank credit facilities (excluding short-term credit
facility and the letter of credit and borrowing facility) from total capacity of
approximately $342.6 million to approximately $350.0 million to $400.0 million.
In addition, PAA is in discussions to restructure and increase the size of its
letter of credit and borrowing facility, which will provide PAA the ability to
enter into contango inventory transactions. Although there can be no assurance
PAA will be successful in restructuring the facilities, we believe these
facilities, combined with cash flow from operating activities and the sale of
the linefill and the segment of the All American Pipeline, will provide PAA with
additional flexibility and liquidity, including liquidity required to meet its
obligations and to make distributions to its unitholders.
Series E and Series G Preferred Stock
On April 1, 1999, we paid a dividend on the Series E Preferred Stock for the
period from October 1, 1998 through March 31, 1999. The dividend amount of
approximately $4.1 million was paid by issuing 8,209 additional shares of the
Series E Preferred Stock. On September 9, 1999, 3,408 shares of Series E
Preferred Stock, including accrued dividends, were converted into 98,613 shares
of common stock at a conversion price of $18.00 per share. On October 1, 1999,
we paid a cash dividend of approximately $4.2 million on the Series E Preferred
Stock for the period April 1, 1999 through September 30, 1999.
In connection with the sale of the Series F Preferred Stock described below,
we agreed with the purchasers of the Series F Preferred Stock (who were also
holders of the Series E Preferred Stock), to reduce the conversion price of the
Series E Preferred Stock from $18.00 to $15.00. This reduction of the conversion
price of the Series E Preferred Stock was effected through an exchange of each
outstanding share of Series E Preferred Stock for a share of a new Series G
Preferred Stock. Other than the reduction of the conversion price, the terms of
the Series G Preferred Stock are substantially identical to those of the Series
E Preferred Stock.
47
<PAGE>
Series F Preferred Stock
On December 14, 1999, we sold in a private placement 50,000 shares of our
Series F Preferred Stock for $50 million. Each share of the Series F Preferred
Stock has a stated value of $1,000 per share and bears a dividend of 10% per
annum. Dividends are payable semi-annually in either cash or additional shares
of Series F Preferred Stock at our option and are cumulative from the date of
issue. Dividends paid in additional shares of Series F Preferred Stock are
limited to an aggregate of six dividend periods. Each share of Series F
Preferred Stock is convertible into 81.63 shares of common stock (an initial
effective conversion price of $12.25 per share) and in certain circumstances may
be converted at our option into common stock if the average trading price for
any sixty-day trading period is equal to or greater than $21.60 per share. After
December 15, 2003, the Series F Preferred Stock is redeemable at our option at
110% of stated value through December 15, 2004 and at declining amounts
thereafter. If not previously redeemed or converted, the Series F Preferred
Stock is required to be redeemed in 2007.
Plains All American Pipeline Public Offering
In October 1999, PAA completed a public offering of an additional 2,990,000
Common Units, representing limited partner interests in PAA, at $18.00 per unit.
Net proceeds to PAA from the offering, including our general partner
contribution, were approximately $51.3 million after deducting underwriters'
discounts and commissions and offering expenses of approximately $3.1 million.
The proceeds were used to reduce outstanding debt. Approximately $44.0 million
was used to reduce the term loan portion of the Plains Scurlock bank credit
agreement and the remainder was used to reduce the balance outstanding on PAA's
other revolving credit facility.
Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
(in millions) 1999 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by (used in):
Operating activities $ (76.0) $ 37.6 $ 30.3
Investing activities (266.4) (483.4) (107.6)
Financing activities 404.0 448.6 78.5
- ----------------------------------------------------------------------
</TABLE>
Operating Activities. Net cash used in operating activities in 1999 resulted
from the unauthorized trading losses. The losses were partially offset by
increased midstream margins due to the Scurlock and West Texas Gathering System
acquisitions and higher crude oil prices and increased volumes associated with
our ongoing upstream acquisition and exploitation activities.
Investing Activities. Net cash used in investing activities for 1999 included
approximately $189.3 million for midstream acquisitions, primarily for the
Scurlock and West Texas gathering system acquisitions, and $77.9 for
acquisition, exploration, exploitation and development costs. Net cash used in
investing activities for 1998 consisted primarily of approximately $394.0
million for the purchase of the All American Pipeline and SJV gathering system
and $80.3 million for acquisition, exploration, exploitation and development
costs.
Financing activities. Cash provided by financing activities in 1999 was
generated primarily from net issuances of (1) $50.0 million in preferred stock
(2) $50.8 million in common units and (3) $344.6 million of short-term and long-
term debt. Cash inflows from financing activities during 1998 included net
issuances of (1) $138.8 of short-term and long-term debt, (2) $241.7 million of
common units in connection with PAA's initial public offering and (3) $85.0
million in preferred stock.
Working Capital
At December 31, 1999, we had working capital of approximately $115.9 million.
Working capital at December 31, 1999 includes $37.9 million of pipeline linefill
and $103.6 million for the segment of the All American Pipeline that were both
sold in the first quarter of 2000. Proceeds from the linefill sale were used to
fund the portion of the unauthorized trading losses that were settled in cash
during the first quarter of 2000. Proceeds from the sale of the pipeline were
used to reduce PAA's outstanding debt under its bank credit agreement. We had a
working capital deficit of approximately $21.0 million at December 31, 1998. We
have historically operated with a working capital deficit due primarily to
ongoing capital expenditures that have been financed through cash flow and our
revolving credit facility.
48
<PAGE>
Capital Expenditures
We have made and will continue to make substantial capital expenditures for
the acquisition, exploitation, development, exploration and production of crude
oil and natural gas reserves. Historically, we have financed these expenditures
primarily with cash generated by operations, bank borrowings and the sale of
subordinated notes, common stock and preferred stock. We intend to make
aggregate capital expenditures of approximately $81.0 million in 2000, including
approximately $72.0 million on the development and exploitation of our upstream
properties, and approximately $9.0 million for midstream activities. In
addition, we intend to continue to pursue the acquisition of underdeveloped
producing properties. We believe that we will have sufficient cash from
operating activities and borrowings under the revolving credit facility to fund
our upstream capital expenditures. The midstream capital expenditures are
expected to be funded by PAA through working capital, cash flow and draws under
PAA's revolving credit facility under its bank credit agreement.
Changing Crude Oil and Natural Gas Prices
Our upstream activities are affected by changes in crude oil prices which have
historically been volatile. The benchmark NYMEX crude oil price of $25.60 per
barrel at December 31, 1999 was more that double the $12.05 per barrel price at
year-end 1998. Although we have routinely hedged a substantial portion of our
crude oil production and intend to continue this practice, substantial future
crude oil price declines would adversely affect our overall results, and
therefore our liquidity. Furthermore, low crude oil prices could affect our
ability to raise capital on favorable terms. Decreases in the prices of crude
oil and natural gas have had, and could have in the future, an adverse effect on
the carrying value of our proved reserves and our revenues, profitability and
cash flow. Almost all of our reserve base (approximately 94% of year-end 1999
reserve volumes) is comprised of long-life oil properties that are sensitive to
crude oil price volatility. In order to manage our exposure to commodity price
risk, we have routinely hedged a portion of our crude oil production. For 2000,
we have entered into various arrangements which provide for us to receive an
average minimum NYMEX WTI price of $16.00 per barrel on 18,500 barrels of oil
per day. Thus, based on our average fourth quarter 1999 crude oil production
rate, these arrangements generally provide us with downside price protection for
approximately 79% of our production. Approximately 10,000 barrels per day of the
volumes hedged in 2000 will participate in price increases above the $16.00 per
barrel floor price, subject to a ceiling limitation of $19.75 per barrel. For
2001, we have entered into arrangements under which we will receive an average
minimum NYMEX WTI price of approximately $18.75 per barrel on 3,000 barrels per
day. The 2001 hedges participate in price increases and are not subject to a
ceiling limitation. All of our NYMEX crude oil prices are before quality and
location differentials. Management intends to continue to maintain hedging
arrangements for a significant portion of our production. Such contracts may
expose us to the risk of financial loss in certain circumstances. See Item 1. --
"Business --Product Markets and Major Customers" and Item 7a. -- "Quantitative
and Qualitative Disclosures About Market Risk".
As is common with most merchant activities, our ability to generate a profit
on our midstream margin activities is not tied to the absolute level of crude
oil prices but is generated by the difference between the price paid and other
costs incurred in the purchase of crude oil and the price at which we sell crude
oil. The gross margin generated by tariff activities depends on the volumes
transported on the pipeline and the level of the tariff charged, as well as the
fixed and variable costs of operating the pipeline. These operations are
affected by overall levels of supply and demand for crude oil.
Commitments
Although we obtained environmental studies on our properties in California,
the Sunniland Trend and Illinois Basin, and we believe that such properties have
been operated in accordance with standard oil field practices, certain of the
fields have been in operation for approximately 90 years, and current or future
local, state and federal environmental laws and regulations may require
substantial expenditures to comply with such rules and regulations.
Consistent with normal industry practices, substantially all of our crude oil
and natural gas leases require that, upon termination of economic production,
the working interest owners plug and abandon non-producing wellbores, remove
tanks, production equipment and flow lines and restore the wellsite. We have
estimated that the costs to perform these tasks is approximately $13.4 million,
net of salvage value and other considerations. Such estimated costs are
amortized to expense through the unit-of-production method as a component of
accumulated depreciation, depletion and amortization. Results from operations
for 1999, 1998 and 1997 include $0.5 million, $0.8 million and $0.6 million,
respectively, of expense associated with these estimated future costs. For
valuation and realization purposes of the affected crude oil and natural gas
properties, these estimated future costs are also deducted from estimated future
gross revenues to arrive at the estimated future net revenues and the
Standardized Measure disclosed in the accompanying Consolidated Financial
Statements.
49
<PAGE>
Contingencies
Since our announcement in November 1999 of PAA's losses resulting from
unauthorized trading by a former employee, numerous class action lawsuits have
been filed against PAA, certain of its general partner's officers and directors
and in some of these cases, its general partner and us alleging violations of
the federal securities laws. In addition, derivative lawsuits were filed in the
Delaware Chancery Court against PAA's general partner, its directors and certain
of its officers alleging the defendants breached the fiduciary duties owed to
PAA and its unitholders by failing to monitor properly the activities of its
traders. See Item 3. -- "Legal Proceedings."
We may experience future releases of crude oil into the environment from our
pipeline and storage operations, or discover releases that were previously
unidentified. While we maintain an extensive inspection program designed to
prevent and, as applicable, to detect and address such releases promptly,
damages and liabilities incurred due to any future environmental releases from
our assets may substantially affect our business.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if so, the type of hedge
transaction. For fair value hedge transactions in which we are hedging changes
in an asset's, liability's, or firm commitment's fair value, changes in the fair
value of the derivative instrument will generally be offset in the income
statement by changes in the hedged item's fair value. For cash flow hedge
transactions, in which we are hedging the variability of cash flows related to a
variable-rate asset, liability, or a forecasted transaction, changes in the fair
value of the derivative instrument will be reported in other comprehensive
income. The gains and losses on the derivative instrument that are reported in
other comprehensive income will be reclassified as earnings in the periods in
which earnings are affected by the variability of the cash flows of the hedged
item. This statement was amended by Statement of Financial Accounting Standards
No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133 ("SFAS 137") issued in June
1999. SFAS 137 defers the effective date of SFAS 133 to fiscal years beginning
after June 15, 2000. We are required to adopt this statement beginning in 2001.
We have not yet determined the effect that the adoption of SFAS 133 will have on
our financial position or results of operations.
YEAR 2000
Year 2000 Project. In order to address the Year 2000 issue, we initiated a
Year 2000 project. We incurred approximately $2.1 million through December 31,
1999, in connection with our Year 2000 project, approximately $1.4 million of
which were costs paid to third parties. We did not encounter any critical system
application, hardware or equipment failures during the date roll over to the
Year 2000, and have not experienced any disruptions of business activities as a
result of Year 2000 failures by our customers, suppliers, service providers or
business partners.
50
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to various market risks, including volatility in crude oil
commodity prices and interest rates. To manage our exposure, we monitor our
inventory levels, current economic conditions and our expectations of future
commodity prices and interest rates when making decisions with respect to risk
management. We do not enter into derivative transactions for speculative trading
purposes. Substantially all of our derivative contracts are exchanged or traded
with major financial institutions and the risk of credit loss is considered
remote.
Commodity Price Risk. The fair value of outstanding derivative commodity
instruments and the change in fair value that would be expected from a 10
percent adverse price change are shown in the table below (in millions):
DECEMBER 31,
---------------------------------------
1999 1998
------------------ ------------------
10% 10%
ADVERSE ADVERSE
FAIR PRICE FAIR PRICE
VALUE CHANGE VALUE CHANGE
------- --------- -------- --------
Crude Oil:
Futures contracts $ - $(2.8) $ 1.8 $(0.3)
Swaps and options contracts (21.9) (6.1) 16.9 (4.3)
The fair values of the futures contracts are based on quoted market prices
obtained from the NYMEX. The fair value of the swaps are estimated based on
quoted prices from independent reporting services compared to the contract price
of the swap and approximate the gain or loss that would have been realized if
the contracts had been closed out at year end. All hedge positions offset
physical positions exposed to the cash market; none of these offsetting physical
positions are included in the above table. Price-risk sensitivities were
calculated by assuming an across-the-board 10 percent adverse change in prices
regardless of term or historical relationships between the contractual price of
the instruments and the underlying commodity price. In the event of an actual 10
percent change in prompt month crude oil prices, the fair value of our
derivative portfolio would typically change less than that shown in the table
due to lower volatility in out-month prices.
Interest Rate Risk. Our debt instruments are sensitive to market fluctuations
in interest rates. The table below presents principal payments and the related
weighted average interest rates by expected maturity dates for debt outstanding
at December 31, 1999. Our variable rate debt bears interest at LIBOR plus the
applicable margin. The average interest rates presented below are based upon
rates in effect at December 31, 1999. The carrying value of variable rate bank
debt approximates fair value as interest rates are variable, based on prevailing
market rates. The fair value of fixed rate debt was based on quoted market
prices based on trades of subordinated debt. The fair value of the Redeemable
Preferred Stock approximates its liquidation value at December 31, 1999.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
EXPECTED YEAR OF MATURITY
---------------------------------------------------------------------------------- FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
-------- ------- ------- ------- ------- ---------- ----- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES:
Short-term debt - variable rate $58.7 $ - $ - $ - $ - $ - $ 58.7 $ 58.7
Average interest rate 8.74% 8.74%
Long-term debt - variable rate 50.6 9.2 37.5 35.0 114.3 200.8 447.4 447.4
Average interest rate 8.44% 7.70% 7.76% 7.64% 8.63% 8.17% 8.23%
Long-term debt - fixed rate 0.5 0.5 0.5 0.5 0.5 275.0 277.5 268.1
Average interest rate 8.00% 8.00% 8.00% 8.00% 8.00% 10.25% 10.23%
REDEEMABLE PREFERRED STOCK - - - - - - $138.8 $138.8
</TABLE>
At December 31, 1998, the carrying value of all variable rate bank debt and
the Redeemable Preferred Stock of $184.7 million and $88.5 million,
respectively, approximated the fair value and liquidation value, respectively,
at that date. The carrying value and fair value of the fixed rate debt was
$200.0 million and $202.0 million, respectively, at that date.
Interest rate swaps and collars are used to hedge underlying debt obligations.
These instruments hedge specific debt issuances and qualify for hedge
accounting. The interest rate differential is reflected as an adjustment to
interest expense over the life of the instruments. At December 31, 1999, we had
interest rate swap and collar arrangements for an aggregate notional principal
amount of $240.0 million, which positions had an aggregate value of
approximately $1.0 million as of such date. These instruments are based on LIBOR
margins and generally provide for a floor of 5% and a ceiling of 6.5% for $90.0
million of debt and a floor of 6% and a ceiling of 8% for $125.0 million of
debt. In August 1999, we terminated our swap arrangements on an aggregate
notional principal amount of $175.0 million and we received consideration in the
amount of approximately $10.8 million.
At December 31, 1998, we had interest rate swap arrangements for an
aggregate notional principal amount of $200.0 million and would have been
required to pay approximately $3.3 million to terminate the instruments at that
date.
51
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required here is included in the report as set forth in the
"Index to Financial Statements" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors will be included in the proxy statement
for the 2000 annual meeting of stockholders (the "Proxy Statement") to be filed
within 120 days after December 31, 1999, and is incorporated herein by
reference. Information with respect to our executive officers is presented in
Part I, Item 4 of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be included in the Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information, if any, regarding beneficial ownership of the common stock will
be included in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions will be
included in the Proxy Statement and is incorporated herein by reference.
52
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
See "Index to Consolidated Financial Statements" set forth on Page F-1.
(a) (3) EXHIBITS
2(a) Stock Purchase Agreement dated as of March 15, 1998, among Plains
Resources Inc., Plains All American Inc. and Wingfoot Ventures
Seven Inc. (incorporated by reference to Exhibit 2(b) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
3(a) Second Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3(a) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995).
3(b) Bylaws of the Company, as amended to date (incorporated by
reference to Exhibit 3(b) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993).
3(c) Certificate of Designation, Preference and Rights of Series D
Cumulative Convertible Preferred Stock (incorporated by reference
to Exhibit 3(c) to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997).
*3(d) Certificate of Designation, Preference and Rights of Series F
Cumulative Convertible Preferred Stock.
*3(e) Certificate of Designation, Preference and Rights of Series G
Cumulative Convertible Preferred Stock.
4 Indenture dated as of March 15, 1996, among the Company, the
Subsidiary Guarantors named therein and Texas Commerce Bank
National Association, as Trustee for the Company's 10 1/4% Senior
Subordinated Notes due 2006, Series A and Series B (incorporated by
reference to Exhibit 4(b) to the Company's Form S-3 (Registration
No. 333-1851)).
4(a) Indenture dated as of July 21, 1997, among the Company, the
Subsidiary Guarantors named therein and Texas Commerce Bank
National Association, as Trustee for the Company's 10 1/4% Senior
Subordinated Notes due 2006, Series C and Series D (incorporated by
reference to Exhibit 4 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1997).
4(b) Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4 to the Company's Form S-1 Registration Statement
(Reg. No. 33-33986)).
4(c) Purchase Agreement for Stock Warrant dated May 16, 1994, between
Plains Resources Inc. and Legacy Resources, Co., L.P. (incorporated
by reference to Exhibit 4(d) to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1994).
4(d) Warrant dated November 12, 1997, to Shell Land & Energy Company for
the purchase of 150,000 shares of Common Stock (incorporated by
reference to Exhibit 4(d) to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1997).
4(e) Indenture dated as of September 15, 1999, among Plains Resources
Inc., the Subsidiary Guarantors named therein and Chase Bank of
Texas, National Association, as Trustee (incorporated by reference
to Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999).
4(f) Registration Rights Agreement dated as of September 22, 1999, among
Plains Resources Inc., the Subsidiary Guarantors named therein,
J.P. Morgan Securities Inc. and First Union Capital Markets Corp.
(incorporated by reference to Exhibit 4(b) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999).
*4(g) Stock Purchase Agreement dated as of December 15, 1999, among
Plains Resources Inc. and the purchasers named therein.
*4(h) Amendment to Stock Purchase Agreement dated as of December 17,
1999, among Plains Resources Inc. and the purchasers named therein.
**10(a) Employment Agreement dated as of March 1, 1993, between the Company
and Greg L. Armstrong (incorporated by reference to Exhibit 10(b)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
**10(b) The Company's 1991 Management Options (incorporated by reference to
Exhibit 4.1 to the Company's Form S-8 Registration Statement
(Reg. No. 33-43788)).
**10(c) The Company's 1992 Stock Incentive Plan (incorporated by reference
to Exhibit 4.3 to the Company's Form S-8 Registration Statement
(Reg. No. 33-48610)).
**10(d) The Company's Amended and Restated 401(k) Plan (incorporated by
reference to Exhibit 10(d) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996).
**10(e) The Company's 1996 Stock Incentive Plan (incorporated by reference
to Exhibit 4 to the Company's Form S-8 Registration Statement
(Reg. No. 333-06191)).
53
<PAGE>
**10(f) Stock Option Agreement dated August 27, 1996 between the Company
and Greg L. Armstrong (incorporated by reference to Exhibit 10(l)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
**10(g) Stock Option Agreement dated August 27, 1996 between the Company
and William C. Egg Jr. (incorporated by reference to Exhibit 10(m)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
**10(h) First Amendment to the Company's 1992 Stock Incentive Plan
(incorporated by reference to Exhibit 10(n) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996).
**10(i) Second Amendment to the Company's 1992 Stock Incentive Plan
(incorporated by reference to Exhibit 10(b) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997).
10(j) Fourth Amended and Restated Credit Agreement dated May 22,1998,
among the Company and ING (U.S.) Capital Corporation, et. al.
(incorporated by reference to Exhibit 10(y) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998)
**10(k) First Amendment to Plains Resources Inc. 1996 Stock Incentive Plan
dated May 21, 1998 (incorporated by reference to Exhibit 10(z) to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1998)
**10(l) Third Amendment to Plains Resources Inc. 1992 Stock Incentive Plan
dated May 21, 1998 (incorporated by reference to Exhibit 10(aa) to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1998)
10(m) First Amendment to Fourth Amended and Restated Credit Agreement
dated as of November 17, 1998, among the Company and ING (U.S.)
Capital Corporation, et. al. (incorporated by reference to
Exhibit 10(m) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998).
10(n) Second Amendment to Fourth Amended and Restated Credit Agreement
dated as of March 15, 1999, among the Company and ING (U.S.)
Capital Corporation, et. al. (incorporated by reference to
Exhibit 10(n) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998).
**10(o) Employment Agreement dated as of November 23, 1998, between Harry
N. Pefanis and the Company (incorporated by reference to
Exhibit 10(o) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998).
10(p) Purchase and Sale Agreement dated June 4, 1999, by and among the
Company, Chevron U.S.A., Inc., and Chevron Pipe Line Company
(incorporated by reference to Exhibit 10(h) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999).
10(q) Third Amendment to Fourth Amended and Restated Credit Agreement
dated June 21, 1999, among the Company and ING (U.S.) Capital
Corporation, et. al. (incorporated by reference to Exhibit 10(p) to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1999).
10(r) Second Amendment to Plains Resources 1996 Stock Incentive Plan
dated May 20, 1999 (incorporated by reference to Exhibit 10(q) to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1999).
10(s) Fourth Amendment to Fourth Amended and Restated Credit Agreement
dated September 15, 1999, among the Company and First Union
National Bank, et al. (incorporated by reference to Exhibit 10(q)
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999).
*10(t) Fifth Amendment to Fourth Amended and Restated Credit Agreement
dated December 1, 1999, among the Company and First Union National
Bank, et al.
*21 Subsidiaries of the Company.
*23(a) Consent of PricewaterhouseCoopers LLP.
*27(b) Financial Data Schedule for the year ended December 31, 1999.
________________________
* Filed herewith
** A management contract or compensation plan.
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K was filed on November 29, 1999, regarding the
discovery of unauthorized trading activity by a former employee of PAA,
which was expected to result in losses to PAA of approximately $160.0
million.
A Current Report on Form 8-K was filed on December 1, 1999, regarding the
execution of agreements with PAA's lenders to provide for a $300.0 million
credit facility and the waiver of defaults under certain covenants in its
credit facilities which resulted from its unauthorized trading losses, as
well as the execution by us of commitment letters for the sale of up to
$50.0 million of a new series of preferred stock, the proceeds of which
would constitute a portion of the $114.0 million in debt financing which we
agreed to provide to PAA.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PLAINS RESOURCES INC.
Date: March 30, 2000 By: /s/ Phillip D. Kramer
-------------------------------------------
Phillip D. Kramer, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 30, 2000 By: /s/ Greg L. Armstrong
---------------------------------------
Greg L. Armstrong, President, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: March 30, 2000 By: /s/ Jerry L. Dees
---------------------------------------
Jerry L. Dees, Director
Date: March 30, 2000 By: /s/ Tom H. Delimitros
---------------------------------------
Tom H. Delimitros, Director
Date: March 30, 2000 By: /s/ Cynthia A. Feeback
---------------------------------------
Cynthia A. Feeback, Vice President -
Accounting And Assistant Treasurer
(Principal Accounting Officer)
Date: March 30, 2000 By: /s/ William M. Hitchcock
---------------------------------------
William M. Hitchcock, Director
Date: March 30, 2000 By: /s/ Phillip D. Kramer
---------------------------------------
Phillip D. Kramer, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: March 30, 2000 By: /s/ Dan M. Krausse
---------------------------------------
Dan M. Krausse, Chairman of the Board
and Director
55
<PAGE>
Date: March 30, 2000 By: /s/ John H. Lollar
---------------------------------------
John H. Lollar, Director
Date: March 30, 2000 By: /s/ Robert V. Sinnott
---------------------------------------
Robert V. Sinnott, Director
Date: March 30, 2000 By: /s/ J. Taft Symonds
---------------------------------------
J. Taft Symonds, Director
Our annual report to stockholders for the year ended December 31, 1999, and
the proxy statement relating to the annual meeting of stockholders will be
furnished to stockholders subsequent to the filing of this annual report on Form
10-K. Such documents have not been mailed to stockholders as of the date of this
report.
56
<PAGE>
PLAINS RESOURCES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements
Report of Independent Accountants.............................................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997..... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997..... F-5
Consolidated Statements of Changes in Non-redeemable Preferred Stock, Common Stock and other
Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997.................... F-6
Notes to Consolidated Financial Statements..................................................... F-7
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Plains Resources Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index, after the restatement described in Note 3, present fairly, in all
material respects, the financial position of Plains Resources Inc. and its
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
March 29, 2000
F-2
<PAGE>
PLAINS RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
---------- ----------
(RESTATED)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 68,228 $ 6,544
Accounts receivable and other 521,948 130,402
Inventory 78,349 42,520
Assets held for sale (Note 6) 103,615 -
---------- ----------
Total current assets 772,140 179,466
---------- ----------
PROPERTY AND EQUIPMENT
Oil and natural gas properties - full cost method
Subject to amortization 671,928 596,203
Not subject to amortization 52,031 54,545
Crude oil pipeline, gathering and terminal assets 458,502 378,254
Other property and equipment 7,706 8,606
---------- ----------
1,190,167 1,037,608
Less allowance for depreciation, depletion and amortization (402,514) (375,882)
---------- ----------
787,653 661,726
---------- ----------
OTHER ASSETS 129,767 131,646
---------- ----------
$1,689,560 $ 972,838
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current liabilities $ 546,393 $ 190,246
Notes payable and other current obligations 109,880 10,261
---------- ----------
Total current liabilities 656,273 200,507
BANK DEBT 137,300 52,000
BANK DEBT OF A SUBSIDIARY 259,450 175,000
SUBORDINATED DEBT 277,909 202,427
OTHER LONG-TERM DEBT 2,044 2,556
OTHER LONG-TERM LIABILITIES AND DEFERRED CREDITS 21,107 10,253
---------- ----------
1,354,083 642,743
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 16)
MINORITY INTEREST 156,045 172,438
---------- ----------
CUMULATIVE CONVERTIBLE PREFERRED STOCK,
STATED AT LIQUIDATION PREFERENCE 138,813 88,487
---------- ----------
NON-REDEEMABLE PREFERRED STOCK, COMMON STOCK
AND OTHER STOCKHOLDERS' EQUITY
Series D Cumulative Convertible Preferred Stock, $1.00 par value,
46,600 shares authorized, issued and outstanding,
net of discount of $1,354 at December 31, 1998 23,300 21,946
Common Stock, $0.10 par value, 50,000,000 shares authorized; issued and outstanding
17,924,050 and 16,881,938 shares at December 31, 1999 and 1998, respectively 1,792 1,688
Additional paid-in capital 130,027 124,679
Accumulated deficit (114,500) (79,143)
---------- ----------
40,619 69,170
---------- ----------
$1,689,560 $ 972,838
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PLAINS RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997
---------------- ----------------- --------------
(RESTATED)
<S> <C> <C> <C>
REVENUES
Oil and natural gas sales $ 116,223 $ 102,754 $ 109,403
Marketing, transportation, storage and terminalling revenues 4,700,434 1,129,689 752,522
Gain on PAA unit offerings 9,787 60,815 -
Gain on sale of linefill 16,457 - -
Interest and other income 1,237 834 319
---------- ---------- ---------
4,844,138 1,294,092 862,244
---------- ---------- ---------
EXPENSES
Production expenses 55,645 50,827 45,486
Marketing, transportation, storage and terminalling expenses 4,592,744 1,091,328 740,042
Unauthorized trading losses and related expenses (Note 3) 166,440 7,100 -
General and administrative 30,389 10,778 8,340
Noncash compensation expense 1,013 - -
Depreciation, depletion and amortization 36,998 31,020 23,778
Reduction in carrying cost of oil and natural gas properties - 173,874 -
Interest expense 46,378 35,730 22,012
---------- ---------- ---------
4,929,607 1,400,657 839,658
---------- ---------- ---------
Income (loss) before income taxes,
minority interest and extraordinary item (85,469) (106,565) 22,586
Minority interest (40,203) 786 -
---------- ---------- ---------
Income (loss) before income taxes and extraordinary item (45,266) (107,351) 22,586
Income tax expense (benefit):
Current (7) 862 352
Deferred (20,472) (45,867) 7,975
---------- ---------- ---------
Income (loss) before extraordinary item (24,787) (62,346) 14,259
Extraordinary item, net of tax benefit
and minority interest (Note 12) (544) - -
---------- ---------- ---------
NET INCOME (LOSS) (25,331) (62,346) 14,259
Less: cumulative preferred stock dividends 10,026 4,762 163
---------- ---------- ---------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (35,357) $ (67,108) $ 14,096
========== ========== =========
Basic earnings per share:
Income (loss) before extraordinary item $ (2.02) $ (3.99) $ 0.85
Extraordinary item (0.03) - -
---------- ---------- ---------
Net income (loss) $ (2.05) $ (3.99) $ 0.85
========== ========== =========
Diluted earnings per share:
Income (loss) before extraordinary item $ (2.02) $ (3.99) $ 0.77
Extraordinary item (0.03) - -
---------- ---------- ---------
Net income (loss) $ (2.05) $ (3.99) $ 0.77
========== ========== =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PLAINS RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997
---------------- ----------------- -------------
(RESTATED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (25,331) $ (62,346) $ 14,259
Items not affecting cash flows from operating activities:
Depreciation, depletion and amortization 36,998 31,020 23,778
Reduction in carrying costs of oil and natural gas properties - 173,874 -
Noncash gain (Notes 4 and 6) (26,244) (70,037) -
Minority interest in income of a subsidiary (40,203) 786 -
Deferred income taxes (20,472) (45,867) 7,975
Other noncash items 952 90 221
Change in assets and liabilities from operating activities:
Accounts receivable and other (226,438) 24,084 (9,390)
Inventory 33,930 (19,057) (18,239)
Pipeline linefill (3) (3,904) -
Accounts payable and other current liabilities 171,974 8,987 11,703
Other long-term liabilities 18,873 - -
---------- ---------- ---------
Net cash provided by (used in) operating activities (75,964) 37,630 30,307
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for midstream acquisitions (Note 6) (176,918) (394,026) -
Payment for crude oil pipeline, gathering and terminal assets (12,507) (8,131) (923)
Proceeds from the sale of oil and natural gas properties - 131 2,667
Payment for acquisition, exploration and developments costs (77,899) (80,318) (105,646)
Payment for additions to other property and assets (2,472) (1,078) (3,732)
Proceeds from sale of pipeline linefill (Note 6) 3,400 - -
---------- ---------- ---------
Net cash used in investing activities (266,396) (483,422) (107,634)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 744,971 570,560 266,905
Proceeds from short-term debt 131,119 31,750 39,000
Proceeds from sale of capital stock, options and warrants 5,542 828 1,104
Proceeds from issuance of preferred stock 50,000 85,000 -
Proceeds from issuance of common units, net (Note 4) 50,759 241,690 -
Principal payments of long-term debt (449,332) (423,560) (207,011)
Principal payments of short-term debt (82,150) (40,000) (21,000)
Costs incurred in connection
with financing arrangements (19,448) (13,075) -
Preferred stock dividends (4,245) - -
Distributions to unitholders (22,201) - -
Other (971) (4,571) (474)
---------- ---------- ---------
Net cash provided by financing activities 404,044 448,622 78,524
---------- ---------- ---------
Net increase in cash and cash equivalents 61,684 2,830 1,197
Cash and cash equivalents, beginning of year 6,544 3,714 2,517
---------- ---------- ---------
Cash and cash equivalents, end of year $ 68,228 $ 6,544 $ 3,714
========== ========== =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PLAINS RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NON-REDEEMABLE
PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
SERIES D
CUMULATIVE ADDITIONAL ACCUMU-
CONVERTIBLE PAID-IN LATED
PREFERRED STOCK COMMON STOCK CAPITAL DEFICIT TOTAL
-------------------------- --------------------- ----------- ----------- --------
SHARES AMOUNT SHARES AMOUNT
------------ ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 - $ - 16,519 $ 1,652 $120,051 $ (26,131) $ 95,572
Capital stock issued
upon exercise of
options and other - - 184 18 1,936 - 1,954
Issuance of preferred
stock and warrant
in connection with
an acquisition 47 20,508 - - 900 - 21,408
Amortization of discount 163 (163) -
Net income for the year - - - - - 14,259 14,259
-------- --------- -------- -------- -------- --------- --------
Balance at
December 31, 1997 47 20,671 16,703 1,670 122,887 (12,035) 133,193
Capital stock issued
upon exercise of
options and other - - 179 18 1,792 - 1,810
Issuance of
preferred stock - - - - - - -
Preferred stock dividends
and amortization of discount - 1,275 - - - (4,762) (3,487)
Net loss for the year (restated) - - - - - (62,346) (62,346)
-------- --------- -------- -------- -------- --------- --------
Balance at
December 31, 1998 (restated) 47 21,946 16,882 1,688 124,679 (79,143) 69,170
Capital stock issued
upon exercise of
options, warrants and other - - 943 94 3,583 - 3,677
Conversion of preferred
stock into common stock - - 99 10 1,765 - 1,775
Preferred stock dividends
and amortization of discount - 1,354 - - - (10,026) (8,672)
Net loss for the year - - - - - (25,331) (25,331)
-------- --------- -------- -------- -------- --------- --------
Balance at
December 31, 1999 47 $ 23,300 17,924 $ 1,792 $130,027 $(114,500) $ 40,619
======== ========= ======== ======== ======== ========= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PLAINS RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Organization
We are an independent energy company that acquires, exploits, develops,
explores and produces crude oil and natural gas. Through our majority ownership
in Plains All American Pipeline, L.P. ("PAA"), we are also engaged in the
midstream activities of marketing, transportation, storage and terminalling of
crude oil. Our upstream crude oil and natural gas activities are focused in
California in the Los Angeles Basin, the Arroyo Grande Field, and the Mt. Poso
Field, offshore California in the Point Arguello Field, the Sunniland Trend of
South Florida and the Illinois Basin in southern Illinois. Our midstream
activities are concentrated in California, Texas, Oklahoma, Louisiana and the
Gulf of Mexico.
Basis of Consolidation and Presentation
The consolidated financial statements include the accounts of Plains Resources
Inc., our wholly-owned subsidiaries and PAA in which we have an approximate 54%
ownership interest, Plains All American Inc., one of our wholly owned
subsidiaries, serves as PAA's sole general partner. For financial statement
purposes, the assets, liabilities and earnings of PAA are included in our
consolidated financial statements, with the public unitholders' interest
reflected as a minority interest. All significant intercompany transactions have
been eliminated. Certain reclassifications have been made to the prior year
statements to conform to the current year presentation.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates made by management include (1) crude oil
and natural gas reserves (2) depreciation, depletion and amortization, including
future abandonment costs, (3) income taxes and related valuation allowance and
(4) accrued liabilities. Although management believes these estimates are
reasonable, actual results could differ from these estimates.
Cash and Cash Equivalents. Cash and cash equivalents consist of all demand
deposits and funds invested in highly liquid instruments with original
maturities of three months or less.
Inventory. Crude oil inventory is carried at the lower of cost, as adjusted
for deferred hedging gains and losses, or market value using an average cost
method. Materials and supplies inventory is stated at the lower of cost or
market with cost determined on a first-in, first-out method. Inventory at
December 31, 1999 includes approximately $37.9 million of crude oil linefill
which we began selling in November 1999 (see Note 6).
Inventory consists of the following:
DECEMBER 31,
---------------------------
1999 1998
------- -------
(IN THOUSANDS)
Crude oil $73,535 $37,702
Materials and supplies 4,814 4,818
------- -------
$78,349 $42,520
======= =======
Oil and Natural Gas Properties. We follow the full cost method of accounting
whereby all costs associated with property acquisition, exploration,
exploitation and development activities are capitalized. Such costs include
internal general and administrative costs such as payroll and related benefits
and costs directly attributable to employees engaged in acquisition,
exploration, exploitation and development activities. General and administrative
costs associated with production, operations, marketing and general corporate
activities are expensed as incurred. These capitalized costs along with our
estimate of future development and abandonment costs, net of salvage values and
other considerations, are amortized to expense by the unit-of-production method
using engineers' estimates of unrecovered proved oil and natural gas
F-7
<PAGE>
reserves. The costs of unproved properties are excluded from amortization until
the properties are evaluated. Interest is capitalized on oil and natural gas
properties not subject to amortization and in the process of development.
Proceeds from the sale of oil and natural gas properties are accounted for as
reductions to capitalized costs unless such sales involve a significant change
in the relationship between costs and the estimated value of proved reserves, in
which case a gain or loss is recognized. Unamortized costs of proved properties
are subject to a ceiling which limits such costs to the present value of
estimated future cash flows from proved oil and natural gas reserves of such
properties reduced by future operating expenses, development expenditures and
abandonment costs (net of salvage values), and estimated future income taxes
thereon (the "Standardized Measure") (see Note 20).
Crude Oil Pipeline, Gathering and Terminal Assets. Crude oil pipeline,
gathering and terminal assets are recorded at cost. Depreciation is computed
using the straight-line method over estimated useful lives as follows:
. crude oil pipelines - 40 years;
. crude oil pipeline facilities - 25 years;
. crude oil terminal and storage facilities - 30 to 40 years;
. trucking equipment, injection stations and other - 5 to 10 years; and
Acquisitions and improvements are capitalized; maintenance and repairs are
expensed as incurred.
Other Property and Equipment. Other property and equipment is recorded at cost
and consists primarily of office furniture and fixtures and computer hardware
and software. Acquisitions, renewals, and betterments are capitalized;
maintenance and repairs are expensed. Depreciation is provided using the
straight-line method over estimated useful lives of three to seven years.
Other Assets. Other assets consist of the following (in thousands):
DECEMBER 31,
-------------------
1999 1998
------- -------
(RESTATED)
Pipeline linefill $ 17,633 $ 54,511
Deferred tax asset (See Note 11) 67,366 46,356
Land 8,853 8,853
Debt issue costs 35,101 18,668
Other 10,965 8,245
-------- --------
139,918 136,633
Accumulated amortization (10,151) (4,987)
-------- --------
$129,767 $131,646
======== ========
Pipeline Linefill. Pipeline linefill is recorded at cost and consists of crude
oil linefill used to pack a pipeline such that when an incremental barrel enters
a pipeline it forces a barrel out at another location. After the sale of the
linefill discussed below, we own approximately 1.2 million barrels of crude oil
that is used to maintain the vast majority of our minimum operating linefill
requirements. Proceeds from the sale and repurchase of pipeline linefill are
reflected as cash flows from operating activities in the accompanying
consolidated statements of cash flows. Proceeds from the sale of linefill in
connection with the segment of the All American Pipeline that we sold are
included in investing activities in the accompanying consolidated statements of
cash flows (see Note 6).
Costs incurred in connection with the issuance of long-term debt are
capitalized and amortized using the straight-line method over the term of the
related debt. Debt issue costs at December 31, 1999 include approximately $13.7
million paid in the fourth quarter of 1999 to amend PAA's credit facilities as a
result of defaults caused by unauthorized trading losses (see Note 3).
Federal and State Income Taxes. Income taxes are accounted for in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using tax rates in
effect for the year in which the differences are expected to reverse.
F-8
<PAGE>
Revenue Recognition. Gathering and marketing revenues are accrued at the time
title to the product sold transfers to the purchaser, which typically occurs
upon receipt of the product by the purchaser, and purchases are accrued at the
time title to the product purchased transfers to us, which typically occurs upon
our receipt of the product. Terminalling and storage revenues are recognized at
the time service is performed. Revenues for the transportation of crude oil are
recognized based upon regulated and non-regulated tariff rates and the related
transported volumes. We recognize oil and gas revenue from our interests in
producing wells as oil and gas is produced and sold from those wells.
Hedging. We utilize various derivative instruments, for purposes other than
trading, to hedge our exposure to price fluctuations on crude in storage and
expected purchases, sales and transportation of crude oil. The derivative
instruments consist primarily of futures and option contracts traded on the
New York Mercantile Exchange and crude oil swap contracts entered into with
financial institutions. We also utilize interest rate swaps and collars to
manage the interest rate exposure on our long-term debt.
These derivative instruments qualify for hedge accounting as they reduce the
price risk of the underlying hedged item and are designated as a hedge at
inception. Additionally, the derivatives result in financial impacts which are
inversely correlated to those of the items being hedged. This correlation,
generally in excess of 80%, (a measure of hedge effectiveness) is measured both
at the inception of the hedge and on an ongoing basis. If correlation ceases to
exist, we would discontinue hedge accounting and apply mark to market
accounting. Gains and losses on the termination of hedging instruments are
deferred and recognized in income as the impact of the hedged item is recorded.
Unrealized changes in the market value of crude oil hedge contracts are not
generally recognized in our statement of operations until the underlying hedged
transaction occurs. The financial impacts of crude oil hedge contracts are
included in our statements of operations as a component of revenues. Such
financial impacts are offset by gains or losses realized in the physical market.
Cash flows from crude oil hedging activities are included in operating
activities in the accompanying statements of cash flows. Net deferred gains and
losses on futures contracts, including closed futures contracts, entered into to
hedge anticipated crude oil purchases and sales are included in current assets
or current liabilities in the accompanying balance sheets. Deferred gains or
losses from inventory hedges are included as part of the inventory costs and
recognized when the related inventory is sold.
Amounts paid or received from interest rate swaps and collars are charged or
credited to interest expense and matched with the cash flows and interest
expense of the long-term debt being hedged, resulting in an adjustment to the
effective interest rate. Deferred gains of $10.1 million received upon the
termination of an interest rate swap are included in other long-term liabilities
and deferred credits in the accompanying balance sheet at December 31, 1999.
Stock Options. We have elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for our employee stock options. Under APB 25, no
compensation expense is recognized when the exercise price of options equals the
fair value (market price) of the underlying stock on the date of grant.
Sale of Units by a Subsidiary. When a subsidiary sells additional units to a
third party, resulting in a change in our percentage ownership interest, we
recognize a gain or loss in our consolidated statement of operations if the
selling price per unit is more or less than our average carrying amount per
unit. When we buy additional units from a subsidiary, resulting in a change in
our percentage ownership interest, the difference between our cost and
underlying equity in investee net assets is assigned first to identifiable
tangible and intangible assets and to liabilities based on their fair values at
the date of the change of interest; any unassigned difference is assigned to
goodwill.
Recent Accounting Pronouncements. In June 1998, the FASB issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if so, the type of hedge transaction. For fair value
hedge transactions in which we are hedging changes in an asset's, liability's,
or firm commitment's fair value, changes in the fair value of the derivative
instrument will generally be offset in the income statement by changes in the
hedged item's fair value. For cash flow hedge transactions, in which we are
hedging the variability of cash flows related to a variable-rate asset,
liability, or a forecasted transaction, changes in the fair value of the
derivative instrument will be reported in other comprehensive income. The gains
and losses on the derivative instrument that are reported in other comprehensive
income will be reclassified as earnings in the periods in which earnings are
affected by the variability of the cash flows of the hedged item. This statement
was amended by Statement of Financial Accounting Standards No. 137, Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 ("SFAS 137") issued in June 1999. SFAS 137 defers
the effective date of SFAS 133 to
F-9
<PAGE>
fiscal years beginning after June 15, 2000. We are required to adopt this
statement beginning in 2001. We have not yet determined the effect that the
adoption of SFAS 133 will have on our financial position or results of
operations.
NOTE 3 -- UNAUTHORIZED TRADING LOSSES AND RESTATED FINANCIAL STATEMENTS
In November 1999, we discovered that a former employee of PAA had engaged in
unauthorized trading activity, resulting in losses of approximately $162.0
million ($174.0 million, including estimated associated costs and legal
expenses). A full investigation into the unauthorized trading activities by
outside legal counsel and independent accountants and consultants determined
that the vast majority of the losses occurred from March through November 1999,
and the impact warranted a restatement of previously reported financial
information for 1999 and 1998. Because the financial statements of PAA are
consolidated with our financial statements, adverse effects on the financial
statements of PAA directly affect our consolidated financial statements. As a
result, we have restated our previously reported 1999 and 1998 results to
reflect the losses incurred from these unauthorized trading activities.
Approximately $7.1 million of the unauthorized trading losses were recognized in
1998 and the remainder in 1999.
Normally, as it purchases crude oil, PAA establishes a margin by selling crude
oil for physical delivery to third-party users or by entering into a future
delivery obligation with respect to futures contracts. The employee in question
violated PAA's policy of maintaining a position that is substantially balanced
between crude oil purchases and sales or future delivery obligations. The
unauthorized trading and associated losses resulted in a default of certain
covenants under PAA's credit facilities and significant short-term cash and
letter of credit requirements.
Although one of our wholly-owned subsidiaries is the general partner of and
owns 54% of PAA, the trading losses do not affect the operations or assets of
our upstream business. The debt of PAA is nonrecourse to us. In addition, our
indirect ownership in PAA does not collateralize any of our credit facilities.
Our $225.0 million credit facility is collateralized by our oil and natural gas
properties.
In December 1999, PAA executed amended credit facilities and obtained default
waivers from all of its lenders. The amended credit facilities:
. waived defaults under covenants contained in the existing credit
facilities;
. increased availability under PAA's letter of credit and borrowing facility
from $175.0 million in November 1999 to $295.0 million in December 1999,
$315.0 million in January 2000, and thereafter decreasing to $239.0 million
in February through April 2000, to $225.0 million in May and June 2000 and
to $200.0 million in July 2000 through July 2001;
. required the lenders' consent prior to the payment of distributions to
unitholders;
. prohibited contango inventory transactions subsequent to January 20, 2000;
and
. increased interest rates and fees under certain of the facilities.
PAA paid approximately $13.7 million to its lenders in connection with the
amended credit facilities. This amount was capitalized as debt issue costs and
will be amortized over the remaining term of the amended facilities. In
connection with the amendments, we loaned approximately $114.0 million to PAA.
This subordinated debt is due not later than November 30, 2005. We financed the
$114.0 million that we loaned PAA with:
. the issuance of a new series of our 10% convertible preferred stock for
proceeds of $50.0 million (see Note 8);
. cash distributions of approximately $9.0 million made in November 1999 to
PAA's general partner; and
. $55.0 million of borrowings under our revolving credit facility.
In the period immediately following the disclosure of the unauthorized trading
losses, a significant number of PAA's suppliers and trading partners reduced or
eliminated the open credit previously extended to PAA. Consequently, the amount
of letters of credit PAA needed to support the level of its crude oil purchases
then in effect increased significantly. In addition, the cost to PAA of
obtaining letters of credit increased under the amended credit facility. In many
instances PAA arranged for letters of credit to secure its obligations to
purchase crude oil from its customers, which increased its letter of credit
costs and decreased its unit margins. In other instances, primarily involving
lower margin wellhead and bulk purchases, certain of its purchase contracts were
terminated.
F-10
<PAGE>
The summarized restated results for the periods ended and financial position
as of March 31, June 30, September 30, 1999 and December 31, 1998 are as
follows (in thousands, except per shared data) (unaudited):
<TABLE>
<CAPTION>
RESTATED
--------------------------------------------------------------------------------
THREE PERIOD ENDED PERIOD ENDED
MONTHS JUNE 30, 1999 SEPTEMBER 30, 1999 YEAR
ENDED ---------------------- ----------------------- ENDED
MARCH 31, THREE SIX THREE NINE DECEMBER 31,
1999 MONTHS MONTHS MONTHS MONTHS 1998
------------ -------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenues $476,971 $887,277 $1,364,248 $1,162,433 $2,526,681 $1,294,092
Operating profit (loss) 7,638 17,966 25,604 (21,624) 3,980 144,837
Net income (loss) (5,161) (3,116) (8,277) (20,047) (28,324) (62,346)
Basic and diluted EPS (0.45) (0.33) (0.78) (1.30) (2.09) (3.99)
BALANCE SHEET DATA:
Current assets $193,752 $ 425,119 $ 539,296 $ 179,466
Current liabilities 215,879 474,017 642,767 200,507
Minority interest 166,647 162,276 132,869 172,438
Non-redeemable preferred stock, common stock
and other stockholders' equity 65,908 60,983 46,050 69,170
CASH FLOW DATA:
Net cash provided by operating activities $ 4,017 $ 25,742 $ 7,868 $ -
</TABLE>
The summarized previously reported results for the periods ended and financial
position as of March 31, June 30, September 30, 1999 and December 31, 1998 are
as follows (in thousands, except per share data) (unaudited):
<TABLE>
<CAPTION>
PREVIOUSLY REPORTED
--------------------------------------------------------------------------------
THREE PERIOD ENDED PERIOD ENDED
MONTHS JUNE 30, 1999 SEPTEMBER 30, 1999 YEAR
ENDED ---------------------- ----------------------- ENDED
MARCH 31, THREE SIX THREE NINE DECEMBER 31,
1999 MONTHS MONTHS MONTHS MONTHS 1998
------------ -------- ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $476,971 $887,277 $1,364,248 $1,295,433 $2,659,681 $1,294,092
Operating profit 29,012 39,193 68,205 50,602 118,807 151,937
Net income 2,566 4,565 7,131 7,050 14,181 (58,554)
Basic EPS 0.01 0.12 0.14 0.26 0.40 (3.77)
Diluted EPS 0.01 0.11 0.13 0.24 0.37 (3.77)
BALANCE SHEET DATA:
Current assets $193,921 $ 425,045 $ 539,198 $ 179,466
Current liabilities 194,674 431,342 527,842 193,407
Minority interest 175,756 180,340 179,659 173,461
Non-redeemable preferred stock, common stock
and other stockholders' equity 73,635 76,391 88,555 72,962
CASH FLOW DATA:
Net cash provided by operating activities $ 3,848 $ 25,816 $ 7,966 $ -
</TABLE>
Below is the summarized restated and previously reported results for the three
and nine months ending September 30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
---------------------- ---------------------
PREVIOUSLY PREVIOUSLY
RESTATED REPORTED RESTATED REPORTED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $393,719 $393,719 $776,732 $776,732
Operating profit 20,111 27,111 55,968 62,968
Net income (loss) (1,442) 3,625 1,407 6,474
Basis EPS (0.19) 0.11 (0.06) 0.24
Diluted EPS (0.19) 0.10 (0.05) 0.22
</TABLE>
NOTE 4 -- PLAINS ALL AMERICAN PIPELINE, L.P. - FORMATION AND OFFERINGS
Our midstream activities are conducted through PAA. PAA was formed in
September of 1998 to acquire and operate the business and assets of our wholly-
owned midstream subsidiaries.
On November 23, 1998, PAA completed an initial public offering of 13,085,000
common units at $20.00 per unit, representing limited partner interests and
received proceeds of approximately $244.7 million. Concurrently with the closing
F-11
<PAGE>
of the initial public offering, we were merged with certain of our midstream
subsidiaries, and then sold the assets of these subsidiaries to PAA in exchange
for $64.1 million and the assumption of $11.0 million of related indebtedness.
At the same time, the general partner conveyed all of its interest in the All
American Pipeline and the SJV Gathering System to PAA in exchange for:
. 6,974,239 common units, 10,029,619 subordinated units and an aggregate 2%
general partner interest;
. the right to receive incentive distributions as defined in the partnership
agreement; and
. PAA's assumption of $175.0 million of indebtedness incurred by the general
partner in connection with the acquisition of the All American Pipeline
and the SJV Gathering System.
In addition to the $64.1 million paid to us, PAA distributed approximately
$177.6 million to the general partner and used approximately $3.0 million of the
remaining proceeds to pay expenses incurred in connection with the offering. The
general partner used $121.0 million of the cash distributed to it to retire the
remaining indebtedness incurred in connection with the acquisition of the All
American Pipeline and the SJV Gathering System and to pay other costs associated
with the transactions. The general partner distributed the remaining $56.6
million to us, which we used to repay indebtedness and for other general
corporate purposes.
During 1998, we recognized a pre-tax gain of approximately $70.0 million (net
of approximately $9.2 million in formation related expenses) in connection with
the formation of PAA. The gain is the result of an increase in the book value of
our equity in PAA to reflect our proportionate share of the underlying net
assets of PAA due to the sale of units in the initial public offering. The
formation related expenses consist primarily of amounts due to certain key
employees in connection with the successful formation of PAA, debt prepayment
penalties and legal fees.
In May 1999, PAA sold to the general partner 1.3 million Class B common units
of PAA for a total cash consideration of $25.0 million, or $19.25 per unit, the
price equal to the market value of PAA's common units on May 12, 1999, in
connection with the Scurlock acquisition (see Note 6).
In October 1999, PAA completed a public offering of an additional 2,990,000
common units representing limited partner interests, at $18.00 per unit. Net
proceeds to PAA from the offering, including our general partner contribution of
$0.5 million, were approximately $51.3 million after deducting underwriters'
discounts and commissions and offering expenses of approximately $3.1 million.
These proceeds were used to reduce outstanding debt. We recognized a pre-tax
gain of $9.8 million in connection with the offering as a result of an increase
in the book value of our equity in PAA, as discussed above.
NOTE 5 -- UPSTREAM ACQUISITIONS AND DISPOSITIONS
On July 1, 1999, Arguello Inc., our wholly owned subsidiary, acquired
Chevron's interests in Point Arguello. The interests acquired include Chevron's
26% working interest in the Point Arguello Unit, its 26% interest in various
partnerships owning the associated transportation, processing and marketing
infrastructure, and Chevron's right to participate in surrounding leases and
certain fee acreage onshore. We assumed its 26% share of (1) plugging and
abandoning all existing well bores, (2) removing conductors, (3) flushing
hydrocarbons from all lines and vessels and (4) removing/abandoning all
structures, fixtures and conditions created subsequent to closing. Chevron
retained the obligation for all other abandonment costs, including but not
limited to (1) removing, dismantling and disposing of the existing offshore
platforms, (2) removing and disposing of all existing pipelines and (3)
removing, dismantling, disposing and remediation of all existing onshore
facilities. Arguello Inc. is the operator of record for the Point Arguello Unit
and has entered into an outsourcing agreement with a unit of Torch Energy
Advisors, Inc. for the conduct of certain field operations and other
professional services.
During 1998, we acquired the Mt. Poso field from Aera Energy LLC for
approximately $7.7 million. The field is located approximately 27 miles north of
Bakersfield, California, in Kern County. The field added approximately 8 million
barrels of oil equivalent to our proved reserves at the acquisition date.
In March 1997, we completed the acquisition of Chevron's interest in the
Montebello field for $25.0 million, effective February 1, 1997. The assets
acquired consist of a 100% working interest and a 99.2% net revenue interest in
55 producing oil wells and related facilities and also include approximately 450
acres of surface fee land. At the acquisition date, the Montebello Field, which
is located approximately 15 miles from our existing California operations, was
producing approximately 800 barrels of crude oil and 800 Mcf of natural gas per
day and added approximately 23 million barrels of oil equivalent to our proved
reserves. The acquisition was funded with proceeds from our revolving credit
facility.
In November 1997, we acquired a 100% working interest and a 97% net revenue
interest in the Arroyo Grande Field in San Luis Obispo County, California, from
subsidiaries of Shell Oil Company ("Shell"). The assets acquired include surface
F-12
<PAGE>
and development rights to approximately 1,000 acres included in the 1,500 acre
unit. At the acquisition date, the Arroyo Grande Field was producing
approximately 1,600 barrels of 14 degrees API gravity crude oil per day from 70
wells and added approximately 20 million barrels of oil equivalent to our proved
reserves.
The aggregate purchase price of $22.1 million for the Arroyo Grande field
consisted of rights to a non-producing property interest conveyed to Shell, the
issuance of 46,600 shares of Series D Preferred Stock with an aggregate stated
value of $23.3 million and a 5-year warrant to purchase 150,000 shares of Common
Stock at $25.00 per share. No proved reserves had been assigned to the rights to
the property interest conveyed.
During 1997, we sold certain non-strategic crude oil and natural gas
properties located primarily in Louisiana for net proceeds of approximately $2.7
million.
NOTE 6 -- MIDSTREAM ACQUISITIONS AND DISPOSITIONS
Scurlock Acquisition
On May 12, 1999, PAA completed the acquisition of Scurlock Permian LLC and
certain other pipeline assets from Marathon Ashland Petroleum LLC. Including
working capital adjustments and closing and financing costs, the cash purchase
price was approximately $141.7 million.
Scurlock, previously a wholly owned subsidiary of Marathon Ashland Petroleum,
is engaged in crude oil transportation, gathering and marketing, and owns
approximately 2,300 miles of active pipelines, numerous storage terminals and a
fleet of more than 250 trucks. Its largest asset is an 800-mile pipeline and
gathering system located in the Spraberry Trend in West Texas that extends into
Andrews, Glasscock, Martin, Midland, Regan and Upton Counties, Texas. The assets
we acquired also included approximately one million barrels of crude oil
pipeline linefill.
Financing for the Scurlock acquisition was provided through:
. borrowings of approximately $92.0 million under Plains Scurlock's limited
recourse bank facility with BankBoston, N.A.;
. the sale to the general partner of 1.3 million Class B common units of PAA
for a total cash consideration of $25.0 million, or $19.125 per unit, the
price equal to the market value of PAA's common units on May 12, 1999; and
. a $25.0 million draw under PAA's existing revolving credit agreement.
The funds for the purchase of the Class B units by the general partner were
provided by a capital contribution from us. We financed our capital contribution
through our revolving credit facility.
The purchase price allocation was based on preliminary estimates of fair value
and is subject to adjustment as additional information becomes available and is
evaluated. The purchase accounting entries include a $1.0 million accrual for
estimated environmental remediation costs. Under the agreement for the sale of
Scurlock by Marathon Ashland Petroleum to Plains Scurlock, Marathon Ashland
Petroleum has agreed to indemnify and hold harmless Scurlock and Plains Scurlock
for claims, liabilities and losses resulting from any act or omission
attributable to Scurlock's business or properties occurring prior to the date of
the closing of such sale to the extent the aggregate amount of such losses
exceed $1.0 million; provided, however, that claims for such losses must
individually exceed $25,000 and must be asserted by Scurlock against Marathon
Ashland Petroleum on or before May 15, 2003.
The assets, liabilities and results of operations of Scurlock are included in
our consolidated financial statements effective May 1, 1999. The Scurlock
acquisition has been accounted for using the purchase method of accounting and
the purchase price was allocated in accordance with Accounting Principles Board
Opinion No. 16, Business Combinations ("APB 16") as follows (in thousands):
Crude oil pipeline, gathering and terminal assets $125,120
Other property and equipment 1,546
Pipeline linefill 16,057
Other assets (debt issue costs) 3,100
Other long-term liabilities (environmental accrual) (1,000)
Net working capital items (3,090)
--------
Cash paid $141,733
========
F-13
<PAGE>
Pro Forma Results for the Scurlock Acquisition
The following unaudited pro forma data is presented to show pro forma
revenues, net loss and basic and diluted net loss per share as if the Scurlock
acquisition, which was effective May 1, 1999, had occurred on January 1, 1998
(in thousands, except per share data):
YEAR ENDED DECEMBER 31,
----------------------
1999 1998
--------- ----------
(RESTATED)
Revenues $5,227,013 $2,529,558
========== ==========
Net loss $ (27,147) $ (69,682)
========== ==========
Net loss per share available
to common stockholders:
Basic and diluted $ (2.15) $ (4.43)
========== ==========
West Texas Gathering System Acquisition
On July 15, 1999, Plains Scurlock Permian, L.P. completed the acquisition of a
West Texas crude oil pipeline and gathering system from Chevron Pipe Line
Company for approximately $36.0 million, including transaction costs. Our total
acquisition cost was approximately $38.9 million including costs to address
certain issues identified in the due diligence process. The principal assets
acquired include approximately 450 miles of crude oil transmission mainlines,
approximately 400 miles of associated gathering and lateral lines and
approximately 2.9 million barrels of crude oil storage and terminalling capacity
in Crane, Ector, Midland, Upton, Ward and Winkler Counties, Texas. Financing for
the amounts paid at closing was provided by a draw under the term loan portion
of the Plains Scurlock credit facility.
Venice Terminal Acquisition
On September 3, 1999, PAA completed the acquisition of a Louisiana crude oil
terminal facility and associated pipeline system from Marathon Ashland Petroleum
LLC for approximately $1.5 million. The principal assets acquired include
approximately 300,000 barrels of crude oil storage and terminalling capacity and
a six-mile crude oil transmission system near Venice, Louisiana.
All American Pipeline Acquisition
On July 30, 1998, Plains All American Inc., acquired all of the outstanding
capital stock of the All American Pipeline Company, Celeron Gathering
Corporation and Celeron Trading & Transportation Company (collectively the
"Celeron Companies") from Wingfoot, a wholly-owned subsidiary of the Goodyear
Tire and Rubber Company ("Goodyear") for approximately $400.0 million, including
transaction costs. The principal assets of the entities acquired include the All
American Pipeline and the SJV Gathering System, as well as other assets related
to such operations. The acquisition was accounted for utilizing the purchase
method of accounting with the assets, liabilities and results of operations
included in our consolidated financial statements effective July 30, 1998.
The acquisition was accounted for utilizing the purchase method of accounting
and the purchase price was allocated in accordance with APB 16 as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Crude oil pipeline, gathering and terminal assets $392,528
Other assets (debt issue costs) 6,138
Net working capital items (excluding cash received of $7,481) 1,498
--------
Cash paid $400,164
========
</TABLE>
Financing for the acquisition was provided through a $325.0 million, limited
recourse bank facility and an approximate $114.0 million capital contribution by
us. Actual borrowings at closing were $300.0 million.
All American Pipeline Linefill Sale and Asset Disposition
We initiated the sale of approximately 5.2 million barrels of crude oil
linefill from the All American Pipeline in November 1999. This sale was
substantially completed in February 2000. The linefill was located in the
segment of the All American Pipeline that extends from Emidio, California, to
McCamey, Texas. Except for minor third party volumes, one of
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<PAGE>
our subsidiaries has been the sole shipper on this segment of the pipeline since
its predecessor acquired the line from Goodyear in July 1998. Proceeds from the
sale of the linefill were approximately $100.0 million, net of associated costs,
and were used for working capital purposes. We estimate that we will recognize a
total gain of approximately $44.0 million in connection with the sale of
linefill. As of December 31, 1999, we had delivered approximately 1.8 million
barrels of linefill and recognized a gain of $16.5 million. The amount of crude
oil linefill for sale at December 31, 1999 was $37.9 million and is included in
inventory on the consolidated balance sheet.
On March 24, 2000, we completed the sale of the above referenced segment of
the All American Pipeline to a unit of El Paso Energy Corporation for total
proceeds of $129.0 million. The proceeds from the sale were used to reduce PAA's
outstanding debt. Our net proceeds are expected to be approximately $124.0
million, net of associated transaction costs and estimated costs to remove
certain equipment. We estimate that we will recognize a gain of approximately
$20.0 million in connection with the sale. During 1999, we reported gross margin
of approximately $5.0 million from volumes transported on the segment of the
line that was sold.
NOTE 7 -- LONG-TERM DEBT AND CREDIT FACILITIES
Short-term debt and current portion of long-term debt consists of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
--------- --------
<S> <C> <C>
PAA letter of credit and borrowing facility, bearing interest at
weighted average interest rates of 8.7% and 6.8%
at December 31, 1999 and 1998, respectively $ 13,719 $ 9,750
PAA secured term credit facility, bearing interest at
a weighted average interest rate of 8.8%
at December 31, 1999 45,000 -
--------- --------
58,719 9,750
Current portion of long-term debt 51,161 511
--------- --------
$ 109,880 $ 10,261
========= ========
</TABLE>
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
--------- --------
<S> <C> <C>
Revolving credit facility, bearing interest at 7.6%
and 6.9%, at December 31, 1999 and 1998, respectively $137,300 $ 52,000
PAA bank credit agreement, bearing interest at 8.3%
and 6.8% at December 31, 1999 and 1998, respectively 225,000 175,000
Plains Scurlock bank credit agreement, bearing interest
at 9.1% at December 31, 1999 85,100 -
10.25% Senior Subordinated Notes, due 2006, net of
unamortized premium of $2.9 million and $2.4 million
at December 31, 1999 and 1998, respectively 277,909 202,427
Other long-term debt 2,555 3,067
--------- --------
Total long-term debt 727,864 432,494
Less current maturities (51,161) (511)
--------- --------
$ 676,703 $431,983
========= ========
</TABLE>
PLAINS RESOURCES LONG-TERM DEBT AND CREDIT FACILITIES
Revolving Credit Facility
We have a $225.0 million revolving credit facility with a group of banks. The
revolving credit facility is guaranteed by all of our upstream subsidiaries and
is collateralized by our upstream oil and natural gas properties and those of
the guaranteeing subsidiaries and the stock of all upstream subsidiaries. The
borrowing base under the revolving credit facility at December 31, 1999, is
$225.0 million and is subject to redetermination from time to time by the
lenders in good faith, in the exercise of the lenders' sole discretion, and in
accordance with customary practices and standards in effect from time to time
for crude oil and natural gas loans to borrowers similar to our company. Our
borrowing base may be affected from time to
F-15
<PAGE>
time by the performance of our crude oil and natural gas properties and changes
in crude oil and natural gas prices. We incur a commintment fee of 3/8% per
annum on the unused portion of the borrowing base. The revolving credit
facility, as amended, matures on July 1, 2001, at which time the remaining
outstanding balance converts to a term loan which is repayable in sixteen equal
quarterly installments commencing October 1, 2001, with a final maturity of July
1, 2005. The revolving credit facility bears interest, at our option of either
LIBOR plus 1 3/8% or Base Rate (as defined therein). At December 31, 1999,
letters of credit of $0.6 million and borrowings of approximately $137.3 million
were outstanding under the revolving credit facility.
The revolving credit facility contains covenants which, among other things,
restrict the payment of cash dividends, limit the amount of consolidated debt,
limit our ability to make certain loans and investments and provide that we must
maintain a specified relationship between current assets and current
liabilities.
10.25% Senior Subordinated Notes Due 2006
We have $275 million principal amount of 10.25% Senior Subordinated Notes Due
2006 outstanding which bear a coupon rate of 10.25% which at December 31, 1999
consists of (in thousands):
Series A $ 500
Series B 149,500
Series C 50
Series D 49,950
Series E 75,000
--------
$275,000
========
The Series A & B 10.25% Notes were issued in 1996 at 99.38% of par to yield
10.35%. The Series C & D 10.25% Notes were issued in 1997 at approximately 107%
of par to yield a minimum yield to worst of 8.79%, or 9.03% to maturity.
Proceeds from the sale of the Series C & D 10.25% Notes, net of offering costs,
were approximately $53.0 million and were used to reduce the balance on our
revolving credit facility.
The Series E 10.25% Notes were issued in September 1999 pursuant to a Rule
144A private placement at approximately 101% of par to yield a minimum yield to
worst of 9.97%. Proceeds from the sale of the Series E 10.25% Notes, net of
offering costs, were approximately $74.6 million and were used to reduce the
balance on our revolving credit facility.
In connection with the sale of the Series E Notes, we agreed to offer to
exchange 10.25% Senior Subordinated Notes due 2006, Series F for all of the
Series E Notes. The Series F Notes will be substantially identical (including
principal amount, interest rate, maturity and redemption rights) to the Series E
Notes except for certain transfer restrictions relating to the Series E Notes.
We also agreed to file a registration statement with the SEC with respect to
this exchange offer and to use our best efforts to cause such registration
statement to be declared effective by January 20, 2000. If such registration
statement is not declared effective by such date, with respect to the first 90-
day period thereafter, the interest rate on the Series E Notes increases by
0.50% per annum and will increase by an additional 0.50% per annum with respect
to each subsequent 90-day period until the registration statement has been
declared effective, up to a maximum increase of 2% per annum. While the
registration statement has been filed, we will not request the SEC to declare it
effective until after the filing of our 1999 Form 10-K. As a result, the
interest rate on the Series E Notes has increased to 10.75% for the 90-day
period following January 20, 2000. At such time as the registration statement is
declared effective by the SEC, the interest rate will revert to 10.25% per
annum.
The 10.25% Notes are redeemable, at our option, on or after March 15, 2001 at
105.13% of the principal amount thereof, at decreasing prices thereafter prior
to March 15, 2004, and thereafter at 100% of the principal amount thereof plus,
in each case, accrued interest to the date of redemption.
The Indenture contains covenants that include, but are not limited to,
covenants that: (1) limit the incurrence of additional indebtedness; (2) limit
certain investments; (3) limit restricted payments; (4) limit the disposition of
assets; (5) limit the payment of dividends and other payment restrictions
affecting subsidiaries; (6) limit transactions with affiliates; (7) limit the
creation of liens; and (8) restrict mergers, consolidations and transfers of
assets. In the event of a Change of Control and a corresponding Rating Decline,
as both are defined in the Indenture, we will be required to make an offer to
repurchase the 10.25% Notes at 101% of the principal amount thereof, plus
accrued and unpaid interest to the date of the repurchase.
F-16
<PAGE>
The Series A-E Notes are unsecured general obligations and are subordinated in
right of payment to all our existing and future senior indebtedness and are
guaranteed by all of our upstream subsidiaries on a full, unconditional, joint
and several basis. The Series A-E Notes are not guaranteed by PAA or any of our
other midstream subsidiaries.
PLAINS ALL AMERICAN PIPELINE L.P. CREDIT FACILITIES
The discussion below relates to credit facilities of PAA, which are
nonrecourse to us, but are included in our consolidated financial statements. In
addition, our indirect ownership in PAA does not collateralize any of our credit
facilities.
PAA has a letter of credit and borrowing facility, the purpose of which is to
provide standby letters of credit to support the purchase and exchange of crude
oil for resale and borrowings primarily to finance crude oil inventory which has
been hedged against future price risk or designated as working inventory. As a
result of the unauthorized trading losses discovered in November 1999, the
facility was in default of certain covenants, with those defaults being
subsequently waived and the facility amended in December. As amended, the letter
of credit facility has a sublimit for cash borrowings of $40.0 million at
December 31, 1999, with decreasing amounts thereafter through April 30, 2000, at
which time the sublimit is eliminated. The letter of credit and borrowing
facility provides for an aggregate letter of credit availability of $295.0
million in December 1999, $315.0 million in January 2000, and thereafter
decreasing to $239.0 million in February through April 2000, to $225.0 million
in May and June 2000, and to $200.0 million in July 2000 through July 2001.
Aggregate availability under the letter of credit facility for direct borrowings
and letters of credit is limited to a borrowing base which is determined monthly
based on certain of PAA's current assets and current liabilities, primarily
accounts receivable and accounts payable related to the purchase and sale of
crude oil. This facility is secured by a lien on substantially all of PAA's
assets except the assets which secure the Plains Scurlock credit facility. At
December 31, 1999, there were letters of credit of approximately $292.0 million
and borrowings of $13.7 million outstanding under this facility.
On December 30, 1999, PAA entered into a $65.0 million senior secured term
credit facility to fund short-term working capital requirements resulting from
the unauthorized trading losses. The facility was secured by a portion of the
5.2 million barrels of linefill that was sold and receivables from certain sales
contracts applicable to the linefill. The facility had a maturity date of March
24, 2000 and was repaid with the proceeds from the sale of the linefill securing
the facility. At December 31, 1999, there were borrowings of $45.0 million
outstanding.
Concurrently with the closing of PAA's initial public offering in November
1998, PAA entered into a $225.0 million bank credit agreement that includes a
$175.0 million term loan facility and a $50.0 million revolving credit facility.
As a result of the unauthorized trading losses discovered in November 1999, the
facility was in default of certain covenants, with those defaults being
subsequently waived and the facility amended in December. The bank credit
agreement is secured by a lien on substantially all of PAA's assets except the
assets which secure the Plains Scurlock credit facility. PAA may borrow up to
$50.0 million under the revolving credit facility for acquisitions, capital
improvements, working capital and general business purposes. At December 31,
1999, PAA had $175.0 million outstanding under the term loan facility, and $50.0
million outstanding under the revolving credit facility. The term loan facility
matures in 2005, and no principal is scheduled for payment prior to maturity.
The term loan facility may be prepaid at any time without penalty. The revolving
credit facility expires in November 2000. The term loan and revolving credit
facility bear interest at PAA's option at either the base rate, as defined, plus
an applicable margin, or reserve adjusted LIBOR plus an applicable margin. PAA
incurs a commitment fee on the unused portion of the revolving credit facility.
Plains Scurlock, an operating partnership which is a subsidiary of PAA, has a
bank credit agreement which consists of a five-year $82.6 million term loan
facility and a three-year $35.0 million revolving credit facility. The Plains
Scurlock bank credit agreement is nonrecourse to PAA, Plains Marketing, L.P. and
All American Pipeline, L.P. and is secured by substantially all of the assets of
Plains Scurlock Permian, L.P. and its subsidiaries, including the Scurlock
assets and the West Texas gathering system. Borrowings under the term loan and
under the revolving credit facility bear interest at LIBOR plus the applicable
margin. A commitment fee equal to 0.5% per year is charged on the unused portion
of the revolving credit facility. The revolving credit facility, which may be
used for borrowings or letters of credit to support crude oil purchases, matures
in May 2002. The term loan provides for principal amortization of $0.7 million
annually beginning May 2000, with a final maturity in May 2004. As of December
31, 1999, letters of credit of approximately $29.5 million were outstanding
under the revolver and borrowings of $82.6 million and $2.5 million were
outstanding under the term loan and revolver, respectively. The term loan was
reduced to $82.6 million from $126.6 million with proceeds from PAA's October
1999 public offering.
F-17
<PAGE>
All of PAA's credit facilities contain prohibitions on distributions on, or
purchases or redemptions of, units if any default or event of default is
continuing. In addition, PAA's facilities contain various covenants limiting its
ability to:
. incur indebtedness;
. grant liens;
. sell assets in excess of certain limitations;
. engage in transactions with affiliates;
. make investments;
. enter into hedging contracts; and
. enter into a merger, consolidation or sale of assets.
Each of PAA's facilities treats a change of control as an event of default. In
addition, the terms of PAA's letter of credit and borrowing facility and its
bank credit agreement require lenders' consent prior to the payment of
distributions to unitholders and require it to maintain:
. a current ratio of 1.0 to 1.0, as defined in PAA's credit agreement;
. a debt coverage ratio which is not greater than 5.0 to 1.0;
. an interest coverage ratio which is not less than 3.0 to 1.0;
. a fixed charge coverage ratio which is not less than 1.25 to 1.0; and
. a debt to capital ratio of not greater than 0.60 to 1.0.
The terms of the Plains Scurlock bank credit agreement require Plains Scurlock
to maintain at the end of each quarter:
. a debt coverage ratio of 6.0 to 1.0 from October 1, 1999 through June 30,
2000; 5.0 to 1.0 from July 1, 2000 through June 30, 2001; and 4.0 to 1.0
thereafter; and
. an interest coverage ratio of 2.0 to 1.0 from October 1, 1999 through
June 30, 2000 and 2.5 to 1.0 thereafter.
In addition, the Plains Scurlock bank credit agreement contains limitations on
the Plains Scurlock operating partnership's ability to make distributions to PAA
if its indebtedness and current liabilities exceed certain levels as well as the
amount of expansion capital it may expend.
Maturities
The aggregate amount of maturities of all long-term indebtedness for the next
five years is: 2000 - $51.1 million, 2001 - $9.7 million, 2002 - $38.0 million,
2003 - $35.5 million and 2004 - $114.8 million.
NOTE 8 - REDEEMABLE PREFERRED STOCK
Series E and Series G Cumulative Convertible Preferred Stock
On July 29, 1998, we sold in a private placement 170,000 shares of our Series
E Cumulative Convertible Preferred Stock (the "Series E Preferred Stock") for
$85.0 million. Each share of the Series E Preferred Stock has a stated value of
$500 per share and bears a dividend of 9.5% per annum. Dividends are payable
semi-annually in either cash or additional shares of Series E Preferred Stock at
our option and are cumulative from the date of issue. Each share of Series E
Preferred Stock is convertible into 27.78 shares of common stock (an initial
effective conversion price of $18.00 per share) and in certain circumstances may
be converted at our option into common stock if the average trading price for
any thirty-day trading period is equal to or greater than $21.60 per share. The
Series E Preferred Stock is redeemable at our option at 105% of stated value
through December 31, 2003 and at par thereafter. If not previously redeemed or
converted, the Series E Preferred Stock is required to be redeemed in 2012.
Proceeds from the Series E preferred Stock were used to fund a portion of our
capital contribution to Plains All American Inc. to acquire the Celeron
Companies (see Note 6).
On April 1, 1999, we paid a dividend on the Series E Preferred Stock for the
period from October 1, 1998 through March 31, 1999. The dividend amount of
approximately $4.1 million was paid by issuing 8,209 additional shares of the
Series E Preferred Stock. On September 9, 1999, 3,408 shares of Series E
Preferred Stock, including accrued dividends, were converted into 98,613 shares
of common stock at a conversion price of $18.00 per share. On October 1, 1999,
we paid a cash dividend of approximately $4.2 million on the Series E Preferred
Stock for the period April 1, 1999 through September 30, 1999.
F-18
<PAGE>
In connection with the sale of the Series F Preferred Stock described below,
we agreed with the purchasers of the Series F Preferred Stock (who were also
holders of the Series E Preferred Stock), to reduce the conversion price of the
Series E Preferred Stock from $18.00 to $15.00. This reduction of the conversion
price of the Series E Preferred Stock was effected through an exchange of each
outstanding share of Series E Preferred Stock for a share of a new Series G
Preferred Stock. Other than the reduction of the conversion price, the terms of
the Series G Preferred Stock are substantially identical to those of the Series
E Preferred Stock.
On March 22, our Board of Directors declared a cash dividend on our Series G
Preferred Stock, which is payable on April 3, 2000 to holders of record on March
23, 2000. The dividend amount of $4,219,000 is for the period of October 1, 1999
through March 31, 2000.
Series F Cumulative Convertible Preferred Stock
On December 14, 1999, we sold in a private placement 50,000 shares of our
Series F Cumulative Convertible Preferred Stock (the "Series F Preferred Stock")
for $50.0 million. Each share of the Series F Preferred Stock has a stated value
of $1,000 per share and bears a dividend of 10% per annum. Dividends are payable
semi-annually in either cash or additional shares of Series F Preferred Stock at
our option and are cumulative from the date of issue. Dividends paid in
additional shares of Series F Preferred Stock are limited to an aggregate of six
dividend periods. Each share of Series F Preferred Stock is convertible into
81.63 shares of common stock (an initial effective conversion price of $12.25
per share) and in certain circumstances may be converted at our option into
common stock if the average trading price for any sixty-day trading period is
equal to or greater than $21.60 per share. After December 15, 2003, the Series F
Preferred Stock is redeemable at our option at 110% of stated value through
December 15, 2004 and at declining amounts thereafter. If not previously
redeemed or converted, the Series F Preferred Stock is required to be redeemed
in 2007.
Proceeds from the Series F Preferred Stock were advanced to PAA in connection
with the unauthorized trading losses through the issuance of $114.0 million of
subordinated debt, due not later than November 30, 2005 (see Note 3). On March
22, our Board of Directors declared a cash dividend on our Series F Preferred
Stock, which is payable on April 3, 2000 to holders of record on March 23, 2000.
The dividend amount of $1,475,000 is for the period December 15, 1999 (the date
of original issuance) through March 31, 2000.
NOTE 9 -- CAPITAL STOCK
Common and Preferred Stock
We have authorized capital stock consisting of 50 million shares of common
stock, $0.10 par value, and 2 million shares of preferred stock, $1.00 par
value. At December 31, 1999, there were 17.9 million shares of common stock
issued and outstanding and 274,226 shares of preferred stock outstanding.
Stock Warrants and Options
At December 31, 1999, we had warrants outstanding which entitle the holders
thereof to purchase an aggregate 251,350 shares of common stock. Per share
exercise prices and expiration dates for the warrants are as follows: 101,350
shares at $7.50 expiring in 2000 and 150,000 shares at $25.00 expiring in 2002.
We have various stock option plans for our employees and directors (see Note
15).
Series D Cumulative Convertible Preferred Stock
In November 1997, we issued 46,600 shares of Series D Cumulative Convertible
Preferred Stock (the "Series D Preferred Stock"). The Series D Preferred Stock
has an aggregate stated value of $23.3 million and is redeemable at our option
at 140% of stated value. If not previously redeemed or converted, the Series D
Preferred Stock will automatically convert into 932,000 shares of common stock
in 2012. Each share of the Series D Preferred Stock has a stated value of $500
and is convertible into common stock at a ratio of $25.00 of stated value for
each share of Common Stock to be issued. The Series D Preferred Stock was
initially recorded at $20.5 million, a discount of $2.8 million from the stated
value of $23.3 million. Commencing January 1, 2000, the Series D Preferred Stock
will bear an annual dividend of $30.00 per share. Prior to this date, no
dividends were accrued and the discount was amortized to retained earnings
through December 31, 1999.
On March 22, our Board of Directors declared a cash dividend on our Series D
Preferred stock, which is payable on April 3, 2000 to holders of record on March
23, 2000. The dividend amount of $350,000 is for the period January 1, 2000
through March 31, 2000.
F-19
<PAGE>
NOTE 10 -- EARNINGS PER SHARE
The following is a reconciliation of the numerators and the denominators of
the basic and diluted earnings per share computations for income (loss) from
continuing operations before extraordinary item for the years ended December 31,
1999, 1998 and 1997 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1999 1998 (RESTATED) 1997
---------------------------------- ------------------------------- ------------------------------
INCOME SHARES PER INCOME SHARES PER INCOME SHARES PER
(NUMERA- (DENOMI- SHARE (NUMERA- (DENOMI- SHARE (NUMERA- (DENOMI- SHARE
TOR) NATOR) AMOUNT TOR) NATOR) AMOUNT TOR) NATOR) AMOUNT
------------- --------- -------- --------- --------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before
extraordinary item $(24,787) $(62,346) $14,259
Less: preferred
stock dividends (10,026) (4,762) (163)
-------- -------- -------
Income (loss)
available
to common
stockholders (34,813) 17,262 $(2.02) (67,108) 16,816 $(3.99) 14,096 16,603 $0.85
====== ====== =====
Effect of dilutive
securities:
Employee stock
options - - - - - 1,085
Warrants - - - - - 516
--------- ------ -------- ------ ------- ------
Income (loss)
available
to common
stockholders
assuming
dilution $(34,813) 17,262 $(2.02) $(67,108) 16,816 $(3.99) $14,096 18,204 $0.77
======== ====== ====== ======== ====== ====== ======= ====== =====
</TABLE>
In 1999 and 1998, we recorded net losses and our options and warrants were
not included in the computations of diluted earnings per share because their
assumed conversion was antidilutive. In 1997 certain options and warrants to
purchase shares of our common stock were not included in the computations of
diluted earnings per share because the exercise prices were greater than the
average market price of the common stock during the period of the calculations,
resulting in antidilution. In addition, our preferred stock is convertible into
common stock but was not included in the computation of diluted earnings per
share in 1999, 1998 and 1997 because the effect was antidilutive. See Notes 9
and 15 for additional information concerning outstanding options and warrants.
F-20
<PAGE>
NOTE 11 -- INCOME TAXES
Our deferred income tax assets and liabilities at December 31, 1999 and 1998,
consist of the tax effect of income tax carryforwards and differences related to
the timing of recognition of certain types of costs incurred in both our
upstream and midstream activities as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1999 1998
---------------- ----------------
(restated)
<S> <C> <C>
U.S. Federal
- ------------
Deferred tax assets:
Net operating losses $ 80,267 $48,911
Percentage depletion 2,450 2,450
Tax credit carryforwards 1,780 1,614
Excess outside tax basis over outside book basis 15,377 10,556
Other 627 1,268
-------- -------
100,501 64,799
Deferred tax liabilities:
Net oil & gas acquisition, exploration and
development costs (28,788) (12,186)
-------- -------
Net deferred tax asset 71,713 52,613
Valuation allowance (2,555) (2,786)
-------- -------
69,158 49,827
-------- -------
States
- ------
Deferred tax liability (1,792) (3,471)
-------- -------
Net deferred tax assets $ 67,366 $46,356
======== =======
</TABLE>
At December 31, 1999, we have a net deferred federal tax asset of $69.2
million. Management believes that it is more likely than not that it will
generate taxable income sufficient to realize such asset based on certain tax
planning strategies available to us.
At December 31, 1999, we have carryforwards of approximately $229.3 million
of regular tax NOLs, $7.0 million of statutory depletion, $1.4 million of
alternative minimum tax credits and $0.3 million of enhanced oil recovery
credits. At December 31, 1999, we had approximately $209.8 million of
alternative minimum tax NOL carryforwards available as a deduction against
future alternative minimum tax income. The NOL carryforwards expire from 2005
through 2019.
Set forth below is a reconciliation between the income tax provision
(benefit) computed at the United States statutory rate on income (loss) before
income taxes and the income tax provision per the accompanying Consolidated
Statements of Operations (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
(restated)
<S> <C> <C> <C>
U.S. federal income tax provision at statutory rate $(15,842) $(37,573) $7,905
State income taxes (1,298) (5,252) 376
Valuation allowance adjustment - (4,987) -
Full cost ceiling test limitation (3,617) 2,903 -
Other 278 (96) 46
-------- -------- ------
Income tax (benefit) on income before extraordinary item (20,479) (45,005) 8,327
Income tax benefit allocated to extraordinary item (293) - -
-------- -------- ------
Income tax (benefit) provision $(20,772) $(45,005) $8,327
======== ======== ======
</TABLE>
F-21
<PAGE>
In accordance with certain provisions of the Tax Reform Act of 1986, a change
of greater than 50% of our beneficial ownership within a three-year period (an
"Ownership Change") will place an annual limitation on our ability to utilize
our existing tax carryforwards. Under the Final Treasury Regulations issued by
the Internal Revenue Service, we do not believe that an Ownership Change has
occurred as of December 31, 1999.
NOTE 12 -- EXTRAORDINARY ITEM
For the year ended December 31, 1999, we recognized an extraordinary loss
related to the early extinguishment of debt. The loss is related to the
reduction of the Plains Scurlock term loan facility with proceeds from PAA's
1999 public offering and the restructuring of PAA's letter of credit and
borrowing facility as a result of the unauthorized trading losses (see Note 3
and 7).
NOTE 13 -- RELATED PARTY TRANSACTIONS
Reimbursement of Expenses of the General Partner and Its Affiliates
As the general partner for PAA, we have sole responsibility for conducting
its business and managing its operations and we own all of the incentive
distribution rights. Some of our senior executives who currently operate our
business also manage the business of PAA. We do not receive any management fee
or other compensation in connection with the management of their business, but
we are reimbursed for all direct and indirect expenses incurred on their behalf.
For the years ended December 31, 1999 and 1998, we were reimbursed approximately
$44.7 million and $0.5 million, respectively, for direct and indirect expenses
on their behalf. The reimbursed costs consist primarily of employee salaries and
benefits. PAA does not employ any persons to manage its business. These
functions are provided by the employees of the general partner and us.
Crude Oil Marketing Agreement
PAA is the exclusive marketer/purchaser for all of our equity crude oil
production. The marketing agreement provides that PAA will purchase for resale
at market prices all of our equity crude oil production for which they charge a
fee of $0.20 per barrel. For the year ended December 31, 1999 and the period
from November 23, 1998 to December 31, 1998, we were paid approximately $131.5
million and $4.1 million, respectively, for the purchase of crude oil under the
agreement. Prior to the marketing agreement, PAA's predecessor marketed our
crude oil production and that of our subsidiaries and our royalty owners. We
were paid approximately $83.4 million and $101.2 million for the purchase of
these products for the period from January 1, 1998 to November 22, 1998 and the
year ended December 31, 1997, respectively. In management's opinion, such
purchases were made at prevailing market prices. PAA's predecessor did not
recognize a profit on the sale of the crude oil purchased from us.
Financing
In December 1999, we loaned to PAA $114.0 million. This subordinated debt is
due not later than November 30, 2005 (see Note 3).
To finance a portion of the purchase price of the Scurlock acquisition, we
purchased 1.3 million Class B common units from PAA at $19.125 per unit, the
market value of the common units on May 12, 1999 (see Note 6).
Long-Term Incentive Plans
We have adopted the Plains All American Inc. 1998 Long-Term Incentive Plan
for employees and directors of the general partner and its affiliates who
perform services for PAA. The Long-Term Incentive Plan consists of two
components, a restricted unit plan and a unit option plan. The Long-Term
Incentive Plan currently permits the grant of restricted units and unit options
covering an aggregate of 975,000 common units. The plan is administered by the
Compensation Committee of the general partner's board of directors.
Restricted Unit Plan. A restricted unit is a "phantom" unit that entitles the
grantee to receive a common unit upon the vesting of the phantom unit. As of
March 15, 2000, an aggregate of approximately 500,000 restricted units have been
authorized for grants to employees of the general partner, 170,000 of which have
been granted with the remaining 330,000 to be granted in the near future. The
Compensation Committee may, in the future, make additional grants under the plan
to employees and directors containing such terms as the Compensation Committee
shall determine. In general, restricted units granted to employees during the
subordination period will vest only upon, and in the same proportions as, the
conversion of
F-22
<PAGE>
the subordinated units to common units. Grants made to non-employee directors of
the general partner will be eligible to vest prior to termination of the
subordination period.
Unit Option Plan. The Unit Option Plan currently permits the grant of options
covering common units. No grants have been made under the Unit Option Plan to
date. However, the Compensation Committee may, in the future, make grants under
the plan to employees and directors containing such terms as the committee shall
determine, provided that unit options have an exercise price equal to the fair
market value of the units on the date of grant. Unit options granted during the
subordination period will become exercisable automatically upon, and in the same
proportions as, the conversion of the subordinated units to common units, unless
a later vesting date is provided.
Transaction Grant Agreements In addition to the grants made under the
Restricted Unit Plan described above, the general partner, at no cost to PAA,
agreed to transfer approximately 400,000 of its affiliates' common units
(including distribution equivalent rights attributable to such units) to certain
key employees of the general partner. A grant covering 50,000 of such common
units was terminated in 1999. Generally, approximately 69,444 of the remaining
common units vest in each of the years ending December 31, 1999, 2000 and 2001
if the operating surplus generated in such year equals or exceeds the amount
necessary to pay the minimum quarterly distribution on all outstanding common
units and the related distribution on the general partner interest. If a tranche
of common units does not vest in a particular year, such common units will vest
at the time the common unit arrearages for such year have been paid. In
addition, approximately 47,224 of the remaining common units vest in each of the
years ending December 31, 1999, 2000 and 2001 if the operating surplus generated
in such year exceeds the amount necessary to pay the minimum quarterly
distribution on all outstanding common units and subordinated units and the
related distribution on the general partner interest. In 1999, approximately
69,444 of such common units vested and 47,224 of such common units remain
unvested as no distribution on the subordinated units was made for the fourth
quarter of 1999. Any common units remaining unvested shall vest upon, and in the
same proportion as, the conversion of subordinated units to common units.
Distribution equivalent rights are paid in cash at the time of the vesting of
the associated common units. Notwithstanding the foregoing, all common units
become vested if Plains All American Inc. is removed as general partner prior to
January 1, 2002.
We recognized noncash compensation expense of approximately $1.0 million for
the year ended December 31, 1999 related to the transaction grants which vested
in 1999
NOTE 14 -- RETIREMENT PLAN
Effective June 1, 1996, our board of directors adopted a nonqualified
retirement plan (the "Plan") for certain of our officers. Benefits under the
Plan are based on salary at the time of adoption, vest over a 15-year period and
are payable over a 15-year period commencing at age 60. The Plan is unfunded.
Net pension expense for the years ended December 31, 1999, 1998 and 1997, is
comprised of the following components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 109 $ 97 $ 82
Interest on projected benefit obligation 83 74 60
Amortization of prior service cost 37 37 37
Unrecognized loss 6 3 -
---------------- ---------------- ----------------
Net pension expense $ 235 $ 211 $ 179
================ ================ ================
</TABLE>
F-23
<PAGE>
The following schedule reconciles the status of the Plan with amounts reported
in our balance sheet at December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 1,094 $ 1,108
Nonvested benefits 139 172
------------ ------------
Accumulated benefit obligation $ 1,233 $ 1,280
============ ============
Projected benefit obligation for service rendered to date $ 1,233 $ 1,280
Plan assets at fair value - -
------------ ------------
Projected benefit obligation for service rendered to date 1,233 1,280
Unrecognized gain (loss) 34 (211)
Prior service cost not yet recognized in net periodic pension expense (545) (582)
------------ ------------
Net pension liability 722 487
Adjustment required to recognize minimum liability 512 582
------------ ------------
Accrued pension cost liability recognized in the balance sheet $ 1,234 $ 1,069
============ ============
</TABLE>
The weighted-average discount rate used in determining the projected benefit
obligation was 7.8% and 6.5% for the years ended December 31, 1999 and 1998.
NOTE 15 -- STOCK COMPENSATION PLANS
Historically, we have used stock options as a long-term incentive for our
employees, officers and directors under various stock option plans. The exercise
price of options granted to employees is equal to or greater than the market
price of the underlying stock on the date of grant. Accordingly, consistent with
the provisions of APB 25, no compensation expense has been recognized in the
accompanying financial statements.
We have options outstanding under our 1996, 1992 and 1991 plans, under which a
maximum of 3.5 million shares of common stock were reserved for issuance.
Generally, terms of the options provide for an exercise price of not less than
the market price of our stock on the date of the grant, a pro rata vesting
period of two to four years and an exercise period of five to ten years.
We have outstanding performance options to purchase a total of 500,000 shares
of common stock which were granted to two executive officers. Terms of the
options provide for an exercise price of $13.50, the market price on the date of
grant, and an exercise period ending in August 2001. The performance options
vest when the price of our common stock trades at or above $24.00 per share for
any 20 trading days in any 30 consecutive trading day period or upon a change in
control if certain conditions are met.
A summary of the status of our stock options as of December 31, 1999, 1998,
and 1997, and changes during the years ending on those dates are presented
below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
Fixed Options (000) PRICE (000) PRICE (000) PRICE
- ------------- ---------- ------------ ----------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 2,749 $10.53 2,614 $ 9.50 2,435 $ 8.56
Granted 237 15.09 333 16.62 384 14.33
Exercised (158) 7.94 (179) 6.71 (163) 6.80
Forfeited (17) 9.93 (19) 11.36 (42) 9.82
------- ------ ------
Outstanding at end of year 2,811 $11.06 2,749 $10.53 2,614 $ 9.50
======= ====== ======
Options exercisable at
year-end 1,836 $ 9.50 1,646 $ 8.53 1,494 $ 7.24
======= ======= =====
Weighted-average fair
value of options granted
during the year $5.40 $4.93 $4.53
</TABLE>
F-24
<PAGE>
In October 1995, the Financial Accounting Standards Board issued SFAS 123
which established financial accounting and reporting standards for stock-based
employee compensation. The pronouncement defines a fair value based method of
accounting for an employee stock option or similar equity instrument. SFAS 123
also allows an entity to continue to measure compensation cost for those
instruments using the intrinsic value-based method of accounting prescribed by
APB 25. We have elected to follow APB 25 and related interpretations in
accounting for our employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires the use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of our employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense has been recognized in the accompanying financial
statements. We will recognize compensation expense under APB 25 in the future
for the performance options described above, if certain conditions are met and
the options vest.
Pro forma information regarding net income (loss) and earnings per share is
required by SFAS 123 and has been determined as if we had accounted for our
employee stock options under the fair value method as provided therein. The fair
value for the options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for grants
in 1999, 1998 and 1997: risk-free interest rates of 5.1% for 1999, 5.6% for 1998
and 6.1% for 1997; a volatility factor of the expected market price of our
common stock of .50 for 1999, .38 for 1998 and .42 for 1997; no expected
dividends; and weighted-average expected option lives of 2.7 years in 1999, 2.7
years in 1998 and 2.6 years in 1997.
The Black-Scholes option valuation model and other existing models were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of and are highly sensitive to subjective assumptions
including the expected stock price volatility. Because our employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro forma
information is not meant to be representative of the effects on reported net
income (loss) for future years, because as provided by SFAS 123, the effects of
awards granted before December 31, 1994, are not considered in the pro forma
calculations. Set forth below is a summary of our net income (loss) before
extraordinary item and earnings per share as reported and pro forma as if the
fair value based method of accounting defined in SFAS 123 had been applied (in
thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
(RESTATED)
<S> <C> <C> <C>
AS REPORTED:
Net income (loss) before extraordinary item $(25,331) $(62,346) $14,259
Net income (loss) per common share, basic (2.02) (3.99) 0.85
Net income (loss) per common share, diluted (2.02) (3.99) 0.77
PRO FORMA:
Net income (loss) before extraordinary item $(25,669) $(63,054) $13,665
Net income (loss) per common share, basic (2.07) (4.03) 0.81
Net income (loss) per common share, diluted (2.07) (4.03) 0.74
</TABLE>
F-25
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1999 (share amounts in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/31/99 LIFE PRICE AT 12/31/99 PRICE
- -------------------- -------------- -------------- ------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 5.25 to $ 6.75 871 2.8 years $ 6.14 871 $ 6.14
7.50 to 7.81 345 3.4 years 7.64 336 7.64
10.50 to 15.63 1,420 2.3 years 14.02 454 13.95
17.00 to 19.19 175 3.8 years 18.31 175 18.31
------ ------
$ 5.25 to $19.19 2,811 2.7 years $11.06 1,836 $ 9.50
====== ======
</TABLE>
During 1999, 1998 and 1997, pursuant to board of directors' resolutions, we
contributed approximately 65,000, 28,000 and 21,000 shares, respectively, of
common stock at weighted average prices of $15.46, $16.21 and $15.22 per share,
respectively, on behalf of participants in our 401(k) Savings Plan, representing
our matching contribution for 50% of an employee's contribution.
NOTE 16 -- COMMITMENTS, CONTINGENCIES AND INDUSTRY CONCENTRATION
Commitments and Contingencies
We lease certain real property, equipment and operating facilities under
various operating leases. We also incur costs associated with leased land,
rights-of-way, permits and regulatory fees whose contracts generally extend
beyond one year but can be canceled at any time should they not be required for
operations. Future non-cancelable commitments related to these items at
December 31, 1999, are summarized below (in thousands):
2000 $8,093
2001 5,759
2002 2,257
2003 1,595
2004 1,506
Later years 2,245
Total expenses related to these commitments for the years ended December 31,
1999, 1998 and 1997 were $9.3 million, $1.6 million and $1.1 million,
respectively.
In connection with its crude oil marketing, PAA provides certain purchasers
and transporters with irrevocable standby letters of credit to secure their
obligation for the purchase of crude oil. Generally, these letters of credit are
issued for up to seventy day periods and are terminated upon completion of each
transaction. At December 31, 1999, PAA had outstanding letters of credit of
approximately $321.5 million. Such letters of credit are secured by PAA's crude
oil inventory and accounts receivable. (see Note 7).
Under the amended terms of an asset purchase agreement between us and
Chevron, commencing with the year beginning January 1, 2000, and each year
thereafter, we are required to plug and abandon 20% of the then remaining
inactive wells, which currently aggregate approximately 233. To the extent we
elect not to plug and abandon the number of required wells, we are required to
escrow an amount equal to the greater of $25,000 per well or the actual average
plugging cost per well in order to provide for the future plugging and
abandonment of such wells. In addition, we are required to expend a minimum of
$600,000 per year in each of the ten years beginning January 1, 1996, and
$300,000 per year in each of the succeeding five years to remediate oil
contaminated soil from existing well sites, provided there are remaining sites
to be remediated. In the event we do not expend the required amounts during a
calendar year, we are required to contribute an amount equal to 125% of the
actual shortfall to an escrow account. We may withdraw amounts from the escrow
account to the extent we expend excess amounts in a future year. As of
December 31, 1999, we have not been required to make contributions to an escrow
account.
F-26
<PAGE>
Although we obtained environmental studies on our properties in California,
the Sunniland Trend and the Illinois Basin and we believe that such properties
have been operated in accordance with standard oil field practices, certain of
the fields have been in operation for more than 90 years, and current or future
local, state and federal environmental laws and regulations may require
substantial expenditures to comply with such rules and regulations. In
connection with the purchase of certain of our California properties, we
received a limited indemnity from Chevron for certain conditions if they violate
applicable local, state and federal environmental laws and regulations in effect
on the date of such agreement. We believe that we do not have any material
obligations for operations conducted prior to our acquisition of the properties
from Chevron, other than our obligation to plug existing wells and those
normally associated with customary oil field operations of similarly situated
properties, there can be no assurance that current or future local, state or
federal rules and regulations will not require us to spend material amounts to
comply with such rules and regulations or that any portion of such amounts will
be recoverable under the Chevron indemnity.
Consistent with normal industry practices, substantially all of our crude oil
and natural gas leases require that, upon termination of economic production,
the working interest owners plug and abandon non-producing wellbores, remove
tanks, production equipment and flow lines and restore the wellsite. We have
estimated that the costs to perform these tasks is approximately $13.4 million,
net of salvage value and other considerations. Such estimated costs are
amortized to expense through the unit-of-production method as a component of
accumulated depreciation, depletion and amortization. Results from operations
for 1999, 1998 and 1997 include $0.5 million, $0.8 million and $0.6 million,
respectively, of expense associated with these estimated future costs. For
valuation and realization purposes of the affected crude oil and natural gas
properties, these estimated future costs are also deducted from estimated future
gross revenues to arrive at the estimated future net revenues and the
Standardized Measure disclosed in Note 20.
As is common within the industry, we have entered into various commitments and
operating agreements related to the exploration and development of and
production from proved crude oil and natural gas properties and the marketing,
transportation, terminalling and storage of crude oil. It is management's belief
that such commitments will be met without a material adverse effect on our
financial position, results of operations or cash flows.
Industry Concentration
Financial instruments which potentially subject us to concentrations of credit
risk consist principally of trade receivables. Our accounts receivable are
primarily from purchasers of crude oil and natural gas products and shippers of
crude oil. This industry concentration has the potential to impact our overall
exposure to credit risk, either positively or negatively, in that the customers
may be similarly affected by changes in economic, industry or other conditions.
We generally require letters of credit for receivables from customers which are
not considered investment grade, unless the credit risk can otherwise be
reduced. The loss of an individual customer would not have a material adverse
effect.
There are a limited number of alternative methods of transportation for our
production. Substantially all of our California crude oil and natural gas
production and our Sunniland Trend crude oil production is transported by
pipelines, trucks and barges owned by third parties. The inability or
unwillingness of these parties to provide transportation services to us for a
reasonable fee could result in our having to find transportation alternatives,
increased transportation costs or involuntary curtailment of a significant
portion of our crude oil and natural gas production which could have a negative
impact on future results of operations or cash flows.
NOTE 17 -- LITIGATION
Texas Securities Litigation. On November 29, 1999, a class action lawsuit was
filed in the United States District Court for the Southern District of Texas
entitled Di Giacomo v. Plains All American Pipeline, et al. The suit alleged
that Plains All American Pipeline, L.P. and certain of the general partner's
officers and directors violated federal securities laws, primarily in connection
with unauthorized trading by a former employee. An additional nineteen cases
have been filed in the Southern District of Texas, some of which name the
general partner and us as additional defendants. Plaintiffs allege that the
defendants are liable for securities fraud violations under Rule 10b-5 and
Section 20(a) of the Securities Exchange Act of 1934 and for making false
registration statements under Sections 11 and 15 of the Securities Act of 1933.
The court has consolidated all subsequently filed cases under the first filed
action described above. Two unopposed motions are currently pending to appoint
lead plaintiffs. These motions ask the court to appoint two distinct lead
plaintiffs to represent two different plaintiff classes: (1) purchasers of our
common stock and options and (2) purchasers of PAA's common units. Once lead
plaintiffs have been appointed, the plaintiffs will file their consolidated
amended complaints. No answer or responsive pleading is due until thirty days
after a consolidated amended complaint is filed.
F-27
<PAGE>
Delaware Derivative Litigation. On December 3, 1999, two derivative lawsuits
were filed in the Delaware Chancery Court, New Castle County, entitled Susser v.
Plains All American Inc., et al and Senderowitz v. Plains All American Inc., et
al. These suits, and three others which were filed in Delaware subsequently,
named the general partner, its directors and certain of its officers as
defendants, and allege that the defendants breached the fiduciary duties that
they owed to Plains All American Pipeline, L.P. and its unitholders by failing
to monitor properly the activities of its employees. The derivative complaints
allege, among other things, that Plains All American Pipeline has been harmed
due to the negligence or breach of loyalty of the officers and directors that
are named in the lawsuits. These cases are currently in the process of being
consolidated. No answer or responsive pleading is due until these cases have
been consolidated and a consolidated complaint has been filed.
We intend to vigorously defend the claims made in the Texas securities
litigation and the Delaware derivative litigation. However, there can be no
assurance that we will be successful in our defense or that these lawsuits will
not have a material adverse effect on our financial position or results of
operation.
On July 9, 1987, Exxon Corporation ("Exxon") filed an interpleader action in
the United States District Court for the Middle District of Florida, Exxon
Corporation v. E. W. Adams, et al., Case Number 87-976-CIV-T-23-B. This action
was filed by Exxon to interplead royalty funds as a result of a title
controversy between certain mineral owners in a field in Florida. One group of
mineral owners, John W. Hughes, et al. (the "Hughes Group"), filed a
counterclaim against Exxon alleging fraud, conspiracy, conversion of funds,
declaratory relief, federal and Florida RICO, breach of contract and accounting,
as well as challenging the validity of certain oil and natural gas leases owned
by Exxon, and seeking exemplary and treble damages. In March 1993, but effective
November 1, 1992, Calumet Florida, Inc. ("Calumet"), our wholly owned
subsidiary, acquired all of Exxon's leases in the field affected by this
lawsuit. In order to address those counterclaims challenging the validity of
certain oil and natural gas leases, which constitute approximately 10% of the
land underlying this unitized field, Calumet filed a motion to join Exxon as
plaintiff in the subject lawsuit, which was granted July 29, 1994. In August
1994, the Hughes Group amended its counterclaim to add Calumet as a counter-
defendant. Exxon and Calumet filed a motion to dismiss the counterclaims. On
March 22, 1996, the Court granted Exxon's and Calumet's motion to dismiss the
counterclaims alleging fraud, conspiracy, and federal and Florida RICO
violations and challenging the validity of certain of our oil and natural gas
leases but denied such motion as to the counterclaim alleging conversion of
funds. We have reached an agreement in principle to settle with the Hughes
Group. In consideration for full and final settlement, and dismissal with
prejudice, we have agreed to pay to the Hughes Group the total sum of $100,000.
We and Exxon have filed motions for summary judgment with respect to the claims
of the remaining defendants. The court has not yet set a date for hearing of
these motions. The trial date is currently scheduled in June 2000.
We are a defendant, in the ordinary course of business, in various other legal
proceedings in which our exposure, individually and in the aggregate, is not
considered material to the accompanying financial statements.
NOTE 18 -- FINANCIAL INSTRUMENTS
Derivatives
We utilize derivative financial instruments, as defined in Statement of
Financial Accounting Standards No. 119, "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments" to hedge our exposure to
price volatility on crude oil and do not use such instruments for speculative
trading purposes. These arrangements expose us to credit risk (as to
counterparties) and to risk of adverse price movements in certain cases where
our purchases are less than expected. In the event of non-performance of a
counterparty, we might be forced to acquire alternative hedging arrangements or
be required to honor the underlying commitment at then-current market prices. In
order to minimize credit risk relating to the non-performance of a counterparty,
we enter into such contracts with counterparties that are considered investment
grade, periodically review the financial condition of such counterparties and
continually monitor the effectiveness of derivative financial instruments in
achieving our objectives. In view of our criteria for selecting counterparties,
our process for monitoring the financial strength of these counterparties and
our experience to date in successfully completing these transactions, we believe
that the risk of incurring significant financial statement loss due to the non-
performance of counterparties to these transactions is minimal.
We have entered into various arrangements to fix the NYMEX crude oil spot
price for a significant portion of our crude oil production. On December 31,
1999, these arrangements provided for a NYMEX crude oil price for 18,500 barrels
per day from January 1, 2000, through December 31, 2000, at an average floor
price of approximately $16.00 per barrel. Approximately 10,000 barrels per day
of the volumes hedged in 2000 will participate in price increases above the
$16.00 per barrel floor price, subject to a ceiling limitation of $19.75 per
barrel. Location and quality differentials attributable to our properties are
not included in the foregoing prices. The agreements provide for monthly
settlement based on the differential
F-28
<PAGE>
between the agreement price and the actual NYMEX crude oil price. Gains or
losses are recognized in the month of related production and are included in
crude oil and natural gas sales.
At December 31, 1999, our hedging activities included crude oil futures
contracts maturing in 2000 through 2002, covering approximately 7.4 million
barrels of crude oil, including the portion of the linefill sold in January and
February 2000. Since such contracts are designated as hedges and correlate to
price movements of crude oil, any gains or losses resulting from market changes
will be largely offset by losses or gains on our hedged inventory or anticipated
purchases of crude oil.
In addition, we have entered into swap agreements with various financial
institutions to hedge the interest rate on an aggregate of $240 million of bank
debt. These swaps are scheduled to terminate in 2001 and thereafter.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, Disclosures About Fair Value of Financial Instruments ("SFAS
107"). The estimated fair value amounts have been determined using available
market information and valuation methodologies described below. Considerable
judgement is required in interpreting market data to develop the estimates of
fair value. The use of different market assumptions or valuation methodologies
may have a material effect on the estimated fair value amounts.
The carrying values of items comprising current assets and current liabilities
approximate fair values due to the short-term maturities of these instruments.
Crude oil futures contracts permit settlement by delivery of the crude oil and,
therefore, are not financial instruments, as defined. The carrying amounts and
fair values of our other financial instruments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1999 1998
-------------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------- ------------- ------------ ------------
Long-Term Debt:
<S> <C> <C> <C> <C>
Bank debt $396,750 $396,750 $227,000 $227,000
Subordinated debt 277,909 268,125 202,427 202,000
Other long-term debt 2,044 2,044 2,556 2,556
Redeemable Preferred Stock 138,813 138,813 88,487 88,487
OFF BALANCE SHEET FINANCIAL INFORMATION:
Unrealized gain (loss) on crude oil swap and collar agreements (1) - (21,822) - 16,870
Unrealized gain (loss) on interest rate swap and collar agreements - 1,048 - (3,253)
</TABLE>
(1) These amounts represent the calculated difference between the NYMEX crude
oil price and the hedge arrangements for future production from our
properties as of December 31, 1999 and 1998. These hedges, and therefore
the unrealized gains or losses, have been included in estimated future
gross revenues to arrive at the estimated future net revenues and the
Standardized Measure disclosed in Note 20.
The carrying value of bank debt approximates its fair value as interest rates
are variable, based on prevailing market rates. The fair value of subordinated
debt was based on quoted market prices based on trades of subordinated debt.
Other long-term debt was valued by discounting the future payments using our
incremental borrowing rate. The fair value of the redeemable preferred stock is
estimated to be its liquidation value at December 31, 1999 and 1998. The fair
value of the interest rate swap and collar agreements is based on current
termination values or quoted market prices of comparable contracts at December
31, 1999 and 1998.
F-29
<PAGE>
NOTE 19 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Selected cash payments and noncash activities were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash paid for interest (net of amount capitalized) $ 44,329 $ 34,546 $ 20,486
=========== =========== ===========
Noncash sources and (uses) of investing and financing activities:
Series D Preferred Stock dividends $ ( 1,354) $ (1,275) $ (163)
=========== =========== ===========
Exchange of preferred stock for common stock $ 71 $ - $ -
=========== =========== ===========
Series E Preferred Stock dividends $ (2,030) $ (3,487) $ -
=========== =========== ===========
Tax benefit from exercise of employee stock options $ 440 $ 653 $ 513
=========== =========== ===========
Detail of properties acquired for other than cash:
Fair value of acquired assets $ - $ - $ 22,140
Debt issued and liabilities assumed - - -
Property exchanged - - (1,619)
Capital stock and warrants issued - - (21,408)
----------- ----------- -----------
Cash (received) paid $ - $ - $ (887)
=========== =========== ===========
</TABLE>
NOTE 20 -- CRUDE OIL AND NATURAL GAS ACTIVITIES
Our oil and natural gas acquisition, exploration, exploitation and
development activities are conducted in the United States. The following table
summarizes the costs incurred during the last three years (in thousands).
Costs Incurred
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
------- -------- --------
Property acquisitions costs:
Unproved properties $ 879 $ 6,266 $ 15,249
Proved properties 2,880 3,851 28,182
Exploration costs 4,101 1,657 1,730
Exploitation and development costs 65,119 89,161 82,217
------- -------- --------
$72,979 $100,935 $127,378
======= ======== ========
Capitalized Costs
Under full cost accounting rules as prescribed by the Securities and Exchange
Commission ("SEC"), unamortized costs of proved crude oil and natural gas
properties are subject to a ceiling, which limits such costs to the Standardized
Measure (as described below). At December 31, 1998, the capitalized costs of our
proved crude oil and natural gas properties exceeded the Standardized Measure
and we recorded a noncash, after tax charge to expense of $109.0 million ($173.9
million pre-tax). The following table presents the aggregate capitalized costs
subject to amortization relating to our crude oil and natural gas acquisition,
exploration, exploitation and development activities, and the aggregate related
DD&A (in thousands).
DECEMBER 31,
--------------------
1999 1998
--------- ---------
Proved properties $ 671,928 $ 596,203
Accumulated DD&A (387,437) (369,260)
--------- ---------
$ 284,491 $ 226,943
========= =========
The DD&A rate per equivalent unit of production excluding the writedown in
1998 was $2.13, $3.00 and $2.83 for the years ended December 31, 1999, 1998 and
1997, respectively.
F-30
<PAGE>
Costs Not Subject to Amortization
The following table summarizes the categories of costs which comprise the
amount of unproved properties not subject to amortization (in thousands).
December 31,
---------------------------------
1999 1998 1997
---------- ---------- ----------
Acquisition costs $ 42,261 $ 47,657 $ 41,652
Exploration costs 4,842 2,467 2,573
Capitalized interest 4,928 4,421 7,799
---------- ---------- ----------
$ 52,031 $ 54,545 $ 52,024
========== ========== ==========
Unproved property costs not subject to amortization consist mainly of
acquisition and lease costs and seismic data related to unproved areas. We will
continue to evaluate these properties over the lease terms; however, the timing
of the ultimate evaluation and disposition of a significant portion of the
properties has not been determined. Costs associated with seismic data and all
other costs will become subject to amortization as the prospects to which they
relate are evaluated. Approximately 16%, 19% and 31% of the balance in unproved
properties at December 31, 1999, related to additions made in 1999, 1998 and
1997, respectively.
During 1999, 1998 and 1997, we capitalized $4.4 million, $3.7 million and $3.3
million, respectively, of interest related to the costs of unproved properties
in the process of development.
Supplemental Reserve Information (Unaudited)
The following information summarizes our net proved reserves of crude oil
(including condensate and natural gas liquids) and natural gas and the present
values thereof for the three years ended December 31, 1999. The following
reserve information is based upon reports of the independent petroleum
consulting firms of H.J. Gruy and Company, Netherland Sewell & Associates, Inc.,
and Ryder Scott Company in 1999, 1998 and 1997 and in addition, in 1997 by
System Technology Associates, Inc. The estimates are in accordance with
regulations prescribed by the SEC.
In management's opinion, the reserve estimates presented herein, in accordance
with generally accepted engineering and evaluation principles consistently
applied, are believed to be reasonable. However, there are numerous
uncertainties inherent in estimating quantities and values of proved reserves
and in projecting future rates of production and timing of development
expenditures, including many factors beyond our control. Reserve engineering is
a subjective process of estimating the recovery from underground accumulations
of crude oil and natural gas that cannot be measured in an exact manner, and the
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. Because all
reserve estimates are to some degree speculative, the quantities of crude oil
and natural gas that are ultimately recovered, production and operating costs,
the amount and timing of future development expenditures and future crude oil
and natural gas sales prices may all differ from those assumed in these
estimates. In addition, different reserve engineers may make different estimates
of reserve quantities and cash flows based upon the same available data.
Therefore, the Standardized Measure shown below represents estimates only and
should not be construed as the current market value of the estimated crude oil
and natural gas reserves attributable to our properties. In this regard, the
information set forth in the following tables includes revisions of reserve
estimates attributable to proved properties included in the preceding year's
estimates. Such revisions reflect additional information from subsequent
exploitation and development activities, production history of the properties
involved and any adjustments in the projected economic life of such properties
resulting from changes in product prices.
Decreases in the prices of crude oil and natural gas have had, and could have
in the future, an adverse effect on the carrying value of our proved reserves
and our revenues, profitability and cash flow. Almost all of our reserve base
(approximately 94% of year-end 1999 reserve volumes) is comprised of long-life
crude oil properties that are sensitive to crude oil price volatility. The NYMEX
market price of crude oil price at December 31, 1999, upon which proved reserve
volumes, the estimated present value (discounted at 10%) of future net revenue
from our proved crude oil and natural gas reserves (the "Present Value of Proved
Reserves") and the Standardized Measure as of such date were based, was $25.60
per barrel. In comparison, the crude oil price at December 31, 1998, was $12.05
per barrel.
Estimated Quantities of Crude Oil and Natural Gas Reserves (Unaudited)
F-31
<PAGE>
The following table sets forth certain data pertaining to our proved and
proved developed reserves for the three years ended December 31, 1999 (in
thousands).
<TABLE>
<CAPTION>
As of or for the Year Ended December 31,
----------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- ------------------------
Oil Gas Oil Gas Oil Gas
(Bbl) (Mcf) (Bbl) (Mcf) (Bbl) (Mcf)
------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Proved Reserves
Beginning balance 120,208 86,781 151,627 60,350 115,996 37,273
Revision of previous estimates 62,895 (8,234) (46,282) 2,925 (16,091) 3,805
Extensions, discoveries, improved
recovery and other additions 37,393 15,488 14,729 29,306 17,884 8,126
Sale of reserves in-place - - - (2,799) (26) (547)
Purchase of reserves in-place 6,442 - 7,709 - 40,764 14,566
Production (8,016) (3,162) (7,575) (3,001) (6,900) (2,873)
------------ ------------ ------------ ------------ ----------- -----------
Ending balance 218,922 90,873 120,208 86,781 151,627 60,350
============ ============ ============ ============ =========== ===========
Proved Developed Reserves
Beginning balance 73,264 58,445 99,193 38,233 86,515 25,629
============ ============ ============ ============ =========== ===========
Ending balance 120,141 49,255 73,264 58,445 99,193 38,233
============ ============ ============ ============ =========== ===========
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
The Standardized Measure of discounted future net cash flows relating to
proved crude oil and natural gas reserves is presented below (in thousands):
December 31,
--------------------------------------
1999 1998 1997
----------- ---------- -----------
Future cash inflows $ 4,837,010 $1,102,863 $ 2,237,876
Future development costs (231,914) (117,924) (157,877)
Future production expense (1,758,572) (546,091) (1,019,254)
Future income tax expense (845,133) - (261,130)
----------- ---------- -----------
Future net cash flows 2,001,391 438,848 799,615
Discounted at 10% per year (1,073,591) (211,905) (387,792)
----------- ---------- -----------
Standardized measure of
discounted future net
cash flows $ 927,800 $ 226,943 $ 411,823
=========== ========== ===========
The Standardized Measure of discounted future net cash flows (discounted at
10%) from production of proved reserves was developed as follows:
1. An estimate was made of the quantity of proved reserves and the future
periods in which they are expected to be produced based on year-end
economic conditions.
2. In accordance with SEC guidelines, the engineers' estimates of future net
revenues from our proved properties and the present value thereof are made
using crude oil and natural gas sales prices in effect as of the dates of
such estimates and are held constant throughout the life of the properties,
except where such guidelines permit alternate treatment, including the use
of fixed and determinable contractual price escalations. The crude oil
price at December 31, 1999 is based on the NYMEX crude oil price of $25.60
per barrel with variations therefrom based on location and grade of crude
oil. We have entered into various fixed price and floating price collar
arrangements to fix or limit the NYMEX crude oil price for a significant
portion of our crude oil production. Arrangements in effect at December 31,
1999 are reflected in the reserve reports through the term of the
arrangements (see Note 18). The overall average prices used in the reserve
reports as of December 31, 1999, were $20.94 per barrel of crude oil,
condensate and natural gas liquids and $2.77 per Mcf of natural gas.
3. The future gross revenue streams were reduced by estimated future operating
costs (including production and ad valorem taxes) and future development
and abandonment costs, all of which were based on current costs.
4. The reports reflect the pre-tax Present Value of Proved Reserves to be $1.2
billion, $226.9 million and $511.0 million at December 31, 1999, 1998 and
1997, respectively. SFAS No. 69 requires us to further reduce these
estimates by an amount equal to the present value of estimated income taxes
which might be payable by us in future years to arrive at the Standardized
Measure. Future income taxes were calculated by applying the statutory
federal
F-32
<PAGE>
income tax rate to pre-tax future net cash flows, net of the tax basis of
the properties involved and utilization of available tax carryforwards. A
large portion of our reserve base (approximately 94% of year-end 1999
reserve volumes) is comprised of long-life oil properties that are
sensitive to crude oil price volatility. By comparison, using a normalized
NYMEX crude oil price of $18.50 per barrel, results in a pre-tax Present
Value of Proved Reserves of $664.7 million and estimated net proved
reserves of 212.7 million barrels of oil equivalent. Such information is
based upon reserve reports prepared by independent petroleum engineers, in
accordance with the rules and regulations of the SEC, using a normalized
crude oil price.
The principal sources of changes in the Standardized Measure of the future net
cash flows for the three years ended December 31, 1999, are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $ 226,943 $ 411,823 $ 578,581
Sales, net of production expenses (60,578) (51,927) (63,917)
Net change in sales and transfer prices, net of production expenses 580,890 (288,320) (359,138)
Changes in estimated future development costs (52,951) 42,858 9,927
Extensions, discoveries and improved recovery, net of costs 112,573 21,095 84,676
Previously estimated development costs incurred during the year 22,842 25,501 23,449
Purchase of reserves in-place 53,724 14,173 74,278
Sales of reserves in-place - (1,151) (1,501)
Revision of quantity estimates 404,705 (91,942) (57,597)
Accretion of discount 22,694 51,099 76,477
Net change in income taxes (318,249) 99,170 87,024
Changes in estimated timing of production and other (64,793) (5,436) (40,436)
----------- ---------- ----------
Balance, end of year $ 927,800 $ 226,943 $ 411,823
=========== ========== =========
</TABLE>
NOTE 21--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table shows summary financial data for 1999 and 1998 (in
thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
--------------- -------------- -------------- ------------- ---------------
1999(1)
- ------
<S> <C> <C> <C> <C> <C>
Revenues $476,971 $887,277 $1,162,433 $2,307,670 $4,834,351 (2)
Operating profit (loss) 7,638 17,966 (21,624) 15,542 19,522 (2)
Net income (loss) (5,161) (3,116) (20,047) 2,993 (25,331)
Basic and diluted EPS (0.45) (0.33) (1.30) 0.02 (2.05)
1998(1)
- --------
Revenues $193,572 $189,441 $ 393,719 $ 456,545 (2) $1,233,277 (2)
Operating profit 17,534 18,323 20,111 28,054 (2) 84,022 (2)
Net income (loss) 1,431 1,418 (1,442) (63,753) (62,346)
Basic EPS 0.07 0.07 (0.19) (3.92) (3.99)
Diluted EPS 0.06 0.06 (0.19) (3.92) (3.99)
</TABLE>
- -----------------
(1) As indicated in Note 3, quarterly results for 1999 and the fourth quarter
of 1998 have been restated from amounts previously reported due to the
unauthorized trading losses.
(2) Excludes net gains of $9.8 million and $60.8 million related to PAA's unit
offerings in 1999 and 1998, respectively, recorded upon the formation of
PAA.
F-33
<PAGE>
NOTE 22--OPERATING SEGMENTS
Our operations consist of three operating segments: (1) Upstream Operations -
engages in the acquisition, exploitation, development, exploration and
production of crude oil and natural gas and (2) Midstream Operations - engages
in pipeline transportation, purchases and resales of crude oil at various points
along the distribution chain and the leasing of certain terminalling and storage
assets and (3) Corporate - reflects certain amounts that are not directly
attributable to Upstream or Midstream Operations. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies (see Note 1). We evaluate segment performance based on gross
margin, gross profit and income before income taxes and extraordinary items.
<TABLE>
<CAPTION>
(IN THOUSANDS) UPSTREAM MIDSTREAM CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
1999
Revenues:
<S> <C> <C> <C> <C>
External customers $ 116,223 $4,700,434 $ - $4,816,657
Intersegment (a) - 1,487 - 1,487
Linefill gain - 16,457 - 16,457
Interest and other income 241 10,783 - 11,024
----------- ------------- ---------- ------------
Total revenues of reportable segments $ 116,464 $4,729,161 $ - $4,845,625
=========== ============ ========= ============
Segment gross margin(b) $ 60,578 $ (58,750) $ - $ 1,828
Segment gross profit(c) 53,275 (81,336) (500) (28,561)
Segment income (loss) before income taxes
and extraordinary item 9,738 (93,601) (1,606) (85,469)
Interest expense 23,586 21,686 1,106 46,378
Depreciation, depletion and amortization 19,586 17,412 - 36,998
Income tax expense (benefit) 1,635 18,844 - 20,479
Capital expenditures 77,899 189,286 - 267,185
Assets 445,921 1,243,639 - 1,689,560
- ----------------------------------------------------------------------------------------------------------------------------
1998
Revenues:
External customers $ 102,754 $1,129,689 $ - $1,232,443
Intersegment (a) - 119 - 119
Interest and other income 250 584 - 834
----------- ------------- ---------- ------------
Total revenues of reportable segments $ 103,004 $1,130,392 $ - $1,233,396
=========== ============ ========= ============
Segment gross margin(b) (d) $ 51,927 $ (45,461) $ - $ 6,466
Segment gross profit(c) (d) 46,446 25,964 - 72,410
Segment income(loss) before income taxes
and extraordinary item(d) (175,926) 8,546 - (167,380)
Interest expense 23,099 12,631 - 35,730
Depreciation, depletion and amortization 199,523 5,371 - 204,894
Income tax expense (benefit) (33,732) (11,273) - (45,005)
Capital expenditures 100,935 405,508 - 506,443
Assets 365,652 607,186 - 972,838
- ----------------------------------------------------------------------------------------------------------------------------
1997
Revenues:
External customers $ 109,403 $ 752,522 $ - $ 861,925
Intersegment (a) - - - -
Interest and other income 181 138 - 319
----------- ------------- ---------- ------------
Total revenues of reportable segments $ 109,584 $ 752,660 $ - $ 862,244
=========== ============ ========= ============
Segment gross margin(b) $ 63,917 $ 12,480 $ - $ 76,397
Segment gross profit(c) 59,106 8,951 - 68,057
Segment income before income taxes and
extraordinary item 19,178 3,408 - 22,586
Interest expense 17,496 4,516 - 22,012
Depreciation, depletion and amortization 22,613 1,165 - 23,778
Income tax expense (benefit) 7,059 1,268 - 8,327
Capital expenditures 127,378 5,381 - 132,759
Assets 407,200 149,619 - 556,819
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Intersegment revenues and transfers were conducted on an arm's-length
basis.
(b) Gross margin is calculated as operating revenues less operating expenses.
(c) Gross profit is calculated as operating revenues less operating expenses
and general and administrative expenses.
(d) Differences between segment totals and company totals represent the net
gain of $60.8 million recorded upon the formation of PAA, which was not
allocated to segments.
F-34
<PAGE>
The following table reconciles segment revenues to amounts reported in our
financial statements:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Revenues of reportable segments $ 4,845,625 $ 1,233,396 $ 862,244
Intersegment (1,487) (119) -
Net gain recorded upon the formation of PAA
not allocated to reportable segments - 60,815 -
----------- ----------- ----------
Total company revenues $ 4,844,138 $ 1,294,092 $ 862,244
=========== =========== ==========
</TABLE>
Customers accounting for more than 10% of total sales for the periods
indicated are as follows:
PERCENTAGE OF TOTAL SALES
YEAR ENDED DECEMBER 31,
------------------------
CUSTOMER 1999 1998 1997
------- ------ -------
Sempra Energy Trading Corporation 22% 27% 11%
Koch Oil Company 18% 15% 27%
PERCENTAGE OF OIL AND GAS SALES
--------------------------------
Chevron 43% - -
Tosco Refining Company 21% 50% -
Conoco Inc. 12%
Scurlock Permian LLC - 17% -
Unocal Energy Trading, Inc. - - 52%
Marathon Oil Company 17% - 23%
Exxon Company U.S.A. - - 10%
NOTE 23 -- CONSOLIDATING FINANCIAL STATEMENTS
The following financial information presents consolidating financial
statements which include:
. the parent company only ("Parent");
. the guarantor subsidiaries on a combined basis ("Guarantor Subsidiaries");
. the nonguarantor subsidiaries on a combined basis ("Nonguarantor
Subsidiaries");
. elimination entries necessary to consolidate the Parent, the Guarantor
Subsidiaries and the Nonguarantor Subsidiaries; and
. Plains Resources Inc. on a consolidated basis.
These statements are presented because the Series A-E Notes discussed in
Note 7 are not guaranteed by PAA and our consolidated financial statements
include the accounts of PAA.
F-35
<PAGE>
PLAINS RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET (in thousands)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Guarantor Nonguarantor Intercompany
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,241 $ 5,134 $ 53,853 $ - $ 68,228
Accounts receivable and other 1,808 11,221 508,919 - 521,948
Inventory - 5,652 72,697 - 78,349
Assets held for sale - - 103,615 - 103,615
----------- ------------ --------------- --------------- --------------
Total current assets 11,049 22,007 739,084 - 772,140
----------- ------------ --------------- --------------- --------------
PROPERTY AND EQUIPMENT 235,158 494,279 460,730 - 1,190,167
Less allowance for depreciation,
depletion and amortization (215,463) (120,016) (11,649) (55,386) (402,514)
----------- ------------ --------------- --------------- --------------
19,695 374,263 449,081 (55,386) 787,653
----------- ------------ --------------- --------------- --------------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES 440,115 (224,598) (45,683) (169,834) -
OTHER ASSETS 40,337 14,752 74,678 - 129,767
----------- ------------ --------------- --------------- --------------
$ 511,196 $ 186,424 $ 1,217,160 $ (225,220) $ 1,689,560
=========== ============ =============== =============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current liabilities $ 23,700 $ 35,457 $ 487,212 $ 24 $ 546,393
Notes payable and other current obligations - 511 109,369 - 109,880
----------- ------------ --------------- --------------- --------------
Total current liabilities 23,700 35,968 596,581 24 656,273
BANK DEBT 137,300 - - - 137,300
BANK DEBT OF A SUBSIDIARY - - 259,450 - 259,450
SUBORDINATED DEBT 277,909 - - - 277,909
OTHER LONG-TERM DEBT - 2,044 105,000 (105,000) 2,044
OTHER LONG-TERM LIABILITIES 1,954 - 19,153 - 21,107
----------- ------------ --------------- --------------- --------------
440,863 38,012 980,184 (104,976) 1,354,083
----------- ------------ --------------- --------------- --------------
MINORITY INTEREST (70,037) - 226,082 - 156,045
----------- ------------ --------------- --------------- --------------
SERIES E, F AND G CUMULATIVE
CONVERTIBLE PREFERRED STOCK,
STATED AT LIQUIDATION PREFERENCE 138,813 - - - 138,813
----------- ------------ --------------- --------------- --------------
NON-REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND
OTHER STOCKHOLDERS' EQUITY
Series D Cumulative Convertible Preferred Stock 23,300 - - - 23,300
Common Stock 1,792 78 - (78) 1,792
Additional paid-in capital 130,027 3,952 43,261 (47,213) 130,027
Retained earnings (accumulated deficit) (153,562) 144,382 (32,367) (72,953) (114,500)
----------- ------------ --------------- --------------- --------------
1,557 148,412 10,894 (120,244) 40,619
----------- ------------ --------------- --------------- --------------
$ 511,196 $ 186,424 $ 1,217,160 $ (225,220) $ 1,689,560
=========== ============ =============== =============== ==============
</TABLE>
F-36
<PAGE>
PLAINS RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET (restated) (in thousands)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Guarantor Nonguarantor Intercompany
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 142 $ 194 $ 6,408 $ (200) $ 6,544
Accounts receivable and other 838 8,909 120,655 - 130,402
Inventory - 4,809 37,711 - 42,520
------------- ------------- --------------- --------------- --------------
Total current assets 980 13,912 164,774 (200) 179,466
------------- ------------- --------------- --------------- --------------
PROPERTY AND EQUIPMENT 234,127 424,646 378,835 - 1,037,608
Less allowance for depreciation,
depletion and amortization (228,579) (91,118) (799) (55,386) (375,882)
------------- ------------- --------------- --------------- --------------
5,548 333,528 378,036 (55,386) 661,726
------------- ------------- --------------- --------------- --------------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES 246,581 (179,716) (2,847) (64,018) -
OTHER ASSETS 47,435 8,177 76,034 - 131,646
------------- ------------- --------------- --------------- --------------
$ 300,544 $ 175,901 $ 615,997 $ (119,604) $ 972,838
============= ============= =============== =============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current liabilities $ 18,425 $ 26,207 $ 145,814 $ (200) $ 190,246
Notes payable and other current obligations - 511 9,750 - 10,261
------------- ------------- --------------- --------------- --------------
Total current liabilities 18,425 26,718 155,564 (200) 200,507
BANK DEBT 52,000 - - - 52,000
BANK DEBT OF A SUBSIDIARY - - 175,000 - 175,000
SUBORDINATED DEBT 202,427 - - - 202,427
OTHER LONG-TERM DEBT - 2,556 - - 2,556
OTHER LONG-TERM LIABILITIES 2,029 8,179 45 - 10,253
------------- ------------- --------------- --------------- --------------
274,881 37,453 330,609 (200) 642,743
------------- ------------- --------------- --------------- --------------
MINORITY INTEREST (70,037) - 242,475 - 172,438
------------- ------------- --------------- --------------- --------------
SERIES E CUMULATIVE CONVERTIBLE
PREFERRED STOCK, STATED AT
LIQUIDATION PREFERENCE 88,487 - - - 88,487
------------- ------------- --------------- --------------- --------------
NON-REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND
OTHER STOCKHOLDERS' EQUITY
Series D Cumulative Convertible Preferred Stock 21,946 - - - 21,946
Common Stock 1,688 77 - (77) 1,688
Additional paid-in capital 124,679 3,954 38,727 (42,681) 124,679
Retained earnings (accumulated deficit) (141,100) 134,417 4,186 (76,646) (79,143)
------------- ------------- --------------- --------------- --------------
7,213 138,448 46,671 (119,404) 69,170
------------- ------------- --------------- --------------- --------------
$ 300,544 $ 175,901 $ 615,997 $ (119,604) $ 972,838
============= ============= =============== =============== ==============
</TABLE>
F-37
<PAGE>
PLAINS RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS (in thousands)
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Guarantor Nonguarantor Intercompany
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
REVENUES
Crude oil and natural gas sales $ - $ 114,736 $ - $ 1,487 $ 116,223
Marketing, transportation, storage and terminalling - - 4,701,921 (1,487) 4,700,434
Gain on PAA unit offering - - 9,787 - 9,787
Gain on sale of linefill - 16,457 - 16,457
Interest and other income 699 89 996 (547) 1,237
------------ ------------ ------------- ------------- --------------
699 114,825 4,729,161 (547) 4,844,138
------------ ------------ ------------- ------------- --------------
EXPENSES
Production expenses - 55,645 - - 55,645
Marketing, transportation, storage and terminalling - - 4,592,744 - 4,592,744
Unauthorized trading loss and related expenses - - 166,440 166,440
General and administrative 2,311 5,492 22,586 - 30,389
Noncash compensation expense - - 1,013 - 1,013
Depreciation, depletion and amortization 2,096 17,490 17,412 - 36,998
Interest expense 6,994 18,851 21,080 (547) 46,378
------------ ------------ ------------- ------------- --------------
11,401 97,478 4,821,275 (547) 4,929,607
------------ ------------ ------------- ------------- --------------
Income (loss) before income taxes, minority interest
minority interest and extraordinary item (10,702) 17,347 (92,114) - (85,469)
Minority interest - - (40,203) - (40,203)
------------ ------------ ------------- ------------- --------------
Income (loss) before income taxes (10,702) 17,347 (51,911) - (45,266)
Income tax expense (benefit):
Current (338) - 331 - (7)
Deferred 3,457 (4,754) (19,175) - (20,472)
------------ ------------ ------------- ------------- --------------
Income (loss) before extraordinary item (13,821) 22,101 (33,067) - (24,787)
Extraordinary item, net of tax benefit
and minority interest - - (544) - (544)
------------ ------------ ------------- ------------- --------------
NET INCOME (LOSS) (13,821) 22,101 (33,611) - (25,331)
Less: cumulative preferred stock dividends 10,026 - - - 10,026
------------ ------------ ------------- ------------- --------------
NET INCOME (LOSS) AVAILABLE
TO COMMON STOCKHOLDERS $ (23,847) $ 22,101 $ (33,611) $ - $ (35,357)
============ ============ ============= ============= ==============
</TABLE>
F-38
<PAGE>
PLAINS RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS (restated) (in thousands)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Guarantor Nonguarantor Intercompany
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
REVENUES
Crude oil and natural gas sales $ - $ 102,634 $ - $ 120 $ 102,754
Marketing, transportation, storage and terminalling - - 1,129,809 (120) 1,129,689
Gain on formation of PAA 60,815 - - - 60,815
Interest and other income 40 76 718 - 834
------------ ------------ ------------- ------------- --------------
60,855 102,710 1,130,527 - 1,294,092
------------ ------------ ------------- ------------- --------------
EXPENSES
Production expenses - 50,827 - - 50,827
Marketing, transportation, storage and terminalling - - 1,091,328 - 1,091,328
Unauthorized trading losses and related expenses - - 7,100 - 7,100
General and administrative 1,536 3,946 5,296 - 10,778
Depreciation, depletion and amortization 5,521 20,127 5,372 - 31,020
Reduction in carrying cost of oil and natural gas properties 9,267 25,738 - 138,869 173,874
Interest expense 11,389 11,710 12,631 - 35,730
------------ ------------ ------------- ------------- --------------
27,713 112,348 1,121,727 138,869 1,400,657
------------ ------------ ------------- ------------- --------------
Income (loss) before income taxes and minority interest 33,142 (9,638) 8,800 (138,869) (106,565)
Minority interest - - 786 - 786
------------ ------------ ------------- ------------- --------------
Income (loss) before income taxes 33,142 (9,638) 8,014 (138,869) (107,351)
Income tax expense (benefit):
Current (3,637) (3) 4,502 - 862
Deferred (24,613) (9,237) (12,017) - (45,867)
------------ ------------ ------------- ------------- --------------
NET INCOME (LOSS) 61,392 (398) 15,529 (138,869) (62,346)
Less: cumulative preferred stock dividends 4,762 - - - 4,762
------------ ------------- ------------ ------------- --------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ 56,630 $ (398) $ 15,529 $ (138,869) $ (67,108)
============ ============= ============ ============= ==============
</TABLE>
F-39
<PAGE>
PLAINS RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS (in thousands)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Guarantor Nonguarantor Intercompany
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
REVENUES
Crude oil and natural gas sales $ 867 $ 108,536 $ - $ - $ 109,403
Marketing, transportation, storage and terminalling - - 752,522 - 752,522
Interest and other income 90 91 138 - 319
----------- ------------ -------------- ------------ --------------
957 108,627 752,660 - 862,244
----------- ------------ -------------- ------------ --------------
EXPENSES
Production expenses 282 45,204 - - 45,486
Marketing, transportation, storage and terminalling - 9 740,033 - 740,042
General and administrative 1,294 3,517 3,529 - 8,340
Depreciation, depletion and amortization 5,887 16,741 1,150 - 23,778
Interest expense 10,111 7,384 4,517 - 22,012
----------- ------------ -------------- ------------ --------------
17,574 72,855 749,229 - 839,658
----------- ------------ -------------- ------------ --------------
Income (loss) before income taxes (16,617) 35,772 3,431 - 22,586
Income tax expense (benefit):
Current (507) 792 67 - 352
Deferred 5,328 1,450 1,197 - 7,975
----------- ------------ -------------- ------------ --------------
NET INCOME (LOSS) (21,438) 33,530 2,167 - 14,259
Less: cumulative preferred stock dividends 163 - - - 163
----------- ------------ -------------- ------------ --------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (21,601) $ 33,530 $ 2,167 $ - $ 14,096
=========== ============ ============== ============ ==============
</TABLE>
F-40
<PAGE>
PLAINS RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Guarantor Nonguarantor Intercompany
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(13,821) $ 22,101 $ (33,611) $ - $ (25,331)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, and amortization 2,096 17,490 17,412 - 36,998
Noncash gains (Note 4 and 6) - - (26,244) - (26,244)
Minority interest in income of a subsidiary - - (40,203) - (40,203)
Deferred income tax 3,457 (4,754) (19,175) - (20,472)
Other noncash items (1,108) - 2,060 - 952
Change in assets and liabilities resulting from -
operating activities: -
Accounts receivable and other (970) (1,287) (224,181) - (226,438)
Inventory - (842) 34,772 - 33,930
Pipeline linefill - - (3) - (3)
Accounts payable and other current liabilities 5,275 2,169 164,530 - 171,974
Other long-term liabilities - - 18,873 - 18,873
----------- ------------- -------------- ------------- --------------
NET CASH FLOWS PROVIDED BY
(USED IN) OPERATING ACTIVITIES (5,071) 34,877 (105,770) - (75,964)
----------- ------------- -------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for midstream acquisitions (See Note 6) - - (176,918) - (176,918)
Payments for crude oil pipeline, gathering -
and terminal assets - - (12,507) - (12,507)
Payments for acquisition, exploration, -
and development costs (3,793) (74,106) - - (77,899)
Payments for additions to other property and assets (267) (2,137) (68) - (2,472)
Proceeds from sale of pipeline linefill - - 3,400 - 3,400
----------- ------------- -------------- ------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (4,060) (76,243) (186,093) - (266,396)
----------- ------------- -------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances/investments with affiliates (194,902) 46,306 148,396 200 -
Proceeds from long-term debt 341,250 - 403,721 - 744,971
Proceeds from short-term debt - - 131,119 - 131,119
Proceeds from sale of capital stock, -
options and warrants 5,542 - - - 5,542
Proceeds from issuance of preferred stock 50,000 - - - 50,000
Proceeds from issuance of common units (Note 4) (25,000) - 75,759 - 50,759
Principal payments of long-term debt (180,711) - (268,621) - (449,332)
Principal payments of short-term debt - - (82,150) - (82,150)
Costs incurred in connection with -
financing arrangements (2,205) - (17,243) - (19,448)
Preferred stock dividends (4,245) - - - (4,245)
Distribution to unitholders 29,472 - (51,673) - (22,201)
Other (971) - - - (971)
----------- ------------- -------------- ------------- --------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 18,230 46,306 339,308 200 404,044
----------- ------------- -------------- ------------- --------------
Net increase in cash and cash equivalents 9,099 4,940 47,445 200 61,684
Cash and cash equivalents, beginning of period 142 194 6,408 (200) 6,544
----------- ------------- -------------- ------------- --------------
Cash and cash equivalents, end of period $ 9,241 $ 5,134 $ 53,853 $ - $ 68,228
=========== ============= ============== ============= ==============
</TABLE>
F-41
<PAGE>
PLAINS RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (restated) (in thousands)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Guarantor Nonguarantor Intercompany
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 61,392 $ (398) $ 15,529 $ (138,869) $ (62,346)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, depletion, and amortization 5,521 20,127 5,372 - 31,020
Reduction in carrying costs of oil and
natural gas properties 9,267 25,738 - 138,869 173,874
Noncash gain (Note 4 and 6) (70,037) - - - (70,037)
Minority interest in income of a subsidiary - - 786 - 786
Deferred income tax (24,613) (9,237) (12,017) - (45,867)
Other noncash items 90 - - - 90
Change in assets and liabilities resulting from
operating activities:
Accounts receivable and other 275 (3,444) 27,253 - 24,084
Inventory 8 (924) (18,141) - (19,057)
Pipeline linefill - - (3,904) - (3,904)
Accounts payable and other current liabilities 6,232 (10,782) 10,825 2,712 8,987
----------- ------------ ------------- ------------- -------------
NET CASH FLOWS PROVIDED BY
(USED IN) OPERATING ACTIVITIES (11,865) 21,080 25,703 2,712 37,630
----------- ------------ ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for midstream acquisitions (Note 6) - - (394,026) - (394,026)
Payments for crude oil pipeline, gathering and terminal assets - - (8,131) - (8,131)
Proceeds from the sale of oil and natural gas properties - 131 - - 131
Payments for acquisition, exploration,
and development costs - (80,318) - - (80,318)
Payments for additions to other property and other assets (510) (309) (259) - (1,078)
----------- ------------ ------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (510) (80,496) (402,416) - (483,422)
----------- ------------ ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances/investments with affiliates (54,060) 59,347 (5,287) - -
Proceeds from long-term debt 239,260 - 331,300 - 570,560
Proceeds from short-term debt - - 31,750 - 31,750
Proceeds from sale of capital stock, options and warrants 828 - - - 828
Proceeds from issuance of preferred stock 85,000 - - - 85,000
Proceeds from issuance of common units - - 241,690 - 241,690
Distributions upon formation 241,690 - (241,690) - -
Principal payments of long-term debt (384,260) - (39,300) - (423,560)
Principal payments of short-term debt - - (40,000) - (40,000)
Capital contribution from Parent (113,700) - 113,700 - -
Dividend to Parent 3,557 - (3,557) - -
Costs incurred in connection with financing arrangements (6,138) - (6,937) - (13,075)
Other (4,571) - - - (4,571)
----------- ------------ ------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,606 59,347 381,669 - 448,622
----------- ------------ ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (4,769) (69) 4,956 2,712 2,830
Cash and cash equivalents, beginning of period 4,911 263 1,452 (2,912) 3,714
----------- ------------ ------------- ------------- -------------
Cash and cash equivalents, end of period $ 142 $ 194 $ 6,408 $ (200) $ 6,544
=========== ============ ============= ============= =============
</TABLE>
F-42
<PAGE>
PLAINS RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (unaudited) (in thousands)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Guarantor Nonguarantor Intercompany
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(21,438) $ 33,530 $ 2,167 $ - $ 14,259
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, depletion, and amortization 5,887 16,741 1,150 - 23,778
Deferred income tax 5,328 1,450 1,197 - 7,975
Other noncash items - 221 - - 221
Change in assets and liabilities resulting from
operating activities:
Accounts receivable and other 3,305 (3,242) (9,453) - (9,390)
Inventory (3) (1,786) (16,450) - (18,239)
Accounts payable and other current liabilities (4,116) 6,051 9,343 425 11,703
--------- ---------- ----------- ----------- -----------
NET CASH FLOWS PROVIDED BY
(USED IN) OPERATING ACTIVITIES (11,037) 52,965 (12,046) 425 30,307
----------- ------------ ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for acquisition, exploration,
and development costs (6,772) (98,874) - - (105,646)
Payments for crude oil pipeline, gathering terminal assets - - (923) - (923)
Proceeds from the sale of oil and natural gas properties 2,667 - - - 2,667
Payments for additions to other property and other assets (430) (3,184) (118) - (3,732)
----------- ------------ ------------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (4,535) (102,058) (1,041) - (107,634)
----------- ------------ ------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances/investments with affiliates (45,228) 49,638 (4,410) - -
Proceeds from long-term debt 266,905 - - - 266,905
Proceeds from short-term debt - - 39,000 - 39,000
Proceeds from sale of capital stock, options and warrants 1,104 - - - 1,104
Principal payments of long-term debt (206,500) (511) - - (207,011)
Principal payments of short-term debt - - (21,000) - (21,000)
Other (474) - - - (474)
----------- ------------ ------------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,807 49,127 13,590 - 78,524
----------- ------------ ------------- ----------- -----------
Net increase in cash and cash equivalents 235 34 503 425 1,197
Cash and cash equivalents, beginning of period 4,676 229 949 (3,337) 2,517
----------- ------------ ------------- ----------- -----------
Cash and cash equivalents, end of period $ 4,911 $ 263 $ 1,452 $ (2,912) $ 3,714
=========== ============ ============= =========== ===========
</TABLE>
F-43
<PAGE>
EXHIBIT 3(d)
PLAINS RESOURCES INC.
====================================================================
Certificate of Designation, Preferences and Rights of a Series of
Preferred Stock by Resolution of the Board of Directors Providing
for an Issue of 68,000 Shares of Preferred Stock Designated
"Series F Cumulative Convertible Preferred Stock"
====================================================================
Plains Resources Inc., a Delaware corporation (hereinafter called the
"Company"), pursuant to the provisions of Section 151 of the General Corporation
Law of the State of Delaware does hereby state and certify that pursuant to the
authority expressly vested in the Board of Directors of the Company by the
Second Restated Certificate of Incorporation, as amended, the Board of
Directors, at a meeting thereof duly called and held on December 1, 1999, at
which meeting a quorum was present and acting throughout, duly adopted the
following resolutions providing for the issue of shares of Preferred Stock
hereinafter referred to, and further providing with respect to such issue of
shares of Preferred Stock for such powers, designations, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations or restrictions thereof, as are hereinafter set
forth, in addition to those set forth in said Second Restated Certificate of
Incorporation;
Resolved, that pursuant to Article FOURTH of the Certificate of
Incorporation (which authorizes 2,000,000 shares of Preferred Stock, $1.00 par
value), the Board of Directors hereby provides for the issue of a series of
68,000 shares of Preferred Stock designated "Series F Cumulative Convertible
Preferred Stock"; and
Resolved, that the powers, designations, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations or restrictions thereof, of the shares of the Series F Cumulative
Convertible Preferred Stock shall be as follows:
Section 1. Designation and Rank. The designation of the series of
Preferred Stock created by this resolution shall be "Series F Cumulative
Convertible Preferred Stock" (hereinafter called this "Series"), and the number
of shares constituting this Series shall be 68,000. Shares of this Series shall
have a stated value of $1,000 per share. The number of authorized shares of
this Series may be reduced by further resolution duly adopted by the Board and
by the filing of a certificate pursuant to the provisions of the General
Corporation Law of the State of Delaware stating that such reduction has been so
authorized, but the number of authorized shares of this Series shall not be
increased, except as provided in Section 2 hereof. The shares of this Series
shall rank prior to the Junior Stock (as defined in Section 10) as to
distribution of assets and payment of dividends. The shares of this Series
shall be of equal rank as to distribution of assets and payment of dividends
with all other series of Preferred Stock except as provided in a certificate of
designation with regard to such other series of Preferred Stock filed pursuant
to Section 151 of the General Corporation Law of the State of Delaware with the
Secretary of State of the State of Delaware.
<PAGE>
Section 2. Dividends.
(a) Shares of this Series shall be entitled to receive, when and as
declared by the Board of Directors, dividends as provided in this Section 2 on
the stated value per share of this Series, and no more. Such dividends shall be
cumulative, shall accrue (whether or not declared and whether or not there shall
be funds legally available for the payment of dividends) from the date of
original issue of such shares and shall be payable in arrears, out of assets
legally available therefor, when and as declared by the Board of Directors of
the Company, on April 1 and October 1 of each year, commencing April 1, 2000
(except that if any such date is a Saturday, Sunday or a legal holiday then such
dividend shall be payable without interest on the next day that is not a
Saturday, Sunday or legal holiday) (each six-month period (or such period from
the date of original issue until April 1, 2000) expiring on a dividend payment
date being referred to herein as a "Dividend Period"). Each of such dividends
shall be paid to the holders of record of shares of this Series as they appear
on the stock register of the Company on such record dates, not exceeding 30 days
preceding the payment dates thereof, as shall be fixed by the Board. Dividends
on account of arrears for any past Dividend Periods may be declared and paid at
any time, without reference to any regular dividend payment date, to holders of
record on such date, not exceeding 45 days preceding the payment date thereof,
as may be fixed by the Board.
(b) With respect to each dividend declared and timely paid on shares of
this Series, the Company may pay a cash dividend at the Dividend Rate (as
defined in Section 10), or, at its option, and in lieu of payment in cash, the
Company may pay such dividend for any six Dividend Periods by issuing additional
fully paid and nonassessable shares, or fractions thereof, of this Series having
an aggregate stated value equal to the cash dividend otherwise payable. Each
dividend that accrues during each Dividend Period shall be deemed to be timely
paid only if it is paid on the dividend payment date on which such Dividend
Period expires. Any dividend not declared and timely paid on shares of this
Series may thereafter be paid only by (i) issuing additional fully paid and
nonassessable shares of this Series, or fractions thereof ("Arrearage Shares"),
having an aggregate stated value equal to the cash that would have been paid had
such dividend been timely paid in cash and (ii) paying an amount in cash equal
to the aggregate amount of cash dividends, if any, that would have accrued on
such Arrearage Shares had such Arrearage Shares been issued on the dividend
payment date for such dividend, or, at the Company's option, and in lieu of such
cash payment, issuing additional fully paid and nonassessable shares, or
fractions thereof, of this Series having an aggregate stated value equal to the
cash payment otherwise to be made. Each fractional share of this Series
outstanding shall be entitled to a ratably proportionate amount of all dividends
accruing with respect to each outstanding share of this Series pursuant to
Section 2 hereof, and all such dividends with respect to such outstanding
fractional shares shall be fully cumulative and shall accrue (whether or not
declared) and shall be payable in the same manner and at such times as provided
for in Section 2 hereof with respect to dividends on each outstanding share of
this Series. The Board of Directors shall authorize additional shares of this
Series to be available for issuance as dividends if the number of authorized
shares of this Series is insufficient to continue accruing or paying dividends
in shares of this Series.
(c) No full dividends shall be declared or paid or set apart for payment
on Parity Stock (as defined in Section 10) or Junior Stock for any period unless
full cumulative dividends have been or
2
<PAGE>
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for such payment on this Series for all Dividend
Periods terminating on or prior to the date of payment of such full cumulative
dividends. When dividends are not paid in full, as aforesaid, upon the shares of
this Series and of any other series of Parity Stock, all dividends declared upon
shares of this Series and of any other series of Parity Stock shall be declared
pro rata so that the amount of dividends declared per share on this Series and
such other series of Parity Stock shall in all cases bear to each other the same
ratio that accrued dividends per share on the shares of this Series and such
other series of Parity Stock bear to each other. Holders of shares of this
Series shall not be entitled to any dividend, whether payable in cash, property
or stock, in excess of full cumulative dividends, as herein provided, on this
Series. Except as set forth in Section 2(b) above, no interest, or sum of money
in lieu of interest, shall be payable in respect of any dividend payment or
payments on this Series that may be in arrears.
(d) So long as any shares of this Series are outstanding, no dividend
(other than a dividend in Junior Stock or other than as provided in Section 2)
shall be declared or paid or set aside for payment or other distribution
declared or made upon the Junior Stock, nor shall any Junior Stock be redeemed,
purchased or otherwise acquired for any consideration (or any moneys be paid to
or made available for a sinking fund for the redemption of any shares of Junior
Stock) by the Company (except by conversion into or in exchange for Junior
Stock) unless, in each case, the full cumulative dividends on all outstanding
shares of this Series then payable shall have been paid.
(e) Dividends payable on this Series for any period less than a full
Dividend Period shall be computed on the basis of the ratio of the number of
days in such partial period to the actual number of days in such full Dividend
Period.
Section 3. Redemption.
(a) On December 15, 2007, the Company shall redeem, to the extent it has
legally available funds therefor, all shares of this Series then outstanding at
a redemption price per share equal to the sum of 100% of the stated value of
such shares plus the Deemed Arrearage Value (as defined in Section 10) per
share. At any time when the Company shall not have redeemed the full number of
shares of this Series required to be redeemed pursuant to this Section 3, no
dividends (other than in Junior Stock or other than as provided in Section 2)
shall be declared or paid or set aside for payment, or other distribution
declared or made, upon the Junior Stock, nor shall any Junior Stock be redeemed,
purchased or otherwise acquired for any consideration (or any moneys be paid to
or made available for a sinking fund for the redemption of any shares of any
such stock) by the Company (except by conversion into or in exchange for Junior
Stock), nor shall any Parity Stock be redeemed, purchased or otherwise acquired
for any consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any shares of any Parity Stock) by the Company
(except by conversion into or in exchange for Junior Stock), unless, in the case
of the mandatory redemption of, repurchase of, or fulfillment of a sinking fund
obligation in respect of, any other series of Parity Stock, payments made in
respect of the mandatory redemption of, repurchase of, or fulfillment of a
sinking fund obligation in respect of, this Series and all other series of
Parity Stock then issued and outstanding and entitled to such mandatory payments
are made pro rata, as nearly as practicable, so that the amounts of such
payments made on this Series and such other series of
3
<PAGE>
Parity Stock shall in all cases bear to each other the same ratio, as nearly as
practicable, that such mandatory payments required to be made on this Series and
such other series of Parity Stock bear to each other.
(b) From and after December 15, 2003, the Company, at its option, may
redeem shares of this Series, as a whole or in part, at any time or from time to
time, at the following redemption prices per share, in each case together with
the Deemed Arrearage Value per share:
REDEMPTION PRICE IF REDEEMED DURING THE PERIOD:
110% of stated value ................. through December 15, 2004.
108% of stated value ................. from December 15, 2004
through December 15, 2005.
106% of stated value ................. from December 15, 2005
through December 15, 2006.
104% of stated value ................. from December 15, 2006
through December 15, 2007.
(c) In the event that fewer than all of the outstanding shares of this
Series are to be redeemed, the number of shares to be redeemed shall be
determined by the Board and the shares to be redeemed shall be determined in a
pro rata manner.
(d) At such time as the Company shall redeem shares of this Series, notice
of such redemption shall be given by first class mail, postage prepaid, mailed
not less than 30 nor more than 60 days prior to the redemption date, to each
holder of record of the shares to be redeemed, at such holder's address as the
same appears on the stock register of the Company. Each such notice shall
state: (i) the redemption date; (ii) the number of shares of this Series to be
redeemed and, if fewer than all the shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; (iii) the
redemption price; (iv) the place or places where certificates for such shares
are to be surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on such redemption
date.
(e) Notice having been mailed as aforesaid, from and after the redemption
date (unless default shall be made by the Company in providing money for the
payment of the redemption price) dividends on the shares of this Series so
called for redemption shall cease to accrue, and said shares shall no longer be
deemed to be outstanding, and all rights of the holders thereof as stockholders
of the Company (except the right to receive from the Company the redemption
price plus the Deemed Arrearage Value to the redemption date) shall cease. Upon
surrender in accordance with said notice of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, if the Board shall so
require and the notice shall so state), such shares shall be redeemed by the
Company at the redemption price aforesaid. In case fewer than all the shares
represented by any such
4
<PAGE>
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof.
(f) Any shares of this Series that shall at any time have been redeemed or
purchased by the Company, or exchanged for shares of Common Stock pursuant to
Section 7, shall, after such redemption, have the status of authorized but
unissued shares of Preferred Stock, without designation as to series until such
shares are once more designated as part of a particular series by the Board.
(g) Notwithstanding the foregoing provisions of this Section 3, if any
dividends on this Series are in arrears, no shares of this Series shall be
redeemed pursuant to Section 3 unless all outstanding shares of this Series are
simultaneously redeemed, and the Company shall not purchase or otherwise acquire
any shares of this Series; provided, however, that the foregoing shall not
prevent the purchase or acquisition of shares of this Series pursuant to a
purchase or exchange offer made on the same terms to holders of all outstanding
shares of this Series.
Section 4. Voting. Except as provided in this Section 4 and except as
otherwise required by law, the holders of shares of this Series shall not have
any right or power to vote on any question or in any proceeding or to be
represented at or to receive notice of any meeting of holders of capital stock
of the Company. On any matters on which the holders of shares of this Series
shall be entitled to vote, they shall be entitled to one vote for each share
held. So long as any shares of this Series remain outstanding, the affirmative
vote or consent of the holders of a majority of the shares of this Series
outstanding at the time, given in person or by proxy, either in writing or at a
meeting, shall be necessary to permit, effect or validate (i) the authorization,
creation or issuance, or any increase in the authorized or issued amount, of any
class or series of Senior Stock (as defined in Section 10), (ii) the amendment,
alteration or repeal of any of the provisions of the Second Restated Certificate
of Incorporation, as amended, which would materially and adversely affect any
right, preference, privilege or voting power of shares of this Series or of the
holders thereof in a manner disproportionate to the effect thereof on the
holders of any other shares of the Company's capital stock and (iii) any merger,
consolidation or sale of all or substantially all of the assets of the Company
or any other similar transaction.
Section 5. Liquidation. In the event of any complete liquidation,
dissolution or winding-up of the Company, whether voluntary or involuntary, the
holders of shares of this Series shall each be entitled to receive out of the
assets of the Company, whether such assets are capital or surplus, for each
share of this Series a sum equal to the Deemed Arrearage Value of such share
plus the stated value of each such share before any distribution shall be made
to the holders of Junior Stock of the Company, and if the assets of the Company
shall be insufficient to pay in full such amounts, then such assets shall be
distributed among such holders and the holders of any Parity Stock ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full. In the event of any complete
liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary, the holders of shares of this Series shall not be entitled to
receive the liquidation price of such shares held by them until the liquidation
price of all Senior Stock shall have been paid in full.
Section 6. Conversion.
5
<PAGE>
(a) Each share of this Series shall be convertible at the option of the
record holder thereof at any time prior to the third Trading Day before the
redemption date for such share, by presentation of the certificate representing
such share by the record holder in person or by registered mail, return receipt
requested with postage prepaid thereon, at the principal office of the Company,
and at such other offices, if any, as the Board of Directors may determine, into
the number of shares of fully paid and nonassessable shares of Common Stock
determined by dividing the sum of the stated value of each such share plus the
Deemed Arrearage Value by the Conversion Price in effect at the time of
conversion.
(b) The Company covenants that it will at all times reserve and keep
available, out of its authorized and unissued Common Stock solely for the
purpose of issuance upon conversion of this Series as herein provided, free from
preemptive rights or any other actual or contingent purchase rights of Persons
other than the holders of shares of this Series, such number of shares of Common
Stock as shall then be issuable upon the conversion of all outstanding shares of
this Series. The Company covenants that all shares of Common Stock that shall
be so issuable shall upon issue be duly and validly issued and fully paid and
nonassessable.
Section 7. Exchange.
(a) If, at any time after December 15, 2001, the Per Share Market Value of
the Common Stock is at least, and not less than, $21.60 (the "Threshold Price")
for any 60 consecutive Trading Days, then each outstanding share of this Series
shall be exchanged for the number of shares of fully paid and nonassessable
shares of Common Stock determined pursuant to subsection 7.
(b) If the conditions set forth in subsection 7(a) have been met, then the
number of shares of Common Stock for which each outstanding share of this Series
shall be exchanged pursuant to Section 7 shall be determined by dividing the sum
of the stated value of each such share plus the Deemed Arrearage Value of such
share by the Conversion Price in effect at the time of such exchange.
(c) Notwithstanding any other provision of this Section 7, in the event
that (i) no registration statement with respect to the shares of Common Stock to
be issued upon exchange of shares of this Series has been declared effective,
(ii) such registration statement has been declared effective but ceases to be
effective, (iii) the prospectus which is a part thereof cannot be used at the
time of the exchange, (iv) necessary consents and filings with any Governmental
Authority relating to the issuance of Common Stock and the exchange have not
been obtained, accomplished or waived or (v) the shares of Common Stock to be
issued upon exchange in accordance with Section 7(a) have not been approved for
listing on the principal securities exchange on which the Common Stock is then
listed, such exchange shall be delayed until such time as none of the foregoing
is continuing, provided that such exchange will occur on the Trading Day
following the first day that none of the foregoing is continuing and the Per
Share Market Value has equaled or exceeded the Threshold Price for 30
consecutive Trading Days.
6
<PAGE>
(d) The Company shall give notice of an exchange under this Section 7 by
first class mail, postage prepaid, mailed (i) not more than 10 business days
after the conditions required under Section 7(a) (and provided that none of the
conditions in Section 7(c) exist) have been met and (ii) not less than 30 nor
more than 60 days prior to the exchange date, to each holder of record of the
shares of this Series to be exchanged, at such holder's address as the same
appears on the stock register of the Company. Each such notice shall state:
(i) that the Board of Directors of the Company has determined in good faith that
the conditions set forth in subsection 7(a) have been met and that none of the
conditions in Section 7(c) exist; (ii) the exchange date; (iii) the number of
shares of Common Stock to be exchanged for each share of this Series; (iv) the
place or places where certificates for such shares are to be surrendered in
exchange for shares of Common Stock; and (v) that dividends on the shares of
this Series to be exchanged will cease to accrue on such exchange date.
(e) Notice having been mailed as aforesaid, from and after the exchange
date, dividends on the shares of this Series so called for exchange shall cease
to accrue, and said shares shall no longer be deemed to be outstanding, and all
rights of the holders as holders of shares of this Series (except the right to
receive from the Company the number of shares of Common Stock issuable pursuant
to this Section 7) shall cease. Upon surrender in accordance with said notice
of the certificates for shares of this Series so exchanged (properly endorsed or
assigned for transfer, if the Board shall so require and the notice shall so
state), such certificates shall be exchanged for certificates representing the
number of shares of Common Stock for which shares of this Series have been
exchanged. Until so surrendered, certificates for shares of this Series shall
represent, after the exchange date, the number of shares of Common Stock for
which shares of this Series have been exchanged. Share certificates
representing shares of this Series that are so surrendered shall be canceled.
(f) Notwithstanding the foregoing provisions of this Section 7, if any
dividends on this Series are in arrears, no shares of this Series shall be
exchanged pursuant to Section 7 unless all outstanding shares of this Series are
simultaneously exchanged, and the Company shall not purchase or otherwise
acquire any shares of this Series; provided, however, that the foregoing shall
not prevent the purchase or acquisition of shares of this Series pursuant to a
purchase or exchange offer made on the same terms to holders of all outstanding
shares of this Series.
Section 8. Adjustment of Conversion Price.
(a) The Conversion Price initially shall be $12.25 (the "Conversion
Price"). The Conversion Price shall be subject to adjustment from time to time
as follows:
7
<PAGE>
(i) If the Company, at any time while any shares of this Series are
outstanding, shall (A) pay a stock dividend or stock dividends or otherwise
make a distribution or distributions on shares of its capital stock payable
in shares of Common Stock (or in securities convertible into shares of
Common Stock), (B) except as set forth in clause (A) above, pay a stock
dividend or make a distribution on shares of its capital stock payable in
shares of its capital stock of any class other than Common Stock or a class
convertible into Common Stock, (C) subdivide outstanding shares of Common
Stock into a larger number of shares, (D) combine outstanding shares of
Common Stock into a smaller number of shares, or (E) issue by
reclassification of shares of Common Stock any shares of capital stock of
the Company of any class or classes, then the Conversion Price in effect
immediately prior to such action shall be adjusted so that the holder of
any shares of this Series thereafter surrendered for conversion or
exchanged shall be entitled to receive the number and class or classes of
shares of the capital stock of the Company that he would have owned or have
been entitled to receive immediately after the happening of any of the
events described above, had such shares of this Series been converted or
exchanged on or immediately prior to the record date for such dividend or
distribution or the effective date of such subdivision, combination or
reclassification, as the case may be. Notwithstanding the foregoing, no
adjustment in the Conversion Price shall be made by reason of the payment
of dividends on shares of Preferred Stock in additional shares of Preferred
Stock. An adjustment made pursuant to this subsection 8 shall become
effective immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective
date in the case of a subdivision, combination or reclassification.
(ii) If the Company, at any time while any shares of this Series are
outstanding, shall issue rights or warrants to all holders of Common Stock
entitling them (for a period expiring within 45 days after the record date
mentioned below) to subscribe for or purchase shares of Common Stock at a
price per share less than the Conversion Price in effect on the record date
mentioned below, then the Conversion Price shall be reduced by multiplying
the Conversion Price in effect prior to such record date by a fraction, of
which the denominator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of
such rights or warrants plus the number of additional shares of Common
Stock offered for subscription or purchase, and of which the numerator
shall be the number of shares of Common Stock (excluding treasury shares,
if any) outstanding on the date of issuance of such rights or warrants plus
the number of shares which the aggregate offering price of the total number
of shares so offered would purchase at the Conversion Price. Such
adjustment shall be made whenever such rights or warrants are issued, and
shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants.
However, upon the expiration of any right or warrant to purchase Common
Stock the issuance of which resulted in an adjustment in the Conversion
Price pursuant to this subsection 8, if any such right or warrant shall
expire and shall not have been exercised, then the Conversion Price shall
immediately upon such expiration, be recomputed and effective immediately
upon such expiration be increased to the prices which they would have been
(but reflecting any other adjustments in the Conversion Price made pursuant
to the provisions of this Section 8 after the issuance of such rights or
warrants) had the adjustment of the Conversion Price made upon the issuance
of such rights
8
<PAGE>
or warrants been made on the basis of offering for subscription or purchase
only that number of shares of Common Stock actually purchased upon the
exercise of such rights or warrants actually exercised.
(iii) If the Company, at any time while shares of this Series are
outstanding, shall distribute to all holders of Common Stock evidences of
its indebtedness or assets (excluding cash dividends or cash distributions
paid out of earned surplus) or rights or warrants to subscribe for or
purchase any security (excluding those referred to in subsection 8 above),
then in each such case the Conversion Price shall be determined by
multiplying the Conversion Price in effect prior to the record date fixed
for determination of stockholders entitled to receive such distribution by
a fraction, of which the denominator shall be the Conversion Price of
Common Stock determined as of the record date mentioned above, and of which
the numerator shall be the Conversion Price of the Common Stock, less the
then fair market value (as determined by the Board of Directors of the
Company in good faith, whose determination shall be conclusive if made in
good faith; provided, however that in the event of a distribution or series
of related distributions exceeding 10% of the net assets of the Company,
then such fair market value shall be determined by a nationally recognized
or major regional investment banking firm or firm of independent certified
public accountants of recognized standing (which may be the firm that
regularly examines the financial statements of the Company) selected in
good faith by the Board of Directors of the Company, and in either case
shall be described in a statement provided to all registered holders of
this Series) of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common
Stock. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned
above.
(iv) If the Company, at any time while any shares of this Series are
outstanding, shall issue or sell shares of Common Stock (excluding stock
issuances referred to in other provisions of this Section 8(a)) for a
consideration per share that is less than the Conversion Price in effect on
the date of such issuance or sale, then the Conversion Price shall be
reduced by multiplying the Conversion Price in effect immediately prior to
the date of such issuance or sale by a fraction, of which the denominator
shall be the number of shares of Common Stock (excluding treasury shares,
if any) outstanding on the date of such issuance or sale plus the number of
additional shares of Common Stock issued or sold, and of which the
numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding on the date of such issuance or sale plus the
number of shares that the aggregate consideration received or receivable by
the Company for the total number of shares so issued or sold would purchase
at the then Conversion Price. Such adjustment shall be made whenever such
shares are issued, and shall become effective immediately after such
issuance. If the consideration received or receivable by the Company for
such issuance or sale of shares of Common Stock is not cash, the fair
market value of such consideration shall be determined by the Board, an
investment banking firm, or certified public accountants in the manner
specified in subsection 8(b).
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<PAGE>
(v) If the Company, at any time while any shares of this Series are
outstanding, shall issue rights, options, or warrants (excluding those
referred to in other provisions of this Section 8(a)) which entitle the
holders thereof to purchase shares of Common Stock (such rights, options,
or warrants collectively referred to as "Purchase Rights") at a price per
share less than the then Conversion Price on the date of the issuance of
such Purchase Rights, then the Conversion Price shall be reduced by
multiplying the Conversion Price in effect immediately prior to the date of
issuance of such Purchase Rights by a fraction, of which the denominator
shall be the number of shares of Common Stock (excluding treasury shares,
if any) outstanding on the date of issuance of such Purchase Rights plus
the number of additional shares of Common Stock offered for purchase, and
of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of
such Purchase Rights plus the number of shares of Common Stock that the
aggregate consideration received or receivable by the Company in connection
with the grant as well as the exercise of such Purchase Rights would
purchase at such Conversion Price. Such adjustment shall be made whenever
such Purchase Rights are issued, and shall become effective immediately
after the issuance of such Purchase Rights. However, upon the expiration of
any such Purchase Right the issuance of which resulted in an adjustment in
the Conversion Price pursuant to this subsection 8(a)(v), if such Purchase
Right shall not have been fully exercised, then the Conversion Price shall
immediately upon such expiration be recomputed and effective immediately
upon such expiration be increased to the prices which they would have been
(but reflecting any other adjustments in the Conversion Price made pursuant
to the provisions of this Section 8 after the issuance of such Purchase
Rights) had the adjustment of the Conversion Price made upon the issuance
of such Purchase Right been made on the basis of offering for purchase only
that number of shares of Common Stock actually purchased upon the exercise
of such Purchase Rights which were actually exercised. If the consideration
for the Purchase Rights received or receivable by the Company for the grant
or exercise of such Purchase Rights is not cash, the fair market value of
such consideration shall be determined by the Board, an investment banking
firm, or certified public accountants in the manner specified in subsection
8(b).
(vi) No notification to the holders of any adjustment in the
Conversion Price otherwise required by this Section 8 shall be required
unless such adjustment would require an increase or decrease of at least 1%
in such price; provided, however, that any adjustment which by reason of
this subsection 8(a)(vi) is not required to be made shall be carried
forward and taken into account in any subsequent adjustments, and that upon
presentment of shares of this Series for conversion, all adjustments shall
be made calculating the conversion rights of such holder. All calculations
under this Section 8 shall be made to the nearest cent or the nearest
1/100th of a share, as the case may be.
(vii) Whenever the Conversion Price is adjusted, as herein provided,
the Company shall promptly mail to each registered holder of shares of this
Series a notice setting forth the Conversion Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment.
Such notice prepared in good faith shall be conclusive evidence of the
correctness of such adjustment absent manifest error.
10
<PAGE>
(viii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which share exchange the Common Stock
is converted into other securities, cash or property, then the holders of
the shares of this Series then outstanding shall have the right thereafter
to convert such shares only into the kind and amount of shares of stock and
other securities and property receivable upon or deemed to be held
following such reclassification, consolidation, merger, sale, transfer or
share exchange by a holder of a number of shares of the Common Stock of the
Company into which such shares of this Series could have been converted
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange.
This provision shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
(ix) If:
(A) the Company shall declare a dividend (or any other
distribution) on the Common Stock payable otherwise than in cash out
of its earned surplus; or
(B) the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
(C) the Company shall authorize the granting to the holders of
the Common Stock of rights or warrants to subscribe for or purchase
any shares of capital stock of any class or of any other rights; or
(D) the approval of any stockholders of the Company shall be
required in connection with any reclassification of the Common Stock
of the Company (other than a subdivision or combination of the
outstanding shares of Common Stock), any consolidation or merger to
which the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, or any compulsory
share exchange whereby the Common Stock is converted into other
securities, cash or property; or
(E) there shall be any voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of the shares of this Series, and
shall cause to be mailed to the holders of record of the shares of this
Series at their last addresses as they shall appear upon the stock books of
the Company, at least 10 days prior to the applicable record date
hereinafter specified, a notice stating (x) the date on which a record is
to be taken for the purpose of such dividend, distribution, redemption,
rights or warrants, or, if a record is not to be taken, the date as of
which the holders of Common Stock of record to be entitled to such
dividend, distribution, redemption, rights or warrants are to be
determined, or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, share exchange, dissolution,
11
<PAGE>
liquidation or winding up is expected to become effective, and the date as
of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reclassification, consolidation, merger,
sale, transfer, share exchange, dissolution, liquidation or winding up (but
no failure to mail such notice or any defect therein or in the mailing
thereof shall affect the validity of the corporate action required to be
specified in such notice).
(b) If at any time conditions shall arise by reason of action taken by the
Company, which, in the opinion of the Board of Directors of the Company, are not
adequately covered by the other provisions hereof and which might materially and
adversely affect the rights of the holders of shares of this Series, or in case
at any time any such conditions are expected to arise by reason of any action
contemplated by the Company, then the Board of Directors of the Company shall
appoint a nationally recognized or major regional investment banking firm or a
firm of independent certified public accountants of recognized standing (which
may be the firm that regularly examines the financial statements of the
Company), who shall give their opinion as to the adjustment, if any (not
inconsistent with the standards established in this Section 8), of the
Conversion Price (including, if necessary, any adjustment as to the securities
into which shares of this Series may thereafter be convertible or exchangeable)
which is or would be required to preserve without dilution the rights of the
holders of shares of this Series. The Board of Directors of the Company shall
make the adjustment recommended forthwith upon the receipt of such opinion or
the taking of any such action contemplated, as the case may be; provided,
however, that no such adjustment of the Conversion Price shall be made which in
the opinion of the investment banking firm or firm of accountants giving the
aforesaid opinion would result in an increase of the Conversion Price to more
than the Conversion Price then in effect.
(c) Upon any adjustment of the Conversion Price pursuant to this Section
8, then the Threshold Price shall be adjusted, as of the date of such adjustment
of the Conversion Price, to that price determined by multiplying the Threshold
Price in effect immediately prior to such adjustment of the Conversion Price by
a fraction (i) the numerator of which shall be the Conversion Price in effect
immediately after such adjustment of the Conversion Price, and (ii) the
denominator of which shall be the Conversion Price in effect immediately prior
to such adjustment.
Section 9. Fractional Shares; Transfer Taxes; HSR Act.
(a) The Company shall not be required to issue stock certificates
representing fractions of shares of Common Stock, but may, if otherwise
permitted, make a cash payment in respect of any final fraction of a share based
on the Per Share Market Value at such time. If the Company elects not, or is
unable, to make such a cash payment, the holder of a share of this Series shall
be entitled to receive, in lieu of the final fraction of a share, one whole
share of Common Stock.
(b) The issuance of certificates for shares of Common Stock on conversion
of this Series shall be made without charge to the holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided, that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate in a name other than that
of the holder of the shares of
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<PAGE>
this Series converted and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(c) The exercise by a holder of shares of this Series of the conversion
rights granted in Section 6 and the exercise by the Company of the exchange
rights as set forth in Section 7 are subject in all respects to and conditioned
upon compliance by the parties with the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), and rules and regulations promulgated
pursuant thereto, to the extent that said act, rules and regulations are
applicable to such exercise. The Company and such holder agree to make such
filings with and provide such information to the Federal Trade Commission and
the Department of Justice with respect to such exercise as are required in
connection with the HSR Act in a timely manner and to join each others request
for early termination. The Company and such holder will use such reasonable
efforts to obtain all governmental approval required to permit such exercise and
to cause early termination of the waiting period under the HSR Act.
Section 10. Definitions. For the purposes hereof, the following terms
shall have the following respective meanings:
"Arrearage Shares" has the meaning given such term in Section 2(b).
"Common Stock" means shares now or hereafter authorized of the class
of Common Stock, $.10 par value, of the Company presently authorized and
stock of any other class into which such shares may hereafter have been
reclassified or changed.
"Conversion Price" has the meaning given such term in Section 8.
"Deemed Arrearage Value" of a share of this Series means (i) the cash
dividend accrued at the Dividend Rate on such share during the partial
Dividend Period ending on the date of conversion, the date fixed for
redemption, the exchange date or the date of payment upon liquidation, as
the case may be, and (ii) if one or more dividends has accrued and has not
been timely paid on such share, an amount in cash equal to $1,000
multiplied by the number of whole and fractional shares of this Series that
would have been issued as dividends on such share had all such accrued and
unpaid dividends been timely paid in shares of this Series, together with
the aggregate amount of cash dividends that would have accrued on such
dividend shares to the date of conversion, the date fixed for redemption,
the exchange date or the date of payment upon liquidation, as the case may
be.
"Dividend Rate" means 10% per annum.
"Governmental Authority" means (i) the United States of America or any
state within the United States of America and (ii) any court or any
governmental department, commission, board, bureau, agency or other
instrumentality of the United States of America or of any state within the
United States of America.
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<PAGE>
"Junior Stock" means the Common Stock of the Company and any other
stock of the Company over which shares of this Series has a preference as
to distribution of assets.
"Parity Stock" means any stock of the Company ranking as to
distribution of assets on a parity with this Series.
"Per Share Market Value" means on any particular date (a) the last
sale price per share of the Common Stock on such date on the principal
stock exchange on which the Common Stock has been listed or, if there is no
such price on such date, then the last price on such exchange on the date
nearest preceding such date, or (b) if the Common Stock is not listed on
any stock exchange, then the final bid price for a share of Common Stock in
the over-the-counter market, as reported by the Nasdaq National Market at
the close of business on such date, or the last sales price if such price
is reported and final bid prices are not available, or (c) if the Common
Stock is not quoted on the Nasdaq National Market, then the final bid price
for a share of Common Stock in the over-the-counter market as reported by
the National Quotation Bureau Incorporated (or any similar organization or
agency succeeding to its functions of reporting prices), or (d) if the
Common Stock is no longer publicly traded, then as determined by a
nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may
be the firm that regularly examines the financial statements of the
Company) selected in good faith by the Board of Directors of the Company,
provided, that none of the transactions related to the foregoing shall
include purchases by any "affiliate" (as such term is defined in the
General Rules and Regulations under the Securities Act of 1933) of the
Company.
"Person" means a corporation, an association, a partnership, an
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"Preferred Stock" means the Company's Preferred Stock, $1.00 par
value.
"Senior Stock" means any shares or class of the Company that are by
their terms expressly given priority over this Series as to distribution of
assets on any liquidation of the Company.
"Threshold Price " has the meaning given such term in Section 7(a).
"Trading Day" means (a) a day on which the Common Stock is traded on
the principal stock exchange on which the Common Stock has been listed, or
(b) if the Common Stock is not listed on any stock exchange, then a day on
which the Common Stock is quoted in the over-the-counter market, as
reported by the Nasdaq Stock Market, or (c) if the Common Stock is not
quoted on the Nasdaq Stock Market, then a day on which the Common Stock is
quoted in the over-the-counter market as reported by the National Quotation
Bureau Incorporated (or any similar organization or agency succeeding to
its functions of reporting prices).
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<PAGE>
IN WITNESS WHEREOF, said Plains Resources Inc. has caused this Certificate
to be signed by a duly authorized officer, this 14th day of December, 1999.
PLAINS RESOURCES INC.
By: /s/ Phillip D. Kramer
----------------------------------
Name: Phillip D. Kramer
Title: Executive Vice President &
Chief Financial Officer
ATTEST:
By: /s/ Michael R. Patterson
-----------------------------------
Name: Michael R. Patterson
Title: Secretary
16
<PAGE>
EXHIBIT 3(e)
PLAINS RESOURCES INC.
==========================================================
Certificate of Designation, Preferences and Rights of a
Series of Preferred Stock by Resolution of the Board of
Directors Providing for an Issue of 250,000 Shares of
Preferred Stock Designated "Series G Cumulative
Convertible Preferred Stock"
==========================================================
Plains Resources Inc., a Delaware corporation (hereinafter called the
"Company"), pursuant to the provisions of Section 151 of the General Corporation
Law of the State of Delaware does hereby state and certify that pursuant to the
authority expressly vested in the Board of Directors of the Company by the
Second Restated Certificate of Incorporation, as amended, the Board of
Directors, at a meeting thereof duly called and held on December 1, 1999, at
which meeting a quorum was present and acting throughout, duly adopted the
following resolutions providing for the issue of shares of Preferred Stock
hereinafter referred to, and further providing with respect to such issue of
shares of Preferred Stock for such powers, designations, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations or restrictions thereof, as are hereinafter set
forth, in addition to those set forth in said Second Restated Certificate of
Incorporation;
Resolved, that pursuant to Article FOURTH of the Certificate of
Incorporation (which authorizes 2,000,000 shares of Preferred Stock, $1.00 par
value), the Board of Directors hereby provides for the issue of a series of
250,000 shares of Preferred Stock designated "Series G Cumulative Convertible
Preferred Stock"; and
Resolved, that the powers, designations, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations or restrictions thereof, of the shares of the Series G Cumulative
Convertible Preferred Stock shall be as follows:
Section 1. Designation and Rank. The designation of the series of
Preferred Stock created by this resolution shall be "Series G Cumulative
Convertible Preferred Stock" (hereinafter called this "Series"), and the number
of shares constituting this Series shall be 250,000. Shares of this Series shall
have a stated value of $500 per share. The number of authorized shares of this
Series may be reduced by further resolution duly adopted by the Board and by the
filing of a certificate pursuant to the provisions of the General Corporation
Law of the State of Delaware stating that such reduction has been so authorized,
but the number of authorized shares of this Series shall not be increased,
except as provided in Section 2(b) hereof. The shares of this Series shall rank
prior to the Junior Stock (as defined in Section 10) as to distribution of
assets and payment of dividends. The shares of this Series shall be of equal
rank as to distribution of assets and payment of dividends with all other series
of Preferred Stock, except as provided in a certificate of designation with
regard to such other series of Preferred Stock filed pursuant to Section 151 of
the General Corporation Law of the State of Delaware with the Secretary of State
of the State of Delaware.
<PAGE>
Section 2. Dividends.
(a) Shares of this Series shall be entitled to receive, when and as
declared by the Board of Directors, dividends as provided in this Section 2 on
the stated value per share of this Series, and no more. Such dividends shall be
cumulative, shall accrue (whether or not declared and whether or not there shall
be funds legally available for the payment of dividends) from the Accrual Date
(as defined below) and shall be payable in arrears, out of assets legally
available therefor, when and as declared by the Board of Directors of the
Company, on April 1 and October 1 of each year, commencing April 1, 2000 (except
that if any such date is a Saturday, Sunday or a legal holiday then such
dividend shall be payable without interest on the next day that is not a
Saturday, Sunday or legal holiday) (each six-month period (or such period from
the date of original issue until April 1, 2000) expiring on a dividend payment
date being referred to herein as a "Dividend Period"). Each of such dividends
shall be paid to the holders of record of shares of this Series as they appear
on the stock register of the Company on such record dates, not exceeding 30 days
preceding the payment dates thereof, as shall be fixed by the Board. Dividends
on account of arrears for any past Dividend Periods may be declared and paid at
any time, without reference to any regular dividend payment date, to holders of
record on such date, not exceeding 45 days preceding the payment date thereof,
as may be fixed by the Board.
(b) With respect to each dividend declared and timely paid on shares of
this Series, the Company may pay a cash dividend at the Dividend Rate (as
defined in Section 10) or, at its option, and in lieu of payment in cash, may
pay such dividend by issuing additional fully paid and nonassessable shares, or
fractions thereof, of this Series having an aggregate stated value equal to the
cash dividend otherwise payable. Each dividend that accrues during each Dividend
Period shall be deemed to be timely paid only if it is paid on the dividend
payment date on which such Dividend Period expires. Any dividend not declared
and timely paid on shares of this Series may thereafter be paid only by (i)
issuing additional fully paid and nonassessable shares of this Series, or
fractions thereof ("Arrearage Shares"), having an aggregate stated value equal
to the cash that would have been paid had such dividend been timely paid in cash
and (ii) paying an amount in cash equal to the aggregate amount of cash
dividends, if any, that would have accrued on such Arrearage Shares had such
Arrearage Shares been issued on the dividend payment date for such dividend, or,
at the Company's option, and in lieu of such cash payment, issuing additional
fully paid and nonassessable shares, or fractions thereof, of this Series having
an aggregate stated value equal to the cash payment otherwise to be made. Each
fractional share of this Series outstanding shall be entitled to a ratably
proportionate amount of all dividends accruing with respect to each outstanding
share of this Series pursuant to Section 2(a) hereof, and all such dividends
with respect to such outstanding fractional shares shall be fully cumulative and
shall accrue (whether or not declared) and shall be payable in the same manner
and at such times as provided for in Section 2(a) hereof with respect to
dividends on each outstanding share of this Series. The Board of Directors shall
authorize additional shares of this Series to be available for issuance as
dividends if the number of authorized shares of this Series is insufficient to
continue accruing or paying dividends in shares of this Series.
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<PAGE>
(c) No full dividends shall be declared or paid or set apart for payment
on Parity Stock (as defined in Section 10) or Junior Stock for any period unless
full cumulative dividends have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for such
payment on this Series for all Dividend Periods terminating on or prior to the
date of payment of such full cumulative dividends. When dividends are not paid
in full, as aforesaid, upon the shares of this Series and of any other series of
Parity Stock, all dividends declared upon shares of this Series and of any other
series of Parity Stock shall be declared pro rata so that the amount of
dividends declared per share on this Series and such other series of Parity
Stock shall in all cases bear to each other the same ratio that accrued
dividends per share on the shares of this Series and such other series of Parity
Stock bear to each other. Holders of shares of this Series shall not be entitled
to any dividend, whether payable in cash, property or stock, in excess of full
cumulative dividends, as herein provided, on this Series. Except as set forth in
Section 2(b) above, no interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on this Series that may
be in arrears.
(d) So long as any shares of this Series are outstanding, no dividend
(other than a dividend in Junior Stock or other than as provided in Section
2(c)) shall be declared or paid or set aside for payment or other distribution
declared or made upon the Junior Stock, nor shall any Junior Stock be redeemed,
purchased or otherwise acquired for any consideration (or any moneys be paid to
or made available for a sinking fund for the redemption of any shares of Junior
Stock) by the Company (except by conversion into or in exchange for Junior
Stock) unless, in each case, the full cumulative dividends on all outstanding
shares of this Series then payable shall have been paid.
(e) Dividends payable on this Series for any period less than a full
Dividend Period shall be computed on the basis of the ratio of the number of
days in such partial period to the actual number of days in such full Dividend
Period.
Section 3. Redemption.
(a) On July 30, 2012, the Company shall redeem, to the extent it has
legally available funds therefor, all shares of this Series then outstanding at
a redemption price per share equal to the sum of $500 per share plus the Deemed
Arrearage Value (as defined in Section 10) per share. At any time when the
Company shall not have redeemed the full number of shares of this Series
required to be redeemed pursuant to this Section 3(a), no dividends (other than
in Junior Stock or other than as provided in Section 2(c) shall be declared or
paid or set aside for payment, or other distribution declared or made, upon the
Junior Stock, nor shall any Junior Stock be redeemed, purchased or otherwise
acquired for any consideration (or any moneys be paid to or made available for a
sinking fund for the redemption of any shares of any such stock) by the Company
(except by conversion into or in exchange for Junior Stock), nor shall any
Parity Stock be redeemed, purchased or otherwise acquired for any consideration
(or any moneys be paid to or made available for a sinking fund for the
redemption of any shares of any Parity Stock) by the Company (except by
conversion into or in exchange for Junior Stock), unless, in the case of the
mandatory redemption of, repurchase of, or fulfillment of a sinking fund
obligation in respect of, any other series of Parity Stock, payments made in
respect of the mandatory redemption of, repurchase of, or
3
<PAGE>
fulfillment of a sinking fund obligation in respect of, this Series and all
other series of Parity Stock then issued and outstanding and entitled to such
mandatory payments are made pro rata, as nearly as practicable, so that the
amounts of such payments made on this Series and such other series of Parity
Stock shall in all cases bear to each other the same ratio, as nearly as
practicable, that such mandatory payments required to be made on this Series and
such other series of Parity Stock bear to each other.
(b) The Company, at its option, may redeem shares of this Series, as a
whole or in part, at any time or from time to time, at the following redemption
prices per share, in each case together with the Deemed Arrearage Value per
share:
REDEMPTION
PRICE IF REDEEMED DURING THE PERIOD:
---------- --------------------------------
$550.00 ............ Through December 31, 1999
525.00 ............ January 1, 2000 though
December 31, 2003
500.00 ............ January 1, 2004 and thereafter
(c) In the event that fewer than all of the outstanding shares of this
Series are to be redeemed, the number of shares to be redeemed shall be
determined by the Board and the shares to be redeemed shall be determined in a
pro rata manner.
(d) At such time as the Company shall redeem shares of this Series, notice
of such redemption shall be given by first class mail, postage prepaid, mailed
not less than 30 nor more than 60 days prior to the redemption date, to each
holder of record of the shares to be redeemed, at such holder's address as the
same appears on the stock register of the Company. Each such notice shall state:
(i) the redemption date; (ii) the number of shares of this Series to be redeemed
and, if fewer than all the shares held by such holder are to be redeemed, the
number of such shares to be redeemed from such holder; (iii) the redemption
price; (iv) the place or places where certificates for such shares are to be
surrendered for payment of the redemption price; and (v) that dividends on the
shares to be redeemed will cease to accrue on such redemption date.
(e) Notice having been mailed as aforesaid, from and after the redemption
date (unless default shall be made by the Company in providing money for the
payment of the redemption price) dividends on the shares of this Series so
called for redemption shall cease to accrue, and said shares shall no longer be
deemed to be outstanding, and all rights of the holders thereof as stockholders
of the Company (except the right to receive from the Company the redemption
price plus the Deemed Arrearage Value to the redemption date) shall cease. Upon
surrender in accordance with said notice of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, if the
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Board shall so require and the notice shall so state), such shares shall be
redeemed by the Company at the redemption price aforesaid. In case fewer than
all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof.
(f) Any shares of this Series that shall at any time have been redeemed or
purchased by the Company, or exchanged for shares of Common Stock pursuant to
Section 7, shall, after such redemption, have the status of authorized but
unissued shares of Preferred Stock, without designation as to series until such
shares are once more designated as part of a particular series by the Board.
(g) Notwithstanding the foregoing provisions of this Section 3, if any
dividends on this Series are in arrears, no shares of this Series shall be
redeemed pursuant to Section 3(b) unless all outstanding shares of this Series
are simultaneously redeemed, and the Company shall not purchase or otherwise
acquire any shares of this Series; provided, however, that the foregoing shall
not prevent the purchase or acquisition of shares of this Series pursuant to a
purchase or exchange offer made on the same terms to holders of all outstanding
shares of this Series.
Section 4. Voting.
(a) Except as otherwise required by law, the holders of shares of this
Series shall not have any right or power to vote on any question or in any
proceeding or to be represented at or to receive notice of any meeting of
holders of capital stock of the Company. On any matters on which the holders of
shares of this Series shall be entitled to vote, they shall be entitled to one
vote for each share held.
(b) So long as any shares of this Series remain outstanding, the
affirmative vote or consent of the holders of a majority of the shares of this
Series outstanding at the time, given in person or by proxy, either in writing
or at a meeting, shall be necessary to permit, effect or validate (i) the
authorization, creation or issuance, or any increase in the authorized or issued
amount, of any class or series of Senior Stock and (ii) the amendment,
alteration or repeal of any of the provisions of the Second Restated Certificate
of Incorporation, as amended, which would materially and adversely affect any
right, preference, privilege or voting power of shares of this Series or of the
holders thereof in a manner disproportionate to the effect thereof on the
holders of any other shares of the Company's capital stock. However, the
creation and issuance of other series of Parity Stock or Junior Stock shall not
be deemed to affect materially and adversely said rights, preferences,
privileges or voting power.
(c) So long as at least 10,000 shares of this Series remain outstanding,
the holders of shares of this Series outstanding at the time shall be entitled
to vote to permit, effect or validate the authorization of a merger or
consolidation of the Company or any compulsory shares exchange pursuant to which
the Common Stock is converted into other securities, cash or property. The
holders of shares of this Series shall be entitled to that number of votes
equal to the number of whole
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shares of Common Stock into which all shares of this Series held by such holders
could be converted pursuant to the provisions of Section 6 hereof, at the record
date for the determination of the stockholders entitled to vote on such matters
or, if no record date is established, at the day prior to the date such vote is
taken or any written consent of stockholders is first executed, such votes to be
counted together with all other shares of capital stock having general voting
powers and not separately as a class.
Section 5. Liquidation. In the event of any complete liquidation,
dissolution or winding-up of the Company, whether voluntary or involuntary, the
holders of shares of this Series shall each be entitled to receive out of the
assets of the Company, whether such assets are capital or surplus, for each
share of this Series a sum equal to the Deemed Arrearage Value of such share
plus $500.00 before any distribution shall be made to the holders of Junior
Stock of the Company, and if the assets of the Company shall be insufficient to
pay in full such amounts, then such assets shall be distributed among such
holders and the holders of any Parity Stock ratably in accordance with the
respective amounts that would be payable on such shares if all amounts payable
thereon were paid in full. In the event of any complete liquidation, dissolution
or winding-up of the Company, whether voluntary or involuntary, the holders of
shares of this Series shall not be entitled to receive the liquidation price of
such shares held by them until the liquidation price of all Senior Stock shall
have been paid in full.
Section 6. Conversion.
(a) Each share of this Series shall be convertible at the option of the
record holder thereof at any time prior to the third Trading Day before the
redemption date for such share, by presentation of the certificate representing
such share by the record holder in person or by registered mail, return receipt
requested with postage prepaid thereon, at the principal office of the Company,
and at such other offices, if any, as the Board of Directors may determine, into
the number of shares of fully paid and nonassessable shares of Common Stock
determined by dividing the sum of $500.00 plus the Deemed Arrearage Value by the
Conversion Price in effect at the time of conversion.
(b) The Company covenants that it will at all times reserve and keep
available, out of its authorized and unissued Common Stock solely for the
purpose of issuance upon conversion of this Series as herein provided, free from
preemptive rights or any other actual or contingent purchase rights of Persons
other than the holders of shares of this Series, such number of shares of Common
Stock as shall then be issuable upon the conversion of all outstanding shares of
this Series. The Company covenants that all shares of Common Stock that shall be
so issuable shall upon issue be duly and validly issued and fully paid and
nonassessable.
Section 7. Exchange.
(a) At the option of the Company, each outstanding share of this Series
shall be exchanged for the number of shares of fully paid and nonassessable
shares of Common Stock determined pursuant to Section 7(b); provided that such
option shall not be exercisable unless and until the
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<PAGE>
average of the Per Share Market Values of the Common Stock for any 30
consecutive Trading Days prior to the mailing of the notice as required by
Section 7(d) and subsequent to the sale of shares of this Series shall have
equaled or exceeded the Threshold Price.
(b) If the condition required under subsection 7(a) has been met, then the
number of shares of Common Stock for which each outstanding share of this Series
may be exchanged pursuant to Section 7(a) shall be determined by dividing the
sum of $500.00 plus the Deemed Arrearage Value of such share by the Conversion
Price in effect at the time of such exchange.
(c) Notwithstanding any other provision of this Section 7(a), in the event
that (i) no registration statement with respect to the shares of Common Stock to
be issued upon exchange of shares of this Series has been declared effective,
(ii) such registration statement has been declared effective but ceases to be
effective, (iii) the prospectus which is a part thereof cannot be used at the
time of the exchange, (iv) necessary consents and filings with any Governmental
Authority relating to the issuance of Common Stock and the exchange have not
been obtained, accomplished or waived or (v) the shares of Common Stock to be
issued upon exchange in accordance with Section 7(a) have not been approved for
listing on the principal securities exchange on which the Common Stock is then
listed, such exchange shall be delayed until such time as none of the foregoing
is continuing, provided that such exchange will occur on the Trading Day
following the first day that none of the foregoing is continuing and the Per
Share Market Value has equaled or exceeded the Threshold Price for 30
consecutive Trading Days.
(d) The Company shall exercise its option under Section 7(a) by giving
notice of such election by first class mail, postage prepaid, mailed (i) not
more than 10 business days after the condition in subsection 7(a) has been met
(and provided that none of the conditions in Section 7(c) then exist), and (ii)
not less than 30 nor more than 60 days prior to the exchange date, to each
holder of record of the shares of this Series to be exchanged, at such holder's
address as the same appears on the stock register of the Company. Each such
notice shall state: (i) that the Board of Directors of the Company has
determined in good faith that the condition set forth in subsection 7(a) has
been met (and that none of the conditions in Section 7(c) exist); (ii) the
exchange date; (iii) the number of shares of Common Stock to be exchanged for
each share of this Series; (iv) the place or places where certificates for such
shares are to be surrendered in exchange for shares of Common Stock; and (v)
that dividends on the shares of this Series to be exchanged will cease to accrue
on such exchange date.
(e) Notice having been mailed as aforesaid, from and after the exchange
date, dividends on the shares of this Series so called for exchange shall cease
to accrue, and said shares shall no longer be deemed to be outstanding, and all
rights of the holders as holders of share of this Series (except the right to
receive from the Company the number of shares of Common Stock issuable pursuant
to this Section 7) shall cease. Upon surrender in accordance with said notice of
the certificates for shares of this Series so exchanged (properly endorsed or
assigned for transfer, if the Board shall so require and the notice shall so
state), such certificates shall be exchanged for certificates representing
7
<PAGE>
the number of shares of Common Stock for which shares of this Series have been
exchanged. Until so surrendered, certificates for shares of this Series shall
represent, after the exchange date, the number of shares of Common Stock for
which shares of this Series have been exchanged. Share certificates representing
shares of this Series that are so surrendered shall be canceled.
(f) Notwithstanding the foregoing provisions of this Section 7, if any
dividends on this Series are in arrears, no shares of this Series shall be
exchanged pursuant to Section 7(a) unless all outstanding shares of this Series
are simultaneously exchanged, and the Company shall not purchase or otherwise
acquire any shares of this Series; provided, however, that the foregoing shall
not prevent the purchase or acquisition of shares of this Series pursuant to a
purchase or exchange offer made on the same terms to holders of all outstanding
shares of this Series.
Section 8. Adjustment of Conversion Price and Threshold Price.
(a) The Conversion Price initially shall be $15.00 (the "Conversion
Price"). The Conversion Price shall be subject to adjustment from time to time
as follows :
(i) If the Company, at any time while any shares of this Series
are outstanding, shall (A) pay a stock dividend or stock dividends or
otherwise make a distribution or distributions on shares of its capital
stock payable in shares of Common Stock (or in securities convertible into
shares of Common Stock), (B) except as set forth in clause (A) above, pay a
stock dividend or make a distribution on shares of its capital stock
payable in shares of its capital stock of any class other than Common Stock
or a class convertible into Common Stock, (C) subdivide outstanding shares
of Common Stock into a larger number of shares, (D) combine outstanding
shares of Common Stock into a smaller number of shares, or (E) issue by
reclassification of shares of Common Stock any shares of capital stock of
the Company of any class or classes, the Conversion Price in effect
immediately prior to such action shall be adjusted so that the holder of
any shares of this Series thereafter surrendered for conversion or
exchanged shall be entitled to receive the number and class or classes of
shares of the capital stock of the Company which he would have owned or
have been entitled to receive immediately after the happening of any of the
events described above, had such shares of this Series been converted or
exchanged on or immediately prior to the record date for such dividend or
distribution or the effective date of such subdivision, combination or
reclassification, as the case may be. Notwithstanding the foregoing, no
adjustment in the Conversion Price shall be made by reason of the payment
of dividends on shares of Preferred Stock in additional shares of Preferred
Stock. An adjustment made pursuant to this subsection 8(a)(i) shall become
effective immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective
date in the case of a subdivision, combination or reclassification.
(ii) In case the Company, at any time while any shares of this
Series are outstanding, shall issue rights or warrants to all holders of
Common Stock entitling them (for a period
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<PAGE>
expiring within 45 days after the record date mentioned below) to subscribe
for or purchase shares of Common Stock at a price per share less than the
then Per Share Market Value of Common Stock at the record date mentioned
below, the Conversion Price shall be reduced by multiplying the Conversion
Price, as the case may be, in effect prior to such record date by a
fraction, of which the denominator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding on the date of
issuance of such rights or warrants plus the number of additional shares of
Common Stock offered for subscription or purchase, and of which the
numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding on the date of issuance of such rights or
warrants plus the number of shares which the aggregate offering price of
the total number of shares so offered would purchase at such Per Share
Market Value. Such adjustment shall be made whenever such rights or
warrants are issued, and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights or warrants. However, upon the expiration of any right or warrant to
purchase Common Stock the issuance of which resulted in an adjustment in
the Conversion Price pursuant to this subsection 8(a)(ii), if any such
right or warrant shall expire and shall not have been exercised, the
Conversion Price shall immediately upon such expiration, be recomputed and
effective immediately upon such expiration be increased to the prices which
they would have been (but reflecting any other adjustments in the
Conversion Price made pursuant to the provisions of this Section 8 after
the issuance of such rights or warrants) had the adjustment of the
Conversion Price made upon the issuance of such rights or warrants been
made on the basis of offering for subscription or purchase only that number
of shares of Common Stock actually purchased upon the exercise of such
rights or warrants actually exercised.
(iii) In case the Company, at any time while shares of this
Series are outstanding, shall distribute to all holders of Common Stock
evidences of its indebtedness or assets (excluding cash dividends or cash
distributions paid out of earned surplus) or rights or warrants to
subscribe for or purchase any security (excluding those referred to in
subsection 8(a)(ii) above) then in each such case the Conversion Price
shall be determined by multiplying the Conversion Price, as the case may
be, in effect prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction, of which
the denominator shall be the Per Share Market Value of Common Stock
determined as of the record date mentioned above, and of which the
numerator shall be such Per Share Market Value of the Common Stock, less
the then fair market value (as determined by the Board of Directors of the
Company in good faith, whose determination shall be conclusive if made in
good faith; provided, however, that in the event of a distribution or
series of related distributions exceeding 10% of the net assets of the
Company, then such fair market value shall be determined by a nationally
recognized or major regional investment banking firm or firm of independent
certified public accountants of recognized standing (which may be the firm
that regularly examines the financial statements of the Company) selected
in good faith by the Board of Directors of the Company, and in either case
shall be described in a
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<PAGE>
statement provided to all registered holders of this Series) of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
(iv) If the Company, at any time while any shares of this Series
are outstanding, shall issue or sell shares of Common Stock (excluding
stock issuances referred to in other provisions of this Section 8(a)) for a
consideration per share which is less than the Per Share Market Value of
Common Stock on the date of such issuance or sale, the Conversion Price
shall be reduced by multiplying the Conversion Price in effect immediately
prior to the date of such issuance or sale by a fraction, of which the
denominator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding on the date of such issuance or sale
plus the number of additional shares of Common Stock issued or sold, and of
which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding on the date of such
issuance or sale plus the number of shares which the aggregate
consideration received or receivable by the Company for the total number of
shares so issued or sold would purchase at such Per Share Market Value.
Such adjustment shall be made whenever such shares are issued, and shall
become effective immediately after such issuance. If the consideration
received or receivable by the Company for such issuance or sale of shares
of Common Stock is not cash, the fair market value of such consideration
shall be determined by the Board, an investment banking firm, or certified
public accountants in the manner specified in subsection 8(b).
(v) If the Company, at any time while any shares of this Series
are outstanding, shall issue rights, options, or warrants (excluding those
referred to in other provisions of this Section 8(a)) which entitle the
holders thereof to purchase shares of Common Stock (such rights, options,
or warrants collectively referred to as "Purchase Rights") at a price per
share less than the then Per Share Market Value of Common Stock on the date
of the issuance of such Purchase Rights, the Conversion Price shall be
reduced by multiplying the Conversion Price in effect immediately prior to
the date of issuance of such Purchase Rights by a fraction, of which the
denominator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding on the date of issuance of such
Purchase Rights plus the number of additional shares of Common Stock
offered for purchase, and of which the numerator shall be the number of
shares of Common Stock (excluding treasury shares, if any) outstanding on
the date of issuance of such Purchase Rights plus the number of shares
which the aggregate consideration received or receivable by the Company in
connection with the grant as well as the exercise of such Purchase Rights
would purchase at such Per Share Market Value. Such adjustment shall be
made whenever such Purchase Rights are issued, and shall become effective
immediately after the issuance of such Purchase Rights. However, upon the
expiration of any such Purchase Right the issuance of which resulted in an
adjustment in the Conversion Price pursuant to this subsection 8(a)(v), if
such Purchase Right shall not have been fully exercised, the Conversion
Price shall
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immediately upon such expiration be recomputed and effective immediately
upon such expiration be increased to the prices which they would have been
(but reflecting any other adjustments in the Conversion Price made pursuant
to the provisions of this Section 8 after the issuance of such Purchase
Rights) had the adjustment of the Conversion Price made upon the issuance
of such Purchase Right been made on the basis of offering for purchase only
that number of shares of Common Stock actually purchased upon the exercise
of such Purchase Rights which were actually exercised. If the consideration
for the Purchase Rights received or receivable by the Company for the grant
or exercise of such Purchase Rights is not cash, the fair market value of
such consideration shall be determined by the Board, an investment banking
firm, or certified public accountants in the manner specified in subsection
8(b).
(vi) No notification to the holders of any adjustment in the
Conversion Price otherwise required by this Section 8 shall be required
unless such adjustment would require an increase or decrease of at least 1%
in such price; provided, however, that any adjustment which by reason of
this subsection 8(a)(vi) is not required to be made shall be carried
forward and taken into account in any subsequent adjustments, and that upon
presentment of shares of this Series for conversion, all adjustments shall
be made calculating the conversion rights of such holder. All calculations
under this Section 8 shall be made to the nearest cent or the nearest
1/100th of a share, as the case may be.
(vii) Whenever the Conversion Price is adjusted, as herein
provided, the Company shall promptly mail to each registered holder of
shares of this Series a notice setting forth the Conversion Price after
such adjustment and setting forth a brief statement of facts requiring such
adjustment. Such notice prepared in good faith shall be conclusive evidence
of the correctness of such adjustment absent manifest error.
(viii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which share exchange the Common Stock
is converted into other securities, cash or property, then the holders of
the shares of this Series then outstanding shall have the right thereafter
to convert such shares only into the kind and amount of shares of stock and
other securities and property receivable upon or deemed to be held
following such reclassification, consolidation, merger, sale, transfer or
share exchange by a holder of a number of shares of the Common Stock of the
Company into which such shares of this Series could have been converted
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange.
This provision shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
(ix) In case:
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(A) the Company shall declare a dividend (or any other
distribution) on the Common Stock payable otherwise than in cash
out of its earned surplus; or
(B) the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
(C) the Company shall authorize the granting to the holders
of the Common Stock of rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any other
rights; or
(D) the approval of any stockholders of the Company shall
be required in connection with any reclassification of the Common
Stock of the Company (other than a subdivision or combination of
the outstanding shares of Common Stock), any consolidation or
merger to which the Company is a party, any sale or transfer of
all or substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is converted
into other securities, cash or property, or
(E) of the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company; then the
Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of the shares of this
Series, and shall cause to be mailed to the holders of record of
the shares of this Series at their last addresses as they shall
appear upon the stock books of the Company, at least 10 days
prior to the applicable record date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution, redemption, rights or
warrants, or, if a record is not to be taken, the date as of
which the holders of Common Stock of record to be entitled to
such dividend, distribution, redemption, rights or warrants are
to be determined, or (y) the date on which such reclassification,
consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders
of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property
deliverable upon such reclassification, consolidation, merger,
sale, transfer, share exchange, dissolution, liquidation or
winding up (but no failure to mail such notice or any defect
therein or in the mailing thereof shall affect the validity of
the corporate action required to be specified in such notice).
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(b) In case at any time conditions shall arise by reason of action taken
by the Company, which, in the opinion of the Board of Directors of the Company,
are not adequately covered by the other provisions hereof and which might
materially and adversely affect the rights of the holders of shares of this
Series, or in case at any time any such conditions are expected to arise by
reason of any action contemplated by the Company, the Board of Directors of the
Company shall appoint a nationally recognized or major regional investment
banking firm or a firm of independent certified public accountants of recognized
standing (which may be the firm that regularly examines the financial statements
of the Company), who shall give their opinion as to the adjustment, if any (not
inconsistent with the standards established in this Section 8), of the
Conversion Price (including, if necessary, any adjustment as to the securities
into which shares of this Series may thereafter be convertible or exchangeable)
which is or would be required to preserve without dilution the rights of the
holders of shares of this Series. The Board of Directors of the Company shall
make the adjustment recommended forthwith upon the receipt of such opinion or
the taking of any such action contemplated, as the case may be; provided,
however, that no such adjustment of the Conversion Price shall be made which in
the opinion of the investment banking firm or firm of accountants giving the
aforesaid opinion would result in an increase of the Conversion Price to more
than the Conversion Price then in effect.
(c) Upon any adjustment of the Conversion Price pursuant to this Section
8, then the Threshold Price shall be adjusted, as of the date of such adjustment
of the Conversion Price, to that price determined by multiplying the Threshold
Price in effect immediately prior to such adjustment of the Conversion Price by
a fraction (i) the numerator of which shall be the Conversion Price in effect
immediately after such adjustment of the Conversion Price, and (ii) the
denominator of which shall be the Conversion Price in effect immediately prior
to such adjustment.
Section 9. Fractional Shares; Transfer Taxes; HSR Act.
(a) The Company shall not be required to issue stock certificates
representing fractions of shares of Common Stock, but may, if otherwise
permitted, make a cash payment in respect of any final fraction of a share based
on the Per Share Market Value at such time. If the Company elects not, or is
unable, to make such a cash payment, the holder of a share of this Series shall
be entitled to receive, in lieu of the final fraction of a share, one whole
share of Common Stock.
(b) The issuance of certificates for shares of Common Stock on conversion
of this Series shall be made without charge to the holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided, that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate in a name other than that
of the holder of the shares of this Series converted and the Company shall not
be required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
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(c) The exercise by a holder of shares of this Series of the conversion
rights granted in Section 6 and the exercise by the Company of the exchange
rights as set forth in Section 7 are subject in all respects to and conditioned
upon compliance by the parties with the HSR Act, and rules and regulations
promulgated pursuant thereto, to the extent that said act, rules and regulations
are applicable to such exercise. The Company and such holder agree to make such
filings with and provide such information to the Federal Trade Commission and
the Department of Justice with respect to such exercise as are required in
connection with the HSR Act in a timely manner and to join each others request
for early termination. The Company and such holder will use such reasonable
efforts to obtain all governmental approval required to permit such exercise and
to cause early termination of the waiting period under the HSR Act.
Section 10. Definitions. For the purposes hereof, the following terms
shall have the following respective meanings:
"Accrual Date" means, with respect to each share of this Series issued
before January 31, 2000, October 1, 1999, and, with respect to other shares
of this Series, the date of original issue of such Shares.
"Arrearage Shares" has the meaning given such term in Section 2(b).
"Common Stock" means shares now or hereafter authorized of the class
of Common Stock, $.10 par value, of the Company presently authorized and
stock of any other class into which such shares may hereafter have been
reclassified or changed.
"Conversion Price" has the meaning given such term in Section 8(a).
"Deemed Arrearage Value" of a share of this Series means (i) the cash
dividend accrued at the Dividend Rate on such share during the partial
Dividend Period ending on the date of conversion, the date fixed for
redemption, the exchange date or the date of payment upon liquidation, as
the case may be, and (ii) if one or more dividends has accrued and has not
been timely paid on such share, an amount in cash equal to $500 multiplied
by the number of whole and fractional shares of this Series that would have
been issued as dividends on such share had all such accrued and unpaid
dividends been timely paid in shares of this Series, together with the
aggregate amount of cash dividends that would have accrued on such dividend
shares to the date of conversion, the date fixed for redemption, the
exchange date or the date of payment upon liquidation, as the case may be.
"Dividend Period" has the meaning given such term in Section 2(a).
"Dividend Rate" means 9.5% per annum.
"Governmental Authority" shall mean (i) the United States of America
or any state
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within the United States of America and (ii) any court or any governmental
department, commission, board, bureau, agency or other instrumentality of
the United States of America or of any state within the United States of
America.
"Junior Stock" means the Common Stock of the Company and any other
stock of the Company over which shares of this Series has a preference as
to distribution of assets.
"Parity Stock" means any stock of the Company ranking as to
distribution of assets on a parity with this Series.
"Per Share Market Value" means on any particular date (a) the last
sale price per share of the Common Stock on such date on the principal
stock exchange on which the Common Stock has been listed or, if there is no
such price on such date, then the last price on such exchange on the date
nearest preceding such date, or (b) if the Common Stock is not listed on
any stock exchange, the final bid price for a share of Common Stock in the
over-the-counter market, as reported by the Nasdaq National Market at the
close of business on such date, or the last sales price if such price is
reported and final bid prices are not available, or (c) if the Common Stock
is not quoted on the Nasdaq National Market, the final bid price for a
share of Common Stock in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or
agency succeeding to its functions of reporting prices), or (d) if the
Common Stock is no longer publicly traded, as determined by a nationally
recognized or major regional investment banking firm or firm of independent
certified public accountants of recognized standing (which may be the firm
that regularly examines the financial statements of the Company) selected
in good faith by the Board of Directors of the Company, provided, that none
of the transactions related to the foregoing shall include purchases by any
"affiliate" (as such term is defined in the General Rules and Regulations
under the Securities Act of 1933) of the Company.
"Person" means a corporation, an association, a partnership, an
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"Preferred Stock" means the Company's Preferred Stock, $1.00 par
value.
"Senior Stock" means any shares or class of the Company that are by
their terms expressly given priority over this Series as to distribution of
assets on any liquidation of the Company.
"Trading Day" means (a) a day on which the Common Stock is traded on
the principal stock exchange on which the Common Stock has been listed, or
(b) if the Common Stock is not listed on any stock exchange, a day on which
the Common Stock is quoted in the over-the-counter market, as reported by
the Nasdaq Stock Market, or (c) if the Common
15
<PAGE>
Stock is not quoted on the Nasdaq Stock Market, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency
succeeding to its functions of reporting prices).
"Threshold Price" of a share of Common Stock shall initially be
$21.60. The Threshold Price is subject to adjustment pursuant to Section
8.
16
<PAGE>
IN WITNESS WHEREOF, said Plains Resources Inc. has caused this Certificate
to be signed by a duly authorized officer, this 14/th/ day of December, 1999.
Plains Resources, Inc.
By: /s/ Phillip D. Kramer
----------------------------------
Name: Phillip D. Kramer
Title: Executive Vice President &
Chief Financial Officer
ATTEST:
By: /s/ Michael R. Patterson
---------------------------------
Name: Michael R. Patterson
Title: Secretary
17
<PAGE>
EXHIBIT 4(g)
STOCK PURCHASE AGREEMENT
Dated as of December 15, 1999
By and Among
Plains Resources Inc.
and
The Purchasers Named Herein
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Page
<S> <C>
1 - DEFINITIONS.......................................................... 1
1.1 Certain Defined Terms......................................... 1
1.2 Accounting Terms.............................................. 3
1.3 References.................................................... 4
1.4 Singular and Plural........................................... 4
1.5 Certain Terms................................................. 4
2 - PURCHASE AND SALE OF THE SHARES...................................... 4
2.1 Sale and Purchase............................................. 4
2.2 Certificate of Designation.................................... 4
3 - PURCHASE PRICE AND CLOSING........................................... 4
3.1 Purchase Price................................................ 4
3.2 Closing....................................................... 4
3.3 Deliveries of the Company..................................... 4
3.4 Deliveries of Purchasers...................................... 5
4 - REGISTRATION RIGHTS.................................................. 5
4.1 Registration.................................................. 5
4.2 Registration Procedures....................................... 6
4.3 Registration Expenses......................................... 9
4.4 Indemnification; Contribution................................. 9
4.5 Participation in Underwritten Registrations................... 12
4.6 Rule 144...................................................... 12
5 - REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................ 13
5.1 Organization.................................................. 13
5.2 Authority..................................................... 13
5.3 Authorization................................................. 13
5.4 Binding Agreement............................................. 13
5.5 No Conflicts.................................................. 13
5.6 Capitalization................................................ 14
5.7 Valid Issuance................................................ 14
5.8 Absence of Bankruptcy Proceedings............................. 14
5.9 Brokers....................................................... 14
5.10 Financial Statements.......................................... 15
5.11 No Material Adverse Change.................................... 15
5.12 Commission Documents.......................................... 15
5.13 Properties.................................................... 15
5.14 Registration Rights........................................... 16
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
5.15 Offering.................................................................. 16
5.16 No Defaults............................................................... 16
5.17 Litigation................................................................ 16
5.18 Compliance with Laws...................................................... 16
5.19 Taxes..................................................................... 16
5.20 ERISA..................................................................... 17
5.21 Compliance with Environmental Laws........................................ 17
6 - REPRESENTATIONS AND WARRANTIES OF PURCHASERS...................................... 17
6.1 General................................................................... 17
6.2 Accredited Investor, Etc.................................................. 18
7 - COVENANTS OF THE COMPANY.......................................................... 19
7.1 Operation of the Business of the Company Pending Closing.................. 19
7.2 Taking of Necessary Action................................................ 19
7.3 Restrictions on Certain Actions........................................... 19
7.4 Use of Proceeds........................................................... 20
7.5 Reservation of Common Stock............................................... 20
7.6 Board Representative...................................................... 20
7.7 Agreement to Seek Amendment of Credit Agreement........................... 20
8 - CLOSING CONDITIONS................................................................ 21
8.1 The Company's Closing Conditions.......................................... 21
8.2 Purchasers' Closing Conditions............................................ 21
9 - TERMINATION....................................................................... 22
9.1 Grounds for Termination................................................... 22
9.2 Effect of Termination..................................................... 22
10 - MISCELLANEOUS.................................................................... 23
10.1 Survival of Representations and Warranties................................ 23
10.2 Indemnification........................................................... 23
10.3 Antitrust Laws............................................................ 23
10.4 Notices................................................................... 23
10.5 Incidental Expenses....................................................... 24
10.6 Entire Agreement.......................................................... 24
10.7 Governing Law............................................................. 24
10.8 Counterparts.............................................................. 24
10.9 Waiver.................................................................... 24
10.10 Binding Effect; Assignment................................................ 24
10.11 Brokers................................................................... 24
10.12 Construction.............................................................. 25
</TABLE>
(ii)
<PAGE>
Schedule A Purchased Shares
Exhibit A Certificate of Designation - Series F
Exhibit B Opinion of Fulbright & Jaworski L.L.P.
Exhibit C Opinion of Michael R. Patterson
Exhibit D Certificate of Designation - Series G
(iii)
<PAGE>
STOCK PURCHASE AGREEMENT
THIS AGREEMENT (this "Agreement"), dated as of the 15th day of December,
1999, is by and among Plains Resources Inc., a Delaware corporation (the
"Company"), and the Purchasers named on Schedule A hereto (collectively,
"Purchasers").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company desires to issue and sell to each Purchaser, and each
Purchaser has made a commitment to purchase from the Company, in the amount
indicated opposite such Purchaser's name on Schedule A hereto, shares of the
Company's authorized but unissued Series F Cumulative Convertible Preferred
Stock, par value $1.00 per share (the "Preferred Stock"), which shares shall
have such rights, preferences, privileges and restrictions as set forth in the
Certificate of Designation, Preferences and Rights of Series F Cumulative
Convertible Preferred Stock of Plains Resources Inc. attached hereto as Exhibit
A (the "Certificate of Designation") on the terms and subject to the conditions
set forth herein; and
WHEREAS, in connection with the sale of the Preferred Stock hereunder, the
Company will make an irrevocable offer to exchange (the "Exchange Offer") the
Company's Series E Cumulative Convertible Preferred Stock ("Series E Shares")
for a new series of preferred stock designated as the Series G Cumulative
Convertible Preferred Stock (the "Series G Shares") pursuant to the Certificate
of Designation, Preferences and Rights of Series G Cumulative Convertible
Preferred Stock attached hereto as Exhibit D (the "Series G Certificate of
Designation").
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties set forth in this Agreement, the parties to this
Agreement hereby agree as follows:
ARTICLE 1 - DEFINITIONS
1.1 Certain Defined Terms. The following terms, as used in this
Agreement, shall have the following meanings:
"Closing" has the meaning given such term in Section 3.2.
"Closing Date" has the meaning given such term in Section 3.2.
"Code" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations thereunder as in effect on the date hereof.
"Commission Documents" has the meaning given such term in Section
5.12.
"Common Stock" means the common stock, $.10 par value, of the Company.
<PAGE>
"Conversion Shares" means the shares of Common Stock issuable upon the
conversion of Preferred Stock into, or exchange of Preferred Stock for,
Common Stock.
"Environmental Laws" has the meaning given such term in Section 5.21.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, or any
successor statute, as at the time in effect. Reference to a particular
section of such Act shall include a reference to the comparable section, if
any, of such successor statute.
"Financial Statements" means the financial statements of the Company
and its consolidated subsidiaries, including the notes thereto, as of and
for the year ended December 31, 1998 and as of and for the nine months
ended September 30, 1999.
"GAAP" means generally accepted accounting principles, as set forth in
the opinions of the Accounting Principles Board of the American Institute
of Certified Public Accountants and statements of the Financial Accounting
Standards Board or in such opinions and statements of such other entities
as shall be approved by a significant segment of the accounting profession
in the United States of America.
"Governmental Authority" means (i) the United States of America or any
state within the United States of America and (ii) any court or any
governmental department, commission, board, bureau, agency or other
instrumentality of the United States of America or of any state within the
United States of America.
"Holder" means the Purchasers and any other holder from time to time
of Preferred Stock or Registrable Securities (other than the Company or any
Subsidiary).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations thereunder.
"Inspectors" has the meaning given such term in Section 4.2(h).
"Law" means any applicable statute, law, ordinance, regulation, rule,
ruling, order, restriction, requirement, writ, injunction, decree or other
official act of or by any Governmental Authority.
"Material Adverse Effect" with respect to a Person means a material
and adverse effect on the financial condition, results of operations,
business or properties of such Person and its consolidated subsidiaries,
taken as a whole.
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<PAGE>
"Person" means an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization, a limited liability
company, a government or any department or agency of a government.
"Pollutants" has the meaning given such term in Section 5.21.
"Purchase Price" has the meaning given such term in Section 3.1.
"Records" has the meaning given such term in Section 4.2(h).
"Registrable Securities" means Conversion Shares until such time as
such shares are sold in a public distribution pursuant to a Registration
Statement under the Securities Act or pursuant to transactions exempt from
registration under the Securities Act where Securities sold in such
transaction may be resold without subsequent registration under the
Securities Act.
"Registration Expenses" has the meaning given such term in Section
4.3.
"Registration Statement" has the meaning given such term in Section
4.2(a).
"Releases" has the meaning given such term in Section 5.21.
"SEC" means the United States Securities and Exchange Commission or
any successor agency.
"Securities Act" means the Securities Act of 1933, or any successor
statute, as at the time in effect. Reference to a particular section of
such Act shall include a reference to the comparable section, if any, of
such successor statute.
"Selling Holder" means a holder of Registrable Securities who is
selling such Registrable Securities pursuant to a Registration Statement.
"Shares" has the meaning given such term in Section 2.1.
"Shelf Registration Statement" has the meaning given such term in
Section 4.1(b).
"Subsidiary" means (a) a corporation a majority of whose voting stock
is at the time, directly or indirectly, owned by the Company, by one or
more subsidiaries of the Company or by the Company and one or more
subsidiaries of the Company or (b) any other Person (other than a
corporation) in which the Company, a subsidiary of the Company or the
Company and one or more subsidiaries of the Company, directly or
indirectly, at the date of determination thereof, has (i) at least a
majority ownership or (ii) the power to elect or direct the election of the
directors or other governing body of such Person.
-3-
<PAGE>
1.2 Accounting Terms. For the purposes of this Agreement, all accounting
terms not otherwise defined in this Agreement shall have the meanings assigned
to such terms in accordance with GAAP.
1.3 References. Unless the context otherwise indicates, references in
this Agreement to a particular section, exhibit or schedule are to the
corresponding section of, or the corresponding exhibit or schedule to, this
Agreement.
1.4 Singular and Plural. The definitions contained in Section 1.1 are
equally applicable to both the singular and plural form of the terms defined in
such Section.
1.5 Certain Terms. As used in this Agreement, the term "knowledge" means
actual knowledge, without any requirement for independent investigation or
verification, of any fact, circumstance or condition by the executive officers
(or any of them) of the party involved, and does not include (i) knowledge
imputed to the party involved by reason of knowledge of or notice to any person,
firm or corporation other than its executive officers or (ii) knowledge deemed
to have been constructively given by reason of any filing, registration or
recording of any document or instrument in any public record or with any
Governmental Authority. As used in this Agreement, the term "day" means any
calendar day. As used in this Agreement, all references to "dollars" or the
symbol "$" shall refer to lawful currency of the United States of America.
ARTICLE 2 - PURCHASE AND SALE OF THE SHARES
2.1 Sale and Purchase. Subject to the terms and conditions set forth in
this Agreement, each Purchaser agrees to purchase, and the Company agrees to
issue and sell to each Purchaser, the number of shares of the Preferred Stock
(the "Shares") set forth opposite such Purchaser's name on Schedule A, free and
clear of all liens, claims, pledges, security interests or other encumbrances.
At the Closing, each Purchaser will pay the portion of the Purchase Price set
forth opposite his or its name in Schedule A.
2.2 Certificate of Designation. The Preferred Stock shall have the rights
and preferences set forth in the Certificate of Designation.
ARTICLE 3 - PURCHASE PRICE AND CLOSING
3.1 Purchase Price. The aggregate purchase price that shall be payable at
the Closing by Purchasers to the Company for the Shares shall be $47,000,000
(the "Purchase Price"). At the Closing, each Purchaser shall pay in immediately
available funds to the account designated by the Company the portion of the
Purchase Price set forth opposite his or its name on Schedule A.
3.2 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall be held on the date and at a location mutually
agreed upon by the Company and the Purchasers, or at such other date or place as
the parties may agree in writing (the "Closing Date").
-4-
<PAGE>
3.3 Deliveries of the Company. At Closing, the Company shall deliver to
Purchasers certificates representing the Shares, each such certificate to be
executed by the Company's President and Secretary and to be appropriately
registered in the name of each Purchaser.
3.4 Deliveries of Purchasers. At Closing, Purchasers shall deliver to the
Company the Purchase Price in immediately available funds to the Company as
provided in Section 3.1.
ARTICLE 4 - REGISTRATION RIGHTS
4.1 Registration.
(a) The Company shall, as promptly as reasonably possible, but, in any
event, not later than March 31, 2000, prepare and file with the SEC a shelf
registration statement (the "Shelf Registration Statement") on an
appropriate form pursuant to Rule 415 (or any similar provision that may be
adopted by the SEC) under the Securities Act with respect to the
Registrable Securities.
(b) The Company agrees to use its best efforts to have the Shelf
Registration Statement declared effective as soon as practicable after the
filing thereof and to keep the Shelf Registration Statement continuously
effective until the earlier of (1) the fourth anniversary of the Closing
Date; or (2) such time as all of the Registrable Securities can be resold
pursuant to Rule 144(k) under the Securities Act (or any successor
provision). Further, the Company shall cause the Registrable Securities to
be listed on the American Stock Exchange as soon as practicable after the
Closing Date, when and as issued, and shall maintain the listing of such
Registrable Securities after their issuance; provided that the Company
shall be deemed not to have used its best efforts to keep the Shelf
Registration Statement effective during the requisite period if it
voluntarily takes any action that would reasonably be expected to result in
Holders of Registrable Securities covered thereby not being able to offer
and sell such Registrable Securities during that period using the
prospectus included in the Shelf Registration Statement, unless such action
is required by applicable law (including, but not limited to, reasonable
periods necessary to prepare appropriate disclosure); and provided,
further, that the foregoing proviso shall not apply to actions taken by the
Company in good faith and for business reasons ("Suspension Event"),
including, without limitation, a merger, consolidation or similar
transaction, the acquisition or divestiture of assets and the offering or
sale of securities, so long as the Company promptly thereafter complies
with the requirements of Section 4.2(f) hereof, if applicable, and so long
as the Company gives prompt notice of the existence of such Suspension
Event to Holders of Registrable Securities. Any such period during which
the Company fails to keep the Shelf Registration Statement effective and
usable for offers and sales of Registrable Securities is referred to as a
"Suspension Period." A Suspension Period shall commence on and include the
date that the Company gives notice that the Shelf Registration Statement is
no longer effective or the prospectus included therein is no longer usable
for offers and sales of Registrable Securities and shall
-5-
<PAGE>
end on the date when each Selling Holder either receives the copies of the
supplemented or amended prospectus contemplated by Section 4.2(f) hereof or
is advised in writing by the Company that use of the prospectus may be
resumed. If one or more Suspension Periods occur, the date referenced in
(1) above shall be extended by the number of days in each such Suspension
Period.
(c) Notwithstanding any other provisions of this Agreement to the
contrary, the Company shall cause the Shelf Registration Statement and the
related prospectus and any amendment or supplement thereto, as of the
effective date of the Shelf Registration Statement, amendment or
supplement, as the case may be, (i) to comply in all material respects with
the applicable requirements of the Securities Act and the rules and
regulations of the SEC and (ii) not to contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading other
than statements or omissions made in reliance upon and in conformity with
information furnished to the Company in writing by the Holders of
Registrable Securities expressly for use in such Shelf Registration
Statement and the related prospectus or any amendment or supplement
thereto.
4.2 Registration Procedures. In connection with any registration pursuant
to Section 4.1 hereof, the following provisions shall apply:
(a) The Company shall (i) prior to filing the Shelf Registration
Statement or any other registration statement registering Registrable
Securities (in either case, "Registration Statement") or prospectus or any
amendments or supplements thereto, furnish to one counsel selected by the
Holders of Registrable Securities of a majority in aggregate principal
amount or number of shares, as the case may be, of the Registrable
Securities covered by such Registration Statement copies of all such
documents proposed to be filed, which documents will be subject to the
review of such counsel, and (ii) as soon as reasonably possible, furnish to
each Selling Holder, prior to filing a Registration Statement, copies of
such Registration Statement as proposed to be filed, and thereafter furnish
to such Selling Holder such number of copies of such Registration
Statement, each amendment and supplement thereto (in each case including
all exhibits thereto), the prospectus included in such Registration
Statement (including each preliminary prospectus) and such other documents
as such Selling Holder may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such Selling Holder.
(b) The Company shall notify the Selling Holders in writing:
(i) when the Registration Statement and any amendment thereto
has been filed with the SEC and when the Registration
Statement or any post-effective amendment thereto has become
effective;
-6-
<PAGE>
(ii) of any request by the SEC for amendments or supplements to
the Registration Statement or the prospectus included
therein or for additional information;
(iii) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose; and
(iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such
purpose.
(c) The Company shall use its best efforts to register or qualify
such Registrable Securities under such other securities or blue sky laws of
such jurisdictions as any Selling Holder reasonably requests and do any and
all other acts and things which may be reasonably necessary or advisable to
enable such Selling Holder to consummate the disposition in such
jurisdictions of the Registrable Securities owned by such Selling Holder;
provided that the Company will not be required to (i) qualify generally to
do business in any jurisdiction where it would not otherwise be required to
qualify but for this paragraph (c), (ii) subject itself to taxation in any
such jurisdiction or (iii) consent to general service of process in any
such jurisdiction.
(d) The Company shall use reasonable efforts to prevent the issuance
or obtain the withdrawal of any order suspending the effectiveness of the
Registration Statement at the earliest possible time.
(e) The Company shall use its best efforts to cause such Registrable
Securities to be registered with or approved by such other governmental
agencies or authorities as may be necessary by virtue of the business and
operations of the Company to enable the Selling Holder or Selling Holders
thereof to consummate the disposition of such Registrable Securities.
(f) The Company shall notify each Selling Holder of such Registrable
Securities at any time when a prospectus relating thereto is required to be
delivered under the Securities Act of the occurrence of an event requiring
the preparation of a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Registrable Securities, such
prospectus will not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading and promptly file with the SEC
and make available to each Selling Holder any such supplement or amendment,
provided that no such filing shall be required during the existence of a
Suspension Event.
-7-
<PAGE>
(g) If requested in writing by the Holders beneficially owning at
least 25% collectively of the Registrable Securities, the Company shall
enter into customary agreements (including an underwriting agreement in
customary form with underwriters selected by such Holders and reasonably
approved by the Company), shall take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such
Registrable Securities, and shall notify each other Holder of Registrable
Securities of such underwritten offerings and offer such Holders the
opportunity to have their Registrable Securities included in such
underwritten offering; provided, however, that the Company shall not be
required to participate in more than two underwritten offerings under the
Shelf Registration Statement pursuant to this Section 4.2(g).
(h) The Company shall make available for inspection by any Selling
Holder of such Registrable Securities, any underwriter participating in any
disposition pursuant to such Registration Statement, and any attorney,
accountant or other professional retained by any such Selling Holder or
underwriter (collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company and
its Subsidiaries (collectively, the "Records") as shall be reasonably
necessary to enable them to exercise their due diligence responsibility,
and cause the Company's and its subsidiaries' officers, directors and
employees to supply all information reasonably requested by any such
Inspector in connection with such Registration Statement. Each Selling
Holder of such Registrable Securities agrees that information obtained by
it as a result of such inspections which is deemed confidential shall not
be used by it as the basis for any market transactions in securities of the
Company unless and until such is made generally available to the public by,
on behalf of or with the consent of, the Company. Notwithstanding the
previous sentence, the parties agree that the Company shall have no
obligation to make generally available to the public any confidential
information, regardless of whether the Company provides such data to the
Selling Holders or the Inspectors. Except as required by law or judicial
process, no Selling Holder shall disclose any such confidential information
to any Person other than an Inspector, and each Selling Holder will cause
any Inspector retained by it to maintain the confidentiality of such
information. Each Selling Holder of such Registrable Securities further
agrees that it will, upon learning that disclosure of such Records is
sought in a court of competent jurisdiction, give notice to the Company and
allow the Company, at the Company's expense, to undertake appropriate
action to prevent disclosure of the Records deemed confidential.
(i) In the event of a sale pursuant to an underwritten offering, the
Company shall use its best efforts to obtain (i) a comfort letter or
comfort letters from the Company's independent public accountants in
customary form and covering such matters of the type customarily covered by
comfort letters as the Selling Holders of a majority of Registrable
Securities being sold or the managing underwriter reasonably requests and
(ii) an opinion of counsel to the Company covering such matters as are
customarily covered by such opinions, which opinion may be that of the
Company's General Counsel as to matters upon which the Company's
underwriters have relied upon the opinions of such
-8-
<PAGE>
General Counsel in connection with the Company's prior underwritten
offerings of its securities.
(j) The Company will use its best efforts to comply with all the rules
and regulations of the SEC to the extent and so long as they are applicable
to the Registration Statement and will make generally available to its
security holders after the effective date of the applicable Registration
Statement an earnings statement satisfying the provisions of Section 11(a)
of the Securities Act.
The Company may require each Selling Holder of Registrable Securities
as to which any registration is being effected to furnish to the Company such
information regarding the distribution of such Registrable Securities as the
Company may from time to time reasonably request in writing and such other
information as may be legally required in connection with such registration.
Each Selling Holder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 4.2(f)
hereof, such Selling Holder will forthwith discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until such Selling Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 4.2(f) hereof, and,
if so directed by the Company, such Selling Holder will deliver to the Company
(at the Company's expense) all copies, other than permanent file copies then in
such Selling Holder's possession, of the prospectus covering such Registrable
Securities current at the time of receipt of such notice.
4.3 Registration Expenses. All expenses incident to the Company's
performance of or compliance with this Article 4, including, without limitation,
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws (including reasonable fees and disbursements of
counsel in connection with blue sky qualifications of the Registrable
Securities), printing expenses, messenger and delivery expenses, internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the fees and
expenses incurred in connection with the listing of the securities to be
registered on each securities exchange on which similar securities issued by the
Company are then listed, and fees and disbursements of counsel for the Company
and its independent certified public accountants (including the expenses of any
special audit or comfort letters required by or incident to such performance),
securities acts liability insurance (if the Company elects to obtain such
insurance), the reasonable fees and expenses of any special experts retained by
the Company in connection with such registration, fees and expenses of other
persons retained by the Company, and reasonable fees and expenses of one counsel
for the Holders (who shall be reasonably acceptable to the Company) incurred in
connection with each registration hereunder (but not including any underwriting
discounts or commissions attributable to the sale of Registrable Securities)
(all such expenses being herein called "Registration Expenses"), will be borne
by the Company.
-9-
<PAGE>
4.4 Indemnification; Contribution.
(a) Indemnification by the Company. The Company agrees to indemnify
and hold harmless each Selling Holder of Registrable Securities, its
officers, directors, partners and agents and each person, if any, who
controls such Selling Holder within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any and
all losses, claims, damages (whether in contract, tort or otherwise),
liabilities and expenses (including reasonable costs of investigation)
whatsoever (as incurred or suffered) arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus relating to the Registrable Securities
or in any amendment or supplement thereto or in any preliminary prospectus,
or arising out of or based upon any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses,
claims, damages, liabilities or expenses arise out of, or are based upon,
any such untrue statement or omission or allegation thereof based upon
information furnished in writing to the Company by such Selling Holder or on
such Selling Holder's behalf expressly for use therein. The Company also
agrees to indemnify any underwriters of the Registrable Securities, their
officers, partners and directors and each person who controls such
underwriters on substantially the same basis as that of the indemnification
of the Selling Holders provided in this Section 4.4(a) or such other
indemnification customarily obtained by underwriters at the time of
offering.
(b) Conduct of Indemnification Proceedings. If any action or
proceeding (including any governmental investigation) shall be brought or
asserted against any Selling Holder (or its officers, directors, partners
or agents) or any person controlling any such Selling Holder in respect of
which indemnity may be sought from the Company, the Company shall assume
the defense thereof, including the employment of counsel reasonably
satisfactory to such Selling Holder, and shall assume the payment of all
expenses. Such Selling Holder or any controlling person of such Selling
Holder shall have the right to employ separate counsel in any such action
and to participate in the defense thereof, but the fees and expenses of
such counsel shall be at the expense of such Selling Holder or such
controlling person unless (i) the Company has agreed to pay such fees and
expenses or (ii) the named parties to any such action or proceeding
(including any impleaded parties) include both such Selling Holder or such
controlling person and the Company, and such Selling Holder or such
controlling person shall have been advised by counsel that there may be one
or more legal defenses available to such Selling Holder or such controlling
person which conflict with those available to the Company (in which case,
if such Selling Holder or such controlling person notifies the Company in
writing that it elects to employ separate counsel at the expense of the
Company, the Company shall not have the right to assume the defense of such
action or proceeding on behalf of such Selling Holder or such controlling
person, it being understood, however, that the Company shall not, in
connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances,
be liable for the fees and expenses of more than one
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separate firm of attorneys (together with appropriate local counsel) at any
time for such Selling Holder and such controlling persons, which firm shall
be designated in writing by such Selling Holder). The Company shall not be
liable for any settlement of any such action or proceeding effected without
the Company's written consent, but if settled with its written consent, or
if there be a final judgment for the plaintiff in any such action or
proceeding, the Company agrees to indemnify and hold harmless such Selling
Holder and such controlling person from and against any loss or liability
(to the extent stated above) by reason of such settlement or judgment.
(c) Indemnification by Selling Holders. Each Selling Holder agrees,
severally but not jointly, to indemnify and hold harmless the Company, its
directors and officers and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20
of the Exchange Act, as amended, to the same extent as the foregoing
indemnity from the Company to such Selling Holder, but only with respect to
information furnished in writing by such Selling Holder or on such Selling
Holder's behalf expressly for use in any registration statement or
prospectus relating to the Registrable Securities, or any amendment or
supplement thereto, or any preliminary prospectus. In case any action or
proceeding shall be brought against the Company or its directors or
officers, or any such controlling person, in respect of which indemnity may
be sought against such Selling Holder, such Selling Holder shall have the
rights and duties given to the Company, and the Company or its directors or
officers or such controlling person shall have the rights and duties given
to such Selling Holder, by the preceding paragraph. Each Selling Holder
also agrees to indemnify and hold harmless underwriters of the Registrable
Securities, their officers and directors and each person who controls such
underwriters on substantially the same basis as that of the indemnification
of the Company provided in this Section 4.4(c).
(d) Contribution. If the indemnification provided for in this Section
4.4 is unavailable to the Company, the Selling Holders or the underwriters
in respect of any losses, claims, damages, liabilities or judgments
referred to herein, then each such indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages, liabilities and judgments (i) as between the Company and the
Selling Holders on the one hand and the underwriters on the other, in such
proportion as is appropriate to reflect the relative benefits received by
the Company and the Selling Holders on the one hand and the underwriters on
the other from the offering of the Registrable Securities, or if such
allocation is not permitted by applicable law, in such proportion as is
appropriate to reflect not only such relative benefits but also the
relative fault of the Company and the Selling Holders on the one hand and
of the underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations and (ii)
as between the Company on the one hand and each Selling Holder on the
other, in such proportion as is appropriate to reflect the relative fault
of the Company and of each Selling Holder in connection with such
statements or omissions, as well as any other relevant equitable
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considerations. The relative benefits received by the Company and the
Selling Holders on the one hand and the underwriters on the other shall be
deemed to be in the same proportion as the total proceeds from the offering
(net of underwriting discounts and commissions but before deducting
expenses) received by the Company and the Selling Holders bear to the total
underwriting discounts and commissions received by the underwriters, in
each case as set forth in the table on the cover page of the prospectus.
The relative fault of the Company and the Selling Holders on the one hand
and of the underwriters on the other shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company and the Selling Holders or
by the underwriters. The relative fault of the Company on the one hand and
of each Selling Holder on the other shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by such party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and the Selling Holders agree that it would not be just
and equitable if contribution pursuant to this Section 4.4 were determined
by pro rata allocation (even if the underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages, liabilities or judgments referred
to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 4.4(d), no underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Registrable Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which
such underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission, and no
Selling Holder shall be required to contribute any amount in excess of the
amount by which the total price at which the Registrable Securities of such
Selling Holder were offered to the public exceeds the amount of any damages
which such Selling Holder has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
4.5 Participation in Underwritten Registrations. No person may participate
in any underwritten registration hereunder unless such person (a) agrees to sell
such person's securities on the basis provided in any underwriting arrangements
approved by the persons entitled hereunder to approve such arrangements and (b)
completes and executes all questionnaires,
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powers of attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements and this
Agreement.
4.6 Rule 144. The Company covenants that it will file any reports
required to be filed by it under the Securities Act and the Exchange Act, and
that it will take such further action as any holder of Conversion Shares may
reasonably request, all to the extent required from time to time to enable
holders of Conversion Shares to sell Conversion Shares without registration
under the Securities Act within the limitation of the exemptions provided by (a)
Rule 144 under the Securities Act, as such Rule may be amended from time to
time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon
the request of any holder of Conversion Shares, the Company will deliver to such
holder a written statement as to whether it has complied with such requirements.
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to Purchasers, except as set forth
in a disclosure schedule attached to this Agreement, as follows:
5.1 Organization. The Company and each of its Subsidiaries that is a
corporation is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation. Each of the
Company's Subsidiaries that is a limited partnership has been duly formed and is
validly existing as a limited partnership under the laws of the jurisdiction of
its formation. Each of the Company's Subsidiaries that is a limited liability
company has been duly organized and is validly existing as a limited liability
company under the laws of its jurisdiction of organization. The Company and each
of its Subsidiaries is duly qualified or licensed to do business as a foreign
corporation, foreign limited partnership or foreign limited liability company,
and in good standing, in every jurisdiction in which its ownership of property
or the conduct of its business requires such qualification or licensing, except
where the failure to be so qualified or licensed would not have a Material
Adverse Effect upon the Company. Attached hereto as Exhibit A is a true and
complete copy of the Certificate of Designation. True and complete copies of the
Second Restated Certificate of Incorporation and Bylaws of the Company, each as
amended to date, have been provided to Purchasers.
5.2 Authority. The Company has all requisite corporate power and authority
to carry on its business as presently conducted and to enter into this Agreement
and to perform its obligations contemplated hereunder.
5.3 Authorization. The execution, delivery and performance of this
Agreement and the transactions contemplated hereby have been duly and validly
authorized by all requisite corporate action on the part of the Company and its
stockholders.
5.4 Binding Agreement. This Agreement has been duly executed and delivered
by the Company, and this Agreement constitutes a legal, valid and binding
obligation of the Company,
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enforceable against it in accordance with its terms, subject to applicable
bankruptcy and other similar laws of general application with respect to
creditors and subject to principles of equity and public policy that affect
enforceability of agreements generally.
5.5 No Conflicts. Neither the execution or delivery of this Agreement, nor
the consummation of the transactions contemplated hereby, including the Exchange
Offer, will result in a breach or violation of, or constitute a default under,
the certificate of incorporation, bylaws or other governing documents of the
Company or its Subsidiaries, or any agreement, indenture or other instrument to
which any of the Company or its Subsidiaries is a party or by which any of them
is bound or to which any of their properties are subject, nor will the
performance by the Company and its Subsidiaries of any of their obligations
hereunder violate any Law or result in the creation or imposition of any lien,
charge, claim or encumbrance upon any property or assets of the Company or its
Subsidiaries. No permit, consent, approval, authorization or order of any
Governmental Authority or other Person is required in connection with the
consummation by the Company and its Subsidiaries of the transactions
contemplated by this Agreement, except such as have been obtained.
5.6 Capitalization. The authorized capital stock of the Company consists
of 50,000,000 shares of common stock, par value $.10 per share, of which
17,924,050 are issued and outstanding, and 2,000,000 shares of preferred stock,
par value $1.00 per share, of which there are 46,600 shares of Series D
Cumulative Convertible Preferred Stock issued and outstanding and 177,625 shares
of Series E Cumulative Convertible Preferred Stock issued and outstanding. All
of the outstanding shares of capital stock of the Company are duly authorized,
validly issued, fully paid, nonassessable and free of preemptive rights, with no
personal liability attaching to the ownership thereof. The Company has reserved
a total of 3,029,307 shares of Common Stock for issuance pursuant to existing
employee benefit plans, of which 2,821,429 shares are currently issuable upon
exercise. In addition, 251,350 shares of Common Stock are issuable upon exercise
of various outstanding warrants. Except for the foregoing, there are no
outstanding subscriptions, options, warrants, rights, convertible securities or
other agreements or commitments of any character obligating the Company to
purchase, redeem, issue, transfer or deliver any shares of Common Stock,
preferred stock or other equity security.
5.7 Valid Issuance.
(a) The issuance, sale and delivery of the Shares in accordance with
this Agreement and the issuance and delivery of the Series G Shares in the
Exchange Offer, and the making of the Exchange Offer have been duly authorized
by all necessary corporate action on the part of the Company and its
stockholders, and the Shares when so issued, sold and delivered against payment
therefor in accordance with this Agreement and the Series G Shares, when so
issued and delivered in exchange for Series E Shares in accordance with the
terms of the Exchange Offer will be duly and validly issued, fully paid and
nonassessable.
(b) The issuance and delivery of the Conversion Shares and the Common
Stock issuable upon conversion of the Series G Shares have been duly authorized
by all necessary
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corporate action on the part of the Company and its stockholders, and the
Conversion Shares and the Common Stock issuable upon conversion of the Series G
Shares have been duly reserved for issuance and, when issued, will be duly and
validly issued, fully paid and nonassessable.
5.8 Absence of Bankruptcy Proceedings. There are no bankruptcy,
reorganization or arrangement proceedings pending against, being contemplated
by, or to the knowledge of the Company, threatened against, the Company or any
of its Subsidiaries.
5.9 Brokers. No broker or finder has acted for or on behalf of the Company
in connection with the investment in the Shares by the Purchasers, and no broker
or finder is entitled to any brokerage or finder's fee or commission in respect
thereof based in any way on agreements, arrangements or understandings made by
or on behalf of the Company in connection with the investment in the Shares by
the Purchasers.
5.10 Financial Statements. The Financial Statements (i) present fairly the
financial position of the Company and its consolidated Subsidiaries as of
December 31, 1998 and September 30, 1999, (ii) present fairly the results of
operations, cash flows and changes in stockholders' equity of the Company and
its consolidated Subsidiaries for the year ended December 31, 1998 and the nine
months ended September 30, 1999 and (iii) were prepared in accordance with GAAP
consistently followed throughout the periods involved, except as otherwise noted
therein. The Company has no material liabilities, contingent or otherwise, not
reflected in the balance sheet as of December 31, 1998 (or the notes thereto) or
the balance sheet as of September 30, 1999 (or the notes thereto) included in
the Financial Statements, other than any such liabilities incurred in the
ordinary course of business since December 31, 1998.
5.11 No Material Adverse Change. Since December 31, 1998, there has not
been any material adverse change in the financial condition, results of
operations, business or properties of the Company.
5.12 Commission Documents. The Company has filed all registration
statements, proxy statements, reports and other documents required to be filed
by it under the Securities Act or the Exchange Act, and all amendments thereto
(collectively, the "Commission Documents"). Each Commission Document complied as
to form when filed in all material respects with the rules and regulations of
the SEC and did not on the date of filing contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
5.13 Properties.
(a) Each of the Company and its Subsidiaries has good and defensible
title to all of its respective interests in oil and gas leases, free and
clear of any encumbrances, except as described in the Commission Documents,
subject only to liens for taxes or charges of mechanics or materialmen not
yet due and to encumbrances under gas sales contracts, operating
agreements, unitization and pooling agreements and other similar
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agreements as are customarily found in connection with comparable drilling
and producing operations and to title defects and other encumbrances that
are, singularly and in the aggregate, not material in amount and do not
interfere with its use or enjoyment of its oil and gas properties. Each of
the Company and its Subsidiaries has complied in all material respects with
the terms of the oil and gas leases in which it purports to own an
interest, and all of such leases are in full force and effect (except where
the failure so to comply or to be in full force and effect will not have a
Material Adverse Effect upon the Company).
(b) The Company and its Subsidiaries do not own any material
properties or other assets that are not described in the Commission
Documents. Each of the Company and its Subsidiaries has good and
defensible title to all properties and assets described in the Commission
Documents as owned by it, in valid, subsisting and enforceable leases for
the properties described in the Commission Documents as leased by them, in
each case free and clear of all liens, charges, encumbrances or
restrictions, except for such as are described in the Commission Documents
and such as do not have a Material Adverse Effect on the Company.
5.14 Registration Rights. Except for the Registration Rights Agreement
dated February 25, 1991 by and among the Company, The Aetna Casualty and Surety
Company and Aetna Life Insurance Company, there are no contracts, agreements or
understandings between the Company and any person granting such person the right
to require the Company to include such securities in the Shelf Registration
Statement.
5.15 Offering. Subject to the accuracy of the Purchasers' representations
in Article 6 hereof, the offer, sale and issuance of the Shares and the
Conversion Shares as contemplated by this Agreement are exempt from the
registration requirements of the Securities Act and the securities laws of any
state having jurisdiction with respect to the transactions contemplated by this
Agreement, and neither the Company nor anyone acting on its behalf has or will
take any action that would cause the loss of such exemption.
5.16 No Defaults. Neither the Company nor any Subsidiary is (a) in
violation of any provision of its charter or bylaws or other governing
documents, (b) in breach, violation or default, in any material respect, of or
under any material contract, lease, commitment or instrument to which it is a
party or by which it is bound or to which any of its properties or assets are
subject, and no event has occurred which (whether with or without notice, lapse
of time or the happening or occurrence of any other event) would constitute such
a breach, violation or default or (c) in material violation of any Law.
5.17 Litigation. There is no action, suit, proceeding or investigation
pending or, to the knowledge of the Company, threatened against or affecting the
Company or its Subsidiaries or any properties or rights of any of them by or
before any Governmental Authority that (i) relates to or challenges the legality
of this Agreement or the Preferred Stock, (ii) would reasonably be expected to
have a Material Adverse Effect upon the Company (except as disclosed in the
Commission Documents) or (iii) would reasonably be expected to impair the
ability of the Company to perform
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fully on a timely basis any obligations that it has under this Agreement, or any
documents related hereto.
5.18 Compliance with Laws. The Company and its Subsidiaries are in
compliance in all material respects with all laws and regulations in all
jurisdictions in which the Company and its Subsidiaries are presently doing
business and where the failure to effect such compliance would reasonably be
expected to have a Material Adverse Effect upon the Company.
5.19 Taxes. All tax returns required to be filed by the Company and its
Subsidiaries in any jurisdiction have been so filed, and all taxes, assessments,
fees and other charges shown thereon to be due and payable have been paid, other
than those being contested in good faith. The Company does not know of any
actual or proposed material additional tax assessments for any fiscal period
against it or any of its Subsidiaries. None of the Company's or its
Subsidiaries' tax returns is under audit, and no waivers of the statute of
limitations or extensions of time with respect to any tax returns have been
granted to the Company or any of its Subsidiaries, except such audits, waivers
or extensions as would not reasonably be expected to have a Material Adverse
Effect upon the Company.
5.20 ERISA. Neither the execution and delivery of this Agreement nor the
sale of the Shares to be purchased by the Purchasers is a prohibited transaction
(within the meaning of Section 406 of ERISA or Section 4975 of the Code) on the
part of the Company or any of its Subsidiaries that is not exempt by statute,
regulation or class exemption. The Company is in compliance in all material
respects with all presently applicable provisions of ERISA; no "reportable
event" (as defined in ERISA) has occurred with respect to any "pension plan" (as
defined in ERISA) for which the Company would have any material liability; the
Company has not incurred and does not expect to incur liability under (i) Title
IV of ERISA with respect to termination of, or withdrawal from, any "pension
plan" or (ii) Section 412 (whether or not waived) or 4971 of the Code; and each
"pension plan" for which the Company would have any liability that is intended
to be qualified under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or by failure to act, that
would cause the loss of such qualification.
5.21 Compliance with Environmental Laws. The business and properties of the
Company and its Subsidiaries have been operated in compliance with all
applicable federal, state or local laws, rules, regulations or orders
(collectively, "Environmental Laws") relating to pollution or protection of the
environment, including, without limitation, any law, rule, regulation or order
relating to emissions, discharges, releases or threatened releases ("Releases")
of chemicals, pollutants, contaminants, wastes, petroleum or petroleum products,
toxic substances or hazardous substances ("Pollutants") for which noncompliance
would have a Material Adverse Effect upon the Company. Neither the Company nor
any Subsidiary has received any written communication, whether from a
Governmental Authority, citizens' group, landowner, employee or otherwise, nor,
to the knowledge of the Company, has the Company or any Subsidiary received any
oral communication from a Governmental Authority, alleging that (i) the Company
or any such Subsidiary is not in compliance with any Environmental Law
applicable to it and its business
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and properties, or (ii) any employee or third party has suffered bodily injury
or property damage as a result of one or more Releases of Pollutants arising out
of or resulting from the operations of the Company, its Subsidiaries, or prior
owners and operators of their business or property, which allegation, if true,
would have a Material Adverse Effect upon the Company. Except as disclosed in
the Commission Documents, neither the Company nor any Subsidiary has any
material obligation to remediate, repair or replace any property, whether real
or personal, owned by the Company, its Subsidiaries or any third party, as a
result of one or more Releases of Pollutants arising out of or resulting from
the operations of the Company, its Subsidiaries, or prior owners and operators
of their business or properties.
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES
OF PURCHASERS
6.1 General. Each Purchaser severally represents and warrants with respect
to itself to the Company as of the date hereof as follows:
(a) Organization. Each Purchaser that is a corporation, limited liability
company or limited partnership is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization.
(b) Authority. Each Purchaser that is a corporation, a limited partnership
or a limited liability company has all requisite power and authority to enter
into this Agreement and the other documents and agreements contemplated hereby,
to purchase the Shares on the terms described in this Agreement, and to perform
its other obligations contemplated by this Agreement.
(c) Authorization. The execution, delivery and performance of this
Agreement and the transactions contemplated hereunder have been duly and validly
authorized by all requisite corporate, partnership or limited liability company
action on the part of each Purchaser that is a corporation, a limited
partnership or a limited liability company.
(d) Binding Agreement. This Agreement has been duly executed and delivered
by each Purchaser and constitutes a legal, valid and binding obligation of such
Purchaser enforceable against such Purchaser in accordance with its terms,
subject to bankruptcy and other similar laws of general application with respect
to creditors and subject to principles of equity and public policy that affect
enforceability of agreements generally.
(e) No Conflicts. Neither the execution nor delivery of this Agreement nor
the consummation of the transactions contemplated hereby will result in a breach
or violation of, or constitute a default under, the governing documents of any
Purchaser that is a corporation, a limited partnership or a limited liability
company, or any material agreement, indenture or other instrument to which the
Purchasers are a party or by which any of them are bound or to which any of
their properties are subject, nor will the performance by the Purchasers of
their obligations hereunder violate any Law or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property or assets
of the Purchasers. No permit, consent, approval,
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authorization or order of any Governmental Authority or other Person is required
in connection with the consummation by the Purchasers of the transactions
contemplated by this Agreement, except such as have been obtained and as
otherwise contemplated by this Agreement.
(f) Absence of Bankruptcy Proceedings. There are no bankruptcy,
reorganization or arrangement proceedings pending against, being contemplated
by, or to any Purchaser's knowledge, threatened against, any Purchaser.
(g) No Brokers. No broker or finder has acted for or on behalf of
Purchasers in connection with the investment in the Shares by the Purchasers,
and no broker or finder is entitled to any brokerage or finder's fee or
commission in respect thereof based in any way on agreements, arrangements or
understandings made by or on behalf of Purchasers in connection with the
investment in the Shares by the Purchasers.
6.2 Accredited Investor, Etc. Each Purchaser severally represents and
warrants that it is an "accredited investor" within the meaning of Rule 501
under the Securities Act. Each Purchaser severally represents and warrants that
it is acquiring the Shares for its own account and not for distribution or
resale, with no present intention of distributing or reselling said Shares or
Conversion Shares or any part thereof; provided that the disposition of such
Purchaser's property shall at all times remain within its control. Each
Purchaser severally agrees: (a) that such Purchaser will not sell, assign,
pledge, give, transfer or otherwise dispose of the Shares or any interest
therein, or make any offer or attempt to do any of the foregoing, except
pursuant to a registration of the Shares under the Securities Act and all
applicable state securities laws or in a transaction which, in the written
opinion of counsel for such Purchaser satisfactory to the Company (which
requirement may be waived by the Company upon advice of counsel), is exempt from
the registration provisions of the Securities Act and all applicable state
securities laws; (b) that the certificate(s) for the Shares will bear a legend
making reference to the foregoing restrictions for so long as such legend may be
required pursuant to applicable federal securities laws; and (c) that the
Company and any transfer agent for the Shares shall not be required to give
effect to any purported transfer of any of the Shares except upon compliance
with the foregoing restrictions.
ARTICLE 7 - COVENANTS OF THE COMPANY
7.1 Operation of the Business of the Company Pending Closing. From and
after the date of execution of this Agreement and until the agreements to
purchase and sell Shares are consummated or lapse pursuant hereto, except as
otherwise consented to by Purchasers in writing and subject to the constraints
of applicable operating and other agreements, the Company will continue to
operate its business in the ordinary course of business, in accordance, in all
material respects, with all applicable Laws.
7.2 Taking of Necessary Action. Subject to the terms and conditions of
this Agreement and to applicable law, each of the parties to this Agreement
shall use all reasonable efforts
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promptly to take or cause to be taken all action and promptly to do or cause to
be done all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement.
7.3 Restrictions on Certain Actions. From and after the date hereof to
the day immediately following the issuance of the Shares hereunder, the Company
will not:
(a) Pay or declare any dividend payable in shares of its Common Stock
or take any other action which, if taken after the date of such issuance,
would result under the terms of the Certificate of Designation in a change
in the number of Conversion Shares into which the Shares may be converted;
or
(b) Make any amendment to the Second Restated Certificate of
Incorporation of the Company, or file any resolution of the board of
directors with the Delaware Secretary of State containing any provisions,
which would impair the rights of the Holders.
7.4 Use of Proceeds. The Company shall use the proceeds from the sale of
the Shares to make a loan to the general partner of Plains Marketing, L.P.,
which will in turn loan the proceeds to Plains Marketing, L.P.
7.5 Reservation of Common Stock. The Company shall at all times provide
for, reserve and keep available out of its authorized but unissued Common Stock,
solely for the purpose of issuance upon conversion or exchange of the Shares,
such number of shares of Common Stock as shall then be issuable upon conversion
or exchange of all issued and outstanding shares of Shares.
7.6 Board Representative. At any time following the Closing and for as
long as the Preferred Stock remains outstanding, the Company agrees that it will
take all reasonable steps within 30 days after so requested by EnCap, to cause
its board of directors to be expanded by one and to appoint a nominee (who shall
be an employee of EnCap) designated by EnCap thereto. Thereafter, EnCap shall
have the right annually to give notice to the Company of the director (who shall
be an employee of EnCap) whom it wishes to be nominated to the board of
directors of the Company at the Company's annual meeting of stockholders. This
notice shall be given by EnCap to the Company in writing in a timely manner
which will permit the Company to cause such person to be included in the
Company's proxy statement and other necessary disclosures, communications and
filings. In the event any person so nominated by EnCap serves on the board of
directors and then fails to serve or continue to serve for any reason, EnCap
shall have the right to nominate a successor to serve on the board of directors
in accordance with this paragraph. Any person so nominated by EnCap will be
recommended by the board of directors to the Company's stockholders for
election. Notwithstanding the foregoing, the Company shall have the right to
reject any individual designated or nominated by EnCap on any reasonable grounds
by providing notice of such rejection and the grounds for such rejection. Such
notice of rejection shall be given
-20-
<PAGE>
by the Company in such time reasonably to permit EnCap to designate a substitute
nominee in accordance with this Section 7.6.
7.7 Agreement to Seek Amendment of Credit Agreement. The Company agrees to
use its commercial best efforts to obtain, prior to the expiration of eighteen
months from the date hereof, an amendment (the "Amendment") of the Fourth
Amended and Restated Credit Agreement dated as of May 22, 1998, between the
Company, First Union National Bank ("FUNB"), as agent (succeeding ING (U.S.)
Capital Corporation in such capacity), and the lender parties named therein, as
amended by the First Amendment thereto dated as of November 17, 1998, the Second
Amendment thereto dated as of March 15, 1999, the Third Amendment thereto dated
as of June 21, 1999, the Fourth Amendment thereto dated as of September 15,
1999, and the Fifth Amendment thereto dated as of December 1, 1999 (the "Credit
Agreement"), to permit the Company to make cash dividend payments under the
terms of the Certificate of Designation and the Series G Certificate of
Designation. If the Amendment is not obtained within such eighteen month period,
the Company may seek extensions of such time period from time-to-time, and
Purchasers agree that the consent thereto will not be unreasonably withheld.
ARTICLE 8 - CLOSING CONDITIONS
8.1 The Company's Closing Conditions. The obligations of the Company
under this Agreement are subject, at the option of the Company, to the
satisfaction at or prior to each Closing of the following conditions:
(a) All representations of Purchasers contained in this Agreement
shall be true at and as of the Closing as if such representations were made
at and as of the Closing, and Purchasers shall have performed and satisfied
all agreements required by this Agreement to be performed and satisfied by
Purchasers at or prior to the Closing; and
(b) As of the Closing Date, no suit, action or other proceeding
(excluding any such matter initiated by the Company) shall be pending or
threatened before any Governmental Authority seeking to restrain the
Company or prohibit the Closing or seeking damages against the Company as a
result of the consummation of this Agreement.
8.2 Purchasers' Closing Conditions. The obligations of Purchasers under
this Agreement are subject, at the option of Purchasers, to the satisfaction at
or prior to each Closing of the following conditions:
(a) All representations of the Company contained in this Agreement
shall be true at and as of the Closing as if such representations were made
at and as of the Closing, and the Company shall have performed and
satisfied all agreements required by this Agreement to be performed and
satisfied by the Company at or prior to the Closing;
-21-
<PAGE>
(b) Purchasers shall have received a certificate dated as of the
Closing, executed by a duly authorized officer of the Company, to the
effect that to such officer's knowledge the conditions set forth in Section
8.2(a) above are satisfied at and as of the Closing;
(c) Purchasers shall have received a legal opinion dated as of the
Closing from Fulbright & Jaworski L.L.P., in substantially the form of
Exhibit B hereto;
(d) Purchasers shall have received a legal opinion dated as of the
Closing from Michael R. Patterson, general counsel of the Company, in
substantially the form of Exhibit C hereto;
(e) Purchasers shall have received a certificate of the Secretary or
the Assistant Secretary of the Company certifying, among other things, as
to the due authorization of the transactions contemplated hereby;
(f) Purchaser shall have received certificates of existence and good
standing for the Company and each of its Subsidiaries in the jurisdiction
of its incorporation and each jurisdiction in which it is qualified or
licensed to do business and own material assets;
(g) As of the Closing Date, no suit, action or other proceeding
(excluding any such matter initiated by Purchasers) shall be pending or
threatened before any Governmental Authority seeking to restrain Purchasers
or prohibit the Closing or the Exchange Offer, seeking damages against
Purchasers as a result of the consummation of this Agreement or the
Exchange Offer;
(h) The Certificate of Designation shall have been duly filed by the
Company with the Secretary of State of the State of Delaware and the
Purchasers shall have received satisfactory evidence thereof;
(i) Except for the Certificate of Designation, no amendments to the
Second Restated Certificate of Incorporation or Bylaws of the Company as in
effect on the date hereof shall have been effected;
(j) Purchasers shall have received a copy of any required written
consent or waiver by any third party or Governmental Authority to the
transactions contemplated hereby; and
(k) The Company shall have made the Exchange Offer, and the Series G
Certificate of Designation shall have been filed with the Secretary of
State of the State of Delaware.
-22-
<PAGE>
ARTICLE 9 - TERMINATION
9.1 Grounds for Termination. This Agreement may be terminated at any time
prior to Closing:
(a) By mutual agreement of the Company, on one hand, and the
Purchasers, on the other hand; and
(b) By the Company or any Purchaser if the Closing shall not have
occurred on or before December 31, 1999, provided, however, that no party
shall be entitled to terminate this Agreement under this Section 9.1(b) if
the Closing has failed to occur because such party negligently or willfully
failed to perform or observe in any material respect its covenants and
agreements hereunder.
9.2 Effect of Termination. In the event that the Closing does not occur
as a result of any party hereto exercising its rights to terminate pursuant to
this Article 9, then this Agreement shall be null and void and, except as
expressly provided herein, no party shall have any rights or obligations under
this Agreement, except that nothing herein shall relieve any party from
liability for any willful or negligent failure to perform or observe in any
material respect any agreement or covenant contained herein. In the event the
termination of this Agreement results from the willful or negligent failure of
any party to perform in any material respect any agreement or covenant herein,
then the other parties shall be entitled to all remedies available at law or in
equity and shall be entitled to recover court costs and reasonable attorneys'
fees in addition to any other relief to which such party may be entitled.
ARTICLE 10 - MISCELLANEOUS
10.1 Survival of Representations and Warranties. All representations,
warranties, covenants and agreements of the Company contained in this Agreement
or made in writing by the Company in connection herewith, and all
representations and warranties of any Purchaser contained in this Agreement or
made in writing by any Purchaser in connection herewith, shall survive the
execution, delivery and performance of this Agreement and the purchase and sale
of the Shares, regardless of any investigation made by such party or on such
party's behalf and without any other document being delivered at the Closing.
10.2 Indemnification. The Company shall indemnify and hold harmless each
Purchaser, and each Purchaser shall severally and not jointly indemnify and hold
harmless the Company, from and against any and all claims, losses, damages and
liabilities (and actions in respect thereof) and any and all costs and expenses
(including reasonable attorneys' fees and expenses) that such person may sustain
or incur as a result of any misrepresentation or breach of warranty or the
nonperformance of any obligation on the part of the other under this Agreement.
10.3 Antitrust Laws. Purchasers and the Company agree to use their best
efforts to make such filings with and provide such information to the Federal
Trade Commission or the
-23-
<PAGE>
Department of Justice with respect to the transactions contemplated by this
Agreement as may be required under the HSR Act, sufficiently in advance of any
transaction which may require such filing so as to permit the lapse of the
normal waiting periods described in the HSR Act in advance of such transaction
and to join in a request for early termination. Purchasers and the Company agree
to use such best efforts to obtain all governmental approvals required to
consummate the transactions contemplated by this Agreement and to cause early
termination of the waiting period under the HSR Act.
10.4 Notices. Except as otherwise expressly provided in this Agreement,
all communications required or permitted under this Agreement shall be in
writing and any such communication or delivery shall be deemed to have been duly
given and received when actually delivered to the address set forth below of the
party to be notified personally (by a recognized commercial courier or delivery
service that provides a receipt) or by telecopier (confirmed in writing by a
personal delivery as set forth above), addressed as follows:
If to the Company: Plains Resources Inc.
500 Dallas, Suite 700
Houston, Texas 77002
Attention: Mr. Michael R. Patterson
Telecopy No.: (713) 654-1523
If to Purchasers, to them at the addresses as listed on Schedule A:
Any party may, by written notice so delivered to the other, change the address
to which delivery shall thereafter be made.
10.5 Incidental Expenses. The Company shall promptly pay after receipt of
an invoice all accrued fees and expenses of Purchasers, including fees and
expenses of Porter & Hedges, L.L.P., counsel to Purchasers, in connection with
the negotiation, preparation, execution and delivery of the Agreement and
related documents and the consummation of the transactions contemplated hereby.
10.6 Entire Agreement. This Agreement embodies the entire agreement
between the parties with respect to the subject matter of this Agreement
(superseding all prior agreements, arrangements, understandings and
solicitations of interest or offers related to the subject matter of this
Agreement), and this Agreement may be supplemented, altered, amended, modified
or revoked by writing only, signed by the Company and the Holders of at least
66 2/3% of the Registrable Securities. The headings in this Agreement are for
convenience only and shall have no significance in the interpretation of any
term or provision of this Agreement.
10.7 Governing Law. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
RULES CONCERNING CONFLICTS OF LAWS.
-24-
<PAGE>
10.8 Counterparts. This Agreement may be executed in any number of
counterparts, and each and every counterpart shall be deemed for all purposes
one agreement.
10.9 Waiver. Any of the terms, provisions, covenants, representations,
warranties or conditions contained in this Agreement may be waived only by a
written instrument executed by the party waiving compliance. No waiver by any
party of any condition, or of the breach of any term, provision, covenant,
representation or warranty contained in this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be or construed as a
further or continuing waiver of any such condition or breach or a waiver of any
other condition or of the breach of any other term, provision, covenant,
representation or warranty.
10.10 Binding Effect; Assignment. All the terms, provisions, covenants,
representations, warranties and conditions of this Agreement shall be binding
upon and inure to the benefit of and be enforceable by the parties to this
Agreement and their respective successors and assigns; but this Agreement and
the rights and obligations hereunder shall not be assignable or delegable by any
party without the express written consent of the non-assigning or non-delegating
parties.
10.11 Brokers. Without limiting the parties' respective representations in
Sections 59 and 61, each party agrees to indemnify and hold the other harmless
from and against any claim for a brokerage or finder's fee or commission in
connection with this Agreement to the extent such claim arises from or is
attributable to the actions of such indemnifying party.
10.12 Construction. Each party hereby acknowledges and agrees that such
party has consulted legal counsel in connection with the negotiation of this
Agreement and that such party has bargaining power equal to that of the other
party in connection with the negotiation and execution of this Agreement.
Accordingly, the parties agree the rule of contract construction to the effect
that an agreement shall be construed against the draftsman shall have no
application in the construction or interpretation of this Agreement.
-25-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the date first above written.
PLAINS RESOURCES INC.
By: /s/ Michael R. Patterson
----------------------------------------
Name: Michael R. Patterson
Title: Vice President
PURCHASERS:
ENCAP ENERGY CAPITAL FUND III, L.P.
Encap Investments L.C., General Partner
By: /s/ Robert L. Zorich
----------------------------------------
Name: Robert L. Zorich
Title: Managing Director
ENCAP ENERGY CAPITAL FUND III-B, L.P.
Encap Investments L.C., General Partner
By: /s/ Robert L. Zorich
----------------------------------------
Name: Robert L. Zorich
Title: Managing Director
BOCP ENERGY PARTNERS, L.P.
Encap Investments L.C., General Partner
By: /s/ Robert L. Zorich
----------------------------------------
Name: Robert L. Zorich
Title: Managing Director
ENERGY CAPITAL INVESTMENT COMPANY PLC
By: /s/ Gary R. Petersen
----------------------------------------
Name: Gary R. Petersen
Title: Director
ARBCO ASSOCIATES, L.P.
Kayne Anderson Investment Management, Inc.,
General Partner
By: /s/ David Schladovsky
----------------------------------------
Name: David Schladovsky
Title: General Counsel
<PAGE>
KAYNE, ANDERSON NON-TRADITIONAL INVESTMENTS,
L.P.
Kayne Anderson Investment Management, Inc.,
General Partner
By: /s/ David Schladovsky
-----------------------------------------
Name: David Schladovsky
Title: General Counsel
OFFENSE GROUP ASSOCIATES, L.P.
Kayne Anderson Investment Management, Inc.,
General Partner
By: /s/ David Schladovsky
-----------------------------------------
Name: David Schladovsky
Title: General Counsel
OPPORTUNITY ASSOCIATES, L.P.
Kayne Anderson Investment Management, Inc.,
General Partner
By: /s/ David Schladovsky
-----------------------------------------
Name: David Schladovsky
Title: General Counsel
KAYNE ANDERSON ENERGY FUND, L.P.
Kayne Anderson Investment Management, Inc.,
General Partner
By: /s/ David Schladovsky
-----------------------------------------
Name: David Schladovsky
Title: General Counsel
KAYNE ANDERSON OFFSHORE LIMITED
By: /s/ David Schladovsky
-----------------------------------------
Name: David Schladovsky
Title: General Counsel
HALLCO, INC.
By: /s/ Arthur E. Hall
-----------------------------------------
Name: Arthur E. Hall
<PAGE>
BUENA VISTA FOUR ASSOCIATES
By: /s/ K. M. Iscol
-----------------------------------------
Name: K. M. Iscol
Title: Partner
MICHAEL TARGOFF INSURANCE TRUST
UAD 1/3/90
By: /s/ Richard A. Kayne
-----------------------------------------
Name: Richard A. Kayne
Title: Trustee
/s/ Michael B. Targoff
---------------------------------------------
Michael B. Targoff
NEWBERG FAMILY TRUST DTD 12/18/90
By: /s/ Bruce Newberg
-----------------------------------------
Name: Bruce Newberg
Title: Trustee
EOS PARTNERS, L.P.
By: /s/ Brian D. Young
-----------------------------------------
Name: Brian D. Young
/s/ Richard A. Kayne
--------------------------------------------
Richard A. Kayne
/s/ John E. Anderson
--------------------------------------------
John E. Anderson
<PAGE>
EXHIBIT 4(h)
AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS AMENDMENT TO STOCK PURCHASE AGREEMENT (this "Amendment"), dated
as of the 17th day of December, 1999, is by and among Plains Resources Inc., a
Delaware corporation (the "Company"), the Series F Holders (as defined below)
and the Strome Purchasers (as defined below).
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the holders of Series F Cumulative Convertible Preferred
Stock (the "Preferred Stock") of the Company listed as such on the signature
pages hereof (the "Series F Holders") acquired such shares from the Company
pursuant to a Stock Purchase Agreement dated as of December 15, 1999 by among
the Company and the purchasers named therein (the "Stock Purchase Agreement");
WHEREAS, the Series F Holders own more than 66 2/3% of the Preferred
Stock; and
WHEREAS, the Series F Holders and the Company desire to amend the
Stock Purchase Agreement to add new Purchasers thereto.
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties set forth in this Amendment, the parties to this
Amendment hereby agree as follows (capitalized terms used herein but not defined
herein shall have the meanings set forth in the Stock Purchase Agreement):
ARTICLE 1 - AMENDMENTS TO THE STOCK PURCHASE AGREEMENT
1.1 Agreement regarding Additional Purchasers. Each of the following
-----------------------------------------
(the "Strome Purchasers"), hereby agrees to purchase from the Company the
following number of Shares and for the purchase price set forth below payable
for such Shares (the "Purchase Price"):
Purchase
Name Number Of Shares Price
---- ---------------- --------
Strome Offshore Ltd. 2,000 $2,000,000
Strome Hedgecap Fund L.P. 850 $ 850,000
Strome Hedgecap Limited 150 $ 150,000
The parties hereto agree that upon payment of the Purchase Price, each
of the Strome Purchasers shall become "Purchasers" for all purposes of the Stock
Purchase Agreement and shall have all rights applicable to the Purchasers, and
the Strome Purchasers agree to be bound by all provisions applicable to the
Purchasers under such agreement.
<PAGE>
1.2 Opinions of Counsel. Upon completion of the purchase and sale of
-------------------
Shares referred to in Section 1.1, the Company agrees to cause each of Michael
R. Patterson, general counsel to the Company, and Fulbright & Jaworski, L.L.P.
to issue a letter to the Strome Purchasers indicating that they may rely on the
opinions rendered at Closing.
2. Continuation of Stock Purchase Agreement. Except as set forth
----------------------------------------
above, the Stock Purchase Agreement shall continue in full force and effect
without amendment.
3. Governing Law. THIS AMENDMENT SHALL BE GOVERNED AND CONSTRUED
-------------
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD
TO RULES CONCERNING CONFLICTS OF LAWS.
4. Counterparts. This Amendment may be executed in any number of
------------
counterparts, and each and every counterpart shall be deemed for all purposes
one agreement.
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the date first above written.
PLAINS RESOURCES INC.
By: /s/ Michael R. Patterson
----------------------------------------------
Name: Michael R. Patterson
Title: Vice President
STROME PURCHASERS:
STROME OFFSHORE LTD.
By: /s/ Jeffrey S. Lambert
----------------------------------------------
Name: Jeffrey S. Lambert
Title: Director
STROME HEDGECAP FUND L.P.
By: Strome Investment Management, L.P.,
General Partner
By: Its General Partner, SSCO, Inc.
By: /s/ Jeffrey S. Lambert
----------------------------------------------
Name: Jeffrey S. Lambert
Title: Chief Operating Officer
STROME HEDGECAP LIMITED
By: /s/ Jeffrey S. Lambert
----------------------------------------------
Name: Jeffrey S. Lambert
Title: Director
3
<PAGE>
SERIES F HOLDERS:
ENCAP ENERGY CAPITAL FUND III, L.P.
Encap Investments L.C., General Partner
By: /s/ Robert L. Zorich
----------------------------------------------
Name: Robert L. Zorich
Title: Managing Director
ENCAP ENERGY CAPITAL FUND III-B, L.P.
Encap Investments L.C., General Partner
By: /s/ Robert L. Zorich
----------------------------------------------
Name: Robert L. Zorich
Title: Managing Director
BOCP ENERGY PARTNERS, L.P.
Encap Investments L.C., General Partner
By: /s/ Robert L. Zorich
----------------------------------------------
Name: Robert L. Zorich
Title: Managing Director
ENERGY CAPITAL INVESTMENT COMPANY PLC
By: /s/ Gary R. Peterson
----------------------------------------------
Name: Gary R. Peterson
Title: Director
4
<PAGE>
ARBCO ASSOCIATES, L.P.
Kayne Anderson Investment Management, Inc.,
General Partner
By: /s/ David Schladovsky
----------------------------------------------
Name: David Schladovsky
Title: General Counsel
KAYNE, ANDERSON NON-TRADITIONAL INVESTMENTS, L.P.
Kayne Anderson Investment Management, Inc.,
General Partner
By: /s/ David Schladovsky
----------------------------------------------
Name: David Schladovsky
Title: General Counsel
OFFENSE GROUP ASSOCIATES, L.P.
Kayne Anderson Investment Management, Inc.,
General Partner
By: /s/ David Schladovsky
----------------------------------------------
Name: David Schladovsky
Title: General Counsel
OPPORTUNITY ASSOCIATES, L.P.
Kayne Anderson Investment Management, Inc.,
General Partner
By: /s/ David Schladovsky
----------------------------------------------
Name: David Schladovsky
Title: General Counsel
5
<PAGE>
KAYNE ANDERSON ENERGY FUND, L.P.
Kayne Anderson Investment Management, Inc.,
General Partner
By: /s/ David Schladovsky
----------------------------------------------
Name: David Schladovsky
Title: General Counsel
KAYNE ANDERSON OFFSHORE LIMITED
By: /s/ David Schladovsky
----------------------------------------------
Name: David Schladovsky
Title: General Counsel
KAYNE ANDERSON TARGET RETURN FUND (Q.P.), L.P.
By: /s/ David Schladovsky
----------------------------------------------
Name: David Schladovsky
Title: General Counsel
6
<PAGE>
EXHIBIT 10(t)
FIFTH AMENDMENT TO
FOURTH AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIFTH AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment") dated as of the 1/st/ day of December, 1999, by and among PLAINS
---------
RESOURCES INC., a Delaware corporation (the "Company"), FIRST UNION NATIONAL
-------
BANK (assignee of ING (U.S.) Capital LLC, successor in interest to ING (U.S.)
Capital Corporation), as Agent ("Agent"), and the Lenders under the Original
-----
Agreement (as defined herein).
W I T N E S S E T H:
WHEREAS, the Company, Agent and Lenders entered into that certain Fourth
Amended and Restated Credit Agreement dated as of May 22, 1998, as amended by a
First Amendment to Fourth Amended and Restated Credit Agreement dated November
17, 1998, a Second Amendment to Fourth Amended and Restated Credit Agreement
dated March 15, 1999 and a Third Amendment to Fourth Amended and Restated Credit
Agreement dated June 21, 1999 and a Fourth Amendment to Fourth Amended and
Restated Credit Agreement dated September 15, 1999 (as amended, the "Original
--------
Agreement") for the purposes and consideration therein expressed, pursuant to
- ---------
which Lenders became obligated to make and made loans to the Company as therein
provided; and
WHEREAS, the Company, Agent and Lenders desire to amend the Original
Agreement for the purposes described herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein and in the Original Agreement, in consideration
of the loans which may hereafter be made by Lenders to the Company, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I. -- Definitions and References
--------------------------
(S) 1.1. Terms Defined in the Original Agreement. Unless the context
---------------------------------------
otherwise requires or unless otherwise expressly defined herein, the terms
defined in the Original Agreement shall have the same meanings whenever used in
this Amendment.
(S) 1.2. Other Defined Terms. Unless the context otherwise requires, the
-------------------
following terms when used in this Amendment shall have the meanings assigned to
them in this (S) 1.2.
"Amendment" means this Fifth Amendment to Fourth Amended and
Restated Credit Agreement.
"Amendment Documents" means this Amendment.
-------------------
"Credit Agreement" means the Original Agreement as amended
----------------
hereby.
1
<PAGE>
ARTICLE II. -- Amendments
----------
(S) 2.1. Investments. Section 8.10(f) of the Original Agreement is hereby
-----------
amended in its entirety to read as follows:
(f) in addition to any capital contributions permitted in
subsection (e) above, the following Investments in Unrestricted
Subsidiaries: (i) capital contributions of up to $85,000,000 of the
proceeds of any preferred or common stock of the Company issued after
January 1, 1998; (ii) any Investment represented by, or required to comply
with the obligations undertaken under, the Stock Purchase Agreement
described in Section 8.35(c) and (iii) loans by the Company to PAAI of up
to $50,000,000 of the proceeds of any preferred stock of the Company issued
after December 1, 1999;
ARTICLE III. -- Conditions of Effectiveness
---------------------------
(S) 3.1. Effective Date. This Amendment shall become effective as of the
--------------
date first above written when and only when (i) Agent shall have received, at
Agent's office, a counterpart of this Amendment executed and delivered by the
Company and Majority Lenders, and (ii) Agent shall have additionally received
all of the following documents, each document (unless otherwise indicated) being
dated the date of receipt thereof by Agent, duly authorized, executed and
delivered, and in form and substance satisfactory to Agent:
(A) Officer's Certificate. A certificate of a duly authorized
---------------------
officer of the Company to the effect that all of the representations and
warranties set forth in Article IV hereof are true and correct at and as of
the date thereof.
(B) Supporting Documents. Such supporting documents as Agent may
--------------------
reasonably request.
ARTICLE IV. -- Representations and Warranties
------------------------------
(S) 4.1. Representations and Warranties of the Company. In order to
---------------------------------------------
induce Agent and Lenders to enter into this Amendment, the Company represents
and warrants to Agent and Lenders that:
(a) The representations and warranties contained in Section 7 of
the Original Agreement, are true and correct at and as of the time of the
effectiveness hereof, subject to the amendment of certain of the Schedules
to the Credit Agreement as attached hereto. No Default has occurred and is
continuing.
(b) The Company and the Subsidiaries are duly authorized to
execute and deliver this Amendment and the other Amendment Documents to the
extent a party thereto, and the Company is and will continue to be duly
authorized to borrow and perform its obligations under the Credit
Agreement. The Company and the Subsidiaries have duly taken all corporate
action necessary to authorize the execution and delivery of
2
<PAGE>
this Amendment and the other Amendment Documents, to the extent a party
thereto, and to authorize the performance of their respective obligations
thereunder.
(c) The execution and delivery by the Company and the
Subsidiaries of this Amendment and the other Amendment Documents, to the
extent a party thereto, the performance by the Company and the Subsidiaries
of their respective obligations hereunder and thereunder, and the
consummation of the transactions contemplated hereby and thereby, do not
and will not conflict with any provision of law, statute, rule or
regulation or of the certificate or articles of incorporation and bylaws of
the Company or any Subsidiary, or of any material agreement, judgment,
license, order or permit applicable to or binding upon the Company or any
Subsidiary, or result in the creation of any lien, charge or encumbrance
upon any assets or properties of the Company or any Subsidiary, except in
favor of Agent for the benefit of Lenders. Except for those which have been
duly obtained, no consent, approval, authorization or order of any court or
governmental authority or third party is required in connection with the
execution and delivery by the Company or any Subsidiary of this Amendment
or any other Amendment Document, to the extent a party thereto, or to
consummate the transactions contemplated hereby and thereby.
(d) When this Amendment and the other Amendment Documents have
been duly executed and delivered, each of the Basic Documents, as amended
by this Amendment and the other Amendment Documents, will be a legal and
binding instrument and agreement of the Company and the Subsidiaries, to
the extent a party thereto, enforceable in accordance with its terms,
(subject, as to enforcement of remedies, to applicable bankruptcy,
insolvency and similar laws applicable to creditors' rights generally and
to general principles of equity).
ARTICLE V. -- Miscellaneous
-------------
(S) 5.1. Ratification of Agreements. The Original Agreement, as hereby
--------------------------
amended, is hereby ratified and confirmed in all respects. The Basic Documents,
as they may be amended or affected by this Amendment and/or the other Amendment
Documents, are hereby ratified and confirmed in all respects. Any reference to
the Credit Agreement in any Basic Document shall be deemed to refer to this
Amendment also. The execution, delivery and effectiveness of this Amendment and
the other Amendment Documents shall not, except as expressly provided herein or
therein, operate as a waiver of any right, power or remedy of Agent or any
Lender under the Credit Agreement or any other Basic Document nor constitute a
waiver of any provision of the Credit Agreement or any other Basic Document.
(S) 5.2. Ratification of Security Documents. The Company, Agent and
----------------------------------
Lenders each acknowledge and agree that any and all indebtedness, liabilities or
obligations arising under or in connection with the Notes are Obligations and is
secured indebtedness under, and is secured by, each and every Security Document
to which the Company is a party. The Company hereby re-pledges, re-grants and
re-assigns a security interest in and lien on every asset of the Company
described as collateral in any Security Document.
3
<PAGE>
(S) 5.3. Survival of Agreements. All representations, warranties,
----------------------
covenants and agreements of the Company herein and in the other Amendment
Documents shall survive the execution and delivery of this Amendment and the
other Amendment Documents and the performance hereof and thereof, including
without limitation the making or granting of each Loan, and shall further
survive until all of the Obligations are paid in full. All statements and
agreements contained in any certificate or instrument delivered by the Company
or any Subsidiary hereunder, under the other Amendment Documents or under the
Credit Agreement to Agent or any Lender shall be deemed to constitute
representations and warranties by, or agreements and covenants of, the Company
under this Amendment and under the Credit Agreement.
(S) 5.4. Basic Documents. This Amendment and each of the other Amendment
---------------
Documents is a Basic Document, and all provisions in the Credit Agreement
pertaining to Basic Documents apply hereto and thereto.
(S) 5.5. GOVERNING LAW. THIS AMENDMENT AND THE OTHER AMENDMENT DOCUMENTS
--------------------------------------------------------------------------
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
- ------------------------------------------------------------------------------
NEW YORK AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA IN ALL
- -----------------------------------------------------------------------
RESPECTS, INCLUDING CONSTRUCTION, VALIDITY AND PERFORMANCE.
- -----------------------------------------------------------
(S) 5.6. Counterparts. This Amendment and each of the other Amendment
------------
Documents may be separately executed in counterparts and by the different
parties hereto in separate counterparts, each of which when so executed shall be
deemed to constitute one and the same Amendment or Amendment Document, as the
case may be.
4
<PAGE>
IN WITNESS WHEREOF, this Amendment is executed as of the date first above
written.
PLAINS RESOURCES INC.
By: /s/ Michael R. Patterson
------------------------------------
Name: Michael R. Patterson
Title: Vice President
FIRST UNION NATIONAL BANK,
as Agent, LC Issuer and a Lender
By: /s/ Paul N. Riddle
------------------------------------
Name: Paul N. Riddle
Title: Senior Vice President
BANKBOSTON, N.A., Lender
By: /s/ Terry Ronan
------------------------------------
Terrence Ronan, Vice President
BANK OF AMERICA, N.A., Lender
By: /s/ Irene C. Rummel
------------------------------------
Name: Irene C. Rummel
Title: Vice President
WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION, Lender
By: /s/ Ann Rhoads
------------------------------------
Name: Ann Rhoads
Title: Vice President
CHASE BANK OF TEXAS, N.A., Lender
By: /s/
------------------------------------
Name:
Title:
5
<PAGE>
COMERICA BANK-TEXAS, Lender
By: /s/ Daniel G. Steele
------------------------------------
Name: Daniel G. Steele
Title: Senior Vice President
MEESPIERSON CAPITAL CORP., Lender
By: /s/ Darrell W. Holley
------------------------------------
Name: Darrell W. Holley
Title: Managing Director
By: /s/ Karlo Louman
------------------------------------
Name: Karlo Louman
Title: Sr. Managing Director
BANK OF SCOTLAND, Lender
By: /s/ Jack B. Dykes
------------------------------------
Name: Jack B. Dykes
Title: Executive Vice President
U.S. BANK NATIONAL ASSOCIATION, Lender
By: /s/ Monte E. Deckerd
------------------------------------
Name: Monte E. Deckerd
Title: Vice President
HIBERNIA NATIONAL BANK
By: /s/ David R. Reid
------------------------------------
Name: David r. Reid
Title: Senior Vice President
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/
------------------------------------
Name:
Title:
6
<PAGE>
CONSENT AND AGREEMENT
---------------------
Each of the undersigned Subsidiary Guarantors hereby consents to the
provisions of this Amendment and the transactions contemplated herein and hereby
(i) acknowledges and agrees that any and all indebtedness, liabilities or
obligations arising under or in connection with the Notes are Obligations and
are secured indebtedness under, and are secured by, each and every Security
Document to which it is a party, (ii) re-pledges, re-grants and re-assigns a
security interest in and lien on all of its assets described as collateral in
any Security Document, (iii) ratifies and confirms its Amended and Restated
Guaranty dated May 22, 1998 made by it for the benefit of Agent and Lenders, and
(iv) expressly acknowledges and agrees that such Subsidiary Guarantor guarantees
all indebtedness, liabilities and obligations arising under or in connection
with the Notes pursuant to the terms of such Amended and Restated Guaranty, and
agrees that its obligations and covenants thereunder are unimpaired hereby and
shall remain in full force and effect.
PLAINS RESOURCES INTERNATIONAL INC.
STOCKER RESOURCES, INC.
CALUMET FLORIDA, INC.
PLAINS ILLINOIS INC.
By: /s/ Michael R. Patterson
-----------------------------------------
Name: Michael R. Patterson
Title: Vice President
STOCKER RESOURCES, L.P.
By: Stocker Resources, Inc.,
its General Partner
By: /s/ Michael R. Patterson
------------------------------------
Name: Michael R. Patterson
Title: Vice President
7
<PAGE>
The undersigned Subsidiary Guarantor hereby consents to the provisions of
this Agreement and the transactions contemplated herein and hereby (i)
acknowledges and agrees that any and all indebtedness, liabilities or
obligations arising under or in connection with the Notes are Obligations and
are secured indebtedness under, and are secured by, each and every Security
Document to which it is a party, (ii) re-pledges, re-grants and re-assigns a
security interest in and lien on all of its assets described as collateral in
any Security Document, (iii) ratifies and confirms its Guaranty dated July 1,
1999 made by it for the benefit of Agent and Lenders, and (iv) expressly
acknowledges and agrees that such Subsidiary Guarantor guarantees all
indebtedness, liabilities and obligations arising under or in connection with
the Notes pursuant to the terms of such Guaranty, and agrees that its
obligations and covenants thereunder are unimpaired hereby and shall remain in
full force and effect.
ARGUELLO, INC.
By: /s/ Michael R. Patterson
------------------------------------
Name: Michael R. Patterson
Title: Vice President
8
<PAGE>
Exhibit 21
SUBSIDIARIES OF PLAINS RESOURCES INC.
State of Organization
---------------------
. Calumet Florida, Inc. Delaware
. Plains Illinois Inc. Delaware
. Stocker Resources, Inc. California
. Stocker Resources, L.P. California
. Plains Resources International Inc. Delaware
. PMCT Inc. Delaware
. Plains All American Inc. Delaware
. Arguello Inc. Delaware
. Plains All American Pipeline, L.P. Delaware
. Plains Marketing, L.P. Delaware
. All American Pipeline, L.P. Texas
. Plains Scurlock Permian, L.P. Delaware
. Scurlock Permian LLC Delaware
. Scurlock Permian Pipe Line LLC Delaware
. PAAI LLC Delaware
<PAGE>
EXHIBIT 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 333-80364, 333-01851, 33-84064, 333-42773,
333-42767, 333-65939) and in each of the Registration Statements on Form S-8
(Nos. 33-43788, 33-48610, 33-53802, 33-06191, 333-27907) of Plains Resources
Inc. of our report dated March 29, 2000, relating to the financial statements
which appear in this Form 10-K.
PricewaterhouseCoopers LLP
Houston, Texas
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PLAINS
RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31,
1999 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000350426
<NAME> PLAINS RESOURCES INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 68,228
<SECURITIES> 0
<RECEIVABLES> 521,948
<ALLOWANCES> 0
<INVENTORY> 78,349
<CURRENT-ASSETS> 772,140
<PP&E> 1,190,167
<DEPRECIATION> 402,514
<TOTAL-ASSETS> 1,689,560
<CURRENT-LIABILITIES> 656,273
<BONDS> 0
138,813
23,300
<COMMON> 1,792
<OTHER-SE> 15,527
<TOTAL-LIABILITY-AND-EQUITY> 1,689,560
<SALES> 4,816,657
<TOTAL-REVENUES> 4,844,138
<CGS> 4,814,829
<TOTAL-COSTS> 4,882,216
<OTHER-EXPENSES> 1,013
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,378
<INCOME-PRETAX> (45,266)
<INCOME-TAX> (20,479)
<INCOME-CONTINUING> (24,787)
<DISCONTINUED> 0
<EXTRAORDINARY> (544)
<CHANGES> 0
<NET-INCOME> (25,331)
<EPS-BASIC> (2.05)
<EPS-DILUTED> (2.05)
</TABLE>
