UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 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 No.)
20 North Broadway, Suite 1500
Oklahoma City, Oklahoma 73102-8260
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (405) 235-3611
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $.10 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 22, 1999, was
$977,270,467. At such date 42,789,808 shares of common stock and
5,690,651 exchangeable shares of Devon's wholly-owned subsidiary,
Northstar Energy Corporation, were outstanding. Each
exchangeable share is exchangeable for one share of Devon common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement for the 1999 annual meeting of stockholders - Part III
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1. Business 4
Item 2. Properties 11
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of
Security Holders 22
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 22
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 8. Financial Statements and Supplementary Data 49
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 104
PART III
Item 10. Directors and Executive Officers of
the Registrant 104
Item 11. Executive Compensation 104
Item 12. Security Ownership of Certain Beneficial
Owners and Management 104
Item 13. Certain Relationships and Related
Transactions 104
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 105
DEFINITIONS
As used in this document:
"Mcf" means thousand cubic feet
"MMcf" means million cubic feet
"Bcf" means billion cubic feet
"MMBtu" means million British thermal units, a measure of heating
value
"Bbl" means barrel
"MBbls" means thousand barrels
"MMBbls" means million barrels
"Boe" means equivalent barrels of oil
"MBoe" means thousand equivalent barrels of oil
"MMBoe" means million equivalent barrels of oil
"Oil" includes crude oil and condensate
"NGLs" means natural gas liquids
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS REPORT INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL
FACTS INCLUDED OR INCORPORATED BY REFERENCE IN THIS REPORT,
INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S
FUTURE FINANCIAL POSITION, BUSINESS STRATEGY, BUDGETS, PROJECTED
COSTS AND PLANS AND OBJECTIVES OF MANAGMENT FOR FUTURE
OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-
LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY", "WILL", "EXPECT",
"INTEND", "PROJECT", "ESTIMATE", "ANTICIPATE", "BELIEVE", OR
"CONTINUE" OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR
SIMILAR TERMINOLOGY. ALTHOUGH THE COMPANY BELIEVES THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL
PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S
EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED UNDER "ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-1998 ESTIMATES", ITEM 2. "PROPERTIES -
PROVED RESERVES AND ESTIMATED FUTURE NET REVENUES" AND ELSEWHERE
IN THIS REPORT. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO THE COMPANY, OR PERSONS ACTING ON ITS
BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE
CAUTIONARY STATEMENTS. THE COMPANY ASSUMES NO DUTY TO UPDATE OR
REVISE ITS FORWARD-LOOKING STATEMENTS BASED ON CHANGES IN
INTERNAL ESTIMATES OR EXPECTATIONS OR OTHERWISE.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Devon Energy Corporation, including its subsidiaries,
("Devon" or the "Company") is an independent energy company
engaged primarily in oil and gas exploration, development and
production, and in the acquisition of producing properties.
Through its predecessors, Devon began operations in 1971 as a
privately-held company. In 1988 the Company's common stock began
trading publicly on the American Stock Exchange under the symbol
DVN. In addition, commencing on December 15, 1998, a new class
of Devon exchangeable shares began trading on The Toronto Stock
Exchange under the symbol NSX. These shares are essentially
equivalent to Devon common stock. However, because they are
issued by Devon's wholly-owned subsidiary, Northstar Energy
Corporation ("Northstar"), they qualify as a domestic Canadian
investment for Canadian institutional shareholders. They are
exchangeable at any time, on a one-for-one basis, for common
shares of Devon.
The principal and administrative offices of Devon are
located at 20 North Broadway, Suite 1500, Oklahoma City, OK
73102-8260 (telephone 405/235-3611).
Devon currently owns oil and gas properties concentrated in
six operating areas: the Permian Basin in southeastern New Mexico
and western Texas; the Rocky Mountain region primarily in
Wyoming; the San Juan Basin region in northwest New Mexico, the
Northern Alberta region in northern Alberta and a portion of
northeastern British Columbia, the Southern Alberta region in
central and southeastern Alberta and southwestern Saskatchewan,
and the Foothills region in southwestern Alberta and northeastern
British Columbia. (A detailed description of the significant
properties can be found under "Item 2. Properties - Significant
Properties" beginning on page 15 hereof.)
At December 31, 1998, Devon's estimated proved reserves were
299.4 MMBoe, of which 67% were natural gas reserves and 33% were
oil reserves. The present value of pre-tax future net revenues
discounted at 10% per annum assuming essentially unescalated
prices ("10% Present Value") of such reserves was $1.0 billion.
Devon is one of the top 15 public independent oil and gas
companies in both the United States and Canada, as measured by
oil and gas reserves.
Strategy
Devon's primary objectives are to build production, cash
flow and earnings per share by (a) acquiring oil and gas
properties, (b) exploring for new oil and gas reserves and (c)
optimizing production from existing oil and gas properties.
Devon's management seeks to achieve these objectives by (a)
keeping debt levels low, (b) concentrating its properties in core
areas to achieve economies of scale, (c) acquiring and developing
high profit margin properties, (d) continually disposing of
marginal and non-strategic properties and (e) balancing reserves
between oil and gas.
During 1988, Devon expanded its capital base with its first
issuance of common stock to the public. This transaction began a
substantial expansion program that has continued through the
subsequent years. Devon has used a two-pronged strategy of
acquiring producing properties and engaging in drilling
activities to achieve this expansion. Approximately two-thirds
of total capital spent during this period was for property
acquisitions and one-third was for drilling. Total proved
reserves increased from 8.1 MMBoe at year-end 1987 to 299.4 MMBoe
at year-end 1998.
Devon's objective, however, is to increase value per share,
not simply to increase total assets. Reserves have grown from
1.31 Boe per share at year-end 1987 to 5.61 Boe per diluted share
at year-end 1998. At the same time, net debt (long-term debt
less working capital) has remained relatively low. At year-end
1998, Devon's net debt was $1.25 per Boe.
Recent Developments
On December 10, 1998, Devon completed a merger with Canadian-
based Northstar. Northstar's properties are located primarily in
the Western Canada Sedimentary Basin in the province of Alberta.
The combination of Northstar with Devon (the "Northstar
Combination") expanded Devon's reserves by approximately 115.0
MMBoe, or 62%, and nearly tripled the Company's undeveloped
leasehold inventory. In addition, Devon retained the experienced
Northstar management team to continue to direct the Company's
Canadian operations. The total consideration to Northstar was
16.1 million common equivalent shares and the assumption of $307
million Northstar debt. At year-end 1998, Devon's unused
borrowing capacity was in excess of $200 million.
The Northstar Combination places Devon in a unique position
to take advantage of growth opportunities both in the U.S. and in
Canada. The Company's properties are now relatively balanced,
with 52% of its proved reserves in the U.S. and 48% in Canada.
This provides Devon with considerable exposure to growing North
American natural gas markets, while retaining Devon's historical
exposure to substantial oil reserves, particularly in the Permian
Basin of the U.S. In addition, the Company owns a large
inventory of acreage and the financial flexibility to pursue the
opportunities for drilling on this acreage.
The Northstar Combination was accounted for under the
"pooling-of-interests" method of accounting. Therefore, all of
Devon's operational and financial information was restated to
include the Northstar results as if Devon and Northstar had
always been combined. As a result, unless otherwise indicated,
all of the operational data included hereafter includes results
for both Devon and Northstar combined.
Drilling Activities
Devon is engaged in numerous drilling activities on
properties presently owned and intends to drill or develop other
properties acquired in the future. For 1999, Devon's drilling
activities will be focused in the Rocky Mountain and Permian
Basin regions in the U.S. and the Foothills and Northern Alberta
regions of Canada.
The following tables set forth Devon's drilling results
(including Northstar's historical activities) for the past five
years.
<TABLE>
<CAPTION>
United States Properties
Development Wells Exploratory Wells
Gross (1) Net (2) Gross (1) Net (2)
Produ Dry Tot Produ Dry Tot Produ Dry Tot Produ Dry Tot
ctive al ctive al ctive al ctive al
<C> <C> <C><C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994 77 1 78 44.40 0.28 44.68 2 3 5 0.52 2.37 2.89
1995 184 3 187 143.87 0.29 144.16 9 3 12 2.53 1.18 3.71
1996 188 3 191 137.05 0.95 138.00 2 1 3 1.50 0.08 1.58
1997 244 9 253 109.00 4.90 113.90 14 2 16 5.00 1.50 6.50
1998 328 0 328 128.69 0.00 128.69 14 4 18 7.36 1.44 8.80
TTL 1,021 16 1,037 563.01 6.42 569.43 41 13 54 16.91 6.57 23.48
</TABLE>
<TABLE>
<CAPTION>
Canadian Properties
Development Wells Exploratory Wells
Gross (1) Net (2) Gross (1) Net (2)
Produ Dry Tot Produ Dry Tot Produ Dry Tot Produ Dry Tot
ctive al ctive al ctive al ctive al
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994 142 19 161 62.50 7.80 70.30 29 12 41 22.50 9.00 31.50
1995 44 8 52 25.20 5.20 30.40 48 13 61 35.70 10.00 45.70
1996 63 11 74 29.70 5.10 34.80 35 18 53 24.70 15.10 39.80
1997 126 29 155 88.20 23.20 111.40 55 48 103 43.50 42.20 85.70
1998 112 15 127 74.88 11.04 85.92 45 37 82 32.99 30.50 63.49
TTL 487 82 569 280.48 52.34 332.82 212 128 340 159.39 106.80 266.19
</TABLE>
<TABLE>
<CAPTION>
Total Properties
Development Wells Exploratory Wells
Gross (1) Net (2) Gross (1) Net (2)
Produ Dry Tot Produ Dry Tot Produ Dry Tot Produ Dry Tot
ctive al ctive al ctive al ctive al
<C> <C> <C><C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994 219 20 239 106.90 8.08 114.98 31 15 46 23.02 11.37 34.39
1995 228 11 239 169.07 5.49 174.56 57 16 73 38.23 11.18 49.41
1996 251 14 265 166.75 6.05 172.80 37 19 56 26.20 15.18 41.38
1997 370 38 408 197.20 28.10 225.30 69 50 119 48.50 43.70 92.20
1998 440 15 455 203.57 11.04 214.61 59 41 100 40.35 31.94 72.29
TTL 1,508 98 1,606 843.49 58.76 902.25 253 141 394 176.30 113.37 289.67
<FN>
(1) Gross wells are the sum of all wells in which Devon owns an interest.
(2) Net wells are the sum of Devon's working interests in gross wells.
</TABLE>
As of December 31, 1998, Devon was participating in the
drilling of 33 gross (11.38 net) wells in the U.S. and 9 gross
(5.37 net) wells in Canada which are not included in the table
above. Through March 22, 1999, 3 gross (0.99 net) wells in the
U.S. and 3 gross (2.17 net) wells in Canada had been completed as
productive. An additional 1 gross (0.45 net) well in the U.S.
and 4 gross (2.2 net) wells in Canada were dry holes. The
remaining wells were still in process.
Customers
Devon sells its gas production to a variety of customers
including pipelines, utilities, gas marketing firms, industrial
users and local distribution companies. Existing gathering
systems and interstate and intrastate pipelines are used to
consummate gas sales and deliveries.
The principal customers for Devon's crude oil production are
refiners, remarketers and other companies, some of which have
pipeline facilities near the producing properties. In the event
pipeline facilities are not conveniently available, crude oil is
trucked or barged to storage, refining or pipeline facilities.
For the years ended December 31, 1998 and December 31, 1997,
one significant purchaser, Aquila Energy Marketing Corporation
("Aquila"), accounted for 19% and 15%, respectively, of Devon's
total revenue. For the year ended December 31, 1996, two
significant purchasers, Aquila and EOTT Energy Operating Limited
Partnership ("Enron"), accounted for 12% and 15%, respectively,
of Devon's total revenue. Aquila and Enron purchase production
from numerous Devon properties, at variable and market-sensitive
prices. Devon does not consider itself dependent upon either of
these purchasers, since other purchasers are willing to purchase
this same production production at competitive prices.
Oil and Natural Gas Marketing
Oil Marketing. Devon's oil production is sold under both
long- and short-term agreements at prices negotiated between the
parties. Devon periodically enters into hedging activities with
a portion of its oil production which are intended to support its
oil price at targeted levels and to manage the Company's exposure
to oil price fluctuations. (See "Item 7A. Quantitative and
Qualitative Disclosures about Market Risk.")
Natural Gas Marketing. Devon's gas production is also sold
under both long- and short-term agreements at negotiated prices.
Although exact percentages vary daily, as of March, 1999
approximately 31% of Devon's natural gas production was sold
under short-term contracts at variable or market-sensitive
prices. These market-sensitive sales are referred to as "spot
market" sales. Another 36% was committed under various long-term
contracts (one year or more) which dedicate the natural gas to a
purchaser for an extended period of time. Devon's remaining gas
production was dedicated under long-term contracts at fixed
prices.
Under both long-term and short-term contracts, typically
either the entire contract (in the case of short-term contracts)
or the price provisions of the contract (in the case of long-term
contracts) are renegotiated from daily intervals up to one-year
intervals. The spot market has become progressively more
competitive in recent years. As a result, prices on the spot
market have been volatile.
The spot market is subject to volatility as supply and
demand factors in various regions of North America fluctuate. In
addition to long-term fixed price contracts, Devon periodically
enters into hedging arrangements or firm delivery commitments
with a portion of its gas production. These activities are
intended to support targeted gas price levels and to manage the
Company's exposure to gas price fluctuations. (See "Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.")
Competition
The oil and gas business is highly competitive. Devon
encounters competition by major integrated and independent oil
and gas companies in acquiring drilling prospects and properties,
contracting for drilling equipment and securing trained
personnel. Intense competition occurs with respect to marketing,
particularly of natural gas. Certain competitors have resources
that substantially exceed those of Devon.
Seasonal Nature of Business
Generally, but not always, the demand for natural gas
decreases during the summer months and increases during the
winter months. Seasonal anomalies such as mild winters sometimes
lessen this fluctuation. In addition, pipelines, utilities, local
distribution companies and industrial users utilize natural gas
storage facilities and purchase some of their anticipated winter
requirements during the summer. This can also lessen seasonal
demand fluctuations.
Government Regulation
Devon's operations are subject to various levels of
government controls and regulations in the United States and
Canada.
United States Regulation
In the United States, legislation affecting the oil and gas
industry has been pervasive and is under constant review for
amendment or expansion. Pursuant to such legislation, numerous
federal, state and local departments and agencies have issued
extensive rules and regulations binding on the oil and gas
industry and its individual members, some of which carry
substantial penalties for the failure to comply. Such laws and
regulations have a significant impact on oil and gas drilling and
production activities, increase the cost of doing business and,
consequently, affect profitability. Inasmuch as new legislation
affecting the oil and gas industry is commonplace and existing
laws and regulations are frequently amended or reinterpreted,
Devon is unable to predict the future cost or impact of complying
with such laws and regulations.
Exploration and Production. Devon's United States
operations are subject to various types of regulation at the
federal, state and local levels. Such regulation includes
requiring permits for the drilling of wells; maintaining bonding
requirements in order to drill or operate wells; submitting and
implementing spill prevention plans; submitting notification
relating to the presence, use and release of certain contaminants
incidental to oil and gas operations; and regulating the location
of wells, the method of drilling and casing wells, the use,
transportation, storage and disposal of fluids and materials used
in connection with drilling and production activities, surface
usage and the restoration of properties upon which wells have
been drilled, the plugging and abandoning of wells and the
transporting of production. Devon's operations are also subject
to various conservation matters, including the regulation of the
size of drilling and spacing units or proration units, the number
of wells which may be drilled in a unit, and the unitization or
pooling of oil and gas properties. In this regard, some states
allow the forced pooling or integration of tracts to facilitate
exploration while other states rely on voluntary pooling of lands
and leases, which may make it more difficult to develop oil and
gas properties. In addition, state conservation laws establish
maximum rates of production from oil and gas wells, generally
prohibit the venting or flaring of gas, and impose certain
requirements regarding the ratable purchase of production. The
effect of these regulations is to limit the amounts of oil and
gas Devon can produce from its wells and to limit the number of
wells or the locations at which Devon can drill.
Certain of Devon's oil and gas leases, including most of its
leases in the San Juan Basin and many of the Company's leases in
southeast New Mexico and Wyoming, are granted by the federal
government and administered by various federal agencies. Such
leases require compliance with detailed federal regulations and
orders which regulate, among other matters, drilling and
operations on lands covered by these leases, and calculation and
disbursement of royalty payments to the federal government.
Environmental and Occupational Regulations. Various
federal, state and local laws and regulations concerning the
discharge of contaminants into the environment, the generation,
storage, transportation and disposal of contaminants or otherwise
relating to the protection of public health, natural resources,
wildlife and the environment, affect Devon's exploration,
development and production operations and the costs attendant
thereto. These laws and regulations increase Devon's overall
operating expenses. Devon maintains levels of insurance customary
in the industry to limit its financial exposure in the event of a
substantial environmental claim resulting from sudden and
accidental discharges of oil, salt water or other harmful
substances. However, 100% coverage is not maintained concerning
any environmental claim, and no coverage is maintained with
respect to any award of punitive damages against Devon or any
penalty or fine required to be paid by Devon because of its
violation of any federal, state or local law. Devon is committed
to meeting its responsibilities to protect the environment
wherever it operates and anticipates making increased
expenditures of both a capital and expense nature as a result of
the increasingly stringent laws relating to the protection of the
environment. Devon's unreimbursed expenditures in 1998
concerning such matters were immaterial, but Devon cannot predict
with any reasonable degree of certainty its future exposure
concerning such matters.
Devon is also subject to laws and regulations concerning
occupational safety and health. Due to the continued changes in
these laws and regulations, and the judicial construction of
same, Devon is unable to predict with any reasonable degree of
certainty its future costs of complying with these laws and
regulations.
In 1992 Devon retained the services of an independent
environmental engineering firm to provide a comprehensive
evaluation of Devon's significant properties and to otherwise
advise Devon concerning its compliance with various environmental
laws. In 1993 Devon established its own internal Environmental
Industrial Hygiene and Safety Department to perform these
functions. This department is responsible for instituting and
maintaining an environmental and safety compliance program for
Devon. The program includes field inspections of properties and
internal audits of Devon's compliance procedures.
Canadian Regulation
The oil and gas industry in Canada is subject to extensive
controls and regulations imposed by various levels of government.
It is not expected that any of these controls or regulations will
affect Devon's Canadian operations in a manner materially
different than they would affect other oil and gas companies of
similar size. The following are the most important areas of
control and regulation.
The North American Free Trade Agreement. The North American
Free Trade Agreement ("NAFTA") which became effective on January
1, 1994, carries forward most of the material energy terms
contained in the Canada-U.S. Free Trade Agreement. In the context
of energy resources, Canada continues to remain free to determine
whether exports to the U.S. or Mexico will be allowed, provided
that any export restrictions do not: (i) reduce the proportion of
energy exported relative to the supply of the energy resource;
(ii) impose an export price higher than the domestic price; or
(iii) disrupt normal channels of supply. All parties to NAFTA are
also prohibited from imposing minimum export or import price
requirements.
Royalties and Incentives. Each province and the federal
government of Canada have legislation and regulations governing
land tenure, royalties, production rates and taxes, environmental
protection and other matters under their respective
jurisdictions. The royalty regime is a significant factor in the
profitability of oil and natural gas production. Royalties
payable on production from lands other than Crown lands are
determined by negotiations between the parties. Crown royalties
are determined by government regulation and are generally
calculated as a percentage of the value of the gross production
with the royalty rate dependent in part upon prescribed reference
prices, well productivity, geographical location, field discovery
date and the type and quality of the petroleum product produced.
From time to time, the governments of Canada, Alberta and British
Columbia have also established incentive programs such as royalty
rate reductions, royalty holidays and tax credits for the purpose
of encouraging oil and natural gas exploration or enhanced
recovery projects. These incentives generally have the effect
of increasing the cash flow to the producer.
Pricing and Marketing. The price of oil and natural gas
sold is determined by negotiation between buyers and sellers. An
order from the National Energy Board ("NEB") is required for oil
exports from Canada. Any oil export to be made pursuant to an
export contract of longer than one year, in the case of light
crude, and two years, in the case of heavy crude, duration (up to
25 years) requires an exporter to obtain an export license from
the NEB. The issue of such a license requires the approval of
the Governor in Council. Natural gas exported from Canada is
also subject to similar regulation by the NEB. Exporters are
free to negotiate prices and other terms with purchasers,
provided that the export contracts in excess of two years must
continue to meet certain criteria prescribed by the NEB. The
governments of Alberta and British Columbia also regulate the
volume of natural gas which may be removed from those provinces
for consumption elsewhere based on such factors as reserve
availability, transportation arrangements and market
considerations.
Environmental Regulation. The oil and natural gas industry
is subject to environmental regulation pursuant to local,
provincial and federal legislation. Environmental legislation
provides for restrictions and prohibitions on releases or
emissions of various substances produced or utilized in
association with certain oil and gas industry operations. In
addition, legislation requires that well and facility sites be
abandoned and reclaimed to the satisfaction of provincial
authorities. A breach of such legislation may result in the
imposition of fines and penalties. Devon is committed to meeting
its responsibilities to protect the environment wherever it
operates and anticipates making increased expenditures of both a
capital and expense nature as a result of the increasingly
stringent laws relating to the protection of the environment.
Devon's unreimbursed expenditures in 1998 concerning such matters
were immaterial, but Devon cannot predict with any reasonable
degree of certainty its future exposure concerning such matters.
Investment Canada Act. The Investment Canada Act requires
Government of Canada approval, in certain cases, of the
acquisition of control of a Canadian business by an entity that
is not controlled by Canadians. In certain circumstances, the
acquisition of natural resource properties may be considered to
be a transaction requiring such approval.
Employees
As of December 31, 1998, Devon's staff consisted of 764 full-
time employees, including 72 professionals in engineering, 57 in
geology, 44 in the land department, 16 in oil and gas marketing,
98 in accounting and data processing, and 34 in administration
and other support positions. The Company also engages independent
consulting petroleum engineers, environmental professionals,
geologists, geophysicists, landmen and attorneys on a fee basis.
ITEM 2. PROPERTIES
Substantially all of Devon's properties consist of interests
in developed and undeveloped oil and gas leases and mineral
acreage located in New Mexico, Wyoming, Texas, Oklahoma and
Alberta, Canada. These interests entitle Devon to drill for and
produce oil, natural gas and NGLs from specific areas. Devon's
interests are mostly in the form of working interests and
volumetric production payments, and, to a lesser extent,
overriding royalty, royalty, mineral and net profits interests
and other forms of direct and indirect ownership in oil and gas
properties.
Proved Reserves and Estimated Future Net Revenue
"Proved reserves" are those quantities of oil, natural gas
and NGLs, which geological and engineering data demonstrate with
reasonable certainty to be recoverable in the future from known
reservoirs under existing economic and operating conditions.
Estimates of proved reserves are strictly technical judgments and
are not knowingly influenced by attitudes of conservatism or
optimism. The following table sets forth Devon's estimated proved
reserves, the estimated future net revenues therefrom and the 10%
Present Value thereof as of December 31, 1998. Approximately 93%
of Devon's U.S. proved reserves were estimated by LaRoche
Petroleum Consultants, Ltd., independent petroleum engineers.
Devon's internal staff of engineers estimated the remainder of
the U.S. reserves. AMH Group Ltd. and Paddock Lindstrom &
Associates Ltd. calculated all of the Canadian proved reserves.
All reserve estimates were prepared using standard geological and
engineering methods generally accepted by the petroleum industry
and in accordance with SEC guidelines (as described in the notes
below). These estimates correspond with the method used in
presenting the supplemental information on oil and gas operations
in note 16 to Devon's consolidated financial statements included
herein, except that federal income taxes attributable to such
future net revenues have been disregarded in the presentation
below.
<TABLE>
<CAPTION>
Total Proved Proved
Proved Developed Undeveloped
Reserves Reserves (1) Reserves (2)
TOTAL RESERVES
<S> <C> <C> <C>
Oil (MBbls) 83,457 73,846 9,611
Gas (MMcf) 1,198,894 1,052,647 146,247
NGLs (MBbl) 16,079 15,081 998
MBoe (3) 299,352 264,368 34,984
Pre-tax Future Net Revenue 1,657,020 1,513,064 43,956l
($ thousands) (4)
Pre-tax 10% Present Value 1,009,039 941,701 67,338
($ thousands) (4)
U.S. RESERVES
Oil (MBbls) 44,451 40,631 3,820
Gas (MMcf) 596,987 469,064 127,923
NGLs (MBbl) 11,494 10,577 917
MBoe (3) 155,443 129,385 26,058
Pre-tax Future Net Revenue 899,983 780,548 119,435
($ thousands) (4)
Pre-tax 10% Present Value 546,118 490,559 55,559
($ thousands) (4)
CANADIAN RESERVES
Oil (MBbls) 39,006 33,215 5,791
Gas (MMcf) 601,907 583,583 18,324
NGLs (MBbl) 4,585 4,504 81
MBoe (3) 143,909 134,983 8,926
Pre-tax Future Net Revenue 757,037 732,516 24,521
($ thousands) (4)
Pre-tax 10% Present Value 462,921 451,142 11,779
($ thousands) (4)
<FN>
(1)Proved developed reserves are proved reserves that are
expected to be recovered from existing wells with existing
equipment and operating methods.
(2)Proved undeveloped reserves are proved reserves to be
recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required for
recompleting or deepening a well or for new fluid injection
facilities.
(3)Gas reserves are converted to MBoe at the rate of six MMcf per
MBbl of oil, based upon the approximate relative energy
content of natural gas to oil, which rate is not necessarily
indicative of the relationship of gas to oil prices. The
respective prices of gas and oil are affected by market
conditions and other factors in addition to relative energy
content.
(4)Estimated future net revenue represents estimated future
gross revenue to be generated from the production of proved
reserves, net of estimated production and development costs. The
amounts shown do not give effect to non-property related expenses
such as general and administrative expenses, debt service and
future income tax expense or to depreciation, depletion and
amortization.
These amounts were calculated using prices and costs in effect
as of December 31, 1998. These prices were not changed except
where different prices were fixed and determinable from
applicable contracts. These assumptions yield average prices
over the life of Devon's properties of $9.89 per Bbl of oil,
$1.70 per Mcf of natural gas and $7.25 per Bbl of NGLs. These
prices compare to December 31, 1998, benchmark posted prices
of $9.50 per Bbl for West Texas Intermediate crude oil and a
composite of $2.02 per MMBtu for Texas Gulf Coast spot gas for
gas delivered to various Texas Gulf Coast pipelines.
</TABLE>
No estimates of Devon's proved reserves have been filed with
or included in reports to any federal or foreign governmental
authority or agency since the beginning of the last fiscal year
except (i) in filings with the SEC and (ii) in filings with the
Department of Energy ("DOE"). Reserve estimates filed by Devon
with the SEC correspond with the estimates of Devon reserves
contained herein. Reserve estimates filed with the DOE are based
upon the same underlying technical and economic assumptions as
the estimates of Devon's reserves included herein. However, the
DOE requires reports to include the interests of all owners in
wells that Devon operates and to exclude all interests in wells
that Devon does not operate.
The prices used in calculating the estimated future net
revenues attributable to proved reserves do not necessarily
reflect market prices for oil, gas and NGL production subsequent
to December 31, 1998. There can be no assurance that all of the
proved reserves will be produced and sold within the periods
indicated, that the assumed prices will be realized or that
existing contracts will be honored or judicially enforced.
The process of estimating oil, gas and NGL reserves is
complex, requiring significant subjective decisions in the
evaluation of available geological, engineering and economic data
for each reservoir. The data for a given reservoir may change
substantially over time as a result of, among other things,
additional development activity, production history and viability
of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates may occur in the
future.
Production, Revenue and Price History
Certain information concerning oil and natural gas
production, prices, revenues (net of all royalties, overriding
royalties and other third party interests) and operating expenses
for the three years ended December 31, 1998, is set forth in
"Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Well Statistics
The following table sets forth Devon's producing wells as
of December 31, 1998:
<TABLE>
<CAPTION>
Oil Wells Gas Wells Total Wells
Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)
<S> <C> <C> <C> <C> <C> <C>
U.S. 8,319 1,230 3,188 831 11,507 2,061
Canada 1,765 554 1,505 628 3,270 1,182
Total 10,084 1,784 4,693 1,459 14,777 3,243
<FN>
(1) Gross wells are the total number of wells in which Devon
owns a working interest.
(2) Net refers to gross wells multiplied by Devon's fractional
working interests therein.
</TABLE>
Devon also held numerous overriding royalty interests in oil
and gas wells, a portion of which are convertible to working
interests after recovery of certain costs by third parties. After
converting to working interests, these overriding royalty
interests will be included in Devon's gross and net well count.
Undeveloped Acreage
The following table sets forth Devon's developed and
undeveloped oil and gas lease and mineral acreage as of December
31, 1998.
<TABLE>
<CAPTION>
Developed Undeveloped
Gross (1) Net (2) Gross (1) Net (2)
United States
<S> <C> <C> <C> <C>
Alabama - - 4,866 2,450
Arkansas 5,909 589 14,699 3,770
Colorado 1,919 452 23,962 10,237
Kansas 20,498 8,372 6,839 1,055
Louisiana 5,369 712 778 484
Mississippi 3,784 828 16,331 6,626
Montana 1,234 113 12,371 2,019
Nebraska - - 6,517 1,377
New Mexico 161,369 60,544 232,495 74,972
North Dakota 7,467 2,455 13,573 3,778
Oklahoma 198,855 70,330 290,758 70,506
South Dakota 3,633 89 162 78
Texas 736,245 208,576 657,189 206,230
Utah 4,066 820 3,397 2,179
Wyoming 174,323 88,552 304,490 222,681
Total U.S. 1,324,671 442,432 1,588,427 608,442
</TABLE>
<TABLE>
<CAPTION>
Developed Undeveloped
Gross (1) Net (2) Gross (1) Net (2)
Canada
<S> <C> <C> <C> <C>
Alberta 1,103,813 577,327 2,607,601 1,907,675
British 9,872 4,048 296,277 216,856
Columbia
Manitoba - - 399 399
Saskatchewan 6,346 2,618 58,928 43,192
Northwest
Territories - - 31,768 6,599
Total Canada 1,120,031 583,993 2,994,982 2,174,721
Grand Total 2,444,702 1,026,425 4,583,409 2,783,163
<FN>
(1) Gross acres are the total number of acres in which
Devon owns a working interest.
(2) Net refers to gross acres multiplied by Devon's
fractional working interests therein.
</TABLE>
Operation of Properties
The day-to-day operations of oil and gas properties are the
responsibility of an operator designated under pooling or
operating agreements. The operator supervises production,
maintains production records, employs field personnel and
performs other functions. The charges under operating agreements
customarily vary with the depth and location of the well being
operated.
Devon is the operator of 3,429 of its wells. These
operated wells account for approximately 80% of Devon's total
proved reserves. As operator, Devon receives reimbursement for
direct expenses incurred in the performance of its duties as well
as monthly per-well producing and drilling overhead reimbursement
at rates customarily charged in the area to or by unaffiliated
third parties. In presenting its financial data, Devon records
the monthly overhead reimbursements as a reduction of general and
administrative expense, which is a common industry practice.
Significant Properties
The following table sets forth proved reserve information on
the most significant geographic areas in which Devon's properties
are located as of December 31, 1998.
<TABLE>
<CAPTION>
10% Present
Value (3) 10% Present
Oil(MBbls) Gas(MMcf) NGLs(MBbl) MBoe(1) MBoe% (2) ($000) Value% (4)
United States
Permian Basin:
West Texas and
Southeast New Mexico
<S> <C> <C> <C> <C> <C> <C> <C>
Grayburg-Jackson Field 11,617 3,306 900 13,068 4.4% $ 5,728 0.6%
Ozona Field 235 53,080 3,104 12,185 4.1% 41,359 4.1%
Other 14,145 66,086 2,962 28,122 9.4% 88,823 8.8%
Total 25,997 122,472 6,966 53,375 17.9% 135,910 13.5%
Rocky Mountains:
Colorado and Wyoming
House Creek Area 11,601 154 41 11,668 3.9% 29,532 2.9%
Powder River Coalbed
Methane Project - 69,269 - 11,545 3.9% 38,094 3.8%
Other 5,399 73,914 2,511 20,228 6.8% 87,403 8.7%
Total 17,000 143,337 2,552 43,441 14.6% 155,029 15.4%
San Juan Basin:
Northwest New Mexico
Northeast Blanco Unit 314 1,491 99 23,685 7.9% 104,821(5) 10.4%
32-9 Unit - 70,234 5 11,710 3.9% 47,336(6) 4.7%
Other 8 629 25 137 - % 426 -%
Total 112 12,354 129 35,532 11.8% 152,583 15.1%
Other U.S. Properties 1,443 118,824 1,847 23,095 7.7% 102,596 10.2%
Canada
Northern Alberta:
Northern Alberta and
Northern British Columbia
Smoky Bear Area - 113,920 8 18,995 6.3% 82,070 8.1%
Other 12,284 186,078 936 44,233 14.8% 153,788 15.2%
Total 12,284 299,998 944 63,228 21.1% 235,858(7) 23.3%
Southern Alberta:
Central and Southern
Alberta 26,722 170,502 3,641 58,780 19.6% 175,878(7) 17.4%
Foothills:
Southwestern Alberta and
Eastern British Columbia
Coleman Field - 91,259 - 15,210 5.1% 41,466 4.1%
Other - 40,148 - 6,690 2.2% 9,719 1.0%
Total - 131,407 - 21,900 7.3% 51,185(7) 5.1%
Grand Total 83,457 1,198,894 16,079 299,351 100.0% $1,009,039 100.0%
<FN>
(1) Gas reserves are converted to MBoe at the rate of six MMcf
of gas per MBbl of oil, based upon the approximate relative
energy content of natural gas to oil, which rate is not
necessarily indicative of the relationship of gas to oil
prices. The respective prices of gas and oil are affected by
market and other factors in addition to relative energy
content.
(2) Percentage which MBoe for the basin or region bears to total
MBoe for all Proved Reserves.
(3) Determined in accordance with SEC guidelines, except that no
effect is given to future income taxes.
(4) Percentage which present value for the basin or region bears
to total present value for all Proved Reserves.
(5) Includes $15.8 million of additional value attributable to
the San Juan Basin Transaction through the year 2002.
(6) Includes $10.3 million of additional value attributable to
the San Juan Basin Transaction through the year 2002.
(7) Canadian dollars converted to U.S. dollars at the rate of $1
Canadian: $0.6535 U.S.
</TABLE>
United States Properties
Permian Basin Properties. The Permian Basin is a prolific
oil and gas-producing region located in western Texas and
southeastern New Mexico. The area encompasses approximately
66,000 square miles and contains more than 500 major oil and gas
fields. Oil and gas leases within the Permian Basin are difficult
to obtain as much of the most prospective acreage is "held by
production" from existing wells or tied to large producing units.
Since 1987, Devon has made four significant acquisitions of
properties in the Permian Basin. These acquisitions have enabled
Devon to obtain prospective acreage in areas in which leasehold
positions could not otherwise be established. This large and well-
situated leasehold position continues to provide Devon with
numerous exploration and development opportunities. Devon has
also initiated enhanced oil recovery projects to further expand
reserves. Devon's activity in the Permian Basin was limited in
1998 and will continue to be limited in 1999 due to low oil
prices.
Grayburg-Jackson Field. Devon acquired the Grayburg-Jackson
Field in 1994. The property consists of approximately 8,600 acres
located in the southeastern New Mexico portion of the Permian
Basin. The field produces from an 800-foot thick interval of the
Grayburg and San Andres formations at depths between 3,000 and
4,000 feet. The Grayburg-Jackson Field contains approximately 14%
of Devon's proved oil reserves and is the Company's largest oil
property.
Production in this field was first established in the
1930's. However, most of the current producing wells were
drilled since 1970. When Devon acquired this property in 1994,
drilling by previous owners had developed the property on an
average spacing of over 40 acres per well. Additional oil
reserves were recovered from similar properties in the immediate
vicinity by infill drilling to 20 acres per well spacing and
subsequent waterflooding. Based upon analogy to these properties,
Devon initiated a $75 million capital development project in 1994
that included drilling approximately 184 infill wells, converting
selected producing wells to water injection wells and optimizing
the existing waterflood. Devon substantially completed the infill
drilling phase of the project in 1996. The majority of the field
was in the initial phases of water injection by mid-1997.
Completion of the waterflood facilities over the remainder of the
field will require the additional conversion of about 39
producing wells to injection wells.
At year-end 1998, gross production averaged approximately
2,600 Boe per day. Devon anticipates that continued water
injection will further improve oil and gas recoveries.
Ozona Field. The Ozona Field encompasses more than 200,000
acres in Crockett County, Texas, situated 120 miles southeast of
Midland, Texas. The field produces gas primarily from the Canyon
and Strawn formations at depths ranging from approximately 6,000
to 10,000 feet. The field has been developed on 80-acre spacing,
with portions now being infill drilled to 40-acre spacing.
San Juan Basin. Devon's single largest natural gas reserve
position relates to its interests in two federal units in the
northwest New Mexico portion of the San Juan Basin: the 33,000
acre Northeast Blanco Unit ("NEBU"), in Rio Arriba and San Juan
Counties, and the 22,400 acre 32-9 Unit in San Juan County. The
San Juan Basin is a densely drilled area covering 3,700 square
miles in central and northwestern New Mexico. It has been
historically considered the second largest gas producing basin in
the United States. Prior to 1990, the Basin's gas production
primarily came from conventional sandstone formations at a depth
of about 5,500 feet. However, in the early 1980's, development of
the shallower Fruitland coal formation began. Coal seam gas
production has increased total production so significantly that
the San Juan Basin could be considered the largest gas producing
basin in the U.S. Production from the coal seams constitutes
almost all of Devon's reserves in these two units.
Substantially all of Devon's interests in both of these
units are a part of a transaction into which the Company entered
effective January 1, 1995. See " - San Juan Basin Transaction"
below.
Northeast Blanco Unit. Approximately 96%, or 135 Bcf, of
Devon's proved reserves attributable to NEBU are associated with
the Fruitland Coal formation. The potential for gas production
from coal seams varies depending upon the thickness of the coal
formation, the type of coal in place, the depth at which it is
found and other factors. NEBU is located in the central part of
the San Juan Basin where each of the factors is at or near its
optimum. NEBU is operated by Devon. The Company initially began
developing its coal seam interest during 1988, eventually
drilling 102 wells -- the maximum permitted under existing
320-acre spacing on NEBU's 33,000 acres.
In the near term, Devon is implementing various projects
that have already increased and may continue to increase
production and recoverable reserves. The first of these projects,
called "line looping," involves laying additional gathering lines
to decrease operating pressures. This project was begun in 1996
and was substantially completed in October 1997. Another project
involves the installation of additional compressors at various
points in the gathering system and at central delivery points
associated with NEBU. This project was begun in 1997 and will
continue in 1999. Additional projects to improve production
through work on individual wells are currently underway. Longer
term, Devon believes that additional wells may be drilled which
could improve production.
Initial results from the line looping and compression
projects that have been completed through March 1999, appear
favorable. Total daily production from NEBU has increased from
an average of 187 MMcf of gas per day in June 1996 to an average
of 243 MMcf of gas per day in March 1999. Devon anticipates that
the installation of additional compression and individual well
workovers could increase production from NEBU another 10 MMcf to
15 MMcf of gas per day.
As part of the San Juan Basin Transaction (discussed in more
detail below), a third party will pay 100% of Devon's share of
the capital necessary to increase production from the existing
NEBU wells. Devon is entitled to retain 75% of any reserves in
excess of those estimated to be in place at the time of the
transaction which are developed as a result of such capital
expenditures. See " - San Juan Basin Transaction" below.
32-9 Unit. The 32-9 Unit is located approximately eight
miles northwest of NEBU. Geologically and operationally this
property is very similar to NEBU; the coal seams at the 32-9 Unit
are about the same thickness as at NEBU, the type of coal and the
depth at which it is found are similar and the gas content of the
coal is estimated to be approximately the same. However, the 32-9
Unit is located in an area where the coal does not appear to be
as permeable as it is at NEBU. Thus, the 32-9 Unit wells tend to
produce at lower rates but should produce for a longer period of
time than the NEBU wells. Longer term, Devon believes that
additional wells may be drilled which could improve production.
This unit is also being evaluated for possible mechanical
improvements similar to those being implemented at NEBU.
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
properties. The effect of the transaction is that the price Devon
receives for its coal seam gas production ranges between $0.40
and $0.60 per Mcf (subject to adjustment for inflation) higher
than the price the Company would otherwise receive during the
period from 1995 through the year 2002. For a detailed discussion
of this transaction, see note 3 to Devon's consolidated financial
statements included elsewhere herein.
Rocky Mountain Properties. The Rocky Mountain region
includes oil and gas producing basins that are grouped together
because of their geographic location rather than their geological
characteristics. The area generally encompasses all or portions
of the states of Colorado, Montana, New Mexico, North Dakota,
Utah and Wyoming. Devon's properties are primarily located in the
Big Horn and Powder River Basins in Wyoming.
House Creek Area. The House Creek area is located in
Campbell County, Wyoming within the prolific Powder River Basin.
Devon acquired its original interest in the area at year-end
1996. In 1997, the Company purchased additional interests. The
area, which produces oil from the Sussex Sandstone reservoir at
depths of 8,200 feet, covers an area thirty miles long and two
miles wide. The Area is divided into two production units.
Devon operates the southern two-thirds of the area, designated as
the House Creek Sussex Unit, with a 46% working interest. An
infill drilling program was initiated late in 1997 which resulted
in the addition of 75 producing and injector wells. These new
locations have effectively reduced well spacing from 160 to 80
acres per well in most of the area. A third party operates the
northern one-third of the area, designated as the House Creek
North Sussex Unit. Devon has a 26% working interest in the North
Unit. Additional infill drilling is also underway in the North
Unit. Both portions of the area are currently under waterflood.
Total daily gross production from House Creek has increased from
an average of 4,600 Boe per day at year-end 1997 to an average of
5,700 Boe per day in January 1999.
Powder River Coalbed Methane Project. Devon has had a small
interest in the Powder River Basin in Campbell County, Wyoming
since the early 1980's. The Company added to its position in
1992 with the acquisition of a small group of producing
properties and undeveloped leasehold. An acquisition in 1996
added significantly to reserves and undeveloped lease inventory.
Virtually all of the production and reserves from these
acquisitions was oil. However, a significant portion of the
acreage included relatively shallow (approximately 600 to 1,000
feet deep) coal seams containing methane. This gas had not been
developed due to relatively small gas reserves per well, the lack
of low-pressure gas pipelines to collect the gas and insufficient
pipeline capacity out of the region to deliver the gas to market.
However, since the mid-1990's industry participants have
attained commercial production from coal wells by using
inexpensive drilling techniques. Based on this information,
Devon began to formulate a plan to develop the coal seam gas
potential. The plan included significantly increasing the
Company's acreage position, drilling a large number of coalbed
methane wells to attain "critical mass" and constructing a gas
gathering system and related carbon dioxide removal facilities to
deliver the gas to any of several interstate pipelines.
During 1998 Devon began to implement this plan by acquiring
significant interests in both producing coalbed methane wells and
undeveloped acreage. In addition, Devon drilled 86 new coalbed
methane wells. By year-end 1998, the Company had an interest in
216,000 net acres and 202 coalbed methane wells. In addition,
Devon has, together with a joint-venture partner, begun
construction of a 126-mile gas gathering system. The gas
gathering system is expected to begin initial operations by the
fourth quarter of 1999. When it is fully developed, in 2001, this
system will have an estimated capacity of 450 MMcf of gas per day
and access to multiple interstate pipelines. It will provide
adequate capacity to transport not only Devon's natural gas
production, but also third party gas.
Devon's total capital investment to the project is expected
to be approximately $50 million for drilling 750 net wells over
the next ten years and $50 to $150 million over the next three
years for the development of the gathering system and facilities.
Canadian Properties
All of Devon's Canadian properties are located within the
Western Canada Sedimentary Basin. The Western Canada Sedimentary
Basin is a large geologic feature encompassing portions of
British Columbia, Alberta, Saskatchewan and Manitoba. This basin
feature forms a wedge-shaped depression that tapers from a
maximum thickness of 17,000 feet on the western and southern
margins to a zero edge along the northeast.
Northern Alberta Properties. This area covers northern
Alberta and a portion of northeastern British Columbia. The
Northern Alberta properties are primarily gas producing
properties, although both gas and oil is present in multiple
formations at varying depths. A large portion of this region is
thick bog that can be accessed by heavy equipment only when the
ground is frozen ("winter-only access"). Therefore drilling and
workover activity must be carefully planned to occur within the
winter months, typically from mid-December through mid-March.
Smoky Bear Area. Devon acquired an approximate 70% interest
in 196 producing wells and nearly 1.1 million net undeveloped
acres in this area of north-central Alberta through the Northstar
Combination. The Smoky Bear Area consists of 16 separate fields
that produce gas from various shallow formations ranging from
1,000 to 2,500 feet. In addition, the Company owns an interest in
several gas processing facilities. This was an active area for
drilling in 1998, during which Northstar drilled 101 gas wells,
including 72 completed wells. After the Northstar Combination,
the Company completed an acquisition in late 1998 which added new
gas reserves and more than 400 additional gas wells. Devon
expects to drill an additional 80 to 90 gas wells during 1999.
Due to Devon's large acreage position in this area, Smoky Bear is
expected to be the source for development and low-risk
exploratory drilling for several years.
Southern Alberta Properties. This area covers central and
southern Alberta and a small portion of Saskatchewan. The
Company's position consists of an average 40% interest in 112
producing properties and 500,000 net undeveloped acres. Existing
production is primarily from oil-producing formations ranging
from 2,300 to 13,200 feet. Activity in this area was limited in
1998 and will continue to be limited in 1999 due to low oil
prices. However, the undeveloped acreage offers the Company a
variety of oil and gas exploration and development opportunities
to pursue in the future. This area is accessible year round.
Foothills Properties. This area spans the western edge of
the Western Canada Sedimentary Basin from southeast British
Columbia/southwest Alberta to northeast British Columbia along
the eastern slope of the Rocky Mountains. It contains Devon's
largest Canadian producing property as well as a large
undeveloped acreage position. Exploration in the Foothills is
typically oriented toward long-life natural gas reserves.
Although the risks and capital expenditures for this type of
exploration projects are high, the potential prospect sizes
ranges from 100 to 1,000 Bcf.
Coleman Field. The Coleman Field, located in the southern
portion of the Foothills, is Devon's largest Canadian property,
producing gas from multiple formations between 9,500 and 11,500
feet. Northstar originally acquired an interest in the Coleman
sour gas processing plant and pipeline in 1993. Through a merger
in 1997 this ownership increased to 100%. Northstar then built a
reserve base consisting of 6 producing wells through acquisitions
and exploratory and development drilling. During 1998 Northstar
drilled three exploratory wells in the Coleman Field, two of
which were productive. During 1999 the Company will drill one
additional exploratory well and connect the two 1998 discoveries
to pipeline.
Title to Properties
Title to properties is subject to contractual arrangements
customary in the oil and gas industry, liens for current taxes
not yet due and, in some instances, other encumbrances. Devon
believes that such burdens do not materially detract from the
value of such properties or from the respective interests therein
or materially interfere with their use in the operation of the
business.
As is customary in the industry in the case of undeveloped
properties, little investigation of record title is made at the
time of acquisition (other than a preliminary review of local
records). Investigations, generally including a title opinion of
outside counsel, are made prior to the consummation of an
acquisition of producing properties and before commencement of
drilling operations on undeveloped properties.
ITEM 3. LEGAL PROCEEDINGS
Devon is involved in various routine legal proceedings
incidental to its business. However, to Devon's knowledge as of
March 22, 1999, there were no material pending legal proceedings
to which Devon is a party or to which any of its property is
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of Devon's shareholders was held on
December 9, 1998. The purpose of the meeting was to consider and
vote upon three issues: (i) approval of the Combination
Agreement dated as of June 29, 1998 between the Company and
Northstar ("Proposal One"); (ii) approval of an amendment to
Devon's Certificate of Incorporation to authorize a class of
Special Voting Stock consisting of one share ("Proposal Two");
and (iii) approve an amendment to Devon's 1997 Stock Option Plan
to increase the number of shares available for grant under the
plan from two million to three million shares ("Proposal Three").
Out of a total of 32,319,894 shares of common stock
outstanding and entitled to vote, 29,383,878 shares, or 93%, were
represented at the meeting in person or by proxy. Each of the
proposals being voted upon was approved. The voting results were
as follows:
<TABLE>
<CAPTION>
Proposal One Proposal Two Proposal Three
<S> <C> <C> <C>
FOR: 27,711,778 27,690,644 28,236,615
AGAINST: 14,090 34,974 1,131,002
ABSTAIN: 45,420 45,670 16,261
WITHHELD: 1,612,590 1,612,590 na
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Price
Devon's common stock has been traded on the American Stock
Exchange (the "AMEX") since September 29, 1988. Prior to
September 29, 1988, Devon's common stock was privately held.
Commencing on December 15, 1998, a new class of Devon
exchangeable shares began trading on the Toronto Stock Exchange
("TSE") under the symbol NSX. These shares are essentially
equivalent to Devon common stock. However, because they are
issued by Devon's wholly owned subsidiary, Northstar, they
qualify as a domestic Canadian investment for Canadian
institutional shareholders. They are exchangeable at any time,
on a one-for-one basis, for common shares of Devon at the
holder's option.
The following table sets forth the high and low sales prices
for Devon common stock and exchangeable shares as reported by the
AMEX and TSE for the periods indicated.
<TABLE>
<CAPTION>
American Stock Exchange Toronto Stock Exchange
High Low Daily High Low Daily
(US$) (US$) Volume (CN$) (CN$) Volume
1997:
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended March 31, 1997 38-7/8 29-1/2 64,500
Quarter Ended June 30, 1997 38-1/2 27-3/8 76,600
Quarter Ended September 30, 1997 45-1/4 36-1/8 54,200
Quarter Ended December 31, 1997 49-1/8 35 63,100
1998:
Quarter Ended March 31, 1998 41-1/8 32-7/8 90,867
Quarter Ended June 30, 1998 40-1/2 32-5/8 97,527
Quarter Ended September 30, 1998 36-5/8 26-1/8 158,909
Quarter Ended December 31, 1998* 36-11/16 27-3/4 140,888 45.45 42.75 13,961
1999:
Quarter Ended March 31, 1999 31-3/4 20-1/8 152,341 48.00 30.40 4,208
(through March 22, 1999)
* Trading of the exchangeable shares on the TSE commenced on
December 15, 1998.
</TABLE>
Dividends
Devon commenced the payment of regular quarterly cash
dividends on its common stock on June 30, 1993, in the amount of
$0.03 per share. Effective December 31, 1996, Devon increased its
quarterly dividend payment to $0.05 per share. Devon anticipates
continuing to pay regular quarterly dividends in the foreseeable
future. Dividends are also paid on the exchangeable shares at
the same rate and on the same dates as dividends paid on the
common stock.
On March 24, 1999, there were 840 holders of record of Devon
common stock and 34 holders of record for the exchangeable
shares.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information (not covered by the
independent auditors' reports) should be read in conjunction with "Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the consolidated financial statements and
the notes thereto included in "Item 8. Financial Statements and
Supplementary Data." Prior year amounts have been restated to combine
Devon and Northstar pursuant to the pooling-of-interests method of
accounting for business combinations. Note 2 to the consolidated
financial statements included in Item 8 of this report contains
information on the 1998 combination of Devon and Northstar as well as
unaudited pro forma financial data for the years 1998, 1997 and 1996
pertaining to certain acquisitions during such periods.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
(Thousands, Except Per Share Data and Ratios)
OPERATING RESULTS
<S> <C> <C> <C> <C> <C>
Oil sales $143,624 207,725 136,023 115,606 92,352
Gas sales 209,344 219,459 101,443 71,194 74,048
NGLs sales 16,692 24,920 19,299 9,091 7,195
Other revenue 17,848 47,555 34,570 14,252 13,953
Total revenues 387,508 499,659 291,335 210,143 187,548
Lease operating expenses 113,484 100,897 58,734 51,724 43,647
Production taxes 13,916 19,227 10,880 7,052 7,217
Depreciation, depletion and amortization 123,844 169,108 70,307 73,440 67,392
General and administrative expenses 23,554 24,381 15,111 14,906 13,908
Northstar Combination expenses 13,149 - - - -
Interest expense 22,632 18,788 12,662 10,885 6,384
Deferred effect of changes in foreign
currency exchange rate on subsidiary's
long-term debt 16,104 5,860 199 307 -
Distributions on preferred securities of
subsidiary trust 9,717 9,717 4,753 - -
Reduction of carrying value of oil and
gas properties 126,900 625,514 - 97,061 21,679
Total costs and expenses 463,300 973,492 172,646 255,375 160,227
Earnings (loss) before income taxes (75,792) (473,833) 118,689 (45,232) 27,321
Income tax expense (benefit):
Current 7,687 26,857 7,834 5,292 956
Deferred (23,194) (200,699) 43,252 (24,631) 9,440
Total (15,507) (173,842) 51,086 (19,339) 10,396
Net earnings (loss) $(60,285) (299,991) 67,603 (25,893) 16,925
Net earnings (loss) per share:
Basic $ (1.25) (6.38) 2.06 (0.80) 0.54
Diluted $ (1.25) (6.38) 1.99 (0.80) 0.54
<FN>
Cash dividends per common share1 $ 0.15 0.14 0.15 0.14 0.13
Weighted average common shares
outstanding - basic 48,376 47,040 32,812 32,473 31,114
<FN>
Ratio of earnings to fixed charges2 N/A N/A 7.59 N/A 5.09
<CAPTION>
December 31,
1998 1997 1996 1995 1994
(Thousands)
BALANCE SHEET DATA
Total assets $1,226,356 1,248,986 1,183,290 715,510 631,953
Long-term debt $ 405,271 305,337 83,000 220,137 106,764
Convertible preferred securities of
subsidiary trust $ 149,500 149,500 149,500 - -
Stockholders' equity $ 522,963 596,546 678,772 394,647 410,916
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
(Thousands, Except Per Unit Data)
CASH FLOW DATA
Net cash provided by operating
activities $ 191,571 253,056 144,248 122,136 118,719
Net cash used by investing activities $ (271,960) (147,583) (243,451) (251,571) (188,066)
Net cash provided (used) by financing
activities $ 57,618 (77,141) 96,420 125,312 70,378
<FN>
Modified EBITDA 3,5 $ 223,405 355,154 206,610 136,461 255,682
<FN>
Cash margin 4,5 $ 183,369 299,792 181,361 120,284 115,436
PRODUCTION, PRICE AND OTHER DATA
Production:
Oil (MBbls) 11,903 11,783 6,780 7,130 6,501
Gas (MMcf) 133,065 121,810 62,186 58,234 51,409
NGLs (MBbls) 1,939 1,891 1,255 831 720
<FN>
MBoe 6 36,020 33,976 18,399 17,666 15,789
Average prices:
Oil (Per Bbl) $ 12.07 17.63 20.06 16.21 14.21
Gas (Per Mcf) $ 1.57 1.80 1.63 1.22 1.44
NGLs (Per Bbl) $ 8.61 13.18 15.38 10.94 9.99
<FN>
Per Boe 6 $ 10.26 13.31 13.96 11.09 10.99
Costs per Boe:
Operating costs $ 3.54 3.54 3.78 3.33 3.22
Depreciation, depletion and amortization
of oil and gas properties $ 3.32 4.86 3.69 4.04 4.13
General and administrative expenses $ 0.65 0.72 0.82 0.84 0.88
<FN>
1 Cash dividends per share are presented based on the combined amount
of dividends paid by both Devon and Northstar in each year. The
dividends per share are also based on the number of shares outstanding
in each year assuming the Northstar Combination had been consummated as
of the beginning of the earliest year presented. Northstar did not pay
any dividends in 1997, or in 1998 prior to the closing of the Northstar
Combination. Also, Northstar's dividends paid in 1996, 1995 and 1994
were at rates per share that were different from the rates paid by Devon
in those years. Because of these facts, the cash dividends per share
presented are not representative of the actual amounts paid by Devon on
an historical basis. For the years 1998, 1997, 1996, 1995 and 1994,
Devon's historical cash dividends per share were $0.20, $0.20, $0.14,
$0.12 and $0.12, respectively.
<FN>
2 For purposes of calculating the ratio of earnings to fixed
charges, (i) earnings consist of earnings before income taxes,
plus fixed charges; and (ii) fixed charges consist of interest
expense, deferred effect of changes in foreign currency
exchange rate on long-term debt, distributions on preferred
securities of subsidiary trust, amortization of costs relating
to indebtedness and the preferred securities of subsidiary
trust, and one-third of the portion of rental expense
estimated to be attributable to interest. For the years 1998,
1997 and 1995, earnings were insufficient to cover fixed
charges by $75.8 million, $473.8 million and $45.2 million,
respectively.
<FN>
3 Modified EBITDA represents earnings before interest (including
deferred effect of changes in foreign currency exchange rate
on subsidiary's long-term debt, and distributions on preferred
securities of subsidiary trust), taxes, depreciation,
depletion and amortization and reduction of carrying value of
oil and gas properties.
<FN>
4 "Cash margin" equals total revenues less cash expenses. Cash
expenses are all expenses other than the non-cash expenses of
depreciation, depletion and amortization, deferred effect of
changes in foreign currency exchange rate on subsidiary's long-
term debt, reduction of carrying value of oil and gas
properties and deferred income tax expense. Cash margin
measures the net cash which is generated by a company's
operations during a given period, without regard to the period
such cash is actually physically received or spent by the
company. This margin ignores the non-operational effect on a
company's "net cash provided by operating activities", as
measured by generally accepted accounting principles, from a
company's activities as an operator of oil and gas wells.
Such activities produce net increases or decreases in
temporary cash funds held by the operator which have no effect
on net earnings of the company.
<FN>
5 Modified EBITDA is presented because it is commonly accepted
in the oil and gas industry as a financial indicator of a
company's ability to service or incur debt and because it is a
component of Devon's and Northstar's debt covenants. Cash
margin is presented because it is commonly accepted in the oil
and gas industry as a financial indicator of a company's
ability to fund capital expenditures or service debt.
Modified EBITDA and cash margin are also presented because
investors routinely request such information. Management
interprets the trends of modified EBITDA and cash margin in a
similar manner as trends in net earnings.
Modified EBITDA and cash margin should be used as supplements
to, and not as substitutes for, net earnings and net cash
provided by operating activities determined in accordance with
generally accepted accounting principles as measures of
Devon's profitability or liquidity. There may be operational
or financial demands and requirements that reduce management's
discretion over the use of modified EBITDA and cash margin.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Modified EBITDA and
cash margin may not be comparable to similarly titled measures
used by other companies.
<FN>
6 Gas volumes are converted to Boe or MBoe at the rate of six
Mcf of gas per barrel of oil, based upon the approximate
relative energy content of natural gas and oil, which rate is
not necessarily indicative of the relationship of oil and gas
prices. The respective prices of oil, gas and NGLs are
affected by market and other factors in addition to relative
energy content.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis addresses changes in
Devon's financial condition and results of operations during the
three year period of 1996 through 1998. Reference is made to
"Item 6. Selected Financial Data" and "Item 8. Financial
Statements and Supplementary Data."
Overview
On June 29, 1998, Devon and Northstar Energy Corporation
("Northstar") announced their intent to merge. The combination
of the two companies (the "Northstar Combination") was closed on
December 10, 1998. As a result of this transaction, Devon issued
the equivalent of 16.1 million common shares and assumed $307
million of long-term debt. The Northstar Combination increased
Devon's proved oil and gas reserves by 115 million Boe, or 62%,
and its undeveloped acreage by 1.8 million acres, or 193%.
The merger with Northstar was the largest transaction in
Devon's history. All of Northstar's operations are located in
Canada, principally in the province of Alberta. The Northstar
Combination established critical mass for Devon in Canada. Devon
believes that it now has the sufficient size to enjoy a fuller
range of opportunities of doing business in Canada.
The Northstar Combination significantly expanded Devon's
operations. However, another significant contributing factor to
Devon's growth over the last three years was Devon's December 31,
1996, acquisition of all of Kerr-McGee Corporations's North
American onshore oil and gas exploration and production business
and properties (the "KMG-NAOS Properties"). Devon acquired the
KMG-NAOS Properties in exchange for approximately 10 million
shares of Devon common stock. At that time, this transaction
increased Devon's proved reserves by 62 million Boe, or 50%.
Devon's drilling and development efforts have also helped
fuel Devon's growth over the last three years. Excluding
Northstar, Devon has spent approximately $309 million in its
exploration and development efforts from 1996 through 1998.
These costs included drilling 851 wells, of which 828 were
completed as producers.
The Northstar Combination was accounted for under the
pooling-of-interests method of accounting for business
combinations. Accordingly, Devon's prior years' results have
been restated to combine such results with those of Northstar for
all years presented. Thus, the three-year comparisons of
various production, revenue and expense items presented later in
this section are shown as if Devon and Northstar had been
combined for all such periods. Although this is consistent with
the financial presentation of the Northstar Combination, it
disguises the substantial changes in Devon's operations that have
occurred as a result of the Northstar Combination.
To present the effects that the Northstar Combination, the
KMG-NAOS Properties acquisition and drilling and development
efforts have had on Devon's operations during the last three
years, the following statistics have been developed. This data
assumes that the Northstar Combination was closed at the
beginning of 1998, but that prior year results were not restated.
Thus, it compares Devon's 1998 results, including Northstar, to
those of 1996 for Devon only, without Northstar. Such comparison
yields the following fluctuations:
Combined oil, gas and NGLs production increased 25.3
million Boe, or 236%.
Despite a 32% decrease in the combined average price of
oil, gas and NGLs, total revenues increased $223.5
million, or 136%.
Net cash provided by operating activities increased
$104.8 million, or 121%. Cash margin increased $87.4
million, or 91%.
Net earnings dropped from $34.8 million in 1996 to a
net loss of $60.3 million in 1998. However, 1998's net
loss included approximately $108.5 million of after-tax
charges from a full cost ceiling writedown, non-cash
foreign currency charges and merger costs. Excluding
these charges, 1998's net earnings as compared to 1996
would have increased $13.4 million, or 39%.
Operating expenses per Boe of production decreased
$0.40 per Boe, or 10%.
Depreciation, depletion and amortization of oil and gas
properties per Boe decreased $0.56 per Boe, or 14%.
General and administrative expenses per Boe decreased
$0.20 per Boe, or 24%.
During 1998, Devon marked its tenth anniversary as a public
company. While Devon has consistently increased production over
this ten-year period, volatility in oil and gas prices has
resulted in considerable variability in earnings and cash flows.
Prices for oil, natural gas and NGLs are determined primarily by
market conditions. Market conditions for these products have
been, and will continue to be, influenced by regional and world-
wide economic growth, weather and other factors that are beyond
Devon's control. Devon's future earnings and cash flows will
continue to depend on market conditions.
Like all oil and gas production companies, Devon faces the
challenge of natural production decline. As virgin pressures are
depleted, oil and gas production from a given well naturally
decrease. Thus, an oil and gas production company depletes part
of its asset base with each unit of oil and gas it produces.
Historically, Devon has been able to overcome this natural
decline by adding more reserves through drilling and acquisitions
than it produces. However, Devon's future growth, if any, will
depend on its ability to continue to add reserves in excess of
production.
Because oil and gas prices are influenced by many factors
which are outside of its control, Devon's management has focused
its efforts on increasing oil and gas reserves and production and
on controlling expenses. Over its ten year history as a public
company, Devon has been able to significantly reduce its
operating costs per unit of production. While Devon's per-unit
operating costs had been increasing since 1994, the Northstar
Combination reduced 1998's per-unit operating costs on a
consolidated basis by approximately $0.65 per Boe. Devon's
future earnings and cash flows are dependent on its ability to
continue to contain operating costs at levels that allow for
profitable production of its oil and gas reserves. This is
especially important considering the current depressed market for
oil and gas prices.
Results of Operations
Devon's total revenues have risen from $291.3 million in
1996 to $499.7 million in 1997 and $387.5 million in 1998. In
each of these years, oil, gas and NGLs sales accounted for over
88% of total revenues.
Changes in oil, gas and NGLs production, prices and revenues
from 1996 to 1998 are shown in the table below. (Unless
otherwise stated, all references in this discussion to dollar
amounts regarding Devon's Canadian operations are expressed in
U.S. dollars.)
<TABLE>
<CAPTION>
Total
Year Ended December 31,
1998 1997
1998 vs 1997 1997 vs 1996 1996
(Absolute Amounts in Thousands)
Production
<S> <C> <C> <C> <C> <C>
Oil (MBbls) 11,903 +1% 11,783 +74% 6,780
Gas (MMcf) 133,065 +9% 121,810 +96% 62,186
NGLs (MBbls) 1,939 +3% 1,891 +51% 1,255
Oil, Gas and NGLs (MBoe) 36,020 +6% 33,976 +85% 18,399
Revenues
Per Unit of Production:
Oil (per Bbl) $ 12.07 -32% 17.63 -12% 20.06
Gas (per Mcf) $ 1.57 -13% 1.80 +10% 1.63
NGLs (per Bbl) $ 8.61 -35% 13.18 -14% 15.38
Oil, Gas and NGLs
(per Boe) $ 10.26 -23% 13.31 -5% 13.96
Absolute:
Oil $ 143,624 -31% 207,725 +53% 136,023
Gas $ 209,344 -5% 219,459 +116% 101,443
NGLs $ 16,692 -33% 24,920 +29% 19,299
Oil, Gas and NGLs $ 369,660 -18% 452,104 +76% 256,765
<CAPTION>
Domestic
Year Ended December 31,
1998 1997
1998 vs 1997 1997 vs 1996 1996
(Absolute Amounts in Thousands)
Production
Oil (MBbls) 5,646 -7% 6,055 +59% 3,816
Gas (MMcf) 65,907 +8% 61,015 +71% 35,714
NGLs (MBbls) 1,373 -6% 1,468 +54% 952
Oil, Gas and NGLs (MBoe) 18,004 +2% 17,692 +65% 10,720
Revenues
Per Unit of Production:
Oil (per Bbl) $ 12.45 -35% 19.08 -9% 21.00
Gas (per Mcf) $ 1.92 -16% 2.28 +19% 1.91
NGLs (per Bbl) $ 8.79 -33% 13.18 -13% 15.09
Oil, Gas and NGLs
(per Boe) $ 11.59 -25% 15.48 +2% 15.16
Absolute:
Oil $ 70,286 -39% 115,504 +44% 80,142
Gas $ 126,273 -9% 139,018 +104% 68,049
NGLs $ 12,071 -38% 19,338 +35% 14,367
Oil, Gas and NGLs $ 208,630 -24% 273,860 +68% 162,558
<CAPTION>
Canada
Year Ended December 31,
1998 1997
1998 vs 1997 1997 vs 1996 1996
(Absolute Amounts in Thousands)
Production
Oil (MBbls) 6,257 +9% 5,728 +93% 2,964
Gas (MMcf) 67,158 +10% 60,795 +130% 26,472
NGLs (MBbls) 566 +34% 423 +40% 303
Oil, Gas and NGLs (MBoe) 18,016 +11% 16,284 +112% 7,679
Revenues
Per Unit of Production:
Oil (per Bbl) $ 11.72 -27% 16.10 -15% 18.85
Gas (per Mcf) $ 1.24 -6% 1.32 +5% 1.26
NGLs (per Bbl) $ 8.16 -38% 13.20 -19% 16.28
Oil, Gas and NGLs
(per Boe) $ 8.94 -18% 10.95 -11% 12.27
Absolute:
Oil $ 73,338 -20% 92,221 +65% 55,881
Gas $ 83,071 +3% 80,441 +141% 33,394
NGLs $ 4,621 -17% 5,582 +13% 4,932
Oil, Gas and NGLs $ 161,030 -10% 178,244 +89% 94,207
</TABLE>
Oil Revenues 1998 vs. 1997 Oil revenues decreased $64.1
million in 1998. An average price decline of $5.56 per barrel
reduced revenues by $66.2 million. This was slightly offset by
$2.1 million of revenues added by production gains of 120,000
barrels.
1997 vs. 1996 Oil revenues increased $71.7 million in 1997.
Production gains of 5.0 million barrels added $100.4 million of
oil revenues in 1997. This increase was partially offset by a
$28.7 million reduction in oil revenues due to price declines in
1997. The average oil price decreased $2.43 per barrel in 1997.
In March 1997, Northstar acquired all the outstanding common
shares of Morrison Petroleums Ltd., an independent oil and gas
producer also located in Alberta, Canada. Northstar acquired the
Morrison Petroleums Ltd. shares by issuing additional shares of
Northstar (the "Morrison Transaction"). The March 1997 Morrison
Transaction and the KMG-NAOS Properties acquired at the end of
1996 were the primary contributors to the increased oil
production in 1997. The KMG-NAOS Properties added 3.1 million
barrels of 1997 production. The Morrison Transaction added 2.7
million barrels during the last nine months of 1997.
Gas Revenues 1998 vs. 1997 Gas revenues decreased $10.1
million in 1998. An average price decline of $0.23 per Mcf
reduced revenues by $30.4 million. This was partially offset by
higher production in 1998. A production increase of 11.3 Bcf in
1998 added gas revenues of $20.3 million.
The coal seam gas properties produced 19.9 Bcf in 1998
compared to 17.6 Bcf in 1997. During the last two years, Devon
has conducted a program of mechanical improvements at the
Northeast Blanco Unit coal seam gas property. The majority of
the production gains realized in 1998 were the result of such
improvements.
The coal seam properties averaged $1.72 per Mcf in 1998
compared to $2.13 per Mcf in 1997. In 1995, Devon entered into a
transaction covering substantially all of its San Juan Basin coal
seam gas properties (the "San Juan Basin Transaction"). This
transaction is described in detail in Note 3 to the consolidated
financial statements uncluded in "Item 8. Financial Statements
and Supplementary Data". The San Juan Basin Transaction added
$8.4 million to coal seam gas revenues in both 1998 and 1997.
The San Juan Basin Transaction's effect on the coal seam gas
properties' average price was an increase of $0.42 per Mcf in
1998 and $0.48 per Mcf in 1997.
1997 vs. 1996 Gas revenues increased $118.0 million in
1997. A 59.6 Bcf increase in production added $97.3 million to
1997's gas revenues. A $0.17 per Mcf increase in 1997's average
gas price added the remaining $20.7 million of increased
revenues.
The KMG-NAOS Properties and the Morrison Transaction were
responsible for the majority of the increased gas production in
1997. The KMG-NAOS Properties produced 29.8 Bcf in 1997. The
Morrison Transaction added 26.4 Bcf in the last nine months of
the year. Coal seam gas properties produced 17.6 Bcf in 1997
compared to 17.4 Bcf in 1996.
The coal seam properties averaged $2.13 per Mcf in 1997
compared to $1.72 per Mcf in 1996. The San Juan Basin
Transaction added $8.4 million to coal seam gas revenues in 1997
compared to $10.3 million in 1996. The San Juan Basin
Transaction increased the average coal seam gas price by $0.48
per Mcf in 1997 and $0.59 per Mcf in 1996.
NGLs Revenues 1998 vs. 1997 NGLs revenues decreased $8.2
million in 1998. An average price decline of $4.57 per barrel
caused revenues to drop by $8.9 million. This decline was only
slightly offset by production increases of 48,000 barrels. Such
production gains added $0.7 million of revenues in 1998.
1997 vs. 1996 NGLs revenues increased $5.6 million in 1997.
A production increase of 636,000 barrels added $9.8 million to
1997's revenues. This was partially offset by a $4.2 million
reduction in revenues caused by lower prices in 1997. The
average NGLs price dropped $2.20 per barrel in 1997.
The majority of the increased production in 1997 was
attributable to the KMG-NAOS Properties and the Morrison
Transaction. The KMG-NAOS Properties added 339,000 barrels to
1997's production. The Morrison Transaction added 161,000
barrels during the last nine months of 1997.
Other Revenues 1998 vs. 1997 Other revenues decreased
$29.7 million in 1998. This decrease was primarily due to
Northstar's $29.4 million of gains from asset sales in 1997 which
did not recur in 1998.
1997 vs. 1996 Other revenues increased $13.0 million in
1997. Northstar's gains from sales of assets increased $18.8
million in 1997. Northstar's pipeline revenues decreased $3.5
million and its equity earnings from unconsolidated subsidiaries
decreased $3.2 million in 1997.
Expenses The details of the changes in pre-tax expenses
between 1996 and 1998 are shown in the table below.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
1998 vs 1997 1997 vs 1996 1996
(Absolute Amounts in Thousands)
Absolute:
Production and operating expenses:
<S> <C> <C> <C> <C> <C>
Lease operating expenses $ 113,484 +12% 100,897 +72% 58,734
Production taxes 13,916 -28% 19,227 +77% 10,880
Depreciation, depletion and amortiza-
tion of oil and gas properties 119,719 -27% 164,977 +143% 67,832
Subtotal 247,119 -13% 285,101 +107% 137,446
Depreciation and amortization of
non-oil and gas properties 4,125 - 4,131 +67% 2,475
General and administrative expenses 23,554 -3% 24,381 +61% 15,111
Northstar Combination expenses 13,149 N/A - N/A -
Interest expense 22,632 +20% 18,788 +48% 12,662
Deferred effect of changes in foreign
currency exchange rate on subsidiary's
long-term debt 16,104 +175% 5,860 N/A 199
Distributions on preferred securities of
subsidiary trust 9,717 - 9,717 +104% 4,753
Reduction of carrying value of oil and
gas properties 126,900 -80% 625,514 N/A -
Total $ 463,300 -52% 973,492 +464% 172,646
Per Boe Produced:
Production and operating expenses:
Lease operating expenses $ 3.15 +6% 2.97 -7% 3.19
Production taxes 0.39 -32% 0.57 -3% 0.59
Depreciation, depletion and amortiza-
tion of oil and gas properties 3.32 -32% 4.86 +32% 3.69
Subtotal 6.86 -18% 8.40 +12% 7.47
Depreciation and amortization of
<FN>
non-oil and gas properties (1) 0.12 - 0.12 -8% 0.13
<FN>
General and administrative expenses (1) 0.65 -10% 0.72 -12% 0.82
<FN>
Northstar Combination expenses (1) 0.36 N/A - N/A -
<FN>
Interest expense (1) 0.63 +15% 0.55 -20% 0.69
Deferred effect of changes in foreign
currency exchange rate on subsidiary's
<FN>
long-term debt (1) 0.45 +165% 0.17 N/A 0.01
Distributions on preferred securities of
<FN>
subsidiary trust (1) 0.27 -4% 0.28 +8% 0.26
Reduction of carrying value of oil and gas
<FN>
properties (1) 3.52 -81% 18.41 N/A -
Total $ 12.86 -55% 28.65 +205% 9.38
<FN>
(1) Though per Boe amounts for these expense items may be helpful
for profitability trend analysis, these expenses are not directly
attributable to production volumes.
</TABLE>
Production and Operating Expenses The details of the
changes in production and operating expenses between 1996 and
1998 are shown in the table below.
<TABLE>
<CAPTION>
Total
Year Ended December 31,
1998 1997
1998 vs 1997 1997 vs 1996 1996
(Absolute Amounts in Thousands)
Absolute:
<S> <C> <C> <C> <C> <C>
Recurring lease operating expenses $ 107,554 +11% 96,738 +79% 54,171
Well workover expenses 5,930 +43% 4,159 -9% 4,563
Production taxes 13,916 -28% 19,227 +77% 10,880
Total production and operating expenses $ 127,400 +6% 120,124 +73% 69,614
Per Boe:
Recurring lease operating expenses $ 2.99 +5% 2.85 -3% 2.94
Well workover expenses 0.16 +33% 0.12 -52% 0.25
Production taxes 0.39 -32% 0.57 -3% 0.59
Total production and operating expenses $ 3.54 - 3.54 -6% 3.78
<CAPTION>
Domestic
Year Ended December 31,
1998 1997
1998 vs 1997 1997 vs 1996 1996
(Absolute Amounts in Thousands)
Absolute:
Recurring lease operating expenses $ 60,920 +11% 54,969 +94% 28,270
Well workover expenses 4,654 +48% 3,143 -5% 3,298
Production taxes 12,255 -31% 17,646 +66% 10,658
Total production and operating expenses $ 77,829 +3% 75,758 +79% 42,226
Per Boe:
Recurring lease operating expenses $ 3.38 +9% 3.10 +17% 2.64
Well workover expenses 0.26 +44% 0.18 -42% 0.31
Production taxes 0.68 -32% 1.00 +1% 0.99
Total production and operating expenses $ 4.32 +1% 4.28 +9% 3.94
<CAPTION>
Canada
Year Ended December 31,
1998 1997
1998 vs 1997 1997 vs 1996 1996
(Absolute Amounts in Thousands)
Absolute:
Recurring lease operating expenses $ 46,634 +12% 41,769 +61% 25,901
Well workover expenses 1,276 +26% 1,016 -20% 1,265
Production taxes 1,661 +5% 1,581 +612% 222
Total production and operating expenses $ 49,571 +12% 44,366 +62% 27,388
Per Boe:
Recurring lease operating expenses $ 2.59 +1% 2.56 -24% 3.37
Well workover expenses 0.07 +17% 0.06 -65% 0.17
Production taxes 0.09 -10% 0.10 +233% 0.03
Total production and operating expenses $ 2.75 +1% 2.72 -24% 3.57
</TABLE>
1998 vs. 1997 Recurring lease operating expenses increased
$10.8 million, or 11%, in 1998. The primary cause of this
increase was the addition of wells drilled or acquired during the
year, plus the effect of having a full year of operations from
the Morrison Transaction properties in 1998 compared to only nine
months in 1997.
The recurring expenses per Boe increased $0.14 per Boe, or
5%, in 1998. This increase was predominantly caused by the 9%
increase in the domestic properties' costs per Boe. The
operating expenses of the additional domestic wells drilled
during the year raised the overall average costs per Boe in the
U.S.
The majority of Devon's production taxes are assessed on its
domestic properties. In the U.S., most of the production taxes
paid are based on a fixed percentage of revenues. Therefore, the
24% drop in domestic oil, gas and NGLs revenues was the primary
cause of the 31% decrease in domestic production taxes.
1997 vs. 1996 Recurring lease operating expenses increased
$42.6 million, or 79%, in 1997. The KMG-NAOS Properties
accounted for $26.0 million of the increased expenses. The
Morrison Transaction added $16.5 million during the last nine
months of 1997.
Recurring expenses per Boe were down $0.09 per Boe, or 3%,
in 1997. The addition of the properties acquired in the Morrison
Transaction accounted for the majority of this decrease in per
unit costs. Such properties' costs per Boe for the last nine
months of 1997 were $2.28 per Boe. This compares to $3.00 per
Boe for all other properties during the year 1997.
Domestic production taxes increased 66% in 1997. This
increase was mostly due to the 68% increase in the U.S. combined
oil, gas and NGLs revenues.
Depreciation, Depletion and Amortization ("DD&A") Devon's
largest recurring non-cash expense is DD&A. DD&A of oil and gas
properties is calculated as the percentage of total proved
reserve volumes produced during the year, multiplied by the net
capitalized investment in those reserves including estimated
future development costs (the "depletable base"). Generally, if
reserve volumes are revised up or down, then the DD&A rate per
unit of production will change inversely. However, if
capitalized costs change, then the DD&A rate moves in the same
direction. The per unit DD&A rate is not affected by production
volumes. Absolute or total DD&A, as opposed to the rate per unit
of production, generally moves in the same direction as
production volumes. Oil and gas property DD&A is calculated
separately for the domestic and Canadian properties.
1998 vs. 1997 Oil and gas property related DD&A decreased
$45.3 million, or 27%, in 1998. A 32% drop in the consolidated
DD&A rate per Boe from $4.86 in 1997 to $3.32 in 1998 reduced
1998's DD&A expense by $55.2 million. This decrease was
partially offset by $9.9 million of increased expense caused by
the 6% increase in combined oil, gas and NGLs production in 1998.
The domestic DD&A rate per Boe increased from $4.13 in 1997 to
$4.24 in 1998. However, the Canadian DD&A rate per Boe decreased
from $5.64 in 1997 to $2.41 in 1998. The $625.5 million
reduction in the carrying value of Canadian oil and gas
properties recorded at the end of 1997 caused the drop in the
Canadian DD&A rate in 1998.
1997 vs. 1996 Oil and gas property related DD&A increased
$97.1 million, or 143%, in 1997. Approximately $57.4 million of
the increase was caused by the 85% increase in combined oil, gas
and NGLs production in 1997. The remaining $39.7 million was
caused by a 32% increase in the combined domestic and Canadian
DD&A rate. The combined rate increased from $3.69 per Boe in
1996 to $4.86 per Boe in 1997. The domestic rate increased from
$3.88 per Boe in 1996 to $4.13 per Boe in 1997. The Canadian
rate increased from $3.42 per Boe in 1996 to $5.64 per Boe in
1997. The increase in 1997's Canadian rate was caused by the
cost per Boe of the properties acquired in the Morrison
Transaction.
General and Administrative Expenses ("G&A") 1998 vs. 1997
G&A decreased $0.8 million, or 3%, in 1998. Employee salaries
and related overhead costs, including insurance and pension
expense, increased $3.0 million in 1998 due to a combination of
compensation increases and an increase in the number of personnel
employed.
The higher salary and overhead costs were partially offset
by an increase in the amount of such costs that were capitalized
pursuant to the full cost method of accounting. Approximately
$9.6 million of costs were capitalized in 1998, compared to $7.6
million in 1997.
The higher salary and overhead costs were also partially
offset by an increase in Devon's overhead reimbursements. As the
operator of a property, Devon receives these reimbursements from
the property's working interest owners. Devon records the
reimbursements as reductions to G&A. These reimbursements
increased $1.9 million in 1998.
1997 vs. 1996 G&A increased $9.3 million, or 61% in 1997.
Employee salaries and related overhead costs, including insurance
and pension expense, increased $11.7 million. This increase was
primarily related to the additional permanent and temporary
personnel added at Devon's Oklahoma City and Calgary offices as a
result of the acquisition of the KMG-NAOS Properties and the
Morrison Transaction. The personnel expansion also caused office-
related costs such as rent, dues, travel, supplies, telephone,
etc., to increase $3.3 million in 1997.
The higher salary, overhead and office costs were partially
offset by an increase in the amount of such costs that were
capitalized pursuant to the full cost method of accounting.
Approximately $7.6 million of costs were capitalized in 1997,
compared to $4.9 million capitalized in 1996.
The higher salary, overhead and office costs were also
partially offset by an increase in Devon's overhead
reimbursements. Due largely to the acquisition of the KMG-NAOS
Properties and the Morrison Transaction, overhead reimbursements
increased $4.4 million in 1997.
Northstar Combination Expenses Approximately $13.1 million
of expenses were incurred in 1998 in connection with the
Northstar Combination. These expenses consisted primarily of
investment bankers' fees, legal fees and costs of printing and
distributing the proxy statement to shareholders. The pooling-of-
interests method of accounting for business combinations requires
such costs to be expensed as opposed to capitalized as costs of
the transaction.
Interest Expense 1998 vs. 1997 Interest expense increased
$3.8 million, or 20%, in 1998. The average interest rate
increased from 5.4% in 1997 to 6.7% in 1998. The increase in the
average rate was primarily due to the fact that Northstar
replaced a large portion of its floating rate debt with longer
term, fixed rate debt early in 1998. The increase in 1998's
average rate caused a $4.4 million increase in interest expense.
The average debt balance increased from $267.0 million in 1997 to
$324.7 million in 1998. This increase in the debt outstanding
caused interest expense to increase $3.1 million. The increases
caused by higher rates and higher balances outstanding were
partially offset by the fact that 1997's interest expense
included a $3.3 million "make-whole" payment related to the early
retirement of debt. Other items included in interest expense that
are not related to the balance of debt outstanding, such as
facility and agency fees, amortization of costs and other
miscellaneous items were $0.4 million lower in 1998 compared to
1997.
1997 vs. 1996 Interest expense increased $6.1 million, or
48%, in 1997. The average long-term debt balance increased from
$183.8 million in 1996 to $267.0 million in 1997. This increase
in the average balance caused interest expense to increase $5.1
million. The average interest rate decreased from 6.1% in 1996
to 5.4% in 1997. This decrease reduced interest expense $2.0
million in 1997. Interest expense in 1997 also included the $3.3
million make-whole payment discussed in the above paragraph.
Other items included in interest expense that are not related to
the balance of debt outstanding were $0.3 million lower in 1997
compared to 1996.
Devon's average domestic long-term debt balance was almost
eliminated in 1997, as it dropped from an average of $77.0
million in 1996 to only $0.7 million in 1997. Devon issued
$149.5 million of 6.5% Trust Convertible Preferred Securities
("TCP Securities") in July, 1996. The proceeds from this
issuance, along with cash flow from operations, were used to
retire all domestic long-term debt by the end of the first
quarter of 1997. (The TCP Securities are discussed further in
this section.)
However, the drop in Devon's average domestic debt balance
was more than offset by an increase in the Canadian average
balance in 1997. Following the Morrison Transaction, Northstar
repurchased $217 million of common shares which was financed with
long-term debt. As a result, the Canadian average long-term debt
balance increased from $106.8 million in 1996 to $266.3 million
in 1997.
Deferred Effect of Changes in Foreign Currency Exchange Rate
on Subsidiary's Long-term Debt Northstar has certain fixed rate
senior notes which are denominated in U.S. dollars. Changes in
the exchange rate between the U.S. dollar and the Canadian dollar
from the dates the notes were issued to the dates of repayment
will increase or decrease the expected amount of Canadian dollars
eventually required to repay the notes. Such changes in the
Canadian dollar equivalent balance of the debt are required to be
included in determining net earnings for the period in which the
exchange rate changes.
1998 vs. 1997 The principal balance of Northstar's U.S.
dollar denominated notes increased from $135 million at the end of
1997 to $225 million at the end of 1998. The rate of converting
Canadian dollars to U.S. dollars decreased from $0.6997 at the end
of 1997 to $0.6535 at the end of 1998. The combination of these
factors caused $16.1 million to be recorded as an expense in 1998.
1997 vs. 1996 The principal balance of Northstar's U.S.
dollar denominated notes increased from $75 million at the end of
1996 to $135 million at the end of 1997. The rate of converting
Canadian dollars to U.S. dollars decreased from $0.7301 at the end
of 1996 to $0.6997 at the end of 1997. The combination of these
factors caused $5.9 million to be recorded as an expense in 1997.
Distributions on Preferred Securities of Subsidiary Trust
1998 vs. 1997 As mentioned earlier in this discussion, and as
discussed in Note 9 to the consolidated financial statements
included elsewhere herein, Devon, through its affiliate Devon
Financing Trust, completed the issuance of $149.5 million of 6.5%
TCP Securities in a private placement in July, 1996. The
distributions accrue and are paid at the rate of 1.625% per
quarter.
1997 vs. 1996 The TCP Securities distributions in 1997 were
$9.7 million compared to $4.8 million in 1996. The 1996
distribution total represented slightly less than two quarters'
distributions due to the issuance date occurring in July of that
year.
Reduction of Carrying Value of Oil and Gas Properties Under
the full cost method of accounting, the net book value of oil and
gas properties, less related deferred income taxes, may not exceed
a calculated "ceiling." The ceiling limitation is the discounted
estimated after-tax future net revenues from proved oil and gas
properties. The ceiling is imposed separately by country. In
calculating future net revenues, current prices and costs are
generally held constant indefinitely. The net book value, less
deferred tax liabilities, is compared to the ceiling on a
quarterly and annual basis. Any excess of the net book value,
less deferred taxes, is written off as an expense.
1998 Reduction. As of September 30, 1998, the carrying value
of Devon's domestic properties, less deferred income taxes,
exceeded the full cost ceiling by $88 million. Accordingly, a
$126.9 million pre-tax reduction of the carrying value of such
properties was recorded in the third quarter of 1998. This
reduction was partially offset by a related $38.9 million deferred
income tax benefit, resulting in an after-tax charge of $88
million.
1997 Reduction. As of December 31, 1997, the carrying value
of Northstar's oil and gas properties, less deferred income taxes,
exceeded the full cost ceiling by $397.9 million. Accordingly, a
$625.5 million pre-tax reduction of the carrying value of such
properties was recorded in the fourth quarter of 1997. This
reduction was partially offset by a related $227.6 million
deferred income tax benefit, resulting in an after-tax charge of
$397.9 million.
Income Taxes 1998 vs. 1997 Devon's effective financial
income tax benefit rate in 1998 was 20% compared to a benefit rate
in 1997 of 37%. The benefit rate in 1998 was lower than in 1997
due to a combination of a smaller pre-tax loss in 1998 and certain
1998 financial expenses that are not deductible for income tax
purposes. Approximately $27.2 million of the $126.9 million
reduction of carrying value of oil and gas properties related to
costs which are not deductible for income taxes. Also,
approximately $5.6 million of the Northstar Combination expenses
and $4.0 million of the deferred effect of changes in foreign
currency exchange rate on subsidiary's long-term debt are not
deductible for income tax purposes.
1997 vs. 1996 Devon's effective financial income tax
(benefit) rate in 1997 was (37%) compared to 43% in 1996. The
benefit rate in 1997, as an absolute percentage, was lower than
1996's tax rate due to the financial deduction of costs in 1997
that were not deductible for income tax purposes. As previously
discussed, Northstar recorded in 1997 a $625.5 million reduction
of carrying value of oil and gas properties. Approximately $115.3
million of the reduction related to costs which are not deductible
for income tax purposes. These non-deductible costs were the
primary cause of the low benefit rate in 1997.
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 "Item 8.
Financial Statements and Supplementary Data."
Capital Expenditures Approximately $375.5 million was spent
in 1998 for capital expenditures, of which $371.3 million was
related to the acquisition, drilling or development of oil and gas
properties. These amounts compare to 1997 total expenditures of
$288.0 million ($279.9 million of which was related to oil and gas
properties) and 1996 total expenditures of $268.7 million ($254.5
million of which was related to oil and gas properties.)
Other Cash Uses Devon's common stock dividends were $7.3
million, $6.4 million and $5.0 million in 1998, 1997 and 1996,
respectively.
Capital Resources and Liquidity Net cash provided by
operating activities ("operating cash flow") has historically been
the primary source of Devon's capital and short-term liquidity.
Operating cash flow was $191.6 million, $253.1 million and $144.2
million in 1998, 1997 and 1996, respectively. The trends in
operating cash flow during these periods have generally followed
those of the various revenue and expense items previously
discussed in this section.
In addition to operating cash flow, Devon's credit lines and
the private placement of long-term debt have been an important
source of capital and liquidity. During the years 1998 and 1997,
long-term debt borrowings, net of repayments, totaled $55.3
million and $127.2 million, respectively. In 1996, due to the
application of the TCP Securities' proceeds against outstanding
debt, repayments of debt exceeded borrowings by $47.9 million.
Following the closing of the Northstar combination in
December 1998, Devon entered into new unsecured long-term credit
facilities aggregating $400 million (the "Credit Facilities").
The Credit Facilities include a U.S. facility of $205 million
(the "U.S. Facility") and a Canadian facility of $195 million
(the "Canadian Facility"). The Credit Facilities replaced
Devon's and Northstar's separate credit facilities that were in
place prior to the Northstar Combination. Of the $180.3 million
borrowed against the Credit Facilities at December 31, 1998, $35
million was borrowed under the U.S. Facility and $145.3 million
was borrowed under the Canadian Facility. Amounts borrowed under
the Credit Facilities bear interest at various fixed rate options
that Devon may elect for periods up to six months. Such rates
are generally less than the prime rate. Devon may also elect to
borrow at the prime rate. The average interest rate on the
$180.3 million of debt outstanding at December 31, 1998, was
5.9%. The Credit Facilities also provide for an annual facility
fee of $0.4 million that is payable quarterly.
The $205 million U.S. Facility consists of a Tranche A
facility of $130 million and a Tranche B facility of $75 million.
The Tranche A facility matures on December 10, 2003. Devon may
borrow funds under the Tranche B facility until December 10, 1999
(the "Tranche B Revolving Period"). Devon may request that the
Tranche B Revolving Period be extended an additional 364 days by
notifying the agent bank of such request not more than 60 days
prior to the end of the Tranche B Revolving Period. Debt
borrowed under the Tranche B facility matures two years following
the end of the Tranche B Revolving Period. All $35 million of
debt outstanding under the U.S. Facility at December 31, 1998,
was borrowed under the Tranche A facility.
Devon may borrow funds under the $195 million Canadian
Facility until December 10, 1999 (the "Canadian Facility
Revolving Period"). Devon may request that the Canadian Facility
Revolving Period be extended an additional 364 days by notifying
the agent bank of such request not more than 90 days prior to the
end of the Canadian Facility Revolving Period. Debt borrowed
under the Canadian Facility matures five years and one day
following the end of the Canadian Facility Revolving Period.
Year 2000 Status Devon's company-wide Year 2000 Project
("the Project") is proceeding on schedule. The Project is
addressing the Year 2000 issue caused by computer programs being
written utilizing two digits rather than four to define an
applicable year. As a result, Devon's computer equipment,
software (all of which is externally developed), and devices with
embedded technology that are time sensitive may misinterpret the
actual date beginning on January 1, 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including, but not limited to, a temporary inability
to process transactions.
Devon has undertaken various initiatives intended to ensure
that its computer equipment and software will function properly
with respect to dates in the Year 2000 and thereafter. In
planning and developing the Project, Devon has considered both
its information technology ("IT") and its non-IT systems. The
term "computer equipment and software" includes systems that are
commonly thought of as IT systems, including accounting, data
processing, telephone systems, scanning equipment, and other
miscellaneous systems. Those items not to be considered as IT
technology include alarm systems, fax machines, monitors for
field operations, or other miscellaneous systems. Both IT and
non-IT systems may contain embedded technology, which complicates
Devon's Year 2000 identification, assessment, remediation, and
testing efforts. Based upon its identification and assessment
efforts to date, Devon is in the process of replacing the
computer equipment and software it currently uses to become Year
2000 compliant. In addition, in the ordinary course of replacing
computer equipment and software, Devon plans to obtain
replacements that are in compliance with year 2000.
Devon has also mailed letters to its significant vendors and
service providers and has verbally communicated with many
strategic customers to determine the extent to which interfaces
with such entities are vulnerable to Year 2000 issues and whether
the products and services purchased from or by such entities are
year 2000 compliant. Devon has received an overall favorable
response from such third parties and it is anticipated that their
significant Year 2000 issues will be addressed on a timely basis.
With regard to IT and non-IT systems and communications with
third parties, Devon anticipates that the Project will be
completed by September 30, 1999.
As noted above, Devon is in the process of replacing certain
computer equipment and software because of the Year 2000 issue.
Devon estimates that the total cost of such replacements will
approximate $0.5 million. Substantially all of the personnel
being used on the Project are existing Devon employees. Devon
does not separately track the time that its own employees spend
on the Project. Therefore, the internal costs incurred on the
Project are not known. Such costs would consist almost entirely
of the payroll costs associated with the time spent on the
Project. Third party consulting costs of Devon's Year 2000
identification, assessment, remediation and testing efforts, as
well as currently anticipated costs to be incurred with respect
to Year 2000 issues of third parties, are expected to be
approximately $0.2 million.
Devon has not yet begun a comprehensive analysis of the
operational problems and costs that would be reasonably likely to
result from the failure by Devon and significant third parties to
complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for
dealing with the most reasonably likely worst case scenario, and
such scenario has not yet been clearly identified. Devon plans
to complete such analysis and contingency planning by December
31, 1999.
Devon presently does not expect to incur significant
operational problems due to the Year 2000 issue. However, if all
Year 2000 issues are not properly and timely identified,
assessed, remediated and tested, there can be no assurances that
the Year 2000 issue will not materially impact Devon's results of
operations or adversely affect its relationships with customers,
vendors, or others. Additionally, there can be no assurance that
the Year 2000 issues of other entities will not have a material
impact on Devon's systems or results of operations.
1999 Estimates
The forward-looking statements provided in this discussion
are based on management's examination of historical operating
trends, the December 31, 1998 reserve reports of independent
petroleum engineers and other data in Devon's possession or
available from third parties. Devon cautions that its future
oil, gas and NGLs production, revenues and expenses are subject
to all of the risks and uncertainties normally incident to the
exploration for and development and production and sale of oil
and gas. These risks include, but are not limited to, price
volatility, inflation or lack of availability of goods and
services, environmental risks, drilling risks, regulatory
changes, the uncertainty inherent in estimating future oil and
gas production or reserves, and other risks as outlined below.
Also, the financial results of Devon's Canadian operations are
subject to currency exchange rate risks. Additional risks are
discussed below in the context of line items most affected by
such risks.
Specific Assumptions and Risks Related to Price and
Production Estimates Prices for oil, natural gas and NGLs are
determined primarily by prevailing market conditions. Market
conditions for these products are influenced by regional and
world-wide economic growth, weather and other substantially
variable factors. These factors are beyond Devon's control and
are difficult to predict. In addition to volatility in general,
Devon's oil, gas and NGLs prices may vary considerably due to
differences between regional markets, transportation availability
and demand for different grades of oil, gas and NGLs. Over 90%
of Devon's revenues are attributable to sales of these three
commodities. Consequently, Devon's financial results and
resources are highly influenced by this price volatility.
Estimates for Devon's future production of oil, natural gas
and NGLs are based on the assumption that market demand and
prices for oil and gas will continue at levels that allow for
profitable production of these products. There can be no
assurance of such stability.
Certain of Devon's individual oil and gas properties are
sufficiently significant as to have a material impact on the
overall financial results. With respect to oil production, these
properties include the West Red Lake Field and the Grayburg-
Jackson Unit, both in southeast New Mexico, and the Gilby and
Halkirk areas in Alberta. Devon's interest in NEBU and the 32-9
Unit, both in the San Juan Basin, and the Coleman and Hamburg
areas in Alberta can have a significant effect on overall gas
production.
The production, transportation and marketing of oil, natural
gas and NGLs are complex processes which are subject to
disruption due to transportation and processing availability,
mechanical failure, human error, meteorological events and
numerous other factors. The following forward-looking statements
were prepared assuming demand, curtailment, producibility and
general market conditions for Devon's oil, natural gas and NGLs
for 1999 will be substantially similar to those of 1998, unless
otherwise noted. Given the general limitations expressed herein,
Devon's forward-looking statements for 1999 are set forth below.
Unless otherwise noted, all of the following dollar amounts are
expressed in U.S. dollars. Those amounts related to Canadian
operations have been converted to U.S. dollars using the year-end
1998 exchange rate of $0.6535 U.S. dollar to $1.00 Canadian
dollar. The actual 1999 exchange rate may vary materially from
the year-end 1998 rate used. Such variations could have a
material effect on the following Canadian estimates.
Oil Production Devon expects its oil production in 1999 to
total between 8.8 million barrels and 10.3 million barrels.
Domestic production is expected to be between 4.6 million barrels
and 5.4 million barrels, and Canadian production is expected to
be between 4.2 million barrels and 4.9 million barrels.
Oil Prices Devon expects its 1999 net oil prices per barrel
will average between $0.25 to $0.55 above West Texas Intermediate
("WTI") posted prices for its domestic production. Approximately
180,000 barrels of Canadian oil production in the first quarter
have been fixed at a price of approximately $17.80 per barrel.
For the remainder of 1999's Canadian oil production, Devon
expects to receive a price between $1.75 and $2.25 below WTI
posted prices.
The above expected range of the Canadian differentials from
WTI prices, as well as the $17.80 per barrel fixed price for
180,000 barrels of first quarter production, include an estimated
$1.25 per barrel decrease resulting from foreign currency hedges.
These hedges, in which Devon will sell $60 million in 1999 at an
average Canadian-to-U.S. exchange rate of $0.726 and buy the same
amount of dollars at the floating exchange rate, offset a portion
of the exposure to currency fluctuations on those Canadian oil
sales that are based on U.S. prices. The $1.25 per barrel
decrease is based on the assumption that the year-end 1998
Canadian-to-U.S. conversion rate of $0.6535 remains constant
during 1999.
Gas Production Devon expects its 1999 gas production to
total between 122 Bcf and 143 Bcf. It is expected that San Juan
Basin coal seam gas production will be between 19 Bcf and 23 Bcf,
and all other domestic production will be between 41 Bcf and 47
Bcf. Canadian production is expected to be between 62 Bcf and 73
Bcf.
Gas Prices - Fixed Through various fixed price contracts or
hedging instruments, Devon has fixed the price it will receive in
1999 on a portion of its natural gas production. The table below
includes the 1999 volumes and the respective prices that have
been fixed.
<TABLE>
<CAPTION>
Volumes Price Per
Area (MMcf) Mcf
<S> <C> <C>
San Juan Basin 13,100 $1.82
Rocky Mountains 7,600 $1.93
Other U.S. 1,500 $2.05
Total U.S. 22,200 $1.87
Canada 41,600 $1.33
</TABLE>
The above price for the San Juan Basin gas includes
approximately $0.41 per Mcf from the San Juan Basin Transaction.
Also, the above San Juan Basin price is net of approximately
$0.63 per Mcf for transportation costs and quality adjustments.
Gas Prices - Floating For the gas production for which
prices have not been fixed, Devon expects its 1999 San Juan Basin
coal seam average price will be between $0.25 and $0.55 per Mcf
less than Texas Gulf Coast spot averages ("TGC"). This includes
the additional $0.41 per Mcf from the San Juan Basin Transaction
and the $0.63 per Mcf reduction for transportation and quality
adjustments, both referred to in the previous paragraph. Devon's
other domestic production is expected to average $0.05 to $0.20
less than TGC, and the Canadian production is expected to average
$0.80 to $0.95 less than the New York Mercantile Exchange price
("NYMEX").
NGLs Production Devon expects its production of 1999 NGLs
to total between 1.7 million barrels and 2.0 million barrels.
Between 1.3 million barrels and 1.5 million barrels are expected
to be produced domestically, and between 0.4 million barrels and
0.5 million barrels are expected to be produced in Canada.
Other Revenues Devon's other revenues in 1999 are expected
to be between $6.0 million and $7.5 million. Domestic other
revenues are expected to be $2.0 million to $2.5 million and
Canadian other revenues are expected to be $4.0 million to $5.0
million. The majority of these other revenues are expected to be
produced from third party gas processing activities.
Production and Operating Expenses Devon's production and
operating expenses vary in response to several factors. Among
the most significant of these factors are additions or deletions
to Devon's property base, changes in production taxes, general
changes in the prices of services and materials that are used in
the operation of the properties and the amount of repair and
workover activity required.
Oil, gas and NGLs prices will have a direct effect on
production taxes to be incurred in 1999. Future prices could
also have an effect on whether proposed workover projects are
economically feasible. These factors, coupled with the
uncertainty of future oil, gas and NGLs prices, increase the
uncertainty inherent in estimating future production and
operating costs. Given these uncertainties, Devon estimates that
1999's total production and operating costs will be between $116
million and $135 million. The U.S. portion of such estimate is
between $73 million and $84 million, while the Canadian costs are
expected to total between $43 million and $51 million.
Depreciation, Depletion and Amortization The 1999 DD&A rate
will depend on various factors. Most notable among such factors
are the amount of proved reserves that could be added from
drilling or acquisition efforts in 1999 compared to the costs
incurred for such efforts, and the revisions to Devon's year-end
1998 reserve estimates that will be made during 1999.
Devon expects that its consolidated DD&A expense in 1999
will be between $122 million and $151 million. The DD&A rates as
of the beginning of 1999 were $3.92 per Boe for domestic
properties and $3.19 per Boe for Canadian properties. Assuming a
1999 domestic rate of between $4.15 per Boe and $4.40 per Boe,
1999 oil and gas property related DD&A expense is expected to be
between $66 million and $81 million for the U.S. properties.
Assuming a 1999 Canadian rate of between $3.40 per Boe and $3.65
per Boe, 1999 oil and gas property related DD&A expense is
expected to be between $51 million and $64 million for the
Canadian properties.
Additionally, Devon expects its 1999 non-oil and gas
property related DD&A to total between $3.9 million and $4.5
million in the U.S. and between $1.0 million and $1.3 million in
Canada.
General and Administrative Expenses Devon's G&A includes
the costs of many different goods and services used in support of
its business. These goods and services are subject to general
price level increases or decreases. In addition, Devon's G&A
varies with its level of activity and the related staffing needs
as well as with the amount of professional services required
during any given period. Should Devon's needs or the prices of
the required goods and services differ significantly from current
expectations, actual G&A could vary materially from the estimate.
Given these limitations, consolidated G&A in 1999 is expected to
be between $22.5 million and $26.0 million. Domestic G&A is
expected to be between $10.5 million and $12.0 million, and
Canadian G&A is expected to be between $12.0 million and $14.0
million.
Interest Expense Future interest rates and oil, natural gas
and NGLs prices have a significant effect on Devon's interest
expense. The fixed-rate provisions on $225 million of existing
long-term debt removes the uncertainty of future interest rates
from some, but not all, of Devon's long-term debt. Also, Devon
can only marginally influence the prices it will receive in 1999
from sales of oil, gas and NGLs. These factors increase the
margin of error inherent in estimating future interest expense.
Other factors which affect interest expense, such as the amount
and timing of capital expenditures, are within Devon's control.
Given the uncertainty of future interest rates and commodity
prices, Devon estimates that the consolidated interest expense in
1999 will be between $28 million and $32 million. Domestic
interest expense is expected to be between $4 million and $5
million, and Canadian interest expense is expected to be between
$24 million and $27 million.
Deferred Effect of Changes in Foreign Currency Exchange Rate
on Subsidiary's Long-term Debt Assuming that there are no
changes during 1999 in the existing principal balance of
Northstar's $225 million of long-term debt which is denominated
in U.S. dollars, the only factor influencing the potential 1999
deferred effect is the foreign currency rate between the U.S.
dollar and the Canadian dollar. For every $0.01 change in the
exchange rate from the year-end 1998 rate of $0.6535, Northstar
will record a deferred effect (either revenue or expense) of
approximately $5 million Canadian dollars. The resulting revenue
or expense in U.S. dollars from such fluctuations would depend on
the currency rate during the applicable period.
Distributions on TCP Securities The TCP Securities are
convertible into common shares of Devon at the option of the
holder. Beginning in June 1999, Devon can redeem the TCP
Securities for cash at 104.55% of face value if the redemption
occurs in 1999, and thereafter at premiums that decline ratably
to 100% in 2006. If Devon were to offer to redeem the TCP
Securities, the holders could decide instead to convert the TCP
Securities into Devon common stock. Assuming all $149.5 million
of TCP Securities are outstanding for the entire year, Devon will
make $9.7 million of distributions in 1999.
Reduction of Carrying Value of Oil and Gas Properties As of
December 31, 1998, the full cost ceiling exceeded Devon's
carrying value of oil and gas properties, less deferred income
taxes. This full cost "cushion" was approximately $15 million
for the domestic properties and $43 million for the Canadian
properties. However, these cushion amounts could easily be
eliminated by declines in oil and/or gas prices between year-end
1998 and the end of any quarter during 1999. The result would be
a 1999 reduction of the carrying value of oil and gas properties.
Income Taxes Devon expects its consolidated financial
income tax rate in 1999 to be between 35% and 45%. These rates
are the combined current and deferred tax rates. There are
certain items, both in the U.S. and Canada, that will have a
fixed impact on 1999's income tax expense regardless of the level
of pre-tax earnings that are produced. These items include
Section 29 tax credits in the U.S., which reduce income taxes
based on production levels of certain properties and are not
necessarily affected by pre-tax financial earnings. The amount
of Section 29 tax credits expected to be used to offset financial
income tax expense in 1999 is approximately $4 million. Also,
Devon's Canadian subsidiaries are subject to Canada's "large
corporation tax" of approximately $2 million which is based on
total capitalization levels, not pre-tax earnings. The Canadian
financial income tax in 1999 will also be increased by
approximately $1 million due to the financial amortization of
certain costs that are not deductible for income tax purposes.
Significant changes in estimated production levels of oil, gas
and NGLs, the prices of such products, or any of the various
expense items could materially alter the effect of the
aforementioned items on 1999's financial income tax rates.
Based on its current expectations of 1999 taxable income,
Devon anticipates its current portion of 1999 income taxes will
be $3 million to $8 million in the U.S. and $2 million to $3
million in Canada. However, unanticipated revenue and/or expense
fluctuations could easily make these tax estimates inaccurate.
Capital Expenditures Devon's capital expenditures budget is
based on an expected range of future oil, natural gas and NGLs
prices as well as the expected costs of the capital additions.
Should Devon's price expectations for its future production
change significantly, some projects may be accelerated or
deferred and, consequently, may increase or decrease total 1999
capital expenditures. In addition, if the actual costs of the
budgeted items vary significantly from the anticipated amounts,
actual capital expenditures could vary materially from Devon's
estimates.
Though Devon has completed several major property
transactions in recent years, these transactions are opportunity
driven. Thus, Devon does not "budget", nor can it reasonably
predict, the timing or size of such possible acquisitions, if
any.
Given these limitations, Devon expects its 1999 capital
expenditures for drilling and development efforts to total
between $145 million and $175 million. These amounts include
between $75 million and $90 million in the U.S. and between $70
million and $85 million in Canada. Devon expects to spend $20
million to $25 million in the U.S. and $15 million to $20 million
in Canada for drilling and facilities costs related to reserves
classified as proved as of year-end 1998. Devon also plans to
spend another $35 million to $45 million in the U.S. and $40
million to $50 million in Canada on new, higher risk/reward
projects.
In addition to the above expenditures for drilling and
development, Devon expects to participate in the construction of
an extensive gas gathering system and related CO2 removal
facilities, and a gas processing project, all located in the
Powder River Basin of Wyoming. The extent to which outside
parties will participate in the project has not yet been
determined. Depending on the final level of participation of
those parties, Devon expects to spend between $60 million to $80
million as its share of the project in 1999.
Other Cash Uses Devon's management expects the policy of
paying a quarterly dividend to continue. With the current $0.05
per share quarterly dividend rate and 48.4 million shares of
common stock outstanding, 1999 dividends are expected to
approximate $10 million.
Capital Resources and Liquidity The estimated future
drilling and development activities are expected to be funded
primarily through a combination of working capital and operating
cash flow, with the remainder funded with borrowings from Devon's
credit facilities. As of December 31, 1998, Devon had $219.7
million available under its $400 million credit facilities. The
amount of operating cash flow to be generated during 1999 is
uncertain due to the factors affecting revenues and expenses as
previously cited. However, Devon expects its combined capital
resources to be more than adequate to fund its anticipated
capital expenditures for 1999. If significant acquisitions or
other unplanned capital requirements arise during the year, Devon
could utilize its existing credit facilities and/or seek to
establish and utilize other sources of financing.
Impact of Recently Issued Accounting Standards Not Yet
Adopted In June, 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities. It requires the recognition of all
derivatives as either assets or liabilities in the statement of
financial position and measurement of those instruments at fair
value. If certain conditions are met, a derivative may be
specifically designated as a hedge. The accounting for changes
in the fair value of a derivative (that is gains and losses)
depends on the intended use of the derivative and whether it
qualifies as a hedge. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Devon
plans to adopt the provision of SFAS 133 in the first quarter of
the year ending December 31, 2000, and is currently evaluating
the effects of this pronouncement.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The primary objective of the following information is to
provide forward-looking quantitative and qualitative information
about Devon's potential exposure to market risks. The term
"market risk" refers to the risk of loss arising from adverse
changes in oil and gas prices, interest rates and foreign
currency exchange rates. The disclosures are not meant to be
precise indicators of expected future losses, but rather
indicators of reasonably possible losses. This forward-looking
information provides indicators of how Devon views and manages
its ongoing market risk exposures. All of Devon's market risk
sensitive instruments were entered into for purposes other than
trading.
Commodity Price Risk. Devon's major market risk exposure is
in the pricing applicable to its oil and gas production.
Realized pricing is primarily driven by the prevailing worldwide
price for crude oil and spot market prices applicable to its U.S.
and Canadian natural gas production. Pricing for oil and gas
production has been volatile and unpredictable for several years.
Devon periodically enters into financial hedging activities
with respect to a portion of its projected oil and natural gas
production through financial price swaps whereby Devon will
receive a fixed price for its production and pay a variable
market price to the contract counterparty. These financial
hedging activities are intended to support oil and natural gas
prices at targeted levels and to manage Devon's exposure to oil
and gas price fluctuations. Realized gains or losses from the
settlement of these financial hedging instruments are recognized
in oil and gas sales when the associated production occurs. The
gains and losses realized as a result of these hedging activities
are substantially offset in the cash market when the hedged
commodity is delivered. Devon does not hold or issue derivative
instruments for trading purposes.
As of year-end 1998, Devon had financial oil and gas price
hedging instruments in place which represented approximately
180,000 barrels of oil production in the first quarter of 1999,
and approximately 29 Bcf, 12 Bcf, 10 Bcf and 2 Bcf of gas
production in the years 1999, 2000, 2001 and 2002, respectively.
The 1999 hedged oil and gas volumes represent approximately 2%
and 20%, respectively, of expected 1999 total production. See
"Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - 1999 Estimates."
Devon uses a sensitivity analysis technique to evaluate the
hypothetical effect that changes in the market value of oil and
gas may have on the fair value of its commodity hedging
instruments. At December 31, 1998, a 10% increase in the
underlying commodities' prices would have reduced the fair value
of Devon's commodity hedging instruments by $7.3 million.
In addition to the commodity hedging instruments described
above, Devon also manages its exposure to gas price risks by
periodically entering into fixed-price gas contracts. The
majority of these fixed price contracts relate to Devon's
Canadian gas production. For each of the years of 1999 through
2003, Devon's fixed-price gas contracts cover approximately 35
Bcf, 17 Bcf, 12 Bcf, 10 Bcf and 6 Bcf of production,
respectively. Devon also has Canadian gas volumes subject to
fixed-price contracts in the years from 2004 through 2016, but
the yearly volumes are less than 6 Bcf. The amount of 1999's
production covered by fixed-price contracts represents
approximately 25% of expected 1999 total production. See "Item
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - 1999 Estimates."
Interest Rate Risk. At December 31, 1998, Devon had long-
term debt outstanding of $405.3 million. Of this amount, $225
million, or 55%, bears interest at fixed rates averaging 6.8%.
The remaining $180.3 million of debt outstanding at the end of
1998 bears interest at floating rates which averaged 5.9% at the
end of 1998. The terms of the credit facilities in place allow
interest rates to be fixed at Devon's option for periods of
between 30 to 180 days. A 10% increase in short-term interest
rates on the floating-rate debt outstanding at the end of 1998
would equal approximately 59 basis points. Such an increase in
interest rates would increase Devon's 1999 interest expense by
approximately $1 million assuming borrowed amounts remain
outstanding.
The above sensitivity analysis for interest rate risk
excludes accounts receivable, accounts payable and accrued
liabilities because of the short-term maturity of such
instruments.
Foreign Currency Risk. Devon's net assets, net earnings and
cash flows from its Canadian subsidiaries are based on the U.S.
dollar equivalent of such amounts measured in the Canadian
dollar. Assets and liabilities of the Canadian subsidiaries are
translated to U.S. dollars using the applicable exchange rate as
of the end of a reporting period. Revenues, expenses and cash
flow are translated using the average exchange rate during the
reporting period.
Northstar, one of Devon's Canadian subsidiaries, has $225
million of fixed-rate long-term debt that is denominated in U.S.
dollars. Changes in the currency conversion rate of the Canadian
and U.S. dollars between the beginning and end of a reporting
period increase or decrease the expected amount of Canadian
dollars required to repay the notes. The amount of such increase
or decrease is required to be included in determining net
earnings for the period in which the exchange rate changes. The
first principal payments on these notes are not due until 2001.
Until then, the gains or losses caused by the exchange rate
fluctuations have no effect on cash flow. In 1999, a $0.03
decrease in the Canadian-to-U.S. dollar exchange rate would cause
Devon to record a charge of approximately $11 million.
Substantially all of Devon's Canadian oil sales are paid in
Canadian dollars, but at amounts based on the U.S. dollar price
of oil. Therefore, currency fluctuations between the Canadian
and U.S. dollars impact the amount of Canadian dollars received
by Devon's Canadian subsidiaries for their oil production. To
mitigate the effect of volatility in the Canadian-to-U.S. dollar
exchange rate on Canadian oil revenues, Devon has existing
foreign currency exchange rate swaps. Under such swap
agreements, in 1999 Devon will sell $60 million at an average
Canadian-to-U.S. exchange rate of $0.726 and buy the same amount
of dollars at the floating exchange rate. The amount of gains or
losses realized from such swaps are included as increases or
decreases to realized oil sales. At the year-end 1998 exchange
rate, these swaps would result in decreases to 1999's annual oil
sales of approximately $6 million. A further $0.03 decrease in
the Canadian-to-U.S. dollar exchange rate in 1999 would result in
an additional decrease in oil sales of approximately $3 million.
For purposes of the sensitivity analysis described above for
changes in the foreign currency exchange rate, a change in the
rate of $0.03 was used as opposed to a 10% change in the rate.
During the last six years, the Canadian-to-U.S. dollar exchange
rate has fluctuated an average of approximately 4% per year, and
no year's fluctuation was greater than 7%. The $0.03 change used
in the above analysis represents an approximate 4% change in the
year-end 1998 rate.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Consolidated
Financial Statement Schedules
Page
Independent Auditors' Reports 50
Consolidated Financial Statements:
Consolidated Balance Sheets
December 31, 1998, 1997 and 1996 53
Consolidated Statements of Operations
Years Ended December 31, 1998, 1997 and 1996 54
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996 55
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996 56
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996 57
All financial statement schedules are omitted as they are
inapplicable or the required information is immaterial.
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Devon Energy Corporation:
We have audited the accompanying consolidated balance sheets of
Devon Energy Corporation and subsidiaries as of December 31,
1998, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years
then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial
statements of Northstar Energy Corporation, a wholly-owned
subsidiary, which statements reflect total assets constituting
31%, 32% and 37% and total revenues constituting 38%, 37%, and
44% in 1998, 1997 and 1996, respectively, of the related
consolidated totals. The financial statements of Northstar
Energy Corporation were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates
to the amounts included for Northstar Energy Corporation, is
based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other
auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position
of Devon Energy Corporation and subsidiaries as of December 31,
1998, 1997 and 1996, and the results of their operations and
their cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG LLP
Oklahoma City, Oklahoma
January 26, 1999
<PAGE>
Auditors' Report to the Shareholders
We have audited the consolidated balance sheets of Northstar
Energy Corporation (a wholly owned subsidiary of Devon Energy
Corporation) as at December 31, 1998 and 1997 and the related
consolidated statements of operations and comprehensive income
(loss), stockholders' equity and cash flows for the years then
ended (not separately included herein). These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally
accepted auditing standards, which are substantially similar to
generally accepted auditing standards in the United States.
Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as at December 31, 1998 and 1997, and the results of its
operations and the changes in its cash flow for the years then
ended in accordance with generally accepted accounting principles
in the United States.
(SIGNED) DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chartered Accountants
Calgary, Alberta
Canada
January 20, 1999
<PAGE>
Report of Independent Accountants
To the Board of Directors of
Northstar Energy Corporation
We have audited the consolidated balance sheet of Northstar
Energy Corporation and its subsidiaries (the "Company") at
December 31, 1996 and the related consolidated statements of
operations and comprehensive income (loss), stockholders' equity
and cash flows for the year then ended (not separately included
herein). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with Canadian generally
accepted auditing standards. Those standards require that we
plan and perform an audit to obtain reasonable assurance whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation.
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as at December 31, 1996 and the results of its operations
and its cash flow for the year then ended in accordance with
accounting principles generally accepted in the United States.
COOPERS & LYBRAND
Chartered Accountants
Calgary, Alberta, Canada
February 5, 1997
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share Data)
<CAPTION>
December 31,
1998 1997 1996
Assets
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 19,154 42,065 13,417
Accounts receivable (Note 5) 83,858 96,828 63,942
Inventories 2,750 4,012 4,310
Prepaid expenses 2,351 3,142 2,311
Assets held for sale - 43,548 100,836
Property disposition receivable - - 47,091
Deferred income taxes (Note 8) 605 434 1,600
Investments and other assets 1,930 23,228 136
Total current assets 110,648 213,257 233,643
Property and equipment, at cost, based on
the full cost method of accounting for oil
and gas properties (Note 6) 2,610,511 2,320,735 1,488,336
Less accumulated depreciation, depletion and
amortization 1,509,583 1,325,452 568,789
1,100,928 995,283 919,547
Other assets 14,780 40,446 30,100
Total assets $1,226,356 1,248,986 1,183,290
Liabilities and stockholders' equity
Current liabilities:
Accounts payable:
Trade 40,177 46,003 33,796
Revenues and royalties due to others 12,508 13,898 11,492
Income taxes payable - 5,029 5,016
Current portion of long-term debt - 48,979 88,835
Accrued expenses 27,971 22,405 7,668
Total current liabilities 80,656 136,314 146,807
Other liabilities (Notes 3 and 12) 34,747 29,464 18,208
Long-term debt (Note 7) 405,271 305,337 83,000
Deferred income taxes (Note 8) 33,219 31,825 107,003
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trust holding
solely 6.5% convertible junior subordinated
debentures of Devon Energy Corporation (Note 9) 149,500 149,500 149,500
Stockholders' equity (Note 10):
Preferred stock of $1.00 par value.
Authorized 3,000,000 shares;
none issued - - -
Common stock of $.10 par value.
Authorized 400,000,000 shares; issued
48,425,000 in 1998, 48,290,000 in 1997, and
42,878,000 in 1996 4,842 4,829 4,288
Additional paid-in capital 796,992 794,176 556,049
Retained earnings (accumulated deficit) (242,909) (175,346) 131,090
Accumulated other comprehensive loss (35,962) (27,113) (12,655)
Total stockholders' equity 522,963 596,546 678,772
Commitments and contingencies (Notes 12 and 13)
Total liabilities and stockholders' equity $1,226,356 1,248,986 1,183,290
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
<CAPTION>
Year Ended December 31,
1998 1997 1996
Revenues
<S> <C> <C> <C>
Oil sales $143,624 207,725 136,023
Gas sales 209,344 219,459 101,443
Natural gas liquids sales 16,692 24,920 19,299
Other 17,848 47,555 34,570
Total revenues 387,508 499,659 291,335
Costs and expenses
Lease operating expenses 113,484 100,897 58,734
Production taxes 13,916 19,227 10,880
Depreciation, depletion and amortization
(Note 6) 123,844 169,108 70,307
General and administrative expenses 23,554 24,381 15,111
Northstar Combination expenses 13,149 - -
Interest expense (Note 7) 22,632 18,788 12,662
Deferred effect of changes in foreign
currency exchange rate on subsidiary's
long-term debt (Note 7) 16,104 5,860 199
Distributions on preferred securities of
subsidiary trust (Note 9) 9,717 9,717 4,753
Reduction of carrying value of oil and
gas properties (Note 14) 126,900 625,514 -
Total costs and expenses 463,300 973,492 172,646
Earnings (loss) before income tax expense
(benefit) (75,792) (473,833) 118,689
Income tax expense (benefit) (Note 8)
Current 7,687 26,857 7,834
Deferred (23,194) (200,699) 43,252
Total income tax expense (benefit) (15,507) (173,842) 51,086
Net earnings (loss) $(60,285) (299,991) 67,603
Net earnings (loss) per average common
share outstanding (Note 1):
Basic $(1.25) (6.38) 2.06
Diluted $(1.25) (6.38) 1.99
Weighted average common shares
outstanding - basic (Note 1) 48,376 47,040 32,812
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In Thousands)
<CAPTION>
Accumulated
Retained Other
Additional Earnings Compre- Total
Common Paid-In (Accumulated hensive Stockholders'
Stock Capital Deficit) Loss Equity
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 $3,258 334,749 68,482 (11,842) 394,647
Comprehensive earnings:
Net earnings - - 67,603 - 67,603
Other comprehensive loss - foreign
currency translation adjustments - - - (813) (813)
Comprehensive earnings - - - - 66,790
Common stock issued 1,030 221,300 - - 222,330
Dividends - - (4,995) - (4,995)
Balance as of December 31, 1996 4,288 556,049 131,090 (12,655) 678,772
Comprehensive loss:
Net loss - - (299,991) - (299,991)
Other comprehensive loss - foreign
currency translation adjustments - - - (14,458) (14,458)
Comprehensive loss - - - - (314,449)
Common stock issued 1,027 453,441 - - 454,468
Common stock repurchased (486) (216,514) - - (217,000)
Tax benefit related to employee stock
options - 1,200 - - 1,200
Dividends - - (6,445) - (6,445)
Balance as of December 31, 1997 4,829 794,176 (175,346) (27,113) 596,546
Comprehensive loss:
Net loss - - (60,285) - (60,285)
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments - - - (8,130) (8,130)
Minimum pension liability
adjustment - - - (719) (719)
Other comprehensive loss - - - - (8,849)
Comprehensive loss - - - - (69,134)
Common stock issued 13 2,816 - - 2,829
Dividends - - (7,278) - (7,278)
Balance as of December 31, 1998 4,842 796,992 (242,909) (35,962) 522,963
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<CAPTION>
Year Ended December 31,
1998 1997 1996
Cash flows from operating activities
<S> <C> <C> <C>
Net earnings (loss) $ (60,285) (299,991) 67,603
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation, depletion and amortization 123,844 169,108 70,307
Deferred effect of changes in foreign currency
exchange rate on subsidiary's long-term debt 16,104 5,860 199
Reduction of carrying value of oil and gas
properties 126,900 625,514 -
(Gain) loss on sale of assets (164) (29,573) (10,598)
Deferred income taxes (benefit) (23,194) (200,699) 43,252
Other 901 2,964 (3,559)
Changes in assets and liabilities net of effects
of acquisitions of businesses (Note 2):
(Increase) decrease in:
Accounts receivable 10,160 (17,404) (24,507)
Inventories 1,173 198 (404)
Prepaid expenses 449 (930) (2,096)
Other assets 130 (874) (1,033)
Increase (decrease) in:
Accounts payable (3,439) 300 4,110
Income taxes payable (5,126) 269 3,501
Accrued expenses 7,000 132 1,522
Long-term other liabilities (2,882) (1,818) (4,049)
Net cash provided by operating activities 191,571 253,056 144,248
Cash flows from investing activities
Proceeds from sale of property and equipment 62,997 180,296 15,059
Proceeds from sale of investments 42,584 - 16,951
Capital expenditures (375,512) (287,991) (268,677)
Increase in equity investment - (32,428) -
Increase in other assets (2,029) (7,460) (6,784)
Net cash used in investing activities (271,960) (147,583) (243,451)
Cash flows from financing activities
Proceeds from borrowings on revolving lines of
credit 1,292,020 817,785 401,623
Principal payments on revolving lines of credit (1,236,713) (690,627) (449,528)
Issuance of common stock, net of issuance costs 2,829 12,878 3,278
Issuance of preferred securities of subsidiary
trust, net of issuance costs - - 144,665
Repurchase of common stock - (217,000) -
Dividends paid on common stock (7,278) (6,445) (4,995)
Increase in long-term other liabilities (Note 3) 6,760 6,268 1,377
Net cash provided (used) by financing
activities 57,618 (77,141) 96,420
Effect of exchange rate changes on cash (140) 316 62
Net increase (decrease) in cash and cash equivalents (22,911) 28,648 (2,721)
Cash and cash equivalents at beginning of year 42,065 13,417 16,138
Cash and cash equivalents at end of year $ 19,154 42,065 13,417
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
1. Summary of Significant Accounting Policies
Accounting policies used by Devon Energy Corporation and
subsidiaries ("Devon") reflect industry practices and conform to
generally accepted accounting principles. The more significant
of such policies are briefly discussed below.
Basis of Presentation and Principles of Consolidation
Devon is engaged primarily in oil and gas exploration,
development and production, and the acquisition of producing
properties. Such activities domestically are primarily in the
states of New Mexico, Texas, Oklahoma and Wyoming. Devon's
Canadian activities are primarily in the province of Alberta.
Devon's share of the assets, liabilities, revenues and expenses
of affiliated partnerships and the accounts of its wholly-owned
subsidiaries are included in the accompanying consolidated
financial statements. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Information concerning common stock and per share data
assumes the exchange of all Exchangeable Shares issued in
connection with the Northstar Combination described in Note 2.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual amounts could differ from those estimates.
Inventories
Inventories, which consist primarily of injected gas and
tubular goods, parts and supplies, are stated at cost, determined
principally by the average cost method, which is not in excess of
net realizable value.
Property and Equipment
Devon follows the full cost method of accounting for its oil
and gas properties. Accordingly, all costs incidental to the
acquisition, exploration and development of oil and gas
properties, including costs of undeveloped leasehold, dry holes
and leasehold equipment, are capitalized. Net capitalized costs
are limited to the estimated future net revenues, discounted at
10% per annum, from proved oil, natural gas and natural gas
liquids reserves. Such limitations are imposed separately for
Devon's oil and gas properties in the United States and Canada.
Capitalized costs are depleted by an equivalent unit-of-production
method, converting gas to oil at the ratio of one barrel ("Bbl") of
oil to six thousand cubic feet ("Mcf") of natural gas. No gain or
loss is recognized upon disposal of oil and gas properties unless
such disposal significantly alters the relationship between
capitalized costs and proved reserves.
Devon adopted the provisions of SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," on January 1, 1996. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Due to Devon's use of the full cost method
of accounting for its oil and gas properties, SFAS No. 121 does
not apply to Devon's oil and gas property assets which comprise
substantially all of Devon's net property and equipment.
Accordingly, the adoption of SFAS No. 121 did not have an impact
on Devon's financial position or results of operations in 1996.
Depreciation and amortization of other property and
equipment, including leasehold improvements, are provided using
the straight-line method based on estimated useful lives from 3
to 39 years.
Gas Balancing
During the course of normal operations, Devon and other
joint interest owners of natural gas reservoirs will take more or
less than their respective ownership share of the natural gas
volumes produced. These volumetric imbalances are monitored over
the lives of the wells' production capability. If an imbalance
exists at the time the wells' reserves are depleted, cash
settlements are made among the joint interest owners under a
variety of arrangements.
Devon follows the sales method of accounting for gas
imbalances. A liability is recorded only if Devon's excess takes
of natural gas volumes exceed its estimated remaining recoverable
reserves. No receivables are recorded for those wells where
Devon has taken less than its ownership share of gas production.
Hedging Activities
Devon has periodically entered into oil and gas price swaps
and foreign exchange rate swaps to manage its exposure to oil and
gas price volatility. The foreign exchange rate swaps mitgate
the effect of volatility in the Canadian-to-U.S. dollar exchange
rate on Canadian oil revenues that are predominantly based on U.S.
prices. The hedging instruments are usually placed with counter-
parties that Devon believes are minimal credit risks. The oil
and gas reference prices upon which the price hedging instruments
are based reflect various market indices that have a high degree
of historical correlation with actual prices received by Devon.
Devon accounts for its hedging instruments using the
deferral method of accounting. Under this method, realized gains
and losses from Devon's price risk management activities are
recognized in oil and gas revenues when the associated production
occurs and the resulting cash flows are reported as cash flows
from operating activities. Gains and losses on hedging contracts
that are closed before the hedged production occurs are deferred
until the production month originally hedged. In the event of a
loss of correlation between changes in oil and gas reference
prices under a hedging instrument and actual oil and gas prices,
a gain or loss is recognized currently to the extent the hedging
instrument has not offset changes in actual oil and gas prices.
Stock Options
On January 1, 1996, Devon adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," which permits entities to
recognize over the vesting period the fair value of all stock-
based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply provisions of APB No.
25, "Accounting for Stock Issued to Employees," whereby
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise
price. Companies which continue to apply the provisions of APB
No. 25 are required by SFAS No. 123 to disclose pro forma net
earnings and net earnings per share for employee stock option
grants made in 1995 and subsequent years as if the fair-value-
based method defined in SFAS No. 123 had been applied. Devon has
elected to continue to apply the provisions of APB No. 25, and
has provided the pro forma disclosures required by SFAS No. 123
in Note 10.
Major Purchasers
During each of the last three years, Aquila Energy Marketing
Corporation ("Aquila") accounted for more than 10% of Devon's
combined oil, gas and natural gas liquids sales. Aquila
accounted for 19%, 15% and 12% of such sales in 1998, 1997 and
1996, respectively. Also, EOTT Energy Operating Limited
Partnership accounted for 15% of combined oil, gas and natural
gas liquids sales in 1996.
Income Taxes
Devon accounts for income taxes using the asset and
liability method, whereby deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
assets and liabilities and their respective tax bases, as well as
the future tax consequences attributable to the future
utilization of existing tax net operating loss and other types of
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences and carryforwards
are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. U.S.
deferred income taxes have not been provided on Canadian earnings
which are being permanently reinvested.
General and Administrative Expenses
General and administrative expenses are reported net of
amounts allocated to working interest owners of the oil and gas
properties operated by Devon, net of amounts charged to
affiliated partnerships for administrative and overhead costs,
and net of amounts capitalized pursuant to the full cost method
of accounting.
Net Earnings Per Common Share
In February, 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." SFAS No. 128 revised the previous
calculation methods and presentations of earnings per share. The
statement required that all prior-period earnings per share data
be restated. Devon adopted SFAS No. 128 in the fourth quarter of
1997 as permitted by the statement. The effect of adopting SFAS
No. 128 was not material to Devon's prior period earnings per
share data.
Under the provisions of SFAS No. 128, basic earnings per
share is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if Devon's dilutive
outstanding stock options were exercised (calculated using the
treasury stock method) or if Devon's Trust Convertible Preferred
Securities were converted to common stock.
The following table reconciles the net earnings and common
shares outstanding used in the calculations of basic and diluted
net earnings per share for the year 1996. The diluted loss per
share calculations for 1998 and 1997 produce results that are
anti-dilutive. (The diluted calculation for 1998 reduced the net
loss by $6.0 million and increased the common shares outstanding
by 5.5 million shares. The 1997 diluted calculation reduced the
net loss by $6.0 million and increased the common shares
outstanding by 5.6 million shares.) Therefore, the diluted loss
per share amounts for 1998 and 1997 reported in the accompanying
consolidated statements of operations are the same as the basic
loss per share amounts.
<TABLE>
<CAPTION>
Weighted
Average Net
Common Earnings
Net Shares Per
Earnings Outstanding Share
(In Thousands)
Year ended December 31, 1996:
<S> <C> <C> <C>
Basic earnings per share $67,603 32,812 2.06
Dilutive effect of:
Potential common shares issuable upon the conversion
of Trust Convertible Preferred securities (the increase
in net earnings is net of income tax expense of $1,837,000) 2,998 2,384
Potential common shares issuable upon the exercise of
employee stock options - 271
Diluted earnings per share $70,601 35,467 1.99
</TABLE>
Comprehensive Earnings (Loss)
Devon adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," on January 1, 1998.
SFAS No. 130 was effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for
reporting and display of "comprehensive income" and its
components in a set of financial statements. It requires that
all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as
other financial statements. Devon's comprehensive income
information is included in the accompanying consolidated
statements of stockholders' equity. As of December 31, 1998, the
accumulated other comprehensive loss of $36.0 million included in
stockholders' equity consisted of $35.3 million of foreign currency
translation adjustments and $0.7 million of minimum pension liability
adjustments. As of December 31, 1997 and 1996, the balance of
accumulated other comprehensive loss consisted solely of foreign
currency translation adjustments. The $0.7 million of minimum
pension liability adjustments included in 1998's comprehensive
loss was net of a $0.5 million deferred tax benefit. There are
no tax benefits related to the foreign currency translation
adjustments.
Foreign Currency Translation Adjustments
Devon's only operations outside the United States are in
Canada. For purposes of foreign currency translation, the
Canadian dollar is the functional currency for Devon's Canadian
operations. Translation adjustments resulting from translating
the Canadian subsidiaries' foreign currency financial statements
into U.S. dollar equivalents are included in accumulated other
comprehensive loss.
Dividends
Dividends on Devon's common stock were paid in the first
three quarters of 1996 at a per share rate of $0.03 per quarter.
The dividend rate was increased to $0.05 per share for the fourth
quarter of 1996 and all four quarters of 1997 and 1998. As
adjusted for the Northstar Combination's pooling-of-interests
method of accounting, annual dividends per share for 1998, 1997
and 1996 were $0.15, $0.14 and $0.15, respectively.
Statements of Cash Flows
For purposes of the consolidated statements of cash flows,
Devon considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims,
assessments, litigation or other sources are recorded when it is
probable that a liability has been incurred and the amount can be
reasonably estimated.
In October, 1996, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities." SOP 96-1 was adopted by
Devon on January 1, 1997. It requires, among other things, that
environmental remediation liabilities be accrued when the
criteria of SFAS No. 5, "Accounting for Contingencies," have been
met. SOP 96-1 also provides guidance with respect to the
measurement of the remediation liabilities. Such accounting is
consistent with Devon's method of accounting for environmental
remediation costs. Therefore, adoption of SOP 96-1 did not have
a material impact on Devon's financial position or results of
operations.
2. Business Combinations and Pro Forma Information
On June 29, 1998, Devon and Northstar Energy Corporation
("Northstar") announced they had entered into a definitive
combination agreement subject to shareholder approval and certain
other conditions. The combination of the two companies (the
"Northstar Combination") was closed on December 10, 1998. At
that date, Northstar became a wholly-owned subsidiary of Devon.
Pursuant to the Northstar Combination, Northstar's common
shareholders received approximately 16.1 million exchangeable
shares (the "Exchangeable Shares") based on an exchange ratio of
0.235 Exchangeable Shares for each Northstar common share
outstanding. The Exchangeable Shares were issued by Northstar,
but are exchangeable at any time into Devon's common shares on a
one-for-one basis. Prior to such exchange, the Exchangeable
Shares have rights identical to those of Devon's common shares,
including dividend, voting and liquidation rights. Between
December 10, 1998 and December 31, 1998, approximately 6.5
million of the originally issued 16.1 million Exchangeable
Shares had been exchanged for shares of Devon common stock.
The Northstar Combination was accounted for under the
pooling-of-interests method of accounting for business
combinations. All operational and financial information
contained herein includes the combined amounts for Devon and
Northstar for all periods presented.
During the fourth quarter of 1998, Devon recorded a pre-tax
charge of $13.1 million ($9.7 million after tax) for direct costs
related to the Northstar Combination. Approximately $7.9 million
of such accrued unpaid costs remained on the consolidated balance
sheet as of December 31, 1998.
The separate results of operations of Devon and Northstar
for the first nine months of 1998 and the years 1997 and 1996 are
as follows.
<TABLE>
<CAPTION>
Nine Months
Ended September Year Ended December 31,
30, 1998 1997 1996
(Unaudited)
(In Thousands)
Revenues:
<S> <C> <C> <C>
Devon $184,506 313,140 164,017
Northstar 113,576 186,519 127,318
Combined $298,082 499,659 291,335
Net earnings (loss):
Devon (65,329) 75,292 34,801
Northstar 8,532 (375,283) 32,802
Combined $(56,797) (299,991) 67,603
</TABLE>
On December 23, 1998, Devon acquired certain natural gas
properties located in northeastern Alberta, Canada, from Wascana
Oil and Gas Partnership, a subsidiary of Canadian Occidental
Petroleums Ltd. (the "Wascana Properties"). Devon acquired the
properties for approximately $57.5 million, which was funded with
bank debt under Devon's existing credit facilities.
Estimated proved reserves of the Wascana Properties as of
December 31, 1998, were 71.5 billion cubic feet of natural gas.
Approximately $52.2 million of the purchase price was allocated
to the proved reserves. The remaining $5.3 million of the
purchase price was allocated to approximately 190,000 net
undeveloped acres and exclusive rights to associated seismic
data. (The quantities of proved reserves stated in this
paragraph are unaudited.)
In March 1997, Northstar acquired all the outstanding common
shares of Morrison Petroleums Ltd. ("Morrison"), an independent
oil and gas producer also located in Alberta, Canada. Northstar
acquired the Morrison common shares by issuing common shares of
Northstar (the "Morrison Transaction"). The Northstar common
shares received by the Morrison shareholders represented
approximately 53% of the combined company's outstanding shares.
Therefore, this transaction was accounted for as a reverse
acquisition under U.S. generally accepted accounting principles.
Accordingly, Northstar's results through March 31, 1997, which
are combined with Devon's results in the accompanying
consolidated financial statements, represent the historical
results of Morrison, the "accounting acquirer." Because
Northstar was the "legal acquirer," the financial results and
other information for periods through March 31, 1997, are
referred to as "Northstar's" results and information, even
though they represent the historical results of Morrison.
For periods subsequent to March 31, 1997, Northstar's results
that are combined with Devon's results represent the historical
results of Morrison, combined with Northstar's results after
valuing Northstar's March 31, 1997, assets and liabilities at
fair value, rather than historical book value.
The estimated proved reserves added in the Morrison
Transaction were 18.3 million barrels of oil, 213.5 billion cubic
feet of natural gas and 2.9 million barrels of natural gas
liquids. Also added in the Morrison Transaction were
approximately 563,000 net acres of undeveloped leasehold. (The
quantities of proved reserves stated in this paragraph are
unaudited.)
After giving effect to the Northstar Combination exchange
ratio of 0.235, approximately 9.8 million Exchangeable Shares are
deemed to have been issued in the Morrison Transaction with a
total value of approximately $441.6 million. Also, approximately
$111.3 million of liabilities were assumed and $128.5 million of
additional deferred tax liabilities were recorded due to the
tax-free nature of the Morrison Transaction to the Morrison
shareholders. Excluding the $128.5 million of additional deferred
tax liabilities, the total purchase price was allocated $435.2
million to proved oil and gas reserves, $37.3 million to
undeveloped leasehold and $80.4 million to other assets acquired.
Including the $128.5 million of deferred tax liabilities, the
allocation was $527.9 million for proved oil and gas reserves,
$43.5 million for undeveloped leasehold and $110 million for
other assets.
On December 31, 1996, Devon acquired all of Kerr-McGee
Corporation's ("Kerr-McGee") North American onshore oil and gas
exploration and production business and properties (the "KMG-NAOS
Properties"). As consideration, Devon issued 9,954,000 shares of
its common stock to Kerr-McGee. The acquisition was made pursuant
to an October 17, 1996, agreement and plan of merger among Devon,
Kerr-McGee and certain of their subsidiaries.
Devon recorded the KMG-NAOS Properties at approximately
$221.6 million. Such value was based on the value of the shares
of Devon common stock issued as determined pursuant to generally
accepted accounting principles. An additional $30.3 million was
allocated to the KMG-NAOS Properties for the deferred income tax
liability created as a result of the substantially tax-free
nature of the transaction to Kerr-McGee. Excluding the
additional deferred tax liability, the amount recorded for the
KMG-NAOS Properties includes approximately $195.1 million
allocated to proved oil and gas reserves, $29.0 million allocated
to undeveloped leasehold acquired, $0.6 million allocated to
inventories and other assets acquired and $3.1 million allocated
to certain assumed liabilities. Including the additional $30.3
million of deferred tax liability, $220.0 million was allocated
to proved reserves and $34.4 million to undeveloped leasehold.
Estimated proved reserves associated with the KMG-NAOS
Properties as of December 31, 1996, were 47 million barrels of
oil equivalent ("MMBoe") in the United States and 15 MMBoe in
Canada. These reserves were approximately 36% oil and natural
gas liquids and 64% natural gas. Included in the acquired
reserves were certain proved undeveloped reserves, for which
Devon expected to incur approximately $6 million of future
capital costs. The United States assets acquired are located
predominantly in the Rocky Mountain, Permian Basin and Mid-
Continent areas of the country. All of these areas were already
core areas of Devon's operations. (The quantities of proved
reserves and the estimated development costs stated in this
paragraph are unaudited.)
Pro Forma Information (Unaudited)
The acquisition of the Wascana Properties, the Morrison
Transaction and the acquisition of the KMG-NAOS Properties as
described above were accounted for by the purchase method of
accounting for business combinations. Accordingly, the
accompanying 1998, 1997 and 1996 consolidated statements of
operations do not include any revenues or expenses of the Wascana
Properties, the 1997 consolidated statement of operations
includes only nine months of revenues and expenses from the
Morrison Transaction, and the 1996 consolidated statement of
operations does not include any revenues or expenses associated
with the KMG-NAOS Properties or the Morrison Transaction.
Following are Devon's pro forma results for 1998, 1997 and 1996
assuming the acquisition of the Wascana Properties, the Morrison
Transaction and the acquisition of the KMG-NAOS Properties
occurred on January 1, 1996:
<TABLE>
<CAPTION>
1998
Pro Forma
Effect of
Devon Wascana Devon
Historical Properties Pro Forma
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
Total revenues $ 387,508 17,570 405,078
Net earnings (loss) $ (60,285) 2,835 (57,450)
Net loss per share -
basic and diluted $(1.25) (1.19)
<CAPTION>
1997
Pro Forma Effect of
Devon Wascana Morrison Devon
Historical Properties Transaction Pro Forma
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Total revenues $ 499,659 21,695 27,959 549,313
Net earnings (loss) $(299,991) 4,325 793 (294,873)
Net loss per share -
basic and diluted $(6.38) (5.95)
<CAPTION>
1996
Pro Forma Effect of
Devon Wascana Morrison KMG-NAOS Devon
Historical Properties Transaction Properties Pro Forma
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Total revenues $291,335 20,203 113,721 133,167 558,426
Net earnings 67,603 3,053 16,796 34,647 122,099
Net earnings per share:
Basic $2.06 2.33
Diluted $1.99 2.27
</TABLE>
<PAGE>
3. 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"). 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 the
Internal Revenue Code of 1986. Consequently, gas produced from
these properties through the year 2002 qualifies for Section 29
tax credits, which as of year-end 1998 were equal to
approximately $1.06 per million Btu ("MMBtu").
The San Juan Basin Transaction involves approximately 186.2
Bcf, or 93%, of Devon's 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.
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 continues 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 nine 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. For the years ended
December 31, 1998, 1997 and 1996, Devon received $10.4 million,
$11.4 million and $11.5 million, respectively, related to the
credits. Of these amounts, $8.4 million, $8.5 million and $10.3
million were recorded as additional gas sales in 1998, 1997 and
1996, respectively, and $2.0 million, $2.9 million and $1.2
million were recorded as an addition to liabilities in 1998, 1997
and 1996, respectively, as discussed in the following paragraph.
Based on the reserves estimated at December 31, 1998, and an
assumed annual inflation factor of 2%, Devon estimates it will
receive total tax credit payments of approximately $39.9 million
from 1999 through 2002.
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 included in long-
term "other liabilities" on the accompanying balance sheet.
Since Devon expects to exercise its option to repurchase the
properties, the liability is being increased over time to reflect
the expected option purchase price. As the purchase price
increases, a portion of the tax credit payments received by Devon
is added to the liability. As stated above, for the years ended
December 31, 1998, 1997 and 1996, $2.0 million, $2.9 million and
$1.2 million, respectively, of the total amount received for tax
credit payments were added to the liability. On December 31,
1997, Devon exercised its option to reacquire approximately 20%
of the properties for approximately $1.9 million. The other
party to the production payment paid Devon $5.3 million in 1997
and $4.8 million in January 1998 in return for Devon agreeing not
to exercise its option on the remaining 80% of the properties
through June 30, 1998. (This agreement does not limit Devon's
right to exercise its option in 1999 or beyond.) The $5.3
million that Devon received in 1997, net of the $1.9 million paid
for the partial repurchase, and the $4.8 million received in 1998
were added to the repurchase liability. The repurchase liability
totaled $21.0 million at the end of 1998.
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 $21.0 million of other liabilities recorded as of
year-end 1998, does not include any amount related to such
reserves.
4. Supplemental Cash Flow Information
Cash payments for interest in 1998, 1997 and 1996 were
approximately $24.5 million, $16.7 million and $12.4 million,
respectively. Cash payments for federal, state and foreign
income taxes in 1998, 1997 and 1996 were approximately $14.2
million, $26.9 million and $5.3 million, respectively.
The 1997 Morrison Transaction and the 1996 acquisition of
the KMG-NAOS Properties involved non-cash consideration as
presented below:
<TABLE>
<CAPTION>
1997 1996
(In Thousands)
<S> <C> <C>
Value of common stock issued $441,590 221,576
Liabilities assumed 111,345 3,099
Deferred tax liability created 128,497 30,308
Fair value of assets acquired $681,432 254,983
</TABLE>
5. Accounts Receivable
The components of accounts receivable included the
following:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(In Thousands)
Oil, gas and natural gas liquids
<S> <C> <C> <C>
revenue accruals $46,360 52,974 39,096
Joint interest billings 23,636 25,283 19,042
Other 14,262 19,398 6,642
84,258 97,655 64,780
Allowance for doubtful accounts (400) (827) (838)
Net accounts receivable $83,858 96,828 63,942
</TABLE>
6. Property and Equipment
Property and equipment included the following:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(In Thousands)
Oil and gas properties:
<S> <C> <C> <C>
Subject to amortization $ 2,413,376 2,157,104 1,368,208
Not subject to amortization:
Acquired in 1998 46,302 - -
Acquired in 1997 51,961 60,399 -
Acquired in 1996 33,941 36,942 46,879
Acquired in 1995 12,491 14,495 21,689
Acquired in 1994 5,182 7,028 10,638
Acquired in 1993 4,027 4,069 5,293
Acquired in 1992 7,773 7,814 8,245
Accumulated depreciation, depletion
and amortization (1,498,075) (1,316,343) (561,935)
Net oil and gas properties 1,076,978 971,508 899,017
Other property and equipment 35,458 32,884 27,384
Accumulated depreciation and amortization (11,508) (9,109) (6,854)
Net other property and equipment 23,950 23,775 20,530
Property and equipment, net of
accumulated depreciation,
depletion and amortization $ 1,100,928 995,283 919,547
</TABLE>
Depreciation, depletion and amortization expense consisted
of the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(In Thousands)
Depreciation, depletion and amortization
<S> <C> <C> <C>
of oil and gas properties $119,719 164,977 67,832
Depreciation and amortization of other
property and equipment 3,964 3,566 1,989
Amortization of other assets 161 565 486
Total expense $123,844 169,108 70,307
</TABLE>
7. Long-term Debt and Related Expenses
A summary of Devon's long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Notes payable to banks $180,271 219,316 96,835
6.76% senior notes due July 19, 2005 75,000 75,000 75,000
6.79% senior notes due March 2, 2009 150,000 - -
7.03% senior notes due November 7, 2005 - 60,000 -
405,271 354,316 171,835
Less amount classified as current - 48,979 88,835
Net long-term debt $405,271 305,337 83,000
</TABLE>
Maturities of long-term debt as of December 31, 1998, are as
follows (in thousands):
<TABLE>
<C> <S>
1999 $ -
2000 7,264
2001 22,264
2002 22,264
2003 57,264
2004 and thereafter 296,215
Total $405,271
</TABLE>
On December 11, 1998, Devon entered into new unsecured long-
term credit facilities aggregating $400 million (the "Credit
Facilities"). The Credit Facilities include a U.S. facility of
$205 million (the "U.S. Facility") and a Canadian facility of
$195 million (the "Canadian Facility"). The Credit Facilities
replaced Devon's and Northstar's separate credit facilities that
were in place prior to the Northstar Combination. Of the $180.3
million borrowed against the Credit Facilities at December 31,
1998, $35 million was borrowed under the U.S. Facility and $145.3
million was borrowed under the Canadian Facility. Amounts
borrowed under the Credit Facilities bear interest at various
fixed rate options that Devon may elect for periods up to six
months. Such rates are generally less than the prime rate.
Devon may also elect to borrow at the prime rate. The average
interest rate on the $180.3 million of debt outstanding
at December 31, 1998, was 5.9%. The Credit Facilities also
provide for an annual facility fee of $0.4 million that is
payable quarterly. The average interest rate on bank debt
outstanding under the previous facilities at December 31, 1997
and 1996 was 4.8% and 3.8%, respectively.
The $205 million U.S. Facility consists of a Tranche A
facility of $130 million and a Tranche B facility of $75 million.
The Tranche A facility matures on December 10, 2003. Devon may
borrow funds under the Tranche B facility until December 10, 1999
(the "Tranche B Revolving Period"). Devon may request that the
Tranche B Revolving Period be extended an additional 364 days by
notifying the agent bank of such request not more than 60 days
prior to the end of the Tranche B Revolving Period. Debt
borrowed under the Tranche B facility matures two years following
the end of the Tranche B Revolving Period. All $35 million of
debt outstanding under the U.S. Facility at December 31, 1998,
was borrowed under the Tranche A facility.
Devon may borrow funds under the $195 million Canadian
Facility until December 10, 1999 (the "Canadian Facility
Revolving Period"). Devon may request that the Canadian Facility
Revolving Period be extended an additional 364 days by notifying
the agent bank of such request not more than 90 days prior to the
end of the Canadian Facility Revolving Period. Debt outstanding
as of the end of the Canadian Facility Revolving Period is
payable in semi-annual installments of 2.5% each for the
following four years, with the remaining balance due five years
and one day following the end of the Canadian Facility Revolving
Period. The yearly maturity schedule shown earlier in this note
assumes that the Canadian Facility Revolving Period is not
extended past December 10, 1999.
Northstar issued the 6.76% notes in a private placement in
1995. The notes are unsecured and are payable in five annual
installments of $15 million each beginning in 2001.
Northstar issued the 6.79% notes in a private placement in
1998. The notes are unsecured and are payable in three annual
installments of $50 million each beginning in 2007. Proceeds from
these notes were partially used to retire the $60 million of
7.03% notes referred to in the preceding table of long-term debt.
The agreements governing the Credit Facilities and the
senior notes contain certain covenants and restrictions,
including maintenance of certain debt-to-capitalization and debt-
to-EBITDA ratios and restrictions on additional borrowings. At
December 31, 1998, Devon and Northstar were in compliance with
such covenants and restrictions.
See Note 9 for a description of certain convertible
debentures issued in 1996 to a Devon affiliate.
Interest Expense
Following are the components of interest expense for the
years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Interest based on debt outstanding $21,814 14,345 11,234
Facility and agency fees 632 598 681
Amortization of capitalized loan costs 156 118 42
Penalty on early retirement of debt - 3,323 -
Hedging gains (188) (410) (205)
Other 218 814 910
Total interest expense $22,632 18,788 12,662
</TABLE>
The above amounts classified as "other" in 1997 and 1996
were primarily related to adjustments of certain oil and gas
property acquisitions.
Deferred Effect of Changes in Foreign Currency Exchange Rate on
Long-term Debt
The fixed rate senior notes referred to in the first table of
this note are debt payable by Northstar. However, the notes are
denominated in U.S. dollars. Changes in the exchange rate between
the U.S. dollar and the Canadian dollar from the dates the notes
were issued to the dates of repayment will increase or decrease
the expected amount of Canadian dollars eventually required to
repay the notes. Such changes in the Canadian dollar equivalent
of the debt are required to be included in determining net
earnings for the period in which the exchange rate changes. The
rate of conversion of Canadian dollars to U.S. dollars declined in
each of the years 1998, 1997 and 1996. Therefore, $16.1 million,
$5.9 million and $0.2 million, respectively, were charged to
expense in each of these years.
8. Income Taxes
At December 31, 1998, Devon had the following carryforwards
available to reduce future income taxes:
<TABLE>
<CAPTION>
Years of Carryforward
Types of Carryforward Expiration Amounts
(In Thousands)
<S> <C> <C>
Net operating loss - U.S. federal 2007 - 2008 $ 5,501
Net operating loss - various states 1999 - 2011 $12,948
Net operating loss - Canada 2000 - 2005 $53,170
</TABLE>
All of the carryforward amounts shown above have been
utilized for financial purposes to reduce deferred taxes.
The earnings (loss) before income taxes and the components of
income tax expense (benefit) for the years 1998, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(In Thousands)
Earnings (loss) before income taxes:
<S> <C> <C> <C>
U.S. $(95,184) 106,665 59,299
Canada 19,392 (580,498) 59,390
Total $(75,792) (473,833) 118,689
Current income tax expense:
U.S. federal 4,801 18,659 6,147
Various states 911 2,521 562
Canada 1,975 5,677 1,125
Total current tax expense 7,687 26,857 7,834
Deferred income tax expense (benefit):
U.S. federal (29,524) 17,025 14,185
Various states (4,836) 1,578 3,604
Canada 11,166 (219,302) 25,463
Total deferred tax expense (benefit) (23,194) (200,699) 43,252
Total income tax expense (benefit) $(15,507) (173,842) 51,086
</TABLE>
Total income tax expense differed from the amounts computed
by applying the U.S. federal income tax rate to earnings (loss)
before income taxes as a result of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
U.S. statutory tax (benefit) rate (35)% (35)% 35%
Non-deductible expenses 15 - -
Nonconventional fuel source credits (4) - -
State income taxes (3) - 2
Taxation on foreign operations 8 (2) 5
Effect of San Juan Basin Transaction (1) - 1
Effective income tax (benefit) rate (20)% (37)% 43%
</TABLE>
The tax effects of temporary differences that gave rise to
significant portions of the deferred tax assets and liabilities
at December 31, 1998, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(In Thousands)
Deferred tax assets:
<S> <C> <C> <C>
Net operating loss carryforwards $ 21,818 21,076 11,581
Statutory depletion carryforwards - - 412
Investment tax credit carryforwards - 19 42
Minimum tax credit carryforwards - - 5,624
Production payments 19,105 18,504 19,685
Other 3,188 7,154 3,323
Total gross deferred tax assets 44,111 46,753 40,667
Less valuation allowance 100 100 100
Net deferred tax assets 44,011 46,653 40,567
Deferred tax liabilities:
Property and equipment, principally due
to differences in depreciation, and
the expensing of intangible drilling
costs for tax purposes (76,156) (76,523) (145,970)
Other (469) (1,521) -
Total deferred tax liabilities (76,625) (78,044) (145,970)
Net deferred tax liability $(32,614) (31,391) (105,403)
</TABLE>
As shown in the above schedule, Devon has recognized $44.0
million of net deferred tax assets as of December 31, 1998. Such
amount consists primarily of $21.8 million of various
carryforwards available to offset future income taxes, and $19.1
million of net tax basis in production payments. The
carryforwards include federal net operating loss carryforwards,
the majority of which do not begin to expire until 2008, state
net operating loss carryforwards which expire primarily between
1999 and 2011 and Canadian carryforwards which expire primarily
between 2000 and 2005. The tax benefits of carryforwards are
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", a valuation
allowance is provided to reduce the recorded tax benefits from
such assets.
Devon expects the tax benefits from the net operating loss
carryforwards to be utilized between 1999 and 2002. Such
expectation is based upon current estimates of taxable income
during this period, considering limitations on the annual
utilization of these benefits as set forth by federal tax
regulations. Significant changes in such estimates caused by
variables such as future oil and gas prices or capital
expenditures could alter the timing of the eventual utilization
of such carryforwards. There can be no assurance that Devon will
generate any specific level of continuing taxable earnings.
However, management believes that Devon's future taxable income
will more likely than not be sufficient to utilize substantially
all its tax carryforwards prior to their expiration. A $0.1
million valuation allowance has been recorded at December 31,
1998, related to depletion carryforwards acquired in a 1994
merger.
The $19.1 million of deferred tax assets related to
production payments is offset by a portion of the deferred tax
liability related to the excess financial basis of property and
equipment. The income tax accounting for the San Juan Basin
Transaction described in Note 3 differs from the financial
accounting treatment which is described in such note. For income
tax purposes, a gain from the conveyance of the properties was
realized, and the present value of the production payments to be
received was recorded as a note receivable. For presentation
purposes, the $19.1 million represents the tax effect of the
difference in accounting for the production payment, less the
effect of the taxable gain from the transaction which is being
deferred and recognized on the installment basis for income tax
purposes.
9. Trust Convertible Preferred Securities
On July 10, 1996, Devon, through its newly-formed affiliate
Devon Financing Trust, completed the issuance of $149.5 million
of 6.5% trust convertible preferred securities (the "TCP
Securities") in a private placement. Devon Financing Trust
issued 2,990,000 shares of the TCP Securities at $50 per share.
Each TCP Security is convertible at the holder's option into
1.6393 shares of Devon common stock, which equates to a
conversion price of $30.50 per share of Devon common stock.
Devon Financing Trust invested the $149.5 million of
proceeds in 6.5% convertible junior subordinated debentures
issued by Devon (the "Convertible Debentures"). In turn, Devon
used the net proceeds from the issuance of the Convertible
Debentures to retire debt outstanding under its credit lines.
The sole assets of Devon Financing Trust are the Convertible
Debentures. The Convertible Debentures and the related TCP
Securities mature on June 15, 2026. However, Devon and Devon
Financing Trust may redeem the Convertible Debentures and the TCP
Securities, respectively, in whole or in part, on or after June
18, 1999. For the first twelve months thereafter, redemptions
may be made at 104.55% of the principal amount. This premium
declines proportionally every twelve months until June 15, 2006,
when the redemption price becomes fixed at 100% of the principal
amount. If Devon redeems any Convertible Debentures prior to the
scheduled maturity date, Devon Financing Trust must redeem TCP
Securities having an aggregate liquidation amount equal to the
aggregate principal amount of Convertible Debentures so redeemed.
Devon has guaranteed the payments of distributions and other
payments on the TCP Securities only if and to the extent that
Devon Financing Trust has funds available therefor. Such
guarantee, when taken together with Devon's obligations under the
Convertible Debentures and related indenture and declaration of
trust, provide a full and unconditional guarantee of amounts due
on the TCP Securities.
Devon owns all the common securities of Devon Financing
Trust. As such, the accounts of Devon Financing Trust are
included in Devon's consolidated financial statements after
appropriate eliminations of intercompany balances and
transactions. The distributions on the TCP Securities are
recorded as a charge to pre-tax earnings on Devon's consolidated
statements of operations, and such distributions are deductible
by Devon for income tax purposes.
10. Stockholders' Equity
The authorized capital stock of Devon consists of 400
million shares of common stock, par value $.10 per share (the
"Common Stock"), and three million shares of preferred stock, par
value $1.00 per share (the "Preferred Stock"). The Preferred
Stock may be issued in one or more series, and the terms and
rights of such stock will be determined by the Board of
Directors.
As discussed in Note 2, there were 16.1 million Exchangeable
Shares issued on December 10, 1998, in connection with the
Northstar Combination. As of year-end 1998, 6.5 million of the
Exchangeable shares had been exchanged for shares of Devon's
common stock. The Exchangeable Shares have rights identical to
those of Devon's common stock and are exchangeable at any time
into Devon's common stock on a one-for-one basis.
Devon's Board of Directors has designated 150,000 shares of
the Preferred Stock as Series A Junior Participating Preferred
Stock (the "Series A Preferred Stock") in connection with the
adoption of the share rights plan described later in this note.
At December 31, 1998, there were no shares of Series A Preferred
Stock issued or outstanding. The Series A Preferred Stock is
entitled to receive cumulative quarterly dividends per share
equal to the greater of $10 or 100 times the aggregate per share
amount of all dividends (other than stock dividends) declared on
Common Stock since the immediately preceding quarterly dividend
payment date or, with respect to the first payment date, since
the first issuance of Series A Preferred Stock. Holders of the
Series A Preferred Stock are entitled to 100 votes per share
(subject to adjustment to prevent dilution) on all matters
submitted to a vote of the stockholders. The Series A Preferred
Stock is neither redeemable nor convertible. The Series A
Preferred Stock ranks prior to the Common Stock but junior to all
other classes of Preferred Stock.
Stock Option Plans
Devon has outstanding stock options issued to key management
and professional employees under three stock option plans adopted
in 1988, 1993 and 1997 ("the 1988 Plan", "the 1993 Plan" and "the
1997 Plan"). Options granted under the 1988 Plan and 1993 Plan
remain exercisable by the employees owning such options, but no
new options will be granted under these plans. At December 31,
1998, 12 participants held the 251,100 options outstanding under
the 1988 Plan, and 23 participants held the 805,300 options
outstanding under the 1993 Plan.
On May 21, 1997, Devon's stockholders adopted the 1997 Plan
and reserved two million shares of Common Stock for issuance
thereunder. On December 9, 1998, Devon's stockholders voted to
increase the reserved shares to three million. Approximately 150
employees and nine members of the board of directors were
eligible to participate in the 1997 Plan at year-end 1998.
The exercise price of stock options granted under the 1997
Plan may not be less than the estimated fair market value of the
stock at the date of grant, plus 10% if the grantee owns or
controls more than 10% of the total voting stock of Devon prior
to the grant. Options granted are exercisable during a period
established for each grant, which period may not exceed 10 years
from the date of grant. Under the 1997 Plan, the grantee must
pay the exercise price in cash or in Common Stock, or a combination
thereof, at the time that the option is exercised. The 1997 Plan
is administered by a committee comprised of non-management members
of the Board of Directors. The 1997 Plan expires on April 25, 2007.
As of December 31, 1998, approximately 150 participants held the
1,126,450 options outstanding under the 1997 Plan. There were
1,873,550 options available for future grants as of December 31,
1998.
In addition to the stock options outstanding under the 1988
Plan, 1993 Plan and 1997 Plan, there were 1,272,842 stock options
outstanding at the end of 1998 that were assumed as part of the
Northstar Combination. Northstar had granted these options prior
to the Northstar Combination. As part of the Northstar
Combination, the options were assumed by Devon and converted to
Devon options at the exchange rate of 0.235 Devon options for
each Northstar option. The 1,272,842 options were held by 134
employees.
A summary of the status of Devon's stock option plans as of
December 31, 1996, 1997 and 1998, and changes during each of the
years then ended, is presented below. The following table
includes the Northstar options converted to the equivalent number
of Devon options.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Weighted
Average Average
Number Exercise Number Exercise
Outstanding Price Exercisable Price
<S> <C> <C> <C> <C>
Balance at December 31, 1995 1,740,798 $25.253 933,936 $22.727
Options granted 518,691 $33.411
Options exercised (142,886) $17.889
Options forfeited (90,820) $36.640
Balance at December 31, 1996 2,025,783 $27.305 1,112,049 $24.556
Options assumed in the
Morrison Transaction 732,041 $36.260
Options granted 691,767 $32.515
Options exercised (486,918) $26.444
Options forfeited (332,183) $37.540
Balance at December 31, 1997 2,630,490 $29.276 1,415,909 $26.483
Options granted 1,260,397 $31.230
Options exercised (134,295) $21.087
Options forfeited (300,900) $32.730
Balance at December 31, 1998 3,455,692 $28.995 2,635,727 $28.793
</TABLE>
The weighted average fair values of options granted during
1998, 1997 and 1996 were $10.72, $10.12 and $11.88, respectively.
The fair value of each option grant was estimated for disclosure
purposes on the date of grant using the Black-Scholes Option
Pricing Model with the following assumptions for 1998, 1997 and
1996, respectively: risk-free interest rates of 4.9%, 6.0% and
6.5%; dividend yields of 0.5%, 0.1% and 0.3%; expected lives of
4, 4 and 5 years; and volatility of the price of the underlying
common stock of 33.9%, 30.7% and 36.8%.
The following table summarizes information about Devon's stock
options which were outstanding, and those which were exercisable,
as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$8.375-$25.440 1,192,391 3.9 years $22.408 1,173,591 $22.382
$25.698-$29.850 960,724 8.3 years $28.905 355,074 $28.529
$30.996-$33.606 520,863 5.3 years $32.094 325,348 $32.275
$35.286-$42.896 781,714 4.6 years $37.087 781,714 $37.087
3,455,692 5.5 years $28.995 2,635,727 $28.793
</TABLE>
Had Devon elected the fair value provisions of SFAS No. 123
and recognized compensation expense over the vesting period based
on the fair value of the stock options granted as of their grant
date, Devon's 1998, 1997 and 1996 pro forma net earnings (loss)
and pro forma net earnings (loss) per share would have differed
from the amounts actually reported as shown in the following
table. The pro forma amounts shown below do not include the
effects of stock options granted prior to January 1, 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(In Thousands, Except Per Share Amounts)
Net earnings (loss):
<S> <C> <C> <C>
As reported $(60,285) (299,991) 67,603
Pro forma $(72,770) (306,992) 62,619
Net earnings (loss) per share:
As reported:
Basic $(1.25) (6.38) 2.06
Diluted $(1.25) (6.38) 1.99
Pro forma:
Basic $(1.50) (6.52) 1.91
Diluted $(1.50) (6.52) 1.85
</TABLE>
Share Rights Plan
Under Devon's share rights plan, stockholders have one right
for each share of Common Stock held. The rights become
exercisable and separately transferable ten business days after
a) an announcement that a person has acquired, or obtained the
right to acquire, 15% or more of the voting shares outstanding,
or b) commencement of a tender or exchange offer that could
result in a person owning 15% or more of the voting shares
outstanding.
Each right entitles its holder (except a holder who is the
acquiring person) to purchase either a) 1/100 of a share of
Series A Preferred Stock for $75.00, subject to adjustment or b)
Devon Common Stock with a value equal to twice the exercise price
of the right, subject to adjustment to prevent dilution. In the
event of certain merger or asset sale transactions with another
party or transactions which would increase the equity ownership
of a shareholder who then owned 15% or more of Devon, each Devon
right will entitle its holder to purchase securities of the
merging or acquiring party with a value equal to twice the
exercise price of the right.
The rights, which have no voting power, expire on April 16,
2005. The rights may be redeemed by Devon for $.01 per right
until the rights become exercisable.
11. Financial Instruments
The following table presents the carrying amounts and
estimated fair values of Devon's financial instruments at
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investments $ 1,930 1,930 2,409 5,125 3,972 5,150
Oil and gas price hedge agreements $ - 1,988 - 3,569 - (4,453)
Foreign exchange hedge agreements $ - (9,310) - (5,038) - 1,825
Long-term debt (including current portion) $(405,271) (421,675) (354,316) (360,294) (171,835) (170,615)
TCP Securities $(149,500) (171,400) (149,500) (218,800) (149,500) (196,600)
</TABLE>
The following methods and assumptions were used to estimate
the fair values of the financial instruments in the above table.
None of Devon's financial instruments are held for trading
purposes. The carrying values of cash and cash equivalents,
accounts receivable and accounts payable (including income taxes
payable and accrued expenses) included in the accompanying
consolidated balance sheets approximated market value at December
31, 1998, 1997 and 1996.
Investments - The fair values of investments are primarily
based on quoted market prices.
Oil and Gas Price Hedge Agreements - The fair values of the
oil and gas price hedges are based on either (a) quotes obtained
from the counterparty to the hedge agreement or (b) quotes
provided by brokers.
Foreign Exchange Hedge Agreements - The fair values of the
foreign exchange agreements are based on quotes obtained from
brokers.
Long-term Debt - The fair values of the fixed-rate long-term
debt have been estimated by discounting the principal and
interest payments at rates available for debt of similar terms
and maturity. The fair values of the floating-rate long-term
debt are estimated to approximate the carrying amounts due to the
fact that the interest rates paid on such debt are generally set
for periods of three months or less.
TCP Securities - The fair values of the TCP Securities are
based on quoted market prices provided by brokers.
As of December 31, 1998, Devon had one open oil price
hedging instrument covering 2,000 barrels per day of Canadian
production for the first three months of 1999. The price to be
received for this production is $20.01 per barrel, while Devon
will pay the counterparty the floating NYMEX price.
In additional to the open oil hedge described in the above
paragraph, Devon also had open foreign currency hedging
instruments at the end of 1998. These hedging instruments offset
a portion of the exposure to currency fluctuations on Devon's
Canadian oil sales that are based on U.S. prices. Gains and
losses recognized on these foreign currency hedging instruments
are included as increases or decreases to realized oil sales. As
of December 31, 1998, Devon had open foreign currency hedging
instruments in which it will sell $60 million in 1999 and $30
million in 2000 at average Canadian-to-U.S. dollar exchange rates
of $0.726 and $0.727, respectively. A portion of these hedging
instruments can be extended an additional year at the option of
the counterparty. If such options are exercised, Devon will sell
an aditional $10 million in each of the years 2000 and 2001 at
average Canadian-to-U.S. dollar exchange rates of $0.713 and
$0.710, respectively. Under these agreements, Devon will buy the
same amount of dollars in each year at the floating exchange
rate.
The following table covers Devon's notional volumes and
pricing on open natural gas hedging instruments as of December
31, 1998:
<TABLE>
<CAPTION>
Year of Production
1999 2000 2001 2002
<S> <C> <C> <C> <C>
Volumes (billion British thermal units) 27,400 12,336 9,650 1,580
Average price to be received $1.79 1.77 1.89 1.80
</TABLE>
The floating reference prices which Devon will pay the
counterparties to the above gas price hedging instruments include
several index prices based upon the area of the gas production
that is hedged. For the hedged Canadian gas production, these
reference prices are primarily based on index prices published by
the Alberta Energy Company ("AECO"). For the hedged U.S.
production, the reference prices are primarily based on index
prices published by "Inside FERC" for the Rocky Mountains, San
Juan Basin and Permian Basin.
Devon's 1998, 1997 and 1996 consolidated balance sheets
include deferred revenues of $1.0 million, $3.8 million and $6.0
million, respectively, for gains realized on the early
termination of commodity and foreign currency hedging instruments
in prior years. These deferred gains as of the end of 1998 will
be recognized as oil and gas sales over periods ranging from ten
months to two years as the hedged oil and gas production occurs.
12. Retirement Plans
Devon has a defined benefit retirement plan (the "Basic
Plan") which is non-contributory and includes U.S. employees
meeting certain age and service requirements. The benefits are
based on the employee's years of service and compensation.
Devon's funding policy is to contribute annually the maximum
amount that can be deducted for federal income tax purposes.
Rights to amend or terminate the Basic Plan are retained by
Devon.
Devon also has separate defined benefit retirement plans
(the "Supplementary Plans") which are non-contributory and
include only certain employees whose benefits under the Basic
Plan are limited by income tax regulations. The Supplementary
Plans' benefits are based on the employee's years of service and
compensation. Devon's funding policy for the Supplementary Plans
is to fund the benefits as they become payable. Rights to amend
or terminate the Supplementary Plans are retained by Devon.
The following table sets forth the aggregate funded status
of Devon's Basic Plan and Supplementary Plans and related amounts
recognized in Devon's balance sheets:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(In Thousands)
Change in benefit obligation:
<S> <C> <C> <C>
Benefit obligation at beginning of year $11,659 8,029 7,027
Service cost 985 706 557
Interest cost 935 747 569
Amendments 293 - -
Actuarial gain 1,773 1,463 (6)
Benefits paid (504) (349) (118)
Establishment of new plan - 1,063 -
Benefit obligation at end of year 15,141 11,659 8,029
Change in plan assets:
Fair value of plan assets at beginning of year 6,036 5,022 4,227
Actual return on plan assets (87) 366 453
Employer contributions 886 997 460
Benefits paid (504) (349) (118)
Fair value of plan assets at end of year 6,331 6,036 5,022
Benefit obligation in excess of plan assets (8,810) (5,623) (3,007)
Unrecognized net actuarial loss 4,730 2,448 965
Unrecognized prior service cost 1,822 1,973 1,104
Net amount recognized $(2,258) (1,202) (938)
<CAPTION>
December 31,
1998 1997 1996
(In Thousands)
The net amounts recognized in the consolidated
balance sheets consist of:
Accrued benefit cost (2,258) (1,202) (938)
Additional minimum liability (2,987) (2,557) (1,013)
Intangible asset 1,808 2,557 1,013
Accumulated other comprehensive loss 1,179 - -
Net amount recognized $(2,258) (1,202) (938)
</TABLE>
Net pension expense for Devon's defined benefit plans included
the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Service cost $ 985 706 557
Interest cost 935 747 569
Expected return on plan assets (532) (445) (382)
Amortization of prior service cost 256 194 96
Recognized net actuarial loss 111 59 64
Net periodic pension expense $1,755 1,261 904
</TABLE>
The weighted average discount rate used in determining the
actuarial present value of the projected benefit obligation in
1998, 1997 and 1996 was 6.5%, 7.0% and 7.5%, respectively. The
rate of increase in future compensation levels was 5% for all
three years. The expected long-term rate of return on assets was
8.5% for all three years.
Devon has a 401(k) Incentive Savings Plan which covers all
domestic employees. At its discretion, Devon may match a certain
percentage of the employees' contributions to the plan. The
matching percentage is determined annually by the Board of
Directors. Devon's matching contributions to the plan were $1.0
million, $0.5 million and $0.2 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
Devon has defined contribution plans for its Canadian
employees. Devon contributes between 6% and 10% of the
employee's base compensation, depending upon the employee's
classification. Such contributions are subject to maximum
amounts allowed under the Income Tax Act (Canada).
Devon also has a savings plan for its Canadian employees.
Under the savings plan, Devon contributes an amount equal to 2%
of the base salary of each employee. The employees may elect to
contribute up to 4% of their salary. If such employee
contributions are made, they are matched by additional Devon
contributions.
During the years 1998, 1997 and 1996, Devon's combined
contributions to the Canadian defined contribution plan and the
Canadian savings plan were $1.8 million, $1.2 million and $0.4
million, respectively.
13. Commitments and Contingencies
Devon is party to various legal actions arising in the
normal course of business. Matters that are probable of
unfavorable outcome to Devon and which can be reasonably
estimated are accrued. Such accruals are based on information
known about the matters, Devon's estimates of the outcomes of
such matters and its experience in contesting, litigating and
settling similar matters. None of the actions are believed by
management to involve future amounts that would be material after
consideration of recorded accruals.
The State of New Mexico on December 29, 1995, assessed Devon
and other producers of gas from the San Juan Basin a "natural gas
processors tax." Devon's tax assessment for the years 1990
through 1995 was approximately $0.6 million, and the state also
assessed another $0.3 million of penalties and interest. All of
the assessment relates to nonconventional gas. Devon paid these
assessments in January 1996, as well as an additional $0.2
million each year for 1998, 1997 and 1996 taxes which were paid
monthly throughout such years, so that it could begin the
necessary procedures of applying for a refund. This tax
historically was paid by the owners of natural gas processing
plants, not the gas producers, and was assessed for the privilege
of processing natural gas. While Devon's nonconventional gas is
purified through a plant prior to the actual sales point, such
purification is only for the purpose of removing CO2. Also,
Devon does not own an interest in such plant. For these and
other reasons, Devon does not believe the assessment of the
additional tax and the related penalties and interest is valid.
The State of New Mexico in 1997 denied Devon's initial refund
application made through the normal administrative processes.
Subsequently, in late 1997, Devon filed a suit asking that the
assessments be reversed. At this time, it is not possible to
determine the eventual outcome of this matter. Devon has not
expensed in its financial statements the taxes, penalties and
interest paid, but rather has recorded the $1.5 million total as
a receivable.
The following is a schedule by year of future minimum rental
payments required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of
December 31, 1998:
<TABLE>
<CAPTION>
Year ending December 31, (In Thousands)
<S> <C>
1999 $2,744
2000 2,631
2001 1,266
2002 505
2003 230
Thereafter 102
Total minimum lease payments required $ 7,478
</TABLE>
Total rental expense for all operating leases is as follows
for the years ended December 31:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
1998 $3,119
1997 $2,619
1996 $1,735
</TABLE>
14. Reduction of Carrying Value of Oil and Gas Properties
Under the full cost method of accounting, the net book value
of oil and gas properties, less related deferred income taxes,
may not exceed a calculated "ceiling." The ceiling limitation is
the discounted estimated after-tax future net revenues from
proved oil and gas properties. The ceiling is imposed separately
by country. In calculating future net revenues, current prices
and costs are generally held constant indefinitely. The net book
value, less deferred tax liabilities, is compared to the ceiling
on a quarterly and annual basis. Any excess of the net book
value, less deferred taxes, is written off as an expense. An
expense recorded in one period may not be reversed in a
subsequent period even though higher oil and gas prices may have
increased the ceiling applicable to the subsequent period.
As of September 30, 1998, the carrying value of Devon's
domestic properties, less deferred income taxes, exceeded the
full cost ceiling by $88 million. Accordingly, a $126.9 million
pre-tax reduction of the carrying value of such properties was
recorded in the third quarter of 1998. This reduction was
partially offset by a related $38.9 million deferred income tax
benefit, resulting in an after-tax charge of $88 million.
As of December 31, 1997, the carrying value of Northstar's
Canadian oil and gas properties, less deferred income taxes,
exceeded the full cost ceiling by $397.9 million. Accordingly, a
$625.5 million pre-tax reduction of the carrying value of such
properties was recorded in the fourth quarter of 1997. This
reduction was partially offset by a related $227.6 million
deferred income tax benefit, resulting in an after-tax charge of
$397.9 million.
15. Oil and Gas Operations
Costs Incurred
The following tables reflect the costs incurred in oil and
gas property acquisition, exploration, and development
activities:
<TABLE>
<CAPTION>
Total
Year Ended December 31,
1998 1997 1996
(In Thousands)
Property acquisition costs:
<S> <C> <C> <C>
Proved, excluding deferred income taxes $135,167 510,331 201,276
Deferred income taxes 21,382 94,822 22,557
Total proved, including deferred income taxes $156,549 605,153 223,833
Unproved, excluding deferred income taxes 42,305 50,336 40,202
Deferred income taxes 661 6,082 5,472
Total unproved, including deferred income taxes $ 42,966 56,418 45,674
Exploration costs $ 85,614 54,640 27,940
Development costs $152,105 162,244 118,876
<CAPTION>
Domestic
Year Ended December 31,
1998 1997 1996
(In Thousands)
Property acquisition costs:
Proved, excluding deferred income taxes $27,349 10,891 150,546
Deferred income taxes - 2,084 15,257
Total proved, including deferred income taxes $27,349 12,975 165,803
Unproved, excluding deferred income taxes 26,764 7,582 26,073
Deferred income taxes - (100) 5,472
Total unproved, including deferred income taxes $26,764 7,482 31,545
Exploration costs $35,686 18,326 2,708
Development costs $76,986 79,943 73,468
<CAPTION>
Canada
Year Ended December 31,
1998 1997 1996
(In Thousands)
Property acquisition costs:
Proved, excluding deferred income taxes $107,818 499,440 50,730
Deferred income taxes 21,382 92,738 7,300
Total proved, including deferred income taxes $129,200 592,178 58,030
Unproved, excluding deferred income taxes 15,541 42,754 14,129
Deferred income taxes 661 6,182 -
Total unproved, including deferred income
taxes $ 16,202 48,936 14,129
Exploration costs $ 49,928 36,314 25,232
Development costs $ 75,119 82,301 45,408
</TABLE>
Pursuant to the full cost method of accounting, Devon
capitalizes certain of its general and administrative expenses
which are related to property acquisition, exploration and
development activities. Such capitalized expenses, which are
included in the costs shown in the preceding tables, were $9.6
million, $7.5 million and $4.9 million in the years 1998, 1997
and 1996, respectively.
Due to the substantially tax-free nature of the acquisition
of the KMG-NAOS properties to Kerr-McGee, Devon recorded
additional deferred tax liabilities of $28.0 million in 1996. As
shown in the preceding 1996 tables, the deferred tax liabilities
caused an additional $22.5 million to be allocated to proved oil
and gas reserves and an additional $5.5 million to be allocated
to unproved properties.
During 1997, various uncertainties that existed at year-end
1996 regarding the tax basis and liabilities assumed in the KMG-
NAOS transaction were resolved. This resulted in an additional
$5.5 million being allocated in 1997 to the proved properties
acquired in the 1996 KMG-NAOS transaction. Of this amount, $3.1
million was for liabilities assumed and $2.4 million was for
additional deferred tax liabilities created. This additional
$5.5 million is included in the preceding table of costs incurred
in 1997. The resolution of the uncertainties also resulted in a
reduction of $0.1 million in 1997 to the deferred tax liabilities
originally allocated in 1996 to the KMG-NAOS unproved properties.
Due to the tax-free nature of the Morrison Transaction,
additional deferred tax liabilities of $128.5 million were
recorded in 1997. Of this amount, $92.7 million was allocated to
proved oil and gas properties and $6.2 million was allocated to
unproved properties. The remaining amount of $29.6 million was
allocated to non-oil and gas properties.
Results of Operations for Oil and Gas Producing Activities
The following tables include revenues and expenses associated
directly with Devon's oil and gas producing activities. They do
not include any allocation of Devon's interest costs or general
corporate overhead and, therefore, are not necessarily indicative
of the contribution to net earnings of Devon's oil and gas
operations. Income tax expense has been calculated by applying
statutory income tax rates to oil and gas sales after deducting
costs, including depreciation, depletion and amortization and
after giving effect to permanent differences.
<TABLE>
<CAPTION>
Total
Year Ended December 31,
1998 1997 1996
(In Thousands, Except Per Equivalent
Barrel Amounts)
<S> <C> <C> <C>
Oil, gas and natural gas liquids sales $ 369,660 452,104 256,765
Production and operating expenses (127,400) (120,124) (69,614)
Depreciation, depletion and amortization (119,719) (164,977) (67,832)
Reduction of carrying value of oil and gas properties (126,900) (625,514) -
Income tax (expense) benefit (19,385) 159,511 (45,870)
Results of operations for oil and gas producing activities $ (23,744) (299,000) 73,449
Depreciation, depletion and amortization per equivalent
barrel of production $3.32 4.86 3.69
<CAPTION>
Domestic
Year Ended December 31,
1998 1997 1996
(In Thousands, Except Per Equivalent
Barrel Amounts)
Oil, gas and natural gas liquids sales $ 208,629 273,860 162,558
Production and operating expenses (77,829) (75,758) (42,226)
Depreciation, depletion and amortization (76,327) (73,091) (41,538)
Reduction of carrying value of oil and gas properties (126,900) - -
Income tax (expense) benefit 18,230 (44,648) (27,796)
Results of operations for oil and gas producing activities $ (54,197) 80,363 50,998
Depreciation, depletion and amortization per equivalent
barrel of production $4.24 4.13 3.88
<CAPTION>
Canada
Year Ended December 31,
1998 1997 1996
(In Thousands, Except Per Equivalent
Barrel Amounts)
Oil, gas and natural gas liquids sales $ 161,031 178,244 94,207
Production and operating expenses (49,571) (44,366) (27,388)
Depreciation, depletion and amortization (43,392) (91,886) (26,294)
Reduction of carrying value of oil and gas properties - (625,514) -
Income tax (expense) benefit (37,615) 204,159 (18,074)
Results of operations for oil and gas producing activities $ 30,453 (379,363) 22,451
Depreciation, depletion and amortization per equivalent
barrel of production $2.41 5.64 3.42
</TABLE>
16. Supplemental Information on Oil and Gas Operations
(Unaudited)
The following supplemental unaudited information regarding
the oil and gas activities of Devon is presented pursuant to the
disclosure requirements promulgated by the Securities and
Exchange Commission and Statement of Financial Accounting
Standards No. 69, "Disclosures About Oil and Gas Producing
Activities".
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net
quantities of crude oil, natural gas and natural gas liquids
reserves for each of the three years ended December 31, 1998.
Approximately 93%, 92% and 94%, of the respective year-end 1998,
1997 and 1996 domestic proved reserves were calculated by the
independent petroleum consultants of LaRoche Petroleum
Consultants, Ltd. The remaining percentages of domestic reserves
are based on Devon's own estimates. All of the Canadian proved
reserves were calculated by the independent petroleum consultants
of Paddock Lindstrom & Associates and AMH Group Ltd. in 1998,
1997 and 1996, as well as John P. Hunter & Associates, Ltd., in
1997.
<TABLE>
<CAPTION>
Total
Natural
Oil Gas Gas Liquids
(MBbls) (MMcf) (MBbls)
<S> <C> <C> <C>
Proved reserves as of December 31, 1995 58,999 649,746 11,550
Revisions of estimates 4,982 (31,569) 1,022
Extensions and discoveries 4,433 149,049 1,154
Purchase of reserves 21,189 252,122 2,130
Production (6,780) (62,186) (1,255)
Sale of reserves (2,668) (58,843) (411)
Proved reserves as of December 31, 1996 80,155 898,319 14,190
Revisions of estimates 42 (46,390) 1,544
Extensions and discoveries 9,387 145,508 424
Purchase of reserves 19,396 275,592 2,914
Production (11,783) (121,810) (1,891)
Sale of reserves (156) (615) (3)
Proved reserves as of December 31, 1997 97,041 1,150,604 17,178
Revisions of estimates (6,277) (68,895) 176
Extensions and discoveries 1,897 116,227 452
Purchase of reserves 8,683 145,629 518
Production (11,903) (133,065) (1,939)
Sale of reserves (5,984) (11,606) (306)
Proved reserves as of December 31, 1998 83,457 1,198,894 16,079
Proved developed reserves as of:
December 31, 1995 43,236 597,564 8,230
December 31, 1996 72,330 810,465 12,563
December 31, 1997 88,258 984,374 16,332
December 31, 1998 73,846 1,052,647 15,081
<CAPTION>
Domestic
Natural
Oil Gas Gas Liquids
(MBbls) (MMcf) (MBbls)
Proved reserves as of December 31, 1995 44,466 363,846 9,469
Revisions of estimates 2,365 4,359 1,096
Extensions and discoveries 3,680 14,849 852
Purchase of reserves 13,659 209,064 1,246
Production (3,816) (35,714) (952)
Sale of reserves (403) (1,743) (16)
Proved reserves as of December 31, 1996 59,951 554,661 11,695
Revisions of estimates (1,358) (21,124) 1,531
Extensions and discoveries 7,394 94,925 301
Purchase of reserves 1,126 992 16
Production (6,055) (61,015) (1,468)
Sale of reserves (156) (615) (3)
Proved reserves as of December 31, 1997 60,902 567,824 12,072
Revisions of estimates (12,560) 1,507 424
Extensions and discoveries 1,242 53,708 371
Purchase of reserves 513 39,855 -
Production (5,646) (65,907) (1,373)
Sale of reserves - - -
Proved reserves as of December 31, 1998 44,451 596,987 11,494
Proved developed reserves as of:
December 31, 1995 28,703 311,664 6,149
December 31, 1996 52,672 529,407 10,328
December 31, 1997 53,059 462,082 11,289
December 31, 1998 40,631 469,064 10,577
<CAPTION>
Canada
Natural
Oil Gas Gas Liquids
(MBbls) (MMcf) (MBbls)
Proved reserves as of December 31, 1995 14,533 285,900 2,081
Revisions of estimates 2,617 (35,928) (74)
Extensions and discoveries 753 134,200 302
Purchase of reserves 7,530 43,058 884
Production (2,964) (26,472) (303)
Sale of reserves (2,265) (57,100) (395)
Proved reserves as of December 31, 1996 20,204 343,658 2,495
Revisions of estimates 1,400 (25,266) 13
Extensions and discoveries 1,993 50,583 123
Purchase of reserves 18,270 274,600 2,898
Production (5,728) (60,795) (423)
Sale of reserves - - -
Proved reserves as of December 31, 1997 36,139 582,780 5,106
Revisions of estimates 6,283 (70,402) (248)
Extensions and discoveries 655 62,519 81
Purchase of reserves 8,170 105,774 518
Production (6,257) (67,158) (566)
Sale of reserves (5,984) (11,606) (306)
Proved reserves as of December 31, 1998 39,006 601,907 4,585
Proved developed reserves as of
December 31, 1995 14,533 285,900 2,081
December 31, 1996 19,658 281,058 2,235
December 31, 1997 35,199 522,292 5,043
December 31, 1998 33,215 583,583 4,504
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows
The accompanying tables reflect the standardized measure of
discounted future net cash flows relating to Devon's interest in
proved reserves:
<TABLE>
<CAPTION>
Total
December 31,
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Future cash inflows $ 2,984,585 3,728,815 4,972,804
Future costs:
Development (113,139) (120,277) (90,638)
Production (1,214,426) (1,386,943) (1,377,410)
Future income tax expense (125,975) (399,972) (953,748)
Future net cash flows 1,531,045 1,821,623 2,551,008
10% discount to reflect timing of
cash flows (599,457) (720,947) (1,096,034)
Standardized measure of
discounted future net cash flows $ 931,588 1,100,676 1,454,974
<CAPTION>
Domestic
December 31,
1998 1996 1995
(In Thousands)
Future cash inflows $ 1,650,930 2,304,602 3,712,956
Future costs:
Development (72,215) (83,350) (54,064)
Production (678,732) (806,130) (1,013,750)
Future income tax expense (86,412) (269,880) (713,182)
Future net cash flows 813,571 1,145,242 1,931,960
10% discount to reflect timing of
cash flows (319,889) (481,263) (846,174)
Standardized measure of
discounted future net cash flows $ 493,682 663,979 1,085,786
<CAPTION>
Canada
December 31,
1998 1997 1996
(In Thousands)
Future cash inflows $ 1,333,655 1,424,213 1,259,848
Future costs:
Development (40,924) (36,927) (36,574)
Production (535,694) (580,813) (363,660)
Future income tax expense (39,563) (130,092) (240,566)
Future net cash flows 717,474 676,381 619,048
10% discount to reflect timing of
cash flows (279,568) (239,684) (249,860)
Standardized measure of
discounted future net cash flows $ 437,906 436,697 369,188
</TABLE>
Future cash inflows are computed by applying year-end prices
(averaging $9.89 per barrel of oil, adjusted for transportation
and other charges, $1.68 per Mcf of gas and $7.25 per barrel of
natural gas liquids at December 31, 1998) to the year-end
quantities of proved reserves, except in those instances where
fixed and determinable price changes are provided by contractual
arrangements in existence at year-end. In addition to the future
gas revenues calculated at $1.68 per Mcf, Devon's total future
gas revenues also include the future tax credit payments to be
received and recorded as gas revenues pursuant to the San Juan
Basin Transaction described in Note 3. Devon's future total and
domestic cash inflows shown in the tables above include $31
million related to these tax credit payments from 1999 through
2002. This amount has been calculated using the assumption that
the year-end 1998 tax credit rate of $1.06 per MMBtu remains
constant.
Future development and production costs are computed by
estimating the expenditures to be incurred in developing and
producing proved oil and gas reserves at the end of the year,
based on year-end costs and assuming continuation of existing
economic conditions.
Future income tax expenses are computed by applying the
appropriate statutory tax rates to the future pre-tax net cash
flows relating to proved reserves, net of the tax basis of the
properties involved. The future income tax expenses give effect
to permanent differences and tax credits, but do not reflect the
impact of future operations.
Changes Relating to the Standardized Measure of Discounted Future
Net Cash Flows
Principal changes in the standardized measure of discounted
future net cash flows attributable to Devon's proved reserves are
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Beginning balance $1,100,676 1,454,974 642,405
Sales of oil, gas and natural gas
liquids, net of production costs (242,260) (331,980) (187,151)
Net changes in prices and
production costs (304,593) (890,534) 763,909
Extensions, discoveries, and improved
recovery, net of future
development costs 64,614 75,698 145,310
Purchase of reserves, net of future
development costs 113,655 246,173 578,099
Development costs incurred during
the period which reduced future
development costs 45,699 62,868 63,123
Revisions of quantity estimates (58,314) (12,251) 35,852
Sales of reserves in place (28,365) (1,395) (81,452)
Accretion of discount 134,065 198,401 73,000
Net change in income taxes 162,517 300,684 (456,426)
Other, primarily changes in timing (56,106) (1,962) (121,695)
Ending balance $ 931,588 1,100,676 1,454,974
</TABLE>
17. Segment Information
Devon manages its business by country. As such, Devon
identifies its segments based on geographic areas. Devon has two
reportable segments: its operations in the U.S. and its
operations in Canada. Substantially all of both segments'
operations involve oil and gas producing activities. Certain
information regarding such activities for each segment is
included in Notes 15 and 16.
Following is certain financial information regarding Devon's
segments for 1998, 1997 and 1996. The revenues reported are all
from external customers.
<TABLE>
<CAPTION>
U.S. Canada Total
(In Thousands)
As of December 31, 1998:
<S> <C> <C> <C>
Current assets $ 57,098 53,550 110,648
Property and equipment, net of accumulated depreciation,
depletion and amortization 635,440 465,488 1,100,928
Other assets 13,326 1,454 14,780
Total assets $705,864 520,492 1,226,356
Current liabilities 25,032 55,624 80,656
Long-term debt 35,000 370,271 405,271
Deferred tax liabilities (assets) 57,393 (24,174) 33,219
Other liabilities 28,987 5,760 34,747
TCP Securities 149,500 - 149,500
Stockholders' equity 409,952 113,011 522,963
Total liabilities and stockholders' equity $705,864 520,492 1,226,356
Year ended December 31, 1998:
Revenues
Oil sales $ 70,285 73,339 143,624
Gas sales 126,273 83,071 209,344
Natural gas liquids sales 12,071 4,621 16,692
Other 4,095 13,753 17,848
Total revenues 212,724 174,784 387,508
Costs and expenses
Lease operating expenses 65,574 47,910 113,484
Production taxes 12,255 1,661 13,916
Depreciation, depletion and amortization 79,254 44,590 123,844
General and administrative expenses 11,052 12,502 23,554
Northstar Combination expenses 3,064 10,085 13,149
Interest expense 658 21,974 22,632
Deferred effect of changes in foreign currency exchange
rate on subsidiary's long-term debt - 16,104 16,104
Distributions on preferred securities of subsidiary trust 9,717 - 9,717
Reduction of carrying value of oil and gas properties 126,900 - 126,900
Total costs and expenses 308,474 154,826 463,300
Earnings (loss) before income tax expense (benefit) (95,750) 19,958 (75,792)
Income tax expense (benefit)
Current 5,712 1,975 7,687
Deferred (34,360) 11,166 (23,194)
Total income tax expense (benefit) (28,648) 13,141 (15,507)
Net earnings (loss) $(67,102) 6,817 (60,285)
Capital expenditures $170,334 205,178 375,512
</TABLE>
<TABLE>
<CAPTION>
U.S. Canada Total
(In Thousands)
As of December 31, 1997:
<S> <C> <C> <C>
Current assets $ 81,517 131,740 213,257
Property and equipment, net of accumulated depreciation,
depletion and amortization 679,677 315,606 995,283
Other assets 14,940 25,506 40,446
Total assets $776,134 472,852 1,248,986
Current liabilities 29,016 107,298 136,314
Long-term debt - 305,337 305,337
Deferred tax liabilities (assets) 92,042 (60,217) 31,825
Other liabilities 21,040 8,424 29,464
TCP Securities 149,500 - 149,500
Stockholders' equity 484,536 112,010 596,546
Total liabilities and stockholders' equity $776,134 472,852 1,248,986
Year ended December 31, 1997:
Revenues
Oil sales $115,504 92,221 207,725
Gas sales 139,018 80,441 219,459
Natural gas liquids sales 19,338 5,582 24,920
Other 4,974 42,581 47,555
Total revenues 278,834 220,825 499,659
Costs and expenses
Lease operating expenses 58,112 42,785 100,897
Production taxes 17,646 1,581 19,227
Depreciation, depletion and amortization 75,944 93,164 169,108
General and administrative expenses 10,481 13,900 24,381
Interest expense 269 18,519 18,788
Deferred effect of changes in foreign currency exchange
rate on subsidiary's long-term debt - 5,860 5,860
Distributions on preferred securities of subsidiary
trust 9,717 - 9,717
Reduction of carrying value of oil and gas properties - 625,514 625,514
Total costs and expenses 172,169 801,323 973,492
Earnings (loss) before income tax expense (benefit) 106,665 (580,498) (473,833)
Income tax expense (benefit)
Current 21,180 5,677 26,857
Deferred 18,603 (219,302) (200,699)
Total income tax expense (benefit) 39,783 (213,625) (173,842)
Net earnings (loss) $ 66,882 (366,873) (299,991)
Capital expenditures $120,689 167,302 287,991
</TABLE>
<TABLE>
<CAPTION>
U.S. Canada Total
(In Thousands)
As of December 31, 1996:
<S> <C> <C> <C>
Current assets $ 42,677 190,966 233,643
Property and equipment, net of accumulated depreciation,
depletion and amortization 632,839 286,708 919,547
Other assets 10,031 20,069 30,100
Total assets $685,547 497,743 1,183,290
Current liabilities 23,389 123,418 146,807
Long-term debt 8,000 75,000 83,000
Deferred tax liabilities 73,821 33,182 107,003
Other liabilities 11,585 6,623 18,208
TCP Securities 149,500 - 149,500
Stockholders' equity 419,252 259,520 678,772
Total liabilities and stockholders' equity $685,547 497,743 1,183,290
Year ended December 31, 1996:
Revenues
Oil sales $ 80,142 55,881 136,023
Gas sales 68,049 33,394 101,443
Natural gas liquids sales 14,367 4,932 19,299
Other 1,459 33,111 34,570
Total revenues 164,017 127,318 291,335
Costs and expenses
Lease operating expenses 31,568 27,166 58,734
Production taxes 10,658 222 10,880
Depreciation, depletion and amortization 43,361 26,946 70,307
General and administrative expenses 9,101 6,010 15,111
Interest expense 5,277 7,385 12,662
Deferred effect of changes in foreign currency exchange
rate on subsidiary's long-term debt - 199 199
Distributions on preferred securities of subsidiary
trust 4,753 - 4,753
Total costs and expenses 104,718 67,928 172,646
Earnings before income tax expense 59,299 59,390 118,689
Income tax expense
Current 6,709 1,125 7,834
Deferred 17,789 25,463 43,252
Total income tax expense 24,498 26,588 51,086
Net earnings $ 34,801 32,802 67,603
Capital expenditures $ 98,855 169,822 268,677
</TABLE>
18. Supplemental Quarterly Financial Information (Unaudited)
Following is a summary of the unaudited interim results of
operations for the years ended December 31, 1998 and 1997. The
following amounts have been restated to reflect the Northstar
Combination, and are therefore different from the results
previously reported.
<TABLE>
<CAPTION>
1998
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
(In Thousands, Except Per Share Amounts)
Oil, gas and natural gas liquids
<S> <C> <C> <C> <C> <C>
sales $ 98,308 93,507 90,469 87,376 369,660
Total revenues $100,437 104,775 92,870 89,426 387,508
Net earnings (loss) $ 14,225 12,173 (83,195) (3,488) (60,285)
Net earnings (loss) per share:
Basic $0.29 0.25 (1.72) (0.07) (1.25)
Diluted $0.29 0.25 (1.72) (0.07) (1.25)
<CAPTION>
1997
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
(In Thousands, Except Per Share Amounts)
Oil, gas and natural gas liquids
<S> <C> <C> <C> <C> <C>
sales $103,236 106,413 114,009 128,446 452,104
Total revenues $133,882 113,114 119,400 133,263 499,659
Net earnings (loss) $ 42,652 14,604 16,785 (374,032) (299,991)
Net earnings (loss) per share:
Basic $0.99 0.30 0.35 (7.75) (6.38)
Diluted $0.91 0.30 0.34 (7.75) (6.38)
</TABLE>
The fourth quarter of 1997 includes a $625.5 million pre-tax
reduction of the carrying value of Canadian oil and gas
properties. The after-tax effect of this charge was $397.9
million, or $8.24 per share. The third quarter of 1998 includes
a $126.9 million pre-tax reduction of the carrying value of U.S.
oil and gas properties. The after-tax effect of this charge was
$88 million, or $1.82 per share. The fourth quarter of 1998
includes $13.1 million of costs incurred in connection with the
Northstar Combination. The after-tax effect of these expenses
was $9.7 million, or $0.20 per share.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item 10 is
incorporated herein by reference to the definitive Proxy
Statement to be filed by the Company pursuant to Regulation 14A
of the General Rules and Regulations under the Securities and
Exchange Act of 1934 not later than April 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item 11 is
incorporated herein by reference to the definitive Proxy
Statement to be filed by the Company pursuant to Regulation 14A
of the General Rules and Regulations under the Securities and
Exchange Act of 1934 not later than April 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for by this Item 12 is
incorporated herein by reference to the definitive Proxy
Statement to be filed by the Company pursuant to Regulation 14A
of the General Rules and Regulations under the Securities and
Exchange Act of 1934 not later than April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item 13 is
incorporated herein by reference to the definitive Proxy
Statement to be filed by the Company pursuant to Regulation 14A
of the General Rules and Regulations under the Securities and
Exchange Act of 1934 not later than April 30, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this
report:
1. Consolidated Financial Statements
Reference is made to the Index to
Consolidated Financial Statements and Consolidated
Financial Statement Schedules appearing at Item 8
on Page 49 of this report.
2. Consolidated Financial Statement Schedules
All financial statement schedules are omitted
as they are inapplicable, or the required
information is immaterial.
3. Exhibits
2.1 Agreement and Plan of Merger among Registrant, Devon Energy
Corporation (Nevada), Kerr-McGee Corporation, Kerr-McGee
North American Onshore Corporation and Kerr-McGee Canada
Onshore Ltd., dated October 17, 1996 (incorporated by
reference to Addendum A to Registrant's definitive proxy
statement for a special meeting of shareholders, filed
on November 6, 1996).
2.2 Amended and Restated Combination Agreement between the
Registrant and Northstar Energy Corporation dated as of
June 29, 1998 (incorporated by reference to Annex B to
Registrant's definitive proxy statement for a
special meeting of shareholders, filed November 6, 1998).
3.1 Registrant's Amended and
Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3 to
Registrant's Form 8-K dated as of December
11, 1998).
3.2 Registrant's Bylaws
(incorporated by reference to Exhibit 3.2 to
Registrant's Registration Statement on Form 8-
B filed on June 7, 1995).
4.1 Form of Common Stock
Certificate (incorporated by reference to
Exhibit 4.1 to Registrant's Registration
Statement on Form 8-B filed on June 7, 1995).
4.2 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 filed on June 7, 1995).
4.3 First Amendment to Rights
Agreement between Registrant and The First
National Bank of Boston, dated October 16,
1996 (incorporated by reference to Exhibit H-
1 to Addendum A to Registrant's definitive
proxy statement for a special meeting of
shareholders, filed on November 6, 1996).
4.4 Second Amendment to Rights Agreement between Registrant and
the First National Bank of Boston, dated December 31, 1996
(incorporated by reference to Exhibit 4.2 to Registrant's
Current Report on Form 8-K dated December 31, 1996).
4.5 Third Amendment to Rights Agreement between Registrant and
The First National Bank of Boston, dated December 10, 1998.
4.6 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 filed on June 7, 1995).
4.7 Certificate of Trust of Devon
Financing Trust [incorporated by reference to
Exhibit 4.5 to Amendment No. 1 to
Registrant's Registration Statement on Form S-
3 (No. 333-00815)].
4.8 Amended and Restated Declaration of Trust of Devon Financing
Trust, dated as of July 3, 1996, by J. Larry Nichols,
H. Allen Turner, William T. Vaughn, The Bank of New
York (Delaware) and The Bank of New York as Trustees
and the Registrant as Sponsor [incorporated by reference
to Exhibit 4.6 to Amendment No. 1 to Registrant's
Registration Statement on Form S-3 (No. 333-00815)].
4.9 Indenture,
dated as of July 3, 1996, between the
Registrant and The Bank of New York
[incorporated by reference to Exhibit 4.7 to
Amendment No. 1 to Registrant's Registration
Statement on Form S-3 (No. 333-00815)].
4.10 First Supplemental Indenture, dated as of
July 3, 1996, between the Registrant and The
Bank of New York [incorporated by reference
to Exhibit 4.8 to Amendment No. 1 to
Registrant's Registration Statement on Form S-
3 (No. 333-00815)].
4.11 Form of 6 1/2% Preferred
Convertible Securities (included as Exhibit A-
1 to Exhibit 4.7 above).
4.12 Form of 6 1/2% Convertible
Junior Subordinated Debentures (included as
Exhibit B to Exhibit 4.7 above).
4.13 Preferred Securities Guarantee
Agreement, dated July 3, 1996, between
Registrant, as Guarantor, and The Bank of New
York, as Preferred Guarantee Trustee
[incorporated by reference to Exhibit 4.11 to
Amendment No. 1 to Registrant's Registration
Statement on Form S-3 (No. 333-00815)].
4.14 Stock Rights and Restrictions
Agreement, dated as of December 31, 1996,
between Registrant and Kerr-McGee Corporation
(incorporated by reference to Exhibit 4.3 to
Registrant's Current Report on Form 8-K dated
December 31, 1996).
4.15 Registration Rights Agreement, dated December 31, 1996, by
and between Registrant and Kerr-McGee Corporation
(incorporated by reference to Exhibit 4.4 to
Registrant's Current Report on Form 8-K, dated
December 31, 1996).
4.16 Support Agreement, dated
December 10, 1998, between the Registrant and
Northstar Energy Corporation (incorporated by
reference to Exhibit 4.1 to Registrant's Form
8-K dated as of December 11, 1998).
4.17 Exchangeable Share Provisions (incorporated by reference to
Exhibit 4.2 to Registrant's Form 8-K dated as of
December 11, 1998).
9 Voting and Exchange Trust
Agreement, dated December 10, 1998, by and
between the Registrant, Northstar Energy
Corporation and CIBC Mellon Trust Company
(incorporated by reference to Exhibit 9 to
Registrant's Form 8-K dated as of December
11, 1998).
10.1 U.S. Credit Agreement, dated December 11, 1998, among the
Registrant, as U.S. Borrower, NationsBank, N.A., as
Administrative Agent, NationsBanc Montgomery Securities,
L.L.C., as Arranger, Bank One, Texas, N.A., as
Syndication Agent, Bank of Montreal, as Documentation
Agent, First Union, as Co-Documentation Agent, and
Certain Financial Institutions, as
Lenders (incorporated by reference to Exhibit 10.1 to
Registrant's Form 8-K dated as of December 11, 1998).
10.2 Canadian Credit Agreement, dated December 11, 1998, among
Northstar Energy Corporation and Devon Energy Canada
Corporation, as Canadian Borrowers, Bank of America Canada,
as Administrative Agent, NationsBanc Montgomery Securities,
L.L.C., as Arranger, First Chicago Capital Markets, Inc., as
Syndication Agent, Bank of Montreal, as Documentation
Agent, First Union, as Co-Documentation Agent, and
Certain Financial Institutions, as Lenders (incorporated
by reference to Exhibit 10.2 to Registrant's Form 8-K
dated as of December 11, 1998).
10.3 Morrison Petroleums Ltd. U.S. $75,000,000 6.76% Senior Notes
Due July 19, 2005 Note Agreement Dated as of July 19, 1995.
10.4 Northstar Energy Corporation U.S. $150,000,000 6.79% Senior
Notes Due 2009 Note Agreement Dated as of March 2, 1998.
10.5 Devon Energy Corporation 1988 Stock Option Plan
[incorporated by reference to Exhibit 10.4 to Registrant's
Registration Statement on Form S-4 (No. 33-23564)].*
10.6 Devon Energy Corporation 1993 Stock Option
Plan (incorporated by reference to Exhibit A
to Registrant's Proxy Statement for the 1993
Annual Meeting of Shareholders filed on May
6, 1993).*
10.7 Devon Energy Corporation 1997 Stock Option
Plan (incorporated by reference to Exhibit A
to Registrant's Proxy Statement for the 1997
Annual Meeting of the Shareholders filed on
April 3, 1997).*
10.8 Severance Agreement between
Devon Energy Corporation (Nevada), Devon
Energy Corporation (Delaware) and Mr. J.
Larry Nichols, dated December 3, 1992
(incorporated 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).*
10.9 Severance Agreement between
Devon Energy Corporation (Nevada), Devon
Energy Corporation (Delaware) and Mr. J.
Michael Lacey, dated December 3, 1992
(incorporated 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).*
10.10 Severance Agreement
between Devon Energy Corporation (Nevada),
Devon Energy Corporation (Delaware) and Mr.
H. Allen Turner, dated December 3, 1992
(incorporated 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).*
10.11 Severance Agreement
between Devon Energy Corporation (Nevada),
Devon Energy Corporation (Delaware) and Mr.
Darryl G. Smette, dated December 3, 1992
(incorporated 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).*
10.12 Severance Agreement
between Devon Energy Corporation (Nevada),
Registrant and Duke R. Ligon, dated March 26,
1997 (incorporated by reference to Exhibit
10.11 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30,
1997).*
10.13 Employment Agreement between Devon Energy Corporation
(Nevada), Registrant and Duke R. Ligon, dated February 7,
1997 (incorporated by reference to Exhibit 10.12 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).*
10.14 Supplemental Retirement Income Agreement among Devon
Energy Corporation (Nevada), Registrant and John W. Nichols,
dated March 26, 1997 (incorporated by reference to Exhibit
10.13 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997).*
10.15 Supplemental Benefit Agreement between Northstar Enerty
Corporation and John A. Hagg dated February 17, 1999.*
10.16 Consulting Agreement between Registrant and Thomas F.
Ferguson dated June 1, 1989.
10.17 Sale and Purchase
Agreement relating to Registrant's San Juan
Basin gas properties (incorporated by
reference to Exhibit 10.15 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995).
10.18 Second Restatement
of and Amendment to Sale and Purchase
Agreement relating to Registrant's San Juan
Basin gas properties (incorporated by
reference to Exhibit 10.16 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995).
10.19 Registration Rights Agreement,
dated July 3, 1996, by and among the
Registrant, Devon Financing Trust and Morgan
Stanley & Co. Incorporated [incorporated by
reference to Exhibit 10.1 to Amendment No. 1
to Registrant's Registration Statement on
Form S-3 (No. 333-00815)].
12 Computation of ratio of earnings to fixed charges
21 Subsidiaries of Registrant
23.1 Consent of LaRoche Petroleum Consultants, Ltd.
23.2 Consent of AMH Group Ltd.
23.3 Consent of Paddock Lindstrom & Associates Ltd.
23.4 Consent of KPMG LLP
23.5 Consent of Deloitte & Touche LLP
23.6 Consent of PricewaterhouseCoopers LLP
* Compensatory plans or arrangements.
(b) Reports on Form 8-K - A Current Report on Form
8-K dated December 11, 1999, was filed by the
Registrant announcing the completion of the Northstar
Combination. A Current Report on Form 8-K dated January
28, 1999, was filed by the Registrant regarding year-
end 1998 financial results and year-end oil and gas
reserves. A Current Report on Form 8-K dated February
8, 1999, was filed by the Registrant regarding 1999
forward-looking information. A Current Report on Form
8-K dated February 22, 1999 was filed regarding
January, 1999 financial results.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DEVON ENERGY CORPORATION
March 29, 1999 By /s/ J. Larry Nichols
J. Larry Nichols, President
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
March 29, 1999 By /s/ John W. Nichols
John W. Nichols
Chairman of the Board and Director
March 29, 1999 By /s/ J. Larry Nichols
J. Larry Nichols
President, Chief Executive Officer
and Director
March 29, 1999 By /s/ William T. Vaughn
William T. Vaughn
Vice President - Finance
March 29, 1999 By /s/ Danny J. Heatly
Danny J. Heatly
Controller
March 29, 1999 By /s/ H. R. Sanders, Jr.
H. R. Sanders, Jr.
Director
March 29, 1999 By /s/ Luke R. Corbett
Luke R. Corbett, Director
March 29, 1999 By /s/ Thomas F. Ferguson
Thomas F. Ferguson, Director
March 29, 1999 By /s/ David M. Gavrin
David M. Gavrin, Director
March 29, 1999 By /s/ Michael E. Gellert
Michael E. Gellert, Director
March 29, 1999 By /s/ John A. Hagg
John A. Hagg, Director
March 29, 1999 By /s/ Michael M. Kanovsky
Michael M. Kanovsky, Director
March 29, 1999 By /s/ Tom J. McDaniel
Tom J. McDaniel, Director
March 29, 1999 By /s/ Lawrence H. Towell
Lawrence H. Towell, Director
<PAGE>
INDEX TO EXHIBITS
Exhibit Page
2.1 Agreement and Plan of Merger among Registrant, Devon Energy
Corporation (Nevada), Kerr-McGee Corporation, Kerr-McGee North
American Onshore Corporation and Kerr-McGee Canada Onshore Ltd.,
dated October 17, 1996 *
2.2 Amended and Restated Combination Agreement between the Registrant and
Northstar Energy Corporation dated as of June 29, 1998 *
3.1 Registrant's Amended and Restated Certificate of
Incorporation *
3.2 Registrant's Bylaws *
4.1 Form of Common Stock Certificate *
4.2 Rights Agreement between Registrant and The First National
Bank of Boston *
4.3 First Amendment to Rights Agreement between Registrant and
The First National Bank of Boston, dated October 16, 1996 *
4.4 Second Amendment to Rights Agreement between Registrant and
the First National Bank of Boston, dated December 31, 1996 *
4.5 Third Amendment to Rights Agreement between Registrant and
The First National Bank of Boston, dated December 10, 1998. 117
4.6 Certificate of Designations of Series A Junior Participating
Preferred Stock of Registrant *
4.7 Certificate of Trust of Devon Financing Trust *
4.8 Amended and Restated Declaration of Trust of Devon Financing
Trust, dated as of July 3, 1996, by J. Larry Nichols, H. Allen
Turner, William T. Vaughn, The Bank of New York (Delaware) and
The Bank of New York as Trustees and the Registrant as Sponsor *
4.9 Indenture, dated as of July 3, 1996, between the Registrant
and The Bank of New York *
4.10 First Supplemental Indenture, dated as of July 3, 1996,
between the Registrant and The Bank of New York *
4.11 Form of 6 1/2% Preferred Convertible Securities *
4.12 Form of 6 1/2% Convertible Junior Subordinated Debentures *
4.13 Preferred Securities Guarantee Agreement, dated July 3,
1996, between Registrant, as Guarantor, and The Bank of New York,
as Preferred Guarantee Trustee *
4.14 Stock Rights and Restrictions Agreement, dated as of
December 31, 1996, between Registrant and Kerr-McGee Corporation *
4.15 Registration Rights Agreement, dated December 31, 1996, by
and between Registrant and Kerr-McGee Corporation *
4.16 Support Agreement, dated December 10, 1998, between the
Registrant and Northstar Energy Corporation *
4.17 Exchangeable Share Provisions *
9 Voting and Exchange Trust Agreement, dated December 10, 1998, by and
between the Registrant, Northstar Energy Corporation and CIBC
Mellon Trust Company *
10.1 U.S. Credit Agreement, dated December 11, 1998, among the
Registrant, as U.S. Borrower, NationsBank, N.A., as
Administrative Agent, NationsBanc Montgomery Securities, L.L.C.,
as Arranger, Bank One, Texas, N.A., as Syndication Agent, Bank of
Montreal, as Documentation Agent, First Union, as Co-
Documentation Agent, and Certain Financial Institutions, as
Lenders *
10.2 Canadian Credit Agreement, dated December 11, 1998, among
Northstar Energy Corporation and Devon Energy Canada Corporation,
as Canadian Borrowers, Bank of America Canada, as Administrative
Agent, NationsBanc Montgomery Securities, L.L.C., as Arranger,
First Chicago Capital Markets, Inc., as Syndication Agent, Bank
of Montreal, as Documentation Agent, First Union, as Co-
Documentation Agent, and Certain Financial Institutions, as
Lenders *
10.3 Morrison Petroleums Ltd. U.S. $75,000,000 6.76% Senior Notes
Due July 19, 2005 Note Agreement Dated as of July 19, 1995 119
10.4 Northstar Energy Corporation U.S. $150,000,000 6.79% Senior
Notes Due 2009 Note Agreement Dated as of March 2, 1998 176
10.5 Devon Energy Corporation 1988 Stock Option Plan *
10.6 Devon Energy Corporation 1993 Stock Option Plan *
10.7 Devon Energy Corporation 1997 Stock Option Plan *
10.8 Severance Agreement between Devon Energy Corporation
(Nevada), Devon Energy Corporation (Delaware) and Mr. J. Larry
Nichols, dated December 3, 1992 *
10.9 Severance Agreement between Devon Energy Corporation
(Nevada), Devon Energy Corporation (Delaware) and Mr. J. Michael
Lacey, dated December 3, 1992 *
10.10 Severance Agreement between Devon Energy Corporation
(Nevada), Devon Energy Corporation (Delaware) and Mr. H. Allen
Turner, dated December 3, 1992 *
10.11 Severance Agreement between Devon Energy Corporation
(Nevada), Devon Energy Corporation (Delaware) and Mr. Darryl G.
Smette, dated December 3, 1992 *
10.12 Severance Agreement between Devon Energy Corporation
(Nevada), Registrant and Duke R. Ligon, dated March 26, 1997 *
10.13 Employment Agreement between Devon Energy Corporation
(Nevada), Registrant and Duke R. Ligon, dated February 7, 1997 *
10.14 Supplemental Retirement Income Agreement among Devon
Energy Corporation (Nevada), Registrant and John W. Nichols,
dated March 26, 1997 *
10.15 Supplemental Benefit Agreement between Northstar Energy
Corporation and John A. Hagg dated February 17, 1999 255
10.16 Consulting Agreement between Registrant and Thomas F.
Ferguson dated June 1, 1989 260
10.17 Sale and Purchase Agreement relating to Registrant's
San Juan Basin gas properties *
10.18 Second Restatement of and Amendment to Sale and
Purchase Agreement relating to Registrant's San Juan Basin gas
properties *
10.19 Registration Rights Agreement, dated July 3, 1996, by
and among the Registrant, Devon Financing Trust and Morgan
Stanley & Co. *
12 Computation of ratio of earnings to fixed charges 262
21 Subsidiaries of Registrant 263
23.1 Consent of LaRoche Petroleum Consultants, Ltd. 264
23.2 Consent of AMH Group Ltd. 265
23.3 Consent of Paddock Lindstrom & Associates Ltd. 266
23.4 Consent of KPMG LLP 267
23.5 Consent of Deloitte & Touche LLP 268
23.6 Consent of PricewaterhouseCoopers LLP 269
<PAGE>
THIRD AMENDMENT TO RIGHTS AGREEMENT
The Rights Agreement dated as of April 17, 1995 between Devon
Energy Corporation and BankBoston, N.A. (formerly, The First National
Bank of Boston (Massachusetts)), as amended as of October 16, 1996
and December 31, 1996, is hereby further amended as of December 10, 1998
as follows:
1. Section 1(a) of the Rights Agreement is
hereby amended to add to the end thereof the
following:
; provided, further, that the trustee from
time to time (the "Trustee") under the
Voting and Exchange Agreement (the "Voting
and Exchange Trust Agreement") to be entered
into by and among the Company, Northstar Energy
Corporation and the Trustee shall not,
and the Trustee's Affiliates and
associates shall not, be deemed an
Acquiring Person pursuant to this
Section solely as a result of the
transactions contemplated by the
Voting and Exchange Trust Agreement,
including, without limitation, the
issuance to the Trustee of the Voting
Share (as defined in the Voting and
Exchange Trust Agreement).
IN WITNESS WHEREOF, the parties hereto
have caused this Agreement to be duly executed,
all as of the 10th day of December, 1998.
DEVON ENERGY CORPORATION
/s/ J. Larry Nichols
J. Larry Nichols
President and Chief Executive Officer
ATTEST:
/s/ Marian J. Moon
Marian J. Moon
Secretary
BANKBOSTON,
N.A. (formerly,
THE FIRST NATIONAL BANK OF BOSTON
(MASSACHUSETTS))
By: /s/ Frank Arron
Administration Manager
ATTEST:
/s/ Deborah H. Norris
Administration Manager
Exhibit 10.3
MORRISON PETROLEUMS LTD.
U.S. $75,000,000
6.76% SENIOR NOTES DUE JULY 19, 2005
NOTE AGREEMENT
Dated as of July 19, 1995
<PAGE>
TABLE OF CONTENTS
(Not Part of Agreement)
Page
1. AUTHORIZATION OF ISSUE OF NOTES 1
2. PURCHASE AND SALE OF NOTES 1
3. CONDITIONS PRECEDENT 2
3A. Certain Documents 2
3B. Opinion of Purchasers' Special Counsel 3
3C. Representations and Warranties; No Default 3
3D. Purchase Permitted By Applicable Laws 3
3E. Proceedings 4
3F. Sale of Notes to Other Purchasers 4
3G. Special Counsel Fees 4
3H. Private Placement Number 4
3I. Existing Bank Security Discharges 4
4. PREPAYMENTS 4
4A. Required Prepayments 4
4B. Optional Prepayment 5
4C. Notice of Optional Prepayment 5
4D. Payments Pro Rata 6
4E. Retirement of Notes 6
5. AFFIRMATIVE COVENANTS 6
5A. Financial Statements 6
5B. Information Required by Rule 144A 8
5C. Inspection of Property 8
5D. Covenant to Secure Notes Equally 9
5E. Reserve Reports 9
5F. Maintain Corporate Existence 9
5G. Comply With Laws 9
5H. Pay Taxes 9
5I. Filings 9
5J. Defend Title 10
5K. Environmental Permits 10
5L. Copies of Environmental Reports 10
5M. Continuous Environmental Risk Management 10
5N. Environmental Audit 10
5O. Proceeds 11
5P. Insurance 11
5Q. Pari Passu 11
6. NEGATIVE COVENANTS 11
6A. Consolidated Net Worth 11
6B. Liens 11
6C. Funded Debt 12
6D. Restricted Subsidiary Funded Debt 12
6E. Sale-Leasebacks 13
6F. Merger 13
6G. Change of Business 14
7. EVENTS OF DEFAULT 14
7A. Acceleration 14
7B. Rescission of Acceleration 18
7C. Notice of Acceleration or Rescission 18
7D. Other Remedies 18
8. REPRESENTATIONS, COVENANTS AND WARRANTIES 19
8A. Organization 19
8B. Financial Statements 19
8C. Actions Pending 19
8D. Outstanding Indebtedness 20
8E. Title to Properties 20
8F. Taxes 20
8G. Conflicting Agreements and Other Matters 20
8H. Offering of Notes 21
8I. Use of Proceeds 21
8J. Governmental Consent 21
8K. Environmental Compliance 22
8L. Disclosure 22
8M. Pari Passu 22
8N. ERISA 22
8O. List of Plans 22
8P. Foreign Assets Control Regulations, etc. 23
8Q. Investment Company Act and Public Utility Holding
Company Status 23
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF EACH
PURCHASER 23
9A. Representations and Warranties of Each Purchaser 23
9B. Representations, Acknowledgements and Covenants of
Each Purchaser 25
10. DEFINITIONS 26
10A. Yield-Maintenance Terms 26
10B. Other Terms 28
10C. Accounting Principles, Terms and Determinations 36
10D. Changes in GAAP 36
11. MISCELLANEOUS 37
11A. Note Payments 37
11B. Expenses 37
11C. Consent to Amendments 38
11D. Form, Registration, Transfer and Exchange of Notes;
Lost Notes 38
11E. Persons Deemed Owners; Participations 39
11F. Survival of Representations and Warranties; Entire
Agreement 39
11G. Successors and Assigns 40
11H. Disclosure to Other Persons; Confidentiality 40
11I. Notices 40
11J. Payments Due on Non-Business Days 41
11K. Satisfaction Requirement 41
11L. Governing Law and Submission to Jurisdiction 41
11M. Amendments 41
11N. Severability 41
11O. Descriptive Headings 42
11P. Payment Free from Equities 42
11Q. Note Repayment Net of Withholding Imposts 42
11R. Interest 43
11S. Counterparts 44
11T. Severalty of Obligations 44
11U. Judgment Currency 44
11V. Currency; Time; "Including"; Interest Equivalency;
Currency Conversion 45
11W. Further Assurances 46
PURCHASER SCHEDULE
SCHEDULE A -- FORM OF NOTE
SCHEDULE B-1 -- FORM OF OPINION OF CORPORATION'S COUNSEL
SCHEDULE B-2 -- FORM OF OPINION OF SPECIAL COUNSEL TO THE
PURCHASERS
SCHEDULE C -- EXISTING LIENS, AGREEMENTS RESTRICTING
INDEBTEDNESS, AND OUTSTANDING INDEBTEDNESS
SCHEDULE D -- SUBSIDIARIES AND RESTRICTED SUBSIDIARIES
SCHEDULE E -- FORM OF NOTICE OF DESIGNATION OF RESTRICTED
SUBSIDIARY
<PAGE>
MORRISON PETROLEUMS LTD.
3000, 400 - 3rd Avenue S.W.
Calgary, Alberta
T2P 4H2
As of July 19, 1995
To Each of the Purchasers Named in the
Purchaser Schedule Attached Hereto
Re: Issue and Sale of U.S. $75,000,000 6.76% Senior Notes
Ladies and Gentlemen:
The undersigned, Morrison Petroleums Ltd. (the "Corporation"),
hereby agrees with the purchasers named in the Purchaser Schedule attached
hereto (the "Purchasers") as follows:
PARAGRAPH 1. AUTHORIZATION OF ISSUE OF NOTES.
1. Authorization of Issue of Notes.
The Corporation will authorize the issue of its senior promissory
notes in the aggregate principal amount of U.S. $75,000,000, to be dated the
date of issue thereof, to mature July 19, 2005, to bear interest on the
unpaid balance thereof from the date thereof until the principal thereof
shall have become due and payable at the rate of 6.76% per annum and on
overdue payments at the rate specified therein, and to be substantially in
the form of Schedule A. The term "Notes" as used herein shall include each
such senior promissory note delivered pursuant to any provision of this
Agreement and each such senior promissory note delivered in substitution
or exchange for any other Note pursuant to any such provision. Capitalized
terms used herein have the meanings specified in paragraph 10.
PARAGRAPH 2. PURCHASE AND SALE OF NOTES.
2. Purchase and Sale of Notes.
The Corporation hereby agrees to sell to each Purchaser and,
subject to the terms and conditions herein set forth, each Purchaser agrees
to purchase from the Corporation the aggregate principal amount of Notes set
forth opposite such Purchaser's name in the Purchaser Schedule attached
hereto at 100% of such aggregate principal amount. The Corporation will
deliver to each Purchaser, at the offices of Macleod Dixon at 3700, 400 -
3rd Avenue, S.W., Calgary, Alberta, T2P 4H2, one or more Notes registered
in such Purchaser's name, evidencing the aggregate principal amount of Notes
to be purchased by such Purchaser and in the denomination or denominations
specified with respect to such Purchaser in the Purchaser Schedule
against payment of the purchase price thereof by transfer of immediately
available funds for credit through the account of Skadden, Arps, Slate,
Meagher & Flom, Account no. 0391190261, at Chase Manhattan Bank NA, 200
East 57th Street, New York, New York, ABA #021000021 with instructions to
pay Royal Bank of Canada, 339 - 8th Avenue S.W., Calgary, Alberta, Transit
#003-00009, for credit to Morrison Petroleums Ltd. account #400-688-8 on the
date of closing, which shall be July 19, 1995 or any other date on or before
July 31, 1995 upon which the Corporation and the Purchasers may mutually
agree (the "Closing" or the "Date of Closing").
If at the Closing the Corporation shall fail to tender such Notes
to each Purchaser as provided above in this paragraph 2, or any of the
conditions specified in paragraph 3 shall not have been fulfilled to each
Purchaser's satisfaction, each Purchaser shall, at its election, be
relieved of all further obligations under this Agreement, without thereby
waiving any rights each Purchaser may have by reason of such failure or such
nonfulfillment.
PARAGRAPH 3. CONDITIONS PRECEDENT.
3. Conditions of Closing.
Each Purchaser's obligation to purchase and pay for the Notes to be
purchased by such Purchaser hereunder is subject to the satisfaction, on or
before the Date of Closing, of the following conditions:
3A. Certain Documents. Each Purchaser shall have received the following,
each dated the Date of Closing:
(i) The Notes to be purchased by such Purchaser.
(ii) A certified copy of the resolutions of the Board of Directors
of the Corporation approving this Agreement and the Notes, and of all
documents evidencing other necessary corporate action and governmental
approvals, if any, with respect to this Agreement and the Notes.
(iii) A certified copy of the articles and by-laws of the
Corporation.
(iv) A certificate of the Secretary or an Assistant Secretary of the
Corporation certifying the names and true signatures of the officers of
the Corporation authorized to sign this Agreement and the Notes and the
other documents to be delivered by it hereunder.
(v) Certificates of status for the Corporation issued by corporate
registries for each jurisdiction in which the Corporation owns material
property or carries on a material business.
(vi) An Officer's Certificate of the Corporation confirming that
the existing Liens publicly registered against the Corporation and each
Restricted Subsidiary, including any referred to in Part B of Schedule C,
would be, if created immediately after the execution and delivery of this
Agreement, permitted hereunder, and that the litigation to which the
Corporation and the Restricted Subsidiaries are presently subject
individually or in the aggregate is not reasonably expected to have a
Material Adverse Effect.
(vii) A favourable opinion of McCarthy Tetrault, counsel to the
Corporation, substantially in the form of Schedule B-1 and as to such
other matters as the Purchasers may reasonably request.
(viii) A favourable opinion of Skadden, Arps, Slate, Meagher and
Flom, United States counsel to the Corporation, to the effect that it is
not necessary in connection with the offering, issuance, sale and delivery
of the Notes under the circumstances contemplated by this Agreement to
register the Notes under the Securities Act or to qualify an indenture
in respect of the Notes under the United States Trust Indenture Act of
1939, as amended, and that the extension, arranging and obtaining of the
credit represented by the Notes do not result in any violation of
Regulation G, T or X of the Board of Governors of the United States
Federal Reserve System.
(ix) A certified copy of the register of Notes maintained by the
Corporation pursuant to paragraph 11D.
3B. Opinion of Purchasers' Special Counsel. Each Purchaser shall have
received from Macleod Dixon, special counsel for the Purchasers in connection
with this transaction, a favourable opinion substantially in the form of
Schedule B-2 and as to such matters incident to the matters herein
contemplated as the Purchasers may reasonably request.
3C. Representations and Warranties; No Default. The representations and
warranties contained in paragraph 8 shall be true on and as of the Date of
Closing; there shall exist on the Date of Closing no Event of Default or
Default; and the Corporation shall have delivered to such Purchaser an
Officer's Certificate, dated the Date of Closing, to both such effects.
3D. Purchase Permitted By Applicable Laws. The purchase of and payment
for the Notes to be purchased by such Purchaser on the Date of Closing on the
terms and conditions herein provided (including the use of the proceeds of
such Notes by the Corporation) shall not violate any Applicable Law
(including section 5 of the Securities Act or Regulation G, T or X of
the Board of Governors of the United States Federal Reserve System) and shall
not subject such Purchaser to any tax, penalty or liability under or pursuant
to any Applicable Law and such Purchaser shall have received such certificates
or other evidence with respect to factual matters as it may request to
establish compliance with this condition.
3E. Proceedings. All corporate and other proceedings taken or to be
taken in connection with the transactions contemplated hereby and all documents
incident thereto shall be satisfactory in substance and form to such Purchaser,
and such Purchaser shall have received all such counterpart originals or
certified or other copies of such documents as it may reasonably request.
3F. Sale of Notes to Other Purchasers. The Corporation shall sell to the
other Purchasers, and the other Purchasers shall purchase, the Notes to be
purchased by them at the Closing.
3G. Special Counsel Fees. Without limiting paragraph 11B, the
Corporation shall have paid for credit on account of the fees of special
counsel for the Purchasers the amount stipulated in a letter of Macleod Dixon
delivered to the Corporation one day prior to Closing.
3H. Private Placement Number. A private placement number issued by
Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities
Valuation Office of the National Association of Insurance Commissioners) shall
have been obtained for the Notes.
3I. Existing Bank Security Discharges. Canadian Imperial Bank of
Commerce shall have discharged, or provided an unconditional undertaking to
discharge, all security held by it over the properties and assets of the
Corporation.
PARAGRAPH 4. PREPAYMENTS.
4. Prepayments.
The Notes shall be subject to prepayment only with respect to the
required prepayments specified in paragraph 4A and the optional prepayments
permitted by paragraph 4B.
4A. Required Prepayments. Until the Notes shall be paid in full, the
Corporation shall apply to the prepayment of the Notes, without premium, the
following amounts on the following dates:
<TABLE>
<CAPTION>
Prepayment Date Amount of Required Prepayment
<S> <C>
July 19, 2001 U.S. $15,000,000
July 19, 2002 U.S. $15,000,000
July 19, 2003 U.S. $15,000,000
July 19, 2004 U.S. $15,000,000
</TABLE>
and such principal amounts of the Notes, together with interest thereon to the
prepayment dates, shall become due on such prepayment dates. The remaining
outstanding principal amount of the Notes, together with interest accrued
thereon, shall become due on the maturity date of the Notes, being July 19,
2005.
4B. Optional Prepayment
(a) With Yield-Maintenance Amount. Prior to July 19, 2004, the
Notes shall be subject to prepayment, in whole at any time or
from time to time in part (in multiples of U.S. $1,000,000),
at the option of the Corporation, at 100% of the principal
amount so prepaid plus interest thereon to the prepayment date
and the Yield-Maintenance Amount, if any, with respect to each
Note.
(b) Without Yield-Maintenance Amount in Final Year. On and after
July 19, 2004, the Notes shall be subject to prepayment, in
whole at any time or from time to time in part (in multiples
of U.S. $1,000,000), at the option of the Corporation, at 100%
of the principal amount so prepaid plus interest thereon to
the prepayment date.
(c) Application of Payments. Any partial prepayment of the Notes
pursuant to this paragraph 4B shall be applied in satisfaction
of required payments of principal in inverse order of their
scheduled due dates.
4C. Notice of Optional Prepayment.
(a) The Corporation shall give the holder of each Note irrevocable
written notice of any prepayment pursuant to paragraph 4B or
paragraph 11Q not less than 15 nor more than 30 Business Days
prior to the prepayment date, specifying such prepayment date
(which shall be a Business Day) and the principal amount of
the Notes, and of the Notes held by such holder, to be
prepaid on such date and stating that such prepayment is to be
made pursuant to paragraph 4B(a) or (b), or paragraph 11Q, as
applicable. Notice of prepayment having been given as
aforesaid, the principal amount of the Notes specified in such
notice, together with interest thereon to the prepayment date
and together with the Yield-Maintenance Amount, if any, with
respect thereto, shall become due and payable on such prepayment
date.
(b) The Corporation shall, at least two Business Days prior to the
prepayment date, give the holder of each Note facsimile notice
(followed by overnight written notice) setting forth the
estimated Yield-Maintenance Amount (for the purposes only of
such estimate, the yields referred to in the definition
of "Reinvestment Yield" shall be those reported three Business
Days preceding the Settlement Date instead of the yields on the
Business Day next preceding the Settlement Date) payable on
such prepayment date together with its calculations thereof in
reasonable detail, and further setting forth the accrued
interest payable on such prepayment date.
(c) The Corporation shall, on the day prior to the prepayment date,
give notice by facsimile followed by overnight written notice of
the actual Yield-Maintenance Amount (together with its
calculations thereof in reasonable detail), principal and
interest that the Corporation will be paying on the prepayment
date to each holder of a Note.
4D. Payments Pro Rata. Upon any prepayment of the Notes pursuant to
paragraph 4A or 4B, the principal amount so prepaid shall be allocated to all
Notes at the time outstanding in proportion to the respective outstanding
principal amounts thereof.
4E. Retirement of Notes. The Corporation shall not, and shall not permit
any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole
or in part prior to their stated final maturity (other than by prepayment
pursuant to paragraph 4A or 4B or upon acceleration of such final maturity
pursuant to paragraph 7A), or purchase or otherwise acquire, directly or
indirectly, Notes held by any holder.
PARAGRAPH 5. AFFIRMATIVE COVENANTS.
5. Affirmative Covenants.
So long as any Note shall remain unpaid, the Corporation covenants
that:
5A. Financial Statements. The Corporation will deliver to the holder of
each Note in duplicate (unless, in respect of any holder, such holder
designates a fewer number of copies in the Purchaser Schedule attached hereto):
(i) quarterly statements: as soon as practicable and in any event
within 60 days after the end of each quarterly period (other than the last
quarterly period) in each fiscal year, a consolidated statement of
earnings and retained earnings and a consolidated statement of changes
in financial position of the Corporation and its Subsidiaries (and of
the Corporation and its Restricted Subsidiaries on a consolidated basis)
for such quarterly period, and for the period from the beginning of the
current fiscal year to the end of such quarterly period, and a
consolidated balance sheet of the Corporation and its Subsidiaries
(and of the Corporation and its Restricted Subsidiaries on a consolidated
basis) as at the end of such quarterly period, setting forth, in the case
of the consolidated statements of earnings and retained earnings and of
changes in financial position, in comparative form figures for the
corresponding quarter and period in the preceding fiscal year and, in the
case of the consolidated balance sheets, in comparative form figures for
the most recent fiscal year end, all certified by an authorized financial
officer of the Corporation, subject to changes resulting from normal
year-end adjustments;
(ii) annual statements: as soon as practicable and in any event
within 120 days after the end of each fiscal year, a consolidated
statement of earnings and retained earnings and a consolidated statement
of changes in financial position of the Corporation and its Subsidiaries
(and of the Corporation and its Restricted Subsidiaries on a consolidated
basis) for such year, and a consolidated balance sheet of the Corporation
and its Subsidiaries (and of the Corporation and its Restricted
Subsidiaries on a consolidated basis) as at the end of such year,
setting forth in each case in comparative form corresponding consolidated
figures from the preceding annual audit, and, as to the consolidated
statements, reported on by independent public accountants of recognized
national or international standing in Canada or the United States selected
by the Corporation whose report shall be without limitation as to the
scope of the audit and satisfactory in substance to the Required Holders;
(iii) reports to shareholders: promptly upon transmission
thereof, copies of all such financial statements, proxy statements,
notices and reports as it shall send to its public shareholders and
copies of all prospectuses filed with Canadian or United States securities
regulatory authorities, registration statements (without exhibits) and all
reports (other than engineering reports) which it files with any Canadian
or United States securities regulatory authorities;
(iv) notice requirements: as soon as practicable and in any event
within 5 days after any Responsible Officer of the Corporation obtaining
knowledge:
(a) of the existence of an Event of Default or Default,
(b) of any condition or event which, in the opinion of
management of the Corporation, individually or in the
aggregate could reasonably be expected to have a Material
Adverse Effect,
(c) that any Person has given any notice to the Corporation or
any of its Restricted Subsidiaries or taken any other
action with respect to a claimed default or event or
condition of the type referred to in paragraph 7A(iii), or
(d) that any holder of a Note has given notice to the
Corporation of the existence or alleged existence of an
Event of Default or Default,
an Officer's Certificate specifying the nature and period of existence of
any such default, condition or event, or specifying the notice given or
action taken by such Person and the nature of any such claimed default,
event or condition, and further specifying what action the Corporation
is taking or proposes to take with respect thereto; and
(v) other information: with reasonable promptness, such other
information respecting the condition, properties or operations, financial
or otherwise, of the Corporation or any of its Restricted Subsidiaries as
such holder may reasonably request.
Together with each delivery of financial statements required by clauses
(i) and (ii) above, the Corporation will deliver to all holders of Notes an
Officer's Certificate demonstrating (with computations in reasonable detail)
compliance by the Corporation and its Restricted Subsidiaries with the
provisions of paragraphs 6A, 6B(ix), 6C, 6D and 6E (for these purposes,
documentation showing the computation of Consolidated Net Worth, Consolidated
Funded Debt, Total Capitalization, Attributable Debt, Priority Debt, and
Non-Recourse Debt of the Corporation and the Restricted Subsidiaries shall be
delivered) and identifying the Subsidiaries and Restricted Subsidiaries,
identifying any Sale-Leaseback proceeds not reinvested as contemplated in
paragraph 6E(b), and stating that there exists no Event of Default or Default,
or, if any Event of Default or Default exists, specifying the nature and period
of existence thereof and what action the Corporation proposes to take with
respect thereto.
If the Corporation has Subsidiaries that are not Restricted Subsidiaries
during any relevant fiscal quarter or year, and the Corporation has delivered
consolidated statements in respect of the Corporation and its Subsidiaries in
accordance with paragraphs 5A(i) or (ii) for such fiscal quarter or year, as
applicable, then notwithstanding such paragraphs the Corporation shall not be
required to deliver additional separate statements in respect of such fiscal
quarter or year if at the end thereof: (A) no Subsidiary has total assets (as
included on the consolidated balance sheet of the Corporation) in excess of
$2,000,000, and (B) the total assets of all Subsidiaries (as included on
the consolidated balance sheet of the Corporation) does not exceed $20,000,000.
Notwithstanding the foregoing, and for certainty, Subsidiaries that are not
Restricted Subsidiaries shall not be included for the purposes of any financial
covenants herein, and the documentation referred to in the previous paragraph
shall reflect the non-inclusion of such Subsidiaries in accordance with such
financial covenants. Further, if the Corporation is relying on this paragraph
to relieve it from its obligation to deliver separate statements, the Officer's
Certificate referred to in the previous paragraph shall show the total assets
of each Subsidiary and the aggregate total assets of all Subsidiaries.
Together with each delivery of financial statements required by clause
(ii) above, the Corporation will deliver to each holder of a Note a certificate
of such accountants stating that, during the course of the audit necessary for
their report on such financial statements (without any special procedures being
implemented for this purpose), they have obtained no knowledge of any Event of
Default or Default, or, if they have obtained knowledge of any Event of Default
or Default, specifying the nature and period of existence thereof.
5B. Information Required by Rule 144A. The Corporation will, upon the
request of the holder of any Note, and at the expense of the Corporation,
provide to such holder, and to any qualified institutional buyer designated by
such holder, the financial and other information described in paragraph (d)(4)
of Rule 144A under the Securities Act required in order to permit reliance upon
Rule 144A under the Securities Act in connection with the resale of Notes,
except at such times as the Corporation is subject to the reporting
requirements of section 13 or 15(d) of the Exchange Act. For the purpose of
this paragraph 5B, the term "qualified institutional buyer" shall have the
meaning specified in Rule 144A under the Securities Act.
5C. Inspection of Property. The Corporation will permit any Person
designated by any holder of a Note in writing, at such holder's expense, to
visit and inspect any of the properties of the Corporation and its Restricted
Subsidiaries, to examine the corporate books, financial records and engineering
and property records and reports of the Corporation and its Restricted
Subsidiaries and make copies thereof or extracts therefrom and to discuss the
affairs, finances and accounts of any of such corporations with the principal
officers of the Corporation and its Restricted Subsidiaries and its independent
public accountants, all at such reasonable times and as often as such holder
may reasonably request, provided that the foregoing shall be at the
Corporation's expense, and shall be reimbursable by the Corporation on demand
by such holder, if such visitation, inspection or examination is conducted at
a time when a Default or Event of Default has occurred and is continuing.
5D. Covenant to Secure Notes Equally. The Corporation will, if it or any
Restricted Subsidiary shall create or assume any Lien upon any of its property
or assets, whether now owned or hereafter acquired, other than Liens expressly
permitted by paragraph 6B (unless prior written consent to the creation or
assumption thereof shall have been obtained pursuant to paragraph 11C), make
or cause to be made effective provision whereby the Notes will be secured by
such Lien equally and ratably with any and all other Indebtedness thereby
secured so long as any such other Indebtedness shall be so secured.
5E. Reserve Reports. Upon request by a holder of a Note, the Corporation
will deliver to such holder a summary of a Reserve Report prepared as at a date
not earlier than the Corporation's most recent fiscal year end, such summary to
be provided within 120 days of such fiscal year end, or if requested after such
120 days, within 10 days of request.
5F. Maintain Corporate Existence. The Corporation will, except as
permitted in paragraph 6F, and except where failure to do so individually or in
the aggregate could not reasonably be expected to have a Material Adverse
Effect, maintain and preserve its and each of the Restricted Subsidiary's
corporate existence and organization in good standing in each jurisdiction in
which it carries on business or owns assets, make all corporate and other
filings and registrations necessary or advisable in connection therewith,
obtain and maintain all licenses, permits, franchises, consents and other
authorizations of any Governmental/Judicial Body necessary to its ownership
of property and to the conduct of its business in each such jurisdiction.
5G. Comply With Laws. The Corporation will, and will cause each of its
Restricted Subsidiaries to, comply with Applicable Laws, including Applicable
Environmental Laws, where failure to do so individually or in the aggregate
could reasonably be expected to have a Material Adverse Effect.
5H. Pay Taxes. The Corporation will, and will cause each of its
Restricted Subsidiaries to, duly file on a timely basis all tax returns
required to be filed by it, and duly and punctually pay all business, goods
and services, income, capital and/or profits taxes and other governmental
charges levied or assessed against it or its property save and except when and
so long as the validity of any such tax is being contested by it in good faith
by appropriate proceedings diligently conducted (which contest effectively
postpones realization or enforcement of any Liens held by the taxing
authority), in which event it shall make on its books provision adequate
therefor to the extent the same is required in accordance with GAAP.
5I. Filings. The Corporation will, and will cause each of its Restricted
Subsidiaries to, comply with all requirements which may exist under applicable
securities legislation to file reports concerning the issuance of the Notes
pursuant to filing, registration or prospectus exemptions under such
legislation within the required time after such issuance.
5J. Defend Title. The Corporation will, and will cause each of its
Restricted Subsidiaries to, defend its title to its property against every
Person whomever claiming or attempting to claim the same, or asserting any
interest adverse to its interest therein, other than Permitted Title Defects.
5K. Environmental Permits. The Corporation will, and will cause each
of its Restricted Subsidiaries to, obtain and maintain all permits, licenses,
consents and other authorizations which are required under Applicable
Environmental Laws regarding its property, the absence of which individually or
in the aggregate could reasonably be expected to have a Material Adverse
Effect, and comply in all respects with the terms and conditions of all such
permits, licenses, consents and authorizations, and comply in all respects with
all other limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in any
Applicable Environmental Laws, or in any regulation, code, plan,
order, decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder, where failure to do so individually or in
the aggregate could reasonably be expected to have a Material Adverse Effect.
5L. Copies of Environmental Reports. The Corporation will, promptly upon
receipt thereof, furnish to each holder of a Note a copy of any environmental
site assessment or audit report required to be submitted by it or any
Restricted Subsidiary to any Governmental/Judicial Body where the Corporation
estimates that the Corporation's share of the cost of any clean-up or
remedial action associated therewith will exceed $3,000,000, and in such event
it shall conduct such clean-up or remedial action within such time as may be
prescribed by such Governmental/Judicial Body.
5M. Continuous Environmental Risk Management. The Corporation will
maintain, in respect of itself and each of its Restricted Subsidiaries, and in
accordance with the practices and standards of companies of established
reputation carrying on the same business, a prudent periodic program for
environmental risk management.
5N. Environmental Audit. (i) The Corporation shall, promptly upon
acquiring knowledge thereof, provide the holder of each Note with written
notice of the discovery of any contaminant or of any spill, discharge, deposit,
escape or release of a contaminant into the environment from or upon the land
or property of the Corporation or a Restricted Subsidiary which, individually
or in the aggregate, could reasonably be expected to have a Material Adverse
Effect; (ii) within 120 days after the end of each fiscal year of the
Corporation, the Corporation shall provide a report to the holders in form and
substance satisfactory to the holders, acting reasonably, describing the
Corporation's environmental policies and the implementation of such
policies and other significant environmental activities of the Corporation and
its Restricted Subsidiaries during the previous fiscal year; (iii) the
Corporation shall, upon the request of the Required Holders (acting
reasonably), make available for discussion with the holders at all
reasonable times the senior officers of the Corporation and any Restricted
Subsidiary primarily responsible for the environmental activities and affairs
of the Corporation and its Restricted Subsidiaries.
5O. Proceeds. The Corporation will use the proceeds from the issuance
and sale of the Notes to pay down its existing revolving credit facilities, and
for its general corporate purposes.
5P. Insurance. The Corporation will maintain business and property
insurance in connection with its and its Restricted Subsidiaries' assets and
business, and liability insurance with respect to claims for personal injury,
death or property damage in relation to the operation of its businesses, all
with responsible and reputable insurance companies in such amounts and with
such deductibles as are customary in the case of businesses of established
reputation engaged in the same or similar businesses.
5Q. Pari Passu. The Corporation will ensure that all payment
obligations hereunder and under the Notes rank at least pari passu in priority
of payment with its other most senior unsubordinated Indebtedness, including
its bank Indebtedness.
PARAGRAPH 6. NEGATIVE COVENANTS.
6. Negative Covenants.
So long as any Note shall remain unpaid, the Corporation covenants
that:
6A. Consolidated Net Worth. The Corporation will not permit Consolidated
Net Worth at any time to be less than $240,000,000.
6B. Liens. The Corporation will not, and will not permit any Restricted
Subsidiary to, create or assume any Lien upon any of its properties or assets,
whether now owned or hereafter acquired, or any income or profits therefrom
(whether or not provision is made for the equal and ratable securing of the
Notes in accordance with paragraph 5D), except:
(i) Liens for taxes not yet due or which are being actively
contested in good faith by appropriate proceedings promptly initiated and
diligently conducted (so long as such contest effectively postpones
realization or enforcement of any such Liens) and for which reserves or
other appropriate provision, if any, as may be required by GAAP shall
have been made therefor,
(ii) Permitted Encumbrances,
(iii) Liens existing on the date hereof as described in Part A of
Schedule C,
(iv) Liens existing on property of a corporation or any other entity
at the time it is being acquired by the Corporation or a Restricted
Subsidiary if, concurrently with such acquisition, such corporation or
other entity becomes a Restricted Subsidiary, provided that such Liens are
not created in contemplation of such acquisition,
(v) Liens existing on property at the time of its acquisition by the
Corporation or a Restricted Subsidiary, provided that such Liens are not
created in contemplation of such acquisition,
(vi) Liens created by a Restricted Subsidiary in favour of the
Corporation or another Restricted Subsidiary,
(vii) Liens relating wholly to Non-Recourse Debt,
(viii) any Lien created to secure all or any part of the purchase
price, or to secure Indebtedness incurred or assumed to pay all or any
part of the purchase price, of equipment, land, buildings or other assets
acquired by the Corporation or a Restricted Subsidiary, provided that (A)
any such Lien shall be confined solely to the item or items of equipment,
land, buildings or other assets so acquired, (B) the principal amount of
Indebtedness secured by any such Lien shall at the time of creation not
exceed the lesser of (y) the purchase price payable by the Corporation or
such Restricted Subsidiary for the property so acquired, and (z) the fair
market value thereof, and (C) any such Lien shall be created within 6
months after such acquisition, and
(ix) other Liens (including Liens in respect of Production Payment
Transactions and Sale Leasebacks, but excluding general Liens such as
floating charges or security interests on all personal property) on
property of the Corporation or its Restricted Subsidiaries, provided that
(A) after giving effect thereto Priority Debt does not exceed 15% of Total
Capitalization, (B) if an Event of Default or Default hereunder, or a
default or event of default under the Corporation's bank loan agreements,
has occurred and is continuing, such Liens are not created to secure
existing Indebtedness, and (C) any Liens on the property of a Person
existing at the time it becomes a Restricted Subsidiary, or Liens assumed
in connection with any acquisition of property, shall be deemed to be
created at that time.
6C. Funded Debt. The Corporation will not, and will not permit its
Restricted Subsidiaries to, create, issue, assume, Guarantee or otherwise
become liable in respect of, any Funded Debt if after giving effect thereto
Consolidated Funded Debt exceeds 55% of Total Capitalization. For these
purposes Funded Debt of a Person existing at the time it becomes a
Restricted Subsidiary, or Indebtedness assumed in connection with any
acquisition of property, shall be deemed to be incurred at that time.
6D. Restricted Subsidiary Funded Debt. The Corporation will not permit
any Restricted Subsidiary to create, incur, assume, Guarantee or otherwise
become liable in respect of, any Funded Debt if after giving effect thereto
Priority Debt exceeds 15% of Total Capitalization. For these purposes Funded
Debt of a Person existing at the time it becomes a Restricted Subsidiary, or
Indebtedness assumed in connection with any acquisition of property,
shall be deemed to be incurred at that time.
6E. Sale-Leasebacks. The Corporation will not, and will not permit any
Restricted Subsidiary to, enter into any Sale-Leaseback unless at least one of
the following conditions is met:
(a) the term of the lease is three years or less, or
(b) the proceeds thereof are either reinvested in oil and gas properties,
equipment and fixed assets used in the business of the Corporation as
described in paragraph 6G, or are used to repay Funded Debt of the
Corporation or a Restricted Subsidiary, or a combination thereof,
within a period of 360 days following receipt thereof, or
(c) after giving effect thereto, Priority Debt does not exceed 15% of
Total Capitalization.
6F. Merger. The Corporation will not enter into any transaction whereby
all or substantially all of its undertaking, property and assets would become
the property of any other Person (herein called a "Successor Corporation")
whether by way of reorganization, consolidation, amalgamation, arrangement,
merger, transfer, sale or otherwise, except that:
(i) the Corporation may amalgamate or merge with any Restricted
Subsidiary (provided that the Corporation shall be the Successor
Corporation or shall form part of the Successor Corporation), and
(ii) the Corporation may enter into such transaction with any other
corporation if:
(A) the Successor Corporation is a corporation organized and
existing under the laws of Canada or a province thereof, or
any state of the United States of America, with
substantially all of its assets located and a majority of
its business conducted within the member countries (from
time to time) of the Organization for Economic Co-operation
and Development,
(B) such Successor Corporation expressly assumes, by an
agreement satisfactory in substance and form to the
Required Holders (which agreement may require the delivery
in connection with such assumption of such opinions of
counsel as the Required Holders may reasonably require),
the obligations of the Corporation under this Agreement
and the Notes,
(C) immediately following such amalgamation or merger, such
Successor Corporation could incur at least $1.00 of
additional Funded Debt in compliance with paragraphs 6C
and 6D, and at least $1.00 of Indebtedness secured by
Liens in compliance with paragraph 6B (ix) and
(D) no Default or Event of Default has occurred and is
continuing or would exist if such transaction is effected.
6G. Change of Business. The Corporation will not change in any material
respect the nature of its or its Restricted Subsidiaries' business or
operations from the exploration for, and development, production,
transportation and marketing of, petroleum, natural gas and related products,
nor will it engage directly or indirectly in any material business activity, or
purchase or otherwise acquire any material property, in either case not related
to the conduct of its business or operations as presently carried on.
PARAGRAPH 7. EVENTS OF DEFAULT.
7A. Acceleration. If any of the following events shall occur and be
continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise):
(i) failure to pay principal: the Corporation defaults in the
payment of any principal of or Yield-Maintenance Amount payable with
respect to any Note when the same shall become due, either by the terms
thereof or otherwise as herein provided; or
(ii) failure to pay interest: the Corporation defaults in the
payment of any interest on any Note for more than 5 Business Days after
the date due; or
(iii) cross acceleration: the Corporation or any Restricted
Subsidiary (A) defaults (whether as primary obligor or as guarantor or
other surety) in any payment of principal of, premium (if any) or interest
on any Indebtedness beyond any period of grace provided with respect
thereto, or (B) fails to perform or observe any other agreement, term or
condition contained in any agreement under which any such Indebtedness is
created (or if any other event thereunder or under any such agreement
shall occur and be continuing), and the effect of such default in
paragraph (A) or (B) is to cause such obligation to become due and payable
(or to be repurchased by the Corporation or any Subsidiary) prior to any
stated maturity, provided in either case that the aggregate amount
of all obligations in respect of which such default shall occur and be
continuing exceeds $10,000,000 (or its then equivalent in U.S. Dollars),
and provided further that if (x) the holders of such accelerated
Indebtedness rescind the acceleration which has resulted in an Event of
Default under this paragraph 7A(iii) pursuant to an express right to do so
contained in the governing agreement for such Indebtedness, (y) no holders
of Notes have then commenced legal action in respect of their Notes, and
(z) no other Event of Default has occurred and is continuing, then the
holders of Notes shall thereupon be deemed to have waived any Default or
Event of Default under this paragraph 7A(iii), and to have rescinded any
acceleration that occurred by reason of this paragraph 7A(iii); or
(iv) incorrect representations: any representation or warranty made
by the Corporation herein or by or on behalf of the Corporation or any of
its officers in any writing furnished in connection with or pursuant to
this Agreement shall be false or incorrect in any respect on the date as
of which made, and the actual facts that exist and give rise to such
falsity individually or in the aggregate could reasonably be expected to
have a Material Adverse Effect, or could have any adverse effect on the
legality, validity or enforceability of this Agreement or any Notes; or
(v) breach of other covenant: the Corporation fails to perform or
observe any other agreement, covenant, term or condition contained herein
and such failure shall not be remedied within 30 days after the earlier of
(A) a Responsible Officer obtaining actual knowledge thereof, and (B) a
holder of a Note giving written notice thereof to the Corporation; or
(vi) insolvency (voluntary proceedings): the Corporation or any
Restricted Subsidiary shall:
(a) become insolvent, or generally not pay its debts or meet
its liabilities as the same become due, or admit in writing
its inability to pay its debts generally, or declare any
general moratorium on its indebtedness, or propose a
compromise or arrangement between it and any class of its
creditors,
(b) commit an act of bankruptcy under the Bankruptcy and
Insolvency Act (Canada), or make an assignment of its
property for the general benefit of its creditors under
such Act, or make a proposal (or file a notice of its
intention to do so) under such Act,
(c) institute any proceeding seeking to adjudicate it an
insolvent, or seeking liquidation, dissolution, winding-up,
reorganization, compromise, arrangement, adjustment,
protection, moratorium, relief, stay of proceedings of
creditors generally (or any class of creditors), or
composition of it or its debts under any other statute,
rule or regulation relating to bankruptcy, winding-up,
insolvency, reorganization, plans of arrangement, relief
or protection of debtors (including the Bankruptcy and
Insolvency Act (Canada), the Companies' Creditors
Arrangement Act (Canada) and any applicable Business
Corporations Act or Company Act), or at common law or
in equity,
(d) apply for the appointment of, or the taking of possession
by, a receiver, interim receiver, receiver/manager,
custodian, administrator, trustee, liquidator or other
similar official for it or any substantial part of its
property, or
(e) threaten to do any of the foregoing, or take any action,
corporate or otherwise, to approve, consent to or authorize
any of the actions described in this paragraph (vi) or in
paragraph (vii), or otherwise act in furtherance thereof
or fail to act in defense thereof; or
(vii) insolvency (involuntary proceedings): any petition shall
be filed, application made or other proceeding instituted against or in
respect of the Corporation or any Restricted Subsidiary:
(a) seeking to adjudicate it an insolvent,
(b) seeking a receiving order against it under the Bankruptcy
and Insolvency Act (Canada),
(c) seeking liquidation, dissolution, winding-up,
reorganization, compromise, arrangement, adjustment,
protection, moratorium, relief, stay of proceedings of
creditors generally (or any class of creditors), or
composition of it or its debts under any statute, rule
or regulation relating to bankruptcy, winding-up,
insolvency, reorganization, plans of arrangement, relief
or protection of debtors (including the Bankruptcy and
Insolvency Act (Canada), the Companies' Creditors
Arrangement Act (Canada) and any applicable Business
Corporations Act or Company Act), or at common law or
in equity, or
(d) seeking the entry of an order for relief or the appointment
of a receiver, interim receiver, receiver/manager,
custodian, administrator, trustee, liquidator or other
similar official for it or any substantial part of its
property,
and such petition, application or proceeding shall continue undismissed,
or unstayed and in effect, for a period of 60 days after the institution
thereof, provided that if an order, decree or judgment has been granted
(whether or not entered or subject to appeal) against the Corporation or
any Restricted Subsidiary thereunder in the interim, such grace period
shall cease to apply; or
(viii) extra-territorial proceedings: any other event shall occur
which, under the laws of any applicable jurisdiction, has an effect
equivalent to any of the events referred to in paragraphs (vi) or (vii); or
(ix) attachment or seizure (secured or unsecured): any property of
the Corporation or any Restricted Subsidiary having a fair market value in
excess of $10,000,000 (or its then equivalent in U.S. Dollars) in the
aggregate shall be seized (including by way of execution, attachment,
garnishment or distraint) or any Lien thereon shall be enforced, or such
property shall become subject to any charging order or equitable
execution of a Governmental/Judicial Body, or any writ of execution or
distress warrant shall exist in respect of the Corporation, any Restricted
Subsidiary or the property of either, or any sheriff or other Person shall
become lawfully entitled to seize or distrain upon such property under the
Execution Creditors Act (Alberta), Seizures Act (Alberta), the Workers'
Compensation Act (Alberta), the Personal Property Security Act (Alberta)
or any other Applicable Laws whereunder similar remedies are provided, and
in any case such seizure, enforcement, execution, attachment, garnishment,
distraint, charging order or equitable execution, or other seizure or
right, shall continue in effect and not be released or discharged for more
than 60 days; or
(x) judgments: one or more judgments for the payment of money in
excess of $10,000,000 (or its then equivalent in U.S. Dollars) in the
aggregate shall be rendered against the Corporation or any Restricted
Subsidiary and the Corporation or such Restricted Subsidiary shall not
have (A) provided for its discharge in accordance with its terms within
60 days from the date of entry thereof, or (B) procured a stay of
execution thereof within 60 days from the date of entry thereof and within
such period, or such longer period during which execution of such judgment
shall have been stayed, appealed such judgment and caused the execution
thereof to be stayed during such appeal, provided that if enforcement
and/or realization proceedings are lawfully commenced in respect
thereof in the interim, such grace period shall cease to apply; or
(xi) unenforceability of documents: this Agreement or any Note or
any material provision of either shall at any time for any reason cease to
be in full force and effect, be declared to be void or voidable or shall
be repudiated, or the validity or enforceability thereof shall at any time
be contested by the Corporation, or the Corporation shall deny that it has
any or any further liability or obligation thereunder or any action or
proceeding shall be commenced to enjoin or restrain the performance or
observance by the Corporation of the terms thereof or to question the
validity or enforceability thereof, or at any time it shall be unlawful
or impossible for the Corporation to perform any of its obligations
thereunder;
then:
(a) if such event is an Event of Default specified in clause (i) or (ii)
of this paragraph 7A, then the holder of any Note may at its option,
by notice in writing to the Corporation, declare such Note to be, and
such Note shall thereupon be and become, immediately due and payable
at par together with interest accrued thereon and together with the
Yield Maintenance Amount, if any, with respect to such Note, without
presentment, demand, protest or other notice of any kind, all of
which are hereby waived by the Corporation;
(b) if such event is an Event of Default specified in clause (vi), (vii)
or (viii) of this paragraph 7A with respect to the Corporation, then
all of the Notes at the time outstanding shall automatically become
immediately due and payable at par together with interest accrued
thereon and together with the Yield-Maintenance Amount, if any, with
respect to each Note, without presentment, demand, protest or notice
of any kind, all of which are hereby waived by the Corporation; and
(c) if such event is not an Event of Default specified in clause (vi),
(vii) or (viii) of this paragraph 7A with respect to the Corporation,
then, whether or not notice has been given pursuant to paragraph (a),
the holders of not less than 25% of the outstanding principal amount
of the Notes, in the case of an event specified in paragraphs (i)
and (ii), and not less than 50% in any other case, may at its or
their option, by notice in writing to the Corporation, declare all of
the Notes to be, and all of the Notes shall thereupon be and become,
immediately due and payable together with interest accrued thereon
and together with the Yield-Maintenance Amount, if any, with respect
to each Note, without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by the Corporation.
7B. Rescission of Acceleration. At any time after any or all of the
Notes shall have been declared immediately due and payable pursuant to paragraph
7A, the Required Holders may, by notice in writing to the Corporation, rescind
and annul such declaration and its consequences if (i) the Corporation shall
have paid all overdue interest on the Notes, the principal of and Yield-
Maintenance Amount, if any, payable with respect to any Notes which have become
due otherwise than by reason of such declaration, and interest on such overdue
interest and overdue principal and Yield-Maintenance Amount at the rate
specified in the Notes, (ii) the Corporation shall not have paid any amounts
which have become due solely by reason of such declaration, (iii) all Events of
Default and Defaults, other than non-payment of amounts which have become due
solely by reason of such declaration, shall have been cured or waived pursuant
to paragraph 11C, and (iv) no judgment or decree shall have been entered for
the payment of any amounts due pursuant to the Notes or this Agreement. No
such rescission or annulment shall extend to or affect any subsequent Event of
Default or Default or impair any right arising therefrom.
7C. Notice of Acceleration or Rescission. Whenever any Note shall be
declared immediately due and payable pursuant to paragraph 7A or any such
declaration shall be rescinded and annulled pursuant to paragraph 7B, the
Corporation shall forthwith give written notice thereof to the holder of each
Note.
7D. Other Remedies. If any Event of Default or Default shall occur and
be continuing, the holder of any Note may proceed to protect and enforce its
rights under this Agreement and such Note by exercising such remedies as are
available to such holder in respect thereof under Applicable Law, either by
suit in equity or by action at law, or both, whether for specific
performance of any covenant or other agreement contained in this Agreement or
in aid of the exercise of any power granted in this Agreement. No remedy
conferred in this Agreement upon the holder of any Note is intended to be
exclusive of any other remedy, and each and every such remedy shall be
cumulative and shall be in addition to every other remedy conferred herein or
now or hereafter existing at law or in equity or by statute or otherwise.
PARAGRAPH 8. REPRESENTATIONS, COVENANTS AND WARRANTIES.
8. Representations, Covenants and Warranties.
The Corporation represents, covenants and warrants as follows:
8A. Organization. The Corporation is a corporation duly organized and
validly existing in good standing under the laws of the Province of Alberta,
and each Restricted Subsidiary is duly organized and existing in good standing
under the laws of the jurisdiction in which it is incorporated. The
Corporation is validly registered as an extra-provincial corporation under the
laws of the Provinces of British Columbia and Saskatchewan, and in each other
jurisdiction where failure to be so registered individually or in the aggregate
could reasonably be expected to have a Material Adverse Effect. The execution,
delivery and performance by the Corporation of this Agreement and the Notes are
within the Corporation's corporate powers and have been duly authorized by all
necessary corporate action. This Agreement and the Notes constitute legal,
valid and binding obligations of the Corporation enforceable against it in
accordance with their respective terms, subject only to the qualifications to
enforceability contained in the opinion of the Corporation's counsel delivered
pursuant to paragraph 3A(vii). All of the Subsidiaries of the Corporation and
the percentage direct or indirect ownership thereof by the Corporation are
listed in Schedule D.
8B. Financial Statements. The Corporation has furnished each Purchaser
with the following financial statements: (a) a consolidated balance sheet of
the Corporation as at December 31 in each of the years 1992 to 1994, inclusive,
and consolidated statements of earnings and retained earnings and consolidated
statements of changes in financial position of the Corporation for each such
year, all reported on by Coopers & Lybrand; and (b) a consolidated balance
sheet of the Corporation as at March 31 in each of the years 1994 and 1995 and
consolidated statements of earnings and retained earnings and consolidated
statements of changes in financial position for the 3 month period ended on
each such date, prepared by the Corporation. Such financial statements
(including any related schedules and/or notes) are true and correct in all
material respects (subject, as to interim statements, to changes resulting
from audits and normal year-end adjustments), have been prepared in accordance
with GAAP consistently followed throughout the periods involved and show all
liabilities, direct and contingent, of the Corporation and its Subsidiaries
required to be shown in accordance with GAAP. The balance sheets present
fairly the condition of the Corporation and its Subsidiaries as at the dates
thereof, and the statements of earnings, retained earnings and changes in
financial position present fairly the results of the operations, properties of
the Corporation and its Subsidiaries and their cash flows for the periods
indicated. There has been no change in the business, condition (financial or
otherwise), operations, properties or business prospects of the Corporation
and its Subsidiaries taken as a whole since December 31, 1994 which
individually or in the aggregate could reasonably be expected to have a
Material Adverse Effect.
8C. Actions Pending. There is no action, suit, investigation or
proceeding pending or, to the knowledge of the Corporation, threatened against
the Corporation or any of its Restricted Subsidiaries, or any properties or
rights of the Corporation or any of its Restricted Subsidiaries, by or before
any Governmental/Judicial Body which individually or in the aggregate could
reasonably be expected to have a Material Adverse Effect. There is no action,
suit, investigation or proceeding pending or threatened against the Corporation
or any of its Subsidiaries which alleges the breach of any Applicable
Environmental Laws, or could result in an order against the Corporation or any
Restricted Subsidiary for the clean up of any property except as disclosed by
the Corporation to each holder of a Note in writing prior to the date hereof,
with reference to this paragraph. There is no action, suit, investigation or
proceeding pending or threatened against the Corporation or any of its
Subsidiaries which purports to affect the validity or enforceability of this
Agreement or any Note.
8D. Outstanding Indebtedness. Neither the Corporation nor any of its
Restricted Subsidiaries has outstanding any Indebtedness except for
Indebtedness that, if it were incurred immediately after the execution and
delivery of this Agreement, would be permitted by paragraphs 6C and 6D of this
Agreement, and all such Indebtedness is accurately described in Part C of
Schedule C, together with particulars thereof. There exists no default or
event of default under the provisions of any instrument evidencing such
Indebtedness or of any agreement relating thereto.
8E. Title to Properties. Except for Permitted Title Defects, the
Corporation and each of its Restricted Subsidiaries have good and marketable
title to its proved producing oil and gas properties and proved non-producing
oil and gas properties, and good and valid title to all of its other respective
material properties and assets, including the properties and assets reflected
in the balance sheet as at March 31, 1995 referred to in paragraph 8B (other
than properties and assets disposed of in the ordinary course of business),
subject to no Lien of any kind except Liens that, if they were incurred
immediately after the execution and delivery of this Agreement, would be
permitted by paragraph 6B. All leases (including petroleum and/or natural gas
leases) necessary in any material respect for the conduct of the respective
businesses of the Corporation and its Restricted Subsidiaries are valid and
subsisting and are in full force and effect.
8F. Taxes. The Corporation and each of its Restricted Subsidiaries has
filed all federal, provincial and other income tax returns which are required
to be filed, and each has paid all taxes as shown on such returns and on all
assessments received by it to the extent that such taxes have become due,
except such taxes as are being contested in good faith by appropriate
proceedings and for which adequate reserves have been established in the
reasonable opinion of the Corporation and in accordance with GAAP.
8G. Conflicting Agreements and Other Matters. Neither the Corporation
nor any of its Subsidiaries is a party to any contract or agreement or subject
to any charter or other corporate restriction which individually or in the
aggregate could reasonably be expected to have a Material Adverse Effect.
Neither the execution nor delivery of this Agreement or the Notes, nor the
offering, issuance and sale of the Notes, nor fulfilment of nor compliance
with the terms and provisions hereof and the Notes will conflict with, or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, or result in any violation of, or result in the creation
of any Lien upon any of the properties or assets of the Corporation or any of
its Restricted Subsidiaries pursuant to, the articles or by-laws of the
Corporation or any of its Restricted Subsidiaries, any Applicable Law or any
agreement (including any instrument or agreement creating or evidencing
Indebtedness), to which the Corporation or any of its Restricted
Subsidiaries is subject. The Corporation and each Restricted Subsidiary is in
compliance with Applicable Laws where failure to do so would individually or in
the aggregate could reasonably be expected to have a Material Adverse Effect.
Neither the Corporation nor any of its Subsidiaries is a party to, or otherwise
subject to any provision contained in, its articles, any instrument or
agreement creating or evidencing Indebtedness of the Corporation or such
Subsidiary, any agreement relating thereto or any other contract or agreement
which limits the amount of, or otherwise imposes restrictions on the incurring
of, Indebtedness of the Corporation of the type to be evidenced by the Notes
except for the agreements listed in Part B of Schedule C.
8H. Offering of Notes. Neither the Corporation nor any agent acting on
its behalf has, directly or indirectly, offered the Notes or any similar
security of the Corporation for sale to, or solicited any offers to buy the
Notes or any similar security of the Corporation from, or otherwise
approached or negotiated with respect thereto with, any Person other than 60
institutional "accredited investors" (as such term is defined in paragraph
9B(2)(a) hereof), each of which has been offered the Notes at a private sale
for investment, and neither the Corporation nor any agent acting on its behalf
has taken or will take any action which would subject the issuance or sale of
the Notes to the provisions of Section 5 of the Securities Act or to the
registration, qualification or similar provisions of any securities or "blue
sky" laws of any applicable jurisdiction or result in any contravention of the
provisions of any securities law of Alberta or any other applicable
jurisdiction.
8I. Use of Proceeds. The Corporation will apply the proceeds of the sale
of the Notes as set forth in paragraph 5O hereof. Neither the Corporation nor
any Subsidiary owns or has any present intention of acquiring any "margin
stock" as defined in Regulation G (12 CFR Part 207) of the Board of Governors
of the United States Federal Reserve System ("margin stock"). None of the
proceeds of the sale of the Notes will be used, directly or indirectly, for the
purpose, whether immediate, incidental or ultimate, of purchasing or carrying
any margin stock or for the purpose of maintaining, reducing or retiring any
Indebtedness which was originally incurred to purchase or carry any stock that
is currently a margin stock or for any other purpose which might constitute
this transaction a "purpose credit" within the meaning of such Regulation G.
Neither the Corporation nor any agent acting on its behalf has taken any action
which might cause this Agreement or the Notes to violate Regulation G,
Regulation T, Regulation X or any other regulation of the Board of Governors of
the United States Federal Reserve System or to violate the Exchange Act, and
the Corporation covenants that it will not, and will not permit any agent
acting on its behalf to, take any action which would cause this Agreement or
the Notes to violate any such regulations or laws or any amendments thereto.
8J. Governmental Consent. Neither the nature of the Corporation or of
any Subsidiary, nor any of their respective businesses or properties, nor any
relationship between the Corporation or any Subsidiary and any other Person,
nor any circumstance in connection with the offering, issuance, sale or
delivery of the Notes is such as to require any authorization, consent,
approval, exemption or other action by or notice to or filing with any
Governmental/Judicial Body (other than routine notification filings and
payment of applicable fees after the Date of Closing with the applicable
provincial securities authorities) in connection with the execution and
delivery of this Agreement, the offering, issuance, sale or delivery of the
Notes or fulfilment of or compliance with the terms and provisions hereof or
of the Notes.
8K. Environmental Compliance. The Corporation and its Restricted
Subsidiaries and all of their respective properties and facilities have
complied at all times and in all respects with all Applicable Environmental
Laws except, in any such case, where failure to comply individually
or in the aggregate could not reasonably be expected to have a Material
Adverse Effect.
8L. Disclosure. Neither this Agreement, the Private Placement
Memorandum, nor any other document, certificate or statement furnished to any
Purchaser by the Corporation or its agents in connection herewith contains any
untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein and therein not
misleading. There is no fact or facts peculiar to the Corporation or any of
its Subsidiaries (excluding conditions general to the oil and gas industry)
which individually or in the aggregate materially adversely affects or could
reasonably be expected to materially adversely affect the business, condition
(financial or otherwise), operations, properties or business prospects of the
Corporation and of its Restricted Subsidiaries taken as a whole and which has
not been set forth in this Agreement or in the other documents, certificates
and statements furnished to each Purchaser by or on behalf of the Corporation
prior to the date hereof in connection with the transactions contemplated
hereby.
8M. Pari Passu. All payment obligations of the Corporation hereunder and
under the Notes rank at least pari passu in priority of payment with its other
most senior unsubordinated Indebtedness (including Indebtedness referred to in
Part C of Schedule C) (it being acknowledged that certain holders of such
Indebtedness may hold security therefor to the extent permitted in paragraph
6B).
8N. ERISA. The execution and delivery of this Agreement and the
issuance and sale of the Notes hereunder will not involve any transaction that
is subject to the prohibitions of section 406(a) of the Employee Retirement
Income Security Act (U.S.) of 1974, as amended ("ERISA") and in connection with
which a tax could be imposed pursuant to section 4975(c)(1(A)-(D)) of the
Internal Revenue Code (U.S.) (the "Code").
The representation by the Corporation in this paragraph 8N is made in
reliance upon and subject to (i) the accuracy of a Purchaser's representation
in paragraph 9A(2) as to the sources of the funds used to pay the purchase
price of the Notes to be purchased by such Purchaser, and (ii) the assumption,
made solely for the purpose of making such representation, that the proposed
prohibited transaction class exemption published by the United States
Department of Labor in the Federal Register on August 22, 1994 (59 FR 43134,
August 22, 1994) will become final in its current form.
8O. List of Plans. The Corporation has furnished a list ("ERISA
Schedule") to each Purchaser identifying (i) each ERISA Affiliate, if any, and
(ii) each "employee benefit plan" as defined in Section 3 of ERISA, and each
"plan" (as defined in section 4975 (e)(1) of the Code), maintained by the
Corporation or any ERISA Affiliate, if any. If the name of any employee
benefit plan (as defined in Section 3 of ERISA) has been disclosed to the
Corporation pursuant to paragraph 9A(2)(g), the Corporation is not a "party in
interest" (as defined in Section 3 of ERISA) with respect to any such plan.
For these purposes, "ERISA Affiliate" means any corporation which is a member
of the same controlled group of corporations as the Corporation within the
meaning of Section 414(b) of the Code, or any trade or business which is under
common control with the Corporation within the meaning of Section 414(c) of
the Code.
8P. Foreign Assets Control Regulations, etc. The Corporation is not a
"national" of any foreign country with which the United States maintains a
commercial embargo, or an order freezing assets, pursuant to legislation,
Executive orders of the President, or regulations of the Treasury Department.
Neither the sale of the Notes by the Corporation nor the use of the
proceeds thereof by the Corporation will violate any of such legislation,
regulations or orders.
8Q. Investment Company Act and Public Utility Holding Company Status.
The Corporation is not (a) an investment company or a Person directly or
indirectly controlled by or acting on behalf of an investment company, within
the meaning of the United States Investment Company Act of 1940, as amended,
or (b) a "holding company" or "subsidiary company" of a "holding company" or
an "affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company", or a "public utility", within the meaning of the United
States Public Utility Holding Company Act of 1935, as amended.
PARAGRAPH 9. REPRESENTATIONS, WARRANTIES AND
COVENANTS OF EACH PURCHASER.
9A. Representations and Warranties of Each Purchaser.
Each Purchaser represents and warrants as follows:
9A(1) Nature of Purchase. Each Purchaser represents (and in entering
into this Agreement the Corporation understands) that each Purchaser is
acquiring the Notes for its own account or for an account over which it
exercises sole investment discretion, and that it is not acquiring the Notes
with a view to the distribution thereof and that it has no present intention of
selling, negotiating or otherwise disposing of the Notes; it being understood,
however, that the disposition of its property shall at all times be and
remain within its control. Each acquisition of a Note is in respect of a
security which has an aggregate acquisition cost to such Purchaser or
account of not less than $97,000, all within the meaning of the Securities Act
(Alberta). Without limiting the foregoing, each Purchaser agrees that it will
only re-offer or resell the Notes purchased by it in accordance with any
applicable federal, state or provincial securities laws, as the case may be;
it understands that the Notes are not being registered under the Securities
Act and are being sold to it in transactions that are exempt from the
registration requirements of the Securities Act; and it has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of an investment in the Notes, and it (and any account
for which it is purchasing) is able to bear the economic risk of investment
in the Notes for an indefinite period.
9A(2) ERISA. In connection with the acquisition of Notes to be
purchased by it hereunder and solely for purposes of determining whether such
acquisition is a "prohibited transaction" (as provided for in section 406 of
ERISA or section 4975 of the Code), one or more of the following statements is
correct with respect to each source of funds being used by Purchaser
to acquire the Notes:
(a) no part of such funds constitutes the assets of any "employee
benefit plan" as defined in Section 3(3) of ERISA, or its
related trust, or any "plan" as defined in Section 4975(e)(1)
of the Code, or its related trust (each a "Plan");
(b) it is an "insurance company" as defined in Section 2(13) of the
Securities Act and it is acquiring such Notes for its own
account with funds from its general account assets, or from
assets of one or more segments of such general account, and,
if any assets in such general account are, or are deemed to
be, assets of any Plan, such acquisition is eligible for and
satisfies the requirements of Prohibited Transaction Exemption
("PTE") 95-60 (issued July 12, 1995), and will be exempt from
the restrictions of section 406(a) and 407(a) of ERISA and the
taxes imposed by section 4975(a) and (b) of the Code;
(c) it is acquiring such Notes with assets of a separate account
that is maintained solely in connection with fixed contractual
obligations of an insurance company under which the amounts
payable, or credited, to any employee benefit plan having an
interest in such account and to any participant or beneficiary
of such plan (including an annuitant) are not affected in any
manner by the investment performance of the separate account
(as provided by the exception set forth in 29 C.F.R. Section
2510.3-101(h)(1)(iii));
(d) such funds constitute assets of either (i) an insurance company
pooled separate account, within the meaning of PTE 90-1 (issued
January 29, 1990), or (ii) a bank collective investment fund,
within the meaning of PTE 91-38 (issued July 12, 1991); no Plan
(together with any other Plan maintained by the same employer or
employee organization) holds more than a 10% interest in such
account or fund; and the Purchaser's acquisition of the Notes
with such funds is eligible for and satisfies the requirements
of PTE 90-1 or PTE 91-38 and will be exempt from the restrictions
of section 406(a), 406(b)(2) and 407(a) of ERISA and the taxes
imposed by section 4975(a) and (b) of the Code; (e) such funds
constitute assets of a governmental plan as defined in Section
3(32) of ERISA;
(f) (i) the source of such funds is one or more "employee benefit
plans" or "plans" (as defined in section 3(3) of ERISA and
section 4975 of the Code, respectively) (each a "Plan") or a
separate account or trust fund including the assets of one or
more Plans; and (ii) the Purchaser has identified each
such Plan to the Corporation in writing; or (g) it is acquiring
such Notes with assets of one or more single customer separate
accounts and it has disclosed to the Corporation in writing the
names of such employee benefit plans whose assets are invested
in such separate accounts, and the purchase of such Notes with
assets of such accounts will not result in a non-exempt
"prohibited transaction"; provided that the foregoing
representation is made in reliance upon the ERISA Schedule
delivered to the Purchasers by the Corporation pursuant to
paragraph 8O.
9A(3) Location. The head registered office of such Purchaser is located
outside of Canada, the employees of such Purchaser responsible for investment
decisions relating to the purchase and holding of the Notes are located outside
Canada, and the Notes will be held by such Purchaser outside Canada.
9B. Representations, Acknowledgements and Covenants of Each Purchaser.
9B(1) Credit Decision. By its execution of this Agreement, each
Purchaser severally represents and acknowledges to each other Purchaser that
it has, independently and without reliance upon any other Purchaser and based
on the financial statements referred to in paragraph 8B, the Private Placement
Memorandum, and such other documents and information as it has deemed
appropriate, made its own credit analysis and decision to enter into this
Agreement. Each Purchaser also severally represents and acknowledges to each
other Purchaser that it will, independently and without reliance upon any other
Purchaser and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement and the Notes. The provisions of this
paragraph are for the sole benefit of the Purchasers and are not intended to
benefit or to confer any right upon the Corporation or any other Person.
9B(2) Acknowledgement. Each Purchaser acknowledges that:
(a) it has purchased the Notes for its own account, or for the account of
one or more separate accounts, each of which is an institutional
"accredited investor" within the meaning of Rule 501(a)(1), (2), (3)
or (7) of the Securities Act;
(b) it has received the Private Placement Memorandum; and
(c) the Notes shall bear the following legend:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "U.S.
SECURITIES ACT") AND MAY BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED ONLY (A) TO THE
CORPORATION, (B) OUTSIDE THE UNITED STATES IN
ACCORDANCE WITH RULE 904 OF REGULATION "S"
UNDER THE U.S. SECURITIES ACT, (C) PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE U.S.
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER,
OR (D) PURSUANT TO ANOTHER EXEMPTION FROM
REGISTRATION UNDER THE U.S. SECURITIES ACT.
THIS NOTE MAY NOT BE TRADED IN CANADA EXCEPT AS
PERMITTED BY RELEVANT SECURITIES LEGISLATION.
ANY TRANSFER OF THIS NOTE IS SUBJECT TO THE
PROVISIONS OF THE NOTE AGREEMENT."
9B(3) Transferee ERISA Representation. By its acquisition of a Note,
each Transferee will be deemed to represent that for the purposes set forth
in paragraph 9A(2), one or more of the statements in clauses (a) to (g)
thereof is correct with respect to the source of funds being used by
it to acquire the Notes.
PARAGRAPH 10. DEFINITIONS.
10. Definitions.
For the purpose of this Agreement, the terms defined in the
introductory sentence and in paragraphs 1 and 2 shall have the respective
meanings specified therein, and the following terms shall have the meanings
specified with respect thereto below (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
10A. Yield-Maintenance Terms.
"Business Day" shall mean, when used in connection with the Yield-
Maintenance Amount, any day other than a Saturday, a Sunday or a day on which
commercial banks in New York, New York are required or authorized to be closed.
"Called Principal" shall mean, with respect to any Note, the principal of
such Note that is to be prepaid pursuant to paragraph 4B or is declared to be
immediately due and payable pursuant to paragraph 7A, as the context requires.
"Discounted Value" shall mean, with respect to the Called Principal of any
Note, the amount obtained by discounting all Remaining Scheduled Payments with
respect to such Called Principal from their respective scheduled due dates to
the Settlement Date with respect to such Called Principal, in accordance with
accepted financial practice and at a discount factor (applied on the same
periodic basis as that on which interest on the Notes is payable) equal to the
Reinvestment Yield with respect to such Called Principal.
"Reinvestment Yield" shall mean, with respect to the Called Principal of
any Note, 0.50% over the yield to maturity implied by (i) the Treasury
Constant Maturity Series yields reported, for the latest day for which such
yields shall have been so reported as of the Business Day next preceding the
Settlement Date with respect to such Called Principal, in Federal Reserve
Statistical Release H.15 (519) (or any comparable successor publication) for
actively traded U.S. Treasury securities having a constant maturity equal to
the Remaining Average Life of such Called Principal as of such Settlement Date,
or if such yields shall not be reported as of such time or the yields reported
as of such time shall not be ascertainable, (ii) the yields reported, as of
10:00 a.m. (New York City time) on the Business Day next preceding the
Settlement Date with respect to such Called Principal, on the display
designated as "Page 678" on the Telerate Service (or such other display as may
replace Page 678 on the Telerate Service) for actively traded U.S. Treasury
securities having a maturity equal to the Remaining Average Life of such
Called Principal as of such Settlement Date. Such implied yield shall be
determined, if necessary, by (a) converting U.S. Treasury bill quotations to
bond-equivalent yields in accordance with accepted financial practice and (b)
interpolating linearly between (1) the actively traded U.S. Treasury bill
with the maturity closest to and greater than the Remaining Average Life,
and (2) the actively traded U.S. Treasury bill with the maturity closest to
and less than the Remaining Average Life.
"Remaining Average Life" shall mean, with respect to the Called Principal
of any Note, the number of years (calculated to the nearest one-twelfth year)
obtained by dividing (i) such Called Principal into (ii) the sum of the
products obtained by multiplying (a) each Remaining Scheduled Payment of such
Called Principal (but not of interest thereon) by (b) the number of years
(calculated to the nearest one-twelfth year) which will elapse between the
Settlement Date with respect to such Called Principal and the scheduled due
date of such Remaining Scheduled Payment.
"Remaining Scheduled Payments" shall mean, with respect to the Called
Principal of any Note, all payments of such Called Principal and interest
thereon that would be due on or after the Settlement Date with respect to
such Called Principal if no payment of such Called Principal were made prior
to its scheduled due date.
"Settlement Date" shall mean, with respect to the Called Principal of any
Note, the date on which such Called Principal is to be prepaid pursuant to
paragraph 4B or is declared to be immediately due and payable pursuant to
paragraph 7A, as the context requires.
"Yield-Maintenance Amount" shall mean, with respect to any Note, an
amount equal to the excess, if any, of the Discounted Value of the Called
Principal of such Note over the sum of (i) such Called Principal plus (ii)
interest accrued thereon as of (including interest due on) the Settlement
Date with respect to such Called Principal. The Yield-Maintenance Amount
shall in no event be less than zero.
10B. Other Terms.
"Affiliate" shall mean:
(a) any Person directly or indirectly controlling, controlled by, or
under direct or indirect common control with, the Corporation.
A Person shall be deemed to control a corporation if such
Person possesses, directly or indirectly, the power to direct
or cause the direction of the management and policies of such
corporation, whether through the ownership of voting securities,
by contract or otherwise,
(b) any Person who beneficially owns or holds 10% or more of any
class of shares of the Corporation, or
(c) any Person, 10% or more of any class of shares (or in the case
of a Person that is not a corporation, 10% or more of the
partnership or equity interest) of which is beneficially
owned or held by the Corporation or a Subsidiary.
"Applicable Environmental Laws" shall mean those Applicable Laws which
pertain to the environment or the release of Hazardous Materials into the
environment, and includes any condition or requirement contained in a permit,
licence, approval, consent or other document issued pursuant to such laws.
"Applicable Laws" shall mean, in relation to any Person, transaction or
event:
(a) all applicable provisions of laws, statutes, rules and
regulations from time to time in effect of any Governmental/
Judicial Body, and
(b) all judgments, orders, awards, decrees, official directives,
writs and injunctions from time to time in effect of any
Governmental/Judicial Body in an action, proceeding or matter
in which the Person is a party or by which it or its property
is bound or having application to the transaction or event.
"Attributable Debt" shall mean, in respect of any Sale-Leaseback
transaction where all of the proceeds thereof have not been reinvested as
contemplated in paragraph 6E(b), the lesser of (a) the fair value of the
assets subject to such transaction, and (b) the present value (discounted
in accordance with GAAP at the interest rate implicit in the lease) of the
obligations of the lessee for rental payments during the term of such lease.
"Business Day" shall mean, when used other than in connection with the
Yield-Maintenance Amount, any day other than a Saturday, a Sunday or a day on
which commercial banks in New York, New York or Calgary, Alberta are required
or authorized to be closed.
"Canadian Dollars" or "Cdn. $" means lawful money of Canada.
"Capitalized Lease Obligation" shall mean, with respect to any Person,
any rental obligation which, under GAAP, would be required to be capitalized
on the books of such Person, taken at the amount thereof accounted for as
indebtedness (net of interest expense) in accordance with such principles.
"Closing" or "Date of Closing" shall have the meaning specified in
paragraph 2.
"Code" shall have the meaning specified in paragraph 8N.
"Confidential Information" shall mean any material non-public information
regarding the Corporation that was clearly marked or labelled or otherwise
adequately identified when received by the holders of Notes as being
"confidential", that is provided to any holder of any Note, any
Person who purchases a participation in a Note and any offeree of a Note or
a participation therein pursuant to this Agreement other than information (a)
which was publicly known or otherwise known to such holder, such Person or
such offeree at the time of disclosure, (b) which subsequently becomes
publicly known through no act or omission of such holder, such Person or
such offeree or (c) which otherwise becomes known to such holder, such Person
or such offeree, other than through disclosure by the Corporation or any
Subsidiary.
"Consolidated Funded Debt" shall mean, as at any date of determination,
the total Funded Debt of the Corporation and its Restricted Subsidiaries
determined on a consolidated basis in accordance with GAAP, after eliminating
all intercompany transactions.
"Consolidated Net Worth" shall mean, as at any date of determination,
shareholders' equity (including capital stock and retained earnings) of the
Corporation and its Restricted Subsidiaries determined on a consolidated basis
in accordance with GAAP as at such date of determination, after eliminating all
amounts properly attributable to minority interests, if any, in the shares
and surplus of Subsidiaries, and after eliminating all earnings which are
derived from assets which are subject to a Lien that secures Non-Recourse Debt.
"ERISA" shall have the meaning specified in paragraph 8N.
"Event of Default" shall mean any of the events specified in paragraph 7A,
provided that there has been satisfied any requirement in connection with such
event for the giving of notice, or the lapse of time, or the happening of any
further condition, event or act, and "Default" shall mean any of such events,
whether or not any such requirement has been satisfied.
"Exchange Act" shall mean the United States Securities Exchange Act of
1934, as amended.
"Funded Debt" shall mean all Indebtedness which is payable more than one
year from the date of creation thereof, including Indebtedness which is
payable within one year but which by its terms is renewable or extendible to
a date beyond one year from the date of creation thereof, but excluding
Non-Recourse Debt. For certainty, obligations and Indebtedness (contingent
or not) under Guarantees of Funded Debt shall be considered to be Funded Debt.
"GAAP" shall mean generally accepted accounting principles in Canada from
time to time approved by the Canadian Institute of Chartered Accountants, or
any successor institute, applicable on the date on which the applicable
determination or calculation is made or required to be made, subject to
paragraphs 10C and 10D.
"Governmental/Judicial Body" shall mean:
(a) any government, parliament or legislature or any regulatory or
administrative authority, agency, commission, tribunal or board
of any government and any other law, regulation or rule making
entity having or purporting to have jurisdiction in the relevant
circumstances, or any Person acting or purporting to act under
the authority of any of the foregoing, and
(b) any judicial, administrative or arbitral court, authority,
tribunal or commission having jurisdiction in the relevant
circumstances.
"Guarantee" shall mean, with respect to any Person, any direct or indirect
liability, contingent or otherwise, of such Person with respect to any
indebtedness, letter of credit, lease, dividend or other obligation of another,
including any such obligation directly or indirectly guaranteed, endorsed
(otherwise than for collection or deposit in the ordinary course of business)
or discounted or sold with recourse by such Person, or in respect of which
such Person is otherwise directly or indirectly liable, including any such
obligation in effect guaranteed by such Person through any agreement
(contingent or otherwise) to purchase, repurchase or otherwise acquire such
obligation or any security therefor, or to provide funds for the payment or
discharge of such obligation (whether in the form of loans, advances, stock
purchases, capital contributions or otherwise), or to maintain the solvency or
any balance sheet or other financial condition of the obligor of such
obligation (including keep-well covenants), in any such case if the purpose or
intent of such agreement is to provide assurance that such obligation will be
paid or discharged, or that the holders of such obligation will be protected
against loss in respect thereof.
"Hazardous Materials" shall mean any substance that:
(a) when released to the natural environment is likely to cause,
immediately or at some future time, material harm or degradation
to the natural environment or any risk to human health and
without restricting the generality of the foregoing, includes
any pollutant, contaminant, waste or hazardous waste, or any
"dangerous goods", "hazardous chemical", "hazardous substance"
or "hazardous waste" as may be defined by Applicable
Environmental Law for the protection of the natural
environment or human health, or (b) exhibits characteristics
of flammability, corrosivity, reactivity or toxicity.
"Indebtedness" shall mean, with respect to any Person, without duplication:
(a) all liabilities for borrowed money of such Person (including,
for certainty, reimbursement obligations in respect of letters
of credit, bankers' acceptances and note purchase facilities,
liabilities of such Person evidenced by a bond, note, debenture
or similar instrument, and liabilities of such Person in
relation to purchase money obligations, deferred purchase price
payments, conditional sales or title retention agreements),
(b) all Capitalized Lease Obligations of such Person, and all
obligations of such Person under Sale-Leasebacks,
(c) all liabilities of such Person under Production Payment
Transactions,
(d) all liabilities secured by a Lien on any property or asset owned
or held by such Person, whether or not the liabilities secured
thereby shall have been assumed, and
(e) all Guarantees of such Person with respect to liabilities of a
type described in the preceding clauses (a) to (d), provided
that contingent liabilities thereunder shall be included only
to the extent of the lesser of (i) the amount of Indebtedness
guaranteed or (ii) the amount to which the maximum exposure of
the Person shall have been expressly limited.
"Lien" shall mean any mortgage, pledge, security interest, encumbrance,
statutory deemed trust, contractual deposit arrangement, lien (statutory or
otherwise) or charge of any kind (including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement or any
Capitalized Lease Obligation) which secures payment or performance of an
obligation, including any right of set-off created for the purpose of securing,
directly or indirectly, the repayment of Indebtedness.
"Material Adverse Effect" shall mean a material adverse effect on the
business, financial condition, operations or property of the Corporation and
its Restricted Subsidiaries taken as a whole, or a material adverse effect on
the rights of the holders hereunder or under the Notes or on the ability of the
Corporation to perform any of its obligations hereunder or under any Note.
"Non-Recourse Debt" means Indebtedness incurred by the Corporation or any
Restricted Subsidiary to finance the acquisition or construction of property or
assets if the terms and conditions of such Indebtedness provide that:
(a) in enforcing their rights in respect of such Indebtedness the
creditors shall have recourse only to, and the obligations of
the Corporation or the Restricted Subsidiary shall be performed,
satisfied and paid only out of, the acquired or constructed (as
the case may be) property or assets or the revenue therefrom
which shall have been mortgaged, pledged or otherwise encumbered
as security for the payment of such Indebtedness, and
(b) no resort or recourse for such purpose shall be had by such
creditors to any other property or assets or revenues of the
Corporation or the Restricted Subsidiary and in particular no
resort or recourse shall be had, judgment issued or execution
or other process levied by such creditors against any of
the property or assets of the Corporation or the Restricted
Subsidiary as the case may be, other than the acquired or
constructed (as the case may be) property or assets or the
revenue therefrom which shall have been mortgaged, pledged or
otherwise encumbered as security for the payment of such
Indebtedness,
provided that if under Applicable Law any creditor in respect of such
Indebtedness could ever become entitled to recourse against the Corporation
or the Restricted Subsidiary pursuant to any bankruptcy, insolvency,
reorganization, moratorium or similar laws of any jurisdiction, or in the
event of a breached representation or warranty or fraud, or for any other
reason, then such instrument shall contain a further provision to the effect
that such creditor's recourse in respect of such Indebtedness shall be and
remain in all respects subordinate and junior to all of the Notes and that
such creditor shall not be entitled to receive any payment, under any condition,
in respect of such Indebtedness, other than the proceeds of such specific
property or assets, until the Notes shall have been indefeasibly paid in full.
"Notes" shall have the meaning specified in paragraph 1.
"Officer's Certificate" shall mean a certificate signed in the name of the
Corporation by any two of its President, a Vice President or its Treasurer.
"Permitted Encumbrances" shall mean, as at any particular time, any of the
following Liens on or in respect of the property or assets of the Corporation
or any Restricted Subsidiary:
(a) Liens of any judgments rendered, or claims filed, against the
Corporation or any Restricted Subsidiary which the Corporation
or Restricted Subsidiary shall be contesting in good faith if
and for so long as (i) a stay of enforcement of such judgment
or claim (if enforceable by seizure, sale or other remedy
against any property), as the case may be, shall, by reason of
a pending appeal or otherwise, be in effect and (ii) in respect
of all such Liens which are in excess of $10,000,000 in the
aggregate, an amount in cash sufficient to pay such judgments
or claims shall have been deposited with a court of competent
jurisdiction,
(b) Liens incurred or created in the ordinary course of business of
the Corporation or any Restricted Subsidiary and in accordance
with sound industry practice and incidental to construction or
operations which have not at such time been filed pursuant to
law or which relate to obligations not due or delinquent,
(c) Liens incurred or created in the ordinary course of business and
in accordance with sound industry practice in respect of any of
the property and assets of the Corporation or any Restricted
Subsidiary as security in favour of any other Person who is
conducting the exploration, development or operation of the
property to which such rights relate for the Corporation's or
Subsidiary's portion of the costs and expenses of such
development or operation which have not at such time been filed
pursuant to law or which relate to obligations not due or
delinquent,
(d) Liens securing assessments under workers' compensation laws,
unemployment insurance or similar social security legislation
which relate to obligations not due or delinquent, and
(e) Liens on any specific property in favour of a government within
or outside Canada or any political subdivision, department,
agency or instrumentality thereof to secure the performance by
the Corporation or any Restricted Subsidiary of any covenant or
obligation to or in favour of or entered into at the request of
any such authorities in the ordinary course of the Corporation's
or Restricted Subsidiary's business where such security is
required pursuant to any statute, order or regulation, and which
relate to obligations not due or delinquent.
"Permitted Title Defects" shall mean, as at any particular time, any of
the following rights, limitations, reservations, provisos, conditions,
exceptions, qualifications, agreements, obligations and interests on or in
respect of the undertaking, property or assets, or any part of the
undertaking, property or assets, of the Corporation or any Restricted
Subsidiary:
(a) easements, rights-of-way, servitudes, and similar rights in land
(including rights-of-way and servitudes for railways, sewers,
drains, gas and oil pipelines, gas and water mains, electric
light and power and telephone or telegraph or cable television
conduits, poles, wires and cables) granted to or reserved or
taken by other Persons, which, individually or in the aggregate,
do not materially detract from the use or value of the property
subject thereto,
(b) the reservations, limitations, provisos and conditions in any
original grants from the Crown of any land or interests therein
and statutory exceptions, qualifications and reservations in
respect of title,
(c) the rights reserved or vested in any governmental or other
authority or Person by the terms of any leases, or by any
statutory provisions to terminate any such leases, or to require
annual or other periodic payments as a condition of the
continuance thereof,
(d) royalties, overriding royalties, net profits and other interests
and obligations arising in the ordinary course of business and
in accordance with sound industry practice under leases in which
the Corporation or Restricted Subsidiaries have an interest,
(e) any agreement, or any interest or right created in favour of any
Person thereunder, relating to pooling or unitization affecting
the property and arising in the ordinary course of business and
in accordance with sound industry practice,
(f) any rights of first refusal, pre-emption or first purchase or
requirements of consent to sale or disposition, created in the
ordinary course of business, none of which have become
exercisable heretofore or as a result of the execution and
delivery of this Agreement or will, merely on the passage of
time, become exercisable, and
(g) the potential existence of defects in title which are not
general in application and which in the aggregate do not
materially detract from the value of the petroleum and natural
gas lands and rights of the Corporation or any Restricted
Subsidiary or any significant part thereof or materially impair
the use of any thereof in the operation of their respective
businesses, or the cash flow therefrom.
"Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, a limited liability company, an unincorporated
organization and a government or any department or agency thereof.
"Priority Debt" shall mean the aggregate, without duplication, of (a)
Indebtedness of the Corporation or Restricted Subsidiaries that is secured by
any Lien other than Liens expressly permitted by clauses (i) to and including
(viii) of paragraph 6B, plus (b) Indebtedness of the Corporation or Restricted
Subsidiaries associated with Production Payment Transactions, plus (c) Funded
Debt of Restricted Subsidiaries, plus (d) Attributable Debt in respect of Sale-
Leaseback transactions entered into after the date of this Agreement.
"Private Placement Memorandum" means the Private Placement Memorandum dated
June 1995 furnished to the Purchasers through Nesbitt Burns Securities Inc. and
Toronto Dominion Securities (USA) Inc.
"Production Payment Transactions" shall mean:
(a) the sale (including any forward sale) or other transfer of
petroleum or natural gas substances, chemicals, minerals or
other products of the Corporation or a Restricted Subsidiary,
whether in place or when produced, for a period of time until,
or an amount such that, the purchaser will realize a specified
amount of money (however determined, including by reference
to interest rates or other factors which may not be fixed) or a
specified amount of such products, or
(b) any other transaction involving an interest in property of the
character commonly referred to as a "production payment",
but excluding, for certainty, any sale or forward sale entered into for the sole
purpose of risk management/hedging in respect of production prices in the
ordinary course of the Corporation's business.
"Responsible Officer" shall mean the chief executive officer, chief
operating officer, chief financial officer, any vice president, or treasurer
of the Corporation.
"Required Holders" shall mean the holder or holders of more than 50% of
the aggregate principal amount of the Notes from time to time outstanding,
exclusive of Notes held by Affiliates.
"Reserve Report" shall mean a consolidated engineering evaluation of and
report on all proven producing and proven non-producing petroleum and natural
gas rights now or hereafter owned by the Corporation and its Restricted
Subsidiaries in form, detail and content satisfactory to the Required Holders
and setting out estimates of reserves and cash flows attributable thereto,
prepared by an independent engineer or firm of engineers [or qualified in-house
engineer], provided that either (a) an evaluation and report that is acceptable
to the Corporation's principal bankers or (b) an evaluation and report that
accords with regulations or guidelines established by provincial securities
regulatory authorities, shall be deemed to be satisfactory to the Required
Holders.
"Restricted Subsidiary" shall mean each Subsidiary identified as a
Restricted Subsidiary in Schedule D, and any Subsidiary which has substantially
all of its assets located and a majority of its business conducted within the
member countries (from time to time) of the Organization for Economic
Co-operation and Development, and which is hereafter designated as a Restricted
Subsidiary by the Chief Executive Officer, the President and Chief Operating
Officer, or the Vice President, Finance, of the Corporation (such designation
to be effective upon receipt by all holders of Notes of a notice of such
designation in the form of Schedule E duly completed and signed by
the Corporation), provided that no Subsidiary may be designated as a Restricted
Subsidiary if after giving effect thereto a Default or Event of Default would
exist, or if the Corporation could not incur at least $1.00 of Indebtedness
secured by Liens in compliance with paragraph 6B(ix) and at least $1.00 of
additional Indebtedness in compliance with paragraphs 6C and 6D or if any
shares in its capital stock are owned by a Subsidiary that is not itself a
Restricted Subsidiary.
The Chief Executive Officer, the President and Chief Operating Officer, or the
Vice President, Finance, of the Corporation may remove the designation of any
Restricted Subsidiary (the Subsidiary to cease being a Restricted Subsidiary
upon receipt by all holders of Notes of a notice to that effect signed by the
Corporation), if the following conditions are met: (a) the Corporation
shall be able to incur at least $1.00 of Indebtedness secured by Liens in
compliance with paragraph 6B(ix), and at least $1.00 of additional Indebtedness
in compliance with paragraphs 6C and 6D, immediately after such removal, (b)
no Default or Event of Default has occurred and is continuing or would exist
immediately after such removal, and (c) the Subsidiary being removed
does not directly or indirectly own any Funded Debt of, or shares in the
capital stock of, any Restricted Subsidiary.
If a Subsidiary previously removed as a Restricted Subsidiary is again
designated hereunder, then any deemed creation of Liens or incurrence of
Indebtedness under paragraph 6B, 6C or 6D shall be deemed to have been created
or incurred on the date of such designation.
"Sale-Leaseback" means an arrangement under which title to any property or
an interest therein, is transferred by or on the direction of a person ("X") to
another person which leases or otherwise grants the right to use such property,
asset or interest to X or nominee of X, whether or not in connection therewith
X also acquires a right or is subject to an obligation to acquire the
property, asset or interest, and regardless of the accounting treatment of such
arrangement.
"Securities Act" shall mean the United States Securities Act of 1933, as
amended.
"Subsidiary" shall mean any corporation organized under the laws of Canada,
or any province of Canada, or any state of the United States of America, over
50% of the total combined voting power of all classes of Voting Stock of which
shall, at the time as of which any determination is being made, be owned by the
Corporation either directly or through Subsidiaries, provided that in the case
of a "wholly-owned Subsidiary", 100% of the issued and outstanding shares in the
capital of such Subsidiary shall, at the time as of which any determination
is being made, be owned by the Corporation either directly or through wholly-
owned Subsidiaries.
"Total Capitalization" shall mean Consolidated Net Worth plus Consolidated
Funded Debt.
"Transferee" shall mean any direct or indirect transferee of all or any
part of any Note purchased by any Purchaser under this Agreement.
"Voting Stock" shall mean, with respect to any corporation, any shares of
stock of such corporation whose holders are entitled under ordinary
circumstances to vote for the election of directors of such corporation
(irrespective of whether at the time stock of any other class or classes
shall have or might have voting power by reason of the happening of any
contingency).
"U.S. Dollars" or "U.S. $" means lawful currency of the United States of
America.
10C. Accounting Principles, Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
determinations with respect to accounting matters hereunder shall be made, and
all financial statements and certificates and reports as to financial matters
required to be furnished hereunder shall be prepared, in accordance with GAAP,
applied on a basis consistent with the most recent audited consolidated
financial statements of the Corporation and its Subsidiaries delivered pursuant
to clause (ii) of paragraph 5A or, if no such statements have been so delivered,
the most recent audited financial statements referred to in clause (a) of
paragraph 8B.
10D. Changes in GAAP. If, due to a change in GAAP after the date hereof,
the Corporation or the Required Holders determine that an amount required to be
calculated for purposes of a financial covenant in paragraphs 6A, 6B(ix), 6C, 6D
and 6E would be materially different if such amount were calculated in
accordance with GAAP in effect on the date hereof, and the parties hereto
cannot agree on equitable adjustments (if any) that may be required to deal
therewith, then either the Corporation or the Required Holders may give written
notice to the other party that it desires to revert, for such purposes, to GAAP
on the date hereof. Effective as of the first day of the fiscal quarter in
which such change in GAAP became effective, the term "GAAP" shall thereafter
be deemed to mean GAAP in effect on the date hereof, together with changes in
GAAP that are not objected to for these purposes after the date hereof, for
the purposes of such financial covenants. Within 30 days of such notice being
given, the Corporation shall deliver to each holder of Notes:
(a) revised financial statements prepared utilizing GAAP in effect
on the date hereof, together with changes in GAAP that are not
objected to for these purposes after the date hereof, and
(b) a revised Officer's Certificate pursuant to paragraph 5A
utilizing, for the purposes of such financial covenants, such
revised financial statements.
No notice shall be delivered under this paragraph except within one year of the
date that the objectionable change in GAAP was made.
PARAGRAPH 11. MISCELLANEOUS.
11A. Note Payments. So long as any Purchaser shall hold any Note, the
Corporation will make payments of principal of, interest on and any Yield-
Maintenance Amount payable with respect to such Note in compliance with the
terms of the Note and this Agreement, such payments to be made by wire transfer
of immediately available funds for credit (not later than 10:00 a.m.,
New York City time, on the date due) to such Purchaser's account or accounts as
specified in the Purchaser Schedule attached hereto, or such other account or
accounts in the United States as such Purchaser may designate in writing,
notwithstanding any contrary provision herein or in any Note with respect to
the place of payment. Each Purchaser agrees that, before disposing of any Note,
such Purchaser will make a notation thereon (or on a schedule attached thereto)
of all principal payments previously made thereon and of the date to which
interest thereon has been paid. The Corporation agrees to afford the benefits
of this paragraph 11A to any transferee which shall have made the same agreement
as each Purchaser has made in this paragraph 11A.
11B. Expenses. The Corporation agrees, whether or not the transactions
contemplated hereby shall be consummated, to pay, and save each Purchaser and
any holder of a Note harmless against liability for the payment of, all out-of-
pocket expenses arising in connection with such transactions, including (i)
all document production and duplication charges and the reasonable fees
and expenses of special counsel (and, if reasonably required, local or other
counsel) engaged by the Purchasers or such holders of a Note in connection with
this Agreement, the transactions contemplated hereby (including the reasonable
fees and expenses of Macleod Dixon) and any subsequent proposed modification
of, or proposed consent or waiver under, this Agreement, whether or not such
proposed modification shall be effected or proposed consent or waiver
granted, (ii) the fees for obtaining a private placement number for the Notes
from Standard & Poors CUSIP Service Bureau, and (iii) the costs and expenses,
including attorneys' fees and solicitors' fees (on a solicitor and his own
client basis), incurred by such Purchaser or such holder of a Note in enforcing
(or determining whether or how to enforce) any rights under this Agreement
or the Notes or in responding to any subpoena or other legal process or
informal investigative demand of any Governmental/Judicial Body issued in
connection with this Agreement or the transactions contemplated hereby or by
reason of such Purchaser's or such holder's having acquired any Note, including
costs and expenses incurred in any bankruptcy case. The obligations of the
Corporation under this paragraph 11B shall survive the transfer of any Note or
portion thereof or interest therein by any Purchaser or any holder of a Note
and the payment of any Note provided that the Corporation shall not be liable
for legal fees of a Purchaser or Transferee in connection with the transfer of
a Note or any portion thereof.
11C. Consent to Amendments. This Agreement may be amended, and the
Corporation may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, if the Corporation shall obtain the
written consent to such amendment, action or omission to act, of the holders
of not less than 66 2/3% of the aggregate principal outstanding on the Notes
(exclusive of Notes held by Affiliates) except that, without the written
consent of the holder or holders of all Notes at the time outstanding, no
amendment to this Agreement shall change the maturity of any Note, or change
the principal of, or the time of payment of interest on or any Yield-
Maintenance Amount payable with respect to any Note, or affect the time,
amount or allocation of any prepayments, or reduce the rate on the Notes, or
change the proportion of the principal amount of the Notes required with
respect to any consent, amendment, waiver or declaration. The Corporation
shall provide to each holder of a Note sufficient information in
respect of the amendment or consent requested to allow it to make a fully
informed decision thereon, and shall also, if requested by the Required
Holders, certify that no Default or Event of Default has occurred or is then
continuing or would occur if such amendment is made or consent granted. Each
holder of any Note at the time or thereafter outstanding shall be bound by
any consent authorized by this paragraph 11C, whether or not such Note shall
have been marked to indicate such consent, but any Notes issued thereafter may
bear a notation referring to any such consent. No course of dealing between
the Corporation and the holder of any Note nor any delay in exercising any
rights hereunder or under any Note shall operate as a waiver of any rights of
any holder of such Note. As used herein and in the Notes, the term "this
Agreement" and references thereto shall mean this Agreement as it may from
time to time be amended or supplemented.
11D. Form, Registration, Transfer and Exchange of Notes; Lost Notes.
(a) The Notes are issuable as registered notes without coupons in
amounts of at least U.S. $1,000,000, except as may be necessary
to reflect any principal amount not evenly divisible by U.S.
$1,000,000. Except as repaid or prepaid in accordance herewith,
no holder of a Note shall hold less than an aggregate principal
amount of U.S. $1,000,000 of Notes.
(b) The Corporation shall keep at its principal office a register in
which the Corporation shall provide for the registration of
Notes and of transfers of Notes. Upon surrender for registration
of transfer of any Note at the principal office of the
Corporation, the Corporation shall, at its expense, execute and
deliver one or more new Notes of like tenor and of a like
aggregate principal amount, registered in the name of such
transferee or transferees. At the option of the holder of any
Note, such Note may be exchanged for other Notes of like tenor
and of any authorized denominations, of a like aggregate
principal amount, upon surrender of the Note to be exchanged at
the principal office of the Corporation. Whenever any Notes are
so surrendered for exchange, the Corporation shall, at its ex-
pense, execute and deliver the Notes which the holder making the
exchange is entitled to receive. Every Note surrendered for
registration of transfer or exchange shall be duly endorsed, or
be accompanied by a written instrument of transfer duly executed,
by the holder of such Note or such holder's attorney duly
authorized in writing. Any Note or Notes issued in exchange
for any Note or upon transfer thereof shall carry the rights
to unpaid interest and interest to accrue which were carried by
the Note so exchanged or transferred, so that neither gain nor
loss of interest shall result from any such transfer or exchange.
(c) Upon receipt of written notice from the holder of any Note of
the loss, theft, destruction or mutilation of such Note and, in
the case of any such loss, theft or destruction, upon receipt of
such holder's unsecured indemnity agreement, or in the case of
any such mutilation upon surrender and cancellation of such Note,
the Corporation will make and deliver a new Note, of like tenor,
in lieu of the lost, stolen, destroyed or mutilated Note.
11E. Persons Deemed Owners; Participations. Prior to due presentment for
registration of transfer, the Corporation may treat the Person in whose name
any Note is registered as the owner and holder of such Note for the purpose of
receiving payment of principal of, interest on and any Yield-Maintenance Amount
payable with respect to such Note and for all other purposes whatsoever,
whether or not such Note shall be overdue, and the Corporation shall not
be affected by notice to the contrary. Subject to the preceding sentence, the
holder of any Note may from time to time grant participations in such Note to
any Person on such terms and conditions as may be determined by such holder in
its sole and absolute discretion, provided that any such participation shall be
in a principal amount of at least U.S. $250,000.
11F. Survival of Representations and Warranties; Entire Agreement. All
representations and warranties contained herein or made in writing by or on
behalf of the Corporation in connection herewith shall survive the execution
and delivery of this Agreement and the Notes, the transfer by any Purchaser of
any Note or portion thereof or interest therein and the payment of any Note,
and may be relied upon by any Transferee, regardless of any investigation made
at any time by or on behalf of any Purchaser. Subject to the preceding
sentence, this Agreement and the Notes embody the entire agreement and
understanding between the Purchasers and the Corporation and supersede all
prior agreements and understandings relating to the subject matter hereof.
11G. Successors and Assigns. All covenants and other agreements in this
Agreement contained by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the parties
hereto (including any Transferee) whether so expressed or not.
11H. Disclosure to Other Persons; Confidentiality. Except as provided in
this paragraph 11H, each holder and each Person who purchases a participation
in a Note or any part thereof agrees that, prior to the occurrence of a Default,
it will, in accordance with its usual practices, hold in confidence and not
disclose the Confidential Information. The Corporation acknowledges that the
holder of any Note may deliver copies of any financial statements and other
documents delivered to such holder, and disclose any other information disclosed
to such holder, by or on behalf of the Corporation or any Subsidiary in
connection with or pursuant to this Agreement to (i) such holder's directors,
officers, employees, agents and professional consultants (to the extent such
disclosure relates to the administration of the investment represented by the
Notes), (ii) any other holder of any Note, (iii) any Person to which
such holder offers to sell such Note or any part thereof, and any Person to
which such holder sells or offers to sell a participation in all or any part
of such Note (if such Person has agreed in writing prior to its receipt of s
uch Confidential Information to be bound by this paragraph), (iv) any Person
from which such holder offers to purchase any security of the Corporation (if
such Person has agreed in writing prior to its receipt of such Confidential
Information to be bound by this paragraph), (v) any federal or state regulatory
authority having jurisdiction over such holder, (vi) the National Association
of Insurance Commissioners (including the Securities Valuation Office) or any
similar organization, (vii) rating agencies that require access to information
about the Purchaser's investment portfolio, or (viii) any other Person to which
such delivery or disclosure may be necessary or appropriate (a) in compliance
with any law, rule, regulation or order applicable to such holder, (b) in
response to any subpoena or other legal process or informal investigative
demand of a Governmental/Judicial Body or (c) in connection with any litigation
to which such holder is a party.
11I. Notices. All notices or other communications provided for hereunder
(except for the facsimile notice required by paragraph 4C) shall be in writing
and sent by nationwide overnight delivery service (with charges prepaid) and
(i) if to any Purchaser, addressed to such Purchaser at the address specified
for such communications in the Purchaser Schedule attached hereto, or at such
other address as such Purchaser shall have specified to the Corporation in
writing, (ii) if to any other holder of any Note, addressed to such other
holder at such address as such other holder shall have specified to the
Corporation in writing or, if any such other holder shall not have so specified
an address to the Corporation, then addressed to such other holder in
care of the last holder of such Note which shall have so specified an address
to the Corporation, and (iii) if to the Corporation, addressed to it at Suite
3000, 400 Third Avenue S.W., Calgary, Alberta, T2P 4H2 Attention: Vice
President, Finance, or at such other address as the Corporation shall have
specified to the holder of each Note in writing; provided that any such
communication to the Corporation may also, at the option of the holder of any
Note, be delivered by any other means either to the Corporation at its address
specified above or to any officer of the Corporation.
11J. Payments Due on Non-Business Days. Anything in this Agreement or the
Notes to the contrary notwithstanding, any payment of principal of or interest
on any Note that is due on a date other than a Business Day shall be made on the
next succeeding Business Day. If the date for any payment is extended to the
next succeeding Business Day by reason of the preceding sentence, the period of
such extension shall be included in the computation of the interest payable
on such Business Day, provided that this shall not result in duplication of
interest payable.
11K. Satisfaction Requirement. If any agreement, certificate or other
writing, or any action taken or to be taken, is by the terms of this Agreement
required to be satisfactory to any Purchaser or to the Required Holders, the
determination of such satisfaction shall be made by such Purchaser or the
Required Holders, as the case may be, in the sole and exclusive judgment
(exercised in good faith) of the Person or Persons making such determination.
11L. Governing Law and Submission to Jurisdiction.
(a) THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL
BE GOVERNED BY, THE LAW OF THE PROVINCE OF ALBERTA
AND THE LAW OF CANADA APPLICABLE THEREIN.
(b) The Corporation agrees that the courts of Alberta shall have
jurisdiction to hear and determine any suit, action or proceeding
and to settle any disputes which may arise out of or in
connection with the aforesaid documents and it irrevocably
submits to the non-exclusive jurisdiction of such courts,
without prejudice to the rights of any holder to take proceedings
in any other jurisdictions, whether concurrently or not.
(c) The Corporation agrees that final judgment in any such suit,
action or proceeding brought in such courts shall be conclusive
and binding upon it and may be enforced against it in the courts
of Canada (or any other courts to the jurisdiction of which it
or its property is subject) by a suit upon such judgment,
provided that it does not waive any right to appeal any such
judgment, to seek any stay or otherwise to seek reconsideration
or review of any such judgment.
11M. Amendments. This Agreement may not be changed orally, but (subject to
the provisions of paragraph 11C) only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification or discharge
is sought.
11N. Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
11O. Descriptive Headings. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
11P. Payment Free from Equities. The Notes shall be paid by the
Corporation, and may be assigned by each holder, absolutely free and clear of
all equities, rights of set-off, claims, defenses, counterclaims, rights or
other matters whatsoever (collectively, "Claims"), whether existing between a
holder and the Corporation and/or any third parties or intermediate holders,
and whether now existing or hereafter arising (before or after notice of any
assignment to the Corporation) which could impair or adversely affect in any
way the entitlement of any present or future holder to enforce the Notes
strictly in accordance with the terms and provisions hereof and of the Note,
and the Corporation hereby agrees not to assert, as against any assignee or any
present or future holder, any Claims arising out of this Agreement or any Note
(other than the defense that obligations hereunder have been performed or
observed by the Corporation). For greater certainty, but without limiting the
generality of the foregoing, the foregoing shall apply:
(a) notwithstanding that such Claim arises due to any act or
omission of any holder or any intermediate holder or any other
party;
(b) regardless of how closely or inseparably connected such Claim is
to the obligations or whether it flows out of dealings or
transactions related thereto; and
(c) notwithstanding actual or constructive notice to any assignee or
any present or future holder, or to any intermediate holder of a
Note or any other third party of such Claim, regardless of when
received or deemed to be received.
The foregoing shall be without prejudice to the right of the Corporation to
subsequently assert any Claim as against the assignor.
11Q. Note Repayment Net of Withholding Imposts. (a) All payments by the
Corporation under this Agreement or any Note, whether in respect of principal,
Yield-Maintenance Amount (if any), interest, interest on overdue interest, fees
or any other payment obligations, shall be made in full without any deduction
or withholding (whether in respect of or on account of taxes, charges or
otherwise whatsoever) unless the Corporation is prohibited by Applicable Law
from doing so, in which event the Corporation shall:
(i) ensure that the deduction or withholding does not exceed the
minimum amount legally required;
(ii) forthwith pay to the holder of each Note such additional amount
so that the net amount received by the holder will equal the
full amount which would have been received by it had no such
deduction or withholding been made;
(iii) pay to the relevant taxation or other authorities within the
period for payment permitted by Applicable Law the full
minimum amount of the deduction or withholding (including the
full amount of any deduction or withholding from any additional
amount paid pursuant to this paragraph); and
(iv) furnish to the holder of each Note promptly, as soon as
available, an official receipt of the relevant taxation or
other authorities involved for all amounts deducted or withheld
as aforesaid.
(b) If as a result of any payment by the Corporation under this
Agreement or any Note, whether in respect of principal, Yield-Maintenance
Amount (if any), interest, interest on overdue interest, fees or other payment
obligations, any holder is required to pay tax under Part XIII of the Income
Tax Act (Canada) or any successor provisions (for instance, in accordance
with Section 803 of the Regulations to the Income Tax Act), then the
Corporation will, upon demand by the holder of any Note, and whether or not
such taxes are correctly or legally asserted, indemnify the holder of each
Note for the payment of any such taxes, together with any interest, penalties
and expenses in connection therewith. All such amounts shall be payable by the
Corporation on demand and shall bear interest at 7.76% per annum calculated
from the date incurred by the holder to the date paid by the Corporation.
(c) If, as a result of a change in Applicable Laws after the date
hereof, the Corporation is required to make payments to all holders of Notes
under paragraph (a)(ii) above or make any indemnity payment to all holders of
Notes under paragraph (b) above, then, unless all holders of Notes waive future
obligations under this paragraph 11Q (without prejudice to accrued obligations),
the Corporation shall be entitled to prepay the Notes in whole at 100% of
the principal thereof plus interest thereon to the prepayment date, plus all
accrued but unpaid obligations under this paragraph 11Q to and including the
date of prepayment, subject to the notice requirements in paragraph 4C hereof,
provided that the Corporation's right to repay under this paragraph shall
terminate if the Corporation has not given notice of optional prepayment under
paragraph 4C(a) within 30 days after the Corporation is first called upon by
any holder to honour its payment or indemnity obligations in paragraph (a)(ii)
or (b) above, respectively.
11R. Interest.
(a) In respect of any overdue amounts hereunder or under the Notes
where no provision is made herein or therein for payment of
interest thereon, the Corporation shall pay interest on such
overdue amounts on demand, calculated from the date such unpaid
amount is due until such unpaid amount is paid in full at 7.76%
per annum.
(b) In no event shall any interest or fee to be paid hereunder or
under a Note exceed the maximum rate permitted by Applicable
Law. In the event any such interest rate or fee exceeds such
maximum rate, such rate shall be adjusted downward to the
highest rate (expressed as a percentage per annum) or fee that
the parties could validly have agreed to by contract on the date
hereof under Applicable Law. It is further agreed that any
excess actually received by a holder shall be credited against
the principal of the Notes (or, if the principal shall have been
or would thereby be paid in full, the remaining amount shall be
credited to the Corporation).
(c) All interest (including interest on overdue interest) payable by
the Corporation hereunder and under the Notes shall accrue from
day to day, computed as provided herein, and shall be payable
after as well as before maturity, demand, default and judgment.
11S. Counterparts. This Agreement may be executed in any number of
counterparts, and by facsimile, all of which together shall constitute one
instrument.
11T. Severalty of Obligations. The sales of Notes to the Purchasers are
to be several sales, and the obligations of the Purchasers under this Agreement
are several obligations. Except as provided in paragraph 3F, no failure by any
Purchaser to perform its obligations under this Agreement shall relieve any
other Purchaser or the Corporation of any of its obligations hereunder, and no
Purchaser shall be responsible for the obligations of, or any action taken or
omitted by, any other Purchaser hereunder.
11U. Judgment Currency.
(a) If for the purposes of obtaining judgment in any court it
becomes necessary to convert any amount due hereunder or under
a Note in one currency into another currency, then the conversion
shall be made at the Rate of Exchange prevailing on the last
Business Day before the day on which the judgment is given.
"Rate of Exchange" means the rate at which the holder is able
on the relevant date to purchase the currency being converted for
such other currency.
(b) In the event that there is a change in the Rate of Exchange
prevailing between the Business Day before the day on which the
judgment is given and the date of payment, the Corporation will
pay such additional amount (if any) or, as the case may be, the
holder will refund such amount (if any) as may be necessary to
ensure that the amount paid on such date is the amount in such
other currency which, when converted at the Rate of Exchange
prevailing on the date of payment, is the amount then due under
this Agreement or any Note in the currency which was converted.
(c) Any amount due from the Corporation or any holder pursuant to
this Section will be due as a separate debt and shall not be
affected by judgment being obtained for any other sum due under
or in respect of this Agreement or any Note.
(d) The Corporation shall indemnify each holder against payment by
the holder of any premiums and costs of exchange incurred in
connection with the purchase of, or conversion into, the relevant
currency.
11V. Currency; Time; "Including"; Interest Equivalency; Currency
Conversion.
(a) Unless otherwise stated, references in this Agreement to dollar
amounts or $ shall be deemed to be references to Canadian
Dollars.
(b) Unless otherwise stated, references to time shall mean local time
in Calgary, Alberta.
(c) The word "including" shall not be construed to limit or restrict
the generality of the matter that precedes it.
(d) Interest on the Notes shall be computed on the basis of a 360-day
year of 12 30-day months. Solely for purposes of the Interest
Act (Canada), the yearly rate of interest to which interest
calculated for a period of less than one year on the basis of
a year of 360 days consisting of 12 30-day periods is equivalent
is such rate of interest multiplied by a fraction of which (i)
the numerator is the product of (A) the actual number of days in
the year commencing on the first day of such period, multiplied
by (B) the sum of (y) the product of 30 multiplied by the number
of complete months elapsed in such period and (z) the actual
number of days elapsed in any incomplete month in such period;
and (ii) the denominator is the product of (a) 360 multiplied by
(b) the actual number of days in such period.
(e) The theory of "deemed reinvestment" shall not apply to the
computation of interest and no allowance, reduction or deduction
shall be made for the deemed reinvestment of interest in respect
of any payments. Calculation of interest shall be made using
the nominal rate method, and not the effective rate method, of
calculation.
(f) A reference in this Agreement to the equivalent of one currency
in another currency shall mean the equivalent determined using
the noon spot rate of exchange for conversion announced by the
Bank of Canada on the day for conversion.
(g) For certainty, the words "property" and "assets" are used
interchangeably herein, and include both real and personal
property.
(h) To the extent permitted by law, Section 6 of the Judgment
Interest Act (Alberta) is hereby waived and shall not apply to
this Agreement or the Notes.
11W. Further Assurances.
(a) Each party shall promptly cure any defect by it in the execution
and delivery of this Agreement or the Notes.
(b) The Corporation, at its expense, shall promptly execute and
deliver to any holder of a Note, upon request by such holder in
writing, all such other and further documents, agreements,
opinions, certificates and instruments in order to give effect
to the covenants and agreements of the Corporation in this
Agreement or the Notes, and shall make any recording, file any
notice or obtain any consent in connection therewith, all as may
be reasonably necessary or appropriate in connection therewith.
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterparts of this letter and return the same to
the Corporation, whereupon this letter shall become a binding agreement among
the Corporation and the Purchasers.
Very truly yours,
MORRISON PETROLEUMS LTD.
By: ________________________________________
Chairman and
Chief Executive Officer
By: _________________________________________
Treasurer
The foregoing Agreement is hereby
accepted as of the date first
above written.
CONNECTICUT GENERAL LIFE PRINCIPAL MUTUAL LIFE INSURANCE
INSURANCE COMPANY COMPANY
By: CIGNA Investments, Inc.
By: By:
Title: Title:
By:
Title:
CONNECTICUT GENERAL LIFE CONNECTICUT MUTUAL LIFE
COMPANY, on behalf of INSURANCE COMPANY
one or more separate accounts
By: CIGNA Investments, Inc. By:
Title:
By: By:
Title: Title:
C M LIFE INSURANCE COMPANY CIGNA PROPERTY AND CASUALTY
INSURANCE COMPANY
By: CIGNA Investments, Inc.
By: By:
Title: Title:
By: By:
Title: Title:
SECURITY LIFE OF DENVER LIFE INSURANCE COMPANY OF
INSURANCE COMPANY NORTH AMERICA
By: CIGNA Investments, Inc.
By: By:
Title: Title:
By:
Title:
[Execution Copy] Exhibit 10.4
NORTHSTAR ENERGY CORPORATION
U.S. $150,000,000
6.79% SENIOR NOTES DUE 2009
NOTE AGREEMENT
Dated as of March 2, 1998
This Agreement contains confidentiality obligations in paragraph 11X.
<PAGE>
TABLE OF CONTENTS
(Not Part of Agreement)
1. AUTHORIZATION OF ISSUE OF NOTES 1
2. PURCHASE AND SALE OF NOTES 1
3. CONDITIONS PRECEDENT 2
3A. Certain Documents 2
3B. Opinions of Purchaser's Special Counsel 4
3C. Representations and Warranties; No Default 4
3D. Purchase Permitted By Applicable Laws 4
3E. Proceedings 5
3F. Private Placement Number 5
3G. Structuring Fee 5
4. PREPAYMENTS 5
4A. Required Prepayments 5
4B. Optional Prepayment With Yield-Maintenance Amount 6
4C. Notice of Optional Prepayment 6
4D. Partial Payments Pro Rata 7
4E. Retirement of Notes 7
5. AFFIRMATIVE COVENANTS 8
5A(1). Financial Statements 8
5A(2). Compliance Certificates 9
5A(3). Auditors Certificate 10
5A(4). Notice of Default or Event of Default 10
5B. Information Required by Rule 144A 10
5C. Inspection of Property 10
5D. Covenant to Secure Notes Equally 11
5E. Engineering Reports; Accuracy of Engineering Reports 11
5F. Corporate Existence; Existence of Material Subsidiaries 12
5G. Compliance With Applicable Laws 12
5H. Payment of Taxes 12
5I. Environmental Matters 13
5J. Insurance 13
5K. Ranking With Other Debt 14
5L. Material Subsidiary Test 14
5M. Material Subsidiary Guarantee; Release of Certain Guarantees 14
5N. Payment and Performance 15
5O. Payment of Other Obligations 15
5P. Maintenance of Books and Records 15
5Q. Subsidiary Designation 15
5R. Proceeds 16
5S. Filings 16
5T. Defend Title 16
5U. West Windsor Power 16
6. NEGATIVE COVENANTS 16
6A. Financial Covenants. 17
6A(3) Alternate Consolidated Net Worth Test 17
6B. Liens and Other Restrictions 17
6C. Joint Venture Company 20
6D. Change of Business 20
6E. Actions in Respect of Material Subsidiaries 20
6F. Constating Documents 21
6G. Amendments to Bank Agreement 21
6H. Most Favoured Lender Status 21
6I. Northstar Energy Partnership 23
7. EVENTS OF DEFAULT 23
7A. Acceleration 23
7B. Rescission of Acceleration 28
7C. Notice of Acceleration or Rescission 29
7D. Other Remedies 29
8. REPRESENTATIONS, COVENANTS AND WARRANTIES 29
8A. Organization 29
8B. Financial Statements 30
8C. Actions Pending 31
8D. Outstanding Indebtedness 31
8E. Title to Properties 31
8F. Taxes 32
8G. Conflicting Agreements and Other Matters 32
8H. Private Offering of Notes 32
8I. Use of Proceeds 33
8J. Governmental Consent 33
8K. Environmental Compliance 33
8L. Environmental Disclosure 35
8M. Environmental Risk Management 35
8N. Disclosure 35
8O. Pari Passu 36
8P. ERISA 36
8Q. Foreign Assets Control Regulations, etc. 36
8R. Investment Company Act and Public Utility Holding Company Status 36
8S. Engineering Reports 37
8T. Subsidiaries 37
8U. Material Subsidiaries 37
8V. West Windsor Power 37
8W. Indeck 37
8X. PLC-Windsor Ltd. 37
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER 38
9A. Representations and Warranties of the Purchaser 38
9B. Representations, Acknowledgements and Covenants of the Purchaser 39
10. DEFINITIONS 40
10A. Yield-Maintenance Terms 40
10B. Other Terms 42
10C. Accounting Principles, Terms and Determinations 65
11. MISCELLANEOUS 65
11A. Note Payments 65
11B. Expenses 65
11C. Consent to Amendments 66
11D. Form, Registration, Transfer and Exchange of Notes; Lost Notes 67
11E. Persons Deemed Owners; Participations 67
11F. Survival of Representations and Warranties 68
11G. Entire Agreement 68
11H. Successors and Assigns 68
11I. Notices 68
11J. Payments Due on Non-Business Days 68
11K. Satisfaction Requirement 69
11L. Governing Law and Submission to Jurisdiction 69
11M. Amendments 69
11N. Severability 69
11O. Descriptive Headings 70
11P. Payment Free from Equities 70
11Q. Note Repayment Net of Withholding Imposts 70
11R. Interest 72
11S. Counterparts 73
11T. Currency References, Conversion and Payments 73
11U. Judgment Currency 73
11V. Time; "Including"; "Assets"; "Property" 74
11W. Environmental Indemnity 74
11X. Disclosure to Other Persons; Confidentiality 75
11Y. Further Assurances 76
PURCHASER SCHEDULE
SCHEDULE A -- FORM OF NOTE
SCHEDULE B FORM OF OPINION OF CORPORATION'S COUNSEL
SCHEDULE C -- EXISTING LIENS, AGREEMENTS RESTRICTING DEBT, AND
OUTSTANDING DEBT
SCHEDULE D -- MATERIAL SUBSIDIARY GUARANTEE
SCHEDULE E -- FORM OF COMPLIANCE CERTIFICATE
SCHEDULE F -- OTHER PERMITTED COUNTRIES
SCHEDULE G -- SUBSIDIARIES
SCHEDULE H -- EXCLUDED ASSETS
<PAGE>
NORTHSTAR ENERGY CORPORATION
3000, 400 - 3rd Avenue S.W.
Calgary, Alberta
T2P 4H2
As of March 2, 1998
To: The Prudential Insurance Company of America
c/o Prudential Capital Group
Gateway Center Four
100 Mulberry Street
Newark, NJ 07102-4069
U.S. $150,000,000 6.79% Senior Notes due March 2, 2009
Ladies and Gentlemen:
The undersigned, Northstar Energy Corporation (the "Corporation"), hereby
agrees with you as follows:
PARAGRAPH 1. AUTHORIZATION OF ISSUE OF NOTES.
1. Authorization of Issue of Notes. The Corporation will authorize the
issue of its senior promissory notes (the "Notes") in the aggregate principal
amount of U.S. $150,000,000; to be dated the date of issue thereof; to mature
March 2, 2009; to bear interest on the unpaid balance thereof from the date
thereof until the principal thereof shall become due and payable at the rate of
6.79% per annum and on overdue payments at the rate specified therein; and to be
substantially in the form of Schedule A attached hereto. The term "Notes" as
used herein shall include each Note delivered pursuant to any provision of this
Agreement and each Note delivered in substitution or exchange for any such Note
pursuant to any such provision. Capitalized terms used herein have the meanings
specified in paragraph 10.
PARAGRAPH 2. PURCHASE AND SALE OF NOTES.
2. Purchase And Sale Of Notes. The Corporation hereby agrees to sell to
you and, subject to the terms and conditions herein set forth, you agree to
purchase from the Corporation Notes in the aggregate principal amount of U.S.
$150,000,000 at 100% of such aggregate principal amount. The Corporation will
deliver to you, at the offices of Macleod Dixon at 3700, 400 - 3rd Avenue S.W.,
Calgary, Alberta, T2P 4H2, one or more Notes registered in your name,
evidencing the aggregate principal amount of Notes to be purchased by you and
in the denomination or denominations specified in the Purchaser Schedule
attached hereto against payment of the purchase price thereof by transfer of
immediately available funds for credit to Bank of America NT&SA, One World
Trade Center, New York, New York, ABA #026-009-593 for credit to Canadian
Imperial Bank of Commerce, Toronto, Ontario, account # 6550-8-26157, for
further credit to CIBC Place, 309 - 8th Avenue S.W., Calgary, Alberta,
Transit # 00009, for credit to Northstar Energy Corporation account # 03-38710
on the date of the closing, which shall be March 2, 1998 or any other date on
or before March 27, 1998 upon which the Corporation and you may mutually agree
(the "Closing" or the "Date of Closing").
If at the Closing the Corporation shall fail to tender such Notes to you as
provided above in this paragraph 2, or any of the conditions specified in
paragraph 3 shall not have been fulfilled to your satisfaction, you shall, at
your election, be relieved of all further obligations under this Agreement,
without thereby waiving any rights you may have by reason of such failure or
such nonfulfillment.
PARAGRAPH 3. CONDITIONS PRECEDENT.
3. Conditions Precedent. Your obligation to purchase and pay for the Notes
to be purchased by you is subject to the satisfaction, on or before the Date of
Closing, of the following conditions:
3A. Certain Documents. You shall have received the following, each
dated the Date of Closing:
(i) The Notes to be purchased by you duly executed by the Corporation.
(ii) A duly executed Material Subsidiary Guarantee from each Material
Subsidiary except the Mountain Companies.
(iii) A certified copy of the resolutions of the Board of Directors of
the Corporation approving this Agreement and the Notes and authorizing the
performance by the Corporation of all of its rights and obligations under
this Agreement from time to time including, without limitation, the
issuance of the Notes hereunder and of all documents evidencing other
necessary corporate action and governmental approvals, if any, with
respect to this Agreement and the Notes.
(iv) A certified copy of the articles and by-laws of the Corporation.
(v) A certificate of the Secretary or an Assistant Secretary of the
Corporation certifying the names and true signatures of the officers of
the Corporation authorized to sign this Agreement, the Notes and the
other documents to be delivered by it hereunder.
(vi) A certified copy of the resolutions of the Board of Directors of
each Material Subsidiary or of the partners of Northstar Energy Partnership
and David Limited Partnership, and in the case any Material Subsidiary
which is a corporation subject to a unanimous shareholders agreement or
declaration which removes the powers of the directors to the shareholders,
a certified copy of the resolutions of such shareholders of each such
Material Subsidiary, in each case, approving its Material Subsidiary
Guarantee and authorizing the performance by such Material Subsidiary of
all of its rights and obligations under its Material Subsidiary Guarantee
from time to time including, without limitation, the delivery of all
documents evidencing other necessary corporate or partnership action and
governmental approvals, if any, with respect to the Loan Documents.
(vii) A certified copy of the articles, by-laws and any unanimous
shareholders agreement or declaration of each Material Subsidiary that is
a corporation, and the partnership agreement, as amended, for each of
Northstar Energy Partnership and David Limited Partnership.
(viii) A certificate of the Secretary or an Assistant Secretary (or
Managing Partner in the case of Northstar Energy Partnership and David
Limited Partnership) of each Material Subsidiary certifying the names and
true signatures of the officers or persons for each Material Subsidiary
authorized to sign its Material Subsidiary Guarantee, and the other
documents to be delivered by it hereunder.
(ix) A certificate of the Corporation confirming that the Consolidated
Tangible Assets of the Corporation and its Material Subsidiaries are equal
to or greater than 95% of the Consolidated Tangible Assets of the
Corporation and its Subsidiaries as of December 31, 1997.
(x) A certified copy of each of the Morrison Note Agreement, the CIBC
Credit Agreements, all guarantees issued by Material Subsidiaries and each
of the documents evidencing the West Windsor Power Indebtedness (including
the agreements listed in the definition thereof).
(xi) An Officer's Certificate of the Corporation confirming that the
existing Liens publicly registered against the Corporation and its Material
Subsidiaries, including any referred to in Part A of Schedule C, are
permitted hereunder, and that the litigation to which the Corporation and
its Material Subsidiaries are presently subject, individually or in the
aggregate, is not reasonably expected to have a Material Adverse Effect.
(xii) A favourable opinion of Bennett Jones Verchere, counsel to the
Corporation and each Material Subsidiary, substantially in the form of
Schedule B attached hereto and as to such other matters as you may
reasonably request.
(xiii) A favourable opinion of Paul, Weiss, Rifkind, Wharton &
Garrison, United States counsel to the Corporation, upon which you and
your Transferees may rely, to the effect that (A) it is not necessary in
connection with the offering, issuance, sale and delivery of the Notes
under the circumstances contemplated by this Agreement to register
the Notes under the Securities Act or to qualify an indenture in respect
of the Notes under the United States Trust Indenture Act of 1939, as
amended, (B) the extension, arranging and obtaining of the credit
represented by the Notes do not result in any violation of Regulations G
or X of the Board of Governors of the United States Federal Reserve System
and (C) the Corporation is not an investment company or a Person directly
or indirectly controlled by or acting on behalf of an investment company,
within the meaning of the United States Investment Company Act of 1940,
as amended.
(xiv) A certified copy of the register of Notes maintained by the
Corporation pursuant to paragraph 11D.
(xv) Certificates of status/compliance for the Corporation and each
Material Subsidiary issued by the corporate registries for its
jurisdiction of incorporation and each jurisdiction in which the
Corporation or such Material Subsidiary owns material property or carries
on a material business and, for the purposes of this clause (xv) "material"
shall mean material in relation to the properties or businesses of the
Corporation and its Subsidiaries taken as a whole; in the case of Northstar
Energy Partnership and David Limited Partnership, evidence of registration
as a partnership in such jurisdictions.
3B. Opinions of Purchaser's Special Counsel. You shall have received
from Macleod Dixon, who are acting as special counsel for you in connection
with this transaction, favourable opinions satisfactory to you as to such
matters incident to the matters herein contemplated as you may reasonably
request.
3C. Representations and Warranties; No Default. The representations
and warranties contained in paragraph 8 shall be true on and as of the Date of
Closing; there shall exist on the Date of Closing no Event of Default or
Default; and the Corporation shall have delivered to you an Officer's
Certificate, dated the Date of Closing, to both such effects.
3D. Purchase Permitted By Applicable Laws. The offer by the
Corporation of, and the purchase of and payment for, the Notes to be purchased
by you on the Date of Closing on the terms and conditions herein provided
(including the use of the proceeds of such Notes by the Corporation) shall not
violate any Applicable Law (including Section 5 of the Securities Act or
Regulation G or X of the Board of Governors of the United States Federal
Reserve System) and shall not subject you to any tax, penalty or liability
under or pursuant to any Applicable Law and you shall have received such
certificates or other evidence with respect to factual matters as you may
request to establish compliance with this condition.
3E. Proceedings. All corporate and other proceedings taken or to be
taken in connection with the transactions contemplated hereby and all documents
incident thereto shall be satisfactory in substance and form to you, and you
shall have received all such counterpart originals or certified or other
copies of such documents as you may reasonably request.
3F. Private Placement Number. A private placement number issued by
Standard & Poor's CUSIP Services Bureau (in cooperation with the Securities
Valuation Office of the National Association of Insurance Commissioners) shall
have been obtained for the Notes.
3G. Structuring Fee. The Corporation shall have paid to you a
structuring fee in the amount of U.S. $185,000 by wire transfer of immediately
available funds to The Bank of New York, New York, New York, ABA # 021-000-018,
for credit to your account, Account No. 890-0304-391.
PARAGRAPH 4. PREPAYMENTS.
4. Prepayments. The Notes shall be subject to prepayment only with
respect to the required prepayments specified in paragraph 4A and the optional
prepayments permitted by paragraph 4B.
4A. Required Prepayments. Until the Notes shall be paid in full, the
Corporation shall apply to the prepayment of the Notes, without Yield-
Maintenance Amount, the sum of U.S. $50,000,000 on March 2, 2007
and March 3, 2008, and such principal amounts of the Notes, together with
interest thereon to the prepayment dates, shall become due on such
prepayment dates; provided that, upon any partial prepayment of the Notes
pursuant to paragraph 4B or purchase of the Notes pursuant to paragraph 4E,
the principal amount of each required prepayment of the Notes becoming due
under this paragraph 4A on and after the date of such prepayment or purchase
shall be reduced in the same proportion as the aggregate unpaid principal
amount of the Notes is reduced as a result of such prepayment or purchase.
The remaining outstanding principal amount of the Notes, together with interest
accrued thereon, shall become due on the maturity date of the Notes, being
March 2, 2009.
4B. Optional Prepayment With Yield-Maintenance Amount.
(a) The Notes shall be subject to prepayment, in whole at any time
or from time to time in part (in multiples of U.S. $5,000,000), at the
option of the Corporation, at 100% of the principal amount so prepaid
plus interest thereon to the prepayment date and the Yield-Maintenance
Amount, if any, with respect to each Note. Any partial prepayment
of the Notes pursuant to this paragraph 4B shall be applied in satisfaction
of remaining scheduled payments of principal on a pro rata basis.
(b) If the Corporation is required to make payments to all Holders
under paragraph 11Q(a) or make any indemnity payment to all Holders under
paragraph 11Q(b), then the Corporation shall be entitled to prepay the
Notes in whole at 100% of the principal amount so prepaid plus interest
thereon to the prepayment date, plus all accrued but unpaid obligations
under paragraph 11Q to and including the date of prepayment, subject to
the notice requirements in paragraph 4C, plus the Yield-Maintenance Amount,
if any, with respect to each Note, provided that:
(i) the Corporation's right to prepay under this clause (b)
shall terminate if the Corporation has not given notice of optional
prepayment under paragraph 4C(a) on or before the later of (A) 90
days after the date that the Corporation is first called upon by any
Holder to honour its payment or indemnity obligations under paragraph
11Q(a) or (b), respectively, or (B) 30 days after the date that any
legislation requiring the Corporation to make any deduction or
withholding under paragraph 11Q(a), or requiring any Holder to pay
tax under Part XIII of the Income Tax Act (Canada) as contemplated in
paragraph 11Q(b), comes into force; and
(ii) the Corporation shall not be entitled to prepay under this
clause (b) any Notes in respect of which the Holder thereof has
waived in writing the future obligations of the Corporation under
paragraph 11Q (without prejudice to accrued obligations thereunder).
4C. Notice of Optional Prepayment.
(a) The Corporation shall give each Holder irrevocable written
notice of any prepayment pursuant to paragraph 4B not less than 15 nor more
than 30 days prior to the prepayment date, specifying (i) such prepayment
date (which shall be a Business Day), (ii) the total principal amount of
the Notes, and of the Notes held by such Holder, to be prepaid on such
date, and (iii) stating that such prepayment is to be made pursuant to
paragraph 4B. Notice of prepayment having been given as aforesaid, the
principal amount of the Notes specified in such notice, together with
interest thereon to the prepayment date and together with the Yield-
Maintenance Amount, if any, with respect thereto, shall become due and
payable on such prepayment date.
(b) The Corporation shall, concurrently with giving the notice
under paragraph 4C(a), give notice by facsimile of the principal amount of
Notes to be prepaid and the prepayment date to each Holder which shall
have designated a facsimile number in the Purchaser Schedule attached
hereto or by notice in writing to the Corporation.
(c) The Corporation shall, at least two Business Days prior to
the prepayment date, give each Holder facsimile notice (followed by
overnight written notice) setting forth the estimated Yield-Maintenance
Amount (for the purposes only of such estimate, the yields referred to in
the definition of "Reinvestment Yield" shall be those reported three
Business Days preceding the Settlement Date instead of the yields on the
Business Day next preceding the Settlement Date) payable on such prepayment
date together with its calculations thereof in reasonable detail, and
further setting forth the accrued interest payable on such prepayment date.
(d) The Corporation shall, on the Business Day prior to the
prepayment date, give notice by facsimile (followed by overnight written
notice) of the actual Yield-Maintenance Amount (together with its calcula-
tions thereof in reasonable detail), principal and interest that the
Corporation will be paying on the prepayment date to each Holder.
4D. Partial Payments Pro Rata. Upon any partial prepayment of the
Notes pursuant to paragraph 4A or 4B, the principal amount so prepaid shall be
allocated to all Notes at the time outstanding (including, for the purpose of
this paragraph 4D only, all Notes prepaid or otherwise retired or purchased
or otherwise acquired by the Corporation or any of its Subsidiaries or
Affiliates other than by prepayment pursuant to paragraph 4A or 4B), in
proportion to the respective outstanding principal amounts thereof.
4E. Retirement of Notes. The Corporation shall not, and shall not
permit any of its Subsidiaries or Affiliates to, prepay or otherwise retire, in
whole or in part, prior to their stated final maturity (other than by prepay-
ment pursuant to paragraph 4A or 4B or upon acceleration of such final maturity
pursuant to paragraph 7A), or purchase or otherwise acquire, directly or
indirectly, Notes held by any Holder unless the Corporation or such Subsidiary
or Affiliate shall have offered to prepay or otherwise retire or purchase or
otherwise acquire, as the case may be, the same proportion of the aggregate
principal amount of Notes held by each other Holder at the time outstanding
upon the same terms and conditions. Any Notes so prepaid or otherwise retired
or purchased or otherwise acquired by the Corporation or any of its Subsidiaries
or Affiliates shall not be deemed to be outstanding for any purpose under this
Agreement, except as provided in paragraph 4D.
PARAGRAPH 5. AFFIRMATIVE COVENANTS.
5. Affirmative Covenants. So long as any Note shall remain unpaid, the
Corporation covenants that:
5A(1). Financial Statements. The Corporation will deliver to each
Holder in duplicate (unless, in respect of any Holder, such Holder designates a
fewer number of copies in the Purchaser Schedule attached hereto or in a written
notice from such Holder):
(i) quarterly statements: as soon as practicable and in any event
within 60 days after the end of each Fiscal Quarter of the Corporation
(other than the last Fiscal Quarter) in each Fiscal Year, a consolidated
statement of earnings and retained earnings and a consolidated statement of
cash flow of the Corporation and its Subsidiaries for such Fiscal Quarter,
and for the period from the beginning of the current Fiscal Year to the
end of such Fiscal Quarter, and a consolidated balance sheet of the
Corporation and its Subsidiaries as at the end of such Fiscal Quarter,
setting forth in each case in comparative form figures for the correspond-
ing quarter and period in the preceding Fiscal Year, all in reasonable
detail and satisfactory in form to the Required Holders and in each case
certified by an authorized financial officer of the Corporation, subject
to changes resulting from year-end adjustments (provided that delivery
pursuant to clause (iii) below of copies of the quarterly consolidated
balance sheet and statements of earnings, retained earnings and cash flow
included in the quarterly reports delivered to its public shareholders and
filed with provincial securities regulatory authorities shall be deemed to
satisfy the foregoing requirements);
(ii) annual statements: as soon as practicable and in any event
within 120 days after the end of each Fiscal Year of the Corporation, a
consolidated statement of earnings and retained earnings and a consolidated
statement of cash flow of the Corporation and its Subsidiaries for such
Fiscal Year, and a consolidated balance sheet of the Corporation and
its Subsidiaries as at the end of such Fiscal Year, setting forth in each
case in comparative form corresponding consolidated figures from the
preceding annual audited consolidated financial statements and reported
on by independent public accountants of recognized national or
international standing selected by the Corporation whose report shall be
without limitation as to the scope of the audit and satisfactory in
substance to the Required Holders, all in reasonable detail and
satisfactory in form to the Required Holders (provided that delivery
pursuant to clause (iii) below of copies of the audited annual consolidated
balance sheet and statements of earnings, retained earnings and cash flow
included in the annual reports delivered to its public shareholders and
filed with provincial securities regulatory authorities shall be deemed to
satisfy the foregoing requirements);
(iii) reports to shareholders: promptly upon transmission thereof,
copies of all such financial statements, proxy statements, notices and
reports as it shall send to its public shareholders and copies of all
prospectuses filed with Canadian and/or United States securities regulatory
authorities, registration statements (without exhibits) and all reports
which it files with any Canadian or United States securities regulatory
authorities;
(iv) accountants reports: promptly upon receipt thereof, a copy of
each other material report submitted to the Corporation or any Subsidiary
by independent accountants in connection with any annual, interim or
special audit made by them of the books of the Corporation or any
Subsidiary;
(v) notices: promptly after any Responsible Officer obtaining
knowledge
(A) of the existence of any condition or event which, in the
opinion of management of the Corporation, has or could reasonably be
expected to have a Material Adverse Effect; or
(B) of any action, suit, litigation or other proceeding which
is commenced or threatened against the Corporation or any Material
Subsidiary and which involves a claim in excess of Cdn. $15,000,000
or which is reasonably likely to have a Material Adverse Effect;
an Officer's Certificate specifying the nature and period of existence of
any such default, event or condition, or specifying the notice given or
action taken by such Person and the nature of any such claimed default,
event or condition, or specifying the details of such proceeding, litiga-
tion or dispute and what action the Corporation or any of its Material
Subsidiaries has taken, is taking or proposes to take with respect thereto;
and
(vi) other information: with reasonable promptness and subject to the
provisions of any confidentiality agreements of third parties, such other
information respecting the condition, businesses or operations (financial
or otherwise), and properties, of the Corporation or any of its Material
Subsidiaries (including in respect of Non-Recourse Debt) as such Holder
may reasonably request, and any information that any Holder may request
that is required to be filed with the United States National Association
of Insurance Commissioners.
5A(2). Compliance Certificates. Together with each delivery of
financial statements required by clauses (i) and (ii) above, the Corporation
will deliver to each Holder a Compliance Certificate, executed by the chief
executive officer, chief operating officer, chief financial officer or
treasurer of the Corporation (or persons fullfilling equivalent functions),
together with such back-up information, including spread sheets, prepared
by the Corporation for the purpose of preparing the Compliance Certificate
as the Required Holders may reasonably request and stating that there
exists no Default or Event of Default, or, if any Default or Event of
Default exists, specifying the nature and period of existence thereof and
what action the Corporation proposes to take with respect thereto.
Together with the delivery of the Compliance Certificate, the Corporation
shall make the Offers to Amend, if not previously made pursuant to
paragraph 6G and 6H, and shall deliver the documents required by the last
sentence of paragraph 6G and 6H if not previously delivered.
5A(3). Auditors Certificate. Together with each delivery of
financial statements required by clause (ii) above, the Corporation will deliver
to each Holder a certificate of such accountants stating whether, in making
their audit necessary for their report on the financial statements, they have
become aware of any condition or event that then constitutes a Default or an
Event of Default, and, if they are aware that any such condition or event then
exists, specifying the nature and period of the existence thereof.
5A(4). Notice of Default or Event of Default. The Corporation
will, promptly (and in any event within five Business Days) after any
Responsible Officer obtains knowledge of the existence of an Event of Default
or Default, deliver to each Holder an Officer's Certificate specifying the
nature and period of existence thereof and what action the Corporation is
taking or proposes to take with respect thereto.
5B. Information Required by Rule 144A.5A(4). The Corporation will,
upon the request of any Holder, provide to such Holder, and to any qualified
institutional buyer designated by such Holder, such financial and other
information as such Holder may reasonably determine to be necessary in order to
permit compliance with the information requirements of Rule 144A under the
Securities Act in connection with the resale of Notes, except at such times as
the Corporation is subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act. For the purpose of this paragraph 5B, the term "qualified
institutional buyer" shall have the meaning specified in Rule 144A under the
Securities Act.
5C. Inspection of Property.5A(4). The Corporation will permit any
Person designated by any Holder in writing, at such Holder's expense, to examine
the corporate/partnership books, financial records and engineering and property
records and reports of the Corporation and its Material Subsidiaries and make
copies thereof or extracts therefrom and to discuss the affairs, finances and
accounts of any of such entities with the principal officers of the Corporation
or its Material Subsidiaries and its independent public accountants and
independent or in-house petroleum engineers, all at such reasonable times and
as often as such Holder may reasonably request, provided that the foregoing
shall be at the Corporation's expense, and shall be reimbursable by the
Corporation on demand by such Holder, if such visitation, inspection or
examination is conducted at a time when a Default or Event of Default has
occurred and is continuing.
5D. Covenant to Secure Notes Equally. The Corporation will, concur-
rently with and as a condition precedent to it or any Material Subsidiary
creating or assuming any Lien on its assets, whether now owned or hereafter
acquired, or upon any income, profits or proceeds therefrom, other than Liens
expressly permitted by paragraph 6B(1):
(i) make or cause to be made effective provision whereby the Notes
will be secured by such Lien equally and ratably with any and all other
Indebtedness thereby secured so long as any such other Indebtedness shall
be so secured, pursuant to security arrangements reasonably satisfactory
in form, scope and substance to the Required Holders,
ii) deliver or cause to be delivered an opinion of its counsel
addressed to all Holders as to such Lien, such opinion to be in form and
substance reasonably satisfactory to the Required Holders, including an
opinion as to the validity, enforceability, registration and perfection of
such Lien and that all payment obligations of the Corporation under the
Notes rank at least pari passu in right of payment with all other obliga-
tions secured by such Lien, and
iii) cause the holders of the obligations secured by such other Lien
to enter into an inter-creditor agreement with all Holders, such inter-
creditor agreement to be in form and substance satisfactory to the
Required Holders.
5E. Engineering Reports; Accuracy of Engineering Reports.
(i) The Corporation shall furnish to the Holders as soon as available
and in any event within 120 days after the end of each Fiscal Year, an
Engineering Report dated as of the first day of the immediately following
Fiscal Year.
(ii) The Corporation shall ensure that each internally prepared
Engineering Report and all other related data prepared by and provided by
the Corporation or any Subsidiary to the Holders, or an independent
engineering firm,with respect to the oil and gas properties evaluated in
an Engineering Report or discussed in such related data are substantially
accurate and fairly reflect the interests of the Corporation and each
Subsidiary therein and thereto net of all royalties and other burdens
affecting same, except to the extent that any inaccuracies would not have
a Material Adverse Effect.
5F. Corporate Existence; Existence of Material Subsidiaries.
(i) The Corporation shall, except as permitted by paragraph 6B(2),
maintain its corporate existence and organization in good standing under
the laws of the Province of Alberta and register and qualify and remain
registered and qualified as a corporation authorized to carry on business
under the laws of each jurisdiction in which the nature of any business
conducted by it or the character of any properties and assets owned or
leased by it requires such registration and qualification, except to the
extent that failure to maintain such registration or qualification does
not have a Material Adverse Effect.
(ii) The Corporation shall cause each Material Subsidiary, except as
permitted by paragraph 6B(2), to maintain its corporate or partnership
existence, as the case may be, and organization in good standing under
the laws of its jurisdiction of incorporation or formation, as applicable,
and shall cause each Material Subsidiary to duly register and qualify and
remain duly registered and qualified as a corporation or partnership, as
applicable, qualified to carry on business under the laws of each
jurisdiction in which the nature of any business conducted by it or the
character of any properties and assets owned or leased by it requires
such registration and qualification, except to the extent that failure
to maintain such registration or qualification does not have a Material
Adverse Effect.
5G. Compliance With Applicable Laws. The Corporation shall and
shall cause each Material Subsidiary to:
(i) carry on and conduct its business and keep, maintain and operate
its assets and properties in accordance with all Applicable Laws, including
Applicable Environmental Laws, and in a good and workmanlike manner and in
accordance with sound oil and gas industry practice; and
(ii) observe and conform in all respects to all valid requirements of
any Governmental Approval relative to any of its assets and properties and
all covenants, terms and conditions of all agreements upon or under which
any of its assets and properties are held;
except to the extent failure to so comply or failure to so observe and conform
does not have a Material Adverse Effect.
5H. Payment of Taxes. The Corporation shall and shall cause each
Material Subsidiary:
(i) to duly file on a timely basis all tax returns which are required
to be filed by it; and
(ii) to pay or make provision for payment (in accordance with GAAP)
of all business, goods and services, income, capital and/or profits taxes
and other governmental charges levied or assessed against it or its
property which are due and payable by it, or to provide adequate reserves
(in accordance with GAAP) for the payment of any such amount, the payment
of which is being contested by it in good faith.
5I. Environmental Matters.
(i) Notice of Environmental Damage. The Corporation shall, promptly
upon acquiring knowledge thereof, provide the Holders with written notice
of:
(a) the discovery of any Hazardous Material or of any Release
of Hazardous Materials into the environment from or upon the land or
property of the Corporation or a Material Subsidiary which would
reasonably be expected to have a Material Adverse Effect; or
(b) any order, judgment or claim (if such claim is determined
adversely) that has been made by any Person against the Corporation,
a Material Subsidiary or their assets and properties that would give
rise to any Environmental Liability which would have a Material
Adverse Effect.
(ii) Additional Environmental Information. The Corporation shall,
upon the request of the Required Holders (acting reasonably), make avail-
able for discussion with any Holder at all reasonable times the senior
officers of the Corporation and any Material Subsidiary primarily respon-
sible for the environmental activities and affairs of the Corporation and
its Material Subsidiaries.
(iii) Environmental Audit. Upon the occurrence or discovery of any
circumstance, condition or event which in the opinion of the Required
Holders, acting reasonably, may result in any Environmental Liability
which would have a Material Adverse Effect during the continuance of a
Default or Event of Default, the Holders may arrange for an environmental
audit to be conducted by an independent environmental engineer or other
environmental consultant, at the expense of the Corporation. The
Corporation shall, and shall cause each Material Subsidiary to, upon
reasonable notice, and so long as any such engineer or consultant agrees
to comply with the health and safety standards generally applicable to
the property or assets to be audited, provide access to its property and
assets in order for such engineer or consultant to conduct such environ-
mental and other inspections as it deems advisable and in that connection
to examine the books, records, assets, affairs and business operations of
the Corporation or such Material Subsidiary and to make inquiries of
government offices concerning compliance by the Corporation or such
Material Subsidiary with Applicable Environmental Laws.
5J. Insurance. The Corporation shall, and shall cause each Material
Subsidiary to, maintain in full force and effect such policies of insurance in
such amounts issued by insurers of recognized standing covering the properties
and operations of the Corporation and its Material Subsidiaries, including their
respective oil and gas properties and related production facilities, in such
amounts and with such deductibles as are customarily maintained by businesses
of established reputation engaged in the same or similar business in the
localities where its properties and operations are located; provided that the
Corporation or any Material Subsidiary may self-insure to the extent it
determines, acting reasonably and in accordance with good insurance practice,
that it has the capacity to do so.
5K. Ranking With Other Debt. The Corporation shall ensure that its
payment obligations hereunder and under the Notes and the payment obligations
of each Material Subsidiary under its Material Subsidiary Guarantee rank at
least pari passu in right of payment with the other most senior unsecured and
unsubordinated Indebtedness for Borrowed Money of the Corporation (including
any unsecured Bank Indebtedness) or such Material Subsidiary (including any
guarantees of the Bank Indebtedness), as applicable.
5L. Material Subsidiary Test. The Corporation shall ensure that,
within 90 days of the end of each Fiscal Quarter, the Consolidated Tangible
Assets of the Corporation and its Material Subsidiaries as of the last day of
such Fiscal Quarter are equal to or greater than 95% of the Consolidated
Tangible Assets of the Corporation and its Subsidiaries as of the last day of
such Fiscal Quarter.
5M. Material Subsidiary Guarantee; Release of Certain Guarantees.
(i) If a Subsidiary is to be included as a Material Subsidiary after
the Date of Closing for the purposes of ensuring compliance with paragraph
5L, the Corporation shall cause such Subsidiary to provide to the Holders
a Material Subsidiary Guarantee on a pari passu basis with all other
unsecured and unsubordinated Indebtedness of such Material Subsidiary and,
in addition thereto, shall provide, or cause to be provided, to each Holder
a favourable opinion of counsel to the Corporation (such opinion to be
satisfactory in form and substance to the Required Holders, acting
reasonably), as to the legality, validity and enforceability of such
Material Subsidiary Guarantee and as to such other matters as the
Required Holders may reasonably require, together with such other
documents, including certification that the representations and warranties
contained in paragraph 8 are true and correct with respect to such Material
Subsidiary and certified resolutions and constating/governing documents
of such Material Subsidiary, as the Required Holders may reasonably
require.
(ii) If, on or before September 30, 1998, the lenders under the CIBC
Credit Agreements (A) release the guarantees of David Limited Partnership
and Morrison, the Holders will, upon the request of the Corporation,
promptly release the Material Subsidiary Guarantees of such Material
Subsidiaries; and (B) reduce the figure "95%" contained in paragraph 5L
and 5Q to a percentage greater than or equal to 85%, the Holders will,
upon the request of the Corporation, promptly enter into an amendment to
this Agreement to reflect such change.
(iii) If the Holders release the guarantee of David Limited
Partnership or Morrison and subsequently either David Limited Partnership
or Morrison guarantees any portion of the Bank Indebtedness, such
Subsidiary will also guarantee the Notes; provided that the Holders will
release any such subsequent guarantee of the Notes upon the holders of
such Bank Indebtedness releasing their guarantee provided by such
Subsidiary. If the Holders reduce the 95% figure as provided in clause
(ii)(B) above, the Corporation will thereafter cause any Subsidiary that
guarantees the Bank Indebtedness outstanding under the Corporation's
largest unsubordinated bank credit facility to issue a Material Subsidiary
Guarantee to the Holders; provided that if the holders of such Bank
Indebtedness subsequently release such guarantees, the Holders will release
such Material Subsidiary Guarantees.
5N. Payment and Performance. The Corporation shall duly and
punctually pay all sums of money due by it hereunder and under the Notes and
the Corporation shall and shall cause each Material Subsidiary to perform all
other obligations on its part to be performed under the terms of the Loan
Documents to which it is a party at the times and places and in the manner
provided for therein.
5O. Payment of Other Obligations. The Corporation shall and shall
cause each Material Subsidiary to pay or cause to be paid all material rents,
royalties and other obligations to pay money validly imposed upon it, or upon
its properties or assets or any part thereof, as and when the same become due
and payable or shall provide adequate reserves (in accordance with GAAP) for
payment of any such obligation, the payment of which is being contested in good
faith.
5P. Maintenance of Books and Records. The Corporation shall and
shall cause each Material Subsidiary to keep proper and adequate records and
books of account in which true and complete entries will be made in a manner
sufficient to enable the preparation of financial statements in accordance
with GAAP and, subject to paragraph 5C, make the same available for
confidential inspection by each Holder and its employees.
5Q. Subsidiary Designation. The Corporation shall from time to
time by notice in writing to the Holders be entitled to designate that either:
i) a Subsidiary will no longer be a Subsidiary and will become an
Excluded Subsidiary;
ii) a Material Subsidiary will no longer be a Material Subsidiary
and will become a Subsidiary; or
iii) an Excluded Subsidiary will no longer be an Excluded Subsidiary
and will become a Subsidiary;
provided that the Corporation shall not be entitled to make any such
designation if immediately after giving effect to any such designation:
(x) a Default or Event of Default would occur or remain outstanding;
and
(y) the Consolidated Tangible Assets of the Corporation and its
Material Subsidiaries (after excluding any Material Subsidiary to be
designated as an Excluded Subsidiary or to be otherwise removed as a
Material Subsidiary) calculated as of the last day of the immediately
preceding Fiscal Quarter is less than 95% of the Consolidated Tangible
Assets of the Corporation and its Subsidiaries calculated as of the last
day of the immediately preceding Fiscal Quarter; and
provided, further, that, notwithstanding this paragraph 5Q and the definition
of "Subsidiary," the designation of Northstar Energy Partnership as a Material
Subsidiary shall not be removed without the written consent of the Required
Holders.
If, in compliance with the foregoing, a Material Subsidiary is designated an
Excluded Subsidiary or is to be otherwise removed as a Material Subsidiary, the
Holders shall (as soon as reasonably practicable) cancel and return to the
Corporation the Material Subsidiary Guarantee of such Subsidiary.
5R. Proceeds. On or before March 31, 1998, the Corporation will
use the proceeds from the issuance and sale of the Notes to repay Existing
Northstar Notes in an aggregate principal amount of U.S. $60,000,000 and repay a
portion of the revolving loans outstanding under the CIBC Credit Agreements,
directly or indirectly. The Corporation will deliver to the Holders on or
before March 16, 1998 an irrevocable notice of prepayment of all of the Existing
Northstar Notes previously delivered to the holders of the Existing Northstar
Notes in accordance with the Northstar Note Agreement.
5S. Filings. The Corporation will comply with all requirements
which may exist under applicable securities legislation to file reports concern-
ing the issuance of the Notes pursuant to filing, registration or prospectus
exemptions under such legislation within the required time after such issuance.
5T. Defend Title. The Corporation will, and will cause each
Material Subsidiary to, defend its title to its property against every Person
whomever claiming or attempting to claim the same, or asserting any interest
adverse to its interest therein, other than Permitted Title Defects, disposi-
tions permitted under this Agreement and such other adverse claims or asserted
interests which, if valid, would not individually or in the aggregate have a
Material Adverse Effect.
5U. West Windsor Power. The Corporation will sell its investment
in West Windsor Power before June 30, 1999.
PARAGRAPH 6. NEGATIVE COVENANTS.
6. NEGATIVE COVENANTS. So long as any Note shall remain unpaid, the
Corporation covenants that:
6A. Financial Covenants.
6A(1) Consolidated Tangible Net Worth. The Corporation will not
permit Consolidated Tangible Net Worth as at the end of each Fiscal Quarter to
be less than $230,000,000.
6A(2) Consolidated Debt to EBITDA Ratio. The Corporation will not
permit Consolidated Debt (i) at the Date of Closing, to exceed 315% of EBITDA
for the most recent period of four consecutive completed Fiscal Quarters and
(ii) as at the end of any Fiscal Quarter commencing with the Fiscal Quarter
ending March 31, 1998, to exceed 300% of EBITDA for the most recent period of
four consecutive completed Fiscal Quarters.
6A(3) Alternate Consolidated Net Worth Test. At any time that
paragraph 6H is not in effect, the Corporation will not permit Consolidated
Tangible Net Worth as at the end of each Fiscal Quarter to be less than the sum
of (i) $400,000,000 plus (ii) 25% of the proceeds from any sale of capital
stock or other form of equity by the Corporation after the first day of the
Fiscal Quarter following the day on which paragraph 6H is no longer effective
plus (iii) 25% of Consolidated Net Earnings for each Fiscal Quarter (if
positive) commencing with the first Fiscal Quarter ending after the day on
which paragraph 6H is no longer effective, up to a maximum required
Consolidated Tangible Net Worth of $500,000,000.
For greater certainty, (i) the financial covenants in paragraphs 6A(1) and
6A(3) shall not include the assets, liabilities, income or equity of any
Excluded Subsidiary or any Excluded Assets and (ii) the financial covenant in
paragraph 6A(2) shall not include the assets, liabilities, income or equity of
any Excluded Subsidiary or, except to the extent received by the Corporation,
any Excluded Assets.
6B. Liens and Other Restrictions. The Corporation will not, and will
not permit any Material Subsidiary to
6B(1) Liens. Except for Permitted Encumbrances, create, incur,
assume, suffer to exist or otherwise have outstanding any Lien upon or with
respect to any of its undertaking, properties, rights or assets, whether now
owned or hereafter acquired, including its oil and gas properties and related
production facilities.
6B(2). Restriction on Amalgamation etc. Except for the winding-up of
all of the assets of, or an amalgamation of, a Subsidiary into, and the assump-
tion of all Indebtedness of such Subsidiary by, the Corporation or a Wholly-
Owned Subsidiary (or any winding-up or amalgamation between the two Mountain
Companies), enter into any transaction whereby all or substantially all of its
undertaking, property and assets would become the property of any other
solvent Person (herein called a "Successor") whether by way of reconstruction,
reorganization, recapitalization, consolidation, amalgamation, merger, transfer,
sale, arrangement or otherwise (each a "Transaction"), unless:
(i) prior to or contemporaneously with the consummation of such
Transaction:
(A) the Successor expressly assumes, by an agreement satisfactory
in substance and form to the Required Holders, acting reasonably, all
the covenants and obligations of either the Corporation under this
Agreement and the other Loan Documents to which it is a party or the
Material Subsidiary under any Loan Documents to which it is a party,
as applicable; and
(B) this Agreement and the other Loan Documents to which the
Corporation or the Material Subsidiary was a party immediately prior
to entering into the Transaction will (except for any merger at law
of any Material Subsidiary Guarantee as a result of the Transaction)
be valid and binding obligations of the Successor, enforceable against
the Successor and entitling each Holder, as against the Successor, to
exercise all its rights under, as applicable, this Agreement and the
other Loan Documents;
and provided that the Successor shall also execute and deliver to the
Holders such documents (including favourable legal opinions of counsel to
the Corporation and/or Successor in this regard, and in regard to with-
holding tax matters, acceptable to the Required Holders, acting
reasonably), if any, as may, in the reasonable opinion of the Required
Holders, be necessary to effect or establish (A) and (B) above;
(ii) if the Transaction involves the Corporation, the Successor is
either (y) a corporation governed (as to corporate matters) by the federal
laws of Canada or the laws in force in a province of Canada other than
Quebec; or (z) a general partnership which partnership is formed under and
governed (as to partnership matters) by the laws in force in a province in
Canada, other than Quebec, and, in each case a majority of the assets of
which Successor are located, and a majority of its business is conducted,
in Canada, the United States or some Other Permitted Country;
(iii) if the Transaction involves a Material Subsidiary but not the
Corporation:
(A) if such Material Subsidiary is governed as to corporate or
partnership matters by the federal laws of Canada or a province
thereof, the Successor is either (y) a corporation governed (as to
corporate matters) by the laws of Canada or the laws in force in a
province of Canada other than Quebec or (z) a partnership formed under
and governed (as to partnership matters) by the laws in force in a
province in Canada, other than Quebec, and, in each case a majority
of the assets of which Successor are located, and a majority of its
business is conducted, in Canada, the United States of America or
some Other Permitted Country; or
(B) if such Material Subsidiary is governed as to corporate or
partnership matters by any other laws, the Successor is governed by
the same laws as such Material Subsidiary, including as to corporate
or partnership matters; and
(C) the Successor remains a Material Subsidiary unless, as of
the date of the completion of the Transaction, the inclusion of such
Successor is not required to satisfy the Material Subsidiary Test
contained in paragraph 5L as of such date of completion;
(iv) such Transaction shall be on such terms and shall be carried out
in such manner as to preserve and not to impair any of the rights and
powers of the Holders hereunder and under any other Loan Documents;
(v) such Transaction shall not result in the undertaking, property
and assets of the Successor being subject to any Liens other than Permitted
Encumbrances; and
(vi) no Event of Default or Default shall have occurred and be con-
tinuing immediately prior to such Transaction or would exist if such
Transaction is effected.
6B(3). Restriction on Sale. Directly or indirectly make any sale
(including a Sale-Leaseback), exchange, lease, transfer or other disposition to
any Person of any of its assets or properties classified as property, plant and
equipment on the consolidated balance sheet of the Corporation and its
Subsidiaries, including the petroleum and natural gas reserves of the Corpora-
tion and its Material Subsidiaries, or any Voting Shares in any Material
Subsidiary, except:
(i) Permitted Dispositions;
(ii) any other sales or dispositions of any assets or properties
classified as property, plant and equipment on the consolidated balance
sheet of the Corporation, including a Sale-Leaseback, if the aggregate
proceeds of all such sales and dispositions in a Fiscal Year, including
therein the proceeds received from any Sale-Leaseback, (net of Eligible
Reinvestments) does not exceed 15% of the Consolidated Tangible Assets of
the Corporation and its Subsidiaries as at the end of the immediately
preceding Fiscal Year; and
(iii) the Corporation and its Material Subsidiaries may sell such
assets and properties in excess of the 15% limit described in clause (ii)
above during a Fiscal Year if all of the proceeds in excess of the 15%
permitted in clause (ii) of this paragraph 6B(3) (the "Excess Cash
Proceeds") are reinvested in Eligible Reinvestments before the date that
is the earlier of (a) five days after a Responsible Officer has knowledge
that sales have occurred generating Excess Cash Proceeds and (b) 60 days
after the end of such Fiscal Year, provided that pending such reinvestment
such Excess Cash Proceeds shall on and after such date be segregated in a
separate deposit account in the name of the Corporation with a bank (the
short-term deposits of which would qualify as Permitted Investments, and
which is not at any relevant time a creditor of the Corporation or any
Subsidiary), and may thereafter be paid directly out of that account only
(x) to acquire Permitted Investments with issuers which are not at any
relevant time creditors of the Corporation or any Subsidiary (which shall
also be kept separate from the other assets of the Corporation and its
Subsidiaries), or (y) to acquire Eligible Reinvestments, or a combination
of (x) and (y), provided, further, that if any of such Excess Cash
Proceeds have not been reinvested in Eligible Reinvestments within 12
months of the date of the transaction giving rise thereto, the Corporation
shall thereupon invest the same in investments of the type referred to in
clauses (a) and (b) of the definition of "Permitted Investments" with
issuers which are not at any relevant time creditors of the Corporation or
any Subsidiary pending reinvestment thereof in Eligible Reinvestments;
provided that no Default or Event of Default has occurred and is continuing or
would exist if such sale, exchange, lease, transfer or other disposition is
effected.
6B(4). Sale-Leaseback. Enter into any Sale-Leaseback where the
assets of the Corporation or a Material Subsidiary subject to such Sale-
Leaseback are being sold for less than their fair market value.
6C. Joint Venture Company. The Corporation will not permit a Joint
Venture Company to create, incur, assume or suffer to exist any Indebtedness for
Borrowed Money (including, for greater certainty, Prepaid Obligations or by way
of Guarantee), other than Non-Recourse Debt and indebtedness in favour of the
shareholders of such Joint Venture Company holding Voting Shares or in favour
of the Corporation or any Material Subsidiary; provided that such covenant
shall not apply if such Joint Venture Company has been designated as an Excluded
Subsidiary pursuant to paragraph 5Q.
6D. Change of Business. The Corporation will not, and will not
permit any Material Subsidiary to, change in any material respect the nature of
its business or operations from the exploration for, and development, produc-
tion, transportation, processing and marketing of, petroleum, natural gas and
related products or investments in West Windsor Power (at any time before June
30, 1999), nor engage directly or indirectly in any material business
activity or purchase or otherwise acquire any material property, in either case
not primarily related to the conduct of its business or operations as presently
carried on.
6E. Actions in Respect of Material Subsidiaries. Notwithstanding
anything to the contrary provided in paragraphs 5 or 6, where the Corporation
has covenanted to cause any Material Subsidiary to do or not to do any act or
thing, and the Corporation does not own more than 50% of the Voting Shares of
such Material Subsidiary, the Corporation shall have complied with its covenants
in that regard if it shall have used all reasonable commercial efforts to cause
such Material Subsidiary to comply with the requirements of paragraphs 5 or 6
or to remedy any breaches thereof, provided that reasonable commercial efforts
shall be deemed to include, without limitation, exercising any veto or voting
power it might have with respect to any such Material Subsidiary; and with
respect to any breach of paragraphs 5 and 6 caused by any Material Subsidiary
acting or failing to act in the manner required by such paragraphs 5 or 6, the
Corporation's obligation to use its reasonable commercial efforts to prevent or
remedy such breach shall only be applicable from and after the date that the
Corporation becomes aware of such breach or the date the Corporation becomes
aware such breach may occur, as the case may be.
6F. Constating Documents. The Corporation will not, and will not
permit any Material Subsidiary to, alter its articles or by-laws, or in the
case of any partnership that is a Material Subsidiary, its partnership agree-
ment, in any manner that would individually or in the aggregate have a Material
Adverse Effect.
6G. Amendments to Bank Agreement. The Corporation will not agree to
any amendment, supplement or modification of the covenants contained in Article
8, or the events of default contained in Article 9, of either of the CIBC Credit
Agreements (except an amendment to the covenant contained in Section 8.3(b) of
the CIBC Credit Agreements), or agree to any consent, waiver or release with
respect to such agreements unless the Corporation contemporaneously gives each
Holder a notice of the amendment, supplement, modification, consent, waiver or
release and offers to amend this Agreement to incorporate such change (a "CIBC
Offer to Amend"); provided, however, that (i) in the event the Corporation shall
enter into, assume or otherwise become bound by or obligated under any such
change without offering to amend this Agreement, the terms of this Agreement
shall, without any further action on the part of the Corporation or any of the
Holders, be deemed to be amended automatically and retroactively to include
such changes, but only for so long as such change remains in effect with respect
to the CIBC Credit Agreements and (ii) the good faith failure to contempora-
neously make a CIBC Offer to Amend shall not constitute an Event of Default if
such CIBC Offer to Amend is made in accordance with paragraph 5A(2). The
Corporation further covenants to promptly execute and deliver at its expense
(including, without limitation, the fees and expenses of counsel for the
Holders) an amendment to this Agreement in the form and substance satisfactory
to the Required Holders evidencing the amendment of this Agreement to include
such change provided that the execution and delivery of such amendment shall
not be a precondition to the effectiveness of such amendment as provided for
in this paragraph 6H, but shall merely be for the convenience of the parties
hereto and the good faith failure to promptly deliver such amendment shall not
constitute an Event of Default unless the Corporation fails to deliver such
amendment within five Business Days of the request of any Holder. The
Corporation shall promptly provide to each Holder a true copy of any such
amendment, supplement or modification of the CIBC Credit Agreements or such
other credit facility, and any consent, waiver or release given under any
thereof; provided that the good faith failure to provide such document promptly
shall not constitute an Event of Default if such document is delivered in
accordance with paragraph 5A(2).
6H. Most Favoured Lender Status. The Corporation will not, and will
not permit any Material Subsidiary that owns more than 30% of the consolidated
assets of the Corporation and its Subsidiaries to, enter into, assume or other-
wise be bound or obligated under any agreement entered into after the date
hereof creating or evidencing Indebtedness (other than Non-Recourse Debt or
Capitalized Lease Obligations) with one or more institutions pertaining to the
issuance of debt or borrowing of funds in an amount equal to in the aggregate
U.S. $50,000,000 or more (or the equivalent amount in another currency) which
contains one or more Additional Covenants, unless the Corporation shall have
offered to amend this Agreement to include such Additional Covenants (an "Other
Lender Offer to Amend"); provided, however, that (i) in the event the
Corporation or any Material Subsidiary shall enter into, assume or otherwise
become bound by or obligated under any such agreement without offering to amend
this Agreement, the terms of this Agreement shall, without any further action
on the part of the Corporation or any of the Holders, be deemed to be amended
automatically and retroactively to include each Additional Covenant contained
in such agreement, but only for so long as such Additional Covenants remain in
effect with respect to such other agreement and (ii) the good faith failure to
contemporaneously make an Other Lender Offer to Amend shall not constitute an
Event of Default if such Other Lender Offer to Amend is made in accordance with
paragraph 5A(2). In the case where a Material Subsidiary has entered into such
an agreement containing one or more Additional Covenants, the Corporation will
covenant to cause such Material Subsidiary to comply with such Additional
Covenants. The Corporation further covenants to promptly execute and deliver
at its expense (including, without limitation, the fees and expenses of counsel
for the Holders) an amendment to this Agreement in the form and substance
satisfactory to the Required Holders evidencing the amendment of this Agreement
to include such Additional Covenants, provided that the execution and delivery
of such amendment shall not be a precondition to the effectiveness of such
amendment as provided for in this paragraph 6H, but shall merely be for the
convenience of the parties hereto and the good faith failure to promptly deliver
such amendment shall not constitute an Event of Default unless the Corporation
fails to deliver such amendment within five Business Days of the request of any
Holder. The Corporation shall promptly provide each Holder a true copy of any
such agreement, or any amendment, supplement or modification thereof or any
consent, waiver or release given thereunder; provided that the good faith
failure to provide such document promptly shall not constitute an Event of
Default if such document is delivered in accordance with paragraph 5A(2). This
paragraph 6H shall not be effective at any time after the last day of any Fiscal
Quarter of the Corporation if, (x) as of such last day, Consolidated Tangible
Net Worth of the Corporation exceeds Cdn. $600,000,000 and for so long there-
after that the Consolidated Tangible Net Worth of the Corporation remains in
excess of Cdn. $600,000,000 and (y) the Corporation shall have elected to have
this paragraph 6H no longer be effective in the Compliance Certificate delivered
for such Fiscal Quarter. For clarity, if the Consolidated Tangible Net Worth
of the Corporation thereafter falls below Cdn. $600,000,000, the Corporation
shall be required to comply with the provisions of this paragraph 6H.
6I. Northstar Energy Partnership. The Corporation will not permit
Northstar Energy Partnership to have as a partner any Person which is not
either the Corporation or a Material Subsidiary.
PARAGRAPH 7. EVENTS OF DEFAULT.
7A. Acceleration. If any of the following events shall occur and be
continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise):
(i) failure to pay principal: the Corporation defaults in the pay-
ment of any principal of or Yield-Maintenance Amount payable with respect
to any Note when the same shall become due, either by the terms thereof or
otherwise as herein provided; or
(ii) failure to pay interest: the Corporation defaults in the payment
of any interest on any Note for more than five Business Days after the date
due; or
(iii) cross-default: the Corporation or any Material Subsidiary
(A) defaults (whether as primary obligor or as guarantor or
other surety) in any payment of principal of, premium (if any) or
interest on any other obligation for money borrowed (or any
Capitalized Lease Obligation, any obligation under a conditional sale
or other title retention agreement, any obligation issued or assumed
as full or partial payment for property whether or not secured by a
purchase money mortgage or any obligation under notes payable or
drafts accepted representing extensions of credit) beyond any period
of grace provided with respect thereto (including any period of grace
provided in a waiver), or
(B) fails to perform or observe any other agreement, term or
condition contained in any agreement under which any such obligation
is created or by which it is evidenced (or if any other event there-
under or under any such agreement shall occur and be continuing) and
the effect of such failure or other event is to cause, or permit any
holder or holders of such obligation (or any trustee on behalf of such
holder or holders) to cause, such obligation to become due (or to be
repurchased by the Corporation or any Subsidiary) prior to any stated
maturity,
provided in either case that (x) the aggregate amount of all obligations in
respect of which such a payment default shall occur and be continuing, or
such a failure or other event causing or permitting acceleration (or resale
to the Corporation or any Subsidiary) shall occur and be continuing,
exceeds $15,000,000 (or its then equivalent in U.S. Dollars); and (y) this
clause (iii) shall not apply to a default or failure in respect of Non-
Recourse Debt where the same would not individually or in the aggregate
have a Material Adverse Effect; or
(iv) incorrect representations: any representation or warranty made
by the Corporation or by any Material Subsidiary in any Loan Document to
which they are a party, or by the Corporation or any Material Subsidiary
or any of their officers in any writing furnished in connection with or
pursuant to this Agreement or any other Loan Document, shall be false in
any material respect on the date as of which made; and if such representa-
tion is contained in the second sentence of paragraph 8E or paragraph 8F
and the falsity thereof can be cured within 20 days, upon the expiration
of a period of 20 days if such falsity is not cured; or
(v) breach of negative covenant: the Corporation fails to perform
or observe any term, covenant or agreement contained in paragraph 5D, 5R,
5U or paragraph 6 (other than paragraph 6B(1), 6C or 6I), or the
Corporation fails to give notice of a Default or Event of Default as
required by paragraph 5A(4); or the Corporation fails to perform or
observe any term, covenant or agreement contained in paragraph 6B(1), 6C
or 6I and such failure shall not be remedied within 30 days; or
(vi) breach of other covenant: the Corporation or any Material
Subsidiary fails to perform or observe any other agreement, covenant,
term or condition contained herein or in any other Loan Document, and such
failure shall not be remedied within 30 days after the earlier of the date
that (a) the chief executive officer, chief operating/engineering officer,
chief financial officer or treasurer of the Corporation (or persons ful-
filling equivalent functions) obtains actual knowledge of such default,
and (b) the Corporation receives notice of such default from any Holder;
or
(vii) insolvency (voluntary proceedings): the Corporation or any
Material Subsidiary shall:
(a) become insolvent, or generally not pay its debts or meet
its liabilities as the same become due, or admit in writing its in-
ability to pay its debts generally, or declare any general moratorium
on its indebtedness, or propose a compromise or arrangement between
it and any class of its creditors,
(b) commit an act of bankruptcy under the Bankruptcy and
Insolvency Act (Canada), or make an assignment of its property for
the general benefit of its creditors under such Act, or make a
proposal (or file a notice of its intention to do so) under such Act,
(c) institute any proceeding seeking to adjudicate it an insol-
vent, or seeking liquidation, dissolution, winding-up, reorganization,
compromise, arrangement, adjustment, protection, moratorium, relief,
stay of proceedings of creditors generally (or any class of
creditors), or composition of it or its debts under any other statute,
rule or regulation relating to bankruptcy, winding-up, insolvency,
reorganization, plans of arrangement, relief or protection of debtors
(including the Bankruptcy and Insolvency Act (Canada), the Companies'
Creditors Arrangement Act (Canada) and any applicable Business
Corporations Act or Company Act), or at common law or in equity,
(d) apply for the appointment of, or the taking of possession
by, a receiver, interim receiver, receiver/manager, custodian,
administrator, trustee, liquidator or other similar official for it
or any substantial part of its property, or
(e) threaten to do any of the foregoing, or take any action,
corporate or otherwise, to approve, consent to or authorize any of
the actions described in this clause (vii) or in clause (viii), or
otherwise act in furtherance thereof, or fail to act in defense
thereof; or
(viii) insolvency (involuntary proceedings): any petition shall be
filed, application made or other proceeding instituted against or in
respect of the Corporation or any Material Subsidiary:
(a) seeking to adjudicate it an insolvent,
(b) seeking a receiving order against it under the Bankruptcy
and Insolvency Act (Canada),
(c) seeking liquidation, dissolution, winding-up, reorganiza-
tion, compromise, arrangement, adjustment, protection, moratorium,
relief, stay of proceedings of creditors generally (or any class of
creditors), or composition of it or its debts under any statute, rule
or regulation relating to bankruptcy, winding-up, insolvency,
reorganization, plans of arrangement, relief or protection of debtors
(including the Bankruptcy and Insolvency Act (Canada), the Companies'
Creditors Arrangement Act (Canada) and any applicable Business
Corporations Act or Company Act), or at common law or in equity, or
(d) seeking the entry of an order for relief or the appointment
of a receiver, interim receiver, receiver/manager, custodian, admin-
istrator, trustee, liquidator or other similar official for it or any
substantial part of its property,
and, if contested by the Corporation or such Material Subsidiary, such
petition, application or proceeding shall continue undismissed, or unstayed
and in effect, for a period of 30 days after the institution thereof, pro-
vided that if an order, decree or judgment is granted (whether or not
entered or subject to appeal) against the Corporation or any Material
Subsidiary thereunder in the interim and such order, decree or judgment is
not stayed or discharged within five days of it being granted, such grace
period shall cease to apply; or
(ix) extra-territorial proceedings: any other event shall occur
which, under the laws of any applicable jurisdiction, has an effect equiva-
lent to any of the events referred to in paragraphs (vii) or (viii); or
(x) judgments and attachments: (A) one or more judgments for the
payment of money in excess of $15,000,000 (or its then equivalent in U.S.
Dollars) in the aggregate shall be rendered against the Corporation or any
Material Subsidiary and the Corporation or such Material Subsidiary shall
not have (1) satisfied or provided for the discharge of such judgment in
accordance with its terms within 30 days from the date of entry thereof,
or (2) procured a stay of execution thereof within 30 days from the date
of entry thereof and within such period, or such longer period during
which execution of such judgment shall have been stayed, appealed such
judgment and caused the execution thereof to be stayed during such appeal,
provided that, if enforcement and/or realization proceedings are commenced
in respect thereof in the interim, such grace period shall cease to apply;
or (B) any property of the Corporation or any Material Subsidiary having a
fair market value in excess of $15,000,000 (or its then equivalent in U.S.
Dollars) in the aggregate shall be seized (including by way of execution,
attachment, garnishment or distraint), or any Lien thereon securing
Indebtedness in excess of $15,000,000 (or its then equivalent in U.S.
Dollars) in the aggregate shall be enforced, or such property shall become
subject to any charging order or equitable execution of a Governmental
Authority, or any writ of enforcement, writ of execution or distress
warrant shall exist in respect of the Corporation, any Material Subsidiary
or the property of either, or any sheriff or other Person shall become
lawfully entitled to seize or distrain upon such property under the Civil
Enforcement Act (Alberta), the Workers' Compensation Act (Alberta), the
Personal Property Security Act (Alberta) or any other Applicable Laws
whereunder similar remedies are provided, and in any case such seizure,
enforcement, execution, attachment, garnishment, distraint, charging order
or equitable execution, or other seizure or right, shall continue in
effect and not be released or discharged for more than 30 days, provided
that if the property is removed from the use of the Corporation or Material
Subsidiary, or is sold, in the interim, such grace period shall cease to
apply (provided that this clause (x) shall not apply to Non-Recourse Debt
or any realization on security for Non-Recourse Debt where such judgment,
seizure, realization or proceeding in respect thereof would not have a
Material Adverse Effect); or
(xi) unenforceability of documents: this Agreement, any Note or any
Material Subsidiary Guarantee or any material provision of any thereof
shall at any time for any reason cease to be in full force and effect, be
declared to be void or voidable or shall be repudiated, or the validity or
enforceability thereof shall at any time be contested by the Corporation
or any Material Subsidiary, or the Corporation or any Material Subsidiary
shall deny that it has any or any further liability or obligation there-
under or any action or proceeding shall be commenced to enjoin or restrain
the performance or observance by the Corporation or any Material Subsidiary
of any terms thereof or determining the same to be invalid or unenforce-
able, or at any time it shall be unlawful or impossible for the Corporation
or any Material Subsidiary to perform any of its obligations thereunder; or
(xii) cessation of business: other than as permitted hereunder, the
Corporation shall cease or threaten to cease to carry on all or any
material part of its business as now conducted, or shall make a bulk sale
of its assets; or
(xiii) ERISA: if (a) any Plan shall fail to satisfy the minimum
funding standards of ERISA or the Code for any plan year or part thereof
or a waiver of such standards or extension of any amortization period is
sought or granted under Section 412 of the Code, (b) a notice of intent to
terminate any Plan shall have been or is reasonably expected to be filed
with the PBGC or the PBGC shall have instituted proceedings under ERISA
Section 4042 to terminate or appoint a trustee to administer any Plan or
the PBGC shall have notified the Corporation or any ERISA Affiliate that a
Plan may become a subject of any such proceedings, (c) the aggregate
"amount of unfunded benefit liabilities" (within the meaning of Section
4001(a)(18) of ERISA) under all Plans, determined in accordance with
Title IV of ERISA, shall exceed $15,000,000, (d) the Corporation or any
ERISA Affiliate shall have incurred or is reasonably expected to incur any
liability pursuant to Title I or IV of ERISA or the penalty or excise tax
provisions of the Code relating to employee benefit plans, (e) the
Corporation or any ERISA Affiliate withdraws from any Multiemployer Plan,
or (f) the Corporation or any Subsidiary establishes or amends any
employee welfare benefit plan that provides post-employment welfare bene-
fits in a manner that would increase the liability of the Corporation or
any Subsidiary thereunder; and any such event or events described in
clauses (a) through (f) above, either individually or together with any
other such event or events, could reasonably be expected to have a
Material Adverse Effect and such default is not cured within 30 days after
the earlier of the date that (a) the chief executive officer, chief opera-
ting/engineering officer, chief financial officer or treasurer of the
Corporation (or persons fulfilling equivalent functions) obtains actual
knowledge of such default, and (b) the Corporation receives notice of such
default from any Holder. As used in clause (xiii), the terms "employee
benefit plan" and "employee welfare benefit plan" shall have the respective
meanings assigned to such terms in Section 3 of ERISA;
then:
(a) if such event is an Event of Default specified in clause (i)
or (ii) of this paragraph 7A, then any Holder (other than the
Corporation or any of its Subsidiaries or Affiliates) may at its
option by notice in writing to the Corporation, declare such Note to
be, and such Note shall thereupon be and become, immediately due and
payable at par together with interest accrued thereon, without
presentment, demand, protest or other notice of any kind, all of
which are hereby waived by the Corporation;
(b) if such event is an Event of Default specified in clause
(vii), (viii) or (ix) of this paragraph 7A with respect to the
Corporation, then all of the Notes at the time outstanding shall
automatically become immediately due and payable at par together with
interest accrued thereon and together with the Yield-Maintenance
Amount, if any, with respect to each Note, without presentment,
demand, protest or notice of any kind, all of which are hereby waived
by the Corporation; and
(c) if such event is not an Event of Default specified in clause
(vii), (viii) or (ix) of this paragraph 7A with respect to the
Corporation, then the Required Holders may at their option, by notice
in writing to the Corporation, declare all of the Notes to be, and all
of the Notes shall thereupon be and become, immediately due and pay-
able together with interest accrued thereon and together with the
Yield-Maintenance Amount, if any, with respect to each Note, without
presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Corporation.
The Corporation acknowledges, and the parties hereto agree, that each Holder has
the right to maintain its investment in the Notes free from repayment by the
Corporation (except as herein specifically provided for) and that the provision
for payment of any Yield-Maintenance Amount by the Corporation, in the event
that the Notes are prepaid or are accelerated as a result of an Event of
Default, is intended to provide compensation for the deprivation of such right
under such circumstances.
7B. Rescission of Acceleration. At any time after any or all of the
Notes shall have been declared immediately due and payable pursuant to paragraph
7A, the Required Holders may, by notice in writing to the Corporation, rescind
and annul such declaration and its consequences if (i) the Corporation shall
have paid all overdue interest on the Notes, the principal of and Yield-
Maintenance Amount, if any, payable with respect to any Notes which have become
due otherwise than by reason of such declaration, and interest on such overdue
interest and overdue principal and Yield-Maintenance Amount at the rate
specified in the Notes, (ii) the Corporation shall not have paid any amounts
which have become due solely by reason of such declaration, (iii) all Events of
Default and Defaults, other than non-payment of amounts which have become due
solely by reason of the circumstances giving rise to such declaration, shall
have been cured or waived pursuant to paragraph 11C, and (iv) no judgment or
decree shall have been entered for the payment of any amounts due pursuant to
the Notes or this Agreement. No such rescission or annulment shall extend to
or affect any subsequent Event of Default or Default or impair any right arising
therefrom.
7C. Notice of Acceleration or Rescission. Whenever any Note shall be
declared immediately due and payable pursuant to paragraph 7A or any such
declaration shall be rescinded and annulled pursuant to paragraph 7B, the
Corporation shall forthwith give written notice thereof to each Holder.
7D. Other Remedies. If any Event of Default or Default shall occur
and be continuing, the Holder of any Note may proceed to protect and enforce
its rights under this Agreement and such Note and under any Material Subsidiary
Guarantee by exercising such remedies as are available to such Holder in respect
thereof under Applicable Law, either by suit in equity or by action at law, or
both, whether for specific performance of any covenant or other agreement con-
tained in this Agreement or any other Loan Document or in aid of the exercise
of any power granted in this Agreement or any other Loan Document. No remedy
conferred in this Agreement upon the Holder of any Note is intended to be exclu-
sive of any other remedy, and each and every such remedy shall be cumulative
and shall be in addition to every other remedy conferred herein or therein or
now or hereafter existing at law or in equity or by statute or otherwise.
PARAGRAPH 8. REPRESENTATIONS, COVENANTS AND WARRANTIES.
8. Representations, Covenants and Warranties.
The Corporation represents, covenants and warrants as follows:
8A. Organization.
i) Corporation. The Corporation is a corporation duly organized
and validly existing in good standing under the laws of the Province of
Alberta. The Corporation is validly registered as an extra-provincial
corporation under the laws of Saskatchewan and British Columbia, being the
only other jurisdictions in which it carries on a material business or owns
material property. The execution, delivery and performance by the
Corporation and each Material Subsidiary of the Loan Documents to which it
is a party are within the Corporation's and such Material Subsidiary's
respective corporate or partnership powers, as applicable, and have been
duly authorized by all necessary corporate or partnership action. This
Agreement and the Notes constitute legal, valid and binding obligations of
the Corporation enforceable against it in accordance with their respective
terms subject to bankruptcy, insolvency, reorganization or other similar
laws affecting the enforcement of creditors' rights generally.
ii) Material Subsidiaries. Each Material Subsidiary is duly
organized and validly existing in good standing under the laws of the
jurisdiction in which it is incorporated or formed as a partnership, as
set out in Schedule G attached hereto. Each Material Subsidiary is validly
registered as an extra-provincial corporation or partnership under the laws
of the Provinces set out in Schedule G attached hereto, being the only
other jurisdictions in which such Material Subsidiary carries on a material
business or owns material property. The Material Subsidiary Guarantee of
each Material Subsidiary constitutes the legal, valid and binding obliga-
tions of such Material Subsidiary enforceable against it in accordance
with its terms subject to bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights generally.
8B. Financial Statements.6I.Northstar Energy Partnership The
Corporation has furnished you with the following financial statements, identi-
fied by a principal financial officer of the Corporation: (i) a consolidated
balance sheet of the Corporation and its Subsidiaries as at December 31 in each
of years 1997, 1996 and 1995, and consolidated statements of earnings and
retained earnings and consolidated statements of cash flow of the Corporation
and its Subsidiaries for each such year, each of the 1996 and 1995 balance
sheets and statements reported on by Deloitte & Touche; and (ii) a consolidated
balance sheet of the Corporation and its Subsidiaries as at September 30 in each
of the years 1997 and 1996 and consolidated statements of earnings and retained
earnings and consolidated statements of cash flow for the nine-month period
ended on each such date, and for the quarter ended on each such date, prepared
by the Corporation. Such financial statements (including any related schedules
and/or notes) are true and correct in all material respects (subject, as to
interim statements, to changes resulting from audits and year-end adjustments),
have been prepared in accordance with GAAP consistently followed throughout the
periods involved and show all liabilities, direct and contingent, of the
Corporation and its Subsidiaries required to be shown in accordance with GAAP.
The consolidated balance sheets present fairly the financial position of the
Corporation and its Subsidiaries as at the dates thereof, and the statements of
earnings, retained earnings and cash flows present fairly the results of the
operations of the Corporation and its Subsidiaries and their cash flows for the
periods indicated. The 1997 statements, although not reported on by Deloitte &
Touche as of the Date of Closing, will not change (except changes to footnote
12 thereof and changes to such financial statements relating to the treatment
of the West Windsor Power disposition). There has been no material adverse
change in the business, property or assets, condition (financial or otherwise),
operations or prospects of the Corporation and its Subsidiaries taken as a whole
since December 31, 1997.
8C. Actions Pending. There is no action, suit, investigation or pro-
ceeding pending or, to the knowledge of the Corporation, threatened against the
Corporation or any of its Subsidiaries, or any properties or rights of the
Corporation or any of its Subsidiaries, by or before any Governmental Authority
which, if determined adversely to the Corporation or its Subsidiaries, individu-
ally or in the aggregate would reasonably be expected to have a Material Adverse
Effect. There is no action, suit, investigation or proceeding pending or, to
the knowledge of the Corporation, threatened against the Corporation or any of
its Subsidiaries which purports to affect the validity or enforceability of any
Loan Document.
8D. Outstanding Indebtedness. Neither the Corporation nor any of its
Material Subsidiaries has outstanding any Indebtedness except for Indebtedness
for Borrowed Money that is permitted by paragraph 6A(2) of this Agreement, and
all such Indebtedness for Borrowed Money, including all guarantees of
Subsidiaries of any Indebtedness for Borrowed Money of the Corporation, is
included in Part C of Schedule C attached hereto, together with particulars
thereof. There exists no default or event of default under the provisions of
any instrument evidencing such Indebtedness for Borrowed Money or of any agree-
ment relating thereto, and no waiver of default is currently in effect. Neither
CIBC nor any other lender under the CIBC Credit Agreements holds any Liens in
respect of the obligations of the Corporation under the CIBC Credit Agreements.
The holders of Indebtedness of West Windsor Power under the West Windsor Credit
Agreement (exclusive of the agreements set forth in clauses (a) through (e) of
the definition thereof) have recourse therefor only to the assets of West
Windsor Power, and not to the Corporation or any Material Subsidiary or any of
their respective assets (other than the Corporation's partnership interest in
West Windsor Power, its interest in the partnership agreement governing West
Windsor Power, and proceeds thereof). The Corporation has no Sale-Leasebacks,
Capitalized Lease Obligations, Production Payment Transactions (other than the
Indeck Gas Contract and the Indeck Security), Prepaid Obligations (other than
the Indeck Gas Contract and the Indeck Security) or Non-Recourse Debt as of the
date hereof.
8E. Title to Properties. Except for Permitted Title Defects, the
Corporation and each of its Material Subsidiaries has good and marketable title
to its material proved producing oil and gas properties, its material proved
non-producing oil and gas properties, and all of its other respective material
properties and assets, including partnership interests in Northstar Energy
Partnership and David Limited Partnership, shares in the Material Subsidiaries
and the other assets reflected in the balance sheet as at December 31, 1997
referred to in paragraph 8B (other than properties and assets disposed of in
the ordinary course of business). None of such properties are subject to any
Lien of any kind except Liens that are expressly permitted by paragraph 6B(1).
All of the producing and non-producing oil and/or gas properties directly or
indirectly owned by the Corporation are owned directly by the Corporation and
its Material Subsidiaries. All leases (including petroleum and/or natural gas
leases) necessary in any material respect for the conduct of the respective
businesses of the Corporation and its Material Subsidiaries are valid and
subsisting and are in full force and effect.
8F. Taxes. The Corporation and each of its Material Subsidiaries
has filed all federal, provincial and other income tax returns which are
required to be filed, and each has paid all taxes as shown on such returns and
on all assessments received by it to the extent that such taxes have become due,
except such taxes as are being contested in good faith by appropriate
proceedings and for which adequate reserves have been established in the
reasonable opinion of the Corporation and in accordance with GAAP.
8G. Conflicting Agreements and Other Matters. Neither the Corporation
nor any of its Subsidiaries is a party to any contract or agreement or subject
to any charter or other corporate or partnership restriction which individually
or in the aggregate has a Material Adverse Effect. Neither the execution nor
delivery of this Agreement, the Notes or the Material Subsidiary Guarantees,
nor the offering, issuance and sale of the Notes, nor fulfilment of nor com-
pliance with the terms and provisions hereof and the other Loan Documents will
conflict with, or result in a breach of the terms, conditions or provisions of,
or constitute a default under, or result in any violation of, or result in the
creation of any Lien upon any of the properties or assets of the Corporation or
any of its Subsidiaries pursuant to, the articles or by-laws of the Corporation
or any of its Subsidiaries, the partnership agreement of Northstar Energy
Partnership and David Limited Partnership, any Applicable Law or any agreement
(including any agreement with shareholders), to which the Corporation or any of
its Subsidiaries is subject. The Corporation and its Subsidiaries are in com-
pliance with Applicable Laws where failure to do so would individually or in
the aggregate have a Material Adverse Effect. Neither the Corporation nor any
of its Subsidiaries is a party to, or otherwise subject to any provision con-
tained in, its articles, by-laws, its partnership agreement, any applicable
shareholders agreement or shareholder declaration, any instrument evidencing
Indebtedness of the Corporation or such Subsidiary, any agreement relating
thereto or any other contract or agreement which limits the amount of, or other-
wise imposes restrictions on the incurring of, Indebtedness of the Corporation
of the type to be evidenced by the Notes except as set forth in the agreements
listed in Part B of Schedule C attached hereto.
8H. Private Offering of Notes. Neither the Corporation nor any agent
acting on its behalf has, directly or indirectly, offered the Notes or any
similar security of the Corporation for sale to, or solicited any offers to buy
the Notes or any similar security of the Corporation from, or otherwise
approached or negotiated with respect thereto with, any Person other than
institutional investors, and neither the Corporation nor any agent acting on its
behalf has taken or will take any action which would subject the issuance or
sale of the Notes to the provisions of Section 5 of the Securities Act or to the
registration, qualification or similar provisions of any securities or "blue
sky" laws of any applicable jurisdiction or result in any contravention of the
provisions of any securities law of Alberta or any other applicable jurisdic-
tion.
8I. Use of Proceeds. Neither the Corporation nor any Subsidiary owns
or has any present intention of acquiring any "margin stock" as defined in
Regulation G (12 CFR Part 207) of the Board of Governors of the United States
Federal Reserve System ("margin stock"). The proceeds of the sale of the Notes
will be used as set forth in paragraph 5R. None of such proceeds will be used,
directly or indirectly, for the purpose, whether immediate, incidental or
ultimate, of purchasing or carrying any margin stock or for the purpose of main-
taining, reducing or retiring any Indebtedness which was originally incurred to
purchase or carry any stock that is currently a margin stock or for any other
purpose which might constitute this transaction a "purpose credit" within the
meaning of such Regulation G. Neither the Corporation nor any agent acting on
its behalf has taken or will take any action which might cause this Agreement or
the Notes to violate Regulation G, Regulation X or any other regulation of the
Board of Governors of the United States Federal Reserve System or to violate the
Exchange Act, in each case as in effect now or as the same may hereafter be in
effect.
8J. Governmental Consent. Neither the nature of the Corporation or
of any Subsidiary, nor any of their respective businesses or properties, nor any
relationship between the Corporation or any Subsidiary and any other Person, nor
any circumstance in connection with the offering, issuance, sale or delivery of
the Notes or the execution or delivery of the Material Subsidiary Guarantees is
such as to require any authorization, consent, approval, exemption or other
action by or notice to or filing with any Governmental Authority in connection
with the execution and delivery of this Agreement, the offering, issuance, sale
or delivery of the Notes, or the execution or delivery of the Material
Subsidiary Guarantees or fulfilment of or compliance with the terms and
provisions hereof or of the other Loan Documents.
8K. Environmental Compliance. Except where individually or in the
aggregate no Material Adverse Effect would reasonably be expected to result
therefrom:
(a) environmental compliance:
i) the Corporation, each Subsidiary and West Windsor Power are
in compliance with Applicable Environmental Laws, and the condition
and use of their property is in compliance with Applicable
Environmental Laws;
ii) the Corporation, each Subsidiary and West Windsor Power are
not subject to any environmental protection order or enforcement order
under any Applicable Environmental Law;
iii) the Corporation, each Subsidiary and West Windsor Power are
not subject to any proceeding of any Governmental Authority alleging
the violation of any Applicable Environmental Law, or that may lead
to a claim or order for clean-up costs, remedial work, reclamation,
conservation, damage to natural resources or personal injury, or that
may lead to the issuance of a stop-work order, environmental protec-
tion order, enforcement order, suspension order, control order,
prevention order or clean-up order;
iv) the Corporation, each Subsidiary and West Windsor Power are
not the subject of any federal, provincial, state, local or foreign
review, audit or investigation which may lead to a proceeding referred
to in clause (iii);
v) the Corporation, each Subsidiary and West Windsor Power are
not aware of any of their predecessors in title to any of their pro-
perty being the subject of any order referred to in clause (ii), or
any federal, provincial, state, local or foreign review, audit or
investigation which may lead to a proceeding referred to in clause
(iii);
vi) none of the Corporation's, any Subsidiary's or West Windsor
Power's property is (or could reasonably be expected to be) designated
as a "contaminated site" or has an equivalent designation under
Applicable Environmental Laws, nor could it be considered to be an
"unsightly property" under Applicable Environmental Laws;
vii) the Corporation, each Subsidiary and West Windsor Power are
not subject to any action, suit, claim or proceeding by any Person
other than a Governmental Authority, relating to non-compliance with
any Applicable Environmental Law or to the release or existence of
Hazardous Materials on any property or in the environment;
viii) the Corporation and each Subsidiary are not subject to any
well abandonment order or direction from the Alberta Energy and
Utilities Board (Alberta) or equivalent agency in any other jurisdic-
tion, nor are they liable for abandonment costs in respect of property
in which the Corporation or such Subsidiary no longer is a working
interest participant under Section 20.4 of the Oil and Gas
Conservation Act (Alberta) or equivalent legislation in another
jurisdiction;
ix) the Corporation and each Subsidiary are not aware of their
respective property or the property of West Windsor Power ever having
been the subject of any non-compliance of any Applicable Environmental
Law, or any order referred to in clause (ii), or any proceeding of the
nature referred to in clause (iii), or any review, audit or investiga-
tion of the nature referred to in clauses (iv) or (v), or any
designation of the nature referred to in clause (vi), or any action,
suit, claim or proceeding of the nature referred to in clause (vii);
and
x) the Corporation and each Subsidiary are not aware of any
Person which is acting or has acted on their behalf, or for which they
could have any liability under Applicable Environmental Laws, viola-
ting any Applicable Environmental Laws; and
(a) environmental permits: the Corporation, each Subsidiary and West
Windsor Power have obtained and continue to hold all approvals, permits,
licenses, consents, certificates of variance, certificates of qualification
and other authorizations which are necessary or advisable under Applicable
Environmental Laws.
8L. Environmental Disclosure. The Corporation, each Subsidiary and
West Windsor Power have no material contingent liability of which they have
knowledge or reasonably should have knowledge in connection with any release of
any Hazardous Materials into the environment, and no Hazardous Materials have
been released on the real property of the Corporation or any Subsidiary (whether
by the Corporation or any Subsidiary or, to their respective knowledge, any pre-
decessor in title), or now exist thereon, in a manner contrary to Applicable
Environmental Laws and which could result in a material expenditure for clean-
up; the Corporation, each Subsidiary and West Windsor Power do not directly or
indirectly generate, transport, handle, treat, store, recycle or dispose of
Hazardous Materials (other than substances associated with the production of
petroleum, natural gas and electricity).
8M. Environmental Risk Management8D.Outstanding Indebtedness . The
Corporation, each Subsidiary and West Windsor Power have implemented and are now
maintaining a prudent periodic program for environmental risk management.
8N. Disclosure. Neither this Agreement nor any other document,
certificate or written statement furnished to you by the Corporation or its
officers in connection herewith contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements con-
tained herein or therein not misleading. There is no fact or facts peculiar to
the Corporation or any of its Subsidiaries (excluding conditions general to the
oil and gas industry) or West Windsor Power (excluding conditions general to the
cogeneration industry) which individually or in the aggregate materially
adversely affects or in the future would reasonably be expected to (so far as
the Corporation can now foresee) materially adversely affect the business or
assets, or financial condition of the Corporation and its Subsidiaries taken as
a whole and which has not been set forth in this Agreement or in the other docu-
ments, certificates and statements furnished to you by or on behalf of the
Corporation prior to the date hereof in connection with the transactions
contemplated hereby.
8O. Pari Passu. All payment obligations of the Corporation hereunder
and under the Notes rank at least pari passu in priority of payment with the
Bank Indebtedness and with its other most senior unsubordinated Indebtedness
for Borrowed Money, subject only to the secured rights of the holders of valid
Liens expressly permitted by paragraph 6B(1) for Indebtedness owed to them.
All payment obligations of each Material Subsidiary under any Material
Subsidiary Guarantee executed by it, rank at least pari passu in priority of
payment with the guarantees by Material Subsidiaries of the Bank Indebtedness
and its other most senior unsubordinated Indebtedness, subject only to the
secured rights of the holders of valid Liens expressly permitted by paragraph
6B(1) for Indebtedness owed to them.
8P. ERISA. No accumulated funding deficiency (as defined in Section
302 of ERISA and Section 412 of the Code), whether or not waived, exists with
respect to any Plan (other than a Multiemployer Plan). No liability to the PBGC
has been or is expected by the Corporation or any ERISA Affiliate to be incurred
with respect to any Plan (other than a Multiemployer Plan) by the Corporation,
any Subsidiary or any ERISA Affiliate which is or would be materially adverse to
the business, condition (financial or otherwise) or operations of the
Corporation and its Subsidiaries taken as a whole. Neither the Corporation, any
Subsidiary nor any ERISA Affiliate has incurred or presently expects to incur
any withdrawal liability under Title IV of ERISA with respect to any
Multiemployer Plan which is or would be materially adverse to the business,
condition (financial or otherwise) or operations of the Corporation and its
Subsidiaries taken as a whole. The execution and delivery of this Agreement
and the issuance and sale of the Notes will be exempt from, or will not involve
any transaction which is subject to, the prohibitions of Section 406(a) of
ERISA and will not involve any transaction in connection with which a
penalty or a tax could be imposed under Section 4975 of the Code. The
representation by the Corporation in the next preceding sentence is made in
reliance upon and subject to the accuracy of your representation in paragraph
9A(2).
8Q. Foreign Assets Control Regulations, etc. The Corporation is not a
"national" of any foreign country with which the United States of America
maintains a commercial embargo, or an order freezing assets, pursuant to
legislation, executive orders of the President, or regulations of the Treasury
Department. Neither the sale of the Notes by the Corporation nor the use of the
proceeds thereof by the Corporation will violate any of such legislation, regu-
lations or orders.
8R. Investment Company Act and Public Utility Holding Company Status.
The Corporation is not (a) an investment company or a Person directly or
indirectly controlled by or acting on behalf of an investment company, within
the meaning of the United States Investment Company Act of 1940, as amended, or
(b) a "holding company" or "subsidiary company" of a "holding company" or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company", or a "public utility", within the meaning of the United States Public
Utility Holding Company Act of 1935, as amended.
8S. Engineering Reports. The most recent Engineering Report and other
related engineering data, production and cash flow projections, economic models
and other information provided by the Corporation to you in respect of the
reserves attributable to the oil and gas properties owned by the Corporation
and its Subsidiaries is substantially accurate and fairly reflects the interests
of the Persons specified therein and thereto as of the date thereof net of all
royalties and other burdens affecting same, except to the extent that any
inaccuracies would not have a Material Adverse Effect.
8T. Subsidiaries. Schedule G attached hereto contains a complete
list, as of the Date of Closing, of (i) all of the Subsidiaries of the
Corporation other than Subsidiaries the assets of which do not exceed Cdn.
$1,000,000 in the aggregate, (ii) all Subsidiaries which have been designated
as Material Subsidiaries, (iii) all Persons which have been designated as
Excluded Subsidiaries by the Corporation, and (iv) the direct or indirect
percentage ownership of the issued and outstanding Voting Shares of such
Subsidiaries and Excluded Subsidiaries.
8U. Material Subsidiaries. As of the Date of Closing, the Corporation
is, directly or indirectly, the registered and beneficial owner of all of the
issued and outstanding Voting Shares and all other securities of each Material
Subsidiary, other than the Mountain Companies.
8V. West Windsor Power. Neither the Corporation nor any Subsidiary
has outstanding any commitments, obligations, other Indebtedness or Liens in
favour of or for the benefit of any lender under the West Windsor Credit
Agreement or any supplier to, buyer from, contractor of, or any other Person
who may now or hereafter become a creditor of, West Windsor Power, other than
(i) Non-Recourse Debt under the West Windsor Credit Agreement and obligations
pursuant to the documents described in paragraphs (a) through (e) of the defini-
tion of West Windsor Power Indebtedness, which documents have not been amended
to change in any material respect the non-recourse nature of the obligations
thereunder or (ii) commitments, obligations, other Indebtedness or Liens in
favour of any supplier to, buyer from, contractor of, or any other Person who
may now or hereafter become a creditor of, West Windsor Power, which in the
aggregate could have a Material Adverse Effect.
8W. Indeck. The total liability of the Corporation and its
Subsidiaries under the Indeck Gas Contract and Indeck Security is less than
Cdn. $7,000,000.
8X. PLC-Windsor Ltd. The proved producing and proved non-producing
oil and gas properties formerly owned by PLC-Windsor Ltd. were contributed
to Northstar Energy Partnership, other than the Dover oil sands project near
Fort McMurray, Alberta.
PARAGRAPH 9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER.
9A. Representations and Warranties of the Purchaser. You represent
and warrant as follows:
9A(1) Nature of Purchase. You are acquiring the Notes to be purchased
by you hereunder as principal and not with a view to or for sale in connection
with any distribution thereof within the meaning of the Securities Act and the
Securities Act (Alberta) and such acquisition is in respect of a security which
has an aggregate acquisition cost to you of not less than $97,000, within the
contemplation of the Securities Act (Alberta), provided that the disposition of
your property shall at all times be and remain within your control.
9A(2) Source of Funds. At least one of the following statements is
an accurate representation as to each source of funds (a "Source") to be used
by you to acquire the Notes to be purchased by you hereunder:
(a) the Source constitutes assets allocated to your "insurance
company general account" (as such term is defined under Section V of the
United States Department of Labor's Prohibited Transaction Class Exemption
("PTCE") 95-60) and, as of the date of the purchase of the Notes, you
satisfy all of the applicable requirements for relief under Sections I and
V of PTCE 95-60;
(b) no part of the Source constitutes the assets of any "employee
benefit plan" as defined in Section 3(3) of ERISA, or its related trust,
or any "plan" as defined in Section 4975(e)(1) of the Code, or its related
trust (in this paragraph 9A(2), each a "Plan");
(c) the Source constitutes assets of either (i) an insurance
company pooled separate account, within the meaning of PTCE 90-1, or (ii)
a bank collective investment fund, within the meaning of PTCE 91-38; and
either (x) no Plan (together with any other Plan maintained by the same
employer or employee organization) holds more than a 10% interest in such
account or fund; and your acquisition of the Notes to be acquired hereunder
with the Source is eligible for and satisfies the requirements of PTCE 90-1
or PTCE 91-38 as in effect on the date of this representation and will be
exempt from the restrictions of Section 406(a), 406(b)(2) and 407(a) of
ERISA and the taxes imposed by Section 4975(a) and (b) of the Code or (y)
you have identified in writing to the Corporation those Plans which (to-
gether with any other Plan maintained by the same employer or employee
organization) hold more than a 10% interest in such pooled separate account
or bank collective investment fund and the Corporation has notified you in
writing that it is not a party in interest or a disqualified person
(as defined in Section 3(14) of ERISA and Section 4975(e)(2) of the Code,
respectively) with respect to any such Plan;
(d) the Source constitutes assets of one or more Plans which you have
identified in writing to the Corporation, or one or more separate accounts
or trust funds in which is included assets of one or more of such identi-
fied Plans, and the Corporation has notified you in writing that it is not
a "party in interest" or a "disqualified person" (as defined in Section
3(14) of ERISA and Section 4975(e)(2) of the Code, respectively) with
respect to any such Plan;
(e) the Source constitutes assets of a "governmental plan" as defined
in Section 3(32) of ERISA; or
(f) the Source constitutes assets of an investment fund, the assets
of which do not include assets of any employee benefit plan within the
meaning of ERISA.
9A(3) Location. Your head registered office is located outside of
Canada, and the Notes will be held by you outside Canada.
9B. Representations, Acknowledgements and Covenants of the Purchaser.
9B(1) Acknowledgement. You (by your execution of this Agreement)
acknowledge that the Notes shall bear the following legend:
THIS NOTE HAS NOT BEEN QUALIFIED FOR DISTRIBUTION IN
ALBERTA AND THIS NOTE, OR ANY INTEREST IN THIS NOTE,
MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED OR
ASSIGNED TO ANY RESIDENT OR PERSON IN ALBERTA UNTIL
MAY 31, 1998.
The Corporation confirms that on and after May 31, 1998, upon request of the
registered Holder of such Note for exchange of the certificates evidencing such
Note and compliance with the terms and conditions hereof, the Corporation will
issue a replacement Note without the above-captioned legend, provided that the
registered Holder of such Note delivers to the Corporation a certificate that
such Note is not beneficially owned by residents of Alberta. By your execution
of this Agreement, you consent to the Corporation making a notation on its
records in order to implement the foregoing provisions.
You, by your execution of this Agreement,
(i) represent that you are an insurance company as defined in
Section 2(13) of the Securities Act, and
(ii) understand and agree that the Notes have not been registered,
and that the Corporation does not intend to register the Notes, under the
Securities Act, and that such Notes shall bear the following legend:
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933 AS AMENDED, AND NEITHER THIS NOTE
NOR ANY PARTICIPATION HEREIN MAY BE OFFERED OR SOLD IN
CONTRAVENTION OF SAID ACT.
9B(2) Covenants Regarding Transfer of Notes. You covenant that you
will not on or before May 31, 1998 sell, offer for sale, transfer or assign such
Notes, or any interest therein, to any Person resident in Alberta. By its
acquisition and holding of a Note, each Transferee will be deemed to represent
that one or more of the statements in clauses (a) through (f) of paragraph 9A(2)
is correct with respect to each Source being used by it to acquire any Note.
PARAGRAPH 10. DEFINITIONS.
10. Definitions.
For the purpose of this Agreement, the terms defined in the introduc-
tory sentence and in paragraphs 1 and 2 shall have the respective meanings
specified therein, and the following terms shall have the meanings specified
with respect thereto below (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
10A. Yield-Maintenance Terms.
"Business Day" shall mean, when used in connection with the Yield-
Maintenance Amount, any day other than a Saturday, a Sunday or a day on which
commercial banks in New York, New York are required or authorized to be closed.
"Called Principal" shall mean, with respect to any Note, the principal
of such Note that is to be prepaid pursuant to paragraph 4B, or has become or is
declared to be immediately due and payable pursuant to paragraph 7A, as the
context requires.
"Designated Spread" shall mean the following:
(a) for all purposes except a prepayment pursuant to paragraph
4B(b), 0.50% in the case of each Note, and
(b) for purposes of any prepayment of any Notes pursuant to para-
graph 4B(b), 1.11%.
"Discounted Value" shall mean, with respect to the Called Principal of any
Note, the amount obtained by discounting all Remaining Scheduled Payments with
respect to such Called Principal from their respective scheduled due dates to
the Settlement Date with respect to such Called Principal, in accordance with
accepted financial practice and at a discount factor (applied on the same
periodic basis as that on which interest on such Note is payable) equal to the
Reinvestment Yield with respect to such Called Principal.
"Reinvestment Yield" shall mean, with respect to the Called Principal of
any Note, the Designated Spread over the yield to maturity implied by (i) the
yields reported, as of 10:00 A.M. (New York City local time) on the Business Day
next preceding the Settlement Date with respect to such Called Principal, on the
display designated as "Page 678" on the Telerate Service (or such other display
as may replace Page 678 on the Telerate Service) for actively traded U.S.
Treasury securities having a maturity equal to the Remaining Average Life of
such Called Principal as of such Settlement Date, or if such yields shall not
be reported as of such time or the yields reported as of such time shall not be
ascertainable, (ii) the Treasury Constant Maturity Series yields reported, for
the latest day for which such yields shall have been so reported as of the
Business Day next preceding the Settlement Date with respect to such Called
Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable
successor publication) for actively traded U.S. Treasury securities having a
constant maturity equal to the Remaining Average Life of such Called Principal
as of such Settlement Date. Such implied yield shall be determined, if neces-
sary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields
in accordance with accepted financial practice and (b) interpolating linearly
between yields reported for various maturities.
"Remaining Average Life" shall mean, with respect to the Called Principal
of any Note, the number of years (calculated to the nearest one-twelfth year)
obtained by dividing (i) such Called Principal into (ii) the sum of the products
obtained by multiplying (a) each Remaining Scheduled Payment of such Called
Principal (but not of interest thereon) by (b) the number of years (calculated
to the nearest one-twelfth year) which will elapse between the Settlement Date
with respect to such Called Principal and the scheduled due date of such
Remaining Scheduled Payment.
"Remaining Scheduled Payments" shall mean, with respect to the Called
Principal of any Note, all payments of such Called Principal and interest
thereon that would be due on or after the Settlement Date with respect to such
Called Principal if no payment of such Called Principal were made prior to its
scheduled due date.
"Settlement Date" shall mean, with respect to the Called Principal of any
Note, the date on which such Called Principal is to be prepaid pursuant to
paragraph 4B, or has become or is declared to be immediately due and payable
pursuant to paragraph 7A, as the context requires.
"Yield-Maintenance Amount" shall mean, with respect to any Note, an amount
equal to the excess, if any, of the Discounted Value of the Called Principal of
such Note over the sum of (i) such Called Principal plus (ii) interest accrued
thereon as of (including interest due on) the Settlement Date with respect to
such Called Principal. The Yield-Maintenance Amount shall in no event be less
than zero.
10B. Other Terms.
"Additional Covenant" shall mean any affirmative or negative covenant or
similar restriction applicable to the Corporation or any Subsidiary (regardless
of whether such provision is labeled or otherwise characterized as a covenant
or a default or event of default) the subject matter of which either (i) is
similar to that of the covenants in paragraphs 5D, 5K, 5L, 5M, 5Q, and 6 of this
Agreement, or related definitions in paragraph 10 of this Agreement, but con-
tains one or more percentages, amounts or formulas that is more restrictive than
those set forth herein or more beneficial to the holder or holders of the
Indebtedness created or evidenced by the document in which such covenant or
similar restriction is contained (and such covenant or similar restriction shall
be deemed an "Additional Covenant" only to the extent that it is more restric-
tive or more beneficial) or (ii) is different from the subject matter of such
covenants but contains restrictions or prohibitions on the ability of the
Corporation or its Subsidiaries to (a) create, incur or permit to exist any
indebtedness, Liens, leases or other similar obligations, (b) make any loans,
advances or investments, (c) pay any dividends or make any distributions or
repurchases of securities, (d) sell receivables, stock, debt or other assets,
(e) concerning pension plans or (f) involving any financial test (other than a
"Debt to Cash Flow" covenant similar to that contained in Section 8.3(b) of the
CIBC Credit Agreements).
"Affiliate" shall mean any Person directly or indirectly controlling,
controlled by, or under direct or indirect common control with, the Corporation,
except a Subsidiary. A Person shall be deemed to control a corporation or other
entity if such Person possesses, directly or indirectly, the power to direct or
cause the direction of the management and policies of such corporation or such
entity, whether through the ownership of voting securities, by contract or
otherwise.
"Agreement" shall have the meaning specified in paragraph 11C.
"Applicable Environmental Laws" shall mean those Applicable Laws which
pertain to the environment or the release of Hazardous Materials into the
environment, and includes any condition or requirement contained in a permit,
license, approval, consent or other document issued pursuant to such laws.
"Applicable Laws" shall mean, in relation to any Person, property, trans-
action or event:
(a) all applicable provisions of laws, statutes, rules and regula-
tions from time to time in effect of any Governmental Authority, and
(b) all judgments, orders, awards, decrees, official directives,
writs and injunctions from time to time in effect of any Governmental
Authority in any action, proceeding or matter in which the Person is a
party or by which it or its property is bound or having application to the
transaction or event.
"Bank Indebtedness" shall mean the Indebtedness of the Corporation from
time to time under the CIBC Credit Agreements and any other credit facility
established in favour of the Corporation by any other bank(s), whether in
substitution therefor or in addition thereto.
"Business Day" shall mean, when used other than in connection with the
Yield-Maintenance Amount, any day other than a Saturday or a Sunday or a day on
which commercial banks in New York, New York or Calgary, Alberta are required
or authorized to be closed.
"Canadian Dollars" or "Cdn. $" or "$" shall mean lawful money of Canada.
"Capitalized Lease Obligation" shall mean, with respect to any Person, any
rental obligation which, under GAAP, would be required to be capitalized on the
books of such Person, taken at the amount thereof accounted for as indebtedness
(net of interest expense) in accordance with such principles.
"CIBC" shall mean the Canadian Imperial Bank of Commerce, a Canadian
chartered bank.
"CIBC Credit Agreements" shall mean the Credit Agreement relating to the
Cdn. $300,000,000 Extendible Revolving Term Credit Facility between the
Corporation and CIBC, Royal and TD, as Lenders and CIBC, as Agent for the
Lenders, and Royal and TD as Co-Agents, dated April 15, 1997, as amended from
time to time and the Credit Agreement relating to the Cdn. $60,000,000
Extendible Operating Credit Facility between the Corporation and CIBC, as
amended from time to time, and the guarantees of David Limited Partnership dated
April 15, 1997, Morrison dated April 15, 1997 and Northstar Energy Partnership
dated November 1, 1997, each as amended from time to time.
"CIBC Offer to Amend" shall have the meaning specified in paragraph 6G.
"Claims" shall have the meaning specified in paragraph 11P.
"Closing" shall have the meaning specified in paragraph 2.
"Code" shall mean the United States Internal Revenue Code of 1986, as
amended.
"Commodity Swap" means an agreement entered into between the Corporation
or a Subsidiary and a counterparty on a case by case basis, the purpose and
effect of which is to mitigate or eliminate the Corporation's or a Subsidiary's
exposure to fluctuations in commodity prices.
"Compliance Certificate" means a compliance certificate substantially in
the form attached hereto as Schedule E or such other form as may be reasonably
acceptable to the Required Holders, executed on behalf of the Corporation by
the Chairman, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, President, any Vice President, Treasurer or Controller of the
Corporation or any other officer of the Corporation involved principally in its
financial administration or controllership function.
"Confidential Information" shall mean any material non-public information
regarding the Corporation that is expressly and conspicuously marked as being
"confidential", that is provided to any Holder, any Person who purchases a
participation in a Note and any offeree of a Note or a participation therein
pursuant to this Agreement other than information (a) which was publicly known
or otherwise known to such Holder, such Person or such offeree at the time of
the disclosure, (b) which subsequently becomes publicly known through no act or
omission of such Holder, such Person or such offeree or (c) which otherwise
becomes known to such Holder, such Person or such offeree, other than through
disclosure by the Corporation or any Subsidiary.
"Consolidated Debt" shall mean, in respect of the Corporation and its
Subsidiaries, as of the end of any Fiscal Quarter and as determined in accord-
ance with GAAP on a consolidated basis, without duplication, an amount equal to:
(a) the aggregate of:
(i) the amount of Indebtedness for Borrowed Money; and
(ii) to the extent not included in Indebtedness for Borrowed Money:
(A) Guarantees in respect of the Indebtedness for Borrowed
Money of any other Person (including Excluded Subsidiaries), other
than a Subsidiary; provided that any such Indebtedness for Borrowed
Money of such other Person shall include obligations of the kind
described in subparagraphs (A) through (F) inclusive of this paragraph
(ii) of the definition of Consolidated Debt;
(B) obligations:
(I) to purchase indebtedness or to advance or supply funds
for the payment or purchase of indebtedness, including the pur-
chase of debt securities, obligations or shares, or
(II) to make any payment, loan, advance, capital contribu-
tion or other investment in or to a Person, or become or be
bound by any agreement to do so, for the purpose of assuring
a minimum equity, an asset base, a working capital or other
balance sheet test or condition for any date or to provide funds
for the payment of any debt liability, dividend or share liquida-
tion payment, or otherwise to supply funds to or in any manner
invest in such Person,
other than where such Person is a Subsidiary or where any such
obligations relate to payments made or to be made on behalf of
any such Person in the ordinary course of business in accordance
with normal petroleum and natural gas industry practice pursuant
to the provisions of operating agreements which require or permit
joint operators under any such operating agreements to make such
payments after such Person has defaulted in the payment thereof;
(C) obligations with respect to Prepaid Obligations and deferred
revenues relating to third party obligations;
(D) the amount of Capitalized Lease Obligations;
(E) any Sale-Leaseback to the extent it constitutes a
Capitalized Lease Obligation;
(F) obligations arising under Swaps entered into by the
Corporation or a Subsidiary for speculative purposes (determined,
where relevant, by reference to GAAP) or other than in the ordinary
course of its business to the extent of the net amount due or accruing
due by the Corporation or a Subsidiary thereunder (determined by
marking-to-market the same in accordance with their terms); provided
that Interest Swaps having as a subject matter principal amounts
(determined on a net basis taking into account Swaps entered into to
reverse the position or limit the exposure under an existing Swap)
greater than the aggregate indebtedness of the Corporation and its
Subsidiaries for borrowed money available to them and Commodity Swaps
in respect of which the Corporation or a Subsidiary is not permitted
to create a Permitted Encumbrance pursuant to paragraph (n) of the
definition thereof shall be deemed to be for speculative purposes or
other than in the ordinary course of business; and
(G) the redemption amount of any preferred shares of the
Corporation or its Subsidiaries (if such preferred shares are not
owned by the Corporation or a Subsidiary) which are redeemable at the
option of the holder thereof;
and shall exclude in any event:
(b) to the extent permitted by GAAP, any particular indebtedness if, upon
or prior to the maturity thereof, there shall have been irrevocably deposited
with the proper depository in trust the necessary funds (or evidences of
indebtedness) for the payment, redemption or satisfaction of such indebted-
ness, and thereafter such funds and evidences of indebtedness or other
security so deposited are not included in any computation of the assets of
such Person;
(c) contingent obligations in respect of court actions, suits or other
proceedings which have not come to a final and conclusive judgment before a
court of competent jurisdiction or such other Person as may have jurisdiction
in the premises and the Corporation or any Subsidiary reasonably expects to
be successful in the defense of such action, suit or other proceeding;
(d) any lease or other arrangement relating to real or personal property
which would, in accordance with GAAP, be accounted for as an operating lease
of such Person;
(e) deferred taxes;
(f) Non-Recourse Debt; and
(g) for greater certainty, any Indebtedness for Borrowed Money included
on the balance sheet of an Excluded Subsidiary, including Indebtedness of the
type described in paragraph (a) above.
"Consolidated Interest Expense" shall mean, with reference to any period,
the following for the Corporation and its Subsidiaries on a consolidated basis,
after eliminating all intercompany transactions:
(a) all interest charges (including amortization of debt discount,
bankers' acceptance discounts and stamping fees, commercial paper discounts,
guarantee fees, and expense and imputed interest on Capitalized Lease
Obligations and on Sale-Leasebacks to the extent they constitute Capitalized
Lease Obligations) on Indebtedness properly charged or chargeable to income
during such period in accordance with GAAP; plus
(b) all interest charges capitalized or deferred in determining
Consolidated Net Earnings for such period; less
(c) to the extent included in clauses (a) or (b), interest charges in
respect of Non-Recourse Debt; less
(d) to the extent included in (a) or (b), interest charges paid by
Excluded Subsidiaries
provided that any interest charges paid or accrued by any Person acquired by the
Corporation or any Subsidiary through purchase, amalgamation, merger or other-
wise, or paid or accrued by any Person which is a successor to the Corporation
by amalgamation or merger or as a transferee of its assets, shall be included in
Consolidated Interest Expense only to the extent taken into account in determin-
ing the net income of such Person included in Consolidated Net Earnings for such
period.
"Consolidated Net Earnings" shall mean, with reference to any period, the
net earnings (or loss) of the Corporation and its Subsidiaries (other than earn-
ings of Excluded Subsidiaries) (after all taxes) for such period (taken as a
cumulative whole), all determined in accordance with GAAP on a consolidated
basis after deducting portions of income properly attributable to minority
interests, if any, in the shares and surplus of Subsidiaries, provided that
there shall be excluded:
(a) the income (or loss) of any Person prior to the date it becomes a
Subsidiary or is merged into or amalgamated with the Corporation or a
Subsidiary;
(b) the income (or loss) of any Person (other than a Subsidiary) in which
the Corporation or any Subsidiary has an ownership interest, except to the
extent that any such income has been actually received by the Corporation or
such Subsidiary in the form of cash dividends;
(c) the undistributed income of any Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Subsidiary is not at the time permitted by the terms of its articles or any
agreement, instrument or Applicable Law;
(d) any restoration to income of any contingency reserve taken in the same
Fiscal Year;
(e) any aggregate net gain (or loss) during such period arising from the
sale, exchange or other disposition of capital assets (such term to include
all fixed assets, whether tangible or intangible, and all inventory sold in
conjunction with the disposition of fixed assets);
(f) any gains or losses resulting from any write-up or write-down of
assets;
(g) any net gain from the collection of the proceeds of life insurance
policies;
(h) any gain or loss arising from the acquisition of any securities, or
the extinguishment, under GAAP, of any Indebtedness, of the Corporation or
any Subsidiary;
(i) any net income or gain or net loss during such period from any change
in accounting, from any extraordinary items or from any prior period adjust-
ments;
(j) any net income or gain or net loss during such period from any discon-
tinued operations or the disposition thereof (for clarity, not including the
net income or gain arising from the disposition or particular oil and gas
properties or related tangibles);
(k) in the case of a successor to the Corporation by amalgamation or
merger or as a transferee of its assets, any earnings of the Person (other
than a Subsidiary) amalgamated with or merged into the Corporation, or whose
assets are transferred to the Corporation, prior to the date of such amalgama-
tion, merger or transfer of assets;
(l) any net income or net loss from operations (for clarity after deduc-
tion of interest expense relating to such operations) included therein and
which are attributable to assets of the Corporation and its Subsidiaries to
which a Non-Recourse Debt holder's rights, remedies and recourse are limited;
and
(m) any net income or loss included therein from, and which is attribu-
table to, Excluded Assets except to the extent received by the Corporation.
"Consolidated Tangible Assets" shall mean, as of the end of any Fiscal
Quarter and as determined in accordance with GAAP, without duplication, the net
book value of the property, plant and equipment as shown on the consolidated
balance sheet of a Person for such Fiscal Quarter, less the aggregate of any
amount included therein which is attributable to:
(a) any property, plant and equipment of such Person which is subject to
a Lien securing Non-Recourse Debt; and
(b) any property, plant and equipment of such Person which is not located
in Canada, the United States of America or Other Permitted Countries;
and, for greater certainty, there shall be excluded from the determination of
Consolidated Tangible Assets, the net book value of any property, plant and
equipment of the Excluded Subsidiaries.
"Consolidated Tangible Net Worth" shall mean, as of the end of any Fiscal
Quarter, and as determined in accordance with GAAP on a consolidated basis, an
amount equal to the amount of shareholders' equity of the Corporation and its
Subsidiaries (including therein retained earnings) but excluding therefrom any
shareholders' equity attributable to:
(a) preferred shares of the Corporation or of a Subsidiary (if such pre-
ferred shares are not owned by the Corporation or another Subsidiary) which
are redeemable at the option of the holder thereof;
(b) any Non-Recourse Debt, any Excluded Assets (for so long as the
Excluded Assets are subject to a Lien securing Non-Recourse Debt) and any
assets of the Corporation and its Subsidiaries to which any such Non-Recourse
Debt holder's rights, remedies and recourse are limited and all retained earn-
ings attributable to such assets;
(c) goodwill, trademarks, copyrights and other similar intangible assets
as shown on the consolidated balance sheet of the Corporation and its
Subsidiaries for such Fiscal Quarter; and
(d) all amounts properly attributable to minority interests, if any, in
the shares and surplus of Subsidiaries;
and, for greater certainty, there shall be excluded from the determination of
Consolidated Tangible Net Worth all Excluded Subsidiaries and all investments
(whether by way of equity, loans or otherwise) of the Corporation and its
Subsidiaries in all Excluded Subsidiaries.
"Currency Swap" shall mean a contract entered into between the Corporation
or a Subsidiary and a counterparty on a case by case basis in connection with
forward rate, currency swap or currency exchange and other similar currency
related transactions, the purpose and effect of which is to mitigate or elimin-
ate the Corporation's or a Subsidiary's exposure to fluctuations in exchange
rates.
"Date of Closing" shall have the meaning specified in paragraph 2.
"David Limited Partnership" shall mean David Limited Partnership, a limited
partnership formed under the laws of Alberta.
"EBITDA" shall mean, with reference to any period, the sum of Consolidated
Net Earnings plus, to the extent deducted in determining Consolidated Net
Earnings, the following for the Corporation and its Subsidiaries (other than
Excluded Subsidiaries) on a consolidated basis, without duplication, after
eliminating amounts properly attributable to minority interests and after
eliminating all intercompany transactions:
(a) Consolidated Interest Expense,
(b) current and deferred income taxes (except current income taxes
relating to sales or other dispositions of capital assets the losses from
which are included in determining Consolidated Net Earnings),
(c) depreciation, depletion and amortization expense, and
(d) other non-cash expenses for such period,
and for certainty, excluding any non-cash income or gain. There shall be
deducted from the foregoing the following for the Corporation and its
Subsidiaries on a consolidated basis (to the extent included in determining
Consolidated Net Earnings): income tax recovery (except income tax recovery
relating to sales or other dispositions of capital assets the losses from which
are included in determining Consolidated Net Earnings).
"Eligible Reinvestments" shall mean
(a) all purchases of property, plant and equipment in Canada, the
United States of America and Other Permitted Countries made by the
Corporation and its Subsidiaries during the relevant Fiscal Year;
(b) any proceeds of disposition in the relevant Fiscal Year held as
cash or other liquid investments at the end of such Fiscal Year; and
(c) investments to acquire shares in the capital stock of petroleum
and/or natural gas exploration and production companies organized and
existing under the laws of Canada or a province thereof, or any state of
the United States of America, with substantially all of its assets located
and a majority of its business conducted within Canada or the continental
United States of America (including Alaska), where the Corporation's objec-
tive in making such acquisition is ultimately to acquire control of the
subject company, provided that (i) the Corporation notifies the Holders in
the next Compliance Certificate delivered pursuant to paragraph 5A(2) that
it is invoking this clause (c) in order to comply with its obligation in
paragraph 6B(3), and identifying the original date of the investment and
the amount thereof as at the date the Compliance Certificate relates to,
and (ii) within 270 days of the date such investment is made, the
Corporation designates the subject company as a Material Subsidiary in
accordance with the terms of this Agreement. For clarity, such investment
shall cease to be an "Eligible Reinvestment" if at any time during such
270-day period the Corporation becomes unwilling or unable to acquire over
50% of the total combined voting power of all classes of Voting Shares of
the subject company.
"Engineering Report" shall mean an engineering evaluation report prepared by
an independent engineering firm or qualified in-house engineers of the
Corporation, in form and substance satisfactory to the Required Holders, acting
reasonably, which report shall, as of the date of such report, set forth the
reserves attributable to the oil and gas properties owned by the Corporation
and its Subsidiaries and evaluated therein, the royalties and other burdens
applicable thereto and a projection of the rate of production and future net
revenue therefrom and shall evaluate at least 70.0% of the proven producing oil
and gas properties of the Corporation and its Subsidiaries determined by
reference to future net revenue of such proven producing oil and gas properties.
"Environmental Liabilities" means any and all Indebtedness for any Release,
any environmental damage, any contamination or any other environmental problem
caused or alleged to have been caused to any Person, property or the environment
as a result of any Release or the condition of any property or asset, whether or
not caused by a breach of Applicable Laws, including, without limitation, all
Indebtedness arising from or related to: any surface, underground, air, ground-
water, or surface water contamination; the abandonment or plugging of any well;
restorations and reclamations; the removal of or failure to remove any founda-
tions, structures or equipment; the cleaning up or reclamation of storage sites;
any Release; violation of pollution standards; and personal injury (including
sickness, disease or death) and property damage arising from the foregoing.
"ERISA" shall mean the United States Employee Retirement Income Security
Act of 1974, as amended.
"ERISA Affiliate" shall mean any corporation which is a member of the same
controlled group of corporations as the Corporation within the meaning of
Section 414(b) of the Code, or any trade or business which is under common
control with the Corporation within the meaning of Section 414(c) of the Code.
"Event of Default" shall mean any of the events specified in paragraph 7A,
provided that there has been satisfied any requirement in connection with such
event for the giving of notice, or the lapse of time, or both, or the happening
of any further condition, event or act, and "Default" shall mean any of such
events, whether or not any such requirement has been satisfied.
"Excess Cash Proceeds" shall have the meaning specified in paragraph 6B(3).
"Exchange Act" shall mean the United States Securities Exchange Act of
1934, as amended.
"Excluded Assets" shall mean, in respect of the Corporation or any Material
Subsidiary, any of its assets and properties which are described in Schedule H.
"Excluded Subsidiary" shall mean a Person which would otherwise be a
Subsidiary but in respect of which the Corporation has advised the Holders in
writing, in the circumstances permitted pursuant to paragraph 5R, that such
Person is no longer a Subsidiary.
"Existing Northstar Notes" shall mean the 7.03% Senior Notes due November
7, 2005 of the Corporation outstanding under the Northstar Note Agreement.
"Fiscal Quarter" shall mean the three month period commencing on the first
day of each Fiscal Year and each successive three month period thereafter during
such Fiscal Year.
"Fiscal Year" shall mean the Corporation's fiscal year which at present
commences on January 1 of each year and ends on December 31 of such year.
"GAAP" shall mean generally accepted accounting principles in Canada from
time to time approved by the Canadian Institute of Chartered Accountants, or any
successor institute, applicable on the date on which the applicable determina-
tion or calculation is made or required to be made.
"Governmental Approval" means an authorization, consent, approval, waiver,
order, decree, license, exemption, permit, registration, filing, qualification
or declaration of or with any Governmental Authority or the giving of notice to
any Governmental Authority or any other action in respect of a Governmental
Authority.
"Governmental Authority" means any federal, state, provincial, county,
local or municipal government; any governmental body, agency, authority, board,
bureau, department or commission (including any taxing authority); any instru-
mentality or office of any of the foregoing (including any court or tribunal)
exercising executive, legislative, judicial, regulatory or administrative func-
tions; or any Person directly or indirectly controlled by any of the foregoing.
"Guarantee" shall mean any undertaking to assume, guarantee, indemnify,
endorse (other than the routine endorsement of cheques in the ordinary course
of business), contingently agree to purchase or to provide funds for the payment
of, or otherwise become directly or indirectly liable (contingent or otherwise)
in respect of, any Indebtedness of any Person; provided that the amount of each
Guarantee shall be deemed to be the amount of the Indebtedness guaranteed
thereby, unless the Guarantee is limited to a specified amount or to realization
exclusively on specified assets in which case the amount of such Guarantee shall
be deemed to be the lesser of such specified amount or the fair market value of
such specified assets, as the case may be, or the amount of such Indebtedness.
"Hazardous Materials" shall mean any substance that:
(a) when released to the natural environment is likely to cause, immedi-
ately or at some future time, material harm or degradation to the natural
environment or any risk to human health and without restricting the generality
of the foregoing, includes any pollutant, contaminant, waste or hazardous
waste, or any "dangerous goods", "hazardous chemical", "hazardous substance"
or "hazardous waste" as may be defined by Applicable Environmental Law for the
protection of the natural environment or human health, or
(b) exhibits characteristics of flammability, corrosivity, reactivity or
toxicity.
"Holder" or "Holders" shall mean the holder or holders of any Notes from
time to time.
"Indebtedness" shall mean, with respect to any Person, all the Person's
present and future indebtedness, liabilities and obligations of every nature
and kind whatsoever, whether absolute or contingent, material or not, known or
unknown, direct or indirect, including indebtedness created, incurred, assumed
or guaranteed by such Person, all indebtedness for borrowed money, any obliga-
tion arising in respect of any Swap or similar obligation and all liabilities
which in accordance with GAAP would appear on the liability side of a balance
sheet of such Person prepared as at such time, except items of capital, retained
earnings, surplus, deferred tax reserves or accrued taxes.
"Indebtedness for Borrowed Money" shall mean, at any date of determination
and as determined in accordance with GAAP on a consolidated basis, all indebted-
ness, obligations and liabilities of a Person as of such date of determination
which would be classified as long term debt upon a consolidated balance sheet
of such Person (including, without limitation, the current portion of such long
term debt) and all other indebtedness for borrowed money, including loans and
commercial paper, which would be classified as current liabilities upon a con-
solidated balance sheet of such Person as of such date of determination.
"Indeck" shall mean Indeck-Yerkes Limited Partnership.
"Indeck Gas Contract" shall mean the Gas Sales and Purchase Agreement dated
March 9, 1989 between the Corporation and Indeck Gas Supply Corporation ("IGS")
as amended by Amending Agreements dated May 31, 1990, June 28, 1991, and
November 11, 1991, respectively, and as assigned by IGS to Indeck pursuant to
an Assignment and Assumption Agreement dated as of May 14, 1992 among IGS, the
Corporation and Indeck, and as further amended by an Amending Agreement dated
July 6, 1992, between the Corporation and Indeck.
"Indeck Security" shall mean:
(a) the demand debenture dated July 6, 1992 in the principal amount of
US $25,000,000 made by the Corporation in favour of Indeck;
(b) the security deposit agreement made as of July 6,1992 between
Indeck and the Corporation; and
(c) any Lien granted under existing commitments in the Indeck Gas
Contract.
"Interest Swap" shall mean a contract entered into between the Corporation
or a Subsidiary and a counterparty on a case by case basis, in connection with
interest rate swap transactions, interest rate options, cap transactions, floor
transactions, collar transactions and other similar interest rate related trans-
actions, the purpose and effect of which is to mitigate or eliminate the
Corporation's or a Subsidiary's exposure to fluctuations in interest rates.
"Joint Venture Company" shall mean any corporation which is jointly con-
trolled by the Corporation (either by itself or through any combination of
itself and its Subsidiaries) and the other shareholders of such corporation;
provided that no one Person exercises control over such corporation and the
accounts of any such corporation, in accordance with GAAP, are proportionately
consolidated into the accounts of the Corporation and, for greater certainty,
"Joint Venture Company" presently includes each Mountain Company.
"Lien" shall mean any assignment, mortgage, charge, pledge, lien, encum-
brance, title retention agreement (including, without limitation, Capitalized
Lease Obligation) or any security interest whatsoever, howsoever created or
arising, whether absolute or contingent, fixed or floating, legal or equitable,
perfected or not.
"Loan Documents" shall mean this Agreement, each Note, each Material
Subsidiary Guarantee and all other certificates, instruments and documents con-
taining representations, warranties or covenants delivered from time to time by
or on behalf of the Corporation or any Subsidiary in connection herewith or
therewith.
"Material Adverse Effect" shall mean any event, circumstance, occurrence
or change which would reasonably be expected to materially impair or have a
material adverse effect on (i) the business, financial condition, operations,
assets or properties of the Corporation and its Material Subsidiaries taken as
a whole, (ii) the ability of the Corporation to repay the Notes or any other
amount outstanding hereunder or any Material Subsidiary to perform its obliga-
tions underits Material Subsidiary Guarantee, or (iii) the validity or enforce-
ability of this Agreement or any other Loan Document.
"Material Subsidiary" shall mean a Subsidiary which has executed and
delivered a Material Subsidiary Guarantee to the Holders and, notwithstanding
that they are unable to provide a Material Subsidiary Guarantee, shall be deemed
as of the Date of Closing to also include the Mountain Companies.
"Material Subsidiary Guarantee" shall mean a guarantee of the obligations
of the Corporation by a Subsidiary to or for the benefit of the Holders substan-
tially in the form of Schedule D, as amended from time to time, which in the
case of Morrison shall initially be limited in an amount to Cdn. $100,000,000.
"Morrison" shall mean Morrison Petroleums Ltd., a corporation amalgamated
pursuant to the laws of the Province of Alberta.
"Morrison Note Agreement" shall mean the Note Agreement dated as of July
19, 1995, as amended by letter agreement dated November 1, 1997, with respect
to the issuance by Morrison of U.S. $75,000,000 of 6.76% senior notes due July
19, 2005, or any substitution therefor or replacement thereof.
"Mountain Companies" shall mean, collectively, Mountain Energy Inc. and
659502 Alberta Inc., the two corporations, the first of which ("Mountain 1") is
owned (as to Voting Shares) as to 50% by each of the Corporation and Morrison
Middlefield Resources Limited and the second of which is owned (as to Voting
Shares) as to 100% by Mountain 1 and "Mountain Company" means either of them.
"Multiemployer Plan" shall mean any Plan which is a "multiemployer plan"
(as such term is defined in Section 4001(a)(3) of ERISA).
"Non-Recourse Debt" shall mean Indebtedness incurred by the Corporation or
a Subsidiary to finance the construction, development or acquisition of assets
where the recourse of the lender of such Indebtedness (or any agent, trustee,
receiver or other Person acting on behalf of the lender in respect of such
Indebtedness) or any judgment in respect of such Indebtedness is limited, in all
circumstances (other than in respect of false or misleading representations,
warranties and covenants customary in limited recourse financing, in respect of
which the lender's recourse is against the Corporation or a Subsidiary, as
applicable, on an unsecured basis) to the assets constructed, developed or
acquired (including all personal property arising from or relating
to such assets) and in respect of which such Indebtedness has been incurred.
"Northstar Energy Partnership" shall mean Northstar Energy, a general
partnership formed under the laws of Alberta, the partners of which are the
Corporation and Morrison .
"Northstar Note Agreement" shall mean the Note Agreement dated as of
November 7, 1995 with respect to the issuance by the Corporation of U.S.
$60,000,000 of 7.03% senior notes due November 7, 2005, as amended.
"Notes" shall have the meaning specified in paragraph 1.
"Offers to Amend" shall mean any CIBC Offer to Amend and/or any Other
Lender Offer to Amend.
"Officer's Certificate" shall mean a certificate signed in the name of the
Corporation by a Responsible Officer.
"Other Lender Offer to Amend" shall have the meaning specified in paragraph
6H.
"Other Permitted Countries" shall mean the countries listed in Schedule F.
"PBGC" shall mean the United States Pension Benefit Guaranty Corporation
or any successor entity.
"Permitted Disposition" shall mean, in respect of the Corporation or any
Subsidiary, any of the following:
(a) a sale or disposition by such Person of oil and gas properties (and
related tangibles) resulting from any pooling, unit or farmout agreement
entered into in the ordinary course of its business and in accordance with
sound industry practice when, in the reasonable judgment of the Corporation
or such Subsidiary, it is necessary or desirable to do so in order to facili-
tate the orderly exploration, development or operation of such oil and gas
properties;
(b) a sale or other disposition by such Person in the ordinary course of
business and in accordance with sound industry practice of tangible personal
property that is obsolete, no longer useful for its intended purpose, or being
replaced in the ordinary course of its business;
(c) a sale or disposition by such Person of current production from oil
and gas properties made in the ordinary course of its business;
(d) sales or dispositions (including Voting Securities) by a Subsidiary
to the Corporation, by a Material Subsidiary to a Material Subsidiary and by
the Corporation to a Material Subsidiary, including dispositions to a partner-
ship involving the Corporation and Morrison;
(e) a sale or disposition of assets by such Person which are subject to a
Lien securing Non-Recourse Debt; and
(f) any sale or disposition of any assets or properties classified as
property, plant and equipment on the most recent consolidated balance sheet
of the Corporation and its Subsidiaries, including a Sale-Leaseback and any
Prepaid Obligations, where the proceeds of disposition are applied to the pro
rata prepayment of the Notes (in accordance with paragraph 4B(a)) and the out-
standing Indebtedness under the CIBC Credit Agreements. The pro rata portion
of such proceeds of disposition to be prepaid to the Holders shall be deter-
mined by multiplying such proceeds by a fraction, the numerator of which is
the aggregate principal amount of the Notes then outstanding plus the Yield-
Maintenance Amount that the Corporation would ordinarily be required to pay
on the full payout of the Notes (determined as of the Business Day next
preceding the date of prepayment), and the denominator of which is the
aggregate principal amount of the Notes outstanding plus the aggregate prin-
cipal amount of Indebtedness outstanding under the CIBC Credit Agreements,
plus all premiums which the Corporation would ordinarily be required to pay
on the full payout of the Notes and such Indebtedness (determined as of the
Business Day next preceding the date of prepayment).
"Permitted Encumbrances" shall mean any of the following:
(a) Liens for taxes, assessments or governmental charges which are not due
or delinquent, or the validity of which the Corporation or any Subsidiary
shall be contesting in good faith; provided the Corporation or such Subsidiary
shall have made adequate provision therefor in accordance with GAAP;
(b) the Lien of any judgment rendered, or claim filed, against the
Corporation or any Subsidiary which the Corporation or any such Subsidiary
shall be contesting in good faith; provided the Corporation or such Subsidiary
shall have made adequate provision therefor in accordance with GAAP;
(c) Liens, privileges or other charges imposed or permitted by law such
as statutory liens and deemed trusts, carriers' liens, builders' liens,
materialmens' liens and other Liens, privileges or other charges of a similar
nature which relate to obligations not due or delinquent, including any Lien
or trust arising in connection with workers' compensation, unemployment
insurance, pension and employment laws or regulations;
(d) Liens arising in the ordinary course of and incidental to construc-
tion, maintenance or current operations which have not been filed pursuant to
law against the Corporation or any Subsidiary or in respect of which no steps
or proceedings to enforce such Lien have been initiated or which relate to
obligations which are not due or delinquent or if due or delinquent, which
the Corporation or such Subsidiary shall be contesting in good faith;
provided the Corporation or such Subsidiary shall have made adequate provision
therefor in accordance with GAAP;
(e) Liens incurred or created in the ordinary course of business and in
accordance with sound oil and gas industry practice in respect of the explora-
tion, development or operation of oil and gas properties or related production
or processing facilities or the transmission of petroleum substances as
security in favour of any other Person conducting the exploration, develop-
ment, operation or transmission of the property to which such Liens relate for
the Corporation's or any of its Subsidiary's portion of the costs and expenses
of such exploration, development, operation or transmission, provided that
such costs or expenses are not due or delinquent or, if due or delinquent,
which the Corporation or such Subsidiary shall be contesting in good faith;
provided the Corporation or such Subsidiary shall have made adequate provision
therefor in accordance with GAAP;
(f) overriding royalty interests, net profit interests, reversionary
interests and carried interests or other similar burdens on production in
respect of the Corporation's or any of its Subsidiary's oil and gas properties
that are entered into with or granted to arm's length third parties in the
ordinary course of business and in accordance with sound oil and gas industry
practice in Alberta;
(g) Liens for penalties arising under ordinary course non-participation
provisions of operating agreements in respect of the Corporation's or any of
its Subsidiary's oil and gas properties if such Liens do not materially
detract from the value of any material part of the property of the Corporation
and its Subsidiaries taken as a whole;
(h) easements, rights-of-way, servitudes, zoning or other similar rights
or restrictions in respect of land held by the Corporation or any Subsidiary
(including, without limitation, rights-of-way and servitudes for railways,
sewers, drains, pipe lines, gas and water mains, electric light and power and
telephone or telegraph or cable television conduits, poles, wires and cables)
which, either alone or in the aggregate, do not materially detract from the
value of such land or materially impair its use in the operation of the
business of the Corporation and its Subsidiaries taken as a whole;
(i) Liens given by the Corporation or any Subsidiary to a public utility
or any Governmental Authority when required by such public utility or
Governmental Authority in the ordinary course of the business of the
Corporation or any Subsidiary in connection with operations of the Corporation
or any Subsidiary if such Lien does not, either alone or in the aggregate,
materially detract from the value of any material part of the property of the
Corporation and its Subsidiaries taken as a whole and relates to obligations
not due or delinquent;
(j) the right reserved to or vested in any Governmental Authority by
the terms of any lease, license, grant or permit or by any statutory or regu-
latory provision to terminate any such lease, license, grant or permit or to
require annual or other periodic payments as a condition of the continuance
thereof;
(k) all reservations in the original grant from the Crown of any lands
and premises or any interests therein and all statutory exceptions, qualifica-
tions and reservations in respect of title;
(l) any Lien from time to time disclosed by the Corporation or any
Subsidiary to the Holders and which is consented to by the Required Holders;
(m) any right of first refusal in favour of any Person granted in the
ordinary course of business with respect to all or any of the oil and gas
properties of the Corporation or any Subsidiary;
(n) Liens on cash or marketable securities of the Corporation or any
Subsidiary granted in connection with any Swap entered into in the ordinary
course of business and not for any speculative purpose provided:
(A) such Liens only secure the obligations of the Corporation or
any Subsidiary under such Swap and, in respect of Commodity Swaps, the
Corporation reasonably expects the Corporation or such Subsidiary to
produce sufficient crude oil, natural gas or natural gas liquids in the
ordinary cause of business equal to or greater than the amount of
production subject to such Commodity Swap; and
(B) the obligations of the Corporation or a Subsidiary under such
Swaps are not due and delinquent;
(o) Liens relating wholly to Non-Recourse Debt or any Lien on the
Excluded Assets;
(p) Liens in favour of the Holders to secure the Notes;
(q) Liens to collateralize monies held in a cash collateral account by
a lender in respect of the prepayment of bankers' acceptances, letters of
credit or similar obligations accepted or issued by such lender but only if at
the time of such prepayment no default or event of default has occurred and
is continuing under the credit facility pursuant to which the bankers' accept-
ances or letters of credit have been accepted or issued;
(r) the Indeck Gas Contract and the Indeck Security;
(s) the rights of buyers under production sale contracts related to the
Corporation's or a Subsidiary's share of petroleum substances entered into in
the ordinary course of business, provided that the contracts create no rights
(including any Lien) in favour of the buyer or any other Person in, to or over
any reserves of petroleum substances or other assets of the Corporation or a
Subsidiary, other than a dedication of reserves (not by way of Lien or abso-
lute assignment) on usual industry terms;
(t) Liens or trusts created, incurred or assumed by the Corporation or
a Subsidiary in respect of Indebtedness for Borrowed Money incurred or assumed
by the Corporation or a Subsidiary (the "Other Security Interest") where the
Corporation or such Subsidiary, concurrently with the creation, incurrence or
assumption of any Other Security Interest, (I) provides equal and ratable
Liens and trusts to or for the benefit of the Holders to secure the Notes on
the same property and assets in form and substance satisfactory to the
Holders, acting reasonably, together with such other documents (including
legal opinions in form and substance reasonably satisfactory to the Required
Holders, including an opinion as to the validity, enforceability, registration
and perfection of such Lien and that all payment obligations of the
Corporation under the Notes rank at least pari passu in right of payment with
all other obligations secured by such Other Security Interest) with respect
to such Lien and trust as the Holders may reasonably require and (II) causes
the holders of the obligations secured by such Other Security Interest to
enter into an inter-creditor agreement with all Holders, such inter-creditor
agreement to be in form and substance satisfactory to the Required Holders;
provided that at the time of and immediately after the creation, incurrence
or assumption of the Other Security Interest and the Indebtedness for Borrowed
Money secured thereby, no Default or Event of Default has occurred and is
continuing;
(u) purchase money Liens upon or in any tangible personal property and
fixtures (including real property surface rights upon which such fixtures are
located) acquired by the Corporation or a Subsidiary in the ordinary course of
business to secure the purchase price of such property or to secure
Indebtedness incurred solely for the purpose of financing the acquisition of
such property; including any Liens existing on such property at the time of
its acquisition (other than any such Lien created in contemplation of any such
acquisition) provided that the aggregate amount of Indebtedness secured by all
such Liens is not at any time in excess of 7.0% of the Consolidated Tangible
Assets of the Corporation and its Subsidiaries as at the end of the immediate-
ly preceding Fiscal Quarter;
(v) Liens on the assets of the Corporation or any Subsidiary which are
not otherwise Permitted Encumbrances; provided that the aggregate amount of
Indebtedness secured by all such Liens is not at any time in excess of 3.0%
of the Consolidated Tangible Assets of the Corporation and its Subsidiaries
as at the end of the immediately preceding Fiscal Quarter and such Liens do
not attach generally to all or substantially all of the assets of the
Corporation or a Material Subsidiary; and
(w) any extension, renewal or replacement (or successive extensions,
renewals or replacements), as a whole or in part, of any Lien referred to in
the preceding paragraphs (a) to (v) inclusive of this definition, so long as
any such extension, renewal or replacement of such Lien is limited to all or
any part of the same property that secured the Lien extended, renewed or
replaced (plus improvements on such property) and the indebtedness or obliga-
tion secured thereby is not increased from its original amount or any amount
to which it has been repaid;
provided that nothing in this definition shall in and of itself constitute or
be deemed to constitute an agreement or acknowledgment by any Holder that the
Indebtedness subject to or secured by any such Permitted Encumbrance ranks
(apart from the effect of any Lien included in or inherent in any such Permitted
Encumbrance) in priority to the Indebtedness of the Corporation hereunder or
of any Material Subsidiary under its Material Subsidiary Guarantee.
"Permitted Investments" shall mean
(a) investments in certificates of deposit or bankers' acceptances of com-
mercial banks organized under the laws of Canada or the United States of
America having capital, surplus or undivided profits in excess of U.S.
$100,000,000 or equivalent in Canadian Dollars, a short term deposit rating
of A-1 or better by Standard and Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P"), P-1 or better by Moody's Investors Services, Inc.
("Moody's"), A-1 or better by Canadian Bond Rating Service ("CBRS") or R-1
(low) or better by Dominion Bond Rating Service ("DBRS") or their equivalent,
and a long term unsecured bond rating of A or better by S&P, A2 or better by
Moody's, A or better by CBRS and A or better by DBRS, in each case such
certificates or acceptances shall be due within one year from the date of
purchase and payable in Canadian or U.S. Dollars,
(b) obligations of the Canadian or United States Government, and obliga-
tions fully guaranteed by the Canadian or United States Government, in each
case due within one year from the date of purchase and payable in Canada or
the United States of America in Canadian or U.S. Dollars, and
(c) commercial paper having a short-term rating of A-1 or better by S&P,
P-1 or better by Moody's, A-1 or better by CBRS and R-1 (middle/low) or better
by DBRS or their equivalent and issued by corporations domiciled in Canada or
the United States of America, in each case due within one year (in the case of
Canadian Dollar denominated commercial paper) and 270 days (in the case of
U.S. Dollar denominated commercial paper) from the date of purchase and
payable in Canadian or U.S. Dollars.
"Permitted Title Defects" shall mean, as at any particular time, any of
the following rights, limitations, reservations, provisos, conditions, excep-
tions, qualifications, agreements, obligations and interests on or in respect
of the assets, or any part of the assets, of the Corporation or any Subsidiary:
(i) easements, rights-of-way, servitudes, zoning, and similar rights in or
restrictions in respect of land (including rights-of-way and servitudes for
railways, sewers, drains, gas and oil pipelines, gas and water mains, electric
light and power and telephone or telegraph or cable television conduits,
poles, wires and cables) granted to or reserved or taken by other Persons,
which do not, individually or in the aggregate, materially detract from the
use or value of the property subject thereto,
(ii) the reservations, limitations, provisos and conditions in any original
grants from the Crown of any land or interests therein and statutory excep-
tions, qualifications and reservations in respect of title,
(iii) the unexercised rights reserved or vested in any municipality or
governmental or other authority or Person by the terms of any title documents,
or by any statutory provisions, to terminate any such title documents, or
other interests in land, or to require annual or other periodic payments as a
condition of the continuance thereof,
(iv) obligations to deliver petroleum substances to buyers thereof or
their assignees or nominees and rights of the buyers, their assignees and
nominees under sales contracts entered into in the ordinary course of business
and in accordance with sound industry practice, as the same may be amended,
replaced or renewed from time to time,
(v) royalties, overriding royalties, production payments, net profits and
other interests and obligations arising in the ordinary course of business
and in accordance with sound industry practice,
(vi) any agreement, or any interest or right created in favour of any
Person thereunder, relating to pooling or unitization affecting the property
and arising in the ordinary course of business and in accordance with sound
industry practice,
(vii) any rights of first refusal, pre-emption or first purchase or
requirements of consent to sale or disposition, created in the ordinary course
of business, none of which have become exercisable heretofore or as a result
of the execution and delivery of this Agreement or will, merely on the passage
of time, become exercisable, and
(viii) defects in title which are not general in application and which do
not, individually or in the aggregate, materially detract from the value of
the property of the Corporation or any Subsidiary or any significant part
thereof or materially impair the use of any thereof in the operation of their
respective businesses.
"Person" shall mean any individual, firm, partnership, company, corporation
or other body corporate, government, governmental body, agency, instrumentality,
unicorporated body of Persons or association and the heirs, executors,
administrators or other legal representatives of an individual.
"Plan" shall mean any "employee pension benefit plan" (as such term is
defined in Section 3 of ERISA) which is or has been established or maintained,
or to which contributions are or have been made, by the Corporation or any ERISA
Affiliate or with respect to which the Corporation or any ERISA Affiliate may
have any liability.
"Prepaid Obligations" shall mean "take-or-pay" or similar prepaid
Indebtedness of a Person whereby such Person is obligated to settle, at some
future date more than 90 days from the date the obligation is incurred, payment
in respect of petroleum substances, whether by deliveries (accelerated or
otherwise) of petroleum substances, payment of money or otherwise howsoever.
"Prime Rate" shall mean:
(a) in respect of amounts in U.S. Dollars, the rate of interest, expressed
as a rate per annum, which The Bank of New York from time to time publicly
announces in New York City as its Prime Rate, and
(b) in respect of amounts in Canadian Dollars, the prime lending rate of
interest, expressed as a rate per annum, which CIBC from time to time
establishes as the reference rate of interest in order to determine the
interest rate it will charge for loans in Canadian Dollars to customers in
Canada.
If either such institution ceases to announce or establish such rates, the
Required Holders may designate an alternate similar financial institution in
its place, both for the purposes of this Agreement and (in the case of U.S.
Dollars) the Notes.
"Production Payment Transaction" shall mean:
(i) the sale (including any forward sale) or other transfer of petroleum
or natural gas substances, chemicals, minerals or other products of the
Corporation or a Subsidiary, whether in place or when produced, for a period
of time until, or an amount such that, the purchaser will realize a specified
amount of money (however determined, including by reference to interest rates
or other factors which may not be fixed) or a specified amount of such pro-
ducts, or
(ii) any other transaction involving an interest in property of the
character commonly referred to as a "production payment".
"Rate of Exchange" has the meaning specified in paragraph 11U.
"Release" shall mean any release, spill, emission, leaking, pumping,
pouring, injection, escaping, deposit, disposal, discharge, leeching or migra-
tion of any element or compound in or into the indoor or outdoor environment
(including the abandonment or disposal of any barrels, tanks, containers or
receptacles containing any contaminant), or in, into or out of any vessel or
facility, including the movement of any contaminant through the air, soil,
subsoil, surface, water, groundwater, rock formation or otherwise.
"Required Holders" shall mean the Holder or Holders of at least 51% of the
aggregate principal amount of the Notes outstanding at such time (exclusive of
Notes held by the Corporation or any of its Affiliates or Subsidiaries).
"Responsible Officer" shall mean the chief executive officer, chief opera-
ting officer, executive vice-president, chief financial officer, vice-president
finance or treasurer of the Corporation or any other officer of the Corporation
involved principally in its financial administration or its controllership
function.
"Royal" shall mean the Royal Bank of Canada, a Canadian chartered bank.
"Sale-Leaseback" shall mean an arrangement under which title to any tan-
gible personal property or fixture is transferred by the Corporation or a
Subsidiary (a "transferor") to another Person which leases or otherwise grants
the right to use such property to the transferor (or nominee of the transferor),
whether or not in connection therewith the transferor also acquires a right or
is subject to an obligation to acquire the property, asset or interest, and
regardless of the accounting treatment of such arrangement.
"Securities Act" shall mean the United States Securities Act of 1933, as
amended.
"Subsidiary" shall mean:
(a) a Person of which another Person alone or in conjunction with its
other Subsidiaries owns an aggregate number of the Voting Shares sufficient
to enable the election of a majority of the directors (or other Persons per-
forming similar functions) regardless of the manner in which other Voting
Shares are voted;
(b) a Person of which another Person alone or in conjunction with its
other Subsidiaries has, through the operation of any agreement or otherwise,
the ability to elect or cause the election of a majority of the directors (or
other Persons performing similar functions) or otherwise exercise control
over the management and policies of such Person; and
(c) a Joint Venture Company;
and shall include any Person in like relation to a Subsidiary, but shall exclude
in all circumstances an Excluded Subsidiary; and unless otherwise expressly
indicated herein, "Subsidiary" shall only refer to and mean a Subsidiary of the
Corporation (including a Joint Venture Company) which is not an Excluded
Subsidiary.
"Successor" has the meaning specified in paragraph 6B(2).
"Swap" shall mean a Commodity Swap, Currency Swap or Interest Swap. For
the purposes of this Agreement, the amount of the obligation under any Swap
shall be the amount determined in respect thereof as of the end of the then most
recently ended Fiscal Quarter of such Person, based on the assumption that such
Swap had terminated at the end of such Fiscal Quarter, and in making such deter-
mination, if any agreement relating to such Swap provides for the netting of
amounts payable by and to such Person thereunder or if any such agreement
provides for the simultaneous payment of amounts by and to such Person, then,
in each such case, the amount of such obligation shall be the net amount so
determined.
"TD" shall mean The Toronto-Dominion Bank, a Canadian chartered bank.
"Transaction" shall have the meaning specified in paragraph 6B(2).
"Transferee" shall mean any direct or indirect transferee of all or any
part of any Note purchased by you under this Agreement.
"U.S. Dollars" or "U.S. $" shall mean lawful currency of the United States
of America.
"Voting Shares" shall mean:
(a) capital stock of any class of any corporation or other securities of
any other Person which carries voting rights to elect the board of directors
(or other Persons performing similar functions) under any circumstances; and
(b) an interest in a general partnership, limited partnership, joint
venture or similar Person which entitles the holder of such interest to
receive a share of the profits, or on dissolution or partition, of the assets,
of such Person.
"West Windsor Credit Agreement" has the meaning specified in the definition
of West Windsor Power Indebtedness.
"West Windsor Power" shall mean West Windsor Power, an Ontario general
partnership.
"West Windsor Power Indebtedness" shall mean the Indebtedness of the
Corporation and any Material Subsidiary in relation to a Cdn. $150,000,000
Credit Agreement dated as of November 2, 1993 among West Windsor Power, the
lenders named therein, Banque National de Paris and Citibank Canada as Lead
Agents, Paribas Bank of Canada and Union Bank of Switzerland (Canada) as
Co-Agents and Union Bank of Switzerland (Canada) as LC Bank, Administrative
Agent and Collateral Agent, as amended by a Consent, Waiver and Amendment
Agreement dated April 20, 1994, by a Consent Agreement dated January 13, 1995,
by an Amendment dated February 23, 1996 and by an Amendment and Consent
Agreement dated as of June 28, 1996 (as so amended, the "West Windsor Credit
Agreement") and any documents related thereto to which the Corporation or any
Material Subsidiary is a party or is bound, including, without limitation;
(a) the obligations of the Corporation pursuant to the Amended and Restated
Sponsor Funding Agreement and Pledge dated as of January 1, 1996 by and among
the Corporation, American Tractebel Corporation, Sky Energy Corporation, West
Windsor Power and Union Bank of Switzerland (Canada);
(b) the obligations of the Corporation under the Amended and Restated
Keep-Well Agreement made the 1st day of January, 1996 by and between the
Corporation, PLC-Windsor Ltd. and Sky Energy Corporation;
(c) the obligations of PLC-Windsor Ltd. under the Amended and Restated
Equity Subscription Agreement made as of January 1, 1996 by and among
PLC-Windsor Ltd., Tractebel Canada Inc., Sky Energy Corporation and West
Windsor Power;
(d) the obligations of PLC-Windsor Ltd. under the Assignment of Partnership
Interest dated as of November 2, 1993 between PLC-Windsor Ltd. as Assignor and
Union Bank of Switzerland (Canada) as Collateral Agent, as amended by a Letter
Agreement dated January 1, 1996; and
(e) the obligations of the Corporation or PLC-Windsor Ltd. in respect of
the "Debt Service Letter of Credit" (as defined in the West Windsor Credit
Agreement).
"Wholly-Owned Subsidiary" shall mean a Subsidiary all of the Voting Shares
and other equity interests of which are owned by the Corporation directly or
indirectly through one or more Wholly-Owned Subsidiaries.
10C. Accounting Principles, Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
determinations with respect to accounting matters hereunder shall be made, and
all financial statements and certificates and reports as to financial matters
required to be furnished hereunder shall be prepared, in accordance with GAAP,
applied on a basis consistent with the most recent audited consolidated finan-
cial statements of the Corporation and its Subsidiaries delivered pursuant to
clause (ii) of paragraph 5A or, if no such statements have been so delivered,
the most recent audited financial statements referred to in clause (i) of
paragraph 8B.
PARAGRAPH 11. MISCELLANEOUS.
11A. Note Payments. The Corporation agrees that, so long as you shall hold
any Note, the Corporation will make payments of principal of, interest on and
any Yield-Maintenance Amount payable with respect to such Note in compliance
with the terms of the Note and this Agreement, such payments to be made by wire
transfer of immediately available funds for credit (not later than noon, New
York City local time, on the date due) to your account or accounts as specified
in the Purchaser Schedule attached hereto, or such other account or accounts in
the United States of America as you may designate in writing, notwithstanding
any contrary provision herein or in any Note with respect to the place of
payment. You agree that, before disposing of any Note, you will make a notation
thereon (or on a schedule attached thereto) of all principal payments previously
made thereon and of the date to which interest thereon has been paid. The
Corporation agrees to afford the benefits of this paragraph 11A to any
Transferee which shall have made the same agreement as you have made in this
paragraph 11A.
11B. Expenses. The Corporation agrees, whether or not the transactions
contemplated by this Agreement are consummated, to pay, and save you and any
Transferee harmless against liability for the payment of, all out-of-pocket
expenses arising in connection with such transactions, including (i) all docu-
ment production and duplication charges and the fees and expenses of any special
counsel engaged by you or such Transferee in connection with this Agreement
(other than the fees and expenses of your special counsel in connection with the
negotiation of and the execution and delivery of the Loan Documents at Closing),
the transactions contemplated hereby and any subsequent proposed modification
of, or proposed consent or waiver under, this Agreement (including the fees and
expenses of counsel), whether or not such proposed modification shall be
effected or proposed consent or waiver granted, and (ii) the costs and expenses,
including attorneys' fees and solicitors' fees (on a solicitor and his own
client basis), incurred by you or such Transferee in enforcing (or determining
whether or how to enforce) any rights under this Agreement or the other Loan
Documents or in responding to any subpoena or other legal process or informal
investigative demand of any Governmental Authority issued in connection with
this Agreement or the other Loan Documents or the transactions contemplated
hereby or thereby or by reason of you or such Transferee being the Holder of
any Note, including costs and expenses incurred in any bankruptcy case. The
obligations of the Corporation under this paragraph 11B shall survive the
transfer of any Note or portion thereof or interest therein by you or any
Transferee and the payment of any Note; provided that the Corporation shall not
be liable for legal fees of a Purchaser or Transferee in connection with the
transfer of a Note or any portion thereof.
11C. Consent to Amendments.
(a) This Agreement may be amended, and the Corporation may take any action
herein prohibited, or omit to perform any act herein required to be performed
by it, if the Corporation shall obtain the written consent to such amendment,
action or omission to act, of the Required Holders except that, without the
written consent of the Holders of all Notes at the time outstanding, no amend-
ment to this Agreement shall change the stated maturity date of any Note, or
change the principal of, or the rate or time of payment of interest on or any
Yield-Maintenance Amount payable with respect to any Note, or affect the time,
amount or allocation of any prepayments, amend this paragraph 11C, or change
the proportion of the principal amount of the Notes required with respect to
any consent, amendment, waiver or declaration. Each Holder at the time or
thereafter outstanding shall be bound by any consent authorized by this para-
graph 11C, whether or not such Note shall have been marked to indicate such
consent, but any Notes issued thereafter may bear a notation referring to any
such consent. No course of dealing between the Corporation and any Holder nor
any delay in exercising any rights hereunder or under any Note shall operate
as a waiver of any rights of any Holder of such Note. As used herein and in
the Notes, the term "this Agreement" and references thereto shall mean this
Agreement as it may from time to time be amended or supplemented.
(b) The Corporation will provide each Holder with sufficient information,
sufficiently far in advance of the date a decision is required, to enable such
Holder to make an informed and considered decision with respect to any pro-
posed amendment, waiver or consent in respect of any of the provisions hereof
or of the Notes. The Corporation will deliver executed or true and correct
copies of each amendment, waiver or consent effected pursuant to the provi-
sions of this paragraph to each Holder promptly following the date on which it
is executed and delivered by, or receives the consent or approval of, the
requisite Holders of Notes.
11D. Form, Registration, Transfer and Exchange of Notes; Lost Notes.
(a) The Notes are issuable as registered notes without coupons in amounts
of at least U.S. $1,000,000, except as may be necessary to reflect any prin-
cipal amount not evenly divisible by U.S. $1,000,000. Except as repaid or
prepaid in accordance herewith, no Holder shall hold less than an aggregate
principal amount of U.S. $2,000,000 of Notes.
(b) The Corporation shall keep at its principal office in Calgary, Alberta
a register in which the Corporation shall provide for the registration of
Notes and of transfers of Notes. Upon surrender for registration of transfer
of any Note at the principal office of the Corporation, the Corporation shall,
at its expense, promptly execute and deliver one or more new Notes of like
tenor and of a like aggregate principal amount, registered in the name of
such transferee or transferees. At the option of the Holder of any Note,
such Note may be exchanged for other Notes of like tenor and of any authorized
denominations, of a like aggregate principal amount, upon surrender of the
Note to be exchanged at the principal office of the Corporation. Whenever
any Notes are so surrendered for exchange, the Corporation shall, at its
expense, promptly execute and deliver the Notes which the Holder making the
exchange is entitled to receive. Every Note surrendered for registration of
transfer or exchange shall be duly endorsed, or be accompanied by a written
instrument of transfer duly executed, by the Holder of such Note or such
Holder's attorney duly authorized in writing. Any Note or Notes issued in
exchange for any Note or upon transfer thereof shall carry the rights to
unpaid interest and interest to accrue which were carried by the Note so
exchanged or transferred, so that neither gain nor loss of interest shall
result from any such transfer or exchange. A true and complete copy of such
register (containing names and addresses of each Holder) shall be provided to
any Holder promptly upon request therefor.
(c) Upon receipt of written notice from the Holder of any Note of the
loss, theft, destruction or mutilation of such Note and, in the case of any
such loss, theft or destruction, upon receipt of such Holder's unsecured
indemnity, or in the case of any such mutilation upon surrender and cancella-
tion of such Note, the Corporation will make and deliver promptly a new Note,
of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note.
11E. Persons Deemed Owners; Participations. Prior to due presentment for
registration of transfer, the Corporation may treat the Person in whose name
any Note is registered as the owner and Holder of such Note for the purpose of
receiving payment of principal of, interest on and any Yield-Maintenance Amount
payable with respect to such Note and for all other purposes whatsoever, whether
or not such Note shall be overdue, and the Corporation shall not be affected by
notice to the contrary. Subject to the preceding sentence and to Applicable
Laws, the Holder of any Note may from time to time grant participations in such
Note to any Person on such terms and conditions as may be determined by such
Holder in its sole and absolute discretion, provided that any such participation
shall be in a principal amount of at least U.S. $1,000,000.
11F. Survival of Representations and Warranties. All representations and
warranties contained herein or made in writing by or on behalf of the
Corporation in connection herewith shall survive the execution and delivery of
this Agreement and the Notes, the transfer by you of any Note or portion thereof
or interest therein and the payment of any Note, and may be relied upon by any
Transferee, regardless of any investigation made at any time by or on behalf of
you or any Transferee.
11G. Entire Agreement. Subject to paragraph 11F, this Agreement and the
Notes embody the entire agreement and understanding between you and the
Corporation and supersede all prior agreements and understandings relating to
the subject matter hereof.
11H. Successors and Assigns. All covenants and other agreements in this
Agreement contained by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the parties
hereto (including any Transferee) whether so expressed or not.
11I. Notices. All notices or other communications provided for hereunder
(except for the facsimile notice required by paragraph 4C) shall be in writing
and sent by nationwide overnight delivery service (with charges prepaid) and
(i) if to you, addressed to you at the address specified for such communications
in the Purchaser Schedule attached hereto, or at such other address as you shall
have specified to the Corporation in writing, (ii) if to any other Holder,
addressed to such other Holder at such address as such other Holder shall have
specified to the Corporation in writing or, if any such other Holder shall not
have so specified an address to the Corporation, then addressed to such other
Holder in care of the last Holder of such Note which shall have so specified an
address to the Corporation, and (iii) if to the Corporation, addressed to it at
3000, 400 - 3rd Avenue S.W., Calgary, Alberta, T2P 4H2, Attention: Chief
Financial Officer, or at such other address as the Corporation shall have
specified to each Holder in writing; provided that any such communication to
the Corporation may also, at the option of any Holder, be delivered by any
other means either to the Corporation at its address specified above or to any
officer of the Corporation.
11J. Payments Due on Non-Business Days. Anything in this Agreement or the
Notes to the contrary notwithstanding, any payment of principal of or interest
on any Note that is due on a date other than a Business Day shall be made on
the next succeeding Business Day. If the date for any payment is extended to
the next succeeding Business Day by reason of the preceding sentence, the
period of such extension shall not be included in the computation of the
interest payable on such Business Day.
11K. Satisfaction Requirement.9B.Representations, Acknowledgements and
Covenants of the Purchaser If any agreement, certificate or other writing,
or any action taken or to be taken, is by the terms of this Agreement required
to be satisfactory to you or to the Required Holders, the determination of such
satisfaction shall be made by you or the Required Holders, as the case may be,
in the sole and exclusive judgment (exercised in good faith) of the Person or
Persons making such determination.
11L. Governing Law and Submission to Jurisdiction.9B.Representations,
Acknowledgements and Covenants of the Purchaser
(a) THIS AGREEMENT AND THE NOTES SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL
BE GOVERNED BY, THE LAW OF THE PROVINCE OF ALBERTA AND THE LAW OF
CANADA APPLICABLE THEREIN.
(b) The Corporation agrees that the courts of Alberta shall have
jurisdiction to hear and determine any suit, action or proceeding and to
settle any disputes which may arise out of or in connection with the aforesaid
documents and it irrevocably submits to the non-exclusive jurisdiction of such
courts, without prejudice to the rights of any Holder to take proceedings in
any other jurisdictions, whether concurrently or not.
(c) The Corporation agrees that final judgment in any such suit, action or
proceeding brought in such courts shall be conclusive and binding upon it and
may be enforced against it in the courts of Canada (or any other courts to the
jurisdiction of which it or its property is subject) by a suit upon such
judgment, provided that it does not waive any right to appeal any such judg-
ment, to seek any stay or otherwise to seek reconsideration or review of any
such judgment.
11M. Amendments. This Agreement may not be changed orally, but (subject
to the provisions of paragraph 11C) only by an agreement in writing signed by
the party against whom enforcement of any waiver, change, modification or
discharge is sought.
11N. Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
11O. Descriptive Headings. The descriptive headings of the several para-
graphs of this Agreement are inserted for convenience only and do not constitute
a part of this Agreement.
11P. Payment Free from Equities. The Notes shall be paid by the
Corporation, and may be assigned by each Holder, absolutely free and clear of
all equities, rights of set-off, claims, defenses, counterclaims, rights or
other matters whatsoever (collectively, "Claims"), whether existing between a
Holder and the Corporation and/or any third parties or intermediate Holders, and
whether now existing or hereafter arising (before or after notice of any assign-
ment to the Corporation) which could impair or adversely affect in any way the
entitlement of any present or future Holder to enforce the Notes strictly in
accordance with the terms and provisions hereof and of the Notes, and the
Corporation hereby agrees not to assert, as against any assignee or any present
or future Holder, any Claims arising out of this Agreement or any Note (other
than the defenses that obligations hereunder have been performed or observed by
the Corporation, or that such performance has been waived or that the Holders
have consented to non-performance). For greater certainty, but without limiting
the generality of the foregoing, the foregoing shall apply:
(a) notwithstanding that such Claim arises due to any act or omission
of any Holder or any intermediate Holder or any other party;
(b) regardless of how closely or inseparably connected such Claim is
to the obligations or whether it flows out of dealings or transactions
related thereto; and
(c) notwithstanding actual or constructive notice to any assignee or
any present or future Holder, or to any intermediate Holder or any other
third party of such Claim, regardless of when received or deemed to be
received.
The foregoing shall be without prejudice to the right of the Corporation to
subsequently assert any Claim as against the assignor.
11Q. Note Repayment Net of Withholding Imposts. (a) All payments by the
Corporation under this Agreement or any Note, whether in respect of principal,
Yield-Maintenance Amount (if any), interest, interest on overdue interest, fees
or any other payment obligations, shall be made in full without any deduction or
withholding on account of taxes or duties of whatsoever nature imposed or levied
by or on behalf of Canada or any Governmental Authority in Canada having power
to tax unless the Corporation is prohibited by Applicable Law from doing so, in
which event the Corporation shall:
(i) forthwith pay to each Holder such additional amount so that the
net amount received by such Holder will equal the full amount which would
have been received by it had no such deduction or withholding been made;
(ii) pay to the relevant taxation or other authorities within the
period for payment permitted by Applicable Law the full amount of the
deduction or withholding (including the full amount of any deduction or
withholding from any additional amount paid pursuant to this paragraph);
and
(iii) furnish to each Holder promptly, as soon as available, an
official receipt of the relevant taxation or other authorities involved
for all amounts deducted or withheld as aforesaid.
(b) If as a result of any payment by the Corporation under this Agreement
or any Note, whether in respect of principal, Yield-Maintenance Amount (if any),
interest, interest on overdue interest, fees or other payment obligations, any
Holder is required to pay tax under Part XIII of the Income Tax Act (Canada) or
any successor provisions (for instance, in accordance with Section 803 of the
Regulations to the Income Tax Act (Canada)), then the Corporation will, upon
demand by any Holder, and whether or not such taxes are correctly or legally
asserted, indemnify each Holder for the payment of any such taxes, together with
any interest, penalties and expenses in connection therewith, and for any taxes
on such indemnity payment. All such amounts shall be payable by the Corporation
on demand and shall bear interest at 8.79% per annum calculated from the date
incurred by the Holder to the date paid by the Corporation.
(c) If, following any payment made by the Corporation to any Holder under
paragraph (a)(i) above or any indemnity payment made by the Corporation to any
Holder under paragraph (b) above, such Holder shall receive or be granted a
refund, credit, allowance or remission in respect of the taxes or duties result-
ing in the payment thereof and such Holder is able to readily identify such
refund, credit, allowance or remission as being attributable to such taxes or
duties, such Holder shall, to the extent that it can do so without prejudice to
the retention of the amount of such refund, credit, allowance or remission and
without prejudice to the right of such Holder to obtain any other relief or
allowance which may be available to it, reimburse the Corporation with such
amount as such Holder, acting reasonably, determines to be the amount of
money attributable to such refund, credit, allowance or remission that may be
paid by such Holder to leave it (after such reimbursement) in no worse position
than it would have been in had there been no such deduction or withholding or
payment of tax which resulted in the payment under paragraph (a)(i) or (b)
above. Such Holder may charge to the Corporation (and may deduct from
amounts reimbursable to the Corporation hereunder) a fee reasonably determined
by such Holder to compensate it for any additional effort expended or cost
incurred in determining such credit or remission or allocating it to the
Corporation. Notwithstanding the foregoing, no Holder shall be obligated to
disclose to the Corporation, or any of its agents, any computation made by such
Holder in connection with this paragraph 11Q(c) or any information regarding
such Holder's tax status or affairs.
11R. Interest.
(a) In respect of any overdue amounts hereunder or under the Notes
where no provision is made herein or therein for payment of interest
thereon, the Corporation shall pay interest on such overdue amounts on
demand, calculated from the date such unpaid amount is due until such
unpaid amount is paid in full, at 8.79% per annum.
(b) In no event shall any interest or fee to be paid hereunder or
under a Note exceed the maximum rate permitted by Applicable Law. In the
event any such interest rate or fee exceeds such maximum rate, such rate
shall be adjusted downward to the highest rate (expressed as a percentage
per annum) or fee that the parties could validly have agreed to by contract
on the date hereof under Applicable Law. It is further agreed that any
excess actually received by a Holder shall be credited against the princi-
pal of the Notes (or, if the principal shall have been or would thereby be
paid in full, the remaining amount shall be credited to the Corporation).
(c) All interest (including interest on overdue interest) payable by
the Corporation hereunder and under the Notes shall accrue from day to day,
computed as provided herein, and shall be payable after as well as before
maturity, demand, default and judgment.
(d) Interest on the Notes shall be computed on the basis of a 360-day
year of 12 30-day months. Solely for purposes of the Interest Act (Canada),
the yearly rate of interest to which interest calculated for a period of
less than one year on the basis of a year of 360 days consisting of 12 30-
day periods is equivalent is such rate of interest multiplied by a fraction
of which (i) the numerator is the product of (A) the actual number of days
in the year commencing on the first day of such period, multiplied by (B)
the sum of (y) the product of 30 multiplied by the number of complete
months elapsed in such period and (z) the actual number of days elapsed in
any incomplete month in such period; and (ii) the denominator is the
product of (a) 360 multiplied by (b) the actual number of days in such
period.
(e) The theory of "deemed reinvestment" shall not apply to the
computation of interest and no allowance, reduction or deduction shall be
made for the deemed reinvestment of interest in respect of any payments.
Calculation of interest shall be made using the nominal rate method, and
not the effective rate method, of calculation.
(f) To the extent permitted by law, Section 6 of the Judgment
Interest Act (Alberta) is hereby waived and shall not apply to this
Agreement or the Notes.
11S. Counterparts. This Agreement may be executed in any number of coun-
terparts, and by facsimile, all of which together shall constitute one
instrument.
11T. Currency References, Conversion and Payments.
(a) Unless otherwise stated, references in this Agreement to dollar
amounts, Cdn. $, or $ shall be deemed to be references to Canadian Dollars.
(b) A reference in this Agreement to the equivalent of one currency
in another currency shall mean the equivalent determined using the noon
spot rate of exchange for conversion announced by the Bank of Canada on
the day for conversion.
(c) All payments on account of the Notes (including interest and
Yield-Maintenance Amounts) shall be made in U.S. Dollars.
11U. Judgment Currency. If, for the purposes of obtaining or enforcing
judgment against the Corporation in any court, or for any other related purpose
hereunder, it is necessary to convert an amount due under this Agreement or any
Note in the currency in which it is due (the "Original Currency") into another
currency (the "Second Currency"), the rate of exchange applicable shall be the
daily noon day rate quoted by the Bank of Canada on the relevant date to
purchase the Original Currency with the Second Currency and includes any premium
and costs of exchange payable in connection with such purchase. The Corporation
agrees that its obligation in respect of any Original Currency due from it
shall, notwithstanding any judgment or payment in the Second Currency, be dis-
charged only to the extent that on the Business Day following the receipt
of any sum so paid or adjudged to be due hereunder in the Second Currency the
payee may purchase in the market the Original Currency with the amount of the
Second Currency so paid or so adjudicated to be due; and if the amount of the
Original Currency so purchased is less than the amount originally due in the
Original Currency, the Corporation agrees that the deficiency shall be a
separate obligation of it, independent from its obligations under this Agreement
or any Note, and shall constitute in favour of the Holders a cause of action
which shall continue in full force and effect notwithstanding any such judgment
or order to the contrary, and the Corporation agrees, notwithstanding any such
payment or judgment, to indemnify the Holders against any such loss or
deficiency.
11V. Time; "Including"; "Assets"; "Property"
(a) Unless otherwise stated, references to time shall mean local
time in Calgary, Alberta.
(b) The word "including" shall not be construed to limit or restrict
the generality of the matter that precedes it.
(c) The words "property" and "assets" of a Person are used
interchangeably herein, and each encompasses all property, assets and
undertakings of the Person, both real and personal, present and future.
11W. Environmental Indemnity. The Corporation shall indemnify each
Holder and hold each harmless against any and all losses, costs, expenses,
liabilities, actions, suits, claims or damages of any and every kind sustained,
paid or incurred by any of them as a result of any environmental claims,
liabilities or obligations of any and every nature whatsoever relating to or
affecting the Corporation, its Subsidiaries or West Windsor Power or the
property of any of them ("their property"), or the property of others where the
Corporation, any Subsidiary or West Windsor Power could have any liability in
respect thereof under Applicable Environmental Laws, or personal injury or
death, including in respect of:
(i) any environmental harm or damage to or impairment of their
property (or any other Person's property) caused by the presence or
release of any Hazardous Materials on their property, or by the Corporation
or any Subsidiary or West Windsor Power, whether or not such presence or
release was under control, care or management of a previous owner or of a
tenant;
(ii) any decrease or loss in value of their property (or any other
Person's property) occasioned by non-compliance with Applicable
Environmental Laws;
(iii) the imposition or assertion of any Lien including any expenses
collectable as taxes affecting their property under Applicable
Environmental Laws by any Governmental Authority;
(iv) any claim asserted or order issued by a Governmental Authority
(including an enforcement order or an environmental protection order issued
under the Environmental Protection and Enhancement Act (Alberta)) against
a Holder or an agent of any of them in respect of any matter referred to
in clauses (i), (ii), or (iii), or for any clean-up, restoration, well
abandonment, reclamation or other securing or remedial action in respect
of their property (or any other Person's property); or
(v) any non-compliance with any provision herein relating to
environmental matters.
Without limiting the generality of the foregoing, the indemnities in this
paragraph shall extend to:
(i) legal fees on a solicitor and his own client basis, including
the costs of defending and/or counterclaiming or claiming over against
third parties in respect of any action or matters; and
(ii) any amounts payable arising out of a settlement of any action
entered into between any Holder, and any Person with or without the consent
of the Corporation;
but shall not extend to any claim, liability or obligation to the extent the
same arises solely due to the gross negligence or willful misconduct of the
Holder claiming indemnification.
These indemnities shall extend to the officers, directors, employees,
agents and assignees of each Holder and the Corporation will hold the benefit of
these indemnities in trust for such indemnified parties to the extent necessary
to give effect hereto. The provisions of and undertakings and indemnification
set out in this paragraph 11W shall survive the payment and satisfaction of the
Notes.
11X. Disclosure to Other Persons; Confidentiality. Except as provided in
this paragraph, each Holder and each Person who purchases a participation in a
Note or any part thereof agrees that, prior to the occurrence of a Default, it
will use its best efforts to hold in confidence and not to disclose the
Confidential Information. The Corporation acknowledges that any Holder may
deliver copies of any financial statements and other documents delivered to
such Holder, and disclose any other information disclosed to such Holder
(including Confidential Information), by or on behalf of the Corporation or any
Subsidiary in connection with or pursuant to this Agreement to (i) such Holder's
directors, officers, employees, agents and legal counsel, (ii) financial
advisors and other professional advisors who agree to hold confidential the
Confidential Information substantially in accordance with the provisions of this
paragraph 11X, (iii) any other Holder, (iv) any Person to which such Holder
offers to sell such Note or any part thereof (if such Person has agreed in
writing prior to its receipt of such Confidential Information to be bound by the
provisions of this paragraph 11X), (v) any Person to which such Holder sells
or offers to sell a participation in all or any part of such Note (if such
Person has agreed in writing prior to its receipt of such Confidential
Information to be bound by the provisions of this paragraph 11X), (vi) any
Person from which such Holder offers to purchase any security of the
Corporation (if such Person has agreed in writing prior to its receipt of such
Confidential Information to be bound by the provisions of this paragraph 11X),
(vii) any federal or state regulatory authority having jurisdiction over such
Holder, (viii) the National Association of Insurance Commissioners or any
similar organization, (ix) rating agencies that require access to information
about the Holder's investment portfolio, or (x) any other Person to which such
delivery or disclosure may be necessary or appropriate (a) in compliance with
any law, rule, regulation or order applicable to such Holder, (b) in response
to any subpoena or other legal process or informal investigative demand of a
Governmental Authority, or (c) in connection with any litigation to which such
Holder is a party.
11Y. Further Assurances.
(a) Each party shall promptly cure any defect by it in the execution
and delivery of this Agreement or the Notes.
(b) The Corporation, at its expense, shall promptly deliver to any
Holder, upon request by such Holder in writing, all such other and further
documents, agreements, opinions, certificates and instruments (executed,
as necessary) in order to give effect to the covenants and agreements of
the Corporation in this Agreement or the other Loan Documents, and shall
make any recording, file any notice or obtain any consent in connection
therewith, all as may be reasonably necessary or appropriate in connection
therewith.
If you are in agreement with the foregoing, please sign the form of accept-
ance on the enclosed counterparts of this letter and return the same to the
Corporation, whereupon this letter shall become a binding agreement among the
Corporation and the Purchasers.
NORTHSTAR ENERGY CORPORATION
By: __________________________________
John Richels c/s
Chief Financial Officer
The foregoing Agreement is hereby accepted
as of the date first above written.
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By: ___________________________________
Robert G. Gwin
Vice President
<PAGE>
SUPPLEMENTAL BENEFIT AGREEMENT
THIS AGREEMENT made effective as of the 31st
day of December, 1998.
BETWEEN:
NORTHSTAR ENERGY CORPORATION, a body corporate having
offices in the City of Calgary, in the Province of
Alberta (hereinafter referred to as "Northstar")
OF THE FIRST PART
JOHN A. HAGG, an individual residing in the City of
Calgary, in the Province of Alberta (hereinafter
referred to as "Hagg")
OF THE SECOND PART BACKGROUND:
(a) Hagg is presently employed as its Chairman;
(b) Hagg has devoted considerable efforts on behalf of
Northstar as an employee of Northstar and its
predecessor corporations;
(c) the pension benefits that may be provided for Hagg
through a registered plan are, due to maximum benefit
levels imposed by the Income Tax Act, not adequate to
provide Hagg with a retirement income commensurate with his
contributions to the corporation; and
(d) Hagg is currently a highly valued employee of Northstar
and Northstar wishes to provide Hagg an incentive to remain
in the employ of Northstar and wishes to provide Hagg with
an adequate retirement income in recognition of his
long service.
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE I
INTERPRETATION
1.01 Definitions. In this Agreement, the following
words and phrases shall have the following meanings:
"Agreement" means this Supplemental Benefit Agreement;
"Compensation" means, in the respect of any calendar year,
the aggregate of:
(a) the annual base salary paid by Northstar to Hagg during
that year; plus
(b) any remuneration paid by Northstar to Hagg in that
year pursuant to any profit sharing or officer or employee
incentive, compensation or bonus program; but
(c) not including any amount paid under this Agreement,
any amount paid due to Hagg's termination of
employment, contributions made on behalf of Hagg pursuant
to the Northstar Savings Plan, any amount included in
income attributable to the exercise of (or acceleration
of rights in) a stock option or receipt of a stock award;
"Corporation" means Northstar;
"Final Average Compensation" shall mean the average of
the highest annual Compensation earned by Hagg during
the three consecutive calendar years of his employment
during the 10 calendar years immediately preceding his
attainment of age 60 or his earlier termination of
employment, as the case may be;
"Retirement Benefit" means the retirement benefit
payable by Northstar to Hagg pursuant to paragraph 2.01
hereof; and
"Spouse" means Hagg's wife, Kristin Bengsten Hagg.
1.02 Headings. The headings of the Articles and
paragraphs herein are inserted for convenience of reference
only and shall not affect the meaning or construction
hereof.
1.03 Applicable Law. This Agreement shall be construed
and interpreted in accordance with the laws of the
Province of Alberta and the federal laws of Canada
applicable therein. Each of the parties hereby
irrevocably attorn to the jurisdiction of the courts of the
Province of Alberta with respect to any matters arising out
of this Agreement.
ARTICLE II
RETIREMENT PAYMENT
2.01 Amount of Payment. Upon his retirement as an
employee of Northstar (as provided below), the Corporation
shall pay to Hagg an annual Retirement Benefit in the
amount of 65% of his Final Average Compensation.
Provided, in the event that Hagg terminates employment
prior to his retirement date (as provided below), then,
his Retirement Benefit shall be calculated as of such date
based on his then earned Final Average Compensation.
The Retirement Benefit shall commence upon Hagg's
retirement or upon Hagg attaining the age of 60 years,
whichever is later. The Retirement Benefit shall be
payable to Hagg for his lifetime, subject to the
survivor benefit payable to his Spouse pursuant to
paragraph 2.03 hereof.
2.02 Manner of Payment. The Retirement Benefit
payable hereunder at any point in time shall be calculated
in Canadian dollars but shall be paid in U.S. dollars
using the conversion rate in effect at the time of each
payment based on the rate of exchange as quoted by the
Bank of Canada (or, if not so quoted, the spot rate of
exchange quoted for wholesale transactions made by Bank of
America Canada at Toronto, Ontario), however, such exchange
rate shall not be less than a conversion rate of .70 or
greater than 1.00 from Canadian to U.S. dollars.
2.03 Survivor Benefit. In the event of Hagg's death
after commencement of the payment of the Retirement Benefit,
his Spouse will continue to receive 60% of the Retirement
Benefit during her lifetime.
In the event of Hagg's death, prior to commencement of the
payment of the Retirement Benefit, his Spouse's entitlement
to receipt of 60% of the Retirement Benefit shall commence
on the day that Hagg would have attained the age of 60 years
or the date of his death, whichever occurs later, and such
shall be payable to her thereafter during her lifetime.
2.04 Disability Benefit. In the event that Hagg is
disabled while employed by Northstar and is, as a result
thereof, unable to continue his employment with
Northstar, Hagg's then earned Retirement Benefit will
commence when Hagg attains age 60. If the disability
occurs after Hagg attains the age of 60, the Retirement
Benefit payments shall commence upon the occurrence of the
disability.
2.05 No Adjustment. Except as provided in paragraph 2.02
herein, with respect to currency conversion, there will
be no adjustment to the Retirement Benefit payable to Hagg
after such payments commence, whether inflationary,
deflationary, or other wise.
ARTICLE III
FUNDING AND TERMINATION
3.01 Funding Policy. The Retirement Benefit
payable hereunder shall not be funded by Northstar in any
way, in advance of payment to Hagg. The Retirement
Benefit shall be unsecured contractual obligation of
Northstar, payable from the available funds of Northstar,
and with payment of the annual Retirement Benefit being
made to Hagg in equal monthly installments. The Survivor
Benefit payable to his Spouse shall similarly be paid. Hagg
may, at his sole option, require Northstar to provide
reasonable security for the ongoing obligations
of the Corporation to make the Retirement Benefit payments,
at the time of his retirement or thereafter, but not prior
thereto.
3.02 Commutation. Northstar may, with the written
agreement of Hagg or his Spouse, as the case may be, at any
time after the date of the first payment of the Retirement
Benefit, commute into a lump sum the value of the remaining
Retirement Benefit payable under this Agreement and pay such
commuted lump sum value to Hagg or his Spouse, as
applicable.
3.03 Continuation of Employment. In consideration for
the benefits payable hereunder, Hagg agrees to
continue his employment with Northstar from January 1,
1999 through December 31, 2000 in the capacity as he
presently serves as of the date this Agreement is
executed. However, notwithstanding any provision herein to
the contrary, Hagg will forfeit no benefits payable under
the terms of this Agreement in the event that his
employment with Northstar terminates for any reason
prior to December 31, 2000.
3.04 Termination Of Employment. The Retirement
Benefit payable to Hagg, and the Survivor Benefit payable
to his Spouse, as the case may be, shall, subject to the
provisions of paragraph 2.01 hereof, be payable by Northstar
notwithstanding the date of Hagg's retirement or whether
his employment is terminated voluntarily or involuntarily
at any time.
ARTICLE IV
GENERAL
4.01 Confidentiality. Hagg shall not at any time use
for his own purposes or purposes other than those of
Northstar, or improperly divulge or communicate to anyone,
confidential information which he receives or obtains in
relation to the business or affairs of Northstar, other
than information which is in the public domain or
which enters the public domain other than through the
act or failure to act on the part of Hagg.
4.02 Non-Competition. Hagg agrees that, at the time of
his retirement or termination of his employment, he
will make available to Northstar, at reasonable times, the
benefits of his experience and advice in a consulting
capacity, provided that Northstar pays to Hagg the
costs and expenses, including travelling expenses,
incurred by him in connection with rendering such services.
In addition, Hagg agrees that he will not, within a two year
period following commencement of payment of Retirement
Benefits hereunder, without prior written approval from the
board of directors of Northstar, either individually or in
partnership or in conjunction with any person or entity,
carry on or be engaged in or connected with any business
that is in direct competition with the business carried on
by Northstar at the time of Hagg's retirement. Nothing
herein contained shall restrict or prohibit Hagg from making
equity investments in any company or other business entity
in the oil and gas industry or in any other industry sector
in which Northstar is carrying on business at the time of
Hagg's retirement, provided that the investment is
passive in nature and Hagg is not involved in the
management, direction or ongoing operation of that company
or other business entity.
4.03 Severable. If any provision of this Agreement
shall be held to be invalid, illegal or unenforceable,
the validity, legality or enforceability of the remaining
provisions of this Agreement shall not in any way be
affected or impaired thereby.
4.04 Entire Agreement. This Agreement constitutes
the entire agreement between the parties hereto with
respect to the subject matter hereof and supersedes
all prior agreements, understandings, negotiations and
discussions, whether oral or
written, among the parties with respect to the subject
matter of this Agreement.
4.05 Amendments. No amendment or modification of
this Agreement shall be binding unless in writing, signed by
each of the parties hereto.
4.06 Waiver. No waiver by either party hereto of any
breach of any of the provisions of this Agreement shall
take effect or be binding upon the party unless in writing
and signed by such party. Unless otherwise provided
therein, such waiver shall not limit or affect the rights
of such party with respect to any other breach.
4.07 Successors and Assigns. This Agreement
shall be non-assignable but shall enure to the benefit and
be binding upon the parties hereto and their respective
heirs, executors, administrators, other legal personal
representatives.
4.08 Guarantee By Devon Energy. Devon Energy
Corporation, an Oklahoma corporation, does hereby guarantee
the performance of all of the obligations of Northstar to
Hagg under the terms of this Agreement.
4.09 Effect of Agreement on Prior Related Agreement. This
Agreement supersedes and replaces that certain agreement
between Northstar and Hagg entitled "Supplemental Benefit
Agreement" and dated January 1, 1996.
4.10 Further Acts. The parties hereto agree to execute
and deliver such further and other documents and perform and
cause to be performed such further and other acts and
things as may be necessary or desirable in order to give
full effect to this Agreement and every part hereof.
IN WITNESS WHEREOF, the parties have executed
this Agreement as of the day and year first above written.
Executed this 17th day of February, 1999.
NORTHSTAR ENERGY CORPORATION
Per:__________________________
/s/ John A. Hagg
John A. Hagg
ACCEPTED AND AGREED TO THIS 17th DAY OF FEBRUARY, 1999:
DEVON ENERGY CORPORATION
Per: /s/William T. Vaughn
William T. Vaughn
<PAGE>
CONSULTING AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
THAT, in consideration of the premises and the mutual
agreements contained herein, DEVON ENERGY CORPORATION (the
"Company"), a Delaware corporation of 1500 Mid-America
Tower, Oklahoma City, Oklahoma 73102, has retained THOMAS F.
FERGUSON ("Consultant"), of 46 Mount Street, London W1Y54D,
England, as a consultant for the Company under the following
terms and conditions:
1. Consultant shall use his best efforts and shall
devote such time as may be necessary in maintaining the best
possible relations between the Company, the shareholders of
the Company and other Company project investors and
participants in Europe; in assisting in identifying
additional corporate opportunities for the Company involving
European investors or participants; in establishing and
maintaining the best possible relations with such
prospective investors or participants; and in generally
assisting the Company in each of such matters or others
which are agreed upon by the parties from time-to-time.
2. Consultant shall provide the Company reports as often
as may be appropriate
under the circumstances (but no less than quarterly)
describing the services performed hereunder and identifying
the personal contacts made by Consultant, each in sufficient
detail to adequately keep the Company apprised of the
actions of Consultant hereunder.
3. It is recognized by the parties that Consultant's
obligations hereunder are limited, and that Consultant's
services shall be performed on a part-time basis only. The
parties agree that Consultant is not and shall not be
considered to be an employee of the Company, nor shall
Consultant be authorized to take any action on the Company's
behalf nor shall Consultant be authorized to obligate
Company in any manner.
4. The Company shall pay Consultant for his services
hereunder the sum of U.S. $30,000 per year in equal,
quarterly installments. In addition, the Company shall
reimburse all reasonable out of pocket expenses incurred by
you in performing services hereunder. Unless specifically
agreed to by the parties in a separate, written agreement,
no other compensation, benefit or fee shall be due
Consultant by the Company for these or other services
performed by him.
5. This Agreement may be terminated by either party
upon simple, written notice one to the other.
EXECUTED as of the 1st day of June, 1989.
DEVON ENERGY CORPORATION
By: /s/ J. Larry Nichols
J. Larry Nichols,
President
By:/s/ Thomas F. Ferguson
Thomas F. Ferguson
<PAGE>
Exhibit 12
DEVON ENERGY CORPORATION
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(In Thousands, Except Ratios)
<S> <C> <C> <C>
Earnings (loss) before income taxes $(75,792) (473,833) 118,689
Add:
Interest expense 22,632 18,788 12,662
Distributions on preferred securities
of subsidiary 9,717 9,717 4,753
Amortization of costs incurred in
connection with offering of the preferred
securities of subsidiary trust 240 269 82
Estimated interest factor of operating
payments 683 505 319
Deferred effect of changes in foreign
currency exchange rate on subsidiary's
long-term debt 16,104 5,860 199
Earnings (loss) as adjusted (A) $(26,416) (438,694) 136,704
Fixed charges:
Interest costs incurred 22,632 18,788 12,662
Distributions on preferred securities
of subsidiary trust 9,717 9,717 4,753
Amortization of costs incurred in connection
with the offering of the preferred
securities of subsidiary trust 240 269 82
Estimated interest factor of operating
lease payments 683 505 319
Deferred effect of changes in foreign
currency exchange rate on subsidiary's
long-term debt 16,104 5,860 199
Total fixed charges (B) $ 49,376 35,139 18,015
Ratio of earnings to fixed charges (A)/(B) N/A N/A 7.59
Insufficiency of earnings to cover
fixed charges $ 75,792 473,833 N/A
</TABLE>
<PAGE>
Exhibit 21
DEVON ENERGY CORPORATION
Subsidiaries of Registrant
The Registrant has the following significant subsidiaries:
Name of Subsidiary Jurisdiction of
Incorporation
Devon Energy Corporation (Nevada) Nevada
Northstar Energy Corporation Alberta, Canada
Devon Energy Canada Corporation Alberta, Canada
Devon Financing Trust Delaware
DBC, Inc. Oklahoma
<PAGE>
Exhibit 23.1
ENGINEER'S CONSENT
We consent to incorporation by reference in the Registration
Statements (No. 33-32378, No. 33-67924 and No. 333-66873) on Form
S-8 and the Registration Statements (No. 333-00815 and No. 333-
66899) on Form S-3 of Devon Energy Corporation the reference to
our appraisal report for Devon Energy Corporation as of December
31, 1998, which appears in the December 31, 1998 annual report on
Form 10-K of Devon Energy Corporation.
By: William E. LaRoche
LAROCHE PETROLEUM CONSULTANTS, LTD.
March 29, 1999
<PAGE>
Exhibit 23.2
ENGINEER'S CONSENT
We consent to incorporation by reference in the Registration
Statements (No. 33-32378, No. 33-67924 and No. 333-66873) on Form
S-8 and the Registration Statements (No. 333-00815 and No. 333-
66899) on Form S-3 of Devon Energy Corporation the reference to
our appraisal report for Devon Energy Corporation as of December
31, 1998, which appears in the December 31, 1998 annual report on
Form 10-K of Devon Energy Corporation.
By: Allen K. Ashton
AMH GROUP LTD.
March 29, 1999
<PAGE>
Exhibit 23.2
ENGINEER'S CONSENT
We consent to incorporation by reference in the Registration
Statements (No. 33-32378, No. 33-67924 and No. 333-66873) on Form
S-8 and the Registration Statements (No. 333-00815 and No. 333-
66899) on Form S-3 of Devon Energy Corporation the reference to
our appraisal report for Devon Energy Corporation as of December
31, 1998, which appears in the December 31, 1998 annual report on
Form 10-K of Devon Energy Corporation.
By: D. L. Paddock
PADDOCK LINDSTROM & ASSOCIATES LTD.
March 29, 1999
<PAGE>
Exhibit 23.4
Independent Auditors' Consent
The Board of Directors
Devon Energy Corporation
We consent to incorporation by reference in the Registration
Statements (No. 33-32378, 33-67924, 333-48643 and 333-66873)
on Form S-8 and the Registration Statements (No. 333-00815
and 333-66899) on Form S-3 of Devon Energy Corporation of
our report dated January 26, 1999, relating to the
consolidated balance sheets of Devon Energy Corporation and
subsidiaries as of December 31, 1998, 1997 and 1996 and the
related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years then ended,
which report appears in the December 31, 1998 annual report
on Form 10-K of Devon Energy Corporation.
KPMG LLP
Oklahoma City, Oklahoma
March 24, 1999
<PAGE>
Exhibit 23.5
Independent Auditors' Consent
We consent to the incorporation by reference in the
Registration Statements (Nos. 33-32378, 33-67924, 333-48643
and 333-66873) on Form S-8 and Registration Statements (Nos.
333-00815 and 333-66899) on Form S-3 of Devon Energy
Corporation of our report dated January 20, 1999 to the
shareholders of Northstar Energy Corporation, appearing in
this Form 10-K.
(SIGNED) DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chartered Accountants
Calgary, Alberta
Canada
March 24, 1999
<PAGE>
Exhibit 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to incorporation by reference in the Registration
Statements (No. 33-32378, 33-67924, 333-48643 and 333-66873)
on Form S-8 and the Registration Statements (No. 333-00815
and 333-66899) on Form S-3 of Devon Energy Corporation and
our report dated February 5, 1997, relating to the
consolidated balance sheet of Northstar Energy Corporation
and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations and comprehensive
income (loss), stockholders' equity and cash flows for the
year then ended, which report appears in the December 31,
1998 annual report on Form 10-K of Devon Energy Corporation.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Calgary, Alberta, Canada
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<PERIOD-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
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