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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
For the transition period from _____________________ to_______________________
Commission File Number 1-10537
NUEVO ENERGY COMPANY
(Exact name of registrant as specified in its charter)
Delaware 76-0304436
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1331 Lamar, Suite 1650, Houston, Texas 77010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 652-0706
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
Common Stock, par value $.01 per share New York Stock Exchange
$2.875 Term Convertible Securities, Series A New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 15, 1999, was approximately $215,855,515.
As of March 15, 1999, the number of outstanding shares of the registrant's
common stock was 19,848,783.
Documents Incorporated by Reference:
Portions of the registrant's annual proxy statement, to be filed within 120 days
after December 31, 1998, are incorporated by reference into Part III.
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NUEVO ENERGY COMPANY
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ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PAGE
NUMBER
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PART I
Item 1. Business........................................................................... 2
Item 2. Properties......................................................................... 12
Item 3. Legal Proceedings.................................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders................................ 20
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters.................................................. 21
Item 6. Selected Financial Data............................................................ 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 24
Item 7a. Quantitative and Qualitative Disclosures About Market Risk......................... 38
Item 8. Financial Statements and Supplementary Data........................................ 40
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................................. 75
PART III
Item 10. Directors and Executive Officers of the Registrant................................. 75
Item 11. Executive Compensation............................................................. 75
Item 12. Security Ownership of Certain Beneficial Owners and Management..................... 75
Item 13. Certain Relationships and Related Transactions..................................... 75
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................... 75
Signatures
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NUEVO ENERGY COMPANY
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PART I
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This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). All
statements other than statements of historical facts included in this document,
including without limitation, statements under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position, estimated quantities and net present values of
reserves, business strategy, plans and objectives of management of the Company
for future operations and covenant compliance, are forward looking statements.
The Company can give no assurances that the assumptions upon which such forward
looking statements are based will prove to be correct. Important factors that
could cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are set forth throughout this document. All subsequent
written and oral forward looking statements attributable to the Company or
persons acting on its behalf are expressly qualified by the Cautionary
Statements.
ITEM 1. BUSINESS
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General
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Nuevo Energy Company ("Nuevo") was formed as a Delaware corporation on
March 2, 1990, to acquire the businesses of certain public and private
partnerships (collectively "Predecessor Partnerships"). On July 9, 1990, the
plan of consolidation ("Plan of Consolidation") was approved by limited partners
owning a majority of units of limited partner interests in the Predecessor
Partnerships. Such Plan of Consolidation provided for the exchange of the net
assets of the Predecessor Partnerships for common stock of Nuevo ("Common
Stock"). The Common Stock began trading on the New York Stock Exchange on
July 10, 1990, under the symbol "NEV." All references to the "Company" include
Nuevo and its majority and wholly-owned subsidiaries, unless otherwise indicated
or the context indicates otherwise.
Nuevo, headquartered in Houston, Texas, is primarily engaged in the
exploration for, and the acquisition, exploitation, development and production
of crude oil and natural gas. The Company's strategy to differentiate itself
versus its numerous peer group competitors and to generate long term shareholder
value consists of: (i) a unique management philosophy that frames all important
decisions in terms of anticipated impact on per share (rather than absolute)
growth of reserves, production, cash flow and earnings; (ii) a contrarian
investment and financing orientation; (iii) the outsourcing of non-strategic
functions; (iv) the alignment of employee compensation structures with
shareholder objectives; and (v) a commitment to an exemplary governance
structure which reinforces the overarching view of Nuevo as merely a conduit for
shareholders to achieve superior long term capital gains.
The Company accumulates oil and gas reserves through the drilling of
exploratory wells on acreage owned by or leased to the Company, or through the
purchase of reserves from others. The Company maximizes production from these
reserves through the drilling of developmental wells and through other
exploitative techniques. The Company also owns and operates gas plants and
other facilities, which are ancillary to the primary business of producing oil
and natural gas. The Company also owns certain adjacent surface real estate
parcels that are candidates for sale and/or development in future years.
Oil and Gas Activities
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Since its inception in 1990, Nuevo has grown and diversified its operations
through a series of contrarian acquisitions of oil and gas properties and the
subsequent exploitation and development of these properties. The Company has
complemented these efforts with an active exploration program, which provides
exposure to high-potential prospects. The Company's primary strengths are its
track record of rapid reserve growth on a per share basis, achieved at extremely
low cost relative to industry averages; its inventory of exploitation and
exploration projects in its core areas of operation which the Company believes
will support future growth in reserves and production per share; its
demonstrated ability to significantly reduce operating costs on acquired
properties from levels experienced by prior operators; its ability to identify
and acquire, at attractive prices, producing properties which have significant
potential for further exploration, exploitation and development; and a capital
structure supportive of a growing investment program and future acquisitions.
During the five years ended December 31,
2
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NUEVO ENERGY COMPANY
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1998, the Company invested $567.7 million in 16 acquisitions that added
estimated net proved reserves of 190.0 million barrels ("MMBBLS") of oil and
187.6 billion cubic feet ("BCF") of natural gas and replaced 375% of its
production at an average cost of $3.53 per barrel of oil equivalent ("BOE"). As
a result, the Company's estimated net proved equivalent reserves have increased
by approximately 376% since 1994.
Domestic Operations
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As of December 31, 1998, the Company's estimated net U.S. proved reserves
totaled 231.5 million barrels of oil equivalent ("MMBOE") or 90% of Nuevo's
total proved reserve base. During 1998, the Company's domestic production was
22.8 MMBOE, or 94% of total production.
WEST:
The majority of the Company's domestic properties are located in the state
of California, where the Company operates from district offices in Bakersfield
and Santa Maria. The Company's properties in California are categorized by
district as either Bakersfield, Pacific Onshore or Pacific Offshore.
Nuevo's Bakersfield district operations encompass an estimated net proved
reserve base of 107.8 MMBOE as of December 31, 1998, and produced 8.7 MMBOE in
1998. Bakersfield district properties include the Company's interests in the
Cymric, Midway-Sunset and Belridge oil fields in the Western San Joaquin Basin
in Kern County, California, and in the Coalinga gas field in the North San
Joaquin Valley. The Company's Bakersfield properties utilize thermal operations
to maximize current production and the ultimate recovery of reserves. The
Company owns an average 100% working interest (87% net revenue) in its
properties in the Cymric field and the entire working interest and an average
net revenue interest of approximately 97% in its properties in the Midway-Sunset
field. Production is from two zones in the Cymric field, the Tulare formation
and the Antelope Shale. The Midway-Sunset field produces from five zones with
the Potter Sand and the thermal Diatomite accounting for the majority of the
total production. The productive zones of the Belridge field above 2,000 feet
in which the Company owns royalty interest are operated by another independent
energy company. The remaining deeper zones of the Belridge field are operated
and owned by the Company in fee with 100% working and net revenue interests.
The Coalinga gas field is operated by Texaco and the Company owns an average 27%
working interest (24% net revenue). Production is from the Gatchell formation.
Nuevo's Pacific Onshore district operations encompass an estimated net
proved reserve base of 41.0 MMBOE as of December 31, 1998, and produced 3.0
MMBOE in 1998. Los Angeles district properties include the Company's interests
in the Brea Olinda oil field in northern Orange County, and in the Huntington
Beach and Belmont oil fields in the federal OCS leases, offshore Long Beach. The
Company operates three fee properties in the Brea Olinda field with a 100%
working and 90% net revenue interest. The Company also has royalty interests in
additional wells in the Brea Olinda field. Brea Olinda production is from
multiple-pay zones in the Miocene and Pliocene sandstones at depths up to 6,500
feet.
Nuevo's Pacific Offshore district operations encompass an estimated net
proved reserve base of 23.8 MMBOE as of December 31, 1998, and resulted in
production of 7.0 MMBOE in 1998. Santa Maria district properties include the
Company's interests in the Point Pedernales, Dos Cuadras and Santa Clara oil
fields in federal OCS leases, offshore Santa Barbara and Ventura Counties, and
in a number of smaller onshore oil fields in Santa Barbara and Ventura Counties.
The Company acquired a 12% working interest (10% net revenue) in the Point
Pedernales field in July 1994 and an additional 68% working interest (57% net
revenue) in the field as part of the acquisition of the California properties
from Torch Energy Advisors Incorporated ("Torch") in 1996. (See Note 3 to the
Notes to Consolidated Financial Statements). The Point Pedernales field is
operated by the Company, and is located 3.5 miles offshore Santa Barbara County,
California, in federal waters. Production is from the Monterey Shale at depths
from 3,500-5,150 feet. The Dos Cuadras field is located offshore five and one-
half miles from Santa Barbara in the Santa Barbara Channel. The Company operates
three platforms with a 25% working interest (20.8% net revenue) and another
platform with a 67.5% working interest (56.3% net revenue).
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NUEVO ENERGY COMPANY
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EAST:
The Company also has properties located in East Texas (see next paragraph
regarding sale) and the onshore Gulf Coast region, which are operated from the
Company's headquarters in Houston. Nuevo's Houston district operations
encompass an estimated net proved reserve base of 58.9 MMBOE as of December 31,
1998, and produced 4.0 MMBOE in 1998. Houston district properties include the
Company's interests in the Oak Hill and Chapel Hill gas fields in Rusk and
Panola Counties of Texas; in the Giddings gas field in Grimes County, Texas; in
the Weeks Island oil field in Iberia Parish, Louisiana; and in the North Frisco
City oil field in Monroe County, Alabama. The Oak Hill field is located in Rusk
County, Texas, and produces from the Cotton Valley reservoir and has long-lived
natural gas reserves. The Company has an average 90% working interest (71% net
revenue) in these wells. In 1996, the Company acquired an average 60% working
interest (46% net revenue) in 11 East Texas fields in the Chapel Hill area.
(See Note 3 to the Notes to Consolidated Financial Statements). Additionally,
2,529 net mineral acres were acquired. The Company owns an approximate 68%
working interest (54% net revenue) in the Weeks Island field. The North Frisco
City field is Company-operated. Nuevo owns approximately a 22% working interest
(16% net revenue).
On January 6, 1999, the Company completed the sale of its East Texas
natural gas assets to an affiliate of Samson Resources Company for an adjusted
purchase price of $192.0 million (see Note 4 to the Notes to Consolidated
Financial Statements). A $5.2 million gain on settled hedge transactions was
realized in connection with closing of this sale in 1999. The effective date of
the sale is July 1, 1998. The Company reclassified these assets to assets held
for sale and discontinued depleting these assets during the third quarter of
1998. Estimated net proved reserves associated with these properties totaled
approximately 329.0 BCF of natural gas equivalent at January 1, 1999.
The Company continues to create value through domestic oil and gas
development projects. The Company initiates workovers, recompletions,
development drilling, secondary and tertiary recovery operations and other
production enhancement techniques to maximize current production and the
ultimate recovery of reserves. The Company has identified in excess of 900
domestic exploitation projects on existing properties, with a West Texas
Intermediate ("WTI") crude price of $12.00 per barrel of oil ("BBL"). At a WTI
price of $18.50 per BBL, the Company has identified in excess of 1,400 domestic
exploitation projects on existing properties. Capital expenditures for domestic
exploitation projects totaled $104.6 million in 1998 and are budgeted at
approximately $32.0 million in 1999. This decrease in budgeted capital
expenditures from 1998 to 1999 is attributable to the current low oil price
environment. Examples of current or planned projects include the continuation of
horizontal drilling in the Bakersfield district and expansion of the waterflood
project at Huntington Beach.
The Company also has an exploration program targeting high-potential
reserve opportunities in California. The Company seeks to reduce the risks
normally associated with exploration through the use of advanced technologies,
such as 3-D seismic surveys and computer aided exploration ("CAEX") techniques,
and by participating with experienced industry partners. The Company's
exploration program resulted in eight successful wells out of 14 drilled in
1998. The Company's most significant domestic discoveries in 1998 were: (i) four
successful wells at Four Isle Dome in Louisiana, which helped increase net
production from 0.6 MMCFPD and 35 BOPD at the beginning of 1998 to 7.9 MMCFPD
and 170 BOPD at the end of 1998; (ii) two successful wells at Weeks Island,
Louisiana, which each resulted in completions producing in excess of 700 BOPD;
and (iii) successful extension to the south and east at the Monument Junction
reservoir in the Cymric Field in California.
Capital expenditures for domestic exploration activity totaled $26.7
million in 1998 and are budgeted at approximately $5.6 million in 1999.
International Operations
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As of December 31, 1998, the Company's estimated international net proved
reserves totaled 25.8 MMBOE, or 10% of Nuevo's total proved reserve base.
During 1998, the Company's international production was 1.5 MMBOE, or 6% of
Nuevo's total production.
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NUEVO ENERGY COMPANY
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The Company's international reserves and production consist of a 50%
working interest (37.5% average net revenue) in the Yombo and Masseko oil fields
located in the Marine I Permit offshore the Republic of Congo in West Africa
("Congo"). Estimated net proved reserves of the Yombo and Masseko oil fields as
of December 31, 1998 were 25.8 MMBOE, and production during 1998 totaled 1.5
MMBOE, all from the Yombo field. In 1998, revenues relating to production from
the Congo accounted for approximately 7% of the total oil and gas revenues for
the Company. The properties are located 27 miles offshore in approximately 370
feet of water. The Company also owns an interest in a converted super tanker
with storage capacity of over one million barrels of oil for use as a floating
production, storage and off loading vessel ("FPSO"). The Company's production is
converted on the FPSO to No. 6 fuel oil with less than 0.3% sulfur content.
In December 1998, the Company temporarily abandoned the Chott Fejaj #3
wildcat well in Tunisia, North Africa. The Company owns a 17.5% ownership
interest in the well. Based on the Company's evaluation of the initial test
results on this well, the Company determined to expense the $1.8 million of
costs incurred as dry hole costs in 1998.
In September 1998, the Company plugged and abandoned its first well in the
East Cape Three Points prospect offshore the Republic of Ghana in West Africa
("Ghana") due to the lack of commercial quantities of reserves. Dry hole costs
and geological and geophysical costs for this well (net to the Company) were
$7.3 million and $1.6 million, respectively, in 1998.
In April 1998, the Company acquired a third party's interest in the Yombo
field in the Congo for $7.8 million. Such acquisition added 3.4 MMBOE to the
Company's reserve base and increased the Company's net working interest in the
Congo from 43.75% to 50.0%.
The Company's most significant international discovery in 1997 was the
Masseko M-4 well drilled on the Marine I Permit approximately six miles to the
northwest of the Yombo field. The Company drilled an exploration well to
evaluate the Lower Sendji and sub-salt sections underlying the Masseko
structure, as well as to further delineate the Upper Sendji and Tchala zones,
which were discovered but not developed by a previous operator. This well tested
at rates over 3,000 gross barrels per day from a newly discovered middle Sendji
section.
During 1996, the Company drilled a successful exploration well, the B-14,
to the Lower Sendji formation in the Yombo field. This well is completed in half
of the 236 feet of net pay and has produced over 1,100 gross MBOE as of
December 31, 1998. Additionally, the Company initiated a waterflood project to
enhance production from existing Upper Sendji and Tchala zones in 1997.
The Company's 1999 international exploration budget of approximately $8.0
million includes seismic evaluation and data acquisition. International
development plans for 1999 include the continuation of the Company's drilling
program in the Congo and are budgeted at approximately $7.0 million.
In March 1997, Nuevo Ghana, Inc., ("Nuevo Ghana"), a wholly-owned
subsidiary of the Company, signed a petroleum agreement with the Republic of
Ghana and the Ghana National Petroleum Corporation, ("GNPC"), for petroleum
rights covering approximately 1.7 million acres offshore Ghana in the East Cape
Three Points prospect area. The Company is the operator with a 75% working
interest, and a third party holds the remaining 25% working interest.
In October 1997, Nuevo Ghana signed a second petroleum agreement with Ghana
and GNPC for petroleum rights covering an additional 2.7 million acres offshore
Ghana in the Accra-Keta prospect area. The Company is the operator of this
prospect with a 100% working interest. This new prospect area is sixty miles to
the east of the Company's 1.7 million acres awarded in March 1997. The
exploration program for the Company's new acreage is similar to the initial
agreement and involves reprocessing existing seismic data, shooting additional
seismic and drilling an exploration well during the first phase of the
agreement.
The Company's international investments involve risks typically associated
with investments in emerging markets such as an uncertain political, economic,
legal and tax environment and expropriation and nationalization of assets. In
addition, if a dispute arises in its foreign operations, the Company may be
subject to the exclusive
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NUEVO ENERGY COMPANY
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jurisdiction of foreign courts or may not be successful in subjecting foreign
persons to the jurisdiction of the United States. The Company attempts to
conduct its business and financial affairs so as to protect against political
and economic risks applicable to operations in the various countries where it
operates, but there can be no assurance that the Company will be successful in
so protecting itself. A portion of the Company's investment in the Congo is
insured through political risk insurance provided by the Overseas Private
Investment Corporation ("OPIC"). See "Risk Factors".
Gas Plant and Other Facilities
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The Company has owned and operated gas plants and other facilities, most of
which have been ancillary to the primary business of producing oil and natural
gas.
The Company owns three gas plants in California that are strategic assets
for the Company's oil and gas activities in California. The Stearns Gas Plant is
located in the Brea Olinda field and was processing 3.0 MMCFD at December 31,
1998. The Santa Clara Valley Gas Plant serves the Torrey field located east of
Ventura, California and was processing 9.2 MMCFD at December 31, 1998. The HS&P
Gas Plant became operational in September 1997 and is used to process gas
production from the Point Pedernales field. At December 31, 1998, the HS&P Gas
Plant was processing 2.6 MMCFD.
In addition to the gas plants that process Company production, Nuevo has
owned certain non-core gas gathering, pipeline and storage assets. In December
1997, the Company announced its intention to dispose of these non-core assets
during 1998. Such assets include: the Company's 48.5% interest in the Richfield
Gas Storage facility, which was sold in February 1998 at its approximate
carrying value, an 80% interest in Bright Star Gathering, Inc., which was sold
in July 1998 at its approximately carrying value, and the Illini pipeline. The
Company recorded a non-cash, pre-tax charge to fourth quarter 1997 earnings of
$23.9 million, reflecting the estimated loss on the disposition of these assets.
A positive revision to this charge was made in the fourth quarter of 1998 in the
amount of $3.7 million to reflect the estimated current fair value of the Illini
pipeline. The Company entered into a sale agreement during 1998 to sell the
Illini pipeline to a third party. Such sale is currently pending and awaiting
regulatory approval. The Company's results of operations for the year ended
December 31, 1998, included the operating results from these assets through the
disposition date, as applicable; however, these assets were not depreciated
during 1998. The Company will retain its California gas plants, as these plants
are strategic assets for the Company's oil and gas activities in California.
On May 2, 1997, the Company sold its 95% interest in the NuStar Joint
Venture, which owned an interest in the Benedum natural gas processing plant,
and an interest in certain related assets and natural gas gathering systems
located in West Texas. The Company recognized a $2.3 million gain on this sale,
which was effective January 1, 1997.
Real Estate
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In April 1996, along with its acquisition of certain California upstream
oil and gas properties from Union Oil Company of California ("Unocal") (see
"Acquisitions and Divestitures"), the Company acquired tracts of land in Orange
and Santa Barbara Counties in California, two office buildings, one in Ventura
County and one in Santa Barbara County, and nearly 16,000 acres of agricultural
property in the central valley of California. As of December 31, 1998, there was
$51.0 million allocated to land. The office buildings are included in other
facilities at December 31, 1998.
Consistent with Nuevo's proactive asset management strategy, the Company
plans to sell certain of its surface real estate assets in Orange County in
1999. With land values rising in California, the Company expects to monetize a
significant portion of its California real estate portfolio to help fund its
1999 capital program.
The surface fee in Orange county lies within the sphere of influence of the
city of Brea, which is in north Orange County and includes three fee parcels,
the Stearns Fee, the Stearns Columbia Fee and Naranjal "B" Fee. These are
contiguous parcels with gross development potential of 764 acres. The Company
allocated $26.3 million
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NUEVO ENERGY COMPANY
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in book value from the Unocal Properties purchase price to this surface fee.
Plans are being formulated in relation to the tract of land in Santa Barbara
County.
One of the two office buildings acquired from Unocal currently houses Nuevo
and Torch employees in the district office in Santa Maria.
The agricultural land, primarily in Kings County, Fresno County and Kern
County, has surface leases for grazing or farming use, which are compatible with
the production of oil.
Acquisitions and Divestitures of Oil and Gas Properties
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Consistent with its contrarian acquisition and divestiture strategy, Nuevo
has, from time to time, been an active participant in the market for oil and gas
properties. The Company attempts to purchase high growth assets which, for any
of a variety of reasons, are out of favor in the marketplace and hence available
for acquisition at attractive prices. From time to time, the Company also seeks
to divest itself of lower growth assets at times when those assets are valued
highly by the marketplace. Examples of this contrarian strategy are listed
below:
On January 6, 1999, the Company completed the sale of its East Texas
natural gas assets to an affiliate of Samson Resources Company for an adjusted
purchase price of $192.0 million. A $5.2 million gain on settled hedge
transactions was realized in connection with the closing of this sale in 1999.
The effective date of the sale is July 1, 1998. The Company reclassified these
assets to assets held for sale and discontinued depleting these assets during
the third quarter of 1998. Estimated net proved reserves associated with these
properties totaled approximately 329.0 BCF of natural equivalent at January 1,
1999.
In April 1998, the Company acquired a third party's interest in the Yombo
field in the Congo for $7.8 million. Such acquisitions added 3.4 MMBOE to the
Company's reserve base and increased the Company's net working interest in the
Congo from 43.75% to 50.0%.
In July 1996, the Company completed the acquisition of certain East Texas
oil and gas properties, which added 31.2 BCF to the Company's reserve base, for
a net purchase price of $9.3 million in cash. The package consisted of interests
in 11 fields. In December 1996, the holders of the preferential rights on these
properties exercised such rights for a cash payment of $8.0 million, acquiring
properties constituting approximately half of the estimated proved reserves
related to this acquisition.
In June 1996, the Company sold 177 producing wells and the majority of its
acreage in the Giddings field and East Texas Austin Chalk holdings for $27.3
million, representing estimated net proved reserves of 4.2 MMBOE as of
December 31, 1995. The Company retained ownership of seven wells and surrounding
acreage in the Turkey Creek prospect area of the Austin Chalk trend located in
Grimes County, Texas.
In April 1996, the Company acquired certain upstream oil and gas properties
located onshore and offshore California ("Unocal Properties") from Unocal and
certain California oil properties ("Point Pedernales Properties" and, together
with the Unocal Properties, the "California Properties") from Torch and certain
of its wholly-owned subsidiaries for a combined net purchase price of $525.9
million, plus a contingent payment based on future realized oil prices. The
California Properties consisted of 52 fields with approximately 2,200 active
wells, and estimated net proved reserves as of December 31, 1998 of 172.6 MMBOE.
During 1998, the California Properties constituted 77% of the Company's total
oil and natural gas production on a barrel of oil equivalent basis. Since
acquiring the California Properties, the Company has spent approximately $240.0
million to complete over 400 exploitation and development projects.
Industry Segment Information
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For industry segment data (including foreign operations), see Note 13 to
the Notes to Consolidated Financial Statements.
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Markets
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The markets for hydrocarbons continue to be quite volatile. The Company's
financial condition, operating results, future growth and the carrying value of
its oil and gas properties are substantially dependent on prevailing prices of
oil and gas. The Company's ability to maintain or increase its borrowing
capacity and to obtain additional capital on attractive terms is also
substantially dependent upon oil and gas prices. Prices for oil and gas are
subject to large fluctuations in response to relatively minor changes in the
supply of and demand for oil and gas, market uncertainty and a variety of
additional factors beyond the control of the Company. These factors include
weather conditions in the United States, the condition of the United States
economy, the actions of the Organization of Petroleum Exporting Countries,
governmental regulation, political stability in the Middle East and elsewhere,
the foreign supply of oil and gas, the price of foreign oil imports and the
availability of alternate fuel sources. Any substantial and extended decline in
the price of oil or gas would have an adverse effect on the Company's carrying
value of its proved reserves, borrowing capacity, the Company's ability to
obtain additional capital, and its revenues, profitability and cash flows from
operations. (See Note 16 to the Notes to Consolidated Financial Statements.)
Properties characterized by the production of San Joaquin Valley heavy oil
(defined herein as those fields which produce primarily 15 (degrees) API quality
crude oil or heavier through thermal operations) constituted 28% of the
Company's total 1998 output.
In addition, properties which produce primarily other grades of relatively
heavy oil (generally, 19 (degrees) API or heavier but produced through non-
thermal operations) constituted 2% of the Company's total 1998 output.
The market for California heavy oil differs from the established market
indices for oil elsewhere in the U.S., due principally to the higher
transportation and refining costs associated with heavy oil.
The Company's Yombo Field production in its Marine I Permit offshore the
Congo produces a relatively heavy crude oil (16-20 (degrees) API gravity) which
is processed into a low-sulfur No. 6 fuel oil product for sale to worldwide
markets. Production from this property constituted 6% of the Company's total
1998 output. The market for residual fuel oil differs from the markets for WTI
and other benchmark crudes due to its primary use as an industrial or utility
fuel versus the higher value transportation fuel component, which is produced
from refining most grades of crude oil.
Sales to Tosco, formerly Unocal, accounted for 60%, 62% and 52% of 1998,
1997 and 1996 oil and gas revenues, respectively. Also in 1998, sales to Torch
Energy L.L.C. accounted for 10% of total 1998 oil and gas revenues. The loss of
any single significant customer or contract could have a material adverse short-
term effect on the Company; however, management of the Company does not believe
that the loss of any single significant customer or contract would materially
affect its business in the long-term.
Under the terms of a $30.0 million volumetric production payment, the
Company was committed to deliver 10.7 BCF of natural gas through December 1998.
As of December 31, 1998, the Company had fulfilled its obligation under this
commitment. (See Note 5 of the Notes to Consolidated Financial Statements).
There are no other significant delivery commitments, and substantially all of
the Company's oil and gas production is sold at market responsive pricing
through a marketing affiliate of Torch. The Company from time to time may enter
into crude oil and natural gas price swaps or other similar transactions to
hedge its exposure to price fluctuations.
Regulation
- ----------
Oil and Gas Regulation
The availability of a ready market for oil and gas production depends upon
numerous factors beyond the Company's control. These factors include state and
Federal regulation of oil and gas production and transportation, as well as
regulations governing environmental quality and pollution control, state limits
on allowable rates of production by a well or proration unit, the amount of oil
and gas available for sale, the availability of adequate pipeline and other
transportation and processing facilities and the marketing of competitive fuels.
For example, a productive gas well may be "shut-in" because of an over-supply of
gas or lack of an available gas pipeline in the
8
<PAGE>
NUEVO ENERGY COMPANY
--------------------
areas in which the Company may conduct operations. State and Federal regulations
generally are intended to prevent waste of oil and gas, protect rights to
produce oil and gas between owners in a common reservoir, control the amount of
oil and gas produced by assigning allowable rates of production and control
contamination of the environment. Pipelines and gas plants also are subject to
the jurisdiction of various Federal, state and local agencies.
The Company's sales of natural gas are affected by the availability, terms
and costs of transportation. The rates, terms and conditions applicable to the
interstate transportation of gas by pipelines are regulated by the Federal
Energy Regulatory Commission ("FERC") under the Natural Gas Acts, as well as
under Section 311 of the Natural Gas Policy Act. Since 1985, the FERC has
implemented regulations intended to increase competition within the gas industry
by making gas transportation more accessible to gas buyers and sellers on an
open-access, non-discriminatory basis.
The Company's sales of oil are also affected by the availability, terms and
costs of transportation. The rates, terms, and conditions applicable to the
interstate transportation of oil by pipelines are regulated by the FERC under
the Interstate Commerce Act. In this connection, FERC has implemented a
simplified and generally applicable ratemaking methodology for interstate oil
pipelines to fulfill the requirements of Title VIII of the Energy Policy Act of
1992 comprised of an indexing system to establish ceilings on interstate oil
pipeline rates. The FERC will also, under defined circumstances, permit
alternative ratemaking methodologies for interstate oil pipelines such as the
use of cost of service rates, settlement rates, and market-based rates. Market-
based rates will be permitted to the extent the oil pipeline can demonstrate
that it lacks significant market power in the market in which it proposes to
charge market-based rates.
Environmental Regulation
General. The Company's activities are subject to existing Federal, state
and local laws and regulations governing environmental quality and pollution
control. It is anticipated that, absent the occurrence of an extraordinary
event, compliance with existing Federal, state and local laws, rules and
regulations regulating the release of materials in the environment or otherwise
relating to the protection of the environment will not have a material effect
upon the operations, capital expenditures, earnings or the competitive position
of the Company.
Activities of the Company with respect to exploration, drilling and
production from wells, natural gas facilities, including the operation and
construction of pipelines, plants and other facilities for transporting,
processing, treating or storing natural gas and other products, are subject to
stringent environmental regulation by state and Federal authorities including
the Environmental Protection Agency ("EPA"), the Department of Transportation
and FERC. Such regulation can increase the cost of planning, designing,
installing and operating such facilities. In most instances, the regulatory
requirements relate to water and air pollution control measures.
Waste Disposal. The Company currently owns or leases, and has in the past
owned or leased, numerous properties that have been used for production of oil
and gas for many years. Although the Company has utilized operating and
disposal practices that were standard in the industry at the time, hydrocarbons
or other wastes may have been disposed of or released on or under the properties
owned or leased by the Company. In addition, many of these properties have been
operated by third parties over whom the Company had no control as to such
entities' treatment of hydrocarbons or other wastes or the manner in which such
substances may have been disposed of or released. State and Federal laws
applicable to oil and gas wastes and properties have become more strict. Under
these new laws, the Company could be required to remove or remediate previously
disposed wastes (including wastes disposed of or released by prior owners or
operators) or property contamination (including groundwater contamination) or to
perform remedial plugging operations to prevent future contamination.
The Company may generate wastes, including hazardous wastes that are
subject to the Federal Resource Conservation and Recovery Act and comparable
state statutes. The EPA has limited the disposal options for certain hazardous
wastes and is considering the adoption of stricter disposal standards for
nonhazadous wastes. Furthermore, certain wastes generated by the Company's oil
and gas operations that are currently exempt from treatment as "hazardous
wastes" may in the future be designated as "hazardous wastes," and therefore be
subject to more rigorous and costly operating and disposal requirements.
9
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Superfund. The Federal Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes joint
and several liability, without regard to fault or the legality of the original
conduct, on certain classes of persons with respect to the release of a
"hazardous substance" into the environment. These persons include the current
owner and operator of a facility and persons that disposed of or arranged for
the disposal of the hazardous substances found at a facility. CERCLA also
authorizes the EPA and, in some cases, third parties to take actions in response
to threats to the public health or the environment and to seek to recover from
the responsible classes of persons the costs of such action. In the course of
its operations, the Company may have generated and may generate wastes that fall
within CERCLA's definition of "hazardous substances". The Company may also be an
owner of facilities on which "hazardous substances" have been released by
previous owners or operators. The Company may be responsible under CERCLA for
all or part of the costs to clean up facilities at which such wastes have been
released. Neither the Company nor, to its knowledge, its Predecessor
Partnerships has been named a potentially responsible person under CERCLA nor
does the Company know of any prior owners or operators of its properties that
are named as potentially responsible parties related to their ownership or
operation of such property.
Air Emissions. The operations of the Company are subject to local, state
and Federal regulations for the control of emissions of air pollution.
Administrative enforcement actions for failure to comply strictly with air
pollution regulations or permits are generally resolved by payment of monetary
fines and correction of any identified deficiencies. Alternatively, regulatory
agencies could require the Company to forego construction, modification or
operation of certain air emission sources, although the Company believes that in
the latter cases it would have enough permitted or permittable capacity to
continue its operations without a material adverse effect on any particular
producing field.
Oil Pollution Act. The Oil Pollution Act of 1990 ("OPA") and regulations
thereunder impose certain duties and liabilities on "responsible parties"
related to the prevention of oil spills and damages resulting from such spills
in United States waters. A "responsible party" includes the owner or operator
of a facility or vessel, or the lessee or permittee of the area in which a
facility covered by OPA is located. OPA assigns joint and several liability to
each responsible party for oil removal costs and a variety of public and private
damages. Few defenses exist to the liability imposed by OPA.
The OPA also imposes ongoing requirements on a responsible party, including
proof of financial responsibility to cover at least some costs in a potential
spill. Certain amendments to the OPA that were enacted in 1996 require owners
and operators of offshore facilities that have a worst case oil spill potential
of more than 1,000 barrels to demonstrate financial responsibility in amounts
ranging from $10.0 million in specified state waters to $35.0 million in federal
OCS waters, with higher amounts, up to $150.0 million in certain limited
circumstances, where the MMS believes such a level is justified by the risks
posed by the quantity or quality of oil that is handled by the facility. On
March 25, 1997, the MMS promulgated a proposed rule implementing these OPA
financial responsibility requirements. The Company believes that it currently
has established adequate proof of financial responsibility for its offshore
facilities. However, the Company cannot predict whether the financial
responsibility requirements under the OPA amendments or the proposed rule will
result in the imposition of substantial additional annual costs to the Company
in the future or otherwise materially adversely affect the Company. The impact
of the financial responsibility requirements is not expected to be any more
burdensome to the Company than it will be to its similarly or less capitalized
competitors.
Management believes that the Company is in substantial compliance with
current applicable environmental laws and regulations and that continued
compliance with existing requirements will not have a material adverse impact on
the Company.
10
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Competition
- -----------
The Company operates in the highly competitive areas of oil and gas
exploration, development and production. The availability of funds and
information relating to a property, the standards established by the Company for
the minimum projected return on investment and the availability of alternate
fuel sources are factors that affect the Company's ability to compete in the
marketplace. The Company's competitors include major integrated oil companies
and a substantial number of independent energy companies, many of which possess
greater financial and other resources than the Company.
Personnel
- ---------
At December 31, 1998, the Company employed 58 full time employees who
represent the executive officers and key operating, exploration, financial and
accounting management. The Company outsources certain administrative and
operational functions to Torch, which maintains a large technical, operating,
accounting and administrative staff. Pursuant to an agreement with Torch (the
"Torch Agreement"), Torch administered certain business activities of the
Company for a monthly fee based on a fixed percentage of operating cash flow and
total assets (as defined) during 1998. (See Note 6 to the Notes to Consolidated
Financial Statements). The combined personnel of Torch and the Company
consisted of 861 employees at December 31, 1998.
11
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. PROPERTIES
- -------------------
Reserves, Productive Wells, Acreage and Production
- --------------------------------------------------
The Company holds interests in oil and gas wells located in the United
States and West Africa. The Company's principal developed properties are located
in California, Texas, Louisiana, Alabama, and Congo, West Africa; undeveloped
acreage (see next page for detail) is located primarily in California, Texas,
Nevada, Mississippi, Congo and Ghana. Estimated proved oil and gas reserves at
December 31, 1998 decreased approximately 12% since December 31, 1997, primarily
as a result of lower oil prices. (See Note 16 to the Notes to Consolidated
Financial Statements). The Company has not filed any different oil or gas
reserve information with any foreign government or other Federal authority or
agency.
The following table sets forth certain information, as of December 31,
1998, which relates to the Company's principal oil and gas properties:
<TABLE>
<CAPTION>
Net Proved Reserves
December 31, 1998 1998 Production PV-10**
------------------------------ --------------------------- ----------
Oil* Gas Oil* Gas
Gross (Mbbls) (Mmcf) MBOE (Mbbls) (Mmcf) MBOE
Wells ------- ------ ------ ------- ------ -----
-----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. PROPERTIES
California Fields
- -----------------
Cymric.................... 498 49,902 5,768 50,863 3,905 1,604 4,172 $ 64,938
Midway-Sunset............. 492 42,085 -- 42,085 2,900 -- 2,900 23,603
Brea Olinda............... 222 32,561 20,749 36,019 826 136 849 35,109
Point Pedernales.......... 10 10,016 5,618 10,953 2,385 990 2,550 1,129
Belridge.................. 434 11,920 1,026 12,091 608 198 641 17,570
Huntington Beach.......... 20 7,194 766 7,322 753 77 766 10,094
Santa Clara............... 29 2,542 2,059 2,885 940 649 1,048 (8,135)
Bardsdale................. 7 1,146 1,355 1,372 387 800 520 4,290
South Mountain............ 77 1,393 1,351 1,618 202 251 244 546
Other..................... 456 3,314 24,395 7,380 3,534 9,000 5,034 (29,075)
------- ------- ------- ------- ------- ------- ------- ---------
Total California Fields. 2,245 162,073 63,087 172,588 16,440 13,705 18,724 120,069
------- ------- ------- ------- ------- ------- ------- ---------
Other U.S. Fields
- -----------------
Oak Hill, Texas........... 349 418 303,468 50,996 33 11,451 1,941 125,271
Carthage, Texas........... 52 139 13,861 2,449 10 854 152 6,073
Giddings, Texas........... 12 13 6,334 1,069 13 3,162 540 7,302
Other..................... 163 1,657 16,506 4,407 849 3,349 1,408 19,248
------- ------- ------- ------- ------- ------- ------- ---------
Total U.S. Properties... 2,821 164,300 403,256 231,509 17,345 32,521 22,765 277,963
------- ------- ------- ------- ------- ------- ------- ---------
FOREIGN PROPERTIES
Yombo, Congo.............. 31 18,193 -- 18,193 1,461 -- 1,461 31,163
Masseko, Congo............ -- 7,648 -- 7,648 -- -- -- (9,193)
------- ------- ------- ------- ------- ------- ------- ---------
Total Foreign Properties 31 25,841 -- 25,841 1,461 -- 1,461 21,970
------- ------- ------- ------- ------- ------- ------- ---------
TOTAL PROPERTIES 2,852 190,141 403,256 257,350 18,806 32,521 24,226 299,933
======= ======= ======= ======= ======= ======= ======= =========
Less: East Texas Assets
Held for Sale........... (509) (759) (324,471) (54,837) (88) (13,050) (2,263) (135,169)
------- ------- ------- ------- ------- ------- ------- ---------
PRO FORMA TOTAL, NET OF
E. TEXAS ASSETS......... 2,343 189,382 78,785 202,513 18,718 19,471 21,963 $ 164,764
======= ======= ======= ======= ======= ======= ======= =========
</TABLE>
- -------------------
* includes natural gas liquids
** pre-tax
12
<PAGE>
NUEVO ENERGY COMPANY
--------------------
The summary of SEC reserves, which is presented on the previous page, is
computed based on realized prices at December 31, 1998, held constant over time
(see Note 16 to the Notes to Consolidated Financial Statements). Management
believes that the following reserve information, which reflects escalated
commodity pricing, is more consistent with the belief that the current low oil
and gas prices will revert to long-term historical averages. The following
table sets forth the escalated reserve information, as of December 31, 1998:
<TABLE>
<CAPTION>
Net Proved Reserves (Escalated Case)
December 31, 1998 PV-10**
-------------------------------------- -------
Oil* Gas
(Mbbls) (Mmcf) MBOE
------- ------ ------
<S> <C> <C> <C> <C>
U.S. PROPERTIES
California Fields
- -----------------
Cymric............................... 54,285 5,805 55,252 $178,438
Midway-Sunset........................ 43,765 -- 43,765 117,839
Brea Olinda.......................... 33,229 21,257 36,772 86,149
Point Pedernales..................... 13,009 7,543 14,266 22,372
Belridge............................. 12,444 1,033 12,616 56,993
Huntington Beach..................... 11,199 1,193 11,398 41,872
Santa Clara.......................... 18,445 30,976 23,608 41,316
Bardsdale............................ 1,206 1,417 1,442 8,072
South Mountain....................... 4,294 4,363 5,021 4,148
Other................................ 35,433 44,640 42,873 71,561
------- ------- ------- --------
Total California Fields............. 227,309 118,227 247,013 628,760
------- ------- ------- --------
Other U.S. Fields
- -----------------
East Texas............................ 833 325,200 55,033 137,400
Giddings, Texas....................... 14 6,334 1,070 7,336
Other................................. 1,515 9,435 3,088 18,753
------- ------- ------- --------
Total U.S. Properties............... 229,671 459,196 306,204 792,249
------- ------- ------- --------
FOREIGN PROPERTIES
Yombo, Congo........................... 17,733 -- 17,733 78,067
Masseko, Congo......................... 7,515 -- 7,515 11,966
------- ------- ------- --------
Total Foreign Properties 25,248 -- 25,248 90,033
------- ------- ------- --------
TOTAL PROPERTIES 254,919 459,196 331,452 $882,282
======= ======= ======= ========
Less: East Texas Assets
Held for Sale....................... (833) (325,200) (55,033) (137,400)
------- ------- ------- --------
PRO FORMA TOTAL, NET OF EAST
TEXAS ASSETS........................ 254,086 133,996 276,419 $744,882
======= ======= ======= ========
</TABLE>
- ---------------------
* includes natural gas liquids
** pre-tax
Acreage
- -------
The following table sets forth the acres of developed and undeveloped oil
and gas properties in which the Company held an interest as of December 31,
1998. Undeveloped acreage is considered to be those leased acres on which wells
have not been drilled or completed to a point that would permit the production
of commercial quantities of oil and gas, regardless of whether or not such
acreage contains proved reserves. A gross acre in the following table refers to
the number of acres in which a working interest is owned directly by the
Company. The number of net acres is the sum of the fractional ownership of
working interests owned directly by the Company in the gross acres expressed as
a whole number and percentages thereof. A "net acre" is deemed to exist when the
sum of fractional ownership of working interests in gross acres equals one.
13
<PAGE>
NUEVO ENERGY COMPANY
--------------------
<TABLE>
<CAPTION>
Gross Net
---------- ----------
<S> <C> <C>
Developed Acreage 284,158 138,566
Undeveloped Acreage 4,835,338 4,161,276
---------- ----------
Total 5,119,496 4,299,842
========== ==========
</TABLE>
The following table sets forth the Company's undeveloped acreage as of
December 31, 1998:
<TABLE>
<CAPTION>
Gross Net
---------- ----------
<S> <C> <C>
California 320,173 139,702
Texas 44,854 14,732
Nevada 1,268 158
Mississippi 13,900 4,194
Congo, West Africa:
Marine 1 Permit 38,000 19,000
Ghana, West Africa:
East Cape Three Points 1,700,000 1,275,000
Accra-Keta 2,700,000 2,700,000
Other 17,143 8,490
---------- ----------
Total 4,835,338 4,161,276
========== ==========
</TABLE>
Productive Wells
- ----------------
The following table sets forth the Company's gross and net interests in
productive oil and gas wells as of December 31, 1998. Productive wells are
producing wells and wells capable of production.
<TABLE>
<CAPTION>
Gross Net
---------- ----------
<S> <C> <C>
Oil Wells 2,500 2,122
Gas Wells 352 139
---------- ----------
Total 2,852 2,261
========== ==========
</TABLE>
Production
- ----------
The Company's principal production volumes for the year ended December 31,
1998, were from the states of California, Texas, Alabama, Louisiana, and from
the Congo.
Data relating to production volumes, average sales prices, average unit
production costs and oil and gas reserve information appears in Note 16 to the
Notes to Consolidated Financial Statements.
Drilling Activity and Present Activities
- ----------------------------------------
During the three year period ended December 31, 1998, the Company's
principal drilling activities occurred in the continental United States and
offshore in state and Federal waters, and offshore the Congo in West Africa.
The Company believes that its demonstrated ability to reduce operating
costs to levels well below those of the larger oil and gas companies from which
acquisitions have been made allows it to compete successfully in an industry
characterized by fluctuating commodity prices.
14
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Between the date of the California Properties acquisition, April 9, 1996,
and the end of 1998, the Company drilled 225 wells in the Cymric field in
central California, which contained 20% of the Company's total estimated net
proved equivalent reserves at December 31, 1998, and anticipates drilling
approximately 10 wells during 1999. In the Midway-Sunset field in central
California, which contained 16% of the total estimated net proved equivalent
reserves at December 31, 1998, the Company drilled 33 wells during 1998, and
plans to drill approximately 10 wells in 1999.
In the Oak Hill field in Rusk County, Texas, the Company drilled 54 wells
since July 1996. The Company sold its interest in the Oak Hill field on
January 6, 1999. Net proved reserves from this field represented 20% of the
Company's total estimated net proved equivalent reserves at December 31, 1998.
In 1996, the Company sold 177 producing wells and the majority of its
undeveloped acreage in the Giddings field and East Texas Austin Chalk formation
for $27.3 million. The Company retained ownership of several wells and
surrounding acreage in the Turkey Creek prospect area of the Austin Chalk trend.
The Company drilled one well in 1998, five wells in 1997, and three wells in
1996 in this area.
In 1997, the Company drilled an exploration well to evaluate the Lower
Sendji and subsalt sections underlying the Masseko structure located several
miles to the west of the Yombo field in the Congo, as well as to further
delineate the Upper Sendji and Tchala zones, which were discovered but not
developed by the previous operator. This well tested at rates over 3,000 gross
barrels per day from a newly discovered middle Sendji section. Platform design
and development plans are being formulated. Other potential exploration features
are being evaluated for possible future drilling. Additionally, the Company
initiated a waterflood project to enhance production from existing Upper Sendji
and Tchala zones. During 1996, the Company completed a six well development
drilling program in the Congo and drilled a successful exploration well, the
B-14, to the Lower Sendji formation in the Yombo field. This well is completed
in half of the 236 feet of net pay and has produced over 1,100 gross MBOE as of
December 31, 1998. Plans for 1999 include four shallow infill wells associated
with the waterflood implementation.
The Company's exploration program resulted in eight successful wells out of
14 drilled in 1998. In addition, two wells were being tested at year-end. The
Company's most significant discoveries in 1998 were: (i) four successful wells
at Four Isle Dome in Louisiana, which helped increase net production from
0.6 MMCFPD and 35 BOPD at the beginning of 1998 to 7.9 MMCFPD and 170 BOPD at
the end of 1998; (ii) two successful wells at Weeks Island, Louisiana, which
each resulted in completions producing in excess of 700 BOPD; and (iii)
successful extension to the south and east at the Monument Junction reservoir in
the Cymric Field in California. In 1997, the Company's exploration program
resulted in nine successful wells out of 14 drilled. 1997 discoveries included:
the Masseko structure offshore Congo, the Monument Junction reservoir in Cymric
field, California and Tranquillon Ridge, offshore California. In 1996, the
Company's exploration program resulted in six successful wells out of 13
drilled. Discoveries included sections in the Yombo field, Cymric field and at
North Riley Ridge in Western Wyoming.
The Company had six gross (2.65 net) wells in progress at December 31,
1998. The following table sets forth the results of drilling activity by the
Company, net to its interest, for the last three calendar years. Gross wells, as
it applies to wells in the following tables, refers to the number of wells in
which a working interest is owned directly by the Company. The number of net
wells is the sum of the fractional ownership of working interests owned directly
by the Company in gross wells expressed as whole numbers and percentages
thereof.
15
<PAGE>
NUEVO ENERGY COMPANY
--------------------
<TABLE>
<CAPTION>
Exploratory Wells
----------------------------------------------------------------------------------------------------
Gross Net
---------------------------------------------- -----------------------------------------------
Dry Dry
Productive Holes Total Productive Holes Total
---------- ----- ----- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1996 6 7 13 3.40 2.09 5.49
1997 9 5 14 6.63 2.33 8.96
1998 8 6 14 4.09 3.58 7.67
Development Wells
----------------------------------------------------------------------------------------------------
Gross Net
---------------------------------------------- -----------------------------------------------
Dry Dry
Productive Holes Total Productive Holes Total
---------- ----- ----- ---------- ----- -----
1996 149 1 150 125.24 1.00 126.24
1997 236 1 237 217.52 1.00 218.52
1998 155 -- 155 134.43 -- 134.43
</TABLE>
Gas Plant, Pipelines and Other Facilities
- -----------------------------------------
As of December 31, 1998, the Company owned interests in the following gas
plant and pipeline facilities:
<TABLE>
<CAPTION>
1998
Capacity Throughput Ownership
Facility State Operator MMCFD MMCFD Interest
-------- ----- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Illini Carrier Illinois Illini Carrier, L.P. 50 6.8 100%
Stearns Gas Plant California Torch Operating Company 5 3.4 100%
Santa Clara Plant California Torch Operating Company 17 10.4 100%
HS&P Gas Plant California Torch Operating Company 13 4.9 80%
</TABLE>
In December 1997, the Company announced its intention to dispose of the
remainder of its non-core gas gathering, pipeline and storage assets during
1998. Such assets include: the Company's 48.5% interest in the Richfield Gas
Storage facility, which was sold in February 1998 at its approximate carrying
value; an 80% interest in Bright Star Gathering, Inc., which was sold in July
1998 at its approximate carrying value; and the Illini pipeline. This resulted
in a non-cash, pre-tax charge to fourth quarter 1997 earnings of $23.9 million,
reflecting the estimated loss on the disposition of these assets. A positive
revision to this charge was made in the fourth quarter of 1998 in the amount of
$3.7 million to reflect the current estimated fair value of the Illini pipeline.
The Company entered into a sale agreement during 1998 to sell the Illini
pipeline to a third party. Such sale is currently pending and awaiting
regulatory approval. The Company's results of operations included operating
results from these assets through the disposition date, as applicable; however,
these assets were not depreciated during 1998. The Company will retain its
California gas plants, as these plants are strategic assets for the Company's
oil and gas activities in California.
On May 2, 1997, Nuevo Liquids, a wholly-owned subsidiary of the Company,
sold its 95% interest in the NuStar Joint Venture, which held the Company's
investment in the Benedum Plant System, for proceeds of $25.0 million. The
Company recognized a pre-tax gain of $2.3 million on this sale. The effective
date of this sale was January 1, 1997.
Risk Factors
- ------------
Historically Low Oil Prices
The Company's financial condition, operating results, future growth and the
carrying value of its oil and gas properties are substantially dependent on
prevailing oil and gas prices. The Company's ability to maintain or increase
its borrowing capacity and to obtain additional capital on attractive terms is
also substantially dependent
16
<PAGE>
NUEVO ENERGY COMPANY
--------------------
upon oil and gas prices. During 1998, oil prices were very low compared with
prices received for oil historically. These low prices adversely affected the
Company's revenues and operating cash flows during 1998, and continued low oil
prices will adversely affect the Company in the future.
Volatility of Oil and Gas Prices
Prices for oil and gas are subject to large fluctuations in response to
relatively minor changes in the supply of and demand for oil and gas, market
uncertainty and a variety of additional factors beyond the control of the
Company. These factors include weather conditions in the United States, the
condition of the United States economy, the actions of the Organization of
Petroleum Exporting Countries ("OPEC"), governmental regulation, political
stability in the Middle East and elsewhere, the foreign supply of oil and gas,
the price of foreign oil imports and the availability of alternate fuel sources.
Any substantial and extended decline in the price of oil or gas would have an
adverse effect on the Company's carrying value of its proved reserves, borrowing
capacity, the Company's ability to obtain additional capital, and its revenues,
profitability and cash flows from operations.
Volatile oil and gas prices make it difficult to estimate the value of
producing properties for acquisition and often cause disruption in the market
for oil and gas producing properties, as buyers and sellers have difficulty
agreeing on such value. Price volatility also makes it difficult to budget for
and project the return on acquisitions and development and exploitation
projects.
A portion of the Company's production is California heavy oil. The market
for California heavy oil differs substantially from the established market
indices for oil and gas, due principally to the higher transportation and
refining costs associated with heavy oil. As a result, the price received for
heavy oil is generally lower than the price for medium and light oil, and the
production costs associated with heavy oil are relatively higher than for
lighter grades. The margin (sales price minus production costs) on heavy oil
sales is generally less than for lighter oil, and the effect of material price
decreases will more adversely affect the profitability of heavy oil production
compared with lighter grades of oil.
Reserve Replacement Risks
The Company's future performance depends upon its ability to find, develop
and acquire additional oil and gas reserves that are economically recoverable.
Without successful exploration, exploitation or acquisition activities, the
Company's reserves and revenues will decline. No assurances can be given that
the Company will be able to find and develop or acquire additional reserves at
an acceptable cost.
The successful acquisition and development of oil and gas properties
requires an assessment of recoverable reserves, future oil and gas prices and
operating costs, potential environmental and other liabilities and other
factors. Such assessments are necessarily inexact and their accuracy inherently
uncertain. In addition, no assurances can be given that the Company's
exploitation and development activities will result in any increases in
reserves. The Company's operations may be curtailed, delayed or canceled as a
result of lack of adequate capital and other factors, such as title problems,
weather, compliance with governmental regulations or price controls, mechanical
difficulties or shortages or delays in the delivery of equipment. In addition,
the costs of exploitation and development may materially exceed initial
estimates.
Substantial Capital Requirements
The Company makes, and will continue to make, substantial capital
expenditures for the exploitation, exploration, acquisition and production of
oil and gas reserves. Historically, the Company has financed these expenditures
primarily with cash generated by operations, proceeds from bank borrowings and
the proceeds of debt and equity issuances. The Company believes that it will
have sufficient cash provided by operating activities and borrowings under its
bank credit facility to fund planned capital expenditures. If revenues or the
Company's borrowing base decreases as a result of lower oil and gas prices,
operating difficulties or declines in reserves, the Company may have limited
ability to expend the capital necessary to undertake or complete future drilling
programs. There can be no assurance that additional debt or equity financing or
cash generated by operations will be available to meet these requirements.
17
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Uncertainty of Estimates of Reserves and Future Net Cash Flows
Estimates of economically recoverable oil and gas reserves and of future
net cash flows are based upon a number of variable factors and assumptions, all
of which are to some degree speculative and may vary considerably from actual
results. Therefore, actual production, revenues, taxes, and development and
operating expenditures may not occur as estimated. Future results of operations
of the Company will depend upon its ability to develop, produce and sell its oil
and gas reserves. The reserve data included herein are estimates only and are
subject to many uncertainties. Actual quantities of oil and gas may differ
considerably from the amounts set forth herein. In addition, different reserve
engineers may make different estimates of reserve quantities and cash flows
based upon the same available data.
Operating Risks
Nuevo's operations are subject to risks inherent in the oil and gas
industry, such as blowouts, cratering, explosions, uncontrollable flows of oil,
gas or well fluids, fires, pollution, earthquakes and other environmental risks.
These risks could result in substantial losses to the Company due to injury and
loss of life, severe damage to and destruction of property and equipment,
pollution and other environmental damage and suspension of operations. Moreover,
offshore operations are subject to a variety of operating risks peculiar to the
marine environment, such as hurricanes or other adverse weather conditions, to
more extensive governmental regulation, including regulations that may, in
certain circumstances, impose strict liability for pollution damage, and to
interruption or termination of operations by governmental authorities based on
environmental or other considerations. The Company's operations could result in
liability for personal injuries, property damage, oil spills, discharge of
hazardous materials, remediation and clean-up costs and other environmental
damages. The Company could be liable for environmental damages caused by
previous property owners. As a result, substantial liabilities to third parties
or governmental entities may be incurred, the payment of which could have a
material adverse effect on the Company's financial condition and results of
operations. The Company maintains insurance coverage for its operations,
including limited coverage for sudden environmental damages, but does not
believe that insurance coverage for environmental damages that occur over time
is available at a reasonable cost. Moreover, the Company does not believe that
insurance coverage for the full potential liability that could be caused by
sudden environmental damages is available at a reasonable cost. Accordingly, the
Company may be subject to liability or may lose substantial portions of its
properties in the event of certain environmental damages.
Foreign Investments
The Company's foreign investments involve risks typically associated with
investments in emerging markets such as uncertain political, economic, legal and
tax environments and expropriation and nationalization of assets. The Company
attempts to conduct its business and financial affairs so as to protect against
political and economic risks applicable to operations in the various countries
where it operates, but there can be no assurance the Company will be successful
in protecting against such risks.
The Company's international assets and operations are subject to various
political, economic and other uncertainties, including, among other things, the
risks of war, expropriation, nationalization, renegotiation or nullification of
existing contracts, taxation policies, foreign exchange restrictions, changing
political conditions, international monetary fluctuations, currency controls and
foreign governmental regulations that favor or require the awarding of drilling
contracts to local contractors or require foreign contractors to employ citizens
of, or purchase supplies from, a particular jurisdiction. In addition, if a
dispute arises with foreign operations, the Company may be subject to the
exclusive jurisdiction of foreign courts or may not be successful in subjecting
foreign persons, especially foreign oil ministries and national oil companies,
to the jurisdiction of the United States.
The Company's private ownership of oil and gas reserves under oil and gas
leases in the United States differs distinctly from its ownership of foreign oil
and gas properties. In the foreign countries in which the Company does
business, the state generally retains ownership of the minerals and consequently
retains control of (and in many cases, participates in) the exploration and
production of hydrocarbon reserves. Accordingly, operations outside the United
18
<PAGE>
NUEVO ENERGY COMPANY
--------------------
States, and estimates of reserves attributable to properties located outside the
United States, may be materially affected by host governments through royalty
payments, export taxes and regulations, surcharges, value added taxes,
production bonuses and other charges.
Hedging
The Company periodically seeks to reduce its exposure to price volatility
by hedging its production through swaps, options and other commodity derivative
instruments. In a typical hedging transaction, the Company will have the right
to receive from the counterparty to the hedge the excess of the fixed price
specified in the hedge contract and a floating price based on a market index,
multiplied by the quantity hedged. If the floating price exceeds the fixed
price, the Company is required to pay the counterparty the difference. The
Company would be required to pay the counterparty the difference between such
prices regardless of whether the Company's production was sufficient to cover
the quantities specified in the hedge. In addition, the index used to calculate
the floating price in a hedge is frequently not the same as the prices actually
received for the production hedged. The difference (referred to as basis
differential) may be material, and may reduce the benefit or increase the
detriment caused by a particular hedge. There is not an established pricing
index for hedges of California heavy crude oil production, and the cash market
for heavy oil production in California tends to vary widely from index prices
typically used in oil hedges. Consequently, hedging California heavy crude oil
is particularly subject to the risks associated with volatile basis
differentials.
Competition; Markets for Production
The Company operates in the highly competitive areas of oil and gas
exploration, exploitation, development and production. The availability of
funds and information relating to a property, the standards established by the
Company for the minimum projected return on investment, the availability of
alternate fuel sources and the intermediate transportation of gas are factors
which affect the Company's ability to compete in the marketplace. The Company's
competitors include major integrated oil companies and a substantial number of
independent energy companies, many of which possess greater financial and other
resources than the Company.
The Company's heavy crude oil production in California requires special
treatment available only from a limited number of refineries. Substantial
damage to such a refinery or closures or reduction in capacity due to financial
or other factors could adversely affect the market for the Company's heavy crude
oil production.
Environmental and Other Regulation
The Company's operations are subject to numerous laws and regulations
governing the discharge of materials into the environment or otherwise relating
to environmental protection. These laws and regulations require the acquisition
of a permit before drilling commences, restrict the types, quantities and
concentration of various substances that can be released into the environment in
connection with drilling and production activities, limit or prohibit drilling
activities on certain lands lying within wilderness, wetlands and other
protected areas, and impose substantial liabilities for pollution which might
result from the Company's operations. Moreover, the recent trend toward
stricter standards in environmental legislation and regulation is likely to
continue. For instance, legislation has been proposed in Congress from time to
time that would reclassify certain oil and gas exploration and production wastes
as "hazardous wastes" which would make the reclassified wastes subject to much
more stringent handling, disposal and cleanup requirements. If such legislation
were to be enacted, it could have a significant impact on the operating costs of
the Company, as well as the oil and gas industry in general. Initiatives to
further regulate the disposal of oil and gas wastes are also pending in certain
states, and these various initiatives could have a similar impact on the
Company. The Company could incur substantial costs to comply with environmental
laws and regulations.
The OPA imposes a variety of regulations on "responsible parties" related
to the prevention of oil spills. The implementation of new, or the modification
of existing, environmental laws or regulations, including regulations
promulgated pursuant to the OPA, could have a material adverse impact on the
Company.
19
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
The Company has been named as a defendant in the lawsuit Gloria Garcia
Lopez and Husband, Hector S. Lopez, Individually, and as successors to Galo Land
& Cattle Company v. Mobil Producing Texas & New Mexico, et al. currently pending
in the 79th Judicial District Court of Brooks County, Texas (the "Lopez Case").
The plaintiffs allege: i) underpayment of royalties and claim damages, on a
gross basis against all working interest owners, of $27.7 million plus $26.2
million in interest for the period from 1985 to date; ii) that their production
was improperly commingled with gas produced from an adjoining lease, resulting
in damages, including interest, of $40.8 million, on a gross basis; (iii) $59.7
million (gross) for alleged failure to develop and $20.0 million (gross) for
interest in the alleged failure to develop; and iv) numerous other claims,
including claims for drainage, breach of the implied covenant to reasonably
develop the lease, conversion, fraud, emotional distress, lease termination and
exemplary damages, that may result in unspecified damages. Nuevo's working
interest in these properties is 20%. The Company, along with the other
defendants in this case, denies these allegations and is vigorously contesting
these claims. Management does not believe that the outcome of this matter will
have a material adverse impact on the Company's operating results, financial
condition or liquidity.
The Company has been named as defendant in certain other lawsuits
incidental to its business. Management does not believe that the outcome of such
litigation will have a material adverse impact on the Company's operating
results or financial condition. However, these actions and claims in the
aggregate seek substantial damages against the Company and are subject to the
inherent uncertainties in any litigation. The Company is defending itself
vigorously in all such matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.
20
<PAGE>
NUEVO ENERGY COMPANY
--------------------
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- -------------------------------------------------------------------------
MATTERS
-------
The principal market on which the Company's Common Stock is traded is
the New York Stock Exchange (Symbol: NEV). There were approximately 1,342
stockholders of record and approximately 4,002 additional beneficial owners as
of March 15, 1999. The Company has not paid dividends on its Common Stock and
does not anticipate the payment of cash dividends in the immediate future as it
contemplates the use of cash flows for expansion of its operations. In addition,
certain restrictions contained in the Company's financing arrangements restrict
the payment of dividends (See Management's Discussion and Analysis of Financial
Condition and Results of Operations - Capital Resources and Liquidity and Note 8
to the Notes to Consolidated Financial Statements). The high and low recorded
prices of the Company's Common Stock during 1998 and 1997 are presented in the
following table:
<TABLE>
<CAPTION>
Market Price
------------------------------
High Low
--------- ---------
Quarter Ended:
<S> <C> <C>
March 31, 1998....................................... $ 40.56 $ 30.19
June 30, 1998........................................ $ 37.81 $ 30.25
September 30, 1998................................... $ 32.75 $ 15.50
December 31, 1998.................................... $ 23.50 $ 9.94
March 31, 1997....................................... $ 57.63 $ 38.38
June 30, 1997........................................ $ 45.38 $ 34.38
September 30, 1997................................... $ 52.63 $ 39.94
December 31, 1997.................................... $ 49.13 $ 38.00
</TABLE>
Treasury Stock Repurchases
- --------------------------
In March 1997, the Board of Directors of the Company authorized the open
market repurchase of up to one million shares of outstanding Common Stock during
1997, at times and prices deemed attractive by management. During April 1997,
the Company repurchased 500,000 shares of Common Stock in open market
transactions, at an average purchase price of $38.94 per share, plus 42,491
shares acquired from the cancellation of warrants issued during 1996. In
December 1997, the Board of Directors authorized the open market repurchase of
an additional 500,000 shares of Common Stock during 1998, however, no such
repurchase occurred during 1998.
Put Options
- -----------
In May 1997, the Company sold put options on its Common Stock to a third
party. The options gave the purchaser the right to sell to the Company 500,000
shares of its Common Stock at prices ranging from $40.26 to $41.04 per share
through December 31, 1997. The contract gave the Company the choice of net
cash, net shares, or physical settlement. Any repurchased shares would have
been treated as Treasury Stock. The Company generated $1.6 million in option
premium from these transactions, which is reflected in additional paid-in
capital on the balance sheet. As of December 31, 1997, 400,000 of these options
had expired with the Company's share prices above the strike price, and 100,000
of these options were settled on December 31, 1997, for a nominal amount of net
cash.
Shareholder Rights Plan
- -----------------------
In March 1997, the Company adopted a Shareholder Rights Plan to protect
the Company's shareholders from coercive or unfair takeover tactics. Under the
Shareholder Rights Plan, each outstanding share and each share of subsequently
issued Common Stock has attached to it one Right. Generally, in the event a
person or group
21
<PAGE>
NUEVO ENERGY COMPANY
--------------------
("Acquiring Person") acquires or announces an intention to acquire beneficial
ownership of 15% or more of the outstanding shares of Common Stock without the
prior consent of the Company, or the Company is acquired in a merger or other
business combination, or 50% or more of its assets or earning power is sold,
each holder of a Right will have the right to receive, upon exercise of the
Right, that number of shares of common stock of the acquiring company, which at
the time of such transaction will have a market price of two times the exercise
price of the Right. The Company may redeem the Right for $.01 at any time before
a person or group becomes an Acquiring Person without prior approval. The Rights
will expire on March 21, 2007, subject to earlier redemption by the Board of
Directors of the Company.
Executive Compensation Plan
- ---------------------------
During July 1997, the Board of Directors of the Company adopted a plan
to encourage senior executives to personally invest in the shares of the
Company, and to regularly review executives' ownership versus targeted ownership
objectives. These incentives include a deferred compensation plan (the "Plan")
that gives key executives the ability to defer all or a portion of their
salaries and bonuses and invest in Common Stock of the Company at a discount to
market prices or make other investments at the employee's discretion. Stock
acquired at a discount will be held in a benefit trust and restricted for a two-
year period, and the Plan does not permit investment in a diversified equity
portfolio until and unless targeted levels of Common Stock ownership in the
Company are achieved and maintained. Target levels of ownership are based on
multiples of base salary and are administered by the Compensation Committee of
the Board of Directors. The Plan applies to all executives at a level of Vice-
President and above.
22
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The following selected financial data with respect to the Company should
be read in conjunction with the consolidated financial statements and
supplementary information included in Item 8 (amounts in thousands, except per
share data).
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
------------------------------------------------------------------
1998 1997/(4)/ 1996/(4)/ 1995/(4)/ 1994/(4)/
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Oil and gas revenues.............. $240,010 $331,973 $279,859 $102,455 $ 79,585
Gas plant revenues................ 2,665 14,826 34,802 27,183 28,798
Pipeline and other revenues....... 2,700 5,772 6,774 7,222 10,309
Gain on sale of assets, net....... 5,768 1,372 6,008 -- 2,402
Interest and other income......... 1,560 3,335 1,614 1,106 245
-------- -------- -------- -------- --------
Total revenues.................. 252,703 357,278 329,057 137,966 121,339
Total costs and expenses before
extraordinary item (including
income taxes and minority
interest)/(3)/.................. 346,975 367,954 294,779 133,834 125,765
Extraordinary loss on early
extinguishment of debt.......... -- 3,024 -- -- --
-------- -------- -------- -------- --------
Net (loss) income/(1) (5)/........ $(94,272) $(13,700) $ 34,278 $ 4,132 $ (4,426)
======== ======== ======== ======== ========
Net (loss) income attributable to
Common stockholders............. $(94,272) $(13,700) $ 33,339 $ 2,660 $ (6,176)
(Loss) earnings per Common
Share - Basic/(2)/.............. $ (4.76) $ (0.69) $ 1.99 $ 0.24 $ (0.57)
(Loss) earnings per Common
share - Diluted/(2)/............ $ (4.76) $ (0.69) $ 1.84 $ 0.23 $ (0.57)
Total Assets...................... $817,685 $804,286 $817,643 $262,359 $272,444
Long-term debt, net of current
maturities...................... $419,150 $305,940 $287,038 $113,032 $118,219
</TABLE>
(1) No Common Stock dividends have been declared since the formation of the
Company. See Note 8 to the Notes to Consolidated Financial Statements
concerning restrictions on the payment of Common Stock dividends.
(2) Retroactively restated to reflect the adoption of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share". (See Note 2 to the
Notes to Consolidated Financial Statements).
(3) Results for the years ended 1998 and 1997 include impairments of oil and
gas properties of $68.9 million and $30.0 million, respectively, and (revision
to) provision for impairment on assets held for sale of ($3.7) million and $23.9
million, respectively.
(4) Retroactively restated to reflect the Company's January 1, 1998 conversion
from the full cost method to the successful efforts method of accounting for its
investments in oil and gas properties. (See Note 2 to the Notes to Consolidated
Financial Statements).
(5) The year ended December 31, 1996, includes activity of the California
Properties from the date of acquisition (April 9, 1996).
23
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
Overview
- --------
Nuevo, headquartered in Houston, Texas, is primarily engaged in the
exploration for, and the acquisition, exploitation, development and production
of crude oil and natural gas. The Company's strategy to differentiate itself
versus its numerous peer group competitors and to generate long term shareholder
value consists of: (i) a unique management philosophy that frames all important
decisions in terms of anticipated impact on per share (rather than absolute)
growth of reserves, production, cash flow and earnings; (ii) a contrarian
investment and financing orientation; (iii) the outsourcing of non-strategic
functions; (iv) the alignment of employee compensation structures with
shareholder objectives; and (v) a commitment to an exemplary governance
structure which reinforces the overarching view of Nuevo as merely a conduit for
shareholders to achieve superior long term capital gains.
Nuevo is an independent energy company. Since its inception in 1990, Nuevo
has grown and diversified its operations through a series of contrarian
acquisitions of oil and gas properties and the subsequent exploitation and
development of these properties. The Company has complemented these efforts
with an active exploration program, which provides exposure to high-potential
prospects. The Company's primary strengths are its track record of rapid
reserve growth on a per share basis, achieved at extremely low cost relative to
industry averages; its large inventory of exploitation and exploration projects
in its core areas of operation, which the Company believes will support future
growth in reserves and production per share; its demonstrated ability to
significantly reduce operating costs from levels experienced by prior operators;
its ability to identify and acquire, at attractive prices, producing properties
which have significant potential for further exploration, exploitation and
development; and a capital structure supportive of a growing investment program
and future acquisitions.
The Company's results of operations have been significantly affected by
fluctuations in oil and gas prices. The Company's success in acquiring oil and
gas properties and its ability to maintain or increase production through its
exploitation activities have also significantly affected the Company's results.
The following table reflects the Company's oil and gas production and its
average oil and gas prices (inclusive of crude oil and natural gas price swaps),
by oil and gas segment and in total, for the periods presented:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
PRODUCTION: 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Oil (MBBLS):
East..................................... 838 878 1,375
West..................................... 16,284 14,694 10,256
Foreign.................................. 1,461 1,555 1,420
------- ------- -------
Total.................................... 18,583 17,127 13,051
======= ======= =======
Natural gas (MMCF):
East..................................... 18,816 20,831 22,232
West..................................... 13,705 14,794 12,543
------- ------- -------
Total.................................... 32,521 35,625 34,775
======= ======= =======
Natural gas liquids (MBBLS):
East..................................... 67 76 68
West..................................... 156 206 225
------- ------- -------
Total.................................... 223 282 293
======= ======= =======
</TABLE>
24
<PAGE>
NUEVO ENERGY COMPANY
--------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
AVERAGE SALES PRICE: 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Oil (per barrel):
East..................................... $ 12.63 $ 18.95 $ 20.39
West..................................... $ 8.98 $ 14.73 $ 15.53
Foreign.................................. $ 10.82 $ 14.66 $ 14.56
Total.................................... $ 9.25 $ 14.86 $ 15.84
Natural gas (per MCF):
East..................................... $ 1.80 $ 2.08 $ 2.13
West..................................... $ 2.21 $ 2.06 $ 1.79
Total.................................... $ 2.00 $ 2.06 $ 2.08
AVERAGE UNIT PRODUCTION COST PER EQUIVALENT
BARREL (6 MCF EQUAL 1 BARREL):
East..................................... $ 2.88 $ 2.71 $ 2.73
West..................................... $ 5.94 $ 5.53 $ 5.41
Foreign.................................. $ 8.14 $ 7.70 $ 7.71
Total.................................... $ 5.56 $ 5.14 $ 4.86
</TABLE>
Effective January 1, 1998, the Company elected to convert from the full
cost method to the successful efforts method of accounting for its investments
in oil and gas properties. The Company believes that the successful efforts
method of accounting is preferable, as it will provide a fair presentation of
the Company's development activities in its core California business and the
drilling success of its selective exploration activities, and reflect an
impairment in the carrying value of its oil and gas properties only when there
has been a permanent decline in their fair value. Accordingly, all prior year
financial statements have been restated to conform to successful efforts
accounting. The effect, after tax, of the change in accounting method as of
December 31, 1997, was a reduction to retained earnings of $64.1 million,
primarily attributable to a decrease in net property and equipment and the
deferred tax liability of $99.2 million and $38.0 million, respectively. The
change in accounting method resulted in a decrease in net income of $32.5
million ($1.64 per share - basic and diluted) and $0.4 million ($0.02 per
share - basic and diluted) during 1997 and 1996, respectively. Had the Company
not converted to the successful efforts method, the results of operations for
the three months ended March 31, 1998, would have included a pre-tax full cost
ceiling write-down of approximately $250.0 million.
Under the successful efforts method of accounting, oil and gas lease
acquisition costs and intangible drilling costs associated with exploration
efforts that result in the discovery of proved reserves and costs associated
with development drilling, whether or not successful, are capitalized when
incurred. When a proved property is sold, ceases to produce or is abandoned, a
gain or loss is recognized. When an entire interest in an unproved property is
sold for cash or cash equivalent, a gain or loss is recognized, taking into
consideration any recorded impairment. When a partial interest in an unproved
property is sold, the amount received is treated as a reduction of the cost of
the interest retained.
Unproved leasehold costs are capitalized, pending the results of
exploration efforts. Significant unproved leasehold costs are reviewed
periodically and a loss is recognized to the extent, if any, that the cost of
the property has been impaired. An impairment of unproved leasehold costs of
$8.1 million was recognized as of December 31, 1998. Exploration costs,
including geological and geophysical expenses, exploratory dry holes and delay
rentals, are charged to expense as incurred.
Costs of productive wells, development dry holes and productive leases are
capitalized and depleted on a unit-of-production basis over the life of the
remaining proved reserves. Capitalized drilling costs are depleted on a unit-
of-production basis over the life of the remaining proved developed reserves.
Estimated costs (net of salvage value) of dismantlement, abandonment and site
remediation are computed by the Company's independent reserve engineers and are
included when calculating depreciation and depletion using the unit-of-
production method.
25
<PAGE>
NUEVO ENERGY COMPANY
--------------------
The Company reviews proved oil and gas properties on a depletable unit
basis whenever events or circumstances indicate that the carrying value of those
assets may not be recoverable. For each depletable unit determined to be
impaired, an impairment loss equal to the difference between the carrying value
and the fair value of the depletable unit is recognized. Fair value, on a
depletable unit basis, is estimated to be the present value of the undiscounted
expected future net revenues computed by application of estimated future oil and
gas prices, production and expenses, as determined by management, to estimated
future production of oil and gas reserves over the economic life of the
reserves. If the carrying value exceeds the undiscounted future net revenues, an
impairment is recognized equal to the difference between the carrying value and
the discounted estimated future net revenues of that depletable unit. The
Company considers probable reserves and escalated commodity pricing in its
estimate of future net revenues. Fair value impairments of oil and gas
properties of $60.8 million and $30.0 million were recognized as of December 31,
1998 and 1997, respectively; no such impairment was recognized during 1996.
Interest costs associated with non-producing leases and exploration and
development projects are capitalized only for the period that activities are in
progress to bring these projects to their intended use. The capitalization
rates are based on the Company's weighted average cost of funds used to finance
expenditures.
Any reference to oil and gas reserve information in the Notes to
Consolidated Financial Statements is unaudited.
Financing Activities
- --------------------
The Company had $422.3 million in outstanding indebtedness at December 31,
1998, which is scheduled to mature as follows (amounts in thousands):
<TABLE>
<S> <C>
1999............................ $ 3,152
2000............................ 750
2001............................ --
2002............................ --
2003............................ 158,400
Thereafter...................... 260,000
---------
$ 422,302
=========
</TABLE>
In June 1998, the Company issued $100.0 million 8 7/8% Senior Subordinated
Notes due June 1, 2008 (the "8 7/8% Notes"). Interest on the 8 7/8% Notes
accrues at the rate of 8 7/8% per annum and is payable semi-annually in arrears
on June 1 and December 1. The 8 7/8% Notes are redeemable, in whole or in part,
at the option of the Company, on or after June 1, 2003, under certain
conditions. The Company is not required to make mandatory redemption or sinking
fund payments with respect to the 8 7/8% Notes. The indenture contains
covenants that, among other things, limit the Company's ability to incur
additional indebtedness, limits restricted payments, limit issuances and sales
of capital stock by restricted subsidiaries, limit dispositions of proceeds of
asset sales, limit dividends and other payment restrictions affecting restricted
subsidiaries, and restricts mergers, consolidations or sales of assets. The 8
7/8% Notes are guaranteed by certain of Nuevo's subsidiaries. The 8 7/8% Notes
are unsecured general obligations of the Company, and are subordinated in right
of payment to all existing and future senior indebtedness of the Company. In
the event of a defined change in control, the Company will be required to make
an offer to repurchase all outstanding 8 7/8% Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest to the date of redemption.
Nuevo's Amended and Restated Credit Agreement, (the "Agreement"), dated as
of February 13, 1998, provides for unsecured revolving credit availability of up
to $400 million (subject to a periodic borrowing base determination) from a bank
group led by NationsBank of Texas, N.A. and Morgan Guaranty Trust Company of New
York, until its expiration on April 1, 2003.
The borrowing base determination establishes the maximum borrowings that
may be outstanding under the credit facility, and is determined by a two-thirds
vote of the banks (three-fourths in the event of an increase in the borrowing
base), each of which bases its judgement on (i) the present value of the
Company's oil and gas reserves based on its own assumptions regarding future
prices, production, costs, risk factors and discount rates, and (ii) on
projected cash flow coverage ratios calculated under varying scenarios. If
amounts outstanding under the credit facility exceed the borrowing base, as
redetermined from time to time, the Company would be required to repay such
excess over a defined period of time.
26
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Effective January 6, 1999 the borrowing base was reduced from $380 million
to $200 million, reflecting the sale on that date of the Company's East Texas
natural gas reserves, and also reflecting a significant decline in projected oil
prices since the previous determination.
Amounts outstanding under the credit facility bear interest at a rate equal
to the London Interbank Offered Rate ("LIBOR") plus an amount which increases as
borrowing base utilization increases. At December 31, 1998 the Company's
interest rate under the credit facility was LIBOR plus .375%, or 5.94%.
Outstandings under this facility at year end were $158.4 million, and at January
6, 1999 were reduced by $82.6 million from a portion of the proceeds of the East
Texas sale.
The Credit Agreement has customary covenants including, but not limited to,
covenants with respect to to the following matters: (i) limitations on certain
restricted payments and investments; (ii) limitations on guarantees and
indebtedness; (iii) limitations on prepayments of subordinated and certain other
indebtedness; (iv) limitations on mergers and consolidations, on certain types
of acquisitions and on the issuance of certain securities by subsidiaries; (v)
limitations on liens; (vi) limitations on sales of properties; (vii) limitations
on transactions with affiliates; (viii) limitations on derivative contracts; and
(ix) limitations on debt in subsidiaries. The Company is also required to
maintain certain financial ratios and conditions, including without limitation
an EBITDA (earnings before interest, taxes, depreciation, depletion,
amortization and exploration expenses) to fixed charge coverage ratio, a net
worth requirement, and a funded debt to capitalization ratio. As a result of
reduced revenues due to falling oil prices, the Company has obtained amendments
for relief from the EBITDA fixed charge coverage test through March 31, 2000.
The Company is in compliance with this test and all other covenants of the
Agreement at December 31, 1998. The Company is currently in negotiation with its
banks regarding other terms of the Agreement, including pricing, security, the
frequency of borrowing base determinations and certain other covenants.
Management believes the outcome of such negotiations will result, over time, in
improved borrowing base availability and greater certainty of the commitment of
this facility during difficult periods in the oil and gas industry.
On July 24, 1992, the Company closed the sale of $75.0 million aggregate
principal amount of 12 1/2% Senior Subordinated Notes (the "Notes") due June 15,
2002. In June 1997, the Company redeemed the Notes at a total cost of $78.0
million, representing $75.0 million face value of the debt plus a 4% premium of
$3.0 million. In addition to the premium, the Company wrote off approximately
$2.0 million of unamortized discount and deferred financing costs. The
redemption resulted in an extraordinary loss on early extinguishment of debt of
$3.0 million, net of the related tax benefit of $2.0 million. The Company used
proceeds from the Credit Facility to fund the redemption.
On December 23, 1996, the Company and its wholly-owned subsidiary, Nuevo
Financing I, a statutory business trust formed under the laws of the state of
Delaware, (the "Trust"), closed the offering of 2,300,000 Term Convertible
Securities, Series A, ("TECONS") on behalf of the Trust. The price to the
public of the TECONS was $50.00 per TECONS. Distributions on the TECONS began
to accumulate from December 23, 1996, and are payable quarterly on March 15,
June 15, September 15, and December 15, at an annual rate of $2.875 per TECONS.
Each TECONS is convertible at any time prior to the close of business on
December 15, 2026, at the option of the holder, into shares of Common Stock at
the rate of .8421 shares of Common Stock for each TECONS, subject to adjustment.
The sole asset of the Trust as the obligor on the TECONS is $115.0 million
aggregate principal amount of 5.75% Convertible Subordinated Debentures of the
Company due December 15, 2026.
Also on December 23, 1996, the Company and United Investors Management
Company ("United"), and The 1818 Fund, L.P. ("The 1818 Fund"), closed the
offering of 2,138,605 shares of Common Stock (the "Shares"). United sold
1,275,000 Shares and The 1818 Fund sold 863,605 Shares. The price to the public
of the Shares was $47.50 per share. All of the Shares sold by United were
outstanding and 112 of the Shares sold by The 1818 Fund were outstanding prior
to the offering. The remaining 863,493 of the Shares sold by The 1818 Fund were
issued upon conversion of the remaining 11,220 shares of 7% Cumulative
Convertible Preferred Stock, ("7% Preferred Stock") of the Company. As a result
of this conversion by The 1818 Fund of its shares of 7% Preferred Stock, there
are no longer any shares of the 7% Preferred Stock outstanding. The Company did
not receive any proceeds from the sale of the Shares. (See Note 8 to the Notes
to Consolidated Financial Statements).
In April 1996, the Company financed the acquisition of the Unocal
Properties with the proceeds from the sale to the public of 5,109,200 shares of
Common Stock (the "Common Stock Offering") and a principal amount of $160.0
million, 9 1/2% Senior Subordinated Notes due 2006 of the Company, and by
borrowings under the Credit
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NUEVO ENERGY COMPANY
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Facility. Such proceeds were also used to retire the borrowings under an
existing credit facility in the amount of $27.0 million. The purchase of the
Point Pedernales Properties was financed by the issuance to Torch of 1,275,000
shares of the Company's Common Stock, valued at the public offering price of
$28.00 per share in the Common Stock Offering. In connection with the
acquisition of the Unocal Properties, the Company also entered into a bridge
commitment with a bank group led by NationsBank of Texas, N.A. The facility was
not drawn down; however, $1.7 million in fees associated with the bridge
commitment were expensed in the second quarter of 1996, when the commitment
expired.
In February 1995, in connection with the purchase of the stock of the Amoco
Congo Petroleum Company, the Company negotiated with the Overseas Private
Investment Corporation ("OPIC") and an agent bank for a non-recourse credit
facility in the amount of $25.0 million. The initial drawdown on the facility
was $8.8 million to finance a portion of the purchase price. The remaining
funds under the credit facility will be used to finance 75% of a development
drilling program in the Republic of Congo, West Africa ("Congo"). A portion of
the remaining outstanding commitment, $6.0 million, was drawn down in January
1996 to fund the first phase of the development drilling program in the Congo.
The interest rate associated with such credit facility is LIBOR plus 20 basis
points and a guaranty fee of 2.75% of the outstanding loan balance, all of which
is payable quarterly. At December 31, 1998, the interest rate was 5.55%, plus
the 2.75% guaranty fee. The loan agreement requires a sixteen-quarter repayment
period.
In April 1994, the Company entered into a four-year commitment for a
$30.0 million volumetric production payment for the development of certain
infill drilling locations in the Oak Hill field. The proceeds from this
agreement financed the capital expenditures for well drilling, fracturing and
completing and for surface facility installations. Each advance under the
production payment obligated the Company to deliver a fixed volume of natural
gas, based on prevailing market conditions at the time of the advance. During
1994, the company received $18.4 million covering expenditures on nineteen
wells; no additional proceeds were ever received under this commitment. As of
December 31, 1998, the Company had fulfilled its obligation under this
commitment. (See Note 5 to the Notes to Consolidated Financial Statements).
At present, there is no plan to pay dividends on Common Stock. The Company
maintains a policy of reinvesting its discretionary cash flows for the expansion
of its business and operations.
Other Matters
- -------------
Gas Balancing Positions
It is customary in the industry for various working interest partners to
sell more or less than their entitled share of natural gas. The settlement or
disposition of gas balancing positions is not anticipated to adversely impact
the financial condition of the Company in the near term.
Year 2000
Nuevo, like all other enterprises that utilize computer technology, faces a
threat of business disruption from the Year 2000 Issue. The Year 2000 Issue
("Y2K") refers to the inability of computer and other information technology
systems to properly process date and time information, stemming from the
outdated programming practice of using two digits rather than four to represent
the year in a date. The consequence of Y2K is that computer and embedded
processing systems are at risk of malfunctioning, particularly during the
transition from 1999 to 2000.
The effects of Y2K are exacerbated by the interdependence of computer and
telecommunication systems throughout the world. This interdependence also
exists among Nuevo and its vendors, customers and business partners, as well as
with regulators in the United States and host governments abroad.
The risks associated with Y2K fall into three general areas: i) financial
and administrative systems, ii) embedded systems in field process control units,
and iii) third party exposures. Nuevo intends to address each of these three
areas through a readiness process that seeks to:
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NUEVO ENERGY COMPANY
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a) increase the awareness of the issue among all employees;
b) identify areas of potential risk;
c) assess the relative impact of these risks and the Company's ability
to manage them;
d) remediate high priority risks wherever possible; and
e) engage in contingency planning for identifiable risks that cannot be
remediated.
The Company's Board of Directors has assigned the oversight of Y2K to the
Audit Committee of the Board. From the Audit Committee, all responsibility for
the readiness effort runs through the Chief Executive Officer ("CEO") of the
Company, and from the CEO through the Chief Financial Officer (for financial and
administrative systems) and the Vice President of Exploitation (for embedded
systems in field process control units). As a matter of routine, management of
the Company updates the Audit Committee, and the entire Board, of its efforts to
increase Nuevo's readiness for Y2K.
The Company and Torch have jointly developed a plan to address Nuevo's
risks associated with Y2K. Torch provides the financial and administrative
systems for Nuevo and operates a substantial portion of its properties. (As
used in the remainder of this Y2K discussion, references to the Company may
include the Torch employees assisting the Company in its Y2K readiness program).
As of March 1, 1999, the Company is in various stages of implementation of the
plan, as summarized below:
Financial and Administrative Systems
------------------------------------
1. Awareness. Nuevo has conducted numerous Y2K informational programs
with its employees and the employees of Torch who provide input to or
utilize the output of the financial and administrative systems of the
Company. Employees at all levels of the organization have been asked
to participate in the identification of potential Y2K risks which
might otherwise go unnoticed by higher level employees and officers
of Nuevo, and as a result, awareness of the issue is considered high.
2. Risk Identification. Nuevo's most significant financial and
administrative systems exposure is the Y2K status of the accounting
and land administration software package that Torch uses to collect
and manage data for internal management decision making and for
external financial reporting purposes. Other concerns include network
hardware and software, desktop computing hardware and software,
telecommunications and office space readiness.
3. Risk Assessment. The failure to identify and correct a material Y2K
problem could result in inaccurate or untimely financial information
for management decision-making or financial reporting purposes. The
severity of any such problems will impact the time period during
which the quality of management information comes under question. At
this time, management is confident that any Y2K disruptions
associated with its or Torch's financial and administrative systems
will not have a material effect on the Company.
4. Remediation. Since April 1998, Torch has been working on an upgrade
to its accounting software, which is expected to achieve full Y2K
compliance in the first half of 1999. In addition, Torch has
inventoried all network and desktop software applications used by
Nuevo and believes them to be generally Y2K compliant. The costs of
all such risk assessments and remediation are borne by Torch under
the terms of Nuevo's outsourcing agreements.
5. Contingency Planning. Notwithstanding the previously described
efforts, should there be significant unanticipated disruptions in
Nuevo's financial and administrative systems, a number of accounting
processes that are currently automated will need to be performed
manually. Nuevo is currently considering its options with respect to
contingency arrangements for temporary staffing to accommodate such
situations.
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NUEVO ENERGY COMPANY
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Embedded Systems
----------------
1. Awareness. The Company's Y2K program has involved all levels of
management of field assets from production foremen and higher.
Employees at all levels of the organization have been asked to
participate in the identification of potential Y2K risks, which might
otherwise go unnoticed by higher level employees and officers of
Nuevo, and as a result, awareness of the issue is considered high.
2. Risk Identification. Nuevo has completed a comprehensive inventory of
embedded computer components within the process control systems of
its operated oil and natural gas fields and processing plants. Nuevo
identified approximately 1,900 embedded components in these
computerized systems. Nuevo researched the manufacturer and/or
installer of each component to determine the anticipated compliance
or non-compliance of the component. To date, the vast majority of
embedded components so researched have been deemed either date
insensitive or Y2K compliant. The Y2K compliance status is unknown
for approximately 24% of the embedded components identified, and
research is continuing on these components. However, the complexity
of embedded systems is such that a small minority of non-compliant
components, even a single non-compliant component, can corrupt an
entire system.
3. Risk Assessment. The failure to identify and correct a material Y2K
problem could result in outcomes ranging from errors in data
reporting, to curtailments or shutdowns in production, to
environmental or safety incidents. Now that the component-level
evaluation is substantially complete, a broader evaluation at the
system-level has commenced. Nuevo anticipates that the system-level
evaluation will be completed by the end of the second quarter of
1999. To assist in this effort, Nuevo and Torch Operating Company
have retained consultants who are knowledgeable and experienced in
the assessment of Y2K issues impacting field operations. The effort
to completely assess the situation with embedded systems is dynamic
and will likely not be fully completed by December 31, 1999. Costs
incurred through December 31, 1998, were not material to Nuevo's
results of operations, and the cost of the assessment is not expected
to be material to Nuevo's future financial results. However, at this
time, management is unable to express any degree of confidence that
there will not be material production disruptions associated with Y2K
non-compliance. Depending on the magnitude of any such disruptions
and the time required to correct them, such failures could materially
and adversely impact the Company's results of operations, liquidity
and financial condition.
4. Remediation. The Company has prioritized the remediation of embedded
components and systems that are either known to be Y2K non-compliant
or that have higher risk of Y2K failures. Nuevo intends to give first
priority to the remediation of any situation with potential impacts
to human health and safety or the environment, and will further
prioritize remediation targets by the anticipated financial impact of
any such situations on the Company. Nuevo intends to test, upgrade
and re-test those embedded components and systems in field process
control units deemed to pose the greatest risk. It is important to
note that in some circumstances, the procedures that are used to test
embedded components for Y2K compliance themselves pose a risk of
damaging the component or corrupting the system, thereby accelerating
the consequences of Y2K failures. Accordingly, in some situations, it
may be deemed the most prudent decision not to test certain embedded
components and systems. The amount of capital that Nuevo budgeted for
these anticipated costs to remediate or replace embedded components
and systems that pose the greatest risk of Y2K non-compliance, is
approximately $1.6 million and is not considered to be material to
the liquidity or financial condition of the Company. However, it is
expected that some additional risks may be identified during 1999, so
there can be no assurances that actual capital spending on Y2K
remediation will not significantly exceed any amounts originally
budgeted.
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NUEVO ENERGY COMPANY
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5. Contingency Planning. Should material production disruptions occur as
a result of Y2K failures in field operations, Nuevo's operating cash
flow will be impacted. This contingency is being factored into
deliberations on capital budgeting, liquidity and capital adequacy.
It is management's intention to maintain adequate financial
flexibility to sustain the Company during any such period of cash
flow disruption.
Third Party Exposures
---------------------
1. Awareness. Nuevo has conducted numerous Y2K informational programs
with its employees and the employees of Torch who have significant
interaction with outside vendors, customers, and business partners of
the Company. All such employees have been asked to participate in the
identification of potential third party Y2K risks, which might
otherwise go unnoticed by higher level employees and officers of
Nuevo, and as a result, awareness of the issue is considered high.
2. Risk Identification. Nuevo's most significant third party Y2K
exposure is to the refinery customers who purchase its oil
production, on the customer side, and from electricity and other
utility companies supplying field operations, on the supplier side.
Other significant concerns include the readiness of third party crude
oil and natural gas pipeline facilities involved in the
transportation of Nuevo's products, the integrity of global
telecommunication systems, the readiness of commercial banks to
execute electronic fund transfers, and of the ability of the
financial community to maintain an orderly market in Nuevo's
securities.
3. Risk Assessment. Refineries are extremely complex operations
containing hundreds or thousands of computerized processes. The
failure on the part of a Nuevo refining customer to identify and
correct a material Y2K problem could result in material disruptions
in the sale of Nuevo's production to that refinery. In many cases,
affected Nuevo production may not be easily shifted to other markets,
and the result can range from reduced realizations on crude oil
produced, curtailed production or even shut-in production. Failures
of pipelines that connect Nuevo's production to markets may have
similar effects. Although the Company has made inquiries to key third
parties on the subject of Y2K readiness and will continue to do so,
it has no ability to require responses to such inquiries or to
independently verify their accuracy. Accordingly, management is
unable to express any degree of confidence that there will not be
material production disruptions associated with third party Y2K non-
compliance. Depending on the magnitude of any such disruptions and
the time required to correct them, such failures could materially and
adversely impact the Company's results of operations, liquidity and
financial condition.
4. Remediation. Where Nuevo perceives significant risk of Y2K non-
compliance that may have a material impact on the Company, and where
the relationship between the Company and a vendor, customer or
business partner permits, Nuevo may pursue joint testing during 1999.
Joint testing would occur following upgrades and other remediation to
hardware, software and communication links, as applicable, with the
intent of determining that the remediated system being tested will
perform as expected on December 31, 1999.
5. Contingency Planning. Should material production disruptions occur as
a result of Y2K failures of third parties, Nuevo's operating cash
flow will be impacted. This contingency is being factored into
deliberations on capital budgeting, liquidity and capital adequacy.
It is management's intention to maintain adequate financial
flexibility to sustain the Company during any such period of cash
flow disruption.
Results of Operations
- ---------------------
Revenues
The Company has experienced significant oil and gas revenue volatility in
recent years. Extremely low oil prices are primarily responsible for the
decreased revenues in 1998, while the Company's acquisitions of producing
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NUEVO ENERGY COMPANY
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properties and development drilling programs are primarily responsible for the
increased revenues during 1997 and 1996. During this three year period, the
volatility of oil and gas prices directly impacted revenues. To reduce its
exposure to changes in oil and gas prices, the Company periodically utilizes
derivative financial instruments. As a result of such hedging transactions, oil
and gas revenues were increased by $0.6 million in 1998, and were reduced by
$6.0 million and $2.5 million in 1997 and 1996, respectively.
Oil and gas revenues for 1998 of $240.0 million were 28% lower than 1997
oil and gas revenues of $332.0 million, primarily due to a 38% decrease in
average realized oil prices from $14.86 per barrel in 1997 to $9.25 per barrel
in 1998. Also contributing to this decline in oil and gas revenues were
decreases in natural gas production and realized gas prices. The Company's gas
production decreased 9% from 35.6 billion cubic feet ("BCF") in 1997 to 32.5 BCF
in 1998. Average realized gas prices decreased 3% from $2.06 per thousand cubic
feet ("MCF") in 1997 to $2.00 per MCF in 1998. The decline in oil and gas
revenues was partially offset by a 9% increase in the Company's oil production
from 17,127 MBBLS in 1997 to 18,583 MBBLS in 1998.
East: 1998 oil and gas revenues for the Company's eastern oil and gas
operations decreased 24% from $61.5 million in 1997 to $46.9 million in 1998.
This decrease is primarily due to a 10% decrease in gas production from 20.8 BCF
in 1997 to 18.8 BCF in 1998, as well as a 13% decrease in the average realized
price of gas from $2.08 per MCF in 1997 to $1.80 per MCF in 1998.
West: 1998 oil and gas revenues for the Company's western oil and gas
operations decreased 28% from $247.7 million in 1997 to $177.3 million in 1998.
This decrease is primarily due to a 39% decrease in the average realized price
of oil from $14.73 per BBL in 1997 to $8.98 per BBL in 1998, which was partially
offset by an 11% increase in oil production from 14,694 MBBLS in 1997 to 16,284
MBBLS in 1998.
Foreign: 1998 oil and gas revenues for the Company's foreign oil and gas
operations decreased 31% from $22.8 million in 1997 to $15.8 million in 1998.
This decrease is primarily due to a 26% decrease in the average realized price
of oil from $14.66 per BBL in 1997 to $10.82 per BBL in 1998, as well as a
decrease in oil production of 6% from 1,555 MBBLS in 1997 to 1,461 MBBLS in
1998.
Oil and gas revenues for 1997 of $332.0 million were 19% higher than 1996
oil and gas revenues of $279.9 million, primarily due to 30% increase in oil
production (including natural gas liquids) from 13,344 MBBLS in 1996 to 17,409
MBBLS in 1997. This increase in oil volumes is attributable to the fact that
1997 included an entire year of operating results for the California Properties,
compared to only nine months in 1996 (the California Properties were acquired in
April 1996). The California Properties accounted for 75% of total oil and gas
revenues in 1997. The increase in production was partially offset by the
disruption of Point Pedernales production due to an oil spill in September 1997
and a decrease in the average realized prices of oil and gas in 1997. The
Company's average realized price for oil in 1997 was $14.86 per barrel, a 6%
decrease from $15.84 in 1996. The Company's average realized price for gas in
1997 was $2.06, a 1% decrease from $2.08 in 1996.
East: 1997 oil and gas revenues for the Company's eastern oil and gas
operations decreased 18% from $74.9 million in 1996 to $61.5 million in 1997.
This decrease is due to: (i) a 6% decrease in gas production from 22.2 BCF in
1996 to 20.8 BCF in 1997; (ii) a 36% decrease in oil production from 1,375 MBBLS
in 1996 to 878 MMBBLS in 1997; (iii) a 7% decrease in the average realized price
of oil from $20.39 per BBL in 1996 to $18.95 per BBL in 1997; and (iv) a slight
decrease in the average realized price of gas from $2.13 per MCF in 1996 to
$2.08 per MCF in 1997.
West: 1997 oil and gas revenues for the Company's western oil and gas
operations increased 34% from $184.3 million in 1996 to $247.7 million in 1997.
This increase is primarily due to the fact that 1997 included an entire year of
operating results for the California Properties, compared to only nine months in
1996.
Foreign: 1997 oil and gas revenues for the Company's foreign oil and gas
operations increased 10% from $20.7 million in 1996 to $22.8 million in 1997.
This increase is primarily due to a 10% increase in oil production from 1,420
MBBLS in 1996 to 1,555 MBBLS in 1997.
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NUEVO ENERGY COMPANY
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Gas plant revenues in 1998 of $2.7 million were 82% lower than 1997
revenues of $14.8 million. This decrease is due to the sale of the Company's
interest in the Benedum Plant System in May 1997. Gas plant revenues in 1997 of
$14.8 million were 57% lower than 1996 revenues of $34.8 million due to the sale
of the Company's investment in the Benedum Plant System in May 1997. The
Company recognized a $2.3 million pre-tax gain on the sale.
Pipeline and other revenues in 1998 of $2.7 million were 53% lower than
1997 revenues of $5.8 million. This decrease is primarily due to the sale of
the Company's interests in the Richfield Gas Storage facility in February 1998
and Bright Star Gathering, Inc. in July 1998. Pipeline and other revenues in
1997 of $5.8 million were 15% lower than 1996 revenues of $6.8 million, as a
result of lower throughput during 1997 compared to 1996.
Gain on sale of assets for 1998 was $5.8 million. This gain on sale of
assets includes a $4.1 million gain on the sale of the Company's interest in the
Sansinena field in California in the third quarter of 1998 and a $1.7 million
gain on the sale of the Company's interest in the Coke field in Chapel Hill,
Texas in the first quarter of 1998. The net gain on sale of assets for 1997 was
$1.4 million, which is comprised of: (i) a $1.4 million gain on the sale of
the Company's interest in Second Bayou, Weeks Island, Louisiana; (ii) a $2.3
million gain on the Company's interest in the Benedum Plant System; (iii) a $1.6
million loss on the sale of the Company's interest in the South Timbalier field;
and (iv) a $0.7 million loss on the sale of other non-core properties. The net
gain on sale of assets for 1996 was $6.0 million, which is comprised of a $9.2
million gain on the sale of the Company's interest in the Giddings field and
East Texas Austin Chalk holdings in June 1996, which was offset by a $3.2
million loss on the sale of other non-core properties.
Expenses
Lease operating expenses for 1998 totaled $134.7 million, as compared to
$120.0 million and $93.1 million for 1997 and 1996, respectively. The annual
increases of 12% in 1998 and 29% in 1997 are generally reflective of higher
production and costs associated with the California Properties, which
constituted 77%, 73% and 66% of total production in 1998, 1997 and 1996,
respectively. In 1998, the Company experienced an increase in workovers of
$11.2 million as compared to the same period in 1997, as well as poor weather
conditions in the first quarter of 1998 in California that caused landslides and
power outages, which resulted in $2.3 million of incremental, unusual costs. In
1997, lease operating expenses were incurred for an entire year versus only nine
months in 1996, since the California Properties were acquired in April 1996.
East: 1998 lease operating expenses for the Company's eastern oil and
gas operations decreased slightly from $11.9 million in 1997 to $11.6 million in
1998. 1997 lease operating expenses for the Company's eastern oil and gas
operations decreased 16% from $14.1 million in 1996 to $11.9 million in 1997,
primarily due to a 14% decrease in oil and gas production.
West: 1998 lease operating expenses for the Company's western oil and
gas operations increased 16% from $96.1 million in 1997 to $111.2 million in
1998. This increase is due to an increase in workovers as compared to the same
period in 1997, as well as poor weather conditions in the first quarter of 1998
in California that caused landslides and power outages, which resulted in $2.3
million of incremental, unusual costs. Lease operating expenses for the west
increased 41% from $68.1 million in 1996 to $96.1 million in 1997, since the
Company owned the California Properties for an entire year in 1997 versus only
nine months in 1996 (acquired in April 1996).
Foreign: 1998 lease operating expenses for the Company's foreign oil and
gas operations decreased slightly from $12.0 million in 1997 to $11.9 million in
1998. 1997 lease operating expenses for the Company's foreign oil and gas
operations increased 10% from $10.9 million in 1996 to $12.0 million in 1997 due
to a 10% increase in production.
Gas plant operating expenses of $3.2 million in 1998 decreased 76% from
$13.4 million in 1997, which decreased 54% from $29.3 million in 1996. These
decreases are due to the sale of the Company's investment in the Benedum Plant
System in May 1997.
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NUEVO ENERGY COMPANY
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Pipeline and other operating expenses for 1998 totaled $2.0 million, as
compared to $5.2 million and $6.1 million in 1997 and 1996, respectively. The
61% decrease in 1998 is primarily due to the sale of the Company's interests in
the Richfield Gas Storage facility in February 1998 and Bright Star Gathering,
Inc. in July 1998. The 14% decrease in 1997 is due to lower throughput in 1997
as compared to 1996.
Exploration costs, including geological and geophysical (G&G) costs, dry
hole costs and delay rentals, were $16.6 million, $11.1 million and $4.6 million
for the years ended December 31, 1998, 1997 and 1996, respectively. Exploration
costs for the year ended 1998 included: $13.0 million of dry hole costs ($7.3
million of which relates to exploration activity in Ghana, West Africa), $2.1
million of G&G costs ($1.5 million of which relates to activity in Ghana), $0.9
million of delay rentals and $0.6 million of other exploration costs.
Exploration costs for the year ended 1997 included: $9.3 million of dry hole
costs, $0.7 million of G&G costs, $1.0 million of delay rentals and $0.1 million
of other exploration costs. Exploration costs for the year ended 1996 included:
$3.1 million of dry hole costs, $1.2 million of G&G costs, $0.2 million of delay
rentals and $0.1 million of other exploration costs.
Depreciation, depletion and amortization of $85.0 million in 1998
decreased 17% from $102.2 million in 1997, which increased 35% from $75.7
million in 1996. The decrease in 1998 is primarily due to the year-end 1997
impairment of $30.0 million related to the excess of capitalized costs over
future net revenues, as well as the reclassification of the East Texas natural
gas properties to assets held for sale as of July 1, 1998, at which point the
properties were no longer depleted. The increase in 1997 is attributable to
increased production volumes in 1997, due to the acquisition of the California
Properties in April 1996.
The Company recorded provisions for impairment of oil and gas properties
in 1998 and 1997 in the amounts of $68.9 million and $30.0 million,
respectively. These impairments were recorded as a result of declines in the
price of oil, which caused capitalized costs to be in excess of future net
revenues. No such impairment was recognized during 1996.
In December 1997, the Company recorded a $23.9 million provision for
impairment on assets held for sale, in connection with its plans to dispose of
its non-core gas gathering, pipeline and gas storage assets during 1998,
including all such assets except its California gas plants. (See Note 4 to the
Notes to Consolidated Financial Statements.) A positive revision to this charge
was made in the fourth quarter of 1998 in the amount of $3.7 million to reflect
the estimated current fair market value of the Illini pipeline.
General and administrative expenses totaled $18.6 million, $19.8 million,
and $14.9 million in 1998, 1997 and 1996, respectively. The 6% decrease in 1998
is primarily due to a reduction in employee bonuses in 1998 and a $1.7 million
severance expense incurred in the third quarter of 1997 associated with the
resignation of the Company's President and Chief Executive Officer. These
decreases were offset in part by non-recurring costs incurred in 1998 associated
with outside engineering costs and third-party consulting studies associated
with the re-negotiation of the Company's outsourcing agreements. The 33%
increase in 1997 compared to 1996 is primarily due to additional general and
administrative costs associated with a full year of operations from the
California Properties and the $1.7 million severance payment referred to above.
Outsourcing fees were $9.5 million, $12.0 million, and $10.2 million in
1998, 1997 and 1996, respectively. The 21% decrease in 1998 is primarily due to
decreased operating cash flows (see Note 6 to the Notes to Consolidated
Financial Statements) as a result of low realized oil prices. The 17% increase
in 1997 is primarily due to the fact that there was a full year of operations
from the California Properties in 1997 as compared to 1996.
Interest expense of $32.5 million for 1998 increased 19% from $27.4 million
in 1997, primarily as a result of additional borrowings under the Company's
Credit Facility and the issuance in June 1998 of $100.0 million of 8 7/8% Notes.
Interest expense for 1997 decreased 24% from $36.0 million in 1996, primarily as
a result of the Company redeeming its 12 1/2% Notes, as well as decreased debt
under the Credit Facility due to the repayment of a portion of the debt
outstanding under this facility with the proceeds from the issuance of the
TECONS in late 1996.
34
<PAGE>
NUEVO ENERGY COMPANY
--------------------
In March 1999, the Company discovered that an employee had fraudulently
authorized and diverted for personal use Company funds totaling $5.9 million,
$4.3 million in 1998 and the remainder in 1999, that were intended for
international exploration. Accordingly, the Company has reclassified the amounts
lost in 1998 from exploration costs to other expense. Based on its review of the
facts, management is confident that only one employee was involved in the matter
and that all misappropriated funds have been identified. The Board has engaged a
Certified Fraud Examiner to conduct an in-depth review of the fraudulent
transactions to determine the scope of the fraud, the possibility of recovery of
amounts lost from insurance, from the terminated employee and/or from third
parties, and to make recommendations regarding what, if any, new internal
control procedures should be implemented.
Dividends on the TECONS increased from $0.2 million in 1996 to $6.6 million
in 1998 and 1997. The TECONS pay dividends at a rate of 5.75% and were issued in
December 1996. (See Note 9 to the Notes to Consolidated Financial Statements.)
Income tax benefit of $32.6 million was recognized in 1998, compared to a
benefit of $8.7 million in 1997 and expense of $24.0 million in 1996. The
Company's effective income tax rate was (25.7)%, (38.8)% and 41.3% in 1998, 1997
and 1996, respectively. At December 31, 1998, the Company determined that it
was more likely than not that a portion of the deferred tax assets will not be
realized and the valuation allowance was increased by $16.9 million to a total
valuation allowance of $17.6 million.
Extraordinary Item
In June 1997, the Company recorded an extraordinary loss on the early
extinguishment of its 12 1/2% Notes in the amount of $3.0 million, net of the
related tax benefit of $2.0 million. No extraordinary items were recorded in
1998 or 1996.
Net (Loss) Income
A net loss of $94.3 million was generated in 1998, as compared to a net
loss of $13.7 million in 1997 and net income of $34.3 million in 1996. Net
income after deducting dividends paid on the 7% Preferred Stock was $33.3
million in 1996. There was no 7% Preferred Stock outstanding during 1998 or
1997; as such, no preferred dividends were paid in 1998 or 1997.
Capital Resources and Liquidity
- -------------------------------
Since its inception, the Company has grown and diversified its operations
through a series of opportunistic acquisitions of oil and gas properties and the
subsequent exploitation of these properties. The Company has complemented these
efforts with an active exploration program, which provides exposure to prospects
that have the potential to add substantially to the growth of the Company. The
funding of these activities has historically been provided by operating cash
flows, bank financing, private and public placements of debt and equity
securities, property divestitures and joint ventures with industry participants.
Net cash provided by operating activities was $35.8 million, $165.5 million, and
$126.9 million in 1998, 1997 and 1996, respectively. The Company invested
$157.4 million, $195.1 million and $516.0 million in oil and gas properties in
1998, 1997 and 1996, respectively. Additionally, the Company spent $2.8
million, $1.7 million and $21.1 million on gas plant and other facilities in
1998, 1997 and 1996, respectively. Included in the oil and gas capital
expenditures for 1998 is approximately $81.5 million for development drilling
activity in California. In the Company's 1999 capital budget, approximately
$40.0 million is allocated to exploitation and development projects and
approximately $17.0 million is directed to exploration. Exploitation spending is
anticipated to consist of $28.0 million in California, $5.0 million in the Gulf
Coast region, and $7.0 million internationally. Exploration spending is planned
to be allocated $7.0 million in California, $2.0 million in the Gulf Coast
region, and $8.0 million internationally. The continued low oil and gas price
impact on the Company's cash flows from operations may require management to
revise its capital expenditure plans.
The Company believes its working capital, cash flow from operations and
available financing sources are sufficient to meet its obligations as they
become due and to finance its exploration and development programs. Effective
May 5, 1998, the Borrowing Base on the Company's Credit Facility was increased
from $330.0 million to $380.0 million. The Company had an unused commitment
under the Credit Facility of $221.6 million at December 31, 1998. The Borrowing
Base was redetermined in connection with the Company's sale of its East Texas
natural gas assets. As a result of this sale and the low oil price environment,
the Borrowing Base was reduced to $200.0
35
<PAGE>
NUEVO ENERGY COMPANY
--------------------
million effective January 6, 1999. The Company applied $82.6 million of the
proceeds from the sale of the East Texas assets to the outstanding borrowings
under its Credit Facility (see Note 4 to the Notes to Consolidated Financial
Statements). Subsequent to this paydown, the Company had unused commitment under
the Credit Facility of $124.2 million as of January 6,1999. Current maturities
of long-term debt for the next five years total $162.3 million.
Outlook
- -------
The Company's revenues, cash flows, results of operations and liquidity are
dependent on oil and gas prices, as is its ability to acquire financing for its
operations. Approximately 78% of the Company' production for 1998 was oil. Oil
prices during 1998 and the first part of 1999 have been very low compared to
historical prices. As a result, the Company's revenues, earnings and cash flows
were materially reduced compared to 1997, even though production levels
increased during 1998. In response to low oil prices, the Company reduced its
1998 capital expenditure budget and budgeted for 1999 accordingly, postponing
projects which are not expected to generate an acceptable rate of return at
current low oil prices. The Company may increase its capital budget for 1999 if
prices improve. Although the Company believes that its cash flows from
operations and borrowing capacity will be sufficient to meet the Company's needs
for the foreseeable future, continued low oil prices will continue to adversely
affect the Company.
The Company anticipates investing approximately $57.0 million during 1999
for exploration and exploitation. The Company plans to sell certain of its
surface real estate assets in Orange County, California, during 1999 to help
fund the 1999 capital program. In addition, the Company believes its working
capital, cash provided by operating activities, property divestitures, project
financing resources and the Credit Facility are sufficient to meet these capital
commitments.
Estimates of future net cash flows from proved reserves of oil, gas,
condensate and natural gas liquids were made in accordance with SFAS No. 69,
"Disclosures about Oil and Gas Producing Activities." (See Note 16 to the Notes
to Consolidated Financial Statements). The estimates are based on realized
prices at year-end of $8.03 per barrel of oil and $1.79 per MCF of gas.
Significant changes can occur in these estimates based on prices currently in
effect. The results of these disclosures should not be construed to represent
the fair market value of the Company's oil and gas properties. A market value
determination would include many additional factors including: (i) anticipated
future increases or decreases in oil and gas prices and production and
development costs; (ii) an allowance for return on investment; (iii) the value
of additional reserves, not considered proved at the present, which may be
recovered as a result of further exploration and development activities; and
(iv) other business risks.
The Company periodically uses derivative financial instruments to manage
oil and gas price risk. For 1999, the Company entered into swap agreements on
4,500 BOPD of its Congo production, hedging the basis differential between No. 6
fuel oil and West Texas Intermediate ("WTI") at an average differential of
$2.28. The Company also purchased a call option on 2,000 BOPD of its Congo
production at a strike price of $16.00 per barrel, to hedge the Company's
potential liability under a price sharing agreement with a third party. These
agreements expose the Company to counterparty credit risk to the extent the
counterparty is unable to meet its settlement commitments to the Company.
Inflation has not had a material impact on the Company and is not expected
to have a material impact on the Company in the future.
36
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Recent Accounting Pronouncements
- --------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes standards of accounting for and disclosures of derivative
instruments and hedging activities. This statement requires all derivative
instruments to be carried on the balance sheet at fair value and is effective
for the Company beginning January 1, 2000; however, early adoption is permitted.
The Company has not yet determined the impact of this statement on its financial
condition or results of operations or whether it will adopt the statement early.
Comprehensive Income
- --------------------
The Company adopted SFAS No. 130, "Reporting Comprehensive Income",
effective January 1, 1998. Comprehensive income includes net income and all
changes in an enterprise's other comprehensive income including, among other
things, foreign currency translation adjustments, and unrealized gains and
losses on certain investments in debt and equity securities. The implementation
of this statement had no impact on the Company, as there are no differences
between comprehensive (loss) income and net (loss) income for the periods
presented.
Contingencies
- -------------
The Company has been named as a defendant in the Lopez case. The plaintiffs
allege, among other things, underpayment of royalties and that their production
was improperly commingled with gas produced from an adjoining lease. See "Legal
Proceedings" and Note 14 to the Notes to Consolidated Financial Statements. The
Company, along with the other defendants in this case, denies these allegations
and is vigorously contesting these claims. Management does not believe that the
outcome of this matter will have a material adverse impact on the Company's
operating results, financial condition or liquidity.
The Company has been named as a defendant in certain other lawsuits
incidental to its business. Management does not believe that the outcome of such
litigation will have a material adverse impact on the Company's operating
results or financial condition. However, these actions and claims in the
aggregate seek substantial damages against the Company and are subject to the
inherent uncertainties in any litigation. The Company is defending itself
vigorously in all such matters.
In March 1999, the Company discovered that an employee had fraudulently
authorized and diverted for personal use Company funds totaling $5.9 million,
$4.3 million in 1998 and the remainder in 1999, that were intended for
international exploration. Accordingly, the Company has reclassified the amounts
lost in 1998 from exploration costs to other expense. Based on its review of the
facts, management is confident that only one employee was involved in the matter
and that all misappropriated funds have been identified. The Board has engaged
a Certified Fraud Examiner to conduct an in-depth review of the fraudulent
transactions to determine the scope of the fraud, the possibility of recovery of
amounts lost from insurance, from the terminated employee and/or from third
parties, and to make recommendations regarding what, if any, new internal
control procedures should be implemented.
In September 1997, there was a spill of crude oil into the Santa Barbara
Channel from a pipeline that connects the Company's Point Pedernales field with
shore-based processing facilities. The volume of the spill was estimated to be
163 barrels of oil. Torch, which operates the platform and pipeline for the
Company, responded immediately by shutting down the pipeline and notified the
National Response Center and all appropriate Federal, state, and local
authorities as well as petroleum industry environmental response consortia. The
costs of the clean- up and the cost to repair the pipeline either have been or
are expected to be covered by insurance held by the Company, less the Company's
deductibles of $120,000. Repairs were completed by the end of 1997, and
production recommenced in December 1997. Additionally, the Company has exposure
to certain costs that may not be recoverable by insurance, including fines,
penalties, and damages. Such costs are not quantifiable at this time, but are
not expected to be material to the Company's operating results, financial
condition or liquidity.
The Company's international investments involve risks typically associated
with investments in emerging markets such as an uncertain political, economic,
legal and tax environment and expropriation and nationalization of assets. In
addition, if a dispute arises in its foreign operations, the Company may be
subject to the exclusive jurisdiction of foreign courts or may not be successful
in subjecting foreign persons to the jurisdiction of the United States. The
Company attempts to conduct its business and financial affairs so as to protect
against political and economic risks applicable to operations in the various
countries where it operates, but there can be no assurance that
37
<PAGE>
PAGE>
NUEVO ENERGY COMPANY
--------------------
the Company will be successful in so protecting itself. A portion of the
Company's investment in the Congo is insured through political risk insurance
provided by OPIC.
The Company and its partners in the Congo are undergoing a tax examination
related to their ownership interests in the Yombo field offshore Republic of
Congo, for the years 1994 through 1997. The Congolese taxing authorities have
issued a preliminary assessment of approximately $24.0 million in taxes and
penalties for all years, in aggregate for all parties who have ownership in this
field. Nuevo's working interest in this field is 43.75% during the years under
examination. The Company, along with the other partners, is in discussions with
the Congolese taxing authorities refuting this assessment as without merit to
the items being disallowed. Management does not believe that the outcome of
this matter will have a material adverse effect upon the Company.
In connection with their respective acquisitions of two subsidiaries (each
a "Congo subsidiary"), owning interests in the Yombo field offshore West Africa,
the Company and a wholly-owned subsidiary of CMS NOMECO Oil & Gas Co. ("CMS")
agreed with the seller of the subsidiaries not to claim certain tax losses
("dual consolidated losses") incurred by such subsidiaries prior to the
acquisitions. Pursuant to the agreement, the Company and CMS may be liable to
the seller for the recapture of dual consolidated losses utilized by the seller
in years prior to the acquisitions if certain triggering events occur, including
(i) a disposition by either the Company or CMS of its respective Congo
subsidiary, (ii) either Congo subsidiary's sale of its interest in the Yombo
field, (iii) the acquisition of the Company or CMS by another consolidated group
or (iv) the failure of the Company or CMS's Congo subsidiary to continue as a
member of its respective consolidated group. A triggering event will not occur,
however, if a subsequent purchaser enters into certain agreements specified in
the consolidated return regulations intended to ensure that such dual
consolidated losses will not be claimed. The Company and CMS have agreed among
themselves that the party responsible for the triggering event shall indemnify
the other for any liability to the seller as a result of such triggering event.
The Company's potential direct liability could be as much as $50.0 million if a
triggering event with respect to the Company occurs, and the Company believes
that CMS's liability (for which the Company would be jointly liable with an
indemnification right against CMS) could be as much as $67.0 million. The
Company does not expect a triggering event to occur with respect to it or CMS
and does not believe the agreement will have a material adverse effect upon the
Company.
During 1997, a new government was established in the Congo. Although the
political situation in the Congo has not to date had a material adverse effect
on the Company's operations in the Congo, no assurances can be made that
continued political unrest in West Africa will not have a material adverse
effect on the Company and its operation in the Congo in the future.
In 1996, the previous Congo government requested that the convention
governing the Marine I Exploitation Permit be converted to a Production Sharing
Agreement ("PSA"). Preliminary discussions were held with the government in
early 1997. Nuevo is under no obligation to convert to a PSA, and its existing
convention is valid and protected by law. The Company's position is that any
conversion to a PSA would have no detrimental impact to Nuevo, otherwise, Nuevo
will not agree to any such conversion. In late 1997, a new government was
established in the Congo. The new government has recently begun discussions with
Nuevo and its partner concerning the conversion to a PSA.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The Company is exposed to market risk, including adverse changes in
commodity prices and interest rates.
Commodity Price Risk - The Company produces and sells crude oil, natural
gas and natural gas liquids. As a result, the Company's operating results can be
significantly affected by fluctuations in commodity prices caused by changing
market forces. The Company periodically seeks to reduce its exposure to price
volatility by hedging its production through swaps, options and other commodity
derivative instruments. The Company uses hedge accounting for these instruments,
and settlements of gains or losses on these contracts are reported as a
component of oil and gas revenues and operating cash flows in the period
realized. These agreements expose the Company to counterparty credit risk to the
extent that the counterparty is unable to meet its settlement commitments to the
Company. At December 31, 1998, the fair value of derivative instruments
outstanding was a loss of $2.4 million. A 10% decrease in the underlying
commodity price would increase this loss by $.2 million.
38
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Interest Rate Risk - The Company may enter into financial instruments such
as interest rate swaps to manage the impact of changes in interest rates. At
December 31, 1998, the Company had no open interest rate swaps or similar
agreements. For 1999, the Company has entered into an agreement which hedges the
price at which Nuevo may repurchase a portion of its fixed rate debt and
effectively converts such debt to a floating rate exposure for a period of one
year. This agreement is not held for trading purposes. As the swap provider is a
major financial institution, the Company does not anticipate non-performance by
the provider.
The Company's exposure to changes in interest rates primarily results from
its short-term and long-term debt with both fixed and floating interest rates.
The following table presents principal amounts (stated in thousands) and the
related average interest rates by year of maturity for the Company's debt
obligations at December 31, 1998:
<TABLE>
<CAPTION>
Fair
----
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Long-term debt, including
current maturities:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate $ 3,152 $ 750 -- -- $ 158,400 -- $ 162,302 $ 162,302
Average interest rate 5.7% 5.7% -- -- 6.2% -- 6.2%
Fixed rate -- -- -- -- -- $ 260,000 $ 260,000 $ 250,788
Average interest rate -- -- -- -- -- 9.3% 9.3%
</TABLE>
39
<PAGE>
NUEVO ENERGY COMPANY
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Number
------
Independent Auditors' Report............................................ 41
Financial Statements:
Consolidated Balance Sheets as of December 31, 1998
and 1997 (Restated).................................................. 42
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 (Restated) and 1996 (Restated)............... 43
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1998,
1997 (Restated) and 1996 (Restated).................................. 44
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 (Restated) and 1996 (Restated)............... 45
Notes to Consolidated Financial Statements.............................. 46
40
<PAGE>
NUEVO ENERGY COMPANY
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nuevo Energy Company:
We have audited the accompanying consolidated balance sheets of Nuevo Energy
Company and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Nuevo Energy
Company and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the Company
has given retroactive effect to the change in accounting for oil and gas
properties from the full cost method to the successful efforts method in 1998.
/s/ KPMG LLP
Houston, Texas
March 25, 1999
41
<PAGE>
NUEVO ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997*
------ ------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 7,403 $ 9,208
Accounts receivable............................................................ 25,096 38,196
Product inventory.............................................................. 5,998 1,627
Assets held for sale........................................................... 120,055 6,950
Prepaid expenses and other..................................................... 2,700 2,879
---------- ----------
Total current assets........................................................ 161,252 58,860
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Land........................................................................... 51,038 51,411
Oil and gas properties (successful efforts method)............................. 959,348 984,273
Gas plant facilities........................................................... 17,112 15,500
Other facilities............................................................... 6,696 7,831
---------- ----------
1,034,194 1,059,015
Accumulated depreciation, depletion and amortization........................... (417,622) (324,904)
---------- ----------
616,572 734,111
---------- ---------
DEFERRED TAX ASSETS, net......................................................... 27,534 --
OTHER ASSETS..................................................................... 12,327 11,315
---------- ----------
$ 817,685 $ 804,286
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................... $ 24,393 $ 17,062
Accrued interest............................................................... 4,161 4,285
Accrued drilling costs......................................................... 8,380 12,781
Accrued lease operating costs.................................................. 4,694 8,891
Other accrued liabilities...................................................... 4,843 2,868
Current maturities of long-term debt........................................... 3,152 3,716
---------- ----------
Total current liabilities................................................... 49,623 49,603
---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES........................................ 419,150 305,940
DEFERRED TAX LIABILITIES......................................................... -- 4,986
OTHER LONG-TERM LIABILITIES...................................................... 2,034 4,018
COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF
NUEVO FINANCING I............................................................... 115,000 115,000
CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 10,000,000 shares authorized; 7% Cumulative
Convertible Preferred Stock, none issued and outstanding at December 31, 1998
and 1997...................................................................... -- --
Common stock, $0.01 par value, 50,000,000 shares authorized, 20,308,462 and
20,237,537 shares issued at December 31, 1998 and 1997, respectively.......... 203 202
Additional paid-in capital..................................................... 355,600 354,296
Treasury stock, at cost, 473,876 and 497,372 shares, at December 31, 1998 and
1997, respectively............................................................ (19,335) (19,929)
Stock held by benefit trust, 47,759 and 45,119 shares, at December 31, 1998
and 1997, respectively........................................................ (1,732) (1,244)
Accumulated deficit............................................................ (102,858) (8,586)
---------- ----------
Total stockholders' equity................................................. 231,878 324,739
---------- ----------
$ 817,685 $ 804,286
========== ==========
</TABLE>
- -----------
* Restated
See Notes to Consolidated Financial Statements.
42
<PAGE>
NUEVO ENERGY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997* 1996*
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Oil and gas revenues.............................................. $ 240,010 $331,973 $279,859
Gas plant revenues................................................ 2,665 14,826 34,802
Pipeline and other revenues....................................... 2,700 5,772 6,774
Gain on sale of assets, net....................................... 5,768 1,372 6,008
Interest and other income......................................... 1,560 3,335 1,614
-------- -------- --------
252,703 357,278 329,057
COSTS AND EXPENSES:
Lease operating expenses.......................................... 134,704 120,042 93,062
Gas plant operating expenses...................................... 3,202 13,356 29,311
Pipeline and other operating costs................................ 2,028 5,243 6,105
Exploration costs................................................. 16,562 11,082 4,571
(Revision of) provision for impairment on assets held for sale.... (3,740) 23,942 --
Provision for impairment of oil and gas properties................ 68,904 30,000 --
General and administrative expenses............................... 18,633 19,822 14,880
Outsourcing fees.................................................. 9,461 11,984 10,249
Depreciation, depletion and amortization.......................... 85,036 102,158 75,664
Interest expense.................................................. 32,471 27,357 36,009
Dividends on Guaranteed Preferred Beneficial Interests in
Company's Convertible Debentures (TECONS)........................ 6,613 6,613 165
Other expense..................................................... 5,726 3,019 1,069
-------- -------- --------
379,600 374,618 271,085
-------- -------- --------
(Loss) income before income taxes, minority interest and
extraordinary item................................................. (126,897) (17,340) 57,972
Income tax (benefit) expense........................................ (32,625) (6,656) 23,965
Minority interest in loss of subsidiary............................. -- (8) (271)
-------- -------- --------
(Loss) income before extraordinary item............................. (94,272) (10,676) 34,278
Extraordinary loss on early extinguishment of debt, net of income
tax benefit of $2,037.............................................. -- 3,024 --
-------- -------- --------
Net (loss) income................................................... (94,272) (13,700) 34,278
Dividends on preferred stock........................................ -- -- 939
-------- -------- --------
Net (loss) income available to common stockholders.................. $(94,272) $(13,700) $ 33,339
======== ======== ========
(Loss) earnings per Common share -- Basic:
(Loss) income before extraordinary item (net of dividends on
preferred stock).................................................. $(4.76) $ (0.54) $1.99
Extraordinary loss on early extinguishment of debt, net of income
tax benefit....................................................... -- (0.15) --
-------- -------- --------
Net (loss) income................................................. $(4.76) $ (0.69) $1.99
======== ======== ========
Weighted average Common shares outstanding.......................... 19,795 19,796 16,755
======== ======== ========
(Loss) earnings per Common share -- Diluted:
(Loss) income before extraordinary item............................ $(4.76) $ (0.54) $1.84
Extraordinary loss on early extinguishment of debt, net of income
tax benefit....................................................... -- (0.15) --
-------- -------- --------
Net (loss) income................................................. $(4.76) $ (0.69) $1.84
======== ======== ========
Weighted average Common and dilutive potential Common shares
outstanding........................................................ 19,795 19,796 18,596
======== ======== ========
</TABLE>
- ------------
* Restated
See Notes to Consolidated Financial Statements.
43
<PAGE>
NUEVO ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional Stock held Retained Total
--------------- ---------------- Paid-In Treasury by Benefit Earnings Stockholders'
Shares Amount Shares Amount Capital Stock Trust (Deficit) Equity
------ ------ ------ ------ ---------- -------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1996*.. 11,717 $117 15 $ 15 $151,442 $ -- $ -- $ (28,225) $123,349
Issuance of 6,384 64 -- -- 172,147 -- -- -- 172,211
Common Stock.....
Exercise of stock
options and 587 6 -- -- 14,718 -- -- -- 14,724
related tax
benefit..........
Issuance of
non-employee -- -- -- -- 244 -- -- -- 244
stock options....
Issuance of -- -- -- -- 1,575 -- -- -- 1,575
warrants.........
Conversion of 1,164 12 (15) (15) -- -- -- -- (3)
Preferred Stock..
Preferred Stock -- -- -- -- -- -- -- (939) (939)
dividends........
Net income*....... -- -- -- -- -- -- -- 34,278 34,278
------ ---- ---- ---- -------- --------- ---------- --------- --------
December 31, 1996* 19,852 199 -- -- 340,126 -- -- 5,114 345,439
====== ==== ==== ==== ======== ========= ========== ========= ========
Exercise of stock
options and 386 3 -- -- 11,332 -- -- -- 11,335
related tax
benefit..........
Stock put options. -- -- -- -- 1,630 -- -- -- 1,630
Employee stock -- -- -- -- 1,208 -- -- -- 1,208
awards...........
Purchase of -- -- -- -- -- (21,173) -- -- (21,173)
Treasury Shares..
Stock held by -- -- -- -- -- 1,244 (1,244) -- --
benefit trust....
Net loss*......... -- -- -- -- -- -- -- (13,700) (13,700)
------ ---- ---- ---- -------- --------- ---------- --------- --------
December 31, 1997* 20,238 202 -- -- 354,296 (19,929) (1,244) (8,586) 324,739
====== ==== ==== ==== ======== ========= ========== ========= ========
Exercise of stock
options and 70 1 -- -- 1,304 -- -- -- 1,305
related tax
benefit..........
Stock held by -- -- -- -- -- 488 (488) -- --
benefit trust....
Sale of Treasury -- -- -- -- -- 106 -- -- 106
Shares...........
Net loss.......... -- -- -- -- -- -- -- (94,272) (94,272)
------ ---- ---- ---- -------- --------- ---------- --------- --------
December 31, 1998. 20,308 $203 -- $ -- $355,600 $(19,335) $(1,732) $(102,858) $231,878
====== ==== ==== ==== ======== ========= ========== ========= ========
</TABLE>
- ------------
* Restated
See Notes to Consolidated Financial Statements.
44
<PAGE>
NUEVO ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1998 1997* 1996*
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.............................................. $ (94,272) $ (13,700) $ 34,278
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation, depletion and amortization.................... 85,036 102,158 75,664
Dry hole costs.............................................. 12,962 9,311 3,145
Amortization of debt financing costs........................ 1,643 1,513 1,370
Amortization of deferred revenue............................ (1,625) (3,203) (4,104)
(Revision of) provision for impairment on assets held for (3,740) 23,942 --
sale.......................................................
Provision for impairment of oil and gas properties.......... 68,904 30,000 --
Gain on sale of assets, net................................. (5,768) (1,372) (6,008)
Loss on early extinguishment of debt........................ -- 5,061 --
Employee stock awards....................................... -- 1,208 --
Deferred taxes.............................................. (32,520) (9,249) 22,465
Depreciation of deferred compensation liability............. (1,138) -- --
Minority interest........................................... -- (8) (271)
--------- --------- ---------
29,482 145,661 126,539
Changes in assets and liabilities, net of acquisition effects:
Accounts receivable......................................... 13,051 578 (21,086)
Gas imbalances.............................................. 333 20 (198)
Accounts payable............................................ 6,634 1,663 14,574
Accrued liabilities......................................... (5,813) 13,719 11,316
Other....................................................... (7,854) 3,821 (4,224)
--------- --------- ---------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES.............. 35,833 165,462 126,921
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to land.............................................. -- -- (51,638)
Additions to oil and gas properties............................ (157,352) (195,108) (515,985)
Proceeds from sale of gas plant................................ -- 24,992 --
Proceeds from sales of properties.............................. 11,830 2,385 42,700
Additions to gas plant and other facilities.................... (2,813) (1,747) (21,079)
--------- --------- ---------
NET CASH FLOWS USED IN INVESTING ACTIVITIES.................. (148,335) (169,478) (546,002)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings....................................... 240,900 234,000 408,000
Debt issuance costs............................................ (3,360) -- (10,920)
Net proceeds from issuance of common stock..................... -- -- 138,327
Payments of long-term debt..................................... (128,254) (217,503) (232,359)
Preferred stock dividends...................................... -- -- (939)
Proceeds from exercise of stock options........................ 1,305 6,074 10,003
Proceeds from issuance of Company-Obligated Mandatorily
Redeemable Convertible Preferred Securities of Nuevo
Financing I................................................... -- -- 115,000
Premium on early extinguishment of debt........................ -- (3,440) --
Proceeds from sale of stock put options........................ -- 1,630 --
Proceeds from sale of treasury stock........................... 106 -- --
Purchase of treasury shares.................................... -- (21,173) --
Cash distribution to minority interest owner................... -- -- (160)
--------- --------- ---------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES..... 110,697 (412) 426,952
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents............. (1,805) (4,428) 7,871
Cash and cash equivalents at beginning of year................... 9,208 13,636 5,765
--------- --------- ---------
Cash and cash equivalents at end of year......................... $ 7,403 $ 9,208 $ 13,636
========= ========= =========
</TABLE>
- -------------
* Restated
See Notes to Consolidated Financial Statements.
45
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Nuevo Energy Company ("Nuevo") was formed as a Delaware corporation on March
2, 1990, to acquire the businesses of certain public and private partnerships
(collectively "Predecessor Partnerships"). On July 9, 1990, the plan of
consolidation ("Plan of Consolidation") was approved by limited partners owning
a majority of units of limited partner interests in the partnerships whereby the
net assets of the Predecessor Partnerships, which were subject to such Plan of
Consolidation, were exchanged for Common Stock of Nuevo ("Common Stock"). All
references to the "Company" include Nuevo and its majority and wholly-owned
subsidiaries, unless otherwise indicated or the context indicates otherwise.
The Company is primarily engaged in the exploration for, and the acquisition,
exploitation, development and production of crude oil and natural gas. The
Company's principal oil and gas properties are located domestically onshore and
offshore California, in East Texas and the onshore Gulf Coast region; and
internationally offshore West Africa.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Nuevo and its
majority and wholly-owned subsidiaries. The Company's 48.5% general partner
interest in Richfield Gas Storage Partnership was pro rata consolidated through
February 1998, at which time the Company's interest was sold. The consolidated
financial statements also include Bright Star Gathering, Inc., which was 80%
owned by the Company until it was sold in July 1998. NuStar Joint Venture and
its 66.7% investment in the Benedum Plant System, of which the Company owned a
95% interest, was pro rata consolidated through May 2, 1997, at which time the
Company's interest was sold. Minority interests have been deducted from results
of operations and stockholders' equity in the appropriate periods. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Change in Accounting Method
Effective January 1, 1998, the Company elected to convert from the full cost
method to the successful efforts method of accounting for its investments in oil
and gas properties. The Company believes that the successful efforts method of
accounting is preferable, as it will provide a fair presentation of the
Company's development activities in its core California business and the
drilling success of its selective exploration activities, and reflect an
impairment in the carrying value of its oil and gas properties only when there
has been a permanent decline in their fair value. Accordingly, all prior year
financial statements have been restated to conform with successful efforts
accounting. The effect, after tax, of the change in accounting method as of
December 31, 1997, was a reduction to retained earnings of $64.1 million,
primarily attributable to a decrease in net property and equipment and the
deferred tax liability of $99.2 million and $38.0 million, respectively. The
change in accounting method resulted in a decrease in net income of $32.5
million ($1.64 per share - basic and diluted) and $0.4 million ($0.02 per share
- - basic and diluted) during 1997 and 1996, respectively. Had the Company not
converted to the successful efforts method, the results of operations for the
three months ended March 31, 1998, would have included a pre-tax full cost
ceiling write-down of approximately $250.0 million.
Oil and Gas Properties
The Company utilizes the successful efforts method of accounting for its
investments in oil and gas properties. Under successful efforts, oil and gas
lease acquisition costs and intangible drilling costs associated with
exploration efforts that result in the discovery of proved reserves and costs
associated with development drilling, whether or not successful, are capitalized
when incurred. When a proved property is sold, ceases to produce or is
abandoned, a gain or loss is recognized. When an entire interest in an unproved
property is sold for cash or cash equivalent, gain or loss is recognized, taking
into consideration any recorded impairment. When a partial interest in an
unproved property is sold, the amount received is treated as a reduction of the
cost of the interest retained.
46
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unproved leasehold costs are capitalized pending the results of exploration
efforts. Significant unproved leasehold costs are reviewed periodically and a
loss is recognized to the extent, if any, that the cost of the property has been
impaired. An impairment of unproved leasehold costs of $8.1 million was
recognized as of December 31, 1998. Exploration costs, including geological and
geophysical expenses, exploratory dry holes and delay rentals, are charged to
expense as incurred.
Costs of productive wells, development dry holes and productive leases are
capitalized and depleted on a unit-of-production basis over the life of the
remaining proved reserves. Capitalized drilling costs are depleted on a unit-
of-production basis over the life of the remaining proved developed reserves.
Estimated costs (net of salvage value) of dismantlement, abandonment and site
remediation are computed by the Company's independent reserve engineers and are
included when calculating depreciation and depletion using the unit-of-
production method.
The Company reviews proved oil and gas properties on a depletable unit basis
whenever events or circumstances indicate that the carrying value of those
assets may not be recoverable. For each depletable unit determined to be
impaired, an impairment loss equal to the difference between the carrying value
and the fair value of the depletable unit is recognized. Fair value, on a
depletable unit basis, is estimated to be the present value of the undiscounted
expected future net revenues computed by application of estimated future oil and
gas prices, production and expenses, as determined by management, to estimated
future production of oil and gas reserves over the economic life of the
reserves. If the carrying value exceeds the undiscounted future net revenues,
an impairment is recognized equal to the difference between the carrying value
and the discounted estimated future net revenues of that depletable unit. The
Company considers probable reserves and escalated commodity pricing in its
estimate of future net revenues. Fair value impairments of $60.8 million and
$30.0 million were recognized as of December 31, 1998 and 1997, respectively; no
such impairment was recognized during 1996.
Interest costs associated with non-producing leases and exploration and
development projects are capitalized only for the period that activities are in
progress to bring these projects to their intended use. The capitalization
rates are based on the Company's weighted average cost of funds used to finance
expenditures.
Any reference to oil and gas reserve information in the Notes to Consolidated
Financial Statements is unaudited.
Environmental Liabilities
Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations, and do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or clean-ups are probable, and the costs can be reasonably
estimated. Generally, the timing of these accruals coincides with the Company's
commitment to a formal plan of action.
Gas Plant and Other Facilities
Gas plant and other facilities include the costs to acquire certain gas plant
and other facilities and to secure rights-of-way. Capitalized costs associated
with gas plant and other facilities are amortized primarily over the estimated
useful lives of the various components of the facilities utilizing the straight-
line method. The estimated useful lives of such assets range from three to
thirty years. The Company reviews these assets for impairment whenever events
or changes in circumstances indicate that their carrying amounts may not be
recoverable.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement establishes
standards of accounting for and disclosures of derivative instruments and
hedging activities. This statement requires all derivative instruments to be
carried on the balance sheet at fair value and is effective
47
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the Company beginning January 1, 2000, however, early adoption is permitted.
The Company has not yet determined the impact of this statement on its financial
condition or results of operations or whether it will adopt the statement early.
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", effective
January 1, 1998. Comprehensive income includes net income and all changes in an
enterprise's other comprehensive income including, among other things, foreign
currency translation adjustments, and unrealized gains and losses on certain
investments in debt and equity securities. The implementation of this statement
had no impact on the Company, as there are no differences between comprehensive
(loss) income and net (loss) income for the periods presented.
Gas Balancing Positions
The Company uses the entitlement method for recording sales of natural gas.
Under the entitlement method, revenue is recorded based on the Company's net
revenue interest in production. Deliveries of natural gas in excess of the
Company's net revenue interests are recorded as liabilities and under-deliveries
are recorded as assets. Production imbalances are recorded at the lower of the
sales price in effect at the time of production or the current market value.
Substantially all such amounts are anticipated to be settled with production in
future periods.
Derivative Financial Instruments
The Company utilizes derivative financial instruments to reduce its exposure
to changes in the market prices of natural gas and crude oil. Commodity
derivatives utilized as hedges include futures, swap and option contracts, which
are used to hedge natural gas and oil prices. Commodity price and basis swaps
are sometimes used to hedge the basis differential between the derivative
financial instrument index price and the commodity field price. In order to
qualify as a hedge, price movements in the underlying commodity derivative must
be highly correlated with the hedged commodity. Settlement of gains and losses
on price swap contracts are realized monthly, generally based upon the
difference between the contract price and the average closing New York
Mercantile Exchange ("NYMEX") price and are reported as a component of oil and
gas revenues and operating cash flows in the period realized.
Gains and losses on option and futures contracts that qualify as a hedge of
firmly committed or anticipated purchases and sales of oil and gas commodities
are deferred on the balance sheet and recognized in income when the related
hedged transaction occurs. Premiums paid on option contracts are deferred in
other assets and amortized into oil and gas revenues over the terms of the
respective option contracts. Gains or losses attributable to the termination of
a derivative financial instrument are deferred on the balance sheet and
recognized in revenue when the hedged crude oil and natural gas is sold. There
were no such deferred gains or losses at December 31, 1998 or 1997. Gains or
losses on derivative financial instruments that do not qualify as a hedge are
recognized in income currently.
As a result of such hedging transactions, oil and gas revenues were increased
by $0.6 million in 1998, and were reduced by $6.0 million and $2.5 million in
1997 and 1996, respectively.
Earnings per Share ("EPS")
Basic EPS is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue Common Stock were exercised or converted into Common
Stock or resulted in the issuance of Common Stock that then shared in the
earnings of the entity. For the years ended December 31, 1998 and 1997, the
Company did not have any potentially dilutive securities, as net losses were
incurred during these periods. For the year ended December 31, 1996, the
Company's potentially dilutive securities included dilutive stock options.
Potential dilution may also occur in future periods due to the Company-Obligated
Mandatorily Redeemable Convertible Preferred Securities of Nuevo Financing I
("TECONS").
48
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company applies the intrinsic value method for accounting for stock and
stock-based compensation described by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees". Had the Company applied the
fair value method described by SFAS No. 123, "Accounting for Stock-Based
Compensation", it would have incurred compensation expense for stock-based
compensation in 1998, 1997 and 1996. (See Note 8 for the SFAS No. 123 pro forma
effects on income and earnings per share.)
Income Taxes
Deferred taxes are accounted for under the asset and liability method of
accounting for income taxes. Under this method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period the change occurs.
Statements of Cash Flows
For cash flow presentation purposes, the Company considers all highly liquid
money market instruments with an original maturity of three months or less to be
cash equivalents. Interest paid in cash, net of amounts capitalized, for 1998,
1997 and 1996 was $31.6 million, $28.2 million and $30.6 million, respectively.
Net amounts paid (refunded) in cash for income taxes for 1998, 1997 and 1996
were $1,332,000, ($45,000) and $1,500,000, respectively.
Product Inventory
Inventory relating to quantities of processed fuel oil and natural gas
liquids in storage as of the balance sheet date is carried at current market
pricing. The Company recognizes revenue for fuel oil sales when the sale is
completed and risk of loss transfers to a third party purchaser. Fuel oil in
inventory is stated at year end market prices less transportation costs; the
Company recognizes changes in the market value of inventory from one period to
the next as oil revenues.
Use of Estimates
In order to prepare these financial statements in conformity with generally
accepted accounting principles, management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities, as well as reserve
information, which affects the depletion calculation. Actual results could
differ from those estimates.
Reclassifications
Certain reclassifications of prior period amounts have been made to conform
to the current presentation.
3. ACQUISITIONS
In April 1998, the Company acquired a third party's interest in the Yombo
field in the Republic of Congo, West Africa ("Congo") for $7.8 million. Such
acquisition added 3.4 million barrels of oil equivalent to the Company's reserve
base and increased the Company's net working interest in the Congo from 43.75%
to 50.0%.
In July 1996, the Company completed the acquisition of certain East Texas oil
and gas properties for a net purchase price of $9.3 million in cash. The
acquisition of these properties was effective as of December 1, 1995, and the
purchase price was reduced by the net cash flows from production between such
date and closing. In December 1996, the holders of the preferential rights on
these properties exercised such rights for a cash payment of $8.0 million,
acquiring properties constituting approximately half of the estimated proved
reserves related to this acquisition.
49
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In April 1996, the Company consummated the acquisition of (i) certain
upstream oil and gas properties located onshore and offshore California ("Unocal
Properties") of Union Oil Company of California ("Unocal") for an adjusted
purchase price of $490.2 million in cash plus a contingent payment based on
future realized oil prices, and (ii) certain California oil properties ("Point
Pedernales Properties", and together with the Unocal Properties, the "California
Properties") from Torch Energy Advisors Incorporated ("Torch") and certain of
its wholly-owned subsidiaries for a net adjusted purchase price of $35.7 million
in Common Stock of the Company. The acquisition of the California Properties was
effective as of October 1, 1995, and the purchase price was reduced by the net
cash flows from production between such date and closing. The acquisition was
recorded using the purchase method, effective April 1, 1996 for accounting
purposes.
4. DIVESTITURES
On January 6, 1999, the Company completed the sale of its East Texas natural
gas assets to an affiliate of Samson Resources Company for an adjusted purchase
price of $192.0 million. Of the proceeds, $100.0 million was set aside to fund
an escrow account to provide "like-kind exchange" tax treatment in the event the
Company acquires domestic producing oil and gas properties in the first half of
1999. The remainder of the proceeds were used to repay outstanding senior bank
debt. A $5.2 million gain on settled hedge transactions was realized in
connection with the closing of this sale in 1999. The effective date of the sale
is July 1, 1998. The Company reclassified these assets to assets held for sale
and discontinued depleting these assets during the third quarter of 1998.
Estimated net proved reserves associated with these properties totaled
approximately 329.0 billion cubic feet of natural gas equivalent at January 1,
1999. The following condensed balance sheet reflects the pro forma effects of
the sale of the East Texas assets:
<TABLE>
<CAPTION>
Pro Forma Pro Forma
December 31, Adjustments December 31,
1998 (Sale of E. TX) 1998
------------ --------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CONDENSED BALANCE SHEET
ASSETS:
Current assets $161,252 $(10,055) $151,197
Net property and equipment 616,572 -- 616,572
Deferred tax assets, net 27,534 (15,222) 12,312
Other assets 12,327 -- 12,327
-------- -------- --------
$817,685 $(25,277) $792,408
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities $ 49,623 $ (9,530) $ 40,093
Long-term debt 419,150 (82,633) 336,517
Deferred tax liabilities -- -- --
Deferred revenue -- -- --
Other long-term liabilities 2,034 -- 2,034
TECONS 115,000 -- 115,000
Stockholders' equity 231,878 66,886 298,764
-------- -------- --------
$817,685 $(25,277) $792,408
======== ======== ========
</TABLE>
During the third quarter of 1998, the Company sold its interest in the
Sansinena field in California, and recorded a gain on the sale of $4.1 million.
During the first quarter of 1998, the Company sold its interest in the Coke
field in Chapel Hill, Texas, and recorded a $1.7 million gain on this sale.
In December 1997, the Company announced its intention to dispose of the
remainder of its non-core gas gathering, pipeline and storage assets during
1998. Such assets include: the Company's 48.5% interest in the Richfield Gas
Storage facility, which was sold in February 1998 at its approximate carrying
value; an 80% interest in Bright Star Gathering, Inc., which was sold in July
1998 at its approximate carrying value; and the Illini
50
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
pipeline. The Company recorded a non-cash, pre-tax charge to fourth quarter 1997
earnings of $23.9 million, reflecting the estimated loss on the disposition of
these assets. A positive revision to this charge was made in the fourth quarter
of 1998 in the amount of $3.7 million to reflect the estimated current fair
value of the Illini pipeline. The Company entered into a sale agreement during
1998 to sell the Illini pipeline to a third party. Such sale is currently
pending and awaiting regulatory approval. The Company's results of operations
for the year ended December 31, 1998, included the operating results from these
assets through the disposition date, as applicable; however, these assets were
not depreciated during 1998. The Company will retain its California gas plants,
as these plants are strategic assets for the Company's oil and gas activities in
California.
In May 1997, Nuevo Liquids, a wholly-owned subsidiary of the Company, sold
its 95% interest in the NuStar Joint Venture, which held the Company's
investment in the Benedum Plant System, for proceeds of $25.0 million. The
effective date of the sale was January 1, 1997. Proceeds from the sale were
used to reduce outstanding debt under the Company's revolving credit facility,
as well as project debt related to the Benedum Gas Plant in the amount of $5.9
million. The Company recorded a pre-tax gain of $2.3 million relating to the
sale.
During the first quarter of 1997, the Company sold its interest in the Second
Bayou field in Cameron Parish, Louisiana and recorded a gain of $1.4 million.
During the third quarter of 1997, the Company recognized a loss of $1.6 million
on the sale of South Timbalier Block 8. In addition, the Company disposed of
several non-core properties at a combined net loss of $679,000.
In June 1996, the Company sold 177 producing wells and the majority of its
acreage in the Giddings field and East Texas Austin Chalk holdings for $27.3
million recognizing a gain of $9.2 million. The Company retained ownership of
seven wells and surrounding acreage in the Turkey Creek prospect area of the
Austin Chalk trend. The Company also sold several non-core properties at a
combined loss of $3.2 million.
5. PRODUCTION PAYMENTS
In April 1994, the Company entered into a four-year commitment for a $30.0
million volumetric production payment for the development of certain infill
drilling locations in the Oak Hill field in East Texas. The proceeds from this
agreement financed the capital expenditures for well drilling, fracturing and
completing and for surface facility installations. Each advance under the
production payment obligates the Company to deliver a fixed volume of natural
gas, based upon prevailing market conditions at the time of the advance. During
1994, the Company received $18.4 million, committing the Company to deliver
10.7 BCF of natural gas through December 1998. As of December 31, 1998, the
Company had fulfilled its obligation under this commitment. The cash advances
were reflected as deferred revenues on the Company's December 31, 1997
consolidated balance sheet and were amortized into revenue as the natural gas
volumes were delivered. No such advances were received in 1998, 1997 or 1996.
6. OUTSOURCING SERVICES
Torch, the Company's outside service provider, is primarily in the business
of providing management and advisory services relating to oil and gas assets for
institutional and public investors and maintains a large technical, operating,
accounting and administrative staff.
In early 1999, Nuevo signed new outsourcing agreements with Torch and its
subsidiaries, effective January 1, 1999, to provide the following services: (i)
oil and gas administration (accounting, information technology and land
administration); (ii) human resources; (iii) corporate administration (legal,
graphics, support, and corporate insurance); (iv) crude oil marketing; (v)
natural gas marketing; (vi) land leasing, and (vii) field operations. Each of
the new agreements is stand alone, with different terms ranging from one to five
years. In addition, the Company executed a Master Services Agreement with
Torch, which contains all the overall terms and conditions governing each
individual service agreement. Several functions, such as mergers and
acquisitions and internal audit, will be brought in-house. The Company is still
in the process of finalizing the field operations agreement with Torch, but
anticipates signing this agreement in late March 1999.
51
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Prior to January 1, 1999, the Company's outsourcing services were governed by
an agreement with Torch (the "Torch Agreement") whereby Torch administered
certain business activities of the Company for a monthly fee. The Torch
Agreement required Torch to administer the business activities of the Company
for a monthly fee equal to the sum of one-twelfth of 2% on the first $250
million of assets and one-twelfth of 1% on assets in excess of $250 million,
excluding certain gas plant facilities and cash, plus 2% of monthly operating
cash flows (as defined) during the period in which the services were rendered.
In addition, the Torch Agreement contained a provision whereby 20% of the
overhead fees on Torch operated properties were credited against the monthly fee
paid to Torch, as well as a provision whereby the monthly fee was credited for
one-twelfth of $900,000. For the years ended December 31, 1998, 1997 and 1996,
outsourcing fees paid to Torch amounted to $9.5 million, $12.0 million and $10.2
million, respectively.
A subsidiary of Torch markets oil, natural gas and natural gas liquids from
certain oil and gas properties and gas plants in which the Company owns an
interest. In 1998, 1997 and 1996, such marketing fees were $2.0 million, $2.9
million and $2.8 million, respectively.
Torch operates certain oil and gas interests owned by the Company. The
Company is charged, on the same basis as other third parties, for all customary
expenses and cost reimbursements associated with these activities. Operator's
fees charged for these activities for the years ended December 31, 1998, 1997
and 1996, was $25.5 million, $24.8 million and $8.8 million, respectively.
In consideration of the services rendered by Torch in connection with the
origination of the 1996 acquisition of the Unocal Properties, the Company agreed
to pay Torch $10.0 million in twelve equal monthly installments after the
closing of the acquisition.
7. RELATED PARTY TRANSACTIONS
A broker's fee of 30,000 warrants was granted to a company, of which a
director of the Company is a partner, for services associated with the
acquisition of the Unocal Properties. These warrants were exercised in the
first quarter of 1997.
Included in general and administrative expenses for 1997 was a $1.7 million
severance payment to the Company's former President and Chief Executive Officer.
8. STOCKHOLDERS' EQUITY
Common and Preferred Stock
The Certificate of Incorporation of the Company authorizes the issuance of up
to 50,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock,
the terms, preferences, rights and restrictions of which are established by the
Board of Directors of the Company. All shares of Common Stock have equal voting
rights of one vote per share on all matters to be voted upon by stockholders.
Cumulative voting for the election of directors is not permitted. Certain
restrictions contained in the Company's loan agreements limit the amount of
dividends that may be declared. Under the terms of the most restrictive
indenture of the 8 7/8% Senior Subordinated Notes and the 9 1/2% Senior
Subordinated Notes described in Note 10, the Company and its restricted
subsidiaries had no funds available for the payment of dividends at December 31,
1998. However, the Company had unrestricted liquidity available through its
unrestricted subsidiaries at December 31, 1998.
On December 23, 1996, the Company and United Investors Management Company
("United") and The 1818 Fund, L.P. ("The 1818 Fund") closed the offering of
2,138,605 shares of Common Stock (the "Shares"). United sold 1,275,000 Shares
and The 1818 Fund sold 863,605 shares. The price to the public of the Shares
was $47.50 per share. All of the Shares sold by United were outstanding and 112
of the Shares sold by The 1818 Fund were outstanding prior to the offering. The
remaining 863,493 of the Shares sold by The 1818 Fund were issued upon
conversion of the remaining 11,220 shares of 7% Preferred Stock of the Company.
The Company did not receive any proceeds from the issuance of these shares. As
a result of this conversion by The 1818 Fund of its shares of 7% Preferred
Stock, there are no longer any shares of the 7% Preferred Stock outstanding.
52
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During April 1996, the Company partially financed the acquisition of the
Unocal Properties with the proceeds from the sale to the public of 5,109,200
shares of Common Stock (the "Common Stock Offering"). The purchase of the Point
Pedernales Properties was financed by the issuance to Torch of 1,275,000 shares
of the Company's Common Stock valued at the public offering price of $28.00 per
share in the Common Sock Offering.
EPS Computation
SFAS No. 128, "Earnings per Share", requires a reconciliation of the
numerator (income) and denominator (shares) of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. In 1998 and 1997,
weighted average potential dilutive common shares of 331,000 and 670,000 are not
included in the calculation of diluted loss per share due to their anti-dilutive
effect. The Company's reconciliation is as follows (amounts in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------
1998 1997* 1996*
------------------- ------------------- ------------------
Loss Shares Income Shares Income Shares
---------- ------ ---------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
(Loss) income before extraordinary item........ $(94,272) $(10,676) $34,278
Less: Dividends on Preferred Stock............ -- -- (939)
-------- -------- -------
(Loss) earnings before extraordinary item per
Common share -- Basic......................... (94,272) 19,795 (10,676) 19,796 33,339 16,755
Effect of dilutive securities:
Convertible Preferred Stock.................... -- -- -- -- 939 --
Stock options.................................. -- -- -- -- -- 1,841
-------- ------ -------- ------ ------- ------
(Loss) earnings before extraordinary item per
Common share -- Diluted....................... $(94,272) 19,795 $(10,676) 19,796 $34,278 18,596
======== ====== ======== ====== ======= ======
</TABLE>
- -----------------
* Restated
Treasury Stock Repurchases
In March 1997, the Board of Directors of the Company authorized the open
market repurchase of up to one million shares of outstanding Common Stock during
1997, at times and prices deemed attractive by management. During April 1997,
the Company repurchased 500,000 shares of Common Stock in open market
transactions, at an average purchase price of $38.94 per share, plus 42,491
shares acquired from the cancellation of warrants issued during 1996. In
December 1997, the Board of Directors authorized the open market repurchase of
an additional 500,000 shares of Common Stock during 1998, however, no such
repurchase occurred during 1998.
Put Options
In May 1997, the Company sold put options on its Common Stock to a third
party. The options gave the purchaser the right to sell to the Company 500,000
shares of its Common Stock at prices ranging from $40.26 to $41.04 per share
through December 31, 1997. The contract gave the Company the choice of net
cash, net shares, or physical settlement. Any repurchased shares would have
been treated as Treasury Stock. The Company generated $1.6 million in option
premium from these transactions, which is reflected in additional paid-in
capital on the balance sheet. As of December 31, 1997, 400,000 of these options
had expired with the Company's share prices above the strike price, and 100,000
of these options were settled on December 31, 1997, for a nominal amount of net
cash.
53
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Shareholder Rights Plan
In March 1997, the Company adopted a Shareholder Rights Plan to protect the
Company's shareholders from coercive or unfair takeover tactics. Under the
Shareholder Rights Plan, each outstanding share and each share of subsequently
issued Common Stock has attached to it one Right. Generally, in the event a
person or group ("Acquiring Person") acquires or announces an intention to
acquire beneficial ownership of 15% or more of the outstanding shares of Common
Stock without the prior consent of the Company, or the Company is acquired in a
merger or other business combination, or 50% or more of its assets or earning
power is sold, each holder of a Right will have the right to receive, upon
exercise of the Right, that number of shares of common stock of the acquiring
company, which at the time of such transaction will have a market price of two
times the exercise price of the Right. The Company may redeem the Right for
$.01 at any time before a person or group becomes an Acquiring Person without
prior approval. The Rights will expire on March 21, 2007, subject to earlier
redemption by the Board of Directors of the Company.
Executive Compensation Plan
During July 1997, the Board of Directors of the Company adopted a plan to
encourage senior executives to personally invest in the shares of the Company,
and to regularly review executives' ownership versus targeted ownership
objectives. These incentives include a deferred compensation plan (the "Plan")
that gives key executives the ability to defer all or a portion of their
salaries and bonuses and invest in Common Stock of the Company at a discount to
market prices or make other investments at the employee's discretion. Stock
acquired at a discount will be held in a benefit trust and restricted for a two-
year period. The stock held in the benefit trust is accounted for as a
liability of the Company and is marked-to-market, with any necessary adjustment
to general and administrative expense. The Company recorded a benefit related
to deferred compensation of $0.6 million in 1998 and an expense of $0.8 million
in 1997. The Plan does not permit investment in a diversified equity portfolio
until and unless targeted levels of Common Stock ownership in the Company are
achieved and maintained. Target levels of ownership are based on multiples of
base salary and are administered by the Compensation Committee of the Board of
Directors. The Plan applies to all executives at a level of Vice-President and
above.
Stock Incentive Plan
In 1990, the Company established its 1990 Stock Option Plan ("Stock Option
Plan"), with respect to its Common Stock, and in 1993, the Board of Directors
adopted the Nuevo Energy Company 1993 Stock Incentive Plan ("Stock Incentive
Plan"). The purpose of the Stock Option Plan and the Stock Incentive Plan is to
provide directors and key employees of the Company and its subsidiaries
performance incentives and to provide a means of encouraging stock ownership in
the Company by such persons.
The maximum number of shares subject to options under the Stock Incentive
Plan is 2,500,000 shares. Options are granted under the Stock Incentive Plan on
the basis of the optionee's contribution to the Company. No option may exceed a
term of more than ten years. Options granted under the Stock Incentive Plan may
be either incentive stock options or options that do not qualify as incentive
stock options. The Company's compensation committee is authorized to designate
the recipients of options, the dates of grants, the number of shares subject to
options, the option price, the terms of payment upon exercise of the options,
and the time during which the options may be exercised. Options granted are
exercisable, in full, six months following the date of the grant.
54
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of activity in the stock option plans during the three years ended
1998 is set forth below:
<TABLE>
<CAPTION>
Weighted-
Average
Options Exercise Price
----------------- -----------------
<S> <C> <C>
Outstanding at January 1, 1996.............................. 1,835,837 $17.97
Granted................................................... 518,100 $38.10
Exercised................................................. (587,799) $17.03
---------
Outstanding at December 31, 1996............................ 1,766,138 $24.24
Granted................................................... 652,875 $41.89
Exercised................................................. (328,550) $18.59
Canceled.................................................. (1,000) $47.88
---------
Outstanding at December 31, 1997............................ 2,089,463 $30.61
Granted................................................... 1,124,800 * $16.27
Exercised................................................. (70,925) $18.35
Canceled.................................................. (466,975)* $36.19
---------
Outstanding at December 31, 1998............................ 2,676,363 $23.94
=========
- ----------------
</TABLE>
*Reflects the cancellation and re-issuance of 401,850 non-executive employee
stock options on December 14, 1998.
The Company had 1,756,263 options and 1,493,088 options exercisable at
December 31, 1998 and 1997, respectively. Detail of stock options outstanding
and options exercisable at December 31, 1998 follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------ ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Remaining Exercise Exercise
Range of Exercise Prices Number Life (Years) Price Number Price
------------------------ ------------- ------------ ----- ------ -------------
<S> <C> <C> <C> <C> <C>
$11.00 to $12.38................... 738,934 9.54 $11.18 43,334 $11.64
$16.13 to $22.13................... 1,046,429 4.84 $19.52 821,929 $19.21
$29.00 to $39.93................... 322,000 6.46 $32.73 322,000 $32.73
$41.50 to $47.88................... 569,000 7.83 $43.70 569,000 $43.70
--------- ---------
Total............................ 2,676,363 1,756,263
========= =========
</TABLE>
The weighted-average fair value of options granted during 1998, 1997 and
1996, was $7.55, $12.89 and $11.52, respectively. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions: expected stock price
volatility of 50.9% in 1998, 35.2% in 1997 and 33.6% in 1996; risk free interest
of 5% in 1998, 5.75% in 1997, and 6% in 1996, and average expected option lives
of 3 years. Had compensation expense for stock-based compensation been
determined based on the fair value at the date of grant, the Company's net
income, earnings available to Common Stockholders and earnings per share would
have been reduced to the pro forma amounts indicated below (amounts in
thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997* 1996*
--------- -------- -------
<S> <C> <C> <C> <C>
Net (loss) income........................................ As reported $ (94,272) $(13,700) $34,278
Pro forma $(103,434) $(16,315) $32,028
Net (loss) income available to Common Stockholders....... As reported $ (94,272) $(13,700) $33,339
Pro forma $(103,434) $(16,315) $31,089
(Loss) earnings per Common share -- Basic................ As reported $ (4.76) $ (0.69) $ 1.99
Pro forma $ (5.23) $ (0.82) $ 1.86
(Loss) earnings per Common share -- Diluted.............. As reported $ (4.76) $ (0.69) $ 1.84
Pro forma $ (5.23) $ (0.82) $ 1.72
</TABLE>
- --------------
* Restated
55
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
OF NUEVO FINANCING I
On December 23, 1996, the Company and Nuevo Financing I, a statutory business
trust formed under the laws of the state of Delaware, (the "Trust"), closed the
offering of 2,300,000 Term Convertible Securities, Series A, ("TECONS") on
behalf of the Trust. The price to the public of the TECONS was $50.00 per
TECONS. Distributions on the TECONS began to accumulate from December 23, 1996,
and are payable quarterly on March 15, June 15, September 15, and December 15,
at an annual rate of $2.875 per TECONS. Each TECONS is convertible at any time
prior to the close of business on December 15, 2026, at the option of the holder
into shares of Common Stock at the rate of .8421 shares of Common Stock for each
TECONS, subject to adjustment. The sole asset of the Trust as the obligor on
the TECONS is $115.0 million aggregate principal amount of 5.75% Convertible
Subordinated Debentures of the Company due December 15, 2026.
10. LONG-TERM DEBT
Long-term debt is comprised of the following at December 31, 1998 and 1997
(amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
8 7/8% Senior Subordinated Notes (a)....................................... $100,000 $ --
9 1/2% Senior Subordinated Notes (b)....................................... 160,000 160,000
OPIC credit facility (at 5.55% and 6.04% at December 31, 1998 and 1997,
respectively, plus a guaranty fee of 2.75%) (c)........................... 3,902 7,605
Bank credit facility (at 5.94% and 6.125% at December 31, 1998 and 1997,
respectively) (d)......................................................... 158,400 142,000
Other...................................................................... -- 51
-------- --------
Total debt.............................................................. 422,302 309,656
Less current maturities.................................................... (3,152) (3,716)
-------- --------
Long-term debt............................................................. $419,150 $305,940
======== ========
</TABLE>
_______
(a) In June 1998, the Company issued $100.0 million , 8 7/8% Senior
Subordinated Notes due June 1, 2008 (the "8 7/8% Notes"). Interest on the
8 7/8% Notes accrues at the rate of 8 7/8% per annum and is payable semi-
annually in arrears on June 1 and December 1. The 8 7/8% Notes are
redeemable, in whole or in part, at the option of the Company, on or after
June 1, 2003, under certain conditions. The Company is not required to
make mandatory redemption or sinking fund payments with respect to the
8 7/8% Notes. The indenture contains covenants that, among other things,
limit the Company's ability to incur additional indebtedness, limits
restricted payments, limit issuances and sales of capital stock by
restricted subsidiaries, limit dispositions of proceeds of asset sales,
limit dividends and other payment restrictions affecting restricted
subsidiaries, and restricts mergers, consolidations or sales of assets.
The 8 7/8% Notes are guaranteed by certain of Nuevo's subsidiaries. The
8 7/8% Notes are unsecured general obligations of the Company, and are
subordinated in right of payment to all existing and future senior
indebtedness of the Company. In the event of a defined change in control,
the Company will be required to make an offer to repurchase all outstanding
8 7/8% Notes at 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of redemption.
(b) In April 1996, the Company financed a portion of the purchase price of the
Unocal Properties with proceeds from the sale to the public of a principal
amount of $160.0 million, 9 1/2% Senior Subordinated Notes due April 15,
2006 (the "9 1/2% Notes"). Interest on the 9 1/2% Notes accrues at the
rate of 9 1/2% per annum and is payable semi-annually in arrears on April
15 and October 15. The 9 1/2% Notes are redeemable, in whole or in part,
at the option of the Company, on or after April 15, 2001, under certain
conditions. The Company is not required to make mandatory redemption or
sinking fund payments with respect to the 9 1/2% Notes. The indenture
contains covenants that, among other things, limit the Company's ability to
incur additional indebtedness, limits restricted payments, limit issuances
and sales of capital stock by restricted subsidiaries, limit dispositions
of proceeds of asset sales, limit dividends and other payment restrictions
affecting restricted subsidiaries, and restricts mergers, consolidations or
sales of assets. The 9 1/2% Notes were guaranteed by
56
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
certain of Nuevo's subsidiaries until February 1998, at which time such
subsidiaries were released as guarantors. The 9 1/2% Notes are unsecured
general obligations of the Company, and are subordinated in right of
payment to all existing and future senior indebtedness of the Company. In
the event of a defined change in control, the Company will be required to
make an offer to repurchase all outstanding 9 1/2% Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
redemption.
(c) In February 1995, in connection with the purchase of the stock of Amoco
Congo Production Company, the Company negotiated with the Overseas Private
Investment Corporation ("OPIC") and an agent bank for a non-recourse credit
facility in the amount of $25.0 million. The security for such facility is
the assets and stock of the Nuevo Congo Company ("NCC"). The initial
drawdown on the facility was $8.8 million to finance a portion of the
purchase price. The remaining funds under the credit facility will be used
to finance 75% of the development drilling program in the Congo. A portion
of the remaining outstanding commitment, $6.0 million, was drawn down in
January 1996 to fund the first phase of the development drilling program in
the Congo. The interest rate associated with such credit facility is the
London Interbank Offered Rate ("LIBOR") plus 20 basis points and a guaranty
fee of 2.75% of the outstanding loan balance, payable quarterly. At
December 31, 1998, the interest rate was 5.55%, plus the guarantee fee of
2.75%. The loan agreement requires a sixteen-quarter repayment period.
(d) Nuevo's Amended and Restated Credit Agreement, (the "Agreement"), dated as
of February 13, 1998, provides for unsecured revolving credit availability
of up to $400 million (subject to a periodic borrowing base determination)
from a bank group led by NationsBank of Texas, N.A. and Morgan Guaranty
Trust Company of New York, until its expiration on April 1, 2003.
The borrowing base determination establishes the maximum borrowings that
may be outstanding under the credit facility, and is determined by a two-
thirds vote of the banks (three-fourths in the event of an increase in the
borrowing base), each of which bases its judgement on (i) the present value
of the Company's oil and gas reserves based on its own assumptions
regarding future prices, production, costs, risk factors and discount
rates, and (ii) on projected cash flow coverage ratios calculated under
varying scenarios. If amounts outstanding under the credit facility exceed
the borrowing base, as redetermined from time to time, the Company would be
required to repay such excess over a defined period of time.
Effective January 6, 1999 the borrowing base was reduced from $380 million
to $200 million, reflecting the sale on that date of the Company's East
Texas natural gas reserves, and also reflecting a significant decline in
projected oil prices since the previous determination.
Amounts outstanding under the credit facility bear interest at a rate equal
to the London Interbank Offered Rate ("LIBOR") plus an amount which
increases as borrowing base utilization increases. At December 31, 1998 the
Company's interest rate under the credit facility was LIBOR plus .375%, or
5.94%. Outstandings under this facility at year end were $158.4 million,
and at January 6, 1999 were reduced by $82.6 million from a portion of the
proceeds of the East Texas sale.
The Credit Agreement has customary covenants including, but not limited to,
covenants with respect to to the following matters: (i) limitations on
certain restricted payments and investments; (ii) limitations on guarantees
and indebtedness; (iii) limitations on prepayments of subordinated and
certain other indebtedness; (iv) limitations on mergers and consolidations,
on certain types of acquisitions and on the issuance of certain securities
by subsidiaries; (v) limitations on liens; (vi) limitations on sales of
properties; (vii) limitations on transactions with affiliates; (viii)
limitations on derivative contracts; and (ix) limitations on debt in
subsidiaries. The Company is also required to maintain certain financial
ratios and conditions, including without limitation an EBITDA (earnings
before interest, taxes, depreciation, depletion, amortization and
exploration expenses) to fixed charge coverage ratio, a net worth
requirement, and a funded debt to capitalization ratio. As a result of
reduced revenues due to falling oil prices, the Company has obtained
amendments for relief from the EBITDA fixed charge coverage test through
March 31, 2000. The Company is in compliance with this test and all other
covenants of the Agreement at December 31, 1998. The Company is currently
in negotiation with its banks regarding other terms of the Agreement,
including pricing, security, the frequency of borrowing base determinations
and certain other covenants. Management believes the outcome of such
negotiations will result, over time, in improved borrowing base
availability and greater certainty of the commitment of this facility
during difficult periods in the oil and gas industry.
In June 1997, the Company redeemed its 12 1/2% Senior Subordinated Notes at
a total cost of $78.0 million, representing $75.0 million face value of the
debt plus a 4% premium of $3.0 million. In addition to the
57
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
premium, the Company wrote off approximately $2.0 million of unamortized
discount and deferred financing costs. The redemption resulted in an
extraordinary loss on early extinguishment of debt in the amount of $3.0
million, net of the related tax benefit of $2.0 million. The Company used
proceeds from its bank facility to fund the redemption.
The amount of scheduled debt maturities during the next five years and
thereafter is as follows (amounts in thousands):
1999........................................... $ 3,152
2000........................................... 750
2001........................................... --
2002........................................... --
2003........................................... 158,400
Thereafter..................................... 260,000
--------
Total debt................................... $422,302
========
Based upon the quoted market price, the fair value of the 8 7/8% Notes was
estimated to be $90.6 million at December 31, 1998, and the fair value of
the 9 1/2 % Notes was estimated to be $160.2 million and $170.3 million at
December 31, 1998 and 1997, respectively. For the OPIC credit facility and
other debt, for which no quoted prices are available, management believes
the carrying value of the debt materially represents the fair value of the
debt at December 31, 1998 and 1997.
58
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
NCC is a U.S. corporation with foreign branch operations in the Congo. The
functional currency of NCC is the U.S. Dollar and its income is taxed in the
United States. The Company's Congo investment involves risks typically
associated with investments in emerging markets such as an uncertain political,
economic, legal and tax environment, and expropriation and nationalization of
assets. The Company's investment is insured through political risk insurance
provided by OPIC.
The OPIC credit facility, discussed in Note 10, requires the Company to
provide consolidating financial statements that separately show NCC. Also shown
separately is Nuevo Congo LTD. ("NCL") which is the company that holds Nuevo's
additional interest in the Yombo field in the Congo (see Note 3) that was
acquired in 1998. These condensed consolidating financial statements are
presented below:
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nuevo NCC NCL Consolidated
-------- ------- ------- ------------
<S> <C> <C> <C> <C>
Total current assets............................ $145,906 $12,870 $ 2,476 $161,252
Net property and equipment...................... 568,509 39,112 8,951 616,572
Deferred tax assets, net........................ 27,059 475 -- 27,534
Total other assets.............................. 12,308 19 -- 12,327
-------- ------- ------- --------
Total assets.................................. $753,782 $52,476 $11,427 $817,685
======== ======= ======= ========
Total current liabilities....................... $ 18,006 $31,163 $ 454 $ 49,623
Long-term debt.................................. 418,400 750 -- 419,150
Other long-term liabilities..................... 2,034 -- -- 2,034
Mandatorily Redeemable Convertible Preferred
Securities of Nuevo Financing I................ 115,000 -- -- 115,000
Total stockholders' equity...................... 200,342 20,563 10,973 231,878
-------- ------- ------- --------
Total liabilities and stockholders' equity.... $753,782 $52,476 $11,427 $817,685
======== ======= ======= ========
</TABLE>
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nuevo* NCC* Consolidated*
-------- ------- -------------
<S> <C> <C> <C>
Total current assets........................................... $ 51,318 $ 7,542 $ 58,860
Net property and equipment..................................... 701,000 33,111 734,111
Total other assets............................................. 11,220 95 11,315
-------- ------- --------
Total assets................................................. $763,538 $40,748 $804,286
======== ======= ========
Total current liabilities...................................... $ 44,177 $ 5,426 $ 49,603
Long-term debt................................................. 302,038 3,902 305,940
Deferred tax liabilities....................................... 4,771 215 4,986
Other long-term liabilities.................................... (5,642) 9,660 4,018
Mandatorily Redeemable Convertible Preferred Securities of
Nuevo Financing I............................................. 115,000 -- 115,000
Total stockholders' equity..................................... 303,194 21,545 324,739
-------- ------- --------
Total liabilities and stockholders' equity................... $763,538 $40,748 $804,286
======== ======= ========
</TABLE>
- ---------------
* Restated
59
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nuevo NCC NCL Consolidated
--------- ------- ------ ------------
<S> <C> <C> <C> <C>
Revenues........................................ $ 236,758 $14,607 $1,338 $ 252,703
Expenses........................................ 362,103 16,279 1,218 379,600
--------- ------- ------ ---------
(Loss) income before income taxes............... (125,345) (1,672) 120 (126,897)
Income tax benefit.............................. (31,935) (690) -- (32,625)
--------- ------- ------ ---------
Net (loss) income............................... $ (93,410) $ (982) $ 120 $ (94,272)
========= ======= ====== =========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nuevo* NCC* Consolidated*
-------- ------- -------------
<S> <C> <C> <C>
Revenues....................................................... $334,446 $22,832 $357,278
Expenses....................................................... 358,079 16,531 374,610
-------- ------- --------
(Loss) income before income taxes and extraordinary item....... (23,633) 6,301 (17,332)
Income tax (benefit) expense................................... (6,883) 227 (6,656)
-------- ------- --------
(Loss) income before extraordinary item........................ (16,750) 6,074 (10,676)
Extraordinary loss on early extinguishment of debt, net of tax
benefit....................................................... 3,024 -- 3,024
-------- ------- --------
Net (loss) income.............................................. $(19,774) $ 6,074 $(13,700)
======== ======= ========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nuevo* NCC* Consolidated*
-------- ------- -------------
<S> <C> <C> <C>
Revenues....................................................... $308,380 $20,677 $329,057
Expenses....................................................... 256,568 14,246 270,814
-------- ------- --------
Income before income taxes..................................... 51,812 6,431 58,243
Income tax expense (benefit)................................... 23,969 (4) 23,965
-------- ------- --------
Net income..................................................... 27,843 6,435 34,278
Dividends on Preferred Stock................................... 939 -- 939
-------- ------- --------
Net earnings available to Common Stockholders.................. $ 26,904 $ 6,435 $ 33,339
======== ======= ========
</TABLE>
- ---------------
* Restated
60
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nuevo NCC NCL Consolidated
--------- -------- ------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income................................ $ (93,410) $ (982) $ 120 $ (94,272)
Non-cash adjustments............................. 119,473 4,281 -- 123,754
Change in assets and liabilities................. (8,015) 14,923 (557) 6,351
--------- -------- ------- ---------
Net cash provided by (used in) operating
activities................................... 18,048 18,222 (437) 35,833
--------- -------- ------- ---------
Cash flows from investing activities:
Additions to oil and gas properties.............. (137,430) (10,971) (8,951) (157,352)
Proceeds from sale of properties................. 11,830 -- -- 11,830
Additions to other properties and other.......... (2,813) -- -- (2,813)
--------- -------- ------- ---------
Net cash used in investing activities....... (128,413) (10,971) (8,951) (148,335)
--------- -------- ------- ---------
Cash flows from financing activities:
Proceeds from borrowings......................... 240,900 -- -- 240,900
Payments of long-term debt....................... (124,551) (3,703) -- (128,254)
Contribution to (from) Nuevo..................... (10,852) -- 10,852 --
Other............................................ (1,949) -- -- (1,949)
--------- -------- ------- ---------
Net cash provided by (used in) financing
activities................................... 103,548 (3,703) 10,852 110,697
--------- -------- ------- ---------
Net increase (decrease) in cash & cash equivalents. (6,817) 3,548 1,464 (1,805)
Cash and cash equivalents at beginning of year..... 7,417 1,791 -- 9,208
--------- -------- ------- ---------
Cash and cash equivalents at end of year........... $ 600 $ 5,339 $ 1,464 $ 7,403
========= ======== ======= =========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nuevo* NCC* Consolidated*
--------- -------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income............................................... $ (19,774) $ 6,074 $ (13,700)
Non-cash adjustments............................................ 155,749 3,612 159,361
Change in assets and liabilities................................ 12,846 6,955 19,801
--------- -------- ---------
Net cash provided by operating activities.................... 148,821 16,641 165,462
--------- -------- ---------
Cash flows from investing activities:
Additions to oil and gas properties............................. (182,261) (12,847) (195,108)
Proceeds from sale of properties................................ 27,377 -- 27,377
Additions to other properties and other......................... (1,747) -- (1,747)
--------- -------- ---------
Net cash used in investing activities...................... (156,631) (12,847) (169,478)
--------- -------- ---------
Cash flows from financing activities:
Proceeds from borrowings........................................ 234,000 -- 234,000
Payments of long-term debt...................................... (213,800) (3,703) (217,503)
Other........................................................... (16,909) -- (16,909)
--------- -------- ---------
Net cash provided by (used in) financing activities.......... 3,291 (3,703) (412)
--------- -------- ---------
Net (decrease) increase in cash and cash equivalents.............. (4,519) 91 (4,428)
Cash and cash equivalents at beginning of year.................... 11,936 1,700 13,636
--------- -------- ---------
Cash and cash equivalents at end of year.......................... $ 7,417 $ 1,791 $ 9,208
========= ======== =========
</TABLE>
- -----------------
* Restated
61
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nuevo* NCC* Consolidated*
--------- -------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 27,843 $ 6,435 $ 34,278
Non-cash adjustments............................................ 89,792 2,469 92,261
Change in assets and liabilities................................ (6,483) 6,865 382
--------- -------- ---------
Net cash provided by operating activities.................... 111,152 15,769 126,921
--------- -------- ---------
Cash flows from investing activities:
Additions to oil and gas properties............................. (496,516) (19,469) (515,985)
Proceeds from sale of properties................................ 42,700 -- 42,700
Additions to other properties and other......................... (72,717) -- (72,717)
--------- -------- ---------
Net cash used in investing activities...................... (526,533) (19,469) (546,002)
--------- -------- ---------
Cash flows from financing activities:
Proceeds from borrowings........................................ 402,000 6,000 408,000
Proceeds from issuance of Company-Obligated Mandatorily
Redeemable Convertible Preferred Securities of Nuevo
Financing I.................................................... 115,000 -- 115,000
Payments of long-term debt...................................... (229,406) (2,953) (232,359)
Other........................................................... 136,311 -- 136,311
--------- -------- ---------
Net cash provided by financing activities.................... 423,905 3,047 426,952
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents.............. 8,524 (653) 7,871
Cash and cash equivalents at beginning of year.................... 3,412 2,353 5,765
--------- -------- ---------
Cash and cash equivalents at end of year.......................... $ 11,936 $ 1,700 $ 13,636
========= ======== =========
</TABLE>
12. INCOME TAXES
Income tax (benefit) expense is summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1998 1997* 1996*
------------ -------------- --------------
<S> <C> <C> <C>
Current
Federal................................................ $ (105) $ 135 $ 1,200
State................................................. -- 421 300
-------- ------- -------
(105) 556 1,500
-------- ------- -------
Deferred
Federal............................................... (24,172) (7,449) 17,465
State................................................. (8,348) (1,800) 5,000
-------- ------- -------
(32,520) (9,249) 22,465
-------- ------- -------
Total income tax (benefit) expense................... $(32,625) $(8,693) $23,965
======== ======= =======
</TABLE>
A deferred tax benefit related to the exercise of employee stock options of
approximately $5.3 million and $4.7 million was allocated directly to additional
paid-in capital in 1997 and 1996, respectively. A current tax benefit of $2.0
million was allocated to the extraordinary loss in 1997.
- -----------------
*Restated
62
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total income tax (benefit) expense differs from the amount computed by
applying the Federal income tax rate to (loss) income before income taxes,
minority interest and extraordinary item. The reasons for these differences are
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1998 1997* 1996*
------------ ------------- ------------
<S> <C> <C> <C>
Statutory Federal income tax rate................................ (35.0)% (35.0)% 35.0%
(Decrease) increase in tax rate resulting from:
State income taxes, net of Federal benefit..................... (4.3) (4.0) 5.9
Non-realization of tax benefits related to provision for
impairment on assets held for sale............................ -- 3.6 --
Increase in valuation allowance................................ 13.4 -- --
Nondeductible travel and entertainment and other............... 0.2 (3.4) .4%
----- ----- ----
(25.7)% (38.8)% 41.3%
===== ===== ====
</TABLE>
The tax effects of temporary differences that result in significant portions
of the deferred income tax assets and liabilities and a description of the
financial statement items creating these differences are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
As of December 31,
----------------------------
1998 1997*
-------- --------
<S> <C> <C>
Net operating loss carryforwards...................................... $ 45,610 $ 10,267
Alternative minimum tax credit carryforwards.......................... 1,054 1,337
State income taxes.................................................... 1,520 --
Capital loss carryforwards............................................ 2,365 700
-------- --------
Total deferred income tax assets.................................... 50,549 12,304
Less: valuation allowance........................................... (17,646) (700)
-------- --------
Net deferred income tax assets...................................... 32,903 11,604
-------- --------
Property and equipment................................................ (5,369) (12,694)
State income taxes.................................................... -- (3,896)
-------- --------
Total deferred income tax liabilities............................... (5,369) (16,590)
-------- --------
Net deferred income tax asset (liability)............................. $ 27,534 $ (4,986)
======== ========
</TABLE>
- ---------------
* Restated
At December 31, 1998, the Company had a net operating loss carryforward for
regular tax of approximately $130.3 million, which will expire in future years
beginning in 2006 through 2012. The alternative minimum tax credit carryforward
of $1.1 million does not expire and may be applied to reduce regular income tax
to an amount not less than the alternative minimum tax payable in any one year.
At December 31, 1998, the Company determined that it was more likely than not
that a portion of the deferred tax assets will not be realized and the valuation
allowance was increased by $16.9 million to a total valuation allowance of $17.6
million.
63
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. INDUSTRY SEGMENT INFORMATION
As of December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which was issued by the FASB
in June 1997. This statement establishes standards for reporting information
about operating segments in annual financial statements and requires that
enterprises report selected information about operating segments in interim
reports.
The Company's operations are concentrated primarily in two segments:
exploration and production of oil and natural gas, and gas plant and other
facilities.
<TABLE>
<CAPTION>
As of and For the Year Ended
December 31,
--------------------------------------------------
1998 1997* 1996*
-------- -------- ---------
(Amounts in thousands)
<S> <C> <C> <C>
Sales to unaffiliated customers:
Oil and gas -- East............................................... $ 46,885 $ 61,456 $ 74,930
Oil and gas -- West............................................... 177,315 247,723 184,261
Oil and gas -- Foreign............................................ 15,810 22,794 20,668
Gas plant, pipeline and other facilities.......................... 5,365 20,598 41,576
--------- -------- --------
Total sales....................................................... 245,375 352,571 321,435
Other revenues.................................................... 7,328 4,707 7,622
--------- -------- --------
Total revenues.................................................... $ 252,703 $357,278 $329,057
========= ======== ========
Operating (loss) profit before income taxes:
Oil and gas -- East............................................... $ 22,608 $ 24,745 $ 37,659
Oil and gas -- West............................................... (67,677) 40,369 72,049
Oil and gas -- Foreign............................................ (12,849) 6,172 7,247
Gas plant, pipeline and other facilities (2)...................... 3,063 (22,478) 2,619
--------- -------- --------
(54,855) 48,808 119,574
Unallocated corporate expenses.................................... 32,958 32,170 25,157
Interest expense.................................................. 32,471 27,357 36,009
Dividends on TECONS............................................... 6,613 6,613 165
--------- -------- --------
Operating (loss) profit before income taxes....................... $(126,897) $(17,332) $ 58,243
========= ======== ========
Identifiable assets:
Oil and gas -- Domestic (1)....................................... $ 748,695 $671,603 $682,995
Oil and gas -- Foreign............................................ 40,700 40,139 33,147
Gas plant and other facilities.................................... 14,893 17,387 66,329
--------- -------- --------
804,288 729,129 782,471
Corporate assets and investments................................... 13,397 75,157 35,172
--------- -------- --------
Total............................................................. $ 817,685 $804,286 $817,643
========= ======== ========
Capital expenditures:
Oil and gas -- East............................................... $ 36,597 $ 32,857 $ 37,480
Oil and gas -- West (1)........................................... 96,179 148,927 525,259
Oil and gas -- Foreign............................................ 30,498 14,111 19,607
Gas plant and other facilities.................................... 2,813 1,747 2,717
--------- -------- --------
$ 166,087 $197,642 $585,063
========= ======== ========
Depreciation, depletion and amortization:
Oil and gas -- East............................................... $ 10,391 $ 14,252 $ 24,842
Oil and gas -- West............................................... 68,164 81,011 43,964
Oil and gas -- Foreign............................................ 4,971 3,385 2,473
Gas plant and other facilities.................................... 812 2,830 3,812
--------- -------- --------
$ 84,338 $101,478 $ 75,091
========= ======== ========
</TABLE>
- ----------------
* Restated
64
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Identifiable assets and capital expenditures for 1996 include $15.0 million
in costs associated with gas plant facilities in California, which
processes immaterial amounts of third party gas, and whose revenues from
the sale of these liquids are included in oil and gas revenues.
(2) Gas plant and other facilities operations for 1998 include a positive
revision to a prior period charge of $3.7 million and for 1997 include a
charge for $23.9 million to record an impairment on assets held for sale
and a $2.3 million gain on sale. See Note 4.
In 1998, 1997 and 1996, the Company had one customer that accounted for 60%,
62%, and 52% of oil and gas revenues, respectively. Also in 1998, the Company
had another customer who accounted 10% of oil and gas revenues.
14. CONTINGENCIES
The Company has been named as a defendant in the lawsuit Gloria Garcia Lopez
and Husband, Hector S. Lopez, Individually, and as successors to Galo Land &
Cattle Company v. Mobil Producing Texas & New Mexico, et al. currently pending
in the 79th Judicial District Court of Brooks County, Texas. The plaintiffs
allege: (i) underpayment of royalties and claim damages, on a gross basis
against all working interest owners, of $27.7 million plus $26.2 million in
interest for the period from 1985 to date; (ii) that their production was
improperly commingled with gas produced from an adjoining lease, resulting in
damages, including interests of $40.8 million, on a gross basis; (iii) $59.7
million (gross) for alleged failure to develop and $20.0 million (gross) for
interest in the alleged failure to develop; and (iv) numerous other claims that
may result in unspecified damages. Nuevo's working interest in these properties
is 20%. The Company, along with the other defendants in this case, denies these
allegations and is vigorously contesting these claims. Management does not
believe that the outcome of this matter will have a material adverse impact on
the Company's operating results, financial condition or liquidity.
The Company has been named as a defendant in certain other lawsuits incidental
to its business. Management does not believe that the outcome of such
litigation will have a material adverse impact on the Company's operating
results or financial condition. However, these actions and claims in the
aggregate seek substantial damages against the Company and are subject to the
inherent uncertainties in any litigation. The Company is defending itself
vigorously in all such matters.
In March 1999, the Company discovered that an employee had fraudulently
authorized and diverted for personal use Company funds totaling $5.9 million,
$4.3 million in 1998 and the remainder in 1999, that were intended for
international exploration. Accordingly, the Company has reclassified the amounts
lost in 1998 from exploration costs to other expense. Based on its review of the
facts, management is confident that only one employee was involved in the matter
and that all misappropriated funds have been identified. The Board has engaged a
Certified Fraud Examiner to conduct an in-depth review of the fraudulent
transactions to determine the scope of the fraud, the possibility of recovery of
amounts lost from insurance, from the terminated employee and/or from third
parties, and to make recommendations regarding what, if any, new internal
control procedures should be implemented.
In September 1997, there was a spill of crude oil into the Santa Barbara
Channel from a pipeline that connects the Company's Point Pedernales field with
shore-based processing facilities. The volume of the spill was estimated to be
163 barrels of oil. Torch, which operates the platform and pipeline for the
Company, responded immediately by shutting down the pipeline and notified the
National Response Center and all appropriate Federal, state, and local
authorities, as well as petroleum industry environmental response consortia.
The costs of the clean up and the repair either have been or are expected to be
covered by insurance held by the Company, less the Company's deductibles of
$120,000 net to the Company. Repairs were completed by the end of 1997, and
production recommenced in December 1997. Additionally, the Company has exposure
to certain costs that may not be recoverable by insurance, including fines,
penalties, and damages. Such costs are not quantifiable at this time, but are
not expected to be material to the Company's operating results, financial
condition or liquidity.
The Company's international investments involve risks typically associated
with investments in emerging markets such as an uncertain political, economic,
legal and tax environment and expropriation and nationalization of assets. In
addition, if a dispute arises in its foreign operations, the Company may be
subject to the exclusive jurisdiction of foreign courts or may not be successful
in subjecting foreign persons to the jurisdiction of the United States. The
Company attempts to conduct its business and financial affairs so as to protect
against political and economic risks applicable to operations in the various
countries where it operates, but there can be no
65
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assurance that the Company will be successful in so protecting itself. A portion
of the Company's investment in the Congo is insured through political risk
insurance provided by OPIC.
The Company and its partners in the Congo are undergoing a tax examination
related to their ownership interests in the Yombo field offshore Republic of
Congo, for the years 1994 through 1997. The Congolese taxing authorities have
issued a preliminary assessment of approximately $24.0 million in taxes and
penalties for all years, in aggregate for all parties who have ownership in this
field. Nuevo's working interest in this field is 43.75% during the years under
examination. The Company, along with the other partners, is in discussions with
the Congolese taxing authorities refuting this assessment as without merit to
the items being disallowed. Management does not believe that the outcome of
this matter will have a material adverse effect upon the Company.
In connection with their respective acquisitions of two subsidiaries (each a
"Congo subsidiary") owning interests in the Yombo field offshore West Africa,
the Company and a wholly-owned subsidiary of CMS NOMECO Oil & Gas Co. ("CMS")
agreed with the seller of the subsidiaries not to claim certain tax losses
("dual consolidated losses") incurred by such subsidiaries prior to the
acquisitions. Pursuant to the agreement, the Company and CMS may be liable to
the seller for the recapture of dual consolidated losses utilized by the seller
in years prior to the acquisitions if certain triggering events occur, including
(i) a disposition by either the Company or CMS of its respective Congo
subsidiary, (ii) either Congo subsidiary's sale of its interest in the Yombo
field, (iii) the acquisition of the Company or CMS by another consolidated group
or (iv) the failure of the Company or CMS's Congo subsidiary to continue as a
member of its respective consolidated group. A triggering event will not occur,
however, if a subsequent purchaser enters into certain agreements specified in
the consolidated return regulations intended to ensure that such dual
consolidated losses will not be claimed. The Company and CMS have agreed among
themselves that the party responsible for the triggering event shall indemnify
the other for any liability to the seller as a result of such triggering event.
The Company's potential direct liability could be as much as $50.0 million if a
triggering event with respect to the Company occurs, and the Company believes
that CMS's liability (for which the Company would be jointly liable with an
indemnification right against CMS) could be as much as $67.0 million. The
Company does not expect a triggering event to occur with respect to it or CMS
and does not believe the agreement will have a material adverse effect upon the
Company.
During 1997, a new government was established in the Congo. Although the
political situation in the Congo has not to date had a material adverse effect
on the Company's operations in the Congo, no assurances can be made that
continued political unrest in West Africa will not have a material adverse
effect on the Company and its operations in the Congo in the future.
15. FINANCIAL INSTRUMENTS
The Company periodically uses derivative financial instruments to manage oil
and natural gas price risk. For 1999, the Company entered into swap agreements
on 4,500 barrels of oil per day ("BOPD") of its Congo production, hedging the
basis differential between No. 6 fuel oil and West Texas Intermediate ("WTI") at
an average differential of $2.28. The Company also purchased a call option on
2,000 BOPD of its Congo production at a strike price of $16.00 per barrel of oil
("BBL"), to hedge the Company's potential liability under a price sharing
agreement with a third party. These agreements expose the Company to
counterparty credit risk to the extent that the counterparty is unable to meet
its settlement commitments to the Company.
For 1999, the Company has entered into an agreement under which a portion of
the its fixed rate debt will be converted to floating rate debt. This agreement
is not held for trading purposes. As the swap provider is a major financial
institution, the Company does not anticipate non-performance by the provider.
Determination of Fair Values of Financial Instruments
Fair value for cash, short-term investments, receivables and payables
approximates carrying value. The following table details the carrying values
and approximate fair values of the Company's other investments, derivative
financial instruments and long-term debt at December 31, 1998 and 1997.
66
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------------- ---------------------------
Carrying Approximate Carrying Approximate
Value Fair Value Value Fair Value
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Other investments...................................... $ 80 $ 80 $ 434 $ 553
Derivative Instruments:
Option premium....................................... 292 241 -- --
Commodity price swaps................................ -- (2,636) -- 506
Long-term debt (see Note 10)........................... 419,150 409,938 305,940 316,228
TECONS................................................. 115,000 71,875 115,000 112,700
</TABLE>
67
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. SUPPLEMENTAL INFORMATION - (UNAUDITED)
Oil and Gas Producing Activities:
Included herein is information with respect to oil and gas acquisition,
exploration, development and production activities, which is based on estimates
of year-end oil and gas reserve quantities and estimates of future development
costs and production schedules. Reserve quantities and future production as of
December 31, 1998 are based primarily on reserve reports prepared by the
independent petroleum engineering firm of Ryder Scott Company. Reserve
quantities and future production for previous years are based primarily upon
reserve reports prepared by Ryder Scott Company and the independent petroleum
firm of Poco Oil Company. These estimates are inherently imprecise and subject
to substantial revision.
Estimates of future net cash flows from proved reserves of gas, oil,
condensate and natural gas liquids ("NGL") were made in accordance with SFAS No.
69, "Disclosures about Oil and Gas Producing Activities". The estimates are
based on realized prices at year-end, of $8.03 per BBL and $1.79 per thousand
cubic feet of gas ("MCF"). Estimated future cash inflows are reduced by
estimated future development and production costs based on year-end cost levels,
assuming continuation of existing economic conditions, and by estimated future
income tax expense. Tax expense is calculated by applying the existing
statutory tax rates, including any known future changes, to the pre-tax net cash
flows, less depreciation of the tax basis of the properties and depletion
allowances applicable to the gas, oil, condensate and NGL production. Because
the disclosure requirements are standardized, significant changes can occur in
these estimates based upon oil and gas prices currently in effect. The results
of these disclosures should not be construed to represent the fair market value
of the Company's oil and gas properties. A market value determination would
include many additional factors including: (i) anticipated future increases or
decreases in oil and gas prices and production and development costs; (ii) an
allowance for return on investment; (iii) the value of additional reserves, not
considered proved at the present, which may be recovered as a result of further
exploration and development activities; and (iv) other business risks.
The following tables include the Company's East Texas natural gas assets,
which were sold on January 6, 1999 (see Note 4). Such assets accounted for 54.9
MBOE, or 21%, of the Company's December 31, 1998 net proved reserve estimates.
Costs incurred (amounts in thousands)-
The following table sets forth the costs incurred in property acquisition and
development activities:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997* 1996*
--------- ---------- ----------
<S> <C> <C> <C>
DOMESTIC
Property acquisition:
Proved properties(2)............................................... $ 200 $ 10,206 $452,603
Unproved properties................................................ 1,320 -- 40,000
Exploration......................................................... 26,706 18,474 7,289
Development(1)...................................................... 104,550 153,104 62,847
-------- -------- --------
$132,776 $181,784 $562,739
======== ======== ========
FOREIGN
Property acquisition:
Proved properties.................................................. $ 7,809 $ -- $ --
Unproved properties................................................ 1,404 -- --
Exploration......................................................... 9,204 10,887 8,844
Development......................................................... 12,081 3,224 10,763
-------- -------- --------
$ 30,498 $ 14,111 $ 19,607
======== ======== ========
</TABLE>
68
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Costs incurred (amounts in thousands) Cont'd. -
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1998 1997* 1996*
-------- -------- --------
<S> <C> <C> <C>
TOTAL
Property acquisition:
Proved properties.................................................. $ 8,009 $ 10,206 $452,603
Unproved properties................................................ 2,724 -- 40,000
Exploration......................................................... 35,910 29,361 16,133
Development......................................................... 116,631 156,328 73,610
-------- -------- --------
$163,274 $195,895 $582,346
======== ======== ========
</TABLE>
(1) Includes capitalized interest directly related to development activities of
$0.6 million in 1998 and $2.4 million in 1997.
(2) The acquisition of domestic proved properties for 1996 includes $15.0
million in costs associated with gas plant facilities in California.
- ---------------
* Restated
Capitalized costs (amounts in thousands)-
The following table sets forth the capitalized costs relating to oil and gas
activities and the associated accumulated depreciation, depletion and
amortization:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997* 1996*
--------- --------- ---------
<S> <C> <C> <C>
DOMESTIC
Proved properties................................................... $ 877,230 $ 903,096 $ 739,260
Unproved properties................................................. 20,984 41,661 44,661
--------- --------- ---------
Total capitalized costs............................................ 898,214 944,757 783,921
Accumulated depreciation, depletion and amortization............... (401,139) (315,038) (198,024)
--------- --------- ---------
Net capitalized costs............................................. $ 497,075 $ 629,719 $ 585,897
========= ========= =========
FOREIGN
Proved properties................................................... $ 59,774 $ 39,516 $ 26,677
Unproved properties................................................. 1,360 -- --
--------- --------- ---------
Total capitalized costs............................................ 61,134 39,516 26,677
Accumulated depreciation, depletion and amortization............... (11,724) (6,378) (2,993)
--------- --------- ---------
Net capitalized costs............................................. $ 49,410 $ 33,138 $ 23,684
========= ========= =========
TOTAL
Proved properties................................................... $ 937,004 $ 942,612 $ 765,937
Unproved properties................................................. 22,344 41,661 44,661
--------- --------- ---------
Total capitalized costs............................................ 959,348 984,273 810,598
Accumulated depreciation, depletion and amortization............... (412,863) (321,416) (201,017)
--------- --------- ---------
Net capitalized costs............................................. $ 546,485 $ 662,857 $ 609,581
========= ========= =========
</TABLE>
- ----------------
* Restated
69
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Results of operations for producing activities (amounts in thousands) --
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997* 1996*
--------- --------- --------
<S> <C> <C> <C>
DOMESTIC
Revenues from oil and gas producing activities...................... $ 224,200 $ 309,179 $259,191
Production costs.................................................... (122,816) (108,074) (82,119)
Exploration costs................................................... (5,137) (9,813) (4,566)
Depreciation, depletion and amortization............................ (78,555) (95,263) (68,806)
Provision for impairment of oil and gas properties.................. (68,529) (30,000) --
Income tax benefit (provision)...................................... 13,234 (26,449) (42,828)
--------- --------- --------
Results of operations from producing activities (excluding
corporate overhead and interest costs)............................. $ (37,603) $ 39,580 $ 60,872
========= ========= ========
FOREIGN
Revenues from oil and gas producing activities...................... $ 15,810 $ 22,794 $ 20,668
Production costs.................................................... (11,888) (11,968) (10,943)
Exploration costs................................................... (11,425) (1,269) (5)
Depreciation, depletion and amortization............................ (4,971) (3,385) (2,473)
Provision for impairment of oil and gas properties.................. (375) -- --
Income tax benefit (provision)...................................... 3,174 (2,469) (2,993)
--------- --------- --------
Results of operations from producing activities (excluding
corporate overhead and interest costs)............................. $ (9,675) $ 3,703 $ 4,254
========= ========= ========
TOTAL
Revenues from oil and gas producing activities...................... $ 240,010 $ 331,973 $279,859
Production costs.................................................... (134,704) (120,042) (93,062)
Exploration costs................................................... (16,562) (11,082) (4,571)
Depreciation, depletion and amortization............................ (83,526) (98,648) (71,279)
Provision for impairment of oil and gas properties.................. (68,904) (30,000) --
Income tax benefit (provision)...................................... 16,408 (28,918) (45,821)
--------- --------- --------
Results of operations from producing activities (excluding
corporate overhead and interest costs)............................. $ (47,278) $ 43,283 $ 65,126
========= ========= ========
</TABLE>
- --------------
* Restated
Per unit sales prices and costs:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
DOMESTIC
Average sales price:
Oil (per barrel)................................................ $ 9.10 $14.88 $15.99
Gas (per MCF)................................................... $ 2.00 $ 2.06 $ 2.08
Average production cost per equivalent barrel..................... $ 5.33 $ 4.96 $ 4.63
FOREIGN
Average sales price:
Oil (per barrel)................................................ $10.82 $14.66 $14.56
Average production cost per equivalent barrel..................... $ 8.14 $ 7.70 $ 7.71
TOTAL
Average sales price:
Oil (per barrel)................................................ $ 9.25 $14.86 $15.84
Gas (per MCF)................................................... $ 2.00 $ 2.06 $ 2.08
Average production cost per equivalent barrel..................... $ 5.56 $ 5.14 $ 4.86
</TABLE>
70
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's estimated total proved and proved developed reserves of oil and
gas are as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
Oil* Gas Oil* Gas Oil* Gas
(Mbbl) (Mmcf) (Mbbl) (Mmcf) (Mbbl) (Mmcf)
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC
Proved reserves at beginning of year....... 202,771 390,691 165,839 394,630 9,700 301,311
Revisions of previous estimates............ (41,399) (8,953) 10,177 (5,105) 5,581 (1,388)
Extensions and discoveries................. 17,694 55,575 39,911 35,682 3,615 18,291
Production................................. (17,345) (32,521) (15,854) (35,625) (11,924) (34,775)
Sales of reserves in-place................. (1,595) (1,536) (15) (675) (2,506) (30,588)
Purchase of reserves in-place.............. 4,174 -- 2,713 1,784 161,373 141,779
------- ------- ------- ------- ------- -------
Proved reserves at end of year............. 164,300 403,256 202,771 390,691 165,839 394,630
======= ======= ======= ======= ======= =======
Proved developed reserves--
Beginning of year........................ 143,486 266,179 122,088 236,013 8,289 142,012
======= ======= ======= ======= ======= =======
End of year.............................. 123,077 308,667 143,486 266,179 122,088 236,013
======= ======= ======= ======= ======= =======
FOREIGN
Proved reserves at beginning of year....... 24,493 -- 20,214 -- 20,826 --
Revisions of previous estimates............ (420) -- (1,313) -- (107) --
Extensions and discoveries................. -- -- 7,147 -- 915 --
Production................................. (1,461) -- (1,555) -- (1,420) --
Sales of reserves in-place................. -- -- -- -- -- --
Purchase of reserves in-place.............. 3,229 -- -- -- -- --
------- ------- ------- ------- ------- -------
Proved reserves at end of year............. 25,841 -- 24,493 -- 20,214 --
======= ======= ======= ======= ======= =======
Proved developed reserves--
Beginning of year........................ 9,526 -- 16,727 -- 14,787 --
======= ======= ======= ======= ======= =======
End of year.............................. 10,242 -- 9,526 -- 16,727 --
======= ======= ======= ======= ======= =======
TOTAL
Proved reserves at beginning of year....... 227,264 390,691 186,053 394,630 30,526 301,311
Revisions of previous estimates............ (41,819) (8,953) 8,864 (5,105) 5,474 (1,388)
Extensions and discoveries................. 17,694 55,575 47,058 35,682 4,530 18,291
Production................................. (18,806) (32,521) (17,409) (35,625) (13,344) (34,775)
Sales of reserves in-place................. (1,595) (1,536) (15) (675) (2,506) (30,588)
Purchase of reserves in-place.............. 7,403 -- 2,713 1,784 161,373 141,779
------- ------- ------- ------- ------- -------
Proved reserves at end of year............. 190,141 403,256 227,264 390,691 186,053 394,630
======= ======= ======= ======= ======= =======
Proved developed reserves--
Beginning of year........................ 153,012 266,179 138,815 236,013 23,076 142,012
======= ======= ======= ======= ======= =======
End of year.............................. 133,319 308,667 153,012 266,179 138,815 236,013
======= ======= ======= ======= ======= =======
</TABLE>
- --------------
* Includes estimated NGL reserves.
71
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Discounted future net cash flows (amounts in thousands) --
The standardized measure of discounted future net cash flows and changes
therein are shown below:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
DOMESTIC
Future cash inflows........................................... $ 1,989,898 $ 3,566,450 $ 4,476,523
Future production costs....................................... (1,061,638) (1,643,774) (1,739,219)
Future development costs...................................... (289,686) (329,997) (309,365)
----------- ----------- -----------
Future net inflows before income tax.......................... 638,574 1,592,679 2,427,939
Future income taxes........................................... -- (427,618) (736,788)
----------- ----------- -----------
Future net cash flows......................................... 638,574 1,165,061 1,691,151
10% discount factor........................................... (360,611) (454,023) (702,996)
----------- ----------- -----------
Standardized measure of discounted future net cash flows...... $ 277,963 $ 711,038 $ 988,155
=========== =========== ===========
FOREIGN
Future cash inflows........................................... $ 260,627 $ 360,959 $ 414,383
Future production costs....................................... (134,549) (171,331) (248,222)
Future development costs...................................... (66,715) (59,985) (2,625)
----------- ----------- -----------
Future net inflows before income tax.......................... 59,363 129,643 163,536
Future income taxes........................................... -- (39,243) (55,083)
----------- ----------- -----------
Future net cash flows......................................... 59,363 90,400 108,453
10% discount factor........................................... (37,393) (36,653) (33,659)
----------- ----------- -----------
Standardized measure of discounted future net cash flows...... $ 21,970 $ 53,747 $ 74,794
=========== =========== ===========
TOTAL
Future cash inflows........................................... $ 2,250,525 $ 3,927,409 $ 4,890,906
Future production costs....................................... (1,196,187) (1,815,105) (1,987,441)
Future development costs...................................... (356,401) (389,982) (311,990)
----------- ----------- -----------
Future net inflows before income tax.......................... 697,937 1,722,322 2,591,475
Future income taxes........................................... -- (466,861) (791,871)
----------- ----------- -----------
Future net cash flows......................................... 697,937 1,255,461 1,799,604
10% discount factor........................................... (398,004) (490,676) (736,655)
----------- ----------- -----------
Standardized measure of discounted future net cash flows...... $ 299,933 $ 764,785 $ 1,062,949
=========== =========== ===========
</TABLE>
72
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following are the principal sources of change in the standardized measure of
discounted future net cash flows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
DOMESTIC
Standardized measure -- beginning of year..................... $ 711,038 $ 988,155 $ 236,920
Sales, net of production costs................................ (101,383) (201,198) (177,072)
Purchases of reserves in-place................................ 2,278 18,293 605,210
Net change in prices and production costs..................... (466,018) (581,640) 505,108
Extensions, discoveries and improved recovery, net of future
production and development costs............................. 46,713 180,146 38,572
Net changes in estimated future development costs............. 79,410 87,606 10,151
Revisions of quantity estimates............................... (86,459) 33,358 79,185
Accretion of discount......................................... 83,281 125,138 26,207
Net change in income taxes.................................... 121,770 141,452 (238,071)
Sales of reserves in-place.................................... (356) (1,598) (41,969)
Changes in production rates and other......................... (112,311) (78,674) (56,086)
--------- ---------- ----------
Standardized measure -- end of year........................... $ 277,963 $ 711,038 $ 988,155
========= ========== ==========
FOREIGN
Standardized measure -- beginning of year..................... $ 53,747 $ 74,794 $ 74,166
Sales, net of production costs................................ (3,923) (10,826) (9,725)
Purchases of reserves in-place................................ 2,750 -- --
Net change in prices and production costs..................... (56,690) (22,193) (1,557)
Extensions, discoveries and improved recovery, net of future
production and development costs............................. -- 5,486 4,930
Net changes in estimated future development costs............. 8,990 (6,212) 3,892
Revisions of quantity estimates............................... (750) (5,609) (598)
Accretion of discount......................................... 6,830 10,720 11,288
Net change in income taxes.................................... 14,552 17,857 6,304
Changes in production rates and other......................... (3,536) (10,270) (13,906)
--------- ---------- ----------
Standardized measure -- end of year........................... $ 21,970 $ 53,747 $ 74,794
========= ========== ==========
TOTAL
Standardized measure -- beginning of year..................... $ 764,785 $1,062,949 $ 311,086
Sales, net of production costs................................ (105,306) (212,024) (186,797)
Purchases of reserves in-place................................ 5,028 18,293 605,210
Net change in prices and production costs..................... (522,708) (603,833) 503,551
Extensions, discoveries and improved recovery, net of future
production and development costs............................. 46,713 185,632 43,502
Net changes in estimated future development costs............. 88,400 81,394 14,043
Revisions of quantity estimates............................... (87,209) 27,749 78,587
Accretion of discount......................................... 90,111 135,858 37,495
Net change in income taxes.................................... 136,322 159,309 (231,767)
Sales of reserves in-place.................................... (356) (1,598) (41,969)
Changes in production rates and other......................... (115,847) (88,944) (69,992)
--------- ---------- ----------
Standardized measure -- end of year........................... $ 299,933 $ 764,785 $1,062,949
========= ========== ==========
</TABLE>
73
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SELECTED QUARTERLY FINANCIAL DATA (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED):
<TABLE>
<CAPTION>
Quarter Ended (4)
------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues....................................... $67,661 $61,512 $ 65,966 $ 57,564
Operating earnings (loss) (1).................. $ 4,011 $ 3,317 $ (5,369) $(66,858)
Net loss (1)................................... $(6,582) $(7,622) $(11,245) $(68,823)
Loss per Common share -- Basic................. $ (0.33) $ (0.39) $ (0.57) $ (3.47)
Loss per Common share -- Diluted............... $ (0.33) $ (0.39) $ (0.57) $ (3.47)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended (4)(5)
-----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues....................................... $102,410 $85,976 $82,120 $ 86,772
Operating earnings (loss) (2).................. $ 39,872 $26,204 $17,410 $(34,688)
Net income (loss) (2)(3)....................... $ 14,609 $ 2,964 $ 352 $(31,625)
Earnings (loss) per Common share -- Basic...... $ 0.73 $ 0.15 $ 0.02 $ (1.60)
Earnings (loss) per Common share -- Diluted.... $ 0.70 $ 0.15 $ 0.02 $ (1.60)
</TABLE>
_________
(1) Includes a fourth quarter charge of $68.9 million to record an impairment
of oil and gas properties and a fourth quarter $3.7 million positive
revision to a prior period impairment on assets held for sale.
(2) Includes fourth quarter charges of $23.9 million to record an impairment on
assets held for sale and $30.0 million to record an impairment of oil and
gas properties and a second quarter gain on sale of $3.0 million that was
adjusted downward by $752,000 in the third quarter (see Note 4).
(3) Includes an extraordinary loss on early extinguishment of debt of $3.0
million, net of income tax benefit, in the second quarter.
(4) Certain reclassifications of prior period amounts have been made to conform
with the current presentation.
(5) Restated.
74
<PAGE>
NUEVO ENERGY COMPANY
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
December 31, 1998. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
December 31, 1998. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
December 31, 1998. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
December 31, 1998. Such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements:
See index to Consolidated Financial Statements and Supplemental Information in
Item 8, which information is incorporated herein by reference.
3. Exhibits
(3) Articles of Incorporation and by-laws.
3.1 Certificate of Incorporation of Nuevo Energy Company (incorporated by
reference to Exhibit 3.1 to Registration Statement on Form S-4 (No. 33-33873)
filed under the Securities Act of 1933).
3.2 By-laws of Nuevo Energy Company (incorporated by reference to Exhibit 3.2 to
Registration Statement on Form S-4 (No. 33-33873) filed under the Securities Act
of 1933).
(4) Instruments defining the rights of security holders, including indentures.
4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-4 (No. 33-33873) filed under the Securities Act
of 1933).
4.2 1990 Stock Option Plan of the Company, as amended (incorporated by
reference from Exhibit 10.8 to Form S-1 dated July 13, 1992).
4.3 Indenture dated April 1, 1996 among Nuevo Energy Company as Issuer, various
Subsidiaries as the Guarantors, and State Street Bank and Trust Company as the
Trustee - 9 1/2% Senior Subordinated Notes due 2006. (Incorporated by reference
from Form S-3 (No. 333-1504).
4.4 Form of Amended and Restated Declaration of Trust dated December 23, 1996,
among the Company, as Sponsor, Wilmington Trust Company, as Institutional
Trustee and Delaware Trustee, and Michael D. Watford, Robert L. Gerry, III and
Robert M. King, as Regular Trustees. (Incorporated by reference from Exhibit 4.1
to Form 8-K filed on December 23, 1996).
75
<PAGE>
NUEVO ENERGY COMPANY
4.5 Form of Subordinated Indenture dated as of November 25, 1996, between the
Company and Wilmington Trust Company, as Indenture Trustee. (Incorporated by
reference from Exhibit 4.2 to Form 8-K filed on December 23, 1996).
4.6 Form of First Supplemental Indenture dated December 23, 1996, between the
Company and Wilmington Trust Company, as Indenture Trustee. (Incorporated by
reference from Exhibit 4.3 to Form 8-K filed on December 23, 1996).
4.7 Form of Preferred Securities Guarantee Agreement dated as of December 23,
1996, between the Company and Wilmington Trust Company, as Guarantee Trustee.
(Incorporated by reference from Exhibit 4.4 to Form 8-K filed on December 23,
1996).
4.8 Form of Certificate representing TECONS. (Incorporated by reference from
Exhibit 4.5 to Form 8-K filed on December 23, 1996).
4.9 1993 Stock Incentive Plan, as amended (incorporated by reference to Exhibit
4.2 to Form S-8 (No. 333-21063) filed on February 4, 1997).
4.10 Shareholder Rights Plan, dated March 5, 1997, between Nuevo Energy Company
and American Stock Transfer & Trust Company, as Rights Agent (incorporated by
reference to Exhibit 1 to the Company's Form 8-A filed on April 1, 1997).
4.11 Release and Termination of Subsidiary Guarantees with respect to the 9 1/2%
Senior Subordinated Notes due 2006. (Incorporated by reference to Exhibit 4.11
to Form 10-K for the year ended December 31, 1997.)
4.12 Indenture dated June 8, 1998 among Nuevo Energy Company as Issuer, various
Subsidiaries as the Guarantors, and State Street Bank and Trust Company as the
Trustee - 8 7/8% Senior Subordinated Notes due 2008. (Incorporated by reference
from Form S-4 (No. 333-60655).
(10) Material Contracts.
10.1 Purchase and sale agreement dated April 14, 1994, between Nuevo Energy
Company (Seller) and Beauregard Corporation (Buyer). (Incorporated by reference
from Exhibit 10.1 to form 10-Q for the quarter ended June 30, 1994).
10.2 First Additional Production Payment dated July 1, 1994, under the Purchase
and Sale Agreement dated April 14, 1994, between Nuevo Energy Company as Seller
and Beauregard Corporation as Buyer. (Incorporated by reference from Exhibit
10.21 to Form 10-K for the year ended December 31, 1994).
10.3 Second Additional Production Payment dated December 15, 1994, under the
Purchase and Sale Agreement dated as of April 14, 1994, between Nuevo Energy
Company, as Seller, and Beauregard Corporation as Buyer. (Incorporated by
reference from Exhibit 10.22 to Form 10-K for the year ended December 31, 1994).
10.4 Stock Purchase Agreement, dated as of June 30, 1994, among Amoco Production
Company ("APC"), Walter International Inc. ("Walter"), Walter Congo Holdings,
Inc. ("Walter Holdings"), Walter International Congo, Inc. (before the merger
"Walter Congo" and after the merger "Old Walter Congo"), Nuevo, Nuevo Holding
and The Nuevo Congo Company (before the merger, "Nuevo Congo" and after the
merger, "Old Nuevo Congo"). (Incorporated by reference from Exhibit (2.1) to
Form 8-K dated March 10, 1995).
10.5 Amendment to Stock Purchase Agreement dated as of September 19, 1994, among
APC, Walter Congo, Nuevo Congo, Walter Holdings, Nuevo Holding, Walter and
Nuevo. (Incorporated by reference from Exhibit (2.2) to Form 8-K dated March 10,
1995).
76
<PAGE>
NUEVO ENERGY COMPANY
10.6 Second Amendment to Stock Purchase Agreement dated as of October 15, 1994,
among APC, Walter Congo, Nuevo Congo, Walter Holdings, Nuevo Holding, Walter and
Nuevo. (Incorporated by reference from Exhibit (2.3) to Form 8-K dated March 10,
1995).
10.7 Third Amendment to Stock Purchase Agreement dated as of December 2, 1994,
among APC, Walter Congo, Nuevo Congo, Walter Holdings, Nuevo Holding, Walter and
Nuevo. (Incorporated by reference from Exhibit (2.4) to Form 8-K dated March 10,
1995.
10.8 Fourth Amendment to Stock Purchase Agreement dated as of February 23, 1995,
among APC, Walter Congo, Nuevo Congo, Walter Holdings, Nuevo Holding, Walter and
Nuevo. (Incorporated by reference from Exhibit (2.5) to Form 8-K dated March 10,
1995).
10.9 Tax Agreement dated as of February 23, 1995, executed by APC, Amoco Congo
Exploration Company ("ACEC"), Amoco Congo Production Company ("ACPC"), Walter,
Walter Holdings, Walter Congo, Nuevo, Nuevo Holding and Nuevo Congo.
(Incorporated by reference from Exhibit (2.6) to Form 8-K dated March 10, 1995).
10.10 Agreement and Plan of Merger executed by Nuevo Congo, Nuevo Holding and
APC dated February 24, 1995. (Incorporated by reference from Exhibit (2.7) to
Form 8-K dated March 10, 1995).
10.11 Finance Agreement dated as of December 28, 1994, among Nuevo Holding,
Nuevo Congo and The Overseas Private Investment Corporation ("OPIC").
(Incorporated by reference from Exhibit (2.8) to Form 8-K dated March 10, 1995).
10.12 Subordination Agreement dated December 28, 1994, among Nuevo Congo, Nuevo
Holding, Walter Congo, Walter Holdings and APC. (Incorporated by reference from
Exhibit (2.9) to Form 8-K dated March 10, 1995).
10.13 Guaranty covering the obligations of Nuevo Congo and Walter Congo under
the Stock Purchase Agreement dated February 24, 1995, executed by Walter and
Nuevo. (Incorporated by reference from Exhibit (2.10) to Form 8-K dated March
10, 1995).
10.14 Inter-Purchaser Agreement dated as of December 28, 1994, among Walter, Old
Walter Congo, Walter Holdings, Nuevo, Old Nuevo Congo and Nuevo Holding.
(Incorporated by reference from Exhibit (2.11) to Form 8-K dated March 10,
1995).
10.15 Latent ORRI Contract dated February 25, 1995, among Walter, Walter
Holdings, Walter Congo, Nuevo, Nuevo Holding and Nuevo Congo. (Incorporated by
reference from Exhibit (2.12) to Form 8-K dated March 10, 1995).
10.16 Latent Working Interest Contract dated February 25, 1995, among Walter,
Walter Holdings, Walter Congo, Nuevo, Nuevo Holding and Nuevo Congo.
(Incorporated by reference form Exhibit (2.13) to Form 8-K dated March 10,
1995).
10.17 Loan agreement dated April 1, 1996 between Nuevo Energy Company (Borrower)
and certain subsidiaries and NationsBank of Texas, N.A. (Administrative Agent),
Morgan Guaranty Trust Company of New York (Documentation Agent) and certain
lenders. (Incorporated by reference from Exhibit 10.1 to Form S-3 (No. 333-
1504).
10.18 Asset Purchase Agreement dated as of February 16, 1996 between Nuevo
Energy Company, the Purchaser, and Union Oil Company of California as Seller.
(Incorporated by reference from Exhibit 2.1 to Form S-3 (No. 333-1504).
10.19 Administrative Services Agreement among the Company and Torch Energy
Advisors Incorporated as amended through January 1, 1996. (Incorporated by
reference from Exhibit 10.22 to Form 10-K filed March 5, 1997).
77
<PAGE>
NUEVO ENERGY COMPANY
10.20 Asset Purchase Agreement dated as of April 4, 1997, by and among Torch
California Company and Express Acquisition Company, as Sellers, and Nuevo Energy
Company, as Purchaser. (Incorporated by reference from Exhibit 2.2 to Form S-3
(No. 333-1504)).
10.21 Separation Agreement with Michael D. Watford. (Incorporated by reference
from Exhibit 10.1 to Form 10-Q filed November 14, 1997).
10.22 Amended and restated Credit Agreement dated February 13, 1998 between
Nuevo Energy Company (Borrower) and certain subsidiaries and NationsBank of
Texas, N.A. (Administrative Agent), Morgan Guaranty Trust Company of New York
(Documentation Agent) and certain lenders.
10.23 Employment Agreement with Douglas L. Foshee. (Incorporated by reference to
Exhibit 10.23 to Form 10-K for the year ended December 31, 1997.)
10.24 Employment Agreement with Robert M. King.
10.25 Employment Agreement with Robert S. Gaston. (Incorporated by reference to
Exhibit 10.25 to Form 10-K for the year ended December 31, 1997.)
10.26 Employment Agreement with Dennis Hammond. (Incorporated by reference to
Exhibit 10.26 to Form 10-K for the year ended December 31, 1997.)
10.27 Employment Agreement with Michael P. Darden. (Incorporated by reference
from Exhibit 10.1 to Form 10-Q filed November 13, 1998).
10.28 Purchase and sale agreement dated October 16, 1998 between Nuevo Energy
Company (Seller) and Samson Lone Star Limited Partnership (Buyer).
10.29 Master Services Agreement among the Company and Torch Energy Advisors
Incorporated, Torch Operating Company, Torch Energy Marketing, Inc., and
Novistar, Inc. dated January 1, 1999.
(22) Subsidiaries of the Registrant
(23) Consents of experts and counsel:
23.1 Consent of KPMG LLP
(b) Reports on Form 8-K:
1. Report filed on Form 8-K on February 4, 1999, regarding the completion of the
Company's sale of its East Texas natural gas assets on January 6, 1999.
2. Report filed on Form 8-K on March 10, 1999, regarding the election of Mr.
David H. Batchelder to the Company's board of directors.
78
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NUEVO ENERGY COMPANY
(Registrant)
Date: March 31, 1999 By: /s/Douglas L. Foshee
--------------------- --------------------------------
Douglas L. Foshee
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Douglas L. Foshee Date: March 31, 1999
-------------------------------------- ------------------------
Douglas L. Foshee
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert M. King Date: March 31, 1999
-------------------------------------- ------------------------
Robert M. King
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Sandra D. Kraemer Date: March 31, 1999
-------------------------------------- ------------------------
Sandra D. Kraemer
Controller (Principal Accounting Officer)
By: /s/ Robert L. Gerry III Date: March 31, 1999
-------------------------------------- ------------------------
Robert L. Gerry III
Director
By: /s/ Gary R. Petersen Date: March 31, 1999
-------------------------------------- ------------------------
Gary R. Petersen
Director
By: /s/ Thomas D. Barrow Date: March 31, 1999
-------------------------------------- ------------------------
Thomas D. Barrow
Director
By: /s/ Isaac Arnold, Jr. Date: March 31, 1999
-------------------------------------- ------------------------
Isaac Arnold, Jr.
Director
By: /s/ David Ross III Date: March 31, 1999
-------------------------------------- ------------------------
David Ross III
Director
By: /s/ Robert W. Shower Date: March 31, 1999
-------------------------------------- ------------------------
Robert W. Shower
Director
By: /s/ Charles M. Elson Date: March 31, 1999
-------------------------------------- ------------------------
Charles M. Elson
Director
By: /s/ David H. Batchelder Date: March 31, 1999
-------------------------------------- ------------------------
David H. Batchelder
Director
</TABLE>
79
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NUEVO ENERGY COMPANY
(Registrant)
<TABLE>
<CAPTION>
<S> <C>
Date: _____________________________________________ By: _________________________________________________
Douglas L. Foshee
Chairman of the Board of Directors,
President and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: _______________________________________________ Date: _______________________________________________
Douglas L. Foshee
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
By: _______________________________________________ Date: _______________________________________________
Robert M. King
Senior Vice President and
Chief Financial Officer (Principal Financial Officer)
By: _______________________________________________ Date: _______________________________________________
Sandra D. Kraemer
Controller (Principal Accounting Officer)
By: _______________________________________________ Date: _______________________________________________
Robert L. Gerry III
Director
By: _______________________________________________ Date: _______________________________________________
Gary R. Petersen
Director
By: _______________________________________________ Date: _______________________________________________
Thomas D. Barrow
Director
By: _______________________________________________ Date: _______________________________________________
Isaac Arnold, Jr.
Director
By: _______________________________________________ Date: _______________________________________________
David Ross III
Director
By: _______________________________________________ Date: _______________________________________________
Robert W. Shower
Director
By: _______________________________________________ Date: _______________________________________________
Charles M. Elson
Director
By: _______________________________________________ Date: _______________________________________________
David H. Batchelder
Director
</TABLE>
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<PAGE>
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
This Agreement is made as of the 1st day of September, 1998 and is by and
between Robert M. King ("King") and Nuevo Energy Company, a Delaware corporation
having a principal place of business at 1331 Lamar, Suite 1650, Houston, Texas
77010 (the "Company").
WHEREAS, King is being employed as the Senior Vice President and Chief
Financial Officer of the Company; and
WHEREAS, the Company believes it to be to its advantage to insure that King
continues to render services as hereinafter provided for the Company;
NOW, THEREFORE, in consideration of the mutual covenants and obligations
herein contained, it is mutually agreed between the parties hereto as follows:
1. Employment and Terms. The Company hereby employs King and King hereby
agrees to serve as the Chief Financial Officer of the Company. The term of this
Employment Agreement shall be effective as of the date of this contract and
shall terminate two (2) years from such date, unless earlier terminated as
hereinafter provided. After the initial term of King's employment, such
employment shall be automatically extended for successive one-year periods,
unless earlier terminated as hereinafter provided or upon ninety (90) days'
advance notice by the Board of Directors to King of its intention to not renew.
For each such extension, the terms of employment shall be subject to approval by
the Board of Directors and agreed to by King. If agreement cannot be reached,
or in the event that the Company decides not to renew this Employment Agreement
at any time, the Company agrees to pay King the greater of (i) 200% of his then
effective annual salary and (ii) $320,000, in either case in one lump sum
payment. In no event shall King be entitled to payment under both this
Paragraph 1 and Paragraph 4 (C).
2. Position and Responsibilities. King shall serve as Chief Financial
Officer of the Company, and King shall exercise such powers and comply with and
perform such directions and duties in relation to the business and affairs of
the Company as are consistent with the duties of the highest ranking financial
officer of similar corporations, and as may from time to time be vested in or
given to him by the President and Chief Executive Officer or the Board of
Directors of the Company and shall use his best efforts to improve and extend
the business of the Company. King shall at all times report to, and his
activities shall be subject to the direction and control of, the President and
Chief Executive Officer. King agrees to devote substantially all of his
business time, attention and services to the diligent, faithful and competent
discharge of such duties for the successful operation of the Company's business.
3. Compensation.
A. In consideration of the services to be rendered by King to the
Company, the Company will pay to King a salary of not less than $160,000 per
annum for the year ending August 31, 1999 and the year ending August 31, 2000.
Such salary shall be payable in conformity with the Company's prevailing
practice for executives' compensation as such
1
<PAGE>
practice shall be established or modified from time to time. Salary payments
shall be subject to all applicable federal and state withholding, payroll and
other taxes.
B. The Company agrees to reimburse King for the reasonable expenses
incurred by him in obtaining and maintaining a country club membership.
4. Termination. King's term of employment under this Employment Agreement
may be terminated as follows:
A. At King's Option. King may terminate his employment hereunder,
with or without cause, at any time upon at least sixty (60) days' advance
written notice to the Company. In such event, King shall be entitled to no
severance or other termination benefits.
B. At the Election of the Company for Just Cause. The Company may,
immediately and unilaterally, terminate King's employment hereunder for just
cause at any time during the term of this Employment Agreement by written notice
to King. Termination of King's employment by the Company shall constitute a
termination "for just cause" if such termination is for one or more of the
following reasons: (i) the willful failure or refusal of King to render services
to the Company in accordance with his obligations under this Employment
Agreement, such failure or refusal to be uncured and continuing for a period of
not less than 15 days after notice outlining the situation is given by the
Company to Mr. King; (ii) the commission by King of an act of fraud or
embezzlement against the Company or the commission by King or any other action
with the intent to injure the Company or (iii) King having been convicted of a
felony. In such event, King shall be entitled to no severance or other
termination benefits.
C. At the Election of the Company for Reasons Other than Just
Cause. The Company may, immediately and unilaterally, terminate King's
employment hereunder at any time during the term of this Employment Agreement or
may constructively discharge him by substantially reducing his responsibilities
to less than those outlined in Section 2 herein without cause by giving written
notice to King of the Company's election to so terminate or constructively
discharge. In the event the Company exercises its right to terminate or
constructively discharge King under this Paragraph 4 (C), the Company agrees to
pay King the greater of (i) 200% of his then effective annual salary and (ii)
$320,000. This amount shall be payable in equal monthly installments over the
remaining term of this Employment Agreement. King shall also be entitled to
reimbursement within six months of his termination of his costs associated with
upgrading his country club membership from "junior member" to "full member"
status. King shall also be entitled to continue participation in the Company's
medical insurance programs during the two (2) years following the termination
King's employment under this Paragraph 4 (C). In addition, in the event the
Company exercises its right to terminate or constructively discharge King under
this Paragraph 4 (C), King will have 18 months to exercise any of his vested
options.
5. Consent and Waiver by Third Parties. King hereby represents and
warrants that he has obtained all necessary waivers and/or consents from third
parties as to enable him to accept employment with the Company on the terms and
conditions set forth herein and to
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execute and perform this Employment Agreement without being in conflict with any
other agreement, obligations or understanding with any such third party.
6. Waivers and Modifications. This Employment Agreement may be modified,
and the rights and remedies of any provision hereof may be waived, only in
accordance with this Paragraph 6. No modification or waiver by the Company
shall be effective without the consent of a least a majority of the Board of
Directors then in office at the time of such modification or waiver. No waiver
by either party of any breach by the other or any provision hereof shall be
deemed to be a waiver of any later or other breach thereof or as a waiver of any
other provision of this Employment Agreement. This Employment Agreement sets
forth all of the terms of the understandings between the parties with reference
to the subject matter set forth herein and may be waived, changed, discharged or
terminated orally or by any course of dealing between the parties, but only by
an instrument in writing signed by the party against whom any waiver, change,
discharge or termination is sought.
7. Governing Law. This Employment Agreement shall be construed in
accordance with the laws of the State of Texas.
8. Severability. In case any one or more of the provisions contained in
this Employment Agreement for any reason shall be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Employment Agreement, but this
Employment Agreement shall be construed as if such invalid, illegal or
unenforceable provisions had never been contained herein.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Employment Agreement as of the date set forth above.
NUEVO ENERGY COMPANY
By: ______________________________
Douglas L. Foshee
Chief Executive Officer
____________________________________
Robert M. King
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EXHIBIT 10.28
Confidential
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT FOR PURCHASE AND SALE
by and between
NUEVO ENERGY COMPANY
as Seller
and
SAMSON LONE STAR LIMITED PARTNERSHIP
as Buyer
October 16, 1998
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- --------------------------------------------------------------------------------
<PAGE>
Confidential
TABLE OF CONTENTS
Page
1. Sale and Purchase of the Properties....................................... 1
1.1. The Properties.................................................... 1
1.2. Excluded Assets................................................... 3
2. Purchase Price............................................................ 5
2.1. Basic Amount...................................................... 5
2.2. Adjustments to Purchase Price..................................... 5
2.3. Deposit........................................................... 6
2.4. Closing Statement................................................. 7
3. Representations and Warranties of Seller.................................. 7
3.1. Organization...................................................... 7
3.2. Authority and Authorization....................................... 7
3.3. Enforceability.................................................... 7
3.4. Conflicts......................................................... 7
3.5. Contracts......................................................... 8
3.6. Litigation and Claims............................................. 8
3.7. Approvals and Preferential Rights................................. 8
3.8. Compliance with Law and Permits................................... 9
3.9. Environmental Compliance.......................................... 9
3.10. Status of Contracts............................................... 10
3.11. Production Burdens, Taxes, Expenses and Revenues.................. 10
3.12. Current Commitments............................................... 10
3.13. Reserve Report.................................................... 10
4. Representations and Warranties of Buyer................................... 10
4.1. Organization...................................................... 10
4.2. Authorization and Authority....................................... 11
4.3. Enforceability.................................................... 11
4.4. Conflicts......................................................... 11
4.5. Qualified Purchaser............................................... 11
4.6. Available Funds................................................... 12
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5. Covenants of Seller Pending Closing....................................... 12
5.1. Conduct of Business Pending Closing............................... 12
5.2. Access............................................................ 12
6. Covenants of Buyer Pending Closing........................................ 13
6.1. Notifications..................................................... 13
7. Conditions Precedent to the Obligations of Buyer.......................... 13
7.1. Representations and Warranties.................................... 13
7.2. Compliance........................................................ 13
7.3. Consents.......................................................... 13
7.4. No Pending Suits.................................................. 13
7.5. Purchase Price Adjustments........................................ 14
8. Conditions Precedent to the Obligations of Seller......................... 14
8.1. Representations and Warranties.................................... 14
8.2. Compliance........................................................ 14
8.3. Consents.......................................................... 14
8.4. No Pending Suits.................................................. 14
8.5. Purchase Price Adjustments........................................ 14
9. Closing................................................................... 15
9.1. The Closing....................................................... 15
9.2. Documents to be Delivered at Closing.............................. 15
9.3. Possession........................................................ 16
9.4. Payment of Purchase Price......................................... 16
10.Termination............................................................... 16
10.1. Events of Termination............................................. 16
10.2. Effect of Termination............................................. 17
11.Taxes, Prorations, Suspense Funds and Assumption of Obligations.......... 18
11.1. Tax Prorations.................................................... 18
11.2. Assumption of Obligations......................................... 18
11.3. Suspended Funds................................................... 19
12.Final Accounting.......................................................... 19
12.1. Settlement Statement.............................................. 19
12.2. Arbitration of Final Settlement................................... 19
12.3. Payment........................................................... 20
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13.Survival and Indemnification.............................................. 20
13.1. Survival.......................................................... 20
13.2. Liabilities....................................................... 20
13.3. Indemnification by Seller......................................... 20
13.4. Indemnification by Buyer.......................................... 21
13.5. Liability Limitations............................................. 21
13.6. Waiver of Representations......................................... 24
13.7. Year 2000 Compliance.............................................. 26
14.Further Assurances........................................................ 26
14.1. General........................................................... 26
14.2. Filings, Notices and Certain Governmental Approvals............... 26
14.3. Logos and Names................................................... 26
15. Access by Seller after Closing.................................... 26
16. Notices........................................................... 27
17. Assignment........................................................ 28
18. Governing Law..................................................... 28
19. Expenses and Fees................................................. 28
20. Integration....................................................... 28
21. Waiver or Modification............................................ 28
22. Headings.......................................................... 29
23. Invalid Provisions................................................ 29
24. Waiver of Jury Trial.............................................. 29
25. Multiple Counterparts............................................. 29
26. Public Announcements.............................................. 29
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27.Arbitration............................................................... 30
27.1. Binding Arbitration............................................... 30
27.2. Governing Rules................................................... 30
27.3. Arbitrators....................................................... 30
27.4. Conduct of Arbitration............................................ 30
27.5. Costs of Arbitration.............................................. 30
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TABLE OF DEFINED TERMS
Term Section
- ---- -------
AAA............................................................ 26.2
Adjusted Purchase Price........................................ 2.1
Agreement...................................................... Page 1
Allocated Value................................................ Annex I
Advisor........................................................ 1.2
Business Day................................................... 16
Buyer.......................................................... Page 1
Buyer Indemnified Parties...................................... 13.3
Closing........................................................ 9.1
Closing Date................................................... 9.1
Closing Period................................................. 2.2.1
Closing Statement.............................................. 2.4
Confidentiality Agreement...................................... 20
Contracts...................................................... 1.1.7
Cure Period.................................................... Annex I
Data........................................................... 1.1.6
Deposit........................................................ 2.3
Dispute........................................................ 26.1
Effective Date................................................. 1
Equipment...................................................... 1.1.5
Equitable Limitations.......................................... 3.3
Excluded Assets................................................ 1.2
Final Settlement Statement..................................... 12.1
Liabilities.................................................... 13.2
Liens.......................................................... Annex I
Marketable Title............................................... Annex I
Net Revenue Interest........................................... Annex I
Notice Date.................................................... Annex I
Oil and Gas Properties......................................... 1.1.1
Permitted Encumbrances......................................... Annex I
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Permits........................................................ 1.1.8
Properties..................................................... 1
Purchase Price................................................. 2.1
Report......................................................... 3.13
Reserves....................................................... 3.13
Seller......................................................... Page 1
Seller Indemnified Parties..................................... 13.4
Substances..................................................... 1.1.3
Surface Contracts.............................................. 1.1.4
Suspended Funds................................................ 11.3
Title Defect................................................... Annex I
Title Defect Amount............................................ Annex I
Wells.......................................................... 1.1.2
Working Interest............................................... Annex I
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AGREEMENT FOR PURCHASE AND SALE
This Agreement for Purchase and Sale ("Agreement") is made and entered into
on this the 16th day of October, 1998, by and between Nuevo Energy Company
("Seller"), and Samson Lone Star Limited Partnership ("Buyer").
1. SALE AND PURCHASE OF THE PROPERTIES. Subject to the terms and conditions
and for the consideration herein set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Seller agrees to sell, assign, convey and deliver to Buyer, and Buyer agrees to
purchase and acquire from Seller at Closing, but effective as of 7:00 a.m. at
the location of each of the Oil and Gas Properties on July 1, 1998 (the
"Effective Date"), all of the interest of Seller in and to the following
properties, other than the Excluded Assets ("Properties"):
1.1. THE PROPERTIES.
1.1.1. OIL AND GAS PROPERTIES. All properties described on the
Exhibit whether the interest of Seller in such properties is fee interests;
leasehold interests; working interests; farmout rights; royalty interests,
overriding royalty interests, production payments or other non-working or
carried interests; or other mineral rights, and any rights that arise by
operation of law or otherwise in all properties and lands pooled, unitized,
communitized or consolidated with such properties (the "Oil and Gas
Properties").
1.1.2. WELLS. All oil, condensate or natural gas wells located on
the Oil and Gas Properties, whether producing, operating, shut-in or temporarily
abandoned (the "Wells").
1.1.3. SEVERED SUBSTANCES. All severed crude oil, natural gas,
casinghead gas, drip gasoline, natural gasoline, petroleum, natural gas liquids,
condensate, products, liquids and other hydrocarbons and other minerals or
materials of every kind and description either produced and sold from the Oil
and Gas Properties on or after the Effective Date or in pipelines on the
Effective Date (the "Substances").
1.1.4. SURFACE CONTRACTS. All right-of-way agreements or other
agreements relating to the use or ownership of surface properties that are used
or held for use in connection with the production of Substances from the Oil and
Gas Properties (the "Surface Contracts").
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Confidential
1.1.5. EQUIPMENT. All processing plants, pipelines and other
equipment, fixtures and physical facilities of every type and description
located on the Oil and Gas Properties or the Surface Contracts (the
"Equipment").
1.1.6. INFORMATION AND DATA. All (a) title opinions, lease and land
files, filings with and reports to regulatory agencies, gas and sales contract
files, division order files and other books, files and records (including but
not limited to relevant accounting records, gas balancing records and suspense
account records) to the extent that they are directly related to Oil and Gas
Properties and the transfer thereof is not prohibited by existing contractual
obligations and (b) all geophysical, geological, engineering, exploration,
production, environmental and other technical data, magnetic field recordings,
digital processing tapes, field prints, summaries, reports and maps, whether
written or in electronically reproducible form, that are owned by Seller or may
be assigned by Seller without any payment by Seller to any other person and are
directly related to the Oil and Gas Properties (the "Data").
1.1.7. CONTRACTS. All contracts and arrangements that directly
relate to the Properties and the production, storage, treatment, transportation,
processing, purchase, sale, disposal or other disposition of Substances
therefrom and any and all amendments, ratifications or extensions of the
foregoing, to the extent that any of the foregoing relate to periods on or after
the Effective Date (the "Contracts"), and all rights to make claims and receive
proceeds under any insurance policy held by or on behalf of Seller in connection
with the Properties for any claim that arises from the Effective Date through
the Closing Date in connection with the Properties.
1.1.8. PERMITS. All franchises, licenses, permits, approvals,
consents, certificates and other authorizations and other rights granted by
governmental authorities and all certificates of convenience or necessity,
immunities, privileges, grants and other rights, that relate to the Properties
or the ownership or operation of any thereof (the "Permits").
1.1.9. IMBALANCES. All rights and benefits arising from or in
connection with any gas production, pipeline, storage, processing or other
imbalance attributable to Substances produced from Oil and Gas Properties
existing on the Effective Date.
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Confidential
1.2. EXCLUDED ASSETS. As used herein, "Excluded Assets" means the
following:
(a) all trade credits and all accounts, instruments and general
intangibles (as such terms are defined in the Texas Uniform Commercial Code)
attributable to the Properties with respect to any period of time prior to the
Effective Date;
(b) all claims and causes of action of Seller (i) arising from acts,
omissions or events, or damage to or destruction of property, occurring prior to
the Effective Date, (ii) arising under or with respect to any of the Contracts
that are attributable to periods of time prior to the Effective Date (including
claims for adjustments or refunds), or (iii) with respect to any of the Excluded
Assets;
(c) all rights and interests of Seller (i) under any policy or
agreement of insurance or indemnity, (ii) under any bond, or (iii) to any
insurance or condemnation proceeds or awards arising, in each case, from acts,
omissions or events, or damage to or destruction of property, occurring prior to
the Effective Date;
(d) all Substances produced and sold from the Oil and Gas Properties
with respect to all periods prior to the Effective Date, together with all
proceeds from or of such Substances;
(e) claims of Seller for refunds of or loss carry forwards with
respect to (i) production or any other taxes attributable to any period prior to
the Effective Date, (ii) income or franchise taxes, or (iii) any taxes
attributable to the Excluded Assets;
(f) all amounts due or payable to Seller as adjustments to insurance
premiums related to the Properties with respect to any period prior to the
Effective Date;
(g) all proceeds, income or revenues (and any security or other
deposits made) attributable to (i) the Properties for any period prior to the
Effective Date, or (ii) any Excluded Assets;
(h) all personal computers and associated peripherals and all radio
and telephone equipment;
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Confidential
(i) all of Seller's proprietary computer software, patents, trade
secrets, copyrights, names, trademarks, logos and other intellectual property;
(j) all of Seller's interpretations of geological and geophysical
data;
(k) all documents and instruments of Seller that may be protected by
an attorney-client privilege;
(l) data that cannot be disclosed or assigned to Buyer as a result of
confidentiality arrangements under agreements with persons unaffiliated with
Seller;
(m) all audit rights arising under any of the Contracts or otherwise
with respect to any period prior to the Effective Date or to any of the Excluded
Assets;
(n) all (i) agreements and correspondence between Seller and
NationsBanc Montgomery Securities LLC (the "Advisor") relating to the
transactions contemplated in this Agreement, (ii) lists of prospective
purchasers for such transactions compiled by either Seller or the Advisor, (iii)
bids submitted by other prospective purchasers of the Properties, (iv) analyses
by Seller or the Advisor of any bids submitted by any prospective purchaser, (v)
correspondence between or among Seller or Advisor, or either of their respective
representatives, and any prospective purchaser other than Buyer, (vi)
correspondence between Seller or Advisor or any of their respective
representatives with respect to any of the bids, the prospective purchasers, the
engagement or activities of the Advisor or the transactions contemplated in this
Agreement and (vii) the Confidential Offering Memorandum dated July, 1998,
prepared by the Advisor and circulated to prospective purchasers; and
(o) the Escrow Agreement dated July 31, 1996, between Seller and
Kerr-McGee Corporation and the Agreement for Purchase and Sale dated July 26,
1996 between Seller and Kerr-McGee Corporation.
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Confidential
2. PURCHASE PRICE.
2.1. BASIC AMOUNT. The purchase price for the Properties, subject to
adjustment as provided in Section 2.2, shall be $190,600,000 (the "Purchase
Price"). The Purchase Price as adjusted pursuant to Section 2.2 is referred to
in this Agreement as the "Adjusted Purchase Price."
2.2. ADJUSTMENTS TO PURCHASE PRICE. The Purchase Price shall be adjusted as
provided in this Section 2.2.
2.2.1. The Purchase Price shall be increased by the following amounts
(without duplication):
(a) An amount equal to the costs and expenses that are (i)
attributable to the Properties for the period from the Effective Date to
the Closing Date (the "Closing Period"), whether paid before or after the
Effective Date, and (ii) paid by Seller, including, without limitation,
bond and insurance premiums paid by or on behalf of Seller attributable to
coverage during the Closing Period.
(b) If Seller is the operator under a joint operating agreement
covering any of the Oil and Gas Properties, an amount equal to the costs
and expenses paid by Seller on behalf of the other joint interest owners
that is attributable to periods after the Effective Date excluding any such
costs and expenses for which the Seller has invoiced the other joint
interest owners.
(c) An amount equal to the value (determined using $1.20/mcfe) of the
under position with respect to any gas production, pipeline, storage,
processing or other imbalance attributable to Substances produced from Oil
and Gas Properties as of the Effective Date under any agreement to the
extent the volume of such under position is greater than the amount set
forth on the Exhibit, or an amount equal to the value of the over position
with respect to any such imbalance as of the Effective Date under any such
agreement to the extent that the volume of the over position with respect
to any such imbalance is less than the volume set forth on the Exhibit.
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Confidential
2.2.2. The Purchase Price shall be decreased by the following amounts
(without duplication):
(a) An amount equal to the proceeds received by Seller for the sale
during the Closing Period of Substances, net of all applicable taxes not
reimbursed to Seller by a purchaser of Substances.
(b) An amount equal to all proceeds received by Seller from whatever
source derived that relate to the Properties and are attributable to
periods on or after the Effective Date, other than operator's overhead
reimbursements received by Seller or Torch Operating Company ("Torch")
under joint operating agreements in which Seller or Torch is designated as
the operator.
(c) The amount of all adjustments determined in accordance with Annex
I for title adjustments for the Oil and Gas Properties to the extent that
the aggregate of all Title Defect Amounts exceeds $1,000,000.
(d) The amount of all taxes prorated to Buyer in accordance with
Section 11.1.
(e) An amount equal to the value (determined using $1.20/mcfe) of the
over position with respect to any gas production, pipeline, storage,
processing or other imbalance attributable to Substances produced from Oil
and Gas Properties as of the Effective Date under any agreement to the
extent the volume of such over position is greater than the amount set
forth on the Exhibit, or an amount equal to the value of the under position
with respect to any such imbalance as of the Effective Date under any such
agreement to the extent that the volume of the under position with respect
to any such imbalance is less than the volume set forth on the Exhibit.
(f) An amount equal to the aggregate net cash settlement amounts under
the two gas price swaps with Bankers Trust, each covering 5 mmbtu per day
with a price of $2.125 per mbtu and $2.210 per mmbtu, respectively, to the
extent they relate to the Closing Period.
2.3. DEPOSIT. On or before 12:00 noon Houston time on October 19,1998,
Buyer shall deposit with Seller an amount equal to five percent of the Purchase
Price (the "Deposit"). The Deposit shall be applied to the Adjusted Purchase
Price to be paid at Closing or may be returned to Buyer or retained by Seller in
accordance with the terms of this Agreement.
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2.4. CLOSING STATEMENT. Seller shall deliver to Buyer not less than two
Business Days before the Closing Date a statement (the "Closing Statement")
setting forth the adjustments to the Purchase Price provided in Section 2.2 and
using Title Defect Amounts that have been agreed by Seller and Buyer prior to
such date or determined by arbitration prior to such date. The Closing
Statement shall be prepared in accordance with customary accounting principles
used in the oil and gas industry.
3. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and warrants
to Buyer as follows:
3.1. ORGANIZATION. Seller is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Seller
is qualified to do business in and is in good standing under the laws of each
state in which the Properties are located.
3.2. AUTHORITY AND AUTHORIZATION. Seller has full corporate power and
authority to carry on its business as presently conducted, to enter into this
Agreement and to perform its obligations under this Agreement. The execution
and delivery of this Agreement by Seller have been, and the performance by
Seller of this Agreement and the transactions contemplated hereby shall be at
the time required to be performed hereunder, duly and validly authorized by all
requisite corporate action on the part of Seller.
3.3. ENFORCEABILITY. This Agreement has been duly executed and
delivered on behalf of Seller and constitutes the legal, valid and binding
obligation of Seller enforceable in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, reorganization or
moratorium statutes, or other similar laws affecting the rights of creditors
generally or equitable principles (collectively, "Equitable Limitations"). At
the Closing all documents and instruments required hereunder to be executed and
delivered by Seller shall be duly executed and delivered and shall constitute
legal, valid and binding obligations of Seller enforceable in accordance with
their terms, except as enforceability may be limited by Equitable Limitations.
3.4. CONFLICTS. The execution and delivery of this Agreement by Seller
does not, and the consummation of the transactions contemplated by this
Agreement shall not, (a) violate or be in conflict with, or require the consent
of any person or entity under, any provision of Seller's governing documents,
(b) violate any provision of or require any consent, authorization
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or approval under any judgment, decree, judicial or administrative order, award,
writ, injunction, statute, rule or regulation applicable to Seller, or (c)
result in the creation of any lien, charge or encumbrance on any of the
Properties.
3.5. CONTRACTS. The Exhibit sets forth a list of the following contracts,
agreements, and commitments to which any of the Properties are bound: (a) any
agreement with any affiliate of Seller; (b) any agreement or contract of Seller
for the sale, exchange or other disposition of Substances produced from the Oil
and Gas Properties that is not cancelable without penalty on not more than 60
days prior written notice; (c) any agreement of Seller to sell, lease, farmout
or otherwise dispose of any of its interests in any of the Properties other than
conventional rights of reassignment; (d) any tax partnership agreement of Seller
affecting any of the Properties; (e) any operating agreement to which Seller's
interests in any of the Oil and Gas Properties is subject; (f) any contract that
requires Seller to expend more than $50,000 in any year in connection with the
Properties; (g) any contract that contains an indemnity with respect to
environmental and health and safety matters; (h) any option to purchase or call
on the Substances produced from the Oil and Gas Properties; and (i) any lease,
title retention agreement, or security interest affecting any of the Equipment.
None of the agreements between Seller and Torch relating to the operation of the
Properties nor the agreements between Seller and Torch Energy Advisors
Incorporated or its affiliates are listed in the Exhibit and none of such
agreements will be binding on the Buyer or on the Properties after the Closing.
3.6. LITIGATION AND CLAIMS. Except as is set forth on the Exhibit, (a)
no claim, demand, filing, investigation, administrative proceeding, action, suit
or other legal proceeding is pending or, to the best of Seller's knowledge,
threatened, with respect to the Properties or the ownership or operation of any
thereof, other than proceedings relating to the oil and gas industry generally
and as to which Seller is not a named party; and (b) no written notice from any
governmental authority or any other person (including employees) has been
received by Seller claiming any violation or repudiation of the Oil and Gas
Properties or any violation of any law, rule, regulation, ordinance, order,
decision or decree of any governmental authority (including, without limitation,
any such law, rule, regulation, ordinance, order, decision or decree concerning
the conservation of natural resources).
3.7. APPROVALS AND PREFERENTIAL RIGHTS. The Exhibit contains a complete
and accurate list of (a) all approvals and consents required to be obtained by
Seller for the assignment or transfer of the Properties (other than the Data) to
Buyer, other than approvals
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and consents of governmental authorities that are customarily obtained in
similar transactions after the consummation of the transaction, and (b) all
preferential purchase rights that affect the transactions contemplated by this
Agreement.
3.8. COMPLIANCE WITH LAW AND PERMITS. The Properties have been and
currently are operated, and Seller and the Properties are, in compliance with
the provisions and requirements of all laws, rules, regulations, ordinances,
orders, decisions and decrees of all governmental authorities having
jurisdiction with respect to the Properties or the ownership or operation of any
thereof, except where noncompliance would not reasonably be expected to have a
material adverse effect on the ownership or operation of the Properties. All
necessary governmental permits, licenses and other authorizations with regard to
the ownership or operation of the Properties have been obtained and maintained
in effect, except where the failure to obtain or maintain such permits, licenses
and other authorizations would not reasonably be expected to have a material
adverse effect on the ownership or operation of the Properties. No violations
exist in respect of such permits, licenses or other authorizations, except for
violations that would not reasonably be expected to have a material adverse
effect on the ownership or operation of the Properties.
3.9. ENVIRONMENTAL COMPLIANCE. Except as is set forth on the Exhibit,
(a) Seller has obtained and maintained in effect all environmental and health
and safety permits, licenses, approvals, consents, certificates and other
authorizations necessary for the ownership or operation of the Properties
("Environmental Permits"); (b) Seller, the Properties and the ownership and
operation thereof are in compliance with all applicable environmental and health
and safety laws, rules, regulations, ordinances, orders, decisions and decrees
of all governmental authorities ("Environmental Laws") and with all terms and
conditions of all Environmental Permits, and all prior instances of non-
compliance have been fully and finally resolved to the satisfaction of all
governmental authorities with jurisdiction over such matters; (c) Seller has not
received any notice of any third party environmental or health and safety claim,
demand, filing, investigation, administrative proceeding, action, suit or other
legal proceeding ("Environmental Claim") or any violation or non-compliance with
any Environmental Law or the terms or conditions of any Environmental Permit,
arising from, based upon, associated with or related to the Properties or the
ownership or operation of any thereof; and (d) no pollutant, waste, contaminant,
or hazardous, extremely hazardous, or toxic material, substance, chemical or
waste identified, defined or regulated as such under any Environmental Law
("Environmental Contaminants") is present, or has been handled, managed,
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stored, transported, processed, treated, disposed of, released, migrated or has
escaped on, in, from, under or in connection with the Properties or the
ownership or operation of any thereof, such as to cause a condition or
circumstance that would reasonably be expected to result in an Environmental
Claim or a violation of any Environmental Law.
3.10. STATUS OF CONTRACTS. All of the contracts described in the Exhibit
are in full force and effect and Seller is not in breach of, or with the lapse
of time or the giving of notice, or both, would be in breach of, any of its
obligations thereunder.
3.11. PRODUCTION BURDENS, TAXES, EXPENSES AND REVENUES. All payments
due under or with respect to the Oil and Gas Properties have been properly and
timely paid. All ad valorem, property, production, severance and other taxes
based on or measured by the ownership of the Properties or the production of
Substances therefrom have been properly and timely paid. All expenses payable
under the terms of the Contracts have been properly and timely paid except for
such expenses as are being currently paid prior to delinquency in the ordinary
course of business. All of the proceeds from the sale of Substances are being
properly and timely paid to Seller by the purchasers of production without
suspension or indemnity other than standard division order indemnities.
3.12. CURRENT COMMITMENTS. The Exhibit contains a true and complete list as
of the date of this Agreement of all authorities for expenditures to drill or
rework Wells or for capital expenditures pursuant to any of the Contracts for
which all of the activities anticipated in such AFEs or commitments have not
been completed by the date of this Agreement.
3.13. RESERVE REPORT. Seller has delivered to Buyer a copy of the reserve
report prepared by Ryder Scott Company dated July 24, 1998 (the "Report")
relating to the oil and gas reserves attributable to the Oil and Gas Properties
(the "Reserves"). To the knowledge of Seller, the historical factual information
supplied by Seller to the independent engineering firm in connection with the
preparation of the Report was accurate and complete in all material respects.
4. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and warrants to
Seller as follows:
4.1. ORGANIZATION. Buyer is a limited partnership duly formed, validly
existing and in good standing under the laws of the State of Texas. The sole
general partner of Buyer is Samson Resources Company.
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4.2. AUTHORIZATION AND AUTHORITY. The execution and delivery of this
Agreement have been and the performance of this Agreement and the transactions
contemplated hereby shall be at the time required to be performed hereunder,
duly and validly authorized by all requisite corporate action on the part of
Buyer. Buyer has full corporate power and authority to carry on its business as
presently conducted, to enter into this Agreement, to purchase the Properties on
the terms described in this Agreement and to perform its other obligations under
this Agreement.
4.3. ENFORCEABILITY. This Agreement has been duly executed and delivered on
behalf of Buyer, and constitutes a legal, valid and binding obligation of Buyer
enforceable in accordance with its terms, except as enforceability may be
limited by Equitable Limitations. At the Closing all documents required
hereunder to be executed and delivered by Buyer shall be duly executed and
delivered and shall constitute legal, valid and binding obligations of Buyer
enforceable in accordance with their terms, except as enforceability may be
limited by Equitable Limitations.
4.4. CONFLICTS. The execution and delivery of this Agreement by Buyer
does not, and the consummation of the transactions contemplated by this
Agreement shall not, (a) violate or be in conflict with, or require the consent
of any person or entity under, any provision of Buyer's Certificate of
Incorporation, bylaws or other governing documents, (b) conflict with, result in
a breach of, constitute a default (or an event that with the lapse of time or
notice, or both, would constitute a default) under any agreement or instrument
to which Buyer is a party or is bound, or (c) violate any provision of or
require any consent, authorization or approval under any judgment, decree,
judicial or administrative order, award, writ, injunction, statute, rule or
regulation applicable to Buyer.
4.5. QUALIFIED PURCHASER. Buyer is an experienced and knowledgeable
investor and operator in the oil and gas business. Buyer is acquiring the
Properties for its own account and not with a view to, or for offer of resale in
connection with, a distribution thereof, within the meaning of the Securities
Act of 1933, 15 U.S.C. (S) 77a et seq., and any other rules, regulations, and
laws pertaining to the distribution of securities.
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4.6. AVAILABLE FUNDS. Buyer has arranged to have available by the Closing
Date sufficient funds to enable the payment to Seller by wire transfer, the
Adjusted Purchase Price in accordance with Section 9.4, and to otherwise perform
Buyer's obligations under this Agreement.
5. COVENANTS OF SELLER PENDING CLOSING.
5.1. CONDUCT OF BUSINESS PENDING CLOSING. Seller covenants that from
the date hereof to the Closing Date, except (a) as provided herein, (b) as
required by any obligation, agreement, lease, contract, or instrument referred
to on the Exhibit, or (c) as otherwise consented to in writing by Buyer, Seller
will:
5.1.1. Not (i) operate or in any manner deal with, incur obligations
with respect to, or undertake any transactions relating to, the Properties other
than transactions (A) in the normal, usual and customary manner, (B) of a nature
and in an amount consistent with prior practice, and (C) in the ordinary and
regular course of business of owning and operating the Properties; (ii) dispose
of, encumber or relinquish any of the Properties (other than relinquishments
resulting from the expiration of leases that Seller has no right or option to
renew); or (iii) waive, compromise or settle any right or claim that would
materially and adversely affect the ownership, operation or value of any of the
Properties after the Effective Date.
5.1.2. Make or give all notifications, filings, consents or
approvals, from, to or with all governmental authorities, and take all other
actions reasonably requested by Buyer, necessary for, and cooperate with Buyer
in obtaining, the issuance, assignment or transfer, as the case may be, by each
such authority of such Permits as may be necessary for Buyer to own and operate
the Properties following the consummation of the transactions contemplated in
this Agreement.
5.1.3. Maintain in effect insurance providing the same type coverage,
in the same amounts with the same deductibles as the insurance maintained in
effect by Seller or its affiliates on the Effective Date.
5.2. ACCESS. Seller shall afford to Buyer and its authorized
representatives from the date hereof until the Closing Date, during normal
business hours, reasonable access to the
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Properties operated by Seller or Torch and to Seller's and Torch's title,
contract, and legal materials and operating data and information available as of
the date hereof and that becomes available to Seller or Torch at any time prior
to the Closing Date, other than any documents that are protected by an attorney-
client privilege.
6. COVENANTS OF BUYER PENDING CLOSING.
6.1. NOTIFICATIONS. Buyer will notify Seller promptly after the discovery
by Buyer of any facts or circumstances that causes or would cause any
representation or warranty of Seller contained in this Agreement to be untrue in
any material respect on the Closing Date. In addition, Buyer will notify Seller
of the discovery by Buyer of any facts or circumstances that causes or would
cause any representation or warranty of Buyer contained in this Agreement to be
untrue in any material respect on the Closing Date.
7. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER. The obligations of
Buyer to be performed at Closing are subject to the fulfillment, before or at
Closing, of each of the following conditions:
7.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties
by Seller set forth in this Agreement shall be true and correct in all respects
on the date of this Agreement and as of the Closing Date except for (i)
inaccuracies therein that would not reasonably be expected to have a negative
impact on the value of the Properties, taken as a whole, equal to 10% of the
Purchase Price or more, or (ii) changes therein specifically contemplated by
this Agreement or that would not reasonably be expected to have a negative
impact on the value of the Properties, taken as a whole, equal to 10% of the
Purchase Price or more.
7.2. COMPLIANCE. Seller shall have performed and complied in all material
respects with each of the covenants and conditions required by this Agreement of
which performance or compliance is required prior to or at the Closing.
7.3. CONSENTS. The consents specified in the Exhibit have been obtained
and any preferential rights specified in the Exhibit have been waived or have
expired.
7.4. NO PENDING SUITS. At the Closing Date, no suit, action or other
proceeding shall be pending or threatened before any court or governmental
agency in which it is sought to restrain or prohibit the performance of or to
obtain damages or other relief in connection with this Agreement or the
consummation of the transactions contemplated hereby.
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7.5. PURCHASE PRICE ADJUSTMENTS. The aggregate of all adjustments to the
Purchase Price pursuant to Annex I and all adjustments asserted by Buyer in good
faith pursuant to Annex I that have not been resolved prior to the Closing Date
shall not exceed 20% of the Purchase Price.
8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER. The obligations of
Seller to be performed at Closing are subject to the fulfillment, before or at
Closing, of each of the following conditions:
8.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties
by Buyer set forth in this Agreement shall be true and correct in all material
respects as of the Closing Date except for changes therein specifically
contemplated by this Agreement.
8.2. COMPLIANCE. Buyer shall have performed and complied in all material
respects with each of the covenants and conditions required by this Agreement of
which performance or compliance is required prior to or at the Closing.
8.3. CONSENTS. The consents specified in the Exhibit have been obtained
and any preferential rights specified in the Exhibit have been waived or have
expired.
8.4. NO PENDING SUITS. At the Closing Date, no suit, action or other
proceeding shall be pending or threatened before any court or governmental
agency in which it is sought to restrain or prohibit the performance of or to
obtain damages or other relief in connection with this Agreement or the
consummation of the transactions contemplated hereby.
8.5. PURCHASE PRICE ADJUSTMENTS. The aggregate of all adjustments to the
purchase price pursuant to Annex I shall not exceed 20% of the Purchase Price.
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9. CLOSING.
9.1. THE CLOSING. The assignment and purchase of the Properties pursuant to
this Agreement (the "Closing"), shall be consummated in Houston, Texas, at the
offices of Bracewell & Patterson, L.L.P. before 11:00 p.m. on the later of (a)
the third Business Day after the day that conditions precedent set forth in
Sections 7 and 8 have been satisfied or waived or (b) the later of (i) December
8, 1998 or (ii) if Seller shall provide a written notice to Buyer on or before
December 8, 1998 that it has elected to extend the Closing, January 6, 1999 (the
"Closing Date").
9.2. DOCUMENTS TO BE DELIVERED AT CLOSING.
9.2.1. At the Closing, Seller shall deliver to Buyer the following
instruments, dated the Closing Date, properly executed by authorized officers
and, where appropriate, acknowledged:
(a) Counterparts of an Assignment of Leases and Bill of Sale in the
form of Annex IV sufficient to convey to Buyer title in and to the
Properties;
(b) Such other instruments as are necessary to effectuate the
conveyance of the Properties to Buyer;
(c) Letters in lieu of division orders addressed to each purchaser of
the Substances;
(d) Evidence of the termination of the interests of Beauregard
Corporation in the Properties;
(e) With respect to any Wells that Seller or Torch is designated as
the operator under the applicable joint operating agreement (other than the
E.H. Pepper Unit and the Terrell Unit), (i) letters to all working interest
owners in which Seller and Torch, as applicable, resign as the operator and
recommends Buyer as the successor operator and (ii) any forms promulgated
by the appropriate governmental authority and completed by Buyer
designating Buyer as the operator that Seller is required to execute by the
governmental authority; and respect to any Wells for which Seller owns all
of the
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leasehold interests and either Seller or Torch is designated as the
operator with the appropriate governmental authority, any forms promulgated
by the appropriate governmental authority and completed by Buyer
designating Buyer as the operator that Seller or Torch is required to
execute by the governmental authority; and
(f) A certificate in the form of Annex II.
9.2.2. At the Closing, Buyer shall deliver to Seller a certificate in
the form of Annex III dated the Closing Date and properly executed by an
authorized officer.
9.3. POSSESSION. At the Closing, Seller shall deliver to Buyer
possession of the Properties other than the Data. Within five Business Days
after Closing, Seller shall deliver to Buyer at Seller's offices all of the
Data.
9.4. PAYMENT OF PURCHASE PRICE. At the Closing, against delivery of the
documents and materials described in Section 9.2, Buyer shall pay to Seller the
estimated Adjusted Purchase Price, less the amount of the Deposit, by wire
transfer of immediately available funds.
10. TERMINATION.
10.1. EVENTS OF TERMINATION. This Agreement may be terminated at any
time prior to the Closing:
10.1.1. By the mutual written consent of Buyer and Seller;
10.1.2. By Seller (i) if Buyer shall fail to perform in any material
respect its covenants contained herein required to be performed by it on or
prior to the Closing Date, or (ii) any of Buyer's representations contained
herein shall be incorrect in any material respect on the Closing Date, and such
failure or misrepresentation is not cured within ten days after Seller shall
have notified Buyer of its intent to terminate this Agreement pursuant to this
Section 10.1.2;
10.1.3. By Buyer if (i) Seller shall fail to perform in any material
respect its covenants contained herein required to be performed by it on or
prior to the Closing Date, or (ii) any of Seller's representations contained
herein shall be incorrect in any material respect
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on the Closing Date, and such failure or misrepresentation is not cured within
ten days after Buyer has notified Seller of its intent to terminate this
Agreement pursuant to this Section 10.1.3; and
10.1.4. By either Seller or Buyer if for any reason the Closing has
not occurred by January 11, 1999.
10.2. EFFECT OF TERMINATION.
10.2.1. If the purchase and sale of the Properties is not consummated
as contemplated in this Agreement and either (a) Buyer shall have failed to
perform in any material respect its covenants contained herein required to be
performed by it on or prior to the Closing Date, or (b) any of its
representations contained herein shall be incorrect in any material respect on
the Closing Date, and such failure or misrepresentation is not cured within the
time period provided in Section 10.1, then Seller may elect to retain the
Deposit as liquidated damages or return the Deposit to Buyer and seek such
damages as may be appropriate. Buyer acknowledges that the extent of damages to
Seller occasioned by any breach or misrepresentation by Buyer would be
impossible or extremely difficult to ascertain and that the amount of the
Deposit is a fair and reasonable estimate of such damages under the
circumstances.
10.2.2. If the purchase and sale of the Properties is not consummated
as contemplated in this Agreement and (a) Buyer shall have performed in all
material respects its covenants contained herein required to be performed by it
on or prior to the Closing Date and (b) all of its representations contained
herein shall be correct in all material respects on the Closing Date, then
Seller shall refund to Buyer the Deposit within three Business Days after the
date of termination of this Agreement.
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11. TAXES, PRORATIONS, SUSPENSE FUNDS AND ASSUMPTION OF OBLIGATIONS.
11.1. TAX PRORATIONS. Real and personal property taxes for the Properties
shall be prorated between Buyer and Seller as of the Effective Date. If the
actual taxes are not known on the Closing Date, Seller's share of such taxes
shall be determined by using (a) the rates and millage for the year prior to the
year in which the Closing occurs, with appropriate adjustments for any known and
verifiable changes thereto, and (b) the assessed values for the year in which
Closing occurs. When Buyer receives the actual tax statements for the Properties
from the appropriate taxing authorities, Buyer shall deliver to Seller a copy of
such statements, together with the amount, if any, by which Seller's proration
exceeds the proration that would have been made had actual tax statements been
used to calculate Seller's proration. If the proration for Seller that would
have been made using actual tax statements exceeds that made at Closing, Seller
shall pay to Buyer such difference within three Business Days of receipt of such
statement.
11.2. ASSUMPTION OF OBLIGATIONS. At Closing, Buyer shall assume (a) the
obligation to (i) plug and abandon or remove and dispose of all wells,
platforms, structures, flow lines, pipelines, and the other equipment now or
hereafter located on the Oil and Gas Properties and Surface Contracts and (ii)
cap and bury all flow lines and other pipelines now or hereafter located on the
Oil and Gas Properties and Surface Contracts; (b) all obligations and
liabilities arising from or in connection with any gas production, pipeline,
storage, processing or other imbalance attributable to Substances produced from
Oil and Gas Properties, whether before, on or after the Effective Date; (c) all
matters disclosed on the Exhibit pursuant to Sections 3.8 or 3.9; (d) all costs,
obligations and liabilities of Seller arising on or after the Effective Date
under or relating to (i) the Acquisition Agreement dated as of April 9, 1993
between Seller, Maxwells Energy Company, Inc. and Torchmark Corporation, (ii)
the Assignment and Bill of Sale dated effective as of January 1, 1993 (and
acknowledged on May 24, 1993 and May 25, 1993), from Nuevo to Torchmark
Corporation, (iii) the Conveyance of Production Payment dated effective as of
January 1, 1993 (and acknowledged on May 24, 1993 and May 25, 1993), from
Torchmark Corporation to Seller and (iv) the Production Payment Offset and
Reduction Agreement dated as of April 9, 1993, between Seller and Maxwell's
Energy Company, Inc.; and (e) all other costs, obligations and liabilities that
arise under the Oil and Gas Properties or Contracts or otherwise relate to the
Properties and, in each case, arise from or relate to events occurring or
conditions existing on or after the Effective Date or accrue after the Effective
Date. All such plugging, replugging, abandonment, removal, disposal, and
restoration operations shall be in compliance with applicable laws and
regulations and contracts.
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11.3. SUSPENDED FUNDS. As soon as practicable after the Closing, but no
later than ninety days thereafter, Seller shall provide to Buyer a listing
showing all proceeds from production attributable to the Properties which are
currently held in suspense by Seller and shall transfer to Buyer all those
suspended proceeds (the "Suspended Proceeds"). Thereafter, Buyer shall be
responsible for proper distribution of all the Suspended Proceeds to the parties
lawfully entitled to them.
12. FINAL ACCOUNTING.
12.1. SETTLEMENT STATEMENT. As soon as practical and, in any event, no
later than one hundred twenty calendar days after the Closing Date, Seller shall
prepare and deliver to Buyer a statement (the "Final Settlement Statement")
setting forth the adjustments to the Purchase Price in accordance with Section
2.2. The Final Settlement Statement shall be prepared in accordance with
customary accounting principles used in the oil and gas industry. The Final
Settlement Statement shall reflect all amounts shown on the Closing Statement
and shall deduct all such amounts from the amounts calculated under the Final
Settlement Statement. Within thirty calendar days after Buyer's receipt of the
Final Settlement Statement (but not earlier than ninety calendar days after the
Closing Date), Buyer and Seller shall endeavor to agree on the final accounting.
12.2. ARBITRATION OF FINAL SETTLEMENT. If Seller and Buyer cannot agree
upon the Final Settlement Statement, the Houston Office of the firm of Arthur
Andersen & Co. is designated to act as an arbitrator and to decide all points of
disagreement with respect to the Final Settlement Statement, such decision to be
binding on both parties. If such firm is unwilling or unable to serve in such
capacity, Seller and Buyer shall attempt to, in good faith, designate another
acceptable person as the sole arbitrator under this Section. If the parties are
unable to agree upon the designation of a person as substitute arbitrator, then
Seller or Buyer, or both of them, may in writing request the Judge of the United
States District Court for the Southern District of Texas senior in term of
service to appoint the substitute arbitrator. The arbitration shall be
conducted under the Texas General Arbitration Act and the rules of the American
Arbitration Association to the extent such rules do not conflict with the terms
of such Act and the terms hereof. The costs and expenses of the arbitrator,
whether the firm designated above, or a third party appointed pursuant to the
preceding sentence shall be shared equally by Seller and Buyer.
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12.3. PAYMENT. Within five Business Days after the agreement of Seller
and Buyer on the Final Settlement Statement or after the decision of the
arbitrator, Buyer or Seller, as the case may be, shall promptly make a cash
payment to the other equal to the sums as may be found to be due in the Final
Settlement Statement.
13. SURVIVAL AND INDEMNIFICATION.
13.1. SURVIVAL. The liability of Buyer and Seller under each of their
respective representations, warranties and covenants contained in this Agreement
shall survive the Closing and execution and delivery of the assignments
contemplated hereby.
13.2. LIABILITIES. The term "Liabilities" shall mean any and all claims,
causes of action, payments, charges, judgments, assessments, liabilities,
damages, penalties, fines or costs and expenses which are asserted, filed or
assessed against, paid or incurred by the person seeking indemnification,
including any legal or other expenses reasonably incurred in connection
therewith.
13.3. INDEMNIFICATION BY SELLER. After the Closing, Seller shall be
responsible for, shall pay on a current basis, and shall indemnify, save, hold
harmless, discharge and release Buyer, all of its affiliates, successors and,
permitted assignees, and all of its and their respective stockholders,
directors, officers, employees, agents and representatives (collectively, "Buyer
Indemnified Parties") from and against any and all Liabilities, arising from,
based upon, related to or associated with (a) any act or omission by Seller
involving or relating to the Properties occurring or existing before the
Effective Date, other than obligations and liabilities assumed by Buyer pursuant
to Section 11.2; (b) any act or omission by Seller involving or relating to the
Excluded Assets whether occurring before or after the Effective Date; (c) the
fees of the Advisor and any brokers' or finders' fees or commissions arising
with respect to brokers or finders retained or engaged by Seller and resulting
from or relating to the transactions contemplated in this Agreement; (d) the
inaccuracy of any representation or warranty of Seller set forth in this
Agreement or in any other agreement, instrument, document or certificate
executed or delivered in connection with this Agreement; (e) the breach of, or
failure to perform or satisfy, any of the covenants of Seller set forth in this
Agreement or in any other agreement, instrument, document or certificate
executed or delivered in connection with this Agreement; and (f) any interest
or penalties on the Suspended Proceeds to the extent such interest or penalties
are attributable to periods prior to the transfer of such Suspended Proceeds to
Buyer.
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13.4. INDEMNIFICATION BY BUYER. After the Closing, Buyer shall assume,
be responsible for, shall pay on a current basis, and shall indemnify, save,
hold harmless, discharge and release Seller, its affiliates, its and their
successors and permitted assigns, and all of their respective stockholders,
directors, officers, employees, agents and representatives (collectively,
"Seller Indemnified Parties") from and against any and all Liabilities arising
from, based upon, related to or associated with (a) any act, omission, event,
condition or circumstance involving or relating to the Properties occurring or
existing on or after the Effective Date; (b) liabilities and obligations assumed
by Buyer pursuant to Section 11.2; (c) any act, omission, event, condition or
circumstance involving or relating to the Properties occurring or existing
before the Effective Date that was not properly asserted by Buyer on or prior to
the date specified in Section 13.5.1; (d) any brokers' or finders' fees or
commissions arising with respect to brokers or finders retained or engaged by
Buyer and resulting from or relating to the transactions contemplated in this
Agreement; (e) the inaccuracy of any representation or warranty of Buyer set
forth in this Agreement or in any other agreement, instrument, document or
certificate executed or delivered in connection with this Agreement; (f) the
breach of, or failure to perform or satisfy any of the covenants of Buyer set
forth in this Agreement or in any other agreement, instrument, document or
certificate executed or delivered in connection with this Agreement; and (g) the
payment to the proper parties of the principal amount of the Suspended Proceeds
and any interest or penalties on the Suspended Proceeds attributable to periods
subsequent to the transfer of such Suspended Proceeds to Buyer.
13.5. LIABILITY LIMITATIONS.
13.5.1. After the Closing, any assertion by any Buyer Indemnified
Party that Seller is liable (a) for the inaccuracy of any representation or
warranty, (b) for the breach of any covenant, (c) for indemnity under the terms
of this Agreement or (d) otherwise in connection with the transactions
contemplated in this Agreement, must be made by Buyer in writing and must be
given to Seller on or prior to the Claims Notice Date. The notice shall state
the facts known to Buyer that give rise to such notice in sufficient detail to
allow Seller to evaluate the assertion. The "Claims Notice Date" for
Liabilities arising from, based upon, related to or associated with the non-
payment of royalties, overriding royalties, production payments, carried
interests, ad valorem taxes, severance taxes, production taxes or similar
burdens or taxes shall be the fourth anniversary of the Closing Date; the
"Claims Notice Date" for claims under Section 13.3(f) shall be December 31,
2018; and the "Claims Notice Date" for all other Liabilities shall be December
1, 1999.
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13.5.2. None of the Buyer Indemnified Parties shall be entitled to
assert any right to indemnification hereunder or to otherwise seek any damages
or other remedies for or in connection with (a) the inaccuracy of any
representations of Seller contained in this Agreement or in any other agreement,
instrument, document or certificate executed or delivered in connection with
this Agreement; (b) the breach of, or failure to perform or satisfy any of the
covenants of Seller set forth in this Agreement or in any other agreement,
instrument, document or certificate executed or delivered in connection with
this Agreement; or (c) any liabilities otherwise arising in connection with or
with respect to the transactions contemplated in this Agreement unless the
individual amount of each such Liability exceeds $10,000 and until the aggregate
amount of such Liabilities in excess of $10,000 for such misrepresentations and
breaches exceeds $2,000,000, and then only to the extent of such excess. The
limitations in this Section shall not apply, however, to the obligations of
Seller under Sections 9.4, 10.2, 11.1, 11.3, 12.1, 12.2, 12.3, 13.3(f) and 19.
13.5.3. The amount of any Liabilities for which any of the Buyer
Indemnified Parties or Seller Indemnified Parties is entitled to indemnification
or other compensation under this Agreement or in connection with or with respect
to the transactions contemplated in this Agreement shall be reduced by any
corresponding insurance proceeds realized or that could reasonably be expected
to be realized by such party if a claim were properly pursued under the relevant
insurance arrangements.
13.5.4. Seller shall not be required to indemnify any Buyer
Indemnified Parties or pay any other amount in connection with or with respect
to the transactions contemplated in this Agreement in any amount exceeding in
the aggregate $25,000,000.
13.5.5. None of the Buyer Indemnified Parties nor the Seller
Indemnified Parties shall be entitled to recover from Seller or Buyer,
respectively, for any losses, costs, expenses, or damages arising under this
Agreement or in connection with or with respect to the transactions contemplated
in this Agreement any amount in excess of the actual compensatory damages, court
costs and reasonable attorney fees, suffered by such party. Buyer on behalf of
each of the Buyer Indemnified Parties and Seller on behalf of each of the Seller
Indemnified Parties waives any right to recover punitive, special, exemplary and
consequential damages arising in connection with or with respect to the
transactions contemplated in this Agreement. This Section shall not limit
Seller's right to retain the Deposit as liquidated damages under Section 10.
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13.5.6. If the Closing occurs, the sole and exclusive remedy of each
of the Buyer Indemnified Parties and the Seller Indemnified Parties with respect
to the purchase and sale of the Properties, except for Title Defects handled in
accordance with the procedures set forth in Annex I, shall be pursuant to the
express indemnification provisions of this Section 13. Any and all (a) claims
relating to the representations, warranties, covenants and agreements contained
in this Agreement, (b) other claims pursuant to or in connection with this
Agreement or (c) other claims relating to the Properties and the purchase and
sale thereof shall be subject to the provisions set forth in this Section 13.
Except for claims made pursuant to the express indemnification provisions of
this Section 13, Buyer on behalf of each of the Buyer Indemnified Parties and
Seller on behalf of each of the Seller Indemnified Parties shall be deemed to
have waived, to the fullest extent permitted under applicable law, any right of
contribution against Seller or any of its affiliates and any and all rights,
claims and causes of action it may have against Seller or any of its affiliates
or Buyer or any of its affiliates, respectively, arising under or based on any
federal, state or local statute, law, ordinance, rule or regulation or common
law or otherwise.
13.5.7. No person entitled to indemnification hereunder or otherwise
to damages in connection with or with respect to the transactions contemplated
in this Agreement shall settle, compromise or take any other action with respect
to any claim, demand, assertion of liability or legal proceeding that could
prejudice or otherwise adversely impact the ability of the person providing such
indemnification or potentially liable for such damages to defend or otherwise
settle or compromise with respect to such claim, demand, assertion of liability
or legal proceeding.
13.5.8. Seller and Buyer acknowledge that the payment of money, as
limited by the terms of this Agreement, shall be adequate compensation for
breach of any representation, warranty, covenant or agreement contained herein
or for any other claim arising in connection with or with respect to the
transactions contemplated in this Agreement. As the payment of money shall be
adequate compensation, Buyer and Seller waive any right to rescind this
Agreement or any of the transactions contemplated hereby.
13.5.9. Each person entitled to indemnification hereunder or
otherwise to damages in connection with the transactions contemplated in this
Agreement shall take all
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reasonable steps to mitigate all losses, costs, expenses and damages after
becoming aware of any event or circumstance that could reasonably be expected to
give rise to any losses, costs, expenses and damages that are indemnifiable or
recoverable hereunder or in connection herewith.
13.5.10. THE INDEMNIFICATION, RELEASE AND ASSUMPTION PROVISIONS
PROVIDED FOR IN THIS AGREEMENT SHALL BE APPLICABLE WHETHER OR NOT THE LOSSES,
COSTS, EXPENSES AND DAMAGES IN QUESTION AROSE SOLELY OR IN PART FROM THE GROSS,
ACTIVE, PASSIVE OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF ANY
INDEMNIFIED PARTY. BUYER AND SELLER ACKNOWLEDGE THAT THIS STATEMENT COMPLIES
WITH THE EXPRESS NEGLIGENCE RULE AND IS CONSPICUOUS.
13.5.11. Neither Seller nor Buyer shall have any obligation or
liability under this Agreement or in connection with or with respect to the
transactions contemplated in this Agreement for any breach, misrepresentation or
noncompliance with respect to any representation, warranty, covenant, indemnity
or obligation (a) if such breach, misrepresentation or noncompliance shall have
been waived by the other party or (b) if such other party had knowledge of the
relevant facts at or before Closing; provided that Buyer shall not be deemed to
have waived any claim for any misrepresentation by Seller with respect to any
misrepresentations asserted by Buyer in writing at or before Closing.
13.6. WAIVER OF REPRESENTATIONS.
13.6.1. THE EXPRESS REPRESENTATIONS OF SELLER CONTAINED IN THIS
AGREEMENT AND IN THE CERTIFICATE TO BE DELIVERED PURSUANT TO SECTION 9.2.1 ARE
EXCLUSIVE AND ARE IN LIEU OF, ANY OTHER REPRESENTATION OR WARRANTY WITH RESPECT
TO THE ENVIRONMENTAL CONDITION, BOTH SURFACE AND SUBSURFACE, OR OTHER CONDITION
OF THE PROPERTIES; OR THE OWNERSHIP OR OPERATION OF THE PROPERTIES OR ANY PART
THEREOF.
13.6.2. EXCEPT TO THE EXTENT OF THE EXPRESS REPRESENTATIONS AND
WARRANTIES OF SELLER CONTAINED IN THIS
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AGREEMENT AND IN THE CERTIFICATE TO BE DELIVERED BY SELLER PURSUANT TO SECTION
9.2.1, SELLER EXPRESSLY DISCLAIMS AND NEGATES, AND BUYER HEREBY WAIVES, ANY
LIABILITY OR RESPONSIBILITY FOR, (I) ALL REPRESENTATIONS AND WARRANTIES,
EXPRESS, IMPLIED OR STATUTORY AND (II) ANY STATEMENT OR INFORMATION ORALLY OR IN
WRITING MADE OR COMMUNICATED TO BUYER, INCLUDING, BUT NOT LIMITED TO, ANY
OPINION, INFORMATION OR ADVICE THAT MAY HAVE BEEN PROVIDED TO BUYER BY ANY
OFFICER, DIRECTOR, EMPLOYEE, AGENT, CONSULTANT OR REPRESENTATIVE OF SELLER, ANY
ENGINEER OR ENGINEERING FIRM OR ANY OTHER AGENT, CONSULTANT OR REPRESENTATIVE.
13.6.3. SELLER EXPRESSLY DISCLAIMS AND NEGATES, AND BUYER HEREBY
WAIVES, ANY LIABILITY OR RESPONSIBILITY FOR, (I) ANY REPRESENTATION OR WARRANTY
WITH RESPECT TO THE QUALITY, QUANTITY OR VOLUME OF THE RESERVES, IF ANY, OF OIL,
GAS OR OTHER HYDROCARBONS IN OR UNDER THE OIL AND GAS PROPERTIES; AND (II) ANY
WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO THE QUALITY,
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, CONFORMITY TO SAMPLES, OR
CONDITION OF ANY OF THE PROPERTIES OR ANY PART THERETO.
13.6.4. EXCEPT FOR THE EXPRESS REPRESENTATIONS CONTAINED IN THIS
AGREEMENT AND IN THE CERTIFICATE TO BE DELIVERED PURSUANT TO SECTION 9.2.1 THE
ITEMS OF PERSONAL PROPERTY, EQUIPMENT, IMPROVEMENTS, FIXTURES AND APPURTENANCES
CONVEYED AS PART OF THE PROPERTIES ARE SOLD, AND BUYER ACCEPTS SUCH ITEMS "AS
IS, WITH ALL FAULTS."
13.6.5. THERE ARE NO WARRANTIES THAT EXTEND BEYOND THE FACE OF THIS
AGREEMENT AND THE CERTIFICATE TO BE DELIVERED PURSUANT TO SECTION 9.2.1.
13.6.6. BUYER ACKNOWLEDGES THAT THE WAIVERS IN THIS SECTION 13.6 ARE
CONSPICUOUS.
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13.7. YEAR 2000 COMPLIANCE. Seller does not make, and expressly disclaims,
any representation or warranty regarding whether or not any software, hardware,
equipment, goods or systems utilized by Seller in connection with the ownership
or operation of any portion of the Properties (or any reporting with respect
thereto), any other owner or operator of any portion of the Properties or any
person who provides goods or services to Seller or any other person with respect
to the ownership or operation of the Properties will properly perform date
sensitive functions before, during or after the year 2000, and Buyer waives any
such representation or warranty.
14. FURTHER ASSURANCES.
14.1. GENERAL. After the Closing, Seller and Buyer shall execute,
acknowledge and deliver or cause to be executed, acknowledged and delivered such
instruments and take such other action as may be necessary or advisable to carry
out their obligations under this Agreement and under any exhibit, document,
certificate or other instrument delivered pursuant hereto.
14.2. FILINGS, NOTICES AND CERTAIN GOVERNMENTAL APPROVALS. Promptly after
Closing Buyer shall (a) record the assignments of the Properties executed at the
Closing in all applicable real property records, (b) send notices to vendors
supplying goods and services for the Properties of the assignment of the
Properties to Buyer and, if applicable, the designation of Buyer as the operator
thereof, (c) actively pursue the unconditional approval by all applicable
governmental authorities of the assignment of the Properties to Buyer and the
designation of Buyer as the operator thereof, and (d) actively pursue all other
consents and approvals that may be required in connection with the assignment of
the Properties to Buyer, and the assumption of the liabilities assumed by Buyer
hereunder, and that shall not have been obtained prior to Closing.
14.3. LOGOS AND NAMES. As soon as practicable after the Closing, Buyer
will remove or cause to be removed the names and marks used by Seller and all
variations and derivatives thereof and logos relating thereto from the
Properties.
15. ACCESS BY SELLER AFTER CLOSING. After the Closing Date, Seller and its
authorized representatives shall have reasonable access (at Seller's sole cost
and expense) during Buyer's normal business hours to (i) all books and records
of Buyer pertaining to the Properties for periods prior to the Closing Date and
(ii) the Properties for the purpose of prosecuting or
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defending claims, lawsuits or other proceedings, for audit purposes, or to
comply with legal process, rules, regulations or orders of any governmental
authority. Seller, at its sole expense, may copy such records that it deems
appropriate. Buyer agrees to maintain such books and records for a minimum of
six years after Closing. Seller may retain a copy, at its expense, of any of the
Data.
16. NOTICES. All notices required or permitted under this Agreement shall be
in writing and shall be deemed to have be given when actually received by the
following recipients:
To Seller: Nuevo Energy Company
Suite 1650, 1331 Lamar
Houston, Texas 77010-3039
Attention: Douglas L. Foshee, President
Telecopier: 713.756.1744
With a copy to: Roland E. Sledge, Esq.
Torch Energy Advisors Incorporated
Suite 1600, 1221 Lamar
Houston, Texas 77010
Telecopier: 713.665.1711
To Buyer: Samson Lone Star Limited Partnership
Two West Second Street
Tulsa, Oklahoma 74103
Attention: Doug Jacobson
Telecopier: 918.591.1757
With a copy to: Samson Lone Star Limited Partnership
Two West Second Street
Tulsa, Oklahoma 74103
Attention: Jack Canon
Telecopier: 918.591.1718
"Business Day" shall mean a day other than Saturday or Sunday or any legal
holiday for commercial banking institutions under the laws of the State of
Texas.
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17. ASSIGNMENT. Neither Seller nor Buyer may assign its rights or delegate
its duties or obligations arising under this Agreement, in whole or in part, by
operation of law or otherwise, before or after Closing, without the prior
written consent of the other party.
18. GOVERNING LAW. This Agreement shall be governed and construed in accordance
with the laws of the State of Texas without giving effect to any principles of
conflicts of laws.
19. EXPENSES AND FEES. Whether or not the transactions contemplated by this
Agreement are consummated, each of the parties hereto shall pay the fees and
expense of its counsel, accountants and other experts incident to the
negotiation and preparation of this Agreement and consummation of the
transactions contemplated hereby. Buyer shall be responsible for the cost of
all fees for the recording of transfer documents and any sales, transfer, stamp
or other excise taxes resulting from the transfer of the Properties to Buyer.
All other costs shall be borne by the party incurring such costs.
20. INTEGRATION. This Agreement, including the Exhibit, and the other agreements
to be entered into by the parties under the provisions of this Agreement and the
Confidentiality Agreement dated July 29, 1998, executed by Buyer and the Advisor
(the "Confidentiality Agreement") set forth the entire agreement and
understanding of the parties in respect of the transactions contemplated hereby
and supersede all prior agreements, prior arrangements and prior understandings
relating to the subject matter hereof.
21. WAIVER OR MODIFICATION. This Agreement may be amended, modified, superseded
or canceled, and any of the terms, covenants, representations, warranties or
conditions hereof may be waived, only by a written instrument executed by a duly
authorized officer of Buyer and Seller, or, in the case of a waiver or consent,
by or on behalf of the party or parties waiving compliance or giving such
consent. The failure of any party at any time or times to require performance of
any provision of this Agreement shall not affect its right at a later time to
enforce such provision. No waiver by any party of any condition, or of any
breach of any covenant, agreement, representation or warranty contained in this
Agreement, in any one or more instances, shall be deemed to be or construed as a
further or continuing waiver of any such condition or breach or waiver of any
other condition or of any breach of any other covenant, agreement,
representation or warranty.
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22. HEADINGS. The Section headings contained in this Agreement are for
convenient reference only and shall not in any way affect the meaning or
interpretation of this Agreement.
23. INVALID PROVISIONS. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable; this Agreement shall
be construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a part hereof; and the remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by the
illegal, invalid or unenforceable provision or by its severance from this
Agreement.
24. WAIVER OF JURY TRIAL. SELLER AND BUYER HEREBY IRREVOCABLY WAIVE, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO A TRIAL BY JURY IN ANY
ACTION, SUIT OR OTHER LEGAL PROCEEDING BASED ON, ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREIN.
25. MULTIPLE COUNTERPARTS. This Agreement may be executed in a number of
identical counterparts, each of which for all purposes is to be deemed an
original, and all of which constitute, collectively, one agreement. In
addition, this Agreement may be executed in a number of counterparts, any one of
which may contain the execution of either Buyer or Seller, and all of such
counterparts taken together shall constitute one completely executed original
agreement.
26. PUBLIC ANNOUNCEMENTS. Buyer and Seller agree that prior to making any
public announcement or statement with respect to the transaction contemplated by
this Agreement, the party desiring to make such public announcement or statement
shall consult with the other party hereto and exercise its best efforts to (a)
agree upon the text of a joint public announcement or statement to be made by
both Buyer and Seller or (b) obtain approval of the other party hereto the text
of a public announcement or statement to be made solely by Seller or Buyer, as
the case may be. Nothing contained in this section shall be construed to
require either party to obtain approval of the other party hereto to disclose
information with respect to the transaction contemplated by this Agreement to
any state or federal governmental authority or agency to the extent required by
applicable law or by any applicable rules, regulations or orders of any
governmental authority or agency having jurisdiction or necessary to comply with
disclosure requirements of the New York Stock Exchange or any applicable
securities laws.
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27. ARBITRATION.
27.1. BINDING ARBITRATION. On the request of any party hereto, whether
made before or after the institution of any legal proceeding, any action,
dispute, claim or controversy of any kind now existing or hereafter arising
between any of the parties hereto in any way arising out of, pertaining to or in
connection with this Agreement (a "Dispute") shall be resolved by binding
arbitration in accordance with the terms hereof. Any party may, by summary
proceedings, bring an action in court to compel arbitration of any Dispute.
27.2. GOVERNING RULES. Any arbitration shall be administered by the
American Arbitration Association (the "AAA") in accordance with the terms of
this Section, the Commercial Arbitration Rules of the AAA, and, to the maximum
extent applicable, the Federal Arbitration Act. Judgment on any award rendered
by an arbitrator may be entered in any court having jurisdiction.
27.3. ARBITRATORS. Any arbitration shall be conducted before one
arbitrator. The arbitrator shall be a practicing or retired attorney licensed
to practice in the State of Texas who is knowledgeable in the subject matter of
the Dispute selected by agreement between the parties hereto. If the parties
cannot agree on an arbitrator within 30 days after the request for an
arbitration, then any party may request the AAA to select an arbitrator. The
arbitrator may engage engineers, accountants or other consultants that the
arbitrator deems necessary to render a conclusion in the arbitration proceeding.
27.4. CONDUCT OF ARBITRATION. To the maximum extent practicable, an
arbitration proceeding hereunder shall be concluded within 180 days of the
filing of the Dispute with the AAA. Arbitration proceedings shall be conducted
in Houston, Texas. Arbitrators shall be empowered to impose sanctions and to
take such other actions as the arbitrators deem necessary to the same extent a
judge could impose sanctions or take such other actions pursuant to the Federal
Rules of Civil Procedure and applicable law. At the conclusion of any
arbitration proceeding, the arbitrator shall make specific written findings of
fact and conclusions of law. The arbitrator shall have the power to award
recovery of all costs and fees to the prevailing party. Each party agrees to
keep all Disputes and arbitration proceedings strictly confidential except for
disclosure of information required by applicable law.
27.5. COSTS OF ARBITRATION. All fees of the arbitrator and any engineer,
accountant or other consultant engaged by the arbitrator, shall be paid by Buyer
and Seller equally unless otherwise awarded by the arbitrator.
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EXECUTED as of the date first set forth above.
SAMSON LONE STAR LIMITED PARTNERSHIP
by its sole general partner, Samson Resources Company
By:
------------------------------------------------
Douglas Jacobson
Attorney-in-Fact
NUEVO ENERGY COMPANY
By:
------------------------------------------------
Douglas L. Foshee
President
Samson Investment Company, a Nevada corporation, unconditionally guarantees the
prompt payment and performance of each and every obligation of Buyer under this
Agreement and each and every agreement or instrument executed by Buyer in
connection with this Agreement.
SAMSON INVESTMENT COMPANY
By:
------------------------------------------------
Douglas Jacobson
Senior Vice President
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ANNEX I
TITLE TO THE PROPERTIES
1. DEFINITIONS. This Annex I incorporates the defined terms contained in the
Agreement and also includes the following definitions:
1.1. "Allocated Value" means the value allocated to each Oil and Gas
Property as set forth on the Exhibit, reflecting the portion of the Purchase
Price associated with each Oil and Gas Property.
1.2. "Liens" means any encumbrance, lien, security interest, claim or
burden.
1.3. "Marketable Title" means such title as (a) will enable Buyer, as
Seller's successor in title, to receive from a particular Oil and Gas Property
at least the "Net Revenue Interest" for the Oil and Gas Properties set forth on
the Exhibit as being associated with such Oil and Gas Property, without
reduction, suspension or termination throughout the productive life of Wells
located on the Oil and Gas Properties, except for any reduction, suspension or
termination caused by Buyer, that arises as a result of Permitted Encumbrances
or set forth in the Exhibit; (b) will obligate Buyer, as Seller's successor in
title, to bear no greater "Working Interest" than the Working Interest for each
of the Oil and Gas Properties identified on the Exhibit as being associated with
such Oil and Gas Property, without increase throughout the productive life of
such Well, except for any increase caused by Buyer, that arises as result of
Permitted Encumbrances or set forth in the Exhibit; and (c) is free and clear of
all Liens, except for Permitted Encumbrances.
1.4. "Notice Date" means November 25, 1998.
1.5. "Permitted Encumbrances" means (a) Liens securing payments to
mechanics and materialmen, payments of taxes or claims arising by statute to
secure or protect any other payment obligation that are, in each case, not yet
delinquent or, if delinquent, are being contested in good faith in the normal
course of business; (b) any matter specifically
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disclosed on the Exhibit; (c) Title Defects that Buyer fails to assert in
accordance with the provisions of this Annex prior to the Notice Date; (d)
consents to assignment by a governmental authority that are obtained by the
Closing Date or that are customarily obtained after the consummation of
transactions of the nature contemplated in this Agreement; (e) Liens held by
Beauregard Corporation to be released at Closing; and (f) other minor defects or
irregularities of title affecting any portion of any Oil and Gas Property that
individually or in the aggregate do not materially interfere with the operation,
value or use of any Oil and Gas Property.
1.6. "Title Defect" means any Lien or other matter, other than a
Permitted Encumbrance or matter specifically waived by Buyer in writing, that is
identified by Buyer on or before the Notice Date, and that renders title to a
Oil and Gas Property (or any portion thereof) less than Marketable Title;
provided that any such individual Lien or such other matter has a value of
$10,000 or less shall not be considered to be a Title Defect.
1.7. "Title Defect Amount" means, with respect to any reduction of the
Net Revenue Interest set forth in the Exhibit for any Oil and Gas Property, an
amount calculated by multiplying the reduction in Net Revenue Interest by the
Allocated Value of such Oil and Gas Property; with respect to any increase in
the Working Interest set forth in the Exhibit for any Oil and Gas Property, an
amount calculated by multiplying the increase in the Working Interest by the
lease operating and capital expense items as shown in the Report over the life
of such Oil and Gas Property; and with respect to any Title Defect that does not
cause the Net Revenue Interest set forth in the Exhibit for an Oil and Gas
Property to decrease or cause the Working Interest set for in the Exhibit for
any Oil and Gas Property to increase, an amount determined by evaluating the
portion of the Oil and Gas Property affected by such Title Defect, the legal
effect of the Title Defect, and the potential economic effect of the Title
Defect over the life of the Oil and Gas Property affected. The Title Defect
Amount as to any particular Oil and Gas Property, however, shall never exceed
the Allocated Value therefor.
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2. TITLE PROCEDURE.
2.1. NOTICE OF TITLE DEFECTS. On or before the Notice Date, Buyer
shall notify Seller of any Title Defect affecting an Oil and Gas Property
discovered by Buyer. The notice shall be in writing and shall describe the
alleged Title Defect, specify the Oil and Gas Property affected and set forth
Buyer's assessment of the Title Defect Amount.
2.2. SELLER'S ELECTION TO CURE. Seller may notify Buyer in writing on
or before the Closing Date that it elects to cure the alleged Title Defect. If
Seller has elected to cure the Title Defect, then Seller shall use commercially
reasonable efforts to cure such Title Defect during a period ending sixty days
after Closing (the "Cure Period").
2.3. UNCURED TITLE DEFECTS. If at the Closing Date, a Title Defect
identified by Buyer pursuant to Section 2.1 of this Annex I remains uncured and
Seller has not notified Buyer of its election to cure such Title Defect, then
the Purchase Price to be paid at the Closing shall be reduced by an amount equal
to the Title Defect Amount. There shall not be any reduction of the Purchase
Price at Closing for any Title Defects that Seller has elected to cure or has
disputed. If after the Cure Period, a Title Defect that Seller has elected to
cure remains uncured, then the Purchase Price shall be reduced in the Final
Settlement Statement by an amount equal to the Title Defect Amount.
3. DISPUTE RESOLUTION. If a Dispute exists as to whether a matter referred to
in any notice furnished by Buyer to Seller pursuant to Section 2.1 of this Annex
I constitutes a Title Defect, whether a Title Defect has been cured, or the
amount of any Title Defect Amount, either Buyer or Seller may request
arbitration of such dispute.
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ANNEX II
CERTIFICATE OF SELLER
Pursuant to the Agreement for Purchase and Sale ("Agreement") dated October 16,
1998, by and between Nuevo Energy Company ("Seller") and Samson Lone Star
Limited Partnership ("Buyer"), Seller hereby represents, warrants and affirms to
Buyer as follows:
1. Seller has performed and complied in all material respects with each
of the covenants and conditions required by the Agreement to be performed or
complied with by it before or at the time of execution of this Certificate; and
2. Each of the representations and warranties made by Seller under the
Agreement are true and correct as of the date hereof except for (a) changes
specifically contemplated by the Agreement, (b) inaccuracies in such
representations and warranties deemed to be waived by Buyer pursuant to the
terms of the Agreement and (c) inaccuracies set forth in the Schedule attached
to this Certificate.
This Certificate is executed this _____ day of _______________, 1998.
Nuevo Energy Company
By:_________________________________________________
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ANNEX III
CERTIFICATE OF BUYER
Pursuant to the Agreement for Purchase and Sale ("Agreement") dated October 16,
1998, by and between Nuevo Energy Company ("Seller") and Samson Lone Star
Limited Partnership ("Buyer"), Buyer hereby represents, warrants and affirms to
Seller as follows (capitalized terms used in this Certificate have the meanings
ascribed to such terms in the Agreement):
1. Buyer has performed and complied in all material respects with each
of the covenants and conditions required by the Agreement to be performed or
complied with by it before or at the time of execution of this Certificate.
2. Each of the representations and warranties made by Buyer under the
Agreement are true and correct as of the date hereof except for (a) changes
specifically contemplated by the Agreement, (b) inaccuracies in such
representations and warranties deemed to be waived by Seller pursuant to the
terms of the Agreement and (c) inaccuracies set forth in the Schedule attached
to this Certificate.
3. Buyer has been afforded an opportunity to (a) examine the Properties
and such materials as it has requested to be provided to it by Seller, (b)
discuss with representatives of Seller such materials and the nature and
operation of the Properties and (c) investigate the condition, including
subsurface condition, of the Oil and Gas Properties and Surface Contracts and
the condition of the Equipment. In entering into this Agreement, Buyer has
relied solely on the express representations and covenants of Seller in this
Agreement, its independent investigation of, and judgment with respect to, the
Equipment and the other Properties and the advice of its own legal, tax,
economic, environmental, engineering, geological and geophysical advisors and
not on any comments or statements of any representatives of, or consultants or
advisors engaged by, Seller or the Advisor.
This Certificate is executed this _____ day of __________, 1998.
SAMSON LONE STAR LIMITED PARTNERSHIP
by its sole general partner, Samson Resources Company
By:______________________________________________
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ANNEX IV
ASSIGNMENT AND BILL OF SALE
THE STATE OF TEXAS
COUNTY OF ________
This Assignment and Bill of Sale ("Assignment") is executed and delivered by
NUEVO ENERGY COMPANY, a Delaware corporation ("Assignor"), to SAMSON LONE STAR
LIMITED PARTNERSHIP, a Texas limited partnership ("Assignee").
Assignor, for valuable considerations, the receipt and sufficiency of which are
hereby acknowledged, does by these presents GRANT, BARGAIN, SELL, CONVEY,
ASSIGN, TRANSFER, SET OVER and DELIVER unto Assignee the undivided interest of
Assignor set forth in the Exhibit in and to the following properties, other than
the Excluded Assets (the "Properties"):
A. OIL AND GAS PROPERTIES. All properties described on the Exhibit
whether the interest of Seller in such properties is fee interests, leasehold
interests, working interests, farmout rights, royalty, overriding royalty or
other non-working or carried interests, or other mineral rights, and any rights
that arise by operation of law or otherwise in all properties and lands pooled,
unitized, communitized or consolidated with such properties (the "Oil and Gas
Properties").
B. WELLS. All oil, condensate or natural gas wells and water and other
types of injection wells located on the Oil and Gas Properties, whether
producing, operating, shut-in or temporarily abandoned.
C. SEVERED SUBSTANCES. All severed crude oil, natural gas, casinghead
gas, drip gasoline, natural gasoline, petroleum, natural gas liquids,
condensate, products, liquids and other hydrocarbons and other minerals or
materials of every kind and description produced
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from the Oil and Gas Properties and either (a) in storage tanks on the Effective
Date, (b) in pipelines on the Effective Date or (c) sold on or after the
Effective Date (the "Substances").
D. SURFACE CONTRACTS. All right-of-way agreements or other agreements
relating to the use or ownership of surface properties that are used or held for
use for flow lines in connection with the production of Substances from the Oil
and Gas Properties, including the rights-of-way agreements and other agreements
described in the Exhibit (the "Surface Contracts").
E. EQUIPMENT. All processing plants, pipelines and other equipment,
fixtures and physical facilities of every type and description located on the
Oil and Gas Properties or the Surface Contracts.
F. INFORMATION AND DATA. All (a) title opinions, lease and land files,
filings with and reports to regulatory agencies, gas and sales contract files,
division order files and other books, files and records to the extent that they
are directly related to Oil and Gas Properties and the transfer thereof is not
prohibited by existing contractual obligations and (b) all geophysical,
geological, engineering, exploration, production and other technical data,
magnetic field recordings, digital processing tapes, field prints, summaries,
reports and maps, whether written or in electronically reproducible form, that
are in the possession of Seller to the extent that they are directly related to
the Oil and Gas Properties.
G. CONTRACTS. All contracts and arrangements that directly relate to
the Properties and the production, storage, treatment, transportation,
processing, purchase, sale, disposal or other disposition of Substances
therefrom, and any and all amendments, ratifications or extensions of the
foregoing, and all rights to make claims and receive proceeds under any
insurance policy held by or on behalf of Assignor in connection with the
Properties for any claim that arises from the Effective Date through the Closing
Date in connection with the Properties, including the contracts described in the
Exhibit (the "Contracts").
H. PERMITS. All franchises, licenses, permits, approvals, consents,
certificates and other authorizations and other rights granted by governmental
authorities and all certificates of convenience or necessity, immunities,
privileges, grants and other rights, that relate to the Properties or the
ownership or operation of any thereof, including, without limitation, the
permits described in the Exhibit.
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I. IMBALANCES. All rights and benefits arising from or in connection
with any gas production, pipeline, storage, processing or other imbalance
attributable to Substances produced from Oil and Gas Properties existing on the
Effective Date.
As used herein, "Excluded Assets" means the following:
(1) all trade credits and all accounts, instruments and general
intangibles (as such terms are defined in the Code) attributable to the
Properties with respect to any period of time prior to the Effective Date;
(2) all claims and causes of action of Assignor (i) arising from acts,
omissions or events, or damage to or destruction of property, occurring prior to
the Effective Date, (ii) arising under or with respect to any of the Contracts
that is attributable to periods of time prior to the Effective Date (including
claims for adjustments or refunds), or (iii) with respect to any of the Excluded
Assets;
(3) all rights and interests of Assignor (i) under any policy or
agreement of insurance or indemnity, (ii) under any bond, or (iii) to any
insurance or condemnation proceeds or awards arising, in each case, from acts,
omissions or events, or damage to or destruction of property, occurring prior to
the Effective Date;
(4) all Substances produced and sold from the Oil and Gas Properties
with respect to all periods prior to the Effective Date, together with all
proceeds from or of such Substances;
(5) all claims of Assignor for refunds of or loss carry forwards with
respect to (i) production or any other taxes attributable to any period prior to
the Effective Date, (ii) income or franchise taxes, or (iii) any taxes
attributable to the Excluded Assets;
(6) all amounts due or payable to Assignor as adjustments to insurance
premiums related to the Properties with respect to any period prior to the
Effective Date;
(7) all proceeds, income or revenues (and any security or other
deposits made) attributable to (i) the Properties for any period prior to the
Effective Date, or (ii) any Excluded Assets;
(8) all personal computers and associated peripherals and all radio and
telephone equipment;
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(9) all of Assignor's proprietary computer software, patents, trade
secrets, copyrights, names, trademarks, logos and other intellectual property;
(10) all of Assignor's interpretations of geological and geophysical
data;
(11) all documents and instruments of Assignor that may be protected by
an attorney-client privilege;
(12) all audit rights arising under any of the Contracts or otherwise
with respect to any period prior to the Effective Date or to any of the Excluded
Assets;
(13) all (i) agreements and correspondence between Assignor and
NationsBanc Montgomery Securities, Inc. (the "Advisor") relating to the
transactions contemplated in this Agreement, (ii) lists of prospective
purchasers for such transactions complied by either Assignor or the Advisor,
(iii) bids submitted by other prospective purchasers of the Properties, (iv)
analyses by Assignor or the Advisor of any bids submitted by any prospective
purchaser, (v) correspondence between or among Assignor or Advisor, or either of
their respective representatives, and any prospective purchaser other than
Buyer, (vi) correspondence between Assignor or Advisor or any of their
respective representatives with respect to any of the bids, the prospective
purchasers, the engagement or activities of the Advisor or the transactions
contemplated in this Agreement; and (vii) the Confidential Offering Memorandum
dated July, 1998, prepared by the Advisor and circulated to prospective
purchasers; and
(14) the Escrow Agreement dated July 31, 1996, between Seller and Kerr-
McGee Corporation and the Agreement for Purchase and Sale dated July 26, 1996
between Seller and Kerr-McGee Corporation.
TO HAVE AND TO HOLD all and singular the Properties, together with all rights,
titles, interests, estates, remedies, powers and privileges thereunto
appertaining unto Assignee and their respective successors, legal
representatives and assigns forever, subject to the Permitted Encumbrances (as
defined in the Agreement for Purchase and Sale dated October 16, 1998, between
Assignee and Assignor (the "Agreement")). Assignor hereby binds itself, its
successors, legal representatives and assigns, to warrant and forever defend the
Properties unto
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Assignee, their respective successors, legal representatives and assigns,
against every person whomsoever lawfully claiming or to claim the same or any
part thereof, by, through or under Assignor, but not otherwise.
In accordance with the terms of the Agreement, Assignee has assumed certain
obligations and liabilities. A complete description of the obligations of
Assignee are contained in the Agreement, and all such obligations are binding on
the successors and assigns of Assignee.
This Assignment may be executed in any number of counterparts and each of such
counterparts shall for all purposes be deemed to be an original, and all such
counterparts shall together constitute but one and the same Assignment.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be duly
executed on this, the _____ day of _______, 199__. This Assignment shall be
effective at 7:00 a.m. at the location of the Properties on July 1, 1998 (the
"Effective Date").
NUEVO ENERGY COMPANY
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
SAMSON LONE STAR LIMITED PARTNERSHIP
by its sole general partner, Samson Resources Company
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
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ADDRESS OF ASSIGNOR: ADDRESS OF ASSIGNEE:
Suite 1650, 1331 Lamar Two West Second Street
Houston, Texas 77010 Tulsa, Oklahoma 74103
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STATE OF TEXAS (S)
(S)
COUNTY OF HARRIS (S)
This instrument was acknowledged before me on December __, 1998, by
_______________, ____________ of Samson Resources Company, a _____________
corporation, on behalf of said corporation, as the sole general partner of
Samson Resources Limited Partnership, a Texas limited partnership.
-----------------------------------------
Notary Public in and for
The State of Texas
Name:
------------------------------------
My Commission Expires:
-------------------
STATE OF TEXAS (S)
(S)
COUNTY OF HARRIS (S)
This instrument was acknowledged before me on December __, 1998, by __________,
Vice President of Nuevo Energy Company, a Delaware corporation, on behalf of
said corporation.
-----------------------------------------
Notary Public in and for
The State of Texas
Name:
------------------------------------
My Commission Expires:
-------------------
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EXHIBIT 10.29
================================================================================
MASTER SERVICES AGREEMENT
AMONG
NUEVO ENERGY COMPANY
AND
TORCH ENERGY ADVISORS INCORPORATED,
TORCH OPERATING COMPANY
TORCH ENERGY MARKETING, INC.,
AND
NOVISTAR, INC.
EFFECTIVE AS OF JANUARY 1, 1999
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MASTER SERVICES AGREEMENT
This Master Services Agreement (the "Master Agreement") is entered into
among Nuevo Energy Company ("Nuevo"), and Torch Energy Advisors Incorporated
("TEAI"), Torch Operating Company ("TOC"), Torch Energy Marketing, Inc.
("TEMI"), and Novistar, Inc. ("Novistar") (TEAI, TOC, TEMI, and Novistar are
herein referred to individually as a "Torch Party" and collectively as "Torch,"
and each Torch Party and Nuevo are herein individually referred to as a "Party"
and collectively referred to as the "Parties"), effective as of January 1, 1999
(the "Effective Date").
For and in consideration of the mutual promises and covenants contained
herein, and other good and valuable consideration the receipt, sufficiency, and
adequacy of which are hereby acknowledged, the Parties hereby agree as follows:
BACKGROUND AND PURPOSE
Certain Torch Parties currently provide certain administrative, operations,
and marketing services to Nuevo pursuant to an Agreement for Contract Operations
between Nuevo and TOC dated November 11, 1991 (the "Operations Agreement"), and
an Amended and Restated Administrative Services Agreement between Nuevo and TEAI
dated January 1, 1996 (the "Restated Agreement"), and the Marketing
Authorization Letter dated April 1, 1996, as amended (the "Marketing
Agreement").
This Master Agreement sets forth the general terms and conditions
applicable to each Service Agreement entered into pursuant to this Master
Agreement. The Parties may, from time to time in the future, enter into one or
more additional Service Agreements setting forth the specific terms and
conditions applicable to specific services to be contracted for by Nuevo and one
or more Torch Parties. The terms of this Master Agreement shall apply to any
such Service Agreement, except as expressly provided otherwise in the Service
Agreement.
ARTICLE 1
DEFINITIONS
SECTION 1.1 CERTAIN DEFINITIONS
In this Master Agreement and in each Service Agreement the following terms
shall have the indicated meanings:
"AFFILIATE" means, with respect to any specified person or entity, any
other person or entity that directly, or indirectly through one or more
intermediaries, Controls or is Controlled by, or is under common Control with,
the specified person or entity.
"BUSINESS DAY" means any day during which Bank of America, NT&SA or its
successor is generally conducting business.
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"Business Records" means a Party's originals and copies of any and all
contracts, leases, accounting, marketing or engineering documents, reports,
analyses, summaries, written subjective evaluations, invoices, bank records,
checks, statements, invoices, receipts, correspondence, vouchers and all other
business records relating to the business operations of such Party, but in any
event excluding documents that constitute another Party's originals and copies
of any and all contracts, leases, accounting, marketing or engineering
documents, reports, analyses, summaries, written subjective evaluations,
invoices, bank records, checks, statements, invoices, receipts, correspondence,
vouchers and all other business records relating to the business operations of
such Party.
"Confidential Information" means information designated as confidential or
which ought to be considered as confidential from its nature or from the
circumstances surrounding its disclosure. Confidential Information includes,
without limiting the generality of the foregoing, Work Product, the terms of
this Master Agreement, and information:
(i) relating to the Disclosing Party's software or hardware products or
services, or to its research and development projects or plans;
(ii) relating to the Disclosing Party's business, policies, strategies,
operations, finances, plans or opportunities, including the identity of, or
particulars about, the Disclosing Party's clients or customers; and
(iii) marked or otherwise identified as confidential, restricted, secret
or proprietary, including, without limiting the generality of the foregoing,
information acquired by inspection or oral disclosure provided such information
was identified as confidential at the time of disclosure or inspection.
Notwithstanding the foregoing, Confidential Information does not include
information that the Receiving Party can establish:
(A) has become generally available to the public or commonly known in
either Party's business other than as a result of a breach by the Receiving
Party of any obligation to the Disclosing Party;
(B) was known to the Receiving Party prior to disclosure to the Receiving
Party by the Disclosing Party by reason other than having been previously
disclosed in confidence to the Receiving Party;
(C) was disclosed to the Receiving Party on a non-confidential basis by a
third party who did not owe an obligation of confidence to the Disclosing Party
with respect to the disclosed information; or
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(D) was independently developed by the Receiving Party without any
reference to any part of the Confidential Information.
"CONFIDENTIAL MATERIALS" means the part of any tangible media upon or within
which any part of the Confidential Information is recorded or reproduced in any
form, excluding any storage device which forms a part of computer hardware.
"CONTRACT EXECUTIVE" means the individual representatives of Torch and Nuevo
who are assigned the primary responsibility of managing a Service Agreement as
described in Section 10.1.1.
"CONTRACT YEAR" with respect to a Service Agreement, means each annual period
beginning on the Service Agreement Effective Date unless defined otherwise
within a Service Agreement.
"CONTROL" and its derivatives means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
person or entity, whether through the ownership of voting securities, by
contract, or otherwise.
"DATA" means all Business Records stored in digital format on magnetic,
optical or other media.
"DISCLOSING PARTY" means the Party furnishing Confidential Information or
Confidential Materials.
"EFFECTIVE DATE" means the date of this Master Agreement.
"INDEMNITEES" shall mean, with respect to a Party entitled to indemnification
hereunder, such Party and its Affiliates, officers, directors, employees,
agents, successors, and assigns.
"LOSSES" means all losses, liabilities, damages and claims, and all related
costs and expenses (including any and all reasonable legal fees and reasonable
costs of investigation, litigation, settlement, judgment, appeal, interest and
penalties) incurred by an indemnified party hereunder in connection with an
indemnified claim.
"MASTER AGREEMENT" means this Master Agreement, all Schedules hereto and, when
the meaning so requires, all Service Agreements.
"PASS-THROUGH EXPENSES" means the actual invoiced amounts (excluding any Torch
Party's profit, administrative fee or overhead charges) charged to the Torch
Party by third parties that Nuevo has agreed to pay directly or for which Nuevo
has agreed to reimburse the Torch Party.
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"PERFORMANCE DEPOSIT" means a payment by Nuevo to a Torch Party in an
amount equal to the highest month's base fees earned by the Torch Party under an
agreement being terminated under Article 16.
"RECEIVING PARTY" means the Party receiving the Confidential Information or
Confidential Materials disclosed by the Disclosing Party.
"SCHEDULES" means any schedule attached to this Master Agreement or to a
Service Agreement, if such document is initialed by Nuevo and the applicable
Torch Party(ies) and states that it is a schedule to such agreement.
"SERVICE AGREEMENT" means any Service Agreement entered into between Nuevo
and a Torch Party(ies) pursuant to Section 2.1.
"SERVICE AGREEMENT EFFECTIVE DATE" means the date indicated in the Service
Agreement as the date upon which such agreement becomes effective.
"SERVICE AGREEMENT TERM" means the term of the applicable Service
Agreement, as defined in each Service Agreement.
"SERVICE CREDITS" means any Service Level Credits issued pursuant to a
Service Agreement.
"SERVICES" means the services provided by Torch Party(ies) to Nuevo
pursuant to Section 4.1, the Service Agreements or any Change Order (as
defined).
"TERM" means the Term of this Master Agreement as provided in Article 3.
When used herein in the context of a Service Agreement, "Term" refers to the
applicable Service Agreement Term.
SECTION 1.2 OTHER DEFINITIONS
Other terms used in this Master Agreement, the Service Agreements any
Change Orders are defined where they first appear and have the respective
meanings there indicated.
ARTICLE 2
MASTER AGREEMENT
SECTION 2.1 MASTER AGREEMENT
This Master Agreement contains general contractual terms for Services to be
provided to Nuevo under each Service Agreement by the Torch Party(ies) thereto.
Separate Service Agreements may be entered into for discrete Services. Each
Service Agreement shall describe the Services covered by the Service Agreement,
the provisions for payment, the term for
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performance, applicable Service Levels, and any other provisions that are
specific to the Service Agreement. No Service Agreement Term shall extend beyond
the Term of this Master Agreement.
Except as otherwise expressly set forth in this Master Agreement, the
obligations of a Party under this Master Agreement, except for unsatisfied
obligations under Article 7, shall be suspended during any period in which no
Service Agreement or Change Order is in effect with respect to such Party.
SECTION 2.2 INTERPRETATION AND PRECEDENCE
This Master Agreement, the Service Agreements, any Change Orders and
Schedules that may be added to the Service Agreements are to be interpreted so
that all of the provisions are given as full effect as possible. In the event
of a conflict among this Master Agreement or any Service Agreement or any Change
Order, the order of precedence shall be first, any Change Order(s), second the
Service Agreement, third, any attachment or Schedule to the Service Agreement;
and fourth, this Master Agreement. All of the terms of this Master Agreement
shall apply to each Service Agreement or Change Order except to the extent
negated or contradicted by the express terms of a Service Agreement or any
Schedule to a Service Agreement or any Change Order.
SECTION 2.3 NO IMPLIED AGREEMENT
Except as expressly required in a Service Agreement or Change Order,
nothing in this Master Agreement requires Nuevo to purchase products or services
from a Torch Party or requires a Torch Party to provide products or services to
Nuevo. Nuevo may request information, proposals, or competitive bids from third
parties on the same or different terms than as provided in this Master
Agreement.
SECTION 2.4 AGREED TERMINATION OF PRIOR AGREEMENTS
The Parties hereby agree that the Operations Agreement and the Restated
Agreement and the Marketing Agreement (collectively the "Prior Agreements") are
terminated as of the effective date of this Master Agreement and the Parties
further agree that no termination fees shall be due as a result of such
terminations. The Parties further agree that all of the indemnification
provisions contained in the Prior Agreements shall survive the termination of
the Prior Agreements, and shall apply to any and all claims for indemnification
based upon events occurring prior to the Effective Date of this Agreement. All
indemnification claims among the Parties based upon events occurring on or after
the Effective Date shall be governed by the indemnification provisions of this
Agreement.
MASTER SERVICES AGREEMENT -5-
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ARTICLE 3
TERM
SECTION 3.1 TERM
The term of this Master Agreement (the "Term") shall begin as of the
Effective Date and shall continue with respect to a Party, for so long as any
Service Agreement is in effect with respect to such Party unless earlier
terminated or renewed in accordance with the provisions of this Master
Agreement.
Each Service Agreement shall set forth the applicable Service Agreement
Term.
SECTION 3.2 RENEWAL TERM
Each Service Agreement shall automatically renew for additional one (1)
year terms unless written notice of termination is given by a Party to the
Service Agreement at least one hundred and eighty (180) days prior to the
expiration of the Service Agreement Term or any renewal term. All of the terms
of this Master Agreement and the applicable Service Agreement and Change Orders
shall continue to apply without change during any renewal period.
ARTICLE 4
SERVICES
SECTION 4.1 GENERAL; SERVICE AGREEMENTS
Throughout each Service Agreement Term, each Party shall perform such
obligations as it may have under the Services Agreements, as such Service
Agreements may be amended and supplemented from time to time by written
amendments thereto or pursuant to the Change Order Procedures. Each Party shall
perform its obligations in accordance with all of the terms of this Master
Agreement, and the Service Agreements and Change Orders, to which it is a party.
The specific Services to be supplied by a Torch Party to Nuevo, the
compensation to be paid and other related matters shall be expressed in Service
Agreements and Change Orders. Each Service Agreement and each Change Order
shall incorporate by reference, and shall be subject to, the terms and
conditions of this Master Agreement, except as expressly provided otherwise in
the Service Agreement or Change Order. No Torch Party shall have an obligation
to provide any services, and no amounts will become due from Nuevo, unless and
until the appropriate Service Agreement has been duly signed and delivered by
authorized officers of Nuevo and of the applicable Torch Party(ies). The
Parties further agree that, while the applicable Service Agreement is in effect,
any service (other than those services identified in Schedule 4.1, which may be
amended if and when a Service Agreement is terminated) that was customarily and
routinely performed by a Torch Party for Nuevo, at no additional charge,
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during the year prior to the Effective Date, but not included in the Services
Schedules to the applicable Service Agreement, shall be performed by the Torch
Party and will be presumed to be covered by the base charges in the applicable
Service Agreement.
Although the Service Agreements will be entered into among Nuevo and the
individual Torch Parties (TEAI, TOC, TEMI, and Novistar), Torch agrees that no
Torch Party shall be relieved of its obligation to provide Services under a
Service Agreement, nor will Nuevo be subject to additional charges, by reason of
such Torch Party making use of personnel or equipment belonging to a Torch Party
other than the Torch Party(ies) with whom the Service Agreement was entered
into.
Except as expressly provided in this Master Agreement, a Torch Party shall
have no liability to Nuevo with respect to (i) any Service Agreement (unless the
Torch Party is a party thereto); (ii) any Change Order (unless the Torch Party
is a party thereto); (iii) any act (or failure to act) by another Torch Party.
As to each Torch Party, for so long as such Torch Party is an Affiliate of TEAI,
TEAI hereby guarantees to Nuevo performance of such Torch Party's obligations,
and satisfaction of such Torch Party's liabilities, under each Service Agreement
to which it is a party.
SECTION 4.2 OUT-OF-SCOPE SERVICES
Notwithstanding any request made to Torch or the submission of any proposal
by Torch pursuant to Section 4.3, Nuevo shall have the right to contract with a
third party to perform any services which are in addition to, or outside the
scope of, the Services. If Nuevo contracts with a third party to perform any
such service, Torch shall cooperate with Nuevo and such third party to the
extent reasonably required for the provision of services by such third party, at
Nuevo's expense and only to the extent specified in a Change Order (as defined),
except to the extent included specifically in the scope of the Services.
The Parties acknowledge and agree that neither this Master Agreement nor
the Service Agreements shall apply to any properties not located in the United
States, or its territorial waters, owned or operated by Nuevo, except as
expressly provided to the contrary in a Service Agreement.
SECTION 4.3 CHANGE ORDER PROCEDURE
(a) From time to time during the Term, Nuevo or Torch Party(ies) may
propose changes in or additions to the Services or other aspects of this Master
Agreement or a Service Agreement. No such changes shall be effective or binding
on the Parties unless a written change order (a "Change Order") is signed by
authorized representatives of both Nuevo and the Torch Party(ies) to be bound
thereby. Subject to clause (e) below, all such Change Orders shall be
implemented pursuant to the procedures set forth in this Section 4.3 (the
"Change Order Procedures").
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(b) Any change to any of Articles 1 through 18 of this Master Agreement
must be approved by a Management Board member of each Party and memorialized in
a written amendment that specifically identifies this Master Agreement, the
section of this Master Agreement that is the subject of the amendment, and the
new provision.
(c) If Nuevo desires to propose a change in or addition to the Services
under a Service Agreement, it shall deliver at Nuevo's expense a written notice
to the applicable Torch Party Contract Executive describing the proposal. The
applicable Torch Party may (but is not required to) respond to such a proposal
and if the Torch Party does respond it shall do so at such Torch Party's expense
(except as otherwise agreed in writing) by delivering to the Nuevo Contract
Executive a written proposal ("Change Order Proposal"), indicating: (i) charges
to Nuevo that would be incurred under the proposal; (ii) the effect of the
proposal, if any, on Service Levels; (iii) the anticipated time schedule for
implementing the proposal; and (iv) any other information agreed upon by the
Parties. If a Torch Party desires to propose a change in or addition to the
Services or other aspects of this Master Agreement or a Service Agreement, it
may do so by preparing at its expense and delivering a Change Order Proposal to
the Nuevo Contract Executive.
(d) No change in or addition to the Services or any other aspect of a
Service Agreement shall become effective without the written approval of the
affected Parties' respective Contract Executives, which approval may be given or
withheld in each Party's sole discretion. If Nuevo and the applicable Torch
Party(ies) agree to the Torch Change Order Proposal, as evidenced by the
signatures of the Nuevo Contract Executive and the applicable Torch Contract
Executive(s), any changes in or additions to the Services described in the
Change Order Proposal shall thereafter be deemed "Services," and other changes
described in the Change Order Proposal shall be deemed to have amended any
applicable Service Agreement, and/or, if applicable, this Master Agreement.
Termination of a Service Agreement shall terminate each Change Order deemed to
have amended such Service Agreement. Termination of this Master Agreement shall
terminate all Change Orders.
(e) Changes made by a Torch Party that do not cause non-compliance with
this Master Agreement, the Service Agreements to which the Torch Party is a
party and the Change Orders to which the Torch Party is a party (including
without limitation changes to operating procedures, schedules and equipment
configurations) need not comply with the procedures set forth in this
Section 4.3, provided that they do not involve any additional cost to any Party.
SECTION 4.4 RESOURCES
Except as otherwise expressly provided in a Service Agreement, Torch shall
provide, at its expense, all of the facilities, personnel, equipment, software,
services and other resources necessary to provide the Services and comply with
the Service Levels.
SECTION 4.5 LICENSES AND PERMITS
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Each Party shall be responsible for obtaining all applicable licenses,
authorizations, and permits required for such Party to perform its obligations
under this Master Agreement and each Service Agreement (or Change Order) to
which it is a party and shall have financial responsibility for, and shall pay,
all fees and taxes associated with such licenses, authorizations, and permits,
except as otherwise expressly provided in this Master Agreement or a Service
Agreement or Change Order.
SECTION 4.6 AFFILIATES
The Services shall be provided by Torch Parties to Nuevo and each of
Nuevo's domestic Affiliates existing on the Effective Date. Upon the written
request of Nuevo, Torch Parties shall provide the Services to those future
Affiliates of Nuevo that are engaged in Nuevo's lines of business existing as of
the Effective Date (such as gathering and downstream gas plants), in accordance
with the provisions of this Master Agreement and the designated Service
Agreement(s). If such a request is made by Nuevo, then Nuevo and Torch shall
each have all of the same rights and obligations with respect to Services
provided to such Nuevo Affiliates as they do with respect to Services provided
to Nuevo.
Nothing in this Master Agreement or in the Service Agreements shall be
construed (i) to limit, restrict or otherwise impair Nuevo's ability, acting in
good faith and not to avoid its obligations under this Master Agreement, or the
Service Agreements or the Change Orders, to sell or otherwise transfer ownership
of any Affiliate or any Nuevo assets to any non-Affiliated third party (or to
require a consent of Torch), or (ii) to require Torch to provide Services to
such an Affiliate, or with respect to such assets or to such a third party.
SECTION 4.7 NUEVO RETAINED AUTHORITY
Nuevo shall retain all decision-making authority with respect to Nuevo's
business objectives and strategic direction related to the Services, and each
Torch Party shall reasonably cooperate and comply with Nuevo's prioritization of
tasks included within the scope of the Services; provided, however, that if a
Torch Party determines that Nuevo's prioritization of tasks impairs a Torch
Party's progress toward meeting one or more Service Levels, the Torch Party may
delay implementation of the prioritization pending a review by the Nuevo
Contract Executive, in which event the Torch Party shall promptly notify the
Nuevo Contract Executive of the prioritization's potential to so impair,
whereupon the Nuevo Contract Executive will determine whether the prioritization
shall be implemented and, if the Nuevo Contract Executive determines that the
prioritization shall be implemented, then the prioritization shall be
implemented and there shall be an exemption from compliance with such Service
Level(s) for that instance of impairment.
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ARTICLE 5
SERVICE LEVELS
SECTION 5.1 SERVICE LEVELS
With respect to each Service which has an associated Service Level, while a
Torch Party has an obligation to provide such Service it shall do so in a manner
that satisfies the associated Service Level, subject to any transition period
specified with respect to such Service Level.
SECTION 5.2 REVIEW OF SERVICE LEVELS
Within three (3) months after the initiation of Services under a Service
Agreement and every three (3) months thereafter, the Parties shall jointly
review the Service Levels, which may be modified by mutual agreement. The
Parties agree to confer in good faith concerning ways in which Service Levels
may be improved without imposing additional costs or burdens on any Party;
provided, however, that Service Levels may be adjusted only by written mutual
agreement of the affected Parties.
SECTION 5.3 MEASUREMENT AND MONITORING TOOLS
As part of the Services throughout the Term, and at no additional cost to
Nuevo, each Torch Party shall implement measurement and monitoring tools and
procedures reasonably necessary to measure its performance of the Services and
compare such performance to that required by the Service Levels. Upon Nuevo's
request to a Torch Party the Torch Party shall provide Nuevo or its auditors
with information and access to the measurement and monitoring tools reasonably
necessary to verify compliance by the Torch Party with the Service Levels.
SECTION 5.4 FAILURE TO MEET SERVICE LEVELS
(a) The provisions of this Section 5.4 set forth Nuevo's exclusive
remedies for any failure by a Torch Party to meet a Service Level. The Parties
agree that a Torch Party's failure to meet a Service Level may cause damage to
Nuevo the amount of which would be impracticable or extremely difficult to
determine. The Parties further agree that the remedies provided under this
Section 5.4 are reasonable under the circumstances existing as of the date of
this Master Agreement and any Service Agreement Effective Date. If a Torch Party
fails to meet a Service Level for reasons other than those specified in (i)
and/or (ii) below, Nuevo shall have the right to credits in the applicable
amount specified in each Service Level Agreement ("Service Level Credits") as
liquidated damages. The Torch Party shall deduct the Service Credits from the
next succeeding invoice or other amounts due to the Torch Party. To the extent
any failure to meet a Service Level is attributable to (i) a Force Majeure
Event, or (ii) a failure of Nuevo to perform its obligations under this Master
Agreement or a Service Agreement, such Service Level shall be deemed to have not
been failed.
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(b) Each time a Torch Party fails to meet a Service Level for reasons
other than those specified in Section 5.4(a)(i) through (ii) above, it shall:
(i) promptly investigate the root cause(s) of the failure and report the
cause(s) to Nuevo; (ii) use commercially reasonable efforts to correct the
problem and to begin meeting such Service Level as soon as practicable; and
(iii) at Nuevo's request, advise Nuevo of the status of such corrective efforts.
Service Levels and applicable Service Credits shall not be suspended solely by
reason of the Torch Party's use of commercially reasonable efforts to correct
any performance problem.
SECTION 5.5 PERFORMANCE STANDARDS
With respect to each Service or obligation that does not have an associated
Service Level, the applicable Torch Party (a) with respect to TOC or Novistar in
performing operator responsibilities, shall perform such Service or obligation
as a prudent operator (as set forth in A.A.P.L. Form 610-1989 Model Form
Operating Agreement, Article V Section A "Designation and Responsibilities of
Operation"), (b) other than with respect to TOC or Novistar in performing
operator responsibilities, shall perform such Service or obligation with a level
of accuracy, quality, completeness, timeliness, responsiveness and cost
efficiency that meets or exceeds the performance of other similar outsourcing
companies in providing a substantially similar Service or performing a
substantially similar obligation ("Performance Standards").
SECTION 5.6 BASELINE NUEVO SATISFACTION SURVEY
Upon the request of Nuevo, but not more than once each year, each Torch
Party (or if Nuevo elects, a third party selected by Nuevo but then at Nuevo's
expense) shall, if requested by Nuevo, conduct a baseline Nuevo satisfaction
survey as approved by the Parties, for affected end-users of the Services as
designated by Nuevo. This survey shall be of the content and scope reasonably
determined by the Parties, administered in accordance with the procedures agreed
upon by the Parties.
ARTICLE 6
CHARGES FOR SERVICES
SECTION 6.1 CHARGES IN GENERAL
As the sole consideration for all of the Services to be performed by each
Torch Party under this Master Agreement and any Service Agreement, Nuevo shall
pay to the Torch Party the amounts due to it as set forth in each Service
Agreement to which it is a party and each Change Order to which it is a party as
well as other amounts due to it in connection with matters, identified as at
Nuevo's expense, under this Agreement, Service Agreements or Change Orders.
Except for costs and expenses that this Master Agreement or a Service Agreement
or a Change Order specifies as being Nuevo's responsibility, each Torch Party
shall be solely responsible for, and shall indemnify Nuevo against, all third-
party claims for costs and expenses incurred by such Torch Party pursuant to its
performance under this Master Agreement and the Service Agreements and Change
Orders to which it is a party. Except as otherwise expressly provided in
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this Master Agreement or a Service Agreement or Change Order, or as otherwise
mutually agreed in writing by the Parties, Nuevo will not pay Torch any
additional fees, charges, assessments, or reimbursements.
SECTION 6.2 TAXES INCLUDED
Payment of federal, state, local, foreign, and other taxes based on the
Services shall be the responsibility of the applicable Torch Party; provided,
however, that Nuevo will reimburse the Torch Party for any federal, state,
local, or foreign excise, sales, use, business privilege, gross receipts, value-
added, single business, or other similar tax (excluding federal, state, or local
taxes based on income or profits of the Torch Party, or any franchise taxes
assessed against the Torch Party) based on the Services, except to the extent
that it results from action of the Torch Party not taken in good faith. In
compliance with applicable law, each Party shall reasonably cooperate with the
other in minimizing any applicable tax and, in connection therewith, Nuevo shall
provide Torch any resale certificates, information regarding out-of-state use of
materials, services or sales, or other exemption certificates or information
reasonably requested by Torch.
SECTION 6.3 BENCHMARKING
Nuevo may, not more frequently than annually, at its expense, engage an
independent qualified consultant for the purpose of performing a review of the
costs to Nuevo of the Services, each Torch Party's performance of the Services,
and use by Nuevo and Torch Parties of new technologies and techniques, as
measured by industry norms. Each Torch Party shall reasonably cooperate with
Nuevo and Nuevo's consultant either to the extent specified in a Change Order or
to the extent involving tasks included in the scope of the Services.
SECTION 6.4 OUT-OF-SCOPE SERVICES
Nuevo shall pay for any "out-of-scope services" (i.e., ancillary or other
services that are not a part of Services), in accordance with the terms and
conditions stated in a written Change Order signed by an authorized Nuevo
representative and the applicable Torch Party(ies). Nuevo shall reimburse a
Torch Party for reasonable out-of-pocket expenses incurred by the Torch Party in
the performance of out-of-scope services, such as reasonable travel and living
expenses, provided such expenses are invoiced with reasonable supporting
documentation and subject to any limitations on such expenses set forth in the
Change Order. Torch shall have no obligation to incur such expenses unless
authorized. Torch shall provide invoicing for out-of-scope services with
documentation that references the Nuevo authorizing Change Order, charges and a
reasonable description of what the charges cover. No invoice with respect to
out-of-scope services will be paid and no such services will be provided unless
such services were authorized in advance in writing with a Change Order.
SECTION 6.5 RECORDKEEPING
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Each Torch Party shall maintain accurate records of, and supporting
documentation for, the amounts billed to and payments made by Nuevo to the Torch
Party under this Master Agreement and the Service Agreements and Change Orders,
as specified in the monthly invoice, of such amounts and payments. Such records
shall include data and documentation of third party charges invoiced to and paid
by the Torch Party. The Torch Party shall retain such records in accordance
with a records retention schedule agreed to by the applicable Parties (including
records received by a Torch Party prior to the applicable Service Agreement
Effective Date). A Torch Party shall provide Nuevo, at Nuevo's request, with
paper or electronic copies, as the case may be, of documents and information
reasonably necessary to verify the Torch Party's compliance with this Master
Agreement. Nuevo and its authorized agents and representatives shall have
reasonable access to such records for audit purposes during normal business
hours for the period during which a Torch Party is required to maintain such
records. Upon termination or expiration of this Master Agreement, Nuevo and the
Torch Parties shall mutually agree as to disposition of records or documentation
and the applicable Torch Party may retain one archive copy.
SECTION 6.6 RFP AND DUE DILIGENCE ASSISTANCE
If at any time during the Term Nuevo elects to issue a request for proposal
to one or more service providers for the provision of all or any part of the
Services, Torch Parties shall cooperate with Nuevo to the extent provided in a
Change Order or included within the scope of the Services, by (i) providing to
Nuevo and such third party providers reasonable access to personnel and
information relevant to such request for proposal, and (ii) participating in a
reasonable due diligence process for the benefit of Nuevo and such third party
providers in connection with the request for proposals. A Torch Party's
obligations pursuant to this Section 6.6 are at all times subject to (i) the
condition that Nuevo and such third party providers shall observe security and
confidentiality restrictions reasonably satisfactory to the Torch Party and in
accordance with Article 9 (Confidentiality) of this Master Agreement, and (ii)
the condition that such activities shall not disrupt or adversely affect the
Torch Party's normal business, including but not limited to provision of the
Services.
ARTICLE 7
INVOICING AND PAYMENT
SECTION 7.1 INVOICES
A Torch Party shall issue to Nuevo, on a monthly basis: (i) a consolidated
invoice billing in advance for base charges due, (ii) a consolidated invoice
billing in arrears for variable amounts due other than time and materials
charges, and (iii) a consolidated invoice billing in arrears for time and
materials charges (which shall include detail for each Service Agreement and
remaining balance information for time and materials services included as part
of base changes, substantially in the form of Schedule 7.1 hereto), all with
respect to each Service Agreement. If out-of-scope Services are provided under
one or more Change Orders,
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Torch Party(ies) will invoice the applicable charges in a separate, composite
invoice for such services. Each Torch Party agrees to waive any charges that it
fails to invoice within six months of the time such charges were due to be
invoiced to Nuevo under this Master Agreement, each Service Agreement and any
Change Order.
SECTION 7.2 PAYMENT
(a) Subject to Section 7.5, each invoice for variable amounts delivered
pursuant to Section 7.1 shall be due and payable within thirty (30) days after
the date such invoice is delivered to Nuevo; provided however, that each invoice
for variable amounts with respect to Termination/Expiration Assistance under
Section 16.5 shall be due and payable within ten (10) days after such invoice is
delivered to Nuevo. Subject to Section 7.5, all invoices for fixed amounts
delivered pursuant to Section 7.1 shall be due and payable on the later of five
(5) days after the date such invoice is delivered to Nuevo or the first of the
month in which the Services covered by such invoice are to be provided.
(b) To the extent Nuevo is entitled to a credit from a Torch Party
pursuant to this Master Agreement or any Service Agreement, the Torch Party
shall provide Nuevo with such credit on the first invoice delivered after such
credit is earned. If the amount of any credits on an invoice exceeds the amount
owing to the Torch Party reflected on such invoice, the Torch Party shall pay
the balance of the credit to Nuevo within thirty (30) days after the invoice
date.
SECTION 7.3 PRORATION
All periodic charges under this Master Agreement or the Service Agreements
(excluding charges based upon actual usage or consumption of Services) shall be
computed on a calendar month basis and shall be prorated for any partial month.
SECTION 7.4 REFUNDS
If either Party receives from a third party a refund or other rebate for
goods or services paid for by another Party, such other Party shall be entitled
to receive the same and if it is in an amount that exceeds $100,000, the
recipient of such refund, credit or rebate shall promptly notify the other Party
and shall pay such amount, with interest at the then-current prime rate of
Citibank of New York (or its successor), to the other Party (or, if applicable,
provide a credit on the next delivered invoice) within sixty (60) days after
receipt thereof. Interest shall be calculated beginning from the date sixty
(60) days after such refund or rebate was received.
SECTION 7.5 SETOFF AND WITHHOLDING
(a) Notwithstanding any other provision of this Master Agreement, a Party
who is owed any undisputed amount by the other Party may, at its option, set off
that amount as a credit against any undisputed amounts it otherwise owes to the
other Party.
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(b) If Nuevo reasonably disputes in good faith any portion of an invoice,
Nuevo shall nevertheless pay the full dollar amount of such invoice when due.
If the invoice amounts disputed by Nuevo aggregate more than $1,000,000, then
the disputed amounts will be deposited by the Parties into an escrow account
with a third party escrow agent that shall be a United States National Bank
selected by the Party making the escrow deposit, pending resolution of the
dispute by mutual agreement or pursuant to Article 17 of this Master Agreement.
(c) If Torch reasonably disputes in good faith any request for issuance of
a credit or other claim by Nuevo for reimbursement of any amount, Torch shall
pay or credit the dollar amount due that is not so disputed and may, at its
option, withhold such disputed portion pending resolution of the dispute by
mutual agreement or pursuant to Article 17 of this Master Agreement. If Torch
withholds any payment or credit pursuant to this Section 7.5(c), Torch shall
notify Nuevo of the basis for such withholding in accordance with Section 18.9.
Upon resolution of the dispute, Torch shall pay or credit to Nuevo such portion,
if any, of such disputed amount determined to be owing to Nuevo. If the
disputed amounts withheld by Torch aggregate more than $1,000,000, then the
disputed amounts will be deposited by Torch into an escrow account with a third
party escrow agent that shall be a United States National Bank selected by the
Party making the escrow deposit, pending resolution of the dispute.
ARTICLE 8
INTELLECTUAL PROPERTY RIGHTS AND OBLIGATIONS
SECTION 8.1 OWNERSHIP OF WORK PRODUCT
As used in this Master Agreement, "Work Product" shall mean (i) newly-
developed work product agreed by a Torch Party in advance of commencement of
work by the Torch Party to be treated as "Work Product;" and/or (ii) newly-
developed work product that is a modification of Nuevo field assets, including
without limitation software that is integrated into a field asset. All Work
Product shall be jointly owned by Nuevo and the Torch Party such that either
Nuevo or the Torch Party may use or transfer Work Product as it sees fit without
consent of or payment to the other Party (Nuevo or the Torch Party, as the case
may be); provided, however, that such other Party's Confidential Information may
not, without its consent, be used or transferred as part of the Work Product.
Except as otherwise provided in this Section 8.1, each Torch Party shall be the
exclusive owner of any custom software or other intellectual property prepared
by the Torch Party (or its subcontractors).
SECTION 8.2 NON-INFRINGEMENT
Each Party agrees that it shall perform its obligations under this Master
Agreement and all Service Agreements in a manner that does not infringe, or
constitute an infringement or misappropriation of, any United States patent, or
any copyright, trademark, trade secret or other intellectual property rights of
any third party.
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SECTION 8.3 USE OF CONCEPTS, KNOW-HOW AND METHODS
Nothing in this Master Agreement or any Service Agreement shall restrict a
Party from the use of any ideas, concepts, know-how, methods or techniques
relating to services that such Party, individually or jointly, develops or
discloses under this Master Agreement or any Service Agreement or obtains from
third parties, except to the extent that such use infringes the other Party's
patent rights, copyrights or other intellectual property rights or involves a
disclosure or use of the other Party's Confidential Information.
ARTICLE 9
CONFIDENTIALITY AND COMPETITION
SECTION 9.1 RIGHTS, RESTRICTIONS AND OBLIGATIONS OF THE RECEIVING PARTY
(a) During the Term, the Receiving Party may:
(i) disclose Confidential Information received from the Disclosing
Party only to its employees, officers and directors and Affiliates who have a
need to know such information exclusively for the purpose of executing its
obligations or exercising its rights under this Master Agreement or any Service
Agreement; provided that the Disclosing Party may, on a case by case basis,
require that the Receiving Party obtain its written consent prior to disclosure
of certain categories of Confidential Information to such persons;
(ii) reproduce the Confidential Information received from the
Disclosing Party as required to perform its obligations or exercise its rights
under this Master Agreement or any Service Agreement;
(iii) disclose Confidential Information as required by law, provided
the Receiving Party, to the extent practicable, gives the Disclosing Party
prompt notice prior to such disclosure to allow the Disclosing Party to make a
reasonable effort to obtain a protective order or otherwise protect the
confidentiality of such information; and
(iv) disclose the contents of this Master Agreement, the Service
Agreements and the Change Orders to advisors, financing sources and potential
acquirers or merger partners as reasonably necessary to conduct its business,
provided that such parties agree to be bound by confidentiality provisions
substantially similar to those forth in this Section 9.1.
(b) Except as otherwise specifically provided in this Master Agreement or
any Service Agreement, the Receiving Party shall not either during or after the
Term:
(i) disclose, in whole or in part, any Confidential Information
received directly or indirectly from the Disclosing Party; or
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(ii) sell, rent, lease, transfer, encumber, pledge, reproduce,
publish, transmit, translate, modify, reverse engineer, decompile, disassemble
or otherwise use the Confidential Information in whole or in part.
(c) The Receiving Party shall exercise the same care in preventing
unauthorized disclosure or use of the Confidential Information that it takes to
protect its own information of a similar nature, but in no event less than
reasonable care. Reasonable care includes, without limiting the generality of
the foregoing:
(i) informing its directors, officers, employees and Affiliates and,
where applicable, their respective directors, officers and employees, of the
confidential nature of the Confidential Information and the related terms of
this Master Agreement, directing them to comply with these terms, and obtaining
their written acknowledgment that they have been so informed and directed, and
their written undertaking to abide by these terms; and
(ii) notifying the Disclosing Party promptly upon discovery of any
loss, unauthorized disclosure or use of Confidential Information, or any other
breach of this Article by the Receiving Party, and assisting the Disclosing
Party in every reasonable way to help the Disclosing Party regain possession of
the Confidential Information and to prevent further unauthorized disclosure or
use.
(d) The Receiving Party acknowledges that:
(i) the Disclosing Party possesses and will continue to possess
Confidential Information that has been created, discovered or developed by or on
behalf of the Disclosing Party, or otherwise provided to the Disclosing Party by
third parties, which information has commercial value and is not in the public
domain;
(ii) unauthorized use or disclosure of Confidential Information is
likely to cause injury not readily measurable in monetary damages, and therefore
irreparable;
(iii) in the event of an unauthorized use or disclosure of
Confidential Information, the Disclosing Party shall be entitled, without
waiving any other rights or remedies, to such injunctive or equitable relief as
may be deemed proper by a court of competent jurisdiction;
(iv) subject to the rights expressly granted to the Receiving Party
in this Master Agreement or in any Service Agreement, the Disclosing Party and
its licensors retain all right, title and interest in and to the Confidential
Information, including without limiting the generality of the foregoing, title
to all Confidential Materials regardless of whether provided by or on behalf of
the Disclosing Party or created by the Receiving Party; and
(v) any disclosure by an Affiliate of the Receiving Party shall be
deemed to be a disclosure by the Receiving Party.
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SECTION 9.2 RIGHTS AND REMEDIES OF THE DISCLOSING PARTY
(a) At the expiration or earlier termination of this Master Agreement or
any applicable Service Agreement, the Receiving Party shall:
(i) return all Confidential Materials, including, without
limitation, all originals, copies, reproductions and summaries of Confidential
Information; and
(ii) destroy all copies of Confidential Information in its
possession, power or control, which are present on magnetic media, optical disk,
volatile memory or other storage device, in a manner that assures the
Confidential Information is rendered unrecoverable.
Upon completion of those tasks an officer of the Receiving Party shall provide
written confirmation to the Disclosing Party that the requirements of this
Section 9.2 have been complied with.
(b) The Disclosing Party may visit the Receiving Party's premises, upon
reasonable prior notice and during normal business hours, to review the
Receiving Party's compliance with the terms of Sections 9.1 and 9.2. Nuevo
shall, at Torch's expense, provide access at reasonable times and after
reasonable notice to all records and supporting documentation relating to
Nuevo's compliance with Nuevo's obligation under this Master Agreement to
refrain from: (i) reverse engineering, decompiling, or disassembling Torch
intellectual property; and/or (ii) competing with Torch as a service provider.
(c) In the event of an unauthorized disclosure of Confidential Information
by the Receiving Party, the Disclosing Party shall have the right to: (i) seek
appropriate injunctive relief to prevent any further disclosure where there
exists reasonable grounds to believe that the unauthorized disclosure may
continue; and/or (ii) pursue the dispute resolution procedure pursuant to
Article 17 to recover damages related to the disclosure. Breach of
confidentiality provisions of this Article 9 shall not give rise to a right to
terminate this Agreement except as provided in Section 16.1(f) and in the event
of any termination by a Torch Party under Section 16.1(f) the Torch Parties
shall not be required to provide the Termination/Expiration Assistance specified
in Section 16.5.
SECTION 9.3 NONDISCLOSURE AGREEMENTS
Each Party shall, at another Party's request made from time to time during
the Term, cause its employees who: (i) have access to such other Party's
Confidential Information and (ii) are designated by such other Party, to sign
nondisclosure agreements with terms consistent with this Article 9 reasonably
proposed by such other Party.
SECTION 9.4 OWNERSHIP OF BUSINESS RECORDS AND DATA
Each Party's Business Records and Data shall remain its property. A
Party's Business Records and Data shall not without its consent be: (i) used by
another Party other than in
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connection with satisfying obligations under this Master Agreement, Service
Agreements or Change Orders, (ii) disclosed, sold, assigned, leased or otherwise
provided to third parties by another Party, or (iii) commercially exploited by
or on behalf of another Party.
SECTION 9.5 RETURN OF BUSINESS RECORDS AND DATA
A Party shall upon: (i) request by another Party at any time, at such other
Party's expense, or (ii) the termination of a Service Agreement and the
cessation of all Services and Termination/Expiration Assistance related to the
Service Agreement, promptly return to the other Party, at the other Party's
expense if non-terminated Service Agreement(s) involve a Torch Party's need
therefor, in the format and on the media in use as of the date of request (or if
such media is non-removable then on reasonable alternative media), all (or at
the requesting Party's expense, any reasonably requested portion) of such other
Party's Business Records and Data. Archival tapes containing any Data of Party
shall be used by another Party solely for back-up purposes except as otherwise
agreed.
SECTION 9.6 SECURITY
(a) Each Party will establish and comply with commercially reasonable
security procedures during the Term of this Master Agreement and any Service
Agreement for the security of each other Party's Business Records, Confidential
Information and Data. Each Party may periodically inspect other Parties'
facilities, at reasonable frequencies and reasonable times, to ensure compliance
with this Section 9.6.
(b) Since a Party's personnel may have access to another Party's financial
information and other information that, if utilized or disclosed could lead to
violations of the applicable securities laws, each Party covenants that it (i)
will not trade in securities of another Party in violation of applicable
securities laws and (ii) will implement and will maintain a policy that its
employees will not trade in securities of another Party in violation of any
applicable securities laws.
SECTION 9.7 DESTROYED OR LOST BUSINESS RECORDS OR DATA
Nuevo's Business Records in possession of a Torch Party shall be retained
in accordance with a records retention policy agreed by the Parties. No Party
will otherwise delete or destroy another Party's Business Records or Data
without prior written authorization. In the event any Party's Business Records
or Data is lost or destroyed due to any act or omission of another Party in
breach of the security procedures described in this Article 9 and/or any Service
Agreement, such other Party shall use commercially reasonable efforts (including
necessary third party assistance) to regenerate or replace such Business Records
or Data and the Parties agree to cooperate to provide any available information,
files or raw data needed for the regeneration of the Business Records or Data.
SECTION 9.8 NON-COMPETITION
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Nuevo agrees that it shall not compete with Novistar for the provision of
services, in Novistar's lines of business (as operated on the Effective Date),
to third parties, during the term of any Service Agreement to which Novistar is
a party, and for three years after such term.
ARTICLE 10
MANAGEMENT AND SUBCONTRACTING
SECTION 10.1 CONTRACT EXECUTIVES AND PERSONNEL
SECTION 10.1.1 CONTRACT EXECUTIVES
Each of the Service Agreements shall identify a Contract Executive for each
Party thereto. A Party may designate a Primary Contact and a Secondary Contact
to act as the Project Executive. Where a Primary Contact and a Secondary
Contact have been designated, the other Party shall be entitled to rely upon
approvals, disapprovals and/or instructions provided by the Primary or Secondary
Contact; provided, however, that in the event of a conflict between the
approvals, disapprovals and/or instructions provided by the Primary and
Secondary Contacts, the approvals, disapprovals and/or instructions of the
Primary Contact shall supersede those given by the Secondary Contact. The Nuevo
Contract Executive shall be deemed to have the authority to act on behalf of
Nuevo with respect to all matters relating to the services included in the
applicable Service Agreement, and the Contract Executive for any Torch Party
shall be deemed to have the authority to act on behalf of Torch with respect to
all matters relating to the services included in the applicable Service
Agreement.
SECTION 10.1.2 MINIMUM PROFICIENCY LEVELS
Torch's personnel and the personnel of subcontractors shall have knowledge,
experience, training, and expertise at least equal to good commercial standards
applicable to such personnel for persons of their responsibilities to enable
them to properly perform the duties and responsibilities assigned to them in
connection with the Service Agreements. In addition, the Services shall conform
to industry standards applicable to such Services. All personnel for a Party
shall abide by the workplace rules and regulations of another Party while at
another Party's facility.
SECTION 10.1.3 SPECIALIZED PERSONNEL
Torch agrees that it will, upon Nuevo's request and at Nuevo's expense,
ensure that Torch's on-site personnel and personnel of its subcontractors are
trained, qualified, and available to perform the Services required in work areas
requiring specific health, security, or safety precautions.
SECTION 10.1.4 TORCH SERVICES TO THIRD PARTIES
Nuevo recognizes that Torch personnel providing Services to Nuevo under
this Master Agreement may perform similar services from time to time for other
persons, including
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competitors of Nuevo. This Master Agreement shall not prevent Torch from using
such personnel (or any Torch equipment) for the purpose of performing such
similar services for such other persons provided that: Torch complies with its
obligations concerning Nuevo's Confidential Information.
SECTION 10.2 MANAGEMENT BOARD
The Parties shall establish and maintain a Management Board, which shall be
composed of at least one senior executive of each Party. The representatives
and their positions with each Party shall be designated in a writing signed by
such Party's president. The general responsibilities of the Management Board
shall be: (i) to monitor the general progress of the performance of this Master
Agreement and the Service Agreements; (ii) to analyze and attempt to resolve
Problems referred by the Contract Executives; (iii) subject to the last sentence
of this Section 10.2, to agree to and implement Change Orders (including
material changes in the Services); and (iv) resolve disputed invoice amounts
where possible. The Management Board shall meet no less than quarterly and at
these meetings shall discuss reports prepared by the Contract Executives with
respect to the status of the performance of the Service Agreements and
significant events that have occurred since the previous meeting.
SECTION 10.3 SUBCONTRACTING
Torch shall be solely responsible for paying any subcontractors it uses to
provide Services under this Master Agreement or any Service Agreement or any
Change Order. Subcontracting shall not relieve Torch Parties of obligations
under this Master Agreement or any Service Agreement or any Change Order. Each
Torch Party agrees that it will notify Nuevo whenever a material ongoing
function under a Service Agreement is being outsourced by the Torch Party to a
third party. At no time during the term of a Service Agreement so long as no
notice of termination has been given, however, shall a Torch Party thereto
retain independent contractors or subcontractors for provision of the Services
in excess of thirty percent (30%) of the number of personnel involved in
providing the Services under the Service Agreement, without the prior written
approval of Nuevo. Each Torch Party agrees that upon a request made by Nuevo
based upon a reasonable belief in good faith that the Torch Party is not in
compliance with this Section 10.3, but not more often than once in a calendar
year, the Torch Party shall, at the Torch Party's expense, retain an independent
third party selected by mutual agreement of Nuevo and the Torch Party to audit
that Torch Party's compliance with this Section 10.3, provided that the sole
deliverable to Nuevo from such third party with respect to the audit shall be a
"yes" or "no" answer to the question of whether that Torch Party is in
compliance with this Section 10.3.
SECTION 10.4 HIRING OF EMPLOYEES
Nuevo shall not, during the term of any Service Agreement and for a period
of twelve (12) months thereafter, solicit or hire any person who is an employee
of a Torch Party, except that upon termination of a Service Agreement Nuevo may
extend offers to "Dedicated Employees" (as defined) who are not "Restricted
Employees" (as defined). A "Dedicated Employee" is any
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employee of a Torch Party to the terminating Service Agreement who has worked on
Nuevo matters for more than two-thirds of that person's "Non-overhead" (as
defined) reported time in the Torch Parties' timekeeping system(s) during the
previous 12 months (or during the period since the Effective Date, if such
period is less than 12 months). "Non-overhead" time includes time worked for
Torch clients, for Torch Parties, and/or Torch Parties' business units. A
"Restricted Employee" is an employee, other than an hourly field employee, that
a Torch Party designates as such not to exceed twenty percent of its "Dedicated
Employees" but not to be less than two (2) employees for each Service Agreement.
Upon Nuevo's request following notice of termination under Article 16, a Torch
Party shall provide a list of its Dedicated Employees and its Restricted
Employees, which list shall be binding upon the Torch Party until the Torch
Party notifies Nuevo of a change thereto (but no notice shall affect the status
of an employee as to whom Nuevo has previously delivered to the Torch Party a
written notice pursuant to the next sentence). In the event that Nuevo provides
written notice to Torch specifying by name an employee that Nuevo would like to
hire under the provisions of this Section 10.4, the applicable Torch Party shall
respond promptly in writing to Nuevo indicating (i) whether the employee is a
Dedicated Employee and (ii) whether the employee is a Restricted Employee, and
(iii) if the employee is not a Dedicated Employee or if the employee is a
Restricted Employee, providing to Nuevo, upon request, records reasonably
substantiating the employee's status as such.
A Torch Party shall not, during the term of any Service Agreement and for a
period of twelve (12) months thereafter, solicit or hire any person who is a
Restricted Employee of Nuevo without obtaining the advance written consent of
Nuevo, or if consent is withheld, payment to Nuevo of a hiring fee equal to two
(2) times the annual salary of such Restricted Employee while such Restricted
Employee was employed by Nuevo. A "Restricted Employee" of Nuevo is any
employee of Nuevo other than a clerical employee. In the event that a Torch
Party provides written notice to Nuevo specifying that the Torch Party would
like to hire a specific employee, Nuevo shall respond in writing to Torch within
fifteen (15) days by either: (i) indicating to the Torch Party that the employee
in question is not a Restricted Employee; or (ii) indicating to the Torch Party
that the employee is a Restricted Employee and providing to the Torch Party
records reasonably substantiating the employee's Restricted Employee status.
SECTION 10.5 OFFICE VISITS
When the personnel of a Party work at the site of another Party such other
Party will reasonably cooperate with the visiting Party in providing such
visiting Party with access to working space and facilities. Each Party, whether
a visiting or visited Party, agrees to comply with any applicable laws or
regulations as well as the visited Party's policies of which the visiting Party
has been notified.
ARTICLE 11
AUDITS
SECTION 11.1 AUDIT RIGHTS
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The applicable Torch Party shall maintain records and supporting
documentation of all financial and non-financial transactions under this Master
Agreement and all Service Agreements and all Change Orders, sufficient to
reasonably permit an audit thereof in accordance with this Section 11.1. Each
Torch Party shall, at Nuevo's expense in accordance with a Change Order, provide
access at reasonable times agreed by the Parties: (i) to all such records and
supporting documentation relating to the Services to Nuevo necessary for its
auditors or regulators to examine Torch's charges and performance of the
Services under this Master Agreement and any Service Agreement and to perform
audits and inspections of Nuevo and its business and (ii) to Nuevo's external
auditors, who have signed confidentiality agreements reasonably satisfactory to
Torch, to the systems that process, store, support and transmit Nuevo's Data in
order that its auditors can verify the integrity of Nuevo's Business Records and
Data. Torch Parties shall provide reasonable cooperation to such auditors,
inspectors, regulators and representatives, including the installation and
operation of audit software. The applicable Torch Parties shall, at their own
expense, provide Nuevo with an annual SAS 70 (type II) audit regarding the Torch
Party; provided, however, Nuevo shall be given the opportunity to participate in
determining the scope of the audit.
SECTION 11.2 PAYMENTS
If an audit reveals that a Torch Party has overcharged Nuevo for Services
during any calendar year of the Term within the then-preceding 24 months the
Torch Party promptly shall reimburse the amount of any overcharges.
SECTION 11.3 SURVIVAL
Sections 11.1 through 11.3 shall (i) apply with respect to a Torch Party
while a Service Agreement to which the Torch Party is a party and (ii) continue
to the third (3d) anniversary thereafter, after which time Sections 11.1 through
11.3 shall no longer apply to the Torch Party.
SECTION 11.4 TEAI FINANCIAL STATEMENTS
While a Service Agreement to which a Torch Party is a party remains in
effect, TEAI shall make available to Nuevo at no additional charge TEAI's annual
audited financial statements as well as its quarterly unaudited financial
statements.
ARTICLE 12
INSURANCE; RISK OF LOSS
SECTION 12.1 REQUIRED INSURANCE COVERAGES
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Throughout the Term each Party (except with respect to a coverage
identified as Torch only) shall maintain in force, at minimum, the insurance
coverages described below. Additional insurance coverage(s) may be required
under a Service Agreement.
(a) Commercial General Liability Insurance with a minimum combined single
limit of $3 million per occurrence and minimum general aggregate limit of $5
million;
(b) Umbrella Liability Insurance with a minimum limit of $50 million per
occurrence and minimum aggregate amount of $50 million;
(c) Worker's Compensation Insurance or any alternative plan or coverage as
permitted or required by applicable law and employers liability insurance with a
minimum occurrence limit of $500,000;
(d) Except with respect to Nuevo, Comprehensive Errors and Omissions
Insurance, for Torch only, covering the liability for financial loss due to
error, omission or negligence, by Torch, with a minimum amount of $5 million;
(e) Automotive Liability Insurance covering use of all owned, non-owned
and hired automobiles with a minimum combined single limit of $3 million per
occurrence for bodily injury and property damage liability;
(f) "All Risk" Property Insurance, for Torch only, in an amount equal to
the replacement value of the equipment used to provide the Services;
(g) Employee Dishonesty and Computer Fraud Insurance for loss arising out
of or in connection with fraudulent or dishonest acts committed by the employees
of a Party, acting alone or in collusion with others, in a minimum amount of $5
million per loss.
SECTION 12.2 GENERAL INSURANCE REQUIREMENTS
All insurance policies a Party is required to carry pursuant to this
Article shall: (i) be primary as to its negligence and non-contributing with
respect to any other insurance or self-insurance another Party may maintain;
(ii) name the other Parties, its Affiliates, subsidiaries and their respective
officers, directors and employees as additional insureds, as such parties'
interests may appear with respect to this Master Agreement; (iii) be provided by
reputable and financially responsible insurance carriers with a Best's minimum
rating of "A-" (or any future equivalent) and minimum Best's financial
performance rating of "6" (or any other future equivalent); (iv) require the
insurer to notify the other Parties in writing at least forty-five (45) days in
advance of cancellation or modification; and (v) include a waiver of all rights
of subrogation against each other Party and its Affiliates. Each Party shall
cause its insurers to issue to the other Parties on or before the Effective Date
and each policy renewal date
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certificates of insurance evidencing that the coverages and policy endorsements
required by this Article are in effect.
ARTICLE 13
CERTAIN REPRESENTATIONS AND WARRANTIES
SECTION 13.1 MUTUAL REPRESENTATIONS AND WARRANTIES
Each Party represents and warrants that, as of the Effective Date and
continuing throughout the Term:
(a) It is a corporation duly incorporated, validly existing and is in good
standing under the laws of the state in which it is incorporated, and is in good
standing in each other jurisdiction where the failure to be in good standing
would have a material adverse effect on its business or its ability to perform
its obligations under this Master Agreement or any Service Agreement to which it
is a party.
(b) It has all necessary corporate power and authority to own, lease and
operate its assets and to carry on its business as presently conducted and as it
will be conducted pursuant to this Master Agreement and each Service Agreement
to which it is a party.
(c) It has all necessary corporate power and authority to enter into this
Master Agreement and each Service Agreement to which it is a party and to
perform its obligations thereunder, and the execution and delivery of this
Master Agreement and each Service Agreement to which it is a party and the
consummation of this transactions contemplated thereby have been duly authorized
by all necessary corporate actions on its part.
(d) This Master Agreement and each Service Agreement to which it is a
party constitutes a legal, valid and binding obligation of such Party,
enforceable against it in accordance with its terms.
(e) It has not violated and it will not violate any applicable laws or
regulation, or another Party's reasonable policies of which it has been
notified, regarding the offering of unlawful inducement in connection with this
Master Agreement or any Service Agreement.
(f) It has and shall have the right and authority to use any software or
other intellectual property provided by it in connection with the Services.
(g) It is not a party to, and is not bound or affected by or subject to,
any instrument, agreement, charter or by-law provision, law, rule, regulation,
judgment or order which would be contravened or breached as a result of the
execution of this Master Agreement, consummation of the transactions
contemplated by this Master Agreement, or execution of any fully executed
Service Agreement.
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SECTION 13.2 TORCH REPRESENTATIONS AND WARRANTIES
As of the Effective Date and continuing throughout the Term, each Torch
Party represents and warrants to Nuevo that all assets and information systems
owned or leased by Torch and used to provide the Services from and after
December 31, 1999 will be and shall remain Year 2000 Compliant; provided,
however, that Torch shall not be required to bear the cost of replacing or
repairing any of Nuevo's assets to correct any Year 2000 problems with respect
to such assets. In the event that any Torch Party fails to achieve Year 2000
compliance for any assets or information systems owned or leased by the Torch
Party and used to provide Services to Nuevo, and such failure is materially
harmful to Nuevo and remains uncorrected for a period of sixty (60) days after
written notice is provided by Nuevo, then Nuevo may terminate any and all
Service Agreements with such Torch Party that are materially affected by such
failure. Upon any such termination hereunder, Nuevo shall pay to the Torch
Entity a termination fee equal to one-half of the termination for convenience
fee that is applicable to such Service Agreement.
ARTICLE 14
INDEMNIFICATION
SECTION 14.1 GENERAL INDEMNIFICATION
Nuevo shall, except to the extent a Torch Party acts with gross negligence
or willful misconduct, indemnify, defend and hold harmless the Torch Party, the
Torch Party's Affiliates, and their respective officers, directors, employees,
agents, successors and assigns, from and against all Losses to the extent
arising from or in connection with the Torch Party's performance (or non-
performance) of obligations under this Master Agreement, the Service Agreements
and all Change Orders.
SECTION 14.2 INTELLECTUAL PROPERTY INDEMNIFICATION
Nuevo and Each Torch Party agrees to defend the other Parties against any
action to the extent that such action is based on a claim that any software or
other intellectual property provided by the indemnitor or the Confidential
Information provided by the indemnitor: (a) infringes a copyright perfected
under applicable law, (b) infringes a patent granted under applicable law or (c)
constitutes an unlawful disclosure, use or misappropriation of another party's
trade secret. The indemnitor will bear the expense of such defense and pay any
damages and attorneys' fees that are attributable to such claim finally awarded
by a court of competent jurisdiction. If any software, other intellectual
property or Confidential Information becomes the subject of a claim under this
Section 14.2, or in the indemnitor's opinion is likely to become the subject of
such a claim, then the indemnitor may, at its option, (a) modify the software,
other intellectual property or Confidential Information to make it noninfringing
or cure any claimed misuse of another's trade secret, provided such modification
does not adversely affect functionality used by the indemnitee, or (b) procure
for the indemnitee the right to continue using the software, other intellectual
property or Confidential Information
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pursuant to the applicable Service Agreement, or (c) replace the software or
other intellectual property or Confidential Information with a substantial
equivalent that is noninfringing or that is free of claimed misuse of a trade
secret. Any costs associated with implementing any of the above alternatives
shall be borne by the indemnitor.
SECTION 14.3 INDEMNIFICATION PROCEDURES
(a) Promptly after receipt by an indemnitee of any written claim or notice
of any action giving rise to a claim for indemnification by the indemnitee, the
indemnitee shall so notify the indemnitor and shall provide copies of such claim
or any documents relating to the action. No failure to so notify an indemnitor
shall relieve the indemnitor of its obligations under this Article 14 except to
the extent that the failure or delay is prejudicial. Within thirty (30) days
following receipt of such written notice, but in any event no later than ten
(10) days before the deadline for any responsive pleading, the indemnitor shall
notify the indemnitee in writing (a "Notice of Assumption of Defense") of the
extent to which the indemnitor elects to assume control of the defense and
settlement of such claim or action and to such extent, indemnitor shall be
deemed to have waived any right it may have to later assert that it is not
required to indemnify the indemnitee with respect to the claim or action. If no
such notice is given within such 30-day period, the indemnitor shall be deemed
to have waived any right to assume such control. For example, in the event that
the indemnitor notifies the indemnitee that only certain of multiple claims are
covered by this Section 14.3(a) then the indemnitor shall be deemed to have so
waived only with respect to such certain claims.
(b) If the indemnitor delivers a Notice of Assumption of Defense with
respect to a claim within the required period, the indemnitor shall have sole
control over the defense and settlement of such claim; provided, however, that
(i) the indemnitee shall be entitled to participate in the defense of such claim
and to employ counsel at its own expense to assist in the handling of such claim
and (ii) the indemnitor shall obtain the prior written approval of the
indemnitee before entering into any settlement of such claim or ceasing to
defend against such claim. After the indemnitor has delivered a timely Notice
of Assumption of Defense relating to any claim, the indemnitor shall not be
liable to the indemnitee for any legal expenses incurred by such indemnitee in
connection with the defense of such claim; provided, that the indemnitor shall
pay for separate counsel for the indemnitee to the extent that conflicts or
potential conflicts of interest between the Parties so require. In addition,
the indemnitor shall not be required to indemnify the indemnitee for any amount
paid by such indemnitee in the settlement of any claim for which the indemnitor
has delivered a timely Notice of Assumption of Defense if such amount was agreed
to without prior written consent of the indemnitor, which shall not be
unreasonably withheld or delayed in the case of monetary claims. An indemnitor
may withhold consent to settlement of claims of infringement affecting its
proprietary rights in its sole discretion.
(c) If the indemnitor does not deliver a Notice of Assumption of Defense
relating to a claim within the required notice period, the indemnitee shall have
the right to defend the claim in such a manner as it may deem appropriate, at
the cost and expense of the indemnitor.
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The indemnitor shall promptly reimburse the indemnitee for all such costs and
expenses upon written request therefor.
SECTION 14.4 SUBROGATION
In the event an indemnitor indemnifies an indemnitee pursuant to this
Article, the indemnitor shall, upon payment in full of such indemnity, be
subrogated to all of the rights of the indemnitee with respect to the claim to
which such indemnity relates.
SECTION 14.5 EXPRESS NEGLIGENCE
THE INDEMNIFICATION PROVISIONS PROVIDED FOR IN THIS AGREEMENT SHALL BE
APPLICABLE WHETHER OR NOT THE LOSSES, COSTS, EXPENSES AND DAMAGES IN QUESTION
AROSE SOLELY OR IN PART FROM THE NEGLIGENCE OF ANY INDEMNIFIED PARTY, OTHER THAN
THOSE LOSSES, COSTS, EXPENSES AND DAMAGES ATTRIBUTABLE TO THE GROSS NEGLIGENCE
AND/OR WILLFUL MISCONDUCT OF THE TORCH PARTIES. NUEVO AND THE TORCH PARTIES
ACKNOWLEDGE THAT THIS STATEMENT COMPLIES WITH THE EXPRESS NEGLIGENCE RULE AND IS
CONSPICUOUS.
ARTICLE 15
LIABILITY AND FORCE MAJEURE
SECTION 15.1 LIABILITY
Subject to the limitations set forth in this Article, a Party that breaches
any obligation under this Master Agreement or a Service Agreement or Change
Order (except for any obligation to which a Service Level Credit or other
liquidated damages provision applies, under this Master Agreement or a Service
Agreement or a Change Order) shall be liable to each other Party except that
with respect to TOC or Novistar in performance of operator responsibilities:
(a) if under any joint operating agreement, TOC or Novistar, as the case may be,
shall only be liable for damages attributable to gross negligence or willful
misconduct in the performance of such responsibilities; and (b) if not under any
joint operating agreement, Nuevo shall be deemed to have entered into a joint
operating agreement having the provisions set forth on the attached
Exhibit 15.1 (1).
SECTION 15.2 LIMIT ON TYPES AND AMOUNTS OF DAMAGES RECOVERABLE
(a) EXCEPT AS SET FORTH IN CLAUSE (B) BELOW, NO PARTY SHALL BE LIABLE FOR
CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION DAMAGES FOR LOST REVENUE
AND/OR PROFITS) OR ANY EXEMPLARY OR PUNITIVE DAMAGES, REGARDLESS OF THE FORM OF
ACTION, WHETHER IN CONTRACT, TORT OR OTHERWISE, AND EVEN IF SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
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(b) The exclusion set forth in clause (a) shall not apply to (i) Losses
otherwise recoverable by an indemnitee pursuant to Article 14 (Indemnification),
(ii) breach by a Party of its obligations for intentional acts with respect to
Confidential Information, or (iii) damages caused by a Party's willful
misconduct.
(c) The total liability under this Master Agreement, Service Agreements
and Change Orders, of each Torch Party to Nuevo shall be limited to three
months' fees under the Service Agreements to which it is a party; provided,
however, that the total aggregate liability of the Torch Parties for gross
negligence or willful misconduct shall be limited to 75 percent of their
aggregate book net worth or $15.0 million, whichever is the greater.
SECTION 15.3 FORCE MAJEURE
(a) A Party shall not be liable for any failure or delay in the
performance of its obligations, other than payment obligations, under this
Master Agreement or any Service Agreement or Change Order, if any, to the extent
such failure or delay is caused, directly or indirectly, without fault by such
Party, by: fire, flood, earthquake, elements of nature or acts of God; labor
disruptions or strikes of third parties; acts of war, terrorism, riots, civil
disorders, rebellions or revolutions; quarantines, embargoes and other similar
governmental action; or any other similar cause beyond the reasonable control of
such Party.
Events meeting the criteria set forth above are referred to collectively as
"Force Majeure Events." The Parties expressly acknowledge that Majeure Events
do not include third party non-performance except to the extent caused by an
event that would be a Force Majeure Event with respect to a Party; provided,
however, that Force Majeure Events shall include disruptions caused by third
party failures of public utilities, building facilities, communications
facilities or public safety functions.
(b) With respect to a Force Majeure Event, a non-performing Party may
elect by notice to the party owed performance to be excused from any further
performance or observance of the affected obligation(s) for as long as such
circumstances prevail and such Party continues to attempt to recommence
performance or observance whenever and to whatever extent is commercially
reasonable without delay.
(c) If a Force Majeure Event for which an election under Section 15.3(b)
has been made by a Torch party causes a material failure in performance of
Services for more than ten (10) consecutive business days then the charges to
Nuevo for such affected services shall be suspended and Nuevo may acquire such
services elsewhere at its expense until such failure has been cured. If a
Force Majeure Event for which an election under 15.3(b) has been made excuses a
material failure in performance for more than one hundred and twenty (120)
consecutive days, and if Nuevo has obtained alternative arrangements for the
Services (if such failure is a failure to perform Services), then a performing
party shall be entitled to terminate the applicable Service Agreement, without
any termination fee and effective upon delivery of written notice to the non-
performing party, but only if the Torch Party has not restored the
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affected Services (if such failure is a failure to perform Services) prior to
such notice and such Services remain restored for a period of thirty (30)
consecutive days.
SECTION 15.4 ACTIONS OF OTHER PARTY
Neither Party shall be liable for any failure or delay in the performance
of its obligations under this Master Agreement or any Service Agreement if and
to the extent such failure or delay is caused by the actions or omissions of the
other Party or breaches of this Master Agreement or a Service Agreement by the
other Party provided that the Party which is unable to perform has provided the
other Party with reasonable notice of such non-performance and has used
commercially reasonable efforts to perform notwithstanding the actions,
omissions or breaches of the other Party.
ARTICLE 16
TERMINATION
SECTION 16.1 TERMINATION FOR CAUSE
(a) Each Party to a Service Agreement shall have the option, but not the
obligation, to terminate any Service Agreement for a material breach of such
Service Agreement, including without limitation a material breach of the
Performance Standards applicable thereto, by the other Party that is not cured
by such Party within thirty (30) days of the date on which the non-breaching
Party provides written notice of such breach if the breaching Party fails to
cure such failure within thirty (30) days after delivery to it of written notice
of the non-breaching Party's exercise of rights under this Section 16.1(a);
(b) Nuevo shall have the option within 30 days of a Torch Party's failure
to meet a Service Level that is defined as a Service Level Termination Event in
the Service Agreement, but not the obligation, in lieu of any applicable Service
Level Credits, to terminate any Service Agreement for such failure;
(c) Each Torch Party shall provide notice to Nuevo at least thirty (30)
days in advance of any sale (other than through an initial public offering) of
such Torch Party that would cause a change in control of such Torch Party. Such
notice shall identify the acquirer, and, if Nuevo agrees to non-disclosure
obligations reasonably satisfactory to the acquirer, reasonable descriptions of
the acquirer's line of business and financial condition, and recent litigation
to which it has been a party. Nuevo shall have the option, but not the
obligation, to terminate any Service Agreement to which such Torch Party is a
party if such sale is not an initial public offering and Nuevo demonstrates
before the sale that the sale would result in a reasonable expectation of
substantial harm to its business and either: (1) the acquirer is a direct
competitor of (or the acquisition would cause a conflict of interest with) Nuevo
based upon Nuevo's business as constituted in 1998; or (2) the acquirer has a
substantial history of pursuing meritless litigation or breaching
confidentiality agreements or has a financial condition that would reasonably be
expected to jeopardize the Torch Party's ability to satisfy
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obligations under the Service Agreement; provided, however that in no event may
Nuevo unreasonably withhold consent to a change of control of the Torch Party
(whether by acquisition or otherwise); or
(d) A Party shall exercise its termination option under this Section 16.1
by delivering to the affected Party(ies) written notice of such termination
identifying the scope of the termination and the termination date. If a
purported termination for cause is determined not to have been a proper
termination for cause, such termination shall be treated as a material breach of
this Master Agreement.
(e) Each Torch Party shall have the option, but not the obligation, to
terminate for cause any or all Service Agreements and/or this Master Agreement,
if either (i) Nuevo fails to pay when due amounts Nuevo owes to a Torch Party,
under Service Agreement(s) and/or Change Order(s) and/or this Master Agreement,
if Nuevo fails to cure such failure within thirty (30) days after delivery to
Nuevo of written notice of exercise of rights under this Section 16.1(d); or
(ii) Nuevo fails to comply with its obligations under Section 7.5(b) with
respect to invoice(s) issued in good faith by Torch Party(ies) if Nuevo fails to
cure such failure upon ten (10) days notice.
(f) Each Torch Party shall have the option, but not the obligation, to
terminate for cause any or all Service Agreements and/or this Master Agreement
if: (i) Nuevo's acts or (ii) acts any of its officers through willful
misconduct; or (iii) acts of any of its employees as a result of Nuevo's failure
to take reasonable safeguards; results in a breach of Nuevo's obligations under
Article 9 to any Torch Party with respect to such Party's patents, copyrights,
trademarks, trade secrets or other intellectual property rights and Nuevo fails
to cure such failure within thirty (30) days after delivery to Nuevo of written
notice of exercise of rights under this Section 16.1(f).
SECTION 16.2 TERMINATION FOR CONVENIENCE
Nuevo shall have the option, but not the obligation, to terminate for
convenience this Master Agreement (and all Service Agreements) or, from time to
time, one or more Service Agreements. Nuevo shall exercise its termination
option by delivering to the affected Torch Parties written notice of such
termination identifying the scope of the termination and the termination date
(which shall be at least ninety (90) days after the delivery to the Torch
Parties of such notice). In connection with any such termination, each Torch
Party to a Service Agreement being terminated shall be paid a termination fee
equal to the greater of (i) the previous calendar year's fees and incentive it
earned under such Service Agreement (but excluding time and materials fees in
excess of pool amounts) or (ii) the current calendar year's fees it earned under
such Service Agreement annualized to 12 months equivalent together with
estimated incentive fees under such Service Agreement ("current" and "previous"
to be determined with reference to such delivery date). In connection with any
such termination, Nuevo shall be responsible for reasonable severance costs in
accordance with the Torch Party's standard severance policy in effect for the
affected employees of each Torch Party to the terminated agreement except for
each employee who: (i) is retained by Torch; or (ii) Nuevo offers a comparable
position at Nuevo
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that the employee does not accept; or (iii) Nuevo employs for at least 12 months
after such termination.
SECTION 16.3 TERMINATION FOR INSOLVENCY
A Party shall have the option, but not the obligation, to terminate this
Master Agreement in its entirety (including all Service Agreements) without
payment of any applicable termination fees if a Party (i) becomes insolvent or
is unable to meet its debts as they mature, (ii) files a voluntary petition in
bankruptcy or seeks reorganization or to effect a plan or other arrangement with
creditors, (iii) files an answer or other pleading admitting, or fails to deny
or contest, the material allegations of an involuntary petition filed against it
pursuant to any applicable statute relating to bankruptcy, arrangement or
reorganization, (iv) shall be adjudicated a bankrupt or shall make an assignment
for the benefit of its creditors generally, (v) shall apply for, consent to or
acquiesce in the appointment of any receiver or trustee for all or a substantial
part of its property, or (vi) any such receiver or trustee shall be appointed
and shall not be discharged within thirty (30) days after the date of such
appointment.
SECTION 16.4 EFFECTS OF TERMINATION
Termination or expiration of this Master Agreement or any Service Agreement
or categories of Services for any reason under this Article shall not affect (i)
any liabilities or obligations of either Party arising before such termination
or out of the events causing such termination or expiration, or (ii) any damages
or other remedies to which a Party may be entitled under this Master Agreement
or any Service Agreement, at law or in equity, arising from any breaches of such
liabilities or obligations.
Nuevo agrees that in connection with any termination of any Service
Agreement it will reimburse the applicable Torch Party for reasonable severance
costs in accordance with that Torch Party's standard severance policy in effect
for the affected employees (not to exceed three years pay) for each employee of
the Torch Party who is discharged in connection with the termination; provided
however that if Nuevo offers comparable employment for at least one year to such
an employee then Nuevo shall be relieved of such reimbursement obligation.
SECTION 16.5 TERMINATION/EXPIRATION ASSISTANCE
Concurrently with the expiration or termination of this Master Agreement or
any Service Agreement, except on the grounds of a failure of Nuevo to satisfy a
payment obligation, a Torch Party shall, at the request of Nuevo, provide to
Nuevo at Nuevo's expense on a time and materials basis in accordance with the
Torch Party's then-current published pricing, the Termination/Expiration
Assistance provided in this Section 16.5, subject, however, to all other
provisions of this Agreement. Termination/Expiration Assistance to which Nuevo
is entitled under this Agreement may not be withheld by Torch provided that
Nuevo has satisfied and continues to satisfy all of its payment obligations to
each Torch Party and provided that Nuevo
MASTER SERVICES AGREEMENT -32-
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<PAGE>
has paid to each Torch Party, from whom Termination/Expiration assistance is
sought, a "Performance Deposit":
(a) Torch shall deliver to Nuevo all Nuevo Business Records, Nuevo
Confidential Information and Nuevo Confidential Materials, in the
Torch Party's possession, and shall, at Nuevo's request, destroy all
electronic copies thereof not turned over to Nuevo (except for one
archival copy), provided that the Torch Party shall have no obligation
to provide any of its intellectual property, Business Records,
Confidential Information, or any other of its property; and Torch
shall deliver to Nuevo a copy of each Work Product not previously
delivered to Nuevo and in the Torch Party's possession;
(b) The Torch Party shall reasonably cooperate with Nuevo and all of
Nuevo's other service providers and shall use commercially reasonable
efforts to facilitate a smooth transition at the time of
disengagement, with no interruption of Services, no adverse impact on
the provision of Services, no interruption of any services provided by
third parties, and no adverse impact on the provision of services
provided by third parties;
(c) The Torch Party shall take such additional actions and perform such
additional tasks as may be reasonably necessary to facilitate a timely
disengagement in compliance with the provision of this Section 16.5,
including full performance, on or before the date of expiration or
termination of the Term, of all of the Torch Party's obligations under
this Section 16.5.
ARTICLE 17
DISPUTE RESOLUTION
SECTION 17.1 GENERAL
Any dispute or controversy between the Parties with respect to the
interpretation or application of any provision of this Master Agreement, any
Service Agreement, or any Change Order or the performance by a Torch Party or
Nuevo of their respective obligations hereunder or thereunder shall be resolved
as provided in this Article.
SECTION 17.2 INFORMAL DISPUTE RESOLUTION
The Parties may, by mutual agreement, attempt to resolve their dispute
informally in the following manner:
(a) Either Party may submit the dispute to the Management Board, which
shall meet as often as the Parties reasonably deem necessary to gather and
analyze any information relevant to the resolution of the dispute. The
Management Board shall negotiate in good faith in an effort to resolve the
dispute.
MASTER SERVICES AGREEMENT -33-
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<PAGE>
(b) If the Management Board determines in good faith that resolution
through continued discussions by such Management Board does not appear likely,
the matter shall be referred to binding arbitration.
(c) During the course of negotiations, all reasonable requests made by one
Party to the other for non-privileged information, reasonably related to the
dispute, shall be honored in order that each of the Parties may be fully advised
of the other's position.
(d) The specific format for the discussions shall be determined at the
discretion of the Management Board, but may include the preparation of agreed
upon statements of fact or written statements of position.
(e) Proposals and information exchanged during the informal proceedings
described in this Article between the Parties shall be privileged, confidential
and without prejudice to a Party's legal position in any formal proceedings.
All such proposals and information, as well as any conduct during such
proceedings, shall be considered settlement discussions and proposals, and shall
be inadmissible in any subsequent proceedings.
SECTION 17.3 ARBITRATION
(a) Except as set forth in clause (b) below, any controversy or claim
arising out of or relating to this Master Agreement or any Service Agreement, or
any alleged breach hereof, including any controversy regarding the arbitrability
of any dispute, shall be settled at the request of either Party by binding
arbitration in Houston, Texas before and in accordance with the then existing
Commercial Arbitration Rules of the American Arbitration Association (the
"Rules"). In any dispute in which the amount in controversy is less than Two
Hundred Fifty Thousand Dollars ($250,000), there shall be one (1) arbitrator
agreed to by the Parties or, if the Parties are unable to agree within thirty
(30) days after demand for arbitration is made, selected in accordance with the
Rules. In all other cases there shall be three (3) arbitrators, one (1) of whom
shall be selected by Nuevo within thirty (30) days after demand for arbitration
is made, one (1) of whom shall be selected by Torch within thirty (30) days
after demand for arbitration is made, and one (1) of whom shall be selected by
the two Party-appointed arbitrators within thirty (30) days after their
selection. If one or more arbitrator(s) is not selected within the time period
stated in the preceding sentence, such arbitrator(s) shall be selected pursuant
to Rule 13 of the Rules. Any arbitrator(s) proposed by the American Arbitration
Association shall have at least ten (10) years of experience in complex,
commercial technology engagements in the area that is generally the same as the
technology issue that is the subject of the dispute. Each Party shall pay its
own attorneys' fees and one-half (1/2) of the other arbitration costs, subject
to final apportionment by the arbitrators. The arbitrators shall apply the law
set forth herein to govern this Master Agreement and any Service Agreement and
shall have the power to award any remedy available at law or in equity;
provided, however, that the arbitrators shall have no power to amend this Master
Agreement or any Service Agreement. The Party prevailing in arbitration shall
be entitled to recover its reasonable and necessary attorneys' fees and expenses
incurred in the arbitration proceeding.
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Any award rendered pursuant to such arbitration shall be final and binding on
the Parties, and judgment on such award may be entered in any court having
jurisdiction thereof. A Party may recover its attorneys' fees incurred in any
such enforcement action.
(b) Notwithstanding clause (a) above, either Party may request a court of
competent jurisdiction to grant provisional injunctive relief to such Party
until an arbitrator can render an award on the matter in question and such award
can be confirmed by a court having jurisdiction thereof.
SECTION 17.4 CONTINUED PERFORMANCE
Subject to Section 7.5, both Parties shall continue performing their
respective obligations and responsibilities under this Master Agreement and any
Service Agreements and any Change Orders while any dispute, other than a dispute
or dispute(s) with respect to breach of confidentiality obligations.
SECTION 17.5 APPLICABLE LAW
All questions concerning the validity, interpretation and performance of
this Master Agreement and any Service Agreement shall be governed by and decided
in accordance with the laws of the State of Texas, as such laws are applied to
contracts between Texas residents and without regard to the choice of law rules
of the State of Texas.
SECTION 17.6 JURISDICTION AND VENUE
The Parties hereby submit and consent to the exclusive jurisdiction of any
state or federal court located within Harris County of the State of Texas and
irrevocably agree that all actions or proceedings relating to this Master
Agreement and any Service Agreement, other than any action or proceeding
required by this Article to be submitted to arbitration, shall be litigated in
such courts, and each of the Parties waives any objection which it may have
based on improper venue or forum non conveniens to the conduct of any such
action or proceeding in such court. Nothing in this Section 17.6 shall affect
the obligation of the Parties with respect to the arbitration of disputes
pursuant to Section 17.3.
SECTION 17.7 EQUITABLE REMEDIES
The Parties agree that in the event of any breach or threatened breach of
any provision of this Master Agreement or any Service Agreement concerning (i)
Confidential Information, (ii) intellectual property rights or (iii) other
matters for which equitable rights may be granted, money damages would be an
inadequate remedy. Accordingly, such provisions may be enforced by the
preliminary or permanent, mandatory or prohibitory injunction or other order of
a court of competent jurisdiction.
ARTICLE 18
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MISCELLANEOUS
SECTION 18.1 INTERPRETATION
(a) In this Master Agreement and in any Service Agreements and any Change
Orders, words importing the singular number include the plural and vice versa
and words importing gender include all genders. The word "person" includes,
subject to the context in which it appears, an individual, partnership,
association, corporation, trustee, executor, administrator or legal
representative.
(b) The division of this Master Agreement, and any Service Agreements and
any Change Orders into Articles, Sections, subsections and Schedules and the
insertion of any captions or headings are for convenience of reference only and
shall not affect its construction or interpretation.
(c) In this Master Agreement and in any Service Agreements and in any
Change Orders, unless otherwise specifically provided:
(i) In the computation of a period of time from a specified date to
a later specified date, the word "from" means "from and including" and the words
"to" and "until" each mean "to but excluding."
(ii) References to a specified Article, Section, subsection,
Schedule or other subdivision shall be construed as references to that specified
Article, Section, subsection, or other subdivision of this Master Agreement or
the applicable Service Agreement or the applicable Change Order, unless the
context otherwise requires.
(iii) The word "dollar" and the symbol "$" refer to United States
dollars.
(iv) References to "days" means calendar days unless "business days"
are specified.
(v) The term "including" means "including, without limitation," or
"including, but not limited to."
(d) The Parties are sophisticated and have been represented by counsel
during the negotiation of this Master Agreement and each Service Agreement. As
a result, the Parties believe the presumption of any laws or rules relating to
the interpretation of contracts against the drafter thereof should not apply,
and hereby waive any such presumption.
SECTION 18.2 BINDING NATURE AND ASSIGNMENT
Except as otherwise provided in this Master Agreement, neither Party may
assign any of its rights or obligations under this Master Agreement without the
other Parties' consent. Torch agrees that it shall provide Nuevo 30 days
advance notice of a change of control of a
MASTER SERVICES AGREEMENT -36-
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<PAGE>
Torch Party. Subject to the foregoing, this Master Agreement and each Service
Agreement shall be binding on the Parties and their respective successors and
assigns.
SECTION 18.3 EXPENSES
In this Master Agreement and each Service Agreement, unless otherwise
specifically provided, all costs and expenses (including the fees and
disbursements of legal counsel) incurred in connection with this Master
Agreement or the applicable Service Agreement, and the completion of the
transactions contemplated by this Master Agreement or the applicable Service
Agreement shall be paid by the Party incurring such expenses.
SECTION 18.4 AMENDMENT AND WAIVER
This Master Agreement may not be modified, amended, or in any way altered
except by written document duly executed by both of the Parties hereto in
accordance with Section 4.3. No waiver of any provision of this Master
Agreement, nor of any rights or obligations of any Party hereunder, will be
effective unless in writing and signed by the Party waiving compliance, and such
waiver will be effective only in the specific instance, and for the specific
purpose, stated in such writing. No waiver of breach of, or default under, any
provision of this Master Agreement will be deemed a waiver of any other
provision, or of any subsequent breach or default of the same provision, of this
Master Agreement.
SECTION 18.5 FURTHER ASSURANCES; CONSENTS AND APPROVALS
Each Party shall provide such further documents or instruments required by
the other Party as may be reasonably necessary or desirable to give effect to
this Master Agreement and to carry out its provisions.
SECTION 18.6 PUBLICITY
All media releases, public announcements and other disclosures by either
Party relating to this Master Agreement or any Service Agreement or the subject
matter hereof, including promotional or marketing materials, but excluding
announcements intended solely for internal distribution or to meet legal or
regulatory requirements, shall be coordinated with and approved by the other
Party prior to release. No license or right, either directly or by implication,
is granted to Torch to use Nuevo's name or any of Nuevo's trade names,
trademarks, service marks, slogans, logos or designs for any advertising,
promotional or other purpose which is not material to Torch's performance under
this Master Agreement without the prior, written permission of Nuevo.
SECTION 18.7 SEVERABILITY
Any provision in this Master Agreement which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or
MASTER SERVICES AGREEMENT -37-
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<PAGE>
unenforceability without invalidating the remaining provisions or affecting the
validity or enforceability of such provision in any other jurisdiction.
SECTION 18.8 ENTIRE AGREEMENT
This Master Agreement and each of the Service Agreements thereto, including
the Schedules thereto, and each of the Change Orders, constitute the entire
agreement between the Parties pertaining to the subject matter hereof and
supersede all prior and contemporaneous agreements, understandings, negotiations
and discussions, whether oral or written, of the Parties pertaining to the
subject matter hereof.
SECTION 18.9 NOTICES
Except as expressly otherwise stated herein, all notices, requests,
consents, approvals, or other communications provided for, or given under, this
Master Agreement, shall be in writing, and shall be deemed to have been duly
given to a Party if delivered personally, or transmitted by facsimile to such
Party at its telecopier number set forth below, or sent by first class mail or
overnight courier to such Party at its address set forth below, or at such other
telecopier number or address, as the case may be, as shall have been
communicated in writing by such Party to the other Party in accordance with this
Section 18.9. All notices will be deemed given when received in the case of
personal delivery or delivery by mail or overnight courier, or when sent in the
case of transmission by facsimile upon electronic confirmation of receipt.
Notices to Nuevo shall be addressed as follows:
Attention: Robert King
Nuevo Energy Company
1331 Lamar, Suite 1650
Houston, TX 77010-3039
Telephone No.: (713) 756-1600
With a copy to the attention of Nuevo's general counsel at:
Attention: General Counsel
Nuevo Energy Company
1331 Lamar, Suite 1650
Houston, TX 77010-3039
Telephone No.: (713) 756-1600
MASTER SERVICES AGREEMENT -38-
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<PAGE>
Notices to Torch shall be addressed as follows:
Attention: Kenneth E. White, President
Torch Energy Advisors Incorporated
1221 Lamar St. Suite 1600
Houston, TX 77010-3039
Telephone No.: (800) 324-8672
with a copy to the attention of Torch's general counsel at:
Attention: General Counsel
Torch Energy Advisors Incorporated
1221 Lamar St. Suite 1600
Houston, TX 77010-3039
Telephone No.: (800) 324-867
SECTION 18.10 SURVIVAL
Any provision of this Master Agreement or of any Service Agreement which
contemplates performance or observance subsequent to any termination or
expiration of this Master Agreement or of any Service Agreement shall survive
expiration or termination of this Master Agreement or any Service Agreement.
SECTION 18.11 INDEPENDENT CONTRACTORS
This Master Agreement will not be construed to constitute either Party as a
representative, agent, employee, partner, or joint venturer of the other. Torch
will be an independent contractor for the performance under this Master
Agreement. Torch will not have the authority to enter into any agreement, nor
to assume any liability, on behalf of Nuevo, nor to bind or commit Nuevo in any
manner. Torch's employees who provide Services pursuant to this Master
Agreement or any Service Agreement hereunder or who are located on Nuevo's
premises shall remain employees of Torch, and Torch will have sole
responsibility for such employees including responsibility for payment of
compensation to such personnel. Torch shall be responsible for all aspects of
labor relations with such employees including their hiring, supervision,
evaluation, discipline, firing, wages, benefits, overtime and job and shift
assignments, and all other terms and conditions of their employment, and Nuevo
will have no responsibility therefor. Torch shall defend, indemnify, and hold
harmless the Nuevo Indemnitees from and against any and all claims, liabilities,
Losses, costs, damages, and expenses, including attorney's fees, based upon or
related to a claim that Torch's or its subcontractors' employees are employees
of Nuevo. Notwithstanding the foregoing, however, Torch shall owe a fiduciary
duty to Nuevo with regard to the preservation and protection of all Nuevo funds,
assets, Business Records, Confidential Information and Data that may be in
Torch's possession or control for purposes of facilitating the provision of
Services under this Master Agreement or any Service Agreement.
SECTION 18.12 THIRD PARTY BENEFICIARIES
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Except as set forth in Article 16 (Indemnification) of this Master
Agreement, nothing in this Master Agreement or in any Service Agreement, express
or implied, is intended to confer on rights, benefits, remedies, obligations or
liabilities on any person (including, without limitation, any employees of the
Parties) other than the Parties or their respective successors or permitted
assigns.
SECTION 18.13 COUNTERPARTS
This Master Agreement and each Service Agreement may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
taken together shall constitute one and the same instrument.
SECTION 18.14 DUTY TO ACT REASONABLY
Whenever a provision of this Master Agreement or any Service Agreement
hereunder requires or contemplates any action, consent, or approval (but
excluding any provision that requires or contemplates agreement), the Parties
shall act reasonably and in good faith and (unless the Agreement expressly
allows exercise of a Party's sole, or sole and absolute discretion) may not
unreasonably withhold or delay such action, consent, or approval (but excluding
agreement).
IN WITNESS WHEREOF, the Parties have executed this Master Agreement as of
the day and year first above written.
NUEVO ENERGY COMPANY
By: /s/ Robert M. King
____________________________
Robert M. King
Sr. Vice President &
Chief Financial Officer
TORCH ENERGY ADVISORS INCORPORATED
By: /s/ Michael B. Smith
____________________________
Michael B. Smith
Managing Director &
Chief Financial Officer
MASTER SERVICES AGREEMENT -40-
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<PAGE>
TORCH OPERATING COMPANY
By: /s/ Michael B. Smith
____________________________
Michael B. Smith
Vice President
TORCH ENERGY MARKETING, INC.
By: /s/ Douglas B. Chapman
____________________________
Douglas B. Chapman
President
NOVISTAR, INC.
By: /s/ Michael B. Smith
____________________________
Michael B. Smith
President
MASTER SERVICES AGREEMENT -41-
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<PAGE>
SCHEDULE 4.1
EXCLUDED SERVICES
MASTER SERVICES AGREEMENT
1. Corporate communications, public relations and investor relations
activities.
2. Acquisitions services, including deal generation, screening, analysis,
evaluation, due diligence, negotiation, closing and final accounting.
3. Divestiture services, including preparation of sales package and/or data
room, bid analysis and screening, sale negotiation, closing and final
accounting.
4. Corporate tax planning and compliance.
5. Land leasing activities, including lease checks, title checks, leasehold
acquisition, farm-ins, right-of-way and permit acquisition, securing title
opinions, acquisition of curative material and maintenance of project files
and land maps.
<PAGE>
Exhibit 22
NUEVO ENERGY COMPANY
Subsidiaries of the Registrant
NAME State of Incorporation
---- ----------------------
Rubicon Venture, Inc. Delaware
Nuevo Liquids, Inc. Texas
Nuevo Congo Company Delaware
The Congo Holding Company Delaware
Nuevo Financing I Delaware
Nuevo Ghana, Inc. Delaware
Nuevo International Inc. Delaware
Nuevo Congo Ltd. Cayman Islands
Nuevo International Holdings Ltd. Cayman Islands
Nuevo Tunisia Ltd. Cayman Islands
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Nuevo Energy Company:
We consent to incorporation by reference in the registration statement (No.
33-43329) on Form S-8, registration statement (No. 33-70108) on Form S-8,
registration statement (No. 333-21063) on Form S-8, registration statement (No.
333-51211) on Form S-8, registration statement (No. 333-51217 on Form S-8,
registration statement (No. 333-51231) on Form S-8, and registration statement
(No. 333-16231) on Form S-3 of Nuevo Energy Company of our report dated March
25, 1999, relating to the consolidated balance sheets of Nuevo Energy Company
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998, which report
appears in the December 31, 1998 annual report on Form 10-K of Nuevo Energy
Company. Our report refers to a change to the successful efforts method of
accounting for oil and gas properties.
/s/ KPMG LLP
Houston, Texas
March 31, 1999
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,403
<SECURITIES> 0
<RECEIVABLES> 25,096
<ALLOWANCES> 0
<INVENTORY> 5,998
<CURRENT-ASSETS> 161,252
<PP&E> 1,034,194
<DEPRECIATION> 417,622
<TOTAL-ASSETS> 817,685
<CURRENT-LIABILITIES> 49,623
<BONDS> 0
115,000
0
<COMMON> 203
<OTHER-SE> 231,675
<TOTAL-LIABILITY-AND-EQUITY> 817,685
<SALES> 245,375
<TOTAL-REVENUES> 252,703
<CGS> 156,496
<TOTAL-COSTS> 156,496
<OTHER-EXPENSES> 33,820
<LOSS-PROVISION> 65,164
<INTEREST-EXPENSE> 39,084
<INCOME-PRETAX> (126,897)
<INCOME-TAX> (32,625)
<INCOME-CONTINUING> (94,272)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (94,272)
<EPS-PRIMARY> (4.76)
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