<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO. 1-5591
PENNZENERGY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 74-1597290
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
PENNZOIL PLACE, P.O. BOX 4616
HOUSTON, TEXAS 77210-4616
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (713) 546-4000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock, par value $0.83 1/3 per share New York Stock Exchange
Pacific Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
Pacific Exchange
Debentures New York Stock Exchange
</TABLE>
4.90% Exchangeable Senior Debentures due August 15, 2008
4.95% Exchangeable Senior Debentures due August 15, 2008
Securities registered pursuant to Section 12(g) of the Act: None
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate 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. X
Aggregate market value of the voting stock held by non-affiliates of the
registrant: $553.6 million as of January 31, 1999.
Number of shares outstanding of each class of stock, as of latest
practicable date, January 31, 1999:
Common stock, par value $0.83 1/3 per share, 47,875,920 shares.
Preferred stock, par value $1.00 per share, 1,500,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE PROXY STATEMENT TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A
UNDER THE SECURITIES EXCHANGE ACT OF 1934 IN CONNECTION WITH THE COMPANY'S 1999
ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III
HEREOF (TO THE EXTENT SET FORTH IN ITEMS 10, 11, 12 AND 13 OF PART III OF THIS
ANNUAL REPORT ON FORM 10-K).
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<PAGE> 2
FORWARD-LOOKING STATEMENTS -- SAFE HARBOR PROVISIONS
This annual report on Form 10-K of PennzEnergy Company for the year ended
December 31, 1998 contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. To the extent that such statements are not
recitations of historical fact, such statements constitute forward-looking
statements which, by definition, involve risks and uncertainties. In particular,
statements (1) under the captions "Domestic -- Exploration, Development and
Production Activities; Offshore", "Domestic -- Exploration, Development and
Production Activities; Onshore", "International -- Exploration, Development and
Production Activities", "Capital Budget" and "Government Regulation" under "Item
1. Business and Item 2. Properties," and (2) under the captions "Disclosures
About Market Risk" and "Capital Resources and Liquidity" under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" contain forward-looking statements. Where, in any forward-looking
statement, PennzEnergy expresses an expectation or belief as to future results
or events, such expectation or belief is expressed in good faith and believed to
have a reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished.
The following are factors that could cause actual results or events to
differ materially from those anticipated, and include but are not limited to:
general economic, financial and business conditions; commodity prices for
natural gas and crude oil; the effect of weather on crude oil and natural gas
demand and consumption; competition for international drilling rights; the costs
of exploration and development of petroleum reserves; exploration risks;
political risks impacting exploration and development; unanticipated
environmental liabilities; changes in and compliance with governmental
regulations; changes in tax laws; and the costs and effects of legal
proceedings.
<PAGE> 3
PART I
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES.
PennzEnergy Company ("PennzEnergy"), formerly named Pennzoil Company
("Pennzoil"), is an independent oil and gas company with operations currently
focused domestically in the Gulf of Mexico, onshore Gulf Coast and east and west
Texas and with operations internationally in Egypt, Venezuela, Azerbaijan, Qatar
and Australia. PennzEnergy engages in the acquisition, exploration, exploitation
and development of prospective and proved oil and gas properties, the production
and sale of crude oil, condensate and natural gas liquids and the production,
treatment and sale of natural gas. The bulk of PennzEnergy's production is
derived from established fields in Texas, Louisiana, Mississippi, West Virginia,
Utah and federal waters offshore Louisiana and Texas.
As of December 31, 1998, PennzEnergy beneficially owned approximately 7.1
million shares of common stock of Chevron Corporation ("Chevron"). At the
current dividend rate, PennzEnergy receives approximately $17 million annually
in dividends on Chevron stock. Reference is made to "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Capital Resources
and Liquidity" and Note 1 of Notes to Consolidated Financial Statements for
additional information.
On December 30, 1998, Pennzoil distributed to its shareholders (the
"Spin-off") 47.8 million shares of common stock of its wholly owned subsidiary
Pennzoil-Quaker State Company ("Pennzoil-Quaker State"), representing all of the
shares of Pennzoil-Quaker State owned by Pennzoil. The motor oil, refined
products and fast lube operations of Pennzoil were separated into
Pennzoil-Quaker State prior to the Spin-off. PennzEnergy's consolidated
financial statements have been restated to present the net assets and results of
operations of Pennzoil-Quaker State as discontinued operations.
OIL AND GAS RESERVES
The following table sets forth information regarding PennzEnergy's net
proved reserves and the present value (discounted at 10 percent) of the
estimated future net cash flows before deduction of income taxes from the
production and sale of those reserves. The reserves are reported by Ryder Scott
Company Petroleum Engineers, Houston, Texas ("Ryder Scott") in accordance with
criteria prescribed by Statement of Financial Accounting Standards ("SFAS") No.
69, "Disclosures About Oil and Gas Producing Activities." The summary report of
Ryder Scott on the reserve estimates as of December 31, 1998, is set forth as an
exhibit to this Annual Report on Form 10-K and includes reserve estimates of
each of PennzEnergy Exploration and Production, L.L.C., Pennzoil Caspian
Corporation, Pennzoil Venezuela Corporation, S.A. and PennzEnergy. The summary
reports of Ryder Scott on the reserve estimates as of December 31, 1997 and 1996
are included in PennzEnergy's previously filed Annual Reports on Form 10-K.
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Information regarding ownership interests, prices, costs and other factual
data was furnished to Ryder Scott by PennzEnergy. To facilitate timely issuance
of the reserve estimates, estimated production data were used for the last few
months of each year. PennzEnergy believes that use of the actual production data
would not have resulted in a material change in the estimates of reserves or
pretax future net cash flows.
<TABLE>
<CAPTION>
TOTAL PROVED RESERVES
------------------------
DECEMBER 31
------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids
(millions of barrels)
United States.......................................... 165 152 126
International(1)(2).................................... 22 75 93
------ ------ ------
187 227 219
====== ====== ======
Natural gas (billion cubic feet ("Bcf"))
United States(3)....................................... 1,187 1,054 849
International(1)(2).................................... 90 5 2
------ ------ ------
1,277 1,059 851
====== ====== ======
Present value (10 percent discount rate) of estimated future
net cash flows before deduction of income taxes (in
millions)(4)(5)
United States.......................................... $3,697 $1,791 $ 941
International.......................................... 270 262 138
------ ------ ------
$3,967 $2,053 $1,079
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
PROVED DEVELOPED RESERVES
---------------------------
DECEMBER 31
---------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids
(millions of barrels)
United States............................................. 141 128 108
International(1)(2)....................................... 1 14 12
------ ------ ------
142 142 120
====== ====== ======
Natural gas (Bcf)
United States(3).......................................... 1,070 964 784
International(1)(2)....................................... 90 4 2
------ ------ ------
1,160 968 786
====== ====== ======
Present value (10 percent discount rate) of estimated future
net cash flows before deduction of income taxes (in
millions)(4)
United States............................................. $3,329 $1,685 $ 911
International............................................. 58 7 9
------ ------ ------
$3,387 $1,692 $ 920
====== ====== ======
</TABLE>
- ---------------
(1) Included in 1998 reserves are 17 million barrels of crude oil, condensate,
and natural gas liquids (10 million barrels of which are proved developed
reserves) and 2 Bcf of proved developed natural gas reserves attributable
to three operating service agreements in Venezuela between Petroleos de
Venezuela, S.A. ("PDVSA") and Pennzoil Venezuela Corporation, S.A., an
indirect wholly owned subsidiary of PennzEnergy. Under these agreements,
all mineral rights are owned by the government of Venezuela. Reference is
made to "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Oil and Gas" for additional information.
(2) In July 1996, PennzEnergy sold a portion of its Canadian oil and gas assets
to Gulf Canada Resources Limited ("Gulf Canada"). In December 1997,
PennzEnergy sold the remainder of its Canadian oil and gas assets to
Phillips Petroleum Company ("Phillips"). Reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Oil and Gas" and Note 10 of Notes to Consolidated Financial
Statements for additional information.
(3) United States natural gas reserves for 1998, 1997 and 1996 exclude 136 Bcf,
178 Bcf and 182 Bcf, respectively, of carbon dioxide gas for sale or use in
PennzEnergy's operations.
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(4) Reference is made to "Supplemental Financial and Statistical
Information -- Unaudited -- Oil and Gas Information" on pages F-33 through
F-39 hereof for additional information regarding PennzEnergy's proved
reserves and estimated future net revenues therefrom, including
presentation of Discounted Future Net Cash Flows Relating to Proved Oil and
Gas Reserves calculated in accordance with SFAS No. 69.
(5) Increases (decreases) in the present value of future net cash flows
attributable to net changes in prices, net of production costs, were
($677.0) million, ($1,707.0) million, and $1,152.0 million for 1998, 1997
and 1996, respectively. Reference is made to "Supplemental Financial and
Statistical Information -- Unaudited -- Oil and Gas Information" on page
F-39 for the presentation of "Changes in the Standardized Measure."
No significant change in PennzEnergy's proved reserves as set forth above
has occurred as a result of any major discovery or other event since December
31, 1998.
No estimates of PennzEnergy's total proved net oil or gas reserves have
been filed with or included in reports to any federal authority or agency other
than the Securities and Exchange Commission ("SEC") since January 1, 1998.
OIL AND GAS PROPERTIES
The following table shows PennzEnergy's developed and undeveloped oil and
gas acreage as of December 31, 1998.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
ACREAGE(1) ACREAGE(2)
---------------- ------------------
GROSS NET GROSS NET
----- ----- ------ ------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
United States
Alabama................................... 5 1 -- --
Arkansas.................................. 24 4 2 1
Colorado.................................. -- -- 35 35
Kansas.................................... 43 40 1 --
Louisiana................................. 235 183 58 52
Mississippi............................... 25 19 8 5
Montana................................... -- -- 350 168
New Mexico................................ 14 9 694 691
New York.................................. 16 14 5 4
Ohio...................................... 6 6 1 1
Pennsylvania.............................. 179 148 143 122
Texas..................................... 478 351 64 32
Utah...................................... 117 55 21 12
West Virginia............................. 348 311 79 58
United States Waters
Offshore Alaska........................ 7 1 3 --
Offshore California.................... 4 1 11 3
Offshore Louisiana..................... 270 179 373 283
Offshore Texas......................... 47 23 145 98
----- ----- ------ ------
Total United States......................... 1,818 1,345 1,993 1,565
International(3)
Australia................................. -- -- 679 271
Azerbaijan................................ 10 -- 202 39
Egypt..................................... -- -- 9,111 8,842
Qatar..................................... -- -- 519 389
Venezuela................................. 23 12 1,434 1,004
----- ----- ------ ------
Total International......................... 33 12 11,945 10,545
----- ----- ------ ------
Total....................................... 1,851 1,357 13,938 12,110
===== ===== ====== ======
</TABLE>
- ---------------
(1) Developed acreage represents the spacing units or other acreage assignable
to productive wells.
(2) Undeveloped acreage is acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether such acreage contains
proved reserves.
(3) Acreage in international areas is operated under production sharing
arrangements, service contracts or other contractual arrangements not
involving lease or fee ownership.
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The following table shows the approximate number of PennzEnergy's
productive oil and gas wells as of December 31 for the years shown. Productive
wells consist of producing wells and wells capable of production in commercial
quantities.
<TABLE>
<CAPTION>
GROSS WELLS(1) NET WELLS(1)
--------------------- ---------------------
1996 1997 1998 1996 1997 1998
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Oil
United States....................... 6,637 6,532 4,535 3,725 3,617 3,327
International....................... 5 12 100 5 8 46
Natural gas
United States....................... 1,814 1,848 1,535 1,234 1,244 1,246
International....................... 46 -- -- 42 -- --
----- ----- ----- ----- ----- -----
8,502 8,392 6,170 5,006 4,869 4,619
===== ===== ===== ===== ===== =====
</TABLE>
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(1) "Gross Wells" includes all wells in which PennzEnergy has an interest. "Net
Wells" reflects PennzEnergy's percentage ownership interest in each "Gross
Well." One or more completions in the same bore hole are counted as one
well. Any well in which one of multiple completions is an oil completion is
classified as an oil well.
PRODUCTION AND SALES
The following table summarizes the average daily production of PennzEnergy,
net of all royalties, overriding royalties and other outstanding interests for
the periods indicated. Natural gas production refers only to marketable
production of natural gas on an "as sold" basis. The decrease in international
natural gas production in 1998 compared to 1997 and 1996 is primarily due to the
sale of producing properties in Canada.
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids (barrels per
day)
United States............................................. 56,391 55,830 51,260
International............................................. 3,213 964 1,929
------- ------- -------
59,604 56,794 53,189
======= ======= =======
Natural gas (thousand cubic feet ("Mcf") per day)
United States............................................. 552,408 568,768 467,474
International............................................. 36,803 20,724 --
------- ------- -------
589,211 589,492 467,474
======= ======= =======
</TABLE>
The following table shows the weighted average sales prices received by
PennzEnergy for its production and the average production (lifting) costs per
unit of production.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------
UNITED
STATES INTERNATIONAL TOTAL
------ ------------- ------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids (per
barrel)................................................... $14.78 $18.70 $14.99
Natural gas (per Mcf)....................................... $ 1.92 $ 1.14 $ 1.87
Production (lifting) costs per equivalent barrel(1)(2)...... $ 3.31 $ 3.78 $ 3.34
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------
UNITED
STATES INTERNATIONAL TOTAL
------ ------------- ------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids (per
barrel)................................................... $16.72 $13.48 $16.66
Natural gas (per Mcf)....................................... $ 2.43 $ 1.39 $ 2.40
Production (lifting) costs per equivalent barrel(1)(2)...... $ 3.40 $ 6.24 $ 3.48
</TABLE>
(Table continued on following page)
4
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------
UNITED
STATES INTERNATIONAL TOTAL
------ ------------- ------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids (per
barrel)................................................... $10.84 $4.94 $10.63
Natural gas (per Mcf)....................................... $ 2.01 $ -- $ 2.01
Production (lifting) costs per equivalent barrel(1)(2)...... $ 3.67 $7.67 $ 3.73
</TABLE>
- ---------------
(1) For purposes of providing common units of measure, natural gas is converted
to a Btu-equivalent barrel of liquid on the basis of relative energy
content (6 Mcf per barrel).
(2) Production (lifting) costs are costs incurred to operate and maintain wells
and related equipment and facilities. They do not include depreciation,
depletion and amortization of capitalized acquisition, exploration and
development costs, exploration expenses, general and administrative
expenses, interest expense or income tax. Differences between sales prices
and production (lifting) costs do not represent profit.
PennzEnergy sells its crude oil and condensate production generally based
on posted prices less any applicable transportation charges. PennzEnergy sells
its natural gas liquids production at negotiated prices. PennzEnergy sells most
of its U.S. natural gas production at market prices to Columbia Energy Services
Corp. ("Columbia") under a contract that terminates on June 30, 2001.
PennzEnergy's natural gas marketing efforts are primarily constrained by
regulatory limitations described generally below under the caption "Government
Regulation."
PennzEnergy has a price risk management program that permits utilization of
agreements and financial instruments (such as futures, forward and option
contracts and swaps and collars) to reduce the price risk associated with
fluctuations in crude oil and natural gas prices. Reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Disclosures about Market Risk" and "-- Capital Resources and
Liquidity" for additional information.
DRILLING ACTIVITY
The following table shows PennzEnergy's net productive and dry exploratory
and development wells completed for the periods shown. Completion occurs upon
the installation of permanent equipment for the production of oil or gas, or, in
the case of dry holes, upon reporting abandonment to the appropriate regulatory
agency.
<TABLE>
<CAPTION>
NET EXPLORATORY NET DEVELOPMENT
WELLS WELLS
------------------ ------------------
1996 1997 1998 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Oil Wells(1)
United States....................................... -- -- -- 22.6 32.8 29.2
International....................................... -- 0.1 1.0 1.0 -- 0.2
Gas Wells(1)
United States....................................... 2.8 2.1 0.8 44.3 43.6 52.2
International....................................... 1.0 -- -- 3.0 -- --
Dry Holes(2)
United States....................................... 2.7 1.7 3.4 3.8 2.6 4.9
International....................................... 5.5 2.3 3.2 -- -- --
---- --- --- ---- ---- ----
12.0 6.2 8.4 74.7 79.0 86.5
==== === === ==== ==== ====
</TABLE>
- ------------
(1) For purposes of this tabulation, a productive well is an exploratory or a
development well that is not a dry hole. One or more completions in the
same bore hole are counted as one well. Any well in which one of multiple
completions is an oil completion is classified as an oil well.
(2) A dry hole is an exploratory or development well found to be incapable of
producing either oil or gas in sufficient quantities to justify completion
as an oil or gas well.
As of December 31, 1998, PennzEnergy was participating in the drilling or
awaiting completion of 4 gross (2.9 net) wells onshore and 1 gross (1 net) wells
offshore the United States.
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<PAGE> 8
VOLUMES AND PRODUCTION COSTS
Natural gas production for 1998 averaged 467 million cubic feet ("MMcf")
per day, which was 122 MMcf per day lower than the prior year. Liquids
production for 1998 averaged 53.2 thousand barrels ("Mbbls") per day, 3.6 Mbbls
per day lower than 1997.
Year-over-year natural gas and liquids production comparisons were
negatively impacted by offshore production declines, pipeline downtime and
temporary production interruptions caused by hurricane evacuations offshore
during 1998. The sale of Canadian properties late in 1997 also negatively
impacted year-over-year natural gas production comparisons. On a barrel of oil
equivalent ("BOE") basis, production declined from 155,000 BOE per day in 1997
to 131,199 BOE per day in 1998.
Total production costs and expenses per BOE, excluding corporate overhead,
exploration expense and depreciation, depletion and amortization, were $5.27 in
1998, $4.49 in 1997 and $4.41 in 1996.
DOMESTIC -- EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES; OFFSHORE
PennzEnergy is one of the largest producers in the Gulf of Mexico, with
operations on 75 blocks. PennzEnergy holds interests in another 98 exploratory
leases. PennzEnergy's deepwater leasehold consists of 39 exploratory blocks, two
blocks in production (Garden Banks Blocks 127/128), and two blocks undergoing
development (PennzEnergy-operated Garden Banks Blocks 161/162). PennzEnergy
operates more than 40 fields and 88 platforms on the shelf in the Gulf of Mexico
and ranked seventh in 1998 in terms of gross BOE per day of production. As of
December 31, 1998, PennzEnergy's offshore reserves totaled 80 million BOE, 56%
of which were natural gas.
In 1998, PennzEnergy participated in six offshore exploration wells and 33
offshore development wells. Sixteen recompletions and workovers were performed.
Thirty-six percent of year-end production (or 21,400 net BOE per day out of a
total of 60,200 net BOE per day) resulted from the development wells,
recompletions and workovers in 1998. Production in 1998 averaged 264 net MMcf
per day and 18 net Mbbls per day (a total of 62,000 net BOE per day).
Two West Cameron Block 580 wells, significant contributors to offshore
production in 1997, experienced increased water production in June 1998
resulting in production rate restrictions to maintain completion integrity. The
wells were producing 21 net MMcf per day of natural gas and 1,500 net barrels
per day of liquids at restricted rates in December 1998, down from 97 net MMcf
per day of natural gas and 3,700 net barrels per day of liquids in December
1997. A recompletion of one of the wells is planned for 1999. Production volumes
were also negatively impacted at West Cameron Block 580 because a third party
marine vessel ruptured a 16-inch gathering pipeline, causing the wells to be
shut-in. The incident resulted in lost or deferred production and reservoir
damage.
The Gulf of Mexico experienced three named storms and a tropical depression
in September 1998 that adversely impacted production and delayed ongoing
drilling operations, especially the development drilling at West Cameron Block
575. Production losses or deferrals as a result of development delays totaled
approximately 450,000 BOE. In addition, approximately $3.6 million of costs were
incurred in association with the disruption of operations.
In 1999, PennzEnergy currently expects to spend $88.0 million offshore to
drill five exploration wells and 16 development wells and to complete two
previously drilled deepwater wells. In addition, PennzEnergy currently expects
to conduct 37 rate-focused capital recompletions and workovers during 1999.
PennzEnergy is also currently negotiating an agreement with a third party to
fund and execute a development well and five workovers at Ship Shoal Block 198,
with first production expected in March 1999. The program would effectively
eliminate PennzEnergy's exposure to the mechanical and reserve risk associated
with the projects. Development drilling during 1999 is expected to be centered
around the Eugene Island Block 330 area, Garden Banks Blocks 127/128 and East
Cameron Block 335.
EXPLORATION. PennzEnergy participated in the drilling of six exploration
wells in 1998, including joint prospects with Enterprise Oil plc ("Enterprise"),
Amerada Hess, and Shell. A South Timbalier Block 287
6
<PAGE> 9
well encountered hydrocarbons in two intervals and is currently being evaluated.
PennzEnergy and Amerada Hess have been negotiating with potential partners for
the development and testing of additional prospects on the block. PennzEnergy
has earned a 30% working interest in the block.
In September 1996, Pennzoil and a subsidiary of Enterprise agreed to form a
strategic alliance to pursue certain exploration opportunities on 102 leases in
Pennzoil's Gulf of Mexico portfolio where Pennzoil's working interest was 50% or
more. Generally, Enterprise earns an interest equal to half of Pennzoil's
working interest in a lease by contributing funds toward the costs of drilling a
jointly agreed upon exploration well on the lease. On 59 of the 102 leases
within the portfolio, where Pennzoil's average working interest is 92%
("Category I"), Enterprise agreed to commit $100.0 million to fund 100% of such
drilling costs. On the remaining 43 leases, where Pennzoil's average working
interest is 80% ("Category II"), Enterprise has the option, through 1999, to
earn an interest equal to half of Pennzoil's working interest in a Category II
individual exploration well by funding 67% of the drilling costs.
Three exploration wells were drilled in 1998 with Enterprise: a Category I
well at West Cameron Block 581 (an extension of West Cameron Block 580), a
Category I well at High Island Block 19 and a Category II well at South Marsh
Island Block 23J-1. None of the wells resulted in a commercial hydrocarbon
discovery.
In 1998, PennzEnergy also drilled exploration wells at Eugene Island Block
215 and Green Canyon Block 326. The Green Canyon well was a dry hole. At Eugene
Island Block 215, the well was mechanically abandoned prior to reaching the
target horizon. PennzEnergy is currently soliciting partners to redrill or
deepen the existing wellbore.
PennzEnergy participated in both the Central and Western Gulf Lease sales
during 1998, acquiring interests in 20 leases, of which 19 were in deepwater.
PennzEnergy partnered with Anadarko and AGIP in both lease sales.
In 1998, PennzEnergy purchased over 40,000 miles of 2-D seismic data and
over 3,500 square miles of 3-D seismic data to support its exploration and
development efforts in the Gulf of Mexico. Total acquisition cost was $16.4
million, of which $1.9 million was capitalized in support of development
activities.
DEVELOPMENT. During 1998, PennzEnergy commenced production from new
platforms at West Cameron Block 575, Ship Shoal Block 150, Garden Banks Blocks
127/128 and West Cameron Block 291.
At West Cameron Block 575 (100% working interest), three wells were drilled
in 1997 and completed in 1998. Production peaked in October 1998 at 28 net MMcf
of natural gas per day.
Two wells drilled in 1997 at Ship Shoal Block 150 (100% working interest)
were completed in 1998, adding 11 net MMcf of natural gas and 1,800 net barrels
of liquids per day in initial production. Several additional targets have been
identified on 3-D seismic.
Production was initiated at the Shell-operated Garden Banks Blocks 127/128
platform in June 1998. PennzEnergy holds a 20% working interest in the unit. As
of December 31, 1998, three wells had been drilled, one well was drilling and
two wells had been completed, yielding a total initial production of 17 net MMcf
of natural gas per day and 700 net barrels of liquids per day. Two additional
wells are planned in 1999 based on new seismic depth imaging of the subsalt
objectives.
At West Cameron Block 291 (100% working interest), PennzEnergy drilled and
completed a well in October 1998 that came online at 11 net MMcf of natural gas
per day and 500 net barrels of liquids per day.
As part of a program begun in 1997 at South Marsh Island Block 48 (100%
working interest), PennzEnergy drilled three wells of a four well program during
1998. Production from the platform peaked in July 1998 at 52 net MMcf per day
and 325 net barrels of liquids per day.
During 1998, PennzEnergy completed a refurbishment of its Ship Shoal Block
154C caisson (100% working interest) and implemented a 4 well drilling program.
By December 31, 1998, three wells had been drilled and two wells had been
completed yielding a buildup of 14 net MMcf of natural gas per day.
7
<PAGE> 10
Production at Garden Banks Blocks 161/162 is expected during the fourth
quarter of 1999. The project is currently expected to contribute 5,000 net BOE
per day from 2 subsea wells tied back via the Garden Banks Block 72 platform.
Enterprise is participating in development of Garden Bank Blocks 161/162 and has
agreed to carry a disproportionate share of development cost.
DOMESTIC -- EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES; ONSHORE
PennzEnergy's onshore oil and gas operations are currently located in east,
west and south Texas, Louisiana, Kansas, Mississippi, West Virginia,
Pennsylvania and Utah. In 1998, PennzEnergy's onshore properties produced 203
net MMcf of natural gas per day and 33,300 net barrels of liquids per day.
Results from onshore operations were reduced by 3.6 net MMcf of natural gas per
day and 400 net barrels of liquids per day over a four month period by hurricane
damage sustained along the Louisiana coastline. PennzEnergy's fields in
Pennsylvania, West Virginia and west Texas (Permian) are primarily waterflood
oil recovery projects. PennzEnergy's SACROC field in west Texas is a CO(2)
recovery oil field and PennzEnergy's remaining onshore fields are primarily in
gas producing areas. PennzEnergy drilled 79 onshore wells and performed 326
workover and recompletion operations during 1998, primarily in northeast Texas,
west Texas and Mississippi.
In east Texas, a two rig drilling program through June 1998 was expanded to
three rigs in July 1998. This program drilled 36 wells with 55 completions
during 1998, adding 23 MMcf per day gross (15 MMcf per day net) of natural gas
production by the end of 1998. In 1998, PennzEnergy's acquisition of properties
in northwest Louisiana added approximately 1 MMcf per day net production of
natural gas and approximately 33,000 net acres of leasehold.
PennzEnergy renewed exploration drilling in south Louisiana in 1998 and the
exploration program is currently focusing on and near existing PennzEnergy
acreage with newly acquired 3-D seismic. One hundred thirty-five square miles of
3-D seismic were added in 1998 with an additional 75 square miles currently
expected to be acquired in 1999.
PennzEnergy plans a significant increase in exploration drilling in south
Texas during 1999. PennzEnergy is securing 3-D seismic coverage across all of
its major south Texas acreage positions. PennzEnergy currently holds
approximately 173,000 net acres in south Texas.
PennzEnergy owns mineral rights under the Vermejo Park Ranch area of
northern New Mexico and southern Colorado and claims mineral rights with respect
to certain additional acreage in the Raton Basin area of New Mexico and
Colorado. The table included under the caption "Oil and Gas -- Oil and Gas
Properties," showing PennzEnergy's developed and undeveloped oil and gas
acreage, includes the mineral rights held and claimed in the Raton Basin.
PennzEnergy has renewed its activity in this area with approximately 35 wells
currently planned for 1999. Coal bed methane recoverable on PennzEnergy acreage
is currently estimated to be 1 to 3 trillion cubic feet. PennzEnergy has not
recorded any reserves for this area.
INTERNATIONAL -- EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES
EGYPT. In Egypt, PennzEnergy has five concessions covering 9.2 million
acres. Four of the concessions are in the Gulf of Suez: North July (100% working
interest), West Feiran (50% working interest), Southwest Gebel el-Zeit (43.75%
working interest), and Southeast Gulf of Suez (25% working interest). The fifth
concession, West Beni Suef (100% working interest), is located in Egypt's
western desert. In June 1998, the North July 1 discovery tested at a rate of
6,000 barrels of liquids per day. Development planning for the discovery was
initiated in 1998 and the project is expected to commence in 1999. In July 1998,
PennzEnergy entered into agreements with Seagull Energy whereby Seagull could
earn half of PennzEnergy's interest in the Southwest Gebel el-Zeit Block and the
Southeast Gulf of Suez Block in exchange for funding up to $20 million of
current and future exploration costs. During the third quarter of 1998,
PennzEnergy drilled two wells on the Southwest Gebel el-Zeit Block and AGIP, the
operator on the West Feiran Block, drilled one well. None of the three wells
found commercial hydrocarbons and PennzEnergy recorded charges of $8.3 million
to exploration expense associated with these projects in 1998. PennzEnergy
acquired 3,500 kilo-
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meters of 2-D seismic on the West Beni Suef block in 1998. PennzEnergy currently
plans to complete the seismic program in 1999.
VENEZUELA. On July 1, 1998 PennzEnergy began operating the B2X-68/79 (54%
working interest) and B2X-70/80 (45% working interest) oil production blocks in
Venezuela. The blocks each encompass approximately 10,000 acres in eastern Lake
Maracaibo. Net production from the two blocks at year-end 1998 was 2,400 barrels
of liquids per day. Development drilling commenced in Lake Maracaibo in early
1999. PennzEnergy also operates a 1.3 million acre onshore block, East Falcon,
in northwestern Venezuela. The Cumerabo Field on the East Falcon Block was
producing 1,000 barrels of liquids per day at the end of 1998.
AZERBAIJAN. In July 1996, PennzEnergy completed the sale of approximately
half of its 9.82% interest in the Azeri-Chirag-Gunashli ("ACG") joint
development unit offshore Azerbaijan in the Caspian Sea to affiliates of Exxon
Corporation ("Exxon"), affiliates of ITOCHU Oil Exploration Co., Ltd. ("ITOCHU")
and affiliates of Unocal Corporation ("Unocal"). The three companies will pay
approximately $130.0 million to PennzEnergy for a 5% working interest in the ACG
unit (3.00% to Exxon, 1.47% to ITOCHU and 0.53% to Unocal) and the right to
receive approximately 51% of the payments due PennzEnergy for reimbursement of
costs incurred in developing a gas utilization project for the Gunashli Field.
Net cash payments to PennzEnergy are scheduled in three installments with the
first installment having been made in two payments consisting of approximately
$83.0 million received at closing and another $5.0 million received in August
1996. A subsequent installment of $22.0 million was received in January 1998 and
a final payment of $20.0 million is due when the unit reaches production of 200
Mbbls per day, currently expected by 2003. PennzEnergy has retained a 4.8175%
working interest in the ACG unit. As part of the transaction, the three
companies are funding all of PennzEnergy's future obligations in the ACG
project, retroactive to January 1, 1996, until all such expenditures and accrued
interest are recovered from PennzEnergy's share of production from the ACG unit
("payout"). In addition, PennzEnergy received a net cash payment of
approximately $16.0 million in August 1996 for reimbursement of PennzEnergy's
costs in the ACG unit incurred from January 1996 through July 1996. In July
1998, PennzEnergy received a net cash payment of $25.3 million for reimbursement
of past costs associated with a related gas utilization project. No gains or
losses were recorded related to any of the above proceeds. Instead, such
receipts were applied to reduce PennzEnergy's net investment in the ACG unit and
the gas utilization project because of uncertainties related to the recovery of
those costs.
In September 1995, the consortium of foreign oil companies developing the
ACG unit elected to pursue dual export routes for transporting early oil
production from the Caspian Sea, one north through an existing pipeline system
to a Russian port on the Black Sea, and the second west through Azerbaijan and
Georgia to the Black Sea. The western route required replacing 288 miles of
pipeline in Azerbaijan and an additional 230 miles of pipeline in Georgia. The
northern route became operational in October 1997 with shipments of oil from the
State Oil Company of the Azerbaijan Republic ("SOCAR"). The western route
started line fill in December 1998 and first sales began in March 1999.
First oil production started in November 1997 from the ACG joint
development area and the consortium drilled an additional six wells in 1998.
Production at ACG at the end of 1998 was 85 Mbbls per day. Total consortium
project production by the end of 1999 is expected to increase to an estimated
130 Mbbls per day. PennzEnergy has recorded 76 million barrels of proved crude
oil reserves relating to early oil from this project.
On the nearby Karabakh prospect, PennzEnergy took a $38.1 million charge to
exploration expense in 1998 after Caspian International Petroleum Company
("CIPCO"), the joint operating company in which PennzEnergy has a 30 percent
interest, determined that the hydrocarbon accumulation tested by three
exploratory wells was not commercial. CIPCO shut down operations in early 1999.
QATAR. In September 1998, the Qatar General Petroleum Corporation approved
the application of PennzEnergy (75% working interest) and Novus Petroleum
Limited (25% working interest) to modify their Block 8 concession offshore Qatar
and enter into a second exploration period on the block. PennzEnergy, as
operator, currently plans to conduct a 200 square kilometer 3-D seismic survey
in 1999 and drill a commitment exploratory well in 2000.
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AUSTRALIA. In Australia, the Whicher Range 1 and Whicher Range 4 wells were
completed in 1998, but were deemed to be noncommercial following completion,
stimulation and testing operations completed in the third quarter of 1998. This
resulted in a $12.4 million charge to exploration expense in 1998 related to
these wells. PennzEnergy will determine the commercial viability of the
remainder of the Whicher Range prospect in 1999.
BRAZIL. In March 1999, PennzEnergy signed a participation agreement with
Petroleo Brasileiro, SA, the national oil company of Brazil, providing for joint
exploration of Block BSeal 4 in the Sergipe-Alagoas Basin offshore Brazil.
PennzEnergy has a 30% working interest in the block and will serve as operator.
Petrobras holds a 70% interest. The 1,300 square kilometer block is located in
the state of Sergipe on Brazil's east coast, straddles the coast onshore and
extends offshore to water depths of up to 200 meters. Under the terms of the
participation agreement, the partners will acquire 250-350 square kilometers of
3-D seismic data and drill one exploratory well over the next 2 1/2 years.
INTERNATIONAL -- CANADIAN PROPERTY SALES
In July 1996, PennzEnergy completed two related transactions with Gulf
Canada: (i) the establishment of a joint venture for the development of natural
gas reserves in the Zama/Virgo region of northwest Alberta and (ii) the sale by
PennzEnergy of its remaining Canadian oil and gas assets to Gulf Canada.
Including working capital and closing adjustments of $3.5 million received in
1997, PennzEnergy received net proceeds of $196.3 million from the sale.
PennzEnergy recorded an after-tax gain of $19.9 million on the sale, of which
$19.1 million was due to the recognition of certain tax benefits. Reference is
made to Note 2 and Note 10 of Notes to Consolidated Financial Statements for
additional information.
In December 1997, PennzEnergy sold its 50% interest in the Zama/Virgo joint
venture to Phillips for net proceeds of $101.9 million and recorded an after-tax
gain of $24.6 million. The assets sold included 132 Bcf equivalent of proved
natural gas reserves. Included in PennzEnergy's consolidated results of
operations for 1997 are revenues of $11.2 million and operating income of $3.3
million from these properties.
CAPITAL BUDGET
PennzEnergy makes and will continue to make substantial capital
expenditures for the acquisition, exploration, development and production of its
oil and natural gas reserves. PennzEnergy has historically funded these
expenditures from cash flows from operating activities, borrowings, sales of
equity and debt securities, sales of non-strategic oil and natural gas
properties and sales of partial interests in exploration concessions.
Due to the current pricing environment for oil and natural gas,
PennzEnergy's capital budget, including capitalized interest, for domestic and
international oil and gas exploration and development during 1999 has been
reduced and is currently estimated to be $250 million, compared to $409.4
million of capital expenditures in 1998. In addition, PennzEnergy will evaluate
its level of capital spending throughout the year based upon drilling results,
commodity prices and cash flows from operations. Actual capital spending may
vary from the capital budget. PennzEnergy's drilling program for 1999 currently
includes 156 exploration and development wells worldwide, as well as substantial
domestic recompletion and workover activities.
PennzEnergy's domestic oil and gas capital budget for 1999 is approximately
$220 million and currently includes 147 exploration and development wells. In
the Gulf of Mexico, PennzEnergy currently plans to drill five exploration wells
and 16 development wells. Onshore, primarily in south and east Texas, the
Permian Basin and SACROC in west Texas, PennzEnergy currently plans to drill
five exploration wells and 121 development wells.
Internationally, PennzEnergy currently plans to drill six exploration wells
and three development wells during 1999 in Australia, Egypt and Venezuela.
International oil and gas expenditures are expected to total approximately $30
million. Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources and Liquidity" for
additional information.
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OPERATING RISKS
PennzEnergy conducts or participates in certain offshore oil and gas
operations which are subject to the hazards of marine operations, such as
capsizing, collision and adverse weather and sea conditions, as well as risks of
blowouts and fires, which are generally present in all oil and gas drilling. In
the past, production from offshore operations has been delayed on several
occasions as a result of pipeline breaks, hurricanes, blowouts and other
unforeseen events. In addition, PennzEnergy's foreign oil and gas operations are
subject to certain risks, such as nationalization, confiscation, renegotiation
of existing contracts and currency fluctuations. PennzEnergy monitors political,
regulatory and economic developments in any foreign country in which it
operates.
OTHER INTERESTS
In September 1996, PennzEnergy completed the sale of Vermejo Park Ranch.
The ranch is located in northern New Mexico and southern Colorado and includes
approximately 578,000 acres of surface properties. Reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Other" and Note 10 of Notes to Consolidated Financial Statements
for additional information.
EMPLOYEES
As of December 31, 1998, PennzEnergy employed approximately 1,100 persons.
Approximately one percent of PennzEnergy's employees are represented by a labor
union. A collective bargaining agreement is in force with the union.
PennzEnergy is subject to various federal and state laws and regulations
governing employment practices and working conditions, including, but not
limited to, Title VII of the Civil Rights Act of 1964, as amended, the Civil
Rights Act of 1866, as amended, the Equal Pay Act of 1963, the Civil Rights Act
of 1991, the Americans with Disabilities Act of 1990, the Family and Medical
Leave Act of 1993, the Drug Free Workplace Act of 1989, the Age Discrimination
in Employment Act of 1967, as amended, the Rehabilitation Act of 1973, as
amended, the Vietnam Era Veterans' Readjustment Assistance Act of 1974, as
amended, the Occupational Safety and Health Act of 1970, the Fair Labor
Standards Act of 1938, as amended, the National Labor Relations Act of 1935, as
amended, and Executive Order 11246.
GOVERNMENT REGULATION
PennzEnergy's operations are affected from time to time in varying degrees
by political developments and federal, state and local laws and regulations. In
particular, oil and gas operations and economics are affected by the imposition,
modification and removal of price controls, regulation of access to markets,
laws on taxation, fuel use restrictions and inducements, federal, state and
Indian land leasing policies and constantly changing administrative regulations
and interpretations of those regulations.
REGULATION OF NATURAL GAS MARKETING. Until as late as January 1, 1993,
PennzEnergy and other natural gas producers were subject to comprehensive
natural gas sales price and service regulation by the Federal Energy Regulatory
Commission ("FERC"). However, since that date, all sales of natural gas by
"first sellers," including producers such as PennzEnergy, have been unregulated,
subject to the terms and conditions of its private contracts, and made at market
prices. The FERC continues to have jurisdiction over and actively regulates
access to and the terms of service of interstate and certain intrastate natural
gas transportation and storage companies on which PennzEnergy relies in the
marketing of its natural gas. Since the mid-1980s, the FERC has issued a series
of so called "open access" orders that have significantly altered the marketing
and transportation of gas by mandating a fundamental restructuring of interstate
pipeline sales and transportation service industry through the unbundling of the
sales, transportation, gathering, storage and other components of wholesale gas
marketing services such pipelines previously performed. While the interstate
pipelines may continue to sell gas in the competitive marketplace, the FERC
regulations require the full separation of the pipelines' sales and
transportation-related functions from its marketing efforts, so that no undue
advantage is gained over other merchants, such as PennzEnergy, which wish to
secure transportation services and/or sell
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into these newly available markets. As a result, virtually all interstate
pipelines have created separate marketing affiliates through which to sell gas.
With some exceptions, the major features of the FERC's open-access policies have
been affirmed on appeal. More recently, the FERC has pursued other policy
initiatives that have affected natural gas marketing. Most notable are (i) the
large-scale divestiture of interstate pipeline-owned gas gathering facilities to
affiliated or non-affiliated companies, (ii) further development of rules
governing the relationship of the pipelines with their marketing affiliates,
(iii) the publication of standards relating to the use of electronic bulletin
boards and electronic data exchange by the pipelines to make available
transportation information on a timely basis and to enable transactions to occur
on a purely electronic basis, (iv) further review of the role of the secondary
market for released pipeline capacity and its relationship to open access
service in the primary market and (v) development of policy and promulgation of
orders pertaining to its authorization of market-based rates (rather than
traditional cost-of-service based rates) for transportation or
transportation-related services upon a pipeline's demonstration of lack of
market control in the relevant service market. It remains to be seen what effect
the FERC's other activities will have on access to markets, the fostering of
competition and the cost of doing business. Because the FERC continues to review
and revise its open-access regulations, it is difficult to predict the ultimate
impact of the orders on PennzEnergy and its gas marketing efforts.
Notwithstanding these ongoing changes, the FERC's open-access policies generally
have eliminated or substantially reduced the interstate pipelines' traditional
role as wholesalers of natural gas and have substantially increased competition
and volatility in natural gas markets. While significant regulatory uncertainty
remains, open access may ultimately enhance PennzEnergy's ability to market and
transport its gas, although it may also subject PennzEnergy to greater
competition.
REGULATION OF PETROLEUM MARKETING. Sales of oil and natural gas liquids by
PennzEnergy are not regulated and are made at market prices. The price
PennzEnergy receives from the sale of these products is affected by the cost of
transporting the products to market. Much of that transportation is through
interstate common carrier pipelines. Effective as of January 1, 1995, the FERC
implemented regulations generally grandfathering all previously approved
interstate transportation rates and establishing an indexing system for those
rates by which adjustments are made annually based on the rate of inflation,
subject to certain conditions and limitations. These regulations may tend to
increase the cost of transporting oil and natural gas liquids by interstate
pipeline, although the annual adjustments may result in decreased rates in a
given year. These regulations have generally been approved on judicial review.
PennzEnergy is not able to predict with certainty what effect, if any, these
relatively new federal regulations will have on it.
FEDERAL AND STATE PRODUCTION REGULATIONS. PennzEnergy's oil and gas
exploration and production operations are subject to various types of regulation
at the federal, state and local levels. Federal regulation of PennzEnergy's
offshore Gulf of Mexico leases is accomplished by the Minerals Management
Service of the Department of the Interior ("MMS"). The MMS has been particularly
active in recent years in evaluating and, in some cases, promulgating new rules
and regulations regarding competitive lease bidding and royalty payment
obligations for production from federal lands. The FERC also has jurisdiction
over certain offshore activities pursuant to the Outer Continental Shelf Lands
Act. State regulation typically includes requiring drilling permits and the
maintenance of bonds in order to drill or operate wells; the regulation of the
location of wells, the method of drilling and casing of wells and the surface
use and restoration of properties upon which wells are drilled; and the plugging
and abandoning of wells. PennzEnergy's operations are also subject to various
conservation regulations, including regulation of the size of drilling and
spacing units or proration units, the density of wells that may be drilled in a
given area and the unitization or pooling of oil and gas properties. In this
regard, some states allow the forced pooling or integration of lands and leases.
In addition, state conservation laws establish maximum rates of production from
oil and gas wells, generally prohibit the venting or flaring of gas and impose
certain requirements regarding the ratability of production. The effect of these
regulations may be to limit the amounts of crude oil, condensate and natural gas
PennzEnergy can produce from its wells and the number of wells or the locations
at which PennzEnergy can drill.
ENVIRONMENTAL MATTERS. PennzEnergy's operations in the United States are
subject to numerous federal, state and local laws and regulations controlling
the discharge of materials into the environment or otherwise relating to the
protection of the environment and human health and safety.
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PennzEnergy is subject to a variety of state and federal Clean Air Act
rules requiring air emission reductions from its operating units and fuels and
Clean Water Act regulations governing discharges of certain contaminants to
"waters of the United States." Currently, the U.S. Environmental Protection
Agency ("EPA"), the Ozone Transport Assessment Group ("OTAG"), Ozone Transport
Region ("OTR") and several states are examining new standards and/or controls
which could impose significant costs on PennzEnergy. The EPA has recently
adopted new, more stringent national ambient air quality standards for ozone and
particulate matter. Under the new standards, many more areas of the country will
be considered high pollution areas and will be subject to additional regulatory
controls. Control measures to implement these new standards will be adopted over
the next five to seven years. Similarly, the multi-state OTAG and OTR groups are
developing lists of suggested controls to limit interstate ozone transport. The
EPA has issued a proposal to require states to begin adopting many of these
suggested controls over the next few years. The precise effect of these actions
on PennzEnergy and other industrial companies is uncertain because most of the
requirements will be implemented through EPA regulations to be issued over a
period of years.
In respect of its production and sales of oil and natural gas liquids, the
Oil Pollution Act of 1990 and resulting regulations impose a variety of
stipulations on "responsible parties" related to the prevention of oil spills
and liability for damages resulting from such spills. PennzEnergy is also
subject to certain laws and regulations relating to environmental remediation
activities associated with past operations, such as the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and similar
state statutes. In response to liabilities associated with these activities,
accruals have been established when reasonable estimates are possible.
PennzEnergy adjusts the accruals when new remediation responsibilities are
discovered and probable costs become estimable, or when current remediation
estimates must be adjusted to reflect new information.
PennzEnergy's assessment of the potential impact of these environmental
laws is subject to uncertainty due to the difficult process of estimating
remediation costs that are subject to ongoing and evolving change. Initial
estimates of remediation costs reflect a broad-based analysis of site conditions
and potential environmental and human health impacts derived from preliminary
site investigations (including soil and water analysis, migration pathways and
potential risk). Later changes in these initial estimates may be based on
additional site investigations, completion of feasibility studies (comparing and
selecting from among various remediation methods and technologies) and risk
assessments (determining the degree of current and future risk to the
environment and human health, based on current scientific and regulatory
criteria) and the actual implementation of the remediation plan. This process
occurs over relatively long periods of time and is influenced by regulatory and
community approval processes and is subject to the ongoing development of
remediation technologies. PennzEnergy's assessment analysis takes into account
the condition of each site at the time of estimation, the degree of uncertainty
surrounding the estimates for each phase of remediation and other site-specific
factors.
Capital outlays of approximately $100 million have been made by PennzEnergy
since January 1996 with respect to environmental protection. Capital
expenditures for environmental control facilities are currently expected to be
approximately $14 million in 1999. Reference is made to "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Capital
Resources and Liquidity -- Environmental Matters" for additional information.
ITEM 3. LEGAL PROCEEDINGS.
(A) RAMCO DISPUTE. In October 1995, subsidiaries of PennzEnergy filed an
action, styled Pennzoil Exploration and Production Company, et al. v. Ramco
Energy Limited and Ramco Hazar Energy Limited, in the United States District
Court for the Southern District of Texas, Houston Division, against Ramco Hazar
Energy Limited, formerly known as Ramco Energy Limited (collectively "Ramco").
The underlying dispute involves Ramco's asserted claim to an interest in the
Karabakh prospect, an oil and gas field located in the territorial waters of the
Azerbaijan Republic in the Caspian Sea. Since the initiation of litigation, the
operator of the Karabakh prospect determined that the hydrocarbon accumulation
tested by three exploratory wells was not commercial. The federal suit sought to
compel Ramco to arbitrate certain disputes that have arisen between it and the
PennzEnergy plaintiffs pursuant to the Federal Arbitration Act and the
Convention on the
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Recognition and Enforcement of Foreign Arbitral Awards. After the filing of the
federal action, the PennzEnergy plaintiffs filed an Original Petition for
Declaration Relief in the 281st Judicial District Court of Harris County, Texas.
The state suit, styled Pennzoil Exploration and Production Company, et al. v.
Ramco Energy Limited and Ramco Hazar Energy Limited, which is expressly
conditioned upon a determination in the federal suit that the disputes between
the PennzEnergy plaintiffs and Ramco are not subject to arbitration, seeks a
declaration that the PennzEnergy plaintiffs have not breached any agreements
with Ramco, and do not owe and/or have not breached any fiduciary or other legal
duty to Ramco including, without limitation, a duty of good faith and fair
dealing. In November 1995, Ramco asserted a counterclaim in the state court
action, asserting breach of contract and breach of fiduciary duties. The
counterclaim seeks a declaratory judgment granting Ramco a participation
interest in the Karabakh prospect, compensatory damages, exemplary damages,
attorneys' fees, costs of court and other unspecified relief. The judge in the
federal suit granted in part the PennzEnergy plaintiffs' motion to compel
arbitration and ordered arbitration to be held in New York, New York. The United
States Court of Appeals for the Fifth Circuit generally affirmed the ruling of
the judge in the federal suit and PennzEnergy has initiated arbitration.
Selection of arbitrators is pending.
(B) TEXAS FEDERAL COURT EMPLOYMENT ACTION SETTLED. The parties have reached
a settlement in the lawsuit styled Donna Alexander, et al. v. Pennzoil Company,
et al., pending in the United States District Court for the Southern District of
Texas, Houston Division. The suit was filed by eleven named plaintiffs and
alleged wrongful and illegal discrimination by PennzEnergy and subsidiaries
against African-American employees. The settlement was approved by the court on
March 8, 1999.
(C) STOCKHOLDER ACTION DISMISSED. By order dated February 16, 1999, the
Chancery Court of Delaware dismissed without prejudice the action filed during
1997 on behalf of stockholders against PennzEnergy and certain of its current
and former directors. The complaints in the action alleged breach of fiduciary
duty on the part of the Board of Directors arising out of a proposal by Union
Pacific Resources Group Inc. to acquire all outstanding shares of common stock
of Pennzoil Company.
(D) ROYALTY MATTERS. More than 30 oil companies, including PennzEnergy, are
involved in disputes in which it is alleged that the oil companies and related
parties have underpaid holders of royalty interests, overriding royalty
interests and working interests in connection with the production of crude oil.
The pending proceedings include suits in federal court in Texas, Louisiana,
Mississippi and Wyoming (that have now been consolidated into one proceeding in
Texas) and in state court in Texas, Utah, Alabama and Louisiana. Certain parties
to the federal litigation have entered into a global settlement agreement, that
is subject to court approval, which would provide a conditional nationwide
settlement, subject to opt-outs, of the crude oil royalty, overriding royalty
and working interest claims of all members of the settlement class, including
claims in the federal litigation and in numerous other individual and class
action cases pending throughout the United States. PennzEnergy is a party to the
settlement agreement, which explicitly refutes an admission of liability, but
was entered into to avoid expensive and protracted litigation.
Also pending is a separate suit in federal court in Texas alleging that
more than 30 major oil companies, including PennzEnergy, underpaid royalties to
the United States in connection with crude oil produced from United States owned
and/or controlled lands since 1986. The claims were filed by private litigants
under the federal False Claims Act, and after investigation, the United States
served notice of its intent to intervene as to certain defendants. The United
States has not intervened with respect to claims against PennzEnergy as of the
date of this report. PennzEnergy is defending vigorously against these claims.
PennzEnergy believes that it has acted reasonably and paid royalties in good
faith.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of 1998 to a vote of
security holders.
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ITEM S-K 401(b). EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Set forth below are the names and ages of the executive officers of
PennzEnergy (at February 28, 1999). Positions, unless otherwise specified, are
with PennzEnergy.
<TABLE>
<S> <C>
JOHN B. CHAPMAN (51) BRUCE K. MISAMORE (48)
Senior Vice President -- Legal Senior Vice President -- Finance and
STEPHEN D. CHESEBRO' (57)(1) Treasurer
President and Chief Executive Officer MICHAEL A. OSBORNE (52) Senior Vice Presi-
WILLIAM S. DAVIS (56) dent -- Planning and Business Development
Senior Vice President and General JAMES L. PATE (63)(1)
Manager, International Chairman of the Board
DONALD A. FREDERICK (53)
Executive Vice President MALCOLM R. RAE (44)
GARY J. MABIE (55) Controller
Senior Vice President and General WILLIAM A. VAN WIE (53) Senior Vice
Manager, Onshore President and General Manager, Offshore
LINDA L. MEAGHER (39)
Corporate Secretary
</TABLE>
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(1) Director of PennzEnergy Company and member of Executive Committee.
(b) Officers are appointed annually to serve for the ensuing year or until
their successors have been appointed. Officers listed above have held their
present offices for at least the past five years except for those named below,
who have had the business experience indicated during that period. Positions,
unless specified otherwise, are with PennzEnergy.
JOHN B. CHAPMAN -- Senior Vice President -- Legal since December 1998. Senior
Vice President -- Legal of Pennzoil Exploration and Production Company from
March 1996 to December 1998. Senior Attorney prior thereto.
STEPHEN D. CHESEBRO' -- President and Chief Executive Officer since December
1998. President and Chief Operating Officer from December 1997 to December
1998. Executive Vice President and President of Pennzoil Exploration and
Production Company from February 1997 to December 1997. Chairman and Chief
Executive Officer of Tenneco Energy from February 1993 to December 1996.
President and Chief Operating Officer of Tenneco Energy prior thereto.
WILLIAM S. DAVIS -- Senior Vice President and General Manager, International
since January 1998, Vice President of Exploration of Amoco Production Company
from 1990 to January 1998.
DONALD A. FREDERICK -- Executive Vice President since December 1998. Group Vice
President -- Oil and Gas from December 1997 to December 1998. Executive Vice
President of Pennzoil Exploration and Production Company from February 1997 to
December 1997. Senior Vice President -- Exploration of Transworld Exploration
and Production, Inc. from January 1994 to February 1997. Consultant to
Transworld Exploration and Production, Inc. for June 1993 to December 1993.
Vice President -- Production of Pecten International, the international
exploration and production subsidiary of Shell Oil Company, prior to March
1993.
GARY J. MABIE -- Senior Vice President and General Manager, Onshore since
November 1997. Vice President of Operations of Hunt Petroleum Corporation from
May 1997 to November 1997, Vice President of Exploration and Production for
Aviara Energy Corp., a subsidiary of Hunt Petroleum, from May 1996 to May 1997
and Vice President -- Operations of Aviara from May 1992 to May 1996.
LINDA L. MEAGHER -- Corporate Secretary since December 1998. Assistant Corporate
Secretary of Union Texas Petroleum Holdings, Inc. from May 1995 to October
1998. Assistant Corporate Secretary Imperial Holly Corporation from October
1990 to May 1995.
15
<PAGE> 18
BRUCE K. MISAMORE -- Senior Vice President -- Finance and Treasurer since
December 1998. Vice President and Treasurer from June 1996 to December 1998.
Assistant Treasurer from July 1993 to June 1996. Director -- Corporate Finance
of USX Corporation from May 1993 to July 1993. Manager -- Financial Planning
of Marathon Oil Company prior thereto.
MICHAEL A. OSBORNE -- Senior Vice President -- Planning and Business
Development, since January 1998. Senior Vice President Production Operations
from January 1996 to January 1998 and Senior Vice President North America
Operations from February 1992 to January 1996.
JAMES L. PATE -- Chairman of the Board since May 1994 and Chief Executive
Officer from March 1990 to December 1998. President from March 1990 to
December 1997. Chairman of the Board and Chief Executive Officer of
Pennzoil-Quaker State Company since December 1998.
MALCOLM R. RAE -- Controller since December 1998. Division Controller from March
1996 to December 1998. General Manager from January 1995 to March 1996.
Division Controller from June 1990 to January 1995.
WILLIAM A. VAN WIE -- Senior Vice President and General Manager, Offshore since
September 1997. Manager of Offshore Exploration of Amerada Hess Corporation
from November 1996 to September 1997, Vice President -- Exploration of
Equitable Resources from April 1996 to November 1996 and Vice
President -- Exploitation Manager of Pennzoil Exploration and Production
Company from 1992 to April 1996.
16
<PAGE> 19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following table shows high and low sales prices for the common stock of
PennzEnergy as reported on the New York Stock Exchange (consolidated
transactions reporting system), the principal market in which the common stock
is traded, and dividends paid per share for the calendar quarters indicated. The
common stock is also listed for trading on the Pacific Exchange. The stock is
being delisted on the Toronto, London and Swiss stock exchanges.
<TABLE>
<CAPTION>
1997 1998
------------------------------- -------------------------------
MARKET PRICE MARKET PRICE
------------------- -------------------
QUARTER ENDED HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
------------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
March 31................................ $63.50 $49.88 $.25 $70.25 $59.50 $.25
June 30................................. $83.88 $45.00 $.25 $70.75 $50.44 $.25
September 30............................ $81.25 $72.25 $.25 $54.38 $34.81 $.25
December 31(1).......................... $82.69 $64.06 $.25 $39.25 $15.31 $.25
</TABLE>
(1) On December 30, 1998, PennzEnergy distributed to its stockholders 47,846,502
shares of common stock of its wholly owned subsidiary Pennzoil-Quaker State
Company. As a result of the distribution, PennzEnergy and Pennzoil-Quaker
State Company are now separately traded companies.
- ---------------
As of December 31, 1998, PennzEnergy had 15,036 record holders of its
common stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following table contains selected financial data for the five years
indicated.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(EXPRESSED IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues from continuing operations........ $ 961.1 $ 813.2 $ 860.9 $ 977.6 $ 837.4
Income (loss) from
Continuing operations(1)................. $ (278.1) $ (283.3) $ 110.2 $ 145.9 $ (45.5)
Discontinued operations(2)............... (5.7) (21.8) 23.7 34.4 (3.2)
Extraordinary items(3)..................... -- -- -- (5.2) (207.0)
Cumulative effect of change in accounting
principle................................ (4.9) -- -- -- --
Preferred stock dividends.................. -- -- -- -- (5.6)
-------- -------- -------- -------- --------
Total............................ $ (288.7) $ (305.1) $ 133.9 $ 175.1 $ (261.3)
Basic earnings (loss) per share
Continuing operations(1)................. $ (6.04) $ (6.13) $ 2.37 $ 3.10 $ (1.07)
Discontinued operations(2)............... (0.12) (0.47) 0.51 0.73 (0.07)
-------- -------- -------- -------- --------
Earnings (loss) per share before
extraordinary items and cumulative
effect of change in accounting
principle............................. $ (6.16) $ (6.60) $ 2.88 $ 3.83 $ (1.14)
Extraordinary items(3)................... -- -- -- (0.11) (4.34)
Cumulative effect of change in accounting
principle............................. (0.11) -- -- -- --
-------- -------- -------- -------- --------
Total............................ $ (6.27) $ (6.60) $ 2.88 $ 3.72 $ (5.48)
</TABLE>
(Table continued on following page)
17
<PAGE> 20
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(EXPRESSED IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Diluted earnings (loss) per share
Continuing operations(1)................. $ (6.03) $ (6.13) $ 2.35 $ 3.04 $ (1.07)
Discontinued operations(2)............... (0.12) (0.47) 0.51 0.72 (0.07)
-------- -------- -------- -------- --------
Earnings (loss) per share before
extraordinary items and cumulative
effect of change in accounting
principle............................. $ (6.15) $ (6.60) $ 2.86 $ 3.76 $ (1.14)
Extraordinary items(3)................... -- -- -- (0.11) (4.34)
Cumulative effect of change in accounting
principle............................. (0.11) -- -- -- --
-------- -------- -------- -------- --------
Total............................ $ (6.26) $ (6.60) $ 2.86 $ 3.65 $ (5.48)
Dividends per common share................. $ 3.00 $ 2.50 $ 1.00 $ 1.00 $ 1.00
Net assets of discontinued operations(2)... $ 669.2 $ 804.6 $ 902.8 $1,076.9 $ --
Total assets............................... $4,361.4 $3,864.8 $3,656.5 $3,983.2 $2,417.1
Debt
Notes payable(4)......................... $ 337.2 $ 468.9 $ -- $ -- $ --
Exchangeable debentures.................. 902.5 902.5 900.4 889.0 739.3
Other long-term debt including current
maturities(5)......................... 1,303.5 1,111.6 1,268.2 1,258.7 797.9
-------- -------- -------- -------- --------
Total debt................................. $2,543.2 $2,483.0 $2,168.6 $2,147.7 $1,537.2
Total shareholders' equity................. $1,204.3 $ 836.2 $ 969.1 $1,138.5 $ 391.1
</TABLE>
- ---------------
(1) Reference is made to Note 2 of Notes to Consolidated Financial Statements.
In October 1994, PennzEnergy entered into a settlement with the Internal
Revenue Service (the "IRS") relating to reporting positions taken by
PennzEnergy in its 1988 federal income tax return resulting in an aggregate
payment by PennzEnergy to the IRS of $556.0 million.
(2) Discontinued operations in the above periods includes motor oil, refined
products and fast lube operations (which generally include Pennzoil
Products Company and Jiffy Lube International, Inc. ("Jiffy Lube") and
their respective subsidiaries and is collectively referred to as
"Pennzoil-Quaker State Company"). The discontinued operating results of
Pennzoil-Quaker State Company are shown net of tax. Reference is made to
Note 1 and Note 12 of Notes to Consolidated Financial Statements for
additional information.
(3) In 1997, PennzEnergy redeemed an issue of outstanding debentures. The
premiums and related unamortized discount and debt issue costs relating to
this redemption resulted in an extraordinary charge of $1.3 million, net of
tax. During 1997 and 1998, certain owners of PennzEnergy's exchangeable
debentures requested to exchange their debentures for Chevron common stock,
in accordance with the respective supplemental indentures. PennzEnergy
recorded extraordinary charges of $3.9 million, net of tax, and $3.2
million, net of tax, respectively, in 1997 and 1998 associated with the
exchanges based on the difference between the face value of the debt and
the value of the Chevron common stock exchanged. In 1998, PennzEnergy
recorded an extraordinary charge of $203.8 million, net of tax, as a result
of an exchange of debentures. Reference is made to Note 3 of Notes to
Consolidated Financial Statements for additional information.
(4) Beginning in May 1996, borrowings under PennzEnergy's commercial paper and
short-term variable-rate credit arrangements, concurrent with the execution
of a revolving credit facility with a group of banks, were classified as
long-term debt. Such debt classification was based upon the availability of
committed long-term credit facilities to refinance such commercial paper
and short-term borrowings and PennzEnergy's intent to maintain such
commitments in excess of one year. Reference is made to Note 3 of Notes to
Consolidated Financial Statements for additional information. There were no
amounts outstanding under such facilities at December 31, 1998.
(5) Debt at December 31, 1998 was reduced as a result of (a) the repayment of
$430.0 million from Pennzoil-Quaker State in settlement of certain accounts
receivable and intercompany indebtedness and (b) the deconsolidation of
indebtedness of Pennzoil-Quaker State. The prior periods do not reflect
this repayment or deconsolidation. Reference is made to Note 3 and Note 12
of Notes to Consolidated Financial Statements for additional information.
18
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to Item 1. Business and Item 2. Properties beginning on
page 1 and the Consolidated Financial Statements beginning on page F-2 for
additional information. (All earnings per share presentations reflect basic
earnings per share, unless otherwise noted.)
RESULTS OF OPERATIONS
A net loss of $255.7 million was recorded for 1998 compared to net income
of $175.1 million for 1997 and net income of $133.9 million for 1996.
After preferred dividends of $5.6 million in 1998, basic earnings per share
available to common shareholders was a loss of $5.48 per share in 1998, income
of $3.72 per share in 1997 and income of $2.88 per share in 1996.
Before an extraordinary loss of $207.0 million, the net loss from
continuing operations for 1998 was $45.5 million, compared to net income from
continuing operations of $145.9 million for 1997 (before extraordinary losses of
$5.2 million), and net income from continuing operations of $110.2 million for
1996.
Net loss from continuing operations for 1998 includes a gain of $147.3
million ($230.1 million before tax) on the disposition of shares of Chevron
common stock and the exchange of a portion of outstanding PennzEnergy debentures
for Chevron common stock. Additionally, a fourth quarter charge of $49 million
($74.7 million before tax) was recognized for asset impairments under the
requirements of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Reference is made to Note 1 and Note 3 of Notes to Consolidated
Financial Statements for additional information.
Net income from continuing operations for 1997 includes a gain of $24.6
million ($67.6 million before tax) on the sale of PennzEnergy's remaining
Canadian oil and gas assets and a charge of $6.5 million ($10.0 million before
tax) associated with PennzEnergy's sale of PennUnion, a natural gas marketing
subsidiary. Reference is made to Note 10 of Notes to Consolidated Financial
Statements for additional information.
Net income from continuing operations for 1996 includes a gain of $25.6
million ($41.7 million before tax) on the sale of Vermejo Park Ranch and a gain
of $19.9 million ($1.2 million before tax) on the sale of non-strategic Canadian
oil and gas assets. Reference is made to Note 2 and Note 10 of Notes to
Consolidated Financial Statements for additional information.
Excluding the special items mentioned above, of the decrease in pretax
income for 1998 compared to 1997, $181.5 million was due to a decrease in
realized natural gas and liquids prices, $93.9 million was due to an increase in
exploration expense and $90.7 million was due to a decrease in natural gas and
liquids production. For 1997 compared to 1996, $140.2 million of the increase in
pretax income was due to an increase in realized natural gas and liquid prices.
This increase was partially offset by $23.4 million of higher exploration
expense primarily associated with offshore lease impairments and dry hole
expenses. Total production costs and expenses per BOE, excluding exploration
expense, corporate overhead and depreciation, depletion and amortization, were
$5.27 in 1998, $4.49 in 1997 and $4.41 in 1996.
Oil and gas production volumes decreased approximately 15% for 1998
compared to 1997. Year-over-year natural gas and liquids production comparisons
were negatively impacted by offshore production declines, pipeline downtime and
temporary production interruptions caused by hurricane evacuations offshore
during 1998. The sale of Canadian properties late in 1997 also negatively
impacted year-over-year natural gas production comparisons. Natural gas produced
for sale in 1998 was 467,474 Mcf per day, compared with 589,492 Mcf per day and
589,211 Mcf per day in 1997 and 1996, respectively. Realized natural gas prices
averaged $2.01 per Mcf in 1998 compared to $2.40 per Mcf in 1997 and $1.87 per
Mcf in 1996. Liquids volumes in 1998 were 53,189 barrels per day, compared to
56,794 and 59,604 barrels per day in 1997 and 1996,
19
<PAGE> 22
respectively. Liquids prices received in 1998 averaged $10.63 per barrel,
compared with $16.66 per barrel in 1997 and $14.99 per barrel in 1996.
Expenses associated with exploration activities in 1998 were $161.6 million
compared with $67.7 million in 1997 and $44.3 million in 1996. Exploration
expenses in 1998 increased by $93.9 million compared to 1997 due principally to
increased international and offshore lease impairments and dry hole expenses.
PennzEnergy's results of operations are subject to volatility resulting
from changes in crude oil and natural gas prices. PennzEnergy has a price risk
management program that permits utilization of agreements and financial
instruments (such as futures, forward and option contracts and swaps and
collars) to reduce the price risk associated with fluctuations in crude oil and
natural gas prices. Reference is made to "-- Disclosures about Market Risk" and
"-- Capital Resources and Liquidity" for additional information.
INVESTMENT AND OTHER INCOME, NET
As of December 31, 1998, PennzEnergy beneficially owned approximately 7.1
million shares of Chevron common stock. The shares of Chevron common stock
beneficially owned by PennzEnergy are classified as non-current "Marketable
securities and other investments" on the accompanying consolidated balance
sheet. Reference is made to "-- Capital Resources and Liquidity" for additional
information. Dividend income on the Chevron common stock was $34.0 million for
1998, $41.0 million for 1997 and $37.6 million for 1996.
Other revenues, net of related expenses, are included in the consolidated
statement of income under "Investment and other income, net" which consists of
the following:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Interest income.................................... $ 830 $ 979 $ 846
Dividend income.................................... 37,623 40,954 34,026
Gains on sale and exchange of marketable securities
and other investments............................ 306 12,066 230,865
Gains on sales of assets, net...................... 50,604 63,593 6,955
Settlements and refunds............................ (9,175) (1,267) --
Other income (expense), net........................ 35,229 (4,280) 13,776
-------- -------- --------
$115,417 $112,045 $286,468
======== ======== ========
</TABLE>
Substantially all interest and dividend income is from marketable
securities and other cash investments.
Reference is made to "Domestic -- Exploration, Development and Production
Activities; Offshore", "Domestic -- Exploration, Development and Production
Activities; Onshore" and "International -- Exploration, Development and
Production Activities" under Item 1. Business and Item 2. Properties for
additional information.
DISCONTINUED OPERATIONS
Income (loss) from discontinued operations before income tax was ($17.2)
million, $62.0 million, and $42.7 million for the years ended December 31, 1998,
1997 and 1996, respectively. Income tax (benefit) on income from discontinued
operations was ($14.0) million, $27.7 million, and $19.0 million for the years
ended December 31, 1998, 1997, and 1996, respectively.
DISCLOSURES ABOUT MARKET RISK
PennzEnergy is exposed to market risk, including adverse changes in
commodity prices, foreign currency exchange rates, marketable equity security
prices, and interest rates as discussed below.
HEDGING ACTIVITIES. PennzEnergy has a price risk management program that
permits utilization of agreements and financial instruments (such as futures,
forward and option contracts and swaps and collars) to reduce the price risks
associated with fluctuations in crude oil and natural gas prices as they relate
to
20
<PAGE> 23
PennzEnergy's anticipated production. These financial instruments are designated
as hedges and accounted for on the accrual basis with gains and losses being
recognized based on the type of contract and exposure being hedged. Realized
gains or losses on crude oil and natural gas financial instruments designated as
hedges of anticipated transactions are treated as deferred credits or charges
and are included in "Other current liabilities" or "Other current assets," as
applicable, on the accompanying consolidated balance sheet. Net gains and losses
on such financial instruments, including accrued gains or losses upon maturity
or termination of the contract, are deferred and recognized in income when the
associated hedged commodities are produced. PennzEnergy did not materially hedge
crude oil or natural gas prices in 1998 or 1997. PennzEnergy will constantly
review and may alter its hedged positions.
PennzEnergy also enters into short-term forward exchange contracts to hedge
the impact of foreign currency fluctuations on certain monetary liabilities and
commitments denominated in foreign currencies. The purpose of entering into
these hedges is to minimize the impact of foreign currency fluctuations on the
results of operations. These contracts have maturity dates that do not exceed
twelve months. The unrealized gains and losses on these contracts are deferred
and recognized in the results of operations in the period in which the hedged
transaction is consummated. Pursuant to this strategy, PennzEnergy hedged
against the foreign currency risk associated with its Cdn.$4.3 million Canadian
tax liability due in early 1999. To accomplish this, in 1998, PennzEnergy
entered into a series of forward contracts at an average exchange rate of 1.539
Cdn.$/U.S.$, whereby the counterparties would pay PennzEnergy Cdn.$3.9 million
in 1999, and PennzEnergy would concurrently pay the counterparties U.S.$2.5
million. Unrealized losses at December 31, 1998 were not material and any
unrealized gains or losses will be recognized in income upon the settlement of
the forward contracts.
MARKETABLE EQUITY SECURITIES AND EXCHANGEABLE DEBENTURES. At December 31,
1998, PennzEnergy's marketable equity securities were recorded at their fair
value of $598.5 million, including net unrealized gains of $223.6 million. A
hypothetical 10 percent adverse change in prices quoted by stock exchanges or
provided by other sources for Chevron common stock or other marketable
securities held by PennzEnergy would not have had a material effect on the
Company's results of operations for the fiscal year ended December 31, 1998. At
December 31, 1998, PennzEnergy's exchangeable debentures were recorded at their
face amount of $739.3 million, with fixed interest rates ranging from 4.90% to
4.95%. With respect to the exchangeable debentures, a hypothetical 10 percent
adverse change in market interest rates would have had no effect on the
Company's results of operations for the fiscal year ended December 31, 1998.
Reference is made to Notes 1 and 3 of the Notes to Consolidated Financial
Statements for additional information.
INTEREST. At December 31, 1998, the fair value of PennzEnergy's long-term
debt, excluding the exchangeable debentures, commercial paper and short-term
variable rate credit agreements, is estimated to be $901.5 million using quoted
market prices or, where such prices are not available, on estimated year-end
interest rates of debt with the same remaining average maturities and credit
quality. Such fair value exceeded the long-term debt carrying value by $103.6
million. PennzEnergy's long-term debt obligations have fixed interest rates.
Because PennzEnergy has no current plans to redeem these obligations before
their stated maturity or call date, PennzEnergy is not exposed to cash flow or
fair value risk from market interest rate changes. The fair value of commercial
paper and short-term variable rate credit agreements is considered to be the
same as the carrying amount. Reference is made to Note 3 of Notes to
Consolidated Financial Statements for additional information. A hypothetical 10
percent adverse change in market interest rates relative to the aforementioned
securities would not have had a material effect on PennzEnergy's results of
operations for the fiscal year ending December 31, 1998.
21
<PAGE> 24
INTEREST CHARGES, NET
During 1998, PennzEnergy's interest charges, net of interest capitalized,
decreased $2.1 million from 1997 levels and $19.0 million from 1996 levels.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1996 1997 1998
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Continuing operations
Interest expense............................. $175,947 $164,044 $161,834
Less: interest capitalized................... 632 5,644 5,562
-------- -------- --------
$175,315 $158,400 $156,272
======== ======== ========
Net interest expense included in income (loss)
from discontinued operations................. $ 2,105 $ 5,406 $ 13,571
======== ======== ========
</TABLE>
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOW. PennzEnergy had cash and cash equivalents of $20.4 million and
$9.5 million at December 31, 1998 and 1997, respectively. Cash flow generated
from continuing operating activities, proceeds from the sales of assets and
repayment of intercompany indebtedness and accounts receivable from Pennzoil-
Quaker State in 1998 totaled approximately $641.0 million. These funds were used
primarily for capital expenditures ($409.4 million), for the net repayment of
debt ($456.8 million) and for payment of cash dividends ($50.9 million).
COMMODITY PRICES. PennzEnergy's financial performance is directly impacted
by changes in oil and natural gas commodity prices. Although low commodity
prices adversely affected PennzEnergy's 1998 results of operations, management
believes that cash flow from operations, together with additional funds
available under its revolving credit agreement, will be sufficient to meet
PennzEnergy's cash requirements, including working capital and debt service
requirements and planned capital expenditures.
CAPITAL EXPENDITURES. PennzEnergy makes and will continue to make
substantial capital expenditures for the acquisition, exploration, development
and production of its oil and natural gas reserves. PennzEnergy has historically
funded these expenditures from cash flows from operating activities, borrowings,
sales of equity and debt securities, sales of non-strategic oil and natural gas
properties and sales of partial interests in exploration concessions.
Due to the current pricing environment for oil and natural gas,
PennzEnergy's capital budget, including capitalized interest, for domestic and
international oil and gas exploration and development during 1999 has been
reduced and is currently estimated to be $250 million. In addition, PennzEnergy
will evaluate its level of capital spending throughout the year based upon
drilling results, commodity prices and cash flows from operations. Actual
capital spending may vary from the capital budget. Total continuing operations
capital expenditures for 1998 were $409.4 million, including $5.6 million of
interest capitalized, a decrease of $2.2 million from comparable 1997 capital
expenditure levels.
INDEBTEDNESS. As of December 31, 1998, PennzEnergy had an adjusted
debt-to-total capitalization ratio of 67.1% (excluding PennzEnergy's outstanding
debentures exchangeable for shares of Chevron common stock). PennzEnergy's debt
level may affect its future cost and availability of funding which (i) could
possibly limit PennzEnergy's ability to take advantage of exploration and
production investment opportunities, and (ii) when coupled with low commodity
prices, could possibly limit the level of capital expenditures that PennzEnergy
may choose to make.
CREDIT FACILITIES. At December 31, 1998, PennzEnergy had no outstanding
borrowings under its commercial paper programs or short-term variable-rate
credit arrangements (the commercial paper programs and the short-term variable
rate credit arrangements, collectively, the "short-term facilities") or under
its revolving credit facility. At December 31, 1997, borrowings under short-term
facilities totaled $347.5 million, all of which was classified as long-term debt
based upon the availability of committed long-term credit
22
<PAGE> 25
facilities to refinance such short-term facilities and PennzEnergy's intent to
maintain such commitments in excess of one year.
In addition, PennzEnergy's $200 million of 9.625% Debentures due November
1999 are classified as long-term debt based upon the availability of committed
long-term credit facilities to refinance the debentures and PennzEnergy's intent
to maintain such commitments in excess of one year.
PennzEnergy's current committed revolving credit facility with a group of
banks provides for up to $500.0 million of unsecured revolving credit borrowings
through November 16, 1999 with any outstanding borrowings on such date being
converted into a term credit facility terminating on November 16, 2000. The
revolving credit facility contains covenants relating to liens, sales of assets
and mergers and consolidations, subsidiary indebtedness, acquisitions and
leverage. PennzEnergy is currently in compliance with these covenants in its
revolving credit facility. Outstanding borrowings under PennzEnergy's revolving
credit facilities totaled $108.0 million at December 31, 1997. The average
interest rate applicable to the amounts outstanding under PennzEnergy's
revolving credit facilities was 5.79% during 1997 and 5.87% during 1998.
PennzEnergy currently is limiting aggregate borrowings under any commercial
paper programs to $500.0 million. Borrowings under PennzEnergy commercial paper
facilities totaled $162.5 million at December 31, 1997. The average interest
rate applicable to outstanding commercial paper was 5.85% during 1997 and 5.87%
during 1998.
PennzEnergy maintains short-term variable-rate credit arrangements with
certain banks and currently limits its aggregate borrowings under these credit
arrangements to $300.0 million. Outstanding borrowings totaled $185.0 million at
December 31, 1997. The average interest rate applicable to the amounts
outstanding was 5.71% during 1997 and 5.80% during 1998. None of the banks under
these credit arrangements have any obligation to continue to extend credit after
the maturities of outstanding borrowings or to extend the maturities of any
borrowings.
Reference is made to Note 3 of Notes to Consolidated Financial Statements
for additional information regarding PennzEnergy's credit facilities.
EXCHANGEABLE DEBENTURES. In 1998, PennzEnergy issued $443.8 million
principal amount of 4.90% Debentures in exchange for $211.6 million principal
amount of 6.50% Debentures and $317.4 million principal amount of 4.95%
Debentures in exchange for $211.6 million principal amount of 4.75% Debentures.
PennzEnergy realized a pretax extraordinary loss on early extinguishment of debt
of $318.4 million, which represents the difference between the carrying amount
of the exchanged debentures of $420.7 million (net of related unamortized debt
issue costs of $2.5 million) and the estimated market value (net of discount) of
$739.1 million for the debentures issued. After deducting an income tax benefit
of $114.6 million, an extraordinary loss of $203.8 million was recognized in
1998 from the early extinguishment of debt.
Virtually all the remaining $464.2 million of the 6.50% and 4.75%
Debentures were exchanged for shares of Chevron common stock. PennzEnergy
delivered Chevron common stock with a historical cost of $308.0 million,
resulting in a recognized ordinary pretax gain of $156.2 million.
In 1998, PennzEnergy sold in the open market 1.55 million shares of Chevron
common stock that previously had been reserved for the exchange rights of the
6.50% Debentures and 4.75% Debentures. PennzEnergy recognized an ordinary pretax
gain of $73.9 million from the sale of these shares.
Each 4.90% Debenture and 4.95% Debenture is exchangeable into 9.3283 shares
of Chevron common stock, matures on August 15, 2008 and is not callable until
August 15, 2000. The 4.90% Debentures and the 4.95% Debentures are exchangeable
at the option of the holders at any time prior to maturity, unless previously
redeemed, for shares of Chevron common stock. In lieu of delivering Chevron
common stock, PennzEnergy may, at its option, pay to any holder an amount in
cash equal to the market value of the Chevron common stock to satisfy the
exchange request. Changes in the fair value of the 4.90% Debentures and the
4.95% Debentures will be recorded in income if and when the market value of the
underlying Chevron common stock exceeds the face amount of the debentures.
23
<PAGE> 26
INVESTMENT IN CHEVRON CORPORATION. As of December 31, 1998, PennzEnergy
beneficially owned approximately 7.1 million shares of Chevron common stock that
have been deposited with exchange agents for possible exchange for $760.3
million principal amount of exchangeable debentures of PennzEnergy due August
15, 2008 at an exchange rate equivalent to $107 7/32 per share of Chevron common
stock. Reference is made to Note 3 of Notes to Consolidated Financial Statements
for additional information. PennzEnergy received approximately $34.0 million in
dividends on its investment in Chevron stock in 1998. Changes in the fair value
of Chevron common stock are recorded in comprehensive income and as a separate
component of shareholders' equity.
At December 31, 1998 and 1997, other assets included long-term receivables
of $18.0 million and $20.2 million, respectively.
PREFERRED STOCK. In June 1998, PennzEnergy issued 1,500,000 shares of 6.49%
Series A Cumulative Preferred Stock at $100 per share. The net proceeds from the
sale of the preferred stock were approximately $147.0 million and were used to
repay borrowings under PennzEnergy's credit facilities. Dividends on the
preferred stock are cumulative from the date of original issue and are payable
quarterly, in cash, when declared by the Board of Directors. The preferred stock
is redeemable at the option of PennzEnergy any time on or after June 2, 2008, in
whole or in part, at a redemption price of $100 per share, plus accrued and
unpaid dividends to the redemption date.
ACCOUNTS RECEIVABLE. In December 1998, PennzEnergy Receivables Company, an
indirect wholly owned special purpose subsidiary of PennzEnergy, entered into a
one-year receivables sales facility, which provides for the ongoing sales of up
to $30 million of accounts receivable of PennzEnergy. Receivables sold under
this agreement totaled $12.9 million as of December 31, 1998. Prior to December
1998, certain of PennzEnergy's receivables were sold by Pennzoil Receivables
Company under a receivables sales facility established in September 1996, which
provided for the ongoing sales of up to $135 million of accounts receivable.
PennzEnergy receivables sold under this former facility totaled $31.7 million as
of December 31, 1997. Fees associated with these transactions totaled $1.2
million and $1.9 million in 1998 and 1997, respectively, and are reflected in
other income.
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES. In December 1998,
PennzEnergy conveyed certain of its East Texas natural gas properties to a newly
formed limited partnership in which PennzEnergy acts as the sole general
partner. The partnership sold limited partner units to an investor for $43.7
million. Such units entitle the limited partner to 99% of the partnership's
earnings and cash flows until payout. Thereafter, PennzEnergy and the limited
partner share earnings and cash flows 95% and 5%, respectively. Proceeds from
sale of limited partner units were used to reduce indebtedness. The limited
partner's investment in the partnership is reported as a minority interest in
the accompanying consolidated balance sheet. Earnings attributable to such
minority interest were not material in 1998.
DISPOSITION OF ASSETS. During 1996, PennzEnergy disposed of approximately
20 producing oil and gas fields, primarily consisting of noncore properties in
the Gulf of Mexico. Proceeds from the sales of these assets in 1996 totaled
$89.2 million. There were no significant gains or losses on the sale of these
assets.
In July 1996, PennzEnergy completed the sale of a portion of its Canadian
oil and gas assets to Gulf Canada. Including working capital and closing
adjustments of $3.5 million received in 1997, PennzEnergy received net proceeds
of $196.3 million from the sale. Proceeds from the sale were primarily used to
reduce outstanding debt. Reference is made to Note 10 of Notes to Consolidated
Financial Statements for additional information.
In late 1997, PennzEnergy sold its 50% interest in a natural gas joint
venture in the Zama/Virgo region of northwest Alberta to Phillips and received
net proceeds of $101.9 million and recorded an after tax gain of $24.6 million.
The assets sold included 132 Bcf equivalent of proved natural gas reserves.
Included in PennzEnergy's consolidated results for 1997 are revenues of $11.2
million and operating income of $3.3 million from these properties during 1997.
In July 1996, PennzEnergy completed the sale of approximately half of its
interest in the ACG joint development unit offshore Azerbaijan in the Caspian
Sea, and in September 1996, completed the sale of
24
<PAGE> 27
Vermejo Park Ranch. PennzEnergy used the proceeds from both of these sales to
partially fund its 1996 capital spending program and to reduce outstanding debt.
Reference is made to Note 10 of Notes to Consolidated Financial Statements for
additional information.
In June 1997, PennzEnergy sold its PennUnion natural gas marketing
subsidiary to Columbia and recorded a pretax charge of $10.0 million.
Divestitures during 1998 included properties in one offshore field and 23
onshore fields in Texas and West Virginia. Proceeds from these sales totaled
approximately $32.1 million resulting in a gain of $8.5 million.
ENVIRONMENTAL MATTERS. PennzEnergy continues to make capital and operating
expenditures relating to the environment, including expenditures associated with
its compliance with federal, state and local environmental regulations. As they
continue to evolve, environmental protection laws are expected to have an
increasing impact on PennzEnergy's operations. In connection with pollution
abatement efforts related to current operations, PennzEnergy made capital
expenditures of approximately $41.0 million in 1998 and $29.0 million in 1997.
Capital expenditures for environmental control facilities are currently expected
to be approximately $14.0 million in 1999. PennzEnergy's recurring operating
expenditures relating to environmental compliance activities are not material.
PennzEnergy is subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
CERCLA, the Resource Conservation and Recovery Act and similar state statutes.
In response to liabilities associated with these activities, accruals have been
established when reasonable estimates are possible. Such accruals primarily
include estimated costs associated with remediation. PennzEnergy has not used
discounting in determining its accrued liabilities for environmental
remediation, and no claims for possible recovery from third-party insurers or
other parties related to environmental costs have been recognized in
PennzEnergy's consolidated financial statements. PennzEnergy adjusts the
accruals when new remediation responsibilities are discovered and probable costs
become estimable, or when current remediation estimates must be adjusted to
reflect new information.
PennzEnergy's assessment of the potential impact of these environmental
laws is subject to uncertainty due to the difficult process of estimating
remediation costs that are subject to ongoing and evolving change. Initial
estimates of remediation costs reflect a broad-based analysis of site conditions
and potential environmental and human health impacts derived from preliminary
site investigations (including soil and water analysis, migration pathways and
potential risk). Later changes in these initial estimates may be based on
additional site investigations, completion of feasibility studies (comparing and
selecting from among various remediation methods and technologies) and risk
assessments (determining the degree of current and future risk to the
environment and human health, based on current scientific and regulatory
criteria) and the actual implementation of the remediation plan. This process
occurs over relatively long periods of time, is influenced by regulatory and
community approval processes and is subject to the ongoing development of
remediation technologies. PennzEnergy's assessment analysis takes into account
the condition of each site at the time of estimation, the degree of uncertainty
surrounding the estimates for each phase of remediation and other site specific
factors.
Certain of PennzEnergy's subsidiaries are involved in matters in which it
has been alleged that such subsidiaries are potentially responsible parties
("PRPs") under CERCLA or similar state legislation with respect to various waste
disposal areas owned or operated by third parties. As of December 31, 1998 and
1997, PennzEnergy's consolidated balance sheet included accrued liabilities,
reflected as other liabilities, for environmental remediation of $7.9 million
and $9.2 million, respectively. PennzEnergy does not currently believe there is
a reasonable possibility of incurring additional material costs in excess of the
current accruals recognized for such environmental remediation activities. With
respect to the sites in which PennzEnergy subsidiaries are PRPs, PennzEnergy's
conclusion is based in large part on (i) the availability of defenses to
liability, including the availability of the "petroleum exclusion" under CERCLA
and similar state laws, and/or (ii) PennzEnergy's current belief that its share
of wastes at a particular site is or will be viewed by the EPA or other PRPs as
being de minimis. As a result, PennzEnergy's monetary exposure is not expected
to be material.
25
<PAGE> 28
YEAR 2000. PennzEnergy has completed a review of its key computer systems
and has identified a number of systems that would be affected by the year 2000
compliance issue. PennzEnergy is undertaking or has completed conversions or
upgrades of these non-compliant financial, operating, human resources, payroll
and seismic data systems. These conversions and upgrades are targeted for
completion during the second quarter of 1999, after compliant upgrades are
received from the vendors, currently scheduled for the first quarter of 1999.
Upgrades and standardization to network, infrastructure, desktop and
communications systems to make these assets compliant are in progress. This
effort is scheduled for completion in the first quarter of 1999 following the
release of compliant updates from the vendors. International as well as domestic
sites were included in these assessments. The assessment of specialized hardware
and software unique to an international location should be completed by the end
of the first quarter of 1999. The only system replacements that have been
accelerated to remedy non-compliance are some of the PennzEnergy voicemail
systems and security systems. No major IT projects have been deferred due to
year 2000 compliance issues. Contingency planning has started for the IT systems
during the first quarter of 1999 and includes backup, standby and storage
service solutions to reduce the impact of critical service providers. The
validation phase that consists of testing mission-critical and significant
systems will be completed by June 1999.
PennzEnergy has completed a comprehensive inventory and is currently
assessing and renovating systems and devices with embedded chips in the
exploration, production and non-production facilities. The exploration and
production facilities consist of offshore platforms, onshore installations, gas
plants, regional pipelines and a natural gas retail distribution operation.
These facilities, which include the processing, storage, and movement of oil and
natural gas, have the greatest inherent risk since embedded chip systems control
and monitor these processes. At this time, several of PennzEnergy's onshore
exploration and production facilities have non-compliant metering and control
equipment. These deficiencies are being addressed by upgrading or replacing the
non-compliant portion of mission-critical equipment. This effort is targeted for
completion by the end of June 1999. Non mission-critical production equipment
that may have non-compliant components is being replaced with compliant
components during normal maintenance and repair outages that occur through 1999.
If for any reason, these systems do not receive maintenance prior to the
millennium or are still found to be non-compliant after the millennium, they
will be operated in a manual mode until further renovation and testing is
completed. In addition, all currently compliant control systems that have
potential for environmental, safety, or business interruption impact will be
tested during scheduled maintenance. The majority of this type of production
equipment is used to monitor and control production only. Nevertheless,
operation of these systems would still be reduced or discontinued if a component
is found to be non-compliant in order to prevent safety and environmental
problems. Contingency planning is also underway to provide alternatives in the
event these systems are partially or completely inoperable. Spare components are
being tested to ensure compliant systems remain compliant through the
maintenance process.
PennzEnergy is contacting key suppliers, banks, customers and other
unaffiliated companies that have business relationships with PennzEnergy to
assess their year 2000 compliance programs. PennzEnergy could be adversely
affected by the failure of these unaffiliated companies to adequately address
the year 2000 issue. This assessment includes activities such as face-to-face
meetings, reviews of year 2000 readiness and co-operative testing. Contingency
planning will be included in this assessment to identify arrangements to
mitigate the impact of disruptions from outside sources. This process is
targeted for completion by the end of June 1999. In addition, PennzEnergy has
implemented internal procedures to respond cooperatively to inquiries from
regulatory agencies and other businesses about its year 2000 program.
As with most companies, PennzEnergy anticipates more issues arising from
international business partners, especially in the banking, utility, shipping
and governmental segments. PennzEnergy is currently reviewing all banking
relationships in international locations. In addition, PennzEnergy is actively
involved in a joint industry effort through the American Petroleum Institute to
collectively address the readiness of their common business partners such as
utilities and governmental agencies, and to share approaches to solving the
specific problems of each international location.
If these steps are not completed successfully in a timely manner,
PennzEnergy's operations and financial performance could be adversely affected
through disruptions in operations. Costs associated with such disruptions
currently cannot be estimated.
26
<PAGE> 29
Both incremental historical and estimated future costs related to the year
2000 issue are not expected to be material to the financial results of
PennzEnergy for several reasons. Most of the renovation is being accomplished
with upgrades to existing software that is under maintenance contracts. The
implementation of the major IT systems was not accelerated to remedy year 2000
problems. Independent quality assurance services and tools are being used to
assure the reliability of the assessment and costs. These services will be
supplemented with PennzEnergy resources. Costs for all year 2000 activities are
estimated to be less than $8 million. This estimate does not include
PennzEnergy's potential share of year 2000 costs that may be incurred by
partnerships and joint ventures in which the company participates but is not the
operator.
PennzEnergy has a June 30, 1999 target readiness date for all major phases
of its year 2000 preparations. PennzEnergy's existing emergency response plan
will be re-evaluated in the fourth quarter of 1999, using the latest information
available for infrastructure services such as utilities. Adjustments to this
plan will be made based on this information. PennzEnergy expects to be fully
ready for the new millennium.
Readers are cautioned that forward-looking statements contained in this
year 2000 update should be read in conjunction with the company's disclosures
under the heading: "Forward-Looking Statements -- Safe Harbor Provisions."
OTHER MATTERS. PennzEnergy does not currently consider the impact of
inflation to be significant in the businesses in which PennzEnergy operates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by Item 305 of Regulation S-K is included under
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of PennzEnergy, together with the
report thereon of Arthur Andersen LLP dated March 19, 1999 and the supplementary
financial data specified by Item 302 of Regulation S-K, are set forth on pages
F-1 through F-39 hereof. (See Item 14 for Index.)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
27
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing under the captions "Nominees," "Directors with
Terms Expiring in 2000 and 2001" and "Compliance with Section 16(a) of the
Exchange Act" set forth within the section entitled "Election of Directors" in
PennzEnergy's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 is incorporated herein by reference.
See also Item S-K 401(b) appearing in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the captions "Director Remuneration,"
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" set forth within the section entitled "Election of Directors" in
PennzEnergy's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Security Ownership of
Directors and Officers" set forth within the section entitled "Election of
Directors" and under the caption "Security Ownership of Certain Shareholders"
set forth within the section entitled "Additional Information" in PennzEnergy's
definitive Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the caption "Director Remuneration" and
"Compensation Committee Interlocks and Insider Participation" set forth within
the section entitled "Election of Directors" and under the caption "Security
Ownership of Certain Shareholders" set forth within the section entitled
"Additional Information" in PennzEnergy's definitive Proxy Statement to be filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934 is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A)(1) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-1
Consolidated Statement of Income............................ F-2
Consolidated Statement of Comprehensive Income.............. F-3
Consolidated Balance Sheet.................................. F-4
Consolidated Statement of Shareholders' Equity.............. F-6
Consolidated Statement of Cash Flows........................ F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
The supplementary financial data specified by Item 302 of Regulation S-K
are included in "Supplemental Financial and Statistical
Information -- Unaudited" beginning on page F-33.
28
<PAGE> 31
(A)(2) FINANCIAL STATEMENT SCHEDULES.
Schedules of PennzEnergy and its subsidiaries are omitted because of the
absence of the conditions under which they are required or because the required
information is included in the financial statements or notes thereto.
(A)(3) EXHIBITS.
<TABLE>
<S> <C>
*3(a) -- Restated Certificate of Incorporation of Pennzoil
Company, as amended through May 10, 1996 (Pennzoil
Company 10-Q (March 31, 1997), SEC File No. 1-5591,
Exhibit 3).
*3(b) -- By-laws of Pennzoil Company, as amended through December
30, 1998 (Pennzoil Company 8-K (December 30, 1998), SEC
File No. 1-5591, Exhibit 4.1).
*4(a) -- Indenture dated as of February 15, 1986 (the "1986
Indenture") between Pennzoil Company and Mellon Bank,
N.A., Trustee (Pennzoil Company 10-Q (June 30, 1986), SEC
File No. 1-5591, Exhibit 4(a)).
*4(b) -- Officer's Certificate dated as of April 14, 1989
delivered pursuant to the terms of the 1986 Indenture
setting forth the terms of Pennzoil Company's 10 5/8%
Debentures due June 1, 2001 (Pennzoil Company 10-Q (March
31, 1989), SEC File No. 1-5591, Exhibit 4(a)).
*4(c) -- Officer's Certificate dated as of November 14, 1989
delivered pursuant to the terms of the 1986 Indenture
setting forth the terms of Pennzoil Company's 10 1/8%
Debentures due November 15, 2009 and 9 5/8% Notes due
November 15, 1999 (Pennzoil Company 10-K (1989), SEC File
No. 1-5591, Exhibit 4(n)).
*4(d) -- Officer's Certificate dated as of November 19, 1990
delivered pursuant to the terms of the 1986 Indenture
setting forth the terms of Pennzoil Company's 10 1/4%
Debentures due November 1, 2005 (Pennzoil Company 10-K
(1990), SEC File No. 1-5591, Exhibit 4(n)).
*4(e) -- Instrument of Resignation, Appointment and Acceptance
dated as of April 1, 1991 among Pennzoil Company, Mellon
Bank, N.A., as Retiring Trustee, and Texas Commerce Bank
National Association, as Successor Trustee, under the
1986 Indenture (Pennzoil Company 10-K (1991), SEC File
No. 1-5591, Exhibit 4(p)).
*4(f) -- Indenture dated as of December 15, 1992 (the "1992
Indenture") between Pennzoil Company and Texas Commerce
Bank National Association, Trustee (Pennzoil Company 10-K
(1992), SEC File No. 1-5591, Exhibit 4(o)).
4(g) -- Third Supplemental Indenture dated as of August 3, 1998
to the 1992 Indenture setting forth the terms of Pennzoil
Company's 4.90% Exchangeable Senior Debentures Due August
15, 2008.
4(h) -- Fourth Supplemental Indenture dated as of August 3, 1998
to the 1992 Indenture setting forth the terms of Pennzoil
Company's 4.95% Exchangeable Senior Debentures Due August
15, 2008.
*4(i) -- Rights Agreement dated as of October 28, 1994 between
Pennzoil Company and Chemical Bank, as Rights Agent
(Pennzoil Company 8-K (October 28, 1994), SEC File No.
1-5591, Exhibit 1).
PennzEnergy Company agrees to furnish to the Commission upon
request a copy of any agreement defining the rights of
holders of long-term debt of PennzEnergy Company and all
its subsidiaries for which consolidated or unconsolidated
financial statements are required to be filed, under
which the total amount of securities authorized does not
exceed 10% of the total assets of PennzEnergy Company and
its subsidiaries on a consolidated basis.
+*10(a) -- 1981 Stock Option Plan of Pennzoil Company (Pennzoil
Company Form S-8 (Registration No. 2-76935), Exhibit
4(a)).
+*10(b) -- 1982 Stock Option Plan of Pennzoil Company (Pennzoil
Company 10-K (1982), SEC File No. 1-5591, Exhibit 10(e)).
+*10(c) -- Pennzoil Company Salary Continuation Plan (Pennzoil
Company 10-K (1982), SEC File No. 1-5591, Exhibit 10(g)).
+*10(d) -- Pennzoil Company Supplemental Disability Plan effective
January 1, 1978 (Pennzoil Company 10-K(1977), SEC File
No. 1-5591, Exhibit 5(y)).
</TABLE>
29
<PAGE> 32
<TABLE>
<S> <C>
+*10(e) -- Pennzoil Company Supplemental Life Insurance Plan
effective January 1, 1978, as amended (Pennzoil Company
10-K (1980), SEC File No. 1-5591, Exhibit 10(g)).
+*10(f) -- Pennzoil Company Deferred Compensation Plan (Pennzoil
Company 10-K (1981), SEC File No. 1-5591, Exhibit 10(i)).
+*10(g) -- Specimen of Pennzoil Company Deferred Compensation
Agreement (Pennzoil Company 10-K (1982), SEC File No.
1-5591, Exhibit 10(j)(1)).
+*10(h) -- Specimen of Pennzoil Company agreements regarding certain
benefits payable in the event of a change in control
(Pennzoil Company 10-Q (September 30, 1982), SEC File
No. 1-5591, Exhibit 28).
+*10(i) -- Pennzoil Company Section 415 Excess Benefit Agreements
(Pennzoil Company 10-Q (March 31, 1980), SEC File No.
1-5591, Exhibit 5).
+*10(j) -- Pennzoil Company Medical Expenses Reimbursement Plan
effective January 1, 1978 (Pennzoil Company 10-K(1977),
SEC File No. 1-5591, Exhibit 5(v)).
+*10(k) -- Pennzoil Company 1985 Conditional Stock Award Program
(Pennzoil Company definitive proxy material (April 25,
1985), SEC File No. 1-5591, Exhibit B).
+*10(l) -- Pennzoil Company Executive Severance Plan (Pennzoil
Company 10-K (1987), SEC File No. 1-5591, Exhibit 10(t)).
+*10(m) -- 1990 Stock Option Plan of Pennzoil Company (Pennzoil
Company definitive proxy material (April 26, 1990), SEC
File No. 1-5591, Exhibit A).
+*10(n) -- Pennzoil Company 1990 Conditional Stock Award Program
(Pennzoil Company definitive proxy material (April 26,
1990), SEC File No. 1-5591, Exhibit B).
+*10(o) -- 1992 Stock Option Plan of Pennzoil Company (Pennzoil
Company definitive proxy material (April 13, 1993), SEC
File No. 1-5591, Exhibit A).
+*10(p) -- Pennzoil Company 1993 Conditional Stock Award Program
(Pennzoil Company definitive proxy material (April 13,
1993), SEC File No. 1-5591, Exhibit B).
+*10(q) -- Employment Agreement between Pennzoil Company and Stephen
D. Chesebro' dated as of February 10, 1997 (Pennzoil
Company 10-K (1996), SEC File No. 1-5591, Exhibit 10(r)).
+*10(r) -- Employment Agreement between Pennzoil Company and Donald
A. Frederick dated February 10, 1997 (Pennzoil Company
10-K (1996), SEC File No. 1-5591, Exhibit 10(s)).
+*10(s) -- 1997 Incentive Plan of Pennzoil Company (Pennzoil Company
definitive proxy material (March 21, 1997), SEC File No.
1-5591, Exhibit A).
+*10(t) -- 1998 Incentive Plan of PennzEnergy Company (Pennzoil
Company Form S-8 (Registration No. 333-69845), Exhibit
4.3).
10(u) -- Credit Agreement dated as of November 17, 1998 among
Pennzoil Company and the lenders named therein.
10(v) -- First Amendment to Credit Agreement dated as of March 19,
1999 between PennzEnergy Company and the lenders named
therein.
12 -- Computation of Ratio of Earnings to Fixed Charges for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994.
21 -- List of Subsidiaries of PennzEnergy Company.
23(a) -- Consent of Arthur Andersen LLP.
23(b) -- Consent of Ryder Scott Company Petroleum Engineers.
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
99(a) -- Summary of Reserve Report of Ryder Scott Company
Petroleum Engineers as of December 31, 1998 relating to
oil and gas reserves.
</TABLE>
- ---------------
* Incorporated by reference.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
30
<PAGE> 33
(B) REPORTS ON FORM 8-K.
PennzEnergy filed the following Current Reports on Form 8-K with the
Securities and Exchange Commission during the quarter ended December 31, 1998:
<TABLE>
<CAPTION>
DATE OF REPORT ITEMS REPORTED
-------------- --------------
<S> <C>
November 12, 1998.................... Pro forma financial information relating to discontinued
operations.
December 30, 1998.................... Information relating to (1) the distribution to stockholders
of 47,846,502 shares of common stock of Pennzoil-Quaker
State Company, (2) the change of corporate name to
PennzEnergy Company and (3) officers and directors of
PennzEnergy Company.
</TABLE>
31
<PAGE> 34
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.
PENNZENERGY COMPANY
By: STEPHEN D. CHESEBRO'
------------------------------------
(STEPHEN D. CHESEBRO', PRESIDENT AND
CHIEF EXECUTIVE OFFICER)
Date: March 23, 1999
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- ----- DATE
<C> <S> <C>
STEPHEN D. CHESEBRO' Principal Executive Officer March 23, 1999
- ----------------------------------------------------- and Director
(STEPHEN D. CHESEBRO', PRESIDENT AND
CHIEF EXECUTIVE OFFICER)
BRUCE K. MISAMORE Principal Financial Officer March 23, 1999
- -----------------------------------------------------
BRUCE K. MISAMORE, SENIOR VICE PRESIDENT -- FINANCE
AND TREASURER
MALCOLM R. RAE Principal Accounting Officer March 23, 1999
- -----------------------------------------------------
MALCOLM R. RAE, CONTROLLER
HENRY R. HAMMAN*
ROBERT A. MOSBACHER, JR.*
TERRY L. SAVAGE* March 23, 1999
BRENT SCOWCROFT*
JAMES L. PATE*
ROBERT B. WEAVER*
*BY: /s/ BRUCE K. MISAMORE
------------------------------------------------
(BRUCE K. MISAMORE, ATTORNEY-IN-FACT)
</TABLE>
A majority of the Directors
of the Registrant
32
<PAGE> 35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PennzEnergy Company:
We have audited the accompanying consolidated balance sheet of PennzEnergy
Company (a Delaware corporation) and subsidiaries as of December 31, 1997 and
1998, and the related consolidated statements of income, comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PennzEnergy Company and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 19, 1999
F-1
<PAGE> 36
PENNZENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1996 1997 1998
-------- -------- ---------
(EXPRESSED IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Net sales............................................. $745,462 $865,512 $ 550,899
Investment and other income, net (Note 1)............. 115,417 112,045 286,468
-------- -------- ---------
860,879 977,557 837,367
COSTS AND EXPENSES
Operating expenses.................................... 218,822 209,030 217,194
General and administrative expenses................... 33,997 37,841 52,228
Depreciation, depletion and amortization.............. 222,019 224,358 208,009
Impairment of long-lived assets (Note 1).............. -- -- 74,739
Exploration expenses.................................. 44,271 67,664 161,615
Taxes, other than income.............................. 40,003 37,899 30,544
Interest charges...................................... 175,947 164,044 161,834
Interest capitalized.................................. (632) (5,644) (5,562)
-------- -------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAX................................................... 126,452 242,365 (63,234)
Income tax provision (benefit).......................... 16,204 96,473 (17,768)
-------- -------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS................ 110,248 145,892 (45,466)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS.............. 23,650 34,363 (3,246)
-------- -------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS................ 133,898 180,255 (48,712)
Extraordinary items (Note 3)............................ -- (5,188) (206,963)
-------- -------- ---------
NET INCOME (LOSS)....................................... 133,898 175,067 (255,675)
Preferred stock dividends............................... -- -- 5,625
-------- -------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS...... $133,898 $175,067 $(261,300)
======== ======== =========
BASIC EARNINGS (LOSS) PER SHARE
Continuing operations................................. $ 2.37 $ 3.10 $ (1.07)
Discontinued operations............................... 0.51 0.73 (0.07)
-------- -------- ---------
Earnings per share before extraordinary items......... 2.88 3.83 (1.14)
Extraordinary items................................... -- (0.11) (4.34)
-------- -------- ---------
TOTAL BASIC................................... $ 2.88 $ 3.72 $ (5.48)
======== ======== =========
DILUTED EARNINGS (LOSS) PER SHARE
Continuing operations................................. $ 2.35 $ 3.04 $ (1.07)
Discontinued operations............................... 0.51 0.72 (0.07)
-------- -------- ---------
Earnings per share before extraordinary items......... 2.86 3.76 (1.14)
Extraordinary items................................... -- (0.11) (4.34)
-------- -------- ---------
TOTAL DILUTED................................. $ 2.86 $ 3.65 $ (5.48)
======== ======== =========
DIVIDENDS PER COMMON SHARE.............................. $ 1.00 $ 1.00 $ 1.00
======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 37
PENNZENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1996 1997 1998
-------- -------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
NET INCOME (LOSS)........................................... $133,898 $175,067 $(255,675)
-------- -------- ---------
Unrealized gains (losses) on marketable securities, net of
tax:
Unrealized gains (losses) arising during period........... 36,373 2,365 185,034
Less: reclassification adjustment for gains, included in
net income............................................. 199 7,843 147,754
-------- -------- ---------
Unrealized gains (losses), net of tax....................... 36,174 (5,478) 37,280
Foreign currency translation adjustment and other........... (1,414) (5,977) 6,781
-------- -------- ---------
34,760 (11,455) 44,061
-------- -------- ---------
COMPREHENSIVE INCOME (LOSS)................................. $168,658 $163,612 $(211,614)
======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 38
PENNZENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1998
---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 9,462 $ 20,439
Receivables (Note 1)...................................... 150,979 71,553
Crude oil and natural gas inventories..................... 6,638 4,818
Materials and supplies, at average cost................... 8,958 12,354
Deferred income tax....................................... 19,479 10,300
Other current assets...................................... 59,838 8,955
---------- ----------
TOTAL CURRENT ASSETS.............................. 255,354 128,419
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, successful efforts method
of accounting.......................................... 4,708,431 4,732,189
Less accumulated depreciation, depletion and
amortization........................................... 3,000,011 3,073,455
---------- ----------
NET PROPERTY, PLANT AND EQUIPMENT................. 1,708,420 1,658,734
---------- ----------
OTHER ASSETS
Marketable securities and other investments (Note 1)...... 900,421 598,462
Other..................................................... 42,069 31,471
---------- ----------
TOTAL OTHER ASSETS................................ 942,490 629,933
---------- ----------
NET ASSETS OF DISCONTINUED OPERATIONS (Note 12)............. 1,076,942 --
---------- ----------
TOTAL ASSETS................................................ $3,983,206 $2,417,086
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 39
PENNZENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1998
---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable...................... $ 176,628 $ 113,495
Taxes accrued......................... 38,909 4,501
Interest accrued...................... 30,016 26,093
Payroll accrued....................... 9,310 9,499
Other current liabilities............. 44,206 24,889
---------- ----------
TOTAL CURRENT LIABILITIES..... 299,069 178,477
---------- ----------
LONG-TERM DEBT (Note 3)
Exchangeable debentures............... 889,027 739,258
Other long-term debt.................. 1,258,722 797,951
---------- ----------
TOTAL LONG-TERM DEBT.......... 2,147,749 1,537,209
DEFERRED INCOME TAX..................... 287,498 167,253
OTHER LIABILITIES....................... 110,351 99,362
---------- ----------
TOTAL LIABILITIES............. 2,844,667 1,982,301
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
MINORITY INTEREST (Note 1).............. -- 43,696
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per
share -- authorized 9,747,720
shares, issued 1,500,000 shares.... -- 1,500
Common stock, par value $0.83 1/3 per
share -- authorized 100,000,000
shares, issued 52,208,888 shares... 43,507 43,507
Additional capital.................... 325,460 358,568
Retained earnings..................... 842,597 --
Net unrealized holding gain on
marketable securities (Note 1)..... 186,325 223,605
Cumulative foreign currency
translation adjustment and other... (9,427) (2,646)
Common stock in treasury, at cost,
4,663,080 shares in 1997 and
4,355,644 shares in 1998........... (249,923) (233,445)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY.... 1,138,539 391,089
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................ $3,983,206 $2,417,086
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 40
PENNZENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------
1996 1997 1998
--------------------- --------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ---------- -------- ---------- -------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK, $1.00 par --
Authorized 9,747,720 shares
Balance January 1................... -- $ -- -- $ -- -- $ --
Shares issued.................... -- -- -- -- 1,500 1,500
------- ---------- ------- ---------- ------- ---------
Balance December 31................. -- -- -- -- 1,500 1,500
======= ---------- ======= ---------- ======= ---------
COMMON STOCK, $0.83 1/3 par --
Authorized 100,000,000 shares
Balance January 1 and December 31... 52,209 43,507 52,209 43,507 52,209 43,507
------- ---------- ------- ---------- ------- ---------
ADDITIONAL CAPITAL
Balance January 1................... 324,812 323,209 325,460
Shares reissued.................. (1,603) 2,251 2,914
Capital contribution to Pennzoil-
Quaker State Company........... -- -- (115,306)
Issuance of preferred stock...... -- -- 145,500
---------- ---------- ---------
Balance December 31................. 323,209 325,460 358,568
---------- ---------- ---------
RETAINED EARNINGS
Balance January 1................... 627,257 714,676 842,597
Net income (loss)................ 133,898 175,067 (255,675)
Dividends on common stock........ (46,479) (47,146) (47,729)
Dividends on preferred stock..... -- -- (5,625)
Capital contribution to Pennzoil-
Quaker State Company........... -- -- (533,568)
---------- ---------- ---------
Balance December 31................. 714,676 842,597 --
---------- ---------- ---------
NET UNREALIZED HOLDING GAIN ON
MARKETABLE SECURITIES
Balance January 1................... 155,629 191,803 186,325
Change in net unrealized holding
gain........................... 36,174 (5,478) 36,437
Spin-off of Pennzoil-Quaker State
Company........................ -- -- 843
---------- ---------- ---------
Balance December 31................. 191,803 186,325 223,605
---------- ---------- ---------
CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENT AND OTHER
Balance January 1................... (2,036) (3,450) (9,427)
Change in translation
adjustment..................... (1,429) (5,982) (2,259)
Spin-off of Pennzoil-Quaker State
Company........................ -- -- 9,026
Change in additional minimum
pension liability.............. 15 5 14
---------- ---------- ---------
Balance December 31................. (3,450) (9,427) (2,646)
---------- ---------- ---------
COMMON STOCK IN TREASURY, at cost
Balance January 1................... (5,839) (312,937) (5,610) (300,670) (4,663) (249,923)
Shares reissued.................. 229 12,267 947 50,747 307 16,478
------- ---------- ------- ---------- ------- ---------
Balance December 31................. (5,610) (300,670) (4,663) (249,923) (4,356) (233,445)
------- ---------- ------- ---------- ------- ---------
TOTAL COMMON STOCK, outstanding as of
December 31......................... 46,599 47,546 47,853
======= ======= =======
TOTAL SHAREHOLDERS' EQUITY............ $ 969,075 $1,138,539 $ 391,089
========== ========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 41
PENNZENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1996 1997 1998
----------- ----------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................... $ 133,898 $ 175,067 $(255,675)
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Depreciation, depletion and
amortization.................. 222,019 224,358 208,009
Impairment of long-lived
assets........................ -- -- 74,739
Dry holes and impairments........ 11,587 31,441 100,362
Deferred income tax.............. (7,714) 23,005 (134,700)
Extraordinary loss associated
with refinancing of
exchangeable debentures....... -- -- 321,257
Gain on sale of marketable
securities.................... (306) (12,066) (230,865)
Gain on sales of assets.......... (50,298) (63,593) (6,955)
Other non-cash items............. 27,829 31,043 7,740
(Income) loss from discontinued
operations, net of tax........ (23,650) (34,363) 3,246
Changes in operating assets and
liabilities................... (77,443) 59,044 104,077
----------- ----------- ---------
Net cash provided by operating
activities.................. 235,922 433,936 191,235
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................. (314,437) (411,679) (409,414)
Purchases of marketable securities and
other investments.................. (572,836) (585,279) (133,210)
Proceeds from sales of marketable
securities and other investments... 578,871 581,925 136,546
Proceeds from sales of Chevron
Corporation common stock........... -- 8,471 126,149
Repayment of intercompany receivable
from Pennzoil-Quaker State
Company............................ -- -- 369,962
Proceeds from sales of assets......... 466,827 116,976 79,797
Other investing activities............ 15,703 3,355 (38,984)
----------- ----------- ---------
Net cash provided by (used in)
investing activities........ 174,128 (286,231) 130,846
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (repayments) of notes
payable, net....................... (140,838) 19,380 (347,475)
Debt repayments....................... (1,566,355) (1,684,223) (984,304)
Proceeds from issuances of debt....... 1,392,000 1,648,000 875,000
Proceeds from issuance of preferred
stock.............................. -- -- 147,000
Dividends paid........................ (46,479) (47,146) (50,920)
Proceeds from exercise of stock
options............................ 488 46,971 5,558
Proceeds from sale of minority
interest (Note 1).................. -- -- 43,696
Other financing activities............ -- -- (4,464)
----------- ----------- ---------
Net cash used in financing
activities.................. (361,184) (17,018) (315,909)
----------- ----------- ---------
CASH PROVIDED BY (USED IN) DISCONTINUED
OPERATIONS............................ (43,427) (139,811) 4,805
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 5,439 (9,124) 10,977
CASH AND CASH EQUIVALENTS,
beginning of period................... 13,147 18,586 9,462
----------- ----------- ---------
CASH AND CASH EQUIVALENTS, end of
period................................ $ 18,586 $ 9,462 $ 20,439
=========== =========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 42
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
Spin-off --
On December 30, 1998, PennzEnergy Company ("PennzEnergy" or the "Company"),
formerly named Pennzoil Company ("Pennzoil"), distributed to its shareholders
(the "Spin-off") 47.8 million shares of common stock of its wholly owned
subsidiary Pennzoil-Quaker State Company ("Pennzoil-Quaker State"), representing
all of the shares of Pennzoil-Quaker State owned by Pennzoil.
In connection with the Spin-off, accumulated retained earnings of Pennzoil
were eliminated. PennzEnergy's consolidated financial statements have been
restated to present the net assets and results of operations of Pennzoil-Quaker
State as discontinued operations. Reference is made to Note 12 for further
discussion of discontinued operations.
General Policies --
The accompanying consolidated financial statements include all
majority-owned subsidiaries of PennzEnergy. All significant intercompany
accounts and transactions have been eliminated.
Certain prior period items have been reclassified in the consolidated
financial statements in order to conform with the current year presentation.
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, the
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. Actual results could differ from those estimates.
Principles of Consolidation --
The consolidated financial statements include the accounts of those
subsidiaries that are more than 50 percent owned directly or indirectly, after
elimination of intercompany balances and transactions, as well as those that are
controlled by PennzEnergy regardless of its level of ownership. PennzEnergy also
consolidates its proportionate share of assets, liabilities, and results of
operations of oil and gas joint ventures and partnerships.
Amounts representing PennzEnergy's percentage interest in the underlying
net assets of less than majority owned companies in which a significant equity
ownership interest is held are included in other assets. PennzEnergy's equity
earnings and losses from these investments are included in other income.
PennzEnergy's investment in Chevron Corporation ("Chevron") common stock is
included in marketable securities and other investments at its fair value.
Reference is made to Note 3 and Note 5 for additional information. Investments
in all other marketable securities are included in other assets at cost, which
approximates fair value. Dividends from these companies are included in other
income as received.
Marketable Securities and Other Investments --
PennzEnergy accounts for certain investments in debt and equity securities
by following the requirements of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This standard requires that, except for debt securities classified
as "held-to-maturity," investments in debt and equity securities must be
reported at fair value. As a result, PennzEnergy's investment in Chevron common
stock, which shares are classified as "available for sale," is reported at fair
value, with the unrealized gain recognized in comprehensive income and reported
as a separate component of shareholders' equity. As of December 31, 1998 and
1997, PennzEnergy beneficially owned approximately
F-8
<PAGE> 43
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7.1 million shares and 17.8 million shares of Chevron common stock,
respectively, acquired at an average cost of approximately $33.68 per share.
In 1998, PennzEnergy issued $443.8 million principal amount of 4.90%
Debentures and $317.4 million principal amount of 4.95% Debentures in exchange
for a portion of its 6.50% and 4.75% Debentures. Reference is made to Note 3 for
additional information regarding the exchange, which resulted in an
extraordinary loss of $203.8 million. Virtually all the remaining $464.2 million
of the 6.50% and 4.75% Debentures were exchanged for shares of Chevron common
stock. PennzEnergy delivered Chevron common stock with a historical cost of
$308.0 million, resulting in a recognized ordinary pretax gain of $156.2
million.
In 1998, PennzEnergy sold in the open market 1.55 million shares of Chevron
common stock that previously had been reserved for the exchange rights of the
6.50% and 4.75% Debentures. PennzEnergy recognized an ordinary pretax gain of
$73.9 million from the sale of these shares.
PennzEnergy's investment in Chevron common stock is subject to the exchange
rights of holders of PennzEnergy's $443.8 million outstanding principal amount
of PennzEnergy's 4.90% Debentures and $316.5 million outstanding principal
amount of PennzEnergy's 4.95% Debentures, all of which are exchangeable at the
option of the holders thereof for shares of Chevron common stock owned by
PennzEnergy. Reference is made to Note 3 for additional information.
The fair value of the shares of Chevron common stock held by PennzEnergy,
as of December 31, 1998 and 1997 was $82.94 and $49.93, respectively, per share,
based on the closing market price for Chevron common stock reported on the New
York Stock Exchange on December 31, 1998 and December 31, 1997 of $82.94 and
$77.00 per share, respectively. The fair value of the Chevron common stock on
December 31, 1997 was reduced by a reserve for certain exchange rights relating
to PennzEnergy's outstanding 6.50% Debentures and 4.75% Debentures outstanding
as of December 31, 1997. As a result, appreciation in the Chevron common stock
in excess of the reserve for exchange rights was capped at the exchange price
for the 6.50% Debentures and the 4.75% Debentures.
The cost, fair value and unrealized gains related to PennzEnergy's
marketable securities are as follows:
<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
AT DECEMBER 31 COST FAIR VALUE GAINS
-------------- -------- ---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
1997
Non-current marketable securities and
other investments:
Chevron common stock............... $599,652 $889,027 $289,375
Other marketable securities and
investments...................... 11,394 11,394 --
-------- -------- --------
Total non-current marketable
securities
and other investments.............. $611,046 $900,421 $289,375
======== ======== ========
1998
Non-current marketable securities and
other investments:
Chevron common stock............... $238,847 $588,228 $349,381
Other marketable securities and
investments...................... 10,234 10,234 --
-------- -------- --------
Total non-current marketable
securities
and other investments.............. $249,081 $598,462 $349,381
======== ======== ========
</TABLE>
PennzEnergy's investments in debt securities are classified as
"held-to-maturity" based on PennzEnergy's ability and intent to hold those
securities to maturity. Such securities are carried at cost, net of unamortized
premium or discount, if any, and consist primarily of domestic commercial paper.
All of
F-9
<PAGE> 44
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PennzEnergy's "held-to-maturity" securities approximate their fair values based
on the relatively short maturities of those investments.
Investment and Other Income, Net --
Other revenues, net of related expenses, are included in "Investment and
other income, net," which consists of the following:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Interest income......................... $ 830 $ 979 $ 846
Dividend income......................... 37,623 40,954 34,026
Gains on sale and exchange of marketable
securities (including Chevron common
stock) and other investments.......... 306 12,066 230,865
Gains on sales of assets, net........... 50,604 63,593 6,955
Settlements and refunds................. (9,175) (1,267) --
Other income (expense), net............. 35,229 (4,280) 13,776
-------- -------- --------
$115,417 $112,045 $286,468
======== ======== ========
</TABLE>
Substantially all interest and dividend income is from marketable
securities and other cash investments.
Receivables --
Current receivables include trade accounts and notes receivable and are net
of allowances for doubtful accounts of $11.2 million in 1998 and $10.4 million
in 1997.
In December 1998, PennzEnergy Receivables Company, an indirect wholly
owned, special purpose subsidiary of PennzEnergy, entered into a one-year
receivables sales facility, which provides for the ongoing sales of up to $30
million of accounts receivable of PennzEnergy. Receivables sold under this
agreement totaled $12.9 million as of December 31, 1998. Prior to December 1998,
certain of PennzEnergy's receivables were sold by Pennzoil Receivables Company
under a receivables sale facility established in September 1996, which provided
for the ongoing sales of up to $135 million of accounts receivable. PennzEnergy
receivables sold under this former facility totaled $31.7 million as of December
31, 1997. Fees associated with these transactions totaled $1.2 million and $1.9
million in 1998 and 1997, respectively, and are reflected in other income.
Crude Oil and Natural Gas Inventories --
Substantially all inventories are recorded at the lower of cost or market
using the first-in, first-out method.
Oil and Gas Producing Activities --
PennzEnergy follows the successful efforts method of accounting for oil and
gas operations. Under the successful efforts method, lease acquisition costs are
capitalized. Significant unproved properties are reviewed periodically on a
property-by-property basis to determine if there has been impairment of the
carrying value, with any such impairment charged currently to exploration
expense. All other unproved properties are generally aggregated and a portion of
such costs estimated to be nonproductive, based on historical experience, is
amortized on an average holding period basis.
Exploratory drilling costs are capitalized pending determination of proved
reserves. If proved reserves are not discovered, the exploratory drilling costs
are expensed. Other exploration costs are also expensed. All
F-10
<PAGE> 45
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
development costs are capitalized. Provision for depreciation, depletion and
amortization expense ("DD&A") is determined on a field-by-field basis using the
unit-of-production method. Estimated costs of future dismantlement and
abandonment of wells and production platforms, net of salvage values, are
accrued as part of DD&A using the unit-of-production method; actual costs are
charged to accumulated depreciation, depletion and amortization.
All other properties are depreciated on straight-line or accelerated
methods calculated to allocate the cost of properties over their estimated
useful lives.
Impairment of Long-Lived Assets --
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" requires that long-lived assets be reviewed
for impairment whenever there is evidence that the carrying value of such assets
may not be recoverable. This consists of comparing the carrying value of the
asset with the asset's expected future undiscounted cash flows without interest
costs. Estimates of expected future cash flows are to represent management's
best estimate based on reasonable and supportable assumptions. PennzEnergy
reviews its proved oil and gas properties on a field by field basis when such
evidence exists. Any impairment recognized in accordance with SFAS No. 121 is
permanent and may not be restored. Due principally to the prolonged depressed
state of oil and natural gas prices, an impairment was recorded during 1998
totalling $49.0 million ($74.7 million before tax). No proved property
impairments were required during 1997 or 1996.
Mineral Property Conveyances and Related Transactions --
PennzEnergy's mineral interests in oil and gas properties are frequently
conveyed to others for a variety of reasons, including the desire to spread
risks, to improve operating efficiencies, and to achieve tax benefits. The
Company complies with SFAS No. 19, "Financial Accounting and Reporting by Oil
and Gas Producing Companies," in accounting for such conveyances.
PennzEnergy recognizes gains and losses when an oil and gas mineral
interest is sold, either partially or in its entirety, based on the difference
between the amount of sales proceeds received and the unamortized cost of the
mineral interest sold. When a partial interest is retained, an allocation based
on fair value is applied to the interest sold and to the partial interest
retained for purposes of the gain or loss calculation. However, normal
retirement treatment of the partial interest sold, without any recognition of a
gain or loss, is used if the amortization basis of the assets retained is not
significantly affected by the sale.
In addition, gains or losses are not recognized when: (i) a transfer of
assets used in oil and gas producing activities is exchanged for other assets
also used in oil and gas producing activities, (ii) a pooling of assets in a
joint undertaking intended to find, develop, or produce oil and gas from a
particular property or group of properties occurs, or (iii) a partial interest
in an unproved property is sold and substantial uncertainty exists as to
recovery of the cost applicable to the interest retained. Under these
circumstances, amounts received are treated as a recovery of prior costs
incurred.
F-11
<PAGE> 46
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition --
Oil and gas revenues are recognized when produced. For production from
properties with natural gas imbalances, PennzEnergy uses the sales method of
accounting. Under the sales method, revenue is recognized based on actual
volumes of gas sold to purchasers. The volume of gas sold may differ from
volumes to which PennzEnergy is entitled based on its interest in the
properties. Differences between volumes sold and volumes based on entitlements
create gas imbalances, which are monitored over the life of the reservoir. At
December 31, 1998, PennzEnergy's gas imbalance reflects a net underproduced
position of 1.2 billion cubic feet ("Bcf") of gas. PennzEnergy expects to
correct this imbalance with co-owners through future production or alternative
arrangements generally accepted by the industry depending on the specific
circumstances involved.
Minority Interest in Consolidated Subsidiaries --
In December 1998, PennzEnergy conveyed certain of its East Texas natural
gas properties to a newly formed limited partnership in which PennzEnergy acts
as the sole general partner. The partnership sold limited partner units to an
investor for $43.7 million. Such units entitle the limited partner to 99 percent
of the partnership's earnings and cash flows until payout. Thereafter,
PennzEnergy and the limited partner share earnings and cash flows 95 percent and
5 percent, respectively. Proceeds from sale of limited partner units were used
to reduce indebtedness. The limited partner's investment in the partnership is
reported as a minority interest in the accompanying consolidated balance sheet.
Earnings attributable to such minority interest were not material in 1998.
Derivative Instruments --
PennzEnergy has a price risk management program that utilizes financial
instruments, principally crude oil and natural gas swaps, to reduce the price
risks associated with fluctuations in crude oil and natural gas prices. These
financial instruments are designated as hedges and accounted for on the accrual
basis with gains and losses being recognized based on the type of contract and
exposure being hedged. Realized gains or losses on crude oil and natural gas
swaps designated as hedges of anticipated production are treated as deferred
credits or charges and are included in other current liabilities or other
current assets on the consolidated balance sheet. Net gains and losses on crude
oil and natural gas swaps designated as hedges of anticipated transactions,
including accrued gains or losses upon maturity or termination of the contract,
are deferred and recognized in income when the associated hedged commodities are
produced.
In order for crude oil and natural gas swaps to qualify as a hedge of an
anticipated transaction, the derivative contract must identify the expected date
of the transaction, the commodity involved, and the expected quantity to be
purchased or sold. In the event that a hedged transaction does not occur, future
gains and losses, including termination gains or losses, are recognized in other
income when incurred.
PennzEnergy also periodically enters into forward exchange contracts to
hedge some of its monetary liabilities and commitments denominated in foreign
currencies. Forward exchange contracts are used to manage exposure to adverse
fluctuations in foreign currency exchange rates. Gains and losses related to
these qualifying hedges are deferred and recognized in operating income when the
hedged transaction occurs. During 1998, PennzEnergy recognized a $0.5 million
loss on a foreign currency exchange contract entered into in 1997 to hedge
foreign currency exposure on PennzEnergy's disposition of Pennzoil Resources
Canada Ltd. Foreign currency transactions which do not qualify as hedges are
marked-to-market and gains and losses are recognized in other income.
In the consolidated statement of cash flows, cash receipts or payments
related to financial instruments are classified consistent with the cash flows
from the transaction being hedged.
F-12
<PAGE> 47
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Environmental Expenditures --
Environmental expenditures are expensed or capitalized in accordance with
generally accepted accounting principles. Liabilities for these expenditures are
recorded when it is probable that obligations have been incurred and the amounts
can be reasonably estimated. Reference is made to Note 8 for a discussion of
amounts recorded for these liabilities.
Cash Flow Information --
For purposes of the consolidated statement of cash flows, all highly liquid
investments purchased with a maturity of three months or less are considered to
be cash equivalents. The effect of changes in foreign exchange rates on cash
balances has been immaterial.
Non-cash and other nonoperating items from continuing operations consist of
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1996 1997 1998
------- -------- ------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Non-cash accruals........................................... $22,706 $ 27,152 $7,751
Other non-cash and nonoperating items....................... 5,123 3,891 (11)
------- -------- ------
$27,829 $ 31,043 $7,740
======= ======== ======
</TABLE>
Changes in operating assets and liabilities consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1997 1998
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Receivables............................. $(42,706) $ 46,016 $ 82,232
Inventories............................. 5,813 (984) 1,820
Other current assets(1)................. 7,462 (49,760) 44,743
Accounts payable and accrued
liabilities(1)(2)..................... (20,571) 66,294 (76,136)
Other assets and liabilities............ (27,441) (2,522) 51,418
-------- -------- --------
(Increase) decrease in operating assets
and liabilities....................... $(77,443) $ 59,044 $104,077
======== ======== ========
Cash paid during the period for:
Interest (net of amount
capitalized)....................... $177,784 $157,511 $157,160
Income taxes.......................... $ 13,441 $ 30,625 $ 27,168
</TABLE>
- ---------------
(1) Included in 1997 accounts payable and accrued liabilities and other current
assets are $40.6 million and $40.1 million, respectively, associated with a
series of forward contracts entered into to hedge against the foreign
currency risk associated with PennzEnergy's $42.2 million Canadian tax
liability. Included in 1998 accounts payable and accrued liabilities and
other current assets are $2.5 million and $2.5 million, respectively,
associated with a series of forward contracts entered into to hedge against
the foreign currency risk associated with PennzEnergy's $2.8 million
Canadian tax liability. See Note 4 for additional information.
(2) Included in 1997 and 1998 accrued liabilities is $42.2 million and $2.8
million, respectively, associated with foreign taxes payable resulting from
the December 1997 gain on the sale of Canadian oil and gas properties.
Current accounting guidelines require that gains on sales of certain oil and
gas reserves and related assets be removed from net income when determining
net operating cash inflows while the related current federal income tax is
required to be included in determining operating cash flows. PennzEnergy
believes that the income tax effect should be treated consistently with the
associated gain when analyzing the elements of operating cash flows.
F-13
<PAGE> 48
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Earnings Per Share --
PennzEnergy computes earnings per share in accordance with SFAS No. 128,
"Earnings Per Share." Under the provisions of SFAS No. 128, basic earnings per
share are computed based on the weighted average shares of common stock
outstanding, while diluted earnings per share also reflects the impact of
potentially dilutive securities such as outstanding options. Earnings per share
computations to reconcile basic and diluted income from continuing operations
for the years 1998, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1996 1997 1998
-------- -------- --------
(EXPRESSED IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Income (loss) from continuing operations................. $110,248 $145,892 $(45,466)
Less: preferred stock dividend........................... -- -- 5,625
-------- -------- --------
Income (loss) from continuing operations available to
common shareholders.................................... $110,248 $145,892 $(51,091)
Basic weighted average shares............................ 46,473 47,119 47,716
Effect of dilutive securities(1):
Options................................................ 183 688 --
Awards................................................. 102 116 --
Diluted weighted average shares.......................... 46,758 47,923 47,716
Per share income (loss) from continuing operations
available to common shareholders:
Basic.................................................. $ 2.37 $ 3.10 $ (1.07)
Diluted................................................ $ 2.35 $ 3.04 $ (1.07)
</TABLE>
- ---------------
(1) A weighted average year-to-date number of options to purchase 3,509,841
shares of common stock and awards of 144,501 shares of common stock were
outstanding during 1998, but were not included in the computation of diluted
per share income from continuing operations because these options and awards
would result in an antidilutive per share amount. A weighted average
year-to-date number of options to purchase 713,369 and 1,982,107 shares of
common stock were outstanding during 1997 and 1996, respectively, but were
not included in the computation of diluted per share income from continuing
operations because the options' exercise prices were greater than the
average market price of the common shares.
International Operations --
Consolidated income (loss) from continuing operations before income tax
includes income (losses) from international operations of $(114.0) million,
$48.7 million and ($28.3) million in 1998, 1997 and 1996, respectively.
Recent Accounting Pronouncements --
Effective January 1, 1998, PennzEnergy adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components. The statement requires companies to
report, in addition to net income, other components of comprehensive income
including unrealized gains or losses on available-for-sale securities and
foreign currency translation adjustments and the related tax effects. For the
years ended December 31, 1998, 1997 and 1996, unrealized holding gains or losses
on marketable securities are reported in the consolidated statement of
comprehensive income net of related income tax (benefit) of $25.4 million,
($3.0) million and $19.5 million, respectively.
F-14
<PAGE> 49
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
Under the new standard, companies are required to report certain information
about operating segments in consolidated financial statements. Operating
segments are determined based on the method by which management organizes its
business for making operating decisions and assessing performance. PennzEnergy,
which has one reportable segment as defined by this standard, has adopted the
provisions of SFAS No. 131 and has included information about geographic areas
in its Supplemental Financial and Statistical Information.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This SOP is
effective for fiscal years beginning after December 15, 1998 and earlier
adoption is permitted. The adoption of SOP No. 98-1 is not expected to have a
material impact on PennzEnergy's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that all derivative instruments be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
SFAS requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
a company to formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999 and early adoption is permitted. The effect
of adopting SFAS No. 133 has not been determined, but is not expected to have a
material impact on PennzEnergy's financial position or results of operations.
(2) INCOME TAXES --
Accounting for Income Taxes --
PennzEnergy accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in its 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 enacted tax rates in effect for the year in which the
differences are expected to reverse.
F-15
<PAGE> 50
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Federal, State and Foreign --
Federal, state and foreign income tax expense (benefit) related to
continuing operations consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1996 1997 1998
-------- ------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Current
United States........................................... $ 23,466 $38,598 $ 9
Foreign................................................. 168 37,120 2,633
State................................................... 283 (2,249) (5)
Deferred
United States........................................... (15,507) 25,670 (17,038)
Foreign................................................. 3,602 (5,602) (1,220)
State................................................... 4,192 2,936 (2,147)
-------- ------- --------
$ 16,204 $96,473 $(17,768)
======== ======= ========
</TABLE>
PennzEnergy's net deferred tax liability is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1998
---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Deferred tax liability...................................... $ 406,185 $ 409,631
Deferred tax asset.......................................... (146,160) (265,071)
Valuation allowance......................................... 7,994 12,393
--------- ---------
Net deferred tax liability........................ $ 268,019 $ 156,953
========= =========
</TABLE>
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1998
---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Investment in marketable equity securities.................. $138,808 $145,621
Property, plant and equipment............................... 231,826 239,105
Proceeds from issuance of exchangeable debentures
treated as option proceeds................................ 40,855 --
Original issue discount on exchangeable debentures.......... (26,763) 2,108
Alternative minimum tax credit carryforward................. (69,124) (77,504)
Net operating loss carryforwards............................ (8,064) (77,293)
Investment in foreign subsidiaries.......................... -- (45,388)
Other, net.................................................. (47,513) (42,089)
Valuation allowance......................................... 7,994 12,393
-------- --------
Net deferred tax liability........................ $268,019 $156,953
======== ========
</TABLE>
F-16
<PAGE> 51
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The principal items accounting for the difference in income taxes on income
(loss) from continuing operations computed at the federal statutory rate and
income taxes as reported are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1996 1997 1998
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision (benefit) at
statutory rate........................ $ 44,258 $ 84,828 $(22,132)
Increases (reductions) resulting from:
Dividends received deduction.......... (9,272) (10,068) (8,336)
State income taxes, net............... 2,393 (124) (1,399)
Sale of foreign subsidiary(1)......... (19,094) -- --
Taxes on foreign income in excess of
statutory rate(2).................. 23 20,504 918
Nondeductible goodwill................ 1,130 1,256 1,255
Spin-off of Pennzoil-Quaker
State(3)........................... -- -- 11,715
Other, net............................ (3,234) 77 211
-------- -------- --------
Income tax provision (benefit).......... $ 16,204 $ 96,473 $(17,768)
======== ======== ========
</TABLE>
- ---------------
(1) In 1996 PennzEnergy recognized a tax benefit from the sale of stock of
Pennzoil Canada, Inc. ("Pennzoil Canada"), an indirect wholly owned
subsidiary of PennzEnergy. The benefit was attributable to prior foreign
losses and asset write-downs that had not previously been recognized for tax
purposes. Reference is made to Note 10 for additional information on the
sale of Pennzoil Canada.
(2) In December 1997, PennzEnergy received net proceeds of $101.9 million from
the sale of its remaining Canadian oil and gas assets. A pretax gain on
these transactions of $67.6 million was recognized and Canadian income taxes
of $29.6 million were accrued in connection with the sale. The $29.6 million
foreign tax liability was deducted in calculating the U.S. federal income
tax liability.
(3) PennzEnergy's income tax expense was increased by approximately $11.7
million due to the Spin-off of Pennzoil-Quaker State Company. This increase
was primarily caused by (1) nondeductible merger costs ($2.0 million), (2)
reallocation of net operating losses between PennzEnergy and Pennzoil-Quaker
State pursuant to Internal Revenue Service regulations ($4.2 million) and
(3) reallocation of income and expense pursuant to a tax separation
agreement ($5.5 million).
In connection with the Spin-off, PennzEnergy entered into a tax separation
agreement with Pennzoil-Quaker State which provides, among other things, that
(i) Pennzoil-Quaker State will be responsible for and indemnify PennzEnergy
against all taxes that are attributable to certain inventory adjustments, (ii)
PennzEnergy will be responsible for and indemnify Pennzoil-Quaker State against
any other consolidated federal or state income tax liability for periods ended
on or before the date of the Spin-off, (iii) any other taxes will be borne by
the party on whom such taxes are imposed by law and (iv) Pennzoil-Quaker State
will make a payment to PennzEnergy equal to the greater of (a) 38% of the
aggregate regular taxable income or (b) 24% of the alternative minimum taxable
income for the year ended December 31, 1998. The agreement also establishes
procedures for the conduct and settlement of certain tax audits and related
proceedings.
The Internal Revenue Service is currently reviewing PennzEnergy's 1996 and
1997 federal income tax returns.
In September 1998, PennzEnergy received a letter and examination report
from the District Director of the Internal Revenue Service that proposed a tax
deficiency based on the audits of PennzEnergy's 1993, 1994 and 1995 federal
income tax returns. The examination report proposed one principal adjustment
with which PennzEnergy disagrees.
That adjustment challenged PennzEnergy's position under Section 172(f) of
the Internal Revenue code that (i) interest of $294.3 million that was
determined and paid in 1994 with respect to a 1988 federal tax deficiency, and
(ii) legal expenses of $1.4 million that were incurred in 1994 in resolving the
1988 tax deficiency, were specified liability losses that could be carried back
10 years. The proposed tax deficiency relating to this proposed adjustment is
$111.1 million. PennzEnergy estimates that the additional after-tax interest on
this proposed deficiency was $29.1 million at December 31, 1998.
F-17
<PAGE> 52
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
If the Internal Revenue Service's position is sustained, the $294.3 million
of interest and $1.4 million of legal fees will be carried forward. If not used,
these carryovers will expire in the year 2009. The proposed adjustment is
currently being reviewed by the Appellate Division of the Internal Revenue
Service. PennzEnergy intends to defend its position vigorously and does not
believe that the final outcome will have a material adverse effect on its
financial condition or results of operations.
As of December 31, 1998, PennzEnergy had a United States net operating loss
carryforward of approximately $183.5 million, which is available to reduce
future regular federal taxable income. Additionally, for purposes of determining
alternative minimum tax, an approximate $129.1 million net operating loss is
available to offset future alternative minimum taxable income. If not used,
these carryovers will expire in the year 2018. In addition, PennzEnergy has
approximately $77.5 million of alternative minimum tax credits indefinitely
available to reduce future regular tax liability to the extent it exceeds the
related alternative minimum tax otherwise due. All net operating loss and credit
carryover amounts are subject to examination by tax authorities.
PennzEnergy also has state net operating loss carryforwards, the tax effect
of which was approximately $13.1 million as of December 31, 1998. A valuation
allowance of approximately $12.4 million has been established to offset the
portion of the deferred tax asset related to state tax loss carryforwards
expected to expire before their utilization.
(3) DEBT --
Debt outstanding was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1998
---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Exchangeable debentures
6.50% due 2003........................ $ 397,247 $ --
4.75% due 2003........................ 491,780 --
4.90% due 2008........................ -- 443,807
4.95% due 2008........................ -- 316,506
Discount on debentures................ -- (21,055)
Other debentures and notes
9.625% due 1999....................... 200,000 200,000
10.625% due 2001...................... 150,000 150,000
10.250% due 2005...................... 250,000 250,000
10.125% due 2009...................... 200,000 200,000
Revolving credit facilities with
banks................................. 108,000 --
Commercial paper........................ 162,475 --
Variable-rate credit arrangements....... 185,000 --
Other................................... 3,247 (2,049)
---------- ----------
Total long-term debt.................. $2,147,749 $1,537,209
========== ==========
</TABLE>
PennzEnergy had no outstanding borrowings under revolving credit
facilities, commercial paper programs, and short-term variable-rate credit
arrangements at December 31, 1998.
PennzEnergy's current committed revolving credit facility with a group of
banks provides for up to $500.0 million of unsecured revolving credit borrowings
through November 16, 1999 with any outstanding borrowings on such date being
convertible into a term credit facility terminating on November 16, 2000. The
revolving credit facility contains covenants relating to liens, sales of assets
and mergers and consolidations, subsidiary indebtedness, acquisitions and
leverage. PennzEnergy is currently in compliance with these covenants in its
revolving credit facility. Outstanding borrowings under PennzEnergy's revolving
credit
F-18
<PAGE> 53
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
facilities totaled $108.0 million at December 31, 1997. The average interest
rate applicable to the amounts outstanding under PennzEnergy's revolving credit
facilities was 5.79% during 1997 and 5.87% during 1998.
PennzEnergy currently is limiting aggregate borrowings under any commercial
paper programs to $500.0 million. Borrowings under PennzEnergy commercial paper
facilities totaled $162.5 million at December 31, 1997. The average interest
rate applicable to outstanding commercial paper was 5.85% during 1997 and 5.87%
during 1998.
PennzEnergy maintains short-term variable-rate credit arrangements with
certain banks and currently limits its aggregate borrowings under these credit
arrangements to $300.0 million. Outstanding borrowings totaled $185.0 million at
December 31, 1997. The average interest rate applicable to the amounts
outstanding was 5.71% in 1997 and 5.80% during 1998. None of the banks under
these credit arrangements have any obligation to continue to extend credit after
the maturities of outstanding borrowings or to extend the maturities of any
borrowings.
In 1998, PennzEnergy issued $443.8 million principal amount of 4.90%
Debentures in exchange for $211.6 million principal amount of 6.50% Debentures
and $317.4 million principal amount of 4.95% Debentures in exchange for $211.6
million principal amount of 4.75% Debentures. PennzEnergy realized a pretax
extraordinary loss on early extinguishment of debt of $318.4 million, which was
the difference between the carrying amount of the exchanged debentures of $420.7
million (net of related unamortized debt issue costs of $2.5 million) and the
estimated market value (net of discount) of $739.1 million for the debentures
issued. After deducting an income tax benefit of $114.6 million, an
extraordinary loss of $203.8 million was recognized in 1998 from the early
extinguishment of debt. Discounts on the issuance of these exchangeable
debentures of $22.0 million are being charged to income over the life of the
debentures.
Each 4.90% Debenture and 4.95% Debenture is exchangeable into 9.3283 shares
of Chevron common stock, matures on August 15, 2008 and is callable beginning
August 15, 2000. The 4.90% Debentures and the 4.95% Debentures are exchangeable
at the option of the holders at any time prior to maturity, unless previously
redeemed, for shares of Chevron common stock. In lieu of delivering Chevron
common stock, PennzEnergy may, at its option, pay to any holder an amount in
cash equal to the market value of the Chevron common stock to satisfy the
exchange request. Changes in the fair value of the 4.90% Debentures and the
4.95% Debentures will be recorded in income if and when once the market value of
the underlying Chevron common stock exceeds the face value of the debentures.
As of December 31, 1998, PennzEnergy's $200 million of 9.625% Debentures
due November 1999 are classified as long-term debt based upon availability of
committed long-term credit facilities to refinance the debentures and
PennzEnergy's intent to maintain such commitments in excess of one year.
Debt at December 31, 1998 was reduced as a result of (a) the repayment of
$430.0 million from Pennzoil-Quaker State in settlement of certain accounts
receivable and intercompany indebtedness and (b) the deconsolidation of
indebtedness of Pennzoil-Quaker State. Pennzoil-Quaker State holds all the net
assets of the motor oil, refined products and fast lube operations held by
Pennzoil prior to December 30, 1998, including approximately $129.5 million in
deconsolidated long-term debt and capital lease obligations. Interest expense
was allocated to the discontinued operations based on the obligations of
Pennzoil-Quaker State for all periods presented. Allocated interest expense was
$13.6 million, $5.4 million and $2.1 million for 1998, 1997 and 1996.
(4) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK --
Financial Instruments With Off-Balance-Sheet Risk --
PennzEnergy is a party to various financial instruments with
off-balance-sheet risk as part of its normal course of business, including
financial guarantees and contractual commitments to extend financial guaran-
F-19
<PAGE> 54
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
tees. These financial instruments involve, to varying degrees, elements of
credit risk which are not recognized in PennzEnergy's consolidated balance
sheet.
PennzEnergy has a price risk management program that permits the
utilization of agreements and financial instruments (such as futures, forward
and option contracts and swaps and collars) to reduce the price risks associated
with fluctuations in crude oil and natural gas prices as they relate to
PennzEnergy's anticipated production of its crude oil and natural gas reserves
of PennzEnergy's marketing. PennzEnergy did not materially hedge crude oil or
natural gas prices in 1998 or 1997.
In connection with PennzEnergy's disposition of the assets of Pennzoil
Resources Canada Ltd., in 1997, PennzEnergy entered into a series of forward
contracts at an average exchange rate of 1.539 Cdn.$/U.S.$ to hedge against the
foreign currency risk associated with its Cdn.$4.3 million Canadian tax
liability due in early 1999. Under these contracts, the counterparties would pay
PennzEnergy Cdn.$3.9 million in 1999, and PennzEnergy would concurrently pay the
counterparties U.S.$2.5 million. In connection with these forward contracts, at
December 31, 1998, PennzEnergy has recorded a liability of $2.5 million,
included in accounts payable, and an asset of $2.5 million, included in other
current assets. Unrealized losses at December 31, 1998 were not material and any
unrealized gains or losses will be recognized in income upon the settlement of
the forward contracts.
PennzEnergy conducts its price risk management program with major financial
institutions and industry partners which the company believes present a minimal
credit risk. PennzEnergy is exposed to potential market risks if its physical
markets for delivery do not substantially correlate with markets designated as
indices in the financial instruments used for price risk management.
Following are the amounts related to PennzEnergy's financial guarantees and
contractual commitments to extend financial guarantees, credit and other
assistance and forward foreign currency exchange contracts as of December 31,
1998 and 1997.
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNTS
------------------------
1997 1998
--------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Natural gas volume delivery guarantees...................... $ 9,102 $ 6,502
Guarantees of letters of credit............................. 3,990 2,199
Forward foreign currency exchange contracts................. 40,576 2,535
------- -------
Total.................................................. $53,668 $11,236
======= =======
</TABLE>
PennzEnergy has agreed to sell most of its U.S. natural gas production at
market prices to Columbia Energy Services Corp. ("Columbia") under a contract
that terminates on June 30, 2001.
Concentrations of Credit Risk --
Substantially all PennzEnergy's accounts receivable at December 31, 1998
result from sales of crude oil, condensate, natural gas liquids and natural gas
and/or joint interest billings to third party companies in the oil and gas
industry. This concentration of customers and joint interest owners may impact
the company's overall credit risk, either positively or negatively, in that
these entities may be similarly affected by changes in economic or other
conditions. Management believes that allowances for doubtful accounts are
adequate to absorb estimated losses as of December 31, 1998. PennzEnergy's
policies concerning collateral requirements and the types of collateral obtained
for on-balance-sheet financial instruments are the same as those described above
under "Financial Instruments With Off-Balance-Sheet Risk."
F-20
<PAGE> 55
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PennzEnergy's exposure to credit losses in the event of nonperformance by
the other parties to these financial instruments is represented by the
contractual or notional amounts. Decisions to extend financial guarantees and
commitments and the amount of remuneration and collateral required are based on
management's credit evaluation of the counterparties on a case-by-case basis.
The collateral held varies but may include real property, accounts receivable,
inventory and equipment, securities and personal assets.
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS --
Balance Sheet Financial Instruments --
The carrying amounts of PennzEnergy's short-term financial instruments,
including cash equivalents, current marketable securities and other investments,
trade accounts receivable, trade accounts payable and notes payable, approximate
their fair values based on the short maturities of those instruments and on
quoted market prices, where such prices are available.
The following table summarizes the carrying amounts and estimated fair
values of PennzEnergy's other balance sheet financial instruments.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------ ---------------------
ESTIMATED ESTIMATED
CARRYING MARKET CARRYING MARKET
AMOUNT VALUE AMOUNT VALUE
---------- ---------- -------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term investments........................ $ 900,421 $1,382,485 $598,462 $598,462
Exchangeable debentures...................... 889,027 1,382,596 739,258 721,326
Other long-term debt......................... 1,258,722 1,383,232 797,951 899,467
</TABLE>
The following methods and assumptions were used to estimate the market
value of each class of financial instrument included above:
Long-Term Investments. The estimated market value of long-term
investments is based on quoted market prices at December 31, 1998 for those
investments. The carrying amount of the investment in Chevron common stock
as of December 31, 1997 beneficially owned by PennzEnergy was limited to
the carrying amount of the exchangeable debentures of $889.0 million on the
balance sheet at that date. Reference is made to Note 1 for additional
information.
Exchangeable Debentures. The estimated market value of the
exchangeable debentures reflected above is based on quoted market prices
which are influenced by the price of the Chevron shares into which the
debentures are exchangeable. At December 31, 1998, the debentures were
exchangeable at the option of the holders thereof into approximately 7.1
million shares of Chevron common stock beneficially owned by PennzEnergy.
Reference is made to Note 3 for additional information.
Other Long-Term Debt. The estimated market value of PennzEnergy's
long-term debt is based on quoted market prices or, where such prices are
not available, on estimated year-end interest rates of debt with the same
remaining average maturities and credit quality.
Off-Balance-Sheet Financial Instruments --
The estimated fair value of certain financial guarantees written and
commitments to extend financial guarantees was $0.1 million as of December 31,
1998 and December 31, 1997.
PennzEnergy did not materially hedge crude oil or natural gas prices in
1998 or 1997.
The estimated value of amounts owed by PennzEnergy under its foreign
currency exchange contracts was $2.5 million as of December 31, 1998. The
estimated value of PennzEnergy's foreign currency exchange
F-21
<PAGE> 56
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contracts represents the original contract amount adjusted using the year-end
closing spot exchange rate. Reference is made to Note 4 for further information
regarding off-balance sheet financial instruments.
(6) BENEFIT PLANS --
As a result of the Spin-off, Pennzoil-Quaker State assumed the liabilities
and related assets for pension benefits related to Pennzoil-Quaker State
employees. Consequently, those assets, liabilities and costs are excluded from
the disclosures herein for all periods. Pennzoil-Quaker State also assumed
responsibility for the defined contribution plans related to Pennzoil-Quaker
State employees.
Pensions and Other Postretirement Benefits
PennzEnergy has non-contributory defined benefit pension plans which
provide benefits based on the participants' years of service and compensation or
stated amounts for each year of service. Contributions to the plans are made in
accordance with the minimum funding provisions of ERISA where applicable, but
not in excess of the maximum amount that can be deducted for federal income tax
purposes.
In addition, PennzEnergy sponsors unfunded defined benefit postretirement
plans that cover substantially all of its employees. The plans provide medical
and life insurance benefits and are, depending on the type of plan, either
contributory or non-contributory. The accounting for the health care plans
anticipates future cost-sharing changes that are consistent with PennzEnergy's
expressed intent to increase, where possible, contributions from future retirees
to a minimum of 30% of the total annual cost. Furthermore, future contributions
for both current and future retirees have been limited, where possible, to 200%
of the average 1992 benefit cost.
F-22
<PAGE> 57
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table reflects the PennzEnergy plans' benefit obligations,
plan assets, reconciliation of funded status, amounts recognized in the
consolidated balance sheets, components of net periodic benefit cost, and the
actuarial assumptions used in determining the recognized obligations:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
AS OF DECEMBER 31 AS OF DECEMBER 31
------------------- -------------------
1997 1998 1997 1998
-------- -------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year.......... $ 65,100 $ 75,708 $ 28,462 $ 25,049
Service cost.................................. 2,572 2,817 401 375
Interest cost................................. 4,629 5,130 1,757 1,789
Plan amendments............................... 5,197 453 -- --
Benefits paid................................. (3,001) (3,545) (2,049) (2,662)
Actuarial (gain) loss......................... 1,211 2,072 (3,522) 1,048
-------- -------- -------- --------
Benefit obligation at end of year................ $ 75,708 $ 82,635 $ 25,049 $ 25,599
======== ======== ======== ========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year... $ 69,660 $ 87,560 $ -- $ --
Actual return on plan assets.................. 20,893 22,245 -- --
Employer contributions........................ 8 26 2,049 2,662
Benefits paid................................. (3,001) (3,545) (2,049) (2,662)
-------- -------- -------- --------
Fair value of plan assets at end of year......... $ 87,560 $106,286 $ -- $ --
======== ======== ======== ========
RECONCILIATION OF FUNDED STATUS:
Over (under) funded amount.................... $ 11,852 $ 23,651 $(25,049) $(25,599)
Unrecognized actuarial gain................... (27,464) (37,915) (3,628) (2,590)
Unrecognized transition obligation............ 19 13 -- --
Unrecognized prior service cost............... 9,412 8,877 -- --
-------- -------- -------- --------
Net amount underfunded at year-end............... $ (6,181) $ (5,374) $(28,677) $(28,189)
======== ======== ======== ========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEET CONSIST OF:
Prepaid benefit cost.......................... $ 2,190 $ 4,138 $ -- $ --
Accrued benefit liability..................... (8,546) (9,519) (28,677) (28,189)
Intangible asset.............................. 175 7 -- --
-------- -------- -------- --------
Net liability recognized at year-end............. $ (6,181) $ (5,374) $(28,677) $(28,189)
======== ======== ======== ========
</TABLE>
The benefit obligation for the defined benefit pension plans with benefit
obligations in excess of plan assets were $0.6 million as of December 31, 1998
and $0.5 million as of December 31, 1997. No plan assets existed for these plans
at December 31, 1998 or 1997.
The projected benefit obligation and accumulated benefit obligation for the
defined benefit pension plans with accumulated benefit obligations in excess of
plan assets were $0.6 million and $0.2 million, respectively, as of December 31,
1998 and $0.5 million and $0.2 million, respectively, as of December 31, 1997.
No plan assets existed for these plans at December 31, 1998 or 1997.
F-23
<PAGE> 58
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic benefit cost included the following components:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
--------------------------- ------------------------
1996 1997 1998 1996 1997 1998
------- ------- ------- ------ ------ ------
(EXPRESSED IN THOUSANDS) (EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT
COST:
Service cost...................... $ 2,622 $ 2,572 $ 2,817 $ 435 $ 401 $ 375
Interest cost..................... 4,321 4,629 5,130 2,040 1,757 1,789
Expected return on plan assets.... (5,608) (7,152) (8,399) -- -- --
Amortization of prior service
cost............................ 545 819 988 -- -- --
Amortization of transition
obligation...................... 7 7 7 -- -- --
Recognized actuarial gain......... (145) (1,192) (1,324) -- -- --
------- ------- ------- ------ ------ ------
Net periodic benefit cost............ $ 1,742 $ (317) $ (781) $2,475 $2,158 $2,164
======= ======= ======= ====== ====== ======
</TABLE>
An additional loss was recognized in 1996 due to a curtailment of $0.4
million. No additional gain or loss due to a curtailment or settlement was
recognized during 1998 or 1997.
Weighted-average assumptions were:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
AS OF DECEMBER 31 AS OF DECEMBER 31
----------------------- --------------------
1996 1997 1998 1996 1997 1998
----- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rates................................. 7.50% 7.25% 7.00% 7.50% 7.25% 7.00%
Expected long-term rate of return on plan
assets....................................... 10.50% 10.50% 10.50% -- -- --
Rate of compensation increase.................. 4.60% 4.60% 4.20% -- -- --
</TABLE>
For measurement purposes, a 7% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998. The rate was assumed
to decrease gradually to 5% through the year 2002 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plan. A one percentage-point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
ONE-PERCENTAGE ONE-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Effect on total of service and interest cost components for
1998...................................................... $ 66 $ (70)
Effect on year-end 1998 postretirement benefit obligation... 744 (850)
</TABLE>
Contribution Plans --
PennzEnergy has defined contribution plans covering substantially all
employees who have completed one year of service. Employee contributions of not
less than 1% to not more than 6% of each covered employee's compensation are
matched between 50% and 100% by PennzEnergy. The cost of PennzEnergy
contributions were $3.3 million in 1998, $2.5 million in 1997 and $2.7 million
in 1996.
(7) CAPITAL STOCK AND STOCK OPTIONS --
Preferred Stock --
PennzEnergy's Restated Certificate of Incorporation authorizes the issuance
of up to 9,747,720 shares of preferred stock. In June 1998, PennzEnergy issued
1,500,000 shares of 6.49% Series A Cumulative Preferred Stock at $100 per share.
The net proceeds from the sale of the preferred stock were approximately $147.0
million and were used to repay borrowings under PennzEnergy's credit facilities.
Dividends on the
F-24
<PAGE> 59
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
preferred stock are cumulative from the date of original issue and are payable
quarterly, in cash, when declared by the Board of Directors. The preferred stock
is redeemable at the option of PennzEnergy at any time on or after June 2, 2008,
in whole or in part, at a redemption price of $100 per share, plus accrued and
unpaid dividends to the redemption date. At December 31, 1998, all 1,500,000 of
these shares were issued and outstanding.
Preference Common Stock --
PennzEnergy's Restated Certificate of Incorporation authorizes the issuance
of up to 27,862,924 shares of preference common stock. None of these shares were
issued or outstanding at December 31, 1998. Dividend rights on any preference
common stock are junior to the rights of any PennzEnergy preferred stock and
senior to the rights of PennzEnergy common stock.
Stock Options --
In 1998, PennzEnergy adopted one new stock option plan and reserved an
additional 500,000 shares of common stock for issuance pursuant to such stock
option plans. At December 31, 1998, PennzEnergy had 4,167,146 shares of common
stock reserved for issuance under all employee benefit plans.
At December 31, 1998, PennzEnergy had nonqualified stock option plans
covering a total of 3,933,374 shares of PennzEnergy common stock (compared to
3,695,413 shares at December 31, 1997), of which 535,900 shares were available
for granting of options. Options granted under the plans have a maximum term of
ten years and are exercisable under the terms of the respective option
agreements at the market price of the common stock at the date of grant, subject
to antidilution adjustments in certain circumstances. At December 31, 1998,
expiration dates for the outstanding options ranged from October 1999 to October
2008 and the average exercise price per share was $28.11. Payment of the
exercise price may be made in cash or in shares of PennzEnergy common stock
previously owned by the optionee, valued at the then-current market value.
In connection with the Spin-off, all outstanding stock options were
immediately vested and their exercise prices were adjusted based upon the
relative market values of common stock of PennzEnergy and Pennzoil-Quaker State
immediately following the Spin-off. PennzEnergy stock options held by employees
of Pennzoil-Quaker State were retained by those employees after the Spin-off and
are included in the disclosures presented herein for all periods.
Information with respect to stock option activity is summarized in the
following table:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------- --------------------- ---------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
STOCK OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................ 2,587,740 $58.75 3,311,921 $54.20 2,968,956 $52.19
Granted..................... 872,570 $39.64 827,441 $52.70 734,090 $64.58
Exercised................... (35,838) $46.76 (786,843) $54.77 (109,563) $45.48
Lapsed...................... (112,551) $48.46 (115,515) $43.09 (143,533) $52.72
Expired..................... -- -- (268,048) $74.88 (52,476) $74.16
--------- ------ --------- ------ --------- ------
Outstanding at end of year.... 3,311,921 $54.20 2,968,956 $52.19 3,397,474 $28.11(1)
========= ========= =========
Options exercisable at
year-end.................... 2,072,538 1,511,084 3,397,474
========= ========= =========
</TABLE>
- ---------------
(1) Reflects adjustment due to the Spin-off of Pennzoil-Quaker State.
F-25
<PAGE> 60
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
---------------------------------------------
NUMBER OF
OPTIONS WEIGHTED WEIGHTED
OUTSTANDING AVERAGE AVERAGE
AND EXERCISABLE CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES AT DEC. 31, 1998 LIFE IN YEARS PRICE
- ------------------------ ---------------- ------------- --------
<S> <C> <C> <C>
$17.52 -$24.00....................................... 1,002,546 6.8 $21.52
$24.01 -$30.00....................................... 1,217,478 6.3 $26.98
$30.01 -$41.52....................................... 1,177,450 6.8 $34.90
--------- ------
$17.52 -$41.52....................................... 3,397,474 $28.11
</TABLE>
Conditional Stock Awards --
In 1998, there were 44,700 units of common stock granted to selected
employees under PennzEnergy's conditional stock award programs. Awards under the
programs are made in the form of units which entitle the recipient to receive,
at the end of a specified period, subject to certain conditions of continued
employment, a number of shares of PennzEnergy common stock equal to the number
of units granted. At December 31, 1998, units covering 137,636 shares of
PennzEnergy common stock were outstanding (compared to 105,332 shares at
December 31, 1997). In 1998, no shares of PennzEnergy common stock were
distributed under PennzEnergy's conditional stock award programs. During 1998,
units covering 12,396 shares of PennzEnergy's common stock lapsed. These units
had been granted in previous years under PennzEnergy's conditional stock award
programs. In connection with the Spin-off, the condition of continued employment
was eliminated for all then outstanding conditional stock awards. All
PennzEnergy conditional stock awards held by employees of Pennzoil-Quaker State
were retained by the employees after the Spin-off and are included in the
disclosures presented herein for all periods.
Pro Forma Compensation Cost for Stock-Based Plans --
PennzEnergy applies Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation plans. APB Opinion 25 does not
require compensation costs to be recorded on options which have exercise prices
at least equal to the market price of the stock on the date of grant.
Accordingly, no compensation cost has been recognized for PennzEnergy's
stock-based plans. Had compensation cost for PennzEnergy's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the optional accounting method
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation,"
PennzEnergy's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ---------
(EXPRESSED IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss)........................... As reported $133,898 $175,067 $(255,675)
Pro forma $130,121 $164,989 $(267,902)
Basic earnings (loss) available to common
shareholders per share.................... As reported $ 2.88 $ 3.72 $ (5.48)
Pro forma $ 2.80 $ 3.50 $ (5.73)
Diluted earnings (loss) available to common
shareholders per share.................... As reported $ 2.86 $ 3.65 $ (5.48)
Pro forma $ 2.78 $ 3.44 $ (5.73)
</TABLE>
F-26
<PAGE> 61
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions for
1998, 1997 and 1996, respectively: risk-free interest rates of 5.83%, 6.63% and
6.25%; dividend yield of 1.45%, 1.67% and 5.45%; stock price volatility factor
of .2890, .2053 and .2079; and expected option lives of 10 years for each of the
respective three years. The weighted average fair value of options granted
during 1998, 1997 and 1996 was $25.62, $18.74 and $6.66 per option,
respectively.
(8) COMMITMENTS AND CONTINGENCIES --
Environmental Matters --
PennzEnergy is subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") and similar state statutes. In response to liabilities associated
with these activities, accruals have been established when reasonable estimates
are possible. Such accruals primarily include estimated costs associated with
remediation. PennzEnergy has not used discounting in determining its accrued
liabilities for environmental remediation, and no claims for possible recovery
from third party insurers or other parties related to environmental costs have
been recognized in PennzEnergy's consolidated financial statements. PennzEnergy
adjusts the accruals when new remediation responsibilities are discovered and
probable costs become estimable, or when current remediation estimates must be
adjusted to reflect new information.
Certain of PennzEnergy's subsidiaries are involved in matters in which it
has been alleged that such subsidiaries are potentially responsible parties
("PRPs") under CERCLA or similar state legislation with respect to various waste
disposal areas owned or operated by third parties. As of December 31, 1998 and
1997, PennzEnergy's consolidated balance sheet included accrued liabilities,
reflected in "Other liabilities," for environmental remediation of $7.9 million
and $9.2 million, respectively. PennzEnergy does not currently believe there is
a reasonable possibility of incurring additional material costs in excess of the
current accruals recognized for such environmental remediation activities. With
respect to the sites in which PennzEnergy subsidiaries are PRPs, PennzEnergy's
conclusion is based in large part on (i) the availability of defenses to
liability, including the availability of the "petroleum exclusion" under CERCLA
and similar state laws, and/or (ii) PennzEnergy's current belief that its share
of wastes at a particular site is or will be viewed by the Environmental
Protection Agency or other PRPs as being de minimis. As a result, PennzEnergy's
monetary exposure is not expected to be material.
Ramco Dispute --
In October 1995, subsidiaries of PennzEnergy filed an action, styled
Pennzoil Exploration and Production Company, et al. v. Ramco Energy Limited and
Ramco Hazar Energy Limited, in the United States District Court for the Southern
District of Texas, Houston Division, against Ramco Hazar Energy Limited,
formerly known as Ramco Energy Limited (collectively "Ramco"). The underlying
dispute involves Ramco's asserted claim to an interest in the Karabakh prospect,
an oil and gas field located in the territorial waters of the Azerbaijan
Republic in the Caspian Sea. Since the initiation of litigation, the operator of
the Karabakh prospect determined that the hydrocarbon accumulation tested by
three exploratory wells was not commercial. The federal suit sought to compel
Ramco to arbitrate certain disputes that have arisen between it and the
PennzEnergy plaintiffs. After the filing of the federal action, the PennzEnergy
plaintiffs filed an Original Petition for Declaration Relief in the 281st
Judicial District Court of Harris County, Texas. The state suit, styled Pennzoil
Exploration and Production Company, et al. v. Ramco Energy Limited and Ramco
Hazar Energy Limited, which is expressly conditioned upon a determination in the
federal suit that the disputes between the PennzEnergy plaintiffs and Ramco are
not subject to arbitration, seeks a declaration that the PennzEnergy plaintiffs
have not breached any agreements with Ramco, and do not owe and/or have not
breached any fiduciary or other legal duty to Ramco including, without
limitation, a duty of good faith and fair
F-27
<PAGE> 62
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
dealing. In November 1995, Ramco asserted a counterclaim in the state court
action, asserting breach of contract and breach of fiduciary duties. The
counterclaim seeks a declaratory judgment granting Ramco a participation
interest in the Karabakh prospect, compensatory damages, exemplary damages,
attorneys' fees, costs of court and other unspecified relief. The judge in the
federal suit granted in part the PennzEnergy plaintiffs' motion to compel
arbitration and ordered arbitration to be held in New York, New York. The United
States Court of Appeals for the Fifth Circuit generally affirmed the ruling of
the judge in the federal suit and PennzEnergy initiated arbitration. Selection
of arbitrators is pending.
Texas Federal Court Employment Action Settled --
The parties have reached a settlement in the lawsuit styled Donna
Alexander, et al. v. Pennzoil Company, et al., pending in the United States
District Court for the Southern District of Texas, Houston Division. The suit
was filed by eleven named plaintiffs and alleged wrongful and illegal
discrimination by PennzEnergy and subsidiaries against African-American
employees. The settlement was approved by the court on March 8, 1999.
Stockholder Action Dismissed --
By order dated February 16, 1999, the Chancery Court of Delaware dismissed
without prejudice the action filed during 1997 on behalf of stockholders against
PennzEnergy and certain of its current and former directors. The complaints in
the action allege breach of fiduciary duty on the part of the Board of Directors
arising out of a proposal by Union Pacific Resources Group Inc. to acquire all
outstanding shares of common stock of Pennzoil Company.
Maersk Rig Contracts --
In December 1997, Pennzoil Venezuela Corporation, S.A., an indirect
subsidiary of PennzEnergy, entered into a contract with Maersk Jupiter Drilling
Corporation, S.A. ("Maersk") for the provision of a rig for drilling services
relative to the anticipated drilling program for PennzEnergy's Block 68/79 in
Lake Maracaibo, Venezuela. The rig to be provided by Maersk was to be assembled
at a shipyard in Brownsville, Texas, with delivery of the rig to the Lake
Maracaibo area and placement in service around October 1998. The term of the
contract was for three years (until October 1, 2001).
With execution of the Contract, construction of the rig destined for Block
68/79 proceeded until completion. In October 1998, Maersk advised that it
intended to commence mobilization of the rig to Lake Maracaibo. However, during
the period of rig construction, changes had occurred in the scope and timing of
the drilling program anticipated for Block 68/79, resulting in a significant
reduction of the need for drilling services originally envisioned in the
contract. PennzEnergy instructed Maersk to cease mobilization and to stack the
rig in Brownsville, where it currently remains. The contract provides for early
termination and establishes the charge for the balance of the term of the
contract (approximately $19,000 per day net to PennzEnergy with certain
escalation factors). Representatives of PennzEnergy and Maersk have since
engaged in various negotiations relative to the stacking of the rig in
Brownsville, which was not contemplated by the contract, and these negotiations
also have addressed contract termination and settlement, together with the
potential for alternative uses for the rig. Negotiations with Maersk are
continuing, but the parties have not yet reached a commercial resolution of the
issues involved. PennzEnergy is expensing all charges relating to the contract
as incurred.
Royalty Matters --
More than 30 oil companies, including PennzEnergy, are involved in disputes
in which it is alleged that the oil companies and related parties have underpaid
holders of royalty interests, overriding royalty interests and working interests
in connection with the production of crude oil. The pending proceedings include
suits in
F-28
<PAGE> 63
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
federal court in Texas, Louisiana, Mississippi and Wyoming (that have now been
consolidated into one proceeding in Texas) and in state court in Texas, Utah,
Alabama and Louisiana. Certain parties to the federal litigation have entered
into a global settlement agreement, that is subject to court approval, which
would provide a conditional nationwide settlement, subject to opt-outs, of the
crude oil royalty, overriding royalty and working interest claims of all members
of the settlement class, including claims in the federal litigation and in
numerous other individual and class action cases pending throughout the United
States. PennzEnergy is a party to the settlement agreement, which explicitly
refutes an admission of liability, but was entered into to avoid expensive and
protracted litigation.
Also pending is a separate suit in federal court in Texas alleging that
more than 30 major oil companies, including PennzEnergy, underpaid royalties to
the Untied States in connection with crude oil produced from United States owned
and/or controlled lands since 1986. The claims were filed by private litigants
under the federal False Claims Act, and after investigation, the United States
served notice of its intent to intervene as to certain defendants. The United
States has not intervened with respect to claims against PennzEnergy as of the
date of this report. PennzEnergy is defending vigorously against these claims.
PennzEnergy believes that it has acted reasonably and paid royalties in good
faith.
PennzEnergy believes that the final outcome of these disputes will not have
a material adverse effect on its consolidated financial condition or results of
operations.
Other --
PennzEnergy and its subsidiaries are involved in various other claims,
lawsuits and other proceedings relating to a wide variety of matters. While
uncertainties are inherent in the final outcome of all claims, lawsuits and
other proceedings and it is presently impossible to determine the actual costs
that ultimately may be incurred, management currently believes that the
resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on PennzEnergy's consolidated financial position
or results of operations.
(9) LEASES --
PennzEnergy has various commitments under non-cancelable operating lease
agreements for buildings, facilities and equipment which expire at various
dates. The leases may be renewed as they expire.
Certain operating lease payments are contingent upon such factors as the
consumer price index or the prime interest rate with any future changes
reflected in income as accruable. The effects of these changes are not
considered material.
Total operating lease rental expenses for PennzEnergy (exclusive of oil and
gas lease rentals) were $20.4 million, $15.3 million and $12.8 million for 1998,
1997 and 1996, respectively.
F-29
<PAGE> 64
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum commitments under non-cancelable leasing arrangements as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-------------
(EXPRESSED
IN THOUSANDS)
<S> <C>
YEAR ENDING DECEMBER 31:
1999........................................................ $4,952
2000........................................................ 3,321
2001........................................................ 679
2002........................................................ 146
2003........................................................ 93
Thereafter.................................................. 221
------
Net minimum future lease payments........................... $9,412
======
</TABLE>
(10) ACQUISITIONS AND DIVESTITURES --
Sale of Interest in Azeri-Chirag-Gunashli Unit-
In July 1996, PennzEnergy completed the sale of approximately half of its
9.82% interest in the Azeri-Chirag-Gunashli ("ACG") joint development unit
offshore Azerbaijan in the Caspian Sea to affiliates of Exxon Corporation
("Exxon"), affiliates of ITOCHU Oil Exploration Co. Ltd. ("ITOCHU") and
affiliates of Unocal Corporation ("Unocal"). The three companies will pay
approximately $130.0 million to PennzEnergy for a 5% working interest in the ACG
unit (3.00% to Exxon, 1.47% to ITOCHU and 0.53% to Unocal) and the right to
receive 51% of the payments due PennzEnergy for reimbursement of costs incurred
in developing a gas utilization project for the Gunashli Field. Net cash
payments to PennzEnergy are scheduled in three installments with the first
installment having been made in two payments consisting of approximately $83.0
million received at closing and another $5.0 million received in August 1996. A
subsequent installment of $22.0 million was received in January 1998 and a final
payment of $20.0 million is due when the unit reaches production of 200,000
barrels per day. PennzEnergy retains a 4.8175% working interest in the ACG unit.
As part of the transaction, the three companies will fund all of PennzEnergy's
future obligations in the ACG project, retroactive to January 1, 1996, until all
such expenditures and accrued interest are recovered from PennzEnergy's share of
production from the ACG unit. In addition, PennzEnergy received a net cash
payment of approximately $16.0 million in August 1996 for reimbursement of
PennzEnergy's costs in the ACG unit incurred from January 1996 through July
1996. In July 1998, PennzEnergy received a net cash payment of $25.3 million for
reimbursement of past costs associated with a related gas utilization project.
No gains or losses were recorded related to any of the above proceeds. Instead,
such receipts were applied to reduce PennzEnergy's net investment in the ACG
unit and the gas utilization project because of uncertainties related to the
recovery of those costs.
Joint Venture with Gulf Canada; Sale of Canadian Assets --
In July 1996, PennzEnergy completed two related transactions with Gulf
Canada: (i) the establishment of a joint venture for the development of natural
gas reserves in the Zama/Virgo region of northwest Alberta and (ii) the sale by
PennzEnergy of its remaining Canadian oil and gas assets to Gulf Canada.
Including working capital and closing adjustments of $3.5 million received in
1997, PennzEnergy received net proceeds of $196.3 million from the sale.
PennzEnergy recorded an after-tax gain of $19.9 million on the sale, of which
$19.1 million was due to the recognition of certain tax benefits. Reference is
made to Note 2 of Notes to Consolidated Financial Statements for additional
information.
F-30
<PAGE> 65
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1997, Pennzoil sold its 50% interest in the Zama/Virgo joint
venture to Phillips Petroleum Company ("Phillips") and received net proceeds of
$101.9 million and recorded an after tax gain of $24.6 million. The assets sold
included 132 Bcf equivalent of proved natural gas reserves. Included in
PennzEnergy's consolidated results for 1997 are revenues of $11.2 million and
operating income of $3.3 million from these properties during 1997.
Sale of Vermejo Park Ranch --
In September 1996, PennzEnergy completed the sale of Vermejo Park Ranch.
The ranch is located in northern New Mexico and southern Colorado and is
approximately 578,000 acres. PennzEnergy recorded a gain of $25.6 million ($41.7
million before tax) from the sale.
Sale of PennUnion --
In June 1997, PennzEnergy sold its natural gas marketing subsidiary,
PennUnion Energy Services, L.L.C., to Columbia and recorded a pretax charge of
$10.0 million.
(11) TRANSACTIONS WITH AFFILIATE --
PennzEnergy and Pennzoil-Quaker State have an arrangement to share certain
services for a period of up to one year after the date of the Spin-off. Any or
all of the services being provided may be discontinued with at least 30 days
prior written notice of the discontinuation. Shared services include legal,
environmental, human resources, finance, treasury, accounting, information
technology, corporate communications, corporate secretary, executive and
government relations. Fees are paid based upon actual costs of providing these
services.
Prior to the Spin-off, PennzEnergy charged Pennzoil-Quaker State for all
direct costs associated with its operations. In addition, certain indirect
administrative costs incurred by PennzEnergy that were not directly charged to
Pennzoil-Quaker State were historically allocated through a monthly charge based
on a formula that considered the relative total assets, sales and employees of
the companies. Such charges totaled $76.0 million, $63.8 million and $42.0
million for the years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, accounts payable included amounts owed to
Pennzoil-Quaker State totaling $11.8 million for borrowings by PennzEnergy
subsequent to and associated with the Spin-off. The full amount was repaid to
Pennzoil-Quaker State in 1999.
(12) DISCONTINUED OPERATIONS --
In December 1998, Pennzoil distributed all of its shares of capital stock
of its wholly owned Pennzoil-Quaker State subsidiary to its shareholders.
Accordingly, Pennzoil-Quaker State's net assets and results of operations for
all periods have been combined and reported as discontinued operations in the
accompanying financial statements. PennzEnergy received approximately $430.0
million in cash proceeds from Pennzoil-Quaker State as settlement for certain
accounts receivable and intercompany indebtedness. The distribution of the
remaining net assets was accounted for as a capital contribution of $639.0
million to Pennzoil-Quaker State. Net assets of Pennzoil-Quaker State as of the
date of the Spin-off were $1.07 billion.
Pennzoil-Quaker State holds all the net assets of the motor oil, refined
products and fast lube operations held by Pennzoil prior to December 30, 1998,
including approximately $129.5 million in deconsolidated long-term debt and
capital lease obligations. Interest expense was allocated to the discontinued
operations based on the obligations of Pennzoil-Quaker State for all periods
presented. Allocated interest expense was $13.6 mil-
F-31
<PAGE> 66
PENNZENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
lion, $5.4 million and $2.1 million for 1998, 1997 and 1996. Certain components
of income (loss) from discontinued operations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1996 1997 1998
---------- ---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Operating revenues....................................... $1,625,966 $1,676,747 $1,734,435
Income (loss) from operations before income taxes........ 42,673 62,030 (17,190)
Income tax (benefit)..................................... 19,023 27,667 (13,944)
Income (loss) from operations............................ 23,650 34,363 (3,246)
</TABLE>
(13) MAJOR CUSTOMERS --
In June 1997, PennzEnergy agreed to sell most of its U.S. natural gas
production at market prices to Columbia under a contract that terminates on June
30, 2001. Columbia's purchases accounted for 39%, and 23% of PennzEnergy's
revenues from continuing operations for 1998 and 1997, respectively. No one
customer accounted for more than 10% of revenues from continuing operations for
1996.
F-32
<PAGE> 67
PENNZENERGY COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED
QUARTERLY RESULTS --
<TABLE>
<CAPTION>
OPERATING FROM
INCOME (LOSS) INCOME (LOSS) DISCONTINUED
FROM FROM OPERATIONS, EXTRAORDINARY NET
CONTINUING CONTINUING NET OF LOSS, NET OF INCOME
REVENUES OPERATIONS(1) OPERATIONS INCOME TAX INCOME TAX (LOSS)
-------- -------------- ------------- ------------ ------------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1997
- -------------------------
First Quarter............ $235,691 $119,577 $ 48,803 $ 8,748 $ -- $ 57,551
Second Quarter........... 203,266 66,736 13,808 10,069 -- 23,877
Third Quarter............ 226,397 82,633 23,877 13,947 (2,575) 35,249
Fourth Quarter........... 312,203 168,312 59,404 1,599 (2,613) 58,390
-------- -------- -------- -------- --------- ---------
$977,557 $437,258 $145,892 $ 34,363 $ (5,188) $ 175,067
======== ======== ======== ======== ========= =========
1998
- -------------------------
First Quarter............ $172,364 $ 41,992 $ 348 $ 9,311 $ -- $ 9,659
Second Quarter........... 167,863 34,557 (5,998) 14,826 -- 8,828
Third Quarter(2)......... 365,312 158,931 58,819 9,442 (205,549) (137,288)
Fourth Quarter........... 131,828 (95,193) (98,635) (36,825) (1,414) (136,874)
-------- -------- -------- -------- --------- ---------
$837,367 $140,287 $(45,466) $ (3,246) $(206,963) $(255,675)
======== ======== ======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
BASIC EARNINGS (LOSS) DILUTED EARNINGS (LOSS)
PER SHARE PER SHARE
------------------------------------------------------ -------------------------
CONTINUING DISCONTINUED EXTRAORDINARY NET INCOME CONTINUING DISCONTINUED
OPERATIONS OPERATIONS LOSS (LOSS) OPERATIONS OPERATIONS
---------- ------------ ------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
1997
- ---------------------
First Quarter........ $ 1.04 $ 0.19 $ -- $ 1.23 $ 1.02 $ 0.19
Second Quarter....... 0.30 0.21 -- 0.51 0.29 0.21
Third Quarter........ 0.50 0.30 (0.05) 0.75 0.49 0.29
Fourth Quarter....... 1.26 0.03 (0.06) 1.23 1.24 0.03
Year-to-date......... $ 3.10 $ 0.73 $(0.11) $ 3.72 $ 3.04 $ 0.72
1998
- ---------------------
First Quarter........ $ 0.01 $ 0.19 $ -- $ 0.20 $ 0.01 $ 0.19
Second Quarter....... (0.14) 0.31 -- 0.17 (0.14) 0.31
Third Quarter........ 1.17 0.20 (4.30) (2.93) 1.17 0.20
Fourth Quarter....... (2.11) (0.77) (0.03) (2.91) (2.11) (0.77)
Year-to-date......... $(1.07) $(0.07) $(4.34) $(5.48) $(1.07) $(0.07)
<CAPTION>
DILUTED EARNINGS (LOSS)
PER SHARE
--------------------------
EXTRAORDINARY NET INCOME
LOSS (LOSS)
------------- ----------
<S> <C> <C>
1997
- ---------------------
First Quarter........ $ -- $ 1.21
Second Quarter....... -- 0.50
Third Quarter........ (0.05) 0.73
Fourth Quarter....... (0.06) 1.21
Year-to-date......... $(0.11) $ 3.65
1998
- ---------------------
First Quarter........ $ -- $ 0.20
Second Quarter....... -- 0.17
Third Quarter........ (4.28) (2.91)
Fourth Quarter....... (0.03) (2.91)
Year-to-date......... $(4.34) $(5.48)
</TABLE>
- ---------------
(1) Operating income is defined as net revenues less costs and operating
expenses.
(2) Results include ordinary pretax gains on the sale and exchange of Chevron
common stock of $230.1 million and a related extraordinary loss on the
exchange of certain exchangeable debentures totalling $203.8 million.
Reference is made to Note 1 and Note 3.
OIL AND GAS INFORMATION
Estimated Quantities of Proved Oil and Gas Reserves
Presented on the following page are PennzEnergy's estimated net proved oil
and gas reserves as of December 31, 1998, 1997 and 1996. Reserves in the United
States are located onshore in all the main producing states (except Alaska) and
offshore California, Louisiana and Texas. International reserves are located in
Azerbaijan, Canada and Venezuela and are not individually material.
F-33
<PAGE> 68
PENNZENERGY COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)
OIL AND GAS INFORMATION (CONTINUED)
The estimates of proved oil and gas reserves have been prepared by Ryder
Scott Company Petroleum Engineers ("Ryder Scott") and are based on data supplied
by PennzEnergy. The report of Ryder Scott, which include a description of the
basis used in preparing the estimated reserves, is included as an exhibit to
PennzEnergy's Annual Reports on Form 10-K for the respective years. Oil includes
crude oil, condensate and natural gas liquids.
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------ ------------------------------ ------------------------------
UNITED UNITED UNITED
PROVED OIL RESERVES STATES INTERNATIONAL TOTAL STATES INTERNATIONAL TOTAL STATES INTERNATIONAL TOTAL
(MILLIONS OF BARRELS) ------ ------------- ----- ------ ------------- ----- ------ ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved developed and
undeveloped
reserves(1)
Beginning of year............ 175 26 201 165 22 187 152 75 227
Revisions of previous
estimates
-- economics............. 8 1 9 (7) 4 (3) (16) (12) (28)
-- performance and
other................. -- 3 3 6 -- 6 2 1 3
Extensions and
discoveries.............. 12 13 25 13 30 43 11 30 41
Estimated production....... (20) (1) (21) (20) -- (20) (19) (1) (20)
Purchases of minerals in
place(2)................. 7 1 8 -- 20 20 2 -- 2
Sales of minerals in
place(2)(3).............. (17) (21) (38) (5) (1) (6) (6) -- (6)
----- ---- ----- ----- ----- ----- ----- --- -----
End of year.................. 165 22 187 152 75 227 126 93 219
===== ==== ===== ===== ===== ===== ===== === =====
Proved developed reserves
Beginning of year............ 151 11 162 141 1 142 128 14 142
End of year.................. 141 1 142 128 14 142 108 12 120
PROVED NATURAL GAS RESERVES
(BILLIONS OF CUBIC FEET)
Proved developed and
undeveloped reserves(1)(4)
Beginning of year............ 1,255 214 1,469 1,187 90 1,277 1,054 5 1,059
Revisions of previous
estimates
-- economics............. 19 -- 19 (24) -- (24) (19) (3) (22)
-- performance and
other................. 20 22 42 (2) 28 26 (49) -- (49)
Extensions and
discoveries.............. 145 29 174 104 23 127 84 -- 84
Estimated production....... (202) (17) (219) (206) (8) (214) (167) -- (167)
Purchases of minerals in
place(2)................. 8 28 36 -- -- -- 4 -- 4
Sales of minerals in
place(2)(3).............. (58) (186) (244) (5) (128) (133) (58) -- (58)
----- ---- ----- ----- ----- ----- ----- --- -----
End of year.................... 1,187 90 1,277 1,054 5 1,059 849 2 851
===== ==== ===== ===== ===== ===== ===== === =====
Proved developed reserves(4)
Beginning of year............ 1,132 202 1,334 1,070 90 1,160 964 4 968
End of year.................. 1,070 90 1,160 964 4 968 784 2 786
</TABLE>
- ---------------
(1) Included in 1998 reserves are 17 million barrels of crude oil, condensate,
and natural gas liquids (10 million barrels of which are proved developed
reserves) and 2 Bcf of proved developed natural gas reserves attributable to
three operating service agreements in Venezuela between Petroleos de
Venezuela, S.A. and Pennzoil Venezuela Corporation, S.A., an indirect wholly
owned subsidiary of PennzEnergy. Under these agreements, all mineral rights
are owned by the government of Venezuela. Reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Oil and Gas" for additional information.
(2) There were no asset exchanges reported as purchases and sales of minerals in
place for 1998 or 1997. Purchases and sales of minerals in place for 1996
include 7 million barrels of oil and 33 Bcf of natural gas and 12 million
barrels of oil and 37 Bcf of natural gas, respectively, associated with
asset exchanges.
(3) In July 1996, PennzEnergy sold its non-strategic Canadian oil and gas assets
to Gulf Canada. In December 1997, PennzEnergy sold its remaining Canadian
oil and gas assets, a 50 percent interest in a natural gas joint venture in
the Zama/Virgo region of northwest Alberta, to Phillips. Reference is made
to Note 10 and to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Oil and Gas" for additional
information on sales of oil and gas reserves.
(4) United States natural gas reserves for 1998, 1997 and 1996 exclude 136 Bcf,
178 Bcf and 182 Bcf, respectively, of carbon dioxide gas for sale or use in
company operations.
F-34
<PAGE> 69
PENNZENERGY COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)
OIL AND GAS INFORMATION (CONTINUED)
Capitalized Costs and Costs Incurred Relating to Oil and Gas Producing
Activities
The following table shows the aggregate capitalized costs related to oil
and gas producing activities and related accumulated depreciation, depletion and
amortization and valuation allowances.
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1997 1998
------- --------
(EXPRESSED IN
MILLIONS)
<S> <C> <C>
Capitalized costs
Proved properties......................................... $ 4,345 $ 4,489
Unproved properties....................................... 260 243
------- --------
4,605 4,732
Accumulated depreciation, depletion and amortization...... (2,923) (3,073)
------- --------
$ 1,682 $ 1,659
======= ========
</TABLE>
The following table shows costs incurred in oil and gas producing
activities (whether charged to expense or capitalized).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------
1996 1997 1998
---------------------------- ---------------------------- ----------------------------
UNITED INTER- UNITED INTER- UNITED INTER-
STATES NATIONAL(1) TOTAL STATES NATIONAL(1) TOTAL STATES NATIONAL(1) TOTAL
------ ----------- ----- ------ ----------- ----- ------ ----------- -----
(EXPRESSED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Costs incurred in oil and gas
producing activities
Property acquisition
Unproved.............. $ 10 $(7) $ 3 $ 9 $ 2 $ 11 $ 12 $ 3 $ 15
Proved................ 2 1 3 1 28 29 10 -- 10
Exploration............. 104 27 131 73 44 117 90 52 142
Development............. 181 27 208 262 24 286 287 17 304
---- --- ---- ---- --- ---- ---- --- ----
$297 $48 $345 $345 $98 $443 $399 $72 $471
==== === ==== ==== === ==== ==== === ====
</TABLE>
- ---------------
(1) Total costs incurred (reimbursed) during 1998, 1997 and 1996 include $19.0
million, $19.0 million and ($4.0) million, respectively, related to
PennzEnergy's Azerbaijan activities. Costs incurred (reimbursed) for
unproved property acquisition related to the gas utilization project in
Azerbaijan during 1998, 1997 and 1996 totaled approximately $2.0 million,
($4.0) million and ($7.0) million, respectively.
F-35
<PAGE> 70
PENNZENERGY COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)
OIL AND GAS INFORMATION (CONTINUED)
Results of Operations From Oil and Gas Producing Activities
The following table sets forth sales and direct costs, excluding interest
expense, general and administrative expense and other items, information
relating to the Company's oil and gas exploration and production activities.
Income taxes were determined by applying the applicable statutory rates to
pretax income with adjustment for tax credits and other allowances. Income tax
provisions involved certain allocations among geographic areas based on
management's assessment of the principal factors giving rise to the tax
obligation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------
1996 1997 1998
------------------------------ ------------------------------ ------------------------------
UNITED UNITED UNITED
STATES INTERNATIONAL TOTAL STATES INTERNATIONAL TOTAL STATES INTERNATIONAL TOTAL
------ ------------- ----- ------ ------------- ----- ------ ------------- -----
(EXPRESSED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales
Outside customers....... $373 $ 41 $ 414 $523 $77 $600 $454 $ 4 $ 458
Other segments, at
market................ 342 -- 342 338 -- 338 116 -- 116
---- ----- ----- ---- --- ---- ---- ----- -----
715 41 756 861 77 938 570 4 574
---- ----- ----- ---- --- ---- ---- ----- -----
Costs and expenses
Production costs
Operating expenses.... 148 13 161 156 10 166 149 5 154
Production, severance
and property
taxes............... 35 -- 35 33 -- 33 26 -- 26
Technical support and
other(1).............. 38 21 59 36 18 54 52 19 71
Exploration expenses,
including dry holes... 31 13 44 53 15 68 81 81 162
Depreciation, depletion,
and amortization and
impairment
provisions(2)......... 195 22 217 216 5 221 258 25 283
---- ----- ----- ---- --- ---- ---- ----- -----
447 69 516 494 48 542 566 130 696
---- ----- ----- ---- --- ---- ---- ----- -----
Pretax results of
operations.............. 268 (28) 240 367 29 396 4 (126) (122)
Income tax expense
(benefit)............... 97 (29) 68 128 31 159 2 (43) (41)
---- ----- ----- ---- --- ---- ---- ----- -----
Results of operations..... $171 $ 1 $ 172 $239 $(2) $237 $ 2 $ (83) $ (81)
==== ===== ===== ==== === ==== ==== ===== =====
</TABLE>
- ---------------
(1) International technical support and other during 1998, 1997 and 1996
includes approximately $8.0 million, $7.0 million and $13.0 million,
respectively, related to PennzEnergy's Azerbaijan activities.
(2) PennzEnergy recorded a pretax charge of $74.7 million as of December 31,
1998, to reflect the impairment of long-lived oil and gas assets. Reference
is made to "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Oil and Gas" and Note 1 of Notes to Consolidated
Financial Statements for additional information.
F-36
<PAGE> 71
PENNZENERGY COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)
OIL AND GAS INFORMATION (CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves (Standardized Measure)
The Standardized Measure is determined on a basis which presumes that
year-end economic and operating conditions will continue over the periods during
which year-end proved reserves would be produced. Neither the effects of future
inflation nor expected future changes in technology and operating practices have
been considered.
The Standardized Measure is determined as the excess of future cash inflows
from proved reserves less future costs of producing and developing the reserves,
future income taxes and a discount factor. Future cash inflows represent the
revenues that would be received from production of year-end proved reserve
quantities assuming the future production would be sold at year-end prices plus
any fixed and determinable future escalations (but not escalations based on
inflation) of natural gas prices provided by existing contracts. As a result of
the continued volatility in oil and natural gas markets, future prices received
from oil, condensate and natural gas sales may be higher or lower than current
levels.
Future production costs include the estimated expenditures related to
production of the proved reserves plus any production taxes without
consideration of inflation. Future development costs include the estimated costs
of drilling development wells and installation of production facilities, plus
the net costs associated with dismantlement and abandonment of wells and
production platforms, assuming year-end costs continue without inflation. Future
income taxes were determined by applying current legislated statutory rates to
the excess of (a) future cash inflows, less future production and development
costs, over (b) the tax basis in the properties involved plus existing net
operating loss carryforwards. Tax credits are considered in the computation of
future income tax expenses. The discount was determined by applying a discount
rate of 10% per year to the annual future net cash flows.
F-37
<PAGE> 72
PENNZENERGY COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)
OIL AND GAS INFORMATION (CONTINUED)
The Standardized Measure does not purport to be an estimate of the fair
market value of PennzEnergy's proved reserves. An estimate of fair market value
would also take into account, among other things, the expected recovery of
reserves in excess of proved reserves, anticipated changes in future prices and
costs and a discount factor more representative of the time value of money and
the risks inherent in producing oil and gas. In the opinion of PennzEnergy's
management, the estimated fair value of PennzEnergy's oil and gas properties is
in excess of the amounts set forth below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------
1997 1998
--------------------------------- ---------------------------------
UNITED UNITED
STATES INTERNATIONAL TOTAL STATES INTERNATIONAL TOTAL
------- ------------- ------- ------- ------------- -------
(EXPRESSED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Future cash inflows............. $ 4,847 $ 961 $ 5,808 $ 3,000 $ 798 $ 3,798
Future production costs......... (1,621) (305) (1,926) (1,215) (289) (1,504)
Future development costs(1)..... (458) (86) (544) (370) (59) (429)
------- ----- ------- ------- ----- -------
Future net cash flows before
income taxes.................. 2,768 570 3,338 1,415 450 1,865
10% annual discount for
estimated timing of net cash
flows before income taxes..... (977) (308) (1,285) (474) (312) (786)
------- ----- ------- ------- ----- -------
Present value of future net cash
flows before income taxes..... 1,791 262 2,053 941 138 1,079
Future income tax expense
discounted at 10%(2).......... (433) (134) (567) (122) (72) (194)
------- ----- ------- ------- ----- -------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves.............. $ 1,358 $ 128 $ 1,486 $ 819 $ 66 $ 885
======= ===== ======= ======= ===== =======
</TABLE>
- ---------------
(1) Includes future dismantlement and abandonment costs, net of salvage values.
(2) Future income taxes before discount were $228.0 million (U.S.) and $176.0
million (foreign) and $710.0 million (U.S.) and $232.0 million (foreign) for
1998 and 1997, respectively.
F-38
<PAGE> 73
PENNZENERGY COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)
OIL AND GAS INFORMATION (CONTINUED)
Changes in the Standardized Measure
The following table sets forth the principal elements of the changes in the
Standardized Measure for the years presented. All amounts are reflected on a
discounted basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1996 1997 1998
------ ------- ------
(EXPRESSED IN MILLIONS)
<S> <C> <C> <C>
Standardized measure -- beginning of period................. $2,065 $ 2,755 $1,486
Revisions --
Net changes in prices, net of production costs............ 1,152 (1,707) (677)
Revisions of quantity estimates........................... 165 17 (123)
Changes in estimated future development costs............. (62) (160) (73)
Accretion of discount..................................... 276 397 205
Changes in production rates (timing) and other............ (189) (302) (276)
------ ------- ------
Net Revisions..................................... 1,342 (1,755) (944)
------ ------- ------
Extensions, discoveries and improved recovery, net of future
production and development costs.......................... 651 366 149
Sales and transfers, net of production costs................ (674) (657) (373)
Development costs incurred during the period that reduced
future development costs.................................. 145 222 247
Net change in estimated future income taxes................. (512) 645 374
Purchases of reserves in place.............................. 42 1 4
Sales of reserves in place.................................. (304) (91) (58)
------ ------- ------
Standardized measure -- end of period....................... $2,755 $ 1,486 $ 885
====== ======= ======
</TABLE>
F-39
<PAGE> 74
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
*3(a) -- Restated Certificate of Incorporation of Pennzoil
Company, as amended through May 10, 1996 (Pennzoil
Company 10-Q (March 31, 1997), SEC File No. 1-5591,
Exhibit 3).
*3(b) -- By-laws of Pennzoil Company, as amended through December
30, 1998 (Pennzoil Company 8-K (December 30, 1998), SEC
File No. 1-5591, Exhibit 4.1).
*4(a) -- Indenture dated as of February 15, 1986 (the "1986
Indenture") between Pennzoil Company and Mellon Bank,
N.A., Trustee (Pennzoil Company 10-Q (June 30, 1986), SEC
File No. 1-5591, Exhibit 4(a)).
*4(b) -- Officer's Certificate dated as of April 14, 1989
delivered pursuant to the terms of the 1986 Indenture
setting forth the terms of Pennzoil Company's 10 5/8%
Debentures due June 1, 2001 (Pennzoil Company 10-Q (March
31, 1989), SEC File No. 1-5591, Exhibit 4(a)).
*4(c) -- Officer's Certificate dated as of November 14, 1989
delivered pursuant to the terms of the 1986 Indenture
setting forth the terms of Pennzoil Company's 10 1/8%
Debentures due November 15, 2009 and 9 5/8% Notes due
November 15, 1999 (Pennzoil Company 10-K (1989), SEC File
No. 1-5591, Exhibit 4(n)).
*4(d) -- Officer's Certificate dated as of November 19, 1990
delivered pursuant to the terms of the 1986 Indenture
setting forth the terms of Pennzoil Company's 10 1/4%
Debentures due November 1, 2005 (Pennzoil Company 10-K
(1990), SEC File No. 1-5591, Exhibit 4(n)).
*4(e) -- Instrument of Resignation, Appointment and Acceptance
dated as of April 1, 1991 among Pennzoil Company, Mellon
Bank, N.A., as Retiring Trustee, and Texas Commerce Bank
National Association, as Successor Trustee, under the
1986 Indenture (Pennzoil Company 10-K (1991), SEC File
No. 1-5591, Exhibit 4(p)).
*4(f) -- Indenture dated as of December 15, 1992 (the "1992
Indenture") between Pennzoil Company and Texas Commerce
Bank National Association, Trustee (Pennzoil Company 10-K
(1992), SEC File No. 1-5591, Exhibit 4(o)).
4(g) -- Third Supplemental Indenture dated as of August 3, 1998
to the 1992 Indenture setting forth the terms of Pennzoil
Company's 4.90% Exchangeable Senior Debentures Due August
15, 2008.
4(h) -- Fourth Supplemental Indenture dated as of August 3, 1998
to the 1992 Indenture setting forth the terms of Pennzoil
Company's 4.95% Exchangeable Senior Debentures Due August
15, 2008.
*4(i) -- Rights Agreement dated as of October 28, 1994 between
Pennzoil Company and Chemical Bank, as Rights Agent
(Pennzoil Company 8-K (October 28, 1994), SEC File No.
1-5591, Exhibit 1).
Pennzoil Company agrees to furnish to the Commission upon
request a copy of any agreement defining the rights of
holders of long-term debt of Pennzoil Company and all its
subsidiaries for which consolidated or unconsolidated
financial statements are required to be filed, under
which the total amount of securities authorized does not
exceed 10% of the total assets of Pennzoil Company and
its subsidiaries on a consolidated basis.
+*10(a) -- 1981 Stock Option Plan of Pennzoil Company (Registration
Statement on Form S-8 (Registration No. 2-76935), Exhibit
4(a)).
+*10(b) -- 1982 Stock Option Plan of Pennzoil Company (Pennzoil
Company 10-K (1982), SEC File No. 1-5591, Exhibit 10(e)).
+*10(c) -- Pennzoil Company Salary Continuation Plan (Pennzoil
Company 10-K (1982), SEC File No. 1-5591, Exhibit 10(g)).
+*10(d) -- Pennzoil Company Supplemental Disability Plan effective
January 1, 1978 (Pennzoil Company 10-K(1977), SEC File
No. 1-5591, Exhibit 5(y)).
+*10(e) -- Pennzoil Company Supplemental Life Insurance Plan
effective January 1, 1978, as amended (Pennzoil Company
10-K (1980), SEC File No. 1-5591, Exhibit 10(g)).
</TABLE>
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
+*10(f) -- Pennzoil Company Deferred Compensation Plan (Pennzoil
Company 10-K (1981), SEC File No. 1-5591, Exhibit 10(i)).
+*10(g) -- Specimen of Pennzoil Company Deferred Compensation
Agreement (Pennzoil Company 10-K (1982), SEC File No.
1-5591, Exhibit 10(j)(1)).
+*10(h) -- Specimen of Pennzoil Company agreements regarding certain
benefits payable in the event of a change in control
(Pennzoil 10-Q (September 30, 1982), SEC File
No. 1-5591, Exhibit 28).
+*10(i) -- Pennzoil Company Section 415 Excess Benefit Agreements
(Pennzoil Company 10-Q (March 31, 1980), SEC File No.
1-5591, Exhibit 5).
+*10(j) -- Pennzoil Company Medical Expenses Reimbursement Plan
effective January 1, 1978 (Pennzoil Company 10-K(1977),
SEC File No. 1-5591, Exhibit 5(v)).
+*10(k) -- Pennzoil Company 1985 Conditional Stock Award Program
(Pennzoil Company definitive proxy material (April 25,
1985), SEC File No. 1-5591, Exhibit B).
+*10(l) -- Pennzoil Company Executive Severance Plan (Pennzoil
Company 10-K (1987), SEC File No. 1-5591, Exhibit 10(t)).
+*10(m) -- 1990 Stock Option Plan of Pennzoil Company (Pennzoil
Company definitive proxy material (April 26, 1990), SEC
File No. 1-5591, Exhibit A).
+*10(n) -- Pennzoil Company 1990 Conditional Stock Award Program
(Pennzoil Company definitive proxy material (April 26,
1990), SEC File No. 1-5591, Exhibit B).
+*10(o) -- 1992 Stock Option Plan of Pennzoil Company (Pennzoil
Company definitive proxy material (April 13, 1993), SEC
File No. 1-5591, Exhibit A).
+*10(p) -- Pennzoil Company 1993 Conditional Stock Award Program
(Pennzoil Company definitive proxy material (April 13,
1993), SEC File No. 1-5591, Exhibit B).
+*10(q) -- Employment Agreement between Pennzoil Company and Stephen
D. Chesebro' dated as of February 10, 1997 (Pennzoil
Company 10-K (1996), SEC File No. 1-5591, Exhibit 10(r)).
+*10(r) -- Employment Agreement between Pennzoil Company and Donald
A. Frederick dated February 10, 1997 (Pennzoil Company
10-K (1996), SEC File No. 1-5591, Exhibit 10(s)).
+*10(s) -- 1998 Incentive Plan of PennzEnergy Company (Registration
Statement on Form S-8 (Registration No. 333-69845),
Exhibit 4.3).
+*10(t) -- 1997 Incentive Plan of Pennzoil Company (Pennzoil Company
definitive proxy material (March 21, 1997), SEC File No.
1-5591, Exhibit A).
10(u) -- Credit Agreement dated as of November 17, 1998 among
Pennzoil Company and the lenders named therein.
10(v) -- First Amendment to Credit Agreement dated as of March 19,
1999 between PennzEnergy Company and the lenders named
therein.
12 -- Computation of Ratio of Earnings to Fixed Charges for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994.
21 -- List of Subsidiaries of PennzEnergy Company.
23(a) -- Consent of Arthur Andersen LLP.
23(b) -- Consent of Ryder Scott Company Petroleum Engineers.
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
99(a) -- Summary of Reserve Report of Ryder Scott Company
Petroleum Engineers as of December 31, 1998 relating to
oil and gas reserves.
</TABLE>
- ---------------
* Incorporated by reference.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
<PAGE> 1
EXHIBIT 4(g)
================================================================================
PENNZOIL COMPANY
AND
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
As Trustee
------------------------------------
Third Supplemental Indenture
Providing for
4.90% Exchangeable Senior Debentures Due August 15, 2008
Dated as of August 3, 1998
Supplementing Indenture dated as of December 15, 1992
================================================================================
<PAGE> 2
THIRD SUPPLEMENTAL INDENTURE, dated as of August 3, 1998
("Third Supplemental Indenture") between PENNZOIL COMPANY, a corporation
organized and existing under the laws of the State of Delaware (hereinafter
called the "Company"), and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, a national
banking association, incorporated and existing under the laws of the United
States of America (formerly known as Texas Commerce Bank National Association),
having its principal corporate trust office in the City of Houston, Texas
(hereinafter called the "Trustee").
WHEREAS, the Company has executed and delivered its Indenture
dated as of December 15, 1992 (hereinafter called the "Indenture"), to provide
for the issue of one or more series of debt securities of the Company; and
WHEREAS, Section 901 of the Indenture authorizes the Company
and the Trustee to enter into supplemental indentures to establish the form or
terms of securities of any series as permitted by sections 201 and 301 of the
Indenture; and
WHEREAS, to so provide for the establishment of such a series,
the Company has authorized the execution of this Third Supplemental Indenture to
the Indenture and has requested the Trustee to execute the Third Supplemental
Indenture; and
WHEREAS, all conditions and requirements necessary to make
this Third Supplemental Indenture a valid, binding and legal instrument have
been done and performed and the execution and delivery hereof have been in all
respects duly authorized, including the delivery to the Trustee of the Opinion
of Counsel referenced in Section 903 of the Indenture;
NOW, THEREFORE, THIS THIRD SUPPLEMENTAL INDENTURE WITNESSETH
that the Company and the Trustee hereby covenant, declare and agree as follows:
ARTICLE ONE
101. Third Series of Debentures.
There shall be a series of Securities (capitalized terms used
herein and not otherwise defined have the meanings given to such terms in the
Indenture) designated "4.90% Exchangeable Senior Debentures Due August 15, 2008"
(herein sometimes referred to as "Debentures"), and the form thereof, which
shall be established by Board Resolution, shall contain suitable provisions with
respect to the matters hereinafter in this Section 101 specified. Debentures
shall mature on and bear interest and be limited in aggregate principal amount
as to each maturity as set forth below:
<TABLE>
<CAPTION>
Aggregate Interest
Principal Rate
Amount Maturity Per Annum
------ -------- ---------
<S> <C> <C>
$443,819,000 August 15, 2008 4.90%
</TABLE>
-2-
<PAGE> 3
Debentures shall be issued as Registered Debentures in denominations of U.S.
$1,000 or integral multiples thereof; interest on Debentures shall be payable
semiannually on February 15 and August 15 of each year, commencing February 15,
1999. The Place of Payment with respect to the Debentures is Chase Bank of
Texas, National Association, Corporate Trust Services, 1201 Main, 18th Floor,
Dallas, Texas 75202.
102. Exchange or Transfer.
Upon any exchange or transfer of Debentures, the Company may
make a charge therefor sufficient to reimburse it for any tax or taxes or other
governmental charge, as provided in Section 305 of the Indenture, but the
Company hereby waives any right to make a charge in addition thereto for any
exchange or transfer of Debentures.
103. Redemption.
(a) The Debentures shall be subject to redemption upon not
less than 30 nor more than 60 days' prior notice as provided in Sections 107 and
1104 of the Indenture at any time on or after August 15, 2000, in whole or from
time to time in part, at the option of the Company, at the following redemption
prices (expressed as a percentage of the principal amount at maturity) if
redeemed during the 12-month period beginning August 15 of the following years:
<TABLE>
<CAPTION>
Redemption
Year Price
---- -----
<S> <C>
2000....................................... 104.00%
2001....................................... 103.50%
2002....................................... 103.00%
2003....................................... 102.50%
2004....................................... 102.00%
2005....................................... 101.50%
2006....................................... 101.00%
2007....................................... 100.50%
</TABLE>
in each case together with accrued interest to the redemption date, provided,
however, that, if any interest payment date on the Debentures is on or prior to
the Redemption Date, such interest shall be payable to the Holders of such
Debentures, registered as such, at the close of business on the relevant Regular
Record Dates according to their terms and the provisions of Section 307 of the
Indenture.
(b) Notice of intention to redeem the Debentures in whole or
in part shall be given in accordance with Section 1104 of the Indenture.
-3-
<PAGE> 4
104. Sinking Fund.
The Debentures shall not be entitled to the benefits of any
sinking fund provisions.
105. Tax Matters.
(a) Subject to Section 105(c) hereof, in addition to the
conditions set forth in Section 401 of the Indenture, the right of the Company
to satisfy the Indenture to the extent set forth in Section 401 of the Indenture
shall be subject to the condition that the Company has delivered to the Trustee
an Opinion of Counsel (as defined in the Indenture) that the satisfaction and
discharge pursuant to Section 401 of the Indenture will not cause the Holders of
the Debentures to recognize income, gain or loss for United States federal
income tax purposes.
(b) Subject to Section 105(c) hereof, in addition to the
conditions set forth in Section 403 of the Indenture, the right of the Company
to satisfy the Indenture with respect to the Debentures to the extent set forth
in Section 403 of the Indenture shall be subject to the conditions that the
Company shall have received from, or there shall have been published by, the
United States Internal Revenue Service a ruling to the effect that the
satisfaction and discharge to the extent set forth in Section 403 of the
Indenture will not cause the Holders of the Debentures to recognize income, gain
or loss for United States federal income tax purposes.
(c) Notwithstanding the satisfaction and discharge of the
Indenture or with respect to the Debentures pursuant to Sections 105(a) and (b)
hereof, the obligations of the Company under Article Two hereof shall survive
until the Debentures are no longer Outstanding.
106. Issuance of Debentures.
Upon the delivery of this Third Supplemental Indenture,
Debentures in the aggregate principal amount of $443,819,000 shall be issued and
be Outstanding as provided in the Indenture.
107. Global Debentures.
The provisions of paragraphs (a), (b), (c) and (d) below shall
apply only to Global Debentures:
(a) Each Global Debenture authenticated under the Indenture
and this Third Supplemental Indenture shall be registered in the name of the
Depository designated for such Global Debenture or a nominee thereof and
delivered to such Depository or a nominee thereof or custodian therefor, and
each such Global Debenture shall constitute a single Debenture for all purposes
of this Third Supplemental Indenture.
(b) Notwithstanding any other provision in the Indenture or
this Third Supplemental Indenture, no Global Debenture may be exchanged in whole
or in part for Debentures registered, and no transfer of a Global Debenture in
whole or in part may be registered, in the name of any Person other than the
Depositary for such Global Debenture or a nominee thereof unless (A) such
Depositary (i) has notified the Company that it is unwilling or unable to
continue as
-4-
<PAGE> 5
Depositary for such Global Debenture and the Company thereupon fails to appoint
a successor depositary or (ii) has ceased to be a clearing agency registered
under the Exchange Act, (B) there shall have occurred and be continuing an Event
of Default or any event which after notice or lapse of time or both would be an
Event of Default with respect to the Debentures or (C) the Company in its sole
discretion determines that such Global Debenture shall be so exchangeable or
transferable.
(c) Subject to Section 107(b), upon issuance of Debentures in
definitive registered certificated form, the Trustee shall register the
Debentures in the name of, and cause the Debentures to be delivered to, the
Person or Persons (or the nominee thereof) identified as the beneficial owners
as the Depositary shall direct.
(d) Every Debenture authenticated and delivered upon
registration of transfer of, or in exchange for or in lieu of, a Global
Debenture or any portion thereof, whether pursuant to this Section, Section 304
or 306 of the Indenture or otherwise, shall be authenticated and delivered in
the form of, and shall be, a Global Debenture, unless such Debenture is
registered in the name of a Person other than the Depositary for such Global
Debenture or a nominee thereof.
108. Form of Legend for Global Debentures.
Every Global Debenture authenticated and delivered hereunder
shall bear a legend in substantially the following form:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY TO PENNZOIL COMPANY OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IN EXCHANGE FOR
THIS CERTIFICATE OR ANY PORTION HEREOF IS REGISTERED IN THE NAME OF CEDE & CO.
(OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON OTHER THAN THE DEPOSITORY TRUST COMPANY OR A
NOMINEE THEREOF IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO.,
HAS AN INTEREST HEREIN.
THIS DEBENTURE IS A GLOBAL DEBENTURE WITHIN THE MEANING OF THE THIRD
SUPPLEMENTAL INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF
A DEPOSITARY OR A NOMINEE THEREOF. THIS DEBENTURE MAY NOT BE EXCHANGED IN WHOLE
OR IN PART FOR A DEBENTURE REGISTERED, AND NO TRANSFER OF THIS DEBENTURE IN
WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH
DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED
IN THE THIRD SUPPLEMENTAL INDENTURE.
-5-
<PAGE> 6
109. Depositary. The Depositary with respect to any Global
Debenture authenticated under the Indenture and this Third Supplemental
Indenture shall be The Depository Trust Company or such other clearing agency
registered under the Exchange Act that is designated by the Company to act as
Depositary with respect to Debentures issued in the form of one or more Global
Debentures.
ARTICLE TWO
201. Right of Exchange.
Subject to and upon compliance with the provisions of this
Section 201, at the option of the Holder thereof, beginning August 3, 1998, any
Debenture or any portion of the principal amount thereof which is $1,000 or an
integral multiple of $1,000, may (unless the Company shall have elected,
pursuant to Section 216 hereof, to pay to the Holder an amount in cash equal to
the value of the Exchange Property, in which case the provisions of Section 216
hereof shall be followed), at any time on or before the close of business on
August 15, 2008, or in the case of Debentures or portions thereof called for
redemption in accordance with Section 1101 of the Indenture, on or before the
close of business on the Business Day next preceding the Redemption Date, be
exchanged for fully paid and nonassessable shares (calculated as to each
exchange to the nearest 1/10,000 of a share) of Chevron Common Stock (as defined
in Section 219 hereof) (or such other securities, property or cash as shall be
added to such Chevron Common Stock or as such Chevron Common Stock shall have
been changed into pursuant to this Article Two) at the Exchange Rate (as defined
below) hereinafter provided.
The rate at which shares of Chevron Common Stock shall be
deliverable upon exchange (herein called the "Exchange Rate") shall be initially
9.3283 shares of Chevron Common Stock for each $1,000 principal amount of
Debentures exchanged. The Exchange Rate shall be subject to adjustment as
provided in Sections 204, 205, 211 and 215 hereof.
202. Method of Exchange.
In order to exercise the right of exchange, the Holder shall
surrender such Debenture to the Exchange Agent (as defined in Section 219
hereof) for exchange by delivering such Debenture to, or mailing such Debenture
by registered mail, postage prepaid, addressed to the Exchange Agent at the
office or agency of the Company, maintained for that purpose pursuant to Section
1002 of the Indenture, accompanied in each case by written notice to the Company
and the Exchange Agent that the Holder elects to exchange such Debenture, or, if
less than the entire principal amount of such Debenture is to be exchanged, the
portion thereof to be exchanged.
The notices in the above paragraph shall also state the name
or names (with address) in which the certificate or certificates for shares of
Chevron Common Stock or, to the extent applicable, other Exchange Property which
shall be issuable on such exchange shall be issued.
-6-
<PAGE> 7
Debentures surrendered for exchange shall be accompanied (if so required by the
Company or the Exchange Agent) by proper assignments thereof to the Company.
If the Company does not elect to deliver cash in lieu of
Chevron Common Stock or other Exchange Property pursuant to Section 216 hereof,
as promptly as practicable after the proper surrender of such Debenture for
exchange as aforesaid (subject however to the following paragraph of this
Section 202 and Section 216 hereof) and in accordance with the procedures set
forth in the Exchange Agreement (as defined in Section 219 hereof), the Company
shall or shall cause the Exchange Agent to deliver to such Holder, or on his
written order a certificate or certificates for the number of whole shares of
Chevron Common Stock and/or any other Exchange Property deliverable upon
exchange of such Debenture (or specified portion thereof). In addition,
provision shall be made for any fraction of a share as provided in Section 203
hereof and any payment of interest as provided by the following paragraph. Such
exchange shall be deemed to have been effected immediately prior to the close of
business on the date on which such Debenture shall have been properly
surrendered for exchange as aforesaid, which shall be the date on which such
Debenture and notice and any such required payment and assignment shall be
received by the Exchange Agent, and at such time the rights of the Holder of
such Debenture as a Debenture holder shall cease and the Person or Persons in
whose name or names any certificate or certificates for shares of Chevron Common
Stock or other Exchange Property shall be deliverable upon such exchange shall,
as between such Person or Persons and the Company, be deemed to have become the
Holder or Holders of record of the shares or other property represented thereby.
Upon any exchange of a Debenture pursuant to this Article Two
(i) if the Debenture to be exchanged has been called for redemption by the
Company, the Holder shall receive accrued interest thereon through the date an
exchange under this Section 202 is deemed effective and (ii) if the Debenture to
be exchanged has not been called for redemption by the Company, the Holder shall
not receive any payment of accrued and unpaid interest.
Delivery of such certificate or certificates and of any check
for any cash or other Exchange Property may be delayed for a reasonable period
of time at the request of the Company in order to effectuate the calculations of
the adjustments pursuant to this Article Two, to obtain any certificate
representing securities to be delivered, to complete any reapportionment of the
shares of Chevron Common Stock or other Exchange Property apportioned thereto
which is required by this Article Two or to comply with any applicable law. If,
between the date an exchange under this Section 202 is deemed effected and the
date of delivery of the applicable security or securities, such security or
securities shall cease to have any or certain rights, or a record date or
effective date of a transaction to which Section 204, 205 or 211 hereof applies
shall occur, the Person entitled to receive such security or securities shall be
entitled only to receive such security or securities as so modified and any
dividends or proceeds received thereon on or after the date such exchange is
deemed effected and none of the Company, the Trustee and the Exchange Agent
shall be otherwise liable with respect to the modification of such security or
securities, from the date such exchange is deemed effected and the date of such
delivery.
-7-
<PAGE> 8
Except as otherwise expressly provided in this Article Two, no
payment or adjustment shall be made upon any exchange on account of any interest
accrued on the Debentures surrendered for exchange or on account of any
dividends on the Chevron Common Stock or other Exchange Property delivered upon
such exchange; provided, however that interest accrued on any Debentures
surrendered for exchange on or after any Regular Record Date and before any
Interest Payment Date relating thereto shall be paid to, as applicable, the
Holder of record as of such record date.
In the case of any Debenture which is exchanged in part only,
upon such exchange the Company shall execute and the Trustee shall authenticate
and deliver to the Holder thereof, at the expense of the Company, a Debenture or
Debentures of authorized denominations in principal amount equal to the
unexchanged portion of such Debenture.
203. Fractional Interests.
No fractional shares of Chevron Common Stock (or any form of
fractional interest in any other security or property which is part of the
Exchange Property) shall be delivered upon exchanges of Debentures. If more than
one Debenture shall be surrendered for exchange at one time by the same Holder,
the number of whole shares (or other integral units of such other securities or
property), which shall be delivered upon exchange shall be computed by the
Company on the basis of the aggregate principal amount of the Debentures (or
specified portions thereof to the extent permitted hereby) so surrendered.
Instead of any fractional share (or other fractional unit) which would otherwise
be deliverable upon exchange of any Debenture or Debentures (or specified
portions thereof), the Exchange Agent on behalf of the Company shall pay, on the
date the exchange is deemed to be effected, a cash adjustment in respect of such
fractional interest in an amount equal to the same fraction of the Market Price
(as defined in Section 219 hereof) per share of the Chevron Common Stock (or per
unit of such other security or property) on the Business Day next preceding the
date the exchange is deemed to be effected. The Company shall authorize the
Exchange Agent to obtain the funds necessary or anticipated by the Exchange
Agent to be necessary, for payment of such fractional interests by the sale of
shares of Chevron Common Stock (or other securities or property which are part
of the Exchange Property) held by the Exchange Agent, provided that after such
sale the number of shares of Chevron Common Stock (and of such other securities
or property) held by the Exchange Agent shall be sufficient to permit the
exchange of all Outstanding Debentures for Chevron Common Stock (and any other
Exchange Property), on the basis of the Exchange Rate then in effect, in
accordance with the provisions of this Article Two. The Company agrees to
furnish or cause to be furnished to the Exchange Agent any additional funds
required to permit such cash payments with respect to fractional interests.
204. Adjustment of Exchange Rate.
(a) In the event Chevron (as defined in Section 219 hereof)
shall (i) pay a dividend on Chevron Common Stock in shares of Chevron Common
Stock, (ii) subdivide the outstanding shares of Chevron Common Stock into a
greater number of shares of Chevron Common Stock, (iii) combine outstanding
shares of Chevron Common Stock into a smaller number of shares
-8-
<PAGE> 9
of Chevron Common Stock, or (iv) issue, by reclassification of shares of Chevron
Common Stock, any shares of its common stock (which in any such case shall apply
to the shares of Chevron Common Stock held by the Exchange Agent under the
Exchange Agreement), the Exchange Rate in effect immediately prior thereto shall
be proportionately adjusted so that the Holder of any Debentures thereafter
surrendered for exchange shall be entitled (subject to Sections 215 and 216
hereof) to receive the number and kind of shares of Chevron Common Stock which
such Holder would have owned or have been entitled to receive after the
happening of any of the events described above, had such Debentures been
exchanged immediately prior to the record date (or if there is no record date,
the effective date) of such event. Such adjustments shall be made whenever any
of the events listed above shall occur and shall become effective as of
immediately after the close of business on the record date in the case of a
stock dividend and shall become effective as of immediately after the close of
business on the effective date in the case of a subdivision or combination or
reclassification. Any Holder surrendering any Debentures for exchange after such
record date or such effective date, as the case may be, shall be entitled to
receive shares of Chevron Common Stock at the Exchange Rate as so adjusted
pursuant to this Section 204(a) (subject to Sections 215 and 216 hereof) and any
other Exchange Property apportioned thereto.
(b) Notwithstanding the foregoing provisions, no adjustment in
the Exchange Rate shall be required unless such adjustment would require an
increase or decrease in such Exchange Rate of more than 1%, provided, however,
that any adjustments which by reason of this paragraph (b) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment.
(c) All calculations under this Section 204 shall be made to
the nearest 1/10,000 of a share.
(d) Whenever the Exchange Rate is adjusted as herein provided,
the Company shall determine the adjusted Exchange Rate in accordance with this
Section 204 and shall prepare an Officer's Certificate setting forth such
adjusted Exchange Rate and any cash or other property apportioned to the Chevron
Common Stock and showing in detail the facts upon which such adjustment is
based. Such certificate shall be conclusive evidence of the correctness of such
adjustment. Such certificate shall forthwith be filed with the Exchange Agent
and the Trustee, who may rely on such Officer's Certificate as conclusive
evidence of the correctness of the adjustment. A notice stating that the
Exchange Rate has been adjusted and setting forth the adjusted Exchange Rate and
any cash or other property apportioned to the Chevron Common Stock shall, as
soon as practicable, be mailed by or on behalf of the Company to the Holders of
Debentures at their last addresses as they shall appear upon the Security
Register.
205. Exchange Agreement.
(a) Simultaneously with the execution and delivery of this
Indenture Supplement, the Company is entering into the Exchange Agreement with
Chase Bank of Texas, National Association, a national banking association,
incorporated and existing under the laws of the United States of America, as
Exchange Agent, pursuant to which the Company is depositing with the
-9-
<PAGE> 10
Exchange Agent 4,140,077 shares of Chevron Common Stock, which in the aggregate
shall initially constitute the Exchange Property. The Exchange Agent shall be
the exchange agent for the exchange of Debentures for Chevron Common Stock and
other Exchange Property, if any, hereunder. The Company shall deposit with the
Exchange Agent from time to time such additional number of shares of Chevron
Common Stock not already held by the Exchange Agent as the Holders of all
Outstanding Debentures shall from time to time be entitled to receive from the
Exchange Agent pursuant to this Article Two upon exchange thereof.
(b) All cash received by the Exchange Agent as herein provided
will be invested upon written request of the Company by the Exchange Agent from
time to time as so requested by the Company pursuant to the Exchange Agreement.
The Company shall be entitled to all cash dividends paid on the Exchange
Property held by the Exchange Agent except to the extent that such dividends are
paid pursuant to a plan of liquidation or partial liquidation or a
recapitalization or restructuring or other extraordinary cash dividends, and to
all interest payments on any debt securities included in the Exchange Property
which Holders of Debentures may be entitled to receive on exchange hereunder;
provided, that if the Exchange Agent shall receive any such cash dividends or
interest to which the Company is entitled pursuant hereto, the Exchange Agent
shall not be required to transfer to the Company any such dividends or interest
to which the Company is entitled pursuant hereto until receipt of an Officers'
Certificate to the effect that the Company is entitled to such dividends or
interest pursuant hereto. The Company shall also be entitled to any interest or
gain on investments made by the Exchange Agent pursuant to Section 11 of the
Exchange Agreement, which shall be paid to the Company on demand as provided in
the Exchange Agreement. Any loss on such investments shall be for the account of
the Company and the amount thereof shall be reimbursed to the Exchange Agent by
the Company. The Exchange Agent shall hold and apply as hereinafter provided all
other dividends paid on the Exchange Property held by the Exchange Agent under
the Exchange Agreement.
(c) In case there shall be, at any time while any Debentures
are Outstanding, any distribution of cash, securities or other property on
Exchange Property (other than (i) cash dividends to which the Company is
entitled and interest paid on debt securities, as specified in paragraph (b) of
this Section 205, (ii) dividends, subdivisions, combinations and
reclassifications for which an adjustment in the Exchange Rate is made pursuant
to Section 204 hereof and (iii) securities or other property received in a
transaction to which Section 211 hereof applies) or in case there shall be
granted with respect to any Exchange Property, any transferable subscription
rights, options, warrants or other similar transferable rights, the Company
shall, as soon as reasonably practicable after its receipt thereof, notify the
Exchange Agent of such receipt and promptly, and in any event within five
business days of the receipt thereof, deposit with the Exchange Agent all such
securities and other property, including any transferable rights, pursuant to
the Exchange Agreement, and concurrently with such deposit, shall (except as
provided in the succeeding paragraph) instruct the Exchange Agent to sell all
securities and other property so received by way of distribution and all rights
for cash so distributed in such manner as the Company shall instruct in writing
and shall apply the proceeds from the sale thereof as hereinafter provided. To
the extent that the Company shall, within 10 days of its notification to the
Exchange Agent of the Company's receipt of such cash, securities or other
property, including any transferrable rights, furnish the Exchange Agent with an
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<PAGE> 11
Opinion of Counsel to the effect that such distribution or grant or the sale of
the securities or other property received on such distribution or the rights
received by such grant is taxable to the Company or the Exchange Agent and an
Officers' Certificate as to the amount of federal, state and local tax payable
by the Company and the Exchange Agent as a result of such distribution or grant
and estimated to be payable as a result of such sale (computed by the Company at
the highest marginal tax rates applicable to such transaction or transactions),
the Exchange Agent shall pay to, or to the order of the Company, in the case of
taxes payable by the Company, or itself, in the case of taxes payable by it,
from the cash received in such distribution, if any, or cash apportioned to
Chevron Common Stock hereunder or from the net cash proceeds received from such
sale, the amount of such tax as so computed by the Company. In the case of taxes
estimated to be payable as a result of such sale, the Company shall deliver an
Officers' Certificate within 10 days after completion of such sale stating the
actual taxes payable as so computed and appropriate adjustment of such payments
shall thereupon be made. The remaining portion of such cash received, if any,
and net cash proceeds shall be apportioned equally among the Exchange Property
for which outstanding Debentures are exchangeable as of immediately after the
close of business on the record date for. the distribution or grant to which
this paragraph (c) applies, or, if there is no such record date, the effective
date of such distribution or grant. Any Holder surrendering any Debentures after
such record date, or such effective date, as the case may be, shall be entitled
to receive, in addition to the Exchange Property for which such Debentures are
exchangeable and any cash theretofore apportioned hereunder, the amount of cash
so apportioned to such shares of Chevron Common Stock.
Notwithstanding the foregoing, however, in the event of any
such distribution of securities or other property, including transferable
rights, which is convertible, without payment of consideration, into Exchange
Property, and which right of conversion does not expire before the retirement of
such securities or other property, the Company shall, after any sale required
for payment of any taxes owed by the Company, or the Exchange Agent, as provided
in the preceding paragraph, instruct the Exchange Agent to retain and hold all
such securities and other property as additional Exchange Property for
apportionment equally among other Exchange Property for which Debentures are
exchangeable as of immediately after the close of business on the record date
for the distribution or grant to which this Section 205 applies, or, if there is
no such record date, the effective date of such distribution or grant; provided,
however, that if the amount of cash deliverable to the holders of such
securities or other property, including transferable rights, for each unit of
such securities or other property upon the retirement thereof is less than the
average of the high and low reported public sales prices for each such unit for
the seven Business Days preceding the date 15 Business Days prior to the date of
their retirement the Exchange Agent shall sell all such securities and other
property prior to the third Business Day prior to the date of their retirement
and, after the payment, from the net proceeds received from such sale by the
Exchange Agent, of any taxes incurred by the Exchange Agent or the Company in
connection with such sale, the remaining cash proceeds of such sale shall be
apportioned equally among the Exchange Property for which Outstanding Debentures
are exchangeable as of the Business Day following the day such sale is
concluded.
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<PAGE> 12
In the event that a distribution or grant of cash, securities
or other property on Exchange Property shall be effected as contemplated by the
two immediately preceding paragraphs, a notice stating that such distribution or
grant has occurred and setting forth the additional cash, securities or other
property on the Exchange Property shall as soon as practicable be mailed by or
on behalf of the Company to the Holders of Debentures at their last addresses as
they appear upon the Security Register.
In case there shall be, at any time while any Debentures are
outstanding, any distribution or grant to holders of Chevron Common Stock (or
other Exchange Property), including the Company (with respect to any Exchange
Property held by the Exchange Agent), of any nontransferable subscription
rights, options, warrants or other similar nontransferable rights that shall, by
the terms of such rights, permit the Company to distribute such rights to the
Holders of Debentures, then the Company and the Exchange Agent shall cause such
rights to be distributed to the Holders of record of Debentures shown on the
Security Register as of immediately after the close of business on the record
date (and if there is no record date, the close of business on the effective
date) for such distribution or grant; provided, however, that if the Company
shall furnish the Exchange Agent with an Opinion of Counsel to the effect that
such distribution or grant, or such distribution by the Company or the Exchange
Agent to Holders of Debentures, is taxable to the Company or the Exchange Agent
and an Officer's Certificate as to the amount of federal, state and local tax
payable by the Company and the Exchange Agent as a result of such distribution
or grant, the Exchange Agent shall to the extent legally permissible sell for
cash in such manner as the Company shall instruct in writing such of the rights
as shall be sufficient to provide to the Company and the Exchange Agent a cash
payment equal to the amount of taxes payable by the Company and the Exchange
Agent, respectively, arising from such distribution or grant (as computed by the
Company at the highest marginal tax rates applicable to such transaction or
transactions and any sale of such rights or, if such sale is not permissible or
the proceeds thereof are not sufficient, the Exchange Agent shall cause an
amount of cash held for exchange by the Exchange Agent (if any) and, if such
cash is not sufficient for the applicable tax payments, an amount of Exchange
Property, to be segregated for the benefit of or delivered to the Company. The
remaining Exchange Property held by the Exchange Agent shall be proportionately
adjusted so as to be apportioned equally to the Debentures outstanding as of
immediately after the close of business on the record date for the distribution
or grant to which this paragraph applies, or, if there is no such record date,
immediately after the close of business on the effective date of such
distribution or grant. Any Holder surrendering any Debentures after such record
date, or such effective date, as the case may be, shall be entitled to receive
any Exchange Property apportioned thereto as so adjusted pursuant to this
paragraph.
(d) In the event of any reduction of the principal amount of
Debentures Outstanding (other than as a result of surrender for exchange for
Exchange Property pursuant to this Article Two), as evidenced by the delivery to
the Trustee by the Company of Debentures for cancellation, the Company shall be
entitled to the kind and amount of Exchange Property as shall at the time be in
excess of the kind and amount of Exchange Property which would be required for
the exchange of all Debentures then Outstanding for the Exchange Property on the
basis of the then Exchange Rate and the other terms and provisions of this
Article Two and the Exchange Agreement.
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<PAGE> 13
Upon expiration of the right to surrender Debentures for exchange pursuant to
this Article Two and the Exchange Agreement and when all other obligations of
the Company shall have been satisfied under this Article Two and the Exchange
Agreement, the Company's obligation to exchange Debentures for Exchange Property
shall be terminated.
(e) The Exchange Agent shall not make any distribution of
Exchange Property to the Company prior to the receipt by the Exchange Agent from
the Company of an Officers' Certificate to the effect that no Event of Default
exists hereunder and no event or condition which with notice or lapse of time or
both would become such an Event of Default and which states in detail the basis
asserted by the Company for such distribution.
(f) The Company shall be entitled to any net income or gain
resulting from investments of cash made by the Exchange Agent pursuant to the
Exchange Agreement and shall reimburse the Exchange Agent for any losses
realized in respect of such investments.
(g) The Company shall have the full and unqualified right and
power to exercise any rights to vote, or to give consents or take any other
action in respect of, the Chevron Common Stock or any other securities included
in the Exchange Property at any time held by the Exchange Agent, and the
Exchange Agent shall have no duty to exercise any such rights. The Company shall
not be liable to any Holder as a result of any vote, or failure to vote, consent
or failure to consent, or any other act or failure to act taken by the Company
in respect of the Chevron Common Stock or any other securities included in the
Exchange Property.
(h) The obligations, covenants and agreements contained in the
Exchange Agreement shall not constitute obligations, covenants or agreements
contained in the Indenture, this Third Supplemental Indenture or any of the
Debentures and neither the failure by the Company to observe any obligation,
covenant or agreement contained in the Exchange Agreement (unless such
obligation, covenant or agreement shall also be contained in this Third
Supplemental Indenture) nor the failure of the Exchange Agent to fulfill any
obligations, agreements or covenants set forth therein shall constitute (with or
without the giving of notice, the passage of time or both) an Event of Default;
provided, however, that nothing in this paragraph shall impair the right of a
Holder to receive the Exchange Property apportioned to such Holder's Debentures
in exchange for such Debentures in accordance with the terms and conditions of
this Article Two, and nothing in this paragraph shall impair the rights and
remedies of the Trustee and the Holders under Article Five of the Indenture with
respect to a failure by the Company to observe its express agreements and
covenants to cause the exchange of Debentures actually surrendered for exchange
pursuant to this Article Two for Exchange Property apportioned thereto in
accordance with the terms and conditions of this Article Two.
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<PAGE> 14
206. Company to Give Notice of Certain Events.
If at any time:
(a) Chevron shall declare a dividend (or any other
distribution) on the Chevron Common Stock which the Exchange Agent would be
required to apply for the benefit of the Holders of the Debentures in accordance
with Section 205 hereof; or
(b) Chevron shall authorize the granting of subscription
rights, options, warrants or other similar rights to holders of Chevron Common
Stock; or
(c) there shall occur any reclassification of Chevron Common
Stock (other than a subdivision or combination of outstanding shares of Chevron
Common Stock) or any consolidation or merger to which Chevron is a party and for
which approval of any stockholders of Chevron is required, or the sale or
transfer of all or substantially all of the assets of Chevron; or
(d) there shall occur the voluntary or involuntary
dissolution, liquidation or winding up of Chevron;
then the Company shall as promptly as practicable cause to be filed at the
office or agency maintained pursuant to Section 1002 of the Indenture and cause
to be mailed to the Holders of Debentures at their last addresses as they shall
appear upon the Security Register a notice stating (x) the date, if known by the
Company, on which a record is to be taken for the purpose of such dividend,
distribution or grant of rights, or, if a record is not to be taken, the date as
of which the holders of Chevron Common Stock of record to be entitled to such
dividend or distribution or grant of rights are to be determined, or (y) the
date, if known by the Company, on which such reclassification, merger,
consolidation, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of Chevron Common Stock of record shall be entitled to exchange their
shares of Chevron Common Stock for securities or other property deliverable upon
such reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up.
207. Covenants by the Company.
So long as any Debentures shall be Outstanding and
exchangeable for Chevron Common Stock or other Exchange Property pursuant to
this Article Two, the Company shall (i) preserve unimpaired the right of each
Holder of Debentures, upon exchange thereof, to receive shares of Chevron Common
Stock or other Exchange Property as such Holder shall from time to time be
entitled to receive in accordance with the provisions of this Article Two, and
(ii) not pledge, mortgage, hypothecate or grant a security interest in, or
permit any mortgage, pledge, security interest or other lien upon, the Exchange
Property.
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<PAGE> 15
208. Transfer Taxes.
The Company will pay any and all taxes that may be payable in
respect of the transfer and delivery of shares of Chevron Common Stock (or other
securities included in the Exchange Property) pursuant hereto, other than
income, capital gains and similar taxes imposed on any Holder by reason of
exchange of Debentures for Exchange Property; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the delivery, upon an exchange of Debentures, of shares
of Chevron Common Stock (or other securities included in the Exchange Property)
in a name other than that in which the Debentures so exchanged were registered,
and no such transfer shall be made unless and until the Person requesting such
transfer has paid to the Company or the Exchange Agent the amount of any such
tax, or has established to the satisfaction of the Company and the Exchange
Agent that such tax has been paid.
209. Fully Paid Shares.
The Company warrants and covenants that all shares of Chevron
Common Stock delivered upon the exchange of Debentures will be fully paid and
nonassessable and that each Holder of Debentures who receives shares of Chevron
Common Stock or other Exchange Property in exchange for his Debentures pursuant
to this Article Two will receive valid and marketable title to such Exchange
Property, free and clear of all claims, liens and encumbrances (other than those
that may be created or suffered to exist by such Holder). Except as provided in
Section 208 hereof, the Company will pay all taxes, liens and charges with
respect to the delivery of Exchange Property in exchange for Debentures
hereunder.
210. Cancellation of Debentures.
All Debentures delivered for exchange shall be delivered by
the Exchange Agent to the Trustee and be canceled by the Trustee, and the
Trustee shall dispose of the same as provided in Section 309 of the Indenture.
211. Merger of Chevron
In case of any consolidation or merger of Chevron with or into
any other Person that results in shares of Chevron Common Stock, as constituted
prior to the consummation of such transaction, being converted into other
securities and/or property (including cash), or in case of any sale or transfer
of all or substantially all of the assets of Chevron (if in connection with such
sale or transfer holders of Chevron Common Stock receive other securities and/or
property including cash, in exchange for their shares of Chevron Common Stock),
or of any voluntary or involuntary dissolution, liquidation or winding-up of
Chevron, the Company shall execute and deliver to the Trustee a supplemental
indenture, and to the Exchange Agent a supplement to the Exchange Agreement,
each providing that the Holder of each Debenture then Outstanding shall have the
right thereafter (subject to Sections 215 and 216 hereof) to exchange such
Debenture (i) for the kind and amount of securities and other property
receivable upon such consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up by a holder of the number of shares of Chevron Common
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<PAGE> 16
Stock for which such Debenture was exchangeable immediately prior to such
consolidation, merger, sale, transfer, dissolution, liquidation or winding up
and (ii) the kind and amount of securities (other than Chevron Common Stock) and
other Exchange Property for which such Debenture was exchangeable immediately
prior to such consolidation, merger, sale, transfer, dissolution, liquidation or
winding up. Such supplemental indenture shall provide for adjustments and rights
to receive and retain dividends or their equivalents, which shall be as nearly
equivalent as may be practicable to the adjustments and rights to receive and
retain dividends or their equivalents provided for in this Article Two. The
above provisions of this Section 211 shall similarly apply to any successive
consolidation, merger, sale, transfers, dissolution, liquidation or winding-up.
Notice of such supplemental indenture shall as soon as
practicable be filed with the Exchange Agent and mailed by or on behalf of the
Company to the Holders of Debentures at their last addresses as they shall
appear on the Security Register.
The Trustee shall not be under any responsibility to determine
the correctness of any provisions contained in any such supplemental indenture
relating either to the kind or amount of shares of stock or securities or
property or cash receivable by the Debenture holders upon the exchange of their
Debentures as herein provided after any such consolidation, merger, sale,
transfer, dissolution, liquidation or winding up or to any adjustment to be made
with respect thereto.
212. Certain Tender or Exchange Offers for Exchange Property.
In the event of a tender offer or exchange offer for any class
of securities included within the Exchange Property (i) if the Company owns
shares of such class which are not subject to the Exchange Agreement, the
Company will cause the Exchange Agent to tender such shares of such class in the
same proportion that the Company tenders its securities in such class which are
not subject to the Exchange Agreement, and (ii) if the Company does not own
securities of a class which are subject to the Exchange Agreement, the Company
may, at its option and in its sole discretion, elect to cause the Exchange Agent
to tender all or any portion or none of such class of security included within
the Exchange Property held by the Exchange Agent. The proceeds of the sale of
any such Exchange Property pursuant to any such tender or exchange offer will be
held by the Exchange Agent for the benefit of Holders as provided in this Third
Supplemental Indenture.
213. Obligations of Trustee and Exchange Agent.
Subject to the provisions of Section 601 of the Indenture,
neither the Trustee nor the Exchange Agent shall at any time be under any duty
or responsibility to any Holder of Debentures to determine whether any facts
exist which may require any adjustment of the Exchange Rate, or with respect to
the nature or extent of any such adjustment when made, or with respect to the
method employed, or herein or in any supplemental indenture provided to be
employed, in making the same. Neither the Trustee nor the Exchange Agent shall
be accountable with respect to the validity or value (or the kind or amount) of
any Exchange Property which may at any time be issued or delivered upon the
exchange of any Debenture or the market conditions existing at the time of sale
of any Exchange Property; and neither the Trustee nor the Exchange Agent makes
any representation with
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<PAGE> 17
respect thereto. Neither the Trustee nor the Exchange Agent shall be
responsible, for any failure of the Company to transfer or deliver any Exchange
Property or certificates or other evidence thereof to the Exchange Agent as
provided herein, or subject to the provisions of Section 601 of the Indenture
and the obligations assumed under the Exchange Agreement, to comply with any of
the covenants of the Company contained in this Article Two.
214. Exchange Arrangements in Case of Redemption.
In connection with any redemption of Debentures, the Company
may arrange for the purchase and exchange of Exchange Property of all or any
part of such Debentures by an arrangement with one or more investment bankers or
other purchasers to purchase such Debentures by paying to the Holders thereof,
or to the Trustee in trust for such Holders, on or before the close of business
on the Business Day next preceding the Redemption Date, an amount not less than
the applicable Redemption Price of the Debentures to be purchased, plus interest
accrued to the Redemption Date. Notwithstanding anything to the contrary
contained in Article Eleven of the Indenture, the obligation of the Company to
pay the Redemption Price of such Debentures, plus interest accrued to the
Redemption Date, shall be satisfied and discharged to the extent such amount is
so paid by such purchasers. Any Debentures to be purchased pursuant to such
agreement which are not presented for redemption or not duly surrendered for
exchange by the Holders thereof shall be deemed acquired by such purchasers from
the Holders and surrendered by such purchasers for exchange, all as of
immediately prior to the close of business on the Business Day next preceding
the Redemption Date, subject to payment of the above amount as aforesaid.
Notwithstanding anything to the contrary contained in this Article Two, in the
event that any Debentures subject to such agreement are surrendered for exchange
(other than by the purchasers) by the close of business on the Business Day next
preceding the Redemption Date, the amounts so paid to the Trustee in trust for
the Holders of the Debentures so surrendered for exchange shall be returned to
such purchasers.
215. Tax Adjustments in Exchange Rate.
If an event shall occur which causes the Exchange Rate to be
subject to adjustment pursuant to Section 204 hereof, or a merger, consolidation
or sale or transfer of assets or of any voluntary or involuntary dissolution,
liquidation or winding up of Chevron shall occur requiring a supplemental
indenture under Section 211 hereof, and if, within ten days after the effective
date of such transaction, the Company shall furnish the Exchange Agent with an
Opinion of Counsel to the effect that such transaction is taxable to the Company
or the Exchange Agent and an Officers' Certificate as to the amount of federal,
state and local tax payable by the Company or the Exchange Agent as a result of
such transaction (computed by the Company at the marginal tax rate applicable to
such transaction), the Exchange Agent shall pay to, or to the order of, the
Company, in the case of taxes payable by the Company, or itself, in the case of
taxes payable by it, the cash held by it and apportioned or to be apportioned to
the Exchange Property for which Outstanding Debentures are exchangeable, up to
the amount of such taxes. In the event that the cash held by the Exchange Agent
and so apportioned or to be apportioned is insufficient to pay to the Company or
the Exchange Agent the amount of such taxes, the Exchange Agent shall, as soon
as reasonably practicable and to the extent legally permissible, sell in
accordance with written instructions received by the Company, or
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<PAGE> 18
if no such instructions are received, as determined by the Exchange Agent, such
Exchange Property (including any securities or other property included therein)
as may be necessary to pay, from the proceeds thereof after payment of any taxes
by the Company or the Exchange Agent on such sale, the amount of any such
insufficiency. The Exchange Agent shall notify the Company and the Trustee of
any such sale and the Exchange Property sold. Following payment of all necessary
amounts to the Company or the Exchange Agent, such Exchange Property held by the
Exchange Agent and any cash apportioned thereto shall be proportionately
adjusted so as to be apportioned equally to the Debentures Outstanding as of
immediately after the close of business on the record date or the effective date
for the transaction to which this Section 215 applies (as shall be specified in
Section 204 or 211 hereof, whichever is applicable). Any Holder surrendering any
Debentures after such record date, or such effective date, as the case may be,
shall be, entitled to receive the Exchange Property and any cash apportioned
thereto as so adjusted pursuant to this paragraph. If this Section 215 shall
apply to a transaction and the sale by the Company of the consideration
receivable therein shall not be legally permissible and the amount of cash
apportioned to the Exchange Property shall not be sufficient to pay all taxes
payable by the Company or the Exchange Agent which arise from such transaction,
the Company may direct the Exchange Agent to segregate for the benefit of the
Company or the Exchange Agent (as the case may be) or deliver to the Company or
the Exchange Agent (as the case may be) an amount of Exchange Property
theretofore held by the Exchange Agent for exchange of Debentures having a
Market Value equal to the unsatisfied portion of the tax payable by the Company
or the Exchange Agent (as the case may be) with respect to such transaction
including any tax payable upon the delivery or sale thereof in order to satisfy
the aforementioned tax, and the Exchange Property shall thereafter be solely for
the account of the Company or the Exchange Agent (as the case may be) and
Holders of Debentures shall have no rights thereto.
In the event that an Opinion of Counsel given pursuant to this
Third Supplemental Indenture concludes that whether taxes are payable by the
Company or the Exchange Agent is uncertain under the then state of the law or
facts or both, the Company shall have the option of requesting the Exchange
Agent to segregate the amount of funds that would be payable (or securities or
other property in lieu thereof), if such taxes were deemed payable, together
with the amount estimated in good faith to be the reasonable costs and expenses
(including attorneys' fees) of obtaining a determination as set forth below. The
Holders shall have no rights to such funds or securities or other property,
which shall be held by the Exchange Agent for the Company (or itself, as the
case may be), the Exchange Property and any cash apportioned thereto deliverable
upon exchange of Debentures pursuant to this Article Two shall be reapportioned
as though such segregated amounts had been paid to the Company or the Exchange
Agent for such taxes, and any Holder surrendering any Debenture after the record
or effective date of the applicable transaction giving rise to an adjustment
pursuant to this Section 215 shall be entitled to receive only such Exchange
Property and any cash apportioned thereto upon exchange of Debentures pursuant
to this Article Two as so reapportioned. The Company shall thereupon in good
faith seek an appropriate determination from the appropriate agencies and, if
judged necessary by the Company in good faith, from appropriate courts, as to
whether taxes are so payable. If an appropriate determination is made that such
taxes are so payable, then the Exchange Agent shall immediately pay the funds or
deliver the securities or other property so segregated to the Company (or, if
taxes are payable by the
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<PAGE> 19
Exchange Agent, retain such funds or securities or other property for itself),
and if an appropriate determination is made that such taxes are not payable or
an amount of tax is payable which is less than the amount of funds or property
so segregated, then the Exchange Agent, after paying to the Company (or itself,
as the case may be) out of such funds or securities or other property the
reasonable expenses and costs (including attorneys' fees) of obtaining such
determination (and any taxes so payable), shall apportion such remaining funds
or securities or other property which had been so segregated among the Exchange
Property and cash apportioned thereto as of immediately after the close of
business on the record date or the effective date of such transaction giving
rise to an adjustment pursuant to Section 204 or 211 hereof, whichever is
applicable. If any Debenture has been exchanged on or after such record date or
such effective date, as the case may be, and before a determination is made that
no taxes are payable or an amount of tax is payable which is less than the
amount of funds or securities or other property so segregated, the Company to
the extent not previously delivered, shall deliver such Exchange Property and
any cash apportioned thereto as reapportioned following such determination, to
the person to which and in the manner in which the other proceeds of the
exchange of such Debenture were delivered.
216. Cash Equivalent.
Notwithstanding any other provisions in this Article Two, in
lieu of delivering certificates representing shares of Chevron Common Stock or
other Exchange Property in exchange for Debentures surrendered in accordance
with Section 202 hereof, the Company may, at the Company's option, pay to the
Holder surrendering such Debentures an amount in cash equal to the value of the
Exchange Property for which such Debentures are exchangeable (based on the
Market Price on the date of receipt by the Company of the notice of exchange
delivered by such Holder pursuant to Section 202 hereof). Prior to so directing
the Exchange Agent to make any such cash payment, the Company shall deposit with
the Exchange Agent the cash so payable.
217. Repurchase Rights.
In the event that the Company obtains or otherwise releases
any Chevron Common Stock or other Exchange Property in any manner otherwise than
as contemplated by Section 218 hereof, each Holder will have the right
("Repurchase Right"), at such Holder's option, to require the Company to
repurchase all of such Holder's Debentures, or a portion thereof which is $1,000
or any integral multiple thereof, in the manner and at the price described
below.
Promptly (and in any event within 10 days) after the Company
has obtained or released any Chevron Common Stock or any other Exchange Property
in any manner otherwise than as contemplated by Section 218 hereof, the Exchange
Agent will mail to all Holders of record of the Debentures a notice thereof and
the Repurchase Right arising as a result thereof (a "Repurchase Notice"). To
exercise the Repurchase Right, a Holder of Debentures must deliver on or before
the fifteenth day after the date of the Repurchase Notice irrevocable written
notice to the Exchange Agent of the Holder's exercise of such right, together
with the Debentures with respect to which the right is being exercised, duly
endorsed for transfer.
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<PAGE> 20
On the date ("Repurchase Date") that is 30 days after the date
of the Repurchase Notice, the Company will be required to repurchase all
Debentures in respect of which the Repurchase Right has been exercised at the
following price: (i) if the date on which the Company's obtaining or release of
Exchange Property in a manner not contemplated by Section 218 hereof first
occurs (the "Triggering Date") is before August 15, 2000, the product of (a)
120% and (b) the greater of the principal amount of such Debentures (plus
accrued and unpaid interest, if any, to the Repurchase Date) and the Market
Price of the Exchange Property deliverable in exchange for such Debentures on
the Triggering Date (or if such date is not a Business Day, on the next
succeeding Business Day); and (h) if the Triggering Date occurs on or after
August 15, 2000, the greater of (a) the redemption price specified in Section
103 hereof on the Triggering Date and (b) the Market Price of the Exchange
Property deliverable in exchange for such Debentures on the Triggering Date (or
if such date is not a Business Day, on the next succeeding Business Day).
The obligation of the Company to deliver Exchange Property (or
cash in lieu thereof) in exchange for Debentures shall survive and continue to
apply in full force and effect following and notwithstanding the occurrence of
any event triggering a Repurchase Right. Failure by the Company to exchange
Debentures in accordance with this Third Supplemental Indenture or to repurchase
Debentures upon valid exercise of a Repurchase Right will constitute an Event of
Default with respect to the Debentures pursuant to Section 501(7) of the
Indenture, and Holders of Debentures will have the remedies provided for in the
Indenture, including acceleration of the indebtedness evidenced by the
Debentures, in the event of any such failure.
If an offer is made to repurchase Debentures in connection
with a Repurchase Right, the Company will comply with all tender offer rules,
including but not limited to Sections 13(e) and 14(e) under the Exchange Act and
Rules 13e-1 and 14e-1 thereunder, to the extent applicable to such offer.
218. Withdrawals of Exchange Property. The Company shall be
entitled, out of the Exchange Property held by the Exchange Agent, to such kind
and quantity of Exchange Property and such amount of any cash (the investments
contemplated by Section 205 hereof being deemed for these purposes to be cash
and to be valued at their outstanding principal balance) and other Exchange
Property as shall be in excess of the quantity of Exchange Property held by the
Exchange Agent that would be deliverable by the Exchange Agent upon the exchange
of all Debentures then outstanding, and such excess shall be held by the
Exchange Agent for the account of the Company and, upon delivery of the
Officers' Certificate provided for in the following sentence, released to the
Company upon demand. Upon demand of any withdrawal of Exchange Property from the
Exchange Agent, the Company shall deliver to the Trustee an Officers'
Certificate (and a copy thereof to the Exchange Agent) which shall state (i) the
principal amount of Debentures then outstanding and the kind and amount of
Exchange Property required for delivery to the Holders thereof upon exchange,
(ii) that the withdrawal of the kind and amount of Exchange Property referred to
in such demand is permitted by the provisions of this Third Supplemental
Indenture and (iii) that the Exchange Property so to be withdrawn would not be
deliverable upon exchange of all Debentures then
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<PAGE> 21
outstanding. In delivering such certificate, the Company may rely on information
furnished to it by the Exchange Agent as to the kind and amount of Exchange
Property held by it and the kind and amount thereof previously delivered to
Holders of Debentures.
219. Certain Definitions. All terms used but not defined in
this Third Supplemental Indenture that are defined in the Indenture shall have
the meanings specified in the Indenture unless the context otherwise requires.
As used in this Third Supplemental Indenture, the following terms shall have the
following meanings:
"Chevron" means Chevron Corporation, a Delaware corporation.
"Chevron Common Stock" means the common stock of Chevron of
the class authorized and designated as common stock, par value $3.00 per share,
as such common stock may be changed or reclassified from time to time.
"Exchange Act" means the Securities Exchange Act of 1934 and
any successor statute thereto, in each case as amended from time to time.
"Exchange Agent" means Chase Bank of Texas, National
Association, Exchange Agent under the Exchange Agreement, until a successor
Exchange Agent shall have become such pursuant to the provisions of Section 16
of the Exchange Agreement, and thereafter "Exchange Agent" shall mean such
successor Exchange Agent thereunder and from time to time any subsequent
successor pursuant to such provisions.
"Exchange Agreement" means the Exchange Agent Agreement
entered into pursuant to the provisions of Section 205 hereof, as the same may
be supplemented and amended from time to time.
"Exchange Property" means initially the aggregate of the
4,140,077 shares of Chevron Common Stock delivered to the Exchange Agent by the
Company pursuant to the Exchange Agreement simultaneously with the execution and
delivery of this Third Supplemental Indenture, and thereafter means the
securities, cash and other property, if any, which at the time are deliverable
upon surrender of the Debentures for exchange in accordance with Article Two of
this Third Supplemental Indenture.
"Global Debenture" means a Debenture that evidences all or
part of the Debentures and bears the legend set forth in Section 108 hereof.
"Market Price" means, when used with respect to any security
as of any date, (i) if such security is not then listed or admitted to trading
on any national securities exchange registered under the Exchange Act, the
average of the high bid and low asked prices in the over-the-counter market on
such date as reported by the National Association of Securities Dealers
Automated Quotation System or (ii) if such security is then listed or admitted
to trading on any such national securities exchange, the last reported sales
price regular way on such date or, in case no such
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<PAGE> 22
reported sale takes place on such date, the average of the reported closing bid
and asked prices regular way on such date, in each case on the principal
national securities exchange on which such security is then listed or admitted
to trading, or (iii) if such prices are not available on such date, the market
value of such security on such date determined in such manner as shall be
satisfactory to the Exchange Agent, which shall be entitled to rely for such
purposes on the advice of any firm of investment bankers or security dealers
having familiarity with such security. "Market Price" means, when used with
respect to any property (other than any security) as of any date, the market
value of such property on such date determined in such manner as shall be
satisfactory to the Exchange Agent, which shall be entitled to rely for such
purposes on the advice of any firm of investment bankers having familiarity with
such property.
ARTICLE THREE
301. Acceptance of Trust.
The Trustee accepts the trust hereby created and agrees to
perform the same upon the terms and conditions herein and in the Indenture set
forth.
302. Trustee Not Responsible for Validity, Due Execution or
Recitals.
The Trustee shall not be responsible in any manner whatsoever
for or in respect of the validity or sufficiency of this Third Supplemental
Indenture or the due execution thereof by the Company or for or in respect of
the recitals herein contained, all such recitals being made by the Company
solely.
303. Counterparts.
This Third Supplemental Indenture may be executed in several
counterparts, each of which shall be an original and all of which together shall
constitute but one and the same instrument.
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<PAGE> 23
IN WITNESS WHEREOF, PENNZOIL COMPANY, party hereto of the
first part, has caused its corporate name to be hereunto affixed, and this
instrument to be signed and sealed by a Group Vice President, for and on its
behalf, in the City of Houston, Texas and CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION, party hereto of the second part, has caused its corporate name to
be hereunto affixed, and this instrument to be signed and sealed by a Vice
President, for and on its behalf, in the City of Houston, Texas, all as of the
_____ day of August, 1998.
PENNZOIL COMPANY
By:
--------------------------------------
Bruce K. Misamore
Vice President and Treasurer
CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION,
As Trustee
By:
--------------------------------------
Name:
------------------------------------
Authorized Officer
STATE OF TEXAS )
)
COUNTY OF HARRIS )
BEFORE ME, the undersigned authority, a Notary Public, on this
day personally appeared Bruce K. Misamore, Vice President and Treasurer of
Pennzoil Company, known to me to be the person whose name is subscribed to the
foregoing instrument, and acknowledged to me that he executed the same for the
purposes therein expressed, in the capacity therein set forth and as the act and
deed of said association.
GIVEN UNDER MY HAND AND SEAL of office, this the _____ day of
August, 1998.
-----------------------------------------
Notary Public
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<PAGE> 24
STATE OF TEXAS )
)
COUNTY OF HARRIS )
BEFORE ME, the undersigned authority, a Notary Public, on this
day personally appeared __________________ of Chase Bank of Texas, National
Association, known to me to be the person whose name is subscribed to the
foregoing instrument, and acknowledged to me that he executed the same for the
purposes therein expressed, in the capacity therein set forth and as the act and
deed of said association.
GIVEN UNDER MY HAND AND SEAL of office, this the _____ day of
August, 1998.
-----------------------------------------
Notary Public
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<PAGE> 1
EXHIBIT 4(h)
================================================================================
PENNZOIL COMPANY
AND
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
As Trustee
-----------------
Fourth Supplemental Indenture
Providing for
4.95% Exchangeable Senior Debentures Due August 15, 2008
Dated as of August 3, 1998
Supplementing Indenture dated as of December 15, 1992
================================================================================
<PAGE> 2
FOURTH SUPPLEMENTAL INDENTURE, dated as of August 3, 1998
("Fourth Supplemental Indenture") between PENNZOIL COMPANY, a corporation
organized and existing under the laws of the State of Delaware (hereinafter
called the "Company"), and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, a
national banking association, incorporated and existing under the laws of the
United States of America (formerly known as Texas Commerce Bank National
Association), having its principal corporate trust office in the City of
Houston, Texas (hereinafter called the "Trustee").
WHEREAS, the Company has executed and delivered its Indenture
dated as of December 15, 1992 (hereinafter called the "Indenture"), to provide
for the issue of one or more series of debt securities of the Company; and
WHEREAS, Section 901 of the Indenture authorizes the Company
and the Trustee to enter into supplemental indentures to establish the form or
terms of securities of any series as permitted by sections 201 and 301 of the
Indenture; and
WHEREAS, to so provide for the establishment of such a series,
the Company has authorized the execution of this Fourth Supplemental Indenture
to the Indenture and has requested the Trustee to execute the Fourth
Supplemental Indenture; and
WHEREAS, all conditions and requirements necessary to make
this Fourth Supplemental Indenture a valid, binding and legal instrument have
been done and performed and the execution and delivery hereof have been in all
respects duly authorized, including the delivery to the Trustee of the Opinion
of Counsel referenced in Section 903 of the Indenture;
NOW, THEREFORE, THIS FOURTH SUPPLEMENTAL INDENTURE WITNESSETH
that the Company and the Trustee hereby covenant, declare and agree as follows:
ARTICLE ONE
101. Fourth Series of Debentures.
There shall be a series of Securities (capitalized terms used
herein and not otherwise defined have the meanings given to such terms in the
Indenture) designated "4.95% Exchangeable Senior Debentures Due August 15,
2008" (herein sometimes referred to as "Debentures"), and the form thereof,
which shall be established by Board Resolution, shall contain suitable
provisions with respect to the matters hereinafter in this Section 101
specified. Debentures shall mature on and bear interest and be limited in
aggregate principal amount as to each maturity as set forth below:
Aggregate Interest
Principal Rate
Amount Maturity Per Annum
------ -------- ---------
$317,398,000 August 15, 2008 4.95%
<PAGE> 3
Debentures shall be issued as Registered Debentures in denominations of U.S.
$1,000 or integral multiples thereof; interest on Debentures shall be payable
semiannually on February 15 and August 15 of each year, commencing February 15,
1999. The Place of Payment with respect to the Debentures is Chase Bank of
Texas, National Association, Corporate Trust Services, 1201 Main, 18th Floor,
Dallas, Texas 75202.
102. Exchange or Transfer.
Upon any exchange or transfer of Debentures, the Company may
make a charge therefor sufficient to reimburse it for any tax or taxes or other
governmental charge, as provided in Section 305 of the Indenture, but the
Company hereby waives any right to make a charge in addition thereto for any
exchange or transfer of Debentures.
103. Redemption.
(a) The Debentures shall be subject to redemption upon
not less than 30 nor more than 60 days' prior notice as provided in Sections
107 and 1104 of the Indenture at any time on or after August 15, 2000, in whole
or from time to time in part, at the option of the Company, at the following
redemption prices (expressed as a percentage of the principal amount at
maturity) if redeemed during the 12-month period beginning August 15 of the
following years:
Redemption
Year Price
---- -----
2000 . . . . . . . . . . . . . . . . . 104.00%
2001 . . . . . . . . . . . . . . . . . 103.50%
2002 . . . . . . . . . . . . . . . . . 103.00%
2003 . . . . . . . . . . . . . . . . . 102.50%
2004 . . . . . . . . . . . . . . . . . 102.00%
2005 . . . . . . . . . . . . . . . . . 101.50%
2006 . . . . . . . . . . . . . . . . . 101.00%
2007 . . . . . . . . . . . . . . . . . 100.50%
in each case together with accrued interest to the redemption date, provided,
however, that, if any interest payment date on the Debentures is on or prior to
the Redemption Date, such interest shall be payable to the Holders of such
Debentures, registered as such, at the close of business on the relevant
Regular Record Dates according to their terms and the provisions of Section 307
of the Indenture.
(b) Notice of intention to redeem the Debentures in whole
or in part shall be given in accordance with Section 1104 of the Indenture.
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<PAGE> 4
104. Sinking Fund.
The Debentures shall not be entitled to the benefits of any
sinking fund provisions.
105. Tax Matters.
(a) Subject to Section 105(c) hereof, in addition to the
conditions set forth in Section 401 of the Indenture, the right of the Company
to satisfy the Indenture to the extent set forth in Section 401 of the
Indenture shall be subject to the condition that the Company has delivered to
the Trustee an Opinion of Counsel (as defined in the Indenture) that the
satisfaction and discharge pursuant to Section 401 of the Indenture will not
cause the Holders of the Debentures to recognize income, gain or loss for
United States federal income tax purposes.
(b) Subject to Section 105(c) hereof, in addition to the
conditions set forth in Section 403 of the Indenture, the right of the Company
to satisfy the Indenture with respect to the Debentures to the extent set forth
in Section 403 of the Indenture shall be subject to the conditions that the
Company shall have received from, or there shall have been published by, the
United States Internal Revenue Service a ruling to the effect that the
satisfaction and discharge to the extent set forth in Section 403 of the
Indenture will not cause the Holders of the Debentures to recognize income,
gain or loss for United States federal income tax purposes.
(c) Notwithstanding the satisfaction and discharge of the
Indenture or with respect to the Debentures pursuant to Sections 105(a) and (b)
hereof, the obligations of the Company under Article Two hereof shall survive
until the Debentures are no longer Outstanding.
106. Issuance of Debentures.
Upon the delivery of this Fourth Supplemental Indenture,
Debentures in the aggregate principal amount of $317,398,000 shall be issued
and be Outstanding as provided in the Indenture.
107. Global Debentures.
The provisions of paragraphs (a), (b), (c) and (d) below shall
apply only to Global Debentures:
(a) Each Global Debenture authenticated under the
Indenture and this Fourth Supplemental Indenture shall be registered in the
name of the Depository designated for such Global Debenture or a nominee
thereof and delivered to such Depository or a nominee thereof or custodian
therefor, and each such Global Debenture shall constitute a single Debenture
for all purposes of this Fourth Supplemental Indenture.
(b) Notwithstanding any other provision in the Indenture
or this Fourth Supplemental Indenture, no Global Debenture may be exchanged in
whole or in part for Debentures registered, and no transfer of a Global
Debenture in whole or in part may be registered, in the name
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<PAGE> 5
of any Person other than the Depositary for such Global Debenture or a nominee
thereof unless (A) such Depositary (i) has notified the Company that it is
unwilling or unable to continue as Depositary for such Global Debenture and the
Company thereupon fails to appoint a successor depositary or (ii) has ceased to
be a clearing agency registered under the Exchange Act, (B) there shall have
occurred and be continuing an Event of Default or any event which after notice
or lapse of time or both would be an Event of Default with respect to the
Debentures or (C) the Company in its sole discretion determines that such
Global Debenture shall be so exchangeable or transferable.
(c) Subject to Section 107(b), upon issuance of
Debentures in definitive registered certificated form, the Trustee shall
register the Debentures in the name of, and cause the Debentures to be
delivered to, the Person or Persons (or the nominee thereof) identified as the
beneficial owners as the Depositary shall direct.
(d) Every Debenture authenticated and delivered upon
registration of transfer of, or in exchange for or in lieu of, a Global
Debenture or any portion thereof, whether pursuant to this Section, Section 304
or 306 of the Indenture or otherwise, shall be authenticated and delivered in
the form of, and shall be, a Global Debenture, unless such Debenture is
registered in the name of a Person other than the Depositary for such Global
Debenture or a nominee thereof.
108. Form of Legend for Global Debentures.
Every Global Debenture authenticated and delivered hereunder
shall bear a legend in substantially the following form:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY TO PENNZOIL COMPANY OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IN
EXCHANGE FOR THIS CERTIFICATE OR ANY PORTION HEREOF IS REGISTERED IN THE NAME
OF CEDE & CO. (OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON OTHER THAN THE DEPOSITORY
TRUST COMPANY OR A NOMINEE THEREOF IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THIS DEBENTURE IS A GLOBAL DEBENTURE WITHIN THE MEANING OF THE FOURTH
SUPPLEMENTAL INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF
A DEPOSITARY OR A NOMINEE THEREOF. THIS DEBENTURE MAY NOT BE EXCHANGED IN
WHOLE OR IN PART FOR A DEBENTURE REGISTERED, AND NO TRANSFER OF THIS DEBENTURE
IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN
SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES
DESCRIBED IN THE FOURTH SUPPLEMENTAL INDENTURE.
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<PAGE> 6
109. Depositary. The Depositary with respect to any
Global Debenture authenticated under the Indenture and this Fourth Supplemental
Indenture shall be The Depository Trust Company or such other clearing agency
registered under the Exchange Act that is designated by the Company to act as
Depositary with respect to Debentures issued in the form of one or more Global
Debentures.
ARTICLE TWO
201. Right of Exchange.
Subject to and upon compliance with the provisions of this
Section 201, at the option of the Holder thereof, beginning August 3, 1998, any
Debenture or any portion of the principal amount thereof which is $1,000 or an
integral multiple of $1,000, may (unless the Company shall have elected,
pursuant to Section 216 hereof, to pay to the Holder an amount in cash equal to
the value of the Exchange Property, in which case the provisions of Section 216
hereof shall be followed), at any time on or before the close of business on
August 15, 2008, or in the case of Debentures or portions thereof called for
redemption in accordance with Section 1101 of the Indenture, on or before the
close of business on the Business Day next preceding the Redemption Date, be
exchanged for fully paid and nonassessable shares (calculated as to each
exchange to the nearest 1/10,000 of a share) of Chevron Common Stock (as
defined in Section 219 hereof) (or such other securities, property or cash as
shall be added to such Chevron Common Stock or as such Chevron Common Stock
shall have been changed into pursuant to this Article Two) at the Exchange Rate
(as defined below) hereinafter provided.
The rate at which shares of Chevron Common Stock shall be
deliverable upon exchange (herein called the "Exchange Rate") shall be
initially 9.3283 shares of Chevron Common Stock for each $1,000 principal
amount of Debentures exchanged. The Exchange Rate shall be subject to
adjustment as provided in Sections 204, 205, 211 and 215 hereof.
202. Method of Exchange.
In order to exercise the right of exchange, the Holder shall
surrender such Debenture to the Exchange Agent (as defined in Section 219
hereof) for exchange by delivering such Debenture to, or mailing such Debenture
by registered mail, postage prepaid, addressed to the Exchange Agent at the
office or agency of the Company, maintained for that purpose pursuant to
Section 1002 of the Indenture, accompanied in each case by written notice to
the Company and the Exchange Agent that the Holder elects to exchange such
Debenture, or, if less than the entire principal amount of such Debenture is to
be exchanged, the portion thereof to be exchanged.
The notices in the above paragraph shall also state the name
or names (with address) in which the certificate or certificates for shares of
Chevron Common Stock or, to the extent applicable, other Exchange Property
which shall be issuable on such exchange shall be issued. Debentures
surrendered for exchange shall be accompanied (if so required by the Company or
the Exchange Agent) by proper assignments thereof to the Company.
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<PAGE> 7
If the Company does not elect to deliver cash in lieu of
Chevron Common Stock or other Exchange Property pursuant to Section 216 hereof,
as promptly as practicable after the proper surrender of such Debenture for
exchange as aforesaid (subject however to the following paragraph of this
Section 202 and Section 216 hereof) and in accordance with the procedures set
forth in the Exchange Agreement (as defined in Section 219 hereof), the Company
shall or shall cause the Exchange Agent to deliver to such Holder, or on his
written order a certificate or certificates for the number of whole shares of
Chevron Common Stock and/or any other Exchange Property deliverable upon
exchange of such Debenture (or specified portion thereof). In addition,
provision shall be made for any fraction of a share as provided in Section 203
hereof and any payment of interest as provided by the following paragraph.
Such exchange shall be deemed to have been effected immediately prior to the
close of business on the date on which such Debenture shall have been properly
surrendered for exchange as aforesaid, which shall be the date on which such
Debenture and notice and any such required payment and assignment shall be
received by the Exchange Agent, and at such time the rights of the Holder of
such Debenture as a Debenture holder shall cease and the Person or Persons in
whose name or names any certificate or certificates for shares of Chevron
Common Stock or other Exchange Property shall be deliverable upon such exchange
shall, as between such Person or Persons and the Company, be deemed to have
become the Holder or Holders of record of the shares or other property
represented thereby.
Upon any exchange of a Debenture pursuant to this Article Two
(i) if the Debenture to be exchanged has been called for redemption by the
Company, the Holder shall receive accrued interest thereon through the date an
exchange under this Section 202 is deemed effective and (ii) if the Debenture
to be exchanged has not been called for redemption by the Company, the Holder
shall not receive any payment of accrued and unpaid interest.
Delivery of such certificate or certificates and of any check
for any cash or other Exchange Property may be delayed for a reasonable period
of time at the request of the Company in order to effectuate the calculations
of the adjustments pursuant to this Article Two, to obtain any certificate
representing securities to be delivered, to complete any reapportionment of the
shares of Chevron Common Stock or other Exchange Property apportioned thereto
which is required by this Article Two or to comply with any applicable law.
If, between the date an exchange under this Section 202 is deemed effected and
the date of delivery of the applicable security or securities, such security or
securities shall cease to have any or certain rights, or a record date or
effective date of a transaction to which Section 204, 205 or 211 hereof applies
shall occur, the Person entitled to receive such security or securities shall
be entitled only to receive such security or securities as so modified and any
dividends or proceeds received thereon on or after the date such exchange is
deemed effected and none of the Company, the Trustee and the Exchange Agent
shall be otherwise liable with respect to the modification of such security or
securities, from the date such exchange is deemed effected and the date of such
delivery.
Except as otherwise expressly provided in this Article Two, no
payment or adjustment shall be made upon any exchange on account of any
interest accrued on the Debentures surrendered for exchange or on account of
any dividends on the Chevron Common Stock or other Exchange Property delivered
upon such exchange; provided, however that interest accrued on
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<PAGE> 8
any Debentures surrendered for exchange on or after any Regular Record Date and
before any Interest Payment Date relating thereto shall be paid to, as
applicable, the Holder of record as of such record date.
In the case of any Debenture which is exchanged in part only,
upon such exchange the Company shall execute and the Trustee shall authenticate
and deliver to the Holder thereof, at the expense of the Company, a Debenture
or Debentures of authorized denominations in principal amount equal to the
unexchanged portion of such Debenture.
203. Fractional Interests.
No fractional shares of Chevron Common Stock (or any form of
fractional interest in any other security or property which is part of the
Exchange Property) shall be delivered upon exchanges of Debentures. If more
than one Debenture shall be surrendered for exchange at one time by the same
Holder, the number of whole shares (or other integral units of such other
securities or property), which shall be delivered upon exchange shall be
computed by the Company on the basis of the aggregate principal amount of the
Debentures (or specified portions thereof to the extent permitted hereby) so
surrendered. Instead of any fractional share (or other fractional unit) which
would otherwise be deliverable upon exchange of any Debenture or Debentures (or
specified portions thereof), the Exchange Agent on behalf of the Company shall
pay, on the date the exchange is deemed to be effected, a cash adjustment in
respect of such fractional interest in an amount equal to the same fraction of
the Market Price (as defined in Section 219 hereof) per share of the Chevron
Common Stock (or per unit of such other security or property) on the Business
Day next preceding the date the exchange is deemed to be effected. The Company
shall authorize the Exchange Agent to obtain the funds necessary or anticipated
by the Exchange Agent to be necessary, for payment of such fractional interests
by the sale of shares of Chevron Common Stock (or other securities or property
which are part of the Exchange Property) held by the Exchange Agent, provided
that after such sale the number of shares of Chevron Common Stock (and of such
other securities or property) held by the Exchange Agent shall be sufficient to
permit the exchange of all Outstanding Debentures for Chevron Common Stock
(and any other Exchange Property), on the basis of the Exchange Rate then in
effect, in accordance with the provisions of this Article Two. The Company
agrees to furnish or cause to be furnished to the Exchange Agent any additional
funds required to permit such cash payments with respect to fractional
interests.
204. Adjustment of Exchange Rate.
(a) In the event Chevron (as defined in Section 219
hereof) shall (i) pay a dividend on Chevron Common Stock in shares of Chevron
Common Stock, (ii) subdivide the outstanding shares of Chevron Common Stock
into a greater number of shares of Chevron Common Stock, (iii) combine
outstanding shares of Chevron Common Stock into a smaller number of shares of
Chevron Common Stock, or (iv) issue, by reclassification of shares of Chevron
Common Stock, any shares of its common stock (which in any such case shall
apply to the shares of Chevron Common Stock held by the Exchange Agent under
the Exchange Agreement), the Exchange Rate in effect immediately prior thereto
shall be proportionately adjusted so that the Holder of any
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<PAGE> 9
Debentures thereafter surrendered for exchange shall be entitled (subject to
Sections 215 and 216 hereof) to receive the number and kind of shares of
Chevron Common Stock which such Holder would have owned or have been entitled
to receive after the happening of any of the events described above, had such
Debentures been exchanged immediately prior to the record date (or if there is
no record date, the effective date) of such event. Such adjustments shall be
made whenever any of the events listed above shall occur and shall become
effective as of immediately after the close of business on the record date in
the case of a stock dividend and shall become effective as of immediately after
the close of business on the effective date in the case of a subdivision or
combination or reclassification. Any Holder surrendering any Debentures for
exchange after such record date or such effective date, as the case may be,
shall be entitled to receive shares of Chevron Common Stock at the Exchange
Rate as so adjusted pursuant to this Section 204(a) (subject to Sections 215
and 216 hereof) and any other Exchange Property apportioned thereto.
(b) Notwithstanding the foregoing provisions, no
adjustment in the Exchange Rate shall be required unless such adjustment would
require an increase or decrease in such Exchange Rate of more than 1%,
provided, however, that any adjustments which by reason of this paragraph (b)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment.
(c) All calculations under this Section 204 shall be made
to the nearest 1/10,000 of a share.
(d) Whenever the Exchange Rate is adjusted as herein
provided, the Company shall determine the adjusted Exchange Rate in accordance
with this Section 204 and shall prepare an Officer's Certificate setting forth
such adjusted Exchange Rate and any cash or other property apportioned to the
Chevron Common Stock and showing in detail the facts upon which such adjustment
is based. Such certificate shall be conclusive evidence of the correctness of
such adjustment. Such certificate shall forthwith be filed with the Exchange
Agent and the Trustee, who may rely on such Officer's Certificate as conclusive
evidence of the correctness of the adjustment. A notice stating that the
Exchange Rate has been adjusted and setting forth the adjusted Exchange Rate
and any cash or other property apportioned to the Chevron Common Stock shall,
as soon as practicable, be mailed by or on behalf of the Company to the Holders
of Debentures at their last addresses as they shall appear upon the Security
Register.
205. Exchange Agreement.
(a) Simultaneously with the execution and delivery of
this Indenture Supplement, the Company is entering into the Exchange Agreement
with Chase Bank of Texas, National Association, a national banking association,
incorporated and existing under the laws of the United States of America, as
Exchange Agent, pursuant to which the Company is depositing with the Exchange
Agent 2,960,784 shares of Chevron Common Stock, which in the aggregate shall
initially constitute the Exchange Property. The Exchange Agent shall be the
exchange agent for the exchange of Debentures for Chevron Common Stock and
other Exchange Property, if any, hereunder. The Company shall deposit with the
Exchange Agent from time to time such additional number of shares
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<PAGE> 10
of Chevron Common Stock not already held by the Exchange Agent as the Holders
of all Outstanding Debentures shall from time to time be entitled to receive
from the Exchange Agent pursuant to this Article Two upon exchange thereof.
(b) All cash received by the Exchange Agent as herein
provided will be invested upon written request of the Company by the Exchange
Agent from time to time as so requested by the Company pursuant to the Exchange
Agreement. The Company shall be entitled to all cash dividends paid on the
Exchange Property held by the Exchange Agent except to the extent that such
dividends are paid pursuant to a plan of liquidation or partial liquidation or
a recapitalization or restructuring or other extraordinary cash dividends, and
to all interest payments on any debt securities included in the Exchange
Property which Holders of Debentures may be entitled to receive on exchange
hereunder; provided, that if the Exchange Agent shall receive any such cash
dividends or interest to which the Company is entitled pursuant hereto, the
Exchange Agent shall not be required to transfer to the Company any such
dividends or interest to which the Company is entitled pursuant hereto until
receipt of an Officers' Certificate to the effect that the Company is entitled
to such dividends or interest pursuant hereto. The Company shall also be
entitled to any interest or gain on investments made by the Exchange Agent
pursuant to Section 11 of the Exchange Agreement, which shall be paid to the
Company on demand as provided in the Exchange Agreement. Any loss on such
investments shall be for the account of the Company and the amount thereof
shall be reimbursed to the Exchange Agent by the Company. The Exchange Agent
shall hold and apply as hereinafter provided all other dividends paid on the
Exchange Property held by the Exchange Agent under the Exchange Agreement.
(c) In case there shall be, at any time while any
Debentures are Outstanding, any distribution of cash, securities or other
property on Exchange Property (other than (i) cash dividends to which the
Company is entitled and interest paid on debt securities, as specified in
paragraph (b) of this Section 205, (ii) dividends, subdivisions, combinations
and reclassifications for which an adjustment in the Exchange Rate is made
pursuant to Section 204 hereof and (iii) securities or other property received
in a transaction to which Section 211 hereof applies) or in case there shall be
granted with respect to any Exchange Property, any transferable subscription
rights, options, warrants or other similar transferable rights, the Company
shall, as soon as reasonably practicable after its receipt thereof, notify the
Exchange Agent of such receipt and promptly, and in any event within five
business days of the receipt thereof, deposit with the Exchange Agent all such
securities and other property, including any transferable rights, pursuant to
the Exchange Agreement, and concurrently with such deposit, shall (except as
provided in the succeeding paragraph) instruct the Exchange Agent to sell all
securities and other property so received by way of distribution and all rights
for cash so distributed in such manner as the Company shall instruct in writing
and shall apply the proceeds from the sale thereof as hereinafter provided. To
the extent that the Company shall, within 10 days of its notification to the
Exchange Agent of the Company's receipt of such cash, securities or other
property, including any transferrable rights, furnish the Exchange Agent with
an Opinion of Counsel to the effect that such distribution or grant or the sale
of the securities or other property received on such distribution or the rights
received by such grant is taxable to the Company or the Exchange Agent and an
Officers' Certificate as to the amount of federal, state and local tax payable
by the Company and the Exchange Agent as a result of such distribution or grant
and
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<PAGE> 11
estimated to be payable as a result of such sale (computed by the Company at
the highest marginal tax rates applicable to such transaction or transactions),
the Exchange Agent shall pay to, or to the order of the Company, in the case of
taxes payable by the Company, or itself, in the case of taxes payable by it,
from the cash received in such distribution, if any, or cash apportioned to
Chevron Common Stock hereunder or from the net cash proceeds received from such
sale, the amount of such tax as so computed by the Company. In the case of
taxes estimated to be payable as a result of such sale, the Company shall
deliver an Officers' Certificate within 10 days after completion of such sale
stating the actual taxes payable as so computed and appropriate adjustment of
such payments shall thereupon be made. The remaining portion of such cash
received, if any, and net cash proceeds shall be apportioned equally among the
Exchange Property for which outstanding Debentures are exchangeable as of
immediately after the close of business on the record date for. the
distribution or grant to which this paragraph (c) applies, or, if there is no
such record date, the effective date of such distribution or grant. Any Holder
surrendering any Debentures after such record date, or such effective date, as
the case may be, shall be entitled to receive, in addition to the Exchange
Property for which such Debentures are exchangeable and any cash theretofore
apportioned hereunder, the amount of cash so apportioned to such shares of
Chevron Common Stock.
Notwithstanding the foregoing, however, in the event of any
such distribution of securities or other property, including transferable
rights, which is convertible, without payment of consideration, into Exchange
Property, and which right of conversion does not expire before the retirement
of such securities or other property, the Company shall, after any sale
required for payment of any taxes owed by the Company, or the Exchange Agent,
as provided in the preceding paragraph, instruct the Exchange Agent to retain
and hold all such securities and other property as additional Exchange Property
for apportionment equally among other Exchange Property for which Debentures
are exchangeable as of immediately after the close of business on the record
date for the distribution or grant to which this Section 205 applies, or, if
there is no such record date, the effective date of such distribution or grant;
provided, however, that if the amount of cash deliverable to the holders of
such securities or other property, including transferable rights, for each unit
of such securities or other property upon the retirement thereof is less than
the average of the high and low reported public sales prices for each such unit
for the seven Business Days preceding the date 15 Business Days prior to the
date of their retirement the Exchange Agent shall sell all such securities and
other property prior to the third Business Day prior to the date of their
retirement and, after the payment, from the net proceeds received from such
sale by the Exchange Agent, of any taxes incurred by the Exchange Agent or the
Company in connection with such sale, the remaining cash proceeds of such sale
shall be apportioned equally among the Exchange Property for which Outstanding
Debentures are exchangeable as of the Business Day following the day such sale
is concluded.
In the event that a distribution or grant of cash, securities
or other property on Exchange Property shall be effected as contemplated by the
two immediately preceding paragraphs, a notice stating that such distribution
or grant has occurred and setting forth the additional cash, securities or
other property on the Exchange Property shall as soon as practicable be mailed
by or on behalf of the Company to the Holders of Debentures at their last
addresses as they appear upon the Security Register.
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<PAGE> 12
In case there shall be, at any time while any Debentures are
outstanding, any distribution or grant to holders of Chevron Common Stock (or
other Exchange Property), including the Company (with respect to any Exchange
Property held by the Exchange Agent), of any nontransferable subscription
rights, options, warrants or other similar nontransferable rights that shall,
by the terms of such rights, permit the Company to distribute such rights to
the Holders of Debentures, then the Company and the Exchange Agent shall cause
such rights to be distributed to the Holders of record of Debentures shown on
the Security Register as of immediately after the close of business on the
record date (and if there is no record date, the close of business on the
effective date) for such distribution or grant; provided, however, that if the
Company shall furnish the Exchange Agent with an Opinion of Counsel to the
effect that such distribution or grant, or such distribution by the Company or
the Exchange Agent to Holders of Debentures, is taxable to the Company or the
Exchange Agent and an Officer's Certificate as to the amount of federal, state
and local tax payable by the Company and the Exchange Agent as a result of such
distribution or grant, the Exchange Agent shall to the extent legally
permissible sell for cash in such manner as the Company shall instruct in
writing such of the rights as shall be sufficient to provide to the Company and
the Exchange Agent a cash payment equal to the amount of taxes payable by the
Company and the Exchange Agent, respectively, arising from such distribution or
grant (as computed by the Company at the highest marginal tax rates applicable
to such transaction or transactions and any sale of such rights or, if such
sale is not permissible or the proceeds thereof are not sufficient, the
Exchange Agent shall cause an amount of cash held for exchange by the Exchange
Agent (if any) and, if such cash is not sufficient for the applicable tax
payments, an amount of Exchange Property, to be segregated for the benefit of
or delivered to the Company. The remaining Exchange Property held by the
Exchange Agent shall be proportionately adjusted so as to be apportioned
equally to the Debentures outstanding as of immediately after the close of
business on the record date for the distribution or grant to which this
paragraph applies, or, if there is no such record date, immediately after the
close of business on the effective date of such distribution or grant. Any
Holder surrendering any Debentures after such record date, or such effective
date, as the case may be, shall be entitled to receive any Exchange Property
apportioned thereto as so adjusted pursuant to this paragraph.
(d) In the event of any reduction of the principal amount
of Debentures Outstanding (other than as a result of surrender for exchange for
Exchange Property pursuant to this Article Two), as evidenced by the delivery
to the Trustee by the Company of Debentures for cancellation, the Company shall
be entitled to the kind and amount of Exchange Property as shall at the time be
in excess of the kind and amount of Exchange Property which would be required
for the exchange of all Debentures then Outstanding for the Exchange Property
on the basis of the then Exchange Rate and the other terms and provisions of
this Article Two and the Exchange Agreement. Upon expiration of the right to
surrender Debentures for exchange pursuant to this Article Two and the
Exchange Agreement and when all other obligations of the Company shall have
been satisfied under this Article Two and the Exchange Agreement, the Company's
obligation to exchange Debentures for Exchange Property shall be terminated.
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<PAGE> 13
(e) The Exchange Agent shall not make any distribution of
Exchange Property to the Company prior to the receipt by the Exchange Agent
from the Company of an Officers' Certificate to the effect that no Event of
Default exists hereunder and no event or condition which with notice or lapse
of time or both would become such an Event of Default and which states in
detail the basis asserted by the Company for such distribution.
(f) The Company shall be entitled to any net income or
gain resulting from investments of cash made by the Exchange Agent pursuant to
the Exchange Agreement and shall reimburse the Exchange Agent for any losses
realized in respect of such investments.
(g) The Company shall have the full and unqualified right
and power to exercise any rights to vote, or to give consents or take any other
action in respect of, the Chevron Common Stock or any other securities included
in the Exchange Property at any time held by the Exchange Agent, and the
Exchange Agent shall have no duty to exercise any such rights. The Company
shall not be liable to any Holder as a result of any vote, or failure to vote,
consent or failure to consent, or any other act or failure to act taken by the
Company in respect of the Chevron Common Stock or any other securities included
in the Exchange Property.
(h) The obligations, covenants and agreements contained
in the Exchange Agreement shall not constitute obligations, covenants or
agreements contained in the Indenture, this Fourth Supplemental Indenture or
any of the Debentures and neither the failure by the Company to observe any
obligation, covenant or agreement contained in the Exchange Agreement (unless
such obligation, covenant or agreement shall also be contained in this Fourth
Supplemental Indenture) nor the failure of the Exchange Agent to fulfill any
obligations, agreements or covenants set forth therein shall constitute (with
or without the giving of notice, the passage of time or both) an Event of
Default; provided, however, that nothing in this paragraph shall impair the
right of a Holder to receive the Exchange Property apportioned to such Holder's
Debentures in exchange for such Debentures in accordance with the terms and
conditions of this Article Two, and nothing in this paragraph shall impair the
rights and remedies of the Trustee and the Holders under Article Five of the
Indenture with respect to a failure by the Company to observe its express
agreements and covenants to cause the exchange of Debentures actually
surrendered for exchange pursuant to this Article Two for Exchange Property
apportioned thereto in accordance with the terms and conditions of this Article
Two.
206. Company to Give Notice of Certain Events.
If at any time:
(a) Chevron shall declare a dividend (or any other
distribution) on the Chevron Common Stock which the Exchange Agent would be
required to apply for the benefit of the Holders of the Debentures in
accordance with Section 205 hereof; or
(b) Chevron shall authorize the granting of subscription
rights, options, warrants or other similar rights to holders of Chevron Common
Stock; or
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<PAGE> 14
(c) there shall occur any reclassification of Chevron
Common Stock (other than a subdivision or combination of outstanding shares of
Chevron Common Stock) or any consolidation or merger to which Chevron is a
party and for which approval of any stockholders of Chevron is required, or the
sale or transfer of all or substantially all of the assets of Chevron; or
(d) there shall occur the voluntary or involuntary
dissolution, liquidation or winding up of Chevron;
then the Company shall as promptly as practicable cause to be filed at the
office or agency maintained pursuant to Section 1002 of the Indenture and cause
to be mailed to the Holders of Debentures at their last addresses as they shall
appear upon the Security Register a notice stating (x) the date, if known by
the Company, on which a record is to be taken for the purpose of such dividend,
distribution or grant of rights, or, if a record is not to be taken, the date
as of which the holders of Chevron Common Stock of record to be entitled to
such dividend or distribution or grant of rights are to be determined, or (y)
the date, if known by the Company, on which such reclassification, merger,
consolidation, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of Chevron Common Stock of record shall be entitled to exchange their
shares of Chevron Common Stock for securities or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up.
207. Covenants by the Company.
So long as any Debentures shall be Outstanding and
exchangeable for Chevron Common Stock or other Exchange Property pursuant to
this Article Two, the Company shall (i) preserve unimpaired the right of each
Holder of Debentures, upon exchange thereof, to receive shares of Chevron
Common Stock or other Exchange Property as such Holder shall from time to time
be entitled to receive in accordance with the provisions of this Article Two,
and (ii) not pledge, mortgage, hypothecate or grant a security interest in, or
permit any mortgage, pledge, security interest or other lien upon, the Exchange
Property.
208. Transfer Taxes.
The Company will pay any and all taxes that may be payable in
respect of the transfer and delivery of shares of Chevron Common Stock (or
other securities included in the Exchange Property) pursuant hereto, other than
income, capital gains and similar taxes imposed on any Holder by reason of
exchange of Debentures for Exchange Property; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the delivery, upon an exchange of Debentures, of
shares of Chevron Common Stock (or other securities included in the Exchange
Property) in a name other than that in which the Debentures so exchanged were
registered, and no such transfer shall be made unless and until the Person
requesting such transfer has paid to the Company or the Exchange Agent the
amount of any such tax, or has established to the satisfaction of the Company
and the Exchange Agent that such tax has been paid.
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<PAGE> 15
209. Fully Paid Shares.
The Company warrants and covenants that all shares of Chevron
Common Stock delivered upon the exchange of Debentures will be fully paid and
nonassessable and that each Holder of Debentures who receives shares of Chevron
Common Stock or other Exchange Property in exchange for his Debentures pursuant
to this Article Two will receive valid and marketable title to such Exchange
Property, free and clear of all claims, liens and encumbrances (other than
those that may be created or suffered to exist by such Holder). Except as
provided in Section 208 hereof, the Company will pay all taxes, liens and
charges with respect to the delivery of Exchange Property in exchange for
Debentures hereunder.
210. Cancellation of Debentures.
All Debentures delivered for exchange shall be delivered by
the Exchange Agent to the Trustee and be canceled by the Trustee, and the
Trustee shall dispose of the same as provided in Section 309 of the Indenture.
211. Merger of Chevron
In case of any consolidation or merger of Chevron with or into
any other Person that results in shares of Chevron Common Stock, as constituted
prior to the consummation of such transaction, being converted into other
securities and/or property (including cash), or in case of any sale or transfer
of all or substantially all of the assets of Chevron (if in connection with
such sale or transfer holders of Chevron Common Stock receive other securities
and/or property including cash, in exchange for their shares of Chevron Common
Stock), or of any voluntary or involuntary dissolution, liquidation or
winding-up of Chevron, the Company shall execute and deliver to the Trustee a
supplemental indenture, and to the Exchange Agent a supplement to the Exchange
Agreement, each providing that the Holder of each Debenture then Outstanding
shall have the right thereafter (subject to Sections 215 and 216 hereof) to
exchange such Debenture (i) for the kind and amount of securities and other
property receivable upon such consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up by a holder of the number of shares of
Chevron Common Stock for which such Debenture was exchangeable immediately
prior to such consolidation, merger, sale, transfer, dissolution, liquidation
or winding up and (ii) the kind and amount of securities (other than Chevron
Common Stock) and other Exchange Property for which such Debenture was
exchangeable immediately prior to such consolidation, merger, sale, transfer,
dissolution, liquidation or winding up. Such supplemental indenture shall
provide for adjustments and rights to receive and retain dividends or their
equivalents, which shall be as nearly equivalent as may be practicable to the
adjustments and rights to receive and retain dividends or their equivalents
provided for in this Article Two. The above provisions of this Section 211
shall similarly apply to any successive consolidation, merger, sale, transfers,
dissolution, liquidation or winding-up.
Notice of such supplemental indenture shall as soon as
practicable be filed with the Exchange Agent and mailed by or on behalf of the
Company to the Holders of Debentures at their last addresses as they shall
appear on the Security Register.
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<PAGE> 16
The Trustee shall not be under any responsibility to determine
the correctness of any provisions contained in any such supplemental indenture
relating either to the kind or amount of shares of stock or securities or
property or cash receivable by the Debenture holders upon the exchange of their
Debentures as herein provided after any such consolidation, merger, sale,
transfer, dissolution, liquidation or winding up or to any adjustment to be
made with respect thereto.
212. Certain Tender or Exchange Offers for Exchange
Property.
In the event of a tender offer or exchange offer for any class
of securities included within the Exchange Property (i) if the Company owns
shares of such class which are not subject to the Exchange Agreement, the
Company will cause the Exchange Agent to tender such shares of such class in
the same proportion that the Company tenders its securities in such class which
are not subject to the Exchange Agreement, and (ii) if the Company does not own
securities of a class which are subject to the Exchange Agreement, the Company
may, at its option and in its sole discretion, elect to cause the Exchange
Agent to tender all or any portion or none of such class of security included
within the Exchange Property held by the Exchange Agent. The proceeds of the
sale of any such Exchange Property pursuant to any such tender or exchange
offer will be held by the Exchange Agent for the benefit of Holders as provided
in this Fourth Supplemental Indenture.
213. Obligations of Trustee and Exchange Agent.
Subject to the provisions of Section 601 of the Indenture,
neither the Trustee nor the Exchange Agent shall at any time be under any duty
or responsibility to any Holder of Debentures to determine whether any facts
exist which may require any adjustment of the Exchange Rate, or with respect to
the nature or extent of any such adjustment when made, or with respect to the
method employed, or herein or in any supplemental indenture provided to be
employed, in making the same. Neither the Trustee nor the Exchange Agent shall
be accountable with respect to the validity or value (or the kind or amount) of
any Exchange Property which may at any time be issued or delivered upon the
exchange of any Debenture or the market conditions existing at the time of sale
of any Exchange Property; and neither the Trustee nor the Exchange Agent makes
any representation with respect thereto. Neither the Trustee nor the Exchange
Agent shall be responsible, for any failure of the Company to transfer or
deliver any Exchange Property or certificates or other evidence thereof to the
Exchange Agent as provided herein, or subject to the provisions of Section 601
of the Indenture and the obligations assumed under the Exchange Agreement, to
comply with any of the covenants of the Company contained in this Article Two.
214. Exchange Arrangements in Case of Redemption.
In connection with any redemption of Debentures, the Company
may arrange for the purchase and exchange of Exchange Property of all or any
part of such Debentures by an arrangement with one or more investment bankers
or other purchasers to purchase such Debentures by paying to the Holders
thereof, or to the Trustee in trust for such Holders, on or before the close of
business on the Business Day next preceding the Redemption Date, an amount not
less than the applicable Redemption Price of the Debentures to be purchased,
plus interest accrued to the
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<PAGE> 17
Redemption Date. Notwithstanding anything to the contrary contained in Article
Eleven of the Indenture, the obligation of the Company to pay the Redemption
Price of such Debentures, plus interest accrued to the Redemption Date, shall
be satisfied and discharged to the extent such amount is so paid by such
purchasers. Any Debentures to be purchased pursuant to such agreement which
are not presented for redemption or not duly surrendered for exchange by the
Holders thereof shall be deemed acquired by such purchasers from the Holders
and surrendered by such purchasers for exchange, all as of immediately prior to
the close of business on the Business Day next preceding the Redemption Date,
subject to payment of the above amount as aforesaid. Notwithstanding anything
to the contrary contained in this Article Two, in the event that any Debentures
subject to such agreement are surrendered for exchange (other than by the
purchasers) by the close of business on the Business Day next preceding the
Redemption Date, the amounts so paid to the Trustee in trust for the Holders of
the Debentures so surrendered for exchange shall be returned to such
purchasers.
215. Tax Adjustments in Exchange Rate.
If an event shall occur which causes the Exchange Rate to be
subject to adjustment pursuant to Section 204 hereof, or a merger,
consolidation or sale or transfer of assets or of any voluntary or involuntary
dissolution, liquidation or winding up of Chevron shall occur requiring a
supplemental indenture under Section 211 hereof, and if, within ten days after
the effective date of such transaction, the Company shall furnish the Exchange
Agent with an Opinion of Counsel to the effect that such transaction is taxable
to the Company or the Exchange Agent and an Officers' Certificate as to the
amount of federal, state and local tax payable by the Company or the Exchange
Agent as a result of such transaction (computed by the Company at the marginal
tax rate applicable to such transaction), the Exchange Agent shall pay to, or
to the order of, the Company, in the case of taxes payable by the Company, or
itself, in the case of taxes payable by it, the cash held by it and apportioned
or to be apportioned to the Exchange Property for which Outstanding Debentures
are exchangeable, up to the amount of such taxes. In the event that the cash
held by the Exchange Agent and so apportioned or to be apportioned is
insufficient to pay to the Company or the Exchange Agent the amount of such
taxes, the Exchange Agent shall, as soon as reasonably practicable and to the
extent legally permissible, sell in accordance with written instructions
received by the Company, or if no such instructions are received, as determined
by the Exchange Agent, such Exchange Property (including any securities or
other property included therein) as may be necessary to pay, from the proceeds
thereof after payment of any taxes by the Company or the Exchange Agent on such
sale, the amount of any such insufficiency. The Exchange Agent shall notify
the Company and the Trustee of any such sale and the Exchange Property sold.
Following payment of all necessary amounts to the Company or the Exchange
Agent, such Exchange Property held by the Exchange Agent and any cash
apportioned thereto shall be proportionately adjusted so as to be apportioned
equally to the Debentures Outstanding as of immediately after the close of
business on the record date or the effective date for the transaction to which
this Section 215 applies (as shall be specified in Section 204 or 211 hereof,
whichever is applicable). Any Holder surrendering any Debentures after such
record date, or such effective date, as the case may be, shall be, entitled to
receive the Exchange Property and any cash apportioned thereto as so adjusted
pursuant to this paragraph. If this Section 215 shall apply to a transaction
and the sale by the Company of the consideration receivable therein shall not
be legally permissible and the amount of cash apportioned to the
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<PAGE> 18
Exchange Property shall not be sufficient to pay all taxes payable by the
Company or the Exchange Agent which arise from such transaction, the Company
may direct the Exchange Agent to segregate for the benefit of the Company or
the Exchange Agent (as the case may be) or deliver to the Company or the
Exchange Agent (as the case may be) an amount of Exchange Property theretofore
held by the Exchange Agent for exchange of Debentures having a Market Value
equal to the unsatisfied portion of the tax payable by the Company or the
Exchange Agent (as the case may be) with respect to such transaction including
any tax payable upon the delivery or sale thereof in order to satisfy the
aforementioned tax, and the Exchange Property shall thereafter be solely for
the account of the Company or the Exchange Agent (as the case may be) and
Holders of Debentures shall have no rights thereto.
In the event that an Opinion of Counsel given pursuant to this
Fourth Supplemental Indenture concludes that whether taxes are payable by the
Company or the Exchange Agent is uncertain under the then state of the law or
facts or both, the Company shall have the option of requesting the Exchange
Agent to segregate the amount of funds that would be payable (or securities or
other property in lieu thereof), if such taxes were deemed payable, together
with the amount estimated in good faith to be the reasonable costs and expenses
(including attorneys' fees) of obtaining a determination as set forth below.
The Holders shall have no rights to such funds or securities or other property,
which shall be held by the Exchange Agent for the Company (or itself, as the
case may be), the Exchange Property and any cash apportioned thereto
deliverable upon exchange of Debentures pursuant to this Article Two shall be
reapportioned as though such segregated amounts had been paid to the Company or
the Exchange Agent for such taxes, and any Holder surrendering any Debenture
after the record or effective date of the applicable transaction giving rise to
an adjustment pursuant to this Section 215 shall be entitled to receive only
such Exchange Property and any cash apportioned thereto upon exchange of
Debentures pursuant to this Article Two as so reapportioned. The Company shall
thereupon in good faith seek an appropriate determination from the appropriate
agencies and, if judged necessary by the Company in good faith, from
appropriate courts, as to whether taxes are so payable. If an appropriate
determination is made that such taxes are so payable, then the Exchange Agent
shall immediately pay the funds or deliver the securities or other property so
segregated to the Company (or, if taxes are payable by the Exchange Agent,
retain such funds or securities or other property for itself), and if an
appropriate determination is made that such taxes are not payable or an amount
of tax is payable which is less than the amount of funds or property so
segregated, then the Exchange Agent, after paying to the Company (or itself, as
the case may be) out of such funds or securities or other property the
reasonable expenses and costs (including attorneys' fees) of obtaining such
determination (and any taxes so payable), shall apportion such remaining funds
or securities or other property which had been so segregated among the Exchange
Property and cash apportioned thereto as of immediately after the close of
business on the record date or the effective date of such transaction giving
rise to an adjustment pursuant to Section 204 or 211 hereof, whichever is
applicable. If any Debenture has been exchanged on or after such record date
or such effective date, as the case may be, and before a determination is made
that no taxes are payable or an amount of tax is payable which is less than the
amount of funds or securities or other property so segregated, the Company to
the extent not
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<PAGE> 19
previously delivered, shall deliver such Exchange Property and any cash
apportioned thereto as reapportioned following such determination, to the
person to which and in the manner in which the other proceeds of the exchange
of such Debenture were delivered.
216. Cash Equivalent.
Notwithstanding any other provisions in this Article Two, in
lieu of delivering certificates representing shares of Chevron Common Stock or
other Exchange Property in exchange for Debentures surrendered in accordance
with Section 202 hereof, the Company may, at the Company's option, pay to the
Holder surrendering such Debentures an amount in cash equal to the value of the
Exchange Property for which such Debentures are exchangeable (based on the
Market Price on the date of receipt by the Company of the notice of exchange
delivered by such Holder pursuant to Section 202 hereof). Prior to so
directing the Exchange Agent to make any such cash payment, the Company shall
deposit with the Exchange Agent the cash so payable.
217. Repurchase Rights.
In the event that the Company obtains or otherwise releases
any Chevron Common Stock or other Exchange Property in any manner otherwise
than as contemplated by Section 218 hereof, each Holder will have the right
("Repurchase Right"), at such Holder's option, to require the Company to
repurchase all of such Holder's Debentures, or a portion thereof which is
$1,000 or any integral multiple thereof, in the manner and at the price
described below.
Promptly (and in any event within 10 days) after the Company
has obtained or released any Chevron Common Stock or any other Exchange
Property in any manner otherwise than as contemplated by Section 218 hereof,
the Exchange Agent will mail to all Holders of record of the Debentures a
notice thereof and the Repurchase Right arising as a result thereof (a
"Repurchase Notice"). To exercise the Repurchase Right, a Holder of Debentures
must deliver on or before the fifteenth day after the date of the Repurchase
Notice irrevocable written notice to the Exchange Agent of the Holder's
exercise of such right, together with the Debentures with respect to which the
right is being exercised, duly endorsed for transfer.
On the date ("Repurchase Date") that is 30 days after the date
of the Repurchase Notice, the Company will be required to repurchase all
Debentures in respect of which the Repurchase Right has been exercised at the
following price: (i) if the date on which the Company's obtaining or release of
Exchange Property in a manner not contemplated by Section 218 hereof first
occurs (the "Triggering Date") is before August 15, 2000, the product of (a)
120% and (b) the greater of the principal amount of such Debentures (plus
accrued and unpaid interest, if any, to the Repurchase Date) and the Market
Price of the Exchange Property deliverable in exchange for such Debentures on
the Triggering Date (or if such date is not a Business Day, on the next
succeeding Business Day); and (h) if the Triggering Date occurs on or after
August 15, 2000, the greater of (a) the redemption price specified in Section
103 hereof on the Triggering Date and (b) the Market Price of the Exchange
Property deliverable in exchange for such Debentures on the Triggering Date
(or if such date is not a Business Day, on the next succeeding Business Day).
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<PAGE> 20
The obligation of the Company to deliver Exchange Property (or
cash in lieu thereof) in exchange for Debentures shall survive and continue to
apply in full force and effect following and notwithstanding the occurrence of
any event triggering a Repurchase Right. Failure by the Company to exchange
Debentures in accordance with this Fourth Supplemental Indenture or to
repurchase Debentures upon valid exercise of a Repurchase Right will constitute
an Event of Default with respect to the Debentures pursuant to Section 501(7)
of the Indenture, and Holders of Debentures will have the remedies provided for
in the Indenture, including acceleration of the indebtedness evidenced by the
Debentures, in the event of any such failure.
If an offer is made to repurchase Debentures in connection
with a Repurchase Right, the Company will comply with all tender offer rules,
including but not limited to Sections 13(e) and 14(e) under the Exchange Act
and Rules 13e-1 and 14e-1 thereunder, to the extent applicable to such offer.
218. Withdrawals of Exchange Property. The Company shall
be entitled, out of the Exchange Property held by the Exchange Agent, to such
kind and quantity of Exchange Property and such amount of any cash (the
investments contemplated by Section 205 hereof being deemed for these purposes
to be cash and to be valued at their outstanding principal balance) and other
Exchange Property as shall be in excess of the quantity of Exchange Property
held by the Exchange Agent that would be deliverable by the Exchange Agent upon
the exchange of all Debentures then outstanding, and such excess shall be held
by the Exchange Agent for the account of the Company and, upon delivery of the
Officers' Certificate provided for in the following sentence, released to the
Company upon demand. Upon demand of any withdrawal of Exchange Property from
the Exchange Agent, the Company shall deliver to the Trustee an Officers'
Certificate (and a copy thereof to the Exchange Agent) which shall state (i)
the principal amount of Debentures then outstanding and the kind and amount of
Exchange Property required for delivery to the Holders thereof upon exchange,
(ii) that the withdrawal of the kind and amount of Exchange Property referred
to in such demand is permitted by the provisions of this Fourth Supplemental
Indenture and (iii) that the Exchange Property so to be withdrawn would not be
deliverable upon exchange of all Debentures then outstanding. In delivering
such certificate, the Company may rely on information furnished to it by the
Exchange Agent as to the kind and amount of Exchange Property held by it and
the kind and amount thereof previously delivered to Holders of Debentures.
219. Certain Definitions. All terms used but not defined
in this Fourth Supplemental Indenture that are defined in the Indenture shall
have the meanings specified in the Indenture unless the context otherwise
requires. As used in this Fourth Supplemental Indenture, the following terms
shall have the following meanings:
"Chevron" means Chevron Corporation, a Delaware corporation.
"Chevron Common Stock" means the common stock of Chevron of
the class authorized and designated as common stock, par value $3.00 per share,
as such common stock may be changed or reclassified from time to time.
-20-
<PAGE> 21
"Exchange Act" means the Securities Exchange Act of 1934 and
any successor statute thereto, in each case as amended from time to time.
"Exchange Agent" means Chase Bank of Texas, National
Association, Exchange Agent under the Exchange Agreement, until a successor
Exchange Agent shall have become such pursuant to the provisions of Section 16
of the Exchange Agreement, and thereafter "Exchange Agent" shall mean such
successor Exchange Agent thereunder and from time to time any subsequent
successor pursuant to such provisions.
"Exchange Agreement" means the Exchange Agent Agreement
entered into pursuant to the provisions of Section 205 hereof, as the same may
be supplemented and amended from time to time.
"Exchange Property" means initially the aggregate of the
2,960,784 shares of Chevron Common Stock delivered to the Exchange Agent by the
Company pursuant to the Exchange Agreement simultaneously with the execution
and delivery of this Fourth Supplemental Indenture, and thereafter means the
securities, cash and other property, if any, which at the time are deliverable
upon surrender of the Debentures for exchange in accordance with Article Two of
this Fourth Supplemental Indenture.
"Global Debenture" means a Debenture that evidences all or
part of the Debentures and bears the legend set forth in Section 108 hereof.
"Market Price" means, when used with respect to any security
as of any date, (i) if such security is not then listed or admitted to trading
on any national securities exchange registered under the Exchange Act, the
average of the high bid and low asked prices in the over-the-counter market on
such date as reported by the National Association of Securities Dealers
Automated Quotation System or (ii) if such security is then listed or admitted
to trading on any such national securities exchange, the last reported sales
price regular way on such date or, in case no such reported sale takes place on
such date, the average of the reported closing bid and asked prices regular way
on such date, in each case on the principal national securities exchange on
which such security is then listed or admitted to trading, or (iii) if such
prices are not available on such date, the market value of such security on
such date determined in such manner as shall be satisfactory to the Exchange
Agent, which shall be entitled to rely for such purposes on the advice of any
firm of investment bankers or security dealers having familiarity with such
security. "Market Price" means, when used with respect to any property (other
than any security) as of any date, the market value of such property on such
date determined in such manner as shall be satisfactory to the Exchange Agent,
which shall be entitled to rely for such purposes on the advice of any firm of
investment bankers having familiarity with such property.
-21-
<PAGE> 22
ARTICLE THREE
301. Acceptance of Trust.
The Trustee accepts the trust hereby created and agrees to
perform the same upon the terms and conditions herein and in the Indenture set
forth.
302. Trustee Not Responsible for Validity, Due Execution
or Recitals.
The Trustee shall not be responsible in any manner whatsoever
for or in respect of the validity or sufficiency of this Fourth Supplemental
Indenture or the due execution thereof by the Company or for or in respect of
the recitals herein contained, all such recitals being made by the Company
solely.
303. Counterparts.
This Fourth Supplemental Indenture may be executed in several
counterparts, each of which shall be an original and all of which together
shall constitute but one and the same instrument.
-22-
<PAGE> 23
IN WITNESS WHEREOF, PENNZOIL COMPANY, party hereto of the
first part, has caused its corporate name to be hereunto affixed, and this
instrument to be signed and sealed by a Group Vice President, for and on its
behalf, in the City of Houston, Texas and CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION, party hereto of the second part, has caused its corporate name to
be hereunto affixed, and this instrument to be signed and sealed by a Vice
President, for and on its behalf, in the City of Houston, Texas, all as of the
_____ day of August, 1998.
PENNZOIL COMPANY
By:
-------------------------------------
Bruce K. Misamore
Vice President and Treasurer
CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION,
As Trustee
By:
------------------------------------
Name:
-----------------------------------
Authorized Officer
STATE OF TEXAS )
)
COUNTY OF HARRIS )
BEFORE ME, the undersigned authority, a Notary Public, on this
day personally appeared Bruce K. Misamore, Vice President and Treasurer of
Pennzoil Company, known to me to be the person whose name is subscribed to the
foregoing instrument, and acknowledged to me that he executed the same for the
purposes therein expressed, in the capacity therein set forth and as the act
and deed of said association.
GIVEN UNDER MY HAND AND SEAL of office, this the ____ day of
August, 1998.
----------------------------------------
Notary Public
-23-
<PAGE> 24
STATE OF TEXAS )
)
COUNTY OF HARRIS )
BEFORE ME, the undersigned authority, a Notary Public, on this
day personally appeared ________________ of Chase Bank of Texas, National
Association, known to me to be the person whose name is subscribed to the
foregoing instrument, and acknowledged to me that he executed the same for the
purposes therein expressed, in the capacity therein set forth and as the act
and deed of said association.
GIVEN UNDER MY HAND AND SEAL of office, this the _____ day of August, 1998.
----------------------------------------
Notary Public
-24-
<PAGE> 1
EXHIBIT 10(u)
================================================================================
[CHASE LOGO]
CREDIT AGREEMENT
dated as of
November 17, 1998
among
PENNZOIL COMPANY
as Borrower
The Lenders Party Hereto
and
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
as Administrative Agent
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
as Syndication Agent
NATIONSBANK, N.A.
as Documentation Agent
and
The Co-Agents
Set Forth On Schedule 2.01 Hereto
---------------------------
CHASE SECURITIES INC.,
as Arranger
$500,000,000 Revolving Credit, Term and Competitive Bid Facility
================================================================================
<PAGE> 2
1
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I
Definitions..............................................................................................1
SECTION 1.01. Defined Terms.............................................................................1
SECTION 1.02. Classification of Loans and Borrowings...................................................13
SECTION 1.03. Terms Generally..........................................................................13
SECTION 1.04. Accounting Terms; GAAP...................................................................13
ARTICLE II
The Credits.............................................................................................14
SECTION 2.01. Commitments..............................................................................14
SECTION 2.02. Loans and Borrowings.....................................................................14
SECTION 2.03. Requests for Revolving Borrowings........................................................15
SECTION 2.04. Competitive Bid Procedure................................................................16
SECTION 2.05. Letters of Credit........................................................................18
SECTION 2.06. Funding of Borrowings....................................................................21
SECTION 2.07. Interest Elections.......................................................................22
SECTION 2.08. Termination and Reduction of Commitments.................................................23
SECTION 2.09. Repayment of Loans; Evidence of Debt.....................................................24
SECTION 2.10. Prepayment of Loans......................................................................24
SECTION 2.11. Fees.....................................................................................25
SECTION 2.12. Interest.................................................................................26
SECTION 2.13. Alternate Rate of Interest...............................................................27
SECTION 2.14. Increased Costs..........................................................................27
SECTION 2.15. Break Funding Payments...................................................................28
SECTION 2.16. Taxes....................................................................................29
SECTION 2.17. Payments Generally; Pro Rata Treatment; Sharing of Set-offs..............................30
SECTION 2.18. Mitigation Obligations...................................................................32
SECTION 2.19. Limitation of Compensation if Applicable Lending Office is Changed.......................32
ARTICLE III
Representations and Warranties..........................................................................33
SECTION 3.01. Organization; Powers.....................................................................33
SECTION 3.02. Authorization; Enforceability............................................................33
SECTION 3.03. Governmental Approvals; No Conflicts.....................................................33
SECTION 3.04. No Material Adverse Change...............................................................33
SECTION 3.05. Litigation and Environmental Matters.....................................................33
SECTION 3.06. Compliance with Laws and Agreements......................................................34
SECTION 3.07. Investment and Holding Company Status....................................................34
</TABLE>
<PAGE> 3
2
<TABLE>
<S> <C> <C>
SECTION 3.08. Taxes....................................................................................34
SECTION 3.09. ERISA....................................................................................34
SECTION 3.10. Financial Information....................................................................34
SECTION 3.11. Year 2000................................................................................35
ARTICLE IV
Conditions..............................................................................................35
SECTION 4.01. Effective Date...........................................................................35
SECTION 4.02. Each Credit Event........................................................................36
ARTICLE V
Affirmative Covenants...................................................................................37
SECTION 5.01. Financial Statements and Other Information...............................................37
SECTION 5.02. Notices of Material Events...............................................................37
SECTION 5.03. Existence; Conduct of Business...........................................................38
SECTION 5.04. Payment of Obligations...................................................................38
SECTION 5.05. Maintenance of Properties; Insurance.....................................................38
SECTION 5.06. Books and Records; Inspection Rights.....................................................39
SECTION 5.07. Compliance with Laws.....................................................................39
SECTION 5.08. Use of Proceeds and Letters of Credit....................................................39
SECTION 5.09. Covenant Cross-Default...................................................................39
SECTION 5.10. Adjusted Consolidated Tangible Net Worth.................................................40
ARTICLE VI
Negative Covenants......................................................................................40
SECTION 6.01. Liens....................................................................................40
SECTION 6.02. Fundamental Changes......................................................................42
SECTION 6.03. Investments, Loans, Advances, Guarantees and Acquisitions................................42
SECTION 6.04. Subsidiary Indebtedness..................................................................42
SECTION 6.05. Reverse Designation of Unrestricted Subsidiaries.........................................43
ARTICLE VII
Events of Default.......................................................................................43
ARTICLE VIII
The Administrative Agent................................................................................45
ARTICLE IX
Miscellaneous...........................................................................................47
SECTION 9.01. Notices..................................................................................47
</TABLE>
<PAGE> 4
3
<TABLE>
<S> <C> <C>
SECTION 9.02. Waivers; Amendments......................................................................48
SECTION 9.03. Expenses; Indemnity; Damage Waiver.......................................................48
SECTION 9.04. Successors and Assigns...................................................................50
SECTION 9.05. Survival.................................................................................52
SECTION 9.06. Counterparts; Integration; Effectiveness.................................................52
SECTION 9.07. Severability.............................................................................53
SECTION 9.08. Right of Setoff..........................................................................53
SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process...............................53
SECTION 9.10. WAIVER OF JURY TRIAL.....................................................................53
SECTION 9.11. Headings.................................................................................54
SECTION 9.12. Confidentiality..........................................................................54
SECTION 9.13. Interest Rate Limitation.................................................................54
</TABLE>
SCHEDULES:
Schedule 2.01 -- Commitments
EXHIBITS:
Exhibit A -- Form of Assignment and Acceptance
Exhibit B -- Form of Opinion of Borrower's Counsel
<PAGE> 5
1
CREDIT AGREEMENT dated as of November 17, 1998, among PENNZOIL COMPANY
(to be renamed PennzEnergy Company), a Delaware corporation, the LENDERS party
hereto (the "Lenders"), and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, as
Administrative Agent (the "Administrative Agent").
The parties hereto agree as follows:
ARTICLE I
Definitions
SECTION 1.01. Defined Terms. As used in this Agreement, the
following terms have the meanings specified below:
"ABR", when used in reference to any Loan or Borrowing, refers
to whether such Loan, or the Loans comprising such Borrowing, are bearing
interest at a rate determined by reference to the Alternate Base Rate.
"Adjusted Consolidated Tangible Net Worth" means Consolidated
Tangible Net Worth adjusted to (i) exclude (A) non-cash charges due to
impairments caused by fluctuations in hydrocarbon pricing or (B) unrealized
non-cash gains or losses due to unrealized gains or losses on the common stock
of Chevron Corporation owned by the Borrower, in each case occurring subsequent
to September 30, 1998 and (ii) include, to the extent not otherwise included
under GAAP, liabilities that are Guarantees of Indebtedness of Unrestricted
Subsidiaries.
"Adjusted LIBO Rate" means, with respect to any Eurodollar
Borrowing for any Interest Period, an interest rate per annum (rounded upwards,
if necessary, to the next 1/100 of 1%) equal to (a) the LIBO Rate for such
Interest Period multiplied by (b) the Statutory Reserve Adjustment Factor.
"Administrative Agent" means Chase Bank of Texas, National
Association, in its capacity as administrative agent for the Lenders hereunder.
"Administrative Questionnaire" means an Administrative
Questionnaire in a form supplied by the Administrative Agent.
"Affiliate" means, with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, Controls
or is Controlled by or is under common Control with the Person specified.
"Agreement" means this Credit Agreement, as the same may,
from time to time be amended or supplemented.
"Alternate Base Rate" means, for any day, a rate per annum
equal to the greater of (a) the Prime Rate in effect on such day, and (b) the
Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in
the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds
<PAGE> 6
2
Effective Rate shall be effective from and including the effective date of such
change in the Prime Rate or the Federal Funds Effective Rate, respectively.
"Applicable Percentage" means, with respect to any Lender, the
percentage of the total Commitments represented by such Lender's Commitment. If
the Commitments have terminated or expired, the Applicable Percentage for any
Lender shall be the percentage of the total Committed Credit Exposure of all
Lenders represented by such Lender's Committed Credit Exposure, in each case as
of the date of determination.
"Applicable Rate" means, for any day, with respect to (a) the
facility fees payable hereunder, a rate per annum equal to 0.15%, (b) any
Eurodollar Revolving Loan or any Eurodollar Term Loan, a rate per annum equal to
0.4%.
"Assignment and Acceptance" means an assignment and acceptance
entered into by a Lender and an assignee (with the consent of any party whose
consent is required by Section 9.04), and accepted by the Administrative Agent,
in the form of Exhibit A or any other form approved by the Administrative Agent.
"Availability Period" means the period from and including the
Effective Date to but excluding the earlier of the Revolving Loan Maturity Date
and the date of termination of the Commitments.
"Board" means the Board of Governors of the Federal Reserve
System of the United States of America.
"Borrower" means Pennzoil Company, a Delaware corporation,
which shall be renamed PennzEnergy Company.
"Borrowing" means (a) Committed Loans of the same Type, made,
converted or continued on the same date and, in the case of Eurodollar Loans, as
to which a single Interest Period is in effect, or (b) a Competitive Loan or
group of Competitive Loans of the same Type made on the same date and as to
which a single Interest Period is in effect.
"Borrowing Request" means a request by the Borrower for a
Revolving Borrowing in accordance with Section 2.03.
"Business Day" means any day that is not a Saturday, Sunday or
other day on which commercial banks in New York City or Houston, Texas are
authorized or required by law to remain closed; provided that, when used in
connection with a Eurodollar Loan, the term "Business Day" shall also exclude
any day on which banks are not open for dealings in dollar deposits in the
London interbank market.
"Capital Lease Obligations" of any Person means the
obligations of such Person to pay rent or other amounts under any lease of (or
other arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
<PAGE> 7
3
accounted for as capital leases on a balance sheet of such Person under GAAP,
and the amount of such obligations shall be the capitalized amount thereof
determined in accordance with GAAP.
"Change in Control" occurs (a) when any "person" or "group"
(as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) shall
become the "beneficial owner" (as defined in the Rules 13d-3 and 13d-5
promulgated under the Exchange Act), directly or indirectly, of more than 35% of
the then outstanding Voting Stock of the Borrower; or (b) when a majority of the
board of directors of the Borrower consists of Persons other than Continuing
Directors. As used in this definition, the term "Continuing Director" means a
member of the board of directors of the Borrower who either (i) was a member of
such board of directors on the Closing Date or (ii) was designated (before
initial election as a director) as a Continuing Director by a majority of the
then Continuing Directors or (iii) was nominated or appointed to such board of
directors by a majority of the then Continuing Directors.
"Change in Law" means (a) the adoption of any law, rule or
regulation after the date of this Agreement, (b) any change in any law, rule or
regulation or in the interpretation or application thereof by any Governmental
Authority after the date of this Agreement or (c) compliance by any Lender or
the Issuing Bank (or, for purposes of Section 2.14(b), by any lending office of
such Lender or by such Lender's or the Issuing Bank's holding company, if any)
with any request, guideline or directive (whether or not having the force of
law) of any Governmental Authority made or issued after the date of this
Agreement; excluding, in any event, Changes in Law resulting in any increase in
Excluded Taxes.
"Charges" has the meaning assigned to such term in Section
9.13.
"Class", when used in reference to any Loan or Borrowing,
refers to whether such Loan, or the Loans comprising such Borrowing, are
Committed Loans or Competitive Loans.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Committed Credit Exposure" means, with respect to any Lender
at any time, the sum of the outstanding principal amount of such Lender's
Committed Loans and its LC Exposure at such time.
"Committed Loan" means a Revolving Loan or a Term Loan.
"Commitment" means, with respect to each Lender, the
commitment of such Lender to make Revolving Loans, to acquire participations in
Letters of Credit hereunder and to convert the Revolving Loans outstanding on
the Revolving Loan Maturity Date to Term Loans, expressed as an amount
representing the maximum aggregate amount of such Lender's Revolving Credit
Exposure hereunder, as such commitment may be (a) reduced from time to time
pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant
to assignments by or to such Lender pursuant to Section 9.04. The initial amount
of each Lender's Commitment is set forth on Schedule 2.01, or in the Assignment
and Acceptance pursuant to which such Lender shall have assumed its Commitment,
as applicable. The initial aggregate amount of the Lenders' Commitments is
$500,000,000.
<PAGE> 8
4
"Competitive Bid" means an offer by a Lender to make a
Competitive Loan in accordance with Section 2.04.
"Competitive Bid Rate" means, with respect to any Competitive
Bid, the Margin or the Fixed Rate, as applicable, offered by the Lender making
such Competitive Bid.
"Competitive Bid Request" means a request by the Borrower for
Competitive Bids in accordance with Section 2.04.
"Competitive Loan" means a Loan made pursuant to Section 2.04.
"Consolidated Net Tangible Assets" means the total amount of
assets, including all cash received from asset sales during the 12 months prior
to the date of determination to the extent that such cash has not been
reinvested, of the Borrower and its Restricted Subsidiaries on a consolidated
basis (less applicable reserves and other properly deductible items) after
deducting therefrom (a) all current liabilities (excluding any which are, by
their terms, extendable or renewable at the option of the obligor thereon to a
time more than 12 months after the time as of which the amount thereof is being
computed) and (b) all goodwill, trade names, trademarks, patents, unamortized
debt premium or discount and expense and other like intangible assets,
determined in accordance with GAAP.
"Consolidated Tangible Net Worth" shall mean, at any time and
from time to time, the sum of preferred or common stock not subject to a
mandatory redemption obligation (other than a mandatory redemption obligation
that can be satisfied by the tendering of common stock of the Borrower) as of
the date of determination, par value of common stock, additional paid-in capital
of common stock, and retained earnings less treasury stock (if any), less good
will, cost in excess of net assets acquired and all other assets as are properly
classified as intangible assets, all as determined as to the Borrower and its
Restricted Subsidiaries on a consolidated basis.
"Control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a
Person, whether through the ability to exercise voting power, by contract or
otherwise. "Controlling" and "Controlled" have meanings correlative thereto.
"Default" means any event or condition which constitutes an
Event of Default or which upon notice, lapse of time or both would, unless cured
or waived, become an Event of Default.
"De Minimis Subsidiary" means any Subsidiary of the Borrower
whose percentage of Consolidated Net Tangible Assets represented by such
Subsidiary's portion of Consolidated Net Tangible Assets (before intercompany
eliminations) is less than 1% as of the end of the most recently- completed
fiscal quarter.
"dollars" or "$" refers to lawful money of the United States
of America.
"Duff & Phelps" means Duff & Phelps Credit Rating Company.
"Effective Date" means the date on which the conditions
specified in Section 4.01 are satisfied (or waived in accordance with Section
9.02).
<PAGE> 9
5
"Environmental Laws" means all laws, rules, regulations,
codes, ordinances, orders, decrees, judgments, injunctions, notices or binding
agreements issued, promulgated or entered into by any Governmental Authority,
relating in any way to the environment, preservation or reclamation of natural
resources, the management, release or threatened release of any Hazardous
Material or to health and safety matters.
"Environmental Liability" means any liability, contingent or
otherwise (including any liability for damages, costs of environmental
remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary
directly or indirectly resulting from or based upon (a) violation of any
Environmental Law, (b) the generation, use, handling, transportation, storage,
treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous
Materials, (d) the release or threatened release of any Hazardous Materials into
the environment or (e) any contract, agreement or other consensual arrangement
pursuant to which liability is assumed or imposed with respect to any of the
foregoing.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) that, together with the Borrower, is treated as a single employer
under Section 414(b) or (c) of the Code or, solely for purposes of Section 302
of ERISA and Section 412 of the Code, is treated as a single employer under
Section 414 of the Code.
"ERISA Event" means (a) any "reportable event", as defined in
Section 4043 of ERISA or the regulations issued thereunder with respect to a
Plan (other than an event for which the 30-day notice period is waived); (b) the
existence with respect to any Plan of an "accumulated funding deficiency" (as
defined in Section 412 of the Code or Section 302 of ERISA), whether or not
waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d)
of ERISA of an application for a waiver of the minimum funding standard with
respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA
Affiliates of any liability under Title IV of ERISA with respect to the
termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate
from the PBGC or a plan administrator of any notice relating to an intention to
terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f)
the incurrence by the Borrower or any of its ERISA Affiliates of any liability
with respect to the withdrawal or partial withdrawal from any Plan or
Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of
any notice, or the receipt by any Multiemployer Plan from the Borrower or any
ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability
or a determination that a Multiemployer Plan is, or is expected to be, insolvent
or in reorganization, within the meaning of Title IV of ERISA.
"Eurodollar", when used in reference to any Loan or Borrowing,
refers to whether such Loan, or the Loans comprising such Borrowing, are bearing
interest at a rate determined by reference to the Adjusted LIBO Rate (or, in the
case of a Competitive Loan, the LIBO Rate).
"Event of Default" has the meaning assigned to such term in
Article VII.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended
<PAGE> 10
6
"Excluded Taxes" means, with respect to the Administrative
Agent, any Lender, the Issuing Bank or any other recipient of any payment to be
made by or on account of any obligation of the Borrower hereunder, (a) income or
franchise taxes (including penalties and interest payable in respect thereof)
imposed on (or measured by) its net income by the United States of America, or
by the jurisdiction under the laws of which such recipient is organized or in
which its principal office is located or, in the case of any Lender, in which
its applicable lending office is located, (b) any branch profits taxes imposed
by the United States of America or any similar tax imposed by any other
jurisdiction in which the Borrower is located and (c) in the case of a Foreign
Lender (other than an assignee pursuant to a request by the Borrower under
Section 2.08(e)), any withholding tax that is imposed on amounts payable to such
Foreign Lender at the time such Foreign Lender becomes a party to this Agreement
(or designates a new lending office) or is attributable to such Foreign Lender's
failure to comply with Section 2.16(e), except to the extent that such Foreign
Lender (or its assignor, if any) was entitled, at the time of designation of a
new lending office (or assignment), to receive additional amounts from the
Borrower with respect to such withholding tax pursuant to Section 2.16(a).
"Federal Funds Effective Rate" means, for any day, the
weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the
rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day that is a Business Day, the average
(rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for
such day for such transactions received by the Administrative Agent from three
Federal funds brokers of recognized standing selected by it.
"Final Maturity Date" means November 16, 2000.
"Financial Officer" means the chief financial officer,
treasurer, any assistant treasurer or controller of the Borrower.
"Fixed Rate" means, with respect to any Competitive Loan
(other than a Eurodollar Competitive Loan), the fixed rate of interest per annum
specified by the Lender making such Competitive Loan in its related Competitive
Bid.
"Fixed Rate Loan" means a Competitive Loan bearing interest at
a Fixed Rate.
"Foreign Lender" means any Lender that is organized under the
laws of a jurisdiction other than that in which the Borrower is located. For
purposes of this definition, the United States of America, each State thereof
and the District of Columbia shall be deemed to constitute a single
jurisdiction.
"GAAP" means generally accepted accounting principles in the
United States of America.
"Governmental Authority" means the government of the United
States of America, any other nation or any political subdivision thereof,
whether state or local, and any agency, authority, instrumentality, regulatory
body, court, central bank or other entity exercising executive, legislative,
judicial, taxing, regulatory or administrative powers or functions of or
pertaining to government.
<PAGE> 11
7
"Guarantee" of or by any Person (the "guarantor") means any
obligation, contingent or otherwise, of the guarantor guaranteeing or having the
economic effect of guaranteeing any Indebtedness or other obligation of any
other Person (the "primary obligor") in any manner, whether directly or
indirectly, and including any obligation of the guarantor, direct or indirect,
(a) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or other obligation or to purchase (or to advance or
supply funds for the purchase of) any security for the payment thereof, (b) to
purchase or lease property, securities or services for the purpose of assuring
the owner of such Indebtedness or other obligation of the payment thereof, (c)
to maintain working capital, equity capital or any other financial statement
condition or liquidity of the primary obligor so as to enable the primary
obligor to pay such Indebtedness or other obligation or (d) as an account party
in respect of any letter of credit or letter of guaranty issued to support such
Indebtedness or obligation; provided, that the term Guarantee shall not include
endorsements for collection or deposit in the ordinary course of business.
"Hazardous Materials" means all explosive or radioactive
substances or wastes and all hazardous or toxic substances, wastes or other
pollutants, including petroleum or petroleum distillates, asbestos or asbestos
containing materials, polychlorinated biphenyls, radon gas, infectious or
medical wastes and all other substances or wastes of any nature regulated
pursuant to any Environmental Law.
"Indebtedness" of any Person means, without duplication, (a)
all obligations of such Person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such Person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such Person
upon which interest charges are customarily paid, (d) all obligations of such
Person under conditional sale or other title retention agreements relating to
property acquired by such Person, (e) all obligations of such Person in respect
of the deferred purchase price of property or services (excluding current
accounts payable incurred in the ordinary course of business), (f) all
Indebtedness of others secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien on
property owned or acquired by such Person, whether or not the Indebtedness
secured thereby has been assumed, (g) all Guarantees by such Person of
Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i)
all obligations, contingent or otherwise, of such Person as an account party in
respect of letters of credit and letters of guaranty and (j) all obligations,
contingent or otherwise, of such Person in respect of bankers' acceptances. The
Indebtedness of any Person shall include the Indebtedness of any other entity
(including any partnership in which such Person is a general partner) to the
extent such Person is liable therefor as a result of such Person's ownership
interest in or other relationship with such entity, except to the extent the
terms of such Indebtedness provide that such Person is not liable therefor.
"Indemnified Taxes" means Taxes other than Excluded Taxes.
"Index Debt" means senior, unsecured, long-term indebtedness
for borrowed money of the Borrower that is not guaranteed by any other Person or
subject to any other credit enhancement.
"Information Memorandum" means the Confidential Information
Memorandum dated August 1998 relating to the Borrower and the Transactions.
"Interest Election Request" means a request by the Borrower to
convert or continue a Committed Borrowing in accordance with Section 2.08.
<PAGE> 12
8
"Interest Payment Date" means (a) with respect to any ABR
Loan, the last day of each March, June, September and December, (b) with respect
to any Eurodollar Loan, the last day of the Interest Period applicable to the
Borrowing of which such Loan is a part and, in the case of a Eurodollar
Borrowing with an Interest Period of more than three months' duration, each day
prior to the last day of such Interest Period that occurs at intervals of three
months' duration after the first day of such Interest Period, and (c) with
respect to any Fixed Rate Loan, the last day of the Interest Period applicable
to the Borrowing of which such Loan is a part and, in the case of a Fixed Rate
Borrowing with an Interest Period of more than 90 days' duration (unless
otherwise specified in the applicable Competitive Bid Request), each day prior
to the last day of such Interest Period that occurs at intervals of 90 days'
duration after the first day of such Interest Period, and any other dates that
are specified in the applicable Competitive Bid Request as Interest Payment
Dates with respect to such Borrowing.
"Interest Period" means (a) with respect to any Eurodollar
Borrowing, the period commencing on the date of such Borrowing and ending on the
numerically corresponding day in the calendar month that is one, two, three or
six months (or, with the consent of each Lender, nine or twelve months)
thereafter, as the Borrower may elect, (b) with respect to any Fixed Rate
Borrowing, the period (which shall not be less than 1 day or more than 360 days)
commencing on the date of such Borrowing and ending on the date specified in the
applicable Competitive Bid Request; provided, that (i) if any Interest Period
would end on a day other than a Business Day, such Interest Period shall be
extended to the next succeeding Business Day unless, in the case of a Eurodollar
Borrowing only, such next succeeding Business Day would fall in the next
calendar month, in which case such Interest Period shall end on the next
preceding Business Day and (ii) any Interest Period pertaining to a Eurodollar
Borrowing that commences on the last Business Day of a calendar month (or on a
day for which there is no numerically corresponding day in the last calendar
month of such Interest Period) shall end on the last Business Day of the last
calendar month of such Interest Period. For purposes hereof, the date of a
Borrowing initially shall be the date on which such Borrowing is made and, in
the case of a Committed Borrowing, thereafter shall be the effective date of the
most recent conversion or continuation of such Borrowing.
"Issuing Bank" means either Chase Bank of Texas, National
Association or The Chase Manhattan Bank, in its capacity as the issuer of
Letters of Credit hereunder, and its successors in such capacity as provided in
Section 2.05(i).
"LC Disbursement" means a payment made by the Issuing Bank
pursuant to a Letter of Credit.
"LC Exposure" means, at any time, the sum of (a) the aggregate
undrawn amount of all outstanding Letters of Credit at such time plus (b) the
aggregate amount of all LC Disbursements that have not yet been reimbursed by or
on behalf of the Borrower at such time. The LC Exposure of any Lender at any
time shall be its Applicable Percentage of the total LC Exposure at such time.
"Lenders" means the Persons listed on Schedule 2.01 and any
other Person that shall have become a party hereto pursuant to an Assignment and
Acceptance, other than any such Person that ceases to be a party hereto pursuant
to an Assignment and Acceptance.
<PAGE> 13
9
"Letter of Credit" means any letter of credit issued pursuant
to this Agreement.
"LIBO Rate" means, with respect to any Eurodollar Borrowing
for any Interest Period, the rate appearing on Page 3750 of the Telerate Service
(or on any successor or substitute page of such Service, or any successor to or
substitute for such Service, providing rate quotations comparable to those
currently provided on such page of such Service, as determined by the
Administrative Agent from time to time for purposes of providing quotations of
interest rates applicable to dollar deposits in the London interbank market) at
approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such Interest Period, as the rate for dollar deposits with a
maturity comparable to such Interest Period. In the event that such rate is not
available at such time for any reason, then the "LIBO Rate" with respect to such
Eurodollar Borrowing for such Interest Period shall be the rate at which dollar
deposits of $5,000,000 and for a maturity comparable to such Interest Period are
offered by the principal London office of the Administrative Agent in
immediately available funds in the London interbank market at approximately
11:00 a.m., London time, two Business Days prior to the commencement of such
Interest Period.
"Lien" means, with respect to any asset, (a) any mortgage,
deed of trust, lien, pledge, hypothecation, encumbrance, charge or security
interest in, on or of such asset and (b) the interest of a vendor or a lessor
under any conditional sale agreement, capital lease or title retention agreement
(or any financing lease having substantially the same economic effect as any of
the foregoing) relating to such asset.
"Loans" means the loans made by the Lenders to the Borrower
pursuant to this Agreement.
"Margin" means, with respect to any Competitive Loan bearing
interest at a rate based on the LIBO Rate, the marginal rate of interest, if
any, to be added to or subtracted from the LIBO Rate to determine the rate of
interest applicable to such Loan, as specified by the Lender making such Loan in
its related Competitive Bid.
"Material Adverse Effect" means a material adverse effect on
(a) the business, assets, operations or condition, financial or otherwise, of
the Borrower and the Subsidiaries taken as a whole, (b) the ability of the
Borrower to perform any of its obligations under this Agreement or (c) the
rights of or benefits available to the Lenders under this Agreement.
"Material Indebtedness" means Indebtedness of any one or more
of the Borrower and its Subsidiaries in an aggregate principal amount exceeding
$50,000,000 of the type described in (i) clauses (a) and (b) of the definition
of Indebtedness and (ii) clause (g) of the definition of Indebtedness (to the
extent that clause (g) relates to Indebtedness described in clauses (a) or (b)
of such definition), but excluding the Loans and Letters of Credit.
"Material Restricted Subsidiary" means each Restricted
Subsidiary that is a Material Subsidiary.
"Material Subsidiary" means each of (a) any Subsidiary of the
Borrower whose percentage of the Consolidated Net Tangible Assets represented by
such Subsidiary's portion of such
<PAGE> 14
10
Consolidated Net Tangible Assets (after intercompany eliminations) exceeds 10%
as of the end of the most recently-completed fiscal quarter, and (b) any other
Subsidiary which at the time shall have been designated by the Borrower as a
Material Subsidiary in an officers' certificate delivered to the Administrative
Agent for such purpose. As of the Effective Date, the only Subsidiary of the
Borrower that qualifies as a Material Subsidiary under clause (a) above is
PennzEnergy Exploration and Production, L.L.C., a Delaware limited liability
company.
"Maximum Rate" has the meaning assigned to such term in
Section 9.13.
"Moody's" means Moody's Investors Service, Inc.
"Multiemployer Plan" means a multiemployer plan as defined in
Section 4001(a)(3) of ERISA.
"Other Taxes" means any and all present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies arising from any payment made hereunder or from the execution, delivery
or enforcement of, or otherwise with respect to, this Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation referred
to and defined in ERISA and any successor entity performing similar functions.
"Permitted Investments" means:
(a) direct obligations of, or obligations on which the
principal of and interest are unconditionally guaranteed by, the United
States of America (or by any agency thereof to the extent such
obligations are backed by the full faith and credit of the United
States of America), in each case maturing within one year from the date
of acquisition thereof;
(b) investments in commercial paper maturing within 270 days
from the date of acquisition thereof and having, at such date of
acquisition, the highest credit rating obtainable from S&P, from
Moody's or from Duff & Phelps;
(c) investments in certificates of deposit, banker's
acceptances and time deposits maturing within 180 days from the date of
acquisition thereof issued or guaranteed by or placed with, and money
market deposit accounts issued or offered by, any domestic office of
any commercial bank organized under the laws of the United States of
America or any State thereof which has a combined capital and surplus
and undivided profits of not less than $1,000,000,000; and
(d) fully collateralized repurchase agreements with a term of
not more than 30 days for securities described in clause (a) above and
entered into with a financial institution satisfying the criteria
described in clause (c) above.
"Person" means any natural person, corporation, limited
liability company, trust, joint venture, association, company, partnership,
Governmental Authority or other entity.
<PAGE> 15
11
"Plan" means any employee pension benefit plan (other than a
Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section
412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or
any ERISA Affiliate is (or, if such plan were terminated, would under Section
4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of
ERISA.
"Prime Rate" means the rate of interest per annum publicly
announced from time to time by Chase Bank of Texas, National Association as its
prime rate in effect at its principal office in Houston, Texas; each change in
the Prime Rate shall be effective from and including the date such change is
publicly announced as being effective.
"Prior Credit Facility" means that certain Amended and
Restated Revolving Credit Agreement dated as of August 20, 1993 by and among
Pennzoil Company, the banking institutions party thereto and Chase Bank of
Texas, National Association (f/k/a Texas Commerce Bank National Association), as
Administrative Agent, as amended from time to time.
"Register" has the meaning set forth in Section 9.04.
"Related Parties" means, with respect to any specified Person,
such Person's Affiliates and the respective directors, officers, employees,
agents and advisors of such Person and such Person's Affiliates.
"Required Lenders" means, at any time, Lenders having
Committed Credit Exposures and unused Commitments representing 66-2/3% or more
of the sum of the total Committed Credit Exposures and unused Commitments at
such time; provided that, for purposes of declaring the Loans to be due and
payable pursuant to Article VII, and for all purposes after the Loans become due
and payable pursuant to Article VII or the Commitments expire or terminate, the
outstanding Competitive Loans of the Lenders shall be added to their respective
Committed Credit Exposures and to the total Committed Credit Exposures in
determining the Required Lenders.
"Restricted Subsidiary" means each Subsidiary of the Borrower
that is not an Unrestricted Subsidiary.
"Revolving Credit Exposure" means, with respect to any Lender
at any time, the sum of the outstanding principal amount of such Lender's
Revolving Loans and its LC Exposure at such time.
"Revolving Loan" means a Loan made pursuant to Section 2.03.
"Revolving Loan Maturity Date" means November 16, 1999.
"S&P" means Standard & Poor's Ratings Group, a division of The
McGraw Hill Companies, Inc.
"Securities Act" means the Securities Act of 1933, as amended
"Statutory Reserve Adjustment Factor" means a fraction
(expressed as a decimal), the numerator of which is the number one and the
denominator of which is the number one minus the
<PAGE> 16
12
aggregate of the maximum reserve percentages (including any marginal, special,
emergency or supplemental reserves) expressed as a decimal established by the
Board to which the Administrative Agent is subject with respect to the Adjusted
LIBO Rate, for eurocurrency funding (currently referred to as "Eurocurrency
Liabilities" in Regulation D of the Board). Such reserve percentages shall
include those imposed pursuant to such Regulation D. Eurodollar Loans shall be
deemed to constitute eurocurrency funding and to be subject to such reserve
requirements without benefit of or credit for proration, exemptions or offsets
that may be available from time to time to any Lender under such Regulation D or
any comparable regulation. The Statutory Reserve Adjustment Factor shall be
adjusted automatically on and as of the effective date of any change in any
reserve percentage.
"subsidiary" means, with respect to any Person (the "parent")
at any date, any corporation, limited liability company, partnership,
association or other entity the accounts of which would be consolidated with
those of the parent in the parent's consolidated financial statements if such
financial statements were prepared in accordance with GAAP as of such date, as
well as any other corporation, limited liability company, partnership,
association or other entity (a) of which securities or other ownership interests
representing more than 50% of the equity or more than 50% of the ordinary voting
power or, in the case of a partnership, more than 50% of the general partnership
interests are, as of such date, owned, controlled or held, or (b) that is, as of
such date, otherwise Controlled, by the parent or one or more subsidiaries of
the parent or by the parent and one or more subsidiaries of the parent.
"Subsidiary" means any subsidiary of the Borrower.
"Taxes" means any and all present or future taxes, levies,
imposts, duties, deductions, charges or withholdings imposed by any Governmental
Authority.
"Term Loan" means a Revolving Loan that is converted to a term
Loan with a maturity of not greater than one year pursuant to Section 2.02(e).
"Transactions" means the execution, delivery and performance
by the Borrower of this Agreement, the borrowing of Loans, the use of the
proceeds thereof and the issuance of Letters of Credit hereunder.
"Type", when used in reference to any Loan or Borrowing,
refers to whether the rate of interest on such Loan, or on the Loans comprising
such Borrowing, is determined by reference to the Adjusted LIBO Rate, the
Alternate Base Rate or, in the case of a Competitive Loan or Borrowing, the LIBO
Rate or a Fixed Rate.
"Unrestricted Subsidiary" shall mean any Subsidiary of the
Borrower designated an "Unrestricted Subsidiary" by the Borrower (which
designation is approved by its Board of Directors), provided, that in each case,
after giving effect to such designation, no Default exists. Notice of any such
designation by the Borrower shall be delivered by the Borrower to the
Administrative Agent by promptly filing with the Administrative Agent a copy of
the resolutions of the Board of Directors of the Borrower approving such
designation and a certificate of an officer of the Borrower certifying that such
designation complies with the requirements of this definition. Such designation
shall become effective upon receipt by the Administrative Agent of the
foregoing. Each Unrestricted Subsidiary designated hereunder shall continue to
be treated as an Unrestricted Subsidiary for purposes of this Agreement until
<PAGE> 17
13
the Borrower shall deliver notice to the Administrative Agent pursuant to and in
compliance with Section 6.05 reversing such designation with respect to any such
Subsidiary.
"Voting Stock" means all outstanding shares (calculated on a
fully diluted basis) of capital stock of the Borrower that are entitled to vote
generally in the election of directors of the Borrower.
"Wholly Owned Subsidiary" means a corporation all the
outstanding voting stock (other than any directors' qualifying shares) of which
is owned, directly or indirectly, by the Borrower or by one or more other Wholly
Owned Subsidiaries, or by the Borrower and one or more other Wholly Owned
Subsidiaries. For the purposes of this definition, "voting stock" means stock
which ordinarily has voting power for the election of directors, whether at all
times or only so long as no senior class of stock has such voting power by
reason of any contingency.
"Withdrawal Liability" means liability to a Multiemployer Plan
as a result of a complete or partial withdrawal from such Multiemployer Plan, as
such terms are defined in Part I of Subtitle E of Title IV of ERISA.
SECTION 1.02. Classification of Loans and Borrowings. For
purposes of this Agreement, Loans may be classified and referred to by Class
(e.g., a "Revolving Loan") or by Type (e.g., a "Eurodollar Loan") or by Class
and Type (e.g., a "Eurodollar Revolving Loan"). Borrowings also may be
classified and referred to by Class (e.g., a "Revolving Borrowing") or by Type
(e.g., a "Eurodollar Borrowing") or by Class and Type (e.g., a "Eurodollar
Revolving Borrowing").
SECTION 1.03. Terms Generally. The definitions of terms herein
shall apply equally to the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
The word "will" shall be construed to have the same meaning and effect as the
word "shall". Unless the context requires otherwise (a) any definition of or
reference to any agreement, instrument or other document herein shall be
construed as referring to such agreement, instrument or other document as from
time to time amended, supplemented or otherwise modified (subject to any
restrictions on such amendments, supplements or modifications set forth herein),
(b) any reference herein to any Person shall be construed to include such
Person's successors and assigns, (c) the words "herein", "hereof" and
"hereunder", and words of similar import, shall be construed to refer to this
Agreement in its entirety and not to any particular provision hereof, (d) all
references herein to Articles, Sections, Exhibits and Schedules shall be
construed to refer to Articles and Sections of, and Exhibits and Schedules to,
this Agreement and (e) the words "asset" and "property" shall be construed to
have the same meaning and effect and to refer to any and all tangible and
intangible assets and properties, including cash, securities, accounts and
contract rights.
SECTION 1.04. Accounting Terms; GAAP. Except as otherwise
expressly provided herein, all terms of an accounting or financial nature shall
be construed in accordance with GAAP, as in effect from time to time; provided
that, if the Borrower notifies the Administrative Agent that the Borrower
requests an amendment to any provision hereof to eliminate the effect of any
change occurring
<PAGE> 18
14
after the date hereof in GAAP or in the application thereof on the operation of
such provision (or if the Administrative Agent notifies the Borrower that the
Required Lenders request an amendment to any provision hereof for such purpose),
regardless of whether any such notice is given before or after such change in
GAAP or in the application thereof, then such provision shall be interpreted on
the basis of GAAP as in effect and applied immediately before such change shall
have become effective until such notice shall have been withdrawn or such
provision amended in accordance herewith.
ARTICLE II
The Credits
SECTION 2.01. Commitments. Subject to the terms and conditions
set forth herein, each Lender agrees to (i) make Revolving Loans to the Borrower
from time to time during the Availability Period in an aggregate principal
amount that will not result in (a) such Lender's Revolving Credit Exposure
exceeding such Lender's Commitment or (b) the sum of the total Revolving Credit
Exposures plus the aggregate principal amount of outstanding Competitive Loans
exceeding the total Commitments; and (ii) at the election of the Borrower, to
convert the principal amount of any Revolving Loans remaining outstanding on the
Revolving Loan Maturity Date to a Term Loan. Within the foregoing limits and
subject to the terms and conditions set forth herein, the Borrower may borrow,
prepay and reborrow Revolving Loans.
SECTION 2.02. Loans and Borrowings. (a) Each Committed Loan
shall be made as part of a Borrowing consisting of Committed Loans made by the
Lenders ratably in accordance with their respective Commitments. Each
Competitive Loan shall be made in accordance with the procedures set forth in
Section 2.04. The failure of any Lender to make any Loan required to be made by
it shall not relieve any other Lender of its obligations hereunder; provided
that the Commitments and Competitive Bids of the Lenders are several and no
Lender shall be responsible for any other Lender's failure to make Loans as
required.
(b) Subject to Section 2.13, (i) each Committed Borrowing
shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may
request in accordance herewith, and (ii) each Competitive Borrowing shall be
comprised entirely of Eurodollar Loans or Fixed Rate Loans as the Borrower may
request in accordance herewith. Each Lender at its option may make any
Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such
Lender to make such Loan; provided that any exercise of such option shall not
affect the obligation of the Borrower to repay such Loan in accordance with the
terms of this Agreement.
(c) At the commencement of each Interest Period for any
Eurodollar Committed Borrowing, such Borrowing shall be in an aggregate amount
that is an integral multiple of $1,000,000 and not less than $10,000,000;
provided that a Eurodollar Committed Borrowing may be in an aggregate amount
that is less than $10,000,000, but greater than $5,000,000, and that is equal to
the entire unused balance of the total Commitments. At the time that each ABR
Committed Borrowing is made, such Borrowing shall be in an aggregate amount that
is an integral multiple of $1,000,000 and not less than $5,000,000; provided
that an ABR Committed Borrowing may be in an aggregate amount that is equal to
the entire unused balance of the total Commitments or that is required to
finance the reimbursement
<PAGE> 19
15
of an LC Disbursement as contemplated by Section 2.05(e). Each Competitive
Borrowing shall be in an aggregate amount that is an integral multiple of
$1,000,000 and not less than $15,000,000. Borrowings of more than one Type and
Class may be outstanding at the same time; provided that there shall not at any
time be more than a total of ten Eurodollar Committed Borrowings outstanding.
(d) Notwithstanding any other provision of this Agreement, (i)
the Borrower shall not be entitled to request, or to elect to convert (except
for a conversion to a Term Loan pursuant to Section 2.02(e))or continue, any
Borrowing containing Revolving Loans if the Interest Period requested with
respect thereto would end after the Revolving Loan Maturity Date and (ii) the
Borrower shall not be entitled to request, or to elect to convert or continue,
any Borrowing containing Term Loans if the Interest Period requested with
respect thereto would end after the Final Maturity Date.
(e) At the option of the Borrower, upon written notice
delivered to the Administrative Agent no later than 10 Business Days prior to
the Revolving Loan Maturity Date, so long as no Default has occurred and is
continuing, the aggregate principal amount of any Revolving Loans remaining
outstanding at the close of the Administrative Agent's business on the Revolving
Loan Maturity Date shall automatically convert to Term Loans with a maturity of
no greater than one year. Any portion of each Lender's Commitment not utilized
on or before the Revolving Loan Maturity Date shall be permanently cancelled.
Any Term Loans that are prepaid may not be reborrowed.
SECTION 2.03. Requests for Revolving Borrowings. To request a
Revolving Borrowing, the Borrower shall notify the Administrative Agent of such
request by telephone (a) in the case of a Eurodollar Borrowing, not later than
11:00 a.m., Houston, Texas time, three Business Days before the date of the
proposed Borrowing, or (b) in the case of an ABR Borrowing, not later than 11:00
a.m., Houston, Texas time, on the date of the proposed Borrowing; provided that
any such notice of an ABR Revolving Borrowing to finance the reimbursement of an
LC Disbursement as contemplated by Section 2.05(e) may be given not later than
10:00 a.m., Houston, Texas time, on the date of the proposed Borrowing. Each
such telephonic Borrowing Request shall be irrevocable and shall be confirmed
promptly by hand delivery or telecopy to the Administrative Agent of a written
Borrowing Request in a form approved by the Administrative Agent and signed by
the Borrower. Each such telephonic and written Borrowing Request shall specify
the following information in compliance with Section 2.02:
(i) the aggregate amount of the requested Borrowing;
(ii) the date of such Borrowing, which shall be a Business
Day;
(iii) whether such Borrowing is to be an ABR Borrowing or a
Eurodollar Borrowing;
(iv) in the case of a Eurodollar Borrowing, the initial
Interest Period to be applicable thereto, which shall be a period contemplated
by the definition of the term "Interest Period"; and
(v) the location and number of the Borrower's account to which
funds are to be disbursed, which shall comply with the requirements of Section
2.06.
If no election as to the Type of Revolving Borrowing is specified, then the
requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period
is specified with respect to any requested
<PAGE> 20
16
Eurodollar Revolving Borrowing, then the Borrower shall be deemed to have
selected an Interest Period of one month's duration. Promptly following receipt
of a Borrowing Request in accordance with this Section, the Administrative Agent
shall advise each Lender of the details thereof and of the amount of such
Lender's Loan to be made as part of the requested Borrowing.
SECTION 2.04. Competitive Bid Procedure. (a) Subject to the
terms and conditions set forth herein, from time to time during the Availability
Period the Borrower may request Competitive Bids and may (but shall not have any
obligation to) accept Competitive Bids and borrow Competitive Loans; provided
that the sum of the total Committed Credit Exposures plus the aggregate
principal amount of outstanding Competitive Loans at any time shall not exceed
the total Commitments. To request Competitive Bids, the Borrower shall notify
the Administrative Agent of such request by telephone, in the case of a
Eurodollar Borrowing, not later than 11:00 a.m., Houston, Texas time, four
Business Days before the date of the proposed Borrowing and, in the case of a
Fixed Rate Borrowing, not later than 10:00 a.m., Houston, Texas time, one
Business Day before the date of the proposed Borrowing. Each such telephonic
Competitive Bid Request shall be confirmed promptly by hand delivery or telecopy
to the Administrative Agent of a written Competitive Bid Request in a form
approved by the Administrative Agent and signed by the Borrower. Each such
telephonic and written Competitive Bid Request shall specify the following
information in compliance with Section 2.02:
(i) the aggregate amount of the requested Borrowing;
(ii) the date of such Borrowing, which shall be a Business
Day;
(iii) whether such Borrowing is to be a Eurodollar Borrowing
or a Fixed Rate Borrowing;
(iv) the Interest Period to be applicable to such Borrowing,
which shall be a period contemplated by the definition of the term "Interest
Period"; and
(v) the location and number of the Borrower's account to which
funds are to be disbursed, which shall comply with the requirements of Section
2.07.
Promptly following receipt of a Competitive Bid Request in accordance with this
Section, the Administrative Agent shall notify the Lenders of the details
thereof by telecopy, inviting the Lenders to submit Competitive Bids.
(b) Each Lender may (but shall not have any obligation to)
make one or more Competitive Bids to the Borrower in response to a Competitive
Bid Request. Each Competitive Bid by a Lender must be in a form approved by the
Administrative Agent and must be received by the Administrative Agent by
telecopy, in the case of a Eurodollar Competitive Borrowing, not later than 9:30
a.m., Houston, Texas time, three Business Days before the proposed date of such
Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than
9:30 a.m., Houston, Texas time, on the proposed date of such Competitive
Borrowing. Competitive Bids that do not conform substantially to the form
approved by the Administrative Agent may be rejected by the Administrative
Agent, and the Administrative Agent shall notify the applicable Lender as
promptly as practicable. Each Competitive Bid shall specify (i) the principal
amount (which shall be a minimum of $15,000,000 and
<PAGE> 21
17
an integral multiple of $1,000,000 and which may equal the entire principal
amount of the Competitive Borrowing requested by the Borrower) of the
Competitive Loan or Loans that the Lender is willing to make, (ii) the
Competitive Bid Rate or Rates at which the Lender is prepared to make such Loan
or Loans (expressed as a percentage rate per annum in the form of a decimal to
no more than four decimal places) and (iii) the Interest Period applicable to
each such Loan and the last day thereof.
(c) The Administrative Agent shall promptly notify the
Borrower by telecopy of the Competitive Bid Rate and the principal amount
specified in each Competitive Bid and the identity of the Lender that shall have
made such Competitive Bid.
(d) Subject only to the provisions of this paragraph, the
Borrower may accept or reject any Competitive Bid. The Borrower shall notify the
Administrative Agent by telephone, confirmed by telecopy in a form approved by
the Administrative Agent, whether and to what extent it has decided to accept or
reject each Competitive Bid, in the case of a Eurodollar Competitive Borrowing,
not later than 10:30 a.m., Houston, Texas time, three Business Days before the
date of the proposed Competitive Borrowing, and in the case of a Fixed Rate
Borrowing, not later than 10:30 a.m., Houston, Texas time, on the proposed date
of the Competitive Borrowing; provided that (i) the failure of the Borrower to
give such notice by such required time shall be deemed to be a rejection of each
Competitive Bid, (ii) the Borrower shall not accept a Competitive Bid made at a
particular Competitive Bid Rate if the Borrower rejects a Competitive Bid made
at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive
Bids accepted by the Borrower shall not exceed the aggregate amount of the
requested Competitive Borrowing specified in the related Competitive Bid
Request, (iv) to the extent necessary to comply with clause (iii) above, the
Borrower may accept Competitive Bids at the same Competitive Bid Rate in part,
which acceptance, in the case of multiple Competitive Bids at such Competitive
Bid Rate, shall be made pro rata in accordance with the amount of each such
Competitive Bid, and (v) except pursuant to clause (iv) above, no Competitive
Bid shall be accepted for a Competitive Loan unless such Competitive Loan is in
a minimum principal amount of $15,000,000 and an integral multiple of
$1,000,000; provided further that if a Competitive Loan must be in an amount
less than $15,000,000 because of the provisions of clause (iv) above, such
Competitive Loan may be for a minimum of $1,000,000 or any integral multiple
thereof, and in calculating the pro rata allocation of acceptances of portions
of multiple Competitive Bids at a particular Competitive Bid Rate pursuant to
clause (iv) the amounts shall be rounded to integral multiples of $1,000,000 in
a manner determined by the Borrower. A notice given by the Borrower pursuant to
this paragraph shall be irrevocable.
(e) The Administrative Agent shall promptly notify each
bidding Lender by telecopy whether or not its Competitive Bid has been accepted
(and, if so, the amount and Competitive Bid Rate so accepted), and each
successful bidder will thereupon become bound, subject to the terms and
conditions hereof, to make the Competitive Loan in respect of which its
Competitive Bid has been accepted.
(f) If the Administrative Agent shall elect to submit a
Competitive Bid in its capacity as a Lender, it shall submit such Competitive
Bid directly to the Borrower at least one quarter of an hour earlier than the
time by which the other Lenders are required to submit their Competitive Bids to
the Administrative Agent pursuant to paragraph (b) of this Section.
<PAGE> 22
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SECTION 2.05. Letters of Credit. (a) General. Subject to the
terms and conditions set forth herein, the Borrower may request the issuance of
Letters of Credit for its own account, in a form reasonably acceptable to the
Administrative Agent and the Issuing Bank, at any time and from time to time
during the Availability Period. In the event of any inconsistency between the
terms and conditions of this Agreement and the terms and conditions of any form
of letter of credit application or other agreement submitted by the Borrower to,
or entered into by the Borrower with, the Issuing Bank relating to any Letter of
Credit, the terms and conditions of this Agreement shall control.
(b) Notice of Issuance, Amendment, Renewal, Extension; Certain
Conditions. To request the issuance of a Letter of Credit (or the amendment,
renewal or extension of an outstanding Letter of Credit), the Borrower shall
hand deliver or telecopy (or transmit by electronic communication, if
arrangements for doing so have been approved by the Issuing Bank) to the Issuing
Bank and the Administrative Agent (reasonably in advance of the requested date
of issuance, amendment, renewal or extension) a notice requesting the issuance
of a Letter of Credit, or identifying the Letter of Credit to be amended,
renewed or extended, and specifying the date of issuance, amendment, renewal or
extension (which shall be a Business Day), the date on which such Letter of
Credit is to expire (which shall comply with paragraph (c) of this Section), the
amount of such Letter of Credit, the name and address of the beneficiary thereof
and such other information as shall be necessary to prepare, amend, renew or
extend such Letter of Credit. If requested by the Issuing Bank, the Borrower
also shall submit a letter of credit application on the Issuing Bank's standard
form in connection with any request for a Letter of Credit. A Letter of Credit
shall be issued, amended, renewed or extended only if (and upon issuance,
amendment, renewal or extension of each Letter of Credit the Borrower shall be
deemed to represent and warrant that), after giving effect to such issuance,
amendment, renewal or extension (i) the LC Exposure shall not exceed
$100,000,000 and (ii) the sum of the total Revolving Credit Exposures plus the
aggregate principal amount of outstanding Competitive Loans shall not exceed the
total Commitments.
(c) Expiration Date. Each Letter of Credit shall expire at or
prior to the close of business on the date that is five Business Days prior to
the Revolving Loan Maturity Date.
(d) Participations. By the issuance of a Letter of Credit (or
an amendment to a Letter of Credit increasing the amount thereof) and without
any further action on the part of the Issuing Bank or the Lenders, the Issuing
Bank hereby grants to each Lender, and each Lender hereby acquires from the
Issuing Bank, a participation in such Letter of Credit equal to such Lender's
Applicable Percentage of the aggregate amount available to be drawn under such
Letter of Credit. In consideration and in furtherance of the foregoing, each
Lender hereby absolutely and unconditionally agrees to pay to the Administrative
Agent, for the account of the Issuing Bank, such Lender's Applicable Percentage
of each LC Disbursement made by the Issuing Bank and not reimbursed by the
Borrower on the date due as provided in paragraph (e) of this Section, or of any
reimbursement payment required to be refunded to the Borrower for any reason.
Each Lender acknowledges and agrees that its obligation to acquire
participations pursuant to this paragraph in respect of Letters of Credit is
absolute and unconditional and shall not be affected by any circumstance
whatsoever, including any amendment, renewal or extension of any Letter of
Credit or the occurrence and continuance of a Default or reduction or
termination of the Commitments, and that each such payment shall be made without
any offset, abatement, withholding or reduction whatsoever.
<PAGE> 23
19
(e) Reimbursement. If the Issuing Bank shall make any LC
Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such
LC Disbursement by paying to the Administrative Agent an amount equal to such LC
Disbursement not later than 12:00 noon, Houston, Texas time, on the date that
such LC Disbursement is made, if the Borrower shall have received notice of such
LC Disbursement prior to 10:00 a.m., Houston, Texas time, on such date, or, if
such notice has not been received by the Borrower prior to such time on such
date, then not later than 12:00 noon, Houston, Texas time, on (i) the Business
Day that the Borrower receives such notice, if such notice is received prior to
10:00 a.m., Houston, Texas time, on the day of receipt, or (ii) the Business Day
immediately following the day that the Borrower receives such notice, if such
notice is not received prior to such time on the day of receipt; provided that
the Borrower may, subject to the conditions to borrowing set forth herein,
request in accordance with Section 2.03 that such payment be financed with an
ABR Revolving Borrowing in an equivalent amount and, to the extent so financed,
the Borrower's obligation to make such payment shall be discharged and replaced
by the resulting ABR Revolving Borrowing. If the Borrower fails to make such
payment when due, the Administrative Agent shall notify each Lender of the
applicable LC Disbursement, the payment then due from the Borrower in respect
thereof and such Lender's Applicable Percentage thereof. Promptly following
receipt of such notice, each Lender shall pay to the Administrative Agent its
Applicable Percentage of the payment then due from the Borrower, in the same
manner as provided in Section 2.06 with respect to Loans made by such Lender
(and Section 2.06 shall apply, mutatis mutandis, to the payment obligations of
the Lenders), and the Administrative Agent shall promptly pay to the Issuing
Bank the amounts so received by it from the Lenders. Promptly following receipt
by the Administrative Agent of any payment from the Borrower pursuant to this
paragraph, the Administrative Agent shall distribute such payment to the Issuing
Bank or, to the extent that Lenders have made payments pursuant to this
paragraph to reimburse the Issuing Bank, then to such Lenders and the Issuing
Bank as their interests may appear. Any payment made by a Lender pursuant to
this paragraph to reimburse the Issuing Bank for any LC Disbursement (other than
the funding of ABR Revolving Loans as contemplated above) shall not constitute a
Loan and shall not relieve the Borrower of its obligation to reimburse such LC
Disbursement.
(f) Obligations Absolute. The Borrower's obligation to
reimburse LC Disbursements as provided in paragraph (e) of this Section shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement under any and all circumstances
whatsoever and irrespective of (i) any lack of validity or enforceability of any
Letter of Credit or this Agreement, or any term or provision therein, (ii) any
draft or other document presented under a Letter of Credit proving to be forged,
fraudulent or invalid in any respect or any statement therein being untrue or
inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of
Credit against presentation of a draft or other document that does not comply
with the terms of such Letter of Credit, or (iv) any other event or circumstance
whatsoever, whether or not similar to any of the foregoing, that might, but for
the provisions of this Section, constitute a legal or equitable discharge of, or
provide a right of setoff against, the Borrower's obligations hereunder. Neither
the Administrative Agent, the Lenders nor the Issuing Bank, nor any of their
Related Parties, shall have any liability or responsibility by reason of or in
connection with the issuance or transfer of any Letter of Credit or any payment
or failure to make any payment thereunder (irrespective of any of the
circumstances referred to in the preceding sentence), or any error, omission,
interruption, loss or delay in transmission or delivery of any draft, notice or
other communication under or relating to any Letter of Credit (including any
document required to make a drawing thereunder), any error in interpretation of
technical terms or any consequence arising from causes beyond the control of the
Issuing Bank; provided that the foregoing
<PAGE> 24
20
shall not be construed to excuse the Issuing Bank from liability to the Borrower
to the extent of any direct damages (as opposed to consequential damages, claims
in respect of which are hereby waived by the Borrower to the extent permitted by
applicable law) suffered by the Borrower that are caused by the Issuing Bank's
failure to exercise care when determining whether drafts and other documents
presented under a Letter of Credit comply with the terms thereof. The parties
hereto expressly agree that, in the absence of gross negligence or wilful
misconduct on the part of the Issuing Bank (as finally determined by a court of
competent jurisdiction), the Issuing Bank shall be deemed to have exercised care
in each such determination. In furtherance of the foregoing and without limiting
the generality thereof, the parties agree that, with respect to documents
presented which appear on their face to be in substantial compliance with the
terms of a Letter of Credit, the Issuing Bank may, in its sole discretion,
either accept and make payment upon such documents without responsibility for
further investigation, regardless of any notice or information to the contrary,
or refuse to accept and make payment upon such documents if such documents are
not in strict compliance with the terms of such Letter of Credit.
(g) Disbursement Procedures. The Issuing Bank shall, promptly
following its receipt thereof, examine all documents purporting to represent a
demand for payment under a Letter of Credit. The Issuing Bank shall promptly
notify the Administrative Agent and the Borrower by telephone (confirmed by
telecopy) of such demand for payment and whether the Issuing Bank has made or
will make an LC Disbursement thereunder; provided that any failure to give or
delay in giving such notice shall not relieve the Borrower of its obligation to
reimburse the Issuing Bank and the Lenders with respect to any such LC
Disbursement.
(h) Interim Interest. If the Issuing Bank shall make any LC
Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in
full on the date such LC Disbursement is made, the unpaid amount thereof shall
bear interest, for each day from and including the date such LC Disbursement is
made to but excluding the date that the Borrower reimburses such LC
Disbursement, at the rate per annum then applicable to ABR Committed Loans;
provided that, if the Borrower fails to reimburse such LC Disbursement when due
pursuant to paragraph (e) of this Section, then Section 2.12(d) shall apply.
Interest accrued pursuant to this paragraph shall be for the account of the
Issuing Bank, except that interest accrued on and after the date of payment by
any Lender pursuant to paragraph (e) of this Section to reimburse the Issuing
Bank shall be for the account of such Lender to the extent of such payment.
(i) Replacement of the Issuing Bank. The Issuing Bank may be
replaced at any time by written agreement among the Borrower, the Administrative
Agent, the replaced Issuing Bank and the successor Issuing Bank. The
Administrative Agent shall notify the Lenders of any such replacement of the
Issuing Bank. At the time any such replacement shall become effective, the
Borrower shall pay all unpaid fees accrued for the account of the replaced
Issuing Bank pursuant to Section 2.11(b). From and after the effective date of
any such replacement, (i) the successor Issuing Bank shall have all the rights
and obligations of the Issuing Bank under this Agreement with respect to Letters
of Credit to be issued thereafter and (ii) references herein to the term
"Issuing Bank" shall be deemed to refer to such successor or to any previous
Issuing Bank, or to such successor and all previous Issuing Banks, as the
context shall require. After the replacement of an Issuing Bank hereunder, the
replaced Issuing Bank shall remain a party hereto and shall continue to have all
the rights and obligations of an Issuing Bank under this Agreement with respect
to Letters of Credit issued by it prior to such replacement, but shall not be
required to issue additional Letters of Credit.
<PAGE> 25
21
(j) Cash Collateralization. If any Event of Default shall
occur and be continuing, on the Business Day that the Borrower receives notice
from the Administrative Agent or the Required Lenders (or, if the maturity of
the Loans has been accelerated, Lenders with LC Exposure representing at least
51% of the total LC Exposure) demanding the deposit of cash collateral pursuant
to this paragraph, the Borrower shall deposit in an account with the
Administrative Agent, in the name of the Administrative Agent and for the
benefit of the Lenders, an amount in cash equal to the LC Exposure as of such
date plus any accrued and unpaid interest thereon; provided that the obligation
to deposit such cash collateral shall become effective immediately, and such
deposit shall become immediately due and payable, without demand or other notice
of any kind, upon the occurrence of any Event of Default with respect to the
Borrower described in clause (h) or (i) of Article VII. Such deposit shall be
held by the Administrative Agent as collateral for the payment and performance
of the obligations of the Borrower under this Agreement. The Administrative
Agent shall have exclusive dominion and control, including the exclusive right
of withdrawal, over such account. Other than any interest earned on the
investment of such deposits, which investments shall be Permitted Investments
and shall be made at the Borrower's risk and expense, such deposits shall not
bear interest. Interest or profits, if any, on such investments shall accumulate
in such account. Moneys in such account shall be applied by the Administrative
Agent to reimburse the Issuing Bank for LC Disbursements for which it has not
been reimbursed and, to the extent not so applied, shall be held for the
satisfaction of the reimbursement obligations of the Borrower for the LC
Exposure at such time or, if the maturity of the Loans has been accelerated (but
subject to the consent of Lenders with LC Exposure representing at least 51% of
the total LC Exposure), be applied to satisfy other obligations of the Borrower
under this Agreement. If the Borrower is required to provide an amount of cash
collateral hereunder as a result of the occurrence of an Event of Default, such
amount (to the extent not applied as aforesaid) shall be returned to the
Borrower within three Business Days after all Events of Default have been cured
or waived.
SECTION 2.06. Funding of Borrowings. (a) Each Lender shall
make each Loan to be made by it hereunder on the proposed date thereof by wire
transfer of immediately available funds by 12:00 noon, Houston, Texas time, to
the account of the Administrative Agent most recently designated by it for such
purpose by notice to the Lenders. The Administrative Agent will make such Loans
available to the Borrower by promptly crediting the amounts so received, in like
funds, to an account of the Borrower maintained with the Administrative Agent in
Houston, Texas and designated by the Borrower in the applicable Borrowing
Request or Competitive Bid Request; provided that ABR Revolving Loans made to
finance the reimbursement of an LC Disbursement as provided in Section 2.05(e)
shall be remitted by the Administrative Agent to the Issuing Bank.
(b) Unless the Administrative Agent shall have received notice
from a Lender prior to the proposed date of any Borrowing that such Lender will
not make available to the Administrative Agent such Lender's share of such
Borrowing, the Administrative Agent may assume that such Lender has made such
share available on such date in accordance with paragraph (a) of this Section
and may, in reliance upon such assumption, make available to the Borrower a
corresponding amount. In such event, if a Lender has not in fact made its share
of the applicable Borrowing available to the Administrative Agent, then the
applicable Lender and the Borrower severally agree to pay to the Administrative
Agent forthwith on demand such corresponding amount with interest thereon, for
each day from and including the date such amount is made available to the
Borrower to but excluding the date of payment to the Administrative Agent, at
(i) in the case of such Lender, the greater of the Federal Funds Effective Rate
and a rate determined by the Administrative Agent in accordance with banking
<PAGE> 26
22
industry rules on interbank compensation or (ii) in the case of the Borrower,
the interest rate applicable to ABR Loans. If such Lender pays such amount to
the Administrative Agent, then such amount shall constitute such Lender's Loan
included in such Borrowing.
SECTION 2.07. Interest Elections. (a) Each Revolving Borrowing
initially shall be of the Type specified in the applicable Borrowing Request
and, in the case of a Eurodollar Committed Borrowing, shall have an initial
Interest Period as specified in such Borrowing Request. Thereafter, the Borrower
may elect to convert such Borrowing to a different Type or to continue such
Borrowing and, in the case of a Eurodollar Committed Borrowing, may elect
Interest Periods therefor, all as provided in this Section. The Borrower may
elect different options with respect to different portions of the affected
Borrowing, in which case each such portion shall be allocated ratably among the
Lenders holding the Loans comprising such Borrowing, and the Loans comprising
each such portion shall be considered a separate Borrowing. This Section shall
not apply to Competitive Borrowings which may not be converted or continued.
(b) To make an election pursuant to this Section, the Borrower
shall notify the Administrative Agent of such election by telephone by the time
that a Borrowing Request would be required under Section 2.03 if the Borrower
were requesting a Revolving Borrowing of the Type resulting from such election
to be made on the effective date of such election. Each such telephonic Interest
Election Request shall be irrevocable and shall be confirmed promptly by hand
delivery or telecopy to the Administrative Agent of a written Interest Election
Request in a form approved by the Administrative Agent and signed by the
Borrower.
(c) Each telephonic and written Interest Election Request
shall specify the following information in compliance with Section 2.02:
(i) the Borrowing to which such Interest Election Request
applies and, if different options are being elected with respect to different
portions thereof, the portions thereof to be allocated to each resulting
Borrowing (in which case the information to be specified pursuant to clauses
(iii) and (iv) below shall be specified for each resulting Borrowing);
(ii) the effective date of the election made pursuant to such
Interest Election Request, which shall be a Business Day;
(iii) whether the resulting Borrowing is to be an ABR
Borrowing or a Eurodollar Borrowing; and
(iv) if the resulting Borrowing is a Eurodollar Borrowing, the
Interest Period to be applicable thereto after giving effect to such election,
which shall be a period contemplated by the definition of the term "Interest
Period".
If any such Interest Election Request requests a Eurodollar Borrowing but does
not specify an Interest Period, then the Borrower shall be deemed to have
selected an Interest Period of one month's duration.
(d) Promptly following receipt of an Interest Election
Request, the Administrative Agent shall advise each Lender of the details
thereof and of such Lender's portion of each resulting Borrowing.
<PAGE> 27
23
(e) If the Borrower fails to deliver a timely Interest
Election Request with respect to a Eurodollar Committed Borrowing prior to the
end of the Interest Period applicable thereto, then, unless such Borrowing is
repaid as provided herein, at the end of such Interest Period such Borrowing
shall be converted to an ABR Borrowing. Notwithstanding any contrary provision
hereof, if an Event of Default has occurred and is continuing and the
Administrative Agent, at the request of the Required Lenders, so notifies the
Borrower, then, so long as an Event of Default is continuing (i) no outstanding
Committed Borrowing may be converted to or continued as a Eurodollar Borrowing
and (ii) unless repaid, each Eurodollar Committed Borrowing shall be converted
to an ABR Borrowing at the end of the Interest Period applicable thereto.
SECTION 2.08. Termination and Reduction of Commitments. (a)
Unless previously terminated, the Commitments shall terminate on the Revolving
Loan Maturity Date as provided in Section 2.02(e).
(b) The Borrower may at any time terminate, or from time to
time reduce, the Commitments; provided that (i) each reduction of the
Commitments shall be in an amount that is an integral multiple of $10,000,000
and (ii) the Borrower shall not terminate or reduce the Commitments if, after
giving effect to any concurrent prepayment of the Loans in accordance with
Section 2.10, the sum of the Revolving Credit Exposures plus the aggregate
principal amount of outstanding Competitive Loans would exceed the total
Commitments.
(c) The Borrower shall notify the Administrative Agent of any
election to terminate or reduce the Commitments under paragraph (b) of this
Section at least three Business Days prior to the effective date of such
termination or reduction, specifying such election and the effective date
thereof. Promptly following receipt of any notice, the Administrative Agent
shall advise the Lenders of the contents thereof. Each notice delivered by the
Borrower pursuant to this Section shall be irrevocable; provided that a notice
of termination of the Commitments delivered by the Borrower may state that such
notice is conditioned upon the effectiveness of other credit facilities, in
which case such notice may be revoked by the Borrower (by notice to the
Administrative Agent on or prior to the specified effective date) if such
condition is not satisfied. Any termination or reduction of the Commitments
shall be permanent. Each reduction of the Commitments shall be made ratably
among the Lenders in accordance with their respective Commitments.
(d) The Borrower may, at its sole expense and effort, upon
notice to any Lender and the Administrative Agent, require such Lender to assign
and delegate, without recourse (in accordance with and subject to the
restrictions contained in Section 9.04), all its interests, rights and
obligations under this Agreement (other than any outstanding Competitive Loans
held by it) to an assignee that shall assume such obligations (which assignee
may be another Lender, if a Lender accepts such assignment); provided that (i)
for all assignees that are not at the time of such assignment a Lender, the
Borrower shall have received the prior written consent of the Administrative
Agent (and, if a Commitment is being assigned, the Issuing Bank), which consent
shall not unreasonably be withheld and (ii) such assigning Lender shall have
received payment of an amount equal to the outstanding principal of its Loans
(other than Competitive Loans) and participations in LC Disbursements, accrued
interest thereon, accrued fees and all other amounts payable to it hereunder,
from the assignee (to the extent of such outstanding principal and accrued
interest and fees) or the Borrower (in the case of all other amounts).
<PAGE> 28
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SECTION 2.09. Repayment of Loans; Evidence of Debt. (a) The
Borrower hereby unconditionally promises to pay (i) to the Administrative Agent
for the account of each Lender the then unpaid principal amount of each
Revolving Loan on the Revolving Loan Maturity Date, unless the same are
converted to Term Loans, (ii) to the Administrative Agent for the account of
each Lender the then unpaid principal amount of each Competitive Loan on the
last day of the Interest Period applicable to such Loan, and (iii) to the
Administrative Agent for the account of each Lender the then unpaid principal
amount of each Term Loan on the Final Maturity Date.
(b) Each Lender shall maintain in accordance with its usual
practice an account or accounts evidencing the indebtedness of the Borrower to
such Lender resulting from each Loan made by such Lender, including the amounts
of principal and interest payable and paid to such Lender from time to time
hereunder.
(c) The Administrative Agent shall maintain accounts in which
it shall record (i) the amount of each Loan made hereunder, the Class and Type
thereof and the Interest Period applicable thereto, (ii) the amount of any
principal or interest due and payable or to become due and payable from the
Borrower to each Lender hereunder and (iii) the amount of any sum received by
the Administrative Agent hereunder for the account of the Lenders and each
Lender's share thereof.
(d) The entries made in the accounts maintained pursuant to
paragraph (b) or (c) of this Section shall be prima facie evidence of the
existence and amounts of the obligations recorded therein; provided that the
failure of any Lender or the Administrative Agent to maintain such accounts or
any error therein shall not in any manner affect the obligation of the Borrower
to repay the Loans in accordance with the terms of this Agreement.
(e) Any Lender may request that Loans made by it be evidenced
by a promissory note. In such event, the Borrower shall prepare, execute and
deliver to such Lender a promissory note payable to the order of such Lender
(or, if requested by such Lender, to such Lender and its registered assigns) and
in a form approved by the Administrative Agent. Thereafter, the Loans evidenced
by such promissory note and interest thereon shall at all times (including after
assignment pursuant to Section 9.04) be represented by one or more promissory
notes in such form payable to the order of the payee named therein (or, if such
promissory note is a registered note, to such payee and its registered assigns).
SECTION 2.10. Prepayment of Loans. (a) The Borrower shall have
the right at any time and from time to time to prepay any Borrowing in whole or
in part, subject to prior notice in accordance with paragraph (b) of this
Section; provided that the Borrower shall not have the right to prepay any
Competitive Loan without the prior consent of the Lender thereof.
(b) The Borrower shall notify the Administrative Agent by
telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of
prepayment of a Eurodollar Committed Borrowing, not later than 11:00 a.m.,
Houston, Texas time, three Business Days before the date of prepayment, or (ii)
in the case of prepayment of an ABR Committed Borrowing, not later than 11:00
a.m., Houston, Texas time, one Business Day before the date of prepayment. Each
such notice shall be irrevocable and shall specify the prepayment date and the
principal amount of each Borrowing or portion thereof to be prepaid; provided
that, if a notice of prepayment is given in connection with a conditional
<PAGE> 29
25
notice of termination of the Commitments as contemplated by Section 2.08, then
such notice of prepayment may be revoked if such notice of termination is
revoked in accordance with Section 2.08. Promptly following receipt of any such
notice relating to a Committed Borrowing, the Administrative Agent shall advise
the Lenders of the contents thereof. Each partial prepayment of any Committed
Borrowing shall be in an amount that would be permitted in the case of an
advance of a Committed Borrowing of the same Type as provided in Section 2.02.
Each prepayment of a Committed Borrowing shall be applied ratably to the Loans
included in the prepaid Borrowing. Prepayments shall be accompanied by accrued
interest to the extent required by Section 2.12.
(c) If at any time the sum of the Revolving Credit Exposures
plus the aggregate principal amount of outstanding Competitive Loans is in
excess of the total Commitments, the Borrower shall immediately pay to the
Administrative Agent, for the account of the Banks, the amount of such excess to
be applied as a prepayment of the Revolving Loans and LC Disbursements
outstanding. Any such prepayment shall be payable in full on the date on which
the applicable reduction or termination of the Commitments pursuant to Section
2.08(d) becomes effective.
SECTION 2.11. Fees. (a) The Borrower agrees to pay to the
Administrative Agent for the account of each Lender a facility fee, which shall
accrue at the Applicable Rate on the daily amount of the Commitment of such
Lender (whether used or unused) during the period from and including the date of
this Agreement to but excluding the date on which such Commitment terminates;
provided that, if such Lender continues to have any Committed Credit Exposure
after its Commitment terminates, then such facility fee shall continue to accrue
on the daily amount of such Lender's Committed Credit Exposure from and
including the date on which its Commitment terminates to but excluding the date
on which such Lender ceases to have any Committed Credit Exposure. Accrued
facility fees shall be payable in arrears on the last day of March, June,
September and December of each year and on the date on which the Commitments
terminate, commencing on the first such date to occur after the date hereof;
provided that any facility fees accruing after the date on which the Committed
Loans have matured, whether by acceleration or otherwise, shall be payable on
demand. All facility fees shall be computed on the basis of a year of 360 days
and shall be payable for the actual number of days elapsed (including the first
day but excluding the last day).
(b) The Borrower agrees to pay (i) to the Administrative Agent
for the account of each Lender a participation fee with respect to its
participations in Letters of Credit, which shall accrue at the same Applicable
Rate as interest on Eurodollar Committed Loans on the average daily amount of
such Lender's LC Exposure (excluding any portion thereof attributable to
unreimbursed LC Disbursements) during the period from and including the
Effective Date to but excluding the later of the date on which such Lender's
Commitment terminates and the date on which such Lender ceases to have any LC
Exposure, and (ii) to the Issuing Bank a fronting fee, which shall accrue at the
rate of 0.125% per annum on the average daily amount of the LC Exposure
(excluding any portion thereof attributable to unreimbursed LC Disbursements)
during the period from and including the Effective Date to but excluding the
later of the date of termination of the Commitments and the date on which there
ceases to be any LC Exposure, as well as the Issuing Bank's standard fees with
respect to the issuance, amendment, renewal or extension of any Letter of Credit
or processing of drawings thereunder. Participation fees and fronting fees
accrued through and including the last day of March, June, September and
December of each year shall be payable on such day, commencing on the first such
date to occur after the Effective Date; provided that all such fees shall be
payable on the date on which the
<PAGE> 30
26
Commitments terminate and any such fees accruing after the date on which the
Commitments terminate shall be payable on demand. Any other fees payable to the
Issuing Bank pursuant to this paragraph shall be payable within 10 days after
demand. All participation fees and fronting fees shall be computed on the basis
of a year of 360 days and shall be payable for the actual number of days elapsed
(including the first day but excluding the last day).
(c) The Borrower agrees to pay to the Administrative Agent,
for its own account, fees payable in the amounts and at the times separately
agreed upon between the Borrower and the Administrative Agent.
(d) All fees payable hereunder shall be paid on the dates due,
in immediately available funds, to the Administrative Agent (or to the Issuing
Bank, in the case of fees payable to it) for distribution, in the case of
facility fees and participation fees, to the Lenders. Fees paid shall not be
refundable under any circumstances.
SECTION 2.12. Interest. (a) The Loans comprising each ABR
Borrowing shall bear interest at the Alternate Base Rate.
(b) The Loans comprising each Eurodollar Borrowing shall bear
interest (i) in the case of a Eurodollar Committed Loan, at the Adjusted LIBO
Rate for the Interest Period in effect for such Borrowing plus the Applicable
Rate, or (ii) in the case of a Eurodollar Competitive Loan, at the LIBO Rate for
the Interest Period in effect for such Borrowing plus (or minus, as applicable)
the Margin applicable to such Loan.
(c) Each Fixed Rate Loan shall bear interest at the Fixed Rate
applicable to such Loan.
(d) Notwithstanding the foregoing, if any principal of or
interest on any Loan or any fee or other amount payable by the Borrower
hereunder is not paid when due, whether at stated maturity, upon acceleration or
otherwise, such overdue amount shall bear interest, after as well as before
judgment, at a rate per annum equal to (i) in the case of overdue principal of
any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the
preceding paragraphs of this Section or (ii) in the case of any other amount, 2%
plus the rate applicable to ABR Loans as provided in paragraph (a) of this
Section.
(e) Accrued interest on each Loan shall be payable in arrears
on each Interest Payment Date for such Loan and, in the case of Revolving Loans,
upon termination of the Commitments; provided that (i) interest accrued pursuant
to paragraph (d) of this Section shall be payable on demand, (ii) in the event
of any repayment or prepayment of any Loan (other than a prepayment of an ABR
Committed Loan prior to the end of the Availability Period), accrued interest on
the principal amount repaid or prepaid shall be payable on the date of such
repayment or prepayment and (iii) in the event of any conversion of any
Eurodollar Committed Loan prior to the end of the current Interest Period
therefor, accrued interest on such Loan shall be payable on the effective date
of such conversion.
(f) All interest hereunder shall be computed on the basis of a
year of 360 days, except that interest computed by reference to the Alternate
Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall
be computed on the basis of a year of 365 days (or 366 days in a leap
<PAGE> 31
27
year), and in each case shall be payable for the actual number of days elapsed
(including the first day but excluding the last day). The applicable Alternate
Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the
Administrative Agent, and such determination shall be conclusive absent manifest
error.
SECTION 2.13. Alternate Rate of Interest. If prior to the
commencement of any Interest Period for a Eurodollar Borrowing:
(a) the Administrative Agent determines (which determination
shall be conclusive absent manifest error) that adequate and reasonable
means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO
Rate, as applicable, for such Interest Period; or
(b) the Administrative Agent is advised by the Required
Lenders (or, in the case of a Eurodollar Competitive Loan, the Lender
that is required to make such Loan) that the Adjusted LIBO Rate or the
LIBO Rate, as applicable, for such Interest Period will not adequately
and fairly reflect the cost to such Lenders (or Lender) of making or
maintaining their Loans (or its Loan) included in such Borrowing for
such Interest Period;
then the Administrative Agent shall give notice thereof to the Borrower and the
Lenders by telephone or telecopy as promptly as practicable thereafter and,
until the Administrative Agent notifies the Borrower and the Lenders that the
circumstances giving rise to such notice no longer exist, (i) any Interest
Election Request that requests the conversion of any Committed Borrowing to, or
continuation of any Committed Borrowing as, a Eurodollar Borrowing shall be
ineffective, (ii) if any Borrowing Request requests a Eurodollar Revolving
Borrowing, such Borrowing shall be made as an ABR Borrowing and (iii) any
request by the Borrower for a Eurodollar Competitive Borrowing shall be
ineffective; provided that (A) if the circumstances giving rise to such notice
do not affect all the Lenders, then requests by the Borrower for Eurodollar
Competitive Borrowings may be made to Lenders that are not affected thereby and
(B) if the circumstances giving rise to such notice affect only one Type of
Borrowings, then the other Type of Borrowings shall be permitted.
SECTION 2.14. Increased Costs. (a) If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special
deposit or similar requirement against assets of, deposits with or for
the account of, or credit extended by, any Lender (except any such
reserve requirement reflected in the Adjusted LIBO Rate) or the Issuing
Bank; or
(ii) impose on any Lender or the Issuing Bank or the London
interbank market any other condition affecting this Agreement or
Eurodollar Loans or Fixed Rate Loans made by such Lender or any Letter
of Credit or participation therein;
and the result of any of the foregoing shall be to increase the cost to such
Lender of making or maintaining any Eurodollar Loan or Fixed Rate Loan (or of
maintaining its obligation to make any such Loan) or to increase the cost to
such Lender or the Issuing Bank of participating in, issuing or maintaining any
Letter of Credit or to reduce the amount of any sum received or receivable by
such Lender or the Issuing Bank hereunder (whether of principal, interest or
otherwise), then the Borrower
<PAGE> 32
28
will pay to such Lender or the Issuing Bank, as the case may be, such additional
amount or amounts as will compensate such Lender or the Issuing Bank, as the
case may be, for such additional costs incurred or reduction suffered.
(b) If any Lender or the Issuing Bank determines that any
Change in Law regarding capital requirements has or would have the effect of
reducing the rate of return on such Lender's or the Issuing Bank's capital or on
the capital of such Lender's or the Issuing Bank's holding company, if any, as a
consequence of this Agreement or the Loans made by, or participations in Letters
of Credit held by, such Lender, or the Letters of Credit issued by the Issuing
Bank, to a level below that which such Lender or the Issuing Bank or such
Lender's or the Issuing Bank's holding company could have achieved but for such
Change in Law (taking into consideration such Lender's or the Issuing Bank's
policies and the policies of such Lender's or the Issuing Bank's holding company
with respect to capital adequacy), then from time to time the Borrower will pay
to such Lender or the Issuing Bank, as the case may be, such additional amount
or amounts as will compensate such Lender or the Issuing Bank or such Lender's
or the Issuing Bank's holding company for any such reduction suffered.
(c) A certificate of a Lender or the Issuing Bank setting
forth the amount or amounts necessary to compensate such Lender or the Issuing
Bank or its holding company, as the case may be, as specified in paragraph (a)
or (b) of this Section and setting forth in reasonable detail the calculation
thereof shall be delivered to the Borrower and shall be conclusive absent
manifest error. The Borrower shall pay such Lender or the Issuing Bank, as the
case may be, the amount shown as due on any such certificate within 30 days
after receipt thereof.
(d) Failure or delay on the part of any Lender or the Issuing
Bank to demand compensation pursuant to this Section shall not constitute a
waiver of such Lender's or the Issuing Bank's right to demand such compensation;
provided that the Borrower shall not be required to compensate a Lender or the
Issuing Bank pursuant to this Section for any increased costs or reductions
incurred more than 90 days prior to the date that such Lender or the Issuing
Bank, as the case may be, notifies the Borrower of the Change in Law giving rise
to such increased costs or reductions and of such Lender's or the Issuing Bank's
intention to claim compensation therefor; provided further that, if the Change
in Law giving rise to such increased costs or reductions is retroactive, then
the 90-day period referred to above shall be extended to include the period of
retroactive effect thereof.
(e) Notwithstanding the foregoing provisions of this Section,
a Lender shall not be entitled to compensation pursuant to this Section in
respect of any Competitive Loan if the Change in Law that would otherwise
entitle it to such compensation shall have been publicly announced prior to
submission of the Competitive Bid pursuant to which such Loan was made.
SECTION 2.15. Break Funding Payments. In the event of (a) the
payment of any principal of any Eurodollar Loan or Fixed Rate Loan other than on
the last day of an Interest Period applicable thereto (including as a result of
an Event of Default), (b) the conversion of any Eurodollar Loan other than on
the last day of the Interest Period applicable thereto, (c) the Borrower's
failure to borrow, convert, continue or prepay any Revolving Loan on the date
specified in any notice delivered pursuant hereto (regardless of whether such
notice may be revoked under Section 2.10(b) and is revoked in accordance
therewith), (d) the Borrower's failure to borrow any Competitive Loan after
accepting the Competitive Bid to make such Loan, or (e) the assignment of any
Eurodollar Loan or Fixed Rate Loan
<PAGE> 33
29
other than on the last day of the Interest Period applicable thereto as a result
of a request by the Borrower pursuant to Section 2.08(e), then, in any such
event, the Borrower shall compensate each Lender for the loss, cost and expense
attributable to such event. In the case of a Eurodollar Loan, such loss, cost or
expense to any Lender shall be deemed to include an amount determined by such
Lender to be the excess, if any, of (i) the amount of interest which would have
accrued on the principal amount of such Loan had such event not occurred, at the
Adjusted LIBO Rate that would have been applicable to such Loan, for the period
from the date of such event to the last day of the then current Interest Period
therefor (or, in the case of a failure to borrow, convert or continue, for the
period that would have been the Interest Period for such Loan), over (ii) the
amount of interest which would accrue on such principal amount for such period
at the interest rate which such Lender would bid were it to bid, at the
commencement of such period, for dollar deposits of a comparable amount and
period from other banks in the eurodollar market. A certificate of any Lender
setting forth any amount or amounts that such Lender is entitled to receive
pursuant to this Section and setting forth in reasonable detail the calculation
thereof shall be delivered to the Borrower and shall be conclusive absent
manifest error. The Borrower shall pay such Lender the amount shown as due on
any such certificate within 30 days after receipt thereof.
SECTION 2.16. Taxes. (a) Any and all payments by or on account
of any obligation of the Borrower hereunder shall be made free and clear of and
without deduction for any Indemnified Taxes or Other Taxes; provided that if the
Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from
such payments, then (i) the sum payable shall be increased as necessary so that
after making all required deductions (including deductions applicable to
additional sums payable under this Section) the Administrative Agent, Lender or
Issuing Bank (as the case may be) receives an amount equal to the sum it would
have received had no such deductions been made, (ii) the Borrower shall make
such deductions and (iii) the Borrower shall pay the full amount deducted to the
relevant Governmental Authority in accordance with applicable law.
(b) In addition, the Borrower shall pay any Other Taxes
(including, without limitation, any Other Tax which Borrower is required to pay
pursuant to Section 2.16(a)(iii)) to the relevant Governmental Authority in
accordance with applicable law.
(c) The Borrower shall indemnify the Administrative Agent,
each Lender and the Issuing Bank, within 20 days after written demand therefor,
for the full amount of any Indemnified Taxes or Other Taxes paid by the
Administrative Agent, such Lender or the Issuing Bank, as the case may be, on or
with respect to any payment by or on account of any obligation of the Borrower
hereunder (including Indemnified Taxes or Other Taxes imposed or asserted on or
attributable to amounts payable under this Section) and any penalties, interest
and reasonable and documented expenses arising therefrom or with respect
thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or
legally imposed or asserted by the relevant Governmental Authority. A
certificate as to the amount of such payment or liability delivered to the
Borrower by a Lender or the Issuing Bank, or by the Administrative Agent on its
own behalf or on behalf of a Lender or the Issuing Bank, shall be conclusive
absent manifest error. To the extent that the Administrative Agent, any Lender,
or the Issuing Bank is reimbursed by a Governmental Authority and such
reimbursement is clearly identified as specifically relating to any Indemnified
Tax or Other Tax that was incorrectly or illegally asserted in connection with
this Agreement, such Person shall return to the Borrower the amount of such
reimbursement, together
<PAGE> 34
30
with any interest that may have been paid by the Governmental Authority with
respect thereto, to the extent the Borrower has actually paid such Person with
respect thereto.
(d) As soon as practicable after any payment of Indemnified
Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower
shall deliver to the Administrative Agent the original or a certified copy of a
receipt issued by such Governmental Authority evidencing such payment, a copy of
the return reporting such payment or other evidence of such payment reasonably
satisfactory to the Administrative Agent.
(e) Each of the Administrative Agent, Lenders, and the Issuing
Bank represents that it is either (i) a corporation organized under the laws of
the United States of America or any state thereof or (ii) it is entitled to
complete exemption from United States withholding tax imposed on or with respect
to any payments, including fees, to be made to it pursuant to this Agreement (A)
under an applicable provision of a tax convention to which the United States of
America is a party or (B) because it is acting through a branch, agency or
office in the United States of America and any payment to be received by it
hereunder is effectively connected with a trade or business in the United States
of America. Each of the Administrative Agent, Lenders, and the Issuing Bank that
is not a corporation organized under the laws of the United States of America or
any state thereof either represents that it has previously furnished to the
Borrower (with a copy to the Administrative Agent) or agrees to provide to the
Borrower (with a copy to the Administrative Agent) on the date of this
Agreement, or on the date which it becomes a party to this Agreement, two
accurate and complete original signed copies of either (1) Internal Revenue
Service Form 4224 (or successor form) certifying that all payments to be made to
it hereunder will be effectively connected to a United States trade or business,
(2) Internal Revenue Service Form 1001 (or successor form) certifying that it is
entitled to the benefit of a tax convention to which the United States of
America is a party which completely exempts from United States withholding tax
all payments to be made to it hereunder, or (3) such properly completed and
executed documentation prescribed by applicable law or reasonably requested by
the Borrower as will permit such payments to be made without withholding; and
each of the Administrative Agent, Lenders and Issuing Bank further agrees to
provide to Borrower, at the time or times prescribed by applicable law, such
properly completed and executed documentation prescribed by applicable law or
reasonably requested by the Borrower as will permit such payments to be made
without withholding. If any of the Administrative Agent, Lenders, or Issuing
Bank determines that it is unable to submit any form or certificate that it is
obligated to submit pursuant to this Section 2.16(e), or that is required to
withdraw or cancel any such form or certificate previously submitted, it shall
promptly notify the Borrower (with copy to the Administrative Agent) of such
fact. In the event that such person fails to deliver any forms required under
this Section 2.16(e) upon its initially becoming a party hereunder, the
Borrower's obligation to pay additional amounts shall be reduced to the amount
that it would have been obligated to pay had such forms been provided.
(f) Any Lender claiming any additional amounts payable
pursuant to this Section 2.16 shall use its reasonable efforts to change the
jurisdiction of its lending office so as to avoid the imposition of any
Indemnified Taxes or Other Taxes or to otherwise eliminate the amount of any
such additional amounts which may thereafter accrue.
SECTION 2.17. Payments Generally; Pro Rata Treatment; Sharing
of Set-offs. (a) The Borrower shall make each payment required to be made by it
hereunder (whether of principal, interest,
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31
fees or reimbursement of LC Disbursements, or of amounts payable under Sections
2.14, 2.15 or 2.16, or otherwise) prior to 12:00 noon, Houston, Texas time, on
the date when due, in immediately available funds, without set-off or
counterclaim. Any amounts received after such time on any date may, in the
discretion of the Administrative Agent, be deemed to have been received on the
next succeeding Business Day for purposes of calculating interest thereon. All
such payments shall be made to the Administrative Agent at its offices at 600
Travis Street, Houston, Texas, except payments to be made directly to the
Issuing Bank as expressly provided herein and except that payments pursuant to
Sections 2.14, 2.15, 2.16 and 9.03 shall be made directly to the Persons
entitled thereto. The Administrative Agent shall distribute any such payments
received by it for the account of any other Person to the appropriate recipient
promptly following receipt thereof. If any payment hereunder shall be due on a
day that is not a Business Day, the date for payment shall be extended to the
next succeeding Business Day, and, in the case of any payment accruing interest,
interest thereon shall be payable for the period of such extension. All payments
hereunder shall be made in dollars.
(b) If at any time insufficient funds are received by and
available to the Administrative Agent to pay fully all amounts of principal,
unreimbursed LC Disbursements, interest and fees then due hereunder, such funds
shall be applied (i) first, towards payment of interest and fees then due
hereunder, ratably among the parties entitled thereto in accordance with the
amounts of interest and fees then due to such parties, and (ii) second, towards
payment of principal and unreimbursed LC Disbursements then due hereunder,
ratably among the parties entitled thereto in accordance with the amounts of
principal and unreimbursed LC Disbursements then due to such parties.
(c) If any Lender shall, by exercising any right of set-off or
counterclaim or otherwise, obtain payment in respect of any principal of or
interest on any of its Committed Loans or participations in LC Disbursements
resulting in such Lender receiving payment of a greater proportion of the
aggregate amount of its Committed Loans and participations in LC Disbursements
and accrued interest thereon than the proportion received by any other Lender,
then the Lender receiving such greater proportion shall purchase (for cash at
face value) participations in the Committed Loans and participations in LC
Disbursements of other Lenders to the extent necessary so that the benefit of
all such payments shall be shared by the Lenders ratably in accordance with the
aggregate amount of principal of and accrued interest on their respective
Committed Loans and participations in LC Disbursements; provided that (i) if any
such participations are purchased and all or any portion of the payment giving
rise thereto is recovered, such participations shall be rescinded and the
purchase price restored to the extent of such recovery, without interest, and
(ii) the provisions of this paragraph shall not be construed to apply to any
payment made by the Borrower pursuant to and in accordance with the express
terms of this Agreement or any payment obtained by a Lender as consideration for
the assignment of or sale of a participation in any of its Loans or
participations in LC Disbursements to any assignee or participant, other than to
the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions
of this paragraph shall apply). The Borrower consents to the foregoing and
agrees, to the extent it may effectively do so under applicable law, that any
Lender acquiring a participation pursuant to the foregoing arrangements may
exercise against the Borrower rights of set-off and counterclaim with respect to
such participation as fully as if such Lender were a direct creditor of the
Borrower in the amount of such participation.
(d) Unless the Administrative Agent shall have received notice
from the Borrower prior to the date on which any payment is due to the
Administrative Agent for the account of the Lenders or the Issuing Bank
hereunder that the Borrower will not make such payment, the Administrative Agent
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may assume that the Borrower has made such payment on such date in accordance
herewith and may, in reliance upon such assumption, distribute to the Lenders or
the Issuing Bank, as the case may be, the amount due. In such event, if the
Borrower has not in fact made such payment, then each of the Lenders or the
Issuing Bank, as the case may be, severally agrees to repay to the
Administrative Agent forthwith on demand the amount so distributed to such
Lender or Issuing Bank with interest thereon, for each day from and including
the date such amount is distributed to it to but excluding the date of payment
to the Administrative Agent, at the greater of the Federal Funds Effective Rate
and a rate determined by the Administrative Agent in accordance with banking
industry rules on interbank compensation.
(e) If any Lender shall fail to make any payment required to
be made by it pursuant to Sections 2.05(d) or (e), 2.06(b) or 2.17(d), then the
Administrative Agent may, in its discretion (notwithstanding any contrary
provision hereof), apply any amounts thereafter received by the Administrative
Agent for the account of such Lender to satisfy such Lender's obligations under
such Sections until all such unsatisfied obligations are fully paid.
SECTION 2.18. Mitigation Obligations. Each Lender will notify
the Borrower of any event occurring after the date of this Agreement which will
entitle such Lender to compensation pursuant to Sections 2.14, 2.15 and 2.16 as
promptly as practicable after it obtains knowledge thereof and determines to
request such compensation, provided that such Lender shall not be liable for the
failure to provide such notice. If any Lender requests compensation under
Section 2.14, or if the Borrower is required to pay any additional amount to any
Lender or any Governmental Authority for the account of any Lender pursuant to
Section 2.16, then such Lender shall use reasonable efforts to avoid or minimize
the amounts payable, including, without limitation, the designation of a
different lending office for funding or booking its Loans hereunder or to assign
its rights and obligations hereunder to another of its offices, branches or
affiliates, if, in the judgment of such Lender, such designation or assignment
(i) would eliminate or reduce amounts payable pursuant to Sections 2.14 or 2.16,
as the case may be, in the future and (ii) would not subject such Lender to any
unreimbursed cost or expense and would not otherwise be disadvantageous to such
Lender. The Borrower hereby agrees to pay all reasonable and documented costs
and expenses incurred by any Lender in connection with any such designation or
assignment.
SECTION 2.19. Limitation of Compensation if Applicable Lending
Office is Changed. Notwithstanding anything herein to the contrary, in the event
that any Lender designates a different lending office other than as set forth on
the signature pages hereof, the Borrower shall not be liable to pay or
compensate such Lender under any provision of Sections 2.14 or 2.16 in an amount
in excess of that for which the Borrower would have been liable had such
designation not been made unless such designation was made (1), so long as no
Default has occurred and is continuing, with the Borrower's prior written
consent or (2) by reason of such Lender's having been required by Section 2.18
to designate a new lending office.
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33
ARTICLE III
Representations and Warranties
The Borrower represents and warrants to the Lenders that:
SECTION 3.01. Organization; Powers. As of the Effective Date
each of the Borrower and its Material Subsidiaries is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, has all requisite corporate power and authority to carry on its
business as now conducted and, except where the failure to do so, individually
or in the aggregate, could not reasonably be expected to result in a Material
Adverse Effect, is qualified to do business in, and is in good standing in,
every jurisdiction where such qualification is required. At all times after the
Effective Date, each of the Borrower and its Material Restricted Subsidiaries is
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, has all requisite corporate power and
authority to carry on its business as now conducted and, except where the
failure to do so, individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect, is qualified to do business in,
and is in good standing in, every jurisdiction where such qualification is
required.
SECTION 3.02. Authorization; Enforceability. The Transactions
are within the Borrower's corporate powers and have been duly authorized by all
necessary corporate and, if required, stockholder action. This Agreement has
been duly executed and delivered by the Borrower and constitutes a legal, valid
and binding obligation of the Borrower, enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
or other laws affecting creditors' rights generally and subject to general
principles of equity, regardless of whether considered in a proceeding in equity
or at law.
SECTION 3.03. Governmental Approvals; No Conflicts. The
Transactions (a) do not require the Borrower or any Material Subsidiary to
obtain any consent or approval of, registration or filing with, or any other
action by, any Governmental Authority, except such as have been obtained or made
and are in full force and effect and except as identified in Sections 2.08(d)
(ii) and (iii), (b) will not violate any applicable law or regulation or the
charter, by-laws or other organizational documents of the Borrower or any of its
Material Subsidiaries or any order of any Governmental Authority, (c) will not
violate or result in a default under any indenture, material agreement or other
instrument binding upon the Borrower or any of its Material Subsidiaries or its
assets, or give rise to a right thereunder to require any payment to be made by
the Borrower or any of its Material Subsidiaries, and (d) will not result in the
creation or imposition of any Lien on any asset of the Borrower or any of its
Subsidiaries.
SECTION 3.04. No Material Adverse Change. At the Effective
Date, there has been no material adverse change in the financial condition,
operations or business of the Borrower and its Material Restricted Subsidiaries,
taken as a whole since September 30, 1998, including with regard thereto the
selected pro forma financial information dated as of and for the six months
ended September 30, 1998, set forth in the Borrower's 8K dated November 12,
1998.
SECTION 3.05. Litigation and Environmental Matters. (a) At the
Effective Date, there are no actions, suits or proceedings by or before any
arbitrator or Governmental Authority pending
<PAGE> 38
34
against or, to the knowledge of the Borrower, threatened against or affecting
the Borrower or any of its Subsidiaries that could reasonably be expected,
individually or in the aggregate, to result in a Material Adverse Effect.
(b) Except for any matters that, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect, neither the Borrower nor any of its Subsidiaries (i) has failed to
comply with any Environmental Law or to obtain, maintain or comply with any
permit, license or other approval required under any Environmental Law, (ii) has
become subject to any Environmental Liability, (iii) has received notice of any
claim with respect to any Environmental Liability or (iv) knows of any basis for
any Environmental Liability.
SECTION 3.06. Compliance with Laws and Agreements. Each of the
Borrower and its Subsidiaries is in compliance with all laws, regulations and
orders of any Governmental Authority applicable to it or its property and all
indentures, agreements and other instruments binding upon it or its property,
except where the failure to do so, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect. No Default has
occurred and is continuing.
SECTION 3.07. Investment and Holding Company Status. Neither
the Borrower nor any of its Subsidiaries is (a) an "investment company" as
defined in, or subject to regulation under, the Investment Company Act of 1940
or (b) a "holding company" as defined in, or subject to regulation under, the
Public Utility Holding Company Act of 1935.
SECTION 3.08. Taxes. Each of the Borrower and its Subsidiaries
has timely filed or caused to be filed all Tax returns and reports required to
have been filed and has paid or caused to be paid all Taxes required to have
been paid by it, except (a) Taxes that are being contested in good faith by
appropriate proceedings and for which the Borrower or such Subsidiary, as
applicable, has set aside on its books adequate reserves or (b) to the extent
that the failure to do so could not reasonably be expected to result in a
Material Adverse Effect.
SECTION 3.09. ERISA. No ERISA Event has occurred or is
reasonably expected to occur that, when taken together with all other such ERISA
Events for which liability is reasonably expected to occur, could reasonably be
expected to result in a Material Adverse Effect. The present value of all
accumulated benefit obligations under each Plan (based on the assumptions used
for purposes of Statement of Financial Accounting Standards No. 87) did not, as
of the date of the most recent financial statements reflecting such amounts,
exceed by more than $50,000,000 the fair market value of the assets of such
Plan, and the present value of all accumulated benefit obligations of all
underfunded Plans (based on the assumptions used for purposes of Statement of
Financial Accounting Standards No. 87) did not, as of the date of the most
recent financial statements reflecting such amounts, exceed by more than
$50,000,000 the fair market value of the assets of all such underfunded Plans.
SECTION 3.10. Financial Information. The Borrower has
disclosed to the Lenders all agreements, instruments and corporate or other
restrictions to which it or any of its Material Subsidiaries is subject, and all
other matters known to it (other than industry-wide risks normally associated
with the types of business conducted by the Borrower and its Subsidiaries) that,
individually or in the aggregate, could reasonably be expected to result in a
Material Adverse Effect. Neither the Information Memorandum nor any of the other
reports, financial statements, certificates or other written information
<PAGE> 39
35
furnished by or on behalf of the Borrower to the Administrative Agent or any
Lender in connection with the negotiation of this Agreement or delivered
hereunder (as modified or supplemented by other information so furnished) when
considered as a whole contains any material misstatement of fact or omits to
state any material fact (other than industry wide risks normally associated with
the types of business conducted by the Borrower and its Subsidiaries) necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading as of the date made or deemed made; provided
that, with respect to projected financial information, the Borrower represents
only that such information was prepared in good faith based upon assumptions
believed to be reasonable at the time, it being recognized by the Lenders that
such projections as they relate to future events are not to be viewed as fact
and that actual results during the period or periods covered by such projections
may differ from the projected results set forth therein by a material amount.
SECTION 3.11. Year 2000. Any reprogramming required to permit
the proper functioning, in and following the year 2000, of (i) the Borrower's,
or any Material Subsidiary's, computer systems and (ii) equipment containing
embedded microchips (including systems and equipment supplied by others or with
which Borrower's, or any Material Subsidiary's, systems interface) and the
testing of all such systems and equipment, as so reprogrammed, will be completed
by October 1, 1999. The cost to the Borrower and its Material Subsidiaries of
such reprogramming and testing and of the reasonably foreseeable consequences of
year 2000 to the Borrower (including, without limitation, reprogramming errors
and the failure of others' systems or equipment) will not result in a Default or
a Material Adverse Effect.
ARTICLE IV
Conditions
SECTION 4.01. Effective Date. The obligations of the Lenders
to make the initial Loans and of the Issuing Bank to issue the initial Letters
of Credit hereunder shall not become effective until the date on which each of
the following conditions is satisfied (or waived in accordance with Section
9.02):
(a) The Administrative Agent (or its counsel) shall have
received from each party hereto either (i) a counterpart of this Agreement
signed on behalf of such party or (ii) written evidence satisfactory to the
Administrative Agent (which may include telecopy transmission of a signed
signature page of this Agreement) that such party has signed a counterpart of
this Agreement.
(b) The Administrative Agent shall have received a favorable
written opinion (addressed to the Administrative Agent and the Lenders and dated
the Effective Date) of Baker & Botts L.L.P., counsel for the Borrower, in the
form of Exhibit B. The Borrower hereby requests such counsel to deliver such
opinion.
(c) The Administrative Agent shall have received such
documents and certificates as the Administrative Agent or its counsel may
reasonably request on or before the Effective Date relating to the organization,
existence and good standing of the Borrower, the authorization of the
Transactions
<PAGE> 40
36
and any other legal matters relating to the Borrower, this Agreement or the
Transactions, all in form and substance reasonably satisfactory to the
Administrative Agent and its counsel.
(d) The Administrative Agent shall have received a
certificate, dated the Effective Date and signed by the President, a Vice
President or a Financial Officer of the Borrower, confirming compliance with the
conditions set forth in paragraphs (a) and (b) of Section 4.02.
(e) The Administrative Agent shall have received all fees and
other amounts due and payable by the Borrower on or prior to the Effective Date,
including, to the extent invoiced at least 3 days prior to the Effective Date,
reimbursement or payment of all reasonable and documented out-of-pocket expenses
required to be reimbursed or paid by the Borrower hereunder.
(f) The Administrative Agent shall have received (or shall
simultaneously receive) notice from the Borrower that the Prior Credit Facility
has been terminated, all Indebtedness owing thereunder has been repaid in full,
and all "Commitments" (as therein defined) have been terminated.
The Administrative Agent shall notify the Borrower and the Lenders of the
Effective Date, and such notice shall be conclusive and binding. Notwithstanding
the foregoing, the obligations of the Lenders to make Loans and of the Issuing
Bank to issue Letters of Credit hereunder shall not become effective unless each
of the foregoing conditions is satisfied (or waived pursuant to Section 9.02).
SECTION 4.02. Each Credit Event. The obligation of each Lender
to make a Loan on the occasion of any Borrowing (which is not a conversion or a
continuation of a Loan as provided in Section 2.07), and of the Issuing Bank to
issue, amend, renew or extend any Letter of Credit which increases the LC
Exposure, is subject to the satisfaction of the following conditions (unless
waived in accordance with Section 9.02):
(a) The representations and warranties of the Borrower set
forth in Article III of this Agreement (except those that by their terms are
limited to a specified date which shall be true and correct as of such specified
date) shall be true and correct on and as of the date of such Borrowing or the
date of issuance, amendment, renewal or extension of such Letter of Credit, as
applicable.
(b) At the time of and immediately after giving effect to such
Borrowing or the issuance, amendment, renewal or extension of such Letter of
Credit, as applicable, no Default shall have occurred and be continuing.
Each such Borrowing and each such issuance, amendment, renewal or extension of a
Letter of Credit shall be deemed to constitute a representation and warranty by
the Borrower on the date thereof as to the matters specified in paragraphs (a)
and (b) of this Section.
<PAGE> 41
37
ARTICLE V
Affirmative Covenants
Until the Commitments have expired or been terminated and the
principal of and interest on each Loan and all fees payable hereunder shall have
been paid in full and all Letters of Credit shall have expired, terminated or
are fully cash collateralized and all LC Disbursements shall have been
reimbursed, the Borrower covenants and agrees with the Lenders that:
SECTION 5.01. Financial Statements and Other Information. The
Borrower will furnish to the Administrative Agent and with a copy for each
Lender:
(a) within five Business Days after filing the Annual Report
on Form 10-K of the Borrower for the fiscal year then ended with the Securities
and Exchange Commission, but in no event later than 120 days after the end of
such fiscal year, the financial statements for such fiscal year as contained in
such Annual Report on Form 10-K, and, as soon as it shall become available, the
annual report to shareholders of the Borrower for the fiscal year then ended;
(b) within five Business Days after filing the Quarterly
Report on Form 10-Q of the Borrower for the fiscal quarter of the Borrower then
ended with the Securities and Exchange Commission, but in no event later than 60
days after the end of such fiscal quarter, copies of the financial statements
for such fiscal quarter as contained in such Quarterly Report on Form 10-Q, and,
as soon as it shall become available, the quarterly report to shareholders of
the Borrower for the fiscal quarter then ended;
(c) concurrently with any delivery of financial statements
under clause (a) or (b) above, a certificate of a Financial Officer of the
Borrower certifying as to whether a Default has occurred and, if a Default has
occurred, specifying the details thereof and any action taken or proposed to be
taken with respect thereto;
(d) promptly after the same become publicly available, copies
of all periodic and other reports, proxy statements and other materials filed by
the Borrower or any Subsidiary with the Securities and Exchange Commission, or
any Governmental Authority succeeding to any or all of the functions of said
Commission, under the Exchange Act; and
(e) promptly following any request therefor, such other
information regarding the operations, business affairs and financial condition
of the Borrower or any Material Subsidiary, or compliance with the terms of this
Agreement, as the Administrative Agent or any Lender may reasonably request.
SECTION 5.02. Notices of Material Events. Upon any Financial
Officer obtaining knowledge thereof, the Borrower will furnish to the
Administrative Agent and each Lender prompt written notice of the following:
<PAGE> 42
38
(a) the occurrence of any Default;
(b) the filing or commencement of any action, suit or
proceeding by or before any arbitrator or Governmental Authority against or
affecting the Borrower or any Affiliate thereof that, if adversely determined,
could reasonably be expected to result in a Material Adverse Effect;
(c) the occurrence of any ERISA Event that, alone or together
with any other ERISA Events that have occurred, result in, or could reasonably
be expected to result in, a Material Adverse Effect;
(d) any other development that results in, or could reasonably
be expected to result in, a Material Adverse Effect; and
(e) the initial issuance of commercial paper supported by the
availability of Loan proceeds.
Each notice delivered under this Section shall be accompanied by a statement of
a Financial Officer or other executive officer of the Borrower setting forth the
details of the event or development requiring such notice and any action taken
or proposed to be taken with respect thereto.
SECTION 5.03. Existence; Conduct of Business. The Borrower
will, and will cause each of its Material Restricted Subsidiaries to, do or
cause to be done all things necessary to preserve, renew and keep in full force
and effect its legal existence and the rights, licenses, permits, privileges and
franchises used or useful in the conduct of its business, except where the
failure to preserve, renew and keep in full force and effect such rights,
licenses, permits, privileges and franchises could not reasonably be expected to
result in a Material Adverse Effect; provided that the foregoing shall not
prohibit any merger, consolidation, liquidation or dissolution permitted under
Section 6.02.
SECTION 5.04. Payment of Obligations. The Borrower will, and
will cause each of its Material Subsidiaries to, pay its obligations, including
Tax liabilities, that, if not paid, could result in a Material Adverse Effect
before the same shall become delinquent or in default, except where (a) the
validity or amount thereof is being contested in good faith by appropriate
proceedings, and for which the Borrower or such Material Subsidiary has set
aside on its books adequate reserves with respect thereto in accordance with
GAAP or (b) the failure to make payment pending such contest could not
reasonably be expected to result in a Material Adverse Effect.
SECTION 5.05. Maintenance of Properties; Insurance. The
Borrower will, and will cause each of its Material Restricted Subsidiaries to,
(a) keep and maintain all property used or useful in the conduct of its business
in good working order and condition, ordinary wear and tear excepted; provided
that the foregoing shall not prohibit any sale, lease, transfer, merger,
consolidation, liquidation, or dissolution permitted under Section 6.02; and
provided further, that nothing in this Section 5.05 shall prevent the Borrower
or any Subsidiary from discontinuing the operation or maintenance of any
property if such discontinuance is, in the reasonable judgment of the Borrower,
desirable in the conduct of its business or the business of any Subsidiary, and
(b) maintain, with financially sound and reputable insurance companies,
insurance in such amounts and against such risks as are customarily maintained
by companies engaged in the same or similar businesses operating in the same or
similar locations.
<PAGE> 43
39
SECTION 5.06. Books and Records; Inspection Rights. The
Borrower will, and will cause each of its Material Subsidiaries to, keep proper
books of record and account in which full, true and correct entries are made of
all dealings and transactions in relation to its business and activities as
required by GAAP. The Borrower will, and will cause each of its Subsidiaries to,
permit any representatives designated by the Administrative Agent or any Lender,
upon reasonable prior notice, to visit and inspect its properties, to examine
and make extracts from its books and records, and to discuss its affairs,
finances and condition with its officers, directors and its independent
accountants, all at such reasonable times and as often as reasonably requested
provided however, that with respect to discussions with the Borrower's
independent accountants, the Borrower shall be given the opportunity to have a
representative present during such discussions; provided, further,
notwithstanding the provisions of Section 9.03 the Administrative Agent or the
Lender making such inspection and visitation hereby releases the Borrower, its
Affiliates, and their officers, directors, employees, and agents against any
claim for injury to the Administrative Agent or such Lender (or the
representatives thereof) during such inspection and visitation; provided,
further, that neither the Borrower nor any of its Subsidiaries shall be required
to disclose to the Administrative Agent, any Lender or any agents or
representatives thereof any information which is the subject of attorney-client
privilege or attorney's work-product privilege properly asserted by the
applicable Person to prevent the loss of such privilege in connection with such
information. The Borrower shall pay or reimburse the reasonable and documented
expenses of the inspections and visitations made by the Administrative Agent and
any Lender pursuant to this Section 5.06, except that such expenses shall not be
the responsibility of the Borrower more than once per calendar year, unless a
Default has occurred and is continuing at the time of the inspection and
visitation, in which case the Borrower shall pay or reimburse such expenses.
SECTION 5.07. Compliance with Laws. The Borrower will, and
will cause each of its Material Restricted Subsidiaries to, comply with all
laws, rules, regulations and orders of any Governmental Authority (including,
without limitation, Environmental Laws) applicable to it or its property, except
where the failure to do so, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect on the Borrower
and its Material Restricted Subsidiaries, taken as a whole.
SECTION 5.08. Use of Proceeds and Letters of Credit. The
proceeds of the Loans will be used only for working capital and general
corporate purposes. No part of the proceeds of any Loan will be used, whether
directly or indirectly, for any purpose that entails a violation of any of the
Regulations of the Board, including Regulations U and X. Letters of Credit will
be issued only to support the general corporate requirements of the Borrower and
its Subsidiaries.
SECTION 5.09. Covenant Cross-Default. In connection with the
incurrence by the Borrower or any Material Subsidiary of any obligation for
borrowed money on terms that provide that an event of default shall exist with
respect to such obligation if the Borrower or such Material Subsidiary, as
applicable, defaults in the performance of any agreement, term or condition
(other than the payment of principal or interest) in any other agreement or
instrument (a "Covenant Cross-Default") under or by which any other obligation
of the Borrower or any Material Subsidiary for borrowed money is created or
evidenced or secured, the Borrower shall execute an instrument in form
satisfactory to the Administrative Agent, to be delivered prior to such
incurrence, agreeing that such Covenant Cross-Default shall also constitute an
Event of Default under this Agreement; provided, however, that this
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Section 5.09 shall not apply to any obligation of a Material Subsidiary for
borrowed money in an amount less than $50,000,000.
SECTION 5.10. Adjusted Consolidated Tangible Net Worth.
Maintain Adjusted Consolidated Tangible Net Worth in an amount not less than
$370,000,000.
ARTICLE VI
Negative Covenants
Until the Commitments have expired or terminated and the
principal of and interest on each Loan and all fees payable hereunder have been
paid in full and all Letters of Credit have expired, terminated or are fully
cash collateralized and all LC Disbursements shall have been reimbursed, the
Borrower covenants and agrees with the Lenders that:
SECTION 6.01. Liens. The Borrower will not, and will not
permit any Material Restricted Subsidiary to pledge, mortgage, hypothecate or
grant a security interest in, or permit any Lien upon, any property or assets
owned by the Borrower or any Material Restricted Subsidiary to secure any
Indebtedness, without making effective provision whereby the outstanding Loans
shall (so long as such other Indebtedness shall be so secured) be equally and
ratably secured with any and all such other Indebtedness and any other
indebtedness similarly entitled to be equally and ratably secured; provided,
however, that this restriction shall not apply to nor prevent the creation or
existence of:
(a) any Lien upon any property or assets (together with
receivables and intangibles related to such property or assets and the cash
proceeds thereof) created at the time of the acquisition or construction of such
property or assets by the Borrower or any Material Restricted Subsidiary or
within one year after such time to secure all or a portion of the purchase price
or construction costs (or Indebtedness incurred to finance such purchase price
or construction costs) for such property or assets;
(b) any Lien upon any property or assets (together with
receivables and intangibles related to such property or assets and the cash
proceeds thereof) existing thereon at the time of the acquisition thereof by the
Borrower or any Material Restricted Subsidiary (whether or not the obligations
secured thereby are assumed by the Borrower or any Subsidiary);
(c) any Lien upon any property or assets (together with
receivables and intangibles related to such property or assets and the cash
proceeds thereof), whenever acquired, of any Restricted Subsidiary that becomes
a Material Restricted Subsidiary after the date hereof, provided that (i) the
instrument creating such Lien shall be in effect prior to the time such
Restricted Subsidiary becomes a Material Restricted Subsidiary and (ii) such
Lien shall only apply to properties or assets (together with receivables and
intangibles related to such property or assets and the cash proceeds thereof)
owned by such Restricted Subsidiary at the time it becomes a Material Restricted
Subsidiary or thereafter acquired by it from sources other than the Borrower or
another Material Restricted Subsidiary;
(d) any extension, renewal or refunding of any Lien permitted
by Subsection (a), (b) or (c) above on substantially the same property or assets
theretofore subject thereto;
<PAGE> 45
41
(e) any Lien arising from or in connection with a conveyance
by the Borrower or a Material Restricted Subsidiary of any production payment
with respect to oil, gas, natural gas, carbon dioxide, sulphur, helium, coal,
metals, minerals, steam, timber or other natural resources; provided that the
value of the obligations secured by Liens permitted by this subsection (e) shall
not exceed at any time, in the aggregate, 15% of the Consolidated Net Tangible
Assets of the Borrower and its Material Restricted Subsidiaries as at the end of
the most recent quarter;
(f) (i) any Lien in favor of the Borrower; (ii) any Lien
created or assumed by a Restricted Subsidiary in favor of another Restricted
Subsidiary; (iii) any Lien created or assumed by a Unrestricted Subsidiary in
favor of another Restricted Subsidiary; and (iii) any Lien created or assumed by
a Unrestricted Subsidiary in favor of another Unrestricted Subsidiary;
(g) any Lien created or assumed by the Borrower or a Material
Subsidiary in connection with the issuance of debt securities the interest on
which is excludable from gross income of the holder of such security pursuant to
the Internal Revenue Code of 1986, as amended, for the purpose of financing, in
whole or in part, the acquisition or construction of property or assets to be
used by the Borrower or a Subsidiary;
(h) any Lien securing any Indebtedness in an amount which,
together with all other Indebtedness secured by a Lien that is not otherwise
permitted by the provisions of this Section 6.01 does not at the time of the
incurrence of the Indebtedness so secured exceed 5% of Consolidated Net Tangible
Assets of the Borrower and its Material Restricted Subsidiaries as at the end of
the most recent quarter; or
(i) any Lien existing in connection with any sale,
securitization or monetization of receivables or other rights to receive payment
of the Borrower and any of its Subsidiaries, so long as such sale,
securitization or monetization is treated as a sale pursuant to the Statement on
Financial Accounting Standards No. 125.
In case the Borrower or any Material Restricted Subsidiary shall
propose to pledge, mortgage, hypothecate or grant a security interest in any
property or assets owned by the Borrower or any Material Restricted Subsidiary
to secure any Indebtedness, other than as permitted by subdivisions (a) to (i),
inclusive, of this Section 6.01, the Borrower will prior thereto give written
notice thereof to the Administrative Agent, and the Borrower will, or will cause
such Material Restricted Subsidiary to, prior to or simultaneously with such
pledge, mortgage, hypothecation or grant of security interest, by executed
instrument in form satisfactory to the Administrative Agent, effectively secure
(for so long as such other Indebtedness shall be so secured) all the Loans
equally and ratably with such Indebtedness and with any other indebtedness
similarly entitled to be equally and ratably secured. Such instrument shall
contain provisions concerning the possession, control, release and substitution
of mortgaged and pledged property and Loans and other appropriate matters as the
Borrower and the Administrative Agent shall deem advisable or appropriate or as
the Administrative Agent shall deem necessary in connection with such pledge,
mortgage, hypothecation or grant of security interest.
For the purpose of this Section 6.01 the term "Lien" shall include the
interest of the lessor under a lease with a term of three years or more that
should be, in accordance with GAAP, recorded as a capital lease and incurred
after the Effective Date, and any such lease of property or assets not acquired
<PAGE> 46
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from the Borrower or any Material Restricted Subsidiary in contemplation of such
lease shall be treated as though the lessee had purchased such property or
assets from the lessor.
SECTION 6.02. Fundamental Changes. (a) The Borrower will not,
and will not permit any Material Restricted Subsidiary to, merge into or
consolidate with any other Person, or permit any other Person to merge into or
consolidate with it, or sell, transfer, lease or otherwise dispose of (in one
transaction or in a series of transactions) all or substantially all of its
assets, or all or substantially all of the stock of any of its Material
Restricted Subsidiaries (in each case, whether now owned or hereafter acquired),
or liquidate or dissolve, except that, if at the time thereof and immediately
after giving effect thereto no Default shall have occurred and be continuing (i)
any Person may merge into the Borrower in a transaction in which the Borrower is
the surviving corporation, (ii) any Person may merge into any Subsidiary in a
transaction in which the surviving entity is a Subsidiary, (iii) any Subsidiary
may sell, transfer, lease or otherwise dispose of its assets to the Borrower or
to another Subsidiary and (iv) any Subsidiary may liquidate or dissolve if the
Borrower determines in good faith that such liquidation or dissolution is in the
best interests of the Borrower and is not materially disadvantageous to the
Lenders; provided that any such merger involving a Person that is not a Wholly
Owned Subsidiary immediately prior to such merger shall not be permitted unless
also permitted by Section 6.03.
(b) The Borrower will not, and will not permit any of its
Subsidiaries to, engage to any material extent in any business that would change
the character of the business of the Borrower and its Subsidiaries, taken as a
whole, from that in existence on the date this Agreement is executed and
delivered by the Borrower.
SECTION 6.03. Investments, Loans, Advances, Guarantees and
Acquisitions. The Borrower will not, and will not permit any of its Material
Subsidiaries to, purchase, hold or acquire (including pursuant to any merger
with any Person that was not a Wholly Owned Subsidiary prior to such merger) any
capital stock, evidences of indebtedness or other securities (including any
option, warrant or other right to acquire any of the foregoing) of, make or
permit to exist any loans or advances to, Guarantee any obligations of, or make
or permit to exist any investment or any other interest in, any other Person, or
purchase or otherwise acquire (in one transaction or a series of transactions)
any assets of any other Person constituting a business unit, if any such loan
advance, Guarantee, acquisition or investment would change the character of the
business of the Borrower and its Subsidiaries, taken as a whole, from that in
existence on the Effective Date.
SECTION 6.04. Subsidiary Indebtedness. The Borrower will not
permit any Subsidiary to, create, incur, assume or permit to exist any
Indebtedness, except:
(a) Indebtedness existing on the date hereof and set forth in
Schedule 6.04 and extensions, renewals and replacements of any such Indebtedness
that do not increase the outstanding principal amount thereof;
(b) Indebtedness incurred in connection with the Liens
permitted under Section 6.01;
(c) Indebtedness of Unrestricted Subsidiaries;
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(d) Indebtedness of any Subsidiary incurred to finance the
acquisition, construction or improvement of any fixed or capital assets,
including Capital Lease Obligations and any Indebtedness assumed in connection
with the acquisition of any such assets or secured by a Lien on any such assets
prior to the acquisition thereof, and extensions, renewals and replacements of
any such Indebtedness that do not increase the outstanding principal amount
thereof; provided that such Indebtedness is incurred prior to or within 365 days
after such acquisition or the completion of such construction or improvement
and;
(e) Indebtedness, other than as permitted by subsections (a)
through (d) above, that does not at the time of the incurrence of such
Indebtedness exceed 5% of Consolidated Net Tangible Assets of the Borrower and
its Material Restricted Subsidiaries as at the end of the most recent quarter.
SECTION 6.05. Reverse Designation of Unrestricted
Subsidiaries. The Borrower will not reverse the designation of an Unrestricted
Subsidiary (which reverse designation is approved by the Board of Directors of
the Borrower) unless both before and after giving effect to such reverse
designation, (a) no Default shall exist, including, without limitation, a breach
of Section 5.10, and (b) no default or event of default shall exist or be
continuing under the Pennzoil Company Debt Securities Indenture dated as of
December 15, 1992, with Chase Bank of Texas, National Association, as trustee.
Notice of any such reverse designation by the Borrower shall be delivered by the
Borrower to the Administrative Agent together with a copy of the resolutions of
the Board of Directors of the Borrower approving such reverse designation and an
officer's certificate certifying that such reverse designation complies with the
requirements of this Section 6.05. Such reverse designation shall become
effective upon receipt by the Administrative Agent of the foregoing. Any reverse
designation that fails to comply with the terms of this Section 6.05 shall be
null and void and of no effect whatsoever.
ARTICLE VII
Events of Default
If any of the following events ("Events of Default") shall
occur:
(a) the Borrower shall fail to pay any principal of any Loan
or any reimbursement obligation in respect of any LC Disbursement when and as
the same shall become due and payable, whether at the due date thereof or at a
date fixed for prepayment thereof or otherwise;
(b) the Borrower shall fail to pay any interest on any Loan
when and as the same shall become due and payable, and such failure shall
continue unremedied for a period of five Business Days or the Borrower shall
fail to pay any fee or any other amount (other than an amount referred to in
clause (a) of this Article) payable under this Agreement, when and as the same
shall become due and payable, and such failure shall continue unremedied for a
period of fifteen Business Days;
(c) any representation or warranty made or deemed made by or
on behalf of the Borrower or any Subsidiary in this Agreement shall prove to
have been incorrect in any material respect when made or deemed made;
<PAGE> 48
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(d) the Borrower shall fail to observe or perform any
covenant, condition or agreement contained in Section 5.02, 5.03 (with respect
to the Borrower's existence), 5.08 or 5.10 or in Article VI;
(e) the Borrower shall fail to observe or perform any
covenant, condition or agreement contained in this Agreement (other than those
specified in clause (a), (b) or (d) of this Article), and such failure shall
continue unremedied for a period of 30 days after notice thereof from the
Administrative Agent to the Borrower (which notice will be given at the request
of any Lender);
(f) the Borrower or any Subsidiary shall fail to make any
payment (whether of principal or interest and regardless of amount) in respect
of any Material Indebtedness, when and as the same shall become due and payable
after giving effect to any period of grace with respect thereto;
(g) any event or condition occurs that results in any Material
Indebtedness becoming due prior to its scheduled maturity or that results in any
Material Indebtedness being required to be prepaid, repurchased, redeemed or
defeased prior to its scheduled maturity; provided that this clause (g) shall
not apply to secured Indebtedness that becomes due as a result of the voluntary
sale or transfer of the property or assets securing such Indebtedness;
(h) an involuntary proceeding shall be commenced or an
involuntary petition shall be filed seeking (i) liquidation, reorganization or
other relief in respect of the Borrower or any Subsidiary that is not a De
Minimis Subsidiary or its debts, or of a substantial part of its assets, under
any Federal, state or foreign bankruptcy, insolvency, receivership or similar
law now or hereafter in effect or (ii) the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official for the Borrower or any
Subsidiary that is not a De Minimis Subsidiary or for a substantial part of its
assets, and, in any such case, such proceeding or petition shall continue
undismissed for 60 days or an order or decree approving or ordering any of the
foregoing shall be entered;
(i) the Borrower or any Subsidiary that is not a De Minimis
Subsidiary shall (i) voluntarily commence any proceeding or file any petition
seeking liquidation, reorganization or other relief under any Federal, state or
foreign bankruptcy, insolvency, receivership or similar law now or hereafter in
effect, (ii) consent to the institution of, or fail to contest in a timely and
appropriate manner, any proceeding or petition described in clause (h) of this
Article, (iii) apply for or consent to the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official for the Borrower or any
Subsidiary that is not a De Minimis Subsidiary or for a substantial part of its
assets, (iv) file an answer admitting the material allegations of a petition
filed against it in any such proceeding, (v) make a general assignment for the
benefit of creditors or (vi) take any action for the purpose of effecting any of
the foregoing;
(j) the Borrower or any Subsidiary that is not a De Minimis
Subsidiary shall become unable, admit in writing its inability or fail generally
to pay its debts as they become due;
(k) one or more judgments for the payment of money in an
aggregate amount in excess of $50,000,000 in excess of insurance in respect
thereof shall be rendered against the Borrower, any Subsidiary that is not a De
Minimis Subsidiary or any combination thereof and the same shall remain
undischarged for a period of 45 consecutive days during which execution shall
not be effectively stayed,
<PAGE> 49
45
or any action shall be legally taken by a judgment creditor to attach or levy
upon any assets of the Borrower or any Subsidiary that is not a De Minimis
Subsidiary to enforce any such judgment;
(l) an ERISA Event shall have occurred that when taken
together with all other ERISA Events that have occurred, could reasonably be
expected to result in a Material Adverse Effect; or
(m) a Change in Control shall occur;
then, and in every such event (other than an event with respect to the Borrower
described in clause (h) or (i) of this Article), and at any time thereafter
during the continuance of such event, the Administrative Agent may, and at the
request of the Required Lenders shall, by notice to the Borrower, take either or
both of the following actions, at the same or different times: (i) terminate the
Commitments, and thereupon the Commitments shall terminate immediately, and (ii)
declare the Loans then outstanding to be due and payable in whole (or in part,
in which case any principal not so declared to be due and payable may thereafter
be declared to be due and payable), and thereupon the principal of the Loans so
declared to be due and payable, together with accrued interest thereon and all
fees and other obligations of the Borrower accrued hereunder, shall become due
and payable immediately, without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by the Borrower; and in case of any
event with respect to the Borrower described in clause (h) or (i) of this
Article, the Commitments shall automatically terminate and the principal of the
Loans then outstanding, together with accrued interest thereon and all fees and
other obligations of the Borrower accrued hereunder, shall automatically become
due and payable, without presentment, demand, protest or other notice of any
kind, all of which are hereby waived by the Borrower.
ARTICLE VIII
The Administrative Agent
Each of the Lenders and the Issuing Bank hereby irrevocably
appoints the Administrative Agent as its agent and authorizes the Administrative
Agent to take such actions on its behalf and to exercise such powers as are
delegated to the Administrative Agent by the terms hereof, together with such
actions and powers as are reasonably incidental thereto.
The bank serving as the Administrative Agent hereunder shall
have the same rights and powers in its capacity as a Lender as any other Lender
and may exercise the same as though it were not the Administrative Agent, and
such bank and its Affiliates may accept deposits from, lend money to and
generally engage in any kind of business with the Borrower or any Subsidiary or
other Affiliate thereof as if it were not the Administrative Agent hereunder.
The Administrative Agent shall not have any duties or
obligations except those expressly set forth herein. Without limiting the
generality of the foregoing, (a) the Administrative Agent shall not be subject
to any fiduciary or other implied duties, regardless of whether a Default has
occurred and is continuing, (b) the Administrative Agent shall not have any duty
to take any discretionary action or exercise any discretionary powers, except
discretionary rights and powers expressly contemplated hereby that the
Administrative Agent is required to exercise in writing by the Required Lenders
(or such
<PAGE> 50
46
other number or percentage of the Lenders as shall be necessary under the
circumstances as provided in Section 9.02), and (c) except as expressly set
forth herein, the Administrative Agent shall not have any duty to disclose, and
shall not be liable for the failure to disclose, any information relating to the
Borrower or any of its Subsidiaries that is communicated to or obtained by the
bank serving as Administrative Agent or any of its Affiliates in any capacity.
The Administrative Agent shall not be liable to the Lenders for any action taken
or not taken by it with the consent or at the request of the Required Lenders
(or such other number or percentage of the Lenders as shall be necessary under
the circumstances as provided in Section 9.02) or in the absence of its own
gross negligence or wilful misconduct. The Administrative Agent shall be deemed
not to have knowledge of any Default unless and until written notice thereof is
given to the Administrative Agent by the Borrower or a Lender, and the
Administrative Agent shall not be responsible for or have any duty to ascertain
or inquire into (i) any statement, warranty or representation made in or in
connection with this Agreement, (ii) the contents of any certificate, report or
other document delivered hereunder or in connection herewith, (iii) the
performance or observance of any of the covenants, agreements or other terms or
conditions set forth herein, (iv) the validity, enforceability, effectiveness or
genuineness of this Agreement or any other agreement, instrument or document, or
(v) the satisfaction of any condition set forth in Article IV or elsewhere
herein, other than to confirm receipt of items expressly required to be
delivered to the Administrative Agent.
The Administrative Agent shall be entitled to rely upon, and
shall not incur any liability for relying upon, any notice, request,
certificate, consent, statement, instrument, document or other writing believed
by it to be genuine and to have been signed or sent by the proper Person. The
Administrative Agent also may rely upon any statement made to it orally or by
telephone and believed by it to be made by the proper Person, and shall not
incur any liability for relying thereon. The Administrative Agent may consult
with legal counsel (who may be counsel for the Borrower), independent
accountants and other experts selected by it, and shall not be liable to the
Lenders for any action taken or not taken by it in accordance with the advice of
any such counsel, accountants or experts.
The Administrative Agent may perform any and all its duties
and exercise its rights and powers by or through any one or more sub-agents
appointed by the Administrative Agent. The Administrative Agent and any such
sub-agent may perform any and all its duties and exercise its rights and powers
through their respective Related Parties. The exculpatory provisions of the
preceding paragraphs shall apply to any such sub-agent and to the Related
Parties of the Administrative Agent and any such sub-agent, and shall apply to
their respective activities in connection with the syndication of the credit
facilities provided for herein as well as activities as Administrative Agent.
Subject to the appointment and acceptance of a successor
Administrative Agent as provided in this paragraph, the Administrative Agent may
resign at any time by notifying the Lenders, the Issuing Bank and the Borrower.
Upon any such resignation, the Required Lenders shall have the right, to appoint
a successor and, if there is no Default or Event of Default, the Borrower shall
have the right to consent, in writing, prior to the appointment of a successor,
provided that such consent shall not be unreasonably withheld. If no successor
shall have been so appointed by the Required Lenders and shall have accepted
such appointment within 30 days after the retiring Administrative Agent gives
notice of its resignation, then the retiring Administrative Agent may, on behalf
of the Lenders and the Issuing Bank, appoint a successor Administrative Agent
which shall be a commercial bank engaged or licensed to conduct banking business
under the laws of the United States or a state thereof with an office in New
<PAGE> 51
47
York, New York, or an Affiliate of any such bank that maintains an office in the
United States and will administer this Agreement from such office. Upon the
acceptance of its appointment as Administrative Agent hereunder by a successor,
such successor shall succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Administrative Agent, and the retiring
Administrative Agent shall be discharged from its duties and obligations
hereunder. The fees payable by the Borrower to a successor Administrative Agent
shall be the same as those payable to its predecessor unless otherwise agreed
between the Borrower and such successor. After the Administrative Agent's
resignation hereunder, the provisions of this Article and Section 9.03 shall
continue in effect for the benefit of such retiring Administrative Agent, its
sub-agents and their respective Related Parties in respect of any actions taken
or omitted to be taken by any of them while it was acting as Administrative
Agent.
Each Lender acknowledges that it has, independently and
without reliance upon the Administrative Agent or any other Lender and based on
such documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the
Administrative Agent or any other Lender and based on such documents and
information as it shall from time to time deem appropriate, continue to make its
own decisions in taking or not taking action under or based upon this Agreement,
any related agreement or any document furnished hereunder or thereunder. Each
Lender acknowledges that Vinson & Elkins L.L.P. is acting in the Transactions as
special counsel to the Administrative Agent only. Each Lender will consult with
its own legal counsel to the extent that is deems necessary in connection with
the Transactions.
None of the Documentation Agent, the Syndication Agent or any
Co-Agent shall have any duties or responsibilities hereunder in its capacity as
such.
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices. Except in the case of notices and other
communications expressly permitted to be given by telephone, all notices and
other communications provided for herein shall be in writing and shall be
delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy, as follows:
(a) if to the Borrower, to it at 700 Milam, Houston,
Texas 77002, Attention: Assistant Treasurer
(Telecopy No. (713) 546-6040);
(b) if to the Administrative Agent, to it at Chase Bank
of Texas, National Association, c/o Chase Securities
Inc., 600 Travis Street, 20th Floor, Houston, Texas
77002 Attention: Peter Licalzi, (Telecopy No. (713)
216-4117);
(c) if to the Issuing Bank, to it at Chase Bank of Texas,
National Association, 712 Main Street, Mezzanine
South, Houston, Texas 77002, Attention: Mary Ellen
Coffey (Telecopy No. (713) 216-4499); and
<PAGE> 52
48
(d) if to any other Lender, to it at its address (or
telecopy number) set forth in its Administrative
Questionnaire.
Any party hereto may change its address or telecopy number for notices and other
communications hereunder by notice to the other parties hereto. All notices and
other communications given to any party hereto in accordance with the provisions
of this Agreement shall be deemed to have been given on the date of receipt.
SECTION 9.02. Waivers; Amendments. (a) No failure or delay by
the Administrative Agent, the Issuing Bank or any Lender in exercising any right
or power hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. The rights
and remedies of the Administrative Agent, the Issuing Bank and the Lenders
hereunder are cumulative and are not exclusive of any rights or remedies that
they would otherwise have. No waiver of any provision of this Agreement or
consent to any departure by the Borrower therefrom shall in any event be
effective unless the same shall be permitted by paragraph (b) of this Section,
and then such waiver or consent shall be effective only in the specific instance
and for the purpose for which given. Without limiting the generality of the
foregoing, the making of a Loan or issuance of a Letter of Credit shall not be
construed as a waiver of any Default, regardless of whether the Administrative
Agent, any Lender or the Issuing Bank may have had notice or knowledge of such
Default at the time.
(b) Neither this Agreement nor any provision hereof may be
waived, amended or modified except pursuant to an agreement or agreements in
writing entered into by the Borrower and the Required Lenders or by the Borrower
and the Administrative Agent with the consent of the Required Lenders; provided
that no such agreement shall (i) increase the Commitment of any Lender without
the written consent of such Lender, (ii) reduce the principal amount of any Loan
or LC Disbursement or reduce the rate of interest thereon, or reduce any fees
payable hereunder, without the written consent of each Lender affected thereby,
(iii) postpone the scheduled date of payment of the principal amount of any Loan
or LC Disbursement, or any interest thereon, or any fees payable hereunder, or
reduce the amount of, waive or excuse any such payment, or postpone the
scheduled date of expiration of any Commitment, without the written consent of
each Lender affected thereby, (iv) change Section 2.17(b) or (c) in a manner
that would alter the pro rata sharing of payments required thereby, without the
written consent of each Lender, or (v) change any of the provisions of this
Section or the definition of "Required Lenders" or any other provision hereof
specifying the number or percentage of Lenders required to waive, amend or
modify any rights hereunder or make any determination or grant any consent
hereunder, without the written consent of each Lender; provided further that no
such agreement shall amend, modify or otherwise affect the rights or duties of
the Administrative Agent or the Issuing Bank hereunder without the prior written
consent of the Administrative Agent or the Issuing Bank, as the case may be.
SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a) The
Borrower shall pay (i) all reasonable and documented out-of-pocket expenses
incurred by the Administrative Agent and its Affiliates, including the
reasonable and documented fees, charges and disbursements of counsel for the
Administrative Agent, in connection with the syndication of the credit
facilities provided for herein, the preparation and administration of this
Agreement or any amendments, modifications or waivers of the
<PAGE> 53
49
provisions hereof (whether or not the transactions contemplated hereby or
thereby shall be consummated), (ii) all reasonable and documented out-of-pocket
expenses incurred by the Issuing Bank in connection with the issuance,
amendment, renewal or extension of any Letter of Credit or any demand for
payment thereunder and (iii) all out-of-pocket expenses incurred by the
Administrative Agent, the Issuing Bank or any Lender, including the reasonable
and documented fees, charges and disbursements of any counsel for the
Administrative Agent, the Issuing Bank or any Lender, in connection with the
enforcement or protection of its rights in connection with this Agreement,
including its rights under this Section, or in connection with the Loans made or
Letters of Credit issued hereunder, including all such out-of-pocket expenses
incurred during any workout, restructuring or negotiations in respect of such
Loans or Letters of Credit.
(b) The Borrower shall indemnify the Administrative Agent, the
Issuing Bank and each Lender, and each Related Party of any of the foregoing
Persons (each such Person being called an "Indemnitee") against, and hold each
Indemnitee harmless from, any and all losses, claims, damages, liabilities and
related expenses, including the reasonable and documented fees, charges and
disbursements of any counsel for any Indemnitee, incurred by or asserted against
any Indemnitee arising out of, in connection with, or as a result of (i) the
execution or delivery of this Agreement or any agreement or instrument
contemplated hereby, the performance by the parties hereto of their respective
obligations hereunder or the consummation of the Transactions or any other
transactions contemplated hereby, (ii) any Loan or Letter of Credit or the use
of the proceeds therefrom (including any refusal by the Issuing Bank to honor a
demand for payment under a Letter of Credit if the documents presented in
connection with such demand do not strictly comply with the terms of such Letter
of Credit), (iii) any actual or alleged presence or release of Hazardous
Materials on or from any property owned or operated by the Borrower or any of
its Subsidiaries, or any Environmental Liability related in any way to the
Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim,
litigation, investigation or proceeding relating to any of the foregoing,
whether based on contract, tort or any other theory and regardless of whether
any Indemnitee is a party thereto; provided that such indemnity shall not, as to
any Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross
negligence or wilful misconduct of any Indemnitee or arise between Indemnitees.
(c) To the extent that the Borrower fails to pay any amount
required to be paid by it to the Administrative Agent or the Issuing Bank under
paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the
Administrative Agent or the Issuing Bank, as the case may be, such Lender's
Applicable Percentage (determined as of the time that the applicable
unreimbursed expense or indemnity payment is sought) of such unpaid amount;
provided that the unreimbursed expense or indemnified loss, claim, damage,
liability or related expense, as the case may be, was incurred by or asserted
against the Administrative Agent or the Issuing Bank in its capacity as such.
(d) To the extent permitted by applicable law, the Borrower
shall not assert, and hereby waives, any claim against any Indemnitee, on any
theory of liability, for special, indirect, consequential or punitive damages
(as opposed to direct or actual damages) arising out of, in connection with, or
as a result of, this Agreement or any agreement or instrument contemplated
hereby, the Transactions, any Loan or Letter of Credit or the use of the
proceeds thereof.
<PAGE> 54
50
(e) All amounts due under this Section shall be payable
promptly after written demand therefor.
(f) Each Indemnitee shall give prompt notice to the Borrower
of any claim for indemnification under this Section 9.03 by such Indemnitee and
shall consult with the Borrower in the conduct of such Indemnitee's legal
defense of such claim; provided, however, that an Indemnitee's failure to give
such prompt notice to the Borrower or to seek such consultation with the
Borrower shall not constitute a defense to any claim for indemnification by such
Indemnitee unless, and only to the extent that, such failure materially
prejudices the Borrower.
SECTION 9.04. Successors and Assigns. (a) The provisions of
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns permitted hereby (including
any Affiliate of the Issuing Bank that issues any Letter of Credit), except that
the Borrower may not assign or otherwise transfer any of its rights or
obligations hereunder without the prior written consent of each Lender (and any
attempted assignment or transfer by the Borrower without such consent shall be
null and void). Nothing in this Agreement, expressed or implied, shall be
construed to confer upon any Person (other than the parties hereto, their
respective successors and assigns permitted hereby (including any Affiliate of
the Issuing Bank that issues any Letter of Credit) and, to the extent expressly
contemplated hereby, the Related Parties of each of the Administrative Agent,
the Issuing Bank and the Lenders) any legal or equitable right, remedy or claim
under or by reason of this Agreement.
(b) Any Lender may assign to one or more assignees all or a
portion of its rights and obligations under this Agreement (including all or a
portion of its Commitment and the Loans at the time owing to it); provided that
(i) except in the case of an assignment to a Lender or an Affiliate of a Lender,
each of the Borrower and the Administrative Agent (and, in the case of an
assignment of all or a portion of a Commitment or any Lender's obligations in
respect of its LC Exposure, the Issuing Bank) must give their prior written
consent to such assignment (which consent shall not be unreasonably withheld),
(ii) except in the case of an assignment to a Lender or an Affiliate of a Lender
or an assignment of the entire remaining amount of the assigning Lender's
Commitment, the amount of the Commitment of the assigning Lender subject to each
such assignment (determined as of the date the Assignment and Acceptance with
respect to such assignment is delivered to the Administrative Agent) shall not
be less than $5,000,000 unless each of the Borrower and the Administrative Agent
otherwise consent, (iii) each partial assignment shall be made as an assignment
of a proportionate part of all the assigning Lender's rights and obligations
under this Agreement, except that this clause (iii) shall not apply to rights in
respect of outstanding Competitive Loans, (iv) the parties to each assignment
shall execute and deliver to the Administrative Agent an Assignment and
Acceptance, together with a processing and recordation fee of $3,500, and (v)
the assignee, if it shall not be a Lender, shall deliver to the Administrative
Agent an Administrative Questionnaire; and provided further that any consent of
the Borrower otherwise required under this paragraph shall not be required if an
Event of Default under clause (h) or (i) of Article VII has occurred and is
continuing. Subject to acceptance and recording thereof pursuant to paragraph
(d) of this Section, from and after the effective date specified in each
Assignment and Acceptance the assignee thereunder shall be a party hereto and,
to the extent of the interest assigned by such Assignment and Acceptance, have
the rights and obligations of a Lender under this Agreement, and the assigning
Lender thereunder shall, to the extent of the interest assigned by such
Assignment and Acceptance, be released from its obligations under this Agreement
(and, in the case of
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51
an Assignment and Acceptance covering all of the assigning Lender's rights and
obligations under this Agreement, such Lender shall cease to be a party hereto
but shall continue to be entitled to the benefits of Sections 2.14, 2.15, 2.16
and 9.03). Any assignment or transfer by a Lender of rights or obligations under
this Agreement that does not comply with this paragraph shall be treated for
purposes of this Agreement as a sale by such Lender of a participation in such
rights and obligations in accordance with paragraph (e) of this Section.
(c) The Administrative Agent, acting for this purpose as an
agent of the Borrower, shall maintain at one of its offices in The City of New
York a copy of each Assignment and Acceptance delivered to it and a register for
the recordation of the names and addresses of the Lenders, and the Commitment
of, and principal amount of the Loans and LC Disbursements owing to, each Lender
pursuant to the terms hereof from time to time (the "Register"). The entries in
the Register shall be conclusive, and the Borrower, the Administrative Agent,
the Issuing Bank and the Lenders may treat each Person whose name is recorded in
the Register pursuant to the terms hereof as a Lender hereunder for all purposes
of this Agreement, notwithstanding notice to the contrary. The Register shall be
available for inspection by the Borrower, the Issuing Bank and any Lender, at
any reasonable time and from time to time upon reasonable prior notice.
(d) Upon its receipt of a duly completed Assignment and
Acceptance executed by an assigning Lender and an assignee, the assignee's
completed Administrative Questionnaire (unless the assignee shall already be a
Lender hereunder), the processing and recordation fee referred to in paragraph
(b) of this Section and any written consent to such assignment required by
paragraph (b) of this Section, the Administrative Agent shall accept such
Assignment and Acceptance and record the information contained therein in the
Register. No assignment shall be effective for purposes of this Agreement unless
it has been recorded in the Register as provided in this paragraph.
(e) Any Lender may, without the consent of the Borrower, the
Administrative Agent or the Issuing Bank, sell participations to one or more
banks or other entities (a "Participant") in all or a portion of such Lender's
rights and obligations under this Agreement (including all or a portion of its
Commitment and the Loans owing to it); provided that (i) such Lender's
obligations under this Agreement shall remain unchanged, (ii) such Lender shall
remain solely responsible to the other parties hereto for the performance of
such obligations and (iii) the Borrower, the Administrative Agent, the Issuing
Bank and the other Lenders shall continue to deal solely and directly with such
Lender in connection with such Lender's rights and obligations under this
Agreement. Any agreement or instrument pursuant to which a Lender sells such a
participation shall provide that such Lender shall retain the sole right to
enforce this Agreement and to approve any amendment, modification or waiver of
any provision of this Agreement; provided that such agreement or instrument may
provide that such Lender will not, without the consent of the Participant, agree
to any amendment, modification or waiver described in the first proviso to
Section 9.02(b) that affects such Participant. Subject to paragraph (f) of this
Section, the Borrower agrees that each Participant shall be entitled to the
benefits of Sections 2.14, 2.15 and 2.16 to the same extent as if it were a
Lender and had acquired its interest by assignment pursuant to paragraph (b) of
this Section. To the extent permitted by law, each Participant also shall be
entitled to the benefits of Section 9.08 as though it were a Lender, provided
such Participant agrees to be subject to Section 2.17(c) as though it were a
Lender. Each Lender that sell participations pursuant to this Section 9.04(e)
shall deliver a notice of such participation setting forth the purchaser
<PAGE> 56
52
thereof to the Borrower, provided that such Lender shall not be liable for the
failure to provide such notice.
(f) A Participant shall not be entitled to receive any greater
payment under Sections 2.14 or 2.16 than the applicable Lender would have been
entitled to receive with respect to the participation sold to such Participant.
A Participant that would be a Foreign Lender if it were a Lender shall not be
entitled to the benefits of Section 2.16 unless the Borrower is notified of the
participation sold to such Participant and such Participant agrees, for the
benefit of the Borrower, to comply with Section 2.16(e) as though it were a
Lender.
(g) Any Lender may at any time pledge or assign a security
interest in all or any portion of its rights under this Agreement to secure
obligations of such Lender, including any pledge or assignment to secure
obligations to a Federal Reserve Bank, and this Section shall not apply to any
such pledge or assignment of a security interest; provided that no such pledge
or assignment of a security interest shall release a Lender from any of its
obligations hereunder or substitute any such pledgee or assignee for such Lender
as a party hereto.
SECTION 9.05. Survival. All covenants, agreements,
representations and warranties made by the Borrower herein and in the
certificates or other instruments delivered in connection with or pursuant to
this Agreement shall be considered to have been relied upon by the other parties
hereto and shall survive the execution and delivery of this Agreement and the
making of any Loans and issuance of any Letters of Credit, regardless of any
investigation made by any such other party or on its behalf and notwithstanding
that the Administrative Agent, the Issuing Bank or any Lender may have had
notice or knowledge of any Default or incorrect representation or warranty at
the time any credit is extended hereunder, and shall continue in full force and
effect as long as the principal of or any accrued interest on any Loan or any
fee or any other amount payable under this Agreement is outstanding and unpaid
or any Letter of Credit is outstanding and so long as the Commitments have not
expired or terminated. The provisions of Sections 2.14, 2.15, 2.16, and 9.03 and
Article VIII shall survive and remain in full force and effect regardless of the
consummation of the transactions contemplated hereby, the repayment of the
Loans, the expiration or termination of the Letters of Credit and the
Commitments or the termination of this Agreement or any provision hereof.
SECTION 9.06. Counterparts; Integration; Effectiveness. This
Agreement may be executed in counterparts (and by different parties hereto on
different counterparts), each of which shall constitute an original, but all of
which when taken together shall constitute a single contract. This Agreement and
any separate letter agreements with respect to fees payable to the
Administrative Agent constitute the entire contract among the parties relating
to the subject matter hereof and supersede any and all previous agreements and
understandings, oral or written, relating to the subject matter hereof. Except
as provided in Section 4.01, this Agreement shall become effective when it shall
have been executed by the Administrative Agent and when the Administrative Agent
shall have received counterparts hereof which, when taken together, bear the
signatures of each of the other parties hereto, and thereafter shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns. Delivery of an executed counterpart of a signature page
of this Agreement by telecopy shall be effective as delivery of a manually
executed counterpart of this Agreement.
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SECTION 9.07. Severability. Any provision of this Agreement
held to be invalid, illegal or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such invalidity, illegality
or unenforceability without affecting the validity, legality and enforceability
of the remaining provisions hereof; and the invalidity of a particular provision
in a particular jurisdiction shall not invalidate such provision in any other
jurisdiction.
SECTION 9.08. Right of Setoff. If an Event of Default shall
have occurred and be continuing, each Lender and each of its Affiliates is
hereby authorized at any time and from time to time, to the fullest extent
permitted by law, to set off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held and other obligations at
any time owing by such Lender or Affiliate to or for the credit or the account
of the Borrower against any of and all the obligations of the Borrower now or
hereafter existing under this Agreement held by such Lender, irrespective of
whether or not such Lender shall have made any demand under this Agreement and
although such obligations may be unmatured. The rights of each Lender under this
Section are in addition to other rights and remedies (including other rights of
setoff) which such Lender may have.
SECTION 9.09. Governing Law; Jurisdiction; Consent to Service
of Process. (a) This Agreement shall be construed in accordance with and
governed by the law of the State of New York.
(b) The Borrower hereby irrevocably and unconditionally
submits, for itself and its property, to the nonexclusive jurisdiction of the
Supreme Court of the State of New York sitting in New York County and of the
United States District Court of the Southern District of New York, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement, or for recognition or enforcement of any judgment,
and each of the parties hereto hereby irrevocably and unconditionally agrees
that all claims in respect of any such action or proceeding may be heard and
determined in such New York State or, to the extent permitted by law, in such
Federal court. Each of the parties hereto agrees that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this Agreement shall affect any right that the Administrative Agent,
the Issuing Bank or any Lender may otherwise have to bring any action or
proceeding relating to this Agreement against the Borrower or its properties in
the courts of any jurisdiction.
(c) The Borrower hereby irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection which it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement in any court
referred to in paragraph (b) of this Section. Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.
(d) Each party to this Agreement irrevocably consents to
service of process in the manner provided for notices in Section 9.01. Nothing
in this Agreement will affect the right of any party to this Agreement to serve
process in any other manner permitted by law.
SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE
TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR
<PAGE> 58
54
INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH
PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B)
ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER
INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION.
SECTION 9.11. Headings. Article and Section headings and the
Table of Contents used herein are for convenience of reference only, are not
part of this Agreement and shall not affect the construction of, or be taken
into consideration in interpreting, this Agreement.
SECTION 9.12. Confidentiality. Each of the Administrative
Agent, the Issuing Bank and the Lenders agrees to maintain (and use reasonable
efforts to cause its respective agents and representatives to maintain) the
confidentiality of the Information (as defined below), except that Information
may be disclosed (a) to its and its Affiliates' directors, officers, employees
and agents, including accountants, legal counsel and other advisors (it being
understood that the Persons to whom such disclosure is made will be informed of
the confidential nature of such Information and instructed to keep such
Information confidential), (b) to the extent requested by any regulatory
authority, (c) to the extent required by applicable laws or regulations or by
any subpoena or similar legal process, (d) to any other party to this Agreement,
(e) in connection with the exercise of any remedies hereunder or any suit,
action or proceeding relating to this Agreement or the enforcement of rights
hereunder, (f) subject to an agreement containing provisions substantially the
same as those of this Section, to any assignee of or Participant in, or any
prospective assignee of or Participant in, any of its rights or obligations
under this Agreement, (g) with the consent of the Borrower or (h) to the extent
such Information (i) becomes publicly available other than as a result of a
breach of this Section or (ii) becomes available to the Administrative Agent,
the Issuing Bank or any Lender on a nonconfidential basis from a source other
than the Borrower. For the purposes of this Section, "Information" means all
information received from the Borrower relating to the Borrower, its
Subsidiaries, its Affiliates or their respective businesses, other than any such
information that is available to the Administrative Agent, the Issuing Bank or
any Lender on a nonconfidential basis prior to disclosure by the Borrower. Any
Person required to maintain the confidentiality of Information as provided in
this Section shall be considered to have complied with its obligation to do so
if such Person has exercised the same degree of care to maintain the
confidentiality of such Information as such Person would accord to its own
confidential information. The provisions of this Section 9.12 shall remain
operative and in full force and effect for a period of three years following the
expiration and termination of this Agreement.
SECTION 9.13. Interest Rate Limitation. Notwithstanding
anything herein to the contrary, if at any time the interest rate applicable to
any Loan, together with all fees, charges and other amounts which are treated as
interest on such Loan under applicable law (collectively the "Charges"), shall
exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for,
charged, taken, received or reserved by the Lender holding such Loan in
accordance with applicable law, the rate of interest payable in respect of such
Loan hereunder, together with all Charges payable in respect thereof, shall be
limited to the Maximum Rate and, to the extent lawful, the interest and Charges
that
<PAGE> 59
55
would have been payable in respect of such Loan but were not payable as a result
of the operation of this Section shall be cumulated and the interest and Charges
payable to such Lender in respect of other Loans or periods shall be increased
(but not above the Maximum Rate therefor) until such cumulated amount, together
with interest thereon at the Federal Funds Effective Rate to the date of
repayment, shall have been received by such Lender.
<PAGE> 60
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
PENNZOIL COMPANY,
as Borrower
By
--------------------------------------
Name:
Title:
CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION,
individually and as Administrative Agent,
By
--------------------------------------
Name:
Title:
[Signature Page - 1]
<PAGE> 61
NATIONSBANK, N.A.,
individually and as Documentation Agent
By
--------------------------------------
Name:
Title:
[Signature Page - 2]
<PAGE> 62
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK,
individually and as Syndication Agent
By
--------------------------------------
Name:
Title:
[Signature Page - 3]
<PAGE> 63
THE FIRST NATIONAL BANK OF CHICAGO
By
--------------------------------------
Name:
Title:
[Signature Page - 4]
<PAGE> 64
THE BANK OF NOVA SCOTIA
By
--------------------------------------
Name:
Title:
[Signature Page - 5]
<PAGE> 65
SOCIETE GENERALE, SOUTHWEST AGENCY
By
--------------------------------------
Name:
Title:
[Signature Page - 6]
<PAGE> 66
THE INDUSTRIAL BANK OF JAPAN, LIMITED
NEW YORK BRANCH
By
--------------------------------------
Name:
Title:
[Signature Page - 7]
<PAGE> 67
DEUTSCHE BANK AG
NEW YORK BRANCH AND/OR
CAYMAN ISLANDS BRANCH
By
--------------------------------------
Name:
Title:
By
--------------------------------------
Name:
Title:
[Signature Page - 8]
<PAGE> 68
CREDIT LYONNAIS NEW YORK BRANCH
By
--------------------------------------
Name:
Title:
[Signature Page - 9]
<PAGE> 69
CITIBANK, N.A.
By
--------------------------------------
Name:
Title:
[Signature Page - 10]
<PAGE> 70
UBS AG, STAMFORD BRANCH
By
--------------------------------------
Name:
Title:
[Signature Page - 11]
<PAGE> 71
THE BANK OF NEW YORK
By
--------------------------------------
Name:
Title:
[Signature Page - 12]
<PAGE> 72
COMMERZBANK AKTIENGESELLSCHAFT,
ATLANTA AGENCY
By
--------------------------------------
Name:
Title:
By
--------------------------------------
Name:
Title:
[Signature Page - 13]
<PAGE> 1
EXHIBIT 10(V)
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "First Amendment") dated as
of March 19, 1999 ("First Amendment Effective Date"), is by and among
PENNZENERGY COMPANY, a Delaware corporation formerly known as Pennzoil Company
(the "Borrower"), CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, individually, as
the Issuing Bank and as Administrative Agent, and the Lenders (as hereinafter
defined) signatories hereto.
PRELIMINARY STATEMENTS
1. The Borrower entered into a Credit Agreement dated as of November
17, 1998 (the "Credit Agreement"), among the Borrower, Chase Bank of Texas,
National Association, individually, as an Issuing Bank and as
Administrative Agent, and the financial institutions parties thereto (the
"Lenders"). Capitalized terms used but not otherwise defined herein shall
have the meanings assigned such terms in the Credit Agreement.
2. The Borrower has requested that certain provisions of the Credit
Agreement be modified and amended.
3. The Borrower, the Administrative Agent, and the Lenders have agreed
to amend the Credit Agreement on the terms and conditions contained herein.
AGREEMENT
In consideration of the premises and the mutual covenants contained herein
and in the Credit Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
SECTION 1. Amendment of Section 1.01 of the Credit Agreement. Section 1.01
of the Credit Agreement is hereby amended by adding the following new
definitions thereto:
(a) immediately following the definition of "ABR" contained in Section
1.01:
"Adjusted EBITDAX" means, as to the Borrower and its Restricted
Subsidiaries on a consolidated basis and for any period, without
duplication, the amount equal to net income determined in accordance with
GAAP, plus to the extent deducted from net income, (a) Interest Expense,
(b) depreciation, depletion or amortization, (c) total oil and gas
exploration expenses, including, without limitation, dry-hole costs, (d)
other non-cash expenses, (e) for the Rolling Periods ending on and prior to
December 31, 1999 only, one-time investment banking and legal fees incurred
in 1998 and one-time costs and fees incurred in connection with the
Borrower's corporate restructuring that concluded as of December 1998, in
the aggregate not to exceed $28,000,000, (f) income and state franchise tax
expenses, and (g) income from discontinued operations; provided, that, (i)
extraordinary gains or losses for any such period, (ii) any and all
dividends received by the Borrower with respect to the common stock of
Chevron Corporation owned by the Borrower, and (iii) any gains or losses
generated from the sale or exchange of marketable securities held by the
Borrower or its Restricted Subsidiaries shall not be included in Adjusted
EBITDAX.
(b) immediately following the definition of "Adjusted LIBO Rate" contained
in Section 1.01:
"Adjusted Total Debt" shall mean, as of the date of determination, all
Funded Indebtedness of the Borrower and its Restricted Subsidiaries,
without duplication, excluding, however, (a) the Indebtedness evidenced by
the 4.90% Exchangeable Senior Debentures due August 15, 2008 issued
pursuant to that certain Third Supplemental Indenture dated as of August 3,
1998 by and between the Borrower and Chase Bank of Texas, National
Association, as trustee, as amended from time to time, (b) the 4.95%
<PAGE> 2
Exchange Senior Debentures due August 15, 2008 issued pursuant to that
certain Fourth Supplemental Indenture dated as of August 3, 1998 by and
between the Borrower and Chase Bank of Texas, National Association, as
trustee, as amended from time to time, and (c) cash and short-term
marketable securities with an A2/P2 rating or higher from S&P, Moody's or
Duff & Phelps or the equivalent thereof held by the Borrower and its
Restricted Subsidiaries in excess of the sum of $10,000,000, the total
Committed Credit Exposure of all Lenders and the aggregate principal amount
of commercial paper supported by the availability of Loan proceeds.
"Adjusted Total Debt Leverage Ratio" shall mean on any day, the ratio
of (a) Adjusted Total Debt as of the date of determination to (b) Adjusted
EBITDAX for the Rolling Period ending on the most recent Quarterly Date as
of the date of determination.
(c) immediately following the definition of "Control" contained in Section
1.01:
"Current Information" shall mean, as of any day, the financial
statements and other related information for any applicable period most
recently required to be delivered to the Administrative Agent pursuant to
Sections 5.01(a), 5.01(b) and 5.01(c).
(d) immediately following the definition of "Financial Officer" contained
in Section 1.01:
"First Amendment" shall mean the First Amendment to Credit Agreement
dated as of the First Amendment Effective Date among the Borrower and the
Administrative Agent on behalf of the Lenders.
"First Amendment Effective Date" shall mean March 19, 1999.
(e) immediately following the definition of "Foreign Lender" contained in
Section 1.01:
"Funded Indebtedness" shall mean, as to any Person, without
duplication, (a) all Indebtedness for borrowed money, all obligations
evidenced by bonds, debentures, notes, or other similar instruments, (b)
all Capital Lease Obligations, (c) all Guarantees of Funded Indebtedness
for which demand has been made for payment and (d) the aggregate amount of
all LC Disbursements that have not yet been reimbursed by or on behalf of
the Borrower.
(f) immediately following the definition of "Interest Election Request"
contained in Section 1.01:
"Interest Expense" shall mean, as to the Borrower and its Restricted
Subsidiaries on a consolidated basis and for any period, without
duplication, total interest expenses, whether paid or accrued as
liabilities (including the interest component of Capital Lease
Obligations), with respect to all outstanding Indebtedness, including,
without limitation, all commissions, discounts and other fees and charges
owed with respect to any financing or letters of credit to the extent that
such costs are included within interest expense under GAAP, plus the net
amount payable (or minus the net amount receivable) under interest rate
protection agreements during such period.
(g) immediately following the definition of "Prior Credit Facility"
contained in Section 1.01:
"Quarterly Date" shall mean the last day of each March, June,
September and December in each year.
(h) immediately following the definition of "Revolving Loan Maturity Date"
contained in Section 1.01:
"Rolling Period" means any period of four consecutive fiscal quarters
of the Borrower.
SECTION 2. Amendment of Existing Terms in Section 1.01 of the Credit
Agreement.
(a) The definition of "Agreement" contained in Section 1.01 of the Credit
Agreement is hereby amended to read in its entirety as follows:
"Agreement" shall mean this Credit Agreement, as amended by the First
Amendment and as further amended, modified or supplemented from time to
time.
2
<PAGE> 3
(b) The definition of "Applicable Rate" contained in Section 1.01 of the
Credit Agreement is hereby amended to read in its entirety as follows:
"Applicable Rate" shall mean, for any day after the First Amendment
Effective Date, with respect to (a) the facility fees payable hereunder, a
rate per annum equal to 0.20%, and (b) any Eurodollar Revolving Loan or any
Eurodollar Term Loan, a rate per annum equal to the applicable per annum
percentage set forth at the appropriate intersection in the table shown
below, based on the Adjusted Total Debt Leverage Ratio for the Rolling
Period ending on the most recent Quarterly Date with respect to which the
Borrower is required to deliver the Current Information:
<TABLE>
<CAPTION>
APPLICABLE RATE
ADJUSTED TOTAL DEBT LEVERAGE RATIO PERCENTAGE
- ---------------------------------- ---------------
<S> <C>
Less than or equal to 3.5:1.0............................... .80%
Greater than 3.5:1.0........................................ 1.05%
</TABLE>
In each case, each change in the Applicable Rate for Eurodollar Loans based
on a change in the Current Information shall be effective on the date on
which the Current Information is received by the Administrative Agent and
shall remain in effect until the next change to be effected pursuant to
this paragraph. Notwithstanding the foregoing, if at any time the Borrower
fails to deliver Current Information on or before the date required
pursuant to Section 5.01 (without regard to grace periods), the Applicable
Rate for Eurodollar Loans will be 1.05% from the date such Current
Information is due pursuant to Section 5.01 (without regard to grace
periods) through the date the Administrative Agent receives all Current
Information then due pursuant to Section 5.01.
SECTION 3. Deletion of Existing Terms in Section 1.01 of the Credit
Agreement. Section 1.01 of the Credit Agreement is hereby amended by deleting
the following terms "Adjusted Consolidated Tangible Net Worth," "Consolidated
Tangible Net Worth" and "Index Debt."
SECTION 4. Amendment of Section 5.01(c) of the Credit Agreement. Section
5.01(c) of the Credit Agreement is hereby amended to read in its entirety as
follows:
(c) concurrently with any delivery of financial statements under
clause (a) or (b) above, a certificate of a Financial Officer of the
Borrower certifying (i) as to whether a Default has occurred and, if a
Default has occurred, specifying the details thereof and any action taken
or proposed to be taken with respect thereto and (ii) the Borrower's
calculations of the Adjusted Total Debt Leverage Ratio for the Rolling
Period related to the information contained in such financial statements;
SECTION 5. Amendment of Section 5.10 of the Credit Agreement. Section 5.10
of the Credit Agreement is hereby deleted in its entirety.
SECTION 6. Amendment of Article VI of the Credit Agreement. Article VI of
the Credit Agreement is hereby amended by adding a new Section 6.06 to read in
its entirety as follows:
Section 6.06 Adjusted Total Debt Leverage Ratio. The Borrower will not
permit the Adjusted Total Debt Leverage Ratio to exceed 3.75:1.00
SECTION 7. Limitations. The amendments set forth herein are limited
precisely as written and shall not (a) be deemed to be a consent to, or a waiver
or modification of, any other term or condition of the Credit Agreement or (b)
except as expressly set forth herein, prejudice any right or rights which the
Lenders may now have or may have in the future under or in connection with the
Credit Agreement or any of the other documents or instruments referred to
therein. Except as expressly modified hereby or by express written amendments
thereof, the Credit Agreement and each of the other documents and instruments
executed in connection with any of the foregoing are and shall remain in full
force and effect. In the event of a conflict between this First Amendment and
any of the foregoing documents, the terms of this First Amendment shall be
controlling.
SECTION 8. Conditions Precedent and Effectiveness. This First Amendment
shall not be effective unless and until the Administrative Agent shall have
received the following items, each in form and substance
3
<PAGE> 4
satisfactory to the Administrative Agent: (i) this First Amendment has been
executed and delivered by the Required Lenders to the Administrative Agent and
(ii) this First Amendment has been executed and delivered by the Borrower to the
Administrative Agent.
SECTION 9. Representations and Warranties. The Borrower hereby represents
and warrants to the Administrative Agent and each of the Lenders that (a) except
as affected by the transactions contemplated in the Credit Agreement and this
First Amendment, each of the representations and warranties made by the Borrower
in or pursuant to Credit Agreement is true and correct in all material respects
as of the First Amendment Effective Date, as if made on and as of such date,
except for any representations and warranties made as of a specified date, which
are true and correct in all material respects as of such specified date and (b)
no Default or Event of Default has occurred and is continuing as of the First
Amendment Effective Date.
SECTION 10. Adoption, Ratification and Confirmation of Credit
Agreement. Each of the Borrower, the Administrative Agent and each of the
Lenders signatories hereto hereby adopts, ratifies and confirms the Credit
Agreement, as amended hereby, and acknowledges and agrees that the Credit
Agreement, as amended hereby, is and remains in full force and effect.
SECTION 11. Payment of Expenses. The Borrower agrees, whether or not the
transactions contemplated hereby shall be consummated, to reimburse and save and
hold the Administrative Agent harmless from and against liability for the
payment of all reasonable out-of-pocket costs and expenses arising in connection
with the preparation, execution, delivery, amendment, modification, waiver and
enforcement of, or the preservation of any rights under this First Amendment,
including, without limitation, the reasonable fees and expenses of any local or
other counsel for the Administrative Agent, and all stamp taxes (including
interest and penalties, if any), recording taxes and fees, filing taxes and fees
and other charges which may be payable in respect of, or in respect of any
modification of, the Credit Agreement. The provisions of this Section shall
survive the termination of the Credit Agreement and the repayment of the Loans.
SECTION 12. Governing Law. THIS FIRST AMENDMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND
BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF
THE NEW YORK GENERAL OBLIGATION LAW, OR ANY SIMILAR SUCCESSOR PROVISIONS
THERETO, BUT EXCLUDING ALL OTHER CONFLICT-OF-LAWS RULES) AND TO THE EXTENT
CONTROLLING, LAWS OF THE UNITED STATES OF AMERICA.
SECTION 13. Descriptive Headings, Etc. The descriptive headings of the
several sections of this First Amendment are inserted for convenience only and
shall not be deemed to affect the meaning or construction of any of the
provisions hereof.
SECTION 14. Entire Agreement. This First Amendment and the documents
referred to herein represent the entire understanding of the parties hereto
regarding the subject matter hereof and supersede all prior and contemporaneous
oral and written agreements of the parties hereto with respect to the subject
matter hereof.
SECTION 15. Counterparts. This First Amendment may be executed in any
number of counterparts (including by telecopy) and by different parties on
separate counterparts and all of such counterparts shall together constitute one
and the same instrument.
[signature blocks]
4
<PAGE> 1
EXHIBIT 12
PENNZENERGY COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED DECEMBER 31
------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- -------- -------- --------
(DOLLAR AMOUNTS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations before income from equity
investees........................... $(252,963) $(290,453) $103,968 $146,494 $(48,817)
Distribution of income from equity
investees........................... -- 7,169 6,280 -- 3,351
Income tax provision (benefit)........ (226,285) (167,726) 16,204 96,473 (17,768)
Amortization of capitalized
interest............................ 12,156 8,392 7,795 9,430 8,105
Interest charges...................... 467,993 188,675 179,584 163,478 163,078
--------- --------- -------- -------- --------
Income (loss) before income tax
provision (benefit) and interest
charges............................. $ 901 $(253,943) $313,831 $415,875 $107,949
========= ========= ======== ======== ========
Fixed charges......................... $ 475,897 $ 189,861 $180,216 $169,122 $177,713
========= ========= ======== ======== ========
Ratio of earnings to fixed charges.... -- -- 1.74 2.46 --
========= ========= ======== ======== ========
Amount by which fixed charges exceed
earnings............................ $ 474,996 $ 443,804 $ -- $ -- $ 69,764
========= ========= ======== ======== ========
DETAIL OF INTEREST, FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Interest charges per Consolidated
Statement of Income which includes
amortization of debt discount,
expense and premium................. $ 471,398 $ 185,336 $175,947 $164,044 $161,834
Preferred stock dividends (grossed up
to pre-tax, based on 38% tax
rate)............................... -- -- -- -- 9,073
Add: portion of rental expense
representative of interest
factor(1)........................... 4,499 4,525 4,269 5,078 6,806
--------- --------- -------- -------- --------
Total fixed charges......... $ 475,897 $ 189,861 $180,216 $169,122 $177,713
Less interest capitalized per
Consolidated Statement of Income.... 7,904 1,186 632 5,644 5,562
Less preferred stock dividends........ -- -- -- -- 9,073
--------- --------- -------- -------- --------
Total interest charges...... $ 467,993 $ 188,675 $179,584 $163,478 $163,078
========= ========= ======== ======== ========
</TABLE>
- ---------------
(1) Interest factor based on management's estimates and approximates one-third
of rental expense.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF PENNZENERGY COMPANY
(AS OF DECEMBER 31, 1998)
<TABLE>
<CAPTION>
PZE PARENT
----- -----------
<S> <C> <C>
PennzEnergy Exploration and Production Company L.L.C. (Delaware)....... 100%
Cachuma Gas Processing Company (Delaware)........................... 100%
Canyon Reef Carriers, Inc. (Texas).................................. 100%
Capitan Oil Pipeline Company (Delaware)............................. 100%
PennzEnergy Receivables Company (Delaware).......................... 100%
Pennzoil Energy Marketing Company (Delaware)........................ 100%
Pennzoil Gas Marketing Company (Delaware)........................... 100%
Pennzoil International Company (Delaware)........................... 100%
Pennzoil Beni Suef, Inc. (British Virgin Islands)................. 100%
Pennzoil Caspian Corporation (British Virgin Islands)............. 100%
Pennzoil Caspian Development Corporation (British
Virgin Islands).............................................. 100%
Pennzoil Egypt, Inc. (Delaware)................................... 100%
Pennzoil Exploration Australia, Inc. (British
Virgin Islands).............................................. 100%
Pennzoil Qatar, Inc. (Delaware)................................... 100%
Pennzoil Red Sea, Inc. (British Virgin Islands)................... 100%
Pennzoil Sinai, Inc. (British Virgin Islands)..................... 100%
Pennzoil Suez, Inc. (British Virgin Islands)...................... 100%
Pennzoil Venezuela Corporation, S.A.
(British Virgin Islands)..................................... 100%
Pennzoil Petroleum Pipeline Company (Delaware)...................... 100%
Pennzoil Petroleums Ltd. (Delaware)................................. 100%
Sisquoc Gas Pipeline Company (Delaware)............................. 100%
Richland Development Corporation (Nevada).............................. 100%
Vermejo Park Corporation (Delaware).............................. 100%
Vermejo Minerals Corporation (Delaware)........................ 100%
</TABLE>
<PAGE> 1
EXHIBIT 23(A)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated March 19, 1999 included in this Form 10-K, into PennzEnergy
Company's previously filed Registration Statements on Form S-8 Nos. 2-76935,
2-95869, 33-40192, 33-51473, 33-63384, 333-26019, 333-26021, 333-31257,
333-59011 and 333-69845 and on Form S-3 Nos. 33-50029 and 33-50953.
Houston, Texas
March 19, 1999
<PAGE> 1
23(b)
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the incorporation by reference in PennzEnergy
Company's previously filed Registration Statements on Form S-8 Nos. 2-76935,
2-95869, 33-40192, 33-51473, 33-63384, 333-26019, 333-26021, 333-31257,
333-59011, 333-69845 and on Form S-3 Nos. 33-50029, and 33-50953 of our summary
report dated February 15, 1999 included as Exhibit 99(a) to this Annual Report
on Form 10-K and the data extracted from our reports and the references to our
firm appearing in "Item 1. Business and Item 2. Properties" under the captions
"Oil and Gas - Oil and Gas Reserves" and in "Supplemental Financial and
Statistical Information - Unaudited - Oil and Gas Information" in such Annual
Report on Form 10-K.
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
February 19, 1999
<PAGE> 1
PENNZENERGY COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZENERGY COMPANY, a Delaware corporation (the "Company"),
intends to file with the Securities and Exchange Commission (the "Commission")
under the Securities Exchange Act of 1934, as amended (the "Act"), an Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed
by the Commission pursuant to the Act and the rules and regulations of the
Commission promulgated thereunder, with such amendments, supplements or
appendices thereto as may be necessary or appropriate, together with any and all
exhibits and other documents having relation to said Annual Report;
NOW, THEREFORE, the undersigned in his or her capacity as a director or
officer, or both, as the case may be, of the Company, does hereby appoint
STEPHEN D. CHESEBRO, BRUCE K. MISAMORE and JAMES L. PATE and each of them
severally, his or her true and lawful attorney or attorneys with power to act
with or without the others, and with full power of substitution and
resubstitution, to execute in his or her name, place and stead, in his or her
capacity as a director or officer, or both, as the case may be, of the Company,
said Annual Report and any and all amendments, supplements or appendices thereto
as said attorneys or any of them shall deem necessary or incidental in
connection therewith and to file the same or cause the same to be filed with the
Commission. Each of said attorneys shall have full power and authority to do and
perform in the name and on behalf of the undersigned in any and all capacities,
every act whatsoever necessary or desirable to be done to the premises, as fully
and to all intents and purposes as the undersigned might or could do in person,
the undersigned hereby ratifying and approving the acts of said attorneys and
each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
17th day of February, 1999.
HENRY R. HAMMAN
--------------------------------------
<PAGE> 2
PENNZENERGY COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZENERGY COMPANY, a Delaware corporation (the "Company"),
intends to file with the Securities and Exchange Commission (the "Commission")
under the Securities Exchange Act of 1934, as amended (the "Act"), an Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed
by the Commission pursuant to the Act and the rules and regulations of the
Commission promulgated thereunder, with such amendments, supplements or
appendices thereto as may be necessary or appropriate, together with any and all
exhibits and other documents having relation to said Annual Report;
NOW, THEREFORE, the undersigned in his or her capacity as a director or
officer, or both, as the case may be, of the Company, does hereby appoint
STEPHEN D. CHESEBRO, BRUCE K. MISAMORE and JAMES L. PATE and each of them
severally, his or her true and lawful attorney or attorneys with power to act
with or without the others, and with full power of substitution and
resubstitution, to execute in his or her name, place and stead, in his or her
capacity as a director or officer, or both, as the case may be, of the Company,
said Annual Report and any and all amendments, supplements or appendices thereto
as said attorneys or any of them shall deem necessary or incidental in
connection therewith and to file the same or cause the same to be filed with the
Commission. Each of said attorneys shall have full power and authority to do and
perform in the name and on behalf of the undersigned in any and all capacities,
every act whatsoever necessary or desirable to be done to the premises, as fully
and to all intents and purposes as the undersigned might or could do in person,
the undersigned hereby ratifying and approving the acts of said attorneys and
each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
17th day of February, 1999.
ROBERT MOSBACHER, JR.
--------------------------------------
<PAGE> 3
PENNZENERGY COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZENERGY COMPANY, a Delaware corporation (the "Company"),
intends to file with the Securities and Exchange Commission (the "Commission")
under the Securities Exchange Act of 1934, as amended (the "Act"), an Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed
by the Commission pursuant to the Act and the rules and regulations of the
Commission promulgated thereunder, with such amendments, supplements or
appendices thereto as may be necessary or appropriate, together with any and all
exhibits and other documents having relation to said Annual Report;
NOW, THEREFORE, the undersigned in his or her capacity as a director or
officer, or both, as the case may be, of the Company, does hereby appoint
STEPHEN D. CHESEBRO, BRUCE K. MISAMORE and JAMES L. PATE and each of them
severally, his or her true and lawful attorney or attorneys with power to act
with or without the others, and with full power of substitution and
resubstitution, to execute in his or her name, place and stead, in his or her
capacity as a director or officer, or both, as the case may be, of the Company,
said Annual Report and any and all amendments, supplements or appendices thereto
as said attorneys or any of them shall deem necessary or incidental in
connection therewith and to file the same or cause the same to be filed with the
Commission. Each of said attorneys shall have full power and authority to do and
perform in the name and on behalf of the undersigned in any and all capacities,
every act whatsoever necessary or desirable to be done to the premises, as fully
and to all intents and purposes as the undersigned might or could do in person,
the undersigned hereby ratifying and approving the acts of said attorneys and
each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
17th day of February, 1999.
TERRY L. SAVAGE
--------------------------------------
<PAGE> 4
PENNZENERGY COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZENERGY COMPANY, a Delaware corporation (the "Company"),
intends to file with the Securities and Exchange Commission (the "Commission")
under the Securities Exchange Act of 1934, as amended (the "Act"), an Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed
by the Commission pursuant to the Act and the rules and regulations of the
Commission promulgated thereunder, with such amendments, supplements or
appendices thereto as may be necessary or appropriate, together with any and all
exhibits and other documents having relation to said Annual Report;
NOW, THEREFORE, the undersigned in his or her capacity as a director or
officer, or both, as the case may be, of the Company, does hereby appoint
STEPHEN D. CHESEBRO, BRUCE K. MISAMORE and JAMES L. PATE and each of them
severally, his or her true and lawful attorney or attorneys with power to act
with or without the others, and with full power of substitution and
resubstitution, to execute in his or her name, place and stead, in his or her
capacity as a director or officer, or both, as the case may be, of the Company,
said Annual Report and any and all amendments, supplements or appendices thereto
as said attorneys or any of them shall deem necessary or incidental in
connection therewith and to file the same or cause the same to be filed with the
Commission. Each of said attorneys shall have full power and authority to do and
perform in the name and on behalf of the undersigned in any and all capacities,
every act whatsoever necessary or desirable to be done to the premises, as fully
and to all intents and purposes as the undersigned might or could do in person,
the undersigned hereby ratifying and approving the acts of said attorneys and
each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
17th day of February, 1999.
BRENT SCOWCROFT
--------------------------------------
<PAGE> 5
PENNZENERGY COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZENERGY COMPANY, a Delaware corporation (the "Company"),
intends to file with the Securities and Exchange Commission (the "Commission")
under the Securities Exchange Act of 1934, as amended (the "Act"), an Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed
by the Commission pursuant to the Act and the rules and regulations of the
Commission promulgated thereunder, with such amendments, supplements or
appendices thereto as may be necessary or appropriate, together with any and all
exhibits and other documents having relation to said Annual Report;
NOW, THEREFORE, the undersigned in his or her capacity as a director or
officer, or both, as the case may be, of the Company, does hereby appoint
STEPHEN D. CHESEBRO, BRUCE K. MISAMORE and JAMES L. PATE and each of them
severally, his or her true and lawful attorney or attorneys with power to act
with or without the others, and with full power of substitution and
resubstitution, to execute in his or her name, place and stead, in his or her
capacity as a director or officer, or both, as the case may be, of the Company,
said Annual Report and any and all amendments, supplements or appendices thereto
as said attorneys or any of them shall deem necessary or incidental in
connection therewith and to file the same or cause the same to be filed with the
Commission. Each of said attorneys shall have full power and authority to do and
perform in the name and on behalf of the undersigned in any and all capacities,
every act whatsoever necessary or desirable to be done to the premises, as fully
and to all intents and purposes as the undersigned might or could do in person,
the undersigned hereby ratifying and approving the acts of said attorneys and
each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
17th day of February, 1999.
JAMES L. PATE
--------------------------------------
<PAGE> 6
PENNZENERGY COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZENERGY COMPANY, a Delaware corporation (the "Company"),
intends to file with the Securities and Exchange Commission (the "Commission")
under the Securities Exchange Act of 1934, as amended (the "Act"), an Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed
by the Commission pursuant to the Act and the rules and regulations of the
Commission promulgated thereunder, with such amendments, supplements or
appendices thereto as may be necessary or appropriate, together with any and all
exhibits and other documents having relation to said Annual Report;
NOW, THEREFORE, the undersigned in his or her capacity as a director or
officer, or both, as the case may be, of the Company, does hereby appoint
STEPHEN D. CHESEBRO, BRUCE K. MISAMORE and JAMES L. PATE and each of them
severally, his or her true and lawful attorney or attorneys with power to act
with or without the others, and with full power of substitution and
resubstitution, to execute in his or her name, place and stead, in his or her
capacity as a director or officer, or both, as the case may be, of the Company,
said Annual Report and any and all amendments, supplements or appendices thereto
as said attorneys or any of them shall deem necessary or incidental in
connection therewith and to file the same or cause the same to be filed with the
Commission. Each of said attorneys shall have full power and authority to do and
perform in the name and on behalf of the undersigned in any and all capacities,
every act whatsoever necessary or desirable to be done to the premises, as fully
and to all intents and purposes as the undersigned might or could do in person,
the undersigned hereby ratifying and approving the acts of said attorneys and
each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
17th day of February, 1999.
ROBERT B. WEAVER
--------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,439
<SECURITIES> 0
<RECEIVABLES> 82,715
<ALLOWANCES> 11,162
<INVENTORY> 4,818
<CURRENT-ASSETS> 128,419
<PP&E> 4,732,189
<DEPRECIATION> 3,073,455
<TOTAL-ASSETS> 2,417,086
<CURRENT-LIABILITIES> 178,477
<BONDS> 1,537,209
0
1,500
<COMMON> 43,507
<OTHER-SE> 346,082
<TOTAL-LIABILITY-AND-EQUITY> 2,417,086
<SALES> 550,899
<TOTAL-REVENUES> 837,367
<CGS> 217,194
<TOTAL-COSTS> 378,809
<OTHER-EXPENSES> 238,553
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156,272
<INCOME-PRETAX> (63,234)
<INCOME-TAX> (17,768)
<INCOME-CONTINUING> (45,466)
<DISCONTINUED> (3,246)
<EXTRAORDINARY> (206,963)
<CHANGES> 0
<NET-INCOME> (255,675)
<EPS-PRIMARY> (5.48)<F1>
<EPS-DILUTED> (5.48)
<FN>
<F1>Reflects basic earnings per share.
</FN>
</TABLE>
<PAGE> 1
[RYDER SCOTT COMPANY LETTERHEAD]
EXHIBIT 99(a)
February 19, 1999
PennzEnergy Company
Post Office Box 4616
Houston, Texas 77210-4616
Gentlemen:
At your request we have prepared an estimate of the reserves,
future production, and income attributable to all operating and ownership
interests of PennzEnergy Company including PennzEnergy Exploration and
Production, L.L.C., PennzEnergy Company - Bluebell/Altamont, Pennzoil Caspian
Corporation, and Pennzoil Venezuela Corporation, S.A. (collectively referred to
herein as the Company) as of December 31, 1998. In accordance with the
requirements of FASB 69, our estimates of the Company's net proved reserves as
of December 31, 1996, 1997, and 1998, as contained in this report and our
previous reports, are presented in attached Table No. 1 together with a
tabulation of the components of the differences in the estimates as of such
dates. The Company's reserves in the United States are located in all the main
producing states (except Alaska), and in state and federal waters offshore
California, Louisiana, and Texas. The Company's foreign reserves are located in
Venezuela and Azerbaijan.
The estimated reserve volumes and future income amounts
presented in this report are related to hydrocarbon prices. December 1998
hydrocarbon prices were used in the preparation of this report as required by
Securities and Exchange Commission (SEC) and Financial Accounting Standards
Bulletin No. 69 (FASB 69) guidelines; however, actual future prices may vary
significantly from December 1998 prices. Therefore, volumes of reserves actually
recovered and amounts of income actually received may differ significantly from
the estimated quantities presented in this report. Our estimates of the proved
net reserves attributable to the interests of the Company as of December 31,
1998 are shown below:
<TABLE>
<CAPTION>
Proved Net Reserves
As of December 31, 1998
-----------------------------
Liquid, Barrels Gas, MMCF
--------------- ---------
<S> <C> <C>
Developed and Undeveloped
United States 125,543,732 849,368
Foreign 93,261,474 2,266
Total Worldwide 218,805,206 851,634
Developed
United States 108,226,490 783,990
Foreign 12,233,076 2,266
Total Worldwide 120,459,566 786,256
</TABLE>
The "Liquid" reserves shown above are comprised of crude oil,
condensate, and natural gas liquids. Natural gas liquids comprise 23.3 percent
of the Company's developed liquid reserves and 13.5 percent of the Company's
developed and undeveloped liquid reserves. All hydrocarbon liquid reserves are
expressed in standard 42 gallon barrels. All gas volumes are hydrocarbon sales
gas expressed in MMCF at the pressure and temperature bases of the area where
the gas reserves are located. Our estimates of
<PAGE> 2
PennzEnergy Company
February 19, 1999
Page 2
hydrocarbon sales gas reserves as of December 31, 1998 do not include 135,504
MMCF of carbon dioxide which is also sales gas. Revenues from carbon dioxide
sales, however, are included in our estimates of future cash inflows as of
December 31, 1998. Our estimates of proved net reserves as of December 31, 1998
include 17,179,701 barrels and 2,266 MMCF for Pennzoil Venezuela Corporation,
S.A. for which the Company has a contract to develop and produce but does not
have actual ownership of the hydrocarbons.
The proved reserves presented in this report comply with the
SEC's Regulation S-X Part 210.4-10 Sec. (a) as clarified by subsequent
Commission Staff Accounting Bulletins, and are based on the following
definitions and criteria:
Proved reserves of crude oil, condensate, natural gas, and natural gas
liquids are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future
from known reservoirs under existing operating conditions, i.e., prices
and costs as of the date the estimate is made. Prices include
consideration of changes in existing prices provided only by contractual
arrangements, but not on escalation based on future conditions.
Reservoirs are considered proved if economic producibility is supported
by either actual production or conclusive formation test. In certain
instances, proved reserves are assigned on the basis of a combination of
core analysis and electrical and other type logs which indicate the
reservoirs are analogous to reservoirs in the same field which are
producing or have demonstrated the ability to produce on a formation
test. The area of a reservoir considered proved includes (1) that portion
delineated by drilling and defined by fluid contacts, if any, and (2) the
adjoining portions not yet drilled that can be reasonably judged as
economically productive on the basis of available geological and
engineering data. In the absence of data on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the lower proved
limit of the reservoir. Reserves that can be produced economically
through the application of improved recovery techniques are included in
the proved classification when these qualifications are met: (1)
successful testing by a pilot project or the operation of an installed
program in the reservoir provides support for the engineering analysis on
which the project or program was based, and (2) it is reasonably certain
the project will proceed. Improved recovery includes all methods for
supplementing natural reservoir forces and energy, or otherwise
increasing ultimate recovery from a reservoir, including (1) pressure
maintenance, (2) cycling, and (3) secondary recovery in its original
sense. Improved recovery also includes the enhanced recovery methods of
thermal, chemical flooding, and the use of miscible and immiscible
displacement fluids. Proved natural gas reserves are comprised of
non-associated, associated and dissolved gas. An appropriate reduction in
gas reserves has been made for the expected removal of natural gas
liquids, for lease and plant fuel, and for the exclusion of
non-hydrocarbon gases if they occur in significant quantities and are
removed prior to sale. Estimates of proved reserves do not include crude
oil, natural gas, or natural gas liquids being held in underground or
surface storage. Proved reserves are estimates of hydrocarbons to be
recovered from a given date forward. They may be revised as hydrocarbons
are produced and additional data become available.
Proved developed oil and gas reserves are reserves that can be expected
to be recovered through existing wells with existing equipment and
operating methods. Additional oil and gas expected to be obtained through
the application of fluid injection or other improved recovery techniques
for supplementing the natural forces and mechanisms of primary recovery
should be included as "proved developed reserves" only after testing by a
pilot project or after the operation of an installed program has
confirmed through production response that increased recovery will be
achieved. Developed reserves may be subcategorized as producing or
non-producing using the SPE/WPC Definitions:
Producing
Reserves sub-categorized as producing are expected to be recovered
from completion intervals which are open and producing at the time
of the estimate. Improved recovery reserves are considered
producing only after the improved recovery project is in
operation.
<PAGE> 3
PennzEnergy Company
February 19, 1999
Page 3
Non-Producing
Reserves sub-categorized as non-producing include shut-in and
behind pipe reserves. Shut-in reserves are expected to be
recovered from (1) completion intervals which are open at the time
of the estimate but which have not started producing, (2) wells
which were shut-in for market conditions or pipeline connections,
or (3) wells not capable of production for mechanical reasons.
Behind pipe reserves are expected to be recovered from zones in
existing wells, which will require additional completion work or
future recompletion prior to the start of production.
Proved undeveloped oil and gas reserves are reserves that are expected to
be recovered from new wells on undrilled acreage, or from existing wells
where a relatively major expenditure is required for recompletion.
Reserves on undrilled acreage shall be limited to those drilling units
offsetting productive units that are reasonably certain of production
when drilled. Proved reserves for other undrilled units can be claimed
only where it can be demonstrated with reasonable certainty that there is
continuity of production from the existing productive formation.
Estimates for proved undeveloped reserves are attributable to any acreage
for which an application of fluid injection or other improved technique
is contemplated, only when such techniques have been proved effective by
actual tests in the area and in the same reservoir.
Because of the direct relationship between volumes of proved
undeveloped reserves and development plans, we include in the proved undeveloped
category only reserves assigned to undeveloped locations that we have been
assured will definitely be drilled and reserves assigned to the undeveloped
portions of secondary, tertiary, or pressure maintenance projects which we have
been assured will definitely be developed.
The Company has interests in certain tracts which have
substantial additional hydrocarbon quantities which cannot be classified as
proved and consequently are not included herein. The Company has active
exploratory and development drilling programs which may result in the
reclassification of significant additional volumes to the proved category.
In accordance with the requirements of FASB 69, our estimates
of future cash inflows, future costs, and future net cash inflows before income
tax as of December 31, 1998 from this report and as of December 31, 1997 from
our previous report are presented below.
<TABLE>
<CAPTION>
Total Worldwide
As of December 31(1)(2)
------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Future Cash Inflows $ 3,797,956,140 $ 5,807,484,505
Future Costs
Production $ 1,504,251,473 $ 1,925,735,766
Development 428,750,500 544,076,586
--------------- ---------------
Total Costs $ 1,933,001,973 $ 2,469,812,352
Future Net Cash Inflows
Before Income Tax $ 1,864,954,167 $ 3,337,672,153
Present Value at 10%
Before Income Tax $ 1,078,627,124 $ 2,052,998,650
</TABLE>
- ----------------------------
(1) The cash inflow data for December 31, 1998 include revenues from 135,504 net
MMCF of carbon dioxide reserves which have a future net cash inflow before
income tax of $37,081,330 and present value at 10 percent before income tax of
$11,054,723. The cash inflow data for December 31, 1997 include revenues from
177,684 net MMCF of carbon dioxide reserves which have a future net cash inflow
before income tax of $70,271,184 and present value at 10 percent before income
tax of $21,362,976.
(2) The cash inflow data for December 31, 1998 includes net cash inflow before
income tax of $10,087,639 and present value at 10 percent before income tax of
$1,886,767 attributable to Pennzoil Venezuela Corporation, S.A.
<PAGE> 4
PennzEnergy Company
February 19, 1999
Page 4
Our estimates as of December 31, 1998 and 1997 of future cash
inflows, future costs, future net cash inflows before income tax, and present
value at 10 percent before income tax are shown individually for total
worldwide, total United States (onshore and offshore), and foreign areas in
Table No. 2 which is attached.
The future cash inflows are gross revenues before any
deductions. The production costs were based on current data and include
production taxes in the United States, certain foreign taxes where applicable,
ad valorem taxes, and certain other items such as transportation and processing
costs, in addition to the operating costs directly applicable to the individual
leases or wells. The development costs were based on current data and include
certain dismantlement and abandonment costs net of salvage for properties where
such costs are relatively significant.
The Company furnished us with gas prices in effect at December
31, 1998 and with its forecasts of future gas prices which take into account SEC
guidelines, current market prices, contract prices, and fixed and determinable
price escalations where applicable. In accordance with SEC guidelines, the
future gas prices used in this report make no allowances for future gas price
increases which may occur as a result of inflation nor do they account for
seasonal variations in gas prices which may cause future yearly average gas
prices to be somewhat different than December gas prices. For gas sold under
contract, the contract gas price including fixed and determinable escalations
exclusive of inflation adjustments was used until the contract expires and then
was adjusted to the current market price for the area and held at this adjusted
price to depletion of the reserves.
The Company furnished us with liquid prices in effect at
December 31, 1998 and these prices were held constant to depletion of the
properties. In accordance with SEC guidelines, changes in liquid prices
subsequent to December 31, 1998 were not considered in this report.
Operating costs for the leases and wells in this report were
based on information provided by the Company and include only those costs
directly applicable to the leases or wells. When applicable, the operating costs
include a portion of general and administrative costs allocated directly to the
leases and wells under terms of operating agreements. Development costs were
furnished to us by the Company and are based on authorizations for expenditure
for the proposed work or actual costs for similar projects. The future
development costs were held constant throughout the life of the properties. The
initial operating costs for each property are based on current operating costs.
In certain cases, these costs were reduced over time as variable costs, such as
well count or production throughput declined as is typical in actual operations.
In most cases, the current operating costs were held constant throughout the
life of the property. At the request of the Company, their estimate of zero net
abandonment costs after salvage value for onshore properties was used in this
report. Ryder Scott has not performed a detailed study of the abandonment costs
nor the salvage value and makes no warranty for the Company's estimate. The
estimated net cost of abandonment after salvage was included for offshore
properties where abandonment costs net of salvage are significant. The estimates
of the offshore net abandonment costs furnished by the Company were accepted
without independent verification. No deduction was made for indirect costs such
as general administration and overhead expenses, loan repayments, interest
expenses, and exploration and development prepayments. The Company supplied data
on accumulated gas production imbalances which were taken into account in our
estimates of future production and income.
The estimates of reserves presented herein are based upon a
detailed study of the properties in which the Company owns an interest; however,
we have not made any field examination of the properties. No consideration was
given in this report to potential environmental liabilities which may exist nor
were any costs included for potential liability to restore and clean up damages,
if any, caused by past operating practices. The Company has informed us that
they have furnished us all of the accounts, records, geological and engineering
data and reports, and other data required for this investigation. The ownership
<PAGE> 5
PennzEnergy Company
February 19, 1999
Page 5
interests, prices, and other factual data furnished by the Company were accepted
without independent verification. The estimates presented in this report are
based on data available through December 1998.
The reserves included in this report are estimates only and
should not be construed as being exact quantities. They may or may not be
actually recovered, and if recovered, the revenues therefrom and the actual
costs related thereto could be more or less than the estimated amounts.
Moreover, estimates of reserves may increase or decrease as a result of future
operations.
In general, we estimate that future gas production rates
limited by allowables or marketing conditions will continue to be the same as
the average rates for the latest available 12 months of actual production until
such time that the well or wells are incapable of producing at these rates. The
well or wells were then projected to decline at their decreasing delivery
capacity rate. Our general policy on estimates of future gas production rates is
adjusted when necessary to reflect actual gas market conditions in specific
cases. The future production rates from wells now on production may be more or
less than estimated because of changes in market demand or allowables set by
regulatory bodies. Wells or locations which are not currently producing may
start producing earlier or later than anticipated in our estimates of their
future production rates.
While it may reasonably be anticipated that the future prices
received for the sale of production and the operating costs and other costs
relating to such production may also increase or decrease from existing levels,
such changes were, in accordance with rules adopted by the SEC, omitted from
consideration in making this evaluation.
Neither we nor any of our employees have any interest in the
subject properties and neither the employment to make this study nor the
compensation is contingent on our estimates of reserves and future cash inflows
for the subject properties.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ RONALD HARRELL
Ronald Harrell, P.E.
President
RH/plk
<PAGE> 6
EXHIBIT 99(a)
TABLE NO.1
PENNZOIL COMPANY
PROVED NET RESERVE DATA(1)
<TABLE>
<CAPTION>
------------------------------ ------------------------------
United States
Total Worldwide Total Onshore and Offshore
------------------------------ ------------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Proved Liquid(3) Reserves, Millions of Barrels
- --------------------------------------------------------------
Developed and Undeveloped
Beginning of Year 227.5 187.4 191.6 152.3 165.1 174.9
12/31/95 Est. Prepared by Outrim Szabo Assoc. Ltd.(4) 0 0 9.6 0 0 0
Revisions (25.1) 3.2 12.2 (13.4) (0.8) 8.1
Extensions and Discoveries 9.6 41.6 23.2 8.6 11.7 10.5
Improved Recovery 31.3 1.0 2.1 1.9 1.0 2.1
Estimated Production (19.6) (19.8) (21.6) (19.0) (19.5) (20.4)
Purchase of Reserves In-Place 1.5 19.9 8.1 1.5 0 7.0
Sales of Reserves In-Place (6.4) (5.8) (37.8) (6.4) (5.2) (17.1)
End of Year 218.8 227.5 187.4 125.5 152.3 165.1
Developed
Beginning of Year(5) 141.8 142.2 152.6 127.8 140.7 151.2
End of Year 120.4 141.8 142.2 108.2 127.8 140.7
Net Proved Gas(6) Reserves, Billions of Cubic Feet
- --------------------------------------------------------------
Developed and Undeveloped
Beginning of Year 1,059 1,277 1,291 1,054 1,187 1,256
12/31/95 Est. Prepared by Outrim Szabo Assoc. Ltd.(4) 0 0 178 0 0 0
Revisions (71) 2 61 (68) (26) 38
Extensions and Discoveries 83 127 172 83 104 143
Improved Recovery 1 0 2 1 0 2
Estimated Production (167) (214) (219) (167) (206) (202)
Purchase of Reserves In-Place 4 0 36 4 0 8
Sales of Reserves In-Place (58) (133) (244) (58) (5) (58)
End of Year 851 1,059 1,277 849 1054 1,187
Developed
Beginning of Year(5) 968 1,160 1,161 963 1,070 1,132
End of Year 786 968 1,160 784 963 1,070
- -------------------------------------------------------------- -------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
------------------------------
Foreign(2)
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net Proved Liquid(3) Reserves, Millions of Barrels
- --------------------------------------------------------------
Developed and Undeveloped
Beginning of Year 75.2 22.3 16.7
12/31/95 Est. Prepared by Outrim Szabo Assoc. Ltd.(4) 0 0 9.6
Revisions (11.7) 4.0 4.1
Extensions and Discoveries 1.0 29.9 12.7
Improved Recovery 29.4 0 0
Estimated Production (0.6) (0.3) (1.2)
Purchase of Reserves In-Place 0 19.9 1.1
Sales of Reserves In-Place 0 (0.6) (20.7)
End of Year 93.3 75.2 22.3
Developed
Beginning of Year(5) 14.0 1.5 1.3
End of Year 12.2 14.0 1.5
Net Proved Gas(6) Reserves, Billions of Cubic Feet
- --------------------------------------------------------------
Developed and Undeveloped
Beginning of Year 5 90 35
12/31/95 Est. Prepared by Outrim Szabo Assoc. Ltd.(4) 0 0 178
Revisions (3) 28 23
Extensions and Discoveries 0 23 29
Improved Recovery 0 0 0
Estimated Production 0 (8) (17)
Purchase of Reserves In-Place 0 0 28
Sales of Reserves In-Place 0 (128) (186)
End of Year 2 5 90
Developed
Beginning of Year(5) 5 90 29
End of Year 2 5 90
- -------------------------------------------------------------- -------- -------- --------
</TABLE>
- ------------------------
(1) Reserve changes due to extensions and discoveries and improved recovery
during 1996, 1997 and 1998 were categorized by Ryder Scott Company. The
remaining reserve changes during 1996, 1997 and 1998 were categorized by
the Company.
(2) 1996 includes 1.4 million barrels and 4 billion cubic feet, 1997 includes
21.3 million barrels and 4 billion cubic feet and 1998 includes 17.2
million barrels and 2 billion cubic feet of natural gas in Venezuela for
which Pennzoil Venezuela Corporation, S.A. has a contract to develop and
produce but does not have actual ownership of the hydrocarbons.
(3) Liquid reserves shown above are comprised of crude oil, condensate, and
natural gas liquids.
(4) These estimates were prepared by Outrim Szabo Associates, Ltd. for Pennzoil
Petroleums, Ltd. as of December 31, 1995. The reserves attributable to
Pennzoil Petroleums, Ltd. were sold during 1996. These estimates are
included at the Company's request in order to reconcile reserve revisions.
Ryder Scott Company has not reviewed these reserve estimates and therefore
expresses no opinion as to their validity.
(5) Beginning of year proved developed gas and liquid reserves for 1996
excludes proved developed reserves estimated by Outrim Szabo Assoc. Ltd.
for Pennzoil Petroleums, Ltd. as of December 31, 1995.
(6) Excludes carbon dioxide reserve and production data.
<PAGE> 7
TABLE NO.2
PENNZOIL COMPANY
CASH INFLOW AND COST DATA(1)
(MILLIONS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
- ---------------------- ----------------------- ----------------------- -----------------------
United States
Total Worldwide Onshore and Offshore Foreign
As of December 31 As of December 31 As of December 31
----------------------- ----------------------- -----------------------
1998 1997 1998 1997 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Future Cash Inflows(2) $ 3,798 $ 5,808 $ 3,000 $ 4,847 $ 798 $ 961
Future Costs
Production(3) $ (1,504) $ (1,926) $ (1,215) $ (1,621) $ (289) $ (305)
Development(4) (429) (544) (370) (458) (59) (86)
---------- ---------- ---------- ---------- ---------- ----------
Total Costs $ (1,933) $ (2,470) $ (1,585) $ (2,079) $ 348 $ (391)
Future Cash Inflows
Before Income Tax $ 1,865 $ 3,338 $ 1,415 $ 2,768 $ 450 $ 570
Present Value @ 10%
Before Income Tax $ 1,079 $ 2,053 $ 941 $ 1,791 $ 138 $ 262
- ---------------------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
- ---------------
(1) Data for 1998 and 1997 include cash inflows and costs attributable to
carbon dioxide reserves located in the United States. The 1998 carbon
dioxide reserves account for $37.1 million of cash inflows before income
tax and $11.0 million of present value at 10% before income tax. The 1997
carbon dioxide reserves account for $70.3 million of future cash inflows
before income tax and $21.4 million of present value at 10% before income
tax.
(2) Gross revenues are before any deductions.
(3) Includes production taxes in the U.S.A., certain foreign taxes where
applicable, ad valorem taxes, and certain other items such as
transportation and processing charges.
(4) Includes future dismantlement and abandonment costs net of salvage for
offshore properties where such costs are relatively significant.
