SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
OR
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1995
Commission File No. 1-10067
DEVON ENERGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Oklahoma 73-1474008
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
20 North Broadway, Suite 1500
Oklahoma City, Oklahoma 73102
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (405) 235-3611
Not applicable
Former name, former address and former fiscal year, if changed
from last report.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
The number of shares outstanding of Registrant's common
stock, par value $.10, as of November 6, 1995, was 22,096,896.
1 of 71 total pages
(Exhibit Index is found at page 28)
<PAGE>
DEVON ENERGY CORPORATION
Index to Form 10-Q Quarterly Report
to the Securities and Exchange Commission
Page No.
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets, September 30, 1995
(Unaudited) and December 31, 1994 4
Consolidated Statements of Operations (Unaudited),
For the Three Months and the Nine Months Ended
September 30, 1995 and 1994 5
Consolidated Statements of Cash Flows (Unaudited),
For the Nine Months Ended September 30, 1995 and
1994 6
Notes to Consolidated Financial Statements. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 23
2
<PAGE>
DEVON ENERGY CORPORATION
Part I. Financial Information
Item 1. Consolidated Financial Statements
September 30, 1995 and 1994
(Forming a part of Form 10-Q Quarterly Report
to the Securities and Exchange Commission)
3
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
1995 1994
(Unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 11,103,702 8,336,371
Accounts receivable 15,111,303 15,626,799
Inventories 587,568 534,326
Prepaid expenses 544,532 564,371
Deferred income taxes 262,000 262,000
Total current assets 27,609,105 25,323,867
Property and equipment, at cost, based on the
full cost method of accounting for oil and
gas properties 566,974,139 523,941,141
Less: Accumulated depreciation,
depletion and amortization 230,259,966 202,634,961
336,714,173 321,306,180
Other assets 3,935,988 4,817,489
Total assets $368,259,266 351,447,536
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable:
Trade 4,727,818 6,394,897
Revenues and royalties due to others 7,816,952 7,398,199
Accrued expenses 3,191,833 3,225,493
Total current liabilities 15,736,603 17,018,589
Revenues and royalties due to others 1,383,135 1,383,135
Other liabilities (Note 2) 6,472,082 -
Long-term debt 97,000,000 98,000,000
Deferred revenue 1,250,810 1,299,947
Deferred income taxes 31,245,000 27,340,000
Stockholders' equity:
Preferred stock of $1.00 par value.
Authorized 3,000,000 shares; none
issued - -
Common stock of $.10 par value.
Authorized 120,000,000 shares; issued
22,096,896 shares in 1995 and 22,050,996
in 1994 2,209,690 2,205,100
Additional paid-in capital 167,284,722 166,654,305
Retained earnings 45,677,224 37,546,460
Total stockholders' equity 215,171,636 206,405,865
Total liabilities and stockholders'
equity $368,259,266 351,447,536
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
(Note 2)
Revenues:
<S> <C> <C> <C> <C>
Gas sales $17,345,089 13,098,264 36,797,786 45,230,185
Oil sales 14,539,096 10,551,133 40,904,485 27,094,532
Natural gas liquids sales 1,704,834 1,404,841 4,738,282 3,460,870
Other 181,845 244,732 742,972 1,177,017
Total revenues 33,770,864 25,298,970 83,183,525 76,962,604
Costs and expenses:
Production and operating expenses 8,784,236 8,179,221 25,336,598 23,365,841
Depreciation, depletion and
amortization 9,490,448 9,234,941 28,549,892 25,544,446
General and administrative expenses 1,944,225 1,837,397 6,334,039 6,115,496
Interest expense 1,687,424 1,467,439 5,214,241 3,774,022
Total costs and expenses 21,906,333 20,718,998 65,434,770 58,799,805
Earnings before income taxes 11,864,531 4,579,972 17,748,755 18,162,799
Income tax expense:
Current 3,492,000 197,000 3,727,000 744,000
Deferred 1,727,000 1,327,000 3,905,000 5,432,000
Total income tax expense 5,219,000 1,524,000 7,632,000 6,176,000
Net earnings $ 6,645,531 3,055,972 10,116,755 11,986,799
Net earnings per average common share
outstanding $.30 .14 .46 .56
Weighted average common shares outstanding 22,092,783 22,049,065 22,065,462 21,386,685
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<CAPTION>
Nine Months
Ended September 30,
1995 1994
(Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 10,116,755 11,986,799
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation, depletion and amortization 28,549,892 25,544,446
(Gain) loss on sale of assets 284,141 (6,157)
Deferred income taxes 3,905,000 5,432,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 306,002 3,561,243
Inventories (53,242) 42,707
Prepaid expenses 19,839 (154,402)
Other assets 727,575 (948,550)
Increase (decrease) in:
Accounts payable 1,713,342 (5,237,059)
Accrued expenses (603,844) (261,313)
Revenues and royalties due to others - (62,748)
Deferred revenue (49,137) (157,380)
Net cash provided by operating activities 44,916,323 39,739,586
Cash flows from investing activities:
Proceeds from sale of property and equipment 6,826,719 2,883,954
Capital expenditures (50,705,325) (21,931,181)
Payments made for acquisition of business (Note 3) (2,391,484) (42,340,808)
Net cash provided by (used in) investing
activities (46,270,090) (61,388,035)
Cash flows from financing activities:
Proceeds from borrowings on revolving line of credit 6,000,000 29,500,000
Principal payments on revolving line of credit (7,000,000) (14,500,000)
Issuance of common stock 635,007 359,430
Dividends paid on common stock (1,985,991) (1,948,297)
Increase in long-term other liabilities (Note 2) 6,472,082 -
Net cash provided by financing activities 4,121,098 13,411,133
Net increase (decrease) in cash and cash equivalents 2,767,331 (8,237,316)
Cash and cash equivalents at beginning of period 8,336,371 19,550,288
Cash and cash equivalents at end of period $ 11,103,702 11,312,972
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements
and notes thereto have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission.
Accordingly, certain footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such
rules and regulations. The accompanying consolidated financial
statements and notes thereto should be read in conjunction with
the consolidated financial statements and notes included in
Devon's 1994 annual report on Form 10-K.
In the opinion of Devon's management, all
adjustments (all of which are normal and recurring) have been
made which are necessary to fairly state the consolidated
financial position of Devon and its subsidiaries as of September
30, 1995, and the results of their operations for the three month
and nine month periods ended September 30, 1995 and 1994 and
their cash flows for the nine month periods ended September 30,
1995 and 1994.
2. San Juan Basin Transaction
Effective January 1, 1995, Devon and an unrelated company
entered into a transaction covering substantially all of Devon's
San Juan Basin coal seam gas properties (the "San Juan Basin
Transaction"). These coal seam gas properties represented
Devon's largest oil and gas reserve position as of December 31,
1994. The properties' estimated reserves as of year-end 1994
were 199.2 billion cubic feet ("Bcf") of natural gas, or 31% of
Devon's 633.2 equivalent Bcf of combined oil and natural gas
reserves. In addition to the cash flow and earnings impact
normally associated with oil and gas production, these properties
also qualify as a "nonconventional fuel source" under Internal
Revenue Service regulations. Consequently, gas produced from
these properties through the year 2002 qualifies for Section 29
tax credits, which as of year-end 1994 were equal to $0.99 per
million Btu.
The San Juan Basin Transaction involves approximately 186.2
Bcf, or 93%, of the year-end 1994 coal seam gas reserves, and has
four major parts associated with it. First, Devon conveyed to
the unrelated party 179 Bcf of the properties' reserves.
However, for financial reporting purposes, Devon retained all of
such reserves and their future production and cash flow through a
volumetric production payment and a repurchase option. Second,
Devon conveyed outright to the unrelated party 7.2 Bcf of
reserves for a sales price of $5.2 million. The reserves and
future cash flow associated with this conveyance were not
retained by Devon. Third, and the source of the most significant
impact of the transaction, Devon receives payments equal to 75%
of the Section 29 tax credits generated by the properties. And
fourth, Devon retained a 75% reversionary interest in any
reserves in excess of the 186.2 Bcf estimated to exist as of
December 31, 1994. Each of these parts of the San Juan Basin
Transaction, and their effects on Devon's operations, are
described in more detail in the following paragraphs.
7
<PAGE>
The production payment retained by Devon is equal to 94.05%
of the first 143.4 Bcf of gas produced from the properties, or
134.9 Bcf. As such, Devon will continue to record gas sales and
associated production and operating expenses and reserves
associated with the production payment. Production from the
retained production payment is currently estimated to occur over
a period of 12 years.
The conveyance of the properties which are not subject to
the retained production payment or the repurchase option was
accounted for as a sale of oil and gas properties. Accordingly,
7.2 Bcf of gas reserves were removed from total proved reserves,
and the $5.2 million of proceeds reduced the book value of oil
and gas properties. The conveyance to the third party is limited
exclusively to the existing wells drilled as of January 1, 1995.
Wells to be drilled in the future, if any, are not included in
this transaction.
In addition to receiving 94.05% of the properties' net cash
flow through the retained production payment, Devon receives
quarterly payments from the third party equal to 75% of the value
of the Section 29 tax credits which are generated by production
from such properties until the earlier of December 31, 2002, or
until the option to repurchase is exercised. Based on the
reserves estimated at January 1, 1995, Devon estimates that the
total of such tax credit payments from 1995 through 2002 could
range from $75 million to $95 million, depending on the rate of
inflation between 1995 and 2002. For the nine months ended
September 30, 1995, Devon received $9.5 million related to the
credits. Of this amount, $8.6 million was recorded as additional
gas sales, and $0.9 million was recorded as an addition to
liabilities as discussed in the following paragraph.
Devon has an option to repurchase the properties at any
time. The purchase price of such option is equal to the fair
market value of the properties at the time the option is
exercised, as defined in the transaction agreement, less the
production payment balance. At closing, Devon received $5.6
million associated with reserves to be produced subsequent to the
term of the production payment. Such amount is reflected as
long-term "other liabilities" on the accompanying balance sheet.
Since Devon expects to eventually exercise its option to
repurchase the properties, the liability will be increased over
time to reflect the option purchase price. As the purchase price
increases, a portion of the tax credit payments received by Devon
will be added to the liability. As stated above, for the nine
months ended September 30, 1995, $0.9 million of the total amount
received for tax credit payments was added to the liability,
which raised the liability balance to $6.5 million.
Devon has retained a 75% reversionary interest in the
properties' reserves in excess, if any, of the 186.2 Bcf of
reserves estimated to exist at December 31, 1994. The terms of
the transaction provide that the third party will pay 100% of the
capital necessary to develop any such incremental reserves for
its 25% interest in such reserves. Devon's repurchase option
also includes the right to purchase this incremental 25%.
However, the $6.5 million of other liabilities recorded as of
September 30, 1995, does not include any amount related to such
reserves.
The San Juan Basin Transaction was initially subject to a
material contingency, and thus the transaction's impact on
Devon's operating statement was deferred pending the
contingency's resolution. In October 1995, the contingency was
favorably resolved, and therefore the transaction's cumulative
effect for the first nine months of the year was recorded in the
third quarter. Had the contingency not been in effect, and had
the results of the transaction not been deferred, the following
results would have been reported for the first, second and third
quarters of 1995.
8
<PAGE>
<TABLE>
First Second Third Year-to-
Quarter Quarter Quarter Date
Revenues:
<S> <C> <C> <C> <C>
Gas sales $12,859,207 12,514,441 11,424,138 36,797,786
Oil sales 11,989,301 14,376,088 14,539,096 40,904,485
Natural gas liquids sales 1,630,262 1,403,186 1,704,834 4,738,282
Other 317,809 318,368 106,795 742,972
Total revenues 26,796,579 28,612,083 27,774,863 83,183,525
Costs and expenses:
Production and operating expenses 8,408,386 8,081,350 8,846,862 25,336,598
Depreciation, depletion and
amortization 9,242,570 9,398,067 9,909,255 28,549,892
General and administrative expenses 2,336,770 2,053,044 1,944,225 6,334,039
Interest expense 1,783,726 1,743,091 1,687,424 5,214,241
Total costs and expenses 21,771,452 21,275,552 22,387,766 65,434,770
Earnings before income taxes 5,025,127 7,336,531 5,387,097 17,748,755
Income tax expense:
Current 1,055,000 1,541,000 1,131,000 3,727,000
Deferred 1,106,000 1,614,000 1,185,000 3,905,000
Total income tax expense 2,161,000 3,155,000 2,316,000 7,632,000
Net earnings $ 2,864,127 4,181,531 3,071,097 10,116,755
Net earnings per average common share
outstanding $.13 .19 .14 .46
</TABLE>
3. Acquisition
On May 18, 1994, Devon acquired Alta Energy
Corporation ("Alta") via a merger between the two companies (the
"Merger"). The accompanying consolidated statements of cash
flows include cash payments related to the Merger in both the
nine month periods ended September 30, 1995 and 1994 of $2.4
million and $42.3 million, respectively. The $42.3 million of
cash payments in the first nine months of 1994 represent
substantially all of the $42.4 million paid in the year 1994
related to the Merger. In addition to these payments, Devon also
issued approximately 1,168,000 shares of its common stock for the
Merger.
Subsequently, in February 1995, Devon paid an
additional $2.4 million to the former Alta stockholders. This
payment, in accordance with the Merger agreement, was based upon
the evaluation of a well completed by Alta during the first half
of 1994.
4. Interest Rate Swap Agreement
Devon entered into an interest rate swap
agreement in June, 1995, to hedge the impact of interest rate
changes on a portion of its long-term debt. The principal amount
of the swap agreement is $75 million, and the other party to the
agreement is one of the lenders in Devon's credit lines (the
"Lender"). The agreement terminates on June 16, 1998, unless the
Lender exercises its right to extend the termination date to June
16, 2000. The terms of the agreement provide for quarterly
payments either to or from Devon, determined by whether the three
9
<PAGE>
month London Interbank Offered Rate ("LIBOR") in effect at the
beginning of each quarterly calculation period is greater or less
than 5.6%. The calculation periods begin on the sixteenth day of
each March, June, September and December during the term of the
agreement. If, on the date of the beginning of the quarterly
calculation period, the three month LIBOR exceeds 5.6%, the
Lender will owe Devon the quarterly amount of the excess rate
applied to the $75 million principal. Alternately, if the three
month LIBOR on the applicable quarterly date is less than 5.6%,
Devon will owe the Lender.
The swap agreement is accounted for as a hedge,
with the amount which is either due to or from Devon recorded as
a reduction or increase in interest expense. The three month
LIBOR has exceeded 5.6% at the beginning of each of the first two
calculation periods. Therefore, Devon has recognized $72,000 and
$85,000 as reductions to interest expense in the third quarter of
1995 and the first nine months of 1995, respectively. Additional
reductions to interest expense of $45,000 have been deferred
until the fourth quarter of 1995. The fair value of the interest
rate swap as of September 30, 1995, was approximately $0.2
million.
The swap agreement does not alter or affect any
terms or conditions of Devon's lines of credit.
5. Subsequent Event
On November 1, 1995, Devon entered into an
agreement to purchase certain Wyoming oil and natural gas
properties and a gas processing plant from an unrelated company
for approximately $50 million. Devon estimates the proved oil
and natural gas reserves of the properties to be approximately 90
equivalent Bcf. Included in these estimates are certain proved
undeveloped reserves, for which Devon expects to incur an
additional $9 million of future capital costs. Also, Devon
expects to spend an additional $4 million to $5 million to expand
the capacity of the gas plant by approximately 75%.
The transaction is expected to close in mid-
December 1995. The purchase price is subject to certain
adjustments, but these are not expected to be material. The
acquisition is expected to be funded with cash on hand and
additional borrowings under Devon's credit lines.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion addresses material
changes in results of operations for the three months and nine
months ended September 30, 1995, compared to the three months and
nine months ended September 30, 1994, and in financial condition
since December 31, 1994. It is presumed that readers have read
or have access to Devon's 1994 annual report on Form 10-K.
Overview
The favorable resolution of the San Juan Basin
Transaction contingency was the single largest event of the third
quarter. The effects and details of the San Juan Basin
Transaction are described in Note 2 to the accompanying
consolidated financial statements, and in "Results of Operations"
in this section of the 10-Q. Because the cumulative nine-month
financial results of the transaction were all recorded in the
third quarter, the San Juan Basin Transaction had a
disproportionate impact on the quarter versus the impact on the
nine months ended September 30, 1995.
Other significant factors affecting the third
quarter and year-to-date results were:
Oil production was up 42% in the quarter and
37% in the year-to-date period. Devon's
drilling efforts in the Grayburg-Jackson
Field, which was acquired in a May 1994
merger, and the Sand Dunes Area both
contributed greatly to the quarterly gain.
Additionally, the May 1994 merger boosted
the year-to-date production.
The May 1994 merger raised production and
operating expenses, and depreciation,
depletion and amortization expenses
("DD&A"), between the 1995 and 1994 year-to-
date periods. The merger only affected the
last four months of the 1994 period, but was
effective for the entire nine months of
1995.
Lower gas prices at the wellhead reduced gas
sales. However, this effect was offset by
the increase in gas sales attributable to
the San Juan Basin Transaction.
Higher interest rates in both the quarter
and year-to-date periods of 1995 caused
interest expense to increase.
The San Juan Basin Transaction caused the
effective financial income tax rate to
increase from 41% to 43%. It also caused
the current (or cash) portion of financial
income taxes to increase substantially.
11
<PAGE>
Results of Operations
The results of operations for the third quarter
and first nine months of 1995 were significantly affected in a
positive manner by the San Juan Basin Transaction. Because this
transaction will be referred to numerous times in the following
pages, it is described briefly below. (See Note 2 to the
consolidated financial statements included elsewhere in this Form
10-Q for a more complete description.)
Effective January 1, 1995, Devon entered into a
transaction covering most of its San Juan Basin properties. This
transaction significantly increases the price Devon receives for
its San Juan Basin gas. The transaction also slightly reduces
Devon's San Juan Basin gas reserves, production volumes and the
related costs of production.
Devon deferred recognition of the operating
statement impact during the first six months of 1995 because the
transaction was subject to a contingency. The contingency was
resolved in October 1995. According, Devon recorded the
transaction's impact for the entire first nine months in the
three month period ended September 30, 1995. Therefore, Devon's
1995 third quarter results include an extra six months of the
transaction's impact. The transaction generated revenues and net
earnings attributable to these six months of $6.0 million and
$3.6 million, respectively.
12
<PAGE>
Combined oil, gas and NGL revenues increased by
34% for the third quarter of 1995, including the out-of period
cumulative effect of the first six months of 1995 from the San
Juan Basin Transaction. Excluding this out-of-period effect,
combined revenues increased 10% in the third quarter of 1995.
The relative contributions of production and price changes on the
quarterly comparisons, both with and without the out-of-period
effect, are shown in the tables below.
<TABLE>
<CAPTION>
<F1>
<F2>
ActualReportedResults (1) Adjusted Results (2)
Three Months Ended Three Months
September 30, September 30,
1995 1994 Change 1995 1994 Change
Production
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 8,199,085 10,019,455 -18% 8,820,535 10,019,455 -12%
Oil (Bbls) 895,315 630,130 +42% 895,315 630,130 +42%
<F3>
NGL (Boe)3 164,439 143,923 +14% 164,439 143,923 +14%
Oil, Gas and
<F3>
NGL (Emcf)3 14,557,609 14,663,773 -1% 15,179,059 14,663,773 +4%
Revenues
Gas $17,345,089 13,098,264 +32% 11,424,138 13,098,264 -13%
Oil 14,539,096 10,551,133 +38% 14,539,096 10,551,133 +38%
NGL 1,704,834 1,404,841 +21% 1,704,834 1,404,841 +21%
Combined $33,589,019 25,054,238 +34% 27,668,068 25,054,238 +10%
Average Prices
Gas (Per Mcf) $2.12 1.31 +62% 1.30 1.31 -1%
Oil (Per Bbl) $16.24 16.74 -3% 16.24 16.74 -3%
<F3>
NGL (Per Boe)3 $10.37 9.76 +6% 10.37 9.76 +6%
Oil, Gas and NGL
<F3>
(Per Emcf)3 $2.31 1.71 +35% 1.82 1.71 +6%
<F1>
1 The 1995 column in this table includes the cumulative effect of the San Juan Basin Transaction,
from the January 1, 1995 effective date through September 30, 1995, all of which was recorded
in the third quarter of 1995. These figures are consistent with the presentation in the
consolidated financial statements.
<F2>
2 The 1995 column in this table excludes the cumulative effect of the San Juan Basin Transaction
for the first six months of the year 1995. Therefore, these figures present the results for
the third quarter which would have been reported if there had been no contingency at the time
the transaction was executed.
<F3>
3 NGL is converted to barrels of oil equivalent ("Boe") at the rate of 42 gallons of liquids per
barrel. Oil and NGL are converted to equivalent thousand cubic feet ("EMcf") at the rate of six
Mcf per barrel of oil (or Boe of NGL). These conversions are based upon the approximate relative
energy content of natural gas, oil and NGL. Such rate is not necessarily indicative of the
relationship of oil, gas and NGL prices, which are affected by market and other factors in addition
to relative energy content.
</TABLE>
13
<PAGE>
Combined oil, gas and NGL revenues increased by
9% for the first nine months of 1995. The relative contributions
of production and price changes are shown below.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994 Change
Production
<S> <C> <C> <C>
Gas (Mcf) 27,554,589 30,096,354 -8%
Oil (Bbls) 2,436,450 1,776,298 +37%
NGL (Boe) 436,320 369,116 +18%
Oil, Gas and NGL (Emcf) 44,791,209 42,968,838 +4%
Revenues
Gas $36,797,786 45,230,185 -19%
Oil 40,904,485 27,094,532 +51%
NGL 4,738,282 3,460,870 +37%
Combined 82,440,553 75,785,587 +9%
Average Prices
Gas (Per Mcf) $1.34 1.50 -11%
Oil (Per Bbl) $16.79 15.25 +10%
NGL (Per Boe) $10.86 9.38 +16%
Oil, Gas and NGL (Per EMcf) $1.84 1.76 +5%
</TABLE>
Gas Revenues. Gas revenues increased by $4.2
million, or 32%, in the third quarter of 1995, due to the effect
of the San Juan Basin Transaction. The transaction's $8.6
million cumulative effect on gas revenues which was recorded in
the third quarter included $5.9 million of gas sales related to
the first six months of 1995, and $2.7 million of gas sales
related to the third quarter.
Excluding the cumulative effect of revenues
related to the first half of the year from the San Juan Basin
Transaction, the average price for all gas produced in the third
quarter of 1995 was $1.30, or 1%, less than the price for the
third quarter of 1994. This price decline caused gas revenues to
drop by $0.1 million. Also excluding the cumulative effect of
the San Juan Basin Transaction, production for the third quarter
was 8.8 Bcf, which was 12% lower than in the third quarter of
1994. This production decline caused gas revenues to drop by
$1.6 million.
Coal seam gas averaged $2.80 per Mcf in the third
quarter of 1995, including the out-of-period revenues from the
first half of the year. Excluding the out-of-period revenues,
coal seam gas averaged $1.25 per Mcf in the third quarter of 1995
compared to the average of $1.03 for the third quarter of 1994.
The $1.25 average in the 1995 quarter includes a benefit of $0.59
per Mcf from the third-quarter-only effect of the San Juan Basin
Transaction. The average price for conventional gas production
in the third quarter of 1995 was $1.35 per Mcf, a 19% reduction
from the $1.67 per Mcf price realized in the third quarter of
1994.
14
<PAGE>
Coal seam gas production in the third quarter of
1995 was 4.3 Bcf. Excluding the six-month out-of-period
cumulative effect of the San Juan Basin Transaction, coal seam
gas production in the third quarter of 1995 was 5.0 Bcf, which
was 12% lower than the 5.7 Bcf of coal seam gas produced in the
third quarter of 1994. The true third-quarter-only effect of the
San Juan Basin Transaction accounted for approximately 0.3 Bcf of
the reduction in 1995 volumes produced. Conventional gas
production in the third quarter of 1995 was 3.9 Bcf, which was 9%
lower than the 4.3 Bcf of conventional gas produced in the third
quarter of 1994.
Gas revenues declined by $8.4 million, or 19%, in
the first nine months of 1995, primarily because the average
price dropped by $0.16 per Mcf, or 11%. This price decline
accounted for $4.6 million of the drop in gas revenues. Also,
declines in production of 2.5 Bcf, or 8%, caused a $3.8 million
drop in gas revenues.
The San Juan Basin Transaction added $8.6 million
of gas revenues during the first nine months of 1995. This
transaction boosted the average gas price of coal seam gas by
$0.59 per Mcf to a total for the nine months ended September 30,
1995, of $1.30 per Mcf. This compares to the coal seam average
price for the first nine months of 1994 of $1.24 per Mcf.
Conventional gas production averaged $1.38 per Mcf for the first
nine months of 1995, a 25% decline from the $1.83 per Mcf average
for the same period in 1994.
Coal seam gas production declined by 6% in the
first nine months of 1995, from 16.7 Bcf in the 1994 period to
15.7 Bcf in the 1995 period. The San Juan Basin Transaction
accounted for 0.9 Bcf of this 1.0 Bcf decline. Conventional gas
production decreased by 12% from 13.4 Bcf in the first nine
months of 1994 to 11.8 Bcf in the same period in 1995.
Oil Revenues. Oil revenues increased by 38% from
$10.6 million in the third quarter of 1994 to $14.5 million in
the third quarter of 1995. Production gains of 265,000 barrels,
or 42%, added $4.4 million of oil revenues in the 1995 quarter.
The average oil price decreased by $0.50 per barrel, or 3%, in
the 1995 quarter, which offset $0.5 million of the revenue gained
from increased production.
Approximately 54% of the increased oil production
was the result of added production from the properties acquired
in the 1994 Merger (the "Merger Properties"). Oil production
from these properties has steadily increased since the Merger.
As a result, the Merger Properties produced 243,000 barrels in
the third quarter of 1995, compared to 99,000 barrels in the
third quarter of 1994. Devon's other oil properties also
increased from 531,000 barrels in the third quarter of 1994 to
652,000 barrels in 1995's third quarter. This 23% increase was
caused by production from new wells which were completed in 1995,
and additional production from recompletions and workovers.
Oil revenues increased by 51% from $27.1 million
in the first nine months of 1994 to $40.9 million in the first
nine months of 1995. Production gains of 660,000 barrels, or
37%, added $10.1 million of oil revenues in the 1995 period.
Also, the average oil price increased by $1.54 per barrel, or
10%, in the 1995 period, which added $3.7 million of oil revenues
compared to the 1994 period.
15
<PAGE>
The Merger Properties added only four months of
production to Devon's totals for the first nine months of 1994,
compared to a full nine months in 1995. This fact, along with
the properties' increase in production since the May 1994 Merger,
caused production from the Merger Properties to increase from
137,000 barrels in the first nine months of 1994 to 582,000
barrels in the 1995 period. Production from Devon's other oil
properties increased 215,000 barrels, or 13%, in the 1995 period.
NGL Revenues. NGL revenues increased by 21% from
$1.4 million in the third quarter of 1994 to $1.7 million in the
third quarter of 1995. Production increased in the 1995 quarter
by 21,000 Boe, or 14%, which added $0.2 million to NGL revenues.
The Merger Properties accounted for 10,000 Boe of this increase.
Also, the average price increased by $0.61 per Boe, or 6%, in the
1995 quarter. This price increase added $0.1 million to NGL
revenues in the 1995 quarter.
NGL revenues increased by 37% from $3.5 million
in the first nine months of 1994 to $4.7 million in the first
nine months of 1995. Production increased in the 1995 period by
67,000 Boe, or 18%, which added $0.6 million to NGL revenues.
The Merger Properties accounted for 41,000 Boe of this increase.
Also, the average price increased by $1.48 per Boe, or 16%, in
the first nine months of 1995. This price increase added $0.6
million to NGL revenues in the 1995 period.
16
<PAGE>
Production and Operating Expenses. Production and
operating expenses in the third quarter and first nine months of
1995 varied compared to 1994 as shown in the tables below.
<TABLE>
<CAPTION>
<F1>
<F2>
Actual Reported Results (1) Adjusted Results (2)
Three Months Ended Three Months Ended
September 30, September 30,
1995 1994 Change 1995 1994 Change
Absolute:
Recurring operations and
<S> <C> <C> <C> <C> <C> <C>
maintenance expenses $6,203,890 5,774,297 +7% 6,230,464 5,774,297 +8%
Well workover expenses 800,237 769,626 +4% 800,237 769,626 +4%
Production taxes 1,780,109 1,635,298 +9% 1,816,161 1,635,298 +11%
Production taxes 1,780,109 1,635,298 +9% 1,816,161 1,635,298 +11%
Total production and
operating expenses $8,784,236 8,179,221 +7% 8,846,862 8,179,221 +8%
Per EMcf:
Recurring operations and
maintenance expenses $0.43 0.40 +7% 0.41 0.40 +2%
Well workover expenses 0.05 0.05 - 0.05 0.05 -
Production taxes 0.12 0.11 +9% 0.12 0.11 +9%
Total production and
operating expenses $0.60 0.56 +7% 0.58 0.56 +4%
<CAPTION>
Nine Months Ended
September 30,
1995 1994 Change
Absolute:
Recurring operations and
maintenance expenses $17,372,701 16,078,902 +8%
Well workover expenses 2,950,110 2,013,785 +46%
Production taxes 5,013,787 5,273,154 -5%
Total production and
operating expenses $25,336,598 23,365,841 +8%
Per EMcf:
Recurring operations and
maintenance expenses $0.39 0.37 +5%
Well workover expenses 0.07 0.05 +40%
Production taxes 0.11 0.12 -8%
Total production and
operating expenses $0.57 0.54 +6%
<F1>
1 The 1995 column in this table includes the cumulative effect of the San Juan Basin Transaction,
from the January 1, 1995 effective date through September 30, 1995, all of which was recorded
in the third quarter of 1995. These figures are consistent with the presentation in the
consolidated financial statements.
<F2>
2 The 1995 column in this table excludes the cumulative effect of the San Juan Basin Transaction
for the first six months of the year 1995. Therefore, these figures present the results for the
third quarter which would have been reported if there had been no contingency at the time the
transaction was executed.
</TABLE>
17
<PAGE>
Recurring operations and maintenance expenses
increased $0.4 million, or 7%, in the third quarter of 1995
compared to the same quarter of 1994. Substantially all of the
increase related to Devon's properties other than the San Juan
Basin gas properties or the Merger Properties. However, $0.2
million, or half, of the increase in the recurring expenses
related to several miscellaneous expenses related to prior
periods.
Recurring expenses of the Merger Properties were
constant at $0.9 million for both the third quarter of 1995 and
1994. However, on a per EMcf basis, the Merger Properties'
recurring expenses were $0.45 per EMcf in the 1995 quarter, a 51%
decrease compared to their cost of $0.91 per EMcf in the 1994
quarter.
The recurring expenses of the coal seam
properties in the third quarter of 1995 were affected by the San
Juan Basin Transaction. However, these properties have such a
low operating cost that the effect of the transaction, including
the cumulative effect of the first six months, had a minimal
effect on the third quarter's total recurring expenses.
Recurring operations and maintenance expenses in the third
quarter were lowered by less than $0.1 million due to the
cumulative effect of the first six months which was recorded in
the third quarter. The San Juan Basin Transaction had a more
significant effect on Devon's overall expense per EMcf because of
the production volumes which were reduced by the transaction.
Without the cumulative six month effect from the transaction,
Devon's total recurring operations and maintenance expenses per
EMcf in 1995's third quarter would have been $0.41 per EMcf,
instead of the $0.43 per EMcf which was actually reported.
Recurring expenses for the first nine months of
1995 were up $1.3 million, or 8%, compared to the first nine
months of 1994. The Merger Properties accounted for $1.1 million
of the increase, due to the fact that these properties were owned
by Devon for the full nine months of the 1995 period, compared to
only four months in the 1994 period. The Merger Properties'
recurring expense per EMcf dropped significantly though, from
$0.87 per EMcf in the 1994 period to $0.49 per EMcf in the 1995
period.
Depreciation, Depletion and Amortization Expenses
("DD&A"). Oil and gas property related DD&A increased $0.2
million, or 2%, from $8.9 million in the third quarter of 1994 to
$9.1 million in the same quarter of 1995. The increase was
solely due to an increase in the DD&A rate per EMcf. The DD&A
rate in 1994's third quarter was $0.61 per EMcf, compared to
1995's third quarter rate of $0.63 per EMcf. The impact of the
higher DD&A rate in the third quarter of 1995 was partially
negated by lower production due to the cumulative effect of the
San Juan Basin Transaction on the first six months of the year
which was recorded in the third quarter. DD&A in 1995's third
quarter was lowered by $0.4 million which was actually related to
lower gas production in the first and second quarters of the year
as a result of the San Juan Basin Transaction.
Oil and gas property related DD&A increased by
$2.9 million, or 12%, from $24.6 million in the first nine months
of 1994 to $27.5 million in the first nine months of 1995. The
DD&A rate increased from $0.57 per EMcf in the 1994 period to
$0.61 per EMcf in the 1995 period, primarily due to the inclusion
of the Merger Properties for a full nine months in 1995, compared
to only four months in the 1994 period. This rate increase
accounted for 64% of the increased DD&A, while the other 36% was
caused by the increase in total production.
18
<PAGE>
General and Administrative Expenses ("G&A"). G&A
increased $0.1 million, or 6%, in the third quarter of 1995
compared to the same period of 1994. There were no individual
G&A items which accounted for a significant portion of the
quarterly increase.
G&A increased $0.2 million, or 4%, for the first
nine months of 1995 compared to the same period of 1994.
Personnel expenses, including salary, pension and insurance
expenses, increased by $0.5 million, while legal fees increased
by $0.3 million. These increases were partially offset by a $0.6
million increase in G&A reimbursements received from joint
interest owners in Devon-operated properties. Approximately $0.2
million of the increase in reimbursements related to a change in
the method used to calculate the reimbursements on certain
properties, which change was retroactive to the prior two years.
Interest Expense. Interest expense increased
$0.2 million, or 15%, in the third quarter of 1995, due
exclusively to higher rates. The annualized interest rate on the
debt outstanding during 1995's quarter was 6.26%, compared to
5.37% during the third quarter of 1994. The overall average
interest rate (including the effect of various fees paid to the
banks and the amortization of certain loan costs) during the
third quarter of 1995 was 7.01%, compared to 5.98% during the
third quarter of 1994. The average debt balance outstanding
during the third quarter of 1995 was $95.6 million, or slightly
lower than the $98.1 million average balance during the third
quarter of 1994.
Interest expense increased $1.4 million, or 38%,
in the first nine months of 1995. Higher interest rates caused
$1.3 million of the increase. The annualized rate on the debt
outstanding during the 1995 period was 6.58%, compared to 4.84%
during the first nine months of 1994. The overall average
interest rate during the first nine months of 1995 was 7.36%,
compared to 5.51% during the same period in 1994. An increase in
the average debt balance caused interest expense to rise by $0.1
million in the first nine months of 1995. The average balance
increased 4% from $91.3 million in the 1994 period to $94.8
million in the 1995 period. The increase in the average balance
was primarily caused by the timing of the borrowings used to fund
a portion of the May 1994 merger.
Devon entered into an interest rate swap
agreement in June, 1995, to hedge the impact of interest rate
changes on a portion of its long-term debt. The principal amount
of the swap agreement is $75 million, and the other party to the
agreement is one of the lenders of Devon's credit lines (the
"Lender"). The agreement terminates on June 16, 1998, unless the
Lender exercises its right to extend the termination date to June
16, 2000. The terms of the agreement provide for quarterly
payments either to or from Devon, determined by whether the three
month London Interbank Offered Rate ("LIBOR") in effect at the
beginning of each quarterly calculation period is greater or less
than 5.6%. The calculation periods begin on the sixteenth day of
March, June, September and December. If, on the date of the
beginning of the quarterly calculation period, the three month
LIBOR exceeds 5.6%, the Lender will owe Devon the quarterly
amount of the excess rate applied to the $75 million principal.
Alternately, if the three month LIBOR on the applicable quarterly
date is less than 5.6%, Devon will owe the Lender.
19
<PAGE>
The swap agreement is accounted for as a hedge,
with the amount which is either due to or from Devon recorded as
a reduction or increase in interest expense. The three month
LIBOR has exceeded 5.6% at the beginning of each of the first two
calculation periods. Therefore, Devon has recognized $72,000 and
$85,000 as reductions to interest expense in the third quarter of
1995 and the first nine months of 1995, respectively. Additional
reductions to interest expense of $45,000 have been deferred
until the fourth quarter of 1995.
The swap agreement does not alter or affect any
terms or conditions of Devon's lines of credit.
Income Taxes. The effective tax rate for the
third quarter of 1995 rose to 44% compared to the 41% which had
been used for each of the first two quarters of 1995. The third
quarter rate includes the cumulative "catch up" effect of
revising the estimated rate for the year 1995 from 41% to 43%.
Therefore, included in the $5.2 million of income tax expense for
the third quarter is $0.1 million of additional taxes related to
taxable earnings recorded during the first six months of 1995.
The increase in the expected tax rate was due to certain tax
attributes of the San Juan Basin Transaction. The effective tax
rate utilized during the third quarter and first nine months of
1994 was 34%. The increase in the 1995 rates compared to those
estimated in 1994 is primarily due to the effect of certain
financial deductions for DD&A which are not allowed for income
tax purposes due to the tax free nature of the May 1994 merger.
Also, although the estimated 1994 income tax rate used in
preparing the consolidated financial statements for the first
nine months of 1994 was 34%, the rate for the entire year of 1994
was actually 36%. The effect of this change in the estimated tax
rate was recorded in the fourth quarter of 1994.
While the San Juan Basin Transaction caused the
financial effective tax rate for the first nine months of 1995 to
increase by two percentage points to 43%, the transaction had a
much more significant impact on the portion of financial taxes
which are current versus deferred. Without the San Juan Basin
Transaction, it was estimated that current federal and state
taxes would equal approximately 12% of the expected total
financial tax expense for the year. However, including the San
Juan Basin Transaction in 1995's expected results causes the
estimate of current income taxes to rise to almost half of the
expected total financial tax expense for the year 1995.
Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("Statement 109"), requires
that the tax benefit of available tax carryforwards be recorded
as an asset to the extent that management assesses the
utilization of such carryforwards to be "more likely than not".
When the future utilization of some portion of the carryforwards
is determined not to be "more likely than not", Statement 109
requires that a valuation allowance be provided to reduce the
recorded tax benefits from such assets.
20
<PAGE>
Approximately $13.1 million of deferred tax
assets were included in the net deferred tax liability as of
September 30, 1995. Over 90% of such assets related to the tax
benefits expected from the future utilization of net operating
loss carryforwards, statutory depletion carryforwards, investment
tax credit carryforwards and minimum tax credit carryforwards.
To assess the likelihood of realizing tax benefits from the
future utilization of these carryforwards, management considered
four primary factors: (1) estimates of future yearly taxable
income which Devon is expected to generate; (2) the level of
future taxable income necessary to utilize the carryforwards; (3)
the expiration dates, if any, of such carryforwards, and (4)
certain limitations on the annual utilization of the
carryforwards as set forth by federal tax regulations.
Based upon current estimates of future production
and average prices, management believes that taxable income
during the carryforward periods will be sufficient to utilize
substantially all of the carryforwards currently available. The
tax benefit from net operating loss and investment tax credit
carryforwards, which totals approximately $6.9 million, is
expected to be realized between 1995 and 2002. This is well
before the 2006 expiration date for the majority of such
benefits. The remaining $6.2 million of tax benefits consist
primarily of statutory depletion and minimum tax credit
carryforwards. These carryforwards do not have expiration dates,
and are therefore available to reduce taxes in any future year.
However, based upon limitations imposed on the utilization of
certain of the depletion carryforwards acquired in the Merger, a
$100,000 valuation allowance was recorded at the time of the
Merger. No changes in this valuation allowance have occurred
through September 30, 1995.
Management's assessment of the future utilization
of Devon's deferred tax assets is based upon current estimates of
taxable income to be generated in 1995 and beyond. Significant
changes in such estimates from variables such as future oil and
gas prices or capital expenditures could alter the timing of the
eventual utilization of such assets. There can be no assurance
that Devon will generate any specific level of continuing taxable
earnings.
Capital Expenditures, Capital Resources and Liquidity
The following discussion of capital expenditures,
capital resources and liquidity should be read in conjunction
with the consolidated statements of cash flows included in Part
1, Item 1 elsewhere herein.
Capital Expenditures. Cash used for capital
expenditures increased 131% from $21.9 million in the first nine
months of 1994 to $50.7 million in the first nine months of 1995.
Approximately $48.4 million was spent in the 1995 period on
exploration and development efforts, compared to $21.2 million
spent in the 1994 period for such efforts. Approximately $23.3
million of 1995's total expenditures related to the drilling and
development of the Grayburg-Jackson Field which was acquired in
the May 1994 merger, compared to $2.1 which was spent at
Grayburg-Jackson following the merger through September 30, 1994.
21
<PAGE>
Cash Used in the Merger with Alta Energy
Corporation. This merger was consummated in the second quarter
of 1994. Through September 30, 1994, Devon incurred costs of
$42.3 million related to the merger. Devon also incurred
subsequent merger-related costs in the fourth quarter of 1994 and
the first quarter of 1995. Approximately $0.1 million of various
costs were incurred in the fourth quarter of 1994. In February
1995, Devon paid an additional $2.4 million to the former Alta
stockholders. This payment, in accordance with the merger
agreement, was based upon the evaluation of a well completed by
Alta during the first half of 1994.
Capital Resources and Liquidity. Net cash
provided by operating activities continued to be a primary source
of capital and liquidity in the first nine months of 1995. Net
cash provided by operating activities increased by 13% from $39.7
million in the first nine months of 1994 to $44.9 million in the
first nine months of 1995. Included in 1995's net cash from
operations was $6.1 million related to the San Juan Basin
Transaction. This additional cash flow consisted of $8.6 million
of additional gas revenues plus $0.1 million of lower production
and operating expenses, less $2.6 million of additional income
taxes paid to date.
The $44.9 million of net cash provided by
operating activities, along with $6.8 million of proceeds from
property sales and $6.5 million of additional cash received from
the San Juan Basin Transaction related to the repurchase option
aspect of the transaction, allowed Devon to fund its capital
expenditures and common stock dividends, and also retire $1.0
million of long-term debt through the first nine months of 1995.
As of September 30, 1995, Devon's credit lines totaled $205
million, of which $108 million was available for future
borrowings after giving effect to the cancellation in October
1995 of a $20 million letter of credit. In connection with the
contingency which previously existed with the San Juan Basin
Transaction, Devon had established a letter of credit which
totaled $20 million as of the end of the third quarter. However,
when the contingency was resolved in October 1995, the letter of
credit was canceled.
Subsequent Event - Property Acquisition. On
November 1, 1995, Devon entered into an agreement to purchase
certain Wyoming oil and natural gas properties and a gas
processing plant from an unrelated company for approximately $50
million. Devon estimates the proved oil and natural gas reserves
of the properties to be approximately 90 equivalent Bcf.
Included in these estimates are certain proved undeveloped
reserves, for which Devon expects to incur an additional $9
million of future capital costs. Also, Devon expects to spend an
additional $4 million to $5 million to expand the capacity of the
gas plant by approximately 75%.
The transaction is expected to close in mid-
December 1995. The purchase price is subject to certain
adjustments, but these are not expected to be material. The
acquisition is expected to be funded with cash on hand and
additional borrowings under Devon's credit lines.
22
<PAGE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of
Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation
S-K are as follows:
Exhibit
No.
2.1 Agreement and Plan of Merger and
Reorganization by and among Registrant
and Devon Energy Corporation, a
Delaware corporation, dated as of April
13, 1995 (incorporated by reference to
Exhibit A to Registrant's definitive
Proxy Statement for its 1995 Annual
Meeting of Shareholders).
2.2 Agreement and Plan of Merger by and
among Devon Energy Corporation, Devon
Acquisition Corp. and Alta Energy
Corporation dated February 18, 1994
[incorporated by reference to Exhibit
2.1 to Registrant's Registration
Statement on Form S-4 (No. 33-76524)].
23
<PAGE>
2.3 Amendment to Agreement and Plan of
Merger by and among Devon Energy
Corporation, Devon Acquisition Corp.
and Alta Energy Corporation dated April
13, 1994 [incorporated by reference to
Exhibit 2.2 to Amendment No. One to
Registrant's Registration Statement on
Form S-4 (No. 33-76524)].
4.1 Registrant's Certificate of
Incorporation (incorporated by
reference to Exhibit B to Registrant's
definitive Proxy Statement for its 1995
Annual Meeting of Shareholders).
4.2 Registrant's Bylaws (incorporated by
reference to Exhibit 3.2 to
Registrant's Registration Statement on
Form 8-B).
4.3 Form of Common Stock Certificate
(incorporated herein by reference to
Exhibit 4.1 to Registrant's
Registration Statement on Form 8-B).
4.4 Rights Agreement between Registrant and
The First National Bank of Boston
(incorporated by reference to Exhibit
4.2 to Registrant's Registration
Statement on Form 8-B).
4.5 Certificate of Designations of Series A
Junior Participating Preferred Stock of
Registrant (incorporated by reference
to Exhibit 3.3 to Registrant's
Registration Statement on Form 8-B).
10.1 Credit Agreement dated October 7, 1994,
among Devon Energy Corporation
(Nevada), as Borrower, the Registrant
and Devon Energy Operating Corporation,
as Guarantors, NationsBank of Texas,
N.A., as Agent, and NationsBank of
Texas, N.A., Bank One, Texas, N.A.,
Bank of Montreal, and First Union
National Bank of North Carolina, as
Lenders (incorporated herein by
reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form
10-Q for the quarter ended September
30, 1994).
10.2 First Amendment, dated January 27,
1995, to Credit Agreement among Devon
Energy Corporation (Nevada), as
Borrower, the Registrant and Devon
Energy Operating Corporation, as
Guarantors, NationsBank of Texas, N.A.,
as Agent, and NationsBank of Texas,
N.A., Bank One, Texas, N.A., Bank of
Montreal and First Union National Bank
of North Carolina, as Lenders
(incorporated herein by reference to
Exhibit 10.2 to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1994).
24
<PAGE>
10.3 Devon Energy Corporation 1988 Stock
Option Plan [incorporated herein by
reference to Exhibit 10.4 to
Registrant's Registration Statement on
Form S-4 (No. 33-23564)]. *
10.4 Devon Energy Corporation 1993 Stock
Option Plan (incorporated herein by
reference to Exhibit A to Registrant's
Proxy Statement for the 1993 Annual
Meeting of Shareholders).*
10.5 Severance Agreement between Devon
Energy Corporation (Nevada), Registrant
and Mr. J. Larry Nichols, dated
December 3, 1992 (incorporated herein
by reference to Exhibit 10.10 to
Registrant's Amendment No. 1 to Annual
Report on Form 10-K for the year ended
December 31, 1992).*
10.6 Severance Agreement between Devon
Energy Corporation (Nevada), Registrant
and Mr. H. R. Sanders, Jr., dated
December 3, 1992 (incorporated herein
by reference to Exhibit 10.11 to
Registrant's Amendment No. 1 to Annual
Report on Form 10-K for the year ended
December 31, 1992).*
10.7 Severance Agreement between Devon
Energy Corporation (Nevada), Registrant
and Mr. J. Michael Lacey, dated
December 3, 1992 (incorporated herein
by reference to Exhibit 10.12 to
Registrant's Amendment No. 1 to Annual
Report on Form 10-K for the year ended
December 31, 1992).*
10.8 Severance Agreement between Devon
Energy Corporation (Nevada), Registrant
and Mr. H. Allen Turner, dated December
3, 1992 (incorporated herein by
reference to Exhibit 10.13 to
Registrant's Amendment No. 1 to Annual
Report on Form 10-K for the year ended
December 31, 1992).*
10.9 Severance Agreement between Devon
Energy Corporation (Nevada), Registrant
and Mr. Darryl G. Smette, dated
December 3, 1992 (incorporated herein
by reference to Exhibit 10.14 to
Registrant's Amendment No. 1 to Annual
Report on Form 10-K for the year ended
December 31, 1992).*
10.10 Severance Agreement between Devon
Energy Corporation (Nevada), Registrant
and Mr. William T. Vaughn, dated
December 3, 1992 (incorporated herein
by reference to Exhibit 10.15 to
Registrant's Amendment No. 1 to Annual
Report on Form 10-K for the year ended
December 31, 1992).*
25
<PAGE>
10.11 Stock Purchase Agreement dated December
22, 1993, between Registrant and John
R. Fitzgerald (incorporated herein by
reference to Exhibit 1 to Registrant's
Schedule 13D dated as of December 22,
1993).
10.12 Schedule identifying other Stock
Purchase Agreements entered into by
Registrant with certain holders of Alta
Energy Corporation common stock
(incorporated herein by reference to
Exhibit 2 to Registrant's Schedule 13D
dated as of December 22, 1993).
10.13 Stock Purchase Agreement dated January
14, 1994, between GSS Investments Corp.
[a wholly-owned subsidiary of
Registrant] and Princor Growth Fund,
Inc. (incorporated herein by reference
to Exhibit 3 to Amendment No. 2 to
Registrant's Schedule 13D dated as of
January 7, 1994).
10.14 Stock Purchase Agreement dated January
14, 1994, between Registrant and Andrew
P. Carstensen, Jr. (incorporated herein
by reference to Exhibit 4 to Amendment
No. 2 to Registrant's Schedule 13D
dated as of January 7, 1994).
10.15 Sale and Purchase Agreement relating to
Registrant's San Juan Basin gas
properties.
10.16 Second Restatement of and Amendment to
Sale and Purchase Agreement relating to
Registrant's San Juan Basin gas
properties.
11 Computation of earnings per share
(b) Reports on Form 8-K
A Form 8-K was filed on July 12, 1995,
regarding the reincorporation of Devon Energy
Corporation from Delaware to Oklahoma.
* Compensatory plans or arrangements.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.
DEVON ENERGY CORPORATION
Date: November 9, 1995 /s/William T. Vaughn
William T. Vaughn
Vice President - Finance
27
<PAGE>
EXHIBIT INDEX
Page
2.1 Agreement and Plan of Merger and Reorganization *
by and among Registrant and Devon Energy
Corporation, a Delaware corporation, dated as of
April 13, 1995.
2.2 Agreement and Plan of Merger by and among Devon *
Energy Corporation, Devon Acquisition Corp. and
Alta Energy Corporation dated February 18, 1994.
2.3 Amendment to Agreement and Plan of Merger by and *
among Devon Energy Corporation, Devon Acquisition
Corp. and Alta Energy Corporation dated April 13,
1994.
4.1 Registrant's Certificate of Incorporation. *
4.2 Registrant's Bylaws. *
4.3 Form of Common Stock Certificate. *
4.4 Rights Agreement between Registrant and the First *
National Bank of Boston.
4.5 Certificate of Designations of Series A Junior *
Participating Preferred Stock of Registrant.
10.1 Credit Agreement dated October 7, 1994, among *
Devon Energy Corporation (Nevada), as Borrower,
the Registrant and Devon Energy Operating
Corporation, as Guarantors, NationsBank of Texas,
N.A., as Agent, and NationsBank of Texas, N.A.,
Bank One, Texas, N.A., Bank of Montreal, and
First Union National Bank of North Carolina, as
Lenders.
10.2 First Amendment, dated January 27, 1995, to *
Credit Agreement among Devon Energy Corporation
(Nevada), as Borrower, the Registrant and Devon
Energy Operating Corporation, as Guarantors,
NationsBank of Texas, N.A., as Agent, and
NationsBank of Texas, N.A., Bank One, Texas,
N.A., Bank of Montreal, and First Union National
Bank of North Carolina, as Lenders.
10.3 Devon Energy Corporation 1988 Stock Option Plan. *
28
<PAGE>
10.4 Devon Energy Corporation 1993 Stock Option Plan. *
10.5 Severance Agreement between Devon Energy *
Corporation (Nevada), Registrant and Mr. J. Larry
Nichols, dated December 3, 1992.
10.6 Severance Agreement between Devon Energy *
Corporation (Nevada), Registrant and Mr. H. R.
Sanders, Jr., dated December 3, 1992.
10.7 Severance Agreement between Devon Energy *
Corporation (Nevada), Registrant and Mr. J.
Michael Lacey, dated December 3, 1992.
10.8 Severance Agreement between Devon Energy *
Corporation (Nevada), Registrant and Mr. H. Allen
Turner, dated December 3, 1992.
10.9 Severance Agreement between Devon Energy *
Corporation (Nevada), Registrant and Mr. Darryl
G. Smette, dated December 3, 1992.
10.10 Severance Agreement between Devon Energy *
Corporation (Nevada), Registrant and Mr.
William T. Vaughn, dated December 3, 1992.
10.11 Stock Purchase Agreement dated December 22, *
1993, between Registrant and John R.
Fitzgerald.
10.12 Schedule identifying other Stock Purchase *
Agreements entered into by Registrant with
certain holders of Alta Energy Corporation
common stock.
10.13 Stock Purchase Agreement dated January 14, *
1994, between GSS Investments Corp. [a
wholly-owned subsidiary of Registrant] and
Princor Growth Fund, Inc.
10.14 Stock Purchase Agreement dated January 14, *
1994, between Registrant and Andrew P.
Carstensen, Jr.
10.15 Sale and Purchase Agreement relating to 30
Registrant's San Juan Basin gas properties.
10.16 Second Restatement of and Amendment to Sale 59
and Purchase Agreement relating to
Registrant's San Juan Basin gas properties.
11 Computation of earnings per share 71
* Incorporated by reference.
29
<PAGE>
<TABLE>
Exhibit 11
DEVON ENERGY CORPORATION
Computation of Earnings Per Share
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1995 1994 1995 1994
PRIMARY EARNINGS PER SHARE
Computation for Statement of Operations
<S> <C> <C> <C> <C>
Net earnings per statement of operations $ 6,645,531 3,055,972 10,116,755 11,986,799
Weighted average common shares outstanding 22,092,783 22,049,065 22,065,462 21,386,685
Primary earnings per common share $0.30 0.14 0.46 0.56
Additional Primary Computation (A)
Net earnings per statement of operations $ 6,645,531 3,055,972 10,116,755 11,986,799
Adjustment to weighted average common shares
outstanding:
Weighted average as shown above in primary
computation 22,092,783 22,049,065 22,065,462 21,386,685
Add dilutive effect of outstanding stock
options (as determined using the treasury
stock method) 118,314 112,800 122,246 123,928
Weighted average common shares outstanding,
as adjusted 22,211,097 22,161,865 22,187,708 21,510,613
Net earnings per common share, as adjusted $0.30 0.14 0.46 0.56
FULLY DILUTED EARNINGS PER SHARE (A)
Net earnings per statement of operations $ 6,645,531 3,055,972 10,116,755 11,986,799
Weighted average common shares outstanding
as shown in primary computation above 22,092,783 22,049,065 22,065,462 21,386,685
Add fully dilutive effect of outstanding
stock options (as determined using the
treasury stock method) 138,659 112,800 148,255 124,428
Weighted average common shares outstanding,
as adjusted 22,231,442 22,161,865 22,213,717 21,511,113
Fully diluted earnings per common share $0.30 0.14 0.46 0.56
(A) These calculations are submitted in accordance with Regulation S-K item 601(b)(11)
although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because
they result in dilution of less than 3%.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 11103702
<SECURITIES> 0
<RECEIVABLES> 15111303
<ALLOWANCES> 225000
<INVENTORY> 587568
<CURRENT-ASSETS> 27609105
<PP&E> 566974139
<DEPRECIATION> 230259966
<TOTAL-ASSETS> 368259266
<CURRENT-LIABILITIES> 15736603
<BONDS> 97000000
<COMMON> 2209690
0
0
<OTHER-SE> 212961946
<TOTAL-LIABILITY-AND-EQUITY> 368259266
<SALES> 82440553
<TOTAL-REVENUES> 83183525
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 25336598
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5214241
<INCOME-PRETAX> 17748755
<INCOME-TAX> 7632000
<INCOME-CONTINUING> 10116755
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10116755
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
SALE AND PURCHASE AGREEMENT
BY AND AMONG
DEVON ENERGY CORPORATION (NEVADA)
AND
NS GAS PROPERTIES, INC.
AND
DEVON ENERGY CORPORATION
AND
NORFOLK SOUTHERN CORPORATION
AND
NORFOLK SOUTHERN PROPERTIES, INC.
Effective January 1, 1995
SALE AND PURCHASE AGREEMENT
BY AND AMONG
DEVON ENERGY CORPORATION (NEVADA)
AND
NS GAS PROPERTIES, INC.
AND
DEVON ENERGY CORPORATION
AND
NORFOLK SOUTHERN CORPORATION
AND
NORFOLK SOUTHERN PROPERTIES, INC.
TABLE OF CONTENTS
Page
1. Agreement of Sale and Purchase Price 1
1.1 Sale and Conveyance of the Interests 1
1.2 Interests Defined 1
1.3 Effective Time 2
1.4 Purchase Price 2
2. Title 2
2.1 Title Material 2
2.2 Possession of Title Materials 4
2.3 Title Standard 4
3. Representations and Warranties of Seller 5
3.1 Agreement Valid 5
3.2 Seller Status and Power to Sell 5
3.3 Title to the Interests 5
3.4 Compliance with Leases and Laws 6
3.5 Processing, Sale and Transportation
of Production 6
3.6 Taxes 7
3.7 Brokers and Finders 7
3.8 Claims or Litigation 7
3.9 Contracts; Consents 8
3.10 Assignments Prior to Closing 8
3.11 Status of Wells 8
3.12 Full Disclosure 8
3.13 Consummation of Transactions 9
3.14 Tax Partnerships 9
3.15 Equipment 9
3.16 Insurance 9
3.17 No Consents 9
-i-
3.18 Miscellaneous 9
3.19 Ordinary Course 10
3.20 Restriction on Operations 10
4. Representations and Warranties of Buyer 10
4.1 Organization 10
4.2 Agreement Authorized 10
4.3 Valid Agreement 10
4.4 Authority to Purchase 10
4.5 Brokers and Finders 11
5. Matters Relating to Operations 11
5.1 Access of Buyer 11
5.2 Preparation of Description of Interests 11
6. Additional Agreement of the Parties 11
6.1 Further Assurances 11
6.2 Buyer's Mortgage 11
6.3 Management and Agency Agreement 11
6.4 Rights of Rescission 12
6.5 Preferential Right to Purchase and
Repurchase Option 13
6.6 Certain Federal Income Tax Matters 16
7. The Closing 16
8. Payment of Closing Payment and Interest 16
9. Execution and Delivery of Documents 16
9.1 Assignment 16
9.2 Management and Agency Agreement 17
9.3 Buyer's Mortgage 17
10. Possession 17
11. Obligations After Closing 17
11.1 Sales and Use Taxes 17
11.2 Receipts and Disbursements 17
11.3 Indemnity 17
11.4 Damages For Breach of Warranty 19
12. Miscellaneous 21
12.1 Notices 21
12.2 Binding Effect 21
12.3 Counterparts 21
12.4 Expenses 21
12.5 Section Headings 22
12.6 Superseding Effect 22
12.7 Governing Law 22
12.8 Waivers 22
12.9 Exhibits and Schedules 22
12.10 Announcements 22
-ii-
12.11 Survival of Warranties 22
12.12 Joinder by Devon Delaware, Norfolk
and Properties 22
12.13 No Restrictions on Production 23
12.14 Insurance 23
12.15 Production Payment Obligations --
Non-Recourse 23
-iii-
DEFINED TERMS
The following terms are defined in the Sale and
Purchase Agreement.
Terms Page Section
"Agreed Values" 1.4
"Assignment" 1.2
"Buyer" Para.1
"Claim" 11.4(c)
"Closing" 1.1
"Closing Date" 1.1
"Closing Payment" 1.4
"Code" 3.5
"Devon Delaware" Para.1
"Effective Time" 1.3
"Initial Report" 3.3(c)
"Interests" 1.2
"Management and Agency Agreement" 6.3
"Mortgage" 6.2
"NGPA" 2.1(n)
"Norfolk" Para.1
"Permitted Encumbrances" 2.3
"Production Payment" 1.2
"Purchase Price" 1.4
"Properties" Para.1
"Remaining Reserves" 6.5(b)(3)
"Seller" Para.1
-iv-
SALE AND PURCHASE AGREEMENT
THIS AGREEMENT is entered into effective January 1,
1995, by and among DEVON ENERGY CORPORATION (NEVADA), a Nevada
corporation ("Seller"); NS GAS PROPERTIES, INC., a Virginia
corporation ("Buyer"); DEVON ENERGY CORPORATION, a Delaware
corporation ("Devon Delaware"); NORFOLK SOUTHERN CORPORATION, a
Virginia corporation ("Norfolk"); and NORFOLK SOUTHERN
PROPERTIES, INC., a Virginia corporation ("Properties").
In consideration of the mutual covenants contained
herein and the benefits to be derived by each party hereunder,
and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as
follows:
1. Agreement of Sale and Purchase Price.
1.1 Sale and Conveyance of the Interests. Sub-
ject to the terms and conditions herein set forth, Seller will,
at the Closing provided for in Section 7 hereof (the "Closing"),
sell, transfer, assign, convey and deliver to Buyer the Inter-
ests, and Buyer will purchase, receive, accept delivery of, and
pay Seller for the Interests. The day appointed for the Closing
in Section 7 is called the "Closing Date."
1.2 Interests Defined. As used herein, the term
"Interests" means the aggregate of all right, title and interest
owned by Seller in, to and under the following:
(a) The oil, gas and mineral leases and the
operating rights, mineral interests, royalty interests,
overriding royalty interests, payments out of production and
interests in or under unit agreements described in Exhibit A,
insofar and only insofar as the same cover and relate to the
lands and depths also described in Exhibit A (the "Leases");
(b) All other contracts, agreements, leases,
licenses, permits, easements and orders to the extent relating to
the Leases, the operations conducted or to be conducted thereon,
or the production, treatment, sale or disposal of hydrocarbons or
water produced therefrom or attributable thereto (all of which,
to the extent they are material, are represented by Seller to be
identified and described on Schedule 3.9 hereto);
(c) All wells (including, without limita-
tion, disposal, supply or injection wells), personal property,
fixtures (including, without limitation, gathering systems,
pipelines, compressors and dehydration and other treatment
facilities, but excluding inventory and supplies), equipment and
improvements as of the Effective Time (hereinafter defined) and
as of the Closing Date to the extent used or obtained in connec-
tion with the Leases or with the operation or maintenance
thereof, or with the production, treatment, sale or disposal of
hydrocarbons or water produced therefrom or attributable thereto;
and<PAGE>
(d) All other rights and interests in, to or
under or derived from the Leases, even though improperly
described in or omitted from Exhibit A;
EXCEPTING and RESERVING unto Seller, however, the production
payment (the "Production Payment") described in the Assignment,
Conveyance and Bill of Sale (the "Assignment") attached as
Exhibit C hereto, together with all interests in the subject
matter of such Assignment, to the extent the same cover or relate
to lands and depths not described in Exhibit A.
1.3 Effective Time. As used herein, the term
"Effective Time" means 7:00 a.m., New Mexico time, on January 1,
1995.
1.4 Purchase Price. The purchase price for the
Interests ("Purchase Price") shall be the total of (i) the sum of
$10,827,145 (the "Closing Payment"), plus (ii) all sums payable
under the Production Payment, which are estimated to have a
present value of $153,463,018. The Purchase Price is therefore
estimated by the parties to be $164,290,163. The Purchase Price
has been allocated by the parties among the various items of the
Interests as set out in Exhibit B. The amounts so allocated
shall be deemed to be the respective fair market values of such
items of the Interests and are herein referred to as the "Agreed
Values" of such items of the Interests.
2. Title.
2.1 Title Material. Seller acknowledges and
understands that Buyer is relying on Seller's representations and
warranties as to the adequacy and sufficiency of Seller's title
to the Interests conveyed by Seller to Buyer, all of which
representations and warranties are material to Buyer and the
transactions contemplated herein. From and after the date hereof
Seller shall provide Buyer, its agents and representatives full
opportunity, at any time and from time to time during normal
business hours, to examine, inspect and copy, at Buyer's expense,
the books, records and files in the possession of Seller insofar
as they pertain to the Interests, pertaining to the following:
(a) All title opinions and reports pertain-
ing to the Interests;
(b) All abstracts of title and status re-
ports pertaining to the Interests;
(c) All documents comprising the Interests,
prior conveyances of interests therein or interests created
thereby, unitization, communitization, pooling and operating
agreements and division and transfer orders, together with all
other contracts and documents affecting the title to or the value
of the Interests;
-2-
(d) All spacing, pooling, unitization,
exception, allowable and other orders of any local, state or
Federal court, agency, commission or other regulatory authority
in any way relating to the Interests or the operation thereof;
(e) The payment of delay rentals, shut-in
royalties, royalties and other payments due under the Interests;
(f) The payment of all ad valorem, property,
production, severance and similar taxes and assessments based on
or measured by the ownership of property or the production or
removal of hydrocarbons or the receipt of proceeds therefrom
attributable to the Interests;
(g) All ownership maps and surveys relating
to the Interests and the lands affected thereby;
(h) All lease records, production records
and data sheets relating to the Interests and to bonuses, delay
rentals, shut-in royalties and royalties payable thereunder;
(i) All division and transfer orders and all
purchase, sale, gathering, dehydration processing, exchange,
transportation and similar agreements relating to the sale,
dehydration, treatment, transportation or marketing of production
from the Interests;
(j) All bonds, insurance policies, leases,
permits, easements, licenses, salt water disposal agreements, gas
balancing agreements, pumping or pumper's agreements and other
agreements in any way relating to the Interests or the operation
thereof;
(k) All records relating to the inventory of
all personal property and fixtures included in the Interests;
(l) Records evidencing that all persons
responsible for distributing proceeds of sale of production from
the Interests are currently paying Seller for at least the net
revenue interests referred to in Section 3.3 hereof without
suspense or any indemnity other than the normal division order
warranty of title;
(m) Records evidencing that all operators of
the Interests are currently billing Seller for no more than the
working interests referred to in Section 3.3 hereof and that
Seller is current with all such operators for all costs and
expenses;
-3-
(n) All regulatory filings relating to the
Interests, including, without limitation, all applications and
determinations under the Natural Gas Policy Act of 1978 ("NGPA");
and
(o) All other available records, files,
reports and documents pertaining to the Interests as Buyer
reasonably may request.
2.2 Possession of Title Material. Seller and
Buyer agree that, for as long as Seller shall continue to perform
the services and duties as Buyer's agent as provided in the
Management and Agency Agreement described in Section 6.3 hereof,
the documents and items referred to in clauses (a) through (o)
above shall remain in Seller's possession, subject to Buyer's
right to examine, inspect and copy the same, at Buyer's expense.
However, Seller agrees that it will, upon Buyer's reasonable
request, promptly deliver to Buyer, at Buyer's expense, copies of
any or all such documents and items as may be specified by Buyer,
to the extent that the same relate to and are necessary to
Buyer's quiet and continuing enjoyment of the Interests, and will
make any original copies of such documents in Seller's possession
available to Buyer at all reasonable times. Upon any termination
of the Management and Agency Agreement for a reason other than
Buyer's sale of all of the Interests to Seller, Seller promptly
will provide to Buyer or its designee, at Buyer's expense, all of
such documents and items as shall be specified by Buyer.
2.3 Title Standard. For the purposes of Seller's
title warranty in Section 3.3, Seller's title shall be good and
defensible (as distinguished from technically marketable);
provided, no Permitted Encumbrance shall constitute a title
defect. "Permitted Encumbrances" are, except as otherwise
provided herein, comprised of (i) matters described without
material omission in Schedule 3.5 or 3.9, (ii) royalties,
overriding royalties, production payments and other burdens on
production which do not reduce the interest in an item of the
Interests to less than that warranted in Section 3.3, (iii) liens
for taxes, labor and materials where payment is not due, (iv)
regulatory authority of governmental agencies not presently or
previously violated, easements, surface leases and rights, plat
restrictions and similar encumbrances, provided that they do not
detract from the value or increase the cost of operation of any
item of the Interests, and (v) regulatory filings with and
consents by regulatory authority if they are customarily obtained
subsequent to the sale or conveyance. For purposes of this
Section 2.3, "good and defensible title" shall mean a title that
is free from reasonable doubts or claims either as to matters of
law or fact, such as are sufficient to form a basis of (or would
reasonably subject Buyer to) litigation, or compel Buyer to
resort to parol evidence, not afforded by the official public
records (or to presumptions of fact that would probably, in the
event of suit, become genuine issues of fact), to defend Buyer's
title against such outstanding doubts or claims.
-4-
3. Representations and Warranties of Seller. Seller
represents and warrants to Buyer as of the Effective Time and as
of the Closing Date, as follows:
3.1 Agreement Valid. Subject to the effects of
bankruptcy, insolvency, reorganization, moratorium and similar
laws affecting creditors' rights, as well as to principles of
equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law), this agreement constitutes,
and all instruments required hereunder to be executed and de-
livered by Seller at the Closing will constitute, the valid and
binding agreement of Seller enforceable against Seller in ac-
cordance with its terms.
3.2 Seller Status and Power to Sell. Seller is a
corporation duly organized, validly existing and in good standing
under the laws of the State of Nevada, and is duly qualified to
carry on its business in each jurisdiction where any item of the
Interests is located. The execution and performance of this
agreement, the transactions contemplated hereby, and all things
necessary or desirable in order to accomplish the same have been
duly authorized by all necessary corporate action of Seller.
Seller has all necessary authority under its charter, bylaws and
other governing documents and otherwise has good right and lawful
authority to carry on its business as presently conducted and to
consummate all transactions contemplated by this agreement.
3.3 Title to the Interests.
(a) In accordance with the standards set out
in Section 2.3, Seller owns the Interests.
(b) Each of the Interests is good, valid,
subsisting and enforceable in accordance with its terms.
(c) Except as given effect in the LaRoche,
Swindell & Associates engineering report to Seller, dated January
10, 1995 and covering the Interests (the "Initial Report"),
Seller's interests in the Interests are not subject to being
increased or reduced by virtue of reversionary interests owned by
third parties or Seller.
(d) Seller has taken or caused to be taken
all actions which are reasonable and customary in the oil and gas
industry to assure that its title to the Interests is as
warranted herein, including without limitation the diligent and
thorough review of those of the items of the Interests which are
not reflected by documents which are a part of official public
records; inquiries to predecessors in interest and other
knowledgeable parties concerning matters not disclosed by
official public records; and the securing of title opinions from
outside legal counsel, and Seller has either corrected, cured or
satisfied each doubt, potential claim or requirement which
resulted from such efforts.
-5-
3.4 Compliance With Leases and Laws. All oil and
gas leases which are a part of the Interests are valid, binding
and enforceable in accordance with their terms, and in full force
and effect. No default exists under any of the terms and
provisions, express or implied, of any of such oil and gas leases
or under any of the terms and provisions of any agreement,
contract, license, permit, easement, order or other instrument
comprising the Interests or to which the Interests are subject,
and Seller has not received notice of any claim of such default
or notice of facts which could constitute a default. All
rentals, shutin royalties and royalties due under the Interests
and applicable law, rules and regulations of the Federal and
state regulatory authorities having jurisdiction have been timely
and properly paid and are not in suspense for any reason. There
are no express provisions under any Interest or any agreement
which require the drilling of additional wells or operations to
earn or continue to hold any of the Interests. All wells on or
attributable to the Interests have been drilled, completed and
operated, and all production therefrom has been accounted for and
paid to the persons entitled thereto, in compliance with all
applicable Federal, state and local laws and applicable rules and
regulations of the Federal, state and local regulatory authori-
ties having jurisdiction thereof; all necessary regulatory
filings have been properly made in connection with the ownership
of and transfer to Buyer of the Interests, the transactions
contemplated by this Agreement, and the drilling, completion and
operation of such wells and all other operations on the Interests
or the land associated therewith; and all production and sales of
oil, gas and other hydrocarbons heretofore produced or sold from
the Interests have not been in excess of any production allowable
established by governmental authorities (plus permitted
tolerances) or price established by the applicable regulatory
authorities. There is no condition at, under or in connection
with the lands associated with the Interests for which Seller has
or Buyer could incur any liability, or have any remedial or
reporting obligation, under any law or regulation in any manner
concerning the protection of the environment or public health.
No gas produced from the Interests is subject to the certificate
and abandonment jurisdiction of the Federal Energy Regulatory
Commission under the Natural Gas Act of 1974. There is no claim,
action or proceeding under applicable environmental, public
health or other laws pending or threatened against Seller
relating to the Interests or the operation thereof.
3.5 Processing, Sale and Transportation of
Production. Except as described in Schedule 3.5, Seller has not
prior to the Effective Time produced or sold gas subject to
-6-
balancing rights of third parties (including without limitation
other owners of interests in the land and purchasers of
production therefrom) or subject to balancing duties under
governmental requirements, and Seller is not and Buyer will not
be obligated by virtue of any prepayment made under any
production sales contract or any other contract containing a
take-or-pay clause, or under any similar arrangement, to deliver
oil, gas or other minerals produced from or allocated to any of
the Interests at any time after the Effective Time without re-
ceiving full payment therefor at the time of delivery. Prior to
the Effective Time, Seller has not collected any proceeds from
the sale of hydrocarbons produced from the Interests which are
subject to refund. Proceeds from the sale of oil, gas and
natural gas liquids from the Interests are being received by
Seller in a timely manner and are not being held in suspense for
any reason. Seller has described in Schedule 3.5 and furnished
to Buyer true and complete copies (with all amendments) of all
contracts and agreements (other than routine division orders
terminable by Seller upon less than sixty (60) days' notice)
pursuant to which hydrocarbons produced from the Interests are
treated, dehydrated, compressed, sold, transported, processed or
otherwise disposed of or marketed. The contracts and agreements
comprising the Interests or identified in the Schedules hereto,
do not contain nonstandard terms which could impose on Buyer
risks or burdens that are not customarily assumed by owners of
working interests. Except as disclosed in Schedule 3.5, no
person has any call upon, option to purchase or similar rights
with respect to the Interests or to the production therefrom.
Except for the Northeast Blanco Unit No. 479R Well, each existing
producing well listed on Exhibit A shall, as of the Effective
Time and the Closing Date, be eligible for the nonconventional
fuels income tax credit under Section 29 of the Internal Revenue
Code of 1986, as amended (the "Code"). Upon consummation of the
transactions contemplated hereby Buyer will have the right to
market production from the Interests on terms no less favorable
than the terms upon which Seller currently is marketing such
production.
3.6 Taxes. All (i) ad valorem, property, produc-
tion, severance and other taxes and assessments based on or
measured by the ownership of property or the production or
removal of hydrocarbons or the receipt of proceeds therefrom, and
(ii) state and local gross receipts and sales and use taxes
related to the Interests, have been timely paid.
3.7 Brokers and Finders. Seller has not incurred
any liability, contingent or otherwise, for brokers or finders
fees in respect of this transaction for which Buyer shall have
any responsibility whatsoever.
3.8 Claims or Litigation. There is no claim,
dispute, suit, action or other proceeding pending or threatened
against Seller or any of the Interests or any third party which
might result in the impairment or loss of Seller's title to any
of the Interests or the value thereof, or otherwise affect the
Interests or the cost of operation thereof, or result in any
loss, damage or cost to or the imposition of any liability on
Buyer.
-7-
3.9 Contracts; Consents. Seller has described in
Schedule 3.9 (i) all operating agreements currently in effect
relating to the Interests, (ii) all partnership, joint venture,
farmin/farmout, dry hole, bottom hole, acreage contribution, area
of mutual interest and similar agreements and obligations of
which any terms remain executory and which affect the Interests,
(iii) all other executory contracts to which Seller is a party
which materially affect any item of the Interests, and (iv) all
governmental or court approvals and third party contractual
consents required in order to consummate the transactions con-
templated by this agreement, other than routine consents required
in connection with transfers of Federal and state leases. All
such agreements and contracts are valid, binding and enforceable
in accordance with their terms and are in full force and effect,
and there are no existing defaults thereunder or events that
would constitute a default thereunder. Seller has furnished to
Buyer true and correct copies (with all amendments) of all such
agreements, contracts, approvals and consents.
3.10 Assignments Prior to Closing. Except as
described in Schedule 3.5, Seller has not made any assignment,
conveyance or encumbrance of the Interests, other than personal
property replaced by equivalent property or consumed in the
operation of the Interests in the ordinary course of business.
3.11 Status of Wells. All wells included in the
Interests, and all wells located on the lands affected thereby
and not included in the Interests but with respect to which
Seller has, or after the Closing Buyer may have, any liability to
plug, either (i) are producing or capable of producing
hydrocarbons in commercial quantities without the necessity of
rework or recompletion operations, or (ii) are being utilized as
pressure observation, injection, water supply or disposal wells
and are fully equipped for such operations, or (iii) have been
properly plugged and abandoned in accordance with all applicable
rules and regulations of governmental authorities having
jurisdiction with respect thereto.
3.12 Full Disclosure. No information furnished by
Seller to Buyer and no representation or warranty of Seller under
this agreement contains or will contain any untrue statement of a
fact or omits or will omit any fact necessary to make the
statements made therein or herein not misleading; provided, no
representations of any kind are made by Seller relating to
projected or estimated future production or reserves attributable
to the Interests. Notwithstanding the foregoing provision,
Seller is not aware of any facts or circumstances which could
cause a prudent person in the oil and gas industry to believe
that the assumptions and/or methodologies employed in the
preparation of or reflected in the Initial Report are unusual,
suspect or not customary in the industry, and none of such
assumptions or methodologies are known by Seller or its
representatives to be misleading or incorrect.
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3.13 Consummation of Transactions. Neither the
execution hereof nor the consummation of the transactions contem-
plated hereby will constitute a violation or breach of, or an
event of default under, any contract or agreement to which Seller
is a party, or constitute the happening of a condition upon which
any other party to such a contract may exercise any right or
option which will adversely affect any of the Interests or
Seller's or Buyer's rights therein or thereto; nor will the
happening of such events result in any liability of Buyer to any
person under the terms of any contracts of employment,
consultancy or for services of any kind.
3.14 Tax Partnerships. No item of the Interests
is treated for income tax purposes as being owned by a partner-
ship.
3.15 Equipment. The Interests include all
property, equipment, easements, rights and facilities necessary
for the proper operation of the Interests. All equipment and
property used in connection with the operation of the Interests
is in good condition and repair, ordinary wear and tear excepted,
and is adequate for the proper operation of the Interests.
3.16 Insurance. The insurance policies described
in Schedule 3.17 are presently maintained in connection with the
Interests and the operation thereof. Such policies are customary
for the operation of the Interests. There are no pending or
threatened claims, actions, suits or proceedings involving any
insurance maintained in connection with the Interests.
3.17 No Consents. Except as provided in Section
3.9 hereof, the sale, assignment and conveyance of the Interests
to Buyer is not subject to the consent or approval of, or the
giving of any notice to, any other person (except for such
consents or approvals as have been obtained and any notice which
has been given) and will not violate or constitute a default
under any of the Interests or any contract, agreement, permit,
order or other instrument relating to the Interests.
3.18 Miscellaneous. For purposes of each
representation, warranty or covenant in this Section 3 as to the
non-existence of any matter, condition or thing (including, but
not limited to any default, condition, suit, action, claim or
proceeding), all references thereto shall be deemed also to
include any event, condition or circumstance which, with the
giving of notice or the lapse of time or both, would constitute
such a matter, condition or thing.
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3.19 Ordinary Course. Since the Effective Time,
Seller has caused the Interests to be maintained and operated in
a good and workmanlike manner consistent with prudent oil and gas
practices, maintained the insurance which was in force on the
Closing Date, and timely paid or caused to be paid all costs and
expenses incurred in connection therewith.
3.20 Restrictions on Operations. Since the
Effective Time, no operations were conducted for the drilling of
any new well or the reworking, recompleting or redrilling of any
existing well, and Seller has not waived any rights or entered
into any new agreements or commitments, has not made any
expenditure attributable to any one project in excess of $100,000
(except when bound to do so under provisions of existing joint
operating agreements which do not require authority for
expenditures), andhas not abandoned any well or released or
abandoned any portion of the Interests.
4. Representations and Warranties of Buyer. Buyer
represents and warrants to Seller as of the Effective Time and as
of the Closing Date as follows:
4.1 Organization. Buyer is a corporation duly
organized, validly existing and in good standing under the laws
of the Commonwealth of Virginia, and is duly qualified to carry
out its business in New Mexico.
4.2 Agreement Authorized. This agreement has
been duly authorized, executed and delivered by Buyer and all
instruments required hereunder to be delivered by Buyer at the
Closing will be duly authorized, executed and delivered by Buyer
and all requisite corporate action has or will have been taken to
authorize the execution hereof, the transactions contemplated
hereby and all things necessary or desirable in order to ac-
complish the purchase of the Interests, and Buyer has all neces-
sary authority under its articles of incorporation, bylaws and
other governing documents to consummate the same.
4.3 Valid Agreement. Subject to the effects of
bankruptcy, insolvency, reorganization, moratorium and similar
laws affecting creditors' rights, as well as to principles of
equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law), this agreement constitutes,
and all instruments required hereunder to be executed and de-
livered by Buyer at Closing will constitute, the valid and bind-
ing agreement of Buyer enforceable against Buyer in accordance
with its terms.
4.4 Authority to Purchase. Buyer has all
necessary corporate power and authority to purchase and pay for
the Interests as contemplated by this agreement.
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4.5 Brokers and Finders. Buyer has incurred no
liability, contingent or otherwise, for brokers or finders fees
in respect of this transaction for which Seller shall have any
responsibility whatsoever.
5. Matters Relating to Operations.
5.1 Access of Buyer. Buyer shall have free
access to the offices, properties, records, marketing agreements,
files, unrestricted seismic data, engineering reports and evalu-
ations, books of account, and all other information of Seller
pertaining to the Interests, including all land material, for the
investigation of the Interests, the status thereof and the title
thereto, through Buyer's employees, attorneys, independent public
accountants or outside consultants; provided, however, that such
investigation shall be conducted during normal business hours and
in a manner that does not unreasonably interfere with Seller's
normal operations and employee relationships. Seller shall cause
its personnel to assist Buyer in making such investigation and
shall cause the counsel, accountants, employees and other repre-
sentatives of Seller to be reasonably available to Buyer for such
purposes. During such investigation, Buyer shall have the right
to cause Seller to make copies, at Buyer's expense, of such
records, files and other materials as Buyer may deem advisable.
5.2 Preparation of Description of Interests.
Seller will, at its expense, prepare and furnish or cause to be
prepared and furnished to Buyer as promptly as possible, the
exhibit to be attached to the assignment and conveyance referred
to in Section 9.1 hereof, which shall correctly set forth and
describe each element of the Interests and the land applicable
thereto as contemplated thereby in appropriate detail, together
with the identification of each existing well associated
therewith.
6. Additional Agreements of the Parties.
6.1 Further Assurances. From time to time
(whether at or after Closing), as and when requested by Buyer or
its successors or assigns, Seller will execute, acknowledge and
deliver all such instruments and documents and take such other
action as Buyer may reasonably deem necessary or desirable in
order to more effectively consummate the transactions contem-
plated hereby and to transfer to Buyer the Interests; and Seller
will assist Buyer in the collection or reduction to possession
thereof.
6.2 Buyer's Mortgage. Attached hereto as
Exhibit F is a form of Mortgage and forms of Financing Statements
covering the Interests (together, the "Mortgage"), which Buyer
agrees to execute and deliver to Seller at Closing.
6.3 Management and Agency Agreement. Attached
hereto as Exhibit D is a form of Management and Agency Agreement
covering the Interests (the "Management and Agency Agreement")
which Seller and Buyer agree to execute and deliver to each other
at Closing.
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6.4 Rights of Rescission.
(a) This agreement may be rescinded under
the following conditions:
(i) By Buyer, provided notice of
Buyer's election to rescind and the reason therefor is given to
Seller prior to December 1, 1995, if the Internal Revenue Service
fails or refuses to issue a private letter ruling holding that
(A) Seller has not retained an economic interest in the Interests
and has transferred all of Seller's economic interest in the
Interests to Buyer, (B) the Production Payment is properly
characterized for income tax purposes as a purchase money
mortgage loan, and (C) any credit for producing fuel from a
nonconventional source, pursuant to Section 29 of the Code,
attributable to production from the Interests after the sale of
the Interests to Buyer is properly allocable to Buyer; and
(ii) By Seller, provided notice of
Seller's election to rescind and the reason therefor is given to
Buyer prior to December 1, 1995, if the Internal Revenue Service
fails or refuses to issue a private letter ruling holding that
recognition of gain by Seller upon reacquisition of the Interests
by exercise of the Repurchase Option granted in Section 6.5
hereof is determined pursuant to Section 1038 of the Code.
(b) If a condition for rescission exists and
proper notice of rescission is given, the parties shall, prior to
December 15, 1995, restore themselves to the relative positions
each would have occupied had this agreement never been made,
including without limitation (A) reconveyance by Buyer of the
Interests to Seller, (B) payment by Seller to Buyer of an amount
equal to all amounts paid by Buyer under this agreement and any
agreement made pursuant hereto, and (C) payment by Buyer to
Seller of an amount equal to all amounts received by Buyer under
this agreement and any agreement made pursuant hereto. If
rescission is properly elected, the failure of any party to take
all steps necessary for a complete rescission prior to January 1,
1996, shall be a breach of this agreement and, in addition to
other damages and remedies to which the aggrieved party may be
entitled, the indemnity in Section 11.3 hereof shall apply to any
third party claims arising from the breach.
(c) Seller agrees that it shall cause there
to be issued to Buyer at closing, and that it shall cause there
to be maintained in force a Letter of Credit in the form of that
attached hereto as Exhibit E. Buyer shall notify the issuer of
the Letter of Credit to terminate it upon the receipt by Buyer of
(i) the private letter rulings described in Section 6.4(a)(i)
hereof and a notice from Seller that it has received or waived
the private letter ruling described in Section 6.4(a)(ii) hereof,
or (ii) all payments from Seller due Buyer under Section 6.4(b),
hereof.
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(d) In the event of a rescission hereunder,
Seller shall agree to and shall indemnify, defend and hold Buyer,
its affiliates and their respective officers, agents and
employees harmless against all liabilities, losses, claims,
damages, costs and expenses (known, unknown, contingent or
otherwise) associated with, arising during or in connection with,
or resulting from Buyer's ownership of the Interests.
6.5 Preferential Right to Purchase and Repurchase
Option.
(a) Preferential Right to Purchase. Seller shall
have a preferential right to purchase the Interests subject to
the Production Payment (the "Option Interests") or any part
thereof, at any time prior to the "Termination Date," as defined
in the Assignment. In the event Buyer, or any of Buyer's
successors or assigns desire to sell all or any part of the
Interests, it shall promptly give written notice of such fact to
Seller, with full information concerning its proposed
disposition, which shall include the name and address of the
prospective transferee (who must be ready, willing and able to
purchase), the purchase price, a legal description sufficient to
identify the property involved, a complete description of the
Option Interests involved, and all other terms of the offer.
Seller shall then have an optional prior right, for a period of
forty-five (45) days after the notice is received by Seller, to
purchase for the stated consideration pertaining to the third
party offer on the same terms and conditions the Option Interests
which are proposed to be sold. The preferential right to
purchase described herein shall be applicable to any proposed
disposition of the Option Interests or any part thereof, whether
by purchase and sale, merger, reorganization or consolidation,
and shall be applicable to any proposed transfer of Option
Interests, whether to a third party, a subsidiary, a parent
company or to a subsidiary of a parent company.
(b) Repurchase Option. Seller shall also have
the option to purchase all or any undivided portion of the whole
of the Option Interests or any individual oil and gas lease or
leases which form the basis for undivided interests therein under
the terms and conditions of this Section 6.5(b), at any time.
(1) Notice of Exercise. Seller shall
exercise such option to purchase by giving Buyer written notice
(the "Repurchase Notice") of its election to exercise the option
at least 20 days prior to the date specified in the notice that
the purchase is to be closed (the "Option Closing Date").
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(2) Contents of Notice. The Repurchase
Notice shall (i) indicate that Seller is exercising its option
under this Section 6.5(b), (ii) specify a place of closing (which
shall be in the city of Seller's or Buyer's principal place of
business), (iii) specify the time and date of closing which shall
be on the last business day of a calendar month following the
expiration of the notice period, (iv) identify the applicable
part of the Option Interests being purchased, if less than the
whole, (v) be accompanied by a schedule prepared by Seller
calculating the purchase price according to the purchase price
determination procedures set forth in Section 6.5(b)(3) below and
(vi) be dated and signed by an officer of Seller.
(3) Determination of Purchase Price. The
purchase price under the option shall be determined with
reference to the gas reserve quantities attributed to the Option
Interests in the Initial Report, a copy of which has been
furnished to Buyer. The reserves for the Option Interests or the
applicable part thereof estimated in the Initial Report to exist
on the Option Closing Date shall be the basis for calculating
Seller's purchase price under the option without regard to the
actual reserves that may exist or be estimated to exist on the
Option Closing Date. If the Option Closing Date under the option
is to occur in a month other than December, the applicable
remaining reserves attributed in the Initial Report to the
calendar year of closing shall be reduced by a fraction, the
numerator of which is the number of months of the year that have
passed through and including the month of the Option Closing Date
(even if on other than the last day of that month) and the
denominator of which is 12. The applicable remaining gas reserve
quantities so calculated shall hereinafter be referred to as the
"Remaining Reserves." Seller's purchase price for the Option
Interests or the applicable part thereof shall be their agreed
upon market value which shall be calculated using the same cash
flow and discounting procedures as were used in preparing the
Initial Report; however, the agreed upon market value calculation
shall use (i) the weighted average price received for the sale of
gas from the Interests or the applicable part thereof during the
twelve month period preceding the month in which the Option
Closing Date is to occur, (ii) the production and ad valorem tax
rates in effect on the date of the Repurchase Notice, (iii)
operating expenses estimated in the Initial Report, adjusted for
known changes, including the "Administration Fee" payable under
the terms of the Management and Agency Agreement , (iv) future
known capital expenditures not contemplated in the Initial Report
and (v) a discount rate equal to One Hundred Twenty Percent
(120%) of the national Prime Rate as quoted in The Wall Street
Journal on the 10th business day preceding the date of the
Repurchase Notice.
(4) Option Closing Procedure.
(i) On the Option Closing Date, Buyer shall
sell, assign and convey the Interests or the applicable part
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thereof to Seller, pursuant to documents prepared by Seller and
satisfactory to Buyer, without representation or warranty of any
kind, except that Buyer shall represent to Seller that Buyer has
not (except as permitted hereby) transferred, assigned or further
encumbered the Interests (or such applicable part) since Buyer
acquired the same from Seller. Buyer shall assign to Seller all
prior rights in warranty to the extent such were received by
Buyer from Seller. The foregoing sale, assignment and conveyance
shall be subject to all necessary consents and approvals of third
parties, if any, which burdened the Interests when the same were
assigned and conveyed to Buyer, or which are subsequently
approved by Seller, and Seller shall be responsible for obtaining
and securing all necessary consents and approvals concerning the
same.
(ii) On the Option Closing Date, Seller shall
(i) release the Mortgage contemplated by Section 6.6 hereof as to
the Interests or the applicable part thereof, and (ii) pay Buyer
the purchase price for the Interests or the applicable part
thereof. Buyer shall also execute all necessary forms of
assignment and transfer customary in the oil and gas industry or
required by governmental authority, together with such transfer
orders or letters in lieu thereof as Seller shall reasonably
request (all of which shall be substantially similar to the
documentation furnished by Seller to Buyer on the date hereof in
connection with the conveyance of the Interests to Buyer), and
Buyer shall deliver to Seller possession of the Interests or the
applicable part thereof.
(5) Indemnification. As part of the closing
of any purchase by Seller hereunder, Seller agrees to and shall
indemnify, defend and hold Buyer, its affiliates and their
respective officers, agents and employees, harmless from and
against all liabilities, losses, claims, damage, costs and
expenses (known, unknown, contingent or otherwise) associated
with, arising during or in connection with, or resulting from
Buyer's ownership of the Interests or the portion thereof
purchased, regardless of cause save only the sole negligence of
Buyer.
(c) Affect on Production Payment Termination
Date. In the event less than the whole of the Option Interests
are purchased or repurchased under the provisions of this Section
6.5, the parties shall execute and record an appropriate document
clearly indicating a reduction in the volume of gas production
necessary to reach the "Termination Date," as set forth in
Section 1(b)(i) of the Assignment. The amount of such reduction
shall be equal to ninety percent (90%) of the Remaining Reserves
attributed in the Initial Report to the Option Interests or the
applicable part thereof which are purchased or repurchased under
the terms of this Section 6.5.
(d) Set-Off. In connection with any purchase by
Seller hereunder, Seller shall be authorized to set-off any and
all amounts due Seller under the Assignment and/or the Management
and Agency Agreement, in determining the net amount to be paid by
Seller to Buyer.
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(e) Taxation. This preferential right to
purchase or repurchase the Option Interests or a part thereof
shall, for federal income tax purposes, constitute a
reacquisition of all or the applicable part of the Interests in
satisfaction of all or the applicable part of the indebtedness
represented by the Production Payment with payment of additional
consideration to Buyer, the taxation of which shall be determined
under Section 1038 of the Code.
6.6 Certain Federal Income Tax Matters. Unless
otherwise finally determined by the Internal Revenue Service or a
court:
(a) Buyer and Seller agree to treat the
Production Payment as a purchase money debt instrument issued by
Buyer to Seller as partial consideration for the Interests; and
(b) Buyer and Seller agree that the issue
price of the Production Payment is determined under Section
1274(b)(3) of the Internal Revenue Code of 1986, as amended, and
Treasury Regulation Sec. 1.1274-2(b)(3) to be equal to the excess
of the agreed upon market value of the Interests (which is
$164,290,163) over the amount of the Closing Payment (which is
$10,827,145), or $153,463,018, as determined by Schedule 6.7(b)
attached hereto.
7. The Closing. The Closing is taking place
simultaneously with the execution of this agreement, in the
offices of McAfee & Taft A Professional Corporation, Tenth Floor,
Two Leadership Square, Oklahoma City, Oklahoma.
8. Payment of Closing Payment and Interest. At
Closing, Buyer shall pay to Seller the Closing Payment, together
with interest thereon at eight and one-half percent (8.5%) for the
applicable period of time from the Effective Time to Closing, by
wire transfer into a bank account to be designated by Seller
prior to Closing.
9. Execution and Delivery of Documents.
9.1 Assignment. Seller shall execute and deliver
to Buyer the Assignment, conveying the Interests to Buyer. For
the purposes of Section 2(b)(vii) of the Assignment, the term
"Tax Credit Percentage" shall mean Eighty-Three and One-Third
Percent (83 %). Seller shall also prepare, execute, acknowledge,
and deliver all necessary forms of assignment and transfer
required by governmental authority in connection with the sale
and purchase of the Interests.
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9.2 Management and Agency Agreement. At the
Closing, Seller and Buyer shall execute and deliver to each other
the Management and Agency Agreement.
9.3 The Mortgage. At the Closing, Buyer shall
execute and deliver to Seller the Mortgage.
10. Possession. Seller shall deliver to Buyer at the
Closing possession of the Interests.
11. Obligations After Closing. In addition to the
other covenants contained in this agreement which are by their
terms to be performed wholly or partly after the Closing Date,
the parties agree as follows:
11.1 Sales and Use Taxes. It is understood that
the Purchase Price does not include sales and use taxes imposed
on account of the transactions contemplated hereby. Within the
time permitted by applicable law to do so, Buyer shall pay and
Seller shall collect and remit to the proper governmental au-
thorities all applicable sales and use taxes, if any, within the
time allowed by law for payment thereof and Buyer shall indemnify
and agree to defend and hold harmless Seller in connection with
any claim regarding the same.
11.2 Receipts and Disbursements. If Buyer
receives any funds relating to items of the Interests which
accrued to the owner of the Interests before the Effective Time,
or if Seller receives any funds relating to items of the
Interests which accrued to the owner of the Interests after the
Effective Time, then the party receiving such funds shall account
therefor and pay the same to the other party promptly after
receipt thereof. Likewise, if Buyer shall pay any amount
relating to items of the Interests which accrued to the owner of
the Interests before the Effective Time, or if Seller shall pay
any amount relating to items of the Interests which accrued to
the owner of the Interests after the Effective Time, then the
party making such payment shall invoice the other party for the
amount of such payment and the party receiving such invoice
promptly shall pay the same.
11.3 Indemnity.
(a) Buyer shall indemnify and save and hold
harmless Seller against all third party claims, and all costs,
expenses and liabilities with respect thereto to the extent the
same arise out of or apply to Buyer's ownership, operation and
management of the Interests arising out of events occurring after
the Closing Date (but not including those incurred by Seller with
respect to the sale of the Interests to Buyer or the negotiations
leading to such sale and not including those that result from or
are attributable to the acts, omissions, negligence or willful
misconduct of Seller, its employees or agents with respect to the
operation and maintenance of the Interests or from any
representation of Seller contained herein being untrue or a
breach of any warranty or covenant of Seller contained herein).
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(b) Seller shall indemnify and save and hold
harmless Buyer against all third party claims, and all costs,
expenses and liabilities with respect thereto to the extent the
same arise out of or apply to (i) Seller's or any of Seller's
predecessors in interest (by ownership or operation) ownership,
operation and management of the Interests arising out of events
occurring prior to the Closing Date (but not including those
incurred by Buyer with respect to the purchase of the Interests
by Buyer or the costs and expenses of negotiations leading to
such purchase and not including those that result from or are
attributable to any representation of Buyer contained herein
being untrue or a breach of any warranty or covenant of Buyer
contained herein); (ii) those which arise out of Seller's breach
of its representations and warranties contained in Section 3.3
hereof; and (iii) other representations and warranties contained
herein; however, nothing contained in (iii) above shall be
applicable to any claim involving any agreement, contract,
operation, event, relationship or other activity, obligation or
circumstance in or with which neither Seller nor Seller's
predecessor in interest (either by ownership or operation) were a
direct participant or otherwise directly involved.
(c) Nothing herein or in Section 11.4(a) or
(b) below shall be deemed or construed or shall have the effect
of granting, imputing or creating in favor of any third parties
any rights, claims or benefits whatsoever, now or in the future,
in or under this Agreement or against any party hereto, or their
successors or assigns.
(d) Notwithstanding anything else in this
Agreement, the indemnity granted by this Section 11.3(b), and the
rights and remedies pursuant hereto, shall not be limited to,
modified or affected in any manner whatsoever, and in no way
relate to, the matters covered by Section 11.4(a) and (b) below.
(e) For the purposes of this Section 11.3,
the indemnitee shall include the indemnitee, its affiliates and
their respective officers, agents and employees.
(f) Each indemnified party hereunder agrees
that within sixty (60) days after receiving actual notice of a
matter (or later, if Seller is not prejudiced in any way by the
delay) giving rise to a claim for indemnity under the provisions
of this agreement, including receipt by it of notice of any
demand, assertion, claim, action or proceeding, judicial or
otherwise, by any third party (such third party actions being
collectively referred to herein as a "Claim") with respect to any
matter as to which it is entitled to indemnity under the
provisions of this Section 11.3, it will give notice thereof in
writing to the indemnifying party together with a statement of
such information respecting any of the foregoing as it shall then
have. Such notice shall include a formal demand for
indemnification under this agreement. The indemnifying party
shall not be obligated to indemnify the indemnified party with
respect to any Claim if the indemnified party fails to notify the
indemnifying party thereof in accordance with the provisions of
this Section 11.3.
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(g) The indemnifying party shall be
entitled, at its cost and expense, to contest and defend by all
appropriate legal proceedings any Claim with respect to which it
has been called upon to indemnify the indemnified party under the
provisions of this Section 11.3; provided, however, that notice
of the intention so to contest shall be delivered by the in-
demnifying party to the indemnified party within twenty (20) days
from the date of mailing to the indemnifying party of the notice
by the indemnified party of the Claim. Any such contest may be
conducted in the name and on behalf of the indemnifying party or
the indemnified party, as may be appropriate. Such contest shall
be conducted by attorneys employed by the indemnifying party, but
the indemnified party shall have the right to participate in such
proceedings and to be represented by attorneys of its own choos-
ing at its cost and expense. If the indemnified party joins in
any such contest, the indemnifying party shall have full author-
ity to determine all action to be taken with respect thereto. If
after proper notice from the indemnified party, the indemnifying
party shall not elect to contest any such claim, the indemnifying
party shall be bound by the result obtained with respect thereto
by the indemnified party. At any time after the commencement of
defense of any Claim, the indemnifying party may request the
indemnified party to agree in writing to the abandonment of such
contest or to the payment or compromise by the indemnifying party
of such Claim, whereupon such action shall be taken unless the
indemnified party determines that the contest should be continued
and so notifies the indemnifying party in writing within fifteen
(15) days of such request from the indemnifying party. In the
event that the indemnified party determines that the contest
should be continued, the indemnifying party shall be liable to
the indemnified party under the provisions of this Section 11.3
only to the extent of the lesser of (i) the amount which the
other party to the contested Claim had agreed to accept in pay-
ment or compromise as of the time the indemnifying party made its
request therefor to the indemnified party, or (ii) such amount
for which the indemnifying party may be liable with respect to
such Claim by reason of the provisions hereof.
11.4 Damages for Breach of Warranty.
(a) The parties agree that their remedy,
among themselves, with respect to any inaccuracy of
representation or breach of warranty or covenant shall be limited
to the recovery of actual damages, as provided herein, and that
no incidental, indirect, consequential or other damages shall be
recoverable therefor.
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(b) The amount of any actual damages
resulting from any inaccuracy of representation or breach of
warranty or covenant on the part of Seller hereunder shall be
limited as follows.
(i) Except as provided in (ii) and (iii)
below, where the value of an item of the Interests affected by
any such inaccuracy or breach is less than its value would have
been had all of Seller's representations and warranties been true
and all covenants performed, then only the difference in value
shall be deemed to be actual damages; and the maximum actual
damages recoverable in connection with such item of the Interests
shall be limited to the Agreed Value for such item of the
Interests, less the portion of the Production Payment
attributable thereto.
(ii) With regard to any breach by Seller
of the representations and warranties set forth in Sections 3.3
concerning title, and those representations and warranties
applicable to wells qualifying for tax credits under Section 29
of the Code as set forth in Section 3.5, Seller shall reimburse
Buyer any amount of the tax credit payments made to Seller under
Section 2(b)(vii) (and the applicable provisions of Section 4
dealing therewith) of the Assignment, but which are determined,
by final order of a court of competent jurisdiction, not to be
allowed as a proper credit against Buyer's tax liability for the
sole reason that such facts and circumstances represented and
warranted by Seller therein were untrue.
(iii) In the event any payment is made by
Seller to Buyer under the provisions of (i) or (ii) above, Seller
shall also pay to Buyer interest on the amount(s) involved, at
the national Prime Rate of interest quoted day to day in The Wall
Street Journal for the applicable period of time from the date
such amount(s) were paid to Seller by Buyer to the date of
repayment hereunder.
(c) No actual damage resulting from any
inaccuracy or representation or breach of warranty or covenant
hereunder shall be payable by the breaching party unless (i) such
actual damage exceeds the sum of $10,000 (in which case the full
amount of such actual damage shall be payable by such breaching
party), or (ii) the total of all such individual items of actual
damages in amounts less than $10,000 exceeds the sum of $200,000
(in which case the full amount of such total and all other actual
damages thereafter incurred shall be payable by the breaching
party).
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12. Miscellaneous.
12.1 Notices. All communications required or
permitted under this agreement shall be in writing, sent by
facsimile or delivered personally or by courier or sent by
registered or certified mail, postage prepaid, addressed as set
forth below.
(a) Notices to Seller and/or Devon Delaware:
Devon Energy Corporation (Nevada)
20 North Broadway, Suite 1500
Oklahoma City, Oklahoma 73102
Attention: Mr. H. R. Sanders, Jr.
Executive Vice President
Fax No.: (405) 552-4550
(b) Notices to Buyer, Properties and/or Norfolk:
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Virginia 23510
Attention: Mr. James A. Hixon
Vice President
Fax No.: (804) 629-2898
Any party may change its address for purposes of this Section by
giving written notice of the change of address to the other
parties in the manner herein provided for giving notice. Any
notice or communication hereunder shall be deemed to have been
given when (i) deposited in the United States mail, if by
certified mail, and (ii) received, if delivered personally or by
courier or by facsimile transmission.
12.2 Binding Effect. This agreement shall be
binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns; provided, no assignment
by any party shall relieve such party of any of its obligations
hereunder. Seller shall not assign or delegate any of its rights
or obligations hereunder, in the Mortgage, the Management and
Agency Agreement, and in the Assignment, including but not
limited to, the Production Payment, without the express written
consent of Buyer, which consent shall not be unreasonably
withheld.
12.3 Counterparts. This agreement may be executed
in any number of counterparts, which taken together shall cons-
titute one and the same instrument and each of which shall be
considered an original for all purposes.
12.4 Expenses. Except as otherwise herein pro-
vided, each party hereto will bear and pay its own expenses of
negotiating and consummating the transactions contemplated
hereby, except for fees and expenses of KPMG Peat Marwick LLP
which are issued in connection with obtaining the private letter
ruling referred to in Section 6.4, which shall be shared equally
by Buyer and Seller.
-21-
12.5 Section Headings. The section headings
contained in this agreement are for convenient reference only and
shall not in any way affect the meaning or interpretation of this
agreement.
12.6 Superseding Effect. This agreement super-
sedes any prior agreement and understanding between the parties
with respect to the subject matter of this agreement.
12.7 Governing Law. This agreement shall be
governed by and construed in accordance with the laws of the
State of Oklahoma applicable to contracts made and performed
entirely therein.
12.8 Waivers. No party's rights hereunder will be
deemed waived except by a writing signed by such party. Without
limitation, the occurrence of the Closing shall not be deemed a
waiver of any party's rights except its right to refuse to close.
12.9 Exhibits and Schedules. The Exhibits and
Schedules referred to herein are attached hereto and by this
reference made a part hereof.
12.10 Announcements. Prior to the earlier of
obtaining the private letter ruling described in Section 6.4(a)
or December 31, 1995, Seller and Buyer shall consult with each
other with regard to all press releases and contacts with
journalists, broadcasters or other media concerning this
agreement or the transactions contemplated hereby, and except as
may be required by applicable laws or the applicable rules,
regulations or guidelines of any governmental agency or stock
exchange, neither Buyer nor Seller shall issue such press release
or other publicity without prior notice of such intent to the
other party.
12.11 Survival of Warranties. Nothing contained
in the Assignment shall be deemed to limit the representations
and warranties set forth herein with respect to Seller's title to
the Interests. The covenants, representations and warranties of
the parties in this agreement shall survive the Closing.
12.12 Joinder by Devon Delaware, Norfolk and
Properties.
(a) Devon Delaware joins in the execution
hereof solely for the purpose of guaranteeing, and Devon Delaware
does hereby guarantee the performance of all of Seller's
obligations hereunder.
-22-
(b) Properties joins in the execution
hereof solely for the following purposes: (i) Properties
represents and warrants that it is the owner of all issued and
outstanding stock of Buyer; (ii) Properties agrees that it will
not during the term of the Production Payment, without the prior
written consent of Seller, transfer such ownership of such stock;
(iii) Properties agrees to cause Buyer to comply with all of the
provisions of Sections 6.4 and 6.5, in the event Seller exercises
any of its rights of rescission, purchase or repurchase
hereunder, and (iv) Properties shall guarantee, and Properties
does hereby guarantee, all representations and warranties to be
made by Buyer pursuant to Section 6.5(b)(4)(i) hereof.
(c) Norfolk joins in the execution hereof
solely for the purpose of guaranteeing, and Norfolk does hereby
guarantee the performance of all of Properties' obligations
hereunder.
(d) Devon Delaware, Properties and Norfolk
each waive, to the fullest extent permitted by law, all defenses
given to sureties or guarantors at law or in equity, other than
the defenses of performance or payment.
12.13 No Restrictions on Production. The parties
agree that any curtailment of production from the Interests might
cause reservoir damage. Accordingly, Buyer agrees not to
initiate any avoidable action which might have the consequence of
curtailing production from the Interests, during the term of the
Production Payment, without first consulting with and receiving
the written consent from Seller concerning such action, which
consent shall not be unreasonably withheld.
12.14 Insurance. In the event the same is not
carried on behalf of Buyer by the operator for any item of the
Interests, Buyer shall procure and maintain insurance from
companies of recognized responsibility in such amounts and with
such coverages as Seller reasonably deems appropriate in respect
to Buyer's ownership of and operations involving such item of the
Interests, and Buyer shall, upon request by Seller, submit to
Seller insurance certificates evidencing such coverage.
12.15 Production Payment Obligations -- Non-
Recourse. Seller agrees that it may only look to its rights
hereunder and under the Mortgage and the Management and Agency
Agreement should Buyer fail to timely make the required payments
under the Production Payment, and that Seller shall not be
entitled to a personal or deficiency judgment.
-23-
Executed this 31st day of January, 1995.
SELLER:
DEVON ENERGY CORPORATION (NEVADA)
By:
H. R. Sanders, Jr., Executive
Vice President
DEVON DELAWARE:
DEVON ENERGY CORPORATION
By:
H. R. Sanders, Jr., Executive
Vice President
NORFOLK:
NORFOLK SOUTHERN CORPORATION
By:
James A. Hixon
Vice President
BUYER:
NS GAS PROPERTIES, INC.
By:
James A. Hixon
Vice President
PROPERTIES:
NORFOLK SOUTHERN PROPERTIES, INC.
By:
James A. Hixon
Vice President
-24-
SECOND RESTATEMENT OF AND AMENDMENT
TO
SALE AND PURCHASE AGREEMENT
THIS AGREEMENT has been made and entered into this 8th
day of September, 1995, by and among DEVON ENERGY CORPORATION
(NEVADA), NS GAS PROPERTIES, INC., DEVON ENERGY CORPORATION,
NORFOLK SOUTHERN CORPORATION and NORFOLK SOUTHERN PROPERTIES,
INC. with reference to the following circumstances:
A. The parties entered into a Sale and Purchase
Agreement (the "Sale Agreement") and a Restatement of and Amend-
ment to Sale and Purchase Agreement (the "First Restatement"),
each effective January 1, 1995 (together the "Agreement"). Words
defined in the Agreement shall have the same meaning herein.
B. The transactions provided for under the Sale
Agreement have closed and Buyer is currently the owner of the
Interests. The Purchase Price for the Interests comprised three
components of consideration; namely, (i) a $10,827,145 cash
payment at Closing, (ii) contingent cash payments measured by any
nonconventional fuel income tax credits allowed under Section 29
of the Code with respect to production from the Interests, and
(iii) a Production Payment reserved by Seller.
C. Under the Sale Agreement, the provision concerning
the contingent cash payments measured by Section 29 tax credits
was incorporated into the provisions of the Production Payment
reserved by Seller in the Assignment (Exhibit C to the Agreement)
pursuant to which Seller conveyed the Interests to Buyer. The
parties believed that the credit payments were an economic
component of the value of the gas to be produced from the Inter-
ests and therefore were appropriately included as part of the
Assignment. Nevertheless, the parties intended that the Produc-
tion Payment and the contingent cash payments measured by tax
credits be independent, separate components of the Purchase Price
for the Interests as illustrated by Schedule 6.7(b) to the
Agreement. In order to make this intention clear, the parties
agreed, in the First Restatement, to move the provisions for
contingent cash payments from the Assignment to the Agreement.
In the First Restatement, the parties also agreed to amend the
Management and Agency Agreement in certain respects. For purpos-
es of clarity and continuity, the parties restate herein the
provisions of the First Restatement as amended by the terms
hereof.
D. The parties have agreed to further amend the
provisions of the Agreement, the Assignment, the Management and
Agency Agreement and the Mortgage.
ACCORDINGLY, in order to accomplish the foregoing, the
parties hereby restate and amend the Agreement as of the Effec-
tive Time as follows:
1. Interests Defined. Section 1.2(a) of the Sale
Agreement is stricken in its entirety and the following substi-
tuted therefor:
"(a) The oil, gas and mineral leases and the
operating rights, mineral interests, royalty
interests, overriding royalty interests, pay-
ments out of production and interests in or
under unit agreements described in Exhibit A,
INSOFAR AND ONLY INSOFAR AS THE SAME COVER
AND RELATE TO (i) the lands and depths also
described in Exhibit A, and (ii) production
from the specific wells listed in Exhibit A
(the "Leases");"
Further, the un-numbered paragraph next following Section 1.2(d)
of the Sale Agreement is stricken in its entirety and the follow-
ing substituted therefor:
"EXCEPTING and RESERVING unto Seller, howev-
er, the production payment (the "Production
Payment") and the possibility of reverter
(the "Reversionary Interest") described in
the Assignment, Conveyance and Bill of Sale
(the "Assignment") attached as Exhibit C
hereto, together with all interests in the
subject matter of the Assignment, to the
extent the same cover or relate to lands and
depths not described in Exhibit A, or to the
extent the same cover or relate to production
from any well not specifically listed in
Exhibit A."
2. Purchase Price. The first sentence of Section 1.4
of the Agreement is deleted in its entirety, and the following
substituted therefor:
"The purchase price for the Interests ("Pur-
chase Price") shall be the total of (a) the
sum of $10,827,145 (the "Closing Payment"),
plus (b) the sum of (i) all amounts payable
under the Production Payment, which is esti-
mated to have a present value of $89,970,095,
and (ii) the Credit Obligation (defined be-
low), which is estimated to have a present
value of $ 66,017,978."
3. Credit Obligation. There is added the following
new section:
"1.5 Credit Obligation. Buyer's obligation
under this Section 1.5 is herein referred to
as the 'Credit Obligation.'
"(a) Buyer shall pay to Seller Seventy-
Five Percent (75%)of all nonconventional fuel
income tax credits under Section 29 of the
Code allowed with respect to all production
from the Interests from and after the Effec-
tive Date, save and except that production
from the Northeast Blanco Unit No. 479R Well.
"(b) Amounts due under this Section 1.5
shall be determined as follows: not less
than ten (10) days prior to March 31, June
30, September 30 and December 31 of each year
("Payment Dates"), Buyer shall make and pro-
vide to Seller a written estimate of the
total amount of such tax credits attributable
to gas expected to be produced from the In-
terests during the preceding three month
period, beginning initially at the Effective
Date, then thereafter beginning the day after
the applicable one of the Payment Dates.
"(c) Buyer shall, on or before the Pay-
ment Dates, pay to Seller the amounts so
estimated, by wire transfer as directed by
Seller.
"(d) The amount due for any calendar
year will initially be based upon the preced-
ing year's Section 29 credit amount; but
estimated amounts shall be adjusted when
actual production becomes known and the In-
ternal Revenue Service issues the Inflation
Adjustment Factor for the applicable calendar
year (the "Adjustment Date"). Each adjust-
ment to estimated amounts shall be implement-
ed by either Buyer paying the appropriate
additional amount to Seller or Seller refund-
ing the appropriate amount to Buyer, within
ten (10) days after the first date such ad-
justment is capable of being made.
"(e) The present value of the Credit
Obligation is estimated by the parties to be
$66,017,978 (the "Principal Balance"). The
unpaid amount of the Principal Balance shall
bear interest from the Effective Date at a
rate equal to One Hundred Twenty Percent
(120%) of the national Prime Rate of interest
as quoted from day to day in The Wall Street
Journal, compounded monthly. For such pur-
poses, any credit payment received hereunder
shall be applied first to the payment of any
accrued unpaid interest and then to reduction
of the unpaid amount of the Principal Bal-
ance.
"(f) In the event Section 29 tax credits
are repealed for any period, such repeal
shall not affect any amount due hereunder for
production during any calendar year preceding
the calendar year in which such action is
taken; provided, however, a repeal of the
Section 29 tax credits before the Adjustment
Date of a particular calendar year shall
affect all amounts payable hereunder attrib-
utable to production after the later of the
effective date of such repeal or January 1 of
the calendar year preceding the Adjustment
Date; and in such event, all affected amounts
shall be immediately refunded by Seller to
Buyer."
4. Determination of Purchase Price. Section 6.5(b)
(3) is stricken and the following substituted therefor:
"(3) Determination of Purchase Price. The
purchase price under the option shall be
determined with reference to the gas reserve
quantities, adjusted out of first production
to the extent possible for existing gas im-
balances, if any, attributable to the Option
Interests in the Annual Reserve Report (the
"Applicable Report") that is required to be
prepared and furnished to the parties for the
December 31 preceding the date of the Repur-
chase Notice. The fair market value of the
Option Interests, or the applicable part
thereof, as of the date of the Applicable
Report, shall be calculated by using the same
cash flow and discounting procedures as were
used in preparing the Initial Report; howev-
er, the calculation for the Applicable Report
shall use (i) the weighted average price
received for the sale of gas from the Inter-
ests or the applicable part thereof during
the 12-month period ending on the date of the
Applicable Report, (ii) the severance and ad
valorem tax rates in effect on the date of
the Applicable Report, (iii) current operat-
ing expenses, including the "Administration
Fee" payable under the terms of the Manage-
ment and Agency Agreement, (iv) Seller's
reasonable estimate of future capital expen-
ditures and (v) a discount rate equal to 120%
of the national Prime Rate as quoted in The
Wall Street Journal on the effective date of
the Applicable Report. Seller's purchase
price, which shall be paid in cash, for the
Option Interests, or the application portion
thereof, shall be the calculated fair market
value thereof as of the date of the Applica-
ble Report (the "Effective Date Amount"),
reduced by an amount equal to Seller's obli-
gation under Section 6.5(b)(5), if any, but
not exceeding the Effective Date Amount and
adjusted for operations from that date to the
Option Closing Date as follows:
(a) The Effective Date Amount, as so reduced,
shall be further reduced by the amount of any cash received by
Buyer as revenue for production or proceeds resulting from
casualty losses, the sale of surplus equipment and similar events
occurring between the effective date of the Applicable Report and
the Option Closing Date; and
(b) The Effective Date Amount, as so reduced,
shall be increased by any expenses and capital costs paid by
Buyer for maintaining and operating the Interests from the
effective date of the Applicable Report to the Option Closing
Date, including but not limited to normal operating expenses and
ad valorem and severance taxes;"
5. Certain Federal Income Tax Matters. Section
6.6(b) is deleted in its entirety, and the following substituted
therefor:
"(b) Buyer and Seller agree that the issue
price of the Production Payment and the Cred-
it Obligation is determined under Section
1274(b)(3) of the Code and Treasury Regula-
tion Sec. 1.1274-2(b)(3) to be equal to the
excess of the agreed upon market value of the
Interests which is $166,815,218) over the
amount of the Closing Payment (which is $10, 827,145),
or $155,988,073, of which $89,970,095
is attributed to the Production Payment
and $66,017,978 is allocated to the Credit
Obligation, as determined by Schedule 6.6(b)
attached hereto."
6. Annual Engineering Report. There is added the
following new section:
"6.7 Annual Engineering Report. Seller and
Buyer will each require an engineering report
evaluating the gas reserve quantities attrib-
utable to the Interests as of their fiscal
years ending December 31 (the "Annual Reserve
Report"), Seller for the purpose of reporting
the gas reserves attributable to the Produc-
tion Payment and the Reversionary Interest,
if any, in its SEC filings, and Buyer for
reporting cost depletion for income tax pur-
poses. Seller will cause LaRoche, Swindell &
Associates, or any other independent, quali-
fied petroleum engineering firm acceptable to
Buyer, to prepare the Annual Reserve Report
and to furnish it to both parties as promptly
as possible after the end of each calendar
year. The expense of the Annual Reserve
Report shall be borne by Seller and Buyer
equally."
7. Assignment. Section 9.1 of the Sale Agreement is
stricken in its entirety and the following substituted therefor:
"9.1 Assignment. Seller and Buyer shall
execute, acknowledge and deliver such instru-
ment or instruments which may be necessary to
give effect to the provisions of Exhibit C,
and to vest title to the Interests in Buyer,
and to vest in Seller title to all rights,
titles and interests excepted and reserved
hereunder."
8. Production Payment Obligations. Section 12.15 is
stricken in its entirety and the following substituted therefor:
"12.15 Seller's Use of Facilities and Equip-
ment; Allocation of Costs and Expenses.
Buyer hereby grants, bargains, sells, conveys
and assigns unto Seller full, unrestricted
easements for, access to and concurrent use
of all facilities, equipment and other fix-
tures and personal property in which an in-
terest is either acquired hereunder or which
may be hereafter acquired by Buyer, including
without limitation those of the Interests
described in Section 1.2(c) hereof (except
the wells listed in Exhibit A, while produc-
ing from the Fruitland Coal Formation), and
any extension, replacement or improvement
thereof (individually, a "Buyer Facility," or
together, "Buyer's Facilities"), without cost
to Seller except as hereinafter provided, for
Seller's use in connection with Seller's
production, transportation and marketing
operations relating to the interests of Sell-
er excepted and reserved hereunder. The cost
of acquiring and maintaining any separate
facility, equipment or operation necessary
for Seller's use of Buyer's Facilities shall
be borne solely by Seller. Each month, the
parties shall determine the volumes of gas
attributable to each party's interest which
are served by a particular Buyer Facility,
and the parties shall share routine operating
expenses attributable thereto (including
maintenance costs) proportionate with such
volumes. The capital cost hereafter incurred
by Buyer of any extension to or acquisition,
replacement or improvement of each of Buyer's
Facilities shall be borne by Buyer; however,
applicable costs for a particular Buyer Fa-
cility shall be amortized over the useful
life thereof and, for each month thereafter
in which Seller utilizes such Buyer Facility
for its own interests, Seller shall pay to
Buyer a portion of the amortized costs appli-
cable thereto for such month, determined by
utilizing the allocation method used for
operating expenses above."
9. Exhibit B. Exhibit B is amended by substituting
therefor The Restated Exhibit B attached hereto.
10. Exhibit C. The Assignment, Conveyance and Bill of
Sale attached as Exhibit C is amended as follows:
(a) The title of the document is amended to read
"Restated Assignment, Conveyance and Bill of Sale" throughout the
document.
(b) Paragraph (a) of the first WHEREAS clause of
the Assignment is amended to read the same as the quoted para-
graph (a) of paragraph 1 above; and the second WHEREAS clause of
the Assignment is amended to insert immediately before the word
"described" appearing in the fifth line of that clause "and the
possibility of reverter (the 'Reversionary Interest')"; the
reservation clause on page 2 of the Assignment is amended by
inserting "and the Reversionary Interest" immediately following
the words "Production Payment" appearing in the second line of
the reservation clause and the heading to Section 1 of the
Assignment is hereby changed to read "Reserved Production Payment
and Reversionary Interest."
(c) In Section 1(b) of the Assignment, the phrase
"167.608 billion cubic feet (Bcf)" is deleted, and the phrase
"143,397,632 Mcf" is substituted therefore, and the phrase
"Ninety Percent (90%)" is deleted and the phrase "Seventy-Seven
Percent (77%)" is substituted therefor. Section 1 of the Assign-
ment is amended to add a paragraph (c) thereto which shall read
as follows:
"(c) The Reversionary Interest excepted and
reserved unto Assignor hereunder shall be an
interest equal to an undivided 75% of the
Interests, which shall automatically revert
to Assignor at Reversionary Payout, as here-
inafter defined. 'Reversionary Payout' shall
mean 7 o'clock a.m., local time, on the day
after the day on which the cumulative amount
of 186,230,691 Mcfs of gas have been produced
from the Interests after the Effective Time.
Promptly following Reversionary Payout,
Assignee shall execute, acknowledge and de-
liver to Assignor an assignment in recordable
form evidencing Reversionary Payout and con-
firming the reversion of the Reversionary
Interest in Assignor. Assignee shall have no
right to pledge, encumber or otherwise burden
the Reversionary Interest and shall warrant
in such assignment that the Reversionary
Interest is free and clear of all liens,
burdens, encumbrances and defects arising by,
through or under Assignee, and shall defend
Assignor against all persons claiming or to
claim any interest in the Reversionary Inter-
est by, through or under Assignee."
(d) In each of Sections 2(b)(i), (ii), (iii),
(iv), (v) and (vi), and in Section 2(c) of the Assignment, the
phrase "Ninety Percent (90%)" is deleted, and the phrase "94.049353%"
substituted therefor. In Section 2(b)(i) the phrase "(the
"Production Payment Gas")" is deleted.
(e) Section 2(b)(vii) is deleted in its entirety.
(f) Section 2(b)(viii) is renumbered as Section
2(b)(vii).
(g) The fourth from the last sentence of Section
4 is deleted in its entirety.
(h) There is added the following to the end of
Section 2(c)(i) of the Assignment:
"provided, however, expenditures
for capital projects not anticipat-
ed in the Initial Report shall
never be charged to the Production
Payment Account."
(i) The $153,463,018 amount set forth in the
third from the last sentence of Section 4 is deleted, and $89,970,095
substituted therefor.
(j) Section 4 is amended by adding at
the end thereof the following:
"The Production Payment shall be payable
solely from production from the gas pro-
duced from or attributable to the Inter-
ests and the proceeds thereof. Accord-
ingly, the amount of any balance in the
Production Payment Account at the end of
a calendar month which cannot be paid
out of the proceeds of production shall
be carried over; however, such balance
shall only be payable from the gas pro-
duced from or attributable to the Inter-
ests and the proceeds thereof, if any."
(k) The Assignment is amended to provide for a
new paragraph 12 that reads, "Any interest created or to be
received by either party thereunder, that has not vested or has
failed to vest in such party within twenty-one years less one day
after the death of the last surviving descendant of Joseph P.
Kennedy (father of past President John F. Kennedy) living at the
execution hereof, shall terminate."
(l) The Assignment is amended to provide for a
new paragraph 13 that reads the same as the quoted Section 12.15
set forth in paragraph 8 hereof but substituting "Assignor" for
"Seller" and "Assignee" for "Buyer" and substituting "paragraph c
of the first WHEREAS clause" for "Section 1.2(c)."
11. Exhibit D. The Management and Agency Agreement
attached as Exhibit D is amended as follows:
(a) The title of the document is amended to read
"Restated Management and Agency Agreement," throughout the
document.
(b) The second "WHEREAS" Clause is deleted in its
entirety.
(c) The third "WHEREAS" Clause is deleted in its
entirety, and the following substituted therefor:
"WHEREAS, the parties have agreed that the
Company will assist Owner in its administra-
tion of the Interests and its fulfillment of
obligations under the Purchase Agreement and
the Assignment (collectively, the 'Operative
Documents')."
(d) The following phrase is added to the end of
Section 2(a):
"provided, however, that without the specific
written authorization by Owner, the Company
may not obligate Owner for any expenditure
attributable to any one project in excess of
$90,000;"
(e) Sections 2(b), 2(d) and 2(f) are deleted in
their entirety.
(f) The remaining subsections of Section 2, as
amended, are appropriately relettered.
(g) The word "and" is inserted between the words
"allocable" and "paid" in the eleventh line of Section 4(b)(i).
(h) Section 5 is amended by deleting the phrases
"Ninety Percent (90%)" and "Ten Percent (10%)" and substituting
therefor the phrases "94.049353%" and "5.950647," respectively,
and by deleting the phrase "retained or" in the last sentence
thereof.
(i) Section 6 is deleted in its entirety, and the
following substituted therefor:
"6. Term and Termination. Without affecting
the obligations of the parties which accrue
during the term hereof (which shall continue
in effect whether or not this Agreement is
subsequently terminated), this Agreement may
be terminated (a) by Owner, at any time upon
30 days prior written notice, and (b) by the
Company, (i) at any time upon 30 days prior
written notice, if either of the Operative
Documents is terminated or cancelled, (ii) at
any time, if Owner shall fail to pay any
amount due and owing to the Company hereunder
or under either of the Operative Documents,
or (iii) on or after the Production Payment
Termination Date."
(j) Section 8 is amended by adding the phrase ",
but not to exceed the sum of $90,000 during any calendar quarter"
to the end of the third from the last sentence thereof, and by
deleting the last two sentences thereof in their entirety and
substituting the following in their stead:
"Advances may be recovered by the Company as
a first payment when the Operating Account
has a credit or positive balance; however, on
March 31, June 30, September 30 and December
31 of each year, Owner shall repay to the
Company all Advances not so recovered during
the preceding calendar quarter, together with
interest on the average daily balance of the
unrecovered advances during such calendar
quarter at the national Prime Rate of inter-
est quoted day to day in The Wall Street
Journal for such calendar quarter."
(k) Section 10 is stricken in its entirety.
(l) Section 11 is stricken in its entirety, and
the following substituted therefor:
"10. Distribution of revenues. All previous-
ly undistributed revenues in the possession
of the Company, which are attributable to
Owner's interest in the Properties shall be
distributed by the Company to Owner on or
before March 31, June 30, September 30 and
December 31 of each year, to the extent re-
ceived by the Company thirty (30) days or
more prior to the date of distribution."
(m) The remaining sections are appropriately
renumbered.
12. Exhibit F. The Mortgage is amended by striking
Section 4.2 thereof in its entirety.
13. Schedule 6.7(b). Schedule 6.7(b) is amended by
redesignating such schedule as Restated Schedule 6.6(b) and by
substituting therefor the Restated Schedule 6.6(b) attached
hereto.
14. General. Wherever in any Exhibit or Schedule
reference is made to the Agreement, the same is amended to read
"the Agreement, as herein restated and amended."
15. Legal Effect. The changes effected by this
amendment are effective as of the Effective Time and with the
same force and effect as if they had been included in the Agree-
ment from inception. All other provisions of the Agreement shall
remain in effect as previously written.
Executed as of the day and year first above written.
DEVON ENERGY CORPORATION (NEVADA)
By:
William T. Vaughn
Vice President
DEVON ENERGY CORPORATION
By:
William T. Vaughn
Vice President
NORFOLK SOUTHERN CORPORATION
By:
James A. Hixon
Vice President
NS GAS PROPERTIES, INC.
By:
James A. Hixon
Vice President
NORFOLK SOUTHERN PROPERTIES, INC.
By:
James A. Hixon
Vice President
